Jerry Bowyer | On April 6, 2021

The Federal Reserve headquarters in Washington, D.C.
(Photo by Dan Smith) (CC BY-SA) (Resized/Cropped)

Paulists have long demanded that we “Audit the Fed!” By Paulists, I mean the acolytes of former congressman Ron Paul, not the saint, though I suspect that he too might have been skeptical of quasi-public entities with enormous wealth and power.

The thing is, we already do audit the Fed. It undergoes a GAAP-based audit by a public accounting firm on a yearly basis, and the results of the latest one were released recently. Lest I keep you in suspense, the Fed revealed that “an independent public accounting firm engaged by the Board has issued unqualified opinions on the financial statements and on the Board’s and each Bank’s internal controls over financial reporting.” That is what’s known in the trade as a “clean” audit opinion. It is as close to an “Amen” as the auditors are allowed to give.

But all of that really misses the point, doesn’t it? The issue, at least for sensible people, has never been whether the Fed is cooking the books. The issue has always been the scandal of what it is doing openly and with full transparency. It has grown to a gargantuan size and done so at an extraordinary pace: “Total Reserve Bank assets as of December 31, 2019, were approximately $7.4 trillion, an increase of $3.2 trillion from the previous year.”

That’s 130 percent growth in one year. What is the colossus eating? “Total Reserve Bank assets were composed primarily of $7.1 trillion of securities under agreements to resell, U.S. Treasury securities, and federal agency and government-sponsored enterprise mortgage-backed securities acquired through open market operations.”

Who’s buying the Fed these lavish (and remember, there are no free ones) lunches? Mainly savers, but more broadly any holders of dollars, and eventually anyone affected when the bubble bursts.

For masochists (or insomniacs), we provide here a link to the sprawling 53-page consolidated financials: 2020 Federal Reserve Banks Combined Financial Statements, but for the rest, let me hit a few highlights.

Source: Federal Reserve Banks Combined Financial Statements, 3/17/21. 2019 data as of 12/31/19, 2020 data as of 12/31/20.

So the Fed added roughly $2.5 trillion dollars in additional Treasuries, going from $2.4 to $4.9 trillion, more than a doubling in a single year. In addition, the Fed expanded its already engorged holdings of agency and GSE securities to $2.1 trillion. Throwing trillions at mortgage-backed securities… what could go wrong?

That is what the Fed owns (well, part of what it owns), but what does it owe? It owes money. Not in the sense that regular borrowers owe money, but in the sense that money is a liability for the Fed. That’s how it’s treated in the accounting system. Why? Because once upon a time, a dollar was a promise to give the bearer gold. So, it was an IOU-Au. Now, of course, it’s not really a promise at all, but it has to go somewhere on the balance sheet, so why not leave it a liability? As you can see below, those little former IOU-Aus, a.k.a. Federal Reserve Notes, did not increase nearly as much as the Fed balance sheet, going only from $1.7 trillion to about $2 trillion, a mere 16 percent expansion. Which means that the Fed’s asset holdings are not matched by currency expansion.

Source: Federal Reserve Banks Combined Financial Statements, 3/17/21. 2019 data as of 12/31/19, 2020 data as of 12/31/20.

There was a lot of hoarding going on. Banks left about $3 trillion in reserves at the Fed and the Treasury department’s deposits with the Fed rose from a mere $400 billion to $1.7 trillion. Who is willing to bet that that money will stay hoarded in Fed vaults as opposed to being spent freely by the government?

Not me.

This article originally appeared on National Review.

Jerry Bowyer

Jerry Bowyer is a Forbes contributor, contributing editor of AffluentInvestor.com, and Senior Fellow in Business Economics at The Center for Cultural Leadership.

Jerry has compiled an impressive record as a leading thinker in finance and economics. He worked as an auditor and a tax consultant with Arthur Anderson, as Vice President of the Beechwood Company which is the family office associated with Federated Investors, and has consulted in various privatization efforts for Allegheny County, Pennsylvania. He founded the influential economic think tank, the Allegheny Institute, and has lectured extensively at universities, businesses and civic groups.

Jerry has been a member of three investment committees, among which is Benchmark Financial, Pittsburgh’s largest financial services firm. Jerry had been a regular commentator on Fox Business News and Fox News. He was formerly a CNBC Contributor, has guest-hosted “The Kudlow Report”, and has written for CNBC.com, National Review Online, and The Wall Street Journal, as well as many other publications. He is the author of The Bush Boom and more recently The Free Market Capitalist’s Survival Guide, published by HarperCollins. Jerry is the President of Bowyer Research.

Jerry consulted extensively with the Bush White House on matters pertaining to the recent economic crisis. He has been quoted in the New York Times, The Wall Street Journal, Forbes Magazine, The International Herald Tribune and various local newspapers. He has been a contributing editor of National Review Online, The New York Sun and Townhall Magazine. Jerry has hosted daily radio and TV programs and was one of the founding members of WQED’s On-Q Friday Roundtable. He has guest-hosted the Bill Bennett radio program as well as radio programs in Chicago, Dallas and Los Angeles.

Jerry is the former host of WorldView, a nationally syndicated Sunday-morning political talk show created on the model of Meet The Press. On WorldView, Jerry interviewed distinguished guests including the Vice President, Treasury Secretary, HUD Secretary, former Secretary of Sate Condoleezza Rice, former Presidential Advisor Carl Rove, former Attorney General Edwin Meese and publisher Steve Forbes.

Jerry has taught social ethics at Ottawa Theological Hall, public policy at Saint Vincent’s College, and guest lectured at Carnegie Mellon’s graduate Heinz School of Public Policy. In 1997 Jerry gave the commencement address at his alma mater, Robert Morris University. He was the youngest speaker in the history of the school, and the school received more requests for transcripts of Jerry’s speech than at any other time in its 120-year history.

Jerry lives in Pennsylvania with his wife, Susan, and the youngest three of their seven children.