As I understand it (please correct me if anyone sees something wrong in this summary), this is a summary of what happens and has continued to happen since the U.S. abandoned the gold standard.

The U.S. Government wants money (value).

The government creates “T. Bill certificates” to the total amount it needs with an interest rate of say + or -5%.

These are offered to everyone; countries, corporations, incl. banks, trust funds etc. and individuals.(The only backing these “T-Bills” have, is based on faith in the government to repay their debt.)

For those bills not exchanged (sold), the FED “buys?” them, and pays with newly created monies (This power was given to them by the U.S. government on 23 Dec. 1913).

The FED adds the total amount to the U.S. debt and it appears on their books as an asset, with a corresponding liability (until it is paid off) so that one side of the ledger balances the other. The interest that will be paid, will also show up as an asset and will go straight to their bottom line (profit).

By going through the FED, the Government “launders” monies to the FED shareholders, and because the FED is allowed to create monies at will, the government will never run out of funds.

All taxes collected go against the government expenditures and any amount that is short, is raised by issuing “T – Bills”.

Every time the Government issues “T-Bills”, that is the amount of new monies that enters the system i.e. the amount of inflation created solely by the government (The government and the FED are solely responsible for any inflation. Every other explanation is “smoke and mirrors”.

As well as creating this “New” money for the government, the FED is also allowed to create 9x that amount. These “New “monies are used to prop up other financial institutions (all with a rate of interest attached for the FED bottom line).

**Note!

As long as any bank (including the FED, and this is one of the reasons that Ron Paul wants to audit the FED)) has issued a valid loan, it shows up on the balance sheet of the bank as an asset with a corresponding liability entry.

That is why banks have no problem loaning to valued customers (Those that will not default).

If default seems to be “in the cards”, the bank is more than happy to increase the loan, just to keep the debt on the books as an asset.

Should any client default, the bank has no choice but to remove the loan from their assets, but the liability remains.

Banks really don’t care if loans are paid off, as long as the interest is paid. This interest payment alone, keeps the loan current.

So, what would happen if the U.S. decided to default on its loan to the FED? Well, in all likelihood, as the FED is not a government department, but an independent entity, the FED would probably become insolvent (it would no longer be able to show the U.S. debt as an asset, but the debt would still remain on the liability side of the ledger.)

Comment:

Ron Paul wants the U.S. government to be responsible for creating its own monies. He wants to end the FED and to do away with the IRS so that no taxes are levied or collected. This would put pressure on the government to curb spending so that runaway inflation does not become the norm. He believes there is more than enough monies in the system, and by procticing frugality, the government will be able to pay off all its debts (with the exception of the money it owes the FED, and be self-sufficient).

Good Luck to all!