Lowering and raising interest rates is any central banks primary method for controlling inflation. If high inflation forces Bernanke to raise interest rates, in a sense it did.
I do not agree. The tail does not wag the dog. Inflation is driven by central interest rates. What Bernanke has been charged with doing is ensuring "price stability". But prices are subject to more forces than just inflation. Market forces undboutly will cause price shifts due to problems or boons in productivity (natural disasters or breakthroughs). Trying to paper over these hiccups by playing with central interest rates is akin to trying to make a cat walk straight on a leash.
Prices stabilize eventually, but attacking the problem centrally introduces too many uncontrolled forces on variables and affects things in an oftentime unforseen way.
Deflation rewards malinvestment, which is great if you already have dollars, not so great if you don't. You'll see this on a small scale with the Bitcoin. That's the whole point of the Fed using interest rates to manipulate inflation.
Deflation doesn't reward malinvestment whatsoever. In fact, it makes people even more cautious with investment because if their venture doesn't prove fruitful, they are out even more than in an inflationary or stagnant envinronment because the currency has appreciated and the instrument is demoninated in nominal terms.
Would you be more or less cautious loaning money to others if the US Dollar index is soaring?
This seems to be the root of where we disagree. The high demand for US treasuries certainly won't last forever and warrants caution, but in my opinion, the market shows no signs of losing its taste for our debt any time soon.
Really? Because major credit institutions are downgrading both quality of US Soverign debt and the Dollar itself which is an ominous sign for any instrument denominated in dollars.
The reason why debt instruments haven't had the rug pulled out from underneath of them is because China and others who are so heavily invested in US Treasury obligations, have a nefarious interest to keep the dollar afloat to avoid massive losses. These bonds cannnot be sold, either, without risking preciptating both huge downward pressure on the value of the bonds themselves and a liquidity crisis (or liliquidity crisis, as it were).
It's a situation where perception of the dollar keeps bonds in their hands, keeps them from being able to do anything with them (even as they mature) and keeps them purchasing more to maintain a climate where their bonds hold value.