OT: My ignorant question on Deficits and the Fed

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Here's a silly question. Maybe not. We have a 5-6 trillion dollar national debt, right? And some insane, gosh-awful percentage of our tax dollars (30%?) goes nowehere but "down the drain" to pay off the interest on this national debt.

My question is...Where does the taxpayer money for paying the debt's interest go? The Federal reserve? Why do they charge the interst rate they do? Why cannot it be lower? Who decides what that rate needs to be? Why?

It just seems like an awful waste that so much of my taxes does nothing but pad the linings of a bank, instead of building things or helping people in need.

-- coprolith (coprolith@rocketship.com), October 08, 1999


Coprolith- Just to ease your troubled mind- Your tax dollars have helped many people in need-Just not in America. Remember all the debt from about 17 or so nations that Bill kissed away the other day? A gift made in the name of the fine folks in this country. Apparently we must have so much he didn't need to collect on it. Bless his heart.

-- Gia (laureltree7@hotmail.com), October 08, 1999.

coprolith, To learn the answer to this, that is to really Get It, is many months' worth of study, and unlearning most things about the US govt and banking system that you thought you knew.

A few high points, much simplified..

The Federal Reserve isn't Federal and it has no reserves. It is a private central bank owned by a consortium of other banks, mostly European. The US govt has to borrow its money, most of it in the form of "commercial paper" not greenbacks, from the Fed at face value plus interest. Where does the Fed get it? They print it, or create it from nothing but computer keystrokes. You may note some potential for profit there. ;-) FDR declared the US in default and put the entire USA, current and future, up as collateral in 1933.

And the interest? Well, the Fed doesn't loan the money for the interest, so ultimately somebody loses something to pay it. Some person or business that has mortgaged real property, created with real bricks and real sweat, to play the game with this funny money, loses it to a bank somewhere.

There is another major part to this system too. Since it is fiat money, constantly being created, there has to be some agent to collect and destroy (so to speak) all this "money" so we don't drown in it. Enter the IRS, and the mechanism by which the FED/IMF can largely influence or control economies. With a generous money supply, easy credit and lower taxes - everybody feels rich, borrows and spends. Tighten up the supply or increase the collection - and create a recession or depression.

Rest assured, "your" "money" does go on to do other things, like giant loans from the IMF and World Bank to developing countries that help subvert their local economies, put them in debt to the banks, and make them susceptible to multinational corporations who can "help" by bringing "jobs".

Do I sound bitter? Sorry. I've been studying this stuff for years now, and I haven't yet gotten to the point where it doesn't sadden and infuriate me. Anyway, as I said, this is extremely simplified. There are thousands of fascinating and disgusting details; just start doing searches for any of the relevant terms. There is a lot of info out there, not the least of which is from the various branches of the FED itself.

-- Joe (paraflyr@cybernet1.com), October 08, 1999.

Hi Coprolith,

As a former Fed employee, and someone with some economics training, I encourage you to ignore the post above which is filled with little more than rumor and half-truth.

The Federal Reserve was chartered in 1913 by an act of the U.S. Congress in order to replace J.P. Morgan as the lender of last resort for the U.S. economy. It set up shop in 1914 and is "owned" by its member banks in the U.S. (not all U.S. banks are members) who are required to keep a minimum percentage of their reserves on account with the Fed. The reserves usually take the form of U.S. government bonds, but there are other assets like U.S. and foreign currency and gold which are acceptable as reserves as well.

The reserves are the primary means through which the Fed "makes" money. No the Fed does not print money. This is done through the Treasury department which works VERY closely with the Fed and causes it to be "quasi-governmental". For example, I had to have an FBI background check to work there, my fingerprints are on file as a result, etc.

The Fed makes money in two different ways and for two different purposes. The first way for it to make money is by using the reserves of its member banks without having to pay interest on the reserves. That's right, it's like an interest-free loan to the Fed by you, or me, or anybody who is a depositer at a bank which is charted through the Fed. The Fed can use the reserves as collateral to purchase or in exchange for government bonds or foreign currency. Whatever money the Fed makes while making these trades goes to cover their operating expenses (except for the check-clearing they do in NY which I think still pays for itself). Typically, there are several million dollars left over every year, and the remainder is paid to the Treasury and "reduces" the government debt.

What happens when the Fed buys and sells these assets? Well, this is the other way that the Fed "makes" money. Because our banking system is based on fractional reserves (and no this is not inherently evil), when the Fed buys government bonds on the open market, it injects cash into the banking system. This either allows the economy to grow at the same price levels or leads to inflation depending upon how much they buy and how much the banks loan out. Selling bonds has the opposite effect.

Why do we have government bonds? Because the federal government for years has run deficits which means they have to borrow money so that they can run the bureaucracy which oppresses the people, pays the military, and hands out the entitlements. Every 10 or so weeks the Treasury has an auction and the big banks and bond brokers line up to see which of their clients want to lend how much to Uncle Sam in exchange for those interest payments. It's actually pretty easy to do this directly through the Treasury now, although you have no influence on the interest rate you get.

Now, to your question. Where does the interest on the government debt go? Well, since the Fed owns some government bonds, they get some of the interest, but not much. Many foreign countries own government bonds, and they like to get paid. Many pension funds (perhaps yours) own the bonds and receive interest payments. And of course the banks still hold them, just like they hold your mortgage. You pay your mortgage, the taxpayers pay the interest and everyone is happy, right?

Well, the Fed is supposed to be able to set interest rates, but they cannot do this in a vacuum. They have to respond to market forces as we all do. Whatever they do to interest rates can have an effect on inflation. They're not quite as powerful as some would have you believe.

What do we get for all the money the Fed makes? Well, we are supposed to get a lender of last resort which will prevent another Great Depression from happening. Wait, didn't the Fed exist then too? Yes, and they unfortunately made matters worse because they didn't understand the economy very well. Personally, I think they made a HUGE mistake in bailing out LTCM. They have contributed more to the current stock bubble than most people realize. When the bubble bursts, it will be ugly, and some of the ugliness can be laid at Greenspan's feet. He learned the wrong lesson from 1987.

The email is real in case you have other questions.

-- nothere nothere (notherethere@hotmail.com), October 08, 1999.


One of the best explinations of our monetary and banking system is here: article by Steven Jacobson.

(Sorry, still can't hotlink) It is lengthy, but quite succinct.

I used to know some coprolites out here on The Plateau; perhaps you are related?


-- Pinkrock (aphotonboy@aol.com), October 08, 1999.


FWIW, I suggest anyone interested get a copy of their local Federal Reserve's annual/financial report. It will be an audited statement, for those of you who think everything you read are lies. I trust what I read, since the 1998 Annual report I have handy was Audited by Pricewaterhouse Coopers, LLP, independent accountants!

Looking at the income statement in the report, and reading the notes to the financial statements, you will find that basically, the Federal Reserve is the fiscal agent of the United States Government. It makes money from interest and from fees charged for services rendered, such as check clearing, ect. After paying out operating expenses, what does it do with all it's "profit"?....It sends almost ALL of it to the U.S. Treasury!!! So much for the myth of "evil bankers" stealing the countries money. That's right....no one is "making off" with anyone's money. The "profit" is given to the U.S. Government to do with as it wills.

Hey, you don't have to take my word for it. Get yourself a copy of any or all FRB annual reports. See for yourself. Sadly, there is so much hate-mongering from the anti- crowd that thinks nothing but "it's all a big conspiracy to rob me" that it's amazing so few actually do any research to find out the true facts. Most of what I've read here about the Fed, the banking system, the government, ect. sounds like the same stuff I heard back in the late seventies when nuclear war with Russia was the worry wart of the day. I remember reading the same drivel about our economic system, how it was about to go under, couldn't last, gold would go to four figures an ounce, you had to head for the hills and prep for survival, ect. Twenty long years ago.....and the same drivel has been spewed forth by the anti-society crowd and those simply missinformed by others who don't do their own research and thinking for the last twenty years that I personally remember...and I'm sure long before...and I'm sure for the next twenty plus years too.

For those too lazy to do any research, because you don't WANT your doomer beliefs challenged, here, from page 11 of the 1998 Financial Report of The Federal Reserve Bank of St. Louis is their Statement of Income for year ended December 31, 1998: All amounts in millions:

Interest Income: Interest on U.S. Government Securities $ 967 Interest on foreign currencies 10 Interest on loans to depositary institutions 1 --- Total interest income 978 million

Other operating income: Income from services $ 41 Reimbursable services to gov. agencies 17 Foreign currency gains, net 44 Government securities gains, net 1 --- Total other operating income 103 million

Operating expenses: Salaries and other benefits $ 65 Occupancy expense 6 Equipment expense 7 Cost of unreimbursed Treasury expenses - Assessments by board of governors 19 Other expenses 44 --- Total operating expenses 141 million

Net income prior to distribution 940 million

Distribution of net income: Dividends paid to member banks $ 7 million Transfered to (from) surplus (1) million Payments TO!! U.S. Treasury as interest on Federal Reserve notes!!!!!!! 266 million Payments TO!! U.S. Treasury as REQUIRED BY STATUTE!!!!!!!!!! 668 million --- TOTAL DISTRIBUTION: $ 940 million dollars

Yes, you read right, that's $934 million of $940 million going to the U.S. Treasury for use by OUR government...not going to any foreign sources or into the pockets of any "evil" "banksters"...Hey doomers....BWAAAHAHAHAHAHAHA!!!!!!

A wise source once said...know the TRUTH and the truth will set you free. To those without rabies of the mind, read the facts for yourself instead of listening to the delusional doomer crowd that will tell you the society is about to collapse for the next twenty years as they have over the last 20 years...Y2K not withstanding, IMO!!! Remeber, this as all information taken from any FRB annual report is a financial statement AUDITED BY OUTSIDE INDEPENDENT ACCOUNTANTS, not the product of some PR spin machine as so many here ignorantluy spew forth, along with the rest of their anti-society puke.

Doomer dummies ---BWAAAHAHAHAHAHAHAH!!!!! You're idiots !! Bet this hurts, huh!! BWAHAHAHAHAHAHA!!!!

Try checking the facts sometimes...and considering the source of your "information/conspiracy theries"...after all, one's life is too short to waste worrying about "boogiemen" that don't exist. Bet they flame this! Oh, how sweet the TRUTH!!

-- Genius (codeslinger@work.now), October 08, 1999.

Actually I am more inclined to believe in the mundane answers here than in the dark, conspiratorial ones. Nevertheless, I will look into this as per you suggestions and I thank you for your frank responses.

-- coprolith (coprolith@rocketship.com), October 08, 1999.

Hey Genius,

No offense but you are SO NAIVE! Ever heard of Creative Accounting? Please share what you know of this and about it's powers with all of the others.....I have been an in accounting for over 13 years now and I have saved MANY companies MANY pennies using an incredible garden variety of methods.

-- BYE (not@fooled.com), October 08, 1999.

If the fed is .gov then why must you find them under "F" in the phone book? The answer is that they are NOT federal, but private, (Interest rates should never be determined by an individual or a small collection of such - NO ONE should possess such enormous power). The 5.6 trillion debt is what's on the books, but what about the liability to fedgov retirees? What about the 17 trillion STOLEN from social security? The debt is fraudulent, your monetary system has been hi-jacked and we've all been made the suckers... Read "The creature from Jekyl Island" by G. Edward Griffin or "The secrets of the Federal Reserve" by Eustace Mullins so you can be educated enough to know a shill, like the one above telling you to ignore a posting. The facts will shine through. One last question - can paper become what it promises to pay by removing the promise? Goldbugs?

-- Patrick (pmchenry@gradall.com), October 08, 1999.


Many of the answers above deal with the philosphy behind the Fed and do not specifly address the questions you asked.

First of all, the interest expense obviously goes to the creditors. These are individuals, retirement plans and foreign holders. To the extent the creditors are US entities, the money paid as interest stays in this country. The US holders pay taxes on the income, so some of the interest payments come back through tax revenue. If the holder is a retirement plan or an IRA, the tax dollars come back to the Treasury as the funds are taken out of the plan. Our national budget is on a cash basis, meaning income (Federal) is reported as funds are actually received. Most large businesses report on something called an accrual method, which records income as EARNED, regardless of when received. The Federal budget deficit does not consider the future tax collections when retirement funds are withdrawn. To some extent, the deficit is actually a fiction since it does not consider monies the Govt will collect in the future from these retirement plans. If you think about it, funds in retirement plans have already reduced tax collections, but the values of the plans have yet to be taxed and the Govt does not record this money owed it as a budget item until it is received.

Much of the interest rate is determined by market forces and the Fed can only tweak the rate. As a general rule, higher rates strengthen the value of a currency. When rates are high, foreigners are eager to invest in a county's debt. But a foreigner must first buy a US dollar before it can purchase US debt. The laws of supply and demand dictate the currency must rise if buyers are more eager than sellers. The more buyers want to buy US debt, the higher the currency price must be.

We are a net importer of goods on the international trading market. Therefore, if our currency is high, we pay fewer dollars for mdse. Much of our low inflation rate is actually due to a strong dollar. If our dollar drops in value, we will pay more dollars for imported goods and our inflation rate will rise. Much of the interest rate is determined by currency value considerations.

I hope this answers your specific questions. This is fairly boring stuff, but there is nothing exciting about the subject of economics. I am also enjoying a splendid Bombay martini so please be understanding if some of this sounds disjointed. I must be certain to have an adequate supply on hand of this wonderful nectar by the 1st of the year- it makes the unthinkable a bit more tolerable.

-- mike (maples@voy.net), October 08, 1999.

Genious and nothere, If there is no 'financial deviation' intended with the Federal Reserve, then please explain why our government farms out money to the privately owned non-Federal Reserve which collects interest and fees when the government could print and distribute it's own money TOTALLY AND COMPLETELY INTEREST FREE as is lawfully our right laid out in the constitution?

We were doing just fine prior to 1913 and the introduction of the Federal Reserve has served one purpose and one purpose alone, however, I am looking forward to your answer....

Somethin' don't jive, baby.

-- OR (orwelliator@biosys.net), October 08, 1999.

Gia, to clarify, your tax dollars do not go towards 'helping others' per say.

Moneys going toward efforts by the govt to 'aid' others are gotten by the public investment of our tax dollars, bond and treasury issues and other 'for profit' ventures. (don't discount the covert profit factor)

The collective populace pays for all of these expenditures in the form of future devaluation of our savings and earnings. We never see the benefit of the investments. Look into the scandal called CAFR. Do a search on CAFR/Walter Burien to inform yourselves of that aspect of the public financial rip-off.

You could call it a triple screwing, if you will.

-- OR (orwelliator@biosys.net), October 08, 1999.

Hi again Coprolith,

Welcome to the world of banking and the Federal Reserve, confusing answers and misdirection. You may notice that there are a few differences of opinion as to what the truth really is. That's why almost all of us are saying research it for yourself.

Years ago I used to think that people who said the things that I am saying now were all wacko nut cases, but eventually enough people that I knew were serious, thoughtful, intelligent folks - definitely *not* nut cases - had said "Check it out" to me that I did. And although it has not been particularly fun having many of my cherished beliefs (instilled by our _public_ education system) smashed, it has been quite an education. I am grateful to have not nearly so much wool over my eyes.

To reply to a few of the points made above and stir a few more things into the pot... Thanks Pinkrock for the that url.. I hope you read it several times, coprolith, then print it out and read it some more. That expresses much more elegantly the points I tried to make.

Does nothere's post sound smooth polished and reasonable? Of course. National and international banking is one of the oldest and most polished scams around. Do they have their act together? Absolutely. Except... "Don't take your money out of the bank for y2k. It's safer in the bank. You might get robbed." Why are we being told this daily? Because bankers don't want the fact that their cash "reserves" amount to only about 1.3% of demand deposits to be exposed. And a not very large bank run would do just that.

Speaking of bank runs and the printing of 70 billion (that's a _B_) dollars of geeenbacks to cover y2k withdrawls, the printing of money without a corresponding increase in goods or services used to be known as inflation. Why haven't we heard the $70B described in those terms? To emphasise Patrick's mention of looking it up under "F" in the phone book - there are 12 Fed branches in the US. East to West, the cities they are in are Boston, New York, Philadelphia, Richmond, Cleveland, Atlanta, Chicago, St. Louis, Minneappolis, Kansas City, Dallas, and San Francisco. If you do not live in in of these cities, go to the library or phone company offices and look in one of the phone books. If you look in the blue (usually) government pages for Federal Reserve Bank, you *will* find it, it says "See white pages listing". What's your conclusion?

Mike, "nothing exciting about the subject of economics???!!! Classic misdirecton.. "Don't watch this hand behind my back, there's nothing interesting there. Watch this one up in the light that you're supposed to be watching." How do you think y2k came about? It wasn't stupid programmers; after all, the programmers did such a good job that all those programs that were supposed to have been superceded long before now are still in use. It was a management decision, that is an *economic*!! decision.

Research the War of 1812 - the USA lost, the British captured and burned our capitol city, Washington. But did we lose any territory? No. Brders after the war were exactly the same as before. What was it about then?

President James Madison had refused to renew the charter of the first central bank, a _private_ British controlled bank, and had instead insisted that the US Federal Goverment issue and control it's own currency as is directed in the US Constitution. Britain, at the Bank of England's insistence, set out to break the new, legal, banking system of the USA. When that was accomplished, the war came to an end and the second _private_ central bank of the US was chartered.

But "nothing exciting about the subject of economics", come on!

As for "a former Fed employee", an employee can do a creditable job for their employer and still not know or care about the policies or intentions of the people in the boardroom of that company, or of the parent company to that one. Many folks, for example, do a great job selling Nike tennis shoes who really do not *want* to know about Nike's horrific third-world employee practices. And nothere, when you say fractional reserve banking is "not inherently evil", then you must make the same moral judgement of robbery and theft, for they are one and the same. Interesting how appropriate "nothere nothere" seems right now..

Coprolith, Mike mentions that many of the answers dealt with philosophy, and I take nothere to task on moral grounds, there is a reason. Ultimately all our choices and decisions are based on moral or ethical grounds. When we forego a system of ethics in favor of _economics_ or personal profit, we end up going in the direction we are now - exploitation of economically disadvantaged people/groups/nations by ever larger multinational corporations, a rapidly widening gap between rich and poor, the type of "leadership" that exists in Washington right now, children murdering children, an unhealthy, non-resilient, just-in-time society that can be put at risk by a couple of missing digits in the computers.

You might notice that it's not the posters who say that things are not as they seem who are ridiculing others, name calling, and talking of hate. The truth does set you free in many ways. Check it out. Peace to you

-- Joe (paraflyr@cybernet1.com), October 08, 1999.

nothere was right on in his explanation. I also am a former (SF) FED employee. They have a lot of safeguards and even give their "surplus" to the US Treasury (I, on the other hand, wanted employee profit sharing!).

-- Mad Monk (madmonk@hawaiian.net), October 09, 1999.

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