11.01.2008 0

The Triple Threat

  • On: 11/13/2008 10:54:08
  • In: Economy
  • By Robert Romano and Isaac MacMillen

    “The U.S. might really have to look at a default on the bankruptcy reorganization of the present financial system. You have almost seen the banks fail, now I think the next thing that might happen is a bankruptcy of the government… in the U.S. and a number of European countries, a very similar situation… that means very high inflation going forward.”—Martin Hennecke, Tyche, speaking on CNBC, November 10th, 2008.

    A wise man once observed that a government can no more spend itself solvent than a drunk can drink himself sober. And that brings us to America’s plunging credit rating.

    In an underplayed piece of news this week, Martin Hennecke, an analyst from Tyche, told CNBC that the U.S. could lose its AAA credit rating. Unfortunately, to most Americans, this likely won’t seem to mean much. But if his prediction comes true, its implications could be nothing short of devastating.

    Several credit rating agencies rate each country in the world based on the risk accrued in lending to it. The United States has consistently come out among those on top, with a triple-A rating, ostensibly indicating a virtual zero risk.

    The several rating agencies that have given credit ratings to the 180+ countries around the world periodically adjust those ratings to reflect new realities. And if a country’s bond rating is downgraded, that means the interest it pays on its national debt increases. Which is where the United States may soon find itself.

    If such a catastrophe ensued, it would simultaneously increase the burden of U.S. taxpayers, consumers, and borrowers who will pay for Big Government excesses with higher taxes, higher prices, and higher interest rates. Clearly, this triple threat must be addressed. But, the fact is, it may already be too late.

    As Mr. Hennecke noted above, the U.S. could be on the road to bankruptcy on account of its excessive spending. And who could blame Moody’s and S&P for seriously considering downgrading the U.S.’s credit worthiness? The government has sought to prop up the financial system with bailouts approaching $2 trillion, nationalized the mortgage industry, nationalized an insurance giant (AIG), practically nationalized the banks, and now is considering nationalizing its failed auto industry.

    To put it bluntly, you’d have to be an idiot to lend us money at this stage. It would be like giving a degenerate drunk $100 to go get groceries and expecting anything but yet another disappointing binge.

    As those familiar with the rarified world of inebriation tell us, there are high bottoms and low bottoms—for the chronically pixilated—and unfortunately for there’s no high bottom for this drunken spender: the U.S. Congress, Treasury, and Federal Reserve. If downgrading the U.S.’s bond rating is what it’s going to take to help Americans see that their government is fiscally irresponsible, then it’s high time for some tough love.

    And those who love this country must know that we may have to hit bottom before we can climb back to the top.

    Robert Romano is the Editor of ALG News Bureau.

    Isaac MacMillen is a contributing editor of ALG News Bureau.

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