Saturday, July 10, 2010

The discussion Congress should be having: PART 3, Punishing the innocent.

What happened to my nest egg, my pension, my IRA?

As is noted in Urgent Speed: Why Ten Million Dollar IPOs Matter: to quote: “…with the proliferation of derivatives the seed stage asset class is one of the few uncorrelated asset classes.”

This is an issue discussed in some detail is The Hedged Economist: Angels, entrepreneurs, and diversification: PART 2 , as well as Part 3 and 4. and the Epilogue to Angels, entrepreneurs, and diversification. Unfortunately, people haven’t connected the dots. If one can’t diversify, the options are to accept volatility in investment prices. And, yes, that includes pensions, IRAs, and nest eggs with no intention of directly participating in early stage investments. One could trace the linkage through markets, fund investments, capital flows into later stage investments, etc., but the generalization is simply that reduced diversification makes the entire economy more volatile without increasing growth.

Ultimately it inhibits job growth. The reason it inhibits growth should be a question that answers itself. Seems every commentator has discovered small business creates the majority of new jobs. But, they fail to point out the inconsistency between small business job creation, and the culture of dependency and the psychology of victimization in the US. Besides, there are very few opportunities for our “leadership” to claim success for a healthy small business sector.

Spreading the wealth is a poor substitute for creating the wealth, but it is a lot easier; sort of the lazy man’s solution. Problem is it doesn’t create jobs. It creates more dependencies.

Nice thing about jobs is that a good number next month will cause many people to ignore how dismal a failure the last year has been. But, unless the last six months get revised away, anemic is still the operative word.

Our “leadership” doesn’t like to point out that the US has a major bias against investment. They seem to fear that someone could loose money, or even worse, someone might make some money. But, they found a solution. Tilt the economy toward consumption.

If lack of consumption is the problem, one has to explain cars that are larger than families; excess housing inventory; families with more TVs, phones, etc. than family members; toys that are replaced almost weekly; consumption that routinely exceeds output (thus a trade deficit); why one can borrow to buy a house at record low interest rates but can’t get a loan to start or expand a small business; zero percent down and no payment for X; and so on.

We currently have a debate going on about fiscal policy. It is all noise unless someone introduces the question of how to address the issue of subsidies for consumption and hostility to small business -- especially toward startups.

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