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America, Creative, Enterprising & Still Number 1!

Friday March 4th 2011

I am British, but I have visited the USA many times, worked with Americans and for American companies…I am married to an American. It is probably fair then to say that I like Americans and I like the USA.

No other nation has ever, or indeed has now such a “Can Do” attitude. It is not even a case of… to paraphrase the late British Prime Minister, “Give me the tools and I will do the job”, in the US, if the tools were not available, they were invented!

So it makes me sad when I hear people say that the best days of the US have already been seen.  That sort of statement makes the presumption that America is a finite story. That is not true, for just as the Pilgrims set their sights on the ocean horizon, and the settlers looked out across to the West and the setting sun, so C20 America and its citizens became pioneers into space. They saw off the challenge of the Soviet Union and stepped, drove, why even played golf on another celestial orb.

Undoubtedly as C21 moves into its second decade it is clear that human civilization is experiencing rapid change whether in technological abilities or in economic muscle. The rise of the BRIC nations has been much discussed and it even more appropriate to add into the mix fast growers such as Indonesia, Mexico and Turkey to see the “E7” as the BRIC’s plus these 3 are known as a true counterweight to the G7.

Of course we saw recently that China passed Japan to become the world’s second largest economy and if the past 5 years average growth rate continues then by the third decade of C21 it would be larger than the USA. However, let’s just look at the data and crunch some numbers:

USA 2010:         GDP   $14,699Bn     Population   312.3m          GDP/Capita   $47,067

China 2010:     GDP   $  6,460Bn     Population 1,345,7m         GDP/Capita    $  4,800

Say the growth rate of China was to continue at 9.0%, fanciful I know, however, let’s run with the exercise for a moment. At the same time we assume the USA will grow at 1.5%. Running the projected year on year GDP data at the assumed growth rates shows that the Chinese GDP will surpass that of the USA in 2022.

What happens to GDP/capita? Assume the US population grows at 5% and the Chinese at 2% given the “One Child Policy”. By 2022 the data now suggests:

USA 2022:         GDP   $17,574Bn     Population     560.8m        GDP/Capita   $ 31,337

China 2022:      GDP   $18,169Bn      Population 1,706.7m        GDP/Capita    $10,645

I accept that the assumptions could be refined, however, it is clear that even if China’s economy storms ahead at 9.0% and the US is sluggish at 1.5%, the level of wealth for each citizen is just one third of that seen in America.

Back to today, the US is not just the world’s largest economy. It has the largest and most sophisticated military and the leading entrepreneurial mind set driven by access technology, engineering and market research data.

Too many in the world are quick to suggest that the US uses it military power in an indiscriminate way. I contend that this is far from the truth, as the US did not start either of the C20’s world wars. In fact it was a reluctant late participant. Korea saw the S join a UN force and in Viet Nam the US fought alongside troops from France and Australia. One can debate the second Iraq war till sun down, but again, America was not alone in engaging Saddam in that theatre. However, look at a statement made this past week by Defense Secretary Robert Gates. Whilst my own Prime Minister has called for a Libyan no fly zone, Mr Gates has suggested that such a policy can only be usefully deployed after an act of war has been undertaken. That is a non Libyan force would have to take out all Libya’s air defenses so that other planes could patrol the skies freely. Mr Gates was correct to question whether or not, the US should take such a step without full UN backing.

Of course the US economy grew in the post WWII years as a result of expansionary policies such as the interstate highway system, science and technology and the education system. It was however, also driven by a welcoming policy toward immigration. The melting pot that is America has never been witnessed before or since.  Even in the UK where immigration from nations freed from the yoke of Empire has been quite dramatic cannot match the sense of “Being American”.

Of course one can see the West moving tables for education or infrastructure, but that is because so much of the system has matured. In the E7, so much is new. However, ask oneself the following question. “What direction do global university students travel in?” Chiefly, those that can travel overseas for education will head for the US.

It is not a question of the US or the West backsliding. Rather the rest of the world is starting to develop. Japan threatened the US role as global number 1 for a while in the 1980’s, but that aspiration soon slipped away. One may say that part of this was that Japan is really a small nation, whereas China is large. That much is true, but both societies have flaws that do not hold a candle against free market entrepreneurship.  Japan was too closely based on gerontocracy, and was for many decades too close to being a one party state. China is still ruled from the political centre despite a growing number of millionaires.  What of India? Still riddled by a “Top Man” culture, although where Indian companies are good…they are very good and do have financial transparency.

In Paris, today the Banque de France is hosting an symposium on the international financial system. Think of finance, and think of France then one has to think of Finance Minister, Christine Lagarde. She is always quick to praise France and strike out against the US. She is calling for an end of the Dollar’s dominance. OK Madame, what do you suggest investor use instead. The Euro is discredited as the ECB have broken almost all of their rules as the supported the PIGS group. Alrady the Iriah Coalition Government are determined to renegotiate the terms of their bailout. This follows Greece who have sought the same. No doubt their credit ratings will be lowered in nthe few weeks. The issue of who will be the next leader of the Euro Zone’s central bank is gong to roll on for 6 months. It will end up being another European decision based on political posturing and whose turn is it as against based upon ability. So before one strikes out at the political debate in the US…think about the discord in the Euro Zone. Fringe nations that are in essence bankrupt still demand better credit terms than makes any economic sense. Talk about the tail wagging the dog!

I heard today Franklin Allen of Pennsylvania University cite the Chinese Rembini as a potential third global reserve currency. Well, knock on my door when the currency has a free float, is convertible and the economy is open, free and fair.
The People's Bank will contain inflation but to keep growth on track it will be done by offering susbsidies to the consumer so to retstrain CPI.

At the moment only the free enterprise model of economics works with any efficiency. The track record of any national government to pick winners is shambolic. Only free market democracies offer an investor any genuine sense of liquidity and only the US has an asset base that can be traded in any size and at any time of the day in the international capital market. That cannot be said for Sterling, nor the Euro and none of the E7 assets bases.

America is not a finite or static story. It is a furnace of change where the unimaginable can be created extremely rapidly. That is not true for anywhere else on the planet.  Until it is, we should stop doing down America.

Stephen Pope ~ Managing Partner
Spotlight Ideas

March 4th 2011 ~ London

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