Ron Paul on money

[miko2d]

Declining Dollar, Declining Fortunes

by Rep. Ron Paul, MD

I recently had an opportunity to hear testimony by Federal Reserve Chairman Alan Greenspan at a hearing of the Joint Economic committee. I always relish the opportunity to question Mr. Greenspan at such hearings, because I disagree so strongly with Fed policies. Mr. Greenspan is a remarkable man, with a background as a devotee of Ayn Rand, a supporter of the gold standard, and a fervent advocate of capitalism. So I’m at a loss to explain his metamorphosis into a believer in fiat currency and centralized economic planning.

Of course capitalism is based on the premise that centralized economic planning is bad. I’m always amazed that otherwise pro-market conservatives, who rightfully scorned disastrous Soviet economic policies, are so willing to accept centralized monetary planning by the Fed. True capitalism requires a free market for money and interest rates, just as surely as it requires a free market for wages and prices.

Mr. Greenspan declined to answer my question about the tumbling value of the dollar, citing a kind of gentlemen’s agreement between him and the Treasury department not to discuss dollar policy. This is preposterous, of course, because he is unquestionably the one man on earth most responsible for the value of the U.S. dollar. If a member of Congress cannot ask the Federal Reserve Chairman a straightforward question about dollar policy, how can we expect the American public to have the faintest idea about what the Fed really does? The answer is that very few Americans pay any attention to the Fed, which has successfully insulated itself as a “nonpolitical” entity.

Mr. Greenspan’s two greatest sins are easy to understand. First, he has wildly inflated the money supply by creating more than $5 trillion in new dollars since he became Fed chairman. Second, he has relentlessly cut interest rates below market levels. These actions make money too plentiful and too cheap. When dollars are abundant and the cost of borrowing is low, people and businesses spend money less carefully. The stock market bubble of the late 1990s is all the proof we need that Fed printing presses can create money, but not wealth.


Both Congress and the Fed should be promoting sound dollar policies, because a sound and stable currency is required for sustained economic growth. Instead, both have through default and deliberate action promoted fiat policies that systematically depreciate the dollar. The financial markets understand this, and investors track the minute-by-minute fluctuations in value of the dollar seeking an investment advantage. This kind of speculation would not exist in a sound monetary system.

Mr. Greenspan certainly basked in the glow of admiration during the 1990s, when money and credit seemed limitless. He was deemed a genius by both the financial press and a general public eager to let the good times roll. Even today, with the nation mired in the inevitable bust following the Fed’s artificially-created boom, his detractors are few. In fact, President Bush plans to offer Mr. Greenspan another term as Fed chief. If our economic woes continue, however, the nation someday may regret not taking a closer look at the Federal Reserve and its manipulation of our financial fortunes.

 June 24, 2003

Dr. Ron Paul is a Republican member of Congress from Texas.

[miko2d]

Views on the Nature of Money

Bastiat goes on to explain that the confusion of money and riches or wealth is the "cause of errors and calamities without number" (p. 176). Money is genuinely beneficial—indeed, it plays a critical role as the medium of exchange—but people confuse money with wealth. This is not a problem for the deluded individual who readily ignores this mistaken belief every time he gets hungry or thirsty and converts money into goods. However, when this mistaken belief becomes acceptable public policy all manner of destruction can be unleashed...

...

Money serves only to facilitate the transmission of these useful things from one to another, which may be done equally well with an ounce of rare metal like gold, with a pound of more abundant material as silver, or with a hundredweight of still more abundant metal, as copper. According to that, if a country like the United States had at its disposal as much again of all useful things, its people would be twice as rich, although the quantity of money remained the same; but it would not be the same if there were double the money, for in that case the amount of useful things would not increase.

...

Bastiat is adamant that any increase in the supply of money does not benefit society and does not increase satisfaction. You simply do not make the citizenry better off by forcing them to give up useful things in return for newly created money. What is good for the individual (more money) is not good for the nation as a whole, and Bastiat invents an ingenious game to explain inflation and debasement. He then explains that money represents value that the holder has provided to someone else in society either by goods or labor, and the holder can take money and exchange it with others for goods or labor of a similar value.

Bastiat laments: "It is impossible for society to render more services than it receives, and yet a belief to the contrary is the chimera which is being pursued by means of the multiplication of coins, of paper money, etc." (pp. 200–01). You cannot solve the problems of society, nor raise the standard of living simply by increasing the supply of money.

...

During inflation the ability to calculate is blurred and this is especially so among the average working class people who are unable to identify the reason for their impoverishment. Bastiat notes that a "day's pay of a country laborer will remain for a long time at a dollar while the salable price of all the articles of consumption around him will be rising" (p. 211). He goes on to note that, because the rise in prices cannot be "instantaneous and equal for all things" (p. 212), inflation also contributes to the chief problem of those who wish to use money to solve social problems, the inequality of wealth in society.

[ra]

Mr. Greenspan’s two greatest sins are easy to understand. First, he has wildly inflated the money supply by creating more than $5 trillion in new dollars since he became Fed chairman. Second, he has relentlessly cut interest rates below market levels. These actions make money too plentiful and too cheap. When dollars are abundant and the cost of borrowing is low, people and businesses spend money less carefully. The stock market bubble of the late 1990s is all the proof we need that Fed printing presses can create money, but not wealth.

Why was there not wild inflation in the 90's?

[miko2d]

ra: Why was there not wild inflation in the 90's?

 There was not? Wouldn't that contradict even the understated official inflation data that says $1000 of 2000 dollars would buy only as much as $746.66 1990 used to?

 Have you checked the housing prices? Stock prices? Appartment rents? Other prices? What about the salaries - especially in the sectors that were the first recepients of the newly created money? An IT professional worth $30-$50 in 1991 was paid a third of a millon in 1999 - is it not an inflation? How about hundreds of billions of dollars leaving US every year and somehow not causing deflation?
 Why the heck do unions demand raises all the time if things are not getting more expensive? And how come the raise in their wages does not constitute inflation to you? How come the train ride in NYC rose from $1.05 to $2.00 despite greatly increased automation (tokens replaced by metrocard) and reduction of presonnel?

 What about exporting inflation abroad by virtue of being world reserve currency - for now? How about governments of foreign countries issuing their currencies or increasing taxes just to buy hundreds of billions dollars a year and take them out of circulation, substituting their inflation for ours?

 BTW, rising prices are not necessarily inflation - they may just be just one of the symptoms or consequences of inflation. You can have inflation without prices rising immediately - or ever. Only when the money supply increases faster than the supply of goods and services money purchases, raise of prices is the result.
 So you completely miss the absent drop in prices that should have happened in the absence of the inflation.
 With relatively stable stock of money the prices of goods should fall in line with increase in productivity, which includes technological improvements and access to cheaper imports (due to free trade). With noticeable improvements in both those areas over 90s, how come things are not cheaper?

 The most popular measure of "inflation" is the government's Consumer Price Index. The CPI tries to measure the average prices of items consumers buy - except that that consumers buy more than food, clothing and the other items in the CPI. They also buy stocks, bonds, housing and other assets and income streams.
The government omits stocks from the CPI, apparently on the assumption that stock prices are not prices.
 If they aren't prices, what are they? If you are buying a certain divident stream for your retirement, how come you now pay way more for it than in 1990?
 How many stocks/bonds does the average consumer buy each year (through the retirement and otherwise) and what do they cost? How about your social security? Isn't it invested in government obligations? How come the same $1000 buys less than half of dollar interest income than it used to?

 Irresponsible growth of the money supply, resulting in inflation, is in effect a massive hidden tax on a population.  The governments can print money today for nothing, spend it today at its full value, and the population pays the price later as more dollars in circulation chase fewer goods and price levels rise.  Inflation creates disincentives for saving which cause major societal debt problems, as inflation rewards debtors (can pay back debts in cheaper dollars) and punishes savers (as a hidden tax that annually vaporizes a portion of one’s wealth).

 miko

[ra]

There was not? Wouldn't that contradict even the understated official inflation data that says $1000 of 2000 dollars would buy only as much as $746.66 1990 used to?

This much inflation over one decade is not at all wild.  
 

Have you checked the housing prices? Stock prices? Appartment rents? Other prices?

These are market driven, for better or worse the stock market went way up.  Housing did not go up that much in the 90's compared to the 80's.

What about the salaries - especially in the sectors that were the first recepients of the newly created money? An IT professional worth $30-$50 in 1991 was paid a third of a millon in 1999 - is it not an inflation?

IT salaries went way up because of the tech sector boom and Y2K hysteria.  I don't know anyone who made $333,000 a year in IT but it might have happened.  IT salaries have come back to earth.

The most popular measure of "inflation" is the government's Consumer Price Index. The CPI tries to measure the average prices of items consumers buy - except that that consumers buy more than food, clothing and the other items in the CPI.

Whatever the shortcomings of the CPI, it is a reasonable measuring stick for inflation.  

If you are buying a certain divident stream for your retirement, how come you now pay way more for it than in 1990?

If so, I must be happy with my portfolio or I would change my investments.  The majority of stocks did not participate in the late 90's boom.

ra

[miko2d]

ra: This much inflation over one decade is not at all wild.

 Even if they represented real inflation rather than less than half of it and ignoring considerable drop in prices that should have occured instead of increase, you think that that having quarter of your property stolen is not such a big deal?

 From 1800 to 1900 the prices dropped over 50% as the supply of goods grew due to productivity increase! In 20th century the progress was much more accelerated and 2000 dollar should have been buying at least ten times as much as 1913 dollar. Instead it buys 2% as much. How about 99.8% of value stolen by the government just through inflation?
 
These are market driven, for better or worse the stock market went way up.  Housing did not go up that much in the 90's compared to the 80's.

 Of course they were! If someone starts spraying sarine on the streets tomorrow and the price of gas masks and caskets increases sharply, you will say that the increase is "market driven" and the deadly chemical attack had nothing to do with it. And if somebody pushes you out the 20-storey window, it's not his action that kills you but the principles of physics, right...

 When a government floods the economy with freshly printed money, of course it is a natural market process that causes the corresponding increase in the price goods starting with sectors that get the money first. And even when government stupidly introduces wage and price controls to keep the resulting inflation down, you get shortages, non-wage benefits and non-public economy.

 Speaking of non-public economy. Do you think billions of US dollars flowing abroad in exchange for drugs figure anywhere in our trade statistics?

 New money was created by Fed and originated in banks and was loaned to home buyers and start-up companies in fasionable sectors - with huge increases in prices of resources and labor used in those sectors as fresh money sucked the limited pool of labor and other resources from elsewhere. As the secondary beneficiaries of that money - home sellers, builders, overpayed professionals - spent that money, whatever they bought further rose in price.

IT salaries went way up because of the tech sector boom and Y2K hysteria.
 Sure they did. But where did the money come from that paid those salaries? It was borrowed from the banks. And where did the bank got the money? Not from the money deposited in it - which would have constututed real savings being used elsewhere - but from the money freshly created from nothing, by virtue of lower reserve requirements and fractional reserve system.
 Consider a simple example. You put $100 in the bank that you got for creating 100 widgets and the bank loans out $200 to whomever it thinks deserve it. Now there is $300 in economy chasing 100 worth of widgets - which causes the price of one increase 3 times, so you cannot buy the same value your labor produced previously.

I don't know anyone who made $333,000 a year in IT but it might have happened.

 I do. And plenty of people with $200+.

IT salaries have come back to earth.

 Sure. And soon the value of their houses will too. But not the mortgages they owe to the banks. And not the union wages or government-mandated minimum wages and lot of other services. And all that capital built with real resurces misallocated from productive uses due to money created during boom  - excessive (compared to other needs) housing, dark fiber, computer hardware that is getting obsolete, etc? That is value lost.
 How about US manufacturing companies ruined by the inflow of imports bought with new paper? When will they come back?

Whatever the shortcomings of the CPI, it is a reasonable measuring stick for inflation.

 How could it be if it does not reflect your spending patterns. Take your hours of labor and measure what you buy for it. The constituents of CPI will not add up to 25%. Your housing, your taxes, your retirement income, education for your children? Where is it in CPI?
 
If so, I must be happy with my portfolio or I would change my investments.

 You may be happy with whatever you personally fancy. As I've said - plenty of people benefitted greatly form the redistribution of wealth that is government-caused inflation. You may be one of them if you got overpaid or sold on the top.

 It does not change the fact that when buying at 8 yield one pays 100 units of labor for income stream equivalent of 8 units of labor and when buying at 2% one is paying 4 times as much for the same income stream.

 miko

[ra]

Even if they represented real inflation rather than less than half of it and ignoring considerable drop in prices that should have occured instead of increase, you think that that having quarter of your property stolen is not such a big deal?

25% inflation in 10 years is nothing.  If inflation were truly robbing us of property we would all have been destitute 100 years ago.  What is real inflation?

From 1800 to 1900 the prices dropped over 50% as the supply of goods grew due to productivity increase! In 20th century the progress was much more accelerated and 2000 dollar should have been buying at least ten times as much as 1913 dollar. Instead it buys 2% as much. How about 99.8% of value stolen by the government just through inflation?

So we should all be incredibly wealthy?  Why should we compare today's dollar to a dollar from 1913?  

When a government floods the economy with freshly printed money, of course it is a natural market process that causes the corresponding increase in the price goods starting with sectors that get the money first. And even when government stupidly introduces wage and price controls to keep the resulting inflation down, you get shortages, non-wage benefits and non-public economy.

If the government floods the economy with more money than is justified by productivty you get inflation across the board.  How does one sector get this over-produced money before another.  Inflation hits everything.  What price controls were introduced in the 90's?

New money was created by Fed and originated in banks and was loaned to home buyers and start-up companies in fasionable sectors - with huge increases in prices of resources and labor used in those sectors as fresh money sucked the limited pool of labor and other resources from elsewhere. As the secondary beneficiaries of that money - home sellers, builders, overpayed professionals - spent that money, whatever they bought further rose in price.

That's how capitalism works, there are no 5-year plans here.  People are free to squander their investments on pets.com, or whatever they want.  There is no way to know the correct allocation of labor and resources without first taking the risk.  Who would have thought Starbucks would be a successful company when all they sell is coffee, which can be bought in a million different places, or is sometimes available for free at work?

Sure. And soon the value of their houses will too. But not the mortgages they owe to the banks. And not the union wages or government-mandated minimum wages and lot of other services.

Well, we agree on something.

And all that capital built with real resurces misallocated from productive uses due to money created during boom - excessive (compared to other needs) housing, dark fiber, computer hardware that is getting obsolete, etc? That is value lost.

"Misallocated" doesn't mean anything.  If money is so easily available that people will throw it around there will be high inflation, which didn't happen.   People invested in a lot of stupid things because the new point-n-click investment account allowed them to do 'research' and buy whatever stock seemed to be hot from the comfort of their living rooms.  No need to call a broker during working hours.  Everyone I know who got reamed by the bubble burst fits this description.  

The constituents of CPI will not add up to 25%. Your housing, your taxes, your retirement income, education for your children? Where is it in CPI?

I don't have a CPI components list available, but I think housing and eductation are part of the CPI.  Why should Taxes and retirement income be measured in the CPI?

ra

[miko2d]

ra: That's how capitalism works, there are no 5-year plans here. People are free to squander their investments on pets.com, or whatever they want. There is no way to know the correct allocation of labor and resources without first taking the risk. Who would have thought Starbucks would be a successful company when all they sell is coffee, which can be bought in a million different places, or is sometimes available for free at work?

 You are missing the point. Government prints paper money and passes it into the economy as the real money - thus allowing some select beneficiaries to hijack resources from other uses by outbidding the people paying with actually earned money. Eventually the purchasing power of all money falls. The real value gets transfered from the population to the early recepients of the new money. That is not capitalism but pure socialist redistribution.

"Misallocated" doesn't mean anything. If money is so easily available that people will throw it around there will be high inflation, which didn't happen. People invested in a lot of stupid things because the new point-n-click investment account allowed them to do 'research' and buy whatever stock seemed to be hot from the comfort of their living rooms. No need to call a broker during working hours. Everyone I know who got reamed by the bubble burst fits this description.

 Bit that is exactly what we a re discussin here -  where does that money come from that is easily available? It is printed.

 If miko creates some resource and sells it for money, that money is a claim for equal value of resources. Instead of claiming and consuming that resource miko can loan that claim (money) to ra through the bank. Money is in limited supply, so ra has to pay for it - in which case he will be less likely to put it in a wastefull venture.
 Now, if the bank simply prints money to give to ra at much lower interest, ra will much more eagerly use it to buy something - whether house or stock, but the purchasing power of the money that miko held (and for which he provided a valuable resource) will also drop - thus robbing him.
 What the government does is exactly what counterfeiter does - except that conterfeiter is the first beneficiary rather than the bank or government.

 Banks are supposed to make living by buying use of money money (loaning it at interest) from depositors and lessing use of money to debtors - lending it at higher interests. Surely if they do not bother paying for the money they get but can create it at will  - like they currently do with the help of Federal Reserve, their business becomes much more lucrative. You get something for nothing and sell/lend it for profit. Where does the valuec backing the new money come from? The same source as the counterfeiter's money - from robbing the colders of old money.

As for how newly-created money disrupt the ecomomic activity and divert respources towards wastefull and inefficien uses - it's a somewhat involved issue to cover in a few words.

 The fact of inflation itself makes people invest their money in ways they would not do otherwise to preserve the value they own.
 The extended credit caused by created money causes lower interest rates than would exist naturally. An interest rate is a very fundamantal issue in economy, being an expression of time-preference of people and main regulator of balance between saving and consumption. By receiving incorrect signals on time-preference, the entrepreneurs expand projects in the wrong  area of the production processes (time from the final consumption). Also the saving/consumption is squewd out of wack. The productivity of economy grows only because of more capital - physical and intellectual (since evolutionary changes on humans are too slow to affect their productivity) and new capital is formed by refraining from consumption of resources - saving them for productive uses.
 Printing money plays hawok with teleological concept of time in production and ulimately makes the human activity chaotic and irrational versus strictly ordered and rational one ensured by the free market.

 Free market operation is much better and more rationally organised by spontaneous self-regulating  process than any arbitrary command plan - 5 year or other, including federal manipulation of money.

 I am afraid I cannot do a complete justice to this subject in so limited space, but if you are interested, I could suggest you a few thousand pages worth of books to read that comprehensively deal with it.

don't have a CPI components list available, but I think housing and eductation are part of the CPI. Why should Taxes and retirement income be measured in the CPI?

 Sook it up - it will be very educational. The pattern they use in no way reflects the actual pattern of spending for anybody.

 miko

[miko2d]

Here is an article that can give you a rough idea on importance of time in economic calcualtions and distribution of capital investment and interest rates affecting it.

The Cone of Production  

 miko