MISUNDERSTANDING THE MONETARY SYSTEM IS BAD FOR YOUR PORTFOLIO

"I’ve been incredibly vocal over the last year about QE2 and its likely impact on the US economy and US government bond market. Time and time again I have said that the policy was largely a waste of time and effort and unlikely to have any real substantive effect on the economy (see here and here). The policy was flawed primarily due to one rather simple mistake – it focused on size and not price. This resulted in no real transmission mechanism through which it could impact the economy and failed to control interest rates.

Most investors did not believe this perspective and maintained that QE2 would not only cause surging inflation, but would also cause US government bond yields to surge when the program ended. This was primarily due to the many myths that have persisted surrounding QE2. These were the myths of “debt monetization“, “money printing” and “stimulus”. These are nothing more than common misunderstandings, but investors who listened to these myths failed to assess how QE2 would impact the asset it targeted – US government bonds. None of these misinterpretations was more famous than Bill Gross who incorrectly analyzed QE1, but also misunderstood QE2. Yesterday, the WSJ discussed the investment performance of the PIMCO Total Return Fund as a result of this analysis:..."

at http://pragcap.com/misunderstanding-the-monetary-system-is-bad-for-your-portfolio