With more than $23 trillion pumped into the financial system via monetary and fiscal policy in the last 12 months, there's good reason to fear a rise in inflation, particularly if the U.S. Federal Reserve's quantitative easing is not withdrawn in time.

Further, rising inflation accompanied by competition for capital from abroad would invariably lead to rising interest rates in the United States, but so far, higher interest rates have not manifested themselves. One example: The U.S. Treasury this week sold $44 billion in two-year notes for 0.802%, Bloomberg News reported. In other words it borrowed $44 billion for less than 1% -- an astoundingly low rate.

Why should we say thank you to China? China has purchased $23.7 billion of U.S. treasuries, bringing their total to $768 billion. Now let's see if we can figure all this out. China has excess reserves from exporting goods the the U.S. The U.S. is caught with having to finance record deficits, some left over from the Bush administration and the new stimulus packages just approved by Congress. So by buying U.S. treasuries, China is helping us to finance our debt.

The actual amount of China's reserves is a state secret. However it is assumed the 70% of the estimated $1.95 billion dollars of China's reserves is in U.S. treasuries, and that China holds about a quarter of U.S. debt held by foreigners.

Do you remember the old adage, stock up bonds down? Well, that's what has been happening during the recent stock market rally. Since March, US treasuries have dropped about 900 basis points or $9000.00. Now remember that the price and the yield go in opposite directions. As the price goes down, The yield or interest rate goes up.The yield on the 30 year US bond stands at 4.21%

Why is the yield so important? For one thing if interest rates go up, mortgage rates will also rise. The Federal Reserve has vowed to bring mortgage rates down to help the housing market. It even took the bold move of buying treasuries to pump more money into the banking system. So far, the Federal Reserve has bought $300 billion of US treasuries.

What does it mean when the International Monetary Fund (IMF) considers issuing bonds to raise cash? Obviously, the organization would be seeking more money to pursue its agenda, but what else could be inferred by this? How would the dynamics of world economic power wielding be affected? What effect could this have on the natural ebb and flow of free market capitalism? How would U.S. Treasuries be affected?

This possible bond issue was examined recently by Bloomberg.com. The Bloomberg article points to what I think is the most significant aspect that an IMF bond issue would present. I'm concerned that IMF bonds would directly compete with U.S. Treasury bonds. That possibility is fodder for a great deal of speculation.

The Federal Reserve is starting to purchase long term U.S. treasuries to bring down borrowing costs. This is a rare move, the first since the 1960s when the Fed wanted to make adjustments in the yield curve.

The Federal Reserve is not alone in this policy. The governments of Japan and the U.K. are also purchasing government debt in an effort to get credit flowing again after cutting interest rates to near zero.

Where is the bond market headed?

Fear over the increased debt supply for various stimulus packages triggered heavy selling in U.S. Treasuries. The 30 year long bond fell over 3 points, now yielding 2.99%. The yield curve has steepened in the past week. This happens when longer term bonds and notes fall faster than shorter term maturities such as Treasury notes and bills.

There is concern over the Treasury's need to finance large chunks of U.S. debt. A new round of quarterly refunding has raised fear about the market's ability to absorb the $144 billion dollars worth of Treasury coupons in that two-week period.

It is expected that the first half of the year will be a volatile period for U.S. Treasuries. We have never had such a large debt to finance, so no one really knows how investors will react when all of this supply hits the market.

What do you think would happen if investors fail to step up and buy our debt?

The New York Times is reporting this morning that the Chinese government may be losing its ability and desire to support low interest rates in the United States by continuing to purchase treasury notes in the hundreds of billions of dollars.

Just as President elect Obama has stated, the economy 'could become dramatically worse.' News from overseas lends credence to our dilemma. The NYT quotes Ben Simpfendorfer, an economist in the Hong Kong office of the Royal Bank of Scotland: "All the key drivers of China's Treasury purchases are disappearing - there's a waning appetite for dollars and a waning appetite for Treasuries, and that complicates the outlook for interest rates."

Under normal conditions, during the last decade China has acquired over a trillion dollars of our debt and kept it. This has supported the dollar, kept us buying their goods, and in turn propelled the rapid growth of the Chinese economy. Fitch Ratings, the credit rating agency, forecasts that China's foreign reserves will increase by $177 billion this year. However, this would be a large drop from an estimated $415 billion accumulated last year.

It looks like 2009 will be another mine field. There is no denying that we are in a deflationary phase with prices falling, notably in the housing markets. The Federal Reserve sees this deflation as the primary concern for 2009. It was the impetus for lowering interest rates to near zero.

So far investors are not convinced that we have turned the corner. We have an explosion of money market funds and US backed Treasuries. The lack of a meaningful rally in the stock market is reinforcing this "wait and see" attitude on the part of investors. On the one hand the Fed is desperately trying to reinflate the economy, while corporate profits, foreclosures and defaults still paint the financial landscape.

If investors see that the Fed policy to reinflate is successful, then money will start to flow from money markets and US Treasuries back into the equity market.

Please add your thoughts on these ideas.

Ben Bernake has initiated the biggest cash infusion in Federal Reserve history -- a stunning $600 billion dollars that has been put into the US economy.

How did he do it? The Federal Reserve has been buying Treasury securities, which creates a credit on bank balance sheets and thus adds new money to the banking system. This in turn allows the banks to use the money for loans and mortgages. Plus, the Fed has been active with offering US Treasuries at auction, which have been scooped up by eager investors. Just today the "bid to cover" in the Treasury auctions was 4.4 percent. That means that there were 4 times more bids than the securities offered on auction. Investors are seeking safety in US Treasuries and are willing to accept a near zero rate of return.

So is this strategy going to work? The problem is that individual buying of US Treasuries does little to stimulate the economy. What is happening is a shift from lower quality securities into the safety of US government backed securities. A devastating side effect of these actions is that it drives down the prices of other lower quality securities.

One may guess that eventually this excess cash will work its way back into the equity markets but for now we are in a holding pattern.

Bill Gross of Pimco, one of the most respected bond investors in the world, thinks the credit crisis is about to get much, much worse. He also believes that the federal government is the only entity that can save the markets.

Gross's biggest concern is that financial companies will have to keep selling assets to raise cash. With home prices falling, he does not see an early end to this, and that troubles him. According to Reuters, Gross wrote "Unchecked, it can turn a campfire into a forest fire, a mild asset bear market into a destructive financial tsunami."

Gross may be right, but his suggested solution is wrong. He wants the U.S. Treasury to start buying distressed assets to help build a floor for their values. Of course, the funding source for Treasury is the U.S. taxpayer.

Solving one problem by creating a larger one is rarely a good program. There is a great deal of evidence supporting the fact that taxpayers are already stretched to the limit. Job losses are up. Easy credit is gone. Gas, oil, and food cost much more than they did a year ago. The average person, who may already be unable to handle his own financial burdens, can hardly be asked to help support the purchase of assets being sold by large financial institutions.

If Gross's vision about the future of the credit markets is right, the financial system is only at the beginning of a growing disaster. But, turning to the U.S. citizen for cash is like looking through a man's pockets for a spare change. All the more valuable paper money has been spent.

Douglas A. McIntyre is an editor at 247wallst.com.

"After reviewing financial statements and data on dozens of closed-end funds, we identified MFS Intermediate Income Trust (NYSE: MIN) as one of my top picks," says income expert Carla Pasternak.

In her High Yield Investing, she explains, "You won't find many closed-end funds with a better mix of high-quality bonds than MIN's AA+ rated portfolio." Here's her look at this fund that offers an estimated 9.8% yield.

"MFS Intermediate Income Trust holds U.S. and foreign developed government bonds; it offers a discounted share price and a steady income stream powered by healthy earnings from portfolio assets.

"And like other bond funds, it can be affected by rising interest rates, but its diverse portfolios should help steady returns.

"You won't find many closed-end funds with a better mix of high-quality bonds than MIN's AA+ rated portfolio. The fund invests in AAA-rated U.S. Treasuries and agency bonds, foreign debt of developed countries, and high-grade corporate bonds.

"Management insulates the portfolio assets from currency volatility by holding them in U.S. dollars. A low duration of 4.4 years limits sensitivity to changing interest rates. The fund also may trade derivatives and use leverage to boost returns.

With Asian markets expressing little confidence in yesterday's "amazing" Dow comeback -- the Nikkei fell 5% its worst day since September 11th -- the New York Times [registration required] reports that U.S. Treasury Secretary Hank Paulson is keeping above the fray.

When he took over the job in May 2006, I posted that I could not figure out why Paulson took the job. I knew that it's quite popular at The Goldman Sachs Group Inc. (NYSE: GS) to go into government after making piles of money there. And I thought that perhaps Paulson took the job so he could outdo one of his predecessors, Robert Rubin, who was widely believed to have excelled in the job. And I anticipated a financial crisis due to a mispricing of risk which might have provided Paulson with a chance to prove his mettle in relation to Rubin's handling of the 1998 Russian financial meltdown.

Well, that crisis is now upon us and Paulson is proving that he does not have what it takes. A former high level Washington hand told me that Paulson is widely regarded as self-important and pushy. This has made him rather unpopular with economic policymakers who are happy to see him fail in getting China to let its currency float.

Major European stock markets are up today between .5% to 1%, following the lead Asia set this early morning. Trading was reported to be brisk on all major markets. Good news came from Swiss drugmaker Novartis (NYSE:NVS) as it received an approval for a blood pressure medication----which will be in demand if these market fluctuations continue.

International Power (NYSE:IPR) of the United Kingdom led the way on the FTSE index as it reported an excellent profits report and lifted its current dividend by 75%. This stock trades on the NYSE as an ADR as well as in the United Kingdom. Rising power prices were attributed to the profit surge.

On the slightly negative side, France Telecom ( FTE) was off less than 1% as they reported a slump in profits and indicated that 2007 would not bring any dividend increase. The CAC 40 however, was still positive on the day as investors were not surprised by the France Telecom report.

Traders in London are anxiously awaiting the open of the US markets today as many feel the stability of US Treasuries today, globally, will stabilize if not begin to lift the bell-weather US stock markets.

Georges Yared is the author of "Stop Losing Money Today" and "Baby Boomer Investing...Where do we go from here?"