As we all sit down for our Thanksgiving meals — and before we discuss the infrastructure bill and our U.S. economy — 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. 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 “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 common ground we can all find.
After all, wine is great, but if you distill it even further, you get brandy… And if you’re not 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 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.
First: Let’s 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 the 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 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 of 2007-2009 (GFC), central banks around the world lowered interest rates to zero — or below — and printed trillions upon trillions of dollars to encourage lending and to 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 their success was tied to the back of the American consumer.
In other words, we spent our way out.
The 4% contraction in personal consumption that occurred from 2008 to 2009 was followed by a 51.3% increase over the next 11 years.
And the sheer magnitude of the past year’s COVID-19-driven decline in consumer spending — nearly four times the size of the drop in 2008 — elicited an equally epic response from the government.
The result? The U.S. economy has already posted a staggering 33.6% recovery.
Source: Bureau of Economic Analysis, Bloomberg
But with peak unemployment levels 50% higher than during the GFC, printing trillions of additional U.S. dollars is placing an exponentially larger burden on the American consumer.
In fact, peak total unemployment in each successive crisis over the past 20 years — from the dot-com bubble to the GFC to the pandemic — more than doubled.
So all of that stimulus wasn’t just riskier this time around, it could prove dangerous…
To provide any real utility, that money must circulate — physically or otherwise. 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 gross domestic product 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 1990s, 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, U.S. debt began to accumulate at increasingly 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 of the 2021 third quarter, the velocity of money in the U.S. sat barely above the all-time low of just 1.10, meaning that only 10% of every dollar printed into existence changes hands more than once in a given period.
Just in case you weren’t paying attention in the first half of 2020, the Federal Reserve printed $3 trillion into existence… while Congress provided $2 trillion in fiscal spending… with an additional $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 any sizable unemployment rate to sustain the U.S. GDP growth rate of the past 11 years.
Something has to change…there is no choice.
The Infrastructure Bill and U.S. Economy
Instead of looking to create another debt-fueled spending spree like we’ve 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.
And a savvy President Dwight 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 $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 U.S. government has ever made.
There’s a common theme there, too… All of those infrastructure investments connected this country in ways that didn’t previously exist.
It’s not like we can’t do similar things in the present.
We desperately need to rebuild our airports, roads and bridges to restore our transportation system’s efficiency. We desperately need advanced high-speed rails, which would allow citizens access to a more diversified job market while still maintaining the cost of living that is right for them, also giving businesses access to a wider pool of applicants.
The infrastructure bill is just a start for the U.S. economy.
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 and 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. 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.
We’ve taken the first step toward rectifying the situation by passing the first installment of what we think will be a decade-long infrastructure push.
My hometown representative, West Virginia Sen. Joe Manchin, was right to suggest incrementalism here. This is a hefty price tag, and we need to closely examine how it affects the overall economy on a stage-by-stage basis.
But the scope of this infrastructure bill only represents a fraction of what needs to be repaired.
So as we are finally moving past this COVID-19 pandemic and finding ourselves staring down the precipice of peak global debt and underemployment, I hope that we all take a lesson from our grandparents and great-grandparents…
And maybe frickin’ build something.
All the best,