Peter Schiff Gave His Predictions

Peter Schiff gave his predictions of how the ongoing banking crisis, which he believes should be coined a financial crisis, will unfold and what could lie ahead. 

Peter Schiff believes the banking crisis is not over yet, a view he put forward on Trader TV

Indeed, the maturity risk associated with bonds, particularly the perceived safe haven treasuries is not fully known, nor has it been calculated by the banking stress tests. 

Fixed-income investments such as long-maturity bonds in times of high inflation are unattractive assets. 

As investors sell out of bonds, bond prices fall, and their corresponding yields rise. So, when the Fed’s buying desk takes a back seat, price discovery for bonds pushes up bond yields and treasury yields. Moreover, because conservative savers act rationally, seeking the highest return with the lowest risks to protect their capital from corrosive inflation, they buy short-maturity treasuries with yields above cash deposit accounts.

Bank stress tests calculate the risk of an asset. The risk of making a loan, or holding a bond of a small-cap company, is higher than making a loan to the US government, or owning a treasury because the latter is unlikely to default on interest loan obligations. The federal government can go to the Federal Reserve, which can print dollars, the world’s reserve currency so that the government can meet yield payments on its treasuries. Treasuries are considered safe haven assets because of this low risk of default.

But, the maturity risk of treasuries is not calculated in the investor risk equation. Nobody thought five years ago we would see double-digit inflation. So, banks held long maturity treasuries when yields were below 1%, thinking it was a safe investment. 

Inflation makes holding long-maturity bonds risky. Nobody is queuing up to buy Argentine sovereign bonds with yields of nearly 50% with annual inflation over 100%. 

Cash is trash when inflation is so high, and a bond is a promise to receive a bundle of cash with some yields.

So if inflation has created a maturity risk of holding treasuries, which are collateral for commercial loans, could the entire Western banking system be undercollateralized?

If so, the mother of all credit squeezes could be on deck unless the Fed steps up asset-buying QE. 

Peter Schiff gave his predictions, where bank bailouts, and QE light could be the aperitif to the inevitable QE feast.

Peter Schiff sees a systemic crisis brewing

“But that’s true with all the other banks. Nobody is marking this stuff to market. Everybody is just putting it in their ‘hold to maturity’ bucket, and they don’t have to take a haircut, they don’t have to market it to market. So, they can pretend that 60 cents worth of bonds is worth a dollar. But, if they had to stop pretending then they would all be insolvent,” he said. 

“If they take the money that they owe you, and blow it on overpriced mortgage-backed securities, then they can not pay you back,”  he added. 

Peter Schiff gave his predictions on FDIC insurance, the government insuring bank deposits within a threshold limit. 

“In effect, FDIC insurance now goes to infinity,” he said. 

But where does the government get the money?

“Well, the US government doesn’t have any money. The Fed just prints the money. That’s where the FDIC gets the money, which is why everybody is going to lose.”

The mainstream pundits, central bankers, and politicians all claim the banking system is sound. “You don’t need to worry about your money,” they say. Peter said you had better worry even more about your money.

The only way the government makes sure your bank doesn’t fail is by destroying the value of the money that you have on deposit. It’s inflation that is going to wipe out the value of everybody’s bank accounts,” he said. 

“They want to call it a banking crisis. They don’t want to evoke any memories of the ’08 crisis. They don’t want to invite any comparison to that crisis. So, they’re trying to label it something different. No! It is a financial crisis. The 2008 financial crisis was also a banking crisis. Unless people have forgotten, it was the banks that were failing. Yes, they were failing because of bad mortgages. But that was the debt that was failing. And so that’s what’s happening now. Banks are failing because of bad debt,” he said. 

Peter Schiff gave his predictions on the extent of the current financial crisis

“This is just the cusp of the crisis, and it is going to get much worse,” he said. 

Peter Schiff noted that in the days leading up to the financial crisis of 2008, policymakers downplayed the financial crisis. 

They are doing the same now. 

“This is your garden-variety white swan. They’re all over the place. This is what swans look like. If you keep interest rates at zero for ten years, it is what you get, and it is not a surprise,” he said.