QE2 Sets Off Inflation Alarms

Economics / Inflation
Feb 11, 2011 - 04:26 AM

By: Mike_Whitney

Ever since he launched the second round of his bond-buying program (QE2), Ben Bernanke has been on a roll. The S&P has gained 10 percent and the economic data has improved dramatically. Manufacturing and retail have rebounded, consumer confidence has started to brighten, and personal consumption (PCE) is on the rise. Car sales, hotel occupancy and exports are all up, too. Even the banks seem to be more eager to lend than they were just a few months ago. Only housing is still in the doldrums and the Fed chairman probably has something up his sleeve for that, too.

Perma-bear Marc Faber thinks he's figured out the secret of Bernanke's recent successes. He says, "Never underestimate the power of printing money." Indeed. Only, in this case, an asset swap of US Treasurys for bank reserves works just as well as a printing press. Bernanke simply buys up boatloads of Treasurys from the banks and, "Voila", investors flock to riskier assets like lemmings to a cliff. And, just look at the results. Stocks keep climbing higher and higher, and everyone is happy. Well, almost everyone.

Richmond Fed President Jeffrey Lacker is not happy and he's taken his grousing to the press. Lacker thinks that Bernanke should heed the market's warnings and back off while he still can.

“The distinct improvement in the economic outlook since the program was initiated suggests taking that re-evaluation quite seriously,â€