I think this would bankrupt the Fed. The 2 previous federal reserve banks of America have gone bankrupt.
it goes like this imo;
fed prints money and buys 10 trillion in bonds.
govt cuts spending, balances the budget and sells no more bonds. govt continues to made interest payments to Fed and uses future taxes to pay back the principal of the bond.
Now the problem is, govt can't raise taxes to make principal payments to Fed. So the govt simple defaults on the bonds now owned by the fed. govt debt gone now. Fed is insolvent, they just lost trillions of dollars! Every dollar the Fed has ever issued is paid back with interest.
Earlier this yr or last yr, the US Treasury changed the accounting standards for the Fed, all the loses will be booked as losses by the Treasury to prevent the Fed going bankrupt like this.
The other way it could/would play out imo;
Fed buys the bonds at 100 cents on the dollar. With the 10 trillion injected into the world over the time it takes to buy all the bonds, the value of the dollar falls dramatically. Now the Fed sells the bonds, nobody buys them. Or they pay 20%, 40%, 60% less to buy them than what the fed paid to buy them. Again with losses like these the Fed is bankrupt.
The Federal Reserve Act of 1913 expressly prohibited the Fed from buying any US govt bonds. The law was changed in the 30's. However, Fed still cannot buy direct, thus they buy in the 'secondary market'. Wall St. banks earn a nice skim off the top for acting as middle men.
When guys like Ron Paul and Peter Schiff talk about the Fed, they both see rolling back all the rule changes since the Act of 1913 was passed as the first step. The fact our money, US money and so on is given to use by govt with a debt obligation attached is simply wrong. Traditionally for thousands of years money was an asset with no debt obligations. real money is an asset. Not a debt obligation.
