Das: U.S. Playing with Financial Weapons of Mass Destruction

Satyajit Das, a derivatives expert, former banker, and author of numerous books, explains why the U.S. has the upper hand against foreign nations and other emerging markets due to its very powerful arsenal of "financial weapons of mass destruction." In this recent interview, Das explains the big picture behind the recent sell-off in emerging markets and the problems foreign nations face with significant U.S. debt holdings.

Mr. Das, you’ve recently written a number of articles on the fundamental, and somewhat counterintuitive, supports for U.S. power around the globe. Tell us, why do feel the U.S. is not on the verge of a major collapse or decline as some claim?

People have been pronouncing the death of the American century for as long as I can remember. In the 1980s, it was Japan who was going to take over, then in the 1990s it was the Asian Tigers, and now it’s apparently China’s turn. The answer is it’s not as simple as that, and I think you have to look at previous empires—the most notable being the British Empire—but it takes a long time to die. And the U.S. has crafted I think a pretty unique position, which is a combination of various things like economic power, its global financial power, its military capability, its geopolitical role—all of that I think gives it its power.

You also write about another strategic advantage that the U.S. has, which most people assume is bad for the U.S, but you think otherwise. Please explain.

The U.S. has what I would refer to as financial weapons of mass destruction. And both of these are actually regarded as a source of weakness, but in my view they’re a source of strength. One is the U.S. dollar and the other is the heavy indebtedness of the U.S. If I look at each in turn, the U.S. dollar is actually still the predominant reserve currency of the world. It is also the currency of choice of actual trade around the world, which means everybody needs the U.S. dollar…Now, let me explain why that gives it enormous power. As you know, the U.S. has used its very loose monetary policy and its budget deficit to basically restart its economy; and to paper over some of the deep seated problems that it has. And what it does is to enable them to do two things: one is to flood the world with money, in terms of U.S. dollars, which keeps their interest rates low, but also to devalue the U.S. dollar, giving it both competitiveness in exports and also, at the same time, reducing the value of those U.S. dollar debt securities, particularly government bonds held by foreigners.

Because of this, many market commentators warn that foreigners—like China—will sell off their U.S. debt holdings and cause a major economic crisis in the U.S. Why don’t you think this will happen?

If you’re say China or Japan or the Middle Eastern oil-rich countries who own a lot of U.S. Treasury bonds, you know the U.S. is going to devalue the currency and has very low interest rates so you don’t want to hold a U.S. dollar bond, but if you sell them, all that does is hurt you because the U.S. dollar falls further and interest rates go up triggering capital losses—so you got to just keep buying the stuff to preserve your existing position. Some years ago I wrote a piece on China and I used the analogy of China’s problem with its extraordinary $3.8 trillion of reserves. I liken it to what is referred to as a “bouncing mine” or a “bounding mine”. Now in anti-personal warfare you use two types of mines: one is you step on it and it explodes and obviously it does mortal damage to you; the other one is when you step on it, it doesn’t go off—it’s when you step off of it, it goes off. And the U.S. dollar and U.S. Treasury bonds are very much like a bounding mine for foreigners. Now this is not actually necessarily good for the world but, in the short-term, it’s certainly good for the United States.

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