On
My Mind Be Prepared for the Worst Ron
Paul, 10.29.09, 09:20 AM EDT - Forbes Magazine dated November
16, 2009
The
large-scale government intervention in the economy is going to end badly.
Any number of pundits claim that we have now
passed the worst of the recession. Green shoots of recovery
are supposedly popping up all around the country, and the
economy is expected to resume growing soon at an annual rate
of 3% to 4%. Many of these are the same people who insisted
that the economy would continue growing last year, even while
it was clear that we were already in the beginning stages
of a recession.
A false recovery is under way. I am reminded of the outlook
in 1930, when the experts were certain that the worst of the
Depression was over and that recovery was just around the
corner. The economy and stock market seemed to be recovering,
and there was optimism that the recession, like many of those
before it, would be over in a year or less. Instead, the interventionist
policies of Hoover and Roosevelt caused the Depression to
worsen, and the Dow Jones industrial average did not recover
to 1929 levels until 1954. I fear that our stimulus and bailout
programs have already done too much to prevent the economy
from recovering in a natural manner and will result in yet
another asset bubble.
Anytime the central bank intervenes to pump trillions of
dollars into the financial system, a bubble is created that
must eventually deflate. We have seen the results of Alan
Greenspan's excessively low interest rates: the housing bubble,
the explosion of subprime loans and the subsequent collapse
of the bubble, which took down numerous financial institutions.
Rather than allow the market to correct itself and clear away
the worst excesses of the boom period, the Federal Reserve
and the U.S. Treasury colluded to put taxpayers on the hook
for trillions of dollars. Those banks and financial institutions
that took on the largest risks and performed worst were rewarded
with billions in taxpayer dollars, allowing them to survive
and compete with their better-managed peers.
This is nothing less than the creation of another bubble.
By attempting to cushion the economy from the worst shocks
of the housing bubble's collapse, the Federal Reserve has
ensured that the ultimate correction of its flawed economic
policies will be more severe than it otherwise would have
been. Even with the massive interventions, unemployment is
near 10% and likely to increase, foreigners are cutting back
on purchases of Treasury debt and the Federal Reserve's balance
sheet remains bloated at an unprecedented $2 trillion. Can
anyone realistically argue that a few small upticks in a handful
of economic indicators are a sign that the recession is over?
What is more likely happening is a repeat of the Great Depression.
We might have up to a year or so of an economy growing just
slightly above stagnation, followed by a drop in growth worse
than anything we have seen in the past two years. As the housing
market fails to return to any sense of normalcy, commercial
real estate begins to collapse and manufacturers produce goods
that cannot be purchased by debt-strapped consumers, the economy
will falter. That will go on until we come to our senses and
end this wasteful government spending.
Government intervention cannot lead to economic growth. Where
does the money come from for Tarp (Treasury's program to buy
bad bank paper), the stimulus handouts and the cash for clunkers?
It can come only from taxpayers, from sales of Treasury debt
or through the printing of new money. Paying for these programs
out of tax revenues is pure redistribution; it takes money
out of one person's pocket and gives it to someone else without
creating any new wealth. Besides, tax revenues have fallen
drastically as unemployment has risen, yet government spending
continues to increase. As for Treasury debt, the Chinese and
other foreign investors are more and more reluctant to buy
it, denominated as it is in depreciating dollars.
The only remaining option is to have the Fed create new money
out of thin air. This is inflation. Higher prices lead to
a devalued dollar and a lower standard of living for Americans.
The Fed has already overseen a 95% loss in the dollar's purchasing
power since 1913. If we do not stop this profligate spending
soon, we risk hyperinflation and seeing a 95% devaluation
every year.