By Ron Paul
Editor's Note: You can watch Dr. Paul deliver the following speech here.
The economic calamity, anticipated by free market advocates, is now at hand.
The current mantra is that the unfolding crisis is caused by deflationary forces, which must be reversed. Paul Krugman champions a solution of increasing government and consumer spending, ignoring debt as a problem, and continuing the Federal Reserve’s unrelenting inflation of the money supply with zero interest rates. Concern for any negative consequence that might arise from such a policy is nowhere to be found.
The other “Paul” -- yours truly -- along with all Austrian economists, strongly disagrees. Continuing and accelerating the policies that gave us this worldwide crisis can’t possibly be the solution.
Deflationary forces are indeed a major problem. They are, however, more a symptom than the cause. It must be understood that market forces and economic law ultimately prevail. Deflation is a market reaction to an inflationary monetary policy out of control. Seeing deflation as the entire problem will not help in finding a solution to the shrinking economy and the loss of real wealth over the past 15 years.
Markets demand a correction when excesses result from massive monetary inflation and zero interest rates. An economy overburdened with debt, overcapacity, mal-investments, and a government overly involved in all economic activity, cannot thrive. A problem of this sort would not exist without a Federal Reserve that accommodates the political demands of operating a welfare /warfare state.
There is a strong disagreement between the Paul Krugman Keynesians and those who believe in a free market economy on both the nature and definition of deflation. Keynesians and many others claim that falling prices define deflation. That is deliberately misleading. If computers and cell phone prices decline because of competition and advanced technology, lower prices are a benefit to the consumer.
True deflation occurred in the 1930s as a correction to the Federal Reserve’s inflation of the 1920s. This means that the money supply shrunk. If the government in the 1930s had taken a hands-off approach the market correction of prices and debt would have occurred much more quickly, as it did in the 1921 depression. It makes no sense to obsess over deflation. Deflation is a consequence of earlier inflation and as such is actually a market solution to problems caused by the excesses of Federal Reserve policy.
All the special interests that benefit from government spending and deficit financing for various reasons – and this includes most Republicans and Democrats – constantly misdefine inflation and deflation on purpose. They claim that prices going up or down is inflation or deflation in order to deflect criticism away from the Federal Reserve and its disastrous monetary policy. The complaint by those who argue for monetary inflation has always been that the real culprit is free markets and sound money – meaning commodity money. It’s never the Fed’s fault.
This then allows more lies to be told to justify runaway welfare spending and war profiteering in unconstitutional wars, while providing great benefits to the financial industries. Profits, wages, and consumer prices can be blamed for the inflation and then used to justify more government regulations. The crisis of 2008 did not result in limiting the Federal Reserve and its arbitrary powers to print money at will. Instead it gave us Dodd/Frank and delivered much greater powers to the Federal Reserve to practice central economic planning for the benefit of the special interests.
Concentrating only on deflation and ignoring the unlawful dangerous powers of the Fed to inflate and regulate will always result in a steady weakening of the economy – an economy which today is now facing total collapse. Deflationary pressures do exist. Some debt and mal-investment is being liquidated. But the correction is constantly impeded by the Federal Reserve’s monetary policy and congressional spending. Still the inexorable growth of the monetary base and the artificially low interest rates continue. As this is not going to change, expect our problems to be with us for a long time to come.
The monetary excesses so far have mostly found their way into the financial markets – stocks, bonds, government debt, government education activity, and medical care. In all these areas we have excessive price increases. Central banks can create credit out of thin air but they have no control over where it ultimately ends. The high cost of living is devastating to retirees and the middle class. We should expect this to get worse, and government manipulation of the CPI and the PPI numbers will not fool the millions of people currently living from hand to mouth and suffering from the insidious effect of constant inflation.
When we hear that the only economic problem we have to deal with is deflation, and that if the Fed could only get prices to rise at a two percent rate all would be well, we should dismiss such foolishness. When the argument is always for more inflation, question it. Challenge it. Study Austrian economics and its explanation of the business cycle. Find out why all paper money throughout history has collapsed and disappeared. Check and see how long commodity money has been chosen as the money of choice when the people have a chance to “vote” on it or be allowed to use it. Hint: it has been the case throughout all recorded history.