Friday, February 27, 2009

Obamanomics and Capital

Obamanomics is socialism packaged in a pretty wrapper and sold to many ignorant souls in America. It costed $250 million to produce and has a negative cash flow to taxpayers equating to over $1.75 trillion in its first year. Now that is a great investment.

Obamanomics entails the following:
1. Giving away money to people that have made bad decisions in the form of foreclosure assistance to 9 million homeowners at a cost of $275 billion
2. Giving away money to bankers who dumped trillions of dollars worth of bad derivatives and CDOs on pension funds, college endowments, hedge funds, insurance companies, and other banks.
3. Taxing the very people who create jobs, therefore punishing them for providing the demands of the marketplace
4. Corporate fascism that rewards politically connected "businesspeople" over real business people
5. Funding a deficit caused by excessive credit expansion and its subsequent destruction with more credit.
6. Transferring soldiers from one war zone to another, spending $75 billion on bombs, guns, ammo, etc to kill people who do not like us because we have been meddling in their lives killing their fathers, mothers, brothers, sisters, and friends for 50 years

Basically, Obama believes in the Free Lunch. He believes that it is possible to "create" without creating anything. He does not understand that wealth is the outcome of providing a good or service that is wanted by people. Wealth is attained by creating value. Wealth cannot be created through credit expansion. Wealth cannot be redistributed if it is not earned in the first place. If capital is destroyed, it must be regained through work of individuals. Products do not make themselves, services are not provided magically through thin air. The natural order of things is disarray. It takes effort to take that disarray and construct a valuable product or service.

Capital is the excess of effort minus the cost of providing that effort. Capital is profit retained and saved to be reinvested in other profit producing activities. Capital cannot be attained without individuals providing goods and services that other individuals want or need in their pursuit of providing goods and services that other individuals want or need. When capital is taken from those who create and given to those who do not, that capital is lost. The cost of capital lost is a negative flow throughout an economy. The accountant who had to pay a $60,000 tax bill cannot hire another accountant to take on the extra business from being a good accountant. The lawyer can not invest in the business of the restauranteur because the accountant cannot take on his business. The restauranteur cannot purchase the equipment that would make his service faster and cheaper. This lost savings from the restauranteur does not make its way into the pocket of the customer, therefore raising his living cost.

To attempt to create capital out of thin air is illusory. Capital cannot be "created"; it can only be earned. Banks can hide their losses through regulatory gimmicks and tricks. Automakers can borrow billions of dollars of fiat money, raising their debt/equity ratio, which is already negative. Taxes can be confiscated from those who create and redistributed to those who do not. However, this will end in failure. Not everyone can be wealthy if they do not have to work. Elderly people cannot be provided "free" prescription drugs. Poor people cannot be provided "free housing". Not everyone can have "free" healthcare funded by the owners of capital. These products and services have to be created through human effort. There is no such thing as a "free" product or service. They were the products of effort.

The timing of the end is uncertain. Games can be played to cover the charade. Fiat money can be printed over time. Debt will rise, interest rates will rise, living standards will fall, tax revenues will decline, business productivity will fall, and capital as a proportion of all assets will dwindle to nothing. Only at this point will it end. It happened in Russia, it happened to Germany, it happened in Argentina, it happened in Rome, it is happening in Zimbabwe, it is happening in Eastern Europe, it is happening in the UK, and it will happen to us. A country can print money into disaster.

The cycle is always the same. History constantly repeats itself. People think they can outsmart the rules of wealth. Smart Harvard grads think that it is different this time. Money can be created by a central bank, this money is not subject to the rules of capital and wealth. Every time it ends with disaster. It will not be different this time and it will be spectacular. Be prepared.

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