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These past few weeks have provided an unfortunate
opportunity to discuss inflation. The dollar index has reached new
all-time lows. The total money supply, M3, as calculated by private sources,
is growing at a disturbing 17% rate. The Fed is pumping dollars into
the economy at an alarming rate. Just recently the Fed announced new
loan auctions totaling $100 billion. That is
new money created from thin air. If these money auctions, combined with
the bailout of Bear Stearns, continue to be the trend, we are in for some
economic stormy weather. The explanation lies in understanding the
basics of money, and why it is dangerous to give
government and big banks control over it.
First, money is not wealth, in and of itself. You
cannot create more wealth simply by creating more money. Wall Street
bankers cry out for more liquidity, but what is really needed is more value
behind the dollar. But the value, unfortunately, isn't there.
You see, the Fed creates new money and uses it to
purchase securities from banks. Flush with funds, these banks seek to
put this money to use. During the Fed's expansionary period, much of
this money went to home loans. Through a combination of federal
government inducements to lend to risky borrowers, and the Fed's supply of
easy money, the housing bubble took shape. Fannie Mae and Freddie Mac
were encouraged to purchase and securitize mortgages, while investors, buoyed
by implicit government backing, rushed to provide funding. Money that
could have been invested in more productive, less risky sectors of the
economy was thereby malinvested in subprime mortgage loans.
The implicit guarantee from the Fed is quickly
becoming explicit, as those institutions deemed "too big to fail"
are bailed out at taxpayer expense. Wall Street made a killing during
the housing bubble, reaping record profits. Now that the bubble has
burst, these same firms are trying to dump their losses on the
taxpayers. This approach requires more money creation, and therefore
debasement of all dollars in circulation.
The Federal Reserve, a quasi-government entity,
should not be creating money or determining interest rates, as this causes
malinvestment and excessive debt to accumulate. Centrally planned,
government manipulated economies always fail eventually. The collapse of communism and the
failure of socialism should have made this apparent. Even the most
educated, well-intentioned central planners cannot plan the market better
than the market itself. Those that understand economics best, understand this reality.
In free markets, both success and failure are
options. If government interventions prevent businesses, like Bear
Stearns, from failing, then it is not truly a free market. As painful
as it might be for Wall Street, banks, even big ones, must be allowed to
fail.
The end game for this policy of monetary inflation
is that the money in your bank account loses purchasing power. So, by
keeping failing banks afloat, the Fed punishes those who have lived frugally
and saved. The power to create money is a power that should never be
granted to government. As we can plainly see today, the Fed has abused
this power, and taxpayers are paying the price.
By :
Ron Paul
www.house.gov/paul
http://www.house.gov/paul/congrec/congrec2007/cr121307h.htm
Congressman
Ron Paul of Texas enjoys a national reputation as the
premier advocate for liberty in politics today. Dr. Paul
is the leading spokesman in Washington 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.
Published with the authorization of Dr. Paul.
Copyright Dr. Ron Paul
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