Flight To Quality

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Ben Cohen
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By Justin Chang

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Over the past month the world has reeled as systems of global finance have begun to contract. Economists have been quick to point fingers, some towards the woes of the ailing home mortgage markets, others to a lack of liquidity in the credit markets. It seems, however, that there is general consensus around the idea that these systems have become over-leveraged. And that the effect of leverage in investment markets has reached an inflection point where the free flow of debt based capital has begun reverse.

There has been for some years now, certainly most of my life, a widespread idea that if you accumulate enough capital reserve, savings, that investment markets have the strength and savvy to parley that reserve into growth. In short it’s the idea that money can be made to make more money. Unfortunately, the lead proponents of this notion, investment banks, have begun to fail at an unprecedented rate, and accordingly those industries and institutions which relied on these banks are in for a corresponding downturn.

In an effort to stem these anticipated losses, investors or more simply
those individuals with control over a surplus of capital, have
responded with what is termed a flight to quality. Essentially,
investors are no longer looking to aggressively expand their assets,
but instead are scrambling for safe places to park them. Instead of
investing in markets by buying corporate bonds, funding infrastructure
or building houses, money is flooding into government bonds, savings
accounts, and cash reserves.

The imminent consumer recession that we all fear coming is going to
be the consequences of that retreat. Less investment in markets will
lead to fewer jobs and a drop in quality of life across the economic
spectrum, which means less money flowing through the system, and an
overall dampening of supply versus demand.

Similar to investors, consumers view governments as the last
reserve of quality. If no companies can offer jobs, why won’t the
government provide one for me? If I can no longer service my
individual debt, what can the government do to keep me in my home and
keep food in my refrigerator? To me, discussions along these lines
represent a sort of consumer flight to quality.

The daunting question becomes then, can government step up to the
demands for real value? America was founded on the notion that a
government is a body comprised of representative members of its own
population, a government by the people and for the people and so on.
Where then does the perceived quality lay? What measure of effort will
be required to ensure that both the investment class and average
citizen will be well served by its representatives? Who, in a sense,
will create the quality and value upon which the socio-economic balance
feeds?

These are the underlying questions which drive me in an attempt to
illuminate our increasingly murky economic picture. Our forefathers
are famous for the claim of “no taxation without representation” and
over the course of the next few articles I’d like to explore the state
of our economy with the goal of figuring out how well represented we
and our tax dollars are nowadays. I hope you and the readers of The DB
will join me in this effort to comprehend the new rules of how
government, finance, and individual responsibility intertwine.