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Tuesday, January 26, 2010

The Federal Reserve

Let's play a game.  It's called "who is my daddy and what does he do"?  (Kindergarten Cop)

Who is the Fed and what does it do?

http://www.federalreserve.gov/

First of all, I find it odd that the web address extension is ".gov" since the Federal Reserve (the Fed) is owned by private banks, and not by the public.

Looks like the first lie so far.

Basically, the Fed is in charge of all the little federal reserve notes floating around this country in the form of computer code in the computer servers of the banks or in the form of "dollar bills".  The treasury prints the money, but only with the permission of the Fed.

Some days, a person, or group of people, in the treasury decides that we need more money to pay off government liabilites.  When this happens, the treasury creates treasury bills (this is a way of saying "the government promises to repay you with something of equal value plus interest") which are then purchased by the Fed.  These aren't purchased with money because the money doesn't exist at this point...remember, the whole point was to create new money in the first place.  The t-bills are purchased with purchasing power. This purchasing power doesn't actually exist either.  What happens is this:  the Fed assumes the purchasing power (pulls it out of thin air) and gives the treasury (a government entity) permision to print new money.  Then the treasury goes and hands out the money to people who produced no value in order to earn said money.

Please go look up the definition of "fiat".  It's a latin word.  I'm not talking about the car.

Now, I could be wrong on all this.  Maybe the Fed does actually own something or produce something that has value, but so far in my education of monetary policy I haven't found it.

Please enlighten me if anyone out there has the answer.


*This post does not even begin to consider the implications of such a fiat system.  I would venture to say that the entire economy is affected by cycles because of this.  Go check out http://atleastonewhy.blogspot.com/

3 comments:

  1. Hahaha, when you look up "fiat currency" on wikipedia, you see a picture of a U.S. $20 bill. Talk about posterchild...

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  2. The Fed is really good at Check Clearing. That's the only thing they do well, unless you consider their fantastic ability to screw up the economy. However, they don't have a monopoly over that activity because there are a bunch of non-Fed Private Banks out there.

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  3. Non Fed private banks that use what currency?

    ReplyDelete