Audit the Fed and Hyperinflation

I recently wrote a piece about Paul Ryan and the problem of unfunded liabilities.  I don’t think any of Ryan’s proposals will solve anything in the long term because he is not proposing any serious cuts.  However, it is interesting that this important subject is getting some widespread attention.

In my piece, I said that Laurence Kotlikoff, now an economics professor, has calculated the unfunded liabilities (government promises) at over $200 trillion.  This is probably the most significant issue facing America right now, as many people just entering retirement or getting close to what they think is retirement are simply unprepared.  They will be relying on the government and the government simply will not have the funds to pay for all of its promises.

I believe the other major issue facing this country is the banking system.  Due to all of the prior creations of entities like the Federal Reserve and the FDIC, and all of the regulations in the industry, there is an unprecedented misallocation of resources due to the moral hazard.  The Fed and the FDIC always stand ready to bail out the banks and it has made the major banks reckless.  This is why they had to be bailed out in 2008, but unfortunately, it is questionable whether any of the major banks could be considered solvent now.  The only reason they can be considered solvent is because of the backing of the Fed and FDIC.

So the banking system and the massive unfunded liabilities are the two major threats to this country when it comes to anything financial.  I think the biggest threat stemming from these two subjects is hyperinflation.  I hear many libertarians and/ or Austrian school followers predicting hyperinflation.  I’m not sure if they understand the implications of their prediction.

Hyperinflation in the U.S. would be the most devastating scenario.  We live in an extremely high division of labor society.  Most people cannot grow their own food, make their own clothes, or find natural treatments for health ailments.  Most people cannot even fix a shingle on their roof.

In a hyperinflation situation, we are talking about a major breakdown in society.  If there are no substitutes for the dollar, then people will stop going to work and the trucks will stop delivering food to the grocery stores.  That is why it is so important to have alternative currencies or money available.  When hyperinflation hit Zimbabwe, the people there could at least use gold and U.S. dollars.

While it would be possible for the marketplace to adjust (meaning people), the U.S. government holds a monopoly on the use of legal tender, which is the U.S. dollar.  It makes it very difficult for other forms of money to compete when you are almost essentially forced to use dollars.

So hyperinflation is by far the biggest threat facing this country.  We would much prefer a depression.  I don’t think the Fed is likely to go to hyperinflation.  Perhaps we will see high price inflation like we saw in the 1970’s, but just like that time, I think the Fed would stop creating money to save the dollar, if necessary.  I think the Fed will keep creating money out of thin air to save the major banks, but there will come a point that the Fed will stop buying government debt.  This will force Congress to cut spending.

While I am an adamant opponent of the Fed, there is a situation that could be worse than having the Fed.  If Congress were to take over the Fed and take control over issuing new money and buying government debt, then I think hyperinflation becomes a more realistic scenario.

For this, the whole subject of auditing the Fed scares me a little.  Ron Paul has been a great opponent of the Fed.  He has been a great advocate for less secrecy and more transparency.  I do worry though when his supporters really get into the one piece about auditing the Fed.  While the Fed should certainly be held accountable (even though it shouldn’t exist at all), I don’t want there to be an excuse for Congress to take over from the Fed.

Ron Paul supporters who clamor for an audit of the Fed need to be careful what they wish for.  I understand their motivation.  They believe they are close to actually winning a victory in terms of legislation.  And I’m sure that a full audit of the Fed would reveal some appalling things.  However, every libertarian supporter of auditing the Fed needs to add a disclaimer every time he clamors for an audit.  He needs to say that he wants an audit of the Fed, but under no circumstances should the Congress ever take over full control of the monetary system.  Regardless, I think it is better to advocate a repeal of the legal tender laws.

Congress taking over the Fed is our biggest threat.  That could lead to hyperinflation and a complete breakdown in our civilization.  I believe clamoring for an audit of the Fed may actually make this more likely.  There is a reason that Ron Paul wrote a book called “End the Fed” and not one called “Audit the Fed”.

Libertarians should continue to speak out against the Fed and central banking in general.  But we should also make it clear that the monetary system should be left to the free market.  We do not want Congress (or the presidency) directly controlling monetary policy.  It would be disastrous.