classical economics
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$5 Trillion Tax Hike

Thanks to President, Congress, Federal Reserve
By Wayne Jett © May 27, 2012

     The federal budget deficit is $5 trillion this year – not the mere $1.3 trillion we’ve been told by the president and Congress. USA Today says so. This is a tax hike of $5 trillion, or $50 trillion if they do the same each year for ten years. Oh, yes, it is a tax hike. The money must be collected from taxpayers. Congress and President Obama are just waiting for someone else to tell taxpayers how much and when to pay. If you now get it that deficit spending mandates increased tax collections, then there’s more news, and its worse.

      How many understand that the Federal Reserve Board has, and uses, the power to tax? One in 100? Doubtful, but perhaps one in 100,000. This is not surprising, because the Fed’s approach to taxation is far more insidious and dangerous than the taxing power vested in Congress by the Constitution. Here is why.

                                                                                 Constitutional Taxation

      Congress labors under the burden that their tax revenues must come from pockets or accounts of the people who vote in congressional elections. Mandatory withholding of income taxes from paychecks helps get the money in. But individuals eventually see the amounts of money they earn which are diverted to government. An incensed electorate often votes tax-raisers out of office.

       Congress sees taxation as a distasteful job akin to plucking feathers from geese. They face hissing and pecking whenever they do it.

     No such concern hinders the Federal Reserve. Like Congress and the president, the Fed wants money to spend. To get it, however, the Fed does not publicly write a tax law or take money from the hands of private individuals or businesses. The Fed simply creates as much new money as it wishes to spend. It does so by printing the currency or by entering the amount electronically in its financial accounts.

     Every dollar conjured in this way appears instantly and is ready to be spent, just as if the Fed had earned the money in the same way you and I do – by working for it. Making money this way is a magnificent experience. So as not to detract from it, Fed officials never have to campaign for election by voters.

    Hold on, you say. Yes, the Fed creates money, apparently because Congress and the president gave it that function. But how does authority to create dollars for use in the economy stack up to being the power to tax? Glad you asked. It is perfectly understandable you should be surprised. The public has never been told the Federal Reserve has power to tax.

                                                                                     How the Fed Imposes Taxes

    Allow me to explain, and please follow closely.

•    Before the Fed creates new dollars, the existing supply of dollars has an equilibrium value in relation to the total supply of goods and services available to be purchased by currencies.
•    New dollars created and held by the Fed have no value (except the value of paper with pictures on it), because the Fed provides no collateral to assure a higher value of those dollars.
•    As soon as the Fed spends the new dollars, however, the new dollars join the pool of existing dollars already in the private economy, and a new equilibrium value of all dollars is reached in relation to the total supply of goods and services.
•    In this process the new dollars absorb value from the already existing dollars, which have value to their owners because they have been earned in exchange for work or assets.
•   If the supply of new dollars created by the Fed is less than the growth in supply of assets, goods and services available for purchase, the value of every dollar increases (this is called monetary deflation).
•   On the other hand, if the Fed creates new dollars in greater amounts than the growth of assets, good and services, the value of every dollar decreases (this is called monetary inflation).
•    When it creates excess dollars and causes inflation, the Fed takes a portion of the value of the dollars everyone in the private economy has already earned.
•    Since 1971, the Fed has taken 98% of the value of dollars held by the private economy, all the while pretending to “fight against inflation.”

This is how the Federal Reserve taxes without notice and spends without accounting or review.  All of this is done outside the structure of safeguards for political rights of the people established by the Constitution.

     On a single day last December, the Fed created $645 billion, “the most massive increase in money in a single day in the history of man,” and promptly sent it to the European Central Bank for distribution to failing banks. That amount of new dollars was only $200 billion short of the entire U. S. monetary base as of July, 2008.

     The dollars given to European banks had no value except what was absorbed from the value of U. S. dollars already earned and owned by Americans and others. Does this not reflect global government rule by private elite? Certainly it is not republican democracy.

The J. P. Morgan Chase Spectacle

    James Grant notes in his May 4 Interest Rate Observer that the Glass-Steagall Act still prohibited commercial banks from proprietary investments in 1998 when Citicorp merged with Traveler’s Insurance. No one lifted a finger to enforce the law, however, and Citi then proceeded with others to get Glass-Steagall repealed by Congress in 1999.

     The Fed furnished billions of new dollars to banks like Citigroup, J. P. Morgan Chase, Goldman Sachs, Morgan Stanley and others in 2008 to save them from trouble caused by doing what Glass-Steagall once prohibited. Their troubles flowed from investing in proprietary “deals” they were sure would make money. But the money put at risk was capital used in commercial banking, which put millions of people in danger of losing their bank deposits.

     Congress, while busy feeding at the Wall Street trough, enacted Dodd-Frank in 2010, prohibiting banks from taking on investment risk through proprietary trading. JPMC and other big banks are highly influential in Congress, using both carrots and sticks. They got a loophole to permit them to “hedge” banking risks in financial markets.

     Many financial observers suspected JPMC continued a high level of proprietary investing for its own account after Dodd-Frank became effective. On April 4, 2012, JPMC official Blythe Masters declared the bank had no net risk exposure on derivative investments, and that such investments were made by JPMC only on behalf of clients. The words hardly passed her lips before a man working under Masters made news as the rumored “whale” roiling European derivative markets.

     Then came “Ugly Thursday,” May 10, the day JPMC CEO Jamie Dimon soiled himself in an urgently arranged conference call for financial analysts. In roundhouse fashion, he admitted sloppiness, lack of oversight and poor judgment in losing $2 billion during the previous six weeks. Doing what? Why, hedging, of course. Dimon said the losses could “get worse.” But, he said, JPMC has a “fortress balance sheet” and will unwind its positions in an orderly manner rather than be forced to liquidate at fire-sale prices.

     This is a tune which sounds strangely familiar – much like the theme from 2008’s big movie, “Bear and Lehman Go Boom.” Dimon may not have seen the movie, but he had a leading role in the reality show on which it was based. Jamie played the good guy who got the girl (her name was Bear Stearns) and then helped finish off the bad guys (that would be Lehman Bros.), all producing JPMC’s best year ever.

     Some speculate the JPMC blood in the water is attracting the sharks of 2008, who may close in and finish off Wall Street’s biggest player. That is a long shot. JPMC is the Wall Street bank which, more than any other, wears the Federal Reserve on its hip like a pistol.

     But one Fed president from the KC hinterland actually “sort of” called for Dimon to remove himself from the board of the New York Fed. A Democratic candidate for the U. S. Senate from Massachusetts, Elizabeth Warren, actually called for Dimon to resign from the New York Fed board.

     Why should Dimon resign? Is it due to bad management in JPMC’s loss of $2 billion-plus? More likely, the call for resignation from the New York Fed board is the initial penalty for JPMC’s rumored violation of federal law by making proprietary investments other than actual hedging. So far, however, no one in government has seen fit to accuse JPMC of violating Dodd-Frank, just as no one in government has demanded JPMC disgorge the money taken from customers of M. F. Global and given to JPMC.  

     Often, JPMC is said to serve as agent for the Fed, but being certain which is principal and which is agent is more problematic than is apparent at first glance. Those who own and operate JPMC possess wealth beyond imagination of most people. Those who run the Fed are employees and appointed operatives. This affects relations of individuals within the two firms.

Mercantilist Government Whack-a-Mole

    You may be convinced, or wish to be, that republican democracy is alive and well in America. If only it were true. Unfortunately, evidence to the contrary keeps popping its head up, like an endless game of whack-a-mole.

     Does anyone else notice the mole gets bigger and more belligerent after each whack? ~