Myth-Busters: The Big & Bloated Bond Bubble

We’ve lived through the illusionary “good times” of the Nasdaq and housing bubbles. They were followed by inevitable and heart-wrenching crises. Well the government and Federal Reserve have created another major bubble in government bonds. Today on Myth-Busters Ron Paul takes a look at how it came to be, what we can expect, and how we can protect ourselves.

Ron Paul: Hello everybody and thank you for tuning in to the Ron Paul Liberty Report. Today is the day we do the program called Myth Busters and the co-host is Chris Rossini. Chris is also the editor of the Chris, nice to have you with us today.

Chris Rossini: Good morning Dr. Paul, great to be with you again.

Ron Paul: Good. I understand that we have a few myths about the budget and bonds and that sort of thing that we want to talk about today.

Chris Rossini: Yes, we are actually going to be talking about another bubble. We’ve covered in previous episodes the stock market bubble and the housing bubble and now we are going to be talking about a real big one and that is government bonds. So, Dr. Paul, we will start with the basics of government bonds, if you could talk about how government bonds affect the economy when they siphon resources, when we give money to the government away from private entrepreneurs and also the morality of lending money to government that must be paid by future generations with taxation. Is that moral?

Ron Paul: The question is it moral and the other question is is it reasonable or sensible. But, anyway, the real myth dealing with government debt is the fact that we have been told by a lot of people in our economic classes and in the media and government that you shouldn’t worry about the debt, the debt is good, because it is useful to manage the economy and manage the monetary system. They think debt is very good and they don’t worry about it. A few of us still worry a little bit about the debt, especially when it’s 20 trillion dollars and growing exponentially and nobody has any desire to cut back on it, but the basic problem is that the role for government that the we are working with today is that the government is supposed to take care of us from cradle to grave and fight wars endlessly and be the policeman of the world.

So, this role for the government has been endorsed by the people and still is to a large degree, which means there has to be a lot of spending, but generally speaking most people think if the government is spending a lot of money you have to raise the taxes. So, is this problem that we have debt and we have to borrow money, is this a problem that we don’t have taxes high enough and then we could balance the budget, or is it too much spending and I think most listeners to this program would say we come down to the side that it is too much spending.

The way I see this is when the government spends money and they don’t have enough money, they do several things. One is there is pressure on to raise taxes, but that is not as popular, but the next things is to issue bonds and the Treasury can issue bonds and put them out in the market and a lot of people will buy these bonds. Not so much the average investor anymore, because they don’t make a whole lot of sense and why buy bonds, short or long and essentially not earn any interest.

This then causes the government to find other people that will actually buy these bonds, but then if they create new money to buy it and the Fed facilitates this, all it does is raise the price of the bond. When the price of the bond goes up, the interest rates go down. When the interest rate is zero, the price is very high. If a bond is zero rate of interest and it’s a 100 dollar bond, you have to pay 100 dollars for it, but if it’s a year, two or three, you get your 100 dollars back and no interest, but that 100 dollars is going to buy less, so it is a ridiculous economic policy. It’s all geared to facilitating big government, that they can keep doing this.

The amazing thing is it keeps working. But, as you indicated in your question, doesn’t this take something from the economy and put it in the hands of the government? Absolutely it does and it interferes. I think there are two mistakes here. First, when you take it from the economy and if we weren’t inflating, it would still be a problem, because it’s taking real assets from the economy and the people who do productive things take it away.

So, let’s say that there is still enough inflation for the business community to invest and do some business. Why should this be so bad? It is still a drain, one way or the other. It might be just through the inflationary forces and other things, but the other thing is taking wealth and productive efforts away from the people, means that the government will be spending the money. Now, the government is spending 40 percent of the money and that is a double burn. I think the people get hit twice. Once they take the money and once the government spends. If the government took the money and burnt it, we would be better off than for them to spend it, because what do they do? They fight wars and they create dependency, they create weak economies, they create all these rules and laws that destroy our economy through regulation.

But, it is the process of debt. It starts with the idea that debt is not to be worried about and we hear that from the Keynesians, we hear it from the Paul Krugmans that debt is actually a benefit. One of the worst things is that in the old days when and what the Founders intended, that if you issue a currency, a paper currency, it would have to be redeemable with something. So, if you had silver in the bank you could issue silver certificate or a gold certificate. Then we drifted away from it, we went down 40 percent and then finally when we had the Bretton-Woods in ’44, we took the gold away from the American people, but not from foreigners and the in ’71 that all disappeared and eventually that broke down too.

What they do is they take these bonds and they monetize the bond. So, if you have a paper currency, it’s backed up by something, it’s backed up by government debt. So, people get conditioned to think about government debt is good, because you can print more money, it stimulates the economy and the economy grows. They concoct these weird theories and if they work accidentally on the short run, right now it doesn’t work or we would have a tremendous boom, by having more government debt in these last 6-8 years and it hasn’t produced.

The real culprit is the debt itself and the principle of government and it’s very detrimental to the economy for these various reasons that we just mentioned.

Chris Rossini: Yes, I agree with you on the conditioning. Many people are under the impression that they have an illusion of safety with the government bonds, that is backed up by the full faith and credit of the US government and that is a bad institution to put your faith into. But, the other institution that has a big role in this in creating the bubble is the Federal Reserve. They created the stock market bubble, the housing bubble. So, please now talk about the Fed’s role in creating the bond bubble.

Ron Paul: The Federal Reserve is responsible for all bubbles. Not all the ups and downs and fluctuations in the free market, prices go up, prices go down, increase supply and supply and demand and there is a little bit about that goes on. But, when you see economies boom and then go into a bust cycle, this is all central banking’s fault, because what they do is they create low credit. Now, I want to put up a chart, a chart that has been produced many times and it reflects what the Fed though they had to do for the crises that we had in ’08 and ’09, because what they resorted to and they thought the solution would be, just massive inflation, which means massive injections of funds.

On this chart you can see where the darker line there, that was the recession of ’08 and ’09 and you can see that the monetary base was around 800 and it goes up over like 42, so it was like 5 times increase in all those years and they keep still hoping and wishing that there is going to be economic growth.

Every once in a while they come up, like today, they say there was economic growth, there were new jobs today, but they didn’t mention that they were bureaucratic jobs, low-paying jobs, Obamacare jobs, industrial jobs and consumer jobs, didn’t come up at all today. So, there is a gross distortion of what happens. But, the bubble is created by the Fed, lowering interest rates, causing businesspeople to lose the most important signal to them, to know when to go into production and build new plants and expand. It should be done when people are not spending as much and they are saving the money and get the interest rates down and the businessman says interest rates are down to three percent, it used to be four and a half, I think this is the time for me to borrow and go into some productive capacity.

But, what happens if the interest rates not only go to three, but to two, to one and the businessman says wow, look at this, this is the time for me to do something and then the money, it is unpredictable where it will go. If we could all keep going into production, it’d be fine, but it doesn’t work that way, because you can produce and nobody wants your products, so it’s a gross distortion. But, the money has to go somewhere and they keep saying we wanted to go into consumers, where the consumers will spend and raise the inflation, that way we can run the inflation rate of two percent, assuming that prices going up is a sign that the economy is good, which doesn’t make any sense whatsoever, so they keep working on that.

The one thing that happens is that when the Fed increases the supply of money and lowers interest rates, they can do that. On some occasions, on milder recessions and things, sometimes they would get us out of recession, they never get blamed over the years for the recession and the bust, but they get a little bit of credit for saying yes, we make times good, but we never cause harm. But, the truth is they have no idea where the money is going to go. They can create money, but they don’t know whether the people will take it and invest with it or whether they are going to pay off debt or just what they will do or whether they will push up prices and the bubbles that you talk about like the financiers and the people on Wall Street took the credit back at the end of the last century and pumped it all into the NASDAQ bubble. Then, as the first decade occurred in this century, it went into housing. Gross distortion because there was money to be made on the quick, never admitting the fact that all these busts have to end badly.

I think this is what we are facing today, that the bubbles are there, they are numerous, they are bigger than ever, the dollar bubble is a worldwide phenomenon, there is gross distortion, everybody is racing to have zero interest rates and it just can’t work. It can pacify some people for a while, it can make the bubble get bigger, people can be reassured, but less so than ever before, because I think if people get confused about all the statistics the government gives us and distorts, they ought to look at the anger factor. How many people are angry and upset with the conditions in this country today, not only the social conditions, because that is secondary to the economic conditions. There is a lot of people very unhappy, just take the young people who owe so much money for going to college and getting degrees that aren’t worth much for jobs that don’t exist and they are very, very annoyed. The parents are probably annoyed too, because they are in for spending all these money.

That figure of who is unhappy with their economic conditions, which very often leads to the social unrest in the inner city, because the conditions get worse and the poor get poorer, so I think this is the problem that has to be resolved. I think this is something that we can resolve, of course as soon as we come to our senses and decide the government has to shrink. But, the government’ can’t shrink unless the people change their minds and lose confidence that just spending money and running up the debt and printing the money is the solution to the problem.

What makes the correction and what happens. All the bubble have to end badly, there has to be a bursting of the bubbles and we’ve had it, we mentioned that the NASDAQ bubble and the housing bubble, but now the bond bubble is going to burst too. I look at this, when this happens, it is going to be a calamity and for me I look at it like there is going to be a flock of black swans that will come, not just one thing that happens, there will be so many things around the world and that is going to be horrendous. If interest rates go up one percent, it is estimated that there will 2.4 trillion dollars in losses. You could have interest rates go up one percent in a day under certain circumstances, what if it goes up two percent? I mean, it is so huge.

This is why the Fed and the world money managers are so desperate to try to keep this thing going, but they are going to be unable to keep it going. We always see signs that people are worried about that, because they are going into real assets, gold has been generally strong over the last several years, hard assets are being advised by a lot of conventional investors and even though the stock market is still up there, there is people getting very nervous, some of the trades that have been around a while are getting very nervous and antsy about the stock market, because I think there is going to be the bursting of this bubble, there has to be the retraction and the elimination. And this is the purpose for this to make the correction.

The people don’t insist on government spending less and getting us out of this mess, but the market is very, very punishing and very demanding. There is a limit to the debt and debt has to unwind. Debt is generally built on pyramiding of debt and fractional reserve banking and once that is reversed you have to reverse the whole principle of the building and the inflating of the bubble. I think that is what we are facing today. We are facing that and it’s coming and it’s a very precarious situation which we are facing.

Chris Rossini: Finally Dr. Paul, let’s talk about how we can protect ourselves from this ultimate calamity that is in the future. What advise would you have for those who have loaned money to the government and what can they expect in the future. What do you think they should do?

Ron Paul: I wish there was an easy answer for that, but we have to do something. Doing nothing isn’t going to be helpful. I start with what we should do especially when I talk to the young people who are trying to figure out how they are going to run their finances for the rest of their lives. One thing that I practice over the years is I went two-fold. One was I invested time and money and energy into education in order to try to preserve and protect our liberties, because I am convinced that as messy as it is and as bad as it is and how devastating it could be, if we have our liberties, we could solve all our problems. If we just get all the debt that was liquidated in one day, we all were broke, but we had our liberty and we could go back to work and work with sound principles. Believe me we would get over this rather quickly.

I think that is one thing that we could do, but people ought to have cash around to take care of their interest. You should be spending and putting some of the money in gold and silver coins and you should be getting prepared. I think a little bit of land is very important, I think having a skill is very important. At times it can get very bad, if you have a skill, you can be finding work and today it’s all kinds of skills. There used to be carpenters and mechanics and all, but now it’s in computers and repairing computers and all these things, so having a skill is very, very important. It can be solved, but ultimately, the solution is the protection of liberty and that of course has been the goal that we have been seeking for so long.

I want to thank you Chris for being with us today and I invite all the viewers to come back soon to the Ron Paul Liberty Report.