Can We Really Trust the Federal Reserve?

Federal ReserveThe Shocking Truth About the Federal Reserve

Think the Great Pyramid is mysterious? Compared to the Federal Reserve, a mysterious and reclusive institution that has mastered the art of hiding in plain sight, the Great Pyramid is an open book. Some investors—especially those who have benefited by “following the Fed”—consider the organization as a panacea, a wonder-drug for all our economic ails. Others, such as Donald Trump, are not quite as convinced.

Did you ever wonder what the real source of the Fed’s hold over us is?

Imagine this. You are shopping for a microwave and finally find the model you want. However, instead of just taking it to the cashier, a salesman sits down with you, discusses the options, the colors, the warranty plans, and then asks you to sign an “offer” which he will then take to his manager for approval. If the deal is okayed, you’re in. You get the microwave. Otherwise, you might have to tweak the offer…?

Sound crazy? Laughable? Well of course nobody buys a microwave like that. But that is the way you buy cars, isn’t it? Did you ever stop to wonder why…?

The answer is that more than a century ago, in the early days of the car biz, the dealers formed one of the strongest cartels in the history of the modern age and were actually able to compel state legislatures to grant them extraordinary rights as to how they conduct business. Not only do those laws still exist today, almost unchanged, but this system was adopted in most other parts of the world. In more than a century, the only one who has had the time, the money, and the influence to challenge this system is Elon Musk of Tesla fame, and even now he is not having an easy time of it. (Source: “Why You Can’t Buy a Car Directly,” AlloverAlbany, last accessed March 1, 2016.)

Here is the same idea presented a different way: a young bride serves her new husband a pot roast based on a recipe that has been in the family for generations. She carefully cuts the roast into four pieces, cooks it according to the instructions, and serves it. Her husband loves it. However, being inquisitive by nature, he asks why the meat was cut that specific way before cooking? The bride does not know so she asks her mother, who then calls the grandmother. The grandmother thinks for a moment and then has an answer: “My own grandmother,” she explains, “never had a pot big enough for the roast. That is why we cut it first.”

The point? Both stories above are based on a core aspect of human nature that the psychologists call “system justification.” That is the actual name. It is a fancy way of saying that we human beings have an innate and almost inexplicable preference to leave things alone and not make dramatic changes. (Source: “System Justification,” Behavioral Economics, last accessed March 1, 2016; http://www.behavioraleconomics.com/mini-encyclopedia-of-be/status-quo-bias/.)

This overwhelming bias can be a good thing. Or in some instances, they say, it can create problems—big problems.

Is the Fed a 100-Year-Old Solution—or a 100-Year-Old Problem?

The Fed, founded in 1913, has been around for so long that we should treat it like an old friend.

Except that it isn’t.

In my prior essays on the Fed (for example, “Who Owns the Fed?”), I have looked more deeply at its origins and its role in the current state of the economy. As well as its proclivity—rarely discussed in the mainstream media—to see itself as more “aligned” with its sister central banks and the political (ruling) class than the people, the citizenry, that it is theoretically supposed to be shepherding.

Is the Fed, like the car dealership system mentioned above, a century-old mistake that people have become used to and are simply unwilling to change?

Ron Paul, several years ago, made a huge fuss about this. At the time, his “Audit the Fed” initiative was watered down to a quick peek into only a very tiny portion of their dealings. What that tiny peek found was some $16.0 trillion (with a “t”) dollars given (or perhaps loaned, we don’t really know) to deep Fed insiders and friends. Makes you wonder what else lies behind the curtain…? (Source: “The Fed’s $16 Trillion Bailouts Under-Reported,” Forbes, September 20, 2011; http://www.forbes.com/sites/traceygreenstein/2011/09/20/the-feds-16-trillion-bailouts-under-reported/#26ad42506877.)

More recently, presidential candidate Donald Trump has picked up the “Audit the Fed” gauntlet. Regardless of whether this is merely a political promise (which might not be kept were he to be elected), it turns out that the topic itself is likely a worthy one, and represents an instance where the common folk should perhaps spurn their tendency for “system justification” and start to look more closely at their friendly Fed.

We Know More about the Mating Wildebeest Than the Fed

An anonymous cynic once suggested, “The goal of business is to carefully massage inputs to produce goods and services within a structured environment that spins off profits and generates cash. The goal of government is to carefully manage their voters, to produce a unimpeded environment of consent for them to collect taxes and spend that cash any which way they want.”

I am guessing that is an older quote because, in the world we live in now, governments working with central banks can, in an instant, create more cash (technically debt used as cash, some might even say “unpayable” debt—more on this below) than would ever be possible from the taxes they collect. What has not changed, however, is that governments still aim to spend the money any darn way they please.

Consider this thought from editorialist Michael Snyder:

“The funny thing is that the Federal Reserve is not even part of the federal government. It is an independent private central bank that was designed by very powerful Wall Street interests a little over 100 years ago. It is at the heart of the debt-based financial system which is eating away at America like cancer, and it has no direct accountability to the American people whatsoever… (The Fed) is at the heart of the debt-based financial system which is eating away at America like cancer, and it has no direct accountability to the American people whatsoever.

The Fed has been around for so long that most people assume that we need it. But the truth is that we don’t actually need the Federal Reserve. In fact, the greatest period of economic growth in United States history happened during the decades before the Federal Reserve was created. A little over 100 years ago, very powerful forces on Wall Street successfully pushed for the creation of an immensely powerful central bank, and since that time the value of the U.S. dollar has fallen by about 98% and our national debt has gotten more than 5,000 times larger.” (Source: “Why We Should Audit The Fed,” Zerohedge, February 24, 2016.)

For those who care about this topic—which really should be pretty much everyone, given the implications—the “boilerplate” arguments are straightforward and easy to grasp.

For example, according to the U.S. Constitution (Article I, Section 8) the authority to “coin money” belongs to Congress and not a bunch of strangers. So, and this is something you may have to ask your fifth-grader, why is the Fed doing Congress’ job?

To make the point even clearer, if you pluck any bill at random from your wallet, you will see the words “Federal Reserve Note” stamped thereon. A “note,” if you Google the term, is not money. A note is a record of debt. The bill, the note, merely establishes that someone owes the Fed money (actually you and your grandkids and their grandkids owe the money ad infinite—money which is unlikely to be repaid until time itself stops and the sun turns to ice). It is simply the proof of that debt.

Where Money Comes From—Don’t Blame the Stork!

Did you ever wonder where money comes from?

Snyder offers one of the best explanations I have ever seen:

“…the U.S. government creates a bunch of U.S. Treasury bonds (debt) and takes them over to the Federal Reserve. The Federal Reserve creates a billion dollars out of thin air and exchanges them for the U.S. Treasury bonds.

“What does the Federal Reserve do with those U.S. Treasury bonds? They end up getting auctioned off to the highest bidder. But this entire process actually creates more debt than it does money… The U.S. Treasury bonds that the Federal Reserve receives in exchange for the money it has created out of nothing are auctioned off through the Federal Reserve system.

“But wait. There is a problem.

Because the U.S. government must pay interest on the Treasury bonds, the amount of debt that has been created by this transaction is greater than the amount of money that has been created.

“So where will the U.S. government get the money to pay that debt? Well, the theory is that we can get money to circulate through the economy really, really fast and tax it at a high enough rate that the government will be able to collect enough taxes to pay the debt. But that never actually happens, does it? And the creators of the Federal Reserve understood this as well.

“They understood that the U.S. government would not have enough money to both run the government and service the national debt. They knew that the U.S. government would have to keep borrowing even more money in an attempt to keep up with the game.” (Source: Ibid.)

Which begs the question, if Congress can create money, why doesn’t it? In fact, since the inception of the Fed, only one individual made a concerted effort to issue money directly from Congress and that was John F. Kennedy, in the period just before he was assassinated—via Executive Order 11110, which authorized the U.S. Treasury to issue “United States notes” that were created by the U.S. government directly and not by the Federal Reserve.

We unfortunately will never know where he was headed with his “Kennedy bills” (which, right at this moment, you can buy on eBay as souvenirs) because Johnson cancelled the initiative upon taking office. (Actually, one of many Kennedy initiatives that LBJ cancelled, but I will save that tale for another day.)

And whose idea was it to allow the Fed to set interest rates which, if you do the research, is a task considerably outside the mandate originally given to the central banks? If you recall your basics from Econ 101, the market sets the rates, or at least it is supposed to. If you “force” rates on the market, you break the market. It is that simple. And, if you break the market, there will be consequences. To see a sample of the consequences, pick up any newspaper today and look at the front page.

The IRS was formed at the exact time the Fed was formed. Prior to that, the U.S. did not have a form of permanent income tax. Coincidence? If you believe that, I have a bridge in Yonkers you might be interested in. I have said before that the amount of debt owed by “we the people” to the third-party Fed is so large, and compounds so fast, it can mathematically never be repaid.

In poking a stick at the Fed via his article, Snyder also noted the following:

“[…] 100% of the shareholders of the Federal Reserve are private banks. The U.S. government owns zero shares.

“[…] The Federal Reserve has become so powerful that it is now known as ‘the fourth branch of government.’

“[…] Since the Federal Reserve was established 100 years ago, the U.S. national debt has gotten more than 5000 times larger.

“[…] From the time that the Federal Reserve was created until now, the U.S. dollar has lost 98 percent of its value.

“[…] The Federal Reserve has stripped the middle class of trillions of dollars of wealth through the hidden tax of inflation.

“[…] The Federal Reserve system fuels the growth of government, and the growth of government fuels the growth of the Federal Reserve system. Since 1970, federal spending has grown nearly 12 times as rapidly as median household income has.” (Source: Ibid.)

Is Any of This Criticism of the Fed Justified?

Some say the Fed is an “easy target” for paranoids and conspiracy nuts. Almost every country on the planet has a central bank, they point out. Surely everyone could not have made the very same error?

The answer to the above is that I do not know. The scary thing is that it appears that no one knows because the Fed, and indeed the entire central banking system, has become so embedded in our economic consciousness that like the bride with the unchangeable recipe, we seem to have lost the ability, the will, to even ask the right questions.

And frankly, that may not be a good thing.

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