Reader Mail #4a - This is Really Complicated

Apparently, the flaws in the financial system are *EXTREMELY* well hidden. I thought I gave a fully detailed example and analysis. Perhaps people have a hard time realizing that they've been totally betrayed by the people who think they control the government.

Anyway, this question seems to be sincere, so I'll answer it again. I think my previous post Reader Mail #4 fully answered this question. This is sufficiently complicated that I'm making it a separate post. When I make a new post, I have better editing options available than in the comment window.

If you're going to post a question, could you at least post it in the appropriate place?

In "Taxes on Bonds' Home Run Baseball", an anonymous reader asks:

Hi

I still do not understand your quote pasted below. When the banks return the interest and profit they make to shareholders and as expenses...this is still 'money' which remains in the banking system or is used for consumption and/or investment by bank staff and shareholders right?

Also the Central Bank and all other banks when they make profits from their operations...am I right in thinking that the 'profits' are not real (as in existing, I admit I do not really know what I mean here) money, it is simply a account entry on a computer ledger (this year we have made this much extra), and again this just creates more entries in the stockholders bank accounts....giving them the power to wield their abstract and non existent wealth to 'buy' up resources and consume/invest?

Also I have read elsewhere that banks destroy the money once it is repaid as debt....does this mean they destroy the record that it exists, only keeping a record of the profits made from the debt?

Why does the government get money returned to it by the fed? If it is a Private entity, it is not in its interest to give money to the government, why does it not just keep it 'as profit'.

Thanks

"At this step, you can already see the Compound Interest Paradox. The Federal Reserve created $1 million and loaned it out at 8% interest. However, the Federal Reserve never created the $80,000 required to make the interest payments. Later, when the Federal Reserve receives its $80,000 interest payment, it pays it out to the government or for its own expenses. This is the mistake that Flaherty and Griffin make. The Federal Reserve, when it does collect the $80,000 interest, pays it out as expenses and profits. There is a permanent $80,000 money supply shortfall. Even though the Federal Reserve and the bank will pay out their profits, the Compound Interest Paradox still exists. The books of the Federal Reserve and the bank will balance, but the books of "society as a whole" do not balance."

Come on, can't you at least post your questions in the proper thread? This properly belongs in "Reader Mail #4 - The Compound Interest Paradox is Real". I think I already answered all these questions before. I think you should go back and reread "Reader Mail #4" and all my other posts on the Federal Reserve and the Compound Interest Paradox.

This question seems to be sincere, so I'll answer it anyway, even though I'm repeating myself. I'll answer one point at a time.

When the banks return the interest and profit they make to shareholders and as expenses...this is still 'money' which remains in the banking system or is used for consumption and/or investment by bank staff and shareholders right?

There are two separate cases: loans by a commercial bank and loans by the Federal Reserve.

When the Federal Reserve creates money via monetizing the debt, this is where the Compound Interest Paradox operates with the full force of law.

When a commercial bank issues a fractional reserve loan from existing customer deposits, all interest and profits are paid out to shareholders and as expenses. In this case, the money in circulation balances. Banks can raise prices above the "free market" rate, because they have an oligopoly and act as a cartel. Except for that, the Compound Interest Paradox does not operate in this case.

Large commercial banks have a oligopoly market position. Banks can borrow from the Federal Reserve at 5.25%. As an individual, if I want to take out a mortgage, I'm going to be charged 6-7%. Banks collect this spread, borrowing from the Federal Reserve and loaning at a higher interest rate. This spread is unearned profit for the bank. This is called "Illicit Interest Arbitrage". The banks sometimes take a loss when they make a bad loan, but overall, borrowing at the Fed Funds rate and loaning to customers is very lucrative. Further, in times when there are lots of bad loans due to a business cycle bust, large banks receive a bailout in the form of a Federal Reserve interest rate cut.

Government regulation of banking allows banks to raise prices. This means they get to confiscate the wealth of the rest of society at a rate equal to the spread between the Fed Funds rate and the rate they actually charge on loans. This is in addition to the effect of the Compound Interest Paradox from the Federal Reserve's operations.

The is an artificially high demand for bank-issued Federal Reserve Points. Society as a whole is in a massive debt hole, and people need to keep borrowing just to repay their existing loans. Even if I personally have no debt, that doesn't matter, because everyone around me has a crushing debt burden. Even if I want to boycott the Federal Reserve, legally I have no choice. Income taxes must be paid in Federal Reserve Points, and government violence enforces income taxes.

Government violence artificially raises the prices banks can charge. Government violence helps increase the spread between the Fed Funds rate and the rate banks can actually charge for loans. This interest rate spread is unearned profit for banks, allowing them to steal the wealth of the rest of society at a rate of a few percent per year.

Look at it this way: If I want to take out a mortgage, why can't I borrow directly from the Federal Reserve at the Fed Funds rate of 5.25%? Why do I have to borrow from a bank at 6-7%? What work is the bank doing to earn its profit of 0.75%-1.75%? Superficially, you could say they're doing a credit check on me. However, in the case when many debtors default, the bank will receive a bailout in the form of an interest rate cut. The cost of the interest rate cut is increased inflation, which is spread out over everyone else holding dollars.

When the Federal Reserve creates new money via monetizing the debt, here the Compound Interest Paradox has the full force of law. I work out another example for you below.

Also the Central Bank and all other banks when they make profits from their operations...am I right in thinking that the 'profits' are not real (as in existing, I admit I do not really know what I mean here) money, it is simply a account entry on a computer ledger (this year we have made this much extra), and again this just creates more entries in the stockholders bank accounts....giving them the power to wield their abstract and non existent wealth to 'buy' up resources and consume/invest?

Bank profits are real. The Federal Reserve Points they confiscate are then used to buy real goods and services. Did you notice that banks always have the nicest buildings and the best real estate? That's part of the wealth they're confiscating. Federal Reserve Points are just a number on a piece of paper or a number in a computer terminal.

One correction: Don't call Federal Reserve Points money. You are insulting money when you call Federal Reserve Notes money. Honest money is a legitimate tool that stimulates trade. Dishonest money is used as a wealth confiscation tool.

Don't confuse money and wealth. Money is a medium used for trade. Wealth is actual goods and services. Even with a gold standard, you can't eat a gold coin.

There are some restrictions on banks' activities. If banks were allowed to print all the money they wanted, they would just buy up the rest of the economy all at once and it'd be obvious. By calibrating interest rates and taxation rates, the Federal Reserve controls the rate at which the financial industry confiscates the wealth of the rest of society.

Banks can borrow at a rate of 5.25%. The true "free market" interest rate is 8-10% or more. Even at a subsidized rate of 5.25%, only so many loans can be justified. People are restricted by the amount of collateral they have. In addition to reserve requirements, banks also have net capital requirements. Debt and the money supply keep expanding, but at a controlled rate.

Also I have read elsewhere that banks destroy the money once it is repaid as debt....does this mean they destroy the record that it exists, only keeping a record of the profits made from the debt?

Yes, money is destroyed as loans are repaid. Under normal circumstances, new money is continually created as new loans are issued. Money is continually being created and destroyed. There is no permanent money supply.

That's the reason the Federal Reserve can reduce the money supply by raising interest rates. When interest rates are raised, fewer new loans are issued. Old loans must still be repaid at the same rate. In other words, money is being destroyed at the same rate, but the rate of creation of new money is decreased. Under the Federal Reserve debt-based monetary system, boom/bust cycles are scientifically created. Even though the Federal Reserve says it is trying to smooth out boom/bust cycles, that is impossible. Boom/bust cycles are built into the basic rules of the monetary system.

It's almost like the "particle/antiparticle" pairs you read about in quantum mechanics. Think of money as a particle and debt as an antiparticle. They are always created in matching pairs. However, there is interest, which means the antiparticles multiply themselves while the particles do not. The only reason any money exists at all is that new loans are continually issued.

Let's look at an example. A bank starts out with $1M in deposits. It issues $0.9M in loans, and suppose that money is deposited at another bank. The people who have $1M in deposits act as if they actually have $1M; they can even write checks against it. The people who have $0.9M in loans act as if they also have money. The bank has created $0.9M in new money.

Ignore the effect of interest for now. Suppose the loan of $0.9M is repaid. Now, there is $1M in deposits again, but no loans. The bank will immediately issue a new loan of $0.9M. Banks always try to stay "loaned up" to the maximum amount allowed by law. A bank with a shortage of reserves will borrow reserves from other banks. A bank with surplus reserves will lend them to other banks. The rate that large banks charge each other for reserves is the "Fed Funds rate". Banks can only move reserves around and issue new money up to the 10x reserve ratio. Only the Federal Reserve has the power to create new reserves via its open market operations. When the Federal Reserve repurchases debt and creates new money, there are more reserves. This drives down the Fed Funds rate to its target level.

Records are always kept. Banks are heavily audited. Even though Federal Reserve Points are just a number on a piece of paper, auditors still make sure that the numbers add up!

Suppose there was a computer error and a bank was accidentally credited with an extra $1B. What would happen? Everyone else would experience a little more inflation. If the error went undetected, or was done on purpose, extra money would have been created.

Why does the government get money returned to it by the fed? If it is a Private entity, it is not in its interest to give money to the government, why does it not just keep it 'as profit'.

The Federal Reserve makes a guaranteed riskless profit from its open market operations. As part of the rules of its creation, the Federal Reserve is supposed to return its extra profits to the government. The Federal Reserve keeps some Treasury notes in its inventory, as a contingency reserve. If there was a sudden money supply expansion, the Federal Reserve would need to sell bonds to soak up the extra money, which would cause it to temporarily lose money. However, the Compound Interest Paradox guarantees that, almost all the time, the Federal Reserve is purchasing debt to increase the money supply.

The Federal Reserve enslaves everyone under a crushing debt burden and shows a profit at the same time. That's the whole point of the "monetizing the debt" scam.

The Federal Reserve, quite literally, prints its own money. It is not subject to budget constraints like the government. Sometimes, it comes under criticism for hiring too many staff or building itself a nice new building, even while the government is under a budget crunch.

The Federal Reserve has never been fully audited, so it's impossible to tell what its true profits are. The point of the Federal Reserve is not its profits. The point is to enslave everyone under a crushing debt burden via the Compound Interest Paradox. The point is a massive subsidy to the financial industry and large corporations via subsidized negative real interest rates.

Now, I give another example, simpler than the one I give in Reader Mail #4.

Here, there will be only 1 citizen, the Federal Reserve, and the government.

At the start, no money is in circulation. In this example, the citizen is allowed to borrow directly from the Federal Reserve at the Fed Funds rate of 5%.

The citizen borrows $1M from the Federal Reserve at 5% interest.

Government: $0
Federal Reserve: -$1 million, money it created
$1 million debt, owed by citizen (earning 5%)
Citizen: $1 million debt (charged 5%)
$1 million cash

A year later, let's add in the interest.

Government: $0
Federal Reserve: -$1 million, money it created
$1.05 million debt, owed by citizen
Citizen: $1.05 million debt
$1 million cash

Already, you can see the Compound Interest Paradox. The Federal Reserve should have paid a credit of $0.05 million to the government when it created the money. In that case, the government could have paid the $0.05 million as its own expenses and the money supply would balance.

The citizen repays the $1 million.

Government: $0
Federal Reserve: $0.05 million debt, owed by citizen
Citizen: $0.05 million unpayable debt

The Federal Reserve says "We'll loan you another $1M so you can repay your debt."

Government: $0
Federal Reserve: -$1 million, money it created
$0.05 million, owed by citizen, in default
$1.0 million, owed by citizen, new debt
Citzen: $1.05 million debt
$1 million cash

The citizen now pays the extra $0.05 million he still owes.

Government: $0
Federal Reserve: -$1 million, money it created
$0.05 million, paid by citizen
$1 million, owed by citizen
Citizen: $1.05 million debt
$0.95 million cash

The Federal Reserve now has a profit of $0.05 million. The Federal Reserve has a bookkeeping surplus of $0.05 million, which it can spend or turn over to the Federal government.

The Federal Reserve's books balance. The citizen is in a deeper and deeper debt hole.

The citizen can't say "This is a stupid game; I'm not playing anymore." The government only recognizes Federal Reserve Points as valid money. The government demands that taxes be paid in Federal Reserve Points, although I didn't include taxes in this example. Government violence forces people to use Federal Reserve Points, even though they're intrinsically worthless.

The Compound Interest Paradox is a structural flaw in the monetary system, put there on purpose to enslave everyone under a crushing debt burden. Legally, there is no escape.

The Compound Interest Paradox is pretty complicated. The original authors of the Federal Reserve Act knew what they were doing. A few Congressmen were smart enough to figure out the scam and complain. They were killed, blackmailed, discredited, or silenced. Nowadays, it's easy to make sure that very few people smart enough to understand the Federal Reserve are elected to Congress. For example, Ron Paul was allowed to be elected to Congress, but as a single Representative he has no real power.

The mainstream media doesn't complain about the Federal Reserve and the Compound Interest Paradox. They are controlled by the international banking cartel insiders, who purchased all the newspapers and TV stations to cover up their misdeeds. University economics professors can't write papers on the evils of the Federal Reserve and the Compound Interest Paradox, because they are dependent on government subsidies/grants.

Many people have tried to explain the flaws in the monetary system and taxation system to the people who think they're the political and economic leaders. They had their chance to fix the current economic system, and neglected their responsibility. The only fair solution is a complete collapse of the current economic system. Hopefully, the collapse can be organized in an orderly fashion.

Let me know if you still have questions. Your questions were kind of unclear.

Another reader says, in response to Anarcho-Capitalism, Agorism, and Fasco-Capitalism:

A society without government would not be stable. You are clueless when you suggest the possibility of a stable society without a government that has a monopoly on violence and justice. Multiple competing police forces would degenerate into all-out chaos.

People are intrinsically evil. Government is needed to keep them in line.

My primary response to this is: "You are obviously such a brainwashed dumbass."

There are historic examples of societies that were stable with multiple competing police forces in the same location. Eventually, they were invaded and compulsory taxation was instituted. This led to their rapid collapse.

It's kind of depressing to think that people are intrinsically evil, isn't it? If that's the case, maybe people should wipe themselves out and let a more intelligent species evolve?

Some research has been done on this subject. About 2-5% of the people are incorrigible psychopaths. They will be evil as possible, provided they think they can get away with it. Also, about 2-5% of people will try to be not evil as much as possible, even when they are punished for being not evil. The vast majority of people will follow the example set by society as a whole. Under the current system, where evil is rewarded and not evil is punished, the vast majority of people will be evil. Under a fair economic and political system, the vast majority of people will be not evil.

Under the current system, the 2-5% incorrigible psychopaths are the people in positions of influence. With a monopolistic government, once it's mostly infiltrated by incorrigible psychopaths, the incorrigible psychopaths wind up in complete control. Even a government filled with mostly honest people can be corrupted, because a few psychopaths in the right places can do incredible amounts of damage. Currently, the government is almost entirely composed of incorrigible psychopaths.

Government is run by people. If you believe that people are inherently evil, then government must be evil because it is composed of people. The problem with government is that it allows the most evil people to use force to impose their will on everyone else.

You can't say "People are inherently evil." and also believe that people in government magically get to be not evil. The opposite is what actually happens. The most evil people get attracted to the government, because government allows them to steal most efficiently. Most competent people get frustrated working for the government, because their abilities are so obviously wasted.

That is the primary purposes of Christianity. It trains people to believe the axiom "People are intrinsically evil." This is used as justification for big government, to keep the evil people in check. Christianity is about a monotheistic all-powerful god. That is the same as the idea of a monolithic all-powerful government. Christianity was promoted at the same time that all-powerful governments were promoted. Christianity was designed to be a slave religion.

I'm pretty sure that a society without a centralized monopolistic government would be stable. I'm interested in performing an experiment. It's a very dangerous experiment, because the people who think they control the existing governments will try to crush the threat to their monopoly.