Can America's New Golden Age be sustained?
Over the course of the next century, the United States will enjoy extraordinary advantages over other nations. It is the only great power that dominates an entire continent and remains politically united. The European Union occupies a good portion of a continent, but it is hardly united. Japan is united, but it does not control a continent. The landmass that the United States controls provides extraordinary advantages.http://www.stratfor.com/SERVICES/GIU/FORECAST/decadetocome/us.asp
First, it is relatively underpopulated. The population density of the United States, in comparison to that of Europe or Asia, is extraordinarily low. The U.S. population has room for dramatic growth if economic conditions deem it necessary. The continent has enormous natural resources. Location and military force make the United States impervious to invasion. Finally, as the only great power bordering both the Atlantic and Pacific, the United States is, by the nature of its placement, the only logical global power. In our mind, the 21st century will undoubtedly be the American century.
Perhaps most important, America dominates world culture. We do not mean Coca-Cola or CNN. Rather, we are referring to the most quintessential innovation of the United States: the computer. Other countries will adopt the computer, but none as easily as the United States. In the United States, the computer has come to dominate business, leisure and commerce, penetrating every aspect of life with an ease that will not be emulated in other countries as readily. The rise of the computer is not only a matter of Americaís technological lead. More important is the fact that the computer arises from American culture and fits perfectly with American sensibilities.
Indeed, the computer clearly has become the foundation of American economic and military power. The expansion in the late 1990s, violating the historical rules of economic growth, depended heavily on the computer. Whether we date this expansion from 1982 or only from 1992, the fact is that long after one might have expected a recession, worker productivity is actually growing. That simple, astonishing fact results largely from the computerís revolutionary effect on production. Thus, where normally we would be expecting a decline in productivity, as industrial capacity is being over-utilized in the face of overheated demand, we are experiencing rises in productivity.
Economics: 2000 to 2005
In economic terms, the United States has experienced a massive surge in capital formation since the 1980s. Most important, the qualitative nature of this capital is dramatically different than before. Capital increases worker productivity. But not all capital increases worker productivity at the same rate. It is more and more obvious that we have not only seen a quantitative increase in capital formation, but a qualitative shift in capital's productivity. This is why the expansion, almost a generation old when viewed in terms of productivity figures, interest rates, inflation or other traditional measures, continues to appear to be relatively young and vigorous.
Stratfor has been extremely bullish on the American economy since 1995. To our amazement, we continue to be bullish. This is particularly troubling since, as our readers know, we tend to be extremely traditional in our view. We believe in cycles, not extrapolation. Nevertheless, we see little reason to expect the expansion to end over the next five years, although a downturn on the order of 1987 or 1991 certainly cannot be ruled out as a possibility. But the main trend remains extremely positive for at least the first half of the decade.
Consider the apparently irrational boom in Internet stocks, in which equity values are completely unrelated to revenues. On the surface, this would appear to be a bubble akin to the Tokyo real estate price surge in the1980s. But look at the Internet this way: in less than a decade, an entirely new communication medium has emerged, with implications for every dimension of economic life. It is certainly going to have a social impact equal to that of the automobile or telephone. It is such a dramatically new part of the social and economic infrastructure, that its technology model has outstripped its business model.
Investors, acting on the expectation that revenue will in due course catch up, are quite rational in establishing equity values independent of revenue. Certainly there will be massive shakeouts and consolidations, which will be painful, as was the case earlier in the century in the auto or airline industries. But betting on the Internet is about as irrational as some of the valuations given to railroads in the 19th century, where revenue lagged far behind valuation. The people who bet on the railroads were far more rational than the "conservative" investors waiting for revenue to catch up. Therefore, we do not see either the market as a whole or the technology sector as representing an irrational bubble in the American economy.
Our expectation is that the massive growth spurt will continue for the first half of the decade. Though it would not surprise to see a sudden, very frightening downturn in the markets or a short, sharp recession, not dissimilar to 1987, the basic upturn will continue until at least 2005 and probably for several years thereafter.
Economics: 2005 to 2010
We do, however, see serious problems developing after 2005 and intensifying toward the end of the decade. The key problem is demographic. As we argued in our last decade forecast, one of the engines driving the American economy during the last 20 years has been the maturation of the baby boomers. A huge age cohort entered its most productive years during the 1980s. This cohort entered a period of intense capital formation during the 1990s, when boomers in their 40s and 50s shifted from net debtors to net creditors.
One of the great engines driving the stock markets is the 401(k) plan. People in their 40s and 50s are pouring huge amounts of money into their retirement plans. Most important, consumers cannot easily withdraw this money, because to do so results in severe tax penalties. Therefore, the growth in the stock market has created a vast pool of stable money that supports the markets, helps provide capital for investment, places a ceiling on interest rates and creates major growths in net worth independent of savings rates. This, coupled with either stable or rising home prices, has generated substantial private wealth for a large social stratum. It certainly does not encompass all Americans, but it does encompass a great many, creating the expectation -- among large segments of the professional and managerial classes -- that they can look forward to an extremely prosperous retirement.
That expectation poses a serious mid-decade danger. At each stage in the lives of baby boomers, they have reshaped a different aspect of American society. Toward the end of the decade, many of these boomers will be heading toward full or partial retirement. Given their net worth, they have an expectation that they will be in a position to reduce their productivity as they approach 60 years of age.
Money will stop pouring into 401(k)s and into the stock market. Withdrawals will begin. Houses will be sold. A fairly sudden, massive downward pressure on both equity and housing prices will be experienced. A massive shift in psychology will, we think, also take place. As equity and real estate prices begin to slip, boomers see their net worth at risk. There will be a tendency to liquidate vulnerable holdings and lock in value. The ingredients for an intense panic, with extended consequences will be very much present.
Presidential Politics in the Next Ten Years
A United States as powerful politically and militarily as it is now is a problem for the world, but not a particularly dangerous one. Prosperity tends to make people less concerned with politics, and less worried about the rest of the world.
It is startling to note, when we compare the 2000 elections to those in 1980, for example, how little controversy there is over issues and ideologies. Except for marginal candidates like Pat Buchanan, the differences among candidates have more to do with personality and character than with principle or issues. This is certainly the case when we compare the situation with the Reagan-Carter election. It is also startling to realize how little interest there is in the outcome of the election. In good times, politics appears uninteresting and marginal.
Pat Buchanan's presidential campaign intrigues us, not because he is going to win, but because he reminds us of Barry Goldwater in 1964. Despite the fact that few ideological similarities exist between the two, they are both precursors. Goldwater had no chance of winning in 1964, but he was a precursor for Reagan's conservatism. Just as Goldwater represented an emerging trend in 1964, we think that Buchanan represents an emerging trend in 2000.
Goldwater posed the first systematic attack on liberal orthodoxy in 1964. Buchanan is posing the first systematic attack on the twin orthodoxies of free trade and U.S. global responsibility. Buchanan's arguments will appeal only to a small segment of Americans during the boom times of 2000. However, during the economic difficulties we predict for later in the decade, anti-free trade sentiment will have a much broader audience, along with a general resentment against the world as a whole.
Fast forward to 2008 and assume that we are right in our forecasts. American military power will still be paramount, if not quite as absolute as it is today. But as economic troubles arrive, the easy consensus will unravel. Politics will once again be important and the election of 2008 will matter. The issues will also be dramatically redefined.
As was visible in the late 1980s, economic constraints generate protectionist sentiments in the United States. Part of this derives from a culture that feels the rest of the world is taking advantage of the United States. Part of it comes from rational economic reality. Asian exports are far more tolerable in boom times than in bad times. During economic downturns, there is a general tendency toward protectionism. This is particularly the case when, regardless of magnitude, the downturn generates insecurity among pivotal sectors. By 2008, we would expect large sectors of the public to resonate to protectionist and isolationist doctrines.
Our expectation is that political discourse will slowly redefine itself in the course of the decade, with the dividing issue in American life being free trade versus protectionism. The worse the downturn of the latter part of the decade, the more powerful the protectionist forces will become.
It is vital to understand, of course, that a round of protectionist measures by the United States late in the decade will have profound effects on the international system. Most important, as the United States disengages from the Eastern Hemisphere, powerful hegemonistic forces will emerge in Eurasia that will tend to destabilize the international system as a whole. That will leave a politically resentful, militarily powerful America, suffering from serious but far from catastrophic economic dysfunction, facing an increasingly unstable world.
It is therefore our view, to be discussed in more detail in the context of Europe and Asia, that economic destabilization in the United States will contribute greatly to a massive rise in international tension late in the decade. Several great powers will arise throughout Eurasia, challenging American primacy. The competition among those powers and between them and the United States will be intense, complex and dangerous. It will lack the elegant simplicity of the Cold War, posing instead the mind-numbing complexity of the pre-World War I period.Thus, we forecast continuation of the current economic expansion through the first half of the decade, along with the general political stability we are experiencing. However, in the second half of the decade, it appears to us that the United States will move, after a generation of expansion, into a period of relative economic distress. This distress will be both smaller and shorter than the boom that preceded it, but it will nevertheless trigger domestic political forces that will not only reshape the United States domestically, but will pose serious problems for the international system as a whole.