Best of the Week
Most Popular
1.UK General Election 2015 - Forecasting Seats for SNP, LIb-Dems, UKIP and Others - Nadeem_Walayat
2.UK General Election 2015 Seats Forecast - Who Will Win? - - Nadeem_Walayat
3.Gold Price Downtrend Looks Set to Continue - Clive_Maund
4.Commodity Prices Set To Plunge Below 2008 Lows - Austin_Galt
5.New Greece Drachma Revealed Amid Bank Runs - Greeks Buy Gold Sovereigns - GoldCore
6.Gold and Silver Stocks or General Stock Market Indices? - Rambus_Chartology
7.“Forgive Us Our Debts” – Only Way To Prevent Economic Meltdown - GoldCore
8.UK House Prices Trend 2015 and the May General Election - Nadeem_Walayat
9.12 Reasons Why Barry Ritholtz and Many UK Experts Are Mistaken On Gold - GoldCore
10.Recession is On The Way; Beat The Stock Market Crowd, Panic Now! - Mike_Shedlock
Last 5 days
Canada’s Central Banks Orders End to ‘Spocking’ Of Canadian Dollar - Defacing Debasing Currencies - 4th Mar 15
Chicago's Only Possible Salvation: A Detroit-Like Bankruptcy - 4th Mar 15
Gold Price and Mining Stocks Decline Together - 3rd Mar 15
Financial Slaughter - The Silence of the Lambs - 3rd Mar 15
Bondholders “Bailed In” In Austria – New Banking Crisis? - 3rd Mar 15
How to Profit from the Coming Oil Price Crunch - 3rd Mar 15
Is Japan Zimbabwe? Could Japan go Hyperinflation? - 3rd Mar 15
Bill Gross Says Fed May Raise Rates 25 Basis Points in June - 3rd Mar 15
The Secret Behind My Hedge Fund Trade on U.S. Housing Market - 3rd Mar 15
BLS CPI Lie - How's That Dsflation Working Out for You? - 3rd Mar 15
Tesla Bonfire of the Money Printers’ Vanities - 3rd Mar 15
Gold Demand in UK, Europe and U.S. – Reuters Interview GoldCore - 2nd Mar 15
Watch the Skies... for Investor Profits - 2nd Mar 15
How Investors Can Identify the Best Small-Cap Stocks - 2nd Mar 15
Gold and Silver - What If the Precious Metal Stocks Bulls are Back - 2nd Mar 15
Students Getting a PhD in Subprime Debt - U.S. Debt Breaking Bad Part 3 - 2nd Mar 15
The Stock Market is in The Process of Major Top! - 2nd Mar 15
Stock Market Weakening Trend - 2nd Mar 15
Gold Price Glimmer of Hope - 1st Mar 15
Stock Markets Are Riding High on Thin Air - 1st Mar 15
Varoufakis vs. the Troika - Showdown in Athens - 1st Mar 15
Subprime Rising - U.S. Debt Breaking Bad Part 2 - 1st Mar 15
Gold CoT Improving, But ... - 1st Mar 15
UK General Election 2015 Seats Forecast - Who Will Win? - 28th Feb 15
UK General Election 2015 - Forecasting Seats for SNP, LIb-Dems, UKIP and Others - 28th Feb 15
Stocks Bull Market Continues - 28th Feb 15
U.S. Debt Breaking Bad - 28th Feb 15
NATO Frankenstein - When Centralization Scales Beyond Our Control - 28th Feb 15
Gold And Silver Insanity Prevails; Precious Metals Without Direction - 28th Feb 15
Fed Raising U.S. Interest Rates - Shovelin’ Schmitt Against the Tide - 28th Feb 15
Don't Let This Stock Market Myth Cost You Your Gains - 28th Feb 15
Recession is On The Way; Beat The Stock Market Crowd, Panic Now! - 28th Feb 15
Stock Market Indexes Creeping Towards the Edge - 28th Feb 15
GGD Going for Mexican Gold - 27th Feb 15
Foreign Real Estate Is the New Swiss Bank Account - 27th Feb 15
10 Reasons Washington Has War Fever - 27th Feb 15
Gold and the Euro Tragedy, Iraq 3.0, Ukraine Conflict Three Ring Circus - 27th Feb 15
Deepak Chopra - New Age Genius or Bullshit Expert? - Video - 27th Feb 15 - Videos
New Greece Drachma Revealed Amid Bank Runs - Greeks Buy Gold Sovereigns - 27th Feb 15
Will Month Long Stocks Rally Continue? - 27th Feb 15
The Only Public Hedge Fund You Should Own - 27th Feb 15
UK House Prices Trend 2015 and the May General Election - 27th Feb 15
Why America is Ungovernable - The Republicans’ Civil War - 27th Feb 15
Gold vs Gold Stocks: Bullish Anomaly Developing? - 27th Feb 15
I Heart Capitalism, Nasdaq Stocks, Then And Now - 27th Feb 15
The Fed’s History of Assassination - 27th Feb 15 i
Gold Bull Market Forecast - Money Will Rotate Into These Dead Investments - 27th Feb 15
"Audit the Fed"? We've Already Done That (Well, Kind of) - 26th Feb 15
Forget Peak Oil; Worry About Peak Demand - 26th Feb 15
Currency Wars, Again - 26th Feb 15
The Fed Waited Too Long: Here Comes Inflation - 26th Feb 15
Investing Inertia Won’t Keep Your Cash Safe - 26th Feb 15
The Net Neutrality Scam - 26th Feb 15
Will Conservatives Out of Control Immigration Crisis Boost UKIP Election 2015 Prospects? - 26th Feb 15
EU Warns Ireland and Euro Zone of Debt Dangers - 26th Feb 15
Commodity Prices Set To Plunge Below 2008 Lows - 26th Feb 15
Ukraine Hyperinflation as Currency Plunges 44% in One Week! - 26th Feb 15
The State of the Global Markets 2015 - 53 Page Report - 26th Feb 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The State of the Global Markets 2015

The Fed’s Funny Money

Interest-Rates / US Interest Rates Jul 28, 2011 - 08:22 AM GMT

By: Dr_Ron_Paul

Interest-Rates

Today's hearing is the second in a series examining the relationship between Federal Reserve policy and the performance of the United States economy. Today we are receiving testimony from the Federal Reserve banks. Of the half-dozen Reserve banks we contacted, only President Hoenig was willing to testify in front of this subcommittee, and we welcome him here today.


Like many critics of the Fed's monetary policy, I fear that quantitative easing will soon return. Despite what we hear from the cheerleaders in government and in the media, the economy remains in a complete shambles. Unemployment remains high and seven million jobs lost during the recession have yet to be regained. The Federal Reserve has kept interest rates at or near zero for over two and a half years and pumped trillions of dollars into the banking system in a vain attempt to revive the economy. Yet even now after the failure of the zero interest rate policy (ZIRP) and quantitative easing have become readily apparent, we still hear calls for more stimulus, more easing, more lose money. Like any other government program, the solution for failure is to throw more money at the problem, never mind the fact that throwing more bad money after good in such instances has never succeeded.

Reading the press releases from the Federal Open Market Committee (FOMC) we see that the FOMC intends to keep interest rates at a low level for an extended period. Chairman Bernanke has hinted at a further round of quantitative easing, the effects of which will undoubtedly be calamitous. Moneyholders seek a return on their holdings, and in an era of near-zero interest courtesy of the Fed, saving makes no sense. Combined with the still-shaky condition of the banking and financial sector, it is not surprising that much of the recently-created easy money has flowed into tangibles such as agricultural commodities, metals, and land. Rather than allowing the housing bubble to burst, overall prices to return to normal and overleveraged banks to break up, the Fed has thrown more fuel onto the fire and created the conditions for an even larger bubble that will eventually burst.

The Fed's easy money policy has also enabled the federal government to increase its total debt by 56% since 2008, an increase of over $5 trillion. Thanks to the Fed driving down interest rates and purchasing debt as fast as the Treasury has issued it, the federal government faces a crunch not only in terms of running up against the debt ceiling, but also in the structure of the debt. Large amounts of short-term debt are coming due in a short period of time. ZIRP and quantitative easing cannot hold down interest rates forever, as at some point investors will rebel and insist on higher interest rates for US debt. At this point this maturing debt will either have to be paid off or rolled over at higher interest rates, both of which will be very costly for taxpayers.

While I disagree with Pres. Hoenig on many matters of monetary policy and especially on key policy issues such as the existence of the Federal Reserve System, we both have been critical of the Fed's policy of quantitative easing and its maintenance of zero interest rates. Pres. Hoenig has been the most outspoken member of the Federal Reserve System against Chairman Bernanke's policies, consistently voting against the Chairman during meetings of the Federal Open Market Committee last year. Due to Pres. Hoenig's impending retirement, the Fed will lose a much-needed counterbalance to the inflationists who dominate at the Fed.

Both Pres. Hoenig and I realize that printing money out of thin air as the Fed has done and threatens to continue to do is not a panacea. If zero interest rates and quantitative easing could really solve unemployment, there would be no reason not to maintain such policies in perpetuity. Such policies, however, lead to the formation of asset bubbles, as both Pres. Hoenig and I know. Chairman Bernanke’s predecessor Alan Greenspan fueled the dot-com bubble and attempted to stave off its collapse by resorting to one percent interest rates. That created the housing bubble whose collapse Chairman Bernanke is attempting to stymie through zero percent interest and massive quantitative easing. The next bubble is already forming, although which sector will be hit hardest remains to be seen. Pres. Hoenig has alluded to some possible bubble sectors in his district, so I look forward to his testimony and his answers to our questions.

Dr. Ron Paul
Project Freedom

Congressman Ron Paul of Texas enjoys a national reputation as the premier advocate for liberty in politics today. Dr. Paul is the leading spokesman in Washington for limited constitutional government, low taxes, free markets, and a return to sound monetary policies based on commodity-backed currency. He is known among both his colleagues in Congress and his constituents for his consistent voting record in the House of Representatives: Dr. Paul never votes for legislation unless the proposed measure is expressly authorized by the Constitution. In the words of former Treasury Secretary William Simon, Dr. Paul is the "one exception to the Gang of 535" on Capitol Hill.

Dr. Ron Paul Archive

© 2005-2015 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014