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Tax Rebate 2008 - United States Congress Resorts to Trickle-Up Irrationality

Economics / Credit Crisis 2008 Feb 29, 2008 - 12:34 PM GMT

By: Andy_Sutton

Economics

Best Financial Markets Analysis ArticleThe Roman poet Juvenal used the term ‘bread and circuses' to characterize palliative measures taken by the imperial Roman government to lure the populace into a state of blissful ignorance. This blissful ignorance comes at the expense of the solution of long-term societal problems, and arguably was a significant component of the end of the Empire.

Charles Fourier described his economic pinnacle a bit differently, opining that the oceans would turn to lemonade and roasted chickens would fly into our mouths. He used this amazing statement to describe a utopian socialism where the government was the ultimate provider.


Ronald Reagan became known during his first term as President in the early 1980's due to a term he coined called ‘trickle-down economics'. The idea behind it was that if you put enough money at the top that somehow, it finds its way to the bottom. As far as that goes, I'm still waiting for my few drops. Despite the obvious flaws, Reagan was able to make quite a bit of mileage from the phrase. What will come to be commonly regarded in the history books as the beginning of the great American hyperinflation, the Tax Rebate of 2008 has some distinct similarities as well as differences with Reagan's model of yesteryear.

Americans are feeling quite poor right now. Their homes have peaked out and the lights on the ATM have been shut off; in many cases, permanently. The $3 Trillion spending spree by and large is over. All that remains is the bill. And it is a hefty one. Ok, well scratch the home says the consumer; I've still got my stocks. Maybe. Stocks are still double-digit percentages below their 2007 highs while consumer prices have surged. By the way Ben, no one believes your 1.5-2% inflation target over the next 3 years. The purchasing power of the average portfolio has gone south like migratory birds for the winter.

Unabashed, the consumer puts down his brokerage statement and saunters over to the mailbox where there will surely be a credit card offer or two waiting. But alas, he says, the rates on these cards are unreal! I thought the Fed was cutting interest rates? The American consumer is certainly feeling rather poor right now. This is not dissimilar from the early 1980's after the massive rise in interest rates engineered by Paul Volcker. Most loans were out of the question for the average middle American, and he was still feeling pretty cleaned out from the inflation-ridden 1970's. He was feeling pretty poor too, but tax rebates weren't what the government had in mind.

The crux of the matter is demand. Demand, in and of itself is infinite. Anyone can want things. Most of us do. What keeps demand in check is production or what we are able to produce and trade to satiate that demand. The more we produce, the more we get to consume and vice versa. Any good central banker should know this. Most have chosen to forget it in favor of the spinoff line ‘if we print, they will spend'. In the 1980's, the plan was to put the money into the banking system and hope to trickle it down to consumers.While flawed, the plan was to encourage growth, resulting in more, higher-paying jobs. This would enable demand to be acted upon and stimulate the economy. To do this, however, we began our fateful journey into borrowing to enable consumption.

Moving to present day, little has changed. We are still borrowing to consume. We are still trying to find ways to enable consumption without production, and we have done so with credit and inflation. These dislocations, however, are getting to the point where they will soon be unmanageable, even as growth slows. To combat this, the United States Congress has resorted to the most desperate of measures; the direct monetization of demand. They are quite literally putting dollar bills directly into the hands of consumers in the hope that they make purchases to keep our economy ‘growing'. Now if the government had a large savings account that it could take the money from that would be one thing, but the very fact is that we don't the money. It will either be borrowed or created from thin air.

How patently absurd does this sound to you?

The problem is, that in the extreme short run, it is likely to meet its objective. People will feel richer for a time. They will go out and spend. If they were willing to mortgage their house to the hilt to do it why wouldn't they when it is ‘free'. The real danger in this is that people will begin to depend on these handouts and will start asking for another. And another. They will pressure their politicians to further overextend our country in the name of baseless consumption. In a way, it is inherent to our system of government that we would arrive at such an end. Clearly the idea of majority rule is desirable so long as the majority maintains a semblance of sanity and acts with rationality in the best interests of the nation. Clearly, that is not what has happened. We have embraced an ideology of trickle-up irrationality where society makes unreasonable demands upon elected officials who then proceed to trip over themselves to curry favor and reinforce society's irrational behavior. Who started it is of little consequence; the more sobering realization is that just like Juvenal's bread and circuses, it will end.

Editor's Note: For a more in-depth discussion of the ongoing financial crisis, please take a moment and listen to Andy Sutton's interview on the Contrary Investor's Café Coffee Break Series. The interview may be found at: http://www.contraryinvestorscafe.com/broadcast.php?media=109

By Andy Sutton
http://www.my2centsonline.com

Andy Sutton holds a MBA with Honors in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics. His firm, Sutton & Associates, LLC currently provides financial planning services to a growing book of clients using a conservative approach aimed at accumulating high quality, income producing assets while providing protection against a falling dollar. For more information visit www.suttonfinance.net

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