The Government's All-Out War on Private Capital

Since early 2008, Uncle Sam has been at war with the private capital market. It started with a panicked rate cut as the stock market tanked from what turned out to be Societe Generale's attempt to unwind massive fraud caused by a rogue trader. It escalated with the hastily engineered Bear Stearns bailout, which set the stage for the infinite moral hazard of multitrillion-dollar handouts. Things reached a crescendo when the critical bankruptcy concept of absolute priority was damaged by further poorly engineered bank "rescue" attempts.

At one point, there was hope that the recent regime change in Washington might bring about some relief. Unfortunately, even under new management, the government's economic policies reward behavior like tax evasion, rampant speculation, and failure to compete. Indeed, Uncle Sam has accelerated its attack on prudent risk-taking, as fears of nationalization spawn capital hoarding among companies that otherwise might be willing to expand.

Was this the fatal blow?
Unfortunately for those of us not politically well-connected, the destructive nature of these policies just keeps growing. In a sign that financial Armageddon may be just around the corner, the Federal Reserve announced that it would continue throwing money at the problem by buying long-term Treasuries.

In a response that has become all too predictable, the market rallied for a day. Like so many of its predecessors, the rally soon fizzled out, once people had the chance to digest the ugly consequences of that latest attack on private capital.

After all, on the very day the Fed threw a trillion more dollars at the debt market, the cost of long-term private borrowing skyrocketed. Even AAA-rated companies were forced to add more than one full percentage point to borrow for 20 years. Similarly, gold leapt over $26 an ounce while the dollar lost more than 3% of its value against the euro and Swiss Franc. And in spite of higher-than-expected inventory, oil has once again broken above $50 a barrel, thanks to the Fed's debasement of the dollar.

While it may come as a shock to Harvard-educated politicians and economists, when the cost of long-term debt rises, it becomes more expensive to borrow for long-term expansion projects. That makes them less likely to happen. Likewise, if inflation expectations ratchet upwards, companies may scale back employment plans to save on future labor costs, despite what the now-discredited Phillips Curve claims.

There's a reason Zimbabwe's hyperinflation hasn't led to full employment and economic growth in that country. Why would similar monetary policies work better here? Yet as long as virtually free loans to the chosen few and an ever more worthless currency are the official and enacted policies of the U.S. government, we're at risk of learning that lesson the hard way.

The all-too-likely ugly future
The dollar's debasement may well trigger an all-out capital flight. Oil may run up to last year's highs (or worse), not because of a supply shortage, but because a race to the bottom could make the currency essentially worthless. Worldwide investors worried about preserving the value of their capital won't be willing to park it in the greenback. Indeed, China is already looking for ways to transition away from its dollar ties and increasing its own gold and oil reserves.

As the U.S. dollar loses its status as the world's reserve currency and investment flees like never before, the economy will only get weaker, no matter how many greenbacks the Fed prints. You cannot stop insolvency by simply printing more currency.

Protect yourself
Fortunately for you, what little capital you may have left still has some buying power. You can use it to buy strong, profitable, and international companies that are headquartered elsewhere and have business lines not solely tethered to the U.S. and its disastrous policies. Ones like these, for instance:

Company

Headquarters Country

Market Cap
(in billions)

Forward
P/E Ratio

Teva Pharmaceuticals (Nasdaq: TEVA  )

Israel

$39.3

10.4

EnCana (NYSE: ECA  )

Canada

$32.0

14.1

AMBEV (NYSE: ABV  )

Brazil

$28.6

13.2

Transocean (NYSE: RIG  )

Switzerland

$19.1

4.5

Netease (Nasdaq: NTES  )

China

$2.9

10.3

Flextronics (Nasdaq: FLEX  )

Singapore

$1.9

6.1

Source: Yahoo! Finance.

If you feel more comfortable keeping your cash closer to home, global titans like IBM (NYSE: IBM  ) get less than half of their revenue from the United States. That worldwide diversification should help preserve some of your investment should the government continue to expand its war on private capital.

We're more than a year and well over $11 trillion into this fiasco, yet the economy shows no sign of recovering anytime soon. It's beyond time to acknowledge that the government's rescue plans have deepened this crisis, rather than resolved it.

At the time of publication, Fool contributor Chuck Saletta did not own shares of any company mentioned in this article. Netease.com is a Motley Fool Rule Breakers recommendation. Try any of our Foolish newsletters today, free for 30 days. As stoic as it may be in normal times, the Fool's disclosure policy will weep at private capital's funeral.


Read/Post Comments (14) | Recommend This Article (37)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 20, 2009, at 2:54 PM, CaptainRadd wrote:

    So don't buy American companies? okay.. Who cares about deficits and spending. Remember...Reagan proved that deficits don't matter. -Dick Cheney

  • Report this Comment On March 20, 2009, at 6:02 PM, SteveDude2727 wrote:

    "So don't buy American companies? okay.. Who cares about deficits and spending. Remember...Reagan proved that deficits don't matter. -Dick Cheney"

    I am tired of this being the argument. Just because the republicans did something stupid or destructive does not excuse the current administration...when they are doing something just as stupid and destructive. Just look at the facts. We are printing money like there is no tomorrow. This must come back to bite us. It must. Economic systems are like any other. They will eventually balance themselves out. It takes time, but the pain that this money machine will create will be 10 times worse than what we have now. And what will the political class tell us (republican and democrat)? They will tell us that only government can bail us out again....Probably with price controls....and more restrictions on our freedom.

    And the cycle of abuse will go on and on.

  • Report this Comment On March 20, 2009, at 7:53 PM, texjammer wrote:

    As long as we keep letting professional politicians run the largest employer and economy in the world, they will bankrupt us. WE MUST VOTE OUT EVERY INCUMBENT POLITICIAN STARTING IN 2010 REGARDLESS OF PARTY AFFILIATION! The Founding Fathers were farmers, businessmen and family men. The lawyers we have elected for the last few decades are only going to drive the United States into the ground.

    We have to start being AMERICANS first! Republicans and Democrats created the two party system to keep themselves in power, not to help the citizens of this country. We have already begun a seperation of the classes, the politically connected and the peasants. How many Russians do you think liked seeing the Politboro members whizzing by in the black limos while they froze and starved to death?

  • Report this Comment On March 20, 2009, at 8:35 PM, PostScience wrote:

    Will we have too much deflation or too much inflation? There are furious proponents of both scenarios, so perhaps the current government policy is just about right.

    These scare articles are becoming all too common on the Fool, and frankly they do a disservice to it's readers and to society at large.

  • Report this Comment On March 21, 2009, at 12:55 PM, jesse2159 wrote:

    This world wide contraction will continue no matter what the politicians do or say. It will take longer to correct, be more expensive to unwind and make the word financially flat when it's over. It will take about 15 years, if everything goes right.

  • Report this Comment On March 21, 2009, at 12:58 PM, OldEnglish wrote:

    Mr. Saletta:

    Yours is one of the best articles I've read on the Fool. A rare variation from the CNBC'esque - "The turn around will occur in mid to late 2009. Now is the time to buy!" America has fundamental problems that few are willing to speak of openly. "You cannot stop insolvency by simply printing more currency." A poetic and damning statement of this nation's chosen course.

    A belief in America's future and a belief in capitalism are rapidly becoming mutually exclusive.

    PostScience:

    "These scare articles are becoming all too common on the Fool, and frankly they do a disservice to it's readers and to society at large." Such articles only do a disservice if they are wrong. They may very well protect readers from the having their savings destroyed by 'society at large'. A rather parasitic society which has elected to punish savers who live beneath their means to reward speculators and the patronage classes of government. Please continue not to be scared. I need to find someone to whom I can sell my dollar denominated assets. Don't forgot, the government says the turn around will begin in late 2009. Now is the time to buy!

  • Report this Comment On March 21, 2009, at 5:23 PM, JFund wrote:

    People seem to forget that these actions are to prevent a complete meltdown of the system. While they may not be good for the government's balance sheet, the alternative is the collapse of global markets. I doubt people will be worrying about investment returns when it is no longer possible to make investments.

    The governments actions are not popular but it must be done. I have greater faith in the Fed and their army of economists than armchair economists who are emotionally caught up in the situation. Fix the economy first, then blame people later.

  • Report this Comment On March 21, 2009, at 10:49 PM, Mudster1 wrote:

    I think this column is nothing more than hyperbole. No persuasive argument is made here. The people who really have access the kind of capital being discussed can afford to invest in new enterprises if they want to. We all agree that those who acted wrongly will not be held accountable and the prudent people of the middle class will pick up the bill. That doesn't mean a thinly veiled political attack like this one should pass off as an objective appraisal of the current financial problems we face. Pure hype, low on substance.

  • Report this Comment On March 22, 2009, at 9:24 AM, ZenMasterK wrote:

    all the talk and blather and stamping of feet and gnashing of teeth and rending of garments about the bailout reminds me of a song i heard the muppets do when my kids were little, "There's a hole in the bucket ,dear Liza, dear Liza! There's a hole in the bucket ,dear Liza, a hole! So fix it dear Henry, dear Henry, dear Henry! So fix it dear Henry, dear Henry, fix it!" not only is there a hole in our bucket but it has several leaks as well let's fix the hole first then move on to the leaks the problem is we're trying to keep the bucket full while we fix it but if we let the bucket go dry to fix it the wood will also dry out and shrink and leak even worse than it did before and as the wood dries and shrinks the hoops will loosen and slip off and the whole thing will fall apart and thats the problem where are you going to find a decent cooper these days because weve set aside the basic values skills and practices and wandered onto an entirely different and wrong-minded path and that grasshopper is the message we must find our way back to the right path and the journey will be difficult

  • Report this Comment On March 22, 2009, at 12:34 PM, pberardi wrote:

    So don't buy American companies? okay.. Who cares about deficits and spending. Remember...Reagan proved that deficits don't matter. -Dick Cheney

    I am sick of people distorting Reagan's policy by taking things out of context.

    1. Reagan inherited an economy far worse than this. He inherited stagflation. Double digit inflation, interest rates, no growth in the economy. He inherited an economy that had a 70% top marginal tax rate on income over $65,000 ($120,000 in today'ss dollars) There was no indexing of the tax code so millions of Americans were getting raises and being pushed into higher brackets as their incomes were being eroded by punishing inflation which is a tax in and of itself.

    My my, have we forgotten.

    He inherited an inept military and weakened foreign policy. The Soviet Union had invaded Afghanistan and Iran was holding hostages.

    Reagan slashed taxes by 30% accross the board. He cut discretionary spending by 5%. He commenced on rebuilding our proud military.

    As he cut taxes, he worked with Paul Volker to raise interest rates that caused a painful recession. He risked his whole presidency (His GOP got killed in the off year elections) on cutting taxes, indexing the code to inflation (thus ending bracket creep and saving the middle class from 70% tax rates) and building a sound foreign policy through strength.

    that's called leadership. He did the right thing.

    The economy started growing, interest rates came down, taxes were lowered and the short term deficit during his first term as a percent of GDP was dramatically reduced during his second term.

    Reagan's $200 billion annual deficits and deficits that equate to 3% of GDP would be a welcome blessing for this country today.

    Obama's trillion dollar deficits caused by spending while Reagan's 200 billion deficits caused by cutting taxes is a huge policy blunder that may very well cause irrevocable harm.

    This country was able to grow its economy under Reagan by lowering taxes, inflation and eventually interest rates. That's what is meant by deficits don't matter.

    This time they do matter because economic growth has ceased as inflation and higher interest rates are around the corner.

    There you go my friend, a lesson in history and economics all in one.

    You sir, have no idea what you're talking about.

  • Report this Comment On March 22, 2009, at 1:42 PM, sevenofseven wrote:

    You're right. Reagan was a very good president. There is a big difference between a deficit created by overspending our money on non-productive programs and entitlements and a deficit created by letting us keep more of our money, thus (as history shows) creating MORE tax revenue, and stimulating PRIVATE economic activity. Some may think this is a scare article, but I for one am scared of this administration. Everyone was worried (supposedly) about GWBush's deficits, but BO's are 3-4 times greater, and that's okay?

  • Report this Comment On March 22, 2009, at 1:52 PM, dimestop wrote:

    HELP "main st" instead of "wall st."

    illusion NUMBER ONE: you keep hearing that we have to prevent the "big investment type banks and financials" from failing TO PREVENT A WORLDWIDE LIQUIDITY CRISIS.

    THIS IS FALSE because PUMPING THOSE BANKS FULL OF LIQUIDITY WILL NOT "GET THEM LENDING!" It only "bails out formerly rich investors!"

    Think: Who is going to be borrowing IF YOU FLOOD THE BANKS WITH MONEY ...that could be used BETTER ELSEWHERE!

    We are in a "global recession" and STILL GOING DOWN with continued FURTHER JOB CUTS. WORLDWIDE BIZ is CONTRACTING, DELEVERAGING, AND LAYING OFF PEOPLE.

    BIZ NEEDS LARGE AMOUNTS OF LIQUIDITY AND FREE FLOWING CREDIT when THEY ARE EXPANDING "NOT CONTRACTING."

    using the "trillion bailout" IS LIKE PUSHING A STRING...

    those that NEED CREDIT, like the consumer WILL NOT GET IT, AND "big biz" does not need it IN CONTRACTION.

    they are just BAILING OUT WALL ST. "AS USUAL!"

    I voted for O'bama thinking CHANGE... but it appears the FOXES have surrounded him... and are taking care of "foxes" and not "us chickens!"

    SOLUTION: we have 600 or so regional and local banks and SOME BIG ONES that are not using "mark to mkt" accounting and are in relatively GOOD FINANCIAL SHAPE.

    LET THE BIG INVESTMENT BANKS GO DOWN...flooding them with credit that few need is WASTING TAXPAYER DOLLARS!

    while there is STILL TIME... give the CONSUMER (who won't qualify for the credit reliquification anyway) A

    HUGE IMMEDIATE TAX REFUND for last year.

    the "individual" consumer could be given a "treasury refund coupon book"

    with options to spend the tax refund in "certain timeframes" and on certain biz and sector purchases. This way he can't "salt away the money, etc."

    say: one coupon of 20% could be used to purchase a "new or used car" or make a mortgage or credit card payment" but not pay off all credit card debt in one shot...like make double the minimum payment, etc. ...get the idea!

    Congress would have to work out the specifics of the plan, but the effect WOULD BE TO IMMEDIATELY PUMP "HUNDREDS OF BILLIONS" OF DOLLARS into ALL SECTORS OF BIZ AND THE ECONOMY (instead of wasting this money to liquefy credit in world banks...where it will help few who "need and quality" for that type of credit).

    JUMPSTARTING the "consumer sector" of the economy is WHAT IS NEEDED IMMEDIATELY...not bailing out Wall St. fiascos...

    if you don't jumpstart the "consumer economy" immediately...more jobs WILL BE LOST, MORE PEOPLE WILL BE FORECLOSED AND LOSE THEIR HOUSES. These jobs will not return easily or quickly once they are lost.

    Get with it Obama. Forget Wall St. ...BACK "MAINSTREET!"

    FLASHROB

  • Report this Comment On March 23, 2009, at 5:24 AM, TyroneGenade wrote:

    Hmm... Should I have sell my humble stash of US$ or save it for the future, when it will cost less than toilet paper. What a tough decision.

    Oh, the fiscal tribulations of people of Darkest Africa...

  • Report this Comment On March 23, 2009, at 12:20 PM, TMayea wrote:

    Hi, Mr. Little! How's the mrs these days?

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