Lowering short term rates merely makes borrowing and lending more attractive without expanding money supply directly. It also encourages banks to borrow short term and invest in longer term Treasuries which keeps rates lower. Quantitative easing literally prints money out of nothing and buys Treasury bonds (and now mortgage securities). That both puts money directly into the system and pushes down longer term rates which are more critical to both borrowing and asset prices. QE is much more potent and like “crack” compared to the “speed” of lowering short term rates. The first “side effect” is the sudden drop in the dollar which raises food and gas costs for everyday consumers. The second is a return of bubble-like market activity from stocks to junk bonds to commodities which will burst again and critically injure aging investors and retirement funds. The third is lower returns on retirement portfolios which lowers the earnings and spending of the largest segment of aging consumers. We can’t be far from a crisis that forces Treasury yields and all bond yields sharply up as occurred in Europe in April of 2010. And down the road when the Fed sells those bonds, it will cause interest rates to rise again as you don’t get something for nothing.
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The Fed has now stimulated a third and even more perverse bubble, which is the first bear market bubble we have ever seen. At least the previous bubbles had rapidly growing productivity and demographic growth to fuel them. The current bubbles only have government stimulus as their fuel despite slowing economic trends and the obvious failure of such stimulus. The current bubbles in stocks, gold, commodities and junk bonds will burst and greatly injure investors, retirees and pension/retirement plans again. The greatest risk is that a falling dollar prompts foreign countries and investors to stop buying and/or start selling U.S. Treasury bonds and that forces a sharp spike in long term interest rates across the board. In addition, the bond markets could simply continue to observe deteriorating economic activity with mushrooming stimulus and start worrying about rising U.S. deficits and raise interest rates suddenly as they did with Europe in April of 2010.
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The Fed has now stimulated a third and even more perverse bubble, which is the first bear market bubble we have ever seen. At least the previous bubbles had rapidly growing productivity and demographic growth to fuel them. The current bubbles only have government stimulus as their fuel despite slowing economic trends and the obvious failure of such stimulus. The current bubbles in stocks, gold, commodities and junk bonds will burst and greatly injure investors, retirees and pension/retirement plans again. The greatest risk is that a falling dollar prompts foreign countries and investors to stop buying and/or start selling U.S. Treasury bonds and that forces a sharp spike in long term interest rates across the board. In addition, the bond markets could simply continue to observe deteriorating economic activity with mushrooming stimulus and start worrying about rising U.S. deficits and raise interest rates suddenly as they did with Europe in April of 2010.
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