From debt to dispossession: after abetting an unprecedented growth in both government and consumer debt, the Federal Reserve may be preparing to reduce the middle class to utter serfdom.

They came before dawn on Friday morning, gathering in cities and towns across the nation in lines that snaked down city blocks. These anxious people weren't queueing up for tickets to see Coldplay or Big & Rich; instead, they were seeking to file bankruptcy before the advent of a new, more rigorous law on October 18.

"There have been huge spikes in filings all over the country," commented Nathalie Martin of the American Bankruptcy Institute (ABI) to the Pittsburgh Business Times. "In New Mexico, there have been almost as many filings the two months before [the new law] as in the entire year. There are huge, huge increases."

Many of the debtors thronging federal courthouses were single parents overwhelmed by unsupportable credit card balances and crushing mortgage payments. More than a few were well-paid professionals who had over-leveraged themselves during the recent Federal Reserve-created credit glut. Others were small businessmen whose ventures had failed. Donald Calairo, a Pennsylvania attorney who specializes in business bankruptcies, reported a 50 percent increase in filings in the two months leading up to the new law, the so-called Bankruptcy Abuse Prevention and Consumer Protection Act.

Several large corporations also raced to beat the clock. Delphi, an auto parts manufacturer that spun off from General Motors in 1999, filed for Chapter 11 bankruptcy protection on October 8. Delphi was joined by two ailing airlines, Delta and Northwest, who filed just ahead of the deadline. Under the new law, corporations filing for bankruptcy confront severe limits in the size of severance packages for top executives: the maximum amount cannot exceed 10 times the amount paid to non-executive employees.

Obviously, people who take on debt should be morally and legally liable to pay it off, but the timing of this new law's implementation couldn't be worse. The new law imposes a "means test" based on cost of living guidelines composed by the Internal Revenue Service. Those found to have an above-average income are now barred from filing under Chapter 7, which permits debts to be expunged. They are now required to file under Chapter 13, which imposes a five-year repayment plan. Filers are also required to enter a professional credit counseling program within six months.

Facing intractable debts and rising household expenses, and concluding that bankruptcy was their inevitable destination, hordes of Americans decided to preempt the new law. In the week prior to the October 18 deadline, more than 103,000 bankruptcy petitions were filed (more than 20,000 per day), bringing the 2005 total up to 14.7 million--an increase of nearly 20 percent over 2004.

"We have never seen anything like this," commented St. Louis consumer bankruptcy attorney Barbara J. May to the New York Times. "We knew it would be an upswing, but this is pandemonium."

"Very, Very Scary" Stuff

"While the economy still seems to be pretty good, it doesn't take a lot to get people in trouble," observed ABI's scholar in residence, Nathalie Martin, to THE NEW AMERICAN. "Practically everybody is in debt, and it just takes one significant problem--such as sudden, unexpected healthcare cost--to drive people into bankruptcy. This is very troubling because there are at least four major developments converging fight now" that threaten the financial ruin of millions of Americans.

The first of those developments, according to Professor Martin, is the new bankruptcy law itself, which "makes the process more costly and difficult for everyone." The second is a newly enacted federal regulation allowing credit card companies to double minimum payments; that measure went into effect at the same time as the new bankruptcy law. Taken in combination, this means that tens of millions of consumers will confront much steeper credit card payments just as it has become more difficult to liquidate outstanding household debt via bankruptcy.

Professor Martin also points out that both interest rates and the cost of living are rising, the latter reflecting this fall's spike in energy costs. (The federal government dishonestly computes the consumer price index in such a way that "core inflation" excludes increases in the price of food and energy.) And over the next three years, millions of Americans with adjustable rate mortgages (ARMs) will face ballooning mortgage payments.

"The ARMs are very, very scary," Martin remarks. "When they start going up we're likely to see another wave of bankruptcies, or maybe even people simply walking away from their homes and mortgages altogether. And this will obviously have a huge impact on our consumer economy at large, which has become dependent on the housing and mortgage industry."

"There's an almost schizoid quality to our economy and culture that has done some very significant damage," Martin continues. "The new bankruptcy law conveys the message that people need to be wiser in the way they spend their money, and more responsible in dealing with their credit and financial obligations. Yet at the same time the consumer is barraged with endless messages--many coming from political leaders and key financial figures--urging him to take equity out of his home to fuel the consumer economy. It's almost as if we have a social duty to spend money we don't have in order to help the general economy, rather than thinking and acting responsibly regarding our own household economies."

The "schizoid" economic message decried by Professor Martin was captured perfectly in comments made by outgoing Federal Reserve Board Chairman Alan Greenspan in February 2004. After acknowledging that the Fed would soon start to raise interest rates, Greenspan urged homeowners who had refinanced to lower fixed rates to refinance to ARMs, whose rates could only be adjusted in one direction--up. While Greenspan's admonition was the purest lunacy, millions of Americans acted on it, most of them out of desperation.

Beginning in 1994, Greenspan's Fed has pumped money and credit into the economy. One result was the now-notorious "dot-com" bubble, which drove high-tech stocks into the stratosphere before the bubble exploded in 2000. After the 9/11 attacks, the Fed opened another gusher of liquidity to keep the markets from collapsing. Since then, millions of homeowners have used their homes as ATMs, using creative mortgage financing to fund consumer spending and absorb high-interest credit card debt.

Many analysts have pointed out that this has created a housing and mortgage refinancing bubble that is even larger--and potentially more catastrophic--than the high-tech bubble. Greenspan himself, while refusing to admit that a national housing bubble exists, has conceded that there are "regional" bubbles, creating what he has called "froth" in the national housing and mortgage market. Rising interest rates and an escalating cost of living both threaten to prick the housing bubble, which would result in collapsing real estate prices.

This would leave millions of homeowners turned "upside down": they would be left with negative equity in their homes, steeply increasing mortgage payments, and relentlessly increasing household expenses. The collapse would also prove devastating to all of the industries that have fed on the housing market.

The Debt Trap

Not surprisingly, most Americans are utterly unprepared for a financial calamity of this magnitude.

"Personal savings--funds left over after expenses, excluding stocks, home equity, and other holdings that are less accessible than cash--are at lows not seen since the Great Depression," reported the November 1 Atlanta Journal-Constitution. "For every $1 of after-tax income in the third quarter, Americans spent $1.01 on average, according to figures released [on October 28] by the Bureau of Economic Analysis. That means households are spending more than they're taking in and making up for that deficit with credit card charges and home equity lines of credit."

Once again, this reflects the perverse economic priorities that have been fostered by the Fed. In recent years, the Fed has defined its mission as that of stimulating "aggregate demand" in order to keep the economy afloat. At the same time, Fed officials--prominent among them Ben Bernanke, Greenspan's designated successor as Fed chairman--have railed against what they call a "savings glut" in Asia, particularly China.

As Professor Martin observes, the tacit but unmistakable subtext of these policies is the assumption that Americans have a moral duty to spend, rather than save, and to take on as much debt as possible in order to do their part for the economy. Where Americans generations ago deferred gratification in order to save, Americans today are expected to defer payment in order to spend. And prior to February 2004, the Fed held interest rates at artificially low levels in order to stimulate consumer spending--home purchases, auto sales, big-ticket consumer items, promiscuous use of credit cards for incidental spending, even fast food purchases. And the consequences have been utterly predictable.

In 2003, aggregate U.S. consumer debt reached a record high of $1.98 trillion, a figure that did not include mortgages. In the same year, the savings rate was a record low, 1.3 percent of disposable income. This combination yielded a phenomenon referred to by economics analyst M.P. Dunleavy as "survival debt"--the use of credit cards to make up income shortfalls in dealing with inflexible expenses, including taxes. Not surprisingly, household bankruptcies hit a record high in 2003 as well. All of this explains why millions were willing to act on Greenspan's insane advice to refinance to an ARM in February 2004, and stand to be utterly wiped out when balloon payments begin to come due.

Thus, there is every reason to believe that the frenzied bankruptcy filings this past October represent merely the first trickle of pebbles heralding an oncoming avalanche.

The Big Buy-out

American consumers who blanch at the prices they pay at gas pumps and checkout lines would welcome falling consumer prices. But the central banking elite has defined deflation as a scourge, and inflation as the remedy. This was summarized quite tidily in the headline of a May 19, 2003 Wall Street Journal report: "Having Defeated Inflation, Fed Girds for New Foe: Falling Prices."

Thus the Fed openly set for itself the task of protecting high prices by undermining the purchasing power of the dollar. And by inducing consumers to tie their household economies to inflated real estate and stock market values, the banking cartel has them caught in a double-bind: a collapse in home prices will wipe them out immediately, while sustaining high prices through inflation will wipe them out incrementally.

Incoming Fed Chairman Ben Bernanke has been a member of the Fed's Board of Governors since 2002. He describes himself as "a Great Depression buff, the way some people are Civil War buffs.... To understand the Great Depression is the Holy Grail of macroeconomics." Like most of his peers in the Power Elite, the Harvard-and MIT-educated Bernanke has drawn precisely the wrong lessons from the Great Depression, viewing it as a vindication of the idea that the Fed must stave off deflation at all costs.

A 2002 meeting of the Fed Board of Governors, reported the Financial Times, examined "unconventional means" to pump up a deflating economy. An anonymous Fed official (most likely Bernanke) told the paper that "buying US equities" would be an example of such possible measures, and later said the Fed "could theoretically buy anything to pump money into the system," including "state and local debt, real estate and gold mines--any asset." (Emphasis added.)

Bernanke elucidated his views in a November 21, 2002 address to the National Economists Club in Washington. Deflation "is always reversible under a flat money system," he pointed out, because dollars--unlike gold--can be created at whim. "Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.... We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation."

That speech earned Bernanke the sobriquet "Helicopter Ben" for its casual endorsement of the idea--originally suggested in a sarcastic comment by Milton Friedman--that the Fed and federal government could stave off deflation by printing bales of money and dropping them randomly from helicopters. But the Fed "can inject money into the economy in still other ways," noted Bernanke. "For example, the Fed has the authority to buy foreign government debt, as well as domestic government debt. Potentially, this class of assets offers huge scope for Fed operations, as the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt."

But the Fed could also buy up "a wide range of private assets," including corporate bonds, bank loans, and mortgages. In order to hold deflation at bay--that is, to save the economy from a badly needed and long overdue fall in prices--the Fed under Bernanke may be prepared to create ever-depreciating dollars in sufficient quantity to buy everything in sight.

"There's no limit to what the Fed is prepared to do," commented investment analyst Richard Daughty of the Smith Consultant Group to Tim NEW AMERICAN. "The only tool it has is inflation--creating money out of nothing. And Bernanke has explicitly stated that the Fed has the statutory means to use the money it creates to buy anything and everything, including stocks, bonds, houses, and raw land. It's entirely possible that someday we'll see the banking cartel literally owning everything--and Americans are letting this happen."

But as noted above, debt-laden American consumers have been manipulated into a position in which they have no good options, since either inflation or deflation would be devastating. "Deflation would be a disaster," comments Daughty. "If the grotesquely inflated stock market were to collapse to its real value, for instance, trillions of dollars would be wiped out--a far greater amount even than we saw evaporate when the dot-com bubble burst in 2000. The collapse of the housing market would be even more catastrophic, since the real estate bubble involves practically the entire banking system. And mortgage refinancing has been practically the only engine driving consumer spending. So the Fed, which created this impending catastrophe, will find widespread sympathy for its solution, which is to inflate the currency even more--despite the fact that historically, it's inflation that destroys a country, not deflation."

If the Fed acts on Bernanke's musings about fighting deflation by buying "a wide range of private assets," concludes Daughty, "we're headed for a 21st century version of feudalism, albeit a more humane variety than we've seen before. Our healthcare system will be better, for instance, and the serfs will enjoy amenities that weren't available to their antecedents. But the banks will own everything, and the rest of us will be serfs."

Feudalism--or Fascism?

There are other possible avenues the Bernanke-led banking cartel might pursue. In his November 2002 address, Bernanke praised the actions taken by FDR during his first year in office, which included a "40 percent devaluation of the dollar against gold ... enforced by a program of gold purchases and domestic money creation." In fact, that program entailed gold confiscation, as well as imposition of fascist controls on the economy in the name of fighting deflation.

In his memoirs, Frances Perkins, FDR's secretary of labor, described how the president's "Brain Trust" pored over the writings of Giovanni Gentile, the chief theoretician of Benito Mussolini's corporate state. Under the Italian Fascist regime, producers were forced into government-controlled cartels called consortia, through which wages and prices were set.

In May 1933, the first of FDR's New Deal "consortia" came into being with the passage of the Agricultural Adjustment Act (AAA). Among other provisions, that act "established acreage and production controls, paying farmers not to grow or raise wheat, corn, cotton, hogs, etc., and to plow under crops and destroy livestock," recalls Ralph Raico, a senior fellow at the Mises Institute. "The aim was explicitly to raise the prices of all farm commodities. The preposterous economic 'theory' behind this was that if prices and wages were jacked up, that would increase 'purchasing power,' which was the way to lift the country out of the Depression. In the two years of the AAA's existence, before the U.S. Supreme Court declared it to be unconstitutional, it distributed some $700 million to farmers to restrict production and destroy their crops, in an attempt to make food (and textiles) dearer for consumers. And that at a time when millions were going hungry."

The following month, Congress enacted the National Industrial Recovery Act (NIRA), setting up the National Recovery Administration (NRA). Its aim, observes Raico, "was nothing less than total control of American industry, again in order to raise prices and wages and hence 'purchasing power.'" The codes came to encompass an estimated 95 percent of American industry. Businesses found to be in substantial compliance with the myriad self-contradictory provisions were permitted to display the NRA's "Blue Eagle" symbol, sparing them further harassment by the agency's enforcement arm.

"May Almighty God have mercy on anyone who attempts to trifle with that bird?" exclaimed General Hugh S. Johnson, head of the NRA, capturing the militancy with which his bureaucratic shock troops persecuted businessmen who persisted in free market behavior by trying to price their goods and services competitively. Before the NIRA was ruled unconstitutional by the Supreme Court in 1935, the NRA storm troopers actually arrested and jailed a tailor for the supposed crime of offering better prices than Johnson's tailor.

Writing of the New Deal in his book The Roosevelt Myth, John T. Flynn summarized: "Liberals called it the Planned Economy. But it was and is fascism by whatever name it is known." Former President Herbert Hoover, whose interventionist policies exacerbated the Depression and laid the groundwork for FDR's fascist revolution, ruefully came to the same conclusion, observing in his memoirs "This stuff was pure fascism.... It was a remaking of Mussolini's 'corporate state.'"

Fascism, in the economic realm, is a corrupt fusion of centralized government and politically insulated private corporations. The Federal Reserve system, a nominally private banking cartel intimately joined with the federal government to control the monetary system and dominate the economy, is itself the most powerful fascist enterprise in existence, and its incoming chairman is an unabashed admirer of the most overtly fascist elements of FDR's program. While a revival of feudalism may not be in our immediate future, Bernanke's ascent may portend an accelerated descent into fascism instead.

What You Can Do

* Federal spending has to be brought under control and radically scaled back. In addition, self-destructive trade pacts such as NAFTA, CAPTA, and the proposed FTAA have to be repealed or opposed. The best way to fight these critical battles is by joining with tens of thousands of like-minded Americans in the action programs led by The John Birch Society (www.jbs.org).

* American households and consumers desperately need to get out of debt, or at the very least start paying down their present indebtedness while avoiding any additional burdens.

* Much of our consumer debt is a reflection of materialistic priorities driven by mediagenerated perceptions of the "American Dream." Renewing and strengthening ties to one's immediate and extended family, finding fulfillment in serving the local community, and rediscovering faith in God will not only help cure our society of those distorted priorities, but provide Americans with a source of strength and a refuge in the challenging times ahead.

* Where possible, Americans would be wise to convert some of their dollars into tangible, inflation-resistant assets--particularly precious metals, gold and silver.