Despite our best efforts to bring you the first and last words on what you need to know about income property investing and how it is affected by current fiscal policy from the ne’er-do-wells in Washington DC, sometimes someone else says what we wanted to say just perfectly.
Such is the case with a recent report written by Mike Larson and titled “The Great American Apocalypse of 2011-2012.” While he deals with many topics over the course of 60 some pages, one particularly caught our eye – the difference between a healthy economic recovery and one bought and paid for by the government.
If you ever wanted to know exactly how to distinguish the two – take it away, Mike…
“Despite the greatest government rescue operations of all time, America continues to suffer through the toughest of times. And the pattern is now clear: First a great speculative bubble … then a greater bust … followed by massive government stimulus, bailouts and money printing … and then … still another, even greater bubble and bust.
When all is said and done, some people make fortunes. But millions of average hard-working people lose their jobs, get evicted from their homes, sink deeper into debt, and even risk abject poverty. What our government has failed to understand is that the most recent bust could have been used as an opportunity to end this cycle — once and for all.
Yes, we could have seen the collapse of the likes of AIG, Fannie Mae and other “too-big-to-fail” institutions. And yes, we could have experienced a very painful decline in asset prices. But that, in turn, could have allowed the patient and conservative, cash-rich investors waiting on the sidelines to swoop in and scoop up the bargains of the century, helping to rebuild America from the ground up. That climactic end to the crisis could have laid the groundwork for a healthy, sustainable economic recovery — one built on solid bedrock rather than quicksand.
But Washington policymakers and politicians blinked! Officials at the Federal Reserve and Treasury panicked. They took the wrong lesson from the Lehman Brothers collapse — namely that anything and everything had to be done to prevent large financial implosions and cleansing recessions. That’s when they went to work with our money, ultimately lending, investing, spending, or committing at least $8 trillion to …
1. Bail out Bear Stearns, Fannie Mae, Freddie Mac, AIG, and General Motors …
2. Shore up banks around the country via the $700 billion Troubled Asset Relief Program (TARP)
program …3. Expand FDIC coverage to even wealthier individuals by raising the deposit insurance cap to $250,000 from $100,000 …
And rescue foreign investors and banks by swapping hundreds of billions of dollars with central banks in Canada, the U.K., Japan, Australia, and continental Europe. That’s also when the Federal Reserve embarked on its epic run of money printing that we mentioned earlier. What about Congress? The Obama administration? More of the same! They showered the economy with money as part of the $787 billion economic stimulus package in early 2009. They helped concoct the bogus “stress test” exercise for the banking sector, which made it easy for banks to raise $75 billion in capital to shore up their balance sheets. And they passed targeted bailout packages for certain industries, such as the $8,000 home buyer tax credit. The government takeover of U.S. credit markets has gotten so extensive, in fact, that Uncle Sam has been standing behind just about every home mortgage issued in this country: Fannie Mae, Freddie Mac, the FHA, and the VA are backing as much as 97 percent of the home loans originated these days. That, in turn effectively brings trillions of dollars worth of additional, contingent liabilities onto Uncle Sam’s balance sheet.
All told, federal government debt outstanding exploded by 24.2 percent in 2008 and another 22.7 percent in 2009, the biggest annual increases since 1975, according to the Fed. Total public debt outstanding is now running at $13.2 trillion, per the Bureau of the Public Debt. That’s a whopping 132 percent rise in the past decade! The budget deficit is
now running at close to 10 percent of GDP year after year, a level never seen before in American history except temporarily — during the Civil War and the two massive world wars.The result of all this money being thrown out of Washington helicopters? A bought-and-paid-for economic recovery. In other words, a recovery based on smoke, mirrors, trillions in funny money and abundant hot air.
Private companies didn’t abruptly decide to start building scores of new factories or hire millions of new workers. They were still swimming in excess production capacity and labor from the bubble days. Consumers didn’t all of a sudden decide to go on a renewed debt binge. They were still reeling from the housing market implosion and looking to repair
their personal finances by paying down their loans — or walking away from them!But with the Treasury and Fed vomiting so much free money, some was invariably spent. That gave us a few quarters of GDP growth, prevented the loss of some jobs, and helped levitate asset prices, driving the Dow up by more than 4,500 points.
Yet even so, the recovery was extremely anemic — nothing like what we’ve seen in past, healthy rebounds driven by a private sector resurgence. And that’s not all. The government-led, bought-and-paid-for economic recovery always had a dangerous Achilles heel: It relied on the willingness of bond investors the world over to finance it! You see, it’s not like we had a bunch of money lying around to pay for all the bailouts, handouts and stimulus packages. We had to borrow it from the capital markets. The same was true for other nations, some of which embarked on the same kind of wild spending that we did.
That worked for a while. Bond investors went along with it like lambs to the slaughter. But that is coming to an end …”
Mr. Larson is a researcher/writer at the Weiss Institute. If you want to get the rest of his fine report, Google it and download it. We get nothing in the way of compensation from suggesting this, but are merely concerned that the average American doesn’t realize how near the precipice our government is taking us with these foolish attempts to spend our way to prosperity. The current economic path we are on in America is an exceedingly dangerous one. Inoculating ourselves with endless nights of television, movies, and eating out will not make it go away.
If parents want their children to grow up in an America that resembles in any way, shape, or form her past economic glories, and not a destitute Third World borrower – better sit up and pay attention now!
The Creating Wealth Team
Flickr / billaday
