[A-List] US Imperialism: The Fed's True Masters

["Anyutka" <annewilliamson@xxxxxxx>]

                Gary North's REALITY CHECK

Issue 315                                  February 3, 2004


              BANKERS: THEIR GAINS, OUR RISKS

          The rich, the owners of the already
     operating plants, have no particular class
     interest in the maintenance of free competition.
     They are opposed to confiscation and
     expropriation of their fortunes, but their vested
     interests are rather in favor of measures
     preventing newcomers from challenging their
     position.  Those fighting for free enterprise and
     free competition do not defend the interests of
     those rich today.  They want a free hand left to
     unknown men who will be the entrepreneurs of
     tomorrow and whose ingenuity will make the life
     of coming generations more agreeable.  They want
     the way left open to further economic
     improvements.  They are the spokesmen of material
     progress.

                                        Ludwig von Mises


          People of the same trade seldom meet
     together, even for merriment and diversion, but
     the conversation ends in a conspiracy against the
     public, or in some contrivance to raise prices.

                                             Adam Smith

     Central banks are tools of the very rich to protect
their capital.  The central banks' primary function is to
protect large commercial banks.  This reduces risk for the
owners of those banks and their senior managers.  But the
cost of this risk reduction is transferred to the general
public.

     The public is told otherwise.  We are told that the
Federal Reserve Bank and FDIC deposit insurance protects
our wealth.  What these government-imposed systems do is to
protect the public from one kind of loss -- closed banks --
at the expense of another kind of loss: depreciating money.
The second form of loss gets little attention.  It doesn't
hurt much.  It's more like a low-intensity headache -- a
headache that is caused by a malignant brain tumor.

     The system reminds me of New York City, as well it
should, since the heart of the system is in New York City,
not Washington.

     Below the streets of New York are the water pipes.
The system was built around the time of the Civil War.
Maybe the city could replace them, if it had any money, but
it doesn't.  Maybe the city could get the money somehow,
but unfortunately, there is no map available which shows
the pipe system, subway system, and electrical system in an
overlay.  So the pipes burst and short out the subway from
time to time.  The capital base of the city is literally
disintegrating under their feet.  The twin towers got a lot
of publicity, but the water system is the accident waiting
to happen.

     Every once in a while, part of the water system
breaks.  The water leaks into the subway system, which has
to be shut down on that line.  This is like big
bankruptcies, such as Long Term Capital Management.  They
can be covered up.  The problem is the system of debt that
undergirds the financial system.

     There is no map.


THE IMMIGRANTS

     Immigrants are everywhere in New York City, the very
rich and the very poor.  There are Indian diplomats in full
dress, African diplomats in full dress, and Arabs in full
dress.  To cater to their demands (and lots of other
people's demands), there are lots of odd looking ladies who
are barely dressed at all.

     The city is being sustained by hundreds of thousands
of people who don't speak much English, some of whom come
to buy $10 million townhouses, and others who come to
sell their services as cooks and janitors, or sell hot dogs.
Most of the poor ones come here to work.  The Puerto Ricans
don't; they've been corrupted by the welfare system (and
forced out of Puerto Rico by U.S. minimum wage laws), but
the others are here to work, and work hard.  The Puerto
Ricans are here legally; I suspect that most of the others
aren't.  The illegals are the productive ones.

     The non-Puerto Rican immigrants are all in New York
for the same reason: freedom.  Some are here because the
level of envy is less in our nation than elsewhere.  All
are here because the opportunities are greater, both for
private good and private evil.

     It is this mix that astounds me.

     1.   The super rich, especially the captains of the
          fractional reserve banking system, who gather
          together, as Adam Smith described, to conspire
          against the public welfare.

     2.   The normal rich, who broadcast the news the first
          group are willing to have broadcast, or who run
          the executive suites of the corporations the
          first group control by their control of large
          blocks of corporate stock.

     3.   The middle class, who run into the city on Sunday
          once a year in the marathon.

     4.   Most of all, the poor, who sell the hot dogs, or
          mug passers-by in Central Park, or play the steel
          drums on 5th Avenue, or who live underground in
          the pipes and caverns near 42nd street.  (This
          literally exists: a "community" of troglodyte
          derelicts who live beneath the streets.)  Rome
          must have been like this in the second century.

     You and I don't rub shoulders with troglodytes, just
as Council on Foreign Relations members don't rub shoulders
with us.  What I'm trying to get at is this: there are
several layers of New York City: the below-ground, the
ground floor, and the upper story.  These groups are
totally separate culturally from each other.  Only the free
market fits them together productively.

     The problem is, an alien ideology opposed to the free
market is eroding the potential zones of co-operation among
the groups.  What keeps peace in such a society are window
bars, alarm systems, and guards who walk up and down in
front of the fortresses.  It is not the illegal aliens who
are the threat; it is the alien ideology which is dominant
in the lands from which they have fled.

     It is this same ideology which dominates the thinking
of the upper-story people of New York City.  And in the
eyes of those who hold it and use it to their own benefit,
you and I are not much different from those illegal aliens,
or even much different from the troglodytes.


THE ULTIMATE "PROTECTION" RACKET

     In 1907 there was a depression, sometimes called the
Panic of 1907, and also called the "bankers' panic."   It
created the conditions for a highly orchestrated hue and
cry for government protection from recessions.  The
response of the bankers -- the very biggest of the banks --
was the preliminary designing of what was to become the
Federal Reserve System.  Nelson Rockefeller's grandfather,
Senator Nelson Aldrich (after whom Rockefeller was named), was
its prime political promoter.  Its designer was European banker
Paul Warburg, whose two-volume history of the FED, "The
Federal Reserve System" (Macmillan, 1930), conceals more
than it reveals.  Its dedication, however, is very
revealing:

                     TO THE GUARDIANS
                          of the
                  FEDERAL RESERVE SYSTEM

                 PAST, PRESENT, AND FUTURE

     The FED has done its work well.  Yes, thousands of
small banks went bankrupt in the 1930's.  But why should we
imagine that this implies that the FED didn't do its work
well?  Milton Friedman has argued endlessly that the FED
made a mistake.  Why not conclude that the FED did what was
necessary to consolidate its own power?  The FED was not
entirely to blame for the magnitude of the depression; the
politicians who passed high tariffs in 1930 are also
blameworthy.  But the FED's loose money policies of 1924-29
created the boom, and its tight money policies led to the
depression's early stages.  (See Murray Rothbard's book,
"America's Great Depression").

     The boom is politically desirable.  It gets people to
go into debt and buy.  It gets businessmen to go into debt
and expand their businesses.  The fiat money artificially
reduces short-term interest rates and lures people to the
loan windows of the banks.  In short, the boom creates a
demand for personal and corporate indebtedness.  The bust
creates the bargain sales for those with cash to pick up.

     From 1965 until late 1979, the FED was expansionist.
Not in a straight line, of course; there were three major
booms (1967-69, 1971-74, 1977-79) and two busts (1969-70,
1975-76).  The third bust, 1980-82, was engineered by the
FED's tight money policies beginning in October of 1979.
In mid-1982, the FED started expanding again.

     When the FED is expansionist, people go deeper into
debt.  They try to take advantage of the "buy now, pay
later -- in cheap money."  This is the familiar strategy of
"get rich quick."  It is the strategy of using other
people's money while it is valuable and paying off with
your own money when it isn't.

     It is an exceedingly dangerous strategy.  It is
dangerous because it lures people into markets that they
never seem to be able to leave voluntarily because of the
psychological thrill of making quick and easy money at the
tail end of the panic boom.  This is why I am not a
promoter of debt, even in mass inflations.

     From time to time I receive letters from people who
ask me, "If you believe that inflation is coming, why don't
you recommend debt?"  Because of 1969-70, 1975-76, and
1980-82.  Price inflation has never left.  We are still in
the age of price inflation.  Central banks are still
expanding money.  Prices are still rising, although
slowly.  Price inflation will continue.

     The debt whipsaw is a killer.  It creates too many
pitfalls for the unsuspecting.  Thus, people get lured into
debt positions when real interest rates are low during the
boom (that is, when they are just barely above, or even
below, the rate of price inflation), and they go bankrupt
when real interest rates turn positive in the recession
phase (like today).  The risk is too great.  The best rule
is cash and carry of the item that is likely to go up
later.


HOW SMART ARE THE INSIDERS?

     The major form of "insiding" is high level fractional
reserve banking.  It always has been.  At first the
insiders win, but they eventually lose.  In 1494, the
mighty Medici bank went under.  Why?  Because it had made
too many loans to princes.  It was in the 15th and 16th
centuries that the German banking family, the Fuggers,
dominated Europe.  They were the Rothschilds of their day.
But they also made the mistake that large-scale bankers
always seem to make: they loaned huge sums to kings.  In
1525, it was the wealthiest firm in Europe.  In 1557,
France and Spain defaulted.  They couldn't get the loans
repaid.  They went bankrupt in 1607.

     Why do the bankers do it?  Because governments grant
them their fractional reserve monopoly, and then demand
loans.  Because the banks assemble (create) such large
sums of lendable money that their loan officers can't
decide what to do with all of it.  Because governments
guarantee easy profits.  Because the huge loans to
governments offer "economies of scale."  It's cheaper to
get a single billion-dollar loan placed than a thousand
million-dollar loans.  But who can borrow a billion
dollars?  More to the point, who can offer comparable
security for such a loan?

     Actually, this security is really a lot of smoke.  The
bankers have been making bad loans to Latin America for
over 190 years.  Nations default, and then bankers make
more loans.  Howard Ruff's law of government is: "Government
is dumb."  My corollary is: "So are its bankers."

     But they are only intermittently dumb.  For a long
time, they look very, very smart.  The Fuggers looked like
geniuses in 1525.  The Medicis looked like geniuses in
1400.

     The banks have buried themselves in government debt
certificates.  They have bought government bonds.  They
have bought what economist Franz Pick called "certificates
of guaranteed confiscation."  Eventually, the debt will be
repudiated.  There is a universal long-run law of all
government debt: creditors eventually get skinned.


CONCLUSION

     All of your long-run financial strategies should be
based on the assumption that the world's bankers will
eventually make a mistake.  A Big Mistake.  They aren't
supermen.  The system is vulnerable.

     The trouble is, we have to invest for both worlds: the
one in which multinational banks are doing fine, and the
one in which they will make the Big Mistake.  My view is
that the mistake will take place over time.  It will not be
a one-shot shock.  We will have warnings.  But in the
meantime, we should not assume that the dollar will always
stay high in relation to everything.

     In recent months, investors have begun to sense this.
Foreign investors who bought dollar-denominated assets have
suffered substantial losses.  American investors don't feel
the pain, because they were not tempted to buy foreign
currencies in 2002.  But they could have.  So, in terms of
opportunities foregone, they have suffered losses.  Maybe
they made money in stocks, but if they did, they're
basically even with the market, compared to what an
investment in the euro would have produced.

     The dollar is doomed in the long run, because U.S.
government debt, including unfunded Social Security and
Medicare debt, cannot be repaid except with fiat money.
Default will come, but it will be disguised by monetary
inflation.

     In order to transfer commercial bankers' risks to the
victims -- depositors and voters -- central banks must
inflate.  Otherwise, commercial bankers would suffer.  The
present system was set up to prevent this.

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