Bernanke’s Secret Code and The Federal Reserve Monster

A 360 Degrees Perspective

Why every American should watch their money like a hawk when Fed Chief Bernanke promises to keep interest rates near zero.

Yesterday, U.S. Fed Chief Bernanke promised NOT to raise our near-zero interest rates. Japan’s central bank made exactly the same pledge. And, governments throughout the West have also joined the chorus.

It sounds like they’re doing us a favor. After all, you’d think that “keeping interest rates low” should encourage consumer and business borrowing — help stimulate the economy — maybe even make a dent in the unemployment rate.

But when you decipher central banks’ secret code — when you read between the lines, considering six fundamental economic facts of life — you see the staggering implications of these low-interest-rate promises.

FACT #1 — Western nations are living on credit: Western governments are drowning in debt and need to borrow trillions of dollars more just to survive. The U.S. government alone will have to borrow more than $2 trillion this year. The rest of the Americas and the nations of the euro zone will likely have similar borrowing needs.

FACT #2 — Excessive government borrowing naturally drives bond prices down; yields up: The laws of supply and demand dictate that when governments flood the bond market with new debt, the value of that debt plunges. When bond prices plunge, the effective yield or interest rates paid on that debt surge.

FACT #3 — When yields on government debt surge, most other interest rates surge along with them: Corporations and consumers trying to borrow money suddenly find themselves competing with sovereign governments for investors’ money. Interest rates — the cost of borrowing — rise across the board.

FACT #4 — Fed Chief Bernanke knows that allowing interest rates to rise would be tantamount to a mercy-killing for any economy that’s as sick as the US's: Higher borrowing costs would further dampen consumer spending, push millions of employers over the brink, light the fuse on a new surge in unemployment, dash any hopes of a recovery, and would likely ignite a vicious double-dip recession.

FACT #5 — To keep rates low, the Fed is printing money like there’s no tomorrow, then using that money to buy bonds.

FACT #6 — When the Fed floods the world with billions of brand-new, unbacked greenbacks, the value of every dollar you earn, save, invest and have socked away for retirement declines.

The bottom line: When the U.S. Federal Reserve — or any central bank, for that matter — promises to keep interest rates near zero for the foreseeable future, what they’re really saying is Washington needs your money and the Fed is perfectly willing to confiscate it from you whether you like it or not.