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Congressional Committee Higher prices at the pump along with an increase in the cost of many items on grocery store shelves make clear inflation has reared its ugly head, despite the Federal Reserve’s claim to the contrary. The March 17 hearing took place before the Monetary Policy Subcommittee of the House Financial Services Committee. Chaired by Congressman Ron Paul (R)-Texas, the subcommittee invited three witnesses to offer testimony and field questions from those subcommittee members interested in discussing inflation. “When a money supply is increased, the value of that currency goes down,” said Paul, in his opening statement. “And inevitably, it will lead to rising prices. I believe the inflation of prices is most damaging to the poor and low middle income people because they suffer the consequences much more so than those that can protect themselves.” Labeling inflation a tax on the poor – on those who can least afford it - Paul said inflation hurts the lower middle class by diminishing their purchasing power, essentially reducing their real income relative to the cost of living. “It is a reasonable assumption to say…that if you destroy a currency you will destroy the middle class. A sound currency encourages a middle class,” said Paul. The Texas Republican warned against government intervention in the form of price controls, something tried as far back as ancient A Dollar as Good as Gold The first witness to speak was Lewis E. Lehrman, Senior Partner of L.E. Lehrman & Co. Lehrman is an advocate for returning to the Gold Standard. In his opening statement Lehrman blamed the Federal Reserve’s first round of Quantitative Easing (QE) in 2008 – an increase in the money supply – for the almost tripling of oil prices and doubling of the cost of a gallon of gasoline. The Fed’s credit expansion from late 2008 through March 2011 created almost $2 trillion new dollars on the Fed balance sheet, explained Lehrman, leading to commodity and stock inflation. One social ramification of rising prices on middle income workers, those on a fixed income or on pension, according to Lehrman, is little to no return on savings. The way back to prosperity for Americans is through reinstituting a dollar convertible into gold, Lehrman proffered. “The gold standard puts control of the supply of money into the hands of the American people, as it should in a Returning to the gold standard requires a three-step process, according to Lehrman. The first step in monetary policy reform is for the government to announce the future convertibility of the U.S. dollar on a date certain and to define the dollar as a weight unit of gold; second, convene an international conference to establish mutual gold convertibility of the currencies of the major world powers; and third, prohibit by treaty the use of any currency but gold as official reserves. Lehrman said the Gold Standard “is not perfect, but it is the least imperfect monetary system tested in the only laboratory we human beings have available to us: the laboratory of human history.” The second witness, James Grant, Editor of Grant’s Interest Rate Observer, began his opening statement by reminding the subcommittee that the Federal Reserve Act of 1913 did not mention zero interest rates, Quantitative Easing, inflation targeting, stock price manipulation, or paper money; all realities today as The Fed approaches its centennial in 2013. Grant then read from the Federal Reserve Act of 1913, specifically, its original mandate to furnish an elastic currency, afford a means to discount commercial paper, provide for the more effective supervision of banks, and “for other purposes.” “We should have known,” said Grant. “’Other purposes’ was the operative phrase. Central banking has morphed into central planning, explained Grant, and today, the chairman of The Fed, the Ben Bernanke, has become “the self-appointed booster of stock prices.” The last witness, Joseph Salerno of Deflation, or falling prices, in most circumstances, is a natural outcome of a prosperous and growing economy, argued The first HD TV was introduced by Sony in 1990 and retailed for $6,000, he said. By 2003, when HD TVs first became widely sold in the “Not even a Keynesian economist would claim that the spectacular price deflation in these industries has been a bad thing for the Under the Gold Standard, “A consumer in the year 1913 needed only 79 cents to purchase the same basket of goods that required $1 to purchase in 1800,” said After each witnessed delivered their opening statement, the subcommittee moved to questioning. Chairman Paul stated monetary policy was an important factor impacting the business climate then asked Deflation as measured by falling prices would most benefit those on fixed incomes and pensions, explained Paul asked Lehrman to expand on stable prices over the long-term when a nation relies on a gold-backed currency, as opposed to the diminishing value of fiat currency – paper money prompting Lehrman to hold-up a graph, the same graph submitted as part of his written testimony, showing the value of a dollar relative to an ounce of gold since 1913. His graph showed that on March 15, 1910, one ounce of gold sold for $20. On March 15, 2011, 101 years later, one ounce of gold cost $1,396. When the dollar is measured by a Consumer Price Index (CPI), the 1913 dollar is worth five cents. It was the Coinage Act of 1792 which made the dollar convertible to precious metals, primarily to silver at first, explained Lehrman, and by 1834, the nation was on the Gold Standard. “If you take the price level under the Gold Standard from 1834, and of course make the exception for the Civil War…until 1914, you will find under the Gold Standard that the general price level for the CPI was exactly in the same position,” said Lehrman. “Over the long run, near a century, there was neither a fall in the general price level - deflation – nor was there any general inflation.” Republican Representative Blaine Luetkemeyer of Missouri asked Grant to elaborate on his opening testimony when he spoke on a fiat currency; specifically that the only thing holding up the dollar is faith in it since it isn’t backed by anything else. Grant said every monetary system is faith-based to a degree and never before, until present day, has the world “been on a system of pure paper” adding, “The dollar is the Coca-Cola of monetary brands.” This Grant called “a remarkable achievement.” The dollar is treated as “good money the world over though the cost of production is essentially nothing,” Grant said. “This is a pretty flattering expression of confidence by the world in Grant warned, however, that faith, unlike gold, must be continually refreshed and is not perpetual. He explained that in the language of modern finance the dollar is a derivative and it once derived its value from the collateral behind it, namely gold. Today the dollar is a derivative without an underlying asset, except for faith. Luetkemeyer asked Grant to explain the impact on the Grant said the nature of “American franchise” is to import foreign goods purchased with dollar bills - currency created at no marginal cost – then send those dollars overseas to, as Grant put it, “Wal-Mart suppliers in Because suppliers do not necessarily need dollars, “they wind up on the balance sheet of the central banks of our Asian creditors,” said Grant. Then our Asian creditors purchase Treasury Securities “as if the dollars never left the 50 States.” Once the world loses their confidence in the Federal Reserve, the Arizona Republican David Schweikert mentioned the two Congressman Schweikert asked what the impact would be, considering the devastating crisis in Lehrman suggested China would fill the breach left by Japan and if that was not to be the case, then the dollar would fall on the foreign currency exchanges until countries whose interest it is in to not have the dollar fall any lower - thus become increasingly competitive in the export market - intervene by buying Treasury Securities. If neither of these scenarios were to play out, Lehrman said The Fed would have no choice but to contract the money supply. Steering the conversation to the Consumer Price Index (CPI), or inflation, Paul explained there are two CPIs. The old version, and the new, and said government likes to focus on “Core CPI” or the new CPI, which does not include food and energy prices. Paul then asked the panel how they measure inflation. Before answering, Lehrman noted if the Department of Labor today abided by the CPI methodology they used to calculate the CPI in 1980, inflation today would be at an 8% annual rate. The Fed chairman, Ben Bernanke, pegged 2010 inflation at a 1.2% annual rate in testimony last month before the full Financial Services Committee as part of his semi-annual Humphrey-Hawkins Monetary Policy Report. Ultimately, Lehrman answered, to more accurately ascertain inflation one should look at the actual cost of products in the market – indicators of the cost of production - and ignore the monthly CPI as set by the Department of Labor. Congressman Schweikert asked if the national debt could have an impact on inflation and Lehrman said there should be a substantial amount of worrying on this issue because the average maturity on the U.S. Treasury debt is approximately four years – a short time period, according to Lehram, especially for a nation in our predicament. Specifically, the uncomfortable truth that the level of If the interest rates were free to rise as dictated by the market, instead of The Fed’s artificially set lower, current rate, the level of debt service payments paid by the taxpayer to service the debt would rise “by an order of magnitude,” said Lehrman, and could eventually consume the entire federal budget. Congressman Paul asked the panel their advice on what they believed is the best way for politicians to move forward on The Fed and the economy. Grant answered it would be a good idea if politicians admonished The Fed to “speak in plain language” suggesting The Fed not use the term “Quantitative Easing” and instead say “money printing.” The Fed should not use the phrase “Portfolio Balance Channel,” to convey their intention to manipulate stock prices higher, added Grant, but instead The Fed should more accurately call it “Thimble-Rigging” an old-timey Wall Street term for a shell game. “If we talk about money printing and manipulation, the public can understand what is afoot. These three dollar words [Portfolio Balance Channel and Quantitative Easing] signify nothing,” said Grant. Lerhman said he wised not to assail the motives of any man and suggested a better way to look at things is to recognize that the academics and central bankers have been trained to think and believe that the Federal Reserve System is the rightful manager of the national economy, and the world economy. “They have been trained to think that way in economics departments of almost every graduate school,” said Lerhman, adding in his view the system is flawed and the best approach when comes to The Fed is discuss policy, “Without attributing base motives to the individuals who are operating in the set of institutions which were bequeathed to them, sort of by chance or by historical developments, rather than by any satanic design.” The House Financial Services Committee is at: www.financialservices.house.gov Mises Institute is at: www.mises.org
Examines Relationship
Between Rising Prices
& Monetary Policy
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One congressional committee recently held a hearing to examine the correlation between these rising prices, and The Fed’s monetary policy.
Can’t Find a Pick-Up a Copy of --- Instead, someone at the AV News has chosen to promote their fledgling newspaper at our expense. During our November distribution we noticed for the first time, at more than a dozen locations - Fox Field and There’s really no way of knowing how long the solitary copy of the AV News had been there covering the Political Observer since the AV News doesn’t move very fast. The AV News’ underhanded maneuver not only deprives our regular readers the opportunity to find the latest copy of The Political Observer, it also prevents people from discovering and enjoying our publication for the first time. That’s bad for business. Later into the month of November during our restocking of distribution points we learned the seedy scheme of placing a lone copy of the AV News atop the Political Observer was not a one-time event, so this editor, along with the publisher, paid a friendly visit to the AV News at their downtown storefront on There we spoke with a cordial Chris McGuinness, with whom we kindly registered our complaint and consequential demand that his organization cease the practice immediately. Mr. Bryant and I got to know each other well during our few years together on campus - he, the brave and honorable campus police chief, and I, the enterprising editor of the college newspaper hot on his trail. Mr. Bryant trading his gun and badge for a pen and notebook is an amusing thought. It’s the very definition of irony and would serve well as the premise for a cleverly-crafted column. Political Observer staff – all two of us – are thrilled the AV News is fully-staffed, up and running in business publishing a newspaper. Until the above-described interference from that newspaper is successfully brought to a halt, readers remember: when in And by all means, we encourage you to grab a copy of the AV News too! It isn’t hard to miss. To be continued…? Mr. Bryant?
Copy of
The Political
Observer?
The AV News
Because We’re
Probably Underneath
When it comes to local print publications our philosophy is, "The More, The Merrier!"
Unfortunately for our advertisers and readers alike, the fine folks down at the AV News apparently do not share this newspaper’s love and admiration for the free marketplace.
Nothing quite like stepping on someone else to make oneself feel taller.
A single copy may do the trick for a week or two. Now that’s economy!
On the business end of things, the employ of this unethical and malicious tactic injures the Right of our paying advertisers to receive full value for their purchase.
Chris took written note and promised to pass the message along to his editor, my dear, old friend from
Along with his deputy - Codename: Kick-Stand - we three shared the privilege and opportunity to become “close” on one particular, special occasion.
Just the facts! I’m sure Mr. Bryant gets my drift.
Most likely you’ll find it atop a stack of The Political Observer.
Building U.N. Coalition to Thwart, Activism, Opportunism The Rise of a 21st Century Empire “It can be said that the 21st century cannot be the ‘American century.’ It is not that the Americans do not want it but that it is not possible. This has been proven by the
of Peaceful Multilateralism
as Strategy to
Diminish
Block
----
Examining
International Behavior
& Diversification
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MOSCOW STATE UNIVERSITY: Then-President and current Russian Prime Minister, Vladimir Putin with former Chinese President Jiang Zemin in 2001 while meeting with University
entrants, students and lecturers. Photo published with permission, courtesy: www.kremlin.ru
-- Former Chinese Vice Premier Qian Qichen
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Read between the lines. On April 1, 2001, less than 90 days into a new
Fast forward to early March 2009, less than 60 days into the next new
The following day, March 5, without any notice or warning, also in international waters, a Chinese frigate approached ocean surveillance ship USNS Impeccable and crossed its bow at a range of roughly 100 yards. This event was followed less than two hours later by a Chinese Y-12 aircraft conducting eleven fly-bys of Impeccable at an altitude of 600 feet and a range from 100-300 feet.
As reported on at the time by FOX News, “The frigate then crossed Impeccable's bow yet again, this time at a range of approximately 400-500 yards without rendering courtesy or notice of her intentions.” Two days later, on March 7, a Chinese military intelligence collection ship challenged USNS Impeccable over bridge-to-bridge radio, calling her operations illegal and directing Impeccable to leave the area or “suffer the consequences.”
There is no doubt among political observers that
One of five permanent members of United Nations Security Council empowered with the veto,
A RAND report, commissioned by the United States Air Force, examined
RAND described China as “a global actor of significant and growing importance” involved in regions and issues once peripheral to her interests, such as Latin America and the Middle East, and through its international behavior China has single-handedly altered the dynamics of the current international system.
According to
RAND revealed contemporary Chinese leaders have concluded that the next 15 to 20 years represented a strategic window of opportunity within which
A Multi-Polar World
After the end of the Cold War, Chinese analysts predicted a quick evolution away from a
Such an order was not to be as the
In a 2004 speech given by Qian Qichen, China’s former vice premier and long-time foreign policy doyen (senior member of a group regarded as an authority because of superior knowledge), Qichen said, “The United States wants to engage in unilateralism but cannot dominate the world.”
In a 2008 Chinese defense white paper,
However, Chinese scholars and policymakers argue, multi-polarity is on the rise as U.S. influence diminishes, and cites as evidence the global financial crisis and relative decline of the U.S. economy on the one hand, and international resentment and alienation fostered by the lengthy U.S. intervention in Iraq and our nation’s militaristic prosecution of the global war on terrorism, on the other hand.
A senior Chinese diplomat was quoted by RAND as saying, “The uni-polar hegemonistic strategy of the
Many Chinese scholars now believe a multi-polar world will emerge over the next 20 to 30 years.
Energy Insecurity
In 2001,
The result was shortages in oil, coal, and electricity and prolonged power shortages in many Chinese provinces that created a situation forcing
Demand and reliance on imported crude oil grew from 1.6 millions barrels per day (b/d) in 2001 to 4.1 million b/d in 2007; consumption levels some Chinese leaders projected for their nation not until 2020.
The International Energy Agency projects
Chinese leadership, like the United States, define energy security in terms of two issues: price volatility and security of delivery, in which China feels vulnerable on both fronts, although the Chinese directly benefit from the United States’ commitment to keep sea lanes open and oil moving safely and freely around the globe.
About 90 percent of Chinese oil imports arrive by ocean tanker, which has made
Long a thorn in the side of Chinese prestige is
China
The strategy to prevent
Examples of Dollar Diplomacy include the construction of a sports stadium in the
According to RAND,
Military Diplomacy
In their 2004 national defense white paper,
According to RAND, Chinese military diplomacy has been successful, for the most part, in reassuring Asian nations of
The content of these exchanges have been limited because of the PLA’s penchant for guarding national defense information and capabilities. However,
Ninety-eight countries have reciprocated and maintain military attaché offices within
In the same three-year period, China sent over 900 military students to over 30 countries while about 4,000 military personnel from more than 130 countries have come to China to study at Chinese military educational institutions.
The export of conventional weapons to a collection of regular customers – Burma, Cambodia, Pakistan, Thailand, Sudan, Algeria, Egypt and Iran – has made China the fifth-largest arms exporter to developing nations, estimated to be valued between $500 million to $1 billion annually.
RAND cautioned that Chinese arms exports (five percent of global market share) are not a major source of political influence, rather, a form of opportunism by China because many buyers lack access to other suppliers, or lack funds to shop for weapons elsewhere.
Chinese conventional weapons are described by RAND as “inexpensive but often unreliable” and RAND stated Chinese arms shipments go to smaller, poorer countries, with the exception of
RAND reports, “
U.S.-Sino Relations
Chinese leaders, since the early 1990s, have articulated three principles to guide their nation’s relations with major powers: non-alliance, non-confrontation, and not directed against any third party. EDITOR’S NOTE: The two incidents reported on at the beginning of this article belie the non-confrontation principle espoused by Chinese leadership.
U.S.-China relations are of paramount importance to Chinese policymakers who have historically treated relations with the
Of equal importance,
Mainly by
Yet, RAND stated,
Ultimately,
Russian-Sino Relations
Since 1996, Chinese and Russian leaders have held annual summit meetings, and Hu Jintao’s first trip abroad as
A second joint exercise involving land forces was conducted inside
At the end of the Cold War, Russia became China’s principal supplier of sophisticated weapons systems that included air defense, advanced jet fighters, destroyers, submarines and supersonic anti-ship cruise missiles and in 2007, Russia became China’s fourth-largest supplier of crude oil imports at nine percent, satisfying a part of China’s desire to receive crude oil delivery overland instead of by sea.
A Chinese assessment declared that “
In the United Nations, Russia and China are two of five permanent members of the Security Council with veto power and RAND reports how the two nations play the United States, “On North Korea nuclear issues at the U.N., China takes the lead, with Russia’s support; and on Iran nuclear issues, Russia takes the lead with support from China. In 2006 and 2007, there was a near 100 percent similarity in Chinese and Russian votes in the UNSC (Security Council), including vetoes.
“As a reflection of their common concern about U.S. power, many Chinese also hope that Russia would be willing to support China in a conflict with the United States over Taiwan; Chinese analysts point to the 2005 joint amphibious exercise as an indication of growing military cooperation, which could be leveraged during a cross-Strait crisis,” RAND reported.
In Central Asia, both
Regardless of the unity of effort between
Although RAND found that most Central Asian states have learned a lesson watching
Despite increased governmental and military ties, there exists low-level social and cultural contact between the peoples of
In 2007, about 40,000 Chinese college students and 80,000 middle school students were learning Russian, while more than 200 million students were learning English. In trade,
In 2007, Russia-Sino bilateral trade reached an all-time high of only $48 billion dollars, compared to $356 billion with the European Union, $302 billion with the
Arms shipments to
Observers need look no further than the United Nations – the center of
Although
However,
During the 2005 debate on
Supporters of
To kill the proposal for Japanese permanent Security Council membership,
The four other occasions where
Also in 1972,
In 2007,
In 2008,
In 2003,
Many Chinese analysts see the U.N. as a mechanism to moderate
For example, according to RAND,
RAND reports, since the Iraq War, “
“This is largely a function of several factors: China’s growing confidence in its own capabilities; its willingness to tolerate negative U.S. reactions and a related view that the United States needs China more than before; Beijing’s perception that the U.S. image and influence were in decline during the Bush administration; its expanding global economic interests; and China’s ability to work with other nations, such as Russia, to avoid isolation in its disagreements with the United States.”
The five permanent members of the U.N. Security Council are
Roughly 75 percent of
RAND concluded that “
Rather, on balance,
As a result, to many nations,
Through her diversification – entreaties into Africa, Latin America and the Middle East - China has lessened her reliance on stable and positive relations with a few powers, such as the U.S., and has generated leverage that helps her avoid restraints on her behavior by major powers in the U.N.
RAND concluded that
RAND reports, “A core Chinese objective is to hinder the
This approach is described as “gravitational” rather than confrontational, meaning,
Although RAND described