IRA Investing: New Year's Skepticism

In contrast to 2008, when pretty much everyone was blindsided by the credit crunch and very few investors were asking the right questions as the year began, I think the battle lines for 2009 have been delineated. We know what is going to happen as Barack Obama takes office: massive government spending coupled with some form of middle-class tax relief.

The obvious question for investors is: Will this approach work in terms of providing broad-based opportunities to make money in the stock market? The market has already answered this question: no. I have tried to take an unbiased look at what has been proposed and I have to come down on the side of the very skeptical.

Massive government spending has been tried before, both in Japan in the '90s and by the United States in the '30s. In neither case did economic prosperity result. There are two reasons for the failure of this approach. First, whenever government takes over making decisions about the allocation of scarce economic resources, huge mistakes are made. In a political economy, pork barrel spending and ideological decision-making force the economy to go in inefficient directions.

Second, the money for the massive spending has to come from somewhere; ultimately, there is no net gain and higher-than-expected inflation is likely the result. I have stated previously that we will inflate our way out of the current problem, but it is going to be very hard to control the resulting inflation before it becomes a serious problem.

The middle class tax relief that Obama spoke of during the campaign was really a new form of welfare payment since almost 50% of households in the U.S. don't pay any income tax. Rather than provide incentives for work, savings and investment, this tax relief rewards less work and less productivity while also serving to increase the deficit. I would much prefer to see across-the-board tax relief for every individual as well as for corporations.

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At the time of publication, Moore was long ATRI, CNMD, IAG, LINC, SBSI, SMTB, SY, USAK and VSEC, although positions may change at any time.

Richard Moore, CFA, has 40 years of experience in various facets of the investment business. He has been employed by banks, mutual funds and investment advisory organizations during his career and has also owned retail and service businesses. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Moore appreciates your feedback; click here to send him an email.