Many people spend considerable amounts of time following the news of the day, and subsequently become angry over the state of world affairs.  Most people who see problems around them are infused with a natural desire to resolve them.  Ironically, this desire to solve problems is a constant thread across both left-leaning and right-leaning people.

To many of the left-leaning persuasion, daily news brings a perpetual onslaught of human suffering that is being allowed to go unchecked and unchanged by society.  Their desire is for somebody to do something to ease this suffering.  Generally speaking, people of this persuasion would prefer to see government step into action.  The persistence of suffering is seen as justification for higher taxes and more concentration of power in the hands of government.

To many of the right-leaning persuasion, daily news brings a perpetual onslaught of government failure, corruption, and excessive power that has been allowed to continue across multiple generations.  They see the erosion of freedom from government regulations, and confiscation of resources through taxation for the purpose of empowering politicians in the name of addressing social ills that never seem to be solved.  Generally speaking, people of this persuasion would prefer to see a less active government, and an increase in free market forces.  The continued failure of government programs to achieve their goals is seen as justification for reducing the size and scope of government activity.

The unfortunate fact that people of both persuasions must ultimately come to grips with is that we do not always live in the world of how things should be . . . we live in the world of what “is”.  Put another way, there are many forces beyond our ability to individually control that shape and influence the world around us.  It is most certainly true that sometimes events will unfold in a way that is more favorable to people on the left, or the right, but it is always true that neither persuasion is every going to be fully satisfied with the tenor of local, national, or wold events.

In many cases, people allow themselves to become bitter and angry because of what feels like a persistent failure of world events to transpire in a manner that they feel is just.  In some cases this phenomenon manifests itself as an “Angry Liberal” or an “Angry Conservative”, but in almost all cases it involves people who are continually upset about a set of circumstances that they cannot control.  In this way, each successive piece of news or information that we consume becomes another piece of evidence showing how little influence we have over the world around us.

In response to this, we recommend shifting focus toward the things in life that we can control.  Put another way, we recommend to live in the world of “is” instead of the world of how things should be.  Instead of focusing on all the problems in the world, focus on what you can do to create something beneficial.  Instead of studying the news as a means of demonstrating that your anger at the world’s political leaders is justified, seek to find information that will help you take action in a way that benefits your family or those in need.

If you are concerned about human suffering, stop complaining about how the government isn’t doing enough and go do something yourself.  Volunteer for an agency who helps people in need, or donate to a charitable foundation.  if you are concerned about the pervasiveness of government, stop complaining and do something to secure the financial future of your family.  Start a small business that generates supplemental income and generates legitimate tax write-offs.  Study investments to determine which ones will provide optimal returns with reasonable risk in a tax favorable manner.

In short, living in the world of “is” really comes down to taking action.  It is not difficult find problems, or to complain about them.  It is considerably harder to actually do something about some of these problems.  However, it is considerably more rewarding as well.  This is not to say that nobody should advocate for changes to government institutions . . . on the contrary, civic participation is a key tenant of continued national prosperity.  What it means is that your future should be built on your own actions, not the actions of people in political office.

In the end, each of us is ultimately responsible for creating our own life.  To many people, this statement seems self-evident, but it is important to ensure that actions match our understanding.  There is nothing wrong with remaining hopeful for progress in the political realm, but there is power in the understanding that we direct our own destiny.  Each new day is a new opportunity to take action.  Make sure that something new is achieved with each passing day, and the future will brighten in a very fast, very profound manner.

 

In the context of news and media, there is a popular belief that journalists and reporters are ethically bound to avoid injecting any of their personal opinions into their work.  This assumption leads many people into a blind belief of anything that is reported by the news agencies.  The unfortunate impact of this phenomenon is that so many people accept what is reported to them in the news without any skepticism or question that it is quite possible for the masses to be manipulated.

In the world that we live in, total separation of thought and action is not possible.  This means that the personal views & opinions of news journalists cannot be prevented from reflection in their actions.  Because of this, objectivity is really a myth that is propagated to create a false sense of trust in news reporting.  The unfortunate result is a large amount of people who allow the television, newspaper, or radio to do their thinking for them.

My belief is that the marketplace of ideas would be much better off if people simply admitted their biases up-front, and then engaged in an open discussion with all of the cards face-up on the table.  Speaking for myself, I am much more prone to respect the opinions and viewpoints of somebody whose ideas I vehemently disagree with, but do not attempt to conceal their biases behind a fictitious cloak of objectivity.  I hold very little respect for somebody that hides their opinions behind a pretentious veil of imagined objectivity instead of respecting the intelligence of the audience.

In the end, objectivity is a fanciful myth that is propagated by the arrogant and self-important.  It is a presumption that people do not possess the intellectual capacity to make their own conclusions in light of all the facts & opinions.  If we wish to exist in the world of reality, it would be wise to understand “objectivity” as a tool that is used to conceal biases and generate a false sense of trust to manipulate the audience.

 

The persistent economic recession that was triggered by the financial crisis of 2008 and has lingered through 2010 is showing every sign that it will drag into 2011.  This is not intended to be a foreboding of doom and gloom, but an honest assessment of the fundamental mis-alignment that the economy is still attempting to reconcile.  The reason for this slow, anemic recovery is a fundamental misunderstanding of the fundamentals that drive economic growth, bubbles, crashes and recovery.

The advent of business cycles is certainly not a new phenomenon.  Economic expansions and contractions have been commonplace throughout human history.  The thing that has made this economic downturn so painful is the fact that it followed successive decades of “fine tuning” the economy by government and quasi-government institutions that skewed incentives and systematically diverted economic resources away from their optimal use.  When this artificial stability (necessarily) collapsed, the result was a much more intense adjustment than most people had anticipated.

In order to understand this phenomenon more completely, we should begin by examining the six stages of boom, bust, and recovery.  These stages are built on top of a natural growth trajectory for free markets that systematically allocate resources to their optimal economic use.  The reason why booms and busts materialize in the first place is when public policy shifts the incentives for market players so that they reap greater rewards from pursuing actions that are not economically optimal.  (Even if they are politically favorable)  These six stages are the bubble (aka ‘boom’), the peak, the bust (frequently involving a ‘crisis’), the decline, the trough, and finally the recovery.  Each of these stages plays an important role and merits further examination.

The Bubble

Bubbles are a market phenomenon where the price of something (such as stocks or homes) rises much higher than is justified by its underlying fundamentals.  Stock Market bubbles are frequently driven by speculative buying of companies that have not yet produced a profit but are expected to grow rapidly in the near future.  Real Estate bubbles are typically driven by a change in financial policy that makes it easier for people to obtain financing, resulting in more buyers and higher prices.  In all cases, market bubbles rely on continued escalation in price for a particular type of labor or asset that eventually surpasses its fundamental value.

The Peak

When bubbles reach their zenith, they result in a market peak.  These peaks are impossible to predict in advance and only become apparent when viewed in hindsight.  The way that they typically emerge is when ‘casual’ investors hear about the spectacular profits being made by other people and finally decide to buy into the market.  Unfortunately, many of these casual investors buy-in just as the irrational value escalation reaches its apex.  All bubbles share a common characteristic in that the price increases will eventually reach a point where no new buyers can be found.  Thus, what the peak really represents is the stopping point where nobody else is willing to pay more than the last person did.

The Bust

When bubble markets eventually rise to a peak, there is typically some type of ‘trigger’ event that initiates a sell-off.  Sometimes it is a disappointing earnings report, sometimes it is news about political unrest that may disrupt food or energy prices, and sometimes it appears to be nothing at all.  However, in all bubbles, there eventually comes a time when new buyers willing to pay higher prices cannot be found and prices fall.  If a rapid succession of bad news accompanies this reduction in prices (as was the case in the fall of 2008) then the adjustment can turn into a crash.

The Decline

At this point in the market cycle, most of the players finally come to realize that the assets they were buying aren’t fundamentally worth the previous market prices.  When it becomes apparent that the hot new stock is not going to reach profitability as expected, or that the large speculative property will not have any buyers, it frequently results in a sell-off among investors who cannot afford to carry the asset indefinitely without selling.  During the bubble, there was a surplus of buyers relative to sellers and now there is a surplus of sellers relative to buyers.  The decline can be further intensified by the fact that many investors feel uncertain about buying-in since they do not yet know where values will eventually hit bottom.

The Trough

When values finally reach a low enough point that investors are willing to accept the risk of further losses in exchange for the opportunity to capture upside gains, a value bottom is frequent reached.  In some cases, the trough can last a very long time if investors are systemically unwilling to begin buying aggressively because of fears that future growth expectations will materialize.  Alternatively, if banks are holding a lot of foreclosed properties, they will naturally want to sell those properties as quickly as possible, provided that they do not drive down the market prices even further.  Ultimately, the length of the trough depends on how many mistaken investments need to be disposed of.  This process is extremely important, because it systematically shifts the ownership of capital toward people with the prudence to deploy it responsibly.

The Recovery

Once the over-priced capital has been sold at reduced prices and the new owners begin deploying that capital in a way that produces value, a recovery can ensue.  Fundamentally, economic growth emerges when the same amount of input can produce a greater output.  (This is also called productivity growth)  Put another way, the recovery unfolds when labor and capital eventually find their optimal use.  This is the only way that our economy will return to a path of real growth.

In the end, market cycles are critically important to long-term growth and prosperity.  They are a way of systematically steering resources to their optimal use.  This happens as the people who made foolish decisions go out of business and are replaced by people who purchase their assets at low prices and have a built-in incentive to operate more prudently. The important thing for each person to understand is that this process cannot be avoided.  Attempts to ‘fine tune’ a ‘soft landing’ for the economy will only drag out the inevitable adjustment.

Economic progress means that capital and labor must find its optimal use.  When the economy gets to a point where the present use of capital and labor is far away from it’s optimal use, that means a period of extreme adjustment is inevitable.  However, for the people who see this trend and capitalize on the opportunities inherent in times of change, there are historic opportunities for gain.  The only question remaining is whether you will take advantage of the opportunity or be thrown about by the change.  The forces are the same . . . the circumstances are the same . . . it is your decisions and actions that will make all the difference.

 

Recent news of growth in the Gross Domestic product, and the appearance of home price stabilization have led many to proclaim that the economy has entered into the greatly desired ‘recovery’ that many in the government and news media are fancifully searching for.  This appraisal of the current economic situation is based on past experience with brief and shallow recessions that were immediately followed by a sharp recovery and expansion.  However, there is a fundamental difference between those events and the current situation.

The fundamentals of a market economy are based on the aggregation of many people making independent decisions.  For example, the housing market relies heavily on people buying and selling homes for liquidity . . . but this buying and selling can only take place if there are people that can legitimately afford to pay their mortgage.  The unique aspect of this recession is that it was precipitated by a massive influx of people purchasing homes who could NOT legitimately afford to pay for them.  Thus, there is a tremendous inventory of homes for sale, and a desperate shortage of people who can afford to pay for their mortgage.  Because of this, it is not reasonable to assume that any real housing recovery will occur until there is an increase in the number of people who can afford to pay their mortgage.

Similarly, there can be no real economic recovery until there is an increase in the amount of people who can afford to pay for their lifestyle.  Put another way, more people must produce enough to pay for what they consume.  Currently, a large amount of spending is being financed with private borrowing, government borrowing, or government subsidy.  None of these represents anything remotely approaching an improvement in market fundamentals.  It is simply borrowing from future production to try and create the appearance of recovery.

In the end, there will be no easy way out of this recession.  Most recessions occur because of a misalignment in market prices that cause a disruption in output.  The current situation was caused by a misalignment in basic economic fundamentals.  Furthermore, the government is actively working to prevent these fundamental from realigning, because of the short-term fallout from economic adjustment.

No Shortcut Home

It has already been established that the root cause of our current economic situation is a misalignment of market fundamentals and a shortage of people who produce enough to pay for what they consume.  In order to improve these fundamentals, three things must happen:

1. Market prices for assets such as real estate must be allowed to fall sufficient low so that they attract investors.
2. The top producers must be incentivized to create more opportunities by removing regulatory barriers and lowering taxes.
3. People whose productive capacity is sitting idle must be incentivized to go out and produce by finding employment.

The unfortunate truth is that current government policy is oriented in the exact opposite direction of the things that must happen for a fundamental recovery.  By expanding entitlements and perpetually extending unemployment benefits, the government is creating a culture of dependence by conditioning a permanent ‘underclass’ of the population who relies on subsidies for their existence.

It is certainly true that initiating a market recovery would be painful.  It will involve many people experiencing uncertainty about their financial situation and settling for much lower compensation than they have become accustomed to receiving.  It will also result in a sharp reduction in the standard of living for the people who have been living beyond their ability to produce.

However, in the long-run it will return the nation to a sustainable growth trajectory that is built on market fundamentals, instead of government subsidy and borrowing.  If this culture of debt and dependence continues, it will eventually result in massive inflation as the government turns to printing money as a last resort for financing its entitlement promises.  If this occurs, it will have the effect of permanently impoverishing the dependent class by slashing the real value of their entitlement payments and leaving them without any of the market skills that are necessary to create real output or build real wealth.

For people who are looking to escape this trap, it is critical to avoid the culture of dependence, develop the skills necessary create real value in a global marketplace, and invest in opportunities that create real wealth and place them in control of real assets.  This is what will separate the productive wealth owners from the dependent consumption class.

 

Recent news of the US national debt topping $14 Trillion and nearing its legislative ceiling have spurred another (badly needed) discussion concerning government spending obligations.  Whenever the topic of national debt re-enters the domain of public conversation, there are two opposing priorities that consistently pull against one another.  The first is the desire to continue current (unsustainable) rates of government spending, and the second is a concern over the burden that is being passed onto the next generation in the form of a tremendous national debt.

An appropriate metaphor for this concern is the Greek Titan Atlas who holds up the world and heavens on his shoulders.  In our case, the future productivity of our children and their children will need to be confiscated for the purpose of paying for money that was already spent to subsidize the recipients of public bailouts, entitlements, pensions, and subsidies.  However, nobody has every stopped to consider the possibility that the future generations will not want to see their productive efforts go to subsidize other people’s lack of productivity.  To put it in the language of Ayn Rand, what if Atlas Shrugs?

This is a very appropriate, and very under-examined question.  What happens if the next generation decides that they no longer wish to pay for subsiding the lifestyle of other people?  What happens if the taxes and regulations are so burdensome that there are no new innovations to drive the economy?  What happens when the cost of employing workers grows so high that nobody is willing to hire anybody?  What happens when the rest of the world stops lending us money at low rates of interest?

The answer to all of these questions is essentially the same.  The standard of living that multiple generations of people have come to regard as their entitlement will come crashing down around them with nobody in sight to pick up the pieces.  When the farce of creating prosperity through legislative fiat is finally uncovered, there will be no comfort to ease the bitter hardships of life.  There will be a large mass of people who have been conditioned to avoid making their own decisions and who have been trained that producing something of value is not a necessity of life.

So what can you do?  The answer lies in reading the prior sentence again . . . what can YOU do?  The answer is that you must take ownership and control of your own life and your own destiny.  In short, follow the John Galt Promise from Atlas Shrugged, and commit to live your life for the sake of no other person and ask no other person to live for the sake of you.  Make decisions for yourself and do not expect others to make decisions for you.  Use those decisions to create a bright future for yourself and your family.  Learn how to create value in everything that you do so that each person who works with you is better off than they were before.

In this way, you will become the captain of your destiny.  Every decision that you make is a proclamation of your intellectual liberty.  This is not any kind of exhortation for greed or self-centered living . . . rather, it is an exhortation to make your own choices.  If you choose to be charitable, make it a choice, not a reaction to guilt.  When you produce something of value, refuse to feel guilt for your success.  Be humble in your success, understanding that all things are gifts from God, but never allow yourself to act out of guilt.  Focus all of your attention on the decisions and actions that you can make for the attainment of your own success and the success of those you care about.  In short, go out and do something great.

 

The German story of Faust is well known throughout literary and scholastic circles.  In the story, Faust is a successful scholar who is unsatisfied with his life and bargains with the Devil.  He offers his soul in exchange for unlimited knowledge and worldly pleasures.  The popular term: “deal with the devil” originates from the story of Faust.  This story has also been interpreted by some as a metaphorical representation of an ambitions person who compromises their moral integrity to achieve power and success.

A more appropriate interpretation for the current political climate is the process by which government entities borrow from future generations to finance social benefits that secure power for the political class.  However, this model has begun to unravel in Europe as many countries are in the midst of a sovereign debt crisis that is on track to land in the United States.

The basis of this debt crisis comes from promises made by politicians for the bestowment of material prosperity in excess of what people produce.  The narrative used to sell this package of fictional prosperity is a promise to “make the rick pay their fair share.”  The universal assumption of this redistributive economic model is that the ‘rich’ are taxed in excess of the services they receive so that the ‘poor’ can receive more than they produce.  To many, this model carries a populist attraction because of its perceived benefit for those at the lower end of the social and economic spectrum.  Unfortunately, it ultimately regresses toward Faust’s “deal with the devil” that requires the submission of a nation’s soul when the price comes due.

So how does a nation lose its soul in this way?  It all starts and ends with incentives.  All people naturally have incentives to behave in ways that result in a better life for themselves and their family.  For people in the productive class, a better life is achieved through taking risks and realizing gains.  Furthermore, these people have incentives to structure their financial affairs such that their tax burden is reduced to the legal minimum.  Conversely, there are many people in the lower classes who view their path to a better life as the election of political leaders that promise to tax the producers and redistribute the resources to them.  Both groups of people are acting in a way that seems completely logical.

The fundamental problem with nations that engage in this redistributive economic model is that there is a fundamental limit to how much tax revenue can be raised.  An empirical analysis known as Hauser’s Law has found that total US tax revenue since World War II has held steady at approximately 19.5% of Gross Domestic Product, despite a wide range of marginal tax rates and tremendous volatility in tax policy.  This suggests that tax payers will self-select into activities that lower their tax burden when rates of taxation increase.  This means that there is an implicit cap on sustainable government spending that is equal to approximately 19.5% of GDP.  Spending in excess of this amount must necessarily be financed with borrowing or monetary inflation.

As nations incur deficit after deficit for decade after decade, the size of their national debt will eventually become so large that it becomes literally impossible for it to every be paid back without massive monetary inflation.  In this situation, investors will frequently become wary of investing in the nation’s debt securities.  As the number of willing investors decrease, the yield required on the debt necessarily increases.  As the effective interest rate on debt increases, nations must devote more of their resources to debt service.  Eventually this results in a debt spiral where a country’s debt obligations occupy so much of its resources that the government cannot function.  In this situation, one of two outcomes inevitably occurs.  If the nation owns a sovereign currency, it will simply expand the supply of its money, devalue the currency already in circulation, and eliminate the debt through inflation.  If the nation’s currency is pegged to another currency or it is part of an economic union, the only remaining option is default.

Another complicating factor is the fact that taxation rates are inversely related to economic growth.  This means that raising taxes to capture revenue will stifle future GDP growth.  When entitlement promises exceed tax revenue, it results in terminal borrowing that eventually creates higher interest rates on the debt.  These higher interest rates place a further pinch on the budget since taxes can only be raised so much before they stifle economic growth and incentivize people to either leave or shift their efforts toward activities that generate less output, but are more tax efficient.  The recent protests in Europe over budget cuts by Greece in an attempt to curb its deficits demonstrate the difficulty implicit in reversing this course of systemic over-spending with borrowed money.  The eventual result of perpetually delivering something for nothing can only be a financial collapse and default.  This is the point where Faust’s bargain comes due and the devil lays claim to the nation’s soul.

For people who do not wish to be caught by the collapse of debt-based entitlement spending, it is critically important to ensure that your personal well-being is not tied to government programs.  When the collapse occurs, it will most likely create dramatic cuts, reductions, or outright default on many of the programs that the government uses to perpetuate its base of political favor.  When this river of support from the government stops, it will instantly impoverish millions of people who have been conditioned over multiple generations to depend on somebody else for their well-being.  The unfortunate impact of this fact is that there will be massive amounts of people whose financial lives are literally destroyed by the collapse of debt-based entitlement spending.  As an individual, I do not possess the power to stop or even influence this phenomenon.  However, I do have the power to impact my own decisions and personal financial situation.  By focusing on what we can influence, instead of worrying about what we cannot change, it will allow people to protect the future of themselves and the people they care about by taking prudent action.

 

In the current environment of bailouts, government entitlements and economic uncertainty there is a perpetual supply of politicians who will claim to be the ‘savior’ of the middle class.  In a strange twist of irony, the way in which most elected officials purport to ‘save’ the country is by taking money away from some people through taxes, borrowing and inflationary money printing so that they can give it to another group of people that just happen to be likely to support them in re-election.

This trend of elected officials using government resources to ‘buy votes’ for re-election has created a problem that is beyond most people’s comprehension.  Multiple decades of an unsustainable spending trajectory has placed the government and economy in position for an unprecedented collapse.  The way that this collapse will precipitate is by the actions that the government will need to take in order to satisfy their spending promises.

The current national debt stands in excess of $14 Trillion dollars, with the government budget deficit running well over $1 Trillion dollars per year into the foreseeable future.  The ultimate consequence of these terminal budget deficits and spending obligations is the fact that the government cannot possibly tax or borrow enough to satisfy its spending promises.  Ultimately, this means that the only way the US government can satisfy its promises is by creating new money and devaluing the dollar.

The expanded impact of this monetary inflation will be a destruction in the value of savings, debt and fixed-income payments such as pensions, annuities, and government assistance.  As people begin to experience a destruction in the ‘real’ value of their assistance payments, it will result in many being ‘pushed off the edge’ of economic viability.

As this phenomenon unfolds, the same government that created the problem will rush to ‘solve’ the situation.  It is most likely that the resources diverted to address the problems of people who are economically destitute will not leave any remaining resources to help those in the middle class who have seen their wealth collapse.

In the end, it will ultimately hold true that “I am my only hope” for financial success.  The government is hurtling toward the edge of an economic cliff and will pull many people along with it into the chasm.  Those who are astute will come to realize that they are the last stop for the well being of their family.  Once this realization has been made, the next step is to take action so that the financial future of you and your family are preserved.  Once the collapse begins to unfold, many will find that it is too late to take the action that is necessary to attain prosperity.

 

One of the criticisms frequently leveled against private industry by the political class is that it is a “winner takes all” environment.  The output of competitive markets is often blamed for the disparity between the “haves” and “have not’s” of society.  However, there is another critically important “winner takes all” effect that needs to be understood.

Consider the fact that in most political elections, the winning side typically garners somewhere between 50% and 55% of the votes.  Because of this, they subsequently claim to represent “the will of the people” due to their success in claiming a narrow majority of the votes cast.  However, almost every election leaves a significant portion of the population unrepresented by the winner . . . regardless of who that winner happens to be or which political party they represent.

The effect created by this phenomenon is an extreme “winner takes all” situation where the winning side of elections can use the power of government to force their will on the side who loses.  This is demonstrated very blatantly by authoritarian regimes where the winning party (frequently running in a rigged election) enforces its policy on the populace without opposition.

In contrast to this situation, consider the interplay of a free market where each consumer can make their own choices.  If a particular person desires to purchase a green vs. blue tie, there are a multitude of profit seeking business entities who are more than happy to satisfy your preference.  If you are concerned about animal cruelty, you have the choice to purchase your food from farms that go out of their way to treat their animals well.  The characteristic of free markets that many people find unappealing is the fact that many other people make choices that they do not personally agree with.  In these cases, they often seek to force their will on the populace through the political process.

On balance, do we really think that our interests are better served by a government that structurally ignores over 40% of the electorate?  Is it really better to use the power of government to enforce the will of a narrow majority onto the whole population?  Or is the populace better served by a free market where competition for revenues and profits creates choices for consumers?  The specter of inequality is frequently cited as the driving motive for government action, but pause to consider all of the other things can be done with the authority of government?  Thomas Jefferson was believed to have expressed the sentiment (later iterated by Gerald Ford) that a government big enough to give you all you want is also big enough to take away all you have.  It is most certainly true that we should be careful what we wish for, because it may not be quite what we were hoping for if we get it.

 

Many people are familiar with the sentiment voiced by Milton Friedman that “There is no such thing as a free lunch.”  However, there is an endemic trend among federal, state, and local government entities to sell promises of a ‘free lunch’ to become elected and gain power.  The fundamental problem with this mathematical problem is that everybody cannot live at the expense of everybody else.

Consider that the government cannot create resources out of thin air.  The only way that a state entity can provide resources for you is to take them from somebody else.  This can be done overtly through taxes, it can be pushed to future generations with debt, or it can be done silently through printing money and causing inflation.  In addition to this, all government programs require overhead and management.  This means that the total amount redistributed is considerably less than the total amount that is extracted from the economy.  Simple arithmetic shows that one of two outcomes can result from this ‘devils bargain’ of buying votes with other people’s money.

The first outcome is where the costs of purchasing favor with the electorate are concentrated on a small segment of the population by assessing high tax rates.  This is necessarily the population segment that generates the highest economic output.  As the burden of taxes increase, the incentives to expand an invest decrease.  This frequently results in a slowing of economic growth as investment is suppressed at the margin because of a desire by investors to avoid burdensome taxes and regulation.  When economic growth slows or stops, it shrinks the tax base for government revenue and suppresses employment growth, thereby increasing the need for government services.

This phenomenon was written about by Ayn Rand in her novel “Atlas Shrugged” where the top producers of society “went on strike” against the government.

The second outcome is when the cost of purchasing favor is shifted to future generations through debt or extracted from the overall population through inflation.  In this scenario, the ‘free lunch’ being promised to the electorate is actually being paid for by the very people who are targeted by government programs in the first place.

Consider who will be impacted when the national debt grows so high that it forces up interest rates?  What will happen to the mortgage rates for the poor and middle class when interest rates spike upward?  Who will be pushed out of their homes into apartments?  What is really being accomplished by borrowing money to ‘help’ these people with government programs?

Consider what will happen when the purchasing power of the US dollar falls by 10%+ per year?  What will happen to the working class families that are dependent on the wages of a primary income earner?  What will happen to the retiree who is living on a fixed-income pension?  What will happen to people who depend on government assistance to take care of their families?  How much will these people be helped when the government devalues the currency to finance its spending obligations?

In the end, the only person whom you can completely trust to take care of you is you.  It is certainly possible that people will help along the way.  It is also possible that some of these people may be politicians, but honestly ask yourself who the politicians will take care of first . . . themselves or you?  If politicians are more likely to take care of themselves first and are extracting your wealth to fund their initiatives, how much do you think will be left over to fund programs that you benefit from?

 

The world of technology is very unique and interesting.  The internet is most clearly the primary ‘game changer’ that is still shaping the technology marketplace.  And when it comes to the internet, Google is the dominant “Strong Man” of the internet marketplace. Analysis of web traffic through Google shows that in 2007, they represented between one percent and two and a half percent of internet traffic.  However, by 2010 that number has risen to between six percent and 12 percent if Google global cache is factored in.

This dominance of internet search has led many people to be skeptical of Google since it touches so much of the world wide web.  There are fears by many people that Google could use its power to monopolize information over the internet.  It is difficult to objectively ascertain the validity of this fear since Google does indeed possess tremendous power.

On the other hand, the business model of Google is unique in that it is predicated on giving many of its services away for free.  By offering a plethora of free software and services, Google attracts a large audience of users.  While users are logged into the Google system, it gives Google the ability to segment advertising down to a very fine level based on when people are accessing the internet, what they are searching for, what demographic profiles they fit, and much more.  This has proven to be an extremely attractive proposition for advertisers who have shifted resources away from traditional ‘mass market’ advertising toward the ability to pinpoint niche markets through Google.

This goal is accomplished through their bidding system for advertising.  The Google advertising marketplace is one where you place a bid price per click based on certain search factors.  This strategy allows Google to achieve rapid price discovery of willingness to pay for advertising to a particular demographic based on their search activity.  This also provides a unique ability to people who are advertising through Google, since they can define their target audience very, very, very finely.  This enables niche marketing models that were not previously cost efficient.

In this way, Google perpetuates its business model by continually developing new products that attract consumers to its network.  One of the things that are important to understand about this is that the consumers are receiving software and services for no direct cost.  The only burden that they bear is to have advertisements on the screen.  Thus, if Google were engaged in a foul plot to monopolize the marketplace it would require them to continually fool a population of consumers who have the choice to use other services besides Google.

On balance, it is difficult to say for sure what Google is up to.  If their strategy is to corner the internet and monopolize the market, it is likely that they will end up in the same place as all monopolies in the past.  That place is one with temporary large profits that open the door for a new competitor to come from “out of nowhere” to change the game and make your business model irrelevant.  In our rush to find the danger of certain economic factors we frequently forget the benefits.  Google is indeed the Strongman of the internet, but it has become so by offering a vast array of products and services to customers for little to no direct cost.

In the end, what Google does is not as important to our lives as what we do.  One unique value that they offer is the ability to access a variety of online tools that lower the barriers to entry for a small business.  By accessing these tools and using them for no direct cost, it may allow you to start a business on a very limited budget to test out new business models.  In turn, this will lower the cost of failure and allow you to keep testing business models until you find one that works.  The best part is that free online tools allow you to achieve market discovery at a much lower cost.  This provides an attractive playing field for innovation since there are many online business models that have now come within reach of people who previously could not have afforded to start their own business.  It is important to view the world from the frame of what you will do in response to everything that is happening instead of becoming angry about everything that is happening.  That single step will take you closer to personal, professional, and financial success with each passing day.