American Empire (?): The Way Forward

The great American experiment that began more than 200 years ago is looking a bit weary as 2011 draws to a (welcome) close.  As a relatively oddball group of historians who apply mathematics to history will tell you, when viewed through the lens of cliodynamics, the empire of America is already past its sell-by date.  The average lifespan of great powers over the last 3,000 years is 215 years.  It has been 223 years since the ratification of the US Constitution.  But these kinds of analyses, especially those that appeal to our preference for simple dichotomies – live or die, good or evil, rise or fall, win or lose – seldom foretell outcomes that often fall outside the boundaries defined by carefully crafted pseudoscientific models.  Clio, the muse of history for whom cliodynamics is named, would undoubtedly find such exactitude quite whimsical; a reason to pluck her lute with a wry smile.  Nevertheless, the current crisis facing the US and much of the Western world is worth considerable contemplation as the consequences of ignoring what is going on might very well end American power as we have come to know and enjoy it.

            By most accounts 2011 was a big disappointment.  Outside of giving bin Laden his due most events were forgettable and regrettable rather than notable or laudable.  The annual lists of best and worst expanded geometrically in 2011, mostly due to an increase in worsts.  The economy remained anemic, our politicians were (at best) a source of painful entertainment, and the social fabric of society was torn by the realization that the pursuit of the American dream is a rigged game: fewer will get there and the few who do will act – often aggressively – to prohibit others from joining them.  During 2011 ‘political will’ became an oxymoron, unless you count extremists in Congress who believe intransigence is virtuous.  Since the current economic crisis began in August 2007, we have made steady progress in the wrong direction.  Our economic crisis has become a political crisis and now, just in the last few months, the ‘Occupiers’ have made the case we now also have a social crisis.  Most of us watched Greece burn in civil unrest without being able to dismiss the news with our usual effete indifference; our own profligacy has made us wonder how far the pain will spread … how long before it arrives here?  Unfortunately, 2012 looks like more of the same in both Europe and the US, no real progress has been made to affect change in the legacy systems that lock us into a dangerous status quo that shows debt and entitlements overwhelming GDP.

            While recent declines in the unemployment rate have been promoted by feel-good aspirants as the beginning of a new economic day, upon closer inspection they look as phony as the smiling politician who claims he or she has our best interest at heart.  The declines ignore the fact that the chronically unemployed are no longer counted.  Nevertheless, turning the tide of expectations from negative to positive is not all bad even if delusional, and nascent evidence suggests the beginning of a decoupling of US security markets from the woes of Europe might be possible.  Meanwhile, China, which aims to diminish American power, is beginning to realize how growth presents a whole new array of economic, political, and social challenges.  However, even if these nascent indications do herald more bullish markets for US securities it is likely a temporary condition, at best a respite from the messy progression toward full globalization where no one, or two, or even a few nations predominate; and which punishes those who have forgotten the value of savings and investment.  Within two or three years our own debt issues – left to bloat – will put us in the same place as Europe and the world will begin to turn away from the dollar as the preferred reserve currency.  A post-dollar world will be devastating to Americans unless it is choreographed by the US to affect a soft landing.  However, if there is a respite in 2012 it will offer Americans one last chance to preserve the US economy and our relative position of power in the world.  The way forward is what I will characterize as a great work-around.  We must challenge legacy thinking and entrenched regimes.  We must negotiate a new narrative to assure a better future. We must find new pathways around the systems and rules that endanger our future.  Fortunately, out of inspiration or desperation, many are thinking this way and many more may join them soon.  Game changers are being actively pursued by the best and brightest among us.  Follow me.

            The biggest ‘work-around’ – already underway – emanates from beyond our shores but may make landfall in the US soon.  It is what Robert Neuwirth of the journal Foreign Policy calls “The Shadow Superpower.”  It is the $10 trillion global black market that he claims is “the world’s fastest growing economy.”  Technocrats, bureaucrats, and aspiring plutocrats take note: much of the developing world and even some of the developed world are finding ways to avoid your negligent tutelage that too often lines your pockets with wealth produced by the enterprise of others.  Neuwirth calls this “unheralded alternative economic universe … System D.”  Two years ago the Organisation of Economic Cooperation and Development revealed that “half the workers of the world – close to 1.8 billion people – were working in System D: off the books, in jobs that were neither registered nor regulated, getting paid in cash, and, most often avoiding income taxes.”  Neuwirth suggests these enterprises are “ruled by the spirit of organized improvisation.”  As we look at the hideous leadership we have today in the US, and face the struggle of making financial ends meet, how long before the model of System D (which is not too far removed from how we currently use eBay, Craig’s List, or Etsy) becomes a prevalent modality of commerce in the US?  Although it will undoubtedly be labeled illegal by those charged with protecting the status quo, will it be considered immoral or unpatriotic?  Once a tipping point of adoption is reached and such organized improvisation becomes the norm, how would the rutty-faced enforcers employed by the Fed ever rein in such a tsunami of renewed independence and self-reliance?  Will there be a Shadow America?

            Following in the modality of organized improvisation are what have become known as flash mobs that are also spawning what I will call flash capitalism.  Neighborhood thugs who wanted to tip over a C-store to sate their appetite for Twinkies and cigarettes were the first to apply the flash mob model.  Like al-Qaeda that first demonstrated the power of asymmetric networks, flash mobs have villainous origins.  However, digital communication certainly allows spontaneous collective action and can also be used for good.  Such was the case in the revolutions in many Arab states in 2011.  It can also be used to more productive ends to both entertain and fund enterprise.  My favorite feel-good flash mob is ‘Deck the Halls’ filmed at the Carlson School of Management at the University of Minnesota.  Another more recent example of this digital collectivism that fits into the modality of organized improvisation is a new online venue to raise funding for creative projects and entrepreneurial startups called kickstart.  Tune in, hear the pitch, and decide if you want to support the venture.  Since traditional lending has dried up largely due to commercial banks finding they can make better returns by using government bailout funds to trade exotic securities to assure their year-end bonuses, kickstart has created what is in effect flash capitalism.  While fewer than half of the solicitors reach their funding goal, that is substantially higher than what traditional private capital markets achieve, which exclude most ideas and entrepreneurs without ever hearing the pitch. 

            The last idea I will share here is the biggest, most promising, most challenging, and frankly most inspiring idea I heard (and then studied) during 2011.  It is the mother of all work-arounds.  It is Jeremy Rifkin’s Third Industrial Revolution.  I first heard Rifkin’s ideas on the Diane Rehm radio show, and you can listen here.  Once you listen, you may want his book, which is available here.  Rifkin’s work-around is of the energy complex, which he persuasively argues is at the center of humankind’s future and, I would argue further is the keystone in the arch holding up America’s future as a world power.  He identifies five pillars that must be radically changed to produce a new narrative that defines our future.  The first pillar is the shift to renewable energy.  The second is essentially a re-conception of where energy comes from; in his thesis it comes from every building, which are turned into “micro-power-plants to collect renewable energies on site.”  The third pillar is on-site storage of unused or intermittent energy utilizing hydrogen technologies.  The fourth pillar is to utilize an Internet model to form smart energy networks that distribute energy in an “energy-sharing intergrid.”  Finally, the fifth pillar is the transformation of the entire transportation fleet of vehicles into “plug-in and fuel cell vehicles that can buy and sell electricity on a smart, continental, interactive power grid.”  The old energy model, which is highly centralized owing to a design that collects energy from a few places and transports it to a distant end user, is rendered obsolete once energy is collected, used, and shared from an infinite number of locations.  This changes the whole power structure of the world – both energy and political – to a lateral and highly distributed model that will create thousands of jobs and – pun intended – pulls the plug on governments and despots who control energy as an insidious form of repression.  (And yes, I include Western democracies here.)  As Rifkin points out in his book, Europe is well ahead of the US in adopting his ideas.  The EU has given them a full embrace.  But, as mentioned above, we may have a respite in the US that allows us to catch up and surpass our friends in Europe.  However, we have got to stop indulging the “drill, baby, drill” bunch and invest in the long term.  That means no pipelines from Canada, among many other things.  It means, in short, blowing up the status quo and having the confidence to form a new identity around our old values of independence, self-reliance, and innovation.

            As leadership advisor Mike Myatt recently wrote in Forbes, leadership is many things, but it is mainly pursuit.  It is the “pursuit of excellence, of elegance, of truth, of what’s next, of what if, of change, of value, of results, of relationships, of service, of knowledge, and of something bigger than themselves.”  If 2012 is anything; I hope it is the year we each start to lead-by-pursuit.  Forget the elections and other political sideshows, just lead, baby, lead!  If we do, we just might overcome the legacy systems that protect the status quo and ensure a much better future for America and the world.

Happy New Year.

Our Real Economic Problem: The Decapitalization of Wealth

 As many economic pundits will tell you today, our current economic crisis was a long time in the making.  Some point to over-consumption, others to the accumulation of debt, and still others point at a broken regulatory system, government spending, and political gridlock.  However, the fundamental issue is none of these things, although each is a symptom of, or a by-product of, the real issue: the decapitalization of wealth.

            The value of capital is the utility that can be realized from it.  Economists generally define utility as the measure of ‘need satisfaction’ realized by a consumer in the consumption of a good or service.  Extending this concept to capital, the utility of capital is the measure of economic goods and services created through its deployment.  Wealth deployed as capital that produces economic goods and services creates healthy economies with low debt, low inflation, and low unemployment.  Unfortunately, much of the wealth created over the last twenty-five years or so has flowed to low capital utility venues.  This process has accelerated over the last decade. 

            So what are these low capital utility venues?  Wealth deployed for war making is a classic example.  Anyone who has taken an introductory course in economics can probably remember the guns vs. butter analysis.  Money invested in death and destruction is obviously not a creator of economic goods, and the US has spent more than $2 trillion in this manner since 2003.[1]  Financial bailouts also have low utility.  As we have seen, we may have stabilized the financial system with the massive bailout of too-big-to-fail banks, but we have not created economic goods in the process, and the bailout funds are now trapped in the balance sheets of banks; idle dollars producing little to no utility.  Our tax system, which is at least partly to blame for the inordinate concentration of wealth in the top 1% of our citizens, is also responsible for decapitalization.  Wealth concentrated among the few means that capital has flowed to idle reserves – in low risk, low velocity trust funds.  Dusty money is not happy money.  Speculation and financial ‘engineering’ is also responsible for decapitalization.  Currency manipulation, which amounts to more than $3 trillion in transactions per day worldwide, does not produce economic goods.  Nor do the billions of dollars invested in credit default swaps that produce no more capital utility than dollars dropped into slot machines on the Vegas Strip.  Another classic example is government spending and investment.  When the Pentagon spends $6,000 on a coffee pot or the White House blows $500 million on Solyndra, it is clear that government bureaucrats make lousy purchase and investment decisions, regardless of party affiliation.  Debt service payments and sovereign debt bailout funds are other examples.  By now you get the idea: most of the places our money ends up today are venues of decapitalization.  That must change.

            In a recent article by the Washington Bureau Chief of The New York Times, David Leonhardt, argued that our current crisis might actually prove to be worse than the Great Depression due to one central difference: during the Depression, invention, production, and investment in public infrastructure continued at high levels.  Leonhardt suggests, “The most worrisome aspect about our current slump is that it combines obvious short-term problems – from the financial crisis – with less obvious long-term problems.  Those long-term problems include a decade-long slowdown in new-business formation, the stagnation of educational gains and rapid growth of industries with mixed blessings, including finance and health care.”[2]  “Mixed blessings” here means finance and health care are relatively low capital utility investments.  When we see job growth in these private, and almost any public sector categories, we must refrain from patting ourselves on the back.  They produce little more than single-round economic effects.

            Correcting this problem is not easy, but it is doable.  As you can see from the above list, one may even argue that decapitalization accelerates in an insidious manner, spawning more and larger venues of low utility.  We need look no further than our own economic history to see that many of these venues, except war making, are relatively new developments in our economic system.  Fiscal policy and, to a lesser extent and effect, monetary policy should both be oriented to direct wealth away from these venues.  Financial system regulations and tax policy can also be changed to affect this.  Education, research and development, small business development, and yes, liberal trade and immigration policies can also help stem the tide of decapitalization. 

            Creating wealth requires a relentless focus on capital utility.  When capital works, it produces economic goods; when idled or addled, it leads to dire economic effects.  Decapitalization is the overarching problem.  Until we recognize this we have little hope of pulling our economy out of the ditch.

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[1] This excludes the $600 to $700 billion the US spends annually as a baseline expenditure for national defense.

[2] David Leonhardt, “The Depression: If Only Things Were That Good,” October 8, 2011,The New York Times, www.nytimes.com.

Re-imagining America

In my last post, “The Best in Us,” I argued that a breach of character – specifically the loss of honesty and humility – was at the center of our political, economic, and social problems in America.  Bringing honesty and humility back to our discourse and decision-making is indeed elemental to the recovery of America.  The lunatic fringe who stand on ideological and religious fantasies, and who spew invective that is void of any credible or durable ideal must be marginalized.  Obama has tried, although addled by his own Socratic disposition and by the virulent and racist attacks against him, whereas a guy like Governor Chris Christie might have a better chance.  Christie doesn’t appear to cotton to stupidity, and he seems to have the honesty thing down. His disposition and, lets face it, his ethnicity, may be more appropriate for the crisis we face.  The last part, as repugnant as it is, is a sorrowful reality.  That said, once we heal our character – in our leaders and ourselves – we must also move forward to re-imagining America.  This requires a holistic makeover of American identity.

            Now, before you go running around with your hair on fire accusing me of being an unpatriotic _________, let me be clear: the basics do not need to change.  Independence, self-reliance, and innovation remain core values in a re-imagined America.  But other myths, dispositions, preferences, and behaviors, which have found their way into our identity since the end of the Cold War twenty years ago, must change.  Unfortunately, the end of the Cold War made us dumb, and 9/11 made us dumber.  It is time to get things back on track.  The “end of history,” which was hubristically claimed by Francis Fukuyama in 1992, was actually the beginning of our self-inflicted decline, which hit warp speed after 9/11.  The post-evil-Soviet-empire era did not result in a prophesized thousand years of peace and prosperity; when coupled with digital technologies it simply created new ways to compete, mostly asymmetrically.  Meanwhile, we Americans gorged ourselves on nothing-down ponzi schemes instead of doubling-down our investment in the things that made us great, most notably all things related to intelligence.  Here are four things we need to re-think.

1. The Power Trap.  The United States won the hard power game based on brawn.  Meanwhile, the rest of the world came up with new pathways to power that are soft, generally based in intelligence.  China has focused on education and economics.  Russia has focused on resource power, principally oil.  Brazil has focused on agriculture, energy, and demographic power.  India is growing a well-educated middle class faster than any state in the world.  Germany kept their debt low and invested in industry and trade.  Ireland welcomed immigrants and entrepreneurs.  But, the United States kept playing the old game: bigger weapons systems and odious domestic security schemes financed with debt and founded in fear.  We are trapped in Cold War power narratives.  Americans need to wake up to the new world and start thinking brains over brawn.
2. The Wealth Myth.  Since the Peace at Westphalia in 1648 that gave rise to the state-centric international system, wealth has been the denominator of power.  The more land, resources, people, and money a state had determined its power in the world.  Wealth is still important, but as argued above, intelligence (which is not always closely correlated with wealth) is now more important.  However, there is another dimension to the wealth myth that needs to be considered anew.  Wealth does not always mean we are better off.  Affluence can actually weaken civil society.  We need look no further than the last twenty years of American history.  Even before the current recession began, depression was up, test scores and graduation rates were down, poverty and homelessness was rising, and the number one threat to our health was not some incurable disease, it had become self-indulgent obesity.  All this occurred as the United States hit the pinnacle of its wealth and power in 2000.  If we are going to succeed in facing the current crisis, we need to shift our focus away from wealth to well-being. We need to practice self-restraint and summon compassion.  We must prefer austerity to audacity.  We need to focus on those things that make us strong and content.  Dignity, respect, resilience, and, moreover our core values of independence, self -reliance, and innovation do not come from wealth, they come from strong bodies, agile minds, and whole hearts.  They come from well-being. 
3. Our Growth Obsession.  The orthodoxy of growth – that more is better – may be fatally flawed.  We are reaching resource limits and facing environmental impacts that suggest we better get on the less-is-more bandwagon.  As Herman Daly, a former member of the World Bank recently argued, “In an empty world, growth is good.  But that is not the world we inhabit.  We live in a world that is full of us and our stuff, a world that is finite in terms of the economic activity it can sustain.”[1]  All of our current financial models call for growth.  It has become the wicked requirement of affluence and the only relatively painless way out of overwhelming financial deficits.  However, what if we rejected that orthodoxy and, with a steady eye on well-being, conceived plans that aimed at contraction?  What if we designed our lives and attendant expectations around less, not more?  I will further suggest contraction, not growth, is the more reasonable way to survive the current crisis and to transcend the many maladies of affluence realized over the last twenty years.  It may seem antithetical, even heretical, when considered through the lens of our current American identity, but it just may be exactly what our future identity requires.
4. The Piety Preference.  May we please retire piety from the political sphere?  Until the 1970s religion was in the private and public sphere – at home and in church.  It crept toward the political sphere during the 1950s as a point of differentiation with “godless communism,” then lurched further forward during the civil rights movement and anti-war demonstrations on the left in the 1960s, only to be met by even more fiery rectitude from the far right after Roe v. Wade in 1973.  Since then, faith-based rectitude has produced more division – and violence – than at any time in US history.  When I hear politicians and despots summon their faith I cannot help but wonder what Jesus, or Moses, or Mohammed, or Buddha, would say to them.  In America, where most politicians claim Christianity, I seldom witness even the slightest correlation between what politicians say and how they behave with the teachings of Jesus Christ.  The fiber of diversity is what made America great, not the twisted interpretation of scripture for the projection of political power.  To those who are elected to lead, please respect our differences by leaving your piety at home.  We are a nation of laws, not prophecy.

It is time to think differently to save our future.  As argued before, we must heal our character, but we must also re-imagine America.  Old orthodoxies that served us well twenty, fifty, or one hundred years ago will not work today.  They may even work against us.  Our core values remain: independence, self-reliance, and innovation.  But, the paradigms we employ – how we think about the world and our role in it– must be reconsidered.  Things will likely get even worse before they get better, but the sooner we start the conversation about re-imagining America, the sooner we will all be better off.

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[1] Interview of Herman Daly by Martin Eirman, September 5, 2011, “We need a Crisis, and a Change of Values,” http://theeuropean-magazine.com/356-daly/357-the-end-of-growth.

The Best in Us

It is often said that the worst times bring out the best in us.  As I reflect on 9/11 and the decade that followed, I oscillate between anger, sadness, and disgust.  At times my jaw is clenched, while at others the tears well up.  Then, too often of late, I just hang my head in disbelief.  As an historian it is impossible for me to avoid comparing 9/11 to other moments of crisis in America, to other ‘worst’ times.  The run-up and aftermath of the American Revolution, Civil War, and Great Depression and World War II are obvious candidates for comparison.  What I find is that the significant markers that define the beginnings of these crises are characterized by both grave challenges and collective determination.  Americans come together and address the crisis with a high sense of resolve, responsibility, and sacrifice.  Our character is lean and strong.  During this period of comparison there are many more similarities than differences.  It is in the ‘out’ years, roughly three years and beyond the initiation of crisis, when more differences are found, and where prospects for the future are defined.

            Our initial response to 9/11 was similar to other crises.  Flags were everywhere and while a few people behaved in a manner unbecoming an American, most of us kept our cool and rallied around our leaders with compassion for those who lost loved ones, and a determination to seek justice.  In the out years, however, we lost our composure by compromising two things: our honesty and our humility.  Ideological bullies like Vice President Dick Cheney began by lying about weapons of mass destruction and al-Qaeda in Iraq.  Inside the Beltway of Washington DC they call it ‘politicizing intelligence’.  I will call it what it is: lying.  The lies enabled a call to action that has cost us at least two trillion dollars and, across the world, the loss of tens of thousands of lives.  Once our honesty was lost, what little humility remained since we had become the world’s sole remaining superpower after the collapse of the Soviet Union was vanquished by our hubristic response to 9/11.  Once our humility was gone, our national character – our identity – was lost as well. We were all sucked into a charade that has proven catastrophic.  The promises of the Cheney bunch – of cheers, bouquets, and new democracies – were never realized and now we are stuck in a quagmire without a clear exit.  The tally of blood and treasure lost is far from over.

            Dishonesty, and moreover, arrogance, appear to be the primary products of the out-years after 9/11.  Now we behave at home the way we have abroad.  Our leaders in Congress swagger about with Cheney-esque anger and certitude.  Ideological bullying has become the norm.  Meanwhile, our president hides in the White House like a prom king who has just realized the student body doesn’t love him so much after all.  What courage he had has been overcome by his naiveté.  No, President Obama, the old white pudgy boys in Congress are not enamored with a young fit black man in the White House.  They want you out and they will do anything possible to bring that about.  It is time for you to fight for our future and forget about a second term.  Use the rest of your term to be the best one-term president ever.  If you do, who knows, you might even have a second term.

            As I watched the tears shed by the children remembering their loved ones at Ground Zero on this tenth anniversary, I couldn’t help but also wonder about all the tears shed by the children of those who have been killed in Iraq, Afghanistan, and now Pakistan.  As I watch Wall Street prosper, I wonder why we can’t do the same thing for main streets all over America.  As I watch the middle class rise across all of Asia, I watch and wonder why we tolerate its decline in the West.  As I watch students across Scandinavia and Asia excel at levels significantly higher than our own kids, I wonder how we expect to remain a superpower.  As I watch our security, health, and environment decline from our dependence on fossil fuels, I wonder why we don’t launch a massive public initiative to produce new fuels and new distribution systems. 

            Many wonder these days if Karl Marx was right; if capitalism will produce its own demise.  It is an interesting question given our current circumstances.  I conclude, however, that capitalism and democracy are not the problem, character is.  We must regain our sense of honesty and humility to face the many challenges we face.  Once our character is lean and strong again we will have the courage to do what we know is right.  We will not allow those we elected to serve us to continue serving themselves first.  We will, once again, summon the best in us.

The Neverwillbe Reagans

As the Republican presidential hopefuls gather at the Ronald Reagan Presidential Library this coming Wednesday evening, there will be (no doubt) a number of attempts to borrow the alchemic allure of President Reagan as each candidate seeks to channel his homespun American exceptionalism.  However, the top-tier, including Rick Perry, Michelle Bachman, and Mitt Romney, have very little in common with Reagan.  They are the product of an angry and twisted exceptionalism steeped in religious certitude, nationalistic fear, and elite entitlement.  Perry espouses state’s rights and secession in a manner not heard since Southern Confederates used the same arguments to preserve the institution of slavery.  Bachman suggests we deserved our earthquakes and hurricanes as a rebuke of our evil ways, while Romney claims that corporations are people too.  At its core, their exceptionalism holds a contempt for Americans – especially for those who do not look like or believe as they do – and for the liberal ideals of the Founding Fathers.  Furthermore, while hope is a dirty word for today’s Republicans, commonly derided in the phrase “hope is not a strategy,” hope is exactly what Reagan brought to America.  (While President Obama tried too, he has – so far – failed.)

            Reagan gave Americans access to a special grace that his predecessor Jimmy Carter couldn’t or wouldn’t offer; largely due to the fact Carter was locked in his evangelical revivalist trinity of sin, redemption, and salvation.  Where Carter admonished Americans to sacrifice in order to alleviate a “crisis of spirit,” Reagan simply offered Americans absolution.  Reagan’s theological innovation was transferring the concept of original sin from the individual to the institution.  On the domestic front, Americans were good, while government and its bureaucracies were bad.  In foreign relations, the Soviet Union was evil, but Gorbachev (the human) was worthy of Reagan’s respect and consideration.  Reagan exalted Americans regardless of their race, religion, ethnicity, or even Party affiliation. Reagan’s ire was reserved for communism, not Americans, which he saw as the principal threat to God’s gift to humankind: freedom.  Reagan’s America was the chosen land inhabited by chosen people who had a responsibility to the world: to establish a divine imperium of freedom.  While Reagan did battle with his political adversaries like Speaker of the House Thomas “Tip” O’Neill, when the day was done they would share a drink, a story, and a song.

            As charming and effective as Reagan was at attracting political support, it is easy to find fault with his presidency.  Besides his promises, government got bigger, deficits swelled, and illegal activities were conducted from the desks of the National Security Council.  Reagan never delivered on the social agenda of the Religious Right, although that should have surprised no one; as Governor of California, he allowed abortion to be legalized and he supported gun control.  He was often heralded as a great communicator, but he was also a lousy executive.  He lived in his own world where too often fantasy trumped fact; where reason was set aside for faith.  But, Reagan gave Americans something that the dismissive angst spewed by today’s field of Republicans will never accomplish: Reagan made Americans feel better about themselves. 

            It is a long road to the election in November 2012, and America is indeed in dire straits.  Things might get better by themselves, although right now I’d bet on worse.  But, we’ve been here before; there have been many dark days in our history.  What’s required now is a humble sense of self, a platform of mutual respect, and above all, the courage to do right by our founders and our children.  Reagan’s alchemic American exceptionalism may not be the answer today, but believing in each other and taking personal responsibility to make the country and the world a better place while setting aside certitude, fear, and elitism would honor his legacy in the most worthy manner.  Less than one hundred yards from where the Republican candidates will debate Wednesday night is Reagan’s tomb.  Above it, carved in granite, reads, “I know in my heart that man is good, that what is right will always eventually triumph, and there is a purpose and worth to each and every life.”  Reagan loved his God and his country, and he loved Americans.  That is a message the Republican candidates would do well to heed.

At the Edge: Survival Tips for Baby Boomers

For the remainder of the typical Baby Boomer’s life the United States will likely be in decline, which will put Boomers – much more than others – in a very precarious position.  But, that does not mean one cannot survive and prosper, although it may require re-defining your life and a whole lot of work.

            Following the Federal debt debacle, the subsequent market sell-off, and the downgrade of U.S Treasuries by Standard & Poor’s, I received a Friday evening email from a financial consultant (to “Our Valued Clients”) that implored their valued ones to avoid panic.  They (all much younger than I) wrote: “We urge clients to take a deep breath, relax, and not react emotionally to what we are seeing in the market.”  While I was nowhere near panicking – perhaps because I have come to accept devaluation due to systemic risk (and because I’ve already changed my own investment strategy) – it struck me that if they were concerned enough to send out such an email after-hours on a Friday in August, then maybe I should panic. 

            The markets after all, like Mother Nature, are incapable of emotional irrationality.  They are the final arbiter of value and instantaneous purveyor of consequence.  They are the highest expression of our collective expectations.  They reveal the (stubborn) truth that is (finally) piercing the veil of denial embedded in the advisor’s call for calm. Panic may actually be a rational choice for a Boomer who is facing this truth.  After all, the timeframe for capitulation and recovery may exceed the Boomer’s lifespan.  Indeed, the market meltdown that followed on Monday suggests panic may be the new norm.  Of course, many financial analysts and pundits immediately rolled out their feel-better rhetoric claiming what we had seen was an aberration or ‘disconnect’, which is their unwitting acknowledgment that they have no idea what is happening.  One thing is certain, however:  leaving your money in their hands is in their best interest.

            The truth the markets have expressed can be summed up as follows: while most of us know what the right thing to do is (setting aside those addled by ideology, misplaced faith, or engaged in modern-day piracy), we lack the will to do it.  This is and has always been the case for Americans. As Winston Churchill once observed, “The Americans will always do the right thing... after they've exhausted all the alternatives.”  The most glaring historical example is slavery.  The Founding Fathers – evidenced by their own writings – knew that slavery was inherently wrong, yet they did nothing about it (notwithstanding presidential aspirant Michelle Bachman’s twisted historical interpretation).  It took nearly one hundred years to breach the legal threshold and emancipate slaves, then another hundred to leap the moral threshold and get rid of the racist work-arounds like the Jim Crow laws. 

            What is required to clean up the financial and political mess in the United States is relatively easy to identify, but impossible to execute.  There are four things that must be done.  We must make at least $4 trillion in expenditure cuts including restructuring Medicare and Social Security, endure increased taxes in the near term, overhaul/simplify the tax code, and redesign Congress (starting with term limits).  Failure to do all of these things will accelerate the precipitous decline of the United States as the wealthiest and most powerful state in the global system, but none of these things will be accomplished – at least not as a matter of will.  The consequences of this are dire and probably worth panicking about.

            Today’s obvious and unbelievable stupidity displayed by our elected representatives is no different than the stubbornness that protected slavery and segregation, except this time we all – not just slaves – will suffer.[1]  It would be ahistorical and irrational to believe we will act better or more quickly in dealing with our financial woes than we did when committing prior sins or facing crises.  While democracies are arguably inherently good, they are not designed to exalt morality or pre-empt crises. Our lesser selves do not assure better governance via aggregation.  In open systems, the best one can hope for is that crises will produce creative destruction, which is what is happening now. There is, however, an alternative for Boomers to limit their exposure and preserve their long-term well-being.

            Boomers must re-imagine and restructure their lives.  Succeeding generations have less baggage to shed and are (sigh) more attractive to employers.  The winning strategy since World War II has been to align one’s self with big companies, big governments with big militaries, and big markets.  Get a job with a large enterprise – public or private – and climb the ladder.  Invest in big money-center financial markets and count on a 7% after-tax return.  Expect the government to provide healthcare and a financial safety net beginning at age sixty-five.  That strategy is not only dead; it has become dangerous because of its exposure to systemic risk.  Now is the time to simplify, disconnect, and sustain.

            Simplify.  Get small and remain flexible.  Reduce your footprint and keep your running shoes nearby.  Eliminate stuff; sell it or give it away.  Invest in yourself first, especially your mind and body.  Get things right in your head and heart: smart and content.  Next, invest in things you control.  Then, invest in companies that play at the edges – that rely on their own balance sheet to fund their future and which are highly adaptive.  Leverage wisdom.  Avoid the whiz-bang dreamers.  Boring companies make more money, longer.  But remember: it’s not about wealth; it’s about well-being.  Take time to appreciate nature, art, music, and literature.  From simplicity comes peace-of-mind and well-being.

            Disconnect.  Minimize your exposure to systemic risk.  Focus on the quality of your connections and relationships, not the quantity.  Size and scale are no longer de facto advantages.  De-leverage your own balance sheet as much as possible.  If able, move to a town that has a history of self-reliance; where services are few but the basic stuff works, and Boomers are still employable.  If you must live in a large city, form small communities (actual or virtual) within the city or within your neighborhood, but do not be constrained by geography or borders. Whenever possible, leverage technology to create your own reliable world.  Alliances are still important, but choose your cohorts carefully.  Large collectives will be unable to avoid systemic risk.  Again, think small to evade collateral damage.

            Sustain.  Within means and with respect.  Channel your inner hippie.  Feed your soul.  Embrace an ethos of sustainability.  Ask yourself when making large and small decisions: is this option sustainable?  Am I using resources in a manner that respects their origin?  The so-called “permaculture movement” is worth exploring to identify ways to support sustainable agriculture and urban food gardening.  “The ethic of permaculture is the movement’s Nicene Creed ... care of the earth; care of the people, and a return of surplus time, energy, and money, to the cause of bettering the earth and its people.”[2]  This may sound a bit squishy until you realize sustainability is essentially what our grandparents called self-reliance.

            The foreseeable future in the United States is grim.  We lack the will to do the right thing.  Our system of collective action is broken.  But, we can always act on our own to re-imagine our lives, form new alliances, and make a new future for ourselves.

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[1] While many deplore Congress but like their own representative, I am not among them.  My Congressman, Michael Burgess, stood with the Tea Party before he bowed to Boehner, and his most recent claim to fame is authoring an amendment to legislation to preserve the production and sale of 100-watt incandescent light bulbs.  I’m sure the electric company and both employees of Light Bulb World are thrilled.

[2] Michael Tortorello, “The Permaculture Movement Grows From the Underground,” The New York Times (July 27, 2011).

The Next Americans

I love the American story.  I admire tales told by old-timers, especially about hardship, redemption, and survival.  I am inspired by listening to young people express their dreams of how they intend to leave their mark, especially when I reflect on the fact that in many places in the world their peers are still unable to have many dreams, let alone express them.  The Next Americans, which I will loosely suggest are the under thirty-five crowd, are today forging a new identity that will change America forever.  My generation (Baby Boomers), ambitious and rapacious as we can be, is largely irrelevant in defining what it means to be a Next American.  I accept this reality with a gulp of humility, a slice of regret, and a pinch of sadness.  Yet, I believe in the Next Americans the same way my peers and I received the confidence of our predecessors: with a transcendent sense of hope.

            The Next Americans have an unusual opportunity.  While American identity constantly evolves and stalwart values like freedom, individualism, and self-reliance are often squeezed in the vice of circumstance, and at other times manipulated to the point of obscurity, periods of crisis offer the greatest opportunity to redefine the American story – to establish a new identity. For Next Americans, crisis is good.  Every eighty years or so America comes full circle and is faced with a crisis.  The American Revolution, Civil War and Reconstruction, and the Great Depression and World War II comprise the first three. I have posited that in the interregnum between crises America follows a dispositional progression starting with objectivism where unity, reason, inclusion, pragmatism, tolerance, and self-reliance mark discourse and behavior.  Then, slowly, we move into a period of radicalism when we begin to reject the status quo and are attracted to narratives of liberalism, activism, inspiration, and intuition.  We reject standardization in favor of differentiation while we accept, if not expect, our government to play a larger role in society.  This is followed by a period of über-idealism that establishes a dialectic synthesis of objective method and “settled” radical ideas and values.  Hyper-exceptionalism is projected on an unwilling populace, both domestic and foreign.  Grandeur reigns.  Conspicuous consumption, speculation, deregulation, class inequalities and high religiosity are normative.  The timber of humanity that Immanuel Kant suggested was ever crooked is at its gnarly apex during this period.  Then, as if the laws of physics hold a bias for self-correction, crisis returns, generally characterized by both severe economic stress and war.  Notwithstanding the requisite humility of an historian – that history is at best an imperfect predictor of the future – it seems more than plausible that we have entered another period of crisis, more or less on schedule.  It may be several more years – accompanied by even greater peril – before we move into the next period of objectivism.  Meanwhile, American identity is once again up for grabs. 

            Who we are as Americans is the common denominator of every major issue we face today.  The role of government, immigration, fiscal and monetary policy, foreign policy, social services, healthcare reform, education reform, the role of unions, taxes, and deficit reduction battles, all contribute to the debate of what it means to be an American.  During every crisis we wrestle between diversity and inclusion on one hand, and the impulse toward uniformity and exclusion on the other. We decide who is worthy and who is not, often based on bigoted parochialism.  We engage in incendiary discourse and watch old assumptions collapse under the weight of new realities.  Adversaries and advocates both conjure (often) bizarre interpretations of what the Founding Fathers must have meant when they scribed our original documents.  Those who feel threatened by dispossession from their historical position in social order become a danger to all, most of all to themselves.  But, out of the chaos, ugliness, and pain, a new American story is born.  Old threadbare myths gain new fiber from the churn of discontent, like a recovering addict with a new hymn in his heart, we form new narratives that stagger forward toward the future.

            Many suggest that our problems are strictly economic.  President Clinton’s campaign strategist, James Carville, is famous for his admonition, “It’s the economy, stupid!”  I agree with Carville, if your job is to manipulate a political outcome in the favor of your candidate, but I would argue this is otherwise a false premise.  The economy and the danger of current and future Federal deficits are indeed deeply concerning.  As a former student of economics I give them their due respect and, like many who view the facts in a sober and clear fashion, I see no immediate solutions that avoid extraordinary pain.  However, I also recognize that our economic consequences are an effect rather than a cause; there are more substantive objectives we must pursue if we are to assure the future of this great nation.  I offer three. 

            First, we must strengthen what I call our operational code.  What we have lost during the last several years is our capacity to reliably predict the behavior of leaders who we have come to rely on, whether they are political, business, judicial, or religious leaders.  Ethics have traveled beyond situational to vaporous.  What some call our “rule of law” has been twisted to such a degree that we are now unable to form reasonable expectations. We behave at home and abroad as if the rules only apply to those who are subject to our power.  The result is a collective social dissonance that may even slip toward civil insanity.  We must fight to re-establish a clear operational code and force, as necessary, compliance therewith.  Leaders must be accountable to their respective constituents, shareholders, employees, laws, and faithful.  If we do not, chaos, while tolerable and even beneficial in small doses, may become endemic.

            Second, we must commit to the development and application of creative intelligence.  Teachers are a treasure, not a burden or a scapegoat.  They should be paid as if we treasure them to assure the best Next Americans train brighter and more creative American minds.  Furthermore, basic research and development must be the focus of rebuilding a prosperous and resilient nation.  For example, big and ambitious public projects must be undertaken immediately to invent/innovate how we produce, distribute, and consume energy.  Our security, health, and wealth depend on it.  Second-rate creative intelligence will assure us of becoming a second-rate nation.

            Finally, humanity matters. We must, again, take responsibility for each other and ourselves. We must reject the ethos that suggests a government or other institution is responsible for our welfare.  The health of our relationships by and between members of families, communities, generations, races, ethnicities, and religions must honor differences first (to establish empathy) and second, identify common interests to produce mutual benefits.  For millennia we have formed collectives to assure security and prosperity.  In the last several years, however, we Americans have grown selfish and jingoistic. We cannot afford to face globalism with the insular and bellicose chauvinism that has become the clarion call of phony patriots.  If we continue to allow this to be part of our story we will lose.

            I am pleased to know many people who are the Next Americans.  They prefer diversity and inclusion.  They realize that zero-sum orthodoxy is more often wrong than right.  They reject rational choice constructs that are an artifact of twentieth century scientific prejudice.  Ideas and relationships matter beyond the calculus and confinement of worn methodologies.  For them, cooperation carries as much gravitas as competition.  Well-being trumps wealth as the primary ambition.  They see the world as a complex matrix of interdependencies and reject the exclusionary and judgmental simplicity of the Manichean imperative that condemns those who embrace unfamiliar traditions or worship a different God as agents of evil.  The Next Americans will do as we all have: they will fail their way to success.  In the process they will define a new America.  They will determine our new identity.  I am grateful they will be the next to call this great country their own.

Happy Independence Day.

Steding's Unverified Theory of Strategic Inversion

In August 2008, I made a presentation to a money management firm in Dallas to attempt an explanation at what I then saw as an impending upheaval in the financial markets that would bring to question the very models of investment strategy that had existed since (at least) the Great Depression.  One month later, Lehman Brothers collapsed, and by the end of October 2008 trillions of dollars in wealth had evaporated from the balance sheets of the world.  (If you want an entertaining telling of that calamity see HBO’s Too Big to Fail, based on Andrew Ross Sorkin’s book of the same title.)  What I saw, and what is now evident not only in financial systems, but in political systems around the world (particularly in the Middle East), is the danger of employing old thinking and models of risk management in a world where complexity compounds thereby exacerbating disequilibria created by fraud and oppression.

            My argument was posed as Steding’s Unverified Theory of Strategic Inversion (SUTSI). SUTSI argues that as complexity compounds, enabled by technology and as manifested in globalism, the distribution of data points – of actual results – represented by the bell curve flattens. Rather than complexity validating regression toward the mean – the center axis of the bell – it produces a greater number of outliers – those events nearer the rim of the bell such that the principle of regression is moot. In the investment world, I argued further, old portfolio allocations and holding periods might be ineffective, and Federal tax policy may need to be flipped.  For example, investment strategies that target the 0 to 20% returns (‘long’ positions – the area immediately to the right of the center axis of the bell) or the 0 to -20% returns (‘short’ positions – the area immediately to the left of the center axis of the bell) actually accept greater risk due to a relatively smaller number of results within that range.  The better strategy is to play the edges, which now include a greater number of data points, taking both long and short positions, not so much as a hedge, but in pursuit of absolute gains.  Nassim Nicholas Taleb has most forcefully made this argument in his book, The Black Swan: the Impact of the Highly Improbable.

In this investment strategy scenario I suggested that perhaps a strategic inversion was warranted:

·      Rather than a portfolio allocation of 50% equities, 30% bonds and 20% cash, maybe one should have 50% cash, 30% bonds, and 20% in equities.

·      Rather than holding investments for the long term – the traditional investor strategy – one should look at short term investments, more of a guerrilla investment strategy.

·      Rather than being highly diversified one should have fewer positions, mitigating risk by having only 20% of wealth ‘exposed’ in equities (and much less leverage but more due diligence).

·      Rather than having a tax policy that penalizes short-term gains at high tax rates (35%) maybe we should swap them with long-term rates (15%) as a better way to support the creation of wealth?

These suggestions fell on polite but mostly deaf ears in August 2008.  Today, you can find many investment strategists arguing for variations of these suggestions.  Since 2008 we have witnessed a bumper crop of Taleb’s so-called black swans, not only in financial markets, but also in political systems.  (Although politicians are even slower slow to catch up than financial managers.)

            In the May/June issue of Foreign Affairs, Taleb, together with Mark Blyth, Professor of International Political Economy at Brown University, apply these same notions of complexity and risk in “The Black Swan of Cairo: How Suppressing Volatility Makes the World Less Predictable and More Dangerous.”  Taleb and Blyth argue “both the recent financial crisis and the current political crisis in the Middle East are grounded in the rise of complexity, interdependence, and unpredictability” where linear models and a preference for stability – what I have called ‘staring at the mean’ – may actually be the most, not least, risky (p. 34).  What may be called for in foreign policy may mirror the strategic inversion we have witnessed in investment strategy.  The “illusion of control and action bias” that are traditional hallmarks of US foreign policy, may in fact produce greater instability and reduced security (p. 39).  The US may be much better off playing less often, and at the margins, where the black swans live.

            Three years after penning my theory and making my presentation about the prospect of strategic inversions to the investment world, it seems at least one thing is clear: compounding complexity requires new modalities of inquiry that reject the linear traps inherent in conventional thinking. While I am not ready to strip "unverified theory" from the title, changing it to Steding's Rule of Strategic Inversion (SRSI), I'm getting closer every day.

The Reagan Echo: Donald Trump

In my forthcoming study of Jimmy Carter and Ronald Reagan, tentatively titled The Disciple and The Alchemist, I wrote about Reagan that,

He was a transcendent optimist – a spokesman-as-leader – who employed alchemy and soaring rhetoric to obviate contradictions.  He stood, as appropriate at any given time, near either Democratic or Republican mirrors to reflect and project his appeal through a libertarian prism, matching the prevailing mood of the electorate.  From the threat of communism, to fatigue of government intervention, to the embrace of an evil enemy, he knew how to change the angle of the camera and strike an appealing pose for his audience.

As I observe the improbable candidacy of Donald Trump for president today, I cannot help but hear echoes of Reagan’s appeal and alchemic modality.  And, the electorate seems to be just as depressed (or angry) today as it was in the latter stages of the Carter presidency.

            The comparisons are eerie.  While Reagan espoused the “Gospel of Prosperity,” Trump promotes what David Brooks of The New York Times has labeled a “Gospel of Success.”  Meanwhile, Obama speaks of self-restraint and sacrifice the same way Carter spewed jeremiads of sacrifice-based redemption.  Like Reagan, Trump also believes in American exceptionalism based on overt power, projected for the benefit of Americans first.  Notwithstanding missteps, like Vietnam before Reagan, and Iraq/Afghanistan before Trump, for Trump Americans remain the chosen people in a chosen land, the new Israel.  Meanwhile, Obama, like Carter, tries to re-identify America as a force for moral good, waging humanitarian wars (Libya) and preferring cooperation to competition.  I can’t remember ever hearing Trump (or Reagan) utter the word ‘cooperation’.  Reagan’s Hollywood-styled past and Trump’s New York/Atlantic City slick-shtick (and multiple marriages) also place them in stark contrast to the Obama/Carter image of up-from-nothing populist purity.  Furthermore, I can easily see Trump reeling in the Religious Right the same way Reagan did with his “I know you can’t endorse me … but I can endorse you”; especially with either Palin or Huckabee at the bottom half of the ticket.

            Trump has also taken a page out of Reagan’s early campaign playbook in his attempt to de-legitimize the President.  Reagan questioned Carter’s strength, patriotism, and decisiveness, while Trump has pounded the birther issue with the conviction of a Klansman.  Trump will easily get the angry white vote, and if he can co-opt the Religious Right (now Christian nationalists) with whitebread exceptionalism, he’s halfway there.  Trump’s next target will be to add the other half – fiscal conservatives – to his electoral coalition.  He’ll question Obama’s fiscal toughness in the face of huge deficits and the recent S&P outlook downgrade on US securities.  Trumps own fiscal follies will no doubt be recast as the scars of experience in a Hobbesian world.  He will ask the Reagan question: “Are you better off today than you were four years ago?” and will couple it with “Who would you rather have at the negotiating table, a nice guy, or a winner?”  He might even say to Obama: “You’re fired!”

            Reagan’s appeal resided in its simplicity; he pulled on American’s sense of patriotism and desire to “stand tall” again.  He re-imagined America’s special destiny as a “shining city on a hill.”  In a complex world full of nuance and strange alliances – one that calls for an Obamaesque mind and demeanor – Americans may decide they’d just like to feel good again.  They may prefer illusion to reality.  If they do, Trump’s orangish hair (like Reagan’s) won’t matter.  Some say Trump’s anger will do him in; this may prove to be wishful thinking by Obama supporters.  After all, aren’t we all angry?  Trump should summon his inner Reagan, and Obama better not make the same mistake Carter’s advisors did when they hoped they’d face Reagan on election day.

Obama’s Doctrine of Ambiguity

As one who studies US foreign policy, I am not a fan of presidential doctrines that are generally crafted by the press out of a line or two of a president’s speech.  The Monroe Doctrine may have actually been the only true doctrine, defined by its namesake, and even it proved susceptible to gross misinterpretation and expansive misapplication.  Moreover, in an age of complexity, doctrines, or grand strategies, seem less appealing or relevant than the flexibility ambiguity allows, which is clearly why President Obama favored ambiguity in his recent address on Libya.  We live in an age of supervention, where seemingly disconnected and anachronistic events have effects, which is an inexorable reality of complexity.  The larger problem however, is not about US foreign policy and its strategic design in a complex world; it is about American identity; it is about how we Americans view our role at home and in the world.

            Obama’s address about the US/NATO intervention in Libya (March 28, 2011) left those wanting to define the Obama Doctrine dissatisfied; there was (purposefully, no doubt) nowhere to hang one’s doctrinal hat.  Ben Smith of Politico probably summed this best when he wrote, “The doctrine is there is no doctrine.”  And while others like Mark Halperin of TIME lauded Obama’s address as “strong” even he underscored the ambiguity by suggesting, “George W. Bush could have delivered every sentence.”  When Obama and W sound the same on foreign policy, the case for ambiguity is unambiguous.  However, as attractive as the flexibility ambiguity provides is, we must also look at the sustainability of an open-ended policy of either adventurism (W) or interventionism (Obama).

            The US has now witnessed two expensive effects of having an unassailable lead as the predominant military in the world: natural competitors find other ways to compete, and allies become dependent on US military power.  China has chosen to compete with the US by investing in their economy and protecting their currency (virtually all their military is deployed in-country to protect the authoritarian government).  Other non-state actors, like al-Qaeda, compete with asymmetric terror strategies that are difficult if not impossible to assail with a behemoth (US) military.  Meanwhile, as we have seen with Libya, US allies and their collective security system, NATO, are unable to provide the command and control platform to launch or sustain an intervention.  Therefore, the US, in its superpower/super-cop role, is caught between the proverbial rock and a hard place; it must continue to fund its super-military for the benefit of friends, while its natural competitors gain in power through other means.  The result, unfortunately, is now and will continue to be the decline – perhaps even accelerated decline – of US power and well-being. 

            Obama could have at least started to halt this unsustainable trajectory of superdom, but he chose ambiguity.  He has missed an opportunity to recast US identity.  In so doing, he has (perhaps unwittingly) elongated the deleterious effects of Eisenhower’s warning about a military industrial complex, and reduced our capacity to invest in better long-term bets like education, alternative energy, and economic innovation.  Lest we forget, we have enormous financial deficits.  The US will likely be better-loved by both allies and competitors for Obama’s post-W retooling of exceptionalism and lofty aims, but such love is an unsustainable luxury.  As Americans we must demand a refocusing on our own strength, resiliency, and well-being.  We can afford neither adventurism nor interventionism.  Prevailing on the “shores of Tripoli” may feel good today, but also puts our future at open-ended risk.