The 19th century belonged to Britain, the 20th century belonged to America and in the 21st century, China will rule the business world. Whether you like it or not, this transition is already underway and it will intensify over the coming decades.
Throughout history, no empire has managed to rule forever. Instead, empires rise to power, they prosper and spread their influence. Thereafter, they over-extend themselves and then break down in some fashion. In fact, all the glorious empires of history had one thing in common - a spectacular collapse.
Now, there can be no doubt that America ruled the economic world for the better part of the previous century. However, this powerful nation has now entered a terminal decline. The recent credit crisis and the failure of some of the largest American financial corporations is compelling evidence that the world's largest economy is well past its prime.
Today, America finds itself heavily in debt and to make matters worse, its demographics are also worsening. Unfortunately, the American leaders are attempting to postpone the day of reckoning by taking on even more debt! It is noteworthy that over the past year alone, America's federal debt increased by approximately US$2.1 trillion and its projected budget deficit over the next decade is now slated to be almost US$9 trillion! If this does not shock you, then consider the chart below which shows the total obligations of the US government.
As you can see, over the past six years, American unfunded obligations increased by almost 50% from US$79 trillion to US$114.7 trillion! Alarmingly, over the same period, American government revenue rose by only 12%! Now, you do not have to be a genius to realize that no entity can continue to increase its liabilities by more than four times the rate of its revenue. If this spending frenzy continues, commonsense dictates that at some point in the future, the solvency of the American government will come into question. When that happens, foreign capital will flee America, interest-rates will skyrocket and we will witness an epic currency crisis.
Furthermore, it is worth noting that apart from the American government, the Federal Deposit Insurance Corporation (FDIC) is also in serious trouble. In an ironic twist of fate, the FDIC's Deposit Insurance Fund has spent so much money covering bank failures over the past three months that it has completely run out of money! This implies that there is no capital available now to insure bank deposits held at American banks.
Given the horrendous deficits and ugly debt obligations, the American government is now left with the following options:
a. Raise taxes (not sufficient to meet obligations)
b. Cut back on spending (highly unlikely)
c. Default (unimaginable)
d. Print money (only viable option)
Remember, America is the largest debtor nation the world has ever seen and the only way it can repay its obligations is through a process known as quantitative easing (euphemism for printing money). In fact, this stealth confiscation of savings is already well underway. A recent report published by the Federal Reserve revealed that the American central bank purchased half of the newly issued US Treasuries in the second quarter of this year. Needless to say, the Federal Reserve financed these purchases by creating dollars out of thin air - a short- term fix but a long-term disaster.
Let us put it bluntly; the days of American hegemony are drawing to a close and within the next two decades, China will become the world's most dominant economy.
If you are sceptical about our claim, you may want to note that twenty years ago, China's economy was worth only US$342 billion and as of last year, its GDP had grown to US$4.4 trillion; representing an annual growth rate of 13.6%. Now, if China succeeds in growing its economy by roughly 8% per annum over the next two decades, its GDP will grow to US$20.5 trillion by 2029. At that point, China may well replace America as the world's largest economy.
It is worth keeping in mind that whereas American households are up to their eyeballs in debt, their Chinese counterparts have a savings rate of almost 40%! Furthermore, at a time when America and other nations in the West are struggling to stay afloat, China's foreign exchange reserves have surged to US$2.3 trillion!
Now, we are aware that many commentators are criticising China for the sheer size of the stimulus unleashed by its leaders. In our view, this ridicule is baseless because instead of spending printed or borrowed money, at least the Chinese are spending their savings.
In any event, the stimulus applied by the Chinese policymakers seems to be working. Over the past seven months, money-supply growth in China has risen by 26% and loans have surged by 32%. In turn, this inflationary orgy is creating a residential construction boom. All this economic activity is in stark contrast to America, where despite all the policy-actions, private-sector credit is contracting.
Look. The Chinese economy is roaring along...and you can be pretty certain that the country's rapid growth will cause domestic consumption to explode. Already, roughly 900,000 cars are sold each month in China and by the end of this year, the Asian powerhouse will replace America as the world's largest market for automobiles. Interestingly, similar trends of rising consumption can be observed in various household items such as refrigerators, motorbikes, mobile phones and so forth.
So it seems to us that in this low-growth world, investors would do well to take a good hard look at high-growth opportunities like China.
Regards,
Puru Saxena
for The Daily Reckoning Australia
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About the Author
Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets. In addition to the monthly report, subscribers also receive "Weekly Updates" covering the recent market action. Puru Saxena is the founder of Puru Saxena Limited, his Hong Kong based firm which manages investment portfolios for individuals and corporate clients. He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs.
Comment by Greg S. on 19 November 2009:
Everybody should check this out and see what the "leader" of the 21st. century business world looks like.
http://www.chinahush.com/2009/10/21/amazing-pictures-pollution-in-china/
American's should be deeply ashamed that we surrendered our industrial base to support this. We should be ashamed that we support this by buying their cheap, poisoned junk. However, the problem for us Americans is that if we quit buying China's cheap junk, there would be nothing left for us to buy.
As for China being the economic leader of the 21st. century, exactly how does a communist, totalitarian and often brutal dictatorship accomplish that? This is a country where speaking your mind or worshiping contrary to the dictates of the state can (and often does) result in imprisonment and torture.
This is a country who's communist system would have never developed the industries that are now overflowing us with junk, had we not moved our industrial base over there to take advantage of their cheap (slave) labor.
If China becomes the 21st. century economic leader, it will only be because the true economic leader of the world became more corrupt than the Chinese. Not because of anything the Chinese did themselves.
Comment by Annie on 19 November 2009:
I agree Greg. Having lived in a country where you can virtually only buy chinese crap, and having it break after one use (can opener, plates, glasses etc) I will not buy any chinese made goods. I also, through lack of choice, ate imported chinese food and was inevitably sick constantly. Labels do not matter, use by dates don't exist, you have no idea what the hell you are eating.
Having worked in the environmental area for many years, I believe China is on the road to nowhere. If you buy any seafood from there you are dicing with death. I mean it!!! Like too many birds just sh%^*ing in their birds nests, it will eventually implode under environmental disaster, corruption, oppression, growth too fast too soon,social rebellion, (a falling us dollar?) and climate change.
PS some of my best friends are ex pat chinese and they agree.
Comment by Justin on 19 November 2009:
Will interest rates skyrocket?
The rising USD gold price indicates to me that interest rates are indeed skyrocketing, just not USD interest rates which are still in a falling trend.
I'm not sure the price of USD denominated liabilities have any bearing on the value of the USD, when the value of the USD is given by the price of USD denominated liabilities, priced in USD of course.
Confusing?
Comment by tar and feathers on 19 November 2009:
I don't think Justin saw your web link Greg.....
Anyway I suppose the reason why gold is going up is its massive demand by World Govts being little to do with USD per say - The USD is being held up by world govt so that they can trade out it ASAP, so markets are being manipulated as well as the USD.
Its interesting that all 1st world economy start up phase produces deleterious pollution although China is way out in front due to its massive production capacity.....this DR article by Puru Saxena is beyond the pale.....its unsustainable for China to develop a large enough middle class that is wealthy enough to absorb excess production capacity...you simply cannot change the socio-economic structure of a nation in the time scale desired by the rest of the world.
The fact is China's surplus of cash is the blood and sweet of its underpaid work force, this DR article hides the motivations and only reveals the end outcome, not the means to it as Greg S reveals - the current workforce and population is an expendable means to an end.
Aus Govt is a avid believer in the import of Chinese poisonous food and products - I guess that's the deal and we can then have our own pollution shame file in Aus.
As disgraceful as the Chinese Govt is the world should try to assist a way in which China can temper its economic capacity, rather than it fall into a hole and pull us all in with it.
Comment by peterg on 19 November 2009:
"a. Raise taxes (not sufficient to meet obligations)
b. Cut back on spending (highly unlikely)
c. Default (unimaginable)
d. Print money (only viable option)"
e. WAR! (with a little of a. (or war bonds), b. (dead soldiers cost less, replace with cheaper (Chinese?) drones, c. (invaded nations don't collect debts and can be stolen from (Iraq)) , and lots of d. but maybe that's old fashioned in a nuclear world... then
f. (unthinkable)
Comment by Daniel Newhouse on 19 November 2009:
China is a dicatorship with its own problems. Remember Godfather Part II? Long term, I'd put my money on India. Short term, Norway or Australia.
Perhaps worth noting: I buy vintage CD drives off of ebay because all the junky ones made these days can't support secure ripping of data - they simply do not respond to the low level instructions needed to do that.
Comment by prozak on 19 November 2009:
yet another DR article that is more editorial opinion that ignores other information or makes up its own information and presents this as fact.
poor poor article.
Comment by Ned S on 19 November 2009:
Had a talk to a mate in Russia yesterday - Economy ain't great at all, banks aren't lending, way too many apartments ... But prices are holding. He didn't say it but I'd guess it helps that inflation is high? So the expectation has to be that prices will hold. Jeez you should see the shit they sell off over there for 5 million roubles. Which is about USD 175 K!
Comment by Ned S on 19 November 2009:
Had a talk to a mate in Russia yesterday - Economy ain't great at all, banks aren't lending, way too many apartments ... But prices are holding. He didn't say it but I'd guess it helps that inflation is high? So the expectation has to be that prices will hold. Jeez you should see the "stuff" they sell off over there for 5 million roubles. Which is about USD 175 K!
Comment by Lachlan Scanlan on 19 November 2009:
"this inflationary orgy"
Since many nations consume vast quantities Chinese goods how much widespread inflation may arrive through this pathway? Indirectly a result of USD devaluation (Chinas'competitive devaluation) amongst other things. No wonder those Chinese so keen on PMs.