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Ron Paul: The Neo-Alchemy of the Federal Reserve

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December 02, 2008 – Comments (10)

As the printing presses for the bailouts run at full speed, those in power are no longer even pretending that the new giveaways will fix our problems.  Now that we are used to rewarding failure with taxpayer-funded bailouts, we are being told that this is “just a start,” more funds will inevitably be needed for more industries, and that things would be much worse had we done nothing.

The updated total bailout commitments add up to over $8 trillion now.  This translates into a monetary base increase of 75 percent over the last two months.  This money does not come from some rainy day fund tucked away in the budget somewhere – it is created from thin air, and devalues every dollar in circulation.  Dumping money on an economy, as they have been doing, is not the same as dumping wealth.  In fact, it has quite the opposite effect.

One key attribute that gives money value is scarcity.  If something that is used as money becomes too plentiful, it loses value.  That is how inflation and hyperinflation happens.  Giving a central bank the power to create fiat money out of thin air creates the tremendous risk of eventual hyperinflation.  Most of the founding fathers did not want a central bank.  Having just experienced the hyperinflation of the Continental dollar, they understood the power and the temptations inherent in that type of system.  It gives one entity far too much power to control and destabilize the economy.

Our central bankers have had a tremendous amount of hubris over the years, believing that they could actually manage a paper money system in such a way as to replicate the behavior and benefits of a gold standard.  In fact, back in 2004 then Fed Chairman Alan Greenspan told me as much.  People talk about toxic assets, but the real toxicity in our economy comes from the neo-alchemy practiced by the Federal Reserve System.   Just as alchemists of the past frequently poisoned themselves with the lead or mercury they were trying to turn to gold, today’s bankers are poisoning the economy with accelerated fiat money creation.  

Throughout the ages, gold has stood the test of time as a consistently reliable medium of exchange, and has frequently been referred to as “God’s money”, as only God can make more of it.  Seeking superhuman power over money in the way alchemists did in ancient times caused society to shun them as charlatans.  In much the same way, free people today should be sending the message that this power and control over our money is no longer acceptable. 

The irony is that even had the ancient practice of alchemy been successful, and gold was suddenly, magically made abundant, alchemists still would have failed to create real wealth.  Creating gold from lead would have cheapened its status to that of rhinestones or cubic zirconia.  It is unnatural and dangerous for paper to be considered as precious as a precious metal.  Our fiat currency system is crumbling and coming to an end, as all fiat currencies eventually do.

Congress should reject the central bank as a failure for its manipulations of money that have brought our economy to its knees.  I am hoping that in the 111th Congress my legislation to abolish the Federal Reserve System gains traction so that the central bank can no longer destroy our money.

10 Comments – Post Your Own

#1) On December 02, 2008 at 6:39 PM, guiron (20.21) wrote:

This money does not come from some rainy day fund tucked away in the budget somewhere – it is created from thin air, and devalues every dollar in circulation.

This is false. The money is in the form of Treasury bills.  There is no money from thin air.  Eventually, we won't be able to finance anything else this way, but for now, other people will buy this debt. When/if that stops and we still need more, then we could be facing insolvency as a nation.

One key attribute that gives money value is scarcity.  If something that is used as money becomes too plentiful, it loses value.  That is how inflation and hyperinflation happens.  Giving a central bank the power to create fiat money out of thin air creates the tremendous risk of eventual hyperinflation.

Yes, but remember that the recent downturn has caused a lot of money to disappear. We're probably close to break even considering all the money that's gone from the system. Part of the reason to inject this money now is to prevent deflation. Hyperinflation will only happen if we spend a lot more and the money supply remains stable. I have a feeling a lot more wealth is going to be lost before it's over.

And gold is only valuable because of market psychology. It lacks intrinsic value. You still can't eat it. And commodity-based currencies are just as vulnerable to manipulation and market problems. For now at least, we're all Keynesians.

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#2) On December 02, 2008 at 6:54 PM, guiron (20.21) wrote:

To be clear, the problem isn't so much the fiat currency and that sort of thing, despite what Ron Paul says (and I'm a fan). We had these same problems before Keynes. The problem is that there are always new asset classes being created which, at first, are unregulated. They always get a bit (or a lot) out of control (remember futures in 1987?), and eventually they are brought under regulation and don't pose much of a problem anymore. This has happened over and over with our economy. Have you studied what the market was like in the 1920s? There was no way to get an honest answer about the health of a company, and there were a lot of assets being sold at margin - in fact, it was possible in most cases to buy at margin at 10%. Lots and lots of people did so, and the leverage became so great at one point that a crash was inevitable. Well, now we have "evil" regulation, except that it prevents a wild-west scenario where everyone gets over-leveraged, and a huge bubble has to pop. This will always, always happen if you let a part of the market go on its own.

Certain regulations are good, particularly when they provide transparency and better understanding of asset classes being offered. Without knowledge, which is what smart regulation brings, all this is is gambling, and not just with your own money.

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#3) On December 02, 2008 at 6:56 PM, guiron (20.21) wrote:

And the asset classes now which need to be brought under control are (obviously) CDO/CDS "insurance" (it's in quotes, because like insurance without anything to back it up!)

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#4) On December 02, 2008 at 7:11 PM, wassapotamus (< 20) wrote:

Plot the difference between the interest rates the banks can borrow at versus the rates they charge "the common people" who are unfortuate enough to be loaded up with charge cards, sub-prime "specials", etc. and you might get a hint at why the whole system is going into a meltdown.  At some point it becomes the old story of the greedy monkey who can't bring himself to let go of the coconut until it's too late. 

Somehow, the bailouts never seem to trickle down to the root of the problem.

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#5) On December 03, 2008 at 12:55 AM, danswords (< 20) wrote:

The underlying truth in the market is that since you must have dollars to have oil, then you must have dollars.  The fact that oil is traded using the dollar creates a demand for it stronger than any other currency which is why all other currencies values are linked to the dollar.  Because of our consumption, negative economic bubbles that start here can have a tsunami effect on other economies, as witnessed over the past 2 months.  If we ended the Federal Reserve and ended our foreign policy of enforcing that oil be traded using the dollar, we would be a third world country in months.  Our currency would be accepted nowhere and we'd be bankrupt.

By linking the dollar with oil the way that we have, we've been able to have the benefits of a metal backed currency while having the elasticity of a fiat currency.  Each time a nation has announced that they will trade their oil in a different currency, the dollar drops considerably.  It happened in 2000 with Iraq, it happened in 2003 with Iran, and it's happening now with Russia.  Our interests in Georgia are very much about that pipeline of oil and you can link every military act since the end of WWII to our oil addiction.

I have this documented in more detail on my blog if you'd like to check it out:  http://droveto.blogspot.com/

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#6) On December 03, 2008 at 11:05 AM, optimk (< 20) wrote:

guiron:

 To be clear, the money that the Federal Reserve pays for the t-bills with is printed out of thin air. The government sells treasury bills which constitute a new debt liability to the Fed. The Fed buys T-bills by creating a book entry and borrows this money to the government. Imagine if you or I had our own printing press and could print limitless money to loan the government. 

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#7) On December 03, 2008 at 11:57 AM, kdakota630 (29.50) wrote:

Imagine if you or I had our own printing press and could print limitless money to loan the government.

Considering the U.S. government's inability to repay its debt, you or I would be screwed in that scenario. LOL!

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#8) On December 03, 2008 at 3:48 PM, RealRufus (< 20) wrote:

Ron Paul

I love you Man!

Honesty rules and most of the press seems to have forgotten what it is. At least we have an internet and people like Ron.

 

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#9) On December 03, 2008 at 4:04 PM, RealRufus (< 20) wrote:

Ron

I see others have added more than one comment so I will do the same. To be fair Gold isn't the answer to any of this. Gold isn't God's money and you'd best stop saying that. (We are God, by the way, Google Figmentalism).

I still love the honest man, Ron, and you are right up there on my list.

The problem is the love of money and those that place it above all else, not the monetary system we use.

The problem is the tall green or gold glass buildings that house the thieves and pirates that do nothing all day except plan to subvert the government and all the working people of this great land.

The problem is the lack of honesty, money is just a means of exchange.

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#10) On December 04, 2008 at 5:27 AM, falstoffe (< 20) wrote:

Actually, it is created out of nothing.  To answer a previous question about who buys the T bills: the federal reserve buys them.  But where does the Fed's purchasing power come from?  They print dollars, which are accounts receivable to them from the Treasury.   The Fed owes a billion dollars to the treasury, backed by $1 Billion in T Bills.  The Treasury owes $1 Billion to the Fed, payable with dollars.  So each owes the other the exact same amount.  It's a shell game on both sides.

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