Big Fat Government and the Private Money See-Saw

Until now the government and private money have each taken turns to manage and control the economy. Regulations are basically what is used to make it change hands. Governments either take control or relinquish part of it. The power is in their hands.

Heavy regulation often comes in after a Boom Bust cycle with government using tax-payer money to bailout the bad guys. Very rarely are these bad guys replaced.

Light regulation occurs when the economy is still in the doldrums and the stock market has been going no where for some time. Governments then realize they need to reduce regulations to get investment going again.

Until recently governments were able to restart a faltering economy by quickly lowering interest rates and/or printing money. A short sharp adrenalin shot in the arm would work for those market dips. Everyone then bought the dips and the markets were off and running once again.

But maybe this time the financial industry, with the aid of government and greedy and ignorant investors, has so wrecked the financial system that these stimulators are not powerful enough to work. We’ve reached a tipping point where we have to complete the recession process rather than injecting our way out of it.

The evidence so far is that this may in fact be true. Nothing governments have tried has done anything to arrest the down-turn of the last 18 months.

Edward De Bono once said You cannot dig a hole in a different place by digging the same hole deeper. He was talking about using laterally thinking to change direction.

This financial crisis might benefit from some lateral thinking as not much is being achieved by traditional (1929) thinking. We haven’t got a 1929 economy. Money now moves at the speed of light. We need 21st century thinking not history-book lessons in 20th century economics.

The problem is Governments are now printing so much money it has swamped the private money. Its the private money that comes out of hiding and gets the economy going when government money retreats and when governments make the regulatory environment stable for risk taking.

It could be years before this massive amount of government money is absorbed into the economy, inflated away or withdrawn from the markets.

Until the balance is restored the seesaw will not work. There are big fat governments sitting on one end and a lean private money investment machine on the other.

Two things have to happen. The big fat governments have to slim down and withdraw from interfering in the markets. There is no chance of that happening in the immediate future because governments are on a mission to save their people from the recession 🙁 And the people want the governments to do just that.

Governments also have to stop messing about with the fiscal system and the monetary system and settle on the new regulations for the financial markets. Stability is the thing here. Again this is unlikely to happen in the short term because no one knows what to do to solve this crisis, so things are changing almost daily.

Private money will not come out to play if it does not trust governments or regulators or does not know what the new rules are.

So at best we can expect stock markets to stabilize if the stimulus packages work. Once that happens the governments will turn their attention to regulations that will be designed to ensure a financial crisis never happens again – until the next time.

As usual there will likely be over-regulation and it will take some time before governments realise they need to release the regulatory reigns to get private investors back into the markets again.

Once they do it will be on for young and old again as we madly rush towards the next Boom and Bust.

The key is to know how this all works and make sure you are on the right side of the cycle. The Pendulum Investment Strategy may keep you on the right side of the markets.

Buy and hold strategies completely ignores this and do not acknowledge the market cycles.

Buy and Hold is designed for the benefit of the fund managers to keep your money under their control regardless of what is happening in the real world.

As such you should ensure that if you use a buy and hold strategy you have clear instructions with your financial planner on what to do if the markets turn bearish.

For Baby Boomers those instructions are clear – Get Out and Stay in Cash.

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