Washington, DC -- (ReleaseWire) -- 02/25/2016 --DAWN BENNETT: Richard Ebeling is the BB&T distinguished professor of Ethics and Free Enterprise Leadership at The Citadel in Charleston, South Carolina. He is also the author of hundreds of articles on free market policy themes, including on the dangers of inflation and the benefits of the gold backed money and monetary freedom. He has testified before the House of Representatives Subcommittee on Monetary Policy. On February 3rd of this year, Ebeling wrote an article about the Federal Reserve for the National Center for Policy Analysis. Richard, welcome to Financial Myth Busting.
RICHARD EBELING: Thank you for having me on. It's a pleasure to be with you today.
BENNETT: You recently authored a study on the behalf of the National Center for Policy Analysis that argues that the monetary uncertainty created by the Federal Reserve could be easily fixed through a return the gold standard. And you argue that the central bank itself is a form of socialism. Since we have a central bank, are you therefore arguing our monetary system is socialist?
EBELING: Well, in the traditional way, socialism was always defined as the government ownership, control, and directing of the means of production. In this case, through the central bank, which is a chartered agency of the U.S. congress, now a little over a hundred years old, the Federal Reserve has control over the amount of money in the economy, what can be used as money in the economy, can influence changes in the quantity of money in the economy. And therefore, by changing the supply of something, can determine its value or price in the marketplace; that is, what each dollar in our pocket can buy over goods and services. And because of its oversight responsibility for the banking system of the United States, it has an ability to influence interest rates and the direction that investment and other types of borrowing are going on in the United States. As a consequence, it is not too much of an exaggeration to refer to our monetary system as a socialist-like monetary regime.
BENNETT: Your NCPA paper also argued that the U.S. government's massive spending and debt would never be possible if we had had a gold standard still in place. Could you explain to our listeners why that is, and couldn't the treasury still sell bonds?
EBELING: Absolutely. But the difference is the following. If the treasury can issue a bond, that is an IOU, because it wants to spend more than it's taking in in taxes, but it then has to persuade potential lenders—that's you, me, financial institutions, banks—that it is more profitable to continue lending to them, the government, compared to private investors and consumers in the society. And as a result, lenders would ask for higher and higher rates of interest. They would have to be persuaded that as the government borrowing and then the accumulated debt was growing, that the government had the financial wherewithal and have the confidence that it would be able to raise enough money in the future to be paying interest payments, and in principle paying back the principal, at some point. And historically, many governments have found that if they didn't have control of a printing press to supply the money they needed for borrowing, financial lenders finally said, 'We don't trust the government. We're not going to lend to them anymore,' or, 'We're going to ask very high rates of interest to compensate for us, for the risk of default.' And as a consequence, that probably would place a brake, if you will, on how much the government could have been borrowing, certainly at the low rates of interest that it has been. But the Federal Reserve basically, in an indirect fashion, creates the money that covers a good portion of the government's deficit spending each year. And as a consequence, artificially enables the government to do something that in a more private and competitive and non-inflationary environment, they couldn't get away with.
BENNETT: You're talking about the printing press, which means printing of paper currency, otherwise known as fiat currency. Do you think the world is starting to finally realize what Alan Greenspan said a number of years ago, which was, 'Gold is a currency,' and that it's still, by all evidence, a premier currency. 'No fiat currency, including the dollar, can match it,' quote, end quote. Do you see us , or even the U.S. government, starting to buy into that quote?
EBELING: Well, I don't think the government will buy into that quote, though it is very interesting to note that during times of great economic instability or financial uncertainty, even governments around the world will sometimes choose to add to their own vault assets, if you will, the purchase of gold, to shore up their gold reserves, either in their central bank or in their treasury. So even governments tacitly recognize that gold is an important financial and monetary instrument, even though officially and legally, virtually no government in the world recognizes it as such anymore.
BENNETT: You can actually see gold higher in value than most other fiat currencies around the world, except for right now, with the dollar. Yyou honestly don't think the U.S. government, or even our media, that it'll ever happen here?
EBELING: Oh, I think that it could happen here, but the problem is that the United States government still, in terms of the global setting, is so influential, so large, as a big player in the international market that they really don't worry about this in the same way a smaller country does. But the difference that you have to understand is that, in principle, the type of chaos and threatened national bankruptcy that we've seen in Greece over the last few years can, if the U.S. government here was to continue on its trend lines, leads to the same type of result. The Congressional Budget Office, for example, recently issued its latest revised estimate of projections of the economy and the government's place in it. We have recently gone over 19 trillion dollars of government debt. They're projecting that annual trillion dollar deficits, that is trillion dollar deficits each year, will return, given their projections of government revenues and expenditures, in 2021, and that by 2026—that is, over the next 10 years—the federal government will have accumulated nearly an additional 10 trillion dollars of debt because of the annual deficits, for a total of about 30 trillion dollars. This is on a trend line of financial burden that has to be taken seriously. And at some point, if it continues beyond that, we'll create a situation with the United States that will be its own variation on the Greek theme.
BENNETT: Once upon a time in our grandfathers' economy of the 1950s, when the U.S. actually dominated the world economy, there seemed to be this weak link between the federal policy rate and the U.S. consumer inflation rate. And of course those days are long gone, so my question to you is should there be a reason left for the Fed to target the inflation rate anymore?
EBELING: Well, the thing is that we have to question, what is the purpose of a central bank? The purpose of a central bank, as established in 1913, was to ensure a stable currency and give some oversight to the financial markets and the banking sector. The fact is that over the last hundred years of the Federal Reserve, we have experienced the Great Depression of the 1930s, several severe bouts of inflation. Those of the listeners old enough to recall, price inflation in the late 1970s and early 1980s was around-- between 15% and 20% at an annualized rate. We've gone through several significant financial downturns or recessions. The Federal Reserve, if that's its mandate, has totally failed. And it certainly is time to turn to a private sector solution, such as a gold-backed currency, in place of clearly the inescapable mismanagement of our paper money by government central banks.
BENNETT: At this stage, shouldn't we request that congress repeal its so-called price stability mandate, on the grounds that the Federal Reserve no longer has the tools capable of making a difference, then?
EBELING: Well, I think that you could change the mandate, but then the question would be what will its mandate be? And if you don't give them a mandate, they'll just assert one, which they're constantly doing now. They were supposed to assure price stability, whatever that meant. Now they implicitly follow a preferred inflation target of 2% a year. Though we should keep in mind that even if they hit that target, a 2% price inflation rate would mean that in less than 20 years, the value of the dollar will have been cut in half. That is, what a dollar buys today only will buy 50 cents' worth of good less than 20 years from now. That's what a 2% inflation target rate would assure us.
BENNETT: Do you see the Federal Reserve's inflation targeting almost as a giant cover-up story for a monumental power grab?
EBELING: What it is, is that the way the system works now, it's guided by two things, hubris and degrees of corruption. By hubris, I mean that if you talk to an economist who has either been working at the Federal Reserve or involved with the Federal Reserve's activities, there's an arrogance that they know how to micromanage the stability of the macro-economy, which they do not have the power to do. And the other one is that if you look at who serves on the Federal Reserve board or where they go and find employment when they leave the Federal Reserve, there's this symbiotic relationship between financial markets and the central bank that means that tacitly and indirectly, they often follow policies to serve the interests of those close to them in the financial sector.
BENNETT: I think that the sad part is when I talk about power grab, I'm talking about the academics who are getting the power, and they have no idea what they're doing in the financial markets, a market, by the way, that they've saturated with financial time bombs.
EBELING: Yes, absolutely. Because we need to keep in mind that since the downturn of 2008, the Federal Reserve has increased the money supply in the banking system by almost 4 trillion dollars, and the only reason most of that money hasn't just floated into the general economy, causing the danger of significant price inflation, is that the Federal Reserve has been playing this little trick game of paying banks a higher rate of interest to just let the money sit there than lend it to you and me.
BENNETT: That's interesting.
EBELING: They've been manipulating interest rates to prevent the inflation their own monetary policy threatens.
BENNETT: So fans of the Fed, people out there that actually support the Federal Reserve, often argue that before the central bank existed, financial panics were far more frequent, and the Federal Reserve has helped stabilize the U.S. economy. How do you respond to that?
EBELING: Well, of course, that's a huge question to answer in just a snippet of time, so I have to make categorical assertions, for which I apologize to the listeners. But if one looks at the history of, let's say, the 19th Century, the beginning of the 20th Century, during a time when the United States and many other major countries of that time in the world had gold standards, were there economic ups and downs and financial crises? Yes. But their frequency and their severity, and certainly the presence of inflation, was far less frequent at that time. And you can usually trace those circumstances where there were financial panics or monetary instability to government influences on even that gold standard, at the time. But the gold standard, in general, historically, was far more stable and reliable than the paper money standards that we've had now for the last century.
BENNETT: Despite the Fed's increasingly dominant role in America's economy, I think that issue was hardly discussed in this 2016 presidential campaign. As a matter of fact, I don't think I've ever heard it, despite the fact that presidents nominate the chairman of the Fed. Accepting that a return to the gold standard might not be a realistic short-term political objective, how would you advise candidates to approach monetary policy? What would a winning message look like?
EBELING: Well, I think that what any winning candidate would have to do, I would suggest, is at least hammer away that the power in the hands of the Fed is a mess, and that if there were to be congressional revisions to the Federal Reserve rules and standards, it would be to impose further restraints on their ability, through discretion and arbitrary decision making, to manipulate the quantity of money in the economy and to manipulate interest rates. Because manipulating interest rates throws out saving decisions, investment decisions, and really is the seed that generates the boom and bust of a recession later on.
BENNETT: Richard, Donald Trump won South Carolina's primary, and Trump is what I would call a protest candidate. I'm wondering whether the so-called protest candidates are set to bring about a political revolution in America, or whether the entrenched political establishment empire is actually set to strike back?
EBELING: Well, I think that, without wanting to get immersed in the primary battles, the problem is that if you listen to Donald Trump, what you here are emotional assertions. 'America will be great again. We're going to have jobs like you've never seen. We're going to build walls that other people have to pay for. This is going to be huge.' I mean, but there's no substance to all of that hot air, and that's what's disturbing. And in that is his implicit seeming disregard or downplaying of the necessary respect for an understanding of the constitutional restraints that are supposed to be on government, and which conservatives often say they want to talk about, in saying that government does certain essential functions, but does not exceed them and start violating the rights of the citizenry, and where they have been used for that purpose should be repealed or reversed.
BENNETT: My thought is that there's so much discussion, at least here in Washington, that's surrounding this increased cost of living that we're all experiencing, but I never hear anything on the campaign trail. In particular, someone like Trump; you'd think he'd take advantage of this with his business knowledge, I mean, how to help Americans afford college and cars and homes and food and living. I mean, why do you think that is? It isn't just Trump; it's almost all of them, across the board. Why aren't they talking about this?
EBELING: Well, in Trump's case, I think part of his appeal is the lack of specifics, just broad brushstroke pictures of the happy, good life that will be America's if he's elected and put in charge. Because he knows the experts to bring on board, like he hires those beneath him in his company. And on the Democratic side, it's even absurd to talk about, because they just want more and big government. There was a cartoon recently that showed Hilary and Bernie Sanders in two automobiles, driving, and the road sign said 'Heading towards Greece'. And Bernie's car was going 80 miles an hour, and Hilary was going 60 miles an hour.
BENNETT: I love that.
EBELING: Exactly. But with the Republicans, I think that the difficulty in a campaign, with all campaigns, is that if you're going to tell people that we have a financial difficulty, that debt is too large, we have the difficulty of the unfunded liabilities of social security, Medicare, and now, with its passing, the emerging costs of ObamaCare, that what we need to do is to put our financial house in order, and this calls for not growing government, but, in fact, streamlining government and cutting programs and taking away some benefits and goodies that the voting constituents have come to take for granted. And that shows itself, that in public opinion polls, when you ask people, 'Do you think government is too big, too intrusive, too expensive?' invariably, the majority say yes. But then when you get to any kind of specific, 'But would you be willing to take a cut in social security or a reduction in government involvement in Medicare or Medicaid?' and just go down the potpourri of all that the government does, invariably, that majority becomes a minority. And it's just that everybody wants the government to be smaller, but not at their expense. And that's the problem, the $64,000 question, if you will, that needs a solution in the political process. Because modern democracy operates on politicians promising voter constituencies more and not less.
BENNETT: I think it's bizarre that Trump's gotten as far as he's gotten, but I do think it's because of the environment we're in. I think Americans are so afraid. As much as the headlines don't tell us, and our own White House and congress don't tell us the difficulties that we're in, I think they feel it. If you were advising Trump at this stage, what would you tell him to focus on for the last part of his campaign?
EBELING: Well, if I were advising him—which is even beyond my imagination to conceive of, other than maybe if we offered me a really high consulting fee, but that's a separate matter—I would have to say that if he really wants to represent a voice in the United States, speak truthfully to the American people, you've run a business, you know what a bottom line is. You know you have to look at the balance sheet, look at your assets and liabilities, your inflows and your outflows, financially. And talk to the American people seriously, that America can be great again, can be a prosperous and continuing leading nation of the world, both economically and politically and culturally, but it requires us to put our financial house in order, just as he, as a business man, would have to sometimes write off an investment or downsize a business to get its house in financial order, so it can, in fact, not just continue to survive, but come back again, hopefully with a big roar.
BENNETT: Carly Fiorina took that approach, and it didn't work for her. Do you think that's the reason why he's staying away from it?
EBELING: It's probably so. Because the thing is that, by using his rhetoric, he can be all things to all men and women. And as a result of this, no one can really point a finger at him and say, 'Well, where is--?' like they're pointing, for example, at Bernie Sanders. He wants to expand this, that, and the other, and you now have people saying, 'Let's look at the numbers; it doesn't add up.' By not getting into any specifics, there are no numbers to add up, so how, therefore, do you challenge the promises he's making? And he's using that with great effect.
BENNETT: I think it's stunning, Trump's victory in South Carolina. It was a clean sweep, actually. And I'm just wondering if his advisers are telling him to tone it down. He has a lot of rhetoric; you're right, he doesn't talk straight. And as a business man, he has so much more to offer. I just wonder if that's even going to happen.
EBELING: My sense would be that as both the primaries continue, and then if he were to be the candidate in the general election, there is no way he can win by just saying, 'It's going to be beautiful, wonderful and huge.'
For over a quarter century, the experienced advisors of Bennett Group Financial Services, LLC have been successfully guiding clients through the complexities of wealth management. Bennett Group Financial Services provides individual investors, corporations and foundations with holistic investment strategies using unique portfolio solutions across a breadth of asset classes. Our unique vision and insight into market trends makes Bennett Group Financial Services a much sought after expert resource with regular appearances on Fox News Channel, CNBC, Bloomberg TV, and MSNBC as well as being featured in Business Week, Fortune, The NY Times, The NY Sun, Washington Business Journal in addition to our highly regarded weekly talk radio program - Financial Mythbusting. Through attentive service and prudent, thoughtful advice, Bennett Group Financial Services, LLC strives to consistently provide its clients with the highest quality of guidance and personalized service available.
About Dawn Bennett
Dawn Bennett is CEO and Founder of Bennett Group Financial Services. She hosts a national radio program called Financial Myth Busting http://www.financialmythbusting.com.
She discusses educational topics and events in the financial news, along with her thoughts on the economy, financial markets, investments, and more with her live guests, who have included rock legend Ted Nugent, as well as Steve Forbes and Grover Norquist. Listeners can call 855-884-DAWN a as well as take podcasts on the road and forums for interaction.
She can be reached on Twitter @DawnBennettFMB or on Facebook Financial Myth Busting with Dawn Bennett.