The Crossroads

“We have arrived at that point in time in which we are forced to see our own humiliation, as a nation, and that a progression in this line cannot be productive of happiness, private or public.”

-Henry Knox


I just finished reading 1776, by David McCullough.  He’s of no relation to Keith, but he, too, is a fine Yale man; even if not a hockey player. 


So why am I wasting my time reading early American history? Well, very simply, because the United States is at the crossroad of political and economic policy leadership.  The future will look remarkably different than the most recent past, and that future will be shaped by the decisions made by those who take leadership roles in the years ahead.


This is a year that is not unlike the year of 1776.  While the battle for independence was fought for many long years, the Founding Fathers changed the trajectory and future of America by declaring independence in 1776.  Many well known names played critical roles that year and in the continued battle for independence, but the name Henry Knox was one that jumped out at me from my readings.


Knox was a book seller from Boston, who quickly earned the trust and confidence of General George Washington.  Like much of the American Army in those days, he had very little real military experience.  But what he liked in experience, he made up for in courage and leadership.


The crucial recommendation that Knox made to General Washington, as a 26-year old, was that the Guns of Ticonderoga should be retrieved as they could have a crucial impact on ending the Siege of Boston. Washington appreciated the importance of increasing his artillery surrounding Boston, so he sent the young colonel on the mission to retrieve the Guns of Ticonderoga.


From early December of 1775 to late January of 1776, Colonel Knox and his men transported 59 cannons and mortars weighing more than 60 tons over 300-miles through the dead of winter.  Knox and his team averaged over five miles a day, and despite death and hardship, eventually arrived in Boston.  The British quickly realized they were outgunned, and shortly thereafter withdrew from Boston, which ended the Siege of Boston.


The key current strategic question facing the nation also relates to resolving a siege, the Siege of Deficit and Debt.  The United States currently has more debt on its balance sheet than any year since World War II.  You don’t have to be a student of history like David McCullough to realize that is not ok.


The Keynesians will have you believe that the way to reignite the American economy, and ultimately narrow deficits, is to Pile Debt Upon Debt. The flag bearer for this school of thought is none other than Nobel Laureate Paul Krugman. In a New York Time column on July 1st Krugman wrote:


“What’s the evidence for the belief that fiscal contraction is actually expansionary, because it improves confidence? ( By the way, this is precisely the doctrine expounded by Herbert Hoover in 1932.)”


While this is a synopsis, Krugman has consistently argued that the recent stimulus was not substantial enough and that austerity will lead to slow growth and, by the aforementioned association to Herbert Hoover, a Depression.


While using history as a guide is important, fear mongering as a way of substantiating economic policy, like using erroneous comparisons to Herbert Hoover, is not.  The stimulus undertaken globally over the past couple of years is about as good of a Keynesian experiment as we can analyze.  While the massive stimulus may have served to halt the economic slowdown in the short term, the massive amount of debt that was used has leveraged the economic future of the free world.


So, what’s the solution? Well, for starters, it begins with admitting what doesn’t work.  Massive government borrowing and associated debt that doesn’t create long run economic activity or build new industries, such as after World War II, doesn’t work.  Increasingly, it is also becoming clear that expanding the government doesn’t work either.


To this point, Krugman’s counterpart at the New York Times, David Brooks, offered some quantified support against increasing government spending.  As Brooks recently wrote:


“Moreover, public spending seems to have odd knock-off effects. Professors Lauren Cohen, Joshua Coval and Christopher Malloy of Harvard surveyed 42 years of government spending increases in certain Congressional districts. They found that federal spending increases dampened corporate hiring and investment in those districts.”


Brooks went on to highlight the need for confidence in our economy above all else.  The type of confidence that does not come with burgeoning deficits and fiat currencies.  According to Brooks, Lord Keynes wrote that the state of confidence is “a matter to which practical men pay the closest and most anxious attention.”


One thing I don’t currently have is confidence in the economic leadership of America.  I do have confidence that new leadership will emerge, just as it did with the 26-year old Henry Knox in 1776.


The real work at our firm gets done by the Young Hedgeye Knights who sit on our trading floor every day.  They open the office up at 430 a.m., and they are the guys and gals that shut the office down at night when most of us are already in bed.


Yes, indeed. The future economic leadership of this fine nation is not going to come from the Hallowed Halls of the Fiat Fools in Washington, but will come from the youthful entrepreneurs of our economic future. 


We are lucky to count many on our staff: Darius Dale, Matt Hedrick, Zach Brown, Allison Kaptur, Rory Green, Felix Wang, and Christian Drake.  All of these folks are in their mid to early 20s and collectively show more economic leadership daily than most of the Fiat Fools in Washington have shown in their careers.


The history of this nation has simply taught us this:  when this fine republic is at a crossroads, new leadership will emerge. 


I’m lucky enough to see this every morning.


Keep your head up and stick on the ice,


Daryl G. Jones

Managing Director


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