Friday, November 12, 2010

I Thought QE2 Was Supposed To Lower Interest Rates

And yet here you can see that the since November 4, 30 year Treasury bond yields have risen from 4.04% to 4.26%.  You have to get to bonds with maturities of under one year before you get any decline in yields--and that isn't much.

The Fed's monetizing of debt by buying up Treasury bonds is supposed to drive up the price, thus lowering the yield, encouraging all the "parked" money to be moved from cash management accounts and bonds into stocks, inflate the money supply, exorcise the demon of deflation, and put people back to work.  But what actually seems to be happening is that fear that the Fed may not be able to get inflation back into Pandora's box is creating inflationary expectations--and driving up yields.

My first reaction is: "Uh-oh.  Inflation coming back!  Bad thing.  I remember the 1970s stagflation way too well. I wish that I had saved my 'Whip Inflation Now' button."  (This was Gerald Ford's stupid attempt to jawbone an end to inflation.)  But now I wonder if I should just wait for 30 year Treasury bond yields to hit 8% or so, and start buying bonds.  At 8%, I think I can quit my day job, and live on the interest.

In the long range, the inflation that would create those sort of yields is not sustainable, and even Democrats know that, so there would be serious beating of the inflation monster by the Fed.  At that point, unemployment will rise dramatically--as happened the last time we beat the inflation monster to a bloody pulp, in the early 1980s.

1 comment:

Mace said...

I still have my WIN button.

The Fed is no more than central planning run amuck. It never works. Just think what the interest payments on the debt will be when rates eventually move higher due to inflation.