Business

No free lunch for Bernanke

There’s no such thing as a free lunch, not even for Fed Chairman Ben Bernanke.

Even as Bernanke prepares to roll out Quantitative Easing 3.0 later this week, as we approach five years of economic turmoil, several of the most astute observers of the bond market are sounding warnings that would send chills down the spine of anyone who has watched the Japanese economy over the past 23 years.

Sure, as interest rates on Uncle Sam’s obligations fell to all-time lows last week, there was celebration among the spendthrifts, and stocks rallied back to their May highs.

Economist Paul Krugman could barely contain his exuberance on Friday — declaring the advent of rock-bottom rates as “money for nothing.”

This supposedly auspicious event should let the US government spend with abandon as far as the eye can see. If borrowing costs nothing, why not borrow more? Or so the thinking goes.

Trouble is, Mom was correct. Nothing in this world is really free.

As fund manager John Hussman eloquently explains in his latest investor letter, we should be scared to death of “money for nothing,” given the fact that once you strip out compensation for default risk (that’s the price investors are demanding in Spain, for example), interest rates basically reflect the value of time.

“What interest rates are telling you, what the Federal Reserve is telling you . . . is that time is economically worthless and that economic malaise will extend for years,” Hussman wrote.

As interest-rate guru Jim Grant puts it in his latest newsletter, “safety is in a bubble.” Professor Ben obviously knows this, yet he continues to string out the same policies he has for five straight years.

As the folks at Hoisington Management — the best interest-rate soothsayers in the land — point out: “It is often said that economic conditions would have been much worse if the government had not run massive budget deficits and the Fed had not implemented extraordinary policies. This whole premise is wrong. In all likelihood, the governmental measures made conditions worse.” A 10-year bond yield of 1.4 percent is the best endorsement of their thinking.

Let’s hope Bernanke and his merry band of bankers consider these warnings when they blow out the five candles on their “economic recovery cake.”

terrykkeenan@gmail.com