Category Archives: Fiat Currency

Federal Reserve Education: The Fed follows no rule of law. Stop it!

federal reserve education

Why should the Fed have to follow rule of law?  

The dollar is on track for a severe impact.  The world’s confidence in the Federal Reserve’s ability to make good on its obligations is shrinking. Why? It’s because the world is coming to recognize that Fed is actually insolvent.  “Insolvent” means that it no longer has sufficient income to repay even the interest on its obligations, now totaling over 17 trillion dollars.

It’s really not complex at all!  Americans are smarter than the Fed estimates.

Information about the Federal Reserve’s management of our currency and economy is presented to the public in mystical and magical ways, but the smoke screen cannot last forever. The public is told that a central bank cannot afford to be restrained by principle, and that the  manipulation of the economy is a complex and necessary operation which none but the financial elite are capable of understanding.  But it’s actually simple.

Government finances work exactly like individual finances.

We all know what happens to individuals when they spend more than their income can bear. They become insolvent. When an individual’s credit limit is raised beyond levels that should be reasonably risked, a point of no return can be reached.  When income becomes insufficient to pay obligations, something has to give. The individual must either find a way to settle up, or be excused from the whole mess by going bankrupt. Of course bankruptcy is not really fair to creditors, but in the big picture the effects of a few cases of bankruptcy aren’t big enough to make a dent in the banking or small business economy.

Why should central banks behave differently from individuals?

They should NOT! What makes the financial rules that apply to a central bank any different from the financial rules that apply to an individual?  Nothing does! A properly managed central bank would operate under principled guidelines for self regulation.  After all, individuals are obliged to do so in order to avoid personal bankruptcy.

But listen to what former Fed chairman Alan Greenspan had to say about that in a 2008 interview:  When asked if Treasury Bonds are still a safe investment, he says “This is not an issue of credit rating.  The United States can always pay any debt it has because …we can always print money.”  Listen to the video here (and watch for the camera panning to incredulous look on the face of one of the participants in this Meet the Press discussion!).

The Federal Reserve puts itself above financial regulation and law.  No system is in place to check their actions.  The only system of credit rating the Fed has to deal with is a foggy one – namely, the willingness of investors to buy T-bills and bonds.  Until recently the Fed enjoyed an artificially high credit rating which enabled it to continue growing its obligations through the worldwide sale of Treasury bonds. This has enabled the injection of currency from other markets into the US system.  But investors are no longer as trusting as they were seven years ago.  Decreasing confidence has translated into a lower Federal Reserve Bank credit rating.

This 2010 article sheds some light on how this vaguely defined credit rating is measured and what that means to the US economy, but in a nutshell it means that it’s becoming harder for the Fed to inject currency into the US system by borrowing it.

Putting this into context,

even though the Fed is in a condition of insolvency, its ability to sell more bonds and T-bills is restricted only by market conditions.  It’s insolvent, yet nothing prevents it from simply borrowing as much money as it can get its hands on to pay its obligations.

An individual in a state of insolvency gets his credit cut off, no questions asked.  An insolvent individual cannot further compound his own financial problems by simply borrowing more to pay his debts.

The Fed is in a condition of insolvency, so when it needs more cash it fires up the money printing presses.  In theory there is some link between the amount of cash that’s printed and the amount of new currency that’s injected into the system through bond sales.  But there are no hard and fast rules.  The Fed can do whatever it wishes.

An individual in a state of insolvency who has to make a mortgage payment is in trouble.  He can’t go to the garage and fire up his money printing press to pay his debts.  If he does, he might find himself under arrest.  The Fed, however, exercises this counterfeiting option freely.  The only real difference between the Fed and a criminal counterfeiter is that the Fed’s counterfeiting activity is sanctioned by the government.  In both cases, the currency is backed by nothing.

It’s really not hard to understand

Smokescreens of excuses painting the financial mismanagement of our currency system as necessary to ensure monetary stability are pure politics.  It’s never too late for the Fed to change bad habits, but with interest obligations too far out of control, a solution is no longer going to result from spending cutbacks alone.

Because the concept of bankruptcy is a pill larger than any central bank is willing to swallow, the United States WILL make good on its obligations, period.  Unfortunately, after the dollar takes its last breath, payment of US debt is most likely going to end up coming from the creation of even more fiat currency coming from the world’s super central bank known as the International Monetary Fund (IMF).

At this time the Fed’s biggest problem is saving face. Stopping its enormous borrowing and spending methods would at the very least be unpopular.  However, informed Americans understand that a central bank that directs the economy of perhaps the most influential nation in the world must operate under a principled and responsible rule of law.

It’s time to end the Fed’s operation as we know it.

Facebooktwitterrss

Why There Won’t be Another Bailout, Courtesy of the Federal Reserve

federal reserve bailout

The 2008 Bailout:  Why it won’t happen one more time.

You  might feel like the problem has passed, but in 2008, the US  experienced only the tremors of a great and forthcoming economic collapse. Since then, Americans have been living in an economic depression the likes of which have not been seen for over 70 years, but which is only an opening tremor in comparison to the coming devastation of a coming huge economic earthquake. Although the major media outlets in cooperation with the federal government continue to report the overall economic situation to be recovering, no such thing is either possible or is really happening at all.

We are actually NOW in the midst of a severe economic depression,  

and the crash has not yet come to a conclusion. 2008 was only the beginning.

The 2008/2009 Bailout of the Major Banks – What happened?

Beginning in 2008, Goldman-Sachs, JP Morgan, Morgan Stanley, Lehmann, Citibank, and Bank of America, among a few others, all suffered conditions of insolvency that would have put them completely out of business were it not for the bailouts that arrived at the last moment from the Federal Reserve, and from a number of other related federal banking agencies. Here’s what happened in a nutshell.

A sudden burst in the real estate bubble caused millions of mortgages to be instantaneously over- valued.  Consequently millions of American mortgages began to go into foreclosure. Foreclosures in large quantities are bad for banks because they create an instant cash shortage. A huge drop in incoming mortgage payments compounded by the problem of needing to shed massive amounts of over evaluated property at a loss, meant that the business of loaning money could not go on unless there were simply more capital on hand.

 Federal Reserve to the rescue?

The Fed stepped in and fixed numerous bank insolvency threats by supplying huge amounts of cash to major banks. The problem was, the Fed itself didn’t really have the money to solve this crisis either. Sure, they had  a few tens of billions of dollars in the reserve, but what they needed was tens of TRILLIONS of dollars! Everyone seems to believe that the Fed always does and always will have cash on hand, but the fact is that Fed had to play some serious games to “create” the money needed to keep these major banks from going under in 2008.

Where the Fed Got the Bailout Money: Borrowing and Printing, Borrowing and Printing, Borrowing and Printing

The bottom line is that the money for the bailouts was created by just playing more dancing around and switcharoo games. The first thing the Fed did was to print about 4 trillion dollars, which make up the reserves that most US banks are still using to operate on. BUT….. that wasn’t nearly enough to handle this emergency!

So, the second thing the Federal Reserve did was to call up the European Central Bank (ECB) and cry “Help!”. Here is what they did with what they had to work with, after having printed as many trillion dollars as they could risk without creating unmanageable inflation.

The European Central Bank had a significant amount of dollar liabilities, owing at that time several trillion dollars to the US money market. So, the Fed effectively asked them to cough up as much of their debt as possible, and to do it immediately!  They came up with around 13 trillion dollars. Of course they didn’t have the dollars on hand to pay out, nor did they have enough Euros lying around in their own reserve to fill the Fed’s need. But since the ECB can print Euros, they did, and then they swapped newly printed Euros for newly printed dollars from the Fed, both of them backed by nothing. That is what was then supplied to fund the Federal Reserve.

Consequently this problem also affected the European money market too. Euros also had to be printed out of thin air. Contrary to popular belief, you can’t just print massive amounts of un-backed currency without inflationary effects. We’re talking about trillions of dollars and trillions of Euros, so it’s hard to imagine that solving the Fed’s problem with fresh crisp currency didn’t also have some negative impact on the value of the Euro.  But it worked, sort of. It was a well calculated risk, and neither the US economy  nor the European economy suffered its final crash as a result.

And what to do when the next emergency arises?

So, will the ECB still be able to continue to prop up the Federal Reserve the next time it has another unsolvable insolvency problem? It’s highly unlikely. Because the Fed continues to do business as usual, and because it has now reached the point of not generating enough revenue to pay even the interest on all of its own debts, an even bigger crash is assuredly coming.

Why  the dollar WILL  crash.

This time the crash will be based upon a sudden and complete loss of world confidence in the dollar. The world is quite aware of the financial perils of the Federal Reserve. It’s credit rating is bad now. When that lack of confidence causes the market for Treasury Bills and bonds to completely die, the Fed will lose its ability to inject any more cash into our system from other systems by just borrowing it. Lacking any other real significant source of income, its only remaining alternative will be to print more and more and more pure counterfeit currency. The result will be hyper-inflation.

Next time they’ll need MORE than mere tens of trillions!

Today the Federal Reserve is falsely looked upon as the hero of 2008 because of its quick thinking that resulted in finding a convenient solution with the European bank. The truth is that the Fed itself caused the very crash they managed to bail us out of with the help of the European Bank.

In the next and probably final crash, it won’t just be tens of trillions that will be needed. The size and volume of the losses that would be caused by hyper-inflation of the dollar would be far more than the ECB could possibly swallow.To implement another solution like that of 2008 would drag the Euro right down with the dollar.

Fasten your seat belts. You may think the ride is smooth now, but the ride ahead will not be. Read more about this topic at Jim Rickards’ blog.

Facebooktwitterrss

Pull Back on the Joystick – We’re going to Crash!

nosedive

Take the threat seriously!

Although economists have been warning us for decades about an inevitable crash in the value of the US dollar, the threat has been voiced for so long that most Americans have stopped taking it seriously.  After all, the Federal Reserve has always bailed us out of every single recession.  Why shouldn’t they be able to just continue to do what they have always done?   But what caused the downturns in the first place? Not enough Americans understand that the real problem is actually that which claims to be our savior, the Federal Reserve itself.

Until the late 70s, the U.S. economic plane had already been on a long and gradual descent. That was when the descent turned into a nosedive. The American people are the passengers, and are assured by the Captain, the Federal Reserve, that everything is just fine.  The Captain keeps pulling back on the stick, but nothing he can do is pulling the plane out of its downward spiral.  Meanwhile as the Captain continues to wrestle with the stick, he announces over the PA system “Ladies and Gentlemen, we’re preparing for a comfortable landing, so just sit back and enjoy the flight!”   

It’s the Federal Reserve driving the crash!

The Federal Reserve is best known for printing currency, but it also carries out the very manipulations which its printing of currency is designed to correct.  Its theoretical job is to control the cash supply and to keep the economy in balance.  Among many other tricks, it manipulates the economy by controlling interest rates, printing and circulating cash, and by selling bonds, which in plain language translates to borrowing money. The sale of government bonds is the primary driver of our out of control national debt.

The truth is that our economy is so far from being balanced, and that returning to a state of solvency is now simply no longer possible.  We are in fact in the midst of the beginning stages of a major collapse.

Selling Bonds:  A friendly phrase that means borrowing money

Why is the federal government $17 trillion in debt? For 100 years they have been overselling bonds.   A bond is a loan to the government from an investor.  It’s a vehicle used to inject cash back into circulation by simply borrowing it.  When individuals get into a pinch, they go to the bank and get a loan. An individual can be either turned down, or granted a loan, depending on their credit score.

That’s exactly what the federal government does, but it doesn’t have to get any approval to get funded.  They just go to the Federal Reserve, who either prints the money out of thin air, and/or  borrows currency by selling bonds to investors.  The result is that the government always gets its funding, the dollar continually loses more value, and the national debt grows even bigger, and our government increasingly operates on pure borrowed capital, much of it coming from economies which are currently stronger than our own, such as China.

Doesn’t the Government have a savings account to fall back on?

The federal “reserve” is the government’s savings account.  It currently has a balance of around $56 billion in it.  That sounds like a nice amount to have in a nation’s savings account doesn’t it?  It is nothing at all when the entire balance sheet is taken into account.  We have $56 billion in the bank, but we owe $17trillion in debt, and have unfunded obligations in the hundreds of millions of dollars on top of the debt.  Those unfunded obligations include Social Security, Medicare, Medicaid and a host of other programs.  Where are they going to get the money to pay these obligations?  They can ether print it out of thin air or go and borrow even more.

Think of that on an individual basis.  Let’s divide the numbers by a million to put them into the perspective of amounts of cash that real people commonly hold.  Imagine you had $56,000 in your savings account, but you lived in a house with an unpaid mortgage of $17 million! Would there be any realistic expectation that you could pay off your $17 million dollar mortgage on the salary from which you managed to save your $56,000?  But if you were like the Federal Reserve, you could solve the problem by going to your garage and printing some counterfeit money, and/or by going to the bank and getting an easy approval to keep borrowing more so you could pay all your bills.  Wouldn’t that be convenient?

What is happening to the federal government’s credit rating?

Why is the government developing a bad credit rating, and why do they even need a credit rating? Our government has accumulated so much debt from the sale of bonds that it’s no longer possible for them to even pay back only the interest.  We recently actually reached that point.  That makes for a bad credit rating because for the government because potential bond purchasers are losing confidence to buy more bonds.  They know that the US is no longer capable of paying their obligations.  Bad credit disables the government’s ability to borrow more money just to pay interest.

Given an inability to borrow anymore, an insignificant sum in the federal  reserve savings account, and an insufficient sum of incoming federal revenue to pay the bills, the only remaining solution would be to print more (counterfeit) currency.

The national debt continues to grow out of control because the federal government continues to turn to the Fed to get unlimited supplies of cash, no questions asked.   Real people learn to adapt their lifestyle to their income level.  The federal government has no such restraints, but it does have the Federal Reserve Bank to pull money out of thin air to keep this county operating.

That’s why you really need to take this warning seriously. Jim Rickards, author of Currency Wars and The Death of Money is a great resource for more information.

Facebooktwitterrss
Do NOT follow this link or you will be banned from the site!