Ron Paul on the Fed Again

I have to admit that I like listening to the little guy speak. My view of Ron Paul (and yes, I have read End the Fed, though I haven’t had time to comment on it yet) is that he is a smart guy with good instincts and a good understanding of the events that have shaped monetary history in the U.S. and elsewhere. (This is unlike PK who, while also very smart, appears to have shaped his macroeconomic theory entirely on the apparent failure of a local babysitting cooperative).

Here is Ron Paul’s attack on the Fed yesterday: Fed Will Self-Destruct. I don’t necessarily disagree with any of the points made in the written article (apart from the fact that Bernanke has never advocated 4% inflation). Some of the things he says in the video interview, however, seem rather strange.

With respect to our “deeply flawed monetary system” he appears to be concerned that one person (Bernanke) has the power to create $600B with the stroke of pen (out of thin air) and then spend it (foolishly).

Note: while the Fed is indeed able to create cash (or reserve balances) “out of thin air,” under normal circumstances, the Fed is effectively prevented from spending this cash on anything other than U.S. government bonds. These bonds are also created “out of thin air” (they exist almost exclusively in book entry form). When the Fed purchases government bonds, it is really just swapping one form of air for another.

When phrased in this way, it becomes a little harder to see why a swap of Fed air for Treasury air should be inflationary (though note, his definition of inflation is money creation — so of course he sees inflation everywhere, even though price-level inflation remains anemic).

About David Andolfatto 93 Articles

Affiliation: Simon Fraser University and St. Louis Fed

David Andolfatto is a Vice President in the Research Division of the Federal Reserve Bank of St. Louis. He is also a professor of economics at Simon Fraser University.

Professor Andolfatto earned his Ph.D. in economics from the University of Western Ontario in 1994, M.A. and B.B.A. from Simon Fraser University. He was associate professor at the University of Waterloo before moving to Simon Fraser University in 2000.

His current research is focused on reconciling theories of money and banking. His past research has examined questions relating to the business cycle, contract design, bank-runs, unemployment insurance, monetary policy regimes, endogenous debt constraints, and technology diffusion.

Visit: MacroMania, David Andolfatto's Page

9 Comments on Ron Paul on the Fed Again

  1. When it comes to the issuing of government bonds, it’s not necessarily on “how” they are created, but “why.” They are created because the government is entitling more than what is being paid in. And so the Federal Reserve is one outlet that “allows” them to do that, bonds are issued, the Fed buys them, money is printed, borrowed and given to the masses. The repercussions of this constant practice is something everybody pays for however, especially the poor, to which inflation disproportionately affects more than any other class. There is a reason why inflation is called “the hidden tax.” Instead of taking away actual possessions, it erases the value of the possessions we have.

    And yes, it needs to end, and the Federal Reserve ought to be abolished. It’s time for some new alternatives in how this economy uses and handles money, to preserve its strength and to end the corporate welfare/warfare state these bailout/stimulus administrations have become.

  2. “though note, his definition of inflation is money creation — so of course he sees inflation everywhere, even though price-level inflation remains anemic”

    Isn’t the tricky part guessing when the one will finally result in the other, and how to stop that once it starts?

  3. With regards to the line “price-level inflation remains anemic” that is not entirely true. Case in point look at the price of the commodities: gold is up at record levels and oil is up to a two year high (all on the front page of Drudge at the time of writing this).

  4. Price inflation is everywhere, it’s just hidden to some extent. With few acceptations a “half gallon” of ice cream now are now 1.5 quarts, down from the 1.75 quart “half gallon” of a couple of years of so ago, the price has also increased and the amount has decreased substantially. Chips? The 7 oz bag is no 5oz, same price. Check out Dunkin Donuts donuts and bagels, same price, smaller size than last year. Peanut Butter jars, cereal boxes, cupcakes getting smaller and smaller. The new tires I bought for my motorcycle cost the same as they did two years ago from the same online site. The shipping however used to be “free”, now it’s in addition to and costs $16.00, or $8 more per tire. THIS is price inflation! The cost of all goods are skyrocketing. It doesn’t matter that the fed is exchanging nothing for nothing, The little zeros on the fed books are are devaluing the dollar

  5. “…I like listening to the little guy speak.” Is there an assumption that we should know where the author is going with the reference, “little guy”? I tried inferring sarcasm, animosity, and empathy, but none made more or less sense.

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