Ron Paul’s Economic Myth Busters: Inflation & Capital Creation (Video)

Dr. Ron Paul interviewed Chris Rossini, regular contributor to LewRockwell.com and author of Set Money Free: What Every American Needs To Know About The Federal Reserve. Together, they debunked some common American myths, including the real source of inflation, US foreign policy against radical Islam, and the importance of real savings and capital in an economic system.

Going back and forth with Paul Krugman, I argue the case that his definition of inflation is different than mine. He says inflation is when the CPI goes up, which is a government statistic which they can alter at will… Austrian economics teaches that inflation really is the increase in the supply of money and credit, especially when it is artificial and comes from the Federal Reserve.”

Highlights from the video:

Rossini: Let’s start with the great enabler of much of our country’s problems – the Federal Reserve. If there’s one thing that our viewers should always keep in mind, it’s that when inflation occurs, you always want to point to the source, which is the central bank, the Federal Reserve. That’s despite what happens with the media. They try to blame everybody else and everything else under the sun, but inflation is always a monetary phenomenon and blame should always go to the Federal Reserve. What happens when prices go up, is the government, in its desire to help, often comes in to institute price controls. The combination of central bank inflation and price controls are like a one-two punch on the public. The government takes a bad situation and makes it worse. Please, Dr. Paul, talk about price controls and how if inflation hits in our country, people should look in that direction.

Paul: One of the reasons there is a lot of confusion about where inflation comes from and what we should do about it, is the fact that not everybody agrees with the same definitions. Going back and forth with Paul Krugman, I argue the case that his definition of inflation is different than mine. He says inflation is when the CPI goes up, which is a government statistic which they can alter at will. If it goes up too fast, they just change it. Austrian economics teaches that inflation really is the increase in the supply of money and credit, especially when it is artificial and comes from the Federal Reserve. You can have an increase in the supply of money in a natural way when it’s a commodity like gold. That, of course, doesn’t cause the problems of malinvestment and prices going up. Price inflation is what people think about and are concerned about. The unfairness of it all is that if wages went up equally and prices went up equally and the cost of living went up equally for everybody, it’d be no big deal. Increase the money supply by 10% and everything goes up by 10%. But that never happens. Some people get hurt more than others. Some people get rich, some people get poor. It’s a vicious cycle…

A lot of people from the liberal side argue that yes, we know the Fed’s involved, but we just have to have better regulation. No, the market should regulate it. We should have the money supply dictated by the marketplace, and we would avoid a lot of harm and injury. There’s a lot to be said about understanding the basics of inflation, and if you did understand that you would come to the conclusion that we don’t need a Federal Reserve system. We don’t need central banks. What we need is free markets and sound money to solve the problems…

Rossini: We live in an upside down, Keynesian world where savings is considered the bane of civilization. Fortunately, we’ve had the works of Austrian economists, like Ludwig von Mises and Murray Rothbard, who pointed out that savings are the bedrock of civilization. They’re really the – it’s what starts the advancement of human kind. Today, however, we have so many who believe that a Federal Reserve official going and typing into a keyboard can create capital out of thin air, by just creating money. This is the opposite of the truth. Please, let’s discuss savings.

Paul: You can’t create capital out of thin air. You have to earn it, and you have to save it. If you think of it in a more primitive economic system, I think you can have a true understanding of what happens. If we’re living in a primitive society, and we don’t have a central bank, and we don’t even have a lot of exchange, even though in a primitive society you would probably have silver and gold exchanging. What if you were producing just enough to live on? You’ll survive. But what if you have a tool and are able to produce more than what you use to live on? If you take that, and you’re able to use it in the primitive society – trade it or use it for exchange or buy more tools or invest in other things or buy more land or whatever. You can’t do that if you have this more primitive society that says, “Okay, we’re just under subsistence. We need some help. So we’re going to elect a board who will declare what money is. We’ll use beads or rocks or stones or pieces of paper. Then all of a sudden we’ll be rich.” That’s what they claim they’re doing, but it makes no sense whatsoever. All it does, it gives people power. If it doesn’t make any sense, how did it happen? All money, according to Austrian economics has to originate in the marketplace. What about the federal reserve note? That didn’t originate in the marketplace. Originally, it did. It originated with the dollar, so we had the dollar historically backed by metals. Even in my lifetime, up until 1965, you could still go in and buy a silver dollar with a federal reserve note. But that’s long gone…

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