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Portfolio > Economy & Markets > Economic Trends

U.S. Locked in Economic 'Death Match' With China: Richard Vague

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America is competing with China in the top industries that define the future of business in the U.S.

It’s “a death match, if I may exaggerate,” Richard Vague, secretary of banking and securities for the commonwealth of Pennsylvania, argues in an interview with ThinkAdvisor. “Unlike the past 20 or 30 years, we have a serious and very capable competitor.”

The industries range from 5G mobile networks and electric vehicles to supercomputers and genetic engineering, including the controversial gene-editing technology CRISPR, already in use in “dozens, if not hundreds” of trials in the U.S. and China, says Vague, formerly managing partner of Gabriel Investments, which he founded.

His new book is “An Illustrated Business History of the United States.” Starting out in 1763, it details through today — and talks about the future — important companies and inventions, particularly discussing the crucial role of financial institutions.

The stock market by industry sector is shown with enlightening pie charts from 1840 through 2018. In the former, the biggest sectors were finance, transports, consumer discretionary, utilities and industrials. In 2018, it was the financial sector that led as well.

In 2019, Vague released “A Brief History of Doom: 200 Years of Financial Crises,” wherein he points out that runaway private debt has been a prelude to nearly every modern financial crisis.

In the interview, he opines that if the rate of growth in U.S. debt — which saw an “uptick” over the last year or two — continues for about two years, America will be in the highly risky danger zone for another financial meltdown.

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Vague is concerned, too, that if, within the next 20 years, the largest U.S. companies aren’t constrained as to the types of businesses they’re permitted to enter, it will have “a stifling effect on innovation.”

In the interview, he tells of brokerages of the early 1900s that, perhaps surprisingly, had special departments to serve female clients and with female brokers. Then he reveals why by 1930, only 2.5% of brokers in the country were women.

ThinkAdvisor recently held a phone interview with Vague, 65, speaking from Philadelphia. His heavy business background focuses largely on banking.

He was co-founder and CEO of two credit card companies, one sold to Bank One, the other to Barclays. He also co-founded Energy Plus, a supplier of electricity and natural gas, which was sold to NRG Energy.

Here are highlights of our interview:

THINKADVISOR: You said in a June 2019 interview with me that runaway private debt has been a prelude to nearly every modern financial crisis. Is this occurring now?

RICHARD VAGUE: Yes. It was very calm and benign for about a decade after the great financial crisis. But in the last 12 to 24 months, we’ve seen a real uptick, particularly on the corporate side.

If I use a “green-yellow-red” scoring system, we’ve gone from a kind of benign green no-risk scenario to a yellow zone. If the rate of growth in debt that we’re seeing today continues for another couple of years, we’re going to be touching the red zone.

Broadly, where do you foresee U.S. business headed in the future?

We’re obviously increasingly tied up in a death match, if I may exaggerate, with China in areas like 5G, artificial intelligence, electric vehicles, supercomputers and genetic engineering.

There are probably six or eight industries that define the future, where, unlike the past 20 or 30 years, we have a serious and very capable competitor. This means that incredible things are going to happen more rapidly going forward.

From a philosophical perspective, what do you predict?

We’re entering an era where we’re all about transforming ourselves. One of those arenas is genetic engineering, where astonishing things are happening.

It’s going to allow us to treat disease but also do things that are ethically daunting, like define the genetics of our offspring. This is no longer science fiction. This is confronting us right now.

Inventor and futurist Ray Kurzweil and a number of other folks believe that we’ll be living our lives through avatars instead of physically.

Whether that occurs or not, something close to that will happen where we transform our lives by making them increasingly digital with the ability to change attributes about ourselves.

Do you think the gene-editing technology CRISPR will be more influential despite ethical objections to it?

The ethics always lag, for better or worse. CRISPR and [technology] like that are going to be everywhere. There are dozens, if not hundreds, of FDA trials using CRISPR right at this moment, and probably more than that happening in China.

We’re doing cancer treatments where CRISPR is involved. It’s all about altering the genetic structure of cells within the living body.

What’s the most significant change personal computers have brought to the world of business?

What’s interesting is how different this innovation is compared to those of a century or two ago.

The big inventions of the 19th century were things like railroads and the telegraph, which allow mankind to transcend time and space in a way that had never been possible in history and therefore to create enormous leaps in productivity.

All the things that had to do with the sustenance of our day-to-day lives got much cheaper and much better quickly. The things that business is starting to be about now are comfort and controversy.

Business is more about guys arguing on CNN and Fox. What we’re focused on now that we’re a wealthy society is far different from the things of a century ago.

But there have been huge technological advances, right?

A lot of what’s going on in technology today is improving our ability to gossip and to buy things that don’t mean anything.

People wonder why this [sort of technology] isn’t improving productivity. Well, it’s not necessarily designed to improve productivity.

It used to be if I wanted to meet a guy for lunch, we’d decide when and where, and I met him for lunch. Now we send emails in advance. We send texts, calendars, reminders. That’s not really an improvement in productivity.

What are the implications of the dark side of Web 2.0, which allows people to interact and has brought out the worst in many of them?

You can buy drugs and murder weapons on the dark web with cryptocurrency.

Contrast that with Time magazine’s having made Web 2.0 “Person of the Year” [in 2006] because it was going to decentralize everything and make our lives wonderful. How wrong was that!

Do you think President Biden’s trying to reshape the economy in what seems to be an idealistic way will change everything?

Yes. Who thought that Joe Biden would end up being such a transformational president. But there’s a lot at stake in November 2022 as to whether his ability to continue to do this will stay intact.

The president says that less competition and more concentration among companies is hobbling the vitality of the economy. Thoughts?

There’s little scrutiny that goes into the new businesses that Facebook, Google, Amazon and others can enter, whereas a commercial bank can only do a limited number of things. Google can get into any business it wants to, and it’s reached such a scale that it can quash the competition.

I don’t think it’s hobbling the economy at this exact moment. But I do think that in the next 10 to 20 years, if we don’t constrain the largest companies from being able to get into any business they want to enter, it will have a stifling effect on innovation.

The 1980s “began with Americans bruised by high oil prices, rampant inflation and depressed stock prices,” you write. Ronald Reagan became president in 1981 with the slogan, “Let’s Make America Great Again.” How would you characterize what happened during the decade?

The 1980s was one of the most tumultuous periods that we’ve had over the last couple of hundred years. We’ve had runaway growth in debt — massive growth in both private and public debt across the board since Ronald Reagan came into office.

It all came to a head in the late 1980s in a stock market crash and collapse, not just in the savings and loan industry, but many portions of the banking industry as well an ugly recession that cost George H.W. Bush the presidency.

Is there any lasting damage from the S&L crisis?

It took the country to a new plateau in the amount of debt that we have and set us up for [the] 2007-2008 [financial crisis]. It goes back to Michael Milken. He, of course, crossed the line on some laws and regulations. But the fundamental principle that he employed of bringing in highly leveraged debt is an idea that endured.

To what extent have wars been favorable for U.S. business?

Wars have ben accelerators of technology, pure and simple. We’ve seen that with the Revolutionary War, the Civil War, the first World War, the second World War.

The U.S. government stepped up and started training programs and later, funded research and development. All that intensifies during a war. The government would never have funded the Apollo moonshot program if we hadn’t been racing against Russia.

We just passed a $250 billion bill in Congress — people call it the “China bill” [intended to make sure the U.S. stays competitive in technology]. So threats and wars accelerate technology fairly dramatically.

What about the Vietnam War?

Unfortunately, there was a lot of development by companies like Dow Chemical. Chemical warfare advanced the chemistry business. It had a horrifying expression in things like napalm.

But when government spends a lot of money on something, intellectual-property progress is made. It’s an ironic fact.

Your book contains charts on the stock market throughout the years according to industry sector. In 2018, the top one was finance, and back in 1840, finance was No. 1 as well. Please comment.

It’s fascinating. The presence of banks and importance of banks was there from the very beginning 200 years ago. A lot of the first stocks traded were banks and insurance companies.

There was the Panic of 1792, in which [speculator] William Duer manipulated both stocks and government bonds. Then there was the Buttonwood Agreement, which was an attempt to professionalize and organize the stock market and prevent guys like Duer from doing so much harm.

In the early 1900s, several U.S. brokerages had departments dedicated to serving women, you write. And they often hired women to work in them. But by 1930, women accounted for only 2.5% of brokers in the country. Why didn’t the trend of women’s participation continue?

There were great women involved in the industry going way back to the 1800s, and a lot of progress was being made in the early 1900s — not just for women but for African American businesses, too, including brokerages.

But the Great Depression set everyone back. It did that to an even greater extent to those who were more disadvantaged in the first place. We’ve been climbing out of that ever since.

Your book, of course, gives plenty of space to the history of the real estate business. Today, because of the coronavirus pandemic, one sector of the economy that seems to have taken a beating is commercial real estate. What’s the status?

Many aspects of real estate are booming right now: residential, industrial, storage. So there are plenty of places in commercial real estate that are doing quite well.

The most obvious place where it isn’t is offices and conventional walk-into-the-store retail. There’s going to be pretty significant repricing there: If a building [was] worth $100 million, it might now only be worth $70 million.

So a lot of folks that own those buildings are going to take losses. But they won’t be of [great] magnitude because it’s going to be balanced out, at least partially, by the good things that are happening [in real estate].

It won’t be a national crisis. It’s just money going out of one pocket into another.

(Pictured: Richard Vague)


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