The Banking Robbers (continued - page 2) Debt and More Debt to Pay Debt A solid understanding of the dollar-bill issued as debt is necessary in understanding the role of credit extension, or debt, which is the main business of all banks.  It is how the cycle of credit can create and will ultimately destroy an economy and its nation.  Credit extension is the result of bank loans, interest-bearing loans lending a sum of money at interest and repaid over the course of a particular period of time.   For instance, the bank loans $10,000 payable over five years at eight percent per annum.  The amount required to pay back the loan would be approximately $202 per month.  Because of interest, the bank receives at the end of the five years $2,120 more than what it loaned originally.   In order to pay back more than what was borrowed, the bank (or some bank) would have to loan an extra $2,120 into the economy to cover the interest accrued on the original $10,000 loan.  The result is a borrower payout of $12,120, and the bank receives an extra $2,120 in addition to the original $10,000.00 loan. The national debt, public debt that is a direct liability of the United States government, works in much the same way as private debt.  It is a grave misconception that the government “makes” the money.  The government incurs public debt only in a slightly different manner compared to private borrowing. Maisel explains: “The creation of government debt is simple.  When the United States Treasury needs 1 billion in dollars, a billion dollars of U.S. bonds are printed [by the U.S. Treasury] and the Federal Reserve Bank is notified, who in turn advises the Bureau of Engraving to print $1 billion Federal Reserve notes (dollar bills).  The Treasury delivers the United States bonds to the Federal Reserve, which then issues the Federal Reserve notes to the Treasury […] a $1 billion debt for the American people on which they must pay interest.  If you analyze this sequence carefully, you will realize that the same amount of money is printed [$1 billion], but the government ends up owing the Federal Reserve Banks and its assignees $1 billion, plus interest” (101). Furthermore, “Every time the Fed voted to increase its discount rate, it was also voting to increase the [public] debt by the additional increment of interest required to service the debt” (Maisel 78), and “The total public debt is largely a legacy of war, economic recession and inflation” (Treasury).   The public debt as of mid-October, 2002, was $6.25 trillion (Public Debt). The supreme dilemma for all debts private and public is that in order for borrowers to pay their debt, banks must loan more debt to the borrowers or otherwise face an economic meltdown.   Loaning more debt means “that for every dollar of money, there is a corresponding dollar of interest bearing debt” (Grey 91). Therefore, current debt can only be serviced by future debt.   “When money is created as debt, the money owed on that interest charge is not created, and this is the crux of the problem in our all debt monetary system” (Jaikaran 7).  By this, the very nature of interest-bearing debt in theory perpetuates the cycle of debt, "in theory" because nothing in the universe is perpetual.  Upon closer observation of this “crux,” it is understood that if the flow of credit extension halts, then the current debt cannot be serviced, economic collapse occurs and banks confiscate collateral (the transfer of wealth or capital).  Hence, in order to keep the economy afloat, more and more debt must be extended ad infinitum, an unapproachable solution.   Inflation Our debt-based system causes inflation, and inflation is a major culprit of economic decline.  The Board of Governors, the policy-making arm of the Federal Reserve which causes inflation, says, “Inflation is a form of taxation that falls on those least able to cope with it” (Board 3).  This means, “the real value of savings held and of income earned by the mass of our people are reduced” (Board 3).  This is further evidence of the Fed’s fraudulent activity, particularly since the Constitution decries that only government can levy taxes.   A recession, or economic slow-down, signals a rise in costs, or inflation.  Inflation is a constant rise in prices of products resulting in a decrease of currency value.  Due to inflation, more dollars are needed to satisfy everyday needs of consumers.  The extra dollars used for everyday needs effectuate fewer dollars spent for debt.  In a time of inflation, this poses real problems for consumers and basically any entity which needs to borrow money - any and all within the economy, really.  Less debt can be incurred by consumers effectively leading to economic decline because fewer dollars are available for payment on existing debt.  Eventually, there will not be enough dollars to pay existing debt which will result in economic collapse.  Default will lead banks to legally confiscate collateral used to secure their loans. Grey, however, argues that there is no “reason why there must be enough money outstanding to pay off all debt” (92).  He cites that “the needs of the economy are much smaller than the economy’ s total debt” (Grey 92).  Also, “the total amount of money needed is less than the total value of the transactions because the money is used more than once” (Grey 92) because the same money can be circulated again and again to complete transactions (Grey 92).  This argument is faulty; it does not solve the problem of debt itself.  In fact, Grey avoids the problem altogether.  Despite whatever amount of money is physically present, the banks keep ledgers on the amount of debt actually owed, and by sheer common sense it is easy to understand that all debt can never be paid in full.   Also, by Grey’s logic, it can be said that the same money can be loaned again without end which creates more debt.  Hence, the same money "used more than once" continuously creates new debt. In addition, Grey argues that not all money is loaned into existence.  The Fed has dividends and expenses it must pay out of its earnings (interest) which are spent into the economy (92).  Grey implies that the Fed, as a private enterprise, provides enough money through its expenditures necessary to pay back the economy's total debt.  This argument would be plausible, however, if the Fed’s payouts matched the amount of all loans and interest charged on all loans of which the payouts do not - not by a long shot.  Again, common sense allows for yet another easy understanding:  The Fed is only a small fraction of the economy, and thus, the Fed’s payouts are just as small. Monetary Controls To their dismay, Americans, in general, seldom understand monetary controls used by the Fed.   The stigma surrounding inflation is the impetus behind the Fed’s changes in the discount rate, one monetary control.  The discount rate is spoken most often by the popular media without explanation and is widely thought to be the only control concerning the Fed's monetary policy.  Simply, the discount rate is the rate the Fed imposes upon individual banks for loans made by the Fed.   Changes in the discount rate proportionately affect individual bank rates - car loans, mortgages, credit cards, etcetera.  It is thought, or at least the Fed argues, that if rates are raised, then inflation is reduced or at least "controlled."  But Maisel argues that “the reverse is true:  high interest rates tend to increase the money supply.  Raising the interest rates increases pressure to expand the money supply” (74).   Also, when the Fed raises the discount rate, inflation occurs evermore rapidly because the cost of credit - interest on loans - for businesses increases.  “Non- productive interest payments on commercial loans is the major cause of inflation” (Jaikaran 58).   Any business, whether banking, manufacturing or whatever, will absorb the extra cost of interest by passing the cost onto the consumer.  This triggers inflation because the dollar’s purchasing power is weakened because of higher prices of goods.  Consequently, economic productivity declines because consumers cannot afford the price increases, and businesses cannot afford to invest in new employees or production. Lowering the discount rate is regularly promoted as a remedial effort for an already sagging economy.  As opposed to raising the rate, if the Fed lowers the discount rate, more credit - interest- bearing loans - can be and is extended to those who could not afford credit at previously higher rates, the price of a loan.  This increase in new credit is given in the form of cash which is now plunged into the economy along with other cash from other loans.  As a result of a formerly cash- hungry economy now virtually swimming in cash, inflation occurs because more dollars are circulating within the economy.   Although this may seem beneficial, it really is not.  Consumers who previously postponed purchasing products now have cash-in-hand to buy the products, but "since the recession has curtailed production, there is a short-term disruption in the flow of goods.  The result is an inflationary force on the economy” (Maisel 82).  In other words, there are simply not enough goods to meet demand, and prices rise as a result.  A rise in prices generally remains that way; rarely do prices return to what they used to be, or at least for a sustained period of time. Another monetary control of the Fed is the reserve requirement, the amount of credit a bank may extend in proportion to the amount of currency in its vaults.  This is perhaps the most dangerous control to our economy, for its harmful effects can be sudden.  Currently, the reserve requirement is at ten percent (Domestic A8) which means out of every one hundred dollars of credit extended by a bank, only ten dollars are required to be in its vault.  This remarks of the ability of any bank to loan nine-hundred percent of the amount of money it has in its vaults for immediate withdrawal.   Unfortunately, inflation occurs if the reserve requirements are lowered as more dollars are allowed to circulate back into the economy as credit.   The opposite, however, would occur if the Fed raised the reserve requirement.  Banks would now need additional cash in their vaults to satisfy the new requirement.  As a result, fewer dollars would circulate, and thus, would deflate the economy.  This is deflation, and it is disastrous because fewer dollars would accelerate an economic collapse.  Paying back all debt is already a mathematical impossibility; taking existing dollars out of the system would only expedite the reality of collapse.  Raising the requirement would prevent banks from making new loans and prompt banks to call existing loans before maturity to fulfill the reserve requirement (Larson 72).  It is unlikely that most consumers and businesses would have the necessary funds on-hand to pay their loans in full, particularly during deflated times.  Failure to pay such loans would result in the immediate confiscation of capital (transfer of wealth) to cover the full amounts of the loans.
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