I’m surprised they haven’t played this card before, but I guess it was too risky when the world economy was growing.

But now with the world economy sinking, the Chinese have their chance to permanently cripple The United States and destroy our capability to be a Superpower (or possibly even a Great Power).

They know that if they refuse to back the debt, Obama and the Dems will destroy our military and international capabilities, rather than endanger their “movement” towards communist utopia – IOW, public spending programs will trump everything else in the budget to the Dems, if money gets tight. (And don’t forget about the massive confiscatory tax hikes that will be “necessary” too!!)

In fact, if the Chinese so chose, they could come at us two ways to really hamper us – refuse to fund out debt, and use their proxies, the North Koreans, to lob (nuclear?) bombs at us.

And this is on top of them and the Russians already going after the U.S. Dollar as the international currency of choice.

All I know is, if I were running China, I’d throw everything I’ve got at The U.S. – now is the time to do it.

any markets, toothbrushes, treasury instruments, local, national, international, they’re all a pain in the ass. How is a statist thug supposed to force his will on the little people when this thing called the market keeps getting in his noble and enlightened way.

I fear a different scenario: the Fed “buys” the debt, as it said it will.

This increases a major component of the money supply – an action which is, by definition, inflationary. Countervailing this inflationary action is the decrease in the velocity of money, which is deflationary. This decrease comes from a lack of consumer confidence and a lack of investor confidence resulting from fears of over-regulation and high taxes. At a fundamental (and simplistic) level, this is what caused Japan’s lost decade: it greatly increased its debt; however, its own banks and citizens purchased the debt and have held it. Velocity dropped and stagnation resulted, albeit with a national debt several times the size of the U.S.’s in proportion to GDP.

I suspect the Fed will leverage our stimulus. Eventually, in a few years, all that money will result in some pretty bridges and highways and schools and local projects that were not really needed. If they were needed, the locals would be funding them. Plus, the money will be in the hands of people who will – unlike Japanese consumers – want to spend it. They will do so; however, they will have built bridges and roads instead of cars, shirts, ipods, ice cream or whatever it is they would have produced had they worked in the market economy. Hence, prices will rise or shortages will appear.

The Fed will attempt to demonetize – to “call back” the increased money supply. It will do so by attempting to sell those bonds and notes it purchased. Only, no one will want them unless the interest rate jumps greatly. Obama and his Treasury Secretary (whoever that is) will oppose the higher interest rates as necessarily “harmful” to the economy – i.e., deflationary. Hence, the Fed will just hold the debt.

Prices will rise. Others around the world who continue to hold U.S. debt will finally begin to sell it, seeing the potential devastation in its value. They will begin to spend the dollars, as well. Whatever they seek will increase in price. The resulting inflation will result in higher interest rates, which will further force down the value of U.S. bonds and notes. Double digit inflation – in the range of 15 to 25% – will ensue and we will enter a new bubble, exponentially greater than the past one.

Over the centuries, such severe economic problems have resulted in wars. I see no reason to believe we are any different than our predecessors.

This will end badly, at least for awhile. But a free market will rise from the ashes – but that could be decades off.

Seems to me that most of the ‘problems’ we are facing at the moment are without ‘benefit’ of any overt efforts by our adversaries, military or economic.
And the economic ‘war’ potential seems, to me anyway, far more a threat to our long term survival then a military threat.
And that may be the biggest curtain of all not being looked behind.

…is the Fed.

Keep the printing presses warm.

Maybe the Dems’ collective nostalgia for the Carter years will bear some fruit: 10% unemployment & 20% interest rates.

unless the interest rate jumps greatly.”

I’ve been looking at this, along with “tepid results from the treasury auction” as signs of the times economically. It is horrifying to think that the government’s decrease in ability to borrow and spend must also indicate the strangulation of capital formation.

I haven’t seen anything yet to indicate that we are not on the glidepath to another Carteresque disaster. Even energy costs will conspire once again to crush economic activity.

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Activists Taking Action: Unified Patriots

The Treasury arm of the US Govt can tax you directly by taking your dollars. The Federal Reserve arm can tax you indirectly by granting itself more shares (dollars) of claims to (mostly) US real assets, thereby decreasing your pro-rata share of real claims.

The US Govt avoids the latter (printing more money) by auctioning Treasury debt to be paid for with future direct taxes. (Perhaps, more accurately, as long as market participants believe that.)

Entities put up with both forms of taxation because the alternatives are at least no better. The opportunity costs of avoiding direct taxation are substantial (giving up doing business in the US, etc.). There is very little cost to avoid the former (exchange dollars for other currencies).

In the American Century, the dollar has been an incredibly trusted store of value. When times are tough, we Americans are inclined to save our economic wealth in the form of dollars. In many other countries, the inclination is to dump the paper money for something of real value that can be subsequently traded, e.g. furniture.

If the world’s population decides too much of the indirect, money-printing taxation will be necessary, Katie bar the door.

Since it came up a bit and I have to get out of here….

The Fed as the buyer of last resort (should an auction fail) is indeed the “official” story (see Rep. Kirk’s comments on this at the included link, where he discussed this two weeks ago).

That might “mechanically” support the continuation of the process. But if have to cross that threshold, the whole exercise goes into another realm entirely and that will be a huge confidence hit.

Scenarios from there are too frightful to ponder on such a nice day….

…….What happens if the decision is made to unpeg from The US Dollar ?

yes they can and the USA be damned as far as they’re all concerned.

I’m just thinkin’ out loud………

Failure to sell government insured debt simply means that Treasury will have to print the money it has committed under the Stimulus and Budget plans.

Obama’s spending plans will directly impact inflation. If government wouldn’t spend as much, debt would be easier to sell, and inflation would be lower. Obama’s current course will spur a rapid spike inflation – the leading edges of which we already see.

LBJ invented inflation as a phantom tax increase as a method to pay for unpopular projects. Obama is following this path. Unfortunately, inflation impacts the poor and middle classes disproportionately, as the wealthy have greater ability to modify behavior to protect themselves. We are seeing the leading edge of this as well – homes are being purchased at bargain rates by wealthy investors. Land and property are a good hedge against inflation. People that invest their own money know that the Obama plan is a train wreck waiting to spring to life- probably in early 2010.

Obama does have a massive tax increase coming and it will be in the form of massive inflation.