As the House passes its version of the $819 billion dollar “stimulus package” and the Senate readies their nearly $900 billion dollar response, investors are going to have their hands full deciding exactly how to navigate the ramifications.

Let me start by saying that I am optimistic for America, the global economy, and our investment approach.  Dynamic markets always provide opportunity that can be exploited by savvy traders.  Government investment in renewable energy programs, infrastructure repair and expansion, and healthcare initiatives will certainly benefit some growth companies that operate in these sectors.  It is my job to uncover these opportunities for investment returns.

However, I would be less than honest if I didn’t voice concerns over the power we are giving the federal government over what I would consider to be the “private sector economy.”  My mother used to tell me “there is no such thing as a free lunch” and that is certainly true in politics and economics.  So with all this government spending on a tossed salad assortment of projects comes strings.  I fear that you and I and our children will be paying off these initiatives for years to come.

Capital and Control

Whenever the government contributes taxpayers dollars to a particular project, it has a responsibility to see that those dollars are used wisely.   I understand that it would be unfair for the federal government to place several billion dollars into a failing investment bank and then see that same capital be used to pay for private jets, extravagant salaries, or executive perks.  This point has been more than adequately covered.

However, the other side to this coin is that too much government control can stifle creativity, growth, and the potential for exponential investment returns.  I remember a publicized event where successful traders of an investment company were rewarded with a lavish company sponsored trip.  This was essentially a perk for bringing significant revenue to the firm.  Now the firm as a whole did poorly for the year and so there was a public outcry that this perk would have been offered.  But if it were not for perks like these, successful traders would leave the firm for the competition leaving the company weaker and less likely to rebound.

Now when government funds are introduced, the entire capitalist structure begins to lean towards socialism.  The government was not made to participate in commerce, but instead to provide a safe and hospitable environment for private citizens to be able to engage in commerce.  Those private citizens are then responsible for securing their economic future, and free to pursue the many creative, and even ingenious endeavors that have given the United States a strong economic foundation.

But when the government controls how business practices take place, and how employees and investors can and cannot be compensated, it disincentive’s the creativity, work ethic, and resolve needed to maintain a healthy and growing economy.

Paying for the Package

The biggest question that investors and citizens should be asking right now is “at what cost” these spending measures are enacted.  The Senate bill is expected to be nearly $900 billion dollars, and many economists expect the actual spending to exceed $1 trillion before all is said and done.  According to the Wall Street Journal, this package will cost more than the entire Iraq war!  The pricetag will likely leave our government with the biggest budget deficit since World War II.The logical question to ask is exactly where this money is coming from?  In essence, our budget deficit is largely capitalized by international funds who invest in US Treasuries.  Since the United States and the US Dollar is still viewed as the primary vehicle to store wealth, demand for these securities remains relatively robust.

However, over the long run if our economy continues to experience weakness, the feds will have to print more dollars to meet our obligations.  Currently our printing presses are running full steam as billions have already been committed in the TARP program and other initiatives.  While there is very little cost to producing more dollars, the long-term inflation danger is mounting.  Foreign parties who own our securities may eventually see their wealth diminished as the dollar looses value.  These entities would be much less likely to purchase debt securities in the future leaving us with fewer options on the table.

So while aid to the economy may certainly be necessary, it is important to note that the capital is spent at a cost, and that cost could actually depress the economy for years to come.

The Personal Side of a Recession

Now I want to be clear that I am not insensitive when it comes to the plight of individuals within this economic crisis.  I am personally not immune to the effects of the recession and members of my family have suffered through unemployment, underemployment, and financial difficulty.

I do not believe that the government should sit idly by and watch its citizens suffer.  There should be programs to ensure basic life necessities are met.  But these programs should be structured to encourage innovation, hard work, and with the purpose of sending each recipient back into the private sector to adequately provide for themselves.   Too much government control stifles this ambition and eventually leads to the depression of the entire economic system.

So while we seek out the most profitable investment ideas over the coming months, and work with the environment we are given, I hope that the country will escape the perils of an increasingly socialized economy.  In the end, it will be our creativity, work ethic, and private sector growth that will restore our thriving economy.

Enjoy this article?  Subscribe to ZachStocks via RSS (What is RSS?)

Additional Reading:
WSJ: House Passes Stimulus Package
The Big Picture: Treasury Plan Lifts Hope