On The Economic Crisis
The wars of the past decades have drained America's coffers, leading to economic stagnation. The class and ethnic divides within society complicate matters further. A clear exposition of these issues is necessary for understanding and addressing the challenges facing the nation.
The Iraq and Afghanistan wars, also known as the Global War on Terror, had a significant impact on fiscal policy in the United States. Like the Vietnam War, these conflicts were costly, with the government spending billions of dollars on military operations and other related expenses. These major military ventures of the United States in the decades since the Vietnam War, including the conflicts in the Middle East and the war in Ukraine, have contributed to the economic stagnation of the country. These conflicts have been costly, both in terms of the lives lost and the financial resources spent.
As a result, the national debt has increased. This has led to slower economic growth.
I am struck by the destructive forces of war, speculation, and waste. These vices have the power to destroy not only entire nations, but also the individual lives within them. In times of war, brother is pitted against brother and families are torn apart.
Speculation breeds greed and leads to the reckless pursuit of wealth at the expense of others. Waste, the folly of throwing away what could be used to benefit ourselves and others. As we look to the present, we can see how these issues are intertwined in the fabric of our society.
First, consider war. It destroys lives and resources. It creates enemies and perpetuates violence. It is a poor solution to any problem.
It is also very expensive.
Second, speculation can lead to economic instability. It benefits a few at the expense of many. It is a gamble, not an investment. Individuals have been making terrible investments by following the herd and exercising no judgment.
But there is another path that we may choose to follow.
In contrast, peace is good. peace allows for economic growth and development by creating a stable and secure environment in which businesses can operate and thrive. This can lead to increased investment, trade, and job creation, all of which can contribute to economic growth. Additionally, peace can reduce the need for military spending, which can free up resources that can be used for other purposes, such as infrastructure development, social welfare programs and lower taxes.
Careful investment is also good. Drawing on Benjamin Graham and Jim Collins, I will contrast foolish speculation with the importance of conducting thorough and careful analysis when selecting investments. It is only through thoughtful and diligent examination that we can make wise choices and find true value. And let us not forget the value of buying undervalued assets and holding them for the long term, for in this way we can protect ourselves against potential losses and lay the foundation for lasting success. But let us also remember to think independently and avoid following the crowd, for in this way we can avoid being led astray and make decisions that are truly in our best interests. The specifics of an organization matter. There are still organizations with a clear and compelling vision, strong leadership, and a focus on execution and results. Investors should seek undervalued organizations with a unique culture of discipline which maintain a consistent set of core values over time.
In the end I will take a bit of a left turn, and invoke the principle of solidarity. Individual action is necessary to fight oligarchy, which can threaten democracy. To oppose oligarchs, support policies that promote competition and prevent companies from gaining too much power. Recognize capitalism's role in driving innovation and address its drawbacks.
Current Events
We find ourselves at a moment of great challenge and uncertainty. In recent years, I have warned of the dangers of declining productivity and the risks of rampant price inflation. And now, in 2022, we are facing the triple threat of costly war, rising energy costs, and higher interest rates.
These forces are not only harmful to our economy, but also to our families and communities. They threaten to undermine our progress and our prosperity, and they require us to take bold and decisive action.
The economy has been distorted by various forms of stimulus, including spending on wars in Iraq and Afghanistan, and efforts to recover from various crises such as the dotcom crash and the Coronavirus pandemic. These efforts have been supported by Keynesian experts who have predicted positive outcomes, but their forecasts may not be accurate. Meanwhile, in the private sector, some people have ignored the risks and continue to engage in speculative activities such as buying stocks and real estate. However, these investments are not guaranteed to be successful.
Now, we are at a crossroads. Increases in energy costs and interest rates could lead to an economic contraction. We should be prepared for the possibility of another crash. For those who are able to invest, it is a good time to look for value stocks and companies with good leadership and a focused strategy. Those who are less financially secure may benefit from a different mindset which I will return to later.
The fiscal impact of the wars in Iraq and Afghanistan on the US budget is not often invoked as a cause of our present crisis. According to a report by the Congressional Research Service, the total cost of the wars from 2001 to 2020 was over $2.4 trillion. This included direct spending on military operations, as well as the costs of providing medical care and other benefits to veterans. The wars in Iraq and Afghanistan were a major contributor to the growth of the US national debt, which increased from $5.8 trillion in 2001 to over $22 trillion in 2020.
It is difficult to directly link the spending on these wars to the 2008 financial crisis, as there were many factors that contributed to the crisis. However, some analysts have suggested that the high levels of government spending on the wars, combined with other factors such as low interest rates and lax regulation, may have contributed to the housing bubble and subsequent financial crisis. The high levels of government spending and debt may have also weakened the overall health of the economy and made it more vulnerable to the crisis.
In response to the financial crisis of 2008, the US government implemented a number of measures to stimulate the economy, including the American Recovery and Reinvestment Act of 2009, commonly known as the "stimulus package." This legislation included a range of measures, such as tax cuts for individuals and businesses, increased government spending on infrastructure and other programs, and support for struggling industries. The total cost of the stimulus package was over $800 billion.
The impact of the stimulus package on the US budget was significant. The increased government spending contributed to an increase in the national debt, which grew from $10.6 trillion in 2008 to over $14.8 trillion in 2010. However, the stimulus package was also designed to stimulate economic growth and help the economy recover from the crisis. Some analysts have suggested that the stimulus package was successful in achieving these goals, while others have argued that it was not effective or that its costs outweighed its benefits. The long-term effects of the stimulus package on the US economy and budget are still being debated. As Zhou Enlai famously said about the 1789 overthrow of King Louis, "It is too early to tell whether the French Revolution will end in a good or bad way. It is still in progress."
Keynesian experts explained sunny forecasts based on Bayesian predictions. Keynesian economics is a school of thought that is named after the economist John Maynard Keynes. Keynesian economists generally believe that government intervention in the economy, such as through fiscal policy (i.e. changes in government spending and taxation), can be effective in addressing economic problems such as unemployment and slow growth.
Bayesian statistics is a branch of statistics that is based on Bayes' theorem, which describes the relationship between prior beliefs and new evidence.
Bayesian models,like all models, are often over-relied upon by analysts and can be misleading because they are based on assumptions about the likelihood of different events, which may not be accurate.
Who are we to tell them they were wrong?
In the private sector, it seems that the lessons of the past have been forgotten. After the dotcom crash and the mortgage crisis of 2009, many people continued to believe in the invincibility of technology and the infallibility of real estate. They ignored the fundamental measures of economic performance at the firm level, and instead put their faith in speculative investments such as the stock market. It's as if they thought that they could "set it and forget it" and expect to always make money.
But as we all know, this kind of thinking is dangerous. The dotcom crash and the mortgage crisis should have been wake-up calls, reminding us that even the most promising industries and investments can fail. We should not take the stability of the economy for granted, and we should not blindly trust in the supposed invincibility of technology or the upward trajectory of real estate. Instead, we should be cautious and thoughtful in our investment decisions, and recognize that even the most seemingly reliable investments carry risks.
So let this be a lesson to us all: don't let the dotcom crash and the mortgage crisis be quickly forgotten.
Let's not be blinded by our faith. Let's remember the lessons of the past, and approach the future with a healthy dose of skepticism and caution.
It is generally believed that steep increases in energy costs can have a negative impact on the economy. This is because energy is an essential input for many economic activities, including manufacturing, transportation, and heating and cooling buildings. When the cost of energy increases, businesses and consumers may have to spend more money to purchase the energy they need, which can reduce their spending power on other goods and services. This can lead to lower levels of economic activity and growth, and potentially to an economic contraction. This can lead to lower levels of investment, hiring, and output. High energy costs can also lead to higher prices for consumers, which can reduce their purchasing power. This can lead to lower levels of consumer demand, which can in turn impact businesses' revenues and profits.
A steep increase in interest rates could spell bad news for the economy. Just as a steep slope can be treacherous for a clumsy hiker, a steep increase in interest rates can be perilous for the economy. When interest rates go up, borrowing costs increase for businesses and consumers, which can reduce their ability to spend and invest. This can lead to lower levels of economic activity and growth, and potentially to an economic contraction.
When interest rates are low, businesses and consumers are more likely to borrow money to invest in new projects or to buy big-ticket items like houses and cars. But when interest rates are high, borrowing becomes more expensive, and businesses and consumers may be less willing to take on new debt. This can reduce their ability to spend and invest, which can in turn impact economic activity and growth.
Higher interest and higher energy costs crowd out other activities and damper growth. Making us all worse off.
War
In "Mother Courage" by Bertolt Brecht, the titular character is a resourceful and resilient businesswoman who tries to profit from the chaos and destruction of the Thirty Years' War. That war is said to have killed over a quarter of all Germans living at the time. It was a war waged against farmers and citizens by mercenaries acting on behalf of far away kings. Mother Courage runs a canteen and supplies soldiers with food, drink, and other goods, and she is willing to take risks and make sacrifices in order to make a profit. Despite her efforts, however, Mother Courage ultimately fails to escape the ravages of the war. She loses her children and her livelihood, and she is left with nothing but regret and bitterness.
The play serves as a commentary on the destructive effects of war on individuals and society. It shows how even the most determined and resourceful individuals can be swept up in the tide of conflict, and how wars can destroy lives, communities, and economies. In this sense, the play resonates with the idea that "wars seem to make some people rich but are economic poison over the long term." Mother Courage is an example of someone who tries to profit from the war, but ultimately pays a heavy price for her actions. The play suggests that the pursuit of wealth and profit during times of war is ultimately futile and self-defeating.
Wars may bring temporary wealth to some, like Mother Courage, but they are ultimately destructive forces that ravage the economy. In the midst of conflict, there may be opportunities for certain individuals and businesses to profit from the production of weapons and other goods and services needed for the war effort. However, these short-term gains come at a high cost. Wars require vast amounts of resources, including money, materials, and labor, which are diverted from other areas of the economy. This can lead to shortages, inflation, and other economic problems.
Over the long term, the effects of war on the economy can be devastating. Wars destroy infrastructure, disrupt trade and commerce, and create uncertainty and instability. Wars also cause human suffering and loss of life, which can have far-reaching economic consequences.
In short, while wars may enrich some in the short term, they are ultimately destructive forces that poison the economy over the long term. They should be avoided whenever possible. By failing to avoid war, the United States has made itself vulnerable and the people have suffered the consequences.
Discernment
If you rely on employment income and you manage to keep your job through this next rough period. Consider this a golden investment opportunity. Not to buy gold, bitcoin, Gamestop or even baseball cards. Nor in any other speculative investments that are not based on sound principles of value investing. In "Good to Great" by Jim Collins, the author discusses the characteristics of companies that have made the transition from good to great, and one of the key factors he identifies is the ability to focus on the "hedgehog concept," which is the intersection of three circles: what you are passionate about, what you can be the best in the world at, and what drives your economic engine.
According to Collins, companies that can effectively align their passions, strengths, and economic goals are more likely to achieve long-term success. In contrast, speculative investments are not focusing on their hedgehog concept and are not making investments that are based on a clear understanding of their strengths and economic goals. Instead, they are gambling on the potential for short-term gains, without a clear understanding of the risks and long-term consequences of their actions.
Investors should look for bargains and opportunities to buy stocks when prices are low. According to Benjamin Graham, the time to buy is when everyone else is selling, and investors should look for stocks that yield dividends, have stock market valuations lower than their book value, and may be temporarily impaired. In addition to looking for stocks based on their financial metrics, investors should also look for companies with strong corporate character, such as a focused strategy, a humble leader, and other qualities that indicate their potential for long-term success. A mindset informed by the principles of Benjamin Graham and Jim Collins can help investors navigate the challenges of the next economic crash.
Solidarity
For those who are struggling in these difficult times, who have been knocked down a rung or two on the economic ladder, and who don't have the extra cash to invest in bargain stocks, I want to offer some words of encouragement. You may not have the resources to profit from the coming chaos, but can build your resilience, your solidarity, and your ability to adapt and overcome.More important than wealth is Freedom. Freedom is only protected by our democracy. Individual action and agency will be necessary for fighting against threats to democracy, such as oligarchy.
Oligarchy, or rule by a small group of powerful individuals or organizations, can be a threat to democracy because it can lead to a concentration of wealth and power in the hands of a few, who may then use their influence to shape policies and decisions in their own favor. This can undermine the principles of democracy, such as political equality and the idea that decisions should be made through a fair and representative process. Oligarchy can also lead to corruption and abuse of power, as those in positions of power may use their influence to gain personal advantages or to further entrench their own position. This can erode public trust in institutions and undermine the legitimacy of the democratic process. Additionally, oligarchy will stifle political and social innovation, as the interests of the ruling elite take precedence over the needs and concerns of the broader population.
Opposing oligarchy should not be confused with destroying the constitution or overthrowing free markets. One way to oppose oligarchs is to support policies that promote competition and prevent large companies from gaining too much market power. This can include things like stricter antitrust laws, policies that support small and medium-sized businesses, and incentives for companies to share their technology and knowledge with others. At the same time, it's important to recognize the role that capitalism has played in driving innovation and economic growth, and to find ways to maintain and support that innovation while addressing the drawbacks of capitalism, such as income inequality and the concentration of wealth and power. Declining productivity has been masked by conspicuous consumption and deceptive media which magnifies the appearance of wealth regardless of the true state of the economy or the real life experience of individuals. Our highest expression of solidarity is to encourage discernment. Individuals, like you, can lead by example, engage in respectful dialogue, and promote access to accurate and reliable information. The public will need to be discerning in the coming economic chaos. They will be ripe for charlatans. Especially if reasonable people do not make the effort to uphold reasonable discourse.
Ultimately, a discerning public will preserve the republic.
Consider the alternative.
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