[Congressional Record Volume 144, Number 64 (Tuesday, May 19, 1998)]
[House]
[Pages H3479-H3480]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                          THE INDONESIA CRISIS

  The SPEAKER pro tempore. Under a previous order of the House, the 
gentleman from Texas (Mr. Paul) is recognized for 5 minutes.


                               background

  Mr. PAUL. Mr. Speaker, the Soviet system, along with the Berlin Wall, 
came crashing down in 1989, the same year the new, never-to-end, era 
came to a screeching halt in Japan. The Japanese economic miracle of 
the 1970's and the 1980's, with its ``guaranteed'' safeguards, turned 
out to be a lot more vulnerable than any investor wanted to believe. 
Today the Nikkei stock average is still down 60% from 1989, and the 
Japanese banking system remains vulnerable to its debt burden, a 
weakening domestic economy and a growing Southeast Asian crisis 
spreading like a wild fire. That which started in 1989 in Japan--and 
possibly was hinted at even in the 1987 stock market ``crash''--is now 
sweeping the Asian markets. The possibility of what is happening in 
Asia spreading next to Europe and then to America should not be 
summarily dismissed.


                            economic fallacy

  Belief that an artificial boom, brought about by Central Bank credit 
creation, can last forever is equivalent to finding the philosopher's 
stone. Wealth cannot be created out of thin air, and new money and 
credit, although it can on the short-term give an illusion of wealth 
creation, is destructive of wealth on the long run. This is what we are 
witnessing in Indonesia--the long run--and it's a much more destructive 
scenario than the currently collapsing financial system in Japan. All 
monetary inflation, something all countries of the world are now 
participating in, must by their very nature lead to an economic slump.
  The crisis in Indonesia is the predictable consequence of decades of 
monetary inflation. Timing, severity, and duration of the correction, 
is unpredictable. These depend on political perceptions, realities, 
subsequent economic policies, and the citizen's subjective reaction to 
the ongoing events. The issue of trust in the future and concerns for 
personal liberties greatly influences the outcome. Even a false trust, 
or an ill-founded sense of security from an authoritarian leader, can 
alter the immediate consequences of the economic corrections, but it 
cannot prevent the inevitable contraction of wealth as is occurring 
slowly in the more peaceful Japan and rapidly and violently in 
Indonesia.
  The illusion of prosperity created by inflation, and artificially 
high currency values, encourage over-expansion, excessive borrowing and 
delusions that prosperity will last forever. This attitude was 
certainly present in Indonesia prior to the onset of the economic 
crisis in mid 1997. Even military spending by the Indonesian government 
was enjoying hefty increases during the 1990's. All that has quickly 
ended as the country now struggles for survival.
  But what we cannot lose sight of is that the Indonesia economic 
bubble was caused by a flawed monetary policy which led to all the 
other problems. Monetary inflation is the mother of all crony 
``capitalism.''


                   characteristics of the correction

  One important characteristic of an economic correction, after a 
period of inflation (credit expansion) is its unpredictable nature 
because subjective reactions of all individuals concerned influence 
both political and economic events. Therefore, it's virtually 
impossible to predict when and how the bubble will burst. It's duration 
likewise is not scientifically ascertainable.
  A correction can be either deflationary or inflationary or have 
characteristics of both. Today, in Indonesia, the financial instruments 
and real estate are deflating in price, while consumer prices are 
escalating at the most rapid rate in 30 years due to the depreciation 
of the rupiah. Indonesia is in the early stages of an inflationary 
depression--a not unheard of result of sustained Central Bank 
inflationary policy. Many believe price inflation only occurs with 
rapid growth. This is not so.
  Blame is misplaced. Rarely is the Central Bank and paper money 
blamed--unless a currency value goes to zero. In Indonesia the most 
vulnerable scapegoat has been the Chinese businessmen, now in threat of 
their lives and fleeing the country.
  A much more justifiable ``scapegoat'' is the IMF and the American 
influence on the stringent reforms demanded in order to receive the $43 
billion IMF bailout. IMF policy on aggravates and prolongs the agony 
while helping the special interest rich at the expense of the poor. The 
IMF involvement should not be a distraction from the fundamental cause 
of the financial problem, monetary inflation, even if it did allow 
three decades of sustained growth.

[[Page H3480]]

  ``Crony capitalism'' was not the cause of Indonesia's trouble. 
Inflationism and political corruption allows crony capitalism to exist. 
It would be better to call it economic interventionism for the benefit 
of special interests--a mild form of fascism--than to abuse the free 
market term of capitalism.
  Any serious economic crisis eventually generates political turmoil, 
especially if political dissent has been held in check by force for any 
significant period of time. There should be no surprise to see the 
blood in the streets of Jakarta--soon to spread and build. Political 
events serve to aggravate and magnify the logical but subjectively 
sensitive declining currency values and the faltering economy. The 
snowballing effect makes the political crisis much more serious than 
the economic crisis since it distracts from the sound reforms that 
could restore economic growth. These circumstances, instead of leading 
to more freedom, invite marshal law for the purpose of restoring 
stability and the dangers that go with it.
  Errors in economic thinking prompt demands from the masses for more 
government programs to ``take care'' of the rapidly growing number of 
poor. Demands for more socialism and price controls results whether 
it's in education, medical care, unemployment benefits or whatever--all 
programs that Indonesia cannot afford even if they tried to appease the 
rioting populous.


                          solutions attempted

  The IMF's $43 billion bailout promise has done nothing to quell the 
panic in the streets of Jakarta. If anything, conditions have worsened 
the Indonesians deeply resent the austere conditions demanded by the 
IMF. Since the U.S. is the biggest contributor to the IMF and the world 
financial and military cop, resentment toward the United States is 
equal to that of the IMF. The Indonesian people know they won't be 
helped by the bailout. They already see their jobs disappearing and 
prices soaring. The political and economic future, just a few months 
ago looking rosy, but it is now bleak beyond all description. 
Indonesians know what the American taxpayers know; the IMF bailout 
helps the rich lenders who for decades made millions but now want their 
losses covered by weak victims. Is there any wonder resentment and rage 
prevails in Indonesia?

  The U.S. has just sent a military delegation to study and obviously 
advise the Indonesian government regarding the law and order crisis now 
in process. Our officials say that we're there to watch that the 
Indonesian military do not abuse the rights of Indonesian citizens. 
Even if true, and well motivated, where did this authority come from 
for us to run to the scene of the crime--on the other side of the world 
and pretend we have all the answers. Proper authority or not put aside, 
the Indonesian people perceive even a few U.S. military advisors as a 
further threat to them. The U.S. is seen as an extension of the IMF and 
is expected to more likely side with the Indonesian military than with 
the demonstrators. No government likes to see any dissolution of 
government power even the questionable ones. It might encourage others 
unhappy with their own government. And it is not like the U.S. 
government is innocent and benign, considering our recent history at 
Kent State, Waco, and Ruby Ridge and the hundreds of no-knock entries 
made in error, causing loss of life, multiple injuries and destruction 
of property. Let us make sure our own government acts responsibly in 
all matters of law and order here at home before we pretend we can save 
the world--a responsibility not achievable even if motivated with the 
best of intentions.
  Effort to prop up an ailing economy after the financial bubble has 
been popped, prolongs the agony and increases the severity of the 
correction. Japan's bubble burst in 1989 and there is not yet any sign 
of the cleansing of the system of bad debt and mal-investment which is 
necessary before sound growth will resume. And Indonesia is embarking 
on the same predictable course. Restoration of free markets, and 
establishing sound monetary policy has not yet been considered. The 
people of Indonesia and the rest of the world should prepare for the 
worst as this crisis spreads. For Congress, the most important thing is 
to forget the notion that further taxing American workers to finance a 
bail-out, that won't work, is the worst policy of all for us to pursue.
  The Indonesian government had one idea worth considering under these 
very difficult circumstances. They wanted to replace their central bank 
with a currency board. It's not the gold standard, but it would have 
been a wise choice under current conditions. But the United States and 
the IMF insisted that in order to qualify for IMF funding this idea had 
to be rejected outright and the new central bank for Indonesia had to 
be patterned after the Federal Reserve with, I'm sure, ties to it for 
directions from Greenspan and company. A currency board would allow a 
close linkage of the rupiah to the dollar, its value controlled by 
market forces, and would have prevented domestic Indonesia monetary 
inflation--the principle cause of the economic bubble now collapsed. 
The shortcoming of a currency board is that the Indonesian currency and 
economy would be dependent on dollar stability which is far from 
guaranteed.


                                refusal

  In the approximately 8 months since the crisis hit Indonesia there 
has been no serious look at the underlying cause--monetary inflation 
brought about by a central bank. Nor has any serious thought gone into 
the internationalization of credit as United States exports of billions 
of dollars, and thus our own inflation, to most nations of the world 
who hold these dollars in reserve and use them to further inflate their 
own currencies. Our huge negative trade balance and foreign debt is not 
considered by conventional wisdom to be relevant to the Asian currency 
problems, yet undoubtedly it is. True reform to deal with the growing 
worldwide crisis can only be accomplished by us first recognizing the 
underlying economic errors that caused the current crisis.
  The philosophy of the free market, holds a lot of answers, yet the 
difference between free market capitalism and interventionist political 
cronyism has not been considered by any of the world banking and 
political leaders currently addressing the exploding Southeast Asian 
crisis.
  Concern for personal liberty is not a subject associated with the 
crisis and is an ongoing casualty of past and current policy. A greater 
concern for individual liberty will be required if a positive outcome 
is to be expected from the fall-out of the Indonesian crisis. Let's 
hope we can get our priorities straight. Congress has an obligation not 
to worsen the crisis by capitulating to more bail-outs and to remain 
vigilant enough to keep the administration from accomplishing the same 
bail-out through Executive Orders outside the law.


                                message

  What should the message be to the Congress and the American people 
regarding this sudden and major change in the economic climate in 
Indonesia? First and foremost is that since we operate with a fiat 
currency, as do all the countries of the world, we are not immune from 
a sudden and serious economic adjustment--at any time. Dollar strength 
and our ability to spend dollars overseas, without penalty, will not 
last forever. Confidence in the U.S. economy, and the dollar will one 
day be challenged. The severity of the repercussion is not predictable 
but it could be enormous. Our obligation, as Members of Congress, is to 
protect the value of the dollar, not to deliberately destroy it, in an 
attempt to prop up investors, foreign governments or foreign 
currencies. That policy will only lead to a greater crisis for all 
Americans.
  As the Asian crisis spreads, I would expect Europe to feel the crunch 
next. Unemployment is already at a 12% level in Germany and France. The 
events can be made worse and accelerated by outside events like a 
Middle Eastern crisis or a war between India and Pakistan both now 
rattling their nuclear weapons. Eventually though, our system of 
``crony capitalism'' and fiat money system will come under attack. Our 
system of favoring industries is different than the family oriented 
favoritism of Suharto, but none-the-less is built on a system of 
corporate welfare that prompts constant lobbying of Congress and the 
Administration for each corporation's special interests. We have little 
to talk about as we preach austerity, balanced budgets and sound money 
to the current victims. Our day will come when we will humble ourselves 
before world opinion as our house of cards comes crashing down.
  We will all know we are on the right track when the people and our 
leaders are talking of restoring liberty to all equally, and 
establishing a sound money system that prevents the Fed from 
manufacturing money and credit out of thin air for the benefit of 
politicians, corporations and bankers who directly benefit.

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