Renowned economist Peter Schiff: The biggest bubbles are the US dollar and US Treasury bonds!

Peter Schiff, a renowned Wall Street economist and long-time "US dollar skeptic," revisited a range of economic issues, including US consumer debt, the fragility of the US dollar, and the shifting landscape of global reserve currencies, during a media interview over the weekend.

In the interview, Schiff delved into how the reckless borrowing behavior of US consumers and the government is intertwined with the unsustainable narrative of US dollar hegemony, and the resulting ripple effects on economic security, inflation, and the gold market.

When analyzing the psychology of US consumers facing financial pressure, Schiff bluntly pointed out that many Americans mired in debt have lost the motivation to curb their borrowing. Schiff stated:

Those Americans who continue to borrow out of desperation may no longer care about repaying their debts.

They just want to borrow more. In fact, when the scale of debt far exceeds repayment capacity and bankruptcy is only a matter of time, people may choose to indulge completely. My point is: why not take out more loans?

Therefore, consumers will not hesitate to refinance houses that are destined to be foreclosed, max out credit cards with no intention of repaying, or sign "buy now, pay later" agreements, which, in their view, are essentially "buy now, never pay."

Schiff then shifted the conversation to the root cause of this unrestrained borrowing, emphasizing the larger bubble quietly inflating behind it: the US dollar and US Treasury bond markets.He argued that it is this bubble that fuels trade imbalances and the decline of the US manufacturing sector, rather than foreign "fraud" or tariffs as claimed by some Trump administration officials:

First and foremost, the biggest bubble is the US dollar and US Treasury bonds.

US Treasury Secretary Bentsen said that it is the huge trade deficit that has hollowed out the US industrial base, destroyed supply chains, and sacrificed economic security.

All of this is indeed true, but he has misidentified the cause. He attributes all these problems to foreigners engaging in fraud through tariff and non-tariff barriers. However, the root cause lies elsewhere (in the US dollar system itself).

Schiff then focused on the risks that most policymakers are reluctant to acknowledge: the vulnerability of the US banking sector in the face of stagflation. He explained that the stress tests conducted by the US Fed have overlooked a scenario that could truly expose the weaknesses of the banking system:

In fact, you know, stagflation, a combination of economic weakness and rising interest rates, is a stress test scenario that the US Fed has never conducted on any bank.

The US Fed believes that in the worst-case scenario, which involves a massive economic recession and high unemployment, interest rates will pull back to zero, and Treasury yields will collapse.

However, they have not conducted stress tests for a scenario where, amid economic recession and high unemployment, inflation and interest rates would rise instead of fall... In a truly adverse situation, both would collapse.

When focusing on global capital flows, Schiff pointed out the current situation where central banks around the world are accelerating the sale of US dollar assets and increasing their gold reserves, predicting that the process of de-dollarization is still in its early stages and that gold prices will rise sharply:

"We are moving towards a gold price of $4,000 or even higher. While central banks are selling US dollars, they are also buying gold."

"They are shifting their reserves from the US dollar to gold, which means they will also not buy US Treasuries or mortgage-backed securities (MBS)."

"This process has just begun. Although it has been going on for several years, there is still a long way to go."

Finally, Schiff supported his argument by reviewing how the US has utilized the global reserve currency status of the US dollar to sustain a lifestyle that exceeds its domestic production and savings. He warned that as the world gradually moves away from the US dollar, Americans will be forced to return to more sustainable habits—production and savings, rather than consumption and borrowing:

"The change I am talking about is related to the fact that we (the US) have been riding for free on the global economic train."

"The reserve status of the US dollar has allowed us to overdraw as a nation. As a country, we consume more than our total production, and we borrow far more than our total savings."

"Therefore, our standard of living, yes, our purchasing power, has been enhanced by the role of the US dollar. Without the US dollar as a reserve currency, we would have to produce more, which also means we would have to save more."

"In other words, once this privilege of the US dollar disappears, Americans will be forced to return to reality: they must create wealth through tangible production and support their lives with real savings, rather than continuing to indulge in the current false prosperity supported by debt."