Is the Federal Reserve a government institution? How and when was this central bank of the United States formed? Why are US citizens forced to divulge all their financial information under penalty of law, yet that of the Federal Reserve remains veiled? The following short video sheds light on this otherwise dark banking enigma.
Ray Dalio of Bridgewater Associates narrates this video, which gives a simplified explanation of how an economy really functions when controlled by a central bank, such as the US Fed. He shows how there are short and long-term cycles which govern credit, debt, inflation and productivity. Dalio ends the video with some simple rules to help maintain a healthy economic system:
Ensure debts don’t rise faster than income
Ensure income doesn’t rise faster than productivity
Try to keep increasing productivity as much as possible
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.
When the economy of a country faces economic stress, that country’s central bank usually tries to take steps to recover by adjusting or boosting inputs to GDP. GDP is based on:
– Consumer consumption – Investments in housing and business – Government spending – Net exports (Exports minus Imports)
When the country reaches a level where there is high unemployment and excessive debt, it leads to a situation where consumer consumption is weak and no one is investing in housing or business because they are uncertain about the future. Government spending can sometimes overcome this, but it comes with higher taxes or borrowing costs which become politically unpopular.
Therefore, as a last-ditch effort to boost GDP, a country will embark on currency debasement in order to increase its net exports. The currency is devalued by inflating the money supply. The local citizens suffer because their own money buys less goods as things become more expensive at home.
However, as a country’s currency becomes weak in relation to its trading partners’ currencies, it makes its products and services cheaper for foreigners, and thus more attractive to buyers in other countries. As foreigners buy more, the affect is a rising GDP.
But this is only a temporary situation. Other countries begin to experience problems because their imports are rising relative to their exports. This hits their own GDP and now they have to take similar steps – debasing their currency to remain competitive.
Rickards explains that there have been two major global currency wars already – one from 1921 to 1936 and the other from 1967 to 1987 and that we are now in the third global currency war. This war has three main participants – the U.S., China and Europe – although many countries around the world are severely affected by the currency games being played out and make their own contributions to the overall picture as well.
Rickards also gives four possible outcomes of this currency war:
Multiple reserve currencies. Instead of the U.S. dollar being the preferred reserve currency of the world, countries would hold several denominations from currencies around the globe. But imagine having to deal with the policies of several central banking activities – it’s bad enough dealing with those of the Fed.
SDRs. Special Drawing Rights have been the instrument of the IMF. SDRs are backed by a basket of different currencies from different countries around the world. However, the SDR’s value floats – that is, it is adjusted according to global exchange rates. Furthermore, the IMF is able to print SDRs at will. Thus, there really is no difference between any other currency of the world, except it’s worse with the SDR – the IMF controls the SDR and the people controlling the IMF are appointed, not democratically elected.
A return to the gold standard. Here Rickards discusses some of the things to think about prior to a return to the gold standard, like what definition of the money supply (M0, M1, M2, etc.) to use as the base money supply on which to base on the gold supply? Additionally what ratio should be used between paper and gold? And finally, what regulations should be in place for exceptions to be made in certain circumstances?
Chaos. If nothing is done to stem the current path towards currency debasement, a catestrophic collapse could devistate the world as we know it.
There’s also an interesting chapter explaining how currency and capital markets have become so complex that they are quickly approaching a breaking point. Current risk models used by most firms are inadequate to account for the existing risk and thus most are unaware of the true problems underlying the system and thus are unprepared for the inevitable catastrophe.
Here’s an interview with James Rickards where his book is discussed:
And here’s an audio interview discussing the book, whether or not America needs the Fed and whether or not a gold standard is a possible answer to today’s economic issues.
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 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:
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!
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.