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During testimony before the Senate Finance Committee, Treasury Secretary-nominee Janet Yellen talked out of both sides of her mouth. She acknowledged that too much debt is problematic, but in the same sentence, insisted we need to “act big” to rescue the economy.

Neither the president-elect, nor I, propose this relief package without an appreciation for the country’s debt burden. But right now, with interest rates at historic lows, the smartest thing we can do is act big.”

This is a prime example of the old adage that you can ignore everything in a sentence that comes before the word “but.”

The truth is, Yellen doesn’t care about the debt, and she, nor the newly installed Biden administration, will ever do anything to address it. The strategy is to spend, spend, spend, and continue to kick the debt-can down the road. In fact, this has been the strategy of both Republicans and Democrats for decades.

Pretty much everybody pays lip-service to the national debt, just as Yellen did. But while politicians of every stripe have jawboned about the need for fiscal responsibility and talked vaguely about “dealing with our rising debt”  – someday – the national debt now approaches $28 trillion. This has to make one wonder, at exactly what number does legitimate concern kick in? $30 trillion? $40 trillion?

I’ll give you a hint: there is no number.

The fact of the matter is, there is always a reason to borrow, spend, and push concerns about the debt into some nebulous moment in the future. During the Obama years, it was the financial crisis. Today, it’s the coronavirus pandemic. And tomorrow there will be another reason — perhaps climate change, or maybe our crumbling infrastructure, or perhaps another war.

Any talk of actually addressing the debt problem should be viewed in the same way we look at Lucy holding the football for Charlie Brown. She’s going to pull it away. Every single time.

Yellen reasons that spending now is fine with “interest rates at record lows.” This should raise a question. Why are interest rates at record lows?

The reason is simple; the Federal Reserve is artificially keeping them there.

The Process

When Uncle Sam borrows money, it puts upward pressure on interest rates. The more bonds the Treasury Department issues, the lower the price falls because market demand can’t keep up with supply. Bond yields inversely correlate with bond prices. As the price of bonds drops, interest rates rise. This is simple economic calculus.

Enter the Federal Reserve. The Fed buys bonds on the open market (quantitative easing), creating artificial demand and propping prices up. This keeps interest rates artificially low.

So far, so good. But there is a small hitch in this process. The Fed buys these bonds with money created out of thin air and injects this money into the economy. This is inflation. And it’s precisely why the money supply increased at a record pace in 2020.

Yellen thinks this process can continue because “in a very low interest-rate environment like we’re in, what we’re seeing is that even though the amount of debt relative to the economy has gone up, the interest burden hasn’t.” And she believes “the future is likely to bring low-interest rates for a long time.” She can say this with some level of certainty because she knows that the Fed will have her back and continue to monetize all of the debt.

Ironically, Yellen promised she would “be a voice for fiscal sanity” in the Biden administration. If this is fiscal sanity, I shudder to think what the fiscally insane are saying.

The End-Game

Here’s the problem with this entire scenario: you can’t just keep printing money indefinitely without consequences. We already see the impact in the massive stock market bubble. We’re starting to see signs of inflation in the commodities markets. Oil is back above $50 a barrel. Remember $4 per gallon gas in the mid-2000s? And at some point, you’re going to see the impact in the supermarket. In fact, my wife insists we already are.

Typically, the Fed fights inflation by tightening monetary policy and letting interest rates rise. But how can it do this with Yellen and Biden depending on low rates to finance their massive spending spree?

The answer is obvious. It can’t.

In another example of Yellen double-talk, she insisted “the United States does not seek a weaker currency to gain competitive advantage and we should oppose attempts by other countries to do so.”

The US may not be “seeking” a weaker currency, but that’s what it’s getting. That’s exactly what happens when you print money out of thin air. And that’s exactly what the Fed is going to continue to do.

There is no exit strategy from this insane monetary policy.

As Peter Schiff explained in a recent podcast, the Fed managed to run this shell game successfully after the 2008 financial crisis because everybody believed all of the quantitative easing was a “temporary emergency measure.” They believed the central bank would unwind it, shrink the balance sheet and normalize interest rates. And as Fed chair, Yellen gave it a shot. But the stock market tanked in the fall of 2018 and the Fed went right back to rate cuts and QE.

Are people going to fall for this con a second time? Not likely, as Schiff explains.

Nobody is going to buy into it again. Nobody is going to bite on this a second time. Everybody knows at this point that QE is infinite. Everybody knows that the Fed is never going to shrink its balance sheet. The balance sheet is going to grow in perpetuity. It’s just that now people are under the delusion that it’s OK. They don’t realize that the only reason it worked the first time was because the world was convinced that it was temporary and a one-off emergency measure.”

A dollar crash is the end game. The Fed has to keep monetizing and the printing presses have to keep running because Yellen-Biden-et al. have to keep interest rates low.

So, sure Janet, debt doesn’t matter.

Until it does.

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Joe Biden was inaugurated on Jan. 20, becoming the 46th president of the United States. And as Peter Schiff put it in his podcast, he took the helm of a sinking ship.

But the stock markets sure don’t act like the ship is taking on water. All four major stock indices close at new record highs on inauguration day. Peter said this proves that the stock market rally really didn’t have much to do with Donald Trump.

If the stock market gains were really attributable to Donald Trump’s policies, and Joe Biden is already unwinding those policies and reversing as many as he can by executive order, why are all the stock markets making record highs? To me, that shows you that the stock market couldn’t care less about Biden being president, because it didn’t matter that Trump was president. This stock market rally that Donald Trump took credit for was not the result of Donald Trump’s policies.”

Peter has said from the beginning that the stock market wasn’t going up because of Donald Trump. And it didn’t go up on inauguration day in anticipation of Joe Biden. The stock market is going up because of the Federal Reserve.

Wall Street knows that. And they know that despite the change in the White House, there is no change at the Federal Reserve. Fed policy is going to be consistent. It is going to remain the same. And I think Joe Biden sent a message to Wall Street of the continuity by nominating Janet Yellen, who was the head of the Federal Reserve, to kind of cement in the minds of the markets, or the participants in the markets, that it is business as usual at the Fed — that they will keep in printing money, they will keep interest rates artificially low, in order to sustain asset bubbles. And that is what the stock market is celebrating.”

At this point, it doesn’t really matter who is sitting in the Oval Office as long as the Fed continues to supply the monetary heroin.

Looking back at the Trump era, it’s pretty clear he failed to “Make America Great Again.” To do so would have required stepping on a lot of political landmines while dealing with the deep-rooted problems of Social Security, Medicare and the national debt – the so-called third rail of politics.

The hope was that Donald Trump would not be shy about grabbing that third rail. Instead, he completely ignored it, and so the problems got much bigger during the Trump presidency.”

Trump wasn’t willing to do the painful things necessary to address the underlying problems facing the US. He wasn’t willing to take steps that would have tanked the stock market. But as Peter says, the stock market needed to go down despite the short-term pain it would have caused.

Had Donald Trump done the right thing, the stock market would have gone down. But that would have been a good thing. Overpriced stocks, overpriced real estate, that’s part of the problem. Part of the solution is allowing these assets to reprice to more reflect their actual value rather than the bubble that the Fed had been inflating. We need real economic growth, not another bubble. And unfortunately, that’s all we got under Trump.”

And now the markets expect the same thing to continue under President Biden. Peter said that’s where he thinks the markets and the country are wrong.

I think that there is a false sense of confidence that this can continue, whereas I think we’re nearing the end.”

A lot of people reason that things were basically OK under President Obama and therefore things under Biden won’t be too bad either. But Peter said the problems Biden is inheriting from Trump pale in comparison to the problems Obama inherited from George W. Bush. Mind you, these aren’t problems that Trump created. They’re the same problems he inherited from Obama.

It’s just that they got a lot bigger while [Trump] was president because he refused to do anything about the problems. The problems got bigger and bigger, to the point where they’re now so enormous that I think it’s impossible for Biden to get out of Dodge and hand this problem to the next president. I think this is the end of the line.”

Peter admitted that he’s had this feeling before and that he underestimated how long we could kick the can down the road. He said he didn’t expect so many people would be fooled into believing that the Fed could normalize rates and shrink its balance sheet after the extraordinary monetary policy launched during the Great Recession.

But just because we were able to kick the can down the road for as many years as we have doesn’t mean we can continue to do it with the same degree of success. Because the can is now so large that it can’t be kicked. If you try to kick it, you’re just going to break your foot.”

The reason QE 1, QE2 and QE 3 didn’t crash the dollar was because so many people believed the Fed would be able to unwind the policy.

But nobody is going to buy into it again. Nobody is going to bite on this a second time. Everybody knows at this point that QE is infinite. Everybody knows that the Fed is never going to shrink its balance sheet. The balance sheet is going to grow in perpetuity. It’s just that now people are under the delusion that it’s OK. They don’t realize that the only reason it worked the first time was because the world was convinced that it was temporary and a one-off emergency measure.”

On top of that, Biden is inheriting an economy that is fundamentally in much worse shape.

We’re in an even deeper economic hole. Despite the fact that the stock market is at record highs, the actual economy is in worse shape now, much worse shape, than it was in 2008.”

Peter said the bottom line is we’re not going to get away with this again, even though we got away with it in the past, and the inevitable dollar crisis is going to be that much worse because they did manage to kick the can so far down the road.

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Peter Schiff recently explained how the Federal Reserve has rigged the US Treasury market. Well, the European Central Bank has taken bond market manipulation to the next level.

According to a Bloomberg report, the ECB is buying bonds to control the yield spread between debt issued by various EU countries. As a result of this central bank mechanization, the spread between the yields on German and Italian bonds has remained “remarkably stable” despite the Italian government teetering on the verge of collapse.

In a nutshell, the ECB buys Italian bonds in order to create artificial demand and prop up the price. Since bond yields are the inverse of bond prices, the ECB can hold rates steady by keeping the price up, thus maintaining a stable spread between the Italian bonds and other European debt. Left to the whims of the market, Italian bonds would plummet in price as they become riskier and riskier. This would cause Italian bond yields to spike and increase the spread between them and their other European counterparts.

The Fed is using essentially the same mechanics to keep US interest rates artificially low. By purchasing Treasuries, the central bank maintains artificial demand, propping up bond prices and keeping yields low, even though the US Treasury is selling a massive number of bonds to fund all of the government’s borrowing and spending. Without Fed intervention, there wouldn’t be enough demand for Treasuries in the open market. Bond prices would tank and interest rates would spike.

The ECB has reportedly upped this market manipulation to the next level by actually targeting specific spreads. According to a source quoted by Bloomberg, “the central bank has specific ideas on what spreads are appropriate.”

So much for the market.

In fact, this is market manipulation taken to the next level. And the arrogant conceit is pretty chilling. How in the world do a few central bankers know what spreads are “appropriate?”

Of course, this kind of fatal conceit is pretty common in the world of central banking. After all, policymakers were convinced that their manipulations of the housing market were benefitting humanity right up until the point the housing market collapsed in 2007.

The Bank of Japan and the Reserve Bank of Australia already engage in what is known as “yield curve control” (YCC). Typically central banks control very short-term rates, such as the rate banks earn on overnight deposits and let other interest rates move with the market. But through YCC, the central bank uses its bond-buying policy to target specific yields. For instance, the BOJ aims for 0% on its 10-year-bond. This ostensibly enables the central bank to further “stimulate” the economy when cutting rates to zero isn’t enough.

According to Bloomberg, “The BOJ adopted the policy in 2016 as a stimulus tool to boost inflation. The RBA decided last March to keep three-year yields at around 0.25%, and in November reduced that to around 0.1%. U.S. Federal Reserve Vice Chair Richard Clarida said late last year it’s part of the toolbox.”

As WolfStreet explains, yield curve control is an effective policy tool precisely because it doesn’t take a lot of actual action on the part of the central bank.

If it is credible, the central bank may not have to buy a lot of securities to enforce it, since the market knows the target, and knows that’s what a central bank with unlimited buying power can achieve, and therefore falls in line. The results of jawboning are marvelous.”

But the ECB doesn’t have the luxury of simply controlling yields on specific bonds. It has to balance the needs of 19 countries all issuing their own debt. A Commerzbank analyst told Bloomberg that the ECB strategy is similar to YCC, but they don’t call it that. It’s kind of like the quantitative easing the Fed launched in 2019 while refusing to call it QE.

But while the European bank can’t effectively implement yield curve control, it is engaging yield spread control. It’s just another form of market manipulation under a different name. The end result is the same — massive distortions of the economy. WolfStreet called  it “central bank absurdity.”

Since the end of January 2020, the German 10-year yield has ticked down 9 basis points, from -0.43% then to -0.52% now. The Italian 10-year yield dropped 33 basis points over the same period, from +0.92% to +0.59%. And the spread between the German and Italian yields narrowed from 135 basis points to 111 basis points. Italy is already borrowing at negative yields on debt of five years and less. All of this is a masterpiece of central bank absurdity.”

The Fed was reportedly considering YCC in the early days of the pandemic. It has since taken the idea of the table – for the time being. But make no mistake, if things go south, the US central bank won’t hesitate to pluck this tool out of its toolbox. Central bank response to a crisis is pretty predictable — loosen monetary policy, encourage debt, keep interest rates low and blow up bubbles. But the fallout from these policies is much less predictable. We just know it won’t be good.

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Peter Schiff recently did an interview with David Lin on Kitco news. Peter talked about the devaluing dollar, the stock market bubble, his investment strategy, the trajectory of the global economy, and finally, what he would do if he was president of the United States. In a nutshell, Peter said he would veto everything.

Is the stock market a bubble?

Lin opened this section of the interview by asking Peter about where he thinks “risk assets” are heading in 2021. Peter said the dollar is a risk asset even though everybody thinks of it as a “safe haven.” Lin asserted that the bond market seems to disagree with yields ticking up. But Peter reiterated something he talked about at length in a previous podcast – the bond market is rigged.

The bond market is being manipulated by government. I mean, there’s not a fair market there. If it was a fair market, bond prices would be crashing. But the government rigged the market by intervening and buying bonds.”

As far as the stock market, Peter said he doesn’t think the entire thing is a bubble.

I certainly think that there are a lot of stocks that are in bubbles. But I think there are a lot of stocks that are going to keep going up, maybe not in real terms, maybe not if you price them in gold. But if you price them in dollars, yes, because the dollar is going to lose value faster than most stocks.”

That said, there are a lot of overhyped stocks trading at prices far out of proportion to any underlying value that the companies have based on their likely earnings. Peter said he stays away from stocks with “pie in the sky” valuations.

I want to buy real businesses that I think are going to do well in the economy globally as I think it’s going to evolve over time.”

And Peter said he thinks it will be an economy where America plays a smaller role.

I think Americans are going to be diminished in their wealth and purchasing power and stature as the dollar goes down and we move more toward a socialist model than a market-based economy. The dollar is going to go down. US assets are going to be out of favor. I think the emerging markets are going to shine.”

Peter said he is investing based on how the world is going to look while most people are looking in the rearview mirror with no idea what lies ahead. And he said his portfolio is outperforming the S&P 500 nicely.

Interestingly enough, it’s not my gold stocks that are doing it. It’s all my non-gold stocks. Even though the story is more bullish than ever for gold, enough people don’t really get that just yet. But I think they will. And I think ultimately it’s my gold stocks that are going to end up being my top performers.”

The conversation then turned to policy. Lin asked Peter what he would do if he was president “to pass legislation to make American lives better.” Peter said we don’t need any new legislation.

We need to get rid of all the existing legislation. So, if I was president, I would just veto everything.”

Peter pointed out that you have to go back to the 1880s to find a president who served four years and vetoed fewer bills than President Trump.

So, Donald Trump pretty much rubber-stamped every spending bill that hit his desk. You can’t drain the swamp without draining the money. But he continued to fill the swamp with money. So, I would veto everything, including raising the debt ceiling or any of these continuing resolutions.”

Peter said, in effect, he would want to dismantle government.

So, I would use my executive power to eliminate as many laws and regulations and taxes as I could as president.”

Peter said he would also use the bully pulpit of the presidency to clearly articulate to the public why the US is in so much trouble, and how past politicians and presidents have destroyed the economy, and what needs to be done in order for Americans to rebuild.

But there is no solution that’s going to come from government.  All the solutions are going to come from the people, from the free market. We need people working, producing, and the government has to get out of the way. But a lot of damage has been done, and we have to acknowledge that. And we’ve got to bite the bullet and accept the losses. We can’t just keep blowing bubble after bubble and try to pretend that those losses aren’t there by making all the problems bigger and ultimately making the day of reckoning that much worse.”

Peter said it’s tough to win an election by telling the truth – especially when other politicians are promising free stuff.

My message is freedom. I’m not giving anything to anybody because the government doesn’t have anything. All the government can do is steal from one person and give to somebody else. But see, I think theft is wrong. I don’t want to steal from anybody. I want to protect everybody so that people don’t steal from them — just protect their liberty, protect their life, protect their property. That’s what government is supposed to do.”

You can watch the first part of the interview here.

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