SUMMARY: This mathematical analysis shows how:
 

1. The economic scheme in the U.S. of creating fiat book-entry money via T-securities in the amount of the principal of the security with a promise to repay the principal PLUS the interest (i.e., deficit spending), is impossible. The interest is never created. The debt must continually be increased to pay interest on earlier securities or the scheme will collapse.

2. The National Debt can never be paid off. Contracts that cannot be culminated are acts of fraud and are void from their inception.

3. The funds from all Treasury security auctions are received on the accounts of the FRBNY; records of disbursements are not disclosed or audited.

4. Congress has temporary benefit of deficit spending (a $1.4 trillion ‘loan’ for 2010) until maturity of the securities (the collateral). At maturity, all securities are perpetually rolled over without mention in government accounting records.

5. The Fed eventually receives the value of all national debt as purloined profit; every dollar of inflation from deficit spending security auctions is undeclared profit. Deficit spending was $1.4 trillion for 2010 and $7 trillion for the past six years.

6. Fiscal social obligations of the nation will be restricted during any economic downturn, whether or not deliberately initiated by the Fed, while debt will escalate to “stimulate the economy,” for war-mongering, and to compensate for reduced tax collection.

7. The operation is, as with any Ponzi scheme, predestined for inherent national bankruptcy when buyers to roll over the increasing debt lose faith that profit will be generated greater than inflation even while interest rates sky-rocket. Commerce, the engine of the economy, will cease to function from uncertainty.

8. Future debt will exceed the entire worth of the nation. As panicked holders of debt attempt to obtain value, they will sell securities to the Fed at reduced rates. The Fed will then purchase national heirlooms and assets at fire-sale prices as in Greece. Ownership of infrastructure and assets will be controlled by shareholders of the BOG. (or Wall Street fronts).

9. The touted concept that the public directly funds deficit spending is an illusion. Such funding can never produce inflation.

10. The 1913 Federal Reserve Act provides that profit from the Fed belongs to the government. Concealment of funds due the government violates several federal criminal laws.　

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The Federal Reserve uses euphemistic smoke and mirrors to obscure their scam. The appearance of the scheme is that Congress receives the benefit of inflation. In reality, it is the Fed that receives the purchasing power from inflation---without public awareness or documentation. With full knowledge the following is not the way the Fed or the government describes the system, allow me to offer a different analysis of their operation.


CREATING BOOK-ENTRY (FIAT) MONEY

Congress can pay for federal expenses with funds collected from taxes, but Congress is never satisfied with this amount. The desire to buy votes/campaign contributions from special interest groups induces congress-critters to spend more, and this is identified as deficit spending. To create this make-believe money requires the assistance of the Federal Reserve.

Congress will give the Fed a T-security (bill, bond, or note) and the Fed will accept the document as an asset of one of the twelve FR Banks. The Fed will then establish a line of credit for the U.S. government (a book entry) in the same amount and list the liability as Federal Reserve Notes. Voila !! Fiat money has just been created for Congress to spend. Ref: 2009 Annual Report to Congress by the Board of Governors, page 448 (for account identification only). http://www.federalreserve.gov/boarddocs/rptcongress/annual09/pdf/ar09.pdf The accumulated securities that have been authorized by Congress add up to the national debt.

If the Fed retained all of the securities (assets), the inflationary pressure created by the extended line-of-credit for Congress would be too obvious. Also, Congress complained several years ago the interest collected was too much profit. The Fed has been forced to return excess profit to the government. The Fed therefore wants to sell a major portion of the securities so it has arranged with the Treasury department to act as auctioneer for selling to the Primary Dealers. This immediately sells the assets of the Fed.

[FN: The Fed recently obtained $700 billion bailout funds. Secretary Paulson begged Congress, on actual bended knee, to give the Fed money and Congress gave them $700 billion in securities. The Fed then swapped the securities to GSE (Freddie and Fannie)/international bankers for toxic MBS‘s---and rescued Paulson’s $800 million in Goldman stock by bailing out AIG. ]

[FN: The 2009 Annual Report lists Assets of $776 billion securities and $908 billion Government Sponsored Enterprise Mortgage Backed securities out of $2.2 trillion total assets. Whether the bailout money, given in large part to international bankers for toxic assets, was a quid pro quo with the PD to avoid lawsuits for fraud is beyond the scope of this writing. The International Bankers do not lightly suffer transgression. The continued mutual benefit of programs, paid for by taxpayers, should evidence Wall Street and the Fed/international bankers constitutes a symbiotic relation.]

The value of any securities not sold by the Fed is still in circulation and becomes the Reserves for commercial banks. Commercial banks, as an aggregate, have no other source of reserves. All money in circulation is originated from T-securities. The reserves, derived from Treasury checks deposited throughout the world, are then multiplied via loans by commercial banks utilizing the fractional reserve practice. (The System Open Market Committee (SOMC) selling and buying of securities alters the reserves---with high leverage---but this effect is applicable only to securities that are already in the public domain.) The Fed currently holds a mere $750 billion of $12.5 trillion issued securities. Ref. http://www.fms.treas.gov/bulletin/b2009_3.pdf. Chart OFS-1.

Observe that the amount of money created by the security is the amount of the principal but the amount promised to be repaid is the principal AND the interest. The interest is never created but payment is required by the agreement. It is impossible. The linear expansion of base/reserve money via fractional reserves by creating commercial loans does not change this. If, hypothetically, all money in circulation was used to pay off the securities issued by Congress, all bank reserves would be wiped out and the commercial loans would collapse---and every dollar of interest on the national debt accumulated from day one would still be due---but there would be no money outside of the Fed’s vaults to pay it.

The debt created by usury based sovereign debt is perpetual; it can never be paid off. The contract cannot be culminated. Any contract that cannot be culminated is an act of fraud. A contract based upon fraud is invalid upon its inception. It would appear the national debt is not legally enforceable. (A debt incurred by a state or municipality is not a sovereign debt as used in this analysis. Such a debt is akin to a commercial loan and is completely repayable---but may be evidence of unwise administration and result in default.)

There are esteemed economists who contend the fractional reserve multiplier is a major cause of inflation. The concept is questionable. Assuming the amount of base money and the multiplier factor remain constant, the creation of fractional reserve money reaches a ceiling that cannot be exceeded until more base money (from T-security issues) is added. The multiplier factor is a mere linear increase of the base money. A major tool of the Fed is to alter the base money with SOMC transactions to boost or quench transient situations. Once the ceiling is reached, only congressional deficit spending can create new money in circulation.

In medieval times, the gold-guilds would inflate the illusion of a commodity with paper gold-certificates. Today, the fractional reserve multiplier increases the image of an image of value; i.e., it increases itself. The basis of value is from the Treasury security.

SOMC operations and multiplier factor alterations change the amount of FRN's in circulation---a debt obligation (IOU) of the Fed. Only congressional deficit spending changes the debt obligation imposed on the citizens. However, if the multiplier factor is reduced to zero and banks are permitted to issue currency without limit, it would produce an inflationary bubble of FR debt just as the housing scam produced a bubble of mortgage debt.

A little-appreciated concept that a FR bank can create money/debt on their own account in the same manner as a commercial bank making a fractional reserve loan appears to be rarely utilized. Any requirement that a FR bank must have reserves is unknown, the lack of which would allow an infinite expansion of money. This option may be the origin of the $7.7 trillion recently discovered by Bloomberg that was created to rescue the TBTF banks.　
 

THE INESCAPABLE WHIRLPOOL OF PERPETUAL, ESCALATING NATIONAL DEBT

There is more skullduggery involved. Let us assume a newly established sovereign nation is setting up a usury based economy and will issue 100 unit securities, a five year maturity, and an annual interest rate of 20 percent over a span of five years. A high rate of interest and short maturity is used to reduce repetitive calculations. The identifications of Congress and the Fed will be used to convey the images.

Upon the issuance of the first security, Congress has 100 units to spend. At the end of the year, Congress/Treasury has to pay 20 units to the Fed for interest. If the nation had to pay off the security at the end of the first year, the bankruptcy is obvious. There have never been 120 units created. Twenty units could be removed from society but that would leave only 80 units in circulation, cause great financial hardships, and still leave an impossible obligation to redeem a 100 unit security. The solution is to put off the interest payment until the next issue of security for the second year. The interest is paid from the principal created by the second issue.

During the second year there are 200 units in circulation but the actual rate of interest on the second issue is not 20 percent. Since 20 units had to be paid to the security holders, congress only received 180 units to spend (100 + 80) but they are committed to pay 40 units of interest on the security at the end of the second year. The interest rate of 40 divided by 180 is 22.2 percent. Considering the second year alone, the interest is 20 divided by 80 or 25 percent.

When the security for the third year is issued, the interest of 40 units for the first two years securities will not be available for congress. Congress will receive only 60 units for public projects but will have to pay 20 units interest at the end of the year. The 240 units received by congress (100 + 80 + 60) will require 60 units of interest at the end of the third year. The cumulative interest rate (60 divided by 240) is 25 percent. The interest rate for the third year alone (20 divided by 60) is 33.3 percent.

At the start of the fourth year, the security will have to cover the interest charge for the three prior years of 60 units. Congress will receive 40 units for government spending. The 280 units received by congress (100 + 80 + 60 + 40) will demand 80 units of interest at the end of the fourth year. The cumulative interest rate (80 divided by 280) is 28.5 percent. The interest rate for the fourth year alone (20 divided by 40) is 50 percent.

The security issued for the fifth year will pay the 80-unit interest for the prior four years. Congress will have 20 units to splurge. The 300 units received by congress (100 + 80 + 60 + 40 + 20) will require 100 units of interest at the end of the fifth year. The cumulative interest rate (100 divided by 300) is 33.3 percent. The interest rate for the fifth year alone (20 units received--20 units in interest) is 100 percent.

At the end of the fifth year, 100 units must be found to redeem the maturing security issued the first year (that “loaned” 100 units to the government) in addition to 100 units of interest that must be paid. Congress has an obligation to pay 200 units. This factor alone makes it obvious that more debt must be incurred to continue the scheme. The inescapable whirlpool of usury debt can only avoid obvious default by increasing the value of future securities. Increasing the value of issued securities merely postpones the inevitable result.

As the sixth year approaches, the Fed holds 500 units of securities that must be redeemed by the Treasury before year eleven. The Fed has already received 200 units as interest while Congress retains 300 units from those securities. Before year eleven, the securities will accumulate an additional 300 units of interest payable to the Fed. That accounts for the entire 1000 units of securities and interest that have been involved over the five years. (Each of the five 100 unit securities involved 100 units of interest.)

Do not let the subtly of the numbers escape you. As the example demonstrates, the Fed receives the total value of the security and the interest if it does not sell the security. Only 500 units were created by the securities but 1000 units (interest and principal) were somehow acquired by the Fed. The only way for Congress to get the funding is to issue a 200 unit security at the end of the fifth and subsequent years and ALL of the value will be instantly due the Fed. The scheme is not only perpetual but it must increase in size to continue.

When the 200 unit security matures, the value will belong to the Fed. And then a larger security must be issued to pay for the 200 unit security and the accruing interest further down the road. This is the methodology of any Ponzi scheme. The increase in the required size of deficit spending to cover the interest must be large enough to make the interest payment a relatively acceptable percentage to minimize public hostility.

[FN: The 100 unit roll-over value for the example’s year five reached $7.0 trillion in year 2010. An additional $1.4 trillion deficit spending accounts for the $8.4 trillion received from the Treasury auctions. Ref. Post.]

A high rate of interest has been selected for the example to minimize repetitive calculations. A ten percent interest rate will return 100 percent of the security value in ten years; a five percent interest rate will take twenty years. Lower rates of interest merely require more years to reach the same inherent bankruptcy and tend to beguile the patsies. (Actually, bankruptcy occurs the first year irrespective of the interest rate, but then again, since the debt can never be paid off, the entire scheme is based upon fraud. A contract based upon fraud is void from its inception.)

But 5 year securities are a slow game. If we shifted our attention to 13 week bills, or even four-week bills, each obligation will quickly mature and must repeatedly be rolled over. Each new issue can cause the creation of fiat money (inflation) and is profit for the Fed to say nothing of lucrative transaction fees and commissions for Wall Street cronies. If time lapse between bid and issue dates are ignored, the roll-over of four week 100 unit securities can be repeated thirteen times within a year. The gain of 1300 units of profit for the Fed only involves 100 units of national debt.

An economic scheme that utilizes later investors to pay the interest due earlier investors is identified as a Ponzi scheme. This is precisely the scheme that has been presented above.

A government publication has noted the fiscal policy insecurity: “(T)his growing gap between (Government’s) receipts and total spending …cannot be sustained indefinitely.” http://www.fms.treas.gov/frsummary/frsummary2010.pdf page 3 of 12. The statement was undoubtedly intended to support confiscation of more wealth from the citizens.