Out of ammo

Last week, Barack Obama declared that the U.S. was out of money. Today, General Motors is expected to file for bankruptcy, which is an ominous sign in a land where the financial health of the automotive giant has long been considered a proxy for the financial health of the nation. And California looks increasingly likely to go bankrupt in the near future. And yet, in a nation without money, Bloomberg has reported that the Federal Reserve has loaned out 7.8 trillion dollars without telling anyone where it has gone.

The American people don't know. Congress doesn't know. No one seems to know; the video of the exchange between Rep. Alan Grayson of the House Subcommittee on Oversight and Investigations and the inspector general of the Federal Reserve Board of Governors is more darkly comedic than anything the Daily Show has shown in years.

Grayson: So are you telling me that nobody at the Federal Reserve is keeping track on a regular basis of the losses that it incurs on what is now a $2 trillion portfolio?

Coleman: I don't know if … you're telling me that there's … you're … missing … that there are losses. I'm just saying that we're not … until we actually look at the program and have the information, we are not in a position to say whether there are losses or to respond in any other way to that question.

TRENDING: Another bank acquiring collapsed Silicon Valley Bank in major deal

Grayson: Mr. Chairman, my time is up, but I have to tell you honestly, I am shocked to find out that nobody at the Federal Reserve including the inspector general is keeping track of this.

Bloomberg also noted that the combined total of the loans and payouts given by the Federal Reserve, the U.S. Treasury, the Federal Deposit Insurance Corporation and the Department of Housing and Urban Development was $12.8 trillion as of March 31. This is equal to 90 percent of the U.S. economy, and would have been more than enough to pay off every single mortgage in the United States – not just every problem mortgage headed for default and foreclosure, but every home loan in the country! The fact that this money has not been given to mortgage borrowers but rather to mortgage holders demonstrates that neither the White House nor the Federal Reserve are genuinely concerned about homeowners losing their homes, except for the way in which their loan defaults are destroying the value of the mortgage-backed securities sold by the banks that are the presumed beneficiaries of the government and central bank largesse.

This may seem like madness, especially since the bank-centric approach to solving the housing problem has been a complete failure. But what people tend to forget is that the U.S. does not have a paper money system; it has a debt money system. The "dollar" in your wallet is not called a Federal Reserve Note because it is just a meaningless paper marker, but because it is an instrument of debt. Creating more money requires creating more debt, which means that if the banks are not creating new loans, new money is not being injected into the money supply since the banks are not loaning out the money loaned to them by the Federal Reserve. A look at the Federal Reserve's report on the aggregate reserves of U.S. depository institutions shows part of the problem facing Ben Bernanke and the board of governors, as the Fed's member banks have increased their cash reserves from less than one percent of their deposits to over 16 percent in the last year.

While I understand Rep. Grayson's frustration and harbor no objections to Ron Paul's proposed legislation to audit the Federal Reserve, I doubt that it is necessary to do much more than wait for events to take their course. Pyramid schemes always fail in the end, and there are an increasing number of signs indicating that the post-Bretton Woods reserve currency system is rapidly approaching terminal status. As Mike Shedlock has chronicled, Chairman Bernanke has exhausted the 13 paper bullets in the Fed's gun, so the ultimate fate of the Federal Reserve Note and the U.S. economy would appear to be in the invisible hands of the market now.

Of course, they always were, as the idea that man can control the great market forces, rather than merely influence them for a short time, has never been more than a vain conceit.