Investors heading to Gault's Gulch

Economics is a fairly well understood discipline. When X happens, Y follows. Always. When Mugabe drove off the farmers in Zimbabwe, anyone with a basic understanding of economics knew that the country had just shot itself in the head. When Chavez nationalizes companies in Venezuela, those sectors die. Populist and socialist policies often lead to bad economic decisions, which end up hurting the people they are suppose to be helping.

Which brings us of course to the nationalizing of the US economy currently under way. For those who understand basic economics, the 10 year view of the damage these policies will bring to the country is startling. Wealth re-distribution, huge federal deficits, and tax hikes are exactly the wrong answer. How an administration gets elected with no understanding of basic economics is a mystery. A lot of people understood going into the election the capital devastation that an Obama administration would unleash. Unfortunately, not enough people.

The people who do understand economics, and have a crystal clear view of the carnage huge government deficits are about to unleash, are investors. And investors are fleeing the market in droves to save what they can. It’s been called a ‘capital strike’, but that implies some general coordination. What we are seeing with the crashing markets is millions of individual investors deciding the economy is on the wrong path, and that this is not the time to be taking risks with capital. There simply is no upside. In the modern era it’s hard for people to go to “Gault’s Gulch”. But they can send their money there.

The current administration is getting a quick lesson in economics. Let’s hope they take the constructive criticism from the stock markets seriously, and alter course. Otherwise, we will continue to march down the road that leads to Zimbabwe and Venezuela - the road to ruin.