Inflation: Ron Paul Explains How We Got Into This Mess

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Ron Paul explains how we got into this mess:

“There were several stages. From the inception of the Federal Reserve System in 1913 to 1933, the Central Bank established itself as the official dollar manager. By 1933, Americans could no longer own gold, thus removing restraint on the Federal Reserve to inflate for war and welfare.

“By 1945, further restraints were removed by creating the Bretton-Woods Monetary System making the dollar the reserve currency of the world. This system lasted up until 1971. During the period between 1945 and 1971, some restraints on the Fed remained in place. Foreigners, but not Americans, could convert dollars to gold at $35 an ounce. Due to the excessive dollars being created, that system came to an end in 1971.

“It’s the post Bretton-Woods system that was responsible for globalizing inflation and markets and for generating a gigantic worldwide dollar bubble. That bubble is now bursting, and we’re seeing what it’s like to suffer the consequences of the many previous economic errors.

“Ironically in these past 35 years, we have benefited from this very flawed system. Because the world accepted dollars as if they were gold, we only had to counterfeit more dollars, spend them overseas (indirectly encouraging our jobs to go overseas as well) and enjoy unearned prosperity. Those who took our dollars and gave us goods and services were only too anxious to loan those dollars back to us. This allowed us to export our inflation and delay the consequences we now are starting to see.

“But it was never destined to last, and now we have to pay the piper. Our huge foreign debt must be paid or liquidated. Our entitlements are coming due just as the world has become more reluctant to hold dollars. The consequence of that decision is price inflation in this country – and that’s what we are witnessing today. Already price inflation overseas is even higher than here at home as a consequence of foreign central bank’s willingness to monetize our debt.

“Printing dollars over long periods of time may not immediately push prices up – yet in time it always does. Now we’re seeing catch-up for past inflating of the monetary supply. As bad as it is today with $4 a gallon gasoline, this is just the beginning. It’s a gross distraction to hound away at ‘drill, drill, drill’ as a solution to the dollar crisis and high gasoline prices. It’s okay to let the market increase supplies and drill, but that issue is a gross distraction from the sins of deficits and Federal Reserve monetary shenanigans.

“This bubble is different and bigger for another reason. The central banks of the world secretly collude to centrally plan the world economy. I’m convinced that agreements among central banks to ‘monetize’ U.S. debt these past 15 years have existed, although secretly and out of the reach of any oversight of anyone – especially the U.S. Congress that doesn’t care, or just flat doesn’t understand. As this ‘gift’ to us comes to an end, our problems worsen. The central banks and the various governments are very powerful, but eventually the markets overwhelm when the people who get stuck holding the bag (of bad dollars) catch on and spend the dollars into the economy with emotional zeal, thus igniting inflationary fever.

“This time – since there are so many dollars and so many countries involved – the Fed has been able to ‘paper’ over every approaching crisis for the past 15 years, especially with Alan Greenspan as Chairman of the Federal Reserve Board, which has allowed the bubble to become history’s greatest.

“The mistakes made with excessive credit at artificially low rates are huge, and the market is demanding a correction. This involves excessive debt, misdirected investments, over-investments, and all the other problems caused by the government when spending the money they should never have had. Foreign militarism, welfare handouts and $80 trillion entitlement promises are all coming to an end. We don’t have the money or the wealth-creating capacity to catch up and care for all the needs that now exist because we rejected the market economy, sound money, self reliance and the principles of liberty.”

Until tomorrow,

Bill Bonner
The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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Comments

  1. It’s a shame he’s so unelectable for Americans :) He actually sounds like he understands the root cause of the problems at the moment with the money supply.

    His biggest problem would be that the plans he’d try and put in place would effectively require a dictatorship to implement, as he would never get the bipartisan support necessary to fix the situation.

    That or a military coup.

    Unpopular Truth
    July 10, 2008
    Reply
  2. Dr No is so good for the soul. I love reading his commentry and watching his interviews and lament that he is largely ignored. Hes so bleeding logical yet people dont get it..AAARRRRHHH

    william pix
    July 10, 2008
    Reply
  3. Love it. Especially the part where Alan Greenspan is to take the blame for his role.

    Reply
  4. It’s Currency Accretion (Growing Money in Circulation) NOT “inflating the money supply” nor “inflating the monetary supply”.

    It’s Loss of Buying Power or Currency Debasement NOT “price inflation”.

    Until men get the names right, the names they use to label concepts, they shall never fix themselves upon a right course of action.

    Inflation is a deliberate process undertaken by a Central Bank when that Central Bank controls the Price of Legal Tender Decreed Money.

    Everytime a Central Bank lowers the Price of Money by declaring a Lower Rate of Interest, the Central Bank engages in Inflation.

    The Purpose of Inflation is Economic Expansion through attempting to increase the Efficiency of Money — higher ratio of Commercial Credit to Money in Circulation.

    Smack MacDougal
    July 11, 2008
    Reply
  5. I’ve been wanting to write a response to several of your recent articles to try to get you to take a look at the root causes of this dire mess we find ourselves in, so I was very happy to see this article finally getting to the heart of the matter.
    Yes, indeed, it is the long standing collusion of the central banks, with each other and with their captive politicians in governments around the world, that has led us to this pass. The creation of the Fed – which most people do not realize IS NOT part of the American government, but is actually an international banking cartel whose purpose is to eliminate competition between the major European and American (and more recently Japanese) Banks, and allow them to share the benefits of a collective monopoly on their wonderfully profitable scam to fabricate money out of thin air – was certainly one of the key milestones on this mad journey. Check out “the Creature from Jekyle Island” for the fascinating background of how, and by whom, the Fed was created.
    And Yes, the Bretton woods agreement was another key milestone along the way. This was the Agreement after world war two in which the victorious allies foisted the dollar upon an unsuspecting world as the currency designated for international trade. This was how the US achieved the unique status of being able to run up massive federal deficits without paying the price of immediate overwhelming monetary and price inflation that any other nation would pay…. because so many of those dollars would be held by other countries as reserves and kept out of circulation. Of course there has been significant inflation since the creation of the Fed and Bretton Woods, but the most severe effects have ben delayed. The end result has always been inevitable, however, and now the time has come to pay the bill.
    A very informative little documentary on money and the banking system that I highly reccommend is called “money as debt”. ( this can be viewed online, free) This gives some crucial historical background on the advent of the modern banking system and the mechanism of money creation that most people have no inkling of. Most people have a vague notion that money is created by national governments. This is true of actual physical currency of course, but then most people do not realize that most money exists only in a digital form, and that this digital money is created by banks out of thin air when a loan is made. This sounds incredible but it is true, and it is a mechanism well known to ( and casually accepted by) economists.
    No doubt many readers of the Daily Reckoning are already aware of these facts. But there is a more obscure and essential corollary that fewer people understand…. and that is that there is never enough money in existence in the world at any given point in time to pay the aggregate sum of the total principal and interest on all the world’s debt. Try to wrap your head around that one. This explains the need for continual growth in the economy, the grow or die argument talked about the other day. Money is created by debt. Yet there is never enough money in existence to pay back the current debt. So the money supply must continue expanding, exponentially, to pay back previously accrued debt. How does that money supply expand, exponentially? Through the creation of new debt, exponentially! There it is folks, the bare bones of the insane and inherently unsustainable treadmill we find ourselves upon.
    This mechanism is the motive force behind everything that is wrong with the way we are living, the engine driving our collective binge of self destructive greed and over-consumption, the insidious disease that has corrupted our governments and social institutions, the secret weapon, in plain view, wielded by the few to enslave the many. I guess one obvious question might be…. what, if anything, can we do about it?

    Stuart Davies
    July 11, 2008
    Reply
  6. Unfortunately,
    1. 70% of Americans live from paycheck to paycheck and have no time to listen.
    2. Those who do listen get distracted from the media and the pundits who discredit him.
    3. From the 30% of Americans that understand him, half (15%) don’t want change, the other half (15%) do not have enough power. Note that this is the approx. % that he received in the primaries.

    What we need is for the US to default in all of its obligations and start from scratch. Total catharsis. Utopian no?

    Dimi Basking Ridge NJ
    July 11, 2008
    Reply
  7. We here in the U.S. are going the way of Germany before WWII.

    Reply
  8. Reply to Unpopular Truth;
    While I am an avid fan of Democracy, I believe that with the right dictator, dictatorship can absolutely work. Unfortunately, the right dictator is very very rare. Its a pity, because of the way we could instantly heal the situation, the only problem is complaining people who don’t want to change.

    Reply
  9. […] clearly written and reasoned article by a guy name Ron Paul, written in 2008, and entitled: “Inflation: How We Got Into This Mess“. (Note, this is taken from a website called “The Daily Reckoning – a free […]

    Reply

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