U.S. Still the Center of Power
(January 5, 2012)
Dear Subscribers and Readers,
Hope everyone is off to a great start in 2012! Over the next couple of weeks, we will publish our 2012 (and beyond) forecasts—that is always a fun exercise and I look forward to bouncing ideas off of you. Also, over the next couple of weeks, 6- and 12-month subscribers will be receiving their prorated refunds as we close down MarketThoughts.com. Again, I want to thank you for all the support over the years.
Despite all the noise surrounding wealth and income inequality in the US, the distribution has actually remained relatively stable over the last 20 years. In fact, as shown in the following table courtesy of USC (distribution of wealth among the top 1 percent of wealthiest Americans vs. the remaining 99%), wealth inequality was greater in the mid-1990s:
Of course, the above table (with data ending in 2007) doesn't take into account the recent recession, which has disproportionately impacted the poor and the least educated in U.S. society. More glaringly, it doesn't take into account the record wealth gap between the old and the young as the latter struggles in the tough job market despite record levels of education (and the debts to go with it). In light of this old-young wealth gap, it is thus not a surprise to see: 1) mobilization of younger, disenfranchised, but educated individuals such as the “Occupy Wall Street” movement; and 2) the baby boomers criticizing the “laziness” of said individuals. Moral and technical judgments aside (we all need to have a little compassion), this much is true: the Y-Gens, or the Echo Boomers would need to be more creative and assertive to ensure sustained U.S. economic growth, which is purely dependent on Schumpeterian productivity growth, and to a lesser extent, population growth. For all the criticisms of the Y-Gens by the Baby Boomers, we need to keep in mind that innovation—and what will keep America as the world's technological leader—will originate from the former group; not the latter.
As an aside, we discussed in our April 30, 2009 commentary (“Can the Baby Boomers Ever Retire?”), about half of US baby boomers have no capacity to retire once they turn 65. Moreover, the original McKinsey was put together using wealth data prior to the recent financial crisis—suggesting that baby boomers have even less capacity to retire today. Even under my personal best case scenario (e.g. where U.S. manufacturing shifts back to domestic shores because of the advent of cheaper manufacturing methods and processes, such as the maturing of the 3-D printing), the vast majority of the poorer baby boomers simply do not have the skills required as part of the 21st century workforce. An extreme example is the mass replacement of workers with robots in many manufacturing facilities today. Not only would workers be replaced; but also the “supervisors” would need an advanced degree in computer science or robotic engineering to simply run the facility. i.e. I see a Renaissance in U.S. manufacturing; but the 21st century U.S. manufacturing industry will look completely different to that of the 1950s to 1980s. On the other hand, manufacturing will be “democratized” for creative workers—as any individual will be able to design her own clothing line, and have it manufactured at the neighborhood 3-D printing facility at a very low cost (even for a small run such as 100 t-shirts). You cannot do this when the cheapest manufacturing base is offshore.
I expect the U.S. to remain the center of power, innovation, and wealth over the next ten years. In our December 14, 2008 commentary (“Demography is Destiny”), we stated:
Make no mistake: The influence of the “developed world” will continue to decline over the next 20 to 40 years. During the Industrial Revolution and into the 1920s, the population of the developed world grew at a faster pace than the rest of the world's population. By 1930, the developed world's share of the world population increased to 25%, up from 17% in 1820. By 2005, its share has shrunk to just 13%, and is projected to decline to a mere 10% by 2050. Similarly, the developed world's share of global GDP will decline from 54% in 2005 to 31% by 2050. Interestingly, the U.S. share of the developed world's GDP is expected to increase – as the US birth rate and immigration policy will allow the US population to continue to grow going forward. According to the report's findings, as recently as the early 1980s, US and Western Europe's GDPs were roughly the same (with each making up 37% of the developed world's GDP). By 2050, US GDP is expected to rise to 54%, versus Western European GDP of a mere 23%. Such a position will put the US in its most dominant position (relative to the rest of the developed world) since the immediate aftermath of World War II. Barring a change in today's geopolitical structure, the US will again be a dominant force relative to her traditional allies – not because we want to but because we need to. Talks over the last ten years of a new “United States of Europe” challenging the dominance of the US in the world's economy and geopolitics is not merely premature, but a hallucination.
The recent European Sovereign Debt Crisis comports with our December 14, 2008 assertion—as the Debt Crisis is really just a symptom of collapsing Western European productivity, population, capital misallocation and lack of foresight. With India now on the verge of a currency crisis, and with Russia still very dependent on its natural resources (note: the recent discovery of Polish shale gas could put a dent in Russia's ambitious geopolitical energy plans), the EM story is looking less rosy than it did a few years ago. More important, Chinese demographics—due to its one-child policy that originated in the early 1980s—is expected to tumble into a cliff by the end of this decade (the relative size of the Chinese workforce will start shrinking relative to Chinese dependents). As long as the U.S. birth rate remains stable and as long as U.S. immigration is encouraged (which it should be), the U.S. will remain the center of global power and wealth for the foreseeable future.
Note that this view is also shared by a recent Deloitte study on global wealth held by millionaire households. Despite the (projected) enormous gains of EM countries, global wealth is expected to remain concentrated in DM countries over the next ten years.
Similarly, despite the significant expected strides by the Chinese economy over the next decade, actual Chinese millionaire wealth will still likely be dwarfed by U.S. millionaire wealth by 2020. This is not a surprise, as Chinese companies keep a very low profit margin from the goods that it ships to DM countries (e.g. Apple vs. Foxconn). Finally, I would note that the Deloitte study may actually be a little optimistic when it comes to Chinese GDP growth projections, especially if U.S. manufacturing relocates to domestic shores and/or if manufacturing shifts to lower-cost countries, such as Vietnam).
Henry To, CFA, CAIA