RIP-OFF BY THE FEDERAL RESERVE
Revised 3/24/2011
PREFACE: This mathematical analysis shows how:
1. The present practice in the U.S. of creating book-entry money via T-securities (deficit spending) in the amount of the principal of the security, with a promise to repay the principal PLUS the interest, is impossible. The interest is never created; the debt is perpetual and must continually be increased or the economy will collapse from de-leveraging;
2. All other fiscal obligations of the nation must be curtailed while the growth in debt will escalate. The exponential growth of the interest and snow-balling debt will increase until the entire wealth of the nation, and of future generations, is inadequate to fund it;
3. ALL money created by Treasury securities goes into the pocket of the Fed ($8.4 trillion for 2010). Not only does the Fed receive the interest (if not sold), but also the value of the security upon maturity (or by sale). Congress has temporary benefit of $1.4 trillion deficit money until maturity (during 2010);
4. The operation is, as in any Ponzi scheme, predestined for inherent national bankruptcy when buyers to roll over the debt cannot be found. As the scheme becomes visibly precarious, the interest rate will sky-rocket and accelerate the collapse.
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The Federal Reserve uses euphemistic smoke and mirrors to obscure their scam. With full knowledge the following is not the way the Fed/government describes the system, allow me to offer a different analysis of their operation.
Congress can pay for federal expenses with funds collected from taxes, but Congress is never satisfied with this amount. The desire to buy votes/campaign contributions from special interest groups induces congress-critters to spend more, and this is identified as deficit spending. To create this make-believe money requires the assistance of the Federal Reserve.
Congress will give the Fed a T-security (bill, bond, or note) and the Fed will accept the document as an asset of one of the twelve FR Banks. The Fed will then establish a line of credit for the U.S. government (a book entry) in the same amount and list the liability as Federal Reserve Notes. Voila !! Fiat money has just been created for Congress to spend. Ref: 2009 Annual Report to Congress by the Board of Governors, page 448.http://www.federalreserve.
If the Fed retained all of the securities (assets), the public would quickly complain that interest payments (approximately $400 billion annually) are of no benefit and the inflationary pressure would also be obvious. The Fed therefore wants to sell a major portion of the securities so it has arranged with the Treasury department to act as auctioneer for selling to the Primary Dealers. The PD submit sealed bids. Since the security has a fixed face value and interest rate, the higher the bid, the lower the interest rate for the buyer.
The Fed recently obtained $700 billion bailout funds. Secretary Paulson begged Congress, on actual bended knee, to give the Fed money and Congress gave them $700 billion in securities and the Fed swapped the securities to GSE (Freddie and Fannie)/international bankers for toxic MBS‘s—and rescued Paulson’s $800 million in Goldman stock by bailing out AIG.
The Annual Report lists Assets of $776 billion securities and $908 billion Government Sponsored Enterprise Mortgage Backed securities out of $2.2 trillion total assets. Whether the bailout money was a quid pro quo with the PD to avoid lawsuits for fraud is beyond the scope of this writing. The International Bankers do not lightly suffer transgression. The continued mutual benefit of programs, paid for by taxpayers, should evidence Wall Street and the Fed/international bankers constitutes a Siamese twin.
The value of any securities not sold by the Fed is still in circulation and becomes the Reserves for commercial banks. Commercial banks, as an aggregate, have no other source of reserves. All money in circulation is originated from T-securities. The reserves, derived from Treasury checks deposited throughout the world, are then multiplied via loans by commercial banks utilizing the fractional reserve practice. The System Open Market Committee (SOMC) selling and buying of securities alters the reserves–with high leverage. The Fed currently holds about $750 billion of $12.5 trillion issued securities. Ref.http://www.fms.treas.gov/
Observe that the amount of money created by the security is the amount of the principal but the amount promised to be repaid is the principal AND the interest. The interest is never created but payment is required by the agreement. It is impossible. The linear expansion of base money via fractional reserves to create commercial loans does not change this. If, hypothetically, all money in circulation was used to pay off the securities issued by Congress, all bank reserves would be wiped out and the commercial loans would collapse—and every dollar of interest on the national debt accumulated from day one would still be due—but there would be no money outside of the Fed’s vaults to pay it.
There are esteemed economists who contend the fractional reserve multiplier is a major cause of inflation. The concept is questionable. Assuming the amount of base money and the multiplier factor remain constant, the creation of fractional reserve money reaches a ceiling that cannot be exceeded until more base money (from T-security issues) is added. The multiplier factor is a mere linear increase of the base money that the Fed can alter by SOMC transactions.
The debt created by usury based sovereign debt is perpetual; it can never be paid off. The contract cannot be culminated. Any contract that cannot be culminated is an act of fraud. A contract based upon fraud is invalid upon its inception. It would appear the national debt is not legally enforceable. (A debt incurred by a state or municipality is not a sovereign debt as used in this analysis. Such a debt is akin to a commercial loan and is completely repayable—but may be evidence of unwise administration and result in default.)
There is more skullduggery involved. Let us assume a newly established sovereign nation is setting up a usury based economy and will issue 100 unit securities, a five year maturity, and an annual interest rate of 20 percent over a span of five years. The identifications of Congress and the Fed will be used to convey the images.
Upon the issuance of the first security, Congress has 100 units to spend. At the end of the year, Congress/Treasury has to pay 20 units to the Fed for interest. If the nation had to pay off the security at the end of the first year, the bankruptcy is obvious. There have never been 120 units created. Twenty units could be removed from society but that would leave only 80 units in circulation, cause great financial hardships, and still leave an impossible obligation to redeem a 100 unit security. (This economic diminution would be akin to a contemporary balanced budget.) The solution is to put off the interest payment until the next issue of security for the second year. The interest is paid from the principal created by the second issue.
During the second year there are 200 units in circulation but the actual rate of interest on the second issue is not 20 percent. Since 20 units had to be paid to the security holders, congress only received 180 units to spend (100 + 80) but they are committed to pay 40 units of interest on the security at the end of the second year. The interest rate of 40 divided by 180 is 22.2 percent. Considering the second year alone, the interest is 20 divided by 80 or 25 percent.
When the security for the third year is issued, the interest of 40 units for the first two years securities will not be available for congress. Congress will receive only 60 units for public projects but will have to pay 20 units interest at the end of the year. The 240 units received by congress (100 + 80 + 60) will require 60 units of interest at the end of the third year. The cumulative interest rate (60 divided by 240) is 25 percent. The interest rate for the third year alone (20 divided by 60) is 33.3 percent.
At the start of the fourth year, the security will have to cover the interest charge for the three prior years of 60 units. Congress will receive 40 units for government spending. The 280 units received by congress (100 + 80 + 60 + 40) will demand 80 units of interest at the end of the fourth year. The cumulative interest rate (80 divided by 280) is 28.5 percent. The interest rate for the fourth year alone (20 divided by 40) is 50 percent.
The security issued for the fifth year will pay the 80-unit interest for the prior four years. Congress will have 20 units to splurge. The 300 units received by congress (100 + 80 + 60 + 40 + 20) will require 100 units of interest at the end of the fifth year. The cumulative interest rate (100 divided by 300) is 33.3 percent. The interest rate for the fifth year alone (20 units received–20 units in interest) is 100 percent.
At the end of the fifth year, 100 units must be found to redeem the maturing security issued the first year (that “loaned” 100 units to the government) in addition to 100 units of interest that must be paid. Congress has an obligation to pay 200 units. This factor alone makes it obvious that more debt must be incurred to continue the scheme. The inescapable whirlpool of usury debt can only avoid obvious default by increasing the value of future securities. Increasing the value of issued securities merely postpones the inevitable result.
As the sixth year approaches, the Fed holds 500 units of securities that must be redeemed by the Treasury before year eleven. The Fed has already received 200 units as interest while Congress retains 300 units from those securities. Before year eleven, the securities will accumulate an additional 300 units of interest payable to the Fed. That accounts for the entire 1000 units of securities and interest that have been involved over the five years. (Each of the five 100 unit securities involved 100 units of interest.)
Do not let the subtly of the numbers escape you. As the example demonstrates, the Fed receives the total value of the security and the interest if it does not sell the security. Only 500 units were created by the securities but 1000 units were somehow acquired by the Fed. The only way for Congress to get the funding is to issue a 200 unit security at the end of the fifth and subsequent years and ALL of the value will be instantly due to the Fed. The scheme is not only perpetual but it must increase in size to continue. And of course, when the 200 unit security matures, the value will belong to the Fed. And then a larger security must be issued to pay for the 200 unit security and the accruing interest further down the road. This is the methodology of any Ponzi scheme. The increase in the required size of deficit spending must be large enough to make the interest payment a relatively acceptable percentage to minimize public hostility. (In 2009, the 200 unit roll-over value reached $7.0 trillion with an additional $1.4 trillion debt for deficit spending. Ref. Post).
A government publication has noted the fiscal policy insecurity: “(T)his growing gap between (Government’s) receipts and total spending …cannot be sustained indefinitely.” http://www.fms.
If the security is sold at auction, as approximately ninety percent of them are, the Fed receives the value of the security from the Primary Dealer and the ultimate purchaser is then reimbursed by the Treasury at maturity. Either way, the Fed eventually receives the value of the security. The value of all redeemed T-securities is a clear profit for the Fed, along with the value of all securities sold to/held by Primary Dealers, funds, nations, states, or financial institutes.
But 5 year securities are a slow game. If we shifted our attention to 13 week bills, or even four-week bills, each obligation will quickly mature and must repeatedly be rolled over. Each new issue is profit for the Fed. If time lapse between bid and issue dates are ignored, the roll-over of four week 100 unit securities can be repeated thirteen times within a year. The gain of 1300 units of profit for the Fed only involves 100 units of national debt.
Low interest rates will reduce gain for security investors but will provide cheap money for commercial banks to loan. Much of the interest from T-securities held by the Fed must be returned to the government as a result of 1970’s legislation, so the Fed has little motivation to raise rates to make more money–they receive the value of the security.
The total value of auctions in 2010 was $8.4 trillion. Approximately $6 trillion matured in less than one year.http://www.