armageddon usa? - america at the crossroads - Tullett Prebon

38 Pages·2012·2.04 MB·English

armageddon usa?
america at the crossroads
Dr Tim Morgan Global Head of Research
strategy insights | issue eight

armageddon usa?
america at the crossroads
contents
armageddon usa? america at the crossroads 5
introduction: powers of darkness 7
part one: what is the American problem? 11
economic data – pollyanna creep 13
what growth, what jobs? 18
“another day older, deeper in debt…..” 20
part two: why did this happen? 25
a failed paradigm 25
un-american activities: have competitor strategies undermined the US? 26
domestic errors – the follies of ideological extremes 28
capital sink investment: betting the house 28
part three: how should america respond? 33
strategy insights | issue eight 3
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“The US and China are carrying out
competition unprecedented in history.
The US must realize that it cannot
stop the rise of China”
The Global Times, 6th January 20121
44 ssttrraatteeggyy iinnssiigghhttss || iissssuuee eeiigghhtt 1 http://www.globaltimes.cn/NEWS/tabid/99/ID/691074/Pentagon-plan-changes-game-in-Asia.aspx
armageddon usa?
america at the crossroads
Commenting on President Obama’s is wrestling with the ending of a In addition to cutting waste, ditching
new defence strategy, the Chinese quarter-century “credit super-cycle”. unaffordable federal programmes and
newspaper Global Times lambasted the Americans have borrowed, not for owning up about un-payable pension
new emphasis reportedly being placed productive investment, but to inflate and welfare promises, the United
by the US on South East Asia, and the value of the nation’s housing States needs to take immediate action
concluded that America “cannot stop stock. Since houses are non-earning on two fronts. At home, regulation
the rise of China”. capital sinks, this process has gravely needs to be tightened to prevent the
undermined the productiveness of mispricing of risk which underpinned
Whilst the rise of China may be subject
the economy. Capital has been poured the subprime disaster. Abroad, America
to caveats, the decline of the US seems
into vanity projects and property needs to get real, and get tough.
undeniable. According to official
price escalation whilst America’s The US needs to demand the free
figures, America is mired in debt and,
decaying infrastructure needs at least float of the renminbi, the elimination
despite a recent modest upturn, her
$2 trillion in restorative investment. of all tariff and informal trade barriers,
economic trend growth is lacklustre.
Where China’s brightest young people and the cessation of all technology
The reality, stripped of statistical
study engineering and technology appropriation. If these demands are
obfuscation, is even worse than
before moving into industry, America’s not met, Washington should have
this. Reported federal debt excludes
brightest study law before moving no compunction about threatening
enormous off-balance-sheet quasi-
into Wall Street. selective default and the introduction
debts. The reported deficit excludes
of protective tariffs. It is high time
huge annual increments to these Abroad, America is the naïve victim of
that the US woke up to the realities
obligations. Reported gross domestic blatantly one-sided globalisation which
of a one-sided globalisation process
product (GDP) includes $2.3 trillion destroys American jobs whilst racking
which has impoverished America and
of non-cash “imputed” dollars that up ever higher levels of private and
has resulted in the haemorrhaging
do not really exist. Both inflation and government debt. America has bought
of American jobs.
unemployment are understated in the into the Ricardian logic of “comparative
official numbers, and the reality may advantage” without realising that this The United States remains the world’s
be that the economy has been drifting model is predicated on others playing most innovative economy, but time is
for a decade. by the rules, and on assumed scope running out.
for infinite growth. Today, neither
Why has this happened? The
assumption is valid.
explanations are both foreign
and domestic. At home, America
strategy insights | issue eight 5
armageddon usa? | america at the crossroads
“The heat is on you. Poised outside this
chamber are the denizens of darkness.
Those are the groups waiting out there
in the temples of this city, waiting to
shred this baby to bits.”
Former Senator (R) Alan Simpson2
2 Talking about the Federal deficit, December 2010.
6 ssttrraatteeggyy iinnssiigghhttss || iissssuuee eeiigghhtt http://www.bbc.co.uk/blogs/thereporters/markmardell/2010/12/simpson_slaps_washington_with.html
introduction
powers of darkness
Commenting on the new defence Britain and America have been has worked so well for all of us,
strategy outlined on January 5th by described as “two countries divided including me, a master of it. So yes,
Barack Obama, the Chinese newspaper by a common language”, and this is times have changed.”
Global Times lambasted the new particularly true where metaphors
Simpson was warning the committee,
emphasis reportedly being placed by are concerned. Where an Englishman
in the starkest possible terms, that
the Pentagon on South East Asia. The procrastinates by “knocking the ball
the federal deficit which, at an official
newspaper argued that competition into the long grass”, an American “kicks
$1.4 trillion, equated to 8.9% of
between China and America was on the can down the road”.
America’s reported gross domestic
a scale “unprecedented in history”. It
The idioms may differ, but the meanings product (GDP) in fiscal year (FY) 20103,
added that China should “strengthen
coincide. And, be it a cricket ball or a was no longer sustainable. Needless
its long-range strike capabilities and
can, procrastination is precisely what to say, Simpson and Bowles are right.
put more deterrence on the US”.
the governments of both countries And, equally needless to say, no-one
Thwarting US policy on Iran might be
have been doing about their huge seems to be listening within the
seen as a valid tactic, it suggested,
economic challenges. In Britain, 2010’s American corridors of power.
concluding that America “cannot stop
change of government has brought at
the rise of China”.
Beyond political paralysis, one of the
least some resolve to the issue, though
reasons for the failure to address
The rise of China may be subject to time alone will tell whether this resolve
America’s economic problems is a lack
caveats, but the decline of the United will prevail. By contrast, American
of appreciation of quite how bad those
States seems undeniable. Three policymakers seem paralysed.
problems really are. Under a process
questions need to be addressed:
This lack of action is not for want of which began in the early 1980s,
• What is the American problem? warning. In December 2010, former reporting methodologies have been
• Why did this happen? Senator (R) Alan Simpson, co-chairman massaged to the point where the true
(with former Clinton chief-of-staff scale of the economic malaise is masked
• How can America respond?
Erskine Bowles) of the President’s from most Americans. As this report
Following the publication of the final bi-partisan committee on fiscal explains, debt, the deficit, inflation
report of our Project Armageddon responsibility, did not mince his words and unemployment are understated,
analysis of the economic outlook for when he warned the committee that whilst both growth and absolute GDP
Britain, it was suggested that we the Federal deficit was a “cadaver are flattered, and not to a minor but
should conduct a similar assessment [that] will rise from the crypt” to a fundamental degree. The first
of the United States. Both countries, imperative for anyone who wants a
“This is it”, continued Sen. Simpson.
it was pointed out, are caught in the comprehensive understanding of the US
“No more fun and games. No more
same basic high-debt, low-growth economic and fiscal situation is to look
smoky mirrors. They [the American
trap, and in neither country has behind the statistical camouflage.
people] have wised up. They’re mad.
government produced wholly credible
They’re tired of the bluster and the
answers to the gravity of the national
blather and the ego and the BS that
economic malaise.
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armageddon usa? | america at the crossroads
Even on the reported figures, the But America’s woes cannot be blamed most notably property, whilst vanity
situation is bad enough. Critically, the wholly, or even primarily, on others. projects have channelled further
US is at the end of a quarter-century The regulatory climate in the US capital away from vital infrastructure
“credit super-cycle” which has seen seems, with hindsight, to have been reconstruction. America’s education
aggregate debt soar to 358% of GDP, unduly relaxed during the latter system produces far too many lawyers
a level which is unprecedented in stages of the credit super-cycle. The and far too few engineers, whilst the
modern times. Over the last decade, authorities ignored the starkest cream of the country’s young people
the US has added $5.58 of debt for each possible warnings in supinely allowing have been drawn into Wall Street
$1 of expansion in GDP. To be sure, the the proliferation of instruments which and the law rather than into more
US – unlike most other OECD countries no less a luminary than Warren Buffett economically-productive sectors.
– has made some very modest inroads had long warned were “weapons
Politicians have allowed America’s
into this debt ratio, but the reduction of financial mass destruction”. The
once-famed capabilities in R&D to
achieved thus far makes no significant Federal Reserve’s default assumption,
be undermined, and have stood by
difference to the overall position. which was that regulation can be
and watched much of the nation’s
minimised because banks can be
The US, then, is stuck in a high-debt, knowledge capital being either
trusted to act responsibly in the long-
low-growth economic trap. How appropriated by other countries or,
term interests of their shareholders,
did this happen? In part, America’s worse still, handed to them on a
was breathtakingly naïve. All of this
woes reflect a naïve approach to plate in pursuit of narrow short-term
was compounded by allowing low
globalisation. The ‘comparative gain. Much of American industry
interest rates to drive America into a
advantage’ paradigm which underpins (exemplified by the auto-makers) has
downwards monetary ratchet.
economic openness assumes, first, followed blind alleys.
that others play by the rules, and, This report is written from a pro-
And, whilst all of this has been
second, that the scope for expansion is market perspective, but we cannot but
happening, America’s political leaders
limitless, such that the growth of one conclude that an excessive reliance
have done……well, nothing constructive
country need not be at the expense of on inadequately-regulated markets
about it. George W. Bush somehow
another. Neither assumption is true. has compounded many other adverse
managed to believe that he could
China and others have not played trends in the American economy.
combine two hugely costly (and, we
by the rules – after all, international The build-up of debt has reflected a
believe, mistaken) wars with tax-cuts
competition is not a parlour game growing consumption recklessness
for the very rich whilst not creating
– and resource constraints are now which the authorities have done
a fiscal deficit. He also presided over
demonstrating that the scope for nothing to counter. Investment has
the build-up of the shadow banking
global economic growth is not infinite. been diverted into capital sinks,
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system and the near-fatal undermining away from capital-sinks and vanity done, America will watch her economic
of the capital markets, to the point projects. There needs to be tougher power drain away.
where Congress had to be arm-twisted regulation of the financial markets,
Has the US the leadership, at all
into handing over $700bn of taxpayers’ including derivatives.
levels – federal, congressional, local
money to bail out the banking system.
Abroad, America needs to toughen up, and corporate – to turn around a truly
It is too early to judge the Obama
most notably with regard to China. dire economic situation? It can only
presidency, but the economy is flat-
America is entitled to make a lengthy be hoped that it has, because the
lining and debt continues to escalate,
list of demands and, for the time alternative is frightening.
whilst grid-locks in Congress do not
being, remains strong enough to back
encourage us to believe that resolute
these up. America should require a free
and effective action will be taken.
float for the renminbi, the removal of
What should that action be? First and all tariff and other import barriers, and
foremost, the job of leaders is to lead. an immediate and complete cessation
The greatest single requirement now of all technology appropriation.
is for honesty. Many of America’s fiscal
The US has two big sticks which it can
promises, such as those on pensions
threaten to wield. Selective default
and welfare, are un-payable – certainly Dr Tim Morgan
could hit China where it hurts. China’s
without massive tax increases – and it Global Head of Research
employment-driven pursuit of volume
is about time that someone admitted Tullett Prebon plc
maximisation over profit is critically
it. The current fiscal deficit is wholly
dependent on free access to American
unsustainable, which probably means
(and other Western) consumer
that both spending cuts and tax
markets. Protectionism could deal
increases are inevitable if disaster is to
China’s leaders a devastating blow,
be averted. The widespread dislike of
and America should not be afraid to
government, whilst understandable,
use this as a threat in the national
rather overlooks a pretty creditable
interest. Since globalisation has in
historic record on nationally-led
any case worked to the detriment of
projects, from the TVA4 to victory
middle America, the US should have
in the Second World War and the
no compunction whatsoever about
Apollo programme. There is an
waving a very big stick in pursuit of
urgent need to channel investment
a fairer deal. For so long as this is not
into essential infrastructure and
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armageddon usa? | america at the crossroads
“Who profits from a low-growth U.S. economy
hidden under statistical camouflage[?] Might
it be Washington politicos and affluent elites,
anxious to mislead voters, coddle the financial
markets, and tamp down expensive cost-of-
living increases for wages and pensions?”
Kevin Phillips5
10 strategy insights | issue eight 5 “Numbers Racket”, Harper’s Magazine v.316, n.1896 1st May 2008