Welcome to our Friday mailbag edition!
Every week, we receive great questions from readers. And every Friday, I answer as many as I can.
This week, we’ve got questions about one of my favorite topics – the Federal Reserve… as well as the future of the U.S. dollar…
From what I have read, the Federal Reserve is actually a private bank, with the stock held by the families of the six financiers who were there at the creation and helped create it.
The statute creating the Fed forbids the release of this information, as I understand it. Could you please confirm these items?
– James A.
Hi, James, thanks for writing in. There’s so much mystery surrounding the Fed. And there’s a lot of confusing information out there.
As you may know, since I left my career on Wall Street, I’ve written several books exposing the cozy relationships between the Fed, Washington, and Wall Street. So here’s the scoop…
According to the Federal Reserve Act of 1913, each of the 12 regional reserve banks of the Federal Reserve system is owned by its member banks.
What that means is that the banks in each region are shareholders of their own part of the Federal Reserve system.
When the Fed first started, these banks put up the capital to get and keep their respective regional reserve bank operating. In return, they received stock in their Fed.
In that way, they are shareholders of the Fed. And the Fed is organized like a private corporation.
But the Federal Reserve Board of Governors is appointed by the president and approved by Congress. So in that way, there’s a political tie to the government.
There’s nothing in the Federal Reserve Act that prohibits the Fed from disclosing the names of their shareholder banks, how many shares each owns, or how much their shares are worth.
But there’s also nothing requiring that disclosure.
When I was researching my book, All the Presidents’ Bankers, the last report I found on that was issued in 1941. It was created by the St. Louis Federal Reserve. But it isn’t available online anywhere.
By the way, I shared an excerpt from All the Presidents’ Bankers about the creation of the Federal Reserve.
It shows how wealthy Wall Street bankers pushed the White House to create America’s central bank, the Fed.
If you missed it, and for readers who have just joined us recently, here it is again.
And if you’re interested in a more in-depth exploration of the different Federal Reserve banks, I put together a unique video series for my Distortion Report Elite members. I call it The 12 Faces of the Fed.
I think all the Goldman Sachs executives in the federal government are crooks. Nothing has changed. If the U.S. had an atomic attack, only cockroaches and Goldman Sachs would survive.
– David R.
Hi, David, the term “crooks” is probably too strong a word. But my former employer, Goldman Sachs, certainly serves as a feeder pool for some of the plum jobs in Washington.
It has produced more treasury secretaries than any other Wall Street bank.
It has also produced key presidential advisors, starting back in the 1930s with Franklin Delano Roosevelt.
Publicly, FDR was considered a “traitor” to the Wall Street class. But in fact, it was largely because of Wall Street money that he got elected, first as the governor of New York and then as president.
Goldman Sachs’ head, Sidney Weinberg, helped gather political donations for FDR’s campaign.
He was the first man to lead the business council that Roosevelt established. This was a liaison between Washington and the business community. Throughout the years, Weinberg advised several presidents.
There are also more recent examples.
Like former Goldman Sachs Vice Chairman Robert Rubin, who was President Bill Clinton’s treasury secretary.
And former Goldman Chairman Hank Paulson, who was President George W. Bush’s treasury secretary. (Paulson was also my boss when I worked at Goldman in the early 2000s.)
Also, former Goldman partner Steven Mnuchin, who served as President Trump’s treasury secretary.
And the Goldman senior gang wasn’t too discerning about political parties, either. It doesn’t matter whether the Goldman gang, or the presidents it served, were Democrats or Republicans.
The influence of Wall Street on Washington transcends these political party distinctions. And it has for years.
The alliances between those in power and the financial world is a topic I am fascinated by. I researched and wrote about it extensively in my 2014 book, All the Presidents’ Bankers, as I mentioned above.
I shared an excerpt from that book, specifically about the rise of the Goldman gang to political power. It shows the historic power connections between Goldman and the White House going back almost a century.
You can read that excerpt here.
The Chinese have made strong inroads to being able to buy Saudi oil with the yuan. And as the U.S. continues to put a stranglehold on Russia, the Chinese continue to work closer with the Russians.
When you look at the oil-producing strength of Russia, and its likely continued relationship-strengthening with China… and the fact that most of the European nations rely on Russia for oil and gas… it would be foolish not to think that if the U.S. ostracizes itself from Saudi Arabia and potentially all of the Organization of the Petroleum Exporting Countries (OPEC), China, and Russia, this could make for an expedited loss of currency dominance.
The U.S. cannot afford to be at odds with every other major nation and their constituents and believe our currency will remain the dominant currency.
Remember, the Chinese and Russians have been increasing their gold reserves at a tremendous rate. If the rest of the world decides to get on the gold standard, in addition to all the other issues discussed, it could leave the U.S. fiat in a very weak position.
– Chris T.
Hi, Chris, thank you for that in-depth observation. I’ll say this: We absolutely need to grow and maintain a strong level of energy independence here in the U.S.
In today’s world, this means focusing on oil and natural gas production and more efficient refining.
It also requires expanding into a more dominant and cost-effective level of alternative energy independence for tomorrow. This includes wind, solar, geothermal, and safe nuclear energy.
The stronger we are concerning energy and power for today, and for whatever transitions are coming in the future, the stronger we are economically – for our domestic population and for our allies.
And that brings me to your specific point about oil, the U.S. dollar, and China.
I want to be clear about this, because I know it’s an area many readers are watching closely: the U.S. is under some sort of threat from the Chinese yuan. But it’s a long way from losing its reserve currency dominance.
That’s because of the size of the U.S. economy (even if it hasn’t grown as quickly as that of China recently). It’s also because of the long-standing advantage that the U.S. dollar has enjoyed – and still enjoys – as a global reserve currency.
Since last year, we’ve witnessed how much the dollar has strengthened in this period of financial, economic, and global geopolitical uncertainty – as the Fed pivoted to a tightening monetary policy.
The People’s Bank of China did the opposite. It continued along its path of a more dovish approach to monetary policy.
China will seek to foster relationships with Saudi Arabia, and with any other oil-producing nation, to ensure it has the energy sources it needs to run its economy.
It will also do everything it can to pay in yuan, and thus push more yuan out into the global economy. That won’t stop. And it will put a dent in U.S. dollar dominance.
However, given the general makeup of trade and reserve currencies around the world, it will still take decades, if ever, for the yuan to take over that post from the U.S. dollar.
That said, it’s also true that the U.S. is not consolidating its global trade position as quickly or as steadfastly as I would do if I was running the country. The same goes for its domestic economy, from a manufacturing and production standpoint.
That’s largely due to the lack of a plan. Our general predisposition to the sort of ugly bipartisan politics that makes efficient planning impossible is not helping, either.
The net result will be that China pushes ahead. So the U.S. needs to push ahead more than it’s currently doing from an economic and financial standpoint.
And the U.S. and China will remain interdependent on their mutual supply chains for decades, at least. I hope that helps answer your question.
And that’s all for this week’s mailbag… thanks to everyone who wrote in!
If I didn’t get to your question this week, look out for my response in a future Friday mailbag edition.
I do my best to respond to as many of your questions and comments as I can. Just remember, I can’t give personal investment advice.
And if there are any other topics you’d like me to write about, I’d love to hear from you. You can write me at [email protected].
In the meantime, happy investing… and have a fantastic weekend!
Editor, Inside Wall Street with Nomi Prins