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Leithner Letter Nos. 93-95
26 September - 26 November 2007

The present exigency is nothing new. From the beginning of our existence as a nation, periods of depression, of industrial failure, of financial distress, of unpaid and unpayable indebtedness, have alternated with years of plenty. The vital lesson that expenditure beyond income begets poverty, that public or private extravagance, financed by the promises to pay, either must end in complete or partial repudiation, or the promises be fulfilled by self-denial and painful effort, though constantly taught by bitter experience, seems never to be learned: and the attempt by legislative devices to shift the misfortune of the debtor to the shoulders of the creditor without coming into conflict with the contract impairment clause has been persistent and oft-repeated.

Justice George Sutherland
Writing for the Minority
Home Building & Loan Association v. Blaisdell (1935)

“In America, we have a two-party system,” a Republican congressional staffer is supposed to have told a visiting group of Russian legislators some years ago. “There is the stupid party. And there is the evil party. I am proud to be a member of the stupid party.” He added: “Periodically, the two parties get together and do something that is both stupid and evil. This is called – bipartisanship.”

Peter Brimelow
Immigration Policy Stupid, Evil and Hurting Americans
Contra Costa Times (4 December, 1999)

First, let me start by saying that Franklin Roosevelt did a good thing when he created the Social Security system. Social Security has been an important part of a lot of people’s lives in America. The Social Security system created by Franklin Roosevelt provided a safety net for people in their retirement. And it worked. There are a lot of people still in this country counting on their Social Security cheque. ... If you’ve retired, you don’t have anything to worry about – third time I’ve said that. [Laughter from audience] I’ll probably say it three more times. See, in my line of work you got to keep repeating things over and over and over again ... to kind of catapult the propaganda. [Applause from audience]

President Bush Participates
in Social Security Conversation (24 May 2005)

The Real Subprime Crisis:
Why Should Uncle Sam Retain His AAA Rating?

In various statements since 11 September 2001, American, Australian, British and other politicians have vowed that their “war on terror” will last years, perhaps decades and maybe even generations. Since 2004, American politicians have referred to a long war, and their lapdogs in Canberra have dutifully parroted the term (see, for example, John Howard’s use of the phrase “the long war against violent Islamic extremism” in Why Our Troops Must Stay, The Age, 22 March 2007).

Long wars, it stands to reason, require deep pockets. But more guns, “leaders” have assured their subjects, do not imply less butter. Quite the contrary: spending of all kinds will rise sharply. Not only are present “commitments” sacrosanct: other bribes, particularly medical and other subsidies required to assuage aging populations, will rise drastically. The anointed of America’s tax-consuming caste state quite unapologetically, and its benighted tax-producers accept credulously, how the country will finance these obligations: the U.S. Government will graciously borrow and foreigners will dutifully lend. The true “coalition of the willing” comprises the savers and lenders of Asia and Europe. They underwrite America’s welfare at home and its warfare around the world.

Today, surprisingly few people question whether the “long war” is financially feasible; and virtually nobody is willing to canvass the likelihood that it and other grandiose ambitions will, in effect, push Uncle Sam into receivership (see, however, Avoid the Rush: Prepare Now for America’s Bankruptcy). Why should this possibility concern an Australian investment company? The plain and simple reason is that, for better or worse, perceptions about the U.S. Government’s creditworthiness calibrate the world’s economic and financial thermostat. For decades the conviction has been wide, deep and seemingly impregnable: it is the planet’s safest credit risk. The yield of a U.S. Treasury bill has thus been the benchmark (or “risk-free”) rate of return; and other assets (ranging from American corporate bonds to European stocks to New Zealand real estate) are priced, if only indirectly, relative to this yield. In recent years, Treasury bills and bonds have stood at or near generational lows. These ultra-low yields, in turn, have helped to generate what by historical standards are very high – and perhaps dangerously high – asset prices.

But what if these yields are far lower than they ought to be? What if, ironically, the “risk-free” rate is actually fraught with risk, and Uncle Sam’s sovereign credit rating overstates his creditworthiness? If so, then a disturbing possibility presents itself: in the future this rating may be downgraded – conceivably to “junk” levels. If that happens, then, to put it mildly, financial and economic shocks will resound around the world.

To read the complete Newsletter (PDF) click here.

Chris Leithner


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