Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20
China Recovered in Q2. Will the Red Dragon Sink Gold? - 23rd Jul 20
UK Covid19 MOT 6 Month Extensions Still Working Late July 2020? - 23rd Jul 20
How Did the Takeaway Apps Stocks Perform During the Lockdown? - 23rd Jul 20
US Stock Market Stalls Near A Double Peak - 23rd Jul 20
Parking at Lands End Car Park Cornwall - UK Holidays 2020 - 23rd Jul 20
Translating the Gold Index Signal into Gold Target - 23rd Jul 20
Weakness in commodity prices suggests a slowing economy - 23rd Jul 20
This Stock Market Stinks - But Not Why You May Think - 22nd Jul 20
Protracted G7 Economic Contraction – or Multiyear Global Depression - 22nd Jul 20
Gold and Oil: Be Aware of the "Spike" - 22nd Jul 20
US Online Casino Demographics: Who Plays Online For Money? - 22nd Jul 20
Machine Intelligence Quantum AI Stocks Mega-Trend Forecast 2020 to 2035! - 21st Jul 20
How to benefit from the big US Infrastructure push - 21st Jul 20
Gold and gold mining stocks are entering a strong seasonal phase - 21st Jul 20
Silver Eyes Key Breakout Levels as Inflation Heats Up - 21st Jul 20
Gold During Coronavirus Recession and Beyond - 21st Jul 20
US Election 2020: ‘A Major Bear Market of Political Decency’ - 21st Jul 20
Summertime Sizzle for Gold and Silver - 21st Jul 20
Overclockers UK Custom Built PC Review - Delivery and Unboxing (3) - 21st Jul 20
Will Coronavirus Vaccines Become a Bridge to Nowhere? - 20th Jul 20
Stock Market Time for Caution?  - 20th Jul 20
ClickTrades Review - The Importance of Dynamic Analysis and Educational Tools in Online Trading - 20th Jul 20
US Housing Market Collapse Second Phase Pending - 20th Jul 20
Capitalising on the AI Mega-trend - 20th Jul 20
Getting Started with Machine Learning - 20th Jul 20
Why Moores Law is NOT Dead! - 20th Jul 20
Help the Economy by Going Outside - 19th Jul 20
Stock Market Fantasy Finance: Follow the Money - 19th Jul 20
Did the Stock Market Bubble Just Pop? - 19th Jul 20
Quick Souring of the S&P 500 Stock Market Mood - 19th Jul 20
The Six-Year Jobs Recession - 19th Jul 20
Silver Demand Exploding! - 18th Jul 20
Tesco Scraps Covid Safe One Way Arrow Supermarket Shopping System - 18th Jul 20
The Rise of Online Pawnbroking - 17th Jul 20
Gold Rallies Together With U.S. Covid-19 Cases - 17th Jul 20
Gold & Silver Measured Moves - 17th Jul 20
The Bizarre Mathematics Of How Negative Interest Rates Create Stratospheric Profits - 17th Jul 20
From a Stocks Bull Market Far, Far Away, Virus Doomsday Scenerio! - 16th Jul 20
Fiscal Cliffs and the Self-destructing Treasury - 16th Jul 20
Dow Stock Market Crash Watch - Update - 16th Jul 20
Gold & Silver Gaining on US Dollar Weakness - 16th Jul 20
How to Find the Best Stocks to Invest In - 16th Jul 20
Overclockers UK Custom Build PC Review - 2. System Build Changes Communications - 16th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

The Government's Cooked Books

Politics / US Debt Sep 05, 2009 - 12:39 AM GMT

By: Jacob_Shreffler


Best Financial Markets Analysis ArticleShould the United States ever adopt the same accounting standards for itself that it foists upon private enterprise, its financial reports would leave the majority of Americans in a state of shock. Americans would have tremendous difficulty recovering from the magnitude of misrepresentation that is going on now. Accounting isn't just a game either; there are material, legal, and ethical consequences when it's done wrong.

As an example of the accounting fictions used daily to dupe the public, consider the US dollars the United States claims to own in the Treasury "coffers." Now brace yourself, because this explanation is going to remind many readers of Alice tumbling down the rabbit hole. All of the interests the United States has in US dollars are cancelled out by liabilities on the Federal Reserve Balance Sheet, so that they have no effect of ownership. The United States owns no domestic money when its off-budget entities are incorporated into its balance sheet. The Treasury general fund is an accounting fantasy. So this begs the question; what happens to tax dollars?

The tax collectors do the accounting equivalent of putting all the collected tax money in a pit and setting it on fire. There is consequently never any taxpayer money in the US treasury coffers. More concretely speaking, when taxpayer checks are cleared by the IRS and the Fed, the tax money ceases to exist in any accounting or legal sense. The fiat money is sent back into the accounting vacuum from whence it came.[1]

How is such an absurd thing possible? Through the sham of fiat currency, of course! While the US dollar used to be a certain weight of metal,[2] or a credit instrument entitling its owner to a best effort attempt to produce that same metal on demand, it has been transformed over the years into a mere credit instrument, with no link to metal at all.

Why is it legitimate for me to consider the US dollar to be a credit instrument? If we set aside for the moment the issue of just exactly to what credit a dollar owner is entitled and the issue of what frauds have been committed in developing the US dollar, we can see that the US dollar is considered a credit instrument by the Fed itself. The Fed has listed a liability for all issued Fed notes on its balance sheet, in accordance with standard procedure in fractional reserve banking.

Why is it legitimate for me to consider the US dollar to be a credit instrument? Set aside for the moment the issue of just exactly to what credit a dollar owner is entitled and the issue of what frauds have been committed in developing the US dollar. We can see by looking at the Federal Reserve's balance sheet that the US dollar is considered a credit instrument by the Fed itself. The Fed has listed a liability for all issued Fed notes, in accordance with standard procedure in fractional reserve banking.

It has also issued similar liabilities in the form of reserve balances for private banks. A private bank can convert its credit balance with the Fed into paper currency upon request. Even if we were to accept the popular circular reasoning and consider dollars to merely entitle their owners to Fed notes and not to any interests in metal, a dollar is still a credit instrument guaranteed by the United States; and the claims I make in this article are still maintained.

"The United States owns no domestic money."

A distinguishing feature of a credit instrument is that it cannot be owned by the debtor it would otherwise bind. For example, if I write myself a signed and sealed letter saying that I owe myself $1,000,000 by next year, that letter does not constitute a contract, a credit instrument, or any legal claim whatsoever. I cannot reasonably claim that I'm managing a million-dollar asset. It cannot properly be placed on my balance sheet as an asset or a liability. Yet the United States handles its accounts in just this way.

The same situation of cancelling self-debt exists with the dollars claimed to be held by the United States. The general treasury account is currently recorded as an asset which is offset by a liability in the Federal Reserve balance sheet. This is similar to how I record my personal checking account as an asset and the local bank records it as a liability. The dollars in my wallet and in my bank's reserve account at the Fed are themselves liabilities of the United States. In the words of the Federal Reserve, "Federal Reserve notes are liabilities on the Federal Reserve's balance sheet." Also, "Coin, however, is an asset on the Federal Reserve's balance sheet, and is a direct obligation of the U.S. Treasury."

The important difference, however, is that unlike me, the United States has total legal control of the operations of its bank.[3] That means that if the United States was willing to eat its own dog food by writing GAAP-compliant financial reports, they would be forced to consolidate the Federal Reserve balance sheet with the general balance sheet.

In the process, several accounting fictions would annihilate each other. The Treasury bonds held on the asset side of the Fed's sheet would cancel with the corresponding debt obligations on the liability side of the Treasury's sheet.[4] The credit balances for the United States and for its off-budget entities on the liability side of the Fed's sheet would cancel with the debit balances (the General Fund) on the asset side of the Treasury sheet and the off-budget entity sheets. The bonds owned by the Social Security Trust Fund would be cancelled by the corresponding obligations on the Treasury sheet.

Why would this consolidation be required? Accounting standards note that

Ownership does not signify control, especially when … another party has the ability to dominate the board of directors of the entity.… Control can exist even when an entity owns less than 50% of an entity's voting share capital (or equity capital) when … [there exists a] power to govern the financial and operating policies of the entity under a statute or an agreement.[5]

This condition is clearly satisfied by the Fed and the United States. Even though bankers own stock in the Fed and vote in some managers of the Fed, the United States reserves the right to appoint major monetary policy makers. Furthermore, if Congress passed a law forcing the Fed to buy a certain amount of Treasury bonds at a certain price, the law could not be successfully contested in court by the Fed's stockholders. That ability signifies most clearly that the Fed is a public sector entity and not a private one. If Congress dictated which specific purchases a particular private company could make, that company would be able to contest the law in court.[6]

Now some readers are probably thinking "Ok, so the United States owns no US money. Who cares? This is just accounting garbage!" But they're forgetting an important thing: accounting is essential to figuring out who can be sued and what they can be sued for. If a court held wasting taxpayer money to be illegal, then to successfully sue someone for that you would have to show that he spent taxpayer money.

But since every person who has cleared a government check has been issued new money, none of them can be correctly accused of handling taxpayer money by clearing a government check. That means that people who are traditionally considered to be tax consumers, such as non-IRS federal employees and defense contractors, in fact are not tax consumers. Not a single one has wasted taxpayer money while engaged in the acts of receiving and spending money from the state, because the taxpayer money cannot be traced or followed to any of these recipients!

In cases where recovery of misappropriated goods is sought, a tradition in common law is to consider certain assets of a misappropriator to be held on constructive trust for the benefit of the victim so that the victim can claim subsequent investments the misappropriator makes with his ill-gotten gains. This style of claim is sometimes used to protect the victim's claim from the misappropriator's debt collectors in a bankruptcy proceeding. If the stolen assets can be uniquely identified and located (the process of "following") then they can be repossessed by the victim.

But if they cannot be followed, then the victim can repossess related assets of the misappropriator (identified by the process of "tracing"). It is common to trace a misappropriated good to the money gained when the misappropriator sold it, and to any durable assets the misappropriator purchased with that money. It is reasonable to trace unidentifiable fungible goods like US dollars to any USD currency and USD bank account holdings of the misappropriator first, and then if the claim still isn't satisfied, to trace to other assets of the misappropriator.

But what if the misappropriator is a banker, and he has stolen checkbook money that he himself issued, so that it is extinguished as it is stolen, due to the money's nature as a fungible credit instrument? The case law on this issue is to trace the checkbook money to its associated economic benefit when extinguished: the bank's increase in equity as it extinguishes its liability. Thus judges have sometimes charged the general assets of the bank in this situation.

So if tax collection is considered theft in part or in whole, then the US taxpayer can at most trace his taxes to a general claim against the assets of the United States, which does not include any US dollars. In practice, extinguishing the US liability will increase the US equity from extremely negative to slightly less negative, but that's still an economic benefit for the United States.

So the question must be asked, have the people who lobby for government bailouts and the technocrats who handed out the money committed any moral crimes in those acts? It appears from this article that they in fact are innocent. However, there are a few considerations that could make them guilty of other crimes against taxpayers:

  1. The government workers might have a fiduciary duty to keep the US equity high enough to pay for reasonably anticipated future judgments against the United States. This duty would fall under the heading of capitalization requirements.

  2. The government workers might have a fiduciary duty to not increase the supply of money in certain situations, as it would generally be considered an abuse of the government monopoly on issuance of legal tender.

  3. Everyone has a duty to not bribe people into subverting a fiduciary duty which is owed to a third party. Such subversion amounts to theft from the third party.

The real culprit behind this behemoth accounting and moral outrage is not the Fed but the legal tender laws. These laws preserve the United States' domestic monopoly on currency issue by forcing courts to abrogate contracts demanding payment in private currencies. Clearly, one of the top priorities of every libertarian should be ending the legal tender laws.

Jacob Shreffler is a 2009 graduate of Kent State University with a bachelor of science in mathematics and physics. He was an attendee of Mises University 2007. Send him mail. See Jacob Shreffler's article archives. Comment on the blog.


[1] Robert Murphy wrote, "ultimately the Federal Reserve creates new deposits for major banks out of an accounting vacuum."

[2] The metal and weight thereof have changed frequently.

[3] Though they certainly don't seem to exercise it often.

[4] See the last chapter of Rothbard's The Case Against the Fed.

[5] Alex Ashwal, Review of Business, 2005.

[6] Barring some kind of Communist takeover that throws away all Constitutional law.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules