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Ron Paul: Federal Reserve's Addiction

NEW YORK ( TheStreet ) -- The Federal Reserve is like a drug addict, according to presidential candidate and Congressman Ron Paul, notorious for his hatred of the Fed and love of gold.

In a recent interview with TheStreet, Dr. Paul likened the Fed to a drug addict unable to stop printing money as no one wanted to go through the pain of withdrawal. The libertarian Congressman, however, believes that Congress will raise the debt ceiling before August 2nd despite that fact that the U.S. is more than $14 trillion in debt, with $275 billion of interest payments due in 2011 alone, according to TreasuryDirect.gov.

According to Erik Oja, U.S. banks analyst at Standard & Poor's Equity Research, the Federal Reserve has committed, not necessarily spent, $14 trillion through its two rounds of quantitative easing programs, plus TARP and TALF, life lines for the financial system during the recession. Banks are holding excess reserves of $1.55 trillion and including their required reserves, their lending capacity is more than $1.58 trillion. As a result, if that money is loaned out then potential inflation is much higher than what is reported currently.

The Consumer Price Index for May rose 3.6%, which is substantially down from the 5.6% level seen in 2008, and specific areas of the economy are not seeing big increases. Housing prices are up just 1.2% year over year, wages rose just 0.3% in May, while apparel prices have climbed just 1%, leading many experts to believe, despite high food and energy prices, that inflation is in check.

Economists would refer to the types of inflation as cost pull versus cost push. Cost pull refers to the second round effects of inflation, like higher wages, when inflation really seeps into the economy, versus cost push which describes an inflation due solely to high commodity prices, which have resulted from high demand, and from which, there is no escape.

Dr. Paul doesn't believe in any of those theories but argues "that's the way inflation works. Inflation is the increase in the supply of money. Sometimes it pushes some prices up and other prices can drop. So for a while it was the inflation that pushed housing prices up too high and then there is a collapse ... Where there are more market forces like in computers and technology those prices actually can drop in the midst of inflation."

Dr. Paul sees inflation now in food and services but believes it will feed into the labor market imminently. Big-time price inflation will be the next shoe to drop for the U.S. economy, he says, as the Fed stays rooted in its money-printing-addiction. The result would be a "downturn much worse than the stagflation of the 70's."

The way to fix this financial disaster is to stop spending money and go back on a gold standard. Dr. Paul reveals the logistics of how to do this in his next one-on-one with TheStreet.

-- Written by Alix Steel in New York.



>To contact the writer of this article, click here: Alix Steel.

>To follow the writer on Twitter, go to http://twitter.com/adsteel.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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