Cheap Money Is Driving The Economy – A Peter Schiff Exclusive (Part 2)

Back in September, Peter Schiff was interviewed by Anthony Wile of The Daily Bell. We posted a segment of the interview last week. In this second part, Peter elaborates on the true drivers of the American economy, his strategy for physical precious metals investment, the war on drugs, and the economic troubles of Europe.

Daily Bell: What’s driving the market – fundamentals? We think it’s almost purely monetary policy these days.

Peter Schiff: It’s just cheap money. That’s all that’s driving it. It’s inflation. You can say to some degree it’s about earnings, but earnings are a function of share buybacks. Companies are buying back stock and they only can afford to do that because they can borrow so cheaply, so it’s stock buybacks that are driving earnings from share growth, not topline revenue growth. And of course, the other thing that’s sustaining earnings is that corporate debt service is so low. Despite a record amount of debt on corporate balance sheets, their debt service costs are so low that’s adding to their earnings. That’s the same thing that’s happening with the federal government. Despite the fact that we have a record national debt, the interest payments that we make per year are lower than we made in Ronald Reagan’s presidency, even though the debt was a fraction of its current size and that’s because the carrying costs are so low. I recently completed a 30-page report on this topic called “Taxed By Debt”, with a lot more information than we have time to go into here.

So what would happen to corporate earnings if interest rates went up? They would collapse because now their debt service costs would go up. The same thing would happen with the US budget deficit. What would happen to the US budget deficit if interest rates went up? It would skyrocket because the cost of servicing the $17.5 trillion debt would skyrocket.

So it’s the cheap interest rates that are sustaining the government’s finances and sustaining corporate America. So you take away the cheap money and we’re in a massive bear market, which is why the Fed’s not going to take it away. Because remember, they’re basing their recovery on asset prices, on the wealth effect associated with rising stock prices and rising real estate prices. But the minute they take away the monetary support, those asset prices collapse, and the wealth effect works in reverse. So if you build a recovery on inflated asset prices, you have to keep inflating those prices to keep the recovery going. So all this talk about ending QE and strengthening the balance sheets by raising interest rates is just false. They can’t actually do it. In fact, they’re going to have to do more of it to maintain the bubble because as the bubble gets bigger, you need more air to keep it inflated. It’s like with drugs. As you get used to a drug you build up a tolerance, and you need a bigger and bigger dose to get high.

Daily Bell: Why have central bankers decided to create another asset bubble? We think they want to stimulate through 2015 at least at an aggressive rate. Your thoughts?

Peter Schiff: It’s because that’s all they’ve got. They also don’t want to make any of the necessary reforms that would be required to generate economic growth. So since we can’t have real economic growth, a fantasy is better than reality. All they can do is blow bubbles, so that’s what they’re doing. They’re oblivious, just like they were oblivious to the real estate bubble and the dot com bubble. It’s almost like the bigger the bubble, the blinder the Fed is to it.