Peter Schiff was a guest on the Wharton Business Daily podcast produced by the Wharton School of Business at the University of Pennsylvania. Peter talked about inflation and how it will impact the US economy moving forward. He said ultimately, we’re heading toward stagflation.
Peter said inflation has been a problem for a long time. A lot of people just weren’t cognizant of it.
A lot of the inflation was in financial assets, so, stock prices were going up because of inflation, bond prices, real estate prices. That didn’t bother people because they thought inflation was making them rich.”
Nevertheless, consumer prices were also going up. But the government was able to keep that hidden with a rigged CPI formula that understates inflation. But in 2021, the price increases got so large, the CPI couldn’t hide them.
Based on CPI, prices were up about 7% last year. But if we still measured prices using the same type of CPI that we had in the 1970s or 1980s, prices rose closer to 15%.
Which is why it’s very disingenuous when the politicians tell us, ‘Hey, you know, it’s not that bad. It was way worse in the 70s.’ It wasn’t worse. Last year was a worse year than any year in the 1970s if we measure it the same way we measured prices in the 70s. So, it’s a big problem. And unfortunately, it’s going to get much worse.”
Peter said he thinks 2022 will be worse than 2021 when it comes to inflation. He said he believes a lot of businesses were reluctant to pass on rising costs to their customers. The fact that producer prices rose much more than consumer prices bears this out.
I think that businesses that were reluctant to raise prices last year are going to raise them this year. They have to repair their margins and make up for lost ground. So, I think you’re going to see catch-up. Plus, the pressure on prices is going to continue because the Federal Reserve continues to create inflation.”
Despite talk of tightening, the Fed continues to run loose monetary policy. It continues to run quantitative easing. Interest rates remain at zero. Meanwhile, the US government is spending a lot of money. The government spent over half-a-trillion dollars in December alone.
But we’re not producing. We have record trade deficits. A lot of Americans have left the workforce.”
And the response to the pandemic was one of the most inflationary policies ever pursued. The government ordered people to stay home and not work, and then handed them thousands of dollars to spend on things they weren’t producing.
We threw gasoline on the inflation fire because we pushed down supply while we were stimulating demand – the worst possible policy mistake. And I was criticizing it in real-time as the government and Fed were making it. And now, we’re paying the price for that with these big increases in consumer prices.”
Peter emphasized that the economy didn’t need to be stimulated.
Unfortunately, we needed to be in a recession. Because, if people are not working and not producing, they have to reduce their consumption. We can’t just keep spending money as if we were still making stuff. So, if we’re going to stay at home, to try to deal with COVID, it meant that people had to spend less. But the government didn’t want that. The government wanted people staying home but continuing to spend money as if they still went to work. And that was the problem. And again, we’re paying for it now.”
The Fed has committed to taking on inflation by raising interest rates three to four times in 2022. Peter said even if they start with a 50 basis-point increase, it’s still inadequate. In order to bend the inflation curve, you have to get out in front of it. The Fed needs to go from easy money to tight money. That means interest rates need to be above the level of inflation.
If the inflation rate is seven, you need eight, nine, ten percent. So, what the Fed is talking about doing – going to 1% or 2% – that’s nothing!”
When Alan Greenspan cut interest rates after the dot-com bubble burst, the lowest they got was 1%.
That was very stimulative monetary policy. That is still stimulative. You can’t fight inflation by throwing gasoline on it. We need tight money. But the problem is we can’t afford tight money now because thanks to the Fed keeping interest rates so low for so long, everybody in America borrowed so much money that if interest rates rise to fight inflation, the whole economy collapses, and we have a much worse financial crisis than 2008, and nobody gets a bailout. So, because of that reality, inflation is here to stay. Americans are going to have to live with it.”
So, how will that impact the economy moving forward? Peter said, “The economy is a mess.”
I think inflation is ultimately going to push the economy into a recession as consumers are forced to spend more and more of what they have on food and energy and insurance and just the basics. They’re not going to have discretionary spending. And when they have to cut back, that means a lot of other people lose their incomes, lose their jobs. This is going to be stagflation.”
Peter said he thinks it will be worse than the 1970s with a weaker economy and even higher inflation. Worst of all, the policymakers won’t be able to do anything about it. Paul Volker finally broke inflation by pushing interest rates to 20%.
We don’t have the ability to do that today. We could afford to pay 20% interest on our debt in 1980 because we hardly had any debt.”