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The first ever GAO (Government Accountability Office) audit of the US Federal Reserve was recently carried out due to the Ron Paul/Alan Grayson Amendment to the Dodd-Frank bill passed in 2010. Jim DeMint, a Republican senator, and Bernie Sanders, an independent senator, while leading the charge for an audit in the Senate, watered down the original language of house bill (HR 1207) so that a complete audit would not be carried out. Ben Bernanke, Alan Greenspan and others, opposed the audit.
What the audit revealed was incredible: between December 2007 and June 2010, the Federal Reserve had secretly bailed out many of the world’s banks, corporations, and governments by giving them US$16,000,000,000,000.00 – that’s 16 trillion dollars.
The GDP of the United States is $14.12 trillion, the entire national debt of the United States government spanning its 200 plus year history is $14.5 trillion. The budget that is being debated in Congress and the Senate is $3.5 trillion.
The primary argument against such a strategy is that it would signal to the financial markets that the Treasury, Fed and Congress are operating unconstrained by any normal rule of law. The so-called "independence" of the Fed would be revealed as fraudulent. Clearly, the markets would see it for what it is; an end run allowing the Treasury to bypass the debt ceiling limit and run open-loop; borrowing money the Fed will keep printing to pay bills the Congress will keep incurring as they overspend. The US would then be seen as just another banana republic, able to do whatever it wanted in the fiscal monetary arena. This view would place us on the same paths taken by Weimar Germany, Zimbabwe and innumerable other countries who deliberately destroyed their currencies.
To address that argument you have to answer three questions. First, is there anyone left that still believes that the US does practice retrained monetary policy? Anyone observing US monetary policy for the last few decades is abundantly aware of the sixty odd times the debt ceiling has been raised and the expanding discrepancy between the currency in circulation and overall money supply (as shown in the figure below). They know how addicted to spending, indebted and over-leveraged we have become as a nation. We have long since abandoned normalcy. The emperor has no clothes. Who is left that that believes he does?