Whence the Money for Gonverment to Waste?
Finally…we’re back in London. We left at the beginning of April…went to San Diego and Los Angeles…then to Buenos Aires and Salta…then to Paris for a few days.. and now we’re back. London is cold and rainy…just like we left it. Not exactly home…but it will do.
But what’s this?
The City seems to be winding down. All those hot shots in the financial sector aren’t so hot any more. In the space of just ten years, the percentage of GDP generated by the financial sector almost doubled – from 5.5% in 1996 to 10.8% a decade later. But now the whole sector is shrinking…along with bonuses…payrolls…and expense accounts.
And since Britain counted so heavily on the financial high fliers and their money…the whole country seems to have gone into a funk.
Tax revenues are collapsing. Deficits are soaring. The U.K.’s national budget deficit is already at 12%…about even with the United States. But if current trends continue, she’ll soon have the largest deficit in the developed world.
But here comes the bad news. Your editor didn’t mind when investors and speculators lost trillions. He barely noticed when the U.S. government practically nationalized the largest banks, insurance and automobile companies. He hardly blinked when $13 trillion of the nation’s treasure was committed to a foolhardy effort to combat capitalism. But now they are going too far.
In an effort to raise money, the British government is raising your editor’s taxes! Yes…your poor editor pays taxes in several countries. And now the Brits are raising their rates to levels that rival those of the highest tax jurisdictions in the world – Sweden, Norway and the Netherlands.
The trouble with this strategy is that your editor just bought a pair of Argentine boots. And these boots are made for walking. If these news taxes pinch too hard he – and thousands of other people working, vaguely, in the financial sector – is likely to walk right out of here.
But to where? Ah…there’s the rub. All over the world, governments are desperate to get out of the mess they’ve gotten themselves into. Argentina and Ireland just got handouts from the IMF. Other countries are getting in line. Having spent far too much in the past, they now spend more – hoping that spending will miraculously bring about economic growth. We say “miraculously” because there is no other way to explain it. When economic growth results from saving, investing and hard work you can describe it in terms of ’cause and effect.’ But if you ever get economic growth simply by spending money, you can only refer to it as an act of God…or the devil. Black magic, maybe. Voodoo economics.
Hardly a day goes by without some abracadabra or hocus pocus announcement. The feds bail out the banks on Monday. On Tuesday, they take over the auto industry. By Wednesday, they’re passing out money on Wall Street. If any of these tactics result in greater wealth or more output – it will be a miracle.
One question that has so far been avoided by practically all the commentators and well-wishers is this: where’s the money come from? In the popular mind, if you can call it that, the government’s pockets are infinitely deep. Reach down far enough and you will pull up whatever resources you need. But the fact of the matter is a bit different. In time of war, a government can marshal the resources of an entire nation. People believe they must buy war bonds, collect old metal, use rationing coupons, forego salary increases, pay higher taxes, and sign up for the Home Guard. Every back bends to the job; better that than bending to the lash, people say to themselves.
But the war against capitalism is not getting the same level of popular support. People are not buying “war bonds” so the feds can bail out Wall Street or the City. They’re not likely to eat margarine so the bankers can slather real butter on both sides of their bread. And they’re not willing to spend less just so the government can spend more.
So instead of asking the whole population to suffer, the feds – both in Britain and back at home in America – have chosen an easy target…the rich!
In the public mind, ‘rich’ and ‘banker’ are inseparable. Like ‘corrupt’ and ‘politician.’ What’s more, the rich were at the scene of the crime when the financial crisis began. The rich were caught red-handed. It doesn’t matter if the ‘rich’ man earned his money from doing heart operations or selling mortgage-backed bonds. Every rich person is presumed guilty of the crime of the century. “Tax them!” screams the mob. “Tax them! Tax them! Eat them.”
And so, it will come to pass that ‘the rich’ are taxed. The money will be taken from them and given to…well…the rich. But these will be different rich people – bondholders…bankers…insiders…hustlers and anglers.
So what gives? Why is the stock market rallying?
The mood of the market is fairly positive, at least as we hear as much. The last few weeks have produced an upward trend on Wall Street. The press is reporting “early signs of a recovery.”
Of course, the crisis has to end sometime. But it seems much too early to us. Remember, this is a depression, not a recession. It is not a pause in an otherwise-healthy economic model. This time, the model itself is insolvent. Americans cannot continue going further and further into debt in order to provide huge bonuses for Wall Street and employment for China.
It’s over. Fini. Caput.
It will take time to destroy the industries, investments and lifestyles that depended on the old model. And it will take even more time to find new ones.
Corporate earnings this year are expected to come in 35% below last year.
The insiders seem to realize that the game is over. They’re selling into this rally – the highest level of insider selling in two years. We continue to believe that this market intends bloody mayhem…and that it won’t stop until it has killed both the bulls and the bears.
The bulls will be killed in the classic way. A strong rally on Wall Street…or a series of minor ones… will lead them to believe that “the worst is over.” They’ll get back into stocks after a 20% or 30% advance – hoping to recover what they lost last year.
Then, the stock market will make a new dramatic move to the downside. This will probably happen several times…each time leaving bullish investors with more losses. Finally, the bulls will give up. They will sell stocks…driving prices down and dividend yields up. By the time the bottom is reached, former investors will neither know nor care. P/Es will be scarcely more than 5. Dividend yields will rise above 5%. The Dow will sink to 3,000-5,000.
Then, eventually, it will be the bears’ turn. But we’re not there yet.
No, dear reader, the months ahead will be a challenge. The world economy is telling a story no one has ever read before…or at least that no one alive has ever experienced before. Every day we turn the page just to see what happens. We have no idea how the story might develop. It’s all guesswork.
Still, when the final chapter is read out…the moral of the story will probably be familiar to us. It always is.
May 4, 2009