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The Terrible Merging Of Economics & Politics

22 January 2011 2 Comments

The merging of politics and economics should be avoided as much as possible.  I would assume however that most democracies end up merging them way too much.  Remember the following on democracies:

“A democracy cannot exist as a permanent form of government.  It can only exist until the voters discover they can vote themselves largess from the public treasury.

“From that moment on, the majority always votes for the candidates promising them the most benefits from the public treasury, with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship.

“The average age of the world’s greatest civilizations has been 200 years.  These nations have progressed through this sequence:

“From bondage to spiritual faith;
from spiritual faith to great courage;
from courage to liberty;
from liberty to abundance;
from abundance to selfishness;
from selfishness to apathy;
from apathy to dependence;
from dependency back again into bondage.”

As stated, people use democracy to vote themselves economic benefits, rather than focusing on freedom and independence.

So, today we find ourselves in an economic setting where truly the only thing that matters is the action that a handful of politically appointed men in a room will make.  As fellow blogger over at economicnoise.com puts:

Last year the Federal Reserve had these options:

  1. The Fed continues its QE beyond their planned cessation in March 2010.
  2. The Fed raises interest rates to levels that would attract the capital necessary to fund government operations via conventional credit markets.
  3. No Fed action is taken. That would cause the government to default on some of its obligations.

It was easily predicted the Fed would continue QE and that QE would not work:

Of the three alternatives, what is best economically is worst politically. This natural conflict between good economics and good politics is not unusual. Economically, the country would be harmed least by implementing alternative 2. From a political standpoint, alternatives 2 and 3 are probably unacceptable. Thus, it is likely that alternative 1 will be used. Again! It is precisely the continual overuse of this alternative that led to the current, sad state.

The natural conflict of good politics and good economics. He continues to look forward with the following:

The best that we can hope for is continued malaise. That probably means the following:

1. Employment does not recover.
2. Stocks, probably overpriced already, might or might not do well as the Fed continues to pump liquidity.
3. Commodities or “hard assets” will likely do well as a play on worldwide fiat currency depreciation.
4. Housing prices will continue down, perhaps as much as an additional 15 – 20%.
5. Bonds will do poorly once it becomes apparent that the government’s only tool is to inflate.
6. QE will continue for the entire year and probably beyond.

QE, at this point, has nothing to do with saving the economy. It is necessary to enable the government to continue paying its bills. It likely will be necessary beyond 2011.

The result of past and present government politices is that we are left with no good ending. For 2011, the best outcome is continued economic malaise.


  • peterdserrano3 said:

    Excellently put! I think the idea of a continuance of the status quo is at best an optimistic viewpoint. The reality is that more and more money is being pumped into the economy, the government isn't anything remotely necessary to reign in the bloated and massive bureaucratic spending that is drowning our nation in debt, and sooner or later those buying the bonds will pull back. When the market stops buying the options to fund the Leviathan will be massive tax increases (destroying the economy) or hyper-inflation (destroying the economy) to cover costs. It's a matter of when not if.

  • David Gallo said:

    A mutual fund's investment portfolio is continually monitored by the fund's portfolio manager or managers, who are employed by the fund's manager or sponsor.