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Killing the Currency

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posted by Jay Colquitt on December 14th, 2009 at 10:04 PM

2484 Comments added to this post

How Barack Obama and Ben Bernanke are destroying the dollar — and perhaps ushering in the amero

By Robert P. Murphy
First under the Bush Administration and even more so under President Obama, the federal government has been seizing power and spending money as it hasn’t done since World War II. But as bold as the Executive Branch has been during this financial crisis, the innovations of Fed chairman Ben Bernanke have been literally unprecedented. Indeed, it is entirely plausible that before Obama leaves office, Americans will be using a new currency.
Bush and Obama have engaged in record peacetime deficit spending; so too did Herbert Hoover and then Franklin Roosevelt (even though in the 1932 election campaign, FDR promised Americans a balanced budget). Bush and Obama approved massive federal interventions into the financial sector, at the behest of their respective Treasury secretaries. Believe it or not, in 1932 the allegedly “do-nothing” Herbert Hoover signed off on the creation of the Reconstruction Finance Corporation (RFC), which was given billions of dollars to prop up unsound financial institutions and make loans to state and local governments. And as with so many other elements of the New Deal, FDR took over and expanded the RFC that had been started under Hoover.
In the past year, the government has seized control of more than half of the nation’s mortgages, it has taken over one of the world’s biggest insurers, it literally controls major car companies, and it is now telling financial institutions how much they can pay their top executives. On top of this, the feds are seeking vast new powers over the nation’s energy markets (through the House Waxman-Markey “Clean Energy and Security Act” and pending Kerry-Boxer companion bill in the Senate) and, of course, are trying to “reform” health care by creating expansive new government programs.
For anyone who thinks free markets are generally more effective at coordinating resources and workers, these incredible assaults on the private sector from the central government surely must translate into a sputtering economy for years. Any one of the above initiatives would have placed a drag on a healthy economy. But to impose the entire packageon an economy that is mired in the worst postwar recession, is a recipe for disaster.
Debt and Inflation
Conventional economic forecasts for government tax receipts are far too optimistic. The U.S. Treasury will need to issue far more debt in the coming years than most analysts now realize. Yet even the optimistic forecasts are sobering. For example, in March the Congressional Budget Office projected that the Obama administration’s budgetary plans would lead to a doubling of the federal debt as a share of the economy, from 41 percent of GDP in 2008 to 82 percent of GDP by 2019. The deficit for fiscal year 2009 (which ended Sept. 30) alone was $1.4 trillion. For reference, the entire federal budgetwas less than $1.4 trillion in the early years of the Clinton administration.
Clearly the U.S. government will be incurring massive new debts in the years to come. The situation looks so grim that economist Jeffrey Hummel has predicted that the Treasury will default on its obligations, just as Russia defaulted on its bonds in 1998. But another scenario involves the Federal Reserve wiping out the real burden of the debt by writing checks out of thin air to buy up whatever notes the Treasury wants to issue.
Many analysts are worried about Fed chairman Ben Bernanke’s actions during the financial crisis; Marc Faber is openly warning of “hyperinflation.” To understand what the fuss is about, consider some facts about our monetary and banking system.
The United States has a fractional reservebanking system. When someone deposits $100 in a checking account, most of that money is lent out again to other bank customers. Only a fraction—typically around 10 percent—needs to be held “on reserve” to back up the $100 balance of the original depositor. A bank’s reserves can consist of either cash in the vault or deposits with the Federal Reserve itself. For example, suppose a given bank has customer checking accounts with a combined balance of $1 billion. Assuming a 10 percent reserve requirement, the bank needs $100 million in reserves. It can satisfy this legal requirement by keeping, say, $30 million in actual cash on hand in its vaults and putting $70 million on deposit in the bank’s account with the Fed.
Normally, the Fed expands the money supply by engaging in “open market operations.” For example, the Fed might buy $1 billion worth of government bonds from a dealer in the private sector. The Fed adds the $1 billion in bonds to the asset side of its balance sheet, while its liabilities also increase by $1 billion. But Bernanke faces no real constraints on his purchasing decisions. When the Fed buys $1 billion in new bonds, it simply writes a $1 billion check on itself. There is no stockpile of money that gets drained because of the check; the recipient simply deposits the check in his own bank, and the bank in turn sees its reserves on deposit with the Fed go up by $1 billion. In principle, the Fed could write checks to buy every asset in America.
Monetary Catastrophe
Since the start of the present financial crisis, the Federal Reserve has implemented extraordinary programs to rescue large institutions from the horrible investments they made during the bubble years. Because of these programs, the Fed’s balance sheet more than doubled from September 2008 to the end of the year, as Bernanke acquired more than a trillion dollars in new holdings in just a few months.
If Bernanke has been so aggressive in creating new money, why haven’t prices skyrocketed at the grocery store? The answer is that banks have chosen to let their reserves with the Fed grow well above the legal minimum. In other words, banks have the legal ability to make new loans to customers, but for various reasons they are choosing not to do so. This chart from the Federal Reserve shows these “excess reserves” in their historical context.
U.S. depository institutions have typically lent out their excess reserves in order to earn interest from their customers. Yet currently the banks are sitting on some $850 billion in excess reserves, because (a) the Fed began paying interest on reserves in October 2008, and (b) the economic outlook is so uncertain that financial institutions wish to remain extremely liquid.
The chart explains why Faber and others are warning about massive price inflation. If and when the banks begin lending out their excess reserves, they will have the legal ability to create up to $8.5 trillion in new money. To understand how significant that number is, consider that right now the monetary aggregate M1—which includes physical currency, traveler’s checks, checking accounts, and other very liquid assets—is a mere $1.7 trillion.
What does all this mean? Quite simply, it means that if Bernanke sits back and does nothing more, he has already injected enough reserves into the financial system to quintuple the money supply held by the public. Even if Bernanke does the politically difficult thing, jacking up interest rates and sucking out half of the excess reserves, there would still be enough slack in the system to triple the money supply.
The End of the Dollar?
Aware of the above considerations, central banks around the world have been quietly distancing themselves from the U.S. dollar. Over the summer, officials in India, China, and Russia opined publicly on the desirability of a new global financial system, anchored on a basket of currencies or even gold.
We thus have in motion two huge trains of supply and demand, and the result will be an inevitable crash in the value of the dollar. Just as the Federal Reserve is embarking on a massive printing spree, the rest of the world is looking to dump its dollar holdings. It’s impossible to predict the exact timing, but sooner or later the dollar will fall very sharply against commodities and other currencies.
A crashing dollar will translate immediately into huge spikes in the price of gasoline and other basic items tied to the world market. After a lag, prices at Wal-Mart and other stores will also skyrocket, as their reliance on “cheap imports from Asia” will no longer be possible when the price of the dollar against the Chinese yuan falls by half.
The consequences will be so dramatic that what now may sound like a “conspiracy theory” could become possible. Fed officials might use such an opportunity to wean Americans from the U.S. dollar. Influential groups such as the Council on Foreign Relations have discussed the desirability of coordination among the North American governments. For example, CFR president Richard N. Haas wrote in the foreword to a 2005 Task Force report titled, “Building a North American Community”:
The Task Force offers a detailed and ambitious set of proposals that build on the recommendations adopted by the three governments [Canada, the U.S., and Mexico] at the Texas summit of March 2005. The Task Force’s central recommendation is establishment by 2010 of a North American economic and security community, the boundaries of which would be defined by a common external tariff and an outer security perimeter.
The “Texas summit of March 2005” refers to the “Security and Prosperity Partnership (SPP) of North America,” which came out of a meeting in Waco, Texas between President George W. Bush, Canadian Prime Minister Paul Martin, and Mexican President Vicente Fox. For the record, the federal government’s website has a special section devoted to refuting the (alleged) myths of the SPP, including the claim that the SPP is a prelude to a North American Union, comparable to the European Union. Yet despite the official protestations to the contrary, the global trend toward ever larger political and monetary institutions is undeniable. And there is a definite logic behind the process: with governments in control of standing armies, the only real check on their power is the ability of their subjects to change jurisdictions. By “harmonizing” tax and regulatory regimes, various countries can extract more from their most productive businesses. And by foisting a fiat currency into the pockets of more and more people, a government obtains steadily greater control over national—or international—wealth.
But if indeed key players had wanted to create a North American Union with a common currency, up till now they would have faced an insurmountable barrier: the American public would never have agreed to turn in their dollars in exchange for a new currency issued by a supranational organization. The situation will be different when the U.S. public endures double-digit price inflation, even as the economy still suffers from the worst unemployment since the Great Depression. Especially if Obama officials frame the problem as an attack on the dollar by foreign speculators, and point to the strength of the euro, many Americans will be led to believe that only a change in currency can save the economy.
For those who consider such a possibility farfetched, remember that one of FDR’s first acts as president was to confiscate monetary gold held by U.S. citizens, under threat of imprisonment and a huge fine. Yet nowadays, that massive crime is described as “taking us off the gold standard” which “untied the Fed’s hands and allowed it to fight the Depression.” The same will be said in future history books, when they explain matter-of-factly the economic crisis that gave birth to the amero.
What Can One Man Do?
If events play out as described, what should average investors do right now to protect themselves? First and most obvious, they should rid themselves of dollar-denominated assets. For example, government and corporate bonds promising to make a fixed stream of dollar payments will all become virtually worthless if huge price inflation occurs. (In contrast, holding U.S. stocks is not a bad idea from the point of view of inflation; a stock entitles the owner to a portion of the revenue stream from a company’s sales, which themselves will rise along with prices in general.)
Second, investors should acquire an emergency stockpile of gold and silver. If and when dollar-prices begin shooting through the roof, there will be a lag for most workers: They will see the prices of milk, eggs, and gasoline increasing by the week, yet their paychecks will remain the same for months or longer. If the dollar crashes in the foreign exchange markets, gold and silver would see their prices (quoted in U.S. dollars) increase in the opposite direction.
We can’t know the timing of the impending monetary catastrophe, but it is coming. Smart investors will minimize their dependence on the dollar before it crashes. At this late date, no one should trust the government and media “experts” who assure us that the worst is over.
Robert P. Murphy has a Ph.D. in economics from New York University. He is an economist with the Institute for Energy Research and author of The Politically Incorrect Guide to the Great Depression and the New Deal.

27 Responses to “Killing the Currency”
  1. [...] the title of my article at The American Conservative. It may smack of paranoid conspiracy theories to some readers, but as [...]
  2. Destiny of America
    Saturday, December 12, 2009
    Alternative Options To The Destruction Of The Dollar.
    When our vision becomes global then all the intrigues and schemes become more noticeable.
    Purposeful destruction of the dollar using the Federal Reserve could appear to be just plain stupidity and it is true that Bernanke has the credentials of a hyperinflationist. But the dollar is not being destroyed without a broader scheme. The ego-driven are impelled to recognize that the age of nation-building is coming to an end and their lust is now to enter into the next stage of human civilization with their blood-covered hands in control of the reigns.
    A classical liberalism world society is the peaceful, prosperous and just alternative to the totalitarian State of the ego-driven interventionists.
    It is therefore very obvious what time it is that we are living in. We are at the crux of the transition. If we fail, another generation in the future will have to fight the battle since - inevitably - the forces of economic equilibrium will not rest until the world is a classical liberalism society.
    Thanks to the Mises Institute (and ultimately Ludwig von Mises’ life work) we are probably ready and able to win this battle during this generation!
  3. Good article. My question is regarding:
    “For example, suppose a given bank has customer checking accounts with a combined balance of $1 billion. Assuming a 10 percent reserve requirement, the bank needs $100 million in reserves. It can satisfy this legal requirement by keeping, say, $30 million in actual cash on hand in its vaults and putting $70 million on deposit in the bank’s account with the Fed.”
    What’s the bank doing with the rest of the money? And how much can the original amount be leveraged in loans out? My understanding was 9 to 1, while the derivatives were up in the 30 and 40 to 1.
    Thank you.
  4. [...] 11, 2009 8:38 PM by Robert Murphy (Archive) That’s the title of my article at The American Conservative. It may smack of paranoid conspiracy theories to some readers, but as the principal in the Simpsons [...]
  5. [...] The American Conservative [...]
  6. If a bank has $1 Billion in deposits, it will put the whole $1 Billion in reserves with the Fed and borrow $10 Billion in Fed Funds at 0.25% interest and loan it out at 5%. It is far worse than you indicate.
    We need full reserves, which means the amount in loans must be equal to or less than what is deposited in savings.
  7. benjycompson, on December 13th, 2009 at 8:49 pm Said:
    …”What does all this mean? Quite simply, it means that if Bernanke sits back and does nothing more, he has already injected enough reserves into the financial system to quintuple the money supply held by the public. Even if Bernanke does the politically difficult thing,[b] jacking up interest rates and sucking out half of the excess reserves,[/b] there would still be enough slack in the system to triple the money supply”
    Coukl someone please help me out here? How would this actually be done? How does jacking up interest rates suck out reserves and extinguish part of the money supply? Which rates is Prof. Murphy talking about? Thanks.
  8. The interest rates would probably be raised to 20% or higher. Of course we are seeing low demand for bank products today due to the economic crisis, I don’t see how raising the interest rates would increase demand.
  9. [...] Read the rest. [...]
  10. Andrew J., on December 13th, 2009 at 11:11 pm Said:
    my personal theory: the Fed’s secret exit strategy is that they will buy back foreign holdings of US dollars with the United States Gold Reserve. This is how they will keep the dollar from collapsing.
  11. Jacking up interest rates would not only be politically “difficult,” it would be tar-and-feather time. The double-whammy here is that we have a debt bomb in the public and PRIVATE sectors. Consumers are already against the wall, carrying more debt than they can service. If Bernanke jacks up interest rates without capping the rates for unsecured debt at the same time, anyone with revolving credit card balances pretty much goes BOOM.
    Classic catch-22. They must increase rates to prevent the destruction of the currency a la Argentina 2001, but if they do, there will be waves of intensifying defaults, both public and private sector (along with the rising unemployment, homelessness, etc) ending in the probable destruction of the economy and “civil unrest”. Either way, we’re screwed. Lots of pain ahead.
    As for gold and silver, long-term, they are a good store of wealth and will be valuable when things settle a bit.
    For the collapse period: water, food, guns/ammo, medications (insulin, blood pressure drugs, antibiotics come immediately to mind) and certain luxury items (cosmetics, booze, cigarettes, clothing, coffee, chocolate, etc) for barter might make more sense. There are 4 things humans must have to survive: water, food, shelter, air.
    Good luck to all if the worst happens…
  12. Brent Railey, on December 14th, 2009 at 12:09 am Said:
    In a fractional reserve banking system, money supply expansion is accomplished primarily by the expansion of credit. When credit is cheap, meaning low interest rates, people and businesses tend to utilize it, causing monetary expansion to take place ($1 from the FED become $10 in the economy).
    To control interest rate, the FED sets a target rate and then injects “supply” (meaning freshly created reserves) into the banking system. It can do this by buying assets with money that previously did not exist, or just by handing it over. When the FED injects reserves, interest rates fall as a result.
    When the FED sells assets back to the banks, they bank buy them with reserve funds, thereby removing excess reserves. This causes interest rates to rise as a result.
  13. Thanks for all the work you do Robert. Between you and Thomas Woods, hopefully when the system callapses the American People will understand WHY and we’ll learn the proper leasons from it.
  14. Janet Holmes, on December 14th, 2009 at 4:56 am Said:
    A handful of greedy, corrupt, paranoid, egomaniacal, and murderous Masters of the Universe (ala Tom Wolf, Bonfire of the Vanities) now have the majority of the “value” of the world stored away in some luxurious caves. Frankly, I don’t see how any good can come out of trying to wrest a bit of gold or anything else of “value” back from them, holing up in a well-fortified hut, and keeping a rifle pointed out the dinning room window is going to help the rest of the population of the planet.
    The legacy media tell us that we should want what our Masters have. Well, a political strategist would say that we should always ask this question: What do THEY gain if I believe them?
    The answer in this case: the status quo.
    Recently learning that Tiger Woods believed he didn’t “have enough” was a real eye opener for me. According to the message of the legacy media, he had it All, lots of stuff, health, drive, focus, and adoration of the masses. It’s ironic and very instructive.
    Extraordinary times like these require new approaches. Answers will come from communities realizing they don’t need to fork over a piece of the action in order to have value, safety or security. Putting our energy into ensuring individual liberty, acting with compassion, living in faith and building an economy based on an exchange of goods and services will give us real value.
    I don’t by any means have all the answers, but let’s not go backwards.
  15. imeasure, on December 14th, 2009 at 5:00 am Said:
    Article is right on target.
    At this point the choices are between massive reductions in government and associated cost-cutting to balance the budget. OR print currency paying all obligations with increasingly worthless paper. Politicians lack the principles required to do the first so they will do the second.
    Pray for this nation. Pray that the American sheeple will turn off their televisions (the only legal mind numbing narcotic), wake up, and demand an end to socialism and the fiat regime that supports it.
  16. Bill Sardi, on December 14th, 2009 at 5:11 am Said:
    Bernanke and Geithner at the Fed and Treasury know this — that if they release a flood of money there will be massive inflation. The bailout was to fix the negative bank ledgers, not the economy. The banks played along and parked their money. Now, how to get this money out of the system? Huge real estate assets sit at the Federal Reserve in the form of Fannie Mae and Freddie Mac paper. If the government sells those assets to hedge funds, this swap will unload the properties, but now, what to do with even more money? This is why they don’t want the Federal Reserve audited. Because this money will simply vanish…. like taking a cigarette lighter to it. They have to make the money vanish, otherwise huge inflation. This will only fix that year’s problem — 2009. The Fed has quietly slipped more money into the system. Yes, we can buy gold, but it needs to be US gold and silver coins if the masses want to buy bread, milk, eggs. The best hedge is grow your own food. Start now.
  17. To Andrew who believes that “the FED is secretly planning to buy back foreign holdings of US dollars with the US gold reserve”:
    Even if you believe that the US has the 8,100 tons of gold as claimed,that is only around 350 billion dollars worth,we owe foreigners about three times that amount,so we’d still come up way short.
    Unless of course the US government allows the price of gold to triple before hand…
  18. Robert- Excellent analysis. I submit to you that the hyperinflation, currency crisis and dollar meltdown will create the perfect storm that will usher in widespread state secessions. At least I hope so. Go to my website at for more info on secession.
  19. [...] By Robert P. Murphy [...]
  20. alpowolf, on December 14th, 2009 at 6:27 am Said:
    I’m trying to get myself some silver and gold (unfortunately I can’t afford much) but I’m wondering: how will I keep the feds from stealing it? I know they will try.
  21. DanFromCT, on December 14th, 2009 at 7:08 am Said:
    Why is the “opposition party” playing parliamentarian games while the Democrats are herding us into abject servitude? Who are Republican representatives, senators, and governors calling for nullification and secession? There are none that I can see.
    The goal of Pelosi, Frank, Reid, Dodd and their ilk is as much retribution as redistribution, and it is reasonable to expect confiscation of precious metals, punitive taxes on capital gains and foreign investment, and wage and price controls intentionally leading to shortages, along with a conversion/debasement of the dollar to another currency unit. Rahm Emmanuel spilled the beans on creative emergencies, and he’s calling the shots. What are we waiting for?
  22. The core reason for the huge theft going on at this time so fast and furious and openly is to fund preparations by the elite for the 2012 event, so that they might save themselves while the rest of us perish. James Cameron’s movie 2012 is based on Patrick Geryl’s work at His research is thorough and very credible… sunspot cycles and ice core sample evidence. He says that this has happened 4 times in the last 100,000 years. I am moving to Lesotho myself.
    Cheers, Charles
  23. No mention of biblical prophecy?
    The coming one-world-government (where ALL of this global chicanery is leading) is being allowed by God NOW …. it must occur in order to ultimately fulfill Revelation 19:19 (”…the kings of the earth, and their armies, gathered together…”)
    It cannot be stopped. No amount of gold, food storage, bazookas, nor “wisdom” from PhD professors will stop nor postpone it.
    Understand bible prophecy and you will understand everything….omit it, and well, you get the idea…
    btw, one cannot gain the wisdom of the bible unless one is a true believer … that’s the catch that will bring destruction to many. Google “sinner’s prayer” for instructions on becoming a true believer.
    Humankind’s future is ALL foretold in the bible…..waiting for you.
    Personally I believe that it will all be over by 2020, with much pain and destruction between now and then (all outlined in the bible).
    For the naysayers and unbelievers and scoffers:
    Another bible prophecy is that Damascus (Syria) “shall be a ruinous heap” (Isa 17:1). So when (not if) you see/hear of Damascus being destroyed, may I highly suggest getting on your knees?
  24. Not any of this is good news at all.
  25. [...] By Robert P. Murphy [...]
  26. No mention of biblical prophecy because this isn’t a discussion about fairy tales.
  27. Mr. Murphy has written an excellent article, but there are factual errors.
    The statement that
    “When someone deposits $100 in a checking account, most of that money is lent out again to other bank customers. Only a fraction—typically around 10 percent—needs to be held “on reserve” to back up the $100 balance of the original depositor. ”
    does not apply to the largest banks, or more precisely to the former 5 largest “Consolidated Supervised Entities” consisting of Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley.
    The leverage of these giant firms was in the range of 20-1 to over 30-1. See
    These firms had reserves that were closer to 3-5% rather than the 10% cited in the Mr. Murphy’s article.
    The statement that
    “If and when the banks begin lending out their excess reserves, they will have the legal ability to create up to $8.5 trillion in new money.”
    assumes that banks will not have other needs for their reserves. (It also assumes they confine themselves to traditional 10-1 leverage, which presupposes a change in their past behavior.) If large banks suffer further losses from the continuing meltdown in residential and commercial real estate mortgages, they may draw upon those reserves to cover their losses. That is a very plausible explanation for their parking those reserves at the Fed, which pays a minuscule rate of interest.
    Similarly the Fed’s $1 Trillion in new assets consists largely of toxic waste purchased from these firms at face value. Eventually the losses on this paper will be realized, significantly reducing the balance sheet of the Fed. Since most mortgages are 30-year notes, within 15 years at most the losses will be undeniable. Given the current default and bankruptcy rates, the losses will very likely be realized sooner rather than later.
    So much of the bank’s excess reserves and the supposed balance of the Fed could be wiped out by canceling real debts with newly created credit. The money supply is still increased dramatically, but not by the fractional reserve ratio.
    This is not to contradict the primary point of the article, that the Fed is very likely to continue debasing the dollar. They simply have less control than anyone realizes. The future is uncertain, but appears to be very grim indeed.