Over the past few decades, the United States has steadily evolved from a nation
of producers to one of consumers. The change has been celebrated by politicians
and economists as proof of America's arrival at the top of the global economic
food chain. In reality, the development has depleted the nation of its
hard-earned wealth, and has led us to the brink of ruin.
But rather than encouraging a return of America's productive energy, our
government is responding to the growing economic crisis by simply trying to
boost consumerism at all costs. Its strategy involves socializing losses among
all citizens so that the depletion can't be easily discerned.
Now that the nation has chosen socialism as its economic
salvation, it is worthwhile to examine some historic precedents. They are not
encouraging. Europe, the former Soviet block and much of Africa and Asia show
vividly that socialism curbs individual freedom and enterprise, and leads
inevitably toward economic decline.
America was blessed both with abundant natural resources and individual
freedom, the backbone of enterprise. The combination rendered American
productivity the envy of the world. Based on the strength of our industry and
productivity, the American Treasury became the world's largest.
Why would America swap a history of successful capitalism for a murky future of
socialism? The answer is politics.
When the vast majority of the country's private sector working population is
employed in the service sector, then votes tip in favor of consumerism. This is
happening in America. Consumer spending now accounts for 72% of gross domestic
product (GDP) and is viewed as the engine of our continued prosperity.
Over the past decade, when recession threatened to curtail spending, the
government pumped hundreds of billions of dollars into the economy. This led to
two massive liquidity-driven booms; first in technology, then in housing.
During these booms, greed knew few bounds and leverage became a way of life.
But when the merry-go-round stalled, politicians did not, and will not, allow
the normally corrective mechanism of a recession to operate. It is trying to
take the pain out of capitalism, while leaving only the pleasure. This is
impossible.
In the current attempt at a market correction, the government has decided that
our bloated financial companies are too big to fail. As a result, the
government has lent billions of taxpayers' dollars to bail out Wall Street and
the mortgage industry. Some investment banks were given privileged access to
the "Fed Window" to borrow unlimited amounts of money, secured by "junk"
securities and at the lowest (negative) interest rates, well below the level of
inflation. In addition, the shares of the larger financial companies were also
given special short-selling trading protections.
It is important to note that these protections were not given to other
industries and were not even extended to the entire financial industry. Those
receiving the public largesse are precisely the large institutions most
responsible for the mess. It was the financial and corporate fat cats who made
the private profits gleaned from massive, irresponsible lending and borrowing.
Yet, when it comes to rescue, the ordinary citizen pays.
Declining corporate earnings, increased government intervention and higher
taxes are tell-tale symptoms of socialism. They can now be expected in America,
bringing downward pressure on US government paper and equities. Recession in
America will likely reverberate around the world, bringing worldwide strain to
economies and equities.
Let us hope that the rest of the world will not follow America’s example and
head down the road toward socialism. Economies adopting a free market approach
are likely to far outperform those embracing the discarded doctrines of
financial failure.
John Browne is senior market strategist, Euro Pacific Capital.
(Euro Pacific Capital commentary and market news is available at
http://www.europac.net. It has a free on-line investment newsletter.)
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