While the U.S Federal Reserve claims it needs to keep interest rates near zero to help the economy, renowned economist Peter Schiff says there's another reason.

According to Schiff, the Fed has little choice: If rates began to climb, the interest payments on the ballooning federal debt would explode making annual budget deficits far worse.

"We're now so addicted to debt that the highest rate we can afford is zero," Schiff, the CEO and chief global strategist of Euro Pacific Capital, told Casey Research chairman Doug Casey in a video interview published today.

"We pay about $300 billion a year right now in interest on a $16.5 trillion debt," Schiff explained. "What if, in two or three years -- and the debt is $20 trillion -- what happens if interest rates are 5%? Well, that's $1 trillion a year in interest payments."

This scenario is not at all far-fetched; the historic norm for interest rates is just below 5%, and rates in the early 1980s were triple that.

Another reason the Fed fears higher rates, Schiff said, is that it would probably bankrupt most of the "too-big-to-fail" banks that the government bailed out back in 2008.

"The only justification for keeping rates so low is that the Fed knows any increase in rates will collapse this phony economy and we'll be right back in recession," Schiff said.