Quote :

"Monetary Policy and the State of the Economy by Ron Paul, Statement at Hearing of the House Financial Services Committee, February 15, 2007 Transparency in monetary policy is a goal we should all support. I've often wondered why Congress so willingly has given up its prerogative over monetary policy. Astonishingly, Congress in essence has ceded total control over the value of our money to a secretive central bank. Congress created the Federal Reserve, yet it had no constitutional authority to do so. We forget that those powers not explicitly granted to Congress by the Constitution are inherently denied to Congress – and thus the authority to establish a central bank never was given. Of course Jefferson and Hamilton had that debate early on, a debate seemingly settled in 1913. But transparency and oversight are something else, and they're worth considering. Congress, although not by law, essentially has given up all its oversight responsibility over the Federal Reserve. There are no true audits, and Congress knows nothing of the conversations, plans, and actions taken in concert with other central banks. We get less and less information regarding the money supply each year, especially now that M3 is no longer reported. The role the Fed plays in the President's secretive Working Group on Financial Markets goes unnoticed by members of Congress. The Federal Reserve shows no willingness to inform Congress voluntarily about how often the Working Group meets, what actions it takes that affect the financial markets, or why it takes those actions. But these actions, directed by the Federal Reserve, alter the purchasing power of our money. And that purchasing power is always reduced. The dollar today is worth only four cents compared to the dollar in 1913, when the Federal Reserve started. This has profound consequences for our economy and our political stability. All paper currencies are vulnerable to collapse, and history is replete with examples of great suffering caused by such collapses, especially to a nation's poor and middle class. This leads to political turmoil. Even before a currency collapse occurs, the damage done by a fiat system is significant. Our monetary system insidiously transfers wealth from the poor and middle class to the privileged rich. Wages never keep up with the profits of Wall Street and the banks, thus sowing the seeds of class discontent. When economic trouble hits, free markets and free trade often are blamed, while the harmful effects of a fiat monetary system are ignored. We deceive ourselves that all is well with the economy, and ignore the fundamental flaws that are a source of growing discontent among those who have not shared in the abundance of recent years. Few understand that our consumption and apparent wealth is dependent on a current account deficit of $800 billion per year. This deficit shows that much of our prosperity is based on borrowing rather than a true increase in production. Statistics show year after year that our productive manufacturing jobs continue to go overseas. This phenomenon is not seen as a consequence of the international fiat monetary system, where the United States government benefits as the issuer of the world's reserve currency. Government officials consistently claim that inflation is in check at barely 2%, but middle class Americans know that their purchasing power – especially when it comes to housing, energy, medical care, and school tuition – is shrinking much faster than 2% each year. Even if prices were held in check, in spite of our monetary inflation, concentrating on CPI distracts from the real issue. We must address the important consequences of Fed manipulation of interest rates. When interests rates are artificially low, below market rates, insidious mal-investment and excessive indebtedness inevitably bring about the economic downturn that everyone dreads. We look at GDP numbers to reassure ourselves that all is well, yet a growing number of Americans still do not enjoy the higher standard of living that monetary inflation brings to the privileged few. Those few have access to the newly created money first, before its value is diluted. For example: Before the breakdown of the Bretton Woods system, CEO income was about 30 times the average worker's pay. Today, it's closer to 500 times. It's hard to explain this simply by market forces and increases in productivity. One Wall Street firm last year gave out bonuses totaling $16.5 billion. There's little evidence that this represents free market capitalism. In 2006 dollars, the minimum wage was $9.50 before the 1971 breakdown of Bretton Woods. Today that dollar is worth $5.15. Congress congratulates itself for raising the minimum wage by mandate, but in reality it has lowered the minimum wage by allowing the Fed to devalue the dollar. We must consider how the growing inequalities created by our monetary system will lead to social discord. GDP purportedly is now growing at 3.5%, and everyone seems pleased. What we fail to understand is how much government entitlement spending contributes to the increase in the GDP. Rebuilding infrastructure destroyed by hurricanes, which simply gets us back to even, is considered part of GDP growth. Wall Street profits and salaries, pumped up by the Fed's increase in money, also contribute to GDP statistical growth. Just buying military weapons that contribute nothing to the well being of our citizens, sending money down a rat hole, contributes to GDP growth! Simple price increases caused by Fed monetary inflation contribute to nominal GDP growth. None of these factors represent any kind of real increases in economic output. So we should not carelessly cite misleading GDP figures which don't truly reflect what is happening in the economy. Bogus GDP figures explain in part why so many people are feeling squeezed despite our supposedly booming economy. But since our fiat dollar system is not going away anytime soon, it would benefit Congress and the American people to bring more transparency to how and why Fed monetary policy functions. For starters, the Federal Reserve should: Begin publishing the M3 statistics again. Let us see the numbers that most accurately reveal how much new money the Fed is pumping into the world economy. Tell us exactly what the President's Working Group on Financial Markets does and why. Explain how interest rates are set. Conservatives profess to support free markets, without wage and price controls. Yet the most important price of all, the price of money as determined by interest rates, is set arbitrarily in secret by the Fed rather than by markets! Why is this policy written in stone? Why is there no congressional input at least? Change legal tender laws to allow constitutional legal tender (commodity money) to compete domestically with the dollar. How can a policy of steadily debasing our currency be defended morally, knowing what harm it causes to those who still believe in saving money and assuming responsibility for themselves in their retirement years? Is it any wonder we are a nation of debtors rather than savers? We need more transparency in how the Federal Reserve carries out monetary policy, and we need it soon."

Give 'Em Hell, Ron!

2/17/2007 10:35:05 PM

words

2/18/2007 12:10:48 AM

i know what he says is important, i just wish i understood more of it. i mean i just found out about the private nature of the federal reserve like a year ago. maybe if fewer celebrities died, the average person would be more interested in our country's monetary policy...

2/18/2007 10:41:01 AM

Quote :

"middle class Americans know that their purchasing power – especially when it comes to housing, energy, medical care, and school tuition – is shrinking much faster than 2% each year."

no, pretty sure that's nothing more than hot air

as is the rest of his rant

2/18/2007 10:55:03 AM

Quote :

" Section 8: The Congress shall have power...To coin money, regulate the value thereof"

http://www.law.cornell.edu/constitution/constitution.articlei.html#section1

Sounds to me like Congress has all the authority it needs to create an agency responsible for regulating the value of our currency.

2/18/2007 11:04:03 AM

Quote :

"maybe if fewer celebrities died, the average person would be more interested in our country's monetary policy..."

Great line!

From the Fed Reserve website:

Quote :

"Today, the Federal Reserve’s duties fall into four general areas: • conducting the nation’s monetary policy by inf luencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates • supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers • maintaining the stability of the financial system and containing systemic risk that may arise in financial markets • providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation’s payments system"

There is controversy over the constitutionality of establishing a central bank, whether it allows the gov't a monopoly over the banking system. Either way, the Congress via the Fed is doing a piss-poor job of carrying out the above stated goals.

I think Paul's main point is that Congress is shirking its constituional responsiblity with our money in regulating the value therof....

It has allowed the Fed to practically destroy the purchase power of the dollar since 1913. It allowed us to go from a strong commodity-based money system(gold & silver) to a fiat one (fed reserve notes) which almost always ends up eventually in hyperinflation.

2/18/2007 11:45:59 AM

All things equal, most of that loss occured in the 60s and 70s, which is unlikely to be repeated in the future.

2/18/2007 12:47:41 PM

Who the fuck is Ron Paul and why should I care?

2/18/2007 12:49:56 PM

congressman from texas

2/18/2007 1:21:22 PM

^^ He's Sean Paul's brother.

2/18/2007 9:54:30 PM

Ron Paul is a small (L) from Texas who is in the US House as an R. He pretty much is one of the only people in congress with enough of a spine to question "his party"

2/18/2007 10:22:11 PM

Quote :

"no, pretty sure that's nothing more than hot air as is the rest of his rant "

http://www.financialsense.com/fsu/editorials/sutton/2007/0216.html
http://www.itulip.com/forums/showthread.php?t=936

[Edited on February 18, 2007 at 10:51 PM. Reason : .]

2/18/2007 10:45:48 PM

Quote :

"...which is unlikely to be repeated in the future."

Doesn't matter, the die is cast. Slow or fast, this country will destroy its currency. Congress is too weak-willed to raise the taxes required for all their spending projects and welfare. Inflating the currency is politically more acceptable.

Inflation will continue to eat away at the value of our money...
As long as the citizens look to gov't to solve all their problems, to supply all their wants and desires.
As long as presidents involve us in costly and open-ended wars.
As long as workers demand full employment.
As long as our fiat system allows the creation of more "money" out of thin air.

2/18/2007 10:46:06 PM

2/19/2007 12:35:03 AM

^
Even your cross holder there William Jennings Bryan wanted money tied to a commodity (gold and silver) and not just fiat.

After the Cross of Gold speech, he did go on to lose the prez. election. But he bounced back by prosecuting Scopes for teaching evolution in Tenn.

2/19/2007 2:41:52 AM

Quote :

"Doesn't matter, the die is cast. Slow or fast, this country will destroy its currency. Congress is too weak-willed to raise the taxes required for all their spending projects and welfare. Inflating the currency is politically more acceptable. Inflation will continue to eat away at the value of our money... As long as the citizens look to gov't to solve all their problems, to supply all their wants and desires. As long as presidents involve us in costly and open-ended wars. As long as workers demand full employment. As long as our fiat system allows the creation of more "money" out of thin air."

Republicans raise taxes indirectly, by printing more money. The Federal Reserve last year stopped providing the public M3, which simply is a measure of all U.S. dollars in existance pretty much. The only person in Congress that harped on Bernanke about it was Ron Paul. I doubt the Fed stopping printing M3 was an accident, it was most likely to keep people from seeing what they were doing.

Here is a private reconstruction of M3. Where the yellow stops is when the Fed stopped publishing data. (For more detail on what M3 really is and represents, go here: http://en.wikipedia.org/wiki/Money_supply ).



Anyone seen the price of gold lately?

[Edited on February 19, 2007 at 8:52 AM. Reason : .]

2/19/2007 8:48:13 AM

BTW: a sizable chunk of the growth of M3 is being shuffled overseas to be used by other nations in international transactions, therefore it is not impacting U.S. domestic inflation. World Trade is exploding, after all, the various actors need reserve currency to participate, so they are using dollars and Euros. If the Federal Reserve was not allowing M3 to rise then the demand for U.S. Dollars from overseas would drain the Domestic supply, producing deflation. Of course, not all of it is going overseas because while a large amount of growth is needed they have exceeded that amount; so domestic inflation is high (only because I think 3% is high) and the trade deficit is larger than it otherwise would be.

Overall, to the best of my understanding of all possible monetary systems, the current Federal Reserve (fiat) System is the most stable. We are able to create money out of thin air when it is useful to do so. The only drawback is a matter of degree: in times of prosperity they should target annual inflation between 0% and 1%, not 2% and 3% like they do now. So, all in all, the current system is great; it allows flexible exchange rates, hinders banking collapses, and provides a relatively stable store of value.

I just wish we could reset it once in awhile so a penny becomes worth as much as today's nickel. But that is impossible, so no point thinking about it.

If people were determined to go back to a commodity backed currency, I would demand any commodity not used by others. If the rest of the world was on gold, I'd pick silver.

2/19/2007 9:13:12 AM

to me that makes even less sense... the commodity would dictate the value of your currency then. whatever it was that you picked would then be at the whim of how much of it you have found. potentially leading to another debeers situation.... or am i wrong on this?

we would also lose the ability to weather and lessen the bumps caused by the bus. cycle.... i know in the past 20 years or so... the fed has done an outstanding job in this respect.

2/19/2007 9:38:05 AM

Quote :

"BTW: a sizable chunk of the growth of M3 is being shuffled overseas to be used by other nations in international transactions, therefore it is not impacting U.S. domestic inflation. World Trade is exploding, after all, the various actors need reserve currency to participate, so they are using dollars and Euros. If the Federal Reserve was not allowing M3 to rise then the demand for U.S. Dollars from overseas would drain the Domestic supply, producing deflation. Of course, not all of it is going overseas because while a large amount of growth is needed they have exceeded that amount; so domestic inflation is high (only because I think 3% is high) and the trade deficit is larger than it otherwise would be."

CPI inflation is something like 2.5%. Real inflation (the basket of goods is set and no substitution allowed, thanks Clinton) I think is around 5%.

Yes, but countries not named China or Japan are buying less and less dollars. The main reason foreign countries need dollars is because in order to buy oil they have to use dollars. However, Iran and Venezuela for example are thinking of stopping accepting dollars for their oil for geopolitical reasons. Then there's Russia who would like to have a weaker USA. So say they stop accepting dollars and start using euros for required medium of exchange. Countries that buy from those oil producers have a lot of dollars they no longer need and will get rid of them and they'll come back here, which will cause inflation.

An economist I read think that what you state (as far as deflation) is incorrect cause the Fed will never allow deflation to happen and would overcompensate (think the Japanese crisis where mass deflation occurred). If you click on the link below, there is a link in the article that shows Bernanke's speech where he says he'll never allow deflation, earning him the nickname Helicopter Ben. His view is that a recession will start in late 2007/early 2008 by disinflation followed by inflation. He calls it the Ka-Poom theory (Ka equals disinflation, Poom equals inflation). Whether you agree with his theory or not, he makes a sound case, and considering that I believe the two parties that run our government to be idiots that look out for their donors over the general populace, that only helps what is stated below IMO. Here is an explanation of it:

http://www.itulip.com/forums/showthread.php?t=428

Quote :

"Mindful that the positive ratio of my successes to failures at economic and market predictions to date may owe more to luck than to rigorous planning and execution, I torture my readers with constant floggings of the key hypothesis, Ka-Poom Theory, which is the framework for these forecasts. Taleb, if he were reading this, is happier to call Ka-Poom a "prophecy." Before the latest flogging begins, a brief definition of terms that are often misused in the seemingly endless debate of post credit bubble "flations"–inflation, deflation and disinflation. Deflation: Negative rate of inflation, e.g., "CPI inflation averaged -1.3% in 2007." Disinflation: Declining rate of inflation, e.g., "CPI inflation declined to 2.1% in Q4 2007 from 2.5% in Q3 2007." Inflation: To an economist, an increase in the general or "all goods" price level resulting from an oversupply of money; to a government statistician, a political football thrown onto the field as producer and consumer price indexes, continuously reformulated and subject to interpretations invented to suit various constituencies over time, such as under-reporting home price inflation via an equivalent rent formula when home prices are rising and rents are falling, in order to hide the fact of a housing bubble that is needed to keep the economy from falling into recession; to the person on the street, rapidly rising prices of non-traded goods and services, especially insurance, education, and health care, resulting from an excess of cheap credit and the inappropriate use of credit to purchase depreciating assets. The "Ka" in Ka-Poom refers to a period of disinflation while the "Poom" refers to a period of rapid inflation. Ka-Poom assumes that the Fed is not kidding when it says it will fight deflation as seriously next time around as the last time it encountered the threat. During the previous "Ka" disinflation, the US economy experienced actual deflation, albeit very brief; CPI averaged -3.3% for the single month of October 2001. You don't see it in Koeing's "Whither the US Economy?" chart below because his chart shows average quarterly inflation, and in the fourth quarter of 2001 CPI inflation was positive–barely. CPI inflation during 2001 averaged a mere 1.6%. Extending the metaphor I used in last week's weekly commentary, "No Deflation! Disinflation followed by lots of inflation" the economic airplane did bounce off the ground very briefly before heading back into the sky. Had the plane not been moving fast enough, because the Fed had not aggressively cut interest rates and fueled the system with enough money, it would have stayed on the ground as happened in Japan in the early 1990s. It took the BoJ and policy makers nearly 15 years to get their economic airplane back in the air. In November 2002, Fed Governor Ben Bernanke, then gunning for the Fed Chairman goat job, made his famous speech on deflation that earned him the nickname "Helicopter Ben" in market bear circles. The speech was intended to supply a context for future Fed's–his–actions. At the time he made it, the deflation scare was already behind us. But the specter of deflation, in light of all the new leveraged asset bubbles forming, in everything from real estate to private equity, was certainly going to be on the bond market's collective mind in the future. The Fed's public talk of deflation in the context of any specific financial markets crisis that threatens to spill over into the so-called "real economy," such as the collapse of the stock market bubble in 2000, is intended to explain to the bond market why the Fed is about to dramatically drop interest rates and open the floodgates. If the Fed did so without first talking about deflation, the bond market is left to wonder whether the Fed has some other intention besides economic rescue, or, conversely, is not on top of the problem. In the context of a market "event," the bond market must believe that inflation is falling and in danger of declining into negative territory, so that bond traders accept higher bond prices and allow long term interest rates to fall in line behind the Fed as it cuts rates, else a deflation may become self-fulfilling."

[Edited on February 19, 2007 at 10:29 AM. Reason : .]

2/19/2007 10:25:10 AM

Quote :

"a sizable chunk of the growth of M3 is being shuffled overseas "

Bottom line: More money printed means less value to it.

Quote :

"hinders banking collapses"

It didn't hinder the Great Depression from happening less than 20 years after the creation of the Fed.

Quote :

"provides a relatively stable store of value. "

What?? The dollar has about 4 cents the buying power of the 1913 dollar. What's stable about that?

The thing that is speeding up the destruction of our fiat currency is this runaway spending by the gov't without a corresponding raise in taxes. We want our cake and eat it too.

2/19/2007 10:32:08 AM

Quote :

"#1 As long as the citizens look to gov't to solve all their problems, to supply all their wants and desires."

hyperbole much?

Quote :

"#3 As long as workers demand full employment."

you do realize that point 3 leads back to point 1 right? or is homelessness and starvation a good thing?

[Edited on February 19, 2007 at 12:47 PM. Reason : ommitted points 2 and 4]

2/19/2007 12:47:28 PM

Quote :

"The main reason foreign countries need dollars is because in order to buy oil they have to use dollars."

Uh, I don't know where you got such an idea. The trade of oil is a tiny fraction of the total of international trade. Most of the world's manufacturers will accept dollars or Euros in exchange for their machinery, cars, ships, food, or consumer goods whether they are located in China, Argentina, South Africa, Mexico, Japan, or North Carolina. This is because dollars are very fungible.

Think about it: if I am in South Africa and want to buy machinery from Argentina, getting someone to do a direct exchange from my Rands to the Pesos I need to pay is complicated, if not difficult. However, it is easy to make the exchange into dollars or Euros. As a result, to make it easier for their customers, most companies will accept dollars or Euros as payment. Then, since everyone accepts dollars they can pay their suppliers in dollars. In this fashion, companies can avoid exchange charges until it comes time to pay salaries or claim profits.

Quote :

"Bottom line: More money printed means less value to it."

Less value than their otherwise would have been. If the fed was only inflating the money supply 6% right now we might still be seeing deflation of 1% or so.

2/19/2007 3:36:12 PM

Quote :

"hyperbole much?"

OK ... Give me a couple examples of problems today where gov't wasn't looked to for a solution.

2/19/2007 11:19:18 PM

As Gorbachev famously said, "Imagine a country that flies into space, launches Sputniks, creates such a defense system, and it can't resolve the problem of women's pantyhose."

2/20/2007 7:34:23 AM