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The Fall of Empires (Part 2)

"Amateurs talk about tactics, but professionals study logistics."
- Gen. Robert H. Barrow, USMC (Commandant of the Marine Corps)
 
The second part of the answer to our original question, “Is the U.S. the prudent place to invest my money for the next 30 years?”, is related to the situation in the world as it stands today. While it may be theoretically preferable to invest all or a sizable amount of one’s portfolio in countries outside of the U.S., there are a number of reasons why American investors should not invest all of their dollars abroad. 
 
1.  The U.S. has the largest and best-functioning markets in the world
 
While the many emerging markets stock markets have had a phenomenal year in 2009.  Chinese (3% of world total) and Indian (2%) stock markets were up over 80% in 2009 and Russia (<1%) was up over 120%, yet the size of their stock markets is still miniscule in comparison to the U.S.(~41% of world total). Smaller (i.e. less “liquid”) markets are generally more volatile, more easily manipulated and more sensitive to government actions. Adding up all of the 22 emerging markets countries’ stock market values together and they comprise only 24% of the world stock market value, but over 80% of the world’s population. 
 
2. Developing countries have a large share of their population in poverty
Increasing their share of the world economy while dragging a majority of their citizens out of absolute poverty continues to be the major challenge for developing countries.   Although many of these countries such as China have made enormous strides in increasing standards of living, there is still much work to be done. In 2008 approximately 35% of Chinese (~460 million) and 81% of Indians (~925 million) lived on less than $2 per day, the benchmark for “absolute poverty” as defined by the United Nations.
 

3. Undemocratic countries generally have higher political and economic risks
 
While China’s state-run economy has been spitting out 8-10% growth every year for the past decade (including a very suspicious 9.6% in 2008) and reporting record low unemployment (4.3% as of early 2009), other conflicting data make it hard to tell what the true reality is. Alan Greenspan, when asked what he thought about a soon-to-be-released Chinese economic report, replied to the effect of “Don’t you think it’s strange that it takes us a month or two to collect all of the data but the Chinese have figured out a way to get it out in a few days?” Unofficial estimates of unemployment in China are around 20% - that would make the ~260 million Chinese unemployed the 4th largest nation in the world. 
 
China and other countries in the same dilemma absolutely require growth to keep their population employed and content. This idea of “growth at any cost” makes some otherwise nonsensical actions make sense. The famous “empty city” of Ordos in China – was completed in 2009 to house 1 million residents but is currently entirely deserted. The city was built with government stimulus money which the local government eagerly spent to keep the economy humming regardless of future losses. Even China’s own politicians have warned of the shenanigans that are occurring as one Communist Party member criticized the common scheme of tearing down newly built bridges just to have something to spend government stimulus money to rebuild. 
 
4. The U.S. dollar is still the preferred currency for international transactions
 
There are many factors that determine if a currency will be the international “standard” for transactions and these have to do primarily with how one country is viewed vs. the rest of the world. Many of these factors currently favor the U.S. dollar over other currences:
-          How necessary is the currency to its users? (as the largest consuming economy in the world, U.S. dollars are extremely necessary)
-          How liquid is the currency? (the dollar is also the most abundant currency)
-          Is it readily available? (there are no limitations on dollar exchange or purchases by the government)
-          How safe is it? (it is backed by the full faith of the U.S. government)
 
5. The U.S. economic and social systems are among the best for rewarding innovation and entrepreneurship
 
In 2006 U.S. resident foreign nationals were listed as inventors or co-inventors on 24% of the patent applications in that year which is a huge increase from the 7% they comprised in 1998. The majority of the applicants were from China & Taiwan (27%) and India (21%). Meanwhile an extremely high percentage of immigrants continue to establish high-tech businesses in the U.S. (almost 40% of all technology and engineering startups from 1995 to 2005). As the largest and one of the most open global economies, many of the best and brightest around the world choose the U.S. as the place to make their mark on the world.

6. U.S. social mobility and relative wealth are substantial
 
Adjusting for cost-of-living between different countries, the U.S. ranks 4th (World Bank 2008) for average income per person at ~$47,000 with China coming in at 89th ($6,000) and India at 113th ($3,000). 
 
While developing countries struggle to deal with a population that survives on less than $2/day, the poverty line in the U.S. is currently set at $30/day and only 13% of Americans are below that level. Put another way, it would take 28 years for a worker earning $2/day to get to $30/day if his wages grew at 10% per year.


Disclosure: No positions