My Conversation With Ben Bernanke, February 15, 2007

Monetary Policy and The State of the Economy hearing before the Committee on Financial Services, U.S. House of Representatives, February 15, 2007

The CHAIRMAN. The gentleman from Texas, the ranking member of the subcommittee.

Dr. PAUL. Thank you, Mr. Chairman, and welcome, Chairman Bernanke. I am very pleased to be here today as the ranking member. In the midst of a great optimism of monetary policy and how the economy is doing, I still have some concerns. And of course, one of my long-term goals has always been to emphasize maintaining the integrity of the monetary unit, rather than looking superficially at some of our statistics. But I also share the concern of the chairman of the committee of our responsibilities for oversight and your interest as well, Chairman Bernanke, on having the transparency that I think we all desire. Transparency in monetary policy is a goal we should all support. I have often wondered why Congress has so willingly given up this prerogative over monetary policy. Congress, in essence, has ceded total control of the value of our money to a secretive central bank. Congress created the Federal Reserve, yet it had no constitutional authority to do so. We forget that those powers not explicitly granted to the Congress by the Constitution are inherently denied to the Congress, and thus, the authority to establish a central bank was never given. Of course, Jefferson and Hamilton had that debate early on and the debate seemingly was settled in 1913. But transparency and oversight are something else, and they are worth considering. Congress — although not by law — essentially has given up all its oversight responsibilities over the Fed. There are no true audits. Congress knows nothing of the conversations, the plans, and the action taken in concert with other central banks. We get less and less information regarding the money supply each year, especially now that we don’t even have access to M3 statistics. The role the Fed plays in the President’s secretive working group on financial markets goes essentially unnoticed by Congress. The Federal Reserve shows no willingness to inform Congress voluntarily about how often the working group meets, what action it takes that affects the financial markets, or why it takes these actions. But all these actions directed by the Federal Reserve alter the purchasing power of our money, and that purchasing power is always reduced. The dollar today is worth only 4 cents compared to the dollar that the Federal Reserve started with in 1913. This has significant consequences on our economy and our political stability. All paper currencies are vulnerable to collapse and history is replete with examples of great suffering caused by these collapses, especially to the Nation’s poor and middle class. This can lead to political turmoil as well. Even before a currency collapses, the damage done by a fiat system is significant. Our monetary system insidiously transfers wealth from the poor and the middle class to the privileged rich. Wages never keep up with profits on Wall Street and the banks, thus sowing the seeds of class and discontent. When economic trouble hits, free markets and free trade are often blamed, while the harmful effects of a fiat monetary system are ignored. We deceive ourselves that all is well with the economy and ignore the fundamental flaws that are a source of growing discontent among the various groups. Few understand that our consumption and apparent wealth is dependent on a current account deficit running at approximately $800 billion a year. This deficit shows that much of our prosperity is based on borrowing rather than a true increase in production. Statistics show year after year that our productive manufacturing jobs continue to go overseas. This phenomenon is not seen as a consequence of the international fiat money system where the U.S. Government benefits as the issuer of the world reserve currency. Government officials consistently claim that inflation is in check at barely 2 percent, but middle class Americans know that their purchasing power — especially when it comes to housing, energy, medical care, and school tuition — is shrinking much faster than 2 percent per year. Even if prices are held in check in spite of our monetary inflation, concentrating on the CPI statistics distracts from the real issue. We must address the important consequences of the Fed manipulation of interest rates. When interest rates are artificially low, below market rates, insidious malinvestment, and excessive indebtedness inevitably brings about the economic downturns that everyone dreads. We look at GDP figures and reassure ourselves that all is well. Yet a growing number of Americans still do not enjoy the high standard of living that monetary inflation brings to the privileged few. Those who benefit the most are the ones who get to use the newly created credit first —

The CHAIRMAN. The gentleman’s time has expired. If the gentleman will come to a conclusion.

Dr. PAUL. I will yield back.


The CHAIRMAN. Without objection. The gentleman from Texas, Mr. Paul.

Dr. PAUL. Thank you, Mr. Chairman. I would like to pursue the issue of the current account deficit. It seems like almost all economists express concern, some worry about it, but I can’t find anybody who tells us that we should totally ignore it. And we do now borrow approximately $800 billion every year. We have a foreign debt of several trillions of dollars, and to me it represents an imbalance which is the consequence of the monetary system and presents a potential problem for us. Likewise, I see that potential problem in the number of derivatives out there. There is one figure that says there are $236 trillion of derivatives, and it seems like very few people understand exactly what that means, and it certainly is so huge and diverse. I don’t even think the Congress that we have that is always anxious to regulate everything has offered a scheme for regulating derivatives because, quite frankly, I don’t think they are capable of doing that. Foreigners now own 43 percent of our debt, approximately twice as much as the Fed has been required to borrow. And one of the questions I have is how much pressure would it put on you if — I guess in even a theoretical sense, what if they didn’t buy any of our debt, and all of a sudden you had to deal with that problem? Right now, there is a sign that maybe they are buying less. We have heard rumors and innuendos in the media and hints from China that, yes, they are not going to be buying as much, and yet there hasn’t been really a crisis. There has been no panic, and we know there is self-interest on their part to maintain the dollar because they hold so many. But in many ways I think we get a free ride. We get to export our dollars. We don’t have to monetize them here. We get to export our inflation, but it potentially has a problem for us if all of a sudden they buy less, and these dollars come home or these dollars go into goods and services. Also the other concern that I have that I would like you to address is the subject of the revaluation of the yuan. I understand you and Secretary Paulson went over to China to put pressure — at least the media presented it that way — put pressure on them to increase the value of the yuan and decrease the value of the dollar in relationship, which in reality, it seems to me, would put pressure on our interest rates and push our interest rates up and raise our prices. And some people have reported that couldn’t possibly be our policy where we would deliberately want to do that. And then again, it would put more pressure on — I know it is an artificial arrangement right now. But in some ways what the Chinese have done is they have revived the old Bretton Woods standard of fixing their currency to our dollar, and some people look longingly to the Bretton Woods days where we worked with fixed exchange rates. Of course, there were different conditions then. But if you would, if you would address both what our position is with the Chinese yuan as well as what happens if they significantly — if the foreigners, especially Japan and China, start to buy a lot fewer dollars and how that would affect your policy.

Mr. BERNANKE. Thank you. You are correct that we are to some extent dependent on capital inflows to support the trade and current account deficits we currently have. The current demand for U.S. assets from abroad both from public and private sources remains strong, so there doesn’t seem to be any immediate concern that will not continue. However, there is a risk sometime in the future that there would be less demand for dollar assets, and that could cause some movements in currency and bond markets that might be disruptive. And for that reason I have advocated, as many others in Congress have, that we have tried gradually to move our current account deficit down to a more sustainable level. The way to do that essentially, it is a very complex subject, but essentially the current account deficit arises because of asymmetries in the saving investment balance here and abroad. In the United States we have a decent rate of investment, including construction of new homes, but relatively low saving rates, and that difference we have to borrow abroad, whereas in many other countries in East Asia, and among oil producers and the like, they have an excess of saving over investment, and they are lending us that difference, and that is why the capital flows are moving from abroad to the United States.

The way to adjust that, over time, is to create a better balance of savings and investment both in the United States, which would be through primarily greater saving, but also abroad by creating more reliance on domestic demand for growth. So, for example, in China there is a long-term plan, which we support, to try to reduce the reliance of the economy on exports and increase its reliance on domestic consumption, thereby reducing their savings rate to a more appropriate level, which also increases the living standard of their people. So I think with that process we can move gradually toward a greater balance. With respect to the yuan, I think there are several reasons to move towards greater flexibility in the yuan, and I described them in a speech I gave in China. First, China is a very large country, and it should at some point have an independent monetary policy of its own rather than being tied to the United States. In order to do that, they have to have a flexible currency. Secondly, the flexibility of the yuan is needed to accomplish this rebalancing from export orientation to domestic demand that I was referring to earlier. And thirdly, yuan appreciation and flexibility makes some contribution to helping us to rebalance the current account deficit we currently have, although I think the larger force quantitively would be the rebalancing of demand from exports towards domestic demand in China.

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

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