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Lloyd Clucas
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Professional investment portfolio management since 1974. CFA Charter (1981). Juris Doctor degree, Northwestern University School of Law (1965). Founder, current Chairman and CEO, Askari Equity Management LLC, successor corporation to RIA asset management proprietorship since 1974. ... More
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  • The Fed Goes Bananas...Grab Your Wallet!  0 comments
    Oct 8, 2012 4:59 AM | about stocks: SPY

    The U.S. Federal Reserve has decided to do what the Chinese worried we'd do several years ago -- inflate away (monetize) our government's debt.

    This has always been where the US, Europe, and eventually Japan, were/are headed. Democracies tend to rely on monetary inflation to get rid of excessive, irresponsible debt. They need political cover to do that. Now, in the predictably-slow recent economic growth, they think they have it. They cannot speak clearly about what they are actually doing. Professors are wonderful for obfuscating reality.

    Savers and lenders to such governments get cheated.

    Unfortunately, no governments in these countries are really dealing with the ongoing underlying issues.

    (1) sclerotic labor legislation,

    (2) excessive and ineffective regulation of business activity,

    (3) excessive taxation,

    (4) trade barriers, and

    (5) the growth of unproductive transfer payments at a rate in excess of the underlying economies' real, sustainable, rate of growth in wealth creation.

    Unsustainable debt-financed consumption is not wealth creation. Wealth creation is producing more or better with inputs the same or less. Producing things or services people will voluntarily pay for without government subsidies.

    The excessive debt burdens (principally to fund transfer payments) materially slow future growth of economies. The larger the part of an economy that government controls, the slower the economy's potential economic growth and hence the growth of sustainable, productive employment. The losses over time are significant.

    Technological improvements and much of globalization are, in part, adaptations to economically destructive domestic policies. They are not "problems" to be solved by further fascistic meddling.

    The social diseases that underlie the self-destructive domestic policies include fostering the cultures of dependency and victim-hood, accepting wars of choice, trumpeting the desirability of nanny/welfare states, demonizing the successful, and catering to envy and jealousy.

    What is "different this time" is the global crescendo where so many are doing so much so wrong, all at the same time, and for what is likely to be such a sustained period.

    Taxing "the rich" is a red herring. It cannot solve anything economic. There isn't enough money there to solve the problem. The "multiplier" effect of tax increases is devastating and much greater than most Keynesians pretend the positive effect of stimulus to be. Raising tax rates especially damages an economy locked in a long-term structural debt mess. And that is where the developed industrial world is today.

    Slowing transfer payment growth is essential. Removing barriers to wealth creation to enhance economic growth is essential.

    "Stimulus" is as silly as the economists who advocate it. Yes, you use defibrillators to resuscitate from a financial heart attack. To keep adding ever-increasing juice to the patient for years thereafter is to adopt the methamphetamine model -- with similar consequences. It didn't work in the Depression. It won't work now. At least in the Depression, some useful infrastructure was constructed. Not so today -- at least not in the US.

    The diminishing effects of incremental debt has been a decades-long trend. The most reasonable Keynesians (e.g., Mankiw at Harvard) admit that multiplier effects from extra, debt-financed, government spending has declined to a relatively small factor. Other respectable economists (e.g.,Taylor at Stanford and Barro at Harvard) don't see any positive effect at all if you properly look out just a few quarters. They see destructive effects going out years into the future. That has been the historic case, as well.

    Inflating away the value of the debts are what authorities don't explain. And when they finally set their course on doing it -- they rationalize it with commensurately unlimited amounts of BS...PhD.

    That seems to be what we saw from the Fed this past week.

    Our portfolios continued to do quite well again this year: 100% in stocks; a little gold, ag, and energy; and a moderate portion of local-currency emerging market debt.

    But it continues to be scary as hell to have to play off of politicized economies run by meddlesome, self-important political twits.

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