EDITOR'S NOTE: Inflation to worsen as a result of rising interest rates? Market strategist Peter Schiff’s point seems contradictory. But Schiff explains, what if businesses that are dependent on debt consider rising interest rates “the cost of doing business”? Instead of discouraging businesses from taking on more debt, it might instead force businesses to charge higher prices. Schiff believes inflation in 2023 will take out the 2022 highs. It’s almost like a repeat of the pattern we saw from 1974 to 1976 (inflation fell) to 1980 when it finally peaked. Schiff believes inflation will rise past 10%. Market bulls beware. Gold bulls, pay attention.
Source: YouTube
Inflation, which peaked at 9.1 percent in June, has further to rise in 2023, said Peter Schiff, Chief Market Strategist at Euro Pacific Asset Management, who correctly forecasted the 2008 housing crash and high inflation in 2022.
“We’re not getting anywhere near 2 percent [inflation],” he said. “Maybe we’ll go below 7 percent before we go above 10 percent, but I think we’re going to take out the highs from 2022 before the end of 2023 on a year-over-year basis.”
The Federal Reserve has hiked rates over the year by 425 basis points in an effort to rein in inflation, but Schiff said they could end up making the situation worse.
“Rising interest rates actually feed into higher consumer prices,” he explained. “If I am a business… I have to pay interest on my debt. Well, if interest rates go up, that’s a cost of doing business. I might have to raise prices to cover that.”
Schiff spoke with David Lin, Anchor and Producer at Kitco News.
Reducing Inflation
Schiff, who campaigned for a Senate seat in 2010, said that the way to stop inflation would be through fiscal prudence.
“If we want to stop taxing people through inflation, we have to either tax them another way, or we have to cut spending,” he said. “In other words, we have to balance the budget.”
However, he added that it is unlikely that such a policy would be adopted, because it would fail to garner political support.
“The problem is it’s not a good campaign to get votes,” he observed. “Politicians always take the easy way out. They want to spend money, and then they want to blame the inflation on somebody else.”
Although he highlighted that gradually raising interest rates can cause more inflation, Schiff stressed that if rates were sufficiently high, then inflation would come down. The relationship is non-linear.
“The other thing that has to happen is that interest rates have to rise to a level that exceeds the inflation rate by a comfortable margin,” he said. “We need people to stop spending and start saving… if you hold interest rates below the inflation rate, nobody’s going to be dumb enough to save. Everyone is going to spend their money as soon as they get their hands on it.”
Crypto Regulation
In response to recent events like the FTX collapse, lawmakers have proposed regulation over the crypto sector. Schiff said that further regulation would not prevent fraud.
“The scam might still be going on if FTX were regulated,” he said. “If you go back to the original Ponzi scheme, [Charles Ponzi’s] scheme didn’t even last a year. There were no regulators there. The market quickly put an end to Ponzi before too many people lost too much money.”
To find out Schiff’s outlook for gold and Bitcoin, watch the video above
Originally published by Cornelius Christian at Kitco
