Posts Tagged ‘Federal Reserve’


July 6, 2010


(In case you don’t know, The “Fed” is the US Federal Reserve System.)

Why end the Fed? Most Americans have no idea. I think it’s important that every citizen understand this. If enough people did understand this, Ron Paul would now be the U.S. President.

The Fed is the means by which our government can tax us without limit, so the government can finance wars and other programs which taxpayers would refuse to support. The Fed is picking your pocket with the stealth tax.

Without the stealth tax, we probably would have avoided involvement in all of the wars of the past 100 years. There would be no American Empire.

Inflation caused by the Fed is the cause of the boom and bust business cycle, stock market, commodity, and housing bubbles, the great depression, and all the lesser recessions since then, including the present one. The course the Fed is following will assure that this recession will become a long, hard depression, with increasing unemployment and hardship.

The American Banking system is a cartel, and the Fed controls it. A cartel is a group of companies acting together to gain the advantages of monopoly: the profit advantage that comes from the exclusion of competition.

The banking cartel was created by the law which created the Fed. The system protects the banks from competition and from failure. Thus secure, the banks can invest recklessly. That recklessness was what caused the crash of 2008. Sure enough, the banks threatened with bankruptcy in 2009 were rescued with massive bailouts from the government. The excuse was that they were “too big to fail”.

Who’s to blame for this crazy system? I wish I knew. There is a hint, though in the identity of the people who drafted the law which created the Fed. In a secret meeting on Jekyll Island, Georgia in 1910, representatives of the Morgan banks, the Rockefeller banks, and Kuhn, Loeb & Co drafted the bill to create the Fed. The bill was passed into law by Congress in 1913

It would be interesting to trace the relationship of all the financial beneficiaries of the 2009 bailouts to see how they relate to the people who wrote the law, 100 years ago, that created the Fed.

Now I’m going to try to explain just how the Fed can cause all those problems. Bear with me. It isn’t simple. In fact the Fed is designed to create an illusion, to delude us into believing that our government, our banks, and our dollars are real, honest, and trustworthy. All these things rest on our faith. If we lose that faith, they will all collapse. That might return us to the sort of country, and government, that the Constitution originally spelled out.

The Evolution of the dollar

Our dollar started out as the Spanish silver dollar, a strong and trustworthy currency. Later we went onto a gold standard. The dollar was defined as one twentieth of a troy ounce of gold. Ten dollar and twenty dollar US gold coins circulated along with silver dollars. Paper treasury notes circulated in $1, $2, and $5 denominations. These, and silver coins, were all redeemable on demand in gold.

We were on the gold standard. Independent banks printed their own paper notes but they too were redeemable in gold. Banks did print some paper notes in excess of the gold they held, but prudence kept them from getting reckless, lest they get caught out and go bankrupt. This kept them fairly cautious and “reasonably” honest.

Bank customers deposited cash in checking accounts. Banks lent temporary fictitious money called credit to customers by crediting their checking accounts with dollars. Banks developed clearing systems so that checks written on an account in one bank could be deposited to an account in another bank. Any imbalance in the flow of money by checks from one bank to another was balanced by a transfer of gold between the banks.

These transfers of gold kept the banks honest, or at least “prudent”. They had to keep enough gold or silver cash on hand to redeem banknotes and checks. All the banks produced some banknotes and credit in excess of their cash reserves; call it an overhang. If they all had about the same overhang in proportion to their reserves, the interbank gold transfers would balance and they would all keep enough cash to redeem checks. Charging interest on credit outstanding was profitable and the chief source of income for banks.

Businessmen, investors, and speculators use credit to invest and make a profit. They always complain that there isn’t enough “money” in circulation. What they really mean, however is not money but cheap credit. The British had long since perfected a central banking system (The Bank of England) which provided lots of cheap credit. This provided funding for the many colonial ventures which eventually built the British Empire. Many Americans clamored for a duplicate of the Bank of England. They wanted to get rich quick, using cheap credit.

The Genesis of the Fed

Twice in the 19th century the US government created a central bank and twice the government, under new administrations, closed them down. Finally in 1913, the Fed was created. It has lasted nearly 100 years.

The purpose of a central bank is to form a cartel of the banking system, to coordinate the expansion of lots of credit on top of the gold reserves. By 1971, the number of dollars in circulation was so great And the value of the dollar so reduced, that foreigners were exchanging all their dollars for gold. At that point we simply went off the gold standard. The government confiscated all the gold. We were left with the fiat dollar. The law (fiat) said that the dollar was legal tender, and the legal tender law said that we must accept the dollar “for all debts, public and private”.

The Stealth Tax Alias Government Deficits

Government, more than anybody, likes cheap credit. Obscured by the smoke and mirrors of bookkeeping, (Now you see it, now you don’t!) the Fed “lends” the government whatever amount of money it wants. The loan is never repaid, and the interest the government pays the Fed is returned to the US Treasury. I’d call that loan an outright gift, wouldn’t you?

This is how our government finances its deficit. The Fed creates (counterfeits) new money for the government to spend. Talk about our grandchildren paying the mounting “debt” is a smokescreen. This is why people in government can say, “Deficits don’t matter.” That newly created money is spent as fast as it is created, and becomes a permanent addition to the money in circulation. That’s money inflation.

Something that’s hard to realize is that money, like any commodity, obeys the law of supply and demand. The more dollars available on the market (in circulation), the less each dollar is worth. Not immediately, but in time. The market reacts slowly because the realization spreads slowly that something has changed. Gradually all prices rise. You and I get less real wealth in goods for the money we earn. Uncle Sam has cleverly picked our pockets.

Remember, money is not wealth; it is just a medium of exchange. Putting it in terms of macroeconomics, the market adjusts prices so that the amount of money in circulation matches the amount of goods in production.

It would be tempting to set this down as an equation (It has been tried) but there are two problems with that. First, an equation implies an instantaneous reaction while the response of prices to money supply is a slowly ongoing process which never quite catches up with the latest change in the money supply.

The second problem lies in the definitions of “in circulation” and “in production”. They are both difficult to define and impossible to measure. But that is a fundamental problem with macroeconomics.

The Business Cycle

Perennial government deficits are a one-way street. Government wants money, the Fed supplies it, the government spends it, and goes back for more. The trend is an ever increasing money supply and an ever decreasing value of the dollar.

The business cycle, however, involves a cyclical variation of the money supply which is superimposed on the trend of increasing money supply caused by the government deficits.

The business cycle is caused by the efforts of the Fed to sustain an unsustainable boom. The boom is unsustainable because it is an illusion. The idea that manipulating the supply of money or credit can somehow increase the production of goods is a basic Keynesian fallacy.

The Fed tries to stimulate the economy by reducing interest rates to encourage the expansion of credit. The banks gladly extend credit at low interest, mostly to businesses.

Businessmen invest the new money on capital goods to improve productivity in hopes of profits. Such expansion appears profitable because of the new low interest rates.

The boom that follows does not affect everyone equally. Rather than increase total production, it shifts some productive activity away from production of consumer goods to production of capital goods: the buildings, machinery, and tools needed to improve production. These capital goods will increase productivity, in time. Meanwhile, the supply of consumer goods will be reduced to provide the means (labor and materials) to produce the capital goods.

The Fed operates on the Keynesian fallacy that adding money to the system is all that is needed to expand production and maintain prosperity. However, added production requires added materials and labor. Increasing the production of materials requires even more added labor. Labor is the limiting factor in a boom. More money can’t create more labor. It can only shift workers between jobs and companies and industries.

To persuade workers to move to new jobs requires offers of increased pay. This is the beginning of the price inflation which always follows an increase in the money supply. As workers spend their increased pay, we find an increasing supply of money chasing a reduced supply of consumer goods. Price inflation follows. Wage inflation spreads.

As with the stealth tax, the means to invest in capital goods is taken by stealth from the value of every dollar in circulation. It also reduces the value of my insurance policy and your pension fund.

The action of the Fed has defeated our efforts to provide for the future. The Fed has taken away our free choice as to how much to spend now and how much to provide for the future. We have been forced to do without some consumption goods now, to subsidize industry in the hope of better or cheaper goods in the future.

Businesses calculate the investment in new capital goods to be profitable on the basis of current prices of materials and labor. Increasing prices of materials and labor may be enough to turn the profit to loss. Some of those projects will fail. When this happens, new buildings and machinery will be wasted, abandoned or sold off at a loss.

When the banks feel that the credit they have expanded has become excessive in proportion to their reserves, they will halt the expansion or even reverse it. To do this, they will raise interest rates on their outstanding credit. This will cause more businesses to fail.

When, finally, some businesses default on their interest payments, bankers will panic and call in loans to retreat to a safer reserve ratio. This is the crash phase of the business cycle. Businesses retrench, downsize, and lay off workers.

The money supply has suddenly shrunk and prices and wages have dropped. Unemployment soars. Recession has arrived. The boom was started by creating money out of nothing. Now the money has returned to the nothingness from which it came. The Fed has orchestrated the cycle, guided by the fallacies of John Maynard Keynes.



June 9, 2010

Keynesian economists speak of deflation as a calamity. They use the word, of course, to mean price deflation and, in fact, they view a drop in price levels itself to be a disaster. Why?

Keynesian economists in the Federal Reserve increase the money supply to achieve what they see as prosperity. (Actually it’s a bubble of malinvestment that eventually must collapse.) The Keynesians see resulting increasing price levels as a healthy symptom of prosperity. So when prices fall, they fear that the bubble may burst.

If the Federal Reserve does nothing at this point, and allows the market to redirect the economy to a more profitable balance, banks will call in loans they now consider risky and increase interest rates. The failing new enterprises of the bubble will quickly shut down, sending redundant workers and materials back into more profitable enterprises. This happened in 1921 and the resulting recession ended quickly in 1922

If the Federal Reserve sees the looming troubles in time and acts as all good Keynesians do, they will force down interest rates to re-inflate the money supply. This may sustain the bubble for a while. When, inevitably, the bubble breaks, the losses will be far greater than they would have been if they had let the banks and entrepreneurs pursue sensible policy, to minimize their losses. When the Federal Reserve reacted with reduced interest rates and increasing money supply in the 1930s, we had the notorious great depression that lasted from 1932 to 1947

Manipulating the money supply always causes transfers of wealth. With inflation, bubbles cause the transfer of materials and labor from ongoing profitable production to capital goods (buildings and tools) for speculative new projects. The last segment of the economy to get adjusted to increased price levels is labor- wages never catch up with increasing prices. Remember, Keynes sold inflation to governments as a stealthy way to reduce real wages.
With deflation, materials and labor will slowly return to more mundane but profitable production. Prices will fall, and workers, at last, will get some benefit, because wages will be the last to fall. Labor will get some temporary benefit from the falling prices until their wages fall, too.

The trouble with the dollar is that it can be manipulated. It is a government creation. Government can create or destroy it at will. Fractional reserve banking makes an ideal tool for the manipulation of the money supply, by creating and destroying credit, which becomes dollars in circulation as soon as the borrower spends it, and disappears when the loan is paid off. This is play money, a fiat currency which the government uses to control the economy and to tax us invisibly.

The advantage of the gold standard is that it defines the dollar in terms of gold. Gold cannot be created or counterfeited.

The disadvantage of the gold standard is that the government defines the standard, and can change the definition at will. In the course of 40 years (1931 to 1971), our government redefined the dollar from 1/20th Troy ounce of gold to 1/35th ounce and then to 1/70th ounce of gold, and finally, to no gold at all. The dollar was legally worthless.

Far superior to the dollar or the gold standard is the use of gold itself as money. That, the government cannot manipulate. Someday, we will take back from our government the freedom to use gold, silver, or anything else we choose, as money.

If we can use gold as money, and establish banking without fractional reserves, we can say goodbye to the business cycle, bubbles, booms, busts, and depressions, inflation, deflation, and the stealth tax. This will never be a free country until we have that freedom.


June 2, 2010

You may think, when I write about government, that I am cynical or paranoid, but when dealing with government, a bit of critical thinking is absolutely necessary. Every official pronouncement is politically motivated and carefully composed to avoid an outright lie or at least an obvious lie, but to leave a positive impression of good, wise, control of any situation.

Today there are noises from Washington DC about “reducing the deficit” to zero by some future date. Doesn’t that sound like a very good thing? It just might leave you with the impression that someone up there in the Federal Government intends to reduce the National debt to zero. Let’s vote for him!
Not so fast. Nobody is proposing to reduce the debt to zero. The deficit and the debt are two very different things. The deficit is the rate at which we are increasing the debt. So even if we reduce the deficit to zero, the debt, instead of constantly rising, will simply settle down, neither rising nor falling.

I estimate that the current deficit is about $1.4 trillion dollars per year. If you can’t imagine such a number, just divide that by the population of the USA and you have a personal deficit of about $4,600. If you have a wife and 2 children, your family has a collective deficit of $18,400. Actually, this is the amount the government will extract from the value of your income, by the stealth tax, in the next year.

Now get this straight; that’s not your personal portion of the national debt. That’s just the amount that will be added to your portion of the national debt this year, if the government stays within its budget.

So how much is the national debt, and what is your share of it? Don’t ask. You’re best not to think about it. And I don’t know the answer, except to assume that it’s many times more than the deficit.

However there’s a silver lining in this dark cloud. Quite a bit of this debt is real debt, but most of it is fake debt, one of the games governments play to fool us.

First, the real debt; There are many trillions of dollars in US government bonds sitting in the vaults of foreign central banks. Our government will have to pay them off if ever the world loses faith in the dollar and demands cash to redeem the bonds.

Then our government will simply convert the real debt into fake debt by selling the bonds to the Federal Reserve Bank. The Fed will obligingly print legal counterfeit money with which the government can buy back its bonds.

Why do I call this fake debt? This is a debt that is simply written off to fill the deficit by creating new counterfeit money to pay it. The Fed obligingly creates the new money. The bonds sit in the Fed vaults, and when the Government pays interest on the bonds, the Fed refunds them to the Treasury Department. It’s a magic trick done with smoke and mirrors. The government deficit is cleared as fast as it is spent, with counterfeit money.

So the government pays for the real value of bills and salaries with counterfeit money. The money supply increases, and the value of each dollar in circulation is reduced. The real value bought by the government with counterfeit money is taken out of your savings and mine by the stealth tax.

When you hear somebody fuming about the massive debt we are passing on to later generations, he’s actually only partly right. The national debt consisting of government bonds in the hands of individuals and foreign banks is real. It will be paid off sometime in the future with counterfeit money- the stealth tax. But most of the national debt is simply a bookkeeping fiction maintained by the Federal Reserve System.

And as for the current deficit, you and I are paying for it now through the stealth tax. $8400 per person per year.

Price Stabilization and the Fed

April 13, 2010

Price Stabilization and the Fed

Our Federal Reserve System has an impossible job. It has too many goals and inadequate means of control to achieve them. Here’s a list of goals:

“Stabilize” price levels, increasing smoothly at some “optimum” rate.

Maintain some “optimum” rate of “growth” of the U.S. economy.

Prevent bubbles of asset prices such as house prices and the stock market.

Satisfy the political demand for a small boom in the run-up to each election, to keep the incumbents in power. 

Provide the government with funds (the stealth tax) to fund wars and such.

Maintain stable exchange rates with foreign currencies to balance import and export rates.

That’s an imposing list of 6 goals. If you think some of these goals are in direct conflict with each other, I agree. If you wonder what some of these goals mean, you’re not alone. I think even the Fed itself is unsure of what they’re trying to do. The Fed certainly has trouble deciding on priorities among those goals. And from the succession of booms, bubbles, recessions, and depressions in the past century, I would say the Fed was a dismal failure. This should be no surprise, since the Fed has just 3 clumsy controls with which to achieve all these goals. The controls are:

Open market operations. The Fed essentially pays the bills of the government with counterfeit money. This is the stealth tax.

Setting the Fed discount window interest rate. This “window” is where the banks borrow from the Fed, and hopefully controls the interest rate at which the banks extend credit. This is also a stealth tax to subsidize unsustainable business expansion

Regular Fed public statements, hopefully to moderate public fear or euphoria. Perhaps many people, like me, assume that each such statement is the opposite of the truth.

My experience with electronic control systems says that you need 6 independent control inputs to achieve 6 independent goals, and if the goals conflict, you’ll be lucky to even partially achieve all of them.

Of course, the Fed certainly achieved the goal for which it was initially created; to finance the British and American action in World War 1. , but at great cost to all the generations of the 20th century, in terms of freedom, economic development and stability, and lives lost in that war and all of our wars since then.