Have Central Bankers Lost Control? Could The Bond Bubble Implode Even If There Is No Tapering?Michael Snyder Stock markets have soared to record highs, bond yields have plunged to record lows and investors have literally hung on every word uttered by Federal Reserve Chairman Ben Bernanke and other prominent central bankers. In the United States, it has been remarkable what Bernanke has been able to accomplish. The U.S. government has been indulging in an unprecedented debt binge, the Fed has been wildly printing money, and the real rate of inflation has been hovering around 8 to 10 percent, and yet Bernanke has somehow convinced investors to lend gigantic piles of money to the U.S. government for next to nothing. But this irrational state of affairs is not going to last indefinitely. At some point, investors are going to wake up and start demanding higher returns. And we are already starting to see this happen in Japan. Wild money printing has actually caused bond yields to go up. What a concept! And that is what should happen when central banks recklessly print money it should cause investors to demand a higher return. But if bond investors all over the globe start acting rationally, that is going to cause the largest bond bubble in the history of the planet to burst, and that will create utter devastation in the financial markets. Central banks can manipulate the financial system in the short-term, but there is usually a tremendous price to pay for the distortions that are caused in the long-term. In Bernankes case, all of this quantitative easing seemed to work well for a while. The first round gave the financial system a nice boost, and so the Fed decided to do another. The second round had less effect, but it still boosted stocks and caused bond yields to go down. The third round was supposed to be the biggest of all, but it had even less of an effect than the second round. If you doubt this, just check out the charts in this article. The only way that this is going to end is with a tremendous amount of pain. There is no free lunch, and there are already signs that investors are starting to wake up to this fact. As investors wake up, they are going to realize that this bond bubble is irrational and entirely unsustainable. Once the race to the exits begins, it is not going to be pretty. In fact, the are indications that the race to the exitshas already begun A lot of people out there have been floating the theory that the Fed will decide not to taper at all and that quantitative easing will continue at the same pace and therefore the markets will settle back down. But what if they dont settle back down? Could the bond bubble implode even if there is no tapering? That is what some are now suggesting. For example,Detlev Schlichter is pointing to what has been happening in Japan as an indication that the paradigm has changed The financial situation in Japan is actually very similar to the financial situation in the United States. We both have a gigantic pile of accumulated debt, high running budget deficits, an old and aging population, near-zero interest rates and the prospect of rising inflation. In both cases, rational investors should demand higher returns when the central bank fires up the printing presses. And if interest rates on U.S. Treasury bonds start to rise to rational levels, the U.S. government is going to have to pay more to borrow money, state and local governments are going to have to pay more to borrow money, junk bonds will crash, the market for home mortgages will shrivel up and economic activity in this country will slow down substantially. Plus, as I am fond of reminding everyone, there is a 441 trillion dollar interest rate derivatives time bomb sitting out there that rapidly rising interest rates could set off. So needless to say, the Federal Reserve is scared to death of what higher interest rates would mean. This article first appeared here at the Economic Collapse Blog. Michael Snyder is a writer, speaker and activist who writes and edits his own blogs The American Dream and Economic Collapse Blog. Follow him on Twitter here. 