Only Ron Paul has the answers
Mark Anderson
January 28, 2008
While Establishmentarians attack or ignore Ron Paul out of fear of losing government-sanctioned power, Ron Paul continues on being Ron Paul. Completely ignored by the Establishment was a salient warning that should be of great concern to everybody, including the Establishmentarians: One way or another, their power will come to an end. Establishmentarians should start taking notes when Dr. Ron Paul speaks, because the day of reckoning is on nigh.
Dr. Ron Paul explained that Social Security benefits are being surpassed by inflation. Perhaps we have been too engrossed with celebrity scandals, personality contests, and platitudinous one-liners to think of this as anything other than an innocuous technicality that can be worked out by some skilled central planners. Maybe people are expecting that with the "right" management team, the government can fine-tune problems out of the economy. If so, then faith is being misplaced.
Social Security benefits are being surpassed by inflation. Does anybody understand the significance of this? Objectively, Social Security is being slowly abolished. One little problem: It isn't being abolished by cuts in government spending, but by excessive government spending. The welfare state is collapsing under its own weight.
This means that the Social Security problem can't be fixed without addressing more abstract issues, such as sound money vs. fiat money and the inflationary spending orgy. To finance this spending orgy, the politicians print money--i.e., inflation--by using their central bank to monetize debt. It is this spending that begets inflation, begetting higher prices. The Social Security problem can't be fixed by simply increasing benefits.
Increasing government spending will only increase inflation. Chasing inflation with inflationary spending is a calculus for run-away government spending and an eventual train wreck. To say that the government should, or can, increase spending, but only at the rate of inflation, is akin to saying that it should rain, but only at the rate that it is flooding. Increasing Social Security benefits isn't even a band-aid solution. The Social Security problem can't be fixed without bringing aggregate government spending into check. The only way to do that is to make dramatic cuts in government spending somewhere else.
Inflation is much worse than what the government pretends. Government statistics are propaganda. The Consumer Price Index is a farce in a plurality of ways, but the biggest is its very reason. The CPI only captures prices of particular transactions. Suppose you walk into a car dealership and pay $15,000 for a car, but the dealer mugs you for another $15,000, how much did you really pay?
Many industries and corporations are beneficiaries of government subsidies in one way or another. Wal-Mart has received subsidies through Tax Increment Financing schemes at the local level. Agricultural subsidies are in the billions. How much does the military-industrial complex get in order to "protect" oil? The subsidies that the pharmaceutical-industrial complex receives are in the billions. What this means is that those cheap goods at Wal-Mart aren't as cheap as you think they are. You pay more for your gas than what you pay at the pump. Medications are even more expensive than you can calculate. What you are paying for milk isn't the full price.
You are paying what I call subsidized prices--something that the Consumer Price Index can't capture. In short, the government, through the Bureau of Labor Statistics, is trying to measure inflation by measuring prices in a price structure that isn't intact.
To really understand what I am saying, look at sectors of the economy in which the government runs exclusive monopoly franchises: e.g., roads. I can get into my car and drive out on the roads without having to pay anything. In a narrow sense, it seems free to drive on government roads. But it isn't really free. The government subsidizes roads through taxation. This is the cost of government, which the CPI doesn't capture. Thus, the government could literally print money (i.e., inflation) like crazy to subsidize everything--displacing consumer spending--and inflation could actually fall pursuant to the CPI's method. Real inflation could very well obfuscate price inflation.
Not only has the cost of government been conveniently excised from inflation statistics, it has been placed--erroneously--into the Gross Domestic Product.
Wealth is that which satisfies demands. Inasmuch as businesses satisfy consumer demands, they are being productive. Within the construct of the pure free market, productivity can be measured by income, since income is earned by satisfying consumer demands. The government, on the other hand, does not sustain itself by satisfying consumer demands--i.e., earning its income. The government uses the threat of violence, or actual violence, to obtain its revenue--i.e., compulsory taxation. Thus, the government can't get away with saying that the more it taxes the more productive it is becoming.
The technocrats and hierophants had to come up with a different excuse for government: Government spending is productive! So, government spending has been placed into the GDP.
Prevailing economic orthodoxy defines economic growth as a rise in the GDP. A rising GDP means we are having "economic growth," because the GDP measures "economic growth," and "economic growth" is defined as a rising GDP. Before you can measure economic growth, you should be able to define it. Defining economic growth as a rise in the very indicator that supposedly measures economic growth is obviously flawed.
The simplest definition of economic growth that I can come up with is a lessening of the unsatisfaction of wants or demands. We are diverse, and our wants, or demands, are subjective. Politicians and econometricians are not psychics. There is no way to quantitatively measure economic growth. Besides, when your economy improves, you won't be needing a statistician to inform you.
My contention for several years has been that the GDP tells us more about inflation than it does about economic growth. Prevailing economic orthodoxy tells us that there are two kinds of GDP growth: Nominal and real. This is where thinking on the subject becomes cloudy. Real GDP growth is defined as nominal GDP growth discounted for inflation, which is determined by the unreliable CPI.
Let's start with a simple thought: Real economic growth need not be discounted for inflation. Either you are having economic growth, or you aren't. If the GDP must be discounted for an inflation component, then this means that some GDP growth is good, but other GDP growth is bad. But if the GDP is measuring the same thing(s) constantly, this makes little sense. Either the GDP measures economic growth and any rise in the GDP is good, or the GDP measures inflation and any rise in the GDP is bad.
Government spending is in the exact wrong index. The GDP is a far better measurement of inflation than is the CPI.
Inflation is the cause of our economic woes, and it is much worse than the government would like people to believe. The economics profession has been taken over by good mathematicians, but terrible economists. The most sinister thing about this is that while the government deceives people about inflation, it then punishes businesspeople and entrepreneurs for overestimating profits--i.e., overvaluing the dollar. In fact, the process of inflation, which is a government policy of debauching the currency, could not work were people not deceived. If everybody properly accounted for inflation, this would nullify the positive effects of inflation for the narrow group of beneficiaries.
The discussion of subprime lending misses the real problem entirely. The problem isn't subprime borrowers, or even bad lenders. The problem is the monetary system--i.e., inflation. In April of 2003, I wrote the following words in a commentary that can be found online:
"The loan market cannot keep underbidding the natural rate of interest and sustain itself for long."
I do not wish to link to this commentary of mine, because there are certain parts of it that I do not agree with, since I have came to a better understanding of the subject than when it was originally written. In particular, my understanding of the rate of interest has evolved. While I got some things correct, my explanation of the rate of interest was inaccurate.
Interest is the discount rate between future goods and present goods. I do not wish to belabor this in detail in this commentary, since I wouldn't be able to give this subject the attention it deserves. My purpose here is to point out that Ron Paul is right when he speaks about the problem of artificially low interest rates. It isn't that he is opposed to low nominal rates per se. He isn't opposed to low nominal rates any more than he is opposed to low prices. In fact, artificially low interest rates are nurturing high prices. Dr. Ron Paul's point is that artificially suppressed interest rates are just as destructive as are government price controls to artificially suppress prices.
In a free market, savings would be much more abundant, giving rise to a lower natural rate of interest. Only can the government use up savings, penalize savers, and suppress interest rates all in one motion. It does this through inflation. When nominal interest rates are outstripped by inflation, that is a negative rate of return. In my estimation, the real rate of interest has been below zero for a long time. That is the problem with the loan market. If businesses consistently sold inventory below cost, how long are they going to survive without government coming to the rescue over and over and over again? The loan market enjoys privileges that other sectors of the economy do not, thanks to the central bank.
So long as interest rates are artificially suppressed, it doesn't matter how good the borrowers are. Lenders shouldn't be scapegoated for the problem any more than Social Security recipients should be scapegoated for the welfare state that politicians have created. If your competitors are taking cheap money, and you must do the same thing in order to remain competitive, are you going to refuse? That the central bank repeatedly injects funds into the loan market is not the loan market's fault. Politicians scapegoating the loan market would be like blaming the rising mercury in a thermometer for the fever.
Inflation is what causes recessions, and the only presidential candidate that understands this is Dr. Ron Paul. As dollars are devalued, profits are overestimated. Because of this overestimation of profits, there is also a higher tax burden in real terms. Sellers exchange goods and services for these devalued dollars, earning what looks like a positive rate of return. When the seller has to replace capital or restock inventory, it is then discovered that the real rate of return was less, since prices have risen. In nominal terms, it looked profitable, at first. This encourages even more malinvestment in those sectors. It is later discovered that the real rate of return was lower--maybe even a negative rate of return in real terms. This forces a contraction.
The recession is the revelation of malinvestment, which was induced by inflation. That which is unproductive would be unprofitable within the construct of the unhampered free market. The biggest beneficiary of inflation is the inflator itself: Government. Just look at how huge the government is, and it is not only unproductive, it is counter-productive. This should lay to rest any doubt about how inflation nurtures malinvestment.
The catharsis for malinvestment is liquidation, which is the only true correction. Especially as firms and businesses are trying to combat the effects of inflation by cutting costs, the worst thing the government can do is to inflate even more to delay the correction. Unfortunately, the mainstream economics profession is lax in this understanding. It is normal that certain prices should drop due to malinvestment. This is where mainstream economists turn logic upside down. Instead of realizing that the inflation before the recession was the cause, these econometricians examine piles of data. The data itself becomes synonymous with the recession, as though nothing in the past helped cause the recession. The recession caused itself. From this thought pattern, it then follows that to fine-tune those "markers" of the recession is to provide the cure. If certain industries are collapsing and prices are falling, the government is supposed to inflate even faster, argue the econometricians.
On one hand, the government inflates the money supply while simultaneously lying to us about inflation, ensuring that people overestimate profits. On the other hand, the government throws businesspeople into jail for believing what the government says about inflation, subsequently overestimating profits by overvaluing the dollar. How evil.
Other problems that are hotly debated, such as the trade "deficit," are but symptoms of the monetary system. A trade "deficit" isn't bad per se. In fact, as the economy tanks, expect imports to decline and the trade "deficit" to fall. The bad part is if the trade "deficit" is due to something other than comparative advantage, such as inflation.
"Again, suppose, that all the money of GREAT BRITAIN were multiplied fivefold in a night, must not the contrary effect follow? Must not all labour and commodities rise to such an exorbitant height, that no neighbouring nations could afford to buy from us; while their commodities, on the other hand, became comparatively so cheap, that, in spite of all the laws which could be formed, they would be run in upon us, and our money flow out; till we fall to a level with foreigners, and lose that great superiority of riches, which had laid us under such disadvantages?" --David Hume, Essays, Moral, Political, and Literary, 1752
What mainstream economists teach runs contrary to what David Hume taught us in 1752. Prevailing economic orthodoxy inverts the trade cycle. We are told that inflation mitigates the trade "deficit." By inflating the money supply, dollars will become less attractive to foreigners. Thus, runs the argument, foreigners will follow by curtailing exports to the U.S. Somehow, domestic productivity will magically be increased, stimulating exports.
The genesis of this error is begotten by the underlying macroeconomic assumptions. Mainstream economics fragments macroeconomics and microeconomics into separate compartments. Macroeconomics then becomes myopic, by lopping individuals out of its paradigm. Myopic macroeconomics doesn't see individuals, only aggregates.
Translated, the macroeconomic analysis is this: The country has dollars. If the country, or nation--or whatever aggregate you wish to use--decides to print more dollars, obviously the country, or nation, isn't going to refuse to use its own dollars. However, the country, or nation, of, say, France, being a different country, won't like very much the devalued American currency.
I guess we aren't supposed to ask why both inflation and the trade "deficit" have been rising in juxtaposition with one another. Sound economics gives us that answer.
The economy is made up of individuals making choices in exchanges. When the government devalues the currency, this doesn't only make dollars less attractive to individuals abroad, but also to individuals right here at home. This is reflected with higher prices. It isn't about aggregates printing more money for use by aggregates.
Since the government dumps dollars on us here at home first, it is right here where the effects of inflation are first felt. The domestic cost of production goes up. Thus, to reduce costs, capital flight takes place. Inflation actually increases the dependance upon cheaper foreign markets to supply goods. As David Hume saliently articulated in 1752, inflation makes not only the currency less attractive abroad, but also the higher-priced goods. It also makes the higher-priced goods less attractive right here at home. Using inflation to remedy the trade "deficit" is akin to breaking a leg to make yourself more competitive.
The inflation-induced imbalance of trade also explains another phenomenon: American workers being displaced by foreigners. As a disabled veteran, I have noticed more often that people working in professional class jobs at the Department of Veterans Affairs are speaking very broken english. The doctors are coming from Asia and elsewhere. The nurses are coming in from the Philippines.
There is nothing wrong with immigration per se, nor foreigners working in professional class jobs per se. But why is this happening? Several years ago the argument used in favor of immigration was that the immigrants are taking jobs that Americans don't want. Now we are seeing immigrants working in professional class jobs. Is this because Americans don't want professional class jobs? Hardly.
Not only has inflation driven up the cost of production, forcing us to depend upon cheaper foreign markets to supply goods, but inflation has done the same thing to the labor market. I am not talking about "outsourcing." I am talking about foreigners coming to work here in the U.S. The cost of obtaining the credentials, in order to satisfy government requirements to work in the professional class jobs, has become unaffordable to the average American. It is now prohibitively expensive to meet the qualifications necessary to work in these occupations, pursuant to government regulations.
By contrast, it is a lot easier to purchase those accredited credentials in foreign markets that haven't had the inflation that we have had. Thus, we are now dependant upon cheaper foreign markets to supply us with professional labor domestically. We can't afford to work in the professional class jobs in our own country. Not only are we having to import our goods, we are also having to import labor.
The only presidential candidate sworn to combat the inflationary spending orgy is Ron Paul. This makes Ron Paul the only candidate offering a solution to our economic woes. This also makes him the only real tax-cutter.
While many Republicans may talk about cutting particular taxes, or redacting methods of taxation, only Ron Paul will fight for an objective cut in the tax burden. The federal government alone spends around $3 trillion per year, not even counting off-budget outlays. To finance this, the government creates new money out-of-thin-air--i.e., inflation. There is no objective difference between the government taking the money you have in your pocket and duplicating the money you have in your pocket, consequently devaluing the money you have. This is a stealth tax, called the inflation tax, which we feel with higher prices and a higher cost-of-living. So long as the bipartisan spending orgy is left intact, we will not have had a real cut in the tax burden. Cuts of particular taxes should not be conflated with a cut in the overall tax burden. For what good does it do if the government leaves you with a little more money that has been devalued by a lot?
You want to do something about the trade "deficit?" Stop the inflationary spending orgy by electing Ron Paul. You want to do something about jobs for Americans? Stop the inflationary spending orgy by electing Ron Paul. You want to do something to fix Social Security? Stop the inflationary spending orgy by electing Ron Paul. You want a real tax cut? Stop the inflationary spending orgy by electing Ron Paul. The only presidential candidate who understands that inflation is the problem, not the cure, is Dr. Ron Paul.