Fiscal Cliff: Time to Call Their Bluff

The “fiscal cliff” has all the earmarks of a false flag operation, full of sound and fury, intended to extort concessions from opponents.  Neil Irwin of the Washington Post calls it “a self-induced austerity crisis.”  David Weidner in the Wall Street Journal calls it simply theater, designed to pressure politicians into a budget deal:

The cliff is really just a trumped-up annual budget discussion. . . . The most likely outcome is a combination of tax increases, spending cuts and  kicking the can down the road.

Yet the media coverage has been “panic-inducing, falling somewhere between that given to an approaching hurricane and an alien invasion.”  In the summer of 2011, this sort of media hype succeeded in causing the Dow Jones Industrial Average to plunge nearly 2000 points.  But this time the market is generally ignoring the cliff, either confident a deal will be reached or not caring.

The goal of the exercise seems to be to dismantle Social Security and Medicare, something a radical group of conservatives has worked for decades to achieve.  But with the recent Democratic victories, demands for “fiscal responsibility” may just result in higher taxes for the rich, without gutting the entitlements.

The problem is that no deal is going to be satisfactory.  If we go over the cliff, taxes will be raised on everyone, and GDP is predicted to drop by 3%.  If a deal is reached, taxes will be raised on some people, and some services will be cut.  But the underlying problems – high unemployment and a languishing economy – will remain.  More effective solutions are needed. 

Be Careful What You Wish for: Fiscal Hostage-Taking Could Backfire

Taxpayers and governments that are pushed too far have been known to resort to more radical measures, and there are some on the table that could fix the problem at its core.  Here are a few that are receiving media attention:

1.  A financial transactions tax.  While children’s shoes and lunchboxes are taxed at nearly 10%, financial sales have so far gotten off scot-free.  The idea of a financial transactions tax, or Tobin tax, has been kicked around for decades; but it is now gaining real teeth.  The European Commission has backed plans from 10 countries — including France, Germany, Italy and Spain — to launch a financial transactions tax to help raise funds to tackle the debt crisis.  Sarah van Gelder of Yes! Magazine observes that the tax would not only help reduce deficits but would hit the highest income earners, and it would cool the speculative fever of Wall Street.

Simon Thorpe, a financial blogger in France, cites figures from the Bank for International Settlements, showing total U.S. financial transactions of nearly $3 QUADRILLION in  2011.  Including other sources, he derives a figure of $4.44 QUADRILLION.  Even using the more “conservative” $3 quadrillion figure, a tax of a mere 0.05% (1/20th of 1%) would be sufficient to raise $1.5 trillion yearly, enough to replace personal income taxes with money to spare.

2.  The trillion dollar coin trick.  If Republicans insist on the letter of the law, Democrats could respond with a law of their own.  The Constitution says that Congress shall have the power to “coin money” and “regulate the value thereof,” and no limit is put on the value of the coins Congress creates, as was pointed out by a chairman of the House Coinage Subcommittee in the 1980s.

I actually suggested this solution in Web of Debt in 2007, when it was just a “wacky idea.”  But after the 2008 banking crisis, it started getting the attention of scholars.  In a December 7th article in the Washington Post titled “Could Two Platinum Coins Solve the Debt-ceiling Crisis?,” Brad Plumer wrote that if Congress doesn’t raise the debt ceiling as part of the fiscal cliff negotiations, “then some of these wacky ideas may get more attention.”

Ed Harrison summarized the proposal at Credit Writedowns like this:

  • The Treasury mints a $1 trillion coin, or whatever amount is desired.
  • The Treasury deposits the coin into the Treasury’s account at the Fed.
  • The Treasury buys back bonds.
  • The retirement of bonds is an asset swap, no different from QE2.
  • The increase in reserve balances is not inflationary, as Credit Easing 1.0, QE 1.0, and QE 2.0 already have shown.
  • These operations by the Treasury create no new net financial assets for the non-government sector.
  • The debt ceiling crisis is averted.

Plumer cites Yale Law School Professor Jack Balkin, confirming the ploy is legal.  He also cites Joseph Gagnon of the Peterson Institute for International Economics, stating, “I like it.  There’s nothing that’s obviously economically problematic about it.”

To the objection that it is a legal trick that makes a mockery of the law, Paul Krugman responded, “These things sound ridiculous — but so is the behavior of Congressional Republicans.  So why not fight back using legal tricks?”

3.  Declare the debt ceiling unconstitutional.  The 14th Amendment to the Constitution mandates that Congress shall pay its debts on time and in full, and Congress does not know how much it will collect in taxes until after the bills have been incurred.  The debt ceiling was imposed by a statute first passed in 1917 and revised multiple times since.   The Constitution trumps it and should rule.

4.  Borrow interest-free from the government’s own central bank.  If the government refinanced its entire debt through the Federal Reserve, it could save nearly half a trillion dollars annually in interest, since the Fed rebates its profits to the government.  The Fed’s newly-announced QE4 adds $45 billion monthly in government securities purchases to the $40 billion for mortgaged-backed securities declared in QE3, and no time limit has been designated for ending the program.  Forty-five billion dollars monthly is over half a trillion yearly.  Added to the federal debt already held by the Fed, the whole $16 trillion federal debt could be bought back in 28 years.

This is not a wild, untested idea.  Borrowing interest-free from its central bank was done by Canada from 1939 to 1974, by France from 1946 to 1973, and by Australia and New Zealand in the first half of the 20th century, to excellent effect and without creating price inflation.

5.  Decommission some portion of the military.  When past costs are factored in, nearly half the federal budget goes to the military.  The data speaks for itself.

6.  Debt forgiveness.  Economists Michael Hudson and Steve Keen maintain that the only way out of debt deflation is debt forgiveness.  That could be achieved by the Fed by buying up $2 trillion in student debt and other asset-back securities and either ripping them up or refinancing the debts interest-free or at very low interest.  If the banks can borrow at 0.25%, why not the people?

7.  Publicly-owned state and local banks.  Municipal governments are facing cliffs of their own.  Ann Larson, writing in Dissent Magazine, blames predatory Wall Street lending practices.  Debt financing of U.S. cities and towns by Wall Street, she says, has inflicted deep and growing suffering on communities across the country.

Predatory Wall Street practices can be avoided by establishing publicly-owned state and local banks, which leverage the public’s funds for the benefit of the public.  The profits are returned as dividends to the local government.  German researcher Margrit Kennedy calculates that a whopping 40% of the cost of public projects, on average, goes to interest.  Publicly-owned banks slash borrowing costs by returning this interest to the government, along with many other advantages, detailed here.

Unshackle the Hostages and Let the Good Times Roll

The fiscal cliff has been said to be holding Congress hostage to conservative demands, but the real hostages are the debt slaves of our financial system.  The demand for “fiscal responsibility” has been used as an excuse to impose radical austerity measures on the people, measures that benefit the 1% while locking the 99% in debt.

The government did not demand fiscal responsibility of the failed financial sector.  Rather, Congress lavished hundreds of billions of dollars on it, and the Fed lavished trillions more.  No evident harm from these measures befell the economy, which has fared better than the austerity-strapped EU countries.  Another couple of trillion dollars poured directly into the real, productive economy could give it a serious boost.

According to the Fed’s figures, as of July 2010, the money supply was actually $4 trillion LESS than in 2008.  (The shrinkage was in the shadow banking system formerly reported as M3.)  That means $4 trillion could be added back into the money supply before general price inflation would be a problem.

The self-induced austerity crisis is a diversion from the real crises, including unemployment, the housing crisis, a bloated military, and unrepayable debt.  Slashing services, selling off public assets, and raising taxes won’t cure these ills.  To maintain a sustainable and productive economy requires a visionary leap into the new.  A new economy needs new methods of public financing.

First posted on


Ellen Brown is an attorney and president of the Public Banking Institute.  In Web of Debt, her latest of eleven books, she shows how a private banking oligarchy has usurped the power to create money from the people themselves, and how we the people can get it back. Her websites are,, and

40 Responses

  1. 7 great ideas, Ellen. keep up the good work. People ARE listening.

  2. The Trillion dollar coin sounds like fun, why not mint 17 of them and fix America’s national debt problem? Sounds like ‘voodoo economics’ though, but then again, what has happened in America and accross the world over recent years hasn’t made much sense at all.
    “The Fiscal Cliff” seems to symbolise the inability of Congress to carry out it’s responsibility to “the people”. A cage full of monkeys could do the same job.
    Really, America’s debt problems will never be solved until the “Military Industrial Complex” is ‘pulled into line’. From what I’ve read in the WSJ and bloggers comments, there is a staggering amount of wasted spending going on.
    And of course, ending the Federal Reserve’s control over America’s monetary system, and handing full control back to The Treasury is absolutely vital to America’s future. Finally, Banks that get into financial dificulty must either ‘sink of swim’, and people responsible for fraud (and there’s lot’s of them) need to be ‘banged up’ (in both senses of the word), in prison.

    • Col. Bo Gritz suggested this years ago. Thomas Jefferson warned us about PRIVATE Central Banks, and a nation that allows a PRIVATE Central Bank like the “Federal” Reserve has done more than just put itself into Compounding Debt-Slavery & Bankruptcy – IT HAS SURRENDERED ITS SOVEREIGNTY. However, even under the unconstitutional Federal Reserve Act itself, the “Fed” MUST accept a coin AT FACE VALUE. A SINGLE Pot Metal Coin with a face value of $14 Trillion could temporarily bring America’s debt to zero. The REAL reason Libya was bombed to pieces by NATO was that she had a NON ROTHSCHILD PUBLIC – not PRIVATE Central Bank. Libya’s foreign debt was ZERO! Owning a home DEBT FREE was regarded as a BASIC HUMAN RIGHT.

    • A lot of the so-called debt are time deposits in the form of T securities and bonds of private and foreign investors. They are being paid back routinely by the Fed. So no problem there. The securities issued by Treasury for deficit spending and bought by banks, and in turn bought by the Fed are the issue. I think the Fed, as a governmental entity using governmental power to create money (out of nothing) has in the very act of buying the securities, redeemed the debt of the United States to the banks, and since the Fed is a governmental agency, the government doesn’t owe itself for its spending, so there is no national debt at the Fed. Treasury does owe 6% of interest on securities bought as a transaction fee to fund Fed operations. This is mandated by law. Treasury could issue new securities to create fund for transaction fees. Banks buy them. Fed buys them from banks.
      Fed redeems debt. New money goes into circulation through banks. Treasury’s money from banks now debt-free used to pay fees.
      No taxpayer money needed.

  3. I agree that the conservatives’ austerity measures benefit the few while impoverishing many. However, the policies being proposed by Krugman and others on the “left” won’t work either.

    The fact is, the US economy will not improve at all until the energy scarcity issue is resolved. It doesn’t matter what form dollars take as they float around the system, or where they came from — if the resources aren’t there to support a society then the society won’t be supported. Period. No amount of left/right squabbling will be able to violate the laws of physics.

    The problem is, neither the left nor the right is taking this at all seriously. And the US energy picture will become even more grim as Peak Oil continues its slide down the back side of the Hubbert Curve (the shale oil boom is minor and will soon peak). Furthermore, if and when the US dollar loses its reserve status then the US will no longer be able to import over half the oil it burns. Then it will be in real trouble.

    I have just finished writing a piece showing how energy is at the core of the issue here, and virtually no one in the public sphere is talking about it wrt to the fiscal deficit. We are all instead distracted and misled by these philosophical and phony left/right debates that are beyond useless; they keep us from discussing the real issues.

  4. Ellen’s seven points are excellent. The fiscal cliff is a fiscal bluff, an artifice of the 1%, a lot of “sound and fury…signifying nothing”! Cutting from the social safety nets, and not raising taxes on those earning $250,000 a year or more are a prescription for AUSTERITY, giving to the rich and robbing the poor. It’s amazing and mind-boggling that after winning another election, our POTUS still wants to compromise and make deals which give more of the people’s money to the very wealthy. If that continues, we will have REAL AUSTERITY. We should be strengthening social security and medicare, NOT cutting it. We did not vote for this. Go off the cliff.

  5. The “fiscal cliff” is a scam. It’s a contrived threat of US collapse from self-imposed huge tax increases and massive cuts to federal spending to reduce a budget deficit and national debt. It is designed to scare you into further economic and political submission.

    Fortunately, the deficit and debt are bogus, being based largely on government employees “borrowing” worthless keyboard cyber currency from private Federal Reserve bankers who obviously create it out of thin air. For generations we’ve been stupidly repaying it at face value with our labors through taxes, enormously enriching and empowering thieves. Their monstrous, parasitic fraud is killing us.

    Unfortunately, this continuous monetary rape by banking and government gangsters is unopposed due to most Americans’ ignorance, laziness, cowardice, or corruption.

    Our nation has historically avoided these fiscal cliffs and prospered by issuing our own currency debt-free, interest-free, and tax-free instead of buying it for face value from a crime syndicate. President Kennedy last did this in the 1960’s when he issued the United States Note currency.

    Taxes and interest are deadly and primitive crimes against humanity. It’s time we crawl out of that primordial ooze while we still can. Here are some solutions:

    • There is no real difference between the US government issuing United States Note Currency (which according to Wikipedia it did until 1971) and the Federal Reserve issuing currency and lending the money to the government (which happens both now and before 1971). In both cases there is a liability on the government’s balance sheet, and the money is essentially interest free.

  6. Ellen – not trying to give you a hard time, but……PAUL KRUGMAN’s name should never, ever appear in any article focused on the hoax of austerity or alternative solutions. You are making it way too easy on those who are putting out propaganda designed to stifle anti-central-bank-usury arguments.

    I don’t care if his little idea box of ridiculousness happened to support your point in this instance, quoting him is doing damage. Step your game up girl.

  7. Social Credit is the solution. We tried everything else.

  8. On the surface govmt taking the debt sounds good, however it is not the answer.
    1) Turning over the keys to the corrupt congress just to take the strings from the Fed is just transferring the situation from robbers to robber/sellouts.
    2) I am not interested in financing any more ‘loans’, especially ‘no interest’. LIAR loans taken out by millions are just as to blame as are the ‘bad bankers’ for where we are today. DEBT of the individual is as much a problem as the Fed scam. ALL are guilty.

    It’s going to have to be a bigger change than what you propose. The
    ‘lessor evil’ hagelian dialect tactic in discussing solutions also needs to change.

  9. The $2 trillion of student debt and other asset-backed securities? Are you saying that student debt is an asset-backed security? What are the assets? What’s the collateral for a student loan? Student loans are an ill-conceived government program to buy votes, like all government spending, and subsidize a compliant academia with bogus money. Eliminate federal student loan guarantees and thousands of desk-bound pencil pushers will be out on the streets holding “Will Work for Food” signs created on university laser printers on their last day of employment. No one in their right mind can justify paying this army of parasites producing 300 BTUs each of heat load per hour on building AC systems..

    • That student loan debts are asset-backed securities is just a fact: that’s what they’re called. The assets are the income streams of the student loans being paid back. The collateral is basically the student’s life: he or she can’t declare bankruptcy and the usury interest charges go through the roof if the student can’t find work and can’t pay.

      Your contention that all government spending is ill-conceived defies all sense — it’s just not true. You might as well say all non-government spending is ill-conceived. If we are going to have a society, both are necessary. Investment in education — true education — is a good investment indeed if done right. So good, in fact, that I think it should be basically free for those worthy — one of society’s best investments if done right. Though I won’t argue that there is no parasitism in education — probably quite a bit as it is run now — the biggest parasite by far is the something-for-nothing financial sector and the rest of the FIRE sector. Read Michael Hudson’s The Bubble and Beyond for perspective on this, and of course Web of Debt by Ellen Brown.

      • How easy do you suppose it would be for a jobless, property-less 19-year-old to get bank financing for room, board, books and tuition without the government guaranteeing the loan? Would you, if you were the loan officer of a bank, write a lot of those kind of loans? But with a government guarantee the education bubble has replaced the housing bubble and will move to disaster more quickly. Almost anybody can get a student loan. Thousands of underemployed pseudo-students will be joining the “dead beat dads” and income tax non-filers on the fed’s garnishment schedule. When the number reaches the tipping point some “progressive” president watching his poll numbers crash will attempt to cancel those loans, driving to distraction those that have diligently made the payments, either through working or borrowing money from others. And their outrage will be perfectly justified.

        There can’t be any such thing as “free education”. Keynesian economics instructors need money to make payments on their BMWs. Just because the students aren’t footing the bill doesn’t make it “free”.

        There’s lots of working stiffs that put away, through their pension funds or 401Ks or personal investments, some money for the future. Does that make them rentiers and usurers? Does the owner of a modest house who paints it and updates the plumbing anticipate an increase in value of that house or is he just a rentier? If somebody takes his paycheck down to the bank and cashes it for Swiss francs is he a money-grubbing currency speculator? Do you work for free?

        • It is with student debt as with all others: the compound interest is what makes it unreasonably burdensome and a bubble.

        • In the 1950’s my undergraduate university education was funded by the Ford Foundation scholarships. After graduating I took a graduate program in clinical psychology and my education was funded by the VA system. Many of us did not go on into clinical psychology but switched careers. I switched to quantitative psychology. But the point is, government funding education of individuals was an investment that paid off in my higher income and taxes, the many students i taught over my career. So if you just attribute power-seeking motives on the part of government politicians, you overlook that many politicians have benign motives of promoting the general welfare, as it says in the Preamble to the Constitution. In my case there were many veterans of WW II needing care, and they needed more psychologists to deal with their mental disabilities brought on by war. Many vets I saw in the VA were schizophrenics, but some had what we now call post traumatic stress disorders, brought on by combat experiences.
          So the VA program promoted the general welfare of its wartime veterans. Today we need more doctors, nurses, physical therapists, etc.. to provide the care of the Affordable Care Act. Government should just fund these without expectation of payback in kind, but in the care that these will provide to citizens.

  10. […] Fiscal Cliff: Let’s Call Their Bluff (Web of Debt, Dec 19, […]

  11. Point 4 “This is not a wild, untested idea. Borrowing interest-free from its central bank was done by Canada from 1939 to 1974, by France from 1946 to 1973, and by Australia and New Zealand in the first half of the 20th century, to excellent effect and without creating price inflation.”

    I have searched in vain for any evidence that this statement is true as it relates to Canada. The Canadian government borrowed from the Bank oof Canada both before and after 1974, and borrowed from the private ssector both before and after 1974. The amount borrowed from the Bank of Canada increased almost every year. The Department of Finance, the Bank of Canada, and Statistics Canada all publish statistics confirming this. Both before and after 1974 the government borrowed at market interest rates from the Bank of Canada, and the profits were paid to the government, essentially making the borrowing interest free, so that part has not changed. Can anyone help with some actual data that shows what changed in 1974? The chart in the article linked to does not help, it only shows that total debt started to grow much faster around 1974, as government deficits increased.

    Even in the US,some government borrowing from the Federal Reserve is essentially interest free, since profits of the Federal Reserve are paid to the government. One difference is that the Fed does pay interest on deposits by private banks, so government debt financed by deposits in the Fed by private banks does have some cost to the Fed and ultimately the government.

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  15. “The increase in reserve balances is not inflationary, as Credit Easing 1.0, QE 1.0, and QE 2.0 already have shown.”

    Regarding this – is this declared based on the government’s phony CPI, which has been skewed from reality at an increasing rate? The inflation rate is gauged more accurately by shadowstats at overall 5%, if the CPI were measured as it was, it would be 9%. So what is causing this, if not QE? Since inflation has exceeded GDP growth for most of the last 12 years, we have been in a recession for most of that time.

    Currently, about $3.5T is paid yearly in interest on the $55T in public and private debt. If the states or the Federal Government took on this revenue stream, or even a fraction of it, as in your public project example, we could eliminate income tax for individuals. Right now we basically pay a 40-50% tax on goods we buy because of interest owed by the manufacturers, and then we pay more in income tax on top of that.

  16. I agree. Why not play by their own rules? The worst that can happen is that it might actually fix a few things.

    Thank you, thank you, thank you, Ellen. After reading your posts I always feel a bit cheerier about the state of the world.

  17. Ellen, why do you not have your own 1hr show on cnbc at night, or some other channel????…:-) These are the ideas people need to hear. takes a lot of searching around the net to find good thought provoking info, but at least i found it.

    also, have you any opinion on congrssional bill HR2990? The text reads as if it is trying to accomplish many similar things you suggest, but haven’t seen any buz on it in mainstream circles..

    • Jack. The reason Ellen Brown doesn’t have her own show on any mainstream media, is that she tells the truth, and “they” don’t want “joe American” to hear the truth, because the truth is ugly.
      Mainstream media in the USA is one of the biggest problems America faces (same as here in Australia). What you get told, is “what they want you to hear”.

  18. There is no national debt. Follow the securities. When there is a deficit (more spending than taxes to cover it), Treasury has to borrow money to cover the deficit. Treasury issues securities to get the money. The securities are IOU’s with the promise to repay the owner(s) at a future date the value of the securities. The securities are sold at public auction to bidders representing banks. Banks get the securities and send money to the Treasury. Banks’ reserves drop an equivalent amount, constraining their ability to make more loans.
    The banks may take their securities back to the auction and put them up for bids. If the securities are near maturity, the Fed buys them from the banks by crediting their reserves with money it creates out of nothing (it is a money issuer). The question is whether the government owes the Fed for the securities. Answer: No. The Fed is an agency of our government insulated from political interference by prohibiting the Fed to buy securities directly from the Treasury; by supporting itself with transaction fees on purchases of 6% of the interest on securities instead of Congressional appropriations; by terms of governors of Fed that extend beyond terms of Presidents and Congressmen. And while some believe the 12 Federal Reserve Banks
    are semi-private, in performing open market operations the Fed makes purchases with new money it creates out of nothing, a government power granted to Congress in the Constitution and delegated to the Fed. So, the very act of purchasing the securities by the Fed is an act of government for government, and so the act automatically and implicitly redeems the debt of the government to the banks. As for the debt to the holder of the securities, does this apply to the Fed? It shouldn’t because as agent of government it is just holding them for the government. Does the Treasury have to get money to cover its securities held in the vault if it does not issue them?
    No. It issues them to get money. Ditto for the Fed as agency of government. What about securities at the Social Security Trust Fund?
    Congress took the money and left the securities in place. A forced sale. It seems to me Social Security could put them up for auction and have the Fed buy them to get their money. Why it hasn’t, I don’t know. It’s like a husband borrows money and the wife pays back the debt. Both are responsible for the debt whether they overtly agree to the borrowing or not. So one or the other can redeem the debt. The United States is the entity responsible, not these individual agencies.
    As for time deposits of the public that purchase Treasury securities and bonds as an investment to get the interest and have a safe deposit, the Fed is redeeming these all the time by just crediting the deposit account and shifting it to a checking account at the Fed. It all comes out of thin air. The Treasury doesn’t use these monies for its deficit spending contrary to some opinions. It has an infinite source of money in the Federal Reserve. The Fed does not do fractional reserve lending. It has no constraints on its lending or its purchasing when it does open market operations.

  19. As for the financial transaction taxes, the Fed actually collects this, though it may not be called a ‘tax’. The Fed gets 6% of the interest on each security that it buys. While the Treasury might pay that by using taxpayer money, it could just issue some more securities to get more than enough to cover the original security and the new securities. Banks buy the securities at auction. The Fed buys the securities with money it creates out of thin air. The banks get back their money. The Treasury gets its money to pay the transaction fees with debt-free money from the bank with the Fed redeeming the debt.

    • Auresdelmulo. Thank you for your comprehensive explanation, but I kinda’ got lost half way through. But, in this whole scenario between The Fed, Treasury, the Govt, and the people, if one party is able to make ends meet by “printing money out of thin air” (ie taking a piece of paper and calling it a US$100 bill) someone is getting screwed. I think it’s the people. I’m impressed with the effort you put into your explanation though.

    • “The fed gets 6% of the interest of the security it buys”
      Since the fed is technically privately owned by it’s memeber banks, the member banks are paid a 6% dividend on the fed’s profits after operating expenses. Then the remaining profits are turned back over to the treasury. This would include 6% of profits from the gm/aig/etc stock interventions as well. Is this what you are referring to?

      • The FAQ at the Fed says otherwise on ownership:

        “Who owns the Federal Reserve?

        The Federal Reserve System fulfills its public mission as an independent entity within government. It is not “owned” by anyone and is not a private, profit-making institution.

        As the nation’s central bank, the Federal Reserve derives its authority from the Congress of the United States. It is considered an independent central bank because its monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government, it does not receive funding appropriated by the Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms.

        However, the Federal Reserve is subject to oversight by the Congress, which often reviews the Federal Reserve’s activities and can alter its responsibilities by statute. Therefore, the Federal Reserve can be more accurately described as “independent within the government” rather than “independent of government.”

        The 12 regional Federal Reserve Banks, which were established by the Congress as the operating arms of the nation’s central banking system, are organized similarly to private corporations–possibly leading to some confusion about “ownership.” For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year.”

        I was referring to the interest on each security. I presume that at the auction the bids are on the principal that the banks want to pay. Difference between full price and the principal paid is the interest they will be paid at maturity. The winner pays the most principal, meaning they get the lowest interest. Whatever that is, 6% of it is the Fed’s transaction fee. The 6% of the annual profits allocated by the bank’s shares may be a different 6%. There are other fees gathered by the Fed on its operations as a clearing house, fund transfers, etc.. So, the profits are differences between actual costs and income, and after 6% dividend is distributed to the member banks, the rest goes back to the Treasury.
        But my argument is based on what the Fed does as a governmental agency, and its purchasing of securities at auction with money created out of thin air is governmental activity.

        • Right. Surely the Federal Reserve has no motive to lie. Here’s Ellen Brown’s answer:

          • I hate to go against Ellen on this point, but I think as far as the Federal Reserve Act of 1913 as amended goes, and the use by the Fed of constitutional powers to create money makes the Fed’s actions in these regards government actions, meaning the Fed redeems the debt with money it creates out of nothing. It is the new money issuer.
            My analysis implies that the Treasury spends debt-free money once the Fed redeems the bank debt by buying the securities used to get money for deficit spending. She sees the Fed as creating debt, I see credit. And I think it doesn’t matter what the Fed is with respect to private banks who are members of the Federal Reserve System, the Fed’s actions in this case are governmental actions, which is why they redeem government debt by and for the government. The Fed uses securities to manage the money supply: it sells securities it acquires to banks to drain money out of banks to fight inflation. It buys securities from banks that got them from Treasury in return for money to put new money into the economy, as in recessions, like now. In studying Modern Monetary Theory, I realized the current system, when Fed redeems the debt of securities it buys, produces the equivalent results of the U.S. Treasury issuing US. Treasury Notes (greenbacks). Treasury gets debt-free money. This is fungible with the money the banks get from the Fed debt-free (once they give up the securities). Banks end up with the money equivalent to what they gave the Treasury. The greenbacks case would still have to have the Treasury issue securities to sell to fight inflation, and buy back to put new money into circulation. This is not taxpayer money!

  20. What is the total in T Bonds owed to Social Security and Medicare Trust funds as of January 2013?

  21. […] Ellen Brown lägger fram 7 förslag till konstruktiva lösningar – Fiscal Cliff: Time to Call Their Bluff […]

  22. This is fantastic! All these financial Rube Goldberg ideas to replace simply spending less than we take in. Buy gold… this baby is going down…

    • Blue: Where does money come from? Storks? Helicopters? If so where do they get it? And it is not simply an issue of just spending less than you take in: that would lead to surpluses, and more and more money would be taken up in taxes out of the economy and not spent. Soon you would have deflation and later a depression. Why do you think we didn’t have inflation, although Bush-Cheney were deficit spending trillions on the wars in Iraq and Afghanistan? We were buying oil from the Arabs and other foreign suppliers, and manufactured goods from Asia, mostly China now. Imports also take money out of circulation. If everyone was a heavy saver and saved more than they spent, that would also ultimately lead to recession and depression unless the savers saw something worthwhile to buy or invest in. So, the national budget is more complicated than simply balancing taxes against government spending. Deficit spending creates new money. Federal finance is not like household, business, or state or local government finance. These need to get money from elsewhere to spend. The Federal government creates the money and spends it. It requires citizens to pay government taxes. The taxes don’t directly pay for all spending. They are more useful for draining money out of circulation if you don’t turn around and spend it. But government needs to tax to make people want the money so they can pay their taxes with it. So, Federal finance has the additional power of being able to create the money supply and spend it to put it in the hands of the people. And since we have fiat money, it is a whole lot different than household finance, business finance, state and local government finance. These are poor analogies for understanding the Federal level.

  23. A Fiscal Cliff is how it is seen from the side of the agency that has been accumulating debt. Seen from the perspective of the principals for whom the agency works, it can be seen as a near avalanche of debt-based assets that have not been collected or redeemed.

    Homebuyers are persuaded that the promissory note is an obligation to pay, when, in fact, the promissory note is changed into a security by the bank and becomes the funding that pays for their house. It’s the law … but VERY few people know that. Just as the Federal Reserve creates money, out of debt, so does the bank in the Federal Reserve System. The promissory note is identical to the funny money the US Treasury prints–based on debt. Most people think the promissory note is a debt. They think it would be necessary to fulfill the obligation to repay, but that isn’t really what the note is about. The promissory note can be converted to debt money just like a Federal Reserve Note and it can be bought and sold as though it were an asset. Assets unclaimed by citizens increase the Federal National debt. Almost all homebuyers think that they owe a debt, but in reality the debt is owed to them.

    The homeowner borrows from a bank, the bank borrows from the Federal Reserve, and the Federal Reserve borrows from the United States Treasury. Banks cannot lend their own capital but they can effect transactions in a trustee capacity. Assets that generated by the sale of the security, the promissory note, belong to the borrower / grantor / obligor / trustor / creator of the trust deed investment.

    The note is sold many times over to investors, and a mortgage pool funds a trust. Unredeemed proceeds are escheated to the State and eventually back to the US Treasury where it becomes part of the national debt. When the investors seek repayment they are directed to the US Treasury to redeem the debt-based currency, “minusing” the “debt” (“minusing the minus money”). That is, subtracting the payment of debt-based currency from the US Treasury, the debt, a minus, is subtracted from the National Debt. There is another answer to the National Debt: in the words of the Prophet Amos, “Let justice roll down like waters, and righteousness like an ever-flowing stream” —Amos 5:24

    The Fiscal Cliff is nothing more than an accumulation of our uncollected assets. It’s time to collect.

  24. Using the debt ceiling and the “fiscal cliff” as leverage to extract additional concessions from the other party may be clever hard-ball politics, but at what cost to the rest of us? In at the Worden Report, I argue that the high-stakes political poker game may reflect a weakness in democracy itself. In short, self-governance does not confront hard problems very well.

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