Peter Schiff On Blind Faith In The Magical 'Monetary Policy' Elixir

Tyler Durden's picture

Submitted by Peter Schiff of Euro Pacific Capital,

Most economic observers are predicting that 2014 will be the year in which the United States finally shrugs off the persistent malaise of the Great Recession. As we embark on this sunny new chapter, we may ask what wisdom the five-year trauma has delivered. Some big thinkers have declared that the episode has forever tarnished freewheeling American capitalism and the myth of Wall Street invincibility. In contrast, I believe that the episode has, for the moment, established supreme confidence in the powers of monetary policy to keep the economy afloat and to keep a floor under asset prices, even in the worst of circumstances. This represents a dramatic change from where we were in the beginning of 2008, and unfortunately gives us the false confidence needed to sail blindly into the next crisis.

Although the media likes to forget, there was indeed a strong minority of bearish investors who did not drink the Goldilocks Kool-Aid of the pre-crisis era. As the Dow moved up in 2006 and 2007 so did gold, even though a rising gold price was supposed to be a sign of economic uncertainty. The counter intuitive gold surge in those years resulted from growing concern among a committed minority that an economic crisis was looming. In the immediate aftermath of the crisis in 2009 and 2010, gold shifted into an even higher gear when those investors became doubly convinced that the extraordinary monetary measures devised by the Fed to combat the recession would fail to stop the economic free fall and would instead kick off a new era of inflation and dollar weakness. This caused many who had been gold naysayers and economic cheerleaders to reluctantly jump on the gold band wagon as well. 

But three years later, after a period of monetary activism that went far beyond what most bears had predicted, the economy has apparently turned the corner. The Dow has surged to record levels, inflation (at least the way it is currently being measured) and interest rates have stayed relatively low, and the dollar has largely maintained its value.  Ironically, many of those former Nervous Nellies, who correctly identified the problems in advance, have thrown in the towel and concluded that their fears of out of control monetary policy were misplaced. While many of those who had always placed their faith in the Fed (but who had failed - as did Fed leadership - from seeing the crisis in advance) are more confident than ever that the Central Bank can save us from the worst.

A primary element of this new faith is that the Fed can sustain any number of asset bubbles if it simply supplies enough air in the form of freshly minted QE cash and zero percent interest.  It's as if the concept of "too big to fail" has evolved into the belief that some bubbles are too big to pop. The warnings delivered by those of us who still understand the negative consequences of such policy have been silenced by the triumphant Dow.

The proof of this shift in sentiment can be seen in the current gold market. If the conditions of 2013 (in which the Federal Government serially failed to control a runaway debt problem, while the Federal Reserve persisted with an $85 billion per month bond buying program and signaled zero interest rates for the foreseeable future) could have been described to a 2007 investor, their conclusions would have most likely been obvious: back up the truck and buy gold. Instead, gold tumbled more than 27% over the course of the year. And despite the fact that 2013 was the first down year for gold in 13 years, one would be hard pressed now to find any mainstream analyst who describes the current three year lows as a buying opportunity. Instead, gold is the redheaded stepchild of the investment world.

This change can only be explained by the growing acceptance of monetary policy as the magic elixir that Keynesians have always claimed it to be. This blind faith has prevented investors from seeing the obvious economic crises that may lay ahead. Over the past five years the economy has become increasingly addicted to low interest rates, which underlies the recent surge in stock prices. Low borrowing costs have inflated corporate profits and have made possible the wave of record stock buybacks. The same is true of the real estate market, which has been buoyed by record low interest rates and a wave of institutional investors using historically easy financing to buy single-family houses in order to rent to average Americans who can no longer afford to buy.

But somehow investors have failed to grasp that the low interest rates are the direct result of the Fed's Quantitative Easing program, which most assume will be wound down in this year. In order to maintain the current optimism, one must assume that the Fed can exit the bond buying business (where it is currently the largest player) without pushing up rates to the point that these markets are severely impacted. This ascribes almost superhuman powers to the Fed. But that type of faith is now the norm.

Market observers have taken the December Fed statement, in which it announced its long-awaited intention to begin tapering (by $10 billion per month), as proof that the dangers are behind us, rather than ahead. They argue that the QE has now gone away without causing turmoil in the markets or a spike in rates. But this ignores the fact that the taper itself has not even begun, and that the Fed has only committed to a $10 billion reduction later this month.  In fact, it is arguable that monetary policy is looser now than it was before the announcement.

Based on nothing but pure optimism, the market believes that the Fed can somehow contract its $4 trillion balance sheet without pushing up rates to the point where asset prices are threatened, or where debt service costs become too big a burden for debtors to bear.  Such faith would have been impossible to achieve in the time before the crash, when most assumed that the laws of supply and demand functioned in the market for mortgage and government debt. Now we "know" that the demand is endless. This mistakes temporary geo-political paralysis and financial sleepwalking for a fundamental suspension of reality.

The more likely truth is that this widespread mistake will allow us to drift into the next crisis. Now that the European Union has survived its monetary challenge, (the surging euro was one of the surprise stories of 2013), and the developing Asian economies have no immediate plans to stop their currencies from rising against the dollar, there is little reason to expect that the dollar will rally in the coming years. In fact, there has been little notice taken of the 5% decline in the dollar index since a high in July. Similarly, few have sounded alarm bells about the surge in yields of Treasury debt, with 10-year rates flirting with 3% for the first time in two years.

If interest rates rise much further, to perhaps 4% or 5%, the stock and real estate markets will be placed under pressure, and the Fed and the other "Too Big to Fail" banks will see considerable losses on their portfolios of Treasury and mortgage-backed bonds. Such developments could trigger widespread economic turmoil, forcing the Fed to expand its QE purchases. Such an embarrassing reversal would add to selling pressure on the dollar, and might potentially trigger an exodus of foreign investment and an increase in import prices. I believe that nothing can prevent these trends from continuing to the point where a crisis will be reached. It's extremely difficult to construct a logical argument that avoids this outcome, but that hasn't stopped our best and brightest forecasters from doing just that.

So while the hallelujah chorus is ringing in the New Year with a full-throated crescendo, don't be surprised by sour notes that will bubble to the top with increasing frequency. Ultimately the power of monetary policy to engineer a real economy will be proven to be just as ridiculous as the claims that housing prices must always go up.

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TheManWithNoName's picture

F*** this guy...he's full of it.

jcaz's picture

Yeah, you're right-  asset prices will rise with interest rates,  and we'll all eat big pink fluffy money clouds every day- we'll all grow to the sky, and nothing will come of this silly idea that a price has to be paid for all this financial malfeasance.... 

Why, we should just solve it all by the Fed buying BitCoins and paying off the debt once they hit $2M each......... YAY!!!!

economics9698's picture

Schiff has a lot of really good insights.  I always pay attention to this guy.

satoshi101's picture

So does fonestar, I get all my information from fonestar and schiff, between these two, I don't need to know anything else.


akak's picture

Now that is one messy and stinky non sequiturd.

buyingsterling's picture

Schiff's got the best (high profile) show on radio, IMO. He's a genuine libertarian, it's second nature to him. He plays the most recent show on a loop on his site, and this fellow posts each show on youtube (lots of great add-ons exist to download youtube and other videos).

Woodhippie's picture

I would like to know which add on is good for downloading youtube videos please.  I looked around and couldn't find one.

epicurious's picture

Okay hot shot so why is he full of it?  You blasting out full retard more likely fits the bill!

satoshi101's picture

The guy is a family fraud,

Everything that ZH pretends to hate, is this guy, like paper-gold,


I know its all for snide, but honestly you POST this shit, and then folks go to the trouble of marking negative, and I really do think there are some tylers here with the power to make 10x, ... or mores negatives in one click.

But yes, SCHIFF is the worst of the flimflam men that ZH brings to this on a daily,

I concur schiff is full it, and its been said why so many times, that we don't need to repeat ourselves,

The same people who defend BTC, defend schiff, and that should tell you all you need to know.


StychoKiller's picture

Time to make some sense out of this...oops, FAILURE!  My bad!

Allow me to explain this so that you understand:  NOTHING HAS BEEN FIXED, NOOOOTHINNNNG!

Skid's picture

Your mom is full of it. 

Uber Vandal's picture

It does appear that there are just a few more "Peter Schiff was right" (About 4,370,000 results) videos on youtube than "Jim Cramer was right" (About 17,500 results) videos.

Just to be fair, there are "Peter Schiff was wrong" (About 126,000 results) and "Jim Cramer was wrong" (About 6,080 results) videos.

Greenskeeper_Carl's picture

Me thinks that is because there is a powerful need to make schiff and other like him appear to be both wrong and stupid. Cramer kinda does that to himself. And by posting content like that of Peter schiff kinda puts out a "Cramer was wrong" sort of message without actually saying it.

JuicedGamma's picture

The stock market is discounting a great recovery.  I'll bet on that rather than the track record of Peter Schiff.


akak's picture

And what was the stock market "discounting" in September of 1987, or in January of 2000, or in October of 2007?

ATM's picture

I think the stock market is just reflecting the trillions of newly issued Federal reserve notes that need a place to reside. Much like the awesome returns earned on Venezuelan stocks last year! Up 480%. In Venezuela I guess stocks are really discounting an amazing recovery! Unless of course Venezuela is the next Zimbabwe where you could have attained incredible returns on stocks each year for a decade yet when you cashed out all you could afford were three eggs.

Obchelli's picture

Bullish for stocks!!!

No matter what!!!

CrashisOptimistic's picture

To see what's happening, look up Home Depot over the last several years.

Revenue down.  Profit down.  EPS up.  Stock up.

How?  Financed share buybacks.

This economy is shrinking.  The companies are getting smaller.  But it's invisible.

NoDebt's picture

Absolutely.  Well said.  Couldn't agree more.  

But the debt never goes away, does it?  Invisible perhaps, but with very real consequences.

Spungo's picture

The debt goes away when you declare bankruptcy. I've met people who have declared bankruptcy, and it's a hell of a lot better than struggling to keep your head above water for another 10 or 20 years, drowning in debt. If you're fucked, just admit you're fucked and go bankrupt. It sucks, but it's better than the alternative.

ATM's picture

And force the lenders to actually incur losses on the risks they took? NEVER! Lnders are not allowed to take losses any longer because their balance sheets cannot tolerate a loss. The lenders all all bankrupt but they cannot be allowed to fail because that exposes the total gutting of the current monetary and financial system.

The whole fucking thing is bankrupt and the only thing that keeps the illlusion alive is the theft of the little real wealth still in private hands via inflation, dilution, theft and confiscation. When that's over then it's really over. 

TideFighter's picture

Marc Faber is better, Peter. Your wine is plonk by comparison.

ATM's picture

Faber is cooler. He may or may not be better but he is one cool mofo IMO.

Seize Mars's picture

Paper money has a 100% batting average. It always fails, and it always causes poverty misery and death. Every time, every where.

The weird and getting weirder fracture of rising stock and apparent prosperity versus unemployment and hunger is a symptom. It's going to get worse, and by degrees; there will be no "kaboom," there will be a slow descent into poverty.

DOGGONE's picture

Peter, Get this in everybody's face, ongoingly:

oncefired's picture

Fuck You Bulldiker Yellen!

kragsquest's picture

He's still trying to rescue his old man out of prison for tax evasion.  

erkme73's picture

And what?   You'd let your old man rot in jail?  You say it like it's a dishonerable thing to try and help.

satoshi101's picture

10's of 1,000's of people  are rotting in jail, because they followed his old mans advice back in the 1970's and 1980's,

I'm surprised that this guy is not on BTC's most valuable kill list

Guy's in jail can't bid hits I guess? I dunno

jcaz's picture

10's of 1000's, eh?   Name 2.


Hyperbole much?

economics9698's picture

God bless Schiff for trying to help his dad.

Carl Popper's picture

Anything wrong with that?  


Tax evasion, that is?

JungleCat's picture

Tax evasion is a non-violent crime, which according to the potheads makes it OK to let them out of prison. Let the embezzlers, fraud artists out while we are at it. Dennis Kozlowski and Jeff Skilling, too.

Confundido's picture

In a world of central planning and financial repression, tax evasion is an act of patriotism! Non-violent, non-cooperative civil disobedience!

satoshi101's picture

Yelling 'fire' in a crowded theatre is free-speech, but it will get you 10-20 in a place where other men will have their way with you.

Schiff's dad got rich leading other men to the living hell, like all roads to idealism, ... "We told you our ideas would take you places, we didnt' say they would be good places"

The problem with the apologists here is that they have no idea of concern of the 'real world', and ramifications, its not about right or wrong, its about what is, and if you follow the advice of schiff's father you get a one way ticket to a place where other men make your their bitch.


Carl Popper's picture

I agree it is about "what is"


We choose our own destiny. I find it repugnant how government has become repressive and confiscatory and I vehemently disagree with how they spend the money they take from us.  


Fight them any way you can. tax evasion is one way.  Just be smart about it. 

satoshi101's picture

Run like fucking hell, to this day I never look back on my decision to escape from the prison known as USA.


Seize Mars's picture


You fucked up your own counterexample, you dipshit. Yelling "fire" in a crowded theater is not protected free speech, nor should it be.

Schiff's dad is guilty of telling the truth.



Anusocracy's picture

It's not an issue of free speech, you are on private property.

It is a violation of the contract between the theater owner and the movie goers to see a movie.

Seize Mars's picture


I just said it isn't protected speech. Understand?

It has nothing to do with private property dill-snip. It has nothing to do with contracts.

Anusocracy's picture

Who gives a shit if it is or isn't your lord and master government's protected free speech, it is on private property.

That's all that matters

Jam's picture

Is that you Mike Norman?

Woodhippie's picture

He didn't evade taxes.  There is no law that states you have to pay tax on labor.  Six Supreme Court decisions point this out.


Stop promoting dis-info.


Educate yourself:  America: Freedom to Fascism

satoshi101's picture

What SCHIFF is missing, cuz he can't see the real world, cuz his mind is on selling paper to morons.

But what he's missing is that the USA now permanently like JAPAN, its print ot the moon, and no end in sight.

It don't fucking matter, already the USD is 'safe haven' which means no volcker, and the FED can print infiinte USD's to cover interest rates,

Japan has pulled this off over 20 years now, ... and the USA will do it for generations,


The sky is falling bullshit, is just schiff's gig to real morons into his biz,

AUD's picture

The $US is a Ponzi scheme. Just because the USA has done it for generations doesn't mean it will continue for generations, nor Japan.

The sky could fall tomorrow, or in 50 years. You don't know, neither do I.

Greenskeeper_Carl's picture

I think we have a pretty good idea who the 'reel' moron is here, ithankyou...

therover's picture

Isn't the big difference between Japan and the US, is that most of the debt in Japan is owned by it's citizens, where as most of the debt in the US is owned by others ?

forwardho's picture

This is the third ZH article to be posted in less than one hour in which "Majic" plays a central role.

Majic in these posts is a synonym for make believe. The whole world seems to have its feet firmly planted in mid-air.

The jobless can pretend they are "working hard"

Corperations can pretend they are producing "goods of value"

We can all pretend the economy is in "recovery"

Reality is going to smack us upside the head because pretending is a game for children.