March 2023. Most public expenditures are not investments. Most private sector expenditures are investments. These private sector expenditures are made to enable production of a product or allow an organization to provide a service. Why is this distinction significant? It is the defining difference between the two sectors. The private sector is created to provide products and services. The public sector is created to provide protection for the citizenry and protect against unwanted behaviors. The ability of the private sector to build products and provide services gives the sector the opportunity to create wealth. The ability of the public sector to create laws and provide protection allows the sector the ability to pass tax laws and collect revenue from their citizenry. This ability is the definition of government.
This month in the United States a bank called Silicon Valley Bank failed when it was unable to repay depositors. The reason it failed is because the bank purchased government bonds when interest rates were low. Later, when the Federal Reserve Bank raised interest rates later to quell inflation, the value of the low interest rate bonds collapsed. Why did the private bank purchase low interest rate bonds? They had no choice. The government requires a bank carry a portfolio of government bonds to allow use of fractional lending laws. This is an example of the public sector making rules for the private sector. Allowing this kind of activity upsets the balance of the financial marketplace and gives the public sector power outside of their area of expertise. Maintaining separation of sectors leaves the power of consequences to be properly managed. The government should have no power over financial rules. All financial rules should be set by the participants in the financial marketplace. Crossing sector lines is a blueprint for disaster. It is like having the government set speed limits on highways. These limits should be set by car manufacturers and car drivers. They are the two parties with a vested interest in safety.
June 2022. The term investment is misused by many in government. First, investment is a financial term with a specific meaning. It is an expenditure of cash from individuals or groups of individuals to earn a financial return sometime in the future. Purchasing a bond is an investment. Purchasing stock is an investment.
Government purchases are typically not investments. A jet fighter is not purchased to be held and sold after a period of inflationary growth. Ice cream is not an investment. Clothes are not investments. School buildings are not investments. First, they are not purchased with the idea of reselling them to earn a return. Any purchase made for a reason other than earning a financial return is not an investment.