There has been a lot of talk recently about preventing an economic recession through a combination of fiscal and monetary stimulus. The politicians and bureaucrats in Washington would have us believe that pursuing such a policy would ward off a recession by stimulating consumer spending, which makes up around 70% of U.S. economic activity. But it wouldn't really matter whether the stimulus came from tax rebates, increased government spending, or lower interest rates, because the end result would be inflation of the money supply by the Federal Reserve System.
In fact, it is the inflationary policies of the federal government and the central bank (the Fed) that have brought us to the brink of a recession in the first place, if we are not already in one. The present problem revolves around the fact that creating money out of nothing distorts price signals in the economy, which causes investments to be misdirected in ways that would not be justified in the absence of monetary inflation. Obviously then, creating more inflation would only serve to exacerbate the problem, because more inflation would simply lead to another round of misdirected investment. And yet, that is precisely what is being advocated as a solution!
History shows that fiscal and monetary stimulus hurts more than it helps, and we don't have to look too far back for proof of that. A policy of tax cuts, increased government spending, and lower interest rates was implemented during 2001, in response to the economic downturn that began with the bursting of the stock market bubble the year before. But those stimulus measures did not prevent a recession and, instead, created the massive real estate market bubble whose bursting is contributing mightily to the present crisis. Allowing the Fed to create more money out of thin air would merely put off the day of reckoning, and ensure that day would be even worse, when it finally arrived.
Ironically, former Fed Chairman Alan Greenspan himself once called the idea that the Fed could prevent recessions a "puzzling" notion. As for inflation, Greenspan is on the record as follows:
Originally Posted by GreenSpan
In the absence of the gold standard there is no way to protect savings from the confiscation through inflation. There is no safe store of value without gold. This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the hidden confiscation of wealth. Gold stands in the way of this insidious process that stands as a protector of property rights.
As pointed out in G. Edward Griffin's classic exposť, The Creature from Jekyll Island, the Federal Reserve System was created, in order to protect the power of the banking cartel and expand its wealth. Since the Fed extends credit to the U.S. government, it profits handsomely from the ever-increasing national debt. As a result, there is every incentive for the Fed to support profligate federal spending.
Fortunately, Congressman Ron Paul has introduced legislation to restore financial stability to America's economy by abolishing the Federal Reserve. Use the alert below to contact your congressional representative and ask him/her to co-sponsor H.R. 2755.