Posted on 02/06/2003 5:24:18 PM PST by arete
Vocabulary is a power builder. Every time I use the word "concomitant" in a conversation I see my listener's eyebrows go up as if to say, "what does this guy know that I don't?" Then again, maybe they're just signaling that I'm full of more than just baked beans. I suspect the latter, but either way it creates an impression. I sensed the power of the almighty word late in my teens as I was preparing for my SAT tests as a foreign exchange student in Germany. Missing the normal study manuals available in the U.S., I turned to my Funk & Wagnalls and began with "abhor," working my way through the Gs before test-time called "time out." Later, serving "midwatch" in the Navy off Vietnam in 1969, I continued the game in reverse, starting with "zymurgy" and regressing to "kinetics" by the time we sailed home to San Diego. There had been lots of midwatches, but not enough it seems to cover all 26 letters; I was missing H I J.
This deficiency never seemed to affect my career much until the last few months when I began reading in The New York Times and The Wall Street Journal about U.S. "hegemony" in connection with post 9/11 maneuverings in Afghanistan, Iraq, and North Korea. This was an "H" word I had read before but never really bothered to think about. Well a "hegemony" it seems, is the dominance of one country over others not only militarily but economically as well, and as fitting a word as any of my A through Gs and Zs to Ks to describe the world's current state of affairs. There can be little doubt that we have an American hegemony. But while the United States rules the waves as well as turf and sky, I'm not so sure that we are, or perhaps will be the economic powerhouse we once were. Three years of stock market declines, a 20% devaluation of the dollar over 10 months, and an inability to serve as the global economy's locomotive despite massive monetary and fiscal stimulation suggests America's "shining city on a hill" may have lost some of its sheen of late. The US of A it seems is becoming less wealthy by the minute as foreign investment is withheld and in some cases redirected to Chinese and other more attractive ports of call. Economically, we may have begun a process of hegemonic decay and if true, at some point we will have to put that in our Funk & Wagnalls and smoke it. Let's see why.
The initiation of U.S. hegemonic decline can't be blamed on any single source. Excessive build up of private debt, which in part led to an investment and stock market bubble, has been a primary culprit. Our overvalued dollar and a near historic trade deficit are in the running for the hegemonic Oscar as well. But if all of these be ingredients, there is no doubt that 9/11 was the significant catalyst, despite its coming more than a year after several of these economic and financial trends experienced their peaks. In the aftermath of 9/11 it became apparent to George Bush and the Washington defense establishment that future conflict would perhaps be not only near perpetual, but of a nature quite different from Desert Storm over a decade ago. While the eradication of Iraq from Kuwait was a single purpose conflict, today's potential invasion of Iraq is but one of a multitude of steps that hopefully leads to terrorist containment as opposed to the eradication of Islamic extremism. Bush has in no uncertain terms said that our future struggle will be a never-ending story as opposed to a single shot kill. If so, investors must know that perpetual containment entails costs - not just monetary but those involving potential policy reversals that have formed the backbone of America's economic hegemony for nearly seven decades.
That such a hegemony has been based upon (1) America's military domination and (2) America's superior economy as reflected by the dollar's ascension to the top of the pile as the world's reserve currency - is undeniable. All hegemonies including Britannia's (since the fall of Napoleon to the end of WWI), have shared similar characteristics. As current leader of the pack, America has been able to implement policies (free trade, open capital markets, and a strong currency) which have not only reflected its political heritage and philosophy but have added dollars and cents to its citizens' pocket books, as well as SUVs to their driveways. But the U.S., unlike the British Empire rests on a fragile foundation built upon consumer spending and trade deficits as opposed to mercantilism and trade surpluses, which characterized Britannia's rule. These deficits, coming at a time of American military expansion in pursuit of terrorist containment, threaten to reverse our hegemonic benefits and end our economic domination. Our SUVs, as well as our top cat near-monopoly of the good times are at risk.
Although I may have absorbed part of the dictionary, I by no means am a policy wonk from some Washington think tank. Perhaps I've confused either you or myself in the last few paragraphs by reference to containment and hegemony based on military power and economic efficiency. Let me get a little more basic - exchange my Funk & Wagnalls for the abridged office edition of the American Heritage dictionary. Because of 9/11 and our necessity to fight a new kind of war, America is losing its peace dividend at a time when - because of our high debt, over-consumption, and reflective trade deficit - we cannot afford to. Guns and butter will soon extend our global credit card to its limit. Our foreign lenders are beginning to make some increasingly urgent phone calls to pay up or else and they are enforcing their demands by selling the dollar and buying almost any other currency that represents the economic philosophy of Ben Franklin as opposed to George Bush.
The end to the strong dollar is but the most visible reversal of U.S. hegemonic policies in recent months. Our promotion of free trade and open capital markets is suffering as well. Last year's U.S. steel and lumber tariffs are being supplemented by an embargo of Chinese containers in Hong Kong and Shanghai due to their possible hiding of terrorist weapons and armaments. Mexican trucks are being halted at the Texas border on the age-old allegation of vehicle safety violations. We are becoming a trade repressor as opposed to trade advocate and other countries no doubt will fight back.
In addition, our advocacy of open capital markets is falling increasingly by the wayside. Global financial controls are now seen as a bonafide weapon in the war against terrorism. Prominent economists such as Paul Krugman and Joseph Stiglitz are wondering whether or not - in the example of Malaysian Prime Minister Mahathir Mohamad during 1998's Asian crisis - there might not be a stronger case for controlling international capital flows. And if these policy reversals don't sound warning alarms, how about Fed Governor Bernanke threatening to support any asset market decline that threatens to reinforce deflation. Come to think of it, Fed Chairman Greenspan by encouraging the belief in a Greenspan "put" has been interfering in our and other countries' stock markets for several years now. Open markets? The door appears to be closing fast.
The reversal of these policies which in the past have promoted U.S. economic hegemony are a natural reaction by foreign creditors and the U.S. debtor nation alike to its future new emphasis on terrorist containment and the costs thereof. Foreigners have and will continue to sell the dollar and U.S. investments in fear of guns and butter bills to come. America will attempt to preserve its hegemony by biasing, and in some cases reversing, free trade and open financial market policies that do not favor the U.S. All of this implies that our peace dividend, not only in the terms of lower defense expenditures, but U.S. domination of (and benefits from) free capital markets and free trade, are nearing an end. We will experience a somewhat vicious cycle of policy reversal instead of the virtuous circle of recent decades, which led to higher profits and lower inflation. In the reversal's wake will come subdued profits, higher inflation, a lower dollar and anemic financial returns.
While that may not qualify as a trip to the poor house, I have no doubt that such events signify to at least some Americans a trip to a poorer house. Many of us will have to adjust, either in the form of higher unemployment, an increased price for imported goods, or heavier indirect taxes in the form of higher inflation and interest rates. Investment strategies, both bond and equity, should put these secular reversals at the top of their A list when considering opportunities to make relative and absolute returns. Hegemonic decay will impose costs unimagined just 16 months ago during the innocent hours of September 10th, 2001.
William H. Gross
Well, I'm glad that someone finally said it. Get government out of the darn markets!
Richard W.
Comments and opinions welcome.
Richard W.
We're about to engage in and possibly lose a global economic "every man for himself" battle.
Richard W.
OK, why?
After the Civil War, there had been a great boom in investment in steel and railways. This opened the American West, and facilitated the movement of agricultural products to the East Coast ports. From there, the new, efficient steamships moved the goods to English ports.
This phenomenon was not limited to the US. Railways crossed Canada, Argentina, Australia and other fertile lands, and steamships now plied all the oceans.
Besides allowing the efficient importation of goods, the technologies of steam and steel directly enhanced agricultural productivity. Mr. Deere's steel plow turned the prairies and Mr. McCormick's reaper gathered the harvest with less manpower than before. Manpower itself was plentiful in the new lands, as the ships brought new immigrants with their large families.
Today the United States is in the same position as England was, and we are in for an extended period of economic malaise from which we may not recover. But the problem is not cheap agricultural or manufactured imports -- it is much more serious than that.
Much has been made of our service economy. A major part of the service economy is "information services". Broadly speaking this is any job which relies on telephone, computer, networks, ordinary mail, etc. It is all the clerical jobs which the "pink collar" employees used to do, as well as a large fraction of the "white collar" jobs in programming, engineering, and so forth.
Most of these jobs can be done cheaper off-shore. The office workers of the United States are destined to suffer the fate of the English farmers.
The semiconductor, disk drive and computer industry provides the technology to do these jobs more efficiently, just as did the farm equipment of the late 19th century. It is produced in the new growth centers of Asia, just as the new farm implements were produced in Moline and Waterloo.
The global fiber optic cables are the steamship lines, and the Internet is the railway. The cheap information transport they provide enables the movement of call centers from Omaha to Bangalore. Cisco systems is Baldwin locomotive, and the submarine cable systems makers are the Glasgow shipyards.
Cheap labor is also available in the new growth centers of the world economy. The number of really bright people is directly proportional to the population, and both China and India are well endowed with really bright people. The same information technologies needed to compete with United States information service workers are useful in training these low wage workers to undertake their tasks.
Just as Great Britain became more agressively imperialistic during the last quarter of the 19th century, the United States also is also espousing the virtures of unilateral, interventionist policies.
This is not a sign of strength, but of weakness -- a sign of a decadent society, an uncompetitive economy, and an leadership who see no way out.
You are talking about Bill Gross -- one of the most successful bond fund managers around. He's just laying it out as it is.
Richard W.
Read post #8. It says it much better than I could ever hope to.
Richard W.
Richard W.
Ditto for our output of cars, planes and widgets of every size and description.
And, thanks to modern transportation and communication, a significant portion of the goods we consume are made in countries that can produce these goods more cheaply than we can do so at home.
This has been a boon for the consumer side of the average American. The outsourcing of manufacturing facilities to low wage countries has created hardship for older, less skilled workers in the US. On the whole, those affected have often been given “early retirement” packages that have allowed people to leave the work force well before the traditional retirement age of 65.
We are now seeing the transfer of technology jobs overseas in the form of “call centers” and engineering facilities. It is only natural that this should happen as countries like India have a large pool of educated people who can do these jobs at lower wages than their American counterparts.
This is a bad thing only if you see the world economy as a zero-sum game. The Indian call center operator who spoke with me today has more money than when he was an unemployed student in Delhi. He is helping build the Indian economy. He will be a consumer of American goods and services, even if all that he does is move into an apartment with a few electric appliances because his demand of electrical power will create the need for a new power plant built by Bechtel and using GE turbines financed by a JP Morgan Chase loan.
Other countries have developed social policies to create a social “safety net” under technologically displaced workers. Germany is one such country. The end result is a stagnant economy with an 11% unemployment rate, with “students” in their 30s and 40s and, and employers who are afraid to hire new workers because of the impossibility of reducing their workforces in bad economic times. It is a policy of economic paralysis by good works.
If the US represents 50% of the global economy today, and we can make that economy grow by 50% over the next few decades, then even if our share of that global economy shrinks to 40%, we will still be better off. And so will those middle class Indians.
And, by the way, the British did not become more imperialistic at the close of the 19th century. That was the Germans.
After you pointed it out, I looked it up. Out of all my 401K investments, his is performing the best.
That being said, he still used the word "hegemony" in a way that teed me off. That and claiming a mastry of the English language largely through reading reference materials biased me against an honest reading of this article. I don't much care for his writing style, but I don't invest based on it either.
There are whole sectors where automation has not staved off collapse of US manufacturing, e.g. clothing, consumer electronics such as CD and DVD drives, magnetic disk drives, etc.
Also, when the service economy collapses because of the comparative advantages of the off-shore operations, what comes next in the United States?
And, thanks to modern transportation and communication, a significant portion of the goods we consume are made in countries that can produce these goods more cheaply than we can do so at home.
Even now the export of services is not sufficient to counterbalance the import of manufactured goods. We are living off of our capital -- essentially selling the assets of the United States in order to pay for current consumption. When the service industry trade balance goes negative as well, the descent into bankruptcy will accelerate.
This is a bad thing only if you see the world economy as a zero-sum game. The Indian call center operator who spoke with me today has more money than when he was an unemployed student in Delhi. He is helping build the Indian economy.
I agree that it is not a zero-sum game. In fact, the period 1873-1896 was a period of considerable progress in other countries than Great Britain. There was great, if uneven, progress in the United States. Germany, unified in 1870, gained rapidly on Great Britain in every sphere. Serfs were freed in Russia, and bonds were floated for railways there.
However, Great Britain's preeminence among the Great Powers declined.
He will be a consumer of American goods and services, even if all that he does is move into an apartment with a few electric appliances because his demand of electrical power will create the need for a new power plant built by Bechtel and using GE turbines financed by a JP Morgan Chase loan.
Could be, although why would the plant not be built by an Indian company using Japanese or European equipment and financing. The idea that only US companies are smart enough to produce the highest-tech manufactures is just as wrong as the idea that only US employees are smart enough to provide the most sophisticated services. The JP Morgan Chase loan officer is most likely to be from London or Singapore, lending money based on deposits by non-US persons.
And, by the way, the British did not become more imperialistic at the close of the 19th century. That was the Germans.
The '80s and '90s were the period when Africa was colonized, and Great Britain acquired the choicest real estate -- Egypt, Sudan, Kenya, Rhodesia, South Africa, and Nigeria, as well as more minor parcels. Great Britain's colonial acquisitions during this period were greater than previously in the years between the Napoleonic Wars and 1870. So Great Britain did indeed become more imperialistic than before, and she was far more successful than was Germany or France.
I suggest that you start paying more attention to what Mr. Gross has to say. He isn't one of those regular flim flam paper pushers from Wall Street. He impresses me as a straight shooter without the hidden agenda. If you remember, he blew the whistle on GE Capital last year and that didn't make him many friends.
Richard W.
Richard W.
That's because he is the most successful bond manager in the country. Bonds have outperformed most other investments for the last three years. Now bonds are at the highest price relative to yield since the sixties.
He bought a couple hundred million of GE debt and they promptly announced another billion on the shelf, effectively depressing the value of his new investment. He was pi**ed and I don't blame him. But because he wields such a large sceptor in the bond markets, and because the timing corresponded with the corporate shennanigans he is given credit for prescience when he simply had a case of good timing.
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