It's that time again. Every four to six years, the US has a recession, so it's due for one soon. China is slowing down and Europe is melting down. The economic symbol that is Facebook saw its shares tumble last Friday. The media is calling it the Friday Facebook Fiasco. And the world's tallest tower opened in Tokyo. Skyscrapers are known to be signals of a bubble.

All of these things tell you it's time for another round of trouble. But it's not the kind of trouble you're thinking of. Not the kind of trouble that gives you falling share prices, rising unemployment or failing businesses.

No, those are just the side effects and the withdrawal symptoms of the real problem.

But before the boogie man of economics is revealed, along with how to profit from him, consider the humble cane toad.

Source: Moviemag.org

Not to be confused with the other kind of (equally dominant) cane toad:

Source: Zimbo

The cane toad (Bufo marinus) was introduced into Australia in 1935 from its native South America to combat the cane beetle. Apparently the introduction worked in places like Hawaii and the Philippines. But here in Australia the toads decided to spend their time mating instead of eating cane beetles. The result has been a plague steadily moving southwards. But Australians are fighting back. More cane toads are teed off than golf balls in much of Queensland, not to mention the dangerous driving Queenslanders engage in to maximise road kill.

So what's the cane toad of economics? It goes by many names. Interventionism, meddling, Keynesianism, monetarism, progressivism, central planning, socialism, communism, fascism, democracy, and 20/20 summits. It's the fateful combination of 'I know better' with 'ooo, what does this button do?' The results are the same as with the cane toad - a complete and utter shemozzle.

The favourite button of those who think they know better is the economic stimulus button. Of course, it's only called stimulus when the economy, that is one measurement of the economy (GDP), is getting smaller. When times are good, stimulus goes by the names of welfare, sharing the spoils and fairness. But the two are the same thing. They are the belief that someone else can use your money better than you, and therefore has the right to take it away from you, or go into debt in your name.

Let's not go into the ideological side of this, because it's not as persuasive as the simple idea that government action backfires, causes unintended consequences, and creates a dangerous amount of power. Examples of this are as plentiful as cane toads. But for some reason, people continue to believe that home insulation schemes, school halls, bailouts, first homebuyer grants and random one-off payments are a good idea. They have faith in the omniscience and innocence of government. Oddly enough, when it comes to the politicians themselves, we don't trust them...

But why is it that everything the government does goes wrong? Surely something like national defence is important? Well, actually, national defence is no different - the government solving a problem it created in the first place. We don't expect many people to agree with that. But you don't have to agree to make money from today's Daily Reckoning. We'll get to how soon.

But first, you need to understand the inherent flaw in government action. The easy way to think about it is like this: Anything worth doing would have been done by the private sector already, and for a profit. In fact, the profit is the signal that it's worth doing.

Because people value what is being done more than the cost of doing it, the difference is profit - a symbol of having served your customers. And the size of the profit is what prioritises the limited resources the economy has to work with. The most needed projects are most profitable, because they are the most valued and therefore the first to be invested in.

The government faces a completely different set of incentives. It considers costs to be part of the benefit - stimulus, jobs and loyal voters (dependents). Not to mention the all-important self-importance this kind of behaviour gives politicians and their not-so-civil-or-servile civil servants. But to get their hands on the resources to spend, the government and its henchmen can't do business normally.

At least not very much, because people wouldn't pay much in taxes voluntarily, especially if government services face competition from the private sector. So the government has to take your property, under the threat of sending you to jail if you resist. If the mafia tries this, it's a crime. Even though the deal is very similar - you get protection and the licence to carry on a business from the mafia. You get the same from your government. Our bet is that the mafia has a lower tax rate too.

So how do you profit from the fact that none of this is likely to change any time soon? We call it policy profiteering. You might want to think of it as clawing back some of the money taken from you in taxes, and doing it by profiting from the government's predictable mistakes. Although thinking of it that way is quite depressing because you will be taxed again on the money you make.

We're preparing a report and a shortlist of policy profiteering stocks you might be interested in, but here's an example to whet your appetite. Any industry the government gets involved in becomes zombified. It becomes less competitive, charges higher prices and comes up with worse goods and services, all to the benefit of insiders.

Our favourite example is the American railroad system. It used to charge less for long haul trips than short haul, because long haul trips faced competition. You had the choice of many different routes over long distances, but usually only one choice over short distances, so railroad companies had to lower their prices to compete for customers for longer trips, but not for short ones. The results was that long trips became so cheap relative to short ones that they sparked outrage amongst the electorate. They thought they were getting ripped off for the short trips. The government stepped in, thank God.

Pretty soon the price of a long trip increased dramatically, to the profit of railroad barons. But the short trips increased in price too! And the barons practically controlled the regulating authority within a very short space of time. Economists call this entirely normal and predictable development 'regulatory capture'. It allowed them to monopolise and cartelise the entire industry, increasing prices for all tickets significantly. Higher prices, less competition, more concentrated power - the government intervention achieved the opposite of everything it attempted. Except to make shorter distances less expensive, in relative terms, than long ones. At least you'd hope they would get that part right.

The same nonsense is happening currently in the healthcare industries of the world. Government involvement is feathering the nests of everyone involved, except the customer. That's why healthcare companies are on the shortlist of policy profiteering shares. That's all we'll say about it for now.

One thing you've got to remember is that these policy profiteering bubbles burst. The American university system is a great example. It's the best in the world and, get this, it's a source of tax revenue for the American government. An education system that is profitable enough to be taxed is the best in the world! But the government got involved in all sorts of nefarious ways in the last few years, feathering the nests of everyone involved, except the students. Academics are paid incredibly well and their admin staff have multiplied like cane toads.

All this was supported by government granted student loans. But now the rort is coming to an end with a government created student debt bubble of enormous proportions popping. The whole system is set to collapse in coming years. The wise policy profiteers will have abandoned ship already, after booking nice profits in some of the tertiary education stocks below.

S&P 500 (blue) vs Tertiary Education Shares

Click here to enlarge

Source: Yahoo Finance

If you can spot any sectors of the Australian economy that are benefiting from a debt funded, government supported boom, let us know at letters@dailyreckoning.com.au.

Until next week,

Nickolai Hubble.
The Daily Reckoning Weekend Edition