As we enter 2012 with the United States of America still the dominant economy in the world, it is interesting to explore how we got there.
Probably one of the most meaningful measures of economic activity is per capita gains in real income. Clearly, data on this when you go back to the very beginnings of our republic may not the most reliable in the world, but it’s the best you can do. The source I refer to is Historical Statistics of the United States, Millennial Edition.
The numbers can tell you a lot. For starters, on the positive side, there has been only one decade between 1800 and the present in which average annual per capita income growth was negative. That was 1810-20, and the negative number was minus 0.2 percent per year. (And who knows…? Given whatever the margin of error might be for statistics from that time, the actual number might have even been plus 0.2 percent.)
What’s a little bit surprising is that even in the 1930s the U.S. managed an average annual per capita real income growth rate of nearly 2 percent a year.
The best decade was the 1940s, the decade of the Second World War and the real recovery from the Depression, two factors that propelled per capita income growth to 4.1 percent per year.
To put that in perspective, it means the average standard of living in the U.S. during that decade increased by nearly 50 percent!
Since that time, the U.S. has never had a decade during which average annual per capita income growth was as high as 3 percent. In the most recent decade, through 2010 (and these are estimates at this point) the increases in per capita income were somewhere around 1 percent.
These numbers should give you some idea of what it takes over the long haul to become the greatest economy in the world.
Now let’s take a look at China, which is rapidly becoming (skeptics notwithstanding) our fiercest economic enemy – as defined in terms of competition for resources. How has China done, historically speaking, and how does it compare to the U.S.?
World Bank data on China begins in 1961, when that nation was barely emerging. We’re not economic historians and therefore couldn’t pinpoint an equivalent year in U.S. history that would correspond to China in 1961. But certainly China in that year, with a GDP per capita of $78, was clearly not a major economic power yet, despite its huge population.
The decade of the 60s in China included one of the most ruinous events from an economic perspective that the country ever experienced: the Cultural Revolution. It was a time in which declines in real economic data during the years 1966-68 probably matched anything we in America experienced during the Depression.
Yet the entire decade between 1961-71 witnessed average annual per capita real income growth of 5 percent a year. In other words, in that decade – despite the utterly disastrous effects on the economy of all the horrific disruptions and violence resulting from a failed experiment on a truly massive scale – the Chinese economy still managed an annualized per capita income growth rate for the decade higher than anything the U.S. experienced at any time in its history.
Of course, these growth rates came before any of the changes in property laws, before China’s full-fledged commitment to some form of capitalism and market economy, bureaucratic or otherwise.
The decade from 1971 to 81 witnessed a mild economic slowdown. But even that slowdown still topped anything that the U.S. has ever produced over any decade: Because of the comparatively higher base, per capita economic growth actually slowed a bit from the previous decade, to 4.2 percent.
But in the period after 1981 reforms really started taking place, and average annualized per capita growth has averaged over 9 percent per year right up to the present.
As an aside here, it is interesting to note the difference between China and that earlier Communist super-power and serious threat to America: Russia. Unlike the post-World War II successes of the Soviet Union, whose 5-Year Plans seemed to go like clockwork – until they did not, the Chinese have shown that, despite all the corruption and all the autocracy of their system, it is at heart a meritocracy. This is a tradition going back thousands of years.
For Christmas my son gave me the collected writings of one of the major Chinese writers of the 20th century, a short story writer, editor, critic, essayist and poet considered by many to be the leading figure in modern Chinese literature: Lu Xun (pronounced “shun”). I’ve only glanced at the book so far, as I’m currently reading one of the great classic novels of Russian literature, Fyodor Dostoyevsky’s The Idiot. This book makes it clear that Russia was never a meritocracy – neither under the Tsars nor the Soviet system, whose leadership, with the exception of Putin and possibly Gorbachev, were generally not first-rate intellects or statesmen.
But China, as we commented before, has a tradition of meritocracy that goes back thousands of years. This is made very clear from the stories I’ve glanced at in the collection by Lu Xun, some of which touch on the fact that the course of his early life was determined by his taking or not taking certain critical civil service examinations; passing these tests was necessary for an individual to rise to the top. This kind of paradigm is utterly foreign to Russia.
Ironically, this does not preclude, at least on an economic level, something akin to the American dream. I mean this in the sense that while many Chinese leaders have had powerful family connections, many have not, and succeeded because of their skills and intelligence.
We could continue, but suffice it to say that taking China with anything but the utmost seriousness is playing far too lightly with the freedoms and lifestyles that so many generations of Americans have worked so hard to achieve. Let’s not blow it now.
And this is a good point to get back to the phenomenon of China’s real average annual per capita growth since 1981 of over 9 percent per year.
This is so far beyond anything that any economy has ever experienced, it clearly indicates that any way in which we’re not taking China seriously is a hideous mistake.
Don’t get us wrong – we love America and our way of life here, and we want America to succeed. But with the jury now split on China (i.e., whether it’s in for a hard landing, soft landing or no landing) regardless of what kind of landing there might be, the U.S. cannot afford to have virtually no preparation being done in the area of resource scarcity.
On this score, as we may have made mention before, we have to give a big nod to the Germans, who have begun a systematic program of accumulating vital resources which include those that that are critical for a transition to a society that is less dependent on hydro carbons for energy.
Some of these commodities are pretty obvious, such as oil (plenty of which is still required to extract, refine and transport the resources necessary for alternative and renewable energies). And indeed, the U.S. does have a very significant stockpile of oil. Others are a little bit less obvious: Heavy rare earths, despite so much publicity about how critical they are for everything from wind turbines to hybrid cards to highly sophisticated military equipment, come almost solely from China.
And that’s a potentially perilous situation for us. Case in point: for at least the last couple of years, China has been a net importer of silver while continuing to have some silver exports. Recently, though, China announced that no silver will be leaving its shores, resulting from the fact that their build-out of solar energy technologies appears to be very much continuing on an exponential track. Whatever silver they have will henceforward be retained exclusively for their own use.
As for the investment implications…
These statistics more than anything else convince us that China’s voracious appetite for resources extends far beyond building out current infrastructure. As grades of various ores continue to decline and scarcities increase, more and more of the ‘old’ resources will be needed just to maintain current energy requirements as well as the creation of the new, alternative energy grids.
For investors, commodities should remain near the top of your list. One lesson of 2011: any commodity portfolio should be at least 50-50 between the actual commodity (for which ETFs are available) and your favorite miners/producers.
For us, two favorites remain top choices: Barrick Gold (ABX) for those who want the biggest and the best, and NovaGold Resources Inc (NG) for those trying to hit the 700-foot home run.\
Disclosure: Leeb Group, its officers, directors, shareholders, employees and affiliated entities and/or clients of such affiliated entities may currently maintain direct or indirect ownership positions in financial instruments (i.e., stocks, bonds, options, warrants, etc.) of companies or entities whose underlying exposure is in the companies mentioned in this article.
