Ron Paul

Inflation: It Just Doesn't Pay the Bills Anymore, and The Fed's Fate in Ron Paul's Paws

|

Jeffrey Rogers Hummel and Sheldon Richman at Forbes on the deflating powers of inflation to solve government's problems:

Historically governments inflated their currencies because they benefited in various ways. For example, they spent the new money, gaining the purchasing power lost by holders of the depreciating currency. This gain, called seigniorage, is an implicit tax on the people's cash balances.

Another way government can gain is in its role as a debtor. If inflation is unanticipated, interest rates will not have risen enough to compensate lenders for the decline in purchasing power. Net debtors gain, and net creditors lose. Government, of course, is the economy's biggest debtor. During the Great Inflation of the 1970s private investors holding long-term U.S. Treasury securities actually earned negative real returns despite receiving positive nominal interest. So from 1946 to 1982, while the government's nominal debt to the general public rose from $242 billion to $925 billion, in 1946 dollars it had actually fallen to $201 billion.

But these potential sources of inflation revenue have become attenuated in developed countries. Of the two, seigniorage has become the least lucrative in the post-World War II period. In a study of 90 countries between 1971 and 1990, Reid W. Click finds that almost no developed country could boast seigniorage amounting to more than 1% of GDP, despite the fact that the study incorporated the inflationary years of the 1970s. This no doubt contributed to inflation's worldwide decline after 1980.

What about the effect of inflation on government as a debtor, which generated about twice as much revenue for the U.S. government as did seigniorage during the unexpected inflation of the 1970s: about 4% of total expenditures or less than 1% of GDP? Investors are much savvier these days.

Globalization, with the corresponding relaxation of exchange controls in all major countries, allows them easily to flee to foreign currencies, with the result that changes in central-bank policy are almost immediately priced by exchange rates and interest rates. Add to this the ability to purchase inflation-indexed government securities, and it becomes highly unlikely investors will be caught off guard by anything less than sudden, catastrophic hyperinflation (defined as more than 50% per month)–and maybe even not then.

It has always struck me as especially clever of governments to ensure that one of the only relatively sure ways to preserve the value of your bucks was to lend them money, but there you go.

In other monetary policy related commentary, Joshua Green in Boston Globe says that the fate of Ron Paul's potential chairmanship of the House subcommittee that oversees the Fed is the bellwether of monetary policy's future:

Were he to assume the chairmanship, Paul would represent an altogether different type of critic: he really means what he says. But he's no lock for the job. His views on monetary policy, and his disinclination to defer to the GOP leadership, have twice before led his own party to ignore his seniority and deny him control of this subcommittee, in 2003 and 2005. One acid test of whether the Republican Party is serious about trying to aggressively influence monetary policy and thwart QE2 is if it finally lets Paul loose on the chairmanship.

Paul expects it will. "I'm assuming that I'll get it," he said. "I've had no indication at all that I won't."

Representative Barney Frank, the outgoing chairman of the Financial Services Committee, agrees. "I think the GOP is afraid to deny him that chairmanship. The Tea Party would revolt."

If he does get it, Paul says that he will indeed go after the Fed, whose current strategy he considers to be "insanity." This would add the force of a major House subcommittee — with investigative and subpoena powers, and able to hold hearings — to the anti-Fed campaign, which would surely roil the markets and further interfere with the struggle to engineer a recovery.

Paul's stance toward the Fed is no different than it was in 2003 or in 2005. What has changed since then is that many other Republicans are now singing from the same hymnbook. That's significant because until very recently, the Republicans worshiped Federal Reserve chairman Alan Greenspan and dismissed Paul as someone whose economic views were so far outside the mainstream as to make him an embarrassment.

I wrote about the burgeoning anti-Fed movement and Ron Paul's role in it in this November 2009 Reason magazine feature.

NEXT: Comedy is Not Pretty. And Steve Martin is Not Funny. Anymore.

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  1. Boy, I hope he gets it.

    What fun!

    1. Our nuttiest blame-America-firster tightwad put in charge of the worst, most spendthrift, most unaccountable financial institution in America.

      If we can swing this one, I’m going for some popcorn. As the Jews would say, Paul and the Fed are a match made in Heaven.

  2. As much as I’d like to see Paul chair the subcommittee, I’d like to see a true Tea Party revolt even more.

  3. Just a question about subcommittees

    Are there Committees above subcommittees? or all all committees below the house classified as subcommittees?

    also how is one subcommittee major while others not?

    1. In order: yes, no, and I think it has something to do with the perceived importance of the subject of the subcommittee.

  4. Green’s piece is quite the hack job. The first two paragraphs are taken straight out of a fairy tale where the handsome young prince (Bernanke) tries to save the recovery only to be thwarted by the underhanded dealings of evil conservative ogres. All this with zero evidence beyond a post hoc ergo propter hoc analysis of interest rates.

    And in the piece quoted above, he frames the future liberal narrative nicely: the recovery was going along swimmingly until the voters had a temper tantrum and elected economic conservatives.

  5. So how many times per session could The Good Dr. haul in the Bernank and his Fed cronies and grill them like a cop interrogating registered sex offenders caught too close to the playground?

    1. Hopefully every day. And in your analogy, I’ll just assume you’re equating The Bernank with a child rapist and not someone who peed in public…which is appropriate.

      1. Did the “Bernank” meme start with that cartoon video a few weeks ago or did I miss it somewhere else first?

        Whatever the case, I think it’s great. Perfectly dehumanizing and obscure.

        1. It was the cartoon video. The video was made with a web app that uses text-to-speech software which sometimes doesn’t get proper names correct unless they are spelled out phonetically. The creator of the video didn’t bother to do so, and our Fed chair shall henceforth be known as The Bernank. 🙂

  6. The fix is in
    : Five GOP leadership aides, speaking anonymously because a decision isn’t final, say incoming House Speaker John Boehner has discussed ways to prevent Paul from becoming chairman or to keep him on a tight leash if he does.

    Contact John Boehner:
    (513)-779-5400 or (202)225-4000

    Contact Eric Cantor:
    (202) 225-2815 or (804) 747-4073

    Tell them you want a voice that will challenge the Federal Reserve and not just take orders from them.

    1. Sad

    2. Dear Tea Party:

      Thanks for the majority in the House and the ability to filibuster in the Senate. Now fuck off.

      Sincerely,

      The GOP

    3. You wanna talk about a hit piece…

    4. Challenge? I want a voice that will kill the Red, or at least rabble rouse for the execution.

      If Paul merely challenges the Fed, that implies a tight leash.

      1. I don’t like Dusty Baker either, but calling for Red executions is going a bit far.

        1. As a Cincy fan, die Dusty die, before you kill off what has become a decent pitching staff.

          1. As a Cubs fan, I sympathize. You guys do need to do something about that Votto guy insulting the Cubs at every opportunity, though.

  7. “Republicans worshiped Federal Reserve chairman Alan Greenspan and dismissed Paul as someone whose economic views were so far outside the mainstream as to make him an embarrassment”.

    Ron was right – Is right – and will continue to be right!

    1. For those that haven’t seen it yet: See Bernanke embarrass himself during the housing boom/bust here: http://www.youtube.com/watch?v=INmqvibv4UU and see Ron Paul warning against the Fed and Fannie & Freddie here: http://www.youtube.com/watch?v=INvKPYdTs3E

      1. That was great! Thanks.

  8. All economists agree that the only way to pay off the debt is to print out more money.

    Of course, we could raise taxes to pay it off, but now that the Republicans control the house and treat taxes like it is kryptonite and would rather destroy the country’s financial infrastructure than pay a little more in taxes, raising more revenue via taxes is out of the question.

    So, Obama’s only choice is to print money so we can pay off the debt that was raised exclusively under Bush’s tenure as president. It’s true, Obama has raised the debt too, but he can’t be held culpable since spending a lot of money is the only way to get out of a recession that was primarily by the libertarian policies of Bush.

    Obama and those he has appointed know a lot more about how to control our finances than you knee-jerk, anti-intellectual ‘tarditarians at Reason, and hicks like Ron Paul. It’s the democratic thing to do to get out of the way and let those who know what they are doing do what they need to do to save this country.

    1. “Obama has raised the debt too, but he can’t be held culpable since spending a lot of money is the only way to get out of a recession that was primarily by the libertarian policies of Bush.”

      Great satire! Thanks 🙂

      “… the libertarian policies of Bush.”

      “All economists agree…”

      Hoo boy, that is just too funny. Eyes tearing….can’t….breathe….can’t type….

    2. I’m betting he’s from another world like Jerry O’Connell in Sliders.

      1. I think this is the commenter Blighter from Mr. McArdle’s wife’s blog.

    3. Much better, I almost thought it was really Chad at first.

  9. Ron Paul had better be careful. The Fed isn’t just Ben Bernanke, it’s a cabal of some of the most wealthy and influential people in the entire world. These are not the sorts of people who will go quietly into the night once he starts holding hearings.

    1. I’d prefer they go pleading, sobbing, and screaming.

      1. I’d prefer they do the perp-shuffle in handcuffs.

    2. it’s a cabal

      That really is an unfortunate word to use in this regard.

      Can’t they simply be cronies with vested interests sucking on the government tit?

    3. Andy Jackson took them down and he couldnt read.

  10. Ron Paul, even at 70+, takes the biggest ploppers!

  11. Ron Paul takes the biggest ploppers!

  12. Ron Paul takes the biggest ploppers!

  13. Ron Paul sure as hell isn’t doing himself any favors by talking up how much trouble he’s going to make for TPTB before he even gets the chairmanship. Don’t get me wrong, I like him in general but he just doesn’t know when to shut up.

  14. As part of my irrational fixation over the misuse of the poor abused apostrophe, I must point out that the following is incorrect:

    struck me as especially clever of government’s to ensure

  15. It has always struck me as especially clever of government’s to ensure that one of the only relatively sure ways to preserve the value of your bucks was to lend them money, but there you go.

    Global capital and currency markets have put an end to that game. Big money (outside of banks, which can be effectively required to buy Treasuries) can, will, and is going overseas where the devaluation of the dollar won’t destroy its gains.

  16. Give ’em hell Ron Paul!

  17. ditors lose. Government, of course, is the economy’s biggest debtor. During the Great Inflation of the 1970s private investors holding long-term U.S. Treasury securities actu

Please to post comments

Comments are closed.