Items of Interest


by Jim Carter

We are all familiar with a Ponzi scheme. The basic principle is to promise investors that money put into control of the operators will return high interest on the principal invested. Unfortunately, the confidence game promises to pay more interest than the principal generates, if the scheme generates any interest or gain whatsoever. The scheme will last as long as more investors are found whose invested principal will pay for the inflated interest due and payable to earlier investors.

The Federal Reserve operates a Ponzi scheme. Congress can pay for federal expenses with funds collected from taxes, imposts, and duties, but congress is never satisfied with this amount. The desire to buy votes from special interest groups, and financially assist politically connected friends (or is this redundant?), compels congress-critters to spend more, and this is identified as deficit spending. To finance this deficit, the Federal Reserve will create on their accounting books a line of credit equal in the amount of the bills, bonds, or notes the congress will authorize; i.e., the Fed receives the interest-bearing obligation on the full faith and credit of the United States and in return checks written by government agencies will be honored by the banking system. The accumulated deficits are identified as the national debt.

It must be observed the amount of money in circulation is increased by the amount of the principle (actually it is a line of credit that is generated) but the amount promised to be repaid is the principal and the interest. The interest is never created but it is promised to be repaid. It is impossible. The scheme will last only as long as more principle is generated to pay the interest. If all of the “dollars” in the world were used to buy back the bills, bonds, and notes, a national debt would still exist and be accumulating compound interest. The holders of federal debt would have a claim on the wealth of the United States citizens.

To make the scheme appear legitimate, the Fed sells a large percentage of the bills, bonds, and notes, with the help of the U.S. Treasury, to remove much of the currency generated by the scheme (multiplied by fractional reserves) from circulation. Japan holds debentures for approximately 10% of the total U.S. debt. How much of this debt holding has been required by financial and government policies to gain approval of trade status for the past 40 years is unknown. It should be apparent that if Japan attempts to sell the obligations to support the yen, it would precipitate a world wide tsunami. How much purchase of the US debt is required of various other nations to gain favorable trade status is also unknown, but it ties all nations into a global economy.

As many have written, the new creation of money by deficit spending is the source of inflation. Those closest to the money printing press will live better than those further away, and the farmers, as a class, are the most distant from the new money. This new money is a way the wealth of the nation is confiscated from the people, and the people are for the greater part, completely unaware of their loss.

Some sources suggest the Fed has never been audited. That is not totally accurate. My 360 page copy of the 1996 Annual Report to Congress by the Board of Governors, (ref. , more recent years also available) obtained after several calls to D.C., contains considerable information on the financial status and revenue transfers of the banks, branches, and the system, including interest earned from holdings of national debt. It is audited and signed by Price Waterhouse, LLP, page 275. All federal agencies are audited by the GAO, are they not? It is also known that real estate owned by the Fed is subject to local property taxes and the tax bills can be verified at the county assessors office; real estate owned by the federal government is not subject to local property tax. Salaries of employees are, with few exceptions, set by the fed; they are not government employee civil service. They also have their own private retirement program. The fed is a privately owned, nationally incorporated for-profit business. Government appointment of governors is from a pre-approved list.

No information is found that suggests an audit of any specie holdings, nor is there any information as to who holds or owns controlling stock (Class A) of the fed. Congressman McFadden went to his grave unsuccessful in his attempts to determine who owns the fed.

When faced with litigation, the Fed can choose, for their benefit, the mantle of a government agency or that of a private business. An entity that can select the most advantageous identification is not controlled by the law; it is above the law.

How long will the Fed be able to continue the Ponzi scheme? A common measure of the solvency of a corporation is the ratio of profit to the cost of debt service. A company that makes 30 times what they must pay for interest on long term debt is much more stable than one with a ratio of 3. Every year the US debt service cost increases, and the increase is exponential. Interest on the national debt now consumes 20 to 25% of the taxes collected by the federal government. It is only a matter of time before taxes will not be able to service the national debt. National bankruptcy is inevitable. Of course, people who do not pay taxes will be blamed for causing the problem just as the stock market was blamed for causing the depression of the 30’s.

The way I hear it, the banks had to call notes (demanded payments of loans) that were normally rolled over year to year. The Fed was pulling currency out of circulation and citizens were unable to pay long-term loans. Three times when the economy appeared to be stabilizing, the Fed tightened the money supply. Gold backed currency was withdrawn. When the economy was expanded to pay for WW II, debt-bearing currency (with interest payable to the Fed) replaced the previous gold backed money. The Fed had installed their Ponzi scheme. Your grandfather who lost his farm during the depression probably never knew what hit him.

Today, the Fed can sell government debt at one to two percent. Is the government getting a bargain? The way I see it, there is a market for currency and all market prices are controlled by supply and demand (Economics 101). People are leery of buying stocks or bonds yet they are looking for a place to invest money. It appears major capital investments by businesses are being deferred as production facilities are being located overseas to escape oppressive taxation levied upon employees and operations. Government burdens on corporations are destroying the tax base. With investors shying away from stocks, bonds, and the reduced demand for capital investments results in currency looking for a safe investment. When the interest rate is lower than the rate of inflation, investors are taking a bath. Investments in government debt are losing money. The interest rate in Japan has been low for a decade.

Mortgage interest rates are at near record lows. If there was a demand for new houses, wouldn’t the interest rates go up? Sure they would. Greenspan’s indications the Fed may raise interest rates is unrealistic. He cannot push a rope. The free market will prevail. A low interest rate is a reflection of skepticism. The economic affect of state legislators lamenting they cannot fund state obligations has not yet been felt, even as educators in several states file court actions to demand more state money. The federal court system has recently declared severe cost reduction and personnel layoffs because of budgetary cutbacks. The resultant loss of jobs will be nation-wide and will dramatically affect national revenue collection. Even now, the IRS has declared more aggressive collection policies. The lose of federal taxes will result in demands for more deficit spending.

The scheme will be perpetuated as long as possible. Ever increasing deficits are necessary to pay the interest and satisfy beneficiaries of government largess, including congress-critters. The increasing deficits will increase the cost of debt service exponentially. Deficit spending to pay for the interest is now sold to the public as the cost of a war. How long can the illusion be maintained?? Rampant inflation resulting is already being seen in the price of fuel and the price of steel. It is not unrelated that fuel and steel are two prime materials of the conflict in Iraq. How long before the citizens realize the government’s ravenous economic appetite will not be sated short of a complete economic collapse??  But then again, the collapse is inherent by the design of the economic system; it is only a matter of time.