China Sees Opportunity

For as long as I can remember, in every economics class of the latter 20th century and early 21st, we have been taught that the United States is the industrial leading behemoth that cannot be surpassed because of its sheer fiscal might. Every currency exchange in the world still compares its local currency to the US Dollar and the United States is still the target for every worldwide consumer innovation, as it is the largest most lucrative market in the world today.

But times are changing. Let's step back and understand the passing of the torch that saw the United States rise as the worldwide economic leader. People who don't study or pay attention to history, may not realize that by the turn of the end of the 19th century and the beginning of the 20th, Great Britain was the world leader in most major industrial and financial measurements. However, by this time the British Empire grew beyond its means. With its empire stretching across the globe and the financial stresses inflicted by various conflicts, that standing became very tenuous. The beginning of the end was the beginning of World War I, where Britain extended itself further fiscally, and just could not keep up with the rising growing economy of the United States.

Despite going through the Great Depression, the United States kept growing in every phase of its economy. The final straw that unseeded Britain from the top spot was the havoc World War II inflicted upon its people, infrastructure, and finances. Soon their colonies, once the cornerstones of their financial income, began to break away as independent sovereign nations. Then their industries began to be nationalized. Finally, their national budget proportionally became a shadow of its former self. This made the economy grow at a snail's pace and even contract at times.

The United States had none of these problems. The younger nation was buoyed by the end of the Civil War. The United States saw its greatest leaps in industrialization and natural resource discoveries push the growth margin higher than ever during the "gilded age", leading up to the start of the 20th century. By the time of the roaring 20s, the country was now an economic contender on the world stage. But because neither of the world wars saw any extensive damage to the United States infrastructure, there was no pause and no rebuilding cost. This freed up the United States to invest in its growth further and leap past its European competitors with a seemingly insurmountable advantage into first place.

It is a spot which we, as a nation, have not relinquished since. However, our supremacy on the world stage has diminished over time. Since the late 20th century, the United States government has continuously mismanaged its budget to the tune of a financially devastating fiscal deficit. As the GDP and per capita income increased, so did the manufacturing costs. As a result, we have transformed our economy into a service, credit, and consumer economy. All the while shipping our blue collar manufacturing jobs overseas. With that transition we have also given the technical expertise and the income, which was previously kept in house, to nations we never saw as our competitors, let alone our equals.

But this is exactly where China finds itself today. Having absorbed decades of manufacturing and assembly handover from Western nations, China has acquired both the infrastructure and the technical knowledge base necessary to compete on the world stage as equals. Furthermore, Chinese government has acquired sufficient sovereign debt of every Western nation, including the United States, to be able to have political and economic leverage it previously dreamed of.

But now, having accumulated sufficient wealth, China is transitioning. It finds itself at the exact same inflection point that the United States found itself in the late 19th and early 20th century, when it was breathing down Great Britain's neck. Except now it is China ready to overtake the United States as the leading economy in the world. Chinese government is well poised for the role, with a bank roll of foreign debt and a national cash surplus that now seems more attractive to global investors than ever before.

As the conflicts of the world swirl around, the safest place for foreign cash is still the United States, as it is being recognized for its past fiscal dependability. But the winds are changing, and the Asian powerhouse that is China sees opportunity in this crisis. Up until now, they have been able to manipulate its currency and keep the value of the Yuan down to keep its manufacturing infrastructure viable on the world stage, and its Yuan-denominated sovereign debt purchases high in value. But their per capita incomes and currency value is growing beyond these controls. Soon enough, China will find itself in transition to a consumer economy. And that's exactly when the United States will be faced with a similar fate that Great Britain faced in the 20th century.

What do you think? Will China become a major consumer economy within the next decade? Will foreign investors see it as the new capital safety market? Will the US Dollar Standard crumble within the next decade? Please Leave your thoughts below in the comments section.

Cracks in Japan

If you're like most Americans, you have probably missed the news this past Monday morning that the Japanese prime minister Shinzo Abe has called for snap elections and a dissolution of the current government body that has previously given him stern opposition.

In effect, he is seizing the moment of higher approval ratings that are currently hovering above the fifty percent mark and put him in a much better position to make this move than his thirty percent approval ratings just months ago. So what has changed? He is finding the opportunity in the North Korean threat, which has propped up his approval despite an economy that is in deep trouble.

Japan's annual debt is currently over twice its own annual gross domestic product. This means that Japan has to continue borrowing and use its own quantitative easing variation of the program in order to keep up the illusion of a functional economic health.

Essentially, the world's governments are all doing this. They are borrowing from each other with money they do not have, treating each others' debt as assets. So we are all essentially stuck holding each others' IOU notes that on which we can barely pay the interest. The problem with playing this global game of musical chairs is that sooner or later the music will stop... and there will be no chairs.

Every time the governments borrow, print, and dilute money; they are in fact devaluing the currency each country uses and its people earn. Therefore, these measures are going along a curve of continuously diminishing returns. As a result, there will come a time when these measures will become completely ineffective. And that's when the music will stop.

Japan, with the highest ratio of debt to GDP, will be one of the first, if not the first country to fall in this setting. Shinzo Abe, being the proponent of monetary easing measures, is seeking to consolidate power and reduce opposition, as his Monday power move has proven.

In America, we will likely be the last nation to feel the impact of this global wave of deflation. The reason is once the dominoes begin to fall, all foreign countries' biggest capital holders will transfer their wealth to the United States market, as it is seen as the most stable. But this will ultimately prop up our assets only to fall the farthest and in the most painful devastating fashion.

That is why Japan matters, why foreign economies we have ties with matter - our economic well being is intertwined with the countries whose debt United States lists as assets. We must recognize that the troubles we are seeing in armed conflicts across the world and natural disasters that devastate other countries are not just "their problem", it is in fact our collective problem.

So do not be deceived by the skyrocketing Dow Jones and S&P 500 in the next few years. These events occur because of the money coming in from foreigners to temporarily avoid the calamity that their nations are enduring, one that will ultimately come our way in the end.

For now, the market will be a good place to keep your savings and retirement. But once the music stops, the only assets that will be safe are defensive ones, whose value doesn't fluctuate based on paper currency.