On June 27, 1930 a baby boy was born in Texarkana, a town that straddles the line between east Texas and Arkansas. His parents, Gabriel and Lula May, were delighted with the lively little bundle. He seemed more ears and nose than anything else, but they loved him just the same. His given name was Henry, but he would become famous using his middle name. He was Henry Ross Perot.
Perot was born in the teeth of the Great Depression. While his family was never destitute, the massive economic fallout from that era affected them just like everyone else. This reference point, along with the southern, small-town sensibilities of his father, who bought and sold cotton for a living, was the early formation of a mind that would become one of the economic and political powerhouses of his day. Perot would later recount a good childhood. He got his first job at eight years old selling newspapers in an abandoned route. He remembered his father teaching him the soft skills of negotiation as they bought and sold small items at local auction houses. As a young man he joined the Navy, and after a tour there, settled down with his new bride in Dallas. He joined IBM as a salesman and eventually built an empire of his own from scratch. He became a multi-billionaire in an era when the term still meant something.
As a businessman owning a global company, Perot became passionately involved in national policy. He was an outspoken advocate for POW’s left behind in Vietnam. He risked his own money and reputation on a rescue operation for his employees stranded in Iran during the revolution. He became very concerned over US fiscal policy and national debt. Eventually, the latter concerns were the motivation and platform on which he based two separate presidential bids.
Running on fiscal policy
As a young person in the early 90’s I well remember Perot’s nasal voice and folksy charm as he tried to convince the American public that our current fiscal path was unsustainable. The issue had merit, and although the presidency was handed to another folksy and charming southerner, Bill Clinton, Ross Perot received 18.9% of the popular vote from across the political spectrum. This percentage for an independent candidate has never been matched before or since and was significant enough to make Perot’s concerns part of the national debate. This was likely influential in Clinton’s policy decisions. Perot had successfully created a real concern in the people of that era for the national debt and fiscal policy. This represented a historic first since World War II.
Four years later, Ross ran against incumbent Bill Clinton and his Republican challenger Bob Dole. In spite of unprecedented scandals plaguing him, Clinton won again. This time, Ross’s views on fiscal and trade policy were less important to the electorate, partly because of Clinton’s austere fiscal approach during an economic boom. He was on track to be the first President in modern history to sign an actual budget surplus into law. Indeed, Clinton is the only president since 1970 to have signed any such budget. He did it four times in his second term. It might be fair to say Ross Perot had lost the battle on being president, but won the war on national policy. If it can be won.
Fast forward a few years and we find Perot again championing a return to sanity with the congressional purse. This time by endorsing Mitt Romney in his two white house bids. Romney was the candidate who again brought the nation’s attention to the ever-mounting national debt. He famously displayed the national debt clock at all his rallies, showing in real time the blinding speed at which the US was going behind on its principal obligations. At the time of his nomination in 2011, it was gaining an astounding $36 million in the time it takes to drink a cup of coffee, or just under $2.5 million every minute. What was even more concerning than the dollar amount itself, was its relationship to GDP, or gross domestic product, which is a measure of the national economic output. When Ross Perot was born during the dust bowl days, the national debt stood at only 16 billion, but more importantly, that amount represented only 17% of GDP. That simply means that only 17% of the total output of the US economy for one year would have wiped out the debt. If you had a mortgage that represented only 17% of your annual household budget, your banker would say you are doing just fine.
By the time Romney ran the second time, national debt stood at 95% due in part to the bailouts from the Great Financial Crisis of 2008. Romney argued this was not sustainable. He lost to a man who birthed universal health care. Think about that for a second. Debt to GDP rose to 107% by the time Ross Perot passed away in 2019. As of the most recent numbers available the national debt stands at 120%. Total debt has grown by 55% since 2013, due largely to stimulus measures since Covid. We could visualize football fields of $100 bills stacked higher than sky scrapers to picture the trillions in debt, but we will scrap that amusement in favor of the sober observation that however unsustainable Ross Perot thought it was in the early 90’s, it is far less so now.
In addition to the above observations, it is worth noting a few related metrics.
Debt in America
Both corporate and household debt are also at all-time highs. Credit card debt, credit card defaults, car, house, and student loan defaults are all on the rise. Unemployment is low, meaning there are still jobs available, but employment participation is lower than it has ever been since World War ll. Interest rates are high relative to the last dozen years, but inflation remains stubbornly above the 2% target set by the Federal Reserve. Add in the “free money” experiments by both political parties that are having material downstream effects on policy maker’s taxation and spending decisions. Americans, especially young people without the benefits of a longer frame of reference, have been conditioned to believe they are exempt from the negative effects of an economic downturn. Checks in the mail, student loan forgiveness, payroll loan forgiveness, not to mention bank bailouts, have all conspired to lull us into the wrong-headed conclusion that we can borrow our way out of debt. It is a patently false idea, but one that will persist until we collectively return our anchor to the bedrock of sound thinking from which we have been adrift for some time.
In other words, America is more indebted than it has ever been at government, business, and individual levels. At the same time, the average American is less interested in being productive while both inflation and interest are uncomfortably high. To top it off, Congress has manacled itself, at least for now, to an entitled electorate. No painful solutions allowed.
As they say sometimes, “What could possibly go wrong?” In a word, quite a bit. Conservative economists have been loudly sounding the alarm since 2019 when liquidity in financial markets was being strained to the breaking point. Having avoided the cliff since then via massive infusions of new money by the Federal Reserve does not make them wrong. It only shifts and elongates the consequences. Some would argue it also made them bigger and more inevitable.
Are there any positives in the outlook going forward? And how does all this affect me and my own small business?
Take wise hearted posture
Today’s decision makers in business stand in a place of real complexity. No one can forecast the future, but it goes without saying that that future must be navigated by the wise hearted. I believe both high interest and high inflation are here to stay for a while. Why? Because political constraints will likely encourage congress to continue to make intemperate fiscal decisions. Congress, not the White House, is responsible for deciding where the nation’s tax revenues are spent and how much to increase debt. However, national attention on the debt issue tends to come during presidential election cycles. Only the presidency has the power to single handedly define and focus the public attention on important issues. Therefore, a return to fiscal reason will likely coincide with a president who successfully convinces the country that we are acting insane. My guess is that will not happen until there are seismic economic events already underway. Will history repeat itself in 2024? It will be interesting to see if the current election cycle continues the rhyme.
One really big positive - offsetting some of the negatives - is the re-shoring of manufacturing to the United States and adjacent countries. The current administration is busy taking all the credit for this, but the truth is that corporate leadership were so spooked by the global supply chain disruptions they would have made the same decisions to bring manufacturing home if Ross Perot’s mummified remains were the acting president. Regardless of who is taking the credit, this movement to secure a manufacturing future on our own soil is having a double impact in bringing jobs back to the rust belt of middle America, as well as a construction boom. If we can convince the “Hillbillies*” to get off a subsidized existence and once again experience the fulfillment of being productively employed, the entire nation will benefit.
Although it is impossible to predict the future, we believe more strongly than ever that now is the time for principled business men to fill the enormous void of reason. The economic environment over the coming months will present an asymmetric risk reward profile. That simply means the temptation will be stronger than ever to make unwise reactionary decisions. We may be tempted to take out-sized risks in order to seize the “opportunity of a lifetime”. Tread carefully. On the other hand, we may be paralyzed by fear and unable to step forward into the next stage of our business. Take courage! Business owners and executive teams need to be grounded on solid, Proverbs principles and faith, rather than fear or greed.
Practical recommendations
Here are some specific recommendations. Hire carefully for known capacity needs rather than projected growth. Use operating lines and leverage in general very conservatively. Internal organization is the key to creating spare capacity. Spare capacity is key to growth. Don’t get them out of order! (A little mirror talk for ourselves right there!) As long as inflation persists, staying on top of your pricing will continue to be critical. Beware the “maturity wall”**. Don’t be greedy. Don’t believe everything you see in the news. Be useful! I’m more convinced than ever that being useful is more important than being informed in an age when informed and deluded are hard to distinguish.
Can we, with God’s help, navigate the complexity of today’s world while still living principled lives? Can we provide for our own through turbulence? To quote Mr. Perot – “You bet your hat we can.” Ex. 31:6 “In the hearts of all the wise hearted I have put wisdom…”
*For a fascinating and empathetic read on the crisis facing rustbelt America, read Hillbilly Elegy by J.D. Vance.
The Arrow Team
Commenti