Holding The Tigers

By: John Browne | Wed, Jun 9, 2010
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In the arc of history, all great powers have their day. Even confining our glance to the modern era, countries such as Spain, France, and Great Britain all had periods of unrivalled power across the world stage. Today, the United States reigns as the world's sole superpower - but the wheel of fortune is turning. The US is being credibly challenged by rising powers in the developing world, like India and China. It is a process that will have huge implications for investors over the coming years.

In the 1990s, following the fall of the Soviet Empire and the privatization of communist China, commercial trade opened up on a worldwide basis. Exporters in America and Europe (the West) cheered at the promise of vast numbers of potential consumers in these new markets. What few realized was that these markets were populated by people who had been denied upward mobility for decades and were ready and eager to work hard for small gains in prosperity.

In the battle between the developed and the emerging, the first round went to the West, as our major companies exported heavy equipment, including aircraft and construction equipment, mostly to emerging governments.

In the second round, entrepreneurs from the emerging markets, many educated in Western universities, imported technologies and imitated management techniques from the West. With access to cheap, hard-working labor, some start-ups achieved spectacular results and grew rapidly. Of those, some became giants and competed on the open markets of the West. In China's case, exporters were aided by a currency manipulated downward (at the expense of domestic savers and consumers).

In the third round, the balance of trade changed for the first time in centuries as countries in the West accumulated vast trade deficits. At the same time, many Western exporters found their overseas markets captured by the new 'Tigers' from the developing world. Soon, even their domestic markets were overrun with inexpensive foreign goods. With bloated welfare systems, high levels of regulation, and aging infrastructure, Western economies were unable to compete on price or quality.

In the fourth round, emerging economies, particularly China, began an unprecedented scheme of consumer financing for the West. Pieces of this policy include the yuan/dollar peg, the stockpiling of US and European government bonds, and the subsidization of export-oriented national champions. The results are neatly summarized by the tale of the new bullet train to be installed in California: it will be paid for with stimulus money that America borrowed from the Chinese government and then produced by a Chinese firm!

The West's debts have now become so great that the credit ratings of major Western sovereigns are now in question and endemic default threatens the fabric of Western economies and social life.

Meanwhile, the Tigers' accumulating real wealth has allowed them to invest in new capital goods and infrastructure. As a consequence, a large middle class is developing, estimated at some 500 million people in China alone. Many of these people, given the first taste of economic possibilities, are keen to acquire luxuries, such as refrigerators, automobiles, and houses, which once were seen as the preserve of Western consumers. Given the spectacular rate of development over recent years, it is highly likely that even high-tech products will increasingly be designed, marketed, and sold locally within Tiger economies.

Many now argue that it will take time for the middle classes of the Tiger nations to accumulate the wealth of those in the West. However, it must be realized that while currently poorer than their Western counterparts, their potential is virtually unlimited. The Tigers have vast savings and capital resources, whereas the West has exhausted much of its capital through consumption. They have access to the oil resources of the Middle East and North Africa, while the United States has made an enemy of itself there. They have billions of people hungry for access to food, shelter, and clean water, whereas we have a declining population unimpressed with a year-old iPod. Finally, the people of the Tiger nations are still self-reliant and untainted by the corrosive effects of socialist entitlements, while Westerners will take to the streets at even a mention of cuts.

The United States has gone from hegemony to decline in a relatively short time-frame. It seems, as history marches forward, that each empire's collapse is quicker than the previous. That may be the case this time, yet again. Since the dawn of the 21st century, it has been clear to me that, if current trends continue, this era belongs to the developing world. The US may have had its day, but the sun is now rising across the Pacific.

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Please note: Opinions expressed are those of the writer.

 


 

John Browne

Author: John Browne

John Browne, Senior Market Strategist
Euro Pacific Capital, Inc.

John Browne

John Browne is the Senior Economic Consultant for Euro Pacific Capital, Inc. Mr. Brown is a distinguished former member of Britain's Parliament who served on the Treasury Select Committee, as Chairman of the Conservative Small Business Committee, and as a close associate of then-Prime Minister Margaret Thatcher. Among his many notable assignments, John served as a principal advisor to Mrs. Thatcher's government on issues related to the Soviet Union, and was the first to convince Thatcher of the growing stature of then Agriculture Minister Mikhail Gorbachev. As a partial result of Brown's advocacy, Thatcher famously pronounced that Gorbachev was a man the West "could do business with." A graduate of the Royal Military Academy Sandhurst, Britain's version of West Point and retired British army major, John served as a pilot, parachutist, and communications specialist in the elite Grenadiers of the Royal Guard.

In addition to careers in British politics and the military, John has a significant background, spanning some 37 years, in finance and business. After graduating from the Harvard Business School, John joined the New York firm of Morgan Stanley & Co as an investment banker. He has also worked with such firms as Barclays Bank and Citigroup. During his career he has served on the boards of numerous banks and international corporations, with a special interest in venture capital. He is a frequent guest on CNBC's Kudlow & Co. and the former editor of NewsMax Media's Financial Intelligence Report and Moneynews.com. He holds FINRA series 7 & 63 licenses.

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