Thursday, January 30, 2014


In 1910, the bankers who devised the Fed, agreed an important function of the central bank was to protect against bank runs in the event of an economic crash. Because banks are required to keep only 10% of their customers’ deposits, a mass of people rushing to close their bank accounts would quickly deplete a bank’s reserves. This is where the idea of government protected insurance came in. Why not let taxpayers protect bank customers? And thus the FDIC (Federal Depositor Insurance Company) was born.
In the aftermath of the 2008 economic crash, in effort to keep banks solvent, the Fed (unbeknownst to anyone at the time) injected $1.65 trillion into the banking system. This was Quantitative Easing 1 (QE1) which lasted from November 2008 - March 2010. It was a huge success. The banks got lots of cheap money and no big bank ran out.
   But the economy wasn’t growing very well, and the country stood on the brink of recession, and to get banks lending and money circulating, the Fed implemented QE2, and injected $600 billion into the economy. That lasted from November 2010 until June 2011.
     Now, with the economy still sluggish, and banks still not lending to the public, the Fed is embarking on QE3, and planning to inject $40 billion a month into circulation.
    Where is it getting this money? It is printing it. As readers of the last post know, printing money dilutes the value of money already in circulation. The banks get free money, and the value of the dollar for everyone else is worth less. Quantitative Easing is a great boon to the banks. Not so great for the people.
         Why isn’t there inflation with all this money added to the circulation? Because it has been given to the banks and they’re holding on to it. They’re not lending it out to people, they’re playing the stock market. The general population hasn’t been the beneficiary of any Fed money. It was the big banks. As Senator Dick Durban knows, money is power. In 2009, he said, "And the banks -- hard to believe in a time when we're facing a banking crisis that many of the banks created -- are still the most powerful lobby on Capitol Hill. And they frankly own the place."


“There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.  The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.” John Maynard Keynes
In economic terms, ‘inflation is the persistent substantial rise in prices related to an increasing volume of money.’ Put in simple terms, things cost more because money is worth less. How does this happen? Well, printed money backed by nothing has no value. It’s like putting Monopoly money into circulation and calling it real. Say you have $100 and add $100 of Monopoly money. Now you have $200, but half of it is fake. Sellers know this, so they double their prices. The increase cost of goods is directly proportional to the amount of fake money added to the money supply. This is inflation. This is what happens when the Fed ‘makes’ money.
            Since the creation of the Fed in 1913, the value of the dollar has been reduced by 95%. Today, what you buy for $1.00 you used to be able to get for a nickel. If you have $30,000 in your bank account today, with inflation at 3.5 %, in ten years you would have $20,550. With inflation at 5.5%, in ten years your $30,000 would be worth $16,500. Inflation decreases your buying power. Even if you don’t spend your money, you become poorer over time.
            Inflation is an invisible tax. The Fed prints money for the government, diluting its value for everyone. If the government gave this money to everyone, doling it out equally, then everyone would suffer the same from the reduced value of the dollar. But that’s not what happens. The government spends the printed money on ‘special projects’. It gives away money to ‘special friends.’ A few benefit from the printed (free) money, while the rest of the population gets nothing but a dollar that is worth less. Forget about taxes, this is the way wealth is really redistributed.


 Due to inflation (which measures the successive decrease in value of the dollar), Social Security payments receive cost-of-living adjustments. These are based on the consumer price index, known as the CPI. The index is a rough indication of the rise in price of goods over time, and thus is said to be a measure of inflation. (When money is worth less you need more of it to buy any given item.)  Currently, the government estimates inflation to be 1.8%.
            However, anyone who has gone to the grocery store recently knows that prices have increased much more than 2%. My own grocery bill is over 5% higher than last year. So, why the discrepancy?
            In its infinite wisdom, in the 70's, the government decided to exclude the cost of food and energy from the calculation of the CPI, on the grounds that the prices were too volatile and therefore misleading. Wrong. The price of food and energy were showing too clearly the true cost of inflation. In 2012, if you factor in food and energy in the CPI, inflation is about 7%. This effectively means that seniors are paying more for food and gas, but their monthly checks aren’t keeping up with this increase. This is crazy. Besides health care, food and gas are seniors greatest expenditures -- what they actually spend most of their money on. Yet, these very items are excluded from the cost-of-living adjustment. Don’t let the government recalculate the CPI. It is not going to favor seniors that’s for sure.  


"I have never seen more Senators express discontent with their jobs....I think the major cause is that, deep down in our hearts, we have been accomplices in doing something terrible and unforgivable to our wonderful country. Deep down in our heart, we know that we have given our children a legacy of bankruptcy. We have defrauded our country to get ourselves elected." — John Danforth (R-Mo)

 We are in a credit crisis. Banks aren’t lending! Small businesses can’t get loans and home-buyers can’t get mortgages. Why? Banks are making money without having to go to the trouble to make a loan. Thanks to the Fed’s near zero interest rates, the banks are getting nearly free money. Instead of lending it out, they’re buying government debt – at a high interest rate. And so, they’re getting money for practically nothing and turning around and giving it to our illustrious government for a lot more. How nice.
      A good question is, why does our government go through a middleman and not deal with the Fed directly? An even better question is, why does our government go through the Fed at all? As President Wilson once said, ‘If the Nation can issue a dollar bond it can issue a dollar bill.’
        Instead, our government borrows the money it needs that it must repay with interest. No, that citizens must repay with interest. How much do we owe the Fed? As of March 2011 it was $1.6 trillion. This is 42% of the government’s total debt. According to congressional rule, the government can buy out the Fed for $450 million and own its own debt. But no, government spending must be slashed in order to reduce our deficit spending and pay back what we owe. Of which, at least 42% came from thin air – money the government had someone else make, that it could have made itself.  


In a country we generally frown upon, the government’s central bank works like this: the bank prints money the government needs and provides it at no interest. This is unlike the U.S., where the government borrows from the Federal Reserve money on which it owes interest. Never mind that the government has a constitutional  duty to create money -- it gave this right away to the commercial banks in 1913. And, never mind that the Fed charges interest on  something it creates out of nothing (that is a subject for another day.) The end result is that we owe the Fed $1.6 trillion, and of course, social spending must be cut so we can begin to repay our 'debt.' 
This other country’s economy flourished after the 2007 global recession. Banks didn’t stop lending and the GDP grew by 10-11% (last year 8-9%), while in the U.S., growth was negative, and is now only 2-4%.
 What was this country? China! Yes, that terrible communist country that isn’t crippling its people with a mountain of debt.
  Why does the American government do this? President John Adams once said, there are two ways to conquer and enslave a country – one is by sword, the other is by debt. Our government is conquering its people through debt. We are voting into office, representatives who enslave us. We could stand to learn something from that communist country where leaders don’t take financial advantage of their people, don’t empower private banks, and don’t eviscerate their country's economy.


North Dakota has the country’s only state bank. It is also the state with the lowest unemployment rate and highest job growth rate. The state is not near bankruptcy , there is no credit freeze stymieing job creators, and no cut backs to social services, higher education, state pensions, and the hiring of teachers, policemen, and firefighters. 
      What’s going on?
       Well, in part, it’s the state bank. By law, all state money that comes from taxes and fees is deposited in the bank, which then issues low interest loans to students, farmers, and businesses. The bank buys government bonds to spur development and to shore-up infrastructure. With a state population of 600,000, last year it made $60 million in profit. Of this, it returned almost one half ($30 million) to the state for projects, disaster relief, and a rainy day savings account.
     Why can’t every state have a bank like this?
      Instead, banking in the remaining forty-nine states operates for profit. A state’s government deposits taxes and fees in a big commercial bank that’s usually headquartered in New York. These banks primary purpose is to generate profit for shareholders. To this end, the banks make risky investments in hopes of high returns. If a bet goes bad, the government (i.e. taxpayers) cover the loss, while the banks keep all profit. How nice for the banks. 


The creation of the Federal Reserve is an instructive story of how the Big Banks took over Washington. There were two central banks in the country’s history that were so destructive to the nation’s economy that both lasted only the length of their charter, which was twenty years. The third, known as the Federal Reserve, has lasted almost one hundred. In 1910, the big bankers knew how difficult it would be to convince Congress to pass a bill to establish a central bank. If the bankers were honest in their demands – to establish a private banking cartel that would control the printing of money, and get taxpayers to cover risky bank bets – the public would never accept it. The central bank had to appear as if it were something that it wasn’t. It wouldn’t even have the word ‘bank’ in its name. No bankers would be associated with the bill, so their connection to it would not be in evidence. The central bank’s true objectives would never be stated, and false objectives would be offered in their place. The banking PR machine went into full swing, singing the praises of a Federal Reserve. It would get politics out of financial policy. It would stabilize the banks and the economy. Still, there was enough dissent that the bill was not tabled until three days before Christmas, when most representatives were home for the holidays. The bill passed. And that is how the big banks, in one bill, seized power over a country’s democracy. As banking magnate Mayer Amschel Rothschild said, ‘Let me issue and control a nation’s money and I care not who writes its laws.’


Another way banks ‘make’ money is through the fractional reserve. This is a percentage set by the Fed which determines how much of a deposit banks must hold in ‘reserve.’ Right now the reserve is 10 %. This means that if you deposit $100 in your account, the bank must hold on to $10. It can do what it wants with the remaining $90, like bet it on the stock market, or lend it to someone else at interest.
             Through the factional reserve, money is multiplied. It works like this. Say you deposit $100 in your account and your bank decides to lend $90 to Ann. When she deposits the $90 in her bank, that bank must keep $9, and can lend $81 to Mary.  Now, Mary has $81, Ann has $90, and you have $100. In this manner, your initial deposit can be multiplied ten-fold ($100+$91+72.90 … = $1000).  This is how money is created out of thin air and how banks have become so profitable. 


The Fed is in the business of making money. It issues loans in returns for IOUs and expects to be repaid with interest. Banks work the same way. Take for instance, a mortgage on a house. You’ve found a house you love with an asking price of $150,000. You’re lucky and have a good job and the bank is happy to loan you the money over a thirty-year period at 5% interest. You sign the papers and take the keys to the house the bank now owns. The bank would like you to think that it has shifted money away from other sources to give to you, but this is not the case. As soon as your loan is approved, the bank prints the money. This is done with the push of a button; a ledger entry. You now have a debt of $150,000 and your debt is the bank’s asset. It has made +$150,000. Over 30 years, you will repay a total of $285,696 (the initial loan plus $135,696 if the interest rate is 5%) -- almost double what the house was originally worth. This money is profit for the bank, made on a house it never owned and on money it never had. The Fed works the same way. It prints money to give to the government, which taxpayers repay with interest.


In 1910, a handful of bankers, a U.S. Senator, and the Treasury Secretary devised a plan to wrest control of the money supply from Congress and give it to the banks. Three years later, on December 23, 1913, with many elected officials home for the Christmas holidays, the Federal Reserve Board (Fed) was created. The legislation took from Congress and gave to the new central bank the power to print money. Hailed as a means to take politics out of financial policy and stabilize the economy, in reality, the aim of the central bank was to make a profit. It was no coincidence that the same year the Federal Reserve was created, Federal Income Tax was imposed. The tax was needed to pay interest on the money that the government could no longer mint itself, but now had to borrow from the Fed. We pay tax, in part, to pay interest on free money the Fed creates out of thin air. (For an excellent history of the Fed see: The Creature from Jekyll Island, by G. Edward Griffin.)


Welcome to Kathy Kale's Blog. Since I first started blogging about the economy, I have written another novel on health care and republished a novel on the plague written a decade ago. Since I have expanded my area of interest, I've created a new blog (this blog) and will move my previous posts from Gold Street News here. Below you will find my first blog published on Tuesday October 16, 2012:

I’m not an economist, so this isn't going to be too technical or advanced. I started studying our banking policy after the 2008 meltdown. I was so disturbed by what I learned, I had to do something. I wrote a novel, Gold Street, detailing how our monetary system works. This isn't taught in Economics 101 at university. When monetary theory is mentioned at all, it is so dry, so long-winded, and made so complicated, it’s nearly undecipherable. But it’s not that difficult to understand. I thought if I sprinkled economics into a fast-moving thriller, I could engage readers with a story that would culminate not only with a climax, but also an understanding of the U.S. economy. (Gold Street is available on Amazon and currently has a five-star rating.) I am writing this blog to raise awareness on how our economy works. To this end, I’m going to examine current and past events that are directly or indirectly related to the use, production, and control of money in this country. I invite you to join me and discover how our economy really works.