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Friday, October 04, 2013 2:31 PM


Ron Paul Ruins a Great Economic Rant, Being Seriously Wrong on One Key Point


It really pains me to see Ron Paul (or anyone else) make a masterful statement on an issue, then blow it at the end with a nonsensical reference to something that is not going to happen.

To understand what I mean, please consider Ron Paul's article A Grand Bargain for Liberty?

As heartened as we should be by the fight against Obamacare, we should be equally disheartened by the fact that so few in DC are talking about making real cuts in federal spending. Even fewer are talking about reductions in the most logical place to reduce spending: the military-industrial complex.  The US military budget constitutes almost 50 percent of the total worldwide military spending.  Yet to listen to some in Congress, one would think that America was one canceled multi-million dollar helicopter contract away from being left totally defenseless.

What makes this military spending impossible to justify is that is does not benefit the American people. Instead, by fomenting resentment and hatred among the world population, our costly interventionist foreign policy makes our people less safe. Thus, reducing spending on militarism would not only help balance the budget, but would enhance our security.

Yet both the House and the Senate continuing resolutions not only fail to reduce military spending, they actually authorize $20 billion more in military spending than authorized by the “sequestration” created by the 2011 Budget Control Act.  Most of the supposedly “draconian” sequestration cuts are not even cuts; instead, they are "reductions in the planed rate of spending.” This is where Congress increases spending but by less than originally planned—and yet they claim to cut spending.

Under sequestration, military spending increases by 18 percent instead of by 20 percent over the next ten years. Yet some so-called conservatives are so opposed to these phony cuts in military spending that they would support increased taxes and increased welfare “military” spending. This “grand bargain” would benefit the DC political class and the special interests, but it would be a disaster for the American people.

Instead of grand bargains of increased spending and taxes, those of us who support limited government and free markets should form a coalition with antiwar liberals to reduce spending on both the military industrial complex and domestic welfare programs. Instead of raising taxes on “the rich” we should also work to reduce all corporate subsidies. This “grand bargain” would truly be a win-win for the American people.

Sadly, even if a congressional coalition to cut both warfare and welfare spending was formed, it would be unlikely to carry the day as long as the Federal Reserve is willing to enable Congress’s debt addiction by monetizing the debt. But this cannot last forever. At some point the Fed’s policies will result in hyper-inflation and an economic crisis that will force Congress to reduce spending. Hopefully, the growing number of Americans who are awaking to the dangers of our current path can convince Congress to reduce overseas militarism and begin an orderly drawdown of the welfare state before this crisis occurs.
Hyperinflation Nonsense

I agree with every bit of that, save one key phrase "At some point the Fed’s policies will result in hyper-inflation".

I certainly do not agree with Fed policy, as the Fed has created asset bubble after asset bubble (with help from misguided policies in Congress and fractional reserve lending). But with total credit market debt approaching $60 trillion, it is absurd to believe $85 billion a month in QE will cause hyperinflation.

Total Credit Market Debt Owed



Worthless US Dollar?

The above chart is surely a sign of inflation, but it's hardly the kind of stuff that will make the dollar become worthless.

The Fed's policies are not going to cause hyperinflation. The idea is silly. Congress could cause hyperinflation (in theory). Yet, Congress is highly unlikely in practice.

And that's just from the US dollar perspective alone. Money supply growth is running rampant in China and numerous other places as well. Credit is exploding in China. Japan is on a mad monetary experiment the likes of which the world has never seen.

Is the US dollar really going to become worthless against the Yen, Yuan, Euro, and the British Pound?

The answer is no (but hyperinflation requires a yes answer, by definition).

Yet, month in and month out readers send me articles predicting hyperinflation "soon". Please stop. Every reference has been and remains downright idiotic.

Parade of Hyperinflationists, All Wrong

A parade of people predicted hyperinflation by 2008, 2010, 2013, 2014. I will be polite and leave the names off.

I will readily admit that just because something has not happened yet, does not mean it can't. But the odds are about as close to zero as you can get within a 5 year time frame (and probably decades).

On the other hand, all the people who said deflation would not happen or that hyperinflation would happen first were dead wrong:

Total credit declined, consumer credit declined, mortgage credit declined, housing prices and asset prices were smashed, and even the CPI declined.

CPI



Deflation Happened Three Ways

  1. If your view of inflation and deflation are credit-based, the US experienced deflation. 
  2. If your view of inflation and deflation are price-based, the US experienced deflation. 
  3. If your view of inflation and deflation are based on the purchasing power of money, the US experienced deflation.

The only conceivable way that one could say the US did not experience deflation during the great financial crisis is by money supply alone, ignoring credit. Given credit dwarfs money supply, that is a foolish leg to stand on.

Where to From Here?

Given the renewed advance in credit, rising asset prices, and rising home prices, it's crystal clear the US is back in a period of inflation. We can debate by how much. I suggest more than noted in the CPI as the CPI ignores home prices.

But, is it unimaginable that credit will turn down again? I think not. And my call (based on credit) was the US was likely to go in and out of deflation for a number of years.

Some may disagree with my in-and-out of deflation view, but there is absolutely zero case for hyperinflation. And when Ron Paul and others says such things, they look silly.

More on Hyperinflation (and Why It's Not Coming)


Summation

Ron Paul made a very nice point on Congressional spending in general, and military spending in particular, then ruined it with a one-liner that is sure to invoke cat-calls from Keynesian and Monetarist clowns who will then ignore asset bubbles and numerous other economic distortions caused by the misguided stimulus they seek.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com


Copyright 2009 Mike Shedlock. All Rights Reserved.
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