Matt Stoller is trying to wake up America to another crisis already baked into the cake. After reading his article (excerpts below) my view is simple, wall street greed is guilty of treason.
In military studies, we simply learned that the instrument of economic power was one of instruments of the national power along with the military. That was as deep as it went.
I never imagined that this instrument of US power would undermine our military capabilities. But when we consider the culture of greed that dominates finance versus the culture of mission and people in the military, we should not be too surprised.
While I’ve ranted that financialism of the US economy is destroying our future retirement security, I now realize the same Political-Financial Complex also decimated the Military-Industrial Complex and with it our future national security. All in the name of short-term wealth extraction.
The de-industrialization of the US economy not only transferred skilled blue collar jobs to China, we transferred the know-how in manufacturing and research to sustain our military capabilities. We transferred our industrial capacity to maintain our military and shockingly much of the industry left at home is now owned by Chinese shareholders.
The age of wealth extraction is not just about wall street skimming profits or corporations engaging in buybacks over investing in the US economy. It includes engineering monopolies to extract from military spending and sending vital industrial production to China seeking short term profits.
One last thought. President Trumps first “economic” adviser came from wall street – Goldman Sachs. He pushed through tax cuts that predominantly went to the billionaire class and little of this money is being reinvested in the US. He quit over disagreements over policies that targeted China – he wanted to maintain the status quo.
The article is excellent and damning, here are some excerpts:
The American Conservative: America’s Monopoly Crisis Hits the Military
…In short, China is becoming a significant shareholder in U.S. industries, and is selectively targeting those with strategic implications.
Congresswoman Shea-Porter’s discovery that defense industry CEOs aren’t able to worry about national security because they “[have] to answer to [Chinese] shareholders” was disturbing enough. But the fact that it potentially translates as CEOs not being able to worry about national security because they have to answer to the Chinese should elevate the issue to the top of our national security discussion. This nexus of China, Wall Street, and our defense industrial base may be the answer to why our military advantage is ebbing. Even when American ingenuity can thrive, too often the fruits go to the Chinese…
This story of lost American leadership and production is not unique. In fact, the destruction of America’s once vibrant military and commercial industrial capacity in many sectors has become the single biggest unacknowledged threat to our national security. Because of public policies focused on finance instead of production, the United States increasingly cannot produce or maintain vital systems upon which our economy, our military, and our allies rely. Huawei is just a particularly prominent example…
American policymakers, unconcerned with industrial capacity, allowed Chinese companies to capture market share despite the predatory subsidies and stolen technology. In 2006, French telecom equipment maker Alcatel bought Lucent, signifying the end of American control of Bell Labs. Today, Huawei, with state backing, dominates the market…
The erosion of much of the American industrial and defense industrial base proceeded like Lucent. First, in the 1980s and 1990s, Wall Street financiers focused on short-term profits, market power, and executive pay-outs over core competencies like research and production, often rolling an industry up into a monopoly producer. Then, in the 2000s, they offshored production to the lowest cost producer. This finance-centric approach opened the door to the Chinese government’s ability to strategically pick off industrial capacity by subsidizing its producers. Hand over cash to Wall Street, and China could get the American crown jewels.
The loss of manufacturing capacity has been devastating for American research capacity. “Innovation doesn’t just hover above the Great Plains,” Mottl said. “It is built on steady incremental changes and knowledge learned out of basic manufacturing.” Telecommunications equipment is dual use, meaning it can be used for both commercial and military purposes. The loss of an industrial base in telecom equipment meant that the American national security apparatus lost military capacity…
Hickey told a story of how the United States is even losing its submarine fleet. He had a conversation with an admiral in charge of the U.S. sub fleet at the commissioning of the USS Illinois, a Virginia-class attack submarine, who complained that the United States was retiring three worn-out boats a year, but could only build one and a half in that time… The supply chain that could support such surge production should be in the commercial world, but it has been offshored to China. “You can’t run a really high-end casting business on making three submarines a year,” Hickey said. “You just can’t do it.” This shift happened because Wall Street, or “the LBO (leveraged buy-out) guys” as Hickey put it, bought up manufacturing facilities in the 1990s and moved them to China...
“The middle-class Americans who did the manufacturing work, all that capability, machine tools, knowledge, it just became worthless, driven by the stock price,” he said. “The national ability to produce is a national treasure. If you can’t produce you won’t consume, and you can’t defend yourself.”
Monopolizing the Defense Industrial Base
But it’s not just the dual-use commercial manufacturing base that is collapsing. Our policy empowering Wall Street and offshoring has also damaged the more specialized defense base, which directly produces weaponry and equipment for the military.
How pervasive is the loss of such capacity? In September 2018, the Department of Defense released findings of its analysis into its supply chain. The results highlighted how fragile our ability to supply our own military has become.
The story here is similar. When Wall Street targeted the commercial industrial base in the 1990s, the same financial trends shifted the defense industry. Well before any of the more recent conflicts, financial pressure led to a change in focus for many in the defense industry—from technological engineering to balance sheet engineering. The result is that some of the biggest names in the industry have never created any defense product. Instead of innovating new technology to support our national security, they innovate new ways of creating monopolies to take advantage of it.
A good example is a company called TransDigm. While TransDigm presents itself as a designer and producer of aerospace products, it can more accurately be described as a designer of monopolies. TransDigm began as a private equity firm, a type of investment business, in 1993. Its mission, per its earnings call, is to give “private equity-like returns” to shareholders, returns that are much higher than the stock market or other standard investment vehicles.
It achieves these returns for its shareholders by buying up companies that are sole or single-source suppliers of obscure airplane parts that the government needs, and then increasing prices by as much as eight times the original amount.
If the government balks at paying, TransDigm has no qualms daring the military to risk its mission and its crew by not buying the parts. The military, held hostage, often pays the ransom. TransDigm’s gross profit margins using this model to gouge the U.S. government are a robust 54.5 percent.
To put that into perspective, Boeing and Lockheed’s profit margins are listed at 13.6 percent and 10.91 percent.
The company is now the sole supplier for 80% of the end markets it serves. And 90% of the items in the supply chain are proprietary to TransDigm. In other words, the company is operating a monopoly for parts needed to operate aircraft that will typically be in service for 30 years…. Managers are uniquely motivated to increase shareholder value and they have an enviable record, with shares up 2,503% since 2009…
In other words, because L3 has a monopoly, there was no one else to pick. The system—a system designed by the financial industry that rewards monopoly and consolidation at the expense of innovation and national security—essentially made the pick for him. It is no wonder our military capacities are ebbing, despite the large budget outlays—the money isn’t going to defense.
At an Armed Services Committee hearing in 2018, Representative Carol Shea-Porter talked about how constant the conflict between financial concentration and patriotism had been in her six years on the committee. She recounted a CEO once telling her, in response to her concern about the outsourcing of defense industry parts, that he “[has] to answer to stockholders.”
Who are these stockholders that CEOs are so compelled to answer to? Oftentimes, China.
The trend accelerated, until the recent flare-up of tensions between the United States and China. “China’s foreign direct investment (FDI) stock in the U.S. increased some 800% between 2009 and 2015,” she wrote. Then, from 2015 to 2017, “Chinese FDI in the U.S. …climbed nearly four-fold, reaching roughly $45.6 billion in 2016, up from just $12.8 billion in 2014.”
This investment runs right through Wall Street, the key lobbying group trying to ratchet down Trump’s tough negotiating posture with the Chinese.
Rather than showing concern about the increasing influence of a foreign power in our commerce and industry, Wall Street banks have repeatedly followed Archie Cox down the path of easy returns.
While TSP & Vanguard Smart Investor main goal is helping serious and reluctant investors make more informed allocation decisions, we also hope to educate readers to the strategic investment environment we find ourselves in today. And hoping our policy makers wake up to the corrosive effects the political-financial complex has on our future.
Unfortunately much of the effects are already baked in and we need to invest so our retirement is not part of the collateral damage. Invest safe, invest smart.