The longest-serving chairman of the Federal Reserve Board, William McChesney Martin, famously said that the function of the Fed is to “take away the punch bowl” when the party gets too exuberant. Bernanke is doing the opposite, he is calling ahead to the party and announcing his car is loaded up with gin, vodka, whiskey and tequila. This in itself is bizarre, since by so loudly broadcasting QE2 in advance, he is building in huge anticipation of QE2. To keep the momentum of this mad program, he will have to print more than the expectations that he has built to high heaven, otherwise QE2 will crash out of the gate. Given Bernanke's speech today, it is clear that Bernanke is fully ready to exceed expectations.
What does all this mean, if Bernanke does indeed follow through on his money printing scheme? A very quick turn upward, in a manipulated way, for the economy. Inflation will explode at a rate far in excess of what most expect. Remember, we are for the most part in a period where the desire to hold cash balances is still very high. This will reverse itself at the same time as Bernanke's money printing. Bernanke wants an increase in "aggregate demand", he is going to get it in the form of huge inflation.
Borrowers should lock in long term rates now. Although, Bernanke may start buying long term bonds, and temporarily push down rates, eventually inflation concerns will overtake Bernanke's bond buying.
We are truly headed into uncharted territory. If Bernanke follows through on the statements in his speech today, I fully expect inflation in the United States greater than what was experienced in the 1970's. It will be devastating to any one on a fixed income and it will destroy savers. It will benefit debtors at all levels, including, not coincidentally, federal, state and local governments that are in hawk across the board.
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