SLIDE FROM EMINENCE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP90G01353R001700020027-7
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 18
• Document Creation Date: December 27, 2016
• Document Release Date: February 22, 2013
• Sequence Number: 27
• Publication Date: January 25, 1988
• Content Type: LETTER

Declassified in Part - Sanitized Copy Approved for Release 2013/02/22.: 3518X 88
CIA-RDP90GO1 353RO01 700020027-7
'%
7007'_ 76.96
(i1 / ~J'~"-/1157
January 25, 1988
At the request of ifr. Leo Cherne,
enclosed please find a Cop of his speech to the
Sales and Marketing Execu Ives of Greater New
York, given at the Waldo- Astoria Hotel on
January 8, 1988.
In the event ou would like additional
copies of his speech, please contact me at (212)
337-4157 and I will e happy to forward them to
you.
Sincerely,
(b)(6)
/mlg
Encl.
M rie L. Gomez
S retary to
Leo Cherne
DOI
EC
REG
Declassified in Part - Sanitized Copy Approved for Release 2013/02/22 : L- Z
CIA-RDP90GO1 353RO01 700020027-7
 Declassified in Part - Sanitized Copy Approved for Release 2013/02/22 : CIA-RDP90G01353RO01700020027-7
SLIDE FROM EMINENCE
a speech by Leo Cherne,
Executive Director of
The Research Institute of America, Inc.
before the Sales E Marketing
Executives of Greater New York
at 12 noon on January 8, 1988
in the Grand Ballroom of the
Waldorf-Astoria Hotel,
New York, New York
For more information,
contact:
Steve Berg
[phone]
Declassified in Part - Sanitized Copy Approved for Release 2013/02/22 : CIA-RDP90G01353RO01700020027-7
 Declassified in Part - Sanitized Copy Approved for Release 2013/02/22 : CIA-RDP90G01353R001700020027-7
SLIDE FROM EMINENCE
A 'year ago I emphasized the fact that no nation,
no business, no investor, is now sheltered from the
incredible speed, size and dimly understood power of a
truly global financial economy.
Last month saw the dollar's value at a twenty year
low. That same day saw the announcement not of shrunken
imports the dropping dollar should have produced. Instead,
the latest figures revealed an all-time high in our adverse
trade balance.
This is the global revolution set into motion by
the computer, the microchip and instant communications.
Now add our trillion dollar debt, our still
growing annual budgets, and stock markets in major
countries which now function differently from anything we
have previously known.
(A recent meeting of 33 leading economists from 13
countries warned "...something is still seriously wrong
with our world economy..... If corrective measures are not
taken promptly, and in adequate degree, a third crash of
the markets could be greater than either predecessor and
with far more pervasive results."]
Declassified in Part - Sanitized Copy Approved for Release 2013/02/22 : CIA-RDP90G01353R001700020027-7
 Declassified in Part - Sanitized Copy Approved for Release 2013/02/22 : CIA-RDP90G01353R001700020027-7
Page 2.
The most dramatic and extensive aspect of the
globalized economy has been the financial revolution.
During 1987, more. than one hundred billion dollars in
financial transactions have occurred 24 hours a day in
market`s without frontiers, operating. around the clock.
100 billion dollars a day is 35 times the total
daily world's trade in goods and services. In one week,
that amount equals the entire third-world debt.
The new globalized financial markets are not only
more powerful, they are more volatile, fragile, and capable
of producing serious disruptions.
As the crash of October 19th progressed, and there
was no bottom in the now interlinked worldwide securities
markets - the important link in Hong Kong broke. They
essentially found themselves without adequate funds. Even
a world securities exchange meltdown seemed possible.
Until a lender came up with the funds needed to restore
Hong Kong's solvency. Believe it or not - a nerve center
of world capitalism was kept from possible disaster by a
loan from the Communist People's Republic of China.
In this new world, what we do to restore
confidence in our ability to manage our key problems is
critical - our still rising debt, deficits,and adverse
trade balance.
Our own deep concern is our competitiveness in
world trade, and our manufacturing recovery is encouraging.
Declassified in Part - Sanitized Copy Approved for Release 2013/02/22 : CIA-RDP90G01353R001700020027-7
 Declassified in Part - Sanitized Copy Approved for Release 2013/02/22 CIA-RDP90G01353R001700020027-7
Page 3.
But highest in the concern of investors abroad is
the great fear that diminished confidence in the value our
dollar. may be causing a free fall in the value of what
remains the world's key currency - a free fall which would
threaten a flight from the dollar, rising interest rates,
renewed inflation and the risk of world-wide recession.
Regrettably we cannot solve our financial and
trade problems alone. They now require cooperation by our
major trading partners.
We must face the fact that preponderant financial
power now resides in Japan, and if that is not a slide from
eminence, I don't know what is. We'll be more acutely
aware of the significance of this as Japan increases its
purchases of our equities businesses and properties at a
sizeable discount.
First, as always, to last year.
I'll emphasize the boners.
How could I expect, as I. did, that the Persian
Gulf would be the most dangerous area in the world and
still think that oil prices would average 16 - 17 dollars a
barrel? I expected OPEC to unravel, but sooner than it
did.
How could I anticipate imports growing more than
exports, our national debt and annual budget deficit still
growing, and still think our trade deficit would shrink
slightly, even with Japan? While our dollar would only
depreciate by 10%.
Declassified in Part - Sanitized Copy Approved for Release 2013/02/22 : CIA-RDP90G01353R001700020027-7
 Declassified in Part - Sanitized Copy Approved for Release 2013/02/22 CIA-RDP90G01353R001700020027-7
Page 4.
As for my expectation that interest rates would
decline, I also said one has to be mindless to anticipate
where interest rates would go. Well, I was wrong about
declining interest rates for the year, but right about
being mindless.
Among my accurate expectations: -- that
manufacturing plants would shrink further, while we would
turn out more goods -- that serious steps would be taken to
cut our budget deficit, with unavoidable revenue
increases.
I was essentially right on the rate of inflation.
Correct in expecting us to avoid a recession. I did expect
an increase in our productivity.
My expectations on autos, housing, construction,
were correct.
Of the 39 economic expectations, nine errors make
the outcome 81%.
On my international projections, I anticipated the
Summit, and the nuclear cut, but picked the wrong class of
missiles. I anticipated that Congress would not renew the
military support of the Contras - and it is unclear to me
that they did, but I will call that one wrong. All the
other 18 expectations were right; that Gorbachev would
begin to run into domestic political opposition to his
.restructuring -- that the Iran/Iraq war would not end this
year -- and that U.S. troops would not be used in Nicaragua
-- for a lucky - or wise - 90% result in my international,
military, political expectations.
Declassified in Part - Sanitized Copy Approved for Release 2013/02/22 : CIA-RDP90G01353R001700020027-7
 Declassified in Part - Sanitized Copy Approved for Release 2013/02/22 CIA-RDP90G01353R001700020027-7
Page 5.
But above all, I said there would be "a firestorm
in the globalized economy during 1987." There was!
Now, however, to the near impossible task of
anticipating the 1988 economy.
In a similar impenetrable and complex time, the
19th Century British Prime Minister Palmerston once said
... "These questions are so complex that there are only
three people who understand them. One is dead, one is in
an insane asylum, and I refuse to talk."
Unlike Palmerston, I will get out on that limb
because you came here to watch me do so.
Because of the final tax rate cuts applicable this
year, the government's revenue will drop, and I expect our
cash budget deficit for this year to be at least ten
billion dollars more than the 148 billion dollar deficit
announced for fiscal '87.
I expect additional corporate loopholes closed
this year in the technical tax corrections law which should
have been enacted this year.
The perception here and especially overseas will
be that we didn't quite bite the bullet in our budget
cutting actions.
Among some influential U.S. and foreign
investors, a forty to fifty billion dollar cut for each of
at least two years was, realistically or not, their
standard of decisive initial action.
Declassified in Part - Sanitized Copy Approved for Release 2013/02/22 : CIA-RDP90G01353R001700020027-7
 Declassified in Part - Sanitized Copy Approved for Release 2013/02/22 : CIA-RDP90G01353R001700020027-7
Page 6.
One effect is that the dollar will continue to
drop toward the 110 dollar-yen level.
Our trade deficit in 1988 will shrink some - but
by a disappointing amount. We will not be helped by new
protectionist measures in Europe.
My toughest call is on a recession in the months
ahead. Our moderated interest rates, the disaster of
rampant protectionism averted, the Fed,bent on a policy of
providing adequate liquidity, productivity increasing
further, -- These all operate to cushion a downturn.
But the flight from the dollar, the steepest
monthly drop in six years of our most recent leading
indicators, reduced consumer expenditures and rising
inventories, lower growth abroad except in Japan. These
threaten a recession. Frankly, I'm more concerned about
unpredictable, even unknowable, negative surprises which
are associated with the now global financial economy. The
question of recession is not whether, but when. Do I
know? Of course not. But you have reason to expect me to
make the best guess I can. It was only last weekend that I
changed my mind toward recession beginning some time this
year - shallow and short unless the dollar drops more than
now seems likely.
I expect a very lackluster 1 to 1-1/2% growth in
GNP for the year.
Declassified in Part - Sanitized Copy Approved for Release 2013/02/22 : CIA-RDP90G01353R001700020027-7
 Declassified in Part - Sanitized Copy Approved for Release 2013/02/22 CIA-RDP90G01353R001700020027-7
Page 7.
Overall corporate profits in 1988 will be flat,
despite the fact that the benefits of corporate
restructuring and economizing, tend to go to the bottom
line. But several industries, steel, computers and related
products, paper, chemicals, drugs, capital goods, will do
better.
We must be grateful for the superb performance of
entrepreneurial small businesses. Virtually all of the
nearly million and a half new jobs were added in 1987 by
businesses which employ 20 or fewer employees. Job saving
restructuring by major corporations will continue this
year, as will the corporate buy-out fever.
I expect inflation to be in the 5% area. If I'm
wrong, my expectation is on the low side. Wage gains will
run no higher than this year, and that means a further cut
in real incomes. There will be no significant strikes.
I am guessing that despite a growing backlog in
housing demand and today's interest rates, housing starts
.will be at least 5% below the 1987 level.
I expect a further decline - at least 12% - in the
sale of domestic passenger cars, but we'll also see the
first drop in sales of foreign made cars. However, there
will be more foreign cars made here and they will do
better. As will U.S. made trucks. And bear in mind no
cars are now made in the United States without foreign
parts.
Declassified in Part - Sanitized Copy Approved for Release 2013/02/22 : CIA-RDP90G01353R001700020027-7
 Declassified in Part - Sanitized Copy Approved for Release 2013/02/22 CIA-RDP90G01353R001700020027-7
Page 8.
Unemployment for the year will, in my opinion,
rise above 6 percent, despite a welcome increase in
manufacturing jobs, a hefty rise in business investment,
increased exports of U.S. products and imports dropping.
And finally, the election. This one will be
Neither party has a coherent program. There will
be no viable GOP candidates other than Bush and Dole.
On the Democratic side, as I now talk, Gore will
do best against Jesse Jackson in the all important "Super
Tuesday" primary. Dukakas is, at least for this period,
the "lead" candidate. I believe that Cuomo is still
looking for a way into this campaign and Lazarus Hart
rising from the dead may have opened that door to an open
convention, perhaps for Bradley and Nunn as well.
The outcome? The bleaker the economic picture,
the better the Democrats' chance. In a passable
environment with a recession avoided, I think we will still
find ourselves in the closing phase of the Republican
control of the White House.
This will continue to be, a campaign in which
personal gossip and innuendo will dominate. In a similar
period, Alice Roosevelt Longworth, Teddy Roosevelt's
sharp-tongued daughter, used to say: "If you can't say
something nice about someone, come sit next to me."
And now to foreign affairs.
Declassified in Part - Sanitized Copy Approved for Release 2013/02/22 : CIA-RDP90G01353R001700020027-7
 Declassified in Part - Sanitized Copy Approved for Release 2013/02/22 CIA-RDP90G01353RO01700020027-7
Page 9.
I do expect another Summit in 1988. The INF
Treaty just signed will pass the Senate. But a radical cut
in strategic weapons, even if agreed to at the next Summit,
which I doubt, will not be ratified by this Senate.
Gorbachev's reforms will not produce the hoped for
increase in Soviet output in 1988, while confronting him
with rising Central committee opposition and growing
discontent in Poland, Czechoslavakia, Hungary and Romania.
China will not give up Communism or
"modernization".
Nicaragua will not be nudged into democracy. The
Sandinistas will be in power until they're either thrown
out by force or fall apart from their severe internal
strains -- neither likely in the coming year.
The Iran-Iraq war will continue.
Reagan will not withdraw from the Persian Gulf.
The present Panama regime will make the Canal
sign-away look like a blunder. U.S.,contingency plans for
staying there will start being made as the year goes on.
The Soviets are eager for a formula to get out of
Afghanistan while leaving a submissive regime in control.
Because the freedom fighters are now more successful, I
expect fighting and negotiating to continue until a
satisfactory formula can be found. There is a possibility
this year.
Declassified in Part - Sanitized Copy Approved for Release 2013/02/22 : CIA-RDP90G01353RO01700020027-7
 Declassified in Part - Sanitized Copy Approved for Release 2013/02/22 CIA-RDP90G01353RO01700020027-7
Page 10.
1988 will be the year of crisis for the LDC debts
with the danger of important defaults. The write-off by
America's 13th largest bank - the Bank of Boston - of
one-fifth of their loans was the formal acknowledgment that
neither the full debts nor interest will be paid. And the
Latin American countries are increasingly acting jointly -
anti-Americanism is growing - They will even press for
.Cuba's return to their joint councils.
The U.S. response will be to reduce the size of
the obligations about a third without formally
acknowledging a default. The U.S. banks will take the
licking in exchange for some form of U.S. assurance of the
reduced amounts.
Piece-meal U.S. protectionist measures will be
passed but stop far short of'a major barrier or from
igniting a trade war.
As I spell out the reasons for our imperiled
eminence, there comes to mind a throw pillow in the late
Clare Luce's apartment with an embroidered legend which
said, "No good deed ever goes unpunished."
An action for which we have received appropriate
punishment is the unbelievable innocence, or was it
avarice, which led us to sell or license our basic
technologies vital to the Age of Information.
Declassified in Part - Sanitized Copy Approved for Release 2013/02/22 : CIA-RDP90GO1353R001700020027-7
 Declassified in Part - Sanitized Copy Approved for Release 2013/02/22 CIA-RDP90G01353R001700020027-7
Page 11.
Who thought that, after this major currency
revaluation, we would find that the United States is no
longer the world's leading exporter. Number 1 is Germany.
We are now number 2. Japan is number 3. In volume terms,
we are, in fact, still the leading exporter. It is the
declining dollar which reduces the value of that trade and
the balance of trade is measured in dollars, not quantity.
For years we've seen the unrelenting appetite of
our consumers, who account for a full two-thirds of our
gross national product. Our maxim has long been "a dollar
saved is a dollar wasted."
The American consumer brings to mind one of
America's notorious tight wads --Errol Flynn -- who once
said, "My problem lies in reconciling my gross habits with
my net income."
Nevertheless, there will be a drop in our
consumption this year, and an urgently needed rise in our
savings rate.
A critical piece of good news! Last year's U.S.
labor productivity rose. more than Germany, Japan, Great
Britain and France, yet we find it next to impossible to
.devise ways of improving the productivity of many of our
services.
There has been a vast erosion of standards, of
accountability, in almost every segment of American life --
corporate, religious, educational, governmental.
Declassified in Part - Sanitized Copy Approved for Release 2013/02/22 : CIA-RDP90G01353R001700020027-7
 Declassified in Part - Sanitized Copy Approved for Release 2013/02/22 : CIA-RDP90G01353R001700020027-7
Page 12.
As I try to understand our slide from eminence,
there are even more vital elements -- discipline. and a
sense 'of national direction. Especially in these days of
the Information Revolution, these must be the product of
education. The dropout rate in High School is horrendous,
13% are functionally illiterate. Inadequacy among our High
School graduates burdens our colleges. U.S. primary and
high schools score a low 17th out of 20 industrial
nations.
Only the graduate schools still retain something
of the quality which was once nearly universal.
In one area we do retain a unique edge -- in basic
research. One measure is the overwhelming number of Nobel
Prizes which go to American scientists trained in America's
vaunted graduate schools.
The Japanese graduate four times as many engineers
per capita as we do. But we do get back at them -- we
graduate 15 times as many lawyers.
In describing the basic elements of the new
cultural forces which shape American life, I must point to
a shattering book, "Ideology and National Competitiveness",
published by the Harvard Business School Press and
co-edited by George C. Lodge, and Ezra Vogel. They and
eight area specialists look at the changes in nine major
nations.
Declassified in Part - Sanitized Copy Approved for Release 2013/02/22 : CIA-RDP90G01353R001700020027-7
 Declassified in Part - Sanitized Copy Approved for Release 2013/02/22 : CIA-RDP90G01353RO01700020027-7
Page 13.
They rank these nine countries in four groups, in
terms of their competitive comparative advantage. Here is
the ranking: Top level - Japan, Korea, Taiwan;
immediately below - Germany; third level - France and
Brazil; and on the bottom rung - the United Kingdom,
Mexico and the United States.
The scholars divided these nations according to
the fundamental cultures which shape them. Does the nation
have a driving sense of its purpose, served by the elements
which commit their people to educational excellence, hard
work, pride of
family culture
accomplishment, and -- the key element -- a
which reinforces these qualities?
came here to challenge you. We can do
and on some problems we already are.
probably would put highest in the needs
to which we succeed in educating our young. I
may astonish you when I tell you I am encouraged by belated
actions now under way - but the road ahead is long.
There are other urgencies.
We face a task so huge and basic in rebuilding our
aged and decaying infrastructure, our bridges, roads,
watermains and virtually all public transportation.
In tackling this job, we will re-start the engine
of basic industry, employment of the new underclass and
boost our national vitality.
Declassified in Part - Sanitized Copy Approved for Release 2013/02/22 : CIA-RDP90G01353RO01700020027-7
 Declassified in Part - Sanitized Copy Approved for Release 2013/02/22 CIA-RDP90G01353RO01700020027-7
Page 14.
We are just at the threshold of the multitude of
breakthroughs that will be the products of biotechnology.
And the race for the Supercomputer has been stepped up - a
race in which we hold the edge.
There is another new frontier in basic research.-
superconductivity.
The first steps toward the demonstration that
power can be transmitted economically without frictional
.loss was discovered by two IBM scientists who, after
several years of secret work, suddenly discovered new
materials which could transmit such power at a higher
temperature than was ever previously possible. Who quickly,
poured substantial funds to find the materials which would
be superconductive at room temperature? The Japanese.
Just days ago, a remarkable further breakthrough, closer to
normal temperatures, occurred in Georgia Tech - which, if
validated, can greatly accelerate our progress.
Whoever first succeeds in solving that riddle will
revolutionize the world economy.
But there are tasks and opportunities, for each of
It wasn't that long ago that we were the world's
masters in marketing, motivation and innovation -- and
pretty good in quality and service. If any one attribute
has suffered most, it has been in the extent to which we
have let our marketing and product design deteriorate. A
Declassified in Part - Sanitized Copy Approved for Release 2013/02/22 : CIA-RDP90G01353RO01700020027-7
 Declassified in Part - Sanitized Copy Approved for Release 2013/02/22 CIA-RDP90G01353R001700020027-7
Page 15.
shocking fact nails this home. Despite the large drop in
dollar value against the yen, our auto exports to Japan
have only risen 3%.. Europe, without a currency boost, has
upped its auto exports to Japan by 25%. Their marketing,
has taught them that the Japanese will pay heavily for the
prestigious, well engineered, high design cars the
Europeans make. We must be shocked into recovering our
lost competence.
What shock will produce that burst of renewed
energy? Let me surprise you by saying that it has already
occurred. That shock is the knowledge we've begun to
absorb, that Japan is now home of 9 of the 10 largest banks
in the world.
Of the world's 10 largest corporations, Japan's
Nippon Telegraph and Telephone leads the list, IBM is 2nd,
Exxon is 3rd, and the remaining 7 corporate giants are all
Japanese. There is the measure of our challenge.
You'll be relieved to know I'm about to close and,
as I usually do, it will be with several aphorisms.
[I apologize to Senator Biden for not knowing who
I took the first one from, but it's on the nose.
"A leader must set goals, select the people
capable of achieving the goals, and communicate the goals.]
My favorite American philosopher, a stevedore who
Declassified in Part - Sanitized Copy Approved for Release 2013/02/22 : CIA-RDP90G01353R001700020027-7
 Declassified in Part - Sanitized Copy Approved for Release 2013/02/22 : CIA-RDP90G01353RO01700020027-7
w
Page 16.
never finished public school, Eric Hoffer, said before his
"In a time of drastic change, it is the learners
who inherit the future. The learned usually find
themselves equipped to live in a world that no
longer exists."
And Walter Lippman said:
"We must plant trees we may never get to sit
under."
Declassified in Part - Sanitized Copy Approved for Release 2013/02/22 : CIA-RDP90G01353RO01700020027-7