Ron Paul on neo-con economics

The Fed is the government's Great Provider, and what it provides is a tree from which government spenders can pick off the funds they need without bothering to increase the heist taken through the tax collection system.

This method of providing, also known as inflation, appeals to statists of all stripes. For generations the left has used it to help fund welfare programs, combining it with their soak-the-rich tax agenda. But the right has caught on, too. Neo-cons find they can rhapsodize about limited government and lower taxes while using inflation to bolster foreign adventures and a domestic police state.

As Ron Paul writes:

The fiat monetary policy we now follow is the most significant factor contributing to our economic peril, and it is central to the neo-con agenda. As we hear new calls to empower the Federal Reserve Board, we should be aware that underlying all neo-conservative policies is the idea of monetary inflation. Inflation is the technique used to pay for the regulatory-state and the costs of policing the world.

High prices and unemployment

As various writers have pointed out, the high unemployment of the Great Depression was ameliorated somewhat by low prices. Government and the Fed have been at war with falling prices ever since, and so far they're winning gloriously. They've succeeded in depreciating the dollar so much that, with the exception of the computer industry, not even the ingenuity of market participants can keep prices from rising.

As Bill Bergman at Morningstar reports:

In the Fed's overall "beige book" review of economic conditions, price pressures were reported as "elevated or increasing" by all 12 of the Federal Reserve's district banks in the latest survey. This may be one of the bleaker inflation assessments in the beige book in recent years.

And meanwhile,

The only "official" report directly relating to U.S. labor markets released last week was the weekly unemployment insurance claims report, released Thursday. Initial claims were up significantly, to 400,000. The four-week moving average has climbed steadily higher in the past year, and at an accelerating pace lately.

Ron Paul on Inflation

In a statement before the House Committee on Financial Services, Ron Paul pointed out the error of blaming higher oil and food prices for the increase in inflation. "The pundits have causation backwards: it is inflation that leads to rising prices of oil and food, and not vice versa." Though the Fed no longer reports on M3, M2 and MZM are still around as approximations of the money supply, and both of these measures have increased significantly, Paul added.

"Until the cause of inflation is understood, no effective strategy can be undertaken to combat it," he said.

But is it the case that most policymakers and pundits have flawed ideas about inflation? It doesn't look like it. As Paul admits,

. . . the government does not want inflation to be done away with. Inflation benefits debtors and harms creditors, and the United States government is the biggest debtor of all. The United States government, the banking monopoly under the Federal Reserve System, and politically-connected firms and industries are the first entities to take advantage of new money injected into the system, before prices increase.

It's not the government and its pundits that need educating. It's the general public.

Demystifying Depressions

From Rothbard's 1969 minibook:

Fortunately, a correct theory of depression and of the business cycle does exist, even though it is universally neglected in present-day economics. It, too, has a long tradition in economic thought. This theory began with the eighteenth century Scottish philosopher and economist David Hume, and with the eminent early nineteenth century English classical economist David Ricardo. Essentially, these theorists saw that another crucial institution had developed in the mid-eighteenth century, alongside the industrial system. This was the institution of banking, with its capacity to expand credit and the money supply . . . It was the operations of these commercial banks which, these economists saw, held the key to the mysterious recurrent cycles of expansion and contraction, of boom and bust, that had puzzled observers since the mid-eighteenth century.

Hoover, the Great Interventionist

Rothbard on Hoover, the anti-free market man:

And so, President Herbert Hoover, on the eve of the Great Depression, stood ready to meet any storm warnings on the business horizon.[44] Hoover, the "great engineer," stood now armed on many fronts with the mighty weapons and blueprints of a "new economic science." Unfettered by outworn laissez-faire creeds, he would use his "scientific" weapons boldly, if need be, to bring the business cycle under governmental control.

Hoover did not fail to employ promptly and vigorously his "modern" political principles, or the new "tools" provided him by "modern" economists. And, as a direct consequence, America was brought to her knees as never before. Yet, by an ironic twist of fate, the shambles that Hoover abandoned when he left office was attributed, by Democratic critics, to his devotion to the outworn tenets of laissez-faire.

Fannie, Freddy Models of Corruption

Lisa Lerer writes on July 16:

If you want to know how Fannie Mae and Freddie Mac have survived scandal and crisis, consider this: Over the past decade, they have spent nearly $200 million on lobbying and campaign contributions.

But the political tentacles of the mortgage giants extend far beyond their checkbooks.

The two government-chartered companies run a highly sophisticated lobbying operation, with deep-pocketed lobbyists in Washington and scores of local Fannie- and Freddie-sponsored homeowner groups ready to pressure lawmakers back home.

They’ve stacked their payrolls with top Washington power brokers of all political stripes, including Republican John McCain’s presidential campaign manager, Rick Davis; Democrat Barack Obama’s original vice presidential vetter, Jim Johnson; and scores of others now working for the two rivals for the White House.

This is interventionism at work, not capitalism.

Unsafe Safety Deposit Boxes

In my posting of June 30 (Primer on gold coins) I referred to a statement in Failsafe Investing by Harry Browne in which he said safety deposit boxes are okay for storing gold coins. Perhaps that was once true (say, in the 19th century), but not anymore, as this report confirms (thanks to Rob Moody, Strike-the-Root):

Not-So-Safe-Deposit Boxes: States Seize Citizens' Property to Balance Their Budgets

I had misgivings about Harry's published recommendation for two reasons. For one, I recall him saying on his old radio show that he advised burying your gold coins in your backyard, or generally, some location not likely to be discovered by state confiscators. That would rule out anything to do with a bank. Secondly, since Roosevelt's confiscation order of April 5, 1933, no property is safe in any institution. If you want it safeguarded, you'll have to take that responsibility alone.

Poole admits Fed inflates

It's not often one sees an open admission of wrong-doing from one of the wrong-doers, but former St Louis Fed president, William Poole, has done precisely that during an interview in a German newspaper. Jörg Guido Hülsmann provided an English translation of Poole's statements on the Mises blog, along with commentary. Poole said:

In historical perspective inflation is a means to diminish the stress felt by debtors. The policy of the US central bank is construed to create inflation to alleviate that stress. Its monetary policy was, is, and will be "lax" until the economic situation, and the situation of financial firms, will be improved. All in all this will entail an inflationary tendency, even if the latter will entail a bundle of new problems in another three or four more years.

Hülsmann:

Poole here confirms the Austrian interpretation of what central banking is all about: special-interest policy in the short run, with harmful aggregate consequences in the medium and long run. Significantly, Poole made this statement only after he had left the Fed (he quit in March).