Peter Lynch, in one of his very good books on investment, talks about how great corporations lose their way and in most cases it has something to do with trying to get into new businesses that they are not familiar with (AT&T?s purchase of NCR comes to mind). Peter Lynch calls it ?Diworsefying?. The reason for this error is something he calls ?the bladder theory of cash? which, to paraphrase, is that as the cash reserves available to a corporation grow, so does the pressure to piss it all away on something really stupid. As the title suggests, perhaps something similar can explain the recent actions of the current US administration.

We can identify 4 different types of powers for a nation to have in the global arena: Military, Economic, Moral and Goodwill. Military power is the easiest to understand. It doesn?t have much to do with the size of the nation, but its prowess in war. Small nations or people who had enormous military power in the past include England and the Mongols. Economic power deals with material wealth and how much a nation produces. For economic power, the population size of a nation does help but can be overcome, as in the case of Japan in recent history. Moral power is sometimes not recognized or appreciated, but depends on the respect a nation (or people) may enjoy among others and it can make those who have moral power very influential beyond their borders. One example of a nation with very high moral power (while little military or economic power) is Costa Rica. Costa Rica has been able to influence events in Latin America far more than any other nation (with a former president receiving the Nobel Prize, an indication of their achievements). Goodwill is something that is recognized as an asset in modern corporations. That is, consumers become so familiar with a particular brand of products that they enjoy a preferential price premium. For example, people pay extra for SONY products because they are accepted as having higher quality. The same principle also works for nations. The French have always enjoyed a level of goodwill and been able to extract a substantial economic benefit from this goodwill.  By all these four measures, the United States of America has in recent years built such a formidable lead that it enjoyed a level of power superiority that is unmatched in human history.

Most people easily acknowledge the military and economic superiority of the US. However, if one traveled outside the US in the 1990?s, USA?s influence in the other two spheres became very evident. In most countries, for someone to buy a product with the label ?made in USA? was a badge of prestige. Likewise, in every trouble spot in the world people craved for US involvement, even in a support role, for it meant that issues will be resolved more equitably than otherwise. This can be seen by the enormous respect for former President Jimmy Carter?s involvement as an observer in overseeing fair elections in many countries. President Carter has been like the US seal of approval in these elections for the people of the country where the elections took place. However, as the US lead was built during the 80?s and 90?s so, it seems, did the temptation to use this power.

Which brings us to my suggestion of the ?bladder theory of power?. We are indeed pissing this power away and will have little to show for in exchange. The dramatic decline of goodwill and moral influence is, from one vantage point, breathtaking. How can one lose so much so quickly? Well, it is easy to explain:  by developing blinding arrogance. When the US government made its intentions known of going into Iraq and forcibly removing weapons of mass destruction, there was a spontaneous civil opposition all over the world. Most people expected this to be the case. However, as the US government turned a deaf ear to these demonstrations at home and abroad, the number of people demonstrating continued to dramatically increase. In a democratic process, sometimes the government does have to take unpopular decisions. However, there is always engagement of the people in the process, their objections are heard and responded to. In contrast, the US administration acted as if it did not even acknowledge this vehement objection by so many. This was on top of some other rather unilateral decisions recently taken, the most significant was the walkout of the Kyoto Agreement, which was being supported by a great majority of the world?s people. The damage done by this arrogant (and one may say wholly unnecessary) behavior has greatly tarnished the image of USA. Even if the war effort was necessary, there didn?t seem to be much benefit in ignoring these vast demonstrations. There could have been a number of means for addressing the concerns of many. Most people in America have little interest or knowledge of events in other countries and are, at present, perplexed by how quickly people have changed. There are more people in the US trying to understand this, but sadly at the same time there is a sort of self denial as many are now supporting the war effort without questioning our motives or objectives.

In the current war in Iraq, we do enjoy an overwhelming military superiority. Basically, we have a three dimensional military fighting a two dimensional enemy. We are able to bomb them at will and destroy or severely weaken their military before attacking on the ground. It is a war we will win. But at what cost? It is becoming very evident that we are planting a very deep distrust of America in youths of many nations in Asia and Africa, as well as some in Europe and elsewhere. In coming years, this is going to sap our economic strength as boycotts of American products continue to escalate.  At the same time, we are witnessing the dramatic rise of China as an economic power. Many in US businesses are already concerned that China will overtake the US as the dominant economic force within 10 ? 15 years. What hasn?t been taken into account is what is the impact if we factor in that US gets very unfavorable access to the fast growing Asian consumer markets (due to soured local sentiments). I would propose that it would vastly accelerate the rise to prominence of China as THE economic power.

While the military might of the USA is truly great at present, in order to maintain this superiority, the US will continue to outspend other nations on defense. However, to continue this high level of spending, one has to have a very superior economy. When one assesses the negative economic impact due to fallout from this war and the huge, and rather quixotic, tax cut that is also being heavily promoted by the current administration, it is difficult to see how the USA will be able to afford this level of military spending in the not too distant future.

So, this is the case for saying we are ?pissing away our power?. Now to discuss the second part, i.e., ? on something really stupid?. Although the premise of the war is elimination of weapons of mass destruction, it is acknowledged that the US also wants to preserve its influence on the vast oil reserves in the Middle East as well. We need to look at these objectives more clearly and also assess what benefit we will derive from these objectives (that warrants the expenditure of such vast resources). The USA has had a long standing policy objective of containment of nuclear weapons technology. This policy drove the ?cold war? with Russia. As new nations have joined the ?nuclear club? (i.e., India and Pakistan recently), there has been pressure within certain US circles to send a strong message to potential upstarts that the cost for future entrants may be destruction. For groups pushing for global nuclear containment, Iraq serves as the perfect candidate to send this message. However, the US?s own involvement in recent past with Iraq in providing chemical and biological weapons (that were indeed used by Iraq on Kurdish civilians and on Iranian military) means that in this matter, for many people, the US has dirty hands. And so it seems that US adventures in the Middle East are continuing with very little understanding of the region and its people. This is at the heart of the global civilian opposition to the war on Iraq.  So the message that the US wants to send is getting completely lost in the means by which it is being delivered. The developments in North Korea make a very clear that containment isn?t going to work.

If one looks at the great economic development of the US, especially since World War 2, it is clear that the dominant factor has been low energy prices. This is the other cornerstone of this war with Iraq. The thinking being, that we need to insure a steady supply of low priced oil to insure continued future growth. However, as a faithful reader of Business Week (BW) for the past 12 years, I do believe, as promoted by BW, that we now have a New Economy. And the rules of growth are quite different in this economy. While stable energy prices may help, they are not going to be the same force for economic growth in this century as they were in the latter half of the last century. The New Economy is driven by dramatic productivity gains due to technology as well as accelerating emergence of new markets, also driven by technology. These factors now impact just about every major sector of our economy. Indeed, the pace of technological advance is sometimes so fast that we, as a nation, are having a tough time dealing with it socially, as is the case with human cloning. The old economic model of industrial productivity driven by cheap raw materials and cheap energy is not as relevant for the future.

Here I haven?t touched much on the moral implications of these same decisions (or rather the lack of morality embedded in these decisions) which also has its own adverse effects. The price we will pay as a nation for taking actions that are indeed very questionable goes to the heart of what it is that makes America great? It is the principles that are embodied in our constitution and our form of government. By ignoring many of these principles and acting contrary to them in our dealings with others, we weaken the very underpinnings of our society. However, quite apart from that, the case made here is that, from this war we are not going to derive much economic benefit nor is it going to do much to contain the aspirations of other nations to develop means of deterring (what THEY perceive to be) potential aggression for outside. Great corporations, at the pinnacle of their size, start believing that they possess some special instincts and become impervious to criticisms of more adventurous strategies end up falling prey to the ?bladder theory of cash?. We are a great nation that is behaving very similarly and seem to be following a corresponding ?bladder theory of power?.