The Name of The Game II
Deficit spending leads to budget deficits. When receipts to the Treasury are less than outlays, the government must borrow to cover the difference. The amount of borrowing, is a result of the budgetary decisions of the Congress and President. The Fed chooses how much borrowing is going to be in the form of interest bearing securities and how much will be in the form of non-interest bearing money.
The Treasury prints legal tender for use in satisfying obligations denominated in dollars. Unlike gold, which can misbehave as all commodities do at times, the Fed can control legal tender. The securities that the Treasury holds back the legal tender.
What backs the securities? Nothing. There are no real assets, public or private, that are specifically pledged to collateralize the debt of the government. The government borrows on its "full faith and credit." “Legal tender” is a euphemism for a transferable IOU, that being a dollar. The government can continue to borrow as long as everyone thinks it is able to service the debt.
By lowering short end rates and selling more money, the Fed, its district branches and the member banks increase their profits. The member banks profit by paying less interest to depositors and lending out more money at the going market rate. When the Fed sells money, profits are made, this is referred to as seignorage. The Fed profits by selling more money and can profit by increasing reserve requirements.
As a requirement of membership, member banks fund the Fed district branch with seed capital. In return they receive stock in the Fed district branch. Each bank gets a 6% return on the funds it has invested in the Fed district branch, and the privilege of borrowing from the Fed at the overnight rate, which was 1% and is now 2.75%.
Whether new money (freshly printed at 4 cents per note) or existing money, the member banks pay face value to the Fed district branch for paper money. The money is paid for, by debiting the member banks account at the Fed branch. The member bank is required to have a fractional percentage of reserve on hand and at the Fed district bank to cover the principal.
When the Fed buys securities, it injects money into the system. By selling securities, it removes money from the system. Between creating reserves (selling money) and selling currency, the Fed acquires a portfolio of interest earning securities, which it profits from. After expenses and dividends to the member banks, the Fed district branches pay no tax on their earnings, 95% of the earnings are remitted to the Fed, which then turns the money over to the Treasury.
This is how fractional reserve banking works. At the retail end, depositors are paid with profits from the borrowers and Forex arbitrage. The principal debited to the member bank from the Fed, is credited with profits generated within the system. The money once in circulation is subject to a transactional multiplying effect. one dollar injected into the system generates several dollars of deposits, a dollar removed results in a reduction of several dollars in deposits.
The assets the banks have are paper; loans and financial instruments. In effect, like checking and credit card accounts; crediting and debiting is based on the governments IOU. This requires profits, liquidity and payment flows to keep the engine running.
In 1978, GAO was given authority to audit the Fed Board of Governors and the regional Federal Reserve Banks, branches, and facilities, subject to the limitation that it could NOT examine the Fed's foreign exchange and open market monetary policy actions.
It is through this loophole that The Fed can buy, sell, hold and speculate in Forex (currency and bond) arbitrage without anyone knowing exactly; who, what, where, when or why. This is how the Fed exerts control over the money that has gone out of the system. (i.e. foreign holdings denominated in dollars)
In Part Three, we discuss the effects of lowering rates and how Forex arbitrage effects the players.
The Treasury prints legal tender for use in satisfying obligations denominated in dollars. Unlike gold, which can misbehave as all commodities do at times, the Fed can control legal tender. The securities that the Treasury holds back the legal tender.
What backs the securities? Nothing. There are no real assets, public or private, that are specifically pledged to collateralize the debt of the government. The government borrows on its "full faith and credit." “Legal tender” is a euphemism for a transferable IOU, that being a dollar. The government can continue to borrow as long as everyone thinks it is able to service the debt.
By lowering short end rates and selling more money, the Fed, its district branches and the member banks increase their profits. The member banks profit by paying less interest to depositors and lending out more money at the going market rate. When the Fed sells money, profits are made, this is referred to as seignorage. The Fed profits by selling more money and can profit by increasing reserve requirements.
As a requirement of membership, member banks fund the Fed district branch with seed capital. In return they receive stock in the Fed district branch. Each bank gets a 6% return on the funds it has invested in the Fed district branch, and the privilege of borrowing from the Fed at the overnight rate, which was 1% and is now 2.75%.
Whether new money (freshly printed at 4 cents per note) or existing money, the member banks pay face value to the Fed district branch for paper money. The money is paid for, by debiting the member banks account at the Fed branch. The member bank is required to have a fractional percentage of reserve on hand and at the Fed district bank to cover the principal.
When the Fed buys securities, it injects money into the system. By selling securities, it removes money from the system. Between creating reserves (selling money) and selling currency, the Fed acquires a portfolio of interest earning securities, which it profits from. After expenses and dividends to the member banks, the Fed district branches pay no tax on their earnings, 95% of the earnings are remitted to the Fed, which then turns the money over to the Treasury.
This is how fractional reserve banking works. At the retail end, depositors are paid with profits from the borrowers and Forex arbitrage. The principal debited to the member bank from the Fed, is credited with profits generated within the system. The money once in circulation is subject to a transactional multiplying effect. one dollar injected into the system generates several dollars of deposits, a dollar removed results in a reduction of several dollars in deposits.
The assets the banks have are paper; loans and financial instruments. In effect, like checking and credit card accounts; crediting and debiting is based on the governments IOU. This requires profits, liquidity and payment flows to keep the engine running.
In 1978, GAO was given authority to audit the Fed Board of Governors and the regional Federal Reserve Banks, branches, and facilities, subject to the limitation that it could NOT examine the Fed's foreign exchange and open market monetary policy actions.
It is through this loophole that The Fed can buy, sell, hold and speculate in Forex (currency and bond) arbitrage without anyone knowing exactly; who, what, where, when or why. This is how the Fed exerts control over the money that has gone out of the system. (i.e. foreign holdings denominated in dollars)
In Part Three, we discuss the effects of lowering rates and how Forex arbitrage effects the players.
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