"No man can become rich without himself enriching others"
Andrew Carnegie

Saturday, May 11, 2013

The Most Predictable Financial Crisis in the Nation's History

Paul Krugman, Laureate of the Sveriges Riksban...
Paul Krugman, Laureate of the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2008 at a press conference at the Royal Swedish Academy of Sciences in Stockholm (Photo credit: Wikipedia)
By Investment U

Baltimore, May.11, hot stock picks .- There's a great tug-o-war going on in the stock market right now. And the stakes are huge. How it turns out will determine not only the future prosperity of the country but whether you have an opportunity to achieve your financial dreams.

Every investor has a stake in this contest. And the outcome will be critical: the difference between comfortably reaching your investment goals and spending your golden years counting nickels. So let me describe this dangerous game and suggest how you should play it... and why.

A Necessary Evil

The tug-o-war I'm talking about is not the daily battle between the bulls and the bears. I'm referring to the epic clash going on between the public sector (government) and the private one (business).

We need both, of course. Government, as our Founding Fathers well understood, is a necessary evil. As James Madison said, "If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary."

Uncle Sam exercises a legal monopoly on force. The federal government exists to defend the shores, enforce contracts, protect your rights and provide for the general welfare. In any advanced economy, regulation is essential too. Government is as necessary to businesses and consumers as an umpire is to ballplayers and their fans.

The problem, however, is that government has now inserted itself into every aspect of modern life. In an unending quest to please constituents and special-interest groups, our elected mis-representatives have run up not only a $16.8 trillion deficit (equal to more than $148,300 per taxpayer) but another $123.9 trillion in unfunded liabilities for Medicare and Social Security (equal to approximately $1.1 million per taxpayer). And it's only getting worse.

This isn't just improvident. It's nuts.

We are barreling toward the most predictable financial crisis in the nation's history. Will something be done about it? Not anytime soon, for two reasons. The first is that the crisis won't land on our doorstep next month or next year. This gives legislators the chance - once again - to kick the can beyond the next election. They pay no price for this.

Second, despite all the grumbling about dysfunction in Washington, polls show that voters don't want to pay more in taxes and don't want to see their federal benefits cuts. On the contrary, they want them either maintained or increased. (Let's see you solve the fiscal crisis while granting these contradictory wishes.)

Carp all you want about the record-low approval ratings for Congress. The only thing that matters to legislators - who value incumbency more than life itself - is elections.

In 2012, for instance, all 435 House seats were contested. But, thanks to gerrymandering and voter apathy, 91% of incumbents were re-elected, only slightly less than the 93% historical average since 1954. Voters may be angry at Congress as an institution, but they believe their particular representative is doing a swell job. You could argue that Americans are getting exactly the kind of government they deserve.

Smothering the Goose

But back to our tug-o-war...

In addition to setting up a debt crisis of epic proportions, Congress passes thousands of pages of new legislation each year, piling on new mandates and regulations. It's not just that complying with all this is expensive (and passed on to consumers). Even grappling with how to comply is expensive and time-consuming, especially for small businesses.

In short, our ever-metastasizing federal government - largely oblivious to the unintended consequences of all its do-goodery and the burden it places on future generations - is smothering the goose that lays the golden eggs.

After all, it is business not government that provides us with food, clothing, shelter and health care. It is business that meets our wants and needs as consumers. Every day businessmen and businesswomen are knocking themselves out to deliver products and services that are better, cheaper and longer lasting. It is business that innovates, creating new technologies and medicines. It is business that grows the economy, provides employment opportunities and pays billions in taxes. Government, if anything, should be aiding and abetting this process, not hindering it.

An Epic Clash

If you want to see how excessive regulation affects an economy, look at Europe. For years, left-leaning economists like Paul Krugman have argued in favor of "the European model." But economic growth on the continent is anemic. Innovation is almost entirely absent. (It's no coincidence that transformative companies like Apple, Google and Facebook are not headquartered in France or Sweden.)

Debt-to-GDP ratios are climbing... and so is unemployment. Indeed, Greece and Spain have unemployment rates that top 25%. That's worse than the United States during the Great Depression. And increasing government burdens threaten our prosperity here at home, too.

These facts may be unpleasant, but they are not debatable. The question is, how does an investor with important long-term goals deal with this unprecedented tug-o-war between business and government? How do you invest when no one can say with certainty how this epic clash will unfold?

The good news is that there is an answer, one that not only is low risk but will allow you to reach all your important financial goals. It grants you unlimited upside potential with strictly limited downside risk. And it works.

So stay tuned. In Monday's column, I'll explain exactly what you need to do in your portfolio and why..
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