An Excellent Article: The Fed and Ben Bernanke

Those interested in reading a well written article about the Fed Chairman, Ben Bernanke, and a short discussion of the history of the Federal Reserve Bank, should take a look at the Sunday New York Times Magazine from January 20, 2008. “The Decider” by Roger Lowenstein is an excellent article that I think will give almost any reader an appreciation of what the Fed does, how it does it and the man, Ben Bernanke, who leads them.

Back in the days when I was a young bond salesman, the munifax wire would ring its bells to announce the latest news from the Fed. Every Thursday afternoon the bells would ring and the figures on the money supply would be announced for the week. In the late ‘60’s and ‘70’s, money supply numbers were the big things to watch. For the bond market, a too rapid growth rate in the money supply was associated with a rise in the the rate of inflation. Inflation to the bond market and those that hold bonds in their portfolios is like kryptonite to Superman. Inflation causes interest rates to go up and when interest rates go up, bond values (prices) go down. It is an inverse relationship, one of many that I have observed in my life. However, this inverse relationship is purely mathematical.

In the second to last paragraph of his article, Lowenstein, in my opinion, gets to the nitty gritty of what we face. “The Fed faces not only the twin demons of recession and inflation but also the specter that further rate cuts would cause foreign investors -- who own more than $2 trillion of U.S. debt -- to bail out, sending U.S. interest rates soaring.”

My fellow Americans, we are truly in a world market. The political bs that is thrown around here at home holds little or no weight when it comes to the movements (buying and selling) on the stage of the world’s bond markets. This is where the rubber meets the road. What we do as a nation with our own spending and borrowing is not entirely under our own control. It is, I hope, not too late for us as a nation to revisit the amounts of spending and borrowing we do and what for.

I could write pages on this subject, but I will take a break now. Try to get your mind around the fact that we are part of a global economy and global security markets. What we do here at home in our own country effects the world bond markets and specifically the debt held in U.S. dollars. Think about that $2 trillion in U.S. debt that is out there. Stay tuned.