Ron Paul: Believer in small government predicts 15-year depression
By Phil Davis
Published: March 22 2009 09:07 | Last updated: March 22 2009 09:07
Pension trustees and insurance company portfolio managers look away now. Your increased commitment to government bond holdings in recent times is about to blow up spectacularly.
At least, that is the view of Ron Paul, the US congressman who ran against John McCain in last yearâs Republican Party presidential nomination.
But the credibility of both western governments and their currencies is waning, and has been ever since the gold standard was abandoned in 1971, says Mr Paul. And that means even âsafeâ investments are far from safe, he claims.
âPeople will start to abandon the dollar as current and past economic policies create a steep rise in interest rates,â Mr Paul says.
âIf you are in Treasuries, you will need to be watchful and nimble to time your escape.â
Unfortunately, cashing out will not protect the value of investments, he insists, because âfiatâ currencies will all decline over the coming years as measures to try to haul the world economy out of recession fail. âThe current stimulus measures are making things a lot worse,â says Mr Paul.
âThe US government just wonât allow the correction the economy needs.â He cites the mini-depression of 1921, which lasted just a year largely because insolvent companies were allowed to fail. âNo one remembers that one. Theyâll remember this one, because it will last 15 years.â
At some stage â Mr Paul estimates it will be between one and four years â the dollar will implode. âThe dollar as a reserve standard is done,â he says. He sees little hope for other currencies where central banks have also created too much liquidity dating right back to the early 1970s.
âEurope and the US will both have to fundamentally change their money systems,â he adds.
And donât even mention shares to Mr Paul: âThe last place you want to be is in the stock market,â he says. âIt may not bottom out for 10 years â just look at Japan.â
Of course, everyone has a view on the credit crisis, its causes and putative solutions. What differentiates Mr Paul is that he has been warning of the dangers to the world economy for nearly 40 years. âThe breakdown of Bretton Woods was my motivation for running for Congress. I have been talking about the dangers ever since and warning that the control by central banks over the money supply would create an enormous bubble.â
A deep recession had only been avoided up until now because of the efforts of successive governments to reflate the economy. But there are no more policy levers left, says Mr Paul. âThis is the big one.â
Unsurprisingly, Mr Paul has been viewed as a crank in Washington, dismissed as a doomsayer and a party-pooper. His bill early this year to abolish the Federal Reserve was largely ignored. And his adherence to the Austrian School of economics, which predicted that fiat currencies would destabilise the world economy, has won him few friends.
âPeople donât like the Austrians because they are against big government, against armies and against the welfare state. To accept Austrian economics, you have to accept limitations of credit expansion and that is what has kept the government and financial firms in business for so long.â
However, his views are, for the first time, being taken seriously in Washington. Like another politician who recently aimed for high office, Al Gore, Mr Paulâs uncomfortable truths are starting to be deliberated at elevated political levels. âBefore last summer, in meetings nobody really knew I was there. Now they often defer to me on economic matters. But you wonât catch any of them admitting that publicly â not yet at least.â
He believes that markets will fall much further and inflation rise much higher before his fellow politicians recognise that the system has failed. âWe are likely to see an inflation depression,â Mr Paul says.
âIn the 1970s, we had stagflation, but not depression. Inflation depression is what you see in Zimbabwe.â
Even Nouriel Roubini, the renegade economist whose once âextremeâ views are now mainstream, fights shy of this analysis. The investment options arising from the analysis are no more palatable. In fact, according to Mr Paul, there is only one: gold.
Such an unproductive asset (unless you are a jeweller) appears unattractive even with the gold price having risen three-fold during the Bush administration. But Mr Paul argues that the current price of about $900/ounce could look cheap in a few years.
âIt is not so much that gold will go up but that fiat currencies will go down,â he says. He even advocates a return to the gold standard, which he says is not as difficult as it sounds to achieve.
Mr Paul, it should be noted, first invested in gold nearly 40 years ago when it was worth $35/ounce and holds a part of his wealth in the metal. But he is not alone: gold exchange traded commodities have seen record inflows in the past six months, most wealth managers now recommend a core holding and central banks are loath to sell their quotas. Indeed, Russia has even announced it is buying gold.
Nevertheless, most large institutions, including pension funds, have little or no gold holdings. Mr Paul argues this is a mistake and decries the widely held view that gold is an anachronism.
âGold is natural money and has been for 6,000 years,â he says.
âYou just canât repeal those laws. A scrap of paper, which the government can just add a nought to, will not do.â He does not, though, expect the mainstream investment industry and its advisers to rush to the bullion vaults.
