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Is the Federal Reserve Ripping Us Off?

I once ghost wrote a book for a financial advisor who insisted that the U.S. monetary system -- especially the Federal Reserve -- was rigged against the little guy..

He claimed the Federal Reserve rips you off by hurting your chances of building wealth through normal savings by way of inflation, and inflation is created and made possible by the Federal Reserve System.

As we discussed earlier in this blog, inflation is expansion of the money supply at a rate greater than the expansion of goods and services you purchase with the money. The only way this can be made legal is if a bureaucracy, such as a central bank of government, allows paper money to be created out of nothing. Without any new goods and services to absorb the new paper money, we get inflation. My ghostwriting client was adamant that investors not be fooled into thinking that inflation is prices going up. He told me that, in all honesty, inflation is the value of your dollars going down. ”

I agree with his main point -- that inflation is made possible by the Federal Reserve, which allows banks to create money out of nothing. Here’s how it works.

It starts with the Federal Government. Let’s pretend that Congress needs $1 billion to spend today. The politicians must figure out a way to come up with all that money. One way is through increased taxation. Since this choice is very unpopular with voters, the politicians need another way. Another way for the government to spend money it doesn’t have is to borrow it. The government can borrow money from citizens by selling them U.S. Treasury bonds. Yet another way the government can get the money is to borrow it with no intention of ever paying it back. This is where the Federal Reserve comes in.

Since Congress needs $1 billion today but doesn’t wish to raise it through taxation, they go to the Federal Reserve and tell them they need $1 billion. The Federal Reserve types “$1 billion” into their fancy computer and gives Congress $1 billion to spend.

Where did the money come from that the Federal Reserve was able to give to Congress? The honest answer is that this money came from nowhere. It was created out of thin air.

This is why politicians love this procedure, because they can raise a lot of money without having to increase taxes and anger taxpayers.

Private banks receive equal benefit from this procedure. The way banks benefit from this partnership is through fractional reserve banking.

We can look in on a bank and its operations at the end of a day when the president comes into the office of the vice president and asks, “How much money did we bring in today?”

The vice president says, “$1 million.”

The president says, “The Federal Reserve says we have to keep 10% of that in reserves. Everything else can be loaned out.”

The president of the bank can take that $1 million that was just deposited, place it in the bank’s reserve column, and loan out $10 million the next day. This is all perfectly legal because the bank still has 10% of the $10 million in reserves, and the loans are considered bank assets.

What happened is that the Federal Reserve first created money out of nothing and then the bank went and did the very same thing while getting to charge interest on the money they created out of nothing.

My ghostwriting client told me that once he called up a bank and asked what their reserve requirement was. They told him it was 3%. This means that for every $1 million that gets deposited, the bank can loan out $33 million.

All this is going on without that many more goods and services being produced to soak up all this new money, so each dollar you have is worth less. This is why today it takes two people working outside the home just to meet the same standard of living of a generation or two ago when only one member of the household needed to work.

People’s perceptions of financial safety are really just programmed theft because those things you view to be safe, like bonds, CDs, and annuities, are in reality instruments guaranteed to confiscate your purchasing power.

Was my client on to something? The more I learn about the gears, pulleys and crankshafts that drive our economy, the more I tend to agree. Something is not right in Fed Reserve-Land.

Published Jun 10 2007, 04:43 PM by moneycoach
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