Why does Ron Paul claim Federal Reserve helps "big business" and hurts the poor

[Howard_Roark]

I was reading End the Fed and he repeatedely said how the Fed helps large corporations, because they get to use the new money that the Fed creates while it hurts the poor and middle class.

Problem is, this doesn't really make sense. If you look at the balance sheet of a lot of big companies many of them have no debt and huge "Cash & Cash Equivalent" positions. It would seem that the Fed is bad for them, being as that they have so much cash holdings loosing value.

The middle class, however, is the one borrowing all the new money. Car loans to drive expensive cars, mortgages, home equity loans, credit cards and almost no savings (cash).

[bobbyw24]

The Inflation Tax

July 17, 2006

All government spending represents a tax. The inflation tax, while largely ignored, hurts middle-class and low-income Americans the most. Simply put, printing money to pay for federal spending dilutes the value of the dollar, which causes higher prices for goods and services. Inflation may be an indirect tax, but it is very real- the individuals who suffer most from cost of living increases certainly pay a “tax.”

Unfortunately no one in Washington, especially those who defend the poor and the middle class, cares about this subject. Instead, all we hear is that tax cuts for the rich are the source of every economic ill in the country. Anyone truly concerned about the middle class suffering from falling real wages, under-employment, a rising cost of living, and a decreasing standard of living should pay a lot more attention to monetary policy. Federal spending, deficits, and Federal Reserve mischief hurt the poor while transferring wealth to the already rich. This is the real problem, and raising taxes on those who produce wealth will only make conditions worse.

Borrowing money to cut the deficit is only marginally better than raising taxes. It may delay the pain for a while, but the cost of government eventually must be paid. Federal borrowing means the cost of interest is added, shifting the burden to a different group than those who benefited and possibly even to another generation. Eventually borrowing is always paid for through taxation.

The third option is for the Federal Reserve to create credit to pay the bills Congress runs up. Nobody objects, and most Members hope that deficits don’t really matter if the Fed accommodates Congress by creating more money. Besides, interest payments to the Fed are lower than they would be if funds were borrowed from the public, and payments can be delayed indefinitely merely by creating more credit out of thin air to buy U.S. treasuries. No need to soak the rich. A good deal, it seems, for everyone. But is it?

The “tax” is paid when prices rise as the result of a depreciating dollar. Savers and those living on fixed or low incomes are hardest hit as the cost of living rises. Low and middle incomes families suffer the most as they struggle to make ends meet while wealth is literally transferred from the middle class to the wealthy. Government officials stick to their claim that no significant inflation exists, even as certain necessary costs are skyrocketing and incomes are stagnating.

The transfer of wealth comes as savers and fixed income families lose purchasing power, large banks benefit, and corporations receive plush contracts from the government-- as is the case with military contractors. These companies use the newly printed money before it circulates, while the middle class is forced to accept it at face value later on. This becomes a huge hidden tax on the middle class, many of whom never object to government spending in hopes that the political promises will be fulfilled and they will receive some of the goodies. But surprise- it doesn’t happen. The result instead is higher prices for prescription drugs, energy, and other necessities. The freebies never come.

The moral of the story is that spending is always a tax. The inflation tax, though hidden, only makes things worse. Taxing, borrowing, and inflating to satisfy wealth transfers from the middle class to the rich in an effort to pay for profligate government spending, can never make a nation wealthier. But it certainly can make it poorer.

http://www.house.gov/paul/tst/tst2006/tst071706.htm

[specsaregood]

Have you noticed that stripmall in every single state and city in the US looks the same nowadays? Same stores? What enabled these big corporations to expand so quickly and extensively? Where did the money to do that come from? Where have the smaller businesses gone? I wonder.

[AuH20]

I was reading End the Fed and he repeatedely said how the Fed helps large corporations, because they get to use the new money that the Fed creates while it hurts the poor and middle class.

Problem is, this doesn't really make sense. If you look at the balance sheet of a lot of big companies many of them have no debt and huge "Cash & Cash Equivalent" positions. It would seem that the Fed is bad for them, being as that they have so much cash holdings loosing value.

The middle class, however, is the one borrowing all the new money. Car loans to drive expensive cars, mortgages, home equity loans, credit cards and almost no savings (cash).

Home prices would not be so inflated if the Fed didn't sign off on 0% interest rates. In fact, all services and goods are inflated because of an irresponsible money supply. Easy money is a destructive force because it distorts innate value.

[fisharmor]

The money benefits the people who get it first the most, then it benefits the people who get it second the second most, et cetera... until it gets to us, and by the time it gets to us the effects of inflation have caught up and it's not a benefit, but a detriment.

The fed creates it, gives it to the big banks, and who do the big banks give it to? To Home Depot, and Ford, and every other multibillion mutinational.

They have to do less with the money in order to turn a profit. Wal-Mart might get a loan to build a new store, but the store is up and operational and profitable before the effects of the inflation that money caused catch up with the people who are buying their goods. Wal-Mart is then under no pressure to pay back the loan early, because they likely got it at a low rate (lending to big business is usually a safe bet), so the effect is that the people who buy from Wal-Mart then get to finance the loan for the building through higher prices.

Contrast that with a small business like Trader Joe's, which probably doesn't have access to huge banks. They have to get more conventional loans, at a higher rate, and farther down the food chain. That means that they are benefiting less from the new money that gets created for their loan. So they're also under more pressure to save up for a new enterprise, which, considering the fact that savings are one of the more foolish things you can do with your money, isn't as effective as just having someone wave a magic wand and give it to you.

[erowe1]

I was reading End the Fed and he repeatedely said how the Fed helps large corporations, because they get to use the new money that the Fed creates while it hurts the poor and middle class.

Problem is, this doesn't really make sense. If you look at the balance sheet of a lot of big companies many of them have no debt and huge "Cash & Cash Equivalent" positions. It would seem that the Fed is bad for them, being as that they have so much cash holdings loosing value.

The middle class, however, is the one borrowing all the new money. Car loans to drive expensive cars, mortgages, home equity loans, credit cards and almost no savings (cash).

I doubt that he said anything to the effect that it helps all big businesses, just that it helps certain businesses and not others, and that the ones it helps are predominantly big, and the ones it hurts are predominantly small.

[Howard_Roark]

The Inflation Tax

The transfer of wealth comes as savers and fixed income families lose purchasing power, large banks benefit, and corporations receive plush contracts from the government-- as is the case with military contractors. These companies use the newly printed money before it circulates, while the middle class is forced to accept it at face value later on. This becomes a huge hidden tax on the middle class, many of whom never object to government spending in hopes that the political promises will be fulfilled and they will receive some of the goodies. But surprise- it doesn’t happen. The result instead is higher prices for prescription drugs, energy, and other necessities. The freebies never come.

http://www.house.gov/paul/tst/tst2006/tst071706.htm

It sounds like RP is talking about government contractors like the defence industry. That makes sense about how they receive the new money. I wish that he would be more clear on that it is the big businesses with government contracts and not all big businesses that are bad.

I mean Apple, Google, Wal-Mart - all they get from the government is a billion dollar tax bill. Large innovative companies are also what make us America and such a prosperous country.

[malkusm]

I was reading End the Fed and he repeatedely said how the Fed helps large corporations, because they get to use the new money that the Fed creates while it hurts the poor and middle class.

Problem is, this doesn't really make sense. If you look at the balance sheet of a lot of big companies many of them have no debt and huge "Cash & Cash Equivalent" positions. It would seem that the Fed is bad for them, being as that they have so much cash holdings loosing value.

The middle class, however, is the one borrowing all the new money. Car loans to drive expensive cars, mortgages, home equity loans, credit cards and almost no savings (cash).

If you have Facebook, I posted a note about this several months ago:

http://www.facebook.com/profile.php?id=720499452#!/note.php?note_id=264175096781

If not, here's the text:


With the Democratic Party's 1-year anniversary of majority control in both the executive and legislative branches, now is a popular time to grade their job performances. Conservatives, as one might expect, have not been kind to the left in their reviews, and words like "socialism" are thrown around almost like clockwork -- much has been made of their criticism of the stimulus bill, cap and trade, and health care reform. But what of the left's defense of these policies?

One major argument that American liberals espouse is that these (and other) government initiatives are aimed at helping the poor and underpriviledged. This is true; I have no doubt that many Congressmen have voted based on that conviction. The poor, after all, can't afford health care. Those who are unemployed due to the troubled economy may be struggling to get by. And think of the poor people of Haiti, in the wake of a devastating earthquake. For a country with so much to offer, what's $100 million in federal aid?

The fatal flaw, lost in all the liberals' good intentions, is a matter of economics. Most people know that inflation destroys the value of a person's savings, by making the value of each dollar go down. Most people don't know that this process harms the poor and middle classes of an economy far more harshly than it does the wealthy.

Ah, but wouldn't it hurt those who have the money? The poor person, after all, has very little currency saved -- the devaluation of which would only leave him with slightly less than before. The wealthy, on the other hand, stand to lose thousands on end if the U.S. dollar were to depreciate in value by 10 or 20 percent.

To understand why inflation adversely hurts the poor, one must understand where money comes from and how inflation occurs. Most people are aware that the currency of the United States is maintained by the Federal Reserve, its central bank. In order to increase the money supply, the Federal Reserve (or "Fed") performs numerous operations, the most common of which is buying treasuries (with printed money) from banks. Banks now have more money to loan out, and the amount of currency in the economy has increased.

However, the most crucial thing to realize is that at this point -- the point when the Fed has expanded the money supply and the banks have more currency to loan out -- inflation has not yet occured. Inflation occurs not simply because of the amount of currency in an economy; if it did, the country would see wild swings in price levels and interest rates in reaction to every decision the Fed makes. Inflation occurs as the market reacts slowly to the amount of currency in circulation -- i.e., after it changes hands several times.

So why is this a bad thing for the poor and middle classes? Consider who the money is given to first: banks. Bankers certainly are not poor, by most estimations. Remember that inflation has not yet occured. The bankers get to use the money before it loses any of its value.

Now, consider what most banks do with most of the money they now have. Typically, the bank will loan it out to a business in order to finance a project that they wish to take on. Business owners certainly are not poor, by most estimations. Inflation has still not occurred. The business owners get to use the money before it loses its value. (They also get to pay back the money they borrowed after it loses its value, making it easier for them to do so.)

Now the business passes the "new" money on to its' employees, as well as the employees of other companies who are helping with their now-financed project. The employees of such a business, more than likely, wouldn't be considered poor -- they have jobs at a company that is financially sound enough to take on debt to finance a project. But now those employees take their paychecks home and spend them on groceries, gasoline, utilities, and other essential goods. The money has been dispersed to thousands of employees at quite a few companies across the country. Now is when inflation occurs. Merchants react to what seems to be higher demand: more people spending more dollars. Prices rise in response.

Naturally, the last people in society to get their hands on the newly-created money are the poorest and most in need. Most of those at the bottom of the wealth structure, therefore, get the money after it has been devalued. The wealthy are able to use the money first, thereby avoiding the price increases caused by an increase in currency.

"Sure," you might say, "that might be right for money that is given to banks, but we're talking about government programs here. Government programs give the money to the poor more directly than in a simple monetary expansion."

However, the data does not bear out the theory that social welfare spending helps the poor or solves the issue of wealth inequality. It is fairly well known that the amount of social welfare spending in the United States has increased dramatically in the past 50 years:

http://sphotos.ak.fbcdn.net/hphotos-ak-snc3/hs143.snc3/17063_831212286813_6220682_45888287_1744724_n.jpg

On the other side of the coin: the Gini coefficient is a popular tool in economics to describe the wealth distribution of a nation or society. The coefficient uses a scale of 0 (complete equality) to 1 (complete inequality). According to the U.S. Census Bureau, the United States' Gini coefficient stood at 0.466 as of 2008 - a number much higher than most other industrialized nations. Furthermore, the Gini coefficient has steadily risen from 0.397 in 1967 (the first year that the Census calculated the measure).

http://www.census.gov/hhes/www/income/histinc/h04.html

If welfare spending is intended to help the poor and balance the wealth structure of society, it has failed fantastically. The negative relationship between Gini coefficient and welfare spending is not confined to the United States, but is fairly consistent from one nation to the next. Going back to the manner in which newly created money passes through an economy, similar effects happen in government: money must pass through the Federal agency and programs, with all of their employees, before being dispersed to the individual state governments, with all of their employees. All of these employees (who, with government jobs, are likely not underprivileged) get the benefit of using the newly created money before the recipients of benefits.

In short, the massive influx of government spending created by the ambitious, well-intentioned Democrats will not result in a higher quality of life for the poor or middle class; instead, as history as shown, it will exacerbate the problems that pervade our society, in the form of inflation-based wealth redistribution to those who get to use the money first.

[Chester Copperpot]

I was reading End the Fed and he repeatedely said how the Fed helps large corporations, because they get to use the new money that the Fed creates while it hurts the poor and middle class.

Problem is, this doesn't really make sense. If you look at the balance sheet of a lot of big companies many of them have no debt and huge "Cash & Cash Equivalent" positions. It would seem that the Fed is bad for them, being as that they have so much cash holdings loosing value.

The middle class, however, is the one borrowing all the new money. Car loans to drive expensive cars, mortgages, home equity loans, credit cards and almost no savings (cash).

what companies are you looking at?

[Mini-Me]

It sounds like RP is talking about government contractors like the defence industry. That makes sense about how they receive the new money. I wish that he would be more clear on that it is the big businesses with government contracts and not all big businesses that are bad.

I mean Apple, Google, Wal-Mart - all they get from the government is a billion dollar tax bill. Large innovative companies are also what make us America and such a prosperous country.

The last part isn't quite true though, that all large companies get from government is a billion dollar tax bill: Large companies also benefit from taxes and regulations, because they increase the cost of doing business and therefore the market entry price. A lot of costs, like paying lawyers to navigate legal red tape, are pretty must fixed costs which large companies can easily afford but really put a dent in smaller companies. Even costs which would seem to be proportional to company size (like taxes, minimum wage, etc.) are not, because smaller companies have more volatile bank balances in addition to their lower cash reserves. All of these barriers naturally result in less competitive pressure in the market, which gives large companies the leeway for complacency, inefficiency, and larger profit margins than they could take in a more competitive market. The increased complacency means fewer companies are competing for talented labor, reducing wages and salaries of ordinary workers. Inefficiency means that too many resources are being spent bringing a good or service to a consumer. Since resources of all kinds are limited over a given time period, the end result is less material wealth circulating through the economy, lower buying power among consumers, and insufficient capital left in the market for full (or anywhere near full) employment levels. All of this is compounded by inflation, since it erodes savings and it causes prices to go up faster than wages.

Granted, you can blame intervention on government, and it couldn't exist without that "vital" coercive tool, but you also have to keep in mind that a lot of large companies deliberately lobby (either overtly or covertly) for regulations (and loopholes and/or more favorable interpretations of dense legalese for the "in club") and other interventions in order to help secure their dominance and make it harder for smaller competition to get a foothold. Although companies with government contracts are certainly first in line for the gravy train, they're not the only ones who benefit at everyone else's expense.

[tjeffersonsghost]

Inflation occurs not simply because of the amount of currency in an economy

I disagree here. Inflation is the amount of money in an economy. It doesn't always reflect right away but that doesn't mean the inflation isn't there. Rising prices are the effects of inflation (increasing the amount of money in circulation).

You are 100% though the banks use the money first, they put the money into circulation. As it trickles down the people who use it last gets the shaft and yes that is the poor. It's not that they necessarily use it last it just takes them a longer time to save up the money to be able to do anything with it and by that time it will have lost value. Business owners who make more money get to use more money sooner. Banks are at the top of the chain.

[malkusm]

I disagree here. Inflation is the amount of money in an economy. It doesn't always reflect right away but that doesn't mean the inflation isn't there. Rising prices are the effects of inflation (increasing the amount of money in circulation).

You are 100% though the banks use the money first, they put the money into circulation. As it trickles down the people who use it last gets the shaft and yes that is the poor. It's not that they necessarily use it last it just takes them a longer time to save up the money to be able to do anything with it and by that time it will have lost value. Business owners who make more money get to use more money sooner. Banks are at the top of the chain.

Well yeah, I was breaking it down in layman's terms in that note. Most people think of price inflation when the term "inflation" is used, and I was using the term in this context to explain that prices won't rise instantly due to the influx of new currency. In terms of inflation of the monetary base, you are exactly right.

[Brian Defferding]

To over-simplify it: Big banks and big lenders can loan far beyond their means to anywhere like large corporations to people like you and me, collect interest, then when loans default the Fed bails them out with emergency loans/credit extensions with money that is printed (a.k.a. "monetized") to avoid/deter potential bankruptcy (not necessarily actual bankruptcy, but rather just to cover potential losses).

So investment banks like Goldman Sachs, Merrill Lynch, etc. can lend virtually to whoever they please knowing that the Fed has their back in case loans default. They will still collect interest and make billions, like what recently happened with GS, while those whom they lended to are bankrupt because of various reasons (business not making enough revenue, property taxes, etc.).

Obviously there is the issue of personal responsibility to those that accepted the loans offered to them, no argument there. But the Fed enables this cycle of over-lending, default-and-bailout. Any kind of reform here won't do because the whole purpose of the Federal Reserve has been delegated by Congress to be the final lender to all banks/firms, and they have the power to print money for their disguised purpose of "avoiding a depression." To me, the Fed is the "great enabling entity" of bad financial practices.

I don't know, does that make sense?

[Howard_Roark]

Now, consider what most banks do with most of the money they now have. Typically, the bank will loan it out to a business in order to finance a project that they wish to take on. Business owners certainly are not poor, by most estimations. Inflation has still not occurred. The business owners get to use the money before it loses its value. (They also get to pay back the money they borrowed after it loses its value, making it easier for them to do so.)

Now the business passes the "new" money on to its' employees, as well as the employees of other companies who are helping with their now-financed project. The employees of such a business, more than likely, wouldn't be considered poor -- they have jobs at a company that is financially sound enough to take on debt to finance a project. But now those employees take their paychecks home and spend them on groceries, gasoline, utilities, and other essential goods. The money has been dispersed to thousands of employees at quite a few companies across the country. Now is when inflation occurs. Merchants react to what seems to be higher demand: more people spending more dollars. Prices rise in response.
:

I'm sorry but this fundamentally doesn't make sense. You imply that large busineses are the ones borrowing all the money. As per what data? Large companies like Apple, Google, Exxon whatever throw off a lot of cash and don't really need to borrow money to grow. Google is holding $9.1 billion in cash for example, and has no debt.

It's the middle class that is on the debt binge and I'm sure statistics would point this out. There are trillions in credit card debt alone. Big businesses are usually the "savers" hoarding billions in cash while the middle class spends the money the second they get it. Furthermore, new debt whether it is created via a home equity loan or borrowed by a large corporation is new money, no one is getting before or after someone else.

[Brian4Liberty]

I was reading End the Fed and he repeatedely said how the Fed helps large corporations, because they get to use the new money that the Fed creates while it hurts the poor and middle class.

Problem is, this doesn't really make sense.

Let's say the Fed prints a trillion dollars and gives it to you. What can you buy with that money today? You haven't put the money into the economy yet, so you haven't created inflation. You spend the money, now it is spreading through the economy. That trillion dollars no longer has the buying power it did when you spent it. By the time it trickles down to everyone else, it is worth less than it was when you got it first and spent it.