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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About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.