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 the Pentagon on South East Asia. The procrastinates by “knocking the ball into Simpson was warning the committee, in newspaper argued that competition the long grass”, an American “kicks the the starkest possible terms, that between China and America was on can down the road”. the federal deficit which, at an official a scale “unprecedented in history”. It $1.4 trillion, equated to 8.9% of added that China should “strengthen its The idioms may differ, but the meanings America’s reported gross domestic 3 long-range strike capabilities and put coincide. And, be it a cricket ball or a product (GDP) in fiscal year (FY) 2010 , more deterrence on the US”. Thwarting can, procrastination is precisely what was no longer sustainable. Needless US policy on Iran might be seen as a the governments of both countries have to say, Simpson and Bowles are right. valid tactic, it suggested, concluding that been doing about their huge economic And, equally needless to say, no-one America “cannot stop the rise of China”. challenges. In Britain, 2010’s change of seems to be listening within the 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 caveats, but the decline of the United will tell whether this resolve will prevail. Beyond political paralysis, one of the States seems undeniable. Three By contrast, American policymakers reasons for the failure to address questions need to be addressed: seem paralysed. America’s economic problems is a 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 made some very modest inroads into this were “weapons of financial mass Politicians have allowed America’s debt ratio, but the reduction achieved destruction”. The Federal Reserve’s once-famed capabilities in R&D to be thus far makes no significant difference default assumption, which was that undermined, and have stood by and to the overall position. regulation can be minimised because watched much of the nation’s knowledge banks can be trusted to act responsibly capital being either appropriated by The US, then, is stuck in a high-debt, in the long-term interests of their other countries or, worse still, handed low-growth economic trap.