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A few months ago I wrote about how the USA was in decline and China was fast catching up – and so I thought that it was time to relook at these economic power machines. Not that a lot can change in a few months that will influence the outcome in decades to come.
Warren Buffett claims USA is still the greatest economic machine – maybe he is talking up his own book as he punted billions on a recovery. But his definition of time is a little further out than my timeline as I think comparatively smaller investors, and I include many Instos in this, who are investing on the stockmarket are able to better fine tune entry and exit. The reason I make this distinction is that strategic investments such as some Buffett has made in the last year and similarly those China has made cannot be so finely tuned. But the other questions one might ask are: is Buffet wearing his allegiance on his sleeve or is he yet again on the money?
Possibly in his lifetime the USA will still reign supreme but over time, if all goes on track, China will outstrip the USA as the leading global economic power. Since I last wrote on this topic we have seen a few more warts and all in the western capital system and particularly in the finance system and if left unattended that batten change may come forward.
In the last major USA recession in the 80s/90’s a time when I was travelling there I would have agreed that the USA was the economic mammoth but I am not sure today. Capitalism and free enterprise have not learned sufficiently well from the past and history repeats itself all too often. The free enterprise system has never claimed to be flawless and it is as much a blue print as the socialists’ economic blue print. But it has not redressed weaknesses – widespread excesses, quality of finance and banking system, company and government balance sheets to name just a few.
I have heard figures of shortfalls in the western banking system of several trillions. Yes last week we threw around the word billions. Let’s hope that trillions does not become a word bandied around as in Zimbabwe where you pay for your bus ticket as you get on the bus and at the end of the journey you owe more – such is the rate of inflation in that country.
USA companies no longer have the deep pockets to invest in developing nations and we have seen many investment plans in China, for example, now shelved indefinitely. Companies are under such great pressure to perform they over extend themselves in an endeavour to remain relevant. The concept amongst individuals, governments and companies of a ‘war chest’ is all but forgotten and for the USA a ‘war chest’ means just that – to get involved, as the leading political nation and going it alone in wars on foreign soils.
One cannot deny though that the USA sneezes and the rest of the world gets a cold – or should that be pneumonia. The high growth economies and beneficiaries of the recent global boom have been the developing nations. Sure their domestic demand is growing at the pace of knots but they still depend and will in the forthcoming years – on western demand. This of course is the undoing of the West as life becomes too cosy and there is little pressure to become innovative. You will have heard of the saying ‘innovation is the mother of necessity’. At no time in history has this been so true for the mighty USA Empire.
China has heaps of money and wants to send a few hundred billion our way to buy up cheap resource assets. They are already into hock with the USA and are not surprisingly running scared that some of that could shrivel up in value. And they have pretty much told the west their financial problems are their own. Maybe they smell some bargains ahead.
But the strength lies with USA in the next phase of the economic cycle until consumer demand in developing nations grows exponentially and that won’t happen for some years yet.
Whether the USA can use the next phase of the global cycle to redress its ills and innovate will be a major determinant if it truly can keep ahead of the big China bear for just a little longer.
Enjoy the ride
Tom Scollon
Chief Analyst
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