At The Brink

I think even though 30 years have passed that the US Tea Party Congressman first delivered his speech, At the Brink, its message is relevant now than ever in the light of recent events in global economy and politics. I am referring to alarming news that happened last second week of September. They include China’s decision to trade oil in Yuan, QE3, coercing Iran, death of US ambassador in Libya, and Japan’s declaration of nationalization of a traditional Chinese territory.

http://www.examiner.com/article/dollar-no-longer-primary-oil-currency-as-china-begins-to-sell-oil-using-yuan

http://money.cnn.com/2012/09/13/news/economy/federal-reserve-qe3/index.html

http://www.telegraph.co.uk/news/worldnews/middleeast/iran/9545597/Armada-of-international-naval-power-massing-in-the-Gulf-as-Israel-prepares-an-Iran-strike.html

http://abcnews.go.com/blogs/politics/2012/09/ambassador-susan-rice-libya-attack-not-premeditated/

http://www.thedailybell.com/4315/Undisclosed-Looming-War-in-East-Asia-A-Historical-Inevitability

Specifically, At the Brink pertains to the collapse of the US dollar and to the threat of impending war. We witnessed the fulfillment of the second part of this prediction in the Middle East, but the first part of it is still in the making as the US dollar continues to struggle.

Financial Cliff

Dr. Paul delivered this speech on September 22, 1982 at the US House of Congress. It is found on pages 133 to 139 of the book, Pillars of Prosperity. In this speech, the Congressman expounded his foreseen economic danger. I just want to touch the subjects on the certainty of default, the detrimental economic policies, and the necessary economic solution.

The Certainty of Default

Ron Paul opened his 1982 speech with the discrepancy between the original goal for the formation of the IMF and its present practice of becoming a “social welfare agency” lending funds for nations immersed in debts. He specifically identified Mexico, Argentina, Eastern bloc Communist nations, and Third World nations that with their huge debts, it is unrealistic to expect payment from them. Dr. Paul disliked such “welfare program” for its serious consequence on US economy due to huge funding coming from the US for its implementation.

He then proceeded to describe the attitude among financial authorities in downplaying the international banking crisis. Default is considered impossible. Dr. Paul predicted otherwise that default is inevitable. It is just a matter of time.

The time the US Congressman wrote this speech, he described the insolvency of SSS, $11 trillion US liabilities, and $1.1 trillion national debt. Compared that data to the present, one will still wonder why Ron Paul’s prediction about the certainty of default is not yet taking place. I am not an expert in reading financial data, but checking usdebtclock.org, I notice that US national debt now is more than $16 trillion and the total unfunded liabilities is more than $120 trillion.

http://usdebtclock.org/

Such attitude of denial persists even until now. The best recent example is John T. Harvey’s Forbes’ article written last September 10. John T. Harvey, with the backing of the messages of financial experts, was confident about the impossibility for US to default. He is bold in his claim that “there is 0% chance that the US will be forced to default on the debt.” Even though without sufficient grounding both in monetary and economic matters, my personal impression in reading the article is that the writer is either deliberately lying and misleading the public or sincerely mistaken in his analysis due to his economic perspective.

http://www.forbes.com/sites/johntharvey/2012/09/10/impossible-to-default/

The Congressman mentioned two methods of default. In the fashion of 1929 deflation, the first method is by declaring bankruptcy and liquidating debt. However, Dr. Paul is also certain that politicians and bankers will not allow this method of default.

The other method is the 1923 German style deflation and that is paying “the debt with the rapidly depreciating newly created dollars” (p. 135). This method is actually “the policy of currency destruction through the inflationary process” (ibid.). Dr. Paul further describes this second method: “When the dollar is worthless, or approaching worthlessness, real debt disappears … As new money appears out of thin air, real assets of the savers and the debt denominated dollars evaporate into thin air” (ibid.).

I think the US government preferred the latter method. For Dr. Paul, choosing the second method is an indication that the US government is failing to learn the lessons of history and is bound to repeat the mistake that caused untold sufferings for many nations in the past.

Detrimental Economic Policies

Detrimental economic policies need to be stopped. That’s the message emphasized by the Congressman 30 years ago. His message never changed, but still the government failed to listen. Inflation, excessive taxation, central planning, protectionism, and economic isolationism must be stopped if we want to see genuine and lasting economic reforms. These are bad economic policies that reduce people’s standard of living. However, the loss of personal liberty is the greater threat resulting from such kind of economic policies. Dr. Paul raised such threat to personal liberty by asking a series of questions:

“How is it that the people cry out for less taxes and they get more? How is it that the people cry out for balanced budgets and they get greater deficits? How is it that the people cry out for sound money and they get more inflation and higher interest rates? They cry out for peace and they get war” (p. 138).

The Solution

One concrete solution offered by Dr. Paul is for the US to stop subsidizing both its political allies and enemies. He was referring both to the “free gifts” offered to strengthen the defense of Germany and Japan and the subsidy given to China to build a steel plant at the expense of American taxpayers. These actions have been justified for the sake of national interest. Dr. Paul could not see the wisdom of such actions. He saw it as absurd and continuing to do so is an act of “economic suicide.”

Financial Cliff

Dr. Paul has been calling for the active participation of an informed public to provide a base for legislators to stop inflation and the destruction of the US dollar. He warned the American public about the danger of failure to respond. He has been calling:

“A bold step is required…The opportunity for positive change is available to us in this decade, and if we fail to respond in a positive way, it could be years or decades before the damage can be undone and a free society restored. It is literally up to us” (p. 139).

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Day of Reckoning

The present article is based on Ron Paul’s paper about “The U. S. Dollar and the World Economy” written on September 6, 2001. In dealing with various economic issues throughout the paper, Dr. Paul keeps on mentioning about the “day of reckoning.” We will find this expression as the Congressman discussed about constitutional duty to maintain sound money, global economic crisis, advantage of the US dollar, new globalism, real estate bubble, and economic solution. Intentionally, I omit other topics, which are too difficult for me.

Global Economic Crisis

Constitutional Duty

Comparing the July 20, 1979 speech of Dr. Paul to his speech in September 6, 2001, it surprises me knowing that the former speech talks about the US government destroying the dollar, while the latter speech indicates the constitutional responsibility of the Congress to protect the value of the dollar. Dr. Paul talks about this constitutional duty “to maintain the value of the dollar by making only gold and silver legal tender…” (p. 214). This is a strange concept for most people today. But if Ron Paul is right that monetary history and economic law support the soundness of this concept, it is to our own peril that we keep ignoring it.

1913 and 1971 are two important dates in financial history. The Federal Reserve System was established in 1913 and President Nixon disconnected the US dollar from gold in 1971. Our present day economic woes can all be traced from these two serious mistakes.

Global economic crisis is here to stay as long as those who are responsible to provide solution remain in the dark as to what is really going on. Dr. Paul describes this blindness of the US Congress as inability to realize the relationship between inflation and the bubble economy. As a result of such blindness, the US Congress wrongly identifies the root cause of the crisis. Due to wrong diagnosis, inflating the money supply is the only solution given ignoring the serious warning from Austrian economists that such action would lead to far deeper economic crisis.

Economic Crisis

For Dr. Paul, the worsening crisis was a product of several decades of disregard of sound money that started in 1971. In his mind, the world was already suffering recession in 2001 while the mainstream hesitatingly accepted this fact only in 2008 due to obvious visibility of real estate bubble. This is the reason why Ron Paul was not surprised seeing the collapse of real estate industry while most “professional economists” were caught unprepared.

In this crisis, Dr. Paul describes the dangerous status not only of the dollar, but including all the currencies of the world. It is a danger that the world has never experienced before due to its scope. Its severity depends primarily on the nature and the time of response of both the Federal Reserve and the US Congress. If the response is the usual creation of fiat money, the collapse will be more catastrophic and the time for recovery will be prolonged.

Advantage of the US Dollar

For citizens outside the US, the analysis of Dr. Paul as to the status of the US dollar deserves careful attention. He claims that the dollar as reserve currency of the world is more advantageous for American citizens than citizens of other countries that follow the US in her monetary policy. It is because the US is permitted to export their inflation by purchasing goods from other countries and at the same time lending back the dollars to finance American deficit.

New Globalism

Dr. Paul mentions an alarming truth that most people consider as delusional. This truth is connected to the dominance of fiat currency. Dr. Paul talks about a new form of globalism.

Unlike in ancient time where the goal of globalism “was honest trade and the currency was gold” (p. 217), the goal of this new form of globalism is world government through fiat currency and international organizations like IMF, WB, and WTO. The connection of the US dollar to other currencies of the world is critical in the success or failure of this goal. For Dr. Paul this goal is nothing but a socialist dream that will certainly collapse along with the destruction of fiat money. The existence of fiat money, international organizations intensely engaged in nations’ economies, and new globalism confirms that the final end of the worsening economic crisis will be far all-encompassing than the Great Depression in the 1930s.

Real Estate Bubble

Among numerous insights in this congressional speech, I find that the information on real estate bubble invaluable. Mainstream media misleads the public as to the primary source of the 2008 crisis. It never touches the primary role of the Federal Reserve in the expansion and explosion of the bubble. I will just restate here ideas that are comprehensible to me.

It all started with Federal Reserve credit expansion. Huge size of the credit went into real estate, stirred up by the “$3.2 trillion of debt maintained by the GSEs” (p. 219). The GSEs by the way, was composed of Fannie Mae, Freddie Mac, and the Federal Home Loan Bank. The GSEs received a special treatment through low interest rates and the Federal Reserve monetizing them “just as if they were U. S. Treasury bills” (p. 220). This action of the Federal Reserve sent an attractive message to foreign central banks causing these banks to purchase great quantity of GSEs.

At this point, the details that follow concerning real estate bubble are too intricate for me. For fear of distorting the Congressman’s message, let me just select three relevant paragraphs from the report.

About the relationship between the collapse of NASDAQ in 2000 and the boom in real state:

“After the NASDAQ collapsed last year, the flow of funds into real estate accelerated. The GSEs accommodated by borrowing without restraint to subsidize new mortgages, record sales, and refinancing. It’s no wonder the price of houses are rising to record levels” (p. 220).

About the direction of new money supply into real estate industry:

“Refinancing especially helped the consumers to continue spending even in a slowing economy. It isn’t surprising for high credit card debt to be frequently rolled into second mortgages, since interest on mortgage debt has the additional advantage of being tax deductible. When financial conditions warrant it, leaving financial instruments (such as paper assets), and looking for hard assets (such as houses), is commonplace and is not a new phenomenon. Instead of the newly inflated money being directed toward the stock market, it now finds its way into the rapidly expanding real estate bubble” (ibid.).

About possible dumping of GSEs: 

“A weak dollar will prompt dumping of GSE securities before Treasuries, despite the Treasury’s and the Fed’s attempt to equate them with government securities. This will threaten the whole GSE system of finance, because the challenge to the dollar and the GSEs will hit just when the housing market turns down and defaults rise. Also a major accident can occur in the derivatives markets where Fannie Mae and Freddie Mac are deeply involved in hedging their interest rate bets” (p. 221).

Among the above three paragraphs, I find the last one familiar. It has been clearly reported in the news. However, the information provided by the first two paragraphs appears to me that it fails to reach public awareness most especially the role of inflation in expanding the real estate industry.

Economic Solution

For Congressman Paul, the solution to global economic crisis must first start with the change in mind that created the crisis in the first place. This would mean an end to Keynesian-monetarist mindset. This would also mean exposure of the powerful identities behind oil corporations, international banking, and the military-industrial complex that serve as the driving force to perpetuate the warfare state. In concrete terms, this tells us to do everything we can to stop the following: regulating the prices of goods, giving artificial low interest rates, centralized economic planning, and manipulating money and credit.

Dr. Paul argues that the above economic and monetary policies are unconstitutional and destructive to the economy not only of the US, but of also of the world. There must be change in these policies if we want to see lasting peace and economic growth.

However, Dr. Paul after several decades of experience in advocating monetary reform is realistic that such change is not easily accomplished. It is hard to change the way both the government and the people think. On the part of the Congress, it is difficult to surrender the monopoly on the supply of money. On the part of the people, it is also difficult to give up the welfare programs of the government. Other sectors of society are also unwilling to give up the benefits they receive from inflating the money supply.

Providing genuine solution to global crisis, the US must give up the obsession to police the world and the constant interfering with free market activity. The Congress must take its responsibility to restore honest monetary system. This would mean an end to the power of the Federal Reserve.

Source: Paul, Ron. (2008). Pillars of Prosperity: Free Markets, Honest Money, Private Property. Auburn, Alabama: Ludwig von Mises Institute.

Ron Paul on “Gold and the Dollar”

This final article about the value of the US dollar serves as a transition to our next subject, the Gold Standard. This article is based on the speech of Congressman Ron Paul dated June 5, 2002. Compared with the previous two speeches on the same subject, we see here a progression in the way the value of the US dollar has been treated. Ron Paul indicated in July 20, 1979 speech that the US government was guilty of destroying the dollar. In September 6, 2001 speech, the Congressman reminded the US Congress of their constitutional responsibility to protect the dollar. After 9 months, this June 5, 2002 speech shows that the US Congress is not fulfilling its responsibility to protect the value of its own currency.

Gold and US dollar

Reading the last speech, I keep on encountering familiar themes that have already been mentioned in previous speeches like the connection of the price of gold and the dollar, inflation, the loss of trust in the US dollar, social tensions, and the call to return to gold standard. This only shows that the call of Dr. Paul for change in monetary policy has been ignored even after several decades of admonishing the US Congress.

Instead of protecting the dollar, the Congress, says Dr. Paul, is either deliberately or by default promotes a monetary policy that erodes the value of the dollar. This erosion is dangerous not only to US economy, but also to world economy since the dollar is the reserve currency of the world.

Repeatedly and consistently, despite of the Congressman’s awareness that politicians dislike the limiting power inherent in a monetary system connected to gold, he has kept on reminding the US Congress about its task to maintain a stable currency by attaching the dollar into gold once again. He believes that monetary history and economic laws show the value of a stable currency in maintaining a system of healthy economic growth and wealth preservation.

Related Article:

After the Dollar: What Comes Next? 

Personal Prayer

Creator of heaven and earth and the Ultimate Owner of all things, I pray that you remove whatever forces that exist in the US Congress that prevents reform of monetary policy leading to a sound, honest, and stable system of currency. Grant knowledge, courage, and tenacity for lawmakers and politicians working to see this change. Help us enjoy your gift of freedom through the Gospel of your Son. Help us live in peace and productivity. Amen!

Ron Paul on the Value of US Dollar

Eight years after President Nixon removed the connection of the US dollar from gold, Congressman Ron Paul delivered three speeches about the value of the US dollar. The first speech was given on July 20, 1979 admonishing the US government to stop the destruction of the value of the dollar. Two months after, on September 28, the second speech was delivered and it is about the connection of the changing prices between gold and the dollar. The last speech was given one month after, on October 17 and it concerns about the relationship between the dollar and inflation.

Stop Destroying the Dollar

Simply reading the first speech, one wonders why the Congressman was talking about the US government to stop destroying the dollar. If only an ordinary person is making this charge, people can easily dismiss it that the person talking is out of his mind. But it was an American Republican Congressman himself who upholds personal liberty, the US constitution, and the free market issuing this warning. The public is missing something important if we fail to grasp why the Republican Congressman was insisting that the US government is indeed destroying its own currency by increasing its supply. We are missing to see the implications of this act of dollar destruction on our personal and economic freedom.

US Dollar

The Gold Panic

The second speech about the relationship between the values of dollar and gold makes me think of the present trend among investing advisors counseling their clients to protect their wealth by buying gold. Good for those who have extra cash to follow such advice.

After reading the second speech, I realized that the gold panic has already started 33 years ago. I have no Internet access upon writing this article and therefore have no way to know the exact price of gold in 1979. The only data I have is that in 1995 the price of gold per ounce was $380.90 and the last time I checked its price two months ago was $1,615.00 per ounce. In other words, in 1979, the price of gold was far below $380.90 per ounce and yet there was already an indication of panic that time. The question is: if there was gold panic in 1979 when the price of gold was still very low, how people now ought to respond when the price of gold has already reached $1,615.00 per ounce? I am thinking that perhaps the conventional answer works within the span of 33 years that the gold panic that Ron Paul mentioned was somehow cooled down. Or maybe we are in the latter stage of that panic. Or perhaps, there are still other reasons. I do not know.

All I know is that the increasing price of gold is an indication of the declining value of the dollar resulting from its continuous creation out of thin air. Just a week ago, I read George Soros and central banks storing gold. One writer indicates that such action is a preparation for something big that is about to happen. For Ron Paul, such big shift is a sure sign that increasing number of people all over the world no longer trusts governments and fiat money. The only way to calm the panic is to stop printing fiat money and restore the official connection of the dollar to the gold once again.

Strong Dollar is a Deception

One month after that second speech, the Republican Congressman delivered another speech concerning the value of US dollar. In this speech, Dr. Paul exposed the prevailing deception reported in mainstream media that the dollar was getting stronger. It was a deception for the whole story was not told to the public and the basis measuring the strength of the dollar was misleading.

For Ron Paul, compared to other currencies, the dollar could appear strong simply because other countries were also inflating their money supply. Instead of using other currencies, Dr. Paul suggested two reliable tests to assess the strength of the dollar: in terms of its purchasing power and in relation to the price of gold.

Which of the two is telling the truth, the report of the mainstream media or the speech of Dr. Paul? Obviously, the two are not telling the same thing. Believing one would mean disregarding the other. Unfortunately, only few are able to see beyond the appearances of things due to absence of education in Austrian way of thinking.

Ron Paul on the Future of US Dollar

I am done with inflation. It is now time for me to study the value of US dollar from the speeches of Congressman Paul. The speeches are taken from Part 5 of the book, Pillars of Prosperity. There are actually 6 speeches concerning the value of the US dollar. I selected the longest one, which Dr. Paul delivered in February 15, 2006 at the US House of Congress. Its title is The End of Dollar Hegemony.

US dollar

Meaning of Hegemony

I first encountered the word “hegemony” while taking my Ed. D. at AGST. Despite of repeated reading and listening, still I find it hard to remember the exact meaning of the term. When I encountered the word again in my study of Pillars of Prosperity, I tested my memory if I could still remember the meaning of the term.

Hegemony to me is a kind of unjust or oppressive mainstream practice or system that the victims of it delight in perpetuating. Then I checked the meaning of the term in the New International Webster’s Dictionary and Thesaurus. The definition given is “predominant influence of one state over others as in a league or alliance.” I forgot where my definition came from. It is obviously subjective, but I prefer it.

Concise Lecture on Monetary History

The Congressman’s speech on dollar hegemony centers on the future of US dollar. He was talking about the end of its hegemony. He did not specify the precise date that his foresight would take place. All we know is that after six years of delivering this speech, we are now nearer to see its fulfillment.

Dr. Paul did not use a crystal ball in his prediction. He is well-informed about the history of money, the power of the market, and the abuses of the governments once they gained monopoly over the money supply. He gave us a concise lecture on monetary history that includes taxes, inflation, fiat money, militarism, imperialism, moral decline, and the downfall of empires. In this piece of history, he narrated the transition from the “dollar diplomacy” during the time of William Taft in late 19th century to “dollar hegemony” in the second half of 20th century.

The Transition to Dollar Hegemony

I understand the “dollar diplomacy” as an attempt of the US to protect its commercial interests in the Far East and Latin America from European influence. The transition took place as new monetary policy was introduced and that the US dollar has also undertaken a radical change. Dr. Paul was referring to the printing of the US dollar since the creation of the Federal Reserve in 1913 and its separation from gold standard that started in 1971. Through these changes, the transition to “dollar hegemony” was achieved.

Another special arrangement that added dominance to the US dollar was the “agreement with OPEC to price oil in U.S. dollars exclusively for all worldwide transactions” (p. 261). The other side of this agreement was the maintenance of US military presence in the Persian Gulf to protect its own interests.

Depreciation, Loss of Trust and Use of Force

The Congressman mentioned other details exposing the distortions in the new economic and monetary systems resulting from dollar hegemony. However, the new systems were gradually eroding the value of the US dollar through the increasing quantity of money supply. As nations of the world would come to realize the decreasing value of the US dollar, we would also see the end of the dollar hegemony.

A typical and controversial example of this loss of trust in the US dollar was the decision of Saddam Hussein in November 2000 to demand Euros for his oil. Such decision was a threat to dollar supremacy. It is alarming that in the following year, 9/11 took place and the dominant rhetoric was about Saddam Hussein and the overthrow of his government. Seen from this perspective, it is logical to think that the war against Iraq was actually a war to maintain the supremacy of the US dollar. Dr. Paul shared similar stories concerning Venezuela’s and Iran’s loss of trust in the US dollar.

Using force to maintain the supremacy of US dollar, the real victims are unaware about the manner they financially support the perpetuation of these new systems. Dr. Paul explains the subtlety of the scheme:

“The license to create money out of thin air allows the bills to be paid through price inflation. American citizens, as well as average citizens of Japan, China, and other countries suffer from price inflation, which represents the ‘tax’ that pays the bills for our military adventures” (p. 267).

No wonder the people remains passive. This is not reported in mainstream media. Conventional education does not train us to think this way. And so the dollar hegemony continues to thrive through the use of force and US militarism in return depends on the ongoing supply of fiat currency. This connection between militarism and the US dollar is clearly expressed by Dr. Paul: “Ironically, dollar superiority depends on our strong military, and our strong military depends on the dollar” (p. 268).

Conclusion

The golden rule has been changed. For several decades, the US dollar has been considered the “new gold” and its printers have been making the rules. But the times are changing. The dominance of the US dollar is about to end. The free market will demand a return to monetary system based on honest money.

After 5 to 6 Years

Dollar Collapse Inevitable

It is Impossible for the US to Default

Personal Prayer

Creator of heaven and earth, our Lord and Savior, you are just and holy. You demand honesty from men in our economic and monetary transaction (Leviticus 19:35-36). You hate currency debasement (Isaiah 1:22). You do not tolerate unjust economic and financial systems to continue. Certainly, there is an end to all of this. As the day of reckoning is becoming nearer in the passing of months and years, let this global economic crisis cause people to return back to you. Amen!