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Ron Paul, Please Explain the Business Cycle and How It Would Change Under President Paul

We've all heard Ron Paul say many times that until the people understand what the business cycle is, nothing much will happen.

I kind of think I know something about the business cycle but I would like to know exactly what Ron Paul's view of it is. I'd like to know what he would do to make it better. How exactly will he do it? In simple terms so that I can relay to my friends and relatives.

I searched on his campaign site and didn't see anything. If his goal is to educate us, he needs to make it much clearer exactly what he's talking about. Not just tell people to go read about Austrian Economics. In the long run that's a good thing, but let's face it, people don't have time to plod through endless economic books and there are differing views.

So Ron Paul, you need to be able to explain in one minute what causes the boom to bust cycle and what things are needed to change that. It has to be simple enough that a fifth grader can understand it. Referring to Austrian Economics works for about 5% of the population. Most others probably get nervous because they think it's foreign or just too complicated for them to even begin to understand.



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Can't be Explained in Five Minutes to a Dolt

and that's the problem.

Imagine that (through some miracle of legislation) that YOU have the monopoly privelege (no one else can do it) to CREATE pieces of paper that you call "money" (that cost you nothing other than the paper and ink). You can just print it at will- much (or as little) as you want and you can set the price of your "money" (interest) at whatever you choose and change it whenever you wish. OK so far?

Now- 309 Million people (US citizens)(by LAW)(and countless others around the world) are required BY LAW to transact ALL of human commerce (groceries, braces, dog-bones, whatever) in YOUR (interest-bearing) pieces of paper. Taxes MUST be paid in your "money" or the person goes to jail. Try to trade in anything else and you go straight to jail and DO NOT collect $200 (But that's kinda the whole purpose of a monopoly, isn't it?- but, I digress)

Now- if there's anything that Politicians love more than "a hog loves slop", it's borrowing this "money" and (after extracting an appropriate "finder's fee) using it to buy "friends" (votes, foreign dictators, corporate chieftains- anyone with power who likes cash). Hell- they don't have to pay it back, somebody else does. Besides, all they have to put up to get an unlimited supply of this "money" are Treasury Bills (which represent the very dirt your standing on). Don't pay 'em back and you lose the farm. Are you with me so far?

Since government and your friends (remember, you own the printing monopoly so naturally, you're gonna hook-up your homeboys) are the first to receive this new "money", they get to spend it and buy things at the "old" price. And if you set the interest rates super-low, they're gonna borrow and spend and ass-load of it (because they can buy more friends!)

Remember- this money, from the mirco-second it leaves the printing press has interest due on re-payment. But again, I digress.

As the government and your "money buddies" spend all of this new easy money (backed-up by the deed to the United States ranch) trickles down through the economy, it looses value with each transaction because there's suddenly MUCH more of it. What happens when anything becomes more plentiful? People waste it- (because it's easy). They buy $100k Barbie boxes for $500K. They send their kids to "Ivy League" schools because the payments are only... Fancy cars "because you've earned it". Jewelry to "prove your love". TULIP BULBS. Yes- when people run out of things to buy, they buy tulip bulbs (on CREDIT) See; Holland.

Cheap Money= debt, debt, debt. Endless amounts of things to buy. Politicians buy friends. People buy stuff (hell, the money's damn near free dude! 1.9% for 18 months!) And the debt is all owed to YOU (remember, you've got the monopoly on all things related to money).

Like Hunter/Gatherers, people borrow your cheap money and do all sorts of things with it. Sure, they buy personal stuff like cars and houses, but some also go build successful businesses. Others go GAMBLING.

The guys who go gamble with it- what do they put up for collateral? They put up your grandma's 401K. What could go wrong? Besides, money's cheap, we're going to share a (small) portion of the profits with grandma and we bought these cool new insurance policies against loss called Credit Default Obligations. Stop worrying so much- grandma's safe and we're all gonna be rich Ba-BeeEeEEE! This is A sure-thing, it's win/win. God, we're smart.

Wash, rinse and repeat, globally.

Remember; You (and only you) can print money and control it's price (interest) and quantity.

Some of the folks that have been partying their asses off with "your money" have picked-up some pretty cool deals along the way. Hell, a bunch of these guys have built businesses approaching the size of nations (your former best customers) and a couple have virtually taken over nations. They must be "the smartest guys in the room" (damn-sure smarter than those smarmey politicians).

YOU: (remember, you're the only one who can CREATE money) I think I'd like to own some of these businesses and countries. Let's see... how can I do that?

YOU (thinking to self): Ya... that's the ticket. Since I own all the money and since I own all the outlets for that money (the banks), I'll just start slowly reducing the supply of money and over time, I'll start raising the interest rates a little along. All of those people who borrowed "My Money" won't be able to pay it back and since all of that cool (REAL) stuff is pledged as collateral, when they default, I'LL OWN IT ALL.

The Federal Reserve Bank is the ULTIMATE pump and dump.

Pump-up the system (with your cheap monopoly "money)- let the plebs work their asses off to build a bunch of good stuff and then crash it (and take it away from 'em). They've (Rothschilds) been doing this over and over and over and over for the last 250 years. The difference this time, is that they no longer care about killing "the host" (America). Time to roll the "big pump" into a global system.

Now- figure out how to explain that to "Bubba six-pack" in five minutes and then we've got something.

Commodity-backed 100% reserve would be great- but "Greenbacks" would better than what we have now.

there would be no business

there would be no business cycle. The free market would rule. You would have no money printing to create the boom and then the bust.

Just The Basics.

Lets say you're lucky enough to live by a lake, river, or ocean.
You catch some fish. You meet somebody that wants to buy or trade you for your fish.
You can accept paper money for your fish or Copper, Silver, or if you catch enough fish, Gold.

Congratulations, you're now a business person.

If you can catch enough fish to sell you might start saving your money, by putting it into a safe local bank, or start a savings partnership with trustworthy friends.

25 friends start doing the same thing, and pretty soon the bank or partnership is holding enough money to start lending some of it to trustworthy borrowers.

Your business cycle depends on how many fish you can catch and sell, and how many steady buyers for fish you can find.

Bad weather slow business, nobody with money or trade able items, slow business.
Good weather lots of fish, good business. Lots of fish customers with money, good business.

You could also create something that other people will pay for, lets call it a widget. Now simply run the same type of business but substitute widgets for fish.

You don't need a PHD to understand this, a Ron Paul Presidency will eliminate most local restrictions already in place that would allow the working class people to start up small businesses, all across America..

beesting

Quote from a Ron Paul town hall speech 9.1.2011

“If you understand monetary policy you understand financial bubbles; if you understand financial bubbles you understand the business cycle; if you understand the business cycle you know why there’s recessions and depressions; if you understand that then you understand why there are no jobs; and if you understand that then you know what you’re supposed to do.”

I think it's rather obvious then how to end the artificially induced business cycles - END THE FED!

The business cycle is

the recurring and fluctuating levels of economic activity that an economy experiences over a long period of time. The five stages of the business cycle are growth (expansion), peak, recession (contraction), trough and recovery.

http://www.investopedia.com/terms/b/businesscycle.asp#axzz1c...

The problem with having the Federal Reserve controlling the money supply is they can cause damage by supplying too much credit (as in the housing boom) which makes the corresponding contraction (recession) that much worse.

The Fed is simply not smart enough to know what is the optimum interest rate at different times to have the best possible business cycle - long sustained growth, with little/mild recessions.

The free market, however, is a better solution because the market itself determines how much growth is sustainable at any given time. This means long sustained growth is possible with less chance of recession (and probably no chance of depression).

I would say this is

I would say this is half-true.

In a free market, without fractional reserve banking, the private sector would have much lower access to capital.

This would both prevent them from making stupid decisions with money....but also prevent them from accesing capital with which to make smart decisions.

You would still have cycles, but they would be of lesser magnitude in both directions.

Think of a country like Switzerland. They have a very high reserve ratio, and their central bank does very little in terms of altering the money supply. They've had peaks and valley like the US; but much more moderate in both directions. That degree of stability has many benefits.

Plan for eliminating the national debt in 10-20 years:

Overview: http://rolexian.wordpress.com/2010/09/12/my-plan-for-reducin...

Specific cuts; defense spending: http://rolexian.wordpress.com/2011/01/03/more-detailed-look-a

I tried to keep it simple

as the OP requested.

I agree with you for the most part, with a few notes.

I focused on a free market solution only, with no mention of monetary policy to keep things simple.

Now, if using a central bank and no fractional reserve or high reserve ratio I agree with you entirely.

However, another case would be sound money, such as gold, and no central bank. In this situation, and with free market forces, you wouldn't even have the cycles. Of course, this isn't optimum because booms and busts are still possible since the variables would be gold supply and population.

In the '08 election cycle I proposed a solution here on the DP in essay form. It based money supply on housing. I still have similar thoughts, although I've been thinking of switching the housing for direct census counts. Either way, the point is I think it's possible to have a far more optimum monetary system than the world has so far seen. I think Dr. Paul believes something similar because he mentions not going strictly back to a gold standard but saying "it could be modern".

Once we get rid of the Fed I'm optimistic our country will come up with something far better than what we have.

I personally like the Swiss

I personally like the Swiss banking system. They basically have allowed the same access to capital for years. One, that provides stability. Two, it allows banks and investors to have a framework with which is reasonable to work with.

Here would be my simple plan:

Get rid of the Fed's ability to set interest rates via OMO.
Get rid of its ability to QE
Reinstate the barrier between commercial and investment banks
Follow through on letting failed companies fail.
Increase the reserve requirement significantly. To perhaps 40%.

This I think would strike a nice balance. Interest rates get set in a fixed system; no swings in the money supply. Investers would have moderate access to capital, but would still have to have quite a bit of cash as a reserve.

Plan for eliminating the national debt in 10-20 years:

Overview: http://rolexian.wordpress.com/2010/09/12/my-plan-for-reducin...

Specific cuts; defense spending: http://rolexian.wordpress.com/2011/01/03/more-detailed-look-a

Hmm

I'm not sold on it.

Increasing reserve requirements would certainly be an improvement, but you've still got fractional reserve banking, and therefore inflation. I don't like inflation because it penalizes savers and rewards consumption. Also, the money supply is still based on debt which I don't like.

I think we can do better.

With sound money, such as a gold standard, the barrier between commercial and investment bank becomes a non-issue. There wouldn't be money supply mischief which could take place.

Technically, inflation

Technically, inflation rewards investors and punishes people who sit on cash.

FRB and inflation:

I think the link between FRB and inflation is overblown.

Think of it this way. If no one saved any money, and spent everything, you would have more money chasing the same amount of goods. Inflation. If banks took all your saved money, and then spent everything, you would have the exact same situation. It increases the monetary base, and the nominal supply. It makes money that normally wouldn't be getting spent, spent.

If the banks have balance-sheet solvency, there is no inflation caused.

What is key to this, is that it can only increase money in the short-term. Eventually, the bank will have to re-pay its depositor by taking fractioned money out of the system. The thing is, banks have never had to do this. They've enjoyed so much growth over the years, that they've been able to pay back initial deposits several times over.

Government spending is a much bigger cause of inflation. Government deficit spending causes money from China to come back into the US through the sale of treasury bonds. This causes inflation. This is what Austrian economists often talk about.

Secondly, in the global market, as people in India and China have become wealthier, they now have the economic means to challenge other countries. Their money is now chasing goods. You have more demand, same supply (especially for commodities), and this causes inflation. This is the kind of CPI inflation that Keynesian economists talk about...aggregate demand increases without change in the aggregate supply. Namly, as the world gets wealthier, America is no longer the massive consumer. Producers have more people demanding their goods and can raise prices.

Lastly, in my plan, the Fed can no longer credit banks, QE, or use OMO to set interest rates. This would prevent the direct increase in the money supply that heavily contributes to inflation.

Plan for eliminating the national debt in 10-20 years:

Overview: http://rolexian.wordpress.com/2010/09/12/my-plan-for-reducin...

Specific cuts; defense spending: http://rolexian.wordpress.com/2011/01/03/more-detailed-look-a

Several points...

"Technically, inflation rewards investors and punishes people who sit on cash."

Yes, this is true too. Inflation rewards (smart) investors, punishes savers, and encourages consumption.

Looking at that philosophically does it sound like the optimum system for the common man? Not to me.

"Think of it this way. If no one saved any money, and spent everything, you would have more money chasing the same amount of goods. Inflation."

No that doesn't necessarily cause inflation. For example, say you have a town of 100 people and a gold standard. The total money supply gives each of these people $10 (redeemable in full by gold). If all the townspeople spent everything they had in their local economy it means there is no saving taking place, but there would not be inflation because the money supply would not be increased.

Inflation in simplest terms is an expansion of the money supply relative to market prices which causes those prices to then rise.

What we have in the world today muddies up the picture, because all countries inflate their currency, and the economies are interlinked.

great topic to take to rp

i am curious as to how you plan to make use of this topic? are you trying to get rp camapaign to answer this question during debates and interviews? are you planning on taking this feedback to someone who will share it with rp? or what are your expectations?

rp/peter shiff/other libertarian allies all speak the same words and language. it is broad. but now that people have gotten the broad message, some are still not accepting or understanding it, bec they need more details/information. i'm not talking about lengthy explanations, but succintly said with structured high level argument with few supporting comments. just like you would make a sales pitch to sell widget x.

jon stewart poses similar questions and i think prominent libertarians should put their heads together and iron out polcies and answers bec there are a lot of libertarian wannabe's out there that are looking for a bit of a nudge.

let us know how rp will use the information obtained from this topic.

bd

You won't find business cycle mentioned in the Constitution

so it's not the purview of the President to change it.

However, it is proper to remove or curtail any non-Constitutional government intervention that interferes with and distorts the free market. One example might be the monopoly granted to the Federal reserve to provide currency for the United States.

If you're looking for a very rudimentary explanation of the boom and bust cycle, you might try this video:

http://www.youtube.com/watch?v=d0nERTFo-Sk

Come on

So when someone asks me about the business cycle I send them to that video? It goes nowhere for the first minute and I'm sure people will never get very far into it.

I want a 60 second explanation on how the business cycle got us in this mess and what we need to fix it.

Tim Maitski
Atlanta real estate agent
Atlanta real estate website

No, you use the video for your own education

and then explain it to those who are interested.

If your audience only has a 60 second attention span, it will be very difficult to explain the business cycle given that limitation.

My wife has a degree in economics, and in her four years of study the business cycle was never adequately explained (typical Keynesian courses). It wasn't until after she graduated and began learning about Austrian economic that she learned of the business cycle.

It's not the business cycle that got us into this mess - it's the government intervention in the free markets that drive the normal ebb and flow of commerce into booms and busts.

You fix it by removing the government intervention in the free markets, which lets consumers and business make choices without the heavy hand of government tipping the scales toward boom or bust.

If you have time, surf over to http://www.mises.org or http://www.fee.org for more explanations.