“In case the people in this room didn’t know, the financial crisis of 2008, which I had been forecasting for some time, and the Great Recession that ensued, was caused predominantly by the Federal Reserve.”
This was the opening line of Peter Schiff’s talk at the Las Vegas MoneyShow.
The Fed managed to “rescue” the economy after the financial crisis, but in the process, it created an even bigger bubble than the one that popped in ’08. This bubble is about to burst and the Fed will try to repeat the process. The difference is this time it won’t work, as Peter explains.
The Fed facilitated the 2008 crash by pushing rates artificially low in the wake of the bursting of the dot-com bubble. In the runup to the financial crisis, most people didn’t realize we were in a bubble. Republicans were particularly blinded to the problems. George Bush was president. He had cut taxes. The economy was great. They didn’t recognize the bubble. But Peter was warning that a crash was imminent.
Most people were in denial — just like they are today.”
Peter said the problem is the bubble the Fed has created this time is bigger than the last one.
And the economic collapse that is going to follow the bursting of this bubble is going to be far more dramatic.”
That’s because the measures the Fed took after the 2008 crash were more extreme than the one that created that bubble. The central bank took rates all the way down to zero and held them there for seven years. It ran three rounds of quantitative easing. And although the Fed claimed it would eventually normalize rates and shrink its balance sheet, that never happened. In fact, the Federal Reserve has already launched a new round of quantitative easing, although it refuses to call it that.
The problems of 2008 were caused by an excess of debt. Artificially low interest rates encourage borrowing. After the financial crisis, the central bank doubled down. Now that the Fed has encouraged all of this debt, there is no way it can allow interest rates to rise.
So, I kept warning that these policies were going to be never-ending, that it would be QE infinity, that it would never stop.”
Donald Trump’s win created a lot of optimism. Everybody expected tax cuts and deregulation. Under those conditions, the Fed was able to do what it couldn’t under Obama and hike rates. The straw that broke the camel’s back was the rate hike in December 2018. At that time, Peter said it would be the last cut. That led to the “Powell Pause” and the subsequent rate cuts and QE.
We’ve never seen anything like this, I mean not even under Obama during the worst part of the Great Recession.”
Now the Fed is desperately trying to keep interest rates from rising. The problem is that it’s a much bigger debt bubble this time around and the Fed is going to have to blow a lot more air into it to keep it inflated.
The difference is this time it’s not going to work.”
Everybody thinks the Fed can do it again. They believe the central bank can rescue the economy.
The belief that the policy worked was completely predicated on the fact that it was temporary and that it was reversible, that the Fed was going to be able to normalize interest rates and shrink its balance sheet back down to pre-crisis levels. Well, when the balance sheet is five-trillion, six-trillion, seven-trillion; when we’re back at zero; when we’re back in a recession … nobody is going to believe it is temporary. Nobody is going to believe that the Fed has this under control, that they can reverse this policy. And the dollar is going to crash. And when the dollar crashes, it’s going to take the bond market with it and we’re going to have stagflation. We’re going to have a deep recession with rising interest rates and this whole thing is going to come imploding down.”