This article on Forbes talks about Congressman Ron Paul's warn of another financial crisis that is even worse than the one in 2008. He also said that "a U.S. currency crisis is inevitable." and supported the comeback of the gold standard.
"A few decades ago, former Fed Chairman, Alan Greenspan stated, “In the absence of the gold standard there is no way to protect savings form confiscation through inflation.” Without a gold standard, there is nothing to limit government spending. In short, as long as the government is able to overspend, the national debt will be the norm rather than the exception."
"If the world lost confidence in the greenback, its value would plummet and life as we know it would be severely and forever altered. How will we know when the next crisis is about to emerge?
The first sign of a currency crisis, according to Paul, will be a precipitous decline in the value of the dollar. A collapse in our currency would result in a spike in inflation. It would also be accompanied by an increase in U.S. interest rates. Paul’s prediction, although rather dire, is for the collapse of the entire U.S. financial system. If this occurs, the systemic risk would be massive. If the U.S. financial system actually did collapse, it would take the entire global financial system with it. Why? Because there is over $18 trillion in U.S. debt outstanding, with China and Japan being the largest holders. A U.S. collapse would devastate the entire globe. Let’s turn our attention to the national debt, an issue which weighs heavily on the minds of millions of Americans"
Paul then talked about the U.S. national debt and that a small rise in the interest rates can "cause the debt to spiral out of control. This is because Washington is heavily dependent on borrowing to operate. Next, it will be much more difficult to expand or even maintain the welfare state." Followed by several other problems.
The author also supports Paul's belief that "Real monetary reform will only come after a major currency crisis hits." because "politics will get in the way and prevent a solution until it reaches a crisis point."
Finally, the U.S. dollar has been at risk of losing its role as global reserve currency. "Recently, China has increased its trading with Germany, India, and others, excluding the dollar as the reserve currency. It seems the world is slowly transitioning away from the dollar. [...] Mr. Paul also stated that 10 countries have already signed a document to begin phasing out the dollar as the basis of trade. Even the IMF has proposed a new world reserve currency system. "
What do you guys think? Is Paul too pessimistic? Or is it something that we should pay attention to?
Paul then talked about the U.S. national debt and that a small rise in the interest rates can "cause the debt to spiral out of control. This is because Washington is heavily dependent on borrowing to operate. Next, it will be much more difficult to expand or even maintain the welfare state." Followed by several other problems.
The author also supports Paul's belief that "Real monetary reform will only come after a major currency crisis hits." because "politics will get in the way and prevent a solution until it reaches a crisis point."
Finally, the U.S. dollar has been at risk of losing its role as global reserve currency. "Recently, China has increased its trading with Germany, India, and others, excluding the dollar as the reserve currency. It seems the world is slowly transitioning away from the dollar. [...] Mr. Paul also stated that 10 countries have already signed a document to begin phasing out the dollar as the basis of trade. Even the IMF has proposed a new world reserve currency system. "
What do you guys think? Is Paul too pessimistic? Or is it something that we should pay attention to?
While I certainly think that the value of the dollar is something to monitor and pay some attention to, I think that Mr Paul is arguing an unlikely and exaggerated point here. I think the idea of the whole world suddenly losing faith in the "greenback" is a highly hypothetical situation, additionally, the solution of the gold standard is not a viable one. Yes, there are discussions of a different currency becoming a reserve currency, but I don't think it would be a huge shock that would cause another crisis.
ReplyDeleteI agree with Shelby here. It is an exaggerated point and we have learned that the gold standard is not realistic in today's society. I don't see a comeback of it. I don't think that the currency crisis is necessarily "inevitable". And if it does happen, I don't foresee what he predicts; it is pessimistic to me.
ReplyDeleteI agree with Shelby that Dr. Paul's hypothesis of an inevitable currency crisis is unlikely and exaggerated. Although I share Dr. Paul's pessimism on the US financial system (and the government's finances, as well) and view it as alarmingly fragile, I doubt that a widespread loss in faith of the greenback is likely. Furthermore, as we've discussed in class, a gold standard is economically infeasible and archaic. Perhaps Dr. Paul is contributing to his own fear, and standing in the way of a real solution.
ReplyDeleteI agree with everyone above. The gold standard had been ruled out long ago as a poor choice in terms of financial system. I would also have to agree that the fears for the US dollar are way overblown. Yes, it is a concern to pay attention to and watch out for but faith in the dollar is not going anywhere, even if it is not a trading currency anymore.
ReplyDeleteI agree with the previous comments as well. There is no way that the gold standard will come back, and Paul is very pessimist with his thoughts. Personally I don't think that there will be a currency crisis anytime soon.
ReplyDeleteI also agree with all the above comments that Paul's hypothesis is exaggerated and that the gold standard is an infeasible system. Furthermore, I do believe that there is a possibility that a currency crisis could occur given that the US economy is relatively fragile. What really stood out to me in the article is that if interest rates increased then the debt would spiral out of control. I hope this is not the case since the Federal Reserve was considering increasing the interest rates that have been very low since the crisis.
ReplyDeleteI also agree with everyone that Paul's prediction is far-fetched and highly unlikely. The gold standard just isn't a viable option anymore and it seems kind of ridiculous to me that it was suggested we go back to it. However, I agree with Alex; our financial system needs some major adjustments made in order to continue to "work" in the future.
ReplyDeleteI honestly can't believe that Paul is suggesting that we return to the gold standard. Like Alex stated, it's archaic. The money we'd have to sink into gold mining would harm us more than the balance it could potentially give us. I do, however, agree with the Paul's point that our system isn't in a stable state. $18 trillion dollars in outstanding debt is outrageous, but I don't really see our government doing anything to turn that around...
ReplyDeleteI agree with everyone above that the gold standard is not the route to pursue due to the fact it is not a viable option. Also, I agree with Alex that our financial system does need to change in order to work and be sustainable in the future.
ReplyDeleteLike mentioned above, going back to the gold standard is unfeasible. To advocate for such a reversal makes me question Mr. Paul's legitimacy and makes me even more skeptical of his predictions. I do believe Paul is being too pessimistic, however, I agree with him that $18 trillion of outstanding debt is worrisome and there should be action to reduce this deficit before it gets out of control. Like Alex mentioned, we currently have a very fragile financial system so it's likely we will continue to borrow money from abroad and use it to try and fix our economy before worrying about implementing policy that will help to reduce the deficit.
ReplyDeleteThis article is pretty ominous. I think that Ron Paul definitely has reason to doubt the strength of the dollar, but going back to the gold standard seems like a very extreme solution. I think that it is unlikely that there would be enough political support for this policy to be seen through.
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