Liveblogging Ron Paul’s Inflation Hearing

Aaron Krowne

Refresh this page for updates as the hearing happens.  Latest updates toward the top.  The below is in summary form, NOT verbatim.

[At approximately 11:50am we had to leave a bit early, but the below captures most of the hearing.]

11:47am: Mr. Lehrman: It is not correct to assign blame to those who manipulate the monetary system… we live in a world of institutions.  All of academia are neo-Keynesians or the discredited Monetarist school.

11:45am: Jim Grant: I would suggest as an interim step before the promuglation of a new gold standard that Congress admonishes the Federal Reserve to speak in plain language.

For example, “quantitative easing” should be called “money printing”.

Similarly, the Fed should refer to “manipulation” instead of “portfolio balance channel” (with respect to stocks).

Fed’s “three dollar words” signify nothing and Congress should outlaw them.

11:44am: Rep. Paul: What to do when a bubble forms?  Should we do nothing (like in 1921) or crank up the printing presses (like now)?

11:44am: Prof. Salerno: Yes this is increasing being discussed in academic policy.  They don’t explicitly say it but what they are really implying is repudiating the debt over time.

11:42am: Rep. Paul: Do people who believe in fiat money believe it is proper policy to liquidate the debate by reducing the value of the money?  I sense when I talk to individuals at the Federal Reserve that they’d like to see inflation come back.  Do they also see it as a way of lowering real wages without lowering nominal wages?  Maybe wages should go down in a correction… is this actually being used as a policy?

11:41am: Mr. Grant: [goes over our horrible deficit stats] … yet the measured rate of inflation and interest rates are “comfortable”.

Looking back we will think “couldn’t we see this was nirvana”?

If the long term Treasury bond goes to 6% and money market rates go from 0 to 4% it will imply immense financing costs.   These are the “good old days”!

11:39am: Mr. Lehrman: Yes; the average maturity of our national debt is about 4 years… were the level of interest rates to rise close to market rates typical of full employment, the level of debt service payments would rise by an order of magnitude (consuming the entire Federal budget).   While today this is unthinkable, it could be as little as 4 or 5 years away.

The Congress needs to worry quite a bit about a rise in the level of interest rates from the current subsidized level  to a level characteristic of full employment.

11:39am: Rep. Schweikert: If we get some ticks [up] at the short end of the curve, should we be worried?

11:37am: Mr. Lehrman: With economy fully employed, with full output, you could bet on higher inflation and interest rates.

11:35am: Jim Grant: I don’t think there is any long-term “tell” of interest rates in the market… [gives two counter-examples of high interest rates and CPI failing to predict near-future inflation or lack therof]

Bond market is like badly-trained waiter looking at his shoes.

Bond market is an arbitrage market; more retrospective.  The stock market is more forward-looking.

11:35am: Prof Salerno: Look at long term bonds; long-term bond rates did not fall with “QE2”, they went up.  That is expectations of future inflation.

11:34am: Rep. Schweikert: If I was watching bonds and bond futures… how do I determine inflation and interest rates in the future?

11:33am: Mr. Lehrman: Yes… but most countries have a food sufficiency strategy.

11:33am: Rep. Schweikert: Isn’t it true that domestic production is also suppressed because some of these countries can’t produce cheaper than we can with our farm subsidies?

11:31am: Mr. Lehrman: US is most efficient producer of foods.  Elimination of subsidies might reduce the prices, but profitability of industry would change and output might contract.

11:30am: Rep. Schweikert: [To Mr. Lerhman] Other components go into food prices, e.g. farm subsidies.  “US agricultural policies kill people in sub-saharan africa”.  What is the breakdown of monetary inflation and other US policy?

11:29am: Mr. Lehrman: Poor families near subsistence have been particularly hurt by the inflation we are experiencing now.   Ferocious protests in the Middle East are related to the frustration poor and middle class people are feeling regarding food and basic necessities prices.

11:28am: Jim Grant: inflation is about “too much money” (not necessarily chasing too few goods); can “chase” various things (stocks, etc) at various times.

11:28am: Rep. Paul: Different incomes, wealth will imply different extent of being effected by the CPI.

11:26am: Mr. Lehrman: Williams uses the methodology that was in force [by the government] in 1980… by this methodology, the price level is now increasing by approximately 8%.   For our investment business, we pay no attention whatsoever to the CPI.  Even the PPI leaves much to be desired.  Previously the wholesale index was use to measure the level of prices.

Articles of wealth are excluded from CPI etc.  Investors have to ignore the CPI (et al.) and look at actual market prices to determine actual costs of production.

11:24am: Prof. Salerno: Von Mises once said the housewife who keeps track of prices in the grocery store is the most scientific measure of prices.   I use median CPI calculated by the Cleveland Fed, though it also has problems.  I agree that the adjustments are ridiculous (mentions “substitution effect”, hedonic adjustments).

11:23am: Rep. Paul: There has been lots of debate about the CPI; e.g John Williams at ShadowStats.com has been doing independent research in this area.

The government drops off things like food and energy [in headline numbers].

But the numbers catch up even with the government.

Please talk about the CPI; is John Williams right about the CPI being distorted since being revamped?  What price measurements do you use/follow?

11:22am: Prof. Salerno: There is a risk of vicious circle of the dollar being sold.  There is already talk of moving to a gold-based global monetary standard by foreign countries, international institutions… even drug dealers are beginning to stop using dollars (in favor of Euros), which could be considered a “first step” in unloading the dollar.

11:20am: Jim Grant: Paradox seems to govern many of these markets, e.g., the Yen has gone up, not down in the face of this disaster.  To stabilize this, the Bank of Japan has bought more dollars.

… but interest rates tend to rise and fall in generational cycles…

11:18am: Mr. Lehrman: … were the United States balance of payments to remain the same, the dollar would fall…. These two options, a great fall in the dollar with no residual buyer on the foreign exchange markets, combined with Federal Reserve contraction, represent two unattractive alternatives.

11:16am: Rep. Schweikert: … What if Japan has to start finance its own reconstruction, and so we get a tick-up in our own bond rates [without them buying]?

11:16am: Prof Salerno: … This could actually be a good thing in the current mercantilist system, but it could raise global prices.

11:16am: Rep. Schweikert:  … What would be the effect of a step-up in inflation in these countries?

11:15am: Prof. Salerno: There could be a cascading effect putting downward pressure on the US dollar if these holders need to sell.   Then the only thing the US government could do then to finance the deficit would be to borrow from its own people.

11:14am: Rep. Schweikert: China and Japan own most of our debt [held by foreign official holders].   What would be the effect of them selling?

11:12am: Mr. Lehrman: The official reserves of foreign central banks held in custody at the Fed (pub’d in the balance sheet of the Fed every Thursday) now amount to $3.5 trillion dollars invested in US gov. securities (Treasuries, with residual in Agencies).

This is the credit provided to our government by (essentially) mercantilist foreign nations.

Until we end this (and ability of the Fed to print through QE) efforts to control the deficit will be futile.

US government grows through deficit spending, which is financed by the Fed and foreign government, making limitless credit available.  An individual in response to limitless credit would behave the same.

11:11am: Grant: The dollar is a “franchise”; allows us to get goods from Asian creditors, who turn right around and buy Treasury securities (so it is as if the dollar has never left our shores).

We would lose this privilege (like a seignorage) if we left this system, and suffer lower standard of living.

11:10am: Congressman Lleutkemeyer: Right now the dollar is the world’s “gold standard”; what happens if it goes away?

11:07am: Jim Grant: To some extent every monetary system is faith based, but never till the present era has the world been on a system of pure paper.

Confidence has to be “refreshed”; is not perpetual.

The very size of the Fed’s QE program has crystallized doubts.

The dollar is a derivative, it used to derive its value from the gold underlying it.

Now it is a derivative with no underlying asset.

[relates anecdote of reader who says he understands QE, but no longer the meaning of “money”]

The mechanics of materializing this quantity of money has drawn great attention.

[relates anecdote from Wilder novel, “money is work”]

11:06am: Congressman Lleutkemeyer: [To Jim Grant] You said only thing holding up dollar is faith/confidence, can you elaborate?

11:02am: Mr. Lehrman : Since the end of the classic gold standard (on the eve of WWI), the value of the dollar as measured by the CPI has fallen to five cents.   Price of gold is [approx.] the reciprocal of the fall in the value of the dollar over the same period.

We have the price level from 1789 till the present quite accurately.

Coinage act of 1792 made dollar convertible to precious metals.

Price level under the gold standard from 1834 till 1914 stayed exactly the same (despite Civil War in between).

The only “laboratory” for monetary theory is history, and in that laboratory the gold standard provides virtual stability in the price level (on the average general level of prices).

11:02am: Ron Paul (to Mr Lehrman): Did we not have better stability of prices when we were under a gold standard?

11:01am: Salerno:  If deflation is falling prices – productivity increases, wages stay the same and there is more production.  Everyone else benefits from the falling prices, because their real incomes go up.

10:59am: Resumption, Ron Paul.

Multiple deflation/inflation definitions.  [Monetarily] deflation would mean money supply is shrinking as in the 30s.  Others worry about prices going down.

If we were on a sound money standard, would commodities prices go down? Who would benefit?  To prof: Salerno.

10:43am: RT is interviewing Jim Grant.

10:33am: Recess for floor vote; will reconvene in approximately 20 minutes.

10:27am: Salerno:  Inflation targetting to prevent inflation is practiced today (quasi-scientific).

This is a misdiagnosis: deflation is not depression.

Gradually falling prices are normal and benign [gives example of computers and calculators falling in prices, even through inflationary times].

[Further examples: HDTVs, LASIK eye surgery]

No one would claim that these “deflations” have been a bad thing for the economy.

Falling prices imply a greater abundance of goods; no detriment to profits, employment.

If this is good in some markets, why is it bad when it happens overall?

A: it’s not.  And under a gold standard, overall prices naturally decline.   This prevailed through the entire 19th century up until WWI.  The dollar could purchase more goods and services in 1913 than in 1800.

This “deflation” did not come with negative economic growth; in fact it came with spectacular growth throughout the span.

Today, as a result of the spike in commodities prices, land prices in the US are rising sharply.  Wholesale food prices went up about 4% last month, the most in 36 years.

Bernanke seems to welcome this inflation (especially in stock prices).

So Bernanke has declared “success” based on yet another potentially-ruinous asset bubble.

Recently the media has published stories that a new tech bubble is starting to grow.

10:22am: Jim Grant: Original Fed act said nothing about QE, 0% rates, or other exotic policies.

We should have known what “for other purposes” in Fed act would portend.

Central banking has become central planning.

Fed has added de facto third mandate: boosting stock prices.

0% funds rate has starved savers and fattened speculators.

Something very wrong in American finance: 12 of the country’s 13 largest financial institutions were at risk of failure in fall 2008.  Doubtful any could actually survive 1930’s depression conditions.

Manipulation of interest rates, even downward, distorting price signals, disrupting entire economies.   “Monetary chain reaction”.

Central banks hold to be true that they can set “the right” rate of interest, controlling for inflation (as they measure it).

Buckley: “would rather be governed by the first 400 names of the Boston phone book than the faculty of Harvard”.

Congress has entrusted control of the dollar to a committee: “the PhD standard”.

Congress should reconsider this system.

10:14am: Lehrman: Oil prices have tripled since QE began in late 2008.  Gasoline prices have almost doubled.  Basic foodstuffs have almost doubled.

Almost $2 trillion new dollars on Fed balance sheet created since then.  Triggered commodity and stock mania.

Flood of credit could not be fully absorbed by US economy, in recession.

Ben Bernanke even suggested this money creation explicitly to boost stock market.

Fall of dollar on forex has resulted.  Fed seems to want this depreciation.

Boom has resulted… in Asia, not US.

Predicts growth ~ 3.5% or more in 2011 and 2012; “Fed-fuelled” (barring oil price spike or wider econ. catastrophe due to Japan).

Slack capacity keeps producer prices from rising faster than they otherwise would, so money goes into commodity prices.

Two generations of money/credit inflation has been a primary cause of increasing economic inequality.  Bankers and speculators get new credit first; bailouts.  Finance stocks, bonds, and commodities with this money (front-running “Fed-created boom”).

Only the nimble “financial class” can manage to protect their inflation in this system. Middle class and poor left behind.

“If you do not have a solution, you do not have a problem” — so what is the solution?

A: dollar should be convertible to gold at a fixed rate.

Gold standard would terminate the world dollar standard.  Special access of the government and financial class to limitless Fed and foreign official credit would end.

Supply of money would be back in the hands of American people, as it should be.

Fed would have to slow down credit creation to maintain statutory gold convertibility.

US could lead by announcing convertibility at a date certain in the future (to a weight in gold).   Then establish convertibility of major foreign currencies.  Then treat only gold as official reserves.

Gold standard not perfect, but best we’ve ever tried (“laboratory of human history”).  Equitable, leading monetary standard of the world.

10:13am: Ron Paul: Introduces the witnesses, starting with Lehrman (advocate of gold standard, ran for governor of New York, … etc), then Jim Grant, then Prof. Salerno.

10:12am: Jones (cont.):  Reads district letter.   One constituent says pension adjustments not keeping up with inflation.  “Hopes to die” before this becomes a critical problem for him & wife.

10:10am: Vice Chair Walter Jones: I do the grocery shopping in my family; to wit:

Mentions Dudley response by public in Queens, NY: “I cannot eat my iPad” [regarding measuring inflation in foodstuffs vs. electronics]

Fed doesn’t think food and gas matter.  Dudley attempted to explain this to public.

10:04am: Chair Ron Paul: Fed’s dual mandate.  Fed is not doing a good job of keeping unemployment low.  Evidence is mounting that the Fed is not keeping price stability low.   Definition of “inflation”: rising prices are the symptom of the problem (printing of money), not the problem itself.

Scapegoats are found when prices start rising.  Real issue is monetary issue.  [Authorities] don’t want to deal with it directly.  We had price controls as recently as the 70s.  Today the Middle East crisis is influenced by rising prices.

Labor is blamed for rising prices.

Speculators are blamed.

Foreigners blamed for not managing their currencies well.

Excessive growth blamed.  Authorities think “let’s just kill the economy to kill inflation”.  Not a good way to solve the problem; growth itself does not cause higher prices.

Growth with no monetary inflation actually lowers prices.

Public starting to realize this mantra is a hoax.

Mises said this inversion is intentional [by Authorities].

This system of inflation is unjust because prices don’t go up evenly —  “If you destroy the currency, you will destroy the middle class.”  I believe inflation is worst for the poor and middle class.

[Yields to co-chair Walter Jones]

10:04am: Ron is introducing the hearing.

10:03am: Joe Salerno, Jim Grant, Mr. Louis Lehrman are seated in the witness seats.

9:56am : Hearing to start in a few minutes.