Be warned Ben....
The BOE executed their first "QE" operation today.
The "bid to cover" was an astonishing 7.35.
This means that for every bond purchased 7.35 were tendered, or made available by willing sellers.
Back in January I posted a Ticker in which I made clear what was likely to happen if Bernanke actually attempted to do (as opposed to threatening) QE:
Bernanke bluffed and the bond market called it. He cannot monetize several trillion in new issue plus the entirety of the 10 and 30 year bonds out there to stop a bond market sell-off. In addition, the market no longer believes him, as evidenced by today's price action. A serious bond-market sell-off will ramp the cost of all credit, including mortgages and commercial loans. If he tries to monetize the result will be current bondholders tendering into his buying, forcing him to essentially "consume" the entire float. That stunt will cause the dollar to implode and we wind up exactly like Iceland. Overnight. Ben knows this; ergo, he is screaming like a petulant child while the market laughs at him just like the market forced Paulson to do what he said he wouldn't with Fannie and Freddie. Bernanke had better shut the hell up before he precipitates a bond market dislocation; traders can and will try to force him to make good on the threat.
Ding. The BOE now has seen exactly what happens when you promise as a government to overpay for something - everyone hits your bid immediately!
This is a form of crack that the government cannot afford to loose into the market - as soon as the buying pressure is removed rates will start to rise again, forcing yet another purchase.
Ultimately The Fed winds up owning all of its own government's bonds, having destroyed the private capital market for sovereign debt (just as it has done for other securitized debt by threatening to overpay for those issues!)
The difference is that if this happens for sovereign debt then deficit spending becomes impossible on an instant basis; this would in turn force a nearly 75% contraction of government spending.
The outcome of this event would be the immediate destruction of Social Security, Medicare, half the military budget and half of all other government programs.
PS: Bernanke knows this, which is why it hasn't happened yet. Let's hope he continues to remember it, because the destruction of our government is very, very un-funny, and this would likely precipiate exactly that in a "vast and fast" form.