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Peter Schiff: "At some point, the dollar has to give"

While the U.S Federal Reserve claims it needs to keep interest rates near zero to help the economy, renowned economist Peter Schiff says there's another reason.

According to Schiff, the Fed has little choice: If rates began to climb, the interest payments on the ballooning federal debt would explode making annual budget deficits far worse.

"We're now so addicted to debt that the highest rate we can afford is zero," Schiff, the CEO and chief global strategist of Euro Pacific Capital, told Casey Research chairman Doug Casey in a video interview published today.

"We pay about $300 billion a year right now in interest on a $16.5 trillion debt," Schiff explained. "What if, in two or three years — and the debt is $20 trillion — what happens if interest rates are 5%? Well, that's $1 trillion a year in interest payments."

This scenario is not at all far-fetched; the historic norm for interest rates is just below 5%, and rates in the early 1980s were triple that.

Another reason the Fed fears higher rates, Schiff said, is that it would probably bankrupt most of the "too-big-to-fail" banks that the government bailed out back in 2008.

"The only justification for keeping rates so low is that the Fed knows any increase in rates will collapse this phony economy and we'll be right back in recession," Schiff said.

Peter Schiff Sees More Inflationary Money Printing

Meanwhile, Schiff predicted that Washington's ongoing reluctance to make any meaningful attempts to balance the federal budget by cutting spending or raising taxes means there will be no let-up in the Fed's other inflationary policy — printing money.

"I think a lot of this is going to be financed by the central bank," he said. "Inflation is the tax that they're going to levy, and it's going to hit everybody."

Limited Time Offer: To receive a free copy of Peter Schiff's new bestseller, The Real Crash, click here.

Further money printing would come on top of the series of programs known as QE1, QE2 and QE3 (quantitative easing), in which the Federal Reserve has been buying U.S. Treasuries. That policy pumps money into the economy by monetizing the federal debt.

The ultimate victim of the Fed's actions, Schiff said, will be the U.S. dollar.

"At some point, the dollar has to give," he said. "You can't just keep printing money, and monetizing debt, and buying bonds, without the dollar imploding."

The only thing that has kept the dollar from collapsing so far, Schiff said, is the dollar's status as a safe haven currency, bolstered over the past two years by a Eurozone debt crisis that has undermined confidence in the euro.

Should global sentiment turn against the dollar, he said, it could rapidly lose value.

"That will put incredible pressure on the Fed to raise rates, but the Fed can't raise rates," Schiff said. "And as investors around the world perceive that the Fed is all bark and no bite, that it's never going to remove he liquidity because it can't, then you get a run on the dollar."

At that point, the Fed would face a crisis.

"Now, either the Fed allows the dollar to collapse, in which case we have runaway inflation, or, they aggressively raise interest rates and collapse this whole economy," Schiff said.

How Investors Can Avoid Disaster

With Fed policies putting the dollar at risk, U.S. investors should be planning their defense now, Schiff said.

"People should have an escape valve for their money, their assets," he said. "If you have substantial financial assets, the government is going to confiscate the purchasing power of those assets and spend it."

Schiff said the best ways to dodge the demise of the dollar is to own precious metals like gold and silver as well as foreign assets such as foreign stocks and bonds, "something the Federal Reserve can't print."

In particular, he recommended that investors look closely at emerging markets, because that's where much of the world's wealth will be in the future – not in the debt-plagued United States.

"When the dollar collapses, it's not doing it in a vacuum," Schiff explained. "If the dollar loses value, it's doing so relative to some other currency. So the purchasing power that we lose, somebody else gets."

Schiff says investors need to look not at the world economy as it is today, but as it will be.

"[Emerging markets] are going to see a big rise in their living standards, so you want to be invested in those economies, in those currencies," he said. "You want to be able to take advantage of the emerging markets, not the submerging U.S."

To get a free copy of Peter Schiff's latest book, The Real Crash: America's Coming Bankruptcy – How to Save Yourself and Your Country, click here.

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  1. Neville Taylor | January 31, 2013

    My biggest question, your article indicates if interest rates went up in the US then the US Federal Reserve debt repayment interest rate would also go up, (I don’t understand that because I haven’t learnt how bonds pay or yield, I thought the US Reserve borrowed money by selling bonds is the bond yield rate linked to the US Reserve rate?) does that mean variable home loan interest rates go up the same way as they do in Australia when the Australian Federal Reserve lifts or lowers its official rate the banks are supposed to follow suit. There are a few different scenarios being floated, the US economy shall slip into deflation followed by hyperinflation or the US will slip into a depression or the whole US economy will collapse, what would happen to variable home loan rates in these situations? In the case of hyperinflation would the banks keep jacking the interest rates up as much as they can because the paper money interest payments they were collecting from lenders had no value or less and less value each day?
    I started to think seriously about investing in shares to grow my money beyond bank returns and also to have dividends and franking to increase income that is independent of having a job. I have had my attention drawn to the possibility/probability? of a collapse of the US economy and the ramifications of that on the global economy, I have read articles about titanium filled gold ingots and that gold as an asset historically has not kept pace with inflation, if Gold went to a stratospheric price of $10,000 US you wouldn’t trade it for US dollars because that would mean the economy is bust and the $10,000 US paper is not worth anything, well it might buy a few $30 loafs of bread, surely you would need to look at foreign currencies that pegged the gold standard at a widely accepted lower, more realistic price, a third of that $10,000 US amount in other currencies before you consider trading gold for paper money, you have got to have faith in the purchasing power of the paper before you would sell your gold. I am wondering which Australian, US and international companies in which sectors would survive and bounce back from such an event as the economic collapse of America and its biggest lender China? Could these big companies function without the US dollar, who would have trustworthy money to buy their goods and services? There are many who seem to be putting a positive spin on perceived improvements in the US and European economy, nobody seems to want to draw attention to the gorilla in the room. I heard a quote that corporate America is doing okay it the US Government that is broke, is there any truth in this with Globalisation and multinationalism could some of the big US darlings of the share market with sales of their goods and services all around the world survive the collapse of the US economy, this ties in with claims that the top 100 billionaires grew their wealth by 15% last year despite the economic woes of Europe and America, perhaps they engineered them or perhaps they already have plans to sidestep the collapse of the US economy.
    I saw on your website a figure I heard on a TV documentary, that Japan has debt of 230% of GDP, if Japan could service the interest on this debt each year and funnel 10% of GDP from taxes etc to pay off the debt could Japan do it in less than 23 years, I am curious because I haven’t looked for the GDP of the US and compared it as a ratio to the US debt and I am trying to work out how bad a shape the American economy was, if the US had a similar debt to GDP problem as Japan could a maverick survivor like the US convince the world it could sort its problems out over a fifteen year time frame and the rest of the world should stick with it as a long term investment?
    Does the US Federal Reserve borrow money to pay the $300 Billion a year to service $16.5 trillion debt, if the US Reserve did then that would mean the debt is growing exponentially without even accounting for further borrowings for spending on future bailouts, economic stimulus and social reforms, if that is the case it would indicate an inevitability of a point in time when foreign countries knew with absolute certainty that loaning money to America would be throwing good money after bad, the miracle of compounding interest works also with compounding debt.

  2. barrie owen | January 31, 2013

    Excellent comments from Peter Schiff who's book ( Bull Moves In Bear Markets ) I have. Sadly, I feel there's too much emphasies on the missunderstood overall problem of this unprecedented financial crisis, Example Too much debt or, The economy, or the Subprime Mortgage catastrophe etc, Only when one has an understanding of the financial system and the the Banking Cartel and its legalised protection concieved in 1910 and written into American law in 1913. Only when one has an understanding of this corrupt system of theft and ultimate control will people realise we need to change the system of banking Radically and to bring those responsible to book. In other words ——-ITS WAKE UP TIME.
    Barrie Owen

  3. Robert in Canada | January 31, 2013

    The premise of the article is entirely logical and is common sense.

    Yet the US Dollar keeps it's value against other currencies year after year no matter what stupid financial schemes the US Gov't engages in.

    So unless there is a major worldwide upheaval or some sort, I predict the US Dollar will maintain it's value against other currencies for the next 10 years.

    You just have to realize the game is rigged.

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