7C: Funds Rate

4. Federal Funds Rate (FFR)

All the banks are required, by law, to maintain a reserve deposit amount at the central bank (CB). The Fed (CB) does not pay any interest for this reserve amount. For many business reasons this reserve amount changes every day. At the end of each day, the banks having low reserves borrow money from the banks with higher reserves. The banks charge interest for this exchange. This interest rate is known as the federal funds rate (FFR). This FFR is set by the Fed independently, without any market conditions and any external constraints.

This is the lowest interest rate that anyone can get. All others pay interest that is more than this rate. Thus the amount of money supply and the core interest rate (FFR) are fixed by the Fed without any oversight and accountability. For more details please see the paper [Das, 2011-2].

Using the FFR the Fed can control everything in the economy. This is because of the simultaneity law of nature, even though FFR is not an object of nature.

“A change in the federal funds rate, or even a change in expectations about the future level of the federal funds rate, can set off a chain of events that will affect other short-term interest rates, longer-term interest rates, the foreign exchange value of the dollar, and stock prices. In turn, changes in these variables will affect households’ and businesses’ spending decisions, thereby affecting growth in aggregate demand and the economy” [TheFed-PF, p.2].

The above quote shows how pervading the money power is. A small change in one thing changes the activities of the entire economic world. By their own admission the FFR affects every individual in our world. Yet this money is artificial and false.

The paper [Modeste] explains in more practical way how FFR controls the entire economy by giving the straight forward Keynesian logic –

“An increase in the federal funds rate is expected to lead an increase in short-term interest rates as the cost of funds to lenders increases. With businesses and consumers responding to the higher interest rate by reducing their expenditures, economic activity is expected to fall, thereby, leading to an increase in the unemployment rate”.

The above logic is very simple and that is what is actually done by the Fed. The Fed keeps increasing the FFR until the borrowing of money by businesses reduces significantly causing very high unemployment and eventually crashing the economy. We show from real data of FFR and unemployment that this is indeed the Fed is doing.

Ideally, if you keep the interest rate at zero, and supply money as much as required by anyone, then the economy will run in full throttle. But if you change FFR to higher value then you are trying to control the economy at lower level. That is why FFR is the root cause variable, or independently controlled variable. FFR does not depend on market. We will show it with data and graphs. However, everything is controlled by the simultaneity law, and nothing is isolated.

4.1   FFR & Unemployment

In this section we show with the data and their graphs that the central bank is systematically controlling the unemployment rate by manipulating the FFR. The unemployment data is taken from Bureau of labor statistics of the US department of labor (DOL, 2010). The details of this data are given in the document (DOL, 2009). The Federal Funds Rate (FFR) data is taken from the Fed database (Fed, 2010).

The two graphs are plotted in Figure-7.1. The green graph represents the interest rate data and the red graph represents the unemployment data. Both graphs are numerically processed little bit, without changing the structure of the graphs. Notice that y-axis has a maximum value of one. Thus we have normalized both datasets by dividing each dataset by the maximum of their absolute values.

As the Fed increases interest rate, the effect is not felt immediately in the economy; we found an inertial delay of about three years, in the unemployment data. Thus we have aligned the two graphs to highlight how closely they are related. A left shift of three years for the unemployment data is ideal for these graphs, which gives a correlation coefficient of 0.92701 between the two graphs [Das, 2011-2].

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The width of the bands defines the length of the recession period. This recession data was collected from (NBER, 2010). The Figure-7.2 is another way to show the relationship of the funds rate and the recessions. Here we superimpose the variations in the FFR over the recession bands. The graphs show that every recession is created at the peak of the FFR values. The Fed keeps on increasing the funds rate until the recession begins.

In (Dimitrov, 2006) the authors presented a graph similar to Figure-7.2 and confirmed that the funds rate shows onset of two recessions during 1979-82. In (Belonga, n.d) the authors comment that the conventional wisdom is that funds rate goes up before recession and goes down after, with data between 1985 and 2009. Bernanke (1992) was the first to show graphs like Figure-7.2.

4.3    Gross Domestic Product (GDP)

GDP is defined as the market value of the final goods and services produced by labor and property located in the United States [BEA, p.2-7]. GDP can be measured – as the sum of goods and services sold to final users – like persons, businesses, governments, and foreigners.

BEA provides the following statement [BEA, p. 1-2] – “In particular, the quarterly estimates of inflation-adjusted GDP provide the most comprehensive picture of current economic conditions in the United States”. Clearly this statement cannot be correct, because the inflation cannot be known, since the total money in circulation is secret as we have seen in the Bloomberg report. Therefore GDP data cannot be correct.

Everybody is working on false data, using false algorithms. CB knows this situation, but CB does not care for people or government. Why then care for such small issues, when the entire economy and its foundations are false. When the entire economy is manipulated, by money supply and FFR, then why bother trying to accurately measure GDP, generating data with high details, producing complex algorithms etc. This is like garbage in garbage out phenomenon. However, the activity gives jobs to many people.

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Unfortunately money power (CB) will not allow such a moneyless system.

4.4    FFR & GDP

Figure-7.3 shows the GDP graph and the data was taken from (NEA, 2010). In Figure-7.3 we have plotted the normalized data of FFR and GDP variations. The GDP data was shifted left by two years to make the peaks match. We have also scaled the data using the following relation 0.8*(1-gdp) to graphically highlight the correlation. A delay or lag of 2 years in the GDP data produced a correlation of 0.8306.

Since we know that the funds rate is the driver, we can see from Figure-7.3 how it causes the GDP variations. Every time the funds rate goes high, the GDP goes low; this in turn causes the recession to begin as we can see from Figure-7.2.

4.5    Wealth Transfer

Crating recessions is a major activity of central bank to purge people for transferring wealth and accumulating it in the hands of a small group of people. By law of conservation, which says there is no win-win situation, another group therefore will become larger and poorer. We show from the income data, which is a measure of wealth of people, how after every recession, bottom fifth becomes poorer and poorer and top fifth becomes richer and richer. We have taken the income data from US Census Bureau (USCB, 2010).

The Figure-7.4 shows the income of the bottom fifth of the population. The graph clearly shows that their income is consistently going downwards since 1976. The graph occasionally went up for short period of time, like in 1967, ’73, ’94 etc. But it has an overall downward trend and every recession has a visible downward impact on the income. The next graph, Figure-7.5, shows the income of the top fifth of the population. It is clear that despite the recessions their income is growing persistently over all the years. Thus there is a truth in the statement that the rich is getting richer and the poor is getting poorer.

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gold by the LOC, money accumulation means gold accumulation i.e. transfer of wealth. Thus inflation means poverty. The amount of inflation is directly proportional to wealth gap between the rich and the poor.

Because of unemployment, during a recession, a poor woman can become homeless very soon. And another rich person will become the new owner of her home thus transferring the wealth. The wealth cannot be destroyed according to the LOC, it can only be transferred. Large number of banks and businesses were forced to fail by the policies of the central banks, during the two great recessions of 1930s and 2008. Millions of people were made unemployed and homeless. And exactly the same amount (Bates, 2003) of wealth was transferred to the rest of the population by LOC. Thus recession is the best way to bulk transfer of wealth over a short period. Profiting and interest charging transfer wealth slowly, persistently, and over longer time frame.

The recession is another way to keep the salary of bottom fifth at low rate. More you beat them with unemployment more vulnerable they will become and will be forced to work with lower salary. Government is helpless, because government is controlled by the CB also. Government is not allowed by CB to create jobs. Thus wealth can be created with lower cost and therefore increasing profit. Note that the people at the bottom fifth really produces the wealth. In this sense the bottom fifth should be paid the highest salary in the hierarchy of the economic food chain.

The recessions are not natural laws of capitalism. Larry Bates, a banker and economists says (Bates, 2003) these recessions are precisely controlled, monitored, and can be predicted. We have explained that theory in various ways in this chapter [Das, 2011-2]. The company (ECRI, 2004) has mastered the prediction method of business cycles. Many world governments consult ECRI to create their indices for predications of their own recessions. ECRI can predict with an accuracy of two weeks.

Printing money is a very secret way to transfer wealth. US President (1801-1809) Thomas Jefferson wrote (Ritholtz, 2009, p. 15):

“.. if the American people allow private banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their property until their children will wake up homeless on the continent their fathers conquered.”

We can see from our graphs that this is happening exactly, recession after recession, in the United States, even after so many years of the above prediction. Note that the above statement is very similar to what Keynes said on inflation, as pointed out in this chapter.

We should understand that, inflation by printing money, as it is, cannot be bad. It becomes bad only when the excess money is allocated to a smaller group instead of the entire population thus forcing the transfer of wealth to happen. When the money goes to the entire population, inflation happens but the purchasing power does not reduce, because it does not violate the LOC.

5. Hiding Inflation

It is said that the Fed has the dual policy to control both inflation and unemployment in an optimal way that is good for the economy. In reality that is not the case, as we have shown with the data. Its only objective is to transfer wealth to a very small number of people. To achieve this objective it makes people unemployed, creates inflation, and makes businesses, including banks, to fail.

Inflation is a process of increasing money supply (Hubbard, 2002, p. 744), violating the LOC. This process helps to transfer wealth, by increasing the share of the pot of gold. Keynes (Keynes, 1920, p. 235-236), a father of economic theories, says –

“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some. … The process engages all the hidden forces of economic law on the side of destruction and it does it in a manner which not one man in a million is able to diagnose”.

We should recognize that profiting and interests charging are also inflation in disguise. Thus the key technology of the economy of the CB is the creation of inflation. Inflation will transfer the wealth and create the poverty by LOC. Observe that Keynes’s statement is very similar to what President Jefferson said nearly 200 years back.

The statement says – only one in a million – can know the real truth behind the role of CB. This is why we have been saying 99% of the population does not know the truth. Government is an agent of CB. Government is helpless; its members are controlled by the lobbyist. In some countries such activities are called corruptions. Lobbyist is a complex term created to hide the truth.

How much money the Fed is printing is never known and will never be known. It is the only body that can print money and allocate to anyone it wishes. Thus we have a very high hidden inflation. If you do not know the amount of money present in the economy then you cannot compute the real inflation. All the inflation data presented by the government are therefore fictitious. All our theories on economics, like Phillips curve, supply-demand, etc., are wrong too.

6. Democracy Under CB

We have discussed this subject in the Moneyless Economy (MLE) chapter. Most of the thoughts expressed there is equally applicable for this section also.

Freedom for Governments

Democracy is only a word with no meaning and is heavily misused in the world today. People do not have any power. Just casting secret ballot is not power. Politicians we elect for capitols do not have secret ballots, and therefore people who elect them loses their secrecy. This is how at a very crucial point in the system the CB has paralyzed the people. CB wants this public ballot at capitols so that its money power can control the politicians and influence their decisions. This is known as the carrot and stick policy.

Note that in USA the government is very transparent. All activities of all representatives are carefully recorded in many electronic forms using audio, video, websites, emails etc. Thus if anyone wants to know what their representatives are doing, the data is always there for analysis. But still people will not and cannot change this public and open ballot system in the capitol.

Most people in USA do not even know that their representatives cannot use secret ballot. Even if they know, they do not see its consequences. Information hiding is a key feature used by money power of CB. Under capitalism government is also privately owned and controlled by CB.

At one point Greece Prime Minister Papandreou wanted to put the bailout plan for nationwide public referendum [Schaefer]. He was not successful in that effort and within few days he was removed from his office. This is a clear indication that real democracy is not acceptable for the CB.

Freedom for Economic System

The present economic system, as we have shown by theory and by data in this chapter, methodically takes wealth away from 99% of the population and gives it to 1% of the population. Such a system cannot be called a democratic economic system, because the economy is exploiting its own people. We have shown using graphs that over the years poor is becoming poorer and rich is becoming richer. This represents a systematic method for transfer of wealth.

 

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