Topic: Presidential Campaign 2008
Ron Paul, Is America Really Going Bankrupt? Monetary Policy is important, most people just don't understand why.by John Armstrong
(libertarian)
Wednesday, January 30, 2008
During the CNN Debate tonight, as in other debates, Ron Paul continued to assert that America is going bankrupt. Another issue he mentions often is monetary policy. Most voters have no idea how important these issues are to them because they understand monetary policy about as well as they understand our million page tax code. Just as the misunderstanding of that tax code can cost a citizen some money on tax day, a misunderstanding of monetary policy could cost us all of our money some day soon which is what Ron Paul means when he talks about America going bankrupt. Below is a reposting of the majority of an article I published earlier called "Ron Paul: A Man Among Boys" that several thousand people have found useful in understanding this issue. I decided to republish it today because of the debate.
This issue of monetary policy isn't discussed openly because it doesn't resonate with voters the way issues like "free health care" or "securing our borders", "protecting us from terrorists", "mortgage crisis", or "national healthcare" do. How many Americans even realize that the U.S. dollar is worth less than a Canadian Dollar? Using the Canadian Dollar as the benchmark, how many people know that after the terrorist attacks on 9/11 the dollar was stronger than it was in 2000?How many people realize that in 2002, when the war in Iraq began, the value of our dollar began to decrease? It hasn't stopped its decline since, and is now reaching historical lows. As the data in the chart below indicates, it wasn't the attacks of 9/11 that destroyed our dollar, it was our response to them coupled with our monetary policy in general which make things like an "Economic Stimulus Package" seem like a good idea.
How many Americans fail to see the connection? How many people in our country don't seem to understand why this matters? And most imporantly, how many presidential candidates are even discussing this issue?
Ron Paul's economic and monetary ideology are typically a punchline at best among political pundits with the level of sophistication along these lines:
"Ron Paul wants to go back to the gold standard. What's next? Reducing dependency on foreign oil by getting rid or our cars and riding horses?"
These pundits are also starting to claim that Ron Paul offers a lot of ideology, but no practical real world solutions to the problems facing America. These blanket statements influence common voters tremendously in a time when "practical real world solution" has become synonomous with "government entitlement program."
These very real solutions RonPaul supports are hard to grasp for the typical American who has little understanding of economic theory, monetary policy, or interest of anything foreign outside of why Europeans insist on calling soccer "football." They were probably watching football when the ABC debate was on a few weeks ago when Ron Paul was discussing gas prices remaining flat vs. gold but increasing drastically vs. the dollar. These same people are depending on Social Security for retirement and are scared to death that when they hear these political experts tell them that "Ron Paul wants to end Social Security."
Below is my humble attempt at explaining this complicated issue in a way the person I just described can easily understand. Once understood, this person will also be able to see that the sky may indeed be falling, and that contrary to public opinion Ron Paul is the only candidate running on a platform that would SAVE Social Security until our country was healthy and prosperous enough that it was no longer needed (which very likely would not be during Paul's administration even if he were to become a two term president).
Monetary Policy and Consequences For Dummies (like me)
Let's assume that everyone in America could print their own money. Or to make it easier, they could just go online to their personal checking account, type in whatever dollar amount they wanted, and that would be how much money had in the bank. How much would a dollar then be worth? This is easy. It would be worth next to nothing because what $1 once bought, it would now take millions to purchase the same good or service because there would be so many dollars.
But let's change the scenario a little. Let's say that this creating of money out of thin air was introduced state by state in alphabetical order. In other words, only residents of Alabama could print money for the first month, then Alaskans could join in a month later, then Arizona residents and so forth. Who would benefit the most? The Alabamans would. By the time Wyoming got into the mix, it probably wouldn't even be worth the bother. In other words, the people who benefit under a system like this are the people who get to use the newly created money first.
Individuals in our country can't print their own money, but there is a private bank that can. It's called the Federal Reserve. And they do. And then they lend it to our government with interest. There are nearly 26 dollars in circulation now for every 1 dollar in circulation in 1959. And the rate of printing this money is increasing. In 2007 alone we printed more dollars than the total amount that existed in 1963. While the number of dollars has increased 26 fold, the population hasn't even doubled over that same period.
Of course this works out fine for the government. They get to spend the money first. And it works out well for the special interest contractors who receive the money. They are like Alaskans in our example. The people are Wyoming.
To bring this down to simpler terms which also illustrates the long term consequences of this issue, when many families receive a new credit card in the mail, they feel as if they have "free money." So they spend it. And then get another credit card. Then they max out that card too. And so it goes until they can no longer meet the minimum payments or get a new card. When the creditors come calling, there are three ways they can pay off the debt.
One is to raise income. But that is very difficult for an individual to do.
Another is to borrow money from grandma.
The third is to cut spending on things that the kids really loved and that may have seemed "necessary" when the "free money" was rolling in, but suddenly doesn't seem as much so when the family is facing losing its car or home.
If they can't get more money, get it from grandma, or cut enough spending to pay the debt, they are forced to go bankrupt and then lose everything that really was important to them.
What is the connection here?
The government has a never ending stream of "free money" printed by the Federal Reserve. As you hopefully now understand, this "free money" hurts the individual citizen by devaluing his dollar.
Eventually this debt has to be repaid. How can this happen?
Unlike the individual citizen, the government can raise its income rather easily. This is accomplished by raising taxes.
The second is to borrow from Granny. The name of the Federal Government's most benevolent Grandmother is China. Although Granny may claim she expects the money back, China actually does--with interest. What happens when Granny cuts us offand wants her money back? Well, the individual's granny doesn't have a Nuclear Option to help her collect like our Government's Granny does.
The third is to cut spending on things we just can't afford. No matter how much the "kids" may like things like supporting foreign countries, propping up dictators to make us "safe from terrorists", testing children annually to make sure they aren't left behind, providing Federal grants to send people to college, or the idea of free health care; if we don't give those things up we won't even be able to afford the things we really need--like a way to defend ourselves should Granny China decides to use a nuclear option, of either sort, to collect what she's owed.
Ron Paul is the only candidate to offer a solution to this problem.
The first step is to stop activating all of those new credit cards. This is why he would end the Federal Reserve (or at least make its actions more transparent by having their now secret meeting televised) and offers radical ideas like making sure our dollar is actually worth something.
The second is to cut out spending no matter how unpopular it is or how much the kids may cry about it.
None of this may seem like a major issue right now. In fact, it doesn't seem bad at all. We are living the high life. The "leading" GOP candidates are like the dads who earn 60,000 (fiat pre-tax) dollars who live in the suburbs, live in a house with an interest only adjustable rate mortgage, and "own" two import SUV's while mom stays at home because it's "best for the kids." There is nothing that they can't afford for their family as long as the credit cards keep rolling in. They just smile and nod and keep promising more. This doesn't seem like a big deal either. They are living the high life. At least until the cards are all maxed; the collection agencies start calling; their credit score goes down; the interest rate gets adjusted upward; they can't afford the mortgage; the bank forecloses; and mom leaves with the kids to go live with grandma and grandpa in the house they paid off in 7 years because they didn't believe in being a mooch, borrowing money, or being in debt. Can you say "mortgage crisis"?
Ron Paul is that wise old grandpappy who kept getting laughed at and called an old-timer who didn't understand how the modern world worked when herepeatedly toldhis daughter her family needed to learn to live below its means. The best way to prevent foreclosure is foresight.
Ron Paul's foresight would not only help us get lower gas prices by restoring the dollar's value,it would help us stave off bankruptcy or a nuclear attack by China. When you grow up and understand this issue, it kinda makes the "major issues" like national healthcare and terrorism seem about as significant as that pimple you had on prom night doesn't it?
Update: Today when the Fed lowered rates (printed more money) for the second time in barely a week, the dollar's value fell a half a percent. In ONE day. And the Price of Gold "increased" $15 dollars. In other words, it took $15 more dollars to buy the same amount of gold today than it did yesterday--not because gold is worth more, but because your dollar is worth less. Comforting, huh?
Your fellow American,
John Armstrong
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When you realize that the US Dollar is horded and used worldwide, it makes sence that we print more money. We have not and will not experience hyper inflation. We are the richest nation in the world and will remain so. Japan is the second largest economy in the world. How weak is the Yen? Very weak. Does a strong currency mean much? Look at the Pound, the Euro, and The Kuwaiti Dinar. Is life really better for the poor in those nations? I think not.
I placed this comment on the CNN blog 25 minutes age and it is still waiting to be moderated. I guess I'm being censored too.
"Unfortunately Ron Paul"s excellent points about the crashing dollar and the gov't overspending or allowing the Fed to print more out of thin air is over a majority of the American public's head. They don't understand economics and that if we could control gov't spening then a lot of the programs we do decide to keep could then be funded. The other candidates are afraid to give the public the bad news. Only Ron Paul has the guts to say it."
But the time is coming when the rest of the world will not want to hold dollars. If they drop the dollar and refuse to take them in exchange for their goods then we're totally screwed.
Posted By: chris garrett
Date: 2008-01-30 21:26:02
I am an American that was raised in Indonesia (the largest Islamic nation on earth), my father being an engineer for a major oil company. I understand firsthand the threat of Muslim extremism and the nature of American Petropolitics. In my informed opinion I believe Ron Paul is the only candidate that represents our best interests and those of future generations.
Unfortunately the congressmen is always given the least amount of time to speak. Nevertheless he was the only politician who spoke with any integrity during tonight's debate.
Once you understand the agenda of the corporate elites that actually run the United States then you realize why they are so afriad of Ron Paul. He wants to help us, they want to control us. The dollar will inevtibly crash leading to an EU style North American Union. Which is not a conspiracty theory. Undoubtedly when it comes around we'll all be told it will be to our profit. Wrong.
I am sending your article to everyone I know who just doesn't "get" it . Most importantly I am sending it to my grown children who think much like the statist....sigh.
If it comes to a total destruction of the dollar as an intro to "ahh, we have a plan called the amero" will the masses be any more receptive then? I fear they will be even more inclined to look to the tooth fairy. Most colleges are not teaching real history and economics. What an uphill battle. Thank you for your fine article. It will be spread far and wide!
Couple of comments. First, to the statist, exchange rate is not the sole factor behind powerful currencies. It's purchasing power. Japan is not weak just because it takes more yen to get one dollar. Look at the cost of living adjusted for exchange in those countries and they're not weak by any standards.
Now, there is a problem with US debt and too much money printing. Cutting spending is imperative. With other powers coming up, the reliance of other countries to hold USD has decreased. They now try to hold baskets of currencies. And if you want to talk about the status of poor people, US doesn’t compare any more favourably than Japan or EU. Printing money is a problem when there is no growth. That's what will lead to inflation.
Also, cutting Federal reserve is a stupid idea. You need monetary control. Just because they printed money to finance a stupid govt doesn’t mean abolishing it is the solution. The analogy of the money printer in the article is pretty cool, but not quite right. When collectively prices go up, that's bad. But this debt could (stressing could) lead the country out of recession and into growth - Keynesian 101.
After all that, I agree with some points. US needs to cut its spending. The Fed coming transparent any more wont have much use. The rates just got cut to promote growth and stave off inflation. Cutting govt spending is necessary, and its not like that will he hard. Cut down the damn military and nobody will have to increase taxes.
Excellent article. Really! However, China’s possible military response is not the only downside to our failing monetary policy. There are many, many other logical consequences including encouraging other countries to peg to other currencies, convincing other countries to ‘dump’ the dollar, and switching to Euro for buying and selling of petrol, any of which could amount to just about the same as a nuclear attack…
Peace,
Tanya
Excellent article. Really! However, China’s possible military response is not the only downside to our failing monetary policy. There are many, many other logical consequences including encouraging other countries to peg to other currencies, convincing other countries to ‘dump’ the dollar, and switching to Euro for buying and selling of petrol, any of which could amount to just about the same as a nuclear attack…
Peace,
Tanya
Bottom line: The US Constitution in art 2 sec 8 gives congress the responsibility to coin money, why would they give it over to a PRIVATE, FOR PROFFIT bank.
Henry Kissinger stated that "He who controls the money controls the world" So do WE THE PEOPLE have the power or does a group of banking elitists run our country?
As far as KD yes the poor Kuwaits are doing better, oh wait a minute there are no poor Kuwaitis, just poor behdouhins (non Kuwaiti citizens).
The EURO? Why would stupid supermodels prefer the EURO over the dollar? OH I guess it is b/c they are stupid and you would rather have worthless currency. Remember that alot of EURO currency is backed by Swiss GOLD or British sterling. The dollar is not horded around the world the EURO is the preferred reserve currency in over 60% of the world.
All American currency was turned in for gold by foreign govts in the late 60's and early 70s causing Nixon to suspend the gold standard for foreign govts. They cashed in our dollars for GOLD b/c of the devaluation due to inflationary spending to support the Vietnam War. Just like the $ is being devaluated b/c of this Iraq debacle.
You are obviously content to lick the hands that feed you now, but what happens when they can no longer afford to run the soup kitchen?
Posted By: mike montagne
Date: 2008-02-05 15:32:28
John,
America really is going bankrupt. But Dr. Paul has yet to understand how and why, neither can he develop a meaningful solution.
The problem is not that the hands which feed us might no longer afford to run the soup kitchen. The problem is, that some day soon we will not be able to afford to service a sum of debt, which the system can only multiply further in proportion to our means.
Unfortunately, Dr. Paul's unreserved dedication to Austrian Economics is adverse to identifying and rectifying the cause of this inherent multiplication of debt. There is a solution; and there is but one solution. If we can all get behind that solution, we can succeed. If we cannot, we may as well start digging our graves.
Posted By: Larry Brandon
Date: 2008-02-06 08:17:33
My education is as an electronics engineer taught me to look very closely at the "output" of any system graphically. When I saw the national debt expressed in dollars graphed, I realized what I was looking at was a curve formed by a geometric progression. There is only one possible result for any system that forms a curve such as that... absolute destruction! Blow Up! Self-Destruction!
We dont have to wait for China or any other nation to "conquer" the USA. We are doing it to outselves!!!
I have studied economics for the last 6 years very thoroughly. Keyenesian economics DOES NOT WORK. If it did, people would not be searching for answers cause the system should work just fine. If we were playing monopoloy, and I was allowed to take from the bank as much money as I wanted and everyone else was limited....no one would ever play with me CAUSE I WOULD ALWAYS WIN. The game would be rigged in my favor. Yet, in the real world, it is ok that the fed can create UNLIMITED AMOUNTS OF MONEY TO LOAN OUT AND REAP VIRTUALLY UNLIMITED PROFITS? Just like the monopoly game, individuals would LOVE to cheat and skip all that hard work to save up capital and just create it out of thin air. WE NEED THE FED TO CONTROL OUR MONEY? Yeah right. What gives them the knowledge to control the supply of money. Anyone who seriously researches the Fed knows that our current monetary system is so horribly corrupt that if it is not changed we will end up homeless, starving, and under tyrannical control. The original bankers (Rothschilds) have an estimated $400 trillion dollars in wealth. There is only $100 trillion dollars right now in the current global economy. That means they control 4/5ths of the ENTIRE GLOBAL WEALTH. How can an organization accumulate THAT much wealth without rigging the game in their favor? All I can say is you better be DAMN sure Keynesian economics is absolutely correct cause if not....you just SCREWED an entire generation of the world's population and WE MAY NEVER EVER RECOVER FROM THE COMING GLOBAL ECONOMIC COLLAPSE!!! (that has already been planned for btw)
I realize that the way the delegates are being positioned that McCain will probably be the next republican candidate. If we were going to war he probably would be great but he appears to be clueless when it comes to finances and we are in the start of a reccession. God help us if he becomes president.
I am a "lost" American, and if I am not alone in my feelings then our country is in even greater danger, than a national bankruptsy. I did not enjoy learning about the dirty laundry of our nation in these, my senior years. My family has served in the armed forces through 3 wars. These men and 1 women fought to defend our nation, the Constitution and world "freedom" without any knowledge of a world banking system, or how our nation enters a war (Pearl Harbor, for example). Before my father died in his senior years he learned that American G.I.'s are simply, "Cannon Fodder." One may call this living a life in reverse since history books are written "after the fact." As a lost American, a Patriot means what? I am not voting again this year because, I believe president's are pre-selected. I support the Right to Bare Arms. I believe in the Constitution of the United States of America and that it should be protected. I place my hand on my heart while saying the Pledge of Allegiance. Would I fight to defend this country from attack. Does this make me a patriot or just an American? .
Well, lets hope your next president will do better. If you want to avoid a real bankruptcy than don't vote for mr. McCain. With his ambitians it will be all done with America. I am not American [Dutch for the matter] but even I can see mr. McCain is not the right choice for your country at this moment. Trying to stop Terrorism only makes it stronger to act just a little more. Just take your army and leave Iraq and Afghanistan. Stop annoying Russia with the damn rocketshield and their dispute in Georgia. Don't interfer in everything. Russia and China can be good friends to the US, if you work together. These 3 nations have to work together, for the wellfare and safeness of all people of this world.
Well, “Statist”, you really have shown your total lack of understanding when it comes to monetary mechanics. There is a great deal of difference between our domestic money supply and what is normally known a “Euro-Dollars”. The domestic money supply is being increased by leaps and bounds, especially during the last few months, the M3 does not count “Euro-Dollars” in its equations of monetary supply, nor does the FED or this government control expatriated dollars, but it does manipulate domestic supplies and that is where the problem is. Currently, the FED is doing something that it has not done, it is, instead of monetizing debt, directly purchasing T-Bonds and injecting that fiat money into the economic pipe-line. The massive liquidity log-jam will begin to break sooner or later. Remember, hyper-inflation never happens during a Boom cycle, it always is preceded by a deep deflationary trough and is caused by the very things we are now seeing in reaction to that deflationary trough.
This is a great article. This was an issue when it was written over a year ago and it's an even bigger issue now. The scary thing is that dispite studying economics and finance, up until a few months ago when it was brought up in one of my lecturers did I know just how much money the US had been printing... I'd known for ages about American debt levels, and of course that they printed money but the alarming volume had surpassed me. It appears it hadn't been widely known, or at least widely discussed until this yr (at least over here in an Australian uni)
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