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August 19, 2009

The Morality Hazard of the Fed
by M.A. Nystrom

Ron Paul's new book, End the Fed (out next month) illuminates the real reasons behind America's recent stunning economic collapse. The Federal Reserve would just as soon you not read it, and instead believe the standard refrains from the standard economists (including those at the Fed): "No one saw it coming! How could anyone have predicted it?"

One school of economic thought - the Austrian School - predicted it, and the world's most famous practitioner of that school, Dr. Ron Paul, has been warning of it for over 30 years. In fact, Ron Paul's vision of our current slow motion decline is what got Dr. Paul into politics in the first place. A primary catalyst behind his decision to seek office was Richard Nixon's decision to "temporarily" remove the dollar's gold backing in 1971. This set the table for the mess we're now in.

That "temporary" disconnect between gold and the dollar remains in effect today.

After being mostly ignored for the bulk of his career, then being shunned and ridiculed during his 2008 presidential bid, Dr. Paul has since been redeemed as a prescient thinker. His fundraising ability has made him a rock star among his fellow Congressmen, and his proposed bill to audit the Federal Reserve (HR 1207) is riding a wave of bi-partisan support in the House of Representatives. Given the current political climate and Ron Paul's swelling influence, End the Fed is destined not only to be a blockbuster of a book, but one that makes a significant impact on the conversation about who we are where we are headed as a nation.

Money from Thin Air

The Fed -- unlike the rest of us who have to work for our money -- creates money from thin air. This has long been an open secret among those in the know. As Henry Ford is purported to have put it:

It is well enough that the people of the nation do not understand our banking and money system, for if they did, I believe there would be a revolution before tomorrow morning.

People are starting to understand, and revolution, friends, is visible on the distant horizon.

The Morality Hazard of the Fed

By now, we are all familiar with the narrow definition of "moral hazard" with regard to our nation's banker of last resort. Since the Fed stands at the ready to bail out our financial system, banks and brokers are free to take excessive risks, secure in the knowledge that the responsibility of their poor decisions will be borne not by them, but by the Fed itself, and ultimately by the taxpayers. The bankers feel no moral responsibility for their investment decisions.

But Dr. Paul's argument goes further than that. Throughout his career, he has warned of a deeper meaning of moral hazard. Anyone who has followed Dr. Paul closely has seen this thread throughout his speeches and writings, but he hammers it home in one of the most powerful chapters in End the Fed. He states bluntly that the entire operation of the Fed is based on an immoral principle. Beyond just a moral hazard that encourages speculation in financial markets, the true hazard is all encompassing for society.

The very existence of the Fed creates a morality hazard for all of society by setting a standard of immorality at the highest levels of business and government.

In its simplest definition, morality is the ability to know the difference between right and wrong. The Fed has a power granted to no one else in society - except counterfeiters. It has the ability to create money from thin air. In fact, the Fed is essentially the largest, most revered, officially sanctioned counterfeiter in the world. It creates money from nothing, which is distributed via Congress to the politically most well-connected individuals and institutions. Bankers, defense contractors, and the medical industrial complex come to mind offhand, but they're not the only members of this old-boy network.

As more money is created to fund bailouts, stimulus measures and just about everything else under the sun, the currency in existence is devalued. Savings are eroded. Wealth is redistributed from the poor to the rich. And all the while, the government and the Fed say the measures taken are necessary, and for the benefit of all.

The Fed is a master of deception in its actions and vocabulary. Few people completely understand the myriad complex machinations by which it creates money and simultaneously devalues the existing stock of currency. But people are not stupid; they understand it on an intuitive level, and the result is the morality hazard: When citizens realize that their leaders are cheating them, they get angry. The implicit message sent from on high is that cheating is okay. Meanwhile every financial transaction is corrupted by the Fed's counterfeit money, weakening the very moral fabric of society.

In the book, Dr. Paul recounts that his first job, at the age of 5 (!), was to help his father, who ran a small dairy line from their basement. He tells of how his father was concerned about the quality of the milk -- primarily that the farmers might dilute their milk with water. This lesson obviously made an impression on the young Ron Paul.

Some forty years later, an older Dr. Paul had the opportunity to ask a Federal Reserve official about the morality of diluting the money supply and how it differs from a farmer diluting the milk he sells:

By what moral right do we have to create purchasing power out of thin air? Whether it is done by the creation of credit or Federal Reserve notes or whether it's the creation of SDRs and international in scope, by what right do they do this? Is it any more moral to dilute the purchasing power of the money you hold in your wallet than it is for the farmer to dilute the milk supply with water?

Let's think about this for a moment: Suppose you find that your local farmer is diluting his milk with water. You'd distrust him immediately - not just with the milk, but in any dealings you have with him. This is the first consequence. If he lies about his milk, you can assume he'd lie about anything.

You might think, "I'd just buy my milk from an honest farmer instead." And if it were a free market, you could do just that. But when it comes to our money, the Federal Reserve is the only show in town -it has a state sponsored monopoly. It is the worst example of a "public-private partnership." (In the old days, we called it fascism.)

So if you're stuck buying from a dishonest monopoly farmer who waters down his milk, you might find that since he is cheating you, it is only "right" that you cheat him in return. Thus begins the perverse cycle of lies and distrust. It is the same with our money. We're all stuck in a dishonest system, forced to deal with diluted dollars, running whatever scam necessary to get as many as possible (after all, if the Fed can create them for free, why should I have to work for them?) then getting rid of them as fast as we can before they lose their value.

Dr. Paul goes on to explain:

I happen to believe that because it [the creation of fiat money] is a moral issue more than an economic issue, it is for this reason that the people have lost trust in their government, trust in the banks, trust in business, trust in themselves, and that we are a nation of distrust.

This is the ultimate moral consequence of the Federal Reserve System: We have become a nation of distrust. Until we regain that trust, the future looks bleak.

The first step in that direction is a full audit of the Fed, and the next step is to end it.

Michael Nystrom
Editor
www.depression2.tv
www.bullnotbull.com

M.A. Nystrom is a private investor and consultant currently living near Boston. He earned his MBA from the University of Washington with a specialty in International Marketing. Following his retirement from the US securities industry, he picked up the hobby of web design, a trade he now plies at his big-picture investment oriented website www.depression2.tv.