NCPA - National Center for Policy Analysis

Fiat Money Will Come Home To Roost

March 21, 2000

"In good times, it's easy to forget severe recessions and commodity price inflation," says Rep. Ron Paul (R-Texas), a member of the House Committee on Banking and Financial Services. But a recession at some point is inevitable, say Paul, and the Federal Reserve Board has only delayed the day of reckoning, in the process ensuring that the downturn will be bigger.

Prices, as measured by the Consumer Price Index, have increased slowly in the 1990s compared to recent decades. But flat prices obscure the monetary inflation that has taken place:

  • Since 1987, the monetary base has increased by 138 percent, resulting in an increase of nearly $3 trillion of bank deposits, as measured by M-3 (the sum of currency, demand deposits in banks and savings institutions and some other time deposits).
  • Since 1987, the national debt has increased $3.5 trillion -- almost all of which has been monetized or paid for by printing new money.
  • In three months just past, bank credit increased at a greater than 30 percent annual rate.

The most pernicious effect of monetary inflation is not rising prices -- although that eventually will come -- but the mal-investment that occurs, which is ultimately liquidated in a correction. But each time in the past three years that the market has threatened to bring on a correction, the Federal Reserve has held it off with a massive influx of new money and lower interest rates. The longer we go without a correction, the more bad investments that will have to be liquidated, says Paul.

Source: Rep. Ron Paul (R-Texas), "Greenspan Go Home," Liberty, March 2000.


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