Market Watch - November 4, 2011
Government indebtedness is socialism's ally, and ruination of the economy is always the result.
A Market Watch article published in February of 2004 contained this quote by David Walker, Comptroller General of the U. S., who wrote in a New York Times editorial that "The federal debt, plus the gap between the government, social security and Medicare commitments, and money set aside to pay for them, exceeds $400,000 per family of four". Today, 8 years later, our government can not agree, among themselves, what we owe, in total, let alone per family. All agree, however, it is at least $800,000 per family, and climbing. That is inexcusable.
A June 2009 Market Watch article indicated "The continuation, and increased philosophy, of government spending, and money manufacturing, to solve a problem created thereby, is unprecedented in economic history. The end game of this is unknown but cannot be positive because it's all built upon debt". We are beginning to now see the endgame results.
The volume of total debt in free world economies is $195 trillion. The total value of assets in those economies is $150 trillion, so the entire free world economy is upside down. Had all of this debt been accumulated to build infrastructure, new manufacturing sites, and research and development, the world economy would be booming. Unfortunately, a great amount of this debt has been driven by governments and used for war and the redistribution of wealth to satisfy socialistic programs. As always, when governments control economies, debts become outsized and economies suffer. Why? It's very simple: money borrowed by the government to give to welfare recipients is not a productive use of capital because it is invested in nothing. Money borrowed and invested in industrial production, business buildings, cars and equipment produce a return on investment which government indebtedness cannot provide. Eventually government borrowing overwhelms an economy because interest payments must be paid annually and there is never a plan to pay back debt. Debt grows until government must borrow money just to pay interest on the debt. This is our present situation and our government is bankrupt. For the last several years, the Fed/Federal Government has borrowed all of the savings in our economy. That was insufficient, so they simply printed the several trillion dollars not available to pay the rest of the bills. This is the sole reason for inflation in the U. S.
There is a fine line between charity and dependency in life. Dependency literally breeds dependency, and that is our primary struggle. We are dependent upon the government for Social Security. We are dependent on the government for medical care. We are dependent on the government for our mortgages. A sizable percentage of our population is dependent upon the government for a living because they haven't learned anything but dependency. Many of our politicians cater to groups of dependent people with the sales pitch that government can solve their problems. In reality, the government cannot ever solve the problem—government only creates more problems. For fifty years we have used debt to fuel growth by increasing the money supply through government borrowing to spend on welfare and war. Growth fueled by anything other than savings is an invitation to disaster.
And that brings us to where we are today. The dollar is beginning to lose its reserve status; the U. S. is on the verge of sinking into a severe slump; there is likely to be a currency collapse because 65% of the world's monetary reserves are in dollars, and many other countries are not willing to accept dollars in settlement of debts. The battle ground in the future will be the dollar and its reserve status. Without the dollar being the world's reserve currency, there is no way government could indebt our country the way it has. We should respect Thomas Jefferson's quote: "We place the economy among the first and most important virtues and public debt as a great danger to be feared. To preserve our independence, we must not let our leaders load us with perpetual debt. We must make our choice between economy and liberty or perfusion and servitude." We have done exactly the opposite of what was intended by our Founding Fathers.
The mess we currently find ourselves in is referred to by deceased Austrian economist Von Mises as "The crisis of interventionism. Intervention is aimed at confiscating the "surplus" of one part of the population and giving it to the other part. Once this surplus is exhausted by total confiscation, a further continuation of this policy is impossible." It is not coincidental that growth of public debt fits hand-in-glove with a large, and invasive, government. The only solution left to people in a country like ours is to drastically reduce the size of all governments: federal, state and local. There is absolutely no indication that our government is doing anything to change this trend. All we have had so far is talk, which is all we have had for the last 50 years.
The Government's Solution? "Tax the 1%"
Let's really examine this in light of the fact that our government is estimated to spend $1.3 trillion more next year than it will receive in tax revenue. Let's say we take that 1% of the population that makes the most money, and who already pay outsized taxes, and we tax away all of their income in one year. That would add about $400 billion additional dollars to the government coffers leaving us a deficit, after taxing the 1% out of all their income, of $900 billion annually. Only it does not make sense to do that because most of the $400 billion just confiscated would go back into businesses in the form of investment which will create permanent, long-term jobs. By taxing the "1%" out of everything, the government still has a massive fiscal shortfall and, the U. S. economy would have very little re-invested. This is more government subterfuge to disguise the real problem—government spending. The government has, and continues to, lie and mislead the public, all to preserve government jobs and politician's power. Elected officials are beginning to characterize the top 1% of wage earners as "the greedy 1%". That's ironic in that the greatest example of greed in history is the U. S. Federal Government.
How Does this Affect the Markets?
How do artificially low interest rates, forced upon us by the Federal Reserve, affect investments in our stock and bond markets?
The bond market remains over priced because interest rates are artificially low. The only debt instruments considered safe for the cautious investor, and yielding a decent interest rate, are A-rated corporate bonds and AAA-rated municipal bonds.
There are several high grade stocks to purchase for yields that pay 3%, or more, a year. But these stocks are priced artificially high because interest rates are so low. Low interest rates force high grade stocks to trade like bonds, based more upon the dividend rate, rather than the long term growth prospects of the market. There are limited long term growth prospects now, just as there are in Japan. Japan's indebtedness of the 1980s is an economic matter with which Japan still wrestles. The market has been depressed in Japan for 20 years, and the U. S. is headed down the same road, all because of government debt.
The conservative investor will have a few of those high grade stocks, and a few of those high grade bonds, and lots of cash. Because cash pays little, and due to inflation, cash holdings are deteriorating in purchasing power as time moves on. However, cash can (1) keep us out of trouble, and (2) be available when the stock and bond markets finally deteriorate and close in upon realistic values.
All the bubbles that have been created by the government and the fed over the last 30 years are a result of artificially low interest rates. Each time the government develops another bubble, the economy gets worse. This is the worst situation we have had in 50 years in America - much worse than the 1970s and 1980s. The wise investor will be judicious about investments, keep large cash balances, and expect that the stock market will continue to go nowhere until the government gets its act together by reducing spending and balancing the budget.
Caveat Emptor.
George Rauch
November 4, 2011
