Comment: "1) What caused bank runs and

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"1) What caused bank runs and

"1) What caused bank runs and panics prior to the creation of the Federal Reserve? Did the Federal Reserve solve the problems of preventing future bank runs?"

So prior to the Federal Reserve...well, prior to Lincoln allowing the US dollar to be fractioned, banks had their own currency. In the era of free banking, they issued their own currency. Of course, they fractioned this to ridiculous proportions, and mostly busted. Lioncoln's law brought some regulation back to the backs, setting strict limits as to how much they could fraction. These laws were mostly followed.

The federal reserve did not solve the issue of a future bank run, as observed by the panic of 1929. What the federal reserve did was give governmental influence over the money supply/monetary policy, as well as provide a lender-of-last-resort.

"Was there fractional reserve banking when the US was on the gold standard, prior to the creation of the Federal Reserve? Can fractional reserve banking be sustainable or is full reserve banking the best option for a sound monetary policy?"

The US only went off the gold standard in 1971. There was so-called fractional reserve banking long before then.

Full-reserve banking will work in the sense that it is incredibly incremental, severely punishes risk-taking, and would only work for a domestic sector that is an exportation empire. Moreover, there is little evidence to suggest that "free markets" ever gravitated towards full-reserve banking. Enhanced credit creation has caused the greatest economic expansion (from 1913 to 2008), EVER. Not even close. From 1800 to 1907..with the industrial revolution, huge advances in technology, the slaves being freed...the average American could buy about twice as much at the end of the 107 years. From 1913 until now, the average American can buy 4-5 times what he could.

"3) If the Federal Reserve is really a private bank ran stockbrokers and private bankers aren't they aware of the inflation caused by their policies? Aren't they hurting their own agenda?"

This is a difficult one to answer. In truth, I don't really think the federal reserve is "causing" inflation. Inflation is caused by debt creation much more than it is created by the creation of available reserves. If the federal reserve raises the short-term interest rate high enough, this will increase the costs of borrowing to the banks, which in turn will lower inflation. In practice, though, there is little correlation, especially now that reserve requirements are basically zero. Remember, the loanable funds model died in 1971. The US government no longer needs gold to issue reserves. Banks no longer need gold to fill requirements; they need US reserves...and the requirements are lower than ever.

"4) If our currency is considered fiat does that mean our 17 trillion dollar debt is fake and shouldn't exist?"

No. The reason the federal reserve issues debt, is to control the reserve rate and to provide an interest-bearing asset to the economy. If the treasury didn't issue any debt, then the 17 trillion (less what would be exported, so really about 13 or 14 trillion) would just sit on the reserves of banks. Because they would have a massive amount of reserves, the reserve requirements would become meaningless and interest rates would plunge to near-zero (as they are now, with the FR paying interest on excessive reserves setting a floor). Moreover, the banking system would lose 200-400 billion in interest payments per year.

Also, the dollar would definitely lose value. Foreigners can no longer exchange dollars for what is considered one of the safest investments in the world: US government debt. In that case, it might benefit the US. The trade imbalance would probably be shifted practically overnight. The US could start importing financial wealth instead of relying on debt.

"5)What is the purpose of keeping track of the debt and deficits if our money is 'worthless' anyway?"

Not sure what you mean by this. Mostly, I would guess that it is because most people do not understand how the monetary system works. They still think in terms of the gold standard; in terms of defaults and borrowing and loanable funds. Keynesians, Modernists, Austrians...they all share this same belief.

6)Should Americans be concerned about the estimated 100 trillion dollars it will cost for future entitlement programs such as Social Security & Medicare?

So those estimates are wildly off.

I would say they may have to worry because some idiot politicians may come and ruin the system. Plus, belief in a lie can often make that lie truth...if people keep on repeating that we will go bankrupt, that is how the investment community will respond. Which is why at first gold and metals soared in response to QE; the market naively thought that QE would cause hyperinflation. Slowly, they are starting to realize it doesn't.

Fundamentally, the Federal Government can run whatever deficit it wants. If the deficit is too much, then it will lead to inflation as there won't be enough production to meet the demand. As long as the productive capacity of the country exists, the government should be able to run a deficit. If trillions are needed to fund SS and Medicare, than the government SHOULD be able to print those trillions..the presumption being that those trillions will be met with production that intends to CLAIM those trillions. Meaning, the elderly need money to buy goods...without the money, there are no goods. If the government provides the money, they can show that they have the money and goods will be provided to meet that money.

Of course, the complicated layer is how government deficits will influence private-sector debt creation, which could cause inflation.

"7)What if President Obama does an executive order or Congress passes a law requiring the Treasury Department to reset the national debt to zero? Will there be any negative consequences to the economy if that ever happened?"

Depends on what you mean. If the government just ripped up all the treasury bonds, yes, this would be a HUGE problem. As those treasury bonds represent the savings of the American people. Net financial savings would be zero (negative if you count the foreign deficit).

If Obama instead just issues money for the bonds, and then destroyed all the bonds, there would still be consequences. The private sector would lose an interest-bearing asset. Interest rates would plunge to zero, and IMO, would just give banks more incentive to speculate. Previously, they at least had to worry about making balance-of-payments...

"8)Could the Federal Reserve create an 17 trillion dollars worth of money out of thin air to 'pay off' the debt?"

Well, the treasury could. But that would have certain adverse consequences as outlined above.

Plan for eliminating the national debt in 10-20 years:


Specific cuts; defense spending: