GROUND ZERO ON WALL STREET: FED FUNDS AND TREASURY BILLS HIT 0% INTEREST

The federal funds rate and the interest on 3-month Treasury bills both just hit ZERO percent. This means banks and the government are borrowing money for free. Yet demand for the T-bills at auction was four times the available supply! Who is clamoring to buy the debt of the world’s most insolvent debtor for no return at all — and why?

Read more  —  http://www.webofdebt.com/articles/zero_percent_t-bills.php

53 Responses

  1. I wonder why you say the US government is “insolvent”. Maybe it is because our government has no publicly available balance sheet, which means that no assets are disclosed. Absolutely no transparency. But are the assets less than the liabilities? Clearly imposible, simply by physical observation and cost accounting.

    We are a sovereign nation and our currency has a daily published exchange value in relation to the currencies of other sovereign nations. If you don’t like the dollar, try yen, euros, etc. But please let’s not consolidate the Federal Reserve System and failed commercial banks with the US government for the sake of greater transparency and “public ownership”

    Also, when the current increase in GDP and the inflation expectations rates are both near zero or below, a trader should expect the short term Treasury rate to be near zero. Daily open market operations give the Fed a good feel for what supply and demand are and they can easily clear the market with or without overwhelming it with a target rate.

    • The U.S. is the largest debtor in the world. Insolvency is defined as being unable to pay one’s debts or having liabilities in excess of a reasonable market value of assets held. The federal debt is now over $10 trillion, and it hasn’t been paid off for nearly 200 years. To pay it off would take $120K per family of four, more than the average family has. That’s the definition of insolvency.

  2. Hi Ellen. I thought for a nation, insolvency is defined as unable to service its treasury interest owed for that year with that year’s tax revenue collected. Since most treasuries are bought by private banks both foreign and domestic, US will only be forced into bankruptcy if all bankers collectively decide US is not credit worthy and drive up Treasury interest rates by refusing to roll over existing treasuries as they mature. Given the bankers interest for self preservation, as long as US government behaves, pay the interest required, and answer the bankers’ call to bail them out, the bankers will continue to return the favor and keep US out of a potential bankruptcy forever. It seems to me this is the result of the checks and balances framework setup by the Federal Reserve Act between private bankers and US government so they both have power to screw each other up and neither has the incentive to do so first.

    • I agree with you; they’re not going to let the U.S. go bankrupt. The Fed has always bought any U.S. debt that wasn’t sold on the open market, and now they’re saying they’re going to do it in spades. Comptroller General David M. Walker kept warning a few years ago that soon the interest alone would be more than the taxpayers could pay. It’s already half a trillion dollars annually, or about half of federal income taxes as I recall off the top of my head — but now they’ve dropped the interest rate to zero! Clever! But my point is that it makes no sense for us to be indebting ourselves to a private bank that just prints the money up, when the Treasury could be printing the money directly and skipping the debt. It would make some sense IF the debt were being sold to real buyers with pre-existing money, taking that money out of circulation; and IF the debt were actually paid back. But it’s not pre-existing money — it’s money created out of thin air — and it’s NEVER paid back, so the Treasury might as well be printing it itself instead of a private central bank that then gets to keep the bonds, which it proceeds to use as the basis for the private banking system’s multiply leveraged loans, with the dangerous potential of hyperinflating the money supply.

  3. Another way I think of it is since almost all Federal Reserve Bank’s assets are in US treasuries, as soon as US government declare default, the Federal Reserve holdings become worthless against Fed’s existing liabilities such as currency in circulation (ie the Fed’s money would no longer be backed by anything). That means under the regulation of Bank of International Settlements the Federal Reserve is also bankrupt and will no longer be able to trade with any other central banks around the world. This simply means US currency is no longer convertable with any other foreign currency and all imports and exports between US and the world stops dead cold.

  4. Hi Ellen. I just have a couple of questions on these uncollateralized interest free money by government –

    1. How to prevent hording of interest free money given that horded money hides inflation and can cause government to assume more money needs to be printed than necessary? It seems hidden cash stash can then be used as inflation raids on non-essential assets by driving prices of basic necessities to unbearable heights so other assets trade at discount.

    2. How to prevent uncollateralized money being spent on day-dreaming activities or pure price speculations? For example people using the money to work on perpetual motion machines, or people using money to hord critical economic production tools in anticipation that they will increase in price.

    I ask because we are taught charging interest and collateralization requirement create incentives for people to not abuse money in ways that do not benefit society. They are not perfect but they seem to be needed in almost all but extreme cases (the extreme cases being to combat deflation expectations like those during Great Depression and during today’s economic crisis).

  5. I need to add I agree with you if all banks are nationalized the government will have more leverage to manage the money. However it seems to me even if government takes over a central bank it still needs to utilize devices and procedures of central banks to ensure the money it creates actually do good.

  6. If our govt., via the Federal Reserve, can just print money whenever it wants to…why do I have to pay income taxes?

  7. Also I would like to point out if money is properly collateralized when created it is not considered as printed out of “thin” air. There are real assets (companies, cars, houses, stocks) or virtual assets (treasury debt) effectively seized for those money at creation time, regardless how many times those loans come back as new deposits. This is why bankers had to invent complex securities just to disguise their duplicated reuse of existing collaterals (housing) to secure both mortgage and CDOs. A nationalized Fed that was not as ideologically charged with libertarian ideologies as Greenspan would have caught on to this improper use of collaterals earlier and did something about it. I believe this would be a better argument to either place further regulations on the Fed or nationalize the Fed, not the argument that money is created out of “thin” air by private bankers which can be easily shot down by private banking interests as flawed due to existence of money collateralization.

  8. But those real assets have been collateralized by money created “out of thin air” by tapping a keyboard. More to the point this money is created as a debt that mathematically can never be repaid.

    We the people should not have to depend on a private moneylender for our money supply. Money should be created by the government on behalf of the people and then earned by the production of real goods and services in the real economy.

    Private lending for profit should be limited either to recycling existing funds or to lending new funds borrowed from a genuinely National central bank

  9. Most informed people knew we were going to get screwed when this fear-factored piece of defecation was throttled through congress. The same scenario was played out after 9/11 and before thePatriot act and Iraq invasion. Now we have a new enemy: terrorists, you’re on the backburner… make way for THE 2ND GREAT DEPRESSION.

    TARP was so full of holes and lack of congressional oversight that is just makes perfect sense that much of the “money” buying these T-Bills at 0% interest would be the banks swapping their toxic assets. I’m just surprised that it wasn’t rigged so we-the-people would have to also pay interest on these securities! Is the Fed throwing us a little scrap from the feast? a little conscience shining through? Or is the Fed just trying to keep real investors out to keep enough supply of securities for the toxic asset swap? Will we ever know?

  10. Excellent article as usual!

    I would like to ask you if you could check if I grasped this correctly.

    When a bank create a loan, let say 1 million dollar, it simultaneously create a debt and an asset (in dollar) on the same amount. So the debt always equals the created dollar asset. Together they cancel each other , hence: if the newly created debt was amortized (morte= kill in latin) the debt as well as the money would disappear, cease to exist.

    Lets continue with the consequences. Let’s say the bank issue a new loan, lets say 1 million dollar again, and thus create the equal amount in dollar as an asset. The person who already holds an asset in dollar would not be likely to borrow that money because he would pay of the loan and the money would be destroyed and hence destroy a part of the money supply (reverse FRB). So in order to make as much new money as possible the bank has to find someone that don’t have a money asset but an asset in real goods or future labor. Hence: the only way the credit expansion can continue is by sucking up people that don’t have any dollar assets. This has an finite limit since sooner or later there will be nor more suckers to suck into this pyramide scheme. I USA the poor and unemployed where the last resource for this parasitic scheme that pumps up money to those at at the top with money assets, collecting more an more with the help of interest. In USA 1% of the population owns 70% of the wealth (and we know who they are) according to economy professor Michael Hudson.. 1% of the worlds population owns 80% of the wealth.

    So banks always needs to get new debt slaves. Now consider two different currencies in two different countries. Sooner or later the all potential debt slaves in one or the other country will be sucked into this parasitic pyramid scheme and the banks in that country will have to go outside it´s borders in order to find new debt slaves. The system has become imperialistic and it will fight against other countries (with wars if necessary) in order to get on top, otherwise the pyramide falls.

    Is it fair to say and inherently consequence of a debt based private monetary system? That a debt based monetary system inevitable leads to wars and conquest? (or form a global cartell, which is perhaps a more accurate description of the situation today)

    • Dt for Ellen, who is currently out of town. Well, that is the way this debt based money system works, as we can see. There needs to be a full airing and exploring of what a rational credit and monetary system should look like, so I refer this to Ellen and the Bloggers for further exploration. She’s back in mid Feb. dt

  11. OK , so I can see why you are certain that we are insolvent. And if insolvent, also bankrupt. And if bankrupt, we can not hide any assets which might be converted into cash to pay creditors. Our assets, all of them, must be listed and a “reasonable market value” determined.

    Certainly if some creditors have been waiting 200 years, they deserve to be paid immediately. I mean what if the Louisiana Purchase is still outstanding? And what about Seward’s folly, now Alaska? I think we bought that from Russia. No wonder they are so impatient with us at times. But it is curious that our longest bond has only a 30 year term.

    What do you think is the “reasonable market value” of our assets? Whatever it is, we are fortunate that only 25% of our present debt is owed to foreigners.

  12. I think the following would solve our financial crisis:
    1. Nationalize the Federal Reserve.
    2. Pay all public, business and private debts. Yes, simply print the money and pay everything off.
    3. Freeze prices of all normal consumer goods.
    4. Limit the purchase of normal consumer goods to normal levels. (No hording or massive purchases to corner markets.)
    5. Let the price of luxury goods (yachts, condos on the ocean, diamonds, etc.) go to whatever level the wealthy want to take those goods.

    If the above were done, then the wealthy would have money instead of loans,bonds,notes etc. What can they do with all this money? Let them invest it, buy expensive yatchs, if they want, or put it in their mattress.

  13. Nobody should be printing any money! Not the Fed and not the treasury. Printing money extracts resources from the public! It’s a tax! I don’t remember this tax ever discussed by our politicians.

    The Fed being private is no big deal. I’m surprised Ellen still insists it’s “private” status is somehow the problem. It’s regulatory powers and power to issue money as debt were delegated to it by Congress. That makes it a Government entity. By law, this “private” bank is not a regular bank. it’s assests belong to the treasury. If the Fed was to be liquidated, then the debt to the Fed would also be also liquidated. It’s all a scam to hide the “printing” from the public.

    The US debt is more like 50 trillion, and not 10 trillion. You forgot about all the debt the Gov. owns to the people, like Social Security, which is also bankrupt!
    If the Fed buys up all of this debt, it will destroy our currency by hper-inflation. The problem is not the debt at this point, it’s inflation! In fact, if the Fed doesn’t stop with the mad printing, and the next administration will live up to it’s promise to spend trillions of dollars on “public” work s, which is all to be financed by the Fed, we will most probably destroy our currecny anyway.
    The Government got us into this mess, it is certainly not going to get us out of it.

  14. Randall,

    I think your suggestions deserve a “critic” based on sound economics:

    1. The Fed should not be nationalized, it should be abolished!

    2. Simply print the money? neat trick, why work then? Wealth is not paper money. wealth is goods and services produced by individuals. If you print the money, you are confiscating that wealth from the people who had truely earned and saved it. If you print too much, you will cause hyper-inflation (look up Zimbabwe) and then it’s all over.

    3. If you hamper with the free market price system, it’s all over! it’s basic economics. If you don’t allow prices to rise when the market is forcing it higher, you will at first create shortages, followed by more unemployment and more business failures. Price controls always leads to more poverty.
    4. What is normal levels? Who is going to do the limits? Who will allocate the resources? Withou the price system of the market, there is no market. Central planning is an economic impossibility. See “Calculation in The Social Commonwealth” by Ludwig Von Mises
    5. Prices of Luxory goods – thanks for letting the market operate at least for the rich. Why should they suffer from inefficiencies of Government planning.

    If your “above” is done, we are not only heading for the most serious depression in our history, but perhaps a dictatorship as well.

    • According to a recent Martin Weiss newsletter, the money supply has contracted this year by $7 trillion. That’s serious deflation, and he says it is just beginning. We could use an infusion of “real” legal tender!

  15. Robert,

    ” Money should be created by the government on behalf of the people and then earned by the production of real goods and services in the real economy. ”

    Today, money is created by the Fed on behalf of the Government on behalf of the people. So what’s going to be the difference if Ben Bernake gets his “pay” from the tax payers? Removing the Fed won’t make your government a benevolent dictator. Government is the one who created the Fed and delegated the power to issue money to it. Remember, it’s the Government who holds the monopoly to use physical force. It is the ones who has the feds with the guns. It and only it controls the military. At the end of the day, the Government could liquidate the Fed in a second. Yes, the Fed serves the banks well, but it also serves the government by financing its deficit spending. No Fed, no welfare and warfare state. it’s that simple. see “The Case Against the Fed” by Murray N. Rothbard

    Money should not be issued by any monopoly. If you want honest money, you must get it out of the control of Government. See “What has Government done with our money” by Murray, N Rothbard

  16. Ellen,

    “the money supply has contracted this year by $7 trillion”

    Ellen, that info is seriously flawed!

    see monetary base graph at: http://www.mises.org/markets.asp

    scroll down to St. Loouis Adjusted Monetary Base graph. As you will see, the money supply is only growing. in fact you will see a spike indicating a rise in the money supply in just 2 months. Your resources are shaky. The numbers don’t even make any sense. go to the Fed website and see the money supply figures for yourself.
    There is no deflation, but only inflation. Ever since we went off the gold standard completely in 1971, there hasn’t been any deflation in the money supply.

    Deflation of all the counterfeit money created by the Fed and Fractional Reserve banking would actually be a good thing, contrary to mainstream belief. While you’re at http://www.mises.org, check out :

    http://mises.org/story/3128

    The Austrian Economics overview /summary of the economic crisis. I am familiar with your agruments so I strongly recommend to you:

    “Causes of the Economic Crisis”, by Ludwig von Mises
    “Banking and the Business Cycle”, by C.A. Phillips
    “The Mystery of Banking”, by Murray rothbard
    “The Case against The Fed”, by Murray N. Rothbard

    • Weiss was talking about the deflated property values that constitute “wealth destruction.” The public collectively has $7 trillion less to spend than a year ago. The economy needs to be “reflated” with something besides debt-money; we need earned income in the form of wages and salaries. Here are his figures:

      First quarter 2008: Households lose $911 billion in stocks, $297 billion in mutual funds and $832 billion in insurance and pension fund reserves. Plus, the losses spread to the last major sector, equity in noncorporate businesses.

      Second quarter 2008: The Bush economic stimulus package kicks in, and it slows down the pace a bit. But the hemorrhaging continues. Not one single sector recovers.

      Third quarter 2008: Earth-shattering losses across the board, with households losing …

      1. ANOTHER $647 billion in real estate

      2. $922 billion in corporate equities

      3. $523 billion in mutual funds

      4. $653 billion in insurance and pension fund reserves

      5. $128 billion in noncorporate businesses

      Grand total: Nearly $2.9 trillion in losses — the worst in recorded history.

      Grand total lost over the past year: $7.2 trillion.

  17. I’m afraid based on what we’ve seen so far of government’s response to GM bail-outs etc, leaving necessary money printing functions entirely up to government is also suicidal. Politicians will never agree on necessary course of action until it is too late. I think everyone here agree replacing those $7 trillion lost to deleveraging this year is top priority. However the obvious solution right now – re-collateralize with an additional $7 trillion of new national debt and have Fed monetize it immediately is currently considered politically suicidal. Most politicians especially Republicans are still stuck in the “balanced” budget illusion while more and more real companies (aka real assets – employees, organizations and production knowledge) disappear due to credit crisis. Without saving real assets today and encourage creation of new real assets there won’t be enough worthy collaterals to get any money back into the system, and there won’t be any real assets in future to generate any tax revuew to pay back national debt.

  18. Ellen,

    You did say “money supply contracted” in your previous post. Prices going down on various assets does not mean monetary deflation. There has been a monetary inflation thus far.
    Prices are going down because:

    1. assets like real-estate have been over valued as a result of the phony real-estate bubble. These prices should come down. Delaying this process is simply “price fixing” and it will hurt the economy even more.

    2. The recent bubble has caused massive malivestments in housing industries and related. All those busieness that have been creatd, or expanded as a result of the housing bubble are unsound. These busineses are all malinvestments caused by the boom phase of the business cycle. Until they are liquidated, we will not be seeing a recovery. Therefore, prices must drop as dictated by the market.

    3. As a result of the economic crisis, people are curtailing their consumption due to future uncertainties. That is the standard pyschological result of the crisis. The mistake is to think that this is the problem, when in fact, this is the result, the effect, and not the cause of the recession. The cause was the boom that was casued by the Fed’s low interest rates and Franctional Reserve Banking.

    Money is not wealth! printing money cannot compensate for real wealth destruction (drop in goods and services). Printing money will simply debase our currency, and make the fewer supplies more expensive, and destort the economy even further by the uneven inflationary process as the mone circulates throught the economy. It certainly won’t increase the quantity of supplies, there will simply be more paper tickets competing for the same quantity of supplies. The “printing money” scheme is nothing more then extracting resources from the real earners and savers. It will bring inflation, thus creating an inflationary depression, it’s the worst of both worlds. If the printing doesn’t stop, we are looking at a potential hper-inflation on the horizon.

  19. I think everyone here agree replacing those $7 trillion lost to deleveraging this year is top priority.

    Why? The housing bubble was speculation against inflating dollar that drove the price of $100,000 house to $300,000. Are the speculators somehow entitled to the fruits of their unsound speculation? The value of a US dollar is presently defined by law to be 1/50 of an ounce of gold. The federal reserve note has to deflate 1600% to reach this level. Doing business with these gold dollars is a great opportunity to escape taxation of all forms. see Kahre case
    I’ve just read EC Riegel’s Private Enterprise Money

  20. Riegel’s book makes clear that money is created by a purchaser,
    not by the banker who monetizes the promissory note.

    Although his Valun system seems kind of clunky, his basic idea that
    the money power belongs to the purchaser, not the government is undeniable.

    There must be some guerilla means of seizing back the money power.

  21. Warren,

    One solution (not guerilla means) is described in a good 1977 article: “A Free Market Monetary System” by Friedrich A. Hayek . Friedrich Hayek was one of the most prominent economists of the 20th century.

    If you can remove the “legal tender laws” from the book, they that will be the 1st step in getting your money back. A free society should have a choice for the kind of medium of exchange they would like to use.
    Removing “legal tender laws” would kill two birds with one stone: The Fed’s monopoly on issueing money, and the practice of Fractional Reserve Banking would be seriously curtailed. Here is why:

    When people have a choice, they will always switch to the more valueable money. As the Fed continues to issue money, the Fed notes will loose their value due to inflation, while the more stable money would retain it’s value. This would cause people to switch to the more stable money, thus making the Fed notes loose their purchasing power. The Fed would eventually have to either compete with the other mediums of exchange by stoping it’s inflation,or eventually become irrelevant and go out of existence. The Fed could no longer manipulate interest rates or have the ability to mainpulate the money supply by the open market transactions. competing currencies would ensure that no one currency can get out of control. banks could also no longer expand credit out of thin air like before because that credit is always on top of a particular type of money. Once again, as they expand the credit, the base money would loose it’s value and eventually it’s purchasing power. Banks would be forced to keep a tight check on any credit exapnsion. The Fed would loose its “lender of last resort” status also.

    Seizing back the money power has to mean to take it out of the control of the Fed and/or Government. No monopoly power is desired, for it’s powers will always be abused. The “free market” is always the best protector of our money and savings. Governmet knows this, that’s why it has “legal tender laws”, so you can’t protect yourself from the Fed. This is why FDR confiscated the Gold from the people in the 30’s, because it put a limit on Government deficit spending through the Fiat monetary system.

    • We never had a true gold standard because they quickly degenerate into debt slavery. In the 12th-13th centuries, when England allowed the moneylenders in and there was no paper money to expand the money supply, the moneylenders soon became enormously wealthy at the expense of the people; the people rioted; and the king had to deport them back to Europe. It is not true that prices drop in direct proportion to a drop in the money supply; this was proven in the Great Depression. Employers have fixed costs; they have contracts with their employees, etc. Rather than operate at a loss, they just close up shop. What happens when the money supply contracts radically is that businesses shut down, people are laid off, there is no money to buy products, so more businesses shut down, in a vicious circle that brings all down with it. We are seeing that today, with the collapse in purchasing power caused by the credit freeze. Jobs are increasingly being lost, because there is insufficient “demand” (money) to warrant manufacturing more “supply” (goods and services).

  22. What about the Community Exchange System? The site seems to say the right things. Perhaps we can all exchange goods and services in community currency, using anonymous internet avatars. That seems more likely to me than persuading 535 scoundrel idiots to do the right thing.

    I myself am looking forward to another 1000 years of blessed darkness.

  23. I put in an application to start a Community Exchange System for Leelanau County, Michigan. The administrator (me) is required to make up a unit of exchange other than a national currency.

    I would like to use the unit ‘Rebellion’ defined as – a Rebellion is the face value of a pre-1965 United States silver dime. The current value of a Rebellion would exchange for approximately $1 Federal Reserve Note.
    However, since a Rebellion is defined in terms of legal tender US money, for tax purposes a Rebellion is worth $0.10 (see Kahre case above)

    Does anyone think I might get into trouble?

  24. Ellen,

    There are so many false claims in your post that I wouldn’t even know where to begin. Nor do I have the time right now. Perhaps later if you allow me to.

    I don’t mean t to be disrespectful, but I will say that the main problem with your analysis in general is that they are based on a inter-network of some of the worst kind of economic fallacies. I don’t think that there has been a serious attempt on your part to study and master the basic sound economics required for you to make an objective analysis. Economics has been greatly distorted due to political ideologies so it is easy to jump on the wrong wagon, but the basic laws are out there, beginning with “Man acts”.

    • If you would be more specific, I might be able to respond. Begin anywhere! When I don’t have time to respond to long emails, I just go for what interests me or bugs me the most.

  25. Dan
    Macro economy is not a science. It doesn´t even have a Nobel prize – it´s a fake like the rest of this so called science. Economy is not bound by some natural laws (this tendency where economist playing natural scientist is quite amusing).

    As the Father of Nuclear Fission, Nobel Prize Winning Scientist, Frederick Soddy, on the Monetary System:
    “I thought that, as a scientific man, I ought to know something about economics. So I studied the money system for two years and could make nothing of it. Then, one day, the truth dawned on me. What I was studying was not a system, but a confidence trick.”

    So your credibilty is zero. Economy is a social construct where humans set the rules. Macro economy has reduced it self to zero in its reductionist inferiority complex attempt to become a natural science. Models are not reality.

  26. “Macro economy” is certainly not a science. I agree! Are you surprised?

    Yet you are confusing “Macro economy” with economics theory on Money and Credit. Specifically, Austrian Theory on Money and Credit. The “Austrian” adjective is simply stated to differentiate from the type of “macro economics” that you encountered.

    The same laws that govern the “micro” also govern the “macro”. It is the artificial seperation of today’s mainstream economics that is errorneous and leads many mainstream economists to not understand money and perhaps leads you to believe that there is no science behind money either. There are of course some mainstream economists who do have a better understanding of money and credit.

    Mainstream “Macro Economy” is not a science, and the Austrian economists will agree. “Macro Economy” mostly tries to use quantified methods to predict and explain, and perhaps control economic activity in the aggregate. “Macro Economics” has more to do with the operations of our modern monetary system then it has to do with natural laws of economics.

    You say:
    “Economy is a social construct where humans set the rules”

    True with respect to our “Political Economy” of choice, but not true with respect to basic “laws” that govern our behavior. Those laws are not arbitrary according to some dictator’s choice. You cannot repeal by Congress the “law of supply and demand” for example, which is built out of more fundamental economic laws.

  27. To Dan on 12/27:
    Your comment seems to contradict Gresham’s Law which is, “Cheap money drives out dear if they exchange for the same price” Your comment seems to say just the opposite. Did you intend this?

  28. Mike Montagne makes the point that the Austrians advocate exploitative private money banking. I don’t think Ron Paul sees the difference between Federal Reserve debt money and Lincoln greenback, which is frustrating to me because I want to support Ron Paul.

  29. Warren,

    Austrians have been battling the “Central Bank” ever since the’ve been called “austrians”. Paper money is just that.. paper, no matter who issues it. It has only one goal and history has clearly verified this – legalized counterfeiting!

    While there are technical differences, It should not make a difference who gets the privilige to print the money because in any case, that “privilige” can only come from government. Whether it is a central bank (ignoring the “money as debt” for a moment) or the Treasury, both methods extract resources from the pubic in order to finance deficit spending. It is an insidious method to Tax because most people do not understand the cause of the rising prices. It is wrong to assume however, that prices must always rise, like some have asserted here. Prices could fall due to economic growth (increase of goods) or public high demand for cash, despite ongoing monetary inflation. All this means is that prices would have dropped even more. Printing money always dilutes the purchasing power of your money.

    The fact that the Fed or any other modern central bank does the job by a complex scheme based on debt utilizing the whole Banking industry in order to benefit not only Government, but also Banks, just shows how untrustworthy governments can be. Bankers of course lobbied for the Fed so that banks can evade the natural “free market” limitations on credit inflation. Their only efficient method was to form a cartel, but in order to hold the cartel together, they needed to use force. Only government has that power and the banking cartel headed by the Fed is one chief example of how government benefits special interests at our expense. It is true that printing money directly would be less costly, but it doesn’t make any sense to simply opt for the fraudulant option that is simply less costly. Remember, the power of the Fed has been delegated to it by Congress. Fractional Reserve banking is possible because Government not only allows it, but gave the Fed power to cartelize the banks so they can inflate almost without limits. Then it went off the Gold standard, allowing the Fed to give away more cheap money and to increase it’s ability to bailout the banks. Keep in mind again, that government is greatly benefiting from this fraudulant scheme because it if financing much of its deficit spending. The banking institution is the perfect example of a semi-socialistic system (centrally planned by the Fed) and you see it’s results: A lot of happy politicians, bankers, and anyone close to government, while failing miserably to maintain a stable economy and honest money for the rest of us.

    I think Ron Paul correctly sees the Fed as a Government entity because it simply is exactly that, no matter what it’s status is (private or public like other central banks). All assets of the Fed belong to the Treasury by law!
    Ron Paul will also tell you that you can’t have free people if you don’t have sound money without the power of anyone to debase it. He is after all the only Congress man that has an understanding of economics (He adheres to Austrian economics) and he is the only one point out that the Fed and fractional reserve banking is “legalized” counterfeiting. He is also putting the correct blame on the Fed and monetary policy on the “business cycle” and every financial disaster to this day.

  30. John,

    Good observation.

    Gresham’s law applies only when there are “legal tender laws”. Thus, the government may decree worn coins as good as new ones in paying off debt, or of silver and gold equivalent to each other in the fixed ratio even though Gold has a higher market value. In such a case, it is obvious that bad money will drive out good money, because sellers are “forced” to accept the bad money for the same face value as the good money. People will always hold on to their “good” money and get rid of their “bad” money. Eventually you will have only bad coins circulating, or silver coins instead of gold.

    Gresham’s law does not apply in a “free market”. People will not accept (rightfully so) the worn coin at the same value as the new coin, therfore, the good money will actually drive out the bad money. Natural result of any freely competitve market.

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