Correcting America's Position in the Global Economy

Baltimore is a great town. It has more liquor stores than churches. But it is being taken over by zombies. More below…

Yesterday, the Dow went up 44 points. Gold rose $16.

Just noise. Pay no attention.

Both stocks and gold are moving against what we think SHOULD they should be doing. Of course, Mr. Market doesn’t give a hoot what we think.

At least interest rates and the dollar are following our script. Interest rates are going down. The dollar is going up.

And here’s something interesting. If you look back to the founding of the US Republic you will find only one time — in 1945 — when interest rates were this low. The US 10-year note hit an all-time low of 1.55% right after the war. That was its lowest point ever.

Today, around 2%…the 10-year is within 50 basis points of making a two-century low.

And guess what? We think it will.

Why? Because the Great Correction is for real. And it is bigger than even we realized.

Remember, there is a Great Correction underway, no doubt about that. But we don’t know yet exactly WHAT the correction intends to correct.

The bubble in housing — check.

The bubble in the financial industry — check.

The boom in stocks — probably.

The paper-based dollar reserve system — probably.

But how about this? It looks to us as though America’s outsize position in the world is going to be corrected too. Check this out, from The Economist:

By 2030 China’s economy could loom as large as Britain’s in the 1870s or America’s in the 1970s

It is perhaps a measure of America’s resilience as an economic power that its demise is so often foretold. In 1956 the Russians politely informed Westerners that “history is on our side. We will bury you.” In the 1980s history seemed to side instead with Japan. Now it appears to be taking China’s part.

These prophesies are “self-denying”, according to Larry Summers, a former economic adviser to President Barack Obama. They fail to come to pass partly because America buys into them, then rouses itself to defy them. “As long as we’re worried about the future, the future will be better,” he said, shortly before leaving the White House. His speech is quoted in “Eclipse”, a new book by Arvind Subramanian of the Peterson Institute for International Economics. Mr. Subramanian argues that China’s economic might will overshadow America’s sooner than people think. He denies that his prophecy is self-denying. Even if America heeds its warning, there is precious little it can do about it.

Three forces will dictate China’s rise, Mr. Subramanian argues: demography, convergence and “gravity”. Since China has over four times America’s population, it only has to produce a quarter of America’s output per head to exceed America’s total output. Indeed, Mr. Subramanian thinks China is already the world’s biggest economy, when due account is taken of the low prices charged for many local Chinese goods and services outside its cities. Big though it is, China’s economy is also somewhat “backward”. That gives it plenty of scope to enjoy catch-up growth, unlike Japan’s economy, which was still far smaller than America’s when it reached the technological frontier.

Buoyed by these two forces, China will account for over 23% of world GDP by 2030, measured at PPP, Mr. Subramanian calculates. America will account for less than 12%. China will be equally dominant in trade, accounting for twice America’s share of imports and exports. That projection relies on the “gravity” model of trade, which assumes that commerce between countries depends on their economic weight and the distance between them. China’s trade will outpace America’s both because its own economy will expand faster and also because its neighbours will grow faster than those in America’s backyard.

We keep thinking about how easy it would be to save America. We’re almost tempted to send a letter to the president or something. But why bother? He wouldn’t listen. He wouldn’t understand. He wouldn’t care.

The country is in decline precisely because it is not in his interest to understand. That’s what zombification is all about. The zombies take over. They control the government, the military, the schools, the doctors…even big businesses. They rig the system so that competition is difficult…and honest work scarcely pays.

It is a situation vividly illustrated here in Baltimore. It’s a great city in some ways; it has more liquor stores than churches, for example. But it is a zombie city too…living largely off of taxes and debt. The more “services” the city offers to zombies…the more it attracts zombies to take advantage of them…the higher taxes go…the more the real, private sector moves to the suburbs…and the more zombies are left in control of the city.

It would be easy to fix Baltimore, if the zombies would let you. Just cut taxes…and eliminate the warm flames that bring the zombie moths hovering around. Cut city jobs. Cut handouts. Stop paying people to do nothing.

Maybe we’ll run for mayor. Our slogan: Zombies Out of Baltimore!

We’d get 2 votes. Maybe three. You don’t get elected in Baltimore — or America — by criticizing the zombies. They’re the biggest single voting bloc!

But what caught our attention recently was the problem of security. People are worried about terrorism. Signs up on US 95 still ask for “Terror Tips,” for example.

So here…we’ve got a tip. You want to stop being a target of terrorists? Easy. Stop asking for trouble.

First you have to realize that the Pentagon is as zombified as every other bureaucracy. “Fighting terrorism” is just another zombie make-work project. But it is not just a waste of money. It is worse than that. It makes enemies. America has more enemies now than it had before it began its ‘War on Terror.’

It is a lot less safe.

Gareth Porter explains:

In December 2007, at a conference in Washington, DC on al Qaeda, former State Department Coordinator for Counterterrorism Daniel Benjamin offered a laundry list of things the United States could do to reduce the threat from al Qaeda. But he said nothing about the most important thing to be done: pledging to the Islamic world that the United States would pull its military forces out of Afghanistan and Iraq and end its warfare against those in Islamic countries resisting US military presence.

During the coffee break, I asked him whether that item shouldn’t have been on his list. “You’re right,” he answered. And then he added, “But we can’t do that.”

“Why not?” I asked.

“Because,” he said, “we would have to tell the families of the soldiers who have died in those wars that their loved ones died in vain.”

His explanation was obviously bogus. But in agreeing that America’s continuing wars actually increase the risk of terrorism against the United States, Benjamin was merely reflecting the conclusions that the intelligence and counter-terrorism communities had already reached.

Bill Bonner
for The Daily Reckoning

The Daily Reckoning