The Presidential Debate

October 05, 2012, 09:00 am ET, BY Thomas H. Kee Jr- Editor, Stock Traders Daily| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

Anyone who watched the Presidential debate could clearly see that Romney outpaced the President in almost every facet of the debate.  My early-morning comments today suggested that he even made a mockery of the President's policies from time to time, and the President did appear visibly distraught from time to time as well.

Without reading too much into either side we can clearly see that these two candidates have distinctly different points of view.  One is a businesslike approach and the other is a bear hug.  One suggests that the economy can do fine on its own if we let it, and the other suggests that the economy needs the support of the government or there will continue to be problems.  At the end, after the moderator was done in the final closing arguments were given the audience, the nation, was left to decide which policy is best to better our economy and our way of life, one or the other.

Interestingly, when we are seniors in high school, at least this is the way it was when I was in high school, we are given a short questionnaire to determine whether we are Republican or Democrat, and there is nothing in between.  The result of my questionnaire was overwhelmingly Republican.  My views line up almost directly with Romney's.  I believe that the economy should be left to work itself out, I believe in Contemporary Darwinism like I have written about in my book, and I think that by allowing the strongest parts of our economy to survive while dropping the weak (irresponsible companies are also weak) we ultimately will be stronger in the end.

However, there are occasions when more government spending is actually a good idea.  I didn't know this when I took that quiz in high school, but after studying the two other major down periods in US history, the Great Depression and stagflation, I can clearly see that during those down periods higher levels of government spending was absolutely required because there were not enough new investment dollars available to keep the economy growing at the same rate as it had been before.

Today's economy is exactly like the Great Depression and stagflation because the natural rate of new investment dollars declines precipitously between 2007 in 2023, with accelerated declines beginning right now.  This is something that Romney also pinpointed in his debate (without knowing it) when he talked about new business creation being at a 30 year low.  New businesses are what drive the economy and when individuals have the money they tend to invest at least part of that money into new businesses.  My reference to individuals means all of us as a group of course, and some of our money will go into the stock market, some into real estate, some into other asset classes, but a very tangible part will also go into creating small businesses.

Having small business creation at a 30 year low is directly associated with the lack of new natural investment dollars as that is defined by the Investment Rate.  The FOMC can add as much liquidity as they want to, but this simple fact is not going to change.  That liquidity will be available to people who have money already, but there are far fewer of those now given what the Investment Rate says.  Fewer and fewer new investors are surfacing every year on a natural socio-economic and demographic basis and there is nothing they can do to stop this.

Looking at this in another way, the argument set forth by Romney, something that I firmly believe in over the long term, suggests that the economy can grow on its own if you give it a chance.  Over time I firmly believe in this concept, but when the natural level of new investment dollars declines like it did during the Great Depression, stagflation, and like it is now that philosophy runs right into a brick wall if you need the economy to always be growing.

Naturally, there are ebbs and flows, with long term increases over time, and right now we are in the middle of a major and quite natural weak period in our economic history.  This philosophy, the concept of free market capitalism, works well in all other instances except the one that we are in today because we, as a nation, have the expectation that we will always be growing at the same rates as we have in the past, when that is simply not possible.  There is an obvious average, we have experienced enough to make determinates too, but natural rates of growth are not consistent, especially not in the down periods as those are defined by The Investment Rate. 

Policies designed to allow the economy to grow naturally, like Romney’s plan and the one I believe will be best over time, will be fine if a lower rate of growth is accepted, but that is not something most of anyone wants to accept, but this is not 1999 so we need to moderate those expectations or eventually our expectations are going to come back and bite us.

While almost grimacing as I write this, I find higher government spending policies to be the best policies in times when the natural rate of new investment dollars declines as aggressively as it is today.

Unfortunately, we are stuck between a rock and a hard place.  We have already spent so much money and incurred so much debt to save the weakest and most irresponsible companies in our country, to try and prevent a depression, and to attempt to stabilize the housing market that we don't have any more room left.  Not only is there no room to wiggle based on domestic accounts, but the international market is beginning to consider us just as irresponsible as Spain, Greece, and those other poster children in the European Union.  This is not a path that we can continue to follow.

Although I believe that if our debt levels were not as high as they are today that the President's policies would be the best policies until such time as this third major down period in US history according to the Investment Rate comes to an end, those tax and spend policies cannot continue along the same path.

Either way, something needs to give, and either we pay the price now, which is something that I expect if Romney comes into office, or we pay an even bigger price later if we continue to spend and incur debt at the rate we are today.  Given these options, there is no good way out.  We cannot navigate around these problems without serious and potentially devastating risks along the way. 

We haven't even begun to tackle the elephant in the room, although they have finally begun to talk about it, but once these debt levels become a focal point of policy, and that is going to happen very soon, the word austerity will actually start to apply to the United States as well.  Headwinds are coming, no matter how you slice it; the question really is about when we want to make the tough decisions.  If we want to do it now, then Romney, but if we want to kick the can then Obama, but neither of them will make this situation any better than it is.  We are in the thick of it, and we all must control risk!

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