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What is Money?
Many people spend their lives trying to make money, but my experience shows that almost no one really understands what money is. For lack of a few concepts, most people place themselves at a tremendous disadvantage to the few who do understand money and how it works.
It seems almost inconceivable that something of universal importance could be universally misunderstood, at all levels, from child to economics professor. But there is a very convenient reason for all the confusion surrounding something as simple as money: profit motive. We'll pinpoint who benefits from widespread misunderstanding, later.
Before we move forward, ask yourself the question, "What is money?" Have you ever been asked?
"The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it." - John Kenneth Galbraith
What is money?
Most people are inclined to point to a distressed note, olive in color, tucked neatly inside their wallet. Everyone knows that these paper "Federal Reserve Notes" are money, right? Wrong. A paper note is "currency." Currency is about the only thing in the world that is not a form of money.
Money is any tradable asset.
An asset is "tradable" when it carries some tangible value, that is, when it is something that people value. A house is money, because people desire homes. A car is money. A paperclip is money. A service is money, if it is desired and can be traded for other things.
So what is the paper note in your wallet? Isn't it money, too? Well, a paper dollar bill does have some tangible value, I can write my grocery list on the back of it. For the most part, paper is worthless. A paper note is "currency." Currency is an accounting system for money. It is difficult to haul your vacation home to market for trade, so we carry currency instead. Currency in isolation, without backing assets, is worthless.
Assets are money. Currency is a paper accounting system for money. Paper is worthless without money.
It follows then, that the total value of any accounting system for money, or all the currency in circulation, is always equal to the amount of money that backs it. There can be a billion dollars of currency in circulation, there can be a trillion, there can be a quadrillion, or there can be a single dollar. The number of paper dollars, or the number of zeros printed on those dollars, does not matter. The sum total of all circulating currency always accounts for the total amount of money in existence, and nothing more.
This concept is critical to understanding what happened in 2008, and what is about to happen in 2009, and beyond.
So we know:
MONEY = any tradable asset
CURRENCY = a paper accounting system for MONEY
And so:
CURRENCY/MONEY = the amount paper per asset = PRICES
The amount of things an asset commands in trade = VALUE
VALUE almost never changes. The VALUE of a house is four walls and roof over your head, so it always commands a similar house in trade, regardless of their PRICES. PRICE can be anything, it is meaningless with respect to asset VALUE. PRICE, while initially arbitrary, should be stable. However, as we will uncover shortly, the people who do understand money will have none of that.
The Currency Scam
If you understand the difference between MONEY and CURRENCY, congratulations, you are one in a million according to Vladimir Lenin:
"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." - Vladimir Lenin, as quoted by John Maynard Keynes
Lenin was saying that almost no one realizes that CURRENCY is a major variable in their lives. Most people simply do not recognize that CURRENCY undergoes wild swings in buying power, carefully imposed by powerful interests to steal away their wealth--routinely, systematically, and ruthlessly. How does it work? How do the powerful systematically steal wealth from under your nose?
The Currency Scam.
Perhaps since the dawn of civilizations, there have been Money Changers. Many will recognize the derogatory term "Money Changer" from the Bible. I'm not sure how far back you can carbon date the act of "Money Changing" as a recognized scam, but the first well documented instance, that I know of, was related to the assassination of Julius Caesar in 44BC.
Caesar's death enabled Money Changers to corrupt and debauch Rome's hard money for private profit--it was downhill from there. Jesus famously upended the tables of the Money Changers, relatively soon after:
He overturned the tables of the money changers. 'It is written,' he said to them, 'My house will be called a house of prayer but you are making it a den of thieves. - Matthew 21:12-13
We'll hear the term "Den of Thieves" again, as young America struggles to throw off her second generation of parasitic Money Changers in the 1830's.
What is a "Money Changer?"
Wikipedia defines Money Changing as "a trade involving exchanges of coins in different denomination. It is thought generally to be the origin of modern banking in Europe."
What a laugh. Somehow I don't think Jesus submitted himself to death by crucifixion to protest honest currency exchange. No, Money Changers do something that is distinctly criminal but often not technically against the law. That is because the law itself operates on the assumption of a stable currency. If it didn't, the Money Changers would create enough CURRENCY to change the law.
Money Changers exploit a largely unrecognized difference between CURRENCY and MONEY. They have done it in a variety of ways, but their method de jour is what we call "fractional reserve banking." We'll get into the precise mechanics of fractional reserve banking later, as it is critical to understanding why the the stock market is falling and will continue to drop. For now, let's stick to identifying The Currency Scam and how it steals away your MONEY.
As we know, the CURRENCY supply relative to the MONEY supply = PRICES. The MONEY supply is not easily manipulated. Contrary to the slippery words of our Federal Reserve Chairman, one cannot print money. It is an absurd notion that one can "print" a house, or a car. What can be printed (or burned), quite easily, is CURRENCY, as any petty counterfeiter will tell you.
The act of flooding the market with CURRENCY is known as INFLATION. The act of draining CURRENCY from the system is known as DEFLATION. As we identified earlier in What is Money, the total CURRENCY supply divided by the total MONEY supply yields our current PRICE levels.
So:
INFLATION is the act introducing more paper currency into the system, causing prices to rise as new paper competes with old paper to buy existing assets.
DEFLATION is the act of draining paper currency from the system, causing prices to fall due to currency starvation (ala our current real estate and stock markets).
So "Money Changers" quite literally change the price of MONEY by willful manipulation of the CURRENCY supply. This handy little trick is not magic, to the contrary, it is a trivial feat in any system that allows fractional reserve banking.
Most people think of INFLATION as an accident, or some sort of natural phenomenon of macro economics. Oh, how wrong that is. We account for every penny in routine transactions, and errors offset. INFLATION must be introduced by an act of malice. It's measurable existence is the smoke produced by a simmering fire of hidden crime.
How does INFLATION impact you? Simple. By printing more CURRENCY, the Money Changers simply purchase your MONEY from you, causing all prices to rise. As prices rise, things become less affordable, which in turn ratchets down your standard of living. You've been scammed.
But as bad as intentional INFLATION sounds, in a country that is supposedly honest, forthright and free, it pales by comparison to the DEFLATIONARY scandal the Money Changers have in store for you. After they steal your wealth by INFLATION, they cut you off at the knees with DEFLATION. Once INFLATION causes prices to rise, people have no choice but to adjust to the new price levels. Unless you refuse to live in a house, you have to pay the price of a house. Same goes for cars, energy, food, everything. You are trapped if you must conduct trade in their currency (that is why they always want to consolidate currencies, like the Euro). INFLATION also means that the price of DEBT notes goes up. Instead of a $3,000 mortgage in 1932, we now have $300,000 mortgages. The existence of INFLATED DEBT notes presents the Money Changers with a uniquely profitable opportunity: DEFLATION.
The scam is almost complete. INFLATION has run its course, now it is time for DEFLATION. With society hooked on high priced DEBT, a sharp drop in prices is catastrophic for the borrower. Given DEFLATION, a $300,000 home falls to $150,000, drowning the borrower $150,000 underwater. His wages fall, or possibly disappear, causing the INFLATED PRICE of his DEBT note to become more and more of a burden. Additionally, lower prices across the board increase the VALUE of future interest payments. Eventually, borrowers break, and their homes, cars, savings (their MONEY) is seized by the Money Changers.
If the American people ever allow the banking system to control their money, first by inflation, then by deflation, their children will one day wake up homeless on the continent their fathers conquered. - Thomas Jefferson
Who are the modern Money Changers?
The answer is another question: Who holds the keys to INFLATION and DEFLATION in our financial system?
The answer: The private Federal Reserve corporation.
Can the Fed Print Currency?
Gorilla dust. When gorillas fight, they throw dust in the air to confuse each other."
- H. Ross Perot, 1986, while resigning from GM for "not building cars customers want."
As a frequent intelligence-gatherer, perusing the Main Stream Media for ideas on what not to do, I have yet to hear a correct explanation of how currency is created in a debt-based monetary system. Strange. It's kind of important right now, isn't it? Is it that "the experts" don't understand a thing about it, or that they don't want others to understand it? I think, the former.
As is always the case with money, the scams are simple and the fog is thick. So here is how the printing press works, or doesn't work, in America. There is no more important set of concepts to grasp given today's currency inferno as bank loans go bad. I know some will say the following is oversimplified, it is, or that I have my buying and selling all mixed up, that is the kind of confusion you can expect in an Orwellian demeritocracy.
Currency creation, step by step:
1) Corrupt or inept politicians ignore, do not understand, or have never read, Article I, Section 8 of the U.S. Constitution.
2) Moneyed Vultures, to borrow a term from 1913, a collection of the world's richest bankers, collude with (#1) to create a "central bank." The concept is sold on the premise that there is such a thing as good debt and the government needs good debt to prosper. That is a ridiculous notion, all debt is bad debt, but we'll leave that for another day. The ability to take on debt, to run deficits, and the reassurance that it is really a good thing or that "deficits don't matter" is very appealing to politicians, because they can spend without raising taxes. The attractiveness of debt over tax collection is the central bank's primary political hook.
3) The government partners with this strictly for-profit, cartel of private banks to issue its national currency. A legalized currency monopoly is born. The bank gets an exclusive deal to loan cash to a faceless government, and the government gets to spend that cash sans the political burden of taxation. The U.S. central bank is called the "Federal Reserve." Much like "Federal Express" they hope to imply some vague governmental association to gain stature and trust. Not only is this cartel of 12 private banks, headed by the Bank of NY, not part our government, as a "creditor" to our government, the Fed is distinctly above our law. In fact, congress is not allowed to audit their books, nor do we have any say or legal recourse with regard to their actions. They are the USA's exclusive creditor; the creditor owns the debtor.
Normally, we associate a "creditor" with someone with money available to lend. However, this kind of "credit" is derived purely from the cartel's currency monopoly. They don't lend or need actual money, they lend their exclusive, legalized privilege to print more currency.
4) The central bank, which I will now refer to as "the Federal Reserve" or the "Fed" despite the fact that they are not federal, and they keep no reserves, agrees to "buy" all the bonds the government does not sell. During this exchange, trading new paper currency (paper) for a real live Treasury bond (money), the Fed is not really buying anything, they are selling freshly printed cash, at interest. The government is actually buying spending cash, using real money, or our bond, which is a binding promise that our children will toil on the central bank's behalf.
The Fed rents a color printer at the U.S. Treasury to print their private-issue interest bearing Federal Reserve Notes (FRNs), aptly called bills. That's a joke, they don't actually rent the color printer, they charge the Bureau of Engraving and Printing a hefty fee for every dollar they print. Using the U.S. Treasury as a printing service is a careful part of the illusion that our government prints her own currency, it also secures the full resources of the United States to prevent secondary counterfeiting. If the Fed properly reimbursed the government to print FRNs, more people might notice the constitutional violation. Instead, the U.S. Treasury pays the Fed a healthy service charge for printing each note, which is nothing but profitable gorilla dust.
5) Politicians quickly spend the hot new cash to "stimulate" votes--I mean--help the economy. Like all counterfeit money, fresh new currency yields full face value at the point of introduction. As it cools, it dilutes the existing currency pool and we all pay for it via the inflation tax.
Presto! Currency has been printed and promised to be paid for, later, by someone else.
Now, if that was where the orgy of crime ended, then one could argue that the government, by contracting Fed private banks can actually print new currency to counter deflation. Unfortunately, the orgy is only getting started, central bankers aren't even naked yet.
So we've followed the new currency to the point of the crime--deficit spending--now, let's follow the money. All profitable schemes scream for leverage, and when you are in the counterfeiting business, leverage means cutting dealers in for a piece of the action.
6) The bond, our money, is wholesaled to the Fed's primary dealers. The bond ultimately becomes new commercial bank reserves, against which banks offer more loans. And more loans. And more, and more, and more loans. Much more than they have money to lend. They extend as many loans as they can find genuinely profitable borrowers. A profitable borrower is someone they trust will pay them back with interest. The act of lending out more money than they possess is called "fractional reserve banking" because they have promised more than they have in reserve.
Banks used to lend out about 10 times more than they held in reserve. But lately, the government has been actively buying the riskiest loans back from the bank, via fronts like Fannie Mae and Freddie Mac. Now, new loans do not need to pass a profit sanity test. Excessive risk is transferred at a premium, that's right, to the same government who created the underlying bonds. The net result is bank lending up to 40 times reserves.
Banks also take in new reserves from people in the form of customer deposits. They pay a small amount of interest, then lend out 10 to 40 times that deposit at a higher rate. A bank might pay you 3% for the use of your money, then loan it at 6% to 10 to 40 borrowers. Net profit: about 200%/year on money they don't have.
So where does all this extra cash come from? Don't ask. The 97% of loaned money that banks do not possess is simply printed, on the spot. When you take out a bank loan to buy a home, the bank requires you open an account with them. That is because they don't have the money to give to you. The account allows them to make an un-backed accounting entry to affect your balance, at interest, and nobody is the wiser. Well, bank regulators know they are doing it, they allow fractional reserve banking. No, they encourage it; a fringe benefit of colluding with government.
Lending money you do not have is called "fractional reserve banking" by elitists and intellectuals. It's called "counterfeiting" by more sensible criminals.
7) Much more currency has now been successfully created and laundered. That is, placed in someone else's name: yours. You spend the fresh new cash into the economy, and then return the money to the bank, plus interest.
The grand counterfeiting scheme is complete. Maximum leverage has been achieved. The riskiest loans have been sold back to the government, and if it all goes to Hades in a hand basket, the FDIC steps in and pays the account balances.
So let's revisit the headline question:
Can the Fed print currency to counter deflation?
The answer:
No. The Fed can only print more bank reserves which then must be multiplied another 10 to 40 times in phony, un-backed commercial bank notes and paper, or the existing paper supply will deflate when credit runs dry. In order to counter deflation, the central bank first requires an ever increasing number of genuinely profitable borrowers, or some colossal new government agency, hellbent on creating another subprime catastrophe. Newly printed Fed reserves and the corresponding government spending (all of which must be paid back to the Fed at predatory interest rates = a long term net reduction in the money supply) simply cannot counter somewhere around $500T and $750T in existing commercial bank leverage, stacked on top of previous Fed paper, going bad due to poor underlying credit and default.
Deflation and Exchange Rates
Anonymous wrote: "I was reading an article this morning that said that the Chinese will continue to buy our debt. I think the truth is that Chinese have decided to stop buying our debt. I wonder what this means to our $ against the other currencies."
It's an interesting question. In general and theoretically, deflation in a global economy has no affect on exchange rates. If Currency A was priced 1:1 with Currency B and you burn cash due to loans imploding with similar exposure across the globe, you can expect global interest rates to plummet near 0% as new cash becomes difficult to generate from existing cash. But exchange rates don't care:
If China is smart, they'll want to own more of our debt as interest rates fall. Like most things financial, it is counter intuitive but true that lower interest rates are more valuable than higher interest rates. In other words, a lower interest rate note (assuming market value) will pay you more stuff (value) over the life of the note.
China's existing U.S. debt is skyrocketing in value, because older notes continue to bear relatively high rates in a now-deflated environment. Every dollar promised is now worth much more.
Many people spend their lives trying to make money, but my experience shows that almost no one really understands what money is. For lack of a few concepts, most people place themselves at a tremendous disadvantage to the few who do understand money and how it works.
It seems almost inconceivable that something of universal importance could be universally misunderstood, at all levels, from child to economics professor. But there is a very convenient reason for all the confusion surrounding something as simple as money: profit motive. We'll pinpoint who benefits from widespread misunderstanding, later.
Before we move forward, ask yourself the question, "What is money?" Have you ever been asked?
"The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it." - John Kenneth Galbraith
What is money?
Most people are inclined to point to a distressed note, olive in color, tucked neatly inside their wallet. Everyone knows that these paper "Federal Reserve Notes" are money, right? Wrong. A paper note is "currency." Currency is about the only thing in the world that is not a form of money.
Money is any tradable asset.
An asset is "tradable" when it carries some tangible value, that is, when it is something that people value. A house is money, because people desire homes. A car is money. A paperclip is money. A service is money, if it is desired and can be traded for other things.
So what is the paper note in your wallet? Isn't it money, too? Well, a paper dollar bill does have some tangible value, I can write my grocery list on the back of it. For the most part, paper is worthless. A paper note is "currency." Currency is an accounting system for money. It is difficult to haul your vacation home to market for trade, so we carry currency instead. Currency in isolation, without backing assets, is worthless.
Assets are money. Currency is a paper accounting system for money. Paper is worthless without money.
It follows then, that the total value of any accounting system for money, or all the currency in circulation, is always equal to the amount of money that backs it. There can be a billion dollars of currency in circulation, there can be a trillion, there can be a quadrillion, or there can be a single dollar. The number of paper dollars, or the number of zeros printed on those dollars, does not matter. The sum total of all circulating currency always accounts for the total amount of money in existence, and nothing more.
This concept is critical to understanding what happened in 2008, and what is about to happen in 2009, and beyond.
So we know:
MONEY = any tradable asset
CURRENCY = a paper accounting system for MONEY
And so:
CURRENCY/MONEY = the amount paper per asset = PRICES
The amount of things an asset commands in trade = VALUE
VALUE almost never changes. The VALUE of a house is four walls and roof over your head, so it always commands a similar house in trade, regardless of their PRICES. PRICE can be anything, it is meaningless with respect to asset VALUE. PRICE, while initially arbitrary, should be stable. However, as we will uncover shortly, the people who do understand money will have none of that.
The Currency Scam
If you understand the difference between MONEY and CURRENCY, congratulations, you are one in a million according to Vladimir Lenin:
"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." - Vladimir Lenin, as quoted by John Maynard Keynes
Lenin was saying that almost no one realizes that CURRENCY is a major variable in their lives. Most people simply do not recognize that CURRENCY undergoes wild swings in buying power, carefully imposed by powerful interests to steal away their wealth--routinely, systematically, and ruthlessly. How does it work? How do the powerful systematically steal wealth from under your nose?
The Currency Scam.
Perhaps since the dawn of civilizations, there have been Money Changers. Many will recognize the derogatory term "Money Changer" from the Bible. I'm not sure how far back you can carbon date the act of "Money Changing" as a recognized scam, but the first well documented instance, that I know of, was related to the assassination of Julius Caesar in 44BC.
Caesar's death enabled Money Changers to corrupt and debauch Rome's hard money for private profit--it was downhill from there. Jesus famously upended the tables of the Money Changers, relatively soon after:
He overturned the tables of the money changers. 'It is written,' he said to them, 'My house will be called a house of prayer but you are making it a den of thieves. - Matthew 21:12-13
We'll hear the term "Den of Thieves" again, as young America struggles to throw off her second generation of parasitic Money Changers in the 1830's.
What is a "Money Changer?"
Wikipedia defines Money Changing as "a trade involving exchanges of coins in different denomination. It is thought generally to be the origin of modern banking in Europe."
What a laugh. Somehow I don't think Jesus submitted himself to death by crucifixion to protest honest currency exchange. No, Money Changers do something that is distinctly criminal but often not technically against the law. That is because the law itself operates on the assumption of a stable currency. If it didn't, the Money Changers would create enough CURRENCY to change the law.
Money Changers exploit a largely unrecognized difference between CURRENCY and MONEY. They have done it in a variety of ways, but their method de jour is what we call "fractional reserve banking." We'll get into the precise mechanics of fractional reserve banking later, as it is critical to understanding why the the stock market is falling and will continue to drop. For now, let's stick to identifying The Currency Scam and how it steals away your MONEY.
As we know, the CURRENCY supply relative to the MONEY supply = PRICES. The MONEY supply is not easily manipulated. Contrary to the slippery words of our Federal Reserve Chairman, one cannot print money. It is an absurd notion that one can "print" a house, or a car. What can be printed (or burned), quite easily, is CURRENCY, as any petty counterfeiter will tell you.
The act of flooding the market with CURRENCY is known as INFLATION. The act of draining CURRENCY from the system is known as DEFLATION. As we identified earlier in What is Money, the total CURRENCY supply divided by the total MONEY supply yields our current PRICE levels.
So:
INFLATION is the act introducing more paper currency into the system, causing prices to rise as new paper competes with old paper to buy existing assets.
DEFLATION is the act of draining paper currency from the system, causing prices to fall due to currency starvation (ala our current real estate and stock markets).
So "Money Changers" quite literally change the price of MONEY by willful manipulation of the CURRENCY supply. This handy little trick is not magic, to the contrary, it is a trivial feat in any system that allows fractional reserve banking.
Most people think of INFLATION as an accident, or some sort of natural phenomenon of macro economics. Oh, how wrong that is. We account for every penny in routine transactions, and errors offset. INFLATION must be introduced by an act of malice. It's measurable existence is the smoke produced by a simmering fire of hidden crime.
How does INFLATION impact you? Simple. By printing more CURRENCY, the Money Changers simply purchase your MONEY from you, causing all prices to rise. As prices rise, things become less affordable, which in turn ratchets down your standard of living. You've been scammed.
But as bad as intentional INFLATION sounds, in a country that is supposedly honest, forthright and free, it pales by comparison to the DEFLATIONARY scandal the Money Changers have in store for you. After they steal your wealth by INFLATION, they cut you off at the knees with DEFLATION. Once INFLATION causes prices to rise, people have no choice but to adjust to the new price levels. Unless you refuse to live in a house, you have to pay the price of a house. Same goes for cars, energy, food, everything. You are trapped if you must conduct trade in their currency (that is why they always want to consolidate currencies, like the Euro). INFLATION also means that the price of DEBT notes goes up. Instead of a $3,000 mortgage in 1932, we now have $300,000 mortgages. The existence of INFLATED DEBT notes presents the Money Changers with a uniquely profitable opportunity: DEFLATION.
The scam is almost complete. INFLATION has run its course, now it is time for DEFLATION. With society hooked on high priced DEBT, a sharp drop in prices is catastrophic for the borrower. Given DEFLATION, a $300,000 home falls to $150,000, drowning the borrower $150,000 underwater. His wages fall, or possibly disappear, causing the INFLATED PRICE of his DEBT note to become more and more of a burden. Additionally, lower prices across the board increase the VALUE of future interest payments. Eventually, borrowers break, and their homes, cars, savings (their MONEY) is seized by the Money Changers.
If the American people ever allow the banking system to control their money, first by inflation, then by deflation, their children will one day wake up homeless on the continent their fathers conquered. - Thomas Jefferson
Who are the modern Money Changers?
The answer is another question: Who holds the keys to INFLATION and DEFLATION in our financial system?
The answer: The private Federal Reserve corporation.
Can the Fed Print Currency?
Gorilla dust. When gorillas fight, they throw dust in the air to confuse each other."
- H. Ross Perot, 1986, while resigning from GM for "not building cars customers want."
As a frequent intelligence-gatherer, perusing the Main Stream Media for ideas on what not to do, I have yet to hear a correct explanation of how currency is created in a debt-based monetary system. Strange. It's kind of important right now, isn't it? Is it that "the experts" don't understand a thing about it, or that they don't want others to understand it? I think, the former.
As is always the case with money, the scams are simple and the fog is thick. So here is how the printing press works, or doesn't work, in America. There is no more important set of concepts to grasp given today's currency inferno as bank loans go bad. I know some will say the following is oversimplified, it is, or that I have my buying and selling all mixed up, that is the kind of confusion you can expect in an Orwellian demeritocracy.
Currency creation, step by step:
1) Corrupt or inept politicians ignore, do not understand, or have never read, Article I, Section 8 of the U.S. Constitution.
2) Moneyed Vultures, to borrow a term from 1913, a collection of the world's richest bankers, collude with (#1) to create a "central bank." The concept is sold on the premise that there is such a thing as good debt and the government needs good debt to prosper. That is a ridiculous notion, all debt is bad debt, but we'll leave that for another day. The ability to take on debt, to run deficits, and the reassurance that it is really a good thing or that "deficits don't matter" is very appealing to politicians, because they can spend without raising taxes. The attractiveness of debt over tax collection is the central bank's primary political hook.
3) The government partners with this strictly for-profit, cartel of private banks to issue its national currency. A legalized currency monopoly is born. The bank gets an exclusive deal to loan cash to a faceless government, and the government gets to spend that cash sans the political burden of taxation. The U.S. central bank is called the "Federal Reserve." Much like "Federal Express" they hope to imply some vague governmental association to gain stature and trust. Not only is this cartel of 12 private banks, headed by the Bank of NY, not part our government, as a "creditor" to our government, the Fed is distinctly above our law. In fact, congress is not allowed to audit their books, nor do we have any say or legal recourse with regard to their actions. They are the USA's exclusive creditor; the creditor owns the debtor.
Normally, we associate a "creditor" with someone with money available to lend. However, this kind of "credit" is derived purely from the cartel's currency monopoly. They don't lend or need actual money, they lend their exclusive, legalized privilege to print more currency.
4) The central bank, which I will now refer to as "the Federal Reserve" or the "Fed" despite the fact that they are not federal, and they keep no reserves, agrees to "buy" all the bonds the government does not sell. During this exchange, trading new paper currency (paper) for a real live Treasury bond (money), the Fed is not really buying anything, they are selling freshly printed cash, at interest. The government is actually buying spending cash, using real money, or our bond, which is a binding promise that our children will toil on the central bank's behalf.
The Fed rents a color printer at the U.S. Treasury to print their private-issue interest bearing Federal Reserve Notes (FRNs), aptly called bills. That's a joke, they don't actually rent the color printer, they charge the Bureau of Engraving and Printing a hefty fee for every dollar they print. Using the U.S. Treasury as a printing service is a careful part of the illusion that our government prints her own currency, it also secures the full resources of the United States to prevent secondary counterfeiting. If the Fed properly reimbursed the government to print FRNs, more people might notice the constitutional violation. Instead, the U.S. Treasury pays the Fed a healthy service charge for printing each note, which is nothing but profitable gorilla dust.
5) Politicians quickly spend the hot new cash to "stimulate" votes--I mean--help the economy. Like all counterfeit money, fresh new currency yields full face value at the point of introduction. As it cools, it dilutes the existing currency pool and we all pay for it via the inflation tax.
Presto! Currency has been printed and promised to be paid for, later, by someone else.
Now, if that was where the orgy of crime ended, then one could argue that the government, by contracting Fed private banks can actually print new currency to counter deflation. Unfortunately, the orgy is only getting started, central bankers aren't even naked yet.
So we've followed the new currency to the point of the crime--deficit spending--now, let's follow the money. All profitable schemes scream for leverage, and when you are in the counterfeiting business, leverage means cutting dealers in for a piece of the action.
6) The bond, our money, is wholesaled to the Fed's primary dealers. The bond ultimately becomes new commercial bank reserves, against which banks offer more loans. And more loans. And more, and more, and more loans. Much more than they have money to lend. They extend as many loans as they can find genuinely profitable borrowers. A profitable borrower is someone they trust will pay them back with interest. The act of lending out more money than they possess is called "fractional reserve banking" because they have promised more than they have in reserve.
Banks used to lend out about 10 times more than they held in reserve. But lately, the government has been actively buying the riskiest loans back from the bank, via fronts like Fannie Mae and Freddie Mac. Now, new loans do not need to pass a profit sanity test. Excessive risk is transferred at a premium, that's right, to the same government who created the underlying bonds. The net result is bank lending up to 40 times reserves.
Banks also take in new reserves from people in the form of customer deposits. They pay a small amount of interest, then lend out 10 to 40 times that deposit at a higher rate. A bank might pay you 3% for the use of your money, then loan it at 6% to 10 to 40 borrowers. Net profit: about 200%/year on money they don't have.
So where does all this extra cash come from? Don't ask. The 97% of loaned money that banks do not possess is simply printed, on the spot. When you take out a bank loan to buy a home, the bank requires you open an account with them. That is because they don't have the money to give to you. The account allows them to make an un-backed accounting entry to affect your balance, at interest, and nobody is the wiser. Well, bank regulators know they are doing it, they allow fractional reserve banking. No, they encourage it; a fringe benefit of colluding with government.
Lending money you do not have is called "fractional reserve banking" by elitists and intellectuals. It's called "counterfeiting" by more sensible criminals.
7) Much more currency has now been successfully created and laundered. That is, placed in someone else's name: yours. You spend the fresh new cash into the economy, and then return the money to the bank, plus interest.
The grand counterfeiting scheme is complete. Maximum leverage has been achieved. The riskiest loans have been sold back to the government, and if it all goes to Hades in a hand basket, the FDIC steps in and pays the account balances.
So let's revisit the headline question:
Can the Fed print currency to counter deflation?
The answer:
No. The Fed can only print more bank reserves which then must be multiplied another 10 to 40 times in phony, un-backed commercial bank notes and paper, or the existing paper supply will deflate when credit runs dry. In order to counter deflation, the central bank first requires an ever increasing number of genuinely profitable borrowers, or some colossal new government agency, hellbent on creating another subprime catastrophe. Newly printed Fed reserves and the corresponding government spending (all of which must be paid back to the Fed at predatory interest rates = a long term net reduction in the money supply) simply cannot counter somewhere around $500T and $750T in existing commercial bank leverage, stacked on top of previous Fed paper, going bad due to poor underlying credit and default.
Deflation and Exchange Rates
Anonymous wrote: "I was reading an article this morning that said that the Chinese will continue to buy our debt. I think the truth is that Chinese have decided to stop buying our debt. I wonder what this means to our $ against the other currencies."
It's an interesting question. In general and theoretically, deflation in a global economy has no affect on exchange rates. If Currency A was priced 1:1 with Currency B and you burn cash due to loans imploding with similar exposure across the globe, you can expect global interest rates to plummet near 0% as new cash becomes difficult to generate from existing cash. But exchange rates don't care:
If China is smart, they'll want to own more of our debt as interest rates fall. Like most things financial, it is counter intuitive but true that lower interest rates are more valuable than higher interest rates. In other words, a lower interest rate note (assuming market value) will pay you more stuff (value) over the life of the note.
China's existing U.S. debt is skyrocketing in value, because older notes continue to bear relatively high rates in a now-deflated environment. Every dollar promised is now worth much more.
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