“Fed illusion as Rising U.S. Bond Prices Cancelled Out by Plunging Dollar”, by Clive Maund, Market Oracle, March 22, 2009.

When you perform work or provide services for a debt-wracked spendthrift you should have a pretty good idea that their IOU’s are never likely to be honored, and are thus not likely to be worth the paper they are written on. The Chinese, who have been supplying the United States with vast quantities of consumer goods for years in exchange for Treasury Bills and Bonds, which are a form of IOU, and various other dubious “investments”, have been slowly waking up in recent months to the fact that they “have been had”. They have been breaking out in a cold sweat as they realize that they have in effect been conned out of trillions. Thus they have been attempting to scale back their purchases of US Treasuries in an effort to stop throwing good money after bad, and have been accumulating more gold. This has increasingly threatened to pull the rug from under the Treasury market. The Chinese (and others) are in a “catch 22″ situation with regard to their vast holdings of US debt, as if they make any serious attempt to divest themselves of it in significant quantities they will collapse the market. They are therefore to a large extent stuck with it – all they can do is drastically scale back purchases and try to offload as much of it as they can clandestinely. However, the reduced demand resulting from their change of stance has nevertheless been threatening to bring down the Treasury market. The Chinese are going to lose big time, and last week the Fed decided the manner of their losing.