The Federal Reserve has subjected us to a constant economic roller-coaster ride. By artificially suppressing interest rates, they create illusory economic booms. Those illusions must always be shattered by an accompanying crisis and bust. Lives are destroyed, families are ruined, and the economy lies in shambles. The widespread suffering is totally unnecessary. Ron Paul leads the way on today’s edition of Myth-Busters!
Ron Paul: Hello everybody and thank you for tuning in to the Liberty Report. Today we do the program Myth Busters and the co-host is Chris Rossini and Chris is also the editor of the ronpaullibertyreport.com. Chris, good to have you with us today, what is the subject going to be about?
Chris Rossini: Good morning Dr. Paul, glad to be with you again. Today we are going to cover the Federal Reserve. To start, they have been around for little over a hundred years and they have given us one economic crisis after another in those hundred years and they got started right away with the lead-up to the Great Depression with the stock market bubble that they created, but that is long gone and we, the people that are alive today have experienced different economic booms and busts created by the Fed.
Most recently with the stock market bubble, where dot-coms were created that should never have been created, the housing bubble where houses and shopping centers and developments that never should have been created were and people were buying houses that had no business buying a house and even more recently with the oil boom and bust that we’ve seen and you’ve had a first-hand look at it down in Texas, so please give us a synopsis on how the Fed keeps creating these false illusionary economic booms.
Ron Paul: They’ve been around for a long time, as a matter of fact they have been known throughout all history, but they have been worse in the last hundred years and especially in the last 40 years since we don’t have any connection with gold since 1971, so there is more booms and more busts, more malinvestment, more debt and more mistakes ever and this will continue as long as we have central banking, especially at its worst and that is what we have today. We do have some advantage as the issuing of the reserve currency of the world, some advantages which a lot of people don’t understand and realize, but the long-term disadvantages are so overwhelming to everybody involved, even those who benefit on the short run.
But, there certainly is the boom period of the cycle. As a matter of fact in free markets there are cycles, but they modulate softly, supply and demand, this encourages people to produce and prices go down and they might cut back, but that is self-adjusting and it has to do more with a particular commodity and less to do if not at all, if you have a sound currency that is not gyrating.
But, the real danger that we see in booms and busts and hurting a lot of people, that comes from a central bank and the key to that problem is the fact that central banks have come along not originally when the Federal Reserve was started, but certainly in the last 40 years, they have become more arrogant and believing and convinced that they know what interest rates ought to be, they know what the precise amount of money supply there has to be and because on the short run it can seem to stimulate and help some people, on the long run it causes a lot of mistakes and that of course is when the boom ends, but you can’t create a boom and you already mentioned Chris, the fact that we had a boom in NASDAQ’s stocks, looks like it is going to happen again.
Right now there is a boom in bonds and that is going to end badly. We had a housing boom and that isn’t just the supply and demand alterations they come in a natural market, these are extreme where things go way up and they way down and then there is a lot of people who suffer and that of course is where the unfair part comes in.
But, in the boom cycle there is a lot of malinvestment, the money goes to the wrong places for the wrong reasons, it is responsible for creating debt and it creates these bubbles.
When it comes to oil it is interesting that most people think it’s only a supply and demand of oil and that is the whole thing. That is important, but if oil prices are boosted because the inflation of the money supply pushes prices up in some areas, all prices don’t go up evenly. If you increase the money supply by 10% a year and all prices and wages went up 10%, it wouldn’t be a problem, but they can’t predict and this is what is driving the Fed nuts, because they are printing money like crazy and this so-called boom that they are trying to re-create, but the money doesn’t go where they want it to go and sometimes it will go into stocks or bonds or whatever or houses.
But, right now we are witnessing the results of the excess of money supply pushing the prices of oil up too high over 100 dollars, 140 dollars, it’s been very, very high, tremendous incentive to look for more oil, there must be an oil shortage according to what the economic factors are telling us, so people get into the business of increasing the supply. They think it’s the end of crude oil, we are not going to have enough, so therefore we have to have alternative sources and then they go into fracking. They make decisions on the fact that prices are artificially high and they base everything on the high price of oil.
But, then there is a second step that the Fed gets involved in, because people come along and the technology is there and somebody figured out how you can get oil out of shale, which is pretty amazing to me, the technology, and there is a lot of oil and a lot of gas and you use this fracking process, but there is no market decision made here. If it were a market decision you’d go by how much money is being saved, it’s the money in the savings account and people are looking for that and then is there a need for more energy and that the price of oil is not artificial, which wasn’t the case, but all of a sudden they get all this money for investing in fracking and lo and behold the supply of oil instead of being seem to be short and the price is too high, the supply is too much and the prices crash.
Then, there is an unwinding of this because debt is pyramid in the boom phases, it’s pyramided because you have fractional reserve banking and it has to unwind. It goes in the opposite direction when you have a fractional reserve you build and build and it looks like everything is going just great, until people go bankrupt and they start peeling this off and declaring they want their money back and people want their money out of the banks and to go someplace else and then that causes the crash. That is the major reason why we have this oil problem. Houston has been hit, Texas has been hit, I don’t think it’s unwound yet at all and eventually it will be, but specifically it has hit energy right now and very few people think it’s not the Fed’s fault on this, there are other factors too, no doubt.
But, I think the Fed, it couldn’t have happened, the boom couldn’t have been so great if you wouldn’t have had the Fed artificially pushing prices of oil up and artificially giving credit to the people who wanted to speculate and go and find alternative sources of energy. Booms on the short run look great, but when the bust comes it is not so good.
Chris Rossini: Yes, that is for sure and we will talk about that next. We have just discussed how the Fed creates the boom, but all artificial economic conditions must come to an end, all illusions must eventually be shattered and that is when the crisis occurs. During the dot-com boom, all those companies that weren’t making profits or even revenues for that matter, they folded immediately. During the “housing crisis”, that is when we are left with all those foreclosures and empty shopping centers littered throughout the country no, they are just sitting there.
Also, it takes a personal effect on people with broken lives, divorces and even some people commit suicide, it gets so bad. So, Dr. Paul, let’s discuss the bust cycle and even down in Texas, you now get to see the other side of the coin with the oil rigs closing, so let’s go over that next.
Ron Paul: Yeah, it does hurt a lot of innocent people, the laborers who looked like they were going to have a good job and the businesspeople who honestly invested because they thought the economic conditions and the economic signals were correct, they all suffer, there is going to be a lot of people who lose their money and lose their investment, a lot of people are going to lose their jobs and then there is one thing that people don’t look at, you look at maybe the people who are drilling for oil or doing the fracking, but there are many others, the service industries, they grow up around the oil and the development, the people who make the pipe and all the other services that have to be used to produce oil.
When you have the boom, there is an economic law that comes in and says that there is a limit to the boom, there is a limit because the boom at stage increases malinvestment, too much investment going to the wrong place, too much debt and then it requires a correction.
Early on, even when we had the Fed, this occurred rather quickly, there was a lot of malinvestment and spending during the World War I and so there was inflation of the money supply, inflation of prices and it required a correction. Back then, they didn’t have a Federal Reserve that was so involved in manipulating the economy at all stages, so they just kept hands off and there was a depression, a depression in 1921 the corrections were made.
But, something happened, especially since 1971 and in particular in this century, the last 15-16 years, it’s that nobody wanted to have the corrections, because eventually it became politically unpopular, because it would increase unemployment and there would be pain for it and people didn’t like this. So, what we did, we ended up with the Fed and unfortunately somebody that knows about the free market and even the gold standard, Alan Greenspan, he was determined that he could keep this thing from going down. He was well known, even by some of the Keynesian economists, they wanted to blame somebody, it is all Greenspan’s fault, he kept interest rates too low too long, hoping that there would never have to be a correction. But, then the people who took over for Greenspan, even up until this day, they all would do anything to keep it from the correction.
If the interest rates went up 1 percent, the cost to governments and everybody else is trillions of dollars, so it is unsustainable, that is why they will continue to do this, until the market forces are so great that the bust will occur anyway. We should stay out of the problems, but if there is the inflation and there is a bust, the only way you can get real economic growth again is the liquidation of debt.
Individuals who get in over their head, they speculate, they start a new business, it is not going well and they can’t make their payments, they are not going to do well until they get rid of that debt, if they are required to pay that debt, so they either have to work their way out of it, they have to go into bankruptcy, there has to be a liquidation, then there can be economic growth, but if you are sitting there with all your earnings going in, not even paying the interest, but if there is not interest on loans people don’t worry about that so much.
But, what if they just have to pay some principle and they can’t do it and then that closes things down and there has to be a correction and this is where we have gone wrong in these last several decades, we do not allow the correction to occur and that is so necessary, so we know where the boom comes from and unfortunately the bust is the market trying to say you have to make these corrections, but we have these sophisticated, well-educated, fancy university people who come along and say we can take care of this.
One time I was talking to one of the Federal Reserve Board Chairmen and the subject of savings came up, because savings are really important to help determine the real interest rates. I said there are no savings, at this particular time it was down to one and two percent, people are saving nothing, but he argued with me and this was before the housing bubble burst and he says no, they have savings, just look, they bought this house for 100,000 and it’s worth 150,000 dollars, so they have 50,000 dollars of savings and I said, I don’t think that is exactly the same and of course a few years later all that vanished, because it was fiction and yet, they are not willing to admit to that.
There is a powerful special interest group that demands this and they become dependent on it, whether it is the government people or the politicians, the big banks, the military industrial complex, the welfare state, so this is why I am not expecting the Fed all of a sudden to try to correct these policies because the price would be so high. But, there is only one thing worse than facing up to the reality of that and that is continue to do what we have now and let the market take care of that.
That is a serious problem, like today we had a GDP figure come out and it’s devastating. There is essentially no growth and the dollar went down over one percent over one day. What if that becomes a habit? That’s huge. And, of course, gold responded to this.
No, it is a bad system and we have to admit that there is no magic, you can’t create wealth out of thin air by creating money. Monetary units have nothing to do with wealth. Only hard work, savings and production is what produces wealth and not the Federal Reserve. The Federal Reserve is in the business of destroying wealth and transferring wealth and at the meantime where some people benefit from it and other people suffer.
Chris Rossini: Yes and let’s finish up on a positive note on how to get out of this roller coaster that the Fed has subjected us to and all the pain that comes with all their booms and busts. It is totally unnecessary, we really don’t have to live this way. However, as long as the Fed exists we do have to live this way, we have to go through the cycles.
So, let’s talk about real free market economics, sound money, what life would look like and should look like with market interest rates and how that would lead to genuine prosperity.
Ron Paul: Yes, we mentioned how we get into the trouble with the boom and excessive money creation, low interest rates and we talked about the bust and what has to come and what should allow that to happens and we certainly are realizing this and under these conditions you could do it theoretically, let the bankruptcies role, politically I don’t believe that is going to happen, but it would be much better to prevent this and just as in foreign policy I think of all the things that we do we dig a hole for ourselves being involved in so many places around the world that we don’t know what the final policy is supposed to be, when do we leave, when can we come home.
That is the way it is in economics, we get so involved we don’t know how to come back, but we should realize that prevention would be very, very helpful and that of course would be free market. Governments, when they were in the money business and they always seem to be in the money business, but when capitalism and free markets thrive the most was when the government was limited to maintaining the value of the currency, the stability of the currency and not pretending that they can produce economic growth and make stable prices and do all these things. They weren’t able to do that.
With the fiat money, they believe it’s of course a panacea, but in the free market, they are not allowed to use fiat money. The market supply increases in a market fashion and there is a measurement of value and that has to do with the currency being attached to a precious metal. A lot of people say that we can’t do that because there is not enough gold in the world. That has been refuted.
Hans Senholtz has a great article, if you look it up, why we do have enough gold for any circumstances. You don’t have to have so much per person. But, if you want to maintain the value of the currency and all these transactions, it is sort of like maintaining a measuring rod, but if you are building a building and your measuring rod is a yardstick and it changes every day, you end up with a messy building. That is about what we do with our money, it’s changing value all the time. We are making mistakes, we are over-investing, we measure incorrectly, so that is what you would have if you had a currency related to the metals.
And it would emphasize savings. But, today if you save you are not a good person, because you are supposed to spend the money. Keynesians hate savers, you got to go out there and spend your money. But, in the old days when people were more self-reliant and didn’t depend on printing money and the government passing it out, they would save their money, they would be frugal and they did better in their retirement than they do today, even with Social Security. This is something that would be beneficial if we restored the principle of savings and it would be necessary in this situation.
The other thing that people have to recognize under the free market system, it is the system that we don’t like. It is really a form of theft and it’s a moral issue. When governments just create units out of thin air and say it has value and they run the world. If a guy, if an individual did this, if he counterfeited the money, he’d go to prison. The Founders actually thought that if you can counterfeit the money you deserved the death penalty, that is how much they hated the inflation. But, taxes would go down in the circumstances of the free market, because the printing of the money is attached to the value of the value of the money and the government gets the benefit from this and borrowing is allowed under the fiat system and it would be discouraged, because you wouldn’t be able to borrow at zero percent and governments would be encouraged to do this. There is so much benefits from this.
But, free market and sound money comes together with what liberty is all about. Once people understand what true liberty is all about and the government is there to protect the freedoms of the individuals and to protect the soundness of money and not to run our lives and run and the economy and police the world, there would be no motive for saying that we can finance this through the fiat system. That of course is what we continue to work for and we certainly hope that some day we will succeed that and I think that is the road to peace and prosperity, which is a very positive goal.
Chris I want to thank you very much today for being with us and we will be probably talking about this next week possibly.
Chris Rossini: Yes, it’s not going away soon, but we will stay on top of it Dr. Paul.
Ron Paul: Ok Chris, thank you for being with us and I want to thank all the viewers today for being with us at the Liberty Report. Please come back soon.