With all the brouhaha surrounding the debt ceiling deadline of August 2nd, I thought it would be nice to bring on a guest who not only has a PhD in Economics, but who has also worked inside the policymaking apparatus (as assistant treasury secretary under Ronald Reagan): Paul Craig Roberts.
I will aim to make this my first video Skype interview for my Sound Money series, so hopefully you all will have a chance to see this show on YouTube instead of the usual downloadable podcast. Since I am now in Athens, the show will be recorded here, with Mr. Roberts participating from home. The interview will take place on Tuesday, August 2nd, 2011
And just to make a quick point about the goings-on surrounding the debt ceiling; I still believe that this is all just political posturing and circus fodder. I fully expect a deal to be worked out that raises the debt ceiling in one way or another, even if that means passing the August 2nd deadline by a week or two. The media is trying to make this all sound like it is the end of the world, but the reality is that the US has many options at its disposal to prevent a default on any and all outstanding payments. However, it is highly disingenuous to suggest, as the government and the MSM has been doing, that not raising the debt ceiling will result in a US default and that we won’t be able to pay back our creditors. This is absurd. The US already brings in more than enough money in revenue to pay the interest on the national debt, so to suggest otherwise is a lie or a sign of ignorance.
And lastly, I am not convinced that a failure to raise the debt ceiling on time, a downgrade by S&P, or a general increase in anxiety by investors resulting from the impasse that we have seen in Washington over the past few weeks or even months will result in a bond market collapse, and even less, in a collapsing dollar. US treasury yields have been dropping for many months now, and the same is true for the yields on German Bunds. The dollar is suffering against the Franc, but this could soon change as investors become increasingly pessimistic on the likelihood of a US recovery and a renewed collapse in asset prices. This could result in the type of scenario that I have been writing about since March, 2011, mainly that a contraction in money supply and credit brought about by panic selling and liquidations ahead of capitalization concerns, will create a deflationary feedback loop that will overwhelm the Fed’s money printing operations.
In fact, as I have pointed out many times, the ZIRP (zero interest rate policy) being pursued by the Federal Reserve has done nothing to inflate the economy because the money that is being leant out cheaply to banks is not circulating in the economy. The money is being used for speculation, sure, but this only means larger air pockets in commodities, equities and precious metals that could easily give way to lower prices if and when this credit bubble begins to deflate. The only real inflationary tool that has thus far been working for the Fed has been the Quantitative Easing programs, because they allow the government to borrow money indirectly from the Fed and to spend it into circulation (it also gives the primary broker dealers a nice fee every time a bond auction happens). If government deficits were cut, the primary tool for creating inflation by the Fed would be significantly hampered.
In any case, today’s revised GDP numbers are further evidence (as if we actually needed more), that this economy is not in a recovery. The economy is a disaster, and the Federal Reserve’s policies are directly responsible for this. All this interest rate manipulation, all these loan programs and shady bailouts have done nothing but perpetuate a model of neofeudalism onto the people of the United States. Until something is done to address the massive manipulation that goes on at the Fed and at the US Treasury deparment (without whose mounting deficits the Federal Reserve would be unable to inflate our economy with such audacity), then we are just postponing the day of judgement, that’s all.