[Congressional Record Volume 144, Number 49 (Tuesday, April 28, 1998)]
[House]
[Pages H2375-H2377]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                               THE BUBBLE

  The SPEAKER pro tempore. Under a previous order of the House, the 
gentleman from Texas (Mr. Paul) is recognized for 5 minutes.
  Mr. PAUL. Mr. Speaker, the big question is how history will play the 
current financial situation if all the great wealth accumulated in the 
last 10 years dissipates in a financial collapse.
  According to an article in The New Republic, Greenspan is not only 
held in high esteem on Wall Street, he is seen as Godlike. One trader 
is quoted as saying, ``When things go well, I hold Greenspan's picture 
between my hands and say, thank you. When things go poorly, I also take 
the photo in my hands and pray.'' And he is not alone on Wall Street in 
heaping praise on Greenspan. This comes as close to idolatry as one can 
get.
  Alan Greenspan took over the Fed a few months before the stock market 
crash of October, 1997. In the 10 years that Greenspan has headed the 
Fed, $2 trillion of new credit has been created as measured by M3. 
Banks threatened by bankruptcy in the early 1990s received generous 
assistance from the Fed policy of low interest rates and rapid credit 
expansion as a response to the recession of 1991. Fed fund rates were 
held at 3 percent for well over a year. This generous dose of Fed 
credit has fueled the 5-year superboom on Wall Street.
  We are endlessly told no inflation exists. But inflation is strictly 
and always a monetary phenomenon and not something that can be measured 
by a government consumer or producer price index.
  Even so, there currently is significant price inflation for the fancy 
homes throughout the country, especially in the New York and 
Connecticut areas influenced by the New York financial center. CEO 
compensation is astronomically high, while wages for the common man 
have been held in check. The cost of all entertainment is not cheap and 
rises constantly. Art prices are soaring, as is the price of tickets to 
athletic events. Buying stocks with a 1.8 percent dividend yield is not 
cheap. These prices are inflated. The cost of education, medicine, and 
general services are expensive and rising.
  In spite of Government reports showing food prices are not rising, 
many constituents I talk to tell me food prices are always going up. It 
seems every family has difficulty compensating for the high cost of 
living and taxes are always inflating.
  There is no doubt that many Americans know the salaries of the CEOs, 
athletes and entertainers are astronomically high. The wages of the 
average working man, though, has not kept up. Workers feel poorer and 
resentment grows.
  Even with all of Wall Street's euphoria, Main Street still harbors 
deep concern for their financial condition and the future of the 
country. Many families continue to find it difficult to pay their 
bills, and personal bankruptcies are at a record high at 1,400,000 per 
year. Downsizing of our large corporations continue as many 
manufacturing jobs are sent overseas.
  This current financial bubble started in mid-1982. At that time, the 
money supply, as measured by M3, was $2.4 trillion. Today it is over 
$5.5 trillion. That is a lot of inflation, and money supply growth is 
currently accelerating.
  Although the money supply has been significantly increased in the 
past 16 years and financial prices as well as other prices have gone 
up, Government officials continue to try to reassure the American 
people that there is no inflation to worry about because price 
increases, as measured by the Government's CPI and PPI, are not 
significantly rising.
  Stock prices, though, are greatly inflated. If we had an average 
valuation of the Dow Jones Industrials for the past 87 years, as 
measured by the PE ratios, the Dow would be a mere 4,100 today, not 
over 9,000. And the Dow would be much lower yet if we took the average 
price-to-dividend ratio or the price-to-book ratio.
  The NASDAQ is now selling at 85 times earning. There is no doubt that 
most stock prices are grossly inflated and probably represent the 
greatest financial bubble known in history.
  A lot of foreign money has been used to buy our stocks, one of the 
consequences of computer-age financial technology and innovations. Our 
negative trade balance allows foreign governments to accumulate large 
amounts of our treasury debt. This serves to dampen the bad effect of 
our monetary inflation on domestic prices, while providing reserves for 
foreign central banks to further expand their own credit.
  Think of this: Money can be borrowed in Japan at Depression-era rates 
of 1 percent and then reinvested here in the United States either in 
more treasury debt earning 5 or 6 percent, or reinvested in our stock 
market, which is currently climbing at a 20 percent annualized rate. 
This sounds like a perfect deal for today's speculators, but there is 
nothing that guarantees this process will continue for much longer. 
Perfect situations never last forever.
  Some of the euphoria that adds to the financial bubble on Wall Street 
and internationally is based on optimistic comments made by our 
government officials. Political leaders remind us time and again that 
our budget is balanced and the concern now is how to spend the excess. 
Nothing could be further from the truth, because all the money that is 
being used to offset the deficit comes from our trust funds.
  In other words, it's comparable to a corporation stealing from its 
pension fund in order to show a better bottom line in its day-to-day 
operations. Government spending and deficits are not being brought 
under control. Tax rates are at historic highs, and all government 
taxation now consumes 50 percent of the gross national income.
  It is now commonly believed that the East Asian financial crisis is 
having no impact on our economy. But it's too early to make that kind 
of an assessment. Our president remains popular, according to the 
polls, but what will it be like if there's any sign of economic 
weakness? There could then be a lot of ``piling on'' and finger 
pointing.


                          problems and victims

  The basic cause of any financial bubble is the artificial creation of 
credit by a central bank (in this case our Federal Reserve). 
Artificially creating credit causes the currency to depreciate in value 
over time. It is important to understand the predictable economic 
problems that result from a depreciating currency:
  1. In the early stages it is difficult to forecast exactly who will 
suffer and when.
  2. Inflated currency and artificially low interest rates result in 
mal-investment that produces over capacity in one area or another.
  3. Wealth generally transfers from the hands of the middle-class into 
the hands of the very wealthy. (The very poor receiving welfare gain a 
degree of protection, short of a total destruction of the currency.)
  4. Prices indeed do go up, although which prices will go up is 
unpredictable, and the CPI and PPI can never be a dependable 
measurement of a monetary policy driven by loose credit.
  5. The group that suffers the very most is the low-middle-income 
group (those willing to stay off welfare, yet unable to benefit from 
any transfer of wealth as stagnant wages fail to protect them from the 
ravages of the rising cost of living).
  There are probably several reasons why this current economic boom has 
lasted longer than most others. The elimination of the Soviet threat 
has allowed a feeling of optimism not felt in many decades, and there 
has subsequently been tremendous optimism placed on potential economic 
development of many world markets in this age of relative peace.
  There is also very poor understanding regarding economic 
interventionism, the system

[[Page H2376]]

most nations of the world accept today. Today's interventionism is not 
close to a free market. The great Austrian economist Ludwig von Mises 
consistently pointed out that interventionism always leads to a form of 
socialism, which then eliminates the apparent benefits of 
interventionism.
  A good example of how interventionism leads to the destruction of a 
market can be seen in the recent tobacco fiasco. First, the tobacco 
industry accepted subsidies and protectionism to build a powerful and 
wealthy industry. Then, having conceded this ``nanny'' role to the 
government, Big Tobacco had no defense when it was held liable for 
illnesses that befell some of the willing users of tobacco products. 
Now, the current plan of super taxation on tobacco users will allow the 
politicians to bail out the individual farmers who may be injured by 
reduced use of tobacco products (destruction of the market). This half-
trillion-dollar tax proposal hardly solves the problem.
  Just as in the 1920's today's productivity has fooled some economists 
by keeping prices down on certain items. Certainly computer prices are 
down because the price of computer-power has dropped drastically, yet 
this should not be interpreted as an ``absence'' of inflation. 
Innovation has kept prices down in the computer industry, but it fails 
to do so when government becomes overly involved as it has in other 
technological areas, such as medical technology, where prices have gone 
up for services such as MRIs and CAT scans, not down.


                            learn from japan

  The most important thing to remember is that perceptions and economic 
conditions here can change rapidly, just as they did last summer in the 
East Asian countries with the bursting of their financial bubble. They 
are now in deep recession.
  Even though Japan first recognized signs of difficulty nine years 
ago, their problems linger because they have not allowed the 
liquidation of debt, or the elimination of over capacity, or the 
adjustment for real estate prices that would occur if the market were 
permitted to operate free of government intervention. The U.S. did the 
same thing in the 1930s, and I suspect we will do exactly what Japan is 
doing once our problems become more pressing. With our own problems 
from the inflation of the last 15 years now becoming apparent, their 
only answer so far is to inflate even more.
  In its effort to re-energize the economy, the Bank of Japan is 
increasing its reserves at a 51 percent rate. This may be the greatest 
effort to ``inflate'' and economy back to health in all of history. 
Japan has inflated over the years and will not permit a full correction 
of their mal-investment. The Bank of Japan is doing everything possible 
to inflate again, but even with interest rates below 1 percent there 
are few takers.
  OECD measurements, the M1 and quasi-money have been increasing at 
greater than 20 percent per year in East Asia. In the United Stats, M3 
has been increasing at 10 percent a year. It is estimated that this 
year the U.S. will have a $250 billion current account deficit--
continued evidence of our ability to export our inflation.
  We are now the world's greatest debtor, with an approximately $1 
trillion debt to foreign nations. Although accumulation of our debt by 
foreign holders has leveled off, it has not dropped significantly. The 
peak occurred in mid-1997--today these holding are slightly lower.


                        the cruelest tax of all

  This process of deliberately depreciating a currency over time 
(inflation) causes a loss in purchasing power and is especially harmful 
to those individuals who save. AIER (American Institute for Economic 
Research) calculates that 100 million households since 1945 have lost 
$11.2 trillion in purchasing power. This comes out to $112,000 per 
household, or put another way, over 5 decades each one of these 
households lost $2,200 every year.
  Although many households are feeling very wealthy today because their 
stock portfolios are more valuable, this can change rather rapidly in a 
crash. The big question is what does the future hold for the purchasing 
power of the dollar over the next 10 or 20 years?


                           the end in sight?

  Reassurance that all is well is a strategy found at the end of a boom 
cycle. Government revenues are higher than anticipated, and many are 
feeling richer than they are. The more inflated the stock market is as 
a consequence of credit creation, the less, reliable these markets are 
at predicting future economic events. Stock markets can be good 
predictors of the future, but the more speculative they become, the 
less likely it is the markets will reveal what the world will be like 
next year.
  The business cycle--the boom-bust cycle of history--has not been 
repealed. The psychological element of trust in the money, politicians, 
and central bankers can permit financial bubbles to last longer, but 
policies can vary as well as perceptions, both being unpredictable.


                            central bankers

  The goal of central bankers has always been to gain ``benefit'' from 
the inflation they create, while preventing deflation and prolonging 
the boom as long as possible--a formidable task indeed. The more 
sophisticated and successful the central bankers are as technicians, 
the larger the bubble they create.
  In recent years, central bankers have had greater ``success'' for 
several reasons. First, due to the age in which we live, 
internationalizing labor costs has been a great deal more convenient. 
It is much easier for companies to either shift labor from one country 
to another, or for the company itself to go to the area of the world 
that provides the cheapest labor. This has occurred with increased 
rapidity and ease over the past two decades.
  Central bankers have also become more sophisticated in the balancing 
act between inflation and deflation. They are great technicians and are 
quite capable of interpreting events and striking a balance between 
these two horrors. This does not cancel out the basic flaw of a fiat 
currency; central bankers cannot replace the marketplace for 
determining interest rates and the proper amount of credit the economy 
needs.
  Central bankers have also had the advantage of technological changes 
that increase productivity and also serve to keep down certain prices. 
It is true that we live in an information age, an age in which travel 
is done with ease and communication improvements are astounding. All of 
these events allow for a bigger bubble and a higher standards of 
living. Unfortunately this will not prove to be as sustainable as many 
hope.


                           the price of gold

  Another reason for the central bankers greater recent success is that 
they have been quite willing to cooperate with each other in propping 
up selected currency values and driving down others. They have 
cooperated vigorously in dumping or threatening to dump gold in order 
to keep the dollar price of gold in check. They are all very much aware 
that a soaring gold price would be a vote of no confidence for central-
bank policy.
  Washington goes along because it is furtively, but definitely, 
acknowledged there that a free-market, high gold price would send a bad 
signal worldwide about the world financial system. Therefore, every 
effort is made to keep the price of gold low for as long as possible. 
It's true the supply-siders have some interest in gold, but they are 
not talking about a gold standard, merely a price rule that encourages 
central-bank fixing of the price of gold. Most defenders of the free-
enterprise system in Washington are Keynesians at heart and will not 
challenge interventionism on principle.
  Instead of making sure that policy is correct, central bankers are 
much more interested in seeing that the gold-price message reflects 
confidence in the paper money. Thus gold has remained in the doldrums 
despite significant rising prices for silver, platinum, and palladium. 
However, be assured that even central banks cannot ``fix'' the price of 
gold forever. They tried this in the 1960's with the dumping of 
hundreds of millions of ounces of American gold in order to 
artificially prop up the dollar by keeping the gold price at $35/oz., 
but in August 1971 this effort was abandoned.


                              the solution

  The solution to all of this is not complex. But no effort is going to 
be made to correct the problems that have allowed our financial bubble 
to develop, because Alan Greenspan has been practically declared a god 
by more than one Wall Street guru. Because Alan Greenspan himself 
understands Austrian free-market economics and the gold standard, it is 
stunning to see him participate in the bubble when he, deep down 
inside, knows big problems lurk around the corner. Without the 
motivation to do something, not much is likely to happen to our 
monetary system in the near future.
  It must be understood that politicians and the pressure of the 
special interests in Washington demand that the current policies of 
spending, deficits, artificially low interest rates and easy credit 
will not change. It took the complete demise of the Soviet-Communist 
system before change came there. But be forewarned: change came with a 
big economic bang not a whimper. Fortunately that event occurred 
without an armed revolution . . . so far. The amazingly sudden, 
economic events occurring in East Asia could still lead to some serious 
social and military disturbances in that region.

  The key element to the financial system under which we are now living 
is the dollar. If confidence is lost in the dollar and a subsequent 
free-market price for gold develops, the whole financial system is 
threatened. Next year, with the European currency unit (ECU) coming on 
line, there could be some serious adjustments for the dollar. The 
success of the ECU is unpredictable, but now that they are indicating 
some gold will be held in reserve, it is possible that this currency 
will get off the ground.

[[Page H2377]]

                              nationalism

  However, I continue to have serious reservations regarding the ECU's 
long-term success, believing that the renewed nationalism within Europe 
will not permit the monetary unification of countries that have 
generally not trusted each other over the centuries. In Germany, 70 
percent of the people oppose entering into this new monetary agreement. 
If economic problems worsen in Europe--currently the unemployment rate 
in Germany and France is 12 percent--the European union may well get 
blamed.
  The issue of nationalism is something that cannot be ignored. 
Immediately after the collapse in East Asia, Malaysia began shipping 
out hundreds of immigrants from Indonesia as a reaction to their 
economic problems. Resentment in Germany, France, and England is 
growing toward workers from other countries.
  The same sentiment exists here in the United States, but it's not 
quiet as bad at this particular time because our economy is doing 
better. But in the midst of a deep recession, the scapegoats will be 
found and alien workers will always be a target.
  The greatest danger in a collapsing financial bubble is that the 
economic disruptions that follow might lead to political turmoil. Once 
serious economic problems develop, willingness to sacrifice political 
liberty is more likely, and the need for a more militant government is 
too often accepted by the majority.
  No one has firmly assessed the Y2K problem, but it cannot bode well 
if a financial crisis comes near that time. Certainly a giant company 
like Citicorp and Travelers, who have recently merged, could really be 
hurt if the Y2K problem is real. Since the markets seem to be 
discounting this, I have yet to make up my own mind on how serious this 
problem is going to be.


                          washington mentality

  Every politician I know in Washington is awestruck by Greenspan. The 
article in The New Republic reflects the way many Members of Congress 
feel about the ``success'' of Greenspan over the last ten years. Add to 
this the fact that there is no significant understanding of the 
Austrian business cycle in Washington, and the likelihood of adopting a 
solution to the pending crisis, based on such an understanding, is 
remote.
  Liberals are heedless of the significance of monetary policy and its 
ill effects on the poor. They have no idea that the transfer of wealth 
from the poor to the rich occurs as a result of monetary policy and 
serves to hurt the very people they claim to represent. Liberals stick 
to the old cliche that all that's needed are more welfare benefits. 
They are, I'm sure, influenced by the fact that if more welfare 
benefits are handed out, they can count on the Federal Reserve to 
accommodate them. Unfortunately this will continue to motivate them to 
argue for a loose monetary policy.
  The debate so often seems only to be who should get the expanded 
credit, the business-banking community or the welfare recipients who 
will receive it indirectly through the monetization of an ever-
expanding government deficit. In Washington there is a craving for 
power and influence, and this motivates some a lot more than their 
public display of concern for helping the poor.
  Whether it's Japan that tries to inflate their currency to get out of 
an economic problem, or the East Asian countries facing their crisis, 
or our willingness to bail out the IMF, resorting to monetary inflation 
is the only option being considered. We can rest assured that inflation 
is here to stay.
  With daily pronouncements that inflation is dead, the stage is set 
for unlimited credit expansion whenever it becomes necessary. Just as 
deficit spending and massive budgets will continue, we can expect the 
falling value of the dollar, long term, to further undermine the 
economic and political stability of this country and the world.
  Until we accept the free market principle that governments cannot 
create money out of thin air and that money must represent something of 
real value, we can anticipate a lot more confiscation of wealth through 
inflation.

                          ____________________