San Juan Mountains

San Juan Mountains
San Juan Mountains: Grenadier Range

Monday, July 20, 2015

Ron Paul Is Right.....But Wrong

I saw a commercial on the television the other day that caught my attention.  I don't know who paid for the commercial but it featured Ron Paul telling the viewers that the Socialist Democracy of Amerika is doomed because of the profligate practices of the Federal Reserve Board.  His argument is a common one among the ranks of those predicting financial catastrophe in the near future due to what is expected to be a Fed created hyper-inflation.  As I watched the commercial it occurred to me that the things Ron was saying were true but his conclusions were not.  Allow me to explain.
Ever since the Fed was created it has embarked upon the practice of money creation.  Although the Fed was justified by its government creators as a means by which elitist government planners could control and manage the SDA economy so that recessions would never again take place, the actual truth of the matter is that Fed meddling in the economy has created a series of boom and bust cycles, all of which have been economically harmful.  In actual practice the Fed is nothing more than the instrument by which the federal government can continue its practice of deficit financing of its bloated, vote-garnering, budgets.  If the Fed were not standing by the side of Treasury, willing and able to lend counterfeit money to Treasury to finance vote-buying wealth transfer programs, the federal government would be incapable of providing massive amounts of largess to politically protected parties in exchange for votes.
Here is a graph that dramatically illustrates the truth of Paul's claims:

https://research.stlouisfed.org/fredgraph.jpg?hires=1&type=image/jpeg&chart_type=line&recession_bars=on&log_scales=&bgcolor=%23e1e9f0&graph_bgcolor=%23ffffff&fo=verdana&ts=12&tts=12&txtcolor=%23444444&show_legend=yes&show_axis_titles=yes&drp=0&cosd=2005-06-01&coed=2015-06-01&height=445&stacking=&range=10yrs&mode=fred&id=BOGMBASE&transformation=lin&nd=&ost=-99999&oet=99999&lsv=&lev=&scale=left&line_color=%234572a7&line_style=solid&lw=2&mark_type=none&mw=2&mma=0&fml=a&fgst=lin&fgsnd=2007-12-01&fq=Monthly&fam=avg&vintage_date=&revision_date=&width=670

As the above graph dramatically illustrates, the Fed has more than quadrupled the monetary base of the SDA just since 2008.  This graph shows the impact of the Fed's practice of quantitative easing whereby it purchased Treasury securities in an attempt to keep the SDA from plunging into a depression.  Or, at least, that was the faulty economic (Keynesian) theory the Fed was operating under.   Simply creating more money never creates economic wealth, nor does it forestall recessions.  Creating more money does nothing more than devalue the existing money supply.  Creating more money is called inflation.
Because of what is evident in the above graph Ron Paul believes that the SDA is doomed to collapse in a hyper-inflation a la Argentina or Venezuela.  What Ron has said about the expansion of the monetary base is true, but his conclusion is wrong.  Look at the graph below:

 https://research.stlouisfed.org/fredgraph.jpg?hires=1&type=image/jpeg&chart_type=line&recession_bars=on&log_scales=&bgcolor=%23e1e9f0&graph_bgcolor=%23ffffff&fo=verdana&ts=12&tts=12&txtcolor=%23444444&show_legend=yes&show_axis_titles=yes&drp=0&cosd=2005-07-06&coed=2015-07-06&height=445&stacking=&range=10yrs&mode=fred&id=M2&transformation=lin&nd=&ost=-99999&oet=99999&lsv=&lev=&scale=left&line_color=%234572a7&line_style=solid&lw=2&mark_type=none&mw=2&mma=0&fml=a&fgst=lin&fgsnd=2007-12-01&fq=Weekly%2C+Ending+Monday&fam=avg&vintage_date=&revision_date=&width=670

This graph shows the actual impact upon the money supply of the expansion of the monetary base.  The monetary base and the money supply are not the same thing.  The Fed can't simply give money to the citizens of the SDA.  Instead, the Fed gives the money to member banks who are then encouraged to loan those counterfeit dollars to the citizens of the SDA.  As the above graph shows, the member banks are not loaning out the reserves that the Fed has given to them.  On the contrary, member banks are leaving those excess reserves on deposit with the Fed, where they are earning risk-free interest on those deposits.  Look at the graph below:

https://research.stlouisfed.org/fredgraph.jpg?hires=1&type=image/jpeg&chart_type=line&recession_bars=on&log_scales=&bgcolor=%23e1e9f0&graph_bgcolor=%23ffffff&fo=verdana&ts=12&tts=12&txtcolor=%23444444&show_legend=yes&show_axis_titles=yes&drp=0&cosd=2005-06-01&coed=2015-06-01&height=445&stacking=&range=10yrs&mode=fred&id=EXCSRESNS&transformation=lin&nd=&ost=-99999&oet=99999&lsv=&lev=&scale=left&line_color=%234572a7&line_style=solid&lw=2&mark_type=none&mw=2&mma=0&fml=a&fgst=lin&fgsnd=2007-12-01&fq=Monthly&fam=avg&vintage_date=&revision_date=&width=670

You will notice the similarity between this graph and the previous one about the monetary base.  Most of the money being created by the Fed is not finding its way into the economy.  Most of the money being created by the Fed is sitting on deposit with the Fed and going nowhere.  Money that is not in the economy can do no harm.  The only cost to the citizens of the SDA associated with enormous amounts of excess reserves is the small amount of interest that is being paid to the banks who hold them with the Fed.
So I conclude that Ron Paul is correct when he declares that the Fed has created an inordinate amount of purchasing media since 2008.  However I must disagree with Ron when he concludes that we are headed for a hyper-inflation.  We do have inflation, as shown by the M2 graph, but it is not even close to a hyper-inflation and I see no reason why it ever should be.  Those excess reserves can be taken back by the Fed as quickly as they were created.  In that case we will be stuck with the good, old moderate monetary inflation we have all lived with all of our lives.  Don't forget, the moderate inflation created by the Fed since 1913 has devalued the dollar by 97%.  That is good enough for me.

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