Thursday, February 18, 2010

On Currency

fdralloveragain: Could you pleaes break down this post like Im a five year old? I really want to understand this stuff but I am just a public school graduate. I remember that the govt sells Tbills (bonds?) when they want to shrink the money supply. and buys them when they want to expand the money supply. otherwise im lost. Thanks.

Ok, it has been a while. Public schoolers, please take a seat. I will warn you upfront: my class recognizes right and wrong, and there are consequences for failure. So please pay attention, or the system will have no choice but to enslave you.

First, let's get something straight: no one can print MONEY. No one.

No one.

The notion of printing MONEY is silly. No, it's just plain stupid. Anyone who states such an absurdity is headed for a month of detention. MONEY = wealth = stuff you can't print. A house is MONEY or wealth (assuming it's yours and not the bank's), a car that you own is wealth, diamonds and emeralds and sparkling things are MONEY and wealth, as long as other people want them.

All MONEY has one thing in common: it cannot be printed. Think about it. If something can be created as easily as churning it out of a printing press, then it can never carry any real value. So what is this paper stuff we carry around? It is CURRENCY. CURRENCY is not MONEY. CURRENCY is an accounting system for MONEY.

If I write, "I have 2 cows." Then I write, "+1 cow = 3 cows." I have not created a cow.

In the same way, creating more CURRENCY, via accounting entry, does not create MONEY. CURRENCY, or paper, represents wealth so I can account for it and trade it more easily. Unlike MONEY, CURRENCY is easily manipulated, but that has no affect whatsoever on the amount of MONEY in existence.

So, if a counterfeiter comes along and prints his own CURRENCY (since creating MONEY is way too hard), he might deposit his new paper in a bank account. If so, he has successfully manipulated an accounting entry to his favor. This accounting entry entitles him to buy real MONEY. Since he is getting MONEY but did not make MONEY, it follows that someone else must lose MONEY.

Who loses?

His additional CURRENCY circulates. It competes with existing CURRENCY to bid up prices, in this case, very slightly. All things become a little less affordable. Everyone loses a little bit, because he has "expanded the money supply."

Enter stage hard-left:

The Federal Reserve Banking System. Counterfeiters, extraordinaire.

Next thing to keep straight. The Fed is not part of our government. They insist they are an "Independent Fed" meaning, immune from the influence and legal inconveniences of government. Officially, the Fed is a special tax-exempt corporation. They conduct unregulated hiring, firing, profit taking, insurance buying, private book keeping, you know, all the things governments are either not allowed to do, or have no need to do. As a unique cartel of private banking corporations, the Federal Reserve system also has private owners who draw profits.

So what does the Fed do? What is a central bank, anyway.
"Plank 5 of 10:

[We must have] centralization of credit in the banks of the state, by means of a national bank with state capital and an exclusive monopoly."

--Karl Marx, The Communist Manifesto, 1848
Simply put, central banks buy a certain government's debt. They are the "creditor" to that government, and the government is the debtor. That's another reason they should never be misconstrued as part of the government.

Indeed, the central bank's interest must be aligned exactly counter to the citizens' self interest, or they could not make MONEY from The People. You probably don't consider yourself buddy-buddy with your bank. You probably don't get invited to their board meetings, or even their private Christmas parties funded by your interest payments. The creditor is not the borrower. The Fed is not the United States.

How do they buy all this debt? Doesn't it cost A LOT of MONEY? Yes, it does. That is why central banks don't use MONEY. They only print CURRENCY to buy government debt. Simply put: they counterfeit what they need.

They really do.

Granted, it's not illegal. Why not? Because congress passed a special law on a voice vote on December 23, 1913, while all but five congressmen where at home on Christmas recess. It is called the Federal Reserve Act, and that Act says it's legal to print currency with no monetary backing. So it is. For them. Not for you.

The Fed prints CURRENCY and with it they buy our Treasuries. The People pay for the counterfeit via a little known phenomenon called price inflation. This is how our government funds deficit spending and avoids direct taxation.

Why does the Federal government do this to itself?

Simple. They get a kickback from the bank. They get virtually unlimited (or so most think) "MONEY" to spend without that politically troublesome "tax hike" thingy. Tax hikes are so, well, inconvenient, and Constitutional. If you have to do that old fashioned taxing thing, people start to revolt, and you can hardly afford any Federal government, and then what? Then the States have rights, and we can't have that messiness, not in a Constitutional Republic like America.

Truth is, it's not spending MONEY it is spending CURRENCY. It creates no wealth when it is printed into existence. It is simply an accounting trick, a transfer of wealth from The People to the private owners of the central bank. It is the same act performed by any petty counterfeiter, legalized, so politicians get a cut. It's an illusion of new MONEY, designed to steal other peoples' real MONEY.

People are often happy about it. After all, their house is magically "worth more" year after year, meaning: the aging structure becomes less affordable. Their income goes up too, but never as much as the sum total of the counterfeit, because everyone must pay the bank.

The really interesting thing is what the central bank does after they print CURRENCY and exchange it for MONEY. I've posted a lot about how private central bankers leverage their MONEY to, "hopefully," make tons more MONEY. The consequences of the word "hopefully" are the key to understanding why we have deflation, instead of inflation, today.

In summary:

The Federal Reserve is not part of the government, but they are closely tied to government: they give politicians kickbacks, or spending CURRENCY without the need to tax directly. The Fed, technically, "buys" the Treasuries required to fund any budget deficit politicians direct, which then becomes part of our kids' national debt. In reality, the Fed isn't "buying" anything, they are selling freshly printed cash, at interest, to politicians who pledge your future work to private bankers.

Most politicians love the Fed. The Fed is the cash store where they go to buy more cash without the need for a tax increase. Since everyone pays for it, no one pays for it as far as our cynical and corrupt politicians are concerned. Inflation is the most inversely burdensome tax in existence, it rapes the poor, but our corrupt government doesn't care because it is a hidden super-tax and so few citizens understand it. And how could they? They are busy working.

And so, the sad irony is that the biggest deficit spenders are the most pro-rich and anti-poor politicians. They fully understand that. But you'd never know it from their rhetoric.

Sorry to get all political, but hardened republican and democrat politicians are thinly veiled arms of ONE party: the Bank Party. There is right and wrong, and that is wrong. Class dismissed.


  1. What is the FED using to buy all the MBS out there? I assume they print currency and purchase MBS from banks which in turn hold the new currency as reserves. How long can the FED hold these MBS's on their balance sheet?How would they sell them, and to whom? If the FED prints currency to buy all the treasury bonds and prints currency to buy all the MBS, all this newly printed currency has to dilute the currency supply somhow. I know you say that the loans in default are greater than the currency being printed, but how is that possible? What happened in Germany in the 1920's? They couldn't print fast enough or they printed too little? I assume confidence in one's currency comes into play, so that one does not flee a currency for hard assets before it is a worthless claim on nothing.

  2. Anyone could buy the MBSs, but no one wants them at the prices the Fed is dying to pay.


    Because the Fed only buys with a taxpayer guaranty on losses and also full interest recovery. They can sell the backing homes for $0.01 each and charge "the loss" to the US Treasury. They printed the cash to buy the securities, so they don't care at all.

    This is CRITICAL to understand:

    The vast majority of MBS backing assets (our national home inventory) are now owned by people WHO HAVE NO COST BASIS. They can sell the houses for $0.01 each and still make a fortune.

    The Fed LOVES grinding home prices to zero and causing mass unemployment.


    It makes pay back of the debt and interest "we owe" them virtually impossible, and that makes the notes they hold against the American people an order of magnitude more valuable.

  3. FDR, you should re-post your strawberries analogy. It might help the newbies understand the scam a bit better.


  5. FDR - I fear you give the FED way too much credit. At the end of the day, they are run by humans. You can shoot them if need be and then you don't owe them anything. Have you thought about this at all?

  6. "FDR - I fear you give the FED way too much credit. At the end of the day, they are run by humans."

    The American Revolution proved that the evils of a central bank are possible to oust.

    Andrew Jackson did it again, after Hamilton brought the BoE back to rape Americans in the form of FBUS, which was killed in the war of 1812. Then SBUS, which was killed by AJ alone, causing a massive depression. We quickly grew out of that depression--without national counterfeiters, every American got richer very fast, we named it the Industrial Revolution.

    It neither case, was removing the central bank easy.

    Post-1913, all of our congressman, government executives, and judges are paid in private-issue Federal Reserve Notes.

    Have you thought about that at all?

  7. All I can think about is my commodity shorts piping me in the face of a stronger dollar today.

  8. Nice work teacher. Thanks.

  9. FDR on the subject of your favourite medium of exchange is there some technical reason why its recent stellar performance seems to have had so little impact on the price of oil and to a lesser extent stocks and some other currencies, most notably the CDN$? Is it because there are a sufficient number of dogmatic "investors" who simply do not believe in the veracity of the Dollar move?

    David Rosenberg wrote several days ago about record inflows of American investment into Canadian equities. I think they are making a mistake if they view our commodity-centric market as a good investment right now let alone an exchange safe haven. Me, I live here and see first hand the amount of damage being wreaked on the populace by our housing bubble, growing deficit, record debt levels and unemployment, with no small thanks to the ineptitude of those in charge.

    Don't you think it is ironic that the most virulent criticism of the US Dollar seems to come from your own citizens (at least from what I read)? I think many of them would be surprised to learn the number of folks in the rest of the world who, given the choice, would prefer greenbacks to their own currency or already have a good supply stashed in the Sealy.

  10. I expected the possibility of stock market gain today, but not the move in silver and gold.

    Any insight to what's going on today?

  11. "I think many of them would be surprised to learn the number of folks in the rest of the world who, given the choice, would prefer greenbacks to their own currency or already have a good supply stashed in the Sealy."

    I'm one of those people. But I try not to get emotionally tied to any trade, and holding dollars is a trade, to me.

    The reason I hold dollars is not because the USA is worth "investing" in, it is because we are not. Don't get me wrong, no one else is either, that's why our deflation is global.

    The key to selecting this trade is twofold: what nation was leveraged the most--that altitude provides the greatest distance to crash--weighed against the risk of holding that nation's currency.

    If I had to choose the best cash to crash, I would hold UK Pounds. But I think the UK is too small and may not survive the crises; the risk is too high. The UK is like the subprimer who isn't big enough to get the bank to change their rules when they get into trouble.

    Next in line is the EU disaster. But they are falling apart already.

    That leaves one more, highly over-leveraged, completely mindless, overconfident, too-socialist government headed for certain disaster: the USA.

    So in terms of risk reward, in the US cash, you have enormous paper leverage imploding, and you have the workforce and work ethic to have some reasonable chance of survival.
    But unlike (I think) all of our politicians, I do not over-confidently assume the USA will survive this crises.

    That's a long way of saying that it isn't stand-out economic performance that tilts one to hoard a certain country's cash, it is the potential for endless economic incompetence.

  12. "Any insight to what's going on today?"

    As Curly once said, "The day ain't over yet."

    But daily fluctuations really aren't trends. Actually, they are counter-trends if they occur on minimum volume.

    A lack of volume is the key to understanding counter-trend movement, the lack of participants is proof positive that the price is broadly unacceptable.

  13. FDR,

    Great post today

    Really helped sum everything up for me and get me thinking about a few things. Just wanted to bounce a couple of ideas off of you see what you think.

    I forget where i read it but someone wrote that all events in money and politics can be boiled down to an argument between the sane billionaires on one side and the insane billionaires on the other. With the insane billionaires arguing "Lets kill everyone and take all their money" and the sane billionaires saying, "no, while I like the way you are thinking on that, why don't we keep everyone just happy enough to keep working for us and then we'll make even more money!"

    If you map that dichotomy to the first great depression, I think the sane side won out mainly because there was just enough fear of a revolution among the insane that they capitulated. I don't see any of that fear this time around, are the insane that much more insane, or are the people that much more sheepish? Probably some of both, but I'm struggling with this, because it seems to be the biggest difference between this go round and the last. It's terrifying, as much as I think a 2nd American Revolution is the only hope for freedom in our country, I fear the terrible toll it will extract.

  14. I think the book "The Creature from Jekyll Island" has a great description of the evolution of currency, currency vs. money, and development of fiat currency in its middle chapters if anyone is interested in a very easy-to-read and understandable synopsis.

  15. In response to Brian:

    I've always had the theory that there are a disproportionately high percentage of sociopaths in positions of government and corporate governance than in the general population.

    Think of the distinct advantage of having no conscience for your fellow man towards your (ability?) to move far up the corporate of governmental ladder.

    These are the people who excel at elbowing past the rest of the masses to direct the world we all live in - I'm convinced that it is much more advantageous than intellect.

    But most of our mindsets are not like theirs - we see the world through OUR eyes, OUR set of principles; and it makes it hard to imagine that these "leaders" can be so unconscionable - except that they are implicitly that.

  16. FDR wrote: "But unlike (I think) all of our politicians, I do not over-confidently assume the USA will survive this crises."


    Then why do you so strongly recommend that people buy U.S. Treasuries?

    If the USA doesn't survive this crisis then it will take all the outstanding U.S. treasuries with it, and people who invested in them will be left with nothing!!

    And that is your recommended play in the face of the not inconsiderable chance that the USA won't survive this?!?

  17. By the way, your explanation of what happens with respect to currency versus money is absolutely, positively, dead on.

    There is hysteresis in the system that the Fed takes advantage of by printing currency. That hysteresis is the delay between the time the currency is printed and the time prices rise as a result of its injection into circulation.

    Note that they can also use this mechanism to take advantage of deflation: they can print and hold onto currency while the currency supply shrinks, until the amount they printed, which may have been relatively little at the beginning of the cycle, is now suddenly quite a lot.

    Being able to print your own currency legally is a really nice scam.

  18. FDR:

    A question I would LOVE to have answered is how the fed profits from the spread between the Fed funds rate and 3m treasuries?

    (Given that the Fed essentially follows the 3m treasury yield)

  19. Money or Currency? As I understand your logic FDR Hold currency to profit from deflation/lower prices and short gold/silver for a speculative gain.
    Gold and silver is money and to be honest I am very scared holding these asset classes but I am scared to death holding cash which I do because of the deflation threat I am in full defensive mode now and only intrested in the return of my money and not the return on it.
    In your class their is right or wrong and the risks are high.
    I dont know how things will pan out but a full blown debt currency crises could very quickly become a global loss of confidence in the currency as a store of value and at this point I trust the risk is high for a massive loss of currenct/paper wealth.
    The point I am making is lets say your forecasts of massive deflation takes hold and gold drops to about a quarter in $ terms but everything else drops 90% this would be a good investment hence very safe and if inflation rips would still offer reasonable protection.
    Would you agree gold and silver a good cowards way of treading water in these risky times?


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