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The Federal Reserve Goes All In... Can You say Bubble?... Strawberry Fields (Low Interest Rates), Forever?... The "Free" is Missing from our Free Markets... Holding Hands and Jumping Off the Cliff.

By Jay D. Ahlbeck, President, JDA & Associates

The Federal Reserve (Fed.) is still buying $85 billion of assets each month with no end in sight.  Economists now predict a $4 Trillion Fed. balance sheet by the end of 2013. In the chart below the green represents the Fed. buying its own paper, at times accounting for 70% of the market in U.S. Treasuries. Maybe the Fed. is sly as a fox, but another viewpoint is that at some level this is insane.

Chart of the US Federal Reserve Balance Sheet

All that money has to go somewhere and in our opinion many asset prices will be pushed up as long as the Fed, along with other central banks, continue to plow money into the global economy. We do not, however, believe that true wealth can be created out of thin air by printing money and view this as a high stakes game of roulette. 

Interest rates will stay artificially low until the Fed. decides otherwise. The Fed. has been responsible for purchasing as much as 70% of the treasury market supply (buying their own paper) so they in affect set the rates by buying supply until the rate is where they want it. 

If you are a believer in free markets, these are not free markets but are the reality that we live and invest in.

Do not be surprised if the Democrats and Republicans hold hands and jump off the cliff together.  This makes political sense as they can quickly "rescue" us from their own doing with tax cuts and spending increases after the draconian measures of the "cliff" go into effect. Both sides then claim victory. Washington has learned that financial crisis provides good political cover and if there is short-term financial chaos for political gain you can bet our politicians are up to the challenge.  We may just need a good crisis to get the logjam broken.