This week marked the first of several collisions ahead between markets and U.S. plans to borrow. Treasury yields have soared, but mortgages are holding in the fours.

New data failed to reinforce either the "Green Shooters" (economic optimists) or the "Agent Orangers" (economic pessimists), as prior historical guides are unreliable in a brand-new predicament.

Leading indicators rose 1 percent, the first gain in seven months. However, Orangers note that 0.44 percent of the boost came from a suspect rocket by stocks; another 0.28 percent from the jump in long-term Treasury rates, more likely to be destructive than helpful; and another roughly 0.28 percent from consumer attitudes improving from desperate to merely miserable.

The Shooters are adaptable. Tuesday’s release of new housing starts and building permits was supposed to show housing bottom, and stocks rose in anticipation. The actual numbers, down 13 percent and 3.3 percent, respectively, were the worst ever measured, but good news! Less construction must mean less supply, therefore housing bottom. Stocks rose.

The Fed’s staff produces the best forecast available. State secrets until a few years ago, these forecasts are public just three weeks after each Fed meeting. The minutes of April 28-29 (see here) were badly misread upon release this week: media and Street sources initially reported the Fed is "considering" an increase in its purchases of Treasurys, and Treasury rates fell. The same crew also reported the Fed had altered its forecast to the downside.

Wrong and wrong. There was no debate on increased purchases, merely unanimous decision to wait-to-see. Then, there are two forecasts at Fed meetings: one by the 12 regional Feds and another by the staff — the latter is historically by far the more accurate of the two.

The elephant in the room since Lehman September: Without blowing up rates, can we and Europe borrow as much as we must? We have borrowed and spent our way to premature prosperity for 50 years, and now must exhaust our emergency borrowing reserve.

None will remain to cushion entitlement promises to aging baby boomers. We cannot inflate our way out of debt because rates will rise and abort recovery. We may be aborting right now, rates rising and the Treasury crowding out lesser borrowers and capital raisers. Tax our way out? Uh … no.

We can grow our way out of debt trouble, but only by limiting spending. Somebody please Twitter the president before markets reach him by bullhorn.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.

***

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