Forty-nine years ago, in January 1961, the two-term U.S. President Dwight D. Eisenhower gave his farewell address to the nation. His remarks are most remembered for his warning against the emergence and increasing reliance upon what he called the “military-industrial complex.” Yet there are other comments in the brief address also worthy of note, comments that seem to speak to us at this point in history with the generation that was born during the Eisenhower presidency (and later) setting policy in Washington DC. President Barack Obama and Treasury Secretary Timothy Geithner were born seven months after Eisenhower’s address (both in August), while Ben Bernanke was seven years old at the time (and surely watched it on CSPAN).
Presciently, Eisenhower intoned:
“As we peer into society’s future, we—you and I, and our government—must avoid the impulse to live only for today, plundering, for our own ease and convenience, the precious resources of tomorrow. We cannot mortgage the material assets of our grandchildren without risking the loss also of their political and spiritual heritage. We want democracy to survive for all generations to come, not to become the insolvent phantom of tomorrow.”
One could argue that Eisenhower was simply a product of his generation. He was the last WWI veteran to serve in the White House and had turned 39 in October 1929, at the beginning of what became the Great Depression. Thus, he spent much of his adult life in times of turmoil, sacrifice, and scarcity unfamiliar to most Americans today. So what did he see that caused such concern? The country was in its prime as economic growth, equity markets, and geopolitical influence were expanding dramatically, and even civil rights were progressing, albeit more slowly. In hindsight, consumer and Government debt were nowhere near 2010 levels in 1961; indeed, 1961 America was frugal relative to today.
However, it appears that in Eisenhower’s mind, the behavioral tendency toward leveraging off a grandchild’s inheritance was firmly established in the American psyche. Three points of reference from the speech stand out as we enter 2010.
1. America is addicted to debt
In his December 16, 2009 commentary, GluskinSheff Chief Economist David Rosenberg noted that, “The ratio of household debt to disposable income is up from a 30% ratio back in the 1950s to 125% today (though down from 139% at the peak in 2007). Mean reverting to a ratio closer to 60% means that the deleveraging process will be a multi-year event and by the time it is over, more than $7 trillion in additional household credit will have to be extinguished.”
It’s pretty astonishing to consider another $7 trillion in liabilities being extinguished, for that would mean that the laws of accounting require another $7 trillion in assets to be erased concurrently. Since the Fall of 2008, Syntrinsic has been calling this economic crisis “The Great Unwinding,” precisely because we see the primary economic catalyst being the deleveraging of consumer, corporate, financial institution, and government balance sheets, not just in the US, but throughout the developed and much of the developing world. Of course, the big question is the nature of the long-term impact of the U.S. Federal Government increasing rather than decreasing leverage. Will that ultimately smooth the unwinding (making it less painful) or might it just prolong the economic pain and suffering?
2. Mortgaging as a core personal and social risk
In the second line of the Eisenhower excerpt, he frames debt as a risk to our “political and spiritual heritage.” That’s a profound statement to make and may account for the emotional intensity so many people are feeling in this economic crisis. For if indeed we are placing the American experiment itself at risk, then of course one could expect passionate emotions to arise and not just because polemic ideologues fill the airwaves, but because something intuitively concerning is at play.
Curiously, Eisenhower—the allegedly staid, boring Republican—emphasized the risk to our “spiritual heritage” associated with trading our grandchildren’s security “for our own ease and convenience.” It is not common to hear talk in Washington about spiritual matters; perhaps there is another dialogue that needs to be occurring where we more directly confront the spiritual cost of our policy decisions. Spiritual matters are often more instinctive, more private; yet, they may be influencing an undercurrent of dissatisfaction that is otherwise hard to put into words and one that transcends traditional party and socio-economic boundaries.
3. Equating democracy and solvency
If democracy is the political expression of society and yet society is insolvent, then there is great risk that society can no longer protect its democratic institutions and ideals. Insolvency has done in many a compelling socio-political experiment; consider the republics of Ancient Greece, Ancient Rome, Cromwell’s England, the Weimar Republic, Post-Revolution France, many efforts throughout Latin America, and even Yeltsin’s Russia. Of course such failures are not just about excess debt and insufficient revenues, but if you cannot pay the bills and people don’t have economic sustenance or confidence, you are done. And if those who control your purse strings are antithetical to democracy (e.g. China, Russia), then the possibility of democracy becoming a “phantom of tomorrow” is real.
While we were pleased with the growth of equity markets, stabilization of the corporate credit market, and healthier behavior of the commodity and public real estate markets in the last 10 months of 2009, we remain quite concerned about what Eisenhower warned against 49 years ago. These issues may or may not drive the performance of public investment markets this quarter or next, but long-term, there is no way to put these issues off indefinitely. Perhaps 2010 can be a year of serious reflection as a country about who we are, a chance to once again “peer into society’s future.”