by JC Leahy
Obama Government Plan to Impoverish Americans to Pay Federal Debt
The road to stagflation is paved with good intentions. The day after the November 2, 2010 elections, the Federal Reserve announced that it would buy $600,000,000,000 of Treasury Bonds on the open market. That sounds like boring financial news, right? Here's what they don't tell you: For the Federal Reserve to buy U.S. Treasury Bonds equates to printing money. This will tend to devalue the dollar and cause inflation. Another way to put it is that the Federal Government will be quietly raiding YOUR paycheck and grandma's retirement fund to pay off it's own insane amount of debt. If this is accompanied by anti-business governmental policies (such as the planned Jan. 1 expansion of EPA regulation, Democratic-style health care reform, business-bashing rhetoric like President Obama's, tax increases of any kind, and uncertainty of policy, then the result will be continuing job shortages and stagflation.
Here's how it happens: When the Federal Reserve buys Treasury bonds on the open market, it pays for the bonds with dollars that it creates, literally, out of thin air. These dollars may be disbursed in the form of checks that can't bounce because the Government says so, or in the form of simple computer entries. When, years ago, the North Vietnamese government created new U.S. dollars with a very sophisticated counterfeiting operation, they were said to be trying to harm America by depleting the value of the dollar and creating economic chaos. Nowadays, for the Federal Reserve to buy bonds with made-out-of-thin-air electronic dollars, will also have the same effect of depleting the value of existing dollars and fostering inflation.
But wait a second!! This dilution of existing dollars is more profound than it first appears! This is because of the fractional-reserve-based bank regulatory system. The underlying legal rule for commercial banks in the United States is that for every dollar of deposits on their books, the bank must have 10% of that amount in actual cash reserves. Conversely, if $1,000 of newly-created money is deposited in a bank, the bank is free to loan out $900 of that amount, keeping only 10%, or $100 in reserves. This fractional reserve requirement leads to what economists refer to as the "multiplier effect." Look how the multiplier effect works when multiple banks are involved.
Bank A receives a $1,000 of magic cyber-dollars as a deposit and loans out $900,
Bank B receives the $900 deposit and loans out 90%, or $810
Bank C receives the $810 deposit and loans out 90%, or $729
Bank D receives the $729 and loans out 90%, or $656
Bank E receives the $656 and loans out 90%, or $590
Bank F receives the $590 and loans out 90%, or $531