The Kind of World the Next Generation Will Inherit

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We’ve been wondering in this space recently about the kind of world the next generation will inherit. Clearly the trend for the long haul points to a shift of power, and a migration of wealth, from West to East. As we routinely report, the roaring Asian economies have amassed enormous piles of foreign reserves, much of it in US Treasuries.

In part due to this shift, these economies – China, India, Brazil, etc. – command an increasingly important role in the geopolitical arena. In addition, these New Economies on the Block are forging important trade ties with each other and inking deals to secure their mutually beneficial future, ex-US.

The United States, meanwhile, is up to its ears in ever-mounting debt…both to its creditor nations in the Middle and Far East and, to an even larger extent, to its own citizens.

And so we ask ourselves, will the young Johnnie and Jenny Smiths of the West be able to bluff their way through the next round of negotiations with a pair of twos? Or will the Changs, Patels and Ahmeds of the world call their bluff and take them to the cleaners?

Unfortunately, the trouble started for Generation iPod before they even had a chance to cause it for themselves. “Like America itself,” observes Bill Bonner, “[Young Americans] are in danger of finding themselves slipping downhill. Instead of expecting things to get better, they may find it hard even to hold onto what they’ve got. Instead of the ‘Morning in America’ that Ronald Reagan promised, they may find that it seems more like evening, both in their personal as well as their national lives.”

Much of America’s international influence was acquired during a time when the dollar roamed free and easy as the world’s reserve currency. French President Charles De Gaulle called it an “extraordinary privilege.”

At its height, the greenback commanded a magisterial awe and its position was largely considered unchallengeable. But no challenge is too great for the mighty US government…especially the challenge to debase its own currency.

It is true that extraordinary privileges carry extraordinary responsibilities. Within a single generation, the irresponsible goons in charge of preserving the dollar’s integrity had destroyed almost all of its purchasing power. Measured against gold, it has slumped some 97% since Nixon closed the gold window in ’71. And now, when the Treasury Secretary of the United States of America tells a classroom of Chinese university students that his nation’s currency is trustworthy and reliable, they laugh in his face.

Then, on top of an increasingly worthless currency, Generation iPod also inherits about a quarter of a million dollars each in unfunded Social Security and healthcare obligations, the overdue infrastructure bills of a crumbling nation, a couple of distant wars to fight and die in and a world full of disgruntled foreign creditors.

Is there any hope?

Opined John Mauldin on the subject in Tuesday’s issue: “It is not the times which dictate the man (or daughter!), but the response of the man which dictates his own time. Today has a brighter future for someone young than any other time in history, whether they are in the US or Brazil or China. They just have to seize it…”

Echoes Bill, “The real advantage in life is having the gumption to get on with it; no one knows where that comes from.”

Indeed, history provides us with countless examples of individuals triumphing over adversity. A hard working American student has every chance to succeed in life, as does a hard working Asian student. It’s just that, on the whole, graduating classes of Asian engineers and computer programmers are far more diligent than graduating classes of Western feminist film studies students.

Taiwanese university graduates, for example, would happily take on the workload of most western jobs as a vacation, never mind as a vocation. The forty-hour workweek (35 for our French readers) is something students here manage between classes…and cram sessions…and helping run the family business…and music lessons…and English school in the afternoons and evenings. Not only have the Asian countries already outworked the west over the past generation – by a measure significant enough to now own virtually all of the western countries’ debts – but they continue to up the ante even now. They have raised the bar, in other words, and they are raising it still.

A generation ago, Mao Tse-Tung did his people a huge favor and finally died. His successor, Deng Xiaoping then told the Chinese masses not to fear wealth and that, in fact, to get rich was “glorious.” It was a stark contrast to the self-immolating edicts spewed forth from Mao. The people rejoiced…and got to work. Last year, China created millionaires at the second fastest rate of any nation on the planet. Only India outpaced her. Meanwhile, America “demoted” millionaires quicker than any other country could manage. England was next on that dubious accolade.

The people in this region of the world are hungry…and they are only now beginning to taste the fruits of their labor. As finite resources – energy, food, land, water – stretch over the coming years to meet exponentially growing demand, Generation iPod needs at least to know what they are up against in the scramble to stake their claims.

And, not unlike the Eastern generations of yore, they must work hard to succeed, despite the impediments their government impose. This unfolding reversal of fortune between the West and East does not simply suggest that American college students might face a less inviting future than their parents faced. It also suggests that investors might find a more inviting future in the Emerging Markets than they will face in the Developed Markets.

Joel Bowman
for The Daily Reckoning Australia

Joel Bowman
Joel Bowman is managing editor of The Daily Reckoning. After completing his degree in media communications and journalism in his home country of Australia, Joel moved to Baltimore to join the Agora Financial team. His keen interest in travel and macroeconomics first took him to New York where he regularly reported from Wall Street, and he now writes from and lives all over the world.
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Comments

  1. those in glass houses (“degree in media communications and journalism”) should not throw uninformed and poorly crafted stones.

    Who is Joel to to say the graduate of “Western feminist film studies” is any less productive or beneficial to society than an equally pointless degree in “media communications and journalism”? Or in fact any other degree.

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  2. Prozak, it’s just flamebait. Don’t miss the point of the article. And not all journalists are bad… I think.

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  3. Astoundingly ignorant comments from Joel and the DR.

    At a previous incarnation of my career my direct superior had a Bachelors of Arts (English).

    I have a Bachelors of Business (UTS), an MBA and a Masters of Finance from the LBS.

    Perhaps DR recommends I should have told my boss that they are worthless? That their 500M direct contribution to the companies bottom line each year was no good as their degree was rather pointless when compared to some Engineering and Computer Science students in Taiwan?

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  4. Dan,
    No they are not all bad. That wasn’t my point. I place no judgement on a persons chosen field of study.

    Although I do sometimes wonder why all these economic and financial journalists think they have opinions that anyone wants to hear when all they have ever done is write about the subject and never seriously studied it.

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  5. Dan I wonder the same thing sometimes although I would also say people who are “deep” in the economy (like shop owners) often make more sense than the lot of us :)

    Sometimes finance journalists remind me of those armchair generals who tell us how they would have led the French to victory at Waterloo. It’s easy to apply theory with the benefit of hindsight or snipe from the sidelines…a bit tougher getting in there are doing something on a real time basis.

    Greg Atkinson
    November 2, 2009
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  6. He does allude to something important, I think, in that China and India together are becoming colossal in so many ways and yet there is no sign that they are about to crumble under their own weight. The Arab nations have never enjoyed the same unity and so are still generations behind … perhaps it’s the “resource curse” – the devil’s excrement or some such thing.

    What will the US do about it long term (or even short term)? I think the US administration and those behind it (including banks) knew that the end of the gold standard set the clock ticking on the fiat based economy – it’s not something done lightly, although it has given the US enormous advantage for a time. But they know full well that in the end it’s tangible economics and statecraft (including military might) that are more important in the big picture. I wouldn’t write them off at all just yet, but it’s a bit of a gamble.

    Thing is, these educated masses in East Asia have been working largely towards peaceful projects, compared to the US’ heavy emphasis on war machines. Somehow I suspect the US won’t be solving its problems by producing soft toys and memory chips – they haven’t been backward in being forward in the Middle East, and now they are playing with fire in Pakistan.

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  7. Greg, being at the coal face gives a specific insight. But it creates its own bias. A bit like Plato and Alexander the Great. Who really understood the world better? Plato spent most of his time thinking. That’s something there’s not enough of nowadays.

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  8. there is one issue I have with all these asian giants taking over the world.

    Where is their innovation?

    The USA is still by a long way the biggest spender in R&D in the world.

    The next “must have” piece of tech – China might assemble it. But you can almost guarantee it was developed and owned by USA.

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  9. You’re right, Prozak, the US is still ahead. But trends are not as forgiving: http://hbswk.hbs.edu/item/4676.html

    Don’t forget that the US itself started off borrowing ideas from the past and taking over where others left off. The fact that assembly and manufacture (and therefore an intimate knowledge of internal workings) occurs in China, or that programmers are tapping away in India, essentially designing code to order, means that the R&D capacity is already there. It can change very quickly.

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  10. Dan,
    Nice link…. if somewhat unrealistic.

    Have you ever been involved in any offshore program or project involving India?

    I have. About 5 multi-million GBP programs. I can tell you now if the short list involved an indian company again but the local bid was more expensive – I would not hesitate to pay double or triple for a local company to do the work.

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  11. I agree with both Dan and prozak’s last comments.

    Dan I think you are right that China (but less so India) can innovate strongly using capacity and even have the Governmental capability to encourage it more ‘strongly’. And yes I understand that freedom enhances innovation, but money and riches tend to motivate pretty well too.

    However, and this is a point that I got from prozak even though he didn’t exactly say it, China and India have some severe limitations:

    1) corruption stifles innovation. If people think their ideas will be stolen or sabotaged, they won’t try to innovate as much.

    2) they are not technologically developed throughout the nation, therefore technological innovation is only likely to stem from those areas that are well developed

    3) if China and India are busy manufacturing, then they are not exactly in the “concepts” part of the product cycle. They are merely at the assembly part. This means that they have plenty of experience understanding assembly, but less experience understanding the reasoning behind the assembly. Plus, not all manufacturing is necessarily done in the same place, or by the same factory/company. This means that manufacturers may only be exposed to ‘components’ of the technology. (My understanding is that this is the case for military equipment manufactured for the US).

    4) again, the freakin’ corruption. The bribes. The money you need just to start out. The lack of civil rights assigned to individuals and any claims to ‘innovations’.

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  12. I have worked for an Indian owned mining company in Australia who was building a new plant and chose to have some of the equipment manufactured in India. The quality issues on that equipment caused quite a few delays in commissioning. One of the standouts was a thickener which had been “welded”. What I mean by “welded” is that to save money instead of metal they used clay to join certain components together and then painted over the top of it to make it look like a proper weld. Held just long enough to get to site and amazingly fell to bits when being put in place. That said there were other machines which were better but it does put some doubt in your mind.

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  13. Remember there was a time when “Made in Japan” meant cheap low quality stuff. Things can change pretty quickly. The Japanese actually received a major lesson regarding quality control from the U.S (via Deming) and then used this to take on and beat the U.S. at their own game. It’s a funny old world :)

    Greg Atkinson
    November 3, 2009
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  14. I have absolutely no doubts that they will improve Greg, I was just relaying my experience to illustrate that they have a ways to go yet :)

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  15. Don my little addition was not directed at you or anyone else, it was just a reflection on how things can change.

    Greg Atkinson
    November 3, 2009
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  16. Sorry Greg, I was not having a go at you there – I put the smiley face in to try and counteract that impression. I need to use more in future :) :) :)

    There!

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  17. Don,
    Don’t get me started on building high tech engineered components in Asia!
    I think I have said on here before. The countries I have worked with in building carbon yachts seem to currently be culturally pre-disposed to cutting corners. We had to have a “foreman” constantly on the job and checking every single piece of work. We had loads of wasted product – not cheap!
    In the end we got a great product out but it was not really cheaper than building in “the west”…. only when the volume got ramped up was there any benefit from low labour costs (building yachts is still very labour intensive)

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  18. Prozak, a friend who has electronic consumer devices and other things manufactured in China related his experience, along the lines of: “In China, you can get anything made, to any standard. You just have to pay for it … and sometimes it’s not a lot cheaper than doing it locally, except nobody can do it locally to the scale they can (ie: Australia).” – do you think that kind of statement holds water?

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  19. China – Batteries for camera – Last for 5 photos; Pick/mattock (forgot which?) shaped like a candle in an Aussie summer at local hardware store – To demonstrate to customers what happens when you buy “Made in China” from Bunnings; Wood glue that I’ll try on paper because it sure doesn’t work on wood; Oh, plus some dozer tracks. But they’ll get better. And one probably only notices the items that don’t perform – So there are lots that presumably do.

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  20. Does anyone know when exactly Steve Keen gets to go walkies – Or is it along the lines of providing property prices don’t go down 40% in any one calendar year he gets to keep sitting on his bum and watching them go up? (Or was that he other bloke’s bet???) I’m confused now … We’ll see of course, but if the RBA should have any clue at all then Keen and Denning and Skayce(sp ?) and Bonner have got it all very wrong. As a self confessed ignoramous, I await the outcome with interest. :)

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  21. As a very stupid man Prozak I would have thought it was Greenspan and the US and Brit financial boffins that screwed the world – Rather than the baby boomers persue? But we all have our own preferred slant on things I guess.

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  22. Dan,
    in my experience that is definitely accurate.
    same goes for IT projects in India.

    The main benefit with China even for quality goods that are labour intensive is that eventually if the volume is high enough you will reap the rewards.

    You’ve just got to understand that you can’t expect or assume anything, especially early on – even later on you have to have quality control from an external party.

    Another benefit apparently (although I have not seen this myself – just heard it through the grapevine) is that some Chinese companies are so willing to get the business and compete internationally that they are willing to incur the costs of wasted materials until they hit the right quality levels… but like I said this at present is just an urban myth as i’ve not seen it myself.

    But this gets back to the other point.

    Where is their innovation and creativity?

    They are struggling getting the low end work 100% right still. I know I would still not be comfortable buying any new high end or high tech product that is 100% Chinese.

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  23. Definitely my experience too Ned. Thing is, that crud sells – and your friendly local sheister will continue to happily liberate you of your hard earned cash for a slave-made fake garden implement. But this entire o/s manufacturing situation is the same everywhere. Companies that have items manufactured abroad need to (and can if they bother) take responsibility for quality control. Apple computers are now largely Chinese/Taiwanese made. Lenovo (IBM laptops, monitors, etc) is now even Chinese owned. If they want to, they can. And there is the issue – the capability is there, and if the nation wants to manufacture high quality drones whose batteries don’t fail after five minutes, it can. If it wants to make a fleet of nuclear subs to provide perennial coverage of the world’s oceans (probably US’s biggest fear), it most likely can – and this is going ahead currently. It’s not all about fluffy toys and two-dollar shop crap anymore.

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  24. “Where is their innovation and creativity?” – Suspect they’ll kick in bigtime one day – Software, medicine, biothingies, younameittech – There are enough of the little buggers once they really start punching them through unis – And they are hungry in ways post 1930’s Westerners probably couldn’t hope to relate to. Let’s just hope they don’t spawn any financial whiz kids hey? :)

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  25. All true enough Dan – We are going to see the old bull and the new bull nudging each other for a bit of room in the paddock over the next few years and decades I think. My money’s on the slopes because motivation counts for a lot – But them old bulls don’t give up their cows easy! :) (Should be a bit of fun to observe over the declining years of my decrepitude – I hope?)
    PS: It was about 2005 I had a silly young bint from my then Oz super fund (QSuper) say to me when I asked about the possibility of another “Great Depression” that the financial markets were too “sophisticated” for such things to happen nowadays – At which point I reckoned my retirement was just maybe been overseen by brainwashed kids and set up a SMSF. Cheers eh!

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  26. Too right, Ned. The less TV a person watches, the more a person starts to see how programmed the thinking is of people around them. Frighteningly Orwellian, actually.

    Good move of course about self managed Super. But doing the right things outside of the Super shell are even more important for people starting out.

    I think the US has a couple of tricks up its sleeve, regarding the new bulls – something is cooking over in Afghanistan that has a lot more to it than just Taliban and Pakistan and spreading American peanut-butter democracy everywhere. They are getting close to a few sensitive spots for India and China. Hard to get good info though.

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  27. China dropped a gentle hint about a month ago that it just might be time for “Yankee to goee homee Dan” – Even offered to arrange the truce – We’ll just have to see I guess? (The US is more than happy with it’s strategic toehold right there for both now and the forseeable future is my guess.)

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  28. I think for China to give even the gentlest hint is significant. There is a fair bit of tension building with all that which isn’t covered in the press at all. I am quite sure China is particularly unamused by India’s warming to the US … conveniently helped along by instability in Pakistan.

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  29. Interesting comments guys, keep em coming.

    I particularly like stories/evidence proving or disproving the Chinese and Indian innovation

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  30. Same work same pay is the end result of globalization. US will have its niche edge in innovation, however that cannot employ 300 million people. The new recruits in call centers in India are told ” 1% of the US leads the world, the rest 99% call us at night”. The major losers would be this 99% dumb people (in the developed world) who need someone to tell them how to switch on a computer or fix something in a washing machine. I guess Joel is worried about the extinction of this 99% of USA (and the developed world). 99% of people in emerging countries are also dumb but they live like paupers and often on less than 2 dollars a day.

    dinakarananda
    November 4, 2009
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  31. Pretty hard to disagree with what you say dinakarananda. DR seemed to be allowing itself a few happy thoughts a while back that high oil prices just might bring globalization unstuck – Re costs of transport. Dunno – Although it seems a bit extreme.

    As to innovation, lots of it nowadays is done by corporations rather than backyard boys of course. With the motivation being purely commercial. So with developing nations not being as keen on paying to use intellectual property rights as the West might like, some of the motivation for it may be declining. We’ll just have to see what gets worked out there I guess.

    Intelligence – IQ at least is based on ye old bell shaped curve. It’s been going up apparently with IQ measures having been tweaked over time so that “average” remains 100. The developing nations (overall) should keep going up in that regard I guess. Whereas it looks like a few developed nations just may have “peaked” – As far back as the 1980’s for the UK? And more recently for Denmark and Norway. (Gains are concentrated in the lower half of the distribution and negligible in the top half?) Some sort of law of diminishing returns involved there perhaps.
    http://en.wikipedia.org/wiki/Intelligence_quotient#Trends_in_IQ

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  32. Hey Ned,

    Had the same sort of experience with Qsuper when I went to change my voluntary contributions to cash in lieu of stocks. Bright sparks in there pointed to ten year gains, blah blah blah, (ten years ago they were in primary school and hadn’t even been through a heavy recession.

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  33. Yes Annie, that particular experience left me feeling way less than confident. And the fact that on a way more basic level, they sent me out statements showing the wrong amounts of tax deducted from my voluntary contributions didn’t especially impress me either. And then they made it worse when I phoned to notify them of the errors by adopting the attitude of “We’re QSuper and we don’t make mistakes … Huh, what, you insist we’re wrong? – Oh alright we’ll look into it just to keep you happy then!”

    You have to able to do your own basic maths these days Annie, because it’s beyond the abilities of our best and finest financial institutions. Hmmm.

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  34. “And people feel more confident buying in rising markets rather than falling ones.” Strange, that, isn’t it?

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  35. Another Pete post. Let’s say we change our names. You go first?

    FYI i am the regular Pete that posts here.

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  36. It could be that “nationality” will be of little importance to many educated ipods. In a “global” economy many ipods may just view themselves as global people. This East vs.West thing may well have a date stamp on it. (I’m hopeful)

    Coffee Addict
    November 4, 2009
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  37. It beats “trying to catch a falling knife” Petetu.
    Seems there is a line in the sand in that regard. As Oz housing is effectively the banks.
    Dr Henry will give those who need them a few more specifics soon I guess.

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  38. That’s why it is so important for everyone to teach their kids financial education now. And that means girls too. As I read somewhere online once “most females piss away their youth on fashion trends” Terrible language I know but it explains it perfectly. Then they get old and they dont have a clue about money or finance. Start teaching your kids- both male and female- about how to manage money now.

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