Two stories which have received limited publicity in recent months are the results of the Federal Reserve audit and this new 'Supercommittee' - created to initiate spending cuts in the US before November 23rd.

We are all generally aware of the Fed's invincible power and its casual secrecy by which it implements life changing policies for the citizens of the world. Up until recently, only a handful of people knew the actual lengths the Federal Reserve had gone to during the heart of the crisis. Now, the world knows.

The Federal Reserve fought hard to keep the truth buried behind the closed doors from which it came. Despite the Fed's efforts, earlier this year, by way of the Dodd Frank Wall Street Reform and Consumer Protection Act, the GOA (Government Accountability Office) audited the Fed for the first time in its 98 year history.

It was revealed that the U.S. Federal Reserve gave out $16.1 trillion in emergency loans to U.S. and foreign financial institutions between Dec. 1, 2007 and July 21, 2010, according to figures produced by the governments first-ever audit of the central bank. This amount was intended to be secret.

That figure is more than the entire annual US GDP, which came in at $14.5 trillion last year.

It's more than the entire National Debt that rose above $15 trillion on Thursday, November 17th 2011.

More than every mortgage in the United States combined.

And all of the money was given out at less than 1% interest...

As mentioned, Fed officials strongly discouraged lawmakers from ordering the audit, claiming it may 'serve to undermine confidence' in the monetary system.

They don't want the average man going to work every day knowing that the Federal Reserve, which doesn't answer to anyone, including the US government, is currently taking the biggest risk in American history. And that his financial future, along with everyone else's, is on the line.

Here is the breakdown of the $16.1 trillion loaned out:

$3.08 trillion went to financial institutions in the U.K., Germany, Switzerland, France and Belgium, the Government Accountability Office's (GAO) analysis shows.

Asset swap arrangements were opened with banks in the U.K., Canada, Brazil, Japan, South Korea, Norway, Mexico, Singapore and Switzerland. Twelve of those arrangements are still ongoing and have been extended through August 2012.

Citigroup received the most financial assistance from the Fed, at $2.5 trillion. Morgan Stanley came in second with $2.04 trillion, followed by Merill Lynch at $1.9 trillion and Bank of America at $1.3 trillion. All of this money was given away for next to nothing. With that stated, the majority of it has been repaid and the Fed did make billions on the transaction.

The audit also clearly outlined that the Fed outsourced the vast majority of its lending operations to the financial institutions responsible for sparking the crisis in the first place. The GAO report recommended new policies that would eliminate such conflicts of interest, and suggests that in the future the Fed should keep better records of their emergency decision-making process.

The Fed agreed to "strongly consider" the recommendations, but as it is not a government-run institution, it cannot be forced to do so by lawmakers.

It is impossible to know what the Fed's balance sheet looks like today or when the next audit will occur. Our team is not comfortable with such a powerful force manipulating the financial landscape of which we all have to navigate through. However, we have to adapt and position ourselves to benefit from the policies which approach us and prepare for whatever comes our way.

And preparing is exactly what we have been writing about for the past three years. It remains our strong belief that inflation will rise in the near-term. If we do see a few months of contraction and deflation, which we strongly believe will happen (temporarily), it will be enough to rally broad support for another Fed intervention (printing copious amounts of money). Always remember that the Fed believes that deflation is the worst possible scenario an economy can go through. Its goal is to create inflation.

The ECB, which had many of its institutions bailed out by the Fed back in 2008 and 2009, is not opting to print its way out of the current financial crisis in Europe; not yet at least. All of these issues are intertwined and Europe and the ECB must be feeling the pressure from the Fed and many of its most influential citizens. The ECB wants its member states to cut spending, not to be bailed out by money printing; this is a pipe dream. There will be a combination of spending cuts and money printing. Remember, when countries are drowning in debt, they inflate their way out via money printing and low rates.

In the United States we are days away from a November 23rd deadline, where if no agreement is made, it could trigger 'across the board spending cuts' of $1.2 trillion beginning January 2013. That threat has been the cause of nothing but laughter from our team at Pinnacle. It is nothing but hot air in our opinion. The process is being dubbed "sequestration" and is designed to spare the US from yet another credit downgrade.

It is our strong belief that US politicians (particularly the Democrats as they struggle to boost growth) will not allow these cuts to take place. They will argue the economy is too fragile - that it is too weak to implement serious cuts.

Democrats, just a few days ago, rejected a plan Republicans offered as a fallback. A Republican leadership aide stated that their, Nov. 17 package included $643 billion in deficit reductions. Democrats denied it because it didn't include enough revenue increases, according to a Senate Democratic leadership aide.

The political system in the US is broken. And with election year quickly approaching, we can expect more stalemates on serious issues that effect the common man.

A former Democratic US Senator Byron Dorgan stated, "It looks like a standoff."

What a joke! Does this sound familiar? Remember back in July and August. This should be part II of the mini-series "The Debt Ceiling Fiasco." There will be at least 5 parts to this terrible show that continues to hurt investors and the middle-class.

Dorgan went on to state that, "Nobody's ever created a supercommittee where you have 523 members of Congress that are not involved and 12 who are working largely in secret. It was generally a bad idea from the start."

This lack of collective effort is going to undermine any initiatives.

The Debt Ceiling is Climbing

The raising of the debt ceiling in August was suppose to last the US until 2013. This might not be the case. The 'supercommittee' could lower the risk by agreeing on a $1.5 trillion deficit reduction plan, but by all accounts this seems very unlikely. The other factor that nobody likes to talk about is that if the US slips back into a recession even for a quarter, its chances of bumping up against the $16.7 trillion debt ceiling rises dramatically. There is a definite chance this will happen before November 2012.

Every politician likes to pretend they are serious about deficit cuts, but no one wants to actually implement them because of the short-term pain and what it might do to their popularity amongst voters.

We are treading in very dangerous water now. If the Europe crisis escalates and it drags the US into a recession, paying off debt through revenues from taxation will be another dream gone with the wind.

Although we hate to focus on just the negative and end on a sour note, we have to be realistic and acknowledge how US politicians and central bankers have dealt with the debt problems until now. With that stated, as we have said before, the Federal Reserve is all in, and it won't leave the table until its chips (US dollar) are not accepted (reserve currency). Until that happens, consider the Fed the bully at the table who will push everyone around by means of creating inflation.

All the best with your investments,