Little Timmy Geithner Races the Interest Rate Demon around the Financial World. The Demon is Wining.

Abstract: U.S. Treasury Secretary Little Timothy Geithner’s plan to keep the yield on 10 year Treasury bonds low has gone gangrene. The Chinese are watching us as they think Treasury is printing money and monetizing the debt thus cheating the Chinese out of the value of their bond holdings. Inflation appears to be looming and this is the usual penalty for too much money being spread around. We are spending and printing our way to financial oblivion and the cracks in this phony facade will start opening soon for all to witness and our financial essence and wealth will gush out leaving us with a worthless currency if we do not watch out what we are doing.  I believe that the far Left want this to happen.

We have been inspecting the antics of our elfin being[1] as he juggles several financial hot potatoes in the steamy atmosphere of Washington politics and the relevant question thus becomes: which one will he drop first? I think he will drop our currency in the latrine.

Little Timmy’s theme song:

“… [the fed people] are very committed to making sure they have the ability to unwind and reverse the exceptional measures they have taken once we have achieved the necessary stability in our financial markets and an economic recovery is back on track."[2]—Geithner [Emphasis is mine in all quotes.]

"I am deeply aware of the complexity and importance of that basic task of making sure we are preserving that great asset -- which is the deepest and most liquid markets in the world. And we will work very hard at that." —Geithner

If we could beg a question here: Why is the interest rate on the 10 year bond going up when Little Timmy wants it to go down? Isn’t he the Snake Charmer who can make the cobra rise and fall from the aperture in the wicker basket with aural spells from his little flute?

For another analysis I choose my favorite international analyst [Ambrose Evans-Pritchard] from the Telegraph in London:

“Yields on 10-year Treasury bonds have risen relentlessly since March when the Fed first announced its plan to buy $300bn (£188bn) of US government debt directly, a move that briefly forced rates down to nearly 2.5pc, a level thought to be the Fed's implicit target.

Yields have jumped to 3.69pc – after spiking as high as 3.74pc on Wednesday – pushing up the standard 30-year mortgage loan to 5.08pc and lifting the borrowing cost for corporations.”[3]-- Bond markets defy Fed as Treasury yields spike. By Ambrose Evans-Pritchard 28 May 2009

We all know, or should know, that the 10-year Treasury bonds actually define the instant cost of capital.  This should be of interest in case capitalism inadvertently survives Obama and his Marxian hordes who believe that we can spend our way to prosperity. Incidentally, these bond yields eventually also directly influence the long bonds and mortgage rates. Not to be so brash or insolent as to mention that the fatal global crash in home prices that precipitated this depression and that the recovery in that global wealth sector depends largely upon new mortgage rates, we seem to be having some problem with the control strings that our little elf uses to push and pull the treasury. Any liberal ought to be able to push on as string or a piece of linguini.

The Chinese position:

“Mr Luo, whose English tends toward the colloquial, added: “We hate you guys. Once you start issuing $1 trillion-$2 trillion [$1,000bn-$2,000bn] . . .we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.””[4]—wild rant by Luo Ping, a director-general at the China Banking Regulatory Commission [Emphasis is mine in all quotes.]

Out of options?

“"The Fed is going to have to consider doubling its purchases of Treasuries," said Ashraf Laidi, from CMC Capital Markets.”We could be nearing the end-game for the US dollar but the Fed has little choice at this point. We're in a vicious circle where any policy aimed at supporting the US economy must be at the expense of the dollar."-- Ambrose Evans-Pritchard

“It is unclear why US bond yields have spiked so violently, with spill-over effects on gilts and bunds. One camp of investors is worried that inflation is rearing its ugly head again: others fear a sovereign debt crisis as over-extended states loses their AAA ratings."-- Ambrose Evans-Pritchard

Maybe this is a Buffet buffeting effect as our Sage of Omaha has divined that our government will “…inflate its way out of the burden of that debt,” Buffett said. [5]

This prompts me to think that Little Timmy Geithner has a novel plan to inflate the dollar, pay off the debt and not raise interest rates. That would be original. With some new and as yet unexplained maneuvers by the Fed and Treasury they might try to satisfy all citizens, and the vigilant world, particularly in Peking, and work a miracle with the cobra and the basket. I happen think Geithner is just lost and frustrated.

Maybe somebody can explain all this to me as I seem to have lost my way in the complex economics of 2009.

“Dallas Fed chief Richard Fisher said his recent trip to Asia was an eye opener. "Chinese government senior officials grilled me about whether or not we are going to monetise the actions of our legislature."-- Ambrose Evans-Pritchard

I think Little Timmy is now the leading candidate for the Nobel Prize in Economics if he pulls this trick out of the magical air he seems to be living in.  But, I tend to be a bit stuffy and really want some proof that we can print money and suffer no inflation or debasement of our currency, credit ratings or dignity during this crash into financial oblivion.

Where do we get these cretins? How much are these losers in Washington going to cost us?

rycK

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