Two things today.  First a great chart.

It shows the relationship between the price of gold and our old but defenseless friend the U.S. dollar.

One is line (gold) going up and the other line (dollar) is going down. It doesn't get much simpler than that.

Of course, it is worth noting that the first of the Fed rate cuts came on September 18, 2007.

It's the exact point where the dollar begins to collapse and gold skyrockets.

It's no coincidence and its part of the reason that I decided to dust off my Federal Reserve story from 16 months ago in the first place.

So here is the final story in the series.(the other 5 can be found on last week's blog)

It ran on Gold World on October 25th, 2006.

The Fed, the Economy, and You

BALTIMORE, MD -- As we learned last week, the Federal Reserve Act of 1913 not only was a great deal for the Federal government but also for the nation's lenders. Not only does the act allow the Federal Reserve to create more dollars, but it also allows the banks themselves to create even more money through its fractional reserve lending policies.

That's because a member bank has to keep on deposit a mere 10% of what it is liable for, allowing it to create nine times that amount in new borrower debt. This, as we saw, is a good deal if you can get it.

And it's even better if you can maintain it, which is another of the Federal Reserve's principal missions.

It accomplishes this through that mysterious Fed Funds Rate that you hear about all the time. This is the overnight interest rate which the Fed sets as a target when banks borrow from one another. And it's this that allows capital to be moved easily from where it's on deposit to where it's needed, to satisfy the 10% reserve requirement of fractional banking.

This borrowing system is needed since banks only have to have a mere 10% of their money on hand, meaning without it they can't possibly always meet their reserve requirements or the demand for withdrawals.

It's what makes every bank liquid well beyond its deposits, since the 10% reserve requirement necessarily makes all banks illiquid.

And it is this constant shifting back and forth of deposits that not only makes the whole system work, but prevents the runs on banks that plagued us in the past. It creates a pool of cash that can stop them.

But while the Fed Funds Rate and its system of borrowing manages to stave off the built-in liquidity problems, it also plays a much larger role in the economy by affecting the interest rate markets.

That's because when the Federal Open Market Committee (FOMC) sets this target rate, it becomes a benchmark of sorts for other rates-especially those that are short-term.

It's one of the tools the Fed uses to either encourage or discourage demand and spending, by raising or lowering the cost of borrowing.

And since the Federal Reserve Act specifies that the FOMC should seek "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates," it is the tool used to either stimulate economic growth or to fight off inflation.

It's the reason why the financial press is constantly on "Fed watch," reporting on and trying to predict the next move in the Fed Funds Rate. Because, ultimately, while the Fed has no direct control over interest rates, its moves tip off the markets as to whether it is trying to tighten or loosen the demand for money.

The Funds Rate is what gives the Fed such an incredible amount of power over the economy. Loosening it causes expansion and inflation, while tightening it causes economic contraction and unemployment.

Since the nation is so dependent on borrowing and spending, it has the effect of putting consumers on an economic roller coaster as it tries to "manage" the economy by constantly tinkering with demand.

The effect is that the economic fortunes of consumers everywhere have ended up in the hands of a class of bankers who consider themselves to be the smartest guys in the room.

And while these folks don't think twice about hurting consumers to achieve their aims, they rarely if ever turn on their banker friends.

That's because, while the Fed concentrates primarily on consumer demand, it turns a blind eye to controlling the money supply, even though it has the ability to shrink its reserves and decrease the amount of money that banks can create to lend in the first place.

So while the Fed thinks nothing of coming after you, its printing presses and those of its member banks continue to create more new money, allowing them to make tidy profits as they not only push you further into debt but exacerbate inflationary pressures.

 And while all of this debt creation is what puts much of the capital in American capitalism and helps to propel economic growth, it does so by putting us through a series of credit-induced booms and busts. This, if you think about it, is exactly where we find ourselves today.

After all, without the Fed, its banker friends, and all of that easy money, the housing bubble is something that never could have happened.

So as long as this system and the people who run it are able to jerk consumers around with their inflationary methods there is no real end in sight.

How could there be?

Politicians love it because it allows them to spend your money without limit.

Banks love it because it allows them to profit immensely from the debt it allows them to create.

Big business loves it because all of that debt keeps them flush with sales.

And even we love it . . . because while the Fed may cost us by raising our rates occasionally, it's nice enough not to cut us off.

And as long as it is willing to keep the spigots open, we are still free. . . . free to chase the dream.

Or so we think.

It's how the homeless get home loans, it's why you have ten credit cards, and it's the reason why the price of everything is twice what it was when you were younger.

It's the ultimate illusion, and it all started on a hunting trip to Georgia 96 years ago.

A hunting trip we've been paying for ever since.

That, of course, was final story in the series on the Fed. All of it is true and I hope it gave you a new perspective on what the "smartest guys in the room" are up to these days.

That's because it has very little to do with you actually or "price stability" for that matter, and everything to do with the banks. After all, they are the ones that created the Federal Reserve in the first place.

By the way, here's what Thomas Jefferson had to say about banks long before the creation of the Federal Reserve. Some of it might sound familiar.

"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."

--Thomas Jefferson

Food for thought.

Since the creation of the Federal Reserve a pre-Fed dollar is now worth only 5 cents.