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Ron Paul Won the Paul Krugman Economic Debate, and Here's Why

recent article on PolicyMic makes the claim that Paul Krugman walked away from the debate with Ron Paul over economic theory as being the clear winner. The article asserts that interest rate price controls by the Fed are marvelous things that create no economic distortions, that inflation of the money supply isn't really theft, and that the Fed is necessary because free markets lead to "great depressions."  So let us go over each of these claims in finer detail to see if they hold up under close scrutiny.

If you believe that the interest rate is a pricewhich represents the time value of money, then arguing in favor of interest rate manipulation by a government agency is tantamount to arguing in favor of price controls. To quote wiki on the subject of price controls, "Although price controls are often used by governments, economists usually agree that price controls don't accomplish what they are intended to do and are generally to be avoided." The central criticism being that, "by keeping prices artificially low, demand is increased to the point where supply can not keep up, leading to shortages in the price-controlled product." This is essentially Austrian economic theory in a nut shell. Does that sound "kooky" to you?

I find it fascinating that mainstream economists, including Krugman, recognize the obvious problems with price controls on physical goods, but not with the money that represents those goods. As Paul points out, there is no way the Fed can possibly know what interest rates should be, any more than it can know what the price of apples should be. Economist Roger W. Garrison explodes the fallacy of interest rate price controls in this lecture. Garrison also covers the fallacy of artificially low interest rates "smoothing" business cycles.

As for inflation not being theft, Nobel Prize winning-economist Milton Friedman, who advocated for a fixed rate of inflation of the money supply, openly stated that, "Inflation is taxation without legislation," and he clearly viewed taxation as theft. It may shock some of you to learn that I actually agree with Friedman's criticism of the gold standard in the video, which is why I feel Bitcoin is superior to gold as a medium of exchange. To Friedman, inflation was a necessary evil. I, however, disagree on the necessity of evil.  Which means I also disagree with Friedman's fixed inflation rate policy. It is interesting to note that Friedman's own son, who is also an economist, agrees with my position on this matter.

Now let us look at the last claim, which says that the Fed facilitating government spending by buying government bonds and artificially driving down the interest rate "smoothes the volatility of the business cycle." For starters, name a period of substantial economic depression that has occurred in any economy throughout recorded history where there was no manipulation of the money supply or interest rates by the government in question.

Let me save you some time: there are none.

Every major economic catastrophe that has occurred throughout recorded history has occurred while government was in direct control of the money supply, and by proxy, the interest rates of that money.  Some might try and point to The Panic of 1837 and the Contraction of 1839-43, as evidence that the free market "fails" to perform, but this myth was exploded by economist H.A. Scott Trask and Murray Rothbard a long time ago.  Economist/historian Tom Woods covers economic cycles prior to the creation of the Fed in this lecture.

The facts of the matter are that there has never been large scale systemic economic depression when the money supply and interest rates of an economy were under the control of the free market. The facts of the matter are that the Great Depression, and our current depression, occurred under the direct supervision of the Federal Reserve. To be clear, banking panics are not depressions. Banking panics are a direct result of fractional reserve banking, as explained in this Khan Academy video. When a bank excessively lends over its reserve holdings, depositors will yank their money (gold) out. Depositors know that their real money is at risk because fractional reserve banking is a form of fraud. This is why the Fed and FDIC were created in the first place, to put depositors' minds at ease. However, putting people's minds at ease does nothing to make the underlying fraud go away.

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