The current economic environment has many seeking various solutions to the problems that have unfolded and are currently causing damage to the economy. The principal driver of this economic damage is the large market bubbles that have emerged, grown, perpetuated and collapsed.  The inherent irony of this situation is the fact that the persistence of these market bubbles and the proposed solutions both bear the same fundamental flaw.  This flaw is that each is steeped in a desire to achieve utopia.  The housing bubble sought a utopia of home ownership, and the recovery plan is seeking a utopia of government regulation, control, and social welfare.

However, utopia never has been and never will be a viable option.  All of business and life is a trade-off between imperfect choices.  Over time, there have been repeated attempts to circumvent this fundamental truth and get ‘something for nothing’ in one form or another.

Unfortunately, the recent financial crisis and the currently unfolding aftermath appear to be a testament to this cycle of infinitely repeating folly.  The cause of purchasing electoral favor with artificially easy credit has given way to a new cause of purchasing electoral favor with government subsidized social welfare programs.  In both cases, the resources to fund these initiatives do not exist in the realm of reality . . . they are creations of government fiat.

The result of this self-destructive pursuit of utopia is that the government will need to satisfy its financial liabilities, and social programs.  These financial commitments will require far more resources than can possibly be raised through taxation.  Since borrowing will become increasingly difficult when investors begin to demand higher yields as the debt burden increases, it only leaves one viable option for the government to finance its pursuit of utopia.  This option is to inflate the currency by printing ever increasing amounts of money to finance its nominal obligations.

This course of action will destroy the purchasing power of savings, equity, financial assets, wages, and debt.  As the impact of inflation ravages the economy, it will impoverish people who depend on savings, pensions, annuities and social security.  It will also destroy the real value of debt obligations, resulting in a shift of purchasing power away from those who have saved to those who have borrowed.

This is the principal reason why an investment strategy centered on using leverage to purchase income producing assets is so powerful.  When the inflation comes, it will destroy the value of debt used to finance these assets, but increase their nominal income and value.  The most typical way to undertake this strategy is through income real estate investment since they produce regular cash flow and can be financed with relative ease.

The pursuit of utopia is going to result in many people currently at or near the bottom of the income distribution to be ‘pushed off the edge’ into desperation.  Those who are dependent on government assistance will find that the purchasing power of the payments steadily diminishes.  This phenomenon serves as a very real reminder that utopia is not an option, and that the pursuit of it can only lead to economic destruction.