Fed just cut rates a 1/4 point..

[MadViking10]

Congratulations your money is worth even less than it was just five seconds ago. :mad:

[tsetsefly]

fuck dumb dumb dumb dumb, they are folding under pressure they had very low interest rates for 4 years unless that was followed by highers interest rates inflation was going to be greater, thank you fed!

btw, I think greenspan would of kept interest rates at the level they where 1 year ago...

[DarkLaw]

: : is glad that he began buying silver : :


THANK YOU Ron Paul!

Where the hell is Liberty Dollar when you NEED them??
Oh yeah - tied up with seized assets without being charged
for a crime yet.

[Bradley in DC]

http://www.federalreserve.gov/newsevents/press/monetary/20071211a.htm

Press Release

Release Date: December 11, 2007
For immediate release


The Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4-1/4 percent.

Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks. Today’s action, combined with the policy actions taken earlier, should help promote moderate growth over time.

Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Charles L. Evans; Thomas M. Hoenig; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; William Poole; and Kevin M. Warsh. Voting against was Eric S. Rosengren, who preferred to lower the target for the federal funds rate by 50 basis points at this meeting.

In a related action, the Board of Governors unanimously approved a 25-basis-point decrease in the discount rate to 4-3/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, and St. Louis.

[nullvalu]

Maybe it'll work this time?

Hmm.. what was the definition of insanity, again?

[Maverick]

This is a joke right? Please tell me they weren't idiotic enough to do it again.

[Dr.3D]

Typical of the FED.... help Wall Street again at our expense. :(

[nullvalu]

http://moneynews.com/money/archives/articles/2007/12/11/142031.cfm

[torchbearer]

Maybe it'll work this time?

Hmm.. what was the definition of insanity, again?

B.S. Bernake. Let the counterfeit money flow...

[Dr.3D]

Looks like even Wall Street didn't like it very much.

http://finance.yahoo.com/q/bc?s=%5EDJI&t=1d

[nullvalu]

Four major banks said Wednesday they each borrowed $500 million from the Federal Reserve's discount window, lending weight to its efforts to restore liquidity to tight markets.
...
http://moneynews.com/money/archives/articles/2007/8/22/143205.cfm

For those of us who can still do math, that's 2 billion. What they don't tell you is due to fractional reserves, that's something like $175,000,000,000 of new money in our economy.

MMMMMM don't you love the smell of fresh INFLATION in the afternoon??

[GunnyFreedom]

I'm a little confused about the big selloff of precious metals at though. I'd have expected to see gold shoot upward at the announcement, not down. huh. maybe a general hit in the commodities market and funds? www.apmex.com

[propanes]

The markets expected a half or as much as 3/4 percent cut. They only got 1/4.

[nullvalu]

http://s188349088.onlinehome.us/rates.jpg

wish i were a better graphic artist ;)

[polomertz]

My wallet feels lighter already. Thanks Fed!

[seapilot]

Dont worry people!!!! Big Ben will save us from this nasty inflation...in fact I hear the helicopter coming now!!!!

[propanes]

The US dollar index was up today, not down.

[Seanmc30]

Not only did they do it again, but there thinking about a rate freeze to bail out the people who bought way over their heads.

Gotta love how the Fed just continues to assassinate the dollar....glad I bought silver.

[Heather in WI]

Before Ron Paul, I wouldn't have batted an eye at this .... now it makes my blood boil!!!



"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 money, first by inflation and then by deflation, the banks and corporations that will grow up around them, will deprive the people of their property until their children will 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."
President Thomas Jefferson

"Whoever controls the volume of money in any country is absolute master of all commerce and industry."
President James A. Garfield

"All the perplexities, confusion and distress in America arise, not from defects in their Constitution or Confederation, not from want of honor or virtue, so much as from the downright ignorance of the nature of coin, credit and circulation."
President John Adams

"In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. ... This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."
Alan Greenspan

"It is well enough that the people of this nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."
Henry Ford

~Heather

[ConQuesimo]

I'm new to the scene and am trying to understand precisely how the inflation occurs when the Fed cuts interest rates. I know that new money is essentially created out of thin air, but through what vehicle exactly? Can someone give me a quick explanation as to where the new lines of credit go and how the borrowing rates are (I assume) consequentially lowered?

[Shooterman]

Looks like even Wall Street didn't like it very much.

http://finance.yahoo.com/q/bc?s=%5EDJI&t=1d

No, they didn't. They wanted a 1/2 point drop, got pissed and the market closed down 294 points.

Helicopter Ben has hinted at more later. The dollar is in the crapper, oil will go back up, but the FED is on the job. :D:D

[Shooterman]

I'm a little confused about the big selloff of precious metals at though. I'd have expected to see gold shoot upward at the announcement, not down. huh. maybe a general hit in the commodities market and funds? www.apmex.com

Gold is still holding it's own. It's been on a small roller coaster. I believe the central banks are still playing games.

[jon_perez]

I'm new to the scene and am trying to understand precisely how the inflation occurs when the Fed cuts interest rates. I know that new money is essentially created out of thin air, but through what vehicle exactly? Can someone give me a quick explanation as to where the new lines of credit go and how the borrowing rates are (I assume) consequentially lowered?The lower the interest rate the more banks, financial institutions and the government are encouraged to borrow from the Fed. This is how new money gets created. Even if the rate were 0%, but no one borrowed from the Fed, no new money gets created.

People often rag Bernanke for his "helicopter" comment, but this is unfair, because if you look at his speech, he was talking about how we need not be worried about deflation, because if, in the severest case, no one wanted to borrow from the Fed, he can still print and give money away. The threat of deflation may sound facetious today, but remember that in Japan, lowering the interest rate all the way to 0% did not succeed getting their economy out of recession. Prices still supposedly deflated. Along with stagflation in the 70s, the recent Japanese recession marks another failure of the predictive power of Keynesian theory.

The Fed presumably only lends money to credit worthy entities, so I suppose the money the Fed lends out has to be backed by some kind of collateral (assets in the case of banks, and future tax collections in the case of the government). Thus, the money the Fed prints is not unbacked, it is backed by debt (or collateral...) While it may be backed by something, the current mechanisms allow a great degree of leverage and ballooning to be done on the money the Fed lends out. Once the Fed injects money into a bank, the banks can create up to 10x that amount "out of thin air".

What I'm wondering is if the Fed is concerned about inflation, why doesn't it raise reserve requirements for US banks to mitigate the inflationary aspects of a lowered interest rate?

[gilliganscorner]

I'm new to the scene and am trying to understand precisely how the inflation occurs when the Fed cuts interest rates. I know that new money is essentially created out of thin air, but through what vehicle exactly? Can someone give me a quick explanation as to where the new lines of credit go and how the borrowing rates are (I assume) consequentially lowered?

I think I can help out here a bit. A term you need to know: "Fractional Reserve Banking" (http://en.wikipedia.org/wiki/Fractional_reserve). I am going to refer to that term as FRB.

Essentially what happens is that when the Fed cuts rates, they make borrowing money from financial institutions more attractive as banking institutions loan rates follow the rates that the Fed sets. As of December 2006, the reserve requirement was 10% on transaction deposits, and there were zero reserves required for time deposits.

FRB means that a bank can lend out more than it has in reserves. For a simplistic example, if a depositor lines up at the teller window and deposits $100, the bank can open up it's loan window, and given it's reserve ratio of 10%, can loan up to $900 based on that $100 being deposited. 10% of $1000 is $100. It loans this money out in the form of bank credit (checkbook money). This is the "creation of money out of thin air". If they loan out the full $900, they have essentially added $900 to the overall money supply in the economy, as that person who obtained the loan will spend the $900 into the economy. Now in reality, the example I showed you is not so simple, but the point has been illustrated.

Now the Fed controls the interest rates that can either encourage or discourage lending by moving the interest lever up or down. If the Fed deems that there is too much money being created in the economy (i.e. inflation resulting from too many dollars chasing too few goods, causing prices to rise), they raise the interest rate. Inflation is bad for savers or mostly the consumer, as the purchasing power of your dollar is diminishing.

This has the effect of discouraging people/businesses from lining up at the loan window, resulting in less new "money" being generated into the economy. In addition, the existing loans out there are being paid back to the lender as well as existing loans being "reset" with the new higher interest rates. Over time, this causes money to be paid back to the lenders at a higher rate. The goal is to reduce the overall sum of money in the money supply.

If the money supply shrinks too much, unchecked, this might lead to deflation. Deflation hurts the supplier or the manufacturer. Banks become extremely concerned about this as well, as in a deflationary environment, they do NOT want to lend out money, as that money will be worth more (as the purchasing power of the money is increasing). In order to mitigate this problem, the Fed lowers interest rate to stimulate the creation of new money, by people/business now being encouraged to line up at that loan window.

Another tool the Fed could use is to increase/decrease reserve requirements for member banks. In Canada, there is no such a thing as a reserve requirement, as mandated by the government of Canada. That's right. Our private banks (we have only about 6 major players in the country) have a reserve requirement of zero. Reserve requirements were phased out starting in 1992. Our central bank, the Bank of Canada, controls the volume of money in our economy solely by setting the interest rates (prime).

Let's do a simple example:

1) You go into the bank for a mortgage. Let's say it is for 300K at 6% for 25 years. For simplicities sake, let's assume you will not make any prepayments, pay it off early, and the interest rate will not change over 25 years.

2) The bank puts you through the hoops to determine your risk of default. If it is low, the bank grants you the mortgage....well, except for the sub-prime debacle, but that is besides the point.

3) The bank does not take this money from other depositors or their private vaults. They make a few entries into their computer and "poof", you have $300K of bank credit, which is a substitute for money, deposited to your account. This is brand new money (credit) added to the economy. In reality, you don't see the money, as a cheque for $300K is transferred to the deposit account of your house seller. Through a very simple accounting trick, this 300K appears as both an asset to the bank (i.e. a loan is an asset) and as a liability (i.e. a deposit into someone's account). So the books balance.

4) The seller spends your 300K on the things they want, and so on, and so on. That new money makes its way into the economy.

5) Your job is to repay that credit money - which is backed by nothing but your promise to pay it. So over the amortization of the loan, you are sucking the original principle - the 300K - PLUS the interest. At 6% for 25 years, this amounts to a total of 300K $275,826 = $575,826.00, assuming no extra prepayments. Wow.

6) We know how the 300K was created, but where do we get the extra $275,826 dollars of interest? Answer: From other loans created after your loan, which must translate into economic expansion, otherwise it cannot be paid back.

7) Multiply this process by 10s of thousands or 100s of thousands of loans, and this is VERY lucrative. How lucrative? Well, I don't have the figures for the US, but according to Statistics Canada, the Canadian economy is estimated at a 1 trillion dollars. This means that we have 1 trillion dollars floating around to service our economy. If you check the Bank of Canada's website, they have printed about 45 billion dollars in bank notes, holding government securities (ie. bonds, T-Bills etc) as collateral for those bank notes. This means that the other 955 billion dollars in our economy is bank created credit (i.e. chequebook money).

8) Assuming that the average interest on 955 Billion dollars is 4% (for simplicity), this means that approximately 38.2 Billion dollars of interest is being pulled out of the economy and makes its way back to the bank, plus the principle. The principle is retired in the banks ledgers, but the interest...that is pure profit and reported as such.

From the bank's perspective:

9) As a bank, that money does not go into my vault and stay there. No. I pay my employees, shareholders, business costs, make strategic investments at home and abroad, but generally spread my wings of influence wherever I can. So some of that money comes back out of the bank, but that money is my asset so I can do whatever I please with it. For after a while, once I have more money than I know what to do with, the game for me becomes power, not wealth. The best part of it is, my shareholders cheer me on if I make more money!

10) Here is what my shareholders don't see. Since interest must be paid back on the credit that the Bank Act of Canada gives me the right to create, the economy MUST expand to find that interest money? More houses have to be built, more businesses have to take out loans, or a recession/depression will occur as I am pulling too much money out of the economy. I demand more people, more products, more consumption, and continue to demand more resources from the Earth. More farming, more mining, more production.

11) If money needs to be added to the economy, my buddies at the Bank of Canada will lower the interest rates, to encourage more loan creation. If there is too much money being added to the economy, my buddies raise it. Either way, I don't care. I win. You see, if I can create money out of nothing, I don't have to charge a whole lot of interest on it to show a profit. Couple that with my service charges and fees, I win even more! And my shareholders, ever desiring better and better returns, cheer me on! Even though my money creation mechanisms rob them of their wealth via inflation!

12) I pay corporate taxes too. Gladly, no problem. This is why the government loves me too. What do I care? It's not like I had to work to create the 300K I loaned you. And the people still cheer me on, because they do not know that I am the worm at the core of Capitalism.

Wouldn't you like to be a bank? Wouldn't you like to be able to legally counterfeit money, lend it to people, and charge interest on it? Nyah nyah, you can't (big tongue sticking out), we are a pretty exclusive club. Back of the bus for you.

Let me leave you with some quotes from people far brighter than I:


"Banking was conceived in iniquity, and was born in sin. The Bankers own the Earth. Take it away from them, but leave them the power to create deposits, and with the flick of the pen, they will create enough deposits, to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear, and they ought to disappear, for this would be a happier and better world to live in. But if you wish to remain the slaves of Bankers, and pay the cost of your own slavery, let them continue to create deposits."
-- Sir Josiah Stamp, Former President of the Bank of England


"Those few who can understand the system (check book money and credit) will either be so interested in its profits, or so dependent on it favors, that there will be little opposition from that class, while on the other hand, the great body of people mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear it burdens without complaint, and perhaps without even suspecting that the system is inimical to their interests."
-- the Rothschild Bros. of London


"The modern banking system manufactures money out of nothing. The process is, perhaps, the most, astounding piece of sleight of hand that was ever invented. Banks can in fact inflate, mint, and un-mint the modern ledger-entry currency".
-- Major L. L. B. Angus


"This is a staggering thought. We are completely dependent, on the Commercial Banks. Someone has to borrow every dollar; we have in circulation, cash or credit. If the Banks create ample synthetic money, we are prosperous; if not, we starve. We are, absolutely, without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity, of our hopeless position, is almost incredible, but there it is. It is the most, important subject; intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse, unless it becomes widely understood, and the defects remedied very soon."
-- ROBERT H. HEMPHILL (Credit Manager of Federal Reserve Bank, Atlanta, Georgia)


"Commercial banks create checkbook money whenever they grant a loan, simply by adding new deposit dollars in accounts on their books in exchange for a borrower's IOU.", p. 19. - Federal Reserve Bank of Chicago, Modern Money Mechanics.

So now that reserve ratios were done away with, these means that the banking system in Canada today can issue an infinite number of loans without having any cash at all on hand to back them up.

So do they create money infinitely?

No.

They can only create credit if there are people and businesses lined up at the loan window. How is this encouraged/discouraged? By altering the interest rate. You and I will think twice about obtaining a loan that has a high interest rate. This discourages people seeking a loan to walk away, if they can. Lowering interest rates encourage people to line up again.

This is what they mean by controlling inflation. If an economy gets too hot, meaning that there is an excess amount of credit creation going on and prices begin to rise too fast, the Central Bank raises the interest rate and private banks follow suit. This causes fewer loans to be issued AND causes existing loans to have their interest rates to be reset when their respective terms come due. Ultimately, this causes the money supply in the economy to shrink as more credit is being paid back to the credit issuers (the banks), thus slowing down the economy.

This cannot go on indefinitely. If too much checkbook money is being vacuumed up by the private banks, this causes recessions or, if left unchecked, deflation or depressions. In fact, the Great Depression was caused by this. Banks refused to lend money, or were extremely careful about who they lent it to, causing the overall money supply to shrink by a whopping 30%. Ben Bernanke (yes, he is still alive) admitted it to Milton Friedman:


"Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again." (source (http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021108/default.htm))

So here we are. 95% of the money we use - checkbook money - is privately created by our banks via the loan process. Put another way, 95% of our money represents our own and someone else's debt. This checkbook money injected into the economy must be paid back over time to the private banks PLUS the interest on that money. The interest part of that money CANNOT be, in theory, paid back, as the money does not exist. Put another way, if all of our debts were attempted to be paid back all at the same time, there wouldn't be enough money in the economy to do it. Not to worry though. Most of us cannot pay our loans all back all in one shot anyway.

As we have debt based checkbook money, AND there is not enough money to pay back all these debts all at the same time, we MUST have continuous economic expansion. This means that we must have MORE people to take out MORE loans. We need MORE jobs so these people have the means to do so. We must have MORE products and services to be consumed. How do we do that? We call for MORE immigrants, LARGER markets via trade agreements. No matter what productivity gains a business makes to improve the bottom line (and they make plenty), eventually it falls back to the perpetual demand for economic expansion as we are all slaves to the privately created debt based money the banks produce.

Liberal, Conservative, Democrat, Republican ... it doesn't matter what political stripes you wear, privately created credit is the worm or cancer at the core of capitalism (and yes, I am a Capitalist).

Think the banks don't know this? Sure, your teller doesn't. Your Loan Officer probably doesn't. But the top level echelon of the private banks do (see my previous quote w.r.t the Rothschild Bros.). This usurping of our money supply began years ago. Some argue all the way back to the creation of the Bank of England in 1694. This is why all these older quotes I cite are still relevant.

I found another quote (yeah, from a dead guy), that was just too good to pass up. Read it carefully:


"Capital must protect itself in every possible manner by combination and legislation. Debts must be collected, bonds and mortgages must be foreclosed as rapidly as possible. When, through a process of law, the common people lose their homes they will become more docile and more easily governed through the influence of the strong arm of government, applied by a central power of wealth under control of leading financiers. This truth is well known among our principal men now engaged in forming an imperialism of Capital to govern the world. By dividing the voters through the political party system, we can get them to expend their energies in fighting over questions of no importance. Thus by discreet action we can secure for ourselves what has been so well planned and so successfully accomplished."
- USA Banker's Magazine, August 25 1924


Finally, what is a better system?

Well, I hope that I have managed to prove that the existing one CANNOT go on. Perpetual economic expansion will ultimately kill us as we demand more and more from Planet Earth. This is why I shake my head at Kyoto and other environmental plans, because NONE of them will succeed unless we have an economy that will function well with zero growth and a stabilization or reduction of population growth. We are locked into a suicide course with the Earth eventually simply packing it in as it's resources cannot sustain infinite economic expansion. Burning the rainforests, killing our oxygen supplies, to set up coffee fields. It goes on and on...

Oh sure, maybe replacing gasoline with hydrogen, coal with wind power, solar, or nuclear will help. Replacing incandescent bulbs with fluorescent. Recycling. Buying locally. New technology emerges and old ones adapt or die. And so on...

All good things, and these things should be done, but eventually it falls back to our debt based money supply and, by it's very nature, forces economic expansion tactics. We cannot have a sustainable zero growth economy, period, end of story, full stop, unless we slay this creature.

Sorry about the length of this post, but it is critical we understand what is going on here.

[Dr.3D]

A system based on debt, makes slaves out of those who are in debt and masters out of those who are supposedly owed the debt.

We need to remember what money was from the start! Originally, money was what was traded to another person to get what was needed by the first person who wished to trade. For instance, if a person had wheat and needed a chicken, then he might trade the wheat for the chicken. In both cases, the items traded were money.

This form of economy is called barter. It was based on wealth not debt. Some how in all of the years of so called banking, the perversion has turned it 180 degrees so now the bankers make slaves of those who wish to trade.

What seems to be needed is the return to a system where those who have something of value are again trading for another item of like value.

We should not be slaves to the bankers!

[fsk]

I'm new to the scene and am trying to understand precisely how the inflation occurs when the Fed cuts interest rates. I know that new money is essentially created out of thin air, but through what vehicle exactly? Can someone give me a quick explanation as to where the new lines of credit go and how the borrowing rates are (I assume) consequentially lowered?


There's a lot of good bits on my blog. This post is a good starting point:

http://fskrealityguide.blogspot.com/2007/11/ron-paul-federal-reserve-and-gold.html

[AFM]

I think I can help out here a bit. A term you need to know: "Fractional Reserve Banking" (http://en.wikipedia.org/wiki/Fractional_reserve). I am going to refer to that term as FRB.

Essentially what happens is that when the Fed cuts rates, they make borrowing money from financial institutions more attractive as banking institutions loan rates follow the rates that the Fed sets. As of December 2006, the reserve requirement was 10% on transaction deposits, and there were zero reserves required for time deposits.

FRB means that a bank can lend out more than it has in reserves. For a simplistic example, if a depositor lines up at the teller window and deposits $100, the bank can open up it's loan window, and given it's reserve ratio of 10%, can loan up to $900 based on that $100 being deposited. 10% of $1000 is $100. It loans this money out in the form of bank credit (checkbook money). This is the "creation of money out of thin air". If they loan out the full $900, they have essentially added $900 to the overall money supply in the economy, as that person who obtained the loan will spend the $900 into the economy. Now in reality, the example I showed you is not so simple, but the point has been illustrated.

Now the Fed controls the interest rates that can either encourage or discourage lending by moving the interest lever up or down. If the Fed deems that there is too much money being created in the economy (i.e. inflation resulting from too many dollars chasing too few goods, causing prices to rise), they raise the interest rate. Inflation is bad for savers or mostly the consumer, as the purchasing power of your dollar is diminishing.

This has the effect of discouraging people/businesses from lining up at the loan window, resulting in less new "money" being generated into the economy. In addition, the existing loans out there are being paid back to the lender as well as existing loans being "reset" with the new higher interest rates. Over time, this causes money to be paid back to the lenders at a higher rate. The goal is to reduce the overall sum of money in the money supply.

If the money supply shrinks too much, unchecked, this might lead to deflation. Deflation hurts the supplier or the manufacturer. Banks become extremely concerned about this as well, as in a deflationary environment, they do NOT want to lend out money, as that money will be worth more (as the purchasing power of the money is increasing). In order to mitigate this problem, the Fed lowers interest rate to stimulate the creation of new money, by people/business now being encouraged to line up at that loan window.

Another tool the Fed could use is to increase/decrease reserve requirements for member banks. In Canada, there is no such a thing as a reserve requirement, as mandated by the government of Canada. That's right. Our private banks (we have only about 6 major players in the country) have a reserve requirement of zero. Reserve requirements were phased out starting in 1992. Our central bank, the Bank of Canada, controls the volume of money in our economy solely by setting the interest rates (prime).

Let's do a simple example:

1) You go into the bank for a mortgage. Let's say it is for 300K at 6% for 25 years. For simplicities sake, let's assume you will not make any prepayments, pay it off early, and the interest rate will not change over 25 years.

2) The bank puts you through the hoops to determine your risk of default. If it is low, the bank grants you the mortgage....well, except for the sub-prime debacle, but that is besides the point.

3) The bank does not take this money from other depositors or their private vaults. They make a few entries into their computer and "poof", you have $300K of bank credit, which is a substitute for money, deposited to your account. This is brand new money (credit) added to the economy. In reality, you don't see the money, as a cheque for $300K is transferred to the deposit account of your house seller. Through a very simple accounting trick, this 300K appears as both an asset to the bank (i.e. a loan is an asset) and as a liability (i.e. a deposit into someone's account). So the books balance.

4) The seller spends your 300K on the things they want, and so on, and so on. That new money makes its way into the economy.

5) Your job is to repay that credit money - which is backed by nothing but your promise to pay it. So over the amortization of the loan, you are sucking the original principle - the 300K - PLUS the interest. At 6% for 25 years, this amounts to a total of 300K $275,826 = $575,826.00, assuming no extra prepayments. Wow.

6) We know how the 300K was created, but where do we get the extra $275,826 dollars of interest? Answer: From other loans created after your loan, which must translate into economic expansion, otherwise it cannot be paid back.

7) Multiply this process by 10s of thousands or 100s of thousands of loans, and this is VERY lucrative. How lucrative? Well, I don't have the figures for the US, but according to Statistics Canada, the Canadian economy is estimated at a 1 trillion dollars. This means that we have 1 trillion dollars floating around to service our economy. If you check the Bank of Canada's website, they have printed about 45 billion dollars in bank notes, holding government securities (ie. bonds, T-Bills etc) as collateral for those bank notes. This means that the other 955 billion dollars in our economy is bank created credit (i.e. chequebook money).

8) Assuming that the average interest on 955 Billion dollars is 4% (for simplicity), this means that approximately 38.2 Billion dollars of interest is being pulled out of the economy and makes its way back to the bank, plus the principle. The principle is retired in the banks ledgers, but the interest...that is pure profit and reported as such.

From the bank's perspective:

9) As a bank, that money does not go into my vault and stay there. No. I pay my employees, shareholders, business costs, make strategic investments at home and abroad, but generally spread my wings of influence wherever I can. So some of that money comes back out of the bank, but that money is my asset so I can do whatever I please with it. For after a while, once I have more money than I know what to do with, the game for me becomes power, not wealth. The best part of it is, my shareholders cheer me on if I make more money!

10) Here is what my shareholders don't see. Since interest must be paid back on the credit that the Bank Act of Canada gives me the right to create, the economy MUST expand to find that interest money? More houses have to be built, more businesses have to take out loans, or a recession/depression will occur as I am pulling too much money out of the economy. I demand more people, more products, more consumption, and continue to demand more resources from the Earth. More farming, more mining, more production.

11) If money needs to be added to the economy, my buddies at the Bank of Canada will lower the interest rates, to encourage more loan creation. If there is too much money being added to the economy, my buddies raise it. Either way, I don't care. I win. You see, if I can create money out of nothing, I don't have to charge a whole lot of interest on it to show a profit. Couple that with my service charges and fees, I win even more! And my shareholders, ever desiring better and better returns, cheer me on! Even though my money creation mechanisms rob them of their wealth via inflation!

12) I pay corporate taxes too. Gladly, no problem. This is why the government loves me too. What do I care? It's not like I had to work to create the 300K I loaned you. And the people still cheer me on, because they do not know that I am the worm at the core of Capitalism.

Wouldn't you like to be a bank? Wouldn't you like to be able to legally counterfeit money, lend it to people, and charge interest on it? Nyah nyah, you can't (big tongue sticking out), we are a pretty exclusive club. Back of the bus for you.

Let me leave you with some quotes from people far brighter than I:











So now that reserve ratios were done away with, these means that the banking system in Canada today can issue an infinite number of loans without having any cash at all on hand to back them up.

So do they create money infinitely?

No.

They can only create credit if there are people and businesses lined up at the loan window. How is this encouraged/discouraged? By altering the interest rate. You and I will think twice about obtaining a loan that has a high interest rate. This discourages people seeking a loan to walk away, if they can. Lowering interest rates encourage people to line up again.

This is what they mean by controlling inflation. If an economy gets too hot, meaning that there is an excess amount of credit creation going on and prices begin to rise too fast, the Central Bank raises the interest rate and private banks follow suit. This causes fewer loans to be issued AND causes existing loans to have their interest rates to be reset when their respective terms come due. Ultimately, this causes the money supply in the economy to shrink as more credit is being paid back to the credit issuers (the banks), thus slowing down the economy.

This cannot go on indefinitely. If too much checkbook money is being vacuumed up by the private banks, this causes recessions or, if left unchecked, deflation or depressions. In fact, the Great Depression was caused by this. Banks refused to lend money, or were extremely careful about who they lent it to, causing the overall money supply to shrink by a whopping 30%. Ben Bernanke (yes, he is still alive) admitted it to Milton Friedman:



So here we are. 95% of the money we use - checkbook money - is privately created by our banks via the loan process. Put another way, 95% of our money represents our own and someone else's debt. This checkbook money injected into the economy must be paid back over time to the private banks PLUS the interest on that money. The interest part of that money CANNOT be, in theory, paid back, as the money does not exist. Put another way, if all of our debts were attempted to be paid back all at the same time, there wouldn't be enough money in the economy to do it. Not to worry though. Most of us cannot pay our loans all back all in one shot anyway.

As we have debt based checkbook money, AND there is not enough money to pay back all these debts all at the same time, we MUST have continuous economic expansion. This means that we must have MORE people to take out MORE loans. We need MORE jobs so these people have the means to do so. We must have MORE products and services to be consumed. How do we do that? We call for MORE immigrants, LARGER markets via trade agreements. No matter what productivity gains a business makes to improve the bottom line (and they make plenty), eventually it falls back to the perpetual demand for economic expansion as we are all slaves to the privately created debt based money the banks produce.

Liberal, Conservative, Democrat, Republican ... it doesn't matter what political stripes you wear, privately created credit is the worm or cancer at the core of capitalism (and yes, I am a Capitalist).

Think the banks don't know this? Sure, your teller doesn't. Your Loan Officer probably doesn't. But the top level echelon of the private banks do (see my previous quote w.r.t the Rothschild Bros.). This usurping of our money supply began years ago. Some argue all the way back to the creation of the Bank of England in 1694. This is why all these older quotes I cite are still relevant.

I found another quote (yeah, from a dead guy), that was just too good to pass up. Read it carefully:



Finally, what is a better system?

Well, I hope that I have managed to prove that the existing one CANNOT go on. Perpetual economic expansion will ultimately kill us as we demand more and more from Planet Earth. This is why I shake my head at Kyoto and other environmental plans, because NONE of them will succeed unless we have an economy that will function well with zero growth and a stabilization or reduction of population growth. We are locked into a suicide course with the Earth eventually simply packing it in as it's resources cannot sustain infinite economic expansion. Burning the rainforests, killing our oxygen supplies, to set up coffee fields. It goes on and on...

Oh sure, maybe replacing gasoline with hydrogen, coal with wind power, solar, or nuclear will help. Replacing incandescent bulbs with fluorescent. Recycling. Buying locally. New technology emerges and old ones adapt or die. And so on...

All good things, and these things should be done, but eventually it falls back to our debt based money supply and, by it's very nature, forces economic expansion tactics. We cannot have a sustainable zero growth economy, period, end of story, full stop, unless we slay this creature.

Sorry about the length of this post, but it is critical we understand what is going on here.
THANK YOU for this extremely informative post
You are a beast

[gilliganscorner]

The lower the interest rate the more banks, financial institutions and the government are encouraged to borrow from the Fed. This is how new money gets created. Even if the rate were 0%, but no one borrowed from the Fed, no new money gets created.

What I'm wondering is if the Fed is concerned about inflation, why doesn't it raise reserve requirements for US banks to mitigate the inflationary aspects of a lowered interest rate?

Good question, Jon. Perhaps it isn't concerned about inflation.

Perhaps, since it is a private consortium/cartel/cabel of private banking interests and government interests, they would rather the American consumer/taxpayer pick up the cost via the inflation tax.

If I were a private bank, I would be pretty pissed if the Fed raised my reserve requirements ... how do I make money on reserves?

BTW, I know that the government can borrow from the Fed as the Fed monetizes debt instruments created by the government. In other words, the government prints pretty pieces of paper called bonds/t-bills or whatever, walks down to the Fed and exchanges those bonds for other pretty pieces of paper we carry around in our wallets called Federal Reserve Notes.

But the private banks? They create the bulk of their money out of thin air via the loan process (Google Fractional Reserve Banking- or see my big long post in this thread). I am not sure how it works at the Fed, but in Canada, the BoC doesn't loan money to the banks per se - sets what we call the "overnight rate" - essentially what interest rates banks charge each other for overnight loans.

Peace, Liberty, and looking forward to Ron Paul being my next door neighborhoods new President of the United States.

[jon_perez]

If I were a private bank, I would be pretty pissed if the Fed raised my reserve requirements ... how do I make money on reserves?The private bank should be thankful it's being allowed to practice fractional reserve banking at all...

I'm guessing if the reserve requirements were increased, that interest rates from banks would go up to compensate for the lower profit so that might be one reason why adjusting reserve requirements defeats the purpose of the Fed rate cut(?)

[fsk]

All you accomplish by raising reserve ratios is that you increase the spread between the Fed Funds Rate and the rate banks charge for loans. Since banks can't earn interest on their reserves, they would have to charge more for loans.

[gilliganscorner]

The private bank should be thankful it's being allowed to practice fractional reserve banking at all...

I'm guessing if the reserve requirements were increased, that interest rates from banks would go up to compensate for the lower profit so that might be one reason why adjusting reserve requirements defeats the purpose of the Fed rate cut(?)

If the banks did that (increase the interest rates) this would discourage taking out loans from the banks and cause existing loans reset with the new interest rates causing further contraction in the money supply, thus exacerbate the credit crunch even further.

In addition, it would be true if any banks increased profits realized on existing loans by raising the interest rate would be offset by the reduction in the rate of production of new loans. You would have to crank through the math.

Either way, doesn't matter. The banks win at the end of the day...as per design.

[JRegs85]

Gilliganscorner,

I am a little confused by your conclusion that continuous economic expansion is fundamentally unstable. We've always had constant economic expansion throughout history....for instance, the real interest rate in ancient Greece was about 3% (strangely close to the real interest rates of the modern era). This is true even for the period in US history when the currency was backed by gold. As the population expands, we do build more houses and need to grow more food, but this is supported by the consistent long-term economic expansion.

Reducing/eliminating the role of the Fed would not cause economic development and expansion to stop, it would just change the money supply expectations of the market.

[fsk]

The US economy isn't growing. The US economy is shrinking! (http://fskrealityguide.blogspot.com/2007/12/real-gdp-growth-has-been-negligible.html)

The problem is that when the government reports inflation-adjusted GDP, it calculates it using the CPI, which understates the true inflation rate. If you use M2, M3, or the price of gold as your inflation index, the analysis shows that GDP is actually shrinking.

In a free market (no Federal Reserve), economic growth would be HIGHER because the Federal Reserve causes misallocations of capital and asset bubbles.

[gilliganscorner]

Gilliganscorner,

I am a little confused by your conclusion that continuous economic expansion is fundamentally unstable. We've always had constant economic expansion throughout history....for instance, the real interest rate in ancient Greece was about 3% (strangely close to the real interest rates of the modern era). This is true even for the period in US history when the currency was backed by gold. As the population expands, we do build more houses and need to grow more food, but this is supported by the consistent long-term economic expansion.

Reducing/eliminating the role of the Fed would not cause economic development and expansion to stop, it would just change the money supply expectations of the market.

Ah, but that was ancient Greece. Very small environmental footprint. And yes, even when the US is backed by gold. Same thing. Economic expansion is not a bad thing, as long as the population is small and we never hit limits.

Everything has its limits. Never have we mined so much and farmed so much. How are we able to do do this? Oil. Oil and it's products. Shipping it, spraying it, landfilling it. Plastics. Fertilizers. Gasoline. It goes on and on. If everyone on the planet had the same standard of living that North Americans do, we would need 5 planets to sustain it.

Have a look at this: http://www.storyofstuff.com/ - Takes about 10 minutes and well worth your time.

It does a pretty good job explaining the bigger picture. What people, especially most economists don't realize, is that the environment sustains the economy 100%. It is not, as they call it, an "externality". No environment = no economy.

The story of Easter Island is an example. A culture lived on it, invented new productivity techniques, discovered cures for basic diseases. Since they were no longer squabbling trying to scratch a living out of the soil, they invented art, philosophy, mathematics. Things went well. The population expanded. Easter Islands resources were consumed at an ever alarming rate. Finally the environment collapsed. They ran out of food. Then they ate each other. Then there were none. They did leave us this though:

http://tbn0.google.com/images?q=tbn:xLhEFDG_LYmdmM:www.factropolis.com/uploaded_images/Easter-786539.jpg

What does this have to do with money? We have an unsustainable monetary system. Because of fractional reserve banking (http://en.wikipedia.org/wiki/Fractional-reserve_banking), interest, and the compound interest paradox (http://fskrealityguide.blogspot.com/2007/06/compound-interest-paradox.html), the banks and the Fed hold the whip to our backs to make sure the economy does expand - it has to to sustain the scam.

If you want further explanation, let me know.

Cheers, and thanks for asking.

[JRegs85]

Mmm...that's a good essay about the compound interest paradox. I suppose my only criticism of the model is the assumption that our economy will reach a point where all debt is called in at once (I agree it would be a total shutdown of the system, I just don't see a point where it happens).

I'll ask my professor on Monday what she thinks.

[gilliganscorner]

Mmm...that's a good essay about the compound interest paradox. I suppose my only criticism of the model is the assumption that our economy will reach a point where all debt is called in at once (I agree it would be a total shutdown of the system, I just don't see a point where it happens).

I'll ask my professor on Monday what she thinks.

Please do. I would be interested in hearing it. Please remember this:


This is a staggering thought. We are completely dependent on the commercial Banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the Banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is. It is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon.
Robert H. Hemphill, Credit Manager of the Federal Reserve Bank of Atlanta Georgia