What Happens Now?

Among Larry Wilkerson’s vignettes, he touched on themes both cautionary and uplifting. The balance tipped throughout. Discussing empire, he drew memories of the familiar parallels. But he brought it home to each individual in their own ways. Each will judge if we’re rising or setting; half full or half empty.

On a recent Friday, David Smick was invited to Washington to give a lecture on his new book, the World is Curved: Hidden Dangers to the Global Economy. Though not sure he agrees with David, Wilkerson recommends a read, “I gotta remember he is a financial consultant for people like Lee Kwan Yew in Singapore, some of the major hedge funds in the world and so forth.” Smick explains in layman’s terms what has happened to us with regards to those worlds and “…whether he is right in terms of the solution or not, his explanation of the problem is pretty good.” Wilkerson says he has absorbed much of the same aspect from a lot of other people too, including what he calls some of our best minds.

Wilkerson tells this story: David is talking for a few minutes and it hits me personal all of a sudden. David begins to talk about how exposed the European banks are. He says first of all, Berlin, Paris, London, are in a state of denial. Their banks are exposed 60 to 300 times more than ours. That’s a staggering figure. He then says, for example, UBS has an exposure four times greater than the GDP of Switzerland, its home country. Got my attention. My father died December of 2007. I became the trustee of his estate. My mother is 89 years old. Two days ago she just went back into the hospital. When she comes out she is going to go into full care. It’s going to be like my father’s was, about 7 to 8 thousand dollars a month. She has about a half million dollars that my father left her; it’s all with UBS.

Talk about coming home personal; my FAX is at UBS. I want a cashier’s check. I don’t care what the basis points are, I don’t care how I do my taxes; don’t talk to me (because I know they are going to); this guy’s been my father’s financial advisor for over 30 years. I want my money. Is that the right thing for me to be doing? No, probably it’s not because this is how you deepen and spread the financial crisis. But, my mother is my mother and I know how fast that money is going to go even if it is what it is right now. She’s already lost a hundred thousand, so I suspect she’s lost more in the interim; it’s been about a month since that initial loss. So, I don’t know what the cashier’s check is going to be. I don’t even know if it is going to be enough. She’s got good genes. Her mother lived to be about 99. You do the numbers.

So, you know how it becomes personal for you. And I know each one of you has probably had your own ordeal or you know someone who has. Or you will have over the next three or four years.

And us people who are in the retired sort of bracket have a situation to look forward to which is probably going to be almost no interest, or volatility that says 20% one year and minus five percent the next. This is a heck of a world to have to live in especially if you are like me. I have a have a military pension and guess what FDR did in 1933. One of the first things he did was reduce military pensions. We’re a small body. We are not a huge constituency. So if anybody is going to start to reduce entitlements, I figure they’ll go to military pensions first. So personally this is an uncomfortable situation. And, I know other people are in the same boat.

But if David is right in his book, the very worst thing we can do is lose confidence in capitalism because of, one, a whole bunch of greedy people, two, a whole bunch of crooks, and three, some real poor moves by the Federal Reserve, by your government, particularly your Congress, and others that will now be the foundation for worse moves by others.

And he cites Sarbanes-Oxley, for example. He discusses how that was a well meaning piece of legislation but was so devastating to this country that we are about to lose New York as the financial capitol of the world because everyone is going to London because Sarbanes-Oxley has made entrepreneurship, has made that which has been the essence of the last 30 years of prosperity an anathema. So other people in the world are eager to take over that role; London being primary. So that is the kind of legislation we do not need, the kind that says “Okay all you crooks, all you bums, all you bankers, all you $400 million bonus people and so forth, we are going to fix you. And in our purity and in our zeal, we crucify capitalism.

So this is a very difficult, challenging time. At the end of five or ten years, we could be a 300 million person country that’s an also ran. Or we could be a resurgent, prosperous again, fortunate again, forging a path in the world again, with others’ help, with alliances, with friendships, with collegiality, with trust, unparalleled. And this group of leaders is going to do that…or they or not going to do that. That is one heck of a plate of challenges to put before yourself. And I wish them every good wish.

If you want to ask me what you can do, I have three pieces of advice. They sound easy, but I know they are not. One is don’t panic, but don’t be dumb. Do smart things. I asked David, “What’s smart? Gold?” I turned about a third of my portfolio into gold about three or four years ago; I’m really happy. But then David tells me “No, Moscow is going to dump gold, the Swiss have got a back channel through Moscow to dump gold. Gold’s going to be really volatile. I said “What then?” He said US Treasuries. Okay, so I share that bit of advice with you. You aren’t going to make any money, but you aren’t going to lose any. And if you do lose it, the country’s going down and you have other worries. So don’t panic and if you have to take it out and put it in something, put it in treasuries. Two, Back this President. Back this President to the hilt. The third thing is give him time. Give him time. So, those sound easy to do, they might not be as this crisis deepens and widens because it is going to. After listening to David, I came out of there and I was sweating; I think everyone in there was sweating and there were some pretty high powered financial people and others. And David holds nothing back with regards to China. That’s probably the most scary part of the worldwide part of his analysis. He’s been operating in China and mainly Shanghai for a long time, and he says it’s just on the cusp. And when it goes, it is really going to be dramatic, and it’s really going to be bad…and bad for the world. Certainly bad for China.

To a criticism of the stimulus package as not being a stimulus package and containing pork, he commented that Congress has been completely feckless. He also said that though he would not completely disagree with the observation, that having listened to the governors, most of them from both parties whom he has respect for, he’ll take their word that they think it is good enough to go with and its probably the best they could have gotten out of a Congress they are very familiar with and probably abominate in their heart of hearts. So, he said, politics is the art of the possible and it is probably the best we could get. And, he looks at it to as the first try and that we are probably going to have to have more, and incredibly more focused. It’s going to have to be focused not just at stimulating the economy, but at transforming the economy. That means transforming the infrastructure, transforming the way we think about things, getting us off automobiles, for example, and into whatever new means of transportation we’re going to use.

I was stunned the other day when a guy directed me to a website that brought me up to speed how that in 1919 we had more rail, more metros, more electric trolleys and things like that than we do today by a factor of something like three to one. We’ve gotten away from where we should be going because of the ease, the speed with which we can get it, the cost and so forth of non-renewable fossil fuel products. It’s going to be painful. It’s going to be behavior as much as it is technology. Behavior. Look at what’s happening right now with the price of oil. It’s because China’s not using it and we’re not using it. I mean, we’ve driven the price off oil down essentially to 40 dollars a barrel or something. There’s no expectation China is going to consume again at the rate they were anytime soon. Nor, us, anytime soon. So you already see what is doable.

This suggestion to tack a tax on gasoline now, to gain some of this money back is probably a darn good move, he says. Though not certain, he’d have to hear the economists, Summers and others, discuss it and see what the pros and cons are, but on the surface it seems like a pretty good move. He suggests we move immediately; that it should have been done last year; let’s move the price to $2.50 a gallon. We can tolerate that economically. Maybe it has to be two and a quarter and make everything between the price, which is what, 1.89 and that, tax to replenish the coffers. This is one move, but he thinks it is going to have to be a lot of moves and it’s going to have to be a lot more focused and a lot smarter and a lot more bipartisan too.

That’s why I am glad the House and the Senate are able to go without the Republicans or very few of them and after the next midterms will be able to go without any of them at all.

“I can tell you what I think about the US automobile industry if you'd like. Every time I hear Rick Wagner from general Motors I want to just spit in my spittoon. How can these people be as ignorant as they are and have risen to the spots that they occupy? I don't know exactly what you should do about the automobile industry. It's a huge question. The moral hazard aspect or component of it tells you just let them fail…let them fail. I don’t care if I'm driving a Toyota; I've been driving two of them for 15 years. I don't care who's making the product as long as it is good. And besides, it's an industry of the past, not an industry of the future. Maybe if we stopped we'd have to rapidly transition into whatever it is, whether its electric cars or whatever. I don't see them doing it that rapidly. When he comes out and says "I'm pulling out the Volt" or whatever it is, the Japanese are so far ahead of us it's pitiful. And they have one tenth the motivation we do.”

Unions in this country are about dead, he observed. Every now and then one of them raises its morbid head and makes some statement and some politician addresses it. But they are about dead. If they are coming back in any was that seems viable, it's in the services industry. And it's in little places. For example, he said he just had to join a union at George Washington University. “52% of your faculties in your universities in this country now is adjunct, it isn't tenured, it's part time, in other words. We have no benefits and we get paid a pittance, so we have SEIU (Service Employees International Union), I guess, is now trying to organize these people. If you were to organize the service industry they way they are doing the few they have, that would be power again. Because let's face it, our country is a service country. What are we down to now? About 20% manufacturing? That discourages me sometimes too when I think about that; that we don’t make anything anymore. But I am told I am a dinosaur. I don’t recognize the power of the computer and the power of the hotel, and the power of electronic transfers of money and everything. I recognize a product in my hand; a well made knife, a well made plate, a well made car, a saddle for a horse, whatever. I recognize products. I don't recognize all this service out there. But I'm a dinosaur.”

Turning outward again, he addressed China. Right now, the way we analyze China’s growth is not by listening to China. We look at things like how long tankers linger in ports before they offload. How many hydroelectric dams are producing and is the power going anywhere? How much coal is actually being transported and actually being burned? With these kind of indices, of which there are about a hundred, the CIA can look a China and say, for example, that growth is about 8 or 10%. The government is saying that 8% is about the floor before they expect political problems. Well, our estimates are that it is at about 6.2% and going down. What is China going to do if gets into a real political swamp? Suddenly some 100 million citizens become as dissatisfied as those citizens a few months ago in Tibet were and suddenly you have to move your military around simply to maintain some semblance of domestic stability? How do you then deal with the other problem you have which is a global economy that no longer serves you at all. What do you do with those commodities that have imported? What do you do with the 450 million tons of steel you have been producing every year which has produced a glut on the global market. Europe produces about 150 million tons, we produce about a 100. When do you stop it? When do you lay off those workers? What are you going to stop building up this huge amount of steel that you are going to have to dump on the world or dump in the ocean? These are serious issues impacting everyone in the world.

When asked about the potential for a trade war, he answered that David Smick sees this as the most likely of the lesser dangerous scenarios. The most dangerous one is that the psychological panic spreads and nothing stops it until we hit bottom. He says you could attenuate this somewhat by forming trade blocks. You might have a Western Hemisphere trade block, a European trade block, and maybe an Asian trade block that would have permutations. “I say if that’s true, we’d better lift the embargo on Cuba and establish really good relations with Brazil quickly.” Watch how much protectionism begins to take over. Watch how much they go domestic instead of international.

Imagine if the Chinese began to dump those commodities on the world or let’s say they begin to dump dollars on the world, they’ve got about 1.4 trillion. People argue that that would be undermining of themselves. Well, they are already undermined; we aren’t buying from them. These are the kinds of things that can be aided and abetted by the psychology too.

Who is coordinating security and how safe do you think we are?

I think the administration as it exists right now in all its national security modes is well attuned to that. But I don't think being well attuned and being well defended, which in some ways we are and in some ways we aren't; the fence being built against in Mexico for example, a big boondoggle, part of Boeing and others who just milked the government for billions of dollars to build a damn fence. It's like the Maginot Line. It's ridiculous. What was it Patton said? "Permanent defenses are monuments to the imbecility of man." That's crazy, but we're doing it because it's making a lot of contractors a lot of money.

That's the stupid part of it, but some of the things we are doing are very smart. One of the very smart things we are doing is through the National Security Agency we are really ripping apart the money terrorists need to survive. That's probably the most effective thing the Bush administration did besides actually kicking the Taliban in Afghanistan initially. So if we keep doing these types of things, it’s not impossible, but increasingly more difficult for groups like al Qaida to act. They probably will and we'll have to live with it. I suggest we don't react the way we reacted the last time.

Now here's the kicker, and this is a point the CIA brought up about three years ago in a briefing that seemed to be all doom and gloom. They have a chart that they have put together the best they can given the records we have back two or three millennia and the chart shows the frequency and intensity of terrorism over the past two or three thousand years. You look at, for example, the period of the first and second crusades, and you look at the development of all kinds of things like the word assassin and so forth, and how terrorism, if you say killing civilians for political objectives, grows and wanes and ebbs and so forth. You look at this chart and you look at this period we are in right now and you see that we will be in this period of this intense use of this tool by various groups for a generation or a generation and a half. Some will say it started in '79 with the fall of the Shah, others will say, no, it didn't start until '83 with the bombing of the Marine barracks in Beirut. Who cares when it started? But they say this is going to be a fairly long period.

In this period, in comes a new group of briefers. They say the ability to build a small nuclear weapon in your garage is going to be developed. You ask the question, "Where are they going to get the fissionable material?" And the guys giving the briefing say, "Don't worry, they'll get it." And then you see these lines intersect about 2015 and you say "Boy, dangerous period." Then they tell you that the probability of that being an external terrorist is outweighed by it being a Timothy McVeigh or a Unabomber; especially in our country. Then you get really worried because you know there's no network for that person; no real network. There's no way to track his cell phone calls. You don't even know he exists. There's no way to block his money in a bank account, because you don't even know he exists or has money in a bank. So these guys from the FBI, the CIA and the rest of the people who track this are more afraid of the home grown terrorist with his capability to build a small yield nuclear weapon and do an Oklahoma City than they are an external threat.

You have presented us with a lot of the dark side of the moon…when you consider the whole picture of the future, do terms like enlightenment and renaissance come into your thinking?

Absolutely, because I am an English major. But I like to sum up the way the world looks to me right now with the last lines of one of the most sublime poems in the English language, Dover Beach, by Matthew Arnold, where he in the whole poem laments the passing of one age and the coming of another age and he says:

…we are here as on a darkling plain,
Swept with confused alarms of struggle and fight,
Where ignorant armies clash by night.

That’s where we are!

This is the conclusion of a series of posts from a presentation by the former Chief of Staff to Colin Powell. More of Lawrence Wilkerson's Williamsburg Observations:

Our Kenyan Born, Muslim, Marxist President

The World Gets Its Curve Back

What Do You Do About The Terrorists?

Military-Industrial-Congressional Corruption

What Happens Now? (Today)

Cross posted at VBDems.org - Blogging our way to Democratic wins in Virginia Beach!