Baby boomers like myself clearly recall the tumultuous years leading up to the Bicentennial of the United States. The world we grew up in was near the peak of the industrial revolution, dominated by the aftermath of the Great Depression, WW2, and the Cold War. We were raised in a culture that had witnessed first-hand the power of a unified government, which led to the victory of fascism in our parent’s generation, followed by a round trip to the moon in our own. In the childhood of my generation, nothing was impossible with sufficient government power.
By 1976, however, America had endured the 1960s cultural revolution, the Vietnam War, a serious energy crisis, stagflation, and Watergate. We were experiencing the shocking end to the post war boom, with new revelations that success had a price, military power had limits, government was not always trustworthy, and our industrial economy had a soft underbelly leaking oil.
By the late 1970s, interest rates were skyrocketing, inflation seemed out of control, the Cold War was threatening to become white hot, and U.S. public debt had risen to the shocking level of $900 billion, representing one third of U.S. GDP. During the next decade of economic expansion led largely by financial engineering and services, the U.S. debt more than tripled in dollar terms, rising to nearly 60% of GDP.
During the 1990s, with the commercialization of the Internet and exponential adoption of computer networking worldwide, the global economy began to shift, but the information revolution did not result in taming the industrial revolution—at least in the short-term, but rather acted as a catalyst in shifting heavy industry from West to East in our never ending quest for growth and scale. The dot-com bubble provided a very brief respite from accumulating debt in the form of capital gains, but it was a one-time gain.
By the late 1990s it became apparent that the unfettered Internet, in ironic contrast to the core message in The Wealth of Nations, offered such disruptive efficiency that many industries would be radically transformed, including the service economy that had become dominant in the U.S.
Meanwhile, global companies became too big to fail, increasingly divorcing themselves from U.S.interests in what became the primary global strategy for risk reduction and growth, which only compounded the challenges facing the U.S. economy. By extension, regional and national economies dependent on the industrial revolution or services would also need to adopt the efficiencies offered by the new medium in order to avoid eventual bankruptcy. In modern parlance, the trajectory of our national budget was increasingly in misalignment with the needs of our economy, the super majority of our citizens, and our collective future.
Rather than downsize to meet the new reality and future obligations, the post 9/11 economy witnessed increased liquidity that “saved the economy” (Alan Greenspan), combined with post war guarantees in banking, systemic corruption, and ideological activism to enable the mega housing bubble, followed by the inevitable correction and almost certain economic depression if not for historic levels of Keynesian intervention. Rather than invest massive stimulus in converting to a sustainable trajectory, however, most of the spending was targeted at populist programs that continued to expand government overhead, thus increasing long-term liabilities, primarily in very temporary form that now leaves regional economies facing an even more challenging future, and citizens faced with much greater national debt; short, mid, and long-term. The promises made by government during and after the Great Depression were obviously not only unfunded, but increasingly unfundable.
The most recent example of kicking the can down the road has been unprecedented life support from the FRB in financing 70% of the U.S. debt in QE2, while once again warning Congress and the White House to get its long-term fiscal house in order. The result, once again, was to witness excess liquidity flow to the most speculative markets, not the fundamental investments required to transition to a sustainable economy, confirming that we have yet to address the underlying structural problems. The cost of avoiding another Great Depression by stimulus and liquidity has been to advance U.S. insolvency by more than a decade; and quite probably more than two.
Port of Call in the Voyage of Fiscal Denial
Regardless of how one interprets the voyage, the destination that our culture is finally beginning to awaken to is tragic. Under what most believe to be an optimistic forecast, the Congressional Budget Office (CBO) warns us that public debt will rise from around 70% of GDP currently to 84% by 2035, with interest payments rising to 4% of GDP from 1% at current levels. This “extended-baseline” scenario is dependent upon a great many things that have not occurred in the past, however, nor are expected by most, including low inflation and a relatively disciplined Congress. The more consensus forecast, or “alternative fiscal scenario”, projects public debt to rise to 100% of GDP by 2021 and 190% by 2035. However, anyone observing financial crises can attest that these events do not occur on an even gradual basis, but rather reach a tipping point.
The warning I offer today is that economists have based their forecasting on comparable situations in very small economies relative to the U.S., not the world’s largest that also manages the global currency, not to mention the only global military power. Every forecast, scenario, and metric I have observed in economics is based on a very different history than the situation we face today, all of which assumes the post war experience of a stable U.S. economy.
To capture the situation, consider that while each have proposed different remedies, the best economic forecasters of our time, to include investors, Nobel Laureates, current and past FRB chairs, and regardless of party or ideology, all essentially agree that this unsustainable trajectory has nearly reached its pinnacle. All are raising red flags, and none can (or have to my knowledge) deny that when the herd finally changes course in bond markets, as we’ve seen most recently in Greece, the stampede is swift and brutal.
Lean, Open, and Secure Governance = The Semantic Enterprise
The Levin–Coburn Report found that the financial crisis was the “result of high risk, complex financial products; undisclosed conflicts of interest; and the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street.”
The U.S. Financial Crisis Inquiry concluded that the crisis was caused by:
“Widespread failures in financial regulation, including the FRB’s failure to stem the tide of toxic mortgages”
“Dramatic breakdowns in corporate governance”
Key policy makers “ill prepared for the crisis, lacking a full understanding of the financial system they oversaw”
“Systemic breaches in accountability and ethics at all levels”
In early January of 2008, former GAO Director David Walker suggested that four types of deficits caused the underlying fiscal problem: budget, trade, savings, and leadership. While these four causal factors are without question, I suggest that all of our deficits depend upon the integrity of governance structure, including our increasing deficits in knowledge, competitiveness, security, and happiness.
The only reliable method to achieve a sustainable governance infrastructure in the network economy is with semantic enterprise architecture, which is based on many years of research and testing. For a brief video description of the semantic enterprise, see my elevator pitch, and for a more in-depth discussion, view this keynote at the recent SemTech conference by Dennis Wisnosky on the transformation of the DoD.