We've lived through the illusionary "good times" of the Nasdaq and housing bubbles. They were followed by inevitable and heart-wrenching crises. Well the government and Federal Reserve have created another major bubble in government bonds. Today on Myth-Busters Ron Paul takes a look at how it came to be, what we can expect, and how we can protect ourselves.
Be sure to visit http://www.ronpaullibertyreport.com for more libertarian commentary.
We've lived through the illusionary "good times" of the Nasdaq and housing bubbles. They were followed by inevitable and heart-wrenching crises. Well the government and Federal Reserve have created another major bubble in government bonds. Today on Myth-Busters Ron Paul takes a look at how it came to be, what we can expect, and how we can protect ourselves.
Be sure to visit http://www.ronpaullibertyreport.com for more libertarian commentary.
Hello, everybody, and thank you for tuning in to the Ron Paul Liberty Report.
Today's the day we do the program called Mythbusters, and the co-host is Chris Rossini.
Chris is also the editor of the Ron Paul LibertyReport.com.
Chris, nice to have you with us today.
Good morning, Dr. Paul.
Great to be with you again.
Well, good.
I understand we have a few myths about the budget and bonds and that sort of thing that we want to talk about today.
Yes, we're actually going to be talking about another bubble.
I mean, we've covered in previous episodes the stock market bubble and the housing bubble.
Now we're going to talk about a real big one.
That's government bonds.
So, Dr. Paul, if you could just get started, we'll start with the basics on government bonds.
If you could talk about how government bonds affect the economy when they siphon resources, when we give money to the government away from private entrepreneurs, and also the morality of lending money to government that must be paid by future generations with their taxation.
Is that moral?
Yeah.
The question is moral.
The other question is, is it reasonable or sensible?
But anyway, the real myth of dealing with government debt is the fact that we have been told by a lot of people in our economic classes and in the media and in government that you shouldn't worry about the debt.
The debt is good because it's useful to manage the economy and manage the monetary system.
So they think debt is very good and they don't worry about it.
A few of us still worry a little bit about the debt, especially when it's $20 trillion and growing exponentially and nobody has any desire to cut back on it.
But the basic problem is that the role for government that we're working with today is that the government is supposed to take care of us from cradle to grave and fight wars endlessly and be the policemen of the world.
So this role for government has been endorsed by the people and still is to a large degree, which means there has to be a lot of spending.
But generally speaking, most people think, well, if the government's spending a lot of money, you have to raise the taxes.
So is this a problem that we have debt and we have to borrow money?
Is this a problem that we don't have taxes high enough and then we could balance the budget?
Or is it too much spending?
And I think most listeners to this program would say, we come down the side and it's too much spending.
But you know, the way I see this is when government spends the money and they don't have enough money, they do several things.
One is there's a pressure on to raise taxes, but that's not as popular.
But the next thing is, is to issue bonds, and the Treasury can issue bonds and put them out in the market, and a lot of people will buy these bonds.
Not so much the average investor anymore because they don't make a whole lot of sense.
And why buy bonds short or long and eventually essentially not earn any interest?
So this then causes the government then to find other people that will actually buy these bonds.
But then if they create new money to buy it and the Fed facilitates this, all it does is raise the price of the bond.
When the price of the bond goes up, the interest rates go down.
When the interest rates are zero, the price is very high.
So if a bond is zero rate of interest and it's a $100 bond, you have to pay $100 for it.
But if it's a year, two, or three, you get your $100 back and no interest, but that $100 is going to buy less.
So it's a ridiculous economic policy.
It's all geared to facilitating big government, you know, that they can keep doing this.
The amazing thing is that it keeps working.
But as you indicated in your question, doesn't this take something from the economy and put it in the hands of the government?
Absolutely, it does.
And it interferes.
I think there are two mistakes here.
First, when they take it from the economy, and if we weren't inflating, it would still be a problem because it's taking real assets from the economy.
And people who want to do productive things take it away.
So let's say that there's still enough inflation for the business community to invest and do some business.
Why should this be so bad?
Well, it is still a drain, one way or the other.
It might be just through the inflationary forces and other things.
But the other thing is, is taking wealth and productive efforts away from the people means that the government will be spending the money.
Now the government's spending 40% of the money.
And that's a double burden.
So I think the people get hit twice.
Once they take the money and once when the government spends.
If the government took the money and burned it, we would be better off than for them to spend it because what do they do?
They fight wars.
They create dependency.
They create weak economies.
They create all these rules and laws that destroy our economy, so through regulation.
But it is the process of debt.
It starts with the idea that debt is not to be worried about.
And we hear this from the Keynesians.
We hear it from the Paul Krugmans, that debt is actually a benefit.
And one of the worst things is that in the old days when, and what the founders intended, that if you issued a currency, a paper currency, it would have to be redeemable in something.
So if you had silver in the bank, you could issue a silver certificate or a gold certificate.
Then we drifted away from it.
We went down to 40%.
And then finally, when we had the Bretton Woods in 44, we took away the gold from the American people, but not from foreigners.
And then, you know, in 71, that all disappeared.
Eventually that broke down too.
But what they do is they take these bonds and they literally monetize the bond.
So if you have a paper currency, they say, oh, yeah, it's backed up by something.
It's backed up by government debt.
And so people get conditioned to think, well, government debt is good because you can print more money.
This stimulates the economy and the economy grows.
Well, you know, they concoct these weird theories.
And if they work accidentally on a short run, right now it doesn't work.
Or we would have had a tremendous boom, you know, by having more government debt in these last six, eight years, and it hasn't produced.
So the real culprit is the debt itself and the principle of government.
And it's very detrimental to the economy for these various reasons that we just mentioned.
Yes, I have to agree with you on the conditioning.
I mean, many people are under the impression that they have an illusion of safety with government bonds, that it's backed up by the full faith and credit of the U.S. government.
And that's a bad institution to put your faith into.
But the other institution that has a big role in this, in creating the bubble, is the Federal Reserve.
They created the stock market bubble, the housing bubble.
So please now talk about the Fed's role in creating the bond bubble.
Well, the Federal Reserve is responsible for all bubbles.
Not all the ups and downs and fluctuations in a free market.
Prices go up, prices go down, increased supply and supply and demand.
There's a little bit of that that goes on.
But when you see economies boom and then go into a bus cycle, this is all central banking's fault because what they do is they create low credit.
Now, I want to put up a chart, a chart that has been produced many times, and it reflects what the Fed thought they had to do for the crisis that we had in 08 and 09 because what they resorted to, and they thought the solution would be, you know, just massive inflation, which means massive injection of funds.
And on this chart, you can see where the darker line there, that was the recession of 08 and 09.
And you can see that the monetary base was around 800, and because up over 42, it was like five times the increase in all those years.
And they keep still hoping and wishing that there's going to be economic growth.
And every once in a while they come up, even like today, they said, well, there's economic growth.
There were new jobs today.
But they didn't mention that they were bureaucratic jobs, low-paying jobs, Obamacare jobs, and industrial jobs.
And consumer jobs didn't go up at all today.
So there's a gross distortion of what happens.
But the bubble is created by the Fed, lowering interest rates, causing business people to lose the most important signal to them, to know when to go into production and build new plants and expand.
It should be done when people are not spending as much and they're saving the money and get the interest rates down.
And the businessman says, you know, interest rates are down from 3 to 3%.
They used to be 4.5%.
I think this is the time for me to borrow and go into some productive capacity.
But what happens if the interest rates not only go to 3, but to 2, to 1, and the businessman, wow, look at this.
You know, this is the time for me to do something.
And then the money, it's unpredictable where it will go.
If it would all keep going into production, it'd be fine.
But it doesn't work that way because you can produce and nobody wants your products.
So it's gross distortion.
But the money has to go somewhere.
And they keep saying, well, we want it to go into consumers where the consumers will spend and raise the interest, raise the inflation rate.
We run the inflation rate at 2%, assuming that prices going up is a sign that the economy is good, which doesn't make any sense whatsoever.
So they keep working on that.
The one thing that happens is when the Fed increases the supply of money and lowers interest rates, they can do that.
On some occasions, on milder recessions and things, sometimes they would get us out of recession.
They never get blamed over the years for the recession and the bust, but they get a little bit of credit for saying, oh, yes, we make times good, but we never cause harm.
But the truth is, they have no idea where the money is going to go.
They can create money, but they don't know whether the people will take it and buy, invest it with it, or whether they're going to pay off debt or just what they will do, or will they push up prices?
The bubbles that you talk about, like the financiers, the people in Wall Street took the credit back at the end of the last century and pumped it all into the NASDAQ bubble.
Then, as the first decade occurred in this century, it went into housing, gross distortion because there was money to be made on the quick, never admitting the fact that all these busts have to lend badly.
And I think this is what we're facing today, that the bubbles are there, they're numerous, they're bigger than ever.
The dollar bubble is world, it's a worldwide phenomenon.
There's gross distortion.
Everybody's racing to have zero interest rates, and it just can't work.
It can pacify some people for a while.
It can make the bubble get bigger.
People can be reassured, but less so than ever before.
Because I think if people get confused about all the statistics the government gives us and distorts, they ought to look at the anger factor.
How many people are angry and upset with the conditions in this country today?
Not only the social conditions, because that's secondary to the economic conditions.
There's a lot of people very unhappy.
Just take the young people who owe so much money for going to college and getting degrees that aren't worth much and for jobs that don't exist.
And they're very, very annoyed.
And the parents are probably annoyed too because they're in hockey for spending all this money.
So that figure of who's unhappy with their economic conditions, which very often leads to the social unrest in the inner city because conditions get worse and the poor get poorer.
So I think this is the problem that has to be resolved.
But I think this is something that we can resolve, of course, as soon as we come to our senses and decide the government has to shrink.
But government can't shrink unless the people change their minds and lose confidence that just spending money, running up the debt, and printing the money is the solution to the problem.
What makes the correction and what happens?
Well, all the bubbles have to end badly.
There has to be a bursting of the bubbles.
And we've had it.
We've mentioned the NASDAQ bubble and the housing bubble, but now the bond bubble is going to burst too.
And I look at this when this happens, it is going to be a calamity.
And for me, I look at it like there's going to be a flock of black swans who will come.
Not just one thing that happens, but there will be so many things around the world.
And that is going to be horrendous.
If interest rates go up 1%, it's estimated that there will be $2.4 trillion in losses.
And you could have interest rates go up 1% in a day under certain circumstances.
What if it goes up 2%?
I mean, it is so huge.
And this is why the Fed and the world money managers are so desperate, you know, to try to keep this thing going, but they're going to be unable to keep it going.
But we already see signs that people are worried about that because they're going into real assets.
Gold has been generally strong over the last several years.
Hard assets are being advised by a lot of conventional investors.
And even though the stock market is still up there, there's people getting very nervous.
Some of the traders that have been around a while are getting very nervous and antsy about the stock market because I think there's going to be the bursting of this bubble and there has to be the retraction and the elimination.
This is the purpose for this, is to make the correction.
The people don't insist on government spending less and getting us out of this mess, but the market is very, very punishing and very demanding.
There's a limit to the debt, and debt has to unwind.
Debt generally is built on pyramiding of debt and fractional reserve banking.
And once that is reversed, you have to reverse the whole principle of the building and the inflating of the bubble.
And I think that is what we're facing today.
We're facing that, and it's coming, and it's a very precarious situation which we're facing.
Finally, Dr. Paul, let's talk about how we can protect ourselves from this ultimate calamity that's in the future.
Skills Over Debt00:01:44
What advice would you have to those who have loaned money to the government?
And what can they expect in the future?
What do you think they should do?
Well, I wish there were an easy answer for that, but we have to do something.
Doing nothing isn't going to be helpful.
But I start with what we should do, especially when I talk to the young people who are trying to figure out how they're going to run their finances for the rest of their lives.
And one thing that I practiced over the years is I went twofold.
One was I invested time and money and energy into education in order to try to preserve and protect our liberties.
Because I'm convinced that as messy as this is and as bad as it is and how devastating it could be, If we have our liberties, we can solve our problems.
If we just get, if all the debt was liquidated in one day and we all were broke, but we had our liberty and we could go back to work and work with sound principles, believe me, we would get over this rather quickly.
So I think that's one thing that we can do.
But people ought to have cash around to take care of their interest.
You should be spending and putting some of the money in gold and silver coins.
And you should be getting prepared.
I think a little bit of land is very important.
I think having a skill is important.
If times get very bad, if you have a skill, you can be finding work.
And today it's all kinds of skills.
It used to be carpenters and mechanics and all, but now it's in computers, repairing computers and all these things.
So there's a lot of having a skill is very, very important.
It can be solved, but ultimately, the solution is the protection of liberty.
And that, of course, has been the goal that we've been seeking for so long.
And I want to thank you, Chris, for being with us today.