Tags: schiff | european | debt | crisis

Schiff: European-Style Debt Crisis Will Strike US

Monday, 09 Jul 2012 05:09 PM

By Forrest Jones and John Bachman

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U.S. attempts to stimulate itself out of the present downturn aren't working, and sooner or later bondholders will turn against the country in much the same way as investors in southern Europe today, says broker, author and financial commentator Peter D. Schiff.

The country remains mired in a depression, Schiff tells Newsmax.TV, and Federal Reserve attempts to stimulate the economy via quantitative easing — asset purchases from banks that inject liquidity into the economy to encourage investment and hiring — delay the day of reckoning when the country will have to tighten its belt and pay its bills.

Meanwhile, loose monetary policies today will pump up inflation rates tomorrow, and haven't made a dent in high unemployment rates they were supposed to make in the first place.

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"People no longer have confidence in the future purchasing power of the dollar. Right now, people think that inflation is nowhere in sight, that the Fed has got a handle on it. Well, they’re wrong," Schiff says.

"I mean, you’ve got a lot of demand for dollars right now as a supposed safe haven," he said. "But at some point the people who are holding dollars are going to want to spend them on something," said the author of "The Real Crash: America's Coming Bankruptcy — How to Save Yourself and Your Country."

Editor’s Note: To order ‘The Real Crash' at a great price — Click Here Now.

Yields on Treasurys have fallen to near-record lows as investors park their cash in U.S. government debt and other dollar-denominated positions to ride out uncertainty in Europe.

However, two rounds of quantitative easing have pumped more than $2.3 trillion into the economy, described by many as printing money out of thin air.

Soon or later, all that liquidity will push up inflation rates, and considering debts remain sky-high in the U.S., it won't take long for investors to flee the U.S. dollar-denominated haven as fast as they raced toward in recent months.

"Somebody has to want dollars to actually buy stuff. Somebody has to hold Treasurys to maturity. They can’t just flip them to a greater fool. So eventually, the music stops," Schiff says.

At the end of this year, Bush-era tax cuts and other tax holidays expire while automatic spending cuts kick in, a combination known as a "fiscal cliff" that could siphon hundreds of billions out of the economy next year and derail recovery.

Fed policies should worry investors more, he says.

"It’s going to be obvious to a lot of people that we can’t afford to service the debt let alone retire it, and our creditors are going to run and that’s when the real crisis is going to come," Schiff says.

"That’s the real fiscal cliff, not, you know, the expiration of the Bush tax cuts or these tiny automatic spending cuts that are due to kick in. The fiscal cliff is when interest goes up and we have a choice between default or runaway inflation."

The U.S. government needs to work out a way to pay off its debts with creditors, including addressing haircuts similar to the way Greece did earlier this year with private creditors.

The U.S. debt is too large to pay off at full value, at least under current terms.

"We have borrowed so much money that repaying it isn’t even a mathematical possibility. So the only thing that we have to consider is how will we default?" Schiff asks.

"We’re going to have to restructure our debt because legitimately paying it back is beyond the realm of possibility."

The U.S. will experience a crisis even if policymakers do everything right from here going forward. There's no way around it, thanks to past monetary and fiscal policies.

So how does an investor protect himself? Hard assets, he says, especially precious metals.

"I think you want to buy gold and silver. You can buy other commodities, non-monetary commodities as a hedge against this," Schiff says.

Investors shouldn’t ignore opportunities that pop up in equities markets, either, but should be aware the U.S. economy is due for rough seas ahead.

Calm seas today are merely mirages created by the Federal Reserve's stimulative policies, which will wear off soon.

"I think we’re still in a depression. I think it’s going to be with us for years and years. It could be five or 10 years; it could be longer, depending on how long it takes us to recognize our mistakes so that we can begin to reverse them," Schiff says.

"I think the only thing that is punctuating the recessions is the phony growth that we get from the stimulus. But it’s not real growth. All we do is spend more borrowed money."

Editor’s Note: To order ‘The Real Crash' at a great price — Click Here Now.

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