When the republic crumbles, it’ll start here

Answering this question for the first and last time:

Q: Why do you only post once a week?

A: Technology has not compressed the length of time it takes to research, prepare, write and edit a worthwhile post. There are web “columnists” who write a column-length piece every day – and it shows. If you want 40 posts a day, go visit Glenn Reynolds and read about what fascinating brand of mayo he had on his turkey sandwich this afternoon. We’ll be waiting here with timely, worthwhile advice and education.

This week’s post is about a macroeconomic topic, but one that affects you at a personal level. Control Your Cash doesn’t typically review books, but Ron Paul is the exception to a lot of things. The Texas congressman/frequent presidential candidate just released his latest, End the Fed. It’s 207 pages that, although written in a clear and concise language, offer some of the most challenging concepts you’ll ever read.

(If you’re not familiar with Dr. Paul, read the news once in a while. Here’s his two-paragraph bio. A Republican, the 73-year old physician represents suburban Houston. He is perhaps the strictest interpreter of the Constitution ever elected to office, refusing to vote for any bill that will increase government spending or reduce freedom. He’s so unflappable that he refused to take a congressional pension, and forbade his kids from applying for federally guaranteed student loans.

Being principled has little to do with compatriotism, though. Here’s a superlative for you: in the history of the House of Representatives, of all the times a congressman has been alone on one side of a vote, 80% of the time that congressman has been Ron Paul. Even though he’s not an economist by profession, Dr. Paul has a far greater grasp on the financial problems plaguing our society than any of his 434 cohorts do.)

His new book starts with a wonderfully pithy title, and doesn’t stop. End the Fed is an argument for the abolition of the Federal Reserve, the mysterious entity that governs much of American economic behavior and at times appears accountable to no one.

The Fed is responsible for distributing the hundreds of billions of dollars in bailout money authorized by both the current and previous Congresses. It’s also responsible for printing money, which is why the bills in your pocket bear the phrase “Federal Reserve Note”. And in 95 years of existence, the Fed has taken great steps to keep its activities largely secret.

The Fed chairman is Ben Bernanke, who was appointed to a 4-year term by George W. Bush in 2006 and re-appointed by Barack Obama last month. When asked why the Fed wouldn’t disclose who’s receiving bailout money, Bernanke was more than a little evasive:

“It is counterproductive and would destroy the value of the program.”

Dr. Paul then called for (and being a congressman, is drafting) a law (HR1207) mandating the Fed be audited. To which Bernanke responded,

“My concern about the legislation is that if the (General Accounting Office) is auditing not only the operational aspects of the programs and the details of the programs but making judgments about our policy decisions would effectively be a takeover of policy by the Congress and a repudiation of the Federal Reserve would be highly destructive to the stability of the financial system, the dollar and our national economic situation.”

In other words, “I like not having to answer to anyone. The absolute power I wield is pretty nice, too.”

Unfortunately, if there’s no pressure to be candid and transparent, most elected (and appointed) officials won’t. Which is why Dr. Paul wants to start by forcing an audit of the Fed. Then, once the reasons for its almost pathological secrecy are exposed, Paul figures voters will clamor to abolish the Fed.

Most of us have at least a hazy notion that the Fed is responsible for controlling interest rates, which is true. Every fortnight the Fed sets its “discount rate” (currently 0–¼%). Banks across the country then use this as a benchmark, setting their own interest rates a few basis points above the Fed rate in order to turn a profit.

Economics students hear interest rates referred to as the “price of money”, which makes sense if you think about it. If your bank pays you 1% to stash your savings in an account, it’s paying you – the price of money – to help it pool assets to make loans (which are of course, its stock-in-trade) with. If you’re Floyd Mayweather, you pay 16% to a lender (in his case, JP Morgan Chase) for the privilege of borrowing the money to buy an obscenely overpriced car. (Before the IRS lien, the civil case and the repo, that is. Floyd dreams about getting financed at 16% today.)

Paul argues that the Fed shouldn’t be in the business of setting interest rates any more than some other government arm should be setting the price of furniture or shoes. But his greater worry is the Fed’s unchecked ability to print money.

In 8 short months, the Obama administration has doubled the nation’s already stratospheric debt ceiling. With our federal government borrowing tons of money from China, Japan, the United Kingdom, and plenty of other countries, we’re in grave danger of having to pay a national bill we can’t afford (that’s a bill with your name on it.)

So if the Chinese government owns $600 billion in U.S. government bonds (which our government issued to raise funds for everything from welfare payments to car manufacturer bailouts), and demands $600 billion that we as a nation don’t have, then what?

Well, one solution is to fire up the presses and print at least part of that $600 billion.

But won’t that make each dollar less valuable?

Yes.

And won’t that make existing dollars less valuable?

Yes. No one cares whether the dollar bill in your wallet has “2009” or “1978” written on it.

Wait. I get paid in dollars.

Now you’re getting it.

So your financial position weakens, even if you’ve spent your life saving, investing and living within your means. By inflating the currency, a profligate government agency is dictating the value of your life’s accomplishments.

The worst part about inflation is that even though it hits everyone, it punishes poor and middle-class people the hardest.

Why?

Because the richer you are, the less of your wealth is held in cash.

Let’s say you make $40,000 a year, carry no consumer debt, and have $10,000 cooling in a savings account. This is fairly impressive: most people who make $40,000 a year don’t have anywhere near a quarter of it stashed away.

Now let’s say you’re Alice Walton, whose fortune increased about $1.4 billion in the past year (that’s the increase, not the total. She’s worth about $18 billion.)

Do you think Alice Walton has a savings account, or even a CD, with $350 million in it?

She doesn’t. She has real estate, she has Wal-Mart stock, she has foreign currency reserves, she has collectible fine art.

A weak, inflated currency hurts all of us. But for the rich and the ultra-rich, who have already made their money and can invest it in hard assets that are difficult to devalue, it’s not so painful. For the people who aspire to be rich, and are looking to move from holding cash to buying hard assets, it’s like running in quicksand. With 45-pound weights around your waist. And a fat woman strapped to your shoulders.

Dr. Paul argues that the potential for American prosperity would be a lot greater if we had a currency based on gold, as opposed to one based on thin air and whimsy. And we did, up until the 1930s. When each unit of our currency represents a certain amount of gold, there’s almost no potential for inflation or debasement.

Gold is scarce, easily divisible, universally recognized, hard to counterfeit, and compact. Because mining gold requires enormous amounts of labor and capital, the price of gold isn’t going to fall dramatically: it’s not like the world aggregation of gold will somehow double in the next year. Gold isn’t a perfect store of value – nothing is – but comes closer than does a purely subjective piece of paper that can be produced in virtually unlimited quantities and is worth whatever the Fed says it is this week. Paul argues that having a currency that’s transferable to gold makes it harder for a federal government to make financial commitments it has neither the desire nor the capacity to honor. As to how convincing his argument is, read the book and understand we burned a weekly post on it for a reason.

Fair or not, lately Republicans have been assailed as everything from reactionary Bible-thumping zealots to thieving robber barons to flaming racists. With his quiet, private faith, noble occupation, and reasoned approach to constitutional questions, Paul is the very antithesis of every stereotype. By virtue of being principled and not beholden to any special interest, the seemingly incorruptible Paul is that rare politician who transcends the political spectrum. Just ask long-haired folkie Arlo Guthrie, who remarks on the back cover of End the Fed that “rarely has a single book not only challenged, but decisively changed my mind.”

The Federal Reserve is technically a private corporation, and not part of the federal government. Also, college athletes are amateurs who are on campus to get an education, and not to enrich their schools’ athletic programs as indentured servants.

As a political appointee, the Fed chairman has interests to please and his own position to preserve. And God knows there are few things as hard to dismantle as a government agency. Still, if you devote an evening or two to reading End the Fed and the arguments therein, you might be a little more inclined to expect the same fiscal responsibility from your government that you should be expecting from yourself.