I.O.U.S.A. (17 page)

The First Panacea

“ The fi rst panacea for a mismanaged nation, ” the writer Ernest Hemingway once famously said, “ is infl ation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists. ” As the lessons Dr. Volcker shared with us show, infl ation can ravage an economy.

“ Infl ation is very simple, ” explains the Honorable Dr. Ron
Infl ation:

Paul. “ It ’ s when government arbitrarily prints money — creates
An increase in the
money and credit — out of thin air. When I talk to many teen-
amount of currency
agers, grade - schoolers, they seem to have no problem com-
in circulation,
resulting in a

prehending the fact that if you just create a lot of money it will
relatively sharp and
be like monopoly money and won ’ t have value. ”

sudden fall in its

Dr. Ron Paul has had a long and checkered career within
value and a rise in
the U.S. government, including two presidential campaigns.
prices.

When the United States went off the Bretton Woods System in 1971, Dr. Paul, a student of the Austrian school of economics, was inspired to run for Congress on a platform of a return back to “ sound money. ” He is incredulous of the United States ’ current paper money system, and believes that c03.indd 51

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52 The

Mission

a currency based on faith alone, that can be printed at a push of a button, is set up to fail.

He believes that America

’ s system discourages people

from saving, because as the dollar depreciates in value, the consumer can ’ t keep up.

“ A negative savings rate is very, very detrimental, ” the congressman told us when we met with him in Washington, D.C.

“ True capital comes from savings. You should have what you can earn over and above what you have to use to run your business or live on. This should be savings and that should be used to be loaned out to create more jobs and more wealth; but today, the dollar loses its value, and then it if earns a little interest then we go ahead and tax people for the interest they ’ ve earned. So in order to regenerate savings, you should have sound money, get rid of the devaluation of the currency, and get rid of all taxes on savings, and then people would go back to savings again. At the same time, we should prohibit the Fed from creating money out of thin air. ”

During the mid - to late 1990s, Dr. Paul was one of the only government offi cials who was speaking out about the fl aws that he saw in the U.S. monetary system. And when Dr. Paul spoke out, he went directly to the source: Alan Greenspan, then chairman of the Federal Reserve. His debates with Alan Greenspan at Congressional hearings were leg-endary in D.C. – and Paul was becoming quite well - known, especially in the libertarian circles, for asking the Fed chairman quite pointed questions about the Fed ’ s role in the deprecia-tion of the U.S. dollar, infl ation, and money supply.

In one such debate, Dr. Paul told us, “ I was complaining about the negative savings rate and he [Greenspan] says,

‘ Yeah, but housing prices are going up, and therefore people have savings. ’ I told him that he was getting savings confused with infl ation, because as a consequence of infl ation the nominal price of houses were going up, but that really isn ’ t savings because as something like that can go up in price, it can also go down.

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Chapter 3 The Savings Defi cit
53

“ Today, because we don ’ t have any savings, ” Ron Paul explains, “ we depend on the Fed, and the Fed creates too much money, lowers interest rates too much, and then they create a bubble. How long has it been that many, many good economists have been predicting that the consequence we ’ re facing is the collapse of the housing bubble? When the markets fi nally realize how damaging this is and how pervasive it is and how it ’ s going to affect all of our other markets, we ’ re going to have a lot more unwinding to do and it ’ s going to affect our whole economy, because housing is a signifi cant part. ”

When we met with Dr. Paul in the summer of 2007, the housing market was only just beginning to show cracks in its foundation. Now, in one year ’ s time, the U.S. housing market has collapsed upon itself — and has taken many fi nancial institutions and U.S. home owners down with it.

The society has become addicted

We’ve been so wealthy. We’re

to cheap and easy credit. “ We ’ ve been

still doing pretty well on the sur-

so wealthy. We ’ re still doing pretty
face. But the tragedy is it’s all on
well on the surface. But the tragedy
borrowed money now. The fi nancis it ’ s all on borrowed money now.
es are in such disastrous shape
The fi nances are in such disastrous
because we can’t survive without
borrowing two and a half billion

shape because we can ’ t survive with-

dollars every day from overseas.

out borrowing two and a half bil-

Eventually that will create big

lion dollars every day from overseas.

economic problems.

Eventually that will create big eco-

—RON PAUL

nomic problems. ”

Ron Paul’s Historic Love Affair with Alan Greenspan

Ron Paul and Alan Greenspan have had a long and tumultuous relationship, as Dr. Paul took every opportunity to grill the former Fed chairman on his monetary policy decisions, most of which he did not agree with. What follows is testimony from February 17, 2000, at a Congressional hearing on money supply.

(continued)

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54 The

Mission

(continued)

Paul:
Good morning, Mr. Greenspan. I see you have stayed on the job in spite of my friendly advice last fall. I thought you should look for different employment but I see you’ve kept your job.

At least you remember the days of sound money, even if it’s only nostalgia, so I’m pleased to have you here.

We have talked a lot about prices today, but for the sound money economist the money supply is the critical issue. If you increase the supply, you create infl ation.

If we aim at a stable price level, we’re making a mistake. Technology and other factors can keep prices contained, but if you’re increasing the money supply we still have malinvestment, excessive debt and borrowing.

Someone mentioned that the Fed might be too tight with money. I disagree. The last quarter of 1999 might be historic highs for an increase in Fed credit. . . .

Everyone likes it now because the bubble is still growing. But what happens when it bursts? Can you reassure me it won’t?

Greenspan:
Let me assure you we believe in sound money. We believe if you have a debased currency you will have a debased economy. As I’ve said earlier, the diffi culty is defi ning what money truly is. We have been unable to defi ne a monetary aggregate that will give us a reliable forecast for the economy.

Paul:
So it’s hard to manage something you can’t defi ne.

Greenspan:
It is not possible to manage something you cannot defi ne.

A Short Visit with the Maestro

As chairman of the Federal Reserve for 18 years, Alan Greenspan presided over (among other things) the “ Black Monday ” stock market crash of 1987, the dot - com boom, and a minor recession in 2001. He is simultaneously lauded and criticized for his “ EZ credit ” policies that fueled the housing bubble of the past few years. Love him or hate him, it is clear even now, two years after his tenure at the Fed ended, c03.indd 54

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Chapter 3 The Savings Defi cit
55

that when Dr. Greenspan talks, the country — and most of the world — listens.

The fi nancial media gobbles up his every word, straining to decipher what has been coined
Greenspeak,
in reference to his painstakingly crafted and coded language, for which he has become famous. Having such a carefully honed language comes with the territory when everything you say not only must be reinterpreted and reported throughout the press, but also has the weight to impact global fi nancial markets. For this reason, that Maestro gives very few interviews, even now.

That ’ s why, when we were granted the privilege of sitting down with the former Fed chairman, we were highly aware that we had been awarded a unique opportunity. While there were many questions we could have asked him, his opinion on the savings problem in the United States was number one in our minds. What did he think, we asked him, of Ron Paul ’ s claims that the blame for America ’ s lack of personal savings rests at the door of the Federal Reserve?

“ The Federal Reserve has had very little to do in that particular scenario, and therefore, Ron Paul, with whom I agree on a number of issues, is mistaken in this area, ” he told us.

“ If fi scal policy is lax or savings are exceptionally low, there is nothing monetary policy or any central bank can do about that. All it can do is try to protect the system from being excessively affected by what would be an irresponsible policy on the part of the government. ”

The explanation Dr. Greenspan gave for the era of low savings and high spending over which he presided was very interesting:

“ The issue of rising wealth in the past 15 years or so is essentially a global phenomenon, and one that results because of the consequences of what was seen when the Cold War came to an end. The extraordinary amount of economic devastation behind the Iron Curtain induced a very large part of the so - called Third World to move signifi cantly c03.indd 55

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towards competitive market capitalism, the effects of which are twofold: one, a major decline in the rate of infl ation, and two, a huge increase in the propen-If fi scal policy is lax or savings are

sity to save around the world, but