The clock is ticking on “Bubbles” Bernanke. Come June 30, his latest “quantitative easing” program (QE2) is scheduled to end. The big question on everyone’s mind is: what happens after June 30? Will government bond yields explode?
A number of respected commentators, including bond king Bill Gross of PIMCO, are bracing for the worst—and it’s not hard to see why. Certainly, the Federal Reserve’s behavior in the wake of the 2008 financial crisis has exceeded, in sheer recklessness, anything attempted by any senior central bank in history.
First, the Fed stuffed its balance sheet with more than $1 trillion of dodgy mortgages (purchased with money created out of thin air). Then last November, well over a year after the economy supposedly pulled out of recession, Bernanke’s crew voted to buy another $600 billion of Treasury paper.
This massive money printing has undermined global confidence in the dollar’s purchasing power. One result: A sharp jump in commodity prices, including gold, oil and—most recently—foodstuffs. Is Bernanke happy with things? You have to wonder.
But as the Federal Reserve chairman takes the podium tomorrow in the central banks first-ever press conference, there are far more direct questions on my mind for Ben Bernanke. Here are five that I would like the answer to:
1. How much “quantitative easing” is enough?
Abe Lincoln supposedly said, “You can’t fool all the people all the time.” I might add: “You don’t have to — a majority will do.” And sure enough, markets have moved about 12% higher since the announcement of QE2 almost six months ago.
But wait, this wasn’t supposed to happen: When the Federal Reserve launched its latest bond-buying program (QE2) on November 4, the yield on the 10-year T-note stood at 2.48%. By February, the benchmark yield had soared as high as 3.72%, a whopping 50% increase. If QE2 was supposed to keep rates down (as you promised), it has been a flop.
Mr. Bernanke, your $600 billion QE2 program clearly smacks of a desperation tactic, ill grounded in economic theory or historical experience. Over the past 10 years, Japan has repeatedly failed to spark its moribund economy by monetizing government debt. Why should the same gimmick work here?
2. What do gold at $1,500 and oil at $112 say about confidence in the Fed?
In an op-ed last November, Mr. Bernanke, you wrote that concerns about quantitative easing were “overstated.” You went on to say that it did not “result in higher inflation. We have made all necessary preparations, and we are confident that we have the tools to unwind these policies at the appropriate time. The Fed is committed to both parts of its dual mandate and will take all measures necessary to keep inflation low and stable.”
But if that’s the case, then why is gold hitting new all-time highs over $1,500 an ounce? Why did oil close Monday at $112 per barrel? Does gas at a national average of $3.88, just 23 cents shy of its all-time high, strike you as the “price stability” described in the Fed’s announcement of QE2?
Already, according to MasterCard SpendingPulse, gasoline sales in the United States have tumbled for five straight weeks. Consumers are cutting back, and businesses will soon feel the pinch. How can we have confidence amid your comments and these trends?