by
Ron Paul

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Before
the United States House of Representatives Committee on Financial
Services, Hearing on ‘Monetary Policy and the State of the Economy,’
2/29/2012

Mr. Chairman,
thank you for holding this hearing on monetary policy and the state
of the economy. I believe that now, more than ever, the American
people want to hold the Federal Reserve accountable for its loose
monetary policy and want full transparency of the Fed’s actions.

While the Fed
has certainly released an unprecedented amount of information on
its activities, there is still much that remains unknown. And every
move towards transparency has been fought against tooth and nail
by the Fed. It took disclosure requirements enacted within the Dodd-Frank
Act to get the Fed to provide data on the its emergency lending
facilities. It took lawsuits filed by Bloomberg and Fox News to
provide data on discount window lending during the worst parts of
the financial crisis. And it will take further concerted action
on the part of Congress, the media, and the public to keep up pressure
on the Fed to remain transparent.

Transparency
is not a panacea, however, as a fully transparent organization is
still capable of engaging in all sorts of mischief, as the Federal
Reserve does on a regular basis. Ironically, one of the Fed’s more
egregious recent actions, adopting an explicit inflation target,
was hailed by many as another wonderful example of transparency.
Yet if you think about what this supposed 2% inflation target actually
is, you realize that it is an explicit policy to devalue the dollar
and reduce its purchasing power. Two percent annual price inflation
means that prices rise 22% within a decade, and nearly 50% within
two decades.

Indeed, if
you look at the performance of the consumer price index (CPI) under
Chairman Bernanke’s tenure, prices have risen at a rate of 2.25%
per year. Many, perhaps even most, economists would consider this
a modest rise, an example of sober, cautious monetary policy. Some
economists of Paul Krugman’s persuasion might even argue that this
is too tight a monetary policy. However, 2.25% is not too far off
from the Fed’s new 2% target.

Now look at
the performance of the US economy since February 1, 2006, the date
Chairman Bernanke took the mantle from Alan Greenspan. Trillions
of dollars have been wasted on bailouts, stimulus packages, and
other feckless spending. Millions of Americans have lost their jobs
and have lost hope of ever regaining employment. The national debt
has risen to more than 100% of GDP, as the federal government continues
to rack up trillion-dollar deficits, aided and abetted by the Fed’s
policies of quantitative easing and zero percent interest rates.
And we are supposed to believe that a 2% inflation rate, similar
to what has prevailed during the worst economic crisis since the
Great Depression, is the cure for what ails this economy.

This explicit
2% target also fails to take into account that whatever measure
is used to determine price inflation, be it CPI, core CPI, PCE,
etc., will always be chosen with an eye towards underreporting the
true rate of inflation and price rises. Pressure will be exerted
on those calculating the price indices, so as not to alarm the public
when prices begin to accelerate. One need only look at what is taking
place in Argentina today, where the government publishes an official
CPI figure that is often less than half that reported by private
sources.

A similar situation
exists in this country, where economists calculating CPI according
to the original basket of goods have determined that price inflation
has increased 9.5% per year since 2006, rather than the 2.25% reported
by the government. Even the government’s own data reports price
rises of nearly 7% per year since 2006 on such consumer goods as
gasoline and eggs. Bread, rice, and ground beef have increased by
nearly 6% per year, while bacon and potatoes have increased nearly
5% per year. This means that in a little over half a decade, prices
on staple consumer goods have increased 30-50%, all while wages
have stagnated and millions of Americans find themselves out of
work and without a paycheck. Of course, government officials claim
that price increases do not affect the average American because
they can always buy hamburger instead of steak, or have cereal instead
of bacon. But the American people can see how they are suffering
because of the Federal Reserve. The government’s claims that the
official statistics show no reason to be concerned about inflation
is Marxist – as in Groucho, who famously said: “Who are you
going to believe, me or your own eyes?”

The
Federal Reserve continues to keep interest rates low in the hopes
of boosting lending and consumption. But keeping interest rates
at zero discourages saving, particularly as the rate of price inflation
continues to rise. Why stick money in a savings account earning
0.05% if it is guaranteed to lose at least 2% of its value every
year? And this is a guarantee, as the Fed has promised a 2% rate
of increase in price inflation, while also guaranteeing a zero percent
federal funds rate through 2014. Retirees living on fixed incomes,
dependent on savings, or on interest income from investments will
see their savings drawn down as they are forced to consume principal.
Young people, hard hit by the recession and struggling to find jobs,
will fail to see the virtue of thrift. Saving or investing is an
exercise in futility, as parking money in the bank or in CDs will
guarantee a loss, while investing in stocks, bonds, or mutual funds
will net at best paltry gains, and at worst massive losses in this
continuing weak economy.

The longer
the Federal Reserve keeps interest rates low and discourages savings
and investment, the more societal attitudes will change from being
future oriented to present oriented. The Federal Reserve and its
policies already served to stimulate and prioritize consumption
over saving, creating the largest debt bubble the world has ever
known. The extended zero interest rate policy only serves to promote
more consumption and debt now, eviscerating thrift and savings –
the true building blocks of prosperity. This present-oriented mindset
has become pervasive especially among politicians, putting the government
in dismal financial shape as Congressmen and Presidents over the
years have taken to heart Louis XV’s famous saying: “Après
moi, le déluge.” If the American people follow the same
path in their own lives, this country will be ruined. Capital will
be depleted, infrastructure will fall into disrepair, and the United
States will be a mere shadow of its former self. It is well past
time to end the failed monetary policy that encourages this mistaken
preference for cheap money now.

See
the Ron Paul File

March
1, 2012

Dr. Ron
Paul is a Republican member of Congress from Texas.

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