The Money Has to Come from Somewhere

by Ron Paul
Septeber 24, 2007

After the current turmoil in the markets, I was hoping that new Federal Reserve Chairman Ben Bernanke would see the big picture and act judiciously. Instead he signaled, with an aggressive rate cut, that we can expect a continuation of the monetary policies that got us here to begin with. Alan Greenspan released his memoir this week explaining his policies and decisions in the wake of the irrational exuberance they fueled. His successor should see that it is now time for a change of policy that addresses the root of our troubles. But instead of seeing an inflation problem, the Federal Reserve sees a liquidity problem, which is a little like extinguishing a forest fire with gasoline. In the wake of the rate cut, the Dow jumped and brokers cheered. Behind the headlines, however, the dollar quietly fell and was abandoned by more of the world in favor of more solid stores of wealth.

The Fed does not act in a vacuum. Mr. Greenspan rightly criticizes Congress and the administration for abandoning principles of fiscal responsibility. However, monetary policy at the Fed did nothing solve money problems, but merely delayed impending crises by creating bubbles.

In a very real sense, the Fed and the government are close to going over the spending limit of our nation's credit card. We rely on foreign investors to buy our debt so our government can maintain its appetite for spending. Yet the market for US Treasury Bills is rapidly shrinking as yield declines. Still the government will need an estimated $100 billion more for every year we "stay the course" in Iraq, not to mention what a possible conflict in Iran could cost.

Yes, the money has to come from somewhere, but we are running out of sources to tap.

Printing more money is the Fed's typical answer, but we are on the verge of runaway inflation. We have printed so many dollars now that we are at parity with the Canadian dollar for the first time since 1976. Since the Fed stopped publishing M3, which tracks the total supply of dollars in the economy, we can't even be sure how many dollars they are creating. Reported inflation is around 2%, but the method for calculating inflation changed in the 1980's, largely at Mr. Greenspan's urging. Private economists using the original method find actual inflation to be over 10%, which matches more closely the pain consumers in the real economy feel.

The reality is that this type of manipulation of the markets masks where resources, or money, ultimately comes from. It comes from the taxpayer. The government doesn't create Gross Domestic Product, they just limit and control how it is done. They then absorb much of the value produced in the economy through taxation and inflation, so they can squander our nation's wealth with runaway spending.

The Fed tries to keep up with government's spending habits, but is sending inaccurate signals to mask bad monetary policy. Ultimately, we'll get back on track financially only when government spending is held in check and the free market controls monetary policy, not the other way around.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.

The Money Has to Come from Somewhere

Regarding subject article, I agree with Ron Paul that the Fed "does not act in a vacuum." But his attempt to counterpose the "government," on one hand, with the "free market," on the other, stems from a false dichotomy. In the context of neoliberalism, the"free market" and the government are collaborators, not combatants. After all, what do we mean by "free markets"? We mean unregulated markets, which, in conjunction with a government that has been hijacked by market profiteers (rather than public service advocates), divert taxpayers' dollars into irresponsible wars (e.g., Iraq) and reckless speculative investments (which have led, among other things, to the subprime mortgage crisis). "Free markets" are what got us into this economic quagmire in the first place. Paul's right: the Fed does not operate in a vacuum. But neither does government. In reality, the same cabal of international bankers and financiers who influence Federal Reserve policy also orchestrate a government agenda that allows spending to be wasted on reckless defense projects and runaway speculation. The solution is not merely eliminating the Fed, but putting constraints on "free markets" in the form of reinstating (or re-enforcing) anti-trust laws and imposing taxes (e.g., a Tobin Tax) on international trade. A genuine solution would also abolish debt-based currency and restore the sole money-issuing authority to Congress, as originally stated in the Constitution.

Your liberal roots are showing :)

It's good to see Paul supporters coming in from the left. It's a good opportunity to learn from them and to teach them that a free society can only exist when it is a free market society.

"Free markets" do not mean businesses can do whatever they wish. Life, liberty, and property cannot be violated, ever. That means a business is not free to commit theft, fraud, pollute the air, sell defective products, products that could harm the consumer without warning, or anything of the sort, even in a free market. They would still be taken to court. Free markets mean no taxes and no beaurocratic regulation, like requiring a license to cut someone's hair.

Free markets do NOT lead to reckless investments, but rather the opposite. The subprime mortgage crisis was caused because the banks knew the government would bail them out if things got ugly. That isn't the free market, it's a public-private partnership. In a free market, the banks would be on their own and in order to ensure their own solvency, they would have had to weigh the risks carefully.

Similarly, there is no purpose to most, if not all, anti-trust laws. Remember, an abusive monopoly cannot exist in a free market, but only when it is protected by the government. In a free market, competition would arise against the abusive monopoly.

Taxes on trade are never good, but unfortunately are sometimes necessary for funding. They should not be used to constrain or regulate trade in any way unless you want to harm the consumer and cause a recession. Remember, many economists agree that the Great Depression might have only been a small U.S. recession instead of a world wide depression if not for the protectionist trade tarrifs passed by Congress and the retaliatory tarrifs imposed on our goods by foreign governments.

Money From The Fed

Like many other people, I have read numerous articles and several books detailing the history of the Fed and the functions it serves. Yet in noway do I get the sense that the Fed has any concern for the well being of the American Republic. Rather, I see the Fed as part of the elite international banking group who's only objective is to earn as much profit and therefore political control as it can.
The Fed has been very successful in turning the American financial system into a gambling casino with themselvers holding the edge in all their dealings. The American public has been very well trained to be the ultimate consumer, living way beyond their earning power.So in steps the Fed willing to provide easy money to abet the consumer. Heck, Greenspan made owning a house , the American dream, ever so easy to do. No money down, not a problem. Need a lower interest rate, no problem. It is said that ninty-five per cent of our money is created with mortgages, loans, and gimmerickery financial packages. The other five per-cent being coins and paper bills. And now the Fed is pushing billions of more dollars at their discount window. Need money, see the Fed.

jimt

Must have missed one

From what I've read, it's credit, not printed dollars, that have caused the recent inflation. Physical dollars are being deflated lately.

Why the Fed Will Not Stop Deflation
http://dailypaul.com/node/1715

Bernanke Has Snookered Us All (The FED is Deflating)
http://www.lewrockwell.com/north/north568.html

In between a rock and a hard place

The illegal Federal Reserve is managing our economy much like the plate spinning entertainer on stage......how long can it go on. With all the phoney money being created by all central banks, and the manipulative governments involved, it may go on for some time. Every time the stock market has a reality check of weakness, or big banks get in trouble, here comes the old printing press issuing some fresh green for the Plunge Protection Team. Maybe they've created a "can't lose" stock market.

alan laney

Fiat Money Is Like a House of Cards

First, I am nowhere near an expert on monetary policy. That said, here are my thoughts on the value of money: the entire idea of money is the concept of value based on rarity (such as not easily reproduced or found) and generally accepted perceptions of trust. Both Hard money (money based on commodities such as gold, silver, or even rare sea shells as some ancient people used) and Fiat money (money backed by nothing) lose their value in two ways:

1) by making it less rare by introducing more of the monetary commodity into the market (such as finding more of it or making more of it up). With hard money this is a difficult and slow task (find more of it), but with fiat money it is very easy (print it up or invent it out of thin air, such as credit).

2) by people losing the perception of value for the money. With hard money, this is almost impossible, since the commodities themselves are accepted as desirable in and of themselves (gold being a perfect example). With fiat money, this is a very tricky proposition because the value of the money is entirely based on a generally accepted perception of trust. The big issue for a fiat money system is trying to control the perception of trust by creating a conservative environement on credit and printing.

It doesn't take a genius to see that the people responsible for handling the fiat money of this country (dollars) have been losing the generally accepted perception of trust for many decades. This is fueled in large part by the irresponsible and unsustainable levels of spending from those holding the reigns of the US fiat system (our Federal government). As such, it is only natural that the perception of trust in the value of the dollar has been steadily declining.

History has proven, time and again, that fiat money stsems can very, very quickly lose much of it's value in a short time, falling much like a house of cards. The reason for this is that fiat sysems are based entirely on this generally accepted trust. When the perception of trust on a fiat system diminishes, it can quickly loose it's perceived value and collapse very quickly. The history of this country has a name for this as coined in the phrase "not worth a Continental." Considering the state of where we are, I can not say I am too optistic for the US dollar's value. There is no reason to doubt the whole house of cards based on the perceived value of the dollar could quickly come crashing down at any time.

Right on Ron!

Right on Ron!

"The world is a dynamic mess of jiggling things, if you look at it right." - Richard Feynman