[PRCo] economy

[Schneider Fred]

Not Pittsburgh Railways ... Economic and world  issues ... Delete  
immediately if not interested.

Subject: INTELLIGENCE BRIEFING FOR CEOs

This is a paper presented several weeks ago by Herb Meyer at a  
Davos,Switzerland meeting which was attended by most of the CEOs from  
all the major international corporations -- a very good summary of  
today's key trends and a perspective one seldom sees. Herbert E.  
Meyer served during the Reagan Administration as Special Assistant to  
the Director of Central Intelligence and Vice Chairman of the CIA's  
National Intelligence Council. In these positions, he managed  
production of the U.S. National Intelligence Estimates and other top-  
secret projections for the President and his national security advisers.

Meyer is widely credited with being the first senior U.S.Government  
official to forecast the Soviet Union's collapse, for which he later  
was awarded the U.S.National Intelligence Distinguished Service  
Medal, the intelligence community's highest honor.

Formerly an associate editor of FORTUNE, he is also the author of  
several books.


WHAT IN THE WORLD IS GOING ON?
A GLOBAL INTELLIGENCE BRIEFING FOR CEOs

By HERBERT MEYER


FOUR MAJOR TRANSFORMATIONS

Currently, there are four major transformations that are shaping  
political, economic and world events. These transformations have  
profound implications for American business leaders and owners, our  
culture and on our way of life.


1 The War in Iraq

There are three major monotheistic religions in the world:  
Christianity, Judaism and Islam. In the 16th century, Judaism and  
Christianity reconciled with the modern world. The rabbis, priests  
and scholars found a way to settle up and pave the way forward.  
Religion remained at the center of life, church and state became  
separate. Rule of law, idea of economic liberty, individual rights,  
human Rights-all these are defining point of modern Western  
civilization. These concepts started with the Greeks but didn't take  
off until the 15th and 16th century when Judaism and Christianity  
found a way to reconcile with the modern world. When that happened,  
it unleashed the scientific revolution and the greatest outpouring of  
art, literature and music the world has ever known. Islam, which  
developed in the 7th century, counts millions of Moslems around the  
world who are normal people. However, there is a radical streak  
within Islam. When the radicals are in charge, Islam attacks Western  
civilization. Islam first attacked Western civilization in the 7th  
century, and later in the 16th and 17th centuries. By 1683, the  
Moslems (Turks from the Ottoman Empire) were literally at the gates  
of Vienna. It was in Vienna that the climatic battle between Islam  
and Western civilization took place. The West won and went forward.  
Islam lost and went backward. Interestingly, the date of that battle  
was September 11. Since them, Islam has not found a way to reconcile  
with the modern world.

Today, terrorism is the third attack on Western civilization by  
radical Islam. To deal with terrorism, the U.S. is doing two things.  
First, units of our armed forces are in 30 countries around the world  
hunting down terrorist groups and dealing with them. This gets very  
little publicity. Second we are taking military action in Afghanistan  
and Iraq.

These actions are covered relentlessly by the media. People can argue  
about whether the war in Iraq is right or wrong. However, the  
underlying strategy behind the war is to use our military to remove  
the radicals from power and give the moderates a chance. Our hope is  
that, over time, the moderates will find a way to bring Islam forward
into the 21st century. That's what our involvement in Iraq and  
Afghanistan is all about.

The lesson of 9/11 is that we live in a world where a small number of  
people can kill a large number of people very quickly. They can use  
airplanes, bombs, anthrax, chemical weapons or dirty bombs. Even with  
a first-rate intelligence service (which the U.S. does not have), you  
can't stop every attack. That means our tolerance for political  
horseplay has dropped to zero No longer will we play games with  
terrorists or weapons of mass destructions.

Most of the instability and horseplay is coming from the Middle East.

That's why we have thought that if we could knock out the radicals  
and give the moderates a chance to hold power, they might find a way  
to reconcile Islam with the modern world. So when looking at  
Afghanistan or Iraq, it's important to look for any signs that they  
are modernizing.

For example, women being brought into the work force and colleges in  
Afghanistan is good. The Iraqis stumbling toward a constitution is good.

People can argue about what the U.S. is doing and how we're doing it,  
but anything that suggests Islam is finding its way forward is good.


2. The Emergence of China

In the last 20 years, China has moved 250 million people from the  
farms and villages into the cities. Their plan is to move another 300  
million in the next 20 years. When you put that many people into the  
cities, you have to find work for them. That's why China is addicted  
to manufacturing; they have to put all the relocated people to work.
When we decide to manufacture something in the U.S., it's based on  
market needs and the opportunity to make a profit. In China, they  
make the decision because they want the jobs, which is a very  
different calculation.

While China is addicted to manufacturing, Americans are addicted to  
low prices. As a result, a unique kind of economic codependency has  
developed between the two countries. If we ever stop buying from  
China, they will explode politically. If China stops selling to us,  
our economy will take a huge hit because prices will jump. We are
subsidizing their economic development; they are subsidizing our  
economic growth.

Because of their huge growth in manufacturing, China is hungry for  
raw materials, which drives prices up worldwide. China is also  
thirsty for oil, which is one reason oil is now at $138.4 a barrel.  
By 2020, China will produce more cars than the U.S. China is also  
buying its way into the oil infrastructure around the world. They are  
doing
it in the open market and paying fair market prices, but millions of  
barrels of oil that would have gone to the U.S. are now going to  
China. China's quest to assure it has the oil it needs to fuel its  
economy is a major factor in world politics and economics.

We have our Navy fleets protecting the sea lines, specifically the  
ability to get the tankers through. It won't be long before the  
Chinese have an aircraft carrier sitting in the Persian Gulf as well.  
The question is, will their aircraft carrier be pointing in the same  
direction as ours or against us?


3. Shifting Demographics of Western Civilization

Most countries in the Western world have stopped breeding. For a  
civilization obsessed with sex, this is remarkable. Maintaining a  
steady population requires a birth rate of 2.1 In Western Europe, the  
birth rate currently stands at 1.5, or 30 percent below replacement.  
In 30 years there will be 70 to 80 million fewer Europeans than there
are today The current birth rate in Germany is 1.3. Italy and Spain  
are even lower at 1.2 At that rate, the working age population  
declines by 30 percent in 20 years, which has a huge impact on the  
economy. When you don't have young workers to replace the older ones,  
you have to import them.

The European countries are currently importing Moslems. Today, the  
Moslems comprise 10 percent of France and Germany, and the percentage  
is rising rapidly because they have higher birthrates. However, the  
Moslem populations are not being integrated into the cultures of  
their host countries, which is a political catastrophe. One reason  
Germany and France don't support the Iraq war is they fear their  
Moslem populations will explode on them. By 2020, more than half of  
all births in the Netherlands will be non-European.

The huge design flaw in the postmodern secular state is that you need  
a traditional religious society birth rate to sustain it. The  
Europeans simply don't wish to have children, so they are dying. In  
Japan, the birthrate is 1.3. As a result, Japan will lose up to 60  
million people over the next 30 years. Because Japan has a very
different society than Europe, they refuse to import workers.  
Instead, they are just shutting down. Japan has already closed 2,000  
schools, and is closing them down at the rate of 300 per year. Japan  
is also aging very rapidly. By 2020, one out of every five Japanese  
will be at least 70 years old. Nobody has any idea about how to run
an economy with those demographics.

Europe and Japan, which comprise two of the world's major economic  
engines, aren't merely in recession, they're shutting down. This will  
have a huge impact on the world economy, and it is already beginning  
to happen. Why are the birthrates so low? There is a direct  
correlation between abandonment of traditional religious society and  
a drop in birth rate, and Christianity in Europe is becoming irrelevant.

The second reason is economic. When the birth rate drops below  
replacement, the population ages. With fewer working people to  
support more retired people, it puts a crushing tax burden on the  
smaller group of working age people. As a result, young people delay  
marriage and having a family. Once this trend starts, the downward
spiral only gets worse. These countries have abandoned all the  
traditions they formerly held in regard to having families and  
raising children.

The U.S. birth rate is 2.0, just below replacement. We have an  
increase in population because of immigration. When broken down by  
ethnicity, the Anglo birth rate is 1.6 (same as France) while the  
Hispanic birth rate is 2.7. In the U.S., the baby boomers are  
starting to retire in massive numbers. This will push the elder  
dependency ratio from 19 to 38 over the next 10 to 15 years. This is  
not as bad as Europe, but still represents the same kind of trend.

Western civilization seems to have forgotten what every primitive  
society understands-you need kids to have a healthy society. Children  
are huge consumers. Then they grow up to become taxpayers. That's how  
a society works, but the postmodern secular state seems to have  
forgotten that. If U.S. birth rates of the past 20 to 30 years had  
been the same as post-World War II, there would be no Social Security  
or Medicare problems.

The world's most effective birth control device is money. As society  
creates a middle class and women move into the workforce, birth rates  
drop. Having large families is incompatible with middle class living.

The quickest way to drop the birth rate is through rapid economic  
development. After World War II, the U.S. instituted a $600 tax  
credit per child. The idea was to enable mom and dad to have four  
children without being troubled by taxes. This led to a baby boom of  
22 million kids, which was a huge consumer market. That turned into a
huge tax base. However, to match that incentive in today's dollars  
would cost $12,000 per child.

China and India do not have declining populations. However, in both  
countries, there is a preference for boys over girls, and we now have  
the technology to know which is which before they are born. In China  
and India, families are aborting the girls. As a result, in each of  
these countries there are 70 million boys growing up who will never
find wives. When left alone, nature produces 103 boys for every 100  
girls. In some provinces, however, the ratio is 128 boys to every 100  
girls.

The birth rate in Russia is so low that by 2050 their population will  
be smaller than that of Yemen. Russia has one-sixth of the earth's  
land surface and much of its oil. You can't control that much area  
with such a small population. Immediately to the south, you have  
China with 70 million unmarried men who are a real potential
nightmare scenario for Russia.


4. Restructuring of American Business

The fourth major transformation involves a fundamental restructuring  
of American business. Today's business environment is very complex  
and competitive. To succeed, you have to be the best, which means  
having the highest quality and lowest cost. Whatever your price  
point, you must have the best quality and lowest price. To be the
best, you have to concentrate on one thing. You can't be all things  
to all people and be the best.

A generation ago, IBM used to make every part of their computer. Now  
Intel makes the chips, Microsoft makes the software, and someone else  
makes the modems, hard drives, monitors, etc. IBM even out sources  
their call center. Because IBM has all these companies supplying  
goods and services cheaper and better than they could do it  
themselves, they can make a better computer at a lower cost. This is  
called a fracturing of business. When one company can make a better  
product by relying on others to perform functions the business used  
to do itself, it creates a complex pyramid of companies that serve  
and support each other.

This fracturing of American business is now in its second generation.

The companies who supply IBM are now doing the same thing -  
outsourcing many of their core services and production process. As a  
result, they can make cheaper, better products. Over time, this  
pyramid continues to get bigger and bigger. Just when you think it  
can't fracture again, it does.

Even very small businesses can have a large pyramid of corporate  
entities that perform many of its important functions. One aspect of  
this trend is that companies end up with fewer employees and more  
independent contractors. This trend has also created two new words in  
business, integrator and complementor. At the top of the pyramid, IBM  
is the integrator. As you go down the pyramid, Microsoft, Intel and  
the other companies that support IBM are the complementors. However,  
each of the complementors is itself an integrator for the  
complementors underneath it.

This has several implications, the first of which is that we are now  
getting false readings on the economy. People who used to be  
employees are now independent contractors launching their own  
businesses. There are many people working whose work is not listed as  
a job. As a result, the economy is perking along better than the
numbers are telling us.

Outsourcing also confused the numbers. Suppose a company like General  
Motors decides to outsource all its employee cafeteria functions to  
Marriott (which it did). It lays-off hundreds of cafeteria workers,  
who then get hired right back by Marriott The only thing that has  
changed is that these people work for Marriott rather than GM. Yet,  
the media headlines will scream that America has lost more  
manufacturing jobs. All that really happened is that these workers  
are now reclassified as service workers. So the old way of counting  
jobs contributes to false economic readings. As yet, we haven't  
figured out how to make the numbers catch up with the changing
realities of the business world.

Another implication of this massive restructuring is that because  
companies are getting rid of units and people that used to work for  
them, the entity is smaller. As the companies get smaller and more  
efficient, revenues are going down but profits are going up. As a  
result, the old notion that revenues are up and we're doing great
isn't always the case anymore. Companies are getting smaller but are  
becoming more efficient and profitable in the process.


IMPLICATIONS OF THE FOUR TRANSFORMATIONS


1. The War in Iraq

In some ways, the war is going very well. Afghanistan and Iraq have  
the beginnings of a modern government, which is a huge step forward.  
The Saudis are starting to talk about some good things, while Egypt  
and Lebanon are beginning to move in a good direction. A series of  
revolutions have taken place in countries the Ukraine and Georgia.

There will be more of these revolutions for an interesting reason. In  
every revolution, there comes a point where the dictator turns to the  
general and says, Fire into the crowd. If the general fires into the  
crowd, it stops the revolution. If the general says No, the  
revolution continues. Increasingly, the generals are saying No  
because their kids are in the crowd.

Thanks to TV and the Internet, the average 18-year old outside the  
U.S. is very savvy about what is going on in the world, especially in  
terms of popular culture. There is a huge global consciousness, and  
young people around the world want to be a part of it. It is  
increasingly apparent to them that the miserable government where  
they live is the only thing standing in their way. More and more, it  
is the well-educated kids, the children of the generals and the  
elite, who are leading the revolutions.

At the same time, not all is well with the war. The level of violence  
in Iraq is much worse and doesn't appear to be improving. It's  
possible that we're asking too much of Islam all at one time We're  
trying to jolt them from the 7th century to the 21st century all at  
once, which may be further than they can go. They might make it and
they might not.

Nobody knows for sure. The point is, we don't know how the war will  
turn out. Anyone who says they know is just guessing. The real place  
to watch is Iran. If they actually obtain nuclear weapons it will be  
a terrible situation. There are two ways to deal with it. The first  
is a military strike, which will be very difficult. The Iranians have
dispersed their nuclear development facilities and put them  
underground. The U.S. has nuclear weapons that can go under the earth  
and take out those facilities, but we don't want to do that.

The other way is to separate the radical mullahs from the government,  
which is the most likely course of action. Seventy percent of the  
Iranian population is under 30. They are Moslem but not Arab. They  
are mostly pro-Western. Many experts think the U.S. should have dealt  
with Iran before going to war with Iraq. The problem isn't so much  
the weapons, it's the people who control them. If Iran has a moderate  
government, the weapons become less of a concern.

We don't know if we will win the war in Iraq. We could lose or win.  
What we're looking for is any indicator that Islam is moving into the  
21st century and stabilizing.


2. China

It may be that pushing 500 million people from farms and villages  
into cities is too much too soon. Although it gets almost no  
publicity, China is experiencing hundreds of demonstrations around  
the country, which is unprecedented. These are not students in  
Tiananmen Square. These are average citizens who are angry with the  
government for building chemical plants and polluting the water they  
drink and the air they breathe.

The Chinese are a smart and industrious people. They may be able to  
pull it off and become a very successful economic and military  
superpower. If so, we will have to learn to live with it. If they  
want to share the responsibility of keeping the world's oil lanes  
open, that's a good thing. They currently have eight new nuclear  
electric power generators under way and 45 on the books to  
build.Soon, they will leave the U.S. way behind in their ability to  
generate nuclear power.

What can go wrong with China? For one, you can't move 550 million  
people into the cities without major problems. Two, China really  
wants Taiwan, not so much for economic reasons, they just want it.  
The Chinese know that their system of communism can't survive much  
longer in the 21st century. The last thing they want to do before  
they morph into some sort of more capitalistic government is to take  
over Taiwan.

We may wake up one morning and find they have launched an attack on  
Taiwan. If so, it will be a mess, both economically and militarily.  
The U.S. has committed to the military defense of Taiwan. If China  
attacks Taiwan, will we really go to war against them? If the Chinese  
generals believe the answer is no, they may attack. If we don't
defend Taiwan, every treaty the U.S. has will be worthless.  
Hopefully, China won't do anything stupid.


3. Demographics

Europe and Japan are dying because their populations are aging and  
shrinking. These trends can be reversed if the young people start  
breeding. However, the birth rates in these areas are so low it will  
take two generations to turn things around. No economic model exists  
that permits 50 years to turn things around. Some countries are
beginning to offer incentives for people to have bigger families. For  
example, Italy is offering tax breaks for having children. However,  
it's a lifestyle issue versus a tiny amount of money. Europeans  
aren't willing to give up their comfortable lifestyles in order to  
have more children.

In general, everyone in Europe just wants it to last a while longer.

Europeans have a real talent for living. They don't want to work very  
hard. The average European worker gets 400 more hours of vacation  
time per year than Americans. They don't want to work and they don't  
want to make any of the changes needed to revive their economies.

The summer after 9/11, France lost 15,000 people in a heat wave. In  
August, the country basically shuts down when everyone goes on vacation.

That year, a severe heat wave struck and 15,000 elderly people living  
in nursing homes and hospitals died. Their children didn't even leave  
the beaches to come back and take care of the bodies. Institutions  
had to scramble to find enough refrigeration units to hold the bodies  
until people came to claim them. This loss of life was five times
bigger than 9/11 in America, yet it didn't trigger any change in  
French society.

When birth rates are so low, it creates a tremendous tax burden on  
the young. Under those circumstances, keeping mom and dad alive is  
not an attractive option. That's why euthanasia is becoming so  
popular in most European countries. The only country that doesn't  
permit (and even encourage) euthanasia is Germany, because of all  
thebaggage from World War II.

The European economy is beginning to fracture. Countries like Italy  
are starting to talk about pulling out of the European Union because  
it is killing them. When things get bad economically in Europe, they  
tend to get very nasty politically. The canary in the mine is anti- 
Semitism.

When it goes up, it means trouble is coming. Current levels of anti- 
Semitism are higher than ever.

Germany won't launch another war, but Europe will likely get  
shabbier, more dangerous and less pleasant to live in. Japan has a  
birth rate of 1.3 and has no intention of bringing in immigrants. By  
2020, one out of every five Japanese will be 70 years old. Property  
values in Japan have dropped every year for the past 14 years. The
country is simply shutting down. In the U.S. we also have an aging  
population. Boomers are starting to retire at a massive rate. These  
retirements will have several major impacts:

Possible massive sell off of large four-bedroom houses and a movement  
to condos.

An enormous drain on the treasury. Boomers vote, and they want their  
benefits, even if it means putting a crushing tax burden on their  
kids to get them. Social Security will be a huge problem. As this  
generation ages, it will start to drain the system. We are the only  
country in the world where there are no age limits on medical
procedures. An enormous drain on the health care system. This will  
also increase the tax burden on the young, which will cause them to  
delay marriage and having families, which will drive down the birth  
rate even further.

Although scary, these demographics also present enormous  
opportunities for products and services tailored to aging  
populations. There will be tremendous demand for caring for older  
people, especially those who don't need nursing homes but need some  
level of care. Some people will have a business where they take care  
of three or four people in their homes. The demand for that type of  
service and for products to physically care for aging people will be  
huge.

Make sure the demographics of your business are attuned to where the  
action is. For example, you don't want to be a baby food company in  
Europe or Japan. Demographics are much underrated as an indicator of  
where the opportunities are. Businesses need customers. Go where the  
customers are.


4 Restructuring of American Business

The restructuring of American business means we are coming to the end  
of the age of the employer and employee. With all this fracturing of  
businesses into different and smaller units, employers can't  
guarantee jobs anymore because they don't know what their companies  
will look like next year. Everyone is on their way to becoming an
independent contractor.

The new workforce contract will be: Show up at the my office five  
days a week and do what I want you to do, but you handle your own  
insurance, benefits, health care and everything else. Husbands and  
wives are becoming economic units. They take different jobs and work  
different shifts depending on where they are in their careers and
families. They make tradeoffs to put together a compensation package  
to take care of the family.

This used to happen only with highly educated professionals with high  
incomes. Now it is happening at the level of the factory floor worker.

Couples at all levels are designing their compensation packages based  
on their individual needs. The only way this can work is if  
everything is portable and flexible, which requires a huge shift  
inthe American economy.

The U.S is in the process of building the world's first 21st century  
model economy. The only other countries doing this are U.K. and  
Australia. The model is fast, flexible, highly productive and  
unstable in that it is always fracturing and re-fracturing. This will  
increase the economic gap between the U.S. and everybody else,  
especially Europe and Japan.

At the same time, the military gap is increasing. Other than China,  
we are the only country that is continuing to put money into their  
military. Plus, we are the only military getting on-the-ground  
military experience through our war in Iraq. We know which high-tech  
weapons are working and which ones aren't. There is almost no one who  
can take us on economically or militarily.

There has never been a superpower in this position before. On the one  
hand, this makes the U.S. a magnet for bright and ambitious people.  
It also makes us a target. We are becoming one of the last holdouts  
of the traditional Judeo-Christian culture. There is no better place  
in the world to be in business and raise children. The US. is by far  
the best place to have an idea, form a business and put it into the  
marketplace.

We take it for granted, but it isn't as available in other countries  
of the world. Ultimately, it's an issue of culture. The only people  
who can hurt us are ourselves, by losing our culture. If we give up  
our Judeo-Christian culture, we become just like the Europeans.

The culture war is the whole ballgame. If we lose it, there isn't  
another America to pull us out.