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The Federal Reserve needs more money
to continue purchasing US government debt, the aggregate amount of which is
soaring because of ballooning deficits. But the Fed has a
problem.
The US government doesn’t pay
its bills with ‘cash currency’, the green paper Americans carry
around in their pocket. So the Fed cannot crank up the printing press
like central banks did in Weimar Germany in the 1920s, or in recent years, in
Zimbabwe.
The US government needs ‘deposit
currency’ – or ‘electronic’ currency, to put it into Mr. Bernanke’s
terms – so that it can pay its
bills by check or wire transfer. Payment for goods and services by
deposit currency are made through the banking system, and nearly all commerce
in the United States is conducted in this way. So where will the
Federal Reserve get enough deposit currency to enable it to continue
purchasing US government debt?
I noted in my recent article that
explained the cause of hyperinflation that “huge bank excess reserves...have funded the Fed’s
purchase of US government debt, putting...the US dollar on the road to
hyperinflation.” But these huge reserves are not providing enough
deposit currency, given the massive, ongoing deficits being racked-up by the
US government. In short, the Federal Reserve needs more money.
So the Federal Reserve is proposing a regulatory change that would allow banks to deposit
money with it and earn interest income on those deposits. These
deposits will be separate and distinct from the reserves that banks leave at
the Fed. They would be time deposits, in contrast to the overnight
tenor of reserves, and therefore would earn the banks a higher rate of interest.
Even their name is different. They are not reserves, but a “term deposit facility”.
It has been evident for some time that the Fed would require new gimmicks to
come up with the deposit currency it needs to fund its growing purchases of
US government paper. This point is neatly captured by Reuters announcing this new Fed facility: “At the height of last year's
financial meltdown, the Fed had been discussing going to Congress to request
the authority to issue its own bills. The term deposit facility achieves a
similar purpose, but can be undertaken within the Fed's existing authority
and does not require congressional approval.”
Side-stepping congressional authority
like this is further evidence that the Federal Reserve sees itself as
unaccountable to the general public – as if not identifying who
received the Federal bailout money was not enough proof of this point
already. But the Fed’s devious maneuver here illustrates
something much more important, namely, the reason the Federal Reserve
exists.
Despite what Fed officials may declare
in testimony before Congress, the Federal Reserve does not exist to fight
inflation, provide full employment or achieve any of the other laudable goals
attributed to it. The Federal Reserve exists solely to provide the US
government with all the dollars it wants to spend, even if it has to
side-step congressional authority to do it.
There is of course a biting irony in
that conclusion, given that Congress is part of the US government. And
Congress is as much to blame for the government’s horrific deficits and
fiscal madness as the president or anyone else in Washington. So why
would the Fed need to side-step Congress?
It is because central banks like to
operate in the dark. That is why they meet behind closed doors and
resist public scrutiny, as evident from their current effort to stop Ron
Paul’s bill to audit the Fed. But we shouldn’t be surprised by the Federal
Reserve’s conduct. After all, I have already explained why central
banks are a barbarous relic.
James Turk
Free Gold Money
Report
Article originally published by the Free Gold Money Report.
Also
by James Turk
James Turk is the
founder of the Free Gold Money Report and of GoldMoney.com. He is also the
co-author of The Coming Collapse of the Dollar (www.dollarcollapse.com).. Copyright
© by James Turk. All rights
reserved.
Copyright © 2008. All rights reserved.
Edited by James Turk
This material is prepared for general circulation and may not have
regard to the particular circumstances or needs of any specific person who
reads it. The information contained in this report has been compiled from
sources believed to be reliable, but no representations or warranty, express
or implied, is made as to its accuracy, completeness or correctness. All
opinions and estimates contained in this report reflect the writer's
judgement as of the date of this report, are subject to change without notice
and are provided in good faith but without legal responsibility.
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