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Chapter 47
OVER THE RAINBOW:
GOVERNMENT WITHOUT TAXES
OR DEBT


“Toto, I have a feeling we™re not in Kansas anymore. We must be
over the rainbow!”




G oing over the rainbow suggested a radical visionary shift,
a breakthrough into a new way of seeing the world. We have
come to the end of the Yellow Brick Road, and only a radical shift in
our concepts of money and banking will save us from the cement wall
looming ahead. We the people got lost in a labyrinth of debt when we
allowed paper money to represent an illusory sum of gold held by
private bankers, who multiplied it many times over in the guise of
“fractional reserve” lending. The result was a Ponzi scheme that has
pumped the global money supply into a gigantic credit bubble. As
bond investor Bill Gross said in a February 2004 newsletter, we have
been “skipping down this yellow brick road of capitalism, paved not
with gold, but with thick coats of debt/leverage that requires constant
maintenance.”
The levees that have kept a flood of debt-leverage from collapsing
the economy showed signs of cracking on February 27, 2007, when
the Dow Jones Industrial Average suddenly dropped by more than
500 points. The drop was triggered by a series of events like those
initiating the Great Crash of 1929. A nearly 9 percent decline in China™s
stock market set off a wave of selling in U.S. markets to satisfy “margin
calls” (requiring investors using credit to add cash to their accounts to
bring them to a certain minimum balance). The Chinese drop, in turn,
was triggered by an intentional credit squeeze by Chinese officials,
who were concerned that Chinese homeowners were mortgaging their
homes and businessmen were pledging their businesses as collateral
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to play the over-leveraged Chinese stock market, just as American
investors did in the 1920s.1 Commentators suggested that the Dow fell
by only 500 points because of the behind-the-scenes maneuverings of
the Plunge Protection Team, the Counterparty Risk Management Policy
Group and the Federal Reserve.2 But it was all just window-dressing,
a dog and pony show to keep investors lulled into complacency,
inducing them to keep betting on a stock market nag on its last legs.
The same pattern has been repeated since, with assorted manipulations
to keep the band playing on; but the iceberg has struck and the
economic Titanic is sinking.
Like at the end of the Roaring Twenties, we are again looking down
the trough of the “business cycle,” mortgaged up to the gills and at
risk of losing it all. We own nothing that can™t be taken away. The
housing market could go into a tailspin and so could the stock market.
The dollar could collapse and so could our savings. Even social security
and pensions could soon be things of the past. Before the economy
collapses and our savings and security go with it, we need to reverse
the sleight of hand that created the bankers™ Ponzi scheme. The
Constitutional provision that “Congress shall have the power to coin
money” needs to be updated so that it covers the national currency in
all its forms, including the 97 percent now created with accounting
entries by private commercial banks. That modest change could
transform the dollar from a vice for wringing the lifeblood out of a
nation of sharecroppers into a bell for ringing in the millennial
abundance envisioned by our forefathers. The government could
actually eliminate taxes and the federal debt while expanding the services
it provides.

The Puzzle Assembled

The pieces to the monetary puzzle have been concealed by layers
of deception built up over 400 years, and it has taken some time to
unravel them; but the picture has now come clear, and we are ready
to recap what we have found. The global debt web has been spun
from a string of frauds, deceits and sleights of hand, including:
“Fractional reserve” banking. Formalized in 1694 with the char-
ter for the Bank of England, the modern banking system involves credit
issued by private bankers that is ostensibly backed by “reserves.” At
one time, these reserves consisted of gold; but today they are merely
government securities (promises to pay). The banking system lends

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these securities many times over, essentially counterfeiting them.
The “gold standard.” In the nineteenth century, the govern-
ment was admonished not to issue paper fiat money on the ground
that it would produce dangerous inflation. The bankers insisted that
paper money had to be backed by gold. What they failed to disclose
was that there was not nearly enough gold in their own vaults to back
the privately-issued paper notes laying claim to it. The bankers them-
selves were dangerously inflating the money supply based on a ficti-
tious “gold standard” that allowed them to issue loans many times
over on the same gold reserves, collecting interest each time.
The “Federal” Reserve. Established in 1913 to create a national
money supply, the Federal Reserve is not federal, and today it keeps
nothing in “reserve” except government bonds or I.O.U.s. It is a pri-
vate banking corporation authorized to print and sell its own Federal
Reserve Notes to the government in return for government bonds,
putting the taxpayers in perpetual debt for money created privately
with accounting entries. Except for coins, which make up only about
one one-thousandth of the money supply, the entire U.S. money sup-
ply is now created by the private Federal Reserve and private banks,
by extending loans to the government and to individuals and busi-
nesses.
The federal debt and the money supply. The United States went
off the gold standard in the 1930s, but the “fractional reserve” system
continued, backed by “reserves” of government bonds. The federal
debt these securities represent is never paid off but is continually rolled
over, forming the basis of the national money supply. As a result of
this highly inflationary scheme, by January 2007 the federal debt had
mushroomed to $8.679 trillion and was approaching the point at which
the interest alone would be more than the public could afford to pay.
The federal income tax. Considered unconstitutional for over a
century, the federal income tax was ostensibly legalized in 1913 by
the Sixteenth Amendment to the Constitution. It was instituted pri-
marily to secure a reliable source of money to pay the interest due to
the bankers on the government™s securities, and that continues to be
its principal use today.
The Federal Deposit Insurance Corporation and the International
Monetary Fund. A principal function of the Federal Reserve was to
bail out banks that got over-extended in the fractional-reserve shell
game, using money created in “open market” operations by the Fed.

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When the Federal Reserve failed in that backup function, the FDIC
and then the IMF were instituted, ensuring that mega-banks considered
“too big to fail” would get bailed out no matter what unwarranted
risks they took.
The “free market.” The theory that businesses in America
prosper or fail due to “free market forces” is a myth. While smaller
corporations and individuals who miscalculate their risks may be left
to their fate in the market, mega-banks and corporations considered
too big to fail are protected by a form of federal welfare available only
to the rich and powerful. Other distortions in free market forces result
from the covert manipulations of a variety of powerful entities. Virtually
every market is now manipulated, whether by federal mandate or by
institutional speculators, hedge funds, and large multinational banks
colluding on trades.
The Plunge Protection Team and the Counterparty Risk
Management Policy Group (CRMPG). Federal manipulation is done by
the Working Group on Financial Markets, also known as the Plunge
Protection Team (PPT). The PPT is authorized to use U.S. Treasury
funds to rig markets in order to “maintain investor confidence,”
keeping up the appearance that all is well. Manipulation is also effected
by a private fraternity of big New York banks and investment houses
known as the CRMPG, which was set up to bail its members out of
financial difficulty by colluding to influence markets, again with the
blessings of the government and to the detriment of the small investors
on the other side of these orchestrated trades.
The “floating” exchange rate. Manipulation and collusion also
occur in international currency markets. Rampant currency specula-
tion was unleashed in 1971, when the United States defaulted on its
promise to redeem its dollars in gold internationally. National curren-
cies were left to “float” against each other, trading as if they were
commodities rather than receipts for fixed units of value. The result
was to remove the yardstick for measuring value, leaving currencies
vulnerable to attack by international speculators prowling in these
dangerous commercial waters.
The short sale. To bring down competitor currencies, speculators
use a device called the “short sale” “ the sale of currency the speculator
does not own but has theoretically “borrowed” just for purposes of
sale. Like “fractional reserve” lending, the short sale is actually a form
of counterfeiting. When speculators sell a currency short in massive
quantities, its value is artificially forced down, forcing down the value

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of goods traded in it.
“Globalization” and “free trade.” Before a currency can be
brought down by speculative assault, the country must be induced to
open its economy to “free trade” and to make its currency freely con-
vertible into other currencies. The currency can then be attacked and
devalued, allowing national assets to be picked up at fire sale prices
and forcing the country into bankruptcy. The bankrupt country must
then borrow from international banks and the IMF, which impose as
a condition of debt relief that the national government may not issue
its own money. If the government tries to protect its resources or its
banks by nationalizing them for the benefit of its own citizens, it is
branded “communist,” “socialist” or “terrorist” and is replaced by
one that is friendlier to “free enterprise.” Locals who fight back are
termed “terrorists” or “insurgents.”
Inflation myths. The runaway inflation suffered by Third World
countries has been blamed on irresponsible governments running the
money printing presses, when in fact these disasters have usually been
caused by speculative attacks on the national currency. Devaluing
the currency forces prices to shoot up overnight. “Creeping inflation”
like that seen in the United States today is also blamed on govern-
ments irresponsibly printing money, when it is actually caused by pri-
vate banks inflating the money supply with debt. Banks advance new
money as loans that must be repaid with interest, but the banks don™t
create the interest necessary to service the loans. New loans must
continually be taken out to obtain the money to pay the interest, forc-
ing prices up in an attempt to cover this new cost, spiraling the economy
into perpetual price inflation.
The “business cycle.” As long as banks keep making low-interest
loans, the money supply expands and business booms; but when the
credit bubble gets too large, the central bank goes into action to deflate
it. Interest rates are raised, loans are reduced, and the money supply
shrinks, forcing debtors into foreclosure, delivering their homes to the
banks. This is called the “business cycle,” as if it were a natural
condition like the weather. In fact, it is a natural characteristic only of
a monetary scheme in which money comes into existence as a debt to
private banks for “reserves” of something lent many times over.
The home mortgage boondoggle. A major portion of the money
created by banks today has originated with the “monetization” of
home mortgages. The borrower thinks he is borrowing pre-existing
funds, when the bank is just turning his promise to repay into an
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“asset” secured by real property. By the time the mortgage is paid off,
the borrower has usually paid the bank more in interest than was
owed on the original loan; and if he defaults, the bank winds up with
the house, although the money advanced to purchase it was created
out of thin air.
The housing bubble. The Fed pushed interest rates to very low
levels after the stock market collapsed in 2000, significantly shrinking
the money supply. “Easy” credit pumped the money supply back up
and saved the market investments of the Fed™s member banks, but it
also led to a housing bubble that will again send the economy to the
trough of the “business cycle” as it collapses.
The Adjustable Rate Mortgage or ARM. The housing bubble was
fanned into a blaze through a series of high-risk changes in mortgage
instruments, including variable rate loans that allowed nearly anyone
to qualify to buy a home who would take the bait. By 2005, about half
of all U.S. mortgages were at “adjustable” interest rates. Purchasers
were lulled by “teaser” rates into believing they could afford mort-
gages that were liable to propel them into inextricable debt if not into
bankruptcy. Payments could increase by 50 percent after 6 years just
by their terms, and could increase by 100 percent if interest rates went
up by a mere 2 percent in 6 years.
“Securitization” of debt and the credit crisis. The banks moved
risky loans off their books by selling them to unwary investors as “mort-
gage-backed securities,” allowing the banks to meet capital require-
ments to make yet more loans. But when the investors discovered
that the securities were infected with “toxic” subprime debt they quit
buying them, leaving the banks scrambling for funds.
The secret insolvency of the banks. The Wall Street banks are
themselves heavily invested in these mortgage-backed securities, as
well as in very risky investments known as “derivatives,” which are
basically side bets that some asset will go up or down. Outstanding
derivatives are now counted in the hundreds of trillions of dollars,
many times the money supply of the world. Banks have been led into
these dangerous waters because traditional commercial banking has
proven to be an unprofitable venture. While banks have the power to
create money as loans, they also have the obligation to balance their
books; and when borrowers default, the losses must be made up from
the banks™ profits. Faced with a wave of bad debts and lost business,
banks have kept afloat by branching out into the economically

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destructive derivatives business, by “churning” loans, and by engaging
in highly leveraged market trading. Today their books may look like
Enron™s, with a veneer of “creative accounting” concealing bankruptcy.
“Vulture capitalism” and the derivatives cancer. At one time,
banks served the community by providing loans to developing
businesses; but today this essential credit function is being replaced by
a form of “vulture capitalism,” in which bank investment departments
and affiliated hedge funds are buying out shareholders and bleeding
businesses of their profits, using loans of “phantom money” created
on a computer screen. Banks are also underwriting speculative
derivative bets, in which money that should be going into economic
productivity is merely gambled on money making money in the casino
of the markets.
Moral hazard. Both the housing bubble and the derivatives

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