Montreal, Canada

The Federal Reserve’s second round of QE, or quantitative easing, came as no surprise to the markets last week following weeks of anticipation. The Fed, or “Bubble Ben” as my friend and colleague, Karim Rahemtulla, likes to call the Fed Chairman, will grow its already bloated balance sheet by another $600 billion dollars from now until next June in order to influence already low U.S. interest rates.

Bond markets thereafter declined sharply on Friday, as news of QE 2 is now “baked into the cake.” The long end of the curve, primarily the 30-year Treasury bond, suffered deep losses on November 5th. Over the past month the yield on the 30-year T-bond – the most sensitive to inflation expectations – has climbed more than 40 basis points to 4.12%.

Is QE III next? When will this nonsense stop? And, when it does end, what will happen to the financial markets? I doubt investors will rejoice when the Fed finally ends this QE escapade.

So here we go again. In its effort to keep the economy humming, even at a subpar rate, the Fed will once again engineer another round of money printing. The odd thing about this exercise in desperately trying to expand monetary aggregates and boost the demand for credit, is that short-term and long-term interest rates in the United States are already at or near record lows.

Just what does the Fed expect to gain from another round of government bond purchases? The demand for credit — though off its multi-decade lows — is still anemic and probably won’t muster a strong recovery any time soon in the age of debt deleveraging and the ongoing bear market in mortgage financing.

For example, 30-year mortgage rates recently hit their lowest rates since that measure was introduced in the early 1970s. Another $600 billion dollars just won’t help at this point.

We really have no idea what occurs behind closed doors at the Fed. Its gargantuan and seemingly frightening unorthodox monetary operations should eventually grant its final wish – that awfully dangerous monetary phenomenon called inflation. The Fed wants to grow inflation at all costs because its arch enemy, deflation, is much harder to control. And inflation it will get. This is painfully obvious at this point, with the cost of U.S. money ridiculously cheap.

Gold prices are now at the gates of a super-spike series of moves since September. I suspect investors have lost patience with most central banks, mainly the Fed, as the global exchange rate system dies a slow death. Alas, a new monetary order will be born and gold should figure prominently in that new unit along with surplus currencies like China and Brazil and other important raw materials.

We can thank Bubble Ben as the day of reckoning grows closer for the U.S. dollar and Treasury.