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In
This Issue This week US Treasury Secretary, Hank Paulson, held a summit meeting with Chinese Vice-premier Wu Yi in Washington DC. It was mostly overlooked in the press and media as the fight over funding the war in Iraq consumed the headlines. The impact of this summit sets the table for the future of the United States in a far more meaningful manner as it outlines the coming miscalculations of the Mandarins in Washington DC. And like an exploding cigar, these issues have the potential to blow up in our faces, the unintended consequences of which can create investment opportunities that can be anticipated. In the last several months the protectionist bombast (soon to be bomb blast) has been spewing forth from the most ignorant of our federal public servants who inhabit the District of Columbia. These elected representatives from both sides of the aisle have decided to try to pin the tail on the Chinese for the failure of US public policy to set the table for wealth creation, and an expanding US economy, in the emerging global economy. What do you do when someone throws a huge and extravagant party and you are not invited? We are about to see, as this is what is unfolding on a global scale, with America on the outside looking in. The G7 in general is embracing socialism and it shows in the economic growth numbers; they are barely growing and after the true inflation numbers are included, they are not growing at all (see “Misery spread widely”). The global economy is growing like mad as the recipes of Austrian Economics and Capitalism are combining to work their timeless magic. Huge piles of savings, combined with the pipes of International Global Money flows, modern communications, the internet, instantly available top quality education resources, entrepreneurs in the emerging world, emerging middle classes, modern transportation, and the loosening grip of socialism substituted with capitalism are creating a global economic boom that is astounding in its size and breadth. Economic growth and wealth creation which used to be made in America, are now being made in many other places. They are now sliding into old age in the US and are on life support. During the Carter Administration the US economy was in serious distress: inflation was in the teens, individual tax rates were as high as 70%, regulations were smothering the economy, inflation was eating everyone alive and in general, the future was so bleak in the public’s mind that change was in the air. Wham! The arrival of Ronald Reagan and Paul Volcker, policy makers with BACKBONE, a firm knowledge of history, capitalism, the sources of wealth creation and economics. Regulations were reduced as the bureaucracy got a haircut, the federal register was reduced for the only time in history. Voters were so desperate that the electorate wiped out the Democratic president and handed Congress to President Reagan. Pain created the impetus for change. Paper money was trash at the time; inflation swallowed alive anything that was printed. When people were paid, they quickly put the money into something that could hold value; real estate and gold were front and center in this period. Bonds were known as certificates of confiscation, stocks were dead, and Wall Street’s name was mud. Inflation was killing the stock market, as dividends could NEVER keep up with the corrosion of the currency they were denominated in. Newsweek was reporting the death of equities in 1982. In the United States we are heading back into many of these environments, but it will take us many years to get there as many things have changed in the global economy. Stocks could soar now due to the same elements, “too many dollars chasing too few goods” that was present then, but will play out differently in this timeframe. In 1980 the United States was the greatest creditor in the world; now it’s the greatest debtor, and that is the keystone of the different endgame. People that have big fat bank accounts don’t have to worry about a rainy day, and even with all those domestic problems at that time, the US was still the manufacturer and banker to the world. Most of the world’s capital resided in the United States. Now it sits in foreign financial hubs, and that pile of capital is growing by the day, as public servants in Washington DC busily tear up the roots of previous wealth generation, and foreign competitors plant the seeds necessary to generate the growth that at one time resided in the United States. China is one of the new primary emerging economic super powers, with an immense population, huge pools of savings, an emerging entrepreneurial class and increasingly good educational system, as well as developing modern communications and transportation. The stage is set for growth. And grow it must as it transforms itself from an agricultural society to an industrial and knowledge-based one. Billions of people are leaving the fields and heading for the cities, seeking to improve their lives and prosper. These things are transpiring in a far broader context in the world as the rest of Asia, the new EU 15, India, Russia and Brazil, join the chorus of emerging capitalism and industrialization. Poverty is receding and wealth creation is mushrooming across the world as vast new middle classes are born, newly created middle classes that will dwarf those now living in the G8 club of industrialized countries. Everywhere, that is, except several countries and regions in the world that are not at the banquet table, and thus they are not going to be part of the big party that is unfolding. What are those places? Principally, they are places such as the United States, the old EU: France, Italy, and Germany (Germany is an interesting subject - some is good, some is very bad), Belgium and Greece, to name a few. The Public Servants and citizens in these countries are caught in the “something for nothing” mentality. They wish to fight the inevitable oncoming globalization and think they can do so by writing something on a little piece of paper, aka “legislation”, which they believe can stop the future from coming to their little piece of the world. Like waves striking a beach, these efforts will be eroded in the same manner. These countries either change their ways or become Banana Republics. Some are farther along the process then others, e.g. Italy and France are arguably solidly in this camp. The US is rushing headlong to catch up to the “bananafication” of these leaders. The United States is now the greatest debtor in the world, and if the real extent of their indebtedness was ever compiled and reported, it would cause an immediate collapse of its currency and inevitably its economy, as the capital required to create future business and wealth creation would quickly be withdrawn by our creditors. This has not happened yet but our leaders are quickly trying to bring this day forward with confrontations like this one with the Chinese Vice-premier. Take a look at this table from the CIA’s website (this website is fascinating), and realize that these numbers have been growing on a compounded basis for years upon years Rank
Order – Current Account Balance Countries for which no information is available are not included in this list.
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