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Bernanke’s Next Fed Created Disaster

Mike Swanson
By Mike Swanson / December 21, 2010

Some are claiming that Republicans are causing interest rates to go up. A reporter in this last Sunday’s Wall Street Journal wrote, “as Fed officials prepare to assess the program next Tuesday, they confront the latest counterweight to their interest-rate plan: the tax agreement between congressional Republicans and the White House that would extend Bush-era cuts and reduce payroll taxes. This has sent bond yields higher, not lower, by leading investors to expect more growth and inflation and to fret more about budget deficits.” Personally I’d rather see the tax cuts than not see them. They are only a very tiny part of the deficit story.

So some bond investors are now worried about even bigger government deficits so are starting to demand more interest for their bonds.

Others worry that inflation could rise due to Bernanke’s money printing operation and are starting to demand higher interest for their money too. Indeed we saw commodity prices jump across the board in the Fall and Summer right after Bernanke announced his plans to go through with quantitative easing.

It is hard to discern the motives of millions of bond investors. Whatever the case it is clear that Bernanke’s money printing is not forcing interest rates down as he thought it would, because it is causing more bond investors to LOSE CONFIDENCE than just blindly trust him and therefore they are demanding more interest for their money. It is that simple.

There has been one unspoken elephant in the room throughout the debate on quantitative easing. In the summer he argued he was going to buy the bonds to help the economy. In reality he HAD to buy the bonds. Foreign investors were pulling back from buying US Treasury bills. The US was going deeper into debt to the tune of trillion dollar deficits and China was not stepping up and buying all of this debt. So someone had to buy it and that person was the Fed.

As long as we continue to have winless wars in Iraq and Afghanistan and Obama style pork barrel bailout programs that results in trillion dollar deficits we will have some version of quantitative easing and deficit spending – and as we can see from the past few months this is going to result in worries over the deficit, worries over inflation, and higher interest rates. It will be Bernanke’s bond buying disaster.

That means higher gold prices and higher commodity prices. Yes I worry about an across the board correction in the first quarter of next year, but if it comes it will be a buying opportunity for commodities and precious metals.

As for the rest of the market I’m not so sure. You see at some point higher interest rates are going to become a problem for the US economy. They will help put a lid on the major market averages.

For now though don’t worry. It is the holiday season and the market always goes up into the end of the year.

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Mike Swanson

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