Etoile Brilliant's  Instablog

Watching the bond market struggle to come to terms with the bloated size of the US Government's balance sheet, it is difficult not to be reminded of the Dr. Seuss classic "The Cat in the Hat Comes Back".

For those readers who are unfamilar with the children's book, it involves the famous cat (read "bank") living the high life by eating cake in the bath tub. When discovered by the hard working children (read "US taxpayer), they banish him from the house only to discover that for his sins the cat left a pink cat stain in the tub. No problem, shrieks the cat as he removes the pink ring with mother's white dress (if the "dress" is the US government's balance sheet, I would struggle to call it white, soiled might be more appropriate). As the story progresses, the blemish is subsequently transferred from the dress to the wall, from the wall to dad's shoes and so on and so forth.

The point is that the transfer of risk from the so called toxic assets from the bank's to the government's balance sheet through the various support programmes doesn't actually remove the risk but simply redefines its ownership. Finally the treasury markets are waking up to the fact that the what used to be the flight to safety play might actually be the toxic asset trade.