Wednesday, March 25, 2009

America’s Economic Collapse

h/t to Woodpile Report

Grand Illusion – Secrets of the Federal Reserve

James Quinn March 16th 2009
Cutting Edge Economic Crisis Analyst

The whole world is in a state of complete confusion. Americans are coming to the realization that their lives have been a grand illusion. You thought your neighbor had it made. They were driving a Mercedes, spent $40,000 on a new kitchen with granite countertops and stainless steel appliances, sent their kids to private school, had a second home at the shore, and took exotic vacations all over the world. Now their house is in foreclosure and you are paying to bail them out. The anger and outrage in the country is at the highest level since the Vietnam War.

The American public is being misled by government officials, politicians, and the Federal Reserve regarding the causes of this crisis and the solutions needed to solve our economic tribulations.

The average American does not know much about the Federal Reserve. The government and the Federal Reserve prefer to operate in the shadows. If the American public understood what their policies have done to their lives, they would be rioting in the streets. Most Americans believe that the Federal Reserve is part of the government. They are wrong. It is a privately held corporation owned by stockholders. The Federal Reserve System is owned by the largest banks in the United States. There are Class A,B, and C shareholders. The owner banks and their shares in the Federal Reserve are a secret. Why is this a secret? It is likely that the biggest banks in the country are the major shareholders. Does this explain why Citicorp, Bank of America and JP Morgan, despite being insolvent, are being propped up by Ben Bernanke and Timothy Geithner?

The history of National Banks in the United States has been controversial since the Founding Fathers signed the Declaration of Independence. The Constitution of the United States unequivocally states that only Congress has the authority to coin money, not an independent bank owned by unknown bankers.

The Congress shall have Power to coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures

Article 1, Section 8 – US Constitution

Our most recent horrifying experience with an all powerful central bank has led to the current worldwide financial crisis. In less than one century the Federal Reserve Bank of the United States has destroyed our currency and has allowed bankers to gain unwarranted power over the country. They had the ability and opportunity to bring down the worldwide financial system. When the average American is told that the dollar has lost 95 percent of its purchasing power since the inception of the Federal Reserve in 1913, they look at you with a blank stare and start wondering whether American Idol is on TV tonight. The systematic inflation purposely created by the Federal Reserve silently robs the average American of their standard of living. The government began keeping official track of inflation in 1913, the year the Federal Reserve was created. The consumer price index (CPI) on January 1, 1914 was 10.0. The CPI on January 1, 2009 was 211.1. This means that a man’s suit that cost $10 in 1913 would cost $211 today, a 2,111 percent increase in 96 years. This is a 95 percent loss in purchasing power of the dollar.

In the years following the creation of the Federal Reserve, inflation ran at double digit rates to finance Woodrow Wilson’s foreign intervention into World War I. The other notable period was in the years following President Nixon’s closing of the gold window in 1971. This led to rampant inflation that wasn’t tamed until the early 1980’s by Paul Volcker, the only independent courageous Federal Reserve Chairman in its history. The figures so far in the twenty-first Century seem modest. This is due partly to the methodical downward manipulation of the calculation by government bureaucrats. The period from 2010 to 2020 will show a dramatic jump caused by all of the money printing and reckless spending that is occurring today.

The average American might just conclude that prices always go up, so what’s the big deal about inflation. This is where the Federal Reserve and politicians have pulled the wool over your eyes. The CPI was 30.9 in 1964. Today, it is 211.1. This means that prices have risen 683 percent since 1964. The only problem is that your wages have not risen at the same rate, even using the government manipulated CPI. Using a true CPI figure, average weekly earnings are 64 percent below what they were in 1964. This explains why a family of five could live well with one parent working in 1964, but even with both parents working and using debt in prodigious amounts, the average family does not live as well today.

The dates February 3, 1913 and December 24, 1913 framed a year which placed our country on a downward fiscal spiral. The United States had tinkered with an income tax during the Civil War and the 1890’s, but the Supreme Court declared it unconstitutional. Until 1913, the U.S. government was restrained from overspending because it was completely reliant on tariffs and duties to generate revenue.

The Sixteenth Amendment changed the game forever. “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.

When you give a Congressman a dollar, he’ll take a hundred billion. The initial tax rates of 1 percent to 7 percent were rather modest. That did not last long. The top tax rate reached 92 percent during the 1950s and today rates are still 500 percent to 1,000 percent higher than they were in 1913. The government is addicted to tax revenue. In 2007, they absconded $1.2 trillion in taxes from American individuals. Does anyone think that the bloated government bureaucracy spent these funds more efficiently or for a more beneficial purpose than its citizens could have? Without $1.2 trillion in individual tax revenue, Congressmen would not be able to add 9,200 earmarks to the current $400 billion Federal spending bill every year.

According to the Federal Reserve’s own website, their duties fall into four general areas:

1. Conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates.
2. Supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers
3. Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets
4. Providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system

The American public was told that the Federal Reserve would eliminate any future bank panics. From 1913 through 1920, inflation increased at more than 10 percent per year as Wilson spent vast sums during World War I and its aftermath. From the early 1920s to 1929, the monetary supply expanded at a rapid pace and the nation experienced tremendous economic growth. By the end of the 1920s, speculation and loose money had propelled asset and equity prices to unsustainable levels. The stock market crashed in 1929, and as the banks struggled with liquidity problems, the Federal Reserve cut the money supply. This was the greatest financial panic and economic collapse in American history so far - and it never could have happened without the Fed's intervention. The Fed caused the bubble with loose monetary policy. The Depression did not become Great until the Smoot Hawley Act in 1930 destroyed world trade and the raising of the top income tax rates from 25 percent to 63 percent in 1932 destroyed the incentive to earn money. Over 9,000 banks failed and a few of the old robber barons' banks managed to swoop in and grab up thousands of competitors for pennies on the dollar.

The Federal Reserve’s primary mandates were maximum employment, stable prices and moderate long-term interest rates. Their other chief function was to supervise and regulate banks to ensure the banking system is safe. Let us assess their success regarding their mandates:

• Unemployment reached 25 percent during the Great Depression; attained levels above 10 percent in 1982; and will breach 10 percent in the next year. Grade: Failure

• Since the Federal Reserve’s inception, the dollar has lost 95 percent of its purchasing power. Grade: Failure

• Interest rates have been anything but moderate since the inception of the Federal Reserve. They have consistently caused booms and busts by setting rates too low or too high. Grade: Failure

• The Federal Reserve was supposed to supervise the activities of banks. Instead, under Alan Greenspan, they stepped aside and let banks take preposterous risks while giving an unspoken assurance that the Fed would clean up any messes that they caused. This total dereliction of duty gross negligence has led the greatest financial collapse in history. Grade: Failure

Anyone who is not mad as hell at this point is not paying attention. Your tax-and-spend political leaders and your banker-controlled Federal Reserve have borrowed and spent your tax dollars, your children’s tax dollars, and their children’s tax dollars desperately attempting to prop up this bankrupt system. The unleashing of a never-ending tsunami of printed dollars by the Federal Reserve makes every dollar worth less. They have systematically created inflation that has slowly but surely reduced your standard of living. Politicians in the pocket of lobbyists, corporate interests, and bankers have used their power to tax in order to spend trillions on worthless projects in their districts to insure re-election. The combination of taxing and printing has led to a National Debt of $11 trillion.

Bankers love debt. The more debt, the more interest they collect. Issuing credit cards and collecting 21 percent interest and billions in late fees seemed like a "can’t miss" proposition. It was, until people couldn’t pay the debt back. Now the unwinding of the greatest debt bubble in history has created a Second Great Depression. Instead of learning from the past, the Federal Reserve has chosen to do exactly what led to the crisis. They have lowered rates to 0 percent and have printed money at prodigious rates. The Fed has doubled their balance sheet in the last 12 months.

They have loaned billions to the bankrupt banks that inhabit our financial system while accepting worthless pieces of paper as collateral. They will not reveal to the public the banks they have loaned money to or the collateral that backs up those loans. The arrogance of Ben Bernanke proves that the Federal Reserve answers to bankers, and not to the American public. The books and records of the Federal Reserve are not open to scrutiny by the General Accounting Office. Ron Paul has introduced the Federal Reserve Transparency Act which would open their books to the public. No organization with as much power as the Federal Reserve should be permitted to operate in the shadows.

The future is cloudy but the direction is clear. Government will spend trillions of dollars. Congress will increase taxes on the rich and secretly raise taxes on the masses by calling them cap and trade fees. The Federal Reserve will pull out all stops to create inflation. When you owe the rest of the world $11 trillion, inflation makes the debt less burdensome. The dollar will decline versus gold. With the enormous amount of currency creation and spending by the government, the economy will eventually pull out of this depression. The acceleration will take the Federal Reserve by surprise. They will be hesitant to raise interest rates. The inflation genie will get out of the bottle and will not go back. The hyperinflation that takes hold will lead to social unrest, rioting, and a drastic reduction in the American standard of living.

There is no solution that will not be painful to everyone in the United States. The only solution that would put America back on a path of sustainable prosperity would be a gold/precious metals backed currency that would force government and its citizens to live within its means. Congress would need to vote for something that would take away its power. With our current political system, this is impossible. Money is power. This leads to only one conclusion. The existing Ponzi scheme will have to collapse before we can adopt a rational financial system for America. It may take decades, or it may happen in 2010. No one knows.

Cutting Edge Economic Crisis Analyst James Quinn is a senior director of strategic planning for a major university. This article reflects the personal views of James Quinn. It does not necessarily represent the views of his employer, and is not sponsored or endorsed by them.


NOTE: This creation of debt has been underway for the past one hundred years.

See my April 2007 post: Hoisting the Black Flag

also see Sept 2008 post: The Federal Reserve Will Destroy America