by Jim Carter
Posted originally October 16, 2010 in Shattered Paradigm
The Federal Reserve uses euphemistic smoke and mirrors to obscure their operations. With full knowledge the following is not the way the Fed/government describes the system, allow me to offer a different analysis of their mathematical operation.
Congress can pay for federal expenses with funds collected from taxes, but Congress is never satisfied with this amount. The desire to buy votes/campaign contributions from special interest groups induces congress-critters to spend more, and this is identified as deficit spending. To create this make-believe money requires the assistance of the Federal Reserve. Approximately 45% of the 2009 budget was paid by new fiat money.
Congress will give the Fed a security (bill, bond, or note) and the Fed will accept the document as an asset of one of the twelve FR Banks. The Fed will then establish a line of credit for the U.S. government for the same amount and list the liability as Federal Reserve Notes. Voila!! Fiat money has just been created for Congress to spend.
Ref: 2009 Annual Report to Congress by the Board of Governors, page 448. http://www.federalreserve.gov/boarddocs/rptcongress/annual09/pdf/ar09.pdf The accumulated securities that are not redeemed add up to the national debt.
The fiat money is identified as a legal tender. A “legal tender” is something that is required by law to be accepted as payment for a debt—it is compelled satisfaction for, but not payment of, the debt.
The public debt is now over $13 trillion, or over $40,000 for every man, woman, and child in the U.S. The value is $200,000 per person if the unfounded debt is included. Through no action of his own, or even an opportunity to reject the imposition, every resident of the United States has become obligated for a debt – for life – that cannot be relieved. It is manifestly clear that an obligation of $40,000 can only be visualized as an unrestricted claim on the future earnings of the citizenry. The citizen has been reduced to an indentured servant, or slave, compelled to work for the company store and still face an ever increasing amount of debt. There is no possible relief. If the earnings of a citizen are properly subject to confiscation by taxation, the government can take the entirety and return what pittance Congress in their largess may bestow. A nation of sovereign people is being reduced to haves and have-nots; the middle class is being eliminated by taxation.
If the Fed retained all of the securities, the public would quickly complain that interest payments (approximately $400 billion annually) are of no benefit and the inflationary pressure would also be obvious. The Fed therefore wants to sell a major portion of the securities so it has arranged with the Treasury department to act as auctioneer for selling to the Primary Dealers. The PD submit sealed bids. Since the security has a fixed face value and interest rate, the higher the bid, the lower the interest rate for the buyer.
The Primary Dealers are branches of the huge international banks/finance centers. Seven Wall Street agencies include Bank of America, Citigroup, J.P. Morgan, Morgan Stanley, Goldman, Jefferies, and Fitzgerald. Foreign agencies of Barclays, HSBC, Credit Suisse, UBS, Deutsche, BNP Paribas, RBS, Daiwa, Mizuho, Nomura, and RBC of Canada are also included. Whether these are the entities that Bloomberg is attempting to identify by FOIA as recipients of bail-out funds that is now in the 2nd Circuit Court of Appeals remains to be seen.
The Fed recently obtained $700 billion bailout funds. It begged Congress, on actual bended knee, for money and Congress gave them $700 billion in securities and the Fed swapped the securities to GSE/international bankers for toxic MBS‘s. The Annual Report lists Assets of $776 billion securities and $908 billion Government Sponsored Enterprise Mortgage Backed securities out of $2.2 trillion total assets. Whether the bailout money was a quid pro quo with the PD to avoid lawsuits for fraud is beyond the scope of this writing. The Mafia does not lightly tolerate transgression. The continued mutual benefit of programs, paid for by taxpayers, should evidence Wall Street and the Fed/international bankers constitutes a Siamese twin.
The touted concept that the Treasury’s auction is used to obtain money for Congress to spend is a cleverly designed disinformation. How can the government sell trillions of dollars of securities if the money is not already in circulation? Such a methodology cannot conceivably create fiat money in the hands of citizens to buy the securities to fund Congress. The initial beneficiary of the securities must be Congress—not the people—for the scheme to be realistic.
The math is going to get more detailed. If the Fed sold all of the securities at face value, there would be no money left in circulation. The money that was created by the securities would all be taken out of circulation and returned to the vaults of the Fed. The operation is identical to the FOMC selling or buying of securities to alter the amount of money in circulation.
The value of any securities not sold by the Fed is still in circulation and becomes the Reserves for commercial banks. The Reserves (known as base money) are then multiplied via loans from commercial banks utilizing the fractional reserve practice. The Fed currently holds about $750 billion of $12.5 trillion issued securities. Ref. http://www.fms.treas.gov/bulletin/b2009_3.pdf. Chart OFS-1.
Observe that the amount of money created by the security is the amount of the principal but the amount promised to be repaid is the principal AND the interest. The interest is never created but payment is required by the agreement. It is impossible. The linear expansion of base money via fractional reserves to create commercial loans does not change this. If, hypothetically, all money in circulation was used to pay off the securities issued by Congress, all bank reserves would be wiped out and the commercial loans would collapse—and every dollar of interest accumulated from day one would still be outstanding—but there would be no money outside of the Fed’s vaults to pay it.
The debt created by usury based sovereign debt is perpetual; it can never be paid off. The contract cannot be culminated. Any contract that cannot be culminated is an act of fraud. A contract based upon fraud is invalid from its inception. It would appear the national debt is not legally enforceable. (A debt incurred by a state or municipality is not a sovereign debt as used in this analysis. Such a debt is akin to a commercial loan and is completely repayable.)
There is more skullduggery involved. Let us assume a newly established sovereign nation is setting up a usury based economy with the issuance of 100 unit securities, a five year maturity, and an annual interest rate of 20 percent over a span of five years. The identifications of Congress and the Fed will be used to convey the images.
Upon the issuance of the first security, Congress has 100 units to spend. At the end of the year, Congress/Treasury has to pay 20 units to the Fed for interest. If the nation had to pay off the security at the end of the first year, the bankruptcy is obvious. There have never been 120 units created. Twenty units could be removed from society but that would leave only 80 units in circulation, cause great financial hardships, and still leave an impossible obligation to redeem a 100 unit security. The solution is to put off the interest payment until the next issue of security for the second year. The interest is paid from the principal created by the second issue.
During the second year there are 200 units in circulation but the actual rate of interest on the second issue is not 20 percent. Since 20 units had to be paid to the security holders, congress only received 180 units to spend (100 + 80) but they are committed to pay 40 units of interest on the security at the end of the second year. The interest rate of 40 divided by 180 is 22.2 percent. Considering the second year alone, the interest is 20 divided by 80 or 25 percent.
When the security for the third year is issued, the interest of 40 units for the first two years securities will not be available for congress. Congress will receive only 60 units for public projects but will have to pay 20 units interest at the end of the year. The 240 units received by congress (100 + 80 + 60) will require 60 units of interest at the end of the third year. The cumulative interest rate (60 divided by 240) is 25 percent. The interest rate for the third year alone (20 divided by 60) is 33.3 percent.
At the start of the fourth year, the security will have to cover the interest charge for the three prior years of 60 units. Congress will receive 40 units for government spending. The 280 units received by congress (100 + 80 + 60 + 40) will demand 80 units of interest at the end of the fourth year. The cumulative interest rate (80 divided by 280) is 28.5 percent. The interest rate for the fourth year alone (20 divided by 40) is 50 percent.
The security issued for the fifth year will pay the 80-unit interest for the prior four years. Congress will have 20 units to splurge. The 300 units received by congress (100 + 80 + 60 + 40 + 20) will require 100 units of interest at the end of the fifth year. The cumulative interest rate (100 divided by 300) is 33.3 percent. The interest rate for the fifth year alone (20 units received – 20 units in interest) is 100 percent.
At the beginning of the fifth year, 500 units of indebtedness have been issued on the full faith and credit of the nation for securities that must be eventually redeemed. 300 units have been available to congress for spending. 200 units have been given to the Fed as interest and another 100 units in interest will be due the security holders at the end of the fifth year.
In addition, 100 units must be found to redeem the maturing security issued the first year. This factor alone makes it obvious that more debt must be incurred to continue the scheme.
Beginning the first day into the sixth year (with no new securities being issued), after paying the 100 units of interest for the fifth year and redeeming the 100 unit security issued the first year, the 300 units that had been available to Congress (over the years) has been reduced to 100 units net gain. In the meantime, the Fed or security holders have collected 300 units in interest, gained 100 units in the redeemed security for the first year, and still have a claim on the citizenry for 400 units of outstanding securities that will accumulate an additional 200 units of interest before redemption—a grand total of 1000 units. And there was no initial investment (consideration) put at risk by the Fed.
The inescapable whirlpool of usury debt can only avoid obvious default by increasing the value of future securities. Increasing the value of issued securities merely postpones the inevitable result.
A high rate of interest has been selected for the example to minimize repetitive calculations. A ten percent interest rate will consume 100 percent of the security value in ten years; a five percent interest rate will take twenty years. Lower rates of interest merely require more years to reach the same inherent bankruptcy. (Actually, bankruptcy occurs the first year, but then again, since the debt can never be paid off, the entire scheme is based upon fraud. A contract based upon fraud is void from its inception.)
An economic scheme that utilizes later investors to pay the interest due earlier investors is identified as a Ponzi scheme. This is precisely the scheme that has been presented above. The scheme will survive only as long as more principal is generated to pay the interest. This action only postpones the ultimate time of a much larger reckoning. If purchasers of the new debt cannot be found, the interest must be paid from previously generated principal and the scheme quickly collapses like any Ponzi scheme. Astute investors will demand a higher rate of interest than inflation (resulting from the creation of new principal) or they will suffer a loss of actual wealth. The increase in interest will always be greater than the increase in principal because of compounding effects; i.e., the more the principal increases, the more the interest increases.
It is reported that interest consumes 78 percent of the Philippians tax revenue. Whether this debt is the result of money creation, or spendthrift legislative action for lavish government salaries and perks, or for select government beneficiaries, or expensive boondoggles sold by the IMF/CIA, is beyond the scope of this paper.
[Current economic conditions find entities with surplus funds buying short-term securities at near zero interest rates to minimize the potential loss of value during a chaotic stock market. The drop in short-term interest rates corresponds with the movement of funds out of the equity markets. Low interest Federal Fund rate for banks was provided to boost the economy as the housing bubble imploded (from easily available over-sized loans) and threatened the collapse of the banking industry.
However, recent auctions have found Primary Dealers bidding such low prices on long term securities (which would have raised the interest rates) that the Fed ate more than 50 percent of the auction (by slipping in shill bids) to keep the interest rate artificially low. The Fed usually purchases 5 to 10 percent of an issue. The PD would have taken a haircut from anticipated inflation if they had accepted a low interest rate on long-term securities with a high bid. On the other hand, the bond market could crash if the Fed had allowed interest rates to escalate. People remember what high interest rates did in the 80’s. The Fed is trying to manipulate / control the market and the gyrations are increasingly wilder. Bill Fleckenstein in GREENSPAN’S BUBBLES writes of how the Fed suppressed federal funds interest rates to create a false prosperity that devastated the construction industry.
A newspaper article a couple of years ago informed us the annual increase in interest to be 15 percent while the budget only grew 7 percent. More recently the deficit has been increasing much faster to fund/conceal the rapid growth in interest requirement. Professor Bob Blain, Southern Illinois University, Edwardsville has graphed the exponential growth in debt from 1915 to be irregular only during the 1930’s. It was that period when the Fed repeatedly made reserve calls on the banks to force gold certificates and gold coins out of circulation – which repeatedly deepened the recession. This was followed by the U.S. being manipulated into WW II by Wall Street and flooding the economy with fiat Federal Reserve Notes. The future will see ever-increasing demands for debt – and interest – and war is the cause celebre. Ref. JFK, AND THE UNSPEAKABLE by James Douglas.
In 1790 during Congress’ consideration of Alexander Hamilton’s proposal to pay the national debt with a usury based obligation placed upon the citizens, congressman James Jackson, after lengthy reflection on the devastation similar plans had imposed on European countries and cities, included the following observations to Congress:
“Let us take warning by the errors of Europe, and guard against the introduction of a system followed by calamities so universal…The funding of the debt will occasion enormous taxes for the payment of the interest…(such a system) must hereafter settle upon our posterity a burthen (sic) which they can neither bear nor relieve themselves from.” Ref. ANNALS OF CONGRESS, Vol. 1, 1790, pp. 1141-2.
In actual practice within the United States, a collection of taxes for part of the government spending is well known. Payment of part of the government expenses by taxation does not alter the government’s usury program; for analytical analysis, they can stand alone. The current pattern of increasingly larger deficit spending is the escalation as the climax of chaos beyond description approaches.
Dr. Bob Blain, Emeritus Professor of Sociology at Southern Illinois University, Edwardsville, in a published paper “Revisiting U.S. Public and Private Debt” released in 2008 observes the exponential increase in national debt from 1915 and the destruction inflicted upon historical societies by usury based monetary systems.
FATAL EMBRACE written by Benjamin Ginsberg documents historic occasions in which a usury debt based economic system (but not so identified) resulted in the “financiers” facing public fury including deportation, confiscation of estates, and physical harm to the individuals involved.
GREENSPAN’S BUBBLES; THE AGE OF IGNORANCE AT THE FEDERAL RESERVE written by Bill Fleckenstein reveals how the Fed suppressed Federal Fund interest rates to create a false prosperity that devastated the economy for 20 years and destroyed the home construction industry.
THIS TIME IS DIFFERENT; EIGHT CENTURIES OF FINANCIAL FOLLY written by Carmen Reinhart & Ken Rogoff reviews defaults as seen by an economist speaking to the International Monetary Fund/World Bank. It is the nature of governments to steal from the people.