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March 31, 2014


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Hah! Hah! Jonathan, perhaps we should introduce this topic to the West End Gentlemen's Club!

I would pose one question to you: If the natural workings of supply and demand are leading to such low interest rates, why the need for years of quantitative easing? Why the need to push rates even lower?

Thanks, Jim! The Fed does not operate in a vacuum. It operates by buying and selling within a market. If the underlying interest rate on U.S. government securities is already low because of foreign demand, then that leaves less room for the Fed to maneuver. That's one reason why the Fed quickly hit the lower bound of a liquidity trap. That's why QE began to start buying other assets in addition to U.S. securities.

The point of all this is that even if the Fed had done nothing, interest rates in the U.S. would be much lower today than in the haydays of the 1980s when real interest rates were exorbitant. That may have been good for seniors, but horrible for everyone else! The Fed's actions have contributed to the phenomenon of lower real interest rates, but not created it. Again, the data on this is pretty conclusive and is provided by Bernanke in the attached link.

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