The economy is not broken, but what can go wrong? This is not a Pollyanna video. There are real threats to talk about, but usually they’re not the threats that people are thinking of. In the last video we discussed the extraordinary performance of the United States economy relative to the rest of the world. But there are things that can go wrong, and particularly, there are five things that cause economists and policy wonks the most concern.
Number one, immigration. It is without a doubt the key to American exceptionalism. If you look at the S&P 500, the founders of those companies that make up the S&P 500, 45% were either immigrants or the children of immigrants. Economic migrants come to the United States with an ability to take risks, a sense of adventure, and a willingness to leave everything behind, that is different from everyone else. And those migrants may even be coming from New York to Texas, or California to Texas, not just another country.
Number two, marginalization, political and economic. The United States life expectancy is actually falling. There is a huge segment of the country that is being left behind, the other reason so much populistic extremism exists. Somehow, despite extraordinary success economically, a whole sector of this society has not enjoyed any of the fruits of that success. Here locally in Montgomery County, we have the highest suicide rate in the area. One of the fastest growing and economically richest counties in the nation.
Now, our suicide rate is double that of 2010. There’s a huge case to be made that this doubling, which is actually throughout the Western world, is very highly correlated to the use of social media. We are seeing a lack of belief in institutions and each other. That marginalization could lead to walls going up between different parts of society, and then you have the failure and collapse of democracy. Unfortunately democracy, or fortunately, democracy means the rule of law. Contracts, economic wealth, depend on a reliable rule of law.
Number three, central bank independence. Throughout history, presidents have loved to criticize central bankers when they raise interest rates before an election, and it’s for obvious reasons. They often drive the economy into recession. When the economy goes into recession, whoever’s in office loses. It’s simple math. Turkey today is the poster child of what not to do. Their president has lowered interest rates every single time the economy doesn’t look good. Their inflation is off the charts. He fires every single central banker that suggests raising interest rates as a way to control inflation.
The last president complained about the Fed to the extent people were worried that the Fed might lose its independence. And why? Because inflation was climbing they were going to raise interest rates. Nixon did this. When Nixon pushed on the Fed, they held those interest rates down. Inflation got so badly out of control it took a long time, decades, and Paul Volcker’s severe recession of 1979, 1980 to get it under control. So it’s super important that we don’t let the politicians dictate to the central bank.
Number four, shutting down global trade. Both parties seem to be in agreement. Both parties seem to have forgotten the concept of comparative advantage that was developed by David Ricardo back in 1817, which basically says, “Focus on your unique ability. Take that wealth and spread it instead of trying to do things that aren’t our unique ability or don’t work with our cost structure.” When we insource, let’s say car manufacturing, the cost of cars go up, the quality falls. This is true for all products. And for those 50% of the population that are living on less than $60,000 a year, those price rises are an enormous tax to benefit the incumbents.
Five, stifling labor markets. Here we’re talking about eliminating right-to-work, unions. Almost every rule that helps the incumbents, that protects the union members, that protects those within their career, hurts trade, raises costs, hurts those who are stuck on the outside and can’t get those jobs now. And most of all, hurts consumers. A great example of stifling the labor market, in Texas to become an esthetician you need 500 hours of training. Do you know the FAA requires 250 hours to become a pilot, a commercial pilot? It’s insane. It’s job protection for incumbents, and rules like this are killing people.
So those are the five things that can go wrong that really can stifle the exceptional growth of the economy. There are four threats that we hear a lot about that, that as far as I’m concerned completely fail the sniff test. One, is depleted oil reserves. When we deplete the oil reserves to deal with price shocks, we refill them when the price drops, and so who cares? And even if they stay depleted, it just means we have less of a shock absorber to price changes. There are those who would argue that’s actually a good thing because then the market can do its job even better. But it’s certainly not something that’s going to collapse the American standing in the world. Most countries don’t even have them.
Central bank digital currency, number two. Currencies, be they digital or otherwise, rely on faith and trust. It doesn’t really matter whether or not the central bank creates a digital currency, or whether or not they even expect you to use it. You can go to many countries around the world and they’re using the dollar on the street because the government’s overreached. This government is not really interested in losing control, and CBDC would cause that to happen if it was done with overreach.
Three, the petrodollar replaced by rubles. The reason gas is being bought with rubles is because the Russians can’t get the dollars they need to buy gas, or to sell it actually, in that case. The transactions are being forced to be in rubles by US policy. As far as most of the world’s concerned, the ruble’s a useless currency, and this is really a non-issue. It kind of coincides with this fourth item, and I’ve heard this for my entire working life, “The US dollar is going to lose their reserve currency status,” often when it’s tied to the debt, and that’s a whole other video. We are so far from losing reserve currency status. It almost isn’t worth the time.
But because I hear it constantly, I’m going to repeat. Reserve currency status, seigniorage, is a function of trust. The US economy is the strongest economy in the world, it’s the most dynamic economy in the world, and people trust it. It’s not going away. At least the reserve currency status is not going away anytime soon. Our best defense against these four threats is to maintain the economic exceptionalism by avoiding the five big mistakes that I just described. We wish you the best of investing success.