A lot of people in the mainstream still insist this isn’t a financial crisis like we saw in 2008. They say this is just a self-inflicted shutdown of the economy. Since we decided to shut it down, we can decide to start it back up again. Peter Schiff begs to differ. In his podcast, he explains that this is absolutely a financial crisis and it’s going to be worse than 2008.
Stocks fell yesterday (April 15) on dour economic news and the financials led the plunge. In fact, even during the stock market rally on Monday, the financials lagged. Peter called them the Achilles Heel in that Monday surge.
This is significant because the financial sector is the key to the US economy.
They shouldn’t be, but they are, because we have a bubble economy. We have an economy based on credit, based on debt. So, not people spending the money they earned, but spending the money they didn’t earn but they borrowed.”
This becomes clear when you look at the consumer debt numbers. Americans were already leveraged up to their eyeballs before coronavirus spurred a government lockdown of the economy.
What is at the heart of the bubble, other than the Federal Reserve which is pumping all the blood through the body of the economy, but it’s pumping it through the heart of the banking sector. So, when you’re seeing this cardiac arrest in the banking sector, this is a sign that there’s trouble brewing here when the banks are having so much trouble.”
Why are banks in trouble? Because people are defaulting on their loans. In fact, there was already trouble in the subprime markets before COVID-19. Both subprime credit card and auto loan defaults were rising. That will only increase with millions of people suddenly unemployed.
Obviously, if people aren’t earning as much money as they were when they were working, especially small businesses, they’re not paying their loans. So, the banks are not getting interest payments. They’re getting defaults...
When you have a credit bubble, when the economy is built on a foundation of debt, and then something happens to shake that foundation, you have a big problem.”
The fact that the banks are selling off on the stock market is evidence of this problem.
That’s why I said from day one, this is a financial crisis.”
The mainstream pundits were insisting this wasn’t going to be a financial crisis like 2008. They said the problem was just the shutdown of the economy due to the pandemic.
If you shut down the economy, how do all the people with debt pay their debt? And if the debt isn’t being paid, then by definition, you have a financial crisis. That’s why the real estate crisis was a financial crisis. It wasn’t because real estate prices went down. It’s because real estate prices going down meant loans that were collateralized by real estate weren’t getting repaid. And to the extent that the banks had to foreclose, the collateral wasn’t there to make the banks whole. The same thing is happening now. The banks are even more exposed today than they were in 2008. This is an even bigger crisis now than it was in 2008 because we have a lot more debt. We have a lot more borrowers who are in trouble.”
Peter said the Fed’s response is an indication that this is a worse financial crisis than 2008.
The Fed is doing everything it did during the last financial crisis except way bigger and way sooner. So, if they’re doing all the same stuff, only they’re having to do more of it, they’re having to do it at even greater excess, then what does that tell you? That tells you this is a financial crisis just like the last one, except it’s bigger. It’s a worse financial crisis.”
A lot of people seem to think that just because the economic shutdown was on purpose, it’s not that big of a problem. Since it was self-inflicted, it’s not a real recession. It’s not a real economic collapse. It’s not that businesses are closing because the economy is bad. We just decided to shut them down. Therefore, we can just decide to open everything back up. Peter said it’s not that simple.
We just can’t make that decision. And even if we could, consumers are not necessarily going to behave the way they did before the virus right away after the virus. Even if they want to, they’re not going to have the resources to do it.”
We aren’t going to just flip a switch and everybody will start spending again. Peter said he thinks this has been a wakeup call for a lot of people that they need some savings. And of course, a lot of people won’t be able to go back to work because their employers will never open up again.
The point is that to expect that just when we turn this economy back on like we turn a key and say, ‘OK everybody, go back to work,’ that everybody’s going back. They’re not. The bubble popped. This bubble is not going to reflate just because somebody decides we can all come out of our houses and we don’t have to social distance or self-quarantine. It’s not going to happen. But again, the other thing that people are missing when they say that this wound is self-inflicted — who cares? It doesn’t matter that the wound is self-inflicted. What matters is that we got a wound. Look, if I grab a knife and I stab myself in the chest, I’m not OK because the wound is self-inflicted...
It doesn’t matter how I got stabbed. What matters is I have a knife in my chest and I’m bleeding. So, I can’t just ignore the wound because I was dumb enough to stab myself.”
Peter went on to highlight all of the dismal economic data that came out. It shows just how serious that wound is.