Greetings fellow travelers!
To begin, I want to quote something Warren Buffet wrote in the Berkshire Hathaway letter to shareholders in February 2021:
In its brief 232 years of existence, however, there has been no incubator for unleashing human potential like America. Despite some severe interruptions, our country's economic progress has been breathtaking. ...
Our unwavering conclusion: Never bet against America.
What Your Track Record Says About You
You can make the case that Mr. Buffet and his partner Charlie Munger are among the most intelligent businesspeople in existence. Certainly, their own track record of performance is breathtaking.
Nonetheless, I suggest today there is a special case when it is appropriate to bet against America, and that is when America is betting against itself.
First, let's address how much weight to put on a successful track record. Mr. Buffet would be the first one to say that simply observing a track record of success, even a long one, tells you nothing about the likelihood that it will continue. How large was the starting sample? If you start with a million people randomly guessing the outcome of a roulette wheel (red or black), and advance only the lucky winners each spin, you will have people who pick the right colors 20 times in a row, purely by chance.
If you then give the participants a slight edge over pure guesswork, you greatly increase the pool of people who survive for decades, seeming geniuses, but really nothing more than the lucky survivors. This is why all securities prospectuses contain a disclaimer that reads "Past performance is no guarantee of future results."
Then you have people who appear to perform stunningly well, until they suddenly implode. This can result from fundamentally misunderstanding the risks, such that you regularly achieve gains while remaining exposed to an unlimited downside. Think of the turkey who is well-treated and fed by the farmer every day without fail. Until Thanksgiving.
But there's a simpler reason to be wary of a successful track record, and that is circumstances change. Success (and failure) are relative, and we operate in complex environments. Some things are within our control, but many are not. We may do everything perfectly and still be outperformed by a new competitor.
Every athlete who reaches the pinnacle of his or her profession stands undefeated, until they are defeated, if merely by the passage of time. Some athletes hold on longer, while some fade quickly. This is not to diminish their accomplishments, or to deny that some are greater than others. No, it is simply to point out that a history of success in almost any endeavor does not guarantee success forever. In fact, it would be foolish to assume so.
What A Child Wonders About
That's as close as I'm going to come to calling Warren Buffet foolish. This post is not about him, but about America. The U.S. has been the dominant world superpower since at least World War II. I was a young kid when America celebrated its bicentennial in 1976, and that was also the year that I moved abroad for the first time.
Moving outside the U.S. and being immersed in other cultures opened me to the idea that there's more than one way to see the world. I thought ahead to the unimaginably distant future, the year 2000, when I would be a practically decrepit 32 years old and wondered what the U.S. would be like.
Would we still be a superpower? Would we suffer the same fate as ever other global superpower, from China, to France, the Netherlands, and the United Kingdom? If so, when? If not, why not? It seemed likely that our predecessors all thought their reign of power would continue, and yet they each lost the mantle. For me, the UK seemed a good object lesson. Truly powerful with a world-spanning empire, yet they suffered a precipitous decline in a matter of decades.
It seemed probable to me that the U.S. would inevitably follow the same path. I used to ask myself whether we would see the signs coming? What would clue us in that the U.S. was declining? And would we have a graceful fall like the UK, in which citizens still enjoyed the fruits of their empire even as it slowly decayed around them?
The year 2000 came and went, as did my 30s (and 40s come to think of it) and I can scarcely believe we're coming up on the 250th anniversary of America's founding, the awkwardly named semi-quincentennial. I'm glad we're still here. But I see that my childhood musings were off the mark, in at least one respect.
It's becoming apparent to me that the U.S. was already at its peak fifty years ago, at least relatively speaking. We've been on a mostly gradual decline ever since and the signs are all around us.
What About America's Track Record?
The flashing yellow signs have been masked by many advances. Growth in GDP and personal incomes, military dominance, global reserve currency status, amazing technological innovation, curing diseases and expanding life expectancy. But the signs of decay are getting harder to ignore.
- Staggering growth in the cost of college by more than twice the rate of inflation
- Steady decline in the last 25 years in the percentage of adults working, that is the labor force participation rate
- Federal spending greater than receipts (deficit spending) in every year since 2001
- Explosion in public debt to over $31 trillion, or from 30% of GDP 40 years ago to almost 130% of GDP today
- Underinvestment by an estimated $2.6 trillion in maintaining critical infrastructure
- Declines in student reading math scores, putting us back 25 years in relative performance
- Successive annual declines in life expectancy, making the U.S. an extreme outlier among wealthy nations for life expectancy as a function of healthcare expenditures
This is to say nothing of the social discontent that seems to be fomenting everywhere. Bitter partisanship among elected leaders, reflecting bitter partisanship among citizens.
Surveying the landscape, I see that we've been enjoying our graceful decline, with institutions and infrastructure slowly crumbling around us. Truly, we should be happy for having enjoyed the last 50 years of peace and relative prosperity.
What Might the Future Hold?
I am less sanguine about prospects for the coming decades. Does it seem to you like the rate of America's decline is increasing? It does to me, although I suppose that could be due to our moving to the U.S. this past year and being exposed to many more signals than before. This question is important, and not just to Americans but for the whole world.
Because as noted above, the question of superpower status is a relative one. As one fades, another rises. No superpower can be free of criticism, for the nature of power is to create winners and losers. But the world was extremely fortunate in its last two superpowers, with the United Kingdom overseeing the Industrial Revolution and the global prosperity that unleashed, and the United States maintaining stability while eschewing colonialism in its democracy-driven approach to world hegemony these last 80 years.
When servicing the interest on our national debt becomes the largest single item in the U.S. budget, which may happen as soon as next year, our focus will turn even more inward. As the decline of the U.S. becomes more rapid, we'll be less in a position to provide stability to other countries and maintain the global trade that drives modern prosperity.
I truly hope Warren Buffet is right, and that it's still not a good idea to bet against America. But with so much of America seemingly betting against itself, I wonder how much longer we can count on our historical strengths to pull us through.
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