Government is Fueling the Engines of Wealth Destruction





In his latest column Ron Paul explains the wonderful workings of the free market and how self-important government officials continue to distort this most efficient mechanism through their endless meddling and intervention.

Download the column as an MP3 file here (3:28 minutes).

Bankruptcy is Economic Stimulus

by Ron Paul

The distraction on Capitol Hill this week has to do with the jackpot bonuses that executives at AIG recently received. The argument is over a relative drop in the bucket. The total amount of bonuses given out was $165 million. The government has put $170 billion into AIG so far. Many now are demanding we get this money back. We ought to be spending our time and effort doing something more worthwhile, like figuring out how the Federal Reserve is handling the trillions of dollars they are creating and pumping into the economy, and how that is affecting the purchasing power of dollars in your pocket.

The big mistake was appropriating the TARP funds in the first place. A Johnny-come-lately bill of attainder won’t stop the spending epidemic. This whole situation is a perfect demonstration of why “doing nothing” and letting failing companies fail would have been much better than sinking valuable money and resources into them.

When a company makes a profit, it is a signal that it is taking resources and increasing their value while controlling costs. When a company operates at a loss, it is a signal that it is decreasing the value of its resources or letting out-of-control costs outstrip any value it has created. A company operating at a loss is therefore an engine of wealth destruction. Bankruptcies are a net positive for the economy because more productive competitors are rewarded by opportunities to buy up remaining assets at bargain prices to strengthen their operations. In an economy that allows this kind of growth and change, any jobs lost by bankruptcy are soon replaced by new ones as the most efficiently managed businesses gain access to more assets and expand.

Bankruptcy was the stimulus that we needed in the case of AIG. More bankruptcies would clean out malinvested resources and enable economic growth again.

AIG, by losing money and maneuvering their operations to the brink of bankruptcy, was telling us that they were inefficient. So what did we do? We forced the taxpayer to assume the losses, and now we are supposed to be shocked that it is not working out. Had AIG gone bankrupt, it would have been impossible to hand out these bonuses. The taxpayer would have been fleeced for $170 billion less last year. Had they gone bankrupt, the world would not have come to an end, it would just continue on with one less engine of wealth destruction.

We should have learned from Japan. The 1990s is referred to as Japan’s “lost decade” because of the zombie banks kept on life support by the Japanese government. Any productivity was redirected through these engines of wealth destruction, resulting in long term stagnation. We should and can avoid this outcome if we come to our senses.

A recession should be a time of strengthening and regrouping for an economy. But as long as the government insists on maintaining the status quo by propping up failed institutions, we will continue to dig a bigger hole for ourselves.



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5 Comments:

  1. Blogs

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  2. Here's the article if you don't want to register

    China calls for new reserve currency
    By Jamil Anderlini in Beijing

    Published: March 23 2009 12:16 | Last updated: March 24 2009 00:06

    China’s central bank on Monday proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund.

    In an essay posted on the People’s Bank of China’s website, Zhou Xiaochuan, the central bank’s governor, said the goal would be to create a reserve currency “that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies”.

    Analysts said the proposal was an indication of Beijing’s fears that actions being taken to save the domestic US economy would have a negative impact on China.

    “This is a clear sign that China, as the largest holder of US dollar financial assets, is concerned about the potential inflationary risk of the US Federal Reserve printing money,” said Qu Hongbin, chief China economist for HSBC.

    Although Mr Zhou did not mention the US dollar, the essay gave a pointed critique of the current dollar-dominated monetary system.

    “The outbreak of the [current] crisis and its spillover to the entire world reflected the inherent vulnerabilities and systemic risks in the existing international monetary system,” Mr Zhou wrote.

    China has little choice but to hold the bulk of its $2,000bn of foreign exchange reserves in US dollars, and this is unlikely to change in the near future.

    To replace the current system, Mr Zhou suggested expanding the role of special drawing rights, which were introduced by the IMF in 1969 to support the Bretton Woods fixed exchange rate regime but became less relevant once that collapsed in the 1970s.

    Today, the value of SDRs is based on a basket of four currencies – the US dollar, yen, euro and sterling – and they are used largely as a unit of account by the IMF and some other international organisations.

    China’s proposal would expand the basket of currencies forming the basis of SDR valuation to all major economies and set up a settlement system between SDRs and other currencies so they could be used in international trade and financial transactions.

    Countries would entrust a portion of their SDR reserves to the IMF to manage collectively on their behalf and SDRs would gradually replace existing reserve currencies.

    Mr Zhou said the proposal would require “extraordinary political vision and courage” and acknowledged a debt to John Maynard Keynes, who made a similar suggestion in the 1940s.

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  3. Have you seen this article

    http://www.ft.com/cms/s/0/7851925a-17a2-11de-8c9d-0000779fd2ac.html

    What I found interesting was Zhou's comments concerning John Maynard Keynes. Its sad to hear that he's even influenced the East.

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  4. Ron Paul is dead on with his analysis of the situation. His economic advisor, Peter Schiff, is running for senate in Connecticut in 2010. Check out his site and lend your support!!!

    www.schiff2010.com

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  5. Pingback: Ron Paul Bankruptcy was answer | Defense of the Republic

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