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Global Ramifications of Brexit:
Implications for the U.S.
Gillian Tett, U.S. Managing Editor of the Financial Times, recently shared her masterful insight into the U.S. and global economy, with a special focus on the global ramifications of Britain’s pending exit from the EU, as part of the World Affairs Council of Charlotte’s speaker series.
What is immediately valuable to glean from her remarks are the implications of Brexit for the upcoming elections and for the future of the United States. Will we choose—as Great Britain has—nationalism, or will we embrace globalism?
Tett shares her political perspective on everything from how the U.K. (including the FT) got Brexit so wrong; to growing economic, social and political polarization, and the “elites” disconnection; to living in a time of anger when voters no longer fear taking big risks; to effective communication and the power of simple, clear, positive messages; to the importance of boring, geeky details of voter registration.
Tett shares her global perspective on the meaning of Brexit for the rest of the European Union from fundamental tension at the heart of the Eurozone project; to the lack of European cohesion and social glue and political unity; to how you create a functioning economic union without a political union; including her keen analysis of the range of trade options and the state of the international finance system.
Perhaps most interesting of all is when she branches out to implications for the U.S. and to the population generally, from income inequality, to technological/digital displacement, to income redistribution, to educational reform, to infrastructure projects.
She provides cautionary messages including one she described in her latest book as “the silo effect,” being essentially fragmented into self-reinforcing silos:
“If you look at who people are getting information from for decisions in their lives, whether it’s where to go out for a meal or where to go to college, or where to vote, it’s increasingly through the social media networks rather than authority figures. That’s fueling this sense of tribalism and of polarization because one of the things about technology is it’s fantastically deductive. It gives us the illusion that we’re all hyper-connected and yet you know that in a world where you can customize, where you can choose where to get your information from, people are increasingly fragmenting into their own classical tribes.”
This is an incredibly important thought-provoking piece. You’ll want to make time to read her remarks in their entirety and appreciate the breadth of her perspective and the genuineness with which she reflects on the world order and human condition.
Gillian Tett, U.S. Managing Editor of the Financial Times (remarks edited for clarity only and emphasis of major points added):
When I first started working for the Financial Times two decades ago, people used to refer to the FT as being the Financial Times of London. What some of you may not know is—quite apart from the fact that these days we’re not really a paper, two-thirds of our subscribers are digital and, in fact, 90 percent in America are digital—America today is our biggest market, not London, not Europe. So in many ways we’re not so much the Financial Times of London, we’re the Financial Times of New York, San Francisco, Washington, Chicago, and Charlotte.
I’m going to be talking today a bit about some thoughts in mind to do with the wider trends in the political economy. I’m happy to take questions on any topic at all. I’d like to first start by talking a bit about what’s going on in Europe these days because in the last few months the U.K., which is where I hail from, has undergone two shocks—one of which you all know about, which is Brexit, I’ll talk about it in a minute. The other one you may not quite have registered but it’s top of most British people’s minds—and it’s actually the most commented article of all at the moment on the FT.com website—is the Olympics.
About two decades ago when I was growing up, British people used to assume that they would never win anything at the Olympics. We used to come to sort of number 47th on the medal table, but this month we are celebrating the most extraordinary result, which is that the U.K. has come second in the table, Team GB beating Russia and China. On one level that’s absolutely wonderful. It’s done wonders to restore a sense of natural confidence at a time when a lot is quite tumultuous. On another level though, it reveals some of the big splits that are going on.
Because no sooner did that tally of medals come out—the U.K.’s Team GB has won 67 medals—I noticed a series of very snide comments from elsewhere in Europe complaining that the British people had only won because they rigged up the usual convention in Europe of giving money equally to all sports, in the wonderfully Socialist way, and so they targeted the sports that they thought that Team GB people would actually win, that they were too focused and a bit too results-orientated.
In fact, the European Union parliament seemed to be very cross when they tweeted yesterday, “Congratulations to Europe for its medals,” and totally ignored the British result. In fact, it was left out that Britain, for the first time ever, got 21 medals over Germany. That, of course, then started a whole great angry set of comments in the British blogosphere saying, “Well, if you want to understand why Britain is leaving the European Union, just look at what the European Union parliament has said about the Olympics.”
That might seem incredibly trivial but it illustrates a very important point, which is that if nothing else, the Brexit vote shows that we’re living through a period of extraordinary political fragmentation, political polarization, political volatility and great political uncertainty. That has implications not just for the U.K. but also for the U.S., as you’re placing your own very momentous vote in a few months’ time. To make the right obvious point, up until the very last minute with the Brexit vote, most of the establishment, including the Financial Times, were assuming, often quite complacently, that it would be almost inconceivable for the British public to vote to leave the European Union.
Yes, I know that in theory, the polls were showing up until the very last minute there would be a proclamation of a fairly even split and yes that’s equal, with myself included, as saying intellectually that yes of course there is a chance that the British voters will vote to leave the European Union. But when it came to that night and when it came to people like me actually standing there in the news room of the Financial Times as the votes were being counted, I and my colleagues and most of my friends and most of my generation who are absolutely, for better or worse, part of that intellectual elite globalized generation, like many of you I’m sure, we didn’t quite believe that the British electorate would do it.
It’s not just us. If you talk to the people who actually headed up Brexit, the people who were leading a whole movement for revolution, and ask them were they expecting to win, it’s pretty clear in retrospect that up until the very last moment, most of them could not quite believe that a political earthquake of this sort would actually happen. I’m sure the question most of you want to know is, “What’s going to happen next?” I’ll come to that later on, but I think it’s worth pausing for a moment and asking how and why did the U.K. get into this position that people were voting for Brexit, and why did so many people get it wrong about what was going to happen?
When I look back at what’s happened in the U.K. in the last few months, I think there are really four or five key lessons, all of which have a lot of implications for the U.S. right now. The first and most obvious one is that we are living in a time where there’s growing economic, social and political polarization, and then frankly the elites, if you like, are pretty disconnected from what many ordinary voters think.
If you look at the results of the Brexit vote and the breakdown, it’s very clear that party affiliations, the traditional dividing points that people have used to try and imagine British politics—right, left, Conservative, Labor—actually was not a good predictor of which way people would vote. Instead, what emerged was, first of all, a very stark geographical split between north, south, rural and urban. For the most part it was the urban south, the wealthy London areas, which wanted to stay. It was the rural areas, particularly the north, who wanted to leave. There was a generational split, the older generation much more strongly in favor of leaving than the younger. There was also a strong educational split, and there was also a wealth effect.
What people like myself who hail from a London background, work in a very nice job in the Financial Times and tend to mostly talk to, like ourselves, business leaders, international people, what we’ve been forced to recognize is actually we are getting sucked into a bubble in a very dangerous way. It’s not just because we live nice, cushy lives. It’s not just because we tend to talk to people with also our professional jobs. It’s also because the entire structure of the media today, if we’re not careful, reinforces this sense of polarization separation, this problem of what I call in my latest book “the silo effect,” being essentially fragmented into self-reinforcing silos.
Lesson one is the elites right now need to stop very quickly and think about how much they actually know about what’s going on in the rest of the country. In the U.K., that’s a big issue.
Lesson number two, I think, is that we live in a time when a number of people in the voting groups feel so angry with what’s going on that fear of jumping into the unknown, taking big risks, has diminished dramatically. Or to put in another way, when somebody like Donald Trump stands up and says, “What do you have to lose?” a lot of people say, “You know what? Not much. Why should we keep bucking the status quo?”
That partly reflects, I think, the level of economic anger at people who feel they have been excluded from economic growth in recent years. I think it also reflects something much more subtle, which is that in the last 10 years we have lived in a world where many of the old certainties have been ripped up. To cite Alice in Wonderland, people have had to grow up and start believing six impossible things before breakfast almost every other day.
By that I mean before 2008, very few people thought that banks would collapse. Very few people ever thought it would be possible to see the government in a country like the U.S. step in to rescue big banks. Very few people ever thought it would be possible to have negative interest rates, and yet as certainty of the certainties starts to crumble, the idea of challenging some of the political status quo, some of the conventions, starts to seem less remarkable.
Which leads me onto my third point, which is if you look at the Brexit vote, it’s also clear is that one of the reasons why the Brexit camp won and the Remain side lost was because the elites were very detached. They had no idea how to communicate effectively with angry voters who were increasingly fed up with the status quo.
It’s very striking that if you look at the messages that came out of the Remain camp in the run-up to the vote, they were either driven by scare stories along the lines of “Don’t be so stupid. How could you possibly vote to leave? It would be disastrous”—very patronizing—or this very rational set of economic arguments where practically every large institution in the world that’s got a multinational economist came out and said, “It would be a really bad idea for the U.K. to vote for Brexit.”
These were laid out over and over again, and yet they didn’t have much resonance with ordinary voters, who simply were uninterested in the economics and were very irritated by all the scare stories and what they thought was essentially a very patronizing campaign. Instead, the thing that really swayed the voters, and I think it’s got a lot of implications for America, was the fact that the Brexit camp had a very simple, clear, positive slogan. The slogan was “Take back control.” Nice, short, memorable slogan with a verb. Verbs matter. Positive momentum.
If you talk to people after the vote about why they voted for Brexit, it wasn’t just a negative, “We’re fed up with the status quo.” It was also a sense that they were voting for something positive. They were voting for a sense of sovereignty, for identity, for control. Again, this tapped in very much to this idea that people are fed up with statistics, fed up with being lectured. They want something positive.
The reason I brought this out is because I’m probably the only person in the room who went to both the RNC and DNC campaign. What struck me, I must say, and I’m not … We can talk about Trump versus Clinton later on, but going into the Trump convention and the Clinton convention, whatever else you might think about Donald Trump, the one thing that you could not leave that convention without knowing was what the campaign slogan was—“Make America Great Again”—emblazoned above the central stage. It was there over and over again.
If you went to the DNC campaign, you came back with a sense of being a wildly slick professional production—very, very mesmerizing—but actually most people didn’t have much of an idea of what the slogan was supposed to be. Yes, “Stronger Together” is all of it, except there’s no verb there. “I’m With Her” was the other one, but it’s actually a lot of mishmash of statistics, some scary stories about Donald Trump, and a fairly, I would argue, confused message. When I look back at Brexit, the fact that the Brexit side had a very clear-cut slogan with positive momentum and the all-important verb, I think it’s a very key reason why they managed to gain so much momentum.
Just one other quick point about why Brexit won. It also came down to the fine, boring, nitty-gritty details of voter registration. Sound familiar? After the vote came out, the results came out, a lot of people said, “The problem was with the vote. The reason why Brexit won was because those wretched kids,” i.e., people aged 18 to 25, and these days they do look like kids to me, “those wretched kids didn’t vote.”
That was incredibly important. If you did a poll on the population as a whole, in fact there was actually a slight advantage for Remain and not Brexit, but the older generation were very strongly more in favor of Brexit than the younger generation. We can talk about why that was if you want later on, but the older generation were very, very inspired and motivated to get out to the polls.
Unfortunately, on the day of the polls, there was a giant thunderstorm, a lot of rain, what’s new with Britain in June? That meant that you had to really want to get out to the polls to vote, and the older generation did. The younger generation didn’t, and people said later at work because they’re all so lazy. “Those kids are all playing with their iPhones. They think that they tweet that means they’re taking part politically. Don’t they realize they have to get out to vote?”
This graphic from Geopolitical Futures contains two maps of the United Kingdom. On the left side are the results of a YouGov poll that identified different parts of the U.K. as more or less Euroskeptic. On the right side are the official results of Britain’s vote to leave the European Union.
The reality is actually the ones that were registered, for the most part, did get out to vote. The problem was that a couple of years ago there was a little-noted reform to British voting law, which meant that you couldn’t be automatically registered by your parents anymore. You had to go and do it yourself. That little tiny detail that no one had noticed meant that actually come polling day, lots of kids woke up and realized that they weren’t registered, and it was too late. Again, sounds familiar? One lesson for Brexit which matters for the U.S. vote is the fine, boring, geeky details about registration could really matter.
Populism, volatility, unpredictability, all big, big themes. It has implications going forward. The big implication was obviously for the U.K., because the fact is the vote has now happened. While there was a huge amount of emotional thinking in the immediate weeks after the Brexit vote—which literally ran from the Remain camp that the whole thing could be reversed, thus far at least—the establishment has scurried to stress that they’re not going to reverse it. “Brexit means Brexit” is the new slogan of Theresa May, the British Prime Minister, and everybody is proceeding on the assumption that Brexit is going to happen.
What will it mean for the U.K.? The honest answer right now is we just don’t know, because one of the extraordinary things about the current situation the U.K. finds itself in is that, although this dramatic political earthquake happened two months ago, Theresa May, the new Prime Minister, has indicated that she doesn’t actually plan to invoke what’s called Article 50, which is really the kind of button you press to signal that you’re actually going to leave. She doesn’t plan to invoke that until next year.
Although she initially said it would be the start of next year, she has now indicated that they won’t leave until after the general elections, which will be more like the autumn. She doesn’t even plan to press the button to start the process for another year, and even when she presses the button it’s likely to take at least two years for the U.K. to actually complete the Brexit process, so right now you’re looking at probably three years before the U.K. actually have Brexit in reality.
Anyone who’s in business, and particularly in finance, knows that if you are in the business of business, you can’t sit around for three years and wonder what’s going to happen next. What you’re seeing right now is a series of indications for big business CEOs but they’re not actually pulling out of anything in the U.K. yet, but they’re not actually investing anymore because there’s so much uncertainty. It’s very little indication yet as to what kind of relationship the U.K. will actually forge with the European Union going forward.
Those of you who follow the debate today will know that there’s a range of options right now. They range from something like Norway, which is what they call an EEA situation where essentially if the U.K. went down the Norwegian route would have access to the European Union market for goods and services, but as a quid pro quo it would have to allow free movement of people, which at the moment seems pretty unpalatable given the immigration hostility in the U.K. We’ve got that at one end of the spectrum. You’ve got the Albania option of the other end of the spectrum, which means pretty much just relying on WTO and nothing else.
You’ve also got what they call the Swiss option, which is doing lots of bespoke trade deals to try and let your financial services industry have access to the single market in certain segments, but in a bespoke way. Best yet from the British politicians that I spoke to recently, and I was with one of the key negotiators just this weekend at Aspen, is that something like the Swiss plus option is what the U.K. will end up with, which means a lot of bespoke negotiations which may allow the financial services sector access to the single market, it may not be, we just don’t know.
If you’re going to be optimistic, and this is the argument of the pro-Brexit camp, the cost of that uncertainty will be more than outweighed by the sense of liberation that small businesses and companies feel over the red tape in Brussels. People who are pro-Brexit would argue that actually now the U.K. will go forth and forge trade deals with China, with India, with Latin America, with many other countries, all the far-thrown countries in the world.
The honest answer is we just don’t know, but we at the FT are desperately trying to work out this cost-benefit analysis, so much so that we actually now have a special page at virtual on our website called Brexit Briefing, which does nothing else than track what’s actually happening as regards Brexit. What’s striking about that page, which I was looking at this morning, is that right now the balance is both pros and cons, both positive and negative, but the one thing is clear that there’s nothing, absolutely nothing tangible which indicates what’s actually going to happen next in terms of rules and regulations. We just don’t know.
The second big point is what obviously happens for the rest of the European Union, on the back of the Brexit vote. Since the Brexit vote has occurred, essentially there has been a circling of the wagons by the leadership in the European Union. You might have seen that over the weekend with the leaders of France, Germany and Italy meeting to very much signal they are together. Certainly the polls suggest that the sheer shock of seeing Brexit go through has made voters elsewhere in the European Union at the moment say they actually are less excited about the idea of leaving than they were before.
What Brexit has exposed is that there are some really fundamental problems at the heart of the Eurozone project, in terms of trying to work out how you take this union which started life as a coal and steel union and economic union, how you take that union and turn it into some kind of effective union for the 21st century where half the union wants to have essentially a United States of Europe and a federal structure in every sense, and parts of the Union don’t. There’s a fundamental tension and contradiction there which has not been resolved.
One of the things that has emerged from the whole Brexit debate is the sense of not just democratic deficit, the idea that actually voters are cross because they’ve got no idea what this faceless, big bureaucracy in Brussels are doing, and as someone who used to work in Brussels believe me, the Brussels bureaucracy, the European Union bureaucracy, is absolutely hideous. It makes Washington look totally rational. It’s huge. It’s sprawling. It’s just dysfunctional.
It’s not just about democratic deficit. It’s also about an issue of sovereignty and identity. Probably what really brought home to me recently this question of sovereignty and identity and to my mind it encapsulates the challenge of Europe today, is the issue of bank notes. I don’t know how many of you travel frequently but those of you who do, the next time you travel you should take some notes out of your wallet and have a look at them. It’s very revealing. I pulled out five notes just now, and if you look at most bank notes around the world, be that the dollar, I’ve got dollars with sterling and real, Brazilian real because I was down at the Olympics last month.
If you look at most bank notes in the world, what you’ll see on one side of the notes at least is at best, some kind of national hero, some kind of national figure whose stands for what the country stands for and essentially a running point, a kind of flag if you like, something which creates a sense of national pride. That’s no surprise because as an anthropologist, one of the things you learn is that the things that create social glue, political glue, are these creation myths in any society. In America you’ve got various figures. You can see you’ve got the Queen here. You’ve got some random Brazilian I don’t know, a Swiss inventor I don’t know, and of course no prizes for guessing who that is.
Anyway, the Eurozone note, I don’t know if any of you have got Eurozone note in your pocket but if you do you should look at it, because on the back of the Eurozone note you have some made-up, imaginary bridges. It’s true. When it came to design the Eurozone note, and I was talking to one of the people who was involved in this, one of the Central Bank governors over the weekend in Aspen, basically when the designers sat around the table, first off they realized that the different European countries couldn’t agree on a single national hero who epitomized Europe.
The last one they had who really probably was pan-European was Charlemagne, and all the recent characters, the people who created the European Union were people like Jean Monnet, no one knows who he was or what he looked like…the face of a bureaucrat. Most of the other European figures are just too darn controversial to provide a unified sense of glue. I once suggested to one of the central bankers, if you wanted to find faces that would get everybody in Europe to feel together, united and happy, they probably would put ABBA on the bank notes.
There are no other single figures, and the problem is there actually is no strong, single, positive, unifying glue that links Europe together. A generation ago it was about trying to avoid the war, but trying to avoid war kind of is not even on the scene today and that positive Founding Father mythology, which is so crucial to creating American national identity and community at its best, is simply not there in Europe. The question of how Europe is going to actually create that sense of cohesion and social glue and political unity, never mind a functioning democracy, is very, very much unanswered and very problematic going forward.
Last but not least, the U.S. The lessons for the Brexit for the U.S. are pretty clear-cut and frankly I think most of you put in there much better than I do. America, today, is a country which is very polarized in every sense; politically polarized, economically polarized, socially polarized. Increasingly in some ways fragmented, increasingly marked by the same problems that they had in the U.K. vote, which is a sense of political tribalism reinforced by the media.
Very interesting work done recently by a group called British Edelman, a public relations firm, which shows that in the last decade if you look at the question of public trust in institutions, you’ve not just seen a collapse of trust over most of the major institutions, government, business, banks, and the media I must say, traditional media. You’ve seen a shift in the nature of trust in that all this technology has proliferated, as we’ve all come to learn about smartphones. We’ve increasingly come to rely not on authority figures you trust but actually a person known as a person like me, i.e. my Facebook friends.
If you look at who people are getting information from for decisions in their lives, whether it’s where to go out for a meal or where to go to college, or where to vote, it’s increasingly through the social media networks rather than authority figures. That’s fueling this sense of tribalism and of polarization because one of the things about technology is it’s fantastically deductive. It gives us the illusion that we’re all hyper-connected and yet you know that in a world where you can customize, where you can choose where to get your information from, people are increasingly fragmenting into their own classical tribes.
Increasing polarization, increasing fragmentation. I would argue probably increasing volatility as well. People today are very susceptible to, if you like, cyber flash mobs and the power of rational reason and argument to sway voters, I would argue, is probably ebbing. The same slogans that won the Brexit vote about “Take Back Control,” positive, easy-to-remember slogans with verbs with momentum, I suspect, are the kind of slogans that would have an awful lot of impact come November. Then when you add into that the fact that we’re living at a time of, at best, economic … I’ll call it stagnation of stability, if you like. A world of zero rates are turning up many of the ordinary assumptions upside down, and you have the makings for really quite an unpredictable, potentially volatile landscape.
The one thing that’s clear is that there’s a lot to write about as a journalist. In my career I used to joke to my colleagues that for a paper like the FT, we could either have a great political story or a great economic story or a great popular story, but probably not all three at once. I think this year in America we probably have got all three at once. It’s been a great bonanza for us as a media organization but it’s also been a year of great surprises.
If you want to be optimistic, speaking of the Brit, nobody would have ever guessed that Britain could win so many medals. Now I’d like to think that’s going to be a metaphor for what happens going forward for Brexit, but it will surprise the naysayers when they say, that’s myself included, and turn Brexit into a positive. On the downside, it also shows that if anyone is leaving here today fully confident about how November is going to play out, think again.
Questions & Answers
Question: One question is on two things, pragmatism versus vindication. Germany is being voted as one of the most powerful countries in the EU, and then you’ve got France. Then another publication, Bloomberg, from the Finance Minister of Germany, if you’re in, you’re in. If you’re out, you’re out. How do you think those two themes play out, pragmatism Merkel versus vindication?
I think what it’s going to play out as in the short-term is a mess, because the European Union is divided about how it wants to respond to the U.K. On the one hand you have people like Juncker who came out initially and indicated he was in quite a vindictive mood, and then you have people like Angela Merkel who have been much more conciliatory. There are a body of people in the European Union who recognize that.
In a sense, it’s not this case that the U.K. has traditionally needed Europe. The European Union has traditionally needed the U.K., partly because of the financial market, and probably London’s role as a financial center, but also because the U.K. has been one of the main promoters of free market ideals within the European Union, and the countries that like to think they’re on the free market side are dismayed by the fact that that won’t be there anymore.
My best guess is that some form of muddle-through strategy prevails, and that I don’t think the U.K. will sign up to the Norway option. I’m not convinced that the rest of the European Union might now offer the Norway option, because a sticking point is the free movement of people. My best guess is probably some form of Swiss plus option is what actually prevails, which essentially allows the U.K. access to part of the single market without having to fully sign up to the free movement of people. The great marriage of the Swiss plus option is that it will be so darn complicated that almost nobody who actually votes in any party has a clue of what’s actually in it, so the politicians can pretend that it is whatever they want. None of that is good for business and the business culture, but that’s my best guess.
There is profound concern right now inside the European Union about what on earth is going to happen in terms of European Union solidarity, because some of the things that one shouldn’t forget amongst all this is that there’s also this separate thing called the Greek crisis happening, the everlasting Greek crisis.
Germany these days is essentially cropping up much of the southern belt through backdoor means. That crisis has not gone away. It’s entirely possible that the refugee crisis, the separate refugee crisis, will end up being the fig leaf that allows the German government to keep subsidizing Greece, as long as Greece keeps taking refugees and keeps them in Greece rather than Germany.
There’s a fundamental problem. It really comes down to this core, core question of does the European Union want to be the United States of Europe, or not? One slight example to show this is that a couple of years ago when the Germans were having this never-ending debate about how on earth they could deal with Greece, should they cut Greece in the throat, should they let it go, should they subsidize it? What could they do? I quite agree. Germany is one of the senior European policy makers but the single best option for Europe, back then and in fact today, was to go out and create the equivalent of a whole series of German Club Med holiday resorts in Greece and to use all the money that German taxpayers were funneling into the banks, and instead use that to give vouchers to all the German pensioners which would only be spent in those German Club Med resorts in Greece.
There would be so much shiploads of German pensioners going on holidays, forced holidays in Greece, it made happy German pensioners because they would be getting free-ish holidays instead of putting their money into the banks, and you get happy Greek waiters and happy Greek builders. More importantly, you’d get the kind of transfer, economic transfer you need to make a European Union work. It’s no different from having retreats and going down to Florida en masse. Essentially you get each part of the European Union playing to it natural advantages, and so you’d actually probably get a much happier outcome for all the voters concerned.
Of course the problem is that that kind of solution can’t work at the moment because of all the impediments to the single market actually operating with free movement of people and stuff, also because of political animosity. If you look at what’s actually happened in terms of German tourism numbers going down to Greece in the last two or three years, they’re declined, partly because there’s so much anti-German feeling today in Greece. The question about how you create a functioning economic union without a political union in Europe is completely unresolved.
Question: Since the very beginning you were talking about the polarization not only here in the United States but all over the place. If you were the advisor to the next president of the United States, what policies could be put into place to lessen some of that polarization?
Gosh. Can I tell you guys, by the way? I’m this media journalist in here. I can tell you how to be a journalist. You don’t have to vote. It would be lovely if you would. How many of you expect the next president of the United States to be Hillary Clinton? Okay. How many of you expect it to be Trump? Okay. If I would dare ask you, how many of you will be voting for Clinton in the election]? How many of you for Trump? Okay. How many of you are undecided? Okay.
Interestingly enough, that’s about the same proportion as Brexit polls in February, just to let you know. No actually, truthfully people think Brexit was wrapped up. Actually if you go back to the February-March time in the U.K., back then about 35 percent of the population said they would remain no matter what, about 20 percent said they would leave no matter what, and the rest were undecided. Pointing back to the issue of political volatility, that’s roughly the same proportion who just voted for Clinton, Trump and undecided in this room. That’s one point.
Okay, let’s assume the next president of the United States on this basis is Clinton. What can you do to lessen income inequality? The most obvious is to try and start to spark the growth big time. It’s a fundamental question right now, which is that if we are going to a phase when robots and digitization are knocking out a large swath of jobs, and where essentially an economy can grow fast but with fewer and fewer people actually employed, what do you do about that?
Do you embrace that word that most Americans hate to embrace, which is redistribution? Do you just cross your fingers and hope somehow it all works out in the end and there’s a trickle-down effect? Do you look at education and things like that for the next generation? What do you do?
When you look at what’s happening with the U.S. economy today, it’s very clear that to blame the job losses on China or Mexico is simply not particularly accurate these days. Yes, some businesses have moved to China and Mexico in the last few decades but these days it’s really about digitization. Many of you would have seen the study that’s come out from Oxford University and McKinsey that suggests that over the next two to three decades, almost half of U.S. jobs will be replaced by machines, by robots or by computers. A controversial study.
If you’re being optimistic, you’ll say actually those jobs will be replaced by something else. Just look at the agricultural revolution and the fact that nobody works near farms anymore and we’re still employed, many of us. If you’re being pessimistic you say actually the speed of transfer that’s happening right now is faster than ever before, and the idea that somehow a new job is springing up quickly to replace the old job is simply unrealistic. Either way, you have this big issue right now of income inequality as is middle jobs all around.
I’ve been in the camp saying if you’re going to take one policy measure that is serious, or two policy measures, and seriously try to address this right now, one is infrastructure spending. It’s very striking that both sides of the aisle right now are officially embracing it. A big question about who pays for what kind of infrastructure, but I would say infrastructure spending is more a way to try and create more of those military jobs and bring more people into the world economy.
Secondly, education. One of the great things that created so much social mobility and reduced income extremes in post-World War II in America was the GI Bill, and the fact that an entire generation of people were suddenly educated and given a chance to rise up. I think looking at the education structure today it’s critical, not just looking at things like student learners, which clearly need to be addressed, but also if I have one policy I’m passionate about in America is about creating mid-career courses that are much more flexible and getting the over-weaning educational bureaucracy, which tries to control these forces in such rigid ways, out of the way and allow companies to work much more flexibly with community colleges and just creating much more flexible nimble ways for educating people mid-career.
Question: I want to change the topic to one of your recent articles in the Financial Times, that the plumbing system of the international finance system is broken. I think we can thank all of our central banks around the world for that. I want to go over a particular European part of that, and that is buying up corporate bonds via the EU and now the U.K. is buying corporate bonds. We have even gotten to the point that corporate bonds are being issued specifically to be bought by central banks. This is happening in markets that are not particularly wide and particularly deep.
Would you comment about that? Would you comment what the future is with that, and what that all means for finance worldwide?
I spent many years of my life writing the financial markets section of the FT. I’m basically an uber-geek so I could happily stand here and talk to you about tri-party repo for hours, but I won’t.
The key point is this, that the financial pipes in the global financial system appear, if you glance at them casually from a distance, which is what most politicians do, to be working just fine. Everything seems very calm and quite functional. It all seems a bit unchanged from how it was 10, 15 years ago. In fact, some very radical changes are taking place inside the pipes of the system.
The analogy I use which works very well in America was that they are throwing up. If you measure the pipes and the amount of plumbing system, they’re getting blockages in all kinds of ways, partly because of regulation and the fact that banks don’t want to act as market leaders anymore, understandably, but also because of QE and the flooding of money liquidity into the system by central banks.
I’m with the kind of people who think right now that QE is completely bad. I think that simply cutting interest rates further is pretty much negative territory, having central banks buy up everything that moves. In Japan it’s even worse. In Japan the central bank is not just buying the bonds it can get ahold of. In fact it’s soon going to run out of bonds to buy. It’s buying up equities as well. Now it owns about 5 percent of the Nikkei 225 which is completely mad. I really have people that said actually these policies have reached the point of exhaustion and they’re probably doing more harm than good.
Having said that though, I think the chances of them changing anytime soon are pretty low. At the Aspen event I was at and I’ve just come back from, there were a number of Central Bank governors there, all of them were preparing for Jackson Hole. None of them are about to say, “Yes, we want to boost rates quickly,” partly because of the potential political repercussions and partly because they know that the financial system now has become so addicted to Central Bank easing that if it were to end it’s going to be very nasty, but also because they don’t have a lot of faith that the central bank. The rest of the governments, the treasuries, the finance ministers are willing to take the obvious step, which is start using fiscal policy and de-regulation instead.
I think right now the world’s caught in a very nasty trap, and I’m worried. I don’t see that changing anytime soon. It reminds me a lot of the situation in 2006, when I was working for the FT and writing about the credit level, which on the surface looks extremely normal. If anyone is looking at the economy from a narrow macroeconomic lens that just looked at real economy indicators, it all looked fine, but when you looked through the weeds you realize just how distorted and vast it was. The problem was that the weeds were so complex and so hidden and so geeky, they are completely invisible to anybody else who is outside the system. The people who were inside the system dealing with stuff had no incentive to blow the whistle or talk more loudly about it.
Question: My question is what does Brexit mean for the future of the U.K.? By that I mean Scotland and Northern Ireland. Are we going to see another independent referendum in Scotland? Also, what does it mean for the young Britons who wanted to remain and may have the opportunity to leave. Roger Cohen had an interesting piece in The New York Times the other day about his daughter, who is eligible for Polish nationality—the granddaughter of a Holocaust survivor from Poland—and is considering that.
Let me take the big point about the young people in Europe today. You make a great point, which is that everyone I know in London, who I have to stress are the international cosmopolitan, well-educated elite, those are my friends. I have my social bubble. I have got a family who come from a rural area elsewhere and have very different views but my friendship group, the people younger than me, anybody who has an Irish grandparent, a French grandparent, a Polish grandparent, are looking at getting a British passport.
That simple, because if you are young, my generation, and I’m 49, grew up assuming the European Union will always be there. It was completely inconceivable that it wouldn’t be there. We also grew up assuming that we get to have the right to go and work anywhere. It’s been actually baked into my whole life experience. I have friends who have worked all over the European Union, and London is full of people from all over the European Union. That was inconceivable to us that we would have left, as it would be for Charlotte to break away from the rest of the United States, and for your case they suddenly wake up tomorrow and realize they can’t just go to Washington as they wanted to. It’s a very drastic shock.
What I must say, and again I will infuriate the Brexit camp by saying this, but on the night of the Brexit vote—we now run rather a rolling news operation, and I run the Americas for the FT, so basically I’m editing the paper—we take it to the papers from about 3:00 until about 1:00 in the morning. We were in charge the last few hours of the Brexit vote in our New York newsroom. I had assumed that we were going to vote Remain, so much so that I had half a mind about what time I would even have to leave to go to the office. Of course when I saw the vote, they all rushed in.
The moment which was actually crystallizing the whole thing for us, as a British people this is seared into our memory as 9/11 is, to be honest. A shock element. As we watched the screens unfold and the results come in, we all sat there going, “Oh well, okay so Brexit is winning but don’t worry. When it gets south it will then swing again.” We all assumed it was going to swing. The moment that Birmingham came out for Brexit, you could have heard a pin drop in the FT newsroom. Everybody was so completely shocked. We couldn’t believe it.
My first reaction and those of my other English national colleagues was, “Oh my God, we’re applying for a Green Card immediately,” because most of us feel we don’t want to go back to a little England vote. That was a nerve reaction. As I said, Brexit could have well surprised all of us who have been so wrong-footed. There was reason to think that actually it could end up being a great thing for the U.K. economy over the long-term to overrun the short-term costs, but the notion, the idea of somehow being adrift from Europe is such a profound and psychological blow that Roger Cohen’s daughter is entirely difficult.
On the issue of what it means for the U.K. well yes, Scotland voted in one referendum and narrowly said no to independence. Most Scottish, as you probably know, were strongly in favor of Remain, even that Donald Trump didn’t agree to notice that when he went to Turnberry immediately after the vote and it was going to be, “But we didn’t want this.” However, it passed.
Scotland would like to stay a part of the European Union. The key problem though, and this comes back to the issue of the bank notes, is that although initially people like Juncko were quite keen to actually embrace Scotland if it voted to leave the U.K. and come into the European Union, since then people like the Spanish have said, “Over our dead bodies do we let in a breakaway region into the European Union because guess what? We have this thing called Catalan and Basque country which are also trying to break away, and we don’t want to give them any ideas.”
It’s unclear what’s going to happen now. My guess is that Nicola Sturgeon is going to play for time and try to avoid having a vote for quite a long time, unless or until she gets clear assurance that she could join the European Union and I’m not sure that’s going to come. If Scotland does break away it can’t join the European Union, and it ends up looking like Iceland.
Question: I’m very intrigued after the Brexit with the idea of changes in currency. The British pound has dropped significantly against the U.S. dollar and possibly Europe as well. I wonder if you could make some comments about this. Specifically, could you ever foresee a time the Germans might find themselves driving British cars?
Driving British cars yeah, because of cost. I think the big question right now is are we going to have cars, period. Given the rise of driverless cars no one’s going to be driving a car at all. The reality is that the hopes of Brexit working out are partly pinned on the idea that the U.K. will become a very flexible, low-cost, low-tax regime in manufacturing and other kinds of services. Currency is obviously devalued already. That will provide a great entrepreneurial free-market energy where you go to flourish compared to the Socialist background decaying the European Union countries.
Will the U.K. become a big manufacturing hub? One of the problems is from what I’ve gathered talking to all the companies that have come into the U.K. and done all this FDI and built car parks in places like Sunderland is that much of that has been predicated on the assumption of free-market access to the rest of the European Union. The real question right now is if you’re going to have a country that’s outside the European Union, do you really want to have it in the U.K. or do you want to go to East Europe where the costs are even cheaper, where you’ve got lots of bright workers there, probably much brighter workers and much better trained these days?
To my mind, it’s very unclear how the U.K. really regains energy focused on Europe as an export destination. Some people I have spoken to have said the only solution is for the U.K. to basically say “Forget Europe,” and turn—go full-on for trading ties with China or India. Certainly the financial market has a strategy that people are looking at, but I think it’s going to take a lot of political courage to implement the scale of reforms that would be needed to make the U.K. a truly vibrant, entrepreneurial, innovative, low-regulation place. That may happen. Theresa May is nothing but pragmatic, but it’s going to be quite narrow.
U.S. Strength Amidst Current Global Crises
Our Geopolitical Future Relative to the Global Hotspots
There a very few speakers who can provide a comprehensive overview of what is happening in the world at any given time. George Friedman of Geopolitical Futures, an expert on explaining and predicting the future of international affairs, is one of them. In his remarks at The Chicago Council on Global Affairs, he looked at several of the growing global crises. His presentation helps to provide some insight into the collective global experiences and how we are affected by them.
At the very beginning of his discussion, he rejects the opinion that “free trade is a necessary boon” and the “best economies are exporting economies.” He then provides his outlook from Europe, to the Baltics, to the Middle East, Russia, China and North and South America. He presents his case in six arenas: The Global Export Crisis, The Refugee Crisis, The European Crisis, The German Export Crisis, The China Crisis, and The Russian Crisis.
He examines the extent of U.S. exporting and, contrary to the currently abounding rhetoric about America’s decreasing power/influence in global affairs and deleterious engagement in foreign trade, he highlights how the relatively diminutive engagement of the U.S. in foreign trade actually immunizes it from the current fundamental systemic world crises and will allow it to pursue its “imperial” power as the most stable world economy. Good news! The world is rotating…there is a fundamental destabilization of the Eurasian hemisphere while ours remains relatively immune. The full transcript of his remarks are included below.
UPDATE: George Friedman spoke to the World Affairs Council of Charlotte in 2015. He has been invited back for 2017.
George Friedman is founder and chairman of Geopolitical Futures, focused on explaining and predicting the future of international affairs for the public. Previously, he founded geopolitical intelligence firm Stratfor (Strategic Forecasting). Friedman is a regular contributor to discussions on international intelligence issues for major news and radio networks including CNN, Fox News, and NPR. He is the author of numerous books on warfare and intelligence, including The Next Decade; The Next 100 Years; America’s Secret War; and The Intelligence Edge.
The following is a transcript of George Friedman’s remarks at The Chicago Council on Global Affairs concerning Global Crises:
The Global Crises
The European crisis has intensified, and has been joined by a series of crises across the Eurasian land mass. When I say Eurasia, I mean Europe and Asia, from the Atlantic to the Pacific, from the Arctic Ocean to the Indian Ocean. It’s noteworthy that every significant part of that land mass, with the exception of India, is in fundamental systemic crisis. We have not seen a model like this really since World War II. This does not mean that I’m saying that we’re going to have a war, or anything else. I’m simply saying that the pattern is ominous.
It is not yet deep—in the sense of intractable—but it is broad. We need to understand why it’s that way, because the world has now taken an interesting shape. Eurasia—in chaos, or close to it, in Europe, in Russia, in China, in Central Asia, in the Middle East certainly. While north America, and the western hemisphere in general, is stable. Relatively stable, not perfectly stable. The great contrast that is developing in the world is the massive distinction between the two hemispheres, in the way, including Latin America, is behaving, and the massive distinction that particularly exists, between North America—NAFTA—and the various trade zones and alliance blocks in the eastern hemisphere.
This is a pattern that will not emerge and then go away in three years. It is a fundamental shift, and an understandable and predictable one I’ll try to make, that really ushers in a new phase of human history. In my book I published back in 2009, The Next Hundred Years, I spoke about the movement of history from Europe to North America. That North America was becoming the center of gravity of the international system, the stable pivot. This is part of that process, and as such, is extremely important.
When we look at this crisis, we need to understand the engines. Many of the engines are simply local. I’ll go through them later, but the EU is poorly founded, the Russians are vulnerable to the price of oil, the Chinese are going through a cyclical downturn as Japan did before it, and the Middle East is the Middle East. Each of them have reasons.
There is an underlying reason that this is intensifying, which I call the crisis of the exporters. For over a century, it has been assumed that free trade is a necessary boon and efficient exporters are in some way economically, and perhaps even morally superior, to poor exporters. What has happened, really since 2008, is a reversal in which heavy exporters have found themselves extremely vulnerable to shifts in the market, while those who are inefficient exporters are relatively immune.
Since NAFTA is a fairly inward-facing institution, it has an immunity which the outward facing entities, like the EU or China, don’t have.
The problem came about in 2008, with a massive downturn economically in the United States and Europe. For the United States it was a relatively temporary affair. For Europe it became a systemic crisis. The crisis’ prior problem was that Europe was China’s largest customer. Not Wal Mart, although close, it was Europe. China was at a particular delicate moment historically when this struck. It had dedicated itself to full employment. It maintained full employment by promiscuously lending money, so the companies wouldn’t go out of business. This lead to inflation, until goods manufactured in Mexico were cheaper than the goods manufactured in China. This was the beginning of this moment.
Its exports situation was already under deep pressure. When the appetite of the Europeans and the Americans for Chinese good contracted, what was a serious problem became a destabilizing problem. The Chinese economy depended on exports for cash flow to pay debts in a debt-based economy. People borrowed money not with equity, and don’t have to pay it back. Deeper than that, with that destabilization that was happening, you found a fundamental political one, that I’ll talk about.
One of the more interesting things is that the China myth, what I call the China bubble, really began exploding in 2010, 2011. But the lag between the time the global markets understood that this was the new normal of China—that China was not going back to that unique 20-30 years of extraordinary growth—when that was understood, everything would change.
I remember that Business Week, in 1993 published an issue on the Japanese economic miracle. 1993. Which is to say, not just the media, but the markets, and I don’t understand this, but I want to understand it someday, continue to believe, against all evidence, that China would maintain its consumption of raw materials, in spite of the downturn of exports.
There was a belief, when you questioned people, that this was a passing phase, and that China would return to what it was—an inability to understand this was not a passing phase, it was a secular shift in the way China worked.
A year ago it became obvious that this was not a passing phase. A number of statistics were published by the Chinese. On one occasion it was actually true. It emerged that they were in serious trouble. Suddenly the global commodity markets, all of them, absorbed the fact that China was not going to be pulling the engine, was not going to be pulling the train, and prices fell down. This had a staggering effect on, for example, Russia.
Russia, for various reasons I’ll talk about, is heavily dependent on energy exports to maintain its political system. Its entire domestic budget is built on oil prices. When oil prices fell down, they were smashed. We just published yesterday, a study on Saudi Arabia, and the decision to sell part of Aramco, to give the sense of how badly this smashed the Saudi economy. But it was not just them, it was also Australia and all of those that were heavy exporters. You had, in the past, mineral exports under pressure, but the industrial goods in good shape. Industrial good in good shape, mineral prices rising with them. You’ve never had a situation, that I recall, in which both mineral prices and industrial prices are under pressure, especially in exporting countries.
You have mineral exporters getting hammered, industrial exporters getting hammered. Everybody who exports is getting hammered. When we look around the world, and we see the export levels, we see that Russia exports 30 percent of its GDP, mostly in energy, China about 22 percent, Germany 46 percent, and that remains a story, and the United States 13 percent, of which 40 percent go to Mexico and Canada. Now we see the basic divergence. The United States is, relative to GDP, an inefficient exporter, and therefore, not subject to the appetites of its customers. Those who are heavy exporters are subject to those appetites.
You must always understand that when you are selling something, you have to have customers. If your customers can’t buy, and you’ve built your economy on the assumption of rising consumption, you’ll stagger. If you’ve built your economy around the idea that it will constantly sell minerals to exporting industrial countries, and they don’t have customers, it all cascades backwards. Let’s now take it each individually, and not look at this broader picture of destabilization, but let’s take a look at each country, at each region that’s in trouble.
The European Crisis
The fundamental problem of Europe is an attempt to take a country like Greece, and a country like Germany, and give them the same currency. Moreover, to leave in the hands of each individual country fiscal policy, while a central bank controls monetary policy, so there’s no coherence between the two, and have one country so overwhelmingly powerful—Germany—that it has the ability to set the regulations in Brussels, and the behavior of the European Central Bank, not because it’s a conspiracy, because if you don’t support the German economy, then it all comes tumbling down. You don’t have Europe. There’s no such thing, except as a geopolitical geographical expression.
The unemployment rate south of the Alps is over 20 percent, somewhere 25 percent. That is the same rate of unemployment the United States had during the great depression. The unemployment rate in Germany is four and a half percent. The harmonization of these economies is not possible. Therefore, on virtually every other issue, they are unable to act.
One of the funniest things I saw was, a decision on the part of the EU. I can’t figure out which commission, because there are so many. They would send help to the Greeks, to patrol their shores to keep people out—in June. Think on this. This is a paralysis. This is a paralysis built in by the system.
Bear in mind two things. There is a major crisis coming in the Italian banks, it’s actually here. Italian banks—and you have to desegregate region and everything like that—have non-performing rates of seventeen to 18 percent. I believe it is higher. You do not have 20 percent unemployment without a consumer debt crisis. This can’t be. The Europeans have not had a consumer debt crisis, which means they’re rolling over the debts in various ways so that they don’t have to register it. How can you possibly have that sort of unemployment without massive mortgage defaults?
Behind all this is the great bubble, Germany. Germany exports 47 percent of its GDP. I’m not good at arithmetic, so give me 50 percent, which means that every time it loses five percent in exports, it loses two and a half in GDP. Now losing two and a half of your GDP matters, but if you lose 15 percent of your exports, you’ve lost seven and a half percent. The point I’m making is Germany is on the edge of the volcano. It is a massive exporting power that has built its economy on the assumption of expanding demand for its goods, basically in the European free trade zone, and that can’t happen now. Its entire structure is based on that because domestic consumption can only be raised so much, when you have that much out there.
Other countries in this position, South Korea for example. Only Germany is the fourth largest economy in the world. So the size of the imbalance, relative to the global system, is massive. In a world, in which you have an exporters’ crisis, and one of the greatest exporters in the world, Germany, with a larger dependence on exports than China or any other country that you might name—the global exporter if you will, from a percentage point of view—has not yet had a decline, a significant decline of exports. When the absolute numbers of significant decline don’t fall, you have Japan in 1989. The margins have to be falling. They have to be, in some cases, negative. There’s only so long that Deutsche Bank can keep underwriting this, and it’s pretty much, I suspect, out of time.
In the meantime, what you have rising in Europe is the right. By the right, I do not mean brown shirts, but nationalists, people who are saying, “This doesn’t work,” while the Financial Times swears its working, because the northern European banks are in good shape. If you read the Financial Times, you read the voice of the European elite. The European elite still believes they’re having a banking crisis, rather than a systemic social failure, and that that systemic social failure is going to result in massive changes in regimes, and in the way regimes change. The tension that we see now between France and Germany is with a proEuropean government, which will not stay in power unless it does this. A Cameron is forced, if he’s going to stay in power, to call a referendum.
Even the moderate regimes that you see, have to tack away from the European Union. I don’t believe the European Union will fail. I believe somewhere, in some building, the League of Nations still has an office somewhere in Geneva. European institutions don’t fail, they just become gentile in their poverty. You already see precisely how Europe will fail. People will simply ignore what it says.
There is no immigration crisis. Europe is five hundred million people. We’re talking about one million, I can’t do the arithmetic, but it’s less than one percent. There is no reason the Europeans can’t handle it; they just can’t decide on what to do. What this distinction has done has paralyzed the European institutional systems. It has also lead to recriminations between government. Everybody knows that this whole thing is Hungary’s fault. Blame it on Hungarians this week. This is a crisis of such fundamental proportions at the heart of the world, Europe.
The Russian Crisis
The Russian crisis is much simpler. Putin was unable to transform the wealth of a hundred-dollar barrel of oil into a viable economy. He wasn’t able to because the forces that bought him the power, the FSB and the oligarchs, had to be satisfied in various ways. That money had to be diverted to support enterprises that—Rosneft for example—that had to be maintained. He never had the room to maneuver to divert that money to build something more substantial.
It now faces a catastrophic situation where the expectation of the Russians was $70 a barrel of oil at the bottom, and I don’t know what it closed at today, but it’s below that. The Russian federation works with money being transferred to the central government, the central government distributing it to the Oblast, the various regions. If the central government doesn’t have the money to distribute to the Oblast, well there’s no terror going on that’s frightening a governor to obey, he’ll go his own way.
In Europe, fragmentation consists of nobody paying attention. In Russia, fragmentation consists of nobody receiving benefits from the central government, and therefore pursuing their own interests in whatever direction it goes.
The China Crisis
In China, what we have seen is a cyclical crisis. You cannot sustain that level of growth permanently. No matter what Goldman Sachs said, it can’t beat the United States. You cannot start where they are, and in a sprint over 40-50 years, surpass a century-deep government. What you do is what Japan did. You reach a point where you cannot sustain it, and you reach a new normal. You’ve had a new normal in Japan. People talk about the lost generation. This was not lost from the Japanese point of view. They maintained full employment. They were feeding their people. There was not unrest. Only American investors felt it was lost. There were no opportunities. The Japanese apologize, but they hadn’t built their economy for Westerners to profit, but they were stable.
China cannot reach a new normal, because in China, by Chinese statistics, six hundred million Chinese, have incomes below $2 dollars a day, household incomes. Four hundred and forty million Chinese, have incomes of $2-$4 a day. China is an extraordinarily poor country, a fact you can miss if you fly into Pudong and have one of those dinners where you mortgage your house, and go to your hotel. If you go to China, rather than this American extension into China, Shanghai, you discover a country of enormous poverty.
This is where Mao Zedong took the long march. The long march when he went to Yanan and raised an army, and came back after two decades and shut down the country to create equality. This is where this holiday, people who have gone to Shanghai, or Guangdong, with dreams, went home, never to come back, let go from their jobs.
The issue here is not what is the Chinese stock market doing. It is an irrelevancy really to the entire thing. It is, what are these people going to do with shattered lives, in a country that has a tradition of Maoism, which is why you see Xi, desperately trying to expropriate that tradition of Maoism. He wants to own it, and then hone it in two ways. First, he is the heir. Second, he will strike at any organization that threatens him.
China has become a dictatorship, because the alternative in China is regional fragmentation. The real issue here is whether China returns to a form of Maoism, or whether it goes back behind Maoism to Regionalism. The Regionalism will be the Chinese communist party fragmenting.
Why? Because if you are in Shanghai, and you are making a great deal of money from your relationship to Apple, you have a greater interest in that relationship, than you have to Beijing’s latest demand for the transfer of money. Or, you’re so afraid of Beijing, that you’ll transfer the money. This is the great, not very sophisticated, but very great question of China.
Will the party committee in the coastal regions be more afraid of the secret police, or less afraid of secret police and more desirous for their relationship with the West? This, by the way, up until 1947, was the nature of China. These are the two Chinas. The China of Mao, and the China of Chiang Kai-shek and Sun Yat-sen. It is not self-evident that it won’t be one of these choices, but it is the least likely that it will return to the way it was for the past generation. There is no path back to that right now.
This is why Xi is conducting intense purges. He has discovered, to his shock, that there is corruption going on in China. That’s not the point. What he is doing is eliminating opponents, fragmenting elites that could rise up against him, and generally creating a sense of insecurity within the Chinese communist party, so that any fragmentation of the party won’t happen.
He is also, of course, playing a game in south China sea. That’s not a trivial game, but it’s not a serious one, however, it is designed to do exactly what the Russians did in Syria. Aside from whatever strategic benefits they had, Putin has 80 percent popularity. That’s no kidding. In the same way that George W. Bush was enormously popular in the first six months after 9/11, nations rally, and the Chinese nation will rally to a confrontation. Not two years’ worth, six months’ worth. What everybody is doing on that continent, that massive two continents, is playing with fire to maintain political stability.
The Middle East Crisis
In the Middle East, you have had the collapse of the states that Europe invented. Syria was an invention, Lebanon was an invention, Jordan was an invention, Israel was an invention, Iraq was an invention. They all had origins of sorts, but many of them—particularly Syria and Iraq—no longer exist. They don’t exist because at a certain point the United States decided it was not going to take responsibility, as the British might have, for the future of the region.
Not necessarily a stupid decision, but one with consequences. The consequence was, that the most natural force in the region, Islam, the most embittered force in the region, Islam, began to form new entities. This will sort itself out, as Lebanon did, because Lebanon is the example.
In 1970s, Lebanon fragmented, the national government collapsed, and Lebanon consisted of various fragments fighting each other. You now have the Lebanese model transferred to Syria and Iraq, and now the Saudis are desperately worried, because they themselves are a faction—the House of Saud—that came to power under British mentorship, if you will.
They look at the price of oil. They look at the stability of the royal family that expects to be paid. Of those not within the tribe, who also expect to be paid. They took to their crisis, and their frightened. Now you have flowing out of that, the Arabian Peninsula, itself on the cusp, to the point where the great triumph of the Saudis was the nationalization of Aramco. The crown prince raises the question; we might sell five percent. This is the equivalent of selling rugs out of your house to pay the rent, and it strikes at the heart of legitimacy of Saudi nationalism such as this.
We also see these crises merging. The European, Middle Eastern crisis on multiple levels, immigrants, terrorism, French/British fighters deploying to the region, nothing intense yet, but merging. The Russian-European relationship is merging, not just over the question of Ukraine, but certainly over the question of Ukraine, because that’s vital. The Russian-Middle East relationship is merging with the Russians intervening.
In the middle of this, note, one nation that intersects everything—intersects the European crisis, intersects the Russian crisis, intersects the Middle Eastern crisis—Turkey. Desperately trying not to get in, having no way to stay out. You will watch Turkey. One of the things I predicted in that book I had mentioned, was the rise of Turkey, not because there is a vast conspiracy, but because everything is going to fall apart around it.
The Europeans are now going to the Turks trying to make a deal on refugees. The Russians are shooting at them, and visa versa. The Americans are demanding that the Turks do something about Syria. Turkey.
But that is not the most important thing. The most important fact of the world is the United States exports 13 of its GDP, and effectively really about seven percent of its GDP outside. That makes the United States, who has always been criticized as being non-competitive, in an enormously comfortable position. It is also the United States that is withdrawing from this region, is not involved in Europe, is not involved in the Middle East the way it’s supposed to be, is playing Kabuki game with the Chinese. The Russians are a more interesting question of how we will play them. The United States now has the option of elective affinities.
It does not have to marry. It does not have to engage. It may withhold. This is not, incidentally, isolationism. It’s called prudence. This changes the American position in the world dramatically.
We all believe, because we’re Americans, that times have never been as terrible as this. This is a religious faith. There’s problems. But the relative position of the United States, compared to all other great powers, is incomparable. What has happened since 2008 was, that a stupid American idea, subprime loans, was bought by even stupider people in Europe. I always say that the guy who bought it is dumber than the guy who sold it. And that has pyramided. But if it wasn’t that, it would be some other thing. The entire eastern hemisphere, each of these countries was standing on a volcano. Whatever was going to set off the volcano, they were all going to fry.
The last time I saw a pattern like this was World War II. It was the last time that all of Eurasia was somehow involved in a destabilization. It is very difficult to imagine this turning into a war. For one thing, none of these countries have the energy for a war. By energy, I mean the sheer moral power to do it. You cannot ignore the fact that whatever subjectively I might think, the pattern is enormously ominous.
The most ominous part of this, and I’ll stop there, is this fact. I think the Russians are going to be very aggressive. I think the Russian Federation will go the way of the Soviet Union, for the same reasons: high defense costs, low energy prices. That took down the Soviet Union. That will, I think, take down Russia. When the Soviet Union collapsed, all nuclear weapons under American tutelage was transferred to the Soviet Union, so the Kazakhstan wouldn’t have a nuclear capability, which we all think is a good idea.
If the Russian Federation collapses, what happens to those nuclear weapons? The frightening thing about Russia is that it is a nuclear power, and if it fragments, something has to be done about it. There really isn’t anything that can be done. What do you do? That’s one fear.
The other thing to look at is the entire center. I haven’t talked about central Asia, but give me that. The center of the Eurasian land mass is being hollowed out. We see one country already emerging—Turkey. The real power, that has always been the dominant power in east Asia, Japan, is now beginning to sense itself. Poland, in most dealing with the Russians, or anyone else, is far more influential than Germany, who is paralyzed by fear of what happens to exports.
So, we are in a position where the world is rotating. The world always rotates. Everybody thinks that it will go back to the way it was; it never does. Those who understand that will fret more than others.
We are now at a turning point. Where the last time I came here and spoke to you about the inherent weakness of Europe, I now have to go to a broader picture: a fundamental destabilization of the hemisphere, while the other hemisphere—ours—remains oddly, but explicably immune. This becomes the real issue.
We are now the imperial power, if you will, in the sense of being the most stable, powerful country in the world. How do we handle this? What is there to be done? The answer is, I don’t know, but I will ask.
[Question and answer period follows.]
About Geopolitical Futures
Geopolitical Futures is a publication dedicated to predicting the future course of the international system. In doing so, Geopolitical Futures challenges two assumptions. First, that political leaders decide what they will do and individual actions can’t be predicted. Second, that there is no methodology for predicting non-quantitative events.
The fact is that political leaders’ decisions are not individual decisions made independent of external factors or domestic circumstances. Leaders come to conclusions based on the various pressures that are placed on them by the international system, as well as by internal political considerations. Having been shaped by their struggle to attain power, they follow a rational course of action when in power and, therefore, their decisions are predictable.
The second assumption, that non-quantitative forecasting is impossible, is untrue. Human beings make successful decisions daily based on non-quantitative models. The models are informal. Geopolitical Futures uses a formal methodology known as “Geopolitics,” along with other methods, to model how the international system is working and will evolve over time.
Collaboration is the New Competition
The Global South Metro Exchange held its first event in Greenville in July, branded “Collaboration is the New Competition,” sponsored by JPMorgan Chase, with support from the Brookings Institution. Multi-regional business leaders coalesced to focus on global competitiveness and to find synergies and opportunities for collaboration between Upstate South Carolina, Charleston, Atlanta and Charlotte, as a means of improving the global competitiveness of our collective region.
“The roads that connect Atlanta, Charlotte, the Upstate and Charleston—Interstates 85 and 26—are a physical manifestation of the many points of affinity between our markets, and the Global South Metro Exchange program aims to explore additional opportunities among transportation and logistics, trade and exports, middle market opportunities, workforce challenges, technology and innovation to ensure we’re working together to align the Southeast as an economic powerhouse where collaboration is the new competition,’” touted John Lummus, president and CEO of the Upstate SC Alliance and primary organizer of the event.
Together, business leaders and organization representatives from Upstate SC Alliance, the Charleston Regional Development Alliance, the Metro Atlanta Chamber and the Charlotte Regional Collaborative for a Global Economy examined their assets and explored their synergies for working together to boost the already booming growth of this southeastern U.S. region.
The event’s theme, “Collaboration is the New Competition,” is a driver to build relationships, explore best practices, and forge connections that support economic development activities across state lines. Discussion topics included globalization, transportation, free trade agreements, workforce challenges and opportunities, the Post-Panamax Ripple Effect, open technology and aligning export support with industry needs.
The keynote speaker, Marek Gootman, a fellow and director of strategic partnerships and global engagements at the Brookings Institution Metropolitan Policy Program, examined the opportunities for the Southeast region to look inside its borders to see if the competitiveness of the region as a whole exceeds the competitiveness of the individual states, cities and localities.
According to Gootman, within the larger Southeast region are a multitude of unique assets and networks including, but not limited to large businesses, small and medium businesses, chambers of commerce, economic development agencies, schools and colleges, an expanding workforce as well as the infrastructure. Numerous other areas within the United States are already focused on their collective opportunities.
These regions seek identities that include:
- Leadership with a World View
- Legacy of Global Orientation
- Specializations with a Global Reach
- Adaptability to Global Dynamics
- Culture of Knowledge and Innovation
- Opportunity and Appeal to the World
- International Connectivity
- Investment for Strategic Priorities
- Government as a Global Enabler
- Compelling Global Identity
Gootman asked, “Could the major metropolitan areas of the Southeastern U.S. leverage complementary economic assets, industry clusters and global identity to better compete and attract commercial attention internationally?” He encouraged developing a list of Global Trade Assets, Global Innovation Assets, Global Talent Assets and Global Infrastructure Assets.
Gootman examined the Southeast region itself, noted the proximity and connectivity of Atlanta, Greenville, Charlotte and Charleston, and suggested that the assets offer substantial new avenues for growth. Topics addressed included comprehensive regional/state economic strategies, exports and foreign investment, infrastructure, innovation, workforce, finance, and governance.
At the Brookings Institute, Gootman focuses on bridging think tank perspective with real world action to increase the vitality of cities and metropolitan areas. His activities involve policy development, demonstration projects, peer learning networks, and external relations. He engages public and private partners in more than 30 metro areas and 20 states, as well as national interests, to advance adoption of the program’s ideas. He also leads the Global Cities Initiative, a five-year, $15 million project to help U.S. and international metro areas strengthen their global economic connections and competitiveness.
“The Charlotte Regional Collaborative for a Global Economy is delighted to participate in the Global South Metro Exchange,” commented Michael Almond, Executive Director. “Our collaborative is a consortium of the 15 community colleges serving more than 3.5 million people in 29 counties in North and South Carolina. We are ‘community colleges providing leadership for global commerce’ in the greater Charlotte region, an integrated and interdependent region that is the economic heartbeat of the Carolinas.
“We are committed to regionalism as the driving force behind economic growth and development. We firmly believe that by working together collectively as a team, we can together accomplish more for the benefit of all of us than any one of us acting alone. And we are proud to support the contribution that the Global South Metro Exchange will make towards sustaining and enhancing our global competitiveness now and in the future.”
“The Metro Atlanta Chamber believes that competitiveness is not solely the prerogative of one metro area,” remarked Jorge Fernandez, Vice President of Global Commerce of the Metro Atlanta Chamber, “but instead is something that is enhanced by a regional approach. The metro Atlanta region can present a stronger global position when we leverage the assets and connectivity of our surrounding regional metros. As such, we are delighted to be a part of the Global South Metro Exchange.”
“The Charleston Regional Development Alliance and World Trade Center Charleston proudly represent the Charleston metro region in supporting the Global South Metro Exchange,” added David Ginn, President. “In the global marketplace, there are clear benefits for metropolitan areas with similar assets, goals, and economic drivers working together as super-regions to collaborate on shared opportunities and challenges. The Charleston metro’s economy ranks among the Top 20 in the nation for advanced industries and Top 10 for FDI. We look forward to building relationships with other top southeastern metros to ensure this strong economic progress continues for years to come.”
CLT Airport Strategic Plan Moves Forward
MXD First Draft Study Coming Out This Month
Charlotte City Council approved a $900,000 expenditure of airport funds for a consultant study as Charlotte Douglas International Airport creates a new master plan to guide future development on the land surrounding the airport.
The purpose of the study is to maximize the opportunity surrounding the fifth busiest airport in the U.S. with a major intermodal center and Charlotte’s unique location midway along the East Coast between New York and Miami. Charlotte is served by two Class I railroads with access to four major ports within four hours and a network of highways. The purpose of this study is to lay out options for growth and development on the 25-mile radius around the airport.
MXD Development, out of British Columbia, will be looking at comparable airports around the world to determine the highest and best use opportunities for Charlotte. MXD has conducted similar studies for Denver, Memphis and San Francisco, as well as international airports in Canada, China, Australia and Russia. They will be considering projects including residential, commercial, industrial, logistics, warehousing, hotels and restaurants.
The effort is being led by the airport’s development director, Stuart Hair. Aviation Director Brent Cagle says, “This project is the refreshing of a 15-year-old development plan,” adding that most of the efforts in that plan are now completed. The airport is reaching out to a broad list of stakeholders and economic developers as well as the surrounding community for input and recommendations.
MXD is about at the midpoint of their study. Preliminary findings have been captured and a first draft of the report is due by the end of August. Completion of the study is expected by the end of 2016.
The River District, a mixed use project being proposed for development by Lincoln Harris and Crescent Communities just off West Boulevard west of I-485, is scheduled for a hearing before the zoning board on August 22, 2016, with final determination expected early this fall.
Obama and Clinton in Charlotte
Targeting North Carolina as a Key State
It was a remarkable day July 5, 2016, when I attended the political rally that had an admittance line over six blocks long. Both President Obama and Hillary Clinton traveled to campaign in Charlotte. They attended a Democratic rally of over 3,000 faithful at the Charlotte Convention Center and then made a quick stop at the Midwood Smokehouse in Plaza Midwood for barbecue and brisket along with the fixins to take home. This was the first campaign trip for President Obama with former Secretary of State Clinton since she clinched the Democratic nomination.
This Charlotte event was planned so that this joint appearance would become the first public event to follow the morning media conference called by FBI Director James Comey to report on the FBI investigation of the Clinton emails. His account included a summary of the emails that had been collected along with the numbers of classified email chains that were not marked appropriately.
Comey went on to say that the Secretary and her staff were extremely careless and that they had mishandled classified documents. Nevertheless, he stated that it was FBI judgment that no reasonable prosecutor would bring such a case with the evidence and research they had gathered. He said the FBI felt that “no charges are appropriate in this case.”
So, why were Obama and Clinton in Charlotte? First, this event was meant to provide some public relations cover to offset the FBI report. Secondarily, but perhaps more important in the long run, they were here because North Carolina has been a swing state in recent years.
In 2008, the state went for Barack Obama to become President; and in 2012, the majority of N.C. voters went for Mitt Romney. Having held his second nominating convention in Charlotte in 2012, President Obama would like to boost Hillary Clinton’s chances of winning North Carolina in this election. While President Obama is at the end of his second term, he would like to see his legacy carried forward by Hillary Clinton to top off his accomplishments.
The third reason for this trip was clearly to capture video of the two campaigning side-by-side for future political ads to be run across the country to increase turnout for Democrats.
Hillary Clinton spoke first and talked about her admiration for President Obama as a colleague in the U.S. Senate, as a competitor for the Democratic nomination in 2008, as a debater in the midst of that race, as a team member in President Obama’s cabinet as Secretary of State, and finally as a friend. She remarked how impressed she was with his performance through some very tough times. With the presidential seal on the rostrum in front of her, she committed to carry on and to go forward from his leadership to the country.
Then, she turned to podium over to President Obama. The president addressed a litany of issues from economic policy and job creation, deficit reduction and budget management, foreign relations and America’s stature in the world, health care reform, climate change and reform, and also energy production.
As I was looking on, it was clear that each issue that he addressed could be a clip in a political spot in support of Hillary Clinton. I am confident that we will see campaign commercials that will exhibit one or more of his comments. It was important for the campaign to capture these comments before the Philadelphia convention, so that the commercials can be prepared for the three months preceding the election.
The mechanics of this event were very well managed. You could see that the advance team had everything set up to make the most of this opportunity. Held on the lower level of the Charlotte Convention Center, it accommodated three to four thousand people. The speaker’s platform was situated in the middle of a 360-degree setup so that the President and Clinton would be surrounded by fans from all angles.
The signs, flags and slogans were appropriately placed so that the cameras could not help but capture both the speakers and the American flag with the brand new slogan “Stronger Together,” maximizing the impact of the audience and the layout of the set.
It was standing room only. the crowd was hyped by music and drums and speeches from Roy Cooper, Democrat for Governor, and Deborah Ross, Democrat for U.S. Senate, and others. While the room was cool before the speeches started, it soon warmed up. Before the end, I saw several people helped or carried out from heat exhaustion. It was jam-packed to make it a rousing rally.
With North Carolina in play for both Republicans and Democrats, we can expect more visits from both of the candidates.
Photo taken by Jim Froneberger.
If you have comments, questions or concerns, we would like to hear from you. You are invited to email me at email@example.com. Thank you.
Trump Heeds Advice from Former Nucor Exec
GOP Economic Strategy Takes Shape
Did you notice? On June 28, Donald Trump took a serious step forward by turning his comments to the economy and jobs by way of criticizing our free trade agreements. On Monday, August 8, Trump addressed the Detroit Economic Club and presented an updated economic recovery message that adopted the budget and tax proposals from the GOP majority in the House of Representatives.
Trump has obviously been taking instruction from his “advisers.” One important adviser on his economic team is Dan DiMicco, former head of Nucor Steel and now chairman emeritus, from right here in Charlotte. Dan has been outspoken with his disdain China’s “dumping” of steel into the U.S. He has also spoken against the North American Free Trade Agreement (NAFTA). Both items were elements of Trump’s speech yesterday.
Even though Hillary Clinton has also articulated these concerns, it was more dramatic to hear Trump combine three sentences on economic trade that strike an important cord in economic policy.
It is important to remember that every trade agreement has winners and losers. Trump’s promise to renegotiate agreements must be measured by whose interests he intends to protect and push forward and whose interests get left behind.
Now we will need to watch and see whose interests he and Hillary choose to represent in their policies going forward. We have more to learn. This is why our democracy has worked so well. It is not just the votes that count. It is the campaigns and what candidates learn going through the process and their education.
Keeping Pace with Market Trends
Now that “normalcy” has returned to the Carolinas real estate market after the Great Recession, the region is poised for accelerating growth for years, says CEO Pat Riley of Allen Tate Co., despite issues of new home affordability and a likely brief, cyclical recession in 2019. Construction labor is slowly coming back, materials are off-the-chart expensive, and land is back at pre-recession prices per acre. So new homes are now 15 to 18 percent more expensive.
A+ Difference: People, Vision Stength
Allen Tate Keeps Pace with Market Trends
Now that “normalcy” has returned to the Carolinas real estate market after the Great Recession, the region is poised for accelerating growth for years, despite issues of new home affordability and a likely brief, cyclical recession in 2019.
According to Pat Riley, president and CEO of the Allen Tate Companies and a former chairman of the Charlotte Chamber, the Interstate 85 corridor between Raleigh and Greenville, S.C., continues to attract a high number of corporate transferees, from young workers to retirees, who are looking for housing.
Charlotte is a Beacon
“Charlanta, the I-85 corridor, right now is the fourth most productive region in the United States and the 11th most productive region in the world,” Riley touts. “The 11th in the world, the fourth in the United States, the same gross output as the entire country of South Korea.”
“We don’t compete against the Triangle, the Triangle doesn’t compete against Charlotte, and we don’t compete against the Upstate. We don’t have what the Triangle has, the Triangle doesn’t have what we have, and we don’t have what the Upstate has, but together, we are a compelling story to the world.”
Raleigh leads the top cities for STEM (Science, Technology, Engineering and Mathematics) graduates. On the I-85 corridor, Chapel Hill-Durham is the only area below the U.S. rate in employment growth. The Charlotte region leads in employment growth, with the arts, theater, sports, food and entertaining and institutes of higher learning, which makes it attractive for young people looking for work and a place to establish themselves.
“Young folks are not buying until they’re sure about employment,” Riley says, adding that delaying marriage is an added factor. “They will come to the Carolinas and tend bar until they find a job. We’re just like Austin, we’re just like Nashville.
“They would rather come to the Charlotte region as a single person than stay in the Triangle. They might go back to Cary when they’re ready to settle down, but the reality is we are beacon for young people right here where you and I sit.”
The region is also second only to Florida in attracting older workers and retirees.
“We know about corporate moves, but there’s another move that nobody is keeping stats on and that’s the number of folks coming here to follow grandkids and kids, and coming here for second careers and to retire. Florida is the golden egg—it still leads the country—but the reality is we are the best alternative because of our cost of living and proximity to the mountains and beaches, quality medical facilities and big city amenities.”
Recession Bigger Than In-migration
Riley remarks that the population increases had made him overly optimistic about Charlotte’s resistance to recession in 2008.
“I had thought that we would not be participating in this recession,” he recalls, “that we were not ready to participate because of in-migration. Folks were coming here, 30,000 a year, right through the recession. But I was so wrong. This was much bigger than in-migration.”
Since World War II, Riley says, such bubbles in the housing market had been limited largely to the West Coast.
“All of a sudden, the roaring 2000s happened and we became part of what happens in California every 10 years,” Riley observes. “We used to snicker, ‘There they go again.’ San Francisco is up, then the bubble breaks and then it goes back down. And we, especially on the East Coast, said, ‘We’ll never participate in that.’ Well, the whole country participated in that phenomenon this time around.”
Allen Tate Co. had $4.1 billion in sales in 2004, and $5.71 billion with 24,500 closings in 2006. The housing market was on fire.
The rapid rise in housing values, encouraged partly by government efforts to increase home ownership, allowed folks to own a home that should not have. It also led many people to borrow against their home equity at unprecedented levels.
“What happened is homes went up so fast that our friends in the banking industry said, ‘You know what? What do we care if we lend people’s equity back to them? What do we care? If a home is going up 5, 10, 15, 20 percent a year, what do we care? What’s our risk?’” Riley explains. “So what we had for the first time in history, we borrowed the equity in our homes for this, that and everything.”
“That was solace for our old age. We gave that away. It was in some cases what we needed for a rainy day; we gave that away. So it was a double-edged sword because for the majority of Americans, their wealth is in their homes. It’s forced savings. That mortgage payment? So much goes to principal, and we’re not, as Americans, good savers. That’s why the mortgage was our safety net.”
Changes in lending practices, a downturn in the stock market that made real estate a more attractive investment; and record-low interest rates fueled the perfect storm. In those heady days, among other things, Allen Tate sold 331 condominiums in five weeks in a single Charlotte development.
“This was the perfect storm,” Riley comments. “The stock market went from 19,000 down to 8.5, 9, and what did we all do? We ran. We ran from the equities and where did we run? We ran into real estate. If we were wealthy, we were down in Naples, buying two condos instead of one. International money was coming into the four corners of America because they saw appreciation of housing and said, ‘Where can we have safe money in America?’”
The recession dramatically slowed home sales except in cases of necessity, such as death, divorce, relocation, or foreclosure, who would sell even when their homes were devalued.
“We were dancing for survival,” Riley recalls. “The only people who moved had to move.” Our company once had 51 offices—building wherever Harris-Teeter or Target identified a desirable demographic.”
We’ve consolidated to 37 offices in 2009, but since added four locations, for a total of 41 locations today across the company’s footprint in North and South Carolina.
Post-recession and Pent-up Demand
The post-recession economy is dealing with pent-up demands on several fronts, including the older Silent Generation that delayed moves to downsized housing because their longtime, paid-for homes’ values were depressed in recent years.
“They needed to move to assisted living or independent care,” Riley explains. “But they didn’t sell their homes, and we—as their kids—advised them not to because the homes were at the lowest values they’d ever been, so they didn’t make those moves.
“So that generation now is really active, and we as their kids should be pushing them to get to where they need to be. You can see from the facilities being built up and down our roads and highways that we are fertile ground for this type of housing.”
On the other end of the spectrum, the Millennials have delayed marriage and childbearing into their 30s, partly because of a bleak job market, high student loan debt, and the experiences of their parents’ divorces and job losses.
Millennials now make up 36 percent of the buying market, but they have been late to the dance. Historically, this age group would now be in their second or third home, not buying their first. Their delayed buying set up a nine-year gap, including the recession, before the typical pattern of a starter home followed by move-ups even began.
But the younger cohorts of this generation, in their early 20s, are making a different decision—buying a home as soon as possible.
“They’re not waiting,” Riley remarks. “They might not be in a long-term relationship; but as a single person, they’re buying. They want to get on this ownership bandwagon as soon as possible to take advantage of the appreciation that’s out there, as well as low interest rates.”
Providing affordable housing for that market is especially challenging because of increased expenses within the industry, in addition to tighter lending requirements. Labor, materials and land are all at or near record costs. And the appraisal lag of needed comps has been a drag.
“The headwind for young adults for home ownership is as strong as it’s ever been,” Riley points out. “For the first time in history, labor for new homes is at an all-time high. We lost a lot of our construction labor, a lot of it, and it’s slowly coming back, and materials are off-the-chart expensive, and land is back at pre-recession prices per acre. So new homes are now 15 to 18 percent more expensive than the same house down the street.”
Buyers have often paid premium prices because they wanted builders to provide modern features such as open floor plans, hardwood floors, outdoor living space, and connectivity, but many are now experiencing sticker shock at the price gap with older homes.
“When prices went down double-digit, what do you expect when the market gets better?” Riley asks. “They go up double-digit. The only persons that got hurt in the recession were the people who bought in 2007 or 2008 at the peak and had to sell in 2008 or 2009. The rest of us are back, and probably ahead unless we haven’t maintained those homes.
“Everybody’s predicting a 5 percent appreciation rate again this year. This is higher than we anticipated because historically since World War II, it’s been about 3.5 percent. So we’re still ahead of history, and that’s caused by lack of supply.
“We’ve got to get back up to that 1.5 million new home starts in America. We’re jogging; we’re not sprinting. We can’t get the land developed quickly enough. We can’t get through the permit process quick enough, and we can’t get the labor that we need, so it’s going to lag a little bit from demand.
“Let’s be really candid. Part of the inventory shortage is because the Baby Boomers are downsizing much, much later than earlier generations. While this will boost the condo market in the future, it’s a huge cause of lack of inventory.
“We’re starting our six-year, eight-year, 10-year trek,” Riley says. “We Boomers are much later than generations before us in downsizing, because we’re healthier and we’re living longer. We’re still out there playing and exercising and thinking that we’re in our 30s. We’re not ready to downsize yet. We are just starting our downsize trek. That’s why the inventory gap will diminish over time. We are just slow to the draw.”
Recovery With Reservation
However, many Boomers are remodeling to enjoy the upgrades now that will be necessary when it becomes time to sell, comments Riley.
“The condo market is typically the first one into a recession and the last one out. Lenders don’t like to lend on a condo project unless 40 percent of a building is owner-occupied. A lot of these towers that are built for conversion will convert in the next couple of years because there is a thirst for a home in the mountains or at the beach and a home here that I can lock and go visit my grandkids in whatever city they are, or to my getaway home. The future of condos is strong if they get built.”
With more than 80 percent of homeowners holding mortgages at very low interest rates, the decision to buy another house might become complicated if interests rates rise as expected.
“Never before in history have so many Americans been sitting in a home with mortgage rates of less than 4 percent. We have never had that. I don’t even know how it’s going to play out,” Riley muses.
“I hear the back-and-forth, ’Honey, we have a mortgage at 3-5/8 percent. Should we really buy this house at 7 percent?’
‘Seven is a point lower than the historic average since 1950 of 8 percent. Seven is great and we can still deduct the interest.’
‘But do we really need this extra bedroom? How big do we need this extra fireplace outside?’
“There’s going to be some discussions when you’re leaving rates under 4 percent. It’s going to be interesting how this plays out,” Riley says, more than a little curious.
Riley says that experts expect a cyclical recession in 2019 (similar to 1990 and 2000) as the government may have to raise interest rates to curb another inflation cycle. But it will last only about 18 months and not be in any way similar to the 4.5-year recession that started in 2008.
“What they’re figuring now is that by 2019, we are going to be in an inflation cycle again, and the only way America knows how to slow it down is to raise interest rates, slow down housing,” he explains. “Housing always goes in first. We always go in first—we’re the first one out, but we’re the first one in when it comes to a recession, and everything else follows.”
Last year, the firm had $5.16 billion in sales on 21,595 closings, the third best in its history. Riley expects another increase of 5 to 6 percent this year.
The improvement in real estate sales is occurring even though new housing starts are still far behind pre-recession levels.
“We used to do a million and a half new homes a year in America,” Riley says. “This year, we’re probably going to do 750,000. We’re millions of new homes behind in America. We are thousands short in our region.”
Riley summarizes the company’s performance: Allen Tate achieved near-record sales in 2015 with far fewer new home purchase opportunities and in a tightened lending environment. In the past two years, only one-fourth of buyers were putting down 3 percent or less—nearly twice that many were making such small down payments in 2009.
“This is doing it the right way, but this is also showing you how healthy the market is where you and I choose to live, work, and play,” Riley comments. “It’s a beautiful thing.”
Allen Tate Co., Inc.
6700 Fairview Road
Charlotte, N.C. 28210
Principal: Patrick C. Riley,
President and CEO
Recognition: Largest real estate company in the Carolinas; ranked #6 among the country’s largest independently owned, non-franchised brokers, and #13 among all brokers, based on closed transactions sides for 2015 (REAL Trends 500)
Business: Residential real estate and real estate-related services.
Turning Dreams into Reality
John Andrew Tammaro II, President and CEO; Gus Pappas, COO; Alan Simonini, Advisor (founded predecessor company in 1994)
Simonini Homes is serving the market with homes and whole neighborhoods designed to blend into traditional communities like Myers Park and Eastover while providing the sought-after livability of modern floor plans. Advisor Alan Simonini describes how people are used to nice things but want to downsize. He says, “I take great pride in making homes that look like the neighborhoods they’re going in. They fit right into the fabric of the neighborhood.”
Simonini Homes Turns Dreams into Reality
As Charlotte’s economy diversifies and recovers from the Great Recession, Simonini Homes is serving the market with homes and whole neighborhoods designed to blend into traditional communities like Myers Park and Eastover while providing the sought-after livability of modern floor plans.
Alan Simonini, who started building top-quality homes in Charlotte in 1994 and now is an advisor in the firm, achieved his excellence goals years ago—the National Housing Quality Gold Award (2002 and 2010), America’s Best Builder (2003), Builder of the Year (2006), and induction into the William S. Marvin Hall of Fame for Design Excellence (2010).
He’s still building on that experience, from new single-family homes and upscale renovations to high-end multifamily housing, luxury town homes in some of the city’s most prestigious zip codes. His accomplishments include City Homes on Kings Drive, Dilworth Crescent, and Stephens Square (named for the founder of Myers Park). Current projects include Lombardy City Homes, SouthPark City Homes, and the most recently announced 19 townhomes on 1.5 acres at Sharon Amity Road and Woodlark Lane.
“We’re known for our custom homes and renovations,” Simonini says. “But we also work for other developers to start developments from scratch that are in our area and price point. We’ve also been hired by some developers to fix and finish some stalled neighborhoods. Instead of building just one custom home, we’re building a whole neighborhood of homes. We’ve got a track record of that.
“We’re at a higher price point,” Simonini continues, “ranging from $500,000 to $1.5 million or more for homes from 2,700 to 5,000 square feet, with lot sizes from one-fourth to one-half acre. That’s why we typically do neighborhoods that are infill or gated or lakefront or golf course, because that’s where the more expensive homes are.”
Design and sales expertise give Simonini Homes an edge, he says. The firm has a complete design studio on Morehead Street where customers can choose their design preferences.
“That’s how we are different than most other custom builders in Charlotte,” Simonini says. “We have the designers and the salespeople. When somebody buys a home from us or does a renovation job with us, we’ll get the house designed for them, we’ll get the plans drawn and priced, we’ll do all the interior design they want. We can do a neighborhood because we have salespeople in the model who sell that neighborhood.”
Contemporary Inside, Classic Outside
These days, the typical desired interior design is a significant departure from the old days of formal living and dining rooms with L- or U-shaped kitchens. A common floor plan involves a big kitchen with a big island that includes seating, a family room, a family dining room, and an outdoor covered living space, all connected and flowing together.
“All of our houses have this module today,” Simonini says, adding that the style has arisen since 2006. “It’s a space that is comprised of where you live. It is a big kitchen with an island, so you’re not trapped by an L-shaped kitchen or a U-shaped kitchen, which is typical of years past. The kitchen becomes part of your living room.
“The kitchen looks right into the family room and the family dining room, which is the same size as a traditional dining room but it’s attached to the main part of the house. That creates one big rectangle, and they’re all interconnected. That’s where you spend 90 percent of your waking hours in the home.”
Depending on the floor plan, the family room might be 20 by 20 feet, the kitchen 18 by 15, the dining room 12 by 14, and the outdoor space 12 by 20. The outdoor space, accessed through sliding glass doors, can be used comfortably for about eight months of the year; some owners add heat sources for extended use.
While the floor plan is a break from the past, Simonini is committed to harmonizing with the traditional look and feel of the established communities where he builds infill housing on cleared tracts.
Years ago, he noticed that a California-inspired community of stucco homes in Charleston was not selling well; when Hurricane Hugo destroyed the subdivision, the traditional Charleston look replaced it and flourished.
“It was a lesson to me,” Simonini explains. “I said I’m never going to build something that doesn’t look like Charlotte. I take great pride in getting homes that look like Charlotte and look like the neighborhoods they’re going in. Those duplexes and townhomes look like they’ve been there a hundred years. They fit into the fabric of the neighborhood.”
When he started the Heydon Hall subdivision near Quail Hollow Country Club, before the recession, Simonini took pictures of his favorite homes in Myers Park, Eastover, and Dilworth and told the designer to make the new homes look like that, with modern floor plans. More contemporary designs can fit downtown or near SouthPark, he says.
Pursuit of Quality
Simonini, who grew up in Chicago, attended Culver Military Academy in Indiana, and earned a degree in biology at Arizona State University, got into the building business after his father, Alfred, who had retired from a family business, moved to River Hills Plantation and started building a few homes for sale.
“Back then, the builders didn’t finish the house and do what they said they were going to do, not on budget or on schedule,” he recalls. “I saw an opportunity to do something different. I went in business for myself and brought in a business partner who kind of ran the business, Simonini Builders.
“We decided to go for being a National Housing Quality award winner and America’s Best Builder, so we set about the process of doing that.”
When their first few applications were turned down, the pair of entrepreneurs studied the detailed comments and learned from them. Simonini says simply, “We improved those things.
“We got to be known in our industry around the country as having really high customer service ratings,” he touts.
However, the recession that devastated the housing industry nationally hit Simonini Builders hard. The company built 122 million-dollar homes in 2007, two in 2011. Fortunately, renovation work held steady.
“That business never really slowed down much during the recession,” Simonini says. “It was a bridge—we had the renovation work going all the way through there, so we didn’t go completely out of business.”
In response to the downturn, the owners divided Simonini Builders—Simonini remained with Simonini Homes in 2011, another part of the business became Classica Homes, and his business partner became a developer-broker for another builder.
John Tammaro, who earned a degree in building construction management from Purdue University in 1998, is president of the company. Gus Pappas, who has a degree in mechanical engineering and Spanish from N.C. State University and an MBA from UNC-Charlotte, is chief operating officer.
Last year, Simonini Homes did about 20 new homes and 20 renovations; Simonini says they expect to do 30 new homes this year, including townhouses. About half the firm’s 30 employees work in new construction, half in renovations.
“I wouldn’t say it’s coming back,” Simonini says. “I’d say it’s improved from the bottom. It’s not back, but we’re doing fine. We’re happy.”
Among other things, the firm has several homes under construction in Foxcroft and at Lake Norman, and plans are taking shape for a new townhome community in Cotswold. Demand is rising as a recession-triggered oversupply dwindles to undersupply because so little was built for years.
“It’s been a while of no building, so that’s kind of been absorbed,” Simonini says. “The market of available homes for sale has really shrunk a lot in Charlotte. The existing homes, there’s not very many on the market relative to the past. Not many, if any, are built on speculation, so there’s a limited number of new homes for sale.”
Choosing New Construction
Simonini Homes’ market is typically mature families with high school or older children, empty-nesters, divorcees, retirees, or young professionals with two incomes and no children.
“Our buyers are typically older because of the price point,” Simonini says, adding that among other things, they don’t care about the house’s school district. “The buyers used to be three-fourths from out of town—people moving here with the banks and businesses moving to Charlotte. Now it’s half the people. We’ve replaced some of the banking with the energy sector here in Charlotte. We have doctors moving here; the hospitals hire a lot of people. We’ve built a lot of doctors’ homes.”
Customers often choose to build when they see the total cost of purchasing and renovating an existing house.
“People look at a house that’s an older home,” Simonini says. “They almost always need some renovation. People are paying the market price for their home and then having to renovate it. Only a portion of what they spend renovating it goes to adding value to the house.
“Price is on a per-square-foot analysis. If you just redo the kitchen, you don’t get 100 percent of your money back; if you replace the roof, you get nothing back. There are a lot of things you do in a renovation, like replace the pink bathroom tile with white, where you don’t get your money back.
“People look at that versus building a new house. A new house becomes a little more attractive when you look at the old house plus the renovations, then the new house makes more sense a lot of times.”
While Simonini is building houses 5,000 to 8,000 square feet, in places like Foxcroft and Lake Norman, some buyers are downsizing but determined to maintain quality even when they reduce quantity of space.
“They live in a nice home in a nice neighborhood; they’re used to nice things,” Simonini describes. “They’re not willing to give up the nice things, but they may be willing to have a home half the size of the one they’re in.
“Perhaps giving up formal areas and a bedroom to go from 6,000 square feet to 3,000 or 4,000,” he points out. “They’re not willing to give up any of the finishes they had in their old house—hardwood floors, moldings, granite or marble countertops, nice hardware, solid doors.”
Newly-constructed homes are also energy efficient, environmentally friendly, low-maintenance, and more comfortable because they filter outside air into the space to compensate for the tight defense against outside weather, and because builders use water-based paints and other materials that do not emit the toxic gases of past construction.
“We’re not putting anything that can rot on the outside of the home anymore,” Simonini says. “The wood has been replaced with wood substitutes. The houses are all Energy Star, so they’re very energy efficient. They’re healthier to live in.”
In whole neighborhoods that Simonini develops, the yard maintenance is usually provided by the community—a practice that started before the recession that yields pleasant, uniform landscaping.
“In almost all our neighborhoods, your lawn is taken care of by the same person for the whole neighborhood,” he says. “You can augment that if you want, but your basic lawn care is taken care of by the community. If you want to have our own English garden or a vegetable garden in the back, that would be your responsibility.
“Everything looks uniform. Everybody’s yard is mowed at the same time. The neighborhood looks really good. This is another advantage of developing neighborhoods. It’s rewarding. People love living in them.”
Simonini Homes LLC
501 E. Morehead St., Suite 4
Charlotte, N.C. 28202
Principal: John Andrew Tammaro II, President and CEO; Gus Pappas, COO; Alan Simonini, Advisor (founded predecessor company in 1994)
Business: Construction and renovation of high-end homes, neighborhoods, and multifamily communities