How The Fed Destroyed The Functioning American Democracy And Bankrupted The Nation

Authored by Chris Hamilton via Econimica blog,

I hope this article brings forward important questions about the Federal Reserves role in the US and I openly admit this is by no means a comprehensive simply attempts to begin a broader dialogue about the financial and economic impacts of allowing the Federal Reserve to direct America's economy.

Against the adamant wishes of the constitutions framers, in 1913 the Federal Reserve System was Congressionally created.  According to the Fed's website, "it was created to provide the nation with a safer, more flexible, and more stable monetary and financial system."  Although parts of the Federal Reserve System share some characteristics with private-sector entities, the Federal Reserve was supposedly established to serve the public interest.

A quick overview; monetary policy is the Federal Reserves actions, as a central bank, to achieve three goals specified by Congress: maximum employment, stable prices, and moderate long-term interest rates in the United States.  The Federal Reserve conducts the nation's monetary policy by managing the level of short-term interest rates and influencing the availability and cost of credit in the economy.  Monetary policy directly affects interest rates; it indirectly affects stock prices, wealth, and currency exchange rates.  Through these channels, monetary policy influences spending, investment, production, employment, and inflation in the United States.

I suggest what truly happened in 1913 was that Congress willingly abdicated a portion of its responsibilities, and through the Federal Reserve, began a process that would undermine the functioning American democracy.  How, you ask?  The Fed, believing the free-market to be "imperfect" (aka; wrong) believed it should control and set interest rates, determine full employment, determine asset prices; not the "free market".  And here's what happened:

  • From 1913 to 1971, an increase of  $400 billion in federal debt cost $35 billion in additional annual interest payments.
  • From 1971 to 1981, an increase of $600 billion in federal debt cost $108 billion in additional annual interest payments.
  • From 1981 to 1997, an increase of $4.4 trillion cost $224 billion in additional annual interest payments.
  • From 1997 to 2017, an increase of $15.2 trillion cost "just" $132 billion in additional annual interest payments.

Stop and read through those bullet points again... and one more time.  In case that hasn't sunk in, now check the chart below...

What was the impact of all that debt on economic growth?  The yellow line in the chart below shows the annual net impact of economic growth (in part, spurred by the spending of that new debt)...gauged by GDP (blue columns) minus the annual rise in federal government debt (red columns).  When viewing the chart, the problem should be fairly apparent.  GDP, subtracting the annual federal debt fueled spending, shows the US economy is collapsing except for counting the massive debt spending as "economic growth".

Same as above, but a close-up from 1981 to present.  Not pretty.

Consider since 1981, the Federal Reserve set FFR % (Federal Funds rate %) is down 94% and the associated impacts on the 10yr Treasury (down 82%) and the 30yr Mortgage rate (down 77%).  Four decades of cheapening the cost of servicing debt has incentivized and promoted ever greater use of debt.

Again, according to the Fed's website, "it was created to provide the nation with a safer, more flexible, and more stable monetary and financial system."  However, the chart below shows the Federal Reserve policies impact on the 10yr Treasury, stocks (Wilshire 5000 representing all publicly traded US stocks), and housing to be anything but "safer" or "stable".

Previously, I have made it clear the asset appreciation the Fed is providing is helping a select few at the expense of the many, HERE.

But a functioning democratic republic is premised on a simple agreement that We (the people) will freely choose our leaders who will (among other things) compromise on how taxation is to be levied, how much tax is to be collected, and how that taxation is to be spent.  The intervention of the Federal Reserve into that equation, controlling interest rates, outright purchasing assets, and plainly goosing asset prices has introduced a cancer into the nation which has now metastasized.

In time, Congress (& the electorate) would realize they no longer had to compromise between infinite wants and finite means.  The Federal Reserves nearly four decades of interest rate reductions and a decade of asset purchases motivated the election of candidates promising ever greater government absent the higher taxation to pay for it.  Surging asset prices created fast rising tax revenue.  Those espousing "fiscal conservatism" or living within our means (among R's and/or D's) were simply unelectable.

This Congressionally created mess has culminated in the accumulation of national debt beyond our means to ever repay.  As the chart below highlights, the Federal Reserve set interest rate (Fed. Funds Rate=blue line) peaked in 1981 and was continually reduced until it reached zero in 2009.  The impact of lower interest rates to promote ever greater national debt creation was stupendous, rising from under $1 trillion in 1981 to nearing $21 trillion presently.  However, thanks to the seemingly perpetually lower Federal Reserve provided rates, America's interest rate continually declined inversely to America's credit worthiness or ability to repay the debt.

The impact of the declining rates meant America would not be burdened with significantly rising interest payments or the much feared bond "Armageddon" (chart below).  All the upside of spending now with none of the downside of ever paying it back or even simply paying more in interest.  Politicians were able to tell their constituencies they could have it all...and anyone suggesting otherwise was plainly not in contention.  Federal debt soared and soared but interest payable in dollars on that debt only gently nudged upward.

  • In 1971, the US paid $36 billion in interest on $400 billion in federal debt...a 9% APR.
  • In 1981, the US paid $142 billion on just under $1 trillion in debt...a 14% APR.
  • In 1997, the US paid $368 billion on $5.4 trillion in debt or 7% APR...and despite debt nearly doubling by 2007, annual interest payments in '07 were $30 billion less than a decade earlier.
  • By 2017, the US will pay out about $500 billion on nearly $21 trillion in debt...just a 2% APR.

The Federal Reserve began cutting its benchmark interest rates in 1981 from peak rates.  Few understood that the Fed would cut rates continually over the next three decades.  But by 2008, lower rates were not enough.  The Federal Reserve determined to conjure money into existence and purchase $4.5 trillion in mid and long duration assets.  Previous to this, the Fed has essentially held zero assets beyond short duration assets in it's role to effect monetary policy.  The change to hold longer duration assets was a new and different self appointed mandate to maintain and increase asset prices.

But why the declining interest rates and asset purchases in the first place?

The Federal Reserve interest rates have very simply primarily followed the population cycle and only secondarily the business cycle.  What the chart below highlights is annual 25-54yr/old population growth (blue columns) versus annual change in 25-54yr/old employees (black line), set against the Federal Funds Rate (yellow line).  The FFR has followed the core 25-54yr/old population growth...and the rising, then decelerating, now declining demand that represented means lower or negative rates are likely just on the horizon.

Below, a close-up of the above chart from 2000 to present.

Running out of employees???  Each time the 25-54yr/old population segment has exceeded 80% employment, economic dislocation has been dead ahead.  We have just exceeded 78% but given the declining 25-54yr/old population versus rising employment...and the US is likely to again exceed 80% in 2018.

Given the FFR follows population growth, consider that the even broader 20-65yr/old population will essentially see population growth grind to a halt over the next two decades.  This is no prediction or estimate, this population has already been born and the only variable is the level of immigration...which is falling fast due to declining illegal immigration meaning the lower Census estimate is more likely than the middle estimate.

So where will America's population growth take place?  The 65+yr/old population is set to surge.

But population growth will be shifting to the most elderly of the elderly...the 75+yr/old population.  I outlined the problems with this previously HERE.

Back to the Federal Reserve, consider the impact on debt creation prior and post the creation of the Federal Reserve:

  • 1790-1913: Debt to GDP Averaged 14%
  • 1913-2017: Debt to GDP Averaged 53%
    • 1913-1981: 46% Average
    • 1981-2000: 52% Average
    • 2000-2017: 79% Average

As the chart below highlights, since the creation of the Federal Reserve the growth of debt (relative to growth of economic activity) has gone to levels never dreamed of by the founding fathers.  In particular, the systemic surges in debt since 1981 are unlike anything ever seen prior in American history.  Although the peak of debt to GDP seen in WWII may have been higher (changes in GDP calculations mean current GDP levels are likely significantly overstating economic activity), the duration and reliance upon debt was entirely tied to the war.  Upon the end of the war, the economy did not rely on debt for further growth and total debt fell.

Any suggestion that the current situation is like any America has seen previously is simply ludicrous.  Consider that during WWII, debt was used to fight a war and initiate a global rebuild via the Marshall Plan...but by 1948, total federal debt had already been paid down by $19 billion or a seven percent reduction...and total debt would not exceed the 1946 high water mark again until 1957.  During that '46 to '57 stretch, the economy would boom with zero federal debt growth.

  • 1941...Fed debt = $58 b (Debt to GDP = 44%)
  • 1946...Fed debt = $271 b (Debt to GDP = 119%)
    • 1948...Fed debt = $252 b <$19b> (Debt to GDP = 92%)
    • 1957...Fed debt = $272 b (Debt to GDP = 57%)

If the current crisis ended in 2011 (recession ended by 2010, by July of  2011 stock markets had recovered their losses), then the use of debt as a temporary stimulus should have ended?!?  Instead, debt and debt to GDP are still rising.

  • 2007...Federal debt = $8.9 T (Debt to GDP = 62%)
  • 2011...Federal debt = $13.5 T (Debt to GDP = 95%)
  • 2017...Federal Debt = $20.5 T (Debt to GDP = 105%)

July of 2011 was the great debt ceiling debate when America determined once and for all, that the federal debt was not actually debt.  America had no intention to ever repay it.  It was simply monetization and since the Federal Reserve was maintaining ZIRP, and all oil importers were forced to buy their oil using US dollars thanks to the Petrodollar agreement...what could go wrong?

*  *  *

But who would continue to buy US debt if the US was addicted to monetization in order to pay its bills?  Apparently, not foreigners.  If we look at foreign Treasury buying, some very notable changes are apparent beginning in July of 2011:

  1. The BRICS (Brazil, Russia, India, China, S. Africa...represented in red in the chart below) ceased net accumulating US debt as of July 2011.
  2. Simultaneous to the BRICS cessation, the BLICS (Belgium, Luxembourg, Ireland, Cayman Island, Switzerland...represented in black in the chart below) stepped in to maintain the bid.
  3. Since QE ended in late 2014, foreigners have followed the Federal Reserve's example and nearly forgone buying US Treasury debt.

China was first to opt out and began net selling US Treasuries as of August, 2011 (China in red, chart below).  China has continued to run record trade driven dollar surplus but has net recycled none of that into US debt since July, 2011.  China had averaged 50% of its trade surplus into Treasury debt from 2000 to July of 2011, but from August 2011 onward China stopped cold.

As China (and more generally the BRICS) ceased buying US Treasury debt, a strange collection of financier nations (the BLICS) suddenly became very interested in US Treasury debt.  From the debt ceiling debate to the end of QE, these nations were suddenly very excited to add $700 billion in near record low yielding US debt while China net sold.

The chart below shows total debt issued during periods, from 1950 to present, and who accumulated the increase in outstanding Treasurys.

The Federal Reserve plus foreigners represented nearly 2/3rds of all demand from '08 through '14.  However, since the end of QE, and that 2/3rds of demand gone...rates continue near generational lows???  Who is buying Treasury debt?  According to the US Treasury, since QE ended, it is record domestic demand that is maintaining the Treasury bid.  The same domestic public buying stocks at record highs and buying housing at record highs.

Looking at who owns America's debt 2007 through 2016, the chart below highlights the four groups that hold nearly 90% of the debt: 

  1. The combined Federal Reserve/Government Accounting Series
  2. Foreigners
  3. Domestic Mutual Funds
  4. And the massive rise in Treasury holdings by domestic "Other Investors" who are not domestic insurance companies, not local or state governments, not depository institutions, not pensions, not mutual funds, nor US Saving bonds.

Treasury buying by foreigners and the Federal Reserve has collapsed since QE ended (chart below).  However, the odd surge of domestic "other investors", Intra-Governmental GAS, and domestic mutual funds have nearly been the sole buyer preventing the US from suffering a very painful surge in interest payments on the record quantity of US Treasury debt.

No, this is nothing like WWII or any previous "crisis". 

While America has appointed itself "global policeman" and militarily outspends the rest of the world combined, America is not at war.  Simply put, what we are looking at appears little different than the Madoff style Ponzi...but this time it is a state sponsored financial fraud magnitudes larger.

The Federal Reserve and its systematic declining interest rates to perpetuate unrealistically high rates of growth in the face of rapidly decelerating population growth have fouled the American political system, its democracy, and promoted the system that has now bankrupted the nation.  And it appears that the Federal Reserve is now directing a state level fraud and farce.  If it isn't time to reconsider the Fed's role and continued existence now, then when?



Déjà view SafelyGraze Tue, 11/14/2017 - 01:32 Permalink

Not 'Whitewashed' by Weiss...

Weiss Ratings Gives US Government Grade of ‘C’ for Sovereign Debt

NEW YORK (Dow Jones)–Weiss Ratings, viagra sale a small, independent credit-ratings agency, has carried the debate over the U.S. government’s triple-A credit rating several steps farther than the big Wall Street ratings agencies–consigning the world’s largest economy to near junk-bond status on Thursday
“Weiss Ratings Says US Credit Rating Already Near Junk” Dow Jones Newswires 28 Apr. 2011
While Standard & Poor’s gained headlines for putting U.S. debt on a watch list for a possible downgrade, Weiss Ratings says the nation is already below average among 47 nations. The Jupiter-based ratings service, which is known for giving opinions on a variety of investments, has ventured into the field of sovereign debt. It gives the U.S. a rating of C (fair), and ranked it 33rd among 47 nations.…

In reply to by SafelyGraze

BennyBoy Bill Brasky Mon, 11/13/2017 - 19:52 Permalink

 The FED:The gov creates debt, then the FED creates money.Your local bank: You get a loan, the bank creates the money, from nothing. Sounds like fraud or some kind of Ponzi scheme.How's the Compound/exponential interest paid?Gee, why does the financial system crash every 10 years or so?Who coulda seen this happening again and again? Any math wizzes out there?

In reply to by Bill Brasky

GUS100CORRINA Bill Brasky Mon, 11/13/2017 - 21:00 Permalink

How The Fed Destroyed The Functioning American Democracy And Bankrupted The NationMy response: Everyone in the Executive and Legislative parts of our government should study this information.This information is downright scary. WE IN THE USA ARE SCREWED!!!!! There is no mathematical solution to resolve these numbers. The information in this article is the report card for the last 24 years of POTUS leadership.My grade for BUSH I, CLINTON, BUSH II and OBAMA ====> "F"

In reply to by Bill Brasky

veritas semper… Tallest Skil Mon, 11/13/2017 - 21:15 Permalink

US should be a Constitutional Republic.The question is :do you think it is?And,if not (because IT IS NOT) ,what is it?I prefer to call it a PARASITOCRACY. Because we are ruled by parasites who take usury and rent ,without producing anything(except bullshit and wars).Socialized loss and privatized gains.I think we can call it a feudal form of socialism,if there is such thing.

In reply to by Tallest Skil

Economiffed dark pools of soros Mon, 11/13/2017 - 19:57 Permalink

Well, yeah kind of.
1st in 1913 was the creation of the IRS. Then during The Congressional Christmas recess, the fed reserve act was passed by only a few representatives. Fast forward to only 20 years later was the wonderful year of 1933. That is the year America was officially bankrupt. Hence the gold confiscation presidential order.

All our grandparents were forces to take their gold to the banks in exchange for paper exchange notes. They didn’t even say this note is legal tender because it wasn’t. It was a claim ticket to redeem for gold. The funny thing is that shortly after the presidential order the price of gold rose significantly and hence the value of that paper money (claim ticket) decreased!

All that gold went to pay off the interest owes to the privately owned fed. But our govt was really nice to build fort knox for them to house all that stolen gold in.. Now you know why they never seem to be able to get an inventory of the gold at fort knox. Because it doesn’t belong to the usa. It belongs to the rothschild robber barons!!!

The end

Sleep well sheeple

In reply to by dark pools of soros

ali-ali-al-qomfri Bastiat Mon, 11/13/2017 - 21:11 Permalink may label as literate those individuals who can read a couple thousand simple words they learned by sight in the first four grades in school. Other sources may term such individuals functionally illiterate if they are unable to use basic sources of written information like warning labels and driving directions.Thus, if this bottom quantile of the study is equated with the functionally illiterate, and these are then removed from those classified as literate, then the resultant literacy rate for the United States would be at most 65-85% depending on where in the basic, minimal competence quantile one sets the cutoff.You know you didn't need a link.  

In reply to by Bastiat

philipat Mon, 11/13/2017 - 19:15 Permalink

All correct but don't hold your breath for any change. The Deep State, Wall Street within the Kazharian cartel has it all under control. 

Sid Davis Mon, 11/13/2017 - 19:18 Permalink

The stated purposes of the Federal Reserve Act essentially were an implementation of Marxism.

The unstated purpose was to facilitate banks creating money out of thin air and then loaning it into circulation, essentially making the public indentured servants thru the interest required to be paid.

I hope that when the shit hits the fan everyone knows who is responsible, i.e., the bankers and the politicians they own.

iLLivaniLLi19 Sid Davis Mon, 11/13/2017 - 20:33 Permalink

You would think Marxists would hate credit lines because it creates social stratification and fuels Capitalist monopolies (top down economies of scale like Wal-Mary/Amazon). I always wondered why you don’t hear more about sound money from socialists. I guess it’s because they wouldn’thave Money for their 5-year plans (they must lack confidence in raising funds through selling bonds, I wonder why).

In reply to by Sid Davis

khakuda Mon, 11/13/2017 - 19:22 Permalink

Nice piece.  He who controls the money controls everything.  The nation has ceded control from elected representatives to an unelected board of academics that believe themselves smarter than the collective intelligence of everyone else.  Anyone who has continued to buy a falling stock has learned that more often than not, it is the market that is smarter.

pynky01 Mon, 11/13/2017 - 19:32 Permalink

...all you gum smacking goy on ZH need to bend over for what is coming next: your time is OVER...we own ya we tell you what to say n think we kill ya we smother ya in debt and poison your food we kill the Christians ... we start the wars we bleed ya white ...WHATS NOT TO LIKE...stfu and PAY ME... the marxist jew is ya eneme...seems like most are marxist and/or voted for the hildog... altruistic stupid ass Americans ... it was nice and cute back in the 50's we are in deep doodoo ...get the commies/dual citizens out of govt...aipac et al as foreign agents...TERM LIMITS... what is wrong with our congress ... I don't see one fuking thing come out of there that has benefited the people ...MADE A LOT OF THESE COKSUKERS RICH ON OUR DIME ....WHAT THE FUK IS WRONG WITH YOU PEOPLE ...  it is TIME FOR CITIZEN DUTY... its not the congress its not the judges its not the president IT IS YOU AND ME... OWN IT