What is Sound Money By Dr. Ron Paul

Henry Ford once said, “It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”

Are you confused by all the talk about monetary policy, fiat money and inflation? You’re not alone. Bankers and politicians have worked hand in hand for many decades to obscure their activities from the public. They hide behind elaborate structures designed to inflate the money supply while creating the false impression that they are looking out for our best interests.

Inflation is a very simple concept to understand: More money = less value. It may seem contradictory but it’s very straightforward.

For illustration purposes, join me on a brief journey of the imagination. One beautiful morning, you wake up and realize that you own twice as much cash as you had just last night. Magic money elves entered your home and bank account and simply doubled your entire cash assets. You’re now twice as wealthy (or half as poor as the case may be).

But you soon realize that the same thing happened to everyone else in the country. The money supply (total amount of money) has doubled! It’s just a one-time event and your regular income remains the same… you just got lucky this one time. It’s okay to dream, so stay with me.

What happens next? If you’re like most people, you probably start spending. You buy things you always wanted to buy but couldn’t afford. You pay back some debts. You buy stocks. In other words, you put the new money into circulation. So do most other people in the country.

Demand for many products increases because a lot more people can afford them now. Consumers are buying so much stuff that some shortages occur. To protect themselves against these shortages, shops and businesses decide to increase their prices. They know that once prices go up, fewer people will be competing to buy the same products, and the situation will be back to normal.

As a side effect of these higher prices, shop owners start earning higher profits than usual. They have more money in their bank accounts, which allows them to increase their spending. They will invest in new stock or expand their business. They might pay out dividends to their investors and bonuses to their employees, allowing these people to buy more products as well. This additional demand puts even more pressure on other shops to increase their prices.

A few months later, prices of almost everything have gone up. Suppliers and manufacturers are faced with the same threat of too much sudden demand from their clients so they too decide to start charging more.

You went on a one-time buying spree and look what happened! Your income stayed the same, but after a few weeks you can suddenly no longer afford the products you used to buy all the time because all prices in the economy have gone up.

Naturally, you demand a higher salary from your employer. If you’re self-employed or in business, you have to charge your customers more money just so that you can maintain your standard of living. Everyone else is in the same situation. Higher prices keep spreading throughout the entire economy, and it’s getting more and more difficult to make a living.

Can you see how this lucky one-time incident which at first seemed so exciting was extremely harmful not just for you but for the entire country? You briefly had a good time but now you’re worse off than before. In our story there are now twice as many dollars in circulation, but your income remains the same and each dollar you earn is worth only about half as much as it used to be. You’re really hoping for those money elves to come back.

As a matter of fact, some people, companies and banks have managed to develop an inside connection to the “money elves”, allowing them to receive new money into their bank accounts whenever they want to. The money is officially a loan (credit), but they know they never have to pay it back… they just “roll it over”, i.e. take up even more debt. With all that easy money in their accounts, and after hearing on TV that stocks only go up and that real estate prices will continue to rise forever, they tend to get a bit lightheaded and start making bad investment decisions. They know that if anything happens to their investments they will be bailed out by the government, so they do not hesitate to take huge risks with their new found “wealth”.

Let’s stop dreaming and look at the reality of things. What if I told you that these “money elves” do exist and that they spring into action not just once in a lifetime, but every couple of weeks? And that they repeatedly give money to their closest friends, but not to you? That prices are going up because the total amount of money in circulation increases, but that you’re missing out on all the fun?

Well, that’s inflation at work. Who benefits from inflation? Only those who are at the top of the pyramid and receive all that new money directly from the source. As you might have guessed by now, the source is the Federal Reserve, and its recipients include the government which “borrows” a lot of new money each year, without any intention of ever paying it back. Another beneficiary these days are failed banks that are being “bailed out” for the good of the “economy”, or defense contractors that receive money to build up our military so we can have a constant presence all over the world and fight never-ending and unnecessary wars. There was even a huge number of small-time beneficiaries who received consumer loans and sub-prime mortgages they would never be able to pay back.

What, then, is fiat money? It’s exactly what we just talked about: money that can be inflated or increased at the push of a button at the say-so of a powerful person or organization. Nowadays most dollars are just blimps on a computer screen and it’s extremely easy for the Federal Reserve to create money out of thin air whenever they want to.

If our money were backed by gold and silver, people couldn’t just sit in some fancy building and push a button to create new money. They would have to engage in honest trade with another party that already has some gold in their possession. Alternatively, they would have to risk their lives and assets to find a suitable spot to build a gold mine, then get dirty and sweaty and actually dig up the gold. Not something I can imagine our “money elves” at the Fed getting down to whenever they feel like playing God with the economy.

As you can see, inflation and fiat money are very seductive and beneficial to those at the top, and very dangerous to everyone else and the nation as a whole. That’s exactly what Henry Ford was talking about. He knew that every country that relies too much on fiat money is ruined sooner rather than later.

There is only one possible solution to the inflation problem: Stop creating money out of thin air. But we’re already in such a mess that the only way to have a real impact on the money supply is to increase interest rates so that people pay back their loans and borrow less money from the banks, which decreases the amount of money in circulation. However, higher interest rates might very well crash the economy. So the Fed’s current “solution” to overcoming inflation is… creating even more of it.

Fiat money is a dangerous addiction. Even if the Fed found a way to stop inflation, as long as the current system persists the temptation will always be there to resume pushing the easy money button. That’s why we need to get back on the gold standard and eliminate the Federal Reserve altogether.

But that won’t happen “before tomorrow morning”, as Henry Ford said, or even this year. Ron Paul believes that the first step towards monetary freedom is to allow open competition in currencies. Once gold and silver are allowed as legal tender and can be sold without sales tax, everyone can use them to store their wealth and to pay for the things they want to buy. The Federal Reserve will finally have a very compelling motivation to stay honest and maintain the value of the dollar because if they don’t, they will simply lose all their customers.

Former US Presidential Candidate DR. Ron Paul "Free trade instead of Bomb and Bribes"

What if tomorrow morning you woke up to headlines that yet another Chinese drone bombing on US soil killed several dozen ranchers in a rural community while they were sleeping? That a drone aircraft had come across the Canadian border in the middle of the night and carried out the latest of many attacks? What if it was claimed that many of the victims harbored anti-Chinese sentiments, but most of the dead were innocent women and children? And what if the Chinese administration, in an effort to improve its public image in the US, had approved an aid package to send funds to help with American roads and schools and promote Chinese values here?

Most Americans would not stand for it. Yet the above hypothetical events are similar to what our government is doing in Pakistan. Last week, Congress did approve an aid package for Pakistan for the stated purposes of improving our image and promoting democracy. I again made the point on the floor of the House that still no one seems to hear: What if this happened on US soil? What if innocent Americans were being killed in repeated drone attacks carried out by some foreign force who was trying to fix our problems for us? Would sending money help their image? If another nation committed this type of violence and destruction on our homeland, would we be at all interested in adopting their values?

Sadly, one thing that has entirely escaped modern American foreign policy is empathy. Without much humility or regard for human life, our foreign policy has been reduced to alternately bribing and bombing other nations, all with the stated goal of “promoting democracy”. But if a country democratically elects a leader who is not sufficiently pro-American, our government will refuse to recognize them, will impose sanctions on them, and will possibly even support covert efforts to remove them. Democracy is obviously not what we are interested in. It is more likely that our government is interested in imposing its will on other governments. This policy of endless intervention in the affairs of others is very damaging to American liberty and security.

If we were really interested in democracy, peace, prosperity and safety, we would pursue more free trade with other countries. Free and abundant trade is much more conducive to peace because it is generally bad business to kill your customers. When one’s livelihood is on the line, and the business agreements are mutually beneficial, it is in everyone’s best interests to maintain cooperative and friendly relations and not kill each other. But instead, to force other countries to bend to our will, we impose trade barriers and sanctions. If our government really wanted to promote freedom, Americans would be free to travel and trade with whoever they wished. And, if we would simply look at our own policies around the world through the eyes of others, we would understand how these actions make us more targeted and therefore less safe from terrorism. The only answer is get back to free trade with all and entangling alliances with none. It is our bombs and sanctions and condescending aid packages that isolate us.

Economic update links

http://www.economywatch.com/world_economy/china/China_Economy_2009_Forecast.html

http://www.ft.com/

http://info.bpiexpressonline.com/bpiprod/produpd.nsf/Economic+Updates/EconomicUpdates

http://www.rbc.com/economics/market/daily_e.html

http://www.research.commbank.com.au/cbaresearch_display/0,2209,CH3347%255FTS17346,00.html

http://www.canadianbusiness.com/index.jsp?gclid=CIHEkLe7pp0CFRQeDQodLBnr3A

http://www.ronpaul.com/

U.S. payroll employment weak; unemployment rate moves up to 9.8%

The labour market report for September showed a disappointing 263,000 loss of jobs compared to market expectations of a 175,000 drop. As well, the report suggested a break from an earlier easing trend in the pace of jobs losses following drops of 201,000 (revised from -216,000) in August, 304,000 (-276,000) in July and 463,000 in June. The report also showed an expected rise in the September unemployment rate to 9.8% from 9.7% in August.

The weakness in employment was relatively broadly based with the goods-producing sectors shedding 116,000 jobs with service-producing industries dropping 147,000. Within the former, construction lost 64,000 jobs, while manufacturing saw a drop of 51,000. Within the service-producing component, all major industries saw declines led by trade, transportation and utilities (60,000) and retail (39,000). The government sector also shed a sizeable 53,000 jobs.

Disappointing news in today’s report was also contained in the workweek measure, which dropped to 33 hours for the overall economy, down from 33.1 hours in August. It was a similar story for manufacturing where the workweek eased to 39.8 hours from 39.9 hours, while overtime dropped to 2.8 hours from 2.9 hours in August. As a result, the index of aggregate weekly hours, which reflects the combined effect of employment and hours worked, was down a disappointing 0.5% in the month. However, it is of note that the annualized decline in this measure in the third quarter of 3% represents an easing from declines of 7.8% and 8.9% in the second and first quarters, respectively.

Weakening labour markets are restraining growth in the average hourly earnings index, the key wage measure in the report. The index rose only 0.1% in the month compared to expectations of a 0.2% rise, which sent the year-over-year rate down to 2.5% in September from 2.6% in August.

The larger-than-expected drop in September payroll employment is clearly disappointing. However, some solace can be taken from the fact that, despite the deterioration in September, the average monthly drop in the third quarter of 256,000 compares to declines of 428,000 and 691,000 in the second and first quarters, respectively.

However, the continued shedding of jobs implies downward pressure on labour income and upward pressure on the unemployment rate. To prevent a negative feedback loop from kicking in and to move the economy towards job growth, policy will need to continue to be stimulative. Recently introduced fiscal measures have been an important factor returning GDP growth to the positive column in the third quarter via the “cash-for-clunkers” rebates. Monetary policy is also expected to make its contribution by continuing to help revive earlier-stalled financial markets both by directly providing liquidity and by keeping interest rates low. This support will likely be needed through next year. In fact, our forecast assumes that the Fed funds rate will not rise from its current very low range of 0% to 0.25% until the final quarter of 2010.

To view charts of today's data, go to
http://www.rbc.com/economics/html_calendars/ca/calendar.html (Canada)
http://www.rbc.com/economics/html_calendars/us/calendar.html (United States)

CHINA ECONOMIC FORECAST 2009

Beijing, 24 Dec. The Chinese economy grew a whopping 9.9% in the first three quarters of 2008, and 11.9% in 2007. Forecasts for 2009 are nowhere near as rosy.

In 2008, the Chinese government took significant action to encourage growth amid the worldwide financial slowdown. It unveiled a US $585 billion stimulus package which will extend into 2010, and slashed the interest rate three times. It also relaxed credit regulations.

Despite these aggressive measures, global uncertainty, a general bleak outlook, and lack of liquidity between financial institutions will drag China’s growth figures, resulting in ‘only’ 8.6% growth in 2009, according to China Galaxy Securities.

Firms, excluding those in the volatile petroleum, finance, power, and steel industries, should see an earnings grow by 7% in 2009, according to Galaxy.

The World Bank made more conservative forecasts. It once expected China to grow 9.2% in 2009, but now has that revised down to 7.5%. The World Bank projected China’s GDP growth rate would be 7.5%, significantly lower than the 9.4% gained in 2008. It also expects China’s export growth to shrink to 3.5% versus a huge 11% in 2008.

David Dollar, the World Bank Country Director for China said, “In terms of the effect of China's slowdown on the world, there's good news and bad news. China's recently announced stimulus package is good news because it will keep China's growth rate up at a pretty healthy rate and so imports will continue to go into China at a fairly good rate. That's good news for countries like Mongolia and Australia that export commodities like copper and iron ore to China – it's also welcome news for countries selling primary products, machinery and parts to China. The bad news is there won't be as much stimulus to these exporting economies as China was giving in the past."

President Hu Jintao is making socially and environmentally-sustainable efforts which should help guide growth. This new policy will begin in 2009, and is sure to appeal to western investors and governments, if done right. Nevertheless, he is sending the right message.

However, human rights issues will continue to loom as ethnic struggles in Tibet and Xinjiang prevail unsolved. These are not expected to damper economic forecasts or even political stability.

Land reforms will be passed in 2009 in efforts to improve accountability within the Chinese Communist Party. Other reforms to improve accountability and democracy are not planned.

The government budget is expected to report small surpluses in 2009-10 after an approximate surplus of .4% of GDP in 2008. And while inflation has been a recent issue, much due to rising oil prices, it is expected to decline to about 3.8% in 2009. Utility costs will remain high, but these will be compensated by low consumer goods and food costs.

China will maintain a current-account surplus due to its massive amount of exports, although it is forecast to fall to about 7.5% of GDP in 2009.

Chen Xiulian, EconomyWatch.com

INDIAN ECONOMIC FORECAST 2009

New Delhi, 16 Dec. 2008 started out well enough with growth figures approaching 10%. However, with the massive financial troubles which began towards the end of 2008, 2009 does not look quite as good. The Asian Development Bank (ADB) has projected growth of a mere 6.5%. Previously, it had forecast 7%, down from another earlier estimate of 7.4%.

ADB stated, “India, South Asia's most dynamic economy in recent years, is reeling from the direct effect of the global financial crisis on its banking systems and financial markets. The growth projection for India has been revised down to seven per cent in 2008 and 6.5 per cent in 2009, from 9 per cent in 2007.”

In the first week of December, the World Bank anticipated the Indian economy would grow by 6.3% in 2008 and 5.8% in 2009.

It realized a 7.8% expansion in the first half of this fiscal year against 9.3% a year ago. The economy grew by 9% for the entire last fiscal year.

Inflation has been an ongoing threat in India, especially when it reached a peak of 12% in early August, 2008. Much of what drive this inflation is the country’s rapid growth and rising oil prices. Oil has fallen considerably since then, easing inflation.

Manufacturing is expected to be hit in 2009 due to a decreased demand as a result of the global downturn. India’s growth is not totally dependent on the West, but the slumps in the US, Europe, and even the Far East will be felt in India’s exports.

The Indian government will need to accelerate its reforms and push for more investment if it wants to maintain good growth rates in the face of the global slowdown.

In a news conference with the World Economic Forum (WEF), CII director general Chandrajit Banerjee said, “"There is a pressure on bottom lines (of companies). Production is down. We do see economic growth moderating to 7.4-7.8 percent this fiscal.”

"Since inflation is down, we expect more fiscal and monetary measures to give a momentum to growth. The government should increase expenditure in infrastructure sector and put on-going projects on the fast track," he continued, but dismissed fears of large-scale corporate lay-offs.

The worldwide credit crunch has led to foreign investors dumping shares amounting to more than $12.5 billion, and the rupee has fallen in excess of 20%.

The WEF said, "It (global crisis) could also weaken the balance sheets of the financial institutions, cause a further fall in share and asset prices, and challenge the macroeconomic situation due to shrinking global growth.”

In November, Prime Minister Manmohan Singh warned that the global financial crisis may be worse and longer than many had expected, but that the government would take the necessary monetary and fiscal action to protect growth in India.

LINK EconomyWatch.com

UNITTED STATES ECONOMIC SYSTEM

The economy of the United States is the largest national economy in the world in both actual dollars and by Purchasing Power Parity.[12] Its nominal gross domestic product (GDP) was estimated as $14.4 trillion in 2008, which is about three times that of the world's second largest economy, Japan[1] Its GDP by PPP is almost twice that of the second largest, China.

The U.S. economy maintains a very high level of output per person (GDP per capita, $47,422 in 2008, ranked at around number ten in the world). The U.S. economy has maintained a stable overall GDP growth rate, a low unemployment rate, and high levels of research and capital investment funded by both national and, because of decreasing saving rates, increasingly by foreign investors. In 2008, consumer spending made seventy-two percent of the economic activity in the U.S.[13]

Since the 1970s, the United States economy has absorbed savings from the rest of the world. The phenomenon is subject to discussion among economists. Like other developed countries, the United States faces retiring baby boomers who have already begun withdrawing from their Social Security accounts; however, the American population is young and growing when compared to Europe or Japan. The 2008 estimates of the United States public debt by the CIA Factbook and the International Monetary Fund were 61% of GDP, about the same as major European countries.

The United States has been one of the best-performing developed countries, consistently outperforming European countries. The American labor market has attracted immigrants from all over the world and has one of the world's highest migration rates. Americans have the second highest income per hour worked.[ The United States is ranked second, down from first in 2008-2009 due to the economic crisis, in the Global Competitiveness Report.

World Economic Systems

The three major types of economies are usually referred to as: command, market, and mixed economies.
Before getting into the differences between these, let us think about what an economy is. In any economic system, there must be a way for resources to be put to use to produce goods and services. That is, an economy must decide how many workers and how much land to devote to producing peaches, and how much should be used to produce vacuum cleaners, and so on. How these kinds of resource allocation decisions are made distinguishes the different economic systems.
In a command economy, these decisions are made by a central authority. A command economy is therefore a form of central planning. For example, a central government would decide how many peaches should be grown, how many vacuum cleaners should be made, and would also decide how much of the various resources would be allocated towards each good. A major problem with this type of system is that it is difficult for a central authority to gather all necessary information to make the right decisions on how to allocate resources efficiently towards the production of each good and service.

A pure market economy is the exact opposite. All decisions are made in a decentralized way, through the interaction of buyers and sellers in individual markets. That is, peach growers and vacuum cleaner builders would offer their goods, and depending on demand conditions, they would decide how many workers to hire, how much land to use, and how much to produce. A major problem of a pure market system is that these individual decisions will not account for what economists call externalities. For example, a pure market economy may result in too much production of a good that generates a great deal of pollution. For reasons like these, most economies are mixed economies.

In a mixed economy, many of the necessary decisions are made in decentralized markets, but there is also some degree of government intervention in the economy. The U.S. is certainly a mixed economy. Though markets are a key piece of our economic system, we also have Federal, State, and Local governments that enact various forms of regulation for the purpose of improving upon the outcome of a pure market economy. That is, a mixed economy like that in the U.S. is typically considered to be the best of both worlds.