On Thursday of this week Federal Reserve Chairman Ben Bernanke announced his latest effort to help his boss, Barrack Obama, get re-elected. This will ensure that Mr. Bernanke can continue to impose his failed economic theories on the private sector for another four years. It is called quantitative easing, which is just a fancy word for printing money and then using that money to buy mortgage-backed securities. The theory from the inept chairman is that this will cause the stock market to rise and put more money in the pockets of the average American, which they will spend to stimulate the economy.The statement that Mr. Bernanke made to this effect shows his total ignorance of how the private sector operates. Sure, the stock market went up on the news, just as it did with the previous two QE actions from the Fed. But the previous two programs did nothing to boost GDP or lower the unemployment rate, in fact, those two economic metrics are much worse.
The fly in Big Ben's ointment is that the stock market lost the average retail investor four years ago and they have not re-entered the market. That is why the volume of shares traded on a daily basis has been pitifully low over that time. Any exposure the average American has to the market is through retirement accounts, which will be worth much less because of the inflation that will occur as a result of printing dollars to buy the mortgage-backed securities. To make matters worse, the new round of quantitative easing is open-ended. Which means Ben will fire up his magical money machine and print 40 billion dollars a month in perpetuity.
By artificially pumping up the securities market, the Fed has kept bond rates low in order to incentivize investors to move their money into the riskier assets. This has caused the ten year treasury bonds to be kept at historic lows, under two percent for the last year. The ten year bond is the basis for interest rates. It is also one of the mainstays of pension and other retirement vehicles. By keeping the bond rates artificially low to pump up the stock market, Mr. Bernanke has taken money away from current retirees.
All the money that Ben Bernanke and the Fed is pouring into the market has to come out of the market at some later date. This is economic law that even the feckless Fed Chairman can not violate. When that happens, interest rates will sky rocket and inflation will rise to a level we have not seen since the Carter administration. This will also facilitate outside interest buying our debt, which now will cost us more to pay back with two credit downgrades under our belt. This will probably occur in the first half of President Obama's second term, if he is re-elected. That is why it is so important for Americans to elect rational people who understand how the private sector economy works. That is after all where most Americans live, work and raise their families, not in the theoretical world of Chairman Bernanke's mind.