National debt and the Federal Reserve

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National debt and the Federal Reserve

Postby Qaanol » Wed Jul 13, 2011 8:28 pm UTC

I’m going to write down how I understand things to work. I would very much like to know if my understanding is flawed, and I am positive that it is incomplete. So please let me know if I get something wrong, or if I omit important aspects.

The Federal Reserve is privately owned by a dozen banks. It was created by an act of congress, but is not itself a government agency. The Federal Reserve also holds a substantial portion of the public debt of the United States. What little I know of the matter stems primarily from a lecture I attended by an economist at UCLA who had studied the matter extensively. I will do my best to explain how he described Federal Reserve debt.

For purposes of borrowing, the Federal Reserve acts like a simple ledger. When congress decides to borrow from the Fed, a ledger entry is made. Say they need $200 billion for something. The Federal Reserve then enters a line on its ledger saying the appropriate account is increased by $200 billion, and the government owes $200 billion to repay it.

The account that now reads as having more money is essentially similar to any other bank account. That money is used to pay contractors and whatever else is needed to do the job that needs paying for. In this way, $200 billion has entered the money supply. That money did not exist before. However, “on paper” the Federal Reserve is still owed that same amount of money. If it were ever paid back, that money would in theory disappear. But the government does not, in general, pay back its debts to the Federal Reserve. Lending from the Federal Reserve is used, in effect if not always on purpose, to increase the money supply.

The money, though, still counts as a loan, and it carries interest. Every year the government must pay the interest on its loans. Thus the government pays some money, perhaps $1 billion if the annual rate is 0.5% on our $200 billion example, to the Federal Reserve. That $1 billion, however, has to come from somewhere. It comes from tax revenue. That is $1 billion in tax revenue that would otherwise have gone to paying for goods, services, and employees, but instead must be used to pay interest on public debt held by the Federal Reserve.

Recall that the Federal Reserve is owned by twelve Federal Reserve Banks. This means, when the $1 billion is paid to the Federal Reserve, it ends up going to those banks. That is $1 billion in tax revenue that goes to private corporations. In a sense this is “trickle up” economics—the government collects taxes from everybody, and sends a chunk of it to the elite few.

Note too that the $200 billion figure I use is the sort of thing one might find on a single piece of legislation, and there could be several such loans issued each year, which means the interest payments add up fast. Moreover, as I understand it, the Federal Reserve Banks did not actual do anything to deserve that interest payment. The money that was loaned did not actually exist before. It’s not like a normal loan where the banks had the money up front. Instead the money is simply created from scratch on paper. If the government were to default on the loan, the banks would not actually have lost anything, since they did not put anything of theirs on the line to begin with.

It seems to me that, in respect to national debt at least, the government—and by extension the people it represents, notably taxpayers—would be better off if it did not take loans from the Federal Reserve. That is to say, an act of congress could simply create the same amount of money by fiat, if it is desired that the money supply be increased. This would achieve the same result as borrowing from the Federal Reserve, except there would be no interest payments leaching tax revenue off and funneling it to large private corporations.

For other cases, such as where the government simply needs a lump sum up front, but does not want to increase the money supply, then it can pursue all the avenues it already has available, such as selling bonds and other securities for which the initial payment is money that already existed in the economy. As in, someone has money and uses it to buy the bond. And yet further, if the government cannot find a buyer for its bonds, and still does not want to increase the money supply but needs money right away, it can create money by fiat with the stipulation that annual payments be made to pay down the principle with no interest. That is, to temporarily increase the money supply, and continually decrease it thereafter until the desired level is reached.

In any event, borrowing from the Federal Reserve, in my understanding, serves no purpose except to give tax money to twelve privileged private banks. If congress desires to give money to those banks, that is something which can be accomplished by an act of legislation or a change in the tax code. But to take legitimate tax revenue and use it to pay interest on a so-called loan that represents no risk but serves merely to increase the money supply, strikes me as downright wasteful.

To be clear, I do not know all the other things the Federal Reserve does. It may very well serve important functions as a cornerstone of the national and global economies. But for the specific case of national debt, I see no benefit to borrowing from the Federal Reserve. The same results could easily be achieved without the interest payments.
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Re: National debt and the Federal Reserve

Postby mosc » Wed Jul 13, 2011 9:46 pm UTC

You don't get it. The key thing you are missing is although the federal reserve is run by private banks, it is operated entirely separate and is incredibly profitable on it's own (as you've described to some level of accuracy) but you've missed the KEY CENTRAL point that WHATEVER profit the federal reserve makes is given directly to the government. All of it. The private sector is willing to give up all profits for the financial control the federal reserve provides. Every year, the federal reserve provides billions in revenue to the US government.

It loans us money, it puts controls on the market, AND it shits money we use as revenue. You could argue your tax dollars pay for the salary of the fed workers (which there are many), but these people do MAKE money on your tax dollars so it's kinda a net plus. Let alone the positive impact on that many jobs being created through the system.
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Re: National debt and the Federal Reserve

Postby Qaanol » Thu Jul 14, 2011 2:43 am UTC

mosc wrote:You don't get it. The key thing you are missing is although the federal reserve is run by private banks, it is operated entirely separate and is incredibly profitable on it's own (as you've described to some level of accuracy) but you've missed the KEY CENTRAL point that WHATEVER profit the federal reserve makes is given directly to the government. All of it. The private sector is willing to give up all profits for the financial control the federal reserve provides. Every year, the federal reserve provides billions in revenue to the US government.

It loans us money, it puts controls on the market, AND it shits money we use as revenue. You could argue your tax dollars pay for the salary of the fed workers (which there are many), but these people do MAKE money on your tax dollars so it's kinda a net plus. Let alone the positive impact on that many jobs being created through the system.

Are the internal financial transactions of the Federal Reserve a matter of public record? I am under the impression that they are not, and the Fed is rather opaque with regard to its own books. If the internal bookkeeping is not transparent, there is a strong risk of so-called Hollywood accounting, wherein even though a movie earned far more at the box office than it cost to produce, market, and distribute, somehow there ends up being only minimal profits to share as royalties.

Even if the Fed were perfectly transparent, however, there is still the issue of whether the total profits exceed the interest payments on public debt held by the Federal Reserve. If not, then the Fed is losing money on the balance of it other activities, and uses those interest payments to subsidize its non-profitable actions. But even if the rest of it activities are profitable, so its total profit exceeds the interest payments and those are thereby returned to the government, there is still no advantage to the government in borrowing from the Fed.

So, in a best-case scenario, borrowing from the Fed leads to tax money being used for interest payments every year, which with luck are returned at some later date. And until that time, the Fed can use that money and the government loses out on it for the duration. In a worst-case scenario, those interest payments are gone forever, straight from the tax fund to the pockets of privileged banking executives. And in a middle scenario, some years will see each type of loss, with partial loss of tax money being common, as interest payments might not be fully recovered each year.

In regard to your job-creation remark, creating jobs for the sake of creating jobs is not beneficial. A job is only a net plus if it contributes something to society. If the principle value realized from a given job is that the jobholder has income, we’d be better off just giving the money to that person and letting them do whatever they want with their time. For those people at the Federal Reserve whose work contributes to stabilizing the global economy and regulating the cycles of boom and bust, their work is valuable. But for the work done solely to pass government money around from one ledger to another, and then perhaps return some of it to the government at the end of the year, that work is not productive.
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Re: National debt and the Federal Reserve

Postby ++$_ » Thu Jul 14, 2011 3:17 am UTC

When you say that Congress could just as well increase the money supply by passing legislation, you're right. However, have you ever watched Congress work? They are slow as hell. In addition, Congress is mostly made up of trained monkeys politicians who do not understand monetary policy and enjoy flinging earmarks at the walls of their cage.

Also, it is very difficult for an act of Congress to decrease the money supply. The Fed has no trouble doing that.

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Re: National debt and the Federal Reserve

Postby nitePhyyre » Thu Jul 14, 2011 6:54 am UTC

It is kind of a sad state of affairs when people are saying "Ya, we could do things properly, but we are far too incompetent."

mosc wrote:You don't get it. The key thing you are missing is although the federal reserve is run by private banks, it is operated entirely separate and is incredibly profitable on it's own (as you've described to some level of accuracy) but you've missed the KEY CENTRAL point that WHATEVER profit the federal reserve makes is given directly to the government. All of it. The private sector is willing to give up all profits for the financial control the federal reserve provides. Every year, the federal reserve provides billions in revenue to the US government.

It loans us money, it puts controls on the market, AND it shits money we use as revenue. You could argue your tax dollars pay for the salary of the fed workers (which there are many), but these people do MAKE money on your tax dollars so it's kinda a net plus. Let alone the positive impact on that many jobs being created through the system.
That sounds like a terrible trade.

The People lose:
- financial control of their country
- the ability to ever be debt free

The People gain:
- The difference between The Fed's profits and what the Fed would have paid in taxes anyways.

The Fed banks lose:
- Several billion in revenue -- the difference between what they would have paid in taxes and their profits.

The fed banks gain:
- the ability to make trillions because they now control the market
- a never ending supply of money from the interest on loans that they did nothing to deserve

There must be something that we are missing to make this trade even remotely worth it.
sourmìlk wrote:Monopolies are not when a single company controls the market for a single product.

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Re: National debt and the Federal Reserve

Postby ++$_ » Thu Jul 14, 2011 8:18 am UTC

As far as I can tell, the alternative you are both proposing to the Federal Reserve is that the US government should not borrow any money. Instead, it should print more money directly when it wants more. Is that accurate?

nitePhyyre wrote:It is kind of a sad state of affairs when people are saying "Ya, we could do things properly, but we are far too incompetent."
No, we are doing it exactly right. Congress, knowing that it wasn't the right kind of body to enact monetary policy, sensibly created another organization that would be better positioned to do so.

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Re: National debt and the Federal Reserve

Postby sardia » Thu Jul 14, 2011 9:52 am UTC

Spoilered for length, since it's just a quick summary of macroeconomics 101.
Spoiler:
I'm surprised nobody mentioned the purpose of monetary policy in defending the Fed. Two big roles of the Federal Reserve is inflation control, and moderating the economy through the money supply.
Inflation is the rise in prices of goods over time. Say you make 100$ a year, and then inflation sets in, and you make 200$ a year. However, everything costs more so that even if you make twice as much, you won't be able to buy more.
If inflation is too high or into deflation territory, it's bad for you and the economy. The federal reserve controls inflation through a couple of tools. As a general rule, the more money there is circulating in the economy, the higher the inflation( because too much money chasing too few goods is the cause of inflation). A simple tool is raising or lowering the interest rates on loans that the Fed makes to banks. Banks take these loans, and then loan the money to consumers at a slightly higher interest rate( to make a profit). Whatever the Fed sets their rates at, all banks follow due to competition and capitalism. You, the consumer, will be more/less likely to get a loan based on interest rates, and in aggregate this lowers/raises the amount of money circulating in the money supply. They can also set minimum reserve levels of money at banks or they can sell/buy special Fed loans to the banks. Whatever tool they use, they all affect the money supply, which influences inflation.
Sidenote: The more money banks have, the more money they can lend, which stimulates the economy since money is being spent and circulated.

The Fed has to balance the control of inflation with maintaining the economy. During recessions, when money is tighter, the fed cares less about inflation, and more about stimulating the economy. During boom times, the fed watches for overheating economies, (signs of excess inflation), and tightens the money supply in response.

I don't know how old the OP is, but I suggest you take Macroeconomics 101. It should be one of your required classes in college; it may seem boring as hell, but it's important to know at least the basics. Supply vs Demand curves, monetary policy, fiscal policy, etc etc. Then you'll have a rough idea as to what it does.



Edit: OP, can you tell me what part of the Fed you are complaining about? Are you saying the Federal Reserve shouldn't be the accountant of the US government, aka when the US sells Treasury bills in order to finance itself? Or are you talking about the securities that the Fed buys and sells to banks? Maybe an article or a specific example would help me understand, because it sounds like you are combining two separate tasks of the Federal Reserve. Making banks buy securities and having the Fed sell treasury bills is related, but serve different functions. The former is to control the money supply, since banks who buy securities that earn interest can't use that money RIGHT NOW to loan to consumers. (that increases the money supply, inflation, stimulates the economy) The latter is the US financing itself by getting a loan from a 3rd party. That money is accounted for very carefully.
Edit2: I reread your original post, and I think I know what you're complaining about. When the US needs money, it gets money from taxes and loans(Treasury bills). When the IRS gets tax money, it deposits it at the Fed because they are the US's accountant and bank. Since we need more money than just taxes, we issue a note promising that in exchange for x dollars now, the US will pay you it back with interest. That's called a Treasury bill or T-bill. These T-bills are accounted for at the fed, and the Fed is in charge of delivery and keeping track of each and every T-bill out there. Any interest the US taxpayers pay to the Fed is sent out, along with the original amount on the T-bill, to whoever loaned us the money in the first place. Nothing goes to the elite bankers except whatever it costs to pay the federal employees.

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Re: National debt and the Federal Reserve

Postby Qaanol » Thu Jul 14, 2011 12:40 pm UTC

sardia wrote:Edit2: I reread your original post, and I think I know what you're complaining about. When the US needs money, it gets money from taxes and loans(Treasury bills). When the IRS gets tax money, it deposits it at the Fed because they are the US's accountant and bank. Since we need more money than just taxes, we issue a note promising that in exchange for x dollars now, the US will pay you it back with interest. That's called a Treasury bill or T-bill. These T-bills are accounted for at the fed, and the Fed is in charge of delivery and keeping track of each and every T-bill out there. Any interest the US taxpayers pay to the Fed is sent out, along with the original amount on the T-bill, to whoever loaned us the money in the first place. Nothing goes to the elite bankers except whatever it costs to pay the federal employees.

I believe you are correct for the case where the Fed sells T-bills to 3rd parties. However, a vast quantity of national debt is owned by the Federal Reserve itself. In that case, “whoever loaned us the money in the first place” is nobody. That money literally sprang into existence on a ledger within the Federal Reserve. This is functionally equivalent to simply adding dollars to the money supply, except it also carries with it annual interest payments in perpetuity that come out of tax revenue and go to, in my understanding, the Federal Reserve Banks.
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Re: National debt and the Federal Reserve

Postby Eowiel » Thu Jul 14, 2011 1:19 pm UTC

Qaanol wrote:I believe you are correct for the case where the Fed sells T-bills to 3rd parties. However, a vast quantity of national debt is owned by the Federal Reserve itself. In that case, “whoever loaned us the money in the first place” is nobody. That money literally sprang into existence on a ledger within the Federal Reserve. This is functionally equivalent to simply adding dollars to the money supply, except it also carries with it annual interest payments in perpetuity that come out of tax revenue and go to, in my understanding, the Federal Reserve Banks.


You're correct in how the Fed works except with respect to who gets the profits from the interest payments on the lent money created out of thin air. The profits of the Fed go to the government, which is indeed an exception to the rule that profits go to the shareholders.

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Re: National debt and the Federal Reserve

Postby Yakk » Thu Jul 14, 2011 1:26 pm UTC

The US dollar is a debt-backed currency. It is backed by the fact that (almost) every dollar out there is being chased by someone who has a debt that needs to be repaid in dollars.

Creating a dollar of debt and a dollar of money means that the new money is backed by the debt. Creating a dollar without the debt means that the dollar lacks backing.

So on top of your musings about the federal reserve (you'll note that the fed is actually controlled by the regional federal banks, moreso than private banks, and that the boards of same are political appointees) being less than robust, there is a problem with your "solution".

While having the money be "owed" to a nominally distinct counter party could be called "just accounting", that is all money is. Accounting.
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Re: National debt and the Federal Reserve

Postby sardia » Thu Jul 14, 2011 4:51 pm UTC

Making banks buy securities and having the Fed sell treasury bills is related, but serve different functions. The former is to control the money supply, since banks who buy securities that earn interest can't use that money RIGHT NOW to loan to consumers. (that increases the money supply, inflation, stimulates the economy)
Let me elaborate, the reason the Fed owns a lot of securities, or T-bills is to make banks buy and sell them as they see fit. (mostly to fiddle with the money supply/inflation) Say a bank has $2 million in reserves, and then the Fed sells a T-bill to the bank for $1 million, what happens to the bank's reserves? It goes down by $1 million, the bank has $1 million less money to loan, has a promissory note worth $1 million dollars, and thus the money supply shrinks. The opposite happens when the Fed buys a T-bill from a bank. The bank gets $1 million, has more in reserves, so it has more to lend, and thus the money supply grows. There's no trickery here, this is simply another tool to control the money supply and indirectly, the economy.

Btw, the Fed is a governmental entity, and governments do have the right to coin money as they see fit. If they wanted to, they could just keep printing money til we were debt free, but then our money would be worthless due to inflation. The reason we trust our government to not simply print money to solve every problem is that bad things would happen. See Zaire or any other African country with hyperinflation.
As you can now see, the purpose of all the debt that the Fed is holding, isn't to steal taxpayer money, it's one of the many tools available to change the money supply.

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Re: National debt and the Federal Reserve

Postby mosc » Thu Jul 14, 2011 5:53 pm UTC

1) You guys are drastically underestimating the amount of PROFIT the federal reserve bank creates. Every year. By it's very nature, it is a banking monopoly with what you would call "unfair market power" if it were a private bank. It is a profit making machine. It SHITS money. Last year, it wrote the government a $79 Billion dollar check for the privilege of it's existence.

2) The fed is relatively transparent and it's chairmen is approved by congress. Like a publicly traded company, it reports a great deal of it's financial information. It is not some maniacal group of men siphoning money from the government. Lets be clear that it is a profitable business and it pays it's profits (minus like 6%) back to the government. It's employees pay for themselves (and pay taxes, which is more revenue). Here's the balance sheet:
http://www.federalreserve.gov/monetaryp ... esheet.htm
See, your money isn't going into a vacuum of wealthy robber barons (Again, its' profitable so if anything you're taking money FROM them). It's required by law to divulge a great deal of information about it's inner workings.

3) The fed has a complex and hard to simplify role in the free market economy but boiled down to it's simplest form, it keeps inflation low and stable. It was created because inflation is the arch enemy of banks. Inflation means that money you have in a bank is worth less as time goes on. The federal reserve to a great extent is simply a bank buying and selling things as it sees fit in order to keep inflation at a small and stable number. That is it's purpose, not to make money. Banks want low inflation and gave us the fed to accomplish it. They don't take profit from the fed and benefit from it because their normal banking can be done without worry of high inflation. To review, please read the following:

WE GET:
Money

BANKS GET:
Low Inflation


4) The US dollar is a debt note. Many people do not understand this. They fear a national debt as some instrument of evil, out of control government waste. It is not. A high debt is an issue but a small debt is of GREAT VALUE to the financial system. I won't go into the economics, but they're pretty basic folks. Once we moved past the bartering stage of world society, debt became the DRIVER of world economics. If you think any debt is inherently bad, you have to get your head out of the 15th century. Sorry, but you're an idiot.

5) Debt implies obligation. One worry we have with the US debt is that a debt holder can excerpt pressure on the US government. "Do as I say or I'll call my debt notes", etc. Another strength of the federal reserve is that it buys US Debt and puts NO pressure on the US government to do anything. There are limits however. The federal reserve is not an infinite supply of money and it can only handle about 1.7 Trillion dollars of our debt. I wish it could take more, but it can't. Anyone who would argue that our national debt should be ZERO would be basically arguing for the abolishment of the federal reserve. It takes ours 1.7 Trillion in debt and uses it to drive the economy and gives us REVENUE for it.

EDIT: If I make it all sound too good to be true, that's because it is. Even people (educated people) who don't like the federal reserve understand that it shits money. The concept is fundamental. The problems and risks with the fed are not related to it's cost of operation. The arguments against the fed, which are not made in this thread hardly at all I would note, are:
1) Inflation should not be controlled artificially. The fed prevents supply and demand from directly controlling the value of the dollar
2) A currency not backed by an asset directly is inherently unstable. (usually people wanting to abolish the fed for this reason want us back on the gold standard)
3) The fed can create financial problems when trying to fix financial problems. The cases are things like the housing bubble which could be tied to low fed rates (which were low to keep inflation stable and low) making mortgages cheap and creating a bubble.

Not that I agree with any of those points mind you...
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Re: National debt and the Federal Reserve

Postby nitePhyyre » Fri Jul 15, 2011 6:33 am UTC

mosc wrote:4) The US dollar is a debt note. Many people do not understand this. They fear a national debt as some instrument of evil, out of control government waste. It is not. A high debt is an issue but a small debt is of GREAT VALUE to the financial system. I won't go into the economics, but they're pretty basic folks. Once we moved past the bartering stage of world society, debt became the DRIVER of world economics. If you think any debt is inherently bad, you have to get your head out of the 15th century. Sorry, but you're an idiot.
Ok, I'm an idiot but, wha?
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Re: National debt and the Federal Reserve

Postby Deep_Thought » Fri Jul 15, 2011 8:42 am UTC

nitePhyyre wrote:
mosc wrote:4) The US dollar is a debt note. Many people do not understand this. They fear a national debt as some instrument of evil, out of control government waste. It is not. A high debt is an issue but a small debt is of GREAT VALUE to the financial system. I won't go into the economics, but they're pretty basic folks. Once we moved past the bartering stage of world society, debt became the DRIVER of world economics. If you think any debt is inherently bad, you have to get your head out of the 15th century. Sorry, but you're an idiot.
Ok, I'm an idiot but, wha?

Note: The following is an engineer's explanation not an economist's.

Imagine a world with no credit. On a micro-economic level, imagine living your life if you could never get a loan, ever, from anyone. It would suck. On a day-to-day level, short $5 for lunch? Oh well, can't borrow from your office mate. Better just go hungry. On a bigger level, just starting your first job and need a car to get there? Oh well, you can't get the car on credit so you'll just have to turn down the job and hope one in walking distance shows up soon. Credit, when used correctly, transfers capital from those who have no immediate use for it to those who do.

The macro-economic picture is cloudier because it is often so far removed from our everyday experience. But again, imagine if you are a government and want to build, say, a road between two far-flung cities so they can start trading with each other. Such projects cost far more than you raise in taxation during one year. Are you supposed to sit around, stashing a decent portion of everyone's taxes in a vault somewhere until you reach the numbers required for such a scheme? Or do you borrow the money now, build the road, pay the interest out of that same income stream and wait for the economy to grow such that future tax revenues allow you to pay off the debt? Which scenario ends up with a bigger economy and more wealth quickest?

Of course, you have to balance your debts against your ability to repay them, and lenders should be very careful who they lend to to guard against default. These are the tricky bits, and are the ones that most politicians (and many bankers these days) never seem to get their head round :(

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Re: National debt and the Federal Reserve

Postby Yakk » Fri Jul 15, 2011 2:22 pm UTC

nitePhyyre wrote:
mosc wrote:4) The US dollar is a debt note. Many people do not understand this. They fear a national debt as some instrument of evil, out of control government waste. It is not. A high debt is an issue but a small debt is of GREAT VALUE to the financial system. I won't go into the economics, but they're pretty basic folks. Once we moved past the bartering stage of world society, debt became the DRIVER of world economics. If you think any debt is inherently bad, you have to get your head out of the 15th century. Sorry, but you're an idiot.
Ok, I'm an idiot but, wha?

Debt is a promise to do something in the future.

Money is nothing but promises that someone will do you something for the money in the future.

Everyone who is in debt wants to pay down that debt -- or, at least, they want to pay down the interest on the debt. (Debt that someone doesn't want to pay down is "bad debt", and banks have to clear it for them under a functioning debt-backed economic system).

People in debt, if they fail to pay down their debts, have to hand over all of their possessions (and some future "earnings" if they get any). This provides incentive to pay down debt (and the more likely they are to earn in the future, and/or their possessions are "worth" to them, the better). This gives them the wish to pay down their debts (or at least service them).

So these people really want to do things for people with money in exchange for that money. This "backs" the currency -- it gives it a foundational value.

Because money that people don't want is useless. Money that people desperately want? Useful.

In effect, we want money so person A can give you the ability for person C to provide services in exchange for the services that person A wants from you. So the money person A gives you needs be balanced by a want others have to give you services for the same money. Debt-backed currencies provide this balance -- every dollar created is created with an equal dollar of debt. (Naturally nothing is ever perfect, but the idea is there).

With a true fiat currency, or a random-resource backed currency, there is not guarantee of this balance. The supply of dollars could fluctuate upwards or downwards with no corresponding change in the desire for people to want your money. In a (functioning) debt-backed economy, new money is created via debt-pair production when banks find someone who has a decent chance and ability to generate wealth (or, do things for people with money). When the banks fail at this task, they are then responsible for paying off the unpaid debt.

Things go poorly with debt-backed currencies when too much "bad debt" accumulates, because this generates unbacked dollars. If I borrow a million dollars with no desire or intention to repay it, and the bank pretends that million dollars is still a good debt, there is a million dollars hanging around without the corresponding person desiring it. If the bank is forced to write down the million dollars in debt, the bank now desires that money (or, rather, the people the bank would have given the million dollars to no longer have payed off real debts in that amount).
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Re: National debt and the Federal Reserve

Postby CorruptUser » Fri Jul 15, 2011 2:51 pm UTC

nitePhyyre wrote:
mosc wrote:4) The US dollar is a debt note. Many people do not understand this. They fear a national debt as some instrument of evil, out of control government waste. It is not. A high debt is an issue but a small debt is of GREAT VALUE to the financial system. I won't go into the economics, but they're pretty basic folks. Once we moved past the bartering stage of world society, debt became the DRIVER of world economics. If you think any debt is inherently bad, you have to get your head out of the 15th century. Sorry, but you're an idiot.
Ok, I'm an idiot but, wha?


Every dollar is actually note from the US government saying that it owes you the equivalent of 1 dollar. A 0% interest note. There are some advantages to a national debt, as no sane lender ever wants that debt to default, the people/organizations/countries that lent money to the US (especially China) have an interest in the US not collapsing economically.

Also, as long as the debt can be paid back in dollars, the debt is not as serious a problem as people claim. At any time, we could simply print the debt away. If the dollar loses value, so does the debt. The Weimar Republik, the example trotted out whenever printing money is brought up, didn't owe marks. Printing money there was useless, because no matter how much of the mark they printed away, the debt was still there.

If the dollar gains value, the opposite occurs. For example, in the Asian Financial Crisis of the late 90's many countries thought the US dollar was overrated, and thought they scamming the world when they borrowed hundreds of billions of dollars to build up their economies. Then the dollar became stronger, and the countries that borrowed dollars more or less had their debt effectively doubled, but without the doubling of the use of that debt. Right now, the dollar is losing value, which is not making China happy at all.

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Re: National debt and the Federal Reserve

Postby E_H » Sun Jul 24, 2011 10:10 pm UTC

The Federal Reserve system is a quasi-governmental entity to which the Congress delegated its constitutional authority to coin money and emit bills of credit, plus some other powers. The Treasury also has been delegated portions of the same powers. The Fed is owned by the private banks in proportion to the deposits each has made with the Fed. The Fed does not pay its owners dividends (as such), but the owners have a dominant voice on who will be on the boards of the regional Fed banks, and on the overall Fed board. There is some window dressing involving the Congress and the President in the selection process, but the banks always get their own way. Profits of the Fed are returned to the Treasury, but there is no system of outside audits to verify the books. The Fed makes most of its transactions in secret, and these often benefit its largest shareholders over all other entities. The "open market operations" often involve lending securities to the biggest banks without any net interest (repurchase agreements - "repos"), and in some cases these have no time limits, amounting to an effective gift of securities. The member banks also can borrow money from the Fed, usually well below rates on the open market, and in quantities that are unavailable from any other entity.

Lately (post-2008) the Fed has taken unmarketable (read: virtually worthless) securities from its member banks as collateral for loans, valuing these securities at face rather than market value. The Fed acts as nominally a regulator (though with teeth only for the smaller banks) but more realistically as a cartel of the largest banks, allowing them to set interest rates and capital requirements. The big banks set these differently for themselves than for their smaller competitors - a bank not in the big 5 or 10 would have a 10% capital requirement, essentially allowing loaning 10X their deposits, while the big banks would be able to loan 30X (and be exempted from money laundering statutes, and able to have their collateral (loan portfolio and securities) valued much more leniently than the small banks, which makes a huge difference in capital requirement calculations).

The vast majority of money is created by the banks directly, not by the Fed. Banks loan several times the value of their deposits out; the excess is created at the time of the loan. (This has been going on at least since the goldsmiths' shops of the 1600s, and likely far longer.) The interest which must be paid back is not created at the time of the loan, however, and this creates a need to constantly inflate the money supply so that the interest can be paid. If the loan is for a productive purpose that creates real value, this need not lead to price inflation, but in practice since the creation of the Fed, there has been a long-term, virtually constant price inflation, which was not seen in the US prior to the creation of the Fed. This amounts to an effective tax on savings and also an additional real tax on all long-term investments, which will show a nominal capital gain even when there is no gain in real, inflation-adjusted terms. Prior to the Fed (or more precisely, prior to the effective ending of the gold standard by FDR) instead of inflation there was instead a more violent business cycle and the expansion of the economy was due more to immigration and expansion across the continent, whereas after constant monetary and price inflation, economic expansion was due more to investment, government expansion, and international trade and the business cycle was perhaps less painful than it otherwise would have been.

Since the 1970s, the benefits of inflation and the Fed have been less apparent - no one but the richest has seen a significant increase in wealth or income despite gains in productivity and GDP per capita. The real economy has been hollowed out, manufacturing shipped abroad and replaced by a poorly paid "service economy" and unproductive finance, insurance and real estate (FIRE) sectors. The Fed has been at the heart of this, being the great patron of the Chicago School of economists who always cite "comparative advantage" but ignore "absolute advantage", worship monetarism but treat mercantilism as a disease (even as our mercantilist competitors such as China succeed), and generally build castles in the air while rebuking reality for failing to conform to their pseudo-mathematical and incestuously peer-reviewed theories. These panderers to power have told their patrons whatever they wanted to hear, so short-term profits were privatized while long-term risks were socialized, those with control over mass amounts of other people's capital robbed everyone else blind and used the proceeds to buy the political system, including the media, the Congress, the Treasury, the Fed, the DOJ, and all the rest of the regulatory system.

The arguments over the desirability of a central bank go back to the First and Second Bank of the United States. The US did better without the banking cartel picking its pockets, and allowed those banks to die. (We need to bring back limited-term corporate charters, BTW.) It also did better without the gold standard - greenbacks are what allowed the North to win the Civil War, just as continentals won the Revolutionary War, and unlimited Federal Reserve notes and Treasury Bonds won WWII and the post-war expansion. Having a real, government-owned bank would be better that the current system where the Fed gives unlimited free money to its cronies who then loan it back to the US government by buying Treasury bonds. The government should get a better rate of interest than any private bank, particularly ones who would be out of business if it weren't for bailouts, prefer to gamble with derivatives rather than make loans to productive enterprises, and have suborned the government and wrecked the economy for their own profit. We need to look at the model of North Dakota's state-owned bank - N.D. has a surplus and low unemployment, and it's mostly due to not being in hock to the banking cartel.

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Re: National debt and the Federal Reserve

Postby Iceman » Sun Aug 07, 2011 12:31 am UTC

I just wanted to poke at this idea of the Federal Reserve 'Making Money'....

Remember that every dollar that exists...is a Liability to the Fed. It can just create money whenever it likes, that's what it does. So while it collects currency...and gives currency and well...basically prints currency...the Fed is essentially above money to a point that 'making money' has no real meaning.

It'd be like you taking your cheque book, and writing 500 cheques to yourself. You didn't accomplish anything. Money essentially has no meaning until the Fed isn't the one holding it....it isn't even 'Money' until they aren't holding it.

Money it's 'making' is just interest on money it lent...which is also just made up. Or appreciation of things it holds, which it won't sell. The money it is making really only exists as a disincentive to borrow from it...as you pay them the interest, that stops being money.

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Re: National debt and the Federal Reserve

Postby Qaanol » Sun Aug 07, 2011 12:45 am UTC

Iceman wrote:as you pay them the interest, that stops being money.

Except it doesn’t, because they don’t use it to write off the debts in their books, they just take it as “profit”, which goes to people it employs, expenses it accrues, and the rest goes back to the government.

Problem is, people are people. If it is possible for someone to abuse a position of power, we have to expect that sooner or later it will get abused. And with people involved with the Fed, which does not have to reveal the details of its expenses, one can easily imagine lots of money being skimmed in various manners.

I mean, we’ve seen multiple cases recently where the council members of a small town hire themselves under multiple titles and earn millions—and that’s when all expenses are at least in theory a matter of public record. If it can happen in what should be plain view, we have to assume someone is doing it anytime something is not in full view. And when it’s tax money being spent, that’s everybody’s concern.

The idea is that the Fed is a “pump” that makes money circulate, thus ensuring the economy runs smoothly. I’m saying we have to assume that whoever is overseeing the pump is almost certainly bottling some of the water for themselves or their friends or their family or their associates. And in the case of tax money, we should not allow that to happen.
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Re: National debt and the Federal Reserve

Postby Iceman » Sun Aug 07, 2011 12:57 am UTC

Except it doesn’t, because they don’t use it to write off the debts in their books, they just take it as “profit”, which goes to people it employs, expenses it accrues, and the rest goes back to the government


If they used it to pay expenses, or pay the government ...it's not Profit...it's expenses. Are you confusing income with profit?

The Fed certainly does indeed have to reveal all the details of its expenses, quite meticulously. Yes, Central banks are most certainly used for power and evil and all kinds of stuff, but I doubt you've got much 'skimming' going on.

Also, are you calling Fed reserve money 'tax money?' I think you should re-read this whole thread.

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Re: National debt and the Federal Reserve

Postby Whimsical Eloquence » Sun Aug 07, 2011 2:28 am UTC

Every bank in a modern Fractional Reserve Banking Scheme can just "create" money, that's not some special power of the Central Bank. Only about 9% of the money supply is held as physical, Government issued money. The rest is credit issued by private institutions.
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Re: National debt and the Federal Reserve

Postby Iceman » Sun Aug 07, 2011 2:45 am UTC

Whimsical Eloquence wrote:Every bank in a modern Fractional Reserve Banking Scheme can just "create" money, that's not some special power of the Central Bank. Only about 9% of the money supply is held as physical, Government issued money. The rest is credit issued by private institutions.


Well, kind of, but they have to have the money to lend it. They can't just 'create' it. They're lending out your deposits.

$100,000 is Deposited in Bank A...
They have to keep 10%,
So they keep 10% reserve and lend $90,000
The $90,000 lent was for someone to pay someone for something, and that $90,000 is deposited...
so they can now Lend out $81,000 more
Then same thing, they lend out $72,900 more..
etc.. etc..

The money is multiplied by 10.

The central bank does not function that way. The Central Bank literally 'Creates' the money, both in the financial and physical sense. They don't need deposits...they just 'Buy' stuff with previously non-existent currency that they just printed in the back. They're not multiplying...they're actually fabricating. It is a special power only they have.

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Re: National debt and the Federal Reserve

Postby Whimsical Eloquence » Sun Aug 07, 2011 3:11 am UTC

Iceman wrote:
Whimsical Eloquence wrote:Every bank in a modern Fractional Reserve Banking Scheme can just "create" money, that's not some special power of the Central Bank. Only about 9% of the money supply is held as physical, Government issued money. The rest is credit issued by private institutions.


Well, kind of, but they have to have the money to lend it. They can't just 'create' it. They're lending out your deposits.

$100,000 is Deposited in Bank A...
They have to keep 10%,
So they keep 10% reserve and lend $90,000
The $90,000 lent was for someone to pay someone for something, and that $90,000 is deposited...
so they can now Lend out $81,000 more
Then same thing, they lend out $72,900 more..
etc.. etc..

The money is multiplied by 10.

The central bank does not function that way. The Central Bank literally 'Creates' the money, both in the financial and physical sense. They don't need deposits...they just 'Buy' stuff with previously non-existent currency that they just printed in the back. They're not multiplying...they're actually fabricating. It is a special power only they have.



No, no. You're quite confused. A Bank must have a certain Reserve Ratio, let's say 10%. If I deposit 10'000, the bank may then issue credit up to 100'000 as long as it maintains that 10'000 in reserves. Banks can, almost literally , create money.
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Re: National debt and the Federal Reserve

Postby Iceman » Sun Aug 07, 2011 3:28 am UTC

Whimsical Eloquence wrote:

No, no. You're quite confused. A Bank must have a certain Reserve Ratio, let's say 10%. If I deposit 10'000, the bank may then issue credit up to 100'000 as long as it maintains that 10'000 in reserves. Banks can, almost literally , create money.


No, I am afraid that is not the case.

The Reserve Ratio means they must keep 10% of all Deposits in Reserve. They can lend the rest out.

So you put in your $10,000...they lend $9000....then it is Redeposited somewhere...then they lend 8100....the redeposited...then 7290 etc...

The total is $100,000 at the end in Deposits.

http://en.wikipedia.org/wiki/Money_multiplier

That explains it pretty clearly and shows you a few examples.


If the situation you described were true, the money supply would be infinite. If you deposited $10,000 and the bank lent me $100,000 based of your $10,000.....then i bought a Sports Car...and the guy deposited the $100,000...then they'd lend out $1,000,000....and they guy would buy a House....and the seller would deposit it and they'd lend out $10,000,000...And that lender would buy a Jet.....etc...etc...

The End multiplier is 10x....$10,000 in Central Bank money creates $100,000 in the money supply.
But No, a Deposit of $10,000 does not create $100,000 in lending of that deposit, that doesn't make sense.

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Re: National debt and the Federal Reserve

Postby nitePhyyre » Sun Aug 07, 2011 3:38 am UTC

Yakk wrote:Everyone who is in debt wants to pay down that debt -- or, at least, they want to pay down the interest on the debt. (Debt that someone doesn't want to pay down is "bad debt", and banks have to clear it for them under a functioning debt-backed economic system).
CorruptUser wrote:Also, as long as the debt can be paid back in dollars, the debt is not as serious a problem as people claim.
This is what I'm missing: If the dollar is a 'debt-note', you can't pay back your debt with dollars. You can only pay back your debt with debt. The idea that 'everyone who is in debt wants to pay down that debt' or that 'the debt can be paid back' only make sense if the debt actually can be paid back, no?
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Re: National debt and the Federal Reserve

Postby Iceman » Sun Aug 07, 2011 4:16 am UTC

nitePhyyre wrote:
Yakk wrote:Everyone who is in debt wants to pay down that debt -- or, at least, they want to pay down the interest on the debt. (Debt that someone doesn't want to pay down is "bad debt", and banks have to clear it for them under a functioning debt-backed economic system).
CorruptUser wrote:Also, as long as the debt can be paid back in dollars, the debt is not as serious a problem as people claim.
This is what I'm missing: If the dollar is a 'debt-note', you can't pay back your debt with dollars. You can only pay back your debt with debt. The idea that 'everyone who is in debt wants to pay down that debt' or that 'the debt can be paid back' only make sense if the debt actually can be paid back, no?


Well...what are you in debt for?

I owe my buddy Mike a case of beer, my friend Rick owes me a new head for my Lacrosse stick...
I owe a Bank some Canadian Dollars...I have a Gold certificate from the same bank, so they owe me 14 oz of gold.

So if you owe someone US Dollars...you can pay them with US Dollars.
Sometimes someone can agree to a 'Eurobond'...I lend them US Dollars...but they are paying me back with Swiss Francs.

Or one step further...I can actually Borrow bonds on margin...I can sell bonds I don't own, but borrowed from someone else. So someone issued a bond...borrowing money from its buyer, then I borrow that borrowing agreement and sell it. Now I owe the guy I borrowed it from a bond saying he borrowed something from someone else.

Then the money itself is a debt note too...the Central Bank owes you something else for it. Something not US dollars. They could instead give you a Bond, or Gold, or foreign currency etc... now they don't actually deal with You...but that's how they deal with banks.

In the old days of course, money was literally just a note for that amount of metal. a Pound sterling was just that...a pound of sterling silver.
Up until relatively recently, 1 US Dollar simply equaled 1/35th an ounce of Gold.

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Re: National debt and the Federal Reserve

Postby Yakk » Sun Aug 07, 2011 4:25 am UTC

nitePhyyre wrote:
Yakk wrote:Everyone who is in debt wants to pay down that debt -- or, at least, they want to pay down the interest on the debt. (Debt that someone doesn't want to pay down is "bad debt", and banks have to clear it for them under a functioning debt-backed economic system).
CorruptUser wrote:Also, as long as the debt can be paid back in dollars, the debt is not as serious a problem as people claim.
This is what I'm missing: If the dollar is a 'debt-note', you can't pay back your debt with dollars. You can only pay back your debt with debt. The idea that 'everyone who is in debt wants to pay down that debt' or that 'the debt can be paid back' only make sense if the debt actually can be paid back, no?

You can pay back a debt with anything the other party will take. Often by contract or law, the other party must accept dollars.

I didn't say "everyone will or can pay back their debts at one time", I said that people with outstanding debts have incentive to pay them back, and there are penalties if they don't pay them back. By "want", I mean that all things being equal, they'd love to erase that debt. Well, more than that -- "good" debt (from the perspective of a debt-backed currency) is a debt that the person really, really wants to pay back.

For a government who controls the denomination of the debt, yes, they can choose to not pay back the debt via a functional default by inflating the currency until the amount owed is trivial. Of course, nations can do this with any kind of debt, even if they don't control the denomination. There can be consequences (import/export restrictions, sometimes nations go to war about unpaid debts, higher future borrowing costs, losing the advantages that an over-valued currency has to the standard of living of a country, etc).

As an example of a nation that engaged in fiat confiscation of assets (which is what inflating or voiding a debt is, in effect) is Cuba -- the US is still restricting trade to Cuba under the justification that Cuba had no right to confiscate US corporate property in Cuba.
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Re: National debt and the Federal Reserve

Postby Qaanol » Sun Aug 07, 2011 4:27 am UTC

Iceman wrote:
Except it doesn’t, because they don’t use it to write off the debts in their books, they just take it as “profit”, which goes to people it employs, expenses it accrues, and the rest goes back to the government


If they used it to pay expenses, or pay the government ...it's not Profit...it's expenses. Are you confusing income with profit?

It’s profit for someone even if not marked as “profit” on the ledgers of the Federal Reserve. See previous mention of “Hollywood accounting”.

Iceman wrote:The Fed certainly does indeed have to reveal all the details of its expenses, quite meticulously.

No, in fact, it doesn’t. The first ever complete audit of the Fed was just recently completed, and it uncovered plenty of waste. In day-to-day and year-to-year operations, there is little to no transparency of the internal finances of the Fed.

Iceman wrote:Yes, Central banks are most certainly used for power and evil and all kinds of stuff, but I doubt you've got much 'skimming' going on.

Your doubts do nothing to allay skepticism, nor should they. And there is a built-in portion of 6% or so that is “skimmed” straight-up, and disappears into the pockets of whomever the Federal Reserve sees fit to pay for whatever services it sees fit to pay for.

Iceman wrote:Also, are you calling Fed reserve money 'tax money?' I think you should re-read this whole thread.

I am calling the money that the government pays to the Federal reserve as interest on loans “tax money”, because it is money that was collected by the IRS as taxes. Sending tax money to the Fed and not getting it back is, as I see it, a waste of tax money. If the Fed actually needs help staying afloat, then it should get absorbed into a government agency and be treated as such. But it doesn’t need any such help, so it should not be getting free tax money to do with as it sees fit.

I think you should re-read both this whole thread and the username of the person who started it.
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Re: National debt and the Federal Reserve

Postby Whimsical Eloquence » Sun Aug 07, 2011 4:49 am UTC

Iceman wrote:
Whimsical Eloquence wrote:

No, no. You're quite confused. A Bank must have a certain Reserve Ratio, let's say 10%. If I deposit 10'000, the bank may then issue credit up to 100'000 as long as it maintains that 10'000 in reserves. Banks can, almost literally , create money.


No, I am afraid that is not the case.

The Reserve Ratio means they must keep 10% of all Deposits in Reserve. They can lend the rest out.

So you put in your $10,000...they lend $9000....then it is Redeposited somewhere...then they lend 8100....the redeposited...then 7290 etc...

The total is $100,000 at the end in Deposits.

http://en.wikipedia.org/wiki/Money_multiplier

Slight confusion here between Commercial Deposits and those made by the Bank to the Central Bank which literally do allow the creation of ,multiple amounts of the deposited money in credit as opposed to commercial deposits held by the bank - slightly tangential anyway.

That explains it pretty clearly and shows you a few examples.


If the situation you described were true, the money supply would be infinite. If you deposited $10,000 and the bank lent me $100,000 based of your $10,000.....then i bought a Sports Car...and the guy deposited the $100,000...then they'd lend out $1,000,000....and they guy would buy a House....and the seller would deposit it and they'd lend out $10,000,000...And that lender would buy a Jet.....etc...etc...

The End multiplier is 10x....$10,000 in Central Bank money creates $100,000 in the money supply.
But No, a Deposit of $10,000 does not create $100,000 in lending of that deposit, that doesn't make sense.
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Re: National debt and the Federal Reserve

Postby Iceman » Sun Aug 07, 2011 5:08 am UTC

Qaanol wrote:It’s profit for someone even if not marked as “profit” on the ledgers of the Federal Reserve. See previous mention of “Hollywood accounting”.


It's not Profit to anyone in the Federal Reserve...If they pay someone to clean the floors...and that company makes a profit doing it...great? To the Fed that's an expense....Any money that goes out the Fed door as a payment for something, like employees...is an expense under any definition of accounting ever. Any US currency IN to the Fed merely reduces its liability.
It collects income for its services...and the government is them just transferred anything they 'made' but its not a profit for the Fed...it's not like Ben Bernake gets to keep it or something.



No, in fact, it doesn’t. The first ever complete audit of the Fed was just recently completed, and it uncovered plenty of waste. In day-to-day and year-to-year operations, there is little to no transparency of the internal finances of the Fed.


Again, this just isn't the case. I think what you may be referring to is a 2009 bill introduced by the Ronpaul in which the Method by which the Federal Reserve was audited was drastically changed. Some of the people supporting it said the Fed had 'not been audited since 1913' but that's not the case, they just didn't like how the audits were being done.
Are you shocked that there's some waste in a government affiliated organization?
The Fed will tell you at all times what its internal finances are, as assets, liabilities and off balance sheet holdings are listed, and its website has links for frequently requested FOIA requests and records of information requests back to 1998.
Again, you seem to be discussing like, its operating budget or something....which would be in the millions of Dollars...instead of it's assets in the Trillions. Like are you claiming the Fed spends too much on lunches and stuff?

90% of the Fed's revenues come from 'Open Market Operations' which, are literally that...them buying and selling in the open market which is pretty transparent...the rest is services or discount window lending. All of which are detailed what they did and how much in their open annual report, and annual report to Congress. Again this stuff is all of their BoG website.

Your doubts do nothing to allay skepticism, nor should they. And there is a built-in portion of 6% or so that is “skimmed” straight-up, and disappears into the pockets of whomever the Federal Reserve sees fit to pay for whatever services it sees fit to pay for.


Literally no idea what you're talking about here....part of me thinks your saying their Operating budget is 6% and you're talking about them like hiring staff and leasing office space? 6% of what? You seem to be saying its just random money they got somewhere and they just give it to some buddies they know?
What do you even mean?

I am calling the money that the government pays to the Federal reserve as interest on loans “tax money”, because it is money that was collected by the IRS as taxes.


Then ALL US Currency is Tax money? There's no such thing as non-Tax money.
The US government Sells Bonds to anyone who wants them. The Fed buys a big chunk of them...The way bonds work is you give money to the person or entity that bought them later on.
That is what occurs.
When those bonds mature..the Fed buys More of them, continuously giving the money back to the government, supporting its debt and giving it currency. This is Helpful to the government.

Sending tax money to the Fed and not getting it back is, as I see it, a waste of tax money. If the Fed actually needs help staying afloat, then it should get absorbed into a government agency and be treated as such. But it doesn’t need any such help, so it should not be getting free tax money to do with as it sees fit.


Now you're just on Crack....The Fed gives the US Government Money...not the other way around. The US government profits from the Fed...not the other way around.

I think you should re-read both this whole thread and the username of the person who started it.


Yes, I know you started it...I was commenting on how you don't seem to have understood anything anyone has said in response to you.
Seriously go to the fed website and read about how it works...you seem to have no actual concept of how the monetary system functions or who is giving currency to who.

You seem to think the Fed is somehow stealing and hiding money from people and just giving it out to random dudes it knows.
Just re-reading things you're saying throughout this threads, you've got a good number of key concepts very confused.

I don't mean to be insulting, but its hard to explain the mechanics of how it works while kind of also refuting a form of conspiracy theory or something.
Your original statement in the OP was that you're writing things as you know it, and some may be wrong or incomplete.
I'm just attempting to explain how it does function, and dispel some of the myths about it.

EDIT:

Hi, Again just re-reading the OP once more I think the entire crux of it comes down to this misunderstanding:

Recall that the Federal Reserve is owned by twelve Federal Reserve Banks. This means, when the $1 billion is paid to the Federal Reserve, it ends up going to those banks. That is $1 billion in tax revenue that goes to private corporations. In a sense this is “trickle up” economics—the government collects taxes from everybody, and sends a chunk of it to the elite few.


This statement...is not accurate at all.

I think much of this comes from your idea of how the lending works.... The Fed doesn't really 'Lend' money like you're thinking of it. (It does something called overnight lending...liquidity lending where it will literally lend money for hours or days at a time)
The Fed BUYS things. And the thing it Buys most, is bonds.

So when the government or a bank needs Currency...they SELL bonds to the Fed who gives them currency for it. The nature of those bonds of course is that you pay interest on them. but no one then like...'withdraws' that money....
Bank of America doesn't like, get to keep 1/12th of it or something. No person gets it. It goes into the fed and reduces the liability outstanding. They literally might as well light it on fire as soon as they get it, it means nothing at that point...it is money 'retired' from the system.
Now in the reality...It's not one big purchase of $200 billion they do...but weekly buys and sells of a few hundred million in an out all the time.
So it just continually buys and sells more things, according to its monetary policy. When some of the gov't debt matures, it just buys the next issue, and the next issue...literally on a daily and weekly basis.

I think that's the real breakdown...it you think the interest being paid into the Fed somehow leaves the Fed and ends up with like a Citibank shareholder, then that's the area of misunderstanding.

And Whimsical, if you changed or added a comment in your previous post, I don't see it? Seems like just re-quoting what I said?

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Re: National debt and the Federal Reserve

Postby nitePhyyre » Sun Aug 07, 2011 7:01 am UTC

Yakk wrote:You can pay back a debt with anything the other party will take. Often by contract or law, the other party must accept dollars.

I didn't say "everyone will or can pay back their debts at one time", I said that people with outstanding debts have incentive to pay them back, and there are penalties if they don't pay them back. By "want", I mean that all things being equal, they'd love to erase that debt. Well, more than that -- "good" debt (from the perspective of a debt-backed currency) is a debt that the person really, really wants to pay back.

I'm sorry for being so dense, I think I'm starting to understand why eliminating debt under a debt-backed would be undesirable. But why would you want a debt backed currency in the first place?

@iceman:
It seems you are saying that individuals can pay off their debt, so just don't bother looking at the macro-level. Is that right?

Iceman wrote:And Whimsical, if you changed or added a comment in your previous post, I don't see it? Seems like just re-quoting what I said?
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Re: National debt and the Federal Reserve

Postby Iceman » Sun Aug 07, 2011 8:12 am UTC

nitePhyyre wrote:
@iceman:
It seems you are saying that individuals can pay off their debt, so just don't bother looking at the macro-level. Is that right?


Not really what I'm saying, no. I'm saying a debt can be denominated in different things.

The Macro level is still very important, and it impacts every individual because it impacts what your currency and goods are worth...I am only saying that you as an individual can no longer walk up to the Fed and say "Here's $20, give me $20 worth of Gold"

When say, 300 hundred years ago, that's precisely how it worked.

I meant to be illustrating on the 4 different levels...the difference between individual debts, corporate debts, governmental debt, and Central bank debts. They're all basically the same thing, but WHAT they owe someone can be very different.

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Re: National debt and the Federal Reserve

Postby Adamah » Sun Aug 07, 2011 12:24 pm UTC

Just want to throw in that the salary of the Chairman, and I believe the governors as well, is limited. I'm not sure of the exact amount but I believe it's around $200,000. These guys could easily be making 10x their salary in the private sector, so the idea that they are in this to steal money from taxpayers just doesn't make sense.

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Re: National debt and the Federal Reserve

Postby Yakk » Sun Aug 07, 2011 3:20 pm UTC

nitePhyyre wrote:
Yakk wrote:You can pay back a debt with anything the other party will take. Often by contract or law, the other party must accept dollars.

I didn't say "everyone will or can pay back their debts at one time", I said that people with outstanding debts have incentive to pay them back, and there are penalties if they don't pay them back. By "want", I mean that all things being equal, they'd love to erase that debt. Well, more than that -- "good" debt (from the perspective of a debt-backed currency) is a debt that the person really, really wants to pay back.

I'm sorry for being so dense, I think I'm starting to understand why eliminating debt under a debt-backed would be undesirable. But why would you want a debt backed currency in the first place?

So, why do you want money?

You want money because people will, in the future, do things or give you things for money.

This is similar to where someone "owes" you a service or a good, and in the future promises to give it to you.

Debt-backed currency is an abstraction of that -- instead of one particular person "owe"ing you the service or good, the entire debt-backed architecture does. Its supply of people willing to do things for money is based on people being in debt -- the aggregate future demand for such services or goods is the money currently outstanding.

By balancing the money currently outstanding against the debts currently outstanding, so long as all debts are "good", you have a situation where the obligations implied by the debt-backed money are good, because when you spend money people will want to do things for it. The money abstraction closely models that which we are going to use the abstraction to do.

Problems occur when debts aren't good (ie, someone borrows money, and has no intention to service it or repay it, leading to money floating around with no debt backing it), when repayment schedules aren't in line (I borrow 1 million dollars intending to repay it over 20 years, because I want to build a factory -- that 1 million dollars is spent right away. Unless someone else intends to repay debt in the short term, we have a repayment schedule mis-match).

So to deal with this, we have banks who judge how good a debt is, and are obligated to "clear" the debt (paying it themselves) in the event a debt is bad. Similarly, interest rates vary based on the timing horizon of the debt: if there is much more demand than supply for goods in 1 years time, the interest rates on 20 and 1 year debt will be different.

A competing model is some variant of the gold standard. In this system, you have some resource that you presume is highly coveted, and each unit of currency represents a claim on some amount of that resource (or is physically made of that resource).

Now, imagine if the economy has a long-term growth rate faster than the rate you can produce that resource. What happens? The currencies value starts going up. In fact, it goes up predictably, which means that people will start investing in currency, which lowers the velocity it moves around, effectively reducing the money supply, causing a bubble in the value of the currency.

Or the resource is produced faster than the economy grows -- the currencies value starts going down. It does so predictably, causing people to avoid hording the currency, increasing the velocity of the currency, increasing the supply, making the situation more extreme.

Both of these have significant macro-economic effects, but are caused by the quirks of the backing resource rather than anything macro-economic. They rattle the economy for ... and why?
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Re: National debt and the Federal Reserve

Postby Algrokoz » Sat Aug 27, 2011 11:23 pm UTC

I am still confused as to what I see as the cetral topic here: Why not have a fiat currency not linked to any resource? What would be the downside to that? People would still want money as a means of easing trade, so there is no reason to believe that if it was not debt-backed, then no one would want it. Furthermore, with a currency that was not backed by debt, zero inflation would be perfectly conducive to a healthy economy as the only reason to increase/decrease the money supply would be in response to temporary, aggregate-demand shocks, would it not? I am also pretty sure that a non-debt backed currency would allow us to break Okun's Law once and for all.

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Re: National debt and the Federal Reserve

Postby mosc » Sun Aug 28, 2011 5:56 am UTC

commodity based currency works perfectly fine. We used it for many, many years. Is your question really about whither or not a commodity based currency would work or is your question more why we don't use one anymore?

There are several advantages to removing the currencies ties to a commodity. The first big one is that the currency does not remove the commodity from circulation. You don't have to hoard gold, quite literally. Also, a commodity backed currency has the problem of a limited money supply. There is only so much gold available. Of course the biggest reason is the ability to regulate the money supply directly without obtaining more of the commodity. Some don't believe the government should be in the business of regulating the money supply but the banks are quite happy for the stability it brings. It enables them to loan money out over longer periods of time with less risk of change in basic market assumptions. In other words, you can get a home mortguage (which you really couldn't when we were on the gold standard).

It's worth going back to the decision that was made to take the US OFF of the gold standard and understanding the reasons for the move. Although country to country exchanges of money were done mostly in the commodity (mainly gold), citizens and businesses began to increasingly rely on direct currency exchanges. Although all were backed up by gold and thus should have been equally valuable, some countries were better about honoring their currency than others. The US dollar quickly became a "reserve currency" because of our longstanding tradition of honoring our debt. Other currencies were measured against the US dollar and would be worth less, even for the same commodity amount referenced because of defaults and fear of delays or other currency returns. The dollar's value was not just it's value in gold, it was ALSO it's value in financial stability and certainty.

Due to these factors, the demand for dollars continued to grow beyond the US's ability/desire to aquire gold. This caused inflationary pressure on the dollar. It's important to understand just how much banks hate inflation, this cannot be understated. The pressures of supply and demand governing the dollar exceeded that of gold. The dollar was MORE DESIRABLE than gold. This is the hardest point to understand I think for a lot of the the Ronpaul supporters out there. When this happened, the move off the gold standard was inevitable. First, we printed more money than we had gold. Then, we lowered the exchange rate. Finally, the gold value of the currency itself became irrelevant and was removed.

I find it ironic that some of same staunch liberatarian "let supply and demand drive the economy" politicians are the ones arguing for a return for the gold standard. We got off of the gold standard because it was what the market wanted and was benefical to the financial market. It also had many other benefits in terms of regulatory control. We live in a world filled with modern convences like 'price tags', 'salaries', and multi-year low interest loans we think our god given right without the least bit of understanding of how these things came about. Commodity based currencies are inherently unstable and were always unstable. The middle class in particular relies greatly on it's ability to spend like the wealthy while only having the assets of the poor. We take this for granted but it's all tied to a stable, non-commodity currency with highly managed inflation.
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Re: National debt and the Federal Reserve

Postby Enokh » Mon Aug 29, 2011 3:59 pm UTC

Adamah wrote:Just want to throw in that the salary of the Chairman, and I believe the governors as well, is limited. I'm not sure of the exact amount but I believe it's around $200,000. These guys could easily be making 10x their salary in the private sector, so the idea that they are in this to steal money from taxpayers just doesn't make sense.


The shouldn't we be asking: What is it that these people are getting that they feel is equivalent or better than 1.8 million+ dollars a year?

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Re: National debt and the Federal Reserve

Postby mosc » Mon Aug 29, 2011 4:51 pm UTC

Lifetime recognition and the ability to charge a decent speaking fee? Your question is naive. There are thousands of positions in government without a conflict of interest that provide financial benefits beyond their salary. These guys have private sector jobs and will again when they're done.
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Re: National debt and the Federal Reserve

Postby Enokh » Mon Aug 29, 2011 5:02 pm UTC

I somehow doubt that there are thousands of people giving up over a million dollars a year to receive fringe benefits. I'm also rather doubtful that "increased speaking fees" factors in to their decision, unless I'm missing something HUGE when it comes to speaking at conferences.

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Re: National debt and the Federal Reserve

Postby Cres » Tue Aug 30, 2011 10:04 am UTC

If you're an economist who has devoted your life to studying the economy, and someone offers to put you in charge of that economy, that's an offer you're going to take no matter how much it pays. Not to mention any sense of public duty you may have, the enormous power and prestige of the role, the fact that doing your job well will improve the lives of many millions of people etc. etc. etc.


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