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Hearing of the Joint Economic Committee - The Economic Outlook


Location: Washington, DC


REP. RON PAUL (R-TX): Thank you, Mr. Chairman.

The best way to I could describe the problems that we face here in this country, as well as the problem that the Federal Reserve faces, is that we're indeed between a rock and a hard place, because we have a serious problem. We don't talk much about how we got here. We talk about how we're going to patch it up.

The bubble has been burst. We saw what happened after the NASDAQ bubble burst. We don't ask how it was created. And then we have a housing bubble, and it's deflating and then spreading.

And yet, nobody says, where does it come from? And what do -- what is the advice that you generally get? And that is, inflate the currency. They don't say, inflate the currency. They don't say, debase the currency. They don't say, devalue the currency. They don't say cheat the people who are saved. They say, lower the interest rate. But they never ask you, and I don't hear you say too often, the only way I can lower interest rates is I have to create more money. I have to lower the discount rate. I have to make it generous. I have to increase reserves. I have to lower the interest rates and fix the interest rates, overnight rates.

And the only way you can do this is by increasing the money supply. And I see this as the problem that we don't want to talk about. Currently, of course, we can't follow the money supply with M3, but we can follow one of your statistics, which is the MZM, the ready cash available. And we see that inflation is alive and well.

That -- that money supply figure is going up about 20 percent annualized. And this -- this just means that the dollar gets weaker. And everybody says, well, the dollar is -- that's great. The dollar weaker, we're going to have exports. And that is a fallacy. Maybe for a month or two, but it just invites inflation.

And unless we get down to the bottom of it and define what inflation is, and not look at only prices -- this was taught by the free market economists all through the 20th century. They said, beware, they will increase the money supply but they will make you concentrate on prices, and they will you CPIs and PPIs and they'll fudge those figures, and they'll talk about wage and prices controls to solve our problems.

And we ignored the fundamental flaw, and that is, that not only have we had a subprime market in housing, the whole -- the whole economic system is subprime in that we have artificially low interest rates.

And it wasn't under your -- your tenure in office. It's been going on for 10 years or longer, and now we're bearing the fruits of -- fruits of that policy. I mean, a 1 percent interest rate, overnight rate, and that's not a distortion. Instead of looking at these -- the price, the consumer prices, which nobody in this country really believes, we need to talk about the distortion, the mal- investment, the misdirection, the bad information that is gotten from artificially low interest rates.

In many ways, some people refer to you as a price fixer, you know, because you fix interest rates. The market is powerful, and usually overwhelms and does come into play, but when the Fed fixes an interest rate at 1 percent, that is price fixing.

At the end of your testimony, you suggested that we should address this housing prices, and we should have rules that would address deceptive lending practices. And I just think that is not the answer at all. The real deception is when we distort the value of money, when we create money out of thin air. We have no savings. We get their so-called capital, there is money available, but it comes from what you have to do, and the pressure is put on you. So I think we have to get back to the very fundamentals of where this problem comes from. And the bubbles occur when we have this mal-investment, and the creation of new money.

So my question boils down to this: How in the world can we expect to solve the problems of inflation; that is, the increase in supply of money, with more inflation?

MR. BERNANKE: Congressman, first as a small technical point, on the growth in money, money growth has been pretty moderate over the last few years. The increase in MZM is probably related to the financial turmoil. People have been taking their savings out of risky assets, putting them into the bank, and that makes the money data show faster growth. But I'm not sure that's indicative of policy necessarily.

What we've tried to do is follow the mandate that Congress gave us, and the mandate that Congress gave us is to look at employment and inflation as measured by domestic price growth. And as I talked about today, and I think you would agree, that we do see risk to inflation, and we are taking those into account, and we want to make sure that -- that prices remain as stable as possible in the United States.

REP. PAUL: How can you do this, and pursue this, the policies you have, without further weakening the dollar? There's a dollar crisis out there, and people's money is being stolen. People who have saved, they're being robbed. I mean, if you have a devaluation of the dollar at 10 percent, people have been robbed of 10 percent. But how can you pursue this policy without addressing the subject that somebody is losing their wealth because of a weaker dollar? And it's going to lead to higher interest rates and a weaker economy.

MR. BERNANKE: If somebody has their wealth in dollars, and they're going to buy consumer goods in dollars -- that's a typical American -- then the decline in the dollar, the only effect it has on their buying power is, it makes imported goods more expensive.

REP. PAUL: Yeah, but not if you're retired and elderly and you have CDs, and their -- their cost of living is going up no matter what your CPI says. Their cost of living is going up, and they're hurting. And that's why people in this country are very upset.

I yield back.


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