Ok, the Fed after a decade of manipulating interest rates to absurdly low levels (like 0%) finally bumped them up a quarter point. I’ve read some of the follow-up from the “experts” but quite frankly most of them are the standard stuff that doesn’t really reveal details the public should know about the Fed and interest rates. They simply run off a list of expected impacts.
Let’s take a moment here and peek behind the curtain of this topic of the Fed and interest rates in the hopes of helping to make sense of this issue. I will not just shallowly skirt the surface to make myself sound like an “expert” I promise. (Follow the links for more details BTW.)
What Are Interest Rates?
Distilling it down to the basics, the interest rate is the cost of currency lent to someone or some institution. For the typical individual, if they borrow money from a bank, they would be charged an interest rate or cost on that money which continues until the money plus interest is paid back. Same with your credit card.
The Fed interest rate is what the Fed charges to lend money to their customers, generally the government and huge international financiers/banks. They bumped it up .25%. Not a huge deal but here’s some things to understand about the Fed and interest rates.
Where Does the Fed Get the Money to Lend?
Do they get it from investments? Does it come from commodity guarantees like from what they hold in gold or silver? Are their assets backing it?
Well, the answers to all those questions would be, no. The real truth is that the Fed simply generates our currency on the basis of a privilege granted to them by our Congress in 1913. That privilege which granted them a charter as the central bank for the United States allows them to generate money from nothing.
That’s correct- nothing. The Fed has no reserves to back our currency. It simply creates it from nothing but electronic blips on a computer screen. G. Edward Griffin, author of the definitive book on the Federal Reserve “The Creature from Jekyll Island: A Second Look at the Federal Reserve” describes this congressional privilege as “The Mandrake Mechanism“.
You’ll note on the Federal Reserve Note (FRN) the phrase, “This note is legal tender for all debts. public and private.” Pull out any FRN and you’ll see it very small print on the front of the bill.
In other words, our currency is not usable for anything but debt! As long as we accept that non-redeemable (in commodities like precious metals) paper as a debt exchange instrument, it has value.
What is Money Today?
In order to understand the impact of interest, you first have to understand what money is. In the simplest terms, money is that which enables us to purchase services or products from other people. Hence, money can be anything widely accepted as payment for products or services. We could exchange dogs and cats for money if we wanted to. (Don’t think the dogs and cats would like that nor the dog and cat lovers but just saying that to make a point.)
However, in modern times, money is the replacement for barter. In place of trading another desired good for another desired good (dogs and cats again?), we use a generally accepted form of money called the Federal Reserve Note.
After the Federal Reserve- Money Changed
Gold Certificate-One Hundred Dollars in Gold Coin Payable to the Bearer on Demand
Our money used to be commodity money. That is, it used to be redeemable in gold or silver coin upon demand. There were some advantages to this, mainly for the user of this type of money.
First of all intrinsic value. Gold cannot be created with the flick of a pen. There is a limited amount of it, it needs to be mined with labor and it is desired, it tends to have stable value. The user of this type of commodity money knew that it could be exchanged for an equivalent quantity of gold coin. So it had intrinsic and BTW universally accepted value. (For more on gold as money read, Why Gold-Backed Money Doesn’t Bring Booms and Busts.)
It was still fiat money. That is, money by decree of the government, but it was redeemable in an exchangeable commodity that was considered valuable.
Entre- the Federal Reserve and the game changed.
With the advent of the Federal Reserve in 1913, money instead of being fiat and redeemable became a new creation- Fiat and irredeemable. Still by decree, no longer redeemable in coin, however, it was also came with something even more insidious. Not only is it by decree only and not redeemable in anything else as a certificate for a commodity but it was also…
Debt Money
Thanks to our Congress, the Federal Reserve Act created a hybrid kind of “Federal” agency called the Federal Reserve. The Federal Reserve according even to its defenders, “the Fed is an independent agency that can conduct its duties without political pressure.” Good as far as it goes but fails to mention that politicians need both media support and money. The media has been monopolized into a cartel. Major Corporations need free access to money as do politicians.
So, can you see where the suppliers of money into the system (The Fed) may, just may, have a little bit of leverage over the government and the media as well? Perhaps the pressure is not coming from political pressure but the other way around. After all, you cannot bite the hand that feeds you without ending up hungry can you?
When the government/politicians need more money than comes from taxes, fees and fines, the government turns to the Fed. That creates the federal deficit which is spending over intake.
The Fed in turn creates new money from nothing for the government through the Mandrake Mechanism. It also lends this fiat, irredeemable currency created from nothing to the government with interest. This is unlike a normal fiat system because now the money has a debt attached to it on top of its creation from nothing- hence it is now debt money.
Here’s the Real Problem
By creating money and putting it into circulation only when a loan is made, and then removing it from circulation when the loan is repaid, the Federal Reserve cartel has created a perfect debt trap. Any meaningful attempt to escape this debt trap, by paying down debt, will trigger an automatic “correction mechanism” that guarantees failure.
The chain of events is very predictable. The nation decides to pay down debt. We also begin to limit spending and not take out new loans. (Ok, I admit this is a bit idyllic and not very realistic with today’s crop of spenders of public money in office. However, stay with me as I am just painting a best outcome possibility picture to make a point.)
Naturally, since all money is debt based, the economy’s debt-based money supply will shrink. Now, this will begin to create some disruptions in the economy. Initially the disruptions will be minor. Over time they will become intolerable, unless new money is injected back into the economy through new loans.
Why? Well, perhaps a 10 percent reduction in the nation’s money supply wouldn’t be traumatically disruptive. However, suppose it ramped up to a 40 percent reduction, or a 60 percent reduction, or even an 80 percent reduction. Imagine an economy with 80% less money circulating in it. What kind of impact would that have?
Robert Hemphill, credit manager of the Atlanta Federal Reserve bank in the forward to 100% Money by Irving Fisher, put it this way:
“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… 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.”
The real problem then? As a nation we are locked into a cycle of ever increasing debt, or a system of financial servitude to the Federal Reserve cartel that is literally inescapable.
National Debt
Now, one can see why the national debt keeps growing. It has to. Otherwise, the money supply for the nations economy will shrink since it is based upon a debt based money supply. That’s why we are encouraged to keep spending (not saving). That’s also why the need for constant wars, entitlement growth, educational loans, credit card spending, etc. Debt fuels the system that the banking cartel created when the Federal Reserve was created. Without debt, the system collapses.
The Interest Rate
First of all, having interest rates controlled by a tiny minority of elite bankers or international financiers is abominable. Think about it. A tiny minority of who we are supposed to revere as “wise men” control the cost and volume of money for the entire nation. Seattle to Miami and Portland, Maine to San Diego, Calif. This doesn’t even include the money lent overseas or used to finance our ongoing “war(s) on terror”
Here’s how this control hurts us. They arbitrarily decide (always for their best interests BTW) that it would be best for all of us if the interest rate they were charging was zero. What does this do?
Savings are not only discouraged but penalized. Why save at an absolutely pitiful rate of .25%? At that rate, may as well spend it because you won’t be alive to see the money grow to any appreciable level of gain anyway.
Spending up to the highest levels is encouraged. When Bush took over the national debt stood at the massive (at the time) level of $5.6 Trillion. When Obama took over it was about $10.3 Trillion. As I write this according to the U.S. National Debt Clock, it currently stands at :
While the interest rate hike will boost savings returns a bit and perhaps annuities, it will also raise credit card interest, student loan interest, bank loan interest and most insidiously the interest on the national debt.
The most quickly felt will be the national debt velocity as government is a first level customer. The rest will trickle down a bit more slowly, maybe. Who knows? Banks and credit cards may simply, like the oil companies when a potentially precipitating event occurs, use it as an excuse to jettison rates up a bit anyway.
The Danger?
The Fed goes beyond .25% and continues to ramp up its rate of lending. Having read this article you can already figure out what will happen. The money supply will contract in increasing velocity with each rate hike. Eventually, like a rubber band springing back in response to being snapped, debt money will need to be injected into our debt based economy.
Like the rubber band however, it will not return to its original position but spring beyond it. This could trigger hyperinflation. Think Weimar Republic, Zimbabwe etc. In other words a complete economic collapse.
So while some may applaud the Fed’s move, I see it as potential danger signal. If interest rates continue to climb so will the national debt.
More debt means the currency continue to drop in value. (It is already inflated to the point of being worth less than 5 cents of its value when the Fed began in 1913. That means that 5 cents would purchase more than what a dollar will today back in 1913.) As it drops in value, more dollars are needed to purchase the same things.
We are seeing that already as food costs are rising or for the same money you are getting less food. (Seen in the form of lowered quantity in packaged goods. Look for it as you shop. You’ll see how food distributors are masking inflation of their production costs to keep us buying.)
There is a whole lot I left out of our economic set up in this article. I really just touched upon the topic of the Fed and our economy. There are also solutions to all of this. It does not include the continuance of the Fed of course. As pointed out briefly here. This Federal Reserve System is a system of financial servitude designed to make as little more than debt slaves.
I hope this article helps you to see that. For more, watch the YouTube with G. Edward Griffin, read The Creature from Jekyll Island already mentioned above or a shorter version of the story in Dishonest Money: Financing the Road to Ruin by Joseph Plummer. Suggestions for change are contained therein.
Meanwhile, pay attention to the Fed interest rate. It could signal danger ahead.
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