While some may call Ron Paul, father of presidential candidate Rand Paul, Chicken Little for his much talked about dire predictions of a looming currency crisis, economic devastation – total breakdown in the stock market, civil unrest, and general mayhem, some aren’t so sure people shouldn’t be listening.
Ron Paul’s predictions in an infomercial for Stansberry & Associates Investment Research, are so severe you might be tempted to get a bomb shelter in your backyard to hide until it’s safe to come out, if it will ever be.
But have no fear, Porter Stansberry has the book to save the day, America 2020: The Survival Blueprint and only for $49.50.
Remember though, Ron ranted years ago and yet the earth still stands. "Paul’s predictions don’t have merit. In particular his point about the Fed monetizing government spending is not true. That is, the Fed is not buying bonds from the Treasury with newly created money and thus there is no support for the assertion that hyperinflation is coming," says Louis Johnston, professor, department of economics at the College of Saint Benedict, Saint John’s University in St. Joseph, Minnesota.
However, there are those who laugh off the notion that Ron’s ramblings are meant to boost book sales. "Stansberry & Associates over the years have been known to make a small economic downturn a catastrophe," says Joseph Jones, a partner and economist with Economic Hedge, a consulting and forecasting firm. But he’s not dismissing Ron. "The Fed is propping up asset prices to pre bubble prices of 2001 and 2008. Financial stability is hinged on interest rates set below market rates thus causing malinvestment and proper malprudential policy requires a rate increase to stop the economy from overheating," explains Jones.
Jones says that as more countries are diverging from U.S. dollars in trade, increasing the likelihood of bank runs in the United States. "The run on the dollar will be spurred by out of country investors who recognize the U.S. dollar as the international reserve currency is no longer sound and a replacement will be in order.
What might a currency crisis look like? Normally, a currency crisis arises because the fiscal authorities are not able to generate sufficient tax revenues to fund desired spending levels. "When it reaches the point that external parties no longer purchase their debt, the country will begin to lose reserves (if it does not have independent monetary policy, for example, if it doesn’t have a central bank that can simply print more)," says Jeffrey Haymond, dean of the school of Business at Cedarville University.
When the reserves run out, the country defaults, like Greece effectively did. "If the country’s central bank prints more, the value of the currency falls relative to the rest of the world and they can no longer buy as many foreign goods due to high domestic inflation. Further, if the external debts were denominated in a currency other than the borrowing country (like Argentina promising to pay back foreign loans in dollars), then having your own central bank doesn’t help and you default," says Haymond.
Currency crisis are usually rooted in the fact that fiscal authorities run chronic imbalances, budget deficits and amass large external debts. If the borrowing country doesn’t grow fast enough to generate the sales via exports they don’t have enough foreign exchange to pay back loans. "They will lose reserves and then default. The impact is always a depreciated domestic currency, higher inflation, and lower standards of living," he adds.
Kevin George of market-guru.com, a provider of research and commentary for investing in stocks, says, "Today Ron may look like the boy who cried wolf, but in the next few years, Americans will realize his warnings were right and will seek out answers from those who are shouting their concerns from the sidelines."
George says the coming crisis won’t only take the form of a currency crisis, but general market turmoil. "This is a generational crisis that was delayed in 2008, only through the efforts of a global bailout to the tune of trillions of dollars. To understand the consequences of this effort, we have to consider that seven years after the downturn, Chinese growth is declining and Europe is caught in a deflationary debt-spiral – both of these were key drivers of global prosperity running into 2007 and the bailouts were intended to put a fire under growth in these regions," explains George.
He says that the market is already showing what’s next as copper and oil, key signals of economic performance are in a deflationary trend, while investors are turning away from sovereign debt and pushing stock prices to record highs. "Market talk in the financial centers is about grave conditions for liquidity in bond markets and when the first crack comes, there will be a crash in bond prices as yields on risky government paper are pushed up from their unrealistic levels near zero. The Swiss devaluation was another ‘shock’ event which highlights that something is wrong."
Russ Field, who used to own and operate a Forex company, says he’s been researching for years what Ron Paul has been saying for years. "Everything changed a year ago that makes what he and others like Peter Schiff and Mike Maloney are saying not just conspiracy fodder." For one thing, he says he believes unemployment is really around 20%+, instead of around 5.4%. "The best way to figure this out is to correlate the economy to food stamps. Currently there are 96 million people on food stamps in the US, a higher percentage today than even the great depression. You have to question what is going on."
He’s skeptical, "Look at the U.S.’s GDP to debt ratio. If it wasn’t for the fact that the USA owns the printing press for the petrol dollar, the U.S. would have gone the way of Greece many months ago."
The bottom line says Haymond, "No nation is immune to the implications of imprudent fiscal policy. So while the specifics of Mr. Paul’s predictions may be questionable, he is right to bring to our attention the large risks our fiscal authorities are placing on our future."