Wednesday, January 7, 2009

Can the Fed Print Currency to Counter Deflation?

Gorilla dust. When gorillas fight, they throw dust in the air to confuse each other."

- H. Ross Perot, 1986, while resigning from GM for "not building cars customers want."
As a frequent intelligence-gatherer, perusing the Main Stream Media for ideas on what not to do, I have yet to hear a correct explanation of how currency is created in a debt-based monetary system. Strange. It's kind of important right now, isn't it? Is it that "the experts" don't understand a thing about it, or that they don't want others to understand it? I think, the former.

As is always the case with money, the scams are simple and the fog is thick. So here is how the printing press works, or doesn't work, in America. There is no more important set of concepts to grasp given today's currency inferno as bank loans go bad. I know some will say the following is oversimplified, it is, or that I have my buying and selling all mixed up, that is the kind of confusion you can expect in an Orwellian demeritocracy.

Currency creation, step by step:

1) Corrupt or inept politicians ignore, do not understand, or have never read, Article I, Section 8 of the U.S. Constitution.
"The Congress shall have Power To coin Money, regulate the Value thereof" -United States Constitution
2) Moneyed Vultures, to borrow a term from 1913, a collection of the world's richest bankers, collude with (#1) to create a "central bank." The concept is sold on the premise that there is such a thing as good debt and the government needs good debt to prosper. That is a ridiculous notion, all debt is bad debt, but we'll leave that for another day. The ability to take on debt, to run deficits, and the reassurance that it is really a good thing or that "deficits don't matter" is very appealing to politicians, because they can spend without raising taxes. The attractiveness of debt over tax collection is the central bank's primary political hook.

3) The government partners with this strictly for-profit, cartel of private banks to issue its national currency.
A legalized currency monopoly is born. The bank gets an exclusive deal to loan cash to a faceless government, and the government gets to spend that cash sans the political burden of taxation. The U.S. central bank is called the "Federal Reserve." Much like "Federal Express" they hope to imply some vague governmental association to gain stature and trust. Not only is this cartel of 12 private banks, headed by the Bank of NY, not part our government, as a "creditor" to our government, the Fed is distinctly above our law. In fact, congress is not allowed to audit their books, nor do we have any say or legal recourse with regard to their actions. They are the USA's exclusive creditor; the creditor owns the debtor.

Normally, we associate a "creditor" with someone with money available to lend. However, this kind of "credit" is derived purely from the cartel's currency monopoly. They don't lend or need actual money, they lend their exclusive, legalized privilege to print more currency.

4) The central bank, which I will now refer to as "the Federal Reserve" or the "Fed" despite the fact that they are not federal, and they keep no reserves, agrees to "buy" all the bonds the government does not sell. During this exchange, trading new paper currency (paper) for a real live Treasury bond (money), the Fed is not really buying anything, they are selling freshly printed cash
, at interest. The government is actually buying spending cash, using real money, or our bond, which is a binding promise that our children will toil on the central bank's behalf.

The Fed rents a color printer at the U.S. Treasury to print their private-issue interest bearing Federal Reserve Notes (FRNs), aptly called bills. That's a joke, they don't actually rent the color printer, they charge the Bureau of Engraving and Printing a hefty fee for every dollar they print. Using the U.S. Treasury as a printing service is a careful part of the illusion that our government prints her own currency, it also secures the full resources of the United States to prevent secondary counterfeiting. If the Fed properly reimbursed the government to print FRNs, more people might notice the constitutional violation. Instead, the U.S. Treasury pays the Fed a healthy service charge for printing each note, which is nothing but profitable gorilla dust.

5) Politicians quickly spend the hot new cash to "stimulate" votes--I mean--help the economy. Like all counterfeit money, fresh new currency yields full face value at the point of introduction. As it cools, it dilutes the existing currency pool and we all pay for it via the inflation tax.

Presto! Currency has been printed and promised to be paid for, later, by someone else.

Now, if that was where the
orgy of crime ended, then one could argue that the government, by contracting Fed private banks can actually print new currency to counter deflation. Unfortunately, the orgy is only getting started, central bankers aren't even naked yet.

So we've followed the new currency to the point of the crime--deficit spending--now, let's follow the money. All profitable schemes scream for leverage, and when you are in the counterfeiting business, leverage means cutting dealers in for a piece of the action.

6) The bond, our money, is wholesaled to the Fed's primary dealers. The bond ultimately becomes new commercial bank reserves, against which banks offer more loans. And more loans. And more, and more, and more loans. Much more than they have money to lend. They extend as many loans as they can find genuinely profitable borrowers. A profitable borrower is someone they trust will pay them back with interest. The act of lending out more money than they possess is called "fractional reserve banking" because they have promised more than they have in reserve.

Banks used to lend out about 10 times more than they held in reserve. But lately, the government has been actively buying the riskiest loans back from the bank, via fronts like Fannie Mae and Freddie Mac. Now, new loans do not need to pass a profit sanity test. Excessive risk is transferred at a premium, that's right, to the same government who created the underlying bonds. The net result is bank lending up to 40 times reserves.

Banks also take in new reserves from people in the form of customer deposits. They pay a small amount of interest, then lend out 10 to 40 times that deposit at a higher rate. A bank might pay you 3% for the use of your money, then loan it at 6% to 10 to 40 borrowers. Net profit: about 200%/year on money they don't have.

So where does all this extra cash come from? Don't ask. The 97% of loaned money that banks do not possess is simply printed, on the spot. When you take out a bank loan to buy a home, the bank requires you open an account with them. That is because they don't have the money to give to you. The account allows them to make an un-backed accounting entry to affect your balance, at interest, and nobody is the wiser. Well, bank regulators know they are doing it, they allow fractional reserve banking. No, they encourage it; a fringe benefit of colluding with government.

Lending money you do not have is called "fractional reserve banking" by elitists and intellectuals. It's called "counterfeiting" by more sensible criminals.

7) Much more currency has now been successfully created and laundered. That is, placed in someone else's name: yours. You spend the fresh new cash into the economy, and then return the money to the bank, plus interest.

The grand counterfeiting scheme is complete. Maximum leverage has been achieved. The riskiest loans have been sold back to the government, and if it all goes to Hades in a hand basket, the FDIC steps in and pays the account balances.

So let's revisit the headline question:

Can the Fed print currency to counter deflation?

The answer:

No. The Fed can only print more bank reserves which then must be multiplied another 10 to 40 times in phony, un-backed commercial bank notes and paper, or the existing paper supply will deflate when credit runs dry. In order to counter deflation, the central bank first requires an ever increasing number of genuinely profitable borrowers, or some colossal new government agency, hellbent on creating another subprime catastrophe. Newly printed Fed reserves and the corresponding government spending (all of which must be paid back to the Fed at predatory interest rates = a long term net reduction in the money supply) simply cannot counter somewhere around $500T and $750T in existing commercial bank leverage, stacked on top of previous Fed paper, going bad due to poor underlying credit and default.


  1. What if they cut federal income tax by, say 90% for one year...would that not put a lot of money into the economy without qualified borrowers?

    That's probably a stupid suggestion, but so dumping money onto banks that won't loan it out anyway...


  2. excellent post, as usual FDR. not sure if you've seen this & i cannot attest to it's accuracy, but this crime has been occurring for centuries.

  3. Thanks for this. I will steer some folks toward your blog in the hope that some might get something out of it.

  4. Help me understand this, FDR. Let's say (hypothetically) the Treasury issues another $10 Trillion of bonds tomorrow, most of which the Fed buys. In exchange, the Fed has $10 Trillion printed and handed over to Congress. Congress now spends $1 Trillion on roads, another $1 Trillion on schools, another $1 Trillion on the electrical grid, another $1 Trillion in alternative energy subsidies, another $1 Trillion on paying down insolvent mortgages, etc.

    Congress thus obtains and spends $10 Trillion, virtually overnight. Now this additional $10 Trillion is sloshing around through the economy, seriously countering deflation (in the short-term.)

    Are you saying that this simply CANNOT happen? Why not? I don't see any fundamental reason why not. What is the fundamental law of nature that prohibits such a series of transactions from occurring? Please help me see what I'm missing here.

  5. FDR - As a group of investor bankers, won't the Federal Reserve itself see the USG as no longer a "profitable borrower"? At the rate of US deficit growth its fairly obvious to me that US taxpayers will never be able to repay the debt of US treasuries.

    Seems to me were just waiting for that "Madoff moment" from our own US treasury. I wouldn't want to be fully vested in Treasuries when that happens.

  6. Hi,

    Yes, the government can spend $trillions upon $trillions in brand new cash at interest. That is exactly what the central bank wants, more DEBT, more DEBT, more DEBT.

    Their solution will ALWAYS be more DEBT.

    The question is, can the freshly borrowed currency infusion outpace hundreds of $trillions in existing bank leverage going bad. On top of increasing capital requirements as 40 to 1 lending must be reigned in to some less insane ratio, assuming the banks can find borrowers at all.

    From another angle, 1 in 10 US mortgages are now in default by 60 days or more or foreclosed. What does that do to bank balance sheets after they lent out 40x more than they had?

    Then there is the interest problem. All the new currency is a net drain. We are taking out higher interest Fed credit cards so we can pay the minimum payments on existing credit cards.

    Borrowing more currency is the worst thing we can do. We currently spend 11% of our total Federal budget on interest payments, that is before New Deal 2.0.

    Let's look at GM as a microcosm of that problem. The market values GM at 610M shares x $4, or $2.5B. Let's say they borrow $25B (no way it'll stop there) at 10%. Now they have to pay as much as they are worth each year in interest alone.

    The point is that this increased spending/lending/debt is not intended to be helpful, it is intended to be predatory. The Fed knows they are sinking desperate companies. They love the big interest and fees, it profitably accelerates defaults and bankruptcies so they can lay claim to the company's assets.

  7. "Seems to me were just waiting for that "Madoff moment" from our own US treasury. I wouldn't want to be fully vested in Treasuries when that happens."

    As currency becomes rare from deflation, asset prices tank, but values don't change. The goal is to smuggle a time capsule stuffed with inflated cash into the next decade. Treasuries are your time capsule once the mattress is full.

    Brother, can you spare a dime?

  8. how would you suggest a person (myself) invest in Treasury bonds when most of their money is in SEP-IRAs and 401K accounts?

  9. FDR, it's me from 7:50 PM. Just wanted to say, thanks for the explanation. The light just went on in my head... I think I'm going to start reallocating some of my investments tomorrow.

    Thanks for your blog, and thanks for the insight. You know your stuff.

  10. FDR:

    I've heard antidotal reports today on blogs, that Obama may be planning to confiscate gold as a result of the 'significant testing' that he will be experiencing early in office, and to which Biden referred.

    Any thoughts? I know according to the interpretation of many, that we are due for the next leg down on their E-Wave charts.

  11. "I've heard antidotal reports today on blogs, that Obama may be planning to confiscate gold as a result of the 'significant testing' that he will be experiencing early in office, and to which Biden referred. Any thoughts? "

    In 1934 when FDR stole all citizen gold, gold was still a common form of money. People had safes and jars full of internationally valued wealth, in the form gold and silver coins. All that money was stolen exported to the Fed's mostly foreign shareholders long ago.

    LBJ finished FDR's American plunder by shaving our silver and copper coins to Zinc, about as worthless as holding paper.

    What's left to steal?

    (I'll try to post more on the answer to that question in the future, perhaps with a few insights from Elliott's discovery)

  12. What about US government default, or dollar collapse from foreign investors diversifying out?

    Fascinating, but gut-wrenching, commentary...

    Thank you.

  13. I can see how the Government and the Federal Reserve could have prevented deflation a couple of months ago by flooding the economy with enough newly created fiat money. Unfortunately, they grossly under-estimated how much new money it would take to turn this economy around. Now, the standard of living is already plunging. And there is not a single case in all of human history where an empire or a nation has been able to increase the standard of living (for more than just a few months) by simply printing money. It has been tried many, many times. But it has never worked for more than just a few months.

  14. note to self start my own bank and off shore myself to some island in mexico and live off the hypothetical money. legally launder and steal peoples money and rap them on the interest.

  15. I'm enjoying your blog, many thanks for contributing your thoughts to wider consumption.

    I think you have the description of fractional reserve banking a little mixed up. Banks cannot lend a multiple of their deposits. They can can choose to lend a fraction of their deposits. E.g., I deposit D=$100, at a fractional reserve rate of F=0.1, they can lend out 90$. This money can then again be deposited and lent out at some fraction. Repeat infinite number of times and you have 1/F times the money available in the system.

    The end result is the same as you described, but the difference is important, because deposits are liabilities to the bank as they pay interest on them. By this mechanism the total deposits are always larger than the total loans. In my example we would have $1000 total deposits, and $900 total loans, from the initial $100 deposit.

    For the bank's total liabilities from deposits to be lower than their loan assets, the deposits must as a natural consequence be served at a lower interest rate than the loans. The banks don't, as by your example, magically generate 200% profit from creating 1/F x Deposit worth of loans.

  16. Christian you are woefully misinformed, sorry

    Simply get the annual report from your local community bank or from one of the big banks like bofA or Citi.

    The truth will scare you.

  17. I believe Christian is correct in his analysis of how banks treat deposits specifically. His error is that of omission, namely the manner in which banks increase their reserves "artificially" by purchasing Treasuries from the Federal Reserve, which FDR discusses at length.


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