How can The Fed still operate legally?

My major goal of this blog is to raise people's awareness of the rampant fraud and corruption in the American circumstance. I especially focus on exposing the Fed for what it is, a crime syndicate authorized by our federal government, and wholly responsible for the destruction of the american laborer's wealth. Sadly, for 95 years we have allowed this unconstitutional organization to create credit from thin air, institute gradual inflation, and profit at the expense of the innocent and unsuspecting citizens of this great country.
But, we have been warned. There are numerous leaders, congressmen, industrialists and others that have spoken out against The Fed. so, why have we allowed its existence and for it to control our society's monetary system? Well, I have my reasons. Here is a long list of quotes of well-respected people who have had the courage to speak. End The Fed

Quotes On Banking and the Federal Reserve System FRAUD

"The entire taxing and monetary systems are hereby placed under the U.C.C. (Uniform Commercial Code)." -- The Federal Tax Lien Act of 1966

"The few who understand the system, will either be so interested from it's profits or so dependant on it's favors, that there will be no opposition from that class." -- Rothschild Brothers of London, 1863

"Give me control of a nation's money and I care not who makes it's laws."-- Mayer Amschel Bauer Rothschild

"Most Americans have no real understanding of the operation of the international money lenders. The accounts of the Federal Reserve System have never been audited. It operates outside the control of Congress and manipulates the credit of the United States." -- Sen. Barry Goldwater (Rep. AZ)

"Whoever controls the volume of money in any country is absolute master of all industry and commerce." -- James A. Garfield, President of the United States

"Banks lend by creating credit. (ledger-entry credit, monetized debt) They create the means of payment out of nothing." -- Ralph M. Hawtrey, Secretary of the British Treasury

"To expose a 15 Trillion dollar ripoff of the American people by the stockholders of the 1000 largest corporations over the last 100 years will be a tall order of business." -- Buckminster Fuller

"Every Congressman, every Senator knows precisely what causes inflation...but can't, [won't] support the drastic reforms to stop it [repeal of the Federal Reserve Act] because it could cost him his job." -- Robert A. Heinlein, Expanded Universe

"It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning." -- Henry Ford

"The regional Federal Reserve banks are not government agencies. ...but are independent, privately owned and locally controlled corporations." -- Lewis vs. United States, 680 F. 2d 1239 9th Circuit 1982

"We have, in this country, one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board. This evil institution has impoverished the people of the United States and has practically bankrupted our government. It has done this through the corrupt practices of the moneyed vultures who control it." -- Congressman Louis T. McFadden in 1932 (Rep. Pa)

"The Federal Reserve banks are one of the most corrupt institutions the world has ever seen. There is not a man within the sound of my voice who does not know that this nation is run by the International bankers." -- Congressman Louis T. McFadden (Rep. Pa)

"Some [Most] people think the Federal Reserve Banks are the United States government's institutions. They are not government institutions. They are private credit monopolies which prey upon the people of the United States for the benefit of themselves and their foreign swindlers." -- Congressional Record 12595-12603 -- Louis T. McFadden, Chairman of the Committee on Banking and Currency (12 years) June 10, 1932

"[Every circulating FRN] represents a one dollar debt to the Federal Reserve system." -- Money Facts, House Banking and Currency Committee

"...the increase in the assets of the Federal Reserve banks from 143 million dollars in 1913 to 45 billion dollars in 1949 went directly to the private stockholders of the [federal reserve] banks." -- Eustace Mullins

"As soon as Mr. Roosevelt took office, the Federal Reserve began to buy government securities at the rate of ten million dollars a week for 10 weeks, and created one hundred million dollars in new [checkbook] currency, which alleviated the critical famine of money and credit, and the factories started hiring people again." -- Eustace Mullins

"By this means government may secretly and unobserved, confiscate the wealth of the people, and not one man in a million will detect the theft." -- British Lord John Maynard Keynes (the father of 'Keynesian Economics' which our nation now endures) in his book "THE ECONOMIC CONSEQUENCES OF THE PEACE" (1920).

"These 12 corporations together cover the whole country and monopolize and use for private gain every dollar of the public currency..." -- Mr. Crozier of Cincinnati, before Senate Banking and Currency Committee - 1913

"A great industrial nation is controlled by it's system of credit. Our system of credit is concentrated in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the world-- no longer a government of free opinion, no longer a government by conviction and vote of the majority, but a government by the opinion and duress of small groups of dominant men." -- President Woodrow Wilson

"We are completely dependant on the commercial banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system.... It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon." -- Robert H. Hamphill, Atlanta Federal Reserve Bank

"The Federal Reserve Banks are not federal instrumentalities..." -- Lewis vs. United States 9th Circuit 1992

"The Federal Reserve banks, while not part of the government,..." -- United States budget for 1991 and 1992 part 7, page 10

"The Federal Reserve bank buys government bonds without one penny..." -- Congressman Wright Patman, Congressional Record, Sept 30, 1941

"The Federal Reserve system pays the U.S. Treasury 020.60 per thousand notes -- a little over 2 cents each-- without regard to the face value of the note. Federal Reserve Notes, incidentally, are the only type of currency now produced for circulation. They are printed exclusively by the Treasury's Bureau of Engraving and Printing, and the $20.60 per thousand price reflects the Bureau's full cost of production. Federal Reserve Notes are printed in 01, 02, 05, 10, 20, 50, and 100 dollar denominations only; notes of 500, 1000, 5000, and 10,000 denominations were last printed in 1945." -- Donald J. Winn, Assistant to the Board of Governors of the Federal Reserve system

"Neither paper currency nor deposits have value as commodities, intrinsically, a 'dollar' bill is just a piece of paper. Deposits are merely book entries." -- Modern Money Mechanics Workbook, Federal Reserve Bank of Chicago, 1975

"This [Federal Reserve Act] establishes the most gigantic trust on earth. When the President [Wilson} signs this bill, the invisible government of the monetary power will be legalized....the worst legislative crime of the ages is perpetrated by this banking and currency bill." -- Charles A. Lindbergh, Sr. , 1913

"From now on, depressions will be scientifically created." -- Congressman Charles A. Lindbergh Sr. , 1913

"The financial system has been turned over to the Federal Reserve Board. That Board administers the finance system by authority of a purely profiteering group. The system is Private, conducted for the sole purpose of obtaining the greatest possible profits from the use of other people's money" -- Charles A. Lindbergh Sr., 1923

"The [Federal Reserve Act] as it stands seems to me to open the way to a vast inflation of the currency... I do not like to think that any law can be passed that will make it possible to submerge the gold standard in a flood of irredeemable paper currency." -- Henry Cabot Lodge Sr., 1913

[Note – From 1913 until now inflation of the dollar has been 2950%. A 1913 dollar would now be worth $.034. When I became a wage earner in 1950 I could buy a full breakfast, eggs, sausage, hashbrowns, shortstack, juice, and coffee for $.39. This morning I paid $9.60 for the same, an inflation of 2460%]

"When you or I write a check there must be sufficient funds in our account to cover the check, but when the Federal Reserve writes a check there is no bank deposit on which that check is drawn. When the Federal Reserve writes a check, it is creating money." -- Putting it simply, Boston Federal Reserve Bank

"There is a distinction between a 'debt discharged' and a debt 'paid'. When discharged, the debt still exists though divested of it's charter as a legal obligation during the operation of the discharge, something of the original vitality of the debt continues to exist, which may be transfered, even though the transferee takes it subject to it's disability incident to the discharge." -- Stanek vs. White, 172 Minn.390, 215 N.W. 784

"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)

"Capital must protect itself in every way...Debts must be collected and loans and mortgages foreclosed as soon as possible. When through a process of law the common people have lost their homes, they will be more tractable and more easily governed by the strong arm of the law applied by the central power of leading financiers. People without homes will not quarrel with their leaders. This is well known among our principal men now engaged in forming an imperialism of capitalism to govern the world. By dividing the people we can get them to expend their energies in fighting over questions of no importance to us except as teachers of the common herd." -- Taken from the Civil Servants' Year Book, "The Organizer" January 1934.

"I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a monied aristocracy that has set the government at defiance. The issuing power (of money) should be taken away from the banks and restored to the people to whom it properly belongs." -- Thomas Jefferson, U.S. President.

"If Congress has the right [it doesn't] to issue paper money [currency], it was given to them to be used by...[the government] and not to be delegated to individuals or corporations." -- President Andrew Jackson, Vetoed Bank Bill of 1836

"History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling money and it's issuance." -- James Madison

"Should government refrain from regulation (taxation), the worthlessness of the money becomes apparent and the FRAUD can no longer be concealed." -- British Lord John Maynard Keynes (the father of 'Keynesian Economics' which our nation now endures) in his book "THE ECONOMIC CONSEQUENCES OF THE PEACE" (1920).

"But if in the pursuit of the means we should unfortunately stumble again on unfunded paper money or any similar species of fraud, we shall assuredly give a fatal stab to our national credit in its infancy. Paper money will invariably operate in the body of politics as spirit liquors on the human body. They prey on the vitals and ultimately destroy them. Paper money has had the effect in your state that it will ever have, to ruin commerce, oppress the honest, and open the door to every species of fraud and injustice." -- George Washington in a letter to Jabez Bowen, Rhode Island, Jan. 9, 1787

The economic Crash of '29 and the Great Depression were caused by the money vultures and foreign swindlers of the Federal Reserve withholding currency from circulation and raising interest rates after an inflationary easy money policy in the early 1920s. The Federal Reserve's fear of excessive speculation led it into a far too deflationary policy in the late 1920s, "destroying the village in order to save it."

The U.S. economy was already past the peak of the business cycle when the stock market crashed in October of 1929. The Federal Reserve did "overdo it" -- raising interest rates too much, bringing on the recession that they had hoped to avoid.

This contrived "emergency" by the money vultures and the political manipulations of FDR, et. al. since then has created innumerous abuses, usurpations, and abridgments of Constitutionally delegated Powers and Authority as clearly stated in Senate Report 93-549 (1973):

"A majority of the people of the United States have lived all of their lives under emergency rule. For 40 years, [-1823 years now in 110] freedoms and governmental procedures guaranteed by the Constitution have in varying degrees been abridged by laws brought into force by statutes of national emergency."

CONSEQUENCES OF EXTEND/PRETEND

There are consequences to every action and every inaction. What can we expect from the banking industry moving forward from this economic crisis? Is the worst behind us? Don't count on it. Here is an interesting excerpt pertaining to the consequences of extend/pretend accounting and the temporary suspension of capital standards by the FASB. IT'S NOT GONNA BE PRETTY.

Guest Post: What Do We Have to Show After a Year of “Extend and Pretend”?

By Gonzalo Lira, a novelist and filmmaker currently living in Chile

In 1982, many of the banks hit by the Latin American debt crisis were effectively insolvent. Paul Volcker, as the then-Chairman of the Federal Reserve—charged with overseeing the banking system—effectively cast a blind eye on this banking insolvency.

Volcker’s reasoning seems to have been that the US banks were not broke—they were just getting temporarily squeezed. Volcker seems to have concluded that time would heal the balance sheet wounds caused by the Latin American defaults. Therefore, to hold the banks to the letter of the accounting rules would likely drive one or more of them broke, to no useful purpose—and it could potentially cause a bank panic and general financial crisis. But to pretend (for a while) that all was right with the US banks would avoid a potential panic—so long as the crisis sorted itself out and the banks repaired themselves by writing off and renegotiating their toxic Latin American debt.

Volcker gambled, and won: The US banks indeed took the Latin American debt hit, but grew their way out of their hole. None of the large American banks were pushed to bankruptcy in 1982, and by 1983, the worst had passed. By 1984, the biggest chunks of Latin American debt had either been renegotiated or written off—so far as the American banking system was concerned, the crisis was over, with not a single name bank going broke. And most importantly, stability and calm reigning all the while.

Score for Volcker and what we could say was the Volcker Call.

In 2008, when Lehman went bankrupt because of all the “toxic assets” on its balance sheet, the severe credit crisis that happened as a result was because everyone realized that Lehman was the canary in the coal mine. All of the American banking system was insolvent, for more or less the same reason: Assets on their books simply were not worth anything close to their nominal value. These assets were clustered around CDO’s, mostly in the real estate and commercial real estate markets.

To relieve the credit crunch that peaked in September, 2008, the Federal Reserve Board opened the money spigots—all kinds of lending windows were opened, with a dizzying array of acronyms, all of them doing basically the same thing: Lending out wads of cash at zero interest to the American banking system, all in an effort to keep it from going broke.

Between September, 2008, and March 2009, the Fed backstopped the entire US banking system—but it still wasn’t enough. The losses were too great, the holes in the balance sheets too big.

So on April 2, 2009, a key FASB rule was suspended: Specifically, rule 157 was suspended, related to the marking of assets to market value—the so-called “mark to market” rule.

Essentially, the mark-to-market rule means marking an asset to the value it can fetch in the open market at the date of the accounting period. If I own a share of XYZ stock which I purchased at $100, but today it’s quoted at $60, I mark it on my books at today’s market price—$60—not at the purchase price—$100. The reason is obvious: By marking the asset to market value, I’m giving a realistic picture of the financial shape of my company or bank.

However, ever since April 2, 2009, when the FASB rules were suspended, the American banking system has been floating on nothing by air. By suspending rule 157, none of the banks have had to admit that they’re insolvent. With the suspension of mark-to-market, accounting rules are now basically mark-to-make-believe.

Why was FASB rule 157 suspended?

Geitner, Bernanke and Summers seem to have been trying to duplicate what Volcker did so successfully in 1982. This period since March 15, 2009, when the suspension of the rule went into effect, has been called “extend and pretend”.

Has it worked?

Prima facie, it would seem so. The banks seem to be stable, and have been raking in the big bucks ever since the rule was suspended. The markets—from their March ’09 lows—have rocketed onward and upward. In fact, Citigroup stock has quadrupled, Goldman Sachs has doubled—everything is wonderful! Nothing hurts!

However, the basic problems in the banking system remain: The banks are still broke, because of the same reason—the toxic assets on their books.

The banks have taken “extend and pretend” to heart—they have lobbied to extend the suspension of FASB, while they have pretended to repair their balance sheets, when in fact, they have not.

In fact, compared to the write-off mania of ’08, the banks have not written off any of these non-performing assets. They sit like dead weight on the balance sheets of the banks—we still do not have a clear grasp of even how much of this garbage is still lurking out there, like turds in the Venice canals, because of the obfuscation of the basic accounting rules—an obfuscation which the banks insist on perpetuating.

The banks still have the holes in their balance sheets which caused the crisis in 2008.

But then, how have the banks made such staggering profits during the last year?

By trading. Instead of being banks, since March of ’09, the Big Six US banks have effectively become hedge funds. They have been trading themselves into profitability. Worst of all, these banks qua hedge funds have been making money by trading with each other. Price-to-earnings ratios bear this out—their general upward trend, across sectors and industries, even as the economy has been severely weakened, is indicative of a speculative bubble. A massive bubble—the kind that makes the Hindenburg look puny.

All of the markets have risen from their March ’09 lows because of what I would term musical chair trading—everyone makes money so long as the music doesn’t stop. The “music” of this metaphor is a combination of Uncle Ben’s easy money, relative calm in the world, and good ol’ “extend and pretend”, courtesy of FASB.

But when the music does stop, the banks are going to realize that it’s not that there’s one less chair in the circle. There are no chairs left.

That when the next crisis will hit—when the music stops, and everyone rushes to get out of their musical chair trading positions.

To continue with the analogy, when will the music stop? When will everyone rush to find a seat—and find that there are none left? My guess is, it will be something from left field, something in-and-of itself not particularly earthshattering: A punitive Israeli airstrike against Iran, say, or Somali pirates sinking a big oil tanker. A lousy consumer sentiment number, or a surprise burst of unemployment.

Why hasn’t Team Obama’s version of the Volcker Call worked? Simple—because Paul Volcker made it clear to the banks in ’82 that he would declare them insolvent, if they didn’t repair their balance sheets. Volcker scared the bankers, scared them enough to make then do what was necessary—which was to clean up their balance sheets.

What did Team Obama do 27 years later? Did they twist bankers’ arms, and force them to write off the garbage on their balance sheets?

No they did not. Instead, they bowed and scraped at the banksters, as if they were truly Masters of the Universe, instead of what they really are—scum of the earth dressed up in really nice suits.

In 1982—unlike 2009—the banks had a reason to try to renegotiate and write off the bad Latin American loans: Volcker was breathing down their collective necks, and the banks were scared of him. Volcker had a credibility then that Team Obama today does not have now—Volcker showed himself willing to bring the entire US economy to a halt, in order to purge inflation. What was putting a few big banks out of business, compared to that? Nothing—catnip for Volcker.

But Geitner, Bernanke and Summers have shown themselves willing to do anything for the banks—they’ve become twisted around, and come to think of the banks as ends-in-themselves, rather than means-to-ends, within the economy.

What should have happened starting in March of ’09 was for the banks to take the suspension of mark-to-market and used it to purge their balance sheets of all the crap they are still carrying.

But they did not. Nor will they. Because no one is forcing them to. No one forced them in April of ’09, no one is forcing them now in April of ’10.

Therefore, once the era of Musical Chair Trading ends with some ridiculous non-event that will send everyone panicking, the banking sector will be right back where it was on Septmber 18, 2008—the only difference, of course, being that Bernanke has already shot his wad, and politically, it will be impossible to pass another TARP.

That’s when the world ends—the second crisis will be loads worse than the one in the fall of ’08. Loads worse, even, than ’29.

When will it happen? I don’t know. Then again, I don’t know when the Yankees will next win the Pennant—but I’m pretty sure it’ll happen.

“Extend and pretend” could have been used to do what Volcker did in ’82—the Volcker Call. But Geitner, Bernanke, Summers, and ultimately Obama himself lacked the will or the gumption to force the banks to do what needed to be done—clean up their balance sheets. Write off all that crap.

So get ready: The countdown to oblivion was paused by “extend and pretend”—but it wasn’t suspended, much less averted. I don’t know if the end will be hyper-inflationary or mega-deflationary—all I know is that it’s gonna really suck.

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A KEYNESIAN INDUCED RETIREMENT

GARY NORTH DOES HIS BEST TO EXPLAIN WHY OUR RETIREMENT, OUR FUTURE, IS RELIANT UPON A GIANT CONFIDENCE GAME, INDUCED BY THE FED. IT DOESN'T LOOK GOOD.

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No Bang for the Keynesian Buck by Gary North by Gary North Recently by Gary North: Obamacare and the Politics of Revenge You may not have watched my video seminar, "Retirement Armageddon." It's here. Let me explain why you should. In fiscal 2010, the Federal debt will increase by an estimated $1.5 trillion, give or take $100 billion. Have you estimated your share yet? Probably not. Divide $1.5 trillion by 300 million Americans. The figure is $5,000. Every American resident, from oldsters to infants, just got hit with an extra $5,000 tab. This is on top of what he already owes. What does he already owe? Something in the range of $300,000: a $90 trillion total debt divided by 300 million. It will happen again next year. And the next. We are told that the deficit over the next decade will be in the range of $900 billion a year. That is $3,000 per person. This is a low-ball estimate. We are talking about the on-budget debt, which is in the range of $12.7 trillion this week. What about the off-budget debt of the two trust funds: Social Security and Medicare? The estimated unfunded liability is about $75 trillion this year. Some say it is more. I will be conservative. This will not be funded. Congress will kick the can, as always. In a mortgage in which the debtor pays nothing – interest or principal – each missed payment is added to the principal owed. This is sometimes called a backward-walking mortgage. Option ARM mortgages are backward-walking. The trust funds are comparable to mortgages. They are therefore backward walking. If we assume that the interest rate on these obligations is in the range of 5% over 75 years, and principal repayment is 1.33% (100% divided by 75), then the amortization rate is about 6.3%. Let's be conservative. Call it 6%. If you multiply $75 trillion by .06, you get $4.5 trillion. This is the unfunded liability for fiscal 2010. It is tacked onto the existing $75 trillion. So, the increased debt per person of the two forms of Federal debt totals $6 trillion ($4.5t + $1.5t). Divided by 300 million Americans, that is $20,000. In one year. This will continue until the debt is paid off. It will happen again in fiscal 2011. But in fiscal 2011, the "mortgage" will be $79.5 trillion, not this year's $75 trillion. How many Americans understand this? The infants do not understand. The oldsters don't care. Neither do the people in the middle. As we all know, most Americans pay relatively few taxes. The tax burden is borne by others. So, your share is way above $20,000 this year. It will be way above $20,000 next year. Will these debts ever be paid off? No. Will there be a default? Of course. Do the politicians factor this into their plans? Of course not. Do the economists sound a warning? Only Austrian School economists. Do you believe this scenario? I mean, really, truly believe it? Sit down with a copy of Quicken or your financial software. How much money did you invest last year in assets that will not be wiped out in the inevitable default? That exercise will tell you how much you believe it. THE GDP/DEBT RATIO We are now facing a monumental debt crisis. We were warned. From the recession of 2001 until his death in August 2007, Dr. Kurt Richebächer warned in his monthly newsletter about an ominous development in the U.S. economy. The level of increased debt necessary to produce one additional dollar in GDP was rising. He said repeatedly that this would eventually produce a major financial crisis. The increased debt would require increased production to finance it, quarter by quarter, let alone repay it. If economic output per dollar of increased debt is declining, there will come a day when an increased dollar of debt will lead to negative returns. We are there. We reached that point in 2008. It continued through 2009. GDP fell, yet total debt increased. Here is a chart that describes this falling ratio, GDP to debt, 1965–2000. The problem is debt financing. If creditors see that their loans will not be able to be funded by the borrowers, quarter by quarter, they will cease lending money at low interest rates. They will demand a higher return in order to compensate them for the increased risk of default. Borrowers will have to pay rising interest rates in order to persuade lenders to continue lending. The cost of capital will rise. The return on investment will fall. At that point, rolling over the existing debt will become a matter of institutional survival for borrowers. Corporate borrowers use banks as a way to keep the doors open. Governments rely on non-bank lenders, such as insurance companies and retirement funds. But all of them are in the same ship of debt. They cannot afford to have the flow of funds cut off. If this were to happen, they would have to shut their doors and declare bankruptcy. Small businesses are already facing a crisis. Commercial banks have ceased lending. Banks are actually contracting their loan portfolios. Borrowers are still able to get lenders to lend at low rates. This is because of the state of the economy. It is no longer suffering from the threat of immediate price inflation. Interest rates have fallen. Lenders have decided that T-bills are safe. They are letting the Treasury borrow at rates well under two-tenths of a percent. This has affected other rates. They are lower. Lenders are not yet ready to consider the long-run implications of the incredibly low return on investment in terms of economic output – negative in 2008 and 2009. The rate of return may have been slightly positive since mid-2009. We will find out next quarter, when the report is published. THE KEYNESIAN BUCK The phrase, "More bang for the buck," became popular in Washington during the Vietnam War. It referred to Defense Secretary McNamara's attempt to increase the efficiency of the military forces in Vietnam. He wanted larger kill/budget ratios. He demanded that all assessments be accompanied with objective data. He used this phrase to filter all assessments not based on objective data: "I'm not interested in your poetry." The commanders got the message. They supplied him with impressive information on kill ratios. The dead were always military forces, never civilians, by definition. Then the North Vietnamese won the war. The kill ratio kept rising, but the war was lost. The North Vietnamese turned out to be exceptionally good poets. They won the war in the American media and in undermining the will to resist in South Vietnam's troops. Keynesians are equally committed to data. They believe that an economic downturn can be reversed by increased debt, especially government debt. They argue that the recession is the result of insufficient aggregate demand. The Federal government must step in and supply this demand. How? By borrowing money. But won't this borrowing reduce the supply of capital to the private sectors? No, say Keynesians. Then where does the money come from? From people who would have converted their money to currency and hidden it under the mattress. Keynesian theory is based on 1936 models of how people behave. People withdrew currency from banks, 1931–34, before the FDIC. Therefore, they will do it again if the Federal government does not increase spending by increasing its debt. Forget about the FDIC. Forget about the fact that money saved is invested. You may think I am exaggerating for effect. I wish I were. I have discussed this Keynesian outlook elsewhere. Keynesians view increased government spending/debt as a way to increase aggregate demand, despite the fact that the money lent to the government comes from private savers, with this exception: when it comes from central banks. These days, about half of the Treasury's debt is bought by foreign central banks, which create domestic fiat money, buy U.S. dollars, and purchase U.S. Treasury debt. To the extent that foreign central banks do this, and would not otherwise buy the U.S. dollar, the Keynesians have a legitimate point. There is an increase in demand. But this increase keeps prices higher in the U.S. than they would have been. Without this increased demand for Treasury debt, the Federal government could not have spent the borrowed money. Then Americans would have purchased either consumer goods or production goods. When they put money in a bank, the bank lends it. Historically, this has meant lending the deposits to borrowers. This time, however, there has been a change. Commercial banks have deposited over $1 trillion in their excess reserve accounts at the Federal Reserve. This sterilizes the money. It does not get spent. This is the fault of prior Federal Reserve policies. Commercial bankers are afraid to lend money in this economy. This is why prices from January to February this year were flat. The CPI did not change. Neither did the Median CPI. In a free market with stable money, prices would generally decline as output increases. Central banks have not allowed this in the modern world. But now, because of excess reserves, it is happening. INCREASED DEBT INCREASES THE GDP, SAY KEYNESIANS The basis of Keynesian fiscal policies in an economic slump is a theory that increased government debt will increase aggregate demand, which will in turn lead producers to hire more people and buy more resources in order to meet future rising demand. The increased debt gives the economy a much-needed shot in the arm – or, these days, a shot in the ARMs. The government stabilizes demand, and this increases the confidence of producers. The commercial bankers are not yet persuaded. They refuse to lend. They see big trouble ahead: commercial real estate loan losses. They want liquid reserves available to keep them from having to call in commercial loans to cover the expected losses in their portfolios. We are told repeatedly that the recovery is weak. Bernanke keeps telling anyone who will listen that the FED will keep rates – meaning the federal funds rate – at or below 0.25%. The market is doing this, not the FED. The FED need only do nothing to achieve this result. Banks are not lending overnight to other banks, because they have such high excess reserves at the FED that they do not need overnight loans to keep from exceeding their legal reserve requirement. As the increased output per dollar of increased debt has gone negative, the Keynesians have called for even more debt. They have said that the $787 billion stimulus passed in October 2008 was not enough. But the trend of the GDP to debt has been falling for decades. This was not some overnight problem in late 2008. The ratio went sharply negative. This was a surprise to everyone except Austrian School economists. But this was merely the result of the severity of the recession in relation to the massive Federal stimulus. The numbers got much worse very fast. But this was an extension of a long trend. The Keynesians have taken credit for the recovery, such as it is. They have argued that things would have been much worse if Congress had not ignored the voters and passed the bailout. But the weakness of the recovery and the size of the Federal deficit indicate that the Keynesian prescription for prosperity is about to produce undeniably negative results. The size of the predicted annual Federal deficits is so large that the economic recovery must be unprecedented in its rate of increase and sustained for a decade if the decline in the GDP to debt ratio is to return to pre-2008 levels. No one in authority in Washington is predicting either outcome. On the contrary, they are predicting a weak recovery. Keynesians are facing a crisis in faith. If the GDP/debt ratio continues to hover around 0, the Keynesian prescription will not solve the problem: massive escalating debt without an even greater percentage increase in output. That will mean that the U.S. economy cannot grow its way out of the present crisis. Such a failure will call all school of economic thought into question. The exception is the Austrian School. CONCLUSION We are way beyond the point of return economically. There is no possibility that the economy will grow its way out of this level of debt. There is no way that there will not be a default. The experts keep telling us that the economy can grow its way out, but they do not say how. They talk as if growth were automatic, as if capital accumulation were automatic, as if the Treasury were not absorbing $1.5 trillion in additional capital this year, as if the numbers really did add up. The numbers do add up: to default. What have you done so far to protect yourself? What extra will you do to protect yourself? April 2, 2010 Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.