The Federal Reserve has announced “Operation Twist,” which saw the U.S. central bank shift from the short end of the curve into the long end.

The idea is that short-term rates are so low that more Fed purchases can’t do anything more.

Most mortgage and consumer-credit rates are based on long-term rates. We have already seen the 10-year bond drop to below 2 percent and the 30-year drop to near 3 percent. The Fed’s idea is too keep longer-term rates lower for people to refinance or get mortgages at low levels.

Get David Skarica's Gold Stock Adviser — Click Here Now!
They also want to flatten the yield curve. What is happening now with short-term rates near zero is that banks can rebuild their balance sheets by borrowing at zero then buying long-term bonds at higher rates. The Fed wants to force banks to lend that money or speculate by ending that trade.

However, I think these Fed actions won’t work for the following reasons:

• You can’t just use cheap money to refuel an economy. You need confidence. Confidence will come from cutting the deficit and getting the U.S. fiscal house in order. With no real plan on either side of the aisle to solve the deficit problem, there is no confidence. Without long-term clarity on the fiscal issue, the economy will bump along.

• The economy is in deleveraging mood. Even if the banks are more open to loaning money, I don’t think the loan demand will be there. Many people were wiped out in the real-estate bust or just don’t have jobs or income to take on loans. Therefore you won’t see a big bump in loans. Right now, private debt to GDP is over 250 percent. That was the level it was at in Japan in 1997 and in Japan it is now 113 percent. I expect a similar decline in the U.S. in the next 10 years.

Editor's Note: Get a free copy of David Skarica’s "The Great Super Cycle" — Read More — Click Here Now. • Another argument is that the Fed wants to recreate the wealth effect. However, we must look at the facts. In the early 2000s at the height of the dotcom bubble, 67 percent of Americans owned stocks. This number reportedly has fallen to 54 percent. Therefore, fewer people are in the market. In addition, with nearly 17 percent of Americans underemployed, many who do own stocks have had to sell to raise capital just to pay bills and live day to day. In the huge stock-market rally from 2009 to 2011, there were net outflows from mutual funds! As long as unemployment stays high, most people can’t afford to invest. In addition, the top 10 percent of income earners own nearly 85 percent of stock market wealth, so the wealth effect isn’t really helping the middle class.

Therefore, we can see that the so called twist is just a waste of time. It is just reallocating printed money, which already didn’t help the economy.

All I see this doing is causing a major bubble in the long-term bond market as the Fed is now buying all the long-term bonds. It will do nothing to help the economy because the pretenses it is based on are false.

About the Author: David Skarica
David Skarica is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He also writes the Gold Stock Adviser. Discover more by Clicking Here Now.