Dear Fellow Shareholders,

As recent countries and companies have demonstrated, great management and leadership are critical to any large organization’s long-term success. While providing strong management is a disciplined and rigorous process — facts, analysis, detail, rinse and repeat — creating an exceptional management team is an art, not a science.

In the rest of this section, I talk about some management lessons — I always enjoy sharing what I have learned over time by watching others and through my own successes and failures.

BUILDING TRUE FRANCHISE VALUE

I have spoken in the past about good and bad revenue and good and bad expenses. Certain expenses, such as opening well-designed and well-located branches, actually are long-term investments of great value. Conversely, poorly underwritten credit creates revenue that you are bound to regret. Further, there are accounting practices that may distort the true value of actions you take. For example, when we create a new credit card account, we recognize origination costs over 12 months, but an average account exists for over eight years. And with the new accounting rules for loan loss reserves — called the current expected credit losses standard — you book the expected life of loan losses on the day you make the loan, while the revenue comes in over multiple years.

Increasingly in the modern world, many valuable things are not reflected on our balance sheet in generally accepted accounting principles — for example, previously expensed intellectual property or extraordinary human capital. At the end of the day, human capital is the most valuable asset. Think of a great athlete, a great lawyer or a great artist. It’s not simply the equipment — it’s the extraordinary training and talent of those involved, as we’ve also seen with the U.S. military. And sometimes it’s not the individual but the highly coordinated activities of the team that deliver the championship.

Finally, if any value is based upon models, one must really test the sensitivity of the outcome against changes in assumptions. Understanding the range of potential outcomes may be far more important than the point estimate created by a model. In some cases, you can have an excellent average outcome, with a chance of death.

The point is: Accounting can distort economic reality and can lead one to make the wrong decisions.

In banking, specific examples illustrate how merely following accounting and capital rules — without thinking through the outcomes— can lead one astray. I’m going to describe just two examples, but there are hundreds more.

If you buy or create a loan at par and put it on your balance sheet at par (think of a mortgage) and internally finance it, even match-funded with 10% capital, you might believe you have a 12% return. Many companies subscribe to this interpretation and simply continue to borrow money to invest in such a thing. But I would tell you this product has no franchise value because it is only worth par, and, in fact, a small change in that value (because of interest rates and credit spread) could mean that you have made a huge mistake. If, on the other hand, you create a loan and sell it at more than par at a profit, you have created value — whether or not you keep it on your balance sheet. And far more important, if you create a loan and at the same time forge a client relationship – and you add additional capital light revenue, such as asset management and cash management — you have created something of long-term value that you can nurture and grow. This is franchise value.

Simply taking interest rate risk (which contributed to the downfall of SVB) is not a business. Nor is simply taking credit risk. One person and a computer will suffice — you do not need 290,000 people circling the globe to do that.

Another example relates to any branch-based business. Let’s say I build a system with well-designed and well-located branches, staffed by well-trained personnel who can offer customers great products and services and who strive to do every task a little bit better. Then you build a branch system with outdated sites in poor locations (often to save money) that have undertrained and underpaid staff and lower-quality products and services. Between the two, my branch system will win every time. One system will have high franchise value and be self-perpetuating with high returns. The other enterprise is probably on the road to eventual failure. If you study the history of business, you can see this phenomenon play out in grocery stores, car companies, restaurants, retailers and various other enterprises.

LEARNING FROM INVESTOR DAY

In February 2021, we did not hold our annual Investor Day for the obvious reason — COVID-19. When February 2022 came around, we were somewhat happy to be relieved of that responsibility again. Investor Day is a tremendous amount of work. But from 2020 to 2022, we did a lot of investment spending and made several acquisitions. Some of our analysts questioned whether we were being transparent enough in terms of what we were doing and why we were doing it. While sometimes we get frustrated with investor demands — and not all investors are created equally — all investors should be treated fairly and with respect. So, in 2022, we gave it more thought and reversed course with an extensive Investor Day. Our senior management team explained in detail our acquisitions and our investments, answering every question to the best of their ability. Having to explain your business to investors, comparing yourself with competitors and looking at the business as a whole — across sales, marketing, returns, growth, risks and strategic opportunities — was a terrific exercise for us. We learned our lesson!

This also raises another issue. Of course, it is critically important to analyze your business at the right disaggregated level — right down to the branch — inside the company. But it is also important to have the proper segments reported externally to the company, properly accounted for and generally aligned to their relevant competitors. This actually helps hold managers accountable by forcing them to accurately assess performance — the good, the bad and the ugly — without any attempts to avoid reality through an external obfuscation of results.

BALANCING A CUSTOMER-CENTRIC APPROACH WITH (EXCESSIVE) RISK

Most businesses, including banks like us, say they put their customers first. We often go further than that statement to say that we need to be there for them, in good times and in bad. However, banking is a complex industry, and this customer-centric approach requires a little more explanation.

In our business, we are essentially a financial partner to a client. While we strive to build great client relationships based on trust over the long run, our role has intricacies. For example, we do not need every transaction to make economic sense — just the overall client relationship, year after year. Whatever the transaction, we need to be properly compensated for the risks we bear, which can be extraordinary. Very often, a client will merely look for the lowest price, which we completely understand; we recognize that sometimes banks are perfectly willing to make a certain transaction for a client at a loss. There are also occasions when we need to tell a client that a specific financial transaction would be imprudent — maybe for us and the client.

Say, for example, that a very strong client of ours is simply trying to get the best price for a leveraged loan. If we believe the desired price is unwise and another institution is willing to offer it, we will advise the client to take that option. For us, this is pure counterparty risk and not really part of our core relationship. Conversely, should the same client come to us and request something that extends beyond what we consider reasonable for that transaction, we may nonetheless do it. Perhaps the client is in the middle of an M&A transaction in difficult markets and simply cannot get the financing they need — other than from us. In recent crises, we have often gone the extra mile for a client at great risks to ourselves, not to make a profit but to rescue the client from financial calamity.

Fundamentally, putting the client first means always providing them with the products and services they need (although they may go somewhere else because of price) and having our whole team work hard for them — either in the United States or around the world, reliably and with constancy. One of the most important things we do for a client, above all else, is to be a steady hand, providing financial safety and security at every turn.

We usually don’t worry about typical economic fluctuations and often compare economic forecasting with weather forecasting: It is extremely complicated, easy to do in the short term and far more difficult to do in the long run. It is particularly hard to forecast true longer-term inflection points in the economy. Although we don’t want to waste time on “normal” fluctuations, we do want to be prepared for economic extremes — we look at multiple possibilities and probabilities and manage our company so that we can handle all of them, whether or not we think they actually will happen. After we spoke last year about storm clouds, some of those storms did, indeed, hit, and, unfortunately, some of those threatening clouds are still here.

2022 was not normal, economically speaking, and, in fact, 2022 witnessed several dramatic events — the Ukraine war began; inflation hit a 40-year high of 9%; the federal funds rate experienced one of its most rapid increases, up 425 basis points, albeit from a low level; stock markets were down 20%; unemployment fell to a 50-year low at 3.5%; and the U.S. economy was bolstered by frequent fiscal stimulus and by high and rising government debt while supply chain issues eased. In addition, work from home began to raise commercial real estate challenges and, finally, long- and short-term interest rates presented a sharply inverted yield curve, which is “eight for eight” in terms of predicting a recession (more on this later). But, surprisingly, the global economy marched ahead.

THE CURRENT ECONOMY: PRETTY GOOD BUT STORM CLOUDS AHEAD

Until the collapse of Silicon Valley Bank, the current economy was performing adequately, both here in the United States and remarkably better than anyone expected in Europe. The “market” was generally forecasting either a soft landing or a mild recession, with interest rates peaking at 5% and then slowly coming down.

There has been a lot of market volatility over the past year, partially, in my opinion, as people over-extrapolate monthly data, which is highly distorted by inflation, supply chain adjustments, consumer substitution, basically poor assumptions about housing costs and other factors. But underlying all this, consumers have been spending 7% to 9% more than in the prior year and 23% more than pre-COVID-19. Similarly, their balance sheets are in great shape as they still have, according to our own analysis, $1.2 trillion more “excess cash” in their checking accounts than before the pandemic (credit card debt is simply normalizing). In addition, unemployment is extremely low, and wages are going up, particularly at the low end. We’ve had 10 years of home and stock price appreciation, and even if we go into a recession, consumers would enter it in far better shape than during the great financial crisis. Finally, supply chains are recovering, businesses are pretty healthy and credit losses are extremely low.

The failures of SVB and Credit Suisse have significantly changed the market’s expectations, bond prices have recovered dramatically, the stock market is down and the market’s odds of a recession have increased. And while this is nothing like 2008, it is not clear when this current crisis will end. It has provoked lots of jitters in the market and will clearly cause some tightening of financial conditions as banks and other lenders become more conservative. However, it is unclear whether this disruption is likely to slow consumer spending (as of April 1, 2023, spending has been consistently running higher versus the prior year). Although higher rates, particularly in mortgages, have reduced both home sales and prices, do remember that consumer spending drives more than 65% of the U.S. economy.

While the current crisis has exposed some weaknesses in the system, it should not be considered, as I pointed out, anything like what we experienced in 2008. Nonetheless, we do have other unique and complicated issues in front of us, which are outlined in the chart below.

POTENTIAL TROUBLE BREWING FROM UNPRECEDENTED FISCAL SPENDING, QUANTITATIVE TIGHTENING AND GEOPOLITICAL TENSIONS

Having already confessed to how difficult it is to predict the future, for planning purposes it still makes sense to try to assess the environment ahead by laying out those factors that may be significantly different from the past.

In the last three years, partially but not entirely due to the pandemic, the federal government had a deficit of $3.1 trillion (2020), $2.8 trillion (2021) and $1.4 trillion (2022). These are extraordinary numbers, which ended up in consumers’ pockets, in states and local municipalities, and even in companies. We pointed out last year that you simply cannot have this level of spending and say that it’s not inflationary. It’s also important to point out that there is a multiplier effect of this stimulus; that is, one person’s spending is another person’s income and so on. The deficit for the next three years is now estimated to be $1.4 trillion to $1.8 trillion per year, which is also an extraordinary number, with no end in sight. In Europe, fiscal deficits are high — even before the enormous subsidies given to consumers to counterbalance higher energy prices. It’s also important to note that borrowing to invest is fundamentally different from borrowing to consume — borrowing to consume can only be inflationary.

This is before any additional costs related to future recessions, the war or any other unforeseeable events. Offsetting this, by sometime late this year or early next year, we expect consumers will have spent the bulk of their remaining excess savings. It remains to be seen whether this will cause a little bit of a cliff effect or whether consumer spending will simply slow down. Either way, this will add to whatever recessionary pressures there are sometime in the future.

Today’s quantitative tightening is following more than a decade of quantitative easing.

In the two years after COVID-19, the Fed bought $4.5 trillion of U.S. Treasuries and mortgage-backed securities, bringing its total balance sheet to $9 trillion. We have experienced almost 12 years of quantitative easing (QE), which drove interest rates down — so much so that U.S. short-term rates were virtually zero, and the 10-year bond hit a low of 0.5%. Amazingly, tens of trillions of dollars of debt, mostly in Europe, sold at negative interest rates (we will look back upon this with total astonishment). This period of QE also led to extraordinary liquidity (and a surging money supply) that undoubtedly drove increased prices across many investment classes — from stocks and bonds to crypto, meme stocks and real estate, among others. Importantly, this also increased bank deposits from $13 trillion to $18 trillion (and the now-famous uninsured deposits from $6 trillion to $8 trillion).

QE is now being reversed into quantitative tightening (QT) as the Fed grapples with inflation. So far, the Fed has reduced its securities holdings by approximately $550 billion and is committed to reducing its holdings by almost $100 billion in securities each month or over $1 trillion each year.

How all this will unfold is still unknown as the direction and speed of money have changed significantly from prior years. To varying degrees, banks will compete for money, not only among one another but also with money market funds, other investments and the Fed itself. Money market fund total assets under management have increased by $650 billion since April 2022, with a significant portion migrating into the Fed’s reverse repo facility, thereby draining deposits from the banking system. So while the Fed’s balance sheet has come down by approximately $550 billion, deposits at the banks have come down by $1 trillion, largely uninsured deposits. Unfortunately, some banks invested much of these excess deposits in “safe” Treasuries, which, of course, went down in value as rates rose faster than most people expected.

It should be noted that an inordinate amount of attention is focused on short-term interest rates, which the Fed affects directly. But the Fed does not completely control long-term rates and liquidity, which are influenced by both supply and demand (QT) and global investor preferences and sentiment — importantly, including views on risk and safety. It is also important to remember that while the central banks of the world are now selling instead of buying securities, the governments of the world have larger debts to finance. The United States alone needs to sell $2 trillion in securities, which must be absorbed in the market. This turn of events is generally true globally.

There has been huge intervention by central banks around the world over the last decade. While it was completely necessary in 2008 and 2009 to stop the worst of the global financial crisis, and again in 2020 to stop the effects of the global pandemic, the depth and breadth of these interventions will be studied for years as will the extent to which we need QT (whose full effect may not be known immediately). It is unclear how the Fed incorporated the enormous fiscal spending into both its forecasts for growth and inflation, as well as its need to continue QE as it did. And importantly, the Fed’s ability to reverse course on this strategy (QT) is somewhat constrained by higher inflation (though, of course, it can temporarily adjust its actions to deal with the current bank failure crisis).

We have not had a major land war in Europe since 1945. The war in Ukraine, already into its second year, has been particularly devastating in terms of casualties and damage and has been haunted by the threat of nuclear weapons. It may very well last for many more years. Wars are unpredictable, and at the start, most predictions about how they will end have been completely wrong.

This war is also affecting global energy and food supplies, with a disproportionate and negative effect falling on poor people and poorer nations, including millions of Ukrainian refugees. There is still a risk that energy and food supply lines, which are not secure, will lead to higher prices and the large migration of people, triggering another level of geopolitical dislocation.

The tensions of this war are also leading to the rethinking of many economic alliances, as well as trade and national security. All these factors create more risk and potentially higher inflation, and their confluence (along with inflation and QT) creates a somewhat unpredictable and dangerous outcome.

Of course, there is always uncertainty. I am often frustrated when people talk about today’s uncertainty as if it were any different from yesterday’s uncertainty. However, in this case, I believe it actually is.

Less-predictable geopolitics, in general, and a complex adjustment to relationships with China are probably leading to higher military spending and a realignment of global economic and military alliances.

Higher fiscal spending, higher debt to gross domestic product (GDP), higher investment spend in general (including climate spending), higher energy costs and the inflationary effect of trade adjustments all lead me to believe that we may have gone from a savings glut to scarce capital and may be headed to higher inflation and higher interest rates than in the immediate past.

Essentially, we may be moving, as I read somewhere, from a virtuous cycle to a vicious cycle.

PREPARING FOR WHAT MAY BE A NEW AND UNCERTAIN FUTURE

Of course, we hope that everything turns out okay and that all of these storm clouds peacefully and painlessly dissipate — and we need to be prepared for that outcome. We also need to be prepared for a new and uncertain future. The new risks (in addition to the normal ones, like recession) are higher inflation for longer, the market effects of QT and growing political risks. Of course, I cannot be sure this will happen, but I place higher odds on it than the “market.”

Managing risks is far more than simply meeting the Fed’s annual stress test.

While it is critical that we meet and pass the Fed’s Comprehensive Capital Analysis and Review (CCAR) stress test, managing risk is far more than that — and we are fairly fanatical when it comes to managing risk. Our company does hundreds of stress tests a week, which include market movements reflective of many past crises (such as volatility resulting from the Russia-Ukraine conflict and the pandemic in 2020) and rapidly rising interest rates.

The Fed’s CCAR stress test, by its nature, has fairly arbitrary results since it uses only one different and hypothetical scenario each year. This creates uncertainty around our capital requirements (as I mentioned, this may damage the value of bank stocks and the banking system). If I were a shareholder, I would want to know if my company would really lose the $44 billion after taxes (over a nine-quarter period) that the stress test shows. And the answer is absolutely not.

While I understand why regulators stress test this way — they are essentially trying to ensure that banks survive the worst-case scenario (which assumes multiple problems at a struggling bank without any benefit from good management or rapid response) — the methodology clearly does not result in an accurate forecast of how our company would perform under adverse circumstances. I have very little doubt that if the severely adverse scenario played out, JPMorgan Chase would perform far better than the stress test projections. I believe we would actually make money over the nine quarters in the Fed’s stress scenario.

Here’s one example that illustrates this. From March 5 to March 20, 2020, when the stock market fell 24% and the bond index spread gapped from 191 to 446 basis points prior to major Fed intervention, our actual trading revenue was higher than normal as we actively made markets for our clients. By contrast, the hypothetical stress test had us losing a huge amount of money in market-making, based on the way it is calculated. One more thing to point out: JPMorgan Chase now has enough total loss-absorbing capacity to bear out peak CCAR losses (using the Fed’s numbers) more than eight times over.

In addition to CCAR testing, we stress test for various types of huge market disruptions. For example, we stress counterparties — such as hedge funds, large asset managers or trading houses — for extremely large market moves, perhaps an instantaneous 130 basis point move in Treasuries or 50% to 60% moves in commodities. Our shareholders should know that regarding any major international bank, we remain well-collateralized across all of our exposures. Even if one of those banks went bankrupt overnight, we would be okay. While there is always a risk that we won’t receive a margin call or that some trades may default and leave us exposed to large market risk, the losses likely would not be material.

Suffice it to say, our company prepares not only for various forms of extreme economic risk but for various forms of geopolitical risk. Later in this letter I describe how we have enhanced those efforts.

Don’t underestimate the extreme importance of interest rates.

Interest rates are extraordinarily important — they are the cosmological constant, or the mathematical certainty, that affect all things economic. Before I comment on that, I want to share some astounding numbers to illustrate this point:

When you analyze a stock, you look at many factors: earnings, cash flow, competition, margins, scenarios, consumer preferences, new technologies and so on. But the math above is immovable and affects all.

In a rapidly rising rate environment, any investment where the cash flows were expected in the out years would have been dramatically affected — think venture capital or real estate development, for example. Any form of carry trade (effectively borrowing short and investing long) would be sorely disappointed. Carry trade exists not just in banks but is embedded and is silently present in companies, investment vehicles and others, including situations that require recurring refinancing.

We are prepared for potentially higher interest rates, and we may have higher inflation for longer.

If we have higher inflation for longer, the Fed may be forced to increase rates higher than people expect despite the recent bank crisis. Also, QT may have ongoing impacts that might, over time, be another force, pushing longer-term rates higher than currently envisioned. This may occur even if we have a mild — or not-so-mild — recession, as we saw in the 1970s and 1980s.

Today’s inverted yield curve implies that we are going into a recession. As someone once said, an inverted yield curve like this is “eight for eight” in predicting a recession in the next 12 months. However, it may not be true this time because of the enormous effect of QT. As previously stated, longer-term rates are not necessarily controlled by central banks, and it is possible that the inversion we see today is still driven by prior QE and not the dramatic change in supply and demand that is going to take place in the future.

We have always looked at the “fat tails” of higher interest rates, particularly on our own company. We were premature in thinking about the possibility of interest rates going to 5%, 6% or 7% — which still might not happen, but we always want to be protected against this outcome. For example, we have spoken about stockpiling cash, not investing in sovereign debt when rates were low and being willing to forgo income to protect against rising rates. Rest assured, our company can handle significantly higher interest rates no matter how anyone analyzes capital.

Higher interest rates will obviously have an important impact, not just for banks but for some of those who borrow on a floating rate or those who have to refinance in a higher rate environment. If this tide goes out, you should assume that it will expose additional weaknesses in the economy. However, our company is prepared — not only for higher rates but for a potential recession that could arise and related credit losses. That preparation includes analyzing all of our clients (in particular our leveraged lending, real estate and other clients) for what the impact of higher rates may mean for them. We believe the risks within our own portfolio are manageable. And we try to analyze the impact of these factors on companies and industries away from us. For example, we do expect that some types of real estate in certain locations may come under pressure.

Finally, we assume all of these risks and uncertainties will result in volatile markets.

There are risks and opportunities in the restructuring of global economic relations.

There is no question that supply chains need to be restructured for three different reasons:

• For any products or materials that are essential for national security (think rare earths, 5G and semiconductors), the U.S. supply chain must be domestic or only open to completely friendly allies or partners. We cannot and should not ever be reliant on processes that can and will be used against us, especially when we are most vulnerable. All countries will be protecting their national security in their own way, tailoring their strategies as they see fit.
• Countries will also be taking specific action to protect critical industries (think electric vehicles (EV), AI and chips) that may not be directly related to national security but are key to national competitiveness. This is essentially what America’s IRA is meant to do.
• Companies will diversify their supply chains simply to be more resilient.

This restructuring will likely take place over time and does not need to be excessively disruptive. There will be winners and losers — some of the main beneficiaries will be Brazil, Canada, Mexico and friendly Southeast Asian nations.

For similar national security reasons, activities — including investment activities — that help create a national security risk (e.g., sharing critical technology with potential adversaries) should be restricted.

While focusing on the risks, it’s also important not to forget the opportunities. The transition to a green economy will eventually require $4 trillion a year in capital expenditures. The IRA, CHIPS Act and Bipartisan Infrastructure Law combined will create huge opportunities for companies, investors and entrepreneurs across virtually every industry group in the United States. You can rest assured that our company is organizing to help clients make the most of these opportunities.

Along with reconfiguring our supply chains, we must create new trading systems with our allies. My preference would be to rejoin the Trans-Pacific Partnership — it is the best geostrategic trade arrangement possible with allied nations. You can be certain that our company is closely monitoring and adjusting to the risks and opportunities created by current events.

Believe it or not, inflation and interest rates are not the things that worry me the most. I’m most concerned about large geopolitical events, cyber attacks, nuclear proliferation, large dysfunctional markets (partially due to poorly calibrated regulations; e.g., the U.K. Gilt and U.S. Treasury markets) and failure of other critical infrastructure.

We have established a new Security Forum.

The war in Ukraine has exposed the severity, complexity and interconnectivity of threats such as physical security, the loss of nonbank critical infrastructure (i.e., communication networks), pandemics, insider threats, trade relations, political risk, sanctions, data privacy, war, and the impact of regulatory and governmental actions. All these factors affect our company, as well as our clients and countries and their governments. You should know that we have formed a new Security Forum, which meets periodically and enables management to continually assess the impact of ongoing threats to our company, our clients and countries around the globe. These risks — which include market risk, credit risk, cyber risk and operational risk, among others — are also covered at the board level by our Risk Committee.

Finally, when one talks about risk for too long, it begins to cloud your judgment. Looking ahead, the positives are huge. However events play out it, is likely that 20 years from now, America’s GDP will be more than twice the size it is today, and hundreds of millions of people around the world will have been lifted out of poverty. In the next section, I talk more about the need for a global economic strategy.

Like most Americans, I get frustrated with the mediocrity and bureaucracy of the massive administrative state. We accept it too readily. And it damages the confidence we have in our own country. I have enormous respect for the people who work for the U.S. government, but we simply don’t invest enough in making it more effective. Some examples are: antiquated systems at the Federal Aviation Administration, United States Postal Service and Internal Revenue Service; inefficient ports and crumbling infrastructure; an ineffective immigration policy; policies that prevent affordable housing and leave apartments vacant; policies that hurt Puerto Rico; tenure versus merit-based compensation and promotion; and work rules that dramatically reduce efficiency. We have a vast system with a lack of accountability and proper reporting. And usually when reports are issued, they only address how much money was spent — not, for example, how many highway miles were built, in what time period and at what cost. Government, which is 20% of the economy, seems to be getting less productive over time, unlike the rest of the economy. In addition, we have too much litigation — this is the bureaucratization of America — think Europe.

To be completely fair, I am also frustrated with the typically shortsighted selfishness of some businesses, asking for abundant special tax breaks and often using regulations to protect the incumbent. I also want to express exasperation with some of my fellow citizens who don’t pay the taxes they owe on the order of $600 billion a year, who won’t consider sensible policy measures like a carbon tax to stem climate change and who sometimes seem to only like democracy when the voters agree with them. Democracy by its nature is compromise. One of the lessons of the past decade is that if major legislation cannot be done in a bipartisan way, maybe it should not be done at all.

DEVELOPING EFFECTIVE POLICY AND EFFECTIVE GOVERNMENT

Theology is not policy. Policy based on falsehood or oversimplified facts is doomed to failure. Too often now, policy starts as politics without the benefit of analytics and experts.

Policy should precede politics — not the other way around.

Policy should be painstakingly developed based on facts and analysis (and on information about how policies were productively developed in other parts of the world). You can effectively crowdsource policy expertise. Why were Germany and Switzerland so successful with apprenticeship programs? Why were Canada and Singapore so effective with permitting and infrastructure? All policies, like education, infrastructure and regulation, need to start with an agreed-upon goal — and be comprehensive and coordinated to accomplish it. After the core of a policy is developed, then, of course, it will be modified by political leaders — but it is hoped the core of the policy remains intact. If those modifications bastardize it in such a way as to render it inefficient, it should be dropped.

We require a 21st century government.

In a company, you are constantly setting up your organization for success. We need to find a way to more rapidly reorganize our government for the new world. While Congress can often move very quickly in a crisis, we are unable to move quickly as a government over the medium term. We need to move faster, adopt new technologies and retrain human capital more quickly. Even in a good company, reorganizing for change can be hard — business and staff units fight to maintain their status quo and perceived prerogatives as if their lives were at stake. I can only imagine how hard this is in the government, but it will only get worse if we do not fix this in our fast-changing world.

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CREATING A COMPREHENSIVE GLOBAL ECONOMIC STRATEGY

Just as we need a comprehensive military strategy, globally, to deal with future security risks, we need a comprehensive global economic strategy to deal with future economic risks. Done properly, this will help strengthen and coalesce the Western democratic alliances over an extended period of time. This strategy has four pillars.

First, we need a U.S. growth strategy.

Between 2000 and 2022, real U.S. GDP grew at an average rate of only 2% a year. Had we grown at 3% instead, last year’s GDP per person would have been $15,000 higher. That would help pay for much of what we need to do as a nation. We simply have not focused enough on growing the U.S. economy.

In prior letters, we have spoken about how we need to get public policy right to address a multitude of areas, which span ineffective education systems, soaring healthcare costs, excessive regulation and bureaucracy, the inability to plan and build infrastructure efficiently, inequitable taxes, a capricious and wasteful litigation system, frustrating immigration policies and reform, inefficient mortgage markets and housing markets and housing policy, a partially untrained and unprepared labor force, excessive student debt, and the lack of proper federal government budgeting and spending. I believe that our poor policies have restrained our growth, and simply improving those policies would accelerate our growth.

We should also focus on reducing the worker shortages by allowing both more merit-based immigration and seasonal immigration. Reducing trade barriers could also have a rapid effect, and decreasing regulations and bureaucracy would be helpful. For example, starting a small business today generally requires multiple licenses, which take precious months to get. But it doesn’t end there. Talk with any small business owner, and that person will describe the mountains of red tape, inefficient systems and huge amount of documentation involved to operate the business. We need to reduce the burdens that are imposed on those who want to open and run a small business.

By seeking a bold, comprehensive approach, we increase our ability to positively impact economic growth and jobs; in fact, this is also the best way to reduce inflation and the deficit.

Second, an industrial policy, done properly, could drive growth and also protect our national security.

The United States has essentially never had an “industrial policy,” a strategy by which the federal government, through incentives and policies, drives American industry. We have done it indirectly through things like the Defense Advanced Research Projects Agency and NASA’s moon mission but not generally by favoring industries. More directly, the IRA and the CHIPS Act provide specific incentives for EVs, semiconductors, rare earths, alternative energy sources and others. There are two reasons we should develop an industrial policy: 1) specifically to safeguard our national security and 2) to counter unfair economic competition, particularly where our national security is directly concerned. For example, making bicycles would not be part of the second example. But China, using subsidies and its economic muscle to dominate batteries, rare earths, semiconductors or EVs, could eventually imperil national security by disrupting our access to these products and materials. We cannot cede these important resources and capabilities to another country.

Crafting an industrial policy should be done properly and with a tightly restricted scope. If the policy is politically motivated, it will be used to benefit various political benefactors and eventually provoke extreme misallocation of capital and corruption. Managing the economy is extremely complex, and Adam Smith’s invisible hand still prevails — in a way we can never understand. If the government starts to micromanage through an industrial policy, it will not stop, and much of the efficiencies meant to be created will not be realized. Industrial policy should come with twins — very strict limitations on political interference and related comprehensive policy around factors like permitting requirements, which if not drastically improved will inhibit our ability to make investments and allow infrastructure to be built.

Third, fixing income inequality will reignite the American dream.

Of all the policy errors we need to remedy in America, there are two that I believe will have a dramatic effect on growth and equality — and go a long way toward repairing the frayed American dream. The first is providing graduating students and other individuals with work skills (in fields such as advanced manufacturing, cyber, data science and technology, healthcare and so on) that will lead to better-paying jobs. This would be good for growth and much that ails us. And we know what to do. High schools and community colleges should work with local businesses to create specific skills—training programs, internships and apprenticeships that prepare graduating students to be job ready — whether they go on to earn a credential, to work or to attend college. With 10.8 million job openings and 5.9 million unemployed workers in the United States, work-skills training has never been needed more. Businesses must be involved in this process, and programs need to be offered locally because that is where the actual jobs are.

The second step is related to the first: Get more income to lower-paid workers. The gap between skilled and unskilled workers has been growing dramatically — so much so that unskilled labor has become less and less a “living wage.” Of the 150 million Americans working today, approximately 21 million are paid less than $15 per hour. It is hard to live on $15 an hour, particularly for families (even if two household members are working). But all jobs should be treated with respect. Jobs and living wages bring dignity, lead to more opportunity — in housing, education, childcare, health and overall well-being — and also help rebuild communities as that income is used to improve how people live.

A major step would be to expand the Earned Income Tax Credit (EITC), which many Democrats and Republicans already agree upon. Today, the EITC supplements low- to moderate-income working individuals and couples, particularly with children. For example, a single mother with two children earning $9 an hour (approximately $20,000 a year) could receive a tax credit of more than $6,000 at year’s end. Workers without children receive a very small tax credit — this should be dramatically expanded, too — and personally, I would eliminate the child requirement altogether. Last year, the EITC program cost the United States about $64 billion, and 31 million individuals received the credit. We should convert the EITC to make it more like a negative income payroll tax, paid monthly. Many people who are eligible for this benefit do not get it (often because they do not know about it). Proper reform of this program could increase benefits where deserved and reduce fraudulent and improper payments. Any tax credit income should not be offset by any other benefits these individuals already receive.

I have little doubt that this would do more than anything else to lift up lower-income neighborhoods as the money is spent on lifting up their families. I also have little doubt that this would add to GDP — because most of this money would, in fact, be spent.

Fourth, America must take the lead on devising a comprehensive global economic strategy.

In an op-ed published by The Wall Street Journal earlier this year, I wrote: “Only America has the full capability to lead and coalesce the Western world, though we must do so respectfully and in partnership with our allies. Without cohesiveness and unity with our allies, autocratic forces will divide and conquer the bickering West. America needs to lead with its strengths-not only military but also economic, diplomatic and moral.”

Getting military strategy right isn’t sufficient. We must keep the Western alliances together and actively appeal to developing nations. A comprehensive economic strategy would tighten the bonds, strengthen our alliances and, importantly, maximize our economic resources. Furthermore, it must encompass a global trade and investment strategy, a holistic plan around energy security and food security, and far more dynamic development finance for emerging markets. Done properly, the economic strength to emerge from such collaboration will preserve our alliances, entice nations such as India into the fold, guarantee the strength of the U.S. military and preserve the mighty U.S. dollar as the world’s reserve currency.

Finally, more active diplomacy and more dynamic communication around the principles that motivate the Western world are required. These principles are life, liberty, the pursuit of happiness and the idea that all people are created equal. Democracy and human freedom are inseparable from freedom of speech, freedom of religion and free enterprise. We should loudly and proudly sing these values from the rooftops.

I would like to express my deep gratitude and appreciation for the 290,000+ employees, and their families, of JPMorgan Chase. From this letter, I hope shareholders and all readers gain an appreciation for the tremendous character and capabilities of our people and how they continue to help communities around the world. They have faced these times of adversity with grace and fortitude. I hope you are as proud of them as I am.

Finally, we sincerely hope that all the citizens and countries of the world return to normal after the pandemic, see an end to the ongoing war in Ukraine, and see a renaissance of a world on the path to peace and democracy.

Jamie Dimon
Chairman and Chief Executive Officer
April 4, 2023