G. Edward Griffin: The Federal Reserve is a Cartel

Eighteen years ago, G. Edward Griffin wrote The Creature from Jekyll Island and exposed the Federal Reserve’s true nature.  Since that initial writing, the knowledge of the fact that the Fed is not a government institution, but a privately owned central banking cartel has expanded in public awareness. In this remarkably lucid interview with Casey Research’s Louis James, Griffin discusses:

  • The growing size of government
  • The decline of the purchasing power of the US dollar
  • The two-party political system is really a cover for a one-party system
  • The realistic expectations of public awakening prior to a collapse
  • The Fed is a cartel. Furthermore, it’s a partnership between the bankers and politicians
  • Why we have not seen hyperinflation (yet)
  • The system has changed from a free enterprise, competitive system to a politically connected, non-productive system, which will inevitably lead to totalitarianism
  • The possibilities for America to reverse course and avoid catastrophe

Ponzi Economics

Casey Research provides a lucid interview with David Stockman, former Reagan administration budget director and author of The Triumph of Crony Capitalism.  Stockman explains that in today’s economy, companies are reporting profits today that are “based on a debt-bloated economy that isn’t sustainable.”  Furthermore, “This market isn’t real. … the 2% on the 10 year, 90 basis points on the 5 year, 30 basis points on the 1 year – those are medicated, pegged rates created by the Fed, and which fast money traders trade against as long as they’re confident the Fed can keep the whole market rigged. Nobody in their right mind wants to own the ten year bond at a 2% interest rate, but they’re doing it because they can borrow overnight money for free … put it on Repo, collect 190 basis points on the spread and laugh all the way to the bank.”

“The Fed has destroyed the money market, it’s destroyed the capital markets.  They have something you can see on a screen called an interest rate – that isn’t a market price of money…. that is an administered price that the Fed has set and that every trader watches by the minute to make sure that he’s still in a positive spread. … You can’t have capitalism if the capital markets are dead, if the capital markets are simply a branch office (a branch casino) of the central bank and that’s essentially what we have today.”

The 12 members of the FOMC are the western world’s Monetary Politbureau – “monetary central planners who are attempting to use the crude instrument of interest rate pegging and yield curve manipulation and essentially buying debt that no one else would buy in order to keep this whole system afloat. It’s Ponzi Economics!!

The New Great Depression

CNBC’s European Squawk Box had an interesting interview session with author and economist, Richard Duncan.  Looking back over the last 40 prosperous years, ever since the last remaining link between the US dollar and gold was removed, the world has evolved into a form of financial creditism.  Duncan notes that the central banks of the world have been able to provide easy credit and the world has greatly benefited. However, there comes a point where borrowers are unable to take on more debt. If the government does not step in and provide QE or some other kind of spending programs, there will be another Great Depression. Duncan even goes on to say that, in fact, a depression is unavoidable and inevitable, but it can be delayed if the government decides to benefit society further by spending on 21st century technologies in the nano science and medical fields, for example.

Another interesting part of this segment that should be noted is where the panel brings up the comparison of the present situation with the past, where central banking policy was to raise interest rates rather abruptly in order to curb reckless borrowing. “When you throw money into the system ….. the good guys out there won’t borrow and spend because they’re too cautious. It’s the bad guys who come in and borrow and spend. … There’s lots of bad guys around, we can see them all over the place – we know they’re there!”    Touché.

Central Banks Manipulate the Gold Markets: Chris Powell

Here’s Chris Powell of GATA explaining the motivation for central banks to keep the gold price under control. Powell also notes that potential gold investors should only buy physical gold, which they can actually hold in their hands. He estimates that 70-80% of all the gold people think they own doesn’t really exist!  The paper forms of ‘investment gold’ such as ETFs or unallocated accounts likely do not have the physical gold supporting all the paper claims.  Through rehypothecation schemes, gold leasing and swaps arrangements, there is simply not enough physical metal to back all the paper claims.

US Government Allows JP Morgan to Manipulate Silver Market: Ted Butler

Finally, after years of analyzing the silver market and studying Commitment of Traders (COT) data, Ted Butler has concluded that the CFTC won’t prosecute JP Morgan for their silver market manipulation because the U.S. government is intentionally allowing the suppression of precious metals prices. (It’s about time! Glad to finally have you aboard, Mr. Butler!)

The Plunge Protection Team
Ben Bernanke - Chairman of the Federal Reserve Mary L. Schapiro - Chairman of the SEC Gary Gensler - Chairman of the CFTC Tim Geithner - Treasury Secretary
Ben Bernanke Mary Schapiro Gary Gensler Tim Geithner
Chairman of the Federal Reserve Chairman of the SEC Chairman of the CFTC Treasury Secretary

Specifically, the President’s Working Group on Financial Markets was created in 1988 by the Reagan administration in order to prevent another market crash like that seen in October of 1987.  This Working Group, sometimes referred to as the “Plunge Protection Team” consists of four members (today’s members pictured above): The Chairman of the Federal Reserve; The Chairman of the Securities Exchange Commission (SEC); The Chairman of the Commodities Futures Trading Commission (CFTC); The Treasury Secretary.

Their mission is to intervene in the markets whenever they feel it is in the best interests of the banking powers.  Strong precious metals prices mean a weakened U.S. dollar. The paper futures markets are used to suppress the prices of gold and silver in order to maintain the illusion of a stronger dollar. As Chris Powell of GATA always says, “There are no markets anymore…only interventions.

Butler noted that even though Chairman Gensler of the CFTC likely understands that citizens are “being screwed” by the manipulation, he’s unable to do his duties and enforce existing commodity laws against JP Morgan because this powerful Working Group has alternate goals.

Find more information about precious metals price suppression here.

Is More QE Coming, Or Not?

With the Fed purchasing 61% of all the US debt, it’s somewhat confusing why potential precious metals investors want to see more QE before making their move. And as the following chart from the St. Louis Fed shows, the money supply is still at uncharted, nose-bleed levels and showing no signs of decreasing.

US Dollar Money Supply

Nevertheless, analyzing a derivative of the TIPS Spread to identify when the Fed might reintroduce even more easing is what the economists over at Agora Financial have been doing.  As the chart below shows, the Fed may be waiting for the “Breakeven Inflation Rate” to drop below 2.2% prior to accelerating those printing presses.

Five-Year Forward Break-Even Inflation Rate

Eric Sprott on CNBC

Eric Sprott is interviewed on CNBC and gives some new perspectives on gold and silver investing for main-stream viewers.  He mentions how the central banks of the world do not like to see the price of gold go higher because that would be a sign of the true weakness in their fiat money as they continually print more to fight the contagion in their economies.  He also expects silver to out-perform gold and gives some interesting statistics for his reasoning.

Ron Paul on CNBC

Which presidential candidate would you be most be confident would NOT lie to you?  Here’s Ron Paul on CNBC taking up the philosophical arguments no other candidates are discussing, including one hell of a debate on gold and the debasement of the dollar with Morgan Stanley’s Stephen Roach.

New Record for Number of Americans NOT in the Work Force

Here’s a chart from the St. Louis Federal Reserve showing Bureau of Labor Statistics (BLS) data on persons not in the work force.  Record numbers!!!  One of the reasons the statistics on unemployment have shown decreases lately is that there are fewer persons counted among the total. When one compares the total population to the number of employed, one can see that there’s a real problem here.

St. Louis Federal Reserve - BLS Not in Labor Force Statistics

Geithner Admits Gold is Not a Relic

U.S. Treasury Secretary, Timothy Geithner and Federal Reserve Chairman, Ben Bernanke testified at the House Committee Oversight and Government Reform on March 21, 2012. In discussing the European debt crisis and responding to questions regarding IMF funding, the Treasury Secretary suggested that a default by the IMF or any of its borrowers was highly unlikely because the loans are backed by “a substantial amount of IMF gold …”

More commentary from Swiss America can be found here.


Fed’s New PR Campaign – Twitter

In an effort to keep that false front of openness and transparency, someone at the Fed had the bright idea to align with technology and start a twitter account.  But with all the tweets bashing the Fed and its policies, maybe it wasn’t such a good idea?  Maybe it won’t be long before the Fed terminates this Twitter account.  Here’s some streaming tweets:

The U.S. Fiat Currency System

A Discourse on the Federal Reserve System
October 25, 2011

Many politicians and economists always talk about ridding America of its debt.  But the truth is, the system depends on debt to sustain itself.  There wouldn’t be any currency for people to spend unless there was debt that inspired the creation of it in the first place. If the debt is reduced, there will be a corresponding reduction in the currency supply. And if the debt is erased completely, there wouldn’t be any currency at all.  It’s amazing, but true – the system traps its users in a perpetual debt cycle. It’s a scam of epic proportions and only a tiny percentage of the population have grasped the significance of what that means.

Every dollar represents no more than simple debt. A dollar is an IOU from the Federal Reserve.  That’s why every bill actually says “Federal Reserve Note” – a piece of paper which represents a promise by the Federal Reserve to pay you a quantity of dollars. It’s not a promise to pay in gold, silver or anything else of any value.  It only promises the reimbursement of dollars.  The obvious question, then, is why would someone turn in such a note in order to receive back exactly the same note?  It’s a good question, but most people don’t know enough about the currency system in order to pose that question.

The Creature from Jekyll IslandThe following is an explanation of the way the Federal Reserve System works in the United States. It’s a crazy system indeed.  For verification of these facts and a history of central banking in America, the reader is urged to read G. Edward Griffin’s book, The Creature from Jekyll Island.

1. U.S. Treasury creates Bills, Notes & Bonds

The United States Government needs money to operate.  So, the U.S. Treasury sells Bills, Bonds & Notes.  All of these are debt instruments which promise to pay back to the buyer the original purchase price, plus interest, at some time in the future.

2. Federal Reserve buys the U.S. Treasury Debt

Certain banks, known as Primary Dealers, buy the U.S. Treasury’s debt instruments during Treasury auctions. But these Primary Dealers are really only “middle-men” because through Open Market Operations (OMO), the Federal Reserve ends up holding the Treasury’s debt and writes a Federal Reserve Check to cover the cost.

But here’s the important thing to remember – the Federal Reserve doesn’t have any money to cover this check.  The check represents money created out of thin air!!! This is what prompted Griffin to refer to this system as the “Mandrake Mechanism,” referring to a magician of the early 1900’s who was famous for making things appear from nothing.

3. Federal Government gets the Cash & Spends

The Federal Reserve’s check is credited toward the Federal Government in a Federal Reserve Bank account.  From this account, the Federal Government is able to disburse funds as necessary among the various branches of government in order to pay for all the deficit spending, welfare programs and wars.

4. People & Contractors get the Cash & Make Deposits

Government employees and soldiers in the military receive their paychecks.  Contractors get paid for their crony-acquired government projects. The employees, soldiers and contractors then make deposits into their personal bank accounts across the nation. Now the currency creation starts to happen in the commercial banks.

5. Banks Take Deposits & Practice Fractional Reserve Banking

Once the commercial banks get these deposits from their customers, they employ Fractional Reserve Banking to create yet more currency into existence. In Fractional Reserve Banking, the banks are able make loans to other people in amounts much greater than the sum they actually have in their reserves.  For example, if a bank gets a deposit of $1000 from someone, it only needs to keep $100 for its reserve base. The bank is therefore able to multiply that original deposit by 90% and make a new loan to someone else for $900 (90% more currency created out of thin air).  The bank now has reserve assets made up of the $100 from the original deposit plus a $900 loan that generates monthly income from the new borrower. But the original depositor still has a claim on the entire $1000.

6. New Loans are Re-Deposited

All the people receiving these new loans take the money and re-deposit it into their banks. And again, those banks take the deposits and turn them into even more currency by re-employing the fractional reserve banking concept and loaning out more to others.  Following the example used above, the new $900 deposit becomes a source for a new loan by taking 90% of that – a new loan of $810 for someone, generating yet another blast of currency out of thin air.

The above steps are repeated over and over again.  Repetitive iterations of steps 5 & 6 produce slightly less currency in the system than the previous iteration, but in the end, the commercial banking system has been able to create almost 10 times the amount of currency that was created by the Federal Reserve in the first place.

The really interesting point here is not the mere currency creation out of thin air, because many people are already familiar with the printing press concept. What’s really amazing is that all this currency creation cannot happen unless someone borrows it into existence. Our government takes the original loan from the Fed in the first step. All subsequent steps depend on the public to take on debt.  It’s truly a perpetual debt system.

Here’s Mike Maloney explaining all this at the Casey Summit, When Money Dies

There are two more ways which the Fed creates debt currency, which are just additional ways of creating money out of thin air.  These are the following:

  1. The Discount Window. The Federal Reserve uses the Discount Window to allow banks to borrow money to increase their own base supply.  Sometimes banks run short of money because they experience temporary surges in customer withdrawals.  Additionallly, bad loans become problematic for the bank – the underlying assets sometimes need to be written off.  In these cases, the bank’s currency reserve is reduced, placing in jeopardy their ability to maintain their miminum fractional reserve base.
    The Federal Reserve is the “banker’s bank.” The Discount Window allows the banks to increase their currency reserve by simply taking a loan from the Fed. But remember, the Fed doesn’t have any money, so this is just more currency creation out of nothing!
  2. Reserve Ratios. In the examples above and in Mike Maloney’s discussion, a reserve ratio of 10 to 1 (or 90%) was used as the fractional reserve base. But the Fed can alter this ratio specification at any time depending on what it deems necessary.  Essentially, this allows them to increase or decrease the rate at which the currency supply grows at any time by simply re-defining the rules for banks keeping a certain percentage of reserves in relation to their loans.

So the Federal Reserve System is quite a remarkable thing indeed. One wonders how long it will be before the populous wakes up to the scam!

Here are a couple of videos discussing the Federal Reserve and central banking concepts.

Money, Banking, and the Federal Reserve from Mises Media on Vimeo.