The Fed and Indentured Citizens

In 1913 Congress abdicated its Constitutional responsibility over currency on behalf of the people when it created the monster called The Federal Reserve System. In creating a private joint stock entity, Congress not only surrendered jurisdiction over the dollar, it also relinquished control, oversight, and authority over the institution intended to manage the citizens’ currency. Decisions hastily made in environments of illiteracy, panic, and fear, and driven by energies with ulterior motives, rarely turn out well for those who succumb.

Section 2A of The Fed’s Monetary Policy Objectives states, “The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” This ill-defined and loose agglomeration of feel-good nonsense might have tasted better if someone had appended “and preserve motherhood and apple pie,” but such addition would not have improved it. When we consider such additional elements as the fact that, as originally established, the notes issued by The Fed were obligations of the U.S. Treasury (read taxpayer) rather than that of the member banks, well, what could go wrong? 

The Fed’s ‘objectives’ reads as if it was written by The Fed so that no repercussions could possibly result from its own failures. Well beyond the bounds of sanity and far from purview of effective diligence, an isolated institution was formed and exists to command and supervise the currency of the most powerful Nation on Earth. This authority reports to no one. It plays footsies with Congress and with the Administration, but it acts in its own best self interest, as all human endeavors are wont to do. As some of us strongly suspected just prior to the last Presidential election, and as we can now with hindsight confirm, Bernanke and The Fed used their capacity to print dollars in an undisguised effort to support the re-election of pro-Bernanke-pro-Fed-pro-free-money Barack Obama. There is no question that the most powerful financial institution on Earth has strayed well beyond any of the intentions which created it, regardless how unenlightened they might have been. 

 If America was a company and you were its CEO, would the above noted Section 2A provide sufficiently focused objectives for your currency? Not if you were capable of simultaneously walking and chewing gum it wouldn’t. Monetary policy should have One objective – Stability. Simple, clear, unambiguous, stability. And inflation? 0%. Not 1.0% or 4.5%, but zero. 

 Who should be in control? The people. Who represents the people? Congress. Who is in control? A small group of individuals running a small group of too-big-to-screw-up international banks. No-one could possibly mount an intellectual or intuitive argument supporting the assumption that such individuals, their desires and the desires of the institutions under their charge, hold dear the altruistic benevolence of their “fellow human beings.” I cannot say “their fellow Americans” since some of the “owners” of The Fed are not American institutions. Go figure. 

Still, is this any way to run a railroad? Not if we look at the state we are in. Not if we critically assess the reality which has been created over a long process of fiscal mismanagement. Not if we understand that unprincipled individuals have too long politicized the dollar, which was easily done once it was unhooked from the hard commodity, gold. Not if we critically appraise the devastation which The Fed has rendered on a Nation with the complicit approval of self-servers in Washington. 

Politicians of the Congressional and White House variety have evidently been more than enthusiastic in allowing inflation and devaluation of the dollar to proceed apace since the de-coupling of the dollar. The banks behind The Fed controlled the game and were only too eager to comply (as in, OK fine, we’ll go along with it but it’s your idea). There were hundreds of billions to be made through debt guaranteed by taxpayers. There were new illiterate and willing generations to be converted to serfdom with the help of standard wavers such as the New York Times. A bigger chicken in every pot and a larger roof over every head, all acquired through debt. The bigger the debt, the greater The Fed’s profits. And what of the savers? . . . Completely destroyed and pushed toward risky investments. 

The dollar has not been stable and in fact has moved in direct opposition to the best interests of all Americans. It has steadily lost value over the long term. For example, when we are provided obfuscating rationales for the high price of oil (up 400% in a decade), we are being lied to. The truth along the vector of veracity is much closer to the reality that the dollar is dropping in value, however such realization might instill doubt of our long term trends toward prosperity. 

It has been in the best interest of the banks which own The Fed and all member banks, to manipulate interest rates to their advantage. The trends of the dollar (read: your earning power) through the past half century against hard assets such as gold or oil tell a tale of unrelenting plundering and evidences the failure of misguided interventionism. Nevertheless, the worst consequence has been an acceptance of indebtedness. Indebtedness has contaminated all human enterprise. From personal debt, to corporate debt, to State debt, to National debt, the burden overwhelms current and future intents to repay. Total debt floats somewhere well North of $100 trillion. 

In a country where the term “Freedom” has resonated profoundly from its very inception, and throughout its history, the citizens of The United States of America now find themselves subservient to a foreign entity they have no control over. Without economic freedom, freedom is simply an ephemeral concept promoted and repeated as a feel-good mantra mesmerizing the population. Awaking to overwhelming indebtedness is tantamount to waking up to enslavement. 

As we wait for the moment when it becomes widely evident that The Fed has become completely ineffective and we are forced to confront the unavoidable crisis of debt yields rising significantly, some alternatives should and must be considered. 

The ubiquitous nature of today’s technologies, software, computers, phones, and networks, present us with possibilities which brilliant economic minds of the past could not dream of, and too many current ones refuse to. We should no longer regard the current monetary system as the sacred and hallowed domain of a few bankers. Congress should immediately mount a full frontal attack on The Fed and retrieve the control it long ago held. Once Congress has recuperated full jurisdiction and authority over the Nation’s currency, it should then enact laws allowing for the formation of competing bank notes including digital currency to be issued by private entities in an open and fee market. But first, let’s get back mastery over that most critical instrument so pervasive in all human activity – our currency. America should not be the only developed country in the world without sovereignty over its currency.

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• Don’t Believe The Pundits On This Being China’s Century

While countries struggle, muddling their way through stimulus packages and bailouts, China is being touted as everything from, “the best current place to invest,” to being, “the engine that will pull the globe out of its recession.” These entreaties and prognostications are sprinkled with reminders of the power it wields over America, given the huge dollar reserves that it holds. If I may quote Tony Soprano, “forget about it.”

China has asked rather politely, that the U.S. maintain its creditworthiness. No kidding? That plea was less a wish that the U.S. not skip town on its debt (devalue the dollar dramatically), than it was a declaration of a deep desire for a return to excessive U.S. borrowing. When the U.S. borrowed, it bought. When it bought, China prospered. This is rather basic, however, what is not so evident, or obvious to many pundits and experts, it seems, is the fact that China became inebriated through the glory days of consumerism. China now suffers the consequences of its acquiescence to a surety that the intoxicating euphoria enjoyed around the globe for a generation, would never end.

China understood that to become America’s principal provider of goods, it had to manufacture less expensively than anyone else. China excelled at squeezing productivity out of its labor force. It rapidly implemented a sweeping expansion of the necessary infrastructure to manufacture products faster, better (sometimes), and cheaper (always). New plants sprouted at an unprecedented rate. China’s expansion of its machine was based on an enormous assumption - the rate of growth it was enjoying through exports would continue unabated. It is now shutting down plants faster than it opened them. The capacity that was preparing for demand twenty years out, is now shutting down, and the Chinese are not about to ramp up their own consumption to energize reopening of the plants. While China has become a major manufacturer, the majority of its manufacturing is for, and on behalf of foreigners, selling established brands. China’s authoritarian “system” has made the creation and recognition of its own brands, all but impossible.

American consumers are not returning to the binge behavior of the past twenty years, although their ambivalence on trade with Asia persists. As for China, it focused on creating trade surpluses, and it adroitly squeezed its workers, but it did not prepare them, or its industries for broad based consumption. It has not created a self-sustaining, stable economic environment. China will dip into its coffers to stimulate internal employment, spending on infrastructure, or investing in what it knows best - export industries. Endeavoring to attract foreign investments, China will claim improvements in efficiencies, forensics, accountability and accounting practices of its indigenous infrastructure. The claims are beyond its ability to deliver. Until such critical elements as property rights, or a welfare breadbasket are implemented through appropriate taxation, Chinese consumers will be more prone to save, as they must individually concern themselves with how to pay for tomorrow’s meals.

Any cash China spends outside will go to acquiring natural resource producers for pennies on the dollar in the present climate, and countries, including Canada will be happy to sell out. This will do absolutely nothing for the long-term health of the North American economy.

There are currently foreign reserves of around $7.5 trillion held around the world with particular concentration of dollars held in East Asia, where since the late 1990s there was perceived need to protect against currency speculations, and a tendency, no, make that urgency, to feed (finance) the American engine driving China’s growth. We should note that the size of China’s reserve accumulations have, in the past couple of years, attracted the very speculation they sought to themselves protect from, which has further accelerated the bloating imbalance. The size of China's dollar reserves forces a tentative, even precarious, equanimity between the U.S. and China, but it is a potent equilibrium nonetheless. It will be a long road traveled before China finds sustainable balance in savings, consumption, exports, and internally stimulated (broad based) investment. It will also be a long wait before we witness demonstrations of international responsibility emerging out of China. Until then, China will continue to flex its new-found influence to push for such things as an independent currency a few degrees removed from the dollar.

The world’s economic history has been fueled by leaps from one bubble to the next, but the current recession may have a long wait for the next bubble of consequence that will yank the world out of the doldrums. Whatever its form, it is not likely to come out of the less than transparent, state owned, and controlled economy of communist China. China has created a massive middle class in a single generation, but it has yet to empower it. China will not soon be supplanting Americans, or Europeans, in the mall line-ups yearning for China-made-American-invented-branded-and-engineered products. American consumers are unconsciously pushing back the clock on that empowerment of the Chinese middle class through their dramatic behavior modification of the past year. Like it or not, global economic stability will for the foreseeable future depend on the West, and very particularly on America.

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• China’s Weak Gambit On A Currency Shift

China is calling for a move toward an obscure international currency known as SDRs (Special Drawing Rights) used by the IMF, to replace the U.S. dollar. The proposal on first blush suggests China is concerned with looming inflation in the U.S. and the devaluation of the debt it holds. While a reasonable concern, why would it push for such a dramatic shift?

The U.S. / China relationship is both complex and fragile. The American consumer has been the principal driving force that has fuelled the Chinese economy into becoming the world’s third largest. The result has been the creation of a communist controlled capitalist system very reliant on a democratic, open society on the other side of the Pacific.

The U.S. has long pressed for Beijing to allow its currency to float. All requests fell on deaf ears. Now with the world is in financial turmoil, and with the U.S. being blamed for mismanaging its own economy, there is some not so subtle muscle flexing being exerted by numerous countries, particularly China. Currency is a major element at the heart of any international debates. China’s suggestion that the world should begin moving away from the dollar changes the dialogue away from demands to see its own currency, the yuan, move higher which would reduce the competitive price edge of its products. Obviously this could in turn very negatively impact its exports. From the U.S. perspective, a rise in the yuan would aid in reducing its mounting deficit with China.

China purchased dollars and will probably purchase more of the Obama packaged U.S. debt. While it can clamor for a move away from the dollar, China has every incentive to see the dollar’s value remain strong, and will not sell its dollar reserves.

So what are we to make of China’s current grandstanding just before the upcoming G20 meeting in early April?

It is understandable that this populous country wants to increase its influence on the world’s financial affairs, and feels emboldened given its almost $1.5 trillion in U.S. securities, nevertheless, the world’s business is done, and continue to be done in U.S. dollars. China and Russia might wish otherwise, however trade is very dependent on the safety and security of the method of payment.

Although there have been abuses in America’s capitalist community, the vast majority of the country’s businesses are well managed organizations who present reliable balance sheets. The Euro has been touted as a potential alternative to the dollar, however the current economic state of countries like Germany, France, England, Italy and others, suggests that they are having difficulty putting their own and collective houses in order, affecting long term confidence on the common European currency. Some of the European member nations also present little reliability as worthy credit risks. For countries such as China and Russia, it would take two or three generations to establish confidence through the evolution of independent, authentic, trustworthy, and transparent organizations populating their economic landscapes.

The Knights Templar became extremely powerful in the middle ages because they could do what others, including whole countries, could not. Their influence was rooted in their reputation as a fighting force. They could guarantee letters of credit paying for goods moving across borders in a disorganized medieval world. America is not in a position to be losing it’s power and influence any time soon. Even as it goes through the process of recuperating from the abuse of its financial system, America remains the principal safe haven for the world’s cash, and the world's principal trading partner.

America holds two critical elements standing in the path of any change to the current status of the dollar; military power, and international confidence in its business sector. It is at this point inevitable that we will see a devaluation of the dollar as the U.S. government prints dollars on its way into unprecedented spending. This action will impact all of America’s creditors, however, it is difficult to envision an unseating of the dollar as the dominant reserve currency and the preferred currency of trade. It is also not likely that Americans will be unseated at the world's foremost consumers, and they buy in dollars.

No matter how much China beats the drums for change, SDRs will remain tools for the IMF to account for its aid to debtor countries, the IMF will not be creating a new super-reserve currency, and the dollar will maintain its position in trade.

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• Revising Government Relationship To Money

In the search for solutions to the global economic turmoil, there is a disconnect between the objective of bankers and financial institutions, and the objective of government (read: people). The global crisis presents an evolving pathology beyond the reach of Paulson, Bernanke or any other imposition. That is the great mystery and abstruse nature of money.

If current examples of frenetic activity on the levers of the financial system are any indication, no one really understands money. The actions have been more akin to transgressions against taxpayers, although where would any forensic audits hope to begin on a course to discover root causes for the overwhelming market, currency or resource price gyrations. Some well enough appreciate how to use or manipulate money, but who really understands its complexities and flux? We all make some use of it, need it, work for it, fight for it, even beg for it, but understanding it is an altogether different exercise. We leave that to the wisdom of economists and Wall Street addressed expertise.

In the past year, banks all over the world have lost billions, and many have slid into bankruptcy. Paulson’s decision to hand billions to bankers, in the hope they would loosen their grip was just that, hope. J.P. Morgan for example acquired depressed financial entities for pennies on the dollar, expanding its presence and reach over the economy. But lend? Not so much. Why should it take risks, when it is still standing after having been more diligent, or gifted with higher levels of awareness than others?

Banks will not lend in this climate of uncertainty when the term rescue has morphed from verb, or name, into an adjective of economy. Paulson did not structure his deals with effective strings attached to ensure the function of providing liquidity to businesses. If the Secretary of the Treasury’s purpose was to stimulate the wheels of commerce on behalf of taxpayers, he is failing. Europe has also taken the bank bailout route in earnest, with each country dispersing enormous percentages of its GDP hoping to diffuse uncertainty and minimize the collapse of banks.

Did anyone listening to the concept of the government acquiring toxic assets from banks not have an intuitive flutter? And with all the talk of mortgages, are we forgetting the careless lending practices that were also applied to car loans and credit cards? Without disputing the overall concept, who could possibly be chosen as the arbiter of moral behavior on such elemental questions as the application of “valuation” on these noxious and nebulous inhabitants at the far reaches of the derivative universe? Walking on water would prove a more plausible expectation. This is not a smear on Paulson. He is human. He will no doubt do what he believes to be right. Paulson’s view is that of a banker. We will not change human nature, nor eliminate greed through regulation. Although perspective can be limiting, and in the existing financial situation may act to further exacerbate the damage, perspective can be modified. This can in turn alter behavior. The banking system may be in crisis, but much of the rest of the economy is not. At least not yet. Is a very different approach worth consideration?

There are endless suggestions floating through the political maelstrom girding an out of control financial implosion that will not be corralled. We are now heading to the $2 Trillion dollar bailout mark with no end in sight, and little substantive ignition of financing activity. On the personal front, taxpayers and workers are on average currently paying interest of 6.95% on car loans, 11.43% on credit cards, with $2.6 Trillion of consumer credit outstanding.

Taking counsel from Abraham Lincoln and Theodore Roosevelt, in the hope that we might prevent reprimand from Thomas Jefferson, may we be so bold as to proffer on the Secretary a few additional suggestions on dealing with the vicious cycle of credit contraction?

Mr. Paulson,

- Send out the whole army of economists and accountants at your disposal, add more as needed, to meet with the critical cogs in the economy, businesses, not the banks.
- Disperse these troops across the country, adding administrative support from state level when needed or appropriate, to meet with companies large and small.
- Don’t ask what they need, that would be insulting since you already know, just ask, “How much and for how long.”
- Assess the reasonableness of the demands based on current audited financial statements of each corporate entity and make a decision on the urgency of the need.
- Cut the check within two weeks, and here’s the key, No Interest. None. Why should banks be the only ones with access to borderline negative interest rates?
- Prorate repayment schedules over a five year window, preferably, but remain flexible and susceptible to the capacity to repay.
- The taxpayers (read: government) aren’t in need of interest on their money. Whether entrepreneurs or employees, they require an economy that continues to thrive, provides them jobs, a roof over their heads and nourishment for their kids. They’ve already been slapped into awareness on the traps of endless credit, they will be more astute from now on. Furthermore, the national currency is not backed by anything other that the strength of the economy, ergo, until there is a change to something like gold, silver or microchips backing the currency, the economy is it. It needs bolstering and we will trust that its resurgence will provide enough gain for us to deal with the cost of escalating debt.
- Take care to ensure that proper documents are signed with equitable collateral.
- Establish very tough regulations and repercussions in order to limit abuse, kick-backs or graft.
- Nationalize the Federal Reserve if you have time, before deploying the distributors. The Fed will be less cantankerous in good time, but you must give it the good news. It will be really good news, since there will be no leveraging with 30+ multipliers on capital to asset ratios, as we have seen over the past two decades in the financial derivative escalations.
- Government will actually have accurate measurements on the money supply, and there will be no concern for where the interest owed will come from, since none will be required. 
In other words, no one needs to fry at the bottom of the financial pyramid. This will also reduce the need to infinitely create new debt.

That’s it, Mr. Paulson. Good luck.
Sincerely,
Your Taxpayers.

While issuing legal tender is in the government’s purview, it does so through creation of bank debt. Banks distribute currency as they see fit. Even The Fed operates under the aegis of the government though it operates privately. Increasing the efficiency of the money creation system, allowing capital to flow and infusing it directly where it will most straightforwardly impact the nation’s engines will ignite recovery. Efficiency is not the primary objective, though under current circumstances, it would appear a necessary one in the mix of considerations. The current monetary and banking infrastructures claim efficiency, while the outcome is evidence otherwise.

The American economy rests on the back of the American worker and consumer. Taxpayers own the government and currency is only a tool enabling commerce. Get it working for you, not against you. With the computing power available and the internet’s ubiquity, the possibilities to become creative on the currency front within economic, political, or other boundaries are endless even to include a large role for banks.

The government just wants its tax. On the next trillion dollars, don’t waste it on the black hole of bad debt. Get this economy thriving again and get it paying its taxes. There will then be hope on the horizon that the principal on trillions of dollars of debt will gradually get paid down.

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