Peter Schiff: This Crisis Won't Be Like 2008, It Will Be a U.S. Sovereign Debt Crisis

Kitco NEWS

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Video Summary

A significant repricing is occurring in global markets, with gold reaching new highs near $3,700 an ounce and silver hitting a 14-year peak above $42. This is driven by investor expectations of lower real interest rates and a weaker dollar. The dollar is currently at multi-week lows against major currencies ahead of an upcoming Federal Reserve decision, where markets overwhelmingly anticipate a rate cut.

This potential rate cut is viewed as a major policy error, especially with inflation still significantly above the 2% target. The speaker argues that the Fed should be raising rates, not cutting them, and that the aborted tightening cycle was a mistake driven by fear of collateral damage from bank failures, rather than a victory over inflation. This decision is further complicated by revised, weaker job numbers, indicating underlying economic fragility.

The broader economic picture involves a significant national debt and an enormous refinancing requirement, leading to decreased foreign demand for U.S. debt. Central banks are increasingly divesting from dollars and treasuries in favor of gold, a trend expected to accelerate with lower interest rates. The discussion also touches on the potential for a crisis of confidence in U.S. public credit and the dollar itself, driven by the Fed's actions and the increasing national debt.

Short Highlights

Gold is trading near $3,700 an ounce, and silver has reached its highest level since 2011, above $42.
Markets are betting on a rate cut, which the speaker calls a "catastrophic mistake," arguing rates should be raised due to worsening inflation data.
Foreign buyers like China and Japan are reducing their holdings of U.S. Treasuries, contributing to a massive U.S. funding gap.
The speaker predicts that rate cuts will backfire, causing long-term rates to rise and leading to a return to quantitative easing, which would be detrimental to the dollar.
The analysis suggests that gold mining stocks have significantly outperformed gold itself and are still considered cheap, with potential for further gains.

Key Details

Market Repricing and Monetary Policy [0:06]

A significant repricing is occurring across global markets.
Gold is reaching fresh records, trading near $3,700 an ounce.
Silver is at its highest level since 2011, above $42, representing a 14-year high.
Investors are pricing in lower real rates and a weaker dollar.
The dollar is on the back foot, nearing multi-week lows ahead of an upcoming Fed decision.

This section highlights the current market conditions, emphasizing the strong performance of gold and silver and the weakening dollar, driven by expectations of interest rate changes.

A great repricing appears to be underway across global markets and we're seeing it in real time.

Historical Parallels and Fed Decisions [0:31]

17 years ago today (September 16th, 2008), the FOMC held rates steady at 2% while the Federal Reserve's primary fund broke the buck.
That night, the Fed authorized up to $85 billion to rescue insurer AIG.
The New York Fed president missed the meeting to deal with AIG.
The Fed's current meeting is under intense political pressure.
Market sentiment, according to the CME Fed Watch tool, shows almost 100% betting on a rate cut.
The guest has long called such a move a "catastrophic mistake."

The speaker draws a parallel to a past financial crisis, suggesting that historical events might offer insights into current market dynamics and potential future outcomes, especially concerning the Fed's actions.

History doesn't maybe repeat, but does it rhyme?

Policy Errors and Inflation Concerns [1:29]

The market is being forced to price in decades of policy errors.
The speaker anticipates another policy error with the upcoming rate cut, calling it potentially the biggest yet.
The argument is that the Fed should not be cutting rates but should be raising them.
A long delay in raising rates is seen as a mistake, as is aborting tightening too soon.
The reason for aborting tightening was fear of collateral damage from bank failures, not winning the battle over inflation.
The Fed is expected to cut rates in the face of worsening inflation data.
Official inflation rates are well above the 2% target, with current inflation further above 2% than it was ever below it.
During periods of inflation below target, the Fed employed 0% interest rates and quantitative easing.
The speaker sarcastically notes the Fed's past urgency to combat 1-1.5% inflation versus its current willingness to cut rates with 3.5% inflation.

This section critically analyzes the Federal Reserve's past and current monetary policies, focusing on the perceived mishandling of inflation and the potential negative consequences of an ill-timed rate cut.

In fact, we're about to make another one. I mean, this may be the biggest error yet for the Fed.

Economic Cracks and Labor Market Data [3:01]

The Fed is ignoring inflation above target and rising inflation due to cracks in the economy's foundation.
The Fed has been able to deny this weakness based on "bogus jobs numbers."
Revisions to jobs data mean the Fed can no longer pretend the labor market is as strong as claimed.
The Fed is now going to cut rates due to weakness in the labor market and the broader economy.
These rate cuts are not expected to deliver relief and will likely backfire.
The cuts are predicted to cause long-term rates to rise, ultimately leading to a return to quantitative easing.
This is seen as a critical blow to the dollar, contributing to its current weakening.

The speaker points to underlying weaknesses in the economy, particularly in the labor market, which are forcing the Fed's hand despite rising inflation. This situation is framed as a precursor to negative economic outcomes.

The Fed's been able to kind of deny that based on bogus jobs numbers.

U.S. Debt and Global Diversification [4:30]

The dollar index is at its second-lowest level of the year.
Gold almost crossed $3,700 an ounce, with expectations of surpassing it soon.
Central banks are increasingly preferring to own gold and are divesting from dollars and treasuries.
Lower interest rates are expected to accelerate this move.
Treasury's TIC data shows China's Treasury holdings near their lowest since 2009 ($756 billion as of June).
Japan remains the largest holder at approximately $1.15 trillion.
The world is actively repricing the value of holding U.S. debt.
Considering the additional debt issued over the years, foreign holdings as a percentage of the outstanding treasury supply are actually decreasing.
U.S. deficits are at their largest, with a significant portion of the national debt needing refinancing, approaching $38 trillion.
The U.S. has to borrow more money than ever and refinance substantial amounts of maturing debt annually.
The world is increasingly unwilling to finance U.S. debt and is diversifying out of dollars.
Despite tariffs, the U.S. continues to run trillion-dollar annual trade deficits, flooding the world with dollars.
Foreign entities are no longer buying U.S. treasuries or stocks as readily, opting instead for their own domestic markets.

This section details the growing international reluctance to hold U.S. debt and dollars, driven by mounting U.S. deficits and trade imbalances, leading to a global shift towards gold.

The world just does not want to do it and they're diversifying out of dollars.

The Fed's Mandates and Sound Money [7:23]

There should not be a second or third mandate for the Fed; its sole mandate should be price stability, defined as zero inflation.
The speaker would prefer falling prices over 0% inflation, seeing 2% inflation as a 2% annual decline in living standards.
The Fed cannot effectively target interest rates by monetizing debt, as this creates inflation, which then puts upward pressure on long-term rates.
The best way for the Fed to foster a sound economy with low unemployment and low interest rates is through sound money and fighting inflation.
The current administration does not want the Fed to fight inflation, preferring to "blow air into the bubble" for a perceived economic boom.
This short-sighted approach prioritizes immediate credit for the president over long-term economic growth and avoids responsibility for an inevitable bust.

The speaker critiques the Federal Reserve's multiple mandates, advocating for a singular focus on price stability and arguing against debt monetization as a tool for interest rate control.

The only mandate and should be uh no inflation or price stability which should be defined as zero inflation.

Debt Monetization and Global Crisis [9:34]

Printing money to finance national debt at artificially low rates is akin to what has been seen in Japan, resulting in economic stagnation and currency devaluation.
If the Fed is perceived to be openly monetizing debt, it could trigger a rapid and acute global crisis of confidence.
This process has already begun and is expected to accelerate.
There is a danger that the Supreme Court might rule against an independent Fed, potentially requiring it to be beholden to elected officials.
Such a ruling could undermine Fed independence, as the president could then fire FOMC members at will.

This segment explores the severe consequences of debt monetization, drawing parallels with Japan and warning of an impending global crisis, exacerbated by potential political interference in the Federal Reserve's operations.

The Fed's not going to stop buying gold because they're not going to stop divesting of dollars.

The Federal Reserve and its Constitutionality [10:00]

It's possible the Supreme Court could rule that an independent Fed is not constitutional, asserting that the Fed needs to be accountable to elected officials.
The Constitution does not explicitly authorize a fourth branch of government like the Fed.
The Fed's independence has always been more of a pretense, with close collaboration between the Treasury and the Fed, especially during crises.
Ideally, there would be no Fed; its existence and powers are not authorized by the Constitution.
The speaker believes a Fed controlled by the president would be worse than the current Fed.
The ideal monetary system would revert to coining gold and silver, as authorized by the Constitution, with banknotes issued by private banks.

The speaker questions the constitutional basis of the Federal Reserve and its independence, suggesting that direct government control could be even more detrimental.

There's nothing in the Constitution that that that gives the the Fed uh governor any power because there's nothing in the Constitution that even authorizes a Fed.

Banking System Stability and Potential Runs [16:32]

The current banking situation is viewed as worse than in 2008, with "too big to fail" banks now larger.
Many banks hold long-term, low-yielding debt (treasuries, mortgage-backed securities, etc.) that is not marked to market.
This accounting practice allows banks to appear solvent until depositors demand their money, leading to runs.
The speaker warns that bank runs, seen with Signature Bank and Silicon Valley Bank, could happen on a larger scale with major institutions like Bank of America, Wells Fargo, and JP Morgan.
Such runs would necessitate government intervention, which would further devalue the currency.

This section highlights the precarious state of the banking system, emphasizing the hidden risks in banks' balance sheets and the potential for widespread runs that could collapse major institutions.

The balance sheets of a lot of these banks are, I think, in a lot of trouble because they own a lot of long-term lowy yielding debt.

Sovereign Debt and Dollar Crisis [19:35]

The impending crisis will be a loss of confidence not in private credit, but in public credit and the U.S. government.
There is a possibility of an outright default on U.S. treasuries, but more likely is the government paying with dollars that have lost significant value.
This devaluation occurs because the funds to cover principal and interest are created out of thin air by the Fed.
The Fed is becoming the buyer of last resort, and potentially the only resort, for maturing treasuries due to a lack of real buyers.
This scenario will lead to the destruction of the currency.
The coming crisis is characterized as a sovereign debt crisis and a U.S. dollar crisis.
Gold prices are expected to continue rising significantly in this environment.

The speaker forecasts a crisis rooted in a loss of faith in U.S. government debt and the dollar, driven by the Fed's monetary policies and the inability to find buyers for U.S. debt.

This is not going to be about a loss of confidence in in private credit but public credit. It's going to be about a loss of confidence in the U.S. government.

Government Intervention and Currency Controls [20:25]

Eventually, foreign exchange controls may be implemented when the dollar is in freefall.
This would occur as U.S. citizens attempt to divest their dollars.
U.S. Treasury bonds are not the best performing sovereign debt when foreign exchange losses are factored in.
A 10% decline in the dollar's value has erased coupon gains on treasuries.
The government might try to stop the bleeding by imposing exchange controls, similar to price controls used in response to inflation.
Such actions would be a reaction to speculators, but the true cause is government and Federal Reserve policy.
Speculators are reacting to the fundamentals, not causing the dollar's decline.

This part of the discussion addresses potential government responses to a currency crisis, including exchange controls, and reiterates that the government's policies are the root cause of currency devaluation.

Eventually there may be some foreign exchange controls when the dollar really is going into freefall.

Gold and Mining Stocks as Investments [23:07]

The easiest money has already been made in gold, but gold stocks have been an even better investment.
Gold stocks were significantly undervalued relative to the price of gold, offering a better risk-reward.
Gold is up almost 40% year-to-date, while gold stocks have more than doubled.
Even with current prices, gold stocks are considered cheap compared to historical averages and market multiples.
Net liquidations have occurred in gold mining ETFs (GDX, GDXJ), indicating a lack of investor interest despite strong performance.
Mining companies are expected to be highly profitable due to strong demand for their product, particularly from central banks divesting dollars.
Central banks will continue buying gold as they need to divest dollars they continue to earn.
The rising price of gold increases its value as a reserve asset, creating FOMO among central banks.
Investors are becoming price-agnostic in their gold purchases, focused on divesting dollars.

The speaker highlights the exceptional performance of gold mining stocks, attributing their current attractiveness to their undervaluation relative to gold and strong central bank demand.

But gold stocks have more than doubled.

Junior Mining Companies and Consolidation [28:32]

There is significant value in smaller companies with proven reserves that haven't yet been developed.
These companies are not as speculative as pure exploration firms, as they have tangible assets.
Larger companies, with ample cash flow from strong gold prices, may opt to acquire these smaller firms rather than invest in costly exploration.
This consolidation is expected to occur before any major increase in new gold projects.
Limited new gold production means prices will likely continue to rise.
Central banks are buying gold, not selling, which further constrains supply.
Emerging market nations have a low percentage of gold in their reserves and will continue to buy.

This section focuses on the investment potential of smaller gold mining companies and the anticipated consolidation within the industry, which is expected to drive up gold prices due to constrained supply.

I think these companies are going to get bought up.

Government Intervention in Mining [31:56]

The speaker dislikes centralized government planning and the government playing an active role in the economy, picking winners and losers.
Government initiatives in the mining sector are seen as counterproductive, leading to inefficient capital allocation, reduced productivity, and higher inflation.
These government actions are ultimately beneficial for gold and precious metals because inflation is good for hard assets.
When governments "screw up," gold tends to do well, making it a relatively safe bet because governments consistently make the wrong choices.

This part critiques government intervention in the mining sector, arguing it is detrimental to efficiency and growth, yet paradoxically beneficial for gold as it fuels inflation.

I don't like centralized government planning.

Mining Industry Discipline and M&A [35:49]

Acquisitions make sense for gold mining companies that have the expertise and resources to develop mines but lack sufficient reserves.
This is especially true for smaller companies whose properties are adjacent to existing mining operations, reducing development costs.
Acquisitions of smaller companies are a more sensible strategy than paying a premium for another public company.
Companies need to replace depleted reserves, making acquisitions or exploration necessary.
Buying existing assets can be a better deal than the risk involved in exploration.
Consolidation in the industry is likely to precede any significant increase in new gold production.

The speaker discusses the strategic logic behind mergers and acquisitions in the gold mining sector, emphasizing the need for companies to acquire reserves to sustain future income and production.

It makes a lot of sense for these companies to invest in acquisitions.

Silver's Potential and Market Dynamics [37:27]

Silver has hit a 14-year high, with projections of reaching $100.
The case for silver is complex, potentially driven by both monetary demand and a squeeze in industrial demand.
Silver is cheap relative to gold, a key indicator of its value.
Even at $50 silver and $4,000 gold, the ratio is still relatively low, suggesting further upside.
Silver's move from $50 to $100 is expected to be rapid.
Silver's historical high (1980) is significantly lower than gold's inflation-adjusted high, indicating it remains undervalued.
Central banks primarily buy gold, not silver, due to its bulkiness, but the public is expected to drive silver demand as they recognize its value.
The lack of recent strong retail demand for gold and silver is attributed to factors like tech stock rallies, false optimism around elections, and a fear of buying at highs.

This segment delves into the bullish outlook for silver, explaining its potential drivers, its current undervaluation relative to gold, and the expected shift in demand from central banks to the public.

I think that once silver gets above 50, I think it's going to take off.

The Future of the U.S. Economy [43:56]

Future historians may view this period as a moment when America chose a path of managed decline through inflation, rather than a painful but necessary crisis leading to a return to sound money.
The outcome is uncertain, depending on whether the current situation catalyzes positive change or leads to widespread socialism and hyperinflation.
The speaker remains hopeful for a lesson learned but sees no signs of it currently, with the nation doing "everything wrong."
The ability to "kick the can down the road" by running large deficits has allowed this situation to persist.
The world does not depend on the U.S. in the way some believe; the U.S. depends on the rest of the world due to its inability to produce what it needs and its lack of savings.
A monetary and debt crisis will reveal this dependence.
Bitcoin and the crypto craze are seen as a modern-day "tulip mania," a case study of mass delusion and the madness of crowds.

This concluding section offers a somber outlook on the U.S. economic future, questioning whether the current challenges will lead to a correction or a deeper dive into unsustainable policies, and likening cryptocurrencies to historical speculative bubbles.