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High Visual Horizon

December 5, 2011

I recently wrote an article with the title “Economic DUI.” I also considered giving it the title “High Visual Horizon.” In essence I was pointing out the fact that the underlying problem with the way we approach economics these days is that we have become more and more shortsighted in our monetary policy. Our failure to look down the road is leading us into an inevitable and potentially disastrous crash.

The more I study our economy and observe our nation’s monetary policy decisions the more I feel like I am riding as a passenger in the car of someone who has had too many libations in the local bar, is driving 110 mph and trying to text all while having no seatbelts for his passenger (me). I’m screaming, “Stop this car and let me out!” But he just grins and says, “Trust me, I know what I’m doing,” and presses even harder on the gas pedal. That is when I usually wake up in a cold sweat and realize it was just a dream… so far!

So I ask myself often, am I insane or is the whole world insane. Let me give you an example of what causes me to ask this question so often. A couple of months ago I watched President Obama address America where he unveiled his “Jobs Program.” There were many aspects to his proposed program that resulted in the usual political rhetoric and finger pointing. However, there was one proposal that all news and political pundits seemed to be able to agree was a good idea. It was the president’s ‘payroll tax cut measure.’ I heard one reporter state that this specific proposal was, “a no-brainer.”

I would agree it is a “no-brainer,” only I use those words in a different context. As I understand it, the payroll tax cut that is being proposed would reduce Social Security tax by 2 percent for both the employer and employee. They claim this is good on many fronts as it would encourage employers to hire and workers to spend. However, this is more of the very same short-term thinking that got us in this mess. It fits right into the philosophy so prevalent today of, “Stimulate now and pass the debt on to the future.”

This is exactly why Europe is making the news every day, but their debt problems are not unique to their region and therefore will not be contained within their borders. The world has all drank the cool-aid of passing on debt and it is finally catching up to us. Many years ago I wrote that the solution to the debt problem is not to pile on more debt, but that is exactly what we have done and we seem to be doing it at an ever increasing rate.

Social Security is infamous for the system’s unfunded liability. How did we think it was a good idea to do the original reduction in payment to Social Security a year ago, much less now propose to double-down? Social Security has an abysmal track record because it is an old age retirement security plan that requires long term funding, investing and discipline… of which our ADHD world cannot possibly understand. So let’s continue to sell out our future, our children’s future and our grandchildren’s future and act like animals on “Black Friday,” because we must spend, spend, spend today and think nothing of tomorrow.

It seems to me that we are in an exponentially growing liquidity cycle that our central banks and government have committed to as the only solution to our economic crisis. It is evident that it has not worked so far, but what if it is actually the opposite of what we should be doing to fix our economy? What seems to be evident is that as our policy setters pour in more liquidity, all new liquidity is having a decreasing influence. Our financial markets are acting just like a drug addict who needs more drugs just to attain a lesser high. Like a druggy, you will never convince our central banks that more liquidity is not the answer. What we need to ask is what will a liquidity, debt and leverage overdose ultimately mean to the rest of us?

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