Worry not about the US economy
Worry not about the US economy
The US economy is looking rather sick. The IMF expects a recession, the Federal Reserve believes the economy is currently contracting, house prices are plummeting, unemployment is rising (although still at a historically low rate of 5.1%), the US dollar is buying 25% less euros than it was two years ago, the US current account deficit – despite the falling dollar – remains at a stubbornly high 5% of GDP, the recently tabled 2009 budget forecasts a deficit in excess of $400bn and Fed Governor Bernanke is doing everything he can to make the already worrying inflation problem worse.
If that’s got you sweating, you can relax. The US will survive and, given enough time, prosper. For all the excess, disasters and unfair distribution of the gains, the system works.
Real economic growth arises through improvements in productivity. You can fiddle with interest rates, money supply and government expenditure all you like, what really matters is increasing the amount of ‘stuff’ produced per person. And, thanks to its devotion to capitalism, increasing the amount of stuff it produces is something the US is better at than any other country in the world.
That’s because the capitalism encourages competition, and competition encourages innovation. The barriers to building something better are small and the potential rewards huge. It's no surprise that the companies leading the technology revolution (think Google, ebay, Facebook and MySpace) are products of the US – it’s hard to imagine building the world’s most popular search engine while attending an Australian university. In fact, think back over the 20th century and it’s hard to think of too many revolutionary technologies that were developed outside the US (fire away in the comments section below). Plenty of the ideas came from elsewhere, they just don't tend to get developed.
In a few (mostly Asian) countries, times are changing – there’s an excellent article in yesterday’s Fin Review about technology and innovation in Korea (page 62 of the hard copy, unfortunately not free online) and, with more than four times the population, China’s economy will overtake that of the US one day. But as long as the US remains the capitalism capital of the world, there’s no need to worry about its obsolescence. It’s been spending much more than is prudent and an adjustment is necessary, but in 10 or 20 years’ time, it will be bigger and stronger than ever.
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The problem in Australia has not been a lack of breakthroughs but unwillingness of Australian investors and governments to support them. I went through this exercise myself, and the products were highly succesful, with world patents. BUT we did not have the capital to protect the patents and within a few years they were widely copied in US. Other clasics are "black boxes" - offerted to Quantas and Government who could see no future in them; and AAS analysis machines which revolutionised chemical analysis BUT company was bought out by US. There are many others.
Neil
Hi Steve,
I always enjoy your comments, but, this time I can't agree, sorry.
I think the Americain economy is a basket case; huge government, corporate and personal debt is bringing the economy down. House prices are falling, unemployment rising. The cut in interest rates only delays the inevitable. My guess is the Fed is being influenced by political desire of not wanting a recession on the present administration.
I also think the slowdown in America will impact here in our resources. It is the old supply and demand thing, as China exports a large percentage of their widgets to America. With the demand for widgets slowing, the need for resources is reduced and every resource company is trying to export there.
Look forward to your response.
Owen.
Hi Owen, I don't think there's any doubt there'll be a recession. My point is that recessions aren't the end of the world. In fact, they can be quite healthy and if they hadn't gone all out to avoid a recession in 2001, they probably wouldn't have the problems they have now. The fundamental reasons the US has been so successful in the past remain in place. They'll get over their problems and get on with it.
As for resources, I agree with you but I've been wrong, wrong and wronger in the past so I'll keep my opinions to myself on that one - there are easier things to predict.
I think you are completely wrong, Steve.
Firstly, the capitalism that made America great in the 20th century is not the 'capitalism' that they have today. Today, they are practicing socialism for Wall Street in the name of 'capitalism.' If they really practice capitalism, then they should let businesses that deserves bankruptcy to be bankrupt. Instead, they are letting bailing out Wall Street by printing money and socializing the losses. And yes, there are plenty of corruption, both in Wall Street and government.
America is consuming their capital for the past few decades, their infrastructure is in disrepair, their industry is getting less and less competitive by the day, their technological edge is eroding (Facebook, eBay does not count as 'technological' innovations). Even the iPod is not produced in America. Less and less PhD in the hard sciences and engineering are produced from the US.
I think it would be fair to say Facebook and eBay do count? By what measure are they not innovative market leaders? Do they not employ technology to achieve there product?
And whilst the iPod may not be produced in the US, Apple is a US company selling the iPod in a global market. The profits go straight back to America.
Having said that, I'm not sure America will weather their current problems and come out the other end a super power. They appear to be unwilling to control their spending or domestic consumption, They are engaging in pointless military activities that are bleeding them dry to the tune of trillions of dollars, With no end in sight. Even the coming Democrat leadership are cagey about a reduction in the military activities. America can't afford to continue this forever.
For all that we have seen a recent shake up on Wall Street, most analysts see it as a minor correction that is already over. I think the problems are deeper than that but in this case, I would love to be wrong.
People are openly talking about recession now as if it's no big deal. A year ago people who uttered that word were ridiculed. Unless the US reduces spending at both the consumer and government levels, US economic conditions WILL worsen. then a few brave souls will start to utter the "D" word and of course they will be ridiculed also.
My main concern is not the economy, but the trigger finger mentality that countries get when their backs are against the wall.
Interesting times.
Richard says,
"I think it would be fair to say Facebook and eBay do count? By what measure are they not innovative market leaders? Do they not employ technology to achieve there product?"
The keyword here is "EMPLOY". They employ existing technological infrastructure (e.g. switches, routers, software, hardware, cryptographic protocols, etc) to do what they do. If Facebook and eBay can employ them, what stops other rival nations from employing them? Already, Google is facing competition in China with the rise of Baidu.com. eBay does not have any hold in China.
eBay and Facebook are just business 'innovation'. They are not technological advancement. It is technological advancement that makes a nation wealthy in the long run.
"And whilst the iPod may not be produced in the US, Apple is a US company selling the iPod in a global market. The profits go straight back to America."
There is a difference between profitability with productivity. Apple, for all its business innovation, is an empty-shell platform company. It outsources all the nitty gritty technological stuffs into Asia, which is an effect a transfer of technology and knowledge. It's only a matter of time before Asian countries climb up the value-chain once they obtain the technological advancement.
Steve,
The US will not dry up and disappear, I agree. However, this does not mean that we shouldn't worry. Yes the US is a great economy, past and present. This is no guarantee that it will continue to be so forever. Without exception, every single great civilization of the past fell from grace and lost the number 1 spot.
American faces some very, very real issues. Just to list a few:
they consume 25% of daily oil production. Oil prices are increasing and there are major questions over whether supply can increase at all, let alone to meet any increase in demand.
US debt is over 9.4 trillion if you believe the US debt clock - thats a lot of ipods.
Banks fell over themselves to lend for houses, forgetting that those people cant afford to pay for them.
Credit Card debt in the US is an addiction, just under another trillion. Rates on these are re-setting to over 22%.
A Social Security system and health care system that can't afford.
Unemployment and inflation statistics have been manipulated to "dress up" the numbers a bit. Taking Food and Oil out of the CPI - like no one buys those things...
So yes, they have a few issues to sort out.
Still I guess if they invent a nice web site that every person in the world joins and pays $500 they will be fine. By $'s I don't mean US $'s.
You should be worried, very worried.
When the US set up the current world order after the second world war it had most of the gold. It is now broke. It's not about sentiment it is about basic fundamentals.
Dear Steve,
Your comments are full of hope. However I am an Australia living in the USA for the past 14 years. From personal experience I can see the housing crises first hand. The worst is ahead of us. I see houses sitting on the market for 9 months and not moving. Here in the LA area prices went from 400K to over 1M in 5 years. People just cant afford their 500-1M mortgages anymore.
And on the company side, I will not share the company I am working for but as a leading entertainment company we just cut this year's IT budget by 75%. Therefore less jobs, people cant pay their mortgages and it will spiral futher.
I sold half my Aussie investments and put it in cash. I am preparing for a very bleak future.
My neighbor lost his IT job and is moving to Silicon Valley to work for Yahoo. The last bastion for IT jobs. He cant sell his house though. The price will be below the mortgage value, so he is stuck.
If I could, I would move back to Australia now....
Who says, Steve? Is it blind faith or are you willing to put a huge bet on it? People always think because it happened in the past it will happen in the future. Things change. No particular outcome is guaranteed in this world.
Digressing slightly...we've heard a lot of talk about alternative energy to power cars. Fine, but I've not yet heard anyone postulate how we are going to power commercial jet airliners when the oil runs out. Maybe not in our lifetime, but this could be a critical point in history. We are conditioned to growth and improvements to our lifestyle, but who says this will always be so?
Thanks for your comments Steve H, and everyone else. I just wanted to add that I don't think Steve J is saying that America won't have a recession, or a year or two of pain. The things you've talked about happening in LA, and I think it's terribly interesting and could create some great opportunities for some and great misery for others, but they're referring to a slow down, to a recession, even a depression, but not necessarily to the end of America. Steve J is saying that the US will come out the other side of the current pain you're talking about, whether it takes a year or a decade. And I agree with that.
That said, I hold a slightly different opinion to Steve J. I think their hegemony will dissipate over time, and I think it's a perfectly natural occurrence. Something like the second law of thermodynamics is surely at play here. But I think it's something that's been happening since, roughly, the 1950s and will probably take another 50 years to play out. Actually, I'm not even sure that this is at odds with SJ, he'd agree that China is likely to be the world's biggest economy in our lifetimes. But then they are many times the size on a per person basis.
As for the end of oil, I do share Wes's concerns over the end of cheap fossil fuel. But it's unlikely the end of fossil fuels will give, say, an edge to China over the US. This is an argument for the end of economics, rather than the end of the US, and I don't think that's the point of SJ's article here. Perhaps it's a discussion for Steve's next rant. In my humble opinion, the transition past oil won't be a smooth one. But it's important to acknowledge that it was the end of abundant timber in Britain that caused the switch to coal and, in effect, got the whole industrial revolution rolling. Scarcity breeds solution and opportunity. And there are many interesting technologies out there already just waiting for the right energy pricing before being rolled out. Oil was a wonderful free kick but we've become accustomed to growth and will work hard to maintain it. I'm not saying life won't look different - it always does over 50 year periods. But even if we can't answer the aviation question, the economic world will still continue to function - although I obviously wouldn't want to keep my Flight Centre shares if the world changes too much.
Probably the most far reaching development in the last century was nuclear fission. This was developed in the US but with mainly European brain power. The US has never been a great innovator, it has been a great user of others ideas.
On another point...
The end of mass use of fossil fuels is probably closer than we think - not so much because of global warming but more because of the certainty of nuclear fusion as a power source. The European fusion reactor is getting closer to reality every day. The great thing about it is that it only has to have few percentage points of positive efficiency to be viable. This is because the fuel is practically free. Admittedly, it has taken a lot of money and time to get to this point. But the second and subsequent reactors will be much cheaper and faster to build. This will be the turning point for the global economy and for US.
Steve, I liked your article until the end...10 or 20 years, I think that says it all.
On the positive side I do recall reading a book written by Lee Iacoca who managed the turnaround in Chrysler where he pointed out the enormous potential the US has if it chooses to unite as a nation.
The negative is that they don't seem prepared to face the reality, take the medicine, pay the price and in fact seem to believe they can spend/borrow there way out of a debt problem. Am I naive to some deeper economic rationale or is it that they are delaying the inevitable. The move in the price of gold screams the markets opinion. For mine the US has a long way to go but until the embrace the reality the road immediately before it has big sign saying beware steep descent.
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