Harvard professor and prolific author Niall Ferguson opened the 2010 Aspen Ideas Festival Monday with a stark warning about the increasing prospect of the American “empire” suddenly collapsing due to the country’s rising debt level.
“I think this is a problem that is going to go live really soon,” Ferguson said. “In that sense, I mean within the next two years. Because the whole thing, fiscally and other ways, is very near the edge of chaos. And we’ve seen already in Greece what happens when the bond market loses faith in your fiscal policy.”
Ferguson said empires — such as the former Soviet Union and the Roman empire — can collapse quite quickly and the tipping point is often when the cost of servicing an empire’s debt is larger than the cost of its defense budget.
“That has not been the case I think at any point in U.S. history,” Ferguson said. “It will be the case in the next five years.”
The affable British scholar tried to keep it light. He used a stage whisper to tell the Aspen Institute audience, “I know you’re not comfortable with the word ‘empire,’ especially just after the Fourth of July, but you are the Redcoats now.”
He said the U.S. is now deeply in the red as a country because of a combination of the Great Recession, the resulting federal stimulus and financial bailout programs, two wars, the Bush tax cuts, and a growth in social entitlement programs.
“By combating our crisis of private debt with an extraordinary expansion of public debt, we inevitably are going to reduce the resources available for national security in the years ahead,” Ferguson said. “Because as a debt grows, so the interest payments you have to make on it grow, even if interest rates stay low. And on current projections, the federal debt is going to be absorbing around 20 percent — a fifth of all the taxes you pay — within just a few years.
Harvard professor and author Niall Ferguson speaks about the financial crisis during an opening session of the Aspen Ideas Festival on Monday afternoon.
“The item of discretionary federal expenditure most likely to be squeezed is of course defense. And there are lots of historic precedents for that,” said Ferguson, who is the author of “Empire: The Rise and Demise of the British World Order and the Lessons for Global Power.”
Ferguson said the financial crisis that started in 2007 has “has accelerated a fundamental shift in the balance of power,” with the U.S. shedding power and China absorbing it.
“I’ve just come back from China — a two-week trip there — and the thing I heard most often was, ‘You can’t lecture us about the superiority of your system anymore. We don’t need to learn anything from you about financial institutions and forget about democracy. We see where it has got you.’”
David Gergen of CNN, who moderated the discussion, which also included billionaire Mortimer Zuckerman, asked Ferguson whether it made a difference if the U.S. declined as a world power.
“Having grown up in a declining empire, I do not recommend it,” Ferguson said. “It’s not a lot of fun, actually, decline. To be more serious, a world in which the United States is no longer predominate is not likely to be a better world, actually.”
In what he called his “light moment,” Ferguson said, “I think there is a way out for the United States. I don’t think its over. But it all hinges on whether you can re-energize the real mainsprings of American power. And those two things are technological innovation and entrepreneurship.
“Those are the things that made the United States the greatest economy in the world and the critical question is, ‘Are we going to get it right?’ Can we revive those things in such a way that in the end we grow our way out of this hole the way the United States grew its way out of the 1970s and of course out of the 1930s?”
The Aspen Ideas Festival continues through July 11 at the Aspen Institute. Such notables as U.S. Attorney General Eric Holder, Microsoft billionaire Bill Gates, U.S. Senator Dianne Feinstein, and former Federal Reserve chairman Alan Greenspan are scheduled to appear.
A number of events are open to the public, but tickets were going fast on Monday through the website Aspen Show Tickets. Aspen Public Radio also plans on broadcasting a number of festival events live, including on Tuesday at 10:30 a.m. and at 1 and 5 p.m. bgs@aspendailynews.com
24/7 Wall St. has created a new list of brands that may disappear, which includes Readers Digest, Kia Motors, Dollar Thrifty (NYSE: DTG - News), Zale (NYSE: ZLC - News), Blockbuster (BLOKA.PK - News), T-Mobile, BP Plc (NYSE: BP - News), RadioShack (NYSE: RSH - News), Merrill Lynch and Moody's (NYSE: MCO - News).
24/7 Wall St. regularly compiles a report of brands that are likely to disappear in the near-term. Last April, and again in December, we published our findings. Usually, it would take a full year before such a list could be compiled again. However, the current economic climate has accelerated this process and a majority of the brands on the first two lists are either gone, have been acquired, or have filed for bankruptcy.
With a number of the brands on the December list either gone or on a short-term path to extinction, 24/7 Wall St. has put together the latest version of the Ten Brands That Will Disappear. To qualify, we expect that brand to be gone by the end of 2011, or for its parent to be sold or go into Chapter 11.
Reader's Digest was once the most widely read magazine in the world. According to the company, it still may be when its overseas editions are taken into account. Last August, the company took its U.S. operations into Chapter 11 to decrease debt. It emerged from bankruptcy in February with $525 million in exit financing. The company cut the number of issues it publishes a year from 12 to 10 last year. It also cut its circulation guarantee for advertisers to 5.5 million copies from 8 million. It would have been unthinkable just a few years ago that a magazine as old and famous as Reader's Digest would be shuttered. However, Reader's Digest as it is known in the U.S. will be gone.
Blockbuster was the national leader in the video rental business for nearly two decades. Now it is contemplating Chapter 11 to eliminate debt. The company lost $65 million last quarter. Its revenue continues to fall rapidly as firms such as Redbox and NetFlix (Nasdaq: NFLX - News) siphon off its revenue. Blockbuster has more than 6,000 stores, so it is hard to imagine that the company could disappear. But, there is some precedent, even if it is on a smaller scale. Blockbuster rival Movie Gallery said in February that it would close all of its 2,400 U.S. stores. Blockbuster's model of renting movies through physical locations has been destroyed by cable and satellite video on demand, DVDs via mail and dispensing machines. Blockbuster may still be around as a company that has movie kiosks and a small mail and Internet-delivered content business. But its brick and-mortar business is dead.
Dollar Thrifty Automotive Group, the car rental company, is for sale. Hertz (NYSE: HTZ - News) is a potential buyer, as is Avis Budget (NYSE: CAR - News). Each of the larger car rental firms would use the Dollar Thrifty business to expand their market share. That does not mean that they would keep the brand. The current company is not much of a business. It made only $27 million last quarter on revenue of $348 million. It has more than $1.5 billion in "debt and other obligations." The number of vehicles that Dollar Thrifty operates at any one time is only 95,000 compared to 420,000 for Hertz. The firm's customer base and some of its locations may be valuable, but Dollar Thrifty can't compete with Avis and Hertz. A decade ago, the car rental industry was able to support six independent brands. A significant drop in business and leisure travel and sharp competition among the companies has already caused the creation of Avis Budget. Dollar Thrifty will be the next casualty of the industry's consolidation.
T-Mobile, the U.S. wireless provider, is owned by telecom giant Deutsche Telekom (DTEGY.PK - News). It is the No.4 cellular company in an American market that only supports two really successful firms -- AT&T Wireless and Verizon Wireless. Even the third-largest company in the market -- Sprint-Nextel (NYSE: S - News) -- has 50 million customers. T-Mobile had 34 million customers at the end of last year. T-Mobile only had a profit of $306 million in 2009. That was down from $483 million in 2008. T-Mobile not only faces three larger competitors, it also has to begin to offer 4G service to compete with Sprint's new WiMax service and LTE-based products from AT&T (NYSE: T - News) and Verizon (NYSE: VZ - News). T-Mobile may seek a partner to offer a 4G network, but there are no super-fast broadband networks likely to be finished before its three rivals offer the service. As it now stands, T-Mobile has no future in the U.S. A merger with Sprint-Nextel has been mentioned several times. The combined company would have a customer base about the same size as AT&T or Verizon. And the transaction would probably make Deutsche Telekom a large owner of the combined operation. Another alternative would be a merger with Virgin Mobile. Maybe Deutsche Telekom will just change the firm's name.
Moody's Corp. may have the name with the largest negative brand equity in the U.S. Scandals about the company's rating of mortgage-backed securities and allegations that the firm compromised it ratings process to get business have ruined the company's image. Moody's is more than 100 years old, but the reputation it built over those years is irretrievably lost. There is a chance Moody's could be ruined by civil actions, four of which are pending, and by charges brought by the U.S. government. Overseas authorities may bring a number of actions against the company as well. Moody's activities are almost certainly to be more regulated, which will squeeze margins and hurt sales. Moody's may end up selling its accounts to a new rating company, which would probably hire many of its employees. Pacific Investment Management Co. and other institutional investors have talked about taking on some if not all the roles that the current rating firms play. Research houses like Alliance Bernstein (NYSE: AB - News) could also take on some of those rolls. Part of Moody's operation may stay alive, but there is not much left to salvage in the brand.
BP: The case against the BP brand is not so much that the company will enter bankruptcy. It is that BP may end up breaking into pieces for its own sake. This may be to put the liabilities for the Deepwater Horizon spill into a company that also holds escrow capital to cover the huge costs of clean-up and suits. BP may also want to separate its successful refining operations from its exploration business, or recreate an American- based company similar to BP America, which existed for two decades. A restructuring of BP would also allow the firm to take a badly crippled brand and give the oil operation a new name -- much as it did when it changed its name from British Petroleum. The second time may be the charm.
RadioShack is one of the oldest retailers in the U.S. It was founded in 1921 and in the early 1960s was purchased by Tandy Corp. The Tandy name was used for some of Radio Shack's retail stores. RadioShack is currently a takeover target. There have been rumors that the company may be taken private via a leveraged buyout or purchased by Best Buy (NYSE: BBY - News), probably for its locations. Best Buy would certainly not keep the RadioShack brand because it is considered downscale and does not have the reputation for quality products and service that Best Buy enjoys. RadioShack has already begun to rebrand itself as "The Shack," an indication that it knows the older brand is a burden.
Zale Corp. was founded in 1924 by the Zale brothers. It was one of the earliest retailers to offer the ability to buy items on credit. By 1980, Zale had revenue of over $1 billion. In 1992, Zale filed for bankruptcy and by the end of that decade, its revenue was $1.3 billion -- about the same as it is today. Zale has been at death's door for some time. Its market value is down to $48 million. The company is trying to turn itself around, but most experts are not convinced. The company recently made the Forbes list for firms with extreme financial risk. In the last quarter, the retailer lost $12 million on revenue of $360 million. Zale is also in a very crowded market that includes retailers as large as Wal-Mart (NYSE: WMT - News). Golden Gate Capital recently put money into Zale to buy it time. New money may defer the point at which Zale goes under, but it won't prevent it.
Merrill Lynch may have been acquired, but that will not keep it safe. In fact, quite the opposite is true. Banks and other large financial services firms have a habit of buying large retail brokerage houses and then changing their names. Shearson is gone. So is EF Hutton and Prudential. In most cases the parent company wants to put their own names on the door. That is very likely to happen to Merrill Lynch, which was at one point the largest full-service broker in the U.S. Merrill is now owned by Bank of America Corp. (NYSE: BAC - News), and the buyout spawned a number of scandals that kept Merrill's name in the paper for weeks and did a great deal to harm its name with customers. Bank of America will follow a time honored tradition, and Merrill Lynch will become BofA Investment Management.
Kia Motors Corp. is one of the two car brands of Hyundai of South Korea. It has always been a marginal brand. Its stable mate, Hyundai USA, has a reputation for high quality cars like the Sonata and Genesis. Kia sells "low rent" cars and SUV nameplates like the Sorento and Rio. As GM and Ford (NYSE: F - News) have already discovered, it is expensive to maintain multiple brands and storied car names, including Pontiac, Saturn and Mercury, are disappearing. Most Kia cars sell for $14,000 to $25,000. Hyundai has several cars in the same price range. Hyundai's Sonata has quickly become one of the best-selling cars in America, and its Genesis flagship model competes with mid-sized BMWs and Mercedes. The parent company will take a page from several other global car companies and dump its weakest brand.
LONDON — BP is in talks to sell up to $12 billion of assets, including its big stake in Alaska’s Prudhoe Bay, the largest oil field in North America, The Sunday Times of London reported.
A sale would be the latest of several steps the beleaguered oil giant is taking to raise money to pay for damages from the disastrous oil spill in the Gulf of Mexico, the Times said.
BP has entered talks with American rival Apache Corp., which approached the British company, the Times said. Negotiations are under way over the structure of the agreement and what other assets could be included, it said.
Houston, Texas-based Apache describes itself as an independent energy company in exploration and development of natural gas and crude oil. The firm operates in the United States, Canada, Egypt, Australia, North Sea and Argentina. Apache is worth $30 billion and is one of America's largest independent oil groups, according to Reuters. Apache reported first-quarter earnings of $705 million on revenue of $2.7 billion. Its shares closed Friday up 48 cents at $87.88.
Word of the BP talks comes as the company is trying to install a tighter seal over the leaking Gulf well, which has been pouring oil since a blowout in April, the Times said. A relief well that may close it off could be complete before the end of the month.
The Times said good news from the Gulf coupled with BP's depressed stock price could tempt rivals to consider bids.
The cash will help to reassure investors that the cost of the cleanup will not overwhelm the company, the Times said. Goldman Sachs, the American investment bank, thinks BP could ultimately be forced to pay $70 billion in cleanup and compensation costs.
Getting a stake in Prudhoe Bay would be a coup for Apache, the Times said. It is one of the largest oil fields discovered and one of BP’s prize assets. It produces 390,000 barrels a day, equivalent to 15 percent of the United Kingdom's North Sea output.
BP’s partners in the field, Exxon and Conoco Philips, are likely to have pre-emption rights that would allow them to match any offer made by Apache, the Times said.
The plot continues to thicken at Germany’s constitutional court, a body with power of life or death over Europe’s monetary union.
Contrary to general belief, Germany’s eurosceptic professors have not abandoned their legal efforts to block the EU rescues for European banks exposed to Greek debt, and since May 7 for banks exposed to debt from Spain, Portugal, and Ireland as well.
Should they succeed, of course, the eurozone risks disintegration within days, and perhaps hours. I am not sure that investors in New York, London, Tokyo, Beijing, or indeed Frankfurt quite understand this.
There are now four cases at the court – or Verfassungsgericht – arguing that these disguised bank bail-outs breach multiple clauses of EU treaty law, and therefore breach Germany’s supreme and sovereign Basic Law.
A quintet of professors – Wilhelm Hankel, Wilhelm Nölling, Joachim Starbatty, Karl Albrecht Schachtschneider, and Dieter Spethmann (ex Thyssen CEO) – have just broadened their complaint over the Greek part of the bank rescue to include the new €440bn Stability Facility, which breaks EU law at every turn.
It also covers the European Central Bank’s mass purchase of Greek, Spanish, Portuguese, and Irish bonds from private banks. This enables investors who bought these bonds during the credit bubble in order to boost yield – just as they bought US subprime CDOs to boost yield – to shift the consequences of their own misjudgements onto taxpayers (Hedge funds were already “long” Club Med debt, of course, when the ECB stepped in so they simply make a speculative gain from taxpayers).
It has been widely reported by the German press – which should know better – that the court rejected the original case by the professors. This is untrue. Their request for an immediate injunction to block transfers to Greece was turned down (on the grounds that such a move would be too dangerous). The case is still pending.
In their latest broadside the professors said the rescue fund “self evidently” violates the no-bailout clause of the Lisbon Treaty.
They have seized on comments by France’s Europe minister Pierre Lelouche, who admitted after the summit deal on May 7 that EU leaders had carried out a constitutional coup. “It is expressly forbidden in the treaties by the famous no-bailout clause. De facto, we have changed the treaty,” he said.
The quintet said the methods used to ram the EU rescue through the Bundestag were a “putschist” threat to German democracy. “This path is leading Germany to ruin,” they said in the Frankfurter Allgemeine.
The citizens were not informed as the €440bn Stability fund was created. The opaque nature of the negotiations in Brussels left it unclear who was driving the policy, and for exactly what purpose. A SIV (structured investment vehicle) had been created in Luxembourg to raise money and operate the fund. “Yet when the Bundestag adopted this aid plan not a single member of parliament knew what they were voting for.”
“Chancellor Merkel obliged the President to sign this emergency law within hours. He was not able to examine its constitutionality, as he is sworn to do. No government should ever treat a head of state in this fashion, not least on a question of such existential importance.”
The group said the erosion of German state finances “strikes a blow at the constitutional foundations of our state and our society”. It runs contrary to the true spirit of Europe, with its diverse roots and cultures, and “trifles with the future of our children and grandchildren”.
“To fight this is not a return to outdated nationalism. As citizens we have a right to demand that our government abides by its sworn oath to protect the German nation against threats.”
They argue that the “pretended bailout” does nothing to reduce the debts of the countries receiving it. The whole game is designed for creditors. “The funds to Greece are clearly financial transfers since everybody knows that Greece cannot repay its debts.” By the IMF’s own sums, Greece’s public debt will rise from 120pc to 150pc by 2014. “This is economic madness,” said Prof Nölling.
Meanwhile Germany’s Centre for European Politics in Freiburg – a free-market think tank – has joined the fray with a report arguing that the use of €60bn of EU money under Article 122 of the Lisbon Treaty to support the rescue package is illegal. This is a new twist and on the face of it looks unanswerable. Here is the link for German speakers: http://www.cep.eu/startseite/
“It is a complete violation of our constitutional law and the judges at the court will have to say so if a case reaches them, even though they are afraid of the economic consequences,” said the author, Dr Thiemo Jeck.
“The Union shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of any Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project. A Member State shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of another Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project.”
This does not necessarily prohibit EU states joining together voluntarily to rescue a country in trouble. However, it is another matter to use EU money itself for this purpose, even if it is possible where “a Member State is in difficulties or is seriously threatened with severe difficulties caused by exceptional occurrences beyond its control”.
Bavarian politician Peter Gauweiler is reportedly planning to amend his separate case at the Verfassungsgericht to include these latest arguments.
I have no idea how the court will respond to all these cases, but those who assert confidently that the judges (usually split 4:4 on EU matters) will throw out the whole do not know either.
This is the court that sent tremors through the EU institutions with its ruling on the Lisbon Treaty in June 2009. The judges read the riot act to the European Court of Justice, a body that scandalously and repeatedly claimed that it has supreme jurisdiction over national law.
The ECJ has no such power. It falsely asserts this claim. The EU is a treaty organization of sovereign states. The states transpose EU rules (not laws) into their own national law.
The Verfassungsgericht stated that the sovereign states are “Masters of the Treaties” and not the other way round. They said national parliaments are the only legitimate fora of democracy, and that the European Parliament is inherently undemocratic. This is correct.
The court constructs a line of defence against any possible infringements of German sovereignty, stating that certain fields “must forever remain under German control” – including, of course, fiscal policy.
In a sense, the Verfassungsericht has become the defender of democratic freedom and liberties for the whole of the European Union since other national courts are largely craven (Though not Ireland’s supreme court) and since the Hegelian ECJ has demonstrated in a series of key cases that it has no respect whatsoever for human rights and acts a mere enforcer of authoritarian power-grabs by the EU’s executive machinery. As such, the ECJ is a dangerous organization.
My guess is that the Verfassungsgericht will spin out these cases for a while, hoping that the immediate crisis will pass. The crisis will not pass because EMU’s North-South split is inherent in the system and cannot be bridged.
At some point the court will find itself forced to rule. It may well deem elements of the rescue to package to be unconstitutional – though not all of it – and order Berlin to go back to the drawing board.