The Dollar Dilemma: Where to From Here?

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by Ron Paul, Mises:

Introduction: Where We Are

It’s a fallacy to believe the US has a free market economy. The economy is run by a conglomerate of individuals and special interests, in and out of government, including the Deep State, which controls central economic planning.

Rigging the economy is required to prevent market forces from demanding a halt to the mistakes that planners continuously make. This deceptive policy can last only for a limited time. Ultimately, the market proves more powerful than government manipulation of economic events. The longer the process lasts, the greater the bubble that always bursts. The planners in charge have many tools to perpetuate confidence in an unstable system, but common sense should tell us that grave dangers lie ahead.

Their policies strive to convince the unknowing that the dollar is strong and its status as the world’s reserve currency is secure, no matter how many new dollars they create of out of thin air. It is claimed that our foreign debt is always someone else’s fault and never related to our own monetary and economic mismanagement.

Official government reports inevitably claim inflation is low and we must work harder to increase it, claiming price increases somehow mystically indicate economic growth.

The Consumer Price Index is the statistic manipulated to try to prove this point just as they use misleading GDP numbers to do the same. Many people now recognizing these reports are nothing more than propaganda. Anybody who pays the bills to maintain a household knows the truth about inflation.

Ever since the Great Depression, controlling the dollar price of gold and deciding who gets to hold gold was official policy. This advanced the Federal Reserve’s original goal of demonetizing precious metals, which was fully achieved in August 1971. Today, even though the official position of all central banks is that gold is not money, central bankers constantly rig the dollar price of gold, pretending the dollar is stronger than it really is. Just as the market overrode the artificial price of $35 per ounce in the 1970’s, today’s price will soar when the dollar is dethroned as the king of the world’s currencies.

In the rigged financial system, stock and bond prices are kept artificially high for the wealthy on Wall Street. To do this, interest rates have to be kept below market rates—which is a major contributing factor to gross economic distortions and financial bubbles.

The false belief setting the stage for an economic crash is the doctrine of “deficits don’t matter,” endorsed universally in the nation’s capital, has been going on for decades. We are destined to soon find out that deficits do matter, and matter very much. Denying economic truth and common sense for long periods of time always ends badly.

If one were to listen only to the MSM recite government economic reports, concerns for the future would be minimal. Low unemployment rates, negligible inflation, no hot war going on, and the US remains the wealthiest and militarily the most powerful nation in history.  Are the worriers justified in their concerns?

There are a lot of them yet the Fed doesn’t seem to be concerned, but then again it has never warned of trouble ahead, even when a major correction was at our doorstep. This is either because the Fed chairmen don’t know any better, or they don’t want to panic the people into preparing for a crisis by knowing the truth. My guess is that it’s both.

One thing for sure is that middle class America is not of much concern to the money managers. What occupies their minds is how to protect Wall Street from any financial crisis that might arise. The monetary elite are alert as to who will be blamed, and the Fed in particular, must be protected.

Since 1987, it’s been the responsibility of the Plunge Protection Team (the president’s Working Group on Financial Markets) to protect Wall Street from sudden and severe corrections in the stock and bond markets.

There are four powerful agencies that secretly can do just about anything they care to do to protect the monetary elites. They are: the Federal Reserve Bank, the US Treasury Department, the Securities and Exchange Commission, and the Commodity Futures Trading Commission. It’s my opinion that the Treasury’s Exchange Stabilization Fund, which was funded by gold confiscated in 1934 by FDR at $20 per ounce and immediately repriced at $35, is still “legally” permitted to be engaged in the gold market and foreign exchange rates.

The key individuals, involved in any rescue operation during a financial crisis, are the Fed Chairman, the Treasury Secretary, the Chairman of the SEC, and the CFTC. We can be assured that they were quite active in the financial crisis of 2007 and in the years of quantitative easing failures that followed. Today’s amazing stock market “success” (as of January 2018) is especially interesting since there is a net outflow of funds from the market. This means that the PPT has been successful in delaying the major correction that is required.

Abnormally low interest rates permit buybacks, mergers, and direct intervention in purchasing stocks and bonds by the PPT or by its allies around the world, with funds clandestinely provided by the Fed, to prop up the market and manipulate the gold price. There’s good reason the financial elite hysterically oppose an audit of the Fed.

If more people knew how fragile the economy is and what is required to hold things together, there would be a lot less optimism. But the bigger question is: Do people accept the government’s favorable reports on the state of the nation’s economy?

Even the mediocre GDP reports overstate economic growth. Since 2008, government debt has grown much faster than GDP, which some claim supports the notion that the more debt the Congress runs up, the better off the economy will be, rather than admitting there’s been no overall growth.

The increase in prosperity has been limited to the already wealthy. It is true that the rich are getting richer and the middle class is being wiped out. Belief in this fiction is limited, and the seriousness of the problem, that more than half the population now realizes, explains the anger and frustration the people feel. Debt may make one feel wealthier on the short term but it is not wealth.

There are many reasons why Americans should be deeply concerned. Evidence readily exists that our prosperity and our liberties are threatened. Our bipartisan foreign policy of interventionism is needlessly driving us toward a major military conflict. In the last several decades, the US has  engaged in constant military conflict remaking the Middle East and elsewhere. Whether it’s a Republican or Democrat administration, the policy remains the same— an obsession to constantly aggravate Russia, China, Iran, North Korea, Syria, Iraq, and Afghanistan. One of these days we can expect the victims of our interventions in their internal affairs, to declare “enough is enough” and gang up against us. The American people will likewise get tired of financing our senseless warmongering policies and demand that they stop.

Our economy is burdened with multiple problems: unsustainable government deficits at all levels; unfunded liabilities; student loan debt; stagnant wages; lingering consequences of the Fed’s QE policy; gross mal-distribution of wealth which generates huge social conflicts; a broken educational system; a breakdown of the family unit affecting all races and classes; and excessive dependence on government benefits and special interest privileges— all of which contribute to anger, frustration, and concern for the future.

Corruption in government is epidemic. Few people believe the lies our officials tell us and most Americans know that the truth-tellers, i.e. the whistle-blowers, are punished, while the criminals in government are rewarded. Commissions, special investigations, and prosecutors are set up to investigate government malfeasance, but instead are used to cover up mistakes and political crimes and never to seek the truth.

Economic conditions, our disastrous foreign policy, and the worsening moral chaos all justify the disillusionment of the American People. Polls show more than 70% of Americans believe the sinister Deep State is in charge of running our government, not our elected leaders.

Because of the dangerous financial situation in which we find ourselves, many people now recognize that it’s caused by the massive debt that results from excessive government spending on war and welfare. It’s becoming common knowledge that this constant spending beyond our means could not occur without the Federal Reserve accommodating congressional spendthrifts with endless monetary inflation. This is why the call for monetary reform is getting louder. These dangers prompt a growing number of people to plan for an alternative monetary system. This is good news.

The reason deep concern about monetary policy is so important, is that it acknowledges how our current political system is failing. It confirms that the policy of central economic planning, inflationism by central bankers, the swollen welfare/warfare state, the casual acceptance of deficit financing, and corporatism has failed. Though it is self-evident, the politicians remain in denial. The constant and outrageous petty partisan fights that dominate the news, distracts from the failure of the current policies, which both parties endorse. They’re “all Keynesians now.”

The struggle is simply over power and whose special interests are being served. The issue of authoritarianism versus voluntarism is never considered. The constant political noise we’re exposed to avoids dealing with the significance of monetary policy. The main purpose of the Federal Reserve is to finance an immoral and unworkable system. Much can be achieved with a better understanding of how the monetary system works. A growing interest in market-driven competing currencies and sound money offers an opportunity to challenge the relationship of fiat money and government tyranny.

The Case for Gold

For years, as a Member of Congress, I supported the principle of competing currencies in the market place, offering legislation that would eliminate the Fed’s monopoly control of monetary policy. This included removing sales and capital gains taxes on silver and gold, if the market chose to use them as money. The fraud of counterfeiting US currency, as is routinely committed by the central bank, would be prohibited. This is consistent with Hayek’s proposal for the denationalization money, “an idea whose time has come.”

The beneficiaries of the current fiat system will vigorously resist such a plan. Control over money has been cherished, for thousands of years by all forms of governments, in collusion with bankers. This partnership has been destructive to the middle class while enriching the well off. The unfairness of a fiat monetary system frequently has led to dangerous social and political upheavals. Our current system is drifting in that direction and has prompted the current interest in monetary reform.

There are several major efforts being made to replace the fiat dollar with gold or cryptocurrencies, while other countries are making plans to challenge the dollar as the world’s reserve currency.

The collapse of the Bretton Woods Agreement in 1971 created monetary chaos the following decade, with gold going from $35 per ounce to an astounding $800. Very high price inflation of 15% and interest rates as high as 21% resulted, along with a very weak dollar. In 1980 Congress enacted legislation directing a commission be set up to study the role of gold in the monetary system.  President Carter signed the bill into law and the “Gold Commission” met in 1981. I was a member of that 17 member commission, which was stacked against gold supporters 15 to 2. The establishment easily won the “debate” to continue and massively expand the fiat dollar standard, guaranteeing that the problems we now face would be much worse.

My dissenting views, co-signed by Lewis Lehrman, were published in the book “The Case for Gold.” The only positive outcome was the Commission’s recommendation that the US Treasury mint gold and silver eagles. This was another significant step away from FDR’s 1933 executive order that made it illegal for American citizens to own gold. Legislation passed in 1975 nullified that E.O.

The world now, under very different circumstances, is once again considering official use of gold in the monetary system. A growing consensus agrees that a world-wide monetary crisis is fast approaching and once again the importance of gold as money is being discussed. Those who benefit from the fiat dollar standard are not pleased with this renewed interest in gold, nor with the possibilities that blockchain technology may provide a nongovernment alternative to the current system of money and banking. The principle of gold as money has been acknowledged for thousands of years and is not going to be ignored any time soon.

The current financial chaos brought back the debate over the exact role gold should play in the international monetary system. There are many signs that various governments are considering using gold as an alternative to the fiat dollar. China for the past three years has been a net seller of dollar denominated assets and a major importer of gold. It is making an effort to popularize a gold Yuan to be used in place of the dollar in international oil transactions. China may well have more clout in this endeavor than is generally realized. Other countries like Russia, India and Brazil are cheering the Chinese on and are net purchasers of gold. The US, picking a fight in a senseless trade war with China, only adds to that country’s resolve to stand up to our domineering attitude.

Provoking China with threats over sea lanes isn’t necessary and provides no benefit. China has near monopoly control over rare earth minerals, which, if needed by other countries, can be used as leverage against us in a trade or currency war with them. China has an advantage of being a creditor nation, while we are the world’s largest debtor nation. As conditions deteriorate this will become a big problem for us and aid China and others in their efforts to implement an alternative currency to the dollar.

We’re in a precarious position with China, and the importance of gold is going to be more beneficial to them than to us when the monetary crisis hits. We will no longer be in the driver’s seat in world financial matter as we have been in the past 100 years.

Just figuring out exactly where physical gold sits and who actually owns it is a challenge. It is believed that essentially all the gold discovered in human history still exists somewhere. It’s durability and universal attractiveness are what throughout the ages, has qualified it as the most unique and desired commodity to be used as money. Approximately 190,000 tons have been mined to date: all of this gold would fit into a cube 23 yards on each side.

Already the approaching currency crisis has prompted some countries to repatriate their gold from the safe havens chosen during the various crises that occurred in the 20th Century. US vaults were especially popular during the various wars in Europe. The effort today by some countries to get their gold back reflects a growing loss of confidence in the dollar and America’s stature around the world to be the “keeper of last resort.” Our weak financial condition is not being ignored. Government spending and huge deficits are unsustainable and we’re starting to pay a price for it.

There is now a growing awareness of a problem in locating gold, identifying exactly who the owners are, and determining how much of it has been loaned out without its rightful owner’s knowledge. This is now acknowledged as a common practice. The effort to return some gold has not gone smoothly. Delays and excuses are common. Germany, Italy, Hungary, Austria and the Netherlands are asking that their gold be returned from the countries where it has been stored.

The current Treasury Secretary, Steven Mnuchin, was curious enough about gold to visit Fort Knox, in Kansas, something only two other Treasury Secretaries had bothered to do. He joked that: “I assume the gold is still there,” but added that “the gold was safe.” This is something nobody can be sure of since the last audit was in 1953.

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