Gil’s Musings

Austerity Measures 2012

France elected a new leader last week, and he is a self-proclaimed Socialist. Greece held elections too, but the outcome is less conclusive. These events could be seen as an outright rejection of austerity measures. As one might imagine, trouble could be looming for the U.S. and the rest of Europe as well, since other countries are struggling with austerity measures of their own. Populist leaders don’t have to dig too deep to find large numbers of supporters who believe that benefits really can be free. With the wealthy outnumbered 1000 to 1 in almost every society, you do the math. President Obama will likely benefit from similar looming circumstances in America. I’m not purporting to have any insight to our upcoming election, and I’m not handicapping any outcome. I’m simply observing the popularity of certain lines of thought, and correlating them to investment implications that might make sense.

With America’s version of austerity programs only in the discussion phase at this point, the tipping of the populist hat in many foreign nations would seem to indicate that the expiration of the Bush tax cuts from 2003 is a near certainty at this point. Simply from a timing standpoint, ratifying them before their January expiration would need some momentum in discussion right now, no matter the outcome of the election this November. This topic seems to have no current head of steam. It is possible that market motivations between buyers and sellers could shift between now and then, and this might upset the normal equilibrium in prices. As sellers may get anxious to lock in gains at 15% tax rates, sellers could easily outnumber buyers as the year nears a close. However, any precipitous drop in stocks might simply bring about more quantitative easing measures, since each round thus far has generated a new sugar high in stock prices in each prior event. All political administrations will admit they see the political benefits of rising stock prices. The race is still on to see which country can depreciate their currency fastest, and this should serve to drive interest rates lower still. This might also serve to pressure gold prices lower, until the flashpoint comes. It seems this flashpoint can be forestalled, but likely not prevented. It’s an interesting game of cat and mouse; and it could get much scarier for the mice in the next few months.

It is also interesting how politicians attempt to change the rules of the game in this grand version of game theory. They seem to assume that players will continue to play as they have before, even though the rules may have shifted against them. This is the fatal flaw in Keynesian economics, which I believe underestimates the willingness of pressured groups to flee. The Wall Street Journal recently contained several articles discussing the five-fold increase in Americans surrendering their passports and giving up their citizenship, with a high-profile Facebook billionaire being the latest to move to tax-friendly Singapore, prior to Facebook’s upcoming IPO debut. The article mentioned that the U.S. is still the only government on the planet that taxes its citizens living abroad. The game of roulette is intricately mathematical, and the key to the house winning the slight majority of the time lies in the two green squares. Add a third square, and the smart players will scoop their chips and head to the exit. The signpost of our undoing will be when the political discussion shifts from prohibitions on immigration to prohibitions on emigration.

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