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Ben's Toxic Legacy

What sort of an economy will Bernanke leave when he exits the Fed...?

THE SPECULATION is that it is doubtful Bernanke will decide to extend his stay as head of the Federal Reserve for a third term at the time his current term finishes at the end of the year, writes George Leong of Investment Contrarians.

While Bernanke has helped to save the economy from a deeper recession, he has also created a climate of easy money and massive debt loads that pose their own risks.

What we know is that the economy has recovered under Bernanke's easy monetary policy.

He has helped to save the big banks, and he will be rewarded by Wall Street, which I will discuss later.

The availability of record-low interest rates by the Federal Reserve has helped to drive up the demand for mortgages and loans. The result has been a marked recovery in the housing market and consumer spending.

Of course, the problem is that the personal debt loads have surged. Recall what happened when the 30-year mortgage rates edged higher in recent weeks on speculation that the Federal Reserve would cut its bond buying at its June meeting: the stock market took a beating as capital shifted into gold and cash.

Loans to companies have been surging. There were $1.53 trillion in commercial and industrial loans in the first quarter by US banks, up 12% year-over-year. (Source: McLaughlin, T., "Surge in US commercial lending raises bubble worries," Reuters, June 10, 2013.) The amount of lending is a concern given the vulnerability to higher interest rates down the line—thanks to the Federal Reserve.

As interest rates begin to edge higher, we will likely see a drag on the housing market followed by a potential bubble, especially with the massive debt loads.

So, while Bernanke finishes off his final six months, there will be many uncertainties and questions in his wake. He will have left an economy on the mend, but the price will be high.

At the forefront of these high costs will be the massive national debt that has been built up. The problem will be the significant interest payments when rates begin to ratchet higher, which will happen as the Federal Reserve takes its foot off the money-printing pedal.

The sequestration will also mean more cuts down the road, which means less fiscal spending on government programs such as Medicare, employment, and social benefits for those in need. The end result will be the continued growth of the gap between the haves and the have-nots.

Bernanke will likely move on to better things after the Federal Reserve; in fact, I'm pretty sure Wall Street already has a lucrative job and corner office ready for Bernanke for when he chooses to leave his current post.

Investment Contrarians is a free financial e-letter whose editors believe the US stock market and the economy have been propped up since 2009 by artificially low interest rates, never-ending government borrowing and an unprecedented expansion in the money supply. They question 'official' unemployment and inflation numbers and argue that rapid inflation caused by huge government debt and money printing will see interest rates, which have seen a quarter-of-a-century of falls, begin a new upwards cycle.

See full archive of Investment Contrarians.

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