It’s 4:30 in the morning, and I’m awake and I’m thinking about my country. Praying even. Out of bed; go downstairs; confirm what I suspected when I went to bed at 9 last night, that Obama and indeed won reelection; check the day’s schedule.
The main item today is a mid-afternoon conference call with an investment committee on which I sit.
What do I say to my fellow committee members? 5,000 families have entrusted their savings to us, the accumulated results of their lifetime of labors, and they have put almost 7 billion dollars of it into our care. They’ve trusted us to help them preserve and grow it a little so they can retire, volunteer for charity, give to the poor, and help their children and grandchildren to get a start in life.
What I would tell them is this: You are used to thinking of America as a place that honors you and what you do, which thinks of entrepreneurship and investing as a noble thing. For this reason, the major investment decisions in the past have been whether you should invest in American stocks or American bonds. The former were a little bit riskier than the latter, but if you could stand it, the best thing is to put as much of your hard-earned cash into good, solid American companies and leave it there for a long time and not give it a second thought. If you were an entrepreneur, your main question was how quickly to expand your business and that almost always meant how quickly to expand in the U.S.
But all of that has changed. Half of this country no longer honors wealth creation, and that half of the country is in charge. For whatever reason: economic illiteracy, class envy, a progressive education which values feelings over logic, thousands upon thousands of movies and TV episodes portraying business as evil, family breakdown which leaves many people seeking the nation as a substitute family and the president as a substitute father, and an increasingly post-Biblical society which looks for an earthly rather than a heavenly king as the source for security and provision in the world.
Pick your poison. Maybe it’s a toxic brew of all of those factors. But for whatever reasons, our nation has left behind the iron laws of human nature upon which was built the greatest engine of prosperity this poor, shivering, starving human race has ever seen.
I don’t know if it is permanent. I think that it probably is not. But it is here now, and you’ve got to adapt to it.
The State is now the principle driver of investment value. Risk levels are high and rising. The U.S. is, according to the Economic Freedom of the World index, the nation with the 18th freest economy in the world. The less-detailed Index of Economic Freedom gives us a more generous ranking of 12th. Both of those reports were before yesterday’s reelection results. We will almost certainly drop. My main research task today is to estimate how much we are likely to drop as a nation in our freedom score. This will be an unenjoyable task. Despite the fact that we are in the midst of a sharp left turn, U.S. stocks and bonds are currently at valuations consistent with times in our history when our culture and policies were much friendlier to economic growth and prosperity. This is troubling.
The great economist Jean Baptiste Say said that ‘An entrepreneur is someone who shifts resources from a situation of low yield to a situation of high yield.’ By ‘entrepreneur’ Say meant not only the type of business owner/operator that we now associate with this word, but also what we currently call ‘investors.’ Say was unusual in that he was an economist, but also a successful practicing entrepreneur. He had not only mastered the writings of Adam Smith, but had also practiced the art of the creation of the wealth of nations. He went on to become a great popularizer of free-market economics and was read widely by some of our founders. Jefferson, in particular, was influenced by Say.
What Say is best known for is Say’s Law, which is the idea that saved money is not wasted money, but that it plays an essential role in the economy. Anticipating Keynes’s error that thrift is bad for the economy: Say proved that when we make the decision to save instead of to spend, that these savings are still recirculated into the economy, but in the form of capital investment rather than consumption. This capital investment is the source of economic progress.
Our leaders, however, have rejected the classical model of Say on which this country was built and hungrily accepted the errors of Keynes: investors are harmful hoarders; we should tax away their savings and spend it in government budgets, and we should punish what remains of their savings through freakishly low interest rates and the resulting inflation.
What would Say say about all of this? I think he would advise us to shift our resources from zones of overly low yield to zones of high yield. You see, although many Americans, and more so, our opinion molding institutions have become bored with freedom, much of the world is falling in love with it for the first time. Former Soviet-dominated states in Eastern Europe, Some European states learning the painful lessons of the collapse of the welfare state, South American nations which are breaking away from left and right wing populism, parts of the long-suffering continent of Africa, Asian city states with low margins for error, swaths of the world are embracing as precious what we throw off as threadbare: economic liberty.
Resist the temptation to think of shifting money from low freedom environments to high freedom environments as unpatriotic. It is not. Patriotism does not require one to make unwise loans to unreliable debtors, even if that unreliable debtor is the U.S. government. U.S. treasuries are no longer liberty bonds, with the proceeds to go towards defeating the Nazis. They now fund a dependency society at home and abroad and crony capitalism in the corporate sector.
Resist also the temptation to act from bitterness. This is not a boycott or an Atlas Shrugged situation in which we punish the nation for not respecting freedom. The goal is not to punish anybody. The goal is not to shrug, but to shift, to shift resources to places where they will do the most good for both our portfolios and for the economy in general, and those places are places where the State is not honored as a god, but treated as servant and a guardian of our life or liberty and our property.
I believe there will be a time again when the United States will be the best place on planet earth to invest our wealth, but that time is not now.
For now, we invest most where our capital is most wanted, give alms to the growing number of people who will need them, and in the meantime we patiently explain to our fellow citizens once again why the economic stagnation they face is the inevitable result of bad policy, and what we would have to do to get America back to growth.