Wednesday, August 27, 2008


(Week 5 - Wednesday Aug.27)

Yesterday I offered the view that the reason we have a "national debt" is that we as a people and a nation have allowed our sovereign prerogative to create our own money supply to be usurped by a private banking establishment. This raises the question, "To whom is this 'national debt' owed."

It would be easy to assume that because the "national debt" arises from transactions in which money is "borrowed" from banks, it must be to these banks that this "debt" is owed. If we trace carefully the course of the bank-loan-and-payback cycle we will discover that this is not the case.

I have described in previous columns how the banker is not really "loaning" money in the common sense use of the term. He is, rather, creating it out of his authority to do so as an agent of the banking system.

I have also described how, when a "borrower" makes a payment on a bank "loan," the payment is divided into two parts, with one portion being used to the pay down the amount of the "loan," and the other applied to "interest." The money credited towards the pay-down of the "loan" is extinguished back to "thin air" in a process that mirrors its creation out of "thin air."

The part that is credited towards the "interest" payment goes instead (after the bank subtracts its operating expenses, that is) into the account of a speculator in "financial-debt" contracts, usually described as an "investor," whose interest typically in the transaction is not to be a financial partner to a productive enterprise, but to be the recipient of the "interest" payments.

It is these "investors" to whom the "national debt" is owed. So who are these "investors?"

This is a big question that can be answered on many levels. At the highest level of finance, they are the persons who have both the means and the privilege of being in a position to act as the first link in the buying and selling of "debt."

For example, the quantity of money borrowed by the Federal government that is allowed to circulate in the economy (the so-called "high-powered money" that serves as the basis for how much money banks can create according to the "fractional reserve formula") is regulated by the buying and selling of U.S. government bonds through the "Open Market Desk" of the Federal Reserve Bank of New York. This "open market" is in reality a strictly limited market, in that the privilege of buying and selling these bonds is restricted to certain few dealers.

After the bonds are bought by these dealers, they are generally sold to "investors," by whom they may or may not be resold. Theoretically, they can wind up in the financial portfolio of anyone in society, even the world, and in fact they do get widely dispersed.

It is not, however, an equitable distribution. The system is set up in such a way that those who are privileged to be the primary bond dealers and their customers (or are otherwise strategically positioned in the system), as well as others who already possess an excess of funds to "invest," have a distinct and often insurmountable advantage in the game.

To illustrate, if one person manages to move into the financial position of being the receiver of "interest" payments (e.g. by buying mortgage contracts), and another finds himself obliged to be a regular payer (e.g. by making payments on a mortgage), then generally, while the latter works to be a producer of wealth (i.e. earns a paycheck), the first will become wealthy without further expenditure of effort. I would caution the reader that this illustration can be simplistic if one tries to apply it dogmatically to real human situations, but it remains a reality in the overall picture that the private-bank-loan transaction by which our money is created is the great engine of inequitable wealth redistribution.

While much has been said in the public discourse about the inherent greed of "the bankers" because they are supposedly getting the benefit of all this money that they "create out of nothing," it is evident from the financial section of the newspaper that the banks too are experiencing difficulties. In fact, many are on the brink of bankruptcy. That is because they are not sovereign entities, but instead have been co-opted themselves as the agents of a perverse principle at the heart of the monetary system which would tempt persons to use the control over money to satisfy their desire for undue private gain, and to exercise control over humanity itself.

To be sure, there are to all outward appearances people who act as this principle's particular promoters, facilitators and even conspirators, but I think a suspension of judgment is necessary if we hope to divine all the way to the core of the "national debt" matter. In truth, the acquiescence to this obverse monetary principle has become culture-wide. Directly or indirectly, in big ways or small, virtually all of us are at least partly responsible for the "national debt." Would it be too much to say that we are all part of the problem, and, potentially, the cure?

While we need not and should not ignore the gross injustices of the monetary system that do arise, it behooves us also to be aware that none of us is wholly blameless. This is a topic that will be explored in an incisive, but dispassionate manner as these columns unfold.

Richard Kotlarz

The complete set of columns from this series is posted at the following websites.