Tag Archive for Inflation

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.

You Know Your Inflation Is Bad When…

Inflation is Venezuela has gotten so bad that the Venezuelan government cannot afford to buy new money. As with many countries that have resorted to inflation to attempt to cure their economic woes, Venezuela has run out of paper to print new money and has had to resort to contracting with foreign firms to acquire new banknotes. The sheer scale of the money printing is so large that it could provide significant business to those foreign firms, assuming that the Venezuelan government has the ability or desire to pay them for their work. Venezuela has placed such strong capital restrictions on its economy that it risks running out of foreign exchange. Foreign companies won’t take bolivars as payment, they want dollars or euros, of which the Venezuelan government doesn’t have much left. Venezuelan companies find themselves in similar straits, with the country’s largest brewery being forced to shut down operations because it lacks foreign currency with which to purchase and import barley malt and hops to brew beer. While some may joke that a shortage of beer will lead to social unrest, it’s really not a joking matter. The problems faced by the brewery are faced by many other businesses that have to import goods.

More Inflation on the Way?

One thing to watch out for in Janet Yellen’s press conference this afternoon is her mentioning of the Fed’s inflation target. The Fed claims that it wants to target an inflation rate of about two percent, and has been perturbed that it can’t seem to reach that. We know, of course, why they can’t, because prices want to drop. Overinflated prices during the last bubble never were allowed to return to normal levels, with the Fed pumping trillions of dollars into the system to keep prices elevated and stave off the fearsome specter of “deflation.” And yet all those trillions have led only to continued low (official) inflation figures, which the Fed wants to boost.

Pennies And Nickels: More Expensive To Mint Than To Use

It’s not breaking news, but the cost of producing pennies and nickels is still higher than their face value. This has been an issue for the past decade, with no progress being made. If the US Mint decides to change the composition of the penny and nickel, operators of vending machines and other coin-operated machines would have to spend hundreds of millions of dollars retrofitting their machines, while the Mint would save a sum that’s only in the tens of millions of dollars. A far better solution would be just to stop using pennies and nickels altogether. Since the Coinage Act of 1792, the United States monetary system has used mils, but no coin was ever minted to provide for that 1/10 of a cent of value. The half cent was eliminated in the mid-19th century. Now it’s the turn of the penny and the nickel. The Federal Reserve’s inflationary monetary policy has so eroded the value of US coinage that those small coins aren’t even worth producing anymore. It’s only a matter of time before they will disappear from circulation anyway. One of the best commentaries on the government’s continuing fiasco with the penny and nickel is from Congressman Ron Paul’s statement at a Congressional hearing on coin production. It’s well worth a read.

Flashback Friday: Ron Paul on the Federal Reserve in 1979

Ron Paul
This Friday we bring you a flashback to one of Congressman Ron Paul’s old speeches before Congress. The topic of this speech was the Federal Reserve and its inflation of the money supply which leads to a rise in prices. It should be noted that in the time since this speech was delivered, the purchasing power of the dollar has plummeted so much that it now takes $3.28 to purchase what $1 did back then. That is a 70% loss in the purchasing power of the dollar. Imagine entering the workforce in 1979 as a 22-year old college graduate. Today you would be 58 years old and nearing retirement if not already retired. Did you think back then that the dollars you started saving for retirement would lose 70% of their purchasing power by the time you retired? Yet the Federal Reserve continues to exist, continues to devalue the dollar, and will cause a similar loss of purchasing power in the future. Those entering the workforce today should bank on another 70% drop in the dollar’s purchasing power, if not more.

Congressman Ron Paul
Speech Before the US House of Representatives
March 15, 1979

Mr. Speaker, while I applaud the committee’s recognition of the fact that “reducing inflation will require persistent, measured, monetary and fiscal restraint,” I believe that the committee is still looking at the Federal Reserve through rose-colored glasses. Throughout its 65-year history, the Federal Reserve has pursued a policy of deliberate inflation and manipulation of the money supply, a policy which has caused numerous recessions, massive unemployment, double-digit price inflation, international exchange crises, and the largest and longest depression in our national history. The committee does note that the Federal Reserve had promised moderation and consistency in monetary policy before, but that it has been either “unwilling or unable” to keep its promise. I concur with the committee’s view of the importance and necessity of the Federal Reserve keeping its promises on monetary policy, but I am skeptical nonetheless. We need only look at the record of the Federal Reserve, which I have briefly recapitulated above, in order to understand my skepticism. The only permanent and practical solution to the problem of inflation — the only way to implement the Federal Reserve’s and this committee’s goal of persistent monetary restraint — is to decouple money and politics altogether, removing control over the money supply from any governmental or quasi-governmental institution. The deregulation of money, not simply a slowing in the growth of the money supply, must be our goal. The committee is looking in the right direction, but it has not yet seen the correct destination.

What Are They Smoking? – The Problem with the “Price Level”

The San Francisco Fed recently stated that inflation (which they define as a rise in prices) is probably lower than it is reported in the US. It makes you wonder whether anyone at the Fed has ever bought a house, rented an apartment, bought food or clothing, etc. The problem with looking at a “price level” that attempts to aggregate and average prices across society is that that aggregate is not an accurate indicator of the cost of living for most people, and perhaps not for anyone. It is the work of of statisticians who have created their “model” price level which bears absolutely no relation to the actual prices paid by any person who actually exists.

Why China Devalued the Yuan

Yuan-Dollar Exchange Rate

Yuan-Dollar Exchange Rate

Taking a look at this chart of the Dollar/Yuan exchange rate, you can understand why the Chinese government took the action that it did. The chart is denominated in yuan to dollars. The more yuan per dollar, the weaker the yuan and the stronger the dollar; the fewer yuan per dollar, the stronger the yuan and the weaker the dollar. You can see that the yuan has been continuously strengthening over the past ten years. Remember that as a currency strengthens, exports from that country become more expensive. A good that cost 100 yuan back in 2005 would mean a dollar cost of a little over $12. A 100-yuan good today would cost over $16. That’s why the Chinese government originally tried to keep the yuan pegged to the dollar, so as not to make the exports it relied upon for economic growth more expensive abroad. But after much pressure from the US and other Western countries, the government depegged the yuan, allowing it to trade in a narrow band and appreciate against the dollar.

The Greek Currency Crisis: Historical Parallels

The continued capital controls and bank closures in Greece have led to a serious shortage of cash. Businesses are unable to pay their workers, they are unable to pay for goods and services, and many ordinary citizens don’t have enough cash to purchase food, water, and other basic supplies. As a result of the shortage of euros in circulation, some businesses have taken to creating their own scrip, essentially paper promises to pay in euros once conditions normalize. As long as they can get other businesses to accept these IOUs, the IOUs could circulate as currency and the lack of circulating euros could be overcome. The Greek government is even considering creating its own IOUs. But Greece is not the only country that has faced a cash shortage. Looking back to historical examples, what might replace euros as circulating money in the near future?