“As I understand it, some mainstream economists and others think former congressman, presidential candidate, and libertarian icon Ron Paul is “a bit of a nut.” These “experts” point to the current strong dollar and low inflation and interest rates as evidence against Mr. Paul’s anti-Fed and fiat currency (paper money backed only by a government promise) and pro-sound money (backed by gold and/or other commodities) views…

…Yet most of these folks have never read the facts and arguments in Mr. Paul’s 2009 book, “End the Fed,” let alone any of the publications and/or economic theories of the Austrian-school economists (Nobel Laureate Hayek, Mises, etc.), from whom nearly all of Mr. Paul’s economic and monetary policy views derive. (By the way, former Federal Reserve Chairman Alan Greenspan expressed Mr. Paul’s exact monetary views in a 1966 paper and confirmed them again to Congressman Paul in the mid-2000’s! Don’t believe it? See blog posting statement # 705.) Right now, Mr. Paul’s long-time predictions of a collapsing dollar and inflation don’t seem right, but his predictions for more Fed-caused asset bubbles/busts do. As we all know post-crisis, in the short-run markets can be distorted or just plain wrong (and in a big way) for years. So let’s look at the longer term and keep it simple. On August 15, 1971, President Nixon took the United States fully off the gold standard.  (As I understand it, as a result of the 1944 Bretton Woods Monetary Accord, implemented in the 1950’s, the United States promised to convert foreign governments’ U.S. dollars into gold at the fixed price of $35 an ounce, and kept that promise until August 15, 1971.)  So, on August 14, 1971 the U.S. dollar price for gold was $35 an ounce. Today, April 22, 2015, gold trades at about $1,187 an ounce. That’s a compounded annual return for gold of over 8.3%, during that roughly 44-year period of time. Meaning that since we went to fiat (paper) money in 1971, the United States dollar has depreciated annually by the same percent, relative to gold. (Throughout history gold has been considered the world’s primary currency and is still held in massive quantities by many central banks and treasuries, including the United States.) Another (mathematically identical) way of saying this is as follows: “A 1971 U.S. dollar is worth about 3 cents today, when compared to gold!” The Fed and many “experts” will point to low government-reported inflation over the years, but Mr. Paul would respond that the market price of gold shows the truth and is a more comprehensive measure of inflation. As shown above, gold has risen, on average, at more than 8% a year for the past 44 years. Don’t think that really matters? Mr. Paul would then point out the fact that Fed Chairman Greenspan testified to Congress in the mid-2000’s that he believed it important that prudent and successful central bankers “replicate the performance of gold” and that the Fed, under his watch, had “generally done so.” Clearly, the math I show here, proves beyond any doubt that Chairman Greenspan’s Congressional testimony, on this issue, was materially wrong. The Fed’s U.S. dollar became nearly worthless (3 cents!) compared to gold since 1971 and much of that dollar decline (relative to gold) occurred during Chairman Greenspan’s tenure. So, is Mr. Paul right or are the “experts” and others who think Mr. Paul is “a bit of a nut” right? I don’t agree with everything Mr. Paul says, but I do think he is right when he says: “Fiat currency and the Fed’s highly distortive monetary policies have severely damaged our economy (causing almost constant bubbles and busts and malinvestment) and free market capitalism.” And like Mr. Paul, I believe these monetary issues were a major cause of our 2008 financial crisis and The Great Recession.” Mike Perry, former Chairman and CEO, IndyMac Bank “P.S. If you don’t agree, where do Mr. Paul and I have this wrong? (I also read that in the 34 years before Nixon closed the gold window in 1971, the money supply grew two-fold and in the 34 years after, the money supply grew 13-fold. I don’t know if this is accurate, but I repeat it here because it jives with the rapid increase in the price of gold since 1971. If it’s not accurate, please tell me and I will take it down. Finally, someone may appropriately argue that the $35-an-ounce, 1971 government price is inappropriate to use, because it was “price-fixed” by the U.S.; that’s why it had to be abandoned as unsustainable. As best I can tell, the average market price for gold in 1971 was $40.62 an ounce. If you use that figure instead, that results in an annual rate of about 8% vs. 8.3%. Not materially different.)”

Posted on April 22, 2015, in Postings. Bookmark the permalink. Leave a comment.

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