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Bernanke confirms QE2; the bond market goes up.

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September 21, 2010 – Comments (5)

It is really very simple. The government is selling bonds to the government. The government can charge unreasonably high prices for its bonds because it knows the government will buy its bonds anyway. The government will not object to paying up for the bonds issued by the government, because it knows it will have an unlimited supply of funds. These funds will be raised by selling more bonds to the government. You may ask, why would the government manage the deficit by selling bonds to the government? Because by selling bonds to the government, it can take advantage of the super-low interest rates set by the government. The government's job is to keep interest rates super-low. It is keeping them super-low by purchasing bonds issued by the government. Why would the government want to keep interest rates low? Because by keeping them low, it can refinance its debt to the government. Why would it want to do that? Because by refinancing its debt to the government, it can maintain its creditworthiness so that it could sell even more bonds to the government. 

The longer this economic masturbation continues, the more reason we have to choose real assets over bonds. 

5 Comments – Post Your Own

#1) On September 21, 2010 at 7:09 PM, russiangambit (29.16) wrote:

Ha-ha, excellent summary of what really goes on. It is amazing how free market capitalism arrived to a fully controlled markets in the name of saving the free markets.And nobody of consequence is willing to call the bluff. Because they are all in on the game.

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#2) On September 21, 2010 at 7:17 PM, cbwang888 (25.80) wrote:

IRS collects taxes from US taxpayers for US Treasury.

Fed collects taxes (by dillution) from all USD holders (including China and Japan) for US Treasury

IRS revenue is shrinking as US economy stays sluggish. Fed has no limit on its money supply ...

Most people only know the IRS part. When more and more people realize the Fed part, precious metals like gold and silver will fly even higher ...

 

 

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#3) On September 22, 2010 at 10:18 AM, vriguy (68.40) wrote:

All positive feedback loops end explosively ... that will be the crash to end all crashes.

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#4) On September 22, 2010 at 3:05 PM, outoffocus (22.84) wrote:

zloj,

The longer this economic masturbation continues, the more reason we have to choose real assets over bonds

Hilarious

Russian,  

It is amazing how free market capitalism arrived to a fully controlled markets in the name of saving the free markets.

Thats because they were never trying to save the free market. They were trying to save the status quo.

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#5) On September 22, 2010 at 6:06 PM, Entrepreneur58 (36.05) wrote:

It isn't masturbation, its mastur-flation....an attempt to stimulate the economy single-handedly.

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