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The Fed – A very secret agent

August 3, 2011

A very secret agent, By Chris Cook, experted from Asia Times Online

There is a charade playing out in Washington at the moment in respect of the completely meaningless “debt ceiling” which the US maintains as a relic from the days of the gold standard. We are told that at the US Treasury’s account at the Federal Reserve Bank there will soon be no more taxpayers’ dollars, and therefore the Fed will soon be unable to make any more payments or issue any more cheques on behalf of the Treasury. The money has run out. This is nonsense. It is a myth, and moreover it is a myth that Federal Reserve chairman Ben Bernanke exploded in his recent testimony to a US congressional committee.

Congressman Sean Duffy: We had talked about the QE2 with [congressman] Dr [Ron] Paul. When – when you buy assets, where does that money come from?
Ben Bernanke: We create reserves in the banking system which are just held with the Fed. It does not go out into the public.
Duff: Does it come from tax dollars, though, to buy those assets?
Bernanke: It does not.
Duffy: Are you basically printing money to buy those assets?
Bernanke: We’re not printing money. We’re creating reserves in the banking system.

But ask yourself the question: if paper money is not being printed, then what exactly is being created? What are these “reserves” to which Bernanke – and indeed the Federal Reserve Bank’s very name – refers?

Bernanke is unwittingly exploding two foundational myths which underpin mainstream economics.

Myth 1: tax and spend
The tax and spend myth is that “tax-payers’ money” is first collected by the Fed and then spent, or lent.

Bernanke blew that one away when he told the committee that taxpayers’ money was not involved when the Fed was busy easing quantitatively. The Fed created 1.6 trillion somethings, which banks accepted, either for their own account or a customer’s account, in exchange for the Treasury Bills they owned, and these somethings were, and still are, deposited with the Federal Reserve Bank as a custodian of… “reserves”…

This myth of tax and spend arises out of credit creation by the central bank. The myth of fractional reserve banking arises out of credit creation by private banks…

Myth 2: fractional reserve banking
This myth is that banks receive deposits from customers and then lend them out again, retaining a fraction in reserve, which enables them to lend out a multiple of their reserves funded with money from the Fed.

The truth is that private banks do exactly what the Fed does: they create tax credits in the form of Treasury IOU “look-alikes”, and these tax credits are then deposited in the banking system by the recipients. Banks create tax credits not only when they lend at interest, but also when they spend, by crediting the accounts of suppliers, staff, management, shareholders, and sellers of assets.
This private bank credit creation is not restricted by bank reserves as is the myth, but by the capital “cushion” they are obliged by banking regulators to retain in order to absorb defaults by borrowers…

A national equity
The US national debt is in truth – like all national debts – a complete and surreal fiction: it is a national equity, the greater part of which is interest-bearing either as claims over public or private revenues.

The debt ceiling
The debt ceiling is a myth because there is no need to borrow to finance public expenditure and the creation of public assets. As Ron Paul points out, the Fed – which is ludicrously receiving interest from the Treasury in order to pay it right back again as profit – could actually waive or tear up the US$1.6 trillion Treasury debt it has bought through quantitative easing (QE), and it would make precisely no difference other than to reduce the National Debt at a stroke by that amount.

A very secret agent
Once the truth of the hitherto secret – or at best, completely obscure – agency relationship between the Fed and the Treasury is understood, then the world view changes. The sun of the Treasury does not go around the Earth of the Fed: it is the other way around. The Fed is servant, not master.

Chris Cook is a former director of the International Petroleum Exchange. He is now a strategic market consultant, entrepreneur and commentator.

A very secret agent experted from Asia Times Online

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