[Congressional Record Volume 144, Number 67 (Friday, May 22, 1998)]
[Extensions of Remarks]
[Pages E981-E982]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


                          THE INDONESIA CRISIS

                                 ______
                                 

                             HON. RON PAUL

                                of texas

                    in the house of representatives

                          Friday, May 22, 1998

  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 (Tokyo) stock average is still down 57% from 1989, and 
the Japanese banking system remains vulnerable to its debt burden, a 
weakening domestic economy and a growing East Asian crisis spreading 
like a wild fire. That which started in 1989 in Japan--and possibly was 
hinted at even in the 1987 stocke market ``crash'' here--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. 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 nearly 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 a 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 influence 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. Its 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 misplace. Rarely is the Central Bank and irredeemable paper 
money blamed--unless a currency value goes toward zero. In Indonesia 
the most vulnerable scapegoat has been the Chinese businessmen who are 
now in threat of their lives and fleeing the country.
  A much more justifiable ``scapegoat'' is the International Monetary 
Fund (IMF) and the American influence on the stringent reforms demanded 
in order to receive the $43 billion IMF-led bailout. IMF policy only 
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.
  ``Crony capitalism'' was not the cause of Indonesia's trouble. 
Inflationism and political corruption allow 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 
discontent, with blood in the streets of Jakarta, soon 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 marshal law.
  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 result 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.

[[Page E982]]

                          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 United States 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, 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 prevail in Indonesia?
  The United States 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 does 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? Putting aside the 
question of whether there is proper authority or not, the Indonesian 
people perceive even a few U.S. military advisors as a further threat 
to them. The IMF is seen as an extension of the United States and is 
expected to more likely side with the Indonesian military that with the 
demonstrators. No government, even the questionable ones, likes to see 
any dissolution of governmental power. It might encourage others 
unhappy with their own government. And it is not as if 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, including 
the establishment of a 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 will work. It won't work--it 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 as good as 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 Federal Reserve Board Governor Alan Greenspan and 
company. A currency board would allow a close linkage of the rupiah to 
the dollar, with 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 
tied to the U.S. dollar is that the Indonesian currency and economy 
would be dependent on dollar stability which is far from guaranteed.


                                REFUSAL

  In the approximately eight 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 which 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 East 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 a similar 
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 almost 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 destroy it 
deliberately, 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 or approaching 12% 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 sabers. 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 
room to talk 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 Federal Reserve 
from manufacturing money and credit out of thin air for the benefit of 
politicians, corporations and bankers who directly profit