Issue: Economic: On the Federal Reserve

[giskard]

The Mises Institute has this 42 min docu:
http://www.youtube.com/watch?v=iYZM58dulPE

And then some people will say something like the following
If you took macroeconomics you'd know:

1) The Fed is purposefully separated from the government so that the government cannot directly control interest rates and affect money. There is a damn good reason for this.
2) Small inflation is a very good thing. It means that people can pay back loans with money that is worth a little less than the money you borrowed. Zero inflation isn't bad but any amount of deflation is almost disasterous.
3) Our national debt as as percentage of GDP is in line with the rest of the first world and slightly lower. Yes, it's large but the money we pay in interest goes to foreign allies that we borrow money from. It keeps them our allies since if they get pissed at us, we'll just negate the debt. It's useful in world stability.

And then there's this "Debunking Federal Reserve Myths"
http://www.geocities.com/CapitolHill/Embassy/1154/flaherty.html

Could someone support or debunk some of the above statements?

 

[wraft]

Ron's position on the Federal Reserve should be the same as Andrew Jackson's - they are a den of vipers to be rooted out. Anything more elaborate than that puts people to sleep.

 

[Gee]

1) I would say this is a question of who can best manage what the Fed does, Congress or private bankers? Private bankers aren't publicly accountable, and Congress is hardly fiscally responsible. To me, neither seem ideal.

2) I don't know the answer to this, as I'm not an economist. I am, however, extremely skeptical that creditors and debtors could not learn to react to any currency with resonably predictable inflationary (or deflationary) tendencies.

I was drawn to Dr. Paul's platform on the Fed not because he says he wants to abolish it, but that he wants to allow hard currencies to compete with it (by removing any tax on buying or selling specie). If we had a "free market" of currencies, I feel confident the best solution would arise, and the US economy would not be as crippled if our government resorted to hyperinflation to pay off its debts. In my opinion anything is better than a state-mandated currency which does not give the people the power to choose what they wish to barter with. Most people today don't think about it, but the reason we have legal tender laws is because people refused to accept fiat currency without the threat of government force. If people were naturally inclined to accept a fiat currency, legislation wouldn't have been necissary.

3) Its still pretty high if you look at it as a percentage of GDP:

As you can see, the trend is for a sharp spike after large wars (and the Great Depression), followed by a gradual decrease. But the overall trend is still increasing levels of debt when compared to GDP.
I think the main cause for concern is the drop in value of the dollar and expansion of our money supply. If the dollar looses too much value, people may stop lending us money. And if the debts get too high to pay back, more inflationary practices may be used. That, combined with promised entitlements to retiring "baby boomers", might push the government into bankruptcy. A good explaination of it is here:
http://news.bbc.co.uk/2/hi/programmes/hardtalk/4857646.stm

 

[Brandybuck]

The Federal Reserve has worked in the past couple of decades because the past few chairmen have had been very disciplined. But we shouldn't be in a situation where our monetary supply is run on the "honor system". There's just too much temptation to reach into that coffee can and snag a few inflation bucks when no one's looking.

Of course, I doubt that getting rid of the Fed is a realistic prospect. Maybe in Ron Paul's second term, but not in his first.

 

[Bryan]

Could someone support or debunk some of the above statements?

Here is my take:

1) The Fed is purposefully separated from the government so that the government cannot directly control interest rates and affect money. There is a damn good reason for this.

And what is that reason? And how does that reason outweigh the proposed alternative? Per the Constitution, the hundreds of members of Congress have the power to regulate money whereas with the Fed there are only seven who serve 14 year terms. With the Fed it only takes four people to get together behind closed doors to preplan years of interest rate fluctuations and then work deals with their business cronies on how to best profit from it. With Congress, it would take hundreds to do this same. So what is the "damn good reason"? Can it top allowing four people to basically run the country?

Small inflation is a very good thing. It means that people can pay back loans with money that is worth a little less than the money you borrowed.

It also means that people who saved money have a little less later than they had before, unless then keep the asset liquid to "invest" it. So by this logic, the advantage goes to the debtor (one who spends too much). If you run big business you thrive on people that spend too much.

Our national debt as as percentage of GDP is in line with the rest of the first world and slightly lower.

Who cares what the rest of the first world does? How about doing what is best? Our national debt is $120,000 for every family of four- how is this a good thing?

Yes, it's large but the money we pay in interest goes to foreign allies that we borrow money from.

How many hundreds of billions of US debt does China hold? Since when are communist our allies?

It keeps them our allies since if they get pissed at us, we'll just negate the debt. It's useful in world stability.

If you threaten to not pay a debt to a friend do you think it adds stability to your friendship? I'd say if a country didn't repay its debt then a citizenry might just want to start an invasion and take control over valuable natural resources to force the repayment. The borrower is servant to the lender. How is this stability?

Never mind the fact that in a free society (like we're suppose to be) no other person or group of people (or their government) can impose a forced tax or debt upon you. If someone else wants to go in debt then let them but don't let them force their debt upon you.


As for the Fed, can anyone provide a diagram that has the following attributes:

- Who are the players (Board of Governors, Open Market Committee, Federal Reserve Banks, Board of Directors, etc)
- What are the players legal roots (some are government, some private)
- Who has what authority?
- How the exact flow of money occurs between all these entities, for all types of transitions

From there it would then be possible to properly analyze and discuss the attributes of the system and who may or may not be getting a favorable deal. I have looked for this information in a plan English form before in books and on the net with no luck, it seems it should be pretty simple to produce- anyone know where it can be found?

 

[wraft]

To understand the current Federal Reserve, it is useful to contrast our current interest bearing currency with that of non-interest bearing money such as the Lincoln greenbacks.

see: http://www.thetruthseeker.co.uk/print.asp?ID=843

Every President who has tried to take control of the money from the bankers has been assassinated - Lincoln, Garfield, McKinley, Kennedy.

 

[beermotor]

The problem you must understand is that a hard currency system, i.e. not what we operate under now, is the single most powerful check on aggressive, destructive government action, period. Look at what Washington had to do to fight the Revolutionary War... print "Continentals." (I think that little bit is in the Mises.org video that features Ron, as well.)

This is the critical issue that many people do not understand.

This is a critical issue that the Democratic party does not understand (among quite a few others).

If $1 == 1/35th ounce of gold (or whatever you'd like to set it to be), a government cannot go on spending forever. It could not fight an open-ended war. Indeed, like you and I, it would have to save funds to conduct such operations.

But government does not have any business whatsoever conducting any open-ended war, period. This is Ron Paul's point every time he opens his mouth. Whether the wars are on personal freedom, on successful capitalists, or on freedom-minded Muslim peoples who simply want self-determination free of Western domination, wars are ALWAYS, ALWAYS THE SAME. SAME OUTCOME, EVERY SINGLE TIME.

And that outcome is: the world is made poorer.

I think he needs to get this message across. The Federal Reserve is a machine of war. Without it, the government could not do the multitude of things that it does so poorly, so ineptly, and nor could it do the multitude of things that are simply evil. Throw in some Bible verses for good measure. This is a moral issue, a Christian issue.

 

[MsDoodahs]

If $1 == 1/35th ounce of gold (or whatever you'd like to set it to be), a government cannot go on spending forever. It could not fight an open-ended war. Indeed, like you and I, it would have to save funds to conduct such operations.

YES YES YES!

This is the key point that I don't think most people understand.

 

[Gee]

YES YES YES!

This is the key point that I don't think most people understand.

Some people would say this is why fiat money is needed, to allow the government to spend a ton more money than it has when its needed (such as in an important war). I don't really agree, but its an argument people will probably make. I think if a nation is actually directly threatened by another, the extra taxes or labor required to defend it will be available without overprinting fiat money.

 

[NMCB3]

Some people would say this is why fiat money is needed, to allow the government to spend a ton more money than it has when its needed (such as in an important war). I don't really agree, but its an argument people will probably make. I think if a nation is actually directly threatened by another, the extra taxes or labor required to defend it will be available without overprinting fiat money.

Nations just borrow money during wartime. For example Great Briton in the 17th and 18th century's borrowed money from the Dutch bankers to finance their wars against the French and everyone else.

 

[lifeasariver]

The Mises Institute has this 42 min docu:
http://www.youtube.com/watch?v=iYZM58dulPE

And then some people will say something like the following
If you took macroeconomics you'd know:

1) The Fed is purposefully separated from the government so that the government cannot directly control interest rates and affect money. There is a damn good reason for this.
2) Small inflation is a very good thing. It means that people can pay back loans with money that is worth a little less than the money you borrowed. Zero inflation isn't bad but any amount of deflation is almost disasterous.
3) Our national debt as as percentage of GDP is in line with the rest of the first world and slightly lower. Yes, it's large but the money we pay in interest goes to foreign allies that we borrow money from. It keeps them our allies since if they get pissed at us, we'll just negate the debt. It's useful in world stability.

And then there's this "Debunking Federal Reserve Myths"
http://www.geocities.com/CapitolHill/Embassy/1154/flaherty.html

Could someone support or debunk some of the above statements?

1. Separated from the government and in the hands of unelected people - financiers and speculators. Whoever has control over money controls the country - the citizens should be more comfortable by knowing the the control of their country is in the hands of the people they elected.
2. True but inflation devalues our money and weakens our stance on the world market - kind of safe for now since the oil is priced and purchased with US dollars which keeps our inflation-weakened currency still in demand.
2 & 3. GDP is inflated by the Wall Street revenues including money that are not monetized and then reduced by inflation. Then the inflation is calculated by the BLS using hedonic regression (look it up). The real inflation is much, much higher than what is made public. In addition, Fed Reserve doesn't publish M3 anymore which was the indicator of all the US dollars in the world (the more money, especially fiat money, the greater the inflation). So, the real GDP is much lower. Borrowing money from others doesn't make them our allies, it makes them our creditors. Just borrow money from a bank and don't pay back and see what happens.

 

[Bryan]

2 & 3. GDP is inflated by the Wall Street revenues including money that are not monetized and then reduced by inflation. Then the inflation is calculated by the BLS using hedonic regression (look it up). The real inflation is much, much higher than what is made public. In addition, Fed Reserve doesn't publish M3 anymore which was the indicator of all the US dollars in the world (the more money, especially fiat money, the greater the inflation). So, the real GDP is much lower.

Great information Stephan.

In the last debate Dr. Paul mentioned that our total debt obligation is $60 trillion, vastly more than the current debt near $9 trillion. The $51 trillion difference is money that we have agreed to pay out (via social security and the like) at a future date. This puts the debt obligation to around $800,000 for every family of four in America which is beyond insane.

Does anyone have a good link to show the $60 trillion figure?

 

[lifeasariver]

Great information Stephan.

In the last debate Dr. Paul mentioned that our total debt obligation is $60 trillion, vastly more than the current debt near $9 trillion. The $51 trillion difference is money that we have agreed to pay out (via social security and the like) at a future date. This puts the debt obligation to around $800,000 for every family of four in America which is beyond insane.

Does anyone have a good link to show the $60 trillion figure?

I was looking for such a link too but couldn't find it but here is some interesting info about SS http://www.heritage.org/Research/SocialSecurity/bg1802.cfm. They consider the social security "off budget" something that sounds to me like they don't see it as an obligation to pay. And about the $8.5 trillion debt, the Congress had to increase the cap every year for the last 4 years or so because, by law, when the cap is reached, the government is considered bankrupt and ceases to function (it only keeps a minimum of critical agencies open, such as DoJ). We have been bankrupt for a long time but they always find ways to hide it. Thinking about the social security debt is even more depressing.The lesson is, never let the government take care of your own well-being, no matter what kind of government is.

 

[jon_perez]

Why is deflation "disastrous"? I believe Japan has undergone some mild deflation recently and it does not seem to have been "disastrous".

Does deflation always precede (and not accompanies, which would be the opposite causal relationship) depression/recession ?


Keynesian economics - which is considered to have worked remarkably well in pulling the US out of the Great Depression - prescribes deficit spending which then justifies the move fiat currency.

pbs.org has a video documentary called "Commanding Heights" which is an excellent and very fascinating layman's introduction to 20th century economic history.

 

[Brandybuck]

Keynesian economics - which is considered to have worked remarkably well in pulling the US out of the Great Depression - prescribes deficit spending which then justifies the move fiat currency

Keynesian economic theory was disproven when we had high unemployment AND high inflation at the same time. Stagflation during the Ford years.

As for getting us out of the Great Depression, big government meddling with the monetary supply had nothing to do with it. In fact, it was that meddling that got us into the depression and kept us there long after the market should have corrected it.

 

[jon_perez]

Keynesian economic theory was disproven when we had high unemployment AND high inflation at the same time. Stagflation during the Ford years.

Disproven or I would say, shown to have its flaws.

As for getting us out of the Great Depression, big government meddling with the monetary supply had nothing to do with it.

It is easy to say this in retrospect. However, perhaps it was the right prescription during those years.

It is entirely possible (and quite likely in fact) that economic theories, unlike hard science theories, are not universally applicable across all times and all different situations. Over history, it seems that the pendulum swings back and forth between statist/socialist and laissez-faire economic theories, generally evolving and becoming more sophisticated as time goes by.

 

[kelldor]

There are 2 "national debt" numbers floating around. The national debt that the government tells you is at about 9 trillion. This debt is calculated using fuzzy math. Federal government agencies have been using cash accounting instead of accrual accounting for the last 10 years. if a corporation did that the ceo's and cfo's would be thrown in jail. Cash accounting does not account for the outlays and unfunded liabilities that accrual accounting does. Using accrual accounting the real national debt is over 50 trillion, if not 60 trillion atm. examples of unfunded liabilities would be veterans benefits, social security, medicare, medicaid, etc.

The GAO has been complaining about this for 10 years now, (No, Clinton did "not" pay off the national debt, he just started using fuzzy math, which bush continues to this day). I urge you to check out this GAO report called "Fiscal Stewardship: A Critical Challenge Facing Our Nation". Just the Preface of the report lays out in clear language how bad the situation is. They even call this a National Security threat. The GAO is probably the last government agency that is telling the truth. This report is well laid out, lots of graphs and charts, not hard to understand.

Grandfather Economic Reports is a great place to get information also.

National Debt, Inflation, and GDP is a good YouTube video with lots of information. It explains how our we are broke, insolvent, bankrupt, and our "real" National Debt is 400% greater than our GDP. This one explains very well the "Inflation=hidden tax" that Ron Paul has talked about recently during the debates.

After you check these out, you may want to puke in a bucket as you come to realize what exactly the corrupt Federal Reserve has done to us. Combine this with the sub-prime mortgage collapse in march, the bursting housing bubble that will result, which is being temporarily staved off by Ben Bernanke printing up as much money as possible, which depreciates the dollar in relation to other currencies like the Euro, which many central banks are switching to for their reserves and for use to buy oil from Iran with since they announced they wouldn't accept dollars anymore, which drops our petro-dollar even more, cause the the fact our dollar is the main currency countries use to buy oil is the only thing holding it afloat, along with the fact that other countries still loan us money, which they are rapidly figuring out that we will never be able to pay back, and it paints a pretty scary picture that our whole house of cards is crashing down around us, but we don't see it cause Neil Cavuto tells us "the economy is great, The DOW is at record levels, unemployment is low, etc."

Lastly, The real reason we attacked Iraq was because in 2000 before Bush was elected Saddam announce that Iraq would no longer accept dollars for oil. This is when Cheney, Wolfowitz and the Project for the New American Century began working on their now famous paper titled "Rebuilding Americas Defenses", which calls for taking out a bunch of mid-east countries we don't like, but sais it will be hard to do absent some "pearl harbor-like event". It had absolutely nothing to do with WMD's.

This is why we will either attack Iran, or switch to the Amero, or both. Iran announced a couple months ago they won't accept dollars for oil, so by these guys logic we must bomb them to save the dollar, but I also think they see that it can't be saved, unless we do away with it and institute the Amero before it crashes completely.

If I had stocks, IRA's, 401k's, I would sell all of them and buy hard gold and hard silver, buy a safe to keep it in, and buy a gun.

http://www.silverstockreport.com has great info on silver.

http://www.dollarcollapse.com/ - Ron Paul friendly site!

Dollar collapse would result in Amero

U.S. Mortgage Crisis Can Trigger Collapse Of the Global Casino

Inflation, Dow 13K and the Second Great Depression

Good luck all, I have to go puke now.

 

[megiddo]

Most of the inflationary macro-economic theory is based (as has been mentioned) on Keynesian economics. The logic is flawed for two reasons:

1. Keynes described a short-run technique for easing economic transaction during periods of contraction (but not growth).

2. Politicians are always looking for free taxes, of which inflation is the most hidden.

This combination of an economic theory of inflation, and politicians who desire such a theory, led to its general use even when it was inappropriate.

Keynesian theory and politicians were a match made in heaven for socialists and expansionist lobbyists.

The long and short of which is, the 3 primary arguments presented in the first post are fallacious in their basis, so arguing them point-by-point is moot.

It would be like claiming that 2+2 = 22, then asking to disprove that 3 x 4 = 34.

 

[giskard]

Can someone debunk the statements in here:
http://www.geocities.com/CapitolHill/Embassy/1154/flaherty.html

Facts: Yes, the Federal Reserve banks are privately owned, but they are controlled by the publically-appointed Board of Governors. The Federal Reserve banks merely execute the monetary policy choices made by the Board. In addition, nearly all the interest the Federal Reserve collects on government bonds is rebated to the Treasury each year, so the government does not pay any net interest to the Fed.

Facts: No foreigners own any part of the Fed. Each Federal Reserve bank is owned exclusively by the participating commercial banks and S&Ls operating within the Federal Reserve bank's district. Individuals and non-bank firms, be they foreign or domestic, are not permitted by law to own any shares of a Federal Reserve bank. Moreover, monetary policy is controlled by the publically-appointed Board of Governors, not by the Federal Reserve banks.

Fact: Independent accounting firms conduct full financial audits of the Federal Reserve banks and the Board of Governors every year. The Fed is also subject to certain types of audits from the Government Accounting Office.

Facts: The Federal Reserve rebates its net earnings to the Treasury every year. Consequently, the interest the Treasury pays to the Fed is returned, so the money borrowed from the Fed has no net interest obligation for the Treasury. The government could print its own currency independent of the Fed, but there would be no effective safeguards against abuse of this power for political gain.

Facts: The Federal Reserve banks have only a small share of the total national debt (about 7%). Therefore, only a small share of the interest on the debt goes to the Fed. Regardless, the Fed rebates that interest to the Treasury every year, so the debt held by the Fed carries no net interest obligation for the government. In addition, it is Congress, not the Federal Reserve, who is responsible for the federal budget and the national debt.

Facts: Kennedy wrote E.O. 11,110 to phase out silver certificate currency, not to issue more of it. Records show Kennedy and the Federal Reserve were almost always in agreement on policy matters. He even signed legislation to give the Fed more authority to issue currency.

Facts: McFadden was incorrect regarding the Fed costing the government money. However, later economic analysis agrees with him that Federal Reserve policy blunders had a substantial role in causing the Depression. However, his implication that this was done deliberately has no basis in fact. Moreover, for a dozen years prior to his rant, McFadden had been the chairman of the House subcommittee that oversaw the Federal Reserve. Why didn't he do anything to reform or abolish the Fed while he had the chance?

Facts: The banking system is indeed able to create money with a mere computer keystroke. However, a bank's ability to create money is tied directly to the amount of reserves customers have deposited there. A bank must pay a competitive interest rate on those deposits to keep them from leaving to other banks. This interest expense alone is a substantial portion of a bank's operating costs and is de facto proof a bank cannot costlessly create money.

Fact: The term 'lawful money' does not refer to gold or silver coin, but to types of money which the government would permit banks to use when tabulating their reserves. These types of money included, but were not limited to, gold and silver coin.

 

[Bradley in DC]

To understand the current Federal Reserve, it is useful to contrast our current interest bearing currency with that of non-interest bearing money such as the Lincoln greenbacks.

see: http://www.thetruthseeker.co.uk/print.asp?ID=843

Every President who has tried to take control of the money from the bankers has been assassinated - Lincoln, Garfield, McKinley, Kennedy.

Not sure where to start dispelling falsehoods: for starters, FRNs are not interest bearing. The First National Bank and Second National Bank were sunsetted (abolished at the end of their charter) without any anyone getting assassinated. Jackson survived a very prominent fight with Nicholas Biddle. Lincoln was horrible on these issues, and you imply a causal relationship on assassinations that isn't there.