Peter Schiff: The US Can't Afford Peace, Much Less War

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by Tyler Durden
Tuesday, Oct 10, 2023 - 02:20 PM


War broke out in the Middle East over the weekend after Hamas attacked Israel. In his podcast, Peter broke down the possible economic ramifications here in the United States. He said the US can’t afford peace, much less war.

Market reaction to the events in Israel and the Gaza Strip was muted. Peter said it was treated almost as a “non-event.”

“There’s so much complacency out there,” he said.

The stock market has been shrugging off the backup in yields, and now it’s shrugged off war in the Middle East, which I think is a big deal.

Oil was up a bit, but not nearly as much as you would expect given the turmoil in the Middle East.

Gold, on the other hand, was up around $30. This came on the heels of an outside reversal on Friday when gold and silver took out the low for the prior day and then closed above the high for the prior day. This kind of reversal generally signals the end of a trend.

In the case of gold and silver, the trend that was ending was the downtrend.”

Peter said the situation in the Middle East is bullish for gold, silver, and oil, but the markets seem to be missing the heightened risks. He said the situation reminds him of what happened when Russia invaded Ukraine in February 2022.

At the time, most people thought it would be over quickly. Peter warned that it would likely drag on.

I wish I was wrong about that. I wish that this thing had ended quickly. But unfortunately, it didn’t.”

In fact, Joe Biden has proposed another $100 billion in aid to Ukraine.

That pretty much guarantees that the war is going to last another year or two because it’s going to take at least that long to spend all that money. But of course, not all the money is spent, right? A lot of it is skimmed off the top by the corrupt politicians, and so they want to keep those money spigots flowing.”

This is money the US doesn’t have.

Biden is like, ‘Oh, let’s just send him an extra 100 billion.’ Well, where are we going to get it? We’re broke. We have a $2 trillion-plus deficit. That’s why bonds are collapsing and yields are rising. And we want to borrow another $100 billion to send it over to Ukraine to perpetuate that war?”

Peter said the outbreak of violence in the Middle East has the potential to evolve into the same type of situation with the US spending billions in military aid to Israel.

The attack was something like a 9-11 for Israel. Of course, when terrorists attacked the US, that led to the “War on Terror,” including the invasion of Iraq, a country that had nothing to do with the attack. We could easily see a similar escalation in the Middle East.

I think this is the beginning of a bad situation, unfortunately. … None of this is going to be pretty in the short run. It’s all going to be problematic. It’s going to destabilize the region. There already is a lot of tension there. But who knows what this is going to do to the oil market.

This comes at a time with the US only has about 12 days left in its strategic petroleum reserve.

This is not a good time to have an oil embargo when you’ve just blown through most of your strategic petroleum reserve trying to buy votes for the Democrats at the midterms. So, we’re particularly vulnerable.”

One sector that did particularly well on Monday was defense stocks.

Why are these defense stocks rallying? Because people know that means they’re going to sell more weapons. So, who’s buying all these weapons, and who’s paying for them? Maybe it’s Israel that’s going to buy all the weapons, but where are they going to get the money? They’ll get the money from us. But where are we going to get the money? We’ve got to borrow it from the Chinese — except the Chinese don’t want to lend it. So, we’ve got to get it from the Federal Reserve. The Federal Reserve is going to print more money.”

Peter speculated that perhaps that’s the reason the markets rallied on Monday.

Maybe it’s not that they are underestimating how bad the problem is. Maybe they realize it’s a bad problem, and they realize that that’s a good thing. Because, you know, bad news is good news. And if this is bad news, maybe it’s good because it means we’re going to get more QE, or a return to QE. And at least we’re not going to get any more rate hikes. We’ve got war in the Middle East, so the Fed can’t raise rates with all that uncertainty out there. And maybe they’ll have to cut rates.”

Peter reiterated something he’s talked about in the past — it doesn’t matter if the Fed stops hiking rates because the market isn’t finished hiking rates.

In fact, if the Fed is done hiking, then the market has even more work to do.”

It’s not so much that the Fed rate hikes have driven up rates on the long end of the curve. Long-term rates have gone up because of inflation and the huge supply of bonds in the market. Meanwhile, everybody thought the rate hikes would cause a recession and then the Fed would cut rates. They also thought the recession would cure the inflation problem. The recession hasn’t happened yet, the mainstream has decided it’s not going to, and now the markets are trying to price it out.

Ironically, we’re seeing huge budget deficits even in this “strong” economy. Generally, economic growth increases tax receipts and shrinks the deficit.

We’re in a situation where a strong economy is resulting in even larger, not smaller budget deficits, which will put even more upward pressure on long-term interest rates than you would normally expect in a strong economy.”

The bottom line is wars are expensive.

There is no short-term benefit economically of fighting a war.”

All of this is going to weaken an economy that is already structurally weak. The US can’t even afford peace. It certainly can’t afford war.