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Stock Ideas Investors Daily Edge The Government Shows Its Real Bazooka
Stock Ideas Investors Daily Edge The Government Shows Its Real Bazooka 
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| The Government Shows Its Real Bazooka |
| Tuesday, 23 September 2008 | ||||||||
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The government came into power waving its principles for all to see. This administration was going to be different. It would be true to its roots ... unwavering in carrying out its ideology ... and unyielding with those who opposed it. But it didn’t turn out that way. Once in power, the party that held its ideals so high saw things differently. What happens when a government turns its back on its most cherished ideas? It’s not too early to tell. To tell you the truth, it’s not the U.S. I’m talking about. I’m talking about Brazil. Six years ago, Brazil’s Workers Party replaced the conservative administration of Fernando Henrique Cardoso and investors couldn’t dump assets fast enough. But once in power, the new government – led by Lula da Silva – surprised everybody. It’s been the picture of economic orthodoxy – letting the local currency strengthen (despite complaints from exporters) ... increasing interest rates to fight inflation (to over 12 percent) ... and sticking to a conservative fiscal restraint policy. You can drive an 18-wheeler between da Silva’s economic policies and Bush’s. In the U.S... - Fiscal restraint has been thrown out the window. The budget deficit for next year should grow to over $500 billion. - Talk of interest rate increases have been just that ... talk. - The bill for U.S. government bailouts will probably be more than $1 trillion. And it could be more than$1.5 trillion.
It’s an odd sight. The Republicans have taken control of the heights of the U.S. economy – following orthodox Socialist tradition with the best of them. And the Workers Party of Brazil is hewing to orthodox capitalist tradition. Of course, the contrast isn’t perfect. For example, Brazil still has a bloated state sector. And the U.S. still has an independent Federal Reserve... Well, I take that back. Bernanke has been working so closely with Hank Paulson and the Treasury Department that any vestige of independence has disappeared. The ironies multiply. Back when Asia was suffering through a slew of bank and company bankruptcies, the U.S. – together with the IMF – preached free-market economics. They were listened to. That was the price of getting an IMF/U.S.-led bailout. These Asian countries hemmed and hawed. It meant letting companies and banks fail ... seeing their currencies fall to half or less than half of what it was ... keeping deficits low and refraining from pouring money into the economy. It was bitter medicine. But it turned these economies around. Singapore, Korea, Taiwan, Thailand, the Philippines and other Asian countries all began robust growth periods that are only just now beginning to slow down. And the U.S.’ response to its current crisis? Well, a couple of weeks ago I asked in this space if the government will allow asset deflation. Here’s what I wrote: “We could try to put off this painful day of reckoning. Many from Wall Street are suggesting that’s exactly what we should do... It’s a long road. And it’s just begun. Chances are the government will do everything in its power to short-circuit it.” Let’s be clear what the government has done and hasn’t done. In the “done” category -- it’s adopted a more systematic bailout scheme to replace a series of ad hoc bailouts. It’s also stopped the bleeding ... for now. In the “not done” category, it hasn’t fixed the economy ... it hasn’t fixed housing by any means ... and don’t expect this latest move to stimulate the economy. At best, it’ll allow banks to begin lending to creditworthy individuals and businesses. That’s not enough to put a stop to foreclosures. Nor is it enough to derail a recession. As a result, the next crisis of confidence could very well come not from within the U.S. but from outside its borders. As we rejoice our “rescue,” it’s increasingly doubtful that central banks will still be willing to invest in a country where debt is piling up and the federal government is eyebrow deep in running banks and insurance companies. Last week is being touted as an historical week. Really? It’s just another failed socialist experiment by a Republican president. How historic was it when Nixon foisted price controls upon the economy? They were supposed to give immediate relief but ended up prolonging the crisis. They failed but not spectacularly. They didn’t bring down the country. I have no doubt that the government’s latest “big and bold move” will also fail. I’m just hoping it doesn’t fail spectacularly and that’s the most I can wish for right now.
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