Ron Paul assesses the current state of the Republic in which he documents the continued decline of our liberties and march towards tyranny and economic peril.
As we start the new year 2010, the establishment politicians, economists and
Wall Street are trying to convince themselves that we have turned the corner
and economic growth has once again begun. The predtictions that conditions are
getting back to normal come from those who never saw the crisis coming and
don't have the vaguest notion what caused it. Some of them concede that it
could be a jobless recovery. That will establish a new definition for a
Official unemployment is at 10% but even the government knows that if
everyone is counted, including those individuals that are too discouraged to
even be looking for work, the unemployment rate is 17%. Free-market economists
claim the actual unemployment rate is closer to 22%.
There's reason to believe that the correction is just barely started and has
a long way to run. If the financial bubble came from excess credit created by
the Federal Reserve, doubling the money supply can hardly be a solution. It
wouldn't make much sense for a doctor taking care of a very sick patient from
severe infection to deliberately give the patient another infection. Yet that's
what the PhD doctors are doing to our very sick economy. It can't work. It will
make the economy much sicker. If our leaders don't wake up soon, the economy
will be brought to its knees. Great danger lies ahead.
In foreign policy, it's always crucial that the motives of those who would
do us harm are understood. Denial of the truth and accepting more politically
palatable excuses will guarantee that threats to our safety will continue as we
pursue a seriously flawed involvement overseas.
It's the same in economic policy. If there's denial or ignorance of the real
cause of financial bubbles and the inevitable corrections that must follow, the
economy cannot be reenergized.
We should have learned the lesson from the Depression of the 1930s that it
was a predictable result from the Federal Reserve's orchestrated excesses of
the 1920s. Instead, the new-born Keynesian economists who took charge made
certain that the correction would not be a one or two year affair as were the
previous corrections in our history. The aggressive intervention by Hoover and
Roosevelt, the Republicans and the Democrats, turned a short recession into the
Great Depression, which lasted until the end of World War II.
The real tragedy was that the interpretation of the 1930s institutionalized
bad economic theories. Unfortunately, and erroneously, the Depression was
blamed on the gold standard, free markets and a lack of regulations. Though
monetary policy was analyzed, its importance was 100% misinterpreted. The low
interest rates and excess credit of the 1920s, driven by Federal Reserve
policy, was not considered a factor in producing the stock market bubble and
Instead, the 1930s analysts and even later analysis by Milton Freidman and
the monetarists, along with academic "scholars" like Bernanke, came
to an opposite conclusion: the Fed was at fault but only because it was too
tight, arguing that massive monetary inflation was the only answer to the
And now we are witnessing a grand experiment by the very person who for
years claimed special knowledge regarding the Depression. Chairman Bernanke is
in the midst of trying to solve the problem of massive monetary inflation and
excessively low interest rates instituted by his predecessor, Alan Greenspan,
by implementing even more inflation at historic rates. The sad part is the
answer to his very risky experiment with the wealth of our country and the
health of our economy will take years to analyze. The conclusions will be just
as flawed as they were in the aftermath of the Great Depression by an
intellectual and political community that had totally rejected commodity money
and the principle of free market with the current understanding in Washington.
One hope, though, is that free-market thinking and Austrian economic
theories will have greater influence in the next decade or two, since their
influence is now on a dramatic upswing. But there are a lot of hurdles to
In the 1930s, in an effort to find the true cause of the crisis, Congress
ordered an official investigation. It became known as the "Pecora
Investigation" named after Ferdinand Pecora, the aggressive chief council
of the hearings. It received a lot of public attention and brought about many
major changes but, tragically, every conclusion made and new policies
implemented caused the depression to worsen and legitimized bad economic
theories that continue to haunt us to this day.
The Federal Reserve was not blamed except for not printing enough money fast
enough. Artificially low interest rates and mal-investment, the main source of
the grossly distorted economy and bubble of the 1920s, were exonerated. Not enough
regulations were blamed, thus the Glass-Stiegall Act and the Securities Act of
1933 were passed and deepened the depression. Separating commercial and
investment banking and the newly created SEC were to have solved all future
problems-as long as the Fed was free from any restraint in its money creation
operation to serve big-government spenders and members of the banking cartel.
Since the flaws in the monetary and economic system were not corrected but
made worse after the Depression, it was to be expected that periodic booms and
busts would persist. The longer these cycles could be papered over with new
money and credit, the greater would be the distortions and debt that would one
day have to undergo a major correction.
That correction is now in its early stages. Since the dollar was the reserve
currency of the world and totally fiat since 1971, without any linkage to gold,
the financial bubble became worldwide. This bubble that burst in 2008 was the
largest in history. During the formation of the bubble, the U.S. as the issuer
of the world currency received undeserved benefits. We essentially became the
counterfeiter of the world and no one called us on it. Even today, the trust in
the dollar that persists has buffeted the pain of the correction for us. This
unique setup was a prime cause for our balance of payment deficits and the huge
foreign debt we owe-the largest in the history of the world. The discord in the
world financial system is telling us that it's time for us to pay for our
profligate spending and massive foreign indebtedness. We have lived, as a
nation, far beyond our means and the message is, for the foreseeable future,
that we will be forced to live beneath our means as this debt is paid.
The inflation optimists are excited about current signs of economic growth
and have even announced the end of the recession. It is conceivable that a
reprieve can be achieved and the penalty that our economy must endure delayed.
A reprieve must not be confused with a pardon; one is a temporary delay, the
other an exemption. The payback for our excesses is certain to come.
Massively increasing debt and monetary inflation can slow the crash and
change some government statistics encouraging the optimists. But real job
growth and return of prosperity will remain elusive. The odds of us once again
becoming an exporter of manufactured goods, like steel, cars, and textiles, are
Ironically, a reprieve may well restore some confidence and motivate some
spending and investment. But instead of restoring long-term growth, it may well
act perversely by precipitating price inflation and higher interest rates.
Since today's interest rates are artificially set, much of our investing is
Current enthusiasm in the stock market is once again a reflection of the
message that low interest rates send. Thus too, the government's stimulus
package has helped to sustain the bond bubble, which in time must be deflated
in order to get back to sound economic growth. All of this activity poses a threat
to the dollar.
Governments are very powerful, and when in partnership with the monetary
authorities that can inflate the currency at will, big government thrives.
Welfare demands and senseless wars can be financed for long period of time
through inflation, as long as trust in the currency lasts. Trust, though
ultimately controlled by facts, can be misleading, since currency values can
gain benefit from a country that has a strong military and wealth and a
reasonably healthy economy. Eventually, markets and reality overwhelm, and
illusions about a currency's worth become a reality.
Today, reality is setting in and the first of three major events has begun.
The worldwide financial system, built on a foundation of paper, has received
the shock waves of an impending collapse.
The wild speculation and the derivatives market, the stock market bubble,
the insurmountable debt-public and private-and the massive mal-investments have
The only solution so far offered worldwide, but led by the United States,
has been to "print money" faster, keep interest rates low at
practically zero percent, and remove all stops for controlling deficits. These
are the very policies that caused the disequilibrium, and doing more of the
same, but only faster, can hardly help our economy. The addiction to easy
credit and deficit defies a wise political solution. Politicians are incapable
of delivering the message of frugality, common sense, and sound money.
We can expect that the course we are on to continue and accelerate, since
the first event, the collapse of the financial system, is still in its early
The housing crisis is far from over; the commercial property crisis has not
yet gotten much attention, and the financial obligations of the government are
growing exponentially. And none of this forces the slightest pause in the
expanding of welfare growth. The number of regulations, which are indeed a tax,
are exploding though the market was already suffering from regulatory excesses.
There's a consensus in Washington that "wise" regulations can
compensate for all the mistakes made by the Federal Reserve, the Executive
Branch, and Congress. This fallacy has been around a long time and will be
difficult to overcome.
The pessimism of the middle class continues to get worse despite the
prognostication of Wall Street and the Administration. Most Americans know that
the standard of living and real wages have not gone up for the past 10 years.
If you're not a shrewd stock trader and instead invested in stocks 10 years ago
and held on, in real terms you would have lost 20% of your savings. The middle
class is poorer also because house prices have crashed and many have lost their
homes. On top of this, all we hear about is the trillions of dollars of debt
and entitlement obligations that have been racked up for future taxpayers to
pay. When it is revealed that the insider friends of the Fed and Congress get
billions of dollars in bailout at the expense of the middle class, it's no
wonder the people are taking to the streets and directing their hostilities
toward both Republicans and Democrats in Washington. Many would agree it's
well-earned anger and properly directed.
This anger and frustration will certainly grow as the consequences of the
collapse of the financial system become more severe. The concerted effort to
prevent the correction the market demands, guarantees a prolonged agonizing
crisis. Every effort to reverse the tide will depend on spending, higher
deficits, increased taxes and money creation. This effort is now providing
another grand bubble: the dollar/bond bubble.
The next event will be a dollar crisis. A full-blown dollar crisis will be
worse than our current financial crisis. The extent of a dollar crisis depends
on whether or not the Washington politicians wake up and change their ways-a
More likely, the insanity will continue until some not yet known event will
undermine the confidence of the dollar worldwide. Signs of less desire by
foreigners to hold our dollars are already present. I'm certain our Treasury
and Federal Reserve are pulling out all stops to prevent a massive run on the
dollar. At present the "orderly" retreat from the dollar is working.
But it won't last.
China is quite active in investing in natural resources around the world,
and including in Iran. While we live in the dark ages and believe only our
military presence and military threats can protect our access to oil, China is
actually spending some of their savings investing in their future access to
energy and other precious metals and minerals.
But the orderly retreat from the dollar won't last forever. Since 1973,
shortly after the breakdown of the Bretton Woods Agreement, the dollar has lost
32% of its value against a Federal Reserve basket of currencies. But that
doesn't tell the real story, since that is a measurement against all other
currencies, and they are fiat currencies as well. This gave the dollar an
artificial benefit from its position of power in great wealth and military
prowess. The dollar in relationship to gold, however, is down 97% since 1971,
and 82% as measured by the CPI. The dollar, mismanaged by the Fed, has not been
a benefit to the savers who sought to responsibly take care of themselves.
They've been cheated by a rotten system and are just beginning to understand
exactly how the Federal Reserve has been responsible for the swindle.
It is impossible to predict the time when confidence will be lost, but it
can come quickly. Resorting to buying other paper currencies will not be of
much help. When the dollar crashes, most likely the purchasing power of all
currencies-since all countries hold dollars as a reserve-will go down as well.
This means that dollars and other currencies will go into buying consumer
items, precious metals and other physical properties. Consumer prices will
soar, as well as interest rates. The central bank will lose control; and the
more they inflate, the worse the confidence becomes. The interest rates will
respond to these efforts by rising sharply.
If the Fed tries to reverse the run on the dollar, interest rates will also
soar, and the pain on the American citizens will be of such proportion that
political chaos will result. Either scenario leads to political and social
chaos-the third event, and the most dangerous.
With no ability of the federal government to fund its commitments,
international or domestic, major changes will occur in our system. The social
unrest will elicit cries for government to exert unusual force to head off a
complete breakdown of law and order. The ultimate trap will be set for a system
of government claiming to protect a free society. If more power and police
authority are not given to the federal government, it will be argued that only
anarchy will result. If more government policing power is given, it will mean a
lethal threat to civil liberties. Already we have permitted the notion that a
single person, the Attorney General or President, can decide who is an
"enemy combatant", thus denying that individual the right to habeas
corpus, permitting indefinite detentions without charges made. This attitude
toward civil liberties has changed significantly since the fear built around
Yes, I know declaring one an "enemy combatant" is reserved for the
radical Muslims engaged in terrorism against the United States. To be reassured
by this reasoning is quite dangerous and naïve. Logic should not lead us to
equate suspects with terrorists, and include American citizens, and yet this
has already been set by precedent. Under difficult circumstances, our political
leaders will not be hesitant to use these powers to maintain order. Tragically,
the people may even demand it.
We are rapidly moving toward a dangerous time in our history. Society as we
know it is vulnerable to political and social chaos.
This impending crisis comes as a consequence of our flawed foreign and
domestic economic policies, a silly notion about money, ignorance about Central
Banking, ignoring the onerous power and mischief of our out-of-control
intelligence agencies, our unsustainable welfare state, and a willingness to
sacrifice privacy and civil liberties in an attempt to achieve safety and
security from an inept government. Dangerous times indeed!
What can be done about it? Must we wait for the inevitable and expect to
restore our liberties in a street fight against the overwhelming power of the
state? Not a good option!
The only way that we can prevent blood from running in the streets is to
offer a better idea of the proper role of government in a society that desires
first and foremost -liberty.
And that is impossible without a firm commitment by our thought leaders to
the ideas of freedom, the source of all creative energy and prosperity. An
all-powerful state is the threat to that ideal.
The prevailing attitude of the people-as it once was in early America-must
be that of liberty and self reliance, rather than the nanny state and
dependency relying on government force to mold all private choices.
If this is understood, a smooth-although not painless-transition to a free
society is achievable. Ignoring this option will be very destructive to
everything that is dear to the hearts of most Americans.
What is it that we must do? We must immediately embark on:
• Balance the budget by reducing spending
• Change our foreign policy to that of non-intervention
• A full audit and more supervision of the Federal Reserve leading to
abolishing the Federal Reserve
• Legalize competition to the Federal Reserve with competing currencies
• Regain respect for civil liberties and privacy while reigning in the CIA
• Wean ourselves off the dependence of wealth transfers by government
• Abolish crony capitalism-no subsidies, no bailouts, no regulatory or tax
privileges to protect the powerful elite, especially the military industrial
• Eliminate the income tax, inheritance tax and taxes on savings and dividends.
None of this can happen without the restoration of Congress to its dominant
position of the three Branches of Government as was originally intended by the
Constitution. The Executive and Judicial must be reined in, and Congress must
assert its prerogatives over all legislation curtailing all unconstitutional
agendae through budgetary controls.
Signs abound that angry Americans are now more ready than ever before for a
change in direction that is indeed real. If this program were improvised-even
suddenly and dramatically-the adjustment, though significant and to a degree
somewhat painful, would be much shorter and of minor consequence compared to
the chaos and poverty that will result if we refuse to change our gluttonous
appetite for a free lunch.