May 19, Editor Xiao Xiang of the Financial Media Union reported that Peter Schiff, a famous Wall Street economist and long-term "dollar skeptic," discussed a series of economic issues, including American consumer debt, the vulnerability of the dollar, and the transformation of the global reserve currency landscape, in an interview with a media outlet over the weekend.

In the interview, Schiff delved into how the reckless borrowing behavior of American consumers and the government is intertwined with the unsustainable narrative of the dollar's dominance, as well as its chain reactions on economic security, inflation, and the gold market.

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

Those Americans who continue to borrow out of desperation may no longer care about whether they can repay their debts.

They just want to borrow more money. In fact, when the scale of debt has long exceeded repayment capacity, bankruptcy is just a matter of time. People may choose to indulge themselves completely. What I mean is: let's borrow a little more.

Therefore, consumers will not hesitate to refinance houses that are going to be foreclosed on, max out credit cards they don't intend to pay off, or sign "buy now, pay later" agreements, which they view as "buy now, don't pay."

Subsequently, Schiff turned his attention to the root cause of this unrestrained borrowing, emphasizing a larger bubble quietly inflating behind it: the dollar and U.S. Treasury markets. He argued that this bubble has fueled trade imbalances and the decline of American manufacturing, rather than foreign "fraud" or tariffs as some officials from the Trump administration claimed:

First of all, the biggest bubble is the dollar and U.S. Treasury bonds.

Treasury Secretary Bessent said that it was the huge trade deficit that emptied America's industrial base, destroyed supply chains, and sacrificed economic security.

All of these are indeed facts, but he got the reasons wrong. He blamed all these problems on foreigners defrauding through tariffs and non-tariff barriers. But the root of the problem does not lie there (but in the dollar system itself).

Subsequently, Schiff focused on the risks most policymakers are reluctant to acknowledge: the vulnerability of the U.S. banking sector in the face of stagflation. He explained that the Federal Reserve's stress tests overlooked a scenario that could truly expose the weaknesses of the banking system:

In fact, you know, stagflation, the combination of weak economic conditions and rising interest rates, is a stress test scenario that the Federal Reserve has never conducted for any bank.

The Federal Reserve believes that in the worst-case scenario, i.e., a severe economic recession and high unemployment rate, interest rates will fall back to zero, and Treasury yields will collapse.

But they haven't conducted such a stress test: in the event of a recession and high unemployment, inflation and interest rates will rise instead of falling... Under truly adverse conditions, they will both collapse.

When focusing on the flow of global capital, Schiff pointed out the current situation where central banks are accelerating the sale of dollar assets and increasing their gold reserves, and predicted that this round of de-dollarization is just beginning, with gold prices still set to rise significantly:

We are heading towards a gold price of $4000 or even higher. Central banks are selling dollars while buying gold.

They are shifting their reserves from dollars to gold, which means they will not buy U.S. Treasury bonds 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 United States used the global reserve currency status of the dollar to maintain a lifestyle beyond domestic production and savings. He warned that as the world gradually moves away from the dollar, Americans will be forced to return to more sustainable habits—production and savings—rather than consumption and borrowing:

What I am talking about is related to our (America's) fact of riding for free on the global economic train.

The reserve status of the dollar allows us to overdraw as a nation. Our consumption exceeds our total output, and our borrowing far exceeds our total savings.

Therefore, our standard of living, yes, our purchasing power, has been enhanced by the role of the dollar. Without the dollar as a reserve currency, we would need to produce more things and save more money.

In other words, once this dollar privilege disappears, Americans will be forced to return to reality: they must create wealth through real production and support life with real savings, unable to continue indulging in the current false prosperity supported by debt.

(Financial Media Union, Xiao Xiang)

Original article: https://www.toutiao.com/article/7506057136674210323/

Disclaimer: The article solely represents the author's views. Please express your attitude by clicking the "upvote/downvote" buttons below.