Mosquito Curtains Blog

In Part 1, we mentioned that the wealthy class is also the investor class.  From a helicopter view, our latest financial crisis has already created a huge wealth redistribution.  Consider two classes of people. The first is the consumption class that predominantly saves nothing and consumes every dollar earned. The second is the investment class who earns more money than it consumes and therefor invests the surplus in stocks, bonds and other investments. 

Implicitly, the wealthy class pulled a reverse Carnegie.  It lent money to the consumtion class to buy homes, refinance mortgages to go on vacation and to buy consumables.  The motivation was that the investor class could make money and there is nothing wrong with that.  However, the wealthy class didn’t run a credit check and the loans were not repaid.  Who lost? 

Asset values plumetted from stocks, to home values, to all the excess stuff on Ebay for sale.  If you have nothing, you have nothing to lose.  If you are the investor class, you have everything to lose.  As an economy, we pulled a reverse Carnegie and there is no savings for a rainy day. The right hand gave it to the left hand and the left hand spent it.

The solution is to allow capitalism to ruthlessly punish the bad decisions so that those responsible are purged from the system.  The absolute worse thing to do is to try to solve the problem by throwing even more money at the problem through the endless consumption stimulus proposals.  America needs to increase its propensity to save so that we can reinvest in things that will last.  Instead, we tried to spend our way out on the perception of the good faith credit of the USA.  While it creates short term relief, it will cause long term pain in ways that will be very difficult to recover from. 

Economic power is every bit as important as military power and in most cases wields more influence.  China is on course to slowly buy up American assets and that fact matters when we sit down to discuss issues like Iran and North Korea. 

What is interesting about the current financial crisis is the paralysis that it has created and the terrible allocation of the nation’s resources.  I want to leave you with a bit of optimism.  The month before the crisis and the month following the crisis were not all that different.  We still have an educated work force and we still have all the stuff we’ve made or built.  The crisis was simply a wake up call to say, “You were spending your money unproductively!” Instead of mass producing new homes, you should have built something else.  The unproductive effort was a waste of time and resources that will set you back, but thank God we have that information.  Unfortunately, our road out of the mess is exactly the road that got us here, unless we make the tough decisions and re-establish a firm financial foundation. 

Politics measures horizons to the next election.  Polititians are motivated to get re-elected.  It’s the flawed decision structure we’ve made for ourselves.  It is up to responsible citizens to remotivate Washington to take a long term approach to this crisis.