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.