Oh oh...looks like quantitative easing won't work after all

As I've ranted on endlessly, quantitative easing (QE), a method of monetizing debt where the central bank purchases it's own government bonds, has a poor track record. QE, which the Bank of England initiated two weeks ago, and the Fed is implementing this week, has the aim of reducing long-term interest rates, in order to facilitate an economic recovery. When homeowners can obtain low-interest mortgages (which are tied to bond yields), it is stimulative to the economy. It works great in theory, but in practice, it is disastrous long-term, as QE induces unintended inflation down the road. You can't print money and not expect inflation, once it flows into the economy. So the net effect is opposite to the desired effect long-term, even if its desired positive effect (lower interest rates) is temporary.

As someone who is betting on higher rates (and lower bond prices), I figured we had at least several quarters before 10- and 30-year yields would increase again--there would be a time lag before the stimulative effects took hold. But something more insidious is in play, and something I've also warned against frequently. This reversal of long-term interest rates rising again is already happening this week.

The Chinese sovereign fund has been the largest purchaser of said US Treasury bonds for their reserves, historically. Due to their distrust of our central bank's print-and-spend policies, they are unwilling to step up their buying anymore. This reduced demand from the Chinese and other foreign central banks result in lack of participation at these bond auctions. QE is inflationary, and no one wants to hold our debt for 30 years, betting there will be no inflation in that span of 30 years. Remember: inflation is a bond killer, as it eats into the income bond yields promise. Hence, this bubble will burst also. And when it does, yields will spike up, raising our country's borrowing costs (higher rates = lower bond prices). This will make it more difficult for the US Government, the borrower of last resort, to repay their IOU's. In this scenario, a default is imminent, ushering in not the Dark Age, but squarely into the Stone Age. This is my biggest fear, and why I was totally against QE--hence, my comments about the Fed selling its soul to the devil. There is no turning back now, because if rates keep climbing up, and our borrowing costs keep increasing (along with our debt), the Fed will keep buying more US Treasuries in a vicious spiral. I also mentioned the bond vigilantes resurfacing, the small group of big bond investors who keep irresponsible central banks in check. When this irresponsibility pops up, the vigilantes drive down bond prices, driving up interest rates simultaneously. This is bad for not only bonds, but it also very bad for stocks. Equities don't like high interest rates, because it makes the low yields on stocks unattractive (remember: investors buy stocks by betting on asset appreciation, not necessarily for income. They theoretically take on more risk in exchange for reaping greater rewards on rising equity prices).

The UK had a bond auction that actually failed, as there were NO buyers. So it's not just our bonds sovereign funds worldwide are shunning; there just isn't any demand for our debt as other countries hunker down and try to repair their economies.

Bottom line: there's just too much supply of debt out there, and not enough demand from untrusting foreign bond buyers. This will lead to long-term interest rates, no matter how much intervention central banks attempt. Using QE, these central banks are just distorting interest rates short-term, but harming the long-term economic health of our economy.