The SPEAKER pro tempore. Under the Speaker’s announced policy of January 7, 1997, and under the previous order of the House, the following Members will be recognized for 5 minutes each. Mr. JONES of North Carolina.
1998 Ron Paul 39:6
The big question
is how history will play the current
financial situation if all the great
wealth accumulated in the last 10 years
dissipates in a financial collapse.
1998 Ron Paul 39:7
According to an article in The New
Republic, Greenspan is not only held in
high esteem on Wall Street, he is seen
as Godlike. One trader is quoted as saying,
“When things go well, I hold
Greenspan’s picture between my hands
and say, thank you. When things go
poorly, I also take the photo in my
hands and pray.”
And he isn’t alone
on Wall Street in heaping praise on
Greenspan. This comes as close to idolatry
as one can get.
1998 Ron Paul 39:8
Alan Greenspan took over the Fed a
few months before the stock market
crash of October, 1987. In the 10 years
that Greenspan has headed the Fed, $2
trillion of new credit has been created
as measured by M3. Banks threatened
by bankruptcy in the early 1990s received
generous assistance from the
Fed policy of low interest rates and
rapid credit expansion as a response to
the recession of 1991. Fed funds rates
were held at 3 percent for well over a
year. This generous dose of Fed credit
has fueled the 5-year superboom on
Wall Street.
1998 Ron Paul 39:9
We are endlessly told no inflation exists. But inflation is strictly and always
a monetary phenomenon and not
something that can be measured by a
government consumer or producer
price index.
1998 Ron Paul 39:10
Even so, there currently is significant
price inflation for the fancy
homes throughout the country,
especially in the New York and Connecticut
areas influenced by the New York
financial center. CEO compensation is
astronomically high, while wages for
the common man have been held in
check. The cost of all entertainment is
not cheap and rises constantly. Art
prices are soaring, as is the price of
tickets to athletic events. Buying
stocks with a 1.8 percent dividend yield
is not cheap. These prices are inflated. The cost of education, medicine, and
general services are expensive and rising.
1998 Ron Paul 39:11
In spite of Government reports showing
food prices are not rising, many
constituents I talk to tell me food
prices are always going up. It seems
every family has difficulty compensating
for the high cost of living and taxes
are always inflating.
1998 Ron Paul 39:12
There is no doubt that many Americans
know the salaries of the CEOs,
athletes and entertainers are astronomically
high. The wages of the average
working man, though, has not kept
up. Workers feel poorer and resentment
grows.
1998 Ron Paul 39:13
Even with all of Wall Street’s euphoria,
Main Streeters still harbor deep concerns
for their financial condition and
the future of the country. Many families
continue to find it difficult to pay
their bills, and personal bankruptcies
are at a record high at 1,400,000 per
year. Downsizing of our large corporations
continue as many manufacturers’jobs are sent overseas.
1998 Ron Paul 39:14
This current financial bubble started
in mid-1982. At that time, the money
supply, as measured by M3, was $2.4
trillion. Today it’s over $5.5 trillion. That’ a lot of inflation, and money
supply growth is currently accelerating.
1998 Ron Paul 39:15
Although the money supply has been
significantly increased in the past 16
years and financial prices as well as
other prices have gone up, Government
officials continue to try to reassure the
American people that there is no inflation
to worry about because price increases,
as measured by the Government’s
CPI and PPI, are not significantly
rising.
1998 Ron Paul 39:16
Stock prices, though, are greatly inflated. If we had an average valuation
of the Dow Jones Industrials for the
past 87 years, as measured by the PE
ratios, the Dow would be a mere 4,100
today, not over 9,000. And the Dow
would be much lower yet if we took the
average price-to-dividend ratio or the
price-to-book ratio.
1998 Ron Paul 39:17
The NASDAQ is now selling at 85
times earning. There is no doubt that
most stock prices are grossly inflated
and probably represent the greatest financial
bubble known in history.
1998 Ron Paul 39:18
A lot of foreign money has been used
to buy our stocks, one of the consequences
of computer-age financial
technology and innovations. Our negative
trade balance allows foreign governments
to accumulate large amounts
of our treasury debt. This serves to
dampen the bad effect of our monetary
inflation on domestic prices, while
providing reserves for foreign central
banks to further expand their own
credit.
1998 Ron Paul 39:19
Think of this: Money can be borrowed
in Japan at Depression-era rates
of 1 percent and then reinvested here in
the United States either in more treasury
debt earning 5 or 6 percent, or reinvested
in our stock market, which is
currently climbing at a 20 percent
annualized rate. This sounds like a perfect
deal for today’s speculators, but
there is nothing that guarantees this
process will continue for much longer. Perfect situations never last forever.
1998 Ron Paul 39:20
The SPEAKER pro tempore. The gentleman’s time has expired.
1998 Ron Paul 39:23
Some of the euphoria that adds to the financial
bubble on Wall Street and internationally
is based on optimistic comments made by our
government officials. Political leaders remind
us time and again that our budget is balanced
and the concern now is how to spend the excess. Nothing could be further from the truth,
because all the money that is being used to
offset the deficit comes from our trust funds.
1998 Ron Paul 39:24
In other words, it’s comparable to a corporation
stealing from its pension fund in order to
show a better bottom line in its day-to-day operations. Government spending and deficits
are not being brought under control. Tax rates
are at historic highs, and all government taxation
now consumes 50 percent of the gross
national income.
1998 Ron Paul 39:25
It is now commonly believed that the East
Asian financial crisis is having no impact on
our economy. But it’s too early to make that
kind of an assessment. Our president remains
popular, according to the polls, but what will it
be like if there’s any sign of economic weakness? There could then be a lot of “piling on”
and finger pointing.
The basic cause of any financial bubble is
the artificial creation of credit by a central
bank (in this case our Federal Reserve). Artificially
creating credit causes the currency to
depreciate in value over time. It is important to
understand the predictable economic problems
that result from a depreciating currency:
1998 Ron Paul 39:27
1. In the early stages it is difficult to forecast
exactly who will suffer and when.
1998 Ron Paul 39:28
2. Inflated currency and artificially low interest
rates result in mal-investment that produces
over capacity in one area or another.
1998 Ron Paul 39:29
3. Wealth generally transfers from the hands
of the middle-class into the hands of the very
wealthy. (The very poor receiving welfare gain
a degree of protection, short of a total destruction
of the currency.)
1998 Ron Paul 39:30
4. Prices indeed do go up, although which
prices will go up is unpredictable, and the CPI
and PPI can never be a dependable measurement
of a monetary policy driven by loose
credit.
1998 Ron Paul 39:31
5. The group that suffers the very most is
the low-middle-income group (those willing to
stay off welfare, yet unable to benefit from any
transfer of wealth as stagnant wages fail to
protect them from the ravages of the rising
cost of living).
1998 Ron Paul 39:32
There are probably several reasons why this
current economic boom has lasted longer than
most others. The elimination of the Soviet
threat has allowed a feeling of optimism not
felt in many decades, and there has subsequently
been tremendous optimism placed on
potential economic development of many
world markets in this age of relative peace.
1998 Ron Paul 39:33
There is also very poor understanding regarding
economic interventionism, the system
most nations of the world accept today. Today’s
interventionism is not close to a free
market. The great Austrian economist Ludwig
von Mises consistently pointed out that interventionism
always leads to a form of socialism,
which then eliminates the apparent benefits
of interventionism.
1998 Ron Paul 39:34
A good example of how interventionism
leads to the destruction of a market can be
seen in the recent tobacco fiasco. First, the tobacco
industry accepted subsidies and protectionism
to build a powerful and wealthy industry. Then, having conceded this “nanny” role
to the government, Big Tobacco had no defense
when it was held liable for illnesses that
befell some of the willing users of tobacco
products. Now, the current plan of super taxation
on tobacco users will allow the politicians
to bail out the individual farmers who may be
injured by reduced use of tobacco products
(destruction of the market). This half-trillion-dollar
tax proposal hardly solves the problem.
1998 Ron Paul 39:35
Just as in the 1920’s today’s productivity
has fooled some economists by keeping
prices down on certain items. Certainly computer
prices are down because the price of
computer-power has dropped drastically, yet
this should not be interpreted as an “absence”
of inflation. Innovation has kept prices down in
the computer industry, but it fails to do so
when government becomes overly involved as
it has in other technological areas, such as
medical technology, where prices have gone
up for services such as MRIs and CAT scans,
not down.
The most important thing to remember is
that perceptions and economic conditions here
can change rapidly, just as they did last summer
in the East Asian countries with the bursting
of their financial bubble. They are now in
deep recession.
1998 Ron Paul 39:37
Even though Japan first recognized signs of
difficulty nine years ago, their problems linger
because they have not allowed the liquidation
of debt, or the elimination of over capacity, or
the adjustment for real estate prices that
would occur if the market were permitted to
operate free of government intervention. The
U.S. did the same thing in the 1930s, and I
suspect we will do exactly what Japan is doing
once our problems become more pressing. With our own problems from the inflation of
the last 15 years now becoming apparent,
their only answer so far is to inflate even
more.
1998 Ron Paul 39:38
In its effort to re-energize the economy, the
Bank of Japan is increasing its reserves at a
51 percent rate. This may be the greatest effort
to “inflate” and economy back to health in
all of history. Japan has inflated over the
years and will not permit a full correction of
their mal-investment. The Bank of Japan is
doing everything possible to inflate again, but
even with interest rates below 1 percent there
are few takers.
1998 Ron Paul 39:39
OECD measurements, the M1 and quasi-money
have been increasing at greater than
20 percent per year in East Asia. In the United
Stats, M3 has been increasing at 10 percent
a year. It is estimated that this year the U.S. will have a $250 billion current account deficit
— continued evidence of our ability to export
our inflation.
1998 Ron Paul 39:40
We are now the world’s greatest debtor,
with an approximately $1 trillion debt to foreign
nations. Although accumulation of our debt by
foreign holders has leveled off, it has not
dropped significantly. The peak occurred in
mid-1997 — today these holding are slightly
lower.
This process of deliberately depreciating a
currency over time (inflation) causes a loss in
purchasing power and is especially harmful to
those individuals who save. AIER (American
Institute for Economic Research) calculates
that 100 million households since 1945 have
lost $11.2 trillion in purchasing power. This
comes out to $112,000 per household, or put
another way, over 5 decades each one of
these households lost $2,200 every year.
1998 Ron Paul 39:42
Although many households are feeling very
wealthy today because their stock portfolios
are more valuable, this can change rather rapidly
in a crash. The big question is what does
the future hold for the purchasing power of the
dollar over the next 10 or 20 years?
Reassurance that all is well is a strategy
found at the end of a boom cycle. Government
revenues are higher than anticipated, and
many are feeling richer than they are. The
more inflated the stock market is as a consequence
of credit creation, the less, reliable
these markets are at predicting future economic
events. Stock markets can be good predictors
of the future, but the more speculative
they become, the less likely it is the markets
will reveal what the world will be like next
year.
1998 Ron Paul 39:44
The business cycle — the boom-bust cycle of
history — has not been repealed. The psychological
element of trust in the money, politicians,
and central bankers can permit financial
bubbles to last longer, but policies can vary as
well as perceptions, both being unpredictable.
The goal of central bankers has always
been to gain “benefit” from the inflation they
create, while preventing deflation and prolonging
the boom as long as possible — a formidable
task indeed. The more sophisticated and
successful the central bankers are as technicians,
the larger the bubble they create.
1998 Ron Paul 39:46
In recent years, central bankers have had
greater “success” for several reasons. First,
due to the age in which we live, internationalizing
labor costs has been a great deal more
convenient. It is much easier for companies to
either shift labor from one country to another,
or for the company itself to go to the area of
the world that provides the cheapest labor. This has occurred with increased rapidity and
ease over the past two decades.
1998 Ron Paul 39:47
Central bankers have also become more sophisticated
in the balancing act between inflation
and deflation. They are great technicians
and are quite capable of interpreting events
and striking a balance between these two horrors. This does not cancel out the basic flaw
of a fiat currency; central bankers cannot replace
the marketplace for determining interest
rates and the proper amount of credit the
economy needs.
1998 Ron Paul 39:48
Central bankers have also had the advantage
of technological changes that increase
productivity and also serve to keep down certain
prices. It is true that we live in an information
age, an age in which travel is done with
ease and communication improvements are
astounding. All of these events allow for a bigger
bubble and a higher standards of living. Unfortunately this will not prove to be as sustainable
as many hope.
Another reason for the central bankers
greater recent success is that they have been
quite willing to cooperate with each other in
propping up selected currency values and
driving down others. They have cooperated
vigorously in dumping or threatening to dump
gold in order to keep the dollar price of gold
in check. They are all very much aware that
a soaring gold price would be a vote of no
confidence for central-bank policy.
1998 Ron Paul 39:50
Washington goes along because it is furtively,
but definitely, acknowledged there that
a free-market, high gold price would send a
bad signal worldwide about the world financial
system. Therefore, every effort is made to
keep the price of gold low for as long as possible. It’s true the supply-siders have some interest
in gold, but they are not talking about a
gold standard, merely a price rule that encourages
central-bank fixing of the price of gold. Most defenders of the free-enterprise system
in Washington are Keynesians at heart and
will not challenge interventionism on principle.
1998 Ron Paul 39:51
Instead of making sure that policy is correct,
central bankers are much more interested in
seeing that the gold-price message reflects
confidence in the paper money. Thus gold has
remained in the doldrums despite significant
rising prices for silver, platinum, and palladium. However, be assured that even central
banks cannot “fix” the price of gold forever. They tried this in the 1960’s with the dumping
of hundreds of millions of ounces of American
gold in order to artificially prop up the dollar by
keeping the gold price at $35/oz., but in August
1971 this effort was abandoned.
The solution to all of this is not complex. But
no effort is going to be made to correct the
problems that have allowed our financial bubble
to develop, because Alan Greenspan has
been practically declared a god by more than
one Wall Street guru. Because Alan Greenspan
himself understands Austrian free-market
economics and the gold standard, it is stunning
to see him participate in the bubble when
he, deep down inside, knows big problems
lurk around the corner. Without the motivation
to do something, not much is likely to happen
to our monetary system in the near future.
1998 Ron Paul 39:53
It must be understood that politicians and
the pressure of the special interests in Washington
demand that the current policies of
spending, deficits, artificially low interest rates
and easy credit will not change. It took the
complete demise of the Soviet-Communist
system before change came there. But be
forewarned: change came with a big economic
bang not a whimper. Fortunately that event
occurred without an armed revolution . . . so
far. The amazingly sudden, economic events
occurring in East Asia could still lead to some
serious social and military disturbances in that
region.
1998 Ron Paul 39:54
The key element to the financial system
under which we are now living is the dollar. If
confidence is lost in the dollar and a subsequent
free-market price for gold develops, the
whole financial system is threatened. Next
year, with the European currency unit (ECU)
coming on line, there could be some serious
adjustments for the dollar. The success of the
ECU is unpredictable, but now that they are
indicating some gold will be held in reserve, it
is possible that this currency will get off the
ground.
However, I continue to have serious reservations
regarding the ECU’s long-term success,
believing that the renewed nationalism
within Europe will not permit the monetary unification
of countries that have generally not
trusted each other over the centuries. In Germany,
70 percent of the people oppose entering
into this new monetary agreement. If economic
problems worsen in Europe — currently
the unemployment rate in Germany and
France is 12 percent — the European union
may well get blamed.
1998 Ron Paul 39:56
The issue of nationalism is something that
cannot be ignored. Immediately after the collapse
in East Asia, Malaysia began shipping
out hundreds of immigrants from Indonesia as
a reaction to their economic problems. Resentment
in Germany, France, and England is
growing toward workers from other countries.
1998 Ron Paul 39:57
The same sentiment exists here in the
United States, but it’s not quiet as bad at this
particular time because our economy is doing
better. But in the midst of a deep recession,
the scapegoats will be found and alien workers
will always be a target.
1998 Ron Paul 39:58
The greatest danger in a collapsing financial
bubble is that the economic disruptions that
follow might lead to political turmoil. Once serious
economic problems develop, willingness
to sacrifice political liberty is more likely, and
the need for a more militant government is too
often accepted by the majority.
1998 Ron Paul 39:59
No one has firmly assessed the Y2K problem,
but it cannot bode well if a financial crisis
comes near that time. Certainly a giant company
like Citicorp and Travelers, who have recently
merged, could really be hurt if the Y2K
problem is real. Since the markets seem to be
discounting this, I have yet to make up my
own mind on how serious this problem is
going to be.
Every politician I know in Washington is
awestruck by Greenspan. The article in The
New Republic reflects the way many Members
of Congress feel about the “success” of
Greenspan over the last ten years. Add to this
the fact that there is no significant understanding
of the Austrian business cycle in Washington,
and the likelihood of adopting a solution
to the pending crisis, based on such an understanding,
is remote.
1998 Ron Paul 39:61
Liberals are heedless of the significance of
monetary policy and its ill effects on the poor. They have no idea that the transfer of wealth
from the poor to the rich occurs as a result of
monetary policy and serves to hurt the very
people they claim to represent. Liberals stick
to the old cliche¥ that all that’s needed are
more welfare benefits. They are, I’m sure, influenced
by the fact that if more welfare benefits
are handed out, they can count on the
Federal Reserve to accommodate them. Unfortunately
this will continue to motivate them
to argue for a loose monetary policy.
1998 Ron Paul 39:62
The debate so often seems only to be who
should get the expanded credit, the business-banking
community or the welfare recipients
who will receive it indirectly through the monetization
of an ever-expanding government deficit. In Washington there is a craving for power
and influence, and this motivates some a lot
more than their public display of concern for
helping the poor.
1998 Ron Paul 39:63
Whether it’s Japan that tries to inflate their
currency to get out of an economic problem,
or the East Asian countries facing their crisis,
or our willingness to bail out the IMF, resorting
to monetary inflation is the only option being
considered. We can rest assured that inflation
is here to stay.
1998 Ron Paul 39:64
With daily pronouncements that inflation is
dead, the stage is set for unlimited credit expansion
whenever it becomes necessary. Just
as deficit spending and massive budgets will
continue, we can expect the falling value of
the dollar, long term, to further undermine the
economic and political stability of this country
and the world.
1998 Ron Paul 39:65
Until we accept the free market principle
that governments cannot create money out of
thin air and that money must represent something
of real value, we can anticipate a lot
more confiscation of wealth through inflation.
Notes:
1998 Ron Paul 39:23 through 1998 Ron Paul 39:65 were inserted in CR as an extension of remarks and were not spoken on the House floor.
1998 Ron Paul 39:35 Just as in the 1920’s today’s productivity could use a comma after 1920’s.
1998 Ron Paul 39:39 In the United Stats probably should have been, In the United States.
1998 Ron Paul 39:43 the less, reliable seems to have an extra comma and probably should be, the less reliable.
1998 Ron Paul 39:57 it’s not quiet as bad perhaps should have been it’s not quite as bad.
