We are moving closer towards a political economy every day. Every dollar borrowed, taxed, printed, and spent by government really comes from the private sector.  Trillions of dollars of national resources are being allocated by politicians and bureaucrats towards things they claim will benefit our economy. Congress just passed a $3.6 trillion budget ($1.2 trillion in deficit), and combined the Federal Reserve and Treasury have dumped $13 trillion into the economy in the last 16 months. What we must all ask ourselves right now is whether or not we trust government with our money?

The stock market certainly seems to believe in Big Brother:

Since the absolute low in early March, the Nasdaq is up 27.8%, the S&P 500 is up 24.5%, and the Dow Industrial Average is up 22.5%. These are massive gains in an extremely short period of time. Are we finally seeing results from TARP and the American Recovery and Reinvestment Act? Is Congress doing something right, and is the market finally warming up to President Obama?

We trust government for so much these days. We have the military, police forces, regulations, laws, courts, Social Security, Medicare, Medicaid, welfare, and myriad other programs upon which we have come to depend. Soon we’ll need government to run our health care, regulate carbon emissions, tell cows how much they can fart, and give us permission to take sight-seeing trips to Antarctica! But how much do we really need of some adults to tell other adults what to do? That is, after all, what government boils down to.

Being that government officials are drawn from the same population pool as everyone else, we ought to question their omnipotence. Are they fallible just like you and I? Or does winning an election or securing a federal union job suddenly strip one of human vice?

In “Contributing Factors To The Housing Boom” I wrote that multiple layers of government caused the housing troubles currently tearing apart our economy. Without the Federal Reserve pumping up the money supply, without Congress creating Fannie and Freddie and mandating they provide junk loans to people who had no chance of repaying them, and without local and state micro-regulators dictating everything from building sizes to where and how you could build, the housing market may have simply functioned like any other market. We didn’t exactly witness cheese prices behaving “irrationally exuberantly” over the last decade!

So if we accept that the people running government are fallible, and that they even have some blame in the distorted, crashing economy in which we are all forced to eke a living, we ought to question all the assumptions they expect us to take for granted. Maybe Americans should cut back on spending and save? Maybe interest rates should float higher to represent scarcity of capital for real economic activities? Maybe adding another $10 trillion to the national debt over the course of the next decade is not a good thing?

If you think that what government is doing is good-if you trust them with your life’s savings, then go ahead and listen to your regular financial adviser. Roll your savings back into the stock market. Buy government bonds. Oh, and don’t forget to buy another SUV, a bigger house, line your walls with gold the IMF is selling, and buy yourself that marble floor you’ve always wanted! The good times will return!

Or maybe they won’t. Our government and the Federal Reserve are rolling dice with our futures. They are playing games with our currency, and they are betting that their blind spending of confiscated trillions will magically restore our economy to pre-crisis conditions. This is a tall order!

Should you suddenly become suspicious, here are a few things you can do to protect yourself:

1) Avoid non-dividend paying stocks. Seek yield in everything you do. Stocks are decent inflation hedges since companies can increase prices to compensate, but you should avoid stocks that retain 100% of earnings. Retained earnings are essentially bets that the company can earn sufficiently high returns on incremental capital expenditures. In a tough business environment this becomes less realistic.

2) Buy short-term debt instruments. Avoid long-term maturity bonds since increasing inflation will wipe out coupon payments and resale value on the secondary market. The big exception to this is if you require a fixed income for living expenses for which the current risk-adjusted yield provides. If you can lock in rates you know you can live on, by all means do so.

3) Buy real estate. During an inflationary environment you want to be a net debtor holding fixed rate liabilities. Each new dollar printed makes all the others less valuable, so you might as well use this to your advantage-repay fixed rate debt with less valuable dollars in the future. The second benefit of real estate is that rents can grow with inflation, so long as your tenants do not hold long-term leases already locked in at pre-inflation terms.

4) Treasury Inflation Protected Securities (TIP). These are Treasury securities with fixed real returns supplemented by an inflation premium. These are good so long as the government issuing them remains solvent. To diversify this risk consider the international equivalent, WIP.

5) Commodities. When the world can no longer trust our paper money people turn to commodities as a refuge. Commodities are tangible and have real utility, unlike government paper. Gold and silver are traditionally viewed as currency replacements, agricultural goods always have value in that people must eat, and energy holds the world together. Consider DBC, USO, GLD, SLV, GSG, and DBA, to name a few.

If you’re really savvy and feeling bold you could short the market, hedge with VIX, or join a local militia.

—–SPECIAL OFFERS—–

The Federal Reserve is creating tens of trillions of new dollars, debasing our currency, and silently taxing us all through inflation. With tens of trillions in federal budget deficits on the horizon there is nowhere for the US dollar to go, but down.

Refuse to be a victim of this flawed financial system, buy gold and silver NOW!

With hyperinflation and risk of economic disaster increasing with each dollar Congress recklessly spends, it pays to be prepared: Consider stocking up on Emergency Supplies:

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Government detention camps cover up deaths-does America have a human rights problem? Congress passes unprecedented $3.6 trillion budget with $1.2 trillion deficit, official unemployment rates his 8.5%-some economists claiming they are really upwards of 20%, government mortgage giants Fannie and Freddie to pay $159 billion in new bonuses, Obama calls end to ‘Pax Americana’, world leaders pledge $1.1 trillion to IMF, Russia refuses to remove troops from Georgia, NY protesters call for government to ‘Bail out the People’, Hugo Chavez declares that ‘Capitalism must end,’ and Treasuries drop with announcement of next week’s $59 billion note issue and Goldman Sachs estimate that government will need to borrow another $3.25 trillion this year…

Immigrant Deaths Buried In Bureaucracy In Government Camps. A patchwork of over 500 camps, detention centers, and prisons have sprung up across the U.S. that currently hold more than 500,000 people. The stated purpose of the camps is to detain immigrants in process of deportation, but critics claim that secrecy and lack of legal accountability shield the system from independent oversight. One recent case, the death of a Pakistani New Yorker, highlights the insidious nature of the system. Ahmad Tanveer, 43, died on Sept. 9th, 2005 from untreated chest pains while in custody in New Jersey. Inquiries into the death were rebuffed by jail officials, and complaints to the Department of Homeland Security were forgotten. Even when Congressional and media pressure on Immigration and Customs Enforcement led government to release a list of those who had died in custody, the man’s name was not included. This raises serious concerns about human rights violations within our own borders, and the growing power and lack of accountability of the governing class.

Congress Passes Budget Plans, No Republican Support. In a spirit of anything but bipartisanship, Congressional Democrats approved an ‘Obama-friendly’ budget that calls for $3.6 trillion in spending for 2009, with a $1.2 trillion deficit, the largest in history. Not a single Republican supported in either the House or Senate. The bill points the way forward for major legislation later this year on health care, energy, and education, all priorities outlined by President Obama. Blaming the country’s problems on the Bush administration, Senate majority leader Harry Reid justified the unprecedented spending by saying “It’s going to take a lot of work to clean up the mess we inherited, and passing this budget is a critical step in the right direction.” Ironically, the inherited ‘mess’ of which Sen. Reid speaks involved too much deficit spending by Republicans in the past.

U.S. Unemployment Rate Hits 8.5%. The U.S. economy shed another 663,000 jobs in March, bringing the tally up to 5.1 million jobs lost since the start of the recession. The Bureau of Labor Statistics (BLS) reported that unemployment has risen to 8.5% from 8.1% in February, its highest levels in a quarter-century. There is controversy over the accuracy of government unemployment statistics, particularly with the method in which they are calculated. Alternative economic analysis suggests real unemployment rates may be as high as 20%:

Fannie and Freddie To Pay $159 Million In Bonuses. Just a few weeks after retention bonuses at American International Group (AIG) became a national scandal, Fannie Mae and Freddie Mac, the two government-owned mortgage giants, released plans to pay an additional $159 million in bonuses to retain key employees. This comes on top of nearly $51 million already paid out last year for the same purpose. The bonus plans were disclosed to the Senate by the Office of Federal Housing Enterprise Oversight. This is a slap in the face to private businesses that are being harassed by government for fulfilling contractual employment obligations.

Obama Calls End to American Empire. Speaking at the G20 Summit in London this week, President Obama called for an end of the ‘Pax Americana’ and heralded a Global New Deal. The chief objectives of the President were come to an agreement on more global financial regulations, and to gain commitments by national governments for concerted stimulus spending.

World Leaders Pledge $1.1 Trillion To IMF. Concluding the Group of 20 (G20) Summit in London this week, world leaders announced a staggering $1.1 trillion funding commitment-$750 billion in funding, and $250 billion in trade credits-to the International Monetary Fund (IMF) to assuage damage of the economic downturn. Speaking without Congressional approval, the President pledged $100 billion from the U.S. It is not yet clear exactly how the IMF will use these funds. NYU economist and author, William Easterly, is an outspoken critic of international aid organizations like the IMF, pointing out that they are costly, bureaucratic, wasteful, and ineffective. Here’s a quick article Easterly wrote called “Why Doesn’t Aid Work?”

Two books Easterly wrote on the subject:

In The White Man’s Burden: Why The West’s Efforts To Aid The Rest Have Done So Much Ill And So Little Good Easterly contends that the West has failed, and continues to fail, to enact its ill-formed, Utopian aid plans because, like the colonialists of old, it assumes it knows what is best for everyone.

Existing aid strategies, Easterly argues, provide neither accountability nor feedback. Without accountability for failures, he says, broken economic systems are never fixed. And without feedback from the poor who need the aid, no one in charge really understands exactly what trouble spots need fixing.

Economists have long tried to figure out how poor countries could attain higher living standards. Attempted remedies have included providing foreign aid, investing in machines, fostering education, controlling population growth, and making aid loans as well as forgiving those loans on condition of reforms. None of these solutions has delivered as promised. The problem is not the failure of economics, William Easterly argues, but the failure to apply economic principles to practical policy work. In The Elusive Quest For Growth: Economists’ Adventures And Misadventures In The Tropics William Easterly shows how these solutions all violate the basic principle of economics, that people–private individuals and businesses, government officials, even aid donors–respond to incentives. Easterly first discusses the importance of growth. He then analyzes the development solutions that have failed. Finally, he suggests alternative approaches to the problem.

Russia Defies Intentional Calls For Troop Withdrawals From Georgia. Nearly eight months after the war between Russia and Georgia, Russian troops continue to hold large swaths of Georgian territory they previously committed to cede. Under conditions of the cease-fire, the militaries of both sides were to return to positions they held before the start of the conflict, which erupted on Aug. 7th, 2008.

New York Protesters Want Government to ‘Bail Out The People.” Protesters asking the government to ‘bail out the People’ are holding a rally on Wall Street today. They say they should get some of the billions of dollars being spent to save big businesses. They plan to repeat the protest on Saturday with chanting and drumming.

Venezuela’s Chavez Says ‘Capitalism Must End.’ Venezeulan President Hugo Chavez on Friday criticized the G20 summit, saying that Capitalism is in crisis and must end. He took aim at pledges of more than $1.1 trillion for lending to struggling countries, calling it “the same medicine that’s killing the patient-a trillion dollars…more money for a bottomless pit.”

Treasuries Drop As Traders Focus On Record Debt Supply. Treasuries fell on Friday as the U.S. Treasury prepared to sell an estimated $59 billion in notes and inflation-indexed securities next week, part of a record amount of debt the government is likely to issue this year. Analysts estimate that the U.S. will need to borrow $3.25 trillion for the 2009 fiscal year ending Sept. 30th.

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