Washington, DC -- (ReleaseWire) -- 07/17/2014 -- Nationally Syndicated Financial Myth Busting Radio Show with Host Dawn Bennett, CEO of Bennett Group Financial Services, LLC, on July 13, 2014, interviewed Dr. Paul Craig Roberts, Former Assistant Secretary of the Treasury Under Reagan and Co-author of Reaganomics.
Dr. Roberts is an American economist and chairman of the Institute for Political Economy. He's a former editor and columnist for the Wall Street Journal and Business Week, and has testified before congressional committees on 30 different occasions. As an author of 12 economic books and numerous political economic articles, Roberts was honored with the Warren-Brooks Award for Excellence in Journalism, and in 1993, Forbes Media Guide ranked him as one of the top seven journalists in the United States.
Back in April of 2014, Roberts wrote an article titled "Is the U.S. or the World Coming to an End," which questions if the U.S. dollar will be abandoned or collapse in value, or if Washington will soon be in military conflict with Russia and China, which could even be worse than the collapsing dollar.
Here is the interview with Dr. Paul Craig Roberts:
Q: Doesn't the role as the dollar as an international currency create systemic risks for the United States?
A: Well, it creates systemic risk for the rest of the world for two big reasons and a bunch of small ones. One of the big reasons is that the Federal Reserve has been creating huge numbers of new dollars in the past few years. These dollars are not matched with an increase in real goods and services, so the money supply is increasing far beyond the scope of the real gross domestic product. That implies a fall in the value of the currency, and the rest of the world holds huge amounts of dollars because it has been the world reserve since the end of World War II. So, the rest of the world is facing the systemic risk of their existing holdings in dollars being diluted by the rate at which the Federal Reserve has been creating them. That's one big risk. The other big risk for the rest of the world is that the dollar payment system is what gives Washington the ability to impose sanctions on other countries when they don't do what Washington wants them to do.
To participate in the dollar payment system, any government that does that, essentially is ceding its own sovereignty to Washington. So, these are huge systemic risks for the rest of the world. The advantage for the United States is that it can impose its will on the rest of the world, and the other big advantage of being the reserve currency is that you can pay your bills by printing money. This is the side of the reserve currency that Washington has used and therefore is calling into question continued participation by a large part of the world in the dollar as reserve currency.
Q: Do you think the United States and the rest of the world believe that the Federal Reserve is barring returns from the future?
A: I don't know what they believe. I think what's happening is that the Treasury, the financial regulatory agencies and the trustees of the New York Federal Reserve Bank are all the top bankers. So the bankers that produced the financial crisis are the same people who are in charge of the policy dealing with it. It's the bank executives who caused the trouble who are running the Treasury, who are running the Fed, who are running the financial regulatory agencies. They are primarily concerned with protecting their own banks from the bad policies that they presided over. So the policy of quantitative easing, which the Fed sometimes pretends is directed at helping home mortgages and stimulating the economy, the real purpose of this policy is to prop up the value of the debt-related derivatives on the balance sheet.
So when the Fed buys bonds, pushes up the price of bonds and the price of all the debt-related derivatives rise with them. This policy has mainly served to improve the solvency, the balance sheet position, of the big banks.
Q: Do you think the dollar as we know it, as Americans know it today, will it be gone within three, four or five years? Do you have that sense that it's going away?
A: I don't see how it can retain its exchange value when such a huge supply is created, when so much new debt is created, and when the authorities in Washington threaten other countries that use the dollar. They either put sanctions on them or they penalize the banks, like recently happened to the big French bank. Washington stole $9 billion from it.
Now they're after the Commerzbank in Germany. So a system that only works for Washington, hurts everybody else, that would be in danger even if the dollar wasn't being printed in huge amounts. It is a puzzle to me that the world hasn't already abandoned the dollar. Much of the world seems to be in that position right now. We have the BRICS: Brazil, India, China, Russia, South Africa who are forming their own international payment system and their own kind of international bank, and it will not be using dollars. They're going to settle their trade in their own currencies. We saw recently the big energy deal between Russian and China in which the dollar is not the currency. So I think we do see, already, movement of countries away from the dollar.
Q: Let's talk about Russia and China, that deal which was a little bit over a month and a half ago. Russia announced that much of this anticipated Holy Grail, Energy Gazprom deal with China, happened. They signed it, and I believe it was actually an agreement to help break the petrodollar and the stranglehold on the rest of the world. Do you think that once the bilateral trade in the ruble or the Renminbi is established that the rest of the world is piggybacking already? Do you think that that's already started to happen?
A: I think that the United States in the 21st century has been very arrogant in its approach to all other countries. It tells them such things as, "Do as you're told, or we'll bomb you into the Stone Age." It tells foreign banks whom they can do business with. "If you do business with some country we don't approve of, we're going to steal from you or prevent you from operating within the United States." In other words, that's what it told the French bank. "Fork over $9 billion, your year's profits, or we're going to freeze all your operations in the United States." Well this type of behavior creates resentment and it also gives people a good excuse not to participate in your payment system.
So I think that the movement will go forward, and taking into account that Washington's decision making in the 21st century has been really poor. They told us that Iraq had weapons of mass destruction, and they had to take them away, and it would be a cakewalk, and it would take six weeks, and it would cost $70 billion, and be paid for by Iraqi oil revenues. Well, according to the Nobel economist Joeseph Stiglitz and the Harvard budget expert Linda Bilmes, Iraq didn't cost $70 billion. It cost $3,000 billion, and it wasn't paid for by Iraqi oil revenues, it was paid for by piling up debt on the American taxpayer.
Then you go into Afghanistan, and it's now 13 years, and they can't defeat a few thousand lightly armed Taliban. Wherever you look, you see Washington just doing stupid things, making bad decisions, piling up debt and cost. I think this also hurts its reputation and causes people to change their attitude, their positive attitude towards the United States. It's disappearing from the combination of things we've talked about.
Q: How pungent does the dollar's corpse need to be before the Federal Reserve and Obama and Washington actually come up with a game plan to save the US dollar?
A: Well they have bailed out the banks, but we don't really know the situation in the banks. There's a lot of concern about the derivatives they hold. One bank, I think it's J.P. Morgan, it has derivative exposure that is larger than the combined value of the U.S. bond and stock markets and put on top of that, margin exposure. The margin exposure has never been this great ever. All the banks are tied together in these debts. Most of these derivatives are interest rate swaps. They're bets on interest rates. They're betting with each other on which direction interest rates will go, and then after they make a bet with one, they turn to another and offset that bet with some other one. The consequence of all this is unknown. I don't think the Federal Reserve could create enough money to bail out the derivative market.
To be clear, if it does create money, it debases the currency every time they turn on the printing press. It can hurt the currency either through domestic price level, which it hasn't done much of because most of the money the Fed has created has not gotten into the economy. It's sitting in the bank reserves.
However, the rest of the world is watching the money creation, and it can bring inflation into the economy through the falling dollar exchange rate. If the world starts looking at the dollar with a jaundiced eye, using less of it, moving away from it, and the exchange value of the dollar drops, the prices of imports on which the United States now is heavily dependent increase. Just think about all your clothes, electronic complements, shoes, food and energy, which are all imported.
When you have heavy dependence on imports and your currency weakens, then you get inflation in that way. So it’s a very dangerous situation and I don't really know what the Fed could do about it.
Q: So if there still is a U.S. dollar around, will we know it as we know do today or is it going to be tied to a very different monetary system?
A: I think it will lose a lot of its value and therefore the standard of living in the United States will drop quite a bit. I don't know that there will be a new world reserve currency. I don't think the world any longer needs a reserve currency.
The dollar came into that role at the end of World War II when all the other economies in the world were destroyed or still in third world status. The United States was the only country that had an economy. The Japanese were blown up, the Germans, the French, the British, the Russians. China had never reached any kind of industrial or manufacturing development. So that's the reason the dollar became the world money. There was no other way to make payments.
Today many countries have sensible, usable, viable currencies, and they can trade with one another in their own currencies, as the BRICS are beginning to do.
Q: The common man doesn't feel it when things go wrong in our monetary shifts. What's going to happen this time around? Will he or she feel it? Will it be a win or lose?
A: I think they will feel it through loss of jobs, loss of income growth and loss of purchasing power of the currency. I think it will be a substantial blow to Americans. I hope I'm wrong about this and nothing like that happens, but from everything we know in economic history, the stage is set for a downward adjustment in American economic power.
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Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com.
She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included Rock Legend Ted Nugent, as well as Steve Forbes and Grover Norquist. The show is a great complement to Dawn’s monthly investing seminars that take place at Tysons Corner in McLean, VA, where she discusses investing.
She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett or firstname.lastname@example.org