US Economy surges

while the rest of globe slows

But why do the majority of Americans not feel

they are gaining ground?

  • By Tyrus W. Cobb

The American economy is growing impressively, as many key indicators reflect significant progress in a number of key areas. This strong performance contrasts with stagnating growth in much of the rest of the world, including Europe and, especially, Russia and Japan. Here are some key stats:

  • U.S. GDP growth is the highest for any developed country, growing 4.2% in Q2 and 3.5% in Q3. In contrast GDP was barely positive in Europe (0.2%) and Russia (0.5%). This is Russia’s worst economic performance since 2009, due to sanctions and lower oil prices. Japan actually officially went into recession, as GDP fell 0.5%!
  • Global corporate outlook remains discouraging, except in the U.S.  European and Asian companies have expectations of worsening global economic climate….low hiring intentions, anticipation of higher interest rates, fears of geopolitical unrest (Ukraine, Mideast). Many see “triple dip recession” coming.
  • In contrast, U.S. unemployment nationally fell to 5.8%, down from 8% just two years ago.
  • Corporate profits are at record highs.
  • The U.S. is adding 200,000 jobs per month.
  • Oil imports are dropping fast while production is rapidly increasing. So much so that the U.S. will soon become the world’s #1 oil producer (thanks to fracking)….Gasoline prices are falling fast.
  • The dollar is at its strongest level in years.
  • The stock market is at record highs.
  • Consumer confidence rose 12% over the past year; home sales were up 5.6% annually and most purchases were by families, not investors; retail sales, especially autos and clothing, way up.
  • And, perhaps most significantly, the deficit is going down! That came as a shock to “deficit hawks” like me, but the deficit this year will be $506 billion, or only 2.9% of GDP, representing a 70% decline from Obama’s first year in office and Bush’s last. In 2013 it was $680 billion.
But not all Americans are benefitting

Amid the very positive economic news, there are two important data points that raise concern: First, the stagnation in wages that has left the majority of Americans feeling pessimistic about their future, and second, the increasing concentration of wealth in the hands of fewer and fewer people.

With respect to wages, a Wall Street Journal poll found that 50% of Americans surveyed felt the country was still in recession. A PEW survey found that those who earn less than $75,000 a year felt they were “falling behind”.

The problem is that income for all wage earners has been stagnant for 30 years, and the average family income is the same as it was in 1995 (adjusted for inflation). While jobs have indeed been added, high paying jobs haven’t. Much of the employment gains reflect the unemployed going back to work part-time, for contract work, or for lower salaries and lesser benefits.

In contrast to the stagnation in living standards most Americans have experienced, income and wealth for the top 3% of U.S. families is now at historically high levels. Families in the bottom 90% have seen a deterioration in their net worth, with the bottom 10% having substantial declines. At the same time, the income and net worth of the top layers have soared.

As the graph below demonstrates, wealth has been concentrating in an increasingly smaller segment of the population. While the top 0.01% held about 3.3% of the U.S. net worth in 1960, today that sliver of the populace holds 11.4%!

 top-wealth-shares

Do these developments have political ramifications?

“Every time the stock market hits a new high, I look over my shoulder to see if they are getting the guillotines ready!”

        Wealthy New York investor

That increasing concentration of wealth in the hands of a very few sounds like Karl Marx’s most apocalyptic predictions being realized. However, to date that development has not ignited the American people—indeed, as the recent elections showed, the electorate resoundingly supported candidates from the party that is the least interested in any “wealth redistribution” schemes!

That may be changing. As former White House aide David Rothkopf has written:

Given this greatest of threats to average Americans — the threat that there is no better future out there for them and their children and that they will toil away producing profits to be enjoyed only by a privileged handful of Americans — we can count on the political debate in the United States for the next two years to turn less and less on the Islamic State or Ebola and more and more on the time bomb placed at the foundations of the U.S. economy — an economic engine of division and destruction that is gradually pulling the country apart and instilling anger and frustration in many of its citizens (especially those in the bottom fifth, those who are not only out of the money but consigned to inescapable lifetimes of struggle and subsistence).”

Let me know what your opinions are on this issue of wealth/income inequality. Is Rothkopf overstating the significance? I’ll come back to the debate once I have thought more about the issue and have the benefit of your thoughts.

– Tyrus W. Cobb, PhD

NSF Participants:

Our next program will be conducted in conjunction with the Northern Nevada International Center.  The event is free, but please make sure to RSVP or you will not be let into the event.  Please note the RSVP process is therefore different for this event, but will go back to normal for our January program.

 

General Ward

Summary and PowerPoint of the Presentation on…

India and the Rise of Narendra Modi

Implications for China and the U.S.

Atul Minocha provided a comprehensive overview of India today and the significance of its new Prime Minister, Narendra Modi.  Minocha emphasized the vast diversity in India; e.g., while 55 Indians are on the Forbes Billionaires list, 1/3 of the population lives below the poverty line.  It is a country that is mostly Hindu, but has significant Muslim and other religious populations.  It is a country of over 2,000 ethnicities, 22 official languages and a diverse and growing economy (albeit, varies significantly by region).

The election of Modi brings to power a very different Prime Minister.  On the one hand, Modi, as head of Gujarat Province, presided over the worst communal riots since Indian independence.  His role placed him on the “do not issue a visa” list by the U.S.  Still, Gujarat has been a model of economic growth and Modi’s popularity extends well beyond the Hindu population.

Minocha discussed India’s relations with China and the U.S., emphasizing Delhi’s “nonalignment status” during the Cold War.  That irritated the U.S., but U.S. support of Pakistan also riled Indian leaders.  With respect to China, both Minocha and Dr. Xiaoyu Pu stressed that relations between the two countries were fairly far down on the list of urgent concerns.  Both stressed that while India primarily looked east, west and south, China’s focus is on the nearby seas and relations with big powers Japan, Russia and the U.S. and it’s “allies”.  The two countries share a border, but one that is on the “roof” of the world.  While there are border flare ups, relations have been stable if not overly friendly.

Pu stressed that the U.S/China relationship was more volatile than that between Beijing and Delhi, and America and China needed to be cautious that growing frictions, particularly in the South China Sea, did not escalate.  Both felt that with India and China having new leaders in Narendra Modi and Xi Jinping, there would be opportunities for enhanced cooperation between the two Asian powers, as well as periods of friction.

Atul Minocha is an Indian born entrepreneur and author who now resides in the Reno area.  China born Dr. Pu is a professor at UNR and was a post-doctoral fellow at Princeton and Harvard.

India China US PowerPoint

The Untold Story of a Key Maneuver that

Hastened the Downfall of the Soviet Union

By Tyrus W. Cobb

I wrote my dissertation at Georgetown on the “Ramifications of the Soviet Energy Dilemma” in 1982.  A key thesis was that the Soviet Union was very vulnerable because of its heavy dependence on the export of oil and gas for hard currency revenues, and that the United States and the west had significant leverage through their technology and investment potential to influence Soviet behavior.  This message was not immediately well received, as the belief that the USSR was economically and militarily strong and capable of asserting its will across the globe, held sway.

However, key figures in the Reagan administration did come to understand the heavy Soviet dependence on its oil/gas exports to earn badly needed hard currency.  Consequently, that meant that any steps that served to increase the availability, and decrease the global price, of oil and gas would impose severe hardships on the USSR.

That was particularly the case since the Soviets were devoting such a significant portion of their GNP to the defense sector. Any action taken that would decrease hard currency earnings would mean that Moscow would have to shift resources to other sectors—including personal consumption—to compensate for the lost revenues.

I had also advocated that the US and its allies withhold technology and investment the USSR badly needed to extract petroleum, since the easy to drill oil fields in the western regions of the country had been exhausted and future production would have to come from more remote and inaccessible regions deeper in Siberia and offshore. And that exploration and production would require extensive western technology and investment.

The U.S. and the Saudis collude to cause Moscow extreme hardships

When Mikhail Gorbachev assumed the mantle of power in 1985, he already knew the precarious state of the Soviet economy and its critical dependence on oil and gas revenues.  He also appreciated that the USSR must have Western technology and investment in order to maintain energy production at then current levels.

That same year the United States undertook actions to put the Soviet economy under greater pressure by working with key oil producers to greatly enhance production. Specifically, CIA Director Bill Casey leaned on the Saudis to “turn on the spigot”.  They did, expanding production 5-fold, and in doing so, the vast new quantities of oil reaching the world market suddenly depressed the global price of oil to under $10 a barrel, down from a high in the $60 range.  This caused the Soviets to lose at least $40 billion in revenue.

While that one action cannot be assigned full responsibility for the ultimate collapse of the Soviet Union, it certainly played a major role, as Soviet officials later admitted. Former Russian acting Prime Minister, Yegor Gaidar, for example, has cited this US-Saudi action as the critical piece in the unraveling of the USSR.  Gaidar stated:

“We are certain about the date the Soviet Union started to collapse.  It was not August of 1991 or December of the same year.  The process began September 13, 1985, when Saudi Arabia’s Minister of Oil Industry Sheikh Yamani declared that his country changed its oil policy, stopped curbing down oil extraction and restored its share in the oil market.  In the next 6 months oil production in Saudi Arabia increased dramatically.”

More recently, Russian analysts have been more direct in asserting that the quick increase in Saudi production resulted from “collusion between the United States and Saudi Arabia”. They are right. The NYT’s Tom Friedman quoted a Russian analyst saying that the “joint action” taken by the U.S. and Saudi Arabia in 1985 caused the collapse of the Soviet Union. According to Friedman:

The Russian newspaper Pravda published an article on April 3 (2014) with the headline, “Obama Wants Saudi Arabia to Destroy Russian Economy.” It said: “There is a precedent [for] such joint action, one that caused the collapse of the U.S.S.R. In 1985, the Kingdom dramatically increased oil production from 2 million to 10 million barrels per day, dropping the price from $32 to $10 per barrel. [The] U.S.S.R. began selling some batches at an even lower price, about $6 per barrel. Saudi Arabia [did not lose] anything, because when prices fell by 3.5 times [Saudi] production increased fivefold. The planned economy of the Soviet Union was not able to cope with falling export revenues, and this was one of the reasons for the collapse of the U.S.S.R.

Because of the sudden increase in oil availability after this action, the global price of oil dropped. The following chart dramatically shows the rapid decline of the price of oil from 1981 to the almost historic low of $10 in 1985:

Oil Graph

 

Conclusion:

I think we can safely conclude that the Reagan administration decision to have Director Casey persuade the Saudis to ramp up oil production in 1985 was a, if not the, critical event leading to the dissolution of the Soviet Union. Former Reagan National Security Advisor, Robert “Bud” McFarlane, confirmed to me that the Saudis agreed with our suggestion on stepping up oil production, and did.

Rae Huffstutler, at the time head of the Soviet Division at the CIA, wrote back to me that while the spike in oil production and consequent drop in prices was a principal factor in the collapse of the USSR, it was not the only cause. Rae writes,

“Some of their woes might be ascribed to pressure from the West to deny a wide array of technology and equipment, some to our joint policy with oil producers, but mostly they did it to themselves with a command economic system that was inefficient and corrupt, and a Party leadership that would not make difficult decisions.”

I might also note that contemporary Russian analysts, such as the one Freidman quoted, have charged that exactly the same thing is happening today—that the U.S. is colluding with major oil producers to flood the world with oil, thus depressing prices and dramatically reducing Moscow’s foreign exchange earnings, which account for almost 50% of all revenues the government takes in!

However, unlike 1985, there is no evidence, despite Russian hysteria and a desire to assign blame for their economic woes on a “foreign conspiracy”, that there is any global plot to drive oil prices down. That drop is the result of: (1) Market forces, such as fracking and other new technologies, which have spurred petroleum and gas production across the globe, especially in North America; and (2) Decreased global demand due to the 5-year recession, increased fuel efficiency in the transportation sector, and alternative energy sources entering the market.

Having said that, one might wonder if Moscow is once again facing an existential economic crisis driven by a surge in global oil production…..as it did in the late 1980’s! Ah, but that is a topic for a future piece!

 

Tyrus W. Cobb served as Director of Soviet, European and Canadian Affairs on the National Security Council from 1983-88.

 

 

Final Announcement for our November 12th Meeting… 

INDIA AND THE RISE OF NARENDRA MODI

Implications for China, the U.S. and the Asian Balance of Power

with

Atul Minocha

and a commentary by Dr. Xiaoyu Pu

The Ramada, 9:00 a.m., Wednesday, November 12th

With over 1.2 billion people, India is the second most populous country in the world but is expected to surpass China by 2025.  More than 50% of the people are below the age of 25, representing more than 2,000 ethnic groups and every major religion.  India selected the controversial Narendra Modi, former Chief Minister of Gujarat state, as its 15th Prime Minister to rule over this ethnic and religious salad bowl.  Under Modi, Gujarat became an economic dynamo, but he also presided over India’s worst communal riots in decades, a 2002 slaughter that left almost 2,000 Muslims dead.

At the same time, Modi has been widely praised for his bold economic policies, which are credited with creating an environment with a high rate of economic growth in Gujarat.  Modi also gained national significance as a key strategist for the Bharatya Janata Party, and led the BJP to victory over the long ruling and very staid Congress party.  Despite being known as a Hindu nationalist, Modi’s election has been widely greeted across India’s various ethnic groups and regional variations.  He recently made a very well received state visit to the United States, made more interesting by the fact that he was on a “denied visa list” for so many years!

The election of Modi as India’s new Prime Minister comes on the heels of the selection of Xi Jinping as China’s new President.  It will be interesting to see how the new leaders of the world’s most populous countries manage their difficult and contentious relationship, as well as relations with America.

Minocha will discuss the current political and economic order in India, and review the sensitive ethnic divide in the country.  He will focus on the rapid rise of Modi– who is he, what are his policy goals, what does his election mean for relations with China and the United States.  Xiaoyu Pu will provide us with a Chinese perspective on Modi and how that election might impact contentious relations between Beijing and New Delhi.  Both will also discuss the implications of these changes for U.S. policy in the region.

Atul Minocha was born and raised in India.  He came to the U.S. “for 2 years” in 1987 to get his MBA from Yale, and has remained here since. Minocha is a partner in Chief Outsiders, a marketing consulting company, and also teaches graduate students at Hult International Business School in San Francisco.  Dr. Xiaoyu Pu is an assistant professor at UNR.  He received his PhD from Ohio State University and was a post doctoral fellow in the Princeton-Harvard “China and the World” Program.  His articles and commentaries have appeared in major journals and media outlets.

Please join us for what will be a very interesting discussion. A full breakfast will be served ($15 Members, $25 Non-Members, and $10 for students with ID and military personnel in uniform; free for WWII veterans). We recommend that you arrive by 8:30 to enjoy some breakfast, coffee and conversation.

You are encouraged to RSVP by clicking HERE. You may also RSVP e-mailing info@nationalsecurityforum.org. Just a reminder, after the forum, we will be accepting new and renewal membership applications for the July 1, 2014 – June 30, 2015 period. Forms will be available at the forum, though you can also access the application form by clicking HERE. For your convenience, we accept cash, check and credit card payments for both the breakfast and membership fees.