Barack Obama is caught in a financial Catch 22.

On the one hand, his party’s fall re-election prospects rest on the stock market consolidating its gains since March 2009 (Dow 10,000), if not rising. Since his first day in office, the president has announced that the country is experiencing a great economic “recovery,” and any serious downturn in the major indices would give middle- and upper-class Americans whiplash and be politically devastating .

On the other hand, in order to remain viable, the Treasury Department needs an equities collapse -- and probably not just a slow bleed but a dramatic crash -- in order to herd millions of investors into the U.S. dollar and government debt.

The will of the Treasury will prevail, and the president and his party will be left high and dry. Furthermore, the crash will greatly empower the Treasury and federal government … for a time.

I’m certainly not the first to claim that the governments can benefit from an economic downturn, though this notion isn’t always theorized properly. Recently, I’ve encountered a number of people, types who listen to talk radio and root on the Tea Parties, who are convinced that Obama isn’t just incompetent and misguided but diabolical. According to this view, Obama is deliberately pursuing bad economic policies in order to crash the markets and bankrupt citizens; in the wake of the devastation, with Americans reeling, he’ll install full-out socialism. Rahm Emmanuel’s famous line about “never letting a good crisis go to waste” is cited as the moment when the wicked Democrats’ mask began to slip…

Both Mark Levin and Glenn Beck have traced Obama’s economic policies back to the infamous “Cloward-Piven strategy,” a scheme named after two tenured leftists who, writing in The Nation in the mid-‘60s, proposed that community organizers purposely overload New York’s public welfare rolls with immigrants, bums, and layabouts in order to bring on a municipal funding crisis. Presumably, this would force the federal government to enact a “guaranteed national income.”

This vision of Obama as “Icebreaker of Revolution” is highly implausible on a number of levels, the foremost being political. As mentioned above, Obama has bet his career on the 2009 Stimulus “working”; moreover, Treasury Secretary Timothy Geithner, acting as the government’s “economic expert,” penned a New York Times op-ed with the Onion-esque title “Welcome to the Recovery.” (The media -- particularly the financial media, which can’t imagine living in a world without an equities bull market -- has lapped it all up.)   The “recovery” might be fallacious, but Obama has been making the case nonetheless. The Crash of 2008 sealed John McCain’s fate, and Obama surely doesn’t want to face something similar. (Generally speaking, political regimes prefer it when voters are content, passive, and hopeful for the future, not mad and disillusioned.)

Moreover, as distressing as this might sound to people who rely on common sense, the idea that the government can do good things for Americans through artificially low interest rates, money printing, and deficit spending is taken seriously by academic economists. To say that Obama is consciously trying to wreck the economy is to imply that he secretly reads F. A. Hayek in his spare time, agrees with his theories, and is extending unemployment insurance out of pure malice. The simpler answer is that Obama, and everyone surrounding him, think that these kinds of policies will actually work.

The “Obama as diabolical” theory is implausible on another level as well, one that brings us to the reason that I believe the Treasury desires -- and requires -- an equities crash.

Leftists in the mode of Richard Cloward and Frances Fox Piven generally believe that socialism is a matter of will power: in their view, America hasn’t eliminated poverty because it hasn’t wanted to hard enough, or because the masses are deluded by religion, or because evil rich corporations are allowed too much influence in political campaigns. What’s overlooked is that wealth and production must be created before they are redistributed; and, to the point of this article, the government must be funded before it can do anything.

The federal government funds itself through taxation and the selling of Treasury bills, notes, and bonds. (It doesn’t necessarily need to issue debt, of course, but it has funded itself thusly for as long as anyone can remember.)

Over the past twenty years, especially the past decade, the market for such “sovereign debt” instruments has been nothing short of stellar.

(In the bond market, when the yield line slopes downward, that’s good.)

Demand for bonds, particularly from foreigners, has steadily increased; interest rates have steadily fallen. Whatever investors might think of the future of the U.S. economy, they apparently expect great stability in the U.S. dollar and inflation to stay well under four percent over the next 30 years.

In the early ‘90s, Bill Clinton’s political strategist James Carville quipped that he wanted to be reincarnated as the bond market, so incredulous was he at the power investors had over governments that operated on deficits. If demand for U.S. bonds collapsed, and interest rates soared, healthcare initiatives, say, or Washington’s massive overseas empire would swiftly evaporate. An enticing prospect…

As is often the case with such things, the frothy bond market has been a blessing and a curse, for over the past quarter century, Washington has become the greatest (if that’s the word) debtor in the history of mankind. In brief, the well know figure of 13 trillion in debt, owed mostly to thrifty and productive Asians, is only the tip of the iceberg; unfunded liabilities, especially Social Security, Medicare, and unending military commitments, bring the number upwards of 70 trillion. Add to this sum future bailouts of banks and state pension funds, and total liabilities likely approach 100 trillion!

Whatever the number, Washington’s debts can never be repaid. They grossly exceed global GDP and could not be settled on their current schedules if every cent of every corporation’s profits and every individual’s income were confiscated. Some might dream of endlessly turning over U.S. debt -- taking on new debt to pay the interest on the old, ad infinitum -- but such Ponzi financing always reaches its breaking point.

Washington essentially has two choices: it can renege on its debt and entitlements to its citizens (highly unlikely, in my mind, for a number of reasons) or it can monetization both (that is, print money to pay off debts.)

King Philip II of Spain owed his creditors silver ducats, the current Greek government, Euros; when faced with national insolvency and uncontainable debts, both reneged and restructured. The U.S. government, on the other hand, pays its obligations in currency that itself creates a virtually no cost. The temptation to print is nearly impossible to resist.

The force -- the only one, really -- preventing Washington from going down this course is the bond market. If investors, especially the big ones like China and Japan, got the inkling that Washington were going to print its debt away (and thus cause massive inflation), then demand for bills, notes, and bonds would collapse and interest rates, soar. The government, and the currency underlying it, would deconstruct.

This perilous situation is heightened by the fact that, as of this writing, around a quarter (20-30 percent) of U.S. debt is in short-term Treasury bills, which mature in less than one year. (Clinton’s Treasury Robert Rubin (formerly of Goldman Sachs) can lay claim to developing this financing arrangement, which came to bear his name.) If the market expects monetization, then in order for the Treasury to roll its debt over, interest rates would have to be increased every three months. A classic Vicious Cycle. And rates wouldn’t actually have to go to stratospheric levels for Washington to be doomed. If they simply returned to where they were in, say, 1980, the Treasury would pay close to a trillion each year just to service its debt.

The prospects for monetization would be much improved, however, if the Treasury could lock investors into long-term Treasury debt, bonds that don’t mature for decades and which investors would have a difficult time exiting from.

This is where the equities crash comes in.

The Crash of 2008 was notable not only for the steep decline in stocks and commodities, but the dramatic increase in the demand for “cash” -- that is, liquidity in the form of the U.S. dollar as well as Treasury debt of all sorts. Visible in the graph above, in the gloomy days of November, long-term interest dipped below 1 percent -- short-terms yields went, absurdly, negative! Investors were hurdling headlong into Treasuries.

The Crash of 2008, along with the two years of “deflation” that has followed, has amounted to the Great Treasury bailout. The department’s interest payments were reduced by billions, the prices of its issuances pushed to excessive levels, and investors who would have otherwise put their money into productive enterprises, flocked to U.S debt.  Best of all, this “bailout” was enacted without anyone objecting or Treasury officials having to seek the approval of Congress.

But it wasn’t nearly enough.

I take the view that equities are (over)due for a major correction regardless of what happens in the bond market. What’s at issue here is that the Treasury Department desires another crash, requires one even, so that enough investors will get spooked and again herd themselves into the “safe haven” of long-term government debt.

Later on, more authoritarian measure might be pursued, such as government’s “guaranteeing” of the two to three trillion sitting in Americans’ 401ks accounts -- and billions more in IRAs and state pensions -- by converting them into “safe” federal annuities.

What’s important is that the lemmings get locked into long-term government debt so the Federal Reserve can begin to print -- and print and print and print -- away federal obligations.

Crash or not, investors seemed to be headed that way anyway. The New York Times recently reported that investors have removed some 33 billion from domestic mutual funds, the majority of the money going into “low risk” bond funds. As with the and housing bubbles, whenever retail investors become certain that they’ve found a “sure thing,” it’s time to run for cover.