The Four Addictions

The Four Addictions

– By Howard Sierer –

Over the last two decades, the world’s economies have become increasingly dependent on four factors: China, digital technology, easy money, and government debt financing. Each of these has offered significant upsides, but as they’ve grown, their downsides are becoming readily apparent.

Mehlman Consulting offers a compelling presentation illustrating how these factors have become intertwined with the world as we know it today. The firm calls them the Four Addictions, each with pluses and minuses. Finding a balance will be both painful and risky.

Since a picture is worth a thousand words, I encourage you to review the Mehlman presentation. Nonetheless – and in far fewer than a thousand words – here is my summary.

China. Mehlman describes our “excessive dependencies on an increasingly unreliable competitor.”

China’s share of worldwide manufacturing value-added has grown from 8.6% in 2004 to 30.3% in 2021 while the U.S. has slumped from 22.1% to 15.6%. China has become the top trading partner for over two-thirds of all countries with its efficient factories and cheaper goods.

In the process, China has become more aggressive internationally while becoming more repressive at home, violating basic human rights of its minority citizens. China was likely the origin of the COVID virus, raising hackles worldwide. And it routinely steals intellectual property from U.S. firms.

Despite growing friction between our two countries, we along with many others continue to rely on China for semiconductors, critical minerals, high tech batteries, prescription ingredients and more. The recent pandemic demonstrated how supply chains upon which we depend often begin in China and are subject to interruption.

Mehlman describes how decoupling, even in part, from China – underway by both our government and by companies who want to reduce risk – will create both pain and opportunities.

Digital Technology. Mehlman notes that “emerging tech risks are too big to ignore.”

The internet and all the smart devices attached to it seem to affect everyone, everywhere, all the time. There are over 5 billion people around the world with access to the internet. In 2022, Americans averaged 8.23 hours per day online. (Finally, I’m above average in something!)

Lots of benefits: new products and services, higher productivity, lower costs, greater access to knowledge, etc.

But there are downsides as well: spreading disinformation, invading privacy, depressing/addicting kids. Another problem area: the skills needed in the digital age are mostly different than the skill sets of those who’ve been displaced, creating hardships for blue collar workers.

Government is expanding its efforts to regulate a rapidly changing technology landscape. Issues include consumer protection, national security, competition policy, and a variety of social issues like the gig economy, fair internet access for all, taxing across jurisdictions and the newest phenomenon, artificial intelligence.

Experience shows that bureaucratic control dampens innovation and personal freedom, two hallmarks of digital technology to date. My take as echoed in the Twitterverse: “AI Is the technocratic elite’s new excuse for a power grab: funny how ‘existential’ threats always justify the same solutions: more control and bureaucracy.”

Easy Money. Per Mehlman, “two decades of easy money built a fragile world.” The chickens are coming home to roost.

The Federal Reserve created trillions of dollars that it fed into the economy to facilitate government spending while claiming that the inflation that started in the last half of 2021 was “transitory.” We’re all paying now in two ways: first with rampant inflation that’s not likely to get back to the Fed’s 2% target until 2025 if then, and second with high interest rates crimping home sales and consumer purchases.

The upshot: banks are collectively about $2 trillion underwater on government bonds they purchased with the Fed’s excess money – Silicon Valley Bank is the poster child – and as a result have either failed or are struggling to convince customers to keep their funds deposited.

When this column went to press, the nationwide average 30 year mortgage rate was 7.08%. Compare that with rates below 3% only 20 months ago. Almost anyone fortunate enough to have secured one of those low-rate mortgages is now effectively locked into their home: they can’t afford to sell and move  elsewhere.

Easy money has distorted the economy and the repercussions are far from over.

Government Debt. Mehlman’s takeaway here: “unsustainable economics may soon force hard choices.”

We’ve had 50 years of federal deficits under Democrats and Republicans, in peace and at war. Our federal debt now far exceeds even World War II levels as a percentage of GDP. Interest on all this federal debt will soon crowd out all discretionary spending and threatens Social Security, Medicare and defense.

There are three ways out, all painful. Raise taxes dramatically, cut spending dramatically or inflate our currency, creating unforeseeable pain for consumers (i.e. all of us).

Solutions. You’ll need to go to near the bottom of Mehlman’s presentation to see its “No Way Out?” possible solutions to each dilemma; words can’t do it justice. The slide clearly shows how dealing with any of the four addictions makes fixing each of the others harder. Solutions are known, just painful to implement.

I found Mehlman’s analysis sobering. I’m confident that we’ll muddle through somehow, making policy mistakes along the way. But then, I’m an optimist who has high hopes for the future.

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