Monday, 5 June 2017

The Mandrake Mechanism (Counterfeiting of credit)

The Creature from Jekyll Island

by G. Edward Griffin

Chapter 10

 What is the Mandrake Mechanism?

It's the most important financial lesson of your life!

THE MANDRAKE MECHANISM . . . What is it? It is the method by which the Federal Reserve creates money out of nothing; the concept of usury as the payment of interest on pretended loans; the true cause of the hidden tax called inflation; the way in which the Fed creates boom-bust cycles.
In the 1940s, there was a comic strip character called Mandrake the Magician. His specialty was creating things out of nothing and, when appropriate, to make them disappear back into that same void. It is fitting, therefore, that the process to be described in this section should be named in his honor.

In the previous chapters, we examined the technique developed by the political and monetary scientists to create money out of nothing for the purpose of lending. This is not an entirely accurate description because it implies that money is created first and then waits for someone to borrow it.

On the other hand, textbooks on banking often state that money is created out of debt. This also is misleading because it implies that debt exists first and then is converted into money. In truth, money is not created until the instant it is borrowed. It is the act of borrowing which causes it to spring into existence. And, incidentally, it is the act of paying off the debt that causes it to vanish. There is no short phrase that perfectly describes that process. So, until one is invented along the way, we shall continue using the phrase "create money out of nothing" and occasionally add "for the purpose of lending" where necessary to further clarify the meaning.

So, let us now . . . see just how far this money/debt-creation process has been carried -- and how it works.

The first fact that needs to be considered is that our money today has no gold or silver behind it whatsoever. The fraction is not 54% nor 15%. It is 0%. It has traveled the path of all previous fractional money in history and already has degenerated into pure fiat money. The fact that most of it is in the form of checkbook balances rather than paper currency is a mere technicality; and the fact that bankers speak about "reserve ratios" is eyewash. The so-called reserves to which they refer are, in fact, Treasury bonds and other certificates of debt.

Our money is "pure fiat" through and through.
The second fact that needs to be clearly understood is that, in spite of the technical jargon and seemingly complicated procedures, the actual mechanism by which the Federal Reserve creates money is quite simple. They do it exactly the same way the goldsmiths of old did except, of course, the goldsmiths were limited by the need to hold some precious metals in reserve, whereas the Fed has no such restriction.

The Federal Reserve is candid.

The Federal Reserve itself is amazingly frank about this process.

A booklet published by the Federal Reserve Bank of New York tells us:
"Currency cannot be redeemed, or exchanged, for Treasury gold or any other asset used as backing. The question of just what assets 'back' Federal Reserve notes has little but bookkeeping significance." 
Elsewhere in the same publication we are told: "Banks are creating money based on a borrower's promise to pay (the IOU) . . . Banks create money by 'monetizing' the private debts of businesses and individuals."

In a booklet entitled Modern Money Mechanics, the Federal Reserve Bank of Chicago says:

In the United States neither paper currency nor deposits have value as commodities. Intrinsically, a dollar bill is just a piece of paper. Deposits are merely book entries. Coins do have some intrinsic value as metal, but generally far less than their face amount.

What, then, makes these instruments -- checks, paper money, and coins -- acceptable at face value in payment of all debts and for other monetary uses? Mainly, it is the confidence people have that they will be able to exchange such money for other financial assets and real goods and services whenever they choose to do so. This partly is a matter of law; currency has been designated "legal tender" by the government -- that is, it must be accepted.

In the fine print of a footnote in a bulletin of the Federal Reserve Bank of St. Louis, we find this surprisingly candid explanation:

Modern monetary systems have a fiat base -- literally money by decree -- with depository institutions, acting as fiduciaries, creating obligations against themselves with the fiat base acting in part as reserves. The decree appears on the currency notes: "This note is legal tender for all debts, public and private." 
While no individual could refuse to accept such money for debt repayment, exchange contracts could easily be composed to thwart its use in everyday commerce. However, a forceful explanation as to why money is accepted is that the federal government requires it as payment for tax liabilities. Anticipation of the need to clear this debt creates a demand for the pure fiat dollars.

Money would vanish without debt.

It is difficult for Americans to come to grips with the fact that their total money-supply is backed by nothing but debt, and it is even more mind boggling to visualize that, if everyone paid back all that was borrowed, there would be no money left in existence.

That's right, there would not be one penny in circulation -- all coins and all paper currency would be returned to bank vaults -- and there would be not one dollar in any one's checking account. In short, all money would disappear.

Marriner Eccles was the Governor of the Federal Reserve System in 1941. On September 30 of that year, Eccles was asked to give testimony before the House Committee on Banking and Currency. The purpose of the hearing was to obtain information regarding the role of the Federal Reserve in creating conditions that led to the depression of the 1930s.

Congressman Wright Patman, who was Chairman of that committee, asked how the Fed got the money to purchase two billion dollars worth of government bonds in 1933.
This is the exchange that followed.

Eccles: We created it.
Patman: Out of what?
Eccles: Out of the right to issue credit money.
Patman: And there is nothing behind it, is there, except our government's credit?
Eccles: That is what our money system is. If there were no debts in our money system, there wouldn't be any money.

It must be realized that, while money may represent an asset to selected individuals, when it is considered as an aggregate of the total money supply, it is not an asset at all. A man who borrows $1,000 may think that he has increased his financial position by that amount but he has not. His $1,000 cash asset is offset by his $1,000 loan liability, and his net position is zero. Bank accounts are exactly the same on a larger scale. Add up all the bank accounts in the nation, and it would be easy to assume that all that money represents a gigantic pool of assets which support the economy. Yet, every bit of this money is owed by someone. Some will owe nothing. Others will owe many times what they possess. All added together, the national balance is zero. What we think is money is but a grand illusion. The reality is debt.

Robert Hemphill was the Credit Manager of the Federal Reserve Bank in Atlanta. In the foreword to a book by Irving Fisher, entitled 100% Money, Hemphill said this:

If all the bank loans were paid, no one could have a bank deposit, and there would not be a dollar of coin or currency in circulation. This is a staggering thought. We are completely dependent on the commercial banks. Someone has to borrow every dollar we have in circulation, cash, or credit. If the banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless situation is almost incredible -- but there it is. 
With the knowledge that money in America is based on debt, it should not come as a surprise to learn that the Federal Reserve System is not the least interested in seeing a reduction in debt in this country, regardless of public utterances to the contrary.
Here is the bottom line from the System's own publications. The Federal Reserve Bank of Philadelphia says:
"A large and growing number of analysts, on the other hand, now regard the national debt as something useful, if not an actual blessing . . . [They believe] the national debt need not be reduced at all." 
The Federal Reserve Bank of Chicago adds:
"Debt -- public and private -- is here to stay. It plays an essential role in economic processes . . . What is required is not the abolition of debt, but its prudent use and intelligent management."

What's wrong with a little debt? 
There is a kind of fascinating appeal to this theory. It gives those who expound it an aura of intellectualism, the appearance of being able to grasp a complex economic principle that is beyond the comprehension of mere mortals. And, for the less academically minded, it offers the comfort of at least sounding moderate. After all, what's wrong with a little debt, prudently used and intelligently managed? The answer is nothing, provided the debt is based on an honest transaction. There is plenty wrong with it if it is "based upon fraud".

An honest transaction is one in which a borrower pays an agreed upon sum in return for the temporary use of a lender's asset. That asset could be anything of tangible value. If it were an automobile, for example, then the borrower would pay "rent." If it is money, then the rent is called "interest." Either way, the concept is the same.

When we go to a lender -- either a bank or a private party -- and receive a loan of money, we are willing to pay interest on the loan in recognition of the fact that the money we are borrowing is an asset which we want to use. It seems only fair to pay a rental fee for that asset to the person who owns it. It is not easy to acquire an automobile, and it is not easy to acquire money -- real money, that is. If the money we are borrowing was earned by someone's labor and talent, they are fully entitled to receive interest on it. But what are we to think of money that is created by the mere stroke of a pen or the click of a computer key? Why should anyone collect a rental fee on that?

When banks place credits into your checking account, they are merely pretending to lend you money. In reality, they have nothing to lend. Even the money that non-indebted depositors have placed with them was originally created out of nothing in response to someone else's loan. So what entitles the banks to collect rent on nothing? It is immaterial that men everywhere are forced by law to accept these nothing certificates in exchange for real goods and services. We are talking here, not about what is legal, but what is moral. As Thomas Jefferson observed at the time of his protracted battle against central banking in the United States, "No one has a natural right to the trade of money lender, but he who has money to lend."

Third reason to abolish the system. 
Centuries ago, usury was defined as any interest charged for a loan. Modern usage has redefined it as excessive interest. Certainly, any amount of interest charged for a pretended loan is excessive. The dictionary, therefore, needs a new definition.
Usury: The charging of any interest on a loan of fiat money. 
Let us, therefore, look at debt and interest in this light. Thomas Edison summed up the immorality of the system when he said:
People who will not turn a shovel of dirt on the project [Muscle Shoals] nor contribute a pound of materials will collect more money . . . than will the people who will supply all the materials and do all the work. 
Is that an exaggeration? Let us consider the purchase of a $100,000 home in which $30,000 represents the cost of the land, architect's fee, sales commissions, building permits, and that sort of thing and $70,000 is the cost of labor and building materials. If the home buyer puts up $30,000 as a down payment, then $70,000 must be borrowed. If the loan is issued at 11% over a 30-year period, the amount of interest paid will be $167,806. That means the amount paid to those who loan the money is about 2 1/2 times greater than paid to those who provide all the labor and all the materials. It is true that this figure represents the time-value of that money over thirty years and easily could be justified on the basis that a lender deserves to be compensated for surrendering the use of his capital for half a lifetime. But that assumes the lender actually had something to surrender, that he had earned the capital, saved it, and then loaned it for construction of someone else's house. What are we to think, however, about a lender who did nothing to earn the money, had not saved it, and, in fact, simply created it out of thin air?

What is the time-value of nothing? 
As we have already shown, every dollar that exists today, either in the form of currency, checkbook money, or even credit card money -- in other words, our entire money supply -- exists only because it was borrowed by someone; perhaps not you, but someone.

That means all the American dollars in the entire world are earning daily and compounding interest for the banks which created them. A portion of every business venture, every investment, every profit, every transaction which involves money -- and that even includes losses and the payment of taxes -- a portion of all that is earmarked as payment to a bank.

And what did the banks do to earn this perpetually flowing river of wealth? Did they lend out their own capital obtained through investment of stockholders? Did they lend out the hard-earned savings of their depositors? No, neither of these were their major source of income. They simply waved the magic wand called fiat money.

The flow of such unearned wealth under the guise of interest can only be viewed as usury of the highest magnitude. Even if there were no other reasons to abolish the Fed, the fact that it is the supreme instrument of usury would be more than sufficient by itself.
Who creates the money to pay the interest? 
One of the most perplexing questions associated with this process is "Where does the money come from to pay the interest?" If you borrow $10,000 from a bank at 9%, you owe $10,900. But the bank only manufactures $10,000 for the loan. It would seem, therefore, that there is no way that you -- and all others with similar loans -- can possibly pay off your indebtedness. The amount of money put into circulation just isn't enough to cover the total debt, including interest. This has led some to the conclusion that it is necessary for you to borrow the $900 for interest, and that, in turn, leads to still more interest. The assumption is that, the more we borrow, the more we have to borrow, and that debt based on fiat money is a never ending spiral leading inexorably to more and more debt.

This is a partial truth. It is true that there is not enough money created to include the interest, but it is a fallacy that the only way to pay it back is to borrow still more. The assumption fails to take into account the exchange value of labor. Let us assume that you pay back your $10,000 loan at the rate of approximately $900 per month and that about $80 of that represents interest. You realize you are hard pressed to make your payments so you decide to take on a part-time job.

The bank, on the other hand, is now making $80 profit each month on your loan. Since this amount is classified as "interest," it is not extinguished as is the larger portion which is a return of the loan itself. So this remains as spendable money in the account of the bank. The decision then is made to have the bank's floors waxed once a week. You respond to the ad in the paper and are hired at $80 per month to do the job. The result is that you earn the money to pay the interest on your loan, and -- this is the point -- the money you receive is the same money which you previously had paid. As long as you perform labor for the bank each month, the same dollars go into the bank as interest, then out of the revolving door as your wages, and then back into the bank as loan repayment.

It is not necessary that you work directly for the bank. No matter where you earn the money, its origin was a bank and its ultimate destination is a bank. The loop through which it travels can be large or small, but the fact remains all interest is paid eventually by human effort. And the significance of that fact is even more startling than the assumption that not enough money is created to pay back the interest. It is that the total of this human effort ultimately is for the benefit of those who create fiat money.

It is a form of modern serfdom in which the great mass of society works as indentured servants to a ruling class of financial nobility.Understanding the Illusion . . . 
That's really all one needs to know about the operation of the banking cartel under the protection of the Federal Reserve. But it would be a shame to stop here without taking a look at the actual cogs, mirrors, and pulleys that make the magical mechanism work. It is a truly fascinating engine of mystery and deception.

Let us, therefore, turn our attention to the actual process by which the magicians create the illusion of modern money. First we shall stand back for a general view to see the overall action.

Then we shall move in closer and examine each component in detail.

The Mandrake Mechanism: An Overview 
The entire function of this machine is to convert debt into money. It's just that simple. First, the Fed takes all the government bonds which the public does not buy and writes a check to Congress in exchange for them. (It acquires other debt obligations as well, but government bonds comprise most of its inventory.) There is no money to back up this check. These fiat dollars are created on the spot for that purpose. By calling those bonds "reserves," the Fed then uses them as the base for creating nine (9) additional dollars for every dollar created for the bonds themselves. The money created for the bonds is spent by the government, whereas the money created on top of those bonds is the source of all the bank loans made to the nation's businesses and individuals. The result of this process is the same as creating money on a printing press, but the illusion is based on an accounting trick rather than a printing trick.

The bottom line is that Congress and the banking cartel have entered into a partnership in which the cartel has the privilege of collecting interest on money which it creates out of nothing, a perpetual override on every American dollar that exists in the world.

Congress, on the other hand, has access to unlimited funding without having to tell the voters their taxes are being raised through the process of inflation. If you understand this paragraph, you understand the Federal Reserve System.

Now for a more detailed view. There are three general ways in which the Federal Reserve creates fiat money out of debt.

One is by making loans to the member banks through what is called the Discount Window.

The second is by purchasing Treasury bonds and other certificates of debt through what is called the Open Market Committee.

The third is by changing the so-called reserve ratio that member banks are required to hold. Each method is merely a different path to the same objective: taking IOUs and converting them into spendable money.

The Discount Window is merely bankers' language for the loan window. When banks run short of money, the Federal Reserve stands ready as the "bankers' bank" to lend it. There are many reasons for them to need loans. Since they hold "reserves" of only about one or two per cent of their deposits in vault cash and eight or nine per cent in securities, their operating margin is extremely thin. It is common for them to experience temporary negative balances caused by unusual customer demand for cash or unusually large clusters of checks all clearing through other banks at the same time. Sometimes they make bad loans and, when these former "assets" are removed from their books, their "reserves" are also decreased and may, in fact, become negative. Finally, there is the profit motive. When banks borrow from the Federal Reserve at one interest rate and lend it out at a higher rate, there is an obvious advantage. But that is merely the beginning.
When a bank borrows a dollar from the Fed, it becomes a one-dollar reserve.

Since the banks are required to keep reserves of only about ten per cent, they actually can loan up to nine dollars for each dollar borrowed.

Let's take a look at the math. Assume the bank receives $1 million from the Fed at a rate of 8%. The total annual cost, therefore, is $80,000 (.08 X $1,000,000). The bank treats the loan as a cash deposit, which means it becomes the basis for manufacturing an additional $9 million to be lent to its customers. If we assume that it lends that money at 11% interest, its gross return would be $990,000 (.11 X $9,000,000). Subtract from this the bank's cost of $80,000 plus an appropriate share of its overhead, and we have a net return of about $900,000. In other words, the bank borrows a million and can almost double it in one year. That's leverage! But don't forget the source of that leverage: the manufacture of another $9 million which is added to the nation's money supply.

The most important method used by the Federal Reserve for the creation of fiat money is the purchase and sale of securities on the open market. But, before jumping into this, a word of warning. Don't expect what follows to make any sense. Just be prepared to know that this is how they do it.

The trick lies in the use of words and phrases which have technical meanings quite different from what they imply to the average citizen. So keep your eye on the words. They are not meant to explain but to deceive. In spite of first appearances, the process is not complicated. It is just absurd.
Start with . . .

The federal government adds ink to a piece of paper, creates impressive designs around the edges, and calls it a bond or Treasury note. It is merely a promise to pay a specified sum at a specified interest on a specified date. As we shall see in the following steps, this debt eventually becomes the foundation for almost the entire nation's money supply. In reality, the government has created cash, but it doesn't yet look like cash. To convert these IOUs into paper bills and checkbook money is the function of the Federal Reserve System. To bring about that transformation, the bond is given to the Fed where it is then classified as a . . .

An instrument of government debt is considered an asset because it is assumed the government will keep its promise to pay. This is based upon its ability to obtain whatever money it needs through taxation. Thus, the strength of this asset is the power to take back that which it gives. So the Federal Reserve now has an "asset" which can be used to offset a liability. It then creates this liability by adding ink to yet another piece of paper and exchanging that with the government in return for the asset. That second piece of paper is a . . .

There is no money in any account to cover this check. Anyone else doing that would be sent to prison. It is legal for the Fed, however, because Congress wants the money, and this is the easiest way to get it. (To raise taxes would be political suicide; to depend on the public to buy all the bonds would not be realistic, especially if interest rates are set artificially low; and to print very large quantities of currency would be obvious and controversial.) This way, the process is mysteriously wrapped up in the banking system. The end result, however, is the same as turning on government printing presses and simply manufacturing fiat money (money created by the order of government with nothing of tangible value backing it) to pay government expenses. Yet, in accounting terms, the books are said to be "balanced" because the liability of the money is offset by the "asset" of the IOU. The Federal Reserve check received by the government then is endorsed and sent back to one of the Federal Reserve banks where it now becomes a . . .

Once the Federal Reserve check has been deposited into the government's account, it is used to pay government expenses and, thus, is transformed into many . . .

These checks become the means by which the first wave of fiat money floods into the economy. Recipients now deposit them into their own bank accounts where they become . . .

Commercial bank deposits immediately take on a split personality.

On the one hand, they are liabilities to the bank because they are owed back to the depositors. But, as long as they remain in the bank, they also are considered as assets because they are on hand. Once again, the books are balanced: the assets offset the liabilities. But the process does not stop there. Through the magic of fractional-reserve banking, the deposits are made to serve an additional and more lucrative purpose. To accomplish this, the on-hand deposits now become reclassified in the books and called . . .


Reserves for what? Are these for paying off depositors should they want to close out of their accounts? No. That's the lowly function they served when they were classified as mere assets. Now that they have been given the name of "reserves," they become the magic wand to materialize even larger amounts of fiat money. This is where the real action is: at the level of the commercial banks. Here's how it works. The banks are permitted by the Fed to hold as little as 10% of their deposits in "reserve." That means, if they receive deposits of $1 million from the first wave of fiat money created by the Fed, they have $900,000 more than they are required to keep on hand ($1 million less 10% reserve). In bankers' language, that $900,000 is called . . . 
The word "excess" is a tip off that these so-called reserves have a special destiny. Now that they have been transmuted into an “excess,” they are considered as available for lending. And so in due course these excess reserves are converted into . . .

But wait a minute. How can this money be loaned out when it is owned by the original depositors who are still free to write checks and spend it any time they wish? The answer is that, when the new loans are made, they are not made with the same money at all. They are made with brand new money created out of thin air for that purpose. The nation's money supply simply increases by ninety per cent of the bank's deposits. Furthermore, this new money is far more interesting to the banks than the old. The old money, which they received from depositors, requires them to pay out interest or perform services for the privilege of using it. But, with the new money, the banks collect interest, instead, which is not too bad considering it cost them nothing to make. Nor is that the end of the process. When this second wave of fiat money moves into the economy, it comes right back into the banking system, just as the first wave did, in the form of . . .

The process now repeats but with slightly smaller numbers each time around. What was a "loan" on Friday comes back into the bank as a "deposit" on Monday. The deposit then is reclassified as a "reserve" and ninety per cent of that becomes an "excess" reserve which, once again, is available for a new "loan." Thus, the $1 million of first wave fiat money gives birth to $900,000 in the second wave, and that gives birth to $810,000 in the third wave ($900,000 less 10% reserve). It takes about twenty-eight times through the revolving door of deposits becoming loans becoming deposits becoming more loans until the process plays itself out to the maximum effect, which is . . .


The amount of fiat money created by the banking cartel is approximately nine times the amount of the original government debt which made the entire process possible. When the original debt itself is added to that figure, we finally have . . .


The total amount of fiat money created by the Federal Reserve and the commercial banks together is approximately ten times the amount of the underlying government debt. To the degree that this newly created money floods into the economy in excess of goods and services, it causes the purchasing power of all money, both old and new, to decline. Prices go up because the relative value of the money has gone down. The result is the same as if that purchasing power had been taken from us in taxes. The reality of this process, therefore, is that it is a . . .


Without realizing it, Americans have paid over the years, in addition to their federal income taxes and excise taxes, a completely hidden tax equal to many times the national debt! And that still is not the end of the process. Since our money supply is purely an arbitrary entity with nothing behind it except debt, its quantity can go down as well as up. When people are going deeper into debt, the nation's money supply expands and prices go up, but when they pay off their debts and refuse to renew, the money supply contracts and prices tumble. That is exactly what happens in times of economic or political uncertainty. This alternation between period of expansion and contraction of the money supply is the underlying cause of . . .

Who benefits from all of this? Certainly not the average citizen.

The only beneficiaries are the political scientists in Congress who enjoy the effect of unlimited revenue to perpetuate their power, and the monetary scientists within the banking cartel called the Federal Reserve System who have been able to harness the American people, without their knowing it, to the yoke of modern feudalism.

The previous figures are based on a "reserve" ratio of 10% (a money-expansion ratio of 10-to-1). It must be remembered, however, that this is purely arbitrary. Since the money is fiat with no previous-metal backing, there is no real limitation except what the politicians and money managers decide is expedient for the moment. Altering this ratio is the third way in which the Federal Reserve can influence the nation's supply of money. The numbers, therefore, must be considered as transient.

At any time there is a "need" for more money, the ratio can be increased to 20-to-1 or 50-to-1, or the pretense of a reserve can be dropped altogether. There is virtually no limit to the amount of fiat money that can be manufactured under the present system.

Because the Federal Reserve can be counted on to "monetize" (convert into money) virtually any amount of government debt, and because this process of expanding the money supply is the primary cause of inflation, it is tempting to jump to the conclusion that federal debt and inflation are but two aspects of the same phenomenon. This, however, is not necessarily true. It is quite possible to have either one without the other.

The banking cartel holds a monopoly in the manufacture of money. Consequently, money is created only when IOUs are "monetized" by the Fed or by commercial banks. When private individuals, corporations, or institutions purchase government bonds, they must use money they have previously earned and saved. In other words, no new money is created, because they are using funds that are already in existence. Therefore, the sale of government bonds to the banking system is inflationary, but when sold to the private sector, it is not. That is the primary reason the United States avoided massive inflation during the 1980s when the federal government was going into debt at a greater rate than ever before in its history. By keeping interest rates high, these bonds became attractive to private investors, including those in other countries. Very little new money was created, because most of the bonds were purchased with American dollars already in existence. This, of course, was a temporary fix at best.

Today, those bonds are continually maturing and are being replaced by still more bonds to include the original debt plus accumulated interest. Eventually this process must come to an end and, when it does, the Fed will have no choice but to literally buy back all the debt of the '80s -- that is, to replace all of the formerly invested private money with newly manufactured fiat money -- plus a great deal more to cover the interest. Then we will understand the meaning of inflation.

On the other side of the coin, the Federal Reserve has the option of manufacturing money even if the federal government does not go deeper into debt. For example, the huge expansion of the money supply leading up to the stock market crash in 1929 occurred at a time when the national debt was being paid off. In every year from 1920 through 1930, federal revenue exceeded expenses, and there were relatively few government bonds being offered. The massive inflation of the money supply was made possible by converting commercial bank loans into "reserves" at the Fed's discount window and by the Fed's purchase of banker's acceptances, which are commercial contracts for the purchase of goods.

Now the options are even greater. The Monetary Control Act of 1980 has made it possible for the Creature to monetize virtually any debt instrument, including IOUs from foreign governments. The apparent purpose of this legislation is to make it possible to bail out those governments which are having trouble paying the interest on their loans from American banks. When the Fed creates fiat American dollars to give foreign governments in exchange for their worthless bonds, the money path is slightly longer and more twisted, but the effect is similar to the purchase of U.S. Treasury Bonds. The newly created dollars go to the foreign governments, then to the American banks where they become cash reserves. Finally, they flow back into the U.S money pool (multiplied by nine) in the form of additional loans. The cost of the operation once again is born by the American citizen through the loss of purchasing power. Expansion of the money supply, therefore, and the inflation that follows, no longer even require federal deficits. As long as someone is willing to borrow American dollars, the cartel will have the option of creating those dollars specifically to purchase their bonds and, by so doing, continue to expand the money supply.

We must not forget, however, that one of the reasons the Fed was created in the first place was to make it possible for Congress to spend without the public knowing it was being taxed. Americans have shown an amazing indifference to this fleecing, explained undoubtedly by their lack of understanding of how the Mandrake Mechanism works. Consequently, at the present time, this cozy contract between the banking cartel and the politicians is in little danger of being altered. As a practical matter, therefore, even though the Fed may also create fiat money in exchange for commercial debt and for bonds of foreign governments, its major concern likely will be to continue supplying Congress.

The implications of this fact are mind boggling. Since our money supply, at present at least, is tied to the national debt, to pay off that debt would cause money to disappear. Even to seriously reduce it would cripple the economy. Therefore, as long as the Federal Reserve exists, America will be, must be, in debt. 
The purchase of bonds from other governments is accelerating in the present political climate of internationalism. Our own money supply increasingly is based upon their debt as well as ours, and they, too, will not be allowed to pay it off even if they are able.

While it is true that the Mandrake Mechanism is responsible for the expansion of the money supply, the process also works in reverse. Just as money is created when the Federal Reserve purchases bonds or other debt instruments, it is extinguished by the sale of those same items. When they are sold, the money is given back to the System and disappears into the inkwell or computer chip from which it came. Then, the same secondary ripple effect that created money through the commercial banking system causes it to be withdrawn from the economy. Furthermore, even if the Federal Reserve does not deliberately contract the money supply, the same result can and often does occur when the public decides to resist the availability of credit and reduce its debt. A man can only be tempted to borrow, he cannot be forced to do so.

There are many psychological factors involved in a decision to go into debt that can offset the easy availability of money and a low interest rate: A downturn in the economy, the threat of civil disorder, the fear of pending war, an uncertain political climate, to name just a few. Even though the Fed may try to pump money into the economy by making it abundantly available, the public can thwart that move simply by saying no, thank you. When this happens, the old debts that are being paid off are not replaced by new ones to take their place, and the entire amount of consumer and business debt will shrink. That means the money supply also will shrink, because, in modern America, debt is money. And it is this very expansion and contraction of the monetary pool -- a phenomenon that could not occur if based upon the laws of supply and demand -- that is at the very core of practically every boom and bust that has plagued mankind throughout history.

In conclusion, it can be said that modern money is a grand illusion conjured by the magicians of finance in politics. We are living in an age of fiat money, and it is sobering to realize that every previous nation in history that has adopted such money eventually was economically destroyed by it. Furthermore, there is nothing in our present monetary structure that offers any assurances that we may be exempted from that morbid roll call.
Correction. There is one. It is still within the power of Congress to abolish the Federal Reserve System.

The American dollar has no intrinsic value. It is a classic example of fiat money with no limit to the quantity that can be produced. Its primary value lies in the willingness of people to accept it and, to that end, legal tender laws require them to do so.

It is true that our money is created out of nothing, but it is more accurate to say that it is based upon debt. In one sense, therefore, our money is created out of less than nothing. The entire money supply would vanish into the bank vaults and computer chips if all debts were repaid.

Under the present System, therefore, our leaders cannot allow a serious reduction in either the national or consumer debt. Charging interest on pretended loans is usury, and that has become institutionalized under the Federal Reserve System.

The Mandrake Mechanism by which the Fed converts debt into money may seem complicated at first, but it is simple if one remembers that the process is not intended to be logical but to confuse and deceive. The end product of the Mechanism is artificial expansion of the money supply, which is the root cause of the hidden tax called inflation.

This expansion then leads to contraction and, together, they produce the destructive boom-bust cycle that has plagued mankind throughout history wherever fiat money has existed.

Friday, 2 June 2017

Steve Keen Says Don Brash Misleading New Zealand How Banking Really Works 28 May 2017

28 May 2017 Radio New Zealand interview by Wallace Chapman, with world renowned Prof of Economics, Steve Keen, re money system funding structure fundamentals and the New Zealand economy;

Full interview audio can be listened to here;

(Transcript done & added by Iain Parker is in brackets)

He says it’s all about debt – specifically private debt.
We’re focussing on the wrong topic. We’re so focussed on government debt, what actually caused the crisis was run away private debt.”
And he says there are a number of ‘debt zombies’ in the world economy - New Zealand among them.
He calls New Zealand ‘Schrodinger’s Zombie’.
The walking dead have already had a financial crisis, he says, and have been experiencing weak growth, while 'zombie-to-be' countries avoided the 2008/2009 crisis by borrowing their way through it.
Now they have a bigger debt burden to deal with when the next crisis hits, he says.
New Zealand sits in both camps. It had 190 percent of debt to GDP back in 2009, it bottomed out at about 170 percent then went back up to 180 percent of GDP. Most of that’s in the household sector so that’s driven the housing bubble in New Zealand, which of course the authorities normally deny, but it’s clearly there although in my opinion starting to turn right now.
So you guys have had two bites of the zombie cherry.”
He says there is no doubt the bubble will burst.

(WC – Just on a personal anecdote, listen to this steve, I can always recall, this is a New Zealand, back in, just before the global financial crisis, so early 2007, I was on a bus, and I saw this massive billboard, and I was looking around, for, to buy a little apartment or something at the time, you know had some savings, but it was a big billboard, and it said it was an advertisement for a bank, and said no more weird flatmates, 100 percent home loans.

Ive always remembered that, never forgotten it, and I thought to myself, how can that be, how can I call a bank and they can give me 100 percent deposit. I thought that was extraordinary, I thought then how sustainable is that.

SK - Youre right, it was unsustainable, and this is the other part of the logic which I cover a little bit in the book, as you are aware as well that banks create money by lending, people think they lend money, Ive actually imported a new term after I wrote the book, rather than saying banks lend, if you and I, you know, if you wanted to buy, I wanted to buy some New Zealand jewelery off you and you lend me the money to buy it, then that is actual lending.
Youve got to put aside money youve saved to give it to me, I then buy it, you cant spend it while youve given it to me, then Ive got to pay you back and its a bit like a seesaw.
If you lend money to me, my spending power goes up, your goes down, but overall the agregate doesnt change, and thats the model that mainstream economists have a lending as well, so they ignore the financial sector on that basis. If they are right, theyd be justified in ignoring it as well, but what banks actually do, is they originate money and debts. Im calling it bank originated debt or bombs, and when you get a bombed in an economy, the banks are creating the money literally out of double entry book keeping,literally out of nothing.
And, when they do it that gives them a claim on real resources. So theyre quite happy when the bubbles going on, to provide that hundred percent finance, Ive even seen evidence of 120 percent.

WC – Wow

SK – And, because they end up owning assets by double entry bookkeeping.

WC – Wow, my goodness. None of us are going to be reassuring to the local audience here to the New Zealand, to the local audience.

SK - Particularly to Don Brash I might add, because I saw hes been in newspapers deriding people who are talking about banks originating money, and hes dead wrong. This is one of these classic things, even central bank governors dont understand, some of them, how money and banks operate.
Thankfully some of them are waking up to it and that includes Bundesbank of all things, which contradicts, quite flatly contradicts Don brash on this particular point.)

The bubble will burst in the next one to two years - there’s been a real acceleration in house prices since 2012, they’ve increased by about 60 percent. But what I’m seeing now is the motivating force for rising house prices is rising mortgage credit. The wind in that bubble is starting to run out.”
So what would he do if he was New Zealand’s finance minister?
Because I’ve diagnosed the problem as being private debt, I’d work out ways to get private debt down. We’ve got two money factories in any capitalist economy: one, the private banks who create money by creating debt and, the other, the government which creates money by spending more than it gets back in taxes, which it’s quite capable of doing because it owns its own bank.
And we accept that bank’s money for anything we have to purchase.”
He wants to see the government create money and transfer it to individuals to pay back debt.
I’d be making a transfer to every private bank account but on condition that those who were in debt had to pay their debt down, whereas those who weren’t in debt got a cash injection - which you might say they’ve got to buy shares with it if you wanted to control the inflationary impact.

That would replace too much debt-based money with more fiat-based money and enable you to get out of the accounting trap you get into when the private sector has more debt than it can repay.”

Monday, 2 January 2017

The undeniable truth of New Zealand colonial era money system funding structure it still suffers.

The Reserve Bank (RBNZ) is starting to more openly tell the truth of the nations colonial era money system funding structures that we still suffer.

Which means they are beginning to feel an increase in wider public knowledge and how it will look if they keeps hiding behind lies.

This paper:

Titled - Implications of global liquidity developments for New Zealand - from the Nov 2015 Financial Stability Report, is the closest to the whole truth I have yet seen from the establishment, in regards to the fact that every unit of NZ credit or currency (not just significant proportion as it says) can be traced back to originating somewhere in the NZ economy as a loan of interest bearing credit owed to a non NZ Government, foreign lending institution, and that the OCR follows external influence, not leads;

"There are three key channels through which New Zealand could be affected by declining market liquidity: the impact on New Zealand banks’ funding markets; the impact on short-term interest rates and monetary policy implementation; and the impact on the New Zealand government bond market.

New Zealand banks fund a significant proportion of their balance sheets by accessing offshore wholesale debt markets. They do this by borrowing in foreign currency, then ‘swapping’ this back into NZD. Conditions in global financial markets are therefore an important determinant of New Zealand bank funding. New Zealand banks tend to focus on the primary market (new issues) rather than the secondary market for debt. Hence, funding liquidity is of more immediate importance than market liquidity. Funding liquidity refers to the ability of the banks to raise debt as required at a reasonable cost. Reserve Bank discussions with bank treasurers suggest that funding liquidity conditions have deteriorated somewhat in 2015, owing largely to greater market volatility caused by events such as the Greek crisis mid-year and recent turbulence tied to China.

New Zealand banks typically use market makers to help facilitate the foreign currency swap leg involved in borrowing from offshore. Market makers take the other side of the transaction with New Zealand banks (providing NZD in exchange for foreign currency that the banks have raised), while charging a spread. This spread has widened as costs have increased for the institutions providing these market making services for the reasons described above. Overall, the cost increases have been manageable thus far, but this highlights the flow-on effects of changes in market liquidity to New Zealand entities seeking offshore funding."

Now please consider the above, in relation to (below) how these Primary Wholesale Credit Institutions admit that they fund themselves and what that means for us;

To learn how a rogue few within the banking sector, have turned criminal, in using the 1980's deregulation of banking, as an opportunity to commit control frauds, that steal the wealth of wider society into their own personal trust accounts, please read on;

Although it is clear that over cooked unwise immigration and foreign criminals looking to launder their proceeds of crime into New Zealand assets, has had a detrimental impact upon the economy, when you know the truth of banking, you know that the criminal rogues within banking have had the greatest detrimental impact of all.

The rogues have used the extraordinary privileges of banking that are little known by wider society, to rob society blind. By pursuing personal gains from commission and bonus based wage structures, share holder dividends and buy backs, that are tied to bank profits.

They have cooked the credit books and loaned society massive amounts beyond fundamental normal course of business basis, than they knew there was ever the physical means to clear.

Now as the penalty compound interest charges upon the massive amounts of private and government debt, that is counterfeit credit based, that is now priced into everything, it is sucking the lifeblood out of the economy.(Debt deflation)

Counterfeit credit based purchasing power has also inflated the cost of land based assets beyond any fundamental normal course of business basis (Debt inflation) It is removing dignified access to them, for those left behind, attempting to make ends meet within the normal course of business real economy.

The Truth about Banks

IMF FINANCE & DEVELOPMENT, March 2016, Vol. 53, No. 1

To summarize, our work builds on the fundamental fact that banks are not intermediaries of real loanable funds, as is generally assumed in the mainstream neoclassical macroeconomics literature. Rather, they are providers of financing, through the creation of new monetary purchasing power for their borrowers. Understanding this distinction has important implications for a host of practical questions......

Practical implication

Many policy prescriptions aim to encourage physical investment by promoting saving, which is believed to finance investment. The problem with this idea is that saving does not finance investment, financing and money creation do. Bank financing of investment projects does not require prior saving, but the creation of new purchasing power so that investors can buy new plants and equipment. Once purchases have been made and sellers (or those farther down the chain of transactions) deposit the money, they become savers in the national accounts statistics, but this saving is an accounting consequence—not an economic cause—of lending and investment. To argue otherwise is to confuse the respective macroeconomic roles of real resources (saving) and debt-based money (financing).

The Bank of England is one of the senior most international financial institutions in the world. This from its March 2014 quarterly bulletin;

• This article explains how the majority of money in the modern economy is created by commercial banks making loans.

• Money creation in practice differs from some popular misconceptions — banks do not act simply as intermediaries, lending out deposits that savers place with them, and nor do they ‘multiply up’ central bank money to create new loans and deposits.

• Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.

Banking in New Zealand Fourth Edition - published by the New Zealand Bankers Association in 2006 - makes it very clear that presently every dollar of currency circulating in New Zealand's money system originates as an interest bearing loan of credit owed to a private owned lending institution. That supplies brand new credit and currency that did not already exist. Domestic banks act as a middleman organiser for larger foreign banks. There is no third party, ultimately only the lender and the banking institutions that sit at the end of the wholesale credit supply discount chain.

Chapter 4 - The Creation of Money and Credit - is especially enlightening;


what Actually Happens in reality, although the process outlined in the previous sections could occur, cash balances in bank vaults no longer act as a constraint on bank lending in the way that they might have up until the latter part of the 20th century.......
in such an environment, there is still scope for a bank to expand its lending and create credit, but it is dependent on there being net inflows of funds into the banking system as a whole. These inflows of funds may come from depositors from outside new Zealand (and we have seen significant inflows of funds from such sources in recent years), or from the government making net deposits of funds into the banking system (through its fiscal policy, as outlined below).

We also have a situation where, since 1985, new Zealand banks have not had any specific reserve requirements applied to their deposit liabilities. This means that, in theory, banks could keep on creating credit and expanding their loan portfolios indefinitely. in such an environment, it is the cost of credit, based upon the costs that banks have to pay to raise the deposits, that becomes the constraint on the quantity of credit that is created.

Back in 2010, Alan Bollard, the former New Zealand Reserve Bank Governor stated as plain as day in a book that he wrote, that some within the banking sector had used their position within banks to commit control frauds against New Zealand society. Yet only superficial band aids were ever applied and the scams have marched on regardless;

Dr Alan Bollard Governor of the Reserve Bank of New Zealand 2002 - 2012.

Excerpts from a book Alan Bollard published 1 Sept 2010;

Crisis: One Central Bank Governor and the Global Financial Collapse

Pg 20
Banking practices differ around the world, but we ensure ours meet international standards. These are set by a somewhat shadowy group called the Basel Committee on Banking Supervision. Comprised of representatives of large countries( not including New Zealand ), the group meets in Switzerland at the Bank of International Settlements (BIS).

Pg 96
The Bank of International Settlements is an important institution, acting as a sort of central bank for central banks. Set up in 1930, originally to facilitate German World War 1 reparations, it has a checkered history but today offers modern banking services and provides a forum for central bankers.

Pg 183
“In self-interest, banks may encourage New Zealanders to take on more debt than is good for them individually or deliver more external liability than is good for the country.”

Pg 157
“Another governance worry related to the power and competence, or lack thereof, on the part of banks chief risk officers and risk committees. These officers assess the possible outcomes from any deal and decide whether the risks are acceptable under the banks mandated policies. We were now hearing about cases where risks had been miscalculated, procedures bypassed and officers overruled, all in the race for higher earnings.”
Pg 165
“In the case of some of the agricultural defaults, we felt that certain banks had been over-optimistic and under-analytical in their lending, and we moved to tighten some of the relevant capital requirements for the future.”