Swap, Don't Pay

Column by Paul Hein.

Exclusive to STR

One of the problems which our newly re-elected president will face is that of the national debt. Terms such as the “fiscal cliff” suggest that disaster awaits if a solution isn't found. It won’t be, and the cliff looms large.

The fiscal cliff first began to take shape back in 1913, with the advent of the Federal Reserve Bank. That system, which led to a national currency, was designed to fail, because it provides no means for the payment of debt.

It isn’t surprising that our Rulers do not mention this, because, having established the Federal Reserve fiat money system, they could, as easily, abolish it; but they won’t, because it is too profitable to consider eliminating--until, of course--it implodes.

You may disagree with me, insisting that you can pay your debts, and thus I am wrong in claiming that our “monetary” system provides no means for doing so. But can you? Let’s look at it. If you owed me $100, how would you pay me? You could offer me a $100 bill. But that would be exchanging your obligation to me with Uncle Sam’s obligation to me, since your $100 bill is, by law, an “obligation of the United States.” I’ve merely swapped your IOU for the Federal Reserve’s IOU. That isn’t payment, although it does SETTLE the debt. Years ago I mailed a Federal Reserve “Note” to the Secretary of the Treasury with the request that he do whatever the law required him to do to satisfy the obligation. He returned my bill indicating that the obligation was thereby satisfied.

But you might write me a check for $100. That would transfer the number 100 from your account to mine. Again, your debt to me would be SETTLED, but not paid, because bank accounts are records of the “liabilities” of commercial banks. You would have swapped your IOU for the bank’s. Unlike the Fed notes, however, bank account numbers (they don’t represent anything or entitle the holder to anything) are not a “legal tender,” meaning you can object to them, and insist upon “real” money, in which case the bank, perhaps with ill grace, would give you cash (Federal Reserve Notes), completing the cycle: your IOU, swapped for the bank’s, in turn swapped for the Fed’s. But at no time is there any actual payment. Some lucky people--bankers and governments--can issue IOUs to obtain goods and services, and never must redeem them. You and I are not so fortunate. (Whatever happened to “equal protection under the law?”)

This is a very desirable situation for the banks. They are the only source of our “money,” and they provide it only as a loan. Since the “money” is nothing but a number in an account, the banker creates it with the stroke of a pen. No thing is spent, or expended, or loaned. Obviously, thanks to interest, the borrower must repay more than he borrowed. At any given time, therefore, the amount of “money” available would be insufficient to repay principal plus interest. This ensures more borrowing, if the economy is not to suffer, and this in turn means more interest payments. Those payments would cease if the loan were repaid, so the impossibility of that happening guarantees the banks an unending supply of interest payments. At present, the annual interest payments of the federal government alone (not including yours, mine, and business’s) are about a trillion dollars. Why in the world would the banks want the debt paid, even were it possible?

So what could go wrong with this system? Where is the fiscal cliff? There’s surely no shortage of “money,” since it is created from nothing with every loan. No, the problem is not a lack of money, but a lack of borrowers to justify its further creation. To some extent, Uncle can make up the shortfall by borrowing billions upon billions to go to the moon, build new aircraft carriers, fly drones over Syria and Iran, and provide more and more welfare payments, but this cannot go on indefinitely. When a bank note covered with zeros barely suffices to buy something that recently cost only 10, the jig is up. We are ruled by psychology, and the illusion that money is real, scarce, and therefore valuable evaporates when even a child’s allowance needs to be a thousand dollars weekly for school lunches!

The fiscal cliff awaits, and cannot be avoided. Try to imagine life without “money,” or even what passes for it. Lay in a supply of food, water, ammunition--and pray.

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Paul Hein's picture
Columns on STR: 84

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Bradley Keyes's picture

Add to that some useful skills, and good friends and neighbors, and you might have a chance to rebuild.