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| preview.tinyurl.com/52vfy2 -> www.pimco.com/LeftNav/Featured+Market+Commentary/IO/2008/IO+June+2008.htm You can fool some of the people all of the time, and all of the people some of the time, but you cannot fool all of the people all of the time. We have for so long now been willing to be entertained rather than informed, that we more or less accept majority opinion, perpetually shaped by ratings obsessed media, at face value. After 12 months of an endless primary campaign barrage, for instance, most of us believe that a candidate's preacher - Democrat or Republican - should be a significant factor in how we vote. We care more about who's going to be eliminated from this week's American Idol than the deteriorating quality of our healthcare system. Alternative energy discussion takes a bleacher's seat to the latest foibles of Lindsay Lohan or Britney Spears and then we wonder why gas is four bucks a gallon. We care as much as we always have - we just care about the wrong things: entertainment, as opposed to informed choices; It's Sunday afternoon at the Coliseum folks, and all good fun, but the hordes are crossing the Alps and headed for modern day Rome - better educated, harder working, and willing to sacrifice today for a better tomorrow. Can it be any wonder that an estimated 1% of America's wealth migrates into foreign hands every year? We, as a people, are overweight, poorly educated, overindulged, and imbued with such a sense of self importance on a geopolitical scale, that our allies are dropping like flies. Well, if so, then the "we" is the critical element, not the leader that will be chosen in November. Let's get off the couch and shape up - physically, intellectually, and institutionally - and begin to make some informed choices about our future. Lincoln didn't say it, but might have agreed, that the worst part about being fooled is fooling yourself, and as a nation, we've been doing a pretty good job of that for a long time now. I'll tell you another area where we've been foolin' ourselves and that's the belief that inflation is under control. I wasn't an inflationary Paul Revere or anything, but I joined others in arguing that our CPI numbers were not reflecting reality at the checkout counter. In the ensuing four years, the debate has been joined by the press and astute authors such as Kevin Phillips whose recent Bad Money is as good a summer read detailing the state of the economy and how we got here as an "informed" American could make. Let me reacquaint you with the debate about the authenticity of US inflation calculations by presenting two ten-year graphs - one showing the ups and downs of year-over-year price changes for 24 representative foreign countries, and the other, the same time period for the US An observer's immediate take is that there are glaring differences, first in terms of trend and second in the actual mean or average of the 2 calculations. These representative countries, chosen and graphed by Ed Hyman and ISI, have averaged nearly 7% inflation for the past decade, while the US has measured 26%. Sure, inflation was legitimately much higher in selected hot spots such as Brazil and Vietnam in the late 90s and the US productivity "miracle" may have helped reduce ours a touch compared to some of the rest, but the US dollar over the same period has declined by 30% against a currency basket of its major competitors which should have had an opposite effect, everything else being equal. I ask you: does it make sense that we have a 3% - 4% lower rate of inflation than the rest of the world? Can economists really explain this with their contorted Phillips curve, output gap, multifactor productivity theorizing in an increasingly globalized "one price fits all" commodity driven global economy? Somebody's been foolin', perhaps foolin' themselves - I don't know. This isn't a conspiracy blog and there are too many statisticians and analysts at the Bureau of Labor Statistics (BLS) and Treasury with rapid turnover to even think of it. I'm just concerned that some of the people are being fooled all of the time and that as an investor, an accurate measure of inflation makes a huge difference. The US seems to differ from the rest of the world in how it computes its inflation rate in three primary ways: 1) hedonic quality adjustments, 2) calculations of housing costs via owners' equivalent rent, and 3) geometric weighting/product substitution. The changes in all three areas have favored lower US inflation and have taken place over the past 25 years, the first occurring in 1983 with the BLS decision to modify the cost of housing. It was claimed that a measure based on what an owner might get for renting his house would more accurately reflect the real world - a dubious assumption belied by the experience of the past 10 years during which the average cost of homes has appreciated at 3x the annual pace of the substituted owners' equivalent rent (OER), and which would have raised the total CPI by approximately 1% annually if the switch had not been made. In the 1990s the US CPI was subjected to three additional changes that have not been adopted to the same degree (or at all) by other countries, each of which resulted in downward adjustments to our annual inflation rate. Product substitution and geometric weighting both presumed that more expensive goods and services would be used less and substituted with their less costly alternatives: more hamburger/less filet mignon when beef prices were rising, for example. In turn, hedonic quality adjustments accelerated in the late 1990s paving the way for huge price declines in the cost of computers and other durables. As your new model MAC or PC was going up in price by a hundred bucks or so, it was actually going down according to CPI calculations because it was twice as powerful. Bet your wallet didn't really feel as good as the BLS did. In 2004, I claimed that these revised methodologies were understating CPI by perhaps 1% annually and therefore overstating real GDP growth by close to the same amount. Others have actually tracked the CPI that "would have been" based on the good old fashioned way of calculation. The results are not pretty, but are undisclosed here because I cannot verify them. Still, the differences in my 10-year history of global CPI charts are startling, aren't they? This in spite of a decade of financed-based, securitized, reflationary policies in the US led by the public and private sector and a declining dollar. In addition, Fed policy has for years focused on "core" as opposed to "headline" inflation, a concept actually initiated during the Nixon Administration to offset the sudden impact of OPEC and $12 a barrel oil prices! For a few decades the logic of inflation's mean reversion drew a fairly tight fit between the two measures, but now in a chart shared frequently with PIMCO's Investment Committee by Mohamed El-Erian, the divergence is beginning to raise questions as to whether "headline" will ever drop below "core" for a sufficiently long period of time to rebalance the two. The correct measure of inflation matters in a number of areas, not the least of which are social security payments and wage bargaining adjustments. There is no doubt that an artificially low number favors government and corporations as opposed to ordinary citizens. But the number is also critical in any estimation of bond yields, stock prices, and commercial real estate cap rates. If core inflation were really 3% instead of 2%, then nominal bond yields might logically be 1% higher than they are today, because bond investors would require more compensation. And although the Gordon model for the valuation of stocks and real estate would stress "real" as opposed to nominal inflation additive yields, today's acceptance of an artificially low CPI in the calculation of nominal bond yields in effect means that real yields - including TIPS - are 1% lower than believed. If real yields move higher to compensate, with a constant equity risk premium, then US P/E ratios would move lower. A readjustment of investor mentality in the valuation of all three of these investment categories - bonds, stocks, and real estate - would mean a downward adjustment of price of maybe 5% in bonds and perhaps 10% ... |
| www.theleftcoaster.com/archives/004721.php Letter From California Sunday :: Jun 26, 2005 Real Inflation Rate by soccerdad I have finally found the answer to a question I have had for some time, ie if there is no inflation why is it costing me more to live. Now I knew that certain things were not included in the estimates so I just sort of figured that must be it. I didnt find it very satisfying but Im far from an economics expert. But today I have read an article that puts the whole issue into a different light. If the report is correct, then it seems that the government is cooking the books to such an extent as to make the inflation reports meaningless. article is by Jim Puplava and I hope some will read it in its entirety and share your thoughts. It discusses what the core rate of inflation is and how it is calculated. The problem apparently started with the findings of the Boskin Commission in December 1996. Clinton and the Republican Congress implemented many of the recommended changes to the way the inflation was calculated. It was claimed at the time that the CPI was 11% too high. The real motivation to lowering the apparent inflation rate was to reduce payments for cosy of living adjustments for the social programs. Lets look at some of the changes and Ill illustrate by example where ever possible. When new car prices rose the BLS used car prices were substituted. When real estate prices rose, more weight has been given to the cost of renting which has not increased. The effect can be to change completely the interpretation of the data. Hedonics helps the BLS keep rising prices for goods in the CPI from ever showing up as rising prices. Even though the cost of housing, energy, food, medical bills, prescription drugs, tuition, and entertainment have soared, the government keeps reporting moderate inflation. It has become a convenient and subjective way of removing prices increases from the CPI. The combination of substitution, changing the weight of goods rising in price, hedonics and seasonal adjustments is one reason why the CPI and reported inflation has remained as subdued as it is reported each month. The problem is that these numbers are all fictional and bare no resemblance to what households face each month with their actual budgets. There is an interesting graph that compares the current CPI with that calculated using the pre-Clinton methodology. It shows that although the current CPI is reported to be about 3%, the value calculated using the original methodology is about 6%. During 2002, when inflation was reported to be about 1% the original methodology calculated at 4%. We know it has been getting more expensive to live because we pay the bills. But it does illustrate how far the government will go to obfuscate the truth about the economy and implies we can not trust them (no surprise there) to tell us. But what is even more scary is that many in government may actually believe in these numbers and thereby affect their policy decisions. The average person saddled with stagnant wages is actually falling behind at a much faster rate than usually reported. Finally it calls into question comparisons of this business cycle to those which occurred before 1996. I also wonder whether the increasing gap between wages and inflation is a main culprit for the decreased national savings rate. Finally he goes on to discuss why he thinks there may be a period of hyperinflation coming. |
| www.isil.org/towards-liberty/inflation-gov-lies.html please support our work - Towards Liberty - A COMMENTARY ON CURRENT EVENTS - by Jarret Wollstein - 2% INFLATION AND OTHER OFFICIAL LIES - 03-21-05 - According to official government statistics, the Consumer Price Index (CPI) - the mostly widely used measure of inflation - is running a very low 22% a year. But if inflation is so low, why is the price of everything you buy going up so fast? How do you reconcile 2% inflation with 10% to 20% annual increases in housing prices . and double-digit increases in the price of nearly everything you consume, from gasoline, to food, to movie tickets? The simple answer is that the official inflation rate is virtually pure fiction, and has been for decades. Thirty years ago, when I took my first college economics class at the University of Maryland, my professor explained why he quit his job at the Commerce Department. He was hired to write economic forecasts based on the best available information. Yet time and again, when he sent in his report, his bosses sent them back to him to be re-written with more "positive" figures. After this happened repeatedly, it became clear to him that there was no way he could honestly do his job. For a very long time, the accuracy of government economic figures has been going straight downhill. As John Williams, head of Shadow Government Statistics, explains: * "During the Kennedy administration, unemployment was redefined with the concept of 'discouraged workers' to reduce the unemployment rate. setting the stage for the adoption of a new and lower-inflation CPI." Why Government Wants to Keep the CPI Low Williams estimates the current real consumer inflation rate is closer to 6% than 2%. Other research services, like free market Agora Research, now put the real inflation rate at 7%-8%. There are many reasons why it is in the government's interest to make the inflation seem lower than it actually is: First and foremost, it saves them billions of dollars. For instance, cost of living adjustments in Social Security, welfare payments, Medicare and other entitlements are based on changes in the CPI. Similarly, keeping the official CPI rate low, keeps salary and pension adjustments for government employees and retirees much lower than they would otherwise be. A low official CPI also helps keep down interest payments on the national debt (which now consumes over 20% of all government expenditures). It also keeps down the cost of government borrowing, which is now over $1 trillion a year - a lot of money even for the federal government. How the official inflation rate is manipulated There are in fact many ways in which the government manipulates economic information to keep the CPI artificially low: 1 Geometric Weighing: Elimination of good and services that are going up rapidly from the CPI. Goods and services that are increasing most rapidly - such as housing and energy costs - are given a lower weight in calculating the CPI, or even eliminated from it entirely! The public rational for this blatant sleigh-of-hand is that such goods and services are "too volatile" to be included or that increases are "temporary" and atypical. However, with such manipulation, the CPI ceases to have any connection to reality. Depending upon how "volatile" goods are geometrically manipulated, the official inflation rate can become any figure the government wants it to be, with little connection to reality. For instance, if the price of a computer goes up by $100 this price increase will not be included in the CPI if (as is usually the case) there is also some improvement in the capabilities of the computer. Using this type of fake adjustment, it's clear that cars have not "really" increased in price at all from the days when Henry Ford sold a Model T for $300. If we need to adjust the inflation rate for quality increases, don't we also need to adjust it for quality decreases? Sixty years ago, first-class postage was just three cents. But back then, the post office made four deliveries each day, two regular and two special. Also, sixty years ago, gas stations had attendants who pumped your gas for you, checked your oil, and cleaned your car windshield at no additional charge. And movie theaters had ushers who took you to your seats. I won't even comment on what has happened to service at US airports since 9/11. Not factoring in such quality decreases - which can be dramatic even in a short period of time - also greatly understates inflation. Like other CPI adjustments, this assumption has little to do with reality and is in the end simply an excuse for manipulating official inflation figures. But since only the price of a subway ride (and not its actual cost) appears in official price reports, the CPI again appears much lower than it actually is. Thousands of goods and services in the US are now subsidized by government, including airport security, public schools, medical care, housing for the poor, the interstate highway system, and much of what you eat. Considering the above list, 7% may be much too low an estimate for the present, real US inflation rate. Economic consequences of manipulating the CPI The blatantly false official consumer price index has many harmful consequences for both individuals and our economy as a whole. First and foremost it causes everyone from individuals to corporations to government to overspend, thanks to artificially low (and unsustainable) interest rates and easy credit. You can see this everywhere in our society today, from home buyers "qualifying" for loans they can't really afford, thanks to artificially low interest rates . to home owners who use their artificially-inflated home equity as an ATM . to the federal government's current binge of deficit financing. Human Action, manipulation of the money supply creates the destructive boom/bust trade cycle, of overexpansion (boom) followed by unavoidable contraction (recession). With foreign central banks buying less and less US debt, and complaining about low interest payments, the bust is now not far off and could begin by the end of this year - potentially devastating stocks, bonds, businesses, and jobs. That will mean the end of the days of easy mortgages for all and unrestrained spending. It could even push the real inflation rate from 7% to 10%+. Such high inflation rates could cause other countries to abandon the dollar and US debt like a hot potato, and in turn trigger a major US recession. No matter how high interest rates go and no matter how many people lose their jobs, the "official government inflation rate" will still probably be well under 3%. |
| www.wnd.com/index.php?pageId=59409 WND Exclusive NEWS ANALYSIS What's America's real inflation rate? If rate is so low, how come food and energy cost so much? Posted: March 19, 2008 9:44 pm Eastern By Jerome R Corsi 2008 WorldNetDaily Why is it that the federal government says the US has virtually no inflation - less that 2 percent - but everything keeps getting more expensive, especially food and gasoline? You're lucky if $100 buys two bags of groceries at the supermarket, even if you avoid the filet mignon. Take a family of four to a movie theater to see a first-run film and it can cost $75 even in the Midwest. You will shell out somewhere between $6 and $9 just for one adult ticket, and you can end up spending somewhere between $65 to $75 total if all you do is spring for the luxury of popcorn and sodas. Still, the US Department of Labor's Bureau of Labor Statistics reported in August 2007 a remarkably low inflation rate of only 17 percent. Inflation numbers are intentionally manipulated to keep cost-of-living numbers low. If the average chief executive officer cooked balance sheet numbers the way the US Bureau of Labor Statistics calculates the Consumer Price Index, the CEO would be in jail, even without Sarbanes-Oxley reporting standards. Telling the truth about inflation would require the Federal Reserve to raise interest rates and that would be bad for economic growth. Besides, hundreds of billions of dollars in government entitlement payment outflows depend on the inflation number. For instance, federal law mandates that Social Security checks increase thanks to "cost-of-living adjustments," or COLAs, that are supposed to compensate for inflation. So, higher inflation numbers cost the federal government millions more in increased Social Security payments. But when the Bureau of Labor Statistics intentionally rigs the Consumer Price Index calculations to low-ball the inflation rate, Social Security entitlement payments are kept level. As a result, retirees quietly lose billions of dollars that should have been paid out, had the cost of living numbers been reported honestly. How does the federal government manipulate inflation numbers? The Consumer Price Index, or CPI, is the central statistic the federal government uses to calculate inflation. The CPI is a complex government statistic that was introduced in the 1920s to track the market cost of a "basket of goods and services." Beginning during the Carter administration, federal economists cleverly redefined the CPI, with the goal of removing from the index expensive items, including food and energy, that would push the CPI higher. Today, the Federal Reserve when setting interest rates focuses on a variation of the CPI that measures "core inflation." According to the Forbes "Investopedia," core inflation excludes items such as food and energy because food and energy "face volatile price movements." In other words, since food and energy prices can spike upwards, as they have this year, the Bureau of Labor Statistics calculates "core inflation" without food and energy prices, under the rationale that food and energy price spikes are merely temporary price shocks that would distort the measurement of underlying long-term inflation. To a family faced with paying rising food costs to feed the kids and skyrocketing gas costs just get to work, the definition of "core inflation" at 2 percent is a joke, not at all reflective of the increased dollars the family has to shovel out just to get by. Even more disturbing, the Bureau of Labor Statistics' calculation of "core inflation" is not limited merely to throwing food and energy prices out of the CPI. The price of any good or service in the CPI market basket prone to spiking can be thrown out, under the rationale that the items with the largest price changes reflect passing market disequilibrium that would distort the measurement of long-term trends. When removing expensive items from the CPI market basket of goods and services was not enough to depress inflation numbers, the Bureau of Labor Statistics innovated even more, changing the "weighted factors" used in calculating CPI statistics, so the results end up under-reporting the true inflation people experience in everyday living. current Social Security payments are roughly half of what they should be if the US Bureau of Labor Statistics reported the Consumer Price Index honestly. Many of the CPI manipulations were masterminded by Alan Greenspan, chairman of the Board of Governors of the Federal Reserve from 1987 under President Reagan to 2006 under President George W Bush. Williams points out that one of Greenspan's manipulations of the CPI involved the consideration that when steak got too expensive, the consumer would substitute hamburger for the steak. So, Greenspan argued, the inflation measure should reflect the costs of buying hamburger, not steak. "Of course, replacing hamburger for steak in the calculations would reduce the inflation rate," Williams commented, "but it represented the rate of inflation in terms of maintaining a declining standard of living. Cost of living was being replaced by the cost of survival." "The old system told you how much you had to increase your income in order to keep buying steak," Williams noted. "The new system promised you hamburger, and then dog food, perhaps, after that." Williams properly concluded that Greenspan's arguments violated the "intent and common usage of the inflation index." "The CPI was considered sacrosanct within the Department of Labor, given the number of contractual relationships that were anchored to it," Williams wrote. "The CPI was one number that never was to be revised, given its widespread usage." Williams calculates that the manipulations of the CPI index cause inflation to be under-reported by as much as 7 percent. The results of this under-reporting are dramatic, with the compounding effect just since the early 1990s reducing annual cost-of-living adjustments in Social Security by more than a third. Greenspan's recently released autobiographical book, "The Age of Turbulence," openly admits how political the calculation of inflation is. He notes that Richard Nixon imposed wage-and-price controls in 1971, even though the rate of inflation then was less than 5 percent. Greenspan argues that the 45 percent inflation we experienced for the half century since we abandoned the gold standard may become the norm for the future, with the unfortunate consequence that such a high rate means we will see our saved dollars lose half their purchasing power "in fifteen years or so." At the height of the gold standard, between 1870 and 1913, just prior to World War I, the cost of living as calculated by the Federal Reserve Bank of New York rose only 02 percent annually, Greenspan notes. The dilemma the Fed faces under our fiat currency system is that to keep inflation truly low, the Fed has to keep interest rates high. "Yet to keep the inflation rate down to a gold standard level of under 1 percent, or even a less draconian 1 to 2 percent range," Greenspan wrote, "the Fed, given my scenario, would have to constrain monetary expansion so drastically that it could temporarily drive up interest rates into the double-digit range not seen since the days of Paul Volcker." High interest rates constrict the money supply, make borrowing difficult, and generally depress economic growth. Greenspan's own solution was to keep interest rates artificially low, as low as the 1 percent interest rates Greenspan in 2003 aspired to hold that low for years - while simultaneously rigging the CPI numbers. The Greenspan years can be characterized as a strategy of lying about inflation to avoid the adverse political consequences of being honest and facing the true cost-of-living music. By lying about inflation, Greenspan justified 1 percent interest rates, which in 2003 were the lowest rates in 45 years, in a determined plan to keep the economy growing while he was at the helm. But one result of the Greenspan liquidity party was to fuel real inflation. So, when you wonder why food and gasoline cost so much when the government says inflation is low, just remember: You are being lied to - som... |
| www.house.gov/paul/congrec/congrec2008/cr031108h.htm Speeches And Statements Financial Services Committee Subcommittee on Domestic and International Monetary Policy, Trade, and Technology Hearing on HR 5512 Opening Statement March 11, 2008 Mr Chairman, I oppose HR 5512 because it is unconstitutional to delegate the determination of the metal content of our coinage to the Secretary of the Treasury. Under Article I Section 8 of the Constitution, the Congress is given the power to coin money and regulate the value thereof. It is a shame that Congress has already unconstitutionally delegated its coinage authority to the Treasury Department, but that is no reason to further delegate our power and essentially abdicate Congressional oversight as the passing of HR 5512 would do. Oversight by members of Congress, who have an incentive to listen to their constituents, ensures openness and transparency. This bill would eliminate that process and delegate it to unelected bureaucrats. The Secretary of the Treasury would be given sole discretion to alter the metal content of coins, or even to create non-metal coins. Given the history of Congressional delegation and subsequent lax oversight on issues as important as the conflict in Iraq, it would be nave to believe that Congress would exercise any more oversight over an issue as unimportant to most members as the composition of coins. While I sympathize with the aim of Section 4 of this bill to save taxpayer dollars by minting steel pennies, it is disappointing that our currency has been so greatly devalued as to make this step necessary. At the time of the penny's introduction, it actually had some purchasing power. Based on the price of gold, what one penny would have purchased in 1909 requires 47 cents today. It is no wonder then that few people nowadays would stoop to pick up any coin smaller than a quarter. Congress' unconstitutional delegation of monetary policy to the Federal Reserve and its reluctance to exercise oversight in that arena have led to a massive devaluation of the dollar. If we fail to end this devaluation, we will undoubtedly hold future hearings as the metal value of our coins continues to outstrip the face value. HR 5512 is a sad commentary on how far we have fallen, not just since the days of the Founders, but only in the last 75 to 100 years. We could not maintain the gold standard nor the silver standard. We could not maintain the copper standard, and now we cannot even maintain the zinc standard. Paper money inevitably breeds inflation and destroys the value of the currency. That is the reason that this proposal is before us today. |
| www.house.gov/paul/congrec/congrec2008/cr0305a08h.htm Speeches And Statements Opening Statement Financial Services Committee Foreign Government Investment in the US Economy and Financial Sector March 5, 2008 Mr Chairman, many Americans have expressed concern over the growing role played by sovereign wealth funds in the US economy. Such fears are to a large extent misplaced, however, as we should be more concerned with the underlying causes that have allowed sovereign wealth funds to accumulate as much capital as they have. The two major types of sovereign wealth funds are those which are funded by proceeds from natural resources sales, and those funded by accumulation of foreign exchange. The former category includes sovereign wealth funds in Saudi Arabia, Kuwait, and the UAE. Flush with dollars due to the high price of oil, they are looking for opportunities to make that money work for them. The high price of oil is due in large part to our inflationary monetary policy. We have literally exported inflation across the globe, spurring malinvestment and a subsequent commodities boom. The second major category of sovereign wealth funds includes China's sovereign wealth fund, which has the potential to draw on China's more than $1 trillion in foreign exchange reserves. Because of China's current account surplus, it continues to accumulate foreign exchange. Much of this is due to the United States' persistent current account deficit. Inflationary monetary policy and a desire to stimulate the economy at all costs has led us to become the world's largest debtor, and this debt must eventually be repaid. The current account deficit has come about because our economy does not produce enough capital goods to satisfy the wants of our foreign creditors. Tired of holding increasingly worthless dollars, it is only natural that our creditors would want to purchase tangibles, which in the present case are stakes in American companies. Rather than bemoaning the fact that foreign governments are using their dollars to purchase stakes in American companies, we should welcome the stability that such investment is bringing to our economy. While I am reluctant as anyone in this room to involve any government in any sort of intervention into the market, the fact remains that without injections of capital from foreign wealth funds the results of the subprime crisis would have been far worse for many financial firms. Even now we read that Citigroup, despite the massive funding it has received from sovereign wealth funds, is in danger of collapse unless it receives additional funding. I have always been a staunch advocate of abandoning our loose monetary policy and facing the consequences now, rather than continuing easy money in the hopes of never having to face a recession. Now that it is clear that decades of Federal Reserve monetary manipulation have led to a severe recession, the thought of sovereign wealth funds investing in the financial sector holds far more appeal than that of a complete collapse of major industry players which would cause catastrophic effects throughout the economy. Sovereign wealth funds are a necessary consequence of fiscal and monetary policies which have left us overextended. Actions to stifle the operations of sovereign wealth funds and corresponding retaliatory actions by foreign countries could have the same detrimental effects on the economy as the trade wars begun after passage of the Smoot-Hawley tariff. Rather than take actions to limit or prohibit the actions of sovereign wealth funds, I would urge my colleagues to take action to end our inflationary monetary policy. |
| www.house.gov/paul/congrec/congrec2008/cr022608h.htm Speeches And Statements Financial Services Committee Hearing Monetary Policy and the State of the Economy February 26, 2008 Mr Chairman, Price controls are almost universally reviled by economists. The negative economic consequences of price floors or price ceilings are numerous and well-documented. Our current series of hearings have been called to discuss the most important, but least understood, price manipulation in the world today: the manipulation of the interest rate. By setting the federal funds rate, the rate at which banks in the Federal Reserve System loan funds to each other, the Federal Reserve inhibits the actions of market participants coming together to determine a market interest rate. The Federal Reserve and the federal government do not deign to interfere in setting the price of houses, the interest rate on mortgages, or the prices of wood and steel. The Fed's actions in setting the federal funds rate however, because it reflects the price of money to a borrower and thus affects demand for money, affects prices throughout the economy in a manner less pervasive but just as damaging as direct price controls. The example of the Soviet Union should have taught us that no one person, no group of people, no matter how scientifically trained, can arbitrarily set prices and not expect economic havoc. Only the spontaneous interaction of market participants can lead to the development of a functioning price system that allows the needs and wants of all participants to be met. The sense I get from reading much of the punditry is that the federal funds rate is set often by the whims of the Federal Reserve governors. Even mechanistic explanations such as the Taylor Rule rely on inputs that are often left up to the discretion of the Fed policymakers: what is the potential GDP, do we use CPI or PCE, overall CPI versus CPI less energy and food, etc. The setting of the interest rate strikes me as quite similar to the way FDR used to set gold prices in the 1930's, at his whim, resulting in economic havoc and uncertainty. When market actors have to devote much of their time to discerning the mindset of government price-setters, to parsing FOMC statements and minutes, they are necessarily diverted from productive economic activity. They cease to become purely economic actors and are forced to become political forecasters. This is not a problem isolated to this particular case, as businesses are forced to reckon with tax increases, expiring tax credits, import tariffs, subsidies to competitors, etc. However, because the interest rate determines the cost of borrowing and therefore determines whether or not marginal long-term business investments are undertaken, this politicized interest rate manipulation has far more impact than other government policies. This setting of the interest rate introduces the business cycle into the economy. Until we understand the results these Federal Reserve actions have, we will be doomed to repeat these periods of boom and bust. I urge my colleagues to study this matter, and to resist the urge for greater Federal Reserve intervention in the market. |
| www.house.gov/paul/congrec/congrec2008/cr021308h.htm Speeches And Statements Congressman Ron Paul Statement on Competing Currencies February 13, 2008 Madam Speaker, I rise to speak on the concept of competing currencies. Currency, or money, is what allows civilization to flourish. In the absence of money, barter is the name of the game; if the farmer needs shoes, he must trade his eggs and milk to the cobbler and hope that the cobbler needs eggs and milk. Rather than having to search for someone with reciprocal wants, the farmer can exchange his milk and eggs for an agreed-upon medium of exchange with which he can then purchase shoes. This medium of exchange should satisfy certain properties: it should be durable, that is to say, it does not wear out easily; it should be divisible into units usable for every-day transactions; it should be recognizable and uniform, so that one unit of money has the same properties as every other unit; it should be scarce, in the economic sense, so that the extant supply does not satisfy the wants of everyone demanding it; it should be stable, so that the value of its purchasing power does not fluctuate wildly; and it should be reproducible, so that enough units of money can be created to satisfy the needs of exchange. Over millennia of human history, gold and silver have been the two metals that have most often satisfied these conditions, survived the market process, and gained the trust of billions of people. Gold and silver are difficult to counterfeit, a property which ensures they will always be accepted in commerce. It is precisely for this reason that gold and silver are anathema to governments. A supply of gold and silver that is limited in supply by nature cannot be inflated, and thus serves as a check on the growth of government. Without the ability to inflate the currency, governments find themselves constrained in their actions, unable to carry on wars of aggression or to appease their overtaxed citizens with bread and circuses. At this country's founding, there was no government controlled national currency. While the Constitution established the Congressional power of minting coins, it was not until 1792 that the US Mint was formally established. In the meantime, Americans made do with foreign silver and gold coins. Even after the Mint's operations got underway, foreign coins continued to circulate within the United States, and did so for several decades. On the desk in my office I have a sign that says: Don't steal the government hates competition. Indeed, any power a government arrogates to itself, it is loathe to give back to the people. Just as we have gone from a constitutionally-instituted national defense consisting of a limited army and navy bolstered by militias and letters of marque and reprisal, we have moved from a system of competing currencies to a government-instituted banking cartel that monopolizes the issuance of currency. In order to introduce a system of competing currencies, there are three steps that must be taken to produce a legal climate favorable to competition. The first step consists of eliminating legal tender laws. Article I Section 10 of the Constitution forbids the States from making anything but gold and silver a legal tender in payment of debts. States are not required to enact legal tender laws, but should they choose to, the only acceptable legal tender is gold and silver, the two precious metals that individuals throughout history and across cultures have used as currency. However, there is nothing in the Constitution that grants the Congress the power to enact legal tender laws. We, the Congress, have the power to coin money, regulate the value thereof, and of foreign coin, but not to declare a legal tender. Yet, there is a section of US Code, 31 USC 5103, that purports to establish US coins and currency, including Federal Reserve notes, as legal tender. Historically, legal tender laws have been used by governments to force their citizens to accept debased and devalued currency. Gresham's Law describes this phenomenon, which can be summed up in one phrase: bad money drives out good money. An emperor, a king, or a dictator might mint coins with half an ounce of gold and force merchants, under pain of death, to accept them as though they contained one ounce of gold. Each ounce of the king's gold could now be minted into two coins instead of one, so the king now had twice as much money to spend on building castles and raising armies. As these legally overvalued coins circulated, the coins containing the full ounce of gold would be pulled out of circulation and hoarded. We saw this same phenomenon happen in the mid-1960s when the US government began to mint subsidiary coinage out of copper and nickel rather than silver. The copper and nickel coins were legally overvalued, the silver coins undervalued in relation, and silver coins vanished from circulation. These actions also give rise to the most pernicious effects of inflation. Most of the merchants and peasants who received this devalued currency felt the full effects of inflation, the rise in prices and the lowered standard of living, before they received any of the new currency. By the time they received the new currency, prices had long since doubled, and the new currency they received would give them no benefit. In the absence of legal tender laws, Gresham's Law no longer holds. If people are free to reject debased currency, and instead demand sound money, sound money will gradually return to use in society. Merchants would have been free to reject the king's coin and accept only coins containing full metal weight. The second step to reestablishing competing currencies is to eliminate laws that prohibit the operation of private mints. One private enterprise which attempted to popularize the use of precious metal coins was Liberty Services, the creators of the Liberty Dollar. Evidently the government felt threatened, as Liberty Dollars had all their precious metal coins seized by the FBI and Secret Service this past November. Of course, not all of these coins were owned by Liberty Services, as many were held in trust as backing for silver and gold certificates which Liberty Services issued. None of this matters, of course, to the government, who hates to see any competition. The sections of US Code which Liberty Services is accused of violating are erroneously considered to be anti-counterfeiting statutes, when in fact their purpose was to shut down private mints that had been operating in California. California was awash in gold in the aftermath of the 1849 gold rush, yet had no US Mint to mint coinage. There was not enough foreign coinage circulating in California either, so private mints stepped into the breech to provide their own coins. As was to become the case in other industries during the Progressive era, the private mints were eventually accused of circulating debased (substandard) coinage, and in the interest of providing government-sanctioned regulation and a government guarantee of purity, the 1864 Coinage Act was passed, which banned private mints from producing their own coins for circulation as currency. The final step to ensuring competing currencies is to eliminate capital gains and sales taxes on gold and silver coins. Under current federal law, coins are considered collectibles, and are liable for capital gains taxes. Short-term capital gains rates are at income tax levels, up to 35 percent, while long-term capital gains taxes are assessed at the collectibles rate of 28 percent. Furthermore, these taxes actually tax monetary debasement. As the dollar weakens, the nominal dollar value of gold increases. The purchasing power of gold may remain relatively constant, but as the nominal dollar value increases, the federal government considers this an increase in wealth, and taxes accordingly. Thus, the more the dollar is debased, the more capital gains taxes must be paid on holdings of gold and other precious metals. Just as pernicious are the sales and use taxes which are assessed on gold and silver at the state level in many states. Imagine having to pay sales tax at the bank every time you change a $10 bill for a roll of quarters to do... |
| www.house.gov/paul/congrec/congrec2006/cr050206.htm RON PAUL OF TEXAS Before the US House of Representatives May 2, 2006 What Congress Can Do About Soaring Gas Prices Gasoline prices are soaring and the people are screaming. But there are some very important things we can do immediately to help. First: We must reassess our foreign policy and announce some changes. One of the reasons we went into Iraq was to secure our oil. The sooner we get out of Iraq and allow the Iraqis to solve their own problems the better. Soaring gasoline prices are a giant unintended consequence of our invasion, pure and simple. Second: We must end our obsession for a military confrontation with Iran. Iran does not have a nuclear weapon, and according to our own CIA is not on the verge of obtaining one for years. Iran is not in violation of the Nuclear Nonproliferation Treaty, and has a guaranteed right to enrich uranium for energyin spite of the incessant government and media propaganda to the contrary. Iran has never been sanctioned by the UN Security Council. Yet the drumbeat grows louder for attacking certain sites in Iran, either by conventional or even nuclear means. Repeated resolutions by Congress stir up unnecessary animosity toward Iran, and create even more concern about future oil supplies from the Middle East. We must quickly announce we do not seek war with Iran, remove the economic sanctions against her, and accept her offer to negotiate a diplomatic solution to the impasse. An attack on Iran, coupled with our continued presence in Iraq, could hike gas prices to $5 or $6 per gallon here at home. By contrast, a sensible approach toward Iran could quickly lower oil prices by $20 per barrel. Third: We must remember that prices of all things go up because of inflation. Inflation by definition is an increase in the money supply. The money supply is controlled by the Federal Reserve Bank, and responds to the deficits Congress creates. When deficits are excessive, as they are today, the Fed creates new dollars out of thin air to buy Treasury bills and keep interest rates artificially low. But when new money is created out of nothing, the money already in circulation loses value. Once this is recognized, prices rise-- some more rapidly than others. Exploding deficits, due to runaway entitlement spending and the cost of dangerous militarism, create pressure for the Fed to inflate the money supply. This contributes greatly to the higher prices we all claim to oppose. If we want to do something about gas prices, we should demand and vote for greatly reduced welfare and military spending, a balanced budget, and fewer regulations that interfere with the market development of alternative fuels. We also should demand a return to a sound commodity monetary system. All subsidies and special benefits to energy companies should be ended. And in the meantime lets eliminate federal gas taxes at the pump. Oil prices are at a level where consumers reduce consumption voluntarily. But as great as the market economy is, it cannot overcome a foreign policy that is destined to disrupt oil supplies and threaten the world with an expanded and dangerous conflict in the Middle East. |
| www.house.gov/paul/congrec/congrec2006/cr042506.htm RON PAUL OF TEXAS Before the US House of Representatives April 25, 2006 What the Price of Gold is Telling Us The financial press, and even the network news shows, have begun reporting the price of gold regularly. For twenty years, between 1980 and 2000, the price of gold was rarely mentioned. There was little interest, and the price was either falling or remaining steady. Since 2001 however, interest in gold has soared along with its price. With the price now over $600 an ounce, a lot more people are becoming interested in gold as an investment and an economic indicator. Much can be learned by understanding what the rising dollar price of gold means. The rise in gold prices from $250 per ounce in 2001 to over $600 today has drawn investors and speculators into the precious metals market. Though many already have made handsome profits, buying gold per se should not be touted as a good investment. After all, gold earns no interest and its quality never changes. Its static, and does not grow as sound investments should. Its more accurate to say that one might invest in a gold or silver mining company, where management, labor costs, and the nature of new discoveries all play a vital role in determining the quality of the investment and the profits made. Buying gold and holding it is somewhat analogous to converting ones savings into one hundred dollar bills and hiding them under the mattress-- yet not exactly the same. Both gold and dollars are considered money, and holding money does not qualify as an investment. Theres a big difference between the two however, since by holding paper money one loses purchasing power. The purchasing power of commodity money, ie gold, however, goes up if the government devalues the circulating fiat currency. Holding gold is protection or insurance against governments proclivity to debase its currency. The purchasing power of gold goes up not because its a so-called good investment; it goes up in value only because the paper currency goes down in value. One of the characteristics of commodity money-- one that originated naturally in the marketplace-- is that it must serve as a store of value. Because of this profound difference, the incentive and wisdom of holding emergency funds in the form of gold becomes attractive when the official currency is being devalued. Its more attractive than trying to save wealth in the form of a fiat currency, even when earning some nominal interest. The lack of earned interest on gold is not a problem once people realize the purchasing power of their currency is declining faster than the interest rates they might earn. The purchasing power of gold can rise even faster than increases in the cost of living. The point is that most who buy gold do so to protect against a depreciating currency rather than as an investment in the classical sense. Americans understand this less than citizens of other countries; some nations have suffered from severe monetary inflation that literally led to the destruction of their national currency. Though our inflation-- ie the depreciation of the US dollar-- has been insidious, average Americans are unaware of how this occurs. For instance, few Americans know nor seem concerned that the 1913 pre-Federal Reserve dollar is now worth only four cents. Officially, our central bankers and our politicians express no fear that the course on which we are set is fraught with great danger to our economy and our political system. The belief that money created out of thin air can work economic miracles, if only properly managed, is pervasive in DC In many ways we shouldnt be surprised about this trust in such an unsound system. For at least four generations our government-run universities have systematically preached a monetary doctrine justifying the so-called wisdom of paper money over the foolishness of sound money. Not only that, paper money has worked surprisingly well in the past 35 years-- the years the world has accepted pure paper money as currency. Alan Greenspan bragged that central bankers in these several decades have gained the knowledge necessary to make paper money respond as if it were gold. This removes the problem of obtaining gold to back currency, and hence frees politicians from the rigid discipline a gold standard imposes. Many central bankers in the last 15 years became so confident they had achieved this milestone that they sold off large hoards of their gold reserves. At other times they tried to prove that paper works better than gold by artificially propping up the dollar by suppressing market gold prices. This recent deception failed just as it did in the 1960s, when our government tried to hold gold artificially low at $35 an ounce. But since they could not truly repeal the economic laws regarding money, just as many central bankers sold, others bought. Its fascinating that the European central banks sold gold while Asian central banks bought it over the last several years. Since gold has proven to be the real money of the ages, we see once again a shift in wealth from the West to the East, just as we saw a loss of our industrial base in the same direction. Though Treasury officials deny any US sales or loans of our official gold holdings, no audits are permitted so no one can be certain. The special nature of the dollar as the reserve currency of the world has allowed this game to last longer than it would have otherwise. But the fact that gold has gone from $252 per ounce to over $600 means there is concern about the future of the dollar. The higher the price for gold, the greater the concern for the dollar. Instead of dwelling on the dollar price of gold, we should be talking about the depreciation of the dollar. Today a dollar is worth 1/600^th of an ounce of gold, meaning it takes $600 to buy one ounce of gold. The number of dollars created by the Federal Reserve, and through the fractional reserve banking system, is crucial in determining how the market assesses the relationship of the dollar and gold. Though theres a strong correlation, its not instantaneous or perfectly predictable. There are many variables to consider, but in the long term the dollar price of gold represents past inflation of the money supply. Equally important, it represents the anticipation of how much new money will be created in the future. This introduces the factor of trust and confidence in our monetary authorities and our politicians. And these days the American people are casting a vote of no confidence in this regard, and for good reasons. The incentive for central bankers to create new money out of thin air is twofold. One is to practice central economic planning through the manipulation of interest rates. The second is to monetize the escalating federal debt politicians create and thrive on. Today no one in Washington believes for a minute that runaway deficits are going to be curtailed. In March alone, the federal government created an historic $85 billion deficit. The current supplemental bill going through Congress has grown from $92 billion to over $106 billion, and everyone knows it will not draw President Bushs first veto. Most knowledgeable people therefore assume that inflation of the money supply is not only going to continue, but accelerate. This anticipation, plus the fact that many new dollars have been created over the past 15 years that have not yet been fully discounted, guarantees the further depreciation of the dollar in terms of gold. Theres no single measurement that reveals what the Fed has done in the recent past or tells us exactly what its about to do in the future. Forget about the lip service given to transparency by new Fed Chairman Bernanke. Not only is this administration one of the most secretive across the board in our history, the current Fed firmly supports denying the most important measurement of current monetary policy to Congress, the financial community, and the American public. Because of a lack of interest and poor understanding of monetary policy, Congress has expressed essentially no concern about the significant change in reporting statistics on the money supply. Beginning in March, though planned bef... |
| www.house.gov/paul/tst/tst2004/tst030804.htm Ron Paul's Texas Straight Talk - A weekly Column Inflation- Alive and Well For years, the central planners at the Federal Reserve have assured us that inflation is dormant, if not dead. Federal Reserve Governor Ben Bernanke, during a recent speech in Washington, took pains to emphasize that inflation is Under very good control. But considering the relentless increase in the money supply engineered by the Fed over the last decade, one wonders whether Mr Bernanke, Chairman Greenspan, and company protest too much. Austrian- school economists demonstrate that true inflation is monetary inflation. True inflation therefore can be measured by an increase in the money supply. Mr Greenspan and Fed policy makers have more than doubled the M3 money supply in less than ten years. While Treasury printing presses can print unlimited dollars, there are natural limits to economic growth. This flood of newly minted US currency can only increase consumer prices in the long term, as more and more dollars chase available goods and services. Lew Rockwell, president of the Ludwig von Mises Institute, explains that Federal Reserve governors are incapable of telling us the truth about inflation for a very simple reason- theyre the ones causing it: The Federal Reserve always promises that its working to bring down inflation, but as Murray N Rothbard shows in The Case Against the Fed, it never does. Since the Fed came into being, the dollars value has plummeted to less than a penny, and even at a 3% inflation rate, prices will tend to double every 25 years The Fed wants to cover its crimes by appearing more successful at battling inflation. What the Fed doesnt want to talk about is the real cause of inflation: not greedy consumers, avaricious workers, or price-gouging corporations, but the central bank itself, and its power and practice of creating money out of thin air. The Treasury department parrots the Fed line that consumer prices, as measured by the consumer price index (CPI), are under control. But even some Keynesian economists admit that CPI grossly understates true inflation. The most glaring problem is that CPI excludes housing prices, instead tracking rents. The Feds easy credit policies have created an artificial mortgage boom, enabling many Americans who would not have met credit standards 30 years ago to buy houses. So demand for rentals has diminished, causing rental housing prices to drop and distorting the CPI downward. However, everyone knows the cost of purchasing a home has increased dramatically in the last ten years. Home prices in many regions have more than doubled in just five years. So price inflation certainly is alive and well when to comes to the largest purchase most Americans make. The prices of many other goods and services, including medical care and energy, also have increased substantially in the past decade. In fact, broad indexes show commodities have risen 49% since last spring! The price of gold, steel, lumber, coal, lead, soybeans, corn, and rice have all spiked over the past year. When raw materials and basic consumables rise in price, all of us feel the effects in our pocketbooks. Mr Greenspan may dismiss commodities as mere physical assets in his vision of an increasingly conceptual economy, but the markets are showing their preference for hard assets over fiat dollars and dollar-denominated equities. |
| www.house.gov/paul/tst/tst2006/tst071006.htm Ron Paul's Texas Straight Talk - A weekly Column Federal Reserve Policy Destroys the Value of Your Savings July 10, 2006 For years officials at the Federal Reserve Bank, including Chairman Bernanke himself, have assured us that inflation is under control and not a problem-- even as the price of housing, energy, medical care, school tuition, gold, and other commodities skyrockets. The Treasury department parrots the Fed line that consumer prices, as measured by the consumer price index (CPI), are under control. But even many mainstream economists now admit that CPI grossly understates true inflation. The most glaring problem is that CPI excludes housing prices, instead tracking rents. Everyone knows the cost of purchasing a home has increased dramatically in the last ten years; in many regions housing prices have more than doubled in just five years. So price inflation certainly is alive and well when to comes to the largest purchase most Americans make. When the Federal Reserve increases the supply of dollars in circulation, both paper and electronic, prices must rise eventually. The supply of dollars has risen much faster than the supply of goods and services being chased by those dollars. Fed policy makers have more than doubled the money supply in less than ten years. While Treasury printing presses can print unlimited dollars, there are natural limits to economic growth. This flood of newly minted US currency can only increase consumer prices in the long term. Mr Bernanke has stated quite candidly that he will use government printing presses to stimulate the economy as necessary. He is famous for joking that he would endorse dropping money from helicopters if needed to prevent an economic slowdown. This is nothing short of an express policy to destroy our money by inflation. Every new dollar erodes the value of existing dollars based on simple supply and demand. Does anyone really believe the Treasury can make us rich simply by printing more money? The coming dollar crisis is not likely to be fixed by politicians who are unwilling to make hard choices, admit mistakes, and spend less money. Demographic trends will place even greater demands on Congress to maintain benefits for millions of older Americans who are dependent on the federal government. Faced with uncomfortable financial realities, Congress will seek to avoid the day of reckoning by the most expedient means available-- and the Federal Reserve undoubtedly will accommodate Washington by printing more dollars to pay the bills. The Fed is the enabler for the spending addicts in Congress, who would rather spend new fiat money than face the political consequences of raising taxes or borrowing more abroad. The irony is that many of the Feds biggest cheerleaders are the same supposed capitalists who denounced centralized economic planning when practiced by the former Soviet Union. Large banks and Wall Street firms love the Feds easy money policy, because they profit at the front end from the resulting loan boom and artificially high equity prices. Its the little guy who loses when the inflated dollars finally trickle down to him and erode his buying power. Someday Americans will understand that Federal Reserve bankers have no magic ability-- and certainly no legal or moral right-- to decide how much money should exist and what the cost of borrowing money should be. |
| www.house.gov/paul/press/press2006/pr021506.htm Paul Questions Bernanke on M3, Inflation February 15, 2006 Washington, DC: Congressman Ron Paul of Texas today questioned new Federal Reserve Chairman Ben Bernanke before the House Financial Services committee. Paul continued his longtime criticism of Fed policies, focusing on whether the relentless increase in the money supply that took place during Alan Greenspans tenure will continue. Mr Bernanke has pledged to bring increased transparency to Federal Reserve policymaking, but the recent Fed decision to discontinue compiling and releasing the M3 monetary aggregate figure casts doubt on this promise. M3 is widely used by economists, policy makers, and investors as the most accurate and reliable true measure of the money supply. Paul, known as a congressional expert on monetary policy, reminded Mr Bernanke that inflation is always a monetary phenomenon, resulting from an increase in the money supply as ordered by the Fed itself. M3 has risen more than twice as fast as M2 and GDP in recent years, illustrating that real inflation is much higher than the government admits through its CPI statistics. The troubling possibility is that the Fed discontinued M3 for the simple reason that it wants to conceal the extent to which the money supply- and hence price inflation- really grows. Paul is preparing legislation that will compel the Fed to continue publishing M3, and plans to introduce the bill in the Financial Services committee later this month. |