"Where is the money coming from? We don't have any money over here in Washington," Paul told Fox News' Your World with Neil Cavuto.
"We have consumed everything we have gotten. So, we either have to borrow it from China or we print the money, which is inflationary. So, I'm opposed to that."
Paul says Federal Reserve moves to cut rates would further hurt the US dollar. Paul, a congressmen representing Texas, is also on the House Financial Services Committee and the Joint Economic Committee. He is a strong advocate of sound monetary policy.
The sub-prime bubble he points out was caused by rates as low as one percent maintained by the Fed under Alan Greenspan which led to reckless lending and a property bubble. Now the Fed was giving its own 'stimulus' by cutting rates.
"This is a bit of a fiction, too, because the problem comes from artificially low interest rates," he pointed out.
"And we can't solve the problems of a weak dollar by printing more dollars."
"So, I think the dollar is still going to remain under attack, because you can't solve the problem of too much credit stimulus by more credit stimulus, because it will just lead to a weaker dollar. And I think they [Fed] are between a rock and a hard place."
Paul says the world is losing confidence in the US dollar as a reserve currency.
He is calling for reforms of the Federal Reserve and long-term changes to promote savings in the United States. Paul says taxes on interest discourages saving and the creation of 'real' capital.
"Then we resort to creating pseudo-capital at the Federal Reserve. And I think that's where our number one problem is," he said.
"And that is where the business cycle originates. And, as long as we have artificial booms, we're going to have these very real busts."
This consumption is financed by borrowing to the limit, hoping that future earnings will cover their financing costs. Whole of USA economy is run on this basis.
This was fine when USA was the prime innovator and mover of markets. Alas no more. American goods are not competitive. Hence the budget deficit.
The aetiology of bubbles, like inflation, is multi-factorial. Gullible workers are encouraged to invest in unsuitable and risky investments by speculators and financial whizz kids with ulterior motives.
Easy credit is more of a bubble generator than low interest rates per se.
All the banks that are involved in the current crisis have been awarded 'Bank of the year' ' Investment Bank of the year etc by various financial institutions that are supposed to know more than the avarage Joe Public. Computers can generate thuosands of indexes, graphs and other data - you just have to feed it with some junk.
The Japanese did have a bubble but they have learnt from their past mistakes. Unlike in USA and UK, conspicuous consumption is out. Very few youngsters are buying cars, computers or mobile phones. Low-impact eco-friendly living is the in-thing. This is why this time round, it's going to be different. The recession may last a lot longer than people think.
Any housewife can tell you that spending money you don't have on things you don't need is one sure way to end up broke- perhaps no one told that to uncle sam.
When credit collapse of course rates have to fall. In a mild credit demand scenario rate can be low.
The problem with a central bank is that it manipulates interest rates. Interest is the price of credit. In a market economy where everything is market determined - including house prices - when you manipulate the price of credit artificially it has very bad consequences.
Very bad bubbles have always been associated with central banking, though like you say greed can probably make bubbles anyway.
But certainly central banking seems to make bubbles happen more often and more intense.
Japanese interest rates had created another global problem. A huge 'carry trade' situation has arisen. People are borrowing in Japan and spending elsewhere. Japan may very well be 'exporting' inflation.
So the Japanese central bank may well be contributing to global inflation.
Your 'liquid soap ' analogy is brilliant. One small correction if I may - soap causes bubbles by reducing surface tension and not Tensile strength.
Cheers.
I’ve heard of the Keynsian model for money and I’ve also heard of the Austrian model forwarded by Ludwig von Mises and Lew Rockwell. Bring this up in any conversation and most eyes immediately glaze over. People either have no idea what you are talking about or they have become pre-conditioned to believe that money backed by something of real and fixed value is either a quaint idea or no longer implementable.
Having beat my head against this proverbial brick wall too many times, I’ve decided to take a new tack in trying to explain what is happening to us financially. Don’t laugh, but I have discovered that the best substance available to model how money works is liquid soap. Really!
I thought about using bar soap, but that immediately created insurmountable liquidity issues, so I dropped that idea. Having solved the liquidity issue by making my money model a liquid, I discovered that this was not quite good enough represent what happens in the real world. To make the analogy work, the liquid soap needs to have one magical quality. That quality is quantum connection. If any part of the soap is diluted with water, the entire batch, no matter where it is located becomes diluted by the same proportion.
The value of money in my model is the soap’s ability to retain tensile strength. The test of that strength (value) is to spread out the soap in an ultra-thin membrane and put air underneath. If all works well, you get a bubble. If there is too much air pressure (caused by demand beyond what the tensile strength of the membrane (again, read real value) can sustain, the bubble bursts. If there is too little pressure (read lack of demand) the bubble deflates and the membrane again becomes part of the mass of liquid.
Here’s where things get a bit tricky. You can cut my magic soap with water, and it will still perform its intended function pretty much as before. Remember that if you dilute one amount, all of the soap will be diluted by the same proportional amount. The thing about diluted soap is that it tends to form bubbles a lot more easily, but the bubbles will be much smaller and because the surface membranes do not have as much tensile strength, they break a lot more quickly.
The housing market was a bubble, and the stock market is also a series of bubbles. As the soap became diluted (inflation caused by trying to increase the money supply without a corresponding increase in value by gold, silver, gross national product or any other form of national treasure) the tensile strength of the bubble membranes became weaker than was necessary to remain whole with the amount of air pressure (demand) underneath.
The 2000 stock market was just such a bubble. With the pressures created by too much demand coupled with the events of and following Sept. 11, 2001, that bubble exploded forcibly. Those who held fairly large amounts of the remaining soap created demand in the housing market by exponentially driving up the cost of real property that they held. This created a huge housing bubble.
Still, because of the demands made by the military due to the War on Terror, Afghanistan and Iraq, the soap became diluted, thus weakening the tensile strength of the bubble membrane. We tried to increase the concentration of the soap by getting loans from China and Saudi Arabia, but because those loans have to be paid back with interest, the soap still became diluted.
Those holding property perceived the value of their assets to be increasing, but when the bubble broke they quickly found that the value of their real asset had staid pretty well flat, but the soap that has been used as the exchange medium had become so dilute that their perceived value bubble simply fell to pieces.
Diluted soap tends to produce suds very easily when compared to concentrate, but the bubbles tend to be very small and break easily. This is essentially what is happening to the stock market today.
Now, can any of you think of an action, or series of actions that can increase the concentration of our liquid soap, or the value of our money?
Dan Smith
Annapolis MD
January 15, 2008
Most of these bubbles are due to a combination of factors including the mood in the country and the psyche of people. But the common denominator seems to be the Anglo- Saxon habit of ' living beyon their means' . You can call it greed, showing off, stupidity etc.
Otherwise how can you explain why an american hairdresser who earns 20,000 dollars a year wanting to live in a a house valued at USD 500,000?
Stockmarket bubbles are caused by the same type of hedonistic people who have no idea about the stockmarket but are sold on the idea that they can make billions by something called 'margin trading'. This ia a trap for the unwary. Stockbrokers entice punters by giving 5- 10 times the deposit to invest in dicey securities like ' Futures' and 'derivatives'.
It takes two hands to clap - on the one hand we have stupid greedy investors and on the other hand we have stupid speculators and scheming stockbrokers. hedonism ....Spending money on things that you don't neeed with money
These boom and bust cycles are caused by deficit spending and interest rate manipulation by the Fed. This is not rocket science, people! Ron Paul 2008
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