Robert's Blog

The National Debt now exceeds $9.2 trillion dollars. In Fiscal Year 2006 the U.S. Government spent $406 billion on interest payments to holders of that debt. Why do we have such a gigantic debt? Because Democrat and Republican officeholders spend far more than the Government receives in revenue.

In 2007 alone, the US government paid out roughly $430 billion in interest to pay for money borrowed to finance previous deficits. The interest total for just the last 20 years – back to 1988 - is well over $6.5 trillion. Interest payments in 2008 alone will again exceed $400 billion. Where on earth will all that money come from? If the government borrowed it all from the credit markets (i.e., sold US Treasury bills, bonds and notes – government IOUs) to raise the money it would dry up all available credit. Interest rates would skyrocket and the economy would collapse. So how does it do this year after year without such dire effects?

Here is the trick. Take, for example, a year like this year in which the government runs a $400 billion dollar deficit. The Treasury Department has to sell $400 billion in US Treasury bills, bonds and notes (government IOUs) to buyers at a rate of interest sufficient to attract their money (and beat the interest competition of other banks’ CDs and other governments’ bills, bonds and notes). To avoid a credit squeeze, the Federal Reserve System Open Market Committee in Washington directs the NY Federal Reserve Bank to purchase roughly 10% of that total (or $40 billion in our example) in existing US bills, bonds, and notes from the current holders. To pay for them it creates the $40 billion out of nothing, merely with keystrokes on a computer. Through more keystrokes, this new $40 billion is deposited into the banks of the various bill, bond, and note sellers, thereby increasing the reserves of those banks by $40 billion.

Pursuant to the Federal Reserve Act of 1913 those banks must keep only 10% of those new deposits on "reserve." (Because these banks do not have to keep 100% on reserve, this banking system is called a “fractional reserve” system.). So of the $40 billion deposited, the banks must keep 10% on reserve ($4 billion) and may loan out $36 billion (90%), for business loans, mortgages, credit card loans, to purchase government bonds - for whatever borrowers want. Those loans (and payments) are in turn deposited in banks (very few folks put their money in mattresses). So of the $36 billion loaned out and then re-deposited, the banks receiving the new deposits can then loan out 90% or $32.4 billion, retaining 10% or $3.6 billion as reserves.

Banks repeat this redeposit-reloan process, reduced 10% each time, until the 10% reserves retained have reduced the funds available for loan to zero. This cunning process allows the banks to create out of nothing nine times the original $40 billion in new deposits received from the Federal Reserve (the “Fed”), or $360 billion dollars. This total is concealed from the public by the only partial expansion of the loan total at each repetitive step.

We can easily see that even by the second re-loan step mentioned above, the banks have loaned out $68.4 billion based on the original $40 billion deposited. The end result of the process is that the banks receiving the deposits and re-deposits collectively have loaned out $360 billion dollars, which they created out of nothing, and have retained $40 billion in reserve. The Fed created the first $40 billion, the banks $360 billion, equaling $400 billion dollars. Thus the credit markets are stabilized even though the US government has borrowed $400 billion.

But notice, the Fed only created the initial 10% ($40 billion). Privately owned banks created 90% ($360 billion) out of nothing, and loaned it out at interest. At even 6% that is $21.6 billion dollars per year in interest. Some of this profit goes to the private stockholders of the banks. However, the banks conceal much of this vast profit from the public as undistributed or retained earnings. Five banks hold over 50% of all deposits in the United States. This means that in a year with a $400 billion deficit (such as FY 2007-2008), those five banks will receive over 50% of approximately 6% interest on the newly created $360 billion: over $10 billion per year, from now on, for creating money out of nothing. This is profoundly unjust, and dangerous to any government, especially in a country that prides itself on being a democracy.

Note that the Fed, not the United States Treasury, created the initial $40 billion in our example. The 12 Federal Reserve banks are private corporations the stock of which is owned by private banks in their districts, not by the United States Government. The United States Treasury pays the Fed interest on the US bills, bonds, and notes the Fed buys with the money it creates out of nothing. The Fed routinely holds about 10% of the United States National Debt (US Treasury bills bonds, notes), which it has accumulated to provide the base for the rest, as explained above.

6% interest on the nearly trillion dollars in bonds it now owns provides the Fed with roughly $50 billion in revenue. With this money the Fed (1) pays some money to its private banks stockholders, (2) uses some to create giant unaudited slush funds to manipulate currency and stock markets (ostensibly to help avoid economic crises such as the one we are currently in), and (3) then takes out whatever it wishes - without any Congressional oversight or external audit - for expenses, salaries, perks, jets, lavish parties, etc.. The rest it returns to the US Treasury. In this manner the Federal Reserve operates independently of our elected Congress and external oversight.

A well-meaning, but later-disillusioned President Woodrow Wilson signed into law The Federal Reserve Act of 1913 that authorized this profoundly unjust system. This law transferred money creation from our elected government to private banks. The vast economic wealth that contorted and deliberately complex law of 1913 concentrated in the hands of the privately-owned national banks is almost incalculable. It is concentrating the wealth of the nation in fewer and fewer hands as they create over 90% of our new money, year after year, and receive the interest tribute on it from the American people to whom they have loaned it.

Deficits fuel the fire of economic injustice by requiring borrowing which requires new money creation, by the private banks. Wars fuel deficits. Conflicts and fear fuel wars. The mass media fuels conflicts and fear. The bankers own and/or control the mass media. Full circle.

Apart from the horrific greed of the banks and mortgage companies making the deceptive sub prime loans, the creation of new money to pay for wars and other deficit-spending results in inflation. Too much money at a time with the same amount of goods for sale drives up prices. To combat this the Fed raises interest rates. Higher interest rates hurt the housing market. Repeated and large deficits require repeated interest rate interest hikes to avoid severe inflation. Since Americans were on the edge economically already, the housing market was killed.

Now that the housing market is dead, can the Fed resurrect it? Perhaps. Certainly lower interest rates and tax breaks (to a much lesser degree) will help. But so many Americans are already bankrupt, or unemployed, or broke, that they simply cannot qualify for or afford any loan, house, or even, increasingly, a rental. They are now homeless, or living in homes owned by the banks, so that most Americans are now debt slaves on the continent their great, great, great, grandfathers conquered. The bankers own it all, or very nearly so. Once the "recession" has been halted - if it can be - the Fed will have to raise interest rates, rather quickly, to avoid severe inflation caused by all the deficits. Again, full circle. Besides the concentration of wealth into fewer and fewer hands it causes, fractional reserve banking is the primary cause of the inherent instability in our economic system and of its boom-bust “cycles.”

Until the American people cease being foolish consumers and realize how the banking system in the United States really works – and fight to reform it - they will remain slaves to the bankers, who will become increasingly harsh taskmasters and injustice and wars will multiply. Soon, very soon, America will consist - like the 3rd world countries - of only the very few very rich and the very many very poor.

Understand now why the banks are the largest buildings in every town in the US?, why the bankers fought tooth and nail to get the Federal Reserve Act of 1913 passed, giving them the power to create the great majority of the US money supply (excepting the tiny fraction in coin issued by the U.S. mint)?, why banks like wars and deficit spending, and why we unfailing have deficits every single year, regardless of which bank puppets they get elected using the mass media they own and control?

Each generation is faced with the same choice. Our forefathers made their choice - to be free. Have we made ours - to be slaves? (copyright 2008)