BUD BREWER
One Man's Opinion
TRANSITION OF THE WORLD’S MAJOR POWER
October 8, 2009: It happens from time to time and usually in very subtle ways. A country rises to the pinnacle of world prestige and power and then slowly inexorably, sometimes drastically, it faces its demise. Before the Nuclear age began, wars were the major cause of a country’s decline in power and influence. Since that time, it has been more or less in accord with economic and financial development. I am struck by the vacuum in most people’s understanding here in America of what is happening on the mainland of Asia, South America and parts of Eastern Europe. China’s leader Deng Xiaoping (done shopping) instigated a policy back in 1978 that acted as a springboard for moving One Billion plus people toward a better life. While denying it reflected his disbelief in the command style economy of Communism, it opened the doors to the acceleration of progress toward a better life for more and more Chinese citizens. What was thought to be an almost benign adjustment in the command and egalitarian style economy that Mao Tse Tung enforced upon the Chinese people after defeating Chiang Kai-Shek’s American supported Nationalist’s government in a civil war, has become an economic rocket engine propelling that country into the position where it will soon become the World’s leading economic as well as political power. The adjustment? Well it was a simple change in how the fruits of labor by the Chinese people were divided. Instead of toiling for their fellow man by turning all their production over to district leaders and government agencies for government processing and redistribution, Deng changed this process. He had observed how much more productive one district was in its agricultural output than their neighbors and learning that the District leader had put in effect a policy allowing each district farmer to keep for personal benefit and trading a small fraction of their output, Deng decided to make this a national policy and the seeds of capitalism were born.
Today, perhaps as many as one third of China’s population (450 million people) has been drawn out of abject poverty and is beginning to enjoy at least some small portion of the fruits from their personal labor or production. They have become better educated, live in modest but better housing, own I phones, cell phones and some number of automobiles. They wear western clothes, are computer literate, travel to other countries, and are accumulating savings at an extraordinary rate of 30% or more of incomes. In response to these changes in life style, the economy has been experiencing extraordinary economic growth. While still a major exporter, the country is producing more and more of what they need rather than having to depend on others to supply it. They still depend on imports for many of their critical needs, but slowly and surely they are beginning to become a consumer driven self dependent nation with more and more of their needs produced domestically. They are a very frugal nation with the highest savings rate in the world. In the meantime the USA is steadily moving toward becoming less influential in the World, politically, economically and socially. Our culture is becoming more and more dominated by people who have not come to America to take advantage of the opportunities freedom gives the individual to achieve greatness but more to exploit the generosity of a nation sensitive to those normally few members unable to take care of themselves. Our political leaders today are embracing policies of wealth redistribution because the recipients of such transfers are increasingly becoming important part of growing constituencies and we all know that getting re-elected is far more important than embracing the principles of free enterprise, individual rights, less government and moderate taxation. Our currency is becoming soft as this and previous Administrations have introduced larger and larger unfunded spending programs for dubious purposes. When we are forced to engage in military action to supposedly protect the security of our people or our allies, the all volunteer military is expected to bear the entire burden of sacrifice while those civilians not engaged do little in support but actively voice their objections to the discomfort the conflict has or is causing. As a result we have truly become the “Paper Tiger” of the world.
I don’t know how long it will be but I am certain that in the next one or two generations, America, the largest economy in the world today, the country seen as a model of freedom and liberty will have a major “800 pound Gorilla” in the room dictating the terms for how global political, financial, monetary and economic policies will function.
It will require careful consideration for investors who want to anticipate and plan for the major changes in the future relative power and economic strength of America. We need to figure out what to do with our accumulated wealth, our retirement accounts and our personal and real property. Will it be possible to preserve wealth by investing in fixed dollar securities? Probably not unless the interest earned thereon is equivalent or greater than the devaluation of the Dollar. Would it be better to invest in other securities denominated in a foreign currency? Will China’s huge investment in U.S. Dollar securities cause them to begin exchanging them for securities denominated in a harder currency? What is all this talk about making a basket of currencies the basis for pricing oil or other globally traded commodities? What about Gold? Is the ownership of this metal a real hedge against inflation or dollar devaluation? As my Friend William H. Hurt of Capital Group said. “Here lies the peril for all of us as we try to maneuver through the next years of diminished relative significance of the United States of America, not absolute, surely, but certainly significant. While that process still has a long way to go we have to avoid simply voicing condescension when addressing the problem”.