Time to Listen to Ron Paul?

Time to Listen to Ron Paul?
By Elizabeth MacDonald
Time to listen to Texas Congressman Ron Paul, the lone voice of reason in Congress today who’s got to feel like he’s shouting into a field of cotton with his repeated warnings about the dangers of a collapsing dollar, while the administration goes AWOL on the problem.

The dollar just hit a record intraday low against the euro on reports that consumer confidence levels have dropped to levels not seen since the post-Watergate era. It is down 7% year to date against the Chinese renminbi, it’s weaker than the Japanese yen and the Canadian loonie.

The joke is the greenback is now only stronger than the Mexican pesos and the Zimbabwe dollar, an overstatement for dramatic effect, to be sure.But since hitting a peak in 2002, the dollar has lost about a quarter of its value against a trade weighted basket of currencies.

A weak dollar acts as an anvil around the neck of the US economy and consumers. Rising inflation is essentially a tax on consumers, so are rising energy prices, and that double whammy threatens to undermine the purchasing power of the rebate checks due out in May–backed by printing even more dollars.

A bellwether event of significant import to our nation’s finances happened this past January 1 with little notice. That’s the day the first baby boomer was allowed to retire. A new federal report wearily warns once again for the umpteenth time that the nation faces some $60t in Social Security and Medicare unfunded liabilities alone.

We’ve heard time and again conservatives say deficits don’t matter. To say that deficits don’t matter is like saying ketchup is a vegetable or trees cause pollution.

The $406b we pay annually in interest on the $9t in federal debt alone would rank as the world’s 30th biggest economy.

That annual interest cost surpasses the gross domestic product of Belgium, and is bigger than the GDP of Denmark and Hungary combined. The $406b would cover the annual cost of investigating Medicare fraud.

Stack all those one dollar bills making up our $9t deficit (and that doesn’t include the $60t in unfunded liabilities for Medicare and Social Security) and you would reach the moon and back. “Printing money cannot create wealth, if it could counterfeiting would be legal,” economist Brian Wesbury has said.

Even Milton Friedman, the Nobel Prize-winning economist and a forceful advocate for laissez-faire economics, got so sick of the way central bankers were willy nilly printing money in the ‘70s, he advocated that the government should replace the Federal Reserve with a computer. “Money is too important to be left to central bankers,” he quipped.

Broad zoom: The US economy has spent all of a year and four months in a downturn over the last two and a half decades. During that time we’ve seen a market crash of 22% in 1987, the S&L crisis, four wars, three financial crises (Mexico, Asian flu and Russian debt crises), the blow up of the hedge fund Long Term Capital, two asset bubbles (dot com and telecom). Since the Bush tax cuts of 2003, the US economy added the equivalent of China’s GDP–and government spending has boomed.

Now Federal Reserve chairman Ben Bernanke has both cut rates at a breakneck speed and pumped a massive amount of monetary stimulus into the markets to cure the credit crisis. I still think he is doing his level best to fix a crisis not entirely of his own making. The question now is, will Bernanke yank the liquidity punch bowl when the economy returns to trend growth in 2010 or 2011 as the central bank projects?

Let’s hope so, because the case for a weak dollar is, to me, well, weak. Namely, that a lame greenback softens the housing and credit crises as it fuels profits at US exporters whose goods are now dirt cheap in the eyes of foreign customers. Strong foreign sales at places like Boeing and Caterpillar reportedly added 1.4% to US growth in the second quarter of 2007. But exports make up just 13% of GDP. Consumers make up a larger 70%.

It’s no surprise consumer confidence is as weak as it was in the ’70s. LBJ had promised this country it could have both guns and butter in the ‘60s, so the Federal Reserve gunned the printing presses to pay for spending on entitlement programs and for the Vietnam war. For the first time, too, politicians got their mitts on taxpayers’ Social Security funds, after Democrats passed a so-called “unified budget” in the late ‘60s.

All that spending caused the dollar to nosedive in the 1970s amidst an oil embargo that sent oil costs, priced in dollars, soaring. Paul Volcker, then Fed chairman, enacted rapid rate hikes hitting 21% by 1979, and the Treasury went so far as to sell $6.4b in “Carter bonds,” largely denominated in Deutschemarks, to prop up the dollar. Gold got ripped off its mooring of an average $35 an ounce in the ‘70s, and in 1980 it hit a record $835 an ounce, around $2,250 in today’s prices.

Gold acts as a dew line for inflation. We essentially have a good handle on how much gold there is in the world and potentially below ground. When gold rises in price, it signals we are printing too many dollars, which indicates a concurrent drop in the greenback’s value. Over the last seven years, gold and oil prices have risen in lockstep, up 239% and 267% respectively. If the dollar had also risen in value at the same rate, oil would be selling at about $30 a barrel.

But now central bankers say that because of the weak dollar, they’ve seen capital losses carved out of an estimated $12t worth of dollars they hold in foreign currency reserves. The fear is they may unload their $12t in greenbacks en masse to cut their losses and run–which would really tip the US into a protracted recession. Already reports out of China show government officials there willing to rotate future planned investments out of US treasurys into other investments.

Countries pegged to the dollar are rightly saying, too, that we are exporting inflation to their shores. Saudi Arabia is a land that has had nearly zero inflation since 1998, but recently inflation soared to 7% annually, despite the fact the country is flush with petrodollars.

Congressman Paul rightfully warns us when he says the US government has “systematically undermined” the US dollar by expanding “the money supply at will for financing war or manipulating the economy with little resistance from Congress–while benefiting the special interests that influence government.”

It’s not just the US gunning the mints. Goldman Sachs figures that three-fifths of the world’s broad money supply growth came from emerging economies over the past year or so. Three-fifths. That’s gigantic.

Goldman Sachs says the growth in Russia’s M3 measure of broad money grew 51% over the last year or so, India by 24%, and by 20% in China, Saudi Arabia, South Africa and Brazil. That’s three times as fast as the US and the rest of the developed world, and it’s faster than their GDP growth rates. It’s the fastest pace in decades.

All that loose money is pouring into commodities, stock exchanges around the planet as well as bond markets–it’s largely why our long-term bond yields have been historically low, spurring a dramatic increase in mortgage borrowing, as mortgage rates typically track the 10-year Treasury note.

Watch out here–emerging economies are just as susceptible to minting lots of money due to political pressures, including things like paying for wars, or calming local populations clamoring for higher pay and more jobs.

What can be done stateside?

The administration needs to state more emphatically that it supports a strong dollar. A stronger dollar would draw liquidity back into the credit markets, lower inflation risks, cut oil prices and restart economic growth, notes Bear Stearns economist David Malpass.

Presidential candidates vilify NAFTA and free trade, when the weak dollar is partly to blame for problems like jobs lost to overseas operations, Malpass adds.

“Empires fail because they run out of money, or more accurately, run out of the ability to spend or inflate,” Congressman Paul warns. “We need to control spending, immediately, before it is too late.”

SheikBen wrote:I would disagree with one thing stated in your quote, Stephanie. The strong dollar of the 90s I believe was bad for American jobs--proving a double whammy when added to NAFTA, as it made goods produced in America that much more expensive for sale as exports.

The weak dollar should be avoided for reasons other than it's effect on jobs.

Aaron wrote:I'm still curious as to how we go to the gold standard when we only have a couple of trillion dollars worth of gold in the United States.

Aaron wrote:I'm still curious as to how we go to the gold standard when we only have a couple of trillion dollars worth of gold in the United States.

SamCogar wrote:

Aaron wrote:I'm still curious as to how we go to the gold standard when we only have a couple of trillion dollars worth of gold in the United States.

Not sure what your question is.

I'll guess and answer to wit: We can't, inflation and debt has done ruled that out.

Gold is a "world commodity" and its value is the same ....... anywhere in the world. An ounce of gold is an ounce of gold.

If the price of gold in the US starts increasing, ......... that means the value (buying power) of our currency (the Dollar) is decreasing relative to the value of the currency in other countries. If the price of gold in the US starts decreasing, ..... it means just the opposite. This difference in the value of different currencies is called the "exchange rate".

Thus, if you exchange an American Dollar for an English Pound or a German Mark, ..... it is not necessarily a 1 for 1 exchange.

But if you exchange 1 oz. of American gold with 1 oz. of English or German gold, ..... it will be a 1 for 1 exchange.

Aaron, back in the early 70's a friend of mine was sent to Germany on business and being it was his 2nd trip over there he didn't think to "exchange" any Dollars for Marks before he left New York.

Well "DUH", something happened and when he landed in Frankfort ........ no one would accept his Dollars. He couldn't even buy a beer. Somehow he managed to contact the Hanover office and they "wired" him some Marks.

cheers

Aaron wrote:
I don't know why you couldn't spend a dollar in Germany in the 70's either.

Many economists contend that the Asian central banks have created an informal version of the Bretton Woods system of fixed exchange rates that lasted from shortly after World War II until the early 1970's. The system collapsed after the imbalances between Europe and the United States became impossible to reconcile. Rapid growth is putting similar pressure on China, which has kept its currency, the yuan, pegged at a fixed rate to the dollar. The growing imbalances, in both China and the United States, is one reason Mr. Rogoff is bracing for a jolt to the dollar and the American economy similar to the one that occurred in the early 1970's. Then, as now, the United States was running large budget and trade deficits. Then, as now, the United States was bogged down in a war costing billions of dollars a year. And in 1974, a few months after the dollar plunged against the German mark and Japanese yen, oil prices soared. "It's striking how many parallels there are between today and the early 1970's," Mr. Rogoff said. "The loss of the anchor of the dollar and fixed exchange rates contributed to the inflation we saw in the 70's. It was the worst period in growth we have had since World War II."

http://www.globalpolicy.org/socecon/crisis/tradedeficit/2004/1116dollarscenario.htm

SamCogar wrote:

Aaron wrote:
I don't know why you couldn't spend a dollar in Germany in the 70's either.

Aaron, this was why:

Many economists contend that the Asian central banks have created an informal version of the Bretton Woods system of fixed exchange rates that lasted from shortly after World War II until the early 1970's. The system collapsed after the imbalances between Europe and the United States became impossible to reconcile. Rapid growth is putting similar pressure on China, which has kept its currency, the yuan, pegged at a fixed rate to the dollar. The growing imbalances, in both China and the United States, is one reason Mr. Rogoff is bracing for a jolt to the dollar and the American economy similar to the one that occurred in the early 1970's. Then, as now, the United States was running large budget and trade deficits. Then, as now, the United States was bogged down in a war costing billions of dollars a year. And in 1974, a few months after the dollar plunged against the German mark and Japanese yen, oil prices soared. "It's striking how many parallels there are between today and the early 1970's," Mr. Rogoff said. "The loss of the anchor of the dollar and fixed exchange rates contributed to the inflation we saw in the 70's. It was the worst period in growth we have had since World War II."

http://www.globalpolicy.org/socecon/crisis/tradedeficit/2004/1116dollarscenario.htm

And when it plunged, ........ a German bartender would not accept your dollar(s) as payment for your beer.

.

I wouldn’t exactly go back on the gold standard, but I would legalize the Constitution where gold and silver should and could be legal tender, which would restrain the federal government from spending and then turning that over to the Federal Reserve and letting the Federal Reserve print the money. There were some short comings of the gold standard of the 19th century because it was linked to silver. It was a fixed price and that caused confusion. So, there is a better gold standard. I’d rather say go forward to a gold standard. The main thing is getting rid of paper money. Getting rid of paper money is the key, because that’s how governments get away with economic murder, because they get to spend and they don’t have to act responsibly.

Stephanie wrote:https://www.youtube.com/watch?v=RKQmYfY3R7c

It is apparent that many of you don't have a clear understanding of what Ron Paul is advocating, or why.

I wouldn’t exactly go back on the gold standard, but I would legalize the Constitution where gold and silver should and could be legal tender, which would restrain the federal government from spending and then turning that over to the Federal Reserve and letting the Federal Reserve print the money. There were some short comings of the gold standard of the 19th century because it was linked to silver. It was a fixed price and that caused confusion. So, there is a better gold standard. I’d rather say go forward to a gold standard. The main thing is getting rid of paper money. Getting rid of paper money is the key, because that’s how governments get away with economic murder, because they get to spend and they don’t have to act responsibly.

shermangeneral wrote:Well Aaron I am a lot like John McCain in that I dont claim to be an economic expert.

But if what you suggest above was implemented the value of other commodities or products would be relative to the gold and not to the previous standard (dollar).

Or am I missing something?

For example, I was listening to one of my Sirius shows the other and they had an economic guru on who pointed out that the value of commodities (such as oil, wheat, etc. has not changed much relative to gold. It has just changed relative to the dollar.

See what I mean?

shermangeneral wrote:Well Aaron I am a lot like John McCain in that I dont claim to be an economic expert.

But if what you suggest above was implemented the value of other commodities or products would be relative to the gold and not to the previous standard (dollar).

Or am I missing something?

For example, I was listening to one of my Sirius shows the other and they had an economic guru on who pointed out that the value of commodities (such as oil, wheat, etc. has not changed much relative to gold. It has just changed relative to the dollar.

See what I mean?

shermangeneral wrote:Well Aaron I am a lot like John McCain in that I dont claim to be an economic expert.

But if what you suggest above was implemented the value of other commodities or products would be relative to the gold and not to the previous standard (dollar).

Or am I missing something?

For example, I was listening to one of my Sirius shows the other and they had an economic guru on who pointed out that the value of commodities (such as oil, wheat, etc. has not changed much relative to gold. It has just changed relative to the dollar.

See what I mean?

(Reuters) - Zimbabwe's economy lies in ruins with the world's highest inflation, ....

In 1987 inflation averaged 11.9 percent. It surged to an official record of 100,586 percent in January 2008, but economic experts say the real rate is much higher.

Aaron wrote:
You're quoting a gold standard, which hasn't been used since the early 30's. And no one has of yet addressed how we revert to a gold standard when current United States paper money in circulation exceeds the amount of gold in the world by 2.5 times.

shermangeneral wrote:Well Sam it looks like in your response to me we are saying the same thing.

So the question then becomes why is the value of these commodities rising compared to the US Dollar?

(Or conversely, why is the Dollar falling?)

People smarter than I am seem to agree it is because of the trade deficit and the budget deficit.

SheikBen wrote:I wholeheartedly agree that giving MFN status to China, while they are eating our lunch (powered by oil, making its cost higher) through trade deficits, is insane.

Invading Iraq while giving MFN status to China is, well, proof that our government doesn't know what it is doing.

Stephanie wrote:Look, Aaron is trying to convince you (and himself) that we won the war because communism fell in the USSR a 2 decades after our withdrawal from Vietnam. Jeez that such bunk.

Stephanie wrote:
If US currency were on the gold standard, or on a gold & silver standard, the Fed wouldn't be able to manufacture money in response to our soaring deficits. Instead, we would have to cut spending and decrease imports and/or increase exports. We wouldn't be able to dig ourselves into such a deep hole.

shermangeneral wrote:Well Sam it looks like in your response to me we are saying the same thing.

So the question then becomes why is the value of these commodities rising compared to the US Dollar?

(Or conversely, why is the Dollar falling?)

People smarter than I am seem to agree it is because of the trade deficit and the budget deficit.