MINSKY TO BERNANKE: "SIZE MATTERS!"
Mike Whitney
http://www.informationclearinghouse.info...e23890.htm


Size matters. And it particularly matters when the size of the financial system grossly exceeds the productive capacity of the underlying economy. Then problems arise. Surplus capital flows into paper assets triggering a boom. Then speculators pile in driving asset prices higher. Margins grow, debts balloon, and bubbles emerge. The frenzy finally ends when the debts can no longer be serviced and the bubble begins to unwind, sometimes violently. As gas escapes; credit tightens, businesses are forced to cut back, asset prices plunge and unemployment soars. Deflation spreads to every sector. Eventually, the government steps in to rescue the financial system while the broader economy slumps into a coma.

The crisis that started two years ago, followed this same pattern. A meltdown in subprime mortgages sent the dominoes tumbling; the secondary market collapsed, and stock markets went into freefall. When Lehman Bros flopped, a sharp correction turned into a full-blown panic. Lehman tipped-off investors that that the entire multi-trillion dollar market for securitized loans was built on sand. Without price discovery, via conventional market transactions, no one knew what mortgage-backed securities (MBS) and other exotic debt-instruments were really worth. That sparked a global sell-off. Markets crashed. For a while, it looked like the whole system might collapse.

The Fed's emergency intervention pulled the system back from the brink, but at great cost. Even now, the true value of the so-called toxic assets remains unknown. The Fed and Treasury have derailed attempts to create a public auction facility--like the Resolution Trust Corporation (RTC)--where prices can be determined and assets can be sold. Billions in toxic waste now clog the Fed's balance sheet. Ultimately, the losses will be passed on to the taxpayer.

Now that the economy is no longer on steroids, the financial system needs to be downsized. The housing/equities bubble was generated by over-consumption that required high levels of debt-spending. That model requires cheap money and easy access to credit, conditions no longer exist. The economy has reset at a lower level of economic activity, so changes need to be made. The financial system needs to shrink.

The problem is, the Fed's "lending facilities" have removed any incentive for financial institutions to deleverage. Asset prices are propped up by low interest, rotating loans on dodgy collateral. While household's have suffered humongous losses (of nearly $14 trillion) in home equity and retirement savings; the financial behemoths have muddled through largely unscathed. The Fed handed Wall Street a golden parachute while ordinary working stiffs were kicked to the curb. That's why household spending has plunged while the big brokerage houses are gearing up. Here's an excerpt from an article by former Morgan Stanley analyst Andy Xie which explains what's really going on:

"First, let’s look at the most basic objective of deleveraging the financial sector. Top executives on Wall Street talk about having cut leverage by half. That is actually due to an expanding equity capital base rather than shrinking assets. According to the Federal Reserve, total debt for the financial sector was US$ 16.5 trillion in the second quarter 2009 — about the same as the US$ 16.6 trillion reported one year earlier. After the Lehman collapse, financial sector leverage increased due to Fed support. It has come down as the Fed pulled back some support, creating the perception of deleveraging. The basic conclusion is that financial sector debt is the same as it was a year ago, and the reduction in leverage is due to equity base expansion, partly due to government funding." (Andy Xie, "Why One Good Bubble Deserves Another", Caijing.com)

See? The financial Goliaths are still leveraged to their eyeballs.

Fed chair Ben Bernanke has bent-over-backwards to preserve the system in its present form. That's why the lending facilities should be viewed with a degree of skepticism. They weren't set up merely to rescue the system from disaster, but to keep asset prices artificially high so institutions could continue to maximize profits via risky investments. And, it's worked, too. The S&P 500 is up over 60 percent since March 9. Still, even though Bernanke has succeeded in resuscitating the flagging financial sector, investors remain pessimistic. According to Bloomberg News:

"An eight-month, 68 percent rally in global stocks failed to convince investors and analysts that it’s time to take on more risk or dispel their concerns about U.S. economic policies and its banking system.

Only 31 percent of respondents to a poll of investors and analysts who are Bloomberg subscribers in the U.S., Europe and Asia see investment opportunities, down from 35 percent in the previous survey in July. Almost 40 percent in the latest quarterly survey, the Bloomberg Global Poll, say they are still hunkering down. U.S. investors are even more cautious, with more than 50 percent saying they are in a defensive crouch.

“The doubt and the pessimism just won’t go away,” says James Paulsen, who helps oversee $375 billion as chief investment strategist at Wells Capital Management in Minneapolis." (Bloomberg News)

Few people seem to believe in the much-ballyhooed economic recovery. And even though the media triumphantly announced the "end of the recession" last week (when GDP came in at 3.5 percent) a closer look at the data, leaves room for doubt. Goldman Sachs analysts put it like this:

"How much of the rebound in real GDP was due to the fiscal stimulus, and where do we stand in terms of the effects of stimulus thus far? Although precise answers are impossible at this juncture, several aspects of the report are consistent with our estimates that the fiscal package enacted in mid-February as the American Recovery and Reinvestment Act (ARRA) would have accounted for virtually all of the growth reported for the third quarter." ( http://www.zerohedge.com/article/hedging-their-bets )

Positive growth is an illusion created by government spending. In fact, the economy is still flat on its back. Consumer spending and credit are in sharp decline. Unemployment is steadily rising (although at a slower pace) and wages are flatlining with a chance of falling for the first time in 30 years. Deflationary pressures are building. The talk of a "jobless recovery" is intentionally misleading. Jobs ARE recovery; therefore a jobless recovery merely points to asset-inflation brought on by erratic monetary policy. Surging stocks shouldn't be confused with a real recovery.

Bernanke is a scholar of the Great Depression. He is familiar with Hyman Minsky and Minsky's "Financial Instability Hypothesis" (FIH), which states that, "A fundamental characteristic of our economy is that the financial system swings between robustness and fragility and these swings are an integral part of the process that generates business cycles."

Boston Globe Correspondent, Stephen Mihm, summarized Minsky's theory in his article "When Capitalism Fails":

"In the wake of a depression, he noted, financial institutions are extraordinarily conservative, as are businesses. With the borrowers and the lenders who fuel the economy all steering clear of high-risk deals, things go smoothly: loans are almost always paid on time, businesses generally succeed, and everyone does well. That success, however, inevitably encourages borrowers and lenders to take on more risk in the reasonable hope of making more money. As Minsky observed, “Success breeds a disregard of the possibility of failure.”

As people forget that failure is a possibility, a “euphoric economy” eventually develops, fueled by the rise of far riskier borrowers - what he called speculative borrowers, those whose income would cover interest payments but not the principal; and those he called “Ponzi borrowers,” those whose income could cover neither, and could only pay their bills by borrowing still further. As these latter categories grew, the overall economy would shift from a conservative but profitable environment to a much more freewheeling system dominated by players whose survival depended not on sound business plans, but on borrowed money and freely available credit.

Once that kind of economy had developed, any panic could wreck the market. The failure of a single firm, for example, or the revelation of a staggering fraud could trigger fear and a sudden, economy-wide attempt to shed debt. This watershed moment - what was later dubbed the “Minsky moment” - would create an environment deeply inhospitable to all borrowers.

The speculators and Ponzi borrowers would collapse first, as they lost access to the credit they needed to survive. Even the more stable players might find themselves unable to pay their debt without selling off assets; their forced sales would send asset prices spiraling downward, and inevitably, the entire rickety financial edifice would start to collapse. Businesses would falter, and the crisis would spill over to the “real” economy that depended on the now-collapsing financial system." (When Capitailsm Fails, Stephen Mihn, Boston Globe)

Stability leads to instability. By zeroing in on capitalism's genetic flaws, Minsky countered the prevailing orthodoxy that markets are fundamentally efficient and rational. He not only showed that capitalism was inherently crisis-prone, but also, that it was most vulnerable during those periods which seemed to be most stable. (like during Greenspan's "Great Moderation") Stability invites speculation and risk-taking. Investors are buoyed by market euphoria and fat returns; borrowing to purchase dodgy equities turns into a mania which distorts prices and leads to massive credit bubbles. Eventually, the foundation cracks and debts cannot be rolled over. Then markets tumble.

The point is, Bernanke knows that a bloated financial system poses unnecessary risks to the economy; just as he knows he should wind-down existing lending programs (which just encourage more speculation) and focus on rebuilding household balance sheets. The only way to put the economy back on a solid foundation is by helping struggling workers get back on their feet so they can create more demand. The objective should be full employment and broad, sustained wage growth, which is precisely what Minsky's recommended.

Stephen Mihm again: "The government - or what Minsky liked to call 'Big Government' - should become the 'employer of last resort,' he said, offering a job to anyone who wanted one at a set minimum wage. It would be paid to workers who would supply child care, clean streets, and provide services that would give taxpayers a visible return on their dollars. In being available to everyone, it would be even more ambitious than the New Deal, sharply reducing the welfare rolls by guaranteeing a job for anyone who was able to work. Such a program would not only help the poor and unskilled, he believed, but would put a floor beneath everyone else's wages too, preventing salaries of more skilled workers from falling too precipitously, and sending benefits up the socioeconomic ladder." ("Why Capitalism Fails, by Stephen Mihm, Boston Globe)

Minsky's analysis not only sheds light on the causes of the current crisis, but also provides a practical way to fix the system. Too bad Bernanke's not paying attention.

FED BEATEN
Bill To Audit Federal Reserve Passes Key Hurdle

Ryan Grim
http://www.informationclearinghouse.info...e24018.htm

In an unprecedented defeat for the Federal Reserve, an amendment to audit the multi-trillion dollar institution was approved by the House Finance Committee with an overwhelming and bipartisan 43-26 vote on Thursday afternoon despite harried last-minute lobbying from top Fed officials and the surprise opposition of Chairman Barney Frank (D-Mass.), who had previously been a supporter.

The measure, cosponsored by Reps. Ron Paul (R-Texas) and Alan Grayson (D-Fla.), authorizes the Government Accountability Office to conduct a wide-ranging audit of the Fed's opaque deals with foreign central banks and major U.S. financial institutions. The Fed has never had a real audit in its history and little is known of what it does with the trillions of dollars at its disposal.

The amendment expressly blocks Congress from interfering with the independence of monetary policy decision-making, but opponents of the measure said that the political pressure would inevitably follow.

A desperate, last-minute attempt to thwart the move came in the form of an amendment championed by Rep. Mel Watt (D-N.C.) and described by its supporters as more reasonable. On Tuesday, however, the Huffington Post reported that, on a close reading, his amendment would in fact decrease transparency at the Fed by adding additional restrictions.

Backers of the Watt amendment pressed their case on Wednesday by sending a letter from a "political cross section of prominent economists" backing a measure like Watt's. HuffPost reported, however, that those economists might well have be prominent, but they certainly aren't a "political cross section." Seven of the eight economists in question have extensive connections to the Fed -- and half of them are currently on the Fed payroll. Those affiliations were not noted in the letter.

The playbook in Washington often goes like this: When a measure that threatens the establishment builds enough momentum that it must be dealt with, it is labeled as "unserious." The Washington Post editorial board, true to the script, called Paul's measure "an unserious answer to a serious question."

And it particularly rankles the center that a pair of "wingnuts" are behind a successful effort to challenge the prevailing order.

Step Two is for a "serious" compromise to be offered. In this case, it was Watt's amendment. But by the time the vote was called Thursday afternoon, committee members had seen through his measure, recognizing that it was not a compromise effort to bring real transparency to the Fed but an attempt to further shut the the doors.

"The Watt amendment will fully obliterate everything 1207" -- Paul's measure -- "is intended to do," said Paul during Thursday's debate.

For anyone remaining confused, the debate was further clarified by the central bank itself: Federal Reserve Vice Chair Don Cohn and General Counsel Scott Alvarez spent much of the day calling committee members, urging them to oppose the Paul-Grayson amendment in favor of Watt's, a member of Congress who asked for confidentiality told HuffPost.

Paul's opponents also placed a letter from former Fed chairmen Alan Greenspan and Paul Volcker on the seats of every committee member. Such a move is in violation of House rules and Grayson was able to have the letters removed.

As the day wore on and support held for the Paul-Grayson side, the Fed still could hope that both would pass. Watt's amendment, which included additional restriction, would then trump Paul's.

To counter that possibility, the Paul-Grayson side moved to fully replace Watt's amendment with theirs, leaving only one amendment to vote on. The motion carried and the amendment passed in a landslide.

The GOP broadly backed the amendment, though Frank chided them for finding their love of Fed transparency only after they lost power, noting that Paul has been introducing some version of the measure since 1983.

Frank said he was opposing the Paul amendment because it could be perceived as influencing monetary policy, which can have inflationary pressure. "Perception is very important in monetary policy," said Frank.

He urged a no vote, yet 15 Democrats bucked him, voting with Paul. Key to winning Democratic support was a letter posted early Thursday from labor leaders and progressive economists. The letter, organized by the liberal blog FireDogLake.com, called for a rejection of the Watt substitute and support for Paul.

Grayson was able to show Democratic colleagues that the liberal base was behind them.

"Today was Waterloo for Fed secrecy," a victorious Grayson said afterwards.

LINING UP FOR THE WALL STREET GRAVY TRAIN

Mike Whitney
http://www.informationclearinghouse.info...e24295.htm

British economist John Maynard Keynes, believed in capitalism, but he was also sharply critical of its structural flaws. He summed it up succinctly like this:

"Our analysis shows... that long-run development is not inherent in the capitalist economy. Thus, specific 'development factors' are required to sustain a long-run upward movement."

What Keynes was alluding to is the fact that mature capitalist economies tend towards stagnation. What happens, is that the rate of return on investment begins to dwindle as overcapacity builds. That causes declining profits which lead to belt-tightening, rising unemployment and falling demand. As investment drops off further, growth slows correspondingly and the economy dips into a protracted slump. This corrosive stagnation is the challenge that all advanced capitalist economies face. The solution--as Keynes notes--lies in "specific development factors", which in today's terms means "financial innovations".

Financial innovation, like derivatives contracts and securitization, have created vast new opportunities for investment and profitmaking. This complex netherworld of highly-leveraged debt-instruments and off-balance sheet operations, constitutes a shadow economy where the process of capital accumulation persists despite pervasive inertia in the underlying economy. This is why the Fed and the Treasury have been doing their best to stitch the system back together without changing its basic structure. The same is true of Congress, which has gone to great lengths to preserve the profit-generating instruments which brought the global financial system to the brink of disaster. This is from the Wall Street Journal:

"Lobbying by Wall Street has blunted efforts to step up regulation on derivatives trading by carving out exceptions or leaving the status quo in place. Derivatives took blame for some of the worst debacles of the financial crisis. But a year after regulators and critics began calling for an overhaul in the way they are traded, some efforts have been shelved and others have been watered down.

The two main issues concerning regulators were trading and clearing of swaps, which allow investors to bet on or hedge movements in currencies, interest rates and many other things. Swaps generally trade privately, leaving competitors and regulators in the dark about the scope of their risks. In November 2008, the chairman of the Senate Agriculture Committee proposed forcing all derivatives trading onto exchanges, where their prices could be publicly disclosed and margin requirements imposed to insure that participants could make good on their market bets.

But a financial-overhaul bill passed by the House of Representatives on Dec. 11 watered down or eliminated these requirements. The measure still allows for voice brokering and allows dealers to use alternatives to public exchanges." ("How Overhauling Derivatives Died" Randall Smith and Sarah Lynch, WSJ)

"Voice brokering" is Wall Street parlance for making a deal over the phone. It makes a joke out of the anemic regulations passed into law by congressmen who are essentially agents of Wall Street.

The bottom line is that financial institutions will not be forced to trade trillions of dollars of derivatives on public exchanges where margin requirements would protect taxpayers against potential losses. Instead, Congress has given Wall Street the green light to continue selling products that are insufficiently capitalized so they can keep raking in gigantic profits. That means it's only a matter of time before another one of the financial giants keels over from its bad bets. It will be AIG all over again.

But derivatives are just part of the problem. The real issue is a financial model that doesn't really work and offers no tangible benefit to society. In its present form, the system--with its exotic OTC markets, its off-book SIVs and SPEs, and its opaque Dark Pools and High Frequency Trading-- is more snake oil than high finance. It does not "efficiently allocate capital to productive activity" as advertised, but--more often than not--diverts it away from production altogether into paper claims on all manner of financial exotica. So called "innovations" have had less to do with increasing the overall vitality of the economy or improving living standards than they do with circumventing regulations to enhance earnings by maximizing leverage. Deregulation has utterly transformed the system; creating a financial Frankenstein that hides its activities off public exchanges, that transfers the risk of losses onto the taxpayer, and that requires explicit government guarantees just to attract investment. It's a mug's game where only a small group of high-stakes speculators come up winners.

The same is true of the Fed's emergency lending programs. They're just another swindle wrapped in fancy public relations ribbon. Ostensibly, the facilities are supposed to provide cheap capital in exchange for dodgy collateral. But that's not a loan; it's a subsidy, and it helps to obscure the true, market price of the assets. As systemic regulator, the Fed has every right to provide liquidity during times of market stress or turbulence. But it does not have the right to help financial institutions conceal their losses by paying exorbitant prices for downgraded junk bonds. That's picking winners and losers, which is far beyond the Fed's mandate.

Quantitative easing (QE) is another Fed boondoggle. The program has been hyped as a way to get the banks to increase lending to businesses and consumers by creating over $1 trillion of excess bank reserves. But instead of increasing lending, QE does the exact opposite; it creates generous incentives for not lending. The banks who qualify have been taking the Fed's zero-rate reserves and exchanging them for safe, 10-year Treasury bonds which yield 3.5%. What a deal! Fed chairman Ben Bernanke has promised to maintain this policy for "an extended period" which means the banks will continue to reap the benefits of this stealth bailout for the foreseeable future.

This is the real reason the banks aren't lending, because the Fed is paying them not to. It's not a matter of creditworthy applicants. It's a matter of hopelessly mangled monetary policy. The ongoing credit contraction can be blamed on one man alone; Ben Bernanke.

Even though QE is mainly a backdoor way to recapitalize the banks; some lending has continued, although not to consumers and businesses. So where has the money gone? Here's part of the answer from the Wall Street Journal:

"Former Salvadoran finance minister Manuel Hinds points out in the latest issue of International Finance that banks have indeed been shirking on their day job of transforming increased deposits into increased private-sector credit. But they haven't quit entirely. In fact, they've funneled significant new funds into nonbank financial institutions—which have not lent them on. What's happening is that U.S. banks have been behaving exactly like developing country banks during earlier crises, such as Indonesian banks in the late 1990s—raising lending to their worst borrowers to keep them alive, lest the banks themselves collapse from their borrowers' defaults.


For U.S. banks, these zombie borrowers are their affiliated financial entities set up to manage so-called off-balance-sheet activities—such as the famous SIVs (structured investment vehicles) created by Citigroup and others during the boom. Thus, the massive fiscal and monetary bailouts of the banks have served to worsen the credit misallocation that led to the general economic collapse in 2008." ("Prepare for a Keynesian Hangover", Ben Steill, Wall Street Journal)

So the banks are not only taking depositors money and using it in high-risk derivatives transactions and currency "carry trades", they're also propping up the long daisy-chain of insolvent creditors whose default could domino Lehman-like through the entire financial system. Funny how the media skips little tidbits like this when they give their rosy evening roundup.

And then there's this; on Christmas Eve, the Treasury Dept announced that it would lift existing caps on the mortgage-finance giants Fannie Mae and Freddie Mac. The two GSE's will no longer be limited to a ceiling of $200 billion in losses each. Although, the Treasury's action looks like it was designed to support the housing market, the real beneficiaries are the banks whose balance sheets are coming under greater pressure from the relentless uptick in foreclosures. It is widely believed that Treasury is laying the groundwork for a major revision of the Obama's mortgage modification program which has, so far, been a dismal failure. If the critics are right, the administration is planning to slash the principle on millions of mortgages sometime in 2010, thus shifting the sizable losses onto the US taxpayer. Otherwise, the banks will face potential losses on another 4 million foreclosures in the next year alone. (according to Credit Suisse)

Economist Dean Baker says that the Treasury's surprise announcement is an indication that Fannie and Freddie may have paid too much for the mortgage-backed securities they bought back in 2008 when the GSE's were used as a dumping ground for distressed bank assets. Here's Baker:

"This would mean that they were paying too much for mortgages and mortgage-backed securities bought from banks after the financial meltdown was already in full swing. This was the original purpose of the TARP program. Of course, TARP came with at least some restrictions and disclosure requirements. If Fannie and Freddie are overpaying for mortgages, then there are no conditions whatsoever put on the banks that get the money." (Fannie Mae and Freddie Mac: Just a four Letter Word, Dean Baker, Huffington Post)

The Treasury's action is tantamount to another stealth bailout by industry reps working within the Obama administration. All policymaking seems to revolve around two fundamental tenets: Increase the profit potential for the big Wall Street banks, and crimp the flow of credit to the real economy to increase privatization, crush the labor movement, and reduce the population to third world poverty. That's Neoliberalism in a nutshell and, apparently, Obama's economic dogma. In fact, as economist L. Randall Wray points out, Obama's new health care bill is just more of the same; another ginormous handout to Wall Street disguised as public policy. Here's Wray:

"There is a huge untapped market of some 50 million people who are not paying insurance premiums—and the number grows every year because employers drop coverage and people can’t afford premiums. Solution? Health insurance “reform” that requires everyone to turn over their pay to Wall Street. Can’t afford the premiums? That is OK—Uncle Sam will kick in a few hundred billion to help out the insurers. Of course, do not expect more health care or better health outcomes because that has nothing to do with “reform” … Wall Street’s insurers… see a missed opportunity. They’ll collect the extra premiums and deny the claims. This is just another bailout of the financial system, because the tens of trillions of dollars already committed are not nearly enough."(Healthcare Diversions Part 3: The Financialization of Health and Everything Else in the Universe" L. Randall Wray)

It's no wonder that the Obama administration's appeal to China to "expand its domestic market" focuses exclusively on health care and retirement programs. Wall Street is just lining up for the next gravy train.

DEEPENING DEBT CRISIS: THE BERNANKE REAPPOINTMENT BE AFRAID, VERY AFRAID
Prof Michael Hudson
www.globalresearch.ca/index.php?context=...;aid=17346
Global Research, February 2, 2010

If the economy deteriorates in the L-shaped hockey-stick rut that many economists forecast, what political price will President Obama and the Democrats pay for having returned the financial keys to the Bush Republican appointees who gave away the store in the first place? Reappointing Federal Reserve Chairman Ben Bernanke may end up injuring not only the economy but also the Democratic Party for years to come. Recognizing this, Republicans made populist points by opposing his reappointment during the Senate confirmation hearings last Thursday, January 27 the day after Mr. Obama s State of the Union address.

The hearings focused on the Fed s role as Wall Street s major lobbyist and deregulator. Despite the fact that its Charter starts off by directing it to promote full employment and stabilize prices, the Fed is anti-labor in practice. Alan Greenspan famously bragged that what has caused quiescence among labor union members when it comes to striking for higher wages or even for better working conditions is the fear of being fired and being unable to meet their mortgage and credit card payments. One paycheck away from homelessness, or a downgraded credit rating leading to soaring interest charges, has become a formula for labor management.

As for its designated task in promoting price stability, the Fed s easy-credit bubble has made asset-price inflation the path to wealth, not tangible capital investment. This has brought joy to bank marketing departments as homeowners, consumers, corporate raiders, states and localities run further and further into debt in an attempt to improve their position by debt leveraging. But the economy has all but neglected its industrial base and the employment goes with manufacturing. The Fed s motto from Bubblemeister Alan Greenspan to Ben Bernanke has been Asset-price inflation, good; wage and commodity price inflation, bad.

Here s the problem with that policy. Rising prices for housing have increased the cost of living and doing business, widening the excess of market price over socially necessary costs. In times past the government would have collected the rising location rent created by increasing prosperity and public investment in transportation and other infrastructure making specific sites more valuable. But in recent years taxes have been rolled back. Land sites still cost as much as ever, because their price is set by the market. Land itself has no cost of production. Locational value is created by society, and should be the natural tax base because a land tax does not increase the price of real estate; it lowers it by leaving less free rent to be paid to the banks.

The problem is that what the tax collector relinquishes is now available to be paid to banks as interest. And prospective buyers bid against each other until the winner is whoever is first to pay the land s location rent to the banks as interest.

This tax shift to the benefit of the bankers, not homeowners has made Mr. Obama s hope of doubling U.S. exports during the next five years ring hollow. This is the upshot of creating wealth in the form of a debt-leveraged real estate and stock market bubble. Labor must pay more for debt-financed housing and education, not to mention payments to health insurance oligopoly and higher sales and income taxes shifted off the shoulders of financial and real estate.

Once the Republicans were certain which way the vote would go, they were able to voice some nice populist sound bites for the mid-term elections this November. Jeff Sessions of Alabama and Sam Brownback of Kansas voted against Mr. Bernanke s confirmation. Jim deMint of South Carolina warned that reappointing him would be The biggest mistake that we re going to make for a long time. He added: Confirming Bernanke is a continuation of the policies that brought our economy down.

Among Democrats running for re-election, Barbara Boxer of California pointed out that by spurring the asset-price inflation, the Fed s pro-Bubble (that is, pro-debt policy) has crashed the economy, shrinking employment. The Fed is supposed to protect consumers, yet Mr. Bernanke is a vocal opponent of the Consumer Finance Products Agency, claiming that the deregulatory Fed alone should be the sole financial regulator seemingly an oxymoron.

Mr. Obama supports Mr. Bernanke and his State of the Union address conspicuously avoided endorsing the Consumer Financial Products Agency that he earlier had claimed would be the centrepiece of financial reform. Wall Street lobbyists have turned him around. Their logic was the same mantra that Connecticut insurance industry s Sen. Chris Dodd repeated at the confirmation hearings: Mr. Bernanke has saved the economy.

How can the Fed be said to do this when the volume of debt is growing exponentially beyond the ability to pay? Saving the debt by bailing out creditors by adding bad private-sector debts to the public sector s balance sheet is burdening the economy, not saving it. The policy only postpones the crisis while making the ultimate volume of debt that must be written off higher and therefore more traumatic to write off, annulling a corresponding volume of savings on the other side of the balance sheet (because one party s savings are another s debts).

What really is at issue is the economic philosophy that Mr. Bernanke will apply during the coming four years. Unfortunately, Mr. Bernanke s questioners failed to ask relevant questions along these policy lines and the economic theory or rationale underlying his basic approach. What needed to be addressed was not just his deregulatory stance in the face of the Bubble Economy and exploding consumer fraud, or even the mistakes he has made. Republican Sen. Jim Bunning elicited only smirks and pained looked as Mr. Bernanke rested his chin on his hand, as if to say, I m going to be patient and let you rant. The other Senators were almost apologetic.

One popular (and thoroughly misleading) description of Bernanke that has been cited ad nauseum to promote his reappointment is that he is an expert on the causes of the Great Depression. If you are going to create a new crash, it certainly helps to understand the last one. But economic historians who have compared Mr. Bernanke s writings to actual history have found that it is precisely his misunderstanding of the Depression that is leading him tragically to repeat it.

As a trickle-down apologist for high finance, Prof. Bernanke has drawn systematically wrong conclusions as to the causes of the Great Depression. The ideological prejudice behind his view is of course what got him his job in the first place, for as numerous observers have quipped, a precondition for being hired as Fed Chairman is that one does not understand how the financial system actually works. Instead of recognizing that deepening debt, low wages and the siphoning up of wealth to the top of the economic pyramid were primary causes of the Depression, Prof. Bernanke attributes the main problem simply to a lack of liquidity, causing low prices.

As my Australian colleague Steve Keen recently has written in his Debtwatch No. 42 (http://www.debtdeflation.com/blogs/), the case against Mr. Bernanke should focus on his neoclassical approach that misses the fact that money is debt. He sees the financial problem as being too low a price level for assets to be collateralized for bank loans. And to Mr. Bernanke, wealth is synonymous with what banks will lend, under existing credit terms.

In 1933, the economist Irving Fischer (mainly responsible for the modern monetarist tautology MV = PT) wrote a classic article, The Debt-Deflation Theory of the Great Depression, recanting the neoclassical view that had led him to lose his personal fortune in the 1929 stock market crash. He explained how the inability to pay debts was forcing bankruptcies, wiping out bank credit and spending power, shrinking markets and hence the incentive to invest and employ labor.

Mr. Bernanke rejects this idea, or at least the travesty he paraphrases in his Essays on the Great Depression (Princeton, 2000, p. 24), as Prof. Keen quotes:

Fisher s idea was less influential in academic circles, though, because of the counterargument that debt-deflation represented no more than a redistribution from one group (debtors) to another (creditors). Absent implausibly large differences in marginal spending propensities among the groups, it was suggested, pure redistributions should have no significant macroeconomic effects.

All that a debt overhead does is transfer purchasing power from debtors to creditors. Bernanke is reminiscent here of Thomas Robert Malthus, whose Principles of Political Economy argued that landlords (Malthus s own class) were necessary to maintain economic equilibrium in a way akin to trickle-down theorists through the ages. Where would English employment be, Malthus argued, without landlords spending their revenue on coachmen, fine clothes, butlers and servants? It was landlords spending their rental income (protected by England s agricultural tariffs, the Corn Laws, until 1846) that kept buggy-makers and other suppliers working. And by the same logic, this is what wealthy Wall Street financiers do today with the money they make by lending to enable homeowners and savers to get rich making capital gains off asset-price inflation.

The reality is that wealthy Wall Street financiers who make multi-million dollar salaries and bonuses spend their money on trophies: fine arts, luxury apartments or houses in gated communities, yachts, fancy handbags and high fashion, birthday parties with appearances by modish pop singers. ( I see the yachts of the stock brokers; but where are those of their clients? ) This is not the kind of spending that reflects the real economy s production profile.

Mr. Bernanke sees no problem, unless rich people spend less of their gains on consumer goods and the products of labor than average wage earners. But of course this propensity to consume is precisely the point John Maynard Keynes made in his General Theory (1936). The wealthier people become, the lower a proportion of their income they consume and the more they save.

This falling propensity to consume is what worried Keynes about the future. He imagined that as economies saved more as their income levels rose, they would spend less on goods and services. So output and employment would not be able to keep pace unless the government stepped in to make up the gap.

Consumer spending is indeed falling, but not because economies are experiencing a higher net saving rate. The U.S. saving rate has fallen to zero because despite the fact that gross savings remain high (about 18 percent), most is lent out to become other peoples debts. The effect is thus a wash on an economy-wide basis. (18 percent saving less 18 percent debt = zero net saving.)

The problem is that workers and consumers have gone deeper and deeper into debt, saving less and less. This is just the opposite of what Keynes forecast. Only the wealthiest 10 percent or so of the population save more and more mainly in the form of loans to the bottom 90 percent. Saving less, however, goes hand in hand with consuming less, because of the revenue that the financial sector drains out of the real economy s circular flow (wage-earners spending their income to buy the goods they produce) as debt service. The financial sector is wrapped around the production-and-consumption economy. So an inability to consume is part and parcel of the debt problem. The basis of monetary policy throughout the world today therefore should be how to save economies from shrinking as a result of their exponentially growing debt overhead.

Bernanke s apologetics for finance capital: Economies seem to need more debt, not less.Bernanke finds declines in aggregate demand to be the dominant factor in the Great Depression (p. ix, as cited by Steve Keen). This is true in any economic downturn. In his reading, however, debt seems not to have anything to do with falling spending on what labor produces. Taking a banker s-eye view, he finds the most serious problem to be the demand for stocks and real estate. Mr. Bernanke promises not to let falling asset demand (and hence, falling asset prices) happen again. His antidote is to flood the economy with credit as he is now doing, emulating Alan Greenspan s Bubble policy.

The wealthiest 10 percent of the population do indeed save most of their money. They lend savings and create new credit to the bottom 90 percent, or gamble in derivatives or other zero-sum activities in which their gain (if indeed they make any) finds its counterpart in some other parties loss. The system is kept going not by government spending, Keynesian-style, but by new credit creation. That supports consumption, and indeed, lending against real estate, stocks and bonds enables borrowers to bid up their prices, enabling their owners to borrow yet more against these assets. The economy expands until current revenue no longer covers the debt s carrying charges.

That s what brings the Bubble Economy down with a crash. Asset-price inflation gives way to crashing prices and negative equity for real estate and for much financial debt leveraging as well. It is in this sense that Prof. Bernanke s blames the Depression on lower prices. When prices for real estate or other collateral plunge, it no longer can be pledged for more loans to keep the circular flow of lending and debt repayment in motion.

This circular financial flow is quite different from the circular flow that Keynes (and Say s Law) discussed the circulation where workers and their employers spent their wages and profits on consumer goods and investment goods. The financial circular flow is between the banks and their clients. And this circular flow swells as it diverts more and more spending from the real economy s circular flow between income and spending. Finance capital expands relative to industrial capital.[1]

Higher prices in the real economy may help maintain the circular financial flow, by giving borrowers more current income to pay their mortgages, student loans and other debts. Mr. Bernanke accordingly sees FDR s devaluation of the dollar as helping reflate prices.

Today, however, a declining dollar would make imports (including raw materials as well as key consumer goods) more costly. This would squeeze the budgets of most families, given America s rising import dependency as its economy is post-industrialized and financialized. So Mr. Bernanke s favored policy is to get banks lending again not for the government to spend more on deficit spending on infrastructure, social services or other full employment projects. The government spending that Mr. Bernanke has endorsed is pure bailouts to the banks, insurance companies, real estate packagers and other Wall Street institutions so that they can support asset prices and thereby save the economy s financial balance sheet, not its employment and living standards.

More debt thus is not the problem, in Chairman Bernanke s view. It is the solution. This is what makes his re-appointment so dangerous.

Devaluation of the dollar FDR-style will make U.S. real estate, corporations and other assets cheaper to global investors. It thus will have the same positive effects (if you can call making homes and office buildings more costly to buyers a positive effect) as more credit and without the debt service needing to be raked off from the economy. This policy is akin to the International Monetary Fund s stabilization and austerity programs that have caused such havoc over the past few decades.[2] It is the policy being prepared for imposition on the United States. This too is what makes Bernanke s re-appointment so dangerous.

The problem is a combination of Mr. Bernanke s dangerous misreading of economic history, and the banker s-eye perspective that underlies this view which he now has been empowered to impose from his perch as central planner at the Federal Reserve Board. Pres. Obama s support for his reappointment suggests that the recent economic rhetoric heard from the White House is a faux populism. The President promises that this time, it will be different. The former Bush appointees Geithner, Bernanke and the Goldman Sachs managers on loan to the Treasury will be willing to stand up to Goldman Sachs and the other bankers. And this time the Clinton-era Rubinomics boys will not do to the U.S. economy what they did to the Soviet Union.

With this stance, it is no wonder that the Obama Democrats are relinquishing the populist anti-Wall Street card to the Republicans!

The Bernanke albatross

Mr. Bernanke misses the problem that debts need to be repaid or at least carried. This debt service deflates the non-financial real economy. But the Fed s analysis stops just before the crash. It is a good news theory limited to the happy time while the bubble is expanding and homeowners borrow more and more from the banks to buy houses (or more accurately, their land sites) that are rising in price. This was the Greenspan-Bernanke bubble in a nutshell.

We need not look as far back as the Great Depression. Japan since 1990 is a good example. Its land prices declined every quarter for over 15 years after its bubble burst. The Bank of Japan did what the Federal Reserve is doing now: It lowered lending rates to banks below 1%. Banks earned their way out of debt by lending to global speculators who used the yen loans to convert into foreign currency and buy higher-yielding assets abroad capped by Icelandic government bonds paying 15%, and pocketing the arbitrage difference.

This steady conversion of speculative money out of yen into foreign currency held down Japan s exchange rate, helping its exporters. Likewise today, the Fed s low-interest policy leads U.S. banks to borrow from it and lend to arbitrageurs buying higher-yielding bonds or other securities denominated in euros, sterling and other currencies.

The foreign-exchange problem develops when these loans are paid back. In Japan s case, when global financial markets turned down and Japanese interest rates began to rise in 2008, arbitrageurs decided to unwind their positions. To pay back the yen they had borrowed from Japanese banks, they sold euro- and dollar-denominated bonds and bought the Japanese currency. This forced up the yen s exchange rate eroding its export competitiveness and throwing its economy into turmoil. The long-ruling Liberal Democratic Party was voted out of power as unemployment spread.

In the U.S. case today, Chairman Bernanke s low interest-rate regime at the Fed has spurred a dollar-denominated carry trade estimated at $1.5 trillion. Speculators borrow low-interest dollars and buy high-interest foreign-currency bonds. This weakens the dollar s exchange rate against foreign currencies (whose central banks are administering higher interest rates). The weakening dollar leads U.S. money managers to send more investment funds out of our economy to those promising stock market gains as well as a foreign-currency gain.

The prospect of undoing this credit creation threatens to lock the United States into a low-interest trap. The problem is that if and when the Fed begins to raise interest rates (for instance, to slow the new bubble that Mr. Bernanke is trying to inflate), global speculators will repay their dollar debts. As the U.S. carry trade is unwound, the dollar will soar in price. This threatens to make Mr. Obama s promise to double U.S. exports within five years seem an impossible dream.

The prospect is for U.S. consumers to be hit by a triple whammy. They must pay higher prices for the goods they buy as the dollar declines, making imports more expensive. And the government will be spending less on the economy s circular flow as a result of Pres. Obama s three-year spending freeze to slow the budget deficits. Meanwhile, states and cities are raising taxes to balance their own budgets as tax receipts fall. Consumes and indeed the entire economy must run more deeply into debt simply to break even (or else see living standards eroded).

To Mr. Bernanke, economic recovery requires resuscitating the Goldman Sachs squid that Matt Taibbi so artfully has described as being affixed to the face of humanity, duly protected by the Fed. The banks will lend more to keep the debt pyramid growing to enable consumers, businesses and local government to avoid contraction.

All this will enrich the banks as long as the debts can be paid. And if they can t be paid, will the government bail them out all over again? Or will it be different this time around?

Will our economy flounder with Mr. Bernanke s reappointment as the rich get richer and the American family comes under increasing financial pressure as incomes drop while debts grow exponentially? Or will Americans get rich off the new bubble as the Fed re-inflates asset prices?

The Road to Debt Peonage

Last week, Senator John Kerry of Massachusetts acknowledged many Americans anger about the bailouts of the big banks: It s understandable why there is debate, questioning and even anger about Mr. Bernanke s re-nomination. Still, he added, out of this near calamity, I believe Chairman Bernanke provided leadership that was urgent, nimble, strong and vital in staving off greater disaster.

Unfortunately, by disaster Sen. Kerry seems to mean losses for Wall Street. He shares with Chairman Bernanke the idea that gains in raising asset prices are good for the economy for instance, by enabling pension funds to pay retirees and build wealth for America s savers.

While the Bush-Obama team hopes to reflate the economy, the $13 trillion bailout money they have spent trying to fuel the destructive bubble takes the form of trickle-down economics. It has not run up public debt in the Keynesian way, by government spending such as in the modest Stimulus package to increase employment and income. And it is not providing better public services. It was designed simply to inflate asset prices or more accurately, to prevent their decline.

This is what re-appointment of the Fed Chairman signifies. It means a policy intended to raise the price of housing on credit, with a corresponding rise in consumer income paid to bankers as mortgage debt service.

Meanwhile, rising stock and bond prices will increase the price of buying a retirement income. A higher stock price means a lower dividend yield. The same is true for bonds. Flooding the capital markets with credit to bid up asset prices thus holds down the yield of the assets of pension funds, pushing them into deficit. This enables corporate managers to threaten bankruptcy of their pension plans or entire companies, General Motors-style, if labor unions do not renegotiate their pension contracts downward. This frees yet more money for financial managers to pay creditors at the top of the economic pyramid.

Mr. Bernanke s opposition to regulating Wall Street

How does one overcome this financial polarization? The seemingly obvious solution is to select Fed and Treasury administrators from outside the ranks of ideologues supported by indeed, applauded by Wall Street. Creation of a Consumer Financial Products Agency, for instance, would be largely meaningless if a deregulator such as Mr. Bernanke were to run it. But that is precisely what he is asking to do in testifying that his Federal Reserve should be the sole regulatory agency, nullifying the efforts of all others just in case some state agency, some federal agency or some Congressional committee might move to protect consumers against fraudulent lending, extortionate fees and penalties and usurious interest rates.

Mr. Bernanke s fight against proposals for such regulatory agencies to protect consumers from predatory lending is thus a second reason not to re-appoint him. How can Mr. Obama campaign for his reappointment as Chairmanship of the Fed and at the same time endorse the consumer protection agency? Without dumping Bernanke and Geithner, it doesn t seem to matter what the law says. The Democrats have learned from the Bush and Reagan administrations that all you have to do is appoint deregulators in key positions, and legal teeth are irrelevant.

Independence of the Federal Reserve is a euphemism for financial oligarchy

This brings up the third premise that defenders of Mr. Bernanke cite: the much vaunted independence of the Federal Reserve. This is supposed to be safeguarding democracy. But the Fed should be subject to representative democracy, not independent of it! It rightly should be part of the Treasury representing the national interest rather than that of Wall Street.

This has emerged as a major problem within America s two-party political system. Like the Republican team, the Obama administration also puts financial interests first, on the premise that wealth flows from its credit activities, the financial time frame tends to be short-run and economically corrosive. It supports growth in the debt overhead at the expense of the real economy, thereby taking an anti-labor, anti-consumer, anti-debtor policy stance.

Why on earth should the most important sector of modern economies finance be independent from the electoral process? This is as bad as making the judiciary independent, which turns out to be a euphemism for seriously right-wing.

Over and above the independence issue, to be sure, is the problem that the government itself if being taken over by the financial sector. The Treasury Secretary, Fed Chairman and other financial administrators are subject to Wall Street s advice and consent first and foremost. Lobbying power makes it difficult to defend the public interest, as we have seen from the tenure of Mr. Paulson and Mr. Geithner. I don t believe Mr. Obama or the Democrats (to say nothing of the Republicans) is anywhere near rising to the occasion of solving this problem. One can only deplore Mr. Obama s repetition of his endorsements.

Allied to the independence issue is a fourth reason to reject Mr. Bernanke personally: the Fed s secrecy from Congressional oversight, highlighted by its refusal to release the names of the recipients of tens of billions of Fed bailouts and cash-for-trash swaps.

Does it matter?

Now that the confirmation arguments against Mr. Bernanke s reappointment have been rejected, what does it mean for the future?

On the political front, his reappointment is being cited as yet another proof that the Democrats care more for bankers than for American families and employees. As a result, it will do what seemed unfathomable a year ago: enable GOP candidates to strike the pose of FDR-type saviors of the embattled middle class. No doubt another decade of abject GOP economic failure would simply make the corporate Democrats appear once again to be the alternative. And so it goes unless we do something about it.

The problem is not merely that Mr. Bernanke failed to do what the Fed s charter directs it to do: promote employment in an environment of stable prices. The Republicans and some Democrats read out the litany of Bernanke abuses. The Fed could have raised interest rates to slow the bubble. It didn t. It could have stopped wholesale mortgage fraud. It didn t. It could have protected consumers by limiting credit card rates. It didn t.

For Bernanke, the current financial system (or more to the point, the debt overhead) is to be saved so that the redistribution of wealth upward will continue. The Congressional Research Service has calculated that from 1979 to 2003 the income from wealth (rent, dividends, interest and capital gains) for the top 1 percent of the population soared from 37.8% to 57.5%. This revenue has been expropriated from American employees pushed onto debt treadmills in the face of stagnating wages.

Meanwhile, the government is permitting corporate tollbooth to be erected across our economy and un-taxing this revenue so that it can be capitalized into financialized wealth paying only a 15% tax rate on capital gains. It pays these taxes not as these gains accrue, but and only when they realize them. And the tax does not even have to be paid if the sales proceeds of these assets is reinvested! Financial and fiscal policy thus reinforce each other in a way that polarizes the economy between the financial sector and the real economy.

Behind these bad policies is a disturbing body of junk economics one that, alas, is taught in most universities today. (Not at the University of Missouri at Kansas City, and a few others, to be sure.) Mr. Bernanke views money simply as part of a supply and demand equation between money and prices and he refers here only to consumer prices, not the asset prices which the Fed failed to address. That is a big part of the Fed s blind spot: Messrs. Greenspan and Bernanke imagined that its charter referred only to stabilizing consumer prices and wages while asset prices the cost of obtaining housing, an education or a retirement income have soared as a result of debt leveraging.

What Mr. Bernanke misses along with his neoclassical colleagues is that the money that is spent bidding up prices is also debt. This means that it leaves a debt legacy. When banks provide credit by writing loans, what they are selling is debt.

The question their marketing departments ask is, how large is the market for debt? When I went to work for Chase Manhattan in 1967 as its balance-of-payments analyst, for example, I liaised with the marketing department to calculate how large the international debt market was and how large a share of this market the bank could reasonably expect to get.

The bank quantified the debt market by measuring how large a surplus borrowers could squeeze out over and above basic break-even needs. For personal loans, the analogy was how much could a wage earner afford to pay the bank after meeting basic essentials (rent, food, transportation, taxes, etc.). For the real estate department, how much net rental income could a landlord pay out, after meeting fuel and other operating costs and taxes? The anticipated surplus revenue was capitalized into a loan. From the marketing department s vantage point, banks aimed at absorbing the entire surplus as debt service.

Financial debt service is not spent on consumer goods. It is recycled into new loans, after paying dividends to stockholders and salaries and bonuses to its managers. Stockholders spend their money on buying other investments more stocks and bonds. Managers buy trophies yachts, trophy paintings, trophy cars, trophy apartments (whose main value is their location the neighborhood where their land is situated), foreign travel and other luxury. None of this spending has much effect on the consumer price index, but it does affect asset prices.

This idea is lacking in neoclassical and monetarist theory. Once money (that is, debt) is spent, it has an effect on prices via supply and demand, and that is that. There is no dynamic over time of debt or wealth. Ever since Marxism pushed classical political economy to its logical conclusion in the late 19th century, economic orthodoxy has been traumatized from dealing about wealth and debt. So balance-sheet relationships are missing from the academic economics curriculum. That is why I stopped teaching economics in 1972, until the UMKC developed an alternative curriculum to the University of Chicago monetarism by focusing on debt creation and the recognition that bank loans create deposits, inverting the usual Austrian and other individualistic parallel universe theories.

UNSUSTAINABLE DEFICITS AND BOND BOYCOTTS: PANIC AT THE FED OR BACK TO FINANCIAL NORMALCY?
F. William Engdahl
http://www.globalresearch.ca/index.php?c...;aid=17788

The decision of the US Federal Reserve to raise its key interest rate was definitely not a sign of confidence in the US economic recovery or a signal that Fed policy is slowly returning to normal as claimed. It was rather a signal of panic over the weakness in US Government bond markets, the heart of the dollar financial system.

Financial markets have reacted with jubilation, by buying dollars and selling Euros, at the decision by the Fed to raise rates for the first time since 2006 for its so-called Discount Rate, going from 0.5% to 0.75%. The Discount Rate is the interest rate charged for banks to borrow from the central bank. At the same time the Fed left its more important short-term Fed Funds rate unchanged and historically low -- between 0.0% and 0.25%. In its official statement the Board of Governors said the rate move was intended to push private banks back into the private inter-bank borrowing market and away from reliance on Federal Reserve subsidized money which had been provided since the financial crisis began in August 2007.

The decision, in plain words, was framed so as to give the impression of a return to business as usual. At the same time, financial players like George Soros continue to speak openly about the fundamental weakness of the Euro. This has the effect of taking speculative pressure away from fundamentally worse economic and financial fundamentals within the dollar zone at the expense of the Euro. The reality is that the dollar world is anything but returning to normal.

Unsustainable deficits
The conservative President of the St. Louis Federal Reserve Bank, Thomas Hoenig recently warned in a little-reported speech that if the size of the Federal Budget deficit is not dramatically and urgently reduced, public debt will soon look like that of Italy or Greece, exceeding 100% of GDP. In a recent speech Hoenig noted, The fiscal projections for the United States are so stunning that, one way or another, reform will occur. Fiscal policy is on an unsustainable course. The US government must make adjustments in its spending and tax programs. It is that simple. If pre-emptive corrective action is not taken regarding the fiscal outlook, then the United States risks precipitating its own next crisis.

Translated into laymens language, that means savage cuts in Government spending at a time when real unemployment is running in the range of an unofficial 23% of the workforce, and the states are struggling to cut their own spending, as Federal dollars disappear.

In brief, the United States economy, though no one is willing to say so, is caught in a Third World-style debt trap. If the Government cuts the deficit, the economy sinks deeper into depression. But if it continues to print money and sell debt, buyers of US Treasury debt will at a certain point refuse to buy, meaning US interest rates could be forced severely high in the midst of depression conditionsequally catastrophic to the economy.

Bond boycott?
The second option, a boycott by buyers of US bonds, may have already begun. On February 11, the US Treasury held an auction of $16 billion worth of 30-year bonds and securities to finance its exploding deficits. In a little-reported feature of a sale which did not go well in terms of demand, foreign central banks reduced their share of purchases from a recent average of 43% of the total to a mere 28%. The largest foreign central bank buyers of US debt in recent years have been China and Japan. Secondly, it appears that the Federal Reserve itself was forced to buy the slack demand, some 24% of the total of bonds sold versus 5% only a month before.

The Federal deficit will reach an estimated $1.6 trillion in the current fiscal year that ends September 2010 and will continue next year and for at least another decade, above $1 trillion annually.

The situation will be further aggravated because the largest generation born after the Second World War, the so-called Baby Boom generation born between 1945-1966, has just begun retiring in huge numbers. That deprives the Federal Government of their Social Security tax revenues, which will now go from an asset in the Federal budget to a liability, as the Government must pay out their monthly retirement pensions. This will hugely aggravate the size of the deficits over the next decade and longer.

The highly-touted Clinton era Budget surplus was in reality not the result of anything done by Clinton or his Treasury Secretaries Robert Rubin and Larry Summers. Rather it was because of the deceptive practice of counting on the Social Security tax revenues from that generation as US Government surplus revenue during their peak earning years in the late 1990s. That tax inflow has now begun to turn into what will be a huge outflow over the next decade.

A new China syndrome
However, in the face of all this the White House seems to be implementing a series of foolish policies, with one action in direct contradiction to another. This is the case in terms of recent Washington behaviour towards China, the largest holder of US Government bonds, at least until this past month.

The Obama White House has recently approved punitive import tariffs on Chinese auto tires. Then it increased friction in relations with its largest creditor by announcing a provocative new arms sale of billions of dollars to Taiwan over strong Chinese protest. In addition, Secretary of State Hillary Clinton has meddled in internal Chinese Internet regulation by openly criticizing China for alleged censorship.

Then, as if to rub salt in a wound, despite further official Chinese protest, US President Obama officially met with the Dalai Lama in a Washington ceremony on February 18. Genuine concern for the well-being of Tibetan monks was not likely the reason. It was to signal heightened US pressure on China. Officially, to date, Beijing has reacted calmly, if firmly. Its real response, however, might be coming in a financial arena, not a political one, something that the ancient Chinese military philosopher, Sun Tzu, would have no doubt suggested.

It appears that the Chinese government has already begun to react to the ill-timed US pressures on China by boycotting US Treasury debt buying. In December the Chinese were net sellers of US Government bonds, selling more than $ 43 billion worth of US debt. Given its huge annual trade surplus from its export earnings, the National Bank of China currently holds reserves of foreign currencies and other assets, including gold, worth $ 2.4 trillion. At least 60% of that is believed to be in US Treasury and other Government-guaranteed debt, perhaps some $1.4 trillion. If China continues to dump US debt onto international financial markets, the dollar will plunge and a full panic will ensue in Wall Street and beyond.

To try to reverse this trend of boycotting US bond purchases by foreign central banks and others was likely the real reason that the Bernanke Fed now suddenly raised a key interest rate, despite the worsening of the domestic economy in real terms. They seem to be engaged in a colossal market game of bluff, trying to convince that the worst is over.

That Fed move, as well as recent hedge fund and Wall Street attacks on the Euro in the context of the Greek events, are looking more and more like covert economic warfare for the future survival of the US dollar as world reserve currency. As my latest book, Gods of Money: Wall Street and the Death of the American Century explains, US global power since 1945 has depended on having the dollar as undisputed world reserve currency and the US military as the worlds dominant power. If the dollar falls away, the over-extended military becomes vulnerable as well.

The Fed is in a desperate situation of trying to avert a full bond market selling panic that would trigger such a financial chain reaction collapse. This is why it raised one rate while leaving the more important Fed Funds rate at zero. Its a desperate bluff. So far the lemmings in the financial markets appear to have bought the trick. How long that will last is unclear.

As the Greek crisis is resolved and it becomes clear that the situation, however difficult, in Spain and Portugal and Italy are not about default, as their problems are no where near terminal, the prospects for the dollar and euro could change dramatically.

In this situation Chinas central bank holds major power to decide the possible outcome. One possible outcome of the growing global impasse is the prospect that the Peoples Bank of China will dramatically increase its purchases of gold and silver reserves. That, in turn, could serve China far better than buying more US debt, and serve as a basis to establish a future role of its currency in regional trade and international business independent of the dollar or the euro.

A golden opportunity
Chinas gold reserves until recently have been relatively low compared to the size of its reserves. Official Chinese central bank gold reserves were 1,054 tons as of March 2009, worth about $37 billion at today's prices. That represents a mere 1.5% of its total reserves, and that is itself up by 76% since 2003. On average, international central banks hold about 10% of their reserves in gold. The German Bundesbank holds some 3,400 tons of gold, the second largest after the US Federal Reserve. To even get to that 10% level, China would have to buy more than $200 billion worth - about two years' global mine output.

Silver is not a significant part of most countries' reserves, but China is historically an exception, since in Imperial times before 1900 it was on a silver standard rather a gold standard, and so retained substantial silver reserves. One aim of the 1840s British Opium Wars against China was to drain the Chinese state of its entire silver currency reserves to the advantage of the British gold standard.

In 2001 and 2002 China was a major seller of silver, selling a total of 100 million ounces at its then-price of less than $5 an ounce. Since then, it has stopped selling silver. Last September 2009, the Chinese government passed a decree encouraging Chinese savers to buy silver, explaining that buying silver was a good deal since the gold/silver price ratio at 70-to-1 was historically very high, offering them convenient small-value ingots with which to buy it, and prohibiting the export of silver from China.

This was almost certainly a move designed to dampen stock-market speculation and reduce money supply growth, since bank deposits converted into silver would effectively be sterilized. What's more, if the long-awaited Chinese banking crisis ever developed, the effect on the long-suffering Chinese public would be mitigated if people held substantial wealth in the form of readily negotiable silver ingots.

It's likely that China is now a very large buyer of silver, possibly even more than gold. Thus, a selloff in People's Bank of China holdings of US Treasuries could be offset by purchases of gold for its own account and of silver to supply to the Chinese public.

F. William Engdahl, author of Gods of Money: Wall Street and the Death of the American Century.

STIGLITZ NOBEL PRIZE-WINNING ECONOMIST, SAYS FEDERAL RESERVE SYSTEM 'CORRUPT'
Shahien Nasiripour

March 06, 2010 "Huffington Post" -- One of the world's leading economists said Wednesday that the very structure of the Federal Reserve system is so fraught with conflicts that it's "corrupt."

Nobel laureate Joseph Stiglitz, a former chief economist at the World Bank, said that if a country had applied for World Bank aid during his tenure, with a financial regulatory system similar to the Federal Reserve's -- in which regional Feds are partly governed by the very banks they're supposed to police -- it would have raised alarms.

"If we had seen a governance structure that corresponds to our Federal Reserve system, we would have been yelling and screaming and saying that country does not deserve any assistance, this is a corrupt governing structure," Stiglitz said during a conference on financial reform in New York. "It's time for us to reflect on our own structure today, and to say there are parts that can be improved."

Stiglitz made the remarks at a conference held by the Roosevelt Institute. He and other speakers, including Harvard Law Professor and federal bailout watchdog Elizabeth Warren and legendary investor George Soros, had bold ideas about reforming the nation's financial system.

After the conference, Stiglitz said that his remarks on the Fed were "maybe a little hyperbole," but then again made the case that if another country had presented a plan to reform its financial system, and included a regulatory regime that copied the makeup of the Federal Reserve system, "it would have been a big signal that something is wrong."

To Stiglitz, the core issue is that regional Fed banks, such as the New York Fed, have clear conflicts of interest -- a result of the banks being partly governed by a board of directors that includes officers of the very banks they're supposed to be overseeing.

The New York Fed, which was led by current Treasury Secretary Timothy Geithner during the time leading Wall Street firms like Citigroup, JPMorgan Chase, AIG, and Goldman Sachs were given hundreds of billions of dollars in taxpayer bailouts, presently has on its board of directors Jamie Dimon, the head of JPMorgan Chase. He's been there for three years. He replaced former Citigroup chairman Sanford "Sandy" Weill.

"So, these are the guys who appointed the guy who bailed them out," Stiglitz said. "Is that a conflict of interest?" he asked rhetorically.

"They would say, 'no conflict of interest, we were just doing our job,'" he answered. "But you have to look at the conflicts of interest."

A message left for a New York Fed spokeswoman after regular business hours was not returned.

"The reason you talk about governance is because in a democracy you want people to have confidence," Stiglitz said. "This is a structure that will undermine confidence in a democracy."

AMERICA's IMPENDING MASTER CLASS DICTATORSHIP

Stewart Dougherty
www.kitco.com

At certain times, focusing on the big picture is important not just for investment success, but for personal welfare, and even survival. We believe such times are here. It is estimated that 98% of Americans have never held a gold coin in their hands. Yet 100% of Americans regularly handle Federal Reserve Notes. From a contrarian standpoint, the financial message from those two statistics is clear. Even so, gold is much more than money or an investment medium; it stands for liberty and throughout history has facilitated escape and ensured freedom. Never having touched a gold coin is the monetary equivalent to never having breathed fresh air, felt the warmth of sunshine, looked up at the stars or risen from the gutter. Fiat Federal Reserve Notes are becoming nothing more than sewage decomposing in the vast, toxic septic tank of predatory Washington politics, epic Federal Reserve arrogance and error, blatant Wall Street fraud and outright Master Class plunder. Below, we outline America’s troubling and compounding predicament, and urge you to think about how to protect yourself from its consequences, both financially and personally.

Thanks to the endless barrage of feel-good propaganda that daily assaults the American mind, best epitomized a few months ago by the “green shoots,” everything’s-coming-up-roses propaganda touted by Federal Reserve Chairman Bernanke, the citizens have no idea how disastrous the country’s fiscal, monetary and economic problems truly are. Nor do they perceive the rapidly increasing risk of a totalitarian nightmare descending upon the American Republic.

One stark and sobering way to frame the crisis is this: if the United States government were to nationalize (in other words, steal) every penny of private wealth accumulated by America’s citizens since the nation’s founding 235 years ago, the government would remain totally bankrupt.

According to the Federal Reserve’s most recent report on wealth, America’s private net worth was $53.4 trillion as of September, 2009. But at the same time, America’s debt and unfunded liabilities totaled at least $120,000,000,000,000.00 ($120 trillion), or 225% of the citizens’ net worth. Even if the government expropriated every dollar of private wealth in the nation, it would still have a deficit of $66,600,000,000,000.00 ($66.6 trillion), equal to $214,286.00 for every man, woman and child in America and roughly 500% of GDP. If the government does not directly seize the nation’s private wealth, then it will require $389,610 from each and every citizen to balance the country’s books. State, county and municipal debts and deficits are additional, already elephantine in many states (e.g., California, Illinois, New Jersey and New York) and growing at an alarming rate nationwide. In addition to the federal government, dozens of states are already bankrupt and sinking deeper into the morass every day.

The government continues to dig a deeper and deeper fiscal grave in which to bury its citizens. This year, the federal deficit will total at least $1,600,000,000,000.00 ($1.6 trillion), which represents overspending of $4,383,561,600.00 ($4.38 billion) per day. (The deficit during October and November, 2009, the first two months of Fiscal Year 2010, totaled $296,700,000,000.00 ($297 billion), or $4,863,934,000.00 ($4.9 billion) per day, a record.) Using the GAAP accounting method (which is what corporations are required to use because it presents a far more accurate and honest picture of a company’s finances than the cash accounting method primarily and misleadingly used by the U.S. government), the nation’s fiscal year 2009 deficit was roughly $9,000,000,000,000.00 ($9 trillion), or $24,700,000,000.00 ($24.7 billion) per day, as calculated by brilliant and well-respected economist John Williams. (www.shadowstats.com) Fiscal Year 2010’s cash- and GAAP-accounting deficits will likely be worse than 2009’s, given government bailout and new program spending that is on steroids and psychotic.

Putting Fiscal Year 2009’s $9,000,000,000,000.00 ($9 trillion) deficit another way, 17% of America’s private wealth, accumulated over a period of 235 years, was wiped out by just one year’s worth of government deficit spending insanity.

Given this, is it any surprise that Treasury Secretary Geithner has announced that the release of the nation’s FY 2009 supplemental GAAP financial statements has been delayed? Remember, this is the same Secretary Geithner who bullied people to cover up the sordid details of the AIG, or more accurately, the taxpayer-funded, multi-billion dollar, Santa Claus bailout and bonus bonanza for Goldman Sachs. Do you really think this government, characterized as it is by fiscal and monetary secrecy, lies, chicanery, cronyism and stonewalling, wants the people to know what is actually happening? Obviously, it does not, so it hides from the public the inexcusable facts.

It is estimated that the top 1% of Americans control roughly 40% of the nation’s wealth. In other words, 3 million people own $21,400,000,000,000.00 ($21.4 trillion) in net private assets, while the other 305 million own the remaining $32,000,000,000,000.00 ($32 trillion). 77,000,000 (77 million) Americans (the lowest 25%) have mean net assets of minus $2,300 ($-2,300.00) per person; they live from paycheck to paycheck, or on public assistance. The lower 50% of Americans own mean net assets of $27,800 each, about enough to purchase a modest car. Obviously, it would be impossible to retire on such an amount without significant government or other assistance. Meanwhile, the richest 10% of Americans possess mean net assets of $3,976,000.00 each, or 143 times those of the bottom 50%; the top 2% control assets worth more than 1,500 times those in the bottom 50%. When you combine these facts with Wall Street’s typical multi-million dollar annual bonuses, you get an idea of wealth inequality in America. Historically, such extreme inequality has been a well-documented breeding ground for totalitarianism.

If the government decides to expropriate (steal) or commandeer (e.g., force into Treasuries) America’s private wealth in order to buy survival time, such a measure will be designed to destroy the common citizens, not the elite. Insiders will be given advance warning about any such plan, and will be able to transfer their money offshore or into financial vehicles immune from harm. Assuming that the elite moves its money to safety, there would then be $120,000,000,000,000.00 ($120 trillion) in American debt and liabilities supported by only $32,000,000,000,000.00 ($32 trillion) in private net worth, for a deficit of $88,000,000,000,000.00 ($88 trillion). In that case, each American would owe $285,714.29 to balance the country’s books. (Remember to multiply this amount by every person in your household, including any infant children.)

If the common people suspect that something diabolical was in the works, a portion of the $32 trillion in non-elite wealth could be evacuated as well prior to a government expropriation and/or currency devaluation, resulting in less money for the government to steal. What these statistics mean is that it is absolutely impossible for the government to fund its debt and deficits, even if it steals all of the nation’s private wealth. Therefore, the government’s only solutions are either formal bankruptcy (outright debt repudiation and the dismantling of bankrupt government programs) or unprecedented American monetary inflation and debt monetization. If the government chooses to inflate its way out of this fiscal catastrophe, the United States dollar will essentially become worthless. You can be absolutely certain that a PhD. in economics, such as Dr. Bernanke, is well aware of these realities, despite what he might say in speeches. For that matter, so are Chinese schoolchildren, who, when patronized by Treasury Secretary Geithner about America’s “strong dollar,” laughed in his face. One day, perhaps America’s school children will receive a real education so that they, too, will know when to laugh at absurd propaganda.

The government has announced that during the fiscal years from 2010 through 2019, it will create an additional $9,000,000,000,000.00 ($9 trillion) in deficits, an amount that is almost certain to be understated by trillions given the country’s current economic trajectory. The government assumes that this vast additional deficit will be funded by others, such as the Chinese, as it is a statistical fact that the United States will be incapable of funding it.

Furthermore, with the budgetary equivalent of a straight face, the Office of Management and Budget reports in its long-term, inter-generational budget projection that the United States government will experience massive, non-stop deficits for the next 70 (SEVENTY) years, requiring the issuance of tens of trillions of dollars of additional debt. The OMB does not project even one year of surplus during the entire seventy year budget period.

These deficits and debts are now so gargantuan that they have become surreal abstractions impossible even for sophisticated financiers to begin to comprehend. The common citizen has absolutely no idea what these numbers mean, or imply for his or her future. The people have been deluded into thinking that America’s arrogant, egomaniacal, always-wrong-but-never-in-doubt fiscal witch doctors and charlatans, including Greenspan, Rubin, Summers, Geithner and Ponce de Bernanke, have discovered a Monetary Fountain of Youth that endlessly spits up free money from the center of earth, in a geyser of good will toward the United States. Unfortunately, this delusion is false: there is no Monetary Fountain of Youth, and contrary to the apparent beliefs of the self-deified man-gods in Washington, D.C., the debt and deficits are real, completely out of control, and 100% guaranteed to create catastrophic consequences for the nation and its people.

When government “representatives” deliberately sell into slavery the citizens of a so-called free Republic, they have committed treason against those people. This is exactly what has happened in the United States: the citizens have been sold into debt slavery that they and their descendants can never escape, because the debts piled onto their backs can never, ever be paid. Despite expensive and sophisticated brainwashing campaigns emanating from Washington, claiming that America can “grow” out of its deficits and debt, it is arithmetically impossible for the country to do so. The government’s statements that it can dig the nation out of its fiscal hole by digging an even deeper chasm have become parodies and perversions of even totally discredited and morally disgusting Keynesianism.

The people no longer have elected representatives; they have elected traitors.

The enslavement of the American people has been orchestrated by a pernicious Master Class that has taken the United States by the throat. This Master Class is now choking the nation to death as it accelerates its master plan to plunder the people’s dwindling remaining assets. The Master Class comprises politicians, the Wall Street money elite, the Federal Reserve, high-end government (including military) officials, government lobbyists and their paymasters, military suppliers and media oligarchs. The interests and mindset of the Master Class are so totally divorced from those of the average American citizen that it is utterly tone deaf and blind to the justifiable rage sweeping the nation. Its guiding ethics of greed, plunder, power, control and violence are so alien to mainstream American culture and thought that the Master Class might as well be an enemy invader from Mars. But the Master Class here, it is real and it is laying waste to America. To the members of the Master Class, the people are not fellow-citizens; they are instruments of labor, servitude and profit. At first, the Master Class viewed the citizens as serfs; now that they have raped and destroyed the national economy, while in the process amassing unprecedented wealth and power for themselves, they see the people as nothing more than slaves.

America’s public finances are now so completely dysfunctional and chaotic that something far worse than debt enslavement and monetary implosion, terrible curses unto themselves, looms on the horizon: namely, a Master Class-sponsored American dictatorship.

Throughout history, the type of situation in which America now finds itself has been a fertility factory for tyranny. The odds of an outright overthrow of the people by the Washington and Wall Street Axis, or more broadly, the Master Class are increasing dramatically. The fact that so few people believe an American dictatorship is possible is exactly why it is becoming likely.

Dictatorships have blighted history and ruined lives since the beginning of civilization. In recent times alone, tyrants such as Hitler, Stalin, Lenin, Ceausescu, Amin, Hussein, Mussolini, Tojo, Kim, Pinochet, Milosevic, Tito, Batista, Peron, Pol Pot, Mugabe, Marcos, Somoza, Mengistu, Bokassa, Sese Seko, Franco, Ho Chi Minh, Mao, and Castro have power-sprayed blood onto the screen of time and ravaged mankind with murder, torture and human oppression. A full catalog of history’s tyrants would require a book of hundreds of pages. In the past 100 years alone, over 200 million human beings have been annihilated by wars, ethnic cleansings and government assassinations. Just when we think that civilization has been able to rise above tyranny’s inhumanity and disgrace, a new dictator appears on the scene to start the process all over again. Every time this happens, fear and submission paralyze the vast majority of the affected masses, leading them to “follow orders” and lick autocracy’s blood-stained boots.

History has proven to tyrants that oppression works. In fact, it is easy to control a populace, once you control the money, markets, military (including police), media and minions (the recipients of welfare, social security, free health care, government jobs and the like, who are dependent upon the state and likely to be compliant). This is exactly where the United States is today.

Recent American events paint an ominous picture of a Master Class that is now in total control.

When 90% of the American people vehemently rejected the $700,000,000,000.00 ($700 billion) TARP bailout plan, the Master Class put it on a fast track and approved it anyway.

When a clear majority of the American people said no to a government takeover of Chrysler and GM, the Master Class poured billions of taxpayer dollars into those corporate sinkholes and took them over anyway.

When the people said no to multi-trillion dollar crony bailouts for the bankers and insurers whose corruption had caused global financial mayhem, the government pledged to those elite insiders more than $13,000,000,000,000.00 ($13 trillion) of the people’s money anyway.

When the people expressed astonishment and anger that Wall Street planned to pay itself record 2009 bonuses, in the midst of America’s worst-ever fiscal and financial crisis caused by them, Wall Street stuffed its pockets with taxpayer-supported bonus money anyway.

When the people said no to a proposed $40,000,000,000.00 ($40 billion) bailout of AIG and its elite trading partners such as Goldman Sachs (an amount that subsequently exploded to $180,000,000,000.00+ ($180+ billion)), the Master Class went underground, covertly misappropriated taxpayer money and made the payoffs anyway.

When Fannie Mae and Freddie Mac were nationalized at enormous taxpayer expense, the government approved $6,000,000.00 individual pay packages in 2009 (150 times the average American wage) for the CEOs of both failed companies anyway.

When a clear majority of the people said no to nationalized health care, even after being bombarded by a multi-million dollar, lie-drenched propaganda campaign designed to bamboozle them, the House and Senate passed nationalized health care bills anyway.

When more than seven million American workers lost their jobs and were subsisting on unemployment benefits and food stamps, federal government employees, who now earn DOUBLE what private sector workers earn, were given another round of pay and benefits increases anyway.

When private sector workers’ 401Ks and IRA retirement plans plummeted in value due to economic collapse and endemic Wall Street-orchestrated market corruption (including systemic front running, flash trading, naked short selling and other manipulations), government “defined benefit,” lifetime-cost-of-living-adjusted pension plans, despite already being underfunded by $2,000,000,000,000.00 ($2 trillion), were made richer than ever anyway.

The long, shameful litany of events signaling the total divorce between the Master Class and the people of the United States doesn’t stop there. It goes on and on.

The message from the American Master Class to the American people is simple and clear:

We Defy You.

Governments that openly defy the people are either already totalitarian or in the process of becoming so. Monetarily, the United States clearly functions as a totalitarian dictatorship already, with a Federal Reserve that operates in secrecy, creates limitless amounts of debt and currency at will, and showers trillions of dollars upon favored Master Class insiders with zero transparency or accountability whatsoever. The Federal Reserve is so shameless about its dictatorial powers that it flatly refuses to provide details about multi-trillion dollar bailouts and rescues of privileged elites, in open defiance of Congress and the people. The fact that they get away with these blatant acts of defiance demonstrates the true extent of the Master Class chokehold on America.

If the Master Class were a benign despot and if its policies and programs actually worked, that would be one thing. But that is not the case. Rather, its programs are in a complete shambles.

Every single government entitlement program in the United States is bankrupt. This includes Social Security ($17,500,000,000,000.00 underfunded; $17.5 trillion); Medicare Part A ($36,700,000,000,000.00 underfunded; $36.7 trillion); Medicare Part B ($37,000,000,000,000.00 underfunded; $37 trillion); Medicare Part D ($15,600,000,000,000 underfunded; $15.6 trillion), Government and military pensions ($2,000,000,000,000 underfunded; $2 trillion), Food Stamps (current underfunding difficult to measure because the number of recipients is exploding; hundreds of billions underfunded versus original projections, minimum); and the list goes on. The above underfunding amounts are NET of projected tax receipts over the next 50 years. But the current recession has invalidated virtually all long-term budget and tax receipt assumptions, meaning that the true underfunded amounts are now greater than current, already mind-boggling estimates.

While the above statistics are terrifying enough to any citizen with a functioning brain, what is Twilight Zone-eerie and a far more serious cause for alarm is the casual indifference with which the Master Class is now making the country’s dire and irreparable fiscal circumstances even worse.

The nationalized health care program will cost at least $1 trillion over the next ten years, and most likely multiples of that. It is being crammed down America’s throat by a bankrupt government that does not have the money today and will not have the money tomorrow to pay for it. Worse is the fact that the same government that has bankrupted each and every existing social program now intends to directly or indirectly control the health care of all citizens. Based on the government’s existing track record and the health care program’s enormous complexity, invasiveness and cost, the probability that it will become a national fiscal and humanitarian catastrophe is roughly 100%.

“Cap and Trade” is a multi-trillion dollar tax scam being foisted onto the American public without a legitimate debate or popular referendum. You might be surprised to learn that “Climate Revenues” are already included in the federal budget, starting with $79,000,000,000.00 ($79 billion) in fiscal year 2012, which begins only 20 months from now. During fiscal years 2012 through 2019, the government expects to collect $646,000,000,000.00 ($646 billion) in “Climate Revenues,” a completely new tax category. Have any of your elected traitors told you that they have enacted $646,000,000,000.00 ($646 billion) in “Climate” taxes beginning twenty months from now and continuing forever? These “Climate Revenues” are based on junk science, lies and hysteria, and have been pimped by greed-diseased parasites who seek to make billions from operating and manipulating the Cap and Trade “marketplace.” Favored elitists such as Hank Paulson, Al Gore, General Electric and Goldman Sachs, among others, have positioned themselves to profit from the nation’s upcoming Cap and Trade tax misery and economic debilitation.

The reality is that the giant Ponzi scheme called the United States of America is running out of money. In any Ponzi scheme, money must constantly be poured into the top of the funnel in order to pay the redeemers at the bottom. As the number of redeemers has grown, tax receipts have fallen far short of covering their withdrawals, a problem that has now become an outright government funding emergency further aggravated by the fiscal, financial and economic crises.

If the Washington and Wall Street Axis were not legally able to create and distribute counterfeit American money, the Ponzi scheme would have collapsed already. Trillions of new, out-of-thin-air, printing-press and electronic “dollars” have bought the Axis additional time, but new sources of revenue must immediately be found to keep the scam alive. Congress is fully aware of this reality. Outright tax increases would be bad politics during a recession that is morphing into a depression, and also bad for 2010 re-election campaigns, so they cannot be implemented. Therefore, Congress continues to advance the health care and Cap and Trade agendas, which are nothing but taxation Trojan Horses festooned in righteousness and sanctimony, despite overwhelming popular opposition.

If the nationalized health care program is passed, revenues and fees will kick in immediately in 2010, whereas costs will not begin to accrue until 2012 and later. The government plans to spend the revenues immediately to forestall a total fiscal collapse. Nationalized health care has absolutely nothing to do with health care; it has to do with creating an immediate revenue stream to help fix the current government funding crisis. Similarly, Cap and Trade has nothing to do with fixing the environment. It, too, is nothing more than a massive tax increase similarly designed to address the government’s epic funding shortfall, with thick slices of pork thrown in for privileged insiders and deceitful propagandists like bloated “Father of the Internet” and now “Savior of the World” Al Gore.

The last thing the Master Class wants is for the people to understand the disastrous state of the nation’s finances. Master Class brainwashing tells the people that it is “negative” and “pessimistic” to look at the facts, despite the fact that psychological health is characterized by the ability to identify and deal with reality. The Master Class wants the people to put on Bozo the Clown happy faces and let sugar plums and green shoots dance in their brains as they write one check after another to pay for Cap and Trade, nationalized health care, and a mind-numbing assortment of other taxes and fees.

On Sunday night, November 30, 2009, North Korea’s dictator Kim Jong Il (a name that says it all, even better than Made-off’s), an international poster child of Master Class psychological illness, devalued his country’s currency by 99%. This vicious tyrant, who has given birth to a national hell on earth, is chauffeured in Mercedes Benz limousines, drinks the finest imported whiskies and dines in imperial dignity on foods prepared by personal chefs while his citizens starve to death on the streets or, at best, eke out a subsistence living. Kim became paranoid that the people were actually figuring out how to improve their pitiful, impoverished lives in tiny ways, so he decided to wipe them out. The people were given one week to exchange their money at a rate of 100 old Won for 1 new Won. Any lifetime family savings in excess of roughly $700.00 were simply confiscated by the North Korean government. To keep the people in line, the military and police were put on high alert, fully prepared to kill or arrest any protesters.

On January 9, 2010, Venezuela’s strong man Hugo Chavez devalued his country’s currency by 50%, overnight and without warning, causing immediate inflation, shortages of food and supplies, and general financial chaos throughout the nation.

While you might be shaking your head in pity over the plight of the citizens of North Korea and Venezuela, ask yourself this: could this not happen in the United States?

On April 5, 1933, President Franklin D. Roosevelt, an Obama hero, outlawed gold ownership overnight by signing Executive Order 6102, which gave the people three and one-half weeks to surrender all privately-owned bullion to the government for a price of $20.67 per ounce. On January 30, 1934, nine months after collecting the people’s gold, Roosevelt devalued the dollar 69% overnight, by raising the gold price from $20.67 to $35.00 per ounce.

Since its founding in 1913, the Federal Reserve has devalued the dollar by 98+% thanks to endless money printing and debt creation, a corrosive and impoverishing process that is now accelerating. In the past year, the Fed has engineered $20+ trillion in bailouts, subsidies and guarantees for well-connected and lucky scavengers and opportunists, an amount equal to roughly 40% of the total private wealth created in this country since its inception. All because a few elitist government man-gods with an almost perfect record of error and failure have deemed in their imperial wisdom that it shall be so. The citizens, whose hard-earned wealth is being systematically destroyed by this continual, government-decreed monetary debasement were never invited to the debate or given a say, which is par for the course for dictatorships. This massive de facto devaluation now hangs over the people’s wealth like a great monetary sword of Damocles.

Conceptually, whether it is a 50% overnight devaluation in Venezuela, a 69% overnight devaluation in the United States, a 98% devaluation in America over time, or a 99% overnight devaluation in North Korea, what is the difference? The fact is: there is no difference; monetary debasements are all the same. In each and every case, the people’s wealth is stolen via government edict, while the people stand by helplessly and in shock.

So one must ask: For whom does the bell toll? A foreign “them,” or a domestic us? Who is to say that you will not be told tomorrow morning that, effective immediately, in accordance with some perversely named mandate such as the “American Monetary Security, Wealth Preservation and Terrorism Prevention Act,” enacted by emergency for “the safety of the nation and the financial well being of the citizens,” all existing currency and bank balances will be redenominated in “New Dollars,” at a conversion rate of 1 new for every 100 old currency units? Would this not simply be another, almost predictable act of defiance toward the American people by the Master Class? And if that happened, do you honestly believe that the Master Class would not have been alerted in advance and allowed to make special preparations for itself ahead of the devaluation? Do you think they intend to go down in the same ship as the people they defy? If such a currency devaluation were announced, what could you do about it? March on Washington? But how would you get there if your money had been wiped out?

Despite what you may hear from State Media, which includes virtually all establishment news organizations, particularly financial ones (e.g., CNBC), America is on the precipice. No bankrupt nation in history has ever defended or preserved the freedoms of its citizens. In fact, it has been the exact opposite: in desperation, bankrupt governments have routinely plundered their citizens’ wealth and imposed totalitarian controls. What will make things different for the United States, the largest debtor nation in all of recorded civilization?

The United States government cannot ever, possibly pay its debts, is pathologically incapable of controlling its spending or curbing its hunger for both domestic and international empire and persistently refuses to tell the American people the truth. If America’s citizens were told the truth and given the benefit of true leadership, as opposed to the guile and dishonesty of an endless array of political liars and hacks, perhaps they could rally and defeat the problems that afflict them. But instead, they are fed by the Master Class a steady diet of narcotic propaganda that deludes, confuses and enervates them. The truth cannot set people free if it is never told, and that is the essence of America’s gathering tragedy.

In a future article, we will detail specific developments you should watch for to chart the course of America’s ominous and potentially deadly national storm. The current, grave situation is already a clear call to action. When the signals become even more urgent, it will be late in the game to take protective action, and possibly too late. Citizens should begin to prepare now not just for financial survival, but for the personal security of themselves and their loved ones should a Category 5 economic and political hurricane rip into the nation, something that becomes more likely every day.

With respect to personal finances, in virtually every national currency devaluation and major political upheaval in the past, gold has represented sanctuary for the affected people. Gold has not just preserved wealth, but personal freedom as well. While governments can devalue fiat currencies, they cannot, by edict, devalue gold. Yes, they can try to manipulate its price, but unless all governments join in the collusion, ultimately the price will return to market. The market for gold is global, and demand exists in all nations and among all peoples. Should the government attempt to confiscate gold, it will be an outright admission that the financial system is collapsing, and the people will know better than to hand over to a corrupt government their only means of survival. The most important point is this: devalued currencies never rise again. Once they are destroyed, they are gone forever, and those whose wealth had once been denominated in them are wiped out. As you have no doubt heard before, not one fiat currency has survived over time, and that is an indisputable fact. More significantly, no fiat currency has ever suffered the abuse that has been inflicted upon the United States dollar, meaning that it is at extreme risk. Gold has been money for 5,000 years. It has not merely survived, it has prevailed over each and every fiat currency collapse throughout history. Given this, the most important financial question a person can ask him- or herself today is: How is my wealth denominated at this time? And given its denomination, is my wealth likely to be safe in current and evolving circumstances?

One thing is certain: as the epic David and Goliath monetary battle unfolds, between the people fighting to defend their hard-earned wealth on one side, and a Master Class that greedily and pathologically wants to plunder them on the other, the price of gold will become extremely volatile for a period of time. Volatility will, in fact, tell you that the War on Wealth has officially been declared, and will be your signal to do whatever you must to protect what is yours. As the government Goliath and its Master Class allies short tonnes of bullion into rigged futures markets in a desperate attempt to make gold look dangerous and risky, the Davids will be coming forth not just in the United States but from all corners of the globe, buying 10 grams here and one ounce there. There are 6.8 billion Davids, versus one diseased Master Class that numbers in the small millions. There is no way the Master Class can defeat the people, if the people finally rise up and say “No More of Your Plunder. No More of Your Cold and Soulless Financial Oppression. No More of Your Cynical and Godless Exploitation.”

If you find the above argument compelling, you should consider how to protect yourself from Executive Orders that could be issued at any time, under any pretext, and that could be extremely hostile to your financial and/or personal health and well being. One simple way to start is to purchase one ounce of gold for yourself and each member of your household, and much more if you can afford it. That is not financial advice; it is merely the common sense generously communicated to you by history.

Stewart Dougherty

Stewart Dougherty is a specialist in inferential analysis, the practice of identifying historic and contemporary patterns and then extrapolating their likely effects upon the future. Dougherty was educated at Tufts University (B.A., magna cum laude), and Harvard Business School (M.B.A. and an academic Fellow). He can be reached at stewartdougherty@cs.com. He is not affiliated with or compensated by those he references or recommends. He does not offer investment or trading advice, and nothing in this article should be construed as such. This article represents the author’s personal opinions, and nothing more. The reader has the author’s permission to share, print, forward or post this article provided that the content is not changed and the author is acknowledged.

Copyright 2010 by Stewart Dougherty, with all rights reserved.

FEDERAL RESERVE & BANKERS FRAUD AND THEIR "INVISIBLE GOVERNMENT"

http://www.theliberationstation.com/lawf...-blog.html
http://ecclesia.org/truth/reserve.html
http://www.healthfreedom.info/Federal_Reserve_Fraud.htm

The Federal Reserve Fraud and the "Invisible Government"

1. IS THE FEDERAL RESERVE BANK REALLY "FEDERAL"? NO!

2. IF THIS IS TRUE WHY HAVEN'T I HEARD ABOUT THIS?

3. HOW DOES THIS AFFECT ME?

4. HOW DID ALL OF THIS GET STARTED?

5. REAL LAWFUL MONEY IS GOLD & SILVER COIN

6. MARK OF THE BEAST OR RELIGIOUS MANIPULATION?

7. WHAT CAN I DO ABOUT IT?

8. FINANCIAL HEALTH OF THE NATION (PART ONE): The Federal Reserve Bailouts

9. FINANCIAL HEALTH OF THE NATION (PART TWO): Is there Gold in Fort Knox?

10. FINANCIAL HEALTH OF THE NATION (PART THREE): The Bilderberg Group

11. Federal Reserve Fraud by Andy Naylor

12. Title 12 Chapter 3 Subchapter XII, USC 411: Private Federal Reserve Notes are redeemable for “lawful money at the US Treasury”!

13. Bundesbank & Others Openly Admin Their Bankers Fraud on Their Websites


Video information on the Private Federal Reserve and IRS http://www.healthfreedom.info/Freedom_To_Fascism.htm

"No State shall make any Thing but gold and silver Coin a Tender in Payment of Debts." --- Article 1, Section 10, Unites States' Constitution

In 1913 when the Federal Reserve Act was fraudulently pushed through Congress, Congressman Charles Lindbergh stated: "This Act establishes the most gigantic trust on earth....When the President signs this Act, the invisible government by the money power, proven to exist by the Money Trust Investigation, will be legalized....The new law will create inflation whenever the trust wants inflation....From now on, depression will be scientifically created."

1. IS THE FEDERAL RESERVE BANK REALLY "FEDERAL"?

Most people assume that the Federal Reserve Bank is federal--that is, part of the Unites States' government. However, the Ninth Circuit Court put that issue to rest in 1982 when they adjudicated:

"We have in this country one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board and the Federal Reserve Banks. Some people think the Federal Reserve Banks are U.S. government institutions. They are not government institutions. They are private credit monopolies; domestic swindlers, rich and predatory money lenders which prey upon the people of the Unites States for the benefit of themselves and their foreign customers. The Federal Reserve Banks are the agents of the foreign central banks. The truth is the Federal Reserve Board has usurped the Government of the Unites States by the arrogant credit monopoly which operates the Federal Reserve Board." [Congressman Louis T. McFadden, Chairman of the House Banking & Currency Committee, speech on the floor of the House of Representatives, June 10, 1932]

"In the Unites States we have, in effect, two governments....We have the duly constituted Government....Then we have an independent, uncontrolled and uncoordinated government in the Federal Reserve System, operating the money powers which are reserved to Congress by the Constitution." [Congressman Wright Patman, Chairman of the House Banking & Currency Committee, speech on the House floor, 1967]

"Most Americans have no real understanding of the operation of the international money lenders....The accounts of the Federal Reserve System have never been audited. It operates outside the control of Congress and....manipulates the credit of the Unites States." [Senator Barry Goldwater]

"Examining the organization and function of the Federal Reserve Banks, and applying the relevant factors, we conclude that the Reserve Banks are not federal instrumentalities for purposes of the FTCA, but are independent, privately-owned and locally controlled corporations." [Lewis vs. U.S., 680 F. 2d 1239, 1241]

"Federal Reserve Notes are illegal" [US Congressman Dr. Ron Paul]

2. IF THIS IS TRUE WHY HAVEN'T I HEARD ABOUT THIS?

Basically, it is because the international bankers, having unlimited funds, own and control the mainstream media. "These international bankers and Rockefeller-Standard Oil interests control the majority of newspapers and the columns of these papers to club into submission or drive out of public office officials who refuse to do the bidding of the powerful corrupt cliques which compose the invisible government." [Teddy Roosevelt]

We also have to ask ourselves why we were not taught the truth about the Federal Reserve in school. Click on the following video link to hear the testimony of Norman Dodd, head of the congressional committee that investigated the Rockefeller, Carnegie and Ford foundations and their intent to control education:

http://video.google.com/videoplay?docid=...orman+dodd

3. HOW DOES THIS AFFECT ME?

Congress initially defined a lawful money "dollar" as being and consisting of (at least) 371.25 grains of pure silver. Before 1965 anyone could exchange one paper dollar for one real silver dollar. However, in 1965 the Unites States' mint stopped minting silver dollars. When this occurred inflation began to skyrocket. Now it takes a whole fist full of paper dollars (i.e., "Federal Reserve Notes") to buy one real silver dollar. It now takes two working parents to support a family and the national debt is shooting over 13 trillion dollars! And this is not even counting the private debt by individuals and corporations, which is somewhere over 50 trillion dollars. And then add to it the debts of the rest of the World’s governments and corporations, all indebted to the Bankers who created this money as ledger money. Get the picture?

The paper and digital currency that bankers create out of thin air is backed by nothing. The more paper "dollars" they roll off the printing presses or digital "dollars" created by computers, the less each one is worth. Therefore, it takes more of 'em to buy the things we need, so the price of everything has to go up and up and up in endless inflation. Unfortunately, wages for most people will not increase fast enough to stay ahead of the game. But not to worry, the international banksters have created plastic "credit cards" to help you out (heh, heh, heh). Of course, they don't bother to tell us that they do not create enough paper/digital currency to pay off the debt plus interest so mathematically the economy will eventually collapse as has always occurred in history with paper currencies.

The exponential function arises whenever a quantity grows or decays at a rate proportional to its current value. One such situation is continuously compounded interest, and in fact it was this that led Jacob Bernoulli in 1683[3] to the number known as e (e=2.718281828). Later, in 1697, Johann Bernoulli studied the calculus of the exponential function.[3]

If a principal amount of 1 earns interest at an annual rate of x compounded monthly, then the interest earned each month is x/12 times the current value, so each month the total value is multiplied by (1+x/12), and the value at the end of the year is (1+x/12)12. If instead interest is compounded daily, this becomes (1+x/365)365. Letting the number of time intervals per year grow without bound leads to the limit definition of the exponential function, e to the power of x, where x is the annual rate of usury, first given by Euler.[4] This is one of a number of characterizations of the exponential function; others involve series or differential equations.

4. HOW DID ALL OF THIS GET STARTED?

Briefly, the Federal Reserve system was created by international banking families such as the Rothschilds, Warburgs and Rockefellers. This international banking cartel creates "money" out of thin air. It only costs them a few cents to print each Federal Reserve Note "dollar bill", and then they "bill" the American people for the full face value of the note. Then to add insult to injury, they charge us interest to borrow their so-called "money". If you or I did this, we would be arrested for counterfeiting and fraud. This system was instituted gradually, starting with the Civil War and culminating with the fraudulent passage of the Federal Reserve Act in 1913.

The passage of the Federal Reserve Act was unconstitutional because 1) the US Constitution prohibited "bills of credit" (i.e., paper notes) and 2) the US Constitution would have to be amended to go off the silver and gold coin standard for money. The US Constitution, the supreme Law of the Land, can only be amended pursuant to Article V. The US Constitution cannot be amended by statute. These unlawful actions by a criminal Congress remind me of a quote by the honorable Alfred E. Neuman of Mad Magazine fame: "America is that land which fought for freedom and then passed laws to get rid of it."

The Federal Reserve is also a monopoly--in a country where monopolies are supposed to be illegal. The IRS deposits people's income tax checks directly in the Federal Reserve banks--not in the Unites States Treasury. Therefore, the IRS, an unconstitutional entity, is merely the collection agency for the international banksters. Over the years the IRS has become a tool of the elite banking families to financially attack and/or imprison people who expose the Federal Reserve. It is also a tool used by the D.C. elite to attack people who expose government corruption.

If you take out a paper dollar and look at it, you will notice that it states at the top of the "bill": "FEDERAL RESERVE NOTE". A "note" is, by definition, an "instrument of debt" and "evidence of debt". According to BLACK'S LAW DICTIONARY (Sixth Ed.) "MONEY" is defined: "In usual and ordinary acceptation it means coins and paper currency used as circulating medium of exchange, and does not embrace notes, bonds, evidences of debt, or other personal or real estate." Now this may come as a shock to some people, but those paper "Federal Reserve Notes" are not money and they are not dollars. Federal Reserve Notes are merely IOUs. There is nothing backing these "bills" except debt. However, people (voluntarily) use them as [instead of] money and as dollars. The key word is "as". (The smallest words can have the biggest meanings.)

Banks can create this phony "currency" out of thin air. Banks can loan out "currency" that they don't even have. When you apply for a loan from a bank, the bank does not have anything to back up that loan because they are allowed to loan out about seven to ten times more "currency" than they have on deposit. This is not mere speculation; this is a matter of court record, testimony under Oath, by a former lawyer for the Federal Reserve. In other words bankers create "currency" with just the stroke of a pen or the keystroke of a computer. These bankers then charge you "interest" to borrow this "currency", which is nothing more than some numbers typed on a piece of paper! If We the People ever did this we would be spending many years in a federal prison. Unfortunately, they do not print enough currency to pay the interest so more pseudo-dollars must be borrowed to pay off the interest, resulting in a unpayable, ever-increasing debt.

This fraudulent "currency" system benefits not only bankers, but lawyers as well. As I have demonstrated in Whitman County, Washington, lawyers (members of the Bar Association) serve the Federal Reserve international banksters, not We the People. The documentation that I have thus far accumulated reveals that Bar Association prosecutors and judges, and even the Attorney General and Governor (also Bar Association members), are co-conspirators with bankers to unlawfully attack and imprison people for bringing up the REAL MONEY issue. The evidence clearly indicates that there is a nationwide criminal conspiracy of bankers and lawyers to overthrow the Unites States of America. CLICK HERE to learn more about this criminal conspiracy.

5. REAL MONEY IS GOLD & SILVER COIN

Article I, Section 10 of the Unites States' Constitution states: "No State shall...make any Thing but gold and silver Coin a Tender in Payment of Debts." The Unites States' Constitution is the Supreme Law of the Land and this Law has never been amended.

Article I, Section 8 states: "The Congress shall have Power...to coin Money". Notice that it states "coin" not "print". Anyone who reads James Madison's notes of the Constitutional Convention, The Federalist Papers, etc. will find that one of the purposes of the Constitutional Convention was to do away with paper money--entirely! Thus for the first 72 years from the founding of our nation the Unites States' Government only minted gold and silver COINS for money.

"It is apparent from the whole context of the Constitution as well as the history of the times which gave birth to it, that it was the purpose of the Convention to establish a currency consisting of the precious metals. These were adopted by a permanent rule excluding the use of a perishable medium of exchange, such as of certain agricultural commodities recognized by the statutes of some States as tender for debts, or the still more pernicious expedient of paper currency." [President Andrew Jackson, 8th Annual Message to Congress, December 5, 1836]

"The Central Bank is an institution of the most deadly hostility existing against the principles and form of our Constitution. I am an enemy to all banks, discounting bills or notes for anything but coin. If the American people allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered." [Thomas Jefferson]

The nightmare that Thomas Jefferson predicted became painfully real during the Great Depression when the international banksters caused the foreclosure of untold numbers of homes, farms and businesses. As the national debt moves exponentially upwards, it appears that we are heading for another economic upheaval. CLICK HERE for an update on the economy.

6. MARK OF THE BEAST OR RELIGIOUS MANIPULATION?

Anyone can obtain an official letter from the Social Security Administration stating that the IRS has jurisdiction over the Social Security Administration. The IRS is merely a corporation used to turn over the labor and possessions of Americans to the international bankers who own the Federal Reserve. The corporation known as the Social Security Administration is not even based in Washington, DC. It is based in Baltimore, Maryland and it does not even have government franking privileges.

Currently, in the Unites States you cannot get a job, bank account, insurance, driver's license, hunting or fishing license without a Social Security Number. In other words, you cannot make a living, travel, buy or sell without this number. Chapter 13 of Revelations states that the Mark of the Beast is a number without which one cannot buy or sell. Is this the "mark of the beast" or religious manipulation on the part of the powers that be?

During the Constitutional Convention the delegates used the words "emit bills of credit" to refer to the issuance of paper (debt-based) currency. The framers of the Constitution were so adamant about prohibiting the printing of paper currency that one of the delegates, George Reed of Delaware, exclaimed that if they put the words "emit bills of credit" in the Constitution it would be "as alarming as the mark of the beast in Revelation!"

CLICK HERE for more information on this subject in the article entitled "Mark of the Beast by the American Bar Association?"

7. WHAT CAN I DO ABOUT IT?

1. GET EDUCATED: The first thing anyone can do and should do is to educate oneself on the subject. The book ECONOMIC SOLUTIONS is a good place to start. Another source is A PLEA FOR THE CONSTITUTION OF THE UNITES STATES by George Bancroft. Another highly-recommended book on the subject of the Federal Reserve is THE CREATURE FROM JEKYLL ISLAND by G. Edward Griffin.

2. There are some great videos that educate people about the Federal Reserve Fraud and the international bankers plan for a cashless society. Many people today would rather watch a movie than read a book. CLICK HERE for free video documentation of the Federal Reserve Fraud and other related subjects.

3. Start using US-minted coins as much as you can to buy goods and services because they are not part of the Federal Reserve system. Nickel-Copper coins are okay but gold and silver coins are much better. Remember what Andrew Williams, a spokesman for the Federal Reserve in Washington, D.C. said about Federal Reserve notes:

"There is no law that says goods and services must be paid for with Federal Reserve notes. Parties entering into a transaction can establish any medium of exchange that is agreed upon."

"In a time of universal deceit, telling the truth becomes a revolutionary act." George Orwell

The author of the above article was Lanny Messinger, the original webmaster for this website, who is now retired.

8. FINANCIAL HEALTH OF THE NATION (PART ONE): The Federal Reserve Bailouts

9. FINANCIAL HEALTH OF THE NATION (PART TWO): Is there Gold in Fort Knox?

10.FINANCIAL HEALTH OF THE NATION (PART THREE): The Bilderberg Group

http://www.HealthFreedom.info.
11.Federal Reserve Fraud

Andy Naylor

The purpose of this application report is to describe the problems with The Federal Reserve and the money system and explain why I think these are problems today. I think this is important because it has to do with everyone in the Unites States. I will examine the perspectives of three economists, and analyze my findings. In this report I hope to accomplish proving how the American public was lied to and robbed of their gold and silver supply.

My first economist is Tom Rose. He is a retired professor of economics from Grove City College, Pennsylvania. He is author of seven books and hundreds of articles dealing with economic and political issues.

My second economist is Steven Jacobson, author of the audiotape series Mind Wars.

My third economist is Alan Greenspan, Chairman of the Board of Governors of the Federal Reserve System and Chairman of the Federal Open Market Committee.

Alan Greenspan, at the annual Dinner and Francis Boyer Lecture of The American Enterprise Institute for Public Policy Research on December 5, 1996 stated, "Augmenting concerns about the Federal Reserve is the perception that we are a secretive organization, operating behind closed doors, not always in the interests of the nation as a whole. This is regrettable, and we continuously strive to alter this misperception."

My research and findings will show otherwise. I will show how the Federal Reserve has confused the public, lied to them and stole their gold and silver.

In a letter to Thomas Jefferson in 1787, John Adams wrote: "All the perplexities, confusion, and distress in America arise, not from defects of the Constitution, not from want of honor or virtue, so much as from downright ignorance of the nature of coin, credit and circulation."

It was Daniel Webster who said; "Of all the contrivances devised for cheating the laboring classes of mankind, none has been more effective than that which deludes him with paper money."

Garet Garrett, in writing about the Federal Reserve System and World War I, said:

...after many years of blundering toward it, and only a few months before the beginning of the war in Europe (WWI), we had found the formula for the most efficient credit machine that was ever invented. This was the Federal Reserve System. Most people are unsure of the meanings of words such as money, dollar, wealth, inflation and credit. The average person would be very surprised if they knew how the money system used to work compared to how it operates now.

According to Jacobson, The essence of psychological warfare is to confuse the meaning of words, and infiltrate the mind with conflicting concepts. Jacobson goes on to say that the use of the word Federal in the name federal Reserve leads the public to believe that the Federal Reserve is a government institution, when it is really a private corporation owned by foreign and domestic banks and operated for profit. The FED controls nation's money supply and interest rates, and there by manipulates the entire economy, in violation of Article 1, Section 8 of the Unites States Constitution that expressly charges Congress with power to coin money and regulate the value thereof. Article 1, Section 10 of the constitution says: No State shall make any thing but gold and silver Coin a Tender in payment of Debts.

Federal Express and Federal Ammunition Company both have the word federal in them but the public knows about them, they know they are not government agencies because they are not misled about the companies.

Over time, gold and silver coins were removed from our money supply and removed as backing for our paper currency and replaced with debt (or credit). Credit is only in our minds. It is an idea, not a thing. It is expressed by bookkeeping entries and computer symbols.

According to Jacobson, "The manipulation of words and their meaning is the key to controlling what people think. Traditional definitions are eliminated while new meanings are repeated over and over again until accepted."

The definition of dollar has changed to hide the fact that a dollar is not money, but a unit of measurement for gold and silver coin. Title 12 Unites States Code Section 152 says: "The terms lawful money or lawful money of the Unites States shall be construed to mean gold or silver coin of the United Sates." Title 31 Unites States Code, Section 5101 says: "The money of account of the Unites States shall be expressed in dollars."

Hundreds of years ago people would pay the local goldsmith to store their gold for them in his vault. He would then give them a receipt for the amount of gold that was stored. The receipt was not money, it was a money substitute. It was later common for people to use the receipts as payment for goods and services since they could be exchanged for the gold held in the vault at any time.

The goldsmith found out that only a small amount of the gold was ever claimed since people just kept exchanging the receipts. The goldsmith started writing receipts for more gold than he had, using some of the receipts to buy things and loaning the rest at interest, while taking title to real property as collateral. The gold for these extra receipts did not exist. By adding to the amount of receipts in circulation, the goldsmith stole from the people with the real receipts and decreased the value of the real gold receipts by creating inflation. The more of something there is, the less it is worth and more it takes to trade it for something else. Paper currency is a money substitute, it is not money. It is only valid when the number of paper currency equals the amount of real money that it is a substitute for. By manipulating the number of receipts in circulation, the goldsmith stole the wealth of the town without anyone figuring it out. By lowering the number of receipts, he could make money scare, creating a depression where he could foreclose on the property and magnify his riches. He could then quicken economic activity and bring abundance by raising the number of receipts until his next rip off.

America's economic problems started with issuing fraudulent receipts for gold that does not exist. This became standard procedure for the banking business.

The recent equivalent to the goldsmith's receipt for gold is the Federal Reserve Note. The word "Federal" implies Federal government, but the Federal Reserve is a privately owned corporation. The word "Reserve" implies that something gives the paper receipt value, but no gold or silver backs this paper. The word "Note" implies a contract, because legally a note must state who is paying, what is being paid, to whom and when.

Most people say something like, "I have a dollar bill". But what is a bill? A bill is a receipt of a debt owed by one person or company to another. Therefore, a "dollar bill" is a receipt (or bill) of debt of one dollar that is owed.

According to Jacobson, from 1914 to 1963, Federal Reserve Notes never claimed to be money, nor did they claim to be dollars. A note for five dollars read: "The Unites States of America will pay to the bearer on demand five dollars." How can a promise to pay five dollars be five dollars? To the left of the President's picture and above the bank seal, it said: "This note is legal tender for all debts public and private, and is redeemable in lawful money at the Unites States Treasury or at any Federal Reserve Bank." In 1963 the FED began to issue its first series of notes without the promise, while taking notes with the promise out of circulation. How can paper become what it promises by removing the promise? To the left of the President's picture and above the bank seal, it now read: "This note is legal tender for all debts public and private." A note is an IOU, it is proof of debt. It is not possible to pay off a debt with a debt. No debt can be paid in full unless paid in gold or silver, coined and regulated in value by Congress. The name "Federal Reserve Note" is a fraudulent label since each word claims to be something that in reality it is not. By removing the promise to redeem the note in lawful money, the Federal Government in cooperation with the Federal Reserve, eliminated the monetary system of the Unites States as established by the Constitution and replaced it with something totally different.

If you are holding a one dollar Federal Reserve Note, the question is, what is it one dollar of? The answer is absolutely nothing. The number one measures no substance. The only thing that gives paper money value is the confidence people have in it as is stated in chapter 30 of our textbook. Federal Reserve Notes are only accepted because people believe they have value. If the truth were ever found out, it would cause financial chaos because people would know they have no value.

There are only two economic systems. They are barter and credit. Barter is the trading of one thing of value for something else of value. A money system using gold and silver coin is a barter system. Throughout history, many different things have been used for bartering because money, in and of itself, does not exist. Something must be used as money. People have traded for goods and services using farm animals, large rocks, shells and crops.

Gold and silver have been used as money worldwide for thousands of years. All things used as money have had one thing in common, they were all tangible wealth. They were all things you could touch. They were all things you could weigh and measure. Credit, however, is intangible. You cannot touch credit. You cannot weigh and measure it because there is no substance to weigh and measure. It is all imagination, vaporware!

Credit is not wealth. No work is used in the creation of credit other than a bookkeeping entry. Hundreds of years ago, when the goldsmith issued his first receipt for gold that did not exist, he created credit and inflation, because credit and inflation are the same thing. They are both receipts for capital that does not exist. They are both an imaginary unit of exchange. When half of the receipts circulating as a money substitute are redeemable in gold, the other half of the receipts are both credit and inflation. When none of the receipts are redeemable, all of it is credit and inflation. Credit is inflation, therefore, the only cure for inflation is real, honest money.

A twenty dollar gold coin is twice as large, and twice as heavy as a ten dollar gold coin. A dollar is a unit of measurement for gold and silver coin to insure uniform weight, purity, and value. A dollar unit of paper money that is not redeemable in gold or silver coin is a dollar unit of inflation, which is a dollar unit of credit, which is a dollar unit of nothing.

The purpose of paper money that is not redeemable for gold or silver coin is to get things without paying for them. Those who issue and control paper money as credit get everything for nothing. The cost to the Federal Reserve for printing a "note" is about two cents, no matter what denomination is printed on it. Paper money as credit is used to take wealth using numbers where numbers of nothing are exchanged for things of substance and value. This grand theft occurs in full view unnoticed because the public has been made an accessory to the crime by accepting pieces of paper with numbers on them in place of lawful money, not knowing the difference between worthless "notes" and lawful money.

Oliver Ellsworth, the countries third Chief Justice of the Supreme Court said of paper money: "This is a favorable moment to shut and bar the door against paper money. The mischief of the various experiments which have been made are now fresh in the public mind and have excited the disgust of the respectable parts of America."

Roger Sherman, a delegate from Connecticut and author of the gold and silver coin provision of the constitution, wrote a condemnation of paper money entitled “A caveat Against Injustice” in which he said..."If what is used as a Medium of Exchange is fluctuating in its value it is no better than unjust weights and measures, both which are condemned by the laws of God and Man, and therefore the longest and most universal Custom could never make the Use of such a Medium either lawful or reasonable."

And so the framers of the Constitution specified a money system of gold and silver, to be coined and regulated in value by Congress and prohibited by the government from issuing paper money as stated in Article 1 sections 8 and 10 of the Constitution: "Congress shall have Power to coin money and regulate the value thereof. No State shall make any thing but gold and silver Coin a Tender in Payment of Debts."

When Congress passed the Federal Reserve Act on December 23, 1913. Congressman Charles A. Lindbergh, Sr., father of the famous airman, told Congress after the vote, "When the President signs this act, the invisible government by the money power will be legalized." President Woodrow Wilson signed the act into law, turning over the money system of the country to a group of private bankers and allowed them to create money by making bookkeeping entries, loan it at interest, and take title to real property as collateral. Because of this, the citizens of the Unites States have lost control over their money system and their government. The banking system operates the same as the goldsmith that deceitfully issued receipts for more gold than was on deposit.

According to Jacobson, Federal Reserve Notes are evidence of debt the U.S. Government owes to the owners of the Federal Reserve the payment of which is guaranteed by the collateral of all property and income of all U.S. citizens. When the U.S. Government needs to borrow money, the Treasury creates a bond, and promises to pay a specified amount of money at a specified interest on a specified date. This bond is evidence of debt just as an. I.O.U. is evidence of debt. This interest-bearing debt is the foundation for this nation's money supply and its payment is guaranteed by the collateral of all property and income of all U.S. citizens. The Federal Reserve "buys" this debt simply by making a bookkeeping entry for the amount and writing a check against no funds, and then converts it into paper currency and checkbook money.

The U.S. Bureau of Engraving prints the paper currency in whatever denominations ordered by the Federal Reserve and charges about two cents for each note, regardless of the denominations, which the Federal Reserve "pays for" by making another bookkeeping entry and writing another bad check. In effect the Federal Reserve lends the U. S. Government its own credit, our credit, and then charges interest on it. If the public does this, it is called kiting, which according to Webster's dictionary is defined as, "to use (a bad check) to get credit or money".

If a citizen does this they can be jailed or fined for it.

Every dollar created by the Federal Reserve System is debt for the citizens of the Unites States, which the central bank collects interest on, in addition to the interest from the bond created by the Treasury that put this magic money making machine in motion. The Federal Reserve inflates the amount of the bond in order to make even more loans of imaginary dollars and collect more interest on an investment that cost nothing. Under fractional reserve banking, the amount of money a bank can create is limited by the reserve ratio or fraction it is required to maintain. For example, when the reserve ratio is ten to one, a bank can create and loan ten dollars for each dollar held in reserve and charge interest on it. While the reserves of the goldsmith were gold, the reserves of the Federal Reserve is paper, nothing more than bookkeeping entries that are a record of debt.

The absurdity of the situation is that if there were no debts, there would be no money, since every dollar of paper currency and checkbook money is loaned into circulation. And, in order to pay the interest, there has to be another loan because the banking system only creates the principal and not the interest. In fact, the interest can never be paid because it is not possible to return to the bank more dollars than were created, making it inevitable that the Federal Reserve Banking System acquire title to all wealth in the nation. This is exactly what the Framers of the Constitution intended to prevent when they specified a money system of gold and silver coin and prohibited the government from issuing paper money, because a nation that uses money based on debt can never be free of debt.

Increasing the amount of currency and checkbook money increases inflation. Creating new dollars reduces the value of all dollars, resulting in higher prices. By manipulating the quantity of created dollars, the purchasing power of every dollar is altered. Depressions are the result of private bankers reducing the money supply by tightening credit and withdrawing currency, causing a drop in prices, unemployment and foreclosure of property. This is premeditated theft.

Thomas Jefferson warned against private banks when he said: "If the American people ever allow private banks to control the issue of their currency, first by inflation and then by deflation, the banks and corporation that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers conquered."

By calling gold and silver "money", and then calling Federal Reserve Notes "money", the two blended together in the public's minds so that over time the difference between them was erased from the people's memories. A promise to pay money substituted for lawful money until the promise was removed. Exchanging paper currency is not a complete transaction until payment is made in gold or silver coin. Until then, it is both credit and debt a record of a specific amount of money to be paid or received.

Credit, a deferred payment and debt, a sum of money due, are the same thing. It is hidden by deceptive double-entry bookkeeping where a debt becomes an asset by calling it a credit. Paper money that redeems nothing only appears to have value because it can be exchanged for things of value. When a piece of paper representing debt is exchanged for wealth, someone has been robbed. Paper money transfers wealth from one person, then from another, then from another, and on and on until the last person will be stuck with it.

During the Great Depression people who had gold in the banks wanted the banks to honor their contract to redeem the paper currency for gold.. The fraudulent nature of fractional reserve banking was at risk of being exposed because there was not enough gold on deposit in the banks to redeem all Federal Reserve Notes issued promising payment in gold. That was when President Roosevelt declared a national emergency and closed the banking system for two days as recommended by the Board of Directors of the Federal Reserve Bank of New York. Congress then passed the Emergency Banking Act declaring it illegal for U.S. citizens to own gold under penalty of up to a $10,000 fine and/or up to 10 years in prison. The people exchanged their gold and gold certificates for Federal Reserve Notes of created dollars based on debt, which stated a promise of redemption in lawful money.

Gold was now removed from the system leaving silver dollars as the only lawful money available. Silver was eventually eliminated from the money system, leaving the public with a totally scam money system of irredeemable paper currency and copper-nickel clad tokens that represent a debt owed to the owners of the Federal Reserve Banking System, the payment of which is guaranteed by the collateral of all property and income of all U.S. citizens.

According to Jacobson, when banks cannot honor their contract to redeem their notes for gold or silver coins, they are bankrupt. The contract between the people and the Federal Reserve printed on each bank note promising to pay in lawful money was invalidated because the system went bankrupt and because the amended version of the "Trading with the Enemy Act of 1917" placed all U.S. citizens in the category of enemy, and no contract is considered valid between enemies. American citizens were declared to be the enemy by their own government, for indeed they would be if the people ever discovered what had happened to their money.

Being unable to trade in wealth such as gold and silver coin enslaves the people to those who create and control what is being called money. All it took to rob the public was to convince people that paper and credit are money. The Federal Government and the Federal Reserve have the power to create unlimited amounts of credit because credit does not exist. It is not a tangible substance, but an idea represented by bookkeeping entries and computer symbols.

To pay means to deliver a tangible substance as money like gold and silver coin. Where there is no substance, there is no payment. There is only pretend payment. Banks do not really lend money, they only pretend to lend money. They put no money in a borrower's account. They only make bookkeeping entries that are reduced as the borrower writes checks against imagined deposits.

When the banks charge interest on a loan they do not make, banks impart psychological value to numbers of nothing. Charging interest sustains the illusion that banks loan something of value, when all they do is rent the appearance of money.

Three years after signing the Federal Reserve Act into law, President Woodrow Wilson made the following statement: "Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the civilized world--no longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a government by the opinion and duress of small groups of dominant men."

According to Jacobson, the Secretary of the Treasury is not the U.S. Secretary of the Treasury because the U.S. Treasury was bankrupted in 1933. The Secretary of the Treasury is not paid by the Unites States Government. The Secretary serves as U.S. Governor of the International Monetary Fund as receiver of the bankrupt Unites States, collecting the debt from U.S. citizens. According to Tom Rose, economics is the science of choice: the science, or study, of how man values alternative choices, and how he acts in implementing those choices in order to maximize his sense of well-being. This definition is somewhat broader than the dictionary definition of economics, that economics is "a social science concerned chiefly with description and analysis of production, distribution and consumption of goods and services."

He defines Biblical economics as what the Bible says about man. He says that we must always remember that God is the Author and Controller of all economic law, and that man's role is to discover and to apply God's law in the created universe. Tom Rose says that according to Leviticus 19:35-36 monetary inflation is immoral, whether it is effected by the government treasury's printing fiat money, or whether it is brought about by the central bank (Federal Reserve Bank) "validating" government deficits through sophisticated, hard to understand forms of credit creation. Monetary inflation, properly defined as the creation of new purchasing media (money), is immoral because it changes the measure of the monetary unit by debauching the currency that people use in their everyday transactions. Monetary inflation is what counterfeiters engage in when they create false money, and it is just as morally wrong for civil rulers to "legally" create false money as it is for counterfeiters to do it illegally. In short, it is a clear breaking of God's admonishment to maintain a system of just weights and measures.

Tom Rose says that The Federal Reserve Bank has provided the needed sleight-of-hand credit financing to involve us in every foreign war during the twentieth century. The net result of our getting involved in one foreign war after another has been a consequent steady decline in personal freedom; the growth of a highly centralized, bureaucratic and fascistic government; a horrendous rise in taxation; the planned destruction of the gold standard, which used to give some degree of protection to American citizens against an out-of-control, profligate, high-spending government in Washington, D.C.; and decades of planned monetary inflation which has brought the 1940 purchasing value of the dollar to less than 8 cents. Yes, 92 percent of the value of the 1940 dollar has evaporated as a result of the Federal Reserve's long-term monetary policy, which has quietly cooperated with the federal government to finance government deficits with Federal Reserve credit.

In conclusion, Alan Greenspan stated, "Augmenting concerns about the Federal Reserve is the perception that we are a secretive organization, operating behind closed doors, not always in the interests of the nation as a whole. This is regrettable, and we continuously strive to alter this misperception."

According to Jacobson, by using misleading words the Federal Reserve has misled the public. They have over time replaced our system of real money of gold and silver coin with worthless paper, which is against the law according to The Constitution. Tom Rose says that according to Leviticus 19:35-36 monetary inflation is immoral, because it is not an honest standard as God commands in Leviticus.

I think the only solution to this problem is to do away with the Federal Reserve and go back to the way it used to be and have our money system based on gold and silver coin. As Jacobson said, the only solution to the problem is honest money. Besides the economic issues I have mentioned in this paper, there are other good reasons to have our money system based on gold and silver coin. For one thing, there would be no more counterfeiters. The only reason people do that now is because paper is pretty worthless. But they print a value on it, and all of a sudden it's worth something. But you cannot counterfeit gold or silver. You cannot take an ounce of gold or silver and make it worth more than it is already worth. If you take an ounce of gold and stamp it into a US gold coin, it is worth no more than an ounce of gold. You can create paper money, just like The Federal Reserve does. But you cannot create gold or silver.

Another good reason for gold and silver coin is that it doesn't wear as bad as paper money does. Paper money is frequently replaced because it wears out so quickly. I have silver dollars over 130 years old and they are still in great shape. In a way, gold and silver never wear out because at the worst they will wear down the fine edges. When this happens, they can just be recycled again into new coins.

I think in this paper I have accomplished what I have set out to do, that being to describe the problems with The Federal Reserve and the money system and explain why I think these are problems today. I have proved how the American public was lied to and robbed of their gold and silver supply.


12.Title 12 Chapter 3 Subchapter XII, USC 411: Private Federal Reserve Notes are redeemable for “lawful money at the US Treasury”!

TITLE 12 - BANKS AND BANKING

CHAPTER 3 - FEDERAL RESERVE SYSTEM

SUBCHAPTER XII - FEDERAL RESERVE NOTES



-HEAD-

Sec. 411. Issuance to reserve banks; nature of obligation;Redemption



-STATUTE-

Federal reserve notes, to be issued at the discretion of the Board of Governors of the Federal Reserve System for the purpose of Making advances to Federal reserve banks through the Federal Reserve agents as hereinafter set forth and for no other purpose, Are authorized. The said notes shall be obligations of the Unites States and shall be receivable by all national and member banks and Federal reserve banks and for all taxes, customs, and other public Dues. They shall be redeemed in lawful money on demand at the Treasury Department of the Unites States , in the city of Washington , District of Columbia , or at any Federal Reserve bank.


13.Bundesbank & Others Openly Admin Their Bankers Fraud on Their Websites

“The terms `lawful money' and `lawful money of the Unites States' shall be construed to mean gold and silver coin of the Unites States." 12 USC 152 (U.S. Code, Title 12, Section 152)

Most people think that banks lend solely from their base of deposits. Some also know that with fractional reserve banking, they can loan out many times more than they actually have in reserves. In many countries, there are no longer reserve requirements and Bernanke is pushing for it in the US as well.

But very few people - with the exception of those in the banking industry and financial experts - know where credit really comes from.

Germany's central bank - the Deutsche Bundesbank (German for German Federal Bank) - has admitted in writing that banks create credit out of thin air.

As the Bundesbank states in a publication entitled "Money and Monetary Policy" (pages 88-93); this translation is provided by Google translate, but German speaker and economic writer Festan von Geldern confirmed the basic translation):

4.4 Creation of the banks money

Money is created by "money creation". Both [central banks] and private commercial banks can create money. In the euro monetary system [money creation] arises mainly through the granting of loans, as well the central banks and commercial banks can buy assets such as gold, foreign currencies, real estate or securities. When the central bank grants a loan to a commercial bank it credits the amount in the "created money" account of that bank, at the central bank.

***

Money creation by commercial banks

The commercial bank can create money itself, the so-called bank money. The money creation process through which commercial banks can create money is explained by the related postings: If a commercial bank makes a customer loan, say of 100,000 euros it is booked into its balance sheet as an asset against a loan receivable, the client. At the same time, the bank writes down to the customer's checking account, which is run on the liabilities of the bank's balance sheet, as being good for 100,000 euros . This credit increases the deposits of customers on its current account - it creates deposit money, which increases the money supply.

In other words, money is created as a book-entry by purchasing assets or entering credits on the left side of the balance-sheet and corresponding deposits on the right side. In other words, credit money is created out of thin air.



Frontiers of money creation

The above description might leave the impression that the commercial banks are able to draw an infinite amount of money in bank accounts. If this were really so, this could be inflationary. The central bank therefore takes effect of the extent of lending and money creation. It requires commercial banks to hold a reserve.

Commercial banks can typically obtain money only by the fact that the central bank grants them credit. For these loans, commercial banks have to pay the central bank interest rate. When the central bank increase their "prime rate", the commercial banks usually raise their part, the interest rates at which they lend themselves. Therefore a general rise in interest rates ensues. This, however, dampens the tendency of businesses and households, for the demand for loans. By raising or lowering the key "prime" interest rate the central bank influences the business sector demand for credit - and thus on Lending and bank money creation.

The commercial banks need central bank money to cover not only the reserve, but also the cash needs of customers. Each bank customer may be overdrawn in their cash bank account . If the stocks of the banks in cash are in short supply, the central bank creates the remedy. Because only they are permitted to bring additional notes in circulation. To meet the cash needs of its clients, the commercial bank must therefore apply to the central bank for a loan. This leads to the creation of central bank cash money. When assets are purchased with central bank cash money the seller can pay off the commercial bank by lodging the cash as a deposit . Thus, cash is now in circulation: from the central bank to commercial banks and then to the bank customers.

Central Bank credit money is also to cover the non-cash payments that are required: when a customer transfers money from its credit to a customer at another bank, this results in many cases in the sending bank transfering via the central bank, money to the receiving bank. The central bank thus facilitates transfers from one bank to another.

***

The commercial banks can use the surplus of central bank money to loan additional credits to businesses and households. As previously described, this arises from the loan of additional credits due to additional demand for central bank money - which can be covered in this special situation of great uncertainty among banks through the existing excess liquidity. When there is abundant supply of liquidity , a bank that wants to provide a loan, uses the traditional consideration of how much money they need after the loan of the credit , how it is constituted, and at what cost. Using the so-called money creation multiplier it can be estimated as to how large the potential for additional Credit limit is.

Do you get it now?

Private banks don't make loans because they have extra deposits lying around. The process is the exact opposite:

(1) Each private bank "creates" loans out of thin air by entering into binding loan commitments with borrowers (of course, corresponding liabilities are created on their books at the same time. But see below); then

(2) If the bank doesn't have the required level of reserves, it simply borrows them "after the fact" from the central bank (or from another bank);

(3) The central bank, in turn, creates the money which it lends to the private banks out of thin air.

It's not just Bernanke ... the central banks and their owners - the private commercial banks - have been running the printing presses for hundreds of years.

Of course, as I pointed out Tuesday, Bernanke is pushing to eliminate all reserve requirements in the U.S. If Bernanke has his way, American banks won't even have to borrow from the Fed or other banks after the fact to have reserves. Instead, they can just enter into as many loans as they want and create endless money out of thin air (within Basel I and Basel II's capital requirements - but since governments are backstopping their giant banks by overtly and covertly throwing bailout money, guarantees and various insider opportunities at them, capital requirements are somewhat meaningless).

The system is no longer based on assets (and remember that the giant banks have repeatedly become insolvent) It is based on creating new "debts", and then backfilling from there.

It is - in fact - a monopoly system. Specifically, only private banks and their wholly-owned central banks can run printing presses. Governments and people do not have access to the printing presses (with some limited exceptions, like North Dakota), and thus have to pay the monopolists to run them (in the form of interest on the loans).

See this and this.

At the very least, the system must be changed so that it is not - by definition - perched atop a mountain of debt, and the monetary base must be maintained by an authority that is accountable to the people.

THE SHRINKING INFLUENCE OF THE US FEDERAL RESERVE

Gabor Steingart
http://www.informationclearinghouse.info...e25329.htm

Humiliation for Mr. Dollar: Ben Bernanke, the chairman of the United States Federal Reserve Bank, faces a general investigation by the International Monetary Fund. Just one more example of the Fed losing its power.

The United States Federal Reserve Bank, or Fed, seems as much a part of America as Coca-Cola or Pizza Hut. But at least one difference has become apparent in recent days. While the pizza chain and soft-drink maker are likely to expand their scope of influence in the age of globalization, the US central bank is finding that its power is shrinking.

No Fed chief in US history has been forced to submit to the kind of humiliation that Ben Bernanke is facing.

This is partly down to circumstances. Inflation is going up and up, and this year's average will likely top 4 percent. But this time Mr. Dollar is also Mr. Powerless. He can raise interest rates in the fall, or he can pray, which would probably be the better choice. At least prayer would not prevent the US economy from growing, a highly likely outcome if interest rates go up.

After years of growth, the United States is now on the brink of a recession, one that is more likely to be deepened than softened by a tight money policy. Investments will automatically become more expensive, consumer spending will be curbed and economic growth will slow down, immediately affecting unemployment figures and wages.

The textbook conclusion is that this will stabilize the value of money, because no one will dare demand higher wages or higher prices. But the macroeconomics textbooks are no longer worth much in the age of globalization. Modern inflation is driven by the global scarcity of resources. Nowadays purchasing power exceeds purchasing opportunity. Most of all, there is not enough oil, and too few raw materials and food products. These increasingly scarce resources are becoming the focus of disputes among many people and billions of dollars are at stake.

This is why the price of a barrel of crude oil (159 liters) has increased from $25 (€16) in 2002 to $135 (€87) in 2008. And it is also why the price of corn has tripled in the same time period, while that of copper has almost quintupled.

If the inflation introduced in the United States is excluded, a small miracle is revealed, namely something approaching price stability. Adjusted for inflation, prices are in fact rising by only 2.3 percent. If this were the extent of it, the Fed chief could simply blink like an old watchdog and go back to sleep. Instead, he is barking loudly, which is his job. But he has lost his bite, because the Fed's interest rate policy can do nothing about the scarcity of goods.

Embarrassing Investigation

Some of Bernanke's personal adversaries are also contributing significantly to his current humiliation. In the past, the chairman of the Federal Reserve was a pope among the priests of the financial elite. But unlike his predecessor Alan Greenspan, Bernanke is finding that his policies are not universally accepted, even within the Fed.

The last seven decisions reached by the Federal Open Market Committee, which sets monetary policy, were accompanied by a growing number of dissenting votes. Bernanke's critics say that with his policy of cheap money -- in other words, recurring rate reductions -- he in fact helped fuel the inflation problem he is now trying to combat.

Another problem for Mr. Dollar is that it will be several months before his actions take effect. Officials with the International Monetary Fund (IMF) have informed Bernanke about a plan that would have been unheard-of in the past: a general examination of the US financial system. The IMF's board of directors has ruled that a so-called Financial Sector Assessment Program (FSAP) is to be carried out in the United States. It is nothing less than an X-ray of the entire US financial system.

As part of the assessment, the Fed, the Securities and Exchange Commission (SEC), the major investment banks, mortgage banks and hedge funds will be asked to hand over confidential documents to the IMF team. They will be required to answer the questions they are asked during interviews. Their databases will be subjected to so-called stress tests -- worst-case scenarios designed to simulate the broader effects of failures of other major financial institutions or a continuing decline of the dollar.

Under its bylaws, the IMF is charged with the supervision of the international monetary system. Roughly two-thirds of IMF members -- but never the United States -- have already endured this painful procedure.

For seven years, US President George W. Bush refused to allow the IMF to conduct its assessment. Even now, he has only given the IMF board his consent under one important condition. The review can begin in Bush's last year in office, but it may not be completed until he has left the White House. This is bad news for the Fed chairman.

When the final report on the risks of the US financial system is released in 2010 -- and it is likely to cause a stir internationally -- only one of the people in positions of responsiblity today will still be in office: Ben Bernanke.