A lot of people are very upset about the rapidly increasing U.S. national debt these days and they are demanding a solution. What they don't realize is that there simply is not a solution under the current U.S. financial system. It is now mathematically impossible for the U.S. government to pay off the U.S. national debt. You see, the truth is that the U.S. government now owes more dollars than actually exist. If the U.S. government went out today and took every single penny from every single American bank, business and taxpayer, they still would not be able to pay off the national debt. And if they did that, obviously American society would stop functioning because nobody would have any money to buy or sell anything.
And the U.S. government would still be massively in debt.
So why doesn't the U.S. government just fire up the printing presses and print a bunch of money to pay off the debt?
Well, for one very simple reason.
That is not the way our system works.
You see, for more dollars to enter the system, the U.S. government has to go into more debt.
The U.S. government does not issue U.S. currency - the Federal Reserve does.
The Federal Reserve is a private bank owned and operated for profit by a very powerful group of elite international bankers.
If you will pull a dollar bill out and take a look at it, you will notice that it says "Federal Reserve Note" at the top.
It belongs to the Federal Reserve.
The U.S. government cannot simply go out and create new money whenever it wants under our current system.
Instead, it must get it from the Federal Reserve.
So, when the U.S. government needs to borrow more money (which happens a lot these days) it goes over to the Federal Reserve and asks them for some more green pieces of paper called Federal Reserve Notes.
The Federal Reserve swaps these green pieces of paper for pink pieces of paper called U.S. Treasury bonds. The Federal Reserve either sells these U.S. Treasury bonds or they keep the bonds for themselves (which happens a lot these days).
So that is how the U.S. government gets more green pieces of paper called "U.S. dollars" to put into circulation. But by doing so, they get themselves into even more debt which they will owe even more interest on.
So every time the U.S. government does this, the national debt gets even bigger and the interest on that debt gets even bigger.
Are you starting to get the picture?
As you read this, the U.S. national debt is approximately 12 trillion dollars, although it is going up so rapidly that it is really hard to pin down an exact figure.
So how much money actually exists in the United States today?
Well, there are several ways to measure this.
The "M0" money supply is the total of all physical bills and currency, plus the money on hand in bank vaults and all of the deposits those banks have at reserve banks. As of mid-2009, the Federal Reserve said that this amount was about 908 billion dollars.
The "M1" money supply includes all of the currency in the "M0" money supply, along with all of the money held in checking accounts and other checkable accounts at banks, as well as all money contained in travelers' checks. According to the Federal Reserve, this totaled approximately 1.7 trillion dollars in December 2009, but not all of this money actually "exists" as we will see in a moment.
The "M2" money supply includes everything in the "M1" money supply plus most other savings accounts, money market accounts, retail money market mutual funds, and small denomination time deposits (certificates of deposit of under $100,000). According to the Federal Reserve, this totaled approximately 8.5 trillion dollars in December 2009, but once again, not all of this money actually "exists" as we will see in a moment.
The "M3" money supply includes everything in the "M2" money supply plus all other CDs (large time deposits and institutional money market mutual fund balances), deposits of eurodollars and repurchase agreements. The Federal Reserve does not keep track of M3 anymore, but according to ShadowStats.com it is currently somewhere in the neighborhood of 14 trillion dollars. But again, not all of this "money" actually "exists" either.
So why doesn't it exist?
It is because our financial system is based on something called fractional reserve banking.
When you go over to your local bank and deposit $100, they do not keep your $100 in the bank. Instead, they keep only a small fraction of your money there at the bank and they lend out the rest to someone else. Then, if that person deposits the money that was just borrowed at the same bank, that bank can loan out most of that money once again. In this way, the amount of "money" quickly gets multiplied. But in reality, only $100 actually exists. The system works because we do not all run down to the bank and demand all of our money at the same time.
According to the New York Federal Reserve Bank, fractional reserve banking can be explained this way....
"If the reserve requirement is 10%, for example, a bank that receives a $100 deposit may lend out $90 of that deposit. If the borrower then writes a check to someone who deposits the $90, the bank receiving that deposit can lend out $81. As the process continues, the banking system can expand the initial deposit of $100 into a maximum of $1,000 of money ($100+$90+81+$72.90+...=$1,000)."
So much of the "money" out there today is basically made up out of thin air.
In fact, most banks have no reserve requirements at all on savings deposits, CDs and certain kinds of money market accounts. Primarily, reserve requirements apply only to "transactions deposits" – essentially checking accounts.
The truth is that banks are freer today to dramatically "multiply" the amounts deposited with them than ever before. But all of this "multiplied" money is only on paper - it doesn't actually exist.
The point is that the broadest measures of the money supply (M2 and M3) vastly overstate how much "real money" actually exists in the system.
So if the U.S. government went out today and demanded every single dollar from all banks, businesses and individuals in the United States it would not be able to collect 14 trillion dollars (M3) or even 8.5 trillion dollars (M2) because those amounts are based on fractional reserve banking.
So the bottom line is this....
#1) If all money owned by all American banks, businesses and individuals was gathered up today and sent to the U.S. government, there would not be enough to pay off the U.S. national debt.
#2) The only way to create more money is to go into even more debt which makes the problem even worse.
You see, this is what the whole Federal Reserve System was designed to do. It was designed to slowly drain the massive wealth of the American people and transfer it to the elite international bankers.
It is a game that is designed so that the U.S. government cannot win. As soon as they create more money by borrowing it, the U.S. government owes more than what was created because of interest.
If you owe more money than ever was created you can never pay it back.
That means perpetual debt for as long as the system exists.
It is a system designed to force the U.S. government into ever-increasing amounts of debt because there is no escape.
We could solve this problem by shutting down the Federal Reserve and restoring the power to issue U.S. currency to the U.S. Congress (which is what the U.S. Constitution calls for). But the politicians in Washington D.C. are not about to do that.
So unless you are willing to fundamentally change the current system, you might as well quit complaining about the U.S. national debt because it is now mathematically impossible to pay it off.
***UPDATE***
It has been suggested that the same dollar can be used to pay off debt over and over - this is theoretically true as long as the dollar remains in the system.
For example, if the U.S. government gives China a dollar to pay off a debt, there is a good chance that the U.S. government will be able to acquire that dollar again and use it to pay off another debt.
However, this is not true when debt is retired with the Federal Reserve. In that case, money is actually removed from the system. In fact, because of the "money multiplier", when debt is retired with the Federal Reserve it can remove ten times that amount of money (and actually more, but let's not get too technical) from the system.
You see, fractional reserve banking works both ways. When $100 is introduced into the system, it can theoretically create $1000 as the example in the article above demonstrates. However, when that $100 is removed, it can have the opposite impact.
And considering the fact that the Federal Reserve "purchased" the vast majority of new U.S. government debt last year, we have got a real mess on our hands.
Even if a way could be figured out how to pay off all the debt we owe to foreign nations (such as China, Japan, etc.) it would still be mathematically impossible to pay off the debt that we owe to the Federal Reserve which is exploding so fast that it is hard to even keep track of.
Of course we could repudiate that debt and shut down the Federal Reserve, but very few in Washington D.C. have any interest in doing that.
It has also been suggested that instead of just using dollars to pay off the U.S. national debt, we could use the assets of the U.S. government to pay it off.
That is rather extreme, but let us consider that for a moment.
That total value of all physical assets in the United States, both publicly and privately owned, is somewhere in the neighborhood of 45 to 50 trillion dollars. Of course the idea of the U.S. government "owning" every single asset of the American people is repugnant to our entire way of life, but let's assume that for a moment.
According to the 2008 Financial Report of the United States Government, which is an official United States government report, the total liabilities of the United States government, including future social security and medicare payments that the U.S. government is already committed to pay out, now exceed 65 TRILLION dollars. This amount is more than the entire GDP of the whole world.
In fact, there are other authors who have written that the actual figure for the future liabilities of the U.S. government should be much higher, but let's be conservative and go with 65 trillion for now.
So, if the U.S. government took control of all physical assets in the United States and sold them off, it could not even make enough money to pay for everything that the U.S. government is already on the hook for.
Ouch.
If you have not read the 2008 Financial Report of the United States Government, you really should. Actually the 2009 report should be available very soon if it isn't already. If anyone knows if it is available, please let us know.
The truth is that the U.S. government is in much bigger financial trouble than we have been led to believe.
For example, according to the report (which remember is an official U.S. government report) the real U.S. budget deficit for 2008 was not 455 billion dollars. It was actually 5.1 trillion dollars.
So why the difference?
The CBO's 455 billion figure is based on cash accounting, while the 5.1 trillion figure in the 2008 Financial Report of the United States Government is based on GAAP accounting. GAAP accounting is what is used by all the major firms on Wall Street and it is regarded as a much more accurate reflection of financial reality.
So needless to say, the United States is in a financial mess of unprecedented magnitude.
So what should we do? Does anyone have any suggestions?
***UPDATE 2***
We have received a lot of great comments on this article. Trying to understand the U.S. financial system (even after studying it for years) can be very difficult at times. In fact, it can almost seem like playing 3 dimensional chess.
Several readers have correctly pointed out that when the U.S. money supply is expanded by the Federal Reserve, the interest that is to be paid on that new debt is not created.
So where does the money to pay that interest come from? Well, eventually the money supply has to be expanded some more. But that creates even more debt.
That brings us to the next point.
Several readers have insisted that the Federal Reserve is not privately owned and that since it returns "most" of the profits it makes to the U.S. government that we should not be concerned about the debt owed to it.
The truth is that what you have with the Federal Reserve is layers of ownership. The following was originally posted on the Federal Reserve's website....
"The twelve regional Federal Reserve Banks, which were established by Congress as the operating arms of the nation’s central banking system, are organized much like 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."
So Federal Reserve "stock" is owned by member banks. So who owns the member banks? Well, when you sift through additional layers of ownership, you will ultimately find that people like the Rothschilds, the Rockefellers and the Queen of England have very large ownership interests in the big banks. But there are so many layers of ownership that they are able to disguise themselves well.
You see, these people are not stupid. They did not become the richest people in the world by being morons. It was the banking elite of the world who designed the Federal Reserve and it is the banking elite of the world who benefit the most from the Federal Reserve today. In the article above when we described the Federal Reserve as "a private bank owned and operated for profit by a very powerful group of elite international bankers" we may have been oversimplifying things a bit, but it is the essence of what is going on.
In an excellent article that she did on the Federal Reserve, Ellen Brown described a number of the ways that the Federal Reserve makes money for those who own it....
The interest on bonds acquired with its newly-issued Federal Reserve Notes pays the Fed’s operating expenses plus a guaranteed 6% return to its banker shareholders. A mere 6% a year may not be considered a profit in the world of Wall Street high finance, but most businesses that manage to cover all their expenses and give their shareholders a guaranteed 6% return are considered "for profit" corporations.
In addition to this guaranteed 6%, the banks will now be getting interest from the taxpayers on their "reserves." The basic reserve requirement set by the Federal Reserve is 10%. The website of the Federal Reserve Bank of New York explains that as money is redeposited and relent throughout the banking system, this 10% held in "reserve" can be fanned into ten times that sum in loans; that is, $10,000 in reserves becomes $100,000 in loans. Federal Reserve Statistical Release H.8 puts the total "loans and leases in bank credit" as of September 24, 2008 at $7,049 billion. Ten percent of that is $700 billion. That means we the taxpayers will be paying interest to the banks on at least $700 billion annually – this so that the banks can retain the reserves to accumulate interest on ten times that sum in loans.
The banks earn these returns from the taxpayers for the privilege of having the banks’ interests protected by an all-powerful independent private central bank, even when those interests may be opposed to the taxpayers’ -- for example, when the banks use their special status as private money creators to fund speculative derivative schemes that threaten to collapse the U.S. economy. Among other special benefits, banks and other financial institutions (but not other corporations) can borrow at the low Fed funds rate of about 2%. They can then turn around and put this money into 30-year Treasury bonds at 4.5%, earning an immediate 2.5% from the taxpayers, just by virtue of their position as favored banks. A long list of banks (but not other corporations) is also now protected from the short selling that can crash the price of other stocks.
The reality is that there are a lot of ways that the Federal Reserve is a money-making tool. Yes, they do return "some" of their profits to the U.S. government each year. But the Federal Reserve is NOT a government agency and it DOES make profits.
So just how much money is made over there? The truth is that we have to rely on what the Federal Reserve tells us, because they have never been subjected to a comprehensive audit by the U.S. government.
Ever.
Right now there is legislation going through Congress that would change that, and the Federal Reserve is fighting it tooth and nail. They are warning that such an audit could cause a financial disaster.
What are they so afraid of?
Are they afraid that we might get to peek inside and see what they have been up to all these years?
If you are a history buff, then you probably know that debates about a "central bank" go all the way back to the Founding Fathers.
The European banking elite have always been determined to control our currency, and that is exactly what is happening today.
Ever since the Federal Reserve was created, there have been members of the U.S. Congress that have been trying to warn the American people about the insidious nature of this institution.
Just check out what the Honorable Louis McFadden, Chairman of the House Banking and Currency Committee had to say all the way back in the 1930s....
"Some people think that the Federal Reserve Banks are United States Government institutions. They are private monopolies which prey upon the people of these United States for the benefit of themselves and their foreign customers; foreign and domestic speculators and swindlers; and rich and predatory money lenders."
The Federal Reserve is not the solution and it never has been.
The Federal Reserve is the problem.
Any thoughts?
how about we go back to barter system???? i was arguing with one of my economy teachers that barter system was actually efficient… the argument was: how can you value a dozen eggs, or something of that sort… well for one person a dozen eggs can be worth a pound of flour, for other gallon of milk, another would provide a service like a roof repair or something. You bargain and come to a mutual understanding of your product/service value, at the same time the product/service might be worth more/less in a different situation. But then again modern economists disagree due to inability of disregarding those “modern unified rules” of value…. but that’s what the real barter system is about there is not prescribed value to anything you make it your own… (and actually this system has been proven by the guy who exchanged a paper pin for a house- check out this story)
Saying money doesn’t have any value is a ridiculous claim. If you really believe it i will be more than happy to come to your house and relieve you of your excess paper. The value of anything is the result of supply and demand. The demand for US dollars derives from the laws mandating they be accepted for all debt public and private. The supply results from the government putting money in circulation. Where supply and demand meet we find the value of something. Paper money has no more or less inherent value than gold or anything else. You can’t eat either, both will fail in getting you to work or sheltering you or your family. There value is determined largely by the rules and mores of society. Money from our laws, and gold from the fact that people like shinny things.
I have no problem with the Fed, actually i trust the fed alot more than i trust the (current) congress, president, and alot of people. Our problems are big, but not insurmountable. We don’t have to worry about paying off the national debt immediately, instead simply balancing the budget would do alot, since with economic growth a constant nominal debt value will decrease as a percent of our economic if the economic is growing.
The problem is geting the economy to start growing. And in order to do that we need to create a friendly environment for business. Another tough, but not impossible thing to accomplish.
United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues. Foreign gold or silver coins are not legal tender for debts. (31 USC Sub IV Ch 51 Sub 1 Sec 5103)
Unfortunately for The Fed they screwed up when they passed The Federal Reserve Act and failed to void the ability of Treasury to issue its own non-debt-bearing currency which is also legal tender. It requires only an executive order to implement
The mounting debts are deliberate and are but a tool to take this country from the American citizens. Furthermore, this discussion ignores the effect of crude oil on banking and money. A comprehensive discussion includes the effect of the petrodollar system on our currency. With that, we should include the impact of holding more crude oil within our borders than all the other proven oil reserves on earth. Here are the official estimates:
- 8-times as much oil as Saudi Arabia
- 18-times as much oil as Iraq
First, investigate the Williston Basin, more commonly referred to as the ‘Bakken.’ It an area stretching from Northern Montana, through North Dakota and into Canada. It contains over 500 billion barrels of oil. Also, since 2006, it’s been common knowledge in the oil industry that 1,000 feet beneath the surface of the Rocky Mountains lies the largest untapped oil reserve in the world. It holds more than 2 TRILLION barrels. On August 8, 2005 President Bush mandated its extraction. In four years of high oil prices none has been extracted and nearly all of us are unaware of its existence. These oil assets are coveted by the international banking cabal and the largest multinational industries because in a world reliant on crude oil, oil can be used as currency between nations. The size of ours guarantee global predominance. Currently the major multinational banks are colluding to take this wealth from the American citizens. They are in the process of creating a spectacular economic collapse of our fiat dollar system. With it will come a tremendous drop in our standard of living. This means more than resorting to “Hamburger Helper” instead of filet mignon. It means increased infant mortality rates and decreased life expectancy. Afterwards we will surrender our constitutional government and our natural resources for the promise of regaining some modicum of our standard of living and relative affluence. All the while we would possess the means and the resources to pay the debts they incurred for us, enormous though they may be. Sad to say it, ladies and gentlemen, but control of our government has been taken from us and now we begin to pay the price for letting it happen.
Bystander_ why don’t you then start printing your own money and see where that takes you. Any country’s currency in order to have any value has to be backed up by something. That is why it is called legal tender because the idea of paper money is simply made up and works just as IOUs (of sort). When US used to have the gold standard- US currency was backed up by the gold bullion, which had value. But after president Nixon ended Brentton Woods act and eliminated gold standards US currency is backed by empty promises and the believe that US is GOOD FOR IT.
The point isn’t that the dollar isn’t worth anything. ($.04) The point is that there arent enough dollars in the collective US to pay off our gov’ts current debt load. And for those of you that trust the fed, may I suggest that you read “the Creature From Jekyll Island”. Or, research what they were up to in 1987 with the creation of Credit Default Swaps and the repeal of Glass-Steagall Act of 1933 in 1999. These were two MAJOR dominoes that fell and put us in the financial situation that we’re in today. Congress and the Treasury are both in the back pocket of the fed. And Goldman Sachs is their favorite recruiting grounds. Support HR 1207. Call your congressman/women and tell them to vote yes.
Fact is if you’re not part of the rich elite you are screwed. The best strategy is to not have any children so they don’t have to live in the coming misery and stuff.
The bumblebee can’t fly either, but it does.
Your article does not take into account that the nation was actually much more in debt during World War II.
Gloom and doom, sensationalistic statements do not help *anybody*.
Solution? Get rid of government. Maybe 70% of it. Keep national defense.
Immediately stop all payroll taxes into the system right now. Do a very slow drain back to those people who paid in their entire lives with an apology that the government will never do that again, ever, under threat of individual sate secession. Let people keep what they earn.
Hold a Con Convention with an agenda that Congress must always balance its budget every year with third party audits held up by private sector and publicized with fact checks made available for all to see.
Medicare can be reformed by ending the entitlement for those paying in now. Bring competition back into the system by letting providers compete across state lines. Handicap trial lawyers and ambulance chasers by introducing a large tax on any judgment issued by a court against businesses. Why? Because businesses are our bread and butter, literally our very survival. We need to become grateful again for businesses who provide jobs rather than stigmatize them as greedy organizations. They create earnings. They create jobs. Not government. Therefore they get special rights as risk takers.
Incentivize corporations with tax holidays or do a fair tax which would essentialy end corporate tax rates and would compete for coporations to come back to the US, theoretically repatriating their assets back to the country, by some estimates of well over $100 trillion in assets.
Talk about a jobs bill!
The current regime has no clue.
Time for them to legalize marijuana. That move alone would save them millions. Then, they take it over. Grow it, sell it, tax it. Problem solved.
Why are they so stubborn about this anyway?
There is a huge hole in the reasoning.
>The Federal Reserve swaps these green pieces of paper for pink pieces of paper called U.S. Treasury bonds.
Correct.
However, the Federal reserve turns over all its profits back to the treasury. So there really is no interest being paid to the Fed.
>The only way to create more money is to go into even more debt which makes the problem even worse.
Who is the government going into debt with? Oh, that’s right. Itself. All it is doing is stuffing a piggy bank full of dollar bills with IOU’s and then taking out actually currency.
Money, itself paper, gold, feathers whatever is simply bizarre. Animals must think we’re nuts and if life exists outside of earth they must think we’re nuts as well.
Tons of plants and animals but if you don’t have paper (in our case) you starve?
lol, this insane system will be laughed at thousands of years from now. It’s so ridiculously stupid.
How can anyne in their right mind have faith in our Congress,the Democrats or the person in Washington
Get Real you are correct. The authority for the federal gov’t to issue banknotes still exists. However consider the fate of the last president to issue United States Notes rather than relying on Federal Reserve Notes. None other than President John F. Kennedy.
A man named Larry Burkett who had a financial radio program some years back on Christian Radiowrote a book called “The Coming Economic Earthquake” which covered the subject very well. He saw this coming when there was hardly a sign of it anywhere, and now it is here.
Here is why your logic is faulty. If it’s impossible to pay off the national debt, then how was it possible to create the debt? Wouldn’t your same logic apply to prove that it is *impossible* to get us in debt his far?
You make a good point, but all you are showing is that it’s impossible to pay off our national debt instantly (as in within a second). And nobody is proposing that anyway;)
Money gets recycled, like air. As long as have some trees around, we’ll never run out of oxygen. If …. that is
“So what should we do? Does anyone have any suggestions?”
Well I tried to look at all the comments and I may have missed it… Did you see the words “treason” or “traitor” anywhere yet? Without prosecution(s) for this crime it will be difficult for the other suggestions — many good — to take place. State & local level actions hold the most promise.
My suggestion then is pray to God for his mercy on our Country. This is our most powerful weapon.
Declare the US as Bankrupt and not pay off the debt…
Alternativly…
1. Refuse monetary policy to get as screwed up as it has been.. for if the interest rate on money was 15% about 8 years ago.. the national debt wouldnt have gotten so high…the international value of the US dollar would have reflected its interest rate better and hence MORE loaning more difficult…
Funny what a war in Iraq can do…
2. Stop a trade debt… so money can come in from other countries and hence pay the debt…
Why do you think Barak Obama just recently asked china to buy product from them?
IE…
START EXPORTING with a low valued dollar and a higher interest rate… hence paying off debt…
3. Take up taxes and stop voting in politicians that claim they can solve the problem without bringing it up…
More is in a movie IOUSA which is alittle better than my descriptions above….
Fractional banking isn’t THE problem… ie 100 = 1000… it is simply a stupid way of handling money… the money has to reflect the assets better thats all… ie… 100 dollars in a society needs to = about 100 dollars of product (including labor products like a lawyer or something) in trade to buy it with…
With all ratios that it has gotten this bad… hard times lie ahead… as everyone loves to repeat…
@Bystander, the point regarding value of the USD is that is comes out of nothing. Certain people can press a few computer buttons and create hundreds of billions of dollars. If one person has the power to create hundreds of billions of dollars out of thin air, then what can the true value be? What work was done or product/service sold in order to productively create this new money? None. The value, the true value, is nonexistent. People value dollars because of faith and trust in the government which says they have value. The same government that prints the money out of thin air.
The difference with gold as money, the reason why the founders of the United States mandated that only gold and silver were money, is that gold or silver cannot be created out of nothing by government bureaucrats. When governments are unable to create money out of thin air then they have no choice but to live within their means. But, governments living within their means equates to less interest income for the bankers…
Another point about gold, it has an extremely long and successful track record as being accepted as money, for more than 5,000 years. All fiat currencies, of which the USD is, in the history of the world (aside from our current group of fiat currencies) have failed. Fiat has a very bad historical track record. Gold, well, as JP Morgan once stated to Congress in 1913, “gold is money and nothing else.”
OK, why not for some famous US solutions:
1. Instigate a few wars and supply all countries/factions involved with US weapons. BIG profits!
2. Increase heroin production in Afghanistan and make young people in Eastern Europe/Asia drug dependent. Who cares? Big Continuous Profits!
3. Abolish the US$ and start another currency. Start over again. Foreign debt? Pooff, Gone!
4. Just manipulate the gold and silver price upward instead of downward. What about US$ 51.000/Oz? Your advantage with only a few telephone calls to some Wall Street Banks: 8,133.5 (MT; US gold reserves) x 1000 kg x 32,15 = 261,5 Million Oz. x US$ 51,000 = US 13,3 Quadrillion. Debt: Pooff, gone!
History has learned to be very cynical to believe the US will have the balls to confront their problems. Most probably they will find an easy way out: bomb the problems into oblivion, let other people pay for their debt or create another paper illusion.
It appears to me the crisis was caused by the US, that is the Federal Reserve. What happened was that the risks were sold abroad as derivatives, so foreign banks have to suffer as well as US banks.
Actually, we are in the same boat, all over the world. I don’t think it is fair to let the people, whether in the US, Greece, Iceland, Portugal or wherever, suffer for the unfair system of debt creation.
We need some bright ideas and political clout to get rid of this debt in the best way for the people. We know that debt is as fictional as money created by the banks, so something must be possible in this area.
Excellent article. Pretty factual despite all of the nanny naysayers.
Therein lies the rub. Money is illusory and does not actually exist. It is a debt instrument. As long as people “believe” the unbacked and fiat currency of the US has value-then it does. Perception is truly reality. The problem is that folks are beginning to figure this out. Like China and the Middle East.
Abolish the voracious middle man-Federal Reserve. Print our own currency. Be a patriot. Vote libertarian.
Everybody needs to get all the credit cards they can…run the limit to the max and don’t pay on them. Stop making mortgage payments. If you are self employed stop paying your quarterly income taxes. Of course nobody will do this because they are scared to lose their littole possessions. But if we did the country would grind to a halt pretty soon. Then see where the chips fall.
I predict we end up going the way of barter, via an unofficial currency like Argentina’s credito. That, or we go back to seashells. Gold & silver are too valuable to be a currency again. We’ll always have money though.
First, (as Get Real pointed out) the Federal Reserve and its fiat note are unconstitutional. Only congress has the power to coin money. Simple, argument over. “Coin” was deliberately used as the Founding Fathers recognized the dangers of paper money, and coins were used for many years. Paper bills were created to facilitate large transactions, but the bills were tied to gold redeemable at a quantity of grams of gold.
The fact is, our Federal reserve not is not redeemable for anything. Nixon cut that tie. So, our money has ties only to Federal reserve assets, which consist of failed mortgage securities, to the tune of 2 trillion.
Other countries are unloading their stockpiles of US currency for gold bullion from the IMF. Foreign banks are trying to get to 30% US currency reserves, down from 65%.
Bystander has drank the kool-aid and I am going to increase your choco rations to 30grams next week! The Fedreral reserve issues currency, not the government. Gold and silver have been used as money for thousands of years, so their established value is not in question whatsoever as a money.
DO the smart thing and diversify some of your investments into precious metals and get in to dividend paying foreign stocks that have little to no ties to US interests.
The answer is pretty obvious, and simple….
The US will default on it`s debt.
It will probably offer to pay China/Japan/etc their parts of the debt (which I belive is actually a pretty small part of the overall debt), but the rest will be defaulted.
There, problems solved (and new problems created!)
Me? I’m renouncing my citizenship and moving to Switzerland.
I won’t even begin to list the ways in which the article is dead wrong. A complete waste of time. If you’re buying what this article is selling, you should look elsewhere for an education on how these systems work. The author doesn’t know.
OK – First of all, the FED actually creates very little money in our fractional monetary system. In normal markets there is $800 Billion of US Treasury Notes (a debit entry) that has been moneterized into Federal Reserve Notes (a credit entry). Due to the enormous one-time (hopefully) money needs stemming from the fall-out of the credit crisis, the FED has mushroomed its balance sheet to approximately $2.3 Trillion from the aforementioned $800 Billion. This quantitative easing was necessary due to interest rate considerations, not because there was not enough money. Simply put, if the US Treasury had to issue a Trillion or so more in US Treasury Notes overnight, the interest rates would have sky-rocketed which would have put the chances for a recovery into the remote range. Moreover, the author implies that the FED is controlled a group of elites that and are absconding the money they make. This is only remotely true. The FED is independent of the US Government, so politics stay out of the banking sector. Moreover, the great majority of the money generated investments on the FED’s books from US Treasuries, and now, Fannie Mae or Freddie Mac paper is simply given back to the US Treasury. If that was not the case, you can be certain the Bernanke would not be re-appointed as FED Chairman by a vote of Congress.
Secondly, the majority of our money is created when banks make loans. When a banker makes a loan, he must retain a capital ratio of around 8%. My sense is that the author is inter-changably treating this 8% requirement as the approximate 10% reserve requirement that the FED has in place. When a bank makes a new loan it is debit on its books and the credit is a deposit into the borrowers account. Somebody has to clarify to me how money has been lost in this transaction. Say the loan is for $100,000… well, $100,000 is credited to the borrower, so how there a loss of 10%? When you borrow $100,000 from a bank, do you only receive $90,000 as the author seems to be implying? For EVERY DEBIT on the books, there is an equal CREDIT, unless the loan is not paid back. Of course, that is why an 8% capital requirement is in place, so that the loan loss can safely be offset against the bank’s capital.
Thirdly, the money supply is tight right now because banks have been contracting their balance sheets. This is being done by tightening credit standards. When less credit is being issued by banks a contraction in the macro money supply occurs. Likewise, when banks make loans, their balance sheets are made larger on both the asset and liability side (deposits or money) of their books and the macro money supply is expanded.
Fourthly, part of the reason that the macro money supply is not expanding is due to loans losses that banks are taking due to the lack of supervision regarding the subprime debacle. When banks lose money, they very naturally become hesitant to make news loans that could result in further losses. Moreover, the loan loss means they have less capital and will have trouble maintaining the 8% capital requirement if they continue to make more loans, thereby expanding their balance sheet. A natural contraction occurs. That is what the FED is trying to partially offset by expanding its balance sheet, so the whole system does not implode. However, in context of the entire money supply, an extra Trillion on the FED’s balance sheet is relative peanuts.
Fifthly, the real threat to the US’s money supply is trade imbalances. When the US imports more goods and services than it exports, the difference is made up by selling them our debt. Again, all the money created via the fractional monetary system has a debit and a credit… they equal. However, when foreigners end up owning our money because we traded it for goods and services, we do end up with less domestic money than we have debt. And, if that money does not eventually come back to the US in the form of trade surpluses we will not have enough money to pay our domestic debt with. However, the money did not somehow disappear. The debits still equal the credits. The problem is the foreigners have become our creditor and we are the debtors.
Sixthly, debt based monetary systems are inherently dependent upon the money continuing to circulate. When people become scared and start hording money instead of keeping a healthy amount of it in circulation, there will be a lack of money to service debt. It is not unwise to save money, but when the macro savings rate is high enough to result in a contraction of economic activity, we will have a debt servicing issue.
GET REAL
It may be legal tender. But under the US Constitution it IS NOT legal MONEY. So what two things are legal money under the constitution of the USA?
A little at a time, the American public has been decieved into thinking that worthless paper is “money”. What is needed is a return to a Consttutionally based monetary system.
End the Federal Reserve,repudiate all debts to the banksters and sieze the assets of the financial oligarchy as reperation for the deception. As for foriegn goverments, send the spineless politicians as payment.
So the US govt owes the Federal Reserve? Who says the US govt has to pay the owners of the Fed reserve? What army do they have?
Every fianical consultanr and economist should be asked if the have read.THE RISE AND FALL OF THE GREAT POWERS AND THE DEVIL FROM JEKAL ISLAND if they haven’t they should not be allowed to comment on the economy or Federal reserve.
best
bob
Funny thing is, 8-9 years ago, things such as “federal reserve system” and “elite international banking cartels” would of been called a conspiracy theory.
This whole situation is retarded. Why don’t we just invade China and make it ours and then they can’t own us anymore. With all of their factories and land we can pay off our debt way faster. At all, actually. I can’t believe you haven’t thought of this already.
“We could solve this problem by shutting down the Federal Reserve”
So why do we not do that? Is there any real practical problem with that, or is it just an ideological issue?
Tim Jowers
Yes, I’ve quite aware of what constitutes GDP. You might be surprised to know just how GDP is calculated in your country (I’m not an American BTW). Did you know that if you earn $100 and then spend that $100, your national accounts show GDP to be $200? But I digress. The point of my response is the the basis of the original article is deeply flawed, by virtue of comparing existing debt (which is repaid over time) with only one year’s GDP. The issue is that the internet is overflowing with ‘experts’ who for the most part gain their knowledge from web-sites and unattributed statements from others who are equally ignorant. The statements then get parroted by others and become conventional ‘wisdom’. Just because experts disagree doesn’t mean every Tom, Dick or Harry’s argument is equally valid. Just look at some of the rambling, incoherent, conspiracy-theory laden responses here; Dennen’s reponse being a great case in point. People, get an education, read BOOKS not just damn web-sites and don’t believe every so-called ‘expert’ who trots out a bunch of stuff that seems to sound right.
The only solution is to go back to the gold standard. We don’t necessarily have to use gold, but there has to be some sort of physical asset that we can use as the cap for how much we can spent. That way if we need to pay back our debts, we can use the gold (or whatever assets the standard is based off) to pay back that debt. Simple, efficient, tolerable.
This article is ridiculous, or has a different definition of “mathematically impossible” than a mathematician does. As one example:
You see, the truth is that the U.S. government now owes more dollars than actually exist.
And when the US Gov’t pays a dollar towards reducing its debt, does that dollar get removed from circulation?
Of course not, it *circulates*. It’s what happens to money in an economy.
So, the question that puzzles me is – why China is giving us the money instead giving it to its own people whose living standard is way lower then ours?
It’s the end of the world as we know it.
People do not want gold because it is a “shiny object”…and no, you cannot “eat your gold”!
What gold is is a store of value. While there is some fluctuation in true value due to the occurrence of a depleted vein of ore, the most common reason that the price goes up or down in any given period is due to the strength (or weakness)of the paper currency used to buy it.
I bought a certain number of gold American Eagles (1 oz. each) when the spot price of gold was under $300/oz – Oh, how I wish I had mortgaged the house and bought MORE! The spot price for 1 oz. American Eagles closed at $1121.50. My return in approximately 10 years would have been around 400%! Top THAT, Wall Street!
But I didn’t buy it for speculation – I bought it to PRESERVE the money I worked hard for.
If the economy crashes and your beloved Federal Reserve Note becomes as worthless as a German Deutchmark between the years 1917-1921, you will see the folly of keeping your wealth in paper dollars!
No, you can’t spend gold at the hardware store or at Wal-Mart but when the dust clears and a new currency replaces the failed one, I have enough gold to buy all the Amero’s or Euro’s or whatever currency I will need.
When people refer to people who hold this mindset as being “gold bugs”, you can rest assured those people probably make money by peddling paper “investments”.
So what’ll it be? Value based on a metal that requires labor and investment in order to be extracted out of the ground? (And has been prized as true wealth since before Biblical times?) Or value based on printed paper. Something that a private group of elite bankers manipulate the value of?
Choose wisely!
As say general De Gaulle(1970), about the end of Bretton Wood sistem, now we have a painted paper to govern the world…
It is clear that the first step is to stop any additional debt. The boat is almost full of water, stop the increase so a plan can be made to reduce what is already in. As people can not find jobs and have time on their hands bartering will become more common, they will trade work or items for things of survival.
“The Federal Reserve is a private bank owned and operated for profit by a very powerful group of elite international bankers.”
Am I missing something here? http://en.wikipedia.org/wiki/Federal_reserve says that the Fed is not owned and is not private and is not for profit, which is what I recollected.
This destroys the credibility of the article for me.
you have just enough info to be dangerous – try to increase your rational thought.
one quick point because i’m in a hurry:
saying it’s “mathematically impossible” is a misnomer. if you have no money for deposit (but a good job) and buy a $30k car with a loan, (as soon as you buy it the car is worth $20k or less), so you have a $30k debt and now only $20k in assests. is that “mathematically impossible” to repay? no. you promise to pay it with your _future earnings_, which is what the entire debt system is based on.
this completely refutes your point 2:
#2) The only way to create more money is to go into even more debt which makes the problem even worse.
no, the other way is to _work off the debt_. luckily, the government is spending on infrastructure and education so the people will be able to produce enough to pay off that debt. oops, sorry, no, they’re spending on wars. my bad.
the issue isn’t debt, it’s what you spend the money on!
Dear “Bystander” – gold has been money for 5,000 years. It is a reliable store of wealth because it can’t be printed out of thin air. If you think fiat currency is as good as gold, I refer you to recent events in Zimbabwe and Argentina. Good luck holding on to your bits of printed paper… perhaps you can use your FRN’s for building fires like this woman from the Weimar Republic.
PS – the “demand” for federal reserve notes came as a result of the Breton Woods agreement. At the time that document was penned, our dollars were in fact backed by gold. Since abandoning the gold standard, foreign governments have little reason to hold the FRN in reserve.
Incorrect. Interest payments are about 4% of GDP. Kick that up to 5% of GDP and the debt would be paid off over time.
“You see, the truth is that the U.S. government now owes more dollars than actually exist”
That is the nature of debt: there is always more debt than money, except in very primitive economies. Even on the gold standard that was true.
The government can still issue money in the form of coins. Maybe we should all pay for things with a lot of loose change!
Just look at how much trouble they are having just trying to get an audit of the Federal Reserve right now….