James Keivom/NY Daily News Archive via Getty Images
- Peter Schiff, the outspoken CEO and president of Euro Pacific Capital, thinks the gargantuan amount of debt the US is carrying is primed to default.
- He calls repayment "impossible" and sees this mess ending in either an "honest" or "dishonest" default.
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For one reason or another, the towering amount of debt the US has racked up over the years seems to be of little concern to market participants and politicians alike.
Currently, that figure tops $22 trillion - and is growing fast. What's more, as modern monetary theory continues to gradually inch its way towards the limelight, some are even questioning if it matters at all.
Peter Schiff, the outspoken CEO and president of Euro Pacific Capital, is passionately on the other side of that debate - and he thinks that the US' frivolous spending and money-printing is going to culminate in a cataclysmic scenario.
"The economy is getting sicker," he said on Off the Chain, a digital assets podcast. "And that's what the central banks are doing when they cut rates and they print money - they're actually making the underlying economy sicker, even though it doesn't look sicker because they're just measuring the spending that goes on and they're ignoring the debt that's behind it."
But that debt is important. After all, it eventually has to be repaid.
In Schiff's opinion, the Federal Reserve's affinity for printing money is going to result in runaway inflation - and as a result, he expects a massive exodus from the greenback.
"If the inflation rate is 4% or 5%, compounding - and you're getting 0% interest on your dollars - that's a one way ticket to a disaster," he said. "I think inflation is going to break out all around the world."
Put briefly, Schiff thinks the US dollar is on track to collapse.
If he's right, these inflationary pressures will have to be suppressed through the raising of interest rates. There's only one problem: The market can't handle higher rates. The Fed tried normalizing interest-rate policy and it barely got off the ground.
"That's when it hits the fan - because now the debt bubble pops," he said. "We've built an entire economy based on the perpetuation of this continuing - that we can run trade deficits forever and budget deficits forever and keep having low interest rates and consumer prices that aren't going up."
This is a key pillar underpinning his argument. To Schiff, this notion is unsustainable - and the longer the kick-the-can mentality manifests, the worse the unwinding will be.
"That's why the Fed is back doing QE," he said. "There's just not enough private demand for all the debt the government is selling."
How it ends
With all of that under consideration, Schiff sees two possible ways that this mess will play out: An honest default or a dishonest default.
By his personal definition, an honest default is exactly what it sounds like: Creditors being paid back far less than they're owed.
In direct contrast to this method is something he calls a dishonest default scenario. Schiff describes this method as just printing money, but according to him, that will result in hyper inflation. Not the outcome that anyone is looking for.
"The important thing to recognize is we're defaulting no matter what," he said. "It is impossible to repay the debt."
Clearly, his perspectives are nothing short of extreme, but he views a default as necessary in order to rebuild an economy that is up to its neck in obligations it can't meet.
Against that backdrop, Schiff sees only one way to getting the US back on track.
"We're going to have to have a severe recession if we're ever going to build a viable economy," he concluded. "This bubble won't go on forever."