May 23, 2024

Ron Paul Blames Destructive Fed Policies For Housing Crash And Economic Bust

Ron Paul explains better than anyone else the destructive economic forces unleashed by Federal Reserve monetary policies.  According to Paul,  loose monetary policies and manipulation of interest rates has caused “every single boom and bust that has occured in this country since the bank’s creation in 1913.”

In a Wall Street Journal editorial, Ron Paul explains exactly how the Fed has wrecked the economy, why they are clueless for the reasons behind their failures and why further Fed actions will only further exacerbate the problems caused by the Fed in the first place.

Adding new money increases the supply of money, making the price of money over time—the interest rate—lower than the market would make it. These lower interest rates affect the allocation of resources, causing capital to be malinvested throughout the economy. So certain projects and ventures that appear profitable when funded at artificially low interest rates are not in fact the best use of those resources.

Eventually, the economic boom created by the Fed’s actions is found to be unsustainable, and the bust ensues as this malinvested capital manifests itself in a surplus of capital goods, inventory overhangs, etc. Until these misdirected resources are put to a more productive use—the uses the free market actually desires—the economy stagnates.

Yet policy makers at the Federal Reserve still fail to understand the causes of our most recent financial crisis. So they find themselves unable to come up with an adequate solution.

The Fed fails to grasp that an interest rate is a price—the price of time—and that attempting to manipulate that price is as destructive as any other government price control. It fails to see that the price of housing was artificially inflated through the Fed’s monetary pumping during the early 2000s, and that the only way to restore soundness to the housing sector is to allow prices to return to sustainable market levels. Instead, the Fed’s actions have had one aim—to keep prices elevated at bubble levels—thus ensuring that bad debt remains on the books and failing firms remain in business, albatrosses around the market’s neck.

If the Fed would stop intervening and distorting the market, and would allow the functioning of a truly free market that deals with profit and loss, our economy could recover. The continued existence of an organization that can create trillions of dollars out of thin air to purchase financial assets and prop up a fundamentally insolvent banking system is a black mark on an economy that professes to be free.

Fed policies have pushed the U.S. and global economies to the precipice of a full blown depression.  What are the odds that they  reverse course and follow Ron Paul’s recommendations?  Zero, in my opinion.  Bernanke still believes in the fantasy illusion that creating more dollars at zero interest rates will somehow ignite economic growth.  The Fed blindly ignores the fact that in all of recorded human history, once great powers that incurred massive debt loads have all failed.

Ron Paul concludes that the Fed will continue its self defeating policies because of  the pressure to “just do something”.  And right on cue, former Federal Reserve Vice Chairman Alan Blinder recommends (in his own concurrent Journal editorial) that the U.S. government needs to incur whatever amount of debt is necessary to cure the housing crisis.  Blinder’s idiotic recommendation comes on the heels of previous failed and costly housing programs that cost billions and futher delayed the recovery in housing by keeping unqualified homeowners in homes they can’t afford to be in.

Here’s Blinder’s advice on How to Clean Up The Housing Mess, which is the exact opposite of Ron Paul’s free market solutions.

Given the huge magnitude of the aggregate gap between house values and mortgage balances, a comprehensive anti-foreclosure solution requires hundreds of billions of dollars.

So what can be done now? There is no silver bullet; we need different remedies for different types of (actual or prospective) foreclosures. And to succeed, we must overcome the three barriers. Foreclosure mitigation is expensive. It will encounter political resistance. It probably requires bending some property rights.

Blinder’s new spending plans and previous similar ones have cost the Government trillions, tremendously debased the dollar and accomplished nothing except to make the case for owning gold even more compelling.


You Know Paper Currencies Are In Trouble When Investors Flock To The “Safety” Of The Yen

Investors in paper currencies are running out of safe havens.  As Europe totters on the brink of a debt implosion and the Dow routinely plunges 1,000 points every other week, holders of paper wealth are desperately searching for a store of stable value.

Ironically, the two currencies viewed as the least risky are the Japanese yen (issued by the country with the highest debt/GDP ratio in the world) and the U.S. dollar (issued by the country with the largest amount of debt in the world).

Investors in U.S. dollars remain forever at risk to the Fed’s policies of dollar debasement and money printing, but to seek safe haven in the yen seems like an even more foolhardy proposition.  Consider It’s 1987 Without the Bubble In Japan for insights into the fundamental weakness of the economy backing the paper yen.

Japan’s labor force shrank last month to its smallest size since October 1987, when the nation’s stock-market benchmark was 185 percent higher and land prices were 85 percent greater than today.

Employers cut payrolls by 160,000 and a further 200,000 workers retired or abandoned efforts to find a job, leaving the seasonally adjusted number of employed at 59.4 million, the statistics bureau said today in Tokyo. Separate figures showed industrial production rose 0.8 percent from the previous month, less than all but three of 28 forecasts in a Bloomberg survey.

The data deepen concern that Japan’s recovery from the March earthquake will be stunted by manufacturers shifting operations abroad because of gains in the yen, a deterioration in consumer confidence and prospects for higher taxes at home. The challenges add to the burden of an economy already beset by a shrinking and aging population.

The yen traded at 76.59 as of 12:11 p.m. in Tokyo, less than 1 percent from the post-World War II record high of 75.95 on Aug. 19. The Nikkei 225 Stock Average was little changed at 8,723.12, compared with the peak of 38,915.87 when it closed out 1989, capping a four-year run when it soared almost 200 percent.

Japan has been in a contained depression for two decades, propped up by massive deficit spending and BOJ money printing.  A double dip world recession will send Japan’s economy into a nosedive since exports account for 15% of GDP.

In order for Japan to service its crushing debt burden, they need rapid economic growth and and a large expansion of their labor force.  Will this happen?  In a word, no.  The world economy has been in a downward spiral since 2007  and massive stimulus efforts by governments and central banks have failed to contain the ongoing depression.  Making matters even worse for Japan is the fact that the Japanese are slowly exterminating themselves.  The birth rate in Japan has been plunging since the early 1970’s and has now gone negative.  An economy with a dwindling labor force and an aging population has little hope of servicing a massive debt burden.

Japan population growth: Courtesy


The appreciation of the yen is forcing Japanese companies to fire domestic employees and move operations overseas in order to remain competitive.   The Japanese government has intervened numerous times in the currency markets, trying to force the yen lower without success.  Despite the weak fundamentals of the Japanese economy and a suffocating level of debt, the yen continues to appreciate, suggesting that investors perceive other currencies to be riskier than the yen.   The yen has gained the dubious distinction of being the cleanest shirt in the dirty laundry.


Yen - courtesy

There is no way of predicting how long the value of the paper yen can defy economic reality.  Markets will eventually price to fundamental values and investors will question the value of all paper currencies.  At this point, gold will rightfully be perceived as the only currency with real value.  What price level gold will soar to during the chaos of collapsing currencies cannot be predicted – what can be predicted is that holders of gold will be the only ones left holding a currency with any value.





How Would Gold Perform In A Full Blown Depression?

“We need to do massive stimulus, otherwise there’s going to be another Great Depression.  Things are getting worse, and the big difference between now and a few years ago is that this time around we’re running out of policy bullets.”  – Professor Nouriel Roubini

As the global financial system lurches towards financial Armageddon, would a safe haven asset such as gold maintain its value in a severe depression?

This and other questions were addressed in a Barron’s interview with Martin Murenbeeld, chief economist for Canada’s DundeeWealth, an asset management firm.  Murenbeeld has held senior positions with various gold mining firms for 40 years and turned bullish on gold in 2001.

In response to questions from Barron’s, Mr. Murenbeeld provided the following insights on the gold market and where he thinks prices are headed.

-Murenbeeld told Barron’s that the recent surge in gold prices was related to investor worries over impaired sovereign balance sheets, monetary reflation, global financial instability and strong demand for physical gold from Asia.  In addition, global gold production has barely increased.  Murenbeeld sees an average gold price of $2,200 in 2012 and only a 10% chance that gold will pull back to the $1,500 range.

-The current gold bull market could last another 10 years due to expanded Asian demand and unprecedented adverse financial conditions in the world economy.  Murenbeeld says history “has shown that gold prices…go through very long cycles.”  The last gold bull market of the early 1980’s was one of the shortest on record.

-Regarding the current disconnect between gold bullion and gold stocks, Murenbeeld notes that during times of severe financial stress, bullion outperforms gold stocks since investors avoid equity issues in general.  Over the long term, however, gold stocks have outperformed bullion.

-If the world enters a major depression, gold prices would likely drop since “demand for everything falls off.”  Murenbeeld notes, however, that monetary response to a depression would be fast and aggressive which would quickly propel gold prices higher.

-Murenbeeld says that current demand for gold in “unprecedented” and due to Federal Reserve policies, the introduction of gold ETFs and huge demand for physical gold by billions of consumers in Asia.

-In response to how world governments will deal with the current severe financial problems, Murenbeeld said “during my working life the risk of monetary debasement – the outright printing of money supply in the developed countries has never been higher.  Thus, we see the unprecedented interest in gold…Most likely governments will meet the bulk of their debt obligations with currency devaluations and the monetizing of debt”.

-As far as the possibility that investors will lose interest in gold, Murenbeeld says that could happen if “confidence in monetary and fiscal policies is restored”.   (Not much chance of that happening any time soon in this writer’s opinion.)

Ultimate Price Of Gold Will Shock The World As Loss Of Global Confidence Leads To Economic Collapse

Gold had another stellar week while stock markets gyrated wildly.   As measured by the closing London PM Fix Price, gold gained $77.25 on the week, hitting all time highs and closing at $1,736.   After the London close, gold recovered from an earlier pullback and closed in New York trading at $1,747.30, up $11.30 from the London close.

Silver ending the week down slightly at $38.29 while platinum gained $91 to $1,800 and palladium edged up $5 to $747.

Gold has gained $253 or 17% since July 1st when it closed at $1,483.00.  The rapid price gains have pushed gold above its long term trend line.  Gold is now trading at $290 (or 20%) above its 200 day moving average.  On previous occasions in late 2009 and the fall of 2010 gold also traded more than $200 dollars above the 200 day moving average and the result was a minor pullback or sideways consolidation.


Gold - courtesy

Gold may be overbought on a short term basis but the fundamental reasons for owning gold are expanding exponentially.  Public realization that dysfunctional governments are incapable of solving our economic problems is resulting in a loss of confidence.  A loss of confidence combined with a debt crisis and out of control spending can have only one result – increasingly worthless paper money and stocks as the  world central banks attempt to prevent an economic collapse with zero interest rates and printed money.

Gold Outperforms paper stocks

Government and  central bank policies have been destroying the value of the US currency for decades and have given birth to crashing housing markets, lower incomes, depression level unemployment and numerous stock market crashes.  When one  considers that the last hope of preventing an all out depression now lies in the hands of the very central banks who have already brought Hell down upon us, we should all be very, very scared.

If the last ditch efforts of the Central Banks fail to contain the financial collapse that is imminent, expect to see governments institute totalitarian measures in order to maintain a semblance of organized society.  As bankrupt empires collapse, they also attempt to expropriate every last dollar of wealth from its citizens in order to maintain their grip on power as long as possible.

The most recent large scale example of the implosion of an empire was the USSR, whose sudden collapse surprised CIA analysts who had been studying the Soviet Empire in detail for decades.  Ironically, those even more surprised by the collapse of the USSR were the politicians and bureaucrats who ran the country into the ground as they remained oblivious to their economy killing policies.  Tragically, misguided and misinformed middle class citizens of the USSR saw the value of their rubles collapse along with pension plans, bank savings and other financial assets.  Those who walked away with more than they had, other than corrupt politicians, were those few citizens who converted paper money into gold or silver before the financial system imploded.

A potential short term price correction in gold is a meaningless concern.  Developed world economies are in inexorably decline from which there is no escape.  The primary concern for most US citizens should be to develop a financial strategy that does not leave them impoverished when the end game arrives.

Unfortunately, most Americans have a religious conviction that “The Government” will save and nourish them as has been promised by every politician of this century.  These promises will all be broken but Americans won’t believe it until it happens, at which point there is no financial escape.

As a worldwide systemic financial collapse grows more probable with each passing day, Americans remain in denial and place their life savings in US government debt and bank accounts, secure with the promise that they are “guaranteed by the government”.   Sorry folks, bankrupt governments don’t keep promises.  The proof of American citizens’ faith in paper assets is their very low commitment to gold and silver.  The public will belatedly turn to gold and silver en masse when the system starts crashing down around them.  This event will be the real rush to gold and at that point, prices will rise thousands of dollars per week.

When establishment journalists warn of a “bubble” or “top” in gold, don’t get annoyed – simply buy more gold, especially on pullbacks.  The ultimate price of gold will wind up shocking even the biggest gold bulls.  When gold demand is insatiable and supply very limited, attempting to figure out the ultimate high price for gold is a fruitless exercise. (see Why There Is No Upside Limit For Gold and Silver).

Precious Metals Prices 8/12/11
PM Fix Since Last Recap
Gold $1,736.00 +$77.25 +4.66%
Silver $38.29 -$0.95 -2.42%
Platinum $1,800.00 +$91.00 +5.32%
Palladium $747.00 +$5.00 +0.67%


U.S. Currency At No Risk Of Becoming Sound – Gold Has Spoken

Ben Bernanke tells us he wants a sound dollar and Barrack Obama tells us he wants to cut entitlements and reduce the budget deficit.

I have no doubt that both gentlemen are honorable and doing what they believe is best for the country.  Others, perhaps less naive than myself, may be inclined to believe that the Fed Chairman and President are attempting to foist a distorted view of reality on the American public.  Credibility can depend on the public’s perception of reality, a fact well understood by politicians and central bankers.

“If you tell a lie big enough and keep repeating it, people will eventually come to believe it.” – Joseph Goebbels, Propaganda Minister

“When it becomes serious, you have to lie”. – Jean-Claude Juncker, Euro Finance Minister

It’s not hard for politicians to fool the American public – they have had many decades of experience honing that skill.  It is another matter to fool the markets and using that scorecard , our dysfunctional and highly polarized government has failed miserably.  The gold market has not been fooled, holders of US dollars have not been fooled and the U.S. debt monster is visible to all.

Gold - courtesy

US Dollar - courtesy


After weeks of bitter debate, the best that the Washington elite could manage to do was agree to disagree at a later date and, of course, establish a commission to look further into the debt crisis, also at a later date.

The elegant solution to the nation’s debt problem, as described above, may finally allow John Q. Public to sleep more soundly at night.  Inquiring minds, however, can cite numerous reasons why the Nation’s debt crisis will be keeping all of us awake in the near term future.

-The ultimate compromise to the debt crisis will be more debt, following in the footsteps of the EU’s grand solution to the Greek debt crisis.  “I will gladly pay you tomorrow if you lend me more money today” attitude  is going to quickly wear thin with U.S. creditors.

-The U.S. is borrowing trillions to pump cash into a weakening economy that already can’t create enough income to service the debt we already have – this strategy is the ultimate Ponzi scheme.  The conviction that future economic growth will pay for today’s borrowings is false.  Burdensome levels of public sector debt have been proven to dramatically restrain future economic growth.

-The U.S. and world economies are looking at a replay of the 1930’s depression, except this one won’t be so gentle.  The American public, with the persuasion of politicians, has come to believe that the “richest nation on earth” can provide cradle to grave security based on mathematically impossible entitlement promises.  The financial chaos and social breakdown resulting from broken promises to pay by the government will severely test the foundations of our democracy.

-All of the proposed “solutions” to the country’s overwhelming debt problem involve increasing the national debt by trillions more and agreeing to phantom spending cuts at some point in the future.  The U.S. is on a debt treadmill and all of the political solutions coming out of Washington are equivalent to turning up the speed on  the treadmill and pouring oil on the belt.

-The Dodd-Frank Act, which was supposed to solve the problem of systemically risky institutions, ignored the biggest systemic risk of all to our financial future – the U.S. government.

-The Federal Reserve, which according to Bernanke, “saved  the entire world” from a depression in 2008, has strangely detached itself from the crisis by proclaiming that they are powerless and without policy tools to prevent the looming U.S. debt default.  (See this on Ron Paul’s view of the Fed).  If worse comes to worse, perhaps Bernanke should seek some advice from the insolvent States of California and Illinois on how to go about issuing vouchers.