Fed in 'monetary roach motel,' won't taper: Schiff
The Federal Reserve has no intention to pull back on its monthly bond buying and instead is more likely to increase it due to economic weakness, investment pro and gold advocate Peter Schiff said.
Fed Chairman Ben Bernanke is trapped in a "monetary roach motel" that will force the central bank to continue quantitative easing, in turn leading to a major economic crisis, Schiff added.
"The recovery that the Federal Reserve is bragging about helping create is 100 percent dependent on the quantitative easing that it is supplying," the CEO of Euro Pacific Capital said Monday during IndexUniverse's Inside Commodities Conference. "Like every drug, the economy's going to need more of it to sustain the phony economy. ... Far from diminishing QE, the next big move is going to expand it."
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On the heels of the financial crisis in 2008, the Fed began the first of what is now three QE programs, with the latest involving purchases of $85 billion a month in Treasurys and mortgage-backed securities.
In recent months, Bernanke and other officials have indicated a desire to start winding down—or "tapering"—the program on belief that the economy is recovering and that prolonged QE carries risks.
However, the Fed stunned the financial markets last week by passing on tapering yet, stressing that the economic data has not improved enough and congressional infighting has stymied fiscal policy.
Schiff, though, said the Fed never intended to taper.
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"They're going to have to do 100, 115, 125 (billion dollars a month). When the market comes to terms with that it's going to be a whole different ballgame," he said. "Right now, the Fed has to maintain the illusion that there's a method to their madness."
From an investment standpoint, Schiff has had to defend a gold position that has deteriorated as belief has increased that the Fed has managed to stave off inflation.
He attributed the fall of the metal to some of the speculative fervor dying off, as well as a highly publicized bearish call from Goldman Sachs.
Once inflation comes back and the speculators realize they were wrong, Schiff said he the expects the price to roar back up.
Marc Chandler, global head of currency strategy at Brown Brothers Harriman, disputed Schiff's thesis on the Fed's end game, leading to a prolonged and heated debate between the two.
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"People like Peter have been arguing that Fed monetary policy has been leading to inflation. But you know what? It hasn't," Chandler said. "Deflation remains a bigger risk to us to date than inflation."
That's not going to be the case for long, said Schiff, who predicted a coming huge drop in the U.S. dollar value and a collapse of the Fed policy structure.
"At some point the dollar is going to fall off the edge of a cliff," he said. "Bond prices are going to go down, and the Fed is going to have no choice but to slam on the brakes, and then we are going to have a worse financial crisis than we had in 2008."
—By CNBC's Jeff Cox. Follow him
@JeffCoxCNBCcom on Twitter.