War and QE Mean Higher Inflation
Peter Schiff

On Friday’s episode of the Peter Schiff Show, Peter walks listeners through a mix of geopolitical flare-ups and what he sees as reckless monetary policy. He ties headlines out of the Middle East to market moves, argues that the Federal Reserve’s balance-sheet expansion is quietly inflationary, and contrasts profit-driven private enterprise with costly government-run alternatives. He also warns that taxes on owner-occupied homes can trap retirees and urges readers to consider international and commodity plays — a reminder that sound money and real assets are prudent hedges when central banks are easing.

Peter opens by linking today’s rally to a string of optimistic headlines from the White House and Iran:

The catalyst for the rally today was news coming out of the White House, coming out of Iran related to not only does the ceasefire continue, but potentially the complete opening of the Strait of Hormuz. Donald Trump claims it’s never going to be closed again. I kind of doubt that, but I think the Iranians are referring to it as a temporary reopening pending the end of the ceasefire and how the negotiations go. But according to Trump, the negotiations are already over and we’ve won. And also we have a ceasefire apparently between Israel and Lebanon.

He immediately pivots to the role of the central bank, warning that the Fed’s actions are lowering real interest rates and expanding its balance sheet — a recipe for higher consumer prices:

And so the Fed is allowing real interest rates to fall. In fact the Fed’s balance sheet continues to grow. The balance sheet again in the most recent week up about another 11 billion. Now we’re over a 6.7 trillion balance sheet. Again the balance sheet is up over 200 billion this year. The Fed is doing quantitative easing. Money supply as I said is up better than 5% year on year. This is a highly inflationary monetary policy and it will be even more inflationary the longer this war continues.

Peter reminds listeners of a basic principle of economics: businesses survive because they create value and earn a profit, not because they exist for their own sake. He frames this definition to set up a critique of government-managed operations:

Well, a business is successful if people want to buy the products that the business makes or the services that the business provides. And the business is able to produce those products or provide those services at a cost that is lower than the value that the customer places on those goods or services. And that’s what enables the profit. If he can’t do that, then he loses money. And you don’t get rich with a money-losing business that ultimately fails.

To make that contrast concrete, Peter asks listeners to imagine a city-owned grocery store and points out the inevitable inefficiencies when profit motive is removed:

What if the owner didn’t have to make a profit? Like it was the city. The city owned the grocery store. Without the profit motive, you have no reason to be cost efficient. You don’t have any efficiencies. So the minute the government operates a grocery store, the groceries are going to be much more expensive even if it’s a nonprofit operation because there is no incentive for whoever’s running that store to keep costs down.

He then addresses another often-overlooked policy problem: property taxes on owner-occupied homes. Peter explains how a tax tied to real estate can create cash-flow problems for retirees who have no wage income:

The problem with a property tax on a piece of residential property that you do not rent out that you live in yourself is that you have no way to pay the property taxes unless you have other income, unless you have a job or some other source of funds. But what if I’m retired? What if I have a house, I paid off the mortgage and I don’t want to work anymore. I just want to live in the house that I own. I don’t need a lot of money.

He wraps up by pointing out how this taxation regime violates property rights when it confiscates property unjustly:

But if you’re taxing non-income producing property, then clearly it’s not an income tax. You’re really confiscating the property. … It’s your right to live there. ANd if you have a right to live there, the government doesn’t have a right to kick you out just because you can’t pay a property tax.

 Peter Schiff is Chairman of SchiffGold, CEO and Chief Global Strategist of Euro Pacific Capital, Inc, and host of The Peter Schiff Show. Peter is an economic forecaster and investment advisor influenced by the free-market Austrian School of economics. He is one of the few forecasters who accurately and publicly predicted the 2007 housing market collapse and subsequent 2008 financial crisis. His latest best-selling book, The Real Crash: America’s Coming Bankruptcy – How to Save Yourself and Your Country, warns that the 2008 crisis was just the prelude to a larger sovereign debt crisis in the United States that may lead to a collapse of the US dollar. Peter recommends long-term investment in foreign markets with sound fiscal policies, as well as global commodities including buying gold, silver and other physical precious metals.

 

schiffgold.com