Wednesday, December 4, 2013

Ron Paul: No Substitute for Sound Money

The sad thing is that sane people like Ron Paul are literally a dying breed.  Ron Paul, although a physician by training, is just about the only person in this country who is economically literate enough to speak with authority about sound money, the dangers of money printing, and the gold standard.  Only someone of Ron Paul's age remembers first hand the relative stability of the gold standard---ultimately abandoned entirely in 1971 when the Bretton Woods accord was abandoned.  The subsequent 40 years is a story of inflation and economic instability.   

Now, we've entered the next-to-final stage of this race to debase our currency by setting the money printing presses into high speed.  The final stage is the acceleration of money printing to "ludicrous speed."   As a result of money printing, our financial system and economy is set to become even more unstable. 

One day, after the current monetary insanity finally ends in a smoldering heap, and it will eventually, people will once again look to the "best imperfect monetary system" of them all:  gold backed money.

Here's some myths about paper money versus sound, gold-backed money from a Ron Paul article at the Daily Reckoning and partially re-printed in ZeroHedge:

Myth #1: Paper Money is Wealth 
"The proponents of big government [Liberals] 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.  [have you noticed that liberals are deceptive about everything these days?]

Wealth comes from production. There’s no other way to create it.  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 steals real wealth from those who hold dollars or have loaned them to someone.  The ultimate inflation steals purchasing power from everyone---especially those with no inflation hedges.

From Ludwig Von Mises (1929):  "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."

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."

Myth #2: Growth of Paper Money Is Required for Economic Growth
"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 mal-investment 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 has 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."

Myth #3: Easy (Paper) Money Lowers Interest Rates
Our current orthodoxy is that the Federal Reserve is "saving the day" by it's money printing and it's forcing interest rates lower.  It's been true for several years, but this only works for a finite amount of time.  From Ron Paul:

"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. [Worse, the people who first receive the newly created money benefit---bankers and financiers--benefit from this largesse and of course get the inflation "signal" well ahead of ordinary citizens. They 'hedge' and even benefit against general inflation. Money printing is creating wealth inequality and is unfair!!]

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.

Money printing ultimately results in higher interest rates, not lower." [Just ask the people of Argentina and Venezuela if they are better off now that inflation rates are 50% per annum.]

Myth #4:  There is Not Enough Gold to Establish the Gold Standard
"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.

Although the gold supply under a gold standard would in all probability increase at the rate of 2 to 3 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."

Myth #5:  Falling Prices (Deflation) Are Bad
Falling prices are a good thing.  Notice that we're talking about falling prices after a government-caused economic depressions or panic.  Falling prices after a Fed-induced bubble/bust is NOT a good thing.  Remember that the monetary authorities, the Federal Reserve, CAUSED the bubble(s) in the first place.

Falling prices due to a finite money supply is a good thing.  Don't you want prices to drop??  Isn't it great that flat screen TVs are falling in price?  Don't you want medical costs to decline?   Aren't you glad when computer prices decline?  Isn't it a good thing that lower home prices make them affordable for subsequent generations?  The inflationistas will argue that wages will eventually"catch up." Yeah, but not everyone's wages catch up.  What if you're retired and wiped out?

Steady or slowly declining prices, cause interest rates to decline too.  In that environment, holding cash, even with a zero interest rate, pays you. That's a good thing.  Not like today when holding cash in your bank account causes you a loss of purchasing power.   The Federal Reserve's brainiacs are targeting 2% inflation with Zero interest rates; meaning the balances in your checking account and CDs lose 2% per annum.  The government is literally stealing from you to prop up the banks and the top 0.1%.  How fair is that?  I see the misery worsening too.

No comments: