Peter Schiff: America Has Never Been in a Weaker Position to Fight Inflation

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Federal Reserve Chairman Jerome Powell, President Biden and other government officials insist the US economy is in a strong position to handle a fight against inflation. In his podcast, Peter Schiff explains why they are wrong. In fact, America has never been in a weaker position to fight inflation.

There are many people who are already claiming that inflation has peaked and that the Federal Reserve is winning the war on inflation. But on what evidence?

Admittedly, just by looking at the price of oil, we have done nothing to fight inflation. In fact, if you look at the actual evidence that is out there, we are further behind the inflation curve than we were when the Fed started its fight. And that’s because it’s a fake fight. The Fed talks, but it doesn’t act. They are dragging their feet on both rate hikes and quantitative tightening.

It looks like the central bank has finally started trying to shrink its balance sheet. We saw a slight decline in total assets held by the Fed in April. But how long can he maintain quantitative tightening?

How long before we cancel it and go back to quantitative easing? Because it will eventually happen. And the way you know it’s going to happen is because nobody in Congress is talking about major tax increases for the middle class. No one is talking about deep cuts in public spending, including middle-class rights like Social Security and Medicare. Because that is what would be needed for the Fed to meet its commitment to reduce the balance sheet. Because after all, if the Fed is going to shrink the balance sheet, how is the government going to sell all those bonds if it keeps spending the same amount of money?

The government depends on the central bank to create artificial demand for its bonds. When the Fed shrinks its balance sheet, it will go from being one of the biggest bond buyers to a bond seller. Instead of helping the Treasury sell bonds, it will become a competitor in the market. Even if the Fed isn’t actually selling Treasuries, but simply allowing bonds off its books without replacing them, that’s an indiscriminate difference. This still means the Fed will have to sell more Treasuries to compensate for what the Fed is no longer buying.

In the absence of Fed purchases, interest rates will have to continue to soar in order to induce people to buy all the Treasuries needed to fund government spending. The government cannot afford to see its borrowing costs increase.

Thus, the only alternative is to replace the Federal Reserve with the taxpayer. So we have to have more taxes, or we have to cut spending. But since neither is under consideration, this quantitative tightening cannot occur. They can start, but they can’t finish it.

Peter said that’s also how you know we won’t get ahead in this fight against inflation.

Because raising interest rates again is not enough. And the Fed is not raising interest rates enough anyway because it has to make interest rates higher than the rate of inflation. They need real interest rates to be positive, and we’re not going to get anywhere near positive. We are not even going to reach zero real interest rates.

In April, the CPI was 8.3% on an annual basis. This means the Fed needs to raise rates above 8.3% just to bring the real rate down to zero. And that’s by using the government’s CPI formula which underestimates inflation.

President Joe Biden keeps saying he’s determined to fight inflation. But you can’t commit to fighting inflation without committing to cutting government spending or raising taxes. And not just raising taxes on the rich. This will not generate enough revenue. They should raise taxes on the middle class — which Biden says he won’t.

If the government has relied on inflation as a source of funding, if that’s how all this government gets paid, well, if we want to stop creating inflation, then we need another way to pay for the government, or alternatively we have to reduce the size of the government because there is no way to pay for it.

Peter said the public needs to understand that there is no free lunch.

Any government we have, we have to pay for it. The government does not support the people. The people must support the government. Right now we are supporting the government with inflation. This is the tax we pay. Prices are going up because the government is spending all that money and not collecting taxes. So the only way to get inflation tax relief is either to get cost relief from the government by asking the government to cut spending or to pay higher taxes in exchange for inflation weaker. So all those politicians who claim to want lower inflation – unless they also claim to want higher taxes or less government spending – they are lying.

Biden says we are entering this fight against inflation from a position of economic strength, thanks to his policies.

The opposite is actually true. Not only is the US economy not in a strong position to fight inflation; we are in a weak position. In fact, we have never been in a weaker position to fight inflation than we are now.

Again, to fight inflation, you need to raise interest rates and reduce the money supply.

But the US economy is more dependent than ever on cheap money and low interest rates. How do we fight inflation when we are so indebted? How can you raise interest rates enough to fight inflation when there is so much debt and no one can afford to pay a high enough interest rate to effectively fight inflation? And when you run record budget deficits, how do you pull the rug out from under your feet? How to fight against inflation, that is to say reduce the money supply, while the government is recording the largest budget deficits in its history? Of course, they’re slightly smaller than they were at their absolute peak during the COVID pandemic. But compared to their historical situation and compared to our current level of taxation, we have huge budget deficits. And then, how to fight against inflation with such large deficits when the fight against inflation will require the elimination of these deficits? That will never happen.

In this podcast, Peter also talks about the employment figures for May and points out that employment is a lagging economic indicator.

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