This may give a little light on what is going on right now.
 ›››  This affects you.

The Federal Reserve Bank (Fed) was created in 1913. The bank's Board of Governors is appointed by the US President. All profit after expenses is returned to the U.S. Treasury or contributed to the surplus capital of the Federal Reserve Banks. The Fed exclusively controls the issuance of money.

The Fed is a group of 12 Privately owned banks. More precisely, it is a private credit monopoly. The Fed, other banks and congressional committees recommend the people to serve on the board of Governors. No US president since 1913 has appointed anyone that was not "recommended".

"Each Federal Reserve Bank is a separate corporation owned by commercial banks in its region. Federal Reserve Act Law which created Federal Reserve banks which act as agents in maintaining money reserves, issuing money in the form of bank notes, lending money to banks, and supervising banks." – Federal Reporter (1982)

The profit returned to the Treasury after expenses in 2006 was $29 billion. The US paid the Fed over $300 billion in interest in 2006. Private banks paid even more. This isn't very much profit even with "creative" accounting. The Fed has never allowed a full external audit; we have to take their word for the profits they make. Actually the Fed doesn't need to break the law: the law as written gives them more that anyone could want.

The Fed banks create money, then loan it back to the government charging interest, currently 2.25%. The average for old loans is around 5%. The government levies income taxes to pay the interest on the debt.

The dollar is not a store of wealth. It is a piece of paper backed by nothing. Its value depends on the buyer and seller's confidence in the paper. It is used by the government as a way of postponing the settlement of its debts. It is a note that can never be redeemed, except by receiving more notes. Since the money in circulation far exceeds the amount of gold in the world, paper money is necessary.

The total amount of U.S. money is called the "M3" which is the total cash and deposits (M2) + large deposits + Fed short-term loans (repros) + dollars that are outside the US – After almost 100 years, the Fed stopped publishing statistics on the M3 in March 2006. At that time the M3 was $12.5 trillion and the ratio of M3 to M2 was becoming increasingly embarrassing.

      Here's what has been happening for years now:

1. The US government spends more money than it receives.
2. The "Federal" Reserve Bank loans money created out of thin air to Congress.
3. Congress issues to the Fed an interest bearing treasury note in payment for the money the Fed has created out of nothing.
4. The US government pays the Fed interest on the treasury note.
5. If the money in circulation exceeds the total of goods and services the value of the money decreases. (See "M3" above. It's nice to keep it a secret...)

This "fiat money" system has been around since the 16th Century and has played a major part in world history. It's a fascinating, realistic view of history – check it out sometime.

      In addition, here's what is happening in 2008:

1. To keep all the distressed banks afloat, the Fed buys (bad) credit derivatives from other banks, paying with the US treasury notes the Fed received in payment for creating money out of thin air.
2. The banks have money to operate for another month.
3. The "cure" makes the problem get worse.

US mortgages in circulation total $11 trillion. Total capital in US banks, government agencies and savings banks amounts to $1.7 trillion. So the total money on hand is only 15% of mortgages. If 15% of the mortgages default, all the banks will be broke. – Actually they would make money by selling the foreclosed homes for what they can get, hopefully for the value of the loan, so it would take more than 15% defaults to make all of them go belly up. US real estate is estimated to be overvalued by 20 to 30 percent. Estimates from most economists are for S1.4 trillion foreclosures over the next year or two.

$ trillions of these mortgages are backed by "hedge funds". Let's say you put up $100 of your own money, borrow $900 at 6% and buy a mortgage-backed security for $1000 that earns 8%. After a year you earn $80 (8%). The loan costs you $54 (900 x 6%). You earn $26 (80 - 54), which is a 26% return on your $100 investment. But if the value of the security you bought loses 20% (which is happening right now), the security is worth $800 and you owe $200. You have lost $200 - $26 = $174. Multiply that by the $ billions invested and you get an idea of the magnitude this part of the economic problem.

The widespread hog-wild trading of these mortgages over the last few years makes it difficult for economists and even the lenders themselves to know what and where the losses are. It may take years, if ever.

It's compounded by selling agreements that guarantee, for a certain time, that the loans aren't bad. Once a bank sells a mortgage to another bank that sells it to another, the originating bank may not know for months whether the loan went bad. I've read estimates of losses between $400 billion and $4 trillion, but nobody knows... Imagine a bank that doesn't know if it is healthy or on its death bed.

The Fed can only help meet the lenders strained liquidity with a loan. But the problem of the financial system doesn't result from a lack of liquidity. Many of the lenders already have lots of liquidity: it's an crisis of insolvency and confidence. That is, lots of lenders are facing bankruptcy; their debts exceed their assets. Adding liquidity with loans won't help in the long run, the Fed's created-out-of-nothing money lowers the value of money and makes the money the lenders have now worth less. The fact is, the lenders made bad loans and nothing the Fed can do will change that.

It's the same old nonsense all over again: bail out from the top and let it "Trickle Down" to the little guy. If they would allow borrowers to restructure their mortgages, we wouldn't be rewarding the loan sharks at the expense of everyone else,

Of course the government can bail-out these make-a-buck-now-no-matter-who-it-hurts lenders by increasing taxes to the sky. But they won't do that in an election year. The Fed is doing just that of course, but most people don't know the taxpayers, those with and those without loans, are footing the bill.

It's unfair to put all the blame on the lenders. They just unethically took advantage of the lack of regulation. Government propaganda about the state of the economy and a long constant advertising effort to make people "good consumers" and enjoy "the good life" gave the borrowers a reason to use the easy credit. In defense of the borrowers, many were so much in debt they had to refinance to stay afloat. They did read the fine print; they just didn't have a choice.

But, the real cause is that through pure stupidity, the lenders got too greedy and gambled too much. They lost. ...And so did we.

Subprime mortgages aren't the only poker game that has been going on — All the corporate low-money-down-leveraged buyouts, done with fake money, were brilliant in their execution, but shortsided. $ billions went to a few wheeler dealers. The corporations gained phony money but lost real capital. They only have a pair of duces to show at the end of the hand.

Everybody thinks there has to be laws against robbing the local liquor store. But some people yell that the government is interfering with Free Enterprise if they pass a regulation to keep greedy businesses from bilking the public. Do some research on national and local subsidies to big business if you think free enterprise actually exists. You may refuse to shop at WalMart, but if you pay taxes, you are contributing to WalMart's wealth.

Sone people complain about our welfare state, meaning food stamps, HUD, etc. They should check out how much welfare the ultra rich get through "corporate socialism", for no other reason than they are rich. I know, they say it "trickles down". After waiting expectantly for decades, I hope it trickles soon.

If you want subsidies to accomplish anything you have to start at the real sources of wealth: subsidize education, subsidize research, subsidize infrastructure. But for years we have been wasting money subsidizing the results of these sources: manufacturing, services, retail.

If "Free Enterprise" doesn't act responsibly, a nation must act to protect its citizens. The banks had their shot. They blew it.

Free enterprise or a free government or a free citizen without empathy is not free.

Don't believe everything the government tells you about the economy. I won't go into detail; you can check it out for yourself. Unemployment rate is calculated with a formula that cuts several percentage points off of reality. The formula for inflation has changed over the years with the result that the government figures are less than half of the actual numbers. Guess what? The cost of food and fuel are not given the weight that that reality requires. Do they include the cost of 8-Track stereos? I wouldn't be surprised…

Every year in January the Administration quietly puts out an unrealistically high estimate of the deficit for the year. Then in the summer, with much fanfare, they announce that the deficit is running much less that expectations – proof that the economy is doing well. They do it year after year. Do they think we are stupid? – But the stock market always goes up after the announcement of the good news. – In fairness to the intelligence of the stock traders, the stock market doesn't follow the economy: it's an indication of what the traders think the other traders are thinking.

Even though the Fed has received trillions of dollars in notes from the US, the Fed is running out of treasury notes (estimated about $400 billion left). Their latest attempt to bail-out a bank (Mar. 13, '08) was for $280 billion. The only way they have to create money out of thin air is through loans.

The problem is that the US government is the only one left that can afford(?) to take out a loan from the Fed. The foreign banks don't want to go down with the ship. And the domestic banks are (finally) beginning to realize they already have more loans than they can bear (although the current prime rate of 2.25% is very tempting for them – almost free money.) Lower mortgage rates will help in the short term if people buy homes. But the public is beginning to wake up to the fact that the party's over and is adding to the problem by cutting down on their spending.

But, again, the Fed is running out of money to loan, even though the huge budget Congress is working on right now will help (help the Fed) since the US doesn't have the money and will have to borrow from the Fed.

And they can't lower interest rates much anymore – would you loan money at a negative interest rate? While lowering interest rates normally can stimulate spending, it directly lowers the US dollar's international value if foreign debt is going up – and there's lot's of these bad loans that have been peddled overseas.

The Fed is running out of options and the problems are only beginning. The Feds are paddling the canoe up stream as fast as they can to keep it from going over the falls.

It's wasted effort:
The faster they pump credit and bail-outs at the top, the more money they create, the faster the value of the US dollar depreciates. All it does is tranquilize the clueless investors who then artificially boost the stock market. The politicians then can assure us that the economy is healthy and good times are coming.

Lately the Fed and the Government have made more blunders than Inspector Clouseau did in the "Pink Panther" movies. — Something like "Inspector Clouseau Meets The Three Stooges."

– Next part: more and bigger problems, but with read-between-the-lines "hints" of what we, that is all of us as average Americans, can do about it. Together we do have the power.

Lately I've been reading about the cost of the Iraq war. Especially after Nobel Prize-winning economist Joseph E. Stiglitz and Harvard economist Linda J. Bilmes put out a new book, "The Three Trillion Dollar War,"

I seldom believe what I hear and very little of what I see. I don't even put much value on most things I believe. So I decided to check out the numbers for myself. Here's what I confirmed...

Iraq war cost: $3.5 billion per week (conservative estimate of direct costs only).

These costs don't include near-future costs such as replacing all the equipment in Iraq that is at the end of its useful life. The costs also don't include indirect costs such as increased veterans medical claims that some economists say will double the cost. The costs also don't include interest on the debt that we are borrowing because we don't have the cash to fund the war. Most of the war funding is borrowed by the US from the Fed, a privately owned bank.

If (somehow) we, the taxpayers, pay off just the currently accumulated Iraq war direct war cost in only 30 years, we will be paying $5 billion per month assuming 4.7% interest. – 4.7% interest is the unweighted average interest paid by the US Treasury on all debts as of Feb. 2008. With current low interest rates, this % will go down slightly as we borrow more.

The cost of the Vietnam War brought about the end of the Bretton Woods System that served the world so well since WWII by maintaining a fixed exchange rate for international trade. The system collapsed in 1971, after the United States stopped exchanging gold for dollars. It's been downhill since with the frequetly criticised World Trade Organization (WTO), International Monetary Fund (IMF) and the World Bank. The cost of Vietnam in current dollars was $584 billion, according to the Congressional Research Office. – The real cost of the war in Iraq exceeded that in 2006.

In the last few years Saudi Arabia has been supplying Sunni insurgents in Iraq to fight the Shiite insurgents that are being helped by Iran. (Sorry John McCain, but you ought to find out that Iran is Shiite not Sunni before you make your next speech.) To be fair to the Saudis, part of Saudi Arabia is out of the Saudi Government's control. The US Administration has been asking the Saudis to quit helping the Sunnis in Iraq for the last few years. They aren't listening.

For decades we have been making sweet deals with Saudi Arabia – deals that benefit us more than them. In March, 2008, the Administration is still trying to make deals with the Saudis, but the Saudis now only want deals that benefit them more than us. This is becoming more common in our dealings with other countries. Our stature in the world is declining – we have lost our power to make the rules.

Where our taxes and borrowed money are NOT going  ››› 
Here are three out of several programs essential to our safety that are critically under funded:

Yearly budget for monitoring and preventing the spread of nuclear weapons = less than one day's worth of war costs

Yearly budget for securing and destroying loose nuclear weapons and bomb-making materials = two day's worth of war costs

Yearly budget for terrorist materials inspection in cargo containers at US ports = one day's worth of war costs

Those guys in Washington like to talk, but are they really concerned about keeping us safe?

The direct Iraq War costs are "only" 11 percent of our tax income. As high as that burden is in dollars, much of our economic troubles come from elsewhere.

Everybody is talking about the collapse of the $8 trillion housing bubble ($110, 000 per homeowner). But that's more of a symptom and a proximate cause rather than the long term cause that has been building since the early 1980's and has gone bonkers since 2001: The problem is our current $9.4 trillion debt. (It's best to ignore, for now, our currently $59 trillion future obligations.)

If you spent $1 million every day – a motor yacht today, a nice home tomorrow, etc. – it would take you 25 thousand years to spend $9.4 trillion.

That $9.4 trillion debt costs us $440 billion per year in interest. That's a whopping 26% of our tax income. $9.4 trillion works out to an average of $79,000 per taxpayer. It's 40% of the Gross Domestic Product. It is increasing at $2 billion per day.

Right now, The United States borrows $1.1 billion dollars a DAY from Japanese and Chinese bankers just to pay the interest on our debt. – Yes, you read that right – we have to Borrow $1.1 billion/day just to pay interest because we don't have the money.

Just like somebody that is so broke he has to get a new credit card to have some money to pay the interest on his maxed-out credit cards.

$1.1 billion a day times 365 = 4/10 Trillion Dollars a year. Next year we will pay about $20 billion New interest – Just on the money we borrowed this year to pay interest. And this has been going on for the last few years. Next year we will be $400 billion + $20 billion more in debt to the Japanese and Chinese than this year. That is, we will owe $840 billion more that we did 2 years ago - just to get help paying interest. (I'm ignoring increases to our obscene trade deficit.)

I know the last paragraph is a mouthful, but the American people have to understand the good old-fashioned math of this before it is too late. (I think it is already too late in several ways: the damage has already been done...)

This isn't play money. The international banks (not to mention the Communist Chinese) aren't going to say, "All is forgiven." At best they will say, "All is forgiven, if you do what we want." – Say goodbye to American sovereignty – Say hello to the American Colonies of Communist China.

Or else, we have to devalue the dollar and pay interest at 5-10 cents on the dollar. But then the things we buy will cost 10-20 times as much. – Just wait it out, after the dollar nose dives, sooner or later the world's currencies will follow and even things out a bit. But before that happens, countries will trade Euros, Yen, Rubles, and Dinar for cheap dollars and buy out our infrastructure.

At one time we enjoyed goodwill toward America from many countries. In the last few years we have wasted so much of our standing with our belligerence. Countries that could extend us a helping hand may decide the world will be a better place without a superpower.

Right now, the Fed. and the banks are in panic mode and are doing their best to stop the free fall of the dollar. I assume, but am not convinced, that they want to do their best… that is, it's hard to believe their best effort is "Inspector Clouseau Meets The Three Stooges."

Nothing is helping; it's getting worse every month.

McCain, Clinton, Obama and Bush aren't talking much about this and the press doesn't want to ask the questions. That's because nobody wants to admit they don't have any answers. And nobody wants to talk about raising taxes – Let's just keep borrowing until the end comes.

It's the elephant in the room that everybody pretends they don't see. Because nobody wants to think about the unthinkable: the virus that keeps on eating up our assets. The United States is a debtor nation suffering under a crushing debt rather than being a creditor nation based on assets.

Our prosperity has been built on the fantasy of debt, consumer spending and an unlimited supply of capital. The business and government debt is out of control. The consumers are in debt and can't buy much more. And our real capital producing ability has been shipped overseas.

We set up manufacturing around the world. Business is happy making more profits. Consumers are happy to buy things cheap. Politicians are happy because they keep getting elected.

But we have given up our power to control our own destiny.

Japan avoided disaster from its economic crisis in 1991 only because its people had savings available to see them through and the country had massive industrial power within its borders to create real wealth. We have lost both.

We can't go on with "business as usual" in Washington. We are all in this together: Republicans, Democrats, Rich, Poor, whatever. If we don't demand a change of our basic economics, everybody loses.

We have lost our way.

We have to bring back our ability to create real wealth.

There is change in the air. I can feel it. It tells me that whatever may happen will lead us to a better world that is already out there waiting for everyone to discover it.

I realized that some of my points are obscure, so I have added this addendum.

First, to clairfy, this is basically an article on the fiat money system.

My rosy closing comments don't make me feel any better, but more and more people are becoming aware of the basic flaws in the 400 year old fiat money system and that gives me some hope: that after the disaster, we can pick up the pieces and move in new direction.

There's not much we can do right now except stay out of debt, if possible; get rid of stocks, bonds and even paper gold; don't buy things you don't need; buy physical things that have value in themselves, like gardening tools; and be prepared to barter.

When the dust settles, the first thing to do is get rid of the Federal Reserve System. The Fed is a self-serving entity – that is, self-serving to Big Money. The Government is perfectly capable of taking over all of the Feds functions at a drastic reduction of cost. We can save $100s of billions in interest each year. Only then can we look a getting rid of the fiat money system. If we have to have a money system at all, we have to have a system based on real assets.

We have to tell everybody, we won't ever pay a cent of our current debts and to hell with the consequences. This will happen sooner or later whether we do it on purpose or not. There is no way we can pay our debts in a hundred years. Why suffer for a hundred years?

Once we do this our fiat money will be forever worthless: we will have to base our money on something more valuable than thin air.

I know I can get obscure at times. What the article implied is, for now, we have to live with the consequences of the fiat money system, but it gives us a focus for the future. It will take a lot of focus by a lot of people to overcome all the people who will point out all the prosperity we have had. — Yes, we have had prosperity, a few times for everybody, but history shows that disaster always follows when reality catches up to the value of fiat money.

But we are moving toward an opportunity that we haven't had in the past – we have better communications and an increasing awareness of our own power. Maybe we will find a way.

* My sources for income and spending:
1. United States Monthly Treasury Statement
http://www.fms.treas.gov/mts/index.html
2. US Treasury Statement of Receipts, Outlays, and Balances
http://fms.treas.gov/annualreport/index.html

* My source for the US debt:
US Treasury Monthly Statement of the Public Debt
http://www.treasurydirect.gov/govt/reports/pd/mspd/mspd.htm

* My source for average interest rates paid by the US Government:
http://www.treasurydirect.gov/govt/rates/rates.htm

 ›››  I'm not making this crazy stuff up.

Aloha, Larry