High Risk Credit[Ron Paul]

House.gov ^ | 20 Aug 2007 | Ron Paul

[BGHater]

As markets went on a rollercoaster ride last week, our economy is coming close to a day of reckoning for loose credit policies being followed by the Federal Reserve Bank. Simply, foreign banks we have been relying on to buy our debt are waking up to the reality of much higher default rates than predicted, and many mortgage backed securities have been reduced to “junk” ratings. Wall Street fears the possibility of tightening credit and the tightening of America’s belts. Why, they say, “if Americans spend only what they can afford, think of the ripple effects throughout the economy!” This is the cry, as the call comes for the fed to cut rates and bail out companies in trouble.

More inflation is, however, never the answer to inflation.

The truth is that business involves risk, and businesses that miscalculate risk should be liquidated, so their assets can be reallocated to businesses that correctly judge risk and make profits. Instead, the Fed has injected $64 billion into the jittery markets, effectively amounting to a bailout that keeps these malinvestments afloat, but eventually they will become the undoing of our economy.

In addition to the negative reactions in financial markets, many Americans have taken on too much personal debt owing to exotic mortgage products and artificially low interest rates. Unfortunately, these families are now in the position of losing their homes in unprecedented numbers as the teaser rates expire and the real bills are coming due.

The real answers are, and always have been, found in the principles of the free market. Let the market set the interest rates. If we had been functioning under a true and transparent free market system, we would not be in the mess we are in today. Government, like the American household, needs to live within its means to get back on stable fiscal ground.

We’ve been headed in the wrong direction since 1971. This week marks the 36th anniversary of Nixon’s decision to close the gold window, which convinced me to seek public office to call attention to the runaway money train that would come in the aftermath of that decision. The temptation to print and spend money with impunity, like the temptation to max out lines of credit, is too strong to for government to resist. While Nixon brokered exclusivity deals with OPEC to prop up demand for the tidal wave of green pieces of paper the Fed pumped into the markets, the world is tiring of marching to the beat of our drum in order to secure their energy needs. The house of cards Nixon built is now on the verge of collapsing on our heads, and on our children’s heads.

As the dollar weakens, it becomes ever clearer that we need a return to sound, commodity-based money for a secure future. Money based on real value, not empty promises and secretive backroom machinations, is the way to get out of the current calamity without causing even bigger problems.

[Jason_b]

If we decide to back our currency with a large quantity of a commodity, we are going to instantly create a huge demand for that commodity and greatly inflate its value. We also have to take that vast amount of that commodity out of circulation. So we store it, and while it is stored it serves no useful purpose.

The demand for gold is already balanced with the demand for other things. The idea is not to back our currency with a "large quantity" (why large?) of a commodity, but to make the commodity itself the currency. You won't be forced to carry heavy metal in your pants pocket, any symbol functioning as currency, any note, any bill, would be an enforcable promise to pay a certain amount of the commodity and would not be legal tender, it could be refused. Demonetizing federal reserve notes and monetizing gold would send the demand for FRNs to zero, and the demand for gold up. But the demand for gold would still be in equilibrium with the rest of the economy. Not a problem. The commodity would not be taken out of circulation, just the opposite, it would circulate! Even when on deposit in allocated storage, or something like e-gold.com, you say it isn't performing a useful purpose, but it is, the one it is meant to, to store the wealth of him who owns it, for a time, until he exchanges it for consumable goods or services. There is an enormous amount of gold in the vault at the NY Federal Reserve. If it was wrong to store gold do you think they'd store it? What's really going on is big boys own and trade gold as always. We have the same right they do. But the big boys have marginalized us off into the paper money ghetto where we can be abused by the inflation they cause.

Dr. Paul thinks we should have never gone away from backing our currency with gold. He suggests that we should back our currency with a material that's main source of value is that people think it is pretty. Does that really have a more real value than our current currency? Does backing a currency with gold really make it less susceptible to fluctuation and manipulation?

That it is pretty is a tiny bit of what makes gold the money par excellence. But it is the only monetary asset that is not simultaneously someone else's liability. The currency you are used to is debt and is debt based. Gold states that its owner is the possessor of wealth. Currency states that its owner is the possessor of someone else's debt. Which do you think is more valuable now? The language of saying to "back the currency with gold," is incorrect. Is a gold coin backed by gold? No, it is gold. Same with silver. What you consider being backed by gold is a gold certificate, backed by silver is a silver certificate. They are for convenience only, so holes don't get worn in your pocket. A gold certificate is by definition backed by gold. If it weren't backed by gold, it wouldn't be a gold certificate. I don't believe gold and silver are susceptible to manipulation of any significant degree. In the past, any time there have been manipulations, what has been manipulated was some paper promise, their proliferation and then deflation, that ruined people, not the gold and silver itself. Silver has had some problems with inflation, new mines might reduce the value a little, after the franco-prussian war, the germans demonetized silver, that caused some reduction in value. But Congress regulated the value by making the UNIT no longer silver, but gold, and then changing the amount of silver in the silver dollar, to keep it in equilibrium. After that, they could had returned the UNIT metal back to silver, but they didn't, they chose to keep it gold. But the ratio of values (it took more silver to equal the same value of gold) was maintained.

If countries of private organizations find new sources of gold and mine them aggressively, the value of our currency would drop. If a country with large gold holdings decided to sell off a large quantity the value of our currency would drop.

Countries and organizations would mine only when it is economically advantageous to do so. When it is not economical, they stop. Say your country decides to dump gold, as the franco-prussian example above indicated, we could do the reverse, make the UNIT metal silver, increase the amount of gold in the gold coin until it is in equilibrium, then return the UNIT metal to gold. You are so worried about the value of our currency dropping, what the hell do you think has been happening since 1913? A dollar will buy in groceries what 5 pennies maybe 3 pennies by now would have bought in 1913. At no time between 1813 and 1914 was there an inflation like that. Maybe 2:1, and a deflation of 1:2, but not an inflation of 100:3.

The value of our currency wasn't stable when it was backed with gold in the past, why would we expect that to change now?

What do you want? Utopia? The stock of gold and silver was nice and stable. It was overissuing of bank notes that created massive inflations which turned into deflations. There was a lot of land speculation too, over creation of credit during land booms, then the collapse and bust. You can't do anything about that. Look at the Nazdaq bubble, look at the housing bubble, nothing has changed, speculation is rampant. People lost their shirts in 2000 and will again with the housing bust.

Our currency is a commodity. It is traded, and it is worth whatever investors believe it to be worth. We can change the monetary supply to some extent to try and control it's value to some extent, just as OPEC tries to control oil production to exert control over the value of oil.

Is an IOU a commodity? A contract for goods is not the goods themselves. Our currency may behave as a commodity as it behaves like a money but that doesn't make it either. We only control the value of our currency in one direction only: down. Anything else and the economy could be ruined. The accumulation of new debts depends that existing debts not be forclosed. We are solvent as long as new debts are being created and accepted. When lenders are afraid to lend and borrowers are afraid to borrow, the economy stops and we discover we are insolvent. We get into this situation by trying to monetize debt, then we find we cannot stop. It is an addiction.

Returning to a gold backed currency is for all practical purposes impossible, and it is also pointless.

The main advantage is that it removes interference direct interference by our government attempting to manipulate the the economy and control inflation.

However, the proponents of such ideas never manage to explain how we are going to be protected against currency manipulation by others if our government doesn't get involved.

The government ought to be involved. It is in the Constitution, Congress has the power (which originally was vested in the several states until delegated, and could revert) to coin money and regulate the value thereof. Coining money means stamping gold and silver coinage, not printing money. Regulating the value means keeping the value of the UNIT constant, just like Congress did after the Franco-Prussian war.

I have heard many valid arguments about how the Fed manages the money supply, but I've yet to hear anything resembling a realistic suggestion of how to get rid of the Fed completely.

You get rid of it by getting rid of it. Shut it down. Tell the Mint to tool up for making silver coins as they did up until 1964, and gold as they did up until 1933, and copper pennies as they did, I forget which year they went to zinc alloy, nickels would be nickel again. Bureau of engraving and printing would prepare to produce silver and gold certificates for when the people decide to trust the government by having their gold and silver on deposit. America thrived for a time with protective tarriffs, only after 1929 did the idea fall apart. Low, fair, tarriffs to run the government would support a constitutionally limited government. The income tax would be abolished. The IRS and the Fed go together. Both: out of here! The welfare state would turn into the get off your ass and work state. Illegals would stay home, no welfare magnet to attract them, no free emergency room visits.

Thanks for your good questions and interesting comments.

[Toddsterpatriot]

The currency you are used to is debt and is debt based.

So do I owe interest to someone for the $20 bill in my wallet? Or does someone owe interest to me?

[Hail Spode]

No sir. Fiat currency is not a commodity, and the market they are exchanged on are called CURRENCY Markets, not commodity markets.

Link here...

http://en.wikipedia.org/wiki/Commodity_markets

where it explicitly states that government currency and debt instruments are not commodities. You argue that you can USE those things to PURCHASE commodities, but our point is “at what rate?” It is a lot easier to put 10 times amount of fiat dollars in circulation as it is to put 10 times the amount of say, copper now in circulation. You can increase the dollar supply based on political whim, but the copper supply is based on economic realities. Because of that, currencies that are commodities based- say a dollar is worth 1/5th an ounce of silver or a pound of copper, is a lot more stable and less subject to political manipulation than fiat currency.

[Jason_b]

You never showed me anything that empowered the Feds to pay in paper promises. No grant of power, no power.

This is how: the District of Columbia was and is a loophole. The Constitution defines the limited relationship of the states to the federal government, the name of which is "The United States (of America)" but within its own zone, jurisdiction, territory, it can do whatever it wants because it is its own government there and it decides what goes. It quietly brought us in under its jurisdiction, as if we lived there, and now has us using its money. Totally constitutional. It didn't have to violate any trust to expand its dominion over us, we volunteered to join and be part of it. If you can find it, see People v. De La Guerra 40 Cal 311. See what the judge says about citizens of the district of columbia vs. state citizens.

[Toddsterpatriot]

commodity

1 : an economic good: as a : a product of agriculture or mining b : an article of commerce especially when delivered for shipment c : a mass-produced unspecialized product

2 a : something useful or valued ; also : THING, ENTITY b : CONVENIENCE, ADVANTAGE

3 obsolete : QUANTITY, LOT

4 : a good or service whose wide availability typically leads to smaller profit margins and diminishes the importance of factors (as brand name) other than price

5 : one that is subject to ready exchange or exploitation within a market

Commodity

I think a few of those definitions fit.

Fiat currency is not a commodity, and the market they are exchanged on are called CURRENCY Markets, not commodity markets.

Don't tell the Chicago Mercantile Exchange, they trade currency products.

where it explicitly states that government currency and debt instruments are not commodities.

Wikipedia? It covers physical product (food, metals, electricity) markets but not the ways that services, including those of governments, nor investment, nor debt, can be seen as a commodity. I think that makes my point more than yours. LOL!

You argue that you can USE those things to PURCHASE commodities, but our point is “at what rate?”

At the market rate.

Because of that, currencies that are commodities based- say a dollar is worth 1/5th an ounce of silver or a pound of copper, is a lot more stable

A lot more stable? Not perfectly stable? What about inflation and deflation? Can those occur with a commodity based currency?

and less subject to political manipulation than fiat currency.

Until the politicians change the amount of commodity behind each dollar.

[Jason_b]

Thanks for reminding me, I almost forgot to pimp my blog.

The Amero vs. The Dollar

[Toddsterpatriot]

So do I owe interest to someone for the $20 bill in my wallet? Or does someone owe interest to me?

[Iconoclast2]

The answer is yes, indirectly, insofar as your taxes are now higher to pay the interest on the national debt, which is much larger than it would be with Constitutional money. You/we are paying the interest to the Federal Reserve, a privately-held corporation that holds much of the debt (along with the Chinese, pension funds, and all the other investors collecting interest).

Do you work for the Government or something? Your attitude toward the gold standard brings to mind the old Upton Sinclair quote:

“It is very difficult to get a man to understand something when his salary depends on not understanding it.”

[Toddsterpatriot]

insofar as your taxes are now higher to pay the interest on the national debt, which is much larger than it would be with Constitutional money.

It's true that the national debt would probably be smaller. Of course, with the deflationary impact a gold standard would have, our economy would be much smaller too.

You/we are paying the interest to the Federal Reserve, a privately-held corporation that holds much of the debt

What's your definition of "much"? How about a percentage range?

Do you work for the Government or something?

No, do you?

[Hydroshock]

Please add me to this ping list, thanks.

[Iconoclast2]

If “regulate the value thereof” does allow Congress to shrink the amount of gold/silver in a dollar, even under a Constitutional gold/silver standard, there need be no deflation or limitation on the growth of an economy occasioned by a gold standard. Indeed, if gold supplies advance at a higher percentage rate than the population and productivity growth, there would be no deflation even at a fixed amount of gold/dollar.

The economy would be smaller, but most of what would be gone would be finance jobs pushing derivatives and exchange rate trading, etc. We’d probably have bases on the Moon and Mars by now and have cured cancer, because the best and the brightest would be doing something useful other than pushing paper.

“Much” was wrong; it is probably a small minority of the debt outstanding, large only in an absolute sense (almost a trillion, if memory serves.

No, I usually work against the Government.

[George W. Bush]

Welcome. I find it interesting how many people are attracted by the RP message on debt, money, the Fed, and other financial issues. It’s especially interesting to see how many young people and even Democrats are attracted to this message. I reminds me of how Rush described the results among high school students of the first ever NAEP national test on knowledge of economics. The students passed with flying colors. Younger voters are far more knowledgeable on economics than any previous generation. And they are disproportionately attracted to Dr. Paul’s economic message.

[Toddsterpatriot]

If “regulate the value thereof” does allow Congress to shrink the amount of gold/silver in a dollar, even under a Constitutional gold/silver standard, there need be no deflation or limitation on the growth of an economy occasioned by a gold standard.

So a "non-gold" gold standard wouldn't ruin the economy? LOL!

The economy would be smaller, but most of what would be gone would be finance jobs pushing derivatives and exchange rate trading, etc.

Because there are no derivatives on stocks or bonds?

We’d probably have bases on the Moon and Mars by now and have cured cancer, because the best and the brightest would be doing something useful other than pushing paper.

That's funny.

No, I usually work against the Government.

Me too. And against goldbugs. And other financial illiterates.

[Petronski]

If by “that’s funny” you mean “that’s quite mad,” I agree with you.

[trisham]

At least the others weren’t talking to themselves. :)

[Hydroshock]

I was at a gun show Susnday where a RP support was handing out all kinds of literature. I liked what I heard, as did my friend and others.

[Toddsterpatriot]

Funny peculiar not funny haha.

[Iconoclast2]

It is funny how difficult it is for those who ostensibly seek a Free Republic to imagine how different life would be if we lived in one, and had lived in one for the last fifty years. While the gold standard may have lead to booms and busts arising from mining strikes, prices remained stable or drifting lower for more than a century, and America expanded at a rapid clip. Just because most goldbugs are financial illiterates does not mean that a gold/silver standard is stupid.

Numerous economists have written of the inefficiencies that arise from floating exchange rates, now the largest markets in the world, largely created by abandonment of the gold standard. And without unbridled credit creation (bank reserves are now far below one percent), markets such as ever-more-exotic derivatives probably would not exist.

I went to Harvard and Yale, and saw my brightest classmates go to Wall Street, even the mathematicians (I was a physics major), many becoming part of an ever-growing parasitic enterprise fueled by abandonment of all nearly all Constitutional constraints on government.

I am confident the trajectory of scientific and engineering development, indeed all human development, would be quite different if not guided by bureaucrats. Here in the Northwest, billions of dollars have been incinerated based on government “science”, and the Region’s economic growth crippled to protect owls doomed by competing species and salmon doomed by overfishing. Armies of highly-paid, intelligent human beings with high level degrees spend their entire professional lives essentially accomplishing nothing other than pushing paper. What if they were creating things in the real world? It would be a very different place.

There remain remnants of non-government scientists and engineers who point out the way things could be. See, e.g., http://www.oism.org/oism/s32p1820.htm (revolutionary changes in human health possible by abandonment of government-dictated monopolies). There was a time when government had positive accomplishments in the real world (from Louisiana Purchase on down to the Interstate Highway system), but it is now almost exclusively in the hands of the looters. Attacking goldbugs does nothing to fight that decay.

[SierraWasp]

"There was a time when government had positive accomplishments in the real world (from Louisiana Purchase on down to the Interstate Highway system), but it is now almost exclusively in the hands of the looters."

Wow! What a powerfully true description!! And the biggest of these is GovernMental EnvironMental GANG-GREEN Goons with huge taxpayer funded salaries, benefits and expensive defined benefit pensions!!!

[ran20]

I’m a supporter of a pure fiat based money system. And yes it like fractional reserve banking does take a responsible government to contain inflation.. making decisions based on the long run. Which I’m not sure democracies can ever really do. It may be that democracy is just not a sustainable political ideology.

We don’t need to create money as debt. But that is what we have today. If we were to reduce debt ever, the money supply would dramatically shrink, and deflation would take over. If we got rid of all debt, we’d actually go into negative money as we had to pay the interest payments too.. Which are not created when the debt is created.

So the only way is exponentially increasing debt. Which is what we have now.. and if our productivity continues to grow and thus our economic output, our children will be exponentially further in debt then we are. Its a system that eventually peaks out.

A pure fiat system however, that is how Julius Cesaer built the great works of Rome, some still standing to this day! Those could never be justified in a debt backed system where things must start showing return quickly to cover the interest.