Peter Schiff: The markets and the Fed

Mr Schiff discusses the once-supposed monetary exit plan for the Federal Reserve, which he predicted last year that they would never actually execute.  This prediction was boosted this week when the Fed announced that it would not be shrinking its balance sheet. This disappointed the government-led US markets, because they wanted the Fed to announce that it was going to keep expanding its balance sheet by printing up even more new paper Dollars and by soaking up even more market assets with this scrip.

Schiff thinks these government-focussed speculators will not be disappointed in the long run, because the Federal Reserve only possesses one arrow in its quiver, which is pointed straight at the ‘On’ switch on a paper Dollar printing press; though the Fed does have to pretend that one day it will aim this arrow at the ‘Off’ switch.

The problem with the Fed’s paper stimulus is that the extra paper currency generated is employed to suck in more consumption goods from overseas, whereas what America really ought to be doing is producing more of its own real goods rather than cranking out yet more paper for the world to soak up.  However, this will fail to happen as long as the Federal Reserve keeps intimating to the markets that it will keep printing more currency and keep accumulating US Treasury bonds, all of which is based upon ‘indefinitely’ low interest rates (as set by the Federal Reserve).

When interest rates eventually rise to avoid a Misesian crack-up boom, Schiff predicts there will then be a Dollar currency crisis and a US sovereign debt crisis and outlines how this will happen. He also thinks the Federal Reserve knows this potential outcome, though they are afraid of stating their thoughts out loud due to the panic that would then ensue; they have trapped themselves in a double-bind.

[One almost imagines that the strategic policy inside the Federal Reserve is now officially, “Hang On as Long as Possible and Wait for a Miracle”.]