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What Every Student in America Needs To Know About The Federal Reserve
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
Frequent contributor Jeff W. recently penned this succinct explanation of the Federal Reserve, and he did so with such clarity that in my view this is the essential primer on the Fed that every high school and college student in America should read. If they study this short essay, they will grasp the essence of the Fed and understand why the financial Status Quo is doomed.
People are confused about the Fed, and I think it would be better if everybody had a clear understanding of what the Federal Reserve is and what it is not.
First of all, the Federal government thinks of the Federal Reserve as a service bureau, whose function it is to print money that the government can spend. As long as the Federal Reserve performs that function--reliably printing, let's say, a trillion or more each year to top off the Federal budget--then Congress will be happy with the Federal Reserve (their rainmaker) and will follow its advice and try to keep it happy.
It should be emphasized here that the whole Keynesian smokescreen and sideshow has very little to do with the reality of the relationship here. The Federal Reserve's job is not just to lend Uncle Sam some money during a recession so as to provide temporary stimulus. The Fed is a milk cow for Uncle Sam. Its job is to give milk all the time.
So to summarize this first point, the Fed is a service bureau for the Federal government whose job it is to provide the government with freshly printed fiat every year. This job has very little to do with the Keynesian prescription of how to deal with a recession.
The Fed is also a service bureau to the big banks that own it. Its job is to give unfair advantage to those banks, either by granting them low-interest loans that can be rolled over into infinity, or by buying their bad debts and disposing of them properly, or by doing any number of other special favors for them that increase their profits and executive bonuses. The Fed is not independent in the sense that it is self-governing. It must provide service to the banks who own it and to the Federal government, which controls its legal environment. Big banks have owned and controlled the Fed since its inception in 1913.
Summary: The Fed is also a service bureau to the big banks. It is not as independent as it proclaims itself to be; it provides services for its owners. Its owners have a profit motive.
The Fed also has its own institutional agenda. It wants to expand and increase its own power. It wants to operate in a safe and predictable environment. It wants to eliminate threats. The Fed advances its own agenda by printing or withholding money. As time goes on, the Fed has asserted more and more control over government. The Federal government is now addicted to freshly printed debt-money. This gives the Fed enormous power over the government.
The big banks who own the Fed also dominate Congress and the Obama administration due to the massive bribes they deliver each year. Thus over time the Federal Reserve has become more and more the master: what it wants it gets, what it doesn't want doesn't happen.
Summary: The Fed is also a selfish, power-seeking institution. It is not an organization of scientists (even though it does employ a small army of Economics Ph.D.'s) whose sole concern is to manage the economy scientifically for the benefit of all.
Some people think the Fed prints money, but when you ask Ben B. about it, he says, "The Fed does not print money. We lend money." Printing money is easy to visualize and understand. Lending money is also easy to understand; it's what banks do. But what the Fed does is somewhat more difficult to understand. To put it into one phrase, "they print debt-money." They print money, but each dollar they print has the chains of debt attached to it. Each dollar they print represents a debt that somebody owes.
A Federal Reserve note is an IOU from the Fed that says "we owe you one dollar." There does exist in the world paper money that is not debt-money, but the Fed does not traffic in that. As the Fed prints more debt-money, they tighten the chains of debt enslaving the government and the people.
A national debt of $1 trillion is manageable. It might be paid off in a few years. But a debt of $17 trillion is permanently enslaving (unless it is defaulted upon). Ben's printing press, then, is also an enslaving press. If Americans were to try to default on $17 trillion of debt, The Powers That Be would unleash their full wrath on the American people.
Summary: Ben B. runs a printing press that is also a debt-enslaving press. We are wrong to focus just on the inflationary effects of his money printing. We should also be alarmed by the enslaving effects.
The Fed has infinite fiat, though they try to disguise that fact. It takes no more effort for them to loan a trillion dollars than a million dollars. They will never run out of zeros in their computer system. The zero keys on their keyboards will always function. No matter how much they can print, they always have available an infinitely greater amount of fiat that they can still print. Printing money requires nearly zero effort and zero cost on their part. They don't get worn out from printing money.
This whole concept of infinite fiat is hard for people to grasp; it is something outside of their experience. People's lifelong experience with money is that it is a limited resource. It is hard to conceive of a group of people who have unlimited, infinite money. Yet the Federal Reserve has just that. The Fed is not like a doctor who prescribes a short-term stimulus for a patient who is feeling run down. The Fed is not like a parent who temporarily puts training wheels on a bike until the kid learns how to ride it. These metaphors make people think that the Fed's fiat printing is temporary and limited. It is not.
Its money printing abilities are permanent and unlimited. The Fed also puts on a show about agonizing over the decision of whether to print money. That make it seem like they are agonizing over whether to pull a sum of carefully saved cash out of their vault. But when they lend to Uncle Sam, they do not pull cash out of a vault that has a finite amount of cash in it. They instead get it from a computer that has the capability of printing unlimited zeros.
Summary: The Fed has infinite fiat. It is not limited by any conceivable shortage, or because of Keynesian stimulus theory, or because the Fed has the role of a doctor, or because the Fed's role is to put training wheels on the economy from time to time, or because it is hard for it to print fiat and there are only so many hours in a day. They have infinite fiat. Their printing is limited only by how much they think they can get away with and their calculations of how they will benefit from it.
So that brings up the final question I shall deal with today. That is, “How does printing money benefit the Fed? Is it better from their point of view to print or not to print?”
The first point in response to this is that they want the government hooked on their printing. They want to be indispensable to the government. A government that balances it budget or reduces the national debt to zero (as the Jackson administration did) is the opposite of what they want.
The Fed's power over government is similar to the power a drug pusher has over a junkie. As long as the junkie is doing what the pusher wants, the supply of drugs is uninterrupted. If the junkie does not pay, the supply is cut off. If the pusher wants to jack up the price at any time, he can do so. If the junkie objects, his supply is cut off. So here we see it is in the Fed's interest usually to maintain the supply, but the supply may also be cut off from time to time in order to ratchet up its power over its victim.
The big banks always benefit from more printing. They profit from it. To the extent that they are cut off from it, they lose money. So from the standpoint of the big banks, the bias is always to print. Note that the Fed can maintain its supply to the banks while cutting off the government. The Fed's owners must always be served; the government is instead to be manipulated, enslaved and controlled under the guise of serving.
Any active defiance of the Fed is a danger signal for investors. The Fed can cut off the government at any time, thus precipitating economic chaos so as to quash rebellion. At present I do not see any serious defiance of the Fed anywhere.
The Fed's main goal is to increase the profits of the big banks. That goal is consistent with increased profits for all firms and prosperity in general, so long as the banks and the elites grab the largest share of the profits.
But that goal is also served in the long run by boom-and-bust cycles that have a ratcheting effect of concentrating wealth in the hands of the wealthy. The clued-in super-wealthy can profit both as bulls and as bears, and can purchase prized assets cheaply at the bottom of the cycle (on easy credit from their friends at the Fed).
It is a Clausewitzian principle that individuals, organizations and nations will expand their power until some superior or equal power effectively opposes them and stops them. Because the Fed's power has no equal, we can expect the Fed's power to continue to increase indefinitely.
At some point, however, history shows that the slaves and victims of oppressors gain strength and confidence when they feel a desperate determination to live.
But that point is still far off. The numbers of the righteous are far exceeded by those who want freshly printed debt-money from Ben Bernanke. Things have not yet reached the desperate, life-threatening stage which is when most revolutions occur.
Thank you, Jeff W. for a clear, concise description of the Fed and its role in the American economy. I would add two clarifications:
1. The U.S. Treasury issues currency (paper money, i.e. Federal Reserve Notes) and sells Treasury bonds to fund Federal deficits, but it does not "print money" in the sense of adding money to the nation's money supply. It borrows money by selling newly issued U.S. Treasury bonds.
2. Technically speaking, the Fed does not give or loan the Federal government money. However, it creates money and pumps it into the economy in a number of ways, enabling large institutions such as banks and insurance companies to buy newly issued Treasury bonds. The Fed also uses its freshly created money to buy Treasury bonds directly. Lastly, the Fed can manipulate the interest rate in a variety of ways, making Treasury bonds attractive to institutional and global buyers.
So even though the Fed doesn't give or loan money directly to the government, it facilitates the sale of Treasury bonds to fund the government in a variety of ways, including direct purchase of government bonds for its own account.
These complexities act as a complexity moat that protects the Fed from inquiry and resistance, as few people understand what the Fed is or what it does.
Correspondent Doug W. recently submitted this excerpt from a letter from Thomas Jefferson to James Madison on the issue of debt as serfdom:
Writing from Paris, in his letter to James Madison dated September 6, 1789, Thomas Jefferson opened with these words:
"The question Whether one generation of men has a right to bind another, seems never to have been started either on this or our side of the water. Yet it is a question of such consequences as not only to merit decision, but place also, among the fundamental principles of every government."
After elaborating on what he thought should be among "the fundamental principles of every government," Jefferson closed with this impassioned request to Madison:
"Turn this subject in your mind, my Dear Sir, and particularly as to the power of contracting debts, and develop it with that perspicuity and cogent logic which is so peculiarly yours. Your station in the councils of our country gives you an opportunity of producing it to public consideration, of forcing it into discussion. At first blush it may be rallied as a theoretical speculation; but examination will prove it to be solid and salutary. It would furnish matter for a fine preamble to our first law for appropriating the public revenue; and it will exclude, at the threshold of our new government the contagious and ruinous errors of this quarter of the globe, which have armed despots with means not sanctioned by nature for binding in chains their fellow-men."
Thank you, Doug, for this reminder that the power to indebt the public is also the power to enslave them. That, fellow citizens, sums up the Federal Reserve and the Savior State it has enabled: debt is serfdom, debt is slavery.
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"The Powers That Be would unleash their full wrath on the American people."
No, no no no, no no. Ain't gonna happen. (sad about that) 1) The Powers That Be ARE the ones doing this. 2) Even if there were other "powerful" actors, they are totally emasculated by the US military and secret services.
No, no no no, no no. Ain't gonna happen.
Read the original and still the best history of the founding of the Fed:
http://www.barefootsworld.net/fedsecrets_00.html
If it wasn't for Eustace Mullins and his brilliant expose of the Fed, Griffin and others would not have been able to write their books about the Fed. They took from Mullins and gave him no credit.
I knew Eustace. He used to complain about that. But he never let it get to him. He was happy knowing that Ezra Pound liked his research, a fact he mentioned a few times.
The funny thing about EM is that he'd tell me something that sounded batshit crazy but when I looked it up, he was 100% correct. I learned to just believe that the Mulligator knew what he was talking about after awhile.
Speaking of Mr. Pound - he nailed a key truth with this observation:
“In our time, the curse is monetary illiteracy, just as inability to read plain print was the curse of earlier centuries.”
He fell for the fallacy that one side must be reasonably good. He was sympathetic with the Nazis because he saw the evil in the Western Debt Money Tryanny system. Yes, the British/American oligarchs are evil personified. But so was Hitler. There are no good sides at the nation state level, which is why they have to be kept small or they will consume us all with their greed and evil. BTW, I'd love to hear some of the other things that Mullins discussed that you thought sounded "out there." I like learning from engaged minds.~Ezra Pound
After writing his expose on the Fed, he wrote his book about the New World Order, which he released in 1958. Again, if it wasn't for him, there wouldn't be any discussion today about a "New World Order" or the "globalists".
Thanks for the link.
: "The Fed can cut off the government at any time, thus precipitating economic chaos so as to quash rebellion. At present I do not see any serious defiance of the Fed anywhere."
A real threat to the Fed is the state Bank of North Dakota because North Dakota is the only state that is not under the thumb of the Federal Reserve. Since 1919, the Bank of North Dakota has told the Fed where to stick it, and unlike all the other 49 states, North Dakota does not desposit its tax revenues with Wall Street, and then with a gun pointed at their heads borrow from Goldman Sachs at high interest rates. While America is collapsing, North Dakota is booming, and the Bank of North Dakota has played a very important role in the success of its state's economy.
i really like the way learned people wrote and spoke in the 1700-1800's. It was so clear, precise, formal, and had such a command of vocabulary.
good stuff.
No television or twitter to melt their brains.
But everyone was familiar with the King James Bible, and every literate person knew Shakespeare, Milton and the Constitution.
Those who were educated also studied logic, rhetoric, and the classics. Education was considered to be an improvement of the mind rather than for the more pragmatic purpose of getting hired somewhere.
Then again, the 'educated' were far less common than they are today....
?
Really... ?
Then again, the 'educated' were far less common than they are today... -- Renfield
They were trained in the seven liberating arts - the Trivium and the Quadrivium.
Trivium - Grammar, Logic and Rhetoric.
Quadrivium - arithmetic (number), geometry (number in space), music (number in time), astronomy (number in space and time).
Search Trivium Education, Trivium Bimder and Gene Odening Trivium Podcasts.
This kind of education teaches one how to think and how to learn so one can become an autodidact... a person who has a system to learn anything on their own... no potentially false or misdirected authority required.
Schooling is a counterfeit for this kind of education - designed to socialize people into the current system, destroy their creativity and create obedient workers for the benefit of the oligarchs.
Search John Taylor Gatto podcasts / books / essays for mind blowing insight into how this was accomplished.
My mind is blown, haven't you noticed? ;>)
The Fed creates money based on credit from commercial banks:
http://www.businessspectator.com.au/article/2012/10/22/commodities/myth-money-multiplier
Thus, money is borrowed into existence.
Charles, Unless it starts with the facts that;
1st It's not a Federal Agency
2nd There are NO Reserves
3rd It's not a Bank
Then explain that it is a private corporation with Share holders. And then listing the share holders.....
All the rest is bull shit.
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So the FED can "print" money.
And the Treasury can issue T-Bills to create money.
What's the difference between the two?
•?•
V-V
If the government printed money it would be inflationary. But if the government prints bonds, sends them to the Fed, and the Fed prints money that's OK.
It is a subtle point but enough to convince the public that there is no inflation.
T-Bills aren't money until they're turned into FRNs, which are created to trade for the T-Bills. Same effect, but it allows the bankers to make money. Remember, the Fed was the banksters' creation, not the government's. The concept was "sold" to congress by buying enough votes to pass the law that created the Fed.
FRNs are a LIEN on citizens and the Country's ability to tax. The Fed also has a cost-plus contract with the U.S.A. and a guaranteed 6% profit margin. Your birth certificate is commercial paper that they hypothecate.
We're fucked pitchez. . ... did I miss anything?
There's mud in the water
Roaches in the cellar
Bugs in the sugar
Mortgage on the home
Mortgage on the home
There's garbage on the sidewalk
Highways in the back yard
Police on the corner
Mortgage on the car
Mortgage on the car
Move
Down the road I go
They're selling independence
Actors in the White House
Acid indigestion
Mortgage on my life
Mortgage on my life
Move
Down the road I go
Not that I'm smarter than CHS, but I've been tellin my friends this for 10+ years. They all think I'm nuckin' futz. The FED owns the US government, just like a drug pusher, that is the relathinship. I'm sick to death of hearing assholes say the Government has control over the FED. Utter bullshit, always has been and now that we're in a 17T hole, will remain to be so.
Most of the article correct. however I don't buy the Fed being a drug pusher. Government is not innocent, or a saint. Government has a mutual interest of having cheap money, not just bankers, etc. Alexander Hamilton, one of the founding fathers of the USA wanted a central bank for the same reason. He wanted big government to lavishely spend. Government benefits from inflation. Fed does not push the government to overspend. Fed simply finances all of it. Government has all the motivation on it's own to create inflation.
The article is correct, the Fed generates new debt. There is no cargo ship shipping millions of pounds of dollars across the ocean from Fed to the collectors. 16 trillion dollars = 360 million pounds in 100 denominated dollar bills, so you can see that's a lot of money if put in physical form simply by sheer weight terms, and this is paper money too mind you.
In old feudal days, the transfer of wealth from the creators, inventors and producers was via direct force (confiscation) and indirect force (taxation).
In the neo-feudal system of bankers -- now CBS -- paper constructs of money (fiat) is used as the transfer mechanism. By creating a whole ecosystem of paper instruments (now electronic -- there's an App for that!), primary and secondary wealth is systematically being concentrated in ever larger amounts in ever fewer hands. ---> Feudalism 2.0
Feudalism 2.0, where soon even gold won't be needed, because YOU will become the 'absolute monetary unit'. You will be walking, talking money -- once they chip you with an RFID. The national Bio-ID card is the next step toward that end-goal of Total World Control.
For literary and dramatic imagery: "One Ring To Rule Them All. The All-Seeing Eye of Sauron, within the triangle on top of the human pyramid. Your new masters are your old masters, going back thousands of years ago. They worshiped their god, and they do so still".
Enjoy your normalcy bias while you can... the world is about to change even more in the next few years.
"...the world is about to change even more in the next few years."
Yes, some heavily armed, highly motivatated American patriots inside of and outside of the U.S. Military will make some necessary "adjustments".
Nice job. The kids at my college already know this that is why they are documentating the royal bloodlines so that when the revolution of the 7 billion people rise up against the banking families there will be no royal bloodlines on the face of the planet afterwards.
One of the most encouraging comments I've read on this thread.
This is not on topic but what if a reward was offered for the arrest and apprehension for the people involved with PRISM and the private corporations such as Microsoft and Google which did not protect our information?
I want to see some justice and enforcement of the Constitution.
Let's all get together and protest the next fomc meeting. Vote this post to the top if you're willing to come, I'll sponsor the event. I'm serious.
Not to put a damper on things, but I don't believe protests work for this problem as well as non-participation does. They can't tax the production of those who aren't producing for them.
Fascism thrives on opposition, but relies on co-operation.
Depends on how you define "non-participation". As well as it's employment tactically in pursuit of strategic objectives. Politically speaking of course...
I'm not following you I promise... I just find your comments interesting.
Jesus H Fucking Christ. Yes, this explains it in many ways. The Fed is Fucking us. However, the complexity moat is drained here: (some of you have seen this, sorry)
Only Fools Think the Fed Has Real Options. Our Debt Death Spiral is Here.
Many Americans have no idea what is happening to our country’s financial condition and what it ultimately means to their finances. People should be outraged at the twilight zone economics perpetrated by the Federal Reserve (the Fed) these last 5 years. These are experimental economic actions that the Fed is implementing. I will focus on one action that is easiest to understand, and the most destructive, Quantitative Easing (QE). The Fed calls QE a “tool”. The consequences of using the QE “tool” will be catastrophic for nearly every American.
QE is the making of money out of thin air. The Fed can create money in their computer accounts that are attached to all the major financial institutions in the world. Yes, they can fill their “checking account” with unlimited amounts of money that never existed, with keystrokes on their computer. They can essentially do whatever they please with it. In early 2013 they are creating $85 billion of this thin air money a month to buy US Treasury debt and Mortgage Backed Securities as we speak. In the name of using tools to help our economy create jobs, they have created $2.4 trillion in thin air money since the crisis started in 2008. There is no end in sight to this money creation. This money creation is not wealth, nor is it money created based on productivity of man or machine. It is dilution of our US dollar. The Fed is doing this because it believes it has no other choice.
Nothing I have read seems to have really summed up with simplicity where we are going to end up economically from the Fed’s actions of the last several years. We are on the road of no return. I felt compelled to boil it down in this article. Without giving all the background of things like wealth being based on productivity and energy inputs, or the ownership or control of the Fed I will just explain the obvious. I will insert clarity to the situation.
I will boil down what the Fed is doing without having to discuss the many canards that lie in wait. These canards confuse most people as to what the correct conclusion is regarding the Fed’s massive QE. These canards also keep our politicians and most Americans completely delusional about our state of affairs. A canard is a false or misleading story or explanation. Too many people go down the path of listening to these canards. An example of a canard related to this is that the high stock market indexes right now show we are fine and the Fed must be doing the right thing. Watch financial media daily, like CNBC, and any number of things they point to keeps most people from actually understanding the path we are on. Small canards are delivered constantly by the steady stream of CNBC guest carnival barkers. All adding up to delusion for the majority of Americans.
Financial Complexity Turned to Simplicity
Our national and world financial situation is extremely complex. More complex than it has ever been. Tomorrow will be more complex than yesterday or last week. Really though, to have clarity and understand our complex financial system, we have to look at the obvious and use math to project real outcomes rather than pie in the sky desired outcomes. The mathematics of what the Fed is doing does not add up. The Fed is breaking simple laws of financial math. Can you imagine someone saying that Einstein’s E=mc2 does not apply anymore because we are in unusual financial circumstances? Complex becomes simple by understanding that math gets you the answers. Complex subjects can be summated, as Einstein did in physics with E=mc2. The theory of what the Fed is doing now is even simpler:
E = FKeep Buying
Where E = Endgame for the US Dollar and FKeep Buying means the Fed cannot stop buying.
Using the math within our financial universe and knowing that there are constants, it is obvious what the mathematics of our situation are. Our economy is dependent on the Fed’s massive QE. The Fed will never be able to stop creating thin air money unless they are willing to let the US and the world take severe economic pain to get through this. They have not showed that they are even aware that is an option. Maybe they think it will be so bad with the no QE option that it is untenable to even table. However, what they are doing will make the outcome even worse. There is an ultimate financial catastrophe Endgame to our pretending that we can go on like we used to. We have been using government spending and QE in the name of keeping our economy going. This will end sometime, and it means we are in what I call the US National Debt Death Spiral.
The Reason for QE and the Effect of QE
The US Treasury is the entity that collects our federal tax dollars. It is also the entity that spends federal money. They spend all the treasury receipts (tax revenue) and spend more than taxes provide by issuing treasury debt securities. Each year since 2008, the US Treasury has spent over $1 trillion more than it took in. This yearly number is the annual deficit. The total accumulated debt from all these years is called our Federal debt. Currently, as of April 14, 2013 it is about $16.8 trillion.
We also know the numbers that the US Treasury gives us are on a non-GAAP basis (Generally Accepted Acounting Principles). The federal government is not accounting for all the money committed in the future, thus it is running even larger real deficits than we are told. Let’s get something straight about the reported annual Federal deficit and the actual annual Federal deficit that the US Treasury reports. The actual annual deficit spending is much higher than reported due to things like Medicare and Social Security. The US Treasury is using collected tax dollars some of which are supposed to be for Social Security and Medicare in the future but using them for current normal Federal spending. However, even with the phony non-GAAP accounting and ignoring entitlements, the system will be blown up just by normal treasury debt. Yes, the stated annual structural deficit piled on year by year to our total federal debt will wreck the system. We do not even need to confuse everybody and play a shell game as to what the problem is right now! No need to introduce the canard of the real problem being the entitlement promises. Focus on one thing, the most pressing thing, and understand the math! The Federal debt that we add to each year even in the phony amount the Us Treasury reports will destroy our financial system before entitlements ever will. Thanks to the Fed.
Are we living in experimental economic times? You bet we are.
When the Fed started buying US Treasuries and continues to buy them in large amounts since 2008, it sent a signal to congress: We condone your massive debt spending. The Fed is and has been buying treasuries to manipulate the interest cost of the Treasury lower, because it knows it has to. The debt spending by congress is out of control and is also structural, in other words, built into our economy. The Fed knows that the economy needs government spending to continue at high levels to prevent a severe contraction in our economy. To help cushion the blow of potential lower government spending into the economy the Fed has to lay a bid for all durations of treasuries to keep the interest cost down for the US Treasury. By doing this, the Fed continues to condone the debt spending of congress. The Fed buys treasuries because if the US Treasury had to issue and refinance our annual and total debt at real market rates the cost of interest would explode the annual deficits even higher. The Fed thinks there is not a better choice in our economic situation! What the Fed has done has initiated the financial end game for the US Dollar as it currently exists. (Yes, there will be a US Dollar after the end game, but of a different value).
It is the start of the 9th inning now. There are only two options for the Fed.
Option #1: Keep Buying
Option #2: Stop Buying
Option #1. If the Fed keeps buying they risk the long term value of the dollar value against all commodities, and eventually CPI problems. Inflation is an obvious, simple and an easy conclusion by anyone who understands economics. However, this appears to be their best option and the option they continue to use, even stepping QE up in December 2012 to $85 billion per month from $40 billion per month. It has no short term negative shock value as stupid Americans are too dumb to see it and speak out and stop it. However, we couldn’t stop it if we wanted to. Rick Santelli screams about it to deaf ears. This is the frog in the pot option. Just cook us slowly. This is inflating our way out of the debt, in a backdoor way. At some point people will come in the front door and there will be a recognition that money from the Fed is not free. The US dollar will have a huge adjustment in value, downward, against real things like oil, gasoline, diesel, metals, and all food commodities leading to massive consumer inflation.
The Fed knows that there is one positive to the keep buying option: After the dollar adjustment, the Federal deficit would be much less burdensome as the value of the dollar at that time will be much less. This is inflating away the debt. Outcome of option #1: The dollar is destroyed. The national debt is minimized. Wealth is disintegrated for most of us.
Option #2. If they Stop buying, interest rates on treasuries rise. Likely rapidly, but just normalizing to interest rates of 4% to 5% would be a huge problem. The real problem with the Fed halting buying Treasuries and MBS is the US Treasury have to to do current financing and also constant refinancing at the higher rates. Interest cost on the Federal debt will explode the annual deficit further. As our annual debt goes higher rates will rise further from simple supply and demand economics. Over several years all the short term debt that is coming due has to be refinanced/sold at the higher rates. The normal Federal monthly deficits and a large portion of the existing debt that comes due will in a matter of a few short years have to be financed at higher free market rates.
The US Treasury is running deficits of over a trillion dollars annually with an average interest cost of 2.2% in the first half of 2012. When average interest rates on all treasuries go to 4.4% then the interest expense doubles. You see the math. What about 8.8%? That would not work for whoever is the Treasury Secretary. Talk about exploding the annual deficit and piling more debt on the stack!
This is a straight up interest rate death spiral. There is no good way out. Wait, there is a way out. It is the same outcome every time. With option #2, the Fed would have to step back in and buy everything. That leads them back to option #1. They could step back in with thin air money, get interest rates to just about zero, like they are doing now. Remember, bond yields are set by the price of the bond. The Fed puts bids under every treasury or debt security, or for S&P Futures for that matter. They just bid the amount for every duration of treasuries to yield zero, or for the longer durations what they can get away with trying to make it look reasonable. The Fed can thus get the treasury’s interest cost on the Federal debt to any number it wants. Even zero. Outcome Option #2: Fed comes in and has to do option #1 and keep buying. We know the outcome of option #1. If they stop buying they will inevitably have to step back in and keep buying. That is option #1. They have set in motion an outcome that they cannot stop making thin air money.
The Fed is taking option #1 and will continue to do so. It will talk of option #2, and all the CNBC crowd will blather about the Fed’s coming exit strategy . It is all talk. These fools talk of an exit strategy and the Fed is not even done buying! There is no exit strategy because the Fed cannot exit! They even know it. If they don’t, they are delusional. The world is delevering. In our old economic times there would be a point where the economy gets over the hump and starts growing so the deficits get smaller as economic activity increases. Not this time. Our feeble and hollowed out economy will not get over that hump. Option #2 is a pipe dream. The Fed will not and cannot stop buying treasuries and other debt to attempt to keep our financial system alive.
Why is this Happening?
The reason why the Fed has to do this is because our economy/financial system is boxed in by our stagnant economy and ever rising structural annual Federal deficits. The economy is weak because it was wrecked in the fiasco we just had, but also from by the hollowing out of the manufacturing sector we had over the last 30 years. It is not coming back like it was. Our 30 year debt and consumption spree is over. Government spending cannot be cut in any meaningful way, especially when the Fed is essentially condoning the spending by buying treasuries. The US Treasury will not stop spending in any meaningful way because it does not have to. We are boxed in on the budget deficit.
GDP= Consumption (70%) Business Investment (16%) Government Spending (20%) Net Exports (-6%)
Key Point: The above is a simple equation of what GDP consists of with rounded numbers. Government spending is part of GDP. In the situation we have now, government spending is actually 23%. Take out 10% of that spending by an across the board cut and the GDP is missing 2.3%. To cut spending 10% across the board the economy would be in contraction. A recession and no growth is the outcome. According to our government’s numbers, real GDP growth in 2012 was 2.2%. In 2011 it was 1.8%. Don’t even get me started on the GDP deflator. Meaningful spending cuts put us in recession. Government spending cannot be cut in a meaningful way. We are in the debt death spiral, just as Greece is.
Key Point: No growth or falling GDP results in less economic activity and therefore less tax revenue for the treasury, which causes higher deficits. See Greece for the best example. They are in their debt death spiral just months ahead of us. GDP is shrinking so they bring in less money which forces more cuts in government spending resulting in even less GDP. That is a debt death spiral, and there is no escape for Greece, and there will be no escape for us.
Meanwhile, back on Main Street.
If the Fed backed off buying treasuries, yields would rise and money would be pulled from the stock market. All money managers worth their salt would rebalance their bonds/stocks. That means the stock market gets hit. Further chaos as the boomers protect what they have by selling stocks and buying the 5% treasuries or whatever yield they have at the time. Pension and retirement funds for everyone take a hit from lower stock prices.
When people retire, they start using their saved retirement money. These funds are put into the economy in all forms of the GDP, but mostly as consumption. When stocks are low people perceive they have less financial wealth and they will cut back spending. Further damaging GDP. Which is it then for the Fed, save the stock market by buying treasuries, or risk losing the control of the US treasury’s interest costs? Or, put a bid under the stock market to create the wealth effect? The answer for the Fed remains option #1. The Fed cannot lose the stock market. It has to buy treasuries.
The Fed is boxed in. Creating money from thin air does real damage to the dollar and their policy is unsustainable. They know that but have no other option. In concert, thin air money is being made by all central banks, and the dollar is not appearing to have damage. On this basis the Fed is hoping the dollar stays strong enough for as long as possible so we can pay the piper as late as possible. Obviously this is part of their thinking.
The outcome is profound and obvious.
In conclusion, the mathematics of our national debt situation in the USA are causing the Fed to use massive QE by creating thin air money (not printed Federal Reserve notes). This Fed action shows how bad our Federal debt situation is. We, the United States, are bankrupt now and just in denial. Congress people talk about the US being bankrupt sometime in the future. Pretending to not be bankrupt by using the Fed’s thin air money is a sham! The horse is out of the barn and trying to close the barn door with thin air money will not accomplish anything but more destruction. With the path we are on, our deficits will continue and the Fed will keep buying even until the point at which the world pukes up nearly all the treasuries to the Federal Reserve’s bid.
The Fed will try all the way to the end to keep the US Treasury’s interest costs as low as possible. It could go on for years like this. At some point the world’s financial markets will see this. It will be clear as a bell that we are bankrupt. That is when we get a restart. It will be plain to see in massive inflation and poverty here in the USA. The end game will be an involuntary reverse capitulation by the Fed. The Fed will be the buyer of any and all securities that need price support. Money will also flow out of treasuries by investor to all other assets. The Fed will be there with unlimited thin air money to fill the gap. They will use thin air money to support any asset price that needs a bid. The world will have become wiser at this point and will understand that dollars are much less valuable than they were before. It will take many more dollars to buy what you need to survive. The US Dollar will be at a value that is yet to be determined. Destroyed by the stupidity of the Fed.
Written by Simeon Chambers 4-17-13
The debt bubble bust is a feature, not a bug.
It is the bust that acts as a fiat converter.
The banksters also know money is worthless, in and of itself.
That's why they want you house, your streets, your power company, your car, your business, your water company, your beaches, your national parks, etc.
If they showed up with guns and simply took it, even your average apathetic, disengaged American consumer could figure out the deal then.
So they use Debt Money Tyranny to blow bubbles, acquire money, loot the treasury, acquire more money, bust the economy, turn trillions in debt paper into real chit and then turn the trillions in money they acquired into real chit, hyperinflate to balance their books and call it all even.
This is elementary.
What is the #1 incentive of anything TBTF?
Wipe out everyone else that isn't TBTF. The only reason they haven't done it yet is they can't be too obvious or the American consumer might "wake up."
The coming debt bust that transfers trillion from American consumers to the criminal international banking mafia's mega coproate fronts will also be engineered.
{eyes rolling}
Yeahbut...Bernanke has a PhD (whoooooooosh) and folks like him are gifted people with very special skills. The laws of math (or gravity come to that) do not apply to him.
He can generate scenarios of how QE is helping the economy to recover that ordinary folks with tons of plain 'ol commonsense, mega-tons of mathematical expertise and assorted lesser PhDs cannot even begin to imagine. Remember: Bernanke has a PhD. This is crucially important. Please do not ignore this. To paraphrase Bernanke "if you do not have at least a PhD, it's unlikely that you have anything useful to add to the debate...". He's such a brilliant expert that he even wrote a book about how to manage monetary policy in recessions/depressions.
And of course he has brilliant people like Paul Krugman to help him crank the numbers.
I mean, what more do we want???
It's all safe. Trust me. I know that to be a fact because Bernanke/Krugman told us it is so.
{/eyes rolling}
If it's a student in our public education system, don't think they'll be learning much.
Public education system is just to churn out more obedient debt slaves...the cycle continues.
Young people educated about the Federal Reserve System? Now that is a fantasy. But it is a nice one.
The dealer cuts drug user off/raises prices to exert control.
What happens when the user can no longer generate enough productivity to sustain the dealer?
If I was a teacher, I would keep it short and sweet:
The Fed is a pile of dogsh*t run by lunatics who have allowed crony capitalism to thrive like a f*cking cancer.
Ever heard of the BIS, a multinational group? I dislike fiat, but I dislike politicians more.
The 60s generation are bankrupt, the first generation in humankind to leave their offspring worse off.
Hitlary Cliton wants your vote. Bush boys do too.
Pretenders - Message of Love (1981 Original Video)
http://www.youtube.com/watch?v=STy8FWhQPwU
.
.....
But we're all right! We're all calm!
reflexivity, a poem. (implies innocence)
.
" fraudulent induction is what it is,
even Picasso would paint it as such, and he did,
so, art imitates life and the elite buy it and
store it away,(providing pedigree to imitate art)\
that which the
child knows before
the onset of indoctrination into the fields of
ubiquitous and universally accepted dogmatic, outside
box, stupidity ( the truth )."
moar poetry ...b.m.
According to CIBC World Markets:
The world remains a place where enormous amounts of debt just keep stacking up. Paying this debt back is constantly believed to be less of an issue given the crucial assumption that economic growth rates in the order of 3% to 5% will return AND will be sustainable. Even if it does, it must be noted that “total payback” of the debt could be unlikely to ever be achieved. At some US$18 trillion of total debt in the U.S., it would take 14,400 million ounces of gold or some 160 years’ worth of annual global gold mined supply (at the current price of some US$1,240/oz. and at current global output of some 2,800 tonnes per annum) to pay this down. At the same time, gold production is about to take an almighty knock and we won’t be surprised to see as much as 25% less gold output in the next five years.
Still, much of this precarious (let’s just stop the debt load from growing) position is critically dependant on very low interest rates being maintained – once rates start moving higher, debt repayment schedules quickly blow out, while the value of bonds, in particular government bonds, starts to decline. The current dramatic decline in the value of government bonds will already see banks’ balance sheets shrinking again, with possible resultant liquidity squeezes across the globe. Euro sovereign debt costs are already up dramatically and Italy is seemingly also sitting with an apparent +30 billion euro loss in the derivatives market…
This could very quickly turn out to be a very bad scenario, but the point, as far as we are concerned, is really that it does not even need to get to this for the markets to start realizing that currencies will have to depreciate much further – we believe this to be a crucial mechanism for delivering lower sovereign debt levels long term. Gold will be the currency that continues to benefit in the longer term. So, making a positive case for the gold price is not too difficult – particularly if inflation becomes a problem much sooner than everybody currently expects.
The real problem, unfortunately, is that all of this argument is dependant on data that will only become apparent much later down the line. Right now, nobody is willing to go against the Fed. That simply means bonds and gold are both getting the “chop” because the Fed is signaling a return to stronger economic growth – leading to a stronger U.S. dollar.
: "the Fed is signaling a return to stronger economic growth – leading to a stronger U.S. dollar."
There was a brilliant man (or woman) on the Liberty Forest forum back in 2009 that predicted this would happen. Everything that person predicted has come true, and yet the members on that forum called him the most vile names. That guy nailed it.
Send this to idiot politicians, so that they may better understand their paymaster, and be less venal.
It is disgraceful that career politicians take the money, and pretend to know not where it comes...whether from international bankers or taxpayers.
Go to College
Party
Get laid
Go to football and basketball games
Get a useless degree
Whine forever
Ah the dream
: "A Federal Reserve note is an IOU from the Fed that says "we owe you one dollar.""
Not exactly. A FRN is a "receipt" of the Treasury notes, which are the "IOUs". Bonds are the "IOUs"; not FRNs. This means that if for any reason the Fed calls the note on the debt, your FRNs (receipts) at any time could be declared "null and void", and the Fed can collect on the debt by confiscating all property in the U.S. This is what will happen through a federal property tax. Millions of Americans will lose their properties. Paul Warburg knew exactly what he was doing when he screwed over America.
The mass of graduates will lead lives of quiet desperation.
Mullins wrote a follow up to his work on the Federal Reserve in 1985, in a book called The World Order: A Study in the Hegemony of Parasitism,[20] updated in 1992 as The World Order: Our Secret Rulers. He argued that the Federal Reserve and other central banks were tools of a "Rothschild World system", centered in the City of London, which extended its power through organizations like the Royal Institute of International Affairs, various foundations, corporate conglomerates, intelligence agencies, etc. He proposed that Nations were not really governing powers, but rather, that the world was parasitically controlled by this interlock of banks, foundations, and corporations, which acted as a unified force, tending towards World monopoly. He furthermore proposed that this oligarchical apparatus was controlled by corrupt, dynastic families that had accumulated their wealth through trade in gold, slaves, and drugs. He claimed that as this consortium furthered its monopolistic ambitions, it would seek the establishment of a World Culture, eradicate nationalism, impoverish everyone except themselves, and progressively turn the world into a police state.