QE2 is looking like it is producing just the opposite effect of what was Bernanke intended. Instead of driving bond yields lower, it seems to be driving them higher, especially the 30-year.
Strike up just another miss for Bernanke if in fact he meant what he said. As I wrote earlier, none of this has anything to do with the economy. It is to reliquify the insolvent banking system and make sure that the government has a source for funds if private investors are unwilling to buy their bonds. Interestingly, the amount Bernanke committed to buying matches up almost perfectly to the monthly borrowing needs estimated by the Treasury.
This post is from Pragmatic Capitalism:
TREASURY YIELDS NOW HIGHER THAN BEFORE JACKSON HOLE
15 NOVEMBER 2010 BY TPCIf the Fed is truly intending to manipulate the yield curve they are failing spectacularly. Ultimately, this is the primary goal of QE – to reduce rates and ease monetary conditions so that business investment and borrowing becomes more attractive. With QE2 officially starting today, however, bond yields are higher across the curve than they were when Ben Bernanke gave his Jackson Hole speech. This is exactly what we saw during QE1, QE in Japan and QE in the UK. In none of these cases did business borrowing pick-up substantially. Higher interest rates are certainly not helping the cause here. This is just one more sign that QE will do nothing to help the real economy:
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Monty,
I followed the links in your post and read more of the analysis by “TPC” at Pragmatic Capitalism. TPC seems to agree with Mr. Bernake that QE will not be inflationary. Does this go back to the timing of deflationary versus eventual inflationary pressure you discussed a few months ago in your American Thinker article?
Troy,
I had not looked at the detail you found when you went to TPC.
After looking at it, I do not agree with most of the commentary back and forth. I think TPC is arguing that the Fed neutralizes the excess reserves that go into the banking system by forcing or incenting them to be held rather than lent out. First, I don’t think that is what will happen and even if it did, there is the problem of excess tinder in the banking system waiting for some spark to set it off.
Second, if what is stated were correct, why don’t we just eliminate taxes and support the government by QE? If it is harmless in the sense that it doesn’t cause inflation or somehow or another can be neutralized to avoid inflation, we have just found the ultimate “free lunch.”
My point was that QE will not help the economy. It will likely ruin it. In an earlier article I speculated that it was not being done to help the economy but to fund an illiquid government that couldn’t fund its deficits via normal bond sales.
Thanks, Monty.
I remember your comments and arguments and find you to be rational and consistent. When you posted the link to TPC’s comments, I was attemting to reconcile his detail against your analysis, which of course could not be done. Thanks for taking the time to look at it and give me your thoughts. Keep up the great work.
-Troy
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