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Longboat Key Wednesday, May. 2, 2012 5 years ago

Market Watch: The givers and the takers

by: George Rauch

People can be divided into two groups: givers and takers. By nature, the takers are more interested in control and, hence, power, than the givers. The takers continue to take more from the givers by complaining that the givers don’t give enough. That’s where we are today. 

Our country is run by takers, not by givers. Whatever we may think of what the Republicans or the Democrats stand for, we ought to be able to agree that they both stand for large government. Because they agree upon large government, then they have not agreed, by definition, upon limited government, either. They sell all of the same programs differently, but all programs remain “managed by government.”

Nothing gets terminated, and no large program receives a funding cut except the military. The military budget is in third place — billions of dollars less than Social Security, and hundreds of billions of dollars behind Medicare/Medicaid.

Ask yourselves these questions: 
• Do you believe the Constitution is the best document under which man can live? 
• Do you think government should get out of most of the programs in which it is involved?
• Do you believe in a separation of powers and a limited government?
• Do you believe government should borrow money only in the event of national peril?

 If you answered all four of those questions with “yes,” then you are to the right of most congressmen and senators. That is the state of our representation, and it is why this country currently has problems. We can expect our problems to become worse in the future, unless these two political parties, with identical philosophies, can reverse what they’ve done the last 50 years. More importantly, it is not likely the stock market will prosper further without a radical change in the behavior, and philosophy, of the major political parties.
Can’t government help right some wrongs and fix a few things?
All government does is prop one thing up at the expense of another and, hence, make all of us dependent upon government. The government should prop nothing up and do nothing more than the Constitution says it should. The government kills, or controls, the competition. Competition creates a balance of power in industries, in markets and among governments. 

The desire and aim of socialistic governments is to control competition through rules and regulations, which inhibit production and efficiency. Entire industries become dependent upon politicians to ensure a continuation of the rules, or a change of them, to favor a certain position favored by the industry. 

Industry lobbies for regulations that support them. Politicians control business through rules and regulations. They control the votes of those people who do not want to work by promising them anything they want for free, without sacrifice, work or effort, which makes that 50% of our taxpayers who pay no taxes dependent upon big government.
Evidence of private sector problems
The standard of living of the average American continues to fall. Adjusted for inflation, household income is equal to what it was 15 years ago. During that time, government debt has ballooned. Debt by government used to finance non-productive assets undermines prosperity today and, more importantly, tomorrow. 

Income gains come from productivity increases that raise the standard of living for everybody. Productivity increases come from the private sector, not from the government sector (the private sector gives, and the government takes). Productivity increases are what’s made this economy great. And productivity increases can’t be realized without private investment. 

Private investment is down because our economy’s cash is going to pay interest on the public debt instead of being reinvested in the economy. It costs government about $400 billion a year just to pay interest on the debt. Imagine our economy if that money went into business investment annually.

Like Japan, over the last 15 years, U.S. public debt has soared; continued increases in government debt plague the future. The Japanese savings rate has gone from a high of 26% in 1989 to 0% now because of tax demands to service the debt accumulated by its government. This is exactly the direction in which we’re headed. And the Japanese stock market is less than 1/3 of its value more than 20 years ago.

Since 2009, each household’s share of the public debt has almost doubled to $201,000. Every five minutes of our lives, the federal government increases national debt by $7.5 million. What? Yes: See The deficit has averaged almost $1.5 trillion a year the last five years, and the national debt has increased almost $7.5 trillion, accounting for about half of our current national debt of $15.7 trillion.
Five banks hold 56% of the deposits in our economy. The president promised to break up the “too big to fail policy.” The banks have, instead, consolidated their power and increased their deposit base. This is further evidence of how the consolidation of power among large institutions undermines the private sector. The reason the government won’t use the anti-trust laws to break up the banks is that those banks are the primary source of campaign money. Moreover, those banks own a considerable amount of stock in the Federal Reserve Bank of New York, which is the bank that sets the interest rates.

About 10% of our population remains unemployed, and the real-estate market cannot be substantially improved with high unemployment. Money going to pay interest on the deficit goes to bankers in interest payments instead of to industry to create more jobs.
What to do with investment funds?
The stock market is likely to continue to go nowhere. The fundamentals of this recession suggest the market ought to be much lower than 13,000 points. Whenever the market sells off, however, we have another QE (printing money), which props up the stock market. To stay even with inflation, and to compound your money, is a difficult undertaking. 

Real assets, like gold, silver and real estate, are likely to do best in a highly indebted, highly regulated economy. Gold and silver act as a hedge against currency purchasing power deterioration from debt build-up, but they pay no dividends.

Real estate, particularly income producing, can be an investment that will increase in value with inflation, and perhaps advance ahead of inflation. 

High-grade companies with a record of increasing dividends annually, when priced right, can be a good investment in an economy like ours. The following high-grade stocks are currently priced right, with yields of 3% or more: Coca-Cola, PepsiCo, Johnson & Johnson, 3M, Chevron, Emerson Electric, Philip Morris and Sysco. The rest of the market has so much risk attached to it that for the conservative investor, non-dividend paying stocks are best avoided. 

Caveat Emptor.

George Rauch, Longboat Key, is chief executive officer of Bradenton-based General Propeller and a former Wall Street investment banker.


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