Will debt problems, decreasing use of the dollar as the global reserve currency and Obamacare lead to a Black Swan event with the dollar plummeting and US power collapsing? Dr. Paul Craig Roberts, Former Assistant Secretary of the Treasury and Wall Street Journal columnist, laid out just such a scenario in a recent phone interview.
Roberts did not think much of the recent settlement about the debt ceiling. He said, "They haven't solved anything. They've just pushed it off until January or February." Roberts argued that another crisis may further erode confidence in the US dollar. "So if it happens again, you might finally get the black swan event that brings the whole house of cards down."
After mentioning that Tea Party Republicans are trying to use the debt ceiling issue to kill Obamacare and entitlements, Roberts argued that entitlements are mostly Social Security and Medicare. "They're not unfunded," he said. Over the past 30 years, the Federal government has been collecting far more social security income than it has been paying out, some $2 trillion in excess. The money should have been put into a fund to cover future Social Security payments, but the Treasury spent it to cover deficits and reassure Wall Street, replacing the money with non-marketable Treasury IOUs. The only way to make good on the IOUs, is if tax revenues go up by $2 trillion, which is impossible, or the Treasury sells $2 trillion in bonds and put the money into the Social Security trust fund.
If the government cuts payments to retired people, Roberts argued, it will only worsen the problem. Reducing Social Security payments will just further hurt the economy by further decreasing retirees' spending power.
Turning to Obamacare, Roberts argued that the new plan is stealing some $500 billion of Medicare revenues to help subsidize Obamacare, by "cutting what they pay doctors who serve Medicare patients, a 27% reduction in reimbursement." The result is that "Doctors are abandoning Medicare patients and healthcare is rationed to those on Medicare."
Roberts stressed several times that retirees on Medicare and Social Security are not "freeloaders" and the programs are "not welfare."
The real problems, Roberts argued are twofold: the outsourcing of professional service jobs overseas, and the cost of the wars. Jobs lost overseas hurt US GDP and the US tax base, while the wars have cost about $6 trillion, which is "most of the debt increase."
The problems he outlined, Roberts said, all put pressure on the dollar. The real problem, he said, is the move away from "the use of the dollar. Others are just going to stop using it." He mentioned that China and the Bank of England and the EU have signed currency swap agreements, which no longer require the use of the US dollar. Even what he called "lackey puppet states," such as Australia, are now settling their trade balances with China in their own currencies. All of this means that there is less demand for dollar, which pushes the price down. The key is that the US can print more and more dollars to buy bonds to shore up the dollar, but it "can't print foreign currencies to buy dollars."
"The real black swan," Roberts said, "that's waiting to happen: When does the dollar plummet? When can the Fed not get enough loans or foreign currencies to buy back the dollar, and when that happens, it's all over. They lose control, interest rates skyrocket, bonds collapses, stocks collapses, real estate collapses, and the deficit becomes huge, I mean really huge….There's no thought about it….The whole situation is, to use an old expression, headed to hell in a hand basket."
When will this black swan paddle into view? "It's gone on longer than I thought possible because people are locked into the dollar use as a tradition," Roberts said. "It could happen at any time. I don't think this can go on for another two or three years."
Turning to gold, Roberts argued that "The intervention in the gold market is part of the plan to prolong the life of the dollar." The policy is to sell naked shorts to prevent the strong demand for physical gold from driving up the price. If gold is rising so rapidly against the dollar, he said, "it raises the question of how can the dollar be worth the same against other currencies?"
Furthermore, the more the Treasure pursues Quantitative Easing, the worse the pressure on the dollar. But they can't stop without pressure on the Fed's ability to cover the deficit.
"We're rolling toward the collapse of the dollar," Roberts predicted, "and with it the collapse of American power." He argues that the United States will have massive bills, which the US will be unable to pay.
Is gold the answer? Roberts said, "Most people can't accumulate gold….Real family income in 2012 was 9% below where it had been 12 years before…The number of people who can buy gold is limited in number." Such a small subset of the population can't save economy, they don't have enough buying power.
Although gold can't save the United States, he urged that "If you have gold, hold it, buy more. Buy silver." He argued that when there is the Black Swan event and the dollar plummets, "that's when the price of precious metals is going to rise so fast that no one is going to be able to buy them."
Holding gold and silver might be the solution for individuals, but no one knows what the government might do; they might "just say you can't have it." Roberts said that the Obama administration has said that it can murder US citizens without due process of law and has done nothing about Bush administration statements that they can put US citizens in jail forever without due process. In sum, he said, "They can do whatever they want. It is essentially lawless. It is not accountable government, and it will get worse."
The information in the Market Commentaries was obtained from sources believed to be reliable, but we do not guarantee its accuracy. Neither the information nor any opinion expressed therein constitutes a solicitation of the purchase or sale of any futures or options contracts.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.