Video: Mervyn King on Twenty Years of Inflation Targeting

A very accessible, excellent talk from the Governor of the Bank of England on the past two decades of financial and central bank history, and the need to rethink the policy of inflation targeting. 

Podcast with better audio quality here.

Speaker(s): Professor Sir Mervyn King

Chair: Professor Craig Calhoun

Recorded on 9 October 2012 in Old Theatre, Old Building.

Since 2008, we have experienced the worst financial crisis and recession since the 1930's. What challenges does this pose to the intellectual foundations of monetary policy? Do we need a new approach?

Mervyn King is the Governor of the Bank of England. Before joining the Bank he was Professor of Economics at the LSE, and a founder of the Financial Markets Group.

Ben Bernanke Cannot Print a New Steve Jobs

Gold bulls rejoice, for open-ended QE is here!

Yesterday's Fed announcement wasn't the long rumored 'QE3', as a '3' implies a beginning and an end like the two prior rounds of quantitative easing.

The Fed has instead committed to not stop printing new money until the economy improves.

What then will the Fed do if the economy never improves, meaning unemployment never gets back below 5%? Will the Fed go on printing forever? We shall have to wait and see.

In the meantime anyone who believes that printing money ad infinitum will fix what ails the U.S. economy, or the global economy for that matter, is living in macroeconomic Willy Wonkaland.

Monetary policy in the form of printing new money and changing interest rates does very little if anything to improve the foundational competitiveness of an economy. The most dynamic economies are the ones which are the most productive and most innovative, and monetary policy has very little if any impact on these two areas.

The kind of GDP growth driven by purchases of products like Apple's iPhone reflects real economic growth. The kind of GDP growth derived from nominal GDP targeting (aka inflation) is fake.

In short, Ben Bernanke cannot create new real jobs. Real jobs are created by the Steve Jobs of the world.

However, it's much easier for central planners to punch a few buttons on a keyboard and print more money than to make the long-term adjustments necessary for fundamental economic improvement.

Quote of the Day: On the Megabank-Government-Central Bank Axis

Portuguese President Anibal Cavaco Silva is calling for the ECB to go beyond just being a lender of last resort to banks and to become one for his and other European governments. Specifically, he's calling on the ECB to make "unlimited" purchases of EU sovereign debt. This may be the first time one of Europe's leaders has publicly asked the ECB to take this step.

Would such a move by the ECB be a sound one? From a recent editorial in the FT:

"If governments stand behind banks and banks stand behind governments and the central bank lends freely to both and also underwrites financial markets, then financial asset prices become completely detached from economic reality. In this “system”, the central bank implementing more quantitative easing is no different, in economic terms, from Bernie Madoff marking up his client accounts every month."

From 'Circular commitments lead to a Ponzi economy'.

More on the distinction between what is meant by being a lender of last resort to banks versus the governments here and why lender of last resort to sovereign countries is the proper role for the IMF.

Video: Jim Rogers on Greek Default, Operation Twist, SNB Intervention & Why He's Shorting Equities

Rogers on how "Bernanke has been lying to us again" and other thoughts on what's happening right now and where he's investing.

Video: Raise the Debt Ceiling Rap

A little late to spot this one, but it's well done and will be relevant again in a few months time when the debt ceiling vote comes up again.

Gold Price: Full Steam Ahead to $2,000/oz.

Over a year ago, on May 6, 2010, this blog launched with a first post on the attractiveness of gold as an investment. On that day the price of gold was just under $1200/oz, and as it became clear that the Federal Reserve was about to embark on another large round of money printing, which later came to be known as QE2, I felt compelled to grab the keyboard and start typing (see articles tagged 'Gold' both here and on SeekingAlpha for further reference).

During this time it has been amusing to watch the professional punditry drone on about a  "gold bubble" and observe various blogger bets about how gold's run couldn't last. The biggest amusement of all, however, has been the disparaging remarks from those such as Berkshire Hathaway's Charlie Munger, who belongs to a group I've taken to calling the 'gold haters'.

Suggestions from credible policymakers, such as the World Bank's Robert Zoellick advocating a return to the gold standard, have lit a fire under the barbarous relic's price this past year. Today, with gold pressing above $1700, or nearly 50% higher in just over a year, I can't help but comment on how we've heard nary a peep of late from the anti-gold crowd.

Where to from here? As long as three key fundamental forces persist then the rise in the price of gold will continue unabated. Those forces are:

1. Low interest rates, a hallmark of the current program of financial repression, which is only just getting started and should extend for many years to come.
2. Continued central bank purchases of gold by countries such as South Korea, Thailand, Russia, etc.
3. More money printing, which we've seen in spades of late with Italian and Spanish bond buying, Bank of Japan and Swiss National Bank currency intervention, and the Fed's rumored QE3.

Continue reading the full article at SeekingAlpha here.

What's the Difference Between 'Financial Repression' and 'Macroprudential Regulation'?

Axel Weber and German Chancellor Angela Merkel

The most striking remarks made by former Bundesbank Chief and ECB frontrunner Axel Weber in a recent WSJ interview were his comments on the possibility of using financial repression to solve the Greek and wider European debt crisis:

“Ultimately, there will be a debate about financial repression. Take what we had in Germany — the Zwangsanleihe [compulsory loans introduced after World War I to help make reparation payments]. If voluntary contributions don’t add up, then the one tool that is still on the shelf is financial repression.”

To my knowledge, this is the first time a major senior policymaker (albeit one who recently stepped down) has publicly used the term 'financial repression'. As economist Carmen Reinhart and others have noted, the policies associated with financial repression are typically couched under the more benign, positive sounding 'macroprudential regulation'.

Update: News today emerged that Weber will become Chairman of Swiss megabank UBS, which perhaps explains the reasoning behind his choice of words.

Economic Newspeak

The term 'financial repression' was first coined in 1973 by two Stanford economists, and the word choice was intended to disparage developing economies which enacted what were deemed to be anti-competitive (and hence anti-growth) policies. In other words, the term 'financial repression' was invented with negative connotations in mind.

Can the contrast between 'financial repression' and 'macroprudential regulation' be viewed along the same lines as the difference between 'quantitative easing' and 'printing money'? The two monetary terms can mean approximately the same thing, although those who oppose Fed policies, like QE2, tend to embrace the use of the latter, which is arguably both more provocative and transparent to a broader audience.

This blog has in the past been highly critical of other examples of opaque, economic 'newspeak', such as Yale Professor Robert Shiller's argument that terms like 'bailout' should be replaced with ‘orderly resolution’ so that the voting public 'gets it'.

Quote of the Day: Jim Rogers On Why He's Long Cotton

From legendary investor Jim Rogers:

“Paper money is made of cotton, and I’m long cotton, by the way,” Rogers said. “One reason I’m long cotton is because Dr. Bernanke is out there running the printing presses as fast as he can.”

More from Rogers, including his thoughts on gold, can be found here.

Video: The Daily Show on Printing Money

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
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Federal Reserve Public Relations in the YouTube Age

The Federal Reserve and its policy of quantitative easing (aka printing money) both have serious image problems. Significant controversy and disagreement has been generated recently by the Fed's QE2 program, resulting in an ongoing communications battle between the Fed's advocates and critics.

This amusing cartoon video, which 'explains' quantitative easing and the current economic situation in a rather simplified (and in some instances erroneous) fashion, has already generated nearly 3 millions views on YouTube. The video's appeal is undeniable: we were all children once upon a time and are practically hardwired to trust cute, entertaining cartoon characters.

Meanwhile the Federal Reserve is hardly sitting idly by. Its New York branch has taken a slightly more high-brow approach with this comic book, a medium typically reserved for pre-teens and up. Like the cartoon, the comic book attempts to explain how the Federal Reserve system and monetary policy work to someone unfamiliar with macroeconomics.

The comic book builds on Ben Bernanke's 60 Minutes television interview and Washington Post QE2 op-ed in that both reflect the Fed's understanding that it needs to engage in more public outreach. The historically secretive Fed correctly recognizes that business as usual won't work anymore.

The comic book also demonstrates the Fed's understanding that to get its message across it will need to employ a media strategy that goes beyond its usual menu of press releases, speeches, and well-timed leaks to news reporters like the WSJ's John Hilsenranth.

But how effective are the Fed's new openness and media strategy?And at what point does the Fed's communication cross the propaganda line?

Some, including influential Yale Professor Robert Schiller, argue that government policies should be purposely shrouded in what is effectively 'Newspeak'. For example, Schiller makes the case that "bailouts" should now be called "orderly resolutions". This framing, Schiller states, can help to ensure that the public 'gets it' when the economic going gets tough.

Perhaps more so than at any other point in its history, the Federal Reserve is under the public spotlight. Discussion of putting an end to the Fed's dual mandate of price stability and full employment is openly being considered.

Whether or not the Fed's mandate should or will change is an open question. However, it appears unlikely that Fed secrecy, as it has been historically been practiced, will survive.

Is Economic Propaganda Ethical?

Ever wondered why government officials use fancy sounding terms like 'quantitative easing' instead of the much easier to understand 'printing money' when they both effectively mean the same thing?

Yale Professor Rober Shiller, who correctly predicted the housing market crash, weighs in on this topic with a piece in this weekend's NY Times. In the article he describes how to handle the inevitable next financial crisis.

His rather surprising answer?  By using the right vocab.

In what so far as I can tell is a first by an esteemed member of the academic community, Schiller goes on public record rationalizing the use of propaganda by government officials.

Shiller states:

"in times of crisis...confidence (expressed by the government) is also vital, even if government can’t absolutely guarantee that it’s justified...for people who don’t fully understand the financial system’s complexities "

In other words, Shiller is making the argument that it's not only ok, but advisable for the government to be less than frank with voters. During a financial crisis, Shiller argues, this lack of candor is actually in the public's own good.

Putting aside the subject of the ethical responsibilities of public officials for a moment, the first question is would Shiller's recommendation even work?

To help answer that question we can turn to a recent example from early 2008, prior to the apex of the financial crisis. On March 28, 2008, Fed Chairman Ben Bernanke, testifying before Congress about the housing market, made the now infamous false assurance that the subprime real estate crisis was "contained".

There are two possibilities here: either a) the Fed Chairman honestly believed that the Fed's actions had magically put the breaks on the real estate meltdown; or b) he was consciously using propaganda to reassure people, as Shiller advocates.

Regardless of which of these two possibilites is correct, what we do know is that his reassurances did absolutely nothing to prevent the financial crisis, which hit full force later that year in September. Perhaps Bernanke's comment postponed the crisis, but postponement may in fact have made it worse by allowing the problem to further fester under a blanket of false Fed confidence.

Are 'bailouts' and 'printing money' hopelessly beyond the general public's understanding, as Shiller believes? And instead of coming up with the proper vocab, shouldn't officials and financial experts be working on how to prevent the next financial crisis?

Video: Why Printing Money is referred to as 'Quantitative Easing'

Has Federal Reserve Secrecy Become Untenable?

The most interesting aspect of the Fed's new 'quantitative easing' announcement (aka QE2 ) was not its $600,000,000,000 price tag.

Nor Fed Chairman Ben Bernanke's op-ed in the Washington Post which stated that a key benefit of QE2 is higher stock prices.

I believe the most interesting, and perhaps significant, questions relate to the impact on the Fed's ability to maintain secrecy in wake of the unprecedented media coverage of QE2.

A Well Telegraphed Event

Regular Fed watchers of course know that an oft used Fed strategy is to communicate upcoming policy shifts through speeches and leaks to the press well in advance of the actual vote and formal policy change announcement. The Fed's thinking here is that this strategy provides time for market participants to acclimate to an upcoming policy change, thereby avoiding a sudden (and perhaps unwelcome) monetary surprise.

Anyone following the general financial press was probably aware no later than September that QE2 was going to be announced at the November Fed meeting. Media coverage of QE2, including my first writeup, began appearing as early as June.

Music Video: Quantitative Easin'

Bill Gross: Run Turkey, Run

Bill Gross, PIMCO

A must read from the 'Bond King' which covers:

• Next Wed's Quantitative Easing II (QE2), which instead of labeling as 'printing money' Gross refers to as 'writing checks'
• The U.S.'s broken political system and his recommendation on what to do about it
• What investors can expect going forward

Bank of Japan Intervention: What Happened Last Time? What's Next?

On Tuesday the yen traded at ¥82.88 yen per dollar, its highest level since May 1995. As predicted the Japanese government decided it had seen enough and instructed the Bank of Japan (BOJ) to 'intervene in the currency market' (aka print money). This caused the yen to quickly fall back to ¥85 per U.S. dollar level.

The BOJ also confirmed that its intervention -- reported to be in the ¥300-¥500 billion range ($3.61-$6.02 billion) -- will go unsterilized, which means that the BOJ will not seek to withdraw the new yen it has 'printed'.

Currency Traders Now Have an ¥82 Yen Bullseye

Via Bloomberg, Japan’s Chief Cabinet Secretary Yoshito Sengoku communicated two very important pieces of information:

1. ¥82 yen per dollar is "the line of defense to prevent currency strength from harming the economy"
2. "The government is seeking to gain the understanding of the U.S. and Europe for the intervention"

We now know the Japanese government's pain point (¥82 yen per dollar). Providing the market with an exact target -- not unprecedented for Japan (see below) -- could prove to be a mistake.

We can also infer from the "seeking to gain the understanding" comment that the BOJ's intervention was not only uncoordinated, but also without the consent of other central banks. It would be surprising if the Fed and ECB signed off on the BOJ's intervention. Europe, the U.S. and other nations are mired in a slow recovery and seeking export led growth. Japan's currency intervention makes U.S. and European goods more expensive in Japan.

What Happened Last Time the BOJ Intervened?

It was six years ago when the Bank of Japan last intervened in the currency market. In 15 months through March 2004, the BOJ sold ¥35 trillion yen ($421.7 billion) for dollars. What was the BOJ trying to accomplish? As noted back then Economy Trade and Industry Minister Takeo Hiranuma said "a dollar at ¥115.00 is the ultimate life-and-death line for Japanese exporters".

Two comments:

Today's Feast for Bears

Stock market bears were handed ample fodder today:

• Comments from Nobel Prize winning economist Joseph Stiglitz on how Europe is at risk of a "double dip" recession due to ill-timed government budget cuts. Professor Stiglitz  has been supposedly advising Greek officials nearly every day since their debt crisis erupted this spring -- ignore this insider's words at your own risk.
• The safe haven Japanese yen rallied to a 15-year high versus the U.S. dollar at 83.59, well beyond the psychologically important 85 level. The yen also hit a nine-year high versus the euro at 105.43. If the yen appreciates further towards 80 vs. the Dollar, the Bank of Japan will probably be forced to intervene with or (more likely) without G7 coordinated action. 
• While the yen is rallying the Japanese stocks are in a bear market, with the Nikkei down over 20% and under the psychologically important 9,000 level.
• Another safe haven currency, the Swiss franc, just rallied to an all-time high against the euro at 1.30 as once again it appears money is flowing out of the EU and into Switzerland.
• Unless you've been hiding under a rock today -- understandable if you've got a lot of equity tied up in the value of your home -- you probably already saw that July home sales figures were abysmal and indicate room for a much further decline in housing prices. Further significant declines in housing -- some estimating another 10-30% down -- may trigger a significant increase in strategic defaults.
• Money continues to pour into bonds as the yield on the U.S. 10-year note punched all the way up to 2.47%, the lowest level since the stock market was pricing in financial armageddon in March 2009.

What does this all mean?

Why QE2 Won't Be Announced at Tuesday's Fed Meeting

Amid rampant discussion of further 'quantitative easing' the market's eyes will be fixed on the Federal Reserve when it meets on Tuesday this week.

In understanding why it is unlikely for 'QE2', as it is being dubbed, to be announced at this week's meeting it is helpful to briefly review the Fed's history and the political environment in which it operates.

Argument for Fed Independence

One of the key justifications for the creation of the Federal Reserve was to "keep politics out of monetary policy". In the Federal Reserve Act passed on December 23, 1913 Congress delegated its Constitutional authority over the nation's money supply ("to coin money, regulate the value thereof") to the newly created Federal Reserve System.

The Fed is free to make independent monetary policy decisions -- such as shrinking or expanding the money supply -- without the prior approval of Congress or the President. The logic behind thus empowering the Fed is that the nation is better off with its monetary policy entrusted to an institution that -- unlike Congress and the President -- is not directly accountable to the voting public. (Not exactly a strong vote of confidence in democracy!)

The theoretical problem with allowing elected politicians to directly control monetary policy can be illustrated through the following hypothetical example of a politician seeking reelection:

A politician might deem it advantageous to his reelection chances if there were a well-timed increase in the money supply. The reason? An increase in the money supply can (and often does) boost asset values (i.e., stocks, housing prices). A stock market rally -- prior to an election -- can in turn boost voter confidence. And more confident voters are less inclined to throw an incumbent politician out of office. While economic conditions may in fact make an increase in the money supply imprudent due to the post-election side effects (e.g., housing price crash), a politician's motivation to get reelected may trump economic logic. 

U.S. President Andrew Jackson vs. the Bankers

The above example can also be turned around to show how it can be politically advantageous to decrease the money supply. For example, in 1833 a reduction in the money supply was orchestrated in an attempt to cause President Andrew Jackson to lose reelection.

In theory, the Fed -- by virtue of its inoculation from public elections -- can base its monetary decisions (e.g., whether to shrink or increase the money supply) on the true economic conditions, and not the election calendar.

However, the Fed is not immune from politics. In fact, Fed Board members have their own mini-election gauntlet to run. To be elected to the Fed Board a person must be nominated by the President and confirmed by the Senate. And that final step, as recent events bear witness, is proving problematic.

Senate Stonewalling Fed Appointments?

In April of this year President Obama announced nominations for the three Fed Board openings and so far none have been approved by the Senate. In fact, the last time the Federal Reserve Board had all seven positions filled was back on April 28, 2006.

On Friday came news that Senator Richard Shelby (Republican, Alabama) had rejected President Obama's nomination of Peter Diamond for the Federal Reserve Board stating "it is not clear...that his background is ideally suited for monetary policy, especially given the current challenges facing the Fed".

Of note, Diamond is considered an inflation 'dove' and close Ben Bernanke monetary policy ally. Interestingly, Diamond was also one of MIT professors a then 25-year-old Bernanke thanked for supporting his doctoral dissertation. One perhaps not so outlandish interpretation of Shelby's move is that Republicans are trying to keep the Fed paralyzed.

Diamond's appointment would help Bernanke with what has proven to be a publicly divided Fed. In the face of significant Fed Board dissent, Bernanke's consensus orientation will make him reluctant to activate QE2.

Republicans Want QE2 Postponed Until After November Elections

I've written previously about Chairman Bernanke's well documented plan for dealing with the present challenge of deflation. Put simply, his plan is to print a lot of money.

The announcement of QE2 would likely trigger a rise in stock prices. An autumn stock market rally -- in addition to signaling that the 'Bernanke Put' is every bit as solid as the 'Greenspan Put' -- could be a reelection boon for a Democratic incumbent majority that is in deep trouble.

Shelby's rejection of Diamond delays his appointment at least until Congress returns from recess in mid-September (Obama's other two Fed nominees are on ice until then as well). Don't be surprised to see the Republicans stall further until after November elections. As such, investors timing an imminent announcement of QE2 are likely to be disappointed.

The Fed's Balance Sheet: More Room to Grow?

There is a lot of speculation and debate about what will happen to the Fed's balance sheet going forward. Recently St. Louis Fed President and FOMC voting member Jim Bullard has called to expand it further. Tonight the WSJ reports that the Fed is contemplating using the "cash the Fed receives when its mortgage-bond holdings mature to buy new mortgage or Treasury bonds, instead of allowing its portfolio to shrink gradually". This idea has been dubbed 'QE lite', as opposed to full 'QE2'.

Sometimes a good graphic really helps to put things in perspective. Courtesy of the WSJ's Real Time Economics blog is this interactive Federal Reserve assets chart.

The chart headline refers to the Fed's "balance sheet". But in small print you read that it is actually charting just the Fed's assets. The full Fed balance sheet would also include liabilities, which are not shown. (If you're curious about what the Fed's liabilities are comprised of take a look at the green paper in your wallet or purse, and you can learn more here and here.)

Why are the Federal Reserve's assets important? Simply put, the Fed's assets equal the money printed by the Fed. In other words, for an asset like a U.S. Treasury bill to wind up on the Fed's balance sheet it must be purchased by the Fed. And the money to purchase that Treasury bill is created (printed) by the Fed. Welcome to the only place in America where in fact money grows on trees!

Looking at the chart two things jump out:

1. The parabolic 'hockey stick' curve. Fed assets shot upwards from roughly $800 billion pre-financial crisis in 2007 to today's $2.3 trillion.
2. The increase in the different types of assets held on the balance sheet

Prior to the crisis the Fed's balance sheet was pretty simple: basically $800 billion in U.S. treasury securities. Now it contains everything from former AIG and Bear Stearns junk assets, to loans to other government's central banks, to who knows what until the one-time Fed audit is completed (see below video).

Looking at the value of the U.S. Dollar and U.S. government debt, so far the market's reaction to the the tripling in size of the Fed's balance sheet has been relatively benign. But can present values be sustained through another round of Fed "quantitative easing"?

Federal Reserve Continues March Down the Primrose Path

Federal Reserve Chairman Ben Bernanke and his army of monetary economists have now had four months to observe the lay-of-the-economic land since winding down their massive $1.2 trillion in mortgage bond purchases.

How do things look? Based on the Chairman's recent comments, not good.

Peer Pressure, Washington Style

When the economic going gets tough and then stays tough for a protracted period there is one institution politicians can be counted on to turn towards for help, and that institution is the nation's central bank.

In the U.S. this political pressure typically involves congressman, and presidents, banging on about how the Fed needs to 'do something'. These politicians, often facing an upcoming election, are making noise so that if monetary surgery fails to deliver a cure (economic growth) it will at lease provide the scapegoat (the central bank).

With the U.S. Congress currently facing historic low popularity and re-election right around the corner, mild-mannered Ben Bernanke is feeling the heat of D.C.'s boiler room. Case in point, Senator Jim Bunning pressed the Chairman during recent testimony on whether he was "out of bullets?", to which Bernanke replied "well, I don't think so." 

What 'bullets' are Jim and Ben referring to?

The Mother of All Bullets

To answer the above question we have the luxury of being able to refer back to the verbatim text of a speech Ben Bernanke delivered in 2002 titled Deflation: Making Sure "It" Doesn't Happen Here (which I've written about previously). 

The economic problem du jour just so happens to be deflation. In the speech, Bernanke outlines detailed steps the Fed could take to combat deflation, which is basically a widespread decline in prices. The last time the U.S. experienced this was during the Great Depression, an area of economic history which Dr. Bernanke is considered to be one of the pre-eminent experts. 

Bernanke's most oft-quoted line from his 2002 speech: "the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost."

Put simply, Dr. Bernanke's deflation prescription is to print a 'ton-o-money'. 

How much money? Given that the nearly $2 trillion printed since the inception of the 2008 financial crisis hasn't created significant inflation concerns, estimates as high as an additional $5 trillion may not be beyond consideration.

QE2: No Longer a Question of If, But When

On Thursday St. Louis Fed President and FOMC voting member Jim Bullard wrote that the U.S. is at risk of Japanese-style deflation and that it should be actively combated by engaging in "quantitative easing" (aka printing money) through Fed purchases of U.S. Treasuries. Bullard had beenconsidered until now one of the Fed's principal 'inflation hawks'.

One interpretation of Bullard's comments is that the Fed is laying the groundwork for 'QE2', the shorthand label which has attached itself to the Fed's latest scheme.

Market Timing QE2

With QE2 fully baked when precisely will it begin?

November congressional midterm elections are a bit of an x-factor for the Fed. Like his predecessor, Bernanke is a Republican. And, again like Greenspan, he was reappointed by a Democratic President. I suspect that, barring another major crisis in the interim, Bernanke & Co. would prefer for QE2 be perceived as apolitical. Consequently, the Fed will likely wait to crank up the printing press until after midterms.

In terms of QE2's implementation, expect an iterative print, evaluate, and then decide to print some more type process. The Fed would probably prefer to trickle QE2 out over an extended period, ala the Bank of England's approach. But, as Bullard suggests, a sudden and rapid deterioration in confidence may force the Fed to go the 'shock and awe' route.

Meanwhile, In Government Debt La-La Land...

In contemplating a new $5 trillion money printing program a reasonable person might be inclined to ask the following question: "if the Fed keeps printing money to buy government bonds, doesn't that potentially create a problem for maintaining the value of the U.S. dollar?"

Uh, yeah.

The prospect of QE2 may be currently driving U.S. Treasuries to rally even further into nose bleed territory as the market contemplates the supply of government debt being squeezed by the Fed even further. And if the Fed doesn't activate QE2 then deflation (or disinflation) could continue to make U.S. Treasuries attractive to investors. So on the surface U.S. Treasuries may at present appear like a win-win trade.

Having said that, printing money at these levels represents a massive and unprecedented financial experiment. Our policy leadership has now guided us into uncharted economic territory and there really is no telling for sure just what will happen.

Nassim Taleb, for one, is calling government debt "the next black swan." In a recent interview he even went so far as to call government debt "a pure Ponzi scheme".

There are several ETF options available for those looking to hedge or play U.S. Treasuries. And if the prospect of massive money printing has you concerned about the future of paper money, then you may want to consider precious metals like gold.