Dollars and oil

Alright, this will be an attempt to completely understand how the federal reserve system works.

It's confusing and complex but also fascinating, so let's see what we can come up with. Please offer additions or corrections as you see them.

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The federal reserve is a private/public hybrid corporation composed of 12 departments or companies that are each somewhat independent. Each of these companies issues stock that can only be bought by banks within its operating region; banks are required to use money (I think it is 3% of their revenues) to purchase stock in the federal reserve company in their region, and in exchange these banks get paid dividends on this stock that they own, and also get to vote on federal reserve company board members. Federal reserve stock isn't publically traded and banks are forbidden from trading or selling the stocks they own.

The US Treasury does not print US currency, it prints federal reserve notes. There is no US currency in existence anywhere in the world anymore, there is only federal reserve corporation's Monopoly money. I say Monopoly money because the federa reserve is a corporation and not a government entity. The federal reserve corporation is not funded by the government or by taxes, rather the federal reserve corporation makes money in several ways: 1) private banks are required to buy stock in the federal reserve corporation, which provided the initial startup capital and probably still provides some revenue as new banks join, 2) the federal reserve company charges interest and fees for managing transactions between private banks, 3) the federal reserve corporation is paid interest on assets it owns, such as mortgage backed securities and US government bonds, and 4) the federal reserve corporation creates money virtually by simply adding money to the reserves of private banks that own stock in one of the 12 federal reserve companies.

This last one is especially interesting, because the federal reserve corporation isn't legally allowed to buy US government bonds "from the government", therefore it skirts this by buying them from the banks. In fact, I'm sure this "restriction" on the federal reserve corporation is actually designed to force the federal reserve corporation to buy bonds though the intermediary of the banks, thus ensuring profits for the banks. So it works like this: large private banks like Citibank or Bank of America buy US government bonds and then turn around and sell these to the federal reserve corporation; the federal reserve corporation "pays for" these bonds by simply adding to the digital account reserves for that private bank from which it received ownership of the bonds. Note that the federal reserve corporation didn't actually spend any existing money or capital acquiring those bonds, it simply credited the accounts of the banks who originally bought the bonds from the government.

Now the private banks made money by selling their bonds to the federal reserve corporation, because these banks charge a fee for the transaction, and the federal reserve corporation now owns a huge amount of treasury bonds some of which at any given time are maturing. When the bonds mature the US treasury must pay the owner of the bond its value plus interest, which means the US treasury transfers some of its federal reserve notes from the US government coffers over to the federal reserve corporation.

What's so funny about this is that the federal reserve corporation is legally required to send any of its excess profits to the US treasury (excluding certain operating costs, and excluding dividend payments to the private banks that own stock in the federal reserve corporation). So while the federal reserve corporation owns a huge amount of US government treasury bonds, as these mature and the government pays he federal reserve corporation the bond value plus interest some, or even most, of this money just gets sent back over to the treasury again.

The federal reserve corporation also determines a "federal funds rate" which is an interest rate for banks lending money to each other overnight; all private banks within the federal reserve corporation's system have a balance of reserves ("money") held in their account at the federal reserve corporation, and if there are more reserves in those accounts than are required then the excess can be loaned to other banks with less or no excess reserves. The federal funds rate is also used as a primary indicator benchmark for how private banks set interest rates on things like mortgages, car loans, and credit card loans. As the federal funds rate increases it becomes more expensive for banks to immediately lend money to each other, which they do all the time in order to help each other out covering costs and deposits to make sure no bank ever runs out of money (banks with more excess reserves at any given moment can loan them to banks in need of immediate funds to cover their deposits and payments, so that when the federal funds rate goes up this is good for the lending bank but bad for the borrowing bank, and vice versa; the federal funds rate is supposed to be the mid-point between profit and loss for lending and borrowing banks respectively), therefore this extra cost is passed on to the consumer in the form of higher interest rates on consumer debts.

The federal reserve corporation also buys assets like mortgage backed securities (a Wall Street invention that is basically like a casino game, where they bundle thousands of individual mortgages together as one financial asset and buy and sell those assets in a market), and it does this in the same way that it buys government bonds, namely by crediting the reserve account of the private bank which owns the mortgage backed security and then taking possession of the mortgage backed security onto the federal reserve corporation's balance sheets. In this situation the federal reserve corporation just owns a made-up financial asset with no real value, as we saw in the 2008 financial collapse when the market for these assets collapsed due to too many bad mortgages being bundled into them (of course someone still made money on that crash, because Wall Street also makes up financial assets that are simply bets on whether or not another financial asset will rise or fall, and then bets on these in a market too). So if a mortgage backed security fails and the owner loses their money they paid for the security, that doesn't affect the federal reserve corporation if it happens to be that owner because it didn't pay real money for the security anyway.

Let's sum up here:

1) the federal reserve corporation constantly creates "money" and credits it into the accounts of private banks, in exchange for those banks giving the federal reserve corporation various government bonds or financial assets that the bank formerly owned. Also, the federal reserve corporation can simply add money to a bank's account for no reason, like in the TARP bailout.

2) most of the extra capital reserves (fake/created money) the federal reserve corporation creates pool in the largest private banks rather than being circulated in the overall real economy. This is somewhat good, because if that invented money were to enter the real economy it would cause massive inflation.

3) banks use that new money to buy primarily two things, mortgage backed securities and government treasury bonds. Buying the former props up Wall Street and the stock market, while buying the latter props up the federal government's revenues.

4) after banks use that made-up money to buy mortgage backed securities and bonds, these banks sell the securities and bonds to the federal reserve corporation, getting paid by the federal reserve corporation in more invented money and keeping the cycle going.

5) when the bonds mature, the treasury pays the federal reserve corporation, and then the federal reserve corporation transfers most of that amount back to the treasury anyway.

6) the federal reserve corporation now has trillions of dollars of mortgage backed securities and bonds on its balance sheets. It could sell these back into the market, thus generating more revenue for the federal reserve corporation and thus for the treasury also, but doing so would potentially flood the market with these securities and cause their devaluation leading to the collapse of this (artificial to begin with) market for these (made-up casino assets) mortgage backed securities. Or the federal reserve corporation can keep them on the balance sheets and either delete them off or wait for the market to collapse their value eventually, because the federal reserve corporation didn't spend any real money acquiring them so it had no loss if it loses them.

7) if the federal reserve corporation wanted to crash the US economy it would be very easy to do. All it would need to do is start selling its mortgage backed securities and treasury bonds on the open markets. This would not only flood and then collapse the prices in these markets but it would also skyrocket inflation leading to the severe devaluation of the dollar, triggering a runaway cycle of inflation, market panic, and unplayable debt.


Philosophical summary: currently the federal reserve corporation seems to be an ingenious scheme for coordinating banking, markets, and government to the mutual benefit of each of those entities. It is a private institution with some publicly appointed officials and which isn't legally allowed to make a profit, yet still pays stock dividends to the banks which own it. It sets powerful interest rates that trickle into the entire economy, it indirectly (and directly) prints money, and it allows banks to lend and borrow amongst each other to make sure no bank ever becomes insolvent.

Side effects: government spending and debt increases dramatically, but the portion of debt owed to the federal reserve corporation is effectively nullified because the federal reserve corporation has to legally transfer back any profits it makes back to the treasury anyway. Amount of dollars in circulation increases dramatically, but many of the new dollars made remain in the upper echelons of the private banks, which they use to 1) enrich themselves personally in salaries and bonuses, 2) lend and borrow to other banks, 3) keep the cycle of buying and selling between the government/Wall Street and the federal reserve corporation going, and 4) pumping out excess dollars into foreign markets in order to sustain and grow the international market for US dollars. Also it is possible this money pooling in the top of the banking sector is being used for other purposes that I'm not aware of.

On the issue of federal debt: most of the federal debt is actually owed to the government from itself, in the form of different government agencies (notably social security) using excess funds to buy treasury bonds, and as noted above in the form of the federal reserve corporation buying these bonds. The federal reserve corporation alone owns more US debt than Japan and China put together. And remember that it's good for as much of the debt as possible to be owned by the federal reserve corporation because when that debt comes due the money paid from the treasury to the federal reserve corporation is just self back anyway, minus the "house take" of course.

I've read that the federal reserve corporation is just a scheme for siphoning off hundreds of billions of dollars a year out of the US economy and into the hands of the financial elite, because the income tax is really just used to make debt payments on the federal debt to the US's creditors. This makes a little bit of sense, but I do not think it is quite that simple either. Those foreign or domestic "elites" (super-rich) who buy US treasuries will certainly get paid out from that, but these treasury bonds have a quite low return on investment (2% or so). That is lower than inflation, so it doesn't really make sense to say that China or Japan or foreign bankers purchasing US debt are "siphoning hundreds of billions out of the US economy every year" by doing that. Plus as I already noted above, most of the US federal debt is owned by the US itself, either as US government agencies owning it or the federal reserve corporation owning it.

The other way the federal reserve corporation can enrich the elites at our expense is by playing around with the interest rates and stock markets. They can create or inspire booms and busts, and whether there is a boom or bust someone is always making huge sums of money from that. The stock market is a sort of casino game of betting, but when you have access to the mechanism within the system that can determine how the game turns out, the betting becomes an inside game. I wonder if anyone within the federal reserve corporation or connected to it has ever been charged with insider trading as a result of the federal reserve corporation's policies causing either booms or busts in the stock markets... probably not.

The federal reserve corporation also creates money out of thin air, and gives this money to private banks (it also gives it to European private banks as well as American ones). That is obviously a way for the federal reserve system to screw the rest of us over by making the super-rich even super-richer. I think the TARP bailout was a tipping point: the federal reserve system wanted to start a massive new scale of fraud, but in order to get the cycle going (the cycle being what I outlined in the last post, of where private banks buy US treasury bonds and then sell these to the federal reserve corporation, which pays for them with created/invented money, and then the bank uses that same money to buy more bonds, etc.) they needed a large influx of new money at the start. They achieved this by forcing Congress to pass the TARP bill, which allowed the federal reserve to "legally" (it could have done it anyway, but with such large amounts it would have been political suicide) create trillions of dollars out of thin air on their computers and simply transfer this money into private banks. That got the whole "QE" thing rolling.

That's already happening. Many of the wealthy are currently paying 7% income tax and in the new health care bill it would b decreased to 3.5%

Here in Florida I am considered a low income person but yet I have to pay 15% federal income tax.

Don't even ask if that pisses me off.