Federal Reserve

To Really “Make America Great Again,” End the Fed!

To Really “Make America Great Again,” End the Fed!
By Ron Paul

Former Dallas Federal Reserve Bank President Richard Fisher recently gave a speech identifying the Federal Reserve’s easy money/low interest rate policies as a source of the public anger that propelled Donald Trump into the White House. Mr. Fisher is certainly correct that the Fed’s policies have “skewered” the middle class. However, the problem is not specific Fed policies, but the very system of fiat currency managed by a secretive central bank.

Federal Reserve-generated increases in money supply cause economic inequality. This is because, when the Fed acts to increase the money supply, well-to-do investors and other crony capitalists are the first recipients of the new money. These economic elites enjoy an increase in purchasing power before the Fed’s inflationary policies lead to mass price increases. This gives them a boost in their standard of living.

By the time the increased money supply trickles down to middle- and working-class Americans, the economy is already beset by inflation. So most average Americans see their standard of living decline as a result of Fed-engendered money supply increases.

Some Fed defenders claim that inflation doesn’t negatively affect anyone’s standard of living because price increases are matched by wage increases. This claim ignores the fact that the effects of the Fed’s actions depend on how individuals react to the Fed’s actions.

Historically, an increase in money supply does not just cause a general rise in prices. It also causes money to flow into specific sectors, creating a bubble that provides investors and workers in those areas a (temporary) increase in their incomes. Meanwhile, workers and investors in sectors not affected by the Fed-generated boom will still see a decline in their purchasing power and thus their standard of living.

Adoption of a “rules-based” monetary policy will not eliminate the problem of Fed-created bubbles, booms, and busts, since Congress cannot set a rule dictating how individuals react to Fed policies. The only way to eliminate the boom-and-bust cycle is to remove the Fed’s power to increase the money supply and manipulate interest rates.

Because the Fed’s actions distort the view of economic conditions among investors, businesses, and workers, the booms created by the Fed are unsustainable. Eventually reality sets in, the bubble bursts, and the economy falls into recession.

When the crash occurs the best thing for Congress and the Fed to do is allow the recession to run its course. Recessions are the economy’s way of cleaning out the Fed-created distortions. Of course, Congress and the Fed refuse to do that. Instead, they begin the whole business cycle over again with another round of money creation, increased stimulus spending, and corporate bailouts.

Some progressive economists acknowledge how the Fed causes economic inequality and harms average Americans. These progressives support perpetual low interest rates and money creation. These so-called working class champions ignore how the very act of money creation causes economic inequality. Longer periods of easy money also mean longer, and more painful, recessions.

President-elect Donald Trump has acknowledged that, while his business benefits from lower interest rates, the Fed’s policies hurt most Americans. During the campaign, Mr. Trump also promised to make audit the fed part of his first 100 days agenda. Unfortunately, since the election, President-elect Trump has not made any statements regarding monetary policy or the audit the fed legislation. Those of us who understand that changing monetary policy is the key to making America great again must redouble our efforts to convince Congress and the new president to audit, then end, the Federal Reserve.

This article originally appeared on the website of the Ron Paul Institute for Peace and Prosperity.

Fed Holds Rates Steady: Setting Up for December Hike?

In an unsurprising decision, the Federal Open Market Committee (FOMC) decided today once again to keep its target federal funds rate steady at 0.25-0.50%. It was widely speculated that the FOMC would hold rates steady at today’s meeting due to concerns about influencing next week’s Presidential election. Expectations now are that the Fed, if it decides to raise rates, will do so at next month’s FOMC meeting.

There were no significant changes in the language of the statement from September’s meeting. Household spending was described as “rising moderately” rather than growing strongly, price inflation and measures of inflation expectations have risen but still remain lower than what the Fed would like to see, and the case for raising rates has continued to strengthen. Voting against today’s action were Esther George from Kansas City and Loretta Mester from Cleveland, both of whom wanted to raise the target federal funds rate to 0.50-0.75%. Eric Rosengren, who voted against September’s FOMC action, switched this month to supporting the most recent FOMC action.

It remains to be seen when the Fed might raise rates, as it seems that central banks are waiting to see what the other central banks are going to do before they make their own decision. The Fed, the Bank of Japan, the European Central Bank, and others are playing a game of chicken. They are like cars heading full-speed towards a volcanic crater, soon to plunge into the chasm and assured of destruction. Yet none of them want to be the first to hike rates. That would be tantamount to admitting error, or at least admitting defeat, and would be a tremendous blow to their pride. And so meeting after meeting we see central bank after central bank holding steady.

Some of them like to talk a good game, jawboning markets into thinking that more easing might be on the way (BOJ, ECB) or that rate hikes are just around the corner (Federal Reserve), but they never back up their tough talk with action. Watching central banks nowadays is like watching a game of poker in which each player has a horrible hand, tries to bluff, and is unwilling to show his hand. And so it goes again today. Even if the Fed were to raise rates next month, it would likely only be to 0.50-0.75%, still an abnormally low figure. Given that the Fed spent all year talking about raising rates and not doing anything, it would be safe to say that rates won’t even approach 1% until December of 2017. Don’t expect full “normalization” to be reached until 2020 at the earliest, assuming the economy doesn’t go down the toilet before then, which is very likely given the huge asset bubbles that easy money policies have inflated all across the world.

The Symbiotic Relationship Between Central Banking and Total War

The following is the prepared version of a speech delivered at the Ron Paul Institute Conference in Sterling, VA.

I am here today to talk about one of the most important, but also most overlooked, issues of our day: the relationship between central banking and total war. When you focus on central banking and the problems that result from it, it’s very easy to see how central banks enable larger, more centralized, and more pervasive governments. But it isn’t always easy for those who oppose war to see how central banks enable war. So I’ll go ahead and give you kind of the 10,000 foot view of the symbiotic relationship between central banking and war.

One of the primary activities that states engage in is fighting wars. But wars cost money. Armies march on their stomachs, and someone has to buy the necessary food and transport it. Weapons and armament cost money too, all of which has to be paid for. So where have kings and governments historically gotten that money from, particularly when their own treasuries ran out? As Willie Sutton could have told them – banks.

Banks developed initially as a means for merchants to store their funds safely and securely. But eventually those banks took in so much money that they got the idea to loan out some of those funds, hoping that they could juggle loans and receive enough payment on outstanding loans to satisfy demands for redemption by depositors. Thus was born fractional reserve banking and the recourse to banks as lenders of money. Sure, kings could expropriate money from banks, but that only went so far. If you continued to rob banks outright, they would eventually either hide their money or disappear from the kingdom and the king was left with no money to fight his wars. So what developed was a relationship that has developed over time and become ever closer and more symbiotic over the course of time between banks and governments.

Ron Paul: Wells Fargo or the Federal Reserve – Who’s the Bigger Fraud?

The Wells Fargo bank account scandal took center stage in the news last week and in all likelihood will continue to make headlines for many weeks to come. What Wells Fargo employees did in opening bank accounts without customers’ authorization was obviously wrong, but in true Washington fashion the scandal is being used to deflect attention away from larger, more enduring, and more important scandals.

What Wells Fargo employees who opened these accounts engaged in was nothing more than fraud and theft, and they should be punished accordingly. But how much larger is the fraud perpetrated by the Federal Reserve System and why does the Fed continue to go unpunished? For over 100 years the Federal Reserve System has been devaluing the dollar, siphoning money from the wallets of savers into the pockets of debtors. Where is the outrage? Where are the hearings? Why isn’t Congress up in arms about the Fed’s malfeasance? It reminds me of the story of the pirate confronting Alexander the Great. When accused by Alexander of piracy, he replies “Because I do it with a small boat, I am called a pirate and a thief. You, with a great navy, molest the world and are called an emperor.”

Over two thousand years later, not much has changed. Wells Fargo will face more scrutiny and perhaps more punishment. There will undoubtedly be more calls for stricter regulation, notwithstanding the fact that regulators failed to detect this fraud, just as they have failed to detect every fraud and financial crisis in history. And who will suffer? Why, the average account-holder of course.

Today in History: President Nixon Closes the Gold Window

45 years ago today, on August 15, 1971, President Richard Nixon officially closed the gold window. While US citizens had been forbidden from owning gold or from redeeming their gold certificates for gold coins since the early 1930s, foreign governments still had the privilege of redeeming their dollars for gold. Due to the Federal Reserve’s inflationary monetary policy during the 1960s, foreign governments began to redeem more and more dollars for gold. Attempts to encourage other governments (especially France) not to redeem their dollar holdings were unsuccessful, and there was a very real threat that US gold holdings might eventually be exhausted. So President Nixon decided to close the gold window, thus severing the final link between the US dollar and gold. The removal of the restraint of gold redemption freed the Federal Reserve to engage in more inflationary monetary policy than ever. The effects of that on money supply and official price inflation figures are readily apparent.

Consumer Price Index

Consumer Price Index

M2 Money Supply

M2 Money Supply

The demonetization of silver in the Coinage Act of 1873 was widely assailed by its critics as the “Crime of ’73.” Isn’t it about time that Nixon’s closing of the gold window be known as the Crime of ’71?

Federal Reserve Holds Yet Again

Unsurprisingly, the Federal Open Market Committee (FOMC) decided today once again to hold the target federal funds rate at 1/4 to 1/2 percent. Kansas City Fed President Esther George was the sole dissenting vote in this month’s FOMC statement, preferring that the target federal funds rate be raised to 1/2 to 3/4 percent. Pointing to some of the rosier economic data that has come out recently, the FOMC adopted a slightly more upbeat stance in its statement. According to the FOMC, the labor market has strengthened, labor utilization has increased, and household spending has been growing strongly.

One curious statement added in this month’s statement is that “Near-term risks to the economic outlook have diminished.” This is probably a reflection of a belief that market risks from China, from the Eurozone, or within the United States have largely blown over. This seems overly optimistic. While August will likely be slow with so many people taking vacation, September has a history of being an unruly month and the next two to three months are definitely within the “near-term.” Has the Fed forgotten the roller coaster that was September 2008? China is a powder keg waiting for a spark, the Eurozone is facing another crisis in the Italian banking system, and the United States has seen bouts of “good” economic data followed up the next month by bad economic data. Whether the economy will boom or bust over the next three months is still up in the air.

Given the Presidential election coming up in November, it would be highly unlikely for the Fed to raise the target federal funds rate until after the election. The Fed wants to make the economy look as good as possible before the election, and raising rates risks slowing things down and increasing pessimism among voters. That would play into Donald Trump’s hand, so we would not be surprised if President Obama has told Chairman Yellen to do whatever she can to ensure a rosy outlook in November.

Fed Declines to Raise Rates

The Federal Open Market Committee (FOMC) decided today to leave the target federal funds rate at between 0.25 and 0.50 percent. This was widely expected, given the dismal jobs report that was published two weeks ago and the uncertainty in the banking sector surrounding the UK’s upcoming Brexit vote. Some FOMC participants had in recent weeks expressed uncertainty about raising rates because of the potential for instability in the banking sector if the UK votes to leave the European Union.

Language in this month’s FOMC statement was largely unchanged from April. The main changes in emphasis were that the FOMC appears to be more downbeat about job gains, stating that the “pace of improvement in the labor market has slowed”, although the Committee continues to believe that “labor market indicators will strengthen.” Additionally, the Committee claimed that household spending has strengthened, but it flagged business fixed investment as soft. References to strong job gains from the April statement were removed in the June statement. The FOMC still maintains that inflation is running below its 2 percent target and points to most measures of inflation expectations remaining little changed. Perhaps surprisingly, there was no mention of specific international factors such as Brexit that might factor into decision-making, only the same “the Committee continues to closely monitor inflation indicators and global economic and financial developments.”

Today’s decision was passed unanimously. Kansas City Fed President Esther George, who dissented from the previous statement and favored a rate hike in April, voted in support of this month’s FOMC policy decision.

Since markets were largely expecting rates to remain steady, we expect no major ramifications from this announcement. More interesting to markets will be the Bank of England’s monetary policy announcement tomorrow, coming one week before the Brexit vote. The ECB has already vowed to support the banking sector in the event that the UK leaves the EU, so it will be interesting to see if the Bank of England makes the same promise to UK banks.

Finally, Fed Chairman Janet Yellen testifies before the Senate and the House of Representatives next week as part of her semiannual Humphrey-Hawkins testimony. Summer testimony has normally been held in July, so these earlier testimony dates are undoubtedly an attempt to provide more timely scrutiny of today’s FOMC decision.

No Fed Hike Anytime Soon

After May’s dismal jobs report, the odds of the Federal Reserve raising the target federal funds rate anytime soon are just about nil. Remember that the Fed has declared itself for the past several years to be “data dependent”, meaning that they are looking for good economic news and data that indicates that the economy has gotten back to normal. And what do they mean by “good news” or “back to normal”? Why, the overheated boom-period growth rates we last saw at the height of the last housing bubble. That is why the Fed will not be raising rates for a long time.