Sense and Nonsense

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Botox Economy

• by Satyajit Das -  Prudent Bear Contributor
• April 07, 2010

Botox (botulinum toxin), a highly toxic neuro-toxic protein produced by Clostridium Botulinum, is commonly used in cosmetic procedures to improve a person’s appearance by removing facial lines and other signs of ageing. The effect is temporary and can have significant side effects.

The global economy is currently taking the “botox” cure. A flood of money from central banks and governments – “financial botox” – has temporarily covered up unresolved and deep-seated problems.

Bad Risks …
In 2009 there was a ‘recovery’ in financial asset prices. The low or zero interest rate policy (“ZIRP”) of major central banks helped increase asset prices. Very low returns on cash or near cash assets forced investors to switch to riskier assets in search of return.

This week I want to write about the differences between a market driven economy and a centrally controlled economy as I promised last week. The question essentially boils down to, “How should the United States of America allocate its resources”? It is a political question. As such, it is difficult to address objectively and succinctly.

First, the federal government in the USA does not have the authority under the Constitution to allocate resources. That power is reserved to the states or to individual citizens. The fact that the federal government does shift resources from the young to the old, from the industrious to the lazy or from the healthy to the unhealthy does not make it legal. It just means that they do it in violation of the most fundamental body of law in the United States of America. It replaces the rule of law with the rule of people who have seized sufficient power to act illegally. If Americans want a centrally controlled economy, then the Constitution should be amended or or replaced to achieve that goal legally. That will not happen.

As you may have noticed, there have not been any money management and investment comments at Sense and Nonsense for six months or more. That is because I have simply been aghast at the speed which the US has moved from market driven to a centrally controlled economy. There is also an element of denial. It is hard for me to concede, to myself or anyone else, that the accumulated knowledge of some thirty years of successful investing is now obsolete and useless.

I concede. I must start over with little more than an open mind and willingness to adapt to new realities. This concession is not based on desperation or defeat – I have made at least a small investment profit every year since 2001. I have more assets and fewer obligations right now than I have ever had before. My life is good and I am grateful.