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:

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.