The argument of large government intervention versus the free market is coming to an end no matter on which side of the debate one stands. Big government is a failed model; history supports that as fact. Free market capitalism is a failed model; the United States' shrinking growth and unemployment figures support that assessment as fact. But which one is better? The answer is free market capitalism. Why is it coming to an end? The growing government debt model will eventually overwhelm our economic system to the point of destruction.
We no longer experience a free market in the United States due to the contamination by the big bank lobby and government collusion. If we strip the intervening policies that are abhorrent to a successful free market economy we could once again enjoy a successful economic model. We cannot mend a hybrid model of synthetic federal government intervention with free market practice and find success.
The government must be rendered a facilitator to the private sector. There is no direct line to the government for GDP growth and employment. The absence of incentive to feed private sector free cash flow is at the center of the issue. When was the last time you heard a politician express the need for private sector free cash flow? Why is it important? Because private sector free cash flow is the fuel for growth. Once individuals and business achieve profits they can maneuver to reintroduce that capital as new ventures or purchases which feed the economic life cycle. The essential inflows required for continued economic health has always been the essential fuel for sustaining our economic health.
Now we go to theory. Everyone has one, here’s mine.
Where are we now? We are in a bad place. The Fed has resorted to a perpetual low interest rate policy that will not allow for economic equilibrium to transpire through its act of protectionism. Who is it protecting? It looks like big banks to me. Why would it do this? I would suggest the Fed is emboldened to maintain the asset values that exist on the banks' balance sheets. The banks expanded the money supply during the derivatives game that resulted in a collapse during the fall of ’08. Instead of the historic practice of allowing bad investments to be just that, Ben Bernanke has attempted to rescue the validity of those toxic assets.
When the Fed lowered interest rates and claimed the fixed income market as a privileged trade for its purposes of reinstituting capital into banks, we lost control in a big way. Ben Bernanke and his merry members of the board and governors decided that printing money would be a great alternative to allowing banks to fail. In doing so we all lost. Not only did we lose value in our currency, we also lost the ability to make interest income with our capital. Why? Because Ben felt it more important that reckless banks should be the recipient of citizen debt in order to make them whole. Did we get to vote on this policy as a people? You already know the answer to that question. The return on capital was manipulated to such a small margin that it would require very large amounts of capital to allocate to this trade. There is no end game at the present time to change this policy, as noted by the Fed during the release of each and every FOMC Minutes.
Should we neuter the Fed? Yes, in my opinion. What are other aspects of this policy? By not forcing banks to reconcile their bad investments, we are left in a state of suspension that has no end. Wall Street and various media hailed Ben a hero for his handling of the fallout post-collapse of Bear Stearns and Lehman Brothers. Was he really a hero? No, he sat back and watched them play their dangerous game of credit default swaps and made generic statements of potential outcomes without imposing necessary actions.
Why didn’t the government call Ben into question? There is simply not enough intellectual capital in Washington to challenge Ben. Politicians are pawns in the system. Their ability to represent citizens has been compromised long ago. In fact they quite often go to bat for other interests versus the American public. The citizens are the perpetual stooge to be taken advantage of by the collaborative efforts of the Fed, Treasury, big corporations, and the White House. There is no agent for the citizens in this debacle. We are simply the ones victimized with the bill to pay for it all. And it is a big bill. With the federal government as our creditor we will owe them for years if not decades before the balance sheet is made healthy again.
The federal government continues to borrow $.41 (or thereabouts) of every dollar it spends. It is content to allow the citizens to foot that debt with accompanying interest for as long as it takes. The government is not only fine with spending more than it collects, it is also accepting of the concept to continue the practice into the future. The citizens have been rendered as indentured servants to the government and we do not have representation for our cause due to the convoluted system that has evolved to date.
Where does this all lead? We will either go to the edge of the cliff and look down and see the need to cut spending and pull ourselves from the ledge, or we will go over. The simpleton approach of leadership in Washington to include Congress and the White House do not appear savvy enough to correct the problem until the system collapses. I will remain optimistic until we go over the cliff but the edge is getting closer by the minute. If we do not acknowledge the need to revert to healthy free market capitalism, then the youth of America will never experience a positive standard of living from an economic growth standpoint. Many are already there occupying Wall Street now. Hybrid socialism is not a sustainable model. Education of what healthy capitalism represents in relation to opportunity must begin now.
End the destruction of Sarbanes Oxley and the Dodd-Frank Act immediately. Allow business to flourish unencumbered by regulation. Allow regional and small banks to do business with their customers again. Reduce tax rates across the board immediately. How can government win with this approach? By sitting on the sidelines and simply collecting its share of the proceeds of a healthy economy in action. Bill Clinton proved this model a success during his administration. Government is not designed, nor smart enough, to create free cash flow on its own.
When you have the argument of big government simply ask the individual or group where they place the importance of private sector free cash flow. If they do not comprehend what private sector free cash flow is then they are excluded as your equal in the debate. You must come to the table of the conversation with an understanding of the private sector’s ability to create free cash flow and its representation within the GDP pie to have admission to this discussion.
Government is a cancer as a component of GDP. Its growth within the pie harms all other entities represented. If you do not understand these concepts of economics then you have some learning to do. It is my hope that someone in Washington will realize these relationships to our economy before we go over the cliff. I’m willing to be naïve enough to give it a try because I see no other alternative. I hope I’m right because I desire a viable United States economy capable of creating prosperity for our youth.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.