Back during the dot-com bubble’s bursting, to my colleagues and family members I said that the economy would not explode but that money would flee from these high-risk securities which were “new” and exciting and seek greater stability. This occurred with the eventual rise in speculation on home prices and other asset-backed securities. At the time I openly worried about what would happen if the housing market crashed given that the economic power of the middle class, especially here in South Florida, was 100% founded on home values. Refinancing mortgages, taking out credit lines on one’s home, and easier access to credit due to home ownership increased consumption without a concurrent increase in average incomes. It was clear to me that a crash in the housing market would leave the America economy and money in general with little place to “go,” i.e. that I did not see where the market could make up its losses. Apparently, my concerns played out… but the government answered my question, the “new money” would come out of thin air, by printing money with reckless abandon. This, my friends, is something that seemed unfathomable to me because of how bad this idea was and is. What our economy has become is one that relies on government moves almost exclusively. Just take a look at the survival of US financial firms and automakers. Just take a look at the commodities markets that are being buoyed by a weakening dollar and lower interest rates. To all those investors out there, be warned, this is a bubble! The US dollar will not crash anytime soon and interests rates are destined to rise in the short- to medium-term. So the question is: what will the effects be of an economic system where the government picks and chooses (in a process that MUST be corrupt) what to inflate with bailout dollars and what not to? This is a question that is most interesting to me and I wondered if there was anything in history that resembled the sort of band-aid-bailout-economy where the temporary inflation of one industry or another would skew markets, hurt the dollar long-term, and keep dying companies alive. Actually there is a historical example: Japan.

While a lot has already been written about Japan’s Lost Decade and comparisons to the current recession, I am more interested in the medium to long-term effects of a bailout-driven economy since it is clear that the current administration has no intention of using this money to pay down our debt. An interesting article on Time focused on the idea of “too big to fail” and also spotlighted Japan’s bailout policies. On the former, the article highlights that South Korea let Daewoo fail, a company that was larger relative their economy than any company in the US, and their economy not only survived but grew, but that’s another topic. On the latter, the article talks about how Japan pumped money into companies that were failing and just continued to lose money, to quote:

“In a pathetic attempt to avoid losses, Japanese banks kept pumping fresh funds into debt-ridden, unprofitable firms to keep them afloat. These companies came to be known as zombie firms — they appeared to be living but were actually dead, too burdened by debt to do much more than live off further handouts.”

This exact scenario will not play out in our government’s own effort because US firms are doing things to turn themselves around and will continue to. Unfortunately, human nature plays against us here: people and groups of people win by the smallest margin they need. This means that it is possible that a lot of these huge companies, if they cannot make good profits for whatever reason, will exploit the lack of moral hazard that exists in American pseudo-capitalism and that an infinite loop of bailouts will continue. Ultimately, it is both moral hazard and competition that ensure innovation and economic independence… a bailout economy only dampens innovation and increases dependence.

The similarity with Japan is in the fact that with government pumping money into failing entities, the entities themselves actually did not improve in a real sense, they simply survived. In America’s case, we are pumping money into sectors that are not doing so well. The question that comes to mind is: once we pump money into some sector in the short-term, what happens then? Do we expect that private investors take over? Do we expect that demand for said sector’s products go up, just because the government pumped money into it? There are a few ways to create wealth, but borrowing from the taxpayer of the future to pay the government handout recipient of the present is not one of them. The market, on the other hand, eager to make profits will invest in “stimulated” industries and then take their money out as soon as the stimulus money moves elsewhere. This skews the market and does not create real wealth.

While this topic deserves much investigation and discussion I wanted to simply present the problem of a bailout-driven economy and what it means to capitalism in general. I do not believe that the dollar will be destroyed by a bailout economy, but I do believe that it will hurt the dollar long term. I truly wonder how such an economy can compete in the world and whether or not it is compatible with a global economy. One thing is certain, the ever-increasing debt that will exist as a result of such an economy will do nothing to help us. I will admit one thing, no candidate for any office will have my vote if they wish to perpetuate a bailout-economy because the only feasible result of such a system is full-fledged Socialism, be it of a corporatist flavor or a straight up nanny-state flavor. We need to retire this bailout by paying down the debt as soon as possible.

-AG