US Financial Future Rests on a Bluff

We’ve been wondering in this space recently about the kind of world the next generation will inherit. Clearly the trend for the long haul points to a shift of power, and a migration of wealth, from West to East. As we routinely report, the roaring Asian economies have amassed enormous piles of foreign reserves, much of it in US Treasuries.

In part due to this shift, these economies – China, India, Brazil, etc. – command an increasingly important role in the geopolitical arena. In addition, these New Economies on the Block are forging important trade ties with each other and inking deals to secure their mutually beneficial future, ex-US.

The United States, meanwhile, is up to its ears in ever-mounting debt…both to its creditor nations in the Middle and Far East and, to an even larger extent, to its own citizens.

And so we ask ourselves, will the young Johnnie and Jenny Smiths of the West be able to bluff their way through the next round of negotiations with a pair of twos? Or will the Changs, Patels and Ahmeds of the world call their bluff and take them to the cleaners?

Unfortunately, the trouble started for Generation iPod before they even had a chance to cause it for themselves. “Like America itself,” observes Bill Bonner, “[Young Americans] are in danger of finding themselves slipping downhill. Instead of expecting things to get better, they may find it hard even to hold onto what they’ve got. Instead of the ‘Morning in America’ that Ronald Reagan promised, they may find that it seems more like evening, both in their personal as well as their national lives.”

Much of America’s international influence was acquired during a time when the dollar roamed free and easy as the world’s reserve currency. French President Charles De Gaulle called it an “extraordinary privilege.”

At its height, the greenback commanded a magisterial awe and its position was largely considered unchallengeable. But no challenge is too great for the mighty US government…especially the challenge to debase its own currency.

It is true that extraordinary privileges carry extraordinary responsibilities. Within a single generation, the irresponsible goons in charge of preserving the dollar’s integrity had destroyed almost all of its purchasing power. Measured against gold, it has slumped some 97% since Nixon closed the gold window in ’71. And now, when the Treasury Secretary of the United States of America tells a classroom of Chinese university students that his nation’s currency is trustworthy and reliable, they laugh in his face.

Then, on top of an increasingly worthless currency, Generation iPod also inherits about a quarter of a million dollars each in unfunded Social Security and healthcare obligations, the overdue infrastructure bills of a crumbling nation, a couple of distant wars to fight and die in and a world full of disgruntled foreign creditors.

Is there any hope?

Opined John Mauldin on the subject in Tuesday’s issue: “It is not the times which dictate the man (or daughter!), but the response of the man which dictates his own time. Today has a brighter future for someone young than any other time in history, whether they are in the US or Brazil or China. They just have to seize it…”

Echoes Bill, “The real advantage in life is having the gumption to get on with it; no one knows where that comes from.”

Indeed, history provides us with countless examples of individuals triumphing over adversity. A hard working American student has every chance to succeed in life, as does a hard working Asian student. It’s just that, on the whole, graduating classes of Asian engineers and computer programmers are far more diligent than graduating classes of Western feminist film studies students.

Taiwanese university graduates, for example, would happily take on the workload of most western jobs as a vacation, never mind as a vocation. The forty-hour workweek (35 for our French readers) is something students here manage between classes…and cram sessions…and helping run the family business…and music lessons…and English school in the afternoons and evenings. Not only have the Asian countries already outworked the west over the past generation – by a measure significant enough to now own virtually all of the western countries’ debts – but they continue to up the ante even now. They have raised the bar, in other words, and they are raising it still.

A generation ago, Mao Tse-Tung did his people a huge favor and finally died. His successor, Deng Xiaoping then told the Chinese masses not to fear wealth and that, in fact, to get rich was “glorious.” It was a stark contrast to the self-immolating edicts spewed forth from Mao. The people rejoiced…and got to work. Last year, China created millionaires at the second fastest rate of any nation on the planet. Only India outpaced her. Meanwhile, America “demoted” millionaires quicker than any other country could manage. England was next on that dubious accolade.