When Is ‘Uncle Sam’ Moving Out of the House?
Posted by Larry Doyle on April 12, 2012 7:14 AM |
“The mind, once expanded to the dimensions of larger ideas, never returns to its original size.” Oliver Wendell Holmes, Sr.
Uncle Sam and his friends in officialdom around the world may believe their ideas are of larger size and greater dimension. That point is open to debate. How do the old man’s ideas mesh with the principles of freedom and liberty?
Uncle Sam and his ‘friends’ make for very strange bedfellows . . . and lousy business partners. I cautioned people on this front a few years back.
The sanctity of contracts? Fuhgeddaboutit. The primacy of market based principles? How inconvenient! Protecting private capital? Why bother?
I broach this topic thanks to a longtime reader who shared with me a recent letter written by David Kotok of Cumberland Advisors who expounded on this theme recently in writing:
Investors who look at the post-Lehman world through the lenses of the private sector-oriented old idea are puzzled. They expect outcomes that do not occur. They measure risk by the size of the official response. They anticipate that the huge sums mentioned by officialdom will yield the results of higher interest rates and more inflation and weakening currency values. In fact, that may eventually come to pass, but it will take a while. The new idea has to run its course before those things will happen. Inflation, weak currency, spiking interest rates are the outcomes of the old-idea framework.
In the new-idea realm, officialdom is in the game for a long time. This is true for Greece. It will need more subsidies. It will be offered that assistance through negotiations under strenuous terms. Such is the power of officialdom. Greece will have little choice, since the alternative of leaving the Eurozone will always appear to be worse. That process will continue for years unless a new Greek government repudiates the decisions of the previous ones and a new political crisis undermines the official European coalition.
Notice how there is no room in this process for a rapid return to the private sector. The private sector is limited and will remain so until the new idea has completed its development phase. Then and only then can a newer version of the old idea commence. Private-sector expansion in Greece requires officialdom to permit it. To do that the political forces must change from the present ones.
We expect the same new-idea process to unfold in Portugal and Spain. The sequence that leads to it is already underway. There is ongoing debate about Italy, since it is in the “too big to fail” category. So far the Monti-led technocrats have maintained power while implementing a changeover to the new idea.
In the US we have experience with the new idea in housing finance. GSE-based mortgages have been the result. It is nearly five years since the first ripple appeared in the Fannie-Freddie mortgage pond. Where are we with officialdom? You take the inventory and be the judge.
In the US, the new-idea framework is now focused on our national healthcare policy. The successors to Justice Oliver Wendell Holmes, Jr. are deliberating. For a perspective, consider that housing is a large part of the United States in economic terms. Now consider that healthcare is bigger. It is about 18% of our GDP. This Supreme Court decision is monumental. It comes down to the debate over officialdom vs. private domain.
“The great thing in the world is not so much where we stand, as in what direction we are moving,” said Holmes, Sr.
In the mature economies of the world, movement is away from the private sector. Movement is toward global and regional officialdom. The players are known by their acronyms, like ESM, EFSF. IMF, or GSE. We live with a consortium of acronyms, funded by central banks and governments. They represent the power of the new idea as it becomes institutionalized.
What does this bode for investors?
We think there is a good period and then a bad period. We are currently in the good period, which is defined by massive liquidity injection from officialdom. $4 trillion of global (G-4 countries) excess reserves in the banking system is a marvelous tonic.
The bad period will evolve as officialdom begins to confront resistance from the citizenry and when the old idea outcomes start to appear. That lies ahead. Signs of it are visible in the civil strife in countries where the new idea is being deployed.
Holmes Sr. warned us: “Beware how you take away hope from another human being.” Investors must carefully observe when officialdom suppresses hope with power. Investors’ capital spent on hope in this uphill fight to preserve hope will be lost. Ask the private holders of Greek debt if you need proof. Ask the holders of Fannie preferred.
The new idea of officialdom is operation and control by a central group of people. They are quite different from the old-idea folks, who are dispersed and whose time is ending. Holmes Sr. warned of the risks implied by this tension. He said, “Between two groups of people who want to make inconsistent kinds of worlds, I see no remedy but force.”
Wow!! Mr. Holmes’ words of warning are strong and should not be discounted.
Remain watchful. Why? The old man has clearly established his presence in all our homes. He shows no inclination or desire to move out anytime soon. In fact, he wants not only a bedroom but seemingly the run of the entire place. He continually leaves his room a mess. Never takes out the garbage. Wouldn’t consider setting the table and, generally speaking, is little more than a cranky old man.
Can we change the locks on the door? If only it were that easy.
The costs associated with Uncle Sam’s presence are enormous, increasing, and not yet fully acknowledged. The debate over his presence will be vigorous over the next 6 months. The impact will be felt for a lot longer than that.
Thanks again to the reader who shared Mr. Kotok’s letter.
I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.