Of Interest

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Friday, May 10, 2013

The Asian Century

Time to look backward

Winston Churchill once said "The longer you can look back, the farther you can look forward" [Churchill by himself (2008)], he also paraphrased George Santayana when declaring "Those who fail to learn from history are doomed to repeat it!". Churchill was an avid student of history, both his own family's and the world's, in the inter war years he compiled a panegyric of his ancestor the Duke of Marlborough and many biographers attribute his conduct and determination during the war campaign to the admiration he had for his ancestry and the lessons he learned from it.

At the time of Churchill's birth Great Britain was the most powerful Nation on earth, the unmatched power of the British Navy had provided the country's merchants with the ability to cover the globe, setting up trade routes to every corner of the world, importing natural resources as well as goods for sale to Europe's capitals. One firm alone, the British East India Company, practically controlled the entire area of South East Asia. The skillful administration of the brilliant Sir Isaac Newton as Master of the Mint saw Britain fix the Gold/Silver ratio at a level at which Silver was deemed to be undervalued by the market. Silver began to flow out of England at these "sale prices" and England's holdings of Gold sky rocketed. By the the early 19th century Gold had become the de facto international reserve currency and, thanks to Newton's actions, Great Britain had the largest Gold stores in the world. Plush with liquid reserves and with its last remaining threat, France, defeated at Waterloo, Great Britain embarked on a course of industrialization, trade and expansion.



Great Britain at the pinnacle of its Empire

A combination of conquest, trade and the industrial revolution created in the space of 40 years the largest empire the world had ever known. The sun never set on the British Empire and at the time one could be forgiven for believing that nothing could threaten Britain's supremacy in world affairs. Towards the end of the 19th century events began to change; In order to maintain its empire as well as sustain the required growth to pay for its Empire, Great Britain began to spend enormous amounts of money on military spending. The Empire's treasury began to be depleted to pay for the expanding infantry, artillery and naval forces. Of course in order to maintain their own national security the rest of Europe began matching the British spend on armaments and by the end of the first decade of the 20th century Europe was stuffed with over sized armies and a growing nationalist spirit. Of course history records that these tensions finally spilt over into the battlefields of World War 1.

The world had never seen a conflict like it in terms of both scope and casualties; A war which was expected to be "over by Christmas" dragged on for four long years and drove most of the participating countries (including Great Britain) off the Gold Standard in order to facilitate massive levels of deficit spending. By the end of the war Great Britain was heavily in debt, it had lost an entire generation of young men from the work force and the domestic economy was in tatters. Although at the time few people in Britain recognized it, flush as they were with victory, their Empire was coming to an end. Over the next two decades Britain remained heavily in debt, post war austerity and then the Great Depression prevented any significant recovery in the Nation's financial health and by the time the second world war arrived soaring national debt, deficit spending and monetizing of debt had become the norm. The destruction of Europe's industrial sectors during the second world war was the final nail in the coffin for any hope of Britain regaining its empirical prominence.

With the end of the Second World War the people of Great Britain had decided that it was time for peace, prosperity and security; The only problem of course was that the country was bankrupt, it was running a massive trade deficit, the Marshall plan had allowed France and Germany to get back up and running far quicker than should have been the case and any post victory boom for Britain quickly evaporated. The introduction of full blown socialism through such programs as the National Health Service (NHS) and the National Pension Scheme loaded even more stress onto the fragile economy until finally in 1976, after several lost decades of stagnant growth, Britain declared it was bankrupt and had to be bailed out by the International Monetary Fund (IMF). It would have been inconceivable to a British gentleman in 1900 to consider such a prospect.

The century of Uncle Sam

While Great Britain was basking in the glory of its empire during the middle of the 19th century America was passing through deep waters. In the midst of a bloody civil war, on the verge of bankruptcy and having lost over 500,000 people not to mention the productive capacity of almost half the country, things didn't look too good for the United States. Despite these challenges the US had several things in its favor and the effective management of these factors (or rather lack of management as we shall see) situated America in the perfect position to take advantage of the chaos which was about to unfold in Europe.

America was rich in natural resources, oil, gold, silver, agriculture, coal and iron ore allowed the US to rapidly climb out of the destruction after the civil war and surge forward into the modern industrial age at a pace which, by the 1880's, far outpaced Great Britain which was resource poor. It wasn't just the abundance of such resources that spurred America's growth but the completely unregulated access to them. Men such as J D Rockefeller, Andrew Carnegie, J P Morgan, Henry Ford and Thomas Edison were able to leverage these resources, coupled with the countries abundance of cheap labor and the extremely laissez faire approach to commerce that existed in America at the time to create fortunes and revolutionize the face of the American landscape.



Henry Ford, Thomas Alva Edison and Samuel Harrison Firestone, 1929

By the time the First World War erupted America was easily on par with the great Empires of Europe and four torturous years of war where neutral America (until 1918) was the sole, readily available source for food and resources, meant that on armistice day 1918 the United States of America was ready to provide the capital and the resources to help rebuild Europe, for a healthy profit of course.

Despite the setbacks suffered during the Great Depression, a second World War in Europe, Africa and Asia once more provided a market without competition for America industry and post war as Great Britain and the rest of Europe sunk into the stagnant growth associated with democratic socialism America thrived! A burgeoning middle class became the icon of the American dream. For the first time in history a well educated, affluent middle class controlled the majority of a nation's wealth. America was strong, secure and the future looked bright. Does this remind you of anyone? Remember our British gentleman from the late 19th century? Could America suffer a similar fate?

Sadly with the accuracy of hindsight we can answer that question today. The prosperity of the 20th century had developed a taste for success, growth and security for the American public. They had lived through the potential downturns associated with free market capitalism during the 1930's and they never wanted to experience that again. So when President Franklin D Roosevelt put forth the idea of establishing some "social safety" nets the idea became very popular. Following Great Britain and other European nations down the path of Democratic Socialism, national pension plans (Social Security), health care programs (Medicaid and Medicare), welfare (food stamps) were all introduced and with all Government subsidized ventures participation rates soared and so did the costs. In fact costs in America soared right across the board, from food prices to fuel prices, housing to labor costs.



Historical chart of US inflation
America had been involved in a 40 year cold war with the forces of communism around the world, unlike a hot war this conflict didn't directly impact American industry or workforce capacity, it did not incur the same levels of casualties we had seen during the first and second world war, however when the Soviets finally capitulated and collapsed in 1989 there was no significant post war boom that normally follows war. The only thing that followed on from such a war was enormous levels of debt and deficit spending.

By the middle of the 1970's it had become clear that America had lost its competitive edge and with the highest standard of living in the world something had to be done.  American corporations found the solution in "emerging markets", one by one Blue Chip American corporations began to dismantle their manufacturing operations in the US and shipping them overseas, mainly to Asia were there existed a willing and hardworking low cost workforce. The results for America are well documented and tragic, all across the country communities were devastated as long standing industries ceased operations and laid off the majority of their work force. Places like Michigan, Pennsylvania and Ohio which had been the cradle of the American industrial revolution saw entire communities ravaged first by the loss of jobs and then by all the accompanying social issues which inevitably follow.

America had become the World's super power during the 20th century by winning its wealth from the rest of the world, by manufacturing and selling goods and services here domestically and exporting them all over the planet. In the 1980's this all started to change, we had ceased exporting our wealth, we were now burning through it to maintain the charade of prosperity and we were borrowing from our neighbors in order to cover and short falls in liquidity. Slowly but surely the national debt began to rise at unprecedented rates, in the short space of 15 years America had gone from being the world's largest creditor to becoming the world's largest debtor until finally now we stand as the largest debtor nation in history.

We had followed the exact same pattern as Great Britain, we had built true sustainable wealth on a diet of sound money, strong industry and a free market but because of the resulting prosperity we sank down into the false security and naivety of of opulence and comfort. We are now in the same steady decline that gripped Great Britain over the course of thirty to forty years. We have replaced genuine productive capacity with a consumption or serviced based economy, take a look at this list of the largest American Corporations, notice how four of them are involved in finance (JP Morgan Chase, Wells Fargo, Citigroup, Berkshire Hathaway), another three (Wal-Mart, GE and Apple) manufacture or purchase their goods overseas (mainly in Asia) and sell them to Americans on credit, the last two (Exxon and Chevron) extract our national resources and guess where we send them? ASIA!



2013 Forbes Global 2000 list

The best Communists Capitalists in the World!

Any American who has bought something at a big box store over the last twenty or so years is very familiar with the phrase "made in China", it seems that the lion's share of American consumables are now imported from Asia in general or China in particular. As this article is being written China ranks first among the G20 in terms of Economic growth with GDP growing at 7.8% annually. China has embarked on a new revolution, a new form of socialism has emerged as unique as Marxism, Leninism or Maoism, we are now on the verge of age of Communist Capitalism.

By the late 1970s the party leaders in China realized that the great Mao cultural revolution had failed and that China was on the same path as the Soviet Union toward ultimate destruction of the system. Zhao Ziyang was the premier of China in the early 1980s, a vocal critic of the policies of Mao Zedong and an active proponent of reform behind the bamboo wall. When Zhao came to power he immediately began opening up China to the outside world, encouraging visitors from the west and even trade with western nations. By the mid 1980s a fledgling market had developed on a local level and there was even a small stock exchange in operation. Famed investor Jim Rogers availed of this opportunity to visit China and ride a motorbike across the country examining the changes which were taking place. His trip was documented in 'The Long Ride' and it gives a very accurate representation on China as it emerges onto the world scene at the end of the 20th century. This documentary is well worth the time to watch.



A long ride in China - Jim Rogers

Let's revisit the 2013 Forbes 2000 list, this time the list is sorted to show the top 10 companies according to assets, notice that out of the top six companies, four are Chinese entities! China has emerged from behind the bamboo curtain and the Chinese (all 1.5 Billion of them!) are hungry for wealth, for advancement, for a higher quality of living. The Chinese are hard working, they seem to recognize that they are on the cusp of a genuine change in the outlook of their country and they know that this forward momentum will take the entire population to a whole new plane of prosperity and abundance.


World's largest companies listed by Assets


The Chinese economy today is remarkably similar to the American economy of the latter half of the 19th century. Yes there are problems, freedom of speech, freedom of thought, political choice, freedom of religion, all these things are in their naissance in China, the images of Tiananmen Square are still fresh in the eyes of the world and China has many hurdles to leap BUT consider this: Where things that different in America in the 1860s? Half the country was trying to kill the other half, a huge portion of Americans were in slaves, freedom of speech and religion were heavily regulated and restricted. I wager that if you took a modern American from 2013 and sent him/her to 1861 they would barely recognize the country of their birth.

China has a long way to go but they are on the right path; All over the world the Chinese are going making good deals and buying up natural resources such as Gold, Silver, Coal, Diamonds, agriculture etc. China is now such a power house in the Global economy that they can enter into bilateral trade agreements with other nations and use direct currency trades (bypassing the US Dollar!). This would have been unthinkable a mere 20 years ago! In Europe, where politicians have traditionally looked to the US for trade agreements, funding for corporations and invitations to come setup corporations on European soil, the leaders are now looking east to Asia and China in particular.

Of course China is not the only emerging market, all throughout Asia there are countries which have traditionally been closed off which are now in the markets looking to compete. Thailand, Vietnam, Korea, Singapore, Taiwan are all growing at a rapid pace with several nations such as Myanmar, Cambodia and Laos on the verge of making the traditions that China and Taiwan have made. I do not believe it to be out of the realms of possibility to even see North Korea, through encouragement from China, begin to enter the markets and transition to a more open society.

It is perfectly obvious that Asia is the best placed continent to dominate the 21st Century, Asia is resource rich (China is the largest producer of Gold in the World), it has a low cost, agile and educated workforce, also the current generations of Chinese have no expectation of security of comfort or any other form of entitlement. When a Chinese person shows up for an interview they don't ask about health insurance or vacation days, they ask how many hours or days they can work and how they can climb the corporate ladder and pay scale. Asia now stands in the same spot that Great Britain found itself at the turn of the 19th Century and the United States a century later. If we study history we learn that one day Asia will get itself into trouble and decline but prior to that decline there will be enormous opportunities for growth and lots of money to be made. Keep a close eye on China and if you are thinking of learning a new language or teach your kids a new language then make that language Mandarin. Proficiency in Mandarin this century will most likely become as important as a proficiency in English has been over the last 200 years!

Intervju med Niall Ferguson from E24 on Vimeo.