Paul and McDuck vs. the Fed
Although the market took much of the blame for the recently bumpy economy, Ron Paul points out, the true cause of such economic uncertainty:
The truth is that business involves risk, and businesses that miscalculate risk should be liquidated, so their assets can be reallocated to businesses that correctly judge risk and make profits. Instead, the Fed has injected $64 billion into the jittery markets, effectively amounting to a bailout that keeps these malinvestments afloat, but eventually they will become the undoing of our economy.
In addition to the negative reactions in financial markets, many Americans have taken on too much personal debt owing to exotic mortgage products and artificially low interest rates. Unfortunately, these families are now in the position of losing their homes in unprecedented numbers as the teaser rates expire and the real bills are coming due.
This temporary fix, provided by the Federal Reserve, will only delay much worse economic woes. Fiat money can be created from nothing, but wealth cannot. We should expect the value of the dollar to continue its downward trend while businesses are rewarded for failure.
On a closely related topic, I recently found an episode of Duck Tales; a cartoon that I watched when I was younger. This particular episode had stuck in my memory as a simplified lesson on the consequences of an inflated money supply. I don’t think it’s uncommon for a child (or an adult for that matter) to wonder why we can’t just print more money and inject it into the economy as a way to boost prosperity. This cartoon provided me with a clear and reasonable explanation of why this method, in the end, would not achieve the intended goal. With the little video editing knowledge I have, I put together a video of the relevant parts of the episode and posted it on youtube. As silly and exaggerated as it is, I hope it serves as a lesson to those who think inflation will create wealth.
August 23rd, 2007 at 8:34 am
This reminds me of the “so-called” great economy of the 1990’s. Of course, Clinton took all the credit, but the nation was being set up for a crash, which we did experience. Everyone was excited about this new thing called the internet and internet companies stock went through the ceiling. Everyone was investing, but investing in what? There were no captial assets to support the value set on stock. All that money was going into the pockets of the internet company owners. The stock prices continued to go up, but still without secured funding. Doom was just around the corner and it eventually reached us in the late 1990’s and early 2000’s. I have to laugh every time I hear someone talk about the great economy of the 90’s under Clinton. It was an artificial economy with ton’s of money and no assets to show for it. People just don’t get it; but that’s why they continue to vote the way they do.
August 23rd, 2007 at 2:51 pm
Clinton deserves NONE of the credit for the short lived boom in the economy during his presidency. It was merely a coincidence that he was in office as the internet began to flourish. in addition to what you mentioned, the fact that it was about to be followed by a devastating bust was, like the housing boom-bust, contributed to significantly by the credit expansion of the Federal Reserve. Investors were enticed by artificially low interest rates thanks to the fed, which led to an overabundance of investing(over speculation) in an new technology. the same thing is happening now with the real estate industry. artificially low interest rates encouraged people to take out mortgages, they normally wouldn’t, leading to a boom, which was followed by a bust. basically what you get from “easy money” is an economy flooded with money backed by nothing (or as you put it “no capital assets”). lew rockwell wrote:
“This pattern closely tracks the run-up and subsequent collapse of internet stocks. Because of the loose money policies of the Fed, venture capitalists enjoyed a huge increase in funds available for investment. What they may or may not have known is that the funding was an illusion created by the central bank. It wasn’t based on savings (which actually fell during the same period), and the investments they made were not based on a realistic assessment of firms’ earning potential.
“Investors weren’t so much blinded by technology as drowned in seas of cash, freshly created by the Federal Reserve System. It was inevitable that the illusion would dissipate; it was only a matter of timing. Some of the skeptics figured it would happen in 1997 and 1998, and when the crash didn’t occur, they were called troglodytes who didn’t understand that risk had been repealed in a new era of cyberspace. But once the Fed stopped feeding it, the tech boom did indeed come to an end.”