There is a Time For the Fed to Create Liquidity

Maybe the only thing I disagree with Ron Paul about, is that there is a time when the Fed should create liquidity, and that time is when, like in the 90’s due to the Internet and Communications revolution, there is a period of incredible growth. A growing economy needs liquidity like a growing body needs food.

The problem is, that it’s exactly during periods of growth that the Fed turns the spicket off and starves a growing economy of the liquidity it needs. This is one of the major reasons that Web 1.0 crashed.

And then during times of recession like the past few years the Fed does the opposite. It adds liquidity, which causes inflation and “stag-flation.”

This is why we don’t need so much a “Gold Standard” in as much as we need a “De-Facto” Gold standard, meaning Gold should be used as the barometer for when liquidity should be injected and or  “mopped up.”

Using the price of Gold as a barometer, the Fed, or whoever directs monetary policy, should keep the price of Gold in a tight trading range by adding liquidity when the price of gold dips below a certain target, and mopping up liquidity when the price of gold rises above the target.

This does two virtuous things: It gives a growing economy the right amount of liquidity it needs to sustain, and it also permanently ends inflation and deflation.

Other than that I totally agree with Dr. Paul that the Fed, as it acts now, should be ended, or given the tight mandate of using a Gold barometer for monetary policy.

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