[Peace-discuss] sickness unto debt - monetary policy

[E. Wayne Johnson]

Today Ron Paul raises and addresses the question of how will we pay for 
the bailout.

 >

Sickness Unto Debt
By Ron Paul
Created 10/13/2008 - 11:01am 
(http://tbm.thebigmoney.com/articles/judgments/2008/10/13/sickness-unto-debt)

One of the burning questions regarding the recently passed bailout, and 
the one that almost no one has bothered to answer, is how the government 
intends to pay for it. Governments have three main methods by which they 
can raise funds: taxation, printing new money, and debt. As our $10 
trillion national debt shows, the federal government has always enjoyed 
raising money by issuing new debt. Money is gained upfront, while the 
cost of repaying that debt is pushed onto future generations.

This method is especially favored today, since imposing $700 billion 
worth of taxes would lead to widespread public dissatisfaction. When the 
cost of all the recent bailouts plus the cost of all the new lending 
facilities the Federal Reserve has initiated are added together, we 
quickly reach a figure in the trillions of dollars. Even with the debt 
ceiling being raised to $11.3 trillion, the issuance of debt alone 
cannot begin to cover the cost of all the bailouts in which the 
government is engaged. Every indication is that the government will use 
both debt and inflation in its attempt to keep the economy running at 
full speed.

Debt financing has begun in earnest, as the national debt has increased 
$600 billion over the past three weeks, and most of that increase came 
even before the $700 billion bailout bill was passed. I fully expect 
that trend to continue in the near future and would not be surprised if 
we see another debt-limit increase slipped into another economic 
stimulus package that might be passed before the new year. Now that our 
foreign creditors are less willing to purchase our debt, what debt we 
cannot sell to foreigners will be monetized through the Federal Reserve, 
resulting in increased inflation.

In fact, money supply data for the narrowest measure, the adjusted 
monetary base, show an unprecedented increase, far higher than when 
Chairman Alan Greenspan attempted to reflate us out of trouble after the 
dot-com stock bubble burst. That intervention on Greenspan's part, 
pumping in liquidity and driving interest rates down, led to the real 
estate bubble, and Chairman Ben Bernanke unfortunately seems to be 
following the same script as his predecessor in resorting to credit 
creation and low interest rates. Even were this effort to succeed, it 
would only delay the inevitable. In order for the economy to return to 
normal, the Federal Reserve must cease the creation of new credit, 
overvalued assets must be allowed to fall in price, and malinvested 
resources must be allowed to liquidate and be put to use in more 
productive sectors.

The government's reaction to the credit crisis is based on the erroneous 
belief that the rate of economic growth over the past 10 to 15 years was 
the result of natural free-market processes, which is not the case. 
Rates of economic growth during the dot-com and real estate booms were 
clearly indicative of an overheated economy, and any attempt to try to 
stimulate the economy to return to such rapid growth will fail. Rather 
than allowing asset bubbles to pop and malinvested resources to 
liquidate, Federal Reserve monetary policy has attempted to pump more 
and more new money and credit into the system to try, in vain, to 
sustain the economic boom.

The monetary base jumping by such a large margin is an indicator that 
the Federal Reserve has not learned from its mistakes and is hoping to 
get out of this economic downturn by creating even more credit out of 
thin air. With such large increases in the monetary base and with banks 
legally able to hold zero reserves, the vaunted money multiplier effect 
could theoretically reach infinity. If our policymakers fail to come to 
their senses, there is a real danger that we could end up in a 
hyperinflationary crisis such as the ones that beset Germany in the 
1920s and Argentina and Zimbabwe in more recent decades

The common measure of inflation, the consumer price index, has been so 
manipulated over the years that it cannot be trusted to be an accurate 
indicator of the true effect of inflation on people's pocketbooks. This 
is especially true of "core inflation," which eliminates food and energy 
prices, the two staples that are most important to every American. When 
the CPI figure is computed using the original method of calculation, it 
comes out to more than 10 percent per year, which is a more accurate 
indicator of the inflation being felt by middle-class Americans.

For years, I pointed to the now-discontinued M3 money supply figure, the 
broadest measure of the total money supply, and remarked how its rate of 
growth far outpaced the officially reported rate of inflation. Since 
inflation is chronically underreported, I continue to view money supply 
figures as a more accurate indicator of the true direction of prices. 
Now that the monetary base has spiked so dramatically, the result will 
be seen over the next few months as this new credit works its way 
through the system, resulting in significantly higher inflation. 
Unfortunately, because M3 is no longer reported, the full effect of this 
inflation on the U.S. economy will go unreported in official statistics.

Our government has lived beyond its means for decades. We now face a 
crucial juncture, at which we determine whether to continue down the 
path of debt, inflation, and government intervention or choose to return 
to the economics of the free market, which have been ignored for almost 
a century. Increased debt leads to higher taxes on future generations, 
while increased inflation diminishes the purchasing power of American 
families and destroys the dollar. No society has ever been achieved 
prosperity through indebtedness or inflation, and the United States is 
no exception. We cannot afford to continue our current policies of 
monetary expansion and unending bailouts. Unless we return to sound 
monetary policy, sharply reduce government expenditures, and realize 
that the government cannot act as a lender of last resort, we will drive 
our economy to ruin.

<http://tbm.thebigmoney.com/articles/judgments/2008/10/13/sickness-unto-debt>
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