Jackson Jambalaya

I'm going to hammer on the point that the Fed's printing of more money and Obama's stimulus plan is going to wreck the market for Treasuries and implode the economy even more as interest rates will shoot up as prices plummet. The Wall Street Journal published a story by Peter Evans today about the reaction of the bond markets to what our government is doing:
The mother of all market battles is just getting started.
In one camp is the federal government, which needs to finance large fiscal deficits as the economy slows. In the other, bond investors who are expected to purchase the flood of Treasury debt.
In recent weeks, investors have staged a small revolt, pushing down the price of 10-year Treasurys to get higher yields. While the 10-year rallied Monday, its 2.72% yield remains far above December's low of 2.07%.

The long-term Treasury yield plays a central role in the economy, heavily influencing lending rates to private borrowers. Right now, the Federal Reserve is keen to keep rates low to stoke a recovery.
But the strategy could backfire. High government spending -- the Congressional Budget Office expects the federal deficit to hit 8.3% of GDP this year -- and a fear of longer-term inflation engendered by the Fed's ultraloose monetary policy could spook Treasury investors.
Granted, for a while, the government can count on some level of market acquiescence.
First, headline consumer prices are likely to fall, with Merrill Lynch predicting 3.2% annual deflation by July. This pushes up "real" yields.
Second, even as Treasury issuance ramps up, it could be soaked up by segments of the market, such as households, wanting to increase their Treasury holdings from low levels. Drew Matus, U.S. economist at Merrill, says that, in 1990, $300 billion of households' $14 trillion in financial assets were in Treasurys. Of the $45 trillion they hold today, less than $100 billion are in Treasurys, leaving plenty of room for growth as nervous individuals get thrifty.
Perhaps the strongest near-term reason why Treasury yields might stay under control is that the Fed might step in and buy the bonds.
Last week, it said it would do so if it felt that would be "particularly effective in improving conditions in private credit markets."
But it is exactly that sort of policy that could freak bond investors over time.
If the Fed buys Treasurys with freshly printed money and starts to rekindle economic growth, it raises the risk of inflation -- the No. 1 enemy for fixed-income investors.
In essence, then, the bond market has to trust that the Fed can, and will, apply the brakes at just the right time -- a skill the central bank hasn't mastered in recent years.
"The market should be pricing in the risk that current fiscal and monetary policies will cause inflation down the road," says Michael Pond, strategist at Barclays Capital, which expects a 4.1% yield on the 10-year at the end of the year.
If the Treasury isn't careful, the current skirmish with investors could yet turn into a rout."

See the dilemma the Fed is in? One one side it is trying to keep interest rates low so as to stimulate private borrowing. On the other side it is printing more money because of poorly-thought out stimulus plans (keep in mind the Fed created over two TRILLION dollars in new money last year). It will be difficult if not almost impossible for the Fed to do both as investors will demand higher yields for Treasuries as they become worth less due to more spending (thank you Bush, Paulson, Bernanke, and Obama). If something doesn't change, a train wreck is coming.