[Congressional Record Volume 146, Number 147 (Monday, December 4, 2000)]
[House]
[Pages H11939-H11941]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                            ECONOMIC UPDATE

  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, more and more people now are talking about an 
oncoming recession. I tend to agree. I think we are moving into a 
recession, and for good reasons. But already the question that comes up 
so often among politicians is, who will get blamed? Will the current 
President be blamed for the recession or will the next President be 
blamed? Will the current Congress be blamed for the recession or the 
next Congress?
  I do not believe either should be blamed. I think we should deal with 
the real cause of the business cycle, and that is the Federal Reserve 
system. The Federal Reserve system causes and brings about a boom 
period in a cycle, but it also brings about the bust. Because the bust, 
the correction, is inevitable consequence of the boom caused by unduly 
inflating the money supply.
  Soon we will hear from many, we have already heard some from the 
financial circles as well as from politicians, to lower interest rates. 
This will keep the economy from turning down. It will prevent the 
recession from coming. And if we do have a recession, it is

[[Page H11940]]

always said, what you do is you lower the interest rates. But dwelling 
on the interest rates and not talking about what it takes to lower 
interest rates I think is a serious mistake.
  The only way the Federal Reserve can lower interest rates is by 
inflating the money supply, increasing the money supply, which is the 
cause of our problems. So if the cause of our problem is the inflation, 
increasing the money supply which causes a boom, we can hardly solve 
our problems by further inflating. And then, too, there is a period of 
time in the business cycle where inflating the money supply or lowering 
interest rates do not get the response that many people hope for.
  Take, for instance, what is happening in Japan today. There is no 
response whatsoever. They take interest rates down below one percent, 
and they cannot generate economic activity to really get them out of 
their slump.
  The other irony of all this is that when we have an economic boom, 
another reason given for raising interest rates to slow up the economy 
is to stop the inflation. This is fallacious thinking because the 
inflation comes from the money supply. The idea that economic growth 
and prosperity and productivity causes inflation, that is the price 
type of inflation, is wrong. If we have good productivity, prices go 
down, they do not go up. So the whole notion that we have to slow up 
the economy in order to prevent inflation is absolutely incorrect.
  The problem I see is that Congress for too long has conceded too much 
of their authority over control of the monetary system to the Federal 
Reserve system, which acts in secrecy.
  It is something that is directly stated in the Constitution that the 
Congress shall have the responsibility over the money supply, not a 
Federal Reserve system. Quite frankly, the Federal Reserve system is 
not even authorized by the Constitution.
  Now, if in the midst of a recession the Federal Reserve decides that 
they want to lower interest rates but the dollar is also dropping and 
we lower interest rates, we cause the dollar to go down and price 
inflation will occur because of that. So it is not quite so simple as 
saying, well, let us just tell the Fed what to do, lower the interest 
rates and it will solve our problems.
  We have the problem of the international debt. We, as Americans, now 
owe more than any other country in the world. We owe $1.7 trillion. Our 
current account deficit is over $400 billion a month. We borrow well 
over $100 billion a day to support the international debt.
  The reason we should be concerned about this more so than we are is 
the fact that, when we are in a recession, revenues go crashing down. 
The inflation that occurred over these past 10 years, which was 
artificially created, giant revenues from capital gains from this 
artificially high stock market. Well that is all being reversed now, so 
revenues are going to go down now, and we will have to deal with this 
in the next Congress.
  Unfortunately, there are some who are concerned about this who say 
there is going to be gridlock and the two sides will not get together 
and the Government is now divided, the House and the Senate and the 
Presidency is undecided and therefore there will be gridlock. Quite 
frankly, I do not think that will happen. I sort of would hope that we 
would have some gridlock.
  What I think is going to happen is that once the recession sets in 
and there is a need for additional spending and there will be no longer 
a concern at all about the deficit; and that is when the Congress will 
spend, the Federal Reserve will inflate. And it may temporarily help, 
but in the long-run it does not do the trick. It is not the way we gain 
economic prosperity out of a printing press. We just cannot allow a 
Federal Reserve to believe it creates capital by creating credit out of 
thin air.
  We will soon be hearing a lot about interest rates. There will be a 
loud clamor from all quarters for the Fed to lower interest rates. It 
will be argued that it is necessary in order to help stop the stock 
market slide/crash and also to stimulate a sagging economy.
  What we must remember though, is that every time someone pressures 
the Fed to lower interest rates, they are saying to the Fed that the 
money supply must be inflated. The only tool The Fed has for lowering 
interest rates is to increase the supply of money. They are arguing the 
case for further systematic and deliberate debasement of the U.S. 
dollar. Those who chant for lower interest rates are literally 
attacking the dollar.
  And yet, depending on many variables, a deliberate attempt by the 
Federal Reserve to lower interest rates may instead lead to higher 
interest rates and precipitate a period of accelerating price 
inflation. Instead of boosting the stock market, this effort can do the 
opposite by producing conditions that will lower the stock market and 
do nothing to avert the economic slump that more people are now worried 
about.
  Congress should be prepared for some surprises in the not-to-distance 
future. A slumping economy or definite recession will obviously lower 
revenues. This will reverse the illusion of the grand surpluses that 
everyone has been anxious to spend. Instead of expenditures being held 
under control, expect them to rise rapidly.
  Many are starting to talk now about a legislative stalemate with no 
clear majority in the House and the Senate and the Presidency being 
uncertain. This concern about a stalemate is overblown. Not that the 
problem isn't serious, but I am certain that under the conditions that 
we are about to experience, the Congress and the President will be all 
too willing to deal with the deteriorating conditions with increased 
spending and with a concerted bipartisan effort to pressure the Federal 
Reserve to further inflate the currency in pursuing the fiction that 
the Federal Reserve can prevent a ``hard landing'' by merely increasing 
the money supply in an effort to dictate short-term Fed funds rates.
  Although this will not be the impasse that many anticipate, the 
actual capitulation by both parties to deal with the oncoming economic 
slowdown will actually be more harmful than gridlock because Congress 
will undoubtedly do more harm than good to the economy.
  For decades now the Federal Reserve has followed a policy of ``fine-
tuning'' and economy and with the relative success of the recent boom 
cycle, it has been deceived into believing its ability is more than it 
actually is. But in this effort to fine-tune the economy the Federal 
Reserve, since the middle of 1999 until May of this year, has 
systematically raised the Fed's fund rates from 4.75% to 6.5%.
  The explanation was that economic growth, when not controlled, leads 
to price inflation and therefore the economy had to be ``cooled.'' A 
healthy free market economy should never have to be cooled, it should 
only be encouraged.
  Ironically it's argued that the deliberate raising of the cost of 
borrowing money for everyone is that this will hold prices in check. 
Yet consumers and businesses suffer from this additional cost--pushing 
all prices upward. But even more ironic is the claim that they now care 
about ``inflation'' after a decade of massive monetary inflation--the 
real culprit--while ignoring the fact that the monetary supply is key 
to money policy not admitting the damage has already been done.
  Signs of economic slowdown are now all around with the seriously 
slumping stock market being the most visible and eliciting the most 
concern. As the slowdown spreads and accelerates the politicians will 
be anxious to advise the Chairman of the Federal Reserve, Alan 
Greenspan. Politicians from both sides of the aisle will become deeply 
and especially concerned when the evidence is clear that the revenues 
are plummeting and the ``surplus'' is disappearing. Since this will 
challenge the ability of the politician to continue the spending spree 
many will become deeply and vocally concerned.
  The big debate--already started--in the financial and political 
circles is when, how much, and how quickly the Federal Reserve should 
lower interest rates. Indeed all will clamor to lower rates to revive 
the economy again. With the signs of rising prices in many sectors, 
especially energy, and in spite of the weak economy we can expect the 
Federal Reserve chairman to issue precautionary statements. He will 
reiterate that he must watch out for the resurgence of (price) 
inflation. In spite of his statements about concerns for inflation, if 
the stock market slump and the economic slowdown are significant enough 
regardless of what he says, we can be certain of one thing, the money 
supply will continue to grow rapidly in an attempt to keep interest 
rates low. But Mr. Greenspan will never admit that inflating is exactly 
what he's been generously doing for the past 13 years.
  A short time after Chairman Greenspan took over the reigns of the 
Federal Reserve the stock market crash of 1987 prompted him to 
alleviate concerns with a heavy dose of monetary inflation. Once again, 
the slump of 1991 and 1992, he again re-ignited the financial bubble by 
more monetary inflation. There was no hesitation on Mr. Greenspan's 
part to inflate as necessary to alleviate the conditions brought about 
by the Mexican financial crisis, the Asian crisis, the Russian ruble 
crisis, and with the Long-Term Capital Management crisis. Just one year 
ago the non-existent Y2K crisis prompted huge, unprecedented monetary 
inflation by the Federal Reserve. All these

[[Page H11941]]

efforts kept interest rates below the market rate and contributed to 
the financial bubble that is now starting to deflate. But, there is no 
doubt that this monetary inflation did maintain an economy that seemed 
like it would never quit growing. Housing markets thrived, the stock 
market and bond market thrived, and in turn, the great profits made in 
these areas, especially gains made by stock market transactions, 
produced profits that inflated greatly the revenues that flowed into 
the Treasury. The serious problem that we now face, a collapsing stock 
market and a rapidly weakening economy, was caused by inflating the 
money supply along with artificially low interest rates. More inflation 
and continuing the policy of artificially low interest rates can't 
possibly be the solution to the dilemma we face.

  We should never blame economic growth as the culprit. But artificial 
growth, mal-investment, overcapacity, speculation, and excessive debt 
that comes from systematic monetary inflation should be blamed, since 
these are all a result of Federal Reserve Board policy.
  Let there be no doubt political and financial leaders will demand 
lower interest rates in order to alleviate the conditions that are 
developing. But just because a boom can come from generous Fed credit, 
it doesn't mean the bubble economy can be maintained or re-inflated by 
easy credit once a correction sets in.
  Besides, Alan Greenspan knows full well that the scenario we are now 
experiencing can be made worse by lowering interest rates. Under the 
conditions we are facing it's very likely the dollar will weaken and 
deliberately lowering interest rates will accelerate this trend. Price 
inflation, which the Fed claims it is so concerned about, will not 
necessarily go away even with a weak economy. And the one thing we will 
come to realize that even the best of all central bankers, Alan 
Greenspan will not be able to determine interest rates at all times of 
the business cycle. Inflation premiums, confidence, the value of the 
dollar, and political conditions all can affect interest rates and 
these are out of the control of the Federal Reserve Board.
  Congress definitely should be concerned about these matters. 
Budgetary planning will get more difficult as the revenues spiral 
downward and spending does the opposite. Interest on the national debt 
will continue and will rise as interest rates rise. The weak dollar, 
lower stock markets and inflation can affect every fixed income 
citizen, especially the Social Security beneficiaries. We can expect 
the World Trade organization managed trade war will actually get much 
worse under these conditions. Military conflict is not out of the 
question under the precarious conditions, that are developing. Oil 
supplies are obviously not secure and as we have seen the run up of 
prices to dangerously high levels.
  The question is what should one expect the Federal Reserve Board to 
eventually do? We can expect it to continue to inflate as they have 
always chosen with every crisis. There's no evidence that Alan 
Greenspan would choose to do anything else regardless of this 
expression of concern about inflation and the value of the dollar. 
Greenspan still believes he can control the pain, produce a weakened 
economy that will not get out of control. But there's no way that he 
can guarantee that the United States might not slip into a prolonged 
lethargy, similar to what Japan is now experiencing. We can be certain 
that Congress will accommodate with whatever seems to be necessary for 
bailing out a weakened financial sector.
  But all this will be done at the expense of the dollar. This is a 
dangerous process and makes our entire economic and financial system 
vulnerable.
  We must someday recognize that neither Congress nor the Fed is 
supposed to ``run'' the economy. Yet we still live with the belief that 
the Administration, our Presidents, our Congress and the Federal 
Reserve should run the economy. This is a dangerous concept and always 
leads to the painful corrections to so-called the good times for which 
everyone is anxious to take credit.
  Congress does have responsibility for maintaining a sound dollar and 
a free market and not much else. Unfortunately this responsibility that 
is clearly stated in the Constitution is ignored.
  A major financial crisis is possible since the dollar is the reserve 
currency of the world, held in central banks as if it were gold itself. 
The current account deficit for the United States continues to 
deteriorate, warning us of danger ahead. Our foreign debt or $1.7 
trillion continues to grow rapidly and it will eventually have to be 
paid.
  Action by the Congress and the Federal Reserve will most likely make 
the correction that is now starting much worse. Also, under conditions 
such as these, personal liberty is always vulnerable by the advocates 
of big government. It is well known that during the times of military 
wars personal liberties are in endangered. Social wars such as the war 
on drugs are notorious for undermining the principles of liberty. So 
too, under economic conditions that are difficult to understand and 
deal with, personal liberty comes under attack. This should concern us 
all.

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