Ali and Frazier, Laurel and Hardy, Mayweather and Pacquiao, Liesman and Santelli, and now Schiff and Maloney. Peter and Mike join clash of the titan-like to discuss their investment strategies and expose the charts the government doesn't want you to seeas "people like Bernanke are taken seriously still and the people that did predict [the crisis] are dismissed as lunatics half the time." The wide-reaching conversation covers everything from gold and stocks to The Fed and The Dollar - Bernanke "took the coward’s way out because all he did was exacerbate the problems to postpone the day of reckoning." The air is coming out of the bubble, they warn, "Bernanke and Greenspan have absolutely destroyed America. People don’t realize what is coming..."

Full interview here:

Full transcript below:

Mike: I was in Puerto Rico a little while back and Peter Schiff invited me over to his house and we were just amazed at how we are exactly on the same page when it comes to everything economically. And so he just made a trip out to California near my offices and we decided we’d get together and discuss some of this stuff. So on your travels Peter lately you were just at a show you were speaking. Where were you at?

Peter: I was in Las Vegas. It’s great to see you again Mike. I was speaking to a very main stream audience of hedge fund managers at an annual conference there. And what was very interesting is even though the audience was, as I said, very main stream, and I was on a panel with a lot of very high profile, main stream individuals, the only person that really got applause was me. I also got some laughs because I told a few jokes, but I think people really got what I was saying and I had maybe 50 to 100 people come up to me afterwards and shake my hand. And really appreciate the candor with which I spoke and I really agree with what you had to say and I was saying some things that the mainstream never really hears about the real problem in the US economy and I blamed it all on the Fed and everybody else was a cheerleader there for the Fed. In fact, Ben Bernanke spoke at the same event as me and he was introduced as being the savior of the US economy and I think he damned it.

Mike: I absolutely agree. I saw you had your picture taken with him right?

Peter: Yes, we were at a cocktail party following the event and I thought people would get the irony of the juxtaposition between the two of us kind of having a glass to drink.

Mike: I think that he and Greenspan have absolutely destroyed America. People don’t realize what is coming from the stored up energy from the manipulations that they did.

Peter: And speaking of him, this was really the first chance I had to have a conversation with Ben Bernanke. Speaking of him, I really got the sense that he has no idea of the Fed’s culpability in the housing bubble or the ensuing financial crisis, he really doesn’t know. And he denies that the Fed had anything to do with that, that maybe it was pure happenstance or coincidence that we had a housing bubble and these very low interest rates. And because Ben Bernanke still doesn’t get the connection between the Fed’s mistakes of the past and the last crisis he certainly doesn’t understand the coming crisis, which is going to be far worse because the mistakes the Federal Reserve made in the aftermath of that crisis are far worse than the ones and far bigger than the ones that caused it.

Mike: Right. Ben Bernanke’s overreaction was far bigger than Greeenspan’s reaction to the NASDAQ crash.

Peter: And as a result the crisis in our future unfortunately is going to be far larger than the one that we just experienced.

Mike: I wanted to show you a couple of things because I have a feeling that you and I will be exactly on the same page here. You know how indicators…there’s all these different factors in the economy and they’ll be going up at different rates. Suddenly one or two indicators start to point down when you’re near a top and then more of them start to point down and then things roll over and then there’s a crash and everybody thinks that nobody saw it coming. But there’s a few people that are watching this stuff that do see it coming.

Peter: That’s exactly what they said about the last crash that nobody could have possibly predicted this except there were people who did predict it.

Mike: You predicted that we were in a real estate bubble. I predicted that we were in a real estate bubble.

Peter: Ben Bernanke denied that there was a real estate bubble. Even after it burst, he still couldn’t figure it out.

Mike: And what amazes me is people like Bernanke are taken seriously still and the people that did predict it are dismissed as lunatics half the time. It really burns me up. But this is manufacturing new orders for consumer goods and this is from the Fed’s website and you can see this big plunge that it took in 2008. And there’s a big plunge that’s happening right now. That suggests to me if people aren’t ordering new goods it feels like this could be this summer maybe..

Peter: Remember, the air is coming out of the bubble because the Fed halted or paused it’s quantitative easing program. Most people think they ended it but I think it’s just a pause because now everybody expects the Fed to raise interest rates because they think the recovery finally has enough traction that it no longer needs the emergency life support of 0% yet your chart is showing and a lot of other economic indicators are showing that the economy is already rolled over and is rapidly headed back to recession even though the Fed hasn’t raised them yet. All they’ve done is talk about raising them in the future and we’re already rolling back into recession.

So I believe that the Fed is going to have to do another round of quantitative easing, that they’re not going to raise rates and that’s going to be a shocker. It’s going to send shock waves throughout the currency markets and the bond markets because everybody expects the Fed to raise rates and when they don’t do it because the economy is too fragile because it’s just a bubble, not a legitimate recovery then people are now going to have to second guess their idea that what the Fed worked instead of calling Ben Bernanke a hero a lot more people are going to say, wait a minute he wasn’t a hero what he did wasn’t heroic. He took the coward’s way out because all he did was exacerbate the problems to postpone the day of reckoning.

Mike: Yes the derivatives are bigger instead of smaller. Everything that was put in place to create that bubble that then popped. The two big [inaudible 00:05:36] banks are all bigger. Nothing has been addressed right?

Peter: No. Those banks are now bigger than ever and if it was going to be a problem to let them fail in 2008 it’s going to be much bigger problem to let them fail in 2016. So the government has to do whatever it can unfortunately to keep the bubble from popping and I think the air is already coming out even without a rate hike but…

Mike: So do I, yes.

Peter: But more importantly, the reason that he’s been able to look like he’s succeeded is because of the illusion that it’s all temporary. Everybody believes that the Fed can normalize rates, shrink their balance sheet but when they realize that they can’t do that, that they’ve been lied to then this is going to be a major event for the currency markets or the financial markets when people come to terms with the predict that we’re in. That it’s QE infinity, that rates have to stay at zero in perpetuity. Because the debt is now so enormous that even the slightest increase in interest rates would collapse the system because there is just so much debt.

Mike: I agree. I don’t think that they can raise interest rates. The next thing here is rejection of credit applications. And I wasn’t following this chart before. I just saw it in somebody’s newsletter. I think this is zero hedge maybe, but this is the crisis of ’08 and look at what happened in March for credit application rejections. So there’s something happening in the economy.

Peter: One of it is the big transformation from full time employment to part time jobs. Everybody points to all the jobs that are being created and the low unemployment rate but the problem is that the unemployment rate dropped not because people found jobs but because a) they stopped looking or b) they settled for a part time job. So when people who used to have full time jobs now have part time jobs they don’t have the income to get the credit that they need.

Mike: Right so they apply for a loan and it gets rejected.

Peter: You know you have home ownership rates now at almost 30 year lows, yet rents are rising. I mean, now you have a record number of 50% or excuse me 25% of people who are renting now devote half their income to pay their housing costs. That’s never happened before. You have hardly anything left over for food or other expenditures that you have. And people are loaded up with student loans and unfortunately a lot of these college grads now have student loans and all they can get is minimum wage jobs and a lot of them are just part time. So people are trying to get by.

In fact, a lot of people are actually enrolling in college now, not because they want the education but because they need the loans. They just want to get the money so they can pay their utility bills. They don’t even care and a lot of our college grads when they graduate with lots of debt, they can’t find jobs so they go to grad school to get a master’s degree so now they have even more debt but they still can’t get a job.

Mike: Right, right. The big debt that has been plaguing us lately, the growth in debt. A lot of it is in student loans and auto loans. There are subprime auto loans now.

Peter: As if the government didn’t learn their lesson from the housing bubble, they decided to create an auto bubble because when the governments.. when GM and Chrysler went bankrupt the government also acquired their financing divisions and they still own them. So the government after they bailed out these companies they certainly didn’t want them to fail again. They wanted to make it look like the ballot was a good idea. So they wanted to revive their profits by making it possible for just about anyone to buy a car. And so many people have been able to buy cars with zero down and they’ve been stretching out their payments so that now people are getting six and seven year auto loans.

Mike: Right, the seven year auto loan. The car only lasts maybe that long. So you have no equity ever.

Peter: Well the warranty only lasts for four years. Four or five years tops. And when these cars come out of warranty, try to have it repaired. We don’t have a lot of repair places anymore. It costs a fortune, and of course the value of the cars are plunging. People are going to have much less equity in their car than the remaining payments on their mortgage. And so they end up not making the payments. Now you’ve got to repossess the cars. But there is a huge bubble. But interestingly enough, the first four months of 2015, this was the worst start to a year in auto sales since 2009. So it looks to me like the air is coming out of the auto bubble already. We’ve already saturated the market and so this is just the beginning of the decline.

Mike: Home mortgages, they’re going longer now than 30 years. There’s longer home mortgages being offered too, trying to keep that bubble inflated.

Peter: Well, of course they’re offering 3.5% down payments now too with government guarantees which was part of the problem because 3.5% is not enough down to actually have skin in the game. It costs you more than that just to sell a house. So if you buy a house with 3.5% down, the minute your mortgage closes you’re already under water. But now the problem is you’re giving the homeowner a free gamble on the real estate market. Because if real estate prices go up, he can keep the profits, refinance. If prices go down, he could just walk away but better than that he can just stop making his payments altogether and live rent free for three years before they can kick you out.

That’s really what they set up. I think a lot of the recent home buyers that did put 3.5% down are going to do just that. They’re just going to stop making their payments when they realize that they’re underwater especially when a lot of their repair bills come in. Because a lot of people were lulled into buying homes they couldn’t afford, once they see that it’s just not the mortgage but you also have maintenance and property taxes and some of these people might lose their jobs in this next recession so they no longer even have the income to service. And a lot of these people have adjustable mortgage. Imagine the people that are not even taking out 30 year fixed.

Mike: With rates this low they are still buying an adjustable rate of mortgage.

Peter: Because they couldn’t afford the fixed rate. That’s how stretched they are. You know the real solution to the housing market problem is to let real estate prices come down so that homes are affordable, but the government doesn’t want to do that because it will bankrupt all the banks that loaned on them so what their answer is to keep prices inflated and just make credit available by keeping interest rates low and keep throwing the lending standards out the window so that people can buy houses that they cant afford.

Mike: Ben Bernanke recently commented on the savings glut. He doesn’t think people are spending enough and what is interesting is when you find out what constitutes savings paying down debt is not included in this calculation so any currency that goes to this that is considered savings for some reason. They consider paying down debt savings.

Peter: Well it’s money you haven’t spent but I think when Bernanke is talking about a savings glut..

Mike: That they’re paying for previous consumption basically..

Peter: Right. But when they’re talking about the savings glut they’re referring in other countries, not the United States. We have a savings shortage. There’s maybe a glut of savings in Asia for example but people look at that.. I read an article recently about Chinese have this big savings problem. They have a bad habit of savings. Like smoking or something. Savings is a virtue, but we’re lecturing the Chinese, “You guys are saving too much. You need to spend more money.” One of the criticisms was that they don’t have social security. They expected the Chinese to save for their retirement. Imagine that. Allowing people the freedom to save for their own retirement. And we basically said “No.”

China needs a gigantic Ponzi scheme run by the government. They should adopt social security so that the Chinese people won’t have to save anymore. As if savings are somehow undermining economic growth. But the only problem for China is that they’re squandering savings on US treasuries. They’re loaning the money to us and we’ll never pay it back. So that’s a waste of their savings they need to invest their savings productively in their own economy and I think that is going to happen and when it does the dollar is going to come crashing down.

Mike: Yes, I agree and then the engineering of the entire economy and the illusion. This is interest rates from 1950 to today. And then we have base money as the red line here and then I plotted the Wilshire 5000 Total Market Cap Index so the value of the 5000 largest companies in America and what you see.. I’ll zoom in on this section here. You see that they took rates down to zero and at the same time created all this currency and the correlation between currency creation and the markets is just mind bogglinginly close. It’s a cannot possibly be an accident that the markets..

Peter: Of course not and that’s why they can’t raise rates without bursting that bubble. To not understand how these things are connected the way that they are is one causes the other and I’ve heard people say, “Peter I’ve had 4%, 5% interest rates in the past so why can’t we go back there now?” It didn’t create a problem then because we didn’t have the enormity of the debt that we have now. It’s one thing to have higher interest rates when you don’t have a lot of debt. Sure you can afford it. But when you’re overwhelmed by debt you can’t afford it.

The other thing is when you’ve been on 0% for 6 years you develop an addiction to that. We have built an entire economy around free money. You can’t take that away even if the interest rates are still low, even if they went to just 2% to 3%. Yes that’s still low. But not low enough for an economy addicted to 0%. If you’re a heroin addict and your body is used to a certain amount of heroin then your pusher says “I can only give you half of what I normally give you, but you still have some heroin.” That’s not gonna cut it. You’re already gonna start going through withdrawal.

You know that’s why the Fed… supposedly we’ve been in a recovery for six years. Yet interest rates are still at zero. I mean if it was a real recovery they would have raised rates years ago. But they’re afraid to do it because they know it’s phony. But after a while they had to at least talk about raising interest rates. They have to pretend that there’s an exit strategy somewhere but you know just like someone who’s overweight and talks about going on a diet in the future they don’t go on one in the present. So the Fed wants to maintain the ruse that they can raise rates by talking about their intention to raise rates but they don’t actually do it and they play word games about “well we’re going to be patient” or “we’re going to wait a considerable period.” Now they take away the word patient but we’re not impatient. Now they’re saying “we can’t raise rates until unemployment improves.” Well it’s supposedly been improving. The unemployment rate is 5.5%. They initially said they would raise rates if it got to 6.5%. But the bottom line is that it doesn’t matter where the unemployment rate goes, doesn’t matter how high the inflation rate goes they can never raise rates without precipitating a worse financial crisis than the one we had in ’08.

Mike: So you and I just absolutely agree that this entire recovery has been engineered through the creation of currency. Now if Keynesian economics was remotely plausible, if it worked would they have made it a QE2 or a QE3?

Peter: Well no, it would have worked the first time.

Mike: Right.

Peter: The reason they’ve done it three times is because it fails every time which is why they’re going to do a fourth. Quantitative easing is like trying to put out a fire with gasoline. You can’t put the fire out, you just make the fire bigger. The problem is when all you have is gasoline that’s all you can do. The Keynesians don’t understand that their own remedy is the reason the patient is so sick and they just want to keep on administering it. But I don’t think we’ve had recovery. We haven’t recovered from anything. We’re sicker than ever. The average American knows that. The man on the street can feel his standard of living declining despite what the Federal Reserve. The cost of living is going up, the quality of jobs is going down, all the Fed is doing with its monetary policy is redirecting our resources from productive uses on main street to speculation on Wall Street. They’re propping up the stock market, they’re propping up housing, they’re diverting loans to things like education, they’re propping up health care but the real economy is disintegrating and Americans can feel that.

If we actually had a real recovery we wouldn’t be talking about all the jobless recovery. The reason it’s jobless is because it’s not a recovery. If it was a recovery there would be good jobs and the jobs that are being created..you know I think the most interesting thing is who is getting them because they look at the labor force participation rate which is the lowest it’s been since the mid 1970s. And everybody wants to say it’s because the baby boom is retiring. So hey, there’s nothing we can do about it. We all know there’s a baby boom. They’re getting old, they must be retiring. That’s why the labor force is shrinking. A lot of people accept that on face value. Even Janet Yellen says that right?

But the reality is the baby boomers, the older people, they are the ones working in record numbers. In fact, there are months when the only jobs that are created are for people 55 and older. It’s the younger people, people in their 20s and 30s that are leaving the labor force. And what’s happening is you have so many Americans who were retired who have to come out of retirement and take a part time job so they can pay their utility bills, so they can put food on the table. That’s where all the jobs are coming. So the labor force participation is not about people retiring. The people who should be retiring can’t afford to and the younger people who should be working can’t get jobs. That’s the truth behind the numbers.

Mike: Yes. The markets are in a bubble. I think there’s a crash coming. This is Dr. Robert Shiller’s data. It’s a little bit of a confusing chart because it’s got two data plots in it and interest rates in red. But the valuation of the stock market, judge by PE ratios. You see bubbles in 1901 and then undervalued in 1921 and overvalued during the peak of the 1929 stock market bubble and without exception once it reaches a bubble it bounces on the way down but it has to go to undervaluation before a new bull market can start. There was a peak in 1966 of about 22 and the peak in 2000 where the PE ratio is over 45 which was absolute insanity and it started to bounce, it went down to fair value but then bounced back up into a bubble here at 27. We’re in an extreme bubble and so with these other indicators turning do you think we’re in for a stock market crash?

Peter: I think first of all that it’s actually worse than that because the earnings have been manufactured by share buy backs because interest rates have been so low it’s been easy for companies to buy back their shares. So now their earnings per share number can be higher because there’s fewer shares. So they’re not really driving the profitability, they’re not driving the revenues, they’re just shrinking the share base but they’re subjecting their shareholders..

Mike: So the earnings per share look better.

Peter: Yes but now they all this debt but right now the interest rates are really low so it’s not hurting their earnings but what happens when interest rates rise and if they rise during a recession where they’re earnings are declining and they have no ability to pay the interest a lot of these companies that were buying back shares might have to come back to the market and resell the shares to raise money to service or repay debt that they can no longer afford.

Mike: ..which will cause it to go way down to the greatest undervaluation in history I think.

Peter: Right but the reason why I think there may not be a stock market crash even though one is warranted and in fact it would be a healthy development rather than to perpetuate the overvaluation and all the malinvestments that result from that. But I think this bubble is literally too big to pop. I think the Fed knows it. Again, that’s why they’ve been talking about raising rates..

Mike: So you think they’ll do more of this, the quantitative easing for..

Peter: The way you stop the value of the stock market from plunging is make the value of the dollar plunge and so rather than nominal prices declining real prices decline. So the real value of stocks let’s say measured in honest money like gold plunges because the Fed is trying to prop everything up. They’re trying to keep these bubbles from popping because they’re literally too big to pop. They think the mistake that they made in 2008 was turning off the spigots right, now they want to keep them wide open and so it’s the dollar that’s more likely to crash this time than the stock market.

Mike: Yes. I do think though that if the problems first develop in other countries like if the Euro has a problem or if China has a problem we could see the dollar go higher. It might not but I think that we could see a very very short term deflation, that’s something that the Fed can’t control and then they will overreact and print into potentially a hyperinflation.

Peter: I think we’ve already seen the dollar rally. In fact there is probably more agreement among traders, speculators in the dollar’s direction. Everybody believes that the dollar’s going to go up, everybody has longed to dollar, betting on it continuing to rise because everybody bought into this myth of legitimate U.S. recovery and they believed that the Fed was going to raise rates. So I doubt something that everybody expects to happen will in fact happen. What’s going to surprise everyone is dollar weakness. Everybody is positioned for dollar strength and I think that trade is already over. I think the dollar is fully valued or overvalued based on this belief and when everybody has ultimately has to come to the conclusion they were wrong, when the Fed is forced to admit the economy is much weaker than they thought and instead of a rate hike we get QE4 I think the dollar collapses. So I wouldn’t want to hold out waiting for another dollar rally. I think we’ve already had it. I think now the next thing for the dollar is a big drop.

Mike: The move that the dollar made was..it’s less than a year right?

Peter: Yes.

Mike: Now imagine if you’re an importer or an exporter, what that’s doing to your business. This whole thing of national currencies is just a silly stupid game that countries play that hurts all of us, it hurts all of our prosperity. An importer or an exporter that sees the cost of their goods changed by 25% or the price that they’re able to get for goods going overseas by 25 % in six months this is something… if you chart it out, the exchange rates you can probably draw a line across it and say my business will be successful when this is under here and it’ll go broke when the exchange rate is above a certain amount. If we were using gold there wouldn’t be an exchange rates. Right? If they used honest money all over the world, if honest money was the money that we used in exchange.

Peter: Yes, it would certainly be a lot easier to do business and we wouldn’t have all these imbalances. The United States couldn’t run these huge trade deficits if we had to pay for our imports with either exports or gold.

Mike: Yes.

Peter: But when we can pay for them just by printing money that costs nothing, we can make an unlimited quantity of it but this is going to end in disaster. This is something that’s never been tried on a global scale. We have had individual examples of fiat currencies being tried in one country or another and it always ends in disaster, it never works and countries always return to a gold standard but what’s unique about this time period since we went off the gold standard in 1971 since the world was on a dollar standard and when we went off the gold standard we took the entire world off of it and this has gone on for a while but I think we’re in the final stages of the world rejecting this monetary system where the dollar is at the center because it cannot work.

Mike: Yes, I do too. When I was writing my book I loaded into a spreadsheet looking for cycles, every currency crisis, stock market crash, bank panics or whatever looking for some kind of cycle in there and what leapt out at me was that every 30 to 40 years the world has a new monetary system. And here we are like 43 years, going on 44 years after the end of the Bretton woods being on this global dollar standard. I think the days are numbered and that there is going to be a crisis and I think it is going to be soon. This is margin debt and the red line is just numerics, the total amount of dollars of margin debt but the blue is margin debt compared to the GDP of the country so the size of the economy. And this chart is already a year old but what you see is every time it got over a certain percentage of the economy here there was a stock market crash right after it got up to those levels and margin debt is back up to those levels.

Peter: And more importantly though too the actual quality of our GDP has declined because so much of it is now just consumer spending finance by debt, the real wealth producing components manufacturing, mining, things like that those parts of our economy have been contracting. So the size of the GDP is very vulnerable to a collapse which would exacerbate those ratios especially if there was an increase in interest rates. So we’re certainly due for a stock market crash but the economy is so vulnerable that it really can’t withstand one anymore which is why I think again the Federal Reserve is going to do everything it can to prevent that from happening and there’s only one thing they can do is printing money but unfortunately the ultimate consequence there is even worse because a dollar crash is going to be much more damaging to the US economy and to the standard of living of the typical American than what a stock market crash or a real estate crash or banking crisis.

But unfortunately the Fed doesn’t care abut that. It’s just trying to delay the inevitable. It doesn’t care how much worse it makes it during that time period because they’re hoping that there’ll be a different administration in charge at the time. They have no idea how much time we have so rather than face the music they want to keep on playing.

Mike: Right just keep on blowing that balloon up bigger and bigger and every time it springs a leak they slap a band-aid on it and keep on blowing more air in. For some reason, people get used to living in a bubble. They like it and the politicians want to..

Peter: Well, some people like it because there are some people that benefit from this process but there’s only a small sliver of the population. The overwhelming number is suffering don’t understand why. You know you talk about now we have this huge growing chasm between the very rich and everybody else. Call it 1% and the 99%. But this class warfare is being fueled by the very people who are creating it and they don’t even realize that it’s their policies that are doing it. It’s the monetary policies we have that are responsible for this widening divide. It’s not capitalism that’s doing it and just calling for higher taxes and more wealth distribution isn’t going to solve the problem. It’s only going to compound it. We have to get to the source of what is driving this and it’s the central bankers and their monetary policy and to the lesser extent the regulatory and taxing policy of the US government.

Mike: Absolutely agreed. The gap between main street and Wall Street again, it’s engineered by all of this currency they created going into Wall Street and not to main street and that’s the reason wages haven’t grown. This chart that John Hussmann came up with where he took overvalued, overbought, overbullish indicators and internals weakening like earnings per share and added those factors together and what was interesting is every time there’s a major top this flashes up to very high levels. The 1987 stock market crash, it nailed that. And we’ve been getting these alarms going off over and over again lately. And it may not.. you may be right, the last time they started creating a lot of currency Wall Street partied but you did say that there’s going to come a time where they’re gonna start questioning the currency creation that it might be different this time. They might start partying on Wall Street first but do you think that even with massive currency creation though that people can say if they’ve got to do it again that means it really hasn’t worked?

Peter: Well they have to come to that conclusion yet. Obviously they didn’t come to the conclusion with QE2 or 3 but I think there’s been so much anticipation and self congratulations by the Fed and the Keynesian economists and the Paul Krugmans of the world that when it doesn’t work, when we’re right back where we started with as far as back to recession and if we’ve gone through the entirety of a business cycle and rates have been at zero the entire time people might start to realize when can you ever raise rates? And if we’re doing a QE4 and instead of the Fed’s balance sheet shrinking from the current four and a half trillion we have to expand it to six to seven trillion, the idea that it’s ever going to go back down again people are going to see that for the ruse that it is and I do think there’s going to be a loss of confidence. Why anyone still has confidence in the Fed is beyond me. But I think that that confidence is going to go away and when it does you know you’ve destroyed the value of the currency.

I think that as the world tries to shun the dollar denominated debt because the rates have to stay low, we can’t raise interest rates to make the dollar attractive because we can’t afford to pay those rates. So we have to keep the rates artificially low. We can only do that by creating more money but the more money we create the less it’s worth, the fewer people who actually want it. So then you have a situation where the Fed Reserve has to expand it’s QE program not just to mortgages and treasuries but to corporate bonds, to municipal bonds, they have to start buying everything. They become the buyer of only resort and then the dollar really has a crisis and now the Fed is in a position..

Mike: How moral is that that there’s an entity that gets to create currency that is going to become the buyer of everything and they’re creating the currency to do it?

Peter:It’s not moral at all, it’s theft is what it is. But eventually people are not going to want to be stolen from and they are going to rebel against that currency and they’re going to look for a safe haven. Something like gold where they can protect themselves from really this monetary looting.

Mike: Most people don’t realize that when we’re in this grand experiment that the Keynesians that run things don’t actually know what they’re doing because this has never been done at this level before.

Peter: Well the irons is it’s not an experiment because we know how it’s going to end. There’s no chance that this can work. Because history is replete with examples again on a smaller scale but if it doesn’t work on a small scale just putting it on a bigger scale doesn’t change the outcome. It maybe changes the dynamics.

Mike: It makes the same outcome but much bigger to match the energy put into it.

Peter: People that say this is some kind of experiment they’re wrong, they haven’t learned anything. We don’t have to experiment, we have history. We can learn from the mistakes of the past. The problem is that our central bankers and economists never learn from the mistakes of the past. They repeat them all.

Mike: What I mean is from their point, they think they’ve got these little models that say if you do this this will happen but they don’t know that they actually can’t control it. They can influence stuff short term but..

Peter: They think that this time it’s different or they can tweak it a little bit. It’s like somebody having another communist revolution saying, we’re gonna get it’s right. The Soviets didn’t get it right or the Chinese didn’t get it right, the Cubans or the North Koreans wherever it’s been tried, we’re gonna try it again. You don’t have to try communism again, it’s failed right.

Mike: Right

Peter: It doesn’t work. No matter how you want to repackage it, it’s never going to work but everybody thinks they’re smart enough they can make it work. And so you’ve got people now that think yes, we can make this work. Yes, it didn’t work in the past but we’re so smart that it’s gonna work now and it’s not going to work it’s going to fail even more spectacularly because it’s even bigger.

Mike: Okay. We were talking about home ownership a little bit earlier. So this is a chart that goes back to 1980. It’s the levels of home ownership have dropped back down to 64% and it hit 69% during the peak of the real estate bubble.

Peter: First of all, it’s going to go lower. But you’re really graphing the disintegration of the middle class who can no longer afford, thanks to the government to buy homes, and you had all these government programs designed to make home ownership more affordable and of course like everything the government does it backfires. And it’s now made home ownership less affordable and less desirable. So you have record numbers of people who are now renting their houses from hedge funds and private equity funds. And you know what’s been happening to rents for the past few years? They’ve been rising, 4% or 5% or 6% per year, more, 10% in some areas. Because people have no choice now but to rent and those rents don’t even make it into the CPI because they use something like owners equivalent rent and for some reason that never goes up.

But the actual rent that people are paying is going up. That’s why I mentioned that right now you have 25% of renters have to spend half their income on their housing costs which is up considerably from where it was in 2007 right before the Great Recession started. The old rule of thumb used to be that housing costs should make up no more than a quarter of your income. And now people are devoting half their income. And of course everything else is getting more expensive. Food is getting more expensive, health care is getting more expensive, utility bills. The only life line that many Americans had is that gas prices came down. Gasoline got less expensive. That’s already changing. Oil prices are going back up. And people are wondering “Where was the benefit that we got because we didn’t see it in retail sales from the lower gas prices?” And there was a benefit, there were just so many other problems that you couldn’t see it because the consumer was drowning. Okay, now he’s got a lifeline here but you couldn’t see it. It wasn’t like they were spending the extra money, they needed the extra money for food. But now that lifeline is being yanked away because gas prices are going back up.

Mike: And so this will go lower. Home ownership.

Peter: Yes, because you need to eat, you need energy, there are certain things you have to buy.

Mike: That figure of 50% to put a roof over your head.

Peter: Yes.

Mike: The percentage of your income going to home ownership or rent to put that roof over your head, that’s pretty much a constant that you can trace back to like ancient Roman times. You can only afford a certain percentage of your income and you can see when something’s in a bubble because it’s at or beyond a certain extreme.

Peter: And think about this Mike because this is the cost of home ownership with interest rates at record lows. The Fed’s got rates at zero.

Mike: Yes, so there’s nowhere to go.

Peter: It’s never been cheaper to borrow money. Back in the day, in the 80’s, people were buying homes with 12% mortgages, 14% second mortgages, carried back by the seller. How could we have afforded that? Imagine how much wealthier Americans used to be in the past when they can buy a house? Put 20% down? And then pay 12% in mortgage on the remaining 80%? Now Americans are so broke they can barely scrape up 3.5% with a 2.5% adjustable rate mortgage. So you imagine where home prices will have to go, or where home ownership will have to go if we just had a return to low interest rates? Not zero, just historically low. Or if people were requiring a down payment again?

Mike: Real estate would definitely crash.

Peter: Of course, either the prices would crash or nobody would own any homes. It would all be owned by hedge funds.

Mike: Yes. So levels of margin debt, we’ll skip that. These are different countries here and all of these countries are in Europe. The blue here is the different durations of their bonds that are in negative interest rate territory where you have to pay to loan the country your currency.

Peter: It shows you how absurd this is. And right that old expression “Whom the God’s would destroy, they first made mad” Well, you can see we’re on the eve of destruction when the world is this crazy that you would actually pay somebody money to borrow from you. They have the use of your money and you get back less. I’m going to buy a bond for $1,000 knowing that I’m only going to get $999 back. I mean, what is the purpose of doing that? But you know, it’s actually worse than that because I do believe there are a lot of countries where their CPI is not accurately measuring what’s really going on with the cost of living. So there probably are a lot of other countries that have negative rates.

Mike: So when you apply real rates to that you think much of the world is upside down.

Peter: I think the United States has negative rates. We say “Oh we have 2% interest rates for a 10-year bond but our inflation is only a 0.5%.” I think our inflation rate is more than 2%. I don’t think the government’s statistics reflect how bad it really is.

Mike: Right, I don’t believe so either. I call it the CP lie.

Peter: Yes, we’ve got negative rates. The fact that there’s actually negative nominal rates where again you buy a bond for 1,000 Euros and you only get nine hundred and ninety something Euros when it matures. Or even the interest you make along the way when you add it to what you get back is still less than you originally loaned.

Mike: Right. It’s crazy. This has never happened before in human history.

Peter: It shows you we’re running out of rope here and now people are saying “Why should I buy that bond? I’m just going to hold on to cash.” “And the bank deposits have a negative rate, why even put my money in the bank? Why don’t I just put it in my mattress?” Now putting money under the mattress seems like it’s a more responsible thing to do than to loan it to a bank at a negative rate of interest. Because the bank could fail and you’ve lost your money. Why take a risk if you’re not going to be paid?

Mike: Right. It’s illegal to put cash in a safe deposit box.

Peter: Some of these countries want to make it illegal to even have cash. And they’re cracking down on people who are even conducting their business in cash which the way around that is own gold. Own real money. If they’re going to start punishing you for owning Euros or owning Yen or maybe owing dollars, okay, don’t own it. Own something real.

Mike: Yes, that’s what I do. My total net worth is split up between cash and a vast majority is physical gold and silver.

Now we’re going to talk about what you can do to protect yourself in this environment and Peter had some… we were talking about gold potentially basing here.

Peter: Well, I think it’s been building this base now for a couple of years. You’ll notice every time we get down below 1200 people start saying “This is it! It’s going to collapse. Gold’s going below a 1000.”

Source: SchiffGold.com