Is the Dollar a Ponzi Scheme?

December 31st, 2009 2:54 pm  |  by  |  Published in Banking, Economics, Federal Reserve, inflation, Jake Towne, Liberty, Market Regulation, Money, Politics  |  1

Ponzi schemea fraudulent investment operation that returns assets to the defrauded from assets they previously loaned to the scheme’s operators or assets paid by subsequent newer “investors” rather than from any actual profit earned

Originally published December 31, 2009 at http://towneforcongress.com/economy/is-the-dollar-a-ponzi-scheme-1

While it is (comparatively) well-known that the US dollar, while a currency, is a solely an instrument of credit issued by the Federal Reserve. All holders of dollars – including myself and most readers of this article – are in debt to the Federal Reserve.  Now, this debt is really phantom debt, but the key really is printed on each dollar, more properly known as a Federal Reserve Note:  ”This note is legal tender for all debts, public and private.” (1)

The total federal debt issued was $11.933 trillion dollars at the end of fiscal year 2009 in September per the Treasury Department, an increase of $1.9 trillion from 2008. (page 37/123) This debt will continue to increase every year until the monetary system collapses due (just in part) to the compounding “miracle” of interest rates.  Federal debt is bought at auction by primary dealers (Goldman Sachs, JP Morgan Chase, etc.) and “resold” to the FED, which then inflates the money supply by creating new dollars, or “injecting liquidity.”  The FED can also “inject liquidity” by purchasing assets, such as toxic mortgage debt or even company stock like AIG or GM.  Individual community banks, whether Citibank, Bank of America, or small local banks and credit unions, can also create new dollars with the fractional reserve system, which is can be viewed graphically here.  However, a proof I wrote demonstrates that fractional reserve banking broke down years ago, and can be more aptly named as the “no-reserve lending” system.

Investors Eric Sprott and David Franklin have gone one step further than I in examining the Treasury situation.  They note that since the largest foreign buyers of Treasuries (China) has stopped buying — which I warned of in May 2009 in “The Gold War – China and the US Treasury Market.”  Sprott and Franklin wonder who purchased over $500 billion in federal debt needed to sustain the system – the FED’s widely-publicized “quantitative easing” or injections of new dollars are not large enough.  They suggest that the “Household Sector” in the FED’s Z1 reports – widely-assumed to be American households – really is just an extension of the FED or Treasury and this is how the scheme is being maintained both in a monetary and psychological sense.  I have been unable to find errors in Sprott and Franklin’s work and sources, but I encourage you to try and leave any comments below.  The document is viewable below or downloadable from here and here.

Also of concern is Zerohedge’s claim that ~40% of the newly issued $1.9 trillion FY2009 Treasury debt must all be repurchased next year – along with the to-be-issued 2010 Treasury debt necessary to maintain the scheme, mostly to pay for the reckless deficit spending of the delusional Congress.  Furthermore, they estimate the USD denominated fixed income market will need to find 11X more demand in 2010.

Will 2010 be the year the Ponzi scheme collapses?  I do not know.  But keep in mind the truth -the value of the dollar is completely subjective.  Same with an egg or barrel of oil.  Even the value of an ounce of gold is completely subjective.  If you understand this truth, and study the world’s most critical market (yes, it’s gold) 2010 will be prosperous.  As always, feel free to ask questions below and I will do my very best to answer them.

I apologize if the above seems complicated – even two years ago I would have had a lot of trouble myself.  Recommended reading materials on basic economics can be found here.  And….

Happy New Year!

Jake Towne

(1) Legal tender laws, protected by the force (or fiat) of government, are important in sustaining the modern fiat monetary and taxation systems, as I noted in this speech.  I recommend the short Hulsmann article referenced.

December 31, 2009

Eric Sprott and David Franklin – Is It All Just a Ponzi Scheme (Dec 2009)

Responses

  1. Jason says:

    January 5th, 2010 at 4:09 am (#)

    Jake,

    Are you and investors Sprott and Franklin suggesting that it is possible the FED has an arm that is buying from itself (hidden within the Z1 reports)? That the $500 billion of Treasury securities were sold to an arm of the FED and then purchased by the FED to inject the new $500 billion in fiat money into the economy? Thus keeping our crackpot government spending party going?

    Jason