Ron Paul warned us in the early debates, “We have lived beyond our means for too long, now we will be destined to live beneath our means”. We will see our prosperity dwindle, inflation erode our savings, heavier taxation and regulation hinders creation of new wealth and more government control of our lives in education, healthcare and everyday privacy.

March 26, 2008 10:37AM

Time to Listen to Ron Paul?

By Elizabeth MacDonald Fox Business News

Time to listen to Texas Congressman Ron Paul, the lone voice of reason in Congress today who’s got to feel like he’s shouting into a field of cotton with his repeated warnings about the dangers of a collapsing dollar, while the administration goes AWOL on the problem.

The dollar just hit a record intraday low against the euro on reports that consumer confidence levels have dropped to levels not seen since the post-Watergate era. It is down 7% year to date against the Chinese renminbi, it’s weaker than the Japanese yen and the Canadian loonie.

The joke is the greenback is now only stronger than the Mexican pesos and the Zimbabwe dollar, an overstatement for dramatic effect, to be sure.But since hitting a peak in 2002, the dollar has lost about a quarter of its value against a trade weighted basket of currencies.

A weak dollar acts as an anvil around the neck of the US economy and consumers. Rising inflation is essentially a tax on consumers, so are rising energy prices, and that double whammy threatens to undermine the purchasing power of the rebate checks due out in May–backed by printing even more dollars.

A bellwether event of significant import to our nation’s finances happened this past January 1 with little notice. That’s the day the first baby boomer was allowed to retire. A new federal report wearily warns once again for the umpteenth time that the nation faces some $60t in Social Security and Medicare unfunded liabilities alone.

We’ve heard time and again conservatives say deficits don’t matter. To say that deficits don’t matter is like saying ketchup is a vegetable or trees cause pollution.

The $406b we pay annually in interest on the $9t in federal debt alone would rank as the world’s 30th biggest economy.

That annual interest cost surpasses the gross domestic product of Belgium, and is bigger than the GDP of Denmark and Hungary combined. The $406b would cover the annual cost of investigating Medicare fraud.

Stack all those one dollar bills making up our $9t deficit (and that doesn’t include the $60t in unfunded liabilities for Medicare and Social Security) and you would reach the moon and back. “Printing money cannot create wealth, if it could counterfeiting would be legal,” economist Brian Wesbury has said.

Even Milton Friedman, the Nobel Prize-winning economist and a forceful advocate for laissez-faire economics, got so sick of the way central bankers were willy nilly printing money in the ‘70s, he advocated that the government should replace the Federal Reserve with a computer. “Money is too important to be left to central bankers,” he quipped.

Broad zoom: The US economy has spent all of a year and four months in a downturn over the last two and a half decades. During that time we’ve seen a market crash of 22% in 1987, the S&L crisis, four wars, three financial crises (Mexico, Asian flu and Russian debt crises), the blow up of the hedge fund Long Term Capital, two asset bubbles (dot com and telecom). Since the Bush tax cuts of 2003, the US economy added the equivalent of China’s GDP–and government spending has boomed.

Now Federal Reserve chairman Ben Bernanke has both cut rates at a breakneck speed and pumped a massive amount of monetary stimulus into the markets to cure the credit crisis. I still think he is doing his level best to fix a crisis not entirely of his own making. The question now is, will Bernanke yank the liquidity punch bowl when the economy returns to trend growth in 2010 or 2011 as the central bank projects?

Let’s hope so, because the case for a weak dollar is, to me, well, weak. Namely, that a lame greenback softens the housing and credit crises as it fuels profits at US exporters whose goods are now dirt cheap in the eyes of foreign customers. Strong foreign sales at places like Boeing and Caterpillar reportedly added 1.4% to US growth in the second quarter of 2007. But exports make up just 13% of GDP. Consumers make up a larger 70%.

It’s no surprise consumer confidence is as weak as it was in the ’70s. LBJ had promised this country it could have both guns and butter in the ‘60s, so the Federal Reserve gunned the printing presses to pay for spending on entitlement programs and for the Vietnam war. For the first time, too, politicians got their mitts on taxpayers’ Social Security funds, after Democrats passed a so-called “unified budget” in the late ‘60s.

All that spending caused the dollar to nosedive in the 1970s amidst an oil embargo that sent oil costs, priced in dollars, soaring. Paul Volcker, then Fed chairman, enacted rapid rate hikes hitting 21% by 1979, and the Treasury went so far as to sell $6.4b in “Carter bonds,” largely denominated in Deutschemarks, to prop up the dollar. Gold got ripped off its mooring of an average $35 an ounce in the ‘70s, and in 1980 it hit a record $835 an ounce, around $2,250 in today’s prices.

Gold acts as a dew line for inflation. We essentially have a good handle on how much gold there is in the world and potentially below ground. When gold rises in price, it signals we are printing too many dollars, which indicates a concurrent drop in the greenback’s value. Over the last seven years, gold and oil prices have risen in lockstep, up 239% and 267% respectively. If the dollar had also risen in value at the same rate, oil would be selling at about $30 a barrel.

But now central bankers say that because of the weak dollar, they’ve seen capital losses carved out of an estimated $12t worth of dollars they hold in foreign currency reserves. The fear is they may unload their $12t in greenbacks en masse to cut their losses and run–which would really tip the US into a protracted recession. Already reports out of China show government officials there willing to rotate future planned investments out of US treasurys into other investments.

Countries pegged to the dollar are rightly saying, too, that we are exporting inflation to their shores. Saudi Arabia is a land that has had nearly zero inflation since 1998, but recently inflation soared to 7% annually, despite the fact the country is flush with petrodollars.

Congressman Paul rightfully warns us when he says the US government has “systematically undermined” the US dollar by expanding “the money supply at will for financing war or manipulating the economy with little resistance from Congress–while benefiting the special interests that influence government.”

It’s not just the US gunning the mints. Goldman Sachs figures that three-fifths of the world’s broad money supply growth came from emerging economies over the past year or so. Three-fifths. That’s gigantic.

Goldman Sachs says the growth in Russia’s M3 measure of broad money grew 51% over the last year or so, India by 24%, and by 20% in China, Saudi Arabia, South Africa and Brazil. That’s three times as fast as the US and the rest of the developed world, and it’s faster than their GDP growth rates. It’s the fastest pace in decades.

All that loose money is pouring into commodities, stock exchanges around the planet as well as bond markets–it’s largely why our long-term bond yields have been historically low, spurring a dramatic increase in mortgage borrowing, as mortgage rates typically track the 10-year Treasury note.

Watch out here–emerging economies are just as susceptible to minting lots of money due to political pressures, including things like paying for wars, or calming local populations clamoring for higher pay and more jobs.

What can be done stateside?

The administration needs to state more emphatically that it supports a strong dollar. A stronger dollar would draw liquidity back into the credit markets, lower inflation risks, cut oil prices and restart economic growth, notes Bear Stearns economist David Malpass.

Presidential candidates vilify NAFTA and free trade, when the weak dollar is partly to blame for problems like jobs lost to overseas operations, Malpass adds.

“Empires fail because they run out of money, or more accurately, run out of the ability to spend or inflate,” Congressman Paul warns. “We need to control spending, immediately, before it is too late.”

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I must discuss why it is so important why Ron Paul continues this fight. There is a threat much greater than global warming, terrorism, education, drugs…etc.  It is simply the bankruptcy of this great nation.  I stopped by the monthly meeting of Securities Traders and Analyst forum. This is a invite only meeting of the best minds in economics and investing from across the globe. I happen to know a member of this semi-elite group and I get to sit along the wall and listen. Here are some quick minutes of this meeting.

The economic forecast for America is dark. Goldman Sachs announced they believe we are in a recession and it wont be easy. The American economy is in a perfect storm for a severe economic crisis. I will try to summarize. 70% of the US GDP is now consumer spending, NOT creating wealth and services. The forthcoming credit crisis and liquidity issues will put this economic tiger to sleep. They forecast inflation to rise sharply in 2008, possibly seeing hyper-inflation by 4th qtr. 2008. A continuing falling dollar and a ever increasing tax burden will nearly crush the poor and middle class. Then throw in $60 trillion in government debt due in the next 20 years.  Point is we CANT afford more government entitlements, that means universal health care, no more tax cuts unless you have deep cuts in spending and certainly cant afford a world empire with 700 bases in 130 countries. No more WARS!!

With a consumer savings rate at negative, a tightening credit market and inflation eating up incomes our precious consumer economy will fall. If consumers can no longer spend at will and food, shelter and energy become more important than shopping at Wal-Mart, this will further throw this country into a recession. Only difference it will be include INFLATION. why…because the Federal Reserve has been pumping trillions of dollars into the money supply while keeping below market interest rates. They have done this to soften all the previous bubbles and to keep America fighting needless wars.

This economic panel were discussing trends that they have never seen in the global economy. Just before christmas the central banks of US, Europe and Britain pumped more than $600 billion into the banking system. This was a signal that something very serious was about to happen. A central bank never should add so much liquidity except during a depression period. All the while inflation is hitting new highs in Europe, Japan and now America. Then tack on all the deficit spending by the federal government. No wonder the dollar is crashing. Trade deficits are still ballooning. Just announced today new record trade deficits. And this is after the media pundits tell us dont worry about it,falling dollar will help exports…40% of American made goods use imported pieces. Yes, as the dollar falls so does your purchasing power and dollar value investments. So if you own mutual funds, IRA’s CD’s any non hard asset, your losing your savings.

Muriel Siebert was in attendance, she was the first women to receive a seat on the exchange and was the New York State Superintendent of Banking (Fed Chairman of NYS). She mentioned the seriousness of what is to come. She discussed her meeting with the Citibank board of directors very recently and she summed it up as they are SCARED, not concerned or worried, but SCARED.

The federal government can not input any stimulus, nor can the Fed. Hands are tied. Unfortunately they continue to try and it will make matters worse. Of course they will do what is necessary during a election year, but it is unsustainable. The more money the Fed prints, the more the dollar crashes. The more the government borrows, higher the interest rates. Its a one-two punch. Just wait, we will soon experience higher prices and higher interest rates and no credit.

Ok, this is what we can expect on our door step. Im including two short clips in above post, one of the with Glenn Beck with the GAO about the $60 trillion in government debt that we can not grow out of and will require all of us to pay tax rates of nearly 70%. because of the above financial crisis, we wont be able to borrow, even from the chinese and the Fed cant print more money. With $60 trillion due in 20 years…..its over…future generations are screwed..heck were screwed….the only option is the road to serfdom.

 There may be hope, because no matter what, even if we fall and can no longer buy crap from china and fill our homes with “stuff” and we end in a financial gutter. At least we have what out founders gave us…Liberty and Freedom.

Now even these are being stolen from us. With legislation such as the Patriot Act, Military Commissions Act and now HR 1955 are slowly eroding the Bill of Rights and the US Constitution.  Gone Will be our economic freedoms, so will our political freedoms vanish in the new world. They can take our money, but to take our freedom is a call for a revolution.

We are seriously leaving a poorer, less free America for future generations. When do we wake up and realize life is not just about “me or I” It is time to return to the hope and promise that was laid down by our founders. We can no longer allow us to be ruled by a few elite on a hill. We the People must take back OUR country.

please watch the video on the financial crisis and the video on HR 1955.  side note, what ever your opinions on 911, focus on the affects of HR 1955 and its implications on all our rights. I personally do not agree with the 911 conspiracy, certainly not to the extent that it was a “inside job” perhaps a post on 911 at a later time. Trust me, there are far more important issues at hand.

ive been a fiscal conservative for all my life, as long as i know. the last few years ive been mentioning (not warning) how we can not maintain our current monetary and fiscal policies. it is simply unsustainable. past 6-9 months ive been turning the heat up and pushing the threat level to warning. point is we are heading for serious trouble. who ever is President come November 2008 will play part in a global financial meltdown. I have to admit, even if its Ron Paul. only difference, he knows why and how we got here and what will need to be done. Im going to include some insight from Bill Fleckenstein a MSN Money columnist. Please stop listening to main stream media financial reporting, its more entertainment than fact.

 He writes: “The global credit bubble is bursting. This bubble is primarily leverage financing for owning risky assets. The people who were responsible for what happened played with other people’s money, marketed arcane financial products with false promises of fat profits, but stuffed their own pockets with big bonuses. Neither these masters of the universe nor their greedy but naive investors deserve to be bailed out. They deserve what is coming to them.

“Markets have been taking more risk than they should because they believe that central banks will come to their aid during times of crisis, like now. The penchant of Alan Greenspan, former U.S. Federal Reserve chairman, to flood the market with liquidity during financial instability is the genesis of this ‘central bank put.’ As long as this expectation remains, financial bubbles will occur again and again. Now is the time to act. Let the crooks go bankrupt. Central banks should bury the Greenspan ‘put’ for good.”

Rather than being a liquidity crisis like the 1998 failure of Long-Term Capital Management — which was more like a run on the bank and was stemmed by the powers that be — Roubini describes the current situation as a “liquidity crisis that signals a more fundamental debt, credit and insolvency crisis among many economic agents in the U.S. and global economy.”

“We are indeed at a ‘Minsky Moment‘ and this recent financial turmoil is the beginning of a much more serious and protracted U.S. and global credit crunch. The risks of a systemic crisis are rising: Liquidity injections and lender-of-last-resort bailout of insolvent borrowers — however necessary and unavoidable during a liquidity panic — will not work; they will only postpone and exacerbate the eventual and unavoidable insolvencies.”

That is the danger that’s been created by the government talking about bailing out the housing market: A multitude of people decide to join the party and not pay. This is a slippery slope we’ve been going down for a long time, and it looks at long last like the problem will be too big to bail out. Bottom line: The dislocation and pain are starting to be felt throughout the financial system. We are headed to a lot of financial turmoil, and there’s no getting around that.

Could the fall of Rome hit home?

Lastly, in a sad commentary about where we are as a country, U.S. Comptroller General David Walker was quoted Tuesday (also in the Financial Times), as follows: “Drawing parallels with the end of the Roman empire, Mr. Walker warned there were ‘striking similarities’ between America’s current situation and the factors that brought down Rome, including ‘declining moral values and political civility at home, an overconfident and overextended military in foreign lands, and fiscal irresponsibility by the central government.’ ”

Unfortunately, it seems to me that he is dead right.