A False Recovery

08/19/2014 6:00 am EST

Focus: MARKETS

Peter Schiff

CEO, Euro Pacific Capital, Inc.

An asset bubble and a false economic recovery will not have a positive outcome says Euro Pacific Capital's Peter Schiff.

SPEAKER:  Hi, I’m here today with Peter Schiff, CEO and Chief Global Strategist for Euro Pacific Capital and we’re going to talk a little bit about the economic recovery and the fed taper and rising rates perhaps.  Yeah, Peter, what’s going on?

PETER SCHIFF:  Well the problem is there is no economic recovery.

SPEAKER:  How so?

PETER SCHIFF:  Well, we have asset bubbles masquerading as a recovery.  The economy is really not getting better.  The fed has succeeded in reflating these bubbles but that’s actually interfering with the economic growth that might’ve taken place had the fed not distorted the economy with artificially-low interest rates and all this money printing. 

SPEAKER:  So how does this affect the average investor?  What should they do?

PETER SCHIFF:  Well the average investor needs to understand the true state of the economy.  Most people are operating under the false premise that we’ve got a legitimate recovery and that the fed can take away the monetary supports, taper QE to zero, and then eventually raise interest rates and not disturb the recovery.  That’s not true.

SPEAKER:  What’s the reality?

PETER SCHIFF:  Well, if the fed were to take away the QE, the stock market’s going to be in a bear market, real estate prices are going down, we’re headed right back into a recession and a worse financial crisis than 2008 so in order to postpone that, I think sometime soon the fed is going to have to admit that its forecast about the economy was too optimistic, that the slowdown we got in the first quarter was not really weather related and  it’s something more substantial and they’re going to look for an excuse to halt the taper and crank up QE again because that’s the only way they can keep these asset markets inflated and maintain the allusion of growth.

SPEAKER:  What’s the better solution?  What would a better solution be?

PETER SCHIFF:  What they should’ve done a long time ago, let interest rates go up dramatically, stop buying government bonds and start selling them, and let the chips fall where they may.  Look, we’re going to go through a recession.  Stock prices are going to come down.  Real estate prices are going to come down.  People are going to lose money.  The government’s going to have to break promises but all of this stuff has to happen.  The longer we delay the hard choices, the more painful it’s going to be when we ultimately make them.

SPEAKER:  Something more needs to happen outside of the central banking system, somewhere in the federal government, other people need to do things? 

PETER SCHIFF:  Well, if the central bank does the right thing and stops monetizing government debt, then government will have no choice but to stop spending.  Right now they don’t have to because the fed is making it possible but if interest rates go up, government spending is going to have to be slashed and that’s a good thing.

SPEAKER:  So, banking gets out of the way, government gets out of the way, the private sector takes care of everything.

PETER SCHIFF:  Yeah, although there’s a lot of damage, the government has dug us into a pretty deep hole so we’re not going to get out of it right away, but in the meantime, we’re digging it deeper because we don’t want to deal with it. 

SPEAKER:  So when does this all get cleaned up?  How far out?

PETER SCHIFF:  I don’t know when it gets cleaned up, but it’s going to be pretty messy first.

SPEAKER:  Thanks Peter.

PETER SCHIFF:  Sure.

SPEAKER:  Thanks for joining us. 

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