While the failure of Congress to act to prevent or mitigate the fiscal cliff - the combination of tax increases and federal spending cuts due to hit on Jan. 2, 2013 - would slam the economy hard, Schiff says it would be preferable to the crash he foresees.
"It's not because we go over this phony fiscal cliff, it's probably because we don't go over that one because the government cancels the spending cuts, cancels the tax hikes, and instead we end up going over the real fiscal cliff further down the road," Schiff told Breakout recently.
Schiff, the CEO and Chief Global Strategist of Euro Pacific Capital, said the real threat to the U.S. economy is "where interest rates spike and we can no longer afford to pay the interest on the enormous amount of debt we have."
He also blamed the Federal Reserve's zero interest rate policy for making government borrowing too easy.
The national debt, fueled by annual budget deficits of more than $1trillion, crossed the $16 trillion threshold at the end of August. At current spending rates it will hit $17 trillion next June.
"We can't keep interest rates artificially low to stimulate the economy because it's the low interest rates that are the source of the problem," Schiff said.
That about a third of the U.S. debt is held by foreign countries such as China and Japan is a ticking time bomb.
"In fact, the real fiscal cliff comes when our creditors want their money back, and we don't have it," he said.
Fiscal Cliff Not the Worst Thing Schiff, who predicted the collapse of the housing bubble and 2008 financial crisis in his 2007 book "Crash Proof," has been warning for months the next fiscal crisis will be worse than the last one.
Avoiding the January fiscal cliff, particularly if the government prints more money and increases the nation's already-crushing debt, will simply add to the problem, he said.
And pumping more money into the economy will only bring about higher inflation, which hurts the poor and middle class by debasing wages and savings while raising the cost of living.
Peter Schiff's advice to the government is to reverse course.
"The best thing the government can do is shrink itself, make itself the smallest possible burden it can to allow the economy to recover," he said. "That means fewer regulations, less spending, and lower taxes."
Basically, he says the U.S. has a choice of either enduring a brief period of economic pain early next year or facing economic disaster later on.
The path of government austerity would cost jobs and cause a drop in the stock market in the near term, "but it will be very constructive pain. The economy will heal and then we'll be able to grow again and have real prosperity," Schiff said.
Surprisingly, a recent Congressional Budget Office (CBO) study supports this idea. The CBO concluded that going over the fiscal cliff would almost surely cause a recession in early 2013, but by 2014 the economy would be growing at a robust pace of 5%.
"Our economy is so screwed up from years and years and years of bad monetary and fiscal policy that it's going to be painful to correct that problem. But we have to do it," Schiff said. "We can't keep avoiding the pain and in the process making the problem worse, because then we're just going to have even more pain in the future to fix an even bigger problem."
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