When Giants Fall Has Arrived!

My latest book, When Giants Fall: An Economic Roadmap for the End of the American Era, has just been published by John Wiley & Sons. It is already on the shelves at Barnes & Noble, and will soon be in stock at Amazon.com, Borders, and many other booksellers around the country.

For a taste of what it’s all about, here is the Introduction:

In late 2007, a Chinese submarine suddenly “popped up” in the middle of U.S. military exercises taking place in the Pacific Ocean. According to Matthew Hickley of the United Kingdom’s Daily Mail, the 160-foot Song class diesel-electric attack submarine “sailed within viable range for launching torpedoes or missiles ” at the USS Kitty Hawk, a 1,000-foot aircraft carrier with 4,500 personnel on board that was being guarded by a dozen warships and at least two submarines. The newspaper added—in a report that received scant U.S. media attention—that American military chiefs “were left dumbstruck.” One North Atlantic Treaty Organization (NATO) official said that “the effect was ‘as big a shock as the Russians launching Sputnik ’—a reference to the Soviet Union’s first orbiting satellite in 1957 which marked the start of the space age.”

But it isn’t only in the military arena where there are signs that the United States is not quite in a league of its own. An August 2007 New York Times editorial, “World’s Best Medical Care?” highlighted two studies that revealed the U.S. health care system, contrary to popular belief, had fallen significantly behind those of other nations. The first, published by the World Health Organization seven years earlier, ranked the United States 37th out of 191 countries worldwide. The second, detailed in May by the well-regarded Commonwealth Fund, rated the United States “last or next-to-last compared with five other nations—Australia, Canada, Germany, New Zealand, and the United Kingdom—on most measures of performance, including quality of care and access to it.”

For a nation that has long viewed itself as the leader of the pack, the results were curiously incongruent. Yet so is the gap between the apparent economic standing of the United States and its long-term financial health. Such could be seen in an eye-opening commentary published in the July/August 2006 issue of the Federal Reserve Bank of St. Louis Review. Written by Laurence J. Kotlikoff, a Boston University economics professor, the essay posed a provocative question: “Is the United States Bankrupt?” Citing a $ 65.9 “fiscal gap” stemming from unaccounted – for pension and health care benefits that 77 million baby boomers are expecting to receive in their golden years, Kotlikoff argued that “unless the United States moves quickly to fundamentally change and restrain its fiscal behavior, its bankruptcy will become a foregone conclusion.”

Many, if not most, Americans believe that their country’s place in the world is not much different than it was two decades ago, when the collapse of the Berlin Wall left the United States as the last superpower standing. Some memories go back even further, to a time when the United States was a beneficent bulwark, helping allies and rivals alike to recover from the ravages of World War II. Yet vignettes like those—along with other evidence—point to the fact that, as music legend Bob Dylan once wrote, “The times they are a-changin’.” Indeed, not only is the United States losing its grip on the reins of global leadership, but other nations, including China, Russia, India, Iran, and Venezuela, are asserting their right to set the international agenda.

For those with some sense of history, the prospect of a new world order should not be all that surprising. Indeed, when it comes to the relative fortunes of countries and empires, the only thing you can be sure of is that tomorrow’s winners will be different from today’s. Advantages that might once have pushed a nation to the top of the heap can become untenable burdens. Technological advances can level the playing field, sometimes abruptly. Those who have lagged try harder, in the hope they can lead. Sometimes, people simply tire of the old and seek out the new. Whatever the reasons, the United States’ loss of status and the prospect of intense jockeying for power by individuals, groups, and nations around the globe will have far-reaching consequences for economies and markets.

There’s more to it, however. As unsettling as a seismic geopolitical shift might be, it is not the only major challenge the world will face in the years ahead. Developments that have played a role in fostering geopolitical upheaval will also heighten other strains. Among the most daunting is the issue of resource constraints. For any American who has experienced the painful consequences of sharply higher prices at the gas pump, it is apparent that circumstances are different than they were only a few years ago. The same holds true in regard to the price and availability of other important resources and the vast array of globally traded commodities. All of a sudden, the promise of a land of plenty has been found wanting.

Thanks to years of booming economic growth in countries around the globe, more people now have the opportunity—as well as the desire—to enjoy what Americans and others in economically advanced nations have long taken for granted. In places like China, for example, with its population of 1.3 billion people, there has been a clamor for automobiles, air conditioners and heating systems, and an agricultural product that many once viewed as a luxury item, served only on special occasions—that is, meat. Meanwhile, the rest of the world has not stood still. Hundreds of millions of people have bought homes, cars, flat-screen televisions, and computers; have increased the miles they drive and the vacations they take; and have kept on consuming as if the horn of plenty could only grow larger.

Coming Home to Roost

Now, though, circumstances are changing. The mistakes and excesses of the past are coming home to roost. It is much more costly and difficult, for example, to obtain the fuel needed to power the spending and consumption habits of an increasingly energy-dependent world. Burgeoning appetites for food have stressed the global ecosystem, undermining the availability of resources that mankind has depended on from time immemorial. Water supplies and sanitation facilities not only have failed to keep pace with the population growth of the past century, they have lagged behind the increases in developing-country per-capita consumption levels that have occurred during the past decade.

Around the world, these concerns have spawned restiveness, protests, and riots. Evidence suggests, however, that the roots of heightened social instability are broad-based. After years of pressure and propaganda from businesses and policy makers for greater integration, people are challenging the utopian promise of globalization and unfettered cross-border commerce. Emboldened by the self-confidence that comes with improving fortunes, the Chinese, the Indians, the Russians, and other up-and-comers are no longer willing to kowtow to the wishes of the West or to suppress the resentments of the past. Many are feeling the powerful tug of tribal roots. All of a sudden, there is much less impetus to keep primal urges under wraps.

The blistering economic successes of the emerging powers, aided by mercantilistic trading strategies, the luck of geography, and a powerful marriage of economics and politics, have also fostered other developments that will destabilize the economic and financial landscape ahead. Around the world, numerous imbalances have sprung up, many unprecedented. Export-driven powerhouses and commodity-rich nations like China, Japan, Russia, Brazil, and oil producers in the Middle East have accumulated outsized foreign currency reserves, with much of their holdings, until recently at least, kept in U.S. dollars. Large chunks have, in turn, been plowed into U.S. stocks, real estate, and bonds, especially government and agency-issued securities.

For a while, this recycling process seemed almost symbiotic, a kind of perpetual-motion machine. The United States—its government and its citizens—would spend more than it could afford on a wide range of goods and services produced elsewhere. Foreign vendors—or, more likely, their public-sector overseers—would redirect the proceeds back into U.S. assets, helping to keep liquidity abundant, market conditions stable, and the cost of borrowing low. This combination would foster the illusion of never-ending nirvana, encouraging everyone to continue carrying on as before. Spend. Borrow. Repeat. It was seemingly a golden age of peace and prosperity for all.

In the end, though, things didn’t quite work out as many had hoped. U.S. public and private sector debt levels soared to all-time highs. Wages stagnated, domestic opportunities disappeared, and the costs of living suddenly rose beyond the reach of ordinary working-class Americans. The allure of buying cheap products from foreign-based manufacturers, together with the stampede by U.S. multinational corporations to move production to offshore locations where labor and other operating costs were low, allowed the nation’s manufacturing prowess to wither on the vine, undermining future growth prospects. All the while, the circle of dependency helped chip away at support for what has long been the world’s major reserve currency.

Gaining Advantage

To be sure, those who have been feeding the beast have suffered some indigestion themselves, as dollar-denominated holdings have fallen in value. Nevertheless, their steady accumulation of cross-border surpluses and other economic resources has given them potent weapons, allowing them to secure geopolitical advantage. Nations like China and Russia, for example, have been aggressively wielding their financial firepower in Africa, Asia, Europe, and South America. In resource-rich regions, they’ve negotiated trade deals and built production and logistical facilities; they’ve provided grants and loans and underwritten infrastructure projects; they’ve supplied arms and high-tech defensive capabilities—increasingly, the currency of choice in a troubled world—all in exchange for what everybody else now wants.

Geopolitical up-and-comers have taken an increasingly aggressive tack in their dealings with established powers. In recent years, for example, China has revealed plans to diversify its $ 1.8 trillion of official reserves, showing just who is in charge of the United States’ economic future. The Asian nation has also warned its ostensibly more powerful rival away from any moves that might undermine its export strategy, asserting that, if need be, China would resort to the so-called nuclear option—dumping its holdings of U.S. assets all at once, regardless of the damage it might cause to its own interests. Russia, meanwhile, has not been shy about increasing its stranglehold over energy supplies for Europe, or throwing its weight around in Asia, Africa, and the Middle East.

Such machinations have helped to augment an already growing antipathy toward free trade and increasing cross-border cooperation, in the West and elsewhere. Spurred on by the fallout from a global financial crisis and a quickening economic downturn, protectionist sentiments have gained strength. Increasingly, the harsh realities of dislocations and distortions have overshadowed the lofty theories of economic liberalization—neoliberalism. Fractures have developed in collective political arrangements. Monetary unions and currency pegs agreed to when times were good are being called into question as conditions worsen. Around the world, multilateralism is being subverted by regionalism, bilateralism, and unilateralism.

Meanwhile, the altered dynamic of key resource markets has set the stage for a debilitating and increasingly divisive struggle for advantage. Financial Times commentator Martin Wolf has made reference to a “zero-sum world,” where a shortage of productivity-enhancing energy might turn back the clock to a time when gains could be achieved only at others’ expense. The prospect of a further disorderly unwinding of numerous global imbalances—apart from the extraordinary eruptions already seen—also signals serious trouble ahead. So does a reversal of the productivity gains of recent years, brought on by heightened geopolitical unrest, rapidly diminishing economies of scale, and adverse demographic trends.

Further undermining the outlook, of course, is the United States ’ loss of standing—economically, politically, and militarily. Over the past several decades, booming global growth has had many forebears, though two, in particular, stand out. The first is the existence of the United States’ protective umbrella, which has allowed vast resources to be channeled into productive peacetime activities. The second is a Western-fomented economic order, centered on the neoliberal-capitalist agenda. But with global stability in doubt, the rules and mechanisms of the established financial and trading system under assault, and the world’s largest marketplace for goods and services becoming unhinged, advanced and developing countries alike will suffer the consequences.

It won’t just be growth prospects that are affected. Economic shifts and shocks will destabilize other realms, too. Indeed, the schisms are already apparent. Growing wealth inequality and the scramble for key commodities have fostered tension and conflict between haves and have-nots. Long-distance, hydrocarbon-fueled global supply chains no longer offer the benefits they once did, lessening the attractiveness of increasing global connectedness. The fact that relatively few countries have managed to realize outsized gains under a trade regime ostensibly based on equality and fair dealings has raised suspicions about others’ intentions. Instead of drawing people together, the successes of the past are driving them apart.

Around the world, economically inspired nationalism has stirred up feelings of arrogance and animosity toward outsiders. An emphasis on diversity has fostered an acceptance of divisiveness. Large populations of illegal immigrants, tolerated when booming growth created a seemingly insatiable demand for low-cost labor, are suddenly the targets of an angry backlash. In places like South Africa, Italy, and the United States, among many others, there have been grassroots movements to punish, prey on, and drive out foreign nationals. Popular anxiety has also spurred growing calls for a dramatic political response. In the United States, meanwhile, weariness and resentment over the long – drawn-out military actions in Iraq and Afghanistan have allowed isolationist sentiments to broaden their hold.

Responding to the End of the American Era

Taken together, these various developments constitute a clear and present danger to the economic well-being of every American, especially those who have been conditioned to believe that life can only get better in future. Dramatically changing times will require new ways of dealing with everyday routines. People will need to factor in the likelihood that livelihoods will be continually at risk. Many will be forced to expend a great deal of time and energy figuring out new ways of getting around and getting by. Living arrangements and lifestyle choices that once seemed second nature will have to be completely rethought when efforts to acquire the basics—fuel, food, water—are much more time-consuming and difficult than before.

Those in the United States and elsewhere will have to pay better attention to where and how they live, who they depend on, and what their options are when things go wrong. They will also need to think about the steps they need to take now in anticipation of the upheavals that will occur in future. Health-and security-related concerns, for example, will have to be a key focus of attention when deteriorating public finances, widespread business failures, and crumbling infrastructure boost crime, disrupt safety nets, and leave critical services, including medical care, that much harder to come by. No doubt the world will also be a more perilous place when competition for scarce resources is intensifying and powerful interests at home and abroad are vying to gain the upper hand—in any way they can.

Most, if not all, businesses will quickly discover that existing models either are irretrievably broken or will have to be dramatically reworked to accommodate the risks and challenges associated with a more uncertain and unstable operating environment. Unlike during the era of globalization, bigger won’t necessarily be better. In fact, large size will likely be a serious disadvantage when flexibility and fast response times are imperative. Growth for growth’s sake will be the road to ruin when the costs and risks of boosting payrolls, increasing plant and equipment, and taking on hefty financial obligations more than outweigh the potential benefits.

Mounting logistical disruptions, tighter borders, heightened geopolitical instability, rising costs of key inputs like water and energy, and an assortment of dislocations will shoot holes in many of the old theories about how to improve efficiency and boost growth. For most firms, approaches that might once have increased the odds of success, including just-in-time inventory management, the development of long and intricate supply chains, and outsourcing of functions to other locales, will lead to their undoing. What is more, instead of focusing on aggressively pruning back operations to reduce costs, owners and managers will be forced to strike a tenuous balance between what they might be able do without and what they must have on hand to remain in business when disaster strikes.

Needless to say, investors will have a much more difficult time preserving and expanding wealth under these sorts of conditions. Not only will economic and financial circumstances create a far more treacherous trading environment than has been seen before in modern times, but even ostensibly correct decisions could prove calamitous when other, previously less likely developments intervene. Betting against the dollar, for example, makes sense on many levels. However, the risks stemming from investing in or moving funds into other currencies, markets, and economies during a time of turbulence and growing geopolitical conflict may well offset all of the potential rewards—and then some. Paradoxically, having what others really want might not necessarily be such a good idea in the new scheme of things. At a time when everything is suddenly up for grabs, some things are best left out of reach.

In the end, the road ahead will be fraught with myriad dangers that will be impossible for anyone to ignore or avoid, regardless of current circumstances. Even worse, developments that have brought us to this point make it clear that a new, far more challenging environment is not just a passing storm, poised to quickly blow over. Instead of looking forward to a return to the way things once were, Americans—and investors in particular—will have to get used to a “new normal, ” where only those who are flexible, open-minded, resilient, and fully prepared for the worst will be able to survive, let alone come out on top. Those who refuse to take these threats seriously risk losing everything. Now more than ever, it is time to become attuned to an entirely unique roadmap.

To learn more, check out the links to the "Description," "Preface," "Table of Contents," and "Advance Praise."

Bob Dylan – The Times They Are A Changin’ (Unreleased 1976)