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US Economy May Go Bust if Dollar Loses Its Reserve Currency Status – Economist

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US Dollar - Sputnik International
The US national and federal debts are unlikely to spell doom to the country's economy while the US dollar maintains its status as a dominant reserve currency, American economist, author and former civil servant Dr. Paul Craig Roberts told Sputnik, shedding light on more pressing issues for the US economy.

The present US economic problems are difficult to correct, because their roots are in the offshoring of US middle class jobs, Dr. Paul Craig Roberts, a prominent American economist, author and former US Assistant Secretary of the Treasury for Economic Policy under President Ronald Reagan, told Sputnik.

What is worse, Trump's plan to bring jobs back "is against the short-term profit interest of the global corporations, as their profits would fall from the higher cost of US wages compared to wages in Asia," he added.

"Essentially, what is happening in the US is that by offshoring middle class jobs, the global corporations have destroyed the purchasing power of the US consumer," the economist stressed. "Essentially, jobs offshoring destroys the domestic consumer market.  It can be kept going for a period by an expansion in consumer debt, but the process stops when the consumers cannot carry any more debt.  Once they can't make the minimum credit card payment, the process stops."

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The author noted that in addition to hampering the growth of US real median family income, the jobs offshoring has consequently decreased the tax base for federal, state and local governments, thus creating a vicious cycle.

"As state and local governments cannot print money with which to pay their bills, their ability to meet pensions and other obligations is declining," he explained. "Cutbacks in pensions, for example, further reduce consumer purchasing power."

For their part, corporations think short term, the economist pointed out, since "senior executives only have a few years by the time they reach senior ranks to make their fortunes by driving up their bonuses and value of their stock options."

"The global corporations are a powerful lobby, like the military/security complex and Israel lobbies," he noted. "It is very difficult for a president to make headway against powerful lobbies.

National Debt and Federal Deficit: There is No Reason for Panic Yet

Commenting on the ongoing fuss over the soaring US national debt, which has mounted over $21 trillion, and federal budget deficit that is threatening to reach $1 trillion by 2020, Dr. Roberts highlighted that "the government debt for the reserve currency country is different from the debt of other countries."

"As international payments are settled in US dollars, there is always a demand for US dollars," the economist underscored. "Other central banks keep their reserves in US dollars.  The demand for the reserve currency allows the reserve currency country to pay its bills by printing its currency. Its trade deficit is financed by other countries using the dollars they earn to purchase US government debt."

Thus, there is no reason for panic yet: "As the Federal Reserve can create an unlimited amount of money, the central bank can always redeem Federal debt by creating money with which to pay the bondholder," the economist remarked.

According to him, the whole construction may fall apart at the seams "when the combination of dollar creation with a move away from the dollar as reserve currency results in a drop in the demand for US dollars."

Treasury Secretary Steven Mnuchin, right, and his wife Louise Linton, hold up a sheet of new $1 bills, the first currency notes bearing his and U.S. Treasurer Jovita Carranza's signatures, Wednesday, Nov. 15, 2017, at the Bureau of Engraving and Printing (BEP) in Washington. - Sputnik International
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"Whereas the Federal Reserve can cover Federal debt by creating dollars, it cannot cover the dollar by printing foreign currencies," Dr. Roberts explained. "Ultimately, the Federal debt becomes a problem via a fall in the dollar's exchange rate as the dollar loses its reserve currency status."

Dr. Roberts admitted that the US dollar's status is "beginning to change a little" as Russia, China, and a few other countries have shifted to national currencies in mutual payments.

But again, it does not seem to be a pressing issue: "Unless the move away from dollar use accelerates, it is likely to be many years before the 'debt crisis' manifests itself as a dollar crisis," he stressed.

'The Picture Is: Indebtedness All Over the Economy'

Currently, "mortgage debt, credit card debt, student loan debt, state government debt, business debt are more serious issues for the US economy than Federal government debt," the economist opined.

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"When the offshoring of high-productivity, high value-added American jobs, such as manufacturing, and software engineering, undermined the growth of real family income, the Federal Reserve substituted an expansion in consumer debt for the missing growth in consumer income," he elaborated. "This kept the economy going until consumers' incomes could not support any more debt… The overall consequence is that in the US economy in which consumer demand is about 70 percent of the economy, the US consumer lacks the discretionary income to drive the economy."

At the same time, US businesses are also heavily indebted: "In recent years most of business profits have not been used for new investment, but to drive up executive bonuses and shareholder capital gains by buying back the company's own shares," Dr. Roberts noted.

He referred to the fact that some businesses have even borrowed the money with which to re-purchase their company's stock. As a result, "the stock buy-backs drive up the share prices and produce bonuses for executives and boards and gains for shareholders," he stressed.

The views and opinions expressed by Dr. Paul Craig Roberts and Ekaterina Blinova are those of the contributors and do not necessarily reflect those of Sputnik.

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