The global financial crisis will inevitably move to the other side of the Atlantic to the U.S., as the focus on the dollar’s terrible fundamentals once again puts pressure on the Treasury market. And when that day comes, the selling of US debt and market turmoil it will ignite will dwarf Europe’s sovereign debt catastrophe, according to him.
“We’ve [U.S.] got a much bigger collapse coming, and not just of the markets but of the economy” Schiff tells Yahoo’s Breakout host Jeff Mack. “It’s like what you’re seeing in Europe right now, only worse.”
In agreement with Swiss economist Marc Faber and commodities trader Jim Rogers, Schiff predicts the Depression of the U.S. economy will deepen some time in 2013.
As the Fed responds with more aggressive QE to prop up banks, in addition to maintaining historically record low debt carrying costs to Treasury, investors will most likely come to realize that the Fed has become powerless to affect any positive outcome to the crisis. More jobs will be lost, tax revenue to the Treasury will fall, and deficits will soar even higher than the $1.5 trillion deficit expected for fiscal 2013.
“That’s when it really is going to get interesting, because that’s when we hit our real fiscal cliff, when we’re going to have to slash — and I mean slash — government spending,” says Schiff.
“Alternatively, we can bail everybody out, pretend we can print our way out of a crisis, and, instead, we have runaway inflation, or hyper-inflation, which is going to be far worse than the collapse we would have if we did the right thing and just let everything implode,” Schiff continues.
But Bernanke will most likely make good on his promise to economist Milton Friedman (1912-2006) during a speech the Fed Chairman made at Friedman’s 90th birthday celebration. In his speech, Bernanke relived the Fed’s monetary policy responses to the financial crisis of the 1930s, and praised Friedman for pointing out that the Fed’s restriction of money supply to stem the flow of gold out of the United States was a mistake. The Fed, instead, should have increased money supply to save the banking system and move off the gold standard (as Britain did earlier in the crisis).
“This action [raising of interest rates] stemmed the outflow of gold but contributed to what Friedman and Schwartz called a ‘spectacular’ increase in bank failures and bank runs, with 522 commercial banks closing their doors in October alone,” Bernanke said At the Conference to Honor Milton Friedman, University of Chicago, Chicago, Illinois .
“The policy tightening and the ongoing collapse of the banking system caused the money supply to fall precipitously, and the declines in output and prices became even more virulent. Again, the logic is that a monetary policy change related to objectives other than the domestic economy–in this case, defense of the dollar against external attack–were followed by changes in domestic output and prices in the predicted direction [down].”
In 1931, the gold price was fixed at $20.67, making it a bargain to holders of U.S. dollars if the Fed had acted by debasing the dollar. But instead, the Fed decided to protect the dollar from “attack” by domestic and foreign holders, a policy move that Schiff believes is in the best interest of the U.S. economy, today.
That’s not likely to happen, however. It’s clear from the passage, above, of Bernanke’s entire speech that Bernanke will sacrifice the U.S. dollar in the hopes of saving the banking system; he believes it’s a small price to pay to prevent the decimation of the banking sector—the very point of Friedman’s lifetime of work.
“Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve,” Bernanke ended his speech. “I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”
And Schiff takes Bernanke at his word, and recommends that investors buy gold and silver before “Helicopter” Ben makes good on his promise to Milton Friedman of 10 years ago.
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