Wealth, Power and Greed is Obliterating America’s Middle Class: The Weapon is Currency

Guest Post by Ralph L.

Identity politics, partisanship and socialism are false flags. The claim of a fundamental philosophical rupture in America is manufactured. False flags distract the electorate from root cause problems.

The current monetary system, cherished by both political parties, is the root cause for our discord. The destruction of middle-class incomes and exponential rise in income inequality is a rapid, deliberate strategy. Politicians crave the ability to print money. This paper describes the tactics of a currency weapon.

In 1972, the United States and all other countries adopted a “Fiat Monetary” process. Fiat Currency is currency that a government has declared to be legal tender, but it is not backed by a physical commodity. The value of Fiat money is derived solely from the relationship between supply and demand of the paper currency, rather than the value of the material from which the money is made: example silver. There are 300 plus recorded instances when governments adopted Fiat currencies in all recorded history. All Fiat currencies have failed. This time is not different.

Two major studies have reviewed the previous three worldwide economic systems. The 2011 paper “Reform of the International Monetary and Financial System,” published by the Bank of England, analyzed the performance of the gold standard (1870-1913) and the Bretton Woods gold exchanges system (1948-72) comparative to “Fiat” monetary practices. The report concludes that today’s system performed poorly relative to prior monetary regimes, “with the key failure being the system’s inability to maintain financial stability and minimize the incidence of disruptive sudden changes in global capital flows.” Trade and investment flows are distorted as the world’s major central banks engage in subtle exchange-rate and devaluation competition.

The Obama administration’s 2015 Economic Report to the President, highlights the growth in middle-class incomes during the Bretton-Woods system of fixed exchange rates. The report describes the period from 1948 to 1973 as the “Age of Shared Growth.” The period was characterized by accelerating labor productivity, falling income inequality, and increased workforce participation in thru fruits of their labor.

Obama asked what would we see today if the Bretton Woods system survived.  The report posits that “incomes would have been 58% higher in 2013” and “the median household would have had an additional $30,000 in income.”  Instead, that income went to the top 10%. Why? Think leverage.

The Federal Reserve is no more “Federal” than Federal Express (Stockholders)

President Woodrow Wilson signed the Federal Reserve Act on December 23, 1913. The Act established the Federal Reserve System to oversee the nation’s money supply and provide an “elastic” currency that could expand and contract in response to the economy’s changing demand for money and credit.

The owners of the Federal Reserve are private Wall Street Banks, not the United States government. Wall Street Banks own all the shares of this Corporation. The President has the power to name “Board Members” but has no power to direct the actions of the Federal Reserve.  That was the deal made in 1913.

The Federal Reserve has no money.  They create it from thin air digitally and loan it to the Treasury and to banks. They just add digits to the Treasury checking account.  The US Treasury pays interest on this created money to the Fed.  The Fed also creates digit money, interest free, and gives it to banks. The banks must buy US Treasury securities with this money.  The banks receive interest from the Treasury for the purchases. These U.S securities, which cost the banks nothing, are held as reserves on the balance sheets of banks. The banks should lend the money to customers on main street needing capital for building a business, but mostly they don’t. The Treasury nor Congress required banks to lend any of 900B dollars to main street customers during the 2009 crisis rescue – so they bought stock.

Since the repeal of the Glass Segal act, banks use reserve money and a portion of your checking deposits to speculate on stock. The idea is to raise bank profits. If just one “Too big to Fail” bank actually fails there is not enough money with the FDIC (Federal Deposit Insurance Corp) to cover the account losses. Logic says , make banks smaller. They are getting bigger.

Conclusion: Start a bank – you get “Money for nothing and the checks for free.”

The Federal Reserve’s role is to preserve the value of the U.S. Dollar

A graph showing the preservation of the Dollar’s value.

An “F” grade is too generous for the Federal Reserve Performance to date.

What is a “Reserve Currency” and has it always been the U.S. Dollar

A reserve currency (or anchor currency) is a currency that is held in significant quantities by governments and institutions as part of their foreign exchange reserves. The reserve currency is commonly used in global transactions, worldwide investments and all aspects of the global economy. It is often considered a hard (gold) currency or safe haven currency (guns to back it up). People who live in a country that issues a reserve currency can purchase imports and borrow across borders more cheaply than people in other nations because they do not need to exchange their currency to do so.

We became the Reserve Currency because we won both world wars, and Europe / North Africa / Japan was destroyed. The US economy resupplied the world with goods and services.  Have we won any wars lately? Are we in danger of losing this status?

Nixon delinked gold to the U.S. Dollar yet saved reserve currency status

Nixon closed the gold exchange window in 1971 and sent Kissinger to Saudi Arabia to hold a gun to the King’s head. Kissinger said the U.S. will invade the Kingdom if OPEC accepted anything other than the U.S. Dollar for all exports of energy. Once they complied, we offered them security from all enemies of the Kingdom.

Nixon substituted Crude Oil owned by OPEC to replace US Gold inventory as the commodity to back up the US Dollar. (See why a big military is an advantage) We required the Saudi’s to purchase US Treasuries and hold them with the US Treasury. This forced the Saudi’s to buy US products. Remember when oil went to $140 a barrel and $5 a gallon gas? We angered Saudi Arabia and OPEC boycotted shipments to the US as revenge. Recently, it almost happened again, only it would have been worse.

What is the Trump Saudi Deal to back up the US dollar with OPEC Oil

Trump vetoed the bill to withdraw US support to Saudi Arabia with the war in Somalia. Why did he veto the bill when most all Americans are tired of war and even Trump said he wanted to get out of wars? The Saudi King called Trump and said to veto the bill or OPEC will accept Euros, Rubles, Gold, Renminbi or Yen for Oil, but not US dollars. We do not have foreign reserves because we are the “Reserve Currency.” Further this would cause the destruction of the dollar and the stock market since countries importing oil would no longer need to hold US dollars in reserve to buy OPEC oil. A massive sell-off of US Treasuries would ensue, skyrocketing interest rates for the Treasury. What would you do if you were President? ​

Has the Federal Reserve created money since Delinking to Gold?

The graph shows just the increase in Cash not Credit

There are now about four Trillion more dollars in cash in circulation. Most of the cash is in $100 bills in the hands of foreigners.

Prior to the delink to gold, currency is created as gold inventories increase

The Fed started to print money when the Treasury needed money. You can’t print gold, oil or other commodities to back up your currency

1971 Gold delink

1972 – 1982 Great Inflation

1989 12.5% Interest rate on US Treasury bills

2002 Dotcom Crash

2009 Housing Crash

Notice the sharp jump in 2009 – Lehman Brothers collapse 900 Billions lent to banks

Does this money printing look sustainable? Are you getting any of it? If not, who is?

Change in US Debt over time

The government consumes printed money in the form of Credit – Bonds

Since money printing started total debt increased from 1 billion to 22 billion Debt

At the same time, Businesses, Consumers and Students have been piling up debt.

                                                  Deficits over Time

This is excess of spending in a given fiscal year or the annual operating amount.

With the Gold Standard and Bretton-Woods fixed gold standard, we ran deficits for major events – WW II. Since money printing, we have been running large deficits. Wait, I see a big surplus – maybe that will happen again.

A Bar Graph Representation of Recent Annual Deficits

The Surplus was an Accounting Scheme

In 1968 under Johnson’s administration, the Federal Budget was unified with Social Security and Medicare. Social Security was a separate account just like an IRA. Congress decided to take the surplus from Social Security, adding it to regular tax revenue. This made the annual deficits appear smaller. We robbed Social Security so that Johnson could have “Guns and Butter.” We did not ask the taxpayer sacrifice for the war in Vietnam. We “borrowed” the money from the Social Security surplus intending to pay it back. We didn’t, and the accounting trick continues today. This is why you hear Congress talk about Social Security running out of money. It was spent in the annual budget.

 Congress Loves to Spend Money

Dick Cheney is famous for saying, “Regan proved that deficits don’t’ matter.” Since Regan, the US has spent about 25% more than revenues received each year. Technically, it is greater than 25% because Congress used excess Social Security taxes as a Piggy Bank to increase annual budget spending.

If the Fed Continues to Print Money, we will look like Japan.

Nobel Prize Economist Paul Krugman believes money printing is not a problem. He is the chief architect for Japan Central Bank theory. Today Japan’s central bank owns almost all the bond markets and half of the stock market. Japan prints money to assure the stocks don’t fall, and bonds pay 0% interest. Japan has borrowed three times the amount of money produced each year (GDP). The U.S. is at 100% +. Technically, Japan is bankrupt. However, since Japan has no intention of returning the money, does not borrow from other countries, pays out essentially no interest on debt and prints money to keep the market afloat they have not declared bankruptcy. One big difference is that the savings rate is higher in Japan than the United States. They need to save more; they receive no return on investment. In the chart below the NIKKEI (Similar to the S&P 500) index has not recovered since the 1990 crash. If the Fed continues printing money, this will be the US Stock Market.

No Problem, Tax the Rich, Reduce the Debt and Give Free Stuff to everyone. 

You hear AOC talk about a 90% Income Tax Rate. Bernie says about 52%. Warren is discussing a “Wealth Tax.” If a billionaire has 10 billion in total wealth – All Assets minus Liabilities – they need to sell assets and send in a portion of the 10 billion. If it was 50%, he sends in 5 billion year one, then 2.5 billion the following year, then1.25 billion the subsequent. This assumes his wealth is static. Let me outline the problem with this idea plus taking income at 90%.

Problem 1 – billionaires stopping income and take stock, which is taxed at 25%

Problem 2 – There just isn’t as much money as you think.

We have 585 billionaires in the United States. If we took everything, stripped them of all wealth, the US would have about Four trillion dollars. That is less than one year of the annual operating budget. It makes a dent in the total debt which is now 22+ Trillion but in four years we are back to are we are today unless we spend less. That will not happen.

Problem 3 – Billionaires can repatriate to another country. The favorite is New Zealand. Wealth can be transferred instantly via Wall Street, and beyond the reach of the U.S. Hundreds of Billionaires have moved over the past ten years all over the world. Many came the U.S. from China and Russia.

Problem 4 – About half of U.S. Citizens pay no income tax. This is a problem since it sets up the perception that half the people have all the money.

Income tax Idea – since everyone pays Social Security and Medicare, remove the Social Security cap for employees but eliminate the company match once the cap is reached. Currently, employees and companies remit matching Social Security Tax 6.2%. This is paid out until the employee reaches $132,900 of income, then the tax stops until the next tax year. Continuing a company match would make companies limit the number of employees paid over $132,900. There needs to be an incentive to pay people more – not less.

Cutting the Size of Government or the Budget is a Big Lie.

Do you see any reductions in expenditures? Yes, during a recession highlighted in gray. This is quickly followed by massive spending by the government to pull us out of the recession. Note: Sequester did flatten spending for three years in Obama area but growth slowed to 1%. Congress decided to rescind the sequester and return to reckless spending.

The Lie that Congress can Reduce the Total Debt

The only way to reduce debt is to spend less than taxes received. Historically, the amount of taxes received by the Federal Government are 17% of GDP. This happens no matter income tax, capital gains, excise, social security and Medicare tax rates. People find a way around the system. This is why most of Europe have VAT (Value-Added Tax). VAT is similar to a national sales tax but collected before sale to the public. Many countries want to become cashless. The rational is efficiency, but the motive is to trace all transactions. You lose all liberty in a cashless society.

Confirmation of the Lie – April 30, 2019

White House chief economic adviser Larry Kudlow told reporters Monday that President Trump “is unlikely to pay off any of the national debt”, currently at $22 trillion, according to The Washington Examiner.  “Whoa, whoa, it doubled under the prior eight years,” Kudlow said on the White House driveway, he said in response to a follow-up question about whether Trump would pay down “any” of the national debt, Kudlow indicated he would not. “Paid off? No, I don’t expect so, and I think the issue there has always been to lower the debt burden on the economy, to try to bring that debt to GDP ratio down,” he said.

In other words, this is a fraction game versus reducing debt.  He is explaining the difference between a numerator and denominator.

Today

22 Trillion Current Debt

—————————-       = 100% Debt to GDP

22 Trillion Current GDP

Some Day

26.5 Trillion Current Debt

——————————-       = 98% Debt to GDP

27 Trillion Current GDP

This is the theory of growing your way out of a debt problem.  However, in all history no country has been able to grow their way out of a debt problem once Debt to GDP is greater than 80%.  It has never happened because it is mathematically impossible unless you drastically stop spending money.  You cannot tax your way or grow your way out of the problem.

We reduced debt to GDP after WW II because we quit spending money for war, and we exported products all over the world because we had no competition. We import billions more than we export today. Do you see this changing?

We cannot stop spending due to entitlements. If interest rates rise 2%, interest on the debt will be greater than the military budget. Not paying interest means we would default and be bankrupt. Currently, we print the money to pay the interest. We know people who used one credit card to pay off another. This is what it looks like when the Government plays the game. It ends badly.

This is also the reason you hear the term “Modern Monetary Theory”. The definition is – printing money but on steroids hoping, inflation stays calm. The evidence is – it never works. Below illustrates how government deficits impede growth. The Government spends; it rarely invests. GDP decreases as government debt grows.

The view of Total Debt

The Federal Reserve Permits Banks to Create Money

Once money printing commenced in 1971, the Federal Reserve outsourced the printing game to banks. Historically, banks retained 20% of Demand Deposits – checking accounts. Now they can lend 98% of deposits. They called it a fancy economic word – rehypothecation. Rehypothecation is when the bank uses your money as collateral to participate in its own stock market transactions, often with the hopes of financial gain. Mostly, this is using your checking money to bet on stocks, hoping to increase profits. 1971 was the beginning of sending everyone credit cards. The purpose was to increase profits with the interest collected.

Companies started borrowing money to buy back stock (It is a gimmick to show earnings per share is increasing when profits are flat) Add in all this credit and then debt to GDP is 320%.

Are all Countries Printing Money?

Everybody is printing money. Think about this fact. The Swiss print money, convert it to dollars and are major investors in Apple. Let that sink in. Switzerland purchased Apple shares with money they printed. Think that is a problem?

Guess which country is not printing money? If fact, they are selling U.S. Treasuries and buying Gold with the proceeds. This country also has the lowest amount of debt to GDP. It is Russia. Putin admitted he did not understand economics, so he hired Princeton Trained Elvira Nabiullina as his right-hand Central Banker. She stopped printing Rubles. She increased foreign reserves by exporting oil. She reduced debt and killed inflation. Now she is working with China and India to set up a currency to replace the US Dollar as the only Reserve Currency. It will be backed by gold. “We Will Defeat You Without Firing A Shot” (Nikita (Nikita Khrushchev) This is why Russia does not spend money on defense. We are close to shooting ourselves with debt.

So Where did the printed money go?

Correlation / Causation? The money went to the stock market and Real Estate? To make it worse, high net worth individuals who own stock and can borrow money on the value of the stock doubled down and maximized their credit limits. Currently, investors have borrowed more than the value of the stock. Every time this happens, we see a big downturn in the economy. Stock gambling alone has created most of the current inequality in income. If stocks fall the loans on the stock become immediately due and thus selling more stock is the only way to pay the loans. Everybody starts rushing to the door to sell, with no buyers. Ugly. .

The Gini Coefficient

In 1912, Corrado Gini published a paper that measures income distribution of a nation’s residents. No tool is better in measuring dispersion. A Gini result registering below 0.2 denoted equitable income distribution. A result higher than 0.4 denotes inequality with all countries. It is the best predictor for revolutions in countries. The Polarization index, designed by the Federal Reserve, measures partisan voting in Congress. Below are both indexes. Polarization commences and grows corresponding with the Gini concurrent with money printing.

Remember the report to Obama, the best years was 1948 to 1972. 1971 the monetary system changed a started printing money. We are polarized because the Fed changed the game to favor banks and high net worth individuals. All the protests we see today are the result of this income inequality. It has nothing to do with RED or BLUE.

Why did Herman Cain and Stephen Moore withdraw their nomination? Remember only a majority is required by the Senate? Is it because they are not qualified or partisans? BS. They both have served on the Fed before. It is because both have written papers determining we need to return to a new gold standard. Don’t believe anything else. This would stop the crazy money printing and change the inequality. Those in power on both sides want more inequality. They don’t represent you. They represent people with money.

What are the Leading Ideas to Fix this Problem

Raising interest rates will tank the market, increase the deficient, slow housing and potentially drop Corporate BBB rated bonds to junk.

Lowering interest rates will raise increase flow of funds to the stock market that is already overpriced at historical levels.

The Fed yearns for inflation so debt (Fixed amount) can be paid with dollars’ worth less – the value of your house increases the mortgage does not.

The Fed told me directly – we know how to put out a house fire (Inflation) we have no tools to stop a house being consumed by a sinkhole (Deflation).

The IMF (International Monetary Fund) suggests there be a Global Reset of all currencies and the SDR (Special Drawing Rights) be the Global Reserve Currency. If the U.S. losses the Reserve Status, our ability to import craters.

Many Economists suggest resetting the price of Gold and back the currency with a percentage with Gold. This is similar to the Russia China India play.

Why won’t someone fix this problem?

A quote from a Favorite Economist

Summary

The Fed is trapped and will be forced to resume printing money on the next downturn of the economy

The Senate is blocking nominations of any Fed appointments that are advocates for returning to a new gold standard.

It appears “Kicking the Can” is again in play with the two Trillion-Dollar infrastructure program. That would get through to the next election.

There are ten times the amount of Credit Default derivatives (Insurance sold by banks to guarantee loans but with no reserves). This means if there is one large failure anywhere in the world, there is not enough money to pay off the insurance contracts which will cause a cascade of failures. The Treasury stopped that event from occurring during the Lehman 2009 crisis but will the public allow Congress to bail out Wall Street and not Mainstreet once again?

Possible Scenarios

Under current conditions Congress does not have the will to fix any problems.  Normally the fix is worse than the problem. Both sides are focused on power and winning. This leaves three possible alternatives.

Failure of the system and revolution at the ballot box

OR

Revolution at the ballot box and then Failure

OR

Interest rates rise exponentially making it too costly to roll over treasury bills or borrow new money. The Treasury is forced to use a pay/go system.  As the money comes in it goes out.  This will trigger actual reductions in payments and lengthening the time to pay.

OR

Congress refuses to raise the debt ceiling (now expired).  Borrowing from retirement escrow accounts and other gimmicks we keep us going a few more months. The Treasury is forced to rank which programs get paid first. Interest on the debt will the number one payment.

Any of these lead to the diminishment of the US and restructure similar to the U.S. S. R.

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