 Winds of Change!
Puru Saxena
5 Aug, 2005
I want you to imagine that
you are the ruler of the world's greatest civilisation. Your
empire is renowned throughout the planet and your army is present
in several hundred countries. You command the best technology
in the world and your military strength is second to none. For
over a century, no other civilisation has been able to compete
with you as you have been crowned the "undisputed heavyweight
champion" of the world.
Now, I also want you to imagine
that due to the immense wealth and luxuries enjoyed by your people
for so long, they have become complacent and used to the good
times. In fact, your citizens have become so accustomed to prosperity
that they live only for today without giving any regard to what
tomorrow might bring. Also, your finance minister has informed
you that your subjects have stopped saving, and furthermore they
have taken on a record amount of debt. Moreover, your nation
is engulfed in a massive consumption orgy! To add to your concerns,
your nation is running low on its energy bounty. In fact, you
have just realised that your nation's energy production is in
decline and it now imports two-thirds of its daily energy needs.
To complicate the situation
further, let us imagine that you have just got news that another
giant empire, which is 1.3 billion strong, is rising rapidly
on the other side of the planet. This civilisation is hungry
for success while its people are hard working and frugal. In
fact, their savings rate is around 30% as they believe in preparing
for the proverbial rainy day. In addition, your finance minister
has informed you that this empire has excellent manufacturing
skills and its people are willing to work hard for a fraction
of the cost when compared to your own subjects. As a matter of
fact, their products are so good and cheap that your own citizens
have been buying them for years now! Furthermore, this alien
civilisation's energy needs are growing quickly and only recently
has it started importing fuel to meet its requirements.
After listening to your confidant,
you now realise that if things carry on the way they are, your
empire will come under a serious threat in the future. In fact,
your empire may even topple over as the other civilisation destroys
you economically.
In this instance, with your
back against the wall, what do you do? Obviously, in order to
protect your ageing empire, you turn to your strong point where
you have a clear advantage - your military.
Unfortunately, the above narration
is not a fantasy but a serious and grim reality, which faces
all of us today. Bush is the ruler of this ageing American empire
while China is the new threat. Take a look at the sobering facts
provided below -
America's economy is now worth
US$ 11.2 trillion. Over the past 5 years only US$ 1.6 trillion
was added to the economy while credit market debt rose sharply
by US$ 7.6 trillion! In summary, it now takes a record amount
of debt to produce one dollar of economic growth. America's debt
to GDP ratio has ballooned to over 350% when compared to "just"
120% in the 1970's.
America faces a record-high
current account deficit of $700 billion as Americans continue
to consume cheap imported goods. Its savings rate is a miniscule
1% (Figure 1), while consumption now accounts for almost 70%
of GDP growth. What will happen to the US economy when consumption
slows down? This is one question not many economists and analysts
are willing to ask!
Figure 1: United
States personal savings slump!
Source: www.yardeni.com
According to Gavekal Research,
American-owned assets overseas total roughly $7 trillion. Whereas,
foreign-owned assets in the US equal $10 trillion. Therefore,
its negative net-asset balance now comes in at around minus $3
trillion or just under 30% of GDP! Not a good sign.
Turning to the other civilisation,
China, we can see that it has a current account surplus as it
continues to manufacture and export to the West.
The Chinese economy is growing
at 9.5% per annum with nominal GDP coming in at $1.2 trillion.
Although, this figure represents only 10% of the size of the
American economy, adjusted for price differences between the
two nations, suddenly the Chinese economy does not seem so small!
China now produces more steel
and five times more cement than America! It is also the largest
consumer of copper. The Middle Kingdom is already the biggest
consumer nation in the world and it is getting bigger! So, you
can see that over time China will become the single most important
empire in the future.
Look, I am not the only analyst
who knows the economic facts presented above. The Chinese leaders
also know very well that America is an economic disaster waiting
to happen. In the meantime, however, they continue to "buy
time" or should I say "buy treasuries"! Over the
past few years, China has bought around $700 billion worth of
treasury and agency debt in the US. They have done this to keep
the US dollar relatively strong and long-term interest-rates
artificially low in the US.
A strong bond market (low interest-rates)
has kept US mortgage rates under check (Figure 2). This has fuelled
a housing boom and allowed Americans to continue buying imported
Chinese goods by refinancing their homes.
Figure 2: United
States 30-year mortgage rate
Source: www.yardeni.com
China hopes that if this game
played by "Monopoly" money continues for a while longer,
its own economy and domestic demand will become strong enough
to withstand a recession in the US.
In a nutshell, Asian economies
are much healthier than the US economy and this trend is likely
to accelerate over the coming years. Impoverished for decades,
Asians now work extremely hard, they export and save, while Americans
import, consume and are going deeper into debt! As a result,
wealth is being transferred to the emerging economies of Asia
and somewhere ahead I expect the vast difference in the standard
of living between the West and the East to diminish significantly.
A lot more follows for subscribers...
5 Aug, 2005
Puru Saxena
 Saxena Archives
email: puru@purusaxena.com
website: www.purusaxena.com Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets. In addition to the monthly report, subscribers also receive "Weekly Updates" covering the recent market action. Money Matters is available by subscription from www.purusaxena.com. Puru Saxena is the founder of Puru Saxena Wealth Management, his Hong Kong based firm which manages investment portfolios for individuals and corporate clients. He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs. Copyright ©2005-2015 Puru Saxena Limited. All rights reserved.
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