Last week, Trump joined CNBC’s “Squawk Box” last week to discuss a wide range of topics including U.S. debt, interest rates and replacing Fed Chair Janet Yellen. It was Trump’s comments about potentially renegotiating the more than $19 trillion in U.S. debt and the sensitivity surrounding higher interest rates that raised eyebrows.
While some observers argued that Trump’s approach could be tantamount to a debt default, Schiff told CNBC the GOP nominee was fundamentally correct in his observation.
“Trump just admitted on CNBC that America has too much debt to afford a rate hike, and that he wants our creditors to accept less than 100 cents on their Treasuries,” the Euro Pacific Capital CEO explained on CNBC’s “Futures Now” last week. “In other words, Trump knows a U.S. government default is inevitable.”
Last year, the widespread belief that the Federal Reserve would tighten monetary policy unsettled markets. Recently, soft economic data and turmoil around the globe have softened expectations of a rate hike. Still, Schiff said an eventual rate hike could leave the world’s largest economy exposed to a growing risk.
“If rates go up, refinancing [debt] doesn’t help. The only thing that helps is restructuring,” said Schiff, who compared the situation to the crisis in Puerto Rico.
The commonwealth “can’t pay because they are broke, well math applies on the main land just like it applies in Puerto Rico, we can’t pay either,” he said. “And if interest rates go up Donald Trump is right, we have no choice than to tell our creditors they are taking a big haircut,” he added.
Schiff has long been opposed to the Fed‘s so-called easy money policies. He insists that rather than helping the economic backdrop, the excess liquidity has created fragile asset bubbles so fragile that may send the U.S. spiraling into a recession worse than what occurred during the financial crisis.
“[Trump] recognizes that we have a bubble and he wants to make America great again,” Schiff said, adding that of all the candidates he has the best understanding of how bad the problems are.
“To get great again we need to recreate what made us great in the first place, and so we’re going to have to let interest rates go up,” Schiff added. “A big part of that is admitting that we aren’t going to be able to re-pay the debt.”