Ken Rogoff explains what the real problem is here.
It is a big mistake to say the Fed is out of ammunition when short term rates are 0. The Fed can purchase anything it wants. QE1 and QE2 were simply the purchase of longer term U.S. government bonds. What Bernanke really should do is commit to QE3 for an indefinite period until we've returned prices to trend. This means, and yes I know this is scary for bond holders (but so is default), higher than 2% inflation in the short term.
Thursday, August 4, 2011
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