Trickle up economics

February 21, 2009

The ideological arguments regurgitated by television talking heads, regarding how governments should intervene to resolve our current economic crisis, focus on whether bailouts should be directed at the rich or the poor… a difference without a distinction, in my opinion. Regardless of how money is injected it will always end up in the same place. Money flows in streams like water and it always trickles up because the rich own everything. When money is given to the poor, they will likely just save it in the bank, pay down debt or purchase consumer products — in other words, immediately rush to line the pocket of their neighborhood rich guy.

There are millionaires and billionaires at the top of every industry. Whether you like it or not, the means of production are owned by the rich. In fact, it is the very ownership of these major income generating assets that made them rich. Private business taking risk with private capital is the best way yet devised by man to create wealth. If you don’t take risks, you can’t create wealth. The likelihood poor people would risk bailout money creating their own cash cows, and succeed, is exceedingly small… especially during difficult economic times. And thus the likelihood bailouts will help poor people overcome their poverty is also exceedingly small. It may provide temporary relief, but eventually the bill must be paid, and in the mean time the rich get richer.

What distinguishes this economic recession from downturns in recent memory is the depth and breadth of the stock market collapse and other bubbles bursting all around us. If rich people are able to preserve their income streams (as a result of government intervention) but refuse to contribute towards losing equity positions, where will their money go? So long as real estate prices, global consumption and the stock market continue their descent to oblivion, the answer can only be bonds and gold. If the underlying problems are not resolved before governments are forced, either by excessive debt or inflation, to pull the plug on their stimulus, the answer can only be gold. A government forced to abandon stimulus for financial reasons is not a good investment. And after years of government subsidized income streams businesses would likely become dependent on those subsidies. Take away the stimulus and the businesses die, along with their bonds.

I recognize there are many “ifs” in this post, but if we have learned anything from this debacle it should be never to discount the probability of the improbable. Gold is traditionally weak during the summer and there are varying scenarios that create peaks at varying levels, but I still don’t see any major obstacles in the years ahead.