Peter Schiff made a big splash on CNBC last week when he said the Federal Reserve Bank of the United States will never raise rates and have been lying to the investor community for years now about their intention to do so.
“The whole world has been fooled by this Fed con,” said the Euro Pacific Capital CEO. “Most people believe the Fed. They believe the Fed is going to raise rates,” he added. Schiff has long posited that the Fed will never raise interest rates, contrary to general consensus. In fact, Schiff believes the likelihood of another round of easing is greater than a rate hike. “I don’t think she ever intended to hike rates,” he said. “They are in a monetary roach hotel, and they will never be able to raise rates back up.”
His basic theory is that the American economy has been kept afloat by an artificial interest rate environment and can only sustain growth by its addiction to free money. Eventually, Schiff says, this will come back to haunt the U.S. in the form of a currency crisis.
According to Schiff, if the Fed continues to kick the can down the road eventually “foreign exchange markets are going to get wise to the Fed’s con,” and “there’s going to be a currency crisis.” For him, the air is already being let out of the dollar, and once the rally reverses, the bond market will collapse along with it. “There’s a bubble in the dollar,” and “people get trapped in this bubble and they can’t see it.”
I would agree with his assessment but I would take the argument one step further. Yes, the economy is addicted to an artificial environment and this is unsustainable. Any whiff of higher financing costs and the markets react horribly and volatility spikes. However, a new dynamic is becoming clear across the market spectrum. Markets are beginning to wish for the good old days where the Fed HAD to raise rates to combat inflation. The markets are nostalgic for a time when rising rates meant a recovery, an emergence from the slowdown as a leading indicator for a strong bounce back.
Now the markets are trying to have it both ways, unsure of which news is better, the Fed raising, or the Fed staying put. There is a violent reaction usually to both scenarios. On one hand the markets are concerned about the economy’s health and on the other hand they are concerned about higher rates. This usually means we are near some type of turn in the overall long-term market direction; in other words, a real sell-off.
However, there is another reason the Fed can’t raise rates that Schiff didn’t mention. The U.S. is deeply in debt and cannot afford the higher debt service costs increased short term interest rates would bring. A one percent rise would be hundreds of billions in additional spending that America just doesn’t have.
Either way, the dollar is in for a world of hurt somewhere down the line if the unsustainable situation is not rectified. It’s not a political view, it’s just simply reality. Politicians can argue over how to fix the problem but the problem has to be fixed, or else.
So for now, the Fed will continue to warn that higher rates are coming and every few weeks the market will freak out, worried that’s actually going to happen. The ironic thing is, a Federal Reserve that has enough guts to raise rates in this environment would be signaling the economy is healthy and I think the markets would take off, just sayin.
Todd Wood is a former emerging market debt trader with 18 years of Wall Street and international experience. He is also an author of historical fiction thriller novels. His first of several books, Currency, deals with the consequences of overwhelming sovereign debt. He is a contributor to many media outlets and is a foreign correspondent for Newsmax TV. LToddWood.com