Peter Schiff reckons inflation crashes the party and already we can see this brewing from a sudden rise in inflation, according to the Perma gold bull and CEO of Euro Pacific Asset Management.

“On May 12, it was revealed that the Consumer Price Index (CPI) had risen 4.2% year-over-year, the fastest pace since 2008” wrote Peter Schiff.

“Some tried to downplay concern by pointing out that the gains resulted from the “base effect” of comparing current prices with the artificially depressed “Covid lockdown” prices of March and April of last year” he wrote 

But Peter Schiff reckons inflation crashes party view is based on what he referred to as, “alarming trend of near-term price acceleration”. 

“In April prices jumped .8% from March, versus an expected gain of just .2%. If this trend continues or even fails to dramatically reverse, we could be looking at inflation well north of 5 or 6 percent for the calendar year” wrote Peter Schiff.

 

“On May 12, it was revealed that the Consumer Price Index (CPI) had risen 4.2% year-over-year, the fastest pace since 2008”

PETER SCHIFF

Rising inflation would create major problems and it is the crux to Peter Schiff reckons inflation crashes party view

“Despite Federal Reserve officials’ recent assurances that the inflation problem is “transitory” many investors are concluding that the central bank will have to deal with this problem by tightening monetary policy far sooner than had been expected. This would make sense if the Fed cared about restraining inflation or, more importantly, had the power to do anything to stop it” he wrote. 

Peter Schiff reckons inflation crashes party because the Fed has no sure way to put the inflation genie back in the bottle

“In truth, we are sailing into these waters with little ability to alter speed or course, and we will be wholly at the mercy of the waves we have spent a generation creating” he added. 

Peter Schiff then provides a backdrop to his thesis. 

“Since the era of central bank activism kicked into high gear in 2008, with the quantitative easing programs created in the wake of the Financial Crisis, the U.S. economy has largely avoided the spike in consumer prices that would typically result from monetary stimulus. It is my belief that the injection of trillions of new dollars into the economy merely offset the downward trajectory of prices that should have occurred during a severe recession. But more significantly, the money the Fed created at the time flowed more directly into assets rather than consumer goods” wrote Peter Schiff. 

“In truth, we are sailing into these waters with little ability to alter speed or course, and we will be wholly at the mercy of the waves we have spent a generation creating”

PETER SCHIFF

Peter Schiff explains that interest rate suppression, which is the mechanism of quantitative easing, stimulates the economy through the financial system. But low-interest rates encourage more borrowing and have the effect of pushing up asset prices, particularly for stocks, bonds, and real estate.“That explains why the era of QE was particularly good for those people who owned lots of those assets (the rich)” wrote Peter Schiff.

“According to the CBO, in 2021 more than 40% of the $5.8 trillion expected to be spent by the Federal Government will be financed by debt issuance rather than taxation. The bulk of that debt is financed by Fed money creation” – Peter Schiff

Peter Schiff then goes on to explain that the bulk of the public deficit is financed with the Fed monetizing the debt. 

“Although the Fed is currently engaging in a quantitative easing program that is almost 50% larger than it was at its peak a decade ago ($120 billion per month in bond buying now vs. $85 billion then), the real bulk of the Fed’s efforts now involve underwriting the Government’s massive direct stimulus program, which has totaled more than $4 trillion in direct payments to businesses and individuals since March of 2020. According to the CBO, in 2021 more than 40% of the $5.8 trillion expected to be spent by the Federal Government will be financed by debt issuance rather than taxation. The bulk of that debt is financed by Fed money creation” added Peter Schiff. 

But these figures do not include the $2 trillion in unpaid infrastructure spending that is currently working its way through Congress noted Peter Schiff. 

Peter Schiff reckons inflation crashes party, bearing in mind that deficit spending is simply financed by monetary expansion

“The two are roughly the same. But each affects the economy in slightly different ways” he wrote. 

Peter Schiff notes that businesses, and governments, result in spending which creates demand for goods and services. “The problem is that this demand is occurring at a time when the supply of goods and services is being artificially suppressed. Through a variety of enhanced unemployment benefits, child-care tax credits, direct stimulus payments, and increased welfare benefits, the government has created conditions where millions of low-income workers make the rational choice to stay home” he wrote. 

“Rates would also severely impact the stock market with the real estate market likely would be hit even harder than stocks” – Peter Schiff

It now pays not to work as you can produce nothing and still consume. 

A Bank of America Global Research report published in April estimated, nationwide, workers who earn less than $32,000 annually could make not working on benefits. 

One million new jobs were expected, instead, only 266,000 new jobs were created “Employers were looking to hire, but far fewer people were willing to work. This explains why the labor force is still eight million jobs smaller than it was before the pandemic, even as the economy has largely reopened” wrote Peter Schiff. 

Peter Schiff examines the CPI during the periods of 1965 to 1887. During that period, the CPI (despite continual methodological adjustments which sought to minimize the results) averaged 6.4%. This meant that by 1987 prices had risen by a factor of more than 3.5 times from the base in 1965, causing the dollar to lose 73% of its value over that time, noted Peter Schiff. 

Peter Schiff reckons inflation crashes party when the Fed raises rates

Peter Schiff thinks Fed will surrender to inflation instead. 

“Rates would also severely impact the stock market with the real estate market likely would be hit even harder than stocks” he wrote.

Peter Schiff cited default levels that might be reminiscent of 2007 and 2008 could create losses for government-guaranteed mortgage lenders, which will require bailouts with more money printed by the Fed. A virtuous circle could then follow.