True Economics Applied in the Real World
… seriousy, I wonder if these clowns they send in again and again to defend secrecy, bailouts, and cronyism are actually highly unreceptive robots, smuggled in from Japan.
Their nonsense is debunked in every single conversation, then someone hits reset, puts on a new skin, and back in action they are!!
Transcript:
As we start the new year 2010, the establishment politicians, economists and Wall Street are trying to convince themselves that we have turned the corner and economic growth has once again begun. The predictions that conditions are getting back to normal come from those who never saw the crisis coming and don’t have the vaguest notion what caused it. Some of them concede that it could be a jobless recovery. That will establish a new definition for a recovery.
Official unemployment is at 10% but even the government knows that if everyone is counted, including those individuals that are too discouraged to even be looking for work, the unemployment rate is 17%. Free-market economists claim the actual unemployment rate is closer to 22%.
There’s reason to believe that the correction is just barely started and has a long way to run. If the financial bubble came from excess credit created by the Federal Reserve, doubling the money supply can hardly be a solution. It wouldn’t make much sense for a doctor taking care of a very sick patient from severe infection to deliberately give the patient another infection. Yet that’s what the PhD doctors are doing to our very sick economy. It can’t work. It will make the economy much sicker. If our leaders don’t wake up soon, the economy will be brought to its knees. Great danger lies ahead.
In foreign policy, it’s always crucial that the motives of those who would do us harm are understood. Denial of the truth and accepting more politically palatable excuses will guarantee that threats to our safety will continue as we pursue a seriously flawed involvement overseas.
It’s the same in economic policy. If there’s denial or ignorance of the real cause of financial bubbles and the inevitable corrections that must follow, the economy cannot be reenergized.
We should have learned the lesson from the Depression of the 1930s that it was a predictable result from the Federal Reserves orchestrated excesses of the 1920s. Instead, the new-born Keynesian economists who took charge made certain that the correction would not be a one or two year affair as were the previous corrections in our history. The aggressive intervention by Hoover and Roosevelt, the Republicans and the Democrats, turned a short recession into the Great Depression, which lasted until the end of World War II.
The real tragedy was that the interpretation of the 1930s institutionalized bad economic theories. Unfortunately, and erroneously, the Depression was blamed on the gold standard, free markets and a lack of regulations. Though monetary policy was analyzed, its importance was 100% misinterpreted. The low interest rates and excess credit of the 1920s, driven by Federal Reserve policy, was not considered a factor in producing the stock market bubble and the mal-investment.
Instead, the 1930s analysts and even later analysis by Milton Freidman and the monetarists, along with academic “scholars” like Bernanke, came to an opposite conclusion: the Fed was at fault but only because it was too tight, arguing that massive monetary inflation was the only answer to the slumping economy.
And now we are witnessing a grand experiment by the very person who for years claimed special knowledge regarding the Depression. Chairman Bernanke is in the midst of trying to solve the problem of massive monetary inflation and excessively low interest rates instituted by his predecessor, Alan Greenspan, by implementing even more inflation at historic rates. The sad part is the answer to his very risky experiment with the wealth of our country and the health of our economy will take years to analyze. The conclusions will be just as flawed as they were in the aftermath of the Great Depression by an intellectual and political community that had totally rejected commodity money and the principle of free market with the current understanding in Washington.
One hope, though, is that free-market thinking and Austrian economic theories will have greater influence in the next decade or two, since their influence is now on a dramatic upswing. But there are a lot of hurdles to overcome.
In the 1930s, in an effort to find the true cause of the crisis, Congress ordered an official investigation. It became known as the “Pecora Investigation” named after Ferdinand Pecora, the aggressive chief council of the hearings. It received a lot of public attention and brought about many major changes but, tragically, every conclusion made and new policies implemented caused the depression to worsen and legitimized bad economic theories that continue to haunt us to this day.
The Federal Reserve was not blamed except for not printing enough money fast enough. Artificially low interest rates and mal-investment, the main source of the grossly distorted economy and bubble of the 1920s were exonerated. Not enough regulations were blamed, thus the Glass-Steagall Act and the Securities Act of 1933 were passed and deepened the depression. Separating commercial and investment banking and the newly created SEC were to have solved all future problems—as long as the Fed was free from any restraint in its money creation operation to serve big-government spenders and members of the banking cartel.
Since the flaws in the monetary and economic system were not corrected but made worse after the Depression, it was to be expected that periodic booms and busts would persist. The longer these cycles could be papered over with new money and credit, the greater would be the distortions and debt that would one day have to undergo a major correction.
That correction is now in its early stages. Since the dollar was the reserve currency of the world and totally fiat since 1971, without any linkage to gold, the financial bubble became worldwide. This bubble that burst in 2008 was the largest in history. During the formation of the bubble, the U.S. as the issuer of the world currency received undeserved benefits. We essentially became the counterfeiter of the world and no one called us on it. Even today, the trust in the dollar that persists has buffeted the pain of the correction for us. This unique setup was a prime cause for our balance of payment deficits and the huge foreign debt we owe—the largest in the history of the world. The discord in the world financial system is telling us that it’s time for us to pay for our profligate spending and massive foreign indebtedness. We have lived, as a nation, far beyond our means and the message is, for the foreseeable future, that we will be forced to live beneath our means as this debt is paid.
The inflation optimists are excited about current signs of economic growth and have even announced the end of the recession. It is conceivable that a reprieve can be achieved and the penalty that our economy must endure delayed. A reprieve must not be confused with a pardon; one is a temporary delay, the other an exemption. The payback for our excesses is certain to come.
Massively increasing debt and monetary inflation can slow the crash and change some government statistics encouraging the optimists. But real job growth and return of prosperity will remain elusive. The odds of us once again becoming an exporter of manufactured goods, like steel, cars, and textiles, are remote.
Ironically, a reprieve may well restore some confidence and motivate some spending and investment. But instead of restoring long-term growth, it may well act perversely by precipitating price inflation and higher interest rates. Since today’s interest rates are artificially set, much of our investing is unproductively misdirected.
Current enthusiasm in the stock market is once again a reflection of the message that low interest rates send. Thus too, the government’s stimulus package has helped to sustain the bond bubble, which in time must be deflated in order to get back to sound economic growth. All of this activity poses a threat to the dollar.
Governments are very powerful, and when in partnership with the monetary authorities that can inflate the currency at will, big government thrives. Welfare demands and senseless wars can be financed for long period of time through inflation, as long as trust in the currency lasts. Trust, though ultimately controlled by facts, can be misleading, since currency values can gain benefit from a country that has a strong military and wealth and a reasonably healthy economy. Eventually, markets and reality overwhelm, and illusions about a currency’s worth become a reality.
Today, reality is setting in and the first of three major events has begun. The worldwide financial system, built on a foundation of paper, has received the shock waves of an impending collapse.
The wild speculation and the derivatives market, the stock market bubble, the insurmountable debt—public and private—and the massive mal-investments have been shattered.
The only solution so far offered worldwide, but led by the United States has been to “print money” faster, keep interest rates low at practically zero percent, and remove all stops for controlling deficits. These are the very policies that caused the disequilibrium, and doing more of the same, but only faster, can hardly help our economy. The addiction to easy credit and deficit defies a wise political solution. Politicians are incapable of delivering the message of frugality, common sense, and sound money.
We can expect that the course we are on to continue and accelerate, since the first event, the collapse of the financial system, is still in its early stage.
The housing crisis is far from over; the commercial property crisis has not yet gotten much attention, and the financial obligations of the government are growing exponentially. And none of this forces the slightest pause in the expanding of welfare growth. The number of regulations, which are indeed a tax, are exploding though the market was already suffering from regulatory excesses. There’s a consensus in Washington that “wise” regulations can compensate for all the mistakes made by the Federal Reserve, the Executive Branch, and Congress. This fallacy has been around a long time and will be difficult to overcome.
The pessimism of the middle class continues to get worse despite the prognostication of Wall Street and the Administration. Most Americans know that the standard of living and real wages have not gone up for the past 10 years. If you’re not a shrewd stock trader and instead invested in stocks 10 years ago and held on, in real terms you would have lost 20% of your savings. The middle class is poorer also because house prices have crashed and many have lost their homes. On top of this, all we hear about is the trillions of dollars of debt and entitlement obligations that have been racked up for future taxpayers to pay. When it is revealed that the insider friends of the Fed and Congress get billions of dollars in bailout at the expense of the middle class, it’s no wonder the people are taking to the streets and directing their hostilities toward both Republicans and Democrats in Washington. Many would agree it is well-earned anger and properly directed.
This anger and frustration will certainly grow as the consequences of the collapse of the financial system become more severe. The concerted effort to prevent the correction the market demands, guarantees a prolonged agonizing crisis. Every effort to reverse the tide will depend on spending, higher deficits, increased taxes and money creation. This effort is now providing another grand bubble: the dollar/bond bubble.
The next event will be a dollar crisis. A full-blown dollar crisis will be worse than our current financial crisis The extent of a dollar crisis depends on whether or not the Washington politicians wake up and change their ways—a dubious hope.
More likely, the insanity will continue until some not yet known event will undermine the confidence of the dollar worldwide. Signs of less desire by foreigners to hold our dollars are already present. I’m certain our Treasury and Federal Reserve are pulling out all stops to prevent a massive run on the dollar. At present the “orderly” retreat from the dollar is working. But it won’t last.
China is quite active in investing in natural resources around the world, including Iran. While we live in the dark ages and believe only our military presence and military threats can protect our access to oil, China is actually spending some of their savings investing in their future access to energy and other precious metals and minerals.
But the orderly retreat from the dollar won’t last forever. Since 1973, shortly after the breakdown of the Bretton Woods Agreement, the dollar has lost 32% of its value against a Federal Reserve basket of currencies. But that doesn’t tell the real story, since that is a measurement against all other currencies, and they are fiat currencies as well. This gave the dollar an artificial benefit from its position of power in great wealth and military prowess. The dollar in relationship to gold, however, is down 97% since 1971, and 82% as measured by the CPI. The dollar, mismanaged by the Fed, has not been a benefit to the savers who sought to responsibly take care of themselves. They’ve been cheated by a rotten system and are just beginning to understand exactly how the Federal Reserve has been responsible for the swindle.
It is impossible to predict the time when confidence will be lost, but it can come quickly. Resorting to buying other paper currencies will not be of much help. When the dollar crashes, most likely the purchasing power of all currencies—since all countries hold dollars as a reserve—will go down as well.
This means that dollars and other currencies will go into buying consumer items, precious metals and other physical properties. Consumer prices will soar, as well as interest rates. The central bank will lose control; and the more they inflate, the worse the confidence becomes. The interest rates will respond to these efforts by rising sharply.
If the Fed tries to reverse the run on the dollar, interest rates will also soar, and the pain on the American citizens will be of such proportion that political chaos will result. Either scenario leads to political and social chaos—the third event, and the most dangerous.
With no ability of the federal government to fund its commitments, international or domestic, major changes will occur in our system. The social unrest will elicit cries for government to exert unusual force to head off a complete breakdown of law and order. The ultimate trap will be set for a system of government claiming to protect a free society. If more power and police authority are not given to the federal government, it will be argued that only anarchy will result. If more government policing power is given, it will mean a lethal threat to civil liberties. Already we have permitted the notion that a single person, the Attorney General or President, can decide who is an “enemy combatant”, thus denying that individual the right to habeus corpus, permitting indefinite detentions without charges made. This attitude toward civil liberties has changed significantly since the fear built around 9/11.
Yes, I know declaring one an “enemy combatant” is reserved for the radical Muslims engaged in terrorism against the United States. To be reassured by this reasoning is quite dangerous and naïve. Logic should not lead us to equate suspects with terrorists, and include American citizens, and yet this has already been set by precedent. Under difficult circumstances, our political leaders will not be hesitant to use these powers to maintain order. Tragically, the people may even demand it.
We are rapidly moving toward a dangerous time in our history. Society as we know it is vulnerable to political and social chaos.
This impending crisis comes as a consequence of our flawed foreign and domestic economic policies, a silly notion about money, ignorance about Central Banking, ignoring the onerous power and mischief of our out-of-control intelligence agencies, our unsustainable welfare state, and a willingness to sacrifice privacy and civil liberties in an attempt to achieve safety and security from an inept government. Dangerous times indeed!
What can be done about it? Must we wait for the inevitable and expect to restore our liberties in a street fight against the overwhelming power of the state? Not a good option!
The only way that we can prevent blood from running in the streets is to offer a better idea of the proper role of government in a society that desires first and foremost -liberty.
And that is impossible without a firm commitment by our thought leaders to the ideas of freedom, the source of all creative energy and prosperity. An all-powerful state is the threat to that ideal.
The prevailing attitude of the people-as it once was in early America-must be that of liberty and self reliance, rather than the nanny state and dependency relying on government force to mold all private choices.
If this is understood, a smooth-although not painless-transition to a free society is achievable. Ignoring this option will be very destructive to everything that is dear to the hearts of most Americans.
What is it that we must do? We must immediately:
- Balance the budget by reducing spending
- Change our foreign policy to that of non-intervention
- A full audit and more supervision of the Federal Reserve leading to abolishing the Federal Reserve
- Legalize competition to the Federal Reserve with competing currencies
- Regain respect for civil liberties and privacy while reigning in the CIA
- Wean ourselves off the dependence of wealth transfers by government
- Abolish crony capitalism—no subsidies, no bailouts, no regulatory or tax privileges to protect the powerful elite especially the military industrial complex
- Eliminate the income tax, inheritance tax and taxes on savings and dividends.
None of this can happen without the restoration of Congress to its dominant position of the three Branches of Government as was originally intended by the Constitution. The Executive and Judicial must be reined in, and Congress must assert its prerogatives over all legislation curtailing all unconstitutional agendae through budgetary controls.
Signs abound that angry Americans are now more ready than ever before for a change in direction that is indeed real. If this program were improvised-even suddenly and dramatically-the adjustment, though significant and to a degree somewhat painful, would be much shorter and of minor consequence compared to the chaos and poverty that will result if we refuse to change our gluttonous appetite for a free lunch.
Ron Paul’s great statement before the Foreign Affairs Committee in the House, December 10, 2009:
Mr. Speaker thank you for holding these important hearings on US policy in Afghanistan. I would like to welcome the witnesses, Ambassador Karl W. Eikenberry and General Stanley A. McChrystal, and thank them for appearing before this Committee.
I have serious concerns, however, about the president’s decision to add some 30,000 troops and an as yet undisclosed number of civilian personnel to escalate our Afghan operation. This “surge” will bring US troop levels to approximately those of the Soviets when they occupied Afghanistan with disastrous result back in the 1980s. I fear the US military occupation of Afghanistan may end up similarly unsuccessful.
In late 1986 Soviet armed forces commander, Marshal Sergei Akhromeev, told then-Soviet General Secretary Mikhail Gorbachev, “Military actions in Afghanistan will soon be seven years old. There is no single piece of land in this country which has not been occupied by a Soviet soldier. Nonetheless, the majority of the territory remains in the hands of rebels.” Soon Gorbachev began the Soviet withdrawal from its Afghan misadventure. Thousands were dead on both sides, yet the occupation failed to produce a stable national Afghan government.
Eight years into our own war in Afghanistan the Soviet commander’s words ring eerily familiar. Part of the problem stems from a fundamental misunderstanding of the situation. It is our presence as occupiers that feeds the insurgency. As would be the case if we were invaded and occupied, diverse groups have put aside their disagreements to unify against foreign occupation. Adding more US troops will only assist those who recruit fighters to attack our soldiers and who use the US occupation to convince villages to side with the Taliban.
Proponents of the president’s Afghanistan escalation cite the successful “surge” in Iraq as evidence that this second surge will have similar results. I fear they might be correct about the similar result, but I dispute the success propaganda about Iraq. In fact, the violence in Iraq only temporarily subsided with the completion of the ethnic cleansing of Shi’ites from Sunni neighborhoods and vice versa — and all neighborhoods of Christians. Those Sunni fighters who remained were easily turned against the foreign al-Qaeda presence when offered US money and weapons. We are increasingly seeing this “success” breaking down: sectarian violence is flaring up and this time the various groups are better armed with US-provided weapons. Similarly, the insurgents paid by the US to stop their attacks are increasingly restive now that the Iraqi government is no longer paying bribes on a regular basis. So I am skeptical about reports on the success of the Iraqi surge.
Likewise, we are told that we have to “win” in Afghanistan so that al-Qaeda cannot use Afghan territory to plan further attacks against the US. We need to remember that the attack on the United States on September 11, 2001 was, according to the 9/11 Commission Report, largely planned in the United States (and Germany) by terrorists who were in our country legally. According to the logic of those who endorse military action against Afghanistan because al-Qaeda was physically present, one could argue in favor of US airstrikes against several US states and Germany! It makes no sense. The Taliban allowed al-Qaeda to remain in Afghanistan because both had been engaged, with US assistance, in the insurgency against the Soviet occupation.
Nevertheless, the president’s National Security Advisor, Gen. James Jones, USMC (Ret.), said in a recent interview that less than 100 al-Qaeda remain in Afghanistan and that the chance they would reconstitute a significant presence there was slim. Are we to believe that 30,000 more troops are needed to defeat 100 al-Qaeda fighters? I fear that there will be increasing pressure for the US to invade Pakistan, to where many Taliban and al-Qaeda have escaped. Already CIA drone attacks on Pakistan have destabilized that country and have killed scores of innocents, producing strong anti-American feelings and calls for revenge. I do not see how that contributes to our national security.
The president’s top advisor for Afghanistan and Pakistan, Richard Holbrooke, said recently, “I would say this about defining success in Afghanistan and Pakistan. In the simplest sense, the Supreme Court test for another issue, we’ll know it when we see it.” That does not inspire much confidence.
Supporters of this surge argue that we must train an Afghan national army to take over and strengthen the rule and authority of Kabul. But experts have noted that the ranks of the Afghan national army are increasingly being filled by the Tajik minority at the expense of the Pashtun plurality. US diplomat Matthew Hoh, who resigned as Senior Civilian Representative for the U.S. Government in Zabul Province, noted in his resignation letter that he “fail[s] to see the value or the worth in continued U.S. casualties or expenditures of resources in support of the Afghan government in what is, truly, a 35-year old civil war.” Mr. Hoh went on to write that “[L]ike the Soviets, we continue to secure and bolster a failing state, while encouraging an ideology and system of government unknown and unwanted by [the Afghan] people.”
I have always opposed nation-building as unconstitutional and ineffective. Afghanistan is no different. Without a real strategy in Afghanistan, without a vision of what victory will look like, we are left with the empty rhetoric of the last administration that “when the Afghan people stand up, the US will stand down.” I am afraid the only solution to the Afghanistan quagmire is a rapid and complete US withdrawal from that country and the region. We cannot afford to maintain this empire and our occupation of these foreign lands is not making us any safer. It is time to leave Afghanistan.