Sunday, January 19, 2014

Linnunrata, Vikings and Tigers

I love the Finnish myth of the creation of the world which starts with an exploding egg.  What I love even more is the cosmology that was developed around the stellar path of the Milky Way – the Linnunrata.  At the edges of the earth, according to the legend, was the warm home of the birds to which they would fly along the path of the band of stars that stretched across the heavens only to return with the summer to nest in the forests of Finland.  The warm south was an idyllic place where birds, souls and fantasies all flew during the long, cold winters.

HSBC just published their updated forecast for where the world’s economies will grow and shrink by 2050 and, to say that the Finnish and Norse birds have flown the coop is the understatement.  Denmark, Norway, Sweden, and Finland all are forecast to free-fall from the upper echelons by enormous scale and with them much of the rest of Europe.  These ranking drops in excess of 20 places on the world stage happen in the face of ascendancies by countries like India (forecast to be the third largest economy behind China and the U.S.) which is slated to rise 5 ranks, Mexico rising to 8th (+5), Turkey rising to 12th (+6), and Philippines to 16th (+27), Malaysia to 21 (+17) and Pakistan to 30 (+14).  In fact, the largest gainers are South Central Asian and South American while the biggest drops are all European. 

This report struck me as fascinating in part because of the massive geopolitical ramifications that these transitions portend but more so because to the absence of creativity reflected in the metrics.  Apparently, we are to assume that in the next 36 years, we’re still going to be measuring and counting things the way we did at the end of the Cold War.  The birds in Finnish mythology, go to the south in the winter and find their way home following the stars of the Milky Way bringing with them the humanity and warmth that they experienced in the south at the edge of the world.  While HSBC sees the rising Tigers and MINT countries (Mexico, Indonesia, Nigeria, and Turkey) is the age of Odin at its end?

In 2007, I gave a speech entitled 10 Years Hence in which I was asked by the Mendoza School at the University of Notre Dame to discuss what the world of 2017 would look like.  I’ve excerpted it below to stimulate a conversation that may light a path to envision a world not of rising or falling ranks but of a More Perfect Union.

We live in an era defined by Ignorance Arbitrage.  By this, I mean that all of our implicit social constructs rely on the selective “knowledge consensus” among authorized network members.  We explicitly communicate within archetypes constrained by presuppositions of awareness that may, or may not, be encoded for others to understand in part or in whole.   As long as equilibrium, or the appearance thereof, is preserved, we’re comfortable.  However, when the preponderance of evidence no longer sustains our contrived realism, we despair over our impending obsolescence.

Let’s review our modern credo of manifest destiny. 

We begin with a resolute recitation of Doctrine of Conquest.  Following World War II, a victor’s conundrum emerged.  You will recall that in 1945, the Soviet Union was our military ally together with Britain, France, Australia, Belgium, Brazil, Canada, China, Denmark, Greece, Netherlands, New Zealand, Norway, Poland, South Africa, and Yugoslavia.  You will also recall that our enemies included Germany, Italy, Japan, Hungary, Romania, and Bulgaria.  Four short years later, we were in the Cold War.  From 1949 to 1989 the global economy was shaped by the dichotomies of the specter of Communism vs. the supremacy of Capitalism in a neat East vs. West model.  It is worth noting that Socialism was largely ignored (albeit frequently invoked as Communism’s evil cousin) despite its important contributions in Europe, India, and other “lesser developed countries”.  The West embraced materialism at every level to overtly display social and economic supremacy and constantly contrasted it to the despondency of those living under the iron fist of “the others”.  When the Soviets, in 1957, successfully launched the highly relevant technology – a satellite – the United States’ response was to put a man on the moon!  We, the country founded on conquest, reclaimed supremacy by conquest of a large dusty rock as though we didn’t have enough dusty rocks on earth.  While I would not suggest that our Space Race didn’t have unintended benefits, it’s comical that modern communication rides on the back of the “losers” of the Cold War.  In short, to confirm our myth of our own divine right, we engaged in a conquest of an inert object.  To the victor goes the re-writing of history.

From Conquest, our Catechism teaches the Doctrine of Colonization.  In the 1980’s, the steel of our cars and guns and the copper of our electronics conveniences provided little solace when Japan out invented the United States in a number of critical technologies – challenging a doctrine of intellectual supremacy that was significantly built on the backs of the German engineers relocated to the United States after the end of World War II.  After all, the MacArthurian utopia was supposed to cooperate with our global economic policy but something had gone terribly wrong.  Japan learned from the excesses of the industrial West during the 1970’s and started beating us at every turn.  You will recall our response in the 1980’s was:
  • Slashing domestic industrial manufacturing to “build competitiveness” thereby un-employing 2.8 million Americans;
  • Doubling of Foreign Direct Investment into the U.S. nearly making up for the job cuts in American businesses by employing Americans in foreign owned enterprises;
  • Pumping billions of dollars into state-sponsored research kicked off by the Stevenson-Wydler Technology Innovation Act of 1980 in which the following doctrine was elucidated.  “It is the continuing responsibility of the Federal Government to ensure the full use of the results of the Nation's Federal investment in research and development. To this end the Federal Government shall strive where appropriate to transfer federally owned or originated technology to State and local governments and to the private sector… including plans for securing intellectual property rights in laboratory innovations with commercial promise and plans for managing such innovations so as to benefit the competitiveness of United States industry.”
  • Malcolm Baldrige, U.S. Secretary of Commerce, architected the “Trade War” doctrine as a matter of national economic response to Japan – a policy strikingly similar to that deployed today against the Chinese;
  • The Capitalist Victor of the Cold War minted the oxymoronic phrase “unfair competition” to level against any country that happened to outperform U.S. economic execution.
Colonization, under the moniker of “Free Trade”, means that U.S. and European policy reserves the right to define “Free” and “Fair” and the litmus test to apply to measure the relative pH of the system is how the behavior of others impacts U.S. and European industry.

When fully bloomed, we achieve the transcendence of the Doctrine of Eminent Domain.  In this final incarnate step, we see the emergence of the unholy trinity of creator, purveyor, and manipulator.  If we say that we create all things that are innovative and valuable, and we convince others that they want and must have the things we create and allege to be innovative and valuable, and finally, if we actively insist that only that which we say is valuable can achieve value, we have achieved bliss.  When white collar jobs followed the blue collar exodus to India, Vietnam, Korea, Singapore, China, and Thailand, the American people were reassured by policy makers and the media that all was fine because, after all, all the innovations come from America.  The assumption followed, therefore, that as long as we created all that is new and valuable, the rest of the world would “need” us.  However, this assessment never fully calculated the fact that, since 1987, the majority of foreign students being educated in the programs created under the 1980 – 1983 national research competitiveness programs came from Taiwan, China, India, and South Korea.  By 1994, the U.S. Department of Education reported that over 50% of all doctoral degrees awarded in computer science and engineering were awarded to foreign students.  A subtly in that report (published in 1996) was the observation that while Taiwanese and Indian students were more biased towards computer science and engineering, students from the People’s Republic of China were more focused on the natural sciences.  One early indicator of pending transformation can be drawn from this statistic – namely that the PRC has millions of basic scientists from whom the next new “new thing” is likely to emerge as their training has not merely prepared them to out-engineer and optimize but to understand the basics of discovery.  Just because we educated masters and doctoral students doesn’t mean that they all returned to their home countries with a permanent sense of loyalty to their academic progenitors.  The assumption that eminent domain applies to the landscape of the mind, while a wistful aspiration, has not held true in the past and will not hold this time.  The Stevenson-Wydler Act inadvertently has educated and enabled the GDP growth of others while we preside over a flat or decreasing GDP on our shores.  Since we’ve educated the world, we should be cooperating with it rather than vilifying those whose intellects we’ve shared.

A series of clearly identifiable factors began to warm the seas into what promises to be the economic El Niño that bodes for a transformational 10 years hence. 
  • In 2006, one third of all international IPO’s were from China with proceeds growth of 87% in a single year.
  • The total proceeds from global IPO’s has not yet returned to 1998 levels though the average deal size has grown by almost 20%.  The companies that are raising money are hardly at the innovative edge of future technology and business models – credit cards, airplanes, real estate, hotels, and car rental to be precise - concerning the top 5 grossing deals in 2006.  It is troublesome to be reminded that one of the common reasons for the slowdown in IPO deals is the requirement for compliance under Sarbanes Oxley – an unwanted burden of accountability and oversight which leads me to my observations about the future.
  • The “strength” of the U.S. economy is measured with metrics which systematically under report:  unemployment and under-employment; the consumer contribution to the economy that is increasingly representing new debt (much of which has been supported by hyper-inflation in perceived real estate value); national entitlement programs including Social Security, Medicare, Medicaid, together with the grossly overlooked actual financial position of the FDIC, Fannie Mae and Freddie Mac and their attendant solvency risks which are nowhere to be found in Federal fiscal transparency; and, the actual contribution and double counting of Federal underwriting of government spending on both consumable products and services as well as the perpetual abuse of the in-process research and experimentation tax credit which is supposed to finance our future GDP.
  • Industrial stalwarts such as General Motors, General Electric’s plastics division, pharmaceutical giants, and consumer electronics increasingly see global competition catching and surpassing them with little or no option than to option off their futures.
  • James Wilsdon’s critique of the British investment in science, and the underlying presumption that this is linked to what I refer to as Gross Innovative Output in the November 3, 2006 Financial Times, in which he illuminated an industrialist paradigm at the public policy level which has become unmoored.  The notion that investing in laboratories, academia, and industrial research and experimentation will somehow positively correlate to the next new thing may have worked in a more industrial society.  However, in a world where proprietary value – that which protects goods or services from commoditization and minimal profitability – is increasingly based on knowledge franchises, this public policy and financial prioritization is outmoded. 
  • According to the FDIC, the total of past due and nonaccrual assets in 2006 were predominantly (82%) in real estate-secured and consumer credit (51% and 31%, respectively).  A closer look reveals that a potential double exposure exists driving the remarkable increase in these statistics from 2004 to 2006 of over 20%.  Leading the increase in non-performing obligations were debts for the 1-4 family residential real estate sector and the credit card debt non-performing sector which are tracking each other very closely supporting the concern that the seven consecutive quarters of negative savings in the U.S. is impacting not only wealth accretion but is also beginning to adversely impact long-term credit rating foundations. 
  • One of the largest financial innovations of 2005 and 2006 was the creation of the sukuk – an Islamic finance product originated in the Gulf States and subscribed from Indonesia to Germany.  This novel finance vehicle, in two year’s time, raised close to 10% of the global total financing proceeds compared to all funds raised through IPO’s in the traditional markets.  While the rest of the world was learning about, and investing in Shari’ a-compliant investments, U.S. policymakers were protesting port security provided by one of our allies who floated a sukuk offering.
In short, our love affair with our domestic ever-expanding consumption without transparency and accountability has resulted in a financial and social bankruptcy the import of which has not been lost on the rest of the world.
The Silk Road is coming back.  For over two thousand years, stretching from the Eastern Mediterranean to the Sea of Japan, southward through the Indian Ocean, the Silk Road was the nexus for the emergence of knowledge transfer and international trade networks which rival, in diversity and value, modern conventions.  While the U.S. and Western Europe prosecute military campaigns in Iraq and Afghanistan, the Silk Road is emerging as a literal and figurative power reminiscent of its earlier glory.  It was after all, on this network, that one of the most compelling technology transfers was facilitated.  Between C.E. 300 and 1168, Chinese and Muslims developed and applied the core technology for potassium nitrate, arguably one of the most explosive technologies that has shaped two millennia of human endeavors. 

To set the context, it is helpful to picture the Silk Road Economic Block in the following way.  Starting in Alexandria, Egypt and terminating in Beijing, China, draw your latitude line angling from N30° to N40°.  Then look south of that line to the Equator.  This region holds close to ½ of the world’s population; is home to most of the world’s religious and cultural progenitors; enjoys unprecedented GDP growth forecast to represent over 20% of the world’s GDP in the next ten years; and, is actively building cross-border economic cooperation at the corporate and national level.  The strength of the Silk Road Economic Block poses a number of compelling arguments for a global shift in power within 10 years hence.

First, the U.S. dollar.  In 2006, 47% of the U.S. Treasury securities were held by foreign interests while the U.S. Monetary Authority retained 17.8%.  The Federal Reserve estimates that two thirds of U.S. currency is held outside the country amounting to over $700 billion.  While the U.S. dollar represents 47% of the world’s official foreign exchange reserves, it is helpful to consider that with that exposure comes certain risks.  In June 2005, the Bank for International Settlements warned that countries would need to act “together” to deal with the burgeoning U.S. trade deficit and went so far as to suggest that the U.S. should consider cutting expenditures and raising taxes.  Failure to address this issue could lead, they suggested, to disorderly decline of the dollar and trigger significant global market perturbations.  As we all know, the appetite for this medicine has not yet created the impetus for change. 

As we see our country slip in its influence on the foreign policy front, we cannot ignore a maelstrom of our own creation.  While we’ve leveraged our nation in our pursuit of energy consumption, insatiable material acquisition, and protection of our way of living, we’ve actually mortgaged our economic fulcrum in shaping global policy.  When China elects to build energy alliances with Iran, paid for in U.S. dollars and financed on U.S. Treasuries, precisely what leverage have we retained.  Given the fact that U.S. consumption has provided vast wealth to those in the Middle East and Asia who now are cast as “emerging threats” to our national security and “sponsors” of terror, what incentive have we provided to engage in constructive dialogue?

Increasingly, innovations of global consequence are emerging from the Silk Road Economic Block.  In Singapore, Malaysia and China, biofuel technology is being funded and deployed.  In China, near-zero emission transportation and municipal systems are being developed.  In Iran, low-fire glass ceramics are being developed to safely dispose of highly radioactive nuclear waste.  In India and Iran, transgenic tomato plants are being developed to produce vaccines for biological warfare agents.  In Singapore, a global surprise anticipation center is being built to fundamentally change national and international policy from reactionary to proactive and anticipatory.  In Saudi Arabia, Kuwait, and the United Arab Emirates, novel energy and water municipal systems are years, if not decades, more advanced than the municipal systems in much of the U.S. and Europe.  Islamic financial products – based on fundamental ethical requirements for transparency and risk-sharing – are attracting capital market participation for funds that have never been liquid in the global economy.  National treasuries are adopting policies for foreign direct investment within the Block realizing that economic gain is inextricably linked to domestic and regional security.  In short, the region is emerging the “Fusion Economy”. 

Why Fusion?  First, because it accurately describes at the physical sciences level the imperative driving the emerging reality.  In the fusion reaction, the application of an external nuclear force overcomes the naked repulsive electrostatic force that keeps nuclei repelled.  When one nucleon is added to a nucleus, it attracts others and, by doing so, adds mass while emitting energy.  What’s coming?  The Fusion Economy.

Highly divergent, one could argue polar, forces exist in the cultures of the Silk Road Economic Block.  Nowhere are the divides between wealth and poverty; progress vs. preservation; theism and modernism more brightly illuminated.  Nowhere is there a more concentrated aggregation of wealth denominated in U.S. dollars.  Nowhere are markets so entirely dependent on the consumption of energy, goods, and services demanded by, but out-sourced from, the West.  However, in spite of these conditions, a single catalyzing event (triggered by war on an economic or corporeal level) could serve to unite those who appear so woefully segregated.  Who would have imagined that Chinese restaurants would become commonplace in Tehran?  Who could imagine that China could evolve an intellectual property regime that would actually begin successfully invalidating presumptive monopolies that other nations feared to challenge?  Could it be possible that ½ the world could create a self-sustaining resiliency that would be denominated on a non-U.S. treasury / currency platform?  Could a new paradigm integrating compulsory, ethical innovation licensing be paid for in “virtual value units” that entitle the bearer to water or energy rather than a call option on a Central Bank?  Is it possible that we’ve actually placed in motion sufficient antipathy to forge Atheist, Buddhist, Hindu, Muslim alliances that embrace more common values than the Anglo-Saxon values we seek to purvey? 

Ten years hence, Chinese won’t be buying IBM computer businesses – they will be engineering nanotechnology autonomous appliances.  While we debate how to deal with global warming in the U.S., New Delhi and Cairo may very well fund emission free public transport.  While our aging population finds itself under increasing financial burden to pay for medicine, Abu Dhabi Organics may be feeding the Gulf States medicament plants engineered at that National Research Center for Genetics and Bioengineering.  And, yes, my dear friends in the Kashmir may finally have the traditional herb compound that grows back my hair.

Today, we can choose the path that allows us to participate with those for whom we’ve had exclusionary practices for years.  We can begin to unwind the pejorative archetypes defining those like us as developed and those unlike us as aspirants.   We can participate in the financial accountability of ethical investing.  We can enter into dialogue with those we’re sure seek to do us harm.  Can we sit and objectively listen to former President Khatami quote the great Persian poet Sa’di’s words, “With devotion I will take that poison as the cure has been created by the Almighty,” and understand that this riddle contains not only the key to understanding those we find so foreign but a gentle echo of the admonition from the very Bank for International Settlements with whom no Silk Road voice conferred?  We have before us the paradox left by our Greek progenitors – to choose an Odyessian or Orphean destiny for the sirens are singing.  I choose the sweeter sound.

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Thank you for your comment. I look forward to considering this in the expanding dialogue. Dave