The Great Recession began in 2007. It didn’t take long for the
money managers to recognize its severity, and that a little tinkering with
interest rates would not suffice in dealing with the economic downturn. In Dec.
2008, the first of four Quantitative Easing programs began which did not end
until Dec. 18, 2013. Some very serious consequences of this policy of
unprecedented credit creation have set the stage for a major monetary reform of
the fiat dollar system. The dollar’s status as the reserve currency of the
world will continue to be undermined. This is not a minor matter. As our
financial system unravels, the seriousness of it will become evident to all, as
the need to pay for our extravagance becomes obvious. This will make the
country much poorer, though the elite class that manages such affairs will
suffer the least.
By the time the QE’s ended,
the Central banks of the world had increased their balance sheet by $8.3
trillion, with only $2.1 trillion worth of GDP growth to show for it. This left
$6.2 trillion of excess liquidity in the banking system that did not go where
the economic planners had hoped. Central banks now own $9.7 trillion of
negative interest yielding bonds. The financial system has been left with a
bubble mania, financed by artificial credit and unsustainable debt. The
national debt in 2007 was $8.9 trillion; today it’s $20.5 trillion. Rising
interest rates will come and that will be deadly for the economy and the
Federal budget.
This inflationary policy is
generated by the belief that there is no benefit in allowing the needed
economic correction to the problems generated by the Fed to occur. The
correction is what the market requires, not the resumption and acceleration of
the dangerous inflationary policy that caused the bubble economy. It’s like
giving a case of beer to an alcoholic to calm his nerves as he attempts to stop
drinking. It should not surprise anyone that perpetuating a problem won’t solve
the problem.
The obsession with a QE
monetary policy has created a bubble economy of enormous size which one day
will burst. The warning signs are everywhere, yet ignored. Political demands
control policy; not common sense or sound economics. All major decisions are
bipartisan and guarantee a continuation of current spending, taxing,
inflationism, welfarism, and warfarism until the giant bubble bursts.
All recessions since the
Great Depression were essentially caused by the Fed’s mismanagement of monetary
policy and subsequently resolved by it with renewed vigor in monetary mischief
by rigging interest rates and the money supply. This off and on process
temporarily aided the economy, but structural defects multiplied. Debt
accumulation, mal-investments, unfunded liabilities, welfare benefits,
militarism, constant wars, uncontrolled government growth, and systematic
attacks on our liberties, have continued unabated.
The people sense that a major
crisis is fast approaching. Today’s Super Bubble economy, promulgated by the
QE’s, must resolve itself. A continued program of spending and inflation, while
financing even bigger government, will only exacerbate the social chaos that
has already started. That is to be expected in a bankrupt nation. And the US is
bankrupt! Eventually our dollar and credit will weaken, prohibiting us from
living off others or our future generations.
Social conflict will add to
the financial difficulties caused by the QE dangerous experiment. Trillions of
new dollars created in the last decade is unprecedented and the full
consequence of this policy is yet to be discounted. My concern is that it will
be much more serious than most expect and few will be prepared to offer a
solution — other than to demand more government even if it’s at the expense of
liberty, peace, and prosperity.
Prosperity, built on debt,
inflation, and false government promises, is illusionary and can disappear
quickly. It will be necessary that the people learn, or relearn, that debt is
not wealth, paper is not money, free stuff is not justice, war is not peace,
and government coercion is not liberty. Signs of social chaos are readily
apparent and are a predictable consequence of the economic distortions created
by the excesses of the QE bubble.
Inequitable wealth
distribution becomes a problem in an economy regulated by Federal Reserve
mismanagement. The wealthy do get wealthier and the poor do get poorer when a
currency is debased, with the middle class suffering the most. The ability of
the special interests to influence legislation to benefit from the distribution
of newly created money, is legendary. Think: “military industrial complex,”
“free welfare benefits,” “bank bailouts,” and early access to an inflated
currency. All these items play a significant role in the accelerating disparity
of wealth distribution between the top 10 percent and rest of the people. These
problems will worsen and fuel social conflicts and anger.
The inequity, not being fully
understood, causes those who feel cheated to become angry and to start thinking
about the false promises of the Socialists. This, along with the large number
of economic Marxists who have inundated our government-run colleges, presents a
problem that feeds into the anger. It doesn’t take a lot of searching to
witness the anger in action on the campuses, as expressed by both students and
faculties.
This conflict encourages envy
and greed to flourish and justified with a sense of moral indignation. The
greater the chaos, the easier it is for the Marxists to join in the fray and promote
hate and destruction of cultural and traditional norms. It’s essential that the
economic distortions, that arrived with the QE’s, as part of Keynesian economic
planning, will need corrected to restore long- term economic growth. The full
cost of decades of deficit spending must be paid for one way or another.
The problem of economic
ignorance and misplaced good intentions will need to be addressed in order to
steer a course that rejects the notion that unlimited government spending can
be financed by the dangerous QE type of monetary inflation. This, sadly, will
not be considered until the super bubble bursts and it becomes evident that the
correction that has been avoided so far has become a necessity.
It is my opinion that the QE
bubble is bigger than the Housing Bubble and the Dot Com Bubble combined. It is
no easy task to correct for all the mal-investments and excessive debt and
provide for all the unfunded liabilities. In the process of paying the piper,
the country is destined to become much poorer, especially since a miraculous
increase in productivity is unlikely in spite of the hoped-for benefits from
the recently passed tax law. Economic, psychological and political pressure
will prevent the changes in policy needed to deal with the huge complicated
mess that the QE’s have generated. What we are experiencing is the climactic
end of gigantic experiment with a fiat currency inflation, the size of which
was never tried before.
The Fed has followed a
deliberate policy of monetary debasement from the time it was sanctioned in
1913. Though there was a steady erosion of the dollar’s value throughout the
20th Century, a link to gold was maintained until the closing of the gold
window by Nixon in 1971. A total fiat currency – the dollar – was unleashed on
the world with this event, and the US became the biggest beneficiary by
assuming the role of managing the world reserve currency. For decades this well
served America’s interests since it was equivalent to the world permitting us
to create as much “gold” as we wanted. The system was totally fraudulent since
it was imaginary money and we owned the printing press. Why should anyone be
surprised at the results of what excessive money creation has caused? Printing
fiat currency and expanding the money supply has nothing to do with creating
wealth. This process is more likely to destroy wealth than create it. The QE
programs have undermined sound economic policy and will continue to do so as
the consequences of the massive monetary expansion become more evident with the
bursting of the bubble economy.
Instead of allowing the
correction to run its course, the economic planners continue to pursue the goal
of invigorating a failed experiment. Keynesianism created the monster crisis
that we’re facing and yet the platitudes pushed by both political parties fail
to address the subject of huge deficits and massive spending. This process
can’t be stopped as long as the politicians and the special interests
persistently and strongly oppose restricting the current role of our government.
A compliant citizenry that fails to grasp the importance of liberty and instead
accepts dependency on government as a substitute for self-reliance, guarantees
that the bursting of the QE Bubble will generate a much more serious crisis
than it need be.
What’s involved in the
bubble? Plenty! Almost everything to some degree. It is difficult for an
economy to operate smoothly without a sound currency to measure value when
goods and services are transferred from one entity to another. A definable medium
of exchange is crucial to facilitate the market. Ever since direct bartering
was phased-out more than three thousand years ago, the choice of the
marketplace for money has been something tangible. As the understanding of the
nature of money developed, the items used for money were easily recognizable,
devisable, long lasting, and definable. Early on, governments challenged the
market choices, especially when gold and silver were chosen, and replaced them
with a government monopoly control over the currency. The contest between the
market’s desire for honest money and the government’s desire to solidify power
by usurping the authority to debase the currency started early on and continues
to this day.
Government’s monopoly over
the creation of money is equivalent to counterfeiting and resulted from the
fact that the people never liked to pay taxes for unnecessary wars and to
provide benefits to the politicians and their friends. Though beneficial to the
powerful few, the abuse and the inequitable distribution of wealth that
resulted would inexorably stir anger and rebellion within the people, who
demanded changes to the system.
It is true that nothing ever
changes under the sun or with human nature. We today are approaching a
political and economic crisis of enormous proportion as a consequence of this
age-old phenomenon of abuse from a government financed by a modern-day monetary
destruction of the economy with the QE’s dangerous experiment. It is more than
a minor correction that is needed to deal with the huge excesses that today
exists world-wide.
Many of the central planners
in charge reassure us that the concern for a dangerous bubble existing is
completely unfounded since the CPI is barely rising. Two points: 1) The CPI is
rising faster than they will admit and 2) The CPI is not the tell-tale sign of
a serious bubble forming. Many other bubbles and dislocations can exist as a
consequence of creating trillions of dollars out of thin air. And there are
quite a few:
The housing bubble is back
along with subprime loans.
There’s an auto financing
bubble encouraged by subprime loans for many customers.
The stock market is in a
bubble waiting to be pricked.
The bond market is in a huge
bubble as a result low or negative interest rates.
Wall Street has inflated expectations
that America is quickly being “Made great again.”
Exaggerated trust exists in
the dollar maintaining its reserve status for the foreseeable future.
The unwinding of the Fed’s
balance sheet and a move toward market rates of interest is a long way off.
Deficit financing for the
Military Industrial Complex will not be challenged before the QE bubble bursts.
Saving for a rainy day or to
make a future purchase is not considered sound policy. Unlimited borrowing is.
Credit card debt is in a
bubble.
Student loan debt is in a
bubble.
Transfer payments to the
dependent poor will never be cut. Instead, when the big bubble bursts these
payments will skyrocket since the process will generate more poor.
The medical care spending
bubble has created a huge mess with misallocation of resources, runaway cost,
and poor care. Corporate medicine must end and be replaced by a free market.
Cultural Marxism’s influence
on American college campuses is a dangerous “bubble.”
The dollar is in a bubble.
The unpayable pension
systems: federal, state, county, city, involves trillions of dollars.
The unpayable debt bubble can
only be held together by accelerating inflation and the liquidation of debt by
currency debasement. This is a very dangerous economic and political solution
that seems inevitable. The problem describes what happens to a bankrupt country
refusing to live within its means. Instead of being reassured that things are
going well because Wall Street is booming, it should be a warning sign that
danger lies ahead and reveals the growing imbalance between rich and poor.
The bubble mentality of
neocon war-mongering needs to end. The sooner the better. Sadly, it will only
end after the dollar-driven bubble economy collapses. The foreign policy of
militant interventionism needs to be extinguished. It’s a major source of debt
and lost credibility for us, both of which undermines dollar hegemony. The
bursting of the dollar bubble will not be a minor event. The adjustments
required to restore economic prosperity and preserve liberty will be a major
challenge to all freedom loving Americans.
The excesses of an economy
based on debt, inflation, central planning, constant war, the military
industrial complex, and crony capitalism, all contribute to a growing disparity
of wealth between rich and poor. This type of command system is self-limited
but eventually always fails. Though it takes a lot to kill a once robust
economy, our political leaders have managed to set the stage for a major
crisis, brought on by QE’s attempt to rescue it from the coming bankruptcy.
The problems we face today
did not appear overnight. It took many decades to create the conditions of
bankruptcy and the beginning of the end for the dollar as the world’s reserve
currency. There have been many warning signs, dating all the way back to the
origination of the Federal Reserve in 1913, and with the subsequent growth of
central banking world-wide. The Bretton Woods Agreement in 1944 established the
dollar as the reserve currency of the world with a watered-down version of the
gold standard, and was destined to fail as it did in 1971. Noted free market
economist, Henry Hazlitt, at the time of its inception, predicted that it would
fail due to inflationary policies that the Fed would not be able to resist.
Throughout the 20th Century,
the Fed created many recessions and depressions that were papered over with
accelerating inflation and government deficit spending. It worked to some
degree on the short run, but postponed the required payment for another day.
Unfortunately that day has arrived, and the flawed policy of delaying the
payment needed to keep the economy churning, is no longer working.
The replacement of the
Bretton Woods arrangement with the fiat dollar standard in 1971 continued to
benefit the US by it maintaining control over the world reserve currency. This
arrangement permitted us to “export” our inflated dollars and buy cheap
imported goods from overseas. This led to a structural imbalance in foreign
trade with a hefty short-term benefit to us at the expense of a huge foreign
debt. When the magnitude of this problem hit in 2007, the QE program of massive
credit creation was initiated, which only compounded the problems already
generated by zero and negative interest rates, along with astronomical
budgetary deficits. More drugs for the addicted never solves their problem.
The search is now on for a
solution to our financial time bomb, a foreign policy presenting great danger
to the world, and the systematic attack on our liberties here at home. We’re
beyond the point where more lies and deception will calm the anger. The wealth
available for bribing the masses is quickly dwindling as the demands and
expectations grow. The dollar is destined to go down in value, as it has been
doing since 1971. We are getting weaker and poorer and other world governments
are getting stronger and richer. The dollar this past year lost more than 10
percent.
There’s a lot of built-up
resentment toward America for the privileged financial position that it has
enjoyed for decades, while it flaunted its “exceptionalism,” backed by a
militant foreign policy. This arrangement is ending and the process will not go
smoothly. Though the consequences of QE are all around us, there’s little else
the planners will consider. A repeat of this failed effort will be tried again-with
worse results. Cutting spending, reining in the Fed, and strictly limiting the
role of government, can only be achieved in the distant future after the
current crony-capitalism and welfare state self-destructs. Preparing for that
day is the job for all who desire to live in a free society. If current
authoritarian policies are left unchecked, our economic conditions will
deteriorate and true freedom will only be a memory.
There’s a growing number of
people becoming aware of the significance of the Fed’s disastrous monetary
policy and the utter silliness of QE. Since few people expect the privileged
class to promote sound money, many outside of government are seeking a system
of money that protects wealth rather than destroys it.
Historically, money originated
in the marketplace as a tangible asset. The choice for thousands of years has
been the precious metals, especially gold. Governments, notoriously, have taken
over monopoly control of the monetary systems and used them to benefit the
government over the people. Because of the abuse of the currency over the
centuries, a return to gold was frequently needed to restore order and
confidence in the money. For this reason, I have been a champion of competing
currencies to allow the people to make the choice about the monetary unit, as
long as no fraud was involved. A government-designed currency should also be
free of fraud. This means no fiat currency and no legal tender laws. A tangible
currency developed in the market, such as gold or silver, should not be subject
to sales or capital gains taxes.
The race is now on to find an
alternative to our current dollar system in order to escape from the Federal
Reserve run banking system. Crypto-currencies have been offered as an
alternative with much vigor. By Jan. 3, 2018 their total capitalization was
more than $700 billion with 97 percent of that achieved in less than a year. It
has been declared a “mania” by many. This type of price appreciation would not
have occurred without the funds the QE’s generated by the Federal Reserve. The
money managers have been in a quandary for the past 10 years because the
inflated money supply and the very low interest rates did not generate the
economic growth they wished for. Now it’s going into numerous bubbles like
stocks, bonds, housing, student debt, and crypto-currencies. My view is that
the entire economy is a huge bubble with sovereign debt being the most
dangerous.
Though currently, there is a
lackadaisical interest in gold compared to crypto-currencies, I believe gold is
in the early stage of the third major bull market since 1971, which started two
years ago when gold was $1050/oz. If history is of any benefit, gold will be
used in the coming monetary reform, whether it’s accomplished by the government
or the market. But if the choice of a monetary unit turns out not related to
something tangible, it will prove to be a first in history. Just because our
current money is now a total fiat dollar, it can’t be used to justify a market
developed fiat currency. We must remember that the dollar was originally
defined as a weight of silver or gold. The destructive nature of the monetary
event of Aug. 15, 1971 was a consequence of our government refusing to maintain
the dollar’s relationship to something tangible, thus making it a fiat
currency. This explains why we’re in such a mess. A fiat currency developed in
the market, won’t solve the current financial crisis the world faces.
A sound currency must have a
fixed definition of a tangible item. Its value must be determined by free
market pricing in exchange for goods and services. Bi-metallism, by fixing an
ounce of gold to a certain number of ounces of silver was unworkable. Fixing
the definition of the monetary unit is similar to fixing the exact length of a
“yard or meter.” The “yard” can be used to measure any item you want and it’s
crucial in all construction. Likewise, a currency with a fixed definition of a
tangible item will facilitate all market transactions. A fiat currency without
a precise definition by its very nature will fluctuate wildly and interfere
with all economic calculations. This is why all fiat currencies are destructive
and end badly. The dollar since 1971 has been a fiat currency and the mischief
it has caused has been especially harmful and broad since it has served as the
world reserve currency. The importance of this is evident when the US
government is willing to exert military force against those who threaten to
abandon the dollar in world trade.
All paper or fiat money
self-destructs and has limited lifespans. Gold currencies last until
governments debase them into a fiat currency. The fiat dollar today, for many
nefarious reasons, is constantly being destroyed by counterfeiters posing as
politicians and central bankers. The day is fast approaching when the fiat
dollar standard will need a major overhaul. The age of “Quantitative Easing” is
ending.
SUMMATION
The trillions of dollars
created by the QE program have not restored soundness to the economy. QE did
not address the problems caused by a central bank manipulating interest rates,
determining the money supply, continuing to monetize government debt, pursuing
central planning, and depending on a very unstable fiat currency. Only true
monetary reform can address these problems.
The economic and political
clout that a central bank has in managing a fiat currency system is enormous.
Without the government’s ability to create money out of thin air, the cost of
financing needless wars and the welfare state would be prohibitive. This
arrangement guarantees excessive government and a systematic abuse of liberty.
The people lose; the special interests always win.
We’re at the point where
another QE inflationary binge will not tide us over in the next economic
downturn. We’re fast approaching the time when true monetary reform will be
required to deal with the “sin” of living beyond our means. If that is not
done, expect a long period of economic chaos, inner city violence, and
political warfare.
Sometimes I’m asked why do I
have to be so pessimistic. Actually, many more see me as being optimistic.
Optimism comes with a willingness to acknowledge the truth and deal with it in
a positive manner with policies that make sense. Accepting bad ideas that
purport to provide unlimited free benefits to everyone, is a deception that
ends in disappointment. Instead of helping the poor, welfare serves the
interest of the wealthy and the bureaucrats. Refusing to change policy will
only extend the bad consequences that come from the Federal Reserve’s atrocious
mismanagement of monetary policy.
In medicine a correct
diagnosis of a serious illness can be very depressing, but knowing that
treatment is available is uplifting. Remaining in denial of a problem’s
severity is a dangerous option. Knowledge and truth lead to optimism. In
politics and economics, the only decision to be made is to decide whether or
not the goal of peace and prosperity can be best achieved by more intrusive
government or by promoting personal liberty.
If peace and prosperity are
the goal, and flawed policies are identified, an understanding of what needs to
be done should be greeted with applause. Fortunately the answers are not
complex, and when discovered most agree that they are based on common sense.
The philosophy of liberty is
based on the moral principle of non-aggression being applied to all individuals
and governments. If individuals can’t steal or cheat, neither should the
government. If individuals can’t harm or kill, neither should the government.
Unfortunately, throughout
history it’s been government that has committed the greatest crimes of
aggression against humanity. A modest beginning for us would be to rein in
government initiated violence by rejecting the Federal Reserve’s authority to
finance wars of aggression overseas and the welfare state at home.
The political chaos, as
reflected by the mess in Washington, is an expected consequence of the last 100
years of our drift away from a limited government philosophy. There is now a
growing interest in the cause of liberty as it becomes evident that the current
system is financially and morally bankrupt. The intellectual groundwork has
been laid for a free society, and with the disintegration of the current system
there is room for hope that truth “will out” and a better world for peace and
prosperity will be available to us.
Dr. Ron
Paul is a former member of Congress and Distinguished Counselor to the Mises
Institute.
Copyright © 2018 Ron Paul
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