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July 1, 2008

SHELF LIFE

Forward editors review the latest books on business, economics and trade.

By Kevin Phillips
Penguin Group, 2008
U.S. $25.95, Canada $28.50

Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism

Nervous about the state of the U.S. economy? Author Kevin Phillips thinks you may not be nervous enough.

“The collapse of the housing bubble may leave some U.S. cities permanently blighted with large new boardedup areas—Cleveland and Detroit lead the list,” he writes in Bad Money.

There’s more. “Recent polls in the United States … show an unprecedented 1.5 million Americans having already decided to leave the United States and another 1.8 million calling themselves likely to leave.” And finally, “No previous leading world economic power has enjoyed a full-fledged manufacturing renaissance after becoming unduly enamored of finance.”

If only these prophesies of gloom and doom were the words of a fringe economist. Phillips, however, a former Republican strategist, has written 13 previous volumes, including Post-Conservative America and The Emerging Republican Majority in a continuing commentary on the American condition. And when you consider how often his predictions have been right, the conclusions he draws in Bad Money are unnerving. As a senior strategist for Richard Nixon in 1968, Phillips correctly forecast the coming conservative realignment that ultimately put Ronald Reagan in the White House. As the primary architect of the Republican “Southern strategy,” he accurately anticipated the shift in influence to the Sunbelt and to the “new right,” two phrases he coined. And the red state/blue state divide—he not only envisioned it, he precisely predicted its geography.

So now we come to the present day and Phillips’ take on the current state of the U.S. economy. He starts with an overview of how the current debt debacle came about, starting in the 1980s, the beginning of “three profligate decades.” From 1980 to 2005, financial services expanded from 15% of America’s gross domestic product (GDP) to a record 20.5%, while manufacturing declined from 21% to 12%. The author doesn’t consider this shift a healthy adaptation to a “post-industrial” economy. Instead, he argues that the emergence of hedge funds and increasingly exotic bundles of financial derivatives has amounted to a “financialization” of the American economy that has made possible a disastrous expansion of private and public debt. The Federal Reserve kept the bubble afloat by providing easy money, and regulators and ratings agencies did their share by turning a blind eye to what was going on.

By 2007, total U.S. debt was more than three times the size of GDP, a ratio that surpassed the record set during the Great Depression. From 2001 to 2007 alone, domestic financial debt grew to $14.5 trillion from $8.5 trillion, with home mortgage debt ballooning to almost $10 trillion from $4.9 trillion, a 102% jump. As we all well know, the party came to an abrupt end in August 2007 when the crisis in the mortgage market crashed the scene.

Aggravating the situation has been the U.S. failure to establish any energy policy. That failure has made us vulnerable to what will likely be the coming peak in oil production worldwide, thereby further weakening the dollar, which is essentially backed by the global petroleum economy. However, with the dollar falling, OPEC has been talking about moving into other currencies. If that happens, “the effects could be painful,” writes Phillips.

Sadly, Phillips doesn’t expect much help from Washington, D.C. His chapter headed, “The Politics of Evasion,” says it all, with both Republicans and Democrats reluctant “to embrace anything like an agenda to manage and minimize a trajectory of U.S. global decline.” Rather, “officeholders on both sides seem to rest easier if everyone stays away from uncomfortable themes … like the reckless expansion of private debt, as well as the federal budget deficit variety; the new economic (and political) dominance of the financial sector; and the mounting probability that the nation will have to choose between desirable energy supplies and global warming measures.”

So where’s the silver lining? It’s there, but you have to look closely. The United States is a North American continental economic power with a large resource and population base, and its defining trait has been, above all else, a capacity for self-renewal. The task at hand is to start building a better foundation at home and stop thinking of ourselves as policeman and banker to the world. The 21st century may not be “the American century,” as was the last one, and adjustments must be made.

 

By Parag Khanna,
Random House, 2008,
U.S., $29.00, Canada, $34.00

The Second World: Empires and Influence in the New Global Order

The Second World argues that America’s dominant moment has passed, replaced by a geopolitical marketplace in which the European Union and China are competing with the United States to shape a new world order. The contest is hottest in what Parag Khanna calls the second world: pivotal countries in Eastern Europe, Central Asia, Latin America, the Middle East and East Asia. Their resources ultimately will determine the fate of the EU, China and the United States, but their futures remain uncertain as they struggle to rise into the first world and avoid falling into the third. The book explores these second-world countries in depth and shows how the EU, China and the United States are working to pull them into their orbits. A provocative read, The Second World posits that globalization—wider and deeper than ever—is the main battlefield of geopolitics, and, to remain a first-world country, America must wholeheartedly embrace it.

 

 

 

By George Stalk
Harvard Business Press, 2008
U.S. and Canada, $18.00

5 Future Strategies You Need Right Now

Author George Stalk discusses the important strategies that he believes will be business-world game changers in the coming years. Along the way, he offers insights into how to turn each of these strategies into competitive advantage. Take his first strategy, supply chain gymnastics. While outsourcing, subcontracting, partnering, offshoring and bestshoring have lowered costs, improved profits and helped build market share, a looming logjam resulting from infrastructure issues presents a critical challenge to continuing success. Stalk suggests creative ways to transform the problem into an opportunity. Written in a clear, concise style, 5 Future Strategies is filled with actionable ideas for seizing these emerging strategic opportunities.