All new money is loaned into circulation as an interest bearing debt. Since the system only creates the principal and never the interest, the debt is always greater than the money supply: The Switch From Wealth To Debt
This Report compiled by: followfortune (author anonymous)
Gold and silver coinage initially work well as money for the people. This is because the people produced the gold and silver, a raw resource of earth, through their labor. The 1792 Coinage Act in America, allowed anyone to take that resource to the United States mint and have it monetized [coined] free of cargo, the people, furnished our own money, based on our production, as wealth to ourselves and spend to it into circulation as a benefit to all of society with no debt attached to it.
Gold and silver are very heavy metals and not as convenient to carry as paper money. If we didn’t want to carry the gold and silver coins around with us, we could take them to the United States treasury and store/deposit the coins. The treasury would issue depositors gold and silver certificates as receipts. They stated on their face that there was x amount of gold or silver coin on deposit in the treasury, payable to the bearer on demand. Now, we had paper money. As long as just the principal was followed, you still had good, honest, wealth money with no debt, no excessive profit, nor excessive purchasing power to anyone.
However, when someone deposited their gold and silver coin in a fractional Reserve bank, a totally different principal went into action. The bank held the coins as a reserve and expanded the money supply by making new loans equal to 10 times the face value of the coins deposited. At that point, money switch from wealth to debt.
Americans have lacked this understanding. Lack of understanding is why America is the world’s greatest debtor nation with all over $26 trillion in public and private debt at the end of 1990. On January 24, 1939, Robert H. Hemphill, Credit Manager of the Federal Reserve bank of Atlanta stated: If all the bank loans were paid no one would have a bank deposit and there would not be a dollar of coin or currency in circulation. This is a staggering thought. We are completely dependent on the commercial banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the bank’s create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is. It [the banking problem] this is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it becomes widely understood and the defects remedied very soon.
At first glance, fractional banking looks like a good deal for everyone. The banks get more profit. The people can get quicker and easier loans. More capital is available to engage in commerce. Production picks up. But, sooner or later, more and more people cannot make there loan payments. An unseen byproduct of fractional banking is it makes some people rich [about 250,000] and leaves many more people very poor [about 150 million]. Alt the while, fractional banking creates, compounding, unpayable public and private debts, which causes the cost of living to go up constantly.
Throughout the nineteenth century, larger banks worked to get laws passed that would consolidate all fractional banking under the control of just a few. They did so under the guise of a standardized national money’ They were successful in 1863 with the passage of the National Banking Act. It allowed newly chartered national banks to create a uniform national bank currency. A few years later, the federal government taxed state bank notes out of existence. In 1873, the government stopped all free coinage of metals. They began to use United States Certificates of Indebtedness-United States Bonds-as security for the national currency.
The note states on it’s face, “The Federal Reserve Bank of Minneapolis, Minnesota will pay to the bearer on demand one dollar- Federal Reserve Bank Note.” However, it no longer said a dollar of what, like the gold and silver certificates did.
It also says, ” secured by United States Certificates of Indebtedness.” You can now clearly understand why our government and private sector are so deeply in debt. All we use for money is [monetized] debts. The switch from wealth-based money to debt-based money had been completed. All that was left was to change the bills.
This pattern was repeated two more times, before the U.S. economy remained in a deficit position.
Since 1985, many items have been taken “off budget” to hide the true size of the deficit. When a depression was predicted within six months of the 1987 market crash, the debt was increased and the depression failed to appear. The government borrowed enough to stimulate the economy out of the predicted depression. Our monetary system has been switched from a wealth-based monetary system to a monetized debt-based monetary system. Under constitutional principles, our money was to be a representation of wealth, and spent or traded into circulation. Now our monetary system is based on debt. When interest is charged on the loans, it means that the debt is always greater than the money supply. In order for the economy to function, there must be an ever-expanding debt. Is this fiscal responsibility?
If the debt is not continually growing there is a money shortage. That is the reason that each time there is a reduction in the deficit a recession follows. A money shortage is what causes recessions. The media doesn’t tell you this. Why not? Is this the kind of system that fosters fiscal responsibility?
Maybe it’s time we the people begin to think of ourselves. The only way out of this mess is to go back to the principle of wealth money, money that is created and paid or traded into circulation, not loaned into circulation. It’s time that people who understand this get to work telling friends and neighbors that the root of the world’s economic problems is our flawed money system.
Often we’re told of the wonderful power of compound interest [earning interest on both principal and previous interest.] We are told how compound interest can make a modest investment grow into a great amount. For example: If you invest $10,000 at 7 percent compound interest for thirty years, you’d expect your investment to grow to $76,122.52. Sounds great! Compound interest must truly make money grow.
Let ‘s step out of the dream world of bankers hype. Just how does money grow? Where does the interest money come from? When you put money into an interest-bearing account, does it turn into something like rabbits that mate and quickly reproduce? What happens? The increase of money in your account had to come from someplace. To understand financial planning, economics, growing public and private debts, increasing taxes and prices, etc., we must always remember what it is that we use for money and how all new money is created and put into circulation.
When the economy grows more money is needed, remember that the actual creation of money always involves the extension of credit by private commercial banks. If someone does not borrow it , the money cannot exist. If you invest $10,000 and thirty years later get $76,122.52 cents, somewhere, some other individual, corporation, or government have to borrow $66,122.52 before it could get into your account. Now, you have the money and they have the debt. The debt can never be paid because the interest is never created when the money is borrowed. Because it cannot be paid, the debt must constantly grow.
It’s at this point that bank agents love to explain that the interest money comes from increased production. Stop here and think! Have you ever waved a magic wand over a shoe, shirt, a bushel of corn, or an hour of labor, etc., and seen it turned into money?
There are only two ways to get money from what we’ve produce:
- We can create new money by using our produce as collateral for of bank loan. Which created the new money
- Sell our production to someone in exchange for money that was also created as a loan to someone
These are the only two ways to get money for what we’ve produced. The production itself NEVER turns into money. You can create money using a credit card by signing the forms sent to you by the credit card company and promising to pay the credit [ money] back in the future with interest. The bank turns that promise to pay into collateral to create the money as a loan the minute you use your credit card to buy something.
Let me explain another way. Imagine that we have $10,000 total money in circulation. We invest all of it in a compound interest-bearing account. Let’s say that the money is invested in a shoe factory. The factory spends the $10,000 for raw resources and labor to produce shoes. It sells the shoes and gathers back the total money supply and returns it to the investor. Remember, if the total money supply is only $10,000, that is all the shoe factory could return to the investor. If the factory is going to return the original $10,000 investment plus the compound interest, the money supply would have to be increased by at least $66,122.52 needed to pay the investor 7% compound interest, the total debt drawing interest at some bank would be $76,122.52. It’s easy to understand how America has $26 trillion of debt drawing interest at the end of 1990. These facts are not clearly visible because there are vast numbers of loans being made and extinguished on a daily bases. Banks spend a large part of the interest back into circulation. However, the interest-spending does not increase the money supply. It simply keeps money in circulation. In addition, the total amount of interest and debts that are not repudiated through business losses, repossession and bankruptcies.
Fractional Reserve Banking System
In the context of our discussion about international bank debenture trading programs, it is important to remember that banks will deny these programs exist. Even banks that are involved in them themselves will deny they exist. Some even gone to the point of warning customers that they do not exist, and that anything purporting to be such are scams.
And just in case you think I have made all this up about banks printing money, let me quote to you from the Encyclopedia Britannica:
Fractional Reserve System, also called a minimum Reserve System, banking system followed by all modern banks in which less than 100 percent of bank deposits are held as reserves. The portion of the money not held as reserves is used to earn income by means of loans and investments; some of this portion eventually returns to the banking system as new deposits. Thus, the banking system is able to expand the money supplied through the creation of new demand deposits.
Banks do not have unlimited freedom to expand deposits but must usually maintain required reserves, which may be held as currency or as deposits at the central bank. The ratio of the required reserves to the bank’s total deposits may be set by custom or by law; use of legally required reserves appears to have originated in United States.
The Fractional Reserve System is strengthened by the ability of banks to liquidate some of their assets quickly by calling in loans, selling short-term securities, or borrowing cash from the central bank.
What banks love are deposits. For every dollar they receive and deposits, they only have to set aside a few cents in reserves. The rest they can lend out over and over and over, each time transferring only a small percentage to reserves, either in the form of government bonds or deposits with the central bank.
Discounted Fixed Interest Securities
Most people have a hard time understanding how the price of bonds [or debentures which are much the same thing] rises as interest rates fall [ and vice versa ], let alone how they can be sold at a discount in the market. Here’s my simple illustration:
Let’s say the government [or a bank] wants to borrow $100,000 at 5 % interest. They can issue an instrument with the face value of $100,000 payable in twelve months’ time. However, the price you pay today is $95,000. It is “discounted” by the amount of interest. That is, you give the government or bank $95,000 today, and they guarantee to give you back $100,000 in 12 months time.
Then let’s say interest rates suddenly rise to 10 %. If the government, or bank now issues a new bond or debenture, how much would investors pay in order to get back $100,000 in a years time? The answer of course is $90,000[ $100,000 less 10 % interest]. And how much would your $95,000 bond now be worth? Well, who was going to pay you $95,000 when they can get a new one from the bank or government for $90,000? Consequently, your bond will have fallen in value to $90,000, because interest rates rose from 5 percent to 10 percent. Conversely, when interest rates fall, the market price of fixed interest securities rises. We call this ” market risk”.
Letters of Credit
Since 1920 international trade [ imports and exports] and banking has been regulated and controlled by the Paris-based International Chamber of Commerce. The ICC has developed a standard code and documentation to facilitate international trade and banking, especially in regards to shipping and payment procedures.
The most common method of financing imports and exports, is by using a documentary Letter of Credit and/or Bill of Exchange. For example, say you are a wine exporter, and you have a container full of wine ready to ship to Germany, having just secured an order from a wine importer there. Now, you are not going to load the container on the ship until you were certain you will be paid, and your customers in Germany is not going to pay you until he is certain you have shipped the goods. So, how will this impasse be solved?
ICC publication Number.500 sets out uniform customs and practices for Documentary Credits. This is a standard code followed by banks, importers and exporters all around world. In a nutshell, the importer in Germany goes to his bank and arranges for a Letter of Credit and /or Bill of Exchange to be drawn in favor of you. Generally speaking, the German bank will release the funds to your bank in New Zealand on receipt of; specific documentation as set out in the ICC No.500, or 30 days, 90 days, 180 days, thereafter, depending on the terms of the sale. The creditworthiness of the German bank is thus substituted for the German importer. The necessity for you to trust the German importer is removed. You are sure of payment [ provided the German bank does not fold, as did some South Korean and Japanese ones recently] and he is sure of receiving the documents and the wine.
The German importer will have to provide security for the Letter of Credit, of course. It could be the container of wine that he offers as collateral or his factory, his house, etc. And he will pay fees and interest to his bank until the amount is paid in full. For your part, you will also pay the bank fees for arranging all this. If you receive a bill of exchange payable in say 90 days, you will be able to “discount” this with the bank. For example; if the bill is for $300,000 payable in 90 days, your bank might cash it for you today for $290,000 dollars. Thus, you pay $10,000 for getting your money three months earlier. Actually, if it is at a favorable rate, there is nothing to stop you selling it on the market for say $295,000 without recourse to the bank. This is a “non- recourse” discontinued bill.
Standby Letters of Credit
Stand by letters of credit are a method of earning interest, for banks without the need to lend out any money [in most cases] and without the need to take a liability into their balance sheet. That is, the risk is “off balance sheet”. Provided banks take sufficient security [and do you know any bank that doesn’t] they must love standby letters of credit. It is really like providing insurance, and charging a premium for it without having any risk. Even if the debtor or customer on whose behalf the guarantee is given does default, and the bank has to pay, they would have collateral assets to sell to recoup the money. You could almost say it’s better than creating money out of thin air. With lending money into existence, there is always the risk of bad debt, which means the money goes to money heaven and the bank has to make restitution. With standby letters of credit, the bank doesn’t even have to lend out any money, unless and until there is a default. They charge their fee [or earn their interest] for just being there has a standby, just in case.
The important point to grasp here is that standby letters of credit are well-known and internationally accepted financial instruments, guaranteed by the full faith and credit of the issuing bank, standardized as to the documentation and procedure by the highly respected and trusted ICC.
Now think about that. Given that the “good faith and credit” of banks is accepted without question, What’s to stop banks issuing IOU’s [letters of credit] for no reason other than to create more new money? That is, forget the container load of wine. Why can’t a bank simply issue an IOU for $300,000 payable in 90 days and sell it to you today for $290,000? They have just created $290,000 in new deposits for themselves. Which now means that they can now lend out another $3 million or so and earn interest on that as well! When the $300,000 is due, they simply create another LOC. so, they never have to pay out. The “good faith and credit” of banks enable them to use letters of credit in the creation of new money, and all this is regulated and conforms to strict documentation standards laid down by the International Chamber of Commerce, the Bank of International Settlements, and the Federal Reserve.
It is important that you understand that for when we come to discussing bank debenture trading programs.
“on budget” and “off balance sheets” transactions
Sometimes you might see as a footnote to a balance sheets [as but not part of the liabilities included in the balance sheet itself] an item called “contingent liabilities”. Standby letters of credit are a “contingent liability” for banks. They don’t become an actual liability until there is default. Hence they are an “off balance sheet” transaction or a company may be involved in litigation. If they lose the court case, they may have to pay out an amount of money. However, until they do lose, they are not liable to pay anything. The liability is contingent upon something happening. Hence the potential liability is only mentioned in the footnote to the accounts. It is not a liability that is included in the balance sheet itself.
Governments are past masters that “off budget” transactions. For example; some governments owe billions of dollars, even trillions, in potential superannuation payouts to public servants when they retire. But these employees may not be due to retire for 10,20,30 or more years. So, the government does not take any liability into their budget, which makes their surplus look better [or their deficit look less serious] . Only when they actually payout do they take the liability into their budget.
In the mid 1980’s the American banking system was nearly brought down by bad loans to Latin American governments, most of whom were corrupt. In some cases political leaders appropriated funds to their own use. Neither the American government nor American banks could afford to bail out Brazil, Argentina, Mexico, etc. Yet unless somebody did, the US banks that had lent squillions to them stood little chance of never getting their money back and faced bankruptcy.
The Secretary of the US Treasury at the time was Nicholas Brady. He propose that if international lenders would lend money to the Latin American countries, the US government would guarantee their repayment. Bonds issued by South American governments with a US government guarantee came to be known as ” Brady Bonds”. Thus money started flowing into South America again, saving the US banks from bankruptcy, yet the US government never actually let them a cent. Nor were they ever going to have to do so unless they defaulted again, and the US government and the International Monetary Fund laid down stringent conditions that ensured that they wouldn’t.
All this was done “off budget”. That is, the US Federal Government did not have to take this liability into its budget [which was already deeply in deficit]. It was only a “contingent” liability. Provided the South Americans never defaulted again, the US government would never have to pay out. Yet their “guarantee” ensured that others would lend to them. Uncle Sam’s guarantee was similar to a “standby letter of credit”.
If you invest $1 million at 10 %, you will earn $100,000. If you borrow a further $9 million and pay 5% interest on the loan, and then invest $10 million at 10% your total interest receivable will be $1 million. But then you will have to pay 5% on the $9 million, or $450,000. As well as repay the $9 million loan. Your net return will be $550,000 or five have times the $100,000 you stood to earn before you leveraged [or geared up] your investment.
the Federal Reserve [ ” The Fed.” ]
Most readers understand that each country has a central bank which usually acts as a banker for the banks and the banker for the government. In the USA the central bank is the Federal Reserve. Created in 1913, the Fed. is privately owned. But acts as fiscal agent for the government, the issues all bank notes, regulates interest rates and money supply, [ and thus, theoretically, inflation] makes loans to banks, and administers the reserves of all the commercial banks. That is, the Fed. determines what proportion of its deposits a member bank must keep in its reserve account, and consequently, how much banks can lend out. The Fed. also buys and sells government bonds, etc., on the open market, which is also a key in regulating money supply.
the Bank for International Settlements the Bank for International Settlements
Located in Basel Switzerland, the BIS was established in 1930 to handle the payments of reparations by Germany after World War I. In 1947 it was appointed to administer the Marshall Plan and acts largely as central bank to the central banks in Europe. However, it sets standards for capitol adequacy among central bank’s all over the world, and coordinates the orderly supply of currency to support international trade and commerce.
the International Monetary Fund [ IMF]
The IMF is an agency of the United Nations, headquartered in Washington, D.C. it was set up at the Bretton Woods conference in 1944. Its role is to secure international monetary cooperation, stabilize exchange rates, expand international liquidity, and reduce the role of gold in international monetary transactions. It has also become a center for research and statistical information on international monetary questions. The IMF lends US dollars to the world’s poorest nations and to those and financial crises [like Southeast Asian countries recently].
International Bank for Reconstruction and Development [World bank]
Also part of the UN, also set up at Bretton Woods, and also headquartered in Washington, D.C., the World bank obtains subscriptions from member governments around the world and lends out on special productive projects that further economic development of member nations, like water, power, transport, agriculture and rural development.
International Chamber of Commerce [ ICC ]
Founded in 1920, and based in Paris, France, the ICC is a World federation of business organizations and people. It presents the business view to governments. The ICC was granted, the highest consultive status with the Economic and Social Council of the United Nations, that of category A. its highly qualified staff look for practical solutions to problems in commercial and financial relations, production and distribution, transport and communications, and law and commercial practice. It even provides an International Court of arbitration.
The United States feared that the poverty, unemployment, and dislocation of World War II were reinforcing the appeal of the communist parties to voters in Western Europe. So, in 1947 US Secretary of state George C. Marshall proposed a self-help program for Europe, financed by the US. America distributed US $12 billion worth of economic aid between 1948 and 1952, helping to restore agricultural and industrial production, establish financial stability and expand trade. It was so successful President Truman extended it to less developed countries throughout the world from 1949 on.
History of Bank Debenture Trading Programs
I have long ponder how the world Debt escalated so dramatically from the early 1960s and why we haven’t fallen into global depression has a result. Little did I realized how this may have been made possible by bank debenture trading programs. They also may help to explain how the IMF could quickly lay it’s hands on $100 billion or so recently to bail out of Thailand, Indonesia, and South Korea.
To understand how aHistory of Bank Debenture Trading Programsnd why these unbelievably lucrative trading programs got started, one needs to think back to the aftermath of World War I. There was a financial and industrial upsurge in the United States, but a massive declined in Europe, with unprecedented uncertainty and instability. The world monetary and trading systems have centered on Europe, but this was now seriously dislocated, as Europe had been transformed from being world creditor to world debtor. Social breakdown exacerbated the problem. The hyper inflation of 1923 in the Weimar Republic of Germany is legendary. Workers collected their wages in suitcases and spend them immediately , before prices rose further. US Capitol played a major role in the reconstruction of Europe for awhile. But in the “roaring 20s” the opportunities for making huge capital gains in US financial markets resolve this resulted in of major flow of capitol back to America. Then came the 1929 stock market crash followed by the Great Depression of the 1930s. This climate facilitated the rise of the Third Reich leading to World War II.
Bretton Woods 1944
Even before World War II ended, under the auspices of the United Nations [then League of Nations] a group of the best economic, social and political minds in the western world met at a little town in New Hampshire, USA, called Bretton Woods. Their mandate was to thrash out a plan for the reconstruction of Europe and Asia after the war, so that the mistakes of the 1920’s, 1930’s and third world war could be avoided. Victory by the Anglo-American world power was considered a matter of when, not if.
The principal architect of the plan was a radical British economist named John Maynard Keynes, who was supported by the U.S. Treasury Secretary, Harry White.
Keynes did not get all of his own way, but he got a lot because he was the only one with a plan that had a chance of success. Basically, he wanted the victor nations to help rebuild the defeated countries, and he wanted a new international monetary system established, with the abolition of the gold standard, and in it’s place a strong international banking system with a common world currency. [He missed out on abolishing the gold standard straight away, but got the rest.]
Keynes’ reasoning was that if the world economy was to emerge from it’s post-depression and new war-stricken state, it had to expand. And it couldn’t expand if a major part of it [notably Europe and Asia] remained economically devastated and deep in debt. He also reasoned that this world expansion would be hindered if currencies were still tied to gold, as this would restrict governments from expanding the money supply. He also forecast that this could lead to a world monetary crisis. A system had to be developed to redistribute wealth [and currency] from the economically strong nations to the weak, so they could expand as well, thus contributing to overall word trade and growth.
Keynes and White proposed that the U.S. dollar replace the pound sterling as the reserve currency of the world [i.e.: the medium of international trade] and that the dollar’s value be tied not to gold or silver, but to the “good faith and credit” of the U.S. government. Just as international trade and finance had been secured by bank guarantees and letters of credit for many years under the supervision of the ICC.
The convention finally adopted Keynes’ basic plan in 1947, but members were too scared to let go of the gold standard, fearing runaway inflation in their own countries and losing control of their own economies without a “hard currency” standard. So, they opted for a gold-backed currency. The U.S. dollar would become the world currency, and U.S. $35 would be the exchange for one ounce of gold. The Bretton Woods convention produced the Marshall Plan, the Bank for Reconstruction and Development [known as the World Bank], the International Monetary Fund [IMF], and the Bank of International Settlements [BIS]. These four agencies would re-establish and revitalize the world economy.
The World Bank would operate like a bank [using the fractional reserve system] and borrow from rich nations and lend to poor nations. Initially it would help rebuild the European and Asian economies, and later third world economies.
The Bank for International Settlements was appointed as a central bank for the central banks around the world. It was organized along the lines of the U.S. Federal Reserve. The BIS would be responsible for the orderly settlement of transactions between central banks, set standards for capitol adequacy of banks, and ensure a sufficient supply of currency in circulation to support international trade and commerce.
Both the BIS and the World Bank are controlled by the “Basel Committee”, which is made up of the finance ministers of the G-10 countries [U.S.,U.K., Canada, Japan, Germany, France, Switzerland, Italy, Belgium and Sweden].
The IMF works closely with the World Bank and steps into lend U.S. dollars to central banks in countries that experience severe balance of payment deficits, bank or financial crises, or economic contraction. It thus helps in recycling U.S. dollars back into the world economy. The IMF also works at helping underdeveloped countries build up exports.
By 1961 the Keynes-inspired plan adopted at Bretton Woods was a tremendous success. However, the Keynes forecast that sticking to the gold standard would cause a world monetary crises was also right. International commerce was expanding rapidly, but there just were not enough U.S. dollars in circulation to keep financing it at the pace the world economy was growing. The U.S. could not print more dollars because it had run out of gold reserves to back them.
The irony was that there was no shortage of Greenbacks. There were plenty of U.S. dollars in the world, but they were being hoarded in the vaults or treasuries of private banks, multinational corporations, private businessman, and personal bank accounts all over the world [especially in Europe] because they were as good as gold. Actually, they were about ten times as “good as gold”. The U.S. government, [the Kennedy administration], the U.S. Federal Reserve and the BIS had to come up with some way to get all those U.S. dollars back into circulation without risking violation of the gold standard, international instability and even another war. How could holders of U.S. dollars be persuaded to exchange their Greenbacks for other currencies?
The private international banking system needed an investment vehicle that was so attractive it would entice U.S. dollars back into circulation bigtime. Once the U.S. dollars were brought out of hiding and turned into new deposits, the “ripple effect” of the fractional reserve banking system would multiply them ten or twenty times over. Issuing new U.S. government bonds was not the answer. In fact, that would only exacerbate the problem, as that would take more U.S. dollars, available in Europe, and offering a higher return than U.S. Treasury Bonds.
The Birth of Bank Debenture Trading Programs
And that’s how Bank Debenture Trading Programs got started in 1961. The most respected and creditworthy of Europe’s private banks [the “Top 100”] were encouraged to issue letters of credit and bank guaranteed instruments in large denominations, offering high returns, and backed by the “good faith and credit” of the issuing bank. With the support of central banks, the IMF and the BIS.
There was no need to create yet another New World agency to monitor the system. The system of banks issuing letters of credit and bank guarantees was well established and understood by banks, governments, and businesses around the world. The documents used in such financing were standardized and administered by the ICC. The world would view these bank-endorsed instruments as safe.
But what if the public found out that instruments offering much higher yields than bank CD’s [certificates of deposit] or term deposits were available? That’s easy. Just don’t tell the public. And to keep them from asking questions, the minimum investment was set at U.S. $100 million. So only the very wealthy would be in on these deals.
The banks were laughing [to coin a cliché “laughing all the way to the bank may have originated from this source.” ] They now had a method of accessing very large amounts of money without even having to advertise. And they were allowed to keep the liability off balance sheet. They were even allowed to create the transactions in the accounts of offshore subsidiaries.
And to make them even more lucrative, the banks were allowed to leverage the returns astronomically by borrowing from the central bank. All under the authority and supervision of the BIS, the IMF, the FED and the ICC.
The use of these instruments [which are safe and provide massive returns to investors and instant liquidity to banks] has worked extremely well since 1961. In fact, they have become known as such a good thing that more and more banks, including smaller ones not included in the “Top 100”, have joined in offering them.
The End of “Gold for Dollars”
Incidentally, although Keynes never lived to see it [he died in 1946] he finally got his wish regarding gold in 1971 when the U.S. faced yet another dollar crises. Even with new bank-endorsed instruments, the volume of world trade finally exceeded the ability of the U.S. to support it’s currency with gold at U.S. $35 an ounce. The world price of gold for use in jewelry,ect., was U.S. $350 to U.S. $400 an ounce. Yet any country could theoretically demand that the U.S. Treasury pay one ounce of gold for every U.S. $35 dollars returned. If just one country demanded gold for dollars, it would have started a “run” on the Greenback. There was just not enough gold in Fort Knox to back all the U.S. dollars in circulation, and everyone knew it. So Britain decided to test the system and quietly issued a demand for gold in exchange for it’s dollars. President Nixon decided to abandon the gold standard altogether and let the U.S. currency “float” in relation to other currencies. But the die had been cast many years earlier. No doubt Nixon was very grateful to President Kennedy for starting the ball rolling in 1961. The world of international business had effectively abandoned the gold standard years before.
The Mechanics of Bank Debenture Programs
Once every quarter of a year, certain international money center banks [described variously as the Top 25, the Top 100 or the Top 250 as ranked by net assets, long-term stability and sound management] are authorized by the ICC, the BIS and the FED to issue large blocks of Bank Debenture Instruments such as Bank Purchase Orders, Medium Term Notes, Promissory Notes, Zero Coupon Bonds, LOC’s, Standby LOC’s etc. according to the official review of each bank’s portfolio. LOC’s usually have a one-year term, whereas Zero’s, MTN’s etc. are usually for ten years with a coupon rate of 7.5% per annum interest.
The [discounted] price of these instruments are quoted as a percentage of the face value amount of the instrument with the initial market price being established when first issued [e.g.: .75 cents on the dollar] Thereafter, as they are sold to other banks, they are sold at escalating higher prices, thus realizing a profit on each transaction. This whole trading program can take as little as one day to complete.
As these instruments are bought and sold within the banking community, the trading cycle generally moves from the higher level banks to the smaller banks. Profits are made at each stage of the cycle. Often they move through as many as seven or eight trading cycles, until they are eventually sold to a previously contracted retail customer or “exit buyer” such as pension funds, insurance companies, etc. at the normal “market” price (e.g. 93 cents on the dollar). No trading program can start unless a guaranteed “exit sale” is contracted. This protects the trader and his clients.
Trading programs are all conducted in Europe, but under the watchful eye of theFederal Reserve, the custodian of the U.S. dollar. The minimum amount traded is usually U.S. $10 million. [it used to be U.S. 100 million.] An entire trading cycle may take only a matter of hours and may be repeated four or five times in a month. Although the profit on each stage may only be for a few percent, the massive amount of money, compounded by leveraging and frequent repetition of the program ensures spectacular profits.
There are only a small number of traders in the world. I have heard numbers from 6 to 19. They are licensed to the banks, under the strict supervision of the Federal Reserve. Traders are not allowed to trade nor do business on their own behalf. Traders employ Program Managers to bundle together money from investors around the world into U.S. $10 million lots. These program Managers may employ hundreds of staff. The paperwork involved in all the contractual transactions is vast.
Until recent years, traders were run as described above. But as the world economy has continued to grow, and more and more banks have become involved, the number of “sure thing” opportunities have increased. Trading programs run for forty weeks each year. Each year, around December 15th, banks and traders and their program managers get together to decide how they will apportion their allocation for the following year, commencing January 15th. Each program comes with it’s own parameters and requirements, and there is no limit to the variety of different programs. Some are for seven days. Some are for twelve months. Some allow withdrawals during trading. Some don’t.
Programs are only open for as long as it takes them to become fully subscribed. Once the committed funds are exhausted and the program filled, the program closes, and will not be reopened that year. In every transaction funds are secured by a top money center bank. This absolutely and irrevocably protects the safety of your capital while it is taking part in the program. There is no “market risk”, and the banking system could not allow you to loose by virtue of a bank guarantee failing. And, incidentally, this is not officially an investment in any securities. For obvious reasons you are entering a joint venture with the trader.
First time investors [U.S. $10 million], after completing a non-disclosure, non-circumvention agreement, a letter of intent, proof of funds, and profit sharing agreement will usually be provided with a memorandum of understanding contract. They will then be invited to go to Europe and meet the principal at the transacting bank, and thus assure themselves of the validity of the transaction. Note that not one cent is handed over until you meet the trader or program manager at the bank and exchange your cheque for a 106% guarantee [known as a “106”] plus a bank-endorsed contract for profit. At no time do the investors lose control of their money or have their capitol at risk. If ever anyone asks you one cent up front, you can be pretty certain it is a scam. With a genuine trading program you have in your hand at all times either your money or a bank guarantee.
How a Trading Program Works
Forearmed with our background knowledge about the fractional reserve banking system, discounting of bank/bond instruments, standby letters of credit, leveraging, the IMF, FED, ICC, BIS, etc., let me now present what must be a grossly oversimplified illustration of how a trading program works, as best I can without entering a transaction myself and finding out for sure. [When I get to that stage, I won’t be able to tell you about it. This entire article is the culmination of the piecing together of a jigsaw puzzle from all around the world. But it is the last time I will be able to put it in writing.] Bearing in mind that banks can’t trade with each other, and that traders can’t use their own money, let’s assume the trader’s program managers gather up $75 million from investors around the world and the bank leverages this up by borrowing a further $675 million from the Federal Reserve. So the bank now has $750 million in potential deposits. The bank is Quite happy to give investors a 106% guarantee on the $75 million. Now, let’s say the bank creates $1 billion worth of twelve months paper [call it a debenture or a letter of credit]. Of course, if interest rates are around 5% per annum, this paper is really worth about $950 million. And that’s exactly how much it has been pre-sold for to a giant pension fund or insurance company. But the trader gets this paper for 75 cents on the dollar.
Before we look at the profit the trader will make, let’s just check to see if the bank had made a terrible mistake here. The bank has just sold an IOU for $1billion for the price of $750 million. It will have to pay out in twelve months’ time. That’s going to cost the bank $250 million! But because of the “multiplier” effect of the fractional reserve banking system, the bank can lend out ten times this $750million in new deposits and earn 5%. That’s a total of $375million interest it can earn. That’s a profit of $125million on one transaction with the trader ($375 million less $250 million). Of course, the bank will have to pay the Federal Reserve a small amount of interest for the use of $675 million for five minutes. But I think we can safely say the bank has looked after itself ,thank-you very much. So, we don’t need to lose any further sleep over that.
Now, let’s look at the trader’s profits. He had just bought paper for $750 million and sold it for $950 million. That’s a profit of $200 million in five minutes. Not bad? Actually it may have taken more than five minutes, let’s say ten minutes. Will assume the trader pays 40% of his profits to the IMF or some humanitarian program. There goes $80 million, leaving $120 million. Let’s say he splits that 50/50 with the investors. That’s $60 million each. The investors put up $75 million for a profit of $60 million. That’s 80% in one day! That’s not bad either. The trader may do the same thing tomorrow. And the next day. Now maybe you can see why hundreds of percent in a year or a month or even a week is not impossible. Who loses? Nobody. This is a win/win/win deal. Everybody wins-the investor, the trader,the bank,the FED, the IMF and even the pension fund has bought a secure investment with a competitive return.
So, why isn’t it done more often? Why doesn’t the general public know about it? You have to be kidding. If you knew you could get 100% in a week, with a bank guarantee, would you put your money in the bank at 4% for a year? If this leaked out, the vast source of cheep deposits the gullible public slavishly surrender to the banks every day would dry up. No, this is one only for the big boys, the favorites of the banks, the FED, the IMF, etc. That’s why the amounts are kept very, very large. To be invited into this circle is financially speaking, a very great privilege.
In illustration I have only used one bank. Actually the deal is spread among a number of banks, who each take a cut. There is a pecking order in the banks, and they each take their place and their turn according to that pecking order.
Because I will never learn the whole story until I am actually in the program, I have had to make some assumptions. For example; I don’t know whether 40% of the profits have to go to the IMF. It may be to justify the whole setup; the banks of their own accord donate a percentage to some humanitarian cause. Program Managers keep the minimum investment at $10 million because they don’t want the headaches of bookkeeping, time-consuming education of new clients, and the constant handholding that many investors want.
In America the Federal Reserve even issues warnings that anything resembling a trading program as described herein is a scam, as would government regulators and banks in this country if you asked them. And you will never read about them in a newspaper. What responsible journalist would write about something that the government says does not exist? (I know one politician who has his superannuation money in it, though.) The best one I have heard of for 1999 is one that will make 500% in six months. The minimum is U.S. $1 million. But that’s only 10X U.S $100,000 or 100X U.S.$10,000 if enough people want to get together, However, you would have to clear the funds in U.S.dollars transferred into an offshore account prior to the trade beginning.
This is very much a game for insiders-a highly private business. Contacts are very jealously guarded, and trading is largely confined to a group of very wealthy individuals. So, 99.9% of the population have never heard of these bank instruments, trading programs or their practice even within the banking community only the very top executives know about them.
See also: Secrets Revealed