Operation Twist

It was the Friday night on my way back home from a party, the drive on the highway reminded me that our life too was just like a black highway at night.

Quite often than not, I wondered to whose tune we may be dancing to. Now, move the time machine 50 years' back. The one thing that made the entire world go crazy is the "Twist" - a dance inspired by the rock and roll music. It was a madness amongst youth; drew fierce criticism for its proactive style and the seed to many club dance forms of today.

Now, come to the year 2011. It was the same Twist that the entire world danced to this week, but for a music composed by Uncle Ben. This Operation Twist is far more fierce and crazy than the original rock and roll in the early 1960s and shook global markets, wiped out billions of dollars.

Operation Twist is the mechanism where the Fed can sell the medium term bonds up to 3 years and purchase the long term bonds, say 10 and 30 years, thereby trying to keep long term rates lower in a hope to boost consumer credit and make Americans spend which could revive the Economy. This may be the best tool available without increasing the government debt, especially after the S&P downgrade.

Though it seems like Uncle Ben has arrived probably with best possible solution, it was rather too late as the damage was already done to the financial system. Take this. The 10 year rates are already below the inflation. The short term rates are close to zero. Unemployment rates are nearing double digit and so called QE1 and QE2 have only treated the symptoms rather than the disease, further aggravating the problem in hand. We haven't seen any meaningful demand uptick. And in all probability, the yield curve would flatten out rather than inverting and the actual outcome from this Operation Twist may not be met.

Fed has already taken the wind by commenting on the Economy, taking global markets for a roller coaster ride. Unless the Americans spend, the dust won't be settled anytime soon. It's a classic case of a chicken and Egg story. The search continues. Until then, our future is a journey on a black highway at nights, waiting for a new dawn.