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SOVEREIGN MAN

The Worst Investors in the World

July 6, 2010
Berlin, Germany

Last Friday, I read about how the US workforce shrank by over 650,000 in June, one of the sharpest contractions ever. Private sector hiring was also less than expected, suggesting that joblessness in the US will remain sluggish.

Always ready to spin a bad story, US politicians immediately began heralding the jobs data as clear evidence that the tide was turning, that the US economy is headed in the right direction, and that their lavish stimulus plans are working.

This gorilla math is truly amazing; it’s the doublethink from 1984 that makes 2+2=5.  So… I decided to do a little number crunching of my own, and the results are pretty incredible.

The ‘recession’ officially began in late 2007, coinciding with the government’s fiscal year 2008 budget.  At this point, politicians became nervous and started dumping money into the economy, which has continued to this day.

What I wanted to do is find out how much money they’ve really poured into the economy, and what the overall impact has been.

I started by looking at the US budget in 2007, which ended September 30th of that year. This was pre-crisis, before the bubble really burst and things got bad. That year, the US budget deficit was ‘only’ $160.7 billion… this is the amount that the government required to function that year– conducting a two-front war, providing social security, etc.

Realistically, if the government hadn’t started its anti-recession stimulus programs, the fiscal year 2008, 2009, 2010, etc. budget deficits should have been $160.7 billion or better; essentially, the government should have spent as much in 2008 as it did in 2007, barring the recession.

Next I added up all the additional deficit spending above and beyond the 2007 level… and then subtracted the hundreds of billions that went to bail out the banks, unions, and big businesses.

The remainder reflects the amount of money that the US federal government has spent since October 2007 to fight the recession, stave off foreclosures, and boost the labor market.  The total amount? About $1.7 trillion in just under 3-years.

I then wanted to find out what kind of impact that spending has had on the economy, so I compared GDP from 2007 through the first quarter of this year.  You would expect that if the government invested $1.7 trillion in the economy, that there would be at least $1.7 trillion in additional economic growth.

Needless to say, this wasn’t the case. Since the end of 2007, the economy has only grown by $476 billion, if you actually trust the government’s inflated numbers to begin with. Even taken at face value, this means that the government has generated a return of $476 billion on an investment of $1.7 trillion.

Let me put this another way– the US government effectively lost 72 cents out of every dollar that it spent on ‘economic stimulus’ since the recession began.

And as for the 8 million jobs that have been lost in the meantime?

With $1.7 trillion in additional deficit spending, they could have paid every single unemployed person in the United States an annual salary of $75,000 for the last three years to sit around and play tiddlywinks all day.

Adding insult to injury, despite racking up a $1.7 trillion bill to fight the recession, politicians remain awfully proud that they increased unemployment benefits by a whopping $25/week, or about $1,300/year.  I’m really wondering what happened to the other $74,000….

Most politicians believe in Keynesian economics, that government spending is a righteous corrective mechanism to economic decline.  As a free market guy, I find this entire philosophy offensive. Individuals and businesses know how to spend their own money better than the government does.

Even if we momentarily suspend disbelief, though, and agree with the philosophy of massive government spending, just look at the results– they lose 72% of the stimulus money, yet they want to keep doing it over and over again.

This is not a Democrat or Republican issue, this isn’t about Obama or Bush, and it’s not even a US issue.  This is simply a structural failure in the system itself: government cannot be trusted under any circumstances.

At the end of the day, regardless of the guarantees and welfare programs that governments promise, we are all fundamentally responsible for ourselves.  No one should trust in the government to be there when it comes time to retire, look for work, or pay for the hospital bill.

Believe it or not, this is a good thing, and I’m optimistic in their serial failures. In my opinion, the sooner people realize that they’re ultimately in charge of their own destiny, the sooner they’ll find an entire world out there full of incredible opportunities.

Planting multiple flags is a great way to protect assets and safeguard against sovereign risk… but keep in mind, it’s also the best way to maximize the opportunities available to you, both personal and professional.

The world is not full of doom and gloom. Yes, our political leaders are a bunch of idiots, but we can rise above that easily and find new possibilities everywhere to secure and improve our lives and the lives of our families. This is one of the most important points that I hope you get out of these conversations.

About the author: Simon Black is an international investor, entrepreneur, permanent traveler, free man, and founder of Sovereign Man. His free daily e-letter and crash course is about using the experiences from his life and travels to help you achieve more freedom.

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Comments on this entry are closed.

  • Laura

    Excellent article today, Simon. Much of Western society has an entitlement mentality, so it’s more important now than ever to speak out against that. I especially appreciate how upbeat you have remained because your enthusiasm is contagious. Many thanks.

  • Ben

    Simon,

    I haven’t received any letter in my inbox or my spam folder for that matter since Friday so I had to sign up again. I am glad I checked in on the site to find this article today. You are emphasizing one of the main points from my response to your Toronto article last week. This being that everyone has to take responsibility for their own actions and destiny. As you quite rightly state the Governments are idiots and we all know how removed from the real world they are as they don’t live in it.

    Some questions should really be asked on the distribution and use of the “Stimulus” funds.

    1. Whose pocket did it really line?
    2. Is the Federal Reserve (A private entity) accounting for it and determining it’s effectiveness?
    3. Where would the economy be now if the Government had not bothered?
    4. Where did the cash go?

    There does seem to be a black hole somewhere in the US financial system but I can’t quite put my finger on it. There must have been a few fiat Trillionaires created from the TARP, bailouts and Stimulus packages with an ever increasing disparity between the haves and the have nots.

  • Wayne

    Politicians “dumping” money into the economy is not explicit, we have a debt based monetary system, before the money can be “dumped” into the economy they have “borrow” the money from the bankers, so this “dumped” money adds to the national debt, not only in principal but with (alas) interest. We hear about how expensive the entitlement programs are but paying the interest on the national debt is also a major expense. They are not only “dumping” money they are creating yet more debt. “The Secret of Oz” DVD (YouTube) explains the debt based money system really well along with a lot of fascinating monetary history. Some say only 45% of the stimulus money has been spent so far and they are saving the rest for before the elections.

  • Phil in Uruguay

    The increased deficits after 2007 were caused by falling tax revenues due to the recession, in addition to increased stimulus spending.

  • Take the red pill.

    Simon you nailed it! This problem with our economy is structural and being thus, can not be stimulated because the dysfunctional aspects of the economy become “more productive” adding to the problems (and the national debt).

    We need deflation to cleanse the economy and give us any semblance of hope to get the economy back on the right track.

  • Antagau

    Simon, I am a South Korean citizen living in the U.S. as a permanent resident (green card). I am qualified to become a US Citizen and was considering doing so. After discovering your website and others, now I am not so sure. Perhaps I should obtain a second passport as a Korean Citizen in other countries. What are the pluses and minuses of my options?

  • Bob

    Simon, absolutely couldn’t nail it any more!! I currently have 3 passports and live all over the world and run an online business. It absolutely infuriates me to have to think about the government blasting away the tax payers money like this…I am in Paris currently and I was watching hundreds of aircraft fly over the city yesterday wondering if maybe somebody is invading France or what was up (joking of course (kinda))…upon asking someone they said: ” oh no its the practice run for the Bastille Day next week…” I could literally see money being burned from the turbines of the jets flying over the city…are you kidding me? You are wasting millions of Euros to practice a fly by for What? To show off your amazing Air Force? Last time I read Le Monde I could have sworn the government is broke here just like the rest of Europe….So once again I have to shake my head in disbelieve….thanx Simon Great simple insight!

  • Jackson

    If there is economic collapse in the US, will countries like Panama ( who use the US Dollar) also feel the pain?

    You’re right, there are opportunities everywhere.

  • JT

    Please explain: What does it mean when countries don’t recognize dual nationalities? It is my understanding that Panama is one of these countries.

    • Fred555

      The expression “don’t recognize dual nationality” is vague.
      MOST countries, if you’re a cititzen of that country, treat you as only a citizen of that country and disregard other nationalities.
      SOME countries attempt (not always successfully) to choose only one nationality; if you are and want to remain a citizen of their country you must give up other nationalities. Otherwise if you keep a foreign nationality you lose that country’s nationality. Doesn’t always work in parctice; sometimes they don’t find out about the other nationality, sometimes the other country doesn’t allow you to give up its nationality.

  • http://www.ilookforwardto.com Christian H Nesheim

    An incredibly important, informative post, Simon, I will make sure to share it on all my social networks. You are one of the few sane voices left on economic issues. It’s a pity that Krugman, Bernanke and their fellow demagogues are even consulted for any sort of economic advice any more, seeing as they’ve been wrong time and time again. Why do people keep listening to them? I guess their message is more palatable. Why do we keep throwing more money on these sinking ships, blindly “stimulating” without considering the soundness of those investments? Why do we keep using the same medicine that has only further harmed the patient, as it has done not only in the US (1930s, 1980s, and now), but also the same measures that have plunged Japan into debt-hell? If it hasn’t worked before, neither in the US nor Japan, why would it work now? Cheap credit is the whole problem to begin with, how can you expect to cure a disease with the very virus that caused it?

  • Kevin

    According to Fortune magazine, the most profitable company in the world is Gazprom. It’s 49% government owned. Government’s aren’t always the “worst investors” – but to wild-eyed libertarians they are always bad, wrong and wasteful – regardless of the facts.

  • JTapiador

    Simon,

    I find your article a good op-ed piece with a strong viewpoint and peppered with common sense. However, I would just like to digress on one point that may have some flawed assumption.

    You wrote, “Since the end of 2007, the economy has only grown by $476 billion …. Even taken at face value, this means that the government has generated a return of $476 billion on an investment of $1.7 trillion.” And you’ve proceeded to lambast the US government for losing “72 cents out of every dollar that it spent on ‘economic stimulus’.”

    Now I’m not for or against any party. But I think to consider the 72% of stimulus money as lost seems to be too hasty a conclusion. Looking at the timeframe and results, the $1.7 trillion government ‘investment’ on the economy would have a 2.5 year return of 28% already or an average annual return of 11.2% assuming it ‘earned’ $476 billion. Not bad for a bunch of ‘idiots’.

    Investments are not written-off as ‘lost’ if there is still a prospect for future earnings, which I think there will be.

    Keynesian interventions may have some positive impact, though it may not be as dramatic as we wished it to be. Whether we like it or not, some government spending has a positive effect not just in monetary terms, but in social terms as well that leads to better economic competitiveness (think public education in the mid-20th century or setting-up the basic infrastructure of the Internet as a Defense department communication system).

    Yes, there is much to be desired regarding how government should work. But let us also take a balanced view so that we do not get boxed in by our own biases.

    As always, I look forward to your future articles. If you happen to pass by the Philippines, do send an announcement, I would very much like to meet you.

    Best Regards,

    JOVE

    • http://twitter.com/thegiveproject Chase Brumfield

      Right on Jove… Great article but certainly thanks for the balancing out comment – it was more than necessary.

      You don’t simply pump money into an extremely complex system like the American economy and then expect to see a return instantly like putting a quarter in a candy machine. These things take time just like any other investment.

      Hopefully it’ll pan out like “they” think it will, but only time will tell. I’m not a huge supporter of over zealous govt control but lets give this ten years and make a more accurate judgement then.

      Give. Get. Give.

      • Doug

        You guys are missing the point. Where do they get that money to pump into the economy in the first place? We either have to borrow it or print it. This is not investment–this is deferred taxation and robbery (because money that is printed causes your money to devalue, effectively stealing your wealth out from underneath you). And I don’t care what Keynes said–you cannot borrow money to get out of debt.

        And seriously? Do you really think the bozos that are running the show have the slightest idea of what they are doing? They are throwing good money after bad, and they are doing it for political reasons. Sorry, I just don’t trust these guys. Simon is right–they are just wasting our money.

    • Super30221

      JOVE- What makes you believe that if we give these ‘idiots’ more time, then their wasteful spending use of our money will strat to bear fruit? I think, Simon’s point si that, sure, spending money in the economy has a positive impact to the economy. but it doesn’t have a $1.7 trillion impact, it has a $476 billion impact. How does a politician become a millionaire? You give him $2 million and let him lose half of it.

  • Escapekey

    “Realistically, if the government hadn’t started its anti-recession stimulus programs, the fiscal year 2008, 2009, 2010, etc. budget deficits should have been $160.7 billion or better; essentially, the government should have spent as much in 2008 as it did in 2007, barring the recession.”

    The war costs were not included in Bush’s budget. Obama included the wars on his first day in charge, and the result was a significant ‘pop’ in the official deficit.

  • http://www.boat-led.com Cameron Benz

    “The world is not full of doom and gloom. Yes, our political leaders are a bunch of idiots, but we can rise above that easily and find new possibilities everywhere to secure and improve our lives and the lives of our families. This is one of the most important points that I hope you get out of these conversations.”

    I was thinking recently, that there comes a point in life when you realize that just because someone is in a position of power or has a “greater” education, doesn’t mean they have the answers either. Your quote kind of tied in with that. Well put and couldn’t agree with you more.

    And lets not forget, most the politicians won’t be taking any pay cuts.

  • biomedlives

    In my view, the free market, minimal regulation people drove the economy to the edge of the cliff and then turned to the federal government for help. There are a lot of bozos at BofA, Citicorp, GE, … as well as in the government.

  • Joe

    Well put,except….. from where I´m standing what you are describing is the first step in feeding a frenzy starting from the top down.

    Do you really believe,at our present level of development, that humanity has the ability ,let alone the will to self regulate itself?

    We´re still very much children.

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