Fed Bond Buying’s Unintended Effect May Boost Rates (Update2) - Bloomberg.com

Government is running out of rope. The problem with quantitative easing is that everyone knows that this is an attempt at an easy way out of a difficult problem. So, why is that you may ask? Well, the end goal of quantitative easing is that the Central bank through its purchases of government bonds is trying to push so much money into the system that it sparks lending, investment and economic growth. More supply will lower prices as the thinking goes. The problem, though, is that it is also an attempt to fool markets and ultimately is a real-time debasement of the currency, the value of money and the real return of investment. The consequences to investment is that by debasing the currency, that fewer and fewer investors will look to make longer-term investments since the longer-term outlook and the supply of money is less certain int eh future.

So, in other words, we know that the interest rates are comprised of 2 factors; 1. A real rate of return; 2. Inflation expectations. So, no matter how hard a central bank tries, it cannot fool the market since these 2 factors are already set by the market. The only thing that the Central Bank can do is to pay too much for the bonds and the market will be more than willing to sell them to them at this inflated value. And as the Central Bank tries harder and harder to push interest rates down, long-term risks to inflation increase and therefore cause interest rates to rise since inflation expectations increase.

It is very difficult in any circumstance to control or assist an economy from a central authority standpoint but evenmore difficult is one decreases the value of your money down the road. It is a recipe for disaster.

Fed Bond Buying’s Unintended Effect May Boost Rates (Update2) - Bloomberg.com