This short write-up was inspired by a discussion I had with one of my close friends who is a Ron Paul die-hard and a staunch supporter of Ron Paul’s “end the Fed” campaign. I hope this write up will open new discussions on some of the common general assumptions.
Maybe I should mention well in advance that I am not an American and my ideas are purely education-motivated. I do not participate in the America’s democratic experiment. Up until this past thanksgiving break and leading into the GOP debates aired live by CNN, I was a fan of Republican Senator Ron Paul from Texas. Like many other revolutionary minds of the “end the Fed campaign,” I saw Ron Paul’s ideas as the solution to our problems. His two books, “End the Fed” and “Liberty Defined,” are eye-catching and rhetorically framed to influence young macroeconomic minds. I am now taking this opportunity to explain why the American political discourse should and must not fall victim to cheap one-sided arguments.
One of Ron Paul’s main concerns is that the Federal Reserve’s policy directive, Quantitative Easing (QE), distresses an already distressed economy by inflicting price inflation. This may appear to be true but the calculated inflation as a result of QE1 and QE2 is not as pronounced to deserve the loudest outcry from a presidential candidate. The Consumer Price Index (CPI) during November 2008’s QE1 announcement was 213.002. At the time of the second QE announcement in April 2011, the CPI was 224.433 and in October it was 227.763. This is a 0.06481percent increase in price inflation over a period of three years. Some argue that there is a policy time lag and that we have yet to see devastating price inflation if not hyperinflation as they say. Our figures show otherwise. The October numbers were even more interesting, as there was a 0.1 percent deflation. I am as scared of deflation as I am with inflation.
What Ron Paul and his Austrian-leaning economist would like to explain is the slow growth, high unemployment and the “soaring prices” are the topics in question. The reserve expansion by the Fed has not brought any significant inflation because much of the money is being held as reserves by the banks. In 2006, the reserves by depository institutions were $44.58 billion and after the QE1 and QE2, this figure was $1186.30 billion, almost 27 times! People are still skeptical about the economy and investment demand is still low. A measure of M2 velocity is about 1.6, a decline of 0.3 in about two years. This being the plan, the Fed can manipulate the short-term interest rates in the future (after mid-2013 according to the Nov. Fed report) which in turn can influence the price of bonds to prevent another assets bubble.
The 2008 discretionary measures, both fiscal and monetary, brought relative stability to credit markets and safeguarded 3 million jobs. In addition, the measures prevented the failure of several large institutions and pensions for the faithful servants of this country. I recognize the loss of over 8 million jobs during the financial crisis and that the unemployment rate still stands at 8.6 percent, but the argument of inflation is baseless and should cease; it’s a lie. I do support restructuring the Fed but my arguments are far from the cheap inflation argument.