"But, they can keep interest rates low, can't they?"

cfdr, I remembered your statement above as I was reading some other material this morning and ran across a link to a Bill Gross newsletter. I had already read this particular newsletter and in fact you may have also because I posted it here on Market talk a few days ago. I read it again for a couple of reasons. First, if anyone should understand the bond market it should be Bill Gross. Also I remembered it being a great article.

But the thing that stuck out in my mind as I read it was your comment about central banks being able to keep interest rates low. They can, till they can't. And Bill Gross does a very good job of explaining the dangers of the "till they can't" part.

So in case you missed it, this article by Pimco's Bill Gross explains the dangers of printing new money to atrificially keep interest rates low. At some point the market revolts, then what seemed like a problem of "just needing a little more money", rapidly transforms into something ugly.

Money for nuthin', writing checks for free.

It is easy to be lulled into thinking what they are doing today, they will always be able to do. My how quickly we have grown accustomed to throwing the word "trillions" around. I can remember when "billions' was a shocking amount of money.

John

Edit: here is a small excerpt:

"Investors and ordinary citizens might wonder then, why the fuss over the fiscal cliff and the increasing amount of debt/GDP that current deficits portend? Why the austerity push in the U.K., and why the possibly exaggerated concern by U.S. Republicans over spending and entitlements? If a country can issue debt, have its central bank buy it, and then return the interest, what’s to worry? Alfred E. Neuman for President (or House Speaker!).

Well ultimately government financing schemes such as today’s QE’s or England’s early 1700s South Sea Bubble end badly. At the time Sir Isaac Newton was asked about the apparent success of the government’s plan and he responded by saying that “I can calculate the movement of the stars but not the madness of men.”  The madness he referred to was the rather blatant acceptance by government and its citizen investors, that they had discovered the key to perpetual prosperity: “essentially costless” debt financing. The plan’s originator, Scotsman John Law, could not have conceived of helicopters like Ben Bernanke did 300 years later, but the concept was the same: writing checks for free."