Leithner Letter Nos. 136-139
26 April 2011 - 26 July 2011

Well sure our terms of trade are hitting a 140-year high and that is on the back of high commodity prices, the iron ore and from coal, but they are going to last for some time. I think that the prices of those goods, given the growth in Asia, given the demand in Asia, given the fact there’s a construction boom in Asia which will last for a long time. That will mean that the prices will be permanently higher. They may not be as high as they are now and they will come off a bit, but they will be historically higher as we go forward, much higher than they were in the past.

Treasurer Wayne Swan
(CNBC, 14 April 2011)

… The same basic policies that produced the bubble are still very active. These policies have driven financial assets to rich valuations and low prospective returns, which compete sufficiently well with zero interest rates, but offer little for long-term investors. … When the main source of “prosperity” is the policy-induced elevation of asset prices – rather than the allocation of savings into productive investment – it helps to remember that present gratification often equates to future unpleasantness.

John P. Hussman
This Is, Because That Is
(21 March 2011)

The Distemper of Our Times and The Evil Princes of Martin Place

Since April, judging from major stock and bond markets in America, Europe and elsewhere, people have sporadically recognised economic reality. Perhaps they are beginning to understand that the welfare-warfare state is not just morally bankrupt: it is financially insolvent. Greece currently hogs the headlines, but the real story is the bankruptcy of Britain, Japan and above all the U.S. Who knows whether this latest outbreak of sanity is ephemeral or will be durable? Clearly, however, events are (in fits and starts) unfolding as they eventually must – and as the mainstream strenuously and indignantly denies that they possibly can. According to Lawrence Summers, the Charles W. Eliot University Professor in the Kennedy School of Government at Harvard University, the Secretary of the Treasury from 1999 to 2001, the President of Harvard University from 2001 to 2006 and a Director of the National Economic Council until late in 2010,

The central irony of financial crisis is that while it is caused by too much confidence, borrowing and lending, and spending, it is only resolved by increases in confidence, borrowing and lending, and spending. Unless and until this is done other policies, no matter how apparently appealing or effective in normal times, will be futile at best.

How to still a panic and combat a bust? According to the best and the brightest, enable or force banks (whether sound or bankrupt) to lend even more, and encourage households, businesses and governments (whether sovereign or private, solvent or broke) to borrow yet more, than they had hitherto! To the high priests of economics and finance, the cure of a massive hangover is yet another – and even bigger – blinder; and the antidote to the drunk’s delerium tremens is an even stiffer dose of the very toxin that threatens his life. Our rulers’ and alleged betters’ prescription is medieval: bleed the patient and apply leeches!

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Chris Leithner


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