One Man's Opinion

Do Economic Laws Still Work?

April 17, 2012: As of the current date, I suppose it is not unreasonable to conclude that Obama will be re-elected next November. While not certain of course, the Dems and Mr. O are doing very well at the polls as they scare every senior into thinking the Republicans, if elected, are going to balance the budget on the back of all those receiving Social Security, Medicare or Obama care (if not reversed) and all the other entitlements given to them in one form or the other. Their success in creating class warfare between those who have wealth and those that do not will even accelerate as the consequences of higher taxes and reckless spending takes its toll on growth in the private sector. We have seen just a small sample of what this Administration has in mind relative to its assumption that it has the right, ergo the necessity to interdict the free market’s role in our capitalistic system. To assign responsibility to a government agency for allocating capital among entities, both public and private, that are presumed to provide the best potential for contributing to employment and growth in our economy is nonsensical at best, and more likely disastrous at least for our nation.

In spite of centuries of evidence that Command societies do not work and individual wellbeing suffers under the leadership of governments that try it, here we are about to fall into the precipice of re-electing a man who has led America at full step toward its doom amid financial ruin. The Political ambivalence about the financial and economic consequences of deficit financing of entitlements is not only dangerous but has become irreversible without significant if not total debasing of the U.S. Currency. That is where we are headed no matter how much hot air comes out of Congress and the Administration.

So what does one do about it? Is there any path that provides certainty of relief to a thoughtful individual investor seeking to protect his wealth and his relative standard of living hard earned by toil over his lifetime? I am sure there is but none without comparable risk to doing nothing. Since The polarization of Americans into independent and dependent camps, seemingly there is no chance for reconciliation between them that would be targeted toward mutual benefits and common purpose. If your life depends upon a liberal government that provides benefits you need and want, you will support that government’s efforts to obtain monies to pay for those benefits even if they are funded from borrowing the monies necessary to pay for them or taxing those citizens who own the capital that is the very source of such borrowing or is providing the capital that generates the income to be taxed. This is simply a plan to borrow from Peter to pay Paul and Peter is going to go broke eventually.

In a free market capitalistic economy, investment capital is generated from savings and is the seed capital for economic growth. Employed to enhance the combination of labor and materials, a transaction therefrom generates revenue and potentially net income. The business manager routinely negotiates the cost of materials and labor applied to a given product or service with the objective to set a price for the sale thereof that will attract buyers and result in long term revenue above the cost attributed to produce that product or service. The current tax debate between conservatives and liberal thinkers addresses the question, “is this net income, the prospective seed capital of a free market economy, sufficient to bear the burden of a larger payment of tax or are the owners of that capital benefiting disproportionately to the amounts they should provide for those dependent upon government largesse”.

When a government sets its tax rates at levels that cause that seed capital to flee its jurisdiction or be reduced from tax rates so high that incentive to assume risk is moderated, the very tax base itself begins to subside and tax revenues fall short of requirements so, 1.) Tax rates and debt will increase and, or 2.) The U.S. Treasury and Federal Reserve will inflate the currency to pay down and refinance its debt, making dollar investments decline in real value. Normally the consequences of this type of action will result in interest rates rising as investors are reluctant to buy fixed income securities at such low rates and lose purchasing power as inflation grips the country. But in the global markets currently, especially the Euro nations, the carryover from the 2007 collapse of the financial and banking systems has so many investors and sovereign funds managers seeking security or a safe haven for at least a portion of its worth it has created an unreasonable demand for dollar based government guaranteed securities. What will happen when the Federal Reserve reverses course and stops buying Treasuries? With a stop to this flooding of liquidity into the market, Investors, the Treasury and the Federal Reserve will become sellers of Treasuries at the same time and buyers will demand higher and higher returns on their investment thus causing interest rates and commodity prices to spike. With interest rates rising, Federal tax revenues will decline and government spending deficits will rise even further thus leading to spiraling amounts of our national debt.

So what happens next? It seems unthinkable that there would be no path to recovery from this prospect of economic and financial decline. Will public reaction lead to chaos in the streets and loss of social order? I fear that is a possibility. The question then will be, “what role would the military assume and what political powers will be retained by a failed Administration. Will limitations be placed on personal freedoms at least temporarily? This is a pretty drastic scenario and may be too extreme, but it is only dependent upon the breakdown of order that comes from the private sector when it no longer believes in the powers of individual responsibility and the willingness and freedom to exercise it.

One Man’s Opinion- Bud Brewer

2 Responses to “Do Economic Laws Still Work?”

  1. What i do not understood is in fact how you are now not actually much more well-appreciated than you may be now. You’re so intelligent. You realize therefore significantly with regards to this subject, produced me personally imagine it from numerous numerous angles. Its like women and men are not fascinated until it is something to accomplish with Girl gaga! Your individual stuffs nice. All the time deal with it up!

  2. Bud,

    Thank you for the time and effort you put into your blogs and sharing. I hope your feeling better.

    Keep up the good work and fight!


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