Address At Davos: ‘If we lose it, there isn’t another America to pull us out.’

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 points 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 $100 + 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 air 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, and that 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 like 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 getting better and 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 economically , 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 the  baggage 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 in the 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 U.S. 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.