Wikinvest Wire

More Texas Straight Talk

Thursday, July 13, 2006

Ron Paul has offered up another condemnation of both the Federal Reserve and the government's fiat money. While he was at it, he had a few unkind words for Wall Street, modern banking, and capitalism - you'd think that as long as he'd gone that far, he may as well disparage hot dogs and apple pie, along with our national pastime.

Easy money is as much a part of America today as are our culinary favorites and the seventh inning stretch.

Congressman Ron Paul has represented the 14th District of Texas since 1996. A thorn in the side of his own Republican party, a party that once backed a primary opponent who had just converted from across the aisle, Dr. Paul has advocated the legalization of marijuana and returning to the gold standard.

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He is best known for peppering former Fed Chairman Alan Greenspan with sundry questions about the eroding value of the dollar and the rampant creation of credit by banks.

In the last exchange between the two back in November, as recounted here, it was clearly a draw - Chairman Greenspan holding firm to his view that there was very little inflation on his watch (close to zero, when properly measured) and Congressman Paul lamenting the fact that, by the governments own questionable statistics, a dollar acquired at the beginning of the former Fed Chairman's term was worth only 55 cents.

[The November post linked to in the preceding paragraph is actually well worth another read. It contains some classic Greenspan Q&A including the memorable question from Congresswoman Carolyn Maloney from New York, "If the economy is so good and inflation is so well behaved, and there's price stability, then why does everything cost so much more when you go to buy something?"]

With next week's appearance by current Fed Chairman Ben Bernanke before the Senate Banking Committee and House Financial Services Committed, it seems Congressman Paul wanted to let the new guy know exactly what's been on his mind lately regarding the nations money and how little it buys these days.

In his most recent writing, he gets right at the issue that is on the minds of more and more of his constituents today - rising prices.

For years officials at the Federal Reserve Bank, including Chairman Bernanke himself, have assured us that inflation is under control and not a problem-- even as the price of housing, energy, medical care, school tuition, gold, and other commodities skyrockets.

The Treasury department parrots the Fed line that consumer prices, as measured by the consumer price index (CPI), are under control. But even many mainstream economists now admit that CPI grossly understates true inflation. The most glaring problem is that CPI excludes housing prices, instead tracking rents. Everyone knows the cost of purchasing a home has increased dramatically in the last ten years; in many regions housing prices have more than doubled in just five years. So price inflation certainly is alive and well when it comes to the largest purchase most Americans make.
Everyone's picking up on that owners' equivalent rent nonsense these days, especially now that it's working against the greater good of a lower Consumer Price Index. And, it's getting harder and harder for economists to explain the utility component of housing costs, or whatever the argument is for excluding real prices paid by real people in the real world.

Oh my! Look who's at #2 on Google for a simple search on the phrase owners' equivalent rent - right behind the Bureau of Labor Statistics and a couple spots ahead of Big Picture Barry.

It's surprising that Dr. Paul didn't mention M3 in this next section. Earlier this year, he was set to propose legislation that would force the Federal Reserve to continue publishing the broadest measure of the money supply. Whatever happened to that?
When the Federal Reserve increases the supply of dollars in circulation, both paper and electronic, prices must rise eventually. What other result it possible? The supply of dollars has risen much faster than the supply of goods and services being chased by those dollars. Fed policy makers have more than doubled the money supply in less than ten years. While Treasury printing presses can print unlimited dollars, there are natural limits to economic growth. This flood of newly minted US currency can only increase consumer prices in the long term.

Mr. Bernanke has stated quite candidly that he will use government printing presses to stimulate the economy as necessary. He is famous for joking that he would endorse dropping money from helicopters if needed to prevent an economic slowdown. This is nothing short of an express policy to destroy our money by inflation. Every new dollar erodes the value of existing dollars based on simple supply and demand. Does anyone really believe the Treasury can make us rich simply by printing more money?
Well, yes. It's commonly referred to as the Reagan Revolution and much of your party now believes that prosperity can be achieved through an ever increasing supply of money and credit. It's worked quite well for over twenty years - Alan Greenspan and a succession of Presidents have transformed a once great nation full of savers into the greatest borrow-and-spend juggernaut the world has ever seen.

As measured by the quantity of cheap imported goods that we've been able to accumulate in the last few years, with money extracted from homes that have risen in value at a pace much faster than the money could be reasonably extracted and spent, we're all quite wealthy.

But this is all part of some grand plan for prosperity, isn't it?

When push comes to shove, our elected officials will toe the line on fiscal spending and heed the commitments made to those entering retirement and seeking promised income and medical coverage by acting responsibly and making tough choices.

Won't they?

Or is this all leading to some kind of crisis that no one wants to talk about?
The coming dollar crisis is not likely to be “fixed” by politicians who are unwilling to make hard choices, admit mistakes, and spend less money. Demographic trends will place even greater demands on Congress to maintain benefits for millions of older Americans who are dependent on the federal government.

Faced with uncomfortable financial realities, Congress will seek to avoid the day of reckoning by the most expedient means available-- and the Federal Reserve undoubtedly will accommodate Washington by printing more dollars to pay the bills. The Fed is the enabler for the spending addicts in Congress, who would rather spend new fiat money than face the political consequences of raising taxes or borrowing more abroad.

The irony is that many of the Fed’s biggest cheerleaders are the same supposed capitalists who denounced centralized economic planning when practiced by the former Soviet Union. Large banks and Wall Street firms love the Fed’s easy money policy, because they profit at the front end from the resulting loan boom and artificially high equity prices. It’s the little guy who loses when the inflated dollars finally trickle down to him and erode his buying power. Someday Americans will understand that Federal Reserve bankers have no magic ability-- and certainly no legal or moral right-- to decide how much money should exist and what the cost of borrowing money should be.
Yeah, someday. But not today.

People still think that they're wealthy because home values have gone up so much in the last five years. It'll take a little while and a lot of financial pain for Americans to realize just what has happened to the nation's money, and by then it may be too late.

That was the last gift to the world by your former sparring partner at the Federal Reserve, Alan Greenspan - illusory wealth.

And, until the new guy does something really stupid, it's hard to feel any emotion other than sympathy for him at the moment. That, of course, and the obvious puzzlement over why someone would accept such an impossible job in the first place.

While the rest of Congress probably thinks that your view toward the nation's money is somehow related to your view on the legalization of marijuana, and much of the country is still drunk with easy money and asset prices that are still inflated, there are a few of us out here who think that your cause is both noble and underappreciated.

Give Ben an earful next week!

7 comments:

Anonymous said...

Sweet. I'm really glad now that my wife is pregnant.

Anonymous said...

Oh my!

ajn said...

Are there any Democrats that have similar view of the FED as Ron Paul?

Anonymous said...

And by the time most Merkuns figure it out, the rich will have moved their take offshore.

Anonymous said...

One of these days, Ron Paul is going to make a lot more sense to a lot more people.

Anonymous said...

Re: "One of these days, Ron Paul is going to make a lot more sense to a lot more people."

Unfortunately, we'll have to wait until then for him to be president.

Anonymous said...

So, your wife is pregnant. Be happy. This is what life is about - not the endless pursuit of paper profits. But teach him what real wealth is, and let him know that 'leverage' is what other people have over you when you go into debt for poor reasons.

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