Eric Fry

Three months ago, Ben Bernanke promised lower mortgage rates and lower corporate bond rates.

He promised.

Quantitative Easing – i.e. the Fed’s scheme to print money and buy bonds – would deliver these benefits, Bernanke promised in a November 4, 2010, op-ed piece for The Washington Post. “Easier financial conditions will promote economic growth,” the Chairman declared. “For example, lower mortgage rates will make housing more affordable, and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence…”

But the Chairman was wrong. Three months after issuing his promise, interest rates are rising steeply, which is causing mortgage rates to rise as well. Quantitative Easing is not magic. It is a shell game that is producing predictably inflationary results.

The prices of stocks and commodities are soaring, while the prices of long-dated bonds are tanking (which means bond yields are soaring). This is “Inflation 101,” folks. Nevertheless, Bernanke credits QE2 for all things good.

“The Chairman reviewed his Quantitative Easing, Second Inning (QE2) at the National Press Club on Thursday, February 3, 2011,” writes financial market observer, Fred Sheehan. “His conclusion: ‘The economic recovery that began in the middle of 2009 appears to have strengthened in recent months… A wide range of market indicators supports the view that the Federal Reserve’s securities purchases have been effective at easing financial conditions. For example, equity prices have risen significantly, volatility in the equity market has fallen, corporate bond spreads have narrowed… Yields on 5- to 10-year Treasury securities initially declined markedly as markets priced in prospective Fed purchases; these yields subsequently rose, however, as investors became more optimistic about economic growth…”

As to bond yields, Bernanke’s assessment of his handiwork seems a bit disingenuous. While true that “yields…initially declined,” it is also true – and more to the point – that yields subsequently soared. Therefore, to claim success because yields “initially declined” would be a bit like declaring the Titanic’s maiden voyage a success because the ship initially floated.

“The yield on 10-year Treasury bonds has jumped from 2.48% on November 4, 2010, to 3.65%,” Sheehan points out. “That’s a 47% boost, during the period in which the Federal Reserve bought approximately $200 billion of Treasury bonds to reduce mortgage rates… Accordingly, since November 4, 2010, Freddie Mac 30-year fixed-rate mortgage rates have risen from $4.10% to 4.81%. Housing – which accounted for 40% of new jobs during the ersatz-boom – is sinking, partially due to the higher rates since Bernanke’s November 4, 2010, manifesto.”

Elsewhere in Washington, the Executive and Legislative branches of our democracy are busy making Bernanke’s job even more hopeless. Enormous deficits are extending far, far toward the horizon, like amber waves of grain. As our colleagues at The 5-Minute Forecast observed earlier today, “The White House has given up any pretense: Its latest forecast for the fiscal 2011 deficit is now $1.65 trillion – which would set a record. And at 11.3% of GDP, the deficit’s share of the overall economy would be the highest since World War II.

“Today the Administration unveils a plan to cut $1.1 trillion from the budget…over the next 10 years. These 10-year projections, no matter which political party trots them out, are always a ruse to distract you from the fact that ‘budget cuts’ never seem to be ‘deficit cuts.’ If you want to talk about the next 10 years, here’s the only number that matters: Under the White House plan, the official national debt would grow by 50% over the next decade, to $21 trillion.”

Hmmm… Since it might be a little tricky to borrow all of those dollars, we may have to print a few extras for ourselves.

Eric Fry
for The Daily Reckoning

Eric Fry

Eric J. Fry, Agora Financial's Editorial Director, has been a specialist in international equities for nearly two decades. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short-selling.  Following his successes in professional money management, Mr. Fry joined the Wall Street-based publishing operations of James Grant, editor of the prestigious Grant's Interest Rate Observer. Working alongside Grant, Mr. Fry produced Grant's International and Apogee Research, institutional research products dedicated to international investment opportunities and short selling. 

Mr. Fry subsequently joined Agora Inc., as Editorial Director. In this role, Mr. Fry  supervises the editorial and research processes of numerous investment letters and services. Mr. Fry also publishes investment insights and commentary under his own byline as Editor of The Daily Reckoning. Mr. Fry authored the first comprehensive guide to investing internationally with American Depository Receipts.  His views and investment insights have appeared in numerous publications including Time, Barron's, Wall Street Journal, International Herald Tribune, Business Week, USA Today, Los Angeles Times and Money.

  • http://www.slaythebankster.com Bankster Slayer

    All of Bernanke’s actions and policies make perfect sense if you first establish the premise that the Federal Reserve was not instituted to serve the interests of the American people, but rather, to destroy the interests of the American people. “By their fruits ye shall know them” is a universal principle and applies no less to The Fed. This cartel has been remarkably successful in accomplishing what it was created to do way back in 1913. Don’t listen to what Bernanke is saying; listen to what he is doing.

Recent Articles

The Next Car You Buy Will Be an Electric Car

Stephen Petranek

Electric cars are proving to be far cheaper to operate than anyone could have guessed. In fact, many people are now just getting the equivalent of thousands of mpg to their electric cars. And that's presenting a unique profit opportunity. Stephen Petranek explains...


A Treasure Chest of “Secret” Buy Signals

Paul Mampilly

The world's most successful investors almost always think differently. That's nowhere more apparent than when you're trying to invest in health care. Today, Paul Mampilly - one of the world's top biotech analysts - reveals one "secret" for making money from a predictable cycle in the industry. Read on...


Natural Gas: How to Stay Warm (and Profit) This Winter Season

Greg Guenthner

Right now, the city of Buffalo, NY is covered in five feet of snow. And while that may be bad news for those poor folks, it could be good news for you. Because now that another harsh winter is upon us... you have a massive opportunity for quick double-digit gains. Greg Guenthner explains...


Tip of the Day
3 “Dirty” (and Sexy) Ways to Boost Your Health Tonight

Chris Campbell

Warning: The following article is not for the puritanical. Today, Chris Campbell shows you three "dirty" health boosters you can use tonight to raise your immune system... improve your outlook on life... and make your partner a happy camper. Read on...


The Shock Doctrine: When Order Trumps Personal Freedom

James Rickards

When some event - be it a terror attack, financial panic or natural disaster - upsets the status quo, people are more willing to relinquish their freedom in favor of a greater sense of security. And that's when ambitious political leaders make their move... And as Jim Rickards explains, another such event could be right around the corner. Read on...