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

Constant readers know I’ve gone back and forth on this:  In September I figured the bailout bill smacked of making things up as he went along.  But on Monday I took note of the phone conversation he had two months before Washington Mutual collapsed, in which Paulson told WaMu’s CEO he ought to sell out to JPMorgan Chase (NYSE:JPM) because his company was in big trouble.

I guess it’s possible Paulson knew bad things were going down, but he still didn’t know what to do about it.  And this morning, the making-things-up-as-he’s-going-along thesis seems inescapable.  I mean, really: The bailout bill was predicated on buying up toxic, er, um “troubled” assets.  Then in the middle of the game it became a hybrid of buying up “troubled” assets and “recapitalizing” the financial sector (for bonuses and takeovers, natch).  And as of yesterday, the buying up “troubled” assets went by the boards altogether.  Now Paulson aims to “recapitalize” the financial sector and “increase the availability of student loans, auto loans and credit cards,” according to the Wall Street Journal.  Right, because if EZ credit got is into this mess, more EZ credit is sure to get us out.

You’d think the media could at least have trotted out some of his quotes and sound bites from September, when he warned of apocalypse if Congress didn’t immediately cave to his demands that he be given unlimited authority to buy up “troubled” assets.  Alas, it’s all gone down the memory hole.  We have always been at war with Eastasia.

Anyway, it sure looks like negligent homicide to me.

And now we have corroborating testimony from Paulson’s protege and bailout point man, Neel Kashkari (a name for a villainous bureaucrat that could have come out of an Ayn Rand novel).  On Monday he gave a speech with some choice quotes picked out by Phil Mattera.

Kashkari spoke of having made “tremendous progress” and of having “accomplished a great deal in a short period of time.” He bragged that his team is “working around the clock” while “ensuring high quality execution.”

Again, this was Monday — hours after AIG (NYSE:AIG) got a do-over on its bailout and around the same time Fannie Mae (NYSE:FNM) reported a $29 billion third-quarter loss.

Heckuva job, Kashie.  We’re staring at a bailout tab of $5 trillion as figured by the firm CreditSights.  That’s not including anything in the future; it’s $5 trillion to date. We have experts not named Peter Schiff going on CNBC and talking about the United States losing its AAA credit rating.

Yup, negligent homicide.  Guilty as charged.

Source: The $5 Trillion Fiasco

Hey, it could be worse. We could be in Iceland. No doubt you’ve seen all the stories about how the country is essentially bankrupt after an especially Dionysian binge on derivatives. I wondered how long it would be before we saw stories about Icelanders stockpiling food and toilet paper. That day has arrived. “Bonus, a nationwide chain, has stock at its warehouse for about two weeks,” reports Bloomberg. “After that, the shelves will start emptying unless it can get access to foreign currency, the 22-year-old manager said, standing in a walk-in fridge filled with meat products, among the few goods on sale produced locally.” The CEO of the Icelandic Federation of Trade and Services sees shortages even sooner than that, the end of this week, if businesses can’t get their hands on foreign currency to make purchases abroad.

Is this coming soon to a country near you? Even if it doesn’t, Outstanding Investments editor Byron King sees a different trigger for shortages in the stores…

Our buddy Matt Simmons said the other day, “We should thank our lucky stars that people in other parts of the world are still willing to ship us oil in payment for dollars.” And: “For as fast as the financial system melted down, the oil and gas network of the world could melt down even faster.” Matt was referring to a run on the refined fuel storage tanks of the world: y’know, hundreds of millions of cars with an average of five gallons each in the tank, and everyone panics and decides to top off all at once. We’d drain the system within 24 hours… be unable to refill it in any conceivable (i.e., short) time frame…. and food supplies would run out — for lack of motor transport – within a week.

Meanwhile, the Associated Press has picked up the story of the National Debt Clock running out of digits, now that the figure has rolled over past $10 trillion. Funny how this coincides with the release of the companion book to I.O.U.S.A.

No, it’s not funny at all. Forgot, economic satire is obsolete now.

Source: Monday Musings