Bernanke's Short-Term Plans are a Long-Term Disaster

• Is Bernanke's Plan Working?
• Three Year Treasury Yields Just Doubled
• I'm still buying gold and silver. Here's why...

I know I talked about Bernanke's 60 Minutes interview earlier this week, but it's such an important issue, that I think it needs a little closer inspection. If you have no stomach for deceit, I can't recommend watching the video. But if you're a George Orwell fan, I'm sure you'll enjoy the many double-speak references and outright distortions.

So we know that Bernanke is a liar, but what's worse is the actual things he's being truthful about. Taken on face value, Bernanke's plans simply aren't working.

In short, Bernanke's latest announcement of $600 billion of Treasury purchases is intended to lower short term interest rates, which (in theory) should spur investment and growth.

From a pragmatic viewpoint, I think it's fair to ask: has this strategy worked?

For that answer, you can take a look at the Treasury yield curve here at the Treasury's website.

If you scroll down, you can see that after Bernanke's announcement on November 2, only the shortest-term rates (the 30-day Treasuries) have gone down. Every other yield rate from 90 days out to 30 years went up.

Perhaps most notably, the three year Treasury yield nearly doubled, from 0.51% to 0.99%. Doubling your interest payments over three years doesn't seem like the wisest tradeoff - especially when you're paying for that yield by conjuring $75 billion every month out of thin air.

There's an expression that describes such short-sighted and ultimately disastrous behavior.

I'm referring to a Norwegian saying that roughly translated means, “peeing in your pants to keep warm.” It refers to an action that gives you a short-term benefit that pretty quickly turns into a disastrous long-term decision.

As the expression suggests, this short-term boost of warmth may spur growth, in the short-term. We've already seen stocks rally higher. Gold, silver and oil are up substantially as well.

I've plotted all four assets below:

To that point, Goldman-Sachs (NYSE: GS), one of the main beneficiaries of Bernanke's easy money policies, recently released their 2011 Forecast. They predict that gold, oil, and stocks will all be higher in 2011.

But we know that one day soon in the not-so-distant future, that warmth will wear off, the piper of higher interest rates will visit us, and we'll be left with frozen pants of urine.

Bernanke's $600 billion will be all used up by June of next year. Will he announce QE3 and then QE4, etc. in order to re-warm the economy with fresh urine?

It seems likely. In which case, I'm still buying gold and silver.

When and if Ben Bernanke, or some other Federal Reserve banker comes to their senses and pursues strong money policies that are good for long-term growth, and when our leaders in Washington pursue similar long-term deficit reducing policies and stop treating the dollar like a bottomless piggy bank, then I'll reconsider my position.

Until then, I'm long gold and silver.

Have a great weekend,

Kevin McElroy

Editor

Resource Prospector

disclosure: long gold and silver, no other positions