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Thursday, June 5, 2008

The Compound Interest Paradox Revisited - The Federal Reserve

Table of Contents

The Federal Reserve
Free Market Banking
A List of Monetary Systems
Edward Flaherty is a Troll

Due to the Federal Reserve, the Compound Interest Paradox operates with the full force of law. Boom/bust cycles aren't an absolute law of economics. They are a consequence of the Compound Interest Paradox. Boom/bust cycles are scientifically created by Federal Reserve manipulation of interest rates.

Before the Federal Reserve was created, large banks had to collude to create boom/bust cycles. There was a risk that non-cartel banks could interfere with their plans, although banking regulations limited their effectiveness. After the Federal Reserve was created in 1913, banks had no choice but to follow the interest rate set by the Federal Reserve cartel.

Near the end of the boom phase, the Federal Reserve says "We are concerned about inflation" and raises interest rates. The money supply shrinks as more loans are repaid than new loans issued. At the bottom of the bust phase, the Federal Reserve says "We need to stimulate the economy" and lowers interest rates, causing the money supply to start expanding again. As large corporations take advantage of cheap debt, they borrow and expand. In the meantime, many small businesses are bankrupted during the bust phase.

If all outstanding loans were called in, would there be enough dollars in circulation to pay them all back simultaneously? The answer is no. The current accumulated Federal deficit is over $9.5 trillion. The current M2 money supply is $7.7 trillion. That means that even if taxes were raised to 100% and all outstanding M2 money were paid as taxes, there still would be a shortfall of $1.8 trillion. That doesn't include private debt, which is estimated to be over $50 trillion.

It's silly that the total amount of Federal debt is greater than the money supply. How can the government be in debt by more money than actually is in circulation? The reason is the Compound Interest Paradox. Under the current monetary system, it is *IMPOSSIBLE* for the national debt to be repaid. It is *MATHEMATICALLY IMPOSSIBLE* for all outstanding loans to be simultaneously repaid.

That's why the Federal Reserve is able to lower the money supply by increasing interest rates. As interest rates are raised, fewer new loans are issued. The net effect is that loans are called back and the amount of money in circulation decreases. Large banks no longer have to collude to cause a recession; they merely have to wait for the Federal Reserve to raise interest rates.

The Federal Reserve is able to force banks to collude and offer fewer loans, because the Federal Reserve controls interest rates. If the interest rate were so high that no new loans were offered at all, then banks would just invest their assets with the Federal Reserve at that rate, instead of investing by issuing loans. If that happened, the money supply would crash to practically nothing. A whole bunch of debtors would be forced into bankruptcy, because there wouldn't be enough money in circulation for them to repay their debts. Large banks would then start being forced into bankruptcy and the entire economic system would collapse. This is how the Federal Reserve caused the Great Depression.

If there were an absolute bar on issuing new loans, it would soon be obvious to everyone what is happening. Instead, what happens is that the price of a loan is increased slightly. This means that marginal loans are not issued. There are now slightly fewer dollars in circulation, but not so much fewer that the entire scam is exposed. Only the people with the worst credit rating are forced into bankruptcy. Does this sound familiar? It's the recent "sub-prime lending" problem.

Hyperinflation and Hyperdeflation

There are two bad things that can happen with debt-based money. You can have hyperinflation and you can have hyperdeflation.

Hyperinflation is when the value of a dollar goes to zero, because too much money has been printed. The Fed Funds Rate is always lower than the true inflation rate, to ensure that enough money is borrowed so that there is sufficient money in circulation. If interest rates are too low, the incentive for borrowing will be too high and the dollar will collapse in hyperinflation.

Hyperdeflation is when the value of a dollar goes to infinity. If the Federal Reserve raises interest rates too high, no new loans will be issued. As loans are repaid, the money supply crashes. The amount of outstanding loans is far greater than the money supply, so people become desperate for dollars so they can repay their loans.

This is what happened during the Great Depression. The Federal Reserve jacked up interest rates, causing the money supply to crash. Wealthy insiders who knew the crash was coming made a fortune. The average person lost everything.

The Federal Reserve always has a credible weapon to fight hyperdeflation. It can print more money! The Federal Reserve will be able to ensure that hyperdeflation never occurs again. Besides, after all the wealth that was confiscated during the Great Depression, hyperdeflation is no longer necessary. Regular boom/bust cycles are a sufficient wealth confiscation tool.

There are two ways the current economic system can fail. If the Federal Reserve sets interest rates too high, there will be hyperdeflation as no new loans are issued while outstanding loans are repaid. If the Federal Reserve sets interest rates too low, there will be hyperinflation as too many new loans are issued. If hyperinflation sets in, that's the end of the US government, because people will be forced to switch to gold or silver or barter as money. All the government policemen will walk off their jobs once it's obvious they aren't going to get paid.

The Federal Reserve will never allow hyperdeflation to occur. That would benefit the average person, who is holding primarily cash. The Federal Reserve can always prevent hyperdeflation by printing more money and giving/loaning it to the financial industry.

Boom/Bust Cycles

Economic cycles are inevitable in an economy where money is only created by debt. Artificially low interest rates encourage borrowing. At some point, those loans need to be repaid and there's a temporary decrease in available money. During a recession or depression, loans are defaulted on and the banks take possession of real assets. That is the only time that total debt decreases, but even with these defaults, debt increases exponentially faster than the money supply.

The Federal Reserve doesn't say "Let's increase the wealth confiscation rate." Instead, they say "We are concerned about inflation and decreasing unemployment and we are increasing the Fed Funds Rate."

Why should the Federal Reserve be concerned about decreasing unemployment? Decreasing unemployment means that workers are starting to be able to demand higher salaries. Their standard of living is increasing. That means that there is more wealth available due to a more productive economy. That wealth needs to be confiscated. The easiest way to confiscate it is to take money out of circulation, forcing everyone who has a loan to have a harder time repaying it.

It is nonsense that low unemployment causes inflation. Inflation is *ALWAYS* related to the money supply, and nothing else. Blame for inflation is always deflected from money supply expansion to other causes. Blame for boom/bust cycles is deflected from the monetary system to other causes.

When the money supply starts getting too tight, the Federal Reserve lowers interest rates. However, the average person does not get to borrow at the risk-free rate. The benefits of financial stimulation (lower rates) primarily go to financial industry insiders. The average person just sees inflation, especially if he has money in the bank instead of inflation-hedged investments.

Plus, the average person does not know in advance when interest rates are going to be raised or lowered. That makes it much riskier for the average person to take out a loan. An insider has the opportunity to profit immensely.

Inflation is Theft

It's pretty easy to convince someone that taxation is theft. When money is coming directly out of your pocket, you feel the pain. More subtle, and more dangerous, inflation is theft. If your money is in a money market account or invested in bonds, you are earning a negative inflation-adjusted return.

There needs to be continuous inflation or else the whole system will collapse. Inflation is needed to ensure there's enough new money to pay back all the loans. If everybody simultaneously refused to borrow money, the financial system would collapse. If a substantial percentage of people simultaneously refused to borrow money, everyone else would be forced into bankruptcy.

Another "benefit" of inflation is that the average person keeps his money in the bank, or has benefits such as a pension or Social Security. These payments are not properly adjusted for inflation. Inflation allows the financial industry and government to slowly confiscate these assets. The Federal Reserve doesn't contract the money supply too much. If the money supply contracted too much there would be deflation and the average person, who is holding mostly cash, would benefit.

As long as the Federal Reserve keeps a balance, the average person won't get wise to the situation. As long as a certain number of new loans are made, the average person will have access to enough money to repay his debts. There will be some foreclosures and bankruptcies, but from the point of view of the average person, those people deserved it. They won't say "The financial system was stacked against them - a certain number people had to go bankrupt because there wasn't enough money in circulation."

Most of the people who are aware of the details of this scam are themselves billionaires already. Knowing the defect in the financial system, they are able to profit from it immensely. Plus, they are insiders who know in advance which way interest rates are going to be moved. It's easy to make money if you know that. They have no incentive to fix the current system, except for the possibility that it might completely collapse soon. Any billionaire who is aware of the system can profit immensely from it. Any billionaire who is not aware will soon lose his wealth. With an awareness of the manipulations of others, it is possible to structure your own investments to maximum advantage. The basic advice I would give the average person is to minimize debt and invest in concrete assets - gold, stocks, real estate, or your own business.

If the banks wound up obviously owning everything, the average person would revolt. Some of the assets are hidden in trusts, so the average person doesn't know about it. Most media companies are incorporated in a way that insiders effectively control the company, even though they own a minority interest, through the issue of preferred voting shares. The money supply and tax rate are carefully managed so that the average person gets to own enough so that they don't revolt.

The national debt is actually absolutely necessary under the current system. Money can only be created via debt, and debt increases exponentially faster than the supply of money. The only way that someone can have money is for someone else to be in debt by an even bigger amount. The government is the only entity that can have unlimited debt without being forced into bankruptcy. The government needs to have bigger and bigger debt just so that there would be a supply of money for other people to have.

Is there any escape from this system? Voting is pointless. The current system won't be reformed by voting. After careful consideration, the only way to escape from a corrupt monetary system, taxation system, and political system is agorism.

The other "critics of the Federal Reserve" websites don't come to the correct conclusion. They explain the problem, but they don't really propose a workable solution. Agorism is the only solution that has a nonzero chance of success.

1 comment:

Anonymous said...

Good evening FSK, I hope you are doing well. I will be standing up a blog of my own soon on the motivation of prior inclination and by no small degree upon your suggestion. In the meantime, I would again like to give you due praise for the opportunity of hope that you place in the hearts of those who would apply honest and objective understanding to the knowledge you possess and share on your blog. What a big mass of indecision, insecurity, and doubt we human beings are. I say that first after my acknoledgement not as an attempt to be deliberately verbose in some exercise of vanity or obstruction, but rather in an attempt to make it clear that while indeed there are axioms of truth, 'X' policy bringing about 'Y' result as you have so aptly identified, that human beings have an imperfect and all too often prevailing dominance of psychological forces at work in the interaction with, and action taken there from, axioms of truth which may be laid before them. How I wish at this point in your reading these words you could truly see how humbly I am engaging with you. How I wish I had the Rosetta Stone of succinctness and intention in my possession, so that I could say everything and anything to you or anyone else without the burden of misunderstanding or the misuse of time. More than just an honest declaration, by saying that I return to the point I would make which is that truth, regardless of its intended delivery, is bound by the inherent imperfections of humanity as it pertains to its reception. I grew up on the west bank of New Orleans, spending my afternoons at Woodland Park and watching the ferry and transport boats land at the docks. Having a family and friendship background in this form of transportation, I know that there is a certain degree of inertial force that must be calculated in the speed and trajectory of a boat's landing at a port. In short, regardless of the cargo on board, how it may best be received is a principal concern if it is ever to be made use of. So, on one side there is the truth, and on the other there is the dynamic logistics of delivery of it which, while an ever-changing grey area, still is a factor in that truth ever manifesting itself into meaningful action. Since coming to your blog, I have learned so much and also given you a lot of thought. I have referenced you in conversations with friends and family and we are all better for it. I believe you truly want to help other human beings have a better and freer life and my heart is in the same place. Though it may be unintentional at times in the things I might say think or do, I AM NOT A PRO-STATE TROLL. I'm sure you receive a lot of vitriol and bitterness from others on your blog, and perhaps that has conditioned a set of absoluteness in your responses as a means of saving time if nothing else. Truth is at this point I cannot know. In closing let me say first that the praise I offered you was not some insincere preface for subsequent criticism or even advice, only heartfelt and well-meaning observations made in conjunction with everything else I have said which may better serve the beliefs, hopes, and ideas I know in my heart that we both share. Thank you.


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