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Financial Meltdown Proves “Reaganonomic" Theory Right

Posted: 24 Jan 2009 10:29 PM CST

A recent article in the Japan update (linked here) reminded me that Ronald Regan was right when he said that “a rising tide raises all boats.” As money is circulated through the economy, it doesn’t just benefit certain people. Everyone gets some benefit out of it. How much benefit is merely a matter of the observer’s perception. Boats close in to shore seem to rise higher in the water than those far out to sea but the net rise and fall is the same for all.

The premise of the trickle-down theory of economics, (sometimes referred to in the form of an epithet as) “Reaganomics” says that when the (so called in the vernacular of the day) “Evil Rich” spend and invest their money, that money is then circulated through the economy. All that money that is either invested or spent pays for a host of goods and services not necessarily seen at the surface level at the time of purchase. I refer you to an interesting article (linked here).

In short, when “Evil Rich” or really anyone with the means for that matter spends their money on things like luxury cars, boats, vacations at posh hotels, expensive dinners, jewelry, clothes etc, the buck doesn’t just stop there. That money not only pays the merchant for their goods or services but circulates through the entire economy. Similarly when they invest money in a company or a financial institution, it is assumed that the money or investment will be used to make even more money.

You see, when Evil Rich people put their money in a bank it’s not the same thing as stuffing it in a mattress or your child’s piggy bank. It’s a transaction of funds done in the form of a loan. It doesn’t matter whether the loan is given in a more direct form through the direct purchase of stocks or bonds or through a bank in the form of your child’s college savings account. Since it is in essence a loan, the money is intended to be paid back with interest. It means the investor is hoping for a profit but none the less putting their money at risk.

Since the beneficiary of the loan has to pay it back with interest, they can’t in turn stuff it into a mattress and hope no one comes knocking on their door looking for it later on down the road. They’re expected to use that money to purchase equipment, raw materials for production or hire workers that they hope will make them more productive and as such, more profitable. If they purchase equipment or hire employees, that money in turn trickles through a wider portion of the economy. Just like the ripples on the water that are formed from throwing a pebble into a pond, the concentric circles expand wider and wider until they finally reach the waters edge.

What we are seeing today is a contraction of the economy that is still in the process of trickling down or rippling through the economy. First the money from investment dries up. That means the “Evil Rich” are not investing or spending their money. Often the result is large expansion projects like the resort hotels that were in construction phase here on Okinawa are often some of the first things we see cease operations. That results in the laying off of construction workers. Furthermore, if credit dries up people can’t buy either the desirable or even necessary high ticket items like cars, big screen high definition televisions, houses etc. The factories can’t keep producing things that no one can buy and they too begin to take cost cutting measures like laying off employees. At this moment in time, the ripples are still in the process of spreading outward.

Typically, history has shown us that down cycles like we are now seeing are regular occurrences that usually last from 12 to 18 months in duration. That is provided they are left to sort themselves out on their own. The danger comes from governments taking drastic measures that can, and more often than not do, exacerbate the situation. For example in the 1930’s many experts agree that the great depression was deeper and longer than it had to be because of trade tariffs like the (Smoot Hawley) act of 1930. Furthermore, a growing number of economists are coming to believe and understand that the big government interventionist policies of the Roosevelt Administration further deepened the misery and even lengthened the recovery process. In case you didn’t know it, the Great Depression lasted for ten years.

Admittedly some of the projects and programs had some long term benefit. The Tennessee Valley Authority and the Hoover Dam project built dams that provided electricity for thousands of the rural south and the west. But many more were nothing more than make work jobs that provided little or no benefit to the public. People were put to work digging holes one day only to fill them back up the next. However, the biggest problem from the era that still affects us to this day was the creation of the entitlement program.

For example, Social Security, the so called “Third Rail” of American politics has become nothing more than a legalized Ponzi scheme and a house of cards. There is no “lock box” as many suppose. A dirty little secret is that at the time it was enacted, life expectancy in the United States was actually less than the age where most people could start to collect benefits. Far more people put money into the program than ever were intended to collect from it. But the demographics of the country changed. One of the benefits of their labors is that America became a mature nation.

Another little known aspect of Social Security is that it was never intended to remain an entirely “government” program. From its inception, there was every intention of “privatizing” at least a portion of it. Unfortunately greedy politicians seeing what at the time seemed to be and endless supply of “free money” to spend on pet projects and buy votes as they pleased ensured that the program remained in government control. Had all of that money been invested privately, the program would almost assuredly pay for itself today, even in spite of the current economic tide. The question with Social Security hasn’t been if the Chickens of this government run “Ponzi” scheme would come home to roost but when?

For years since WWII, the American consumer drove the world economy. The climb in the American standard of living from the 1950’s till 2008 benefited not only the industrial complex of American but, all of Western Europe and the Far East in South Korea and Japan too. Even the so called poor in these countries are rich by world standards. The questions to be asked now is can America do it again and will enacting Roosevelt like socialist economic policies, which is exactly what the Obama Administration is proposing, strangle at worst or at best retard the recovery process?

My bet is that if left to wait on the Obama Administration's plan for an American economic recovery, the current global economic meltdown will last several years and will in fact be a depression vice a short recession. The Obama recovery plan is exactly the wrong medicine at the wrong time, or any time for that matter. For example the money being tasked for driving this government sponsored economic stimulus is not being borrowed, it is merely being printed. The result is a marked devaluation of the Dollar which is already being felt. In the last year the Dollar has fallen over 25% against the Yen.

It is the consumer and the investor that drive the economy, not the government. If America cannot put its financial house in order and the recovery from this contraction is instead driven by emerging markets in India, China and perhaps even Russia, as some suppose; when combined with the wholesale printing of an increasingly worthless currency we can expect to see the long term funk in the American economy to continue indefinitely! America may in fact become a second rate power much like Western Europe did following the war. It may take decades for us to return to the way it was.

One thing we can all do to lessen or prevent a severe depression is to buy products vice hoarding our money. Consider a purchase of a genuine Goya Republic product to help keep the economy going. Your purchase doesn't just benefit me. It ripples through the entire economy. It helps keep people employed in a host of different trades and occupations.

In truth it matters not whether you buy from me or someone else, the important thing is to keep the free market going and people employed. That is the real way out of our economic mess, not government debt heaped on the next generation merely to keep a political ideology in power indefinitely. Buy now, do it for your children's sake. Don't give up the ship just because it's been beached. The tide will eventually turn. How soon depends on us, not Mr. Obama!


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