U.S. Federal Reserve chairman Ben Bernanke could be forgiven for assuming his latest speech would be taken as a sign of good news. Instead, his forecast of a gradual recovery in the U.S. economy sent markets into a panic. Included was the suggestion the central bank may scale back its long-standing bond-buying practice, known as quantitative easing, which now pours $85 billion a month into the economy. The timelines for the policy change were vague, but it was enough to send investors scurrying for cover. Bond prices plummetted to their lowest levels since the great bond crash of 1994. Gold dropped below $1,200 an ounce, a 34-month low. Mortgage rates jumped to a two-year high.
To quell the fear, the Fed issued several “clarifications” insisting that the economy still has a long way to go before the central bank will slow its printing presses. But the frenzy exposed just how crucial easy money and ultra-low interest rates have become to sustaining the economic recovery. Quantitative easing may have helped keep the U.S. out of a deep depression. But as consumers know all too well, the problem with easy money is that, once you become accustomed to a certain lifestyle, it can be awfully hard to adjust to living within your means.