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Aug. 20, 2019 - Ron Paul Liberty Report
18:02
The Terror of Deflation v. The Love of Inflation

Can you imagine the money, that you work so hard for, actually increasing in purchasing power every year? Can you imagine your bills gradually falling over the years, instead of relentlessly rising? Of course you can't! And the reason that you can't is because of the government-created monopoly called The Federal Reserve.

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Understanding Deflation 00:13:32
Thank you for tuning in to the Liberty Report.
Today we're doing this by audio because of our busy schedule this week with our conference at Dulles Airport.
Also today, our co-host is Chris Rossini.
Chris, welcome to the program.
Great to be with you, Dr. Paul.
Very good.
Chris, you and I have talked a whole lot about the economy.
We spend a whole lot of time with the Fed and we talk a lot about inflation.
Today I want to concentrate on just trying to get a better understanding about deflation because it's in the news all the time and everybody's terrified by the word deflation.
And they should be because it is a very dangerous situation.
But when you read the definition of deflation in all the current articles and the dictionary and all, it's always prices are going down.
Prices are going down.
And people don't distinguish the difference between prices going down because of true deflation, which is the shrinkage of the money supply and liquidation of bad debt, but also because prices can go down for good reasons.
So prices going down has to be analyzed.
But I always saw the scare tactics about talking about deflation, how terrible it is.
Look at what Japan has gone through in the last 20, 30 years because they had inflation.
The market was demanding deflation.
They resisted.
They kept inflating.
And they've never really gotten out of the doldrums.
So it's important to know what's going on.
And it's the necessary correction that comes from there's too much inflation.
So it's ironic for the people who are terrified by deflation.
They don't ask the question, why did they have deflation?
Of course, it had to do with the Federal Reserve inflating.
They don't ask that question.
They say, well, it's painful to have deflation.
So therefore, what we have to do is inflate.
And in a period of time when the currency is undergoing destruction, they can get away with that to a degree.
They can give the economy a little boost.
But eventually, how low can you get interest rates down?
Now that they're down near zero, they don't have much room for it.
And they're still terrified of deflation.
And it's almost like, don't give us the correction.
We don't want to hear anything about it because that means we can't inflate.
But I think over the years, today it's serious, but over the years, they'll use the word deflation.
We've got to prevent it.
We've got to prevent it.
And that is the excuse just to pursue the inflation, which is a benefit to the special interest group, to the banks, and to the government, and all the bad things about inflation.
So even, and I'm sure you've noticed, Chris, when we look at a few comments on our website, people will give me a little criticism, say, Dr. Paul, you're doing okay, but you don't understand deflation.
Deflation is horrible.
You can't let this happen.
But I think you have to just understand it.
One of the best examples of the difference between allowing deflation to exist and preventing it was probably the first serious recession depression that we had after we had the Federal Reserve in 1921.
We had a very, very sharp, deep depression.
But back then, they weren't informed by the Keynesians that you got to inflate to prevent that from happening.
So the 1921 depression was a short period of time.
GDP went down sharply, and the treatment was there.
There was liquidation of debt and malinvestment, and it ushered in another age of growth.
So the whole problem is that right now we live in an age where you can't allow the correction to occur.
And there's a lot of nonsense that goes on when they're fighting deflation without even figuring out, well, deflation is related to that monster called inflation.
But they conclude, and I think you've probably noticed this, Chris, it's easy to conclude, inflation is a lot more fun than deflation.
Especially for the government and its many interests.
And inflation is a monster.
And because the Fed was created over 100 years ago, people alive today know nothing less than inflation.
We don't know what it's like for our money to actually increase in purchasing power.
The only thing that we've ever been exposed to is every year prices are going up.
And this is just taking as a force of nature when it really isn't.
This is specifically created by the central bank, the Federal Reserve.
And I think a dollar back in 1913 was worth about 95% more than it is today.
You know, when we see that cheeseburgers were a quarter and now they're $6, that just shows how much the Federal Reserve has destroyed the purchasing power of our money, and they're taking it directly out of our pockets.
It's pure theft.
See, I think inflation is a tool, tool of the banks and government and all the special interests.
And they urge it on, and it's artificial because they believe that if you inflate the currency, you get more wealth, and it represents wealth, which is not true, because that would be simple.
Just print a lot of money and everybody would be wealthy.
But it doesn't happen that way.
But governments always want inflation because there's a temporary help and people feel better about it.
But when it gets out of whack, the market comes in, and the market says that has to be corrected.
Governments nowadays, at least since the 1930s, they were never allowed to sit still and let markets pursue their own rule and liquidate what is bad.
And the things that are bad are bad investments and too much debt.
I think a good example of this is in the student loan program.
How many people think, oh, these student loans have just been great and wonderful?
But when you look at it, we have a $1.6 trillion debt.
We have a lot of people who got lousy education.
Some who got some of this money never graduated.
And yet, there's going to be some liquidation of that debt.
It's never going to be paid off.
Now, some of the Keynesians and the people in government recognize this.
Yeah, they're right about that.
This has to be liquidated.
And that's why we have to have inflation.
The real value of the money goes down, and that gets rid of real debt.
But right now, there's this big argument with the student debt.
What are we going to do with it?
Are we going to just write it off the books?
Or are we going to have the young people get jobs and pay it off?
Well, that's not going to happen.
So the market says the debt will be liquidated one way or the other.
And it's always painful to do this.
Declaring bankruptcy is tough.
But governments usually liquidate debt since they don't want to go through the agony of deflation and shrinking the money supply.
They liquidate debt by forcing and begging and pleading and doing everything to inflate.
Even today, we see that our president is calling on the Fed, and he's pretty good at calling on the Fed to pursue monetary balance.
He wants a whole lot more inflation and a whole lot more prevention of deflation.
So, in economics, conventional economics, all you have to do is watch out for the deflation.
Everybody says, Yeah, inflate, inflate, inflate.
But the whole truth is it doesn't work.
There's no wealth created that way.
Matter of fact, it's negative on wealth.
It eventually destroys the economy, and it destroys, it consumes wealth by diluting the wealth that exists.
And you just pointed out in your opening statement that, you know, what has happened to a dollar?
You know, if you had a dollar, it was worth a dollar, but now it's worth four cents.
So that's what inflation does.
Deflation is, you know, the invisible hand, which people hate because it makes more sense than the wonderful, smart people who manage the money supply.
And yet, one thing good, though, Chris, it's happening right now is people are starting to recognize this.
More people are calling and demanding at least for auto dinner, and more and more conventional people on the business station are talking negatively about the Federal Reserve.
And they are also people thinking, maybe we don't even need central banking.
And that sounds like a good trend.
Absolutely.
And the more people that understand this, the better.
And as I mentioned earlier, we don't know what it's like for prices to gradually fall and our money to increase in value.
But, you know, our ancestors actually did.
Back when there was a gold standard, and there has never been, to my knowledge, a perfect gold standard because governments always get involved.
And as with everything else, they mess it up.
So they messed up the gold standard of the 17 and 1800s.
But back then, even though it was imperfect, money actually increased in value because of, and with increased productivity, prices gradually fell.
So you want to go and work for a dollar, let's say, that buys one hot dog today.
But next year, you want that very same dollar to not only buy one hot dog, but French fries as well.
You want the money that you work for to appreciate, not depreciate.
But, you know, we're outlawed from this.
We have what are called legal tender laws.
They force us to use these dollars.
So not only do they destroy the purchasing power, we can't get out of it.
They force us to use it.
And that just shows how immoral our monetary system is.
You know, and a lot of people talk about deflation and they want to do something about it.
And some are very sincere but misinformed.
But they don't ask the one question.
Of course, they don't ask the question about the definition.
Inflation is the increase in the supply of money, not just when somebody pushes the prices up because they want to make more money and more profit.
But they want to stop the deflation and the negative effects.
Now, you talk about the very positive things that prices falling down and the purchasing power of the dollar going up.
That is 100% different than true deflation.
We did have true deflation in the Depression, and they did everything they could, and that prolonged the Depression.
But if anybody's really interested in trying to prevent this horrible, horrible thing called deflation, you have to prevent the inflation.
The deflation is the natural consequence, the predictable consequence of inflation.
Sometimes it happens quickly.
Sometimes it takes a long time.
Sometimes it makes some people punish some people more than others.
But I was often thinking about what they were doing in the Depression, how silly it was, because that was when they introduced the notion that you weren't allowed to have the liquidation of debt.
And that is when they thought, well, the farmers are the backbone of our economy.
We have to have the farmers do well.
But they had a downturn, and the prices of crops and food started to drop.
And they said, no, we have to bail out the farmers.
We've got to give the farmers what they do.
They have to produce and keep the farmers going, and that will stimulate the whole economy.
The problem was, though, that prices wanted to drop, and they had to fight that, and they had trouble knowing how to do this.
But one thing that they did, well, they wouldn't allow cost of labor to go down and adjust.
And they also thought, well, how do we get food prices up?
Well, that means there's too much stuff out there.
There's too much food.
So what we should do is pile the crops under.
That'll cause a shortage.
The prices will go up.
People will be happier and we'll get over the depression.
I mean, that's the kind of thing that they think about because they don't think about what the true nature is of inflation and deflation.
And, of course, it didn't work, but we've never changed our ways.
Ever since the Depression, we always use the same tools, but it's just gradually gotten worse.
And the steady erosion of the purchasing power of the dollar and this nonsense of negative interest rates is just so bad.
And so all the shouting and demanding from people outside the Fed and in government or in the administration demanding, you have to prevent this from happening.
Print more faster and keep those rates down.
It's just pouring gasoline on the fire.
It's not going to work.
Japan, in a way, tried to do that, but they would never allow the deflation and liquidation to occur.
And they've been in indulgence since 1990, and they're barely limping along, which could have been corrected by just allowing the correction to occur.
The Free Market's Promise 00:04:27
People should think about it more like an individual.
If you're really, really in trouble with debt and you don't see any way out, you might have to declare bankruptcy.
Otherwise, you have to go to work, get another job, and pay off the debt.
But you've got to get rid of the debt because otherwise you can't get new growth again.
Right, Dr. Paul.
And I'll finish coming back to the point that we always harp on, and it's this boils down to philosophy.
I mean, if we want liberty, we have to have sound money.
There's no other choice.
And you never want government to be able to finance itself by counterfeiting.
You want them, if they're going to get any money, let them come and take it from the taxpayers.
But they figured out a way that they will come and take it, but on top of that, they're going to print whatever they want.
That's a recipe for the disaster that we have today.
And they're going to do exactly what they have done.
The U.S. has grown itself to be the biggest government in the history of the world, in debt, unlike any other government that has ever existed.
They ridiculously promise free stuff to everyone.
They ridiculously try to dictate the world and conquer the world.
This is all an outgrowth of a failed philosophy.
And people, they want messianic government, and that's exactly what we have, and we're going to continue to suffer under it as long as people want it.
But if we want liberty, we must have sound money.
Okay, very well said.
And I want to make one point as we close: is that in a free market, in a free society, the way the economy works is that it satisfies and directs their attention to the consumer.
Because labor and business people should be doing their very best to satisfy the consumer at the best price.
And the consumer is going to be attracted, and they will sort it out.
The consumer should be the most powerful individual.
It's the only really democratic system that I like.
I don't like government, pure democracy.
The pure democracy of the marketplace, where everybody who spends a nickel or a dime are voting their satisfaction with the product.
And yet today, it's the special interest.
The consumer is sort of manipulated.
They're a special interest and they get bailouts and privileges, but everybody's worrying about how do we take care of big business?
How do we take care of the stock market?
How do we take care of labor?
What should the labor price be?
Should we raise the minimum wage?
Should we give special benefits here?
And on and on.
But in a true free market, as you so well pointed out, is the purchasing power goes up, prices go down, it serves the consumer.
So with hands-on, that's what would happen.
People would have an increase in their economic well-being by allowing that to happen.
But instead, the politician has to be loved and wanted.
And so, therefore, they will make use of this whole concept that we will terrorize the nation, we'll scare them to death.
The slices whiff of prices dropping, even if it isn't deflation, it'll be an excuse, once again, to solve the problem of running to the Fed and begging and pleading and badgering with the Fed, print, print, print, and get interest rates low.
But once they're down to zero, there's not many other much lower they can go.
So the message we have today is just look carefully at the precise definition of inflation and deflation and not get frightened every time you see prices go down.
Just think about the electronics.
I mean, the prices of electronics, in spite of inflation, the value went down because of productivity.
So it's not nearly as complicated.
The economics that we deal with, especially with the intrusion of socialism and welfarism and all, it's very, very confusing.
But actually, a free market is easily understood if people could just understand that the government should never kowtow to the special interests.
That's where the problems start.
And the people who want the power and money, whether it's in the banking system or the people who are in the military-industrial complex and are allies with the Federal Reserve, that's where the problem comes from.
So my solution would be immediately audit the Fed and then very quickly after that, get rid of the Fed.
And Chris, I want to thank you for being with us today, and I want to thank our audience for joining us.
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