By consuming more than it produces, America has dissipated vast amounts of its wealth. And in the past quarter-century, some macro trends have tipped the balance of wealth creation from the United States in favor of new foreign competitors.
B-R-I-Cs soar while U.S. suffers
pittsburghlive.com
By John Browne
Sunday, May 18, 2008
Following a relatively flat but volatile trend, New York stock markets continue to disappoint most investors. Food and oil prices continue to rise at home. Foreclosure levels escalate and there are indications of slowing consumer demand.
Frustrated by relatively low returns at home, Americans are looking beyond their borders while they await an economic revival here.
In the 18th century, British traders looking for foreign profits sailed from Georgian England. In the 16th century, the East India Company, started by Queen Elizabeth I, became the model for European conquest and rule. Today, investors seek to "capture" India, along with Brazil, Russia and China. The purpose is not to colonize but to capture profits through investments in commerce, labor and resources.
America, rather than seeking overseas expansion and acquisition (like its mother country), created instead an investment-based relationship -- the "dollar empire." This new concept was founded on the principle of hard work utilizing abundant natural resources and labor to produce the products needed for consumption at home.
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We made what we consumed and enjoyed the fruits of our labor.
Until the mid 1970s, America enjoyed massive wealth creation. However, our economy gradually has turned from being one dominated by producers to one dominated by consumers. Today, consumers account for about 72 percent of the American economy, or gross domestic product (GDP). Even the current federal stimulus package is skewed heavily (90 percent) in favor of the consumer -- where the votes are -- at the expense of the producer.
By consuming more than it produces, America has dissipated vast amounts of its wealth. And in the past quarter-century, some macro trends have tipped the balance of wealth creation from the United States in favor of new foreign competitors.
BRIC, an acronym coined at Goldman Sachs, stands for Brazil, Russia, India and China, the four leading emerging markets. Economic growth within BRIC, far faster than that within the United States, translates into higher financial returns and stock market prices. The returns generated within BRIC are creating a tidal wave of real wealth.
How did poor countries, formerly only travel stops, come to be viewed as investment opportunities for worried Americans?
Unwilling to admit publicly any reduction in living standards, successive American governments borrowed heavily while simultaneously depreciating the U.S. dollar to produce consumer booms, as in the dot.coms and housing. Future generations of Americans now are saddled with enormous debt (already $30,000 a head). In addition, all Americans are required to pay the stealth taxes of reduced government services, inflation and currency devaluation, now clearly evident in energy and food prices.
Today, Western consumers buy raw materials, cheaper products and services from BRIC. Growth rates in BRIC have skyrocketed. Corporate profits and stock prices have followed suit, far outstripping the average performance of U.S. stock markets.
Brazil, Russia, India and China now are known by investors as the "Big Four."
In 2006, the stock markets of BRIC offered superior yields in appreciating currencies, with Brazil up 33 percent, India 47 percent, Russia 71 percent and China 131 percent.
At the same time, the Standard & Poor's 500 average index rose by only 14 percent gross. Only about 80 percent of our mutual fund managers even met this return. Even worse, when deductions were made for management fees, transaction costs, inflation at about 3 percent and for a depreciated U.S. dollar, many American investors actually had a real net loss in 2006.
Capital flows within this new world super-boom clearly have benefited producer nations. This, even though BRIC investments are not without risk.
Other "mature" producer nations, such as Germany and Japan -- or even smaller producer economies such as Singapore -- have benefited. They should be considered alongside the BRIC economies.
A major impact of the increased manufacturing of the "Big Four," along with some smaller countries such as Vietnam, is a greatly increased thirst for raw materials.
Furthermore, as internal wealth is generated, people demand food higher up the food chain, impinging upon the established demand of people in "mature" manufacturing nations.
These two factors account for another type of producer -- the providers of raw materials and energy, including food, both for industry and people.
In addition to BRIC, international investors, looking for higher returns, are eyeing Japan, Australia, Canada and smaller nations. These include Singapore, Vietnam and even New Zealand, whose currency has risen 74 percent against the U.S. dollar since 2001.
A BRIC country creates wealth for foreign investors in various ways. China is a good example.
With a population of 1.3 billion people, China represents a vast new producer base with the potential to compete effectively with low-cost, deflationary exports. As its economy has grown, wages have accumulated, leading to a major new internal demand -- already estimated to be in excess of $1 trillion a year -- for consumer products ranging from refrigerators to motorcars.
At the same time, with reserves of $1.5 trillion, China has the capacity to import vast amounts of food and raw materials to feed its people and its industry. Indeed, China already is scouring raw-material producers such as Brazil (oil), Australia (uranium) and Canada (coal). China has acted subtly but aggressively to secure access to these raw materials and foodstuffs over the long term.
Incredibly, she has even invested in Brazil's dams, railways and seaport facilities.
Under President Luiz da Silva, Brazil has transformed from a financial leper to near-AAA status, with inflation reduced from almost 13 percent to about 2 percent. It possesses raw-material resources that could challenge the United States and Canada combined.
Historically, America is a nation of producers, not conquerors. The BRIC countries are the four largest emerging markets because they learned from us how to produce products and services efficiently utilizing domestic resources.
They have learned what, regrettably, we have forgotten -- that productivity means profit and is best found, not overseas, but right in our own backyard.
John Browne, a financial analyst and former member of Britain's Parliament, is a financial and political columnist for the Trib. He is a frequent commentator on CNBC's "Kudlow & Company." E-mail him at: johndbrowne@yahoo.com.
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