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Ron Paul Rages "'Easy' Money Causes Hard Times"

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Submitted by Ron Paul via The Daily Reckoning blog,

One economic myth is that paper money is wealth. The proponents of big government oppose honest money for a very specific reason. Inflation, the creation of new money, is used to finance government programs not generally endorsed by the producing members of society. It is a deceptive tool whereby a “tax” is levied without the people as a whole being aware of it. Since the recipients of the newly created money, as well as the politicians, whose only concern is the next election, benefit from this practice, it’s in their interest to perpetuate it.

For this reason, misconceptions are promulgated about the “merits” of paper money and the “demerits” of gold. Some of the myths are promoted deliberately, but many times they are a result of convenient rationalizations and ignorance.

Paper money managers and proponents of government intervention believe that money itself — especially if created out of thin air — is wealth. A close corollary of this myth — which they also believe — is that money supply growth is required for economic growth.

Paper money is not wealth. Wealth comes from production. There’s no other way to create it. Capital comes from production in excess of consumption. This excess is either reinvested, saved, or loaned to others to be used to further produce and invest. Duplicating paper money units creates no wealth whatsoever, it distorts the economy, and it steals wealth from savers. It acts as capital in the early stages of inflation only because it staels real wealth from those who hold dollars or have loaned them to someone.

Instead of economic growth being dependent on money growth as the paper money advocates claim, great economic harm comes from central banks creating new money out of thin air. This leads to the sort of economic stagnation and economic decline that we are experiencing today. Inflation — increasing the supply of paper money — is the cause of malinvestment and the business cycle, and literally destroys the capital needed for economic growth and stability. The formation of capital through savings is discouraged or eliminated by a paper money system. Instead of paper money producing economic growth, it accomplished the opposite. If money growth were necessary for economic growth, the 1970’s would have been a great decade. During this period of time the Federal Reserve nearly tripled the total money supply but the economy grew only 37 percent.

Although the supply under a gold standard would in all probability increase at the rate of two to three percent per year, this growth is not a requirement for gold to function as a sound currency. This natural or market increase in the money supply easily accommodates population growth and economic growth as long as prices are freely adjusting.

If population or economic growth presents a need for “more” purchasing media, prices merely adjust downward if the money supply is not growing. In the latter part of the nineteenth century this occurred. Wholesale prices dropped 47 percent from 1879 to 1900 and economic growth averaged nearly four percent per year. Obviously, although prices were decreasing, there was no depression. While an increase in the supply of money is never needed to produce economic growth, under a gold standard there might be honest money growth (i.e. not money created out of thin air by the politicians and bankers for the benefit of special interests) and this would serve to smooth out price adjustments.

The myth that paper money is wealth has another corollary: the myth that there’s “not enough gold” for reestablishing a gold standard. But this is merely a device used by paper money advocates to confuse the uninformed, and should carry no weight in the debate of gold versus paper. Hans Sennholz explains this clearly in his essay “No Shortage of Gold”:

On the other hand, if the supply of goods increases while that of money remains unchanged, a tendency toward enhancement of the purchasing power of money results. This fact is probably the most popular reason advanced today for policies of monetary expansion. “Our expanding national economy,” economic and monetary authorities proclaim, “requires an ever-growing supply of money and credit in order to assure economic stability.”

 

No one can seriously maintain that present expansionary policies have brought about economic stability. During the last forty years of almost continuous monetary expansion, whatever else it may have achieved, did not facilitate economic stability. Rather it gave our age it’s economic characteristic — unprecedented instability.

Ludwig von Mises, in his book A Critique of Interventionism (1929), clearly denounces the belief that government can create wealth by printing paper money. He explains:

By its very nature, a government decree that “it be” cannot create anything that has not been created before. Only the naive inflationists could believe that government can create anything; its orders cannot even evict anything from the world of reality, but they can evict from the world of the permissible. Government cannot make man richer, but it can make man poorer.

This is a powerful political and economic message, and yet it seems that so few understand it. Unfortunately, the poorer the people get, the moe economic problems we have, the more inflation we endure, and the higher the interest rates go, since more people demand government intervention. This trend has to be changed if we expect to preserve our freedoms and our standard of living.

Fact: Paper money is not wealth, it steals wealth.

A second myth is that “easy” money causes low interest rates. This myth is based on the erroneous assumption, itself a myth about government, that government officials — the Federal Reserve Board, the Congress, or the Treasury — can actually set interest rates. In reality the market determined interest rates. Governments can dictate rates, but if these rates are contrary to the market, government will not achieve the intended goal. For instance, if a usury law establishes a ten percent interest rate and the market rate if fifteen percent, no funds will be available except those allocated through government force and the creation of new money.

One reason this myth is so persistent is that in the early stages of inflation, an “easy” monetary policy temporarily lowers interest rates below market levels. Before the people are aware of the depreciation of their currency and do not yet anticipate higher prices, the law of supply and demand serves to lower “cost” of money and interest rates fall. But when the people become aware of the depreciation of the dollar’s value and anticipate future loss of purchasing power, this prompts higher interest rates due to inflationary expectations.

This expectation of future inflation and higher risk is determined subjectively by all borrowers and lenders and not by an objective calculation of money supply increases. These increases in the money supply certainly are important and contribute to the setting of the interest rates, but they are not the entire story. Interest rates vary from day to day, week to week, and year to year. There is no close correlation between money supply figures and interest rates.

Crises and panics can occur for political as well as financial reasons; and interest rates can be pushed higher than monetarist theory says they “should be.” In the early stage of inflation, rates may be lower than they “should be,” and in the latter stages frequently are higher than they “should be,” if by “should be” one means commensurate with money supply growth. Nevertheless, wrong ideas die slowly. “Easy” money, that is, inflation of the paper money supply, is still thought of as an absolute method by which the monetary authorities can achieve low interest rates.

This is not to say the Federal Reserve is helpless in manipulating interest rates. If it alters the discount rate and injects new money into the market, the immediate reaction can be that of lowering rates. But a gold-backed dollar, even if only partially backed, is a different sort, and at the time of the ’30s and the ’40s rates were at historic lows.

If the demand for lower interest rates is great enough and not accompanied by a call for sound currency — gold — the politicians will be “forced” to accommodate the demand by means of massive inflation of the money supply with strict credit controls and credit allocation. This would solve nothing, would serve to worsen economic conditions, and real interest rates in the markets would eventually soar. There is no substitute for sound money, and the sooner we realize this the better.

“Easy” money causes hard times.

 


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Mon, 12/02/2013 - 23:40 | Link to Comment pachanguero
pachanguero's picture

God I love that man!  I respect him more than anyone.  The truth will set you free.

Tue, 12/03/2013 - 00:53 | Link to Comment fonestar
fonestar's picture

Well I am not sure I would follow him into believing the Earth is 6,000 years old but that was pretty Eastwood-esque when he held that silver coin up to Count Bernankula.

Tue, 12/03/2013 - 02:19 | Link to Comment joego1
joego1's picture

Ha! How about a econofish named Bernacuda?

Tue, 12/03/2013 - 02:50 | Link to Comment Pareto
Pareto's picture

It was fucking brilliant in my opinion.  "Let me ask you something Mr. Chairman - Do you do your own grocery shopping?"  I used to get popcorn out when Paul was drilling the Bernanke on the hill.  Senator Jim DeMint would always yield his time to Paul when they served on the Senate banking committee together, just so Paul could have more time to put the screws to Bernanke.  But the biggest benefit for me was, I used to always glean something new from Paul - I always felt that I was getting an education which is what you would expect from somebody who has looked at and studied monetary policy for the better part of his life.

Tue, 12/03/2013 - 03:33 | Link to Comment A Nanny Moose
A Nanny Moose's picture

Do you have evidence that he believes the earth to be 6000 years old? If so, do you have evidences that because he believe the earth to be 6000 years old, that it invalidates his views on monetary policy?

Tue, 12/03/2013 - 04:54 | Link to Comment Deo vindice
Deo vindice's picture

.

Tue, 12/03/2013 - 05:25 | Link to Comment Peter Pan
Peter Pan's picture

Ron Paul is not a politician and never was. He was just a decent, intelligent man who preferred to tell the truth, to keep repeating it and to never sell out to the other side.

I'll bet there will never be anotherr man like him on the political scene this side of Armagedon.

A man any nation would be proud to call its son.

Tue, 12/03/2013 - 07:51 | Link to Comment BlankfeinDiamond
BlankfeinDiamond's picture

Why do you refer to him in the past tense?

Wed, 12/04/2013 - 11:12 | Link to Comment mess nonster
mess nonster's picture

Because RP sold out. He could have taken the Convention from the floor, but he chose to fade away. Like many, I was bitterly disappointed. OK, I'll give Paul a pass. It is possible that his family was threatened. There may have been other pressures just as compelling placed on Mr. Paul to back down. I suppose we'll never know. But if he had persisted... well, things could look very different right now.

Tue, 12/03/2013 - 07:19 | Link to Comment bubblemania
bubblemania's picture

You Rock Ron Paul!

Mon, 12/02/2013 - 23:40 | Link to Comment lasvegaspersona
lasvegaspersona's picture

This is by far the best essay on Honest Money...ever!

http://fofoa.blogspot.com/2011/05/return-to-honest-money.html

Mon, 12/02/2013 - 23:44 | Link to Comment Prairie Dog
Prairie Dog's picture

Paper money isn't wealth. Freedom is slavery. Arbeit macht frei.

Money is what you can buy with it. End of story

 

Mon, 12/02/2013 - 23:49 | Link to Comment Debugas
Debugas's picture

Paul fails to understand that we have overcapacity to produce almost in every sector of economy due to the lack of payable demand.

Printing money and providing it to the poor would increase production without price increases up to the level of utilizing existing capacity to produce. Only after that prices would start to go up

Tue, 12/03/2013 - 00:08 | Link to Comment Caviar Emptor
Caviar Emptor's picture

You are on the right track. Overcapacity was planned as part of supply-side economics. However it was financed through deficit spending. Hence a losing biflationary bet from the start. By now it is so core to the supply-side dogma that it will take a disaster for the believers to stop believing

Tue, 12/03/2013 - 00:11 | Link to Comment NidStyles
NidStyles's picture

Put the crack pipe away. That whole overcapacity nonsense is a fallacy used to explain away malinvestment as something that isn't bad by the Keynesian morons.

Tue, 12/03/2013 - 05:54 | Link to Comment Squid-puppets a...
Squid-puppets a-go-go's picture

hey, come on. There is massive overcapacity (although everything else dubug said was totally whack). Look at all the mountains of unsold goods sitting idle in dockyards, armadas of cargo ships lying idle, the entire former US manufacturing base lying fallow.

You telling me that 200 years of creating 'labour saving devices' hasnt resulted in some kind of overcapacity?

Tue, 12/03/2013 - 09:45 | Link to Comment Australian Economist
Australian Economist's picture

If produced goods are lying unsold, isn't that malinvestment?

Wed, 12/04/2013 - 11:21 | Link to Comment mess nonster
mess nonster's picture

PLease everyone, look at this from an energy standpoint. The reason wholesale prices plummeted in the 19th century was the advent of the steam engine and the burgeoning use of cheap fossil fuel (coal). 

There is nothing that is produced that can be produced without a fire. You can't even eat food without cooking it, raw-foodists to the contrary. No fire, no economy. Go, on name one thing you have that doesnt require a fire somewhere in the production process. Electric motors turn because of a fire, somewhere- coal fire, nuclear fire, solar fire.. somewhere there's a fucking fire.

Our economy has grown because we found new, (once cheap, once plentiful) sources of fire. Fire was so cheap that in real terms it was almost free. It is because of all this fire that we now have 7 billion people and an over-capacity of production. Why? becaiuse fire ain't so cheap any more. The fuel is gone by half, and the last half will be exponentially more expensive than the first half.

Fiat money can't bring back the fire. But, sad to say, neither can gold-backed money. Fiat money worked great when we had lots of fire. Now, I don't give a shit what your money is made out of, as the economy SHRINKS because there is less fuel, and therefore less fire, and therefore less production, we will all get a lot poorer. That's just the way it is. Get used to it.

Tue, 12/03/2013 - 00:22 | Link to Comment Anusocracy
Anusocracy's picture

It's actually an under capacity to buy.

For example, most thirty-year old males would like to have a Bugatti Veyron.

Wants are practically unlimited, but the government greatly undermines the ability to satisfy those wants - cost of government day 2012 was July 11th.

54% of GDP for government, 46% for those producing the GDP.

Tue, 12/03/2013 - 00:34 | Link to Comment FieldingMellish
FieldingMellish's picture

So why is the newly printed money going to the wealthiest instead of the poorest?

Tue, 12/03/2013 - 00:49 | Link to Comment Professorlocknload
Professorlocknload's picture

They figure nothing can trickle down until it's overflowing at the top.

Tue, 12/03/2013 - 08:04 | Link to Comment therover
therover's picture

How can it overflow at the top when there is a bottomless pit at the bottom ? 

Tue, 12/03/2013 - 01:00 | Link to Comment neidermeyer
neidermeyer's picture

Same as always , the already wealthy can tell the government where to allocate ... you don't think they're going to consider you do you?

Tue, 12/03/2013 - 01:15 | Link to Comment OneTinSoldier66
OneTinSoldier66's picture

The wealthy consider the poor to be too damn poor to need a 'government' bailout.

 

"The more power and control you give to government, the more businesses will try and control the government." -John Stossel

 

John also notes how people say that businesses are greedy. And to that he says, "Okay, fair enough." So, how do you control greedy corporations? The free market is what controls them, not government. But so many people seem to buy into a notion that is opposite of that.

 

If a business(corporation) cannot stay afloat on it's own, then what's it going to do if it is unable to turn to the government? Change, innovate, or go under. Which is opposite of what happened in the financial crisis of 2008.

Tue, 12/03/2013 - 05:26 | Link to Comment Peter Pan
Peter Pan's picture

Jsut remember that trickle down economics is just a euphemism for pissing down on the poor.

Tue, 12/03/2013 - 06:47 | Link to Comment Sword61
Sword61's picture

Because the poor will waste most of that money on stuff like food, shelter etc and not leverage it for a new Porsche

Tue, 12/03/2013 - 00:42 | Link to Comment joego1
joego1's picture

Just hand out money to everyone and not just to the privledged few? That would blow the whole con game and money would simply turn into butt wipe in a nano second.

Tue, 12/03/2013 - 03:40 | Link to Comment A Nanny Moose
A Nanny Moose's picture

Wait. Give me a chance to stock up on a shitload of TP first.

Tue, 12/03/2013 - 06:50 | Link to Comment Sword61
Sword61's picture

Hand out $100,000 to everyone (Real people) and make sure that it is applied against debt before any cash is paid out

Tue, 12/03/2013 - 02:04 | Link to Comment TheMeatTrapper
TheMeatTrapper's picture

Paul fails to understand that we have overcapacity to produce almost in every sector of economy due to the lack of payable demand.

This is one of the dumbest goddam things I've ever read here - and that includes the bullshit from Million Dollar Homo and Born Flatulence. 

Let me ask you a few simple questions:

  • Do we have the capacity to overproduce organic, free range chicken? No.
  • Do we have the capacity to overproduce organic, grass fed beef? No.
  • Do we have the capacity to overproduce heirloom corn and corn products? No.
  • Do we have the capacity to overproduce the chips, semiconductors and electronics we need? No. In fact we have very little capacity to produce any of them.

We don't even have the capacity to overproduce cheap, plastic, Walmart bullshit. 

The only fucking thing we have the capacity to overproduce is Bernanke bucks, bullshit and baby daddies. 

Tue, 12/03/2013 - 03:36 | Link to Comment A Nanny Moose
A Nanny Moose's picture

If you bnothered to read Dr. Paul, you would understand that overcapacity is simply malinvestment, precipitated by the very actions against which he speaks....Currency Debasement. This is a tale older than Tulips.

Mon, 12/02/2013 - 23:51 | Link to Comment Yen Cross
Yen Cross's picture

  How can we figure out a way to convey "Ron Paul" ? Why is it that the youth of this country connects with Ron Paul?

 

Tue, 12/03/2013 - 06:02 | Link to Comment Squid-puppets a...
Squid-puppets a-go-go's picture

youth have more passion for truth. They have yet to acquire wealth and have no motivation therefore to indulge in fabrications that might exaggerate their wealth or social status

Tue, 12/03/2013 - 00:02 | Link to Comment Reaper
Reaper's picture

"Against stupidity the gods struggle in vain." ~ von Schiller

Tue, 12/03/2013 - 00:59 | Link to Comment Yen Cross
Yen Cross's picture

 I appreciate your Victorian demeanor. Albiet 2 centuries too late.  Point being, your thoughts are required

   History lesson: Johann Von Christoff ?

  Ask and you shall recieve.

Tue, 12/03/2013 - 01:02 | Link to Comment Yen Cross
Yen Cross's picture

 Children of the dark always find the light.

 Quimsical you are, non the less . Same as always.

Tue, 12/03/2013 - 00:10 | Link to Comment Yen Cross
Yen Cross's picture

 Enough with this Nor CAl , FAGGAERY!

Tue, 12/03/2013 - 00:16 | Link to Comment Opinionated Ass
Opinionated Ass's picture

Dr. Paul hits the nail right on the head. Bravo.

I like to expose the monetarist thieves this way: Supposing we grant your crazy assumption that money supply growth is needed for economic growth, why not hand out the newly printed money proportionately to everyone? Why does the newly printed money go just to government and your friends? Cat got your tongue?

Tue, 12/03/2013 - 00:26 | Link to Comment Constitutional ...
Constitutional Republic's picture

It is a pleasure to read Dr. Ron Paul's astute observations. 

Let's apply the Pareto Principle, and remain optimistic that building a community of like minds and actions only requires the goal of 20% to alter the 80%.

Tue, 12/03/2013 - 00:35 | Link to Comment OneTinSoldier66
OneTinSoldier66's picture

'Easy Money' does create hard times. Just ask Rodney Dangerfield! ;-)

Tue, 12/03/2013 - 01:03 | Link to Comment neidermeyer
neidermeyer's picture

Are you referring to Rodneys new next door neighbor from Vegas? Such a sweet little girl.

Tue, 12/03/2013 - 01:20 | Link to Comment Vice
Vice's picture

The man is brilliant. A doctor, a wise investor, and a politician that actually puts his own self interests aside for the greater good. 

It would be an honor to meet him. 

Tue, 12/03/2013 - 02:41 | Link to Comment Pareto
Pareto's picture

He's the most humble person you will ever meet and the honor would be his - of this I can assure you.

Tue, 12/03/2013 - 01:29 | Link to Comment XRAYD
XRAYD's picture

These days it is not paper "money" that is wealth, but electronic statements of accounts with your brokers are "wealth" - matched by the digital entries on the fed's balanceD sheet.

The price of this wealth is our future. The question: Who will really pay for it and how?

Tue, 12/03/2013 - 01:40 | Link to Comment Yen Cross
Yen Cross's picture

 Brilliant code ? Brilliant breeding?  

  End of story

Tue, 12/03/2013 - 02:01 | Link to Comment monad
monad's picture

The transfer of wealth causes hard times. Fiat has only one purpose: theft.

Tue, 12/03/2013 - 03:42 | Link to Comment A Nanny Moose
A Nanny Moose's picture

Alas, we get the government we deserve and deserve the government we get.

Tue, 12/03/2013 - 03:55 | Link to Comment The Heart
The Heart's picture

We all told America three elections ago, Ron Paul was the ONLY hope for America's future.

Even now, he still proves his metal and wisdom after leaving office. No one is perfect, but the record of performance speaks loudly for itself. Who else can hold a candle up to this Lightbrigader?

When the revolution happens after the babylonians fire the first shot, Ron Paul will be installed as the new and well respected President of what's left of the united States of America. Imagine how it would be like to hear his speeches on TV, and get real news there, rather than the lies, dis/mis-information, and distractions for the war profiteers and Eugenicists that want to kill off EVERY single living being on the planet. What is out-right-insane, is ANYONE OR ANYTHING ignoring this truth that has been told over and over again. How much longer will people support, finance, enforce, and build up their own eventual demise? The more the beast is fed, the faster comes the dark clouds of death. How long will the world suicide society keep thinking money is god? See the lemmings gingerly walking off the cliff. See Sally run.

The answers to a peaceful abundant and prosperous world are plenty indeed. Sir Ron here speaks of many. Added to all those that could come from all the fine crew here might be an amazing spectacle to see. Some time some where two things must happen. For one, all the possible answers to all the problems that effect the world today should be gathered in one place in a simple well written way. Easy to understand is well written. And second, a place to list all the names and faces of all the beings that would stand in the way, or prevent all the answers/solutions from manifesting. Basically, two target lists. After these lists are big forward around the entire world, all can choose the right path because of the greater education and well expressed choices laid out for all to choose from.

Hummm..sumptin to ponder weza reckon.

In the meanwhile, we are thankful for all this truth that flows naturally, and certainly resonates in the heart.

Tue, 12/03/2013 - 07:46 | Link to Comment falak pema
falak pema's picture

About the EASY MONEY MEME fed by the CBs and the relation between Money supply and inflation, AND additionally, as per the devious and nefarious influence of Shadow Banking instruments in multiplying its devastating effect by quantum jumps, here are TWO ARTICLES that ZH/TD crowd should address to clarify our understanding about this conundrum :

A New Market for Hedge Funds | Inside Investing

A Non-Monetary Explanation For Inflation Using 14 Familiar Charts - Business Insider

 

These two articles hit a nerve that is central to the monetary discussion; aka money velocity and price formation (inflation) and more laxist SEC legislation about HFs and their ability to sell their shadow banking skills to individual investors.

How many ways can the sheeple be fleeced or the increasing divide between Oligarchy world and general public be FURTHER BREACHED ! ?

Tue, 12/03/2013 - 07:19 | Link to Comment Rick64
Rick64's picture

Easy credit is the problem.

Tue, 12/03/2013 - 10:22 | Link to Comment kikk
kikk's picture

Paper money is not wealth. Wealth comes from production. There’s no other way to create it.

There is the nail, right on the head. The USA's problem is all your production has been moved to China in persuit of profit.

The people responsible for this should be charged with treason.

Tue, 12/03/2013 - 11:02 | Link to Comment withglee
withglee's picture

The proponents of big government oppose honest money for a very specific reason. Inflation, the creation of new money, is used to finance government programs not generally endorsed by the producing members of society.

Money is created by "trading promises". These are not inflationary unless the trader doesn't deliver. They're not even inflationary then if a like amount of interest collections recovers the default.

Governments make trading promises but the don't ever deliver. They just roll them over (a default) and add to them. Further they grant themselves the lowest interest of any trader. They are the economy's deadbeats. Their trading promises should always be rejected.

Todd Marshall
Plantersville, TX

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