Unintended consequences of currency wars?

Bud Conrad

And yesterday Bud was talking about the plunge in U.S. Government debt held for foreign Central Banks… “What could be the cause of all this? The Senate passed a controversial bill that threatens to punish China for "currency manipulation" which will bring mandatory tariffs. China's opposition to the Senate action could be the power behind the big shift in direction of these custody holdings. In an election year, government action against Chinese imports may be seen as supportive for US jobs, thus garnering votes. But unintended consequences of decreasing liquidity in the credit markets will put pressure on financial markets. The movement shown in these charts could be the result of China's reaction to some of those anticipated policies. We can't tell what country is doing the selling until two months have gone by and the TIC data are published. In some senses, it doesn't matter which country is behind the shift. If rates begin to rise rapidly, even in the face of continued Fed manipulation, it could call into question confidence in the Fed's ability to keep supporting the economy. The rate on the ten-year Treasuries jumped from 1.8% to 2.2% in the last week. Foreign selling of this magnitude is dangerous for the dollar, and it could be very bad for US interest rates.”

But, to keep interest rates from soaring when foreign buying of U.S. debt wanes, the Fed is going to have to step in and buy what the foreigners don’t… Can you say Quantitative Easing? I thought you could !