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Posts Tagged ‘abolish the Fed’

Growth economics is about to meet its maker. Debt is money. We have taken on too much debt. If debt is reduced so then is the global economy for the repayment of debt equals the destruction of money which is essentially the destruction of an economy. But don’t take it from me. Read the following explanation of how money is created and destroyed. Unlike my alarmist goading it is well written in a matter of fact tone.

Whether you like it or not this is the reality that we all must deal with going forward. The problems will not simply go away. The future will not magically become full of hope and optimism. The years ahead will be challenging and disorienting. This crisis is not like the ones we’ve been through so many times before…it is more akin to the fall of Rome… Well at least for America it is. But all other nations of the world will suffer collateral damage as the U.S. Behemoth rolls over and dies.

From: HOW MONEY IS CREATED, DISAPPEARS, AND WORKS, AND THE VALUES INVOLVED IN THE PROCESS by Paul Krumm

Interest creation is a functional glitch in the system, one which must be understood. When money is created in the current loan process, money with which to pay the interest is not created. Interest owed is only set up as a debt to the bank. No money is created to pay it with. As a result of this bookkeeping system the principle put into circulation is insufficient to repay the principal and interest owed. So either the trader uses money that someone else borrowed to pay his interest, or he does not pay all the principal and interest.

In the first case, someone else is in a worse position to make their payments. In the second case this trader is drawn into a downward spiral of debt. No matter how hard we try, somebody always has to lose. Because money is not created with which to pay interest, interest can never all be paid. Because traders have to pay out interest, they never have enough money for all their needs. Scarcity of money drives up prices, meaning money becomes worth less, which we call inflation.

Economic growth masks the inflation issue, by bringing in new wealth to borrow on (monetize), creating more money with which to pay the ever increasing interest tax load. In the current system, the economy must continually grow so that there is sufficient money available to keep the system operating. This system flaw caused by interest creation is the reason why economists commonly see the need for an economics of growth, rather than sustainable, dynamic steady state (homeostatic) economics.

Total outstanding interest and total current interest due and payable increase exponentially over time. In other words, as time goes on, outstanding debt becomes larger and larger with respect to the sum of all exchanges, what we call Gross National Product ‑‑ (GNP) the productive capacity of our nation. Because the overall interest load grows exponentially, it inevitably grows to be a larger and larger part of GNP. As the interest load becomes a significant portion of GNP, the system breaks down, because an ever larger portion of money is going to pay the growing interest load. A recession or depression is necessary in which some of the debt, and its interest load, is wiped out thru unpayable debts and bankruptcies. Sometimes smaller banks even fail, if too many of their clients are forced into losses and foreclosure.5

Bankruptcies and bad debts move control of wealth to those who control assets and the money creation process. In the long term, inevitably all the money becomes concentrated in the hands of a very few people who control the money creation process, and the economy and culture disintegrate. This was one of the major factors that led to the disintegration of the cultures of Mesopotamia, Egypt, Greece and Rome.

The Federal government (remember, the business owned by all the people) has often been forced to become borrower of last resort, borrowing from the banks to bring enough money into circulation to prevent major depression and mass foreclosures. It is called deficit spending. But nothing has been done to prevent the systemic exponential growth of interest and debt, which is the driving mechanism, leading to the failure. Meanwhile, Government borrowing to create money to maintain the economy has created a ballooning government debt.

In the early and mid 90’s there was an increase in individual debt, largely due to the increasing use of credit cards, taking some of the debt load off the federal government. The entry of the former Soviet Union and China into the international market has also opened new growth markets and, more importantly, assets to be monetized and borrowed upon to temporarily sustain the appetite for growth of the international money system.

In the late 90’s private debt increased in the US to the point that the Federal Government thought it was going to be able to pay off the national debt. But as the economy has slowed down, the government gave away its surplus, and consumer spending and debt has been insufficient to meet the demand for an increased money supply, it is becoming evident that Government debt is not going away, and on the contrary is increasing again.Those who would balance the Federal budget and reduce the Federal deficit under the present money creation ground rules do not recognize that their goal is simply not feasible. If the government stops its continued borrowing and balances its budget, and private borrowing does not take up the slack, the money supply will be so drastically shrunk that there will not be enough money to pay interest (or principle) on outstanding private debt, and the economy will go into a tailspin. This happened in 1836-37 after President Andrew Jackson paid off almost all the federal debt. The ground rules of money creation must be changed.

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Absolutely required viewing for those who give a damn… Everyone else: Back to your iCrap and hipster rock.

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From: Of (Economic) Myths And (Central Banking) Heretics

“… The impossible takes a little longer.” This motto has been used by many organisations, the original being the US Army Service Forces in WWII. Actually, it is a perfect motto for Ben Bernanke and will hopefully stand in future as an epitaph of the Fed and every other central bank.

The “difficult” part of what the Fed and every other central bank does is not actually very difficult at all for them, but it most certainly would be for you and me. Today, one of the accepted and primary roles of governments everywhere is to “run” the economy. It is true that they spend all their time passing new rules and regulations into law in order to do the “running”, but their primary means has been and remains their total control over the money in the nation they govern. The institution which justifies and facilitates this is the central bank. It actually produces the money, both physically and as computer entries.

The “impossible” part is the one which Ben Bernanke is just starting to suspect now. For almost forty years, the Fed has maintained the facade that a purely paper fiat money can function in a market economy just as well as an objective REAL money can. Central to this task is their contention that they can control the economy and prices by manipulating the amount of “money” they issue. This is the impossible. It has never been successfully done in the entire history of paper fiat money.

When the Fed talks about “stable prices”, it is not actually serious, it just wants to be taken seriously. The last thing in the world which the Fed or any other central bank wants is stable prices for the paper assets which form the ultimate “collateral” for the paper money they emit in such vast torrents. Any lowering of these prices puts the Fed’s “mandate” of economic growth into danger. From there it is a short step to the collapse of the money itself which has absolutely NOTHING else behind it. To forestall that step being taken, Mr Bernanke is now poised to defy the impossible on a scale never before attempted.

Jettisoning “Stable Prices”:

Ben Bernanke started warning us all about the perils of what he called “deflation” long before he became Fed Chairman in 2006. He gave what is probably still his best known speech way back in November 2001. His title was: “Deflation – Making Sure “It” Doesn’t Happen Here”. He proceeded into the meat of his speech in the following manner: “So, is deflation a threat to the economic health of the United States? Not to leave you in suspense, I believe that the chance of significant deflation in the United States in the foreseeable future is extremely small.”

Almost nine years and some hair raising experiences – most of which had to do with very “significant deflation” in the paper asset markets later – Mr Bernanke has changed his tune. Not only has he decided that “deflation” (falling prices in his jargon) is a significant threat, he has decided that it is an imminent threat. Sadly, the direct means at the disposal of the Fed with which to deal with this threat have already been deployed to their fullest extent. Official US interest rates have been non existent for almost two years. The Fed’s balance sheet – paper “assets” which still retain a “value” only because the Fed owns them – exceeds $US 2 TRILLION. The Fed spent most of 2009 monetising Treasury debt with no benefit to either the real US economy or to the still uncomfortably high official US unemployment rate.

So now, the whole world awaits the Fed’s announcement of a second attempt to pump up the US economy by means of creating US Dollars and using them to buy US government (Treasury) debt. As the “decision date” of November 3 draws closer, the focus of global markets discards almost all other considerations. But what is it, precisely, that the Fed hopes to accomplish?

Encouraging Inflationary Expectations:

When, not if, the Fed and Mr Bernanke do announce their second program of US government debt monetisation, they will have admitted in public that the first (March to October 2009) program has failed them. Further, they will have confirmed for a second time in about a year and a half that the ultimate job of all central banks is to act as a “lender of last resort” to the governments which control them. Third, they will have demonstrated for all that have eyes to see that the “full faith and credit” of government which is the only underpinning for modern fiat money is an illusion. It is no more credible in the light of FACTS than contentions that the earth is flat, that the universe is fixed in place or that “creation” took place well over a million years after the first recognised human beings walked the earth.

Modern governments and their central banks cling to the tenets of orthodoxy in the economic and financial realm with fanatical zeal. They have no choice, their power depends upon them. The situation has now reached a level where the US political and financial establishment have decided that to retain power they have no choice but to risk losing it altogether. The surest evidence of this is Mr Bernanke’s stated intention to encourage “inflationary expectations” amongst the American people.

The Eye Of The Tiger:

Like most organisations whose main aim is to accumulate power in the hands of the government, the Fed has always relied on what Elihu Root (see the quote earlier in this section) described as “optimism”. Another word for this is ignorance. Ignorance is not a pejorative term, it simply means a lack of knowledge in a given field of human endeavour. No human being has ever lived who is not totally ignorant about many vitally important areas of knowledge. But no VALID field of human knowledge has ever relied upon ignorance as its prime justification. This is what the Fed now proposes to do.

The fact is that inflation – an increase in the total stock of money – is the modus operandi of every central bank which has ever existed. Central banks still exist only because the vast majority of the people they rule do not equate what they do with inflation. Mr Bernanke now proposes to change that. In doing this, he is placing the biggest bet in history on economic and financial ignorance. All such bets lose.

Read the whole article HERE

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