What's Yours Is Ours

If I told you I have a gambling addiction and asked you to lend me money to pay off some debt would you? The answer is most likely no, because any reasonable person would not believe the money would go to settle debt. Rather, I am more likely to gamble it away. Why? because I am addicted. The solution to my addiction and debt is not to give me more money. Rather, it is by making me realize and understand that "my world" of gambling is not an entitlement just because I got used to it. The same can be said about the state of our economy. Just because we got used to easy and cheap money doesn't mean we are entitled to it. Worse yet, is taking other people's money to satisfy our addiction. Yet this is exactly what our government is doing with private as well as public money in the name of curing our addiction. I say private money because that is exactly what happened with the bondholders of Chrysler and GM. They were forced to accept a fraction of what they are entitled to legally under our existing business laws. The public part is the endless printing and spending of money by the federal government as well as the Fed. Both fall under the Robin Hood syndrome, taking from the rich to help the poor. This is a very dangerous precedent that will hamper the ability of the economy to recover. The Robin Hood syndrome also extends to the banking industry, the energy industry and the health care industry but seems to exclude the politically sensitive unions, Fannie Mae and Freddie Mac. I guess Robin Hood took only from a select group of rich people.

The idea of government spending, on the scale we have seen lately and in an economic state we are experiencing now, acting as a stimulus is flawed for the main reason that the American consumers' psyche (as well as that of businesses) is shaken to its foundation. This is not to be taken lightly. Spending is not on the mind of many Americans, but deleveraging is. Hence the government can print all the money it wants without any real results. The government does not buy everyday essentials like the consumer does. The only stimulus will come from the consumer once he/she has deleveraged and is confident enough in our fiscal and taxing policies. In addition, I think we can all agree that government does not create jobs. Thus that money the government is spending is money that is not available to the job creating private sector, thus delaying recovery. Second, for that money to be stimulative it has to bring something new to the table but this can't be because the money is borrowed money that increases our already huge deficit and hinders our ability to borrow more or even service our existing debt. In other words taking money from my left pocket and putting it in my right pocket does not add to my net worth, and therefore does nothing to make me want to spend and by extension create a job or two. It is a waste of expanded energy (wasteful spending) that creates a short term illusion of economic activities (my right pocket has more money now). The first quarter GDP was reduced from 3.2% to 3% and finally to 2.7%. The GDP for the second half of the year is projected to be even lower. The jobless rate is still at 9.5% and likely to stay there for several years. So where is all that stimulus that is supposed to take place? where were these promised jobs created? in China? which poor people were helped by raiding the coffers of the rich? The starving in Africa? the answer may be in the "now you see it now you don't" pick up in the housing market thanks to all the incentives that pulled in from future demand (no net increase) at a huge expense that will burden us for years to come.

What we are witnessing in terms of public policy is nothing short of madness targeted at a segment of our economy. I say that because by now it is well known that creating economic equality among the population does not work. Hence the ex Soviet Union and the new Russia, China and a host of newly created nations that have embraced the concept of capitalism even in the midst of this crisis. Big government, even if just perceived, sends anti-growth vibes through the economy as well as unsettling uncertainties of a centrally planned economy. Big government does not have to be involved in the day to day business decisions. It is enough to set a tone and make an example of an industry or two and the message is received.

The premise of taking what belongs to the successful ones and spread it more equally among the rest of the population in the hope of instilling a sense of government responsibility or creating a sense of equality does nothing to stimulate creativity and risk taking which are necessary to create jobs. It actually has the opposite effect. It sends the message that either there is no need to, or we are incapable of being creative or productive; the government will do it for us. History, as well as common sense, shows otherwise.

China is widely held as a model of modern day capitalism. To a certain extent I agree. However, I caution that China is still to a large extent a centrally planned economy as evidenced by its control of the banks and other state owned entities that are responsible for the larger share of GDP. China had to embrace certain principles of capitalism because it knew it will not be able to take care of its population, and risked falling behind the rest of the world. The difference between China and the current U.S. administration way of thinking is that the two come from opposing backgrounds and are heading in opposing directions. That is why China is very mindful of the ineffectiveness of the Robin Hood syndrome while the U.S. seems to think that restoring economic power and prosperity is not only to take from the rich and provide for the poor but to also borrow from the Chinese to fix our many social ills. I am not promoting a Chinese style economy either (see previous blog). I still think that China's economy is not what it seems to be. But at least China seems to be forward looking in terms of its business practices (not enough) and in terms of its acknowledgment of the power of lower taxes ( no capital gains tax in China) while the U.S. seems to want to revive an old worthless system (by the way the U.S. has one of he highest corporate tax rate in the world in addition to the soon to be 40% capital gains and dividend tax rate).

There are signs that policymakers are beginning to realize their misguided efforts. Today's job report and the slowing economic activities as well as the urging of some of our European friends to cut back on spending and stimulus may help speed that realization. Let's hope it doesn't take a European style debt crisis to awaken us because by then it may be too late and the consequences will be severe indeed.

Robin Hood may have been an entertaining legend and character but never the savior. On the other hand we are facing reality and our responses have to be equally realistic and future looking. That is not to say there are easy and painless solutions, to the contrary, the solutions are difficult and quiet painful (not literally), but absolutely necessary and should not include a Robin Hood style solution.



Coming soon: What An Investor To Do?