The Fed

Den of Thieves

Free Report

Den of Thieves How the Federal Reserve Steals the Wealth of

American Citizens Through a Process of Inflation

By Brett Buchanan May 13, 2009

First Released: May 13, 2009

Last Revised: May 13, 2009

Contact Information: Web-Site; itsnotrealmoney.com Contact Information: E-Mail; brettbuchanan@yahoo.com

Introduction

If you are reading this report I can safely assume you have some interest in learning more about this economic crisis and more importantly how it is we will be affected by it. My own reasons for writing this report are varied. If I were to narrow it down to the single most important reason for investing the energy to condense this complex subject into a concise valuable resource I would have to say it is my desire to share with people in plain English what I know to be the truth.

What I have come to understand is that as this catastrophe unfolded there was always a common denominator behind every headline. Like a thread weaving its way into every swatch of fabric that made up this crisis – that thread was the Federal Reserve and its needle was the very money on which our entire economy is based.

Our money, our beloved US dollar in the hands of the central bank that issues it is in fact the original weapon of mass destruction. When in the hands of unscrupulous bankers our money can render entire populations destitute. It can be used to transfer wealth from one economic class to another, from savers to borrowers, from foreign countries to our own citizens. It can even be used to steal property. The destructive nature of our money is on the one hand so difficult to grasp when clouded by the static of mainstream misrepresentation and misinterpretation, yet so simple to understand in the end that the mind is repelled upon reaching that point of knowing the truth. The mind stops dead in its tracks and in a moment of absolute clarity the disbelieving mind says, “No, this can’t be. Have we really allowed this to go on?”

I reached such a point in my life. That moment at which I understood that holding money in my pocket or on deposit in my bank meant that I owed interest to bankers, and that my wealth could be taken from me without so much as a warrant or the permission of my agreement. Take a moment to wrap your mind around the following words.

Holding money means you owe interest to private bankers and they can and do steal your wealth without your permission.

Bankers do not collect their interest from you directly but rather indirectly through the Internal Revenue Service. These interest charges are paid to the bankers in such a way that not one man in a million understands their scheme. And most egregiously the central bank that controls all issuance of our currency can and does impose hidden taxes on you far beyond what the IRS ever collects from your paycheck. The Fed does it in such a way that we believe their policies are somehow brilliant, that with all their Ivy League degrees these men must know more than we do about money. They must

know how to save our fragile economy from itself through the infinite mystery that is monetary policy. I am here to tell you these men of the Fed and the US Treasury are no smarter than a single one of us. Their Harvard degrees mean only that they passed indoctrination into their money club, nothing more. Their brilliance is all a façade. It is all a lie. And I will now prove it.

Suggested Reading – Atlas Shrugged by Ayn Rand (Cliff Notes)

Understanding Money – Some basics

What Is Money?

Money is anything that is generally accepted as payment for goods or services or for the repayment of debts. Shells have been used as money, as have cattle, stones, precious metals, and even paper has been used as money – ironically, paper still is.

All modern money is ‘fiat’ money, meaning that it has no intrinsic value other than an implied value as bestowed on it by its creator – in the case of the United States that creator is the Federal Reserve. Fiat money is backed by nothing but more fiat money. It is not backed by gold. It is not backed by beaver-skins. It is however propped up by debt, a concept of which we will explore later in this report.

A Brief History of Money

Money was born in the cradle of civilization in Sumer, southern Iraq in the 6th millennium BC. Sumerians used ‘commodity money’ wherein the value of the money was the raw material itself.

Commodity money is unique in that the supply of money can expand only to the extent that the raw material can be had. Gold is perhaps the most understandable of commodity monies as the supply of money is limited to the amount of gold that can be mined from the ground.

Almost from the beginning of civilization the issuance of money has fallen under the control of governments or some central authority. We will come back to this statement later but for now I want you to consider these words again – money has always been under the control of governments or some central authority. Centralized monetary planning is one of the primary tenets of Marxist Socialism or more specifically, state socialism or state communism.

Centralized monetary planning runs counterintuitive to even the most basic tenets of free market capitalism. Centralized monetary planning, especially in control of private hands as in the case of the Federal Reserve System, creates a class division defined by those financial institutions included in the supply chain of money versus those at the consumption end, or more succinctly of capitalists versus the capitalized.

Money has gone through almost immeasurable incarnations throughout history. My focus here is not to give you an epic blow-by-blow regarding every phase of money development over time but rather to apply some simple logic and expose why money is what it is today.

For a more in depth look at the development of money throughout history click on the following link. It is an astounding insight into how we came to this place in history.

Suggested DVD - “The Ascent of Money”

How does modern money come into existence and how does money affect prices?

Here we will explore the process by which the Fed controls the money supply. The overall supply of money has a direct (but lagging) impact on general prices. This section is not meant to be a technical outline of Fed operations but rather an overview providing enough information so as to understand how the Fed’s manipulation of the money supply affects prices and ultimately your wealth. Below are two examples of how the supply of money relates to prices.

In this first example let’s assume that all things are constant; the supply of goods, the supply of labor, demand for goods, the supply of raw materials, the general population itself, and the supply of money in circulation. Imagine them all to be in fixed quantities in a perfect harmonious world of equilibrium. In this scenario there would never be a need to add or subtract any money from overall supply because the system is in perfect balance. Under such a reality prices would never change.

Now assume those same factors; supply, labor, demand, materials, and population were all in flux. Some rising at times, others falling, basically a fluid situation wherein each factor could at times be working against the other factors and at times in sync – a truly chaotic market wherein all things were unpredictable. Now here is the strangest thing about money – this is a reality you must understand before we continue. It is perhaps the most important concept to grasp regarding money. The reality is that even with

all these things in flux the supply of money would never have to change. As a matter of fact the supply of money remaining fixed would act as the great equalizer to bring things that had fallen out of sync back into harmony. Prices would change, but never to the extent that any one sector of the economy could draw so much money away from the other sectors so as to drive selective prices up to intolerable levels. In other words, with only so much money to go around price fluctuations would be restrained by other money requirements in the economy – there would still exist balance.

A fixed amount of money in a chaotic environment creates equilibrium.

The flipside to the concept above is that when an over-supply of money is injected into the economy price distortion becomes the norm. One section of the economy can easily draw a disproportionate amount of money from the others because there is now too much money to go around. The money supply is out of equilibrium and has difficulty balancing itself. This is the perpetual state in which we find ourselves today.

Like our economy, for a ship caught in a raging storm there would exist the perfect amount of ballast to keep the ship upright and afloat. Add too much ballast and the ship will list to one side drawing a disproportionate amount of ballast from the other side until eventually the ship capsizes, rolls over, and sinks to the bottom. An over-supply of money in an economy is like a ship overloaded with ballast.

Sadly, the Fed would like us to believe that in a state of chaos where the basic driving forces of economies; supply, labor, demand, and population are in a continuous state of flux that they, the Federal Reserve, in their infinite wisdom can somehow manipulate the supply of money to balance the chaos. This is utter madness. And the Fed knows it. Manipulating the supply side of money only adds to the misallocation of resources as newly created money attempts to settle amidst all the chaos. Hence the phenomenon of asset bubbles.

All asset bubbles are Fed created.

Below is a graph from the Case/Schiller Real Estate Index. A spike in asset prices, or prices in general, as seen to the right only occurs in the wake of three influences; 1) war or national emergency - crisis, 2) extreme monetary mismanagement by central banks - incompetence, or 3) by design - fraud.

Perhaps the most prescient book regarding this crisis as it relates to asset bubbles and Fed monetary policies is Peter Schiff’s, Crash Proof. I highly recommend reading this prophetic work.

Suggested Reading - Crash Proof by Peter Schiff

Money Creation

The two types of money the Fed creates are central bank money and commercial bank money. Both are loaned into existence.

1.   Central Bank Money

Central bank money is created when the Fed buys collateral from commercial banks in exchange for newly created dollars. It is also created when the Federal Reserve funds our government’s fiscal deficits.

Central bank money is most easily explained by reviewing how our government raises money to fund its budget deficits.

When the US Government is short of funds to pay its expenses it turns to the US Treasury and requests the sum of money needed. The US Treasury then issues Treasury Securities, or debt instruments, in the amount

requested. Treasury then sells these securities to the Fed who delivers to the Treasury Department a Federal Reserve Check (or newly created dollars) equal to the collateral the Treasury just provided the Fed. Treasury now has the money to pay government expenses and the Fed has the collateral that they can now sell on the open market, to let’s say, China. The new Federal Reserve money was created by the stroke of a pen (or keyboard entry) and the money is backed by an interest bearing debt, a US Treasury security of which the ultimate holder of the debt, say a US bank, or a foreign bank, is owed the interest. Hence, in that transaction, as in all money creation the money created carries a debt burden, or interest charge simply for its existence.

The theory goes that the US Treasury would be able to collect enough in the way of taxes to pay off those debts. And in paying off those debts the government is in fact ‘retiring’ the Fed Money that had been created and added to the money supply when the original debt was issued as collateral in exchange for the new money. In other words money is loaned into existence, the debt is retired as the loan is repaid, and the private banker who funded the deal gets to keep the interest.

Below is a flow chart of central bank money creation.

The two basic steps to create new money for government purposes are; 1) Treasury delivers collateral (a promise to pay) to the Fed, 2) the Fed then writes a check to the Treasury which the Treasury can deposit in its account and begin using. Once the Treasury begins writing checks for their expenses to defense contractors, social security recipients, and so on, the money has then entered the money supply.

In theory, newly created money by way of federal deficit funding would ultimately be retired from the money supply when the Government runs a budget surplus and then repays the principal balance owed on outstanding US Treasury securities. However, we all know our government does not run budget surpluses therefore it will never retire its debt.

The second way the Fed creates new money is through the commercial banking system. While the Fed does not in fact create money directly through commercial banks as it does in the case of central bank money to fund government deficits, the Fed does control the framework under which commercial banks lend new money into existence.

2. Commercial Bank Money – Fractional Reserve Banking

Commercial bank money is created through Fractional Reserve Banking. Simply put, when a person deposits money into a bank the bank can then lend out a percentage of that money. The remainder, a fraction of the deposit, is held in reserve. Hence the term fractional reserve banking.

Historically banks have been required to keep as much as 10% of deposits in reserve. This money is held in the event that a vast number of depositors would want their money withdrawn all at once. However, with the blessing of the Federal Reserve, banks devised a way to circumvent the 10% reserve requirement and for the most part can now lend out nearly 100% of money they hold on deposit.

Fractional reserve banking is in reality a license to loan money into existence and then collect interest on that loan. The loan (and resulting increase to the general money supply) is retired as the principal balance of the loan is repaid – much like when the government would use budget surpluses to retire debt it had put up as collateral for new central bank money. Now here is where the fractional reserve equation gets really interesting – it’s called the money-multiplier. The money-multiplier simply means that each new loan a banker issues begets another loan, and so on, and so on.

When a banker issues a new home loan to a borrower and that borrower goes out and buys his new house, the seller he bought from takes his profit and deposits it into a bank, which then makes another loan against that deposit. Much like a vicious circle of new money being loaned into existence if left unchecked this whirling circle can whip up into a tornado with new money being created at such a frantic pace that everyone seems to be awash in money and equity. The explosion of credit over the last decade was a direct result of the fractional reserve requirement having been all but eliminated and the money-multiplier going parabolic with absolutely no tether whatsoever. All banks were on the prowl for new channels through

which to lend. There was no restraint whatsoever. It was almost as if banks dared people to take out loans.

It can be said that the Fed, in tandem with our Government and commercial banks, creates nothing but debt. They create nothing but a massive extension of credit on our population and collect interest in the process. Fiat money when backed by debt is not real money. Real money is gold. When there is a shortage of real money the end users of money, the common folk, must come to the banks for an extension of credit. When there is a shortage of real money, the creators of money can and do anticipate those areas of the economy where their debt money will pool – as it did in mortgage-backed-securities. It is in these places where the money creators will congregate and drive their herd blindly toward the edge of the cliff all the while reaping gargantuan profits as the herd ironically believes they too are getting rich when in fact they are getting raped.

Neither the Fed nor the Government possesses the ability to produce income other than the US Treasury’s ability to collect taxes. On the commercial side, the Fractional Reserve Banking system is by design a ‘debt paradigm’ or Ponzi scheme who’s sole aim is to continually leverage against deposits –

a model of which relies on asset values (collateral) continually rising in order to retire old debts and interest charges.

And if this all weren’t scary enough, we haven’t even touched on the subject of securitization and Wall Street investment banks. That’s a whole other story.

If you want to read the most scathing look at the inner-workings of the Federal Reserve read William Greider’s, Secrets of the Temple – How the Federal Reserve Runs the Country.

Suggested Reading – Secrets of the Temple

How Does the Fed Regulate Short-Term Money Supply?

Aside from the two main money creation channels of new central bank money and fractional reserve commercial bank money the Fed also regulates money on a more short-term basis. Through a process known as Open Market Operations the Fed either adds money to the money supply or removes it on a daily basis.

In theory, adding money to the money supply drives spending, spending on new capital investment, consumer spending, bank lending, etc. The downside of adding money to the money supply is that the potential of price distortion as discussed above, and hence, selective price increases becomes very real. The Fed know this all too well as once they see signs of general price distortions to the upside they then move to subtract money from the money supply thereby limiting price distortions, and hence, counteracting inflation.

The problem is that by the time ‘general price signals’ start going off it’s already too late. Selective areas of the economy, like housing, could have already drawn disproportionate amounts of money from the rest of the economy and thus entered a ‘bubble’ mode.

Simply observing the last two bubbles in the US economy, the NASDAQ and housing bubbles, should tell you the Fed is growing less and less able to correct their own mistakes. And even when they do step in to reign in prices they never pull so much money out of supply to retard GDP growth because without ever-increasing asset values and general production growth there would not be enough income or equity to retire old debt.

Money supply that perpetually increases must be matched by perpetually increasing income and production.

The graph below depicts MZM money supply (Money at Zero Maturity) versus CPI-AUCNS (Consumer Price Index for All Urban Consumers). Notice the ever-widening gap between the two indicators. When the NASDAQ bubble popped post-2000 you can see the CPI line drop off while the MZM line accelerates in counteraction. However, as prices rebounded money supply did not decrease, it continued to accelerate. As a matter of fact money supply never decreases. If it does, it is both short-term and negligible. Following the two lines further right, to the present, you can see the Fed is pumping historical amounts of money into our money supply to counteract the deflationary price signals seen at the bottom right of the graph. These deflationary price signals are driven largely by the collapse in real estate asset prices. In other words, by inflating the money supply the Fed is attempting to recreate the inflationary environment that facilitated the housing bubble and hence prop up asset prices. Delving further into the subject of the Fed’s present attempts to prop up asset prices would take an entire other report, which is not our aim. Your take-away from this graph should simply be to understand that no matter what price signals the Fed receives aggregate money supply increases.

Open Market Operations is the operational term used by the Fed when executing daily policy, specifically adding or subtracting money from the money supply. These operations are dictated at the behest of the FOMC, or Federal Open Market Committee.

The FOMC does not inject or retract money from the US economy directly, but rather indirectly through the banking system. Moreover, the FOMC, through the New York Federal Reserve Bank Trading Desk either adds money to the money supply or subtracts it by buying or selling US Treasury Securities in coordination with a select group of banks known as Primary Dealers.

Every business day at about 9:30am, the New York Federal Reserve Bank's trading desk announces the day's "temporary open market operation". These are routine transactions in which the NY Fed buys securities from the group of "primary dealers" together with an agreement to sell them back at a later time, the familiar "repo" transaction. This is usually the next day, but can also be 3, 4, 7 or 15 days later. The effect is to add reserves to the banking system for that corresponding period, that is, to provide liquidity. If there is an excess of liquidity, the NY Fed may do "reverse repurchase agreements", selling securities with an arrangement to buy them back, thus draining some reserves for the day or 2 or 3 during which the transaction is in force.

Below are graphic representations of the basic flow of collateral and liquidity between the New York Fed and Primary Dealers both adding and subtracting money from the money supply.

One of the most cutting-edge articles I read regarding Fed monetary policy and how it opened the floodgates to this crisis was a piece by Aaron Krowne on iTulip that was authored in 2006. It is fairly technical but even skimming the article will provide incredible insight as to how the Fed completely mismanaged policy and opened Pandora’s box.

Essay by Aaron Krowne - What Really Happened In 1995?

What is inflation and who profits from it?

So far we have focused primarily on the process of money creation. Understanding the mechanics of this process is essential to understanding how those who control the issuance of currency through central banking can and do through a continuing process of inflation impose a hidden tax on all lower, middle, and most upper class Americans.

As I wrote in my Introduction the concept of how money creation is used to usurp wealth from the users of money is “so simple to understand in the end that the mind is repelled upon reaching that point of knowing the truth.” You are about to understand this truth.

First, what is inflation? Inflation is simply an increase in the supply of money. What is the effect of inflation? The effect of inflation is seen through an increase in the general prices within an economy.

How does inflation benefit the creator of money by taxing the consumer? To answer this question is to understand the reasons our founding fathers fought the Revolutionary War.

When a central bank requires new money to pay for whatever expenditure public or private, bailout or stimulus, or to push whatever economic button it desires, the central bank simply creates it. Their new money appears out of thin air. They then have the audacity to charge the public interest for its use. These interest charges go solely toward private gain.

It can be said that the power to create money is the power to never incur any cost. Think about it. If you have the ability to create money from nothing what do you care how much you need to print to pay for what you want? For you it’s free money. But for the people who can’t print their own money they are the ones who will bear your cost. All real cost is passed on to the consumer of money through an increase in general prices. This is how new money created from thin air is used for free by its creator and then absorbed into the economy where the creators folly is paid for by the end users of money who absorb the inevitable increase in general prices.

Remember, the creator gets to use its newly created money for whatever it wants. Price is not an issue. Have you ever wondered why Congress spends money so foolishly? It simply does not matter to them because for them money has no value. It comes from nowhere, at least in the minds of our leaders. In reality fiat money only has value when it enters the economy. And at that point we must absorb the new money by accepting a lower divisible value of our existing money.

Here’s an example of what I mean. Picture a man approaching you with a briefcase full of a million brand new dollars never before used. The man hands over the case then turns and walks away. You now have a million dollars. It cost you nothing. No labor, no risk, nothing whatsoever you simply had no money, then you had a million dollars. You spend every dime of it immediately. But here’s the catch. A million new dollars have now entered the economy and nothing was done to make room for these dollars so they have to squeeze into the economy with all the other dollars. This creates a greater divisible value between all previously existing money. Hence, each dollar is now worth less as it is divided into the economy with all the other dollars.

In a fiat currency system we know that money is created essentially from nothing. Before it enters the economy fiat money has no value because it does not exist. Money that does not exist can therefore have no influence on general prices, as it causes no drag on the value of existing money. But the moment a central bank issues even one new dollar all existing money is then worth less. And when a central bank issues trillions of new dollars, well, you do the math. The value of your previous dollars just got divisibly hammered by trillions of new dollars. When your dollar is worth less you

then need more of them at the cash register than you did before. (You multiply to undo the division).

When the Fed creates new money they are in essence trying to squeeze more units into a confined space, or the economy as defined by the overall quantity of goods and services produced, or Gross Domestic Product (GDP). The Fed hopes that the increase in money will serve to expand the economy thereby expanding the ‘confined’ economic space, or GDP, and offsetting the division of value (dilutive effect) caused by the new money.

The graphic below depicts the economy as a fixed box. The overall quantity of goods and services (GDP) sit atop the supply of money acting as a ceiling (or demand cap) on the divisible value of money. On the left side, Before Inflation, a balanced amount of money exists in relation to ‘demand’ on GDP. However, After Inflation, more money has been ‘squeezed’ into the economic space within the constraints (or demand cap) of GDP. Hence, each dollar in circulation must then be divided into GDP with all the other pre-existing money, hence making all money worth less and prices seemingly higher.

The paradox of inflation is that old money, money that existed prior to additional new money being added to the money supply, never regains its full prior value due to the Fed policy of always expanding money supply beyond the capacity of GDP to grow enough to offset the monetary expansion. Based on the Fed’s track record of only focusing on the short-term, that is to expand money supply to wrangle its way out of economic slumps, it is mathematically impossible. Once old money is diluted it is diluted forever. The only question is how much? The only course the Fed could take to counter the inflationary effects (on prices) of monetary expansion would be to contract the money supply enough so as to pull GDP all the way back to its pre-monetary expansion level. However, the Fed can never do this, as they need an ever-expanding GDP (and money supply) to retire old debt. If they went against this practice it would mean to take away from the ‘inflation driven’ wealth of the very banking system the Fed created. And this is how we got to where we are today.

What have we learned?

We’ve learned that by creating money out of thin air (fiat money) there is no cost to the issuer and first user of new money. Their money is free. Money is in fact a gift to them. The cost of the gift is only seen when new money enters the money supply and is put into use by consumers. It is only then new money reflects the cost of its creation by way of diminished purchasing power and hence higher prices. This is how monetary inflation serves the creator. This is the hidden tax of inflation.

We’ve also learned that too much money in the money supply is like too much ballast on a ship. It can easily list to one side or the other tipping the scale so to speak causing asset bubbles, erratic price swings, and distorting entire economies in general – a fact of which the creators of new money anticipate and capitalize upon.

Finally, we’ve learned that the Federal Reserve in their infinite wisdom is in fact the cause of inflation and of the general deterioration of the American standard of living. Thomas Jefferson put it best.

“I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”

Thomas Jefferson, (Attributed) 3rd president of US (1743 - 1826)

The Proof

So when I made the claim I would prove the brain trust of the Federal Reserve and the US Treasury are no smarter than a single one of us, that proof exists in your ability to see through their scheme. Evidence that the Federal Reserve system uses the hidden tax of inflation to usurp the wealth of hard working citizens is conclusive. To argue any different would be absurd.

They create money from nothing – new fiat money is a free gift to the first user.

The cost of the gift is paid for by the consumer of money (you and I) through the hidden tax of higher prices resulting from their monetary inflation. The gift that keeps on taking…

Closing Words by the Venerable Ron Paul – US Congressman

Ron Paul – Paper Money and Tyranny; September 5, 2003 Speech to the US House of Representatives.

“Alan Greenspan, years before he became Federal Reserve Board Chairman in charge of flagrantly debasing the U.S. dollar, wrote about this connection between sound money, prosperity, and freedom. In his article “Gold and Economic Freedom” (The Objectivist, July 1966), Greenspan starts by saying: “An almost hysterical antagonism toward the gold standard is an issue that unites statists of all persuasions. They seem to sense…that gold and economic freedom are inseparable.” Further he states that: “Under the gold standard, a free banking system stands as the protector of an economy’s stability and balanced growth.” Astoundingly, Mr. Greenspan’s analysis of the 1929 market crash, and how the Fed precipitated the crisis, directly parallels current conditions we are experiencing under his management of the Fed. Greenspan explains: “The excess credit which the Fed pumped into the economy spilled over into the stock market- triggering a fantastic speculative boom.” And, “…By 1929 the speculative imbalances had become overwhelming and unmanageable by the Fed.” Greenspan concluded his article by stating: “In the absence of the gold standard, there is no way to protect savings from confiscation through inflation.” He explains that the “shabby secret” of the proponents of big government and paper money is that deficit spending is simply nothing more than a “scheme for the hidden confiscation of wealth.” Yet here we are today with a purely fiat monetary system, managed almost exclusively by Alan Greenspan, who once so correctly denounced the Fed’s role in the Depression while recognizing the need for sound money.”