Spending to Wipe Out Bad Debt Equals Inflation

He said the bailout bill would make the economy worse. “It’s propping up bad debt with more spending,” he said. “As long as you can create new money, you create more inflation” he said, referring to the power of the Federal Reserve to introduce new money into the banking system.

Before the late 1960s, the Fed had to keep a percentage of gold on hand for every Federal Reserve note it issued. These constraints were removed by Congress in the mid to late 1960s during the administration of President Lyndon Johnson, thus giving the Fed a blank check on how much currency it could put into circulation.

It forced Johnson’s successor, President Richard Nixon, to remove the final restraint, pegging the dollar to a fixed gold price. This created an inflationary spiral that was not quashed until the mid-1980s via the restrained monetary policy of then-Fed Chairman Paul Volcker.

Paul’s remarks indicated that he believes the economy could be headed for a similar inflationary spiral.

But Paul had a few good things to say about the bailout bill. “I think there have been a few improvements,” Paul said, citing tax breaks and cuts tacked on to the $700 bn in taxpayer-funded buyouts that could make the bill more appealing to legislators. “Maybe the markets will like that for a little while.”

Words of Warning

Here is Rep. Paul on the biggest bailout in the government’s history, words he wrote before the U.S. House of Representatives voted to approve the bill Friday:

This time last week, the biggest bailout in the history of the world seemed to be a fait accompli. 

Last weekend, the Fed Chairman and the Secretary of the Treasury had harsh words of doom and gloom for Congressional leaders, with the rest of the administration parroting along, and by last Monday it seemed both parties were about to fall in line and vote our Republic away by socializing the banking industry through this bailout. 

Foolish business behavior was about to be rewarded, and propped up a little longer, the bubble blown a little bigger, and our coming Depression made that much greater, but then something happened on the way to the House floor.

Citizens made their voices heard. 

The real story behind the story in Congress this week was the thousands of calls and emails sent to Representatives, clogging up inboxes and even slowing down the House internet system. 

Slowly, like the Titanic turning around, sentiments on the Hill shifted, and we heard Congressmen capitulating and changing their tune a little, desperately trying to find ways to salvage the bailout without completely enraging their constituencies.

Now we hear about taxpayer protections, about golden parachutes, and about other nuances that hardly cover up the fact that we would be creating more money out of thin air and further devaluing the dollar! 

The problem is not HOW the government is spending this money; it’s the fact that the government is spending this money. We don’t have it. We are already nearly $10 tn in debt, not including unfunded liabilities. 

We already spend about $1 tn a year we don’t have on our overseas empire. Now nearly $1 tn more is somehow supposed to magically appear and solve all our problems!  No — creating more money might delay the inevitable for some well-connected banks on Wall Street, but in a few weeks we will find ourselves right back in this same position, but much poorer.

The unfortunate thing is that we’ve already spent at least $700 bn on other bailouts that did not solve the problem. And while all this negotiation was taking place, the auto industry was quietly bailed out, with no controversy, no discussion, to the tune of $25 bn.

Inevitably, it appears Congress will call their constituents’ bluff and the bailout will pass, because that is the habit Wall Street and Washington have fallen into. People are right to be concerned about our financial future. 

I’ve been talking for 30-some years about reasons we need to be concerned and change our ways. We find ourselves now in a position of no good options, and no silver bullets. 

But the worst thing we can do is to compound our problems by intensifying the mistakes of the past. 

We do have tough economic times ahead, no doubt, no matter what we do, even if we do nothing. 

The question is, will we have the courage to take our medicine now and get it over with, or will we prolong the misery for many years to come? I’m less and less optimistic about the answer to that question.