Sent July 2022
I first want to wish you a Happy Fourth of July, the upcoming anniversary date of this country. However, let’s also use this occasion to address an important economic concept that saw its manifestation on this date: the importance of balance in economics.
A Brief Recap Of US History
In the years leading up to July 4th, we all know that the “United States” did not exist. This large slab of land had numerous communities made up of Dutch, French, Italian, Irish, Ottoman / Hungarian (Germanic), Scottish, Swedish, and African nationalities, but it was the 60% of British heritage people that dominated. Thus, the territory legally existed as a holding of the King of England. Less well known is that these 13 colonies had existed for a mere 150 years at that time, and though not a nation, per capita income was the highest in all the developed world[i].
Without reciting historical details, we know that the driving and increasingly polarizing issues of “taxation without representation” and generally poor governance of British-appointed Governors caused the revolution that led these upstarts to declare independence from the world’s most powerful nation. Many Americans (British Americans) felt loyalty to England and knew the substantial odds of failure any attempt to break away would cause, which was one reason why the First Continental Congress was so contentious. Therefore, make no mistake about it that this Declaration of Independence would NOT have occurred if King George III had exhibited a little “balance” toward these colonies – and that sought balance was both economic and political in nature.
But…that desired balance didn’t happen, and the rest, as they say, is history.
The Importance Of Balance
Which leads to this month’s topic: “Balance.”
Wellspring as a firm is absolutely blessed to have many great clients. They range in political leaning from fairly progressive to fairly conservative. Perhaps because of those oft opposing proclivities, I am hearing for the first time ever – from both sides I point out – that we might have a “civil war” pending. If I were to harken back to Thomas Paine, one of the original 1776 revolutionaries, I would quote: “These are the times that try men’s souls.” Yet in contrast to that dire warning, I find that most of my clients want balance.
And in economics, I need to stress that a good economic foundation as a country is also achieved by balance. If we drift too far one way or the other, we will find ourselves in unsustainable territory. The choices at that point become truly unpleasant or, worse yet, they present no choice because the good outcomes become unachievable.
The Elements Of Political And Economic Balance
The below ten items are major economic points on a decision spectrum that MUST be made in any country:
- Competition / Monopoly
- High employment rates / High unemployment rates
- High taxation / Low taxation
- Free Trade / Protectionism (in the times of the colonies, called “mercantilism”)
- Inflation / Deflation
- Central Control / Federalism
- Monetary policy / Fiscal policy
- Low interest rates / High interest rates (in the 18th century, called “cheap credit” and “dear credit”)
- Targeted social programs / Society-based socialism
- Rule of law / Laissez-faire
Now that you have read these key economic constructs, please note with great appreciation that only the first two elements are determined in the free market. The other 8 out of 10 are economic policy decisions that are heavily, or solely, determined within the sphere of “the state.” The United States is the most powerful economic engine in the world. We are a “vibrant consumer driven economy” – which is entirely private sector activity. Nonetheless, now you know that 80% of key aspects to economic vibrancy are influenced by, if not controlled by, the state.
That tension is what is trying men’s souls…the most recent of which is the ugly trade-off between inflation and interest rates. Over the past year we have put the petal to the metal on fiscal policy (spending) while at the same time are slamming on the monetary policy brakes (rising interest rates). No matter what you know about economic policy, you intuitively sense that combination is very tough on engines. Thus, we recently lost our balance on inflation and if we don’t get that balance right, we will tip into recession.
Finding Balance
Balance is not an abstract concept, but one that is real. As you get ready to enjoy this Nation’s birthday, try to bring balance to any dialogue you might engage. We have endured 246 years of economic evolution to become the world’s undisputed economic superpower, but never forget that ever since the beginning balance is the key.
It remains my deep and distinct honor to serve you.
Patrick Zumbusch
Founder and CEO
Wellspring Financial Partners
[i] “Fleming; What Life Was Like In 1776” (Thomas Fleming, Wall Street Journal, July 2, 2012)
