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Ron Paul On Gold & The Fed's Failed 'Utopian Dream'
Submitted by Ron Paul via The Ron Paul Institute for Peace & Prosperity,
Over the last 100 years the Fed has had many mandates and policy changes in its pursuit of becoming the chief central economic planner for the United States. Not only has it pursued this utopian dream of planning the US economy and financing every boondoggle conceivable in the welfare/warfare state, it has become the manipulator of the premier world reserve currency.
As Fed Chairman Ben Bernanke explained to me, the once profoundly successful world currency – gold – was no longer money. This meant that he believed, and the world has accepted, the fiat dollar as the most important currency of the world, and the US has the privilege and responsibility for managing it. He might even believe, along with his Fed colleagues, both past and present, that the fiat dollar will replace gold for millennia to come. I remain unconvinced.
At its inception the Fed got its marching orders: to become the ultimate lender of last resort to banks and business interests. And to do that it needed an “elastic” currency. The supporters of the new central bank in 1913 were well aware that commodity money did not “stretch” enough to satisfy the politician’s appetite for welfare and war spending. A printing press and computer, along with the removal of the gold standard, would eventually provide the tools for a worldwide fiat currency. We’ve been there since 1971 and the results are not good.
Many modifications of policy mandates occurred between 1913 and 1971, and the Fed continues today in a desperate effort to prevent the total unwinding and collapse of a monetary system built on sand. A storm is brewing and when it hits, it will reveal the fragility of the entire world financial system.
The Fed and its friends in the financial industry are frantically hoping their next mandate or strategy for managing the system will continue to bail them out of each new crisis.
The seeds were sown with the passage of the Federal Reserve Act in December 1913. The lender of last resort would target special beneficiaries with its ability to create unlimited credit. It was granted power to channel credit in a special way. Average citizens, struggling with a mortgage or a small business about to go under, were not the Fed’s concern. Commercial, agricultural, and industrial paper was to be bought when the Fed's friends were in trouble and the economy needed to be propped up. At its inception the Fed was given no permission to buy speculative financial debt or U.S. Treasury debt.
It didn’t take long for Congress to amend the Federal Reserve Act to allow the purchase of US debt to finance World War I and subsequently all the many wars to follow. These changes eventually led to trillions of dollars being used in the current crisis to bail out banks and mortgage companies in over their heads with derivative speculations and worthless mortgage-backed securities.
It took a while to go from a gold standard in 1913 to the unbelievable paper bailouts that occurred during the crash of 2008 and 2009.
In 1979 the dual mandate was proposed by Congress to solve the problem of high inflation and high unemployment, which defied the conventional wisdom of the Phillips curve that supported the idea that inflation could be a trade-off for decreasing unemployment. The stagflation of the 1970s was an eye-opener for all the establishment and government economists. None of them had anticipated the serious financial and banking problems in the 1970s that concluded with very high interest rates.
That’s when the Congress instructed the Fed to follow a “dual mandate” to achieve, through monetary manipulation, a policy of “stable prices” and “maximum employment.” The goal was to have Congress wave a wand and presto the problem would be solved, without the Fed giving up power to create money out of thin air that allows it to guarantee a bailout for its Wall Street friends and the financial markets when needed.
The dual mandate was really a triple mandate. The Fed was also instructed to maintain “moderate long-term interest rates.” “Moderate” was not defined. I now have personally witnessed nominal interest rates as high as 21% and rates below 1%. Real interest rates today are actually below zero.
The dual, or the triple mandate, has only compounded the problems we face today. Temporary relief was achieved in the 1980s and confidence in the dollar was restored after Volcker raised interest rates up to 21%, but structural problems remained.
Nevertheless, the stock market crashed in 1987 and the Fed needed more help. President Reagan’s Executive Order 12631 created the President’s Working Group on Financial Markets, also known as the Plunge Protection Team. This Executive Order gave more power to the Federal Reserve, Treasury, Commodity Futures Trading Commission, and the Securities and Exchange Commission to come to the rescue of Wall Street if market declines got out of hand. Though their friends on Wall Street were bailed out in the 2000 and 2008 panics, this new power obviously did not create a sound economy. Secrecy was of the utmost importance to prevent the public from seeing just how this “mandate” operated and exactly who was benefiting.
Since 2008 real economic growth has not returned. From the viewpoint of the central economic planners, wages aren’t going up fast enough, which is like saying the currency is not being debased rapidly enough. That’s the same explanation they give for prices not rising fast enough as measured by the government-rigged Consumer Price Index. In essence it seems like they believe that making the cost of living go up for average people is a solution to the economic crisis. Rather bizarre!
The obsession now is to get price inflation up to at least a 2% level per year. The assumption is that if the Fed can get prices to rise, the economy will rebound. This too is monetary policy nonsense.
If the result of a congressional mandate placed on the Fed for moderate and stable interest rates results in interest rates ranging from 0% to 21%, then believing the Fed can achieve a healthy economy by getting consumer prices to increase by 2% per year is a pie-in-the-sky dream. Money managers CAN’T do it and if they could it would achieve nothing except compounding the errors that have been driving monetary policy for a hundred years.
A mandate for 2% price inflation is not only a goal for the central planners in the United States but for most central bankers worldwide.
It’s interesting to note that the idea of a 2% inflation rate was conceived 25 years ago in New Zealand to curtail double-digit price inflation. The claim was made that since conditions improved in New Zealand after they lowered their inflation rate to 2% that there was something magical about it. And from this they assumed that anything lower than 2% must be a detriment and the inflation rate must be raised. Of course, the only tool central bankers have to achieve this rate is to print money and hope it flows in the direction of raising the particular prices that the Fed wants to raise.
One problem is that although newly created money by central banks does inflate prices, the central planners can’t control which prices will increase or when it will happen. Instead of consumer prices rising, the price inflation may go into other areas, as determined by millions of individuals making their own choices. Today we can find very high prices for stocks, bonds, educational costs, medical care and food, yet the CPI stays under 2%.
The CPI, though the Fed currently wants it to be even higher, is misreported on the low side. The Fed’s real goal is to make sure there is no opposition to the money printing press they need to run at full speed to keep the financial markets afloat. This is for the purpose of propping up in particular stock prices, debt derivatives, and bonds in order to take care of their friends on Wall Street.
This “mandate” that the Fed follows, unlike others, is of their own creation. No questions are asked by the legislators, who are always in need of monetary inflation to paper over the debt run up by welfare/warfare spending. There will be a day when the obsession with the goal of zero interest rates and 2% price inflation will be laughed at by future economic historians. It will be seen as just as silly as John Law’s inflationary scheme in the 18th century for perpetual wealth for France by creating the Mississippi bubble – which ended in disaster. After a mere two years, 1719 to 1720, of runaway inflation Law was forced to leave France in disgrace. The current scenario will not be precisely the same as with this giant bubble but the consequences will very likely be much greater than that which occurred with the bursting of the Mississippi bubble.
The fiat dollar standard is worldwide and nothing similar to this has ever existed before. The Fed and all the world central banks now endorse the monetary principles that motivated John Law in his goal of a new paradigm for French prosperity. His thesis was simple: first increase paper notes in order to increase the money supply in circulation. This he claimed would revitalize the finances of the French government and the French economy. His theory was no more complicated than that.
This is exactly what the Federal Reserve has been attempting to do for the past six years. It has created $4 trillion of new money, and used it to buy government Treasury bills and $1.7 trillion of worthless home mortgages. Real growth and a high standard of living for a large majority of Americans have not occurred, whereas the Wall Street elite have done quite well. This has resulted in aggravating the persistent class warfare that has been going on for quite some time.
The Fed has failed at following its many mandates, whether legislatively directed or spontaneously decided upon by the Fed itself – like the 2% price inflation rate. But in addition, to compound the mischief caused by distorting the much-needed market rate of interest, the Fed is much more involved than just running the printing presses. It regulates and manages the inflation tax. The Fed was the chief architect of the bailouts in 2008. It facilitates the accumulation of government debt, whether it’s to finance wars or the welfare transfer programs directed at both rich and poor. The Fed provides a backstop for the speculative derivatives dealings of the banks considered too big to fail. Together with the FDIC's insurance for bank accounts, these programs generate a huge moral hazard while the Fed obfuscates monetary and economic reality.
The Federal Reserve reports that it has over 300 PhD’s on its payroll. There are hundreds more in the Federal Reserve’s District Banks and many more associated scholars under contract at many universities. The exact cost to get all this wonderful advice is unknown. The Federal Reserve on its website assures the American public that these economists “represent an exceptional diverse range of interest in specific area of expertise.” Of course this is with the exception that gold is of no interest to them in their hundreds and thousands of papers written for the Fed.
This academic effort by subsidized learned professors ensures that our college graduates are well-indoctrinated in the ways of inflation and economic planning. As a consequence too, essentially all members of Congress have learned these same lessons.
Fed policy is a hodgepodge of monetary mismanagement and economic interference in the marketplace. Sadly, little effort is being made to seriously consider real monetary reform, which is what we need. That will only come after a major currency crisis.
I have quite frequently made the point about the error of central banks assuming that they know exactly what interest rates best serve the economy and at what rate price inflation should be. Currently the obsession with a 2% increase in the CPI per year and a zero rate of interest is rather silly.
In spite of all the mandates, flip-flopping on policy, and irrational regulatory exuberance, there’s an overwhelming fear that is shared by all central bankers, on which they dwell day and night. That is the dreaded possibility of DEFLATION.
A major problem is that of defining the terms commonly used. It’s hard to explain a policy dealing with deflation when Keynesians claim a falling average price level – something hard to measure – is deflation, when the Austrian free-market school describes deflation as a decrease in the money supply.
The hysterical fear of deflation is because deflation is equated with the 1930s Great Depression and all central banks now are doing everything conceivable to prevent that from happening again through massive monetary inflation. Though the money supply is rapidly rising and some prices like oil are falling, we are NOT experiencing deflation.
Under today’s conditions, fighting the deflation phantom only prevents the needed correction and liquidation from decades of an inflationary/mal-investment bubble economy.
It is true that even though there is lots of monetary inflation being generated, much of it is not going where the planners would like it to go. Economic growth is stagnant and lots of bubbles are being formed, like in stocks, student debt, oil drilling, and others. Our economic planners don’t realize it but they are having trouble with centrally controlling individual “human action.”
Real economic growth is being hindered by a rational and justified loss of confidence in planning business expansions. This is a consequence of the chaos caused by the Fed’s encouragement of over-taxation, excessive regulations, and diverting wealth away from domestic investments and instead using it in wealth-consuming and dangerous unnecessary wars overseas. Without the Fed monetizing debt, these excesses would not occur.
Lessons yet to be learned:
1. Increasing money and credit by the Fed is not the same as increasing wealth. It in fact does the opposite.
2. More government spending is not equivalent to increasing wealth.
3. Liquidation of debt and correction in wages, salaries, and consumer prices is not the monster that many fear.
4. Corrections, allowed to run their course, are beneficial and should not be prolonged by bailouts with massive monetary inflation.
5. The people spending their own money is far superior to the government spending it for them.
6. Propping up stock and bond prices, the current Fed goal, is not a road to economic recovery.
7. Though bailouts help the insiders and the elite 1%, they hinder the economic recovery.
8. Production and savings should be the source of capital needed for economic growth.
9. Monetary expansion can never substitute for savings but guarantees mal–investment.
10. Market rates of interest are required to provide for the economic calculation necessary for growth and reversing an economic downturn.
11. Wars provide no solution to a recession/depression. Wars only make a country poorer while war profiteers benefit.
12. Bits of paper with ink on them or computer entries are not money – gold is.
13. Higher consumer prices per se have nothing to do with a healthy economy.
14. Lower consumer prices should be expected in a healthy economy as we experienced with computers, TVs, and cell phones.
All this effort by thousands of planners in the Federal Reserve, Congress, and the bureaucracy to achieve a stable financial system and healthy economic growth has failed.
It must be the case that it has all been misdirected. And just maybe a free market and a limited government philosophy are the answers for sorting it all out without the economic planners setting interest and CPI rate increases.
A simpler solution to achieving a healthy economy would be to concentrate on providing a “SOUND DOLLAR” as the Founders of the country suggested. A gold dollar will always outperform a paper dollar in duration and economic performance while holding government growth in check. This is the only monetary system that protects liberty while enhancing the opportunity for peace and prosperity.
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The attributes of precious metals, especially gold and silver make them the supreme form of money if your intention is to control the growth of government.
Wrong. Management of any MOE is about record keeping. It's about knowing which traders are creating the money (getting trading promises certified) so you can know they have returned it when they deliver on their trades (i.e. be able to measure DEFAULTs). On recognizing a DEFAULT you must immediately collect an equal amount of INTEREST. This guarantees zero INFLATION all the time, everywhere, by the relation: INFLATION = DEFAULT - INTEREST.
Introduction of precious metals only muddies the waters. That's why BitCoins can never work. They think linking money to something precious is what makes it work. It's not. Linking it to "actual trading promises" is what makes it work ... because that's obviously what money is.
Re controlling the growth of government: The government is "just another trader". The government makes trading promises and creates money like any other trader. But unlike other traders, they "never" deliver on their trading promises ... they just roll them over ... and that is DEFAULT. A properly managed MOE mitigates DEFAULTs by collecting a like amount of INTEREST. Under proper MOE management, deadbeat traders like governments would soon be totally removed from the marketplace because their deals couldn't work with the imposed INTEREST.
With our mismanaged MOE the opposite happens. The biggest deadbeat trader in our marketplace enjoys the lowest interest.There's really no reason to have a Fed as our MOE manager. If it's to be a government function (like building roads and keeping property records), then it is properly a function of the Treasury Department and runs at zero profit. But really, it's a function of the marketplace and can be handled by the marketplace itself.
It just takes simple rules and rigorous open adherence to those rules. You don't need to make laws to get adherence. Those MOE managers that adhere to the very natural rules are more competitive than those who don't
It's not rocket science.
Society's rules are always easily broken. And it is never terribly difficult to conceal the breaking.
Nature's rules simply CANNOT be broken.
That is the source of the linkage to PMs or commodities in general.
No one can print or forge them effectively.
Nature's rules simply CANNOT be broken.
Agreed.
That is the source of the linkage to PMs or commodities in general.
Disagree. There is no natural linkage between PM's and trade. That's a human invention.
No one can print or forge them effectively.
Perhaps, but while resistance to counterfeiting is a requirement of a properly managed MOE, it is far from the most important one. It is just a minor leak considering today's technology. In the olden days the PM coins suffered from a practice called "shaving" ... scraping small amounts of metal off the edges of the coins (kind of like putting sand in reclaimed aluminum cans where remuneration is determined by weight). That's why coins have cerrations on their edges ... to reveal shaving.
The biggest leak by far we have in todays MOE management is an absence of a link between DEFAULTs and INTEREST collections ... especially when governments are one of the traders.
"He might even believe, along with his Fed colleagues, both past and present, that the fiat dollar will replace gold for millennia to come."
The Germans thought the Third Reich would last for a thousand years.
Psychopaths often have grand delusions.
Admit it gold is barter. Sound money my ass. Its a shortcut back to fiat.
So sell yours. Oh, wait, I forgot--you don't have any...
Banks are not going to be happy with gold backed currencies.
FX profits will go through the floor.
Correct. With properly managed MOEs, exchange rates "never" change. There is "no" profit in making exchanges.
The Federal Reserve reports that it has over 300 PhD’s on its payroll.
Of the 250 PhD economists, 250 of them all believe in exactly the same school of economics.
An economic school that didn't see 2008 coming.
"Bubbles , what are bubbles?" 250 PhD economists in unison.
Ron Pauls article here has a simularity to Enoch Powells writings about Socialism and central planning that was very much alive in the Socialist Britain of the 1960's.
Both are dead right and described things eloquently, what we have is a system where capital is mis-allocated in large quantities with every larger interventions required to avoid the consequences. One day enough people will decide the system is no longer in their interests (such as China deciding they can get a better standard of living by receiving another currency other than the dollar) and it will collapse. That end is inevitable economically.
Would appreciate a considered article on the pros and cons of a multi-metal currency backing. For example not just considering Gold and Silver backed currencies but also their comparitive values to each other and national economies, of Platinum, Uranium, Carbon, Nickel, etc. And if holding these as 'live' supports for each national currencies, what effects might it have on the current values of debt and deficits and GDP per capita, and so on.
Why did the Swiss reject the idea of making the banks, or was it just the central bank of Switzerland, back 20% of their issued debt with Gold?
Why do you insist on linking the Medium of Exchange (MOE) to commodities? It just adds another uncontrollable degree of freedom and muddies the waters.
Money is obviously "a promise to complete a trade". You know that by observing the three steps in trade: (1) Negotiation; (2) Promise to deliver; (3) Delivery. With simple barter, (2) and (3) happen simultaneously on the spot. Money allows (2) and (3) to happen over time and space.
What is crucial is assuring that, while in circulation and acting as the most desirable object in simple barter, that money represents actual in-process trading promises. That means monitoring deliveries and failures to deliver. On delivery, the money created by the trading promise is retured and extinguished. On DEFAULT it is mopped up by a like amount of INTEREST collections. This "guarantees" zero INFLATION all the time everywhere by the relation INFLATION = DEFAULT - INTEREST.
It's oh so very very simple.
An uncontrollable degree of freedom? muddies the waters?? I could barter for goods, but the law is explicit that the Government requires its share of the trade in taxes, for various reasons.
But if that means that fiat currencies can trade by guess work exchange values of different economies, and without assesssment of ther strengths and weakness's? Of their ability to pay their debts, reduce their defecits, and balance the budgets? Values of commodities must be the basis of monetary exchange, for all major exchanges or purchases, so why not exmine the reasons behind the values to each economy. Oil, Gas, Water and infrastructure are valued items, as is the talent and ability to create them.
If you want an uncontrollable degree of freedom, just look at the balance sheets, if they will let you, and haven't fiddled them, of the major Central Banks. Then tell me I have muddied the waters.
Or are you a servant of the banking system, carefree of the worries of everyone else and happy to allow the banks to play rich man- poor man with the relevant economies?
Or are you a servant of the banking system, carefree of the worries of everyone else and happy to allow the banks to play rich man- poor man with the relevant economies?
A properly manged MOE needs no banking system. I'm a proponent of a properly managed MOE and that makes me an obvious opponent of banks.
BenB is not being naive when he says gold isn't money, just deceitful. He and his cohorts have been main lining the cult koolaide and are disconnected from reality. They think pulling enough strings and forcing mechanisms will keep it going, until the endgame. They pledge allegiance to no currency or country.
http://www.telegraph.co.uk/finance/economics/11358316/Central-bank-prophet-fears-QE-warfare-pushing-world-financial-system-out-of-control.html
Mr. William White said Quantitative Easing (QE) is a disguised form of competitive devaluation. "The Japanese are now doing it as well but nobody can complain because the US started it," he said.
"There is a significant risk that this is going to end badly because the Bank of Japan is funding 40pc of all government spending. This could end in high inflation, perhaps even hyperinflation.
"The emerging markets got on the bandwagon by resisting upward pressure on their currencies and building up enormous foreign exchange reserves. The wrinkle this time is that corporations in these countries - especially in Asia and Latin America - have borrowed $6 trillion in US dollars, often through offshore centres. That is going to create a huge currency mismatch problem as US rates rise and the dollar goes back up."
Mr. White's warnings are ominous. He acquired great authority in his long years at the BIS arguing that global central banks were falling into a trap by holding real rates too low in the 1990s, effectively stealing growth from the future through "intertemporal" effects.
He argues that this created a treacherous dynamic. The authorities kept having to push rates lower with the trough of each cycle, building up ever greater imbalances, in an ineluctable descent to the "zero bound", where monetary levers stop working properly.
Under his guidance, the BIS annual reports over the three years before the Lehman crisis were a rising crescendo of alarm calls at a time when other global watchdogs were asleep. His legendary report in June 2008 openly discussed whether the world was on the cusp of events that might prove as dangerous and intractable as the Great Depression, as it indeed it was.
Mr White said central banks have been put in an invidious position, compelled to respond to a deep economic disorder that is beyond their power. The latest victim is the Swiss National Bank, which was effectively crushed last week by greater global forces as it tried to repel safe-haven flows into the franc. The SNB was damned whatever it tried to do. "The only choice they had was to take a blow to the left cheek, or to the right cheek," he said.
He deplores the rush to QE as an "unthinking fashion". Those who argue that the US and the UK are growing faster than Europe because they carried out QE early are confusing "correlation with causality". The Anglo-Saxon pioneers have yet to pay the price. "It ain't over until the fat lady sings. There are serious side-effects building up and we don't know what will happen when they try to reverse what they have done."
The painful irony is that central banks may have brought about exactly what they most feared by trying to keep growth buoyant at all costs, he argues, and not allowing productivity gains to drive down prices gently as occurred in episodes of the 19th century. "They have created so much debt that they may have turned a good deflation into a bad deflation after all."
I believe we need a new economic standard called the “keep-politicians-in-check-forever” standard. The Gold standard once served that purpose as the founders outlined. However to get to the new standard it is clear we will have to go through an economic debacle in order for the Sheeple to open their eyes to what the current political filth has done to America and the world. Then we may have a few more generations of freedom before the new oligarchy finds a way to subvert the new standard…