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More on the Fed

January 3, 2012

From last week’s chart of the Federal Reserve’s balance sheet, I would add one quick note. If you want to know how “Operation Twist” would make a new Fed chart appear, you can expect to see the dark blue (traditional or short-term U.S. treasuries) decline, while the light blue (long-term U.S. treasuries/debt) and the red portion (mortgage backed securities) both increase.

It occurred to me that the Fed holdings should really be viewed as the American taxpayers’ investment portfolio. While the Fed balance sheet is anything but a savings account, since it is derived as a result of newly printed money (out of thin air), it is nonetheless the taxpayers’ ultimate responsibility. So it begs the question, “How would you want your money to be invested?” My response to this question is quite simple; paying someone else’s original purchase price for real estate in a hugely depressed market would not be my preferred choice for investing hundreds of billions of dollars. Why would anyone want to pay full price for a home that is now 50 percent in the red?  Secondly, taking ownership of long-term treasuries when they are at an all-time low rate of return would also be cause for concern, particularly when interest rates are being artificially depressed by the Fed. As long-term interest rates eventually go up, long-term bonds will face a real “smack-down.”

For someone responsible for others’ money and investments, I understand what the term fiduciary means. I truly wish that those responsible for our nation’s financial well-being would take their fiduciary responsibility seriously— and herein lies the crux of our problem.

Still, the one thought I want to leave with you is this: Think about the ultimate consequence of all these trillions of dollars that have been —and continue to be — pumped into our financial markets, and the artificial effects this has  on our economy, and add to it other stimulus efforts created by our federal government in the form of bailouts, tax breaks, employment stimulus programs (American Recovery and Reinvestment Act) and other consumer-driven programs (remember Cash for Clunkers), etc. etc. This is not the last time you will hear me say that this is an unprecedented liquidity experiment gone wild. It must be “spring break” in our nation’s capitol and at our central banks! Party on, Dude!

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