predicting in this blog for more than a month now, Fed Chair Ben Bernanke's new stimulus plan, dubbed QEII, has failed to lower interest rates. In fact, interest rates have RISEN, not fallen as Bernanke expected.
The reason is simple. Devaluing the dollar raises inflation fears. The increase in yield is the additional risk premium.
Even the lamestream media has begun reporting on Bernanke's missteps. Read this apologetic gem from the Atlantic.
So let's see. If the Fed buys bonds with newly printed money and interest rates rise, what will happen to interest rates if the Fed buys more bonds? Ask a second grader this question and you will likely get the right answer. Ask the Fed and they will have a novel theory that avoids reality, empiricism, common sense, and the truth.
The U.S. and world economy are not out of the woods yet. The foundations of growth are more firm than they were in 2007. But not by much. The world economy including China is going to limp along for years, maybe even a decade. Look at Japan and its now TWENTY YEAR deflationary cycle as an example. Real estate values have fallen in Japan for NINETEEN straight years. Read about their Lost Decade for an example of what will happen in the United States, just not as severe or as long. There are many, many parallels.
Bernanke recently appeared on the CBS News program 60 Minutes and gave a nervous, sweaty, and tense performance that has lit up the blogosphere. Here is one view of how poorly he did in front of the cameras answering questions about his actions at the Fed from 2005 to the present day.
Representative Ron Paul and his new chairmanship over the Fed is going to cause Mr. Bernanke many sleepless nights. While I do not share all of Mr. Paul's views, he is more right than he is wrong about the Fed and its obscure and hidden accounting, its misconceived easy money policies (called the Greenspan and now Bernanke "puts") and the bizarre statements and laughable predictions made by Bernanke and his predecessors. I welcome Mr. Paul's inquiries and suggestions for reform.
The Fed needs to end its pointless stimulus plans.