Giving Thanks: Why We Need to Build a New America
As we all sit down for our Thanksgiving meals, it’s important to reflect on what’s most important in life.
In our Declaration of Independence, author Thomas Jefferson reflected on that very concept. Ultimately, he distilled that personal importance into several self-evident, “unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.”
Jefferson himself was borrowing heavily from John Locke here, whose Two Treatises of Government says that “no one ought to harm another in his life, health, liberty or possessions.”
But if I might be so bold as to borrow these thoughts myself – and distill them even further – I think there’s a common ground that we can all find.
After all, wine is great, but if you distill it even further, you get brandy… and if you’re not yet aware, brandy is delicious. Frankly, after one of the most polarizing years in our country’s history, I think we could all use some.
In my mind, Locke’s health and possessions (or property), and Jefferson’s flowery “pursuit of Happiness” are each inextricably intertwined with “Life” and “Liberty.”
Without the latter two, the first three cannot exist.
Moreover, without the liberty to plan a family, life cannot exist… much less the pursuit of happiness.
That leaves us with Liberty. And although we may take it for granted on these shores, we should all recognize that it is complicated to achieve.
For that reason, the next part of the Declaration of Independence happens to be my personal favorite.
It says that in order “to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed.”
The most important word in this passage – perhaps in the whole document – is the word “secure.” It means that when we send representatives into office, or ship men and women off to die in battle, it is their singular responsibility to either maintain the freedom we currently have, or acquire new and lasting ones.
The Declaration continues, “whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.”
In other words, should our representatives fail at that job – and everyone makes mistakes – there is always the opportunity to remedy the situation.
But Jefferson says that we, the People, also have a responsibility to determine the degree of seriousness, writing in the very next sentence, “Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes.”
In the event the degree of seriousness is “a long train of abuses and usurpations,” Jefferson wrote, then “it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security.”
There are parts of our institutions that many can argue have done just that…in a moment, I’m going to tell you one such story.
But first – today of all days – I want to give thanks.
I want to give thanks to my family, without whom neither my life nor my happiness would exist.
I want to give thanks for my freedom, and for those who actively work to defend it, here and abroad, behind a desk or on a battleship.
I want to give thanks for the foundation of government – as wholly imperfect as it is – that we have in this country… because if it’s not working for us, we get to change it.
And finally, I want to thank you for reading. The opportunity to think about these things and share those thoughts and ideas with you means a lot, and I’m grateful.
So Happy Thanksgiving, everyone… now on to the story.
Learning From Past Mistakes
If there’s one lesson that investors need to internalize, it’s that past performance is no guarantee of future returns… that is to say, history doesn’t repeat itself. But as many have pointed out over the years, it does often rhyme.
For instance, no two bear markets are the same, but they always follow bull markets… and vice versa.
Similarly, government response to each of those instances is never identical… but there is always a response.
Following the Global Financial Crisis, Central Banks around the world lowered interest rates to zero – or below – and printed trillions upon trillions of dollars to encourage lending and prop up rickety financial markets.
The vast majority of that stimulus made its way through banks and into low-risk financing for business sectors across the board. But the one thing they all had in common was that their success was tied to the back of the American consumer.
In other words, we spent our way out.
The 4.5% contraction in personal consumption that occurred in 2008-2009 was followed by a staggering 54.5% increase over the next 11 years.
Source: Bureau of Economic Analysis, Bloomberg
That’s amazing. However, the actions that were appropriate for the Federal Reserve and the US government to take in 2008 are not likely to be as effective in the wake of the COVID-driven global shutdown in 2020.
First off, that’s because a large portion of that spending increase was financed using personal debt. As a result, downturns are far more likely to result in defaults and personal bankruptcies.
Source: St. Louis Federal Reserve
Next, there’s the sheer magnitude of the decline. This time around, consumer spending fell by roughly 20% – nearly 4 times the size of the drop in 2008.
Source: Bureau of Economic Analysis, Bloomberg
And with unemployment levels 50% higher than the GFC (and climbing as of this writing), printing trillions of additional US dollars only to place an exponentially larger burden on the American consumer is not just riskier, it’s stupid.
Source: St. Louis Federal Reserve
That’s because to provide any real utility, money has to circulate – physically or otherwise. The greater the number of transactions in which a single dollar is involved, the greater the number of goods and services it purchases.
Put another way, the more a dollar changes hands, the more jobs it supports.
The opposite is true as well. If money is taken out of the economy – for instance, by hoarding cash or paying off debt – then it can’t be put to work, and fewer jobs benefit.
This concept is called the velocity of money, and it is calculated by dividing GDP by the total money supply.
In general, velocity should increase or decrease alongside both GDP (which measures the total output of an economy) and inflation (which measures price increases).
But despite both metrics increasing over the past two decades, the velocity of money in the United States has moved decidedly in the opposite direction.
Source: St. Louis Federal Reserve, US Treasury, Bloomberg
There’s a clear inflection point that begins in the late 1990’s, after which velocity never recovers. And when I overlay the United States’ total debt, you begin to understand why.
Source: St. Louis Federal Reserve, US Treasury, Bloomberg
As soon as the dot-com bubble burst, US debt began to accumulate at faster and faster rates. That dragged velocity lower and lower as an increasing amount of money went toward servicing debt instead of being exchanged for goods and services –what economists have dubbed “the real economy.”
At the end Q4 2019, the velocity of money in the US sat at an all-time low of just 1.425, meaning that less than half of every dollar printed into existence changes hands more than once in a given period.
And just in case you weren’t paying attention in the first half of 2020, the Federal Reserve printed US$3 trillion into existence, while Congress provided US$2 trillion in fiscal spending, with an additional US$2 trillion passed but not yet spent.
That’s a lot of trillions.
Worse, almost all of it will go to pay down expenses and debt, which has a velocity of 1… the lowest possible value.
It’s the Law of Diminishing Returns playing out right before our very eyes… the denominator (money supply) is growing much faster than the numerator (GDP).
In other words, the economic “growth” over the past two decades is an illusion.
And the idea that this pattern of monetary behavior will work again this time around is preposterous.
There’s simply not enough consumer spending available at 20% unemployment to sustain the US GDP growth rate of the past 11 years.
Now, the market has been trying like hell to convince us otherwise since March, as the correlation coefficient of continuing jobless claims and the Nasdaq 100 (currently at all-time highs) is 0.88 – darn near a perfect 1:1.
Source: Bloomberg, Department of Labor
That’s about 20 million people out of work (and spending less) versus a 44% return in less than three months, or 47,091 jobs lost per 1% gain.
Something has to change… there is no choice.
If You Build It, We Will Come
Instead of looking to create another debt-fueled spending spree like we have endured for the past two decades, the United States should look to a different part of history for ideas.
Specifically, I’m talking about the years immediately following World War II – 1944 through 1971 – referred to by many as the “Golden Age of Capitalism.”
Unlike our European counterparts, the public works built in the United States under President Franklin Roosevelt’s New Deal – Bridges, airports, hospitals, schools, roads, buildings, dams, and the initial installment of what would become our power grid – escaped the war completely unscathed.
Electrification allowed manufacturers access to automation and scale, while the resulting machinery also revolutionized farming.
A brand new technology industry developed, led by the advent of television, computers, and commercial aviation.
And a savvy President Eisenhower took inspiration from Germany’s Autobahn and signed into law the Federal Aid Highway Act of 1956, which created our Interstate system.
While we may take that last one for granted, we have to realize that it cost us roughly US$125 billion to construct, but it accounts for trillions of dollars in freight… every single year.
That makes it by far the single greatest investment the US government has ever made.
There’s a common theme there, too… all those investments connected this country in ways that didn’t previously exist.
And it’s not like we can’t do similar things in the current economy.
We desperately need to rebuild our airports, roads, and bridges to restore our transportation system’s efficiency.
We desperately need advanced high-speed rail, which would allow citizens access to a more diversified job market while still maintaining the cost of living that is right for them, and would also give businesses access to a wider pool of applicants.
We desperately need to solve the energy storage problem and perform a top-down redesign of our nation’s power grid – allowing consumers with distributed solar installments greater access to wholesale power markets, thereby incentivizing wider adoption rates.
We desperately need faster wireless connectivity, faster cloud infrastructure, more powerful software, and to construct a more sophisticated, personalized, efficient, and affordable health care system.
These programs will all cost a tremendous amount of money… but the money velocity of all these investments is enormous.
And that means instead of making a solitary debt payment to the bank, these investments all have the potential to pay dividends for generations to come.
So, once we finally move past this COVID pandemic and find ourselves staring down the precipice of peak global debt and unemployment, I hope that we all take a lesson from our grandparents and great-grandparents.
… and maybe frickin’ build something.
All the best,
Matt Warder
