I’m not talking about the latest romantic comedy or action movie. I’m talking about the reviews of the Federal Reserve’s quantitative easing, or “QE2,” program! Get a load of these comments …

• From the central bank president of Brazil, Henrique Meirelles: “Excess liquidity” resulting from QE2 is creating “risks for everyone” …

• From the vice foreign minister of China, Cui Tiankai: “Many countries are worried about the impact of the policy on their economies. It would be appropriate for someone to step forward and give us an explanation” …

• From the finance minister of Germany, Wolfgang Schäuble: “It’s our problem as well if the U.S. is no longer certain that the old recipes don’t work anymore.” Schäuble then delivered the coup de grâce, calling Bernanke’s gambit “clueless” …

• Jean-Claude Juncker of Luxembourg, the leader of a panel of euro-zone finance ministers, seconded the condemnation. He said: “I see more risks and possibilities of global excesses in the decisions that have been made by the Fed than benefits.”

So there you have it. Bernanke’s QE2 plan is about as popular as New Coke. It makes the movie Ishtar look like Casablanca. And despite multiple Fed and Treasury efforts to talk QE2 up, foreign leaders are having none of it.

This international war of words is all part of what I’m calling “The Great Global Money War of 2010-2012.” We’re seeing a complete breakdown of international cooperation on monetary and fiscal policy. Countries are going their separate ways, with dramatic impacts for the capital markets.

The Bond Market Gives Bernanke

the Thumbs Down Too!

Is it all just talk? A bunch of politicians whining about the Fed’s actions, but the markets ignoring them? Hardly. The bond market’s verdict on QE2 couldn’t be more clear — it’s a 100 percent universal rejection!

The Fed claimed its moves would drive down long-term interest rates. Heck, Ben Bernanke wrote a highly unusual op-ed in The Washington Post defending his move. He claimed that long-term interest rates fell when the QE2 talk began bubbling up.

Bond yields have zoomed higher. A clear rejection of the Fed’s actions.

My response: Really? Is Bernanke looking at the same quotes I am?

Because my screens show that the yield on the 30-year Treasury bond has shot UP by 75 basis points since late August, when the Fed started hinting at QE2 in earnest. That’s a rise of more than 21 percent — the biggest, multi-month surge in long-term rates in a year!

Then Tuesday, an auction of 10-year Treasury Notes bombed. Uncle Sam tried to sell $24 billion of Treasuries, but the “bid-to-cover ratio” came in at just 2.8. That means there were just $2.80 in bids for every $1 in notes being sold, the worst reading since February.

Result: A massive, one-day rise of 11 basis points in the 30-year bond yield.

Wednesday was even worse … the government dumped $16 billion in 30-year Treasuries on the market, and buyers were having none of it. The auction’s bid-to-cover ratio was the worst in a year, causing yet ANOTHER surge in yields.

Bernanke: What Me Worry?

Things are so bad that this week, China — yes, China — downgraded its U.S. credit rating. China’s answer to Moody’s and S&P, Dagong Global Credit Rating Co., cut its sovereign debt rating for the U.S. to A+ from AA.

It cited the detrimental effects of the QE2 plan and the U.S.’s sizable debt load. China owned $868 billion of Treasuries as of August, the most of any foreign creditor.

But over in Fed-land, it’s business as usual …

Bernanke told a crowd of college students in Jacksonville, Florida this past weekend that everything was hunky dory. He said it doesn’t matter what foreign countries think because “our first objective, the first goal that we have, is to meet our mandate to get price stability and maximum employment in the United States.”

The Fed chairman wants to repeat a strategy that has a history of failure.

He waved off questions about the surge in commodities, saying they won’t cause broad inflation because they are just “one exception” in an otherwise anti-inflationary environment. And the gigantic surge in gold prices? Also, no worries. The Fed has “the tools to unwind and tighten policy at the appropriate time.”

My take? Men may be from Mars. Women may be from Venus. But Fed Chairman Ben Bernanke is clearly living on Pluto!

Look, the difference between the QE2 view in Washington — and the view in virtually every other capital city on the planet — couldn’t be more stark …

Bernanke wants to throw more easy money at the economy, even though that strategy has led to two massive bubbles and busts. Foreign central bankers are shaking their heads in response and protesting ever more vigorously.

I expect to see the global money war escalate in response. So now could be a good time for you to consider raising more cash and taking some profits in case this gets even uglier than it already has.

Until next time,

Mike

P.S. In last night’s episode of Money and Markets TV, I took part in three round tables where we broke down what’s already been a momentous month in America. If you missed that show or would like to see it again at your convenience — it is now available at www.weissmoneynetwork.com.

Nov. 12, 2010

www.moneyandmarkets.com/bernanke-qe2-program-backfiring-global-money-war-intensifying-40765