Phinance Memo 1: The Pilot
And those who were seen dancing were thought to be insane by those who could not hear the music. - Friedrich Nietzsche
When Jerome Powell held the FED’s regularly scheduled March-21 FOMC Press Conference, 9,119 economists, market watchers, and macro policy nerds such as myself tuned in to watch on the FED’s YouTube Stream. This past month, March-2022, the same press conference had 140,091 views. ~130,000 more people tuned in to watch the Fed’s chairman recite a carefully sanitized script summarizing the Fed Committee’s view on the United States’ macroeconomic outlook. All of a sudden, people now care!
I’ve cared for a while! My first moment of political consciousness was the 2008 election – I was 10 at the time and solidified a relatively uninformed belief in fiscal responsibility, making me a rather unpopular skeptic of the culture of borrowing and spending that has plagued us in the 14 years since. Since 2008, our government spent $58T, ran a deficit of $16T, and borrowed $18T of new debt to bridge the difference. Over the same period GDP grew $8T – in other words, debt grew by 177% / 8.1% annually while nominal GDP grew 64% / 3.9% annually. This serves to acknowledge the severely underappreciated fact: that we did not become a debt-burdened, stagnated economy overnight: this has been a long time coming.
If you want to learn more about this while being treated like a twelve-year-old, I highly recommend Ray Dalio’s Principles for Dealing with the Changing World Order. For those who simply want to read this and get on with their day, I’ll summarize by saying that throughout history the richest empires:
Get complacent and overestimate their wealth
Borrow, spend and waste
Are no longer rich and get surpassed by a new empire
I would also add:
The engine of this collapse is the metastasis of a bureaucracy that captains the waste and regulates the growth engines that originally made the empire rich
This mechanism extrapolates to people, communities, and firms
This is just a fancy version of the following saying:
Strong men create good times. Good times create weak men. And, weak men create hard times.
My own guilty plea: I’m a certified silver spooner and now have a crippling addiction to fancy food, wine, watches, art, and travel. I rarely exercise, sleep late, and can’t leave home without a 20-minute hot shower. I have never done a manual labor job, and I complain when I have to work weekends. I’m working on a cure to this debilitating decadence and will keep you apprised.
But American society itself isn’t doing to hot either. We have no plan for environmental sustainability, no plans of fiscal sustainability, we were / still are not prepared for a pandemic, our military is underprepared. We’d rather focus on divisive partisan issues like identity politics, mask-wearing, school curriculums – these are issues that the “weak men” care about, ignoring the buffet of risks that might bring about hard times.
I can only informedly speak to the fiscal challenges we face, so the blog is called Phinance (Philosophy + Finance). The goal is to combine amateur political philosophy and professional finance experience to test my worldview against our battle for fiscal stability and the risks we face.
So we have the risks outlined above – I wouldn’t call myself an expert on any of them except maybe the fiscal stuff, and what’s got me finally writing is that despite all these risks if you asked the market in November “what do you think about these risks over a 30-year time horizon” everyone would have said “everything is fine” and within the 5 months since then, they’ve changed their minds! Now we have economic risks and challenges that we can candidly discuss with being dismissed as alarmist, but we can also contextualize this “2-year” problem into a larger supercycle transition from good to weak times.
We can talk about interest rates, inflation, equity markets, sovereign debt loads, central banks, currencies, commodities, credit cycles, economic growth, policy and whatnot, but to talk about any of these individually, without the wider context would make us blind men feeling up the elephant. We might think the culprit is stimulus, we might say it’s supply shocks, we might say Russia, but really what we’re watching is our own complacency as our Debtor Nation anemically tries to keep it together.
Basically, I’d like to build on Ray Dalio’s thoughts and take inspiration from Howard Mark’s Memos to outline a financial case to dispel the notion that in the grand course of changing world orders “This time is different.”
This is too pessimistic a job for a 24-year-old, but my hope is that based on these writings, and discussions stemming from these writings, we can find actionable ways to protect against, mitigate, and hopefully even avoid the challenges ahead.