Interview Part 2
US Economic Outlook 2011
US Opportunities and Risks

Q1: What is your short, mid-term and long-term outlook for the US economy?

While in the short term the US will continue to recover, I'm not fully optimistic about the mid and long-terms yet. A change in my outlook depends on the US government policies, global competition and private sector variables. My main concern is that the recovery was created by an accounting trick; they took the bad assets off Wall Street and put them on the government's balance sheet. It is merely a psychological trick to rebuild confidence in the financial markets. It worked! Wall Street recovered, but the US tax payers and main street businesses will have to pay for it through higher taxes, higher interest rates, inflation or a combination that will eat future profits and consumer spending power, thus hindering growth rates for a long period of time.

Q2: What are your views on the current US economic policies to overcome the crisis?

Many economists believe that the US government can jumpstart the economy by an additional stimulus package that later can be paid for with increased tax revenues. I believe such policies are counter productive. The causes of past recoveries are misattributed to government policies, real recovery comes from the private sector.

In 2006, I published a paper outlining US economic risks and warned against deficit spending and tax increases. If we continue on the same path we could enter a vicious economic cycle. To understand the impact of current government policies on the economic health, you have to understand the theory of virtuous and vicious economic cycles.

• Over the long term, if government revenues continue to be more than expenditures (surplus), then the economic health of the country improves, because the government can afford to invest in development projects such as research and development, education and infrastructure. With more income, the government can also afford to lower taxes, which increases corporate profits and attracts more foreign investors, resulting in more economic activities, creating more jobs and enlarging consumer spending and government revenues despite income tax cuts. It is what I call a virtuous economic cycle.

• Over the long term, if government revenues continue to be less than the expenditures (deficit), then the economic health of the country worsens because this will result in accumulated debt. An increasing government debt will result in higher interest payments, and less money available for socioeconomic development. To pay for the debt, the government will have to raise taxes, which will reduce the competitive position of the country in the global economy and chase investors away resulting in less economic activities and more job losses. In order to avoid higher unemployment and social instability, the government has to raise more debt to fund spending and welfare support by raising the interest rate which will increase the cost of money, reduce corporate profits and slow economic investments, thus resulting in more job losses and reduced government revenues, despite income tax increases. It is what I call a vicious economic cycle.

From an economic point of view, the best action a government can take during an economic crisis is to reduce taxes by reducing its spending budget. That is easier said than done. Leaders tend to resist budget cuts to avoid alienating voting blocs and sometime they have to increase welfare spending to reduce the social suffering resulting from the economic downturn. It is a very delicate balancing act and can be easily missed. Such actions in the long term will accelerate the vicious economic cycle and the entire country will suffer.

The only hope for a real US recovery is from the private sector. US companies selling new innovations globally in industries such as nano-tech, bio-tech, ICT and converged media. Clinton's budget surplus and recent US wealth was built by entrepreneurs and companies such as Apple, Google, Boeing, and GE. The future will not be different, only an innovation-driven economic growth can attract foreign investments, generate enough revenues to pay the debt and re-energize the growth again.

Q3: What are the risks for the US economic recovery?

The financial sector is still a drain on the US and the global economy. When it comes to the US, the media focuses on the accounting profits of the bailed out mega banks, but less attention is given to the medium and smaller banks that are in trouble. I believe the deleveraging process of the banks is still not completed. Unfortunately, more banks could fail. Many states and municipalities are also in deep debt and there is a high risk of defaults. Unlike the Federal Reserve, states cannot print money to pay their debt, so either they will impose higher taxes or significantly cut spending or ask for another bailout.

It is expected from the government officials and the financial sector to selectively report on the good news to avoid investors' panic and maintain confidence in the economy. Unfortunately, building confidence has been the name of the game since the beginning of the crisis rather than real economic reforms.

Other risks include US foreign policy. The spread of popular unrest in the Middle East to remove dictatorial regimes supported by the US will align those countries with US rivals. A US or Israeli strike against Iran can bring the world recovery to halt and drive the US into an economic depression.

In the mid and long terms, currency wars and the momentum to replace the US dollar with a basket of international currencies as the international trade and reserve currency can result in the collapse of the dollar and the US economy.

Q4: What is the likelihood of those risks materializing?

No one can know with certainty, but the risks are high and that is what worries me. Despite of my disapproval of Obama's bailouts and tax policies, I believe that his foreign policy is less confrontational and we are less likely to have a tit-for-tat or strong conflicts with China, Russia, North Korea or Iran. However, things can change. For example, if Israel pulls the US into a war with Iran in 2011 or the war lobby has its way in 2012 elections, then the risk of another global crisis is very real. WikiLeaks has revealed that Israel and some of the US Arab allies are secretly pushing the US to strike against Iran. This is a gross miscalculation. What they do not realize is that a strike on Iran will do more damage to the region and the world economy than most analysts foresee.

Q5: Is there a solution to this global economic crisis?

Yes, global economic and political reset. However, this requires a strong global leadership action. Unfortunately, the US leadership is limited by many conflicting private interest groups and is buried in domestic politics, ideological conflicts, and security issues.

A global economic reset means that the world can come together to agree on debt forgiveness to all nations and restructuring of the global economy. To be fair to nations with lesser debts, they could be compensated on a fair ratio basis to enjoy a treasury surplus. A new international reserve and trade currency will probably be established to create a new and fair global economic system. This is a much better alternative than currency wars and continuous risks of economic shocks.

On the political front, the US could reset its foreign policy and stop burdening its economy and its people by allowing some lobbies to change the US role from the leading global trading nation to that of world police. US government could allow international justice courts to resolve international conflicts and the UN to enforce them. Countries that are busy conducting wars do not have enough time and resources to develop their economies and will eventually lose their leadership.

Q6: Should the world decouple from everything American… particularly the dollar peg?

Many countries peg their currency to the US dollar. While this was beneficial in the past, it is not beneficial for the future. Brazil, China, Russia, India, South Korea, South Africa, Iran and other countries are in favor of using the International Monetary Fund's own currency - called special depository receipts (SDRs) as an international trade and reserve currency. With the US dollar coming under pressure, there are concerns about inflation in emerging markets.

My advice is not to blindly imitate the US economic and financial policies or any other policies for that matter; leaders should analyze and customize them to their own economic conditions. You cut the jacket to fit the person; you do not cut the person to fit the jacket.

Other countries do not need to decouple from everything American. America's economy and businesses are still the largest in the world. We always managed to recover from past crises and will recover from this one. We are simply paying the price for our mistakes and I see no nation without mistakes. I would not bet against US innovation, entrepreneurship and business culture - The trinity that drives economic growth and recovery. Yes, we do face a major crisis, but we also do have a proven track record of recovery.

Q7: Is it over for the US as the world's super power?

After the collapse of the USSR, we became the world's sole superpower both militarily and economically. The mistakes of our elite led us to where we are today. I do believe we will continue to recover from this crisis. The US will not turn into a third world country. However, it is unlikely that we will be the only superpower or be as rich as we used to. Wealth is being distributed globally and the world is becoming multi-polar. This is evident by the expansion of G-7 to G-20.

Over the next decade, if the US macroeconomic trends remain in the same direction, while other countries are growing in power and wealth, we will lose our leadership. We will become like the UK, an influential political and economic player, but not the only global economic empire.

This is inevitable; it is part of what I call the inescapable "power cycles". The forces of the Power Cycles work over time to distribute the power and wealth among nations. Every nation and every political party must go through the cycles of expansion and contraction. This is true for all past, current and future powers. The only difference is that this power cycle got accelerated tremendously with the introduction of the Internet and global communications.

The knowledge, wealth, and development gaps among nations are reducing and the reign of superpowers is shortening. Just look at the history of the Roman, Islamic, Russian and British empires: the newer the power the shorter the reign. In the economic and business worlds the same power cycles apply. Ford, IBM, Nokia and other companies lost their leadership position to newer companies faster than their predecessors

The globalization of trade, knowledge, innovation, industrialization and entrepreneurial culture is increasing at a rapid rate and the net result is more distribution of wealth and power. A new world order is imminent. The countries that succeed will be those with better socioeconomic policies, more cash, natural resources and creativity. The US can embrace this change and compete or we can resist it and lose.

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