Peter Schiff & Doug Casey About Gold, Dollar Collapse & US Fed

In a recent interview, Doug Casey talks with Peter Schiff about his expectations of the gold price and the future of the dollar. They discuss the role of the central bank(s) in today’s debt crisis and conclude that the Fed is trapped. They end with some tips on where individuals and investors can go to with their money.

The gold price will exceed $5,000

Peter Schiff believes that the gold price will rise fast in the coming years. His prediction has always been $5,000. In fact, he believes gold will go much higher, but it is impossible to tell when exactly. It will not be in ten or twenty years; the sharp price increase should be rather imminent (somewhere in the coming few years).

In order for gold to rise to those price levels, more people need to recognize what really is going on. History shows that assets can be mispriced for a long time. It all depends on perception. The average investor and certainly the institutional money are clueless with respect to the true state of the global economy, the ugly future of the dollar and other fiat currencies, the rate of inflation, etc. Most people just look at the fact that the gold price has risen and think it is sort of a bubble, not understanding the fundamental reasons why it is up.

Peter Schiff says: “I think the day is coming that people will start understanding and then you will see a meteoric rise in the price of gold. Whether it stops at  $5,000 or keeps going up from there will depend on how much money will be created between now and then. Although we have created a lot of money in the last two decades, it is nothing compared to how much money we are going to create in the coming decade.”

How the US Fed is facilitating the collapse of the dollar

One of the biggest casualties, other than individual liberty, is going to be the value of the dollar. How does the government plan on financing all of its expense as they’re not going to raise taxes on middle-class Americans? They are willing to raise taxes on the rich. A lot of this is going to be financed by the central bank.

Inflation is a tax that the government is going to levy. It is going to hit everybody because inflation is a tax on your money. It is also a tax on the value of our wages. The government is going to confiscate the purchasing power of people’s assets and spend it on services, social security, national defense, Medicare, etc. To avoid that inflation tax, one has to avoid the currency that is being inflated, which is the dollar. There are ways to do that, for instance by owning gold and silver, foreign assets or foreign stocks … assets that the federal reserve cannot print.

The country that is most likely to print the most amount of money is the US. There is a monthly 50 billion trade deficit. The point is that printing is really not free; it becomes very expensive but people don’t necessarily associate the rising prices (think the cost of gasoline or food) with the tax. Most people do not understand that the government is the source of inflation.

The central bankers apply the Keynesian practices by printing money to avoid deflation. Inflation and government stimulus is their salvation. Peter Schiff says:

I think the fed reserve as an entity is dangerous for society. The Fed chairman does not show integrity and understanding. Look at the Q4 2007 minutes, where Ben Bernanke was as clueless as ever, as the major collapse had already started but he did not even see it coming. If we had somebody with integrity and the Fed Reserve was a truly independent central banker who would just refuse to modify these debts and would just let interest rates go up, it would force the government to make the structural reforms that are needed. Yet you hear Ben Bernanke criticizing the government for its long-term deficits without understanding that they are the enabler of the process. The Fed is taking debt and turning it into money. Moreover, they maintain that it is not really monetization because they will reverse the process at some point the future. There simply is no way to withdraw liquidity in the future.

The government runs budget deficits of over a trillion dollars a year. The Fed is printing and monetizing 90% of it. That means the federal government only has to sell 100 or 200 billion dollar of treasuries to private investors. If you take the Fed out of it, the government has to sell a trillion-and-a-half for two trillion dollars. Who is going to buy those bonds?

As a consequence, interest rates (the cost of money) WILL go up. The treasury market is a bubble, just like the bond bubble in Japan which incidentally might actually break before the American one. The US economy is now so addicted to debt that the highest affordable interest rate is zero. The national debt is financed at these low rates. The payments in interest on the 16.5 trillion dollar debt are about 300 billion dollar. What if in two or three years the debts were to be twenty trillion and interest rates five percent. That would result in 1 trillion yearly  interest payments.

The only justification for keeping rates so low is that the Fed knows that any increase in rates will collapse the (already phony) economy. The economy is artificial. You can’t just keep printing money and monetize the debt and buy bonds without the dollar imploding.  What has helped the US recently was the European crisis. Worries about the European debt have led to an increased  demand for US Treasuries (even though the US had more debt than Europe). The the fears are subsiding in Europe, be it temporarily. If all of those money flows into the US Treasury reverse, it would cause the dollar to weaken and put pressure on the Fed to raise rates. But the Fed can not raise rates, so they will give investors around the world the perception that they will never really remove the liquidity.

That is when you will really get a run out of the dollar. The Fed will be really trapped as they need to chose between a collapse of the dollar (leading to runaway inflation) or an aggressive rise of the interest rates (collapsing the whole economy in a way worse than 2008).

Where should individuals go with their money

People should get out of US dollars and anticipate the future. Everyone’s objective should be to dissipate the revaluation of assets. The main idea is to buy assets when they are cheap and not highly demanded, in order to sell them when they are expensive because of a high demand. The biggest change that is coming in the global economy is the realignment of living standards in the global packing order.

America has been on the top for a long time because:

  • there was a limited government
  • low cost of government
  • high production
  • high exports towards the whole world
  • huge surpluses that were invested globally.

That is not America of today. Nowadays, the US is characterized by a standard of living which is the result of debt. The US has:

  • more regulations than ever
  • higher taxes
  • no trade surpluses
  • enormous deficits
  • the US is the world’s largest debtor, owing more than all other countries in the world combined
  • it has a trade deficit with every country.

Peter Schiff thinks a collapse in the dollar is inevitable, which will dramatically reduce the standard of living of Americans. When the dollar collapses, it is not doing in the vacuum. If the dollar loses value, it is doing so relative to other currencies. It implies that the purchasing power is being shifted to somebody else. Other countries’ currencies will appreciate. It means that people in other parts of the world will become wealthier, particularly in emerging markets and Southeast Asia. The hard working people over there, who save their money, will see a big rise in their living standards. “You want to be invested in those economies, in those currencies.”

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