What is the “Bernanke Twist” and “Operation Twist”? What exactly does it do?
"So ""Operation Twist"" is actually a pretty simple concept. Here's the break down: The Fed sells short-term treasury bonds that it already holds on its books. Short-term treasury bonds refer to - bonds that mature in less than three years. Then: Uses that money to buy long term treasury bonds. Long-term treasury bonds refer to -  bonds that mature in six to 30 years The reason: The fed buys these longer-term treasuries to lower longer-term interest rates and encourage more borrowing and spending. Diving deeper into how it works: So the Fed can easily determine short-term rates by using the Federal funds rate this rate has a direct effect on the following: However this does not play a direct role in influencing the rate of long-term loans (what you might pay on a 30-year fixed mortgage). Instead, long-term rates are determined by investors who buy and sell bonds in the bond market, which changes daily. These bond yields fluctuate depending on the health of the economy and inflation. However, the Fed funds rate does play an indirect role in these rates. So now that we know a little more about what effects what rate, why does lower long-term rates in treasuries influence my 30yr fixed mortgage? Well when you are looking for a loan you are entering a market and competing against other people, by people I mean anyone looking for money (e.g: my grandmother, companies, or the US government). The bank that lends you money has to decide weather the deal you are offering them is better then another deal on the market. If the risk of lending to one person is the same as the risk of lending to another, the bank will make whichever loan yields the higher interest rate. The U.S. government is considered a very safe borrower, so much so that government bonds are considered almost “risk free”, but because of the lower risk the rate of return is lower. So now the bank has to factor in this risk and make its decision weather to lend you money, or the government. So, if the government were to go to the market and buy its own long-term bonds it is adding demand in the market causing the price of the bond to rise in effect lowering the interest rate (when price goes up, yield goes down). So when you go back and ask for a loan it has to re-evaluate and decide ""Is it worth giving this money to Joe McFreeBeer instead and collecting a higher yield?"" (After all, Joe McFreeBeer is a nice guy). Here's an example: Lets say the US has a rating of 10 out of 10 and its bonds pay a 2% yield. Now lets say for each lower mark in rating the bank will lend at a minimum of 1% higher and your rating is 8 of 10. So if you go to market, the lowest rate you can get will be 4%. Now lets say price rises on the US treasury and causes the rate to go down by 1%. In this scenario you will now be able to get a loan for 3% and someone with a rating of 7 of 10 would be able to get that 4% loan. Here's some more info and explinations: Why is the Government Buying Long-Term Bonds? What Is 'Operation Twist'? A Q&A on US Fed Program Federal Reserve for Beginners Federal Open Market Committee" "To understand the Twist, you need to understand what the Yield Curve is.  You must also understand that the price of debt is inverse to the interest rate. So when the price of bonds (or notes or bills) rises, that means the current price goes up, and the yield to maturity has gone down.  Currently (Early 2012) the short term rate is low, close to zero. The tools the fed uses, setting short term rates for one, is exhausted, as their current target is basically zero for this debt. But, my mortgage is based on 10yr rates, not 1 yr, or 30 day money. The next step in the fed's effort is to try to pull longer term rates down. By buying back 10 year notes in this quantity, the fed impacts the yield at that point on the curve. Buying (remember supply/demand) pushes the price up, and for debt, a higher price equates to lower yield. To raise the money to do this, they will sell short term debt. These two transactions effectively try to ""twist"" the curve to pull long term rates lower and push the economy."
Let me explain this for you:   - Massive decrease in sales from 2009-2010= bad government (Obama/Bernanke).  - Even bigger increase in sales from 2010-2013= substantive economic growth due to a well-run company.  - Later downturn in 2013-2014= bad government (Obama/Bernanke)  Basically, when a company is increasing overall revenue and profits, that's because economics and free-markets. When a company is losing sales and revenues, that's because Obama. If their stock-price goes up when it shouldn't, that's also because Obama.   Stock prices that are high right now are only high because Obama/Bernanke, except when they are high because of something else. When stock prices go down, it will also be because of Obama/Bernanke.   Hopefully that clarifies things for you. "When you say that the problem is ""high supply but no demand"" you are actually correct. Here's why:  The phrase ""borrow/spend less, save more"" isn't an absolute law. It's more of a cautionary tale. Obviously, spending is an integral part of an economy: it accounts for at least 50% of every transaction! But the aphorism is getting at something other than admonishing people to not spend. The point of the saying is that interest rates should reflect savings rates.   What it comes down to is the how the law of supply and demand applies to the relationship between savings and interest rates. Consider this thought experiment: in a world where everybody saves 50% of their income, what would happen to interest rates? Banks would have a glut of savings, relative to the population. Assuming demand remains constant, interest rates would go down: the price of borrowing goes down as the supply of money to be borrowed increases. Thus a corollary of the law of supply and demand is that as savings increase, interest rates tend to go down.   So, as savings increase, the economic environment encourages capital improvements. Businesses can borrow at lower rates and increase long-term productive capacity. This is what the federal reserve has attempted to do by lowering the Fed Funds rate to near zero and by Operation Twist: increase economic activity through low borrowing costs.   So, what's the problem? When interest rates are artificially low there are no savings to support the production later in time. A company that borrows at a 1% rate created by the feds can build a factory to make widgets, but it will have a hard time selling that widget to a population with a negative net worth. However, if the 1% rate is ""natural"", then the company should be fine: the savings of the population should support the production from his widget factory.   For about 30 years we have experienced a credit boom in this country that was not created by excess savings. This trend couldn't continue forever. Look around you. At the end of the day, an economy is simply a group of people getting together to buy and sell stuff and services. Right now there is a lot of debt, and little cash. Who will be doing the buying?" "A bond fund will typically own a range of bonds of various durations, in your specific fund: The fund holds high-quality long-term New York municipal bonds with an   average duration of approximately 6–10 years So through this fund you get to own a range of bonds and the fund price will behave similar to you owning the bonds directly.  The fund gives you a little diversification in terms of durations and typically a bit more liquidity.  It also may continuously buy bonds over time so you get some averaging vs. just buying a bond at a given time and holding it to maturity.  This last bit is important, over long durations the bond fund may perform quite differently than owning a bond to maturity due to this ongoing refresh.  Another thing to remember is that you're paying management fees for the fund's management. As with any bond investment, the longer the duration the more sensitive the price is to change in interest rates because when interest rates change the price will track it. (i.e. compare a change of 1% for a one year duration vs. 1% yearly over 10 years) If I'm correct, why would anyone in the U.S. buy a long-term bond fund   in a market like this one, where interest rates are practically   bottomed out? That is the multi-trillion dollar question.  Bond prices today reflect what ""people"" are willing to pay for them.  Those ""people"" include the Federal Reserve which through various programs (QE, Operate Twist etc.) has been forcing the interest rates to where they want to see them.  If no one believed the Fed would be able to keep interest rates where they want them then the prices would be different but given that investors know the Fed has access to an infinite supply of money it becomes a more difficult decision to bet against that.  (aka ""Don't fight the Fed"").  My personal belief is that rates will come up but I haven't been able to translate that belief into making money ;-)  This question is very complex and has to do not only with US policies and economy but with the status of the US currency in the world and the world economy in general.  The other saying that comes to mind in this context is that the market can remain irrational (and it certainly seems to be that) longer than you can remain solvent." I agree with all those points, but add them as reasoning to why I'm against the program.  I'd rather invest the money into something worthwhile, and if I die have what's there be left to my family. My family and I would be better off.  I believe that this would be true for every other individual paying into social security as well, and the great union would be better off putting that money into proper investments rather than a twisted defined benefits program. There are various indexes on the stock market that track the currencies.  Though it is different than Forex (probably less leverage), you may be able to get the effects you're looking for.  I don't have a lot of knowledge in this area, but looked some into FXE, to trade the Euro debt crisis.  Here's an article on Forex, putting FXE down (obviously a biased view, but perhaps will give you a starting point for comparison, should you want to trade something specific, like the current euro/dollar situation). "The problem with the proposed plan is the word ""inevitable"". There is no such thing as a recovery that is guaranteed (though we may wish it to be so), and even if there was there is no telling how long it will take for a recovery to occur to a sufficient degree. There are also no foolproof ways to determine when you have hit the bottom. For historical examples, consider the Nikkei. In 2000 the value fell from 20000 to 15000 in a single year. Had you bought then, you would have found the market still fell and didn't get back to 15k until 2005...where it went up and down for years, when in 2008 it fell again and would not get back to that level again until 2014. Lest you think this was an isolated international incident, the same issues happened to the S&P in 2002, where things went up until they fell even lower in 2009 before finally climbing again.  Will there be another recession at some point? Surely. Will there be a single, double, or triple dip, and at what point is the true bottom - and will it take 5, 10, or 20+ years for things to get back above when you bought? No one really knows, and we can only guess.  So if you want to double down after a recession, you can, but it's important you not fool yourself into thinking you aren't greatly increasing your risk exposure, because you are." "It's simply supply and demand.   First, demand: If you're an importer trying to buy from overseas, you'll need foreign currency, maybe Euros.  Or if you want to make a trip to Europe you'll need to buy Euros.  Or if you're a speculator and think the USD will fall  in value, you'll probably buy Euros. Unless there's someone willing to sell you Euros for dollars, you can't get any.  There are millions of people trying to exchange currency all over the world.  If more want to buy USD, than that demand will positively influence the price of the USD (as measured in Euros).  If more people want to buy Euros, well, vice versa. There are so many of these transactions globally, and the number of people and the nature of these transactions change so continuously, that the prices (exchange rates) for these currencies fluctuate continuously and smoothly. Demand is also impacted by what people want to buy and how much they want to buy it.  If people generally want to invest their savings in stocks instead of dollars, i.e., if lots of people are attempting to buy stocks (by exchanging their dollars for stock), then the demand for the dollar is lower and the demand for stocks is higher.  When the stock market crashes, you'll often see a spike in the exchange rate for the dollar, because people are trying to exchange stocks for dollars (this represents a lot of demand for dollars). Then there's ""Supply:"" It may seem like there are a fixed number of bills out there, or that supply only changes when Bernanke prints money, but there's actually a lot more to it than that.  If you're coming from Europe and want to buy some USD from the bank, well, how much USD does the bank ""have"" and what does it mean for them to have money?  The bank gets money from depositors, or from lenders.  If one person puts money in a deposit account, and then the bank borrows that money from the account and lends it to a home buyer in the form of a mortgage, the same dollar is being used by two people.  The home buyer might use that money to hire a carpenter, and the carpenter might put the dollar back into a bank account, and the same dollar might get lent out again.  In economics this is called the ""multiplier effect."" The full supply of money being used ends up becoming harder to calculate with this kind of debt and re-lending.   Since money is something used and needed for conducting of transactions, the number of transactions being conducted (sometimes on credit) affects the ""supply"" of money. Demand and supply blur a bit when you consider people who hoard cash.  If I fear the stock market, I might keep all my money in dollars.  This takes cash away from companies who could invest it, takes the cash out of the pool of money being used for transactions, and leaves it waiting under my mattress.  You could think of my hoarding as a type of demand for currency, or you could think of it as a reduction in the supply of currency available to conduct transactions. The full picture can be a bit more complicated, if you look at every way currencies are used globally, with swaps and various exchange contracts and futures, but this gives the basic story of where prices come from, that they are not set by some price fixer but are driven by market forces.   The bank just facilitates transactions.  If the last price (exchange rate) is 1.2 Dollars per Euro, and the bank gets more requests to buy USD for Euros than Euros for USD, it adjusts the rate downwards until the buying pressure is even.  If the USD gets more expensive, at some point fewer people will want to buy it (or want to buy products from the US that cost USD).  The bank maintains a spread (like buy for 1.19 and sell for 1.21) so it can take a profit. You should think of currency like any other commodity, and consider purchases for currency as a form of barter.  The value of currency is merely a convention, but it works.  The currency is needed in transactions, so it maintains value in this global market of bartering goods/services and other currencies.  As supply and demand for this and other commodities/goods/services fluctuate, so does the quantity of any particular currency necessary to conduct any of these transactions. A official ""basket of goods"" and the price of those goods is used to determine consumer price indexes / inflation etc.  The official price of this particular basket of goods is not a fundamental driver of exchange rates on a day to day basis." "This chart summarizes the FED's balance sheet (things the FED has purchased - US treasuries, mortgage backed securities, etc.) nicely.  It shows the massive level of ""printing"" the FED has done in the past two years.  The FED ""prints"" new money to buy these assets. As lucius has pointed out the fractional reserve banking process also expands the money supply.  When the FED buys something from Bank A, then Bank A can take the money and start lending it out.  This process continues as the recipients of the money deposit the newly printed money in other fractional reserve banks. FYI....it took 95 years for the FED to print the first $900 billion.  It took one year to print the next $900 billion."