The market knows this. It also knows that the duration of his holdings has gone up — a lot — and that he cannot pull enough liquidity via short-term roll-off to matter. Despite his claim of being “100% confident,” he cannot tighten policy — not now, and not for many years.
The market thus sees risk — that if the economy improves you get inflation, and lots of it, as Bernanke can’t do anything about it. If the economy doesn’t improve, then the only way for the government to continue spending like crazy (which it clearly is going to do) is to continue to devalue the currency, which means interest rates go up too as commodities will continue to skyrocket (priced in dollars) — and this will destroy the tax base upon which government funding rests from the bottom up.” Read more.
Ben Bernanke’s Bond Bunk
Seeking Alpha, December 8, 2010.
Image by jscreationzs / FreeDigitalPhotos.net.