Peter Schiff: A 2% inflation rate from the Fed would cause financial Armageddon

According to Peter Schiff, a monetary tightening aimed at bringing inflation back to 2% would cause the collapse of the American financial system. The Fed is faced with a Herculean dilemma between controlling prices and supporting growth.

The Doomsday Scenario Outlined by Peter Schiff

In a recent alarming tweet, economist Peter Schiff paints a doomsday scenario in the event of a drastic tightening of monetary policy. According to him, aggressively raising interest rates with the sole goal of curbing inflation would have apocalyptic repercussions.

This shock therapy would lead to nothing less than the widespread bankruptcy of the banking system, a massive default by the US federal government on its sovereign debt, a blowout in the financial markets, an exponential surge in unemployment, and the collapse of the real economy.

In short, a financial Armageddon that Mr. Schiff considers fortunately unlikely, as the Fed, in his view, is not willing to assume such a destructive tightening. He summarizes his thoughts with this striking phrase:

“If the Fed raised rates high enough to bring inflation down to 2%, all the major U.S. banks would go bankrupt, the U.S. government would be forced into default, the markets would collapse, unemployment would skyrocket, and the economy would crumble. That’s why it won’t happen.“

Between Inflation and Debt Explosion, An Unsolvable Dilemma?

Yet, the Fed is cornered. Because easing its monetary policy too soon could reignite inflation, undoing 11 months of effort to contain it. Conversely, a prolonged tightening could trigger a debt crisis just as devastating, as recently mentioned by Jerome Powell.

In a recent interview with CBS News, the chairman of the Federal Reserve issued a worrying warning about the unsustainable trajectory of US public debt. This spiral is heavily mortgaging the country’s fiscal future and the well-being of young generations, he worries.

Faced with this unsolvable puzzle, the Fed is navigating blindly, walking a tightrope. Torn between its contradictory mandates of guarding price stability and promoting growth, it sees its room to maneuver dangerously shrink.

Peter Schiff’s sharp analysis starkly highlights the strategic impasse the Fed is grappling with, forced to choose in the short term between a relapse into inflation or a devastating recession. The American central bank is therefore cornered, called upon to achieve an almost impossible soft landing.