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Politicians Try to Drink Themselves Sober

As investors and businesses attempt to work their way through the economic, financial and regulatory minefields facing them, a debate is raging that strikes at the heart of the capitalist system.

Do governments know what they are doing and does their interference in the economy actually just make things worse?

Tim Scala, macro-strategist at Sophis Investments, said recent fiscal stimuli has kept the economy going in difficult times. Unfortunately, at least in Scala’s view, the short-term consumption spurt actually comes at the expense of investment

“Bluntly put, the politics are driving the economics when it really should be the other way around," Scala said. "The private sector would spend where they see legitimate demand whereas the public sector spends according to their political agenda."

All the uncertainty surrounding tax and regulation is holding back investment and holding back job creation, he said.

“The uncertainty of just what this government is liable to do next has business decision makers hunkering down in foxholes, hardly an environment that is likely to result in hiring new people, committing capital for expansion, and the types of actions that spur long term economic growth," he added.

With government fundingbeing driven by debt Scala drew comparisons between governments in the US and Europe with a drunk celebrating the Fourth of July.

“Governments can't create wealth through stimulus that results in more debt," he said. "Borrowing to get out of a huge debt position is like trying to drink yourself sober. That appears to be our economic policy at the moment."

Who Picks Up The Bill?

The Federal Reserve's current policyis also driving uncertainty, Scala said.

“The Fed is adding reserves to the banking system and banks are reluctant to convert these reserves into loans since the current credit climate is so poor and the outlook is so shaky,” he said.

This is known as "pushing the string" and Scala said investors are extremely nervous as a result.

“Markets are also understandably concerned that the massive debt will ultimately be monetized. Europe's woes have given us a glimpse of what happens when governments make promises that they can't keep."

As the world looks at pictures on their TVs of unrest in countries like Greece and Thailand some are asking if their country will be next.