Suddenly, I was jolted rudely awake by alarms ringing in the Mogambo Bunker Of Paranoid Delusions (MBOPD) at the news of a drop of $40 billion of Total Fed Credit last week. Wow! This is the “money” that magically appears, literally “out of thin air, as a new credit on the books of the banks, which they can then loan out some Huge Freaking Multiple (HFM) of that little bit of new credit, thus creating lots and lots of new money.

And this huge $40 billion downward swing of Total Fed Credit in one week is a Big Freaking Bunch (BFB), where the total effect on the banks is the reciprocal of the fractional reserve ratio, which is at least 10 times as much according to the classical textbook examples, but more likely a thousand times as much, seeing as how the Federal Reserve itself says that total bank assets are now a whopping $12.030 trillion and total bank liabilities are $10.780 trillion, against which the banks are only “required” to have $57.622 billion as reserves! Hahaha!

So what does that make the fractional reserve ratio? 187-to-one? Hahaha! We’re freaking doomed by out-of-control fractional-reserve banking!

And in that regard, the M1 and M2 money supplies are still growing, with M1 up 17% over last year and now hitting $1,596.2 billion ($1.696 trillion) and M2 up 8% from this time last year, now hitting $8,327.9 billion ($8.327 trillion).

Perhaps this is the reason the internationalforecaster.com quotes Nassim Nicholas Taleb, economist and author of the terrific book The Black Swan, as saying, “Bank nationalizations are ‘absolutely necessary’ to stop them damaging the financial system further with more losses.”

His sentiments are obviously echoed by New York University Professor Nouriel Roubini, who actually says the majority of U.S. banks are “insolvent”.

And as if anyone had to be told that bankers and politicians cannot be trusted, Mr. Taleb goes on, “You cannot trust the banks in taking risks,” and because we stupidly did, we now “have a very strange situation in which it’s the worst of capitalism and socialism, a situation in which profits were privatized and losses were socialized. We taxpayers have the worst.”

And one of the reasons that you can’t trust the banks is revealed by Bloomberg.com when it’s reported that one of the Federal Reserve morons, Dallas district-bank President Richard Fisher, said, “The Federal Reserve isn’t capable of offsetting the ‘flood’ of U.S. Treasury borrowing with its bond-purchase program, which is helping to revive credit markets.” Hahaha!

I got a Hot Mogambo News Flash (HMNF) for this dork: yes they can! There is nothing to stop them! Hahaha! Who’s going to stop the Federal Reserve from creating all the money that the federal government wants to borrow, and then the Fed using the money to buy all the new government debt? Hahaha! You gonna stop them? Hahaha!

Of course, he may be saying this because he and his Fed moron buddies have screwed everything up and he doesn’t want to talk about that, or how Mises.org reported that “The Federal Deposit Insurance Corporation (FDIC) list of problem banks grew to 305 in the first quarter, the highest number since 1994,” to which they then ominously added that “but of course the names of those banks are not released so that depositors can be forewarned.”

This is probably why msnbc.com had the headline “Most Banks Still Getting Weaker, Analysis Shows,” with an explanatory subhead of “First-quarter reports show bad loans increasing at 60% of banks,” which seems somewhat understated since later we read that “Overall, bad loans rose another 22 percent in the quarter.”

Even worse, it is even more lopsided than that, as, “While the 10 largest banks reported $10.2 billion in earnings for the quarter, the remaining 8,245 banks together lost $2.6 billion, according to the analysis,” which comes down to “One in five banks lost money in the quarter, and several lost big, weighing down the rest.”

The disintegration of the banking system, the fall of the dollar and the ruination of everything connected with them seems the perfect place to remind you that if you are not buying gold, silver and oil to profit from this governmental incompetence and stupidity, then there is something Very, Very Wrong (VVW) with you, which means you probably stopped paying attention already, which leaves the rest of us who ARE buying gold, silver and oil, meaning that there is nothing more to say about buying gold, silver and oil!

Whee! This investing stuff is easy!

Source: Trusting Banks as Far as You Can Throw Them

This from The Sovereign Society:

Your bank is a counterfeiter, as facilitated by the Federal Reserve System and permitted by the government that allegedly represents you.

The lie of fractional reserve banking is at the heart of our ‘banking’ system. And its acceptance as fact or necessity by the world’s populace is the basis on which most other economic lies and myths gain so much credibility.

To understand why we’re in so much trouble right now, and why the privately owned Federal Reserve Banks are to blame, one must understand fractional reserve banking, and why it amounts to little more than counterfeiting.

King Edward II, Goldsmiths and “Legal” Counterfeiting

For all of history through to the 1800s, goldsmiths were the world’s primary bankers. It made sense in those hard money days to keep your gold with the fellow who molded it into coins and acted as the community’s central cash register.

So here we have the goldsmiths…guardians of bullion and protectors of everyone’s wealth. I’ve personally always seen this as the primary function of a bank.

But just guarding money and issuing certificates for it…I suppose it just didn’t pay as well as it could. That and you always end up with a huge pile of cash (gold) that’s just sitting around and not really doing anything other than backing promissory notes. So the goldsmiths got crafty, and at this point they became the bankers we know today.

They started issuing more certificates than they could back in gold, allowing them to collect interest on the physical gold collecting dust in their shop… gold that already belonged to someone else. But weren’t there already certificates attached to that gold? Of course. But the bankers believed those certificates wouldn’t all be cashed in at the exact same time, so they could get by and no one would ever be the wiser.

This is the critical point in our story, and at few points in history has the difference between right and wrong been so very clear.

The value of goldsmith’s notes was in the gold behind them. So when they issue a new note backed by…well backed by nothing other than the supposition that they’d have enough inventory to pay it off if it fell through…they were engaging in wishful thinking, at best. Ladies and gentlemen, I give you irrational exuberance. At the very core of our banking system.

But how could the goldsmiths get away with such blatant counterfeiting? Didn’t anyone realize that they were pulling wealth from thin air, that they were trading worthless notes for valuable goods? Well, the governments knew. Why didn’t they do anything to stop the goldsmiths?

Put clearly; it wasn’t in the interest of the world’s ruling monarchs to stop them. King Charles II of England had his own con game going with the bankers…one where they traded him physical gold for sticks of wood (I’m not kidding at all…we’ll be covering government debt next week.)

So by complying with the government’s con games and ponzi schemes, the goldsmiths earned themselves a back-scratching from the world’s monarchs, received in the form of Fractional Reserve Banking.

The Whole World Falling for the Same Tricks…500 years later

And so we arrive at the modern-day. The Dollar is the world’s reserve currency, making us in some sense the world’s goldsmith. And we have a Federal Reserve System – composed of privately owned member banks – that represents how cloudy and convoluted the relationship between governments and banks has become in the last half-millennium.

But somehow, the world economy keeps falling for the same scam.

You see, the Federal Reserve controls not only the interest rate at which banks are allowed to lend, but the fractional reserve ratios they’re required to keep (as a percentage of their reserves).

Let’s backpedal for a second here… make it even simpler. An institution composed of banks and their representatives is in control of not only our money supply, but the amount of new money (in the form of loans issued) that banks are allowed to ‘counterfeit’ and the interest they’re required to charge on those conjured-from-nowhere dollars.

Interest rates – when the decision is left to the borrower and the lender – represent the time preferences and assumed risk of borrower and lender. Like the price of any other good, the interest rate of a loan ideally represents a compromise for both parties in terms of time and risk.

But when the government intervenes with a mandated interest rate (like Greenspan’s sub-zero “liquidity experiment”) those decisions to lend and borrow are often made with little or no consideration to time and risk. Since the money is cheap, free, or the government might even be paying you to take it, incentives are changed across the board.

And then fractional reserve banking comes in. Since the banks only have to keep a percentage of their reserves – a ratio set by an institution they own…making them essentially self-governing – these ridiculously low interest rates spur the banks into a lending frenzy.

Lending to and from each other, commercial interests and private parties, the banks go hog-wild. Without the restraint of reasonable lending costs, they lend as much credit against your money as humanly possible, flooding the economy with fresh dollars that never existed before.

Euphoria takes over. Of course housing prices will continue to go up when the pool of dollars chasing those houses is growing so rapidly…that’s just common sense. But many of us bought into it, in some way or another. And that’s what makes the coming correction so painful.

The M3 Chart:
Ever wonder why the government dropped it a few years ago?

Because of the one-two punch of mandated interest rates and fractional reserve banking, an epic amount of bad business decisions are inevitably made. That’s a simple truth of economics… no matter who tries to ignore it.

But what can I do?

Well, it’s pretty easy actually. Just don’t believe all the hype, take everything with a grain of salt, and make your own decisions. I’m not telling you to protest at your local federal reserve bank, I’m just saying you should use reason and that you shouldn’t take most things at face value.

Like when the keepers of our national pocketbook – and thereby our national sovereignty – are run by the very banks they’re supposed to govern, and those banks (whose original purpose was to guard the money of the people) have a balance sheet that looks like this:

You should be asking questions.

When our government gives a US$25 Billion bailout to Citigroup (NYSE:C), and then the company’s market capitalization is listed at around US$20 Billion shortly before the company is taken over… you should certainly be asking questions.

When Detroit’s CEOs fly to Washington in separate luxury jets, and they beg for US$75 Billion in bailout money for companies with a combined market capitalization of less than US$10 Billion…you should be asking questions.

There’s a heist going on out there… and plans are afoot. Through the careful control of information sources, those in power can control the actions of the masses. But you don’t have to be a part of the masses.

To make the difference and speak out on the part of personal sovereignty, The Sovereign Society’s Chairman John Pugsley has assembled this comprehensive report to tell you about a few of their most dangerous and pervasive of lies. I urge you to have a look.

Regardless of whether you voted for the current President. Regardless of whether or not you like or even trust our country’s political and economic systems. You need to give this special information enough of your time to understand the grim situation you could be facing. Not just for your sake, but for the sake of the Sons & Daughters of America, now being laden with years and years of debt.

Source: Fractional Reserve Banking a.k.a. Counterfeiting

There are, as I understand it, police reports that people two freaking blocks away dialed 911 in a panic because they heard my screaming and crying in terror when I saw what was going on in the banks and at the Federal Reserve.

First off, Total Fed Credit was up about $5 billion last week, which is, in the parlance, “goodly sized!”, which makes me howl in dismay because this is the ultimate source of fiat money! Total Fed Credit is the legendary stuff from which fiat money springs… From the bowels of the banks, in whose bowels this credit first appeared (thanks to the Fed depositing it there from their bowels!), and which was turned into some multiple of this $5 billion credit when someone borrowed some huge, unbelievable multiple (fractional reserve banking at its finest!) of this $5 billion increase in TFC from the aforementioned banks.

That is the situation in a nutshell, and if you are suddenly cold with fear and you feel a scream of terror rising in your chest at the obvious fraud, then congratulations! This means that you are achieving Total Mogambo Enlightenment (TME), which means you now understand the significance of the seeming overuse of the word “bowels” in the preceding paragraph, and now you are appropriately disgusted at the repellent true nature of fiat money.

One of the benefits of TME is that there are no real bowels involved at all (unlike when raising children or pets), nor any fees or dues to pay, except for the price of your very soul and sanity, because now you begin to comprehend the terrifying enormity of what happens to a country so completely idiotic that they ignore their own Constitution’s Article 1, Section 10 requirement that only silver and gold coin can be made a tender in payment of debt, and instead, use the One Damned Thing (ODT) that the Founding Fathers and everybody else feared above all others, namely a fiat currency!

A damned silly piece of paper or electronic fluff that can be increased, without limit, at the mere caprice of an authority figure, which is the ODT we didn’t want because this inevitable increase in the supply of fiat money leads to increases in prices, and history is FULL of the ugliness of what happens when people can no longer afford food because their money is rendered worthless! It’s a killer-diller!

As the solid foundation of your True Mogambo Enlightenment (TME), you have the fact that not once in the 4,000-year history of man and money has this “fiat money” crap NOT led to total ruination. Not once. Not even close.

And then, as your TME skills grow and develop, you will become evermore horrified, evermore paranoid, evermore suspicious and hateful, when you read things like how the Non-Borrowed Reserves in the banks hit a new record in disgusting banking infamy; they now have to report a staggering negative $111.8 billion in Non-Borrowed Reserves!

The brain explodes; “What? Total Reserves in the banks are the same lousy $42 billion that they have always laughably been for the freaking last decade or so, but now Non-Borrowed Reserves are a negative $111.8 billion? Gaaaahhhh! It makes no sense! Don’t make me crap in my pants out of horror!”

Of course, it will just keep getting weirder, and you will crap in your pants at the horror of the economic mistakes being made, and your TME skills will grow stronger until one day you find yourself gobbling heart medication by the handful at the mere sight of a fact like, well, how last week the Fed itself sold another $17 billion of its stash of government debt.

Interestingly, the Federal Reserve has now sold over one-third of its stash, taking their remaining stranglehold on us, through our money, down to $502 billion, waaAAAaaaay off from the $790 billion they had in August, 2007, and even down from their $713 billion in March, just two months ago! Panic mode!

And as you quickly blossom into a full-fledged Junior Mogambo Ranger (JMR) after about two minutes of TME, you will be outraged and personally insulted that only you, of all the people around you – people that you now regard with contempt and loathing – see the awful significance of how inflation in prices is the thing that is going to destroy this country, which it will because the demonic Alan Greenspan and the Fed has destroyed our country by creating so much money and credit for so many, many years, which produced, first, inflation in the prices of stocks and the prices of bonds, which everyone loved, and then inflation in the size of government, which everyone loved, then inflation in the prices of houses, which everyone loved, and now inflation in commodities like food and energy, which nobody loves, and now nobody likes you because you remind them of me, and they all hate me, and I hate them back because they are stupid and they elected people to Congress who have destroyed us.

And though you will, thanks to the True Mogambo Enlightenment (TME) side of you, foresee many, many horrors that will inflict the dollar, and thus the country, and be sorely afraid, you will also know that the answer to your own financial salvation, and verily the salvation of a country, is to own gold. And you will.

It’s the Greedy Mogambo Side (GMS) of you that makes you think that the only thing better than financial salvation is having lots and lots of financial salvation, and that path lies in owning lots and lots of gold and silver. Me, too! Whee!

P.S. To get The Daily Reckoning sent directly to your inbox, sign up for our free email newsletter, or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.

Editor’s Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter – an avocational exercise to heap disrespect on those who desperately deserve it.

Source: Fiat Ruination