The Federal Reserve - Ron Paul asks the question
by Tom Donelson on February 23, 2011 at 12:47 PM
Regardless of what one thinks of Ron Paul, he does ask questions that need answers; how does one determine the value of currency? What is the duty of the Federal Reserve, or a better question, what should the duty of the Reserve be? Since the mid 70’s, the Federal Reserve has been given two jobs, promote currency stability and full employment. These goals can be contradictory, like in our present economic situation. With unemployment at 9%, currency czar Ben Bernanke has expanded the monetary supply but inflation is starting to show up with the rise of commodities world wide and a weakening dollar.
The Federal chairman is caught between the rock and a hard place for economic policies emanating from Washington have not been growth oriented nor is there any chance of one coming anytime soon.
As it is, any reforms or attempts to reduce spending or reform public union bargaining is being met by massive intimidation by public sector unions and the Democrats are already talking about shutting the Federal government, so any serious attempt to rein in government spending or institute serious growth orient policies wait until 2012. (Provided the right people get elected.) So what we are left with is the Federal Reserve expanding the money supply to deal with deflation and attempting to reduce unemployment, but keeping interest rates at near zero, but we are now at risk of a future inflation run.
Much of the world has noticed as there is a call for a new standard. There are two reasons many of our trading partners want to be rid of what has been the dollar standard. The first reason is geopolitical for to divorce the world from the dollar standard would weaken the United States' place in the world. The second is more defensive namely with a weak dollar, commodities prices go up and the worth of dollar being held goes down. The Chinese are wondering why we keep buying our debt and hoarding a dollar that keeps going down in value?
As long as the United States maintained a strong dollar as the United States did during the 1980’s and 1990’s, there was no reason to replace the dollar standard. When the dollar weakened, this only gave others a reason to replace the dollar as the main currency, but now the question remains: replaced with what?
The Chinese have been accused of manipulating with their currency, the Euro is in shambles along with European economy, the Japanese economy has been sub par for nearly two decades, and who would want the Russian Ruble as the world currency? While others have suggested replacing the dollar with the Chinese Juan or the European Euro or even a basket of currency; it still begs the question, how much do you trust other governments to run their economy correctly? Or for that matter, the IMF be designated the final arbitrator?
Ron Paul's biggest question for the rest of us is how do you protect our currency? For Paul, the Federal Reserve's monopoly of our currency is a threat in of itself, but there is no simple solution. I have written on this and have myself reviewed the revival of the Gold standard or other possible systems independent of a governing body's control of currency, but there is no doubt that others will argue that a central banker makes sense in today’s economy. Or simply no one who is alive has ever lived under a real gold standard and it has been four decades since the Bretton Wood System broke down. The system was based on the premise that other currencies were tied to the Dollar, which was tied to Gold. This forced the United States to maintain a strong currency, but in the late 60’s, the dollar weakened due to spending on the Vietnam War as well as the Great Society programs and the system collapsed. The 70’s was a period of stagflation which was broken by Reagan growth oriented policy combined with Federal Reserve chief Paul Volcker ringing out inflation and strengthening the dollar. For the next two decades, the strong dollar was policy but this broke down with the advent of the Y2K scare, the Gulf War and the easy money policy of the Fed, first by Alan Greenspan and then by Ben Bernanke over the past decade.
Which brings us to the question, what should be the Fed be doing? In an ideal world, the Federal Reserve would be concerned with maintaining our currency and preventing inflation, but with the Congress or the President choosing to ignore sound policies; it makes the Federal Reserve's job that much harder and confusing.
Ron Paul is asking the question, how do we measure the strength of a currency and who should be responsible in safeguarding the dollar? The next part of the question is what is the responsibility of Washington politicians at whose hands we have suffered?