Wall Street Journal – From the beginning, our representatives in Washington have approached this economic downturn with old-fashioned, Keynesian economics.  Keynesianism- named after the British economist John Maynard Keynes — is the theory that you fight an economic downturn by pumping money into the economy to “encourage demand” and “create jobs.”  The result of our recent Keynesian stimulus bills?  The longest recession since World War II — 21 months and counting — with no clear end in sight.  Borrowing close to a trillion dollars out of the private economy to increase government spending by close to a trillion dollars does nothing to increase incentives for investment and entrepreneurship. 

The fallacies of Keynesian economics were exposed decades ago by Friedrich Hayek and Milton Friedman.  Keynesian thinking was then discredited in practice in the 1970s, when the Keynesians could neither explain nor cure the double-digit inflation, interest rates, and unemployment that resulted from their policies.  Ronald Reagan’s decision to dump Keynesianism in favor of supply-side policies — which emphasize incentives for investment — produced a 25-year economic boom.  That boom ended as the Bush administration abandoned every component of Reaganomics one by one, culminating in Treasury Secretary Henry Paulson’s throwback Keynesian stimulus in early 2008. 

Mr. Obama showed up in early 2009 with the dismissive certitude that none of this history ever happened, and suddenly national economic policy was back in the 1930s.  Instead of the change voters thought they were getting, Mr. Obama quintupled down on Mr. Bush’s 2008 Keynesianism.

Producing long-term economic growth will require a fundamental change in economic policies – lower, not higher, tax rates; reliable, low-cost energy supplies, not higher energy costs through cap and trade; and not unreliable alternative energy surviving only on costly taxpayer subsidies.

Unfortunately, Mr. Obama seems to be wedded to his political talking points, and his ideological blinders seem to be permanently affixed.  So don’t expect any policy changes.  Expect an eventual return to 1970s-style economic results instead.

One Final Point: Consider this line from Keynes’ 1919 book THE ECONOMIC CONSEQUENCES OF THE PEACE: “[The Soviet Union's] Lenin was certainly right.  There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.  The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

From Political Math:

Many folks wonder why I’m not panicking about the deficit and why I’m not predicting hyperinflation soon.

Check out the below article and I think you will feel better.

Link: A Relative Perspective

In order to prosper in your financial life and get through this economic environment with the greatest peace of mind, you must rid yourself of any short-sighted thinking that may negatively impact your financial life. 

Every major downturn has its own unique characteristics.  This frightens investors into making the wrong decision at the wrong time.  For example, over the past 18 months I’ve witnessed investors dump their stock market holdings regardless of how well-managed the companies might be.  

A classic short-sighted decision.    

“But Roland,” you say. “Shouldn’t you move more of your money over to cash until you know the market recovery has arrived?  Isn’t that the safe thing to do for now.”

Nope, and here’s why:  For 95 years now the Federal Reserve has destroyed the buying power of our dollars.  With the massive amount of money that’s been created in recent months, I expect inflation to continue being the dominant, long-term trend throughout my lifetime. 

Cash is the LAST place I want my long term savings to be.  For more on this see my previous posts on derivatives. 

Knowledgeable investors I know realize that putting money in the bank today that could buy a loaf of bread will one day be given back those same dollars but this time they will only buy a few crumbs after inflation has taken its share.   

See, there is a difference between money and wealth.  Money is just the tool society uses to measure and trade wealth.  The true wealth: businesses, stocks, land, real estate, and precious metals cannot be created without limit; money can. 

My suggestion is that you recognize the difference between the two and if you have not done so already, start dipping a toe into the market by taking money and buy up the abundance of wealth that so many of your peers are ignoring. 

Here’s one last bit of common sense that explains why now is not the time for cash:

FINAL NOTE: I could be wrong but the chance we saw the market bottom back in the early part of March grows by the day.  Don’t get too excited yet because the windbags in Washington could quickly change that with a speech or a new piece of legislation.  But please stay tuned - the remainder of the year will likely be filled with many twists and turns.  

Take some time and watch John Stossell’s “Bailouts and Bull” that aired on ABC’s 20/20. The first part is shown below with the remaining segments linked further down.

Part 2, Part 3, Part 4, Part 5, and Part 6.

In this article from Burton Frierson at Reuters and published on Forbes.com, I briefly mention that inflation is a much greater threat than deflation. 

Here is a short article from Steve, one of my favorite economic commentators.

I’ve been a follower of economics since I had the opportunity to try to understand America.  I immigrated from Italy as a 10 year old, and everything was “new” to me.  In school I strived to understand cause and effect.  Having studied economics for almost 50 years, this article best describes how I feel about it all.  Enjoy!

Conservatives should never say to voters, “We can lower your taxes.”  Conservatives should say to voters, “You can raise spending.  You, the electorate, can, if you choose, have an infinite number of elaborate and expensive government programs.  But we, the government, will have to pay for those programs.  We have three ways to pay.

“We can inflate the currency, destroying your ability to plan for the future, wrecking the nation’s culture of thrift and common sense, and giving free rein to scallywags to borrow money for worthless scams and pay it back 10 cents on the dollar.

“We can raise taxes.  If the taxes are levied across the board, money will be taken from everyone’s pocket, the economy will stagnate, and the poorest and least advantaged will be harmed the most.  If the taxes are levied only on the wealthy, money will be taken from wealthy people’s pockets, hampering their capacity to make loans and investments, the economy will stagnate, and the poorest and the least advantaged will be harmed the most.

“And we can borrow, building up a massive national debt.  This will cause all of the above things to happen plus it will fund Red Chinese nuclear submarines that will be popping up in San Francisco Bay to get some decent Szechwan take-out.”

Yes, this would make for longer and less pithy stump speeches.  But we’d be showing ourselves to be men and women of principle.  It might cost us, short-term.  We might get knocked down for not whoring after bioenergy votes in the Iowa caucuses.  But at least we wouldn’t land on our scruples.  And we could get up again with dignity intact, dust ourselves off, and take another punch at the liberal bully-boys who want to snatch the citizenry’s freedom and tuck that freedom, like a trophy feather, into the hatbands of their greasy political bowlers.”

~ From The Weekly Standard

 Hat Tip:  Adventures in Capitalism

This is unbelievable, but it is good news:

WASHINGTON – House Speaker Nancy Pelosi told the Wall Street Journal that she is considering a two-staged effort to boost the shaky U.S. economy, arguing for action now on a stimulus package of $60 billion to $100 billion, followed early next year by a companion measure that would include a “permanent tax cut.”

In an interview Thursday morning, the California Democrat pointed to weakness in the nation’s jobs market, and urged the White House, long skeptical of Democratic-led stimulus efforts, to work with Congress in the waning days of President Bush’s term.

“Let’s see if we can’t do something, working together now, that gives us a two month jump,” she said.  She said any measure enacted in a lame-duck session of Congress this month would effectively be a downpayment on additional measures enacted later.  “We’ll take the longer view as soon as we take over in January.”

Ms. Pelosi said she doesn’t favor a capital gains tax cut, as pushed by congressional Republicans.  But she did say the “second piece” of the Democratic stimulus agenda should include a tax cut.

The speaker said she prefers a direct tax cut over tax rebate like the one pushed by President George W. Bush a year ago.  The speaker said a direct tax cut can have a more immediate impact on the economy, especially if the government adjusts tax withholding tables to speed dollars into worker paychecks.  “The impact is faster than a rebate, which takes a few months get into people’s hands,” she said in an interview.

 ~ From Thursday’s Wall Street Journal