No Safe Haven

One of my correspondents forwarded me a link to a Fox Business News story that quoted economist Peter Schiff as saying the rising price of gold was a warning of future inflation and a looming financial crisis. Mr. Schiff (also known as Dr. Doom) has had a controversial career and his positions have been severely criticized by Nobel laureate Paul Krugman (which actually improves his credibility in my eyes). In a 2009 speech Mr. Schiff predicted that gold (which was about $900/oz back in 2009) would hit $5,000 per ounce (gold is quoted at $5560/oz as I write). But Mr. Schiff’s ominous warnings over the decades about rising inflation needed some assistance from Joe Biden to come true.

However, Mr. Schiff is correct that there is something going on regarding gold, the dollar and inflation. It is very clear that President Trump’s tariff policies are shaking up trade policy around the globe, but they are also shaking up monetary policy. I have always asserted that the US dollar’s position as the world’s reserve currency is a great asset to the United States. But as I wrote back in April 2025 (Just Another Powerful Country), President Trump’s Chairman of the Council of Economic Advisors at that time, Stephen Miran (now a Fed governor), views our reserve currency status as a terrible burden that has done great harm to our country. He believes that because the dollar is the world’s reserve currency the dollar is stronger than it should be and, because a strong currency favors imports and discourages exports, that reserve currency status is the cause of our persistent trade deficits. (See also: Who is Ripping off Whom?, published February 14, 2025)

Of course, Dr. Miran ignores our also persistent fiscal deficits that pump money into the economy (increasing demand) while not increasing production (meaning imports must fill the gap). Tariffs are Dr. Marin’s chosen weapon to fight the persistent trade deficits which is why tariff man (otherwise known as President Trump) hired him in the first place. Now as a Fed Governor he will push to lower interest rates in order to further weaken the dollar (and drive gold and other metals even higher ) as he did in his dissenting vote at the recent Fed meeting.

But are we heading to a dollar collapse and a financial crisis as Dr. Doom is predicting? The answer is not so simple. Financial analysts like the Fox interviewer of Mr. Schiff point out that inflation remains moderate (although slightly above the Fed’s target of 2%), GDP is booming (to a large extent due to the reduction of the trade deficit since trade deficits are deducted from GDP) and the stock market is booming (because a company’s value is based on production, not exchange rates).

But we are not out of the woods just yet. Part of the problem is that Mr. Trump’s tariffs are not just trade related. He threatened European countries with additional tariffs if they did not back his grab for Greenland so tariffs can also be geopolitical weapons. And he leveled 100% tariffs on Canada because he was pissed at what Canadian PM Carney said in his speech at Davos. It is not just common folks on Main Street that get worried by President Trump’s chaotic activities. It is also central bankers in capitals around the world. China’s central bank is dumping dollars by selling its holdings of Treasury bonds and buying gold. The United States is no longer a safe place to store your treasure. Treasury bonds are getting riskier even as yields decline. Capricious and seemingly irrational policy decisions increase uncertainty. For many decades the United Sates was considered the one safe place in a very uncertain world. That is no longer the case.

I don’t know if the financial crisis Dr. Doom is predicting is imminent but there will be a day of reckoning sometime in our future. Decades of politicians more interested in getting reelected than in the good of our country have pandered to fickle voters with all sorts of enticements along with the promise that someone else will pay for all of it. Electric car subsidies. No tax on overtime. You name it and some politician will float it out there in the hope of garnering a few more votes. And because taxes on current voters may cost some votes and the repayment of loans by those not yet born do not, our government has run fiscal deficits for most of the last five decades. And persistent fiscal deficits mean that our unsustainable public debt is becoming more unsustainable every minute.

There is no magic pill that will solve all our problems. And putting all our trust in a great populist leader is not the answer either. It is not just the politicians and bureaucrats that need to make changes. We will have to make sacrifices as well. Our desire to have the government take care of us has weakened our government and made us dependent. That has to change.