armageddon usa? - Tullett Prebon Information

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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
armageddon usa? | america at the crossroads
“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
4 strategy insights | issue eight 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 strategy insights | issue eight 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 tired of the bluster and the blather and
strategy outlined on January 5th by described as “two countries divided the ego and the BS that has worked so
Barack Obama, the Chinese newspaper by a common language”, and this is well for all of us, including me, a master
Global Times lambasted the new particularly true where metaphors of it. So yes, times have changed.”
emphasis reportedly being placed by are concerned. Where an Englishman
Simpson was warning the committee, in
the Pentagon on South East Asia. The procrastinates by “knocking the ball into
the starkest possible terms, that
newspaper argued that competition the long grass”, an American “kicks the
the federal deficit which, at an official
between China and America was on can down the road”.
$1.4 trillion, equated to 8.9% of
a scale “unprecedented in history”. It
The idioms may differ, but the meanings America’s reported gross domestic
added that China should “strengthen its
coincide. And, be it a cricket ball or a product (GDP) in fiscal year (FY) 20103,
long-range strike capabilities and put
can, procrastination is precisely what was no longer sustainable. Needless
more deterrence on the US”. Thwarting
the governments of both countries have to say, Simpson and Bowles are right.
US policy on Iran might be seen as a
been doing about their huge economic And, equally needless to say, no-one
valid tactic, it suggested, concluding that
challenges. In Britain, 2010’s change of seems to be listening within the
America “cannot stop the rise of China”.
government has brought at least some American corridors of power.
The rise of China may be subject to resolve to the issue, though time alone
Beyond political paralysis, one of the
caveats, but the decline of the United will tell whether this resolve will prevail.
reasons for the failure to address
States seems undeniable. Three By contrast, American policymakers
America’s economic problems is a
questions need to be addressed: seem paralysed.
lack of appreciation of quite how bad
• What is the American problem? This lack of action is not for want of those problems really are. Under a
• Why did this happen? warning. In December 2010, former process which began in the early 1980s,
Senator (R) Alan Simpson, co-chairman reporting methodologies have been
• How can America respond?
(with former Clinton chief-of-staff massaged to the point where the true
Following the publication of the final Erskine Bowles) of the President’s scale of the economic malaise is masked
report of our Project Armageddon bi-partisan committee on fiscal from most Americans. As this report
analysis of the economic outlook for responsibility, did not mince his words explains, debt, the deficit, inflation
Britain, it was suggested that we should when he warned the committee that and unemployment are understated,
conduct a similar assessment of the the Federal deficit was a “cadaver [that] whilst both growth and absolute GDP
United States. Both countries, it was will rise from the crypt” are flattered, and not to a minor but
pointed out, are caught in the same to a fundamental degree. The first
“This is it”, continued Sen. Simpson. “No
basic high-debt, low-growth trap, and imperative for anyone who wants a
more fun and games. No more smoky
in neither country has government comprehensive understanding of the US
mirrors. They [the American people]
produced wholly credible answers to the economic and fiscal situation is to look
have wised up. They’re mad. They’re
gravity of the national economic malaise. behind the statistical camouflage.
3 The American fiscal year ends on 30th September strategy insights | issue eight 7
armageddon usa? | america at the crossroads
Even on the reported figures, the But America’s woes cannot be blamed whilst vanity projects have channelled
situation is bad enough. Critically, the wholly, or even primarily, on others. further capital away from vital
US is at the end of a quarter-century The regulatory climate in the US seems, infrastructure reconstruction. America’s
“credit super-cycle” which has seen with hindsight, to have been unduly education system produces far too many
aggregate debt soar to 358% of GDP, a relaxed during the latter stages of lawyers and far too few engineers, whilst
level which is unprecedented in modern the credit super-cycle. The authorities the cream of the country’s young people
times. Over the last decade, the US ignored the starkest possible warnings have been drawn into Wall Street and the
has added $5.58 of debt for each $1 of in supinely allowing the proliferation of law rather than into more economically-
expansion in GDP. To be sure, the US – instruments which no less a luminary productive sectors.
unlike most other OECD countries – has than Warren Buffett had long warned
Politicians have allowed America’s
made some very modest inroads into this were “weapons of financial mass
once-famed capabilities in R&D to be
debt ratio, but the reduction achieved destruction”. The Federal Reserve’s
undermined, and have stood by and
thus far makes no significant difference default assumption, which was that
watched much of the nation’s knowledge
to the overall position. regulation can be minimised because
capital being either appropriated by
banks can be trusted to act responsibly
The US, then, is stuck in a high-debt, other countries or, worse still, handed
in the long-term interests of their
low-growth economic trap. How did to them on a plate in pursuit of narrow
shareholders, was breathtakingly naïve.
this happen? In part, America’s woes short-term gain. Much of American
All of this was compounded by allowing
reflect a naïve approach to globalisation. industry (exemplified by the auto-
low interest rates to drive America into a
The ‘comparative advantage’ paradigm makers) has followed blind alleys.
downwards monetary ratchet.
which underpins economic openness
And, whilst all of this has been
assumes, first, that others play by the This report is written from a pro-
happening, America’s political leaders
rules, and, second, that the scope for market perspective, but we cannot but
have done……well, nothing constructive
expansion is limitless, such that the conclude that an excessive reliance
about it. George W. Bush somehow
growth of one country need not be at the on inadequately-regulated markets
managed to believe that he could
expense of another. Neither assumption has compounded many other adverse
combine two hugely costly (and, we
is true. China and others have not played trends in the American economy. The
believe, mistaken) wars with tax-cuts for
by the rules – after all, international build-up of debt has reflected a growing
the very rich whilst not creating a fiscal
competition is not a parlour game consumption recklessness which the
deficit. He also presided over the build-
– and resource constraints are now authorities have done nothing to
up of the shadow banking system and
demonstrating that the scope for global counter. Investment has been diverted
the near-fatal undermining of the
economic growth is not infinite. into capital sinks, most notably property,
8 strategy insights | issue eight
capital markets, to the point where projects. There needs to be tougher done, America will watch her economic
Congress had to be arm-twisted into regulation of the financial markets, power drain away.
handing over $700bn of taxpayers’ including derivatives.
Has the US the leadership, at all
money to bail out the banking system.
Abroad, America needs to toughen up, levels – federal, congressional, local
It is too early to judge the Obama
most notably with regard to China. and corporate – to turn around a truly
presidency, but the economy is flat-
America is entitled to make a lengthy dire economic situation? It can only
lining and debt continues to escalate,
list of demands and, for the time being, be hoped that it has, because the
whilst grid-locks in Congress do not
remains strong enough to back these alternative is frightening.
encourage us to believe that resolute
up. America should require a free float
and effective action will be taken.
for the renminbi, the removal of all
What should that action be? First and tariff and other import barriers, and an
foremost, the job of leaders is to lead. immediate and complete cessation of all
The greatest single requirement now 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
and welfare, are un-payable – certainly threaten to wield. Selective default Dr Tim Morgan
without massive tax increases – and it could hit China where it hurts. China’s Global Head of Research
is about time that someone admitted employment-driven pursuit of volume 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 markets.
that both spending cuts and tax
Protectionism could deal China’s leaders
increases are inevitable if disaster is to
a devastating blow, and America should
be averted. The widespread dislike of
not be afraid to use this as a threat in
government, whilst understandable,
the national interest. Since globalisation
rather overlooks a pretty creditable
has in any case worked to the detriment
historic record on nationally-led projects,
of middle America, the US should have
from the TVA4 to victory in the Second
no compunction whatsoever about
World War and the Apollo programme.
waving a very big stick in pursuit of a
There is an urgent need to channel
fairer deal. For so long as this is not
investment into essential infrastructure
and away from capital-sinks and vanity
4 The Tennessee Valley Authority strategy insights | issue eight 9
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