The Evil of Bailout

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of the burning questions regarding the recently passed bailout,
and the one that almost no one has bothered to answer, is how the
government intends to pay for it. Governments have three main methods
by which they can raise funds: taxation, printing new money, and
debt. As our $10 trillion national debt shows, the federal government
has always enjoyed raising money by issuing new debt. Money is gained
upfront, while the cost of repaying that debt is pushed onto future

This method
is especially favored today, since imposing $700 billion worth of
taxes would lead to widespread public dissatisfaction. When the
cost of all the recent bailouts plus the cost of all the new lending
facilities the Federal Reserve has initiated are added together,
we quickly reach a figure in the trillions of dollars. Even with
the debt ceiling being raised to $11.3 trillion, the issuance of
debt alone cannot begin to cover the cost of all the bailouts in
which the government is engaged. Every indication is that the government
will use both debt and inflation in its attempt to keep the economy
running at full speed.

Debt financing
has begun in earnest, as the national debt has increased $600 billion
over the past three weeks, and most of that increase came even before
the $700 billion bailout bill was passed. I fully expect that trend
to continue in the near future and would not be surprised if we
see another debt-limit increase slipped into another economic stimulus
package that might be passed before the new year. Now that our foreign
creditors are less willing to purchase our debt, what debt we cannot
sell to foreigners will be monetized through the Federal Reserve,
resulting in increased inflation.

In fact, money
supply data for the narrowest measure, the adjusted monetary base,
show an unprecedented increase, far higher than when Chairman Alan
Greenspan attempted to reflate us out of trouble after the dot-com
stock bubble burst. That intervention on Greenspan’s part, pumping
in liquidity and driving interest rates down, led to the real estate
bubble, and Chairman Ben Bernanke unfortunately seems to be following
the same script as his predecessor in resorting to credit creation
and low interest rates. Even were this effort to succeed, it would
only delay the inevitable. In order for the economy to return to
normal, the Federal Reserve must cease the creation of new credit,
overvalued assets must be allowed to fall in price, and malinvested
resources must be allowed to liquidate and be put to use in more
productive sectors.

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the Ron Paul File

14, 2008

Dr. Ron
Paul is a Republican member of Congress from Texas.

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