Peter Schiff Warns of Hyperinflation Risks Looming

Peter Schiff

Stock market strategist Peter Schiff was once regarded as “Dr. Doom” for his pessimistic views of the housing market. He’s seeing the potential for doom once again.

Calling someone “Dr. Doom” is only an insult if the doom that you see is that exaggerated. Equity strategist and stock market commentator Peter Schiff did seem to earn that title at one time, when he told us back in 2006 that “the United States is like the Titanic and I am here with the lifeboat trying to get people to leave the ship…. I see a real financial crisis coming for the United States.”

Few took him that seriously back then, even though there were others that shared his concerns that far back, although perhaps not to the degree that they thought we should all head for the lifeboats. At the very least though, we should have been hanging near the edge of the ship and at the ready for when the time comes where we may need to jump, as many financial lives were lost when we did hit the iceberg a couple of years later.

The lax lending standards with mortgages wasn’t that big of a secret, but many thought we could just keep the thing going like a Ponzi scheme. We didn’t care much about people not being able to afford these mortgages, as we could just set them up with teaser rates that they could afford for now.

When they expired and they would have to afford the payments that competitive rates required, we weren’t worried, as all they had to do was to refinance their mortgage and use the equity that was built up during the term to help finance their future payments.

Meanwhile, as is always the case with Ponzi schemes, a lot of money was made by those promoting it, from mortgage brokers to lenders to the big investment banks that underwrote the securitization of this debt. Most think that this collapsed unto itself, but it was actually interest rates going up that brought down this house of cards, and ultimately, inflation rising that caused the need for these higher rates, which this artificial inflation of the housing market contributed to.

Aside from a scheme like this being completely against any sensible risk management policy by lenders, rising home values just isn’t really that compatible with low rates, as this creates inflation, which cannot be left to stand. The inflation happened, the Fed raised rates, for better or worse, and then the jig was up. While no one, even Schiff, had no idea how bad this really was, we did know that we had a real problem and we cannot leave inflation to grow unchecked, and dealing with it does require that we turn down the borrowing by putting up rates, among other things.

This did end up being a disaster, and while Dr. Doom did try to warn us in plenty of time, we did not heed the warning, and he certainly got the last laugh, if it is ever appropriate to laugh at such a thing. Those who got ahead of this move were though, and while a lot of money was lost, there was a lot made as well, by those who either jumped on the lifeboats in time and got back in lower, or profited from the crash by betting on prices going down when it appeared pretty clear that they would.

This is not anything we want to ever be too preemptive with, and this includes the Dr.’s newest prognostication of doom, the real risk of hyperinflation that Schiff now sees on the horizon. Back in 2006, it was too soon to bail from our stock positions, and it wasn’t until toward the end of 2007 that the word got out on how deep the rabbit hole may be with this issue, and the market in general started to really discount it. It’s too soon to panic too much about inflation, but we do need to have our eyes open to it.

As these waves splashed over the deck, and as the shadows of the iceberg dead ahead started to emerge, that was the time to jump. Many investors chose to go down with the ship back then though, and when you get warned about something and it actually happens, with people on Capitol Hill staying up all night to try to figure out how we don’t all die from this shipwreck, and you still don’t jump, you have no one to blame but yourself.

Schiff has been cautioning us against hyperinflation since back in those days, and while it was far from even a concern back then, we managed to figure out a way to cause it now. Many countries have experienced the doom first hand that hyperinflation brings, from Ancient Rome to 21st century Venezuela. This happening to the United States seems to be so improbable that it may not even be worth considering, especially since the U.S. dollar is where they flee when this happens, but we cannot ever be so sure that we close our eyes to something.

We know with absolute certainty though that the U.S. dollar will implode one day, when we have borrowed so much that we can no longer borrow enough to make the payments on the debt, which will cause the dollar to become worthless. Not many people really appreciate how deadly a beast hyperinflation is, but it leaves nothing in its wake. This is not like hitting an iceberg like the 2008 crisis, it can be so bad that it is more like our ship getting hit with a nuclear missile and vaporizing it.

We spend a lot of effort fighting inflation, and even a little inflation can pound our economy, but in a very mild way compared to hyperinflation. When this happens to the U.S. dollar, all wealth held in the currency will just evaporate, and this explosion will be like nothing we have ever seen, because there is so much wealth held in U.S. dollars.

Hyperinflation is a Pac-Man Like Beast That Eats All of the Money

Hungary’s experience with hyperinflation after the WWII ended gives us a good taste of how powerful a monster this is. By the time hyperinflation was finished its gobbling, all the money in Hungary was reduced to just a thousandth of a penny in U.S. money.

Along the way, the value of their currency was halved every 15 hours. Imagine getting paid and needing to spend all of it right away to avoid these massive losses. This cranks up what is called the velocity of money to the extreme, another hallmark of hyperinflation. In just one month, at its peak, Hungary experienced an inflation rate of 419,000,000,000,000,000%. This would turn all the money in the world to tiny fractions of a penny in no time.

Lesser events are no party either, where you may have to trade in millions of dollars in the old money for just a dollar in the newly minted currency. It’s not that nothing survives such things, as non-currency wealth still has its practical value, for instance your house would still be standing, but with no one having any money anymore, you won’t be able to sell it for money anyway. This is a true economic nightmare, and while this is inevitable, we want to do our best to forestall it.

The recipe for hyperinflation comes down to governments spending far too much money, and when you do this while your tax base decreases, this is all the more worrisome. This is exactly what we are doing to fight the self-inflicted economic damage that we have recently put ourselves under, and while the damage isn’t anywhere near this bad yet, continuing on this course can take us in very dangerous waters indeed.

We aren’t headed toward this economic Black Death yet, even though we have done unprecedented damage already, and this includes both the trillions that the government is set to spend already as well as even more trillions that the Fed has thrown into this mess. However, the price will be high now at the very least, and we’re not even sure how high since we are in uncharted waters, but we need to at least have a basic understanding of what is really at stake.

It would not be inaccurate to call modern economies Ponzi schemes, but this one is so big that we have no choice but to just keep it going and pushing our inevitable collapse away from the present continually. This is not unlike someone who makes $50,000 a year but spends $100,000, and has to borrow the rest. The ratio of our government spending to what they make is right around this 2:1, which should scare us a lot more than it does.

Eventually, if you do this for long enough, every cent you have or could borrow will eventually not be enough to even keep up with the interest on this debt. This would happen very soon if we tried this on an individual level, but governments can go much more in the hole than we can, they can just keep the Ponzi scheme going for a not longer, but not forever.

Our ratio of debt to income is now around 10:1 and growing, and this isn’t just growing, the growth is accelerating at an alarming rate. It’s not hard to imagine what happens as this continues to grow, and given that the amount that we can borrow is limited by actual money out there that people wish to lend us, that will eventually dry up and it will be bottoms-up for all of us.

Between now and economic doomsday, there is a certain maximum amount that we can borrow in total before the end comes, and when we throw money around like we have lately, we need to be very careful. This brings the time we have left before the collapse of the U.S. dollar and the U.S. economy, and the collapse of the world economy in turn, all the shorter.

Not all of the threat is years away though, as while we may not bring on this hyperinflation in 2020, this is still going to cause a disturbing amount of inflation at best. If we insist on sinking our ship over this, there is no limit to the damage that we can do, as this is not a matter of the Wizards of Washington just conjuring up any amount that we need to keep the country’s economy on life support while we deal with our pandemic of paranoia.

Most people understand inflation risk as just things costing more, and we therefore just need to get paid more and this is thought to even the score or at least come close. Inflation isn’t even a good word to describe this effect, as devaluation would be a lot more accurate, and this is what inflation does, it devalues our money by having more and more of it circulating.

If our money gets devalued by 50%, this means that if you had a million dollars before, you now only have half of that, losing $500,000 in the process. When you project this on the whole economy, a lot of money is lost indeed. If this gets too much out of hand, we lose everything, but even the smaller stuff does matter a lot and can really hurt.

When we expand the money supply, this is inflationary, but we do want to stimulate it enough to keep inflation positive because that stimulates the growth we crave. We want to at least shoot for having more money, and this allows us to do so, and in the absence of economic growth, we have an economic recession or a depression, which is simply not what we are after.

We had inflation in the perfect spot before this, around 2%, but that has blown out the window now in favor of our choosing to be held hostage. There aren’t a lot of people who appreciate the risk that this brings, but it is vital that we do, lest we choose a far worse path than we are looking to prevent.

Donald Trump has mentioned numerous times that we do not want the cure to be worse than the disease, although with his mentioning deaths from suicide as serving to offset the present concerns, he shows that he doesn’t really understand what is really at stake. The real risk is creating a situation where a lot of people will just starve to death, and this is well within the realm of possibility should we continue this kidnapping for long enough.

Spending is Already Alarming, and We Need to be Very Careful Not to Overdose

We might think that we could just spend our way out of it, with Washington carrying the whole economy on its back for a year or two or however long we decide, but that’s actually the risk here if you understand how inflation works. This could set us on a course where the economy is left for dead and a whole lot of people will die along with it.

With this said, it is unimaginable that we would ever let things go this far, even being as much out of our minds as we presently are. It is not that America wasn’t designed to be shut down, it is more that it cannot survive being shut down for extended periods, and if we try such a thing, the cure won’t just be worse than the disease, the cure may even be fatal.

Our saving grace will come down to the combination of feeling the economic pain more and more and seeing this not very remarkable event die down. The media has created Mount Everest out of what should have only been seen as a mole hill, where you might get bit by this mole but should not want to blow up the whole property to get rid of it.

Many believe that the big money does all of the real talking in a democracy, and we better hope that this is true because someone needs to ensure our way of life is preserved even if the motivation is merely profit. Luckily, this is true to enough of a degree that we will survive this economic pandemic, but not without some real scars.

The title of Dr. Doom may suit Peter Schiff, but while he may have a tendency to overstate things somewhat, there is some real doom at the end of this tunnel if we do not decide wisely enough. Ironically, Iran is probably doing the U.S. a big favor in opening things up while still in the midst of this viral battle, as every mine needs a good canary.

This is shocking a lot of people, those who have bought the fairy tales that we’ve been told about how many millions will die if we don’t keep this all up, but this looks like a very good time for Iran to do this, with their infection rates in decline for a while now and their economy really hurting. It’s not that this won’t put their infection rates up for a while, but this should be fairly tame and nothing that should have us considering prolonging our shutdown for much longer. So far, so good, in Iran and elsewhere where life proceeds normally now, with the monsters we are terrified by being confined to our overactive imaginations.

Once the numbers are in with this, both the number of deaths and the amount of economic harm we’ve taken on to battle this, the war against this will only have begun. This is where the inflation beast enters the fray, and the cost to fight it will be significant indeed. In order to tame inflation, you basically have to put enough people out of work on purpose, enough to take us from close to economic paradise to one where the temperature will be much hotter.

This is the danger that hardly anyone is seeing, and why we cringed so much when we saw the Fed put rates to zero even before things started shutting down. In the face of these shutdowns, we have no real choice but to create a lot of inflation to keep the water out of our boat, but the price for this will need to be paid.

Schiff’s prognostications of doom this time do seem well overstated, and it is unimaginable how we could possibly tolerate the suffering for anywhere near long enough to take us into the hyperinflationary realm, but good old high inflation is at our doorstep. Schiff advises us to move to gold, and sees the price of gold rising phenomenally, but just like in 2006, the time for this is not quite here.

Save for a massive crisis, gold just isn’t going to $10,000 an ounce anytime soon, but given that gold does serve as a hedge against inflation, it’s outlook thanks to COVID-19 has become decidedly more bullish. There’s too much money to be made with stocks right now to want to have too much of your money in gold though.

However, once that does play out and we regain what we are set to regain with stocks, gold certainly deserves a hard look provided that it can keep pace and show us that it is ready to take the throne and rule over other investments like it very well could.

Another type of asset that may be a big benefactor of this crisis is cybercurrency, such as Bitcoin, and Bitcoin has already been used in the war against inflation in Venezuela. Why gold and Bitcoin are such valuable tools against inflation is that their prices are completely determined by the supply and demand for the asset, where hard currencies are subject to a lot of other things, like watering down their value so much with all these extra trillions spent to fight this virus.

This is one of the main reasons, if not the main reason itself, why cybercurrencies were created, as these currencies are immune from hyperinflation and even inflation. Their value can drop greatly from lack of demand, but the more people need to flee from inflation, the greater the demand is and the greater their value becomes.

Both cybercurrencies and gold enjoy the advantage of very constrained supply, with the supply of gold limited to new gold mined, which is very little, and cybercurrencies limited digitally by design. The supply of hard currency, on the other hand, is subject to whim. A lot of investors are spooked by the idea of having a lot of their wealth in a financial fiction, but fiat money is a fiction of sorts as well and a much more precarious one in the end, which is why there are still people lamenting getting off the gold standard where money was actually capped instead of just being numbers we create out of thin air and seeing this come home to roost one day.

Schiff is not alone in worrying about inflation so much, as Deutsche Bank strategist Oliver Harvey is concerned about this as well for instance, and he sees the combination of runaway spending and constraining demand as a recipe for hyperinflation. It surely is, in a big enough measure that is, as this is the how other countries have done themselves in, albeit less intentionally.

We already know that there will be plenty of inflation from this just from what we’ve done so far, which means that it is time to start thinking about hedging against it, by moving from hard currency-based assets to assets that are not subject to the sort of depreciation that currencies will be subject to.

Gold is a lot shinier at certain times, and we may be getting ready to enter one of these times. It may not go to the moon like Schiff believes, but at least part of the way there will at least carry us away from what may end up being some troubling times ahead for other currencies.



Monica uses a balanced approach to investment analysis, ensuring that we looking at the right things and not confined to a single and limiting theory which can lead us astray.