Dissipate
02-01-2004, 08:46 AM
This is an easy to understand step by step description of how money is created by the Federal Reserve:
From: http://political-resources.com/money/creation.htm
1. The Government wants to raise money. Rather than raise taxes (which could be political suicide), they create a gov. bond or Treasury note. This is essentially an IOU, which says they will pay it back at a specified date with a specified interest rate. It is no more than a piece of paper with ink on it, and has no more backing than just a promise to pay. Let's say it is for one million dollars.
2. The gov. gives this to the Federal Reserve System, where it is classified as a securities asset (they assume the government will pay when they say) They treat this note as an asset, so are able to balance the books with a corresponding liability in the form of a Federal Reserve check made out to the government.
3. The Fed's check is not drawn on any bank. They literally create it out of nothing. Actually, it is created out of government debt. The gov. then deposits this check into one of the Federal Reserve banks, where it becomes a gov. deposit of one million dollars.
4. The gov. pays its employees (postal workers etc)from its funds. Let's say 1,000 people receive $1,000 as wages from the government. These 1,000 people have now deposited their $1,000 into their individual accounts at commercial banks.
5. The commercial banks gladly receive the check for $1,000 and count it as an asset for the bank, even though it is a liability, as it is owed to the depositor. Now the bank's books are balanced with an equal asset and liability.
6. The bank assets are now called "bank reserves", which are to be used for paying the depositors back when they want. (hah!). However, through a useful trick the Feds allow, the banks are allowed to hold as little as 10% of their deposits in "reserve". The remaining 90% is classified as "excess reserves" .
7. The excess reserves can now be used by the bank for making loans. Think about this. If you deposit $1,000 into your account, the bank is paying you a few % interest, while they can go ahead and loan out 90% of your money
8. Bank loans out $900 at 8% or so to person A.
9. Person A's account grows by $900 (let's say it is at the same bank as your's for ease of this example)
10. The same bank now has increased its assets by $900 (this shouldn't make sense, but this is reality) because person A's account just went up by $900 when they took out the loan
11. Because the bank's assets just increased by $900, their excess reserves also went up, by 90% of $900 - in this example $810.
12. Person B comes along and takes out a loan for $810, puts it into their account at the same bank, the bank now has an additional $810 in assets, takes 90% as excess reserves
13. and so on and so on.
14. This process can go on many more iterations. If played out to the theoretical end, it loans the same money out over 50 times and at a total of 9 times the original $1,000 deposit. The bank charges the loan out at 8% or so, basically charging you interest on nothing. Isn't this a cool magic trick?
15. Add up the whole thing, and you can see that the total money introduced into the system can be up to 10 times the original gov. note.
16. Take this another step, and you have increased the nation's money supply, which leads to inflation, the hidden tax.
Let's keep something in mind while reading this folks, increasing the money supply is not in and of itself a bad thing. However, the way the government does it is ridiculous. First of all every dollar introduced into the economy is based on debt! New money cannot be created unless new debt is created. Second of all, the government & the Fed year after year increases the money supply greater than the output of the economy.
Let's say the economy grows by 3% in one year. The money supply should then grow by 3% in order to not have deflation. Does the government increase the money supply by 3%? Nope, it increases the money supply by 4-6%. That extra 1-3% is money that comes right out of your paycheck, a hidden tax.
This is why there has been a total of 1500% inflation since the Federal Reserve was established in 1913.
Keep in mind this is LONG TERM inflation I am talking about. Not short term inflation, which can be caused by market forces. I think short term inflation is a smokescreen for the cause of long term inflation as they can easily be confused by the common man.
Take a look at this quote:
While economists disagree about many issues, there is near unanimity about this one: continuing inflation occurs when the rate of growth of the money supply consistenty exceeds the rate of growth of output(of the economy).
- Laurence Ball, assistant professor of economics at Princeton University and a visiting scholar in the Research Department of the Philidelphia Fed.
From: What causes inflation? (http://www.econ.ohio-state.edu/hineline/econ520/ball.pdf)
This tells us that yearly inflation can only be caused be one thing and one thing alone, increase of the money supply greater than the output of the economy. Who controls the money supply? The Federal Reserve of course, and therefore the Federal Reserve deliberately causes inflation every single year. Why? Simple, to insure that the banking industry makes billions of dollars a year off of money that they create from nothing.
Laurence Ball of course goes on to say in his article that ending inflation would be bad beause it would cause a recession. This is to be expected since he is in bed with the Fed so to speak as he is a "visiting scholar".
In my opinion a recession is a small price to pay in order to end the inflation tax the government imposes on everyone every year. This is only one problem with the Federal Reserve and the fractional reserve banking system but I think it is one of the largest ones right after the national debt which is all tied in.
From: http://political-resources.com/money/creation.htm
1. The Government wants to raise money. Rather than raise taxes (which could be political suicide), they create a gov. bond or Treasury note. This is essentially an IOU, which says they will pay it back at a specified date with a specified interest rate. It is no more than a piece of paper with ink on it, and has no more backing than just a promise to pay. Let's say it is for one million dollars.
2. The gov. gives this to the Federal Reserve System, where it is classified as a securities asset (they assume the government will pay when they say) They treat this note as an asset, so are able to balance the books with a corresponding liability in the form of a Federal Reserve check made out to the government.
3. The Fed's check is not drawn on any bank. They literally create it out of nothing. Actually, it is created out of government debt. The gov. then deposits this check into one of the Federal Reserve banks, where it becomes a gov. deposit of one million dollars.
4. The gov. pays its employees (postal workers etc)from its funds. Let's say 1,000 people receive $1,000 as wages from the government. These 1,000 people have now deposited their $1,000 into their individual accounts at commercial banks.
5. The commercial banks gladly receive the check for $1,000 and count it as an asset for the bank, even though it is a liability, as it is owed to the depositor. Now the bank's books are balanced with an equal asset and liability.
6. The bank assets are now called "bank reserves", which are to be used for paying the depositors back when they want. (hah!). However, through a useful trick the Feds allow, the banks are allowed to hold as little as 10% of their deposits in "reserve". The remaining 90% is classified as "excess reserves" .
7. The excess reserves can now be used by the bank for making loans. Think about this. If you deposit $1,000 into your account, the bank is paying you a few % interest, while they can go ahead and loan out 90% of your money
8. Bank loans out $900 at 8% or so to person A.
9. Person A's account grows by $900 (let's say it is at the same bank as your's for ease of this example)
10. The same bank now has increased its assets by $900 (this shouldn't make sense, but this is reality) because person A's account just went up by $900 when they took out the loan
11. Because the bank's assets just increased by $900, their excess reserves also went up, by 90% of $900 - in this example $810.
12. Person B comes along and takes out a loan for $810, puts it into their account at the same bank, the bank now has an additional $810 in assets, takes 90% as excess reserves
13. and so on and so on.
14. This process can go on many more iterations. If played out to the theoretical end, it loans the same money out over 50 times and at a total of 9 times the original $1,000 deposit. The bank charges the loan out at 8% or so, basically charging you interest on nothing. Isn't this a cool magic trick?
15. Add up the whole thing, and you can see that the total money introduced into the system can be up to 10 times the original gov. note.
16. Take this another step, and you have increased the nation's money supply, which leads to inflation, the hidden tax.
Let's keep something in mind while reading this folks, increasing the money supply is not in and of itself a bad thing. However, the way the government does it is ridiculous. First of all every dollar introduced into the economy is based on debt! New money cannot be created unless new debt is created. Second of all, the government & the Fed year after year increases the money supply greater than the output of the economy.
Let's say the economy grows by 3% in one year. The money supply should then grow by 3% in order to not have deflation. Does the government increase the money supply by 3%? Nope, it increases the money supply by 4-6%. That extra 1-3% is money that comes right out of your paycheck, a hidden tax.
This is why there has been a total of 1500% inflation since the Federal Reserve was established in 1913.
Keep in mind this is LONG TERM inflation I am talking about. Not short term inflation, which can be caused by market forces. I think short term inflation is a smokescreen for the cause of long term inflation as they can easily be confused by the common man.
Take a look at this quote:
While economists disagree about many issues, there is near unanimity about this one: continuing inflation occurs when the rate of growth of the money supply consistenty exceeds the rate of growth of output(of the economy).
- Laurence Ball, assistant professor of economics at Princeton University and a visiting scholar in the Research Department of the Philidelphia Fed.
From: What causes inflation? (http://www.econ.ohio-state.edu/hineline/econ520/ball.pdf)
This tells us that yearly inflation can only be caused be one thing and one thing alone, increase of the money supply greater than the output of the economy. Who controls the money supply? The Federal Reserve of course, and therefore the Federal Reserve deliberately causes inflation every single year. Why? Simple, to insure that the banking industry makes billions of dollars a year off of money that they create from nothing.
Laurence Ball of course goes on to say in his article that ending inflation would be bad beause it would cause a recession. This is to be expected since he is in bed with the Fed so to speak as he is a "visiting scholar".
In my opinion a recession is a small price to pay in order to end the inflation tax the government imposes on everyone every year. This is only one problem with the Federal Reserve and the fractional reserve banking system but I think it is one of the largest ones right after the national debt which is all tied in.