Chapter 81 2. How Debt Dollars Are Made

The Federal Reserve Bank of New York describes the US dollar as such, and the US dollar cannot be exchanged for gold or any other assets of the Treasury Department.The question of the assets backing the Fed notes has no practical significance. It only has the need for bookkeeping︱Banks produce money when borrowers promise to pay back.Banks create money by monetizing these private and commercial debts. The explanation of the Federal Reserve Bank of Chicago is that in the United States, neither banknotes nor bank deposits have intrinsic value like commodities, and the dollar is just a piece of paper.Bank deposits are just a few numbers in the bookkeeping.Coins, while possessing some intrinsic value, are usually well below their face value.

So what is it that makes these checks, banknotes, coins, etc., acceptable at face value for debt repayment and other monetary purposes?It's mostly people's confidence that they can exchange those currencies for other financial assets and real products and services whenever they want.Part of the reason for this is that governments have mandated by law that these fiat currencies must be accepted. That is, the monetization of debt creates dollars whose face value must be enforced by external forces.So how exactly does debt turn into dollars?To understand the details of debt-to-money transfers, we must take a magnifying glass to carefully observe the US currency operation mechanism.

As a non-financial professional reader, you may need to read the following content repeatedly to fully understand the money-making process of the Federal Reserve and banking institutions.This is the core commercial secret of the Western financial industry. Since the U.S. government does not have the right to issue currency, it can only issue currency through the Federal Reserve and the commercial banking system by issuing debt and then using the national debt as collateral to the private central bank, the Fed. Therefore, the source of the US dollar is the national debt. The first step is that Congress approves the scale of national bond issuance, and the Ministry of Finance designs national bonds into different types of bonds, among which the bonds with a maturity of less than one year are called T-Bills, those with a maturity of 20︱10 years are called T-Notes, and those with a maturity of 30 years are called T-Notes. -Bonds.These bonds are auctioned in the open market at different frequencies and at different times.Finally, the Ministry of Finance sent all the treasury bonds that were not sold in the auction transaction to the Federal Reserve, and the Fed accepted them as they were ordered. At this time, the Fed's accounts recorded these treasury bonds under securities assets.

Because national debt is collateralized by the U.S. government against future tax revenues, it is considered the most reliable asset in the world.When the Fed acquires this asset, it can use it to create a liability, which is the Fed checks printed by the Fed.This is a critical step in creating something out of nothing.Behind this first check from the Federal Reserve, there is no money to back up this empty check. This is a well-designed and disguised step. Its existence makes it easier for the government to control supply and demand when it auctions bonds. The Fed gets the interest of lending money to the government.The Federal Reserve, which is obviously an empty-handed wolf, is completely balanced in its accounting books, and the assets of the national debt are exactly equal to the liabilities of the currency.The entire banking system is subtly wrapped under this shell.

It is this simple but crucial step that creates the greatest injustice in the world.The future tax revenue of the people is mortgaged by the government to the private central bank to lend dollars. Since the money is borrowed from the private bank, the government owes a huge amount of interest.Its injustice is manifested in: First, the people's future tax revenue should not be mortgaged, because the money has not been earned, and the mortgage of the future will inevitably lead to the depreciation of the purchasing power of the currency, thus hurting the people's savings. Second, the people's future tax revenue should not be mortgaged to the private central bank. The bankers suddenly have the promise of the people's future tax revenue with almost no money. This is a typical white wolf with empty hands.

Third, the government owes huge amounts of interest for no reason, and these interest payments eventually become a burden on the people.Not only are people inexplicably mortgaging their future, but they are now being taxed immediately to repay the interest that the government owes to a private central bank.The greater the circulation of US dollars, the heavier the interest burden on the people, and they will never be able to pay back for generations! In the second step, when the federal government receives and endorses the Federal Reserve check issued by the Federal Reserve, this magical check is deposited back to the Federal Reserve Bank and transformed into government savings and stored in the government's account at the Federal Reserve.

The third step, when the federal government starts spending money, large and small federal checks constitute the first wave of money flooding the economy.Companies and individuals who received these checks deposited them into their business bank accounts, and the money became business bank deposits.At this time, they show a dual personality. On the one hand, they are the liabilities of the bank, because the money belongs to the depositors and will be returned to others sooner or later.But on the other hand, they constitute the assets of the bank and can be used for lending.From the accounting books everything is still balanced, the same assets constitute the same liabilities.However, commercial banks here begin to prepare for the creation of money with the help of the high multiplier of fractional reserves.

In the fourth step, commercial bank deposits are reclassified as bank reserves on the bank books.At this time, these savings have been transformed from ordinary assets of the bank into reserves of money-making seeds.Under a fractional reserve system, the Federal Reserve allows commercial banks to keep only 10 percent of their deposits in reserves (generally, U.S. banks keep only 1 to 2 percent of total deposits in cash and 8 to 9 percent) bills in its own treasury, as reserves), and lend out ninety percent of its savings.Then, 90% of the money will be used by banks to extend credit. There is a problem here. When 90% of the savings are loaned to others, what should the original depositors do if they write a check or use the money?

In fact, when loans are made, these loans are not original savings, but new money created completely out of nothing.The new money immediately increased the total amount of money held by banks by 90% over the old money.Unlike the old money, the new money can generate interest income for the bank.This is the second wave of money flooding the economy.When the second wave of money returned to the commercial banks, there were further waves of new money creation in decreasing amounts. When the twentieth wave ended, one dollar of treasury bonds, under the close coordination of the Federal Reserve and commercial banks, had created an increment of ten dollars in currency circulation.If the increase in money circulation generated by the issuance of national debt and the aftermath of money creation is greater than the needs of economic growth, the purchasing power of all old money will decline, which is the root cause of inflation.From 2001 to 2006, when the United States added 3 trillion U.S. dollars of national debt, a considerable part of it directly entered currency circulation, coupled with the redemption of national debt and interest payments many years ago, the result was that the U.S. dollar Dramatic depreciation and sharp rise in the prices of commodities, real estate, oil, education, medical care, and insurance.

However, most of the additional issuance of Treasury bonds did not go directly into the banking system, but was purchased by foreign central banks, non-financial US institutions, and individuals.In this case, these buyers spend existing dollars, so no new dollars are created.Only when the Fed and U.S. banking institutions buy U.S. treasury bonds will new dollars be generated, which is why the U.S. can temporarily control inflation.However, the treasury bonds in the hands of non-U.S. banks will mature sooner or later, and the interest will also need to be paid every six months (30-year treasury bonds). At this time, the Federal Reserve will inevitably create new dollars.

In essence, a fractional reserve system coupled with a debt monetary system is the culprit of long-term inflation.Under the gold standard, the result will inevitably be that the issuance of bank notes will gradually and greatly exceed the amount of gold reserves, which will inevitably lead to the disintegration of the gold standard.Under the Bretton system, it will inevitably lead to the collapse of the gold exchange system.Under the pure fiat currency system, hyperinflation will inevitably occur in the end, which will eventually lead to a severe recession worldwide. Under the debt currency, the United States will never be able to repay its national debt, corporate and private debt, because the day the debt is paid off is also the day when the dollar disappears.Not only will the total debt of the United States not decrease, but with the snowball effect of debt interest and the natural growth of money demand in the economy, the total debt of the United States will continue to rise, and the speed will become faster and faster.