By: Ron Paul
The Federal Reserve recently increased interest rates to 1.75 percent. This is the highest interest rates have been since 2008, but it still leaves rates at historic lows. While the Fed says economic growth justifies future rate increases, an honest examination of the economy suggests that future rate increases are unlikely.
The Fed’s claim that the economy is strong is based on misleading government statistics. For example, the official unemployment rate understates true unemployment by not counting those who have given up looking for work. According to John Williams of Shadow Government Statistics, the real unemployment rate is above 20 percent. Government figures also understate the rate of inflation by pretending that you are not negatively impacted by inflation if you can still buy hamburger when you cannot afford steak. Shadow Stats estimates that the real rate of inflation is as much as four times higher than the official rate.
President Trump’s tariffs will further weaken the economy. While export-driven industries, including manufacturers that rely on imported materials, will be particularly hard-hit, the tariffs combined with the inevitable retaliation from other counties will impact all sectors of the economy. A global trade war could also lead other countries to stop buying US debt instruments, increasing pressure on the Fed to keep rates low.
Since Republicans have held control of the White House and Congress over the last year, federal spending has increased 12.9 percent. Clearly those in Congress serious about reducing government spending are few and far between. The sad fact is that both major parties are happy to increase welfare and warfare spending, although many Republicans pretend to oppose deficits when a Democrat sits in the White House. This puts tremendous pressure on the Fed to keep rates low so as not to increase the federal government’s already high interest payments.
This cannot last forever. Eventually the combination of a spendthrift Congress and a print-happy central bank will cause a major economic crisis. This crisis will herald the end of the welfare-warfare state and the fiat money system that sustains it. The only question is whether the existing system will be replaced by a free market and limited constitutional government or we will complete our descent into totalitarianism.
Fortunately, more Americans are becoming aware of the freedom philosophy and demanding that government roll back the welfare-warfare state and rein in the Fed. Many are also demanding protection of their right to opt out — not just from government programs like Obamacare but also from the Federal Reserve System. For example, Wyoming recently joined Arizona in passing a law recognizing gold and silver as legal tender. Citizens of these states are now able to protect themselves from the coming dollar crisis by using what has historically been considered real money.
At the federal level, the movement to audit the Fed remains strong. As the failures of Keynesianism become more apparent, the movement to audit and end the Fed will grow in size and strength. Hopefully this movement will ensure the end of the welfare-warfare state and the fiat currency system as well as lead to a new era of liberty.
This was originally posted on Mises.org.
Most investors now believe three things about the Federal Reserve, money and interest rates. They think that the Federal Reserve is artificially depressing rates below what would be a “normal” level. They believe that in the process of doing so the Federal Reserve has enormously increased the supply of money and they believe that the USA is on a fiat money system.
All three of those beliefs are incorrect. One benchmark rate that the Federal Reserve has absolute control of is the rate paid on reserves deposited at the Federal Reserve. That rate is now 175 basis points, after being zero since the inception of the Federal Reserve in 1913 until recently. If the Federal Reserve had left that rate at zero t-bill rates would now be even lower than they are now. The shortest t-bills rates would now be probably negative.
Paying interest on reserves combined with the subsidy to the banks of providing free unlimited deposit insurance on non-interest bearing demand deposits is keeping t-bill rates positive. Absent those policies the rate on t-bills would be actually negative. The Chinese and others all over the world are willing to pay anything for the safety of depositing funds in the USA.
An investor who believes that interest rates are headed up may respond that the rate paid on reserves is a special case and that the vast increase in the money supply resulting from the quantitative easing must result in higher rates when the Federal Reserve reverses its course. The problem with that view is that the true effective money supply is still far below its 2007 level.
Money is what can be used to buy things. Historically money has first been specie (gold and silver coins), then fiat money which is paper currency and checking accounts (M1) and more recently credit money. The credit money supply is what in aggregate can be bought on credit. Two hundred years ago your ability to take your friends out to dinner depended on whether or not you had enough coins (specie) in your pocket. One hundred years ago it depended on the quantity of currency in your pocket and possibly the balance in your checking account if the restaurant would take checks.
Today it is mostly your credit card that allows you to spend. We no longer have a fiat money system. Today we have a credit money system. Just because there is still some fiat money does not negate the fact that we are on a credit money system. When we were on a basically fiat money system there was still a small amount of specie in circulation. Even today a five cent piece contains about 5 cents worth of metal, but no one would claim we are still on a specie money system.
Fiat money is easy to measure; M1 was $1.376 trillion in 2007 and is above $3 trillion now. The effective money supply is the sum of fiat money and credit money. Credit money cannot be precisely measured. However, when the person in California whose occupation was strawberry picker and who had made $14,000 in his best year was able to get a mortgage of $740,000 with no money down and private equity could buy a company like Clear Channel in a $20 billion leveraged buyout, also with essentially no money down, the credit money supply was clearly much higher than today. A reasonable ballpark estimate of the credit money supply is that it was $70 trillion in 2007 compared to $50 trillion today.
The effective money supply is the sum of the traditional fiat money aggregates plus the credit money supply. Thus, despite the claims of many to the contrary, the effective or true money supply has fallen drastically over the last few years….”
http://seekingalpha.com/article/1514632
In practical terms while commodities have maintained value or in may cases gone down with little fluctuation the value of the dollar has fallen to 15X less in my 58 years. In 1965 if I made a dollar I would need $15.00 to have the same value today. We pine for the days of quarter a gallon gas but that quarter was 90% silver and is worth $4.50 now. Do we wish for $4.50 a gallon gas? This is the real cost of fiat money. Inflation is a word used to detract from the real cause of the “wage gap”. The devaluation of the dollar due to the increase in debt. It’s not corporations that caused this it’s the same who set themselves up as the solution that caused this, government!