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 this special 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.

Take a few minutes to watch this excellent video from Brian Wesbury to gain a better understanding of what is taking place in today’s economy. 

When you take out the government-speak and insert common sense language, stimulus simply means “create more money out of nothing.” 

More on this in the video below:

What this all amounts to is a growing inflationary risk.  The negative headlines you see today are primarily deflationary driven.  Eventually the massive amount of money created by the Fed (an effort to avoid deflation) will spread throughout the economy thus devaluing all existing dollars in your pocket.   

As the U.S. dollar makes its downward plunge, gold and other assets NOT created out of thin air will likely be the winners.  But one should not get in over their head with this precious metal or any other non-dollar asset class since it’s obvious the economy is becoming more saturated with Washington’s policies. 

And if ever you have felt that our financial lives can be improved with politics, here is a must-see video for you.  In it Congressman Pete Stark attempts to explain how America’s wealth grows as the national debt grows.

*Note: The Congressman quickly becomes angered with some of the reporter’s basic questioning and uses foul language so view with caution. 

Now back to the main point …  

As a long term investor, you cannot eliminate investment risk but you can manage it and the only method to accomplish this that allows me to sleep at night is broad diversification.  We can’t control the daily happenings on Capitol Hill but we can be informed about the financial consequences that stem from political actions. 

Bottom line, these stimulus packages we’ve seen are nothing more than crafty smoke and mirror programs.  Unfortunately the typical citizen thinks the government is the one cutting the check.  

LESSON OF THE DAY: Governments have debt, not capital. 

It’s you and I who are covering the bill and we will pay dearly in the years to come by way of increasing taxes and constantly depreciating dollars.    

“Sometimes I wonder whether the world is being run by smart people who are putting us on…or by imbeciles who really mean it.”  – Mark Twain 

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!