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Nightmare Scenario: The Fed Outlives the US Federal Government
This is a relatively short piece, because a longer one may
be considered "conspiracy theory".
Similarly, I've removed all citations and references (US Supreme Court
rulings, etc.) because those may obscure the point, since people's eyes tend to
glaze over with such (mostly irrelevant) facts/details. However, all assertions here are
easily/trivially provable with a simple web search, or are obvious logical
conclusions (with which the reader is free to rebut).
Rather, these are merely clinical observations and
assertions regarding what I would do to become King of the World, if I were Ben
Bernanke.
- Background: The US Federal Reserve (i.e.,
"Fed") is a private institution, which the US Congress and US Supreme
Court agree is not part of the US Federal Government. Rather, the Fed is merely a private
bank. - Many
private companies exist in the United States. The Fed is one of them. - Many
private companies have contracts with other companies, and even with the
US Federal Government. Some private
companies have "charters" established through the US Congress (i.e.,
"Government Sponsored Entities [GSEs]"), and thus may be
considered "pseudo-private".
The Fed has such a charter.
However, the charter merely establishes bounds regarding the
institution's founding and behavior.
Typically, that charter still permits the chartered private company
to sell shares and perform other market functions typical of a private
company (that was the goal, which is why the GSE was sponsored in the
first place, so the government could "kick-start" a private
enterprise). - Should
the US Federal Government dissolve, private companies would continue to
exist (e.g., they are owned by their shareholders, they have debt
obligations to their bondholders, and they engage in contracts with other
companies, in addition to possible contracts with the Federal Government.) True, private companies holding
contracts with the (now-dissolved) Federal Government would no longer have
those contracts (since the counter-party no longer exists). This is a typical occurrence with any
contract (dissolution through defaulted counter-party) which has nothing
to do with the lifespan of the remaining party, except for possible losses
associated with contract termination (e.g., loss of future revenue,
etc.). Similarly, a private company
established through charter with the Federal Government would continue to
exist when the Federal Government is gone (it just means the charter is no
longer in effect, since the sponsoring institution no longer exists). That now-unchartered organization
continues to exist because it is still owned by its private shareholders,
still has bond obligations, and still has other outstanding
contracts/agreements.
The above assertions suggest the Fed, as a private
institution, can continue to behave as a viable private institution once the US
Federal Government is gone. In such a
case the Fed would be just like any other private institution (it simply would
no longer have a US Congressional Charter).
These are the implications:
- The US
Congressional Charter gave the Fed a monopoly control of the US
$dollar. Literally, the dollar (a
"Federal Reserve Note") is the intellectual property of the Fed,
not of the US Government. The
charter "promotes" use of the dollar as a currency, and in
return the Fed (at some level) is "restricted" in what it can do
with the dollar. - The
Fed has claims on the US Federal Government. The US Federal Government does not have
claims on the Fed. Thus, dissolving
the US Federal Government does not trigger Fed liabilities. - In the
event the US Federal Government dissolves, the charter would no longer
exist. However, the Fed would
continue to exist (e.g., it still owns the intellectual property called
the "dollar"). Other
parties are free to interact with the Fed if they wish (like with any
private institution). However, the
Fed would no longer have "sponsorship", so these interactions
would be voluntary. - Without
a charter, the Fed is free to arbitrarily establish policies for its
intellectual property (the dollar), and even to establish a new charter
with another institution.
Many assume that the Fed would not survive a dissolution of
the US Federal Government. However, that
is not true: The Fed will only dissolve
when its intellectual property (e.g., the "dollar") no longer has
value, and the Fed shareholders
decide to liquidate assets. If people
still want dollars, the Fed exists.
Since the dollar is an unsecured claim on Fed assets, even if people do
not want dollars, the Fed remains one of the largest real property owners in
the United States
(through its mortgage securities and stock market holdings).
If I were Ben Bernanke and wanted to become King of the
World, I would:
- Encourage
nations all over the world to issue sovereign debt denominated in US
dollars (Germany
and numerous other EU nations are doing this now). I would do this even if I needed to print
dollars to promise/subsidize their debt issuance (it's "free to
me"). This establishes a
future need by that nation to come up with dollars at the sovereign level. - Print
dollars to gift/loan massive amounts of dollars to nations all over the
world. I want as many (public and
private) institutions using dollars as possible, and more importantly, to
leverage debt denominated in dollars.
(This was the purpose for the AIG bailout, and continues with
currency swaps and outright purchases of foreign sovereign bonds.) - Print
dollars to purchase real assets and securities which establishes my
"fundamental value" as a holder of assets (MBS purchases, POMO,
etc.)
What would happen next:
- Sovereign
defaults will start worldwide. I
could even trigger them by restricting currencies, or buying/selling
currencies to force a change in exchange rates that would trigger
sovereign default (since nearly all countries are over-leveraged past the
point-of-no-return). The ECB can't
freely print, but I can. The US
Congress can't freely issue bonds, but I can freely print. You think a $700B bailout is a big
deal? Bah. I can write checks $Trillions at a time with no vote and no review. - In the
deflationary unwind, people would need dollars. The dollars would not exist (e.g., debt
would not be serviced, counter-party risk would be massive). Suddenly, my ability to print dollars
would make me even more important. And, these are my dollars that I am free to spend as I please. - I'd
default foreign nations first, and the US Federal Government last. As the holder of the World Reserve
Currency, I don't want the US Government to default first, because there
would be a chance that another world reserve currency would replace
me. However, by removing all
foreign currency viability *first*, and then defaulting the US Federal
Government *last*, I would be the undisputed holder of the World Reserve
Currency without a challenge. - To
fortify my World Reserve Currency status in a new world of sovereign
mistrust (which further undermines the chance of a new sovereign currency
arising), now freed from the restrictions defined by US Congressional
charter, I would establish a new charter with the IMF or BIS (each is outside
the bounds of any given nation). I
would probably pick the IMF, since they are more "direct
meddlers" with a good history of ensuring indentured servitude on
nations. I would thus enhance my
protected "world currency" status, and the IMF would gain the
power to print its own currency without the annoying influence of
sovereign governments. - To
show my "good will", I would start a "new" Marshall
Plan to "print-and-gift" my dollars to countries that agree to
use my currency. This will ease every one's transition in a new uncertain world. Why use "New
Greek Drachmas" when you can't buy a tanker of oil with them? I'll give Greece enough dollars to buy
*three years* of oil, after which time the Greek economy will be entirely
denominated in dollars. Greece
doesn't want to play? Fine. I'll ignore them for a few years until
they realize the Saudi's don't want New Drachmas, and Greece
gets desperate for my grace (at which point I'd make them an offer they
can't refuse).
Not only is this plausible, it's rather simple. If Ben can't pull this off, he really is a moron.
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The value of labor is being debased faster than currencies, and though it may begin with "unskilled" labor automation and robotics with artificial intelligence will move [is moving] rapidly up the labor food chain. Perhaps in the end, there will be meaningful "work" for only a small percentage, most likely in make-work government programs. Bleak image. Hope I am wrong.
I think you guys are falling for the 'lump of labour' fallacy:
http://en.wikipedia.org/wiki/Lump_of_labour_fallacy
J6P's problems arise from the US' high cost of labour due to its military and welfare spending and onerous regulations.
you are correct , like it or not. apologies
you are correct , like it or not. apologies
Wasn't there a precedent set against secured credititors??
At a certain point the Fed became complicit in the crimes and may become a conspirator depending on the amount of involvement by the Fed. It is clear they are guilty of many crimes of illegal loans etc., but the link to this corrupt government will bring them down as co-conspirators.
I hear the unemployment rate in hell is nill...
Without a government, there is no judicial system. Good luck prosecuting them personally.
The military will outlast the FED.
The military has always been owned by the monarchs. Indeed, the monarchs hand out badges and ribbons [and booty/fiefdoms] to keep them on side.
Chit chat on wall street-
"HP should have made Bernanke the new CEO,
He is the best in Printing business"
Oh yah, the US military has a great track record when it comes to nation-building, after all.
Wait, no, actually--they can SEIZE it, they can DESTROY it, but for damn sure they don't want to RULE it.
Not to mention the way they go about their efforts at nation-building: private contractors. They know they don't have the "expertise" to develop or manage financial systems and economies. That's what bankers and all the others lower in the food chain do.
Would the military even want the headaches of trying to manage the US economy if it were silly enough to imagine that it could?
I strongly doubt it. Their first alliance/mutual defense pact/treaty would be with the bankers.
Exactly my thought. Military coup followed by adobe wall for Ben and his minions. All seems pretty unlikely. The folks Ben serves don't like to get their hands dirty.
Correct. Big Ben and his Masters (the owners of the large and private internaltional banks) are much more interested in stability and invisibility than "front and center" control. They are behind-the-scenes type of people who are used to being trampled on when in the public eye.
Berknucklehead has a very difficult task to pull off here. He must preserve reserve status of the dollar; keep his Masters in control and out of the spotlight; and increase the real asset holdings of the Federal Reserve all the while preventing a total meltdown of the dollar with subsequent loss of reserve status. In my mind, this requires letting go of the stock market until it crashes again. This allows him to QE2 without too much fear of complaining of King Dollar creditors and political puppets. It also allows him to pick up yet more real assets on the cheap using devalued bucks.
Prepare for the coming crash!
Great read, I continue to ask the same questions. Really, Uncle Ben is in total control. The thirst for dollars will continue until the end.
Is the dollar crisis really that bad if you look at it from a global perspective? Its not the dollar versus the us consumer, the dollar is global.
In what way does this fantasy help me grow or preserve my assets?
It doesn't, unless you see it start to happen, in which case you know to switch to physical gold, physical dollars, canned food, and guns & ammo.
Awesome article!
+1. Outstanding analysis, Mikla!
The only correction I would make is: Ben is just a puppet [front man], not the king.
And china is making deals circumventing the dollar. And they are not alone. No confidence in the USA is making a difference. After all, confidence is required to accept the next currency.
Indeed,
Bernanke is the GOD on Earth now!
ZH proposes GOD disposes and bytes money exponentially!
One (large) initial error: The Fed needs the U.S. government, or at least its guns, to compel people to transact in the Fed's proprietary currency. Without the U.S. govt to hold the gun to our heads, how long would the FRN be the only legal tender?
And once it's not the only legal tender, it's dead in the water.
Agreed, but only when a better currency displaces it.
The question is, "What is a better international currency?"
Agreed, there need to be a "better currency" (whatever that may be).
PS: The author did a very good job BUT you need to know:
THE IMF IS THE FED (in 'drag').
"What is a better international currency?"
Necessity is the mother of invention. The world will come up with a better currency.
Look up goldmoney.com for instance. No central bank even required.
At the risk of speaking for Mikla, he is purposely asking a rhetorical question with the intent of leading one to conclude the obvious: gold is a/the better international currency.
Much in the fashion of Candide, Mikla's entire parable rests on accepting a set of absurd assumptions as a basis for expostulating continued $USD viability.
Good job!
The chinese Yuan pegged to gold . Would that not give china all the remaining boost it needs?