2017-01-11barrons.com

THE NEW REGIME HATES THE FED: Donald Trump's supporters are remarkably unified on the Federal Reserve: It monetizes the debt, it creates asset bubbles, it is utterly nontransparent, it's controlled by Keynesians, its regulations hurt the economy, its bloated balance sheet will be impossible to wind down in an orderly manner, etc. But most importantly, the new regime thinks the Fed has too much power.

SO HERE WE GO, WITH "AUDIT THE FED" LEGISLATION likely to move quickly in the House. Sen. Rand Paul, an increasingly important player, has re-introduced his "Federal Reserve Transparency Act," which has a good chance of passing in the Senate as well. Paul will need 60 votes to break a filibuster, but some left-wing Democrats -- Bernie Sanders, Elizabeth Warren, Sherrod Brown, for example -- might support the bill. If it passes, Trump would sign it.

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OUR BOTTOM LINE: The Fed has its flaws, but it's largely apolitical -- you have to go back to Arthur Burns and Richard Nixon in the early 1970s to detect political deal-making. The concern in financial markets is that the Fed once again may be on the verge of politicization.

THAT CONCERN ON WALL STREET will be strongly conveyed to the Goldman Sachs faction in the Trump administration. These pragmatists may get Trump and his supporters to tone down the Fed bashing, but this issue may take on a life of its own -- as politicians in both parties squirm over rate hikes this year. If the funds rate is 75 basis points higher at the end of this year, the Fed will become a political pinata -- just as legislation to curb it is advancing.

Sorry, Barron's -- the point isn't how "political" the Fed is; the point is that it implements monetary mal-construction that has corrupted our banking system and economy to its core. So hopefully the new Audit the Fed Bill is merely a prelude to abolishing the Fed, substituting its worthwhile functions with a department of the Treasury, and introducing well as a gold-backed dollar calibrated to a level that wipes out a substantial amount of the public debt (and trade deficit). We can dream...



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