Friday, January 23, 2009

Federal Reserve Fails Test

On slide 30 of "Fiat Money for Dummies" (ok, the real name is 'Banking Basics') the Federal Reserve suggests an interesting test:
Today's coins and paper money are backed by the "full faith and credit" of the U.S. government.

If that makes you a little uneasy, try the following exercise. Put a ten-dollar bill and a blank piece of paper on the tabletop, and ask people to choose between the two. Chances are everyone will choose the ten-dollar bill...

...That's because the ten-dollar bill is backed by the promise of the United States government, and to most people, that promise is as good as gold.

So I decided to do the Fed's suggested test. I put a $50 bill on the table next to a one ounce U.S. gold coin worth exactly $50 as legal tender:

I asked 10 people to choose between the coin and the un-backed FRN $50.

Guess what?

The Federal Reserve Note had a 100% failure rate.


  1. Great point well made. By choosing gold, they choose wisely, however, a bet on gold is a bet against the bank, and as those who play monopoly know, the bank always wins.

    Keep up the awesome work. Great Blog. Truly.

    Trying to get others to read it. I am asked, "what should I do?" a lot. I am a cash in mattress man myself, but what advice would you give to others about holding onto their wealth.


  2. Yeah it is just a joke, anybody would grab the coin.

  3. Gerald Celente Forecasts for 2009

  4. FDR are we close to a systemic collapse and global equity crash? Else why has gold surged so much in the last few days? or these are the last spikes of gold before they collapse?

  5. Hmmm...nowhere in that dumbed-down version of the Fed's "Banking Basics" did I see where the banks charter is to leverage debt 40:1 and circumvent the Glass-Steagall Act to speculate wildly with depositor's money.

    Another item that seemed blatant was in the FAQ:

    Q. Do all Federal Reserve Banks store gold bars in their vaults?

    A. Only the Federal Reserve Bank of New York has a working gold vault, and almost all of the
    gold in its vault is foreign-owned.


    Q. Does the Federal Reserve set interest rates?

    A: The Federal Reserve is responsible for U.S. monetary policy. This means it makes policies that influence how much money and credit will be available to the U.S. economy. Interest rates often go up or down in response to the Federal Reserve’s monetary policy decisions, but only the discount rate is set directly by the Federal Reserve.

    Something doesn't smell right here. If almost all of the gold in its vault is foreign-owned, then how can the Fed make policies that influence how much money and credit will be available to the U.S. economy?

    Unless the Fed itself is foreign-owned.

  6. Great points, especially on the Fed admitting they are foreign backed and owned.

    Then there is slide 32, 33, 34, and 35:

    32 - Odd appearance of pagan Eye of Providence symbolism before they reveal how they cause problems. Like a serial killer who has to brag...

    33 - Shows the Fed is acutely aware of how their price monopoly can be used to raise then lower prices, creating a depression for their benefit.

    34 - Admits the Federal Reserve System "plagued" the U.S. with banking panics.

    Admits the Federal Reserve "shattered public confidence in the banking system."

    Admits that under the Federal Reserve system deposits are stolen, and if depositors ask for their money back, "only the first few people have any hope of ever seeing their money again."

    Admits that by 1934 the people had to seek government protection from the Fed. Only after the FDIC was created in 1934 would people entertain putting money back into a Federal Reserve System.

    35 - Admits that a competition-based commercial insurance system is already in place and working just fine to maintain confidence in bank deposits, no need for the Fed or the FDIC.

  7. This seems a strange post for you FDR. I thought you were bearish on gold and bullish on the dollar. Which would you choose right now? The $50 or the gold coin?

  8. Yes i concur with Anonymous @11:10AM.I too thought you were short on gold.Please update ,if there is any change in your stance on shorting gold now.

  9. I think it is consistent to be bearish on the gold price and still recognize it is currently higher than $50/ounce?

    The fact that these coins were originally minted at face value is a stunning rebuke of the Federal Reserve and indisputable proof that the Federal Reserve System has been an abject failure.

    The absurd notion that FRNs are "as good as gold" has been 94.5% stupid since gold was last priced $50 only 35 years ago, and even dumber since the mint's $20/ounce gold pieces were minted.

  10. I plan to post a brief gold article shortly.

  11. Dear FDR.

    I would like to hear your views.

    I hate the FED. For the reasons we are all too familiar. But Mr Obama has pledged to spend money on programs to update the infrastructure, stuff which never happens in good times. Personally, I find this not only vital, but much more acceptable than spending it on bailouts that go STRAIGHT into the banks pockets without any value given to the public, like improved and updated public services and jobs for the boys.

    Assuming these jobs go to USA passport holders, am I being naive in thinking this type of spending is better than "here banks, have some free cash"?

    Thank you.


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