The fed can raise or lower the short term rate as they wish. All other bond rates are set by the market. If demand for a specific bond (2 yr, 3yr, 10 yr, 30year paper)declines the yield rises.

Yup, but they are going to do it anyway, because the market is awash with people that don't understand economics. When investors see the Fed drop rates the immediate go on a buying spree in equities, because it worked in the past twenty five years. This gives the false preception that everything is just fine.

When foreign investors stop buying US federal and corporate debt the interest rates for these bonds will rise for everything except the short term interbank rates the US Fed controls.

Well that isn't entirely correct. The Fed and the US treasury dept. can directly purchase gov't bonds (Repos) and have been doing a fine job purchasing the treasures sold off by Japan and China. The Treasury dept. has also begun to opening the door to purchase Commericial paper via MLEC. The Fed has also opened the door to accepting MBS too.

http://www.pimco.com/TopNav/Home/Default.htm (All Treasury rates are far below the official overnight rate of 4.75%)

If the Chinese and oil producers decide they no longer want to carry the US consumer and their increasingly worthless currency interest rates will go through the roof.

Well this is probably untrue because of the Fed and Treasury can use Repos to keep the yields of gov't bonds low. But it would cause costs for imports to soar. I don't either the Fed or Treasury is concerned about the damage rising imports will cause. In fact, Paulson has been hard at work trying to get the Chinese to revalue their currency. Its seems obvious to me that that are deliberately engineering a lower dollar, on the false premise that this is the time to correct trade imbalances. It may take a couple of years before Washington figures out that they killed the US by trying to fix trade imbalances. Its almost certainly going to cause a global depression. If the US dollar goes under (loses its AAA bond rating) it will likely be the end of the United states some years later. We will likely see the beginning of the "Divided States of America" as foriegners will be unwilling to accept US currency and individual states will print local currencies. Sooner or later, Americans (and foriegners) will loose all faith and interest in Washington. When that happens its likely that states will assume more control over their own interests and we end up with a figure head federal gov't (like the British Monarchy) that is virtually powerless.

Paulson, Bernanke and the Goldman mafia tell the sheeple one thing

Then there is the part they tell their own people
http://www.irvinehousingblog.com/wp-content/uploads/2007/10/california-v...