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March 22, 2009
Issue 38  -  The End is Near (Due to the Fed)

The events of the past week were stunning in nature and presage a tsunami of dollar selling and the advent of massive inflation. The announcement by the Federal Reserve that they will buy over 1 trillion dollars of Treasuries and Agency paper was the final straw on the camel’s back. Things in the United States will never be the same. Before I further explain this, I have gotten several inquiries about how the Federal Reserve works so let me give a brief overview.

As I have written before, the Federal Reserve is neither a reserve nor Federal. The name was actually chosen to fool the public and allow the bankers to implement their plan. Their plan was to control the money supply. The Constitution actually forbids any entity, other than Congress, from issuing money. The Founders knew all too well that this function was ill suited for a private entity. Regretfully, this private company now has total control over our credit and money system.

To fully understand how it works, you have to realize that our whole system is based on debt. If there was no debt, there would literally be NO money. No borrowers, no money supply in place. We have a fiat system. Fiat means "by decree". The government has mandated by law that we HAVE to accept the Federal Reserve Notes in all transactions. That’s right, if you look at the money in your wallet you will see it says Federal Reserve Note. The Federal Reserve prints all of our money and the congress has made it the law that it has to be accepted.

Think about this. If something is of intrinsic value, would you need to mandate that it is accepted as money? Of course not. We have an enforced money that is really worthless.

Let’s back up a little. Banks started out as PROTECTORs of money. Warehouses where people could store their money so that it wouldn’t be stolen for a fee. The bank would issue a receipt to the depositor. The depositor could then use that receipt as money, since it was assumed that the bank had the money. So at any one time you could only use the paper receipt or the coins, but not both.

This practice was later abandoned when banks found out they could issue receipts to BORROWERS. So they actually create money out of thin air. Actually it’s even more amazing as they create money out of DEBT. While on the gold standard, the money supply was tightly limited by actual gold supply but with this new system, no such limitation exist. So bankers have always disliked gold as money and have done everything possible to eliminate it from banking. This is why the Fed is constantly attacking gold, It is much easier to make digital entries on a computer screen to "create" money than it is to mine for gold.

Our system uses a fractional reserve. The banks only have to have a fraction of the total money they are guaranteeing. They can lend out the rest. Now this is quite unseemly in reality as there is no way the bank could satisfy even a 10% request for return of deposits. So the bank borrows from the Fed, and then lends to you. The Fed charges the bank an interest and then the bank charges you an interest. Nice work if you can get it, huh? Make money out of thin air, lend it to someone and they pay you interest. A virtual magic trick. Push the button and out pops the money.

So backing up a little. Your local bank borrows money from the Federal Reserve. They in turn lend it out to their customers. The customers in turn spend it on something and sellers deposit it in their banks. These banks can then lend it out. This repeated ad infinitum.  This means that money is multiplied many times over the original amount.

How did the Fed get this power of money creation? Well, the main reason for is it to eliminate competition. Create a banking system that is "backed" by the government and then you can make any rules you want. If a new bank wanted its money to be backed by gold, you can be sure that they would be attacked. They can’t have honest competition. All banks are part of the system, or they will be forced out of business.

A cartel is a group working together to control the price of a good or service. In this case the good is money, the ultimate cartel. The banks secretly met in Jekyll Island, off the coast of Georgia, and planned the cartel during 1910. This was to stop the proliferation of banks, whose numbers were growing wildly. This extra competition had to be stopped. The meeting group consisted of a Senator Aldrich and about 9 prominent bankers including Rockefeller, Rothchild and Morgan. The plan was passed by congress with a skeleton attendance two days before Christmas in 1912. President Wilson signed the bill which he had promised to do during his campaign due to the heavy backing of the bankers.

The public was told this banking system was needed for stabilizing the market. In the bank panic of 1908, which is widely thought to have been caused by Rockefeller, there was a run on the banks. The Fed was sold as the answer. Of course that is a lie. Since passage the buying power of the dollar is down over 97%. This has happened through inflation. Through inflation the government can tax people without them even knowing it while the Fed prints more and more money. Think about that. It’s the stealth tax and is why the banks and governments work together. The banks get their interest and the government gets to tax you into oblivion so they can spend on their pet projects which increases their power over the people as they become more and more dependent on Uncle Sam.

Think what happens when you go for a loan. The banks "create" money out of thin air and you go there to borrow it. What do they want in return? A signature promising your house or car, right? So they create something for nothing and then they want your hard assets if you don’t pay them back. Fantastic! Magic! A giant scam!

The Fed is not only not a good idea, it is an evil idea. That’s right, evil. Using inflation they tax people in servitude. The poor and old are actually, even though government is supposedly "helping" them, the most affected by the scam. They lose purchasing power faster due to their lower and/or fixed incomes. Remember the Fed have no interest in helping the country. They only care about maintaining their monopoly.

This latest bailout is just the icing on the cake. The Fed is "saving" the system by helping the banks. The only problem is that banks they are helping, actually own the Fed. This is the dark little secret that you won’t hear on CNBC. Goldman Sacs OWNS part of the FED! Why should the Fed be allowed to give anything to their owners? Isn’t that a conflict of interest? You bet it is.

With the Fed now admitting they are printing money (see 60 minutes interview of Bernanke) it has virtually assured their (and our) destruction. Once the inflation ball starts rolling it is nearly impossible to stop. The only way is to raise interest rates to very high rates which, with the financial condition of the country today, is not possible without causing havoc.

Just this past week our national debt passed $11 trillion:  (from Bloomberg

The eye-popping national debt surpassed $11 trillion Monday, the largest in U.S. history.

The new Treasury Department figures on the national debt were released as the non-partisan Congressional Budget Office is expected to project that the annual budget deficit will be higher than previously estimated by the White House's Office of Management and Budget. The debt, which refers to the cumulative amount of money the government owes, hit $10.9 trillion on Friday.

The whopping number has major ramifications for President Barack Obama, who is trying to push through a raft of big-ticket bills on health care, energy, education and climate change — while also attempting to stabilize the swooning economy.

Sen. Kent Conrad (D-N.D.), chairman of the Budget Committee, said Tuesday that the numbers could force Congress to make "adjustments" to Obama's $3.6 trillion budget plan.

"It’s very important get a result for the American people and one that has the priorities that have been [announced] by the president in terms of reducing our dependence on foreign energy, that’s in all of our interests, excellence in education, health care reform and dramatic reduction of the deficit," Conrad told reporters. "Those will be our guiding principles as we go forward, but as I say, we’ve not yet seen CBO’s new numbers. But I think we can all anticipate because they were done substantially later than OMB’s, that they are going to be more adverse. That that’s going to require all of us to make adjustments."

 
Now remember the actual debt of the country is much higher when factoring in unfunded liabilities like Social Security. Using GAAP accounting, which is the law for public companies, our debt is approaching $100 trillion! Last year the national debt increased by $1.2 trillion but when unfunded liabilities are included, it ballooned to over $5 trillion. Next year, with all proposed spending it will exceed $8 trillion! This is unsustainable.

Our country is fast approaching a tipping point that will spiral us out of control and no Fed chairman will be able to save us. Look at this:

Credit Card Defaults at 20 Year-High

by CalculatedRisk on 3/16/2009 07:56:00 PM

From Reuters: U.S. credit card defaults rise to 20 year-high

U.S. credit card defaults rose in February to their highest level in at least 20 years, with losses particularly severe at American Express ... and Citigroup ..AmEx ... said its net charge-off rate ... rose to 8.70 percent in February from 8.30 percent in January.

... Citigroup Inc (C.N) ... default rate soared to 9.33 percent in February, from 6.95 percent a month earlier ...

...Chase ... reported its charge-off rate rose to 6.35 percent in February from 5.94 percent in January. ...

Capital One Financial Corp's ... default rate increased to 8.06 percent in February from 7.82 percent in January.

...Analysts estimate credit card chargeoffs could climb to between 9 and 10 percent this year from 6 to 7 percent at the end of 2008.

The Treasury and Federal Reserve haven't publicly released the indicative loss rates for various asset classes associated with the two stress test economic scenarios (baseline and more adverse), but these numbers are definitely approaching the "more adverse" scenario range for credit cards.

Our country is on a course toward bankruptcy, it just hasn’t been publicly announced. People are doing what any sane group would do, beginning to reduce spending. Witness this from contrary investor.com:
 
 
This is NOT what the Fed or government wants. They want spending, spending and more spending. They can’t have an actual negative growth in debt. By the way, looking at the chart, this debt growth has only been negative 2 times before in the last fifty plus years! Also notice that the negative growth was MUCH smaller than this last quarter. The reduction in debt growth is unprecedented. The Fed will not be able to stop this and that means hard, hard times are ahead.
 
As if that isn't enough evidence, look at this, another one from contrary investor:
 
 
So for the first time in HISTORY the American people have a negative balance on their homes.  This is bleak.  Really bleak.  Please get some gold before it is too late. To see how bad it could actually get, look at this video from Zimbabwe where the paper money is now not accepted in most stores.  Guess what stores want instead?  If you guessed gold, you win:
 
 
 

Now I don’t think we will get this bad but we will see increased barter and exchange as time goes forward. I would highly recommend a garden and some food stocks in the pantry. I recently bought some Zimbabwe money and will have some pictures next week.  If you need any help at all, let me know. Currymagic@gmail.com  Have a great week!