Eat more, weigh less not equivalent to spend more, owe less

By DAVID MOON, Moon Capital Management, LLC
February 8, 2009


In 1993, cardiologist Dr. Dean Ornish authored a book on health and diet titled 'Eat More, Weigh Less.' The New York Times called it a book title a fat person could love.

My suspicion is that our government economists and policy-makers have fallen prey to the monetary equivalent of the title of Ornish's best seller. Spend more, owe less.

In the waning days of the Bush administration, Congress passed the now much maligned TARP program, authorizing $700 billion or so to be spent on 'well'about whatever the Treasury Secretary darn well pleases. We are now about to get a new larger bailout plan, or as I like to call it, 'Son-of-a-TARP.'

If government spending is the solution to our economic ills, we shouldn't be sick. In the past four years, non-military government spending increased more than during any presidential term since Gerald Ford's. The increase was almost twice the increase in GDP.

Freddie Mac and Fannie Mae didn't get into problems because they made too many bad loans. SunTrust, First Tennessee and BB&T all have higher levels of non-performing assets than Freddie Mac. But Freddie Mac had a lot more debt, so a smaller percent of bad loans wiped out its equity.

What was the first thing Congress wanted to do after taking control of the national lenders? Increase their borrowing and lending limits.

A little hair of the dog that bit you might help the morning after a wild New Year's Eve party, but Washington officials are like alcoholics who think switching from bourbon to lots of bourbon will solve their drinking problem.

Money ' in the form of access to capital ' can enable businesses to fix certain structural economic problems. Money ' historically in the form of safety net programs ' can also enable people to withstand certain individual economic problems.

One of the things we learned during the early 1930s was that government shouldn't take money out of the system during a recession by increasing taxes or making it more difficult for creditworthy borrowers to access needed capital.

We don't have, however, any successful economic precedent for printing money and dropping it from airplanes.

Medicaid and Social Security black holes already loom on the horizon ' near enough to affect my generation, but far enough away to be some other president's problem. We simply can't afford today's monetary air drops.

Much of our economic growth in the last five years wasn't being produced. We were borrowing from future growth. In 2005-2007, as much as a third of the annual increase in consumer spending was the result of people spending cash they withdrew from their home equity lines of credit and first mortgage refinancing.

That spending is gone.

If increased consumer spending was the key to long-term economic growth the solution would be easy. The federal government could simply buy everyone a Walmart or Gourmet's Market gift card each month.

The gift-card solution is only a Band-Aid. The longer-term solution to our economic woes is hard. Eat more, weigh less doesn't work in accounting.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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