Judging Freedom - Peter Schiff reveals the truth about inflation

Episode Date: December 21, 2021

Legendary economist, Peter Schiff, joins Judge Napolitano to detail the truth about inflation, the Federal Reserve, and the state of our economy today.#Economy #PeterSchiff #Inflation See Privacy Policy at https://art19.com/privacy and California Privacy Notice at https://art19.com/privacy#do-not-sell-my-info.

Judge Andrew Napolitano here, my friends. Welcome to Freedom Watch, my podcast where I get to interview my friends and pick their brains and talk about topics of interest to you. Today, one of the smartest people I know or know of in explaining economic factors, why does it cost you more for a gallon of gas today than it did two years ago, which will be my first question to him. Peter Schiff. Peter is a graduate of the University of California at Berkeley. He is the founder of Euro Pacific Asset Management, which is a successor to many of his other companies, all with the name of Euro Pacific. Back when I was at Fox, he was a regular guest of ours. He is about the best explainer of free market economics that I know. Peter, welcome to Judging Freedom. Oh, thanks for having me on your podcast, Judge.

It's a pleasure, my dear friend. Why are we all suffering from inflation today? Well, there's only one reason that anybody suffers from inflation, and that's because of the government. Government is created by inflation. It's a creature of government. In fact, it's simply a stealth way that the government taxes us, because inflation, by definition, is the expansion of the money supply. I mean, to inflate literally means to expand. People normally think about prices, but you can't expand a price. It's the money supply that expands. But when you increase the supply of money, you diminish the value of that money, and now more money is required to buy goods and services and so the price of those goods and services rises to reflect the additional money so it's the increase in price is merely a

result of the inflation that is created by government specifically the federal reserve because the federal reserve is expanding the money, but the government is ultimately spending that money supply into circulation when it sends out checks without collecting tax revenue, right? You have these big budget deficits. Where does the government get a lot of the money to spend if it's not collecting it in taxes and it's getting it from the government that is simply creating it out of thin air. Now, what you just said is so logical and so obvious and so inassailable. Why doesn't the government recognize what it's doing or is it doing this intentionally? Well, certainly the government doesn't want the public to know that inflation is created by government because then they might oppose it, obviously, because it's a tax. on OPEC for raising the price of oil, speculators for trading in commodities,

sometimes even maybe greedy unions demanding higher wages. The government wants to point the finger at everybody but itself. And, you know, part of the problem is inflation sometimes, instead of causing prices to go up it prevents them from falling and so we don't actually see the harmful effects of inflation because you don't realize how much lower your cost of living would otherwise have been absent government created inflation because the beauty of capitalism what little we have left in this country, is that capitalism is a force that leads to abundance, that leads to efficiencies and economies of scale. And so normally in a capitalist economy, the cost of goods and services is going down. And that means our standard of living is going up because we can afford to buy more stuff. But when the government creates inflation, oftentimes it prevents those benevolent price

declines from happening. But we don't complain about it because we don't realize the benefit that we never enjoyed. So if prices go up by 2%, but they should have gone down by 5%, the government says, oh, we have 2% inflation. But we don't. We have 7% inflation. Prices are 7% higher because the government inflated the money supply than what they would have been had the government not created the inflation in the first place. So how does the government tax people by its inflationary behavior? Well, the government needs money to spend, and it has two ways of getting that money.

One is the honest way. It could take it from us through taxation, where the government literally takes money out of our paychecks so we have less money to spend. Or they can persuade us to loan them the money, which again, we take money that we could have spent and we loan it to the government and the government spends it instead. Now, of course, that represents a claim on future taxpayers, which are ultimately going to have to pay taxes to the government so the government can pay me back the money it borrowed. But in either of those two ways, taxation or legitimate borrowing, money is sent from the private sector to the government and then the government puts it back into the private sector. So there is no net increase in the money supply, but there is a net reduction in my personal money supply because money that I send to the government cannot be spent by me. But I have less to spend, so I get less stuff. The other way the government can pay for spending is just by printing money, and then it gives that newly printed money to

somebody else to spend it. But when that happens, even though the government didn't take my money, the government took my purchasing power because now the the people who got that newly printed money they go out into the marketplace and spend it they compete with me to buy goods and services and that drives up the price of those goods and services and that additional price basically is the equivalent of a tax so let's say the government takes 10% of my money in taxes and now I have to reduce my spending by 10% because I only have 90% of my money. So I buy less stuff. But if the government leaves me with all my money but just prints up the

equivalent of 10% of my money and gives it to another person. And now that person goes and buys goods and services, and the price of those goods and services go up by 10%. I now have to reduce my spending by that same 10% because I don't have an unlimited amount of money. Things now cost more. So I end up in the same place, regardless of whether the government takes my money or my purchasing power. The difference is when the government takes my money, I know who to blame, right? You raise my taxes. But when they steal my money through inflation, I'm confused, especially when the government is lying to the public

about why prices are going up, or in fact, they're pretending they're not going up by using the CPI, which doesn't even capture the real extent that prices are going up. So I don't even know they're going up if I believe the government. But what I do know is my standard of living is going down because, you know, I'm not able to afford as much stuff with my income, but I'm not blaming government and I'm not taking my frustration out at the polls. That's what the politicians don't

want. They don't like to raise taxes because the voters don't like paying higher taxes. But if they steal their purchasing power through inflation, the voters don't know they're getting robbed and they may still continue to reelect the people who are robbing them. When I was a senior at Princeton, there was a young kid who lived across the hall from me, and his name was Jay Powell. Today, that young kid, I see you laughing. He was a nice guy when he was 17 and 18 years old. Today, he's ruining the economy as the chairman of the Federal Reserve. How can he say with a straight face that inflation is transitory when the government is trying to borrow trillions? Yeah, well, apparently he stopped using the word transitory. So I don't know

what he's using now, but he still expects inflation to come down. I mean, if you look at the Fed's projection of interest rates two years from now, by the end of 2023, the Fed still expects rates to be below 2%. Now, how could that be? How could rates be that low if the Fed is actually committed to fighting inflation? Because even if you believe the government's methodology for tracking prices, prices are rising 7% right now. Well, how are you going to do anything about 7% inflation when your interest rates are lower than 2%? You've got negative real interest rates greater than 5%. You're not going to make any headway fighting inflation unless you have a positive real interest rates, which means if inflation is 7%, you need interest rates of maybe

8%, 9%. I mean, ask Paul Volcker. I mean, he's not alive anymore. But, you know, they didn't take rates up to 20%, you know, for the fun of it. Rates went up there because inflation was 13%, and people thought it was going to get even worse. And so the Fed had to get in front of the inflation curve. Well, Powell is still way behind the inflation curve. That curve is accelerating now and it's clearly going to accelerate more as the size of the deficits get bigger and bigger. And the Fed is then required to print even more money to monetize it. Now, it's not legally required to do it. In fact, it should refuse to do it. That's what the Fed is supposed to do. But unfortunately, the Fed does Congress's bidding and whatever deficits Congress runs, the Fed is happy to monetize them. In fact, the Fed is encouraging the government to run bigger deficits specifically so it can monetize

them. So when you say print money, they don't literally print money. Don't they just add zeros to the bank accounts of their favorite bankers? Yeah, you know, they don't need a printing press anymore because most of the money is electronic. It's just an entry, computer entry into a bank deposit. And so the federal government has an account at the Fed and the Fed just adds numbers into that account, you know, by pushing a button or whatever, whatever they have to do, stroke a key. But that's it. So you can create even more inflation because in the past, maybe you were at least constrained by the availability of paper and ink.

But now, I guess as long as they have an internet connection, they can keep creating inflation. So the interest rates you're talking about is really the rent you pay to borrow money. Are those rents, those interest rates ever going to float so that it's determined by supply and demand? That is unless you and Ron Paul become members of the Fed without you and Ron Paul becoming members of the Fed. Well, eventually it's going to have to happen because the government can only succeed in artificially suppressing them for so long. How long? Well, as anybody's guess, I mean, it's already or they've already been able to succeed for a long time, longer than a lot of people, myself included, would have expected years and years ago when they really started the process. But there are many reasons that the Federal Reserve is

artificially suppressing rates. And of course, this is doing severe damage to the U.S. economy. But the reason they're doing it is, number one, the Fed believes that high asset prices are key to economic growth. They believe in the wealth effect, even if it's phony wealth, just on paper. As long as we feel richer, the Fed is happier. And so the Fed wants to keep stock prices high, real estate prices high, to maintain that illusion of wealth. And politicians like to use the level of the stock market as some type of barometer of the efficacy of their policies. So they want to keep assets overpriced, and so they have to keep money cheap. But I think a bigger issue than that is a recognition of the degree of debt that exists throughout the economy.

The federal government, state and local governments, corporations, individuals are loaded up with debt. Now, the reason they're loaded up with debt is because the Fed encouraged them to borrow by keeping rates so low. But now that they've taken on so much debt, they can't afford higher interest rates. It's like the Fed got everybody hooked on the drug of cheap money, and now it can't withdraw the drug without everybody going into withdrawal. And so in

order to perpetuate this bubble that it created, it's keeping interest rates low. Imagine what would happen if the Federal Reserve allowed interest rates to return to a market level, wherever that level is. Now, we would know based on supply and demand, because prices are determined by supply and demand absent government intervention. And so interest rates, the price of money, would be determined by the supply of savings in the economy versus how much demand there is on that savings, borrowing, on the part of all the borrowers. Well, given that we have record amounts of borrowing and hardly any savings, the price of money should be pretty high to borrow. I mean, it shouldn't just be historically normal. It should be historically high given the degree

of borrowing we have relative to savings. But even if interest rates just went up to 5% from where they are now, which is basically zero, the government's national debt, which is about $30 trillion, it's financed at 1%, not even. But that's only about $300 or a little bit more. It's about $350 billion a year in interest that we're paying on that $30 trillion debt. I mean, $29, whatever it is. But what if interest rates moved up to 5% on average? And over the next few years, all of that debt reset at the higher rate.

Well, then the feds would do the unthinkable. They would borrow money to pay the interest on money they already borrowed. Right. But my point is, legitimately, if the federal government had to pay 5% interest on $3 trillion, that's $1.5 trillion a year in interest payments versus $350 billion. That's about, what, $1.2 trillion per year in additional expense. Now, compare that to the Build Back Better bill that they're talking about. They were saying that that was going to cost us $1.75 billion over 10 years. Now, of course, they're way off. But if you just believe their bad math, that cost $1.2 billion per year. That's $12 trillion over 10 years. That dwarfs the cost of Build Back Better. In fact, if interest rates go to 5%,

given the current size of the national debt, we would be spending more on interest payments than we do on any other line item in the budget, which would include Social Security, national defense. I mean, maybe Medicare, which I think Medicare, Medicaid, all the health care programs combined would still be bigger than interest on the debt. But if interest rates went to 10%, then interest on the debt would dwarf what we pay on Medicare and Medicaid. In fact, I think it would exceed what we spend on Medicare, Medicaid, Social Security, and National Defense all combined. That's a 10% interest. We were at 20% in 1980 when we had a lot less debt than we have now. And we've got a much bigger inflation problem on our hands.

But what that shows you is we can't do anything about it. The Fed has put itself into a situation where it can't actually fight inflation because fighting inflation would destroy the bubble economy that they've been nurturing all these years, which is the reason I always said that, you know, when the Fed was saying we want more inflation, I always said, be careful what you wish for. You just might get it because the worst thing that could possibly have happened

was a pickup in measured inflation because the entire justification for keeping interest rates artificially low was the idea that we didn't have enough inflation. I mean, that's how crazy this was. The Federal Reserve said we didn't have enough inflation. I mean, that's how crazy this was. The Federal Reserve said, we don't have enough inflation. Prices are rising too slowly, and therefore the Fed has an obligation to make sure they rise more quickly, because somehow prices that don't rise fast enough represent some type of threat to the economy,

which was complete nonsense, But that was the justification. But if inflation is clearly much, much higher than 2%, what is the justification for keeping interest rates at zero? What is the justification for trying to create any additional inflation when we already have too much? None. One of the people behind all this, certainly behind the Build Back Better, Senator Elizabeth Warren from Massachusetts, you just got in some sort of a public spat with her after she attacked Elon Musk for not paying enough taxes. What was that all about? Well, you let her have it, Peter. God bless you.

I'm glad you haven't changed. She works for the government, so she doesn't pay taxes. I mean, at least not on her senatorial salary. You know, a lot of people that work for the government, see, they think they pay taxes because taxes are taken out of their pay. But they're not really paying taxes. They're just giving back to the government a portion of what the government gave them. Gave to them, right. So basically, the government could just reduce their salaries and pay them tax-free.

It's the same thing. You see, when you or I pay taxes on our private incomes, we're giving the government money it didn't already have, right? So it's getting extra money. But the government gives money to its employees. And if it takes some of that money back, it's not really taxes. So the people who work for the government are tax takers. They're not taxpayers. They are living off of tax revenue. It's everybody who's in the private sector that is contributing the taxes that pay

their salaries. So somebody like Elizabeth Warren shouldn't accuse anybody of being a freeloader, right? Because when you're living in a glass house, you're not supposed to throw stones. Peter Schiff, it's a pleasure, pleasure to chat with you. We first met each other 10 or 15 years ago. You haven't changed at all. Maybe you got a little better, but it's just a joy. I hope you'll come back and join us again, Judging Freedom.

Oh, anytime, Judge. Just give me a call and i'll thank you you know what well let's get together in about four or five months when the situation is worse than it is today it it will be worse you can rest assured of that that's thank you have a great holiday my friend worth all right you too