[T]his is why politicians engage in complicity with the bankers to lower interest rates: first, because money flowing into sovereign debt enables them to spend more money and, second, because the promise of higher asset prices makes for happier voters. But none of this adds to wealth, merely the perception and distortion of wealth.
Moreover, Bernanke’s thesis is not working: the transmission mechanism into higher general assets prices is broken. The banks are insolvent. They flee from one safe haven to another. As Herbert Hoover once lamented: “capital is acting like a loose cannon on the deck of a ship in the middle of a storm.” The banks buy Treasuries not for the income, but because they can pledge them as collateral for more credit, which they require to remain liquid. They are pushed into taking sovereign duration risk because they are too weak to take business risk.
When the market does finally overpower the manipulations, sovereign debt markets will pop, interest rates will rise, the banks will tumble along with the markets they have rigged, and then the real witch-hunts will begin. It is this outcome, not more rounds of money printing, that will send gold up vertically in terms of the major currencies. The current inflation/deflation seesaw is merely the prelude to debt failure and currency revaluation.
