The Big Bet
Why the U.S. will not solve its economic, educational, health, retirement, energy, and other major structural problems until it suffers a major financial crisis.
] | POSTED: 12.14.05 @07:45 On Always-On Network
In his recent Newsweek
article "Sputnik Was Nothing
," Louis V. Gerstner Jr. asks, "How much longer will the United States be a superpower? Not much, if we do not wake up to the fact that our economic strength, which has underpinned our political and military might for two centuries, is decaying. In the 21st century, economic power will be derived from skills and innovation. Nations that don't invest in skills will weaken: it is that straightforward."
Gerstner once again raises the alarm on the deterioration of the U.S. educational system and the negative implications this has for the future of America. He states that "calls for a crash program to defend our superpower status are even more urgent now."
Gerstner's message is not new—not for him, nor for other "enlightened" (read: already got theirs) capitalists such as financiers Robert Rubin, Paul Volcker, and Peter Peterson, and respected technology executives like Intel's Andy Grove and Craig Barrett—all of whom have been calling for various reforms for years.
In the 1990s, Gerstner led the big turnaround of IBM from an aging computer maker into the largest global IT services corporation in the world. Now he's chairman of the Carlyle Group
, the well-connected private equity firm that included President Bush I, whose friends Brent Scowcroft and James Baker have voiced serious concerns
about the foreign policy direction of the current Bush II administration.
Thomas Friedman, a cheerleader for "globalization" in his New York Times
columns, his recent book The World is Flat,
and his appearances on "The Charlie Rose Show," has wondered aloud why CEOs and political leaders don't speak out even more emphatically about the obvious economic threats facing America.
To us, the reason why these leaders don't take meaningful action—such as mobilizing a serious political movement to set things right—is straightforward.
All these leaders understand, but never admit, that the motivation and incentive for Americans to resolve these critical problems—to improve our education, healthcare, and energy systems; to control our debts, live within our means, and so on—have been gradually reduced by the U.S.-dominated global speculative financial system that they themselves have helped create.
Welch of GE, in his book Winning,
describes how pleasantly surprised he was to learn (in the late 1970s and early 1980s) how easy it was to make money in financial services as he sold or shut down GE's industrial businesses. He not only became very wealthy by doing so, but also came to symbolize an entire era.
The reality is: why should Gerstner really care to do anything about education, when his private equity firm can buy a public company, "fix" it via financial leverage and layoffs, and then sell it for a quick profit to individuals and pension funds made both desperate for yield (by years of accommodative Fed rate policy) and oblivious to risk (from decades of Fed bailouts every time a poorly conceived, high-risk investment failure threatens the so-called "real economy")?
For that matter, why should ambitious American students study physics, engineering, and math (except perhaps to become Wall Street "quants"), when it is so much easier to make money speculating in real estate, stocks, and everything else, including untenable IPOs for companies that are unlikely to ever be profitable?
Why should corporate CEOs worry about American education, science, and technology, when they can simply "downsize" and "outsource" to Asia, greatly enhancing the value of their stock options and, at least in the short term, shareholder value?
Why should any corporate leader be surprised that, 25 years after the magic of making masses of money from government-protected leverage and guaranteed liquidity, the process has come full circle? The financial corporations now dominate the private sector's ability to generate profits. At the same time, we are witnessing the slow death of industrial giants like General Motors, which for decades stood as the world's premier industrial corporation.
The countries that Gerstner, Friedman, and others cite—South Korea, China, India—have taken a different road to wealth creation than the U.S. has over the past quarter century. That's why they are graduating so many more engineers than America.
Meanwhile, all the U.S. apparently has had to do to "compete" in the global economy is to print more debt in its own reserve currency—debt that the world continues to accept—and use the proceeds to fund domestic consumption of foreign goods that the U.S. can no longer make.
For obvious reasons, no one in power ever makes this simple link between the U.S.-dominated global speculative financial system and the diminishing motive for Americans to innovate and create new goods and services. This is the reason why clearly needed economic, social, and political changes are not forthcoming. Instead, the so-called solutions to the problem have become a shell game of retraining and social safety nets.
While the global speculative financial system shifts U.S. assets and productive capacity (and thus wealth-generation capabilities) overseas, the average U.S. household is losing its ability to generate real income in the domestic economy. About 80% of the U.S. labor force has seen real weekly earnings decline 16% over the past 33 years, according to government statistics.
Meanwhile, the global speculative financial system has pushed income inequality to all-time highs, with over 50 percent of 2004 income going to the top fifth of U.S. households, and the biggest gains going to the top one percent.
The growth in billionaires has leaped dramatically since the early 1980s, when the U.S.-dominated global speculative financial system started to develop. The average net worth of individuals on the Forbes 400 was $400 million in 1980. Twenty-five years later, their average net worth is $2.8 billion.
Wal-Mart's Walton family, for example, now earns 771,287
times more income than the median U.S. household. They earn this from the business of selling goods often invented by foreign engineers (sorry, the invention that goes into these products is not "stolen" from U.S. inventors; it comes from either expired patents or new innovations) and made with foreign labor, purchased by U.S. Wal-Mart customers using cheap credit.
This consumer "boon" of cheap credit is made possible by low interest rates that are largely the result of massive purchases of U.S. treasuries by the central banks of the very same countries that are exporting the products that Wal-Mart sells. Where do the foreign central banks get the money to purchase the U.S. treasuries? From the savings of their highly trained workers, who have a strong incentive to save due to the absence of social safey nets and affordable basic services.
Now that the U.S. economy has lost much of its ability to generate high-paying jobs outside the business of asset speculation, U.S. workers inside the goods and services sectors (the making
part of the economy) are being asked to "share the burden" via more cuts in retirement and health plans and essential services, all the while leaving untouched the huge gains of the one percent at the top of the wealth and income pyramid, already enhanced by Bush's tax cuts.
The reason America doesn't change is that there is no incentive for it to do so. Not as long as the U.S. can keep getting more "wealthy" by printing more money to inflate already existing assets (such as real estate) with impunity, compliments of foreign creditors and the Fed.
But printing money to inflate asset values creates no new real wealth. Econ 101 taught us that true wealth creation can only come from real
income generated by the real
production of innovative, new, real
goods and services that improve productivity and generate domestic savings,
which are in turn re-invested into the economy.
The global speculative financial system continues to operate as a kind of perpetual motion machine, propped up by the "moral hazard" of central bank policies and the willingness of foreign lenders to support U.S. consumption on credit, in order to fund their own economic expansion at home via export income and domestic savings.
As long as the global system works this way, profit incentives, asset markets, and resource allocation will remain distorted. The system will continue to reward speculators with great wealth while it offers scraps to the inventors. The U.S. educational system will cater to speculators, who pay the endowments, and ignore the inventors, who can’t help them much at all.
After more than 25 years of this, is it any wonder that the entire U.S. economy has organized itself to conform to this financial model: a gigantic, risky, one-way bet that uses trillions of dollars of credit and massive leverage, relying on the savings of foreign workers to fund the bet and the foreign central banks to cover the risks?
As the U.S. sucks in the bulk of the world’s "excess" savings to support consumption, it seems unwilling to live up to its global commitments to devote 0.7 percent of its GDP for global economic development, up from a mere 0.1-0.2 percent. Again, there seems to be virtually no political and economic incentive to do so, as the U.S. seems insulated, for the time being, from the negative effects of global poverty, war, and natural disasters.
Can the U.S. transition to a more balanced and less dysfunctional global economy, so that these domestic problems get fixed? Not as long as the global speculative financial system is running. Until a new system is in place, there will never be enough incentive and motivation to fix the problems that Gerstner, Sachs, Stiglitz, Grove, Gates, and so many others care about. Not until it's too late.
It was only after learning the horrible lessons of the 20th century’s own "Thirty Years War" that the U.S. elites created the global financial and political institutions (after WW II) that helped to rebuild war-torn Europe and Asia. Unfortunately, it may take another crisis to once again drive home the point that we are all in this together.
As Paul Volcker stated
in April of this year, "I don't know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change."
This column was co-authored by Eric Janszen and a 25-year veteran Wall Street analyst and fund manager who prefers to remain anonymous.
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