A Lesson in History
On a gray and rainy day, October 25, 1415, a small English army led by King Henry V, although weakened by disease and hunger, met and defeated an overwhelming force of Frenchmen. Henry, a claimant to the French throne, had invaded France and seized the French port of Harfleur. As he attempted to make his way back to England, he feared meeting up with the superior French force of heavy cavalry. He and his troops of 6,000 consisted of light foot soldiers and lightly equipped archers. They faced annihilation from the superior French army of 25,000 made up of armored cavalry and infantry.
Henry had sought a truce with the French, but Charles d'Albret, Constable of France and leader of the French army rejected the truce. Following their refusal, the French intercepted the English retreat in a narrow valley near the village of Agincourt. Fortunately for the English, heavy rains had preceded the battle. This put the French troops at a great disadvantage due to the narrowness of the battleground, the muddy terrain, and the faulty tactics used by the commanders of the French army. The heavy rains also made the battlefield muddy, which caused the heavily armored French cavalry to get mired in the mud. The French became easy targets for the English. The English archers were using a unique weapon - the English longbow. This innovation enabled the English archers to pick off the French cavalry from a safe distance.
After seeing their heavy cavalry slaughtered by the English long-bowmen, the French troops were overwhelmed and demoralized. By the end of the day, d'Albret and over 500 members of the French nobility had been killed. French casualties totaled about 5,000. English losses were fewer than 200 men. Until Agincourt, no standing army had ever been able to withstand the charge of heavy horse. The introduction of the English longbow completely changed feudal military strategy. Prior to Agincourt, the French had dominated feudal warfare through the employment of heavily armored troops and cavalry. The English longbow changed feudal warfare and paved the way for English domination on the battlefield. Heavy cavalry could now be defeated from a safe distance with armor-piercing arrows shot from the longbow.
Yet Another Lesson In Military Strategy
In the next century, the English introduction of light and fast warships would defeat another superior force - the Spanish Armada in 1588. Spain, led by Philip II, was the most powerful empire in the world. The Spanish king pledged to conquer the protestant heretics in England. He sent an armada of 130 ships bearing 30,493 men to invade England. The force represented the largest naval invasion in history. The Spanish ships consisted of heavy transports and heavy gun ships. However, the advantage lay with the English whose ships were lighter, had less freeboard and carried more firepower. The battle that ensued showed the superiority of English gunnery and naval tactics. The Spanish fleet was annihilated. What was left of the Armada was destroyed by bad weather. Once again superior technology, combined with appropriate tactics, defeated a more powerful force.
A More Recent Lesson in History
Now, let's fast-forward to the Twentieth Century and the Gulf War. The enemy Saddam Hussein had amassed large conventional forces of heavy tank, artillery, and infantry in an effort to conquer Kuwait and Saudi Arabia. The intervention of the American military and its allies used high-tech weaponry. The battle's outcome was the most lopsided victory witnessed in history.
The American war-fighting doctrine "Air Land Battle" was designed in the 1980's to defeat the Russians in Europe. NATO forces were numerically out-manned and out-gunned. To defeat the overwhelming Russian forces, American military doctrine developed a military strategy based on our strength in quality. America designed this strategy around offensive quality, consisting of two components. The first component was designed around fast-target identification and long-range precision guided weapons. The second element of the strategy was stealth technology and techniques to hide weapon platforms from electromagnetic observation.
The combination of these two elements was displayed dramatically in Desert Storm. The strategy gave American-led forces more effective command and control over the battlefield. The use of precision-guided weapons acted as a force multiplier. The combination of intelligence surveillance, precision navigation systems, and advanced telecommunication systems gave the American military an overview and understanding of the battlefield never before achieved in military history.
The Transformation of War with Unconventional, Asymmetric Means
Our enemies have not forgotten America's military victory. It dramatically shifted the balance of power between the East and the West. It brought the end of the "Cold War" and the transformation of war itself. The revolution in American military strategy has turned this country into the world's military superpower. Even so, the advancement of our supremacy in the conventional arena has created our "Achilles heel." No nation on earth can oppose America in a conventional war. So our enemies are hard at work developing asymmetric means to strike at our weak points. There are now over 25 countries that have or are acquiring and developing weapons of mass destruction. These weapons are also finding their way into the hands of fanatical terrorists and zealots willing to destroy us and die for their cause.
Our country's superiority in all matters military is overwhelming. No other nation is capable at the moment of matching our defense budget. The U.S. is ahead in all forms of electronic warfare. We lead the world in quantum computing, software development, bioengineering and other advanced forms of technology too numerous to enumerate. America's enemies are working feverishly to build their nuclear and biological forces. They will use this unconventional and asymmetric means to fight American hegemony around the globe.
At the moment we remain unchallenged on the battlefield. Any country that wants to go to war with the United States will need to have nuclear weapons. It is for this precise reason, they are working to acquire them. This arming of less-powerful countries makes us vulnerable. To understand our vulnerability, it is necessary to understand what warfare in the next century will look like.
War in the 21st Century
Talking about war in this century seems unimaginable for most Americans. Believe it or not, since the end of World War II, we have seen 172 wars. Even today, there are currently 24 conflicts being waged. These conflicts are called LCD's or Low Density Conflicts. A prime example is Chechnya. With the old Russian Empire crumbling, the geopolitical map is crawling with potential conflicts. War is part of human history and is unlikely to go away in the future.
War in the next century will look much differently than what the general public or Hollywood imagines. The Gulf War was the last war of the Industrial Age. War in the 21st Century will be carried out with new technology and fought with different tactics. It is more likely to be psychological as well as physical. In the digital and electronic age, large armies massed on the battlefield will be a thing of the past. Large battle forces become an electronic signature that can be picked up by surveillance and knocked out by precision-guided weapons. The U.S. is rapidly approaching the ability of "seeing" any target on the battlefield, thus increasing the capability of "destroying" anything it can see from remote battle platforms. This makes military force untenable on the battlefield. The combination of detection, data analysis, command and control communications, and intelligence gives dominance to the U.S. battlefield. Essentially, this means we will be able to bring maximum force to bear at any time, in any weather, and from any location. We will be capable of configuring the right kind of force, at the right place, at the right time, against the right opponent. America's military force in the future will be more mobile, agile and smaller. U.S. military forces will have dominant maneuverability, precision engagement weaponry, full dimensional protection, and move with fully synchronized logistics.
The arsenal ship, a mobile offshore base capable of delivering 500 cruise missiles from a distance, will eventually replace the carrier battle group. Unmanned aerial vehicles and missiles will replace the fighter-bomber. Lighter, faster vehicles that can be moved easily in large numbers by cargo planes will replace the heavy-armored tank. All of this will mean a different kind of war. The battlefield will be smaller. It will be criss-crossed by small elite forces and light armored cavalry vehicles moved by helicopters. The soldier on the battlefield will be a technical engineer of war. Battle will resemble and look like guerrilla warfare.
If American military might is leaping forward exponentially, then where are our vulnerabilities?
#1 Vulnerability: Lack of A Missile Defense System
The greatest risk to America is in nuclear warfare. Our enemies are rapidly acquiring nuclear weapons. These weapons can travel at supersonic speeds. Any city in the U.S. is only 30 minutes away from a nuclear missile strike. That is why everyone from China, North Korea, Iraq and Iran are acquiring them. Russia has also spent the last decade upgrading its nuclear forces. Our enemies have learned the lessons from the Gulf War well. Instead of fixed missile silos, the Russians, Chinese and Iraqis are building mobile missile launchers. They can be moved. They are less detectable and therefore, less vulnerable to a counter missile attack.
As our enemies build up and modernize their nuclear capabilities, the Clinton Administration is reducing our own stockpile of nuclear weapons. Even more important, President Clinton has stopped funding and development of Star Wars or SDI. It was the introduction of Star Wars under President Reagan that forced the USSR to perestroika and glasnost. It is the development of this defensive technology that Russia and China fear most. The United States has the technological and financial resources to develop a missile defense system, but we haven't received the backing of the Clinton Administration.
A Growing Threat
The key to China's strategic thinking to defeat the U.S. is the development of its nuclear missile capabilities. China knows it cannot match the U.S. on the battlefield. What it can't do in a conventional sense, it hopes to do in a strategic sense through its nuclear missile force. If faced with a military confrontation with the U.S., China hopes it can frighten an American President and the American public with the possibility of nuking a U.S. city. China hopes to leverage its military capabilities with asymmetry represented by nuclear weapons. To counter the U.S. carrier presence in the Pacific, China is buying Russian destroyers equipped with nuclear tipped missiles capable of taking out a U.S. carrier battle group.
If the U.S. does press ahead with a missile defense system on a national and theatre basis, it makes China's missile threat useless. The U.S. could detect and counter a missile launch and make it ineffective. We could then bring our full military might against China and completely destroy its military capabilities. This potential is China and Russia's worst nightmare. This is why they have contributed money to U.S. political campaigns sympathetic to blocking SDI. The Chinese have found a valuable ally in the Clinton-Gore Administration. The administration has flip-flopped on many issues. But on the issue of SDI, the president has remained resolute. He has blocked funding and development on a missile defense system for the U.S. these last seven years. In my estimation, the lack of a missile defense system is our greatest vulnerability.
#2 Vulnerability: The Transference of Technology
Our second vulnerability is the transference of our technology to the Chinese and other enemies. Clinton has allowed U.S. companies, such as Hughes Aerospace and Loral, to build China's missile launch and satellite capabilities. Both companies were major contributors to his presidential campaigns. Their reward was that the President paved the way for these companies to go to China and work on developing their systems. In addition to building their missile forces, the President has also authorized the sale of super computers to the Chinese. These companies got their reward for campaign contributions. Helping China develop its missile system was justified by the fact that it was good for U.S. business.
A lesson in history might illustrate the fallacy of this thinking. In the nineteenth century, the British Army killed 10,000 Sudanese soldiers at the battle of Omdurman with the use of the British maxim guns. The British suffered casualties of only 48 soldiers. Just 17 years later, Turkish maxims mowed down allied troops at Gallipoli. Arming the Chinese because "it's good for business" may produce the same results of England's Gallipoli against American soldiers or civilians.
#3 Vulnerability: Today's Moral Fiber
Our third vulnerability is a moral one. Today's war is a duel of wills. It must be fought and won in the "hearts and minds of the population." Vietnam was a good example. We were winning on the battlefield, but we were losing the war at home. Even in Somalia, the pictures of dead American troops being dragged naked through the streets had a powerful impact on the American psyche. We were forced to pull out. The public had neither the mind nor the will to fight. In his last book Beyond Peace, President Nixon warned that America's greatest threat lies within America herself. The breakdown of the family, the decline in morals, and the loss of integrity in our political and financial system do not bode well for our future. Nixon warned that the relentless assault on religion, the promotion of promiscuity, encouraging illegitimacy, and bashing America by our entertainment, media and education establishment was undermining cultural and moral traditions.
Today, our heroes are athletes and movie stars who validate our pursuit of narcissistic pleasure. The country's infatuation with technology and the pursuit of wealth ignores the more important deterioration of national-cultural factors. Ignoring the breakdown and decay of our moral structure is dangerous. Need we be reminded of the Romans? Rome, like the United States, was the most powerful military force of its day. Rome's decline came from within - not from without. Oppression from taxes, the enlargement of a welfare state, the decline of public servitude, and the perversion of Roman virtue all contributed to Rome's decline.
#4 Vulnerability: Military Over-Stretch
U.S. Force Elimination
(Clinton Administration)
- 10 Army Divisions (1 million troops)
- 20 Air Force/Navy Wings (2,000 aircraft)
- 4 Aircraft Carriers (12 = 10)
- 121 Surface Ships/Attack Submarines
- 232 Strategic Bombers
- 13 Ballistic Subs (2,114 warheads)
- 500 Intercontinental Ballistic Missiles (1,950 warheads)
Like Rome, the U.S. has its legions spread all over the globe. Military over-stretch is our fourth vulnerability. At the same time that Clinton has multiplied U.S. force commitments, he has also reduced our capabilities to wage war. It has long been the strategy of the U.S. military to wage war simultaneously on two fronts and win. This is no longer possible. Consider the following reductions to our military forces under the Clinton-Gore Administration.
Although our force commitment has expanded, our logistical and war capabilities have been greatly reduced. Currently, the United States has three major force commitments: Former Yugoslavia, South Korea, and the Persian Gulf.
The US military has taken on the role of becoming the world's "Global Cop." In this regard the mission and the objective have changed. The Clinton Doctrine of Intervention has reshaped the mission statement of the U.S. military. Rather than defense, the military has taken an offensive position. This can clearly be seen in the Kosovo War and our bombing of Sudan during the Lewinsky scandal. Furthermore, as the number of missions has escalated, the objective has become less clear. The troops sent to Bosnia were to be home by Christmas. Years later we are still expanding our presence in the region without an exit strategy.
As the number of force commitments has expanded, the capability of supporting those missions has been dramatically reduced. This over-stretch of our combat forces is our fourth vulnerability. The president has spread our forces thinly around the globe; while reducing the logistical capabilities to support and defend them. At the same time, as our enemies build up their missile forces, Clinton has refused to develop a missile defense system that would protect and shield our conventional fighting capabilities from weapons of mass destruction. While our enemies continue to build their asymmetric force capabilities to counter U.S. conventional strength, we continue to weaken our own forces, while at the same time, multiplying the number of missions.
#5 Vulnerability: U.S. Financial Markets
Our final area of exposure lies within the financial arena. As pointed out earlier, warfare is psychological as well as physical. Sun-Tzu wrote in The Art of War the highest excellence is to subdue the enemy's army without fighting at all. Therefore, the best military policy is to attack strategies, the next to attack alliances, the next to attack soldiers, and the worst is to assault walled cities. It is best to defeat the enemy and keep your own forces intact. Crushing the enemy is not as important as keeping your forces to fight another battle. Therefore, military expertise lies in subduing the enemy's forces without going into battle, taking the enemy's walled cities without launching an attack, and crushing the enemy's state without a protracted war.
Sun-Tzu was speaking about defeating one's opponent through psychological warfare as the ultimate skill of a military commander. Hence in war, the prize is the quick victory, not the protracted engagement. An example of this was the psychological and demoralizing defeat of the U.S. military mission to Somalia, the psychological damage to the US military in the Vietnam War, and the demoralization of our troops in Kosovo.
We may have won the battle, but we are losing the war. The battle was won when we went after civilian targets in Kosovo. Bombing military targets produced very little results. The tide of battle turned when we took out bridges, power centers and water towers. When the lights went out, the water was shut off, and transportation was disrupted, the population revolted. Milosivec was forced to withdraw his troops.
Psychological forces reduced Milosivec's ability to fight. In the same way our own ability to remain in a protracted engagement could end by delivering a psychological blow to the American public. The Nightly News reports on our losses in Vietnam led to our eventual withdrawal from the conflict. Today, a mortal blow to the American public would be dealt more swiftly through the disruption of our financial markets. As prosperous as our economy and financial markets appear, they remain vulnerable due to economic imbalances. The U.S. relies heavily on foreign capital. Our massive trade deficits are being financed by foreigners. As we buy more goods and services from overseas, we place more dollars in the hands of foreign governments and investors.
Foreign Ownership of Our Debt
Fortunately, our rising stock market and high interest rates have enticed foreigners to recycle those dollars into our financial markets. This has helped to propel our markets even higher. But the continuous financing of America's voracious appetite for consumption cannot be financed indefinitely. Ownership of American treasury bonds and equities has grown disproportionately. This places enormous financial power into the hands of foreign powers. Tom Clancy wrote a fictional account of the risk of a financial disruption of our financial markets as a prelude to war in his novel Debt of Honor. Oddly enough, there is much truth to the story. His fiction could become our reality.
Today, because of our massive trade deficits, China is accumulating a large position in U.S. securities. This accumulation could be used to China's advantage to disrupt our security markets. China is building a large hedge fund for exactly this purpose. Other governments have also amassed large positions in our financial markets as a result of our long-standing trade deficit. Any loss of confidence in U.S. leadership or our economy could lead to a widespread dumping of those dollars. Reducing dollar positions in the U.S. would devastate our financial markets and lead to widespread inflation.
Status as the World's Reserve Currency Weakening
The American dollar is the world's reserve currency. We have attained that position through financial strength, military prowess and political leadership. Yet the dollar is not backed by gold reserves as under the old gold standard. The dollar's strength rests on the faith in the American financial system and the strength of the U.S. military. A loss in faith in either of the two could lead to the loss of the dollar's reserve status. The consequence of such a loss would be catastrophic. It would lead to higher inflation and interest rates, and most certainly, a severe recession. In military matters, it would deal a psychological blow to our willingness to remain engaged in a conflict.
At the moment the U.S. remains the only superpower in the world. No one will be able to challenge the U.S. militarily for the foreseeable future. But our world hegemony will be challenged politically. The country's inability to match its political and economic objectives with foreign policy matters is being undermined by a moral decay that has become a national cultural phenomenon. In addition, our heavy dependence on foreign capital and our massive corporate and consumer debt levels leave our financial markets extremely vulnerable. Our leaders only need to look at what happened to Asia in 1997 when the "hot money" withdrew to see our own weakness.
Where Do We Go From Here?
None of the five vulnerabilities mentioned above are insurmountable. They need to be acknowledged, articulated, communicated. Following this, solutions need to be developed and implemented. The greatest threat to our military comes from asymmetric means of warfare that comes from weapons of mass destruction. To counter this threat the U.S. should proceed unilaterally to develop a missile defense system on a national and theatre-wide basis. A missile defense system combined with our technological and operational advantages would only enhance and advance our lead in RMA (Revolution in Military Affairs).
The second threat of the transference of high technology should be controlled by our country's military command. They are the ones charged with defending the nation. The decision should be taken out of the hands of politicians who are subject to the temptation of election campaigns. The damage done by the campaign fundraising scandal of the Clinton-Gore Administration should be a warning. Funding for the CIA and FBI involved with counter espionage should be increased. The Chinese stealing of our nuclear secrets could have been prevented had our Justice Department heeded the warnings from our security agencies.
The decline of morality in our country is a more difficult task to overcome. Morality can't be legislated. However, the networks and the entertainment industry should be held more accountable. The studios, the stars, the producers and writers are trying to force their dysfunctional views upon the country. They want to hold the gun industry responsible for shooting deaths, but excuse themselves for their promotion of violence. The incessant assaults upon Judeo-Christian beliefs, family values and virtues should be stopped. We need to change the moral and cultural climate to reinforce rather than undermine the traditional importance of family and religion. The tax and welfare system should be reformed to reward and reinforce the family not to divide it. The marriage penalty of higher tax rates should be abolished.
The problem of military over-stretch can be dealt with by developing a more coherent foreign policy. The role of the U.S. military should be returned to defending the nation as its primary task. Only those conflicts that directly impact the national security of the United States or its closest allies should be defended. The military's chief function is the defense of the country not global cop for the UN.
Our Tax System is Part of the Problem
The final threat, which comes from our heavy dependence on foreign capital and the money spigot and which has fueled a speculative stock market, is a delicate issue. The nation's dependence on debt is a result of the U.S. tax system. Savings is penalized; while debt is rewarded by its deductibility. The tax system can correct this major threat to our financial security. The system should be simplified. Hard work should be rewarded and not punished by progressive tax rates. Making debt non-deductible, with the exception of home mortgages, should discourage debt. At the same time saving and capital formation should be rewarded by lowering capital gains rates and eliminating the double taxation of dividends. Those who are successful should not be penalized by their hard work at death. We are one of the few countries that punishes hard work at death by the confiscation of assets through death taxes. This deprives a man from leaving a legacy to his children.
Throughout history taxation has played a role in the rise and fall of nations. Just taxes produce and promote liberty. Taxation played a key role in the staying power of the Roman Empire. Fair taxation under Queen Elizabeth propelled England forward in the formation of its empire. Lower taxes instituted under Ronald Reagan took our own nation out of disparity and revitalized our economic system. [Graphic courtesy of Americans For Tax Reform.]
Today, Americans are burdened by the highest taxes in our history. It takes two parents working to support a family. In the final analysis, the wife's salary pays the tax burden. If we want to continue to enjoy prosperity, if we want to restore family values, and if we want to remain a strong economic power, the solution lies in our tax system. The current rate of taxes on our citizens is greater than that of feudal lords. The Nobel prize-winning economist, Frederick Hayek, warned of granting too much power to governments to tax in his book The Road to Serfdom. Charles Adams in his seminal work For Good and For Evil; The Impact of Taxes on the Course of Civilization, explains at length how nations prosper or fall under just or corrupt tax systems.
In my opinion, our tax system has become corrupt and it has most certainly become the most burdensome in our nation's history. Governments at the state and local level, as well as Washington, are running surpluses. Yet the propensity to tax is getting even stronger. Whether it is a reduction in gas taxes, income taxes, death taxes or the marriage penalty tax, all politicians can do is talk. The greed in our political system has never been stronger and it is endangering our economic system. Americans are taking on records amount of debt to maintain their life style. I'm afraid it will take another recession before there will be any relief to taxpayers. Even then it will depend on who holds the presidency and who controls Congress. Liberals believe that recessions require more taxes rather than tax relief. Like plantation overlords, they crack the whip in hard times rather than give the workers relief.
Tying it All Together
Many may wonder how the above discourse relates to economics or even the stock market. It is very simple. Much of what goes on in the economy and the stock market is controlled by politics. Oil is all about politics.
We are currently experiencing this link between war, rumors of war and politics with our stock market through higher gas prices at the pump. It only takes a couple of dollars to pump oil out of the ground in the Middle East. The difference between a few dollars and a barrel is politics.
Higher oil prices have driven inflation rates throughout the economy. The result is that the PPI and CPI have risen substantially. This means that the Fed will now raise interest rates aggressively; a thought not lost on the minds of investors last week in the stock market.
Politics also changed the direction of our economy and the strength of our military under the direction of President Reagan. Just as Paul Volcker changed monetary policy at the Fed, Reagan lowered taxes in order to stimulate the economy and create incentives. Volcker changed monetary policy from loose money to tight money. These dramatic actions eventually resulted in bringing inflation under control, lowering interest rates, and brought prosperity to the economy and stock market. If the truth be told, much of today's prosperity has more to do with Reagan's economic policies than it does to Bush and Clinton's tax increases.
The result of a stronger economy gave Reagan the means to rebuild the military and reformulate U.S. military strategy. Our military under Reagan's leadership went from out-manned and outgunned to the most formidable fighting force in world history. It was the Reagan military that ended the Cold War and won the Gulf War. It was Reagan's foresight that began Star Wars or SDI. Reagan already foresaw the risks of the future proliferation of missiles in this new century. It is unfortunate that the ignorance of the Clinton-Gore Administration put an end to SDI and effectively put our nation in harm's way.
Just as the English longbow at Agincourt defeated the French, the U.S. stands at risk from missile proliferation. We have no defense against it other than outright nuclear war. A strong missile defense system gives the nation other options and enhances our security. It is unfortunate that many of our government leaders don't believe in a strong military. Even more dangerous is their belief that somehow the world is a "safer place". U.S. foreign policy is now based on appeasement of our enemies rather than dealing with them from a position of strength. The fact that our enemies are arming, as we weaken our military, makes the possibility of a confrontation in the next decade even more probable. To avoid this possibility we must reverse our unilateral disarmament. I hope we will not commit the same mistake as the British made in dealing with Hitler during the 30's. While Hitler armed his nation for war, the British disarmed their military. Their Prime Minister, Neville Chamberlain, pursued appeasement in foreign policy. The result was that when war began, the nation was nearly vanquished by the Germans.
November Election Key to Our Future
That is why this next election will be crucial to our maintaining our lead and security in military affairs. The contrast between the two candidates is a chasm. Gore loathes the military and believes that appeasement works best in diplomacy. Gore has little understanding of foreign affairs. You need look no further than U.S. foreign policy today to see evidence of this. Foreign military missions have multiplied with no exit in sight. From Somalia, Haiti, Bosnia, Kosovo, North Korea, to the Middle East or Russia, there seems to be no direction to our policies. We have become reactive rather than proactive. At least Governor Bush understands the importance of a missile defense system and would make it a priority in his administration. He also understands that the U.S. military cannot act as global cop for the UN. He would restrict our missions to those deemed vital to our national defense. More importantly he would rebuild the military and restore its morale.
Probability of Economic Downturn
Finally, it is my belief that the probability of an economic recession and a severe stock market downturn is very probable during the next 12-18 months. The high levels of consumer, corporate and margin debt put the economy and the market at risk. We've already seen the results of margin calls in the steep deceleration of the Nasdaq and the Dow over the last few weeks. The country cannot run massive trade deficits indefinitely. As economies recover, capital will be redeployed where it can earn the highest return. Too much of our trade deficit is a result of consumption rather than capital formation. There is a major difference between the two. One destroys while the other builds.
The Over-Valued Stock Market
Last and not least are the valuations of stocks themselves. Every reasonable benchmark of value has been surpassed. We are now valuing companies on multiples of sales or the lack thereof. Earnings, if they do exist, have been decelerating. Much of what we report as earnings has become unreliable. That is why you see so many companies today restating earnings or "cooking the books" to meet analysts' estimates.
Everyone Is Playing the Trading Game
The present state of our market has become speculative in nature and it has captured the whole nation. From truck drivers to corporate executives, everyone is playing the trading game. As I've already outlined in previous articles, much of the market's expansion has been the result of cheap money. That is what I believe accounts for five years of back-to-back, double-digit gains. Sooner or later all of that printed money will come home to roost. The nation has undergone the greatest credit expansion in history. It is the result of the Fed liquefying the financial system after a series of financial crises. The very nature of credit booms is that credit busts follow them. The key to what happens afterwards is how those busts are handled.
History shows that policy makers have a poor track record of reacting to economic downturns. Just look at the Great Depression or Japan today. How the next recession will be handled will depend on the leadership that stems from the Oval Office. It will make the difference between a recession and a depression.
At the moment, It may be hard to believe that anything but prosperity lies ahead for the country. I believe that unless we have astute political leadership, tough times could lie ahead. I don't believe that the business cycle has been repealed. Nor do I believe that high taxes are what have been behind our nation's prosperity. America is currently the only superpower left in the world. We are at the pinnacle of economic prosperity and military supremacy. So it may be hard to see that problems lie ahead, just as it would have been for an Englishman to see his own country's decline at the beginning of the 20th Century. Poor policy decisions, high taxes, and socialism have reduced Great Britain to a former shadow of itself.
None of the problems outlined in this Perspective remain insurmountable. A leader who can articulate and communicate the threat to the American public can solve them. Churchill had that ability and so did Ronald Reagan. Reagan understood the danger of the Cold War at a time of national weakness. He also understood what was behind our economic malaise. Our stock market was in a bear market, interest rates were high, inflation was rampant and our military had fallen into disarray. He saw the threat and had the clarity to articulate it and communicate it to the nation. He outlined a solution and had the political will to carry it out. The result was he won the Cold War and directed the American economy towards its greatest period of prosperity in our nation's history.
The path to finding a solution to a problem is to acknowledge that a problem exists.
Currently, few leaders on the national level are even aware of these problems. Most of our members in Congress have not served in the military, so they have very little understanding of foreign or military affairs. Few are educated in matters concerning finance or economics. Most senators and congressmen confine their expertise to local matters and their battle to get reelected. They can't see the forest through the trees. It is hard for anyone to imagine that most of these problems exist. Those who are aware, seem to be in the minority.
We are basking in the glow of the longest economic expansion and bull market in our history. It is hard to imagine that any of these threats exists. The British would have had a hard time contemplating the end of their empire at the turn of the century. Britain was at the pinnacle of its power, just as the U.S. is today. It might be well worth remembering what happened to Britain. The map on the left depicts the British Empire at its peak.
The victory at Agincourt began England's rise as a military power. The economic policies of Queen Elizabeth put England on the road to becoming a financial power. British leadership would turn both, the military and the financial, into an empire.
At the turn of the century, those same qualities were transforming America into an economic powerhouse. With that economic power came the means to develop into a military superpower. Today, like Britain a century ago, the United States stands at the pinnacle of its economic and military power. Two decades ago, few saw those possibilities. Ronald Reagan was a leader who saw the problem along with the possibilities. He had the will and the leadership qualities to reinvigorate the nation.
Empires rise and fall on the strength of natural-cultural factors. Let us hope that in the midst of our technological superiority we don't ignore the decay of our cultural institutions. God, country, and family are things that matter. Without them, we cannot remain a great power. In the last eight years, we have prospered in the economic realm; while floundering in the moral realm. The next presidential election will determine whether we remain a great power. Let us hope we chose wisely.
Perspectives Part 7 is the final installment of a series on the American stock market.
