The Inflation Tsunami Is Just Getting Started

After CPI came in hotter than expected yet again in January, Peter Schiff appeared on Fox Business along with Chief Investment Officer and Portfolio Manager of Solutions Funds Group Larry Shover.

Peter said that the inflation tsunami is just getting started and the Fed is powerless to fight it.

With the hot inflation print for January, the markets are now pricing in a 50 basis point rate hike in March. Peter said that won’t be enough.

“If we still measured inflation the way we did 40 years ago, it would be 15%, not 7.5%. And the rate hikes they’ve proposed are completely inadequate. In fact, the Fed is intending to pursue an accommodative monetary policy. Even if they raise interest rates to 1 or 2%, that is highly accommodative. That’s the same type of interest rates they had when inflation was below 2%. You’ve got inflation at 7.5%, even the way they measure it – and rising. The only way to put out this fire is to have positive real interest rates. The Fed needs to get above the inflation rate. We’re not even going to get close. So, they’re going to continue to pour gasoline on the fire. And so, the entire time the Fed is inching up rates, inflation is actually going to be moving higher. Inflation is going to be worse in 2022 than it was in 2021, and real interest rates are going to continue to fall even as the Fed raises nominal rates.”

So what happens to the economy?

It’s massive stagflation.

‘The problem is people still don’t recognize the box that the Fed put us in. Because there is no interest rate that the Fed could put to fight inflation that the economy could withstand. If the Fed has to fight inflation, we not only have a massive recession, and a crash in the stock market and in the real estate market, but we have a much worse financial crisis than the one we had in 2008.”

Peter said the Fed initially pretended inflation was “transitory” even though it obviously wasn’t because they knew that there was no way to fight it.

“And now that they’re no longer pretending inflation is transitory, they’re pretending that they’re going to fight it when they can’t.”

Shover said he doesn’t think the Fed is behind the curve. He pointed out that we had 10 years of low inflation, and “we’re just not used to this kind of inflation.”

Peter said we’re about to pay for that 10 years of low inflation.

“The Fed kept creating inflation, printing money, and staring at the broken CPI, and assuming that because the CPI wasn’t having a reading that was above 2% that they had the green light to create more inflation. Well, it works with a lag. And now we’re catching up to all the inflation that we created over the past decade. And it’s just started to take hold.”

The massive level of quantitative easing during the pandemic really dialed it up.

“That was the worst possible combination of monetary policy because as we ordered people to stop working, and people went home and were no longer producing goods and services, we gave them additional money to buy the stuff that nobody was producing. So, we have even more money chasing fewer stuff. We have an inflationary tsunami. And we have barely even caught up to that. This is just getting started.”

Peter also pointed out that there is a much higher level of debt today than there was in 1980 when Paul Volker went to war against inflation with 20% interest rates.

“What would happen to the economy given all the debt we have if interest rates even went to 10%? What about 5%? I mean, we couldn’t even handle two-and-a-half percent in 2018. And the economy is in much worse shape now with a lot more debt than it was then.”

Shover said there’s a savings glut. Peter said that’s not the problem. The problem is there’s a debt glut. And he reiterated the key point.

‘There is no way you can fight historically high inflation with 1% interest rates. One percent interest was the rate Alan Greenspan slashed rates to in 2002 to stimulate the economy after the stock market bubble popped and we had that recession. You can’t fight inflation with stimulative monetary policy. You need restrictive monetary policy. And no one is even talking about making money tight. All they’re doing is talking about making it less loose. And you can’t fight inflation with loose money.”

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