Federal borrowing eventually results in a transfer of income from U.S. taxpayers to the investors who hold the Treasury bonds. As long as Americans own the bonds, the transfer is simply from one American to another. Bondholders may get richer, while taxpayers who don't own bonds get poorer. But shuffling the income between the two groups doesn't reduce America's overall wealth.

Today, however, 43 percent of the United States' publicly held debt of $4.8 trillion is held abroad, mainly by central banks in Japan, China, and Britain and by offshore hedge funds. That's up from a 30 percent share in 2001, an extraordinary increase.

Indeed, during the Bush years, 73 percent of new government borrowing has been from abroad. Paying the interest on the foreign- owned portion of the debt will be a burden on future generations of Americans, draining their wallets, and siphoning off America's wealth.

America is at war and the budget is so wildly out of balance (Bush is the only sitting president that has not raised taxes while America is at war) that the government cannot pay its bills without borrowing money from foreign investors. America is living beyond its means, and foreigners are increasingly supporting the excess - in exchange for a government guarantee that a chunk of America's future collective income will benefit them, not the Americans who earn it. The problem will come when there is a shift in global foreign exchange reserves away from the dollar, perhaps driven by events in the Middle East. ۬

Meanwhile, David Goldman of Cantor Fitzgerald worries that the Federal Reserve and the European Central Bank have become sources of risk for the markets. The rise in inflation breakeven rates (derived from bond markets) has been driven by oil and gold prices. He believes these factors are geopolitical, not economic. Then, there is the run on resources such as oils, metals, and construction materials! The Commodity Research Bureau (CRB) index has doubled since January 2002, thanks to surging demand from China, India, and other developing countries. Recently prices slid, but the high-demand story still has years to run, says CRB chief economist Richard Asplund


As we absorb the true meaning of these words we have seen a roller coaster ride in the DOW, the NASDAQ, and the S & P 500-reminding us that investors have little faith on the New Fed Chairman and his ability to produce a "soft landing." They even believe that The Fed is a source of risk for the markets.

The recent economic growth was caused by low interest rates. Most homeowners cashed out the value of their homes and kept the economy expanding. It had nothing to do with tax cuts.

Moreover, increasing interest rates and commodities prices (specifically oil) are creating a money crunch that is felt by most Americans who now can't make ends meet.

Without the cushion of equity and increased interest rates, they will contribute to an economic slowdown unless the corporate world starts filling the void. So far, we have not seen that.

Companies and institutional investors around the globe are holding record amounts of cash - an indication that they are growing more pessimistic over the outlook for future economic and profits growth.

According to the latest data from Thomson Financial, the cash on the balance sheets of the world's largest 100 companies has now reached $1,100bn and shows little sign of falling.

Cash holdings have been rising steadily since 1999, first breaking the $1,000bn mark in 2004 and they have remained unusually high since then.

Institutional investors are also holding on to more cash, according to recent surveys.

Last week Merrill Lynch said that a net 33 per cent of asset allocators were overweight in cash-- an all-time high. "You have to go back to the Iraq invasion of March 2003 to see levels of risk appetite this low," said David Bowers, an independent consultant to Merrill Lynch.

Unless Congress stops spending precious time debating Gay Marriage and Flag Burning and starts confronting President Bush on the deficit (both trade and budgetary) we run the chance of a real fiscal crisis and a recession.