Say Anything

A report/rumor that has been circulating of late suggests that the Obama Administration may be looking at some “creative” ways to spend more of your tax dollars. According to a report from World-Net Daily:

…the Obama administration appears to have come up with a novel way of financing trillion-dollar budget deficits -demanding IRA and 401(k) holders buy trillions of dollars in Treasury bonds. With the Treasury needing this year to see another $1 trillion in debt to finance the anticipated federal budget deficit, and the Federal Reserve about to discontinue its 2009 program of buying Treasury bonds for the Fed’s asset portfolio, the Obama administration is scrambling to find ways to sell government debt without having to raise interest rates. Bloomberg reported Friday that Assistant Labor Secretary Phyllis C. Borzi and Deputy Assistant Treasury Mark Iwry are planning to stage a public comment period before implementing regulations that would require private investors to structure IRA and 401(k) accounts into what could amount to a U.S. Treasury debt-backed government annuity. CNBC’s Rick Santelli broadcast the rumor the same day from the trading floor during CNBC’s “Power Lunch” show last week. Spokesmen from both the U.S. Treasury and Department of Labor confirmed that the federal agencies are about to enter a pre-regulation public comment phase on the proposed rule change.

Before I dismiss the above report, I read a very interesting report on the far more reputable Bloomberg News network that has me wondering if perhaps the above paragraph isn’t so crazy after all?

China, which cut Treasury holdings by the most in five months in November, may scale back purchases of U.S. debt on concern the dollar will decline, said Liu Yuhui, an economist at the Chinese Academy of Social Sciences. The Asian nation’s investors, the biggest foreign holders of U.S. government debt, trimmed holdings by $9.3 billion in November to $789.6 billion, a Treasury Department report showed yesterday. The decline came even as Chinese foreign-exchange reserves swelled $61 billion in the month. “China may reduce purchases of U.S. Treasuries because there has been no sign the dollar’s long-term trend of weakness will change,” said Liu, director of the Center for Chinese Economic Evaluation in Beijing at CASS, a government-backed research body. “But it won’t likely make a big adjustment to its existing holdings.”

While I doubt VERY seriously that such a measure could be passed even if proposed, if in fact it is even being considered should be a warning sign to investors and put them on inflation watch as it suggests that the US Treasury may be forced to raise interest rates sooner rather than later in order to attract capital to the treasury market. The problem is that rising interest rates will hurt the housing market and all those re-adjustable rate mortgages that are coming due in the back half of this year through 2012. Also, if interest rates are going to go higher and IF (that’s a very big if) we are forced to buy US Treasuries, people will have to buy dollars to put into these treasuries, which could cause a sharply higher rally in the US Dollar.