Mailbag: "Bear Trader" writes on QE2, QE3, QE4 and much more:

I sent you my thoughts on China buying Spanish Sovereign bonds.

Those buying bond funds are buying into leverage, as you point out. There are few bond funds operating without it. I could be interested in a bond fund that uses only futures for leverage if they were used prudently. Ah, "prudently", that is the rub.

Comparing the Carter era with the present, I think the Bond Vigilantes nowadays are, on the one hand, benefiting greatly from QE2, and are making money for nothing hand over fist with it, and don't want to be cut off; on the other, nobody in USG bonds wants to cross the FED because the FED just swamps the market with QE2. There is no telling how many Treasuries the FED has bought, but it is in the $Trillions - some think that the FED has bought well over half of the Treasuries coming to market on occasion. I am sure they are targeting 30 years at 4.5% and 10 years at about 3.4% with an absolute upper limit of 4.0%.

The Primary Dealers buy the Federal paper and then immediately sell it to the FED. For some profit, of course.

This is why those in the know sometimes talk about QE3, QE4, QE5, etc., because how do you stop? Unless Happy Days Are Here Again?

This is what is known as "monetizing the debt". Historically this has always lead to massive inflation, not the Carter era variety, but the money killing kind. Bernanke is sure he can handle it, of course. Hubris. A very, very destructive guy.