The Fed's Misguided Beliefs About Currency Debasement

What does it mean?

30-Year Treasury Yield vs. 30-Year Mortgage Rates

The chart above shows that the 30-year Treasury bond yield is now higher than the interest rate on 30-year mortgages.

What does it mean?

The answer is not immediately apparent. On the surface, this chart indicates that the average American mortgage-holder is a better credit risk than the US government. After digging a little deeper, the picture doesn’t change very much. The average American mortgage-holder is genuinely trying to repay his debts. The US government isn’t.

Treasury bonds remain the global benchmark for safety and reliability. But at the same time, Federal Reserve Chairman, Ben Bernanke, is busy establishing a new global benchmark for dumb ideas. He is busy printing up dollars in the name of dollar stewardship.

The man considers it a good idea to sacrifice the dollar’s hard-won reputation in the pursuit of a lower unemployment rate. He considers it prudent to exchange America’s world-leading credit-worthiness for short-term economic benefits.

But the global economy does not operate according to the wacky theories of academia. It follows the common sense principles of the real world. Chairman Bernanke does not seem to grasp the fact that the Federal Reserve does not create jobs; the private sector does.

Nevertheless, last night on 60 Minutes, Bernanke defended his quantitative easing campaign as an essential assault against unemployment.

“At the rate we’re going,” said the Chairman, “it could be four, five years before we are back to a more normal unemployment rate.” Therefore, Bernanke continued, additional quantitative easing is “certainly possible… It depends on the efficacy of the program.”

In other words, the Chairman will continue to debase the dollar for as long as it takes to revive economic growth…or to destroy it. According to the academic theories that Bernanke embraces, the Federal Reserve can stimulate the economy by printing dollars and buying Treasury bonds, thereby lowering interest rates…and facilitating capitalistic ventures.

In the real world, however, currency debasement is just that, currency debasement…which is just a form of wealth destruction. And notwithstanding Ben Bernanke’s theories, destroying wealth never creates it.

Bernanke believes he is waging a war against economic malaise and unemployment. Unfortunately, his arsenal features a falling dollar and a rising inflation rate.

These dynamics are not lost on bond investors…or at least not completely lost. Yields on long-term Treasury securities have been climbing since August. Last week, the 10-year T-note yield pushed above 3.0% for the first time in months. 30-year bond yields have also been climbing.

So Bernanke’s tactics are working, right? Hardly.

The economy added a paltry 39,000 jobs in November, as the unemployment rate jumped to 9.8 percent, the highest level since April.

So if you’re keeping score at home, it’s…

Bad Economy: One

Dumb Ideas: Zero

Eric Fry
for The Daily Reckoning

The Daily Reckoning