The Coming Category 5 Financial Hurricane
Hon Ron Paul of Texas, before the House of Representatives, Sep
15, 2005
revealed on national TV by Katrina’s destruction
were real eye-openers for many. These scenes prompted two
emotional reactions. One side claims Katrina proved there
was not enough government welfare, and its distribution was based
on race. The other side claims we need to pump billions of
new dollars into the very federal agency that failed (FEMA), while
giving it extraordinary new police powers. Both sides support
more authoritarianism, more centralization, and even the imposition
of martial law in times of natural disasters.
There is no hint that we will resort to reason now that the failed
welfare policies of the past 60 years have been laid bare. Certainly
no one has connected the tragedy of poverty in New Orleans to the
flawed monetary system that has significantly contributed to the
impoverishment of a huge segment of American society.
Congress reacted to Katrina in the expected irresponsible manner. It
immediately appropriated over $60 billion with little planning
or debate. Taxes won’t be raised to pay the bill--
fortunately. There will be no offsets or spending reductions
to pay the bill. Welfare and entitlement spending is sacrosanct. Spending
for the war in Iraq and the military-industrial complex is sacrosanct. There
is no guarantee that gracious foreign lenders will step forward,
especially without raising interest rates. This means the
Federal Reserve and Treasury will print the money needed to pay
the bills. The sad truth is that monetary debasement hurts
poor people the most-- the very people we saw on TV after Katrina. Inflating
our currency hurts the poor and destroys the middle class, while
transferring wealth to the ruling class. This occurs in spite
of good intentions and misplaced compassion.
We face a coming financial crisis. Our current account deficit
is more than $600 billion annually. Our foreign debt is more
than $3 trillion. Foreigners now own over $1.4 trillion of
our Treasury and mortgage debt. We must borrow $3 billion
from foreigners every business day to maintain our extravagant
spending. Our national debt now is increasing $600 billion
per year, and guess what, we print over $600 billion per year to
keep the charade going. But there is a limit and I’m
fearful we’re fast approaching it.
Runaway inflation is a well-known phenomenon. It leads to
political and economic chaos of the kind we witnessed in New Orleans. Hopefully
we’ll come to our senses and not allow that to happen. But
we’re vulnerable and we have only ourselves to blame. The
flawed paper money system in existence since 1971 has allowed for
the irresponsible spending of the past 30 years.
Without a linkage to gold, Washington
politicians and the Federal Reserve have no restraints placed on their power to devalue our money by merely printing
more to pay the bills run up by the welfare-warfare state.
This system of money is a big contributing factor in the exporting
of American jobs, especially in the manufacturing industries.
Since the last link to gold was severed in 1971, the dollar has
lost 92% of its value relative to gold, with gold going from $35
to $450 per ounce.
Major adjustment of the dollar and the current account deficit
can come any time, and the longer the delay the greater the distortions
will be in terms of a correction.
In the meantime we give leverage to our economic competitors and
our political adversaries, especially China.
The current system is held together by a false confidence in the
U.S. dollar that is vulnerable to sudden changes in the economy
and political events.
My suggestion to my colleagues: Any new expenditures must have
offsets greater in amount than the new programs. Foreign
military and foreign aid expenditures must be the first target. The
Federal Reserve must stop inflating the currency merely for the
purpose of artificially lowering interest rates to perpetuate a
financial bubble. This policy allows government and consumer debt
to grow beyond sustainable levels, while undermining incentives
to save. This in turn undermines capital investment while
exaggerating consumption. If this policy doesn’t change,
the dollar must fall and the current account deficit will play
havoc until the house of cards collapses.
Our spending habits, in combination with our flawed monetary system,
if not changed will bring us a financial whirlwind that will make
Katrina look like a minor storm. Loss of confidence in the
dollar and the international financial system is a frightening possibility--
but it need not happen if Congress can curb its appetite for buying
the people’s support through unrestrained spending.
If Congress does not show some sense of financial restraint soon,
we can expect the poor to become poorer; the middle class to become
smaller; and the government to get bigger and more authoritarian--
while the liberty of the people is diminished. The illusion
that deficits, printing money, and expanding the welfare and warfare
states serves the people must come to an end.
