Governments Fail to Do the Hard Thing Every Time

When I was trading the markets I read many books on the subject. One theme came through apart from the big one – always use stop losses. It was that you should always try to do the hard thing.

For instance the hard thing when trading is to sell a stock and take a loss. Another hard thing was to let your profits run. Many people can’t do that. They often wait for it to bounce back and when it doesn’t the stock becomes a “long term investment”. Or they take profits too early.

Government Deficits are just like stock losses in that respect. Governments are reluctant to reduce spending and frightened to death of high unemployment.

So Governments do the easy thing and borrow and/or print money to try to maintain the highly inflated economy at the boom level in the hope of maintain full employment. They can do this sometimes for years. But in the long term it always comes back to bite them.

The problem is always that the public act rationally during financial crisis and actually stop spending and save money. This means the government has to spend more if you believe that government should replace consumer spending and the situation just gets worse.

The last time it came back to bite them was in the 1970’s when deficit spending and false economic theories had plunged the western world into long recessions with high inflation and high unemployment.

Remember inflation is when government increase the volume of money and bank credit in relation of the volume of goods.

It was resolved by the new age of capitalism for a short time lead by Reagan and Thatcher. The result was they knocked off inflation (courtesy of Mr Paul Volcker, by the way where is he in the Obama Administration?) from a double digit figure and got people back to work through reducing taxes and letting the people create new businesses with significantly reduce government interference.

They also broke the back of union power which in the UK had all but crippled the nation. There is a place for unions but not when they hold the country to ransom.

This ended the bear market in stocks and revived the world economy and lead to the greatest economic expansion the world has ever known.

Bill Clinton had a brief attempt to derail it but Newt Gingrich rode into take control of Congress and put that to right and Clinton actually had surpluses.

We won’t talk about Bush’s fiscal irresponsibility 🙁

History was forgotten in the euphoria that lead to the belief the world now had the tools to manage the economy no matter what happened. If that was the case why did the credit crisis occur?

What went wrong? As usual governments believed that business are like trees, they just grow and grow, and so they can be taxed and taxed and manipulated to satisfy the political objectives of the party in power and are not left alone to operate in a good regulatory environment to make real profits.

Slowly but surely governments found ways to redirect private profits into public welfare programs to grab votes to keep them in power or to keep their seat. Nobody cared because everyone was making money. The mother of all programs was the US congressional push to provide low interest loans to people who could not afford them.

As with all such programs it worked for a while and there was a wealth effect as more and more demand for these loans pushed up house prices. But remember the laws of the parabolic rise in prices. At some point the parabola will turn and drop. If it is tied to human confidence and sentiment it is likely to drop like a stone as the people panic.

Now if anyone tries to tell me this is capitalism at work I will pay for a one way ticket to Cuba for them. They will get national health care there Castro-style too.

How can any country claim to be  a capitalist country when there is a FED that is outside the law (it’s called independence of the FED) and can print and manipulate the money supply and can use Interest rates as a weapon to give and take favours?

I’m not saying that markets should be unregulated either. What I am saying is regulations should be put in place that allow capital to flow where it is most profitable for it to go. Such flows should be protected to ensure that neither big business, big unions nor government can influence that flow to redirect it into their pet projects.

Just remember profits are not made at the point of a gun – that’s called tax. It is made through the free exchange of goods or services. No one forces you to buy an Ipod or an IPhone. But forcing banks to make sub prime loans is bad regulation pure and simple and stops the free flow of money to genuinely profitable enterprises.

Paper profits based on below market loans and government subsidies are not real profits.

I am fast coming to the view that the great increase in securitization of the mortgages was because the sub prime loans were so successful and banks knew it was unsustainable but governments coerced them into making them. So they found a way to offset the risk which is exactly what they should do with any investment.

Only problem was too many bad loans needed securitization and risk redistributed and they were unregulated. So the sky was the limit.

The hard thing is for governments to enact good regulations that stop them meddling in the market place, stop big business lobbying them to get favours and stop big unions from doing the same.

Rather than oversee the financial system the question they should be asking is how do they enact regulations that stop them interfering with the markets yet make the financial industry fiscally responsible and accountable.

I know…  Pigs might fly well before this happens.

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