Tuesday, July 12, 2011

Understanding Unintended Consequences


As you get older and start thinking more, you realize there are more layers to even seemingly straightforward problems. When you are young, solutions are simple: If drugs are bad, we should make them illegal and put people in jail for using them. Or if we need to raise revenue, we should raise taxes on everyone, especially the rich. Perhaps this is the logic behind the saying, "If you are young and not liberal, then you have no heart; but if you are old and not conservative, then you have no brain." Once you've been around the block and seen enough shenanigans, you realize things aren't so simple. When you're young, you're what I like to call a do-gooder; you don't even realize there is such a thing as unintended consequences.

Unintended consequences come in many forms. There are unintended consequences in our foreign policy, such as those that came from the CIA-led overthrow of the democratically elected Prime Minister of Iran. We put the brutish Shah of Iran in power, making the Iranian people suffer for 26 years, which led to the radical movement there and the instability in the Middle East. Unintended consequence. The average person my age thinks I'm making these kind of things up because they don't read. I let them wallow in their ignorance- these are generally accepted historical facts that you must know and accept to peer into the future. If you don't have the ability to objectively view history, then you will not be able to see what's coming; you are too biased.

Then there are finance and economics-related unintended consequences. For example, if our leaders fear a stock market crash, they ban short selling. Little do they realize that short sellers are the only buyers in a panic and that stocks fall like a rock without short sellers. Or better yet, we overregulate markets with Sarbanes-Oxley to the point that new companies don't want to do business here. Solutions like these evidence a complete lack of knowledge of markets. This is the hallmark of government- they graduate with degrees in law and think they can preside over an economy. Who are they fooling?

Our leaders are clueless and you will be hard-pressed to find one politician, besides Ron Paul, who saw this crisis coming. Most politicians have their focus on the wrong problem. The debate now is whether we should raise taxes on the rich or not. Well let me tell you, the rich happen to be the movers and shakers in the economy who create jobs; they can easily take their businesses abroad if they have to. By raising taxes in the hopes of boosting revenue, we will likely do the exact opposite. Instead of attacking domestic capital, we should worry about the problem of sending hundreds of billions of dollars abroad annually to service our debt to foreigners. It is the debt that is going to bring this ship down.

The worst is yet to come because our leaders don't know how to deal with this debt crisis. Cut spending and you will see a dramatic rise in unemployment from the public sector and civil unrest. Raise taxes and you will see rising unemployment, slower economic growth, and a flight of capital abroad. Print money and kick the can down the road and you will see most assets, including stocks, go to record highs. Because this cycle will be one where people generally lose their faith in government, gold is going to rise even higher in percentage terms than most assets. I feel like this is 2007 all over again: the storm clouds are painfully obvious, I'm warning everyone around me about what's coming, but people are too apathetic to prepare or they flat-out don't believe me. Fine. Let's see how this plays out; I am positive the magnitude of this crisis will be shocking.

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