Bernanke explains what he is doing wrong

In his speech Governor Ben S. Bernanke observed that if inflationary expectations rise, and the Fed fails to raise interest rates correspondingly, this is unstable. He failed to make the reason for this clear, but the reason is that real interest rates are nominal interest minus expected inflation – so a rise in inflationary expectations causes a fall in real interest rates, causing massive real borrowing – as for example the housing boom and flight from money into real things, such as oil, which causes actual inflation, which increases inflationary expectations.

Which is of course exactly what has been happening. Inflationary expectations have escalated, as shown by the price of gold that international value of the US dollar, and Bernanke failed to raise interest rates correspondingly, leading to a vicious cycle, which is still under way as I post this.

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