Yesterday, National Review posted an interview with Congressman Ron Paul. The interview itself is worth reading. Paul is a great man and has been essential in educating Americans about constitutional government, non-interventionism and monetary policy. But a paragraph from the interview deserves its own highlight, and here it is:
Paul, however, says his political philosophy is quite simple: “I’m a constitutionalist.” And he takes it as a sign of the times that his faithfulness to an originalist reading of the Constitution — which he claims forbids the existence of the Federal Reserve, among other government creatures — engenders such confusion, so many accusations of both radicalism and reaction.
Paul’s faithfulness to the U.S. Constitution is seen as radical. That should scare the daylights out of any conservative American. The government has abandoned any sane reading of Article I Section 8 of the constitution, and created a vast array of regulation for which it has no legal authority to enforce. As Paul says in the interview “regulations are very negative when they come from government. What we need are more private-property regulations, more market regulations.” Market-based regulation allows for failure. The government has propped up every terrible, “too-big-to-fail,” institution in the country, even though what those companies needed was a failure all along. Marty Whitman in his book, Value Investing, makes the case that a controlled, planned bankruptcy is the best way to reorganize a company, and I agree. The willy-nilly government bailouts of banks and the quasi-bankruptcies of GM and Chrysler along with the Federal Reserve’s propping up of corporations all around the U.S. and the world and the saving of Fannie and Freddie, were exactly the wrong ways to go about the failure of these behemoth corporations.
Paul hits the nail on the head in regards to where policy meets investing. He says:
Nobody wants to make interest rates very high, deliberately. But the low interest rate misleads the businessman and makes him think there’s been a lot of savings, and therefore it’s proper to have more capital investments. And that’s why they overbuild in various areas. And these moneys flow into the various areas — sometimes into asset bubbles, sometimes into housing, sometimes in raw property or whatever. They help create bubbles that have to pop at some point.
I have emphasized the key phrase in this quote. Misguided monetary policy generates asset bubbles. Misallocated capital creates inefficiencies in the markets. Recognizing those inefficiencies can prepare you for their eventual collapse.
Also of interest to savers, retirees and those soon to be retired are Paul’s remarks on inflation:
It’s the worst thing any government could deliberately do. It’s counterfeit. It means some people will benefit at the expense of others. People who saved money and are living off their savings get cheated. It’s a moral issue: They might make 1 percent on their certificates of deposit, and they can’t live on that. And the government practically gives the money to the banks and then they turn it over and buy Treasury bills and bonds and make 3 or 4 percent. So they make billions of dollars after having just been rescued from their bankruptcy.
This is precisely what I have been telling readers for decades now, starting with my earliest writings in Young’s World Money Forecast. The government is expropriating the citizens for its own benefit.
There have always been two camps in government, one that thinks government power should be used to further the ideals of those in government, and the other that thinks government should have as little power as possible, allowing the citizenry to further its own ideals.
Alexander Hamilton is the exemplar of the first camp, while Thomas Jefferson is the masthead of the second. Hamilton would certainly have agreed with the idea that the federal government has the power to create and sustain a federal reserve, while Jefferson would have flatly denied any such power. Jefferson was an ardent protector of constitutional boundaries (barring, of course, his purchase of the Louisiana territories which had no constitutional basis but is unarguably one of the most brilliant real estate purchases of all time). The constitution does not allow the creeping government intrusion into the economy that has accelerated under the current administration.
The Austrian school of economics, pioneered by Ludwig von Mises foretold the current financial collapse. They argue for competitive money and much smaller government presence in the economy (if any at all is necessary). Liberal Keynesian economists like Paul Krugman are the antithesis of this view. Krugman has never heard of a government intervention he didn’t like the sounds of. His brand of money printing and government meddling are exactly what pushed the country into an economic trough to begin with, now he claims to know how to get America on the right track. Absolute hogwash.
Asset bubbles are being created by federal government money printing. Don’t let the blinders put on by Krugman and his ilk blind you to the dangers being created by government policy.