Editor's note: The Internet brings us evermore information about free-market thinking. Recently there have appeared several youtube.com videos of Congressman Ron Paul (pictured left) confronting Federal Reserve Chairman Ben Bernanke about inflation, a true definition of inflation and how the Fed intends to "drain" inflation from the American economy. We draw our readers' attention to them and comment below on an economic discussion that took place only a few days ago between Paul and Bernanke — when Bernanke was testifying before congress. Click here to watch video.
Dominant Social Theme: A civil discussion between appropriate points of view?
Free-Market Analysis: We often wondered how Alan Greenspan could sit up in front of Congress and defend Fed money creation when he had written a scathing paper on the subject in his mid 20s. At the time, Greenspan proclaimed that the gold standard was the single real defense against monetary debasement. An article that appeared several years ago on WorldNetDaily described the article and Greenspan's point of view:
The article, entitled, "Gold and Economic Freedom," was written for the July 1966 issue of The Objectivist newsletter, a publication that also featured authors Ayn Rand and Nathaniel Branden. In it, Greenspan discusses "the specific role of gold in a free society," as well as the importance of a tangible monetary "standard." "If men did not have some commodity of objective value which was generally acceptable as money, they would have to resort to primitive barter or be forced to live on self-sufficient farms and forego the inestimable advantages of specialization," he wrote. A congressional source told WorldNetDaily that Greenspan still agrees with the premise of his article today, even though the U.S. went off the gold standard in 1972. According to the source, Greenspan — following a March House Banking Committee meeting — told one lawmaker that if given a chance to add any "disclaimers" to the 34-year-old article, Greenspan said he still "would not change a single word."
Greenspan understood monetary policy in its fullness, in our opinion, and this paper is proof of it. How could he not? Now along comes Ben Bernanke who, in public discussions with honest money proponent Ron Paul during the most recent congressional hearings shows quite clearly his understanding of monetary policy and the Fed's role in it.
It is obvious from the youtube discussion that Ben Bernanke understands the difference between real inflation (an increase in the money supply) and price inflation (when prices go up as a result) and understands as well the consequences of the policies that the Fed has implemented. At one point in the digitalized debate, Ron Paul confronts him passionately about the consequences of monetary inflation and Bernanke indicates there is no way around the consequences of the Fed's most recent actions. It is simply the way monetary policy works, he indicates flatly and without providing any alternatives.
Now what Mr. Bernanke is saying here (strangely this doesn't seem to have gotten much coverage) is that the Fed is going to raise interest rates as much as it has to in order to drain the most recently injected electronic and paper money – seemingly several trillion dollars' worth.
Bernanke has spoken about other methods of draining the money supply ("sterilizing," in delightful Fed-speak) in the past, but in the dialogue with Ron Paul he does not provide alternatives. Maybe there are (we're aware of some of them) but they sure don't seem to have been implemented with any great effectiveness in the late 1970s and early 1980s when then-chairman Paul Volcker raised rates aggressively and eventually ratcheted them up to around 20 percent in an effort to "whip inflation now."
The question we wish to ask (Ron Paul did ask it) is how high will interest rates go if the economy starts to take off and price inflation begins to become an irritant? We remember in the 1970s, price inflation began to spike and the reaction of the Fed almost shut down the economy. But that was then. Today, we figure that the Fed has shoved a heckuva lot more cash into the market than back in the 1970s. If Volcker had to raise rates to 20 percent to shut down the inflation, how high is Bernanke going to have to go? 40 percent? 50 percent?
In a previous analysis, we indicated that one of the results of Federal Reserve price fixing (that's what it is) is that middle class citizens get absolutely hammered toward the end of the paper-money business cycle. First they lose a great deal of money when the inevitable crash occurs since it is almost impossible to time such things and it's hard to understand business cycles anyway. Then comes the recession during which time people make do anyway they can. Then comes the central bank to raise rates – higher and higher until the cost of money is prohibitively expensive.
Sure, you can make a lot of money if you can figure the timing of the business cycle, the collapse of the market, the pace of inflation and the predilection of the Fed to cut money production and raise rates. But the trouble is that many people, whipsawed by the market, the recession and then inflation, have little or no resources left by the time rates begin to rise. Of course, you could buy an annuity and live off it for the rest of your life if rates swing high enough, but most people aren't going to have the wherewithal to commit the necessary funds. No, they will just suffer dumbly. And they do.
In this interview with Ron Paul, Bernanke basically comes right out and grants that there may well be rip-roaring price inflation. We kinda expected it. We've already ventured a guess that big Paul Volcker was imported by the current administration (like an old fashioned gunslinger) to be trotted out when the time was right in order to provide credibility and cover for the astonishing rate hikes yet to come. But here's a question that will be asked more and more as this whole thing unwinds. Why should people have to suffer through sky-high interest rates yet again to perpetuate a monetary system that is both manipulative and unfair? The Internet has already educated millions about what's going on, and now the worst of it is occurring right under the eyes of those millions in America and Europe too. We think this time when the "Fed takes away the punchbowl" (if the economy gets that far) as Bernanke so mildly puts it, people are going to become mighty upset. This time, we think, it may be different.
Two possibilities occur. One is that this time round the monetary elite has simply run out of the political capital necessary to staunch the price inflation, in which case gold and silver will go sky high. The second possibility is that they do hike rates to 20, 30 or 40 percent – and people just don't stand for it. Enter a protracted and no doubt incredibly nasty debate about a new money standard – one that may somehow end up being imposed either by global consensus or by the market itself as the dollar finally collapses. Oh, the third possibility is that they do pull it off and the whole thing starts over again. It's just the way "monetary policy" works, according to Bernanke.