The Creature From Jekyll Island

Imagine this scenario for a few minutes:

A small group of men, representing the most wealthy and powerful banking interests in America and elsewhere, meet in secret to plan a blatant scam to rip off American citizens. Their plan is to form a cartel consisting of the major banks in the Eastern United States to help suppress competition from the smaller regional banks out west, and to develop a scheme to offload losses from bad loans onto the back of the American taxpayer instead of taking the losses themselves. While the plan is designed to profit the bankers and the families that are the major stakeholders in them, they will pitch the plan to Congress as a way to both achieve economic growth in the country as well as stabilize its economic policy.

Sounds like the plot to a good novel, eh? Well, here’s the really good part. All of this happened back in 1910. The place was Jekyll Island, Georgia, and the eventual name the cartel would take is the Federal Reserve.

Contrary to public perceptions, the Federal Reserve isn’t a government entity; it’s a privately-owned consortium of regional banks, owned by private banking institutions that the United States Government has given the authority to manage the national money supply and set fiscal policy for the nation. It’s a privately-held corporation, so little is known about the inner workings of the place. The fact that it’s not a government entity is obfuscated regularly. Their website is ‘www.federalreserve.gov‘, which implies it being a branch of the government.

(NOTE: I’m an amateur when it comes to economics. Any mistakes below are totally based on my inability to convey the concepts correctly. This is meant just to give people an idea of how our economy really works, not the pablum we’re spoonfed by the media.)

The Fed’s main tools to control the US economy are based around their ability to set inter-bank interest rates (i.e. the ‘prime rate’) and by controlling how much liquidity there is in the US dollar market. They have the ability to influence markets by either creating new money and injecting it into the financial markets, or remove liquidity via an opposite move. Many critics of the system argue that the periods of inflation and deflation that regularly hit the US economy are created in part by the Fed, who first lower interest rates and inject liquidity into the monetary system to create growth, and then raise rates and reduce liquidity to slow things down. Whether this is normal business cycle, or a purposeful scheme to fleece small investors is a matter of some debate. After reading a fair bit on the subject, I’m inclined to believe it’s at least 50/50, if not tilted towards the latter.

The Great Depression of the 1930’s was created in part due to some very poor decision making both before and after the initial stock market crash in 1929. The initial crash was due to low interest rates and major growth in the money supply in the 1920’s, which led to an asset bubble of sorts that popped in October of 1929. In an effort to fix things, the Fed ended up raising interest rates quickly and reduced the money supply by around 1/3, leading to a situation where no-one had much cash at all to buy the necessities of life, like food, energy, etc. “Brother, can you spare a dime?” was the cry. This was in direct contrast to the financial crisis in Weimar Germany in the early 20’s, where hyperinflation, not deflation was the issue.

I bring this up because we’ve been through several ‘bubbles’ recently… the High-Tech stock market bubble of the 1990’s, and now the housing bubble, which is starting to deflate. When these asset bubbles deflate, small investors tend to lose their shirts, while the larger investment banks do fine.

Episodes like the Great Depression are seen as huge transfers of wealth from the poor to the rich:

Small investors like you and I speculate on the stock market, or buy more house than we can afford, based on the bet that the price of both assets will increase and we’ll make a profit when we sell. Well, when the Fed takes liquidity out of the financial markets and raises interest rates, guess what? Prices start falling as economic growth slows or stops altogether. Suddenly formerly bullish investors start to panic as asset prices level off and then decline. In a panic to sell while their investments are still worth something, everyone tries to sell at once, driving the price of these assets down further still. Once the prices of these assets drop far enough, the banks swoop in, either buying the assets at a bargain price, or in the case of homes, simply foreclosing on them when people can’t make the mortgage payments any further.

We have a similar situation forming right now. People have been buying more house than they can afford using adjustable-rate mortgages, and then taking cash out to pay the bills and buy toys. The Federal deficit is climbing daily, as is personal debt, while we are running huge trade deficits with our trading partners, most noticeably China. Our ability to continue racking up huge debts (the Iraqi conflict has consumed over $300 billion so far lone) is based on other nations being willing to buy our debt in the form of Treasury Bonds, and they are becoming less and less enthusiastic about doing so unless we raise interest rates to the point that it will cripple the US economy. This state of affairs is unsustainable over the long run, and when things finally come to a head, the Federal Reserve and it’s chairman, Ben Bernanke, will be faced with one of two choices: They can either jack interest rates up into the double-digits ala Paul Volcker, or they will have to inflate the debt away. There is no other choice that I can see. The first option will destroy the US economy while possibly leaving the dollar somewhat intact, whereas the second choice will destroy the dollar’s value completely, leaving everyone holding dollars with nothing but a pile of worthless paper.

Imagine a scenario where hyperinflation has gone to the point that your take-home pay is $1 million per month. Sounds great… if you’ve got a fixed-rate mortgage you can have that paid off in no time flat. However, a loaf of bread will cost you $5,000. It’s a distinct possibility that this will happen at some point in the relatively near future.

I haven’t got time to go into all the details of why our current monetary system will screw us in the end. Mike Ruppert of From the Wilderness has often said about peak oil that “until you change the way money works, you change nothing.” I agree with that statement whole-heartedly. The US Dollar is based on nothing but a promise from our government that we’ll honor it. In order for the scheme to work, we need to constantly inflate our money supply and prices in order for the whole debt/interest model to be appealing to anyone. This is a major reason why the value of the US dollar has plummeted since the Federal Reserve was created in 1913. I’m a history major, and the old joke about the Holy Roman Empire of the Middle Ages was that it was neither Holy, nor Roman, nor an Empire. In a similar vein, the Federal Reserve is neither Federal, nor do they have any reserves…. just a printing press.

Here are a couple of closing points to ponder:

  • Since the end of World War II, the dollar has lost about 90% of it’s purchasing power. That’s why the house our parents bought for $30,000 in the late 60’s is now selling for $300,000.
  • Inflation isn’t the cost of goods going up; it’s the purchasing power of our money being slaughtered.
  • Our dollar is based on nothing. Read up on fiat currency sometime for an education in how we are getting screwed.
  • Then when you get sick of that subject, check out how the ‘miracle’ of fractional reserve banking is setting us up for failure. Here’s a parable that illustrates it pretty good I think.
  • Read up further on Petrodollars to see how we have kept this scheme going for decades on end, and why we get so nervous when nations talk about selling oil in currencies other than dollars. here’s another link among many…
  • The title of this piece is the same as the book by G. Edward Griffin. It’s a thick, hard read, but it details a myriad of reasons why we’re screwed, who’s doing the screwing, and who benefits. I was able to pick it up via ILL from my local library, and if you’re interested in the subject, I would suggest you do the same.
  • When the dollar tanks, all of our investments based on them will go as well. I’m not a financial expert, and I don’t give advice out, but if you’ve got some savings that you don’t foresee using anytime soon, I would look at moving them into something else: commodities, precious metals, foreign currencies (most of them are fiat-based as well, so watch out). If you’re interested in discussing this more, shoot me an email, and we can discuss it in private, or check out some of my del.icio.us links for finance.
  • It’s shocking how few people in the country truly understand how money works. I’m not a financial genius by any stretch of the imagination, but at least I’ve bothered to try and figure things out. I hope this is of value to readers of this blog, and please share the information with anyone you think might benefit from it.
  • Finally, take a look at this exchange between Rep. Ron Paul of Texas and Ben Bernanke at one of the last committee meetings Bernanke testified for. Bernanke is obviously evading some of the tougher questions Paul is throwing at him. His claims of not knowing are complete bullshit. Remember, when Bernanke goes to the hill and acts the part of the loyal servant of the public, he may be loyal, but he’s serving someone other than you and me.

(NOTE: I’ve updated this posting a little bit in late September to correct some inaccuracies… the Fed is truly a hybrid. It’s a corporation owned by the major banks, but it’s board of directors and chariman are nominated by the government. This does nothing to change my opinion that it has no business regulating our monetary policy, since they’ve done a crappy job of it from the start, with more boom & bust cycles, and massive devaluation of the dollar)

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