Double Dip

In 1933 and 1934, America was on a trajectory to recover from the Depression.  But, before recovering, the economy was to nose dive again, and never really did recover until the next decade.  Historians and economists argue endlessly about this, but I am convinced that the arbitrary and capricious meddling in the economy by the Roosevelt administration caused many folks who would have started investing and bargain hunting with their capital to sit on the sidelines.  The National Industrial Recovery Act (thankfully killed by a mercifully non-packed Supreme Court) was just the most egregious example of the US government making it impossible to evaluate long-term business proposals because the basic foundations of the rule of law were shifting so much.

I fear we are facing a similar danger.   Everything continues to tell me that had we taken our medicine late last year, we would be entering a recovery over the next few months.  However, the Obama administrations economic interventions have gotten so egregious that there is a real danger investors are going to sit on the sidelines with their capital.  Who knows when your industry will get targeted with compensation restrictions, or higher taxes, or even forced changes in ownership?  Who could possibly feel comfortable making 20-year investments in this environment?  Dale Franks quotes Thomas Cooley:

Many investors are sitting on the sidelines, as is much money. Why? Because it is impossible to know what the rules of the game are. And that's because the administration and the Congress keep changing the rules in capricious ways in pursuit of larger political objectives.

Postscript: There is legislation pending in Congress to restrict the ability of lenders  (e.g. credit card issuers) from changing rates on existing debt.  They ask if it is fair for someone who took on a debt thinking it would be at 15% to suddenly find it is at 25%.  But how are tax increases any different.  I make 10-20 year investments in my company, and the expected tax rate is a hugely important assumption in whether it makes any sense for me to put my capital in a particular venture.   How is a large increase in taxes on returns from my past investments any different than changing the interest rate on an existing debt?


  1. DrTorch:

    I'm not sure we'll ever get to recovery until we reduce gov't bureaucracy. You just can't have that many people and that big of an institution pulling money out of the economy, while producing nothing.

    Show me an administration that slashes the Fed Gov't by 35%, reduces regulation (which you cover last column), and figures out a scheme to tax states based on regulation and employees...and I'll believe we can recover.

    Otherwise, we'll just keep borring to feed the insatiable institutions that are our governments.

  2. Brad Warbiany:

    One issue with your postscript... The complaint with credit cards isn't that the increase your interest rate on new purchases, it's that they retroactively increase your rate on existing debt. I.e. you owe $2000 @ 15%, and they're raising your rate to 25%. Should they be allowed to charge 25% on your existing $2K in debt, or only on new purchases...

    A better analogy than income taxes would be the AIG bonus "clawbacks". I.e. the government was considering writing retroactive taxes on contracts already written and (in some cases) paid.

  3. LoneSnark:

    No Brad, you are mistaken. Yes, the CCC was charging only 15% but in numerous forms they mailed you since getting your credit card they told you what your interest rate could be bumped up to in the event they felt like it. While I agree it seems unfair, there is nothing more for it than to demand better credit card agreements in the future which limit such terms in the future.

    There are some examples of CCC changing your rate to be even higher than the constract states, as my CCC did earlier this year. However, I was offered the right to opt out and pay any balance back under the old conditions, they would just revoke my right to charge any future purchases, which was their right under the old conditions.

  4. Chris Yeh:

    I freely admit that I wouldn't touch government money or programs with a 10-foot pole, simply because there isn't any guarantee that the terms will change with the weather.

    Why should I risk my capital when for all I know, a shift in the political mood would result in my becoming an unwelcome donor?

  5. stan:

    If you eliminate the banks' ability to adjust interest rates, you make it harder for people to get credit and make the price of credit higher. There's no free lunch. The argument that banks shouldn't be able to exercise their contract rights makes no sense to me. Such govt intervention just heightens fears that the game is rigged.

    FDR's demonization of business and investors in his 1936 campaign caused net investment to turn negative. It deepened the depression. see Amity Shlaes' The Forgotten Man.

  6. Bart Hall (Kansas, USA):

    I have a problem with the concept of money "sitting on the sidelines." Assume somebody cashed out of the market for $100 K. He sold his position to somebody else for $100 K. The net amount of money "sitting on the sidelines" is therefore absolutely unchanged.

    Where the difference matters is particularly in small business. If I sit on my profits, refusing to re-invest them, or even if I use them to pay down debt, that money really is out of the game for awhile.

    Similarly, if a bank paying 0.5% on deposits decides to lend money to the US Treasury at 3% and is willing to adjust its business in order to live with a 2.5% spread rather than lending that money ... it is also "sitting on the sidelines" of the entire private sector and has been sucked into the black maw of the DC bureaucracy.

  7. Allen:

    Another thing I'd throw in there is despite having about 5 bazillion different things going on from ensuring banks don't fail to Chrysler and GM to bailing out insurance companies to reforming health care to high speed rail to building a new green economy to finding ways for the extremes on the abortion issue to find common ground to building relations with countries that still accuse the US of trying to kill off their leaders, somehow the Obama administration has found the resources to start beating it's chest in public about cracking down on so-called monopolies. No, they're not going to reform the post office or de-regulate muni services, they're going to go after those big evil companies. So if you're an exec at Google, Cisco, IBM, Exxon, Biogen, SanDisk, Boeing, Multiband, Schwab, Boston Scientific, VMWare, GE and others how much do you want to invest in the US? How long before they singled out for being a "monopoly" and get bogged down and distracted by those things. Why invest too much here and risk that versus pushing into markets that are growing now?

  8. G. Plant:

    You are right, Bart, about the original $100K, but as long as either investor's $100K sits on the sidelines, it is not building wealth. The amount of wealth is not fixed. If the second $100K were invested, it too would be building wealth and contributing to the recovery. As long as it just sits on the sidelines because of uncertainty, it is not helping the economy recover. Indeed, I find myself in precisely that situation. To modify an old saying, if the government fools me once, shame on it; if it fools me twice, shame on me.

  9. Bart Hall (Kansas, USA):

    G -- except somebody would have to sell in order for that second $100 K to be invested, and he would now be "on the sidelines" with his money.

    Again, I differentiate between businesses "sitting on the sidelines," which mine is, and investors. Investment money can't "sit on the sidelines" because for each position closed out somebody must add an equal amount to his position.

    I'm doing more than sitting out. I'm cutting back on labor and other avoidable expenses in order to boost free cash flow, most of which will go to de-financing. I am also structuring my affairs for maximum legitimate tax avoidance.

  10. Fred Z:

    I have worked long and hard and taken great risks.

    No more, at least for a while.

    I need a break. I'll be at the cottage.

    Need a job? Fuck you. You voted Democrat so call Obama, maybe his toilet needs cleaning. Sorry for the language, but hard truths sometimes need hard language.

  11. Eric Hammer:

    Bart, I think you are a little mistaken in your assumptions. You seem to think that for one fellow to enter the market another has to leave, either a zero sum situation or one very close to it.
    In fact, that second fellow with 100k could invest in a new company that did not exist as such previously, all while the first fellow with 100k keeps his money in. That is the sense in which people are sitting on the sidelines: they are simply not purchasing new investments from companies, existing or otherwise, nevermind buying existing stocks.

  12. Link:

    3.5% is our average annual growth rate -- if we hit that number, each generation is substantially better off than the one before. Until now, with little exception, we've been hitting this number for so long we take it for granted. Without this kind of growth, all sorts of bad things will happen -- it's baked into a lot of our assumptions. It's especially important to have growth as we try to deal with looming boomer retirements.

    If I tried, I couldn't come up with a worse set of anti-growth policies than Obama's. Is there a single plank in Obama's platform that supports real sustainable growth? Do any of his "investments" have a measurable payback period?

    The CBO assumes 2.4% growth instead of Obama's 2.9%, so the CBO projects that his budget will blow up even faster -- with permanent trillion dollar annual deficits ... What if we don't even hit 2.4%.

    We're likely to have at least a weak recovery in 2010 that will carry into 2011, bought with post-dated checks ... even if pissed away, a $1.8 trillion deficit will have its effects -- call it a sugar rush. Beyond that, Obama has gutted the potential of our private sector.

  13. morganovich:


    while you are correct that every seller needs a buyer, you are assuming that the size of the pie is fixed. if more money keeps flowing into the financial system (and it does) then it's easy for there to be "money on the sidelines". if you fund a 401k but don't invest it, that's money on the sidelines. if mutual funds take in new contributions but don't invest them immediately, same thing. if you leave your cash in a savings account or a mattress or whatever, this is also "sideline money" (though deeper on the sidelines). there is a huge pile of cash waiting to be allocated just at the hedge funds that took AIG to the cleaners. (ask paulson (the fund not the treasury dimwit), 200:1 leverage can really add up)

    further, retained earnings at companies plays a similar role. deferring investment and husbanding cash flow can cause a big uptick when the spigots are opened again.

    this is what "money on the sidelines" really means. there is a great deal of it around right now, particularly in the hedge fund world. i have also never seen small cap growth names with such strong balance sheets and large cash piles. most are still too scared to put them to work even just buying back their own stock, but this seems to be thawing out a bit.

    (i do agree with you though that the term is often used incorrectly)

  14. morganovich:

    also worth considering:

    there is a great deal of money in short term debt instruments at the moment. this is a huge pool of "money on the sidelines". the allure of safety has driven yields on CD's and bills down to very low levels (at one point last year 3 month US t bills traded at a negative yield)

    this stock of capital differs from equity capital in an important way: it expires. in 3 months, you will get cash for your 3 month bill. unless you go out and buy something else, you will just be sitting on dollars. investors have been accepting negative real rates of return on the short end of the curve for some time now. this is real money on the sidelines. on an inflation adjusted basis, you are PAYING to keep it there. a retreat from the "safety bid" will push money out into other markets again. a situation where large pools of capital are being held at negative real return is not sustainable (notable exception of the social security trust fund, but that's a horse of a different color...)

  15. Bram:

    The post and comments refer to individual investors but businesses aren’t investing either. Businesses are sitting on their capital right now - just like the 30's. No new factories, for-profit laboratories, etc... are being planned right now.

    The economic climate is too uncertain, the administration has expressed too much hostility towards business. Why borrow or spend capital? Why stick our necks out when plans can be destroyed on a whim with new regulations and taxes? No thanks, we’ll just cut the workforce, put off major investments, make our current operations as efficient as possible, and wait for stable adults to regain control of the government.

  16. spiro:


    I recently took on a second "moonlighting" job to sustain my business (full-time+ job that it is by itself), my wife also took a part-time job -- thrusting our 1 year old into daycare 3 days a week.
    One of our liberal friends found about this as our new jobs had made us disappear from our social circle. She came to me nearly in tears offering help and sympathy.
    I told her the same thing that I was telling her August-December of 2008, "hey, you already did you part by putting Obama in office, thanks for offering, but if I get any more 'help' from you liberals I'll end up in a tent behind the Salvation Army."
    Surprisingly, she didn't respond to my rude and aggressive comments with a defense of Obama...but just stood there looking sad. I think some of even the more hardcore hope-n-changers are seeing the cracks in the facade. Little good it does us now.

  17. CT_Yankee:

    highlights from similar report from the Wall Street Journal
    investing patterns change when the rules on risk change

    Indiana Treasurer Richard Mourdock revealed this week that his state's police and teacher pension funds have lost millions of dollars in the Chrysler "restructuring." Indiana's State Police Fund and Major Moves Construction Fund, which finances roads and bridges, together lost more than $1 million. And the Teacher's Retirement Fund "suffered, at a minimum, a loss of $4.6 million due to the action of the Federal government," reports Mr. Mourdock.

    Far from being speculators, these funds represent retired public employees, including cops and teachers. The funds paid a premium to buy "secured" status, only to discover that they were politically outranked by the United Auto Workers in the White House hierarchy.

    We've worried that the Chrysler sandbagging would discourage bond investment. And, sure enough, Mr. Mourdock says that from now on no funds under his control will invest in the secured debt of "General Motors, other manufacturing companies, or those insurance companies who have or will be receiving bailout funds." Given the recent actions by the feds, he adds, "the risk is too great for any prudent investor to accept."