Sunday, September 18, 2005
The Coming Category 5 Financial Hurricane and the Truth About Poverty
The Coming Category 5 Financial Hurricane
by Ron Paul
Before the US House of Representatives, September 15, 2005
The tragic scenes of abject poverty in New Orleans revealed on national TV by Katrina’s destruction were real eye-openers for many. These scenes prompted two emotional reactions. One side claims Katrina proved there was not enough government welfare, and its distribution was based on race. The other side claims we need to pump billions of new dollars into the very federal agency that failed (FEMA), while giving it extraordinary new police powers. Both sides support more authoritarianism, more centralization, and even the imposition of martial law in times of natural disasters.
There is no hint that we will resort to reason now that the failed welfare policies of the past 60 years have been laid bare. Certainly no one has connected the tragedy of poverty in New Orleans to the flawed monetary system that has significantly contributed to the impoverishment of a huge segment of American society.
Congress reacted to Katrina in the expected irresponsible manner. It immediately appropriated over $60 billion with little planning or debate. Taxes won’t be raised to pay the bill – fortunately. There will be no offsets or spending reductions to pay the bill. Welfare and entitlement spending is sacrosanct. Spending for the war in Iraq and the military-industrial complex is sacrosanct. There is no guarantee that gracious foreign lenders will step forward, especially without raising interest rates. This means the Federal Reserve and Treasury will print the money needed to pay the bills. The sad truth is that monetary debasement hurts poor people the most – the very people we saw on TV after Katrina. Inflating our currency hurts the poor and destroys the middle class, while transferring wealth to the ruling class. This occurs in spite of good intentions and misplaced compassion.
We face a coming financial crisis. Our current account deficit is more than $600 billion annually. Our foreign debt is more than $3 trillion. Foreigners now own over $1.4 trillion of our Treasury and mortgage debt. We must borrow $3 billion from foreigners every business day to maintain our extravagant spending. Our national debt now is increasing $600 billion per year, and guess what, we print over $600 billion per year to keep the charade going. But there is a limit and I’m fearful we’re fast approaching it.
Runaway inflation is a well-known phenomenon. It leads to political and economic chaos of the kind we witnessed in New Orleans. Hopefully we’ll come to our senses and not allow that to happen. But we’re vulnerable and we have only ourselves to blame. The flawed paper money system in existence since 1971 has allowed for the irresponsible spending of the past 30 years. Without a linkage to gold, Washington politicians and the Federal Reserve have no restraints placed on their power to devalue our money by merely printing more to pay the bills run up by the welfare-warfare state.
This system of money is a big contributing factor in the exporting of American jobs, especially in the manufacturing industries.
Since the last link to gold was severed in 1971, the dollar has lost 92% of its value relative to gold, with gold going from $35 to $450 per ounce.
Major adjustment of the dollar and the current account deficit can come any time, and the longer the delay the greater the distortions will be in terms of a correction.
In the meantime we give leverage to our economic competitors and our political adversaries, especially China.
The current system is held together by a false confidence in the U.S. dollar that is vulnerable to sudden changes in the economy and political events.
My suggestion to my colleagues: Any new expenditures must have offsets greater in amount than the new programs. Foreign military and foreign aid expenditures must be the first target. The Federal Reserve must stop inflating the currency merely for the purpose of artificially lowering interest rates to perpetuate a financial bubble. This policy allows government and consumer debt to grow beyond sustainable levels, while undermining incentives to save. This in turn undermines capital investment while exaggerating consumption. If this policy doesn’t change, the dollar must fall and the current account deficit will play havoc until the house of cards collapses.
Our spending habits, in combination with our flawed monetary system, if not changed will bring us a financial whirlwind that will make Katrina look like a minor storm. Loss of confidence in the dollar and the international financial system is a frightening possibility – but it need not happen if Congress can curb its appetite for buying the people’s support through unrestrained spending.
If Congress does not show some sense of financial restraint soon, we can expect the poor to become poorer; the middle class to become smaller; and the government to get bigger and more authoritarian – while the liberty of the people is diminished. The illusion that deficits, printing money, and expanding the welfare and warfare states serves the people must come to an end.
September 17, 2005
Dr. Ron Paul is a Republican member of Congress from Texas.
by Charley Reese
Grand prize for the most absurd statements about the hurricane goes to those liberal columnists who have self-righteously proclaimed that the New Orleans disaster has "forced" the American people to confront poverty.
This is an example of projection. It's the media that ignore poverty. The American people, except for that 1 percent who own practically everything, confront poverty every day. You can't drive around any American city or rural area and not see it.
To the members of the lower middle class, poverty is a pack of wolves loping behind them. One accident, one bout of sickness, one layoff, and the wolves of poverty will devour them. Ignore poverty? How ridiculous. These people know it because they lived it and worked hard to escape it and are afraid every day of their lives they will slip back into it.
No, the media are out of touch, not only with poor people but with middle-class people. Look at the entertainment on television. Practically all of the characters in the shows are portrayed as being more affluent than the people who watch the shows. It doesn't take long for six-figure commentators to start associating exclusively with people in their income bracket or higher. Pretty soon they think everybody is worried about his or her 401(k) and investment strategy.
Not so. The majority of Americans are worried about keeping their jobs and paying their bills. They are worried about health care. They are worried about their children's future. This isn't liberal dogma. It's fact. We have allowed a system to develop that makes it easier for the rich to get richer and harder for the poor to escape to the middle class.
The underlying cause – and the most difficult to address – is a policy of gradual depreciation of the currency. It's usually referred to as inflation, but whatever jargon you wish to apply, the end result is that year after year, the dollar a man or woman earns buys less. To hide this from the public, the government periodically changes the base year by which it computes inflation. To further confuse the public, the government harps on the monthly rate of inflation.
Measured in purchasing power, it takes $4 today to buy what $1 would buy in 1967. Now, if wages and prices rose in a uniform rate, as some imagine, everything would be equal. Trouble is, they don't. Prices, for both goods and services, far outstrip wage increases. Ever-increasing taxes chip away at living standards. Look at your telephone bill, your utility bill and your cable-TV bill. Every conceivable thing that can be taxed is taxed.
The basic unfairness of our system lies in a difference in power. The business owner, the manufacturer, the professional can raises prices and fees restrained only by the competitive factor. This problem is often solved with some unofficial price fixing. Look at the near uniformity of prices among competing brands. Call five orthodontists and get a price for braces on your child's teeth. Competition, which is supposed to keep prices down, is often nothing more than a cover to keep prices high and uniform. For all the lip service paid to free enterprise, most American businesses and professionals hate price competition with a passion.
So while the businesses and professionals are free to increase their income as the market or their agreements allow, the working man and woman cannot. They are totally dependent on their employer. If the employer gives them a cost-of-living raise once a year, he is, in effect, not giving them a raise at all. If they try to save money, they will lose money, as the gradual inflation will eat away their capital. If you had put $10,000 in the mattress in 1967, it would be worth $2,500 today. The $7,500 was stolen by a combination of Congress and the central bank, for they are monetizing the deficits that have depreciated the currency.
America is being converted into a Third World country before our very eyes. Don't give me that malarkey about being blind to poverty. We'll all see more of poverty than we want to if we don't change the system.
September 17, 2005
Charley Reese has been a journalist for 49 years.
© 2005 by King Features Syndicate, Inc.