Tuesday, September 2, 2008

An Insider Talks

"Will the U.S. Treasury repudiate its obligations to its creditors, be they citizens or investors around the world? Most observers would answer 'no' without hesitation. But Congress, with the complicity of the White House and the Fed, has arguably embarked on a stealth repudiation. In his famous treatise, 'The Wealth of Nations,' Adam Smith noted there had never been a 'single instance' of sovereign debts having been repaid once 'accumulated to a certain degree.' We may have reached Smith's threshold. ... Markets are supposed to be forward-looking and efficiently price in all relevant risks. Yet monarchs have been repudiating debt explicitly and implicity throughout recorded history. ... In the 1990s, when Mr. Greenspan faced his own banking crisis, he was able to adopt a policy of comparatively low short-term interest rates. Banks used the opportunity to borrow cheaply and lend profitably to grow their way out of the crisis. Credibility allowed the Fed to engineer a recovery without stoking inflation fears. ... Now Fed Chairman Ben Bernanke has decided to try for a hat trick, and spend the Fed's reputational capital on an easy credit policy. ... As Milton Friedman long ago taught us, government spending is the ultimate tax on the economy: It extracts real resources from productive, private use and puts them to unproductive, public use. And there is the is the rub. ... The markets have long assessed the debt of Fannie and Freddie at AAA because of the Treasury's guarantee, now explicit. But no one has ever seriously assessed the Treasury's creditworthiness with Fannie and Freddie on its books. ... Anyone who works, saves and invests is exposed to confiscation of his capital and earnings through inflation", my emphasis, Gerald O'Driscoll (GO) at the WSJ, 22 August 2008.

"Arguably", GO? Not arguably, indisputably, beyond peradventure! GD is a Dallas Fed former vice president. Will GO be tried for treason for exposing the "plan"? See my 5 January, 29 May and 4 July 2008 posts.

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