The Great Experiment of the last century was Capitalism/Free Enterprise vs. Communism/Totalitarianism. As the results came in in the form of obvious living standard differences - Japan vs. Red China, Western Europe vs. Eastern Europe, South Korea vs. North Korea, USA vs. USSR - the shackles of central planning were loosened and a couple billion workers have now been added to the global labor pool. In addition, the global labor price crashed.
To build on our economic lead (25% of GDP from 4% of global population), the US needed to adjust to this new reality by competing, which our largest corporations did. But since 2005/2006, when our economy was the envy of the world, political leaders have started moving us in the wrong direction- higher taxes for companies growing overseas (where the high growth markets are and will be for existing products), higher minimum wages, more power for unions, higher pay for non-risk-taking, non-inventing and marginally-innovating government workers.
The US and similar industrialized nations have started to lose our place in the world, where the game is competition for the right to convert natural resources and manpower into useable products and services.
As we've seen with the recent QE2 talk, the prospect of action can have an effect- inflation has spiked the past month. The good news is this may create opportunity for new market entrants, and new sources of supply to come on line - creating jobs (albeit many of them outside the US) or at least preserving some (many of those inside the US).
The bad news is this initial inflation might persuade some to back away from QE as the Bank of Japan has done whenever there was a hint of inflation. This would then close the door on some new entrants, killing jobs and growth, as well as confidence.
What the US needs is a solution to underutilized labor, a way to utilize US labor at market prices. The American Dream- "start small to grow rich"- needs to add the "start small" piece back into the equation, somehow. And the best way to do that, in my opinion, is to let market forces work.
Since cutting market and minimum wage is a difficult proposition, inflating it away is one solution- and this will require QE2, QE3, and more. Low interest rates, and labor rates in line with global realities, coupled with higher prices, can make new entrants viable, stimulating both supply and demand and growing the economy. I'm thinking the pending elections will make this approach more politically acceptable (even if card check is passed in lame duck session, it will undoubtedly be overturned in 2013).
What does this mean for investments should the elections (GOP majority in the House) and FMOC meeting (modest QE, a couple hundred billion dollars over the next year) go as I expect?
First, dollar interest rates will stay low- short term rates for at least three years, 30 year rates perhaps for ten or more. Second, US companies that do significant overseas business in BRIC countries (Boeing (NYSE:BA), General Electric (NYSE:GE), (IBM), Coca-Cola Bottling Co. Consolidated (NASDAQ:COKE), perhaps even General Motors (NYSE:GM)) will continue to outperform the broader market.
Third, home prices will stabilize, but US commercial real estate will continue to suffer (except those that can be converted to condos). Fourth, lower labor costs will make some services more viable- home health care, personal shoppers, and the like- increasing startups and services to help startups.
QE and adding US workers back into the global labor market could lead to less government growth in the US, and more overseas (in real terms, not as a percentage of their economies).
Disclosure: Author holds no positions