An Upbeat View of America's 'Bad' Year
Among global big thinkers, never a bashful crowd, the notion of a United States in decline has become conventional wisdom. In late 2011, this narrative has crescendoed, with experts arguing that China has surpassed the United States economically, Niall Ferguson declaring that we are at "the end of 500 years of Western predominance" and The National Interest proclaiming "the end of the American era." Even the National Intelligence Council's coming Global Trends 2030 study reportedly assumes an America in decline.
As 2011 draws to a close, the U.S. military's exit from Iraq and challenges in Afghanistan along with American vulnerability to the European crisis provide further confirmation of the decline narrative.
We agree with some of these views. The United States has neither the willingness nor the capability to provide the kind of global leadership that it has provided in the past several decades, and other countries are increasingly less willing to follow America's lead.
But the conventional wisdom obscures as much as it reveals. Specifically, the declinists overlook the inconvenient truth that global power is relative. And comparing America's year to that of our present and potential adversaries paints an interesting picture: 2011 was not the year when the United States fell off the wagon. Instead, a look back at the past 12 months suggests that U.S. power is more resilient than the narrative of inevitable decline portrays.
David Fuller's view In geopolitics as well as markets it seldom pays to back extreme views which are often trumpeted for reasons of sensationalism rather than objective analysis.
US pre-eminence was overstated at the turn of the century and more recent stories of its systemic descent have been exaggerated. America has experienced at least a lengthy cyclical decline, for reasons including expensive military engagements, credit addiction and an entitlement mentality. A strong military response following 9/11 aside, these are primarily self-inflicted wounds resulting from top-down failures of governance.
The US won the economic debate which has seen all successful economies embrace what at its best is mainly free-market capitalism. However, America was not prepared for the rapid competitive challenge of globalisation which it helped to create. While this continues to lift hundreds of millions of people out of poverty around world, a gradual levelling of the playing field has exerted downward pressure on all but the very wealthy people in OECD countries.
Arguably, capitalist economies with three to four times the USA's population should surpass it in GDP within the next twenty to forty years. However, this will require improvements in governance which China and India, in their very different ways, have yet to demonstrate convincingly.
China's command capitalism has revealed remarkable organisational skills and its ruling cadre are both highly educated and worldly. Nevertheless, China's extraordinary economic growth over the last twenty years has left a scorched earth legacy in terms of pollution. The system has also created a kleptocracy in which the incentive is often to get rich quick…and perhaps get out. The future challenge of governing a rapidly growing middleclass will require more subtlety, including a broader devolution of power.
Political governance in India has long had a lamentable reputation but even by those low standards 2011 has been deplorable. This will continue to cost India dearly in terms of lost FDI, which remains vital for the country's development, not least regarding infrastructure. India's entrepreneurs and rapidly growing middleclass, backed by a vocal free press, appear to be the only positive catalysts for political change. The Upper House of Parliament's stalling of the Anti-Corruption Bill is the latest failure of governance. To use a western expression, it has a 'turkey's don't vote for Christmas' feel about it.
Despite concerns over governance for the two Asian giants mentioned above and lamentable stock market performances in 2011, there are compelling reasons to expect a better performance in 2012, particularly by China (weekly & daily) Valuations (historic PER & Yield) are historically attractive and monetary policy will become more stimulative, providing the required tailwind.
The US faces an important Presidential Election in November 2012, in terms of future economic policy. From my admittedly remote perspective in London, the outcome will have a significant influence on how the economy is steered during at least 2013 through 2016. The election could also be close, assuming Republicans nominate their most electable moderate candidate, rather than any of the others favoured by the Tea Party and Fox News. In saying this, I assume that the election will be won from the middle, or lost from the far right.
The result should determine whether or not the USA moves somewhat closer to a more egalitarian and European-style welfare state, or attempts to sprint out of its debt overhang with a more robust form of capitalism. The latter would include measures to hasten America's move towards energy independence, achieved mainly by developing all known gas and oil reserves. Interestingly, a Democrat victory, unless overwhelming, could loses the House, making it difficult to pass legislation. A Republican victory could sweep the House as the GOP already has a majority in Congress and 23 of the 33 Senate seats to be contested are currently held by Democrats.
As 2011 ends, expectations for stock markets in 2012 are decidedly cautious. That would suggest another soft year in terms of performance. This seems too pessimistic, in my opinion, given that valuations are reasonably attractive and monetary policy is becoming more accommodative in the growth economies. A crucial forecast in this assessment - Fullermoney maintains that Euroland is beyond the nadir of its debt insolvency crisis. If so, and if Europe moves off centre stage in terms of peoples' focus of attention, then less pessimistic stories will dominate financial headlines.
(See also this week's earlier Comments of the Day.)