"World Economic Growth - The U.S. Can Still be a Contender"
Sydney M. Williams
It is generally accepted that the twenty-first century will belong to emerging nations, especially China. Over the last ten years nations like China, Brazil, India, Indonesia and Vietnam have experienced annual GDP growth of about ten percent. (China has been doing so for almost thirty years.) That growth has been reflected in the performance of the iShares MSCI Emerging Market Index. Since April 2003, the Index has compounded at 18.4%, compared to an annual compounding return of 4.5% for the S&P 500 over the same period.
In a recently published book, Uprising: Will Emerging Markets Shape or Shake the World Economy, George Magnus questions the assumption. Mr. Magnus, an economist with UBS in London, gained fame with his prescient prediction in early 2007 that a financial crisis faced the world. While acknowledging that power is shifting away from the West, he suggests that growth in China will soon slow. Export growth is the path followed by all emerging economies. As their economies expand (China is now the world’s largest creditor nation and the second largest economy,) imbalances develop, including exceptionally low interest rates in debtor nations (as surplus cash is invested in safe instruments like U.S. Treasuries) and unnaturally high asset prices, resulting from raw material purchases by emerging countries and speculators in the developed world. Rising commodity prices – in part, a function of China’s inventory building – are already creating problems.
Exacerbating the problem for China’s invested surpluses is the pressure to let their currency float higher. The net returns (after inflation) to China, as the Renminbi increases versus the Dollar, is likely to be negative – not a sustainable situation and a cause for the increase in the price of gold.
Last weekend’s edition of London’s The Telegraph had an article entitled, “The End of China’s Cheap Denim Dream,” written by Malcolm Moore. The city of Xintang, home to one third of the world’s jeans production, is facing rising cotton prices, wage demands that have risen fifteen fold and developing environmental hazards. Mr. Moore quotes 24-year-old Wei Xiaofeng, owner of one of 5000 factories in Xintang producing 260 million jeans a year: “We are still getting orders…but no one is taking them…We have not made any profits for two years.” Unfortunately, the situation in Xintang is symptomatic of the growing pains facing nations as they morph from export driven to consumer driven economies. The disease is not fatal, but it can cause setbacks.
In reviewing Magnus’ book for USA Today, Jon Rosen cites three factors that may haunt China’s ability to transition smoothly from a state-controlled economy to a consumer driven one – an underdeveloped financial sector, a rising property bubble and creeping local government debt. Mr. Rosen adds that the biggest obstacle may lie in demographics. The one-child policy, which did so much to reduce poverty over the past thirty years, will result in China having an older population than the U.S. in twenty years. Their old-age dependency burden will soar, tripling today’s level by 2030. At the same time, their working age population will peak and enter a gradual decline.
Markets are aware of these problems. China’s Shanghai Index peaked in October 2007 at 6124.04 and today, at 2913.80 is only 38% above where it was ten years ago – a compounded return of 3.3%, substantially below GDP growth. Even the MSCI Emerging Market Index is 18% below its October 2007 level. It has declined 4.4% this year, while the S&P 500 is up 3.8%.
Predicting emerging market economies is far beyond my abilities, but common sense suggests growth never proceeds uninterrupted, especially for fledging markets. China’s economy, at 40% of the U.S., is second in the world, but their per capita GDP is only 10% of ours. They achieve this growth with a workforce of around 815 million people, versus about 150 million in the U.S.
Growing pains are endemic to young economies and include, as we have recently seen in the Middle East, protests that can turn bloody. As a mature economy, the U.S. will not again experience the exuberance of youth. Nevertheless, opportunities abound. We have the most diverse population in the world, having demonstrated the ability to assimilate cultures in a manner unique in history. We have a legal system that protects individual and property rights and an economy, built on private capital that has benefitted from the creative abilities of thousands of individuals and their resulting entrepreneurship. Our government is based on democratic principles that been tested over 200 years, in civil war and depression, and has proven adaptable to changing values. While political rhetoric has created a polarized environment, manifested in our political differences, very few Americans would choose to live under a different system.
That does not mean we do not have problems. We have. We have an entitlement system that, unchecked, risks either bankrupting the country, or, more likely, causing severe inflationary pressures. Our level of debt is unsustainable. Fifty percent of U.S. Treasuries are now held by investors. The result has been artificially low interest rates, masking the problem of our federal debt. In 2001, the average interest rate paid by the U.S. government was 5.3%. Today, it is 2.4%. Total interest expense consumes about 8.5% of the U.S. budget. Should rates revert to more normal levels, the impact will be substantial.
A combination of entitlement, defense spending and interest costs limit our government’s options. In 1970, entitlements represented 4% of GDP; today it is 10%. Mark Helprin, in an article in today’s Wall Street Journal on the decline of U.S. Naval Power suggests that the acme of the American Century was when, in a 1962 speech at Rice University, President Kennedy framed the challenge not only of going to the moon but of sustaining American exceptionalism and this country’s leading position in the world.
It is the balance between unimpeded growth and societal safety nets that must be found. European-style socialism has proven ineffective, but, then, nobody wants to return to a system of child labor and poor houses. It is that balance that must be found. Personally, I believe in individual responsibility and less dependency on government. I would always err on the side of individual rights. I believe our immigration policies are too restrictive, that our country is capable of housing multiples of our current population and that integrating immigrants has been instrumental to our unique growth and exceptionalism. We must encourage investment. With a focus on the future, there is no reason the U.S. cannot lead the way in the twenty-first century.
Thought of the Day
“World Economic Growth – The U.S. Can Still be a Contender”
March 2, 2011It is generally accepted that the twenty-first century will belong to emerging nations, especially China. Over the last ten years nations like China, Brazil, India, Indonesia and Vietnam have experienced annual GDP growth of about ten percent. (China has been doing so for almost thirty years.) That growth has been reflected in the performance of the iShares MSCI Emerging Market Index. Since April 2003, the Index has compounded at 18.4%, compared to an annual compounding return of 4.5% for the S&P 500 over the same period.
In a recently published book, Uprising: Will Emerging Markets Shape or Shake the World Economy, George Magnus questions the assumption. Mr. Magnus, an economist with UBS in London, gained fame with his prescient prediction in early 2007 that a financial crisis faced the world. While acknowledging that power is shifting away from the West, he suggests that growth in China will soon slow. Export growth is the path followed by all emerging economies. As their economies expand (China is now the world’s largest creditor nation and the second largest economy,) imbalances develop, including exceptionally low interest rates in debtor nations (as surplus cash is invested in safe instruments like U.S. Treasuries) and unnaturally high asset prices, resulting from raw material purchases by emerging countries and speculators in the developed world. Rising commodity prices – in part, a function of China’s inventory building – are already creating problems.
Exacerbating the problem for China’s invested surpluses is the pressure to let their currency float higher. The net returns (after inflation) to China, as the Renminbi increases versus the Dollar, is likely to be negative – not a sustainable situation and a cause for the increase in the price of gold.
Last weekend’s edition of London’s The Telegraph had an article entitled, “The End of China’s Cheap Denim Dream,” written by Malcolm Moore. The city of Xintang, home to one third of the world’s jeans production, is facing rising cotton prices, wage demands that have risen fifteen fold and developing environmental hazards. Mr. Moore quotes 24-year-old Wei Xiaofeng, owner of one of 5000 factories in Xintang producing 260 million jeans a year: “We are still getting orders…but no one is taking them…We have not made any profits for two years.” Unfortunately, the situation in Xintang is symptomatic of the growing pains facing nations as they morph from export driven to consumer driven economies. The disease is not fatal, but it can cause setbacks.
In reviewing Magnus’ book for USA Today, Jon Rosen cites three factors that may haunt China’s ability to transition smoothly from a state-controlled economy to a consumer driven one – an underdeveloped financial sector, a rising property bubble and creeping local government debt. Mr. Rosen adds that the biggest obstacle may lie in demographics. The one-child policy, which did so much to reduce poverty over the past thirty years, will result in China having an older population than the U.S. in twenty years. Their old-age dependency burden will soar, tripling today’s level by 2030. At the same time, their working age population will peak and enter a gradual decline.
Markets are aware of these problems. China’s Shanghai Index peaked in October 2007 at 6124.04 and today, at 2913.80 is only 38% above where it was ten years ago – a compounded return of 3.3%, substantially below GDP growth. Even the MSCI Emerging Market Index is 18% below its October 2007 level. It has declined 4.4% this year, while the S&P 500 is up 3.8%.
Predicting emerging market economies is far beyond my abilities, but common sense suggests growth never proceeds uninterrupted, especially for fledging markets. China’s economy, at 40% of the U.S., is second in the world, but their per capita GDP is only 10% of ours. They achieve this growth with a workforce of around 815 million people, versus about 150 million in the U.S.
Growing pains are endemic to young economies and include, as we have recently seen in the Middle East, protests that can turn bloody. As a mature economy, the U.S. will not again experience the exuberance of youth. Nevertheless, opportunities abound. We have the most diverse population in the world, having demonstrated the ability to assimilate cultures in a manner unique in history. We have a legal system that protects individual and property rights and an economy, built on private capital that has benefitted from the creative abilities of thousands of individuals and their resulting entrepreneurship. Our government is based on democratic principles that been tested over 200 years, in civil war and depression, and has proven adaptable to changing values. While political rhetoric has created a polarized environment, manifested in our political differences, very few Americans would choose to live under a different system.
That does not mean we do not have problems. We have. We have an entitlement system that, unchecked, risks either bankrupting the country, or, more likely, causing severe inflationary pressures. Our level of debt is unsustainable. Fifty percent of U.S. Treasuries are now held by investors. The result has been artificially low interest rates, masking the problem of our federal debt. In 2001, the average interest rate paid by the U.S. government was 5.3%. Today, it is 2.4%. Total interest expense consumes about 8.5% of the U.S. budget. Should rates revert to more normal levels, the impact will be substantial.
A combination of entitlement, defense spending and interest costs limit our government’s options. In 1970, entitlements represented 4% of GDP; today it is 10%. Mark Helprin, in an article in today’s Wall Street Journal on the decline of U.S. Naval Power suggests that the acme of the American Century was when, in a 1962 speech at Rice University, President Kennedy framed the challenge not only of going to the moon but of sustaining American exceptionalism and this country’s leading position in the world.
It is the balance between unimpeded growth and societal safety nets that must be found. European-style socialism has proven ineffective, but, then, nobody wants to return to a system of child labor and poor houses. It is that balance that must be found. Personally, I believe in individual responsibility and less dependency on government. I would always err on the side of individual rights. I believe our immigration policies are too restrictive, that our country is capable of housing multiples of our current population and that integrating immigrants has been instrumental to our unique growth and exceptionalism. We must encourage investment. With a focus on the future, there is no reason the U.S. cannot lead the way in the twenty-first century.
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