Alexander Mizan

Why the U.S. Should Learn from China's Foresight

Great article and excellent comments from everyone. I am a European living in the US for the last 11 years...
I came here because this country use to export hope. It used to export jeans, music, cars, movies, Coke, computers. Even if you are a fan of guns & ammo, it used to do that too. We produce less and less by the day. Instead of debating the automobile bailout but approve the banking bailout in a second, maybe we should have let the banks falter and maybe think of how we can save the auto industry (never mind with the fools in place, we cannot even do that) because they actually produce something, albeit broken at the time...

Well, the good old US of A is still the biggest superpower in the world. Both economically and militarily, so for the next 5-10 years, we will just keep seeing erosion of the middle class, greater wealth disparity and decline of our relative standard of living vis-a-vis other countries, primarily Asia. The vehicle for doing this would most likely be the massive, yet gradual, depreciation of the dollar. The fed and the government HAD TO choose between:

A) Depression-era unemployment and credit destruction so large, which in the 30s eventually led to greater problems such as trade barriers, rise of fascism and communism (yes, those forces were strong in the US as well if you look at the history books) and eventually WWII

B) Slow destruction of the dollar, so that the average American does not realize that his purchasing power is declining compared to the rest of the world. In fact, what is happening now if only acceleration of what has been happening in the last 15 years. Just faster continuation of the trend.

So, how can you blame the Govt? If you had to make that choice, I am sure you would choose B as well. Who would want millions of people to suffer. You could have riots, hunger and most importantly a quick change in those who are holding office!!

But the long-term (10-20 years) is a whole different story and it's all in the numbers. Crystal Clear! We are 5% of the world's population consuming 40% of the global resources. I don't need to speak about Asia's population, population growth and what they will need to consume to bring them to parity with our standard of living.

So, here are my thoughts:

1. In the best case scenario, our standard of living will decline and theirs will go up. That will happen slowly and the rebalancing will take place via dollar depreciation. No major run on the currency. They will keep investing in Treasuries but also start investing in their own economies. If we are lucky, once we get out of the recession, our government will be smart and politically skillful enough to raise rates ala Paul Volcker in the 80s to reign in the money supply. At the same time, we will be smart enough as Americans to start living within our means, start producing more and consuming less. Eventually, China WILL become the world's largest economic power. That is inevitable (barring scenario #2). We will probably still live a little better than them but the disparity will not be as large as it is now. We will have to adjust our lifestyles to live within our means, and some industries will return to the US.

2. In the worst case scenario, the US govt will implement a policy of segniorage to purposely devalue the dollar and therefore its debts to foreigners. China will keep investing in infrastructure and its people. By pure numbers, it will be come the largest economic power. At some point, the foreigners will demand higher rates from the US for its Treasuries because they will have the better options of investing in their own economies. There will be rivalry and we will feel as if we are being dethroned as the de-facto superpower. In reality, the US will still be the most powerful military power the world has ever seen BUT it will not be the most power economically. Sounds familiar? If one reads any history, one would know what this is the most likely scenario for a great power to start a war: to restore its economic power by brute force.

At this point, moneywise, we are relative losers either way but I am just praying for the best case scenario... And if we have to make a small sacrifice for other people in the world live better than they used to, so be it. I'll just settle with one instead of 2 cars in my driveway knowing that the great American Dream became International. And when I see Jefferson, Hamilton & Franklin in the other world, I'll tell them they were the winners!