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The Fed Plans for the Next Crisis – Article by Ron Paul

The Fed Plans for the Next Crisis – Article by Ron Paul

The New Renaissance HatRon Paul

In her recent address at the Jackson Hole monetary policy conference, Federal Reserve Chair Janet Yellen suggested that the Federal Reserve would raise interest rates by the end of the year. Markets reacted favorably to Yellen’s suggested rate increase. This is surprising, as, except for one small increase last year, the Federal Reserve has not followed through on the numerous suggestions of rate increases that Yellen and other Fed officials have made over the past several years.

Much more significant than Yellen’s latest suggestion of a rate increase was her call for the Fed to think outside the box in developing responses to the next financial crisis. One of the outside-the-box ideas suggested by Yellen is increasing the Fed’s ability to intervene in markets by purchasing assets of private companies. Yellen also mentioned that the Fed could modify its inflation target.

Increasing the Federal Reserve’s ability to purchase private assets will negatively impact economic growth and consumers’ well-being. This is because the Fed will use this power to keep failing companies alive, thus preventing the companies’ assets from being used to produce a good or service more highly valued by consumers.

Investors may seek out companies whose assets have been purchased by the Federal Reserve, since it is likely that Congress and federal regulators would treat these companies as “too big to fail.” Federal Reserve ownership of private companies could also strengthen the movement to force businesses to base their decisions on political, rather than economic, considerations.

Yellen’s suggestion of modifying the Fed’s inflation target means that the Fed would increase the inflation tax just when Americans are trying to cope with a major recession or even a depression. The inflation tax is the most insidious of all taxes because it is both hidden and regressive.

The failure of the Federal Reserve’s eight-year spree of money creation via quantitative easing and historically low interest rates to reflate the bubble economy suggests that the fiat currency system may soon be coming to an end. Yellen’s outside-the-box proposals will only hasten that collapse.

The collapse of the fiat system will not only cause a major economic crisis, but also the collapse of the welfare-warfare state. Yet, Congress not only refuses to consider meaningful spending cuts, it will not even pass legislation to audit the Fed.

Passing Audit the Fed would allow the American people to know the full truth about the Federal Reserve’s conduct of monetary policy, including the complete details of the Fed’s plans to respond to the next economic crash. An audit will also likely uncover some very interesting details regarding the Federal Reserve’s dealings with foreign central banks.

The large number of Americans embracing authoritarianism — whether of the left or right-wing variety — is a sign of mass discontent with the current system. There is a great danger that, as the economic situation worsens, there will be an increase in violence and growing restrictions on liberty. However, public discontent also presents a great opportunity for those who understand free-market economics to show our fellow citizens that our problems are not caused by immigrants, imports, or the one percent, but by the Federal Reserve.

Politicians will never restore sound money or limited government unless forced to do so by either an economic crisis or a shift in public option. It is up to us who know the truth to make sure the welfare-warfare state and the system of fiat money ends because the people have demanded it, not because a crisis left Congress with no other choice.

Ron Paul, MD, is a former three-time Republican candidate for U. S. President and Congressman from Texas.

This article is reprinted with permission from the Ron Paul Institute for Peace and Prosperity.

The Imperative of Technological Progress: Why Stagnation Will Necessarily Lead to Disaster and How Techno-Optimism Can Overcome It – Article by G. Stolyarov II

The Imperative of Technological Progress: Why Stagnation Will Necessarily Lead to Disaster and How Techno-Optimism Can Overcome It – Article by G. Stolyarov II

The New Renaissance HatG. Stolyarov II
August 14, 2015

“He who moves not forward, goes backward.”
~ Johann Wolfgang von Goethe

It is both practically desirable and morally imperative for individuals and institutions in the so-called “developed” world to strive for a major acceleration of technological progress within the proximate future. Such technological progress can produce radical abundance and unparalleled improvements in both length and quality of life – whose possibilities Peter Diamandis and Steven Kotler outlined in their 2012 book Abundance: The Future is Better Than You Think. Moreover, major technological progress is the only way to overcome a devastating step backward in human civilization, which will occur if the protectionist tendencies and pressures of existing elites are allowed to freeze the status quo in place.

If the approximate technological and economic status quo persists, massive societal disintegration looms on the horizon. A Greece-style crisis of national-government expenditures may occur as some have predicted, but would only be a symptom of a greater problem. The fundamental driver of crisis since at least September 11, 2001, and more acutely since the Great Recession and the national-government bailouts of legacy financial and manufacturing institutions, is an increasing disconnect between the powerful and everybody else. The powerful – i.e., the politically connected, including the special interests of the “private sector” – seek to protect their positions through political barriers, at the expense of individual rights, upward social mobility, and economic/technological progress. Individuals from a relatively tiny politically connected elite caused the 2008 financial crisis, lobbied for and received unprecedented bailouts and lifelines for the firms whose misbehavior exacerbated the crisis, and then have attempted to rig the political “rules of the game” to prevent themselves from being unseated from positions of wealth and influence by the dynamics of market competition. The system created by these elites has been characterized by various observers as crony capitalism, corporatism, corporate fascism, neo-mercantilism, and a neo-Medieval guild system.

The deleterious influence of the politically connected today is reflected in the still-massive rates of unemployment and underemployment for the millennial generation, while many established industries fail to make openings for young people to ascend and fail to accommodate the emerging technologies with which young people thrive. While the millennial generation had nothing to do with the Great Recession, it has suffered its greatest fallout. Many millennials now encounter tremendous diminution in economic opportunity and living standards (think of young people in New York City paying several thousand dollars a month to share a tiny, century-old apartment among three people – or the emerging trend of shipping containers being converted into the only type of affordable housing for young people in San Francisco). The “Occupy” movement was a reflection of the resulting discontentment – a reflexive and indiscriminate backlash by young people who knew that their circumstances were unjustly bad, but did not understand the root causes or the culprits.

The only way for a crisis to be averted is for the current elites to stop blocking people from the millennial generation from opportunities to achieve upward mobility. The elite must also stop bailing out obsolete and poorly managed legacy institutions, and cease erecting protectionist barriers to the existence of innovative businesses that young people can and have tried to start. If the millennial generation continues to be shut out of the kinds of opportunities available to the preceding generation, however, I can envision two crisis scenarios. Each of these characterizations is not a prediction (but rather a nightmare which I hope can be avoided), is somewhat broad and, of course, is tentative. However, these scenarios are rough outlines of how the West could falter in the absence of significant technological progress.

Crisis Scenario 1: “Occupy” Times Ten: Millions of unemployed thirty-somethings (millennials in five to ten years) riot in the streets, indiscriminately destroying storefronts and setting cars alight. Economic activity and sophisticated production are ground to a halt because of the turmoil. The continuity of knowledge transfer and intergenerational symbiosis involved in human civilization are completely interrupted. Clashes with police create martyrs who are then invoked by opportunistic thugs as an excuse to loot and burn. Without the opportunity for peaceful economic cooperation, society degenerates into armed gangs, some left-wing (e.g., “Black Bloc” violent anarchists), others right-wing (e.g., survivalist militia groups). Thoughtful and intellectual people, who want the violence to end and see an imperfect peace as better than a war of all against all, are universally despised by the new tribes and cannot find a safe environment in which to work and innovate. The infrastructure of everyday life is critically damaged, and nobody maintains or repairs it. Roads, bridges, pipes, and electrical grids are either destroyed or become unusable after years of decay. The West becomes Ukraine writ large, eventually regressing into premodernity.

Crisis Scenario 2: The Reaction: Current political and crony-capitalist elites crack down with extreme force, either in response to actual riots or, more likely, to the threat thereof. Civil liberties are obliterated and an economic underclass enforced through deliberate restrictions on entry into any remunerative occupations – much like the 17th-century mercantilists advocated for maximum wages and prohibitions on perceived luxuries for the working classes. Those who do get jobs are required to work 60 or more hours per week and so have no time for anything else in life. All established industries are maintained in their current form through legal protections and bailouts, and there is an official policy that the structure of the economy must not be allowed to change for any reason. (Think of Directive 10-289 from Ayn Rand’s Atlas Shrugged.) Licensing requirements for professions become ubiquitous and burdensome, laden with Catch-22 provisions so that few or no new entrants can make it into the system. Only an elite cadre of Baby Boomers enjoys wealth and uses the force of legal entry barriers to prevent anyone else from having the opportunity to earn their own. They have ground technological progress to a halt, seeking to keep established business models in place and thwart all competition. The national government develops a massive spying capability and enforces social order through the ability to detect behaviors that might even be algorithmically correlated with dissent. All ordinary citizens are routinely humiliated in public under the pretense of thwarting crime or terrorism. TSA body searches have expanded beyond airports to highway checkpoints, shopping centers, and random stops by police on city streets. People’s homes are routinely raided by SWAT teams at the mildest pretext. This is done to make people meek and subservient to the established order. To keep young people from rioting (and get rid of the “excess” unemployed youths), the elites concoct jingoistic justifications to inflame endless foreign wars, and young people are conscripted and sent to die abroad. If any of these wars aggravate the regimes of either Russia or China, this scenario has the added risk of putting the world back on the verge of nuclear conflict. The fast-senescing crony-capitalist elites have cut off future biomedical progress and so will die eventually, but only the children of the elite will inherit any wealth. A neo-feudal oligarchy is established and becomes gradually ossified throughout the generations, while the industrial and technological base built over the past 200 years, as a legacy of the Enlightenment and individual rights, will deteriorate, eventually bringing the West back into premodernity.

I see an ossification of the status quo as leading to one or both of the above crisis scenarios. A return of premodernity is the logical conclusion of the dynamics of a fundamentally unaltered status quo. If humankind does not move technologically forward, it will go backward in a spiral of destruction and repression.

The only way for either crisis scenario to be averted is for technological progress to occur at no slower than the rates experienced during the twentieth century. Overt political revolution, even if it begins peacefully, is dangerous. To understand why this is so, one needs look no further than the recent Arab Spring uprisings – initially motivated by liberally minded dissidents and ordinary people who could no longer tolerate corrupt dictatorships, but ultimately hijacked by Islamist militants, military juntas, or both. A case even closer to the contemporary Western world is the recent Maidan revolution in Ukraine, which, while initially motivated by peaceful and well-intentioned pro-European activists, replaced a corrupt regime that occasionally persecuted dissidents with a fiercely militant, nationalistic regime that tolerates no dissent, engages in coercive historical revisionism, prohibits criticism of Nazi and neo-Nazi thugs, conscripts some of its citizens to die in civil war, and indiscriminately shells others of its citizens in the East. Revolutions always have the potential of replacing a lethargically bad regime with an aggressively destructive one.

This is why it is better for any societal transformation to be driven primarily by technological and economic development, rather than by political turmoil. The least turbulent transformations should be somewhat gradual and at least grudgingly accepted by the existing elites, who need to be willing to alter their own composition and accept bright minds from any background – not just their own progeny. A sufficient rate of technological advancement – especially due to the growth in 3D printing, robotics, nanotechnology, biotechnology, genetic engineering, vertical farming, and renewable energy – can ensure near-universal abundance within a generation, untethered from permission-granting institutions to which most people today owe a living. Such prosperity would enable most people to experience what are today upper-middle-class living standards, therefore having no motivation to riot. Technological progress can also preserve individual liberty by continually creating new spheres where politicians and lobbyists are incapable of control and individuals can outmaneuver most political restrictions.

Technological progress, particularly radical extension of the human lifespan through periodic rejuvenation that can restore the body to a more youthful condition, is also the only hope for remedying unsustainable expenditures of national governments, which are presently primarily intended to support people’s income and healthcare needs in old age. Rejuvenation biotechnology of the sort championed by Dr. Aubrey de Grey’s SENS Research Foundation could be developed with sufficient investment into the research, and could become disseminated by biotechnology entrepreneurs, ensuring that older people do not become decrepit or incapable of productive work as they age. The only way to sustainably extend average lifespans past about 85 years would be to turn back the clock of biological aging. It is not possible for most people (who do not have some degree of genetic luck) to live much longer beyond that without also becoming more youthful.

Many people who receive rejuvenation treatments will not want to retire – at least not from all work – if they still feel the vitality of youth. They will seek out activities to support human well-being and high living standards, even if they have saved enough money to consider it unnecessary to take a regular 8-to-5 job. With the vitality of youth combined with the experience of age, these people will be able to make sophisticated, persistent contributions to human civilization and will tend to plan for the longer term, as compared to most people today. If automation takes care of basic human needs, then human labor will be freed for more creative and fulfilling tasks.

Effective rejuvenation will not arrive right away, but immigration can keep the demographic disparity between the young and the old from being a severe problem in the meantime. This is another reason to reject protectionist policies and instead pursue approaches that allow more people to contribute to and benefit from the material prosperity of the “developed” world. Birth rates tend to fall anywhere there are major rises in standards of living after an industrial revolution, as children stop becoming productive helpers in an agricultural economy and instead become expensive to raise and educate so that they can participate in a knowledge-based economy. However, birth rates are still higher in many less-developed parts of the world, and people from those areas will readily seek opportunities for economic advancement in more developed countries, if given the option.

Fortunately, there are glimmers of hope that the path of gradual embrace of ever-accelerating progress will be the one taken in the early-21st-century Western world. The best outcome would be for an existing elite to facilitate mechanisms for its own evolution by offering people of merit but from humble backgrounds a place in real decision-making.

Some of that evolution can occur through market competition – new, upstart businesses displacing incumbents and gradually amassing significant resources themselves. The best instantiation of this in the United States today is the Silicon Valley entrepreneurial culture – which, incidentally, tends to finance the majority of longevity research. The most massive infusion of funds into longevity-related research has been from an offshoot of Google – Calico – founded in 2013 and currently partnering with a large pharmaceutical company, AbbVie. Calico has been somewhat secretive as to the details of its research, but there are other large businesses that are beginning to invest in similar endeavors – e.g., Craig Venter’s Human Longevity, Inc. Moreover, the famous libertarian venture capitalist Peter Thiel has given millions of dollars to Dr. Aubrey de Grey’s SENS Research Foundation – a smaller-scale organization but perhaps the most ambitious in its goals to bring about a reversal of human senescence through advances in rejuvenation treatments within the next quarter-century.

These developments are evidence that the United States today is characterized not by one elite, but by several – and the old “Paper Belt” elite is clearly in conflict with the new Silicon Valley elite. Politicians tend, surprisingly, not to be the most decisive players in this conflict, since they typically depend on harnessing pre-existing cultural currents in order to get elected and stay in office. Thus, they will tend to side with whatever issues and special interests they consider to be gaining ground at a given time. For this reason, many thinkers have characterized politics as a lagging indicator, responding to rather than triggering the defining events of an era. The politicians ride the currents to power, but something else creates those currents.

Differences in the breadth of vision among elites also matter. For instance, breakthroughs in human longevity could actually be a great boon for medical providers and the first pharmaceutical companies that offer effective products/treatments. Even the most ambitious proponents of life extension do not think it possible to develop a magic immortality pill. Rather, the treatments involved (which will be quite expensive at first) would require periodic regeneration of the cells and tissues within a person’s body – essentially resetting the biological clock every decade or so, while further innovation uncovers ways to reverse the damage more cheaply, safely, and effectively. This is a field ripe with opportunities for enterprising doctors, researchers, and engineers (while, at the same time, certainly endangering many extant business models). Some government officials, if they are sufficiently perceptive, could also be persuaded to support these changes – if only because they could prevent a catastrophic collapse of Social Security and Medicare. Approximately 30% of Medicare expenditures occur during the last year of patients’ lives, when the body is often fighting back multiple ailments in a losing battle. If this situation were simply prevented in the first place, and if most people became biologically young again and fully capable of working for a living or financing their own retirements, the expenses of both Social Security and Medicare could plummet until these programs became wholly unnecessary in the eyes of most voters.

The key to achieving a freer, more prosperous, and longer-lived future is to educate both elites and the general public to accurately weigh the opportunities and risks of emerging technologies. Too many individuals today, both elites and ordinary people, view technological progress with suspicion, conjuring in their minds every possible dystopian scenario and every possible malfunction, inconvenience, lost opportunity, moral reservation, or esthetic dislike they can muster against breakthroughs in life extension, artificial intelligence, robotics, autonomous vehicles, genetic engineering, nanotechnology, and many other areas of advancement that could vastly benefit us all. This techno-skeptical mindset is the biggest obstacle for proponents of progress and a better future to overcome. Fortunately, we do not need to be elites to play important roles in overcoming it. By simply arguing the techno-optimist case and educating people from all walks of life about the tremendous beneficial potential of emerging technologies, we can each do our part to ensure that the 21st century will become known as an era of humankind’s great liberation from its age-old limitations, and not a lurch back into the bog of premodern barbarism.

If we have a modicum of technological progress, the West might be able to muddle through the next several decades. If we have an acceleration of technological progress, the West will leave its current problems in the dust. The outcome will be a question of whether people (both elites and ordinary citizens) are, on balance, held hostage to the fear of the new or, rather, willing to try out technological alternatives to the status quo in the hopes of achieving improvement in their lives.

This essay may be freely reproduced using the Creative Commons Attribution Share-Alike International 4.0 License, which requires that credit be given to the author, G. Stolyarov II. Find out about Mr. Stolyarov here.
Janet Yellen is Right: She Can’t Predict the Future – Article by Ron Paul

Janet Yellen is Right: She Can’t Predict the Future – Article by Ron Paul

The New Renaissance Hat
Ron Paul
May 25, 2015
This week I found myself in rare agreement with Janet Yellen when she admitted that her economic predictions are likely to be wrong. Sadly, Yellen did not follow up her admission by handing in her resignation and joining efforts to end the Fed. An honest examination of the Federal Reserve’s record over the past seven years clearly shows that the American people would be better off without it.

Following the bursting of the Federal Reserve-created housing bubble, the Fed embarked on an unprecedented program of bailouts and money creation via quantitative easing (QE) 1, 2, 3, etc. Not only has QE failed to revive the economy, it has further damaged the average American’s standard of living while benefiting the financial elites. None other than Donald Trump has called QE “a great deal for guys like me.”

The failure of quantitative easing to improve the economy has left the Fed reluctant to raise interest rates. Yet the Fed does not want to appear oblivious to the dangers posed by keeping rates artificially low. This is why the Fed regularly announces that the economy will soon be strong enough to handle a rate increase.

There are signs that investors are beginning to realize that the Fed’s constant talk of raising rates is just talk, so they are looking for investments that will protect them from a Fed-caused collapse in the dollar’s value. For example, the price of gold recently increased following reports of stagnant retail sales. An increased gold price in response to economic sluggishness may appear counterintuitive, but it is a sign that investors are realizing quantitative easing is not ending anytime soon.

The increase in the gold price is not the only sign that investors are interested in hard assets to protect themselves from inflation. Recently a Picasso painting sold for a record 180 million dollars. This record may not last long, as an additional two billion dollars worth of art is expected to go on the market in the next few weeks.

Another sign of the increasing concerns about the dollar’s stability is the growing interest in alternative currencies. Investing and using alternative currencies can help average Americans, who do not have millions to spend on Picasso paintings, protect themselves from a currency crisis.

Congress should ensure that all Americans can protect themselves from a dollar crisis by repealing the legal tender laws.

Congress should also take the first step toward monetary reform by passing the Audit the Fed bill. Unfortunately, Audit the Fed is not a part of the Federal Reserve “reform” bill that was passed by the Senate Banking Committee. Instead, the bill makes some minor changes in the Fed’s governance structure. These “reforms” are the equivalent of rearranging deck chairs as the Titanic crashes into the iceberg. Hopefully, the Senate will vote on, and pass, Audit the Fed this year.

The skyrocketing federal debt is also a major factor in the coming economic collapse. The Federal Reserve facilitates deficit spending by monetizing debt. Congress should make real cuts, not just reductions in the “rate of growth,” in all areas. But it should prioritize cutting the billions spent on the military-industrial complex.

Some say that eliminating the welfare-warfare state and the fiat currency system that props it up will cause the people pain. The truth is the only people who will feel any long-term pain from returning to limited, constitutional government are the special interests that profit from the current system. A return to a true free-market economy will greatly improve the lives of the vast majority of Americans.

Ron Paul, MD, is a former three-time Republican candidate for U. S. President and Congressman from Texas.

This article is reprinted with permission from the Ron Paul Institute for Peace and Prosperity.

If the Fed Has Nothing to Hide, It Has Nothing to Fear – Article by Ron Paul

If the Fed Has Nothing to Hide, It Has Nothing to Fear – Article by Ron Paul

The New Renaissance Hat
Ron Paul
January 19, 2015
Since the creation of the Federal Reserve in 1913, the dollar has lost over 97 percent of its purchasing power, the US economy has been subjected to a series of painful Federal Reserve-created recessions and depressions, and the federal government has grown to dangerous levels thanks to the Fed’s policy of monetizing the debt. Yet the Federal Reserve still operates under a congressionally-created shroud of secrecy.No wonder almost 75 percent of the American public supports legislation to audit the Federal Reserve.

The new Senate leadership has pledged to finally hold a vote on the audit bill this year, but, despite overwhelming public support, passage of this legislation is by no means assured.

The reason it may be difficult to pass this bill is that the 25 percent of Americans who oppose it represent some of the most powerful interests in American politics. These interests are working behind the scenes to kill the bill or replace it with a meaningless “compromise.” This “compromise” may provide limited transparency, but it would still keep the American people from learning the full truth about the Fed’s conduct of monetary policy.

Some opponents of the bill say an audit would somehow compromise the Fed’s independence. Those who make this claim cannot point to anything in the text of the bill giving Congress any new authority over the Fed’s conduct of monetary policy. More importantly, the idea that the Federal Reserve is somehow independent of political considerations is laughable. Economists often refer to the political business cycle, where the Fed adjusts its policies to help or hurt incumbent politicians. Former Federal Reserve Chairman Arthur Burns exposed the truth behind the propaganda regarding Federal Reserve independence when he said, if the chairman didn’t do what the president wanted, the Federal Reserve “would lose its independence.”

Perhaps the real reason the Fed opposes an audit can be found by looking at what has been revealed about the Fed’s operations in recent years. In 2010, as part of the Dodd-Frank bill, Congress authorized a one-time audit of the Federal Reserve’s activities during the financial crisis of 2008. The audit revealed that between 2007 and 2008 the Federal Reserve loaned over $16 trillion — more than four times the annual budget of the United States — to foreign central banks and politically influential private companies.

In 2013 former Federal Reserve official Andrew Huszar publicly apologized to the American people for his role in “the greatest backdoor Wall Street bailout of all time” — the Federal Reserve’s quantitative easing program. Can anyone doubt an audit would further confirm how the Fed acts to benefit economic elites?

Despite the improvements shown in the (federally manipulated) economic statistics, the average American has not benefited from the Fed’s quantitative easing program. The abysmal failure of quantitative easing in the US may be one reason Switzerland stopped pegging the value of the Swiss Franc to the Euro following reports that the European Central Bank is about to launch its own quantitative easing program.

Quantitative easing is just the latest chapter in the Federal Reserve’s hundred-year history of failure. Despite this poor track record, Fed apologists still claim the American people benefit from the Federal Reserve System. But, if that were the case, why wouldn’t they welcome the opportunity to let the American people know more about monetary policy? Why is the Fed acting like it has something to hide if it has nothing to fear from an audit?

The American people have suffered long enough under a monetary policy controlled by an unaccountable, secretive central bank. It is time to finally audit — and then end — the Fed.

Ron Paul, MD, is a former three-time Republican candidate for U. S. President and Congressman from Texas.

This article is reprinted with permission from the Ron Paul Institute for Peace and Prosperity.

Military Conscription Shows the Evil of Ukraine’s Government – Article by G. Stolyarov II

Military Conscription Shows the Evil of Ukraine’s Government – Article by G. Stolyarov II

The New Renaissance Hat
G. Stolyarov II
May 1, 2014

I have, in the past, expressed ambivalence regarding the government of Oleksandr Turchynov and Arseniy Yatseniuk in Ukraine, but that government’s decision on May 1, 2014, to impose military conscription for men aged 18 to 25 clearly reveals it to be evil and unworthy of even verbal support, not to mention the material assistance and economic bailouts currently lavished on it by Western governments and the International Monetary Fund.

As I wrote in 2008 in “Why Freedom is Free and Rights Are Right: The Case Against Conscription, Compulsion, and Confiscation”, conscription is murder by lottery: “By fielding an army of conscripts, a government necessarily guarantees that some of those conscripts will be killed – although nobody knows in advance who will die. In effect, this is no different from selecting a large number of fit young men, assigning numbers to each of them, and picking a few of the numbers out of a hat – whereafter those whose numbers have been picked will be shot. Conscription is just such a murder by lottery – except that the picking of numbers is performed by the vicissitudes of the battlefield rather than the luck of a draw. The responsibility for the deaths of millions of young men from conscripted armies throughout world history lies solely on the shoulders of the governments who conscripted them. The enemy soldiers who killed them were mere instruments of murder; they were likely only following orders – and were likely themselves under compulsion to do so. The government officials who drafted the men, however, did so of their own free will and even with enthusiasm.”

It would be a complete contradiction of the principles of liberty and peace to support any government that conscripts its young men to become cannon fodder – disposable pawns in the power struggles of older, powerful leaders who will not themselves bear the physical costs of their desires to dominate over one group of people or another. Vladimir Putin’s regime is evil, too, and so are many of the militants aligned with it, as I have acknowledged previously. But supporting one evil just because it is arrayed against another is neither moral nor effective. American foreign policy engages in this support for the “enemy of the enemy” at almost every available opportunity, and this always comes back to hurt Americans in both the long and the not-so-long term.

Ironically, it was the overthrown Viktor Yanukovych who had abolished conscription in 2013 – perhaps the only good and liberty-friendly decision he made. Yanukovych deserved to be overthrown for instigating the killings of his own people, but this new government of thugs is no better. Indeed, it has managed to undo the one good legacy of Yanukovych’s reign! And yes, it is a government of thugs. This March 5 article from Channel 4 News in the United Kingdom – no Putin mouthpiece! – explains how many of the top posts in the Ukrainian government are occupied by leaders of Svoboda and Right Sector, two ultra-nationalist groups that grew out of explicitly fascist movements that use explicit Nazi symbols such as the Wolfsangel. Here are two images: at the top, Svoboda’s Oleh Tyahnybok delivers a Nazi salute; at the bottom, he poses with arch-interventionist and neoconservative warmonger John McCain. Right Sector’s leader Dmytro Yarosh is Ukraine’s Deputy Secretary of National Security – security, that is, for those who meet Yarosh’s standards of ethnic and linguistic “purity”.

Neither side in the conflict in Eastern Ukraine is just or right, or anything but destructive to the interests of the only innocent parties in the mix – civilians who seek to live and work in peace. No principle, no signal, no feverish nationalistic pride, no set of lines drawn on a map is worth the life of a single human being. As Voltaire poignantly and perceptively expressed it in his Philosophical Dictionary, “It needs twenty years to lead man from the plant state in which he is within his mother’s womb, and the pure animal state which is the lot of his early childhood, to the state when the maturity of the reason begins to appear. It has needed thirty centuries to learn a little about his structure. It would need eternity to learn something about his soul. It takes an instant to kill him.” No worthless, ephemeral power struggles and posturing can ever justify sacrificing the existence of the rich individual universe – the incomparably intricate and sophisticated mind and body – of any actual human being.

The Ukrainian government is forcing young men to kill their fellow Ukrainian and Russian young men, against whom they have no individual grievances. This is vile and reprehensible, and the Ukrainian government deserves to fall. It would be easy for it to fall and would not require active external intervention; the West would just need to withdraw its support and let the situation unfold as it would with only the involvement of local actors. If the West continues to prop it up with aid, this would only prolong the spree of destruction engaged in by people who should never have had a chance at high office in any civilized society, who should have been marginalized much like the Ku Klux Klan and various neo-Nazi parties are treated in the United States today. No government that uses its own people as cannon fodder against their will deserves to exist; no country whose “territorial integrity” must be maintained by a conscript army deserves for its territory to remain intact.

As to the young Ukrainian men about to suffer under the yoke of military conscription, my advice to them can be found in my poem “The Draft Dodger”, written in 2004 but still just as relevant ten years later. As one who proudly escaped Alexander Lukashenko’s Belrusian military conscription myself (I have subsequently become a US citizen – so I am thankfully safe from that particular tyranny), I wish these innocent young men all the best in finding peaceful, prosperous lives outside the heinous havoc which they did not create.

The Draft Dodger (2004)
G. Stolyarov II

I have been sentenced to a war.
And my offense? Naught but my age.
I’ll suffer pestilence and gore,
And die upon a foreign stage.
The verdict has been passed by those
Who wish to equal me to rags,
Plug sand into a breathing nose,
Borrow my life, return dog-tags.

They tell me, “Freedom is not free,”
And thus they seek mine to deprive.
But no! I’ll courage have to flee,
To choose to prosper and survive!
The right that mine was from the womb,
That I had bought with Reason’s gold,
I shall not lay before a tomb,
But will Self’s Shrine from robbers hold.

I claim no more than what is mine;
To rise each morning when I will,
To build, compose, create, refine,
And heed no Congressman’s dread bill,
Whose parasitic voting bloc
My soul as spoils of war would claim,
No noble war of awe and shock,
But rabble-rousers’ power game.

When nations seek me for their slave,
Their cause, their plight shall pass in vain.
Let no man give but what he gave,
Of his own will, for his own gain.
Freedom can’t stand on sacrifice;
With blood and bones I shan’t it craft.
I shall not offer prey to vice,
And, proudly, I shall dodge this draft!

Bernanke’s Legacy: A Weak and Mediocre Economy – Article by John P. Cochran

Bernanke’s Legacy: A Weak and Mediocre Economy – Article by John P. Cochran

The New Renaissance Hat
John P. Cochran
February 8, 2014


As Chairman Bernanke’s reign at the Fed comes to an end, the Wall Street Journal provides its assessment of “The Bernanke Legacy.” Overall the Journal does a reasonable job on both Greenspan and Bernanke, especially compared to the “effusive praise from the usual suspects; supporters of monetary central planning. The Journal argues when accessing Bernanke’s performance it is appropriate to review Bernanke’s performance “before, during, and after the financial panic.”

While most assessments of Bernanke’s performance as a central banker focus on the “during” and “after” financial-crisis phases with much of the praise based on the “during” phase, the Journal joins the Austrians and John Taylor in unfavorable assessment of the more critical “before” period. It was this period when the Fed generated its second boom-bust cycle in the Greenspan-Bernanke era. In the Journal’s assessment, Bernanke, Greenspan, and the Fed deserve an “F.” While this pre-crisis period mostly fell under the leadership of Alan Greenspan, the Journal highlights that Bernanke was the “leading intellectual force” behind the pre-crisis policies. As a result of these too-loose, too-long policies, just as the leadership of the Fed passed from Greenspan to Bernanke, the credit boom the Fed “did so much to create turned to mania, which turned to panic, which became a deep recession.” The Journal’s description of Bernanke’s role should be highlighted in any serious analysis of the Bernanke era:

His [Bernanke’s] role goes back to 2002 when as a Fed Governor he gave a famous speech warning about deflation that didn’t exist [and if it did exist should not have been feared].[1] He and Mr. Greenspan nonetheless followed the advice of Paul Krugman to promote a housing bubble to offset the dot-com crash.

As Fed transcripts show, Mr. Bernanke was the board’s intellectual leader in its decision to cut the fed-funds rate to 1% in June 2003 and keep it there for a year. This was despite a rapidly accelerating economy (3.8% growth in 2004) and soaring commodity and real-estate prices. The Fed’s multiyear policy of negative real interest rates produced a credit mania that led to the housing bubble and bust.

For some of the best analysis of the Fed’s pre-crisis culpability one should turn to Roger Garrison’s excellent analysis. In a 2009 Cato Journal paper, Garrison (2009, p. 187) characterizes Fed policy during the “Great Moderation” as a “learning by doing policy” which, based on events post-2003, would be better classified as “so far so good” or “whistling in the dark.” The actual result of this “learning by doing policy” is described by Garrison in “Natural Rates of Interest and Sustainable Growth”:

In the earlier episode [ boom-bust], the Federal Reserve moved to counter the upward pressure of interest rates, causing actual interest rates not to deviate greatly from the historical norm. In the later episode [housing bubble/boom-bust], the Federal Reserve moved to reinforce the downward pressure on interest rates, causing the actual interest rates to be exceedingly low relative to the historical norm. Although the judgment, made retrospectively by economists of virtually all stripes, that the Fed funds target rate was “too low for too long” between mid-2003 and mid-2004, it was almost surely too low for too long relative to the natural rate in both episodes. (p. 433)

Given this and other strong evidence of the Fed’s role in creating the credit-driven boom, the Journal faults “Mr. Bernanke’s refusal to acknowledge that the Fed made any mistake in the mania years.”

On the response to the crisis, the Journal refrains from the accolades of many who credit the Fed led by the leading scholar of the Great Depression from acting strongly to prevent another such calamity. According to the Fed worshipers, things might not be good, but without the unprecedented actions and bailouts things would have been catastrophic. The Journal’s more measured assessment:

Once the crisis hit, Mr. Bernanke and the Fed deserve the benefit of the doubt. From the safe distance of hindsight, it’s easy to forget how rapid and widespread the financial panic was. The Fed had to offset the collapse in the velocity of money with an increase in its supply, and it did so with force and dispatch. One can disagree with the Fed’s special guarantee programs, but we weren’t sitting in the financial polar vortex at the time. It’s hard to see how others would have done much better.

But discerning readers of Vern McKinley’s Financing Failure: A Century of Bailouts might disagree. Fed actions, even when not verging on the illegal, were counter-productive, unnecessary, and contributed to action-freezing policy uncertainty which contributed to the collapse of the velocity of money. McKinley describes much of what was done as “seat-of-the-pants decision-making” (pp. 305-306):

“Seat of the pants” is not a flattering description of the methods of the regulators, but its use is justified to describe the panic-driven actions during the 2000s crisis. It is only natural that under the deadline of time pressure judgment will be flawed, mistakes will be made and taxpayer exposure will be magnified, and that has clearly been the case. With the possible exception of the Lehman Brothers decision … all of the major bailout decisions during the 2000s crisis were made under duress of panic over a very short period of time with very limited information at hand and with input of a limited number of objective parties involved in the decision making. Not surprisingly, these seat-of-the-pants responses did not instill confidence, and there was no clear evidence collected that the expected negative fallout would truly have occurred.

While a defense of some Fed action could be found in Hayek’s 1970s discussion of “best” policy under bad institutions (a central bank) where he argued that during a crisis a central bank should act to prevent a secondary deflation, the Fed actions went clearly beyond such a recommendation. Better would have been an immediate policy to end the credit expansion in its tracks. The Fed’s special guarantee programs and movement toward a mondustrial policy should be a great worry to anyone concerned about long-term prosperity and liberty. Whether any human running a central bank could have done better is an open question, but other monetary arrangements could clearly have led to better outcomes.

The Journal’s analysis of post-crisis policy, while not as harsh as it should be,[2] is critical. Despite an unprecedented expansion of the Fed’s balance sheet, the “recovery is historically weak.” At some point “a Fed chairman has to take some responsibility for the mediocre growth — and lack of real income growth — on his watch.” Bernanke’s policy is also rightly criticized because “The other great cost of these post-crisis policies is the intrusion of the Fed into politics and fiscal policy.”

Because the ultimate outcome of this monetary cycle hinges on how, when, or if the Fed can unwind its unwieldy balance sheet, without further damage to the economy; most likely continuing stagnation or a return to stagflation, or less likely, but possible hyper-inflation or even a deflationary depression, the Bernanke legacy will ultimately depend on a Bernanke-Yellen legacy. Given, as the Journal points out, “Politicians — and even some conservative pundits — have adopted the Bernanke standard that the Fed’s duty is to reduce unemployment and manage the business cycle,” the prospect that this legacy will be viewed favorably is less and less likely. Perhaps if the editors joined Paul Krugman in reading and fully digesting Joe Salerno’s “A Reformulation of Austrian Business Cycle Theory in Light of the Financial Crisis,” they would correctly fail Bernanke and Fed policy before, during, and after the crisis.

But what should be the main lesson of a Greenspan-Bernanke legacy? Clearly, if there was no pre-crisis credit boom, there would have been no large financial crisis and thus no need for Bernanke or other human to have done better during and after. While Austrian analysis has often been criticized, incorrectly,[3] for not having policy recommendations on what to do during the crisis and recovery, it should be noted that if Austrian recommendations for eliminating central banks and allowing banking freedom had been followed, no such devastating crisis would have occurred and no heroic policy response would have been necessary in the resulting free and prosperous commonwealth.


[1] See Joseph T. Salerno, “An Austrian Taxonomy of Deflation — With Applications to the U.S.” Quarterly Journal of Austrian Economics 6, no. 4 (2001).

[2] See John P. Cochran’s, Bernanke: The Good Engineer? Mises Daily Article, 21 March 2013 and Bernanke: A Tenure of Failure, Mises Daily Article, 31, July 2013.

[3] See John P. Cochran, Recessions: The Don’t Do List, Mises Daily Article, 17 February 2013.

John P. Cochran is emeritus dean of the Business School and emeritus professor of economics at Metropolitan State University of Denver and coauthor with Fred R. Glahe of The Hayek-Keynes Debate: Lessons for Current Business Cycle Research. He is also a senior scholar for the Mises Institute and serves on the editorial board of the Quarterly Journal of Austrian Economics. Send him mail. See John P. Cochran’s article archives.

This article was published on and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

Federal Reserve Steals From the Poor and Gives to the Rich – Article by Ron Paul

Federal Reserve Steals From the Poor and Gives to the Rich – Article by Ron Paul

The New Renaissance Hat
Ron Paul
November 19, 2013

Last Thursday the Senate Banking Committee held hearings on Janet Yellen’s nomination as Federal Reserve Board Chairman. As expected, Ms. Yellen indicated that she would continue the Fed’s “quantitative easing” (QE) polices, despite QE’s failure to improve the economy. Coincidentally, two days before the Yellen hearings, Andrew Huszar, an ex-Fed official, publicly apologized to the American people for his role in QE. Mr. Huszar called QE “the greatest backdoor Wall Street bailout of all time.”

As recently as five years ago, it would have been unheard of for a Wall Street insider and former Fed official to speak so bluntly about how the Fed acts as a reverse Robin Hood. But a quick glance at the latest unemployment numbers shows that QE is not benefiting the average American. It is increasingly obvious that the Fed’s post-2008 policies of bailouts, money printing, and bond buying benefited the big banks and the politically-connected investment firms. QE is such a blatant example of crony capitalism that it makes Solyndra look like a shining example of a pure free market!

It would be a mistake to think that QE is the first time the Fed’s policies have benefited the well-to-do at the expense of the average American. The Fed’s polices have always benefited crony capitalists and big spending politicians at the expense of the average American.

By manipulating the money supply and the interest rate, Federal Reserve polices create inflation and thereby erode the value of the currency. Since the Federal Reserve opened its doors one hundred years ago, the dollar has lost over 95 percent of its purchasing power —that’s right, today you need $23.70 to buy what one dollar bought in 1913!

As pointed out by the economists of the Austrian School, the creation of new money does not impact everyone equally. The well-connected benefit from inflation, as they receive the newly-created money first, before general price increases have spread through the economy. It is obvious, then, that middle- and working-class Americans are hardest hit by the rising level of prices.

Congress also benefits from the devaluation of the currency, as it allows them to increase welfare- and warfare-spending without directly taxing the people. Instead, the increase is only felt via the hidden “inflation tax.” I have often said that the inflation tax is one of the worst taxes because it is hidden and because it is regressive. Of course, there is a limit to how long the Fed can facilitate big federal spending without causing an economic crisis.

Far from promoting a sound economy for all, the Federal Reserve is the main cause of the boom-and-bust economy, as well as the leading facilitator of big government and crony capitalism. Fortunately, in recent years more Americans have become aware of how the Fed is impacting their lives. These Americans have joined efforts to educate their fellow citizens on the dangers of the Federal Reserve and have joined efforts to bring transparency to the Federal Reserve by passing the Audit the Fed bill.

Auditing the Fed is an excellent first step toward restoring a monetary policy that works for the benefit of the American people, not the special interests. Another important step is to repeal legal tender laws that restrict the ability of the people to use the currency of their choice. This would allow Americans to protect themselves from the effects of the Fed’s polices. Auditing and ending the Fed, and allowing Americans to use the currency of their choice, must be a priority for anyone serious about restoring peace, prosperity, and liberty.

Ron Paul, MD, is a former three-time Republican candidate for U. S. President and Congressman from Texas.

This article is reprinted with permission from the Ron Paul Institute for Peace and Prosperity.

Why Do Banks Keep Going Bankrupt? – Article by Kirby R. Cundiff

Why Do Banks Keep Going Bankrupt? – Article by Kirby R. Cundiff

The New Renaissance Hat
Kirby R. Cundiff
November 4, 2013

The banking industry is unstable. Banks are regularly going bankrupt. Crises in the banking industry have occurred in three distinct time periods during the twentieth century—during the Great Depression of the 1930s, during the Savings and Loan crisis of the 1980s and 1990s, and during the Great Recession from 2007 to present.

Why the banking industry is so vulnerable to bankruptcies and what can be done to correct this problem?

Debt to assets, or leverage, ratios vary significantly from industry to industry. They are typically under ten percent in most high tech industries and go up to forty percent for public utilities. Average debt ratios in the banking and financial services industry are in the fifty to seventy percent range, however, and many banks have much higher leverage ratios.

Firms attempt to minimize their total financing costs or Working Average Cost of Capital (WACC). The component costs of capital (cost of debt and cost of equity) are determined by investors’ perceptions of the risk and return possibilities associated with buying debt or equity in a given company or individual.

A credit card loan has a higher interest rate than a home loan because the credit card loan is riskier—i.e. there are no assets to seize if the money is not paid back. Similarly, a high-risk company normally pays a higher interest rate on its debt than a lower-risk company and increasing leverage is normally associated with increasing risk. Due to deposit insurance, however, this isn’t the case with banks.

Moral Hazard

The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $250,000 in the United States. Most of the European countries (including Cyprus) have similar organizations that insure deposits up to 100,000 EUR. (See Deposit Insurance.)

Since depositors believe that their bank accounts are insured by governments, they do not generally know or care how much risk banks incur when they invest their depositors’ money. This creates a moral hazard problem with very little oversight by depositors of a bank’s management of their assets. Bank managers can take a lot of risk and, if they make profits, they keep the money. If they lose money, the taxpayers pay for the losses. In theory, this moral hazard problem is mitigated by subordinated debt, investors with deposits over the deposit insurance limit, and banking regulations. But these approaches are clearly not working.

In a series of agreements called the Basel Accords, the Basel Committee on Bank Supervision (BCBS) provides certain recommendations on banking regulations in regards to capital risk, market risk and operational risk. The purpose of these accords is to ensure financial institutions have enough capital to meet their obligations. The Tier I and Tier II capital controls of the Basel Agreements are supposed to prevent banks from taking too much risk with depositors’ assets. Tier 1 capital consists largely of shareholders’ equity. Tier 2 capital comprises undisclosed reserves, revaluation reserves, general provisions, hybrid instruments and subordinated debt.

The capital ratios are:

  •   Tier 1 capital ratio = Tier 1 capital / Risk-adjusted assets
  •   Total capital (Tier 1 and Tier 2) ratio = Total capital (Tier 1 + Tier 2) / Risk-adjusted assets
  •   Leverage ratio = Tier 1 capital / Average total consolidated assets

To be well-capitalized under federal bank regulatory definitions, a bank holding company must have a Tier 1 capital ratio of at least six percent, a total capital ratio of at least ten percent, and a leverage ratio of at least five percent (Capital).

The leverage ratios allowed under the Basel agreements are far higher than the typical leverag ratios in most industries and are far higher than would exist in a free-market financial system. Under a free-market system, depositors would not put their money in overly-leveraged banks and banks would be forced to decrease their leverage ratios and behave more like mutual or money market funds. Banks would be less likely to use short-term liabilities (deposits) to fund long-term assets (loans).

The S&L Crisis

Massive bank leverage would not create as much instability if the money supply was stable as in the 1800s under the gold standard. Under the current debt-is-money system, inflation and interest rates can vary wildly from year to year. The Savings and Loan Associations (S&Ls) made many low interest 30-year fixed rate home loans when inflation was low in the 1960s—five percent interest rate loans were typical. As inflation increased, the S&Ls still had these long-term home loans on their books, but the market now demanded higher interest rates on deposits (eighteen percent at times). The interest rates that many savings and loans were receiving on their assets (30-year fixed rate loans) were much lower than the interest rates the same S&Ls were paying on their liabilities (deposits). This duration mismatch resulted in the mass insolvency of the Savings and Loan Industry and a bailout of the S&Ls by the American tax payers exceeding $100 billion.

The Great Recession

The banking defaults of the Great Recession (2007 to present) were also caused by unstable interest rates combined with high leverage. The Federal Reserve lowered rates in the early 2000s to stimulate the economy after the bursting of the bubble. This resulted in many people borrowing money at very low interest rates to buy homes. Then the Federal Reserve raised interest rates and many people were no longer able to make their home payments. Again the result was massive bank insolvency and a substantial decrease in home values. Another huge taxpayer -funded bailout of the banking system followed, and the Federal Reserve has been printing money ever since, trying to stimulate the economy in the wake of yet another bubble it created.  The disbursements associated with placing into conservatorship government-sponsored enterprises Fannie Mae and Freddie Mac by the U.S. Treasury, the Troubled Asset Relief Program (TARP), and the Federal Reserve’s Maiden Lane Transactions are probably around $400 billion. How much of these disbursements will be paid back is currently unclear.

During the recent crises in Cyprus, proposals were seriously considered to ignore the 100,000 EUR deposit insurance and seize a fraction of even small depositors’ money. Most depositors lost access to their accounts for over a week and large depositors are still likely to lose a large fraction of their assets. This crisis has made some depositors more likely to pay attention to the solvency of their banks, but most depositors still believe that deposit insurance will cover any possible losses. If banks are to become more stable, the amount of equity relative to debt in the banking system must be drastically increased to something resembling what it would be without government deposit insurance, central bank subsidies, and treasury bailouts. Given the lobbying power of bankers in Washington, DC and around the word, such is unlikely to occur. The boom-bust cycle of banking bubbles followed by banking crises will most surely continue.

For further reading on this topic see this from The Freeman.

Kirby R. Cundiff, Ph.D. is an Associate Professor of Finance at the Rochester Institute of Technology. He is a Chartered Financial Analyst and a CERTIFIED FINANCIAL PLANNERTM Professional. 

This article was originally published by The Foundation for Economic Education.


Bernanke’s Farewell Tour – Article by Ron Paul

Bernanke’s Farewell Tour – Article by Ron Paul

The New Renaissance Hat
Ron Paul
August 17, 2013

In mid-July 2013 Federal Reserve Chairman Ben Bernanke delivered what may well be his last Congressional testimony before leaving the Federal Reserve in 2014. Unfortunately, his farewell performance was full of contradictory comments about the state of the economy and the effects of Fed policies on the market. One thing Bernanke inadvertently made clear was that the needs of Wall Street trump Main Street, the economy, and sound money.

Quantitative easing (QE) and effectively zero interest rates have created paper prosperity, but now the Fed must continuously assure Wall Street that the QE spigot will not be turned off. Otherwise even the illusion of recovery will disappear. So Bernanke made every effort to emphasize that the economy was not doing well enough to end QE, while lauding the success of Fed policies in improving the economy.

Bernanke was also intent on denying that Fed policies directly boost financial markets. However, the money the Fed creates out of nothing in order to buy mortgage-backed securities and government debt for the QE3 program, benefits first and foremost the big banks and the financial class — those people who are invited to the Fed auctions. This new money then fuels stock bubbles, bond bubbles, agricultural land bubbles, and others. The consequences of this are felt by ordinary savers, investors, and retirees whose savings lose value because of the Fed’s zero interest rate policy.

As if Wall Street favoritism and zero returns for savers isn’t bad enough, the Fed wants the rest of America to bear a greater inflation burden. The Fed thinks you should lose two percent of the value of your dollar this year. But Bernanke is not satisfied with having reduced purchasing power by ten percent since the 2008 recession. The inflation picture is actually much worse if we look at the old consumer price index —the one that did not assume that ground beef is a perfect substitute for steak.

Using the old CPI metric, as calculated by John Williams at Shadow Government Statistics, we’ve lost close to 50 percent of the purchasing power of our money in just the last five years. So what you were able to buy with the $20 in your pocket before the financial crisis costs more than $30 today. That might be peanuts to Wall Street, but that’s real money for working Americans. And it’s theft by the Fed. It is a direct consequence of the trillions of new dollars the Fed has “not literally” printed—as Bernanke put it.

Bernanke’s final testimony before Congress confirms that the Fed has blatant disregard for the extra costs and the new bubbles it is creating. The Fed only understands paper prosperity, not how middle-class Americans and the poor suffer the consequences of higher prices, resources misallocations, and distortionary bubbles as well as insidious unemployment.

The only way out of this tailspin of monetary favoritism is to restore sound money, which would end the Fed’s ability to put Wall Street first and to manipulate currency. The Fed has proven over and over again that it has no respect for the real money that preserves the value of people’s labor, their wealth, and their ability to live free and prosperous lives. It is beyond time for the Fed, Wall Street, and the federal government to stop manipulating money and stealing from the American people under the false guise of paper prosperity.

Ron Paul, MD, is a former three-time Republican candidate for U. S. President and Congressman from Texas.

This article is reprinted with permission.

Bitcoin for Beginners – Article by Jeffrey A. Tucker

Bitcoin for Beginners – Article by Jeffrey A. Tucker

The New Renaissance Hat
Jeffrey A. Tucker
April 2, 2013

Understanding Bitcoin requires that we understand the limits of our ability to imagine the future that the market can create for us.

Thirty years ago, for example, if someone had said that electronic text—digits flying through the air and landing in personalized inboxes owned by us all that we check at will at any time of the day or night—would eventually displace first class mail, you might have said it was impossible.

After all, not even the Jetsons cartoon imagined email. Elroy brought notes home from his teacher on pieces of paper. Still, email has largely displaced first-class mail, just as texting, social networking, private messaging, and even digital vmail via voice-over-Internet are replacing the traditional telephone.

It turns out that the future is really hard to imagine, especially when entrepreneurs specialize in surprising us with innovations. The markets are always outsmarting even the most wild-eyed dreamers, and they are certainly smarter than the intellectual who keeps saying: such and such cannot happen.

It’s the same today. What if I suggested that digital money could eventually come to replace government paper money? Heaven knows we need a replacement.

Solving Problems a Byte at a Time

Money started in modern times as gold and silver, and it was controlled by its owners and users. Then the politicians got hold of it—a controlling interest in half of every transaction—and look what they did. Today money is rooted in nothing at all and its value is subject to the whims of central planners, politicians, and monetary bureaucrats. This system is not very modern when we consider a world in which the market is driving innovations in other aspects of our daily lives.

Maybe it was just a matter of time. The practicality is impossible to deny: Gamers needed tokens they could trade. Digital real estate needed to be bought and sold. Money was also becoming more and more notional, with wire transfers, bank computer systems, and card networks serving to move “money” around. The whole world was gradually migrating to the digital sphere, but conventional money was attached to the ground, to vaults owned or controlled by governments.

The geeks went to work on it in the 1990s and developed a number of prototypes—Ecash, bit gold, RPOW, b-money—but they all faltered for the same reason: their supply could not be limited and no one could figure out how to make them impossible to double and triple spend. Normally, reproducibility is a wonderful thing. You can send me an image and still keep it. You can send me a song and not lose control of yours. The Internet made possible infinite copying, which is a great thing for media and texts and—with 3-D printing—even objects. But reproducibility is not a feature that benefits a medium of exchange.

After all, a currency is useless unless it is scarce and its replication is carefully controlled. Think of the gold standard. There is a fixed amount of gold in the world, and it enters into economic life only through hard work and real expenditure. Gold has to be mined. All gold is interchangeable with all other gold, but when I own an ounce, you can’t own it at the same time. How can such a system be replicated in the digital sphere? How can you assign titles to a fungible digital good and makes sure that these titles are absolutely sticky to the property in question?

Follow the Money

Finally it happened. In 2008, a person called “Satoshi Nakamoto” created Bitcoin. He wasn’t the first to solve the problem of double spending. A currency called e-gold did that, but the flaw was that there was a central entity in charge that users had to trust. Bitcoin removed this central point of failure, enabling miners themselves constantly to validate the transaction record. He had each user download the full ledger of all existing Bitcoins so that each could be checked for its title and not used more than once at the same time. With his system, every coin had an owner, and the system could not be gamed.

Further, Nakamoto built in a system of mining that attempts to replicate the experience of the gold standard. The math equations you have to solve get harder over time. The early creators had it easy, just like the early miners of gold could pan it out of the river, though later they had to dig into the mountain. Nakamoto put a limit on the number of coins that can be mined (21 million by 2140). (A new coin is currently mined every 20 seconds or so, and a transaction occurs every second.)

He made his code completely open-source and available to all so that it could be trusted. And the payment system used the most advanced form of encryption, with public keys visible to all and a scrambling system that makes its connection to the private key impossible to discover.

No one would be in charge of the system; everyone would be in charge of the system. This is what it means to be open source, and it’s the same dynamic that has made WordPress a powerhouse in the software community. There would be no need for an Audit Bitcoin movement. Trust, anonymity, speed, strict property rights, and the possibility that applications could be built on top of the infrastructure made it perfect.

Bitcoin went live on November 1, 2008. To really appreciate why this matters, consider the times. The entire political and financial establishment was in full-scale panic meltdown. The real estate markets had collapsed, pulling down the balance sheets of the major banks. The investment banks were unloading mortgage-backed securities at an unprecedented pace. Boats delivering goods couldn’t leave shore because they could find no backers for their insurance bonds. For a moment, it seemed like the world was ending. The Republicans held the White House, but the unthinkable still happened: Government and the central banks decided to attempt a full-scale rescue of the whole system, spending and creating trillions in new paper tickets to fill bank vaults.

Clearly government paper was failing. A digital alternative had to exist. But what gave Bitcoin its value? There were several factors. It was not fixed to any existing currency, so it could float according to human valuation. It was made from real stuff: the very 1s and 0s that were driving forward the global market economy. And while 1s and 0s can be reproduced unto infinity, the new coins could not, thanks to a system in which the coin and its public key were strictly controlled and the ledger updated for every transaction. Its soundness could be checked constantly through instantaneous conversion to other currencies as well as to goods and services. The model seemed impenetrable, the first digital currency that really addressed all the problems that had doomed previous attempts.

A Bitcoin of One’s Own

Let’s fast forward in time to March 2013. I had become the proud owner of my first Bitcoin. My wallet lived on my smartphone. Only three years ago, some wonderful applications had already developed around the currency unit. Although I’m a bit techy, I’m not a rocket scientist and I’m quite certain that I would have been out of my league. But this is how digital institutions develop to become ever more user friendly. At the same event at which I became a Bitcoin owner, I also used a Bitcoin ATM. I put in the green stuff, held my digital wallet up to the scanner, and then I felt the buzz on my smartphone. Physical became digital. Beautiful.

But still I wondered what exactly I could do with these things. That’s when the consumer world of Bitcoin products appeared before me. We aren’t just talking about the Silk Road—a website that became notorious for enabling the easy, anonymous buying and selling of drugs. There are Bitcoin stores everywhere. And there are services in which you can buy from any website with a Bitcoin interface. There was growing talk of Bitcoin futures markets. Some companies were rumored to be going public with Bitcoins, and thereby bypassing the whole of the Securities and Exchange Commission. The implications are mind-blowing.

Sacred Pliers

Still, I’m a tactile kind of guy. I need to experience things. So I went to one of these sites. I brought the first product I saw (why, I do not know). It was a pair of pliers for crimping electric cables. I put in my shipping address and up came a note that said it was time to pay. This was the moment I had been waiting for. A QR code—that funny square design that looks like a 3-D bar code—popped up onscreen. I held up my “wallet” and scanned. In less than 2 seconds, the deed was done. It was easier than Amazon’s one-click ordering system. My heart raced. I jumped out of my chair and did a quick song and dance around the room. Somehow I had seen it thoroughly for the first time: this is the future.

The pliers arrived two days later, and even though I have no use for them, I still treasure them.

Bitcoin had already taken off when the surprising Cyprus crisis hit in a big way. The government was talking about seizing bank deposits as a way of bailing out the whole system. During this period, Bitcoin essentially doubled in value. Press reports said that people were pulling out government currency and converting it, not only in Cyprus but also in Spain and Italy and elsewhere. The price of Bitcoin in terms of dollars soared. Another way to put this is that the price of goods and services in terms of Bitcoin was going down. Yes, this is the much-dreaded system that mainstream economists decry as “deflation.” The famed Keynesian Paul Krugman has even gone so far as to say that the worst thing about Bitcoin is that people hoard them instead of spending them, thereby replicating the feature of the gold standard that he hates the most! He might as well have given a ringing endorsement, as far as I’m concerned.

Obsession and Resentment

My own experience with Bitcoin during this time intensified. I began to call friends on Skype and scan their QR codes and trade currencies. I began to rope other people into the obsession based on my experience: you have to own to believe. After one full day of buying, selling, and using Bitcoins, I had the strange experience of resenting that I had to pay a cab fare in plain old U.S. dollars.

How do you obtain Bitcoins? This process can be a bit tricky. You can look up and find a local person to meet you to trade cash for Bitcoins. Usually, this exchange takes place at high premiums of anywhere from 10 percent to 50 percent depending on how competitive the local market is. It is understandable why people are reluctant to do this, no matter how safe it is. There is just something that seems sketchy about meeting a stranger in an all-night cafe to do some unusual digital currency exchange.

A more conventional route is to go to one of many online sellers and link up your bank account and buy. This process can take a few days. And then when you set out to transfer the funds, you might be surprised at the limits in the market that exist these days. Sites are rationing Bitcoin selling based on availability, just given the high demand. It could be 10 days or more to go from non-owner to real owner. But once you have them, you are off to the races. Sending and receiving money has never been easier.


As of this writing, a Bitcoin is trading for $88.249.  Just three years ago, it hovered at 0.14 cents. Many people look at the current market and think, surely this is a speculative bubble. That could be true, but it might not be. People are exchanging an unstable, fiat paper for something with a real title that cannot be duplicated. Everyone knows precisely how many Bitcoins exist at any time. Anyone can observe the transactions taking place in real time. A Bitcoin’s price can go up and down, and that’s fine, but there is no real speculation going on here that is endogenous to the Bitcoin market itself.

Is it a pyramid scheme? The defining mark of a pyramid scheme is that more than one person has an equal claim on the same money or good. This is physically impossible with Bitcoin. The way the program is set up, it is a strict property rights regime with no exceptions. In fact, in early March, there was a brief hiccup in the system when some new coins were approved by one group of developers but not approved by another. A “fork” appeared in the system. The price began to fall. Developers worked fast to resolve the dispute and eventually the system—and the price—returned to normal. This is the advantage of the open-source system.

But what about the vague sense some people have that a handful of coders cannot, on their own, cause a new currency to come in existence? Well, if you look back at what Austrian monetary theorist Carl Menger says, he points out that a similar process is precisely how gold became money. Every new currency is not at first used by everyone. It is at first used only “by the most discerning and most capable economizing individuals.” Their successful behaviors are then emulated by others. In other words, the emergence of money involves entrepreneurship—that is, being alert to opportunities to discover and provide something new.

Leviathan Leers

But what about a government crackdown? No doubt that attempt will be made. Already, some national government agencies are expressing some degree of annoyance at what could be. But governments haven’t been able to control the cash economy. It would be infinitely more difficult to control a virtual currency with no central bank, with encryption, and with millions of users per day. Controlling that would be unthinkable.

There was a time when the idea that ebooks would replace physical books was an absurd notion. When I first took a look at the early generation of ereaders, I laughed and scoffed. It will never happen. Now I find myself looking for a home for my physical books and loading up on ebooks by the hundreds. Such is the way markets surprise us. Technology without central planners makes dreams come true.

It’s possible that Bitcoin will flop. Maybe it is just the first generation. Maybe thousands of people will lose their shirts in this first go-round. But is the digitization of money coming? Absolutely. Will there always be skeptics out there? Absolutely. But in this case, they are not in charge. Markets will do what they do, building the future whether we approve or understand it fully or not. The future will not be stopped.

Jeffrey Tucker is executive editor and publisher at Laissez Faire Books

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.