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Monetary
Policy and The State of the Economy hearing before the Committee on Financial
Services, U.S. House of Representatives, February 15, 2007
The
CHAIRMAN. The gentleman from Texas, the ranking member of the subcommittee.
Dr.
PAUL. Thank you, Mr. Chairman, and welcome, Chairman Bernanke. I am very
pleased to be here today as the ranking member. In the midst of a great
optimism of monetary policy and how the economy is doing, I still have some
concerns. And of course, one of my long-term goals has always been to
emphasize maintaining the integrity of the monetary unit, rather than looking
superficially at some of our statistics. But I also share the concern of the
chairman of the committee of our responsibilities for oversight and your
interest as well, Chairman Bernanke, on having the transparency that I think
we all desire. Transparency in monetary policy is a goal we should all
support. I have often wondered why Congress has so willingly given up this
prerogative over monetary policy. Congress, in essence, has ceded total
control of the value of our money to a secretive central bank. Congress
created the Federal Reserve, yet it had no constitutional authority to do so.
We forget that those powers not explicitly granted to the Congress by the
Constitution are inherently denied to the Congress, and thus, the authority
to establish a central bank was never given. Of course, Jefferson and
Hamilton had that debate early on and the debate seemingly was settled in
1913. But transparency and oversight are something else, and they are worth
considering. Congress – although not by law – essentially has
given up all its oversight responsibilities over the Fed. There are no true
audits. Congress knows nothing of the conversations, the plans, and the
action taken in concert with other central banks. We get less and less
information regarding the money supply each year, especially now that we
don’t even have access to M3 statistics. The role the Fed plays in the
President’s secretive working group on financial markets goes essentially
unnoticed by Congress. The Federal Reserve shows no willingness to inform
Congress voluntarily about how often the working group meets, what action it
takes that affects the financial markets, or why it takes these actions. But
all these actions directed by the Federal Reserve alter the purchasing power
of our money, and that purchasing power is always reduced. The dollar today
is worth only 4 cents compared to the dollar that the Federal Reserve started
with in 1913. This has significant consequences on our economy and our
political stability. All paper currencies are vulnerable to collapse and
history is replete with examples of great suffering caused by these
collapses, especially to the Nation’s poor and middle class. This can
lead to political turmoil as well. Even before a currency collapses, the
damage done by a fiat system is significant. Our monetary system insidiously
transfers wealth from the poor and the middle class to the privileged rich.
Wages never keep up with profits on Wall Street and the banks, thus sowing
the seeds of class and discontent. When economic trouble hits, free markets
and free trade are often blamed, while the harmful effects of a fiat monetary
system are ignored. We deceive ourselves that all is well with the economy
and ignore the fundamental flaws that are a source of growing discontent
among the various groups. Few understand that our consumption and apparent
wealth is dependent on a current account deficit running at approximately
$800 billion a year. This deficit shows that much of our prosperity is based
on borrowing rather than a true increase in production. Statistics show year
after year that our productive manufacturing jobs continue to go overseas.
This phenomenon is not seen as a consequence of the international fiat money
system where the U.S. Government benefits as the issuer of the world reserve
currency. Government officials consistently claim that inflation is in check
at barely 2 percent, but middle class Americans know that their purchasing
power – especially when it comes to housing, energy, medical care, and
school tuition – is shrinking much faster than 2 percent per year. Even
if prices are held in check in spite of our monetary inflation, concentrating
on the CPI statistics distracts from the real issue. We must address the
important consequences of the Fed manipulation of interest rates. When
interest rates are artificially low, below market rates, insidious
malinvestment, and excessive indebtedness inevitably brings about the
economic downturns that everyone dreads. We look at GDP figures and reassure
ourselves that all is well. Yet a growing number of Americans still do not
enjoy the high standard of living that monetary inflation brings to the
privileged few. Those who benefit the most are the ones who get to use the
newly created credit first –
The
CHAIRMAN. The gentleman’s time has expired. If the gentleman will come
to a conclusion.
Dr.
PAUL. I will yield back.
[break]
The
CHAIRMAN. Without objection. The gentleman from Texas, Mr. Paul.
Dr.
PAUL. Thank you, Mr. Chairman. I would like to pursue the issue of the
current account deficit. It seems like almost all economists express concern,
some worry about it, but I can’t find anybody who tells us that we
should totally ignore it. And we do now borrow approximately $800 billion
every year. We have a foreign debt of several trillions of dollars, and to me
it represents an imbalance which is the consequence of the monetary system
and presents a potential problem for us. Likewise, I see that potential
problem in the number of derivatives out there. There is one figure that says
there are $236 trillion of derivatives, and it seems like very few people
understand exactly what that means, and it certainly is so huge and diverse.
I don’t even think the Congress that we have that is always anxious to
regulate everything has offered a scheme for regulating derivatives because,
quite frankly, I don’t think they are capable of doing that. Foreigners
now own 43 percent of our debt, approximately twice as much as the Fed has
been required to borrow. And one of the questions I have is how much pressure
would it put on you if – I guess in even a theoretical sense, what if
they didn’t buy any of our debt, and all of a sudden you had to deal
with that problem? Right now, there is a sign that maybe they are buying
less. We have heard rumors and innuendos in the media and hints from China
that, yes, they are not going to be buying as much, and yet there
hasn’t been really a crisis. There has been no panic, and we know there
is self-interest on their part to maintain the dollar because they hold so
many. But in many ways I think we get a free ride. We get to export our
dollars. We don’t have to monetize them here. We get to export our
inflation, but it potentially has a problem for us if all of a sudden they
buy less, and these dollars come home or these dollars go into goods and
services. Also the other concern that I have that I would like you to address
is the subject of the revaluation of the yuan. I understand you and Secretary
Paulson went over to China to put pressure – at least the media
presented it that way – put pressure on them to increase the value of
the yuan and decrease the value of the dollar in relationship, which in
reality, it seems to me, would put pressure on our interest rates and push
our interest rates up and raise our prices. And some people have reported
that couldn’t possibly be our policy where we would deliberately want
to do that. And then again, it would put more pressure on – I know it is
an artificial arrangement right now. But in some ways what the Chinese have
done is they have revived the old Bretton Woods standard of fixing their
currency to our dollar, and some people look longingly to the Bretton Woods
days where we worked with fixed exchange rates. Of course, there were
different conditions then. But if you would, if you would address both what
our position is with the Chinese yuan as well as what happens if they
significantly – if the foreigners, especially Japan and China, start to
buy a lot fewer dollars and how that would affect your policy.
Mr.
BERNANKE. Thank you. You are correct that we are to some extent dependent on
capital inflows to support the trade and current account deficits we
currently have. The current demand for U.S. assets from abroad both from
public and private sources remains strong, so there doesn’t seem to be
any immediate concern that will not continue. However, there is a risk
sometime in the future that there would be less demand for dollar assets, and
that could cause some movements in currency and bond markets that might be
disruptive. And for that reason I have advocated, as many others in Congress
have, that we have tried gradually to move our current account deficit down
to a more sustainable level. The way to do that essentially, it is a very
complex subject, but essentially the current account deficit arises because
of asymmetries in the saving investment balance here and abroad. In the
United States we have a decent rate of investment, including construction of
new homes, but relatively low saving rates, and that difference we have to
borrow abroad, whereas in many other countries in East Asia, and among oil
producers and the like, they have an excess of saving over investment, and
they are lending us that difference, and that is why the capital flows are
moving from abroad to the United States.
The
way to adjust that, over time, is to create a better balance of savings and
investment both in the United States, which would be through primarily
greater saving, but also abroad by creating more reliance on domestic demand
for growth. So, for example, in China there is a long-term plan, which we
support, to try to reduce the reliance of the economy on exports and increase
its reliance on domestic consumption, thereby reducing their savings rate to
a more appropriate level, which also increases the living standard of their
people. So I think with that process we can move gradually toward a greater
balance. With respect to the yuan, I think there are several reasons to move
towards greater flexibility in the yuan, and I described them in a speech I
gave in China. First, China is a very large country, and it should at some
point have an independent monetary policy of its own rather than being tied
to the United States. In order to do that, they have to have a flexible
currency. Secondly, the flexibility of the yuan is needed to accomplish this
rebalancing from export orientation to domestic demand that I was referring
to earlier. And thirdly, yuan appreciation and flexibility makes some
contribution to helping us to rebalance the current account deficit we
currently have, although I think the larger force quantitively would be the
rebalancing of demand from exports towards domestic demand in China.
Ron Paul
www.house.gov/paul
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Congressman
Ron Paul of Texas enjoys a national reputation as the premier advocate for
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for limited constitutional government, low taxes, free markets, and a return
to sound monetary policies based on commodity-backed currency. For more
information click on the Project Freedom website.
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Dr. Ron Paul
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