How Do You Feel About Being A Lab Rat? Do you trust Ben Bernke, the Fed and the other central banks?

By: ispeculatornew
Date posted: 08.15.2012 (5:00 am) | Write a Comment  (2 Comments)

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It’s funny how some things work. We use all kinds of tests to verify that our food, medicine and more are safe and that we use sophisticated software to make sure that our cars can sustain the impact of an accident. We have incredibly complex flight simulators that can help to determine what modifications in an airplane equipment, weight or other changes could do.

We Are Not Testing Everything

Did you know that you and I are currently taking part in a huge experiment? After a big technology bubble exploded, central banks tried to pump out money but also maintain very low rates. For a while, it looked like we had escaped the crisis thanks to the Fed’s action. Of course, we found out a few years later that these low rates had created a major housing bubble and a credit crisis unlike anything we had witnessed in several decades. Some thought the whole system was at risk of a collapse and it turned out to be scary times.

How did the Fed react? It took unprecedented action, pumping trillions into the system, trying to manipulate interest rates to keep them as low as possible. It went even further by not only working on short term interest rates but also using “Operation Twist” to create record low long term rates. The federal government has been piling up debt but as worrying is the fact the explosion of the monetary base:


Source: Wikipedia 

Economic theory says that over the long term, inflation is very much linked to the amount of money in the system. So seeing this much money being tossed around has many including myself truly concerned. Worst of all is that no one, not even the guy in charge of all of this, Ben Bernanke, knows what the consequences will be. Are we headed for massive inflation? Or perhaps still headed for a Japanese style of recovery? Or will turn out well? It’s easy to see why so many are moving some of their money into assets that would do well if inflation ends up exploding such as gold, TIP’s and more.

It’s possible that even he knows that pumping out money like this could end up creating the biggest bubble that we have ever seen. But he wouldn’t tell us. Why? We have a system that’s built on confidence and until he has no other choice, he will continue to try to look positive and confident about the economy.

I know that I’m personally far from convinced that what is being tried here will result in success, especially over the next few years…What Are Your Thoughts?

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2 Comments

  1. Comment by pk de cville — August 15, 2012 @ 9:13 am

    OK. The monetary base has exploded due to the financial crisis.

    The Fed has been protecting against wholesale depression style deflation by expanding the monetary base. They’re using the money to buy assets (bonds and such) to keep asset prices from deflating.

    Those interest rates are down because no one else is buying assets. If the Fed stopped doing what it’s doing we’d begin deflating and that is not something anyone wants to live through.

    You say Benanke doesn’t know what he’s doing. I say he’s doing everything he can to prevent deflation.

    And he’s stuck here where he is because 30 years of deregulation led directly to the biggest Wall St blowup in history.

    Alan Greenspan, himself, was stunned enough to say he was totally surprised by the incredible failure of the too big to fail banks to protect themselves from the systemic risk inherent in the real estate mortgage boondoggle.

    (He was also the leading proponent of the idea that there was no housing bubble despite all signs to the contrary. Unfortunately, HE DID KEEP interest rates low for far too long; not what Bernanke is doing at all.)

  2. Comment by Hans — August 16, 2012 @ 5:42 am

    All Central Banks, in my opinion including the US Federal Reserve, are an impediment to the natural flow of free enterprise and subsequently, the economy.

    In a vain effort to boost or fetter economic growth through fiat control of interest rates or other monetary actions, these institutions have caused more damage than good.

    Their manipulation of interest, creates uncertainties, distorts markets and lengthen downward cycles and shortens upward cycles, in a failed attempt to aid the economy…

    Despite this massive intervention, the frequency of recessions (dooms & busts) have been as insidious as before 1913…

    The policies of Greenspam (married to Andrea Mitchel NBC reporter, the first of many warming of his incompetency) and his cohart, Bank Bernank, have demonstrated over the past decade, the clear and utter inability to execute the mandate given to them, by the clueless members of CONgress. (No difference than mandating that cows must breed with goals)

    I see no difference between the Federal Reserve and an outhouse; both of which have no transparency and practice quantified easing on a regular bases and produce nothing of value.

    Not only should the Feddy be audited but decommissioned as well and the sooner the better…

    “Could we please break for coffee”?

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