Jeff  Carter

Name a state or national government that isn’t in some sort of financial trouble. Even the states that are supposedly rock solid financially have underfunded liabilities somewhere on their balance sheet. If they aren’t readily apparent now, a big downturn in the market will cause them to be less obscured by the clouds.

Governments make financial decisions and they have consequences. Shifting money from this to that has costs.

Businesses do the same thing. However, there are contraints on business that don’t exist for governments. The important thing to look at is how a business reacts to severe adversity, and a government.

Governments react by raising prices. Fees and taxes go up. How badly would the market punish a stock that raised prices in a crisis?

Governments react by spending more money. They borrow via the bond market to use money today to stimulate economic activity. Of course, the multiplier effect of that activity is zero, nada, zilch, a goose egg. Businesses restructure debt, cut costs, and lay off workers. They retool the enterprise. They figure out where they are going to get the most bang for their buck, and spend money there. If the resource is unproductive, they kill it.

People will say that governments aren’t like a business, so it doesn’t matter but they are incorrect. Economic opportunity costs run through governments just like they do businesses. Just like the business that buries poor decisions behind shifty accounting, eventually the math catches up to you. Those poor decisions see the light of day and the market punishes them. That’s what is happening to government today.

I would agree with critics that governments don’t produce anything. But they should provide a basis for societal interaction. That means clean water, roads and bridges, cops and fireman. They don’t need to provide much more than that. But economics still rule the decisions they make regarding our most basic resources.

Congress and the President are unpopular. The President is unpopular because he has made some really, really bad short run decisions for the economic vitality of the country. Congress is unpopular because a half century of bad decision making is being shown in budget numbers that have sunshine on them.

If we didn’t have a gigantic economic downturn, governments would have been able to continue papering over their losses. It can’t anymore so we have reached the day of reckoning.

Jeff Carter

Jeffrey Carter is an independent speculator. He has been trading since 1988. His blog site, Points and Figures was named by Minyanville as one of The 20 Most Influential Blogs in Financial Media.