Yes, the long end is falling now with the short end. Bernanke has been quite effective in manipulating interest rates across the curve. I still think that these measures may prove ineffective because of the money multiplier. In essense, inflation will not show up if banks don’t lend and people hoard cash. Money velocity in that scenario decreases and the Fed ends up pushing on a string.

The true Armageddon scenario is an uncontrolled deleveraging that decreases credit and therefore brings deflation. This is the scenario I actually anticipate but fear. On the other hand, Bernanke has really reflated so much and used other methods to control the long end that inflation may be the result.

At this point I am still agnostic regarding the deflation/inflation debate. It could go either way depending on the pace of deleveraging in the financial sector.

I always used to think that the one thing the Fed couldn’t overly influence was the long end of the yield curve, which would act as a counter-balance to inflation-inducing monetary excesses. It would seem from all I’ve read in the last month that I couldn’t have been more wrong. It appears that not only can this be done, but there may actually be real buyers foolish/desperate enough to fall for it and thereby lock-in the inevitable capital loss when inflation eventually puts the lie to such manipulation. Inflation does seem the inevitable outcome, unless you could please kindly explain if/how such actions by the Fed could be successfully sterilized without meaningful cost and without inflation eventually emerging and long rates rising substantially?