THE WORLD TODAY...........VERY IMPORTANT ANALYSIS

THE WORLD TODAY

23 years ago the world seemed much simpler. Francis Fukuyama wrote that the West had won the war of Capitalism. However, 23 years later things have changed. By 2016 the economy of China will exceed that of the U.S. This is not what Fukuyama expected in 1989. It should not be possible that a communistic society could be poised to overtake a capitalistic economy. It is quite an amazing turn of events.

The explosion of public debt in Western economies is a symptom of the more profound economic malaise. The argument between stimulus and austerity are very futile. The reality is that by 2050 interest payments on government debt will be above 100% of federal revenues according to the Alternative Fiscal Scenario (AFS) of the CBO. The AFS is the more realistic of the two assumptions that the CBO produces.

If we look at the US and China per capita to GDP ratios we find that in 1978 the average American was 22 times richer than the average Chinese citizen. Today, that ratio is down to only 5 times. The great divergence of prosperity that was generated by the strength of capitalism is now the great re-convergance.

There were "6 Killer Apps" that defined the U.S. during its great economic growth cycle.

1) Competition

2) Scientific Revolution

3) Modern Medicine

4) Consumer Society

5) Work Ethic

6) Property Rights

Those issues allowed for growth, innovation and rising economic prosperity during the 20th century. Today, while the rest of the world has slowly been adopting these "killer apps" the U.S. is slowly losing them.

Innovation is rising but is moving to the East. Patents granted by country in 2008 showed Japan with almost 250k patents with the U.S. trailied with just a little more than 150k. However, China, which virtually had no patents in 2000 has risen in number of patents to 50,000 in just 8 years.

It is unfortunate but the "work ethic" which was the backbone of the western ideal and the strength of the U.S. economy. The psychology of Americans during the 20th century was that hard work led to prosperity. Today, that work ethic has shifted to the East. As an example the average Korean works 1000 hours more a year than the average German. That is why when you go on vacation the German's are already there.

One of the biggest changes in recent history is in mathematics. If you look at the standard mathematics scores at age 15 -the gap between the scores from China to the US is the same as the gap between the U.S. And Albania. China is in the lead by far with a score of 600 versus the US at 480. The importance of this is that strength in mathematics will continue to support the transfer of innovation to the East.

While we currently argue over of the healthcare law the life expectancy in Japan and China is significantly longer than in the U.S. The importance of this, when you consider the shift in innovation, is that a longer life exptancy leads to longer productive working careers of individuals. In turn, this goes to support the idea of the continued shift of innovation and prosperity.

A critical point is the Rule of Law. In order to have a strong and prosperous economic environment the participants in the system must be able to rely on a stable and fair legal system. In the U.S. the rule of law has been under continuous attack over the last 30 years. The declination in the rule of law has been evident in the shift of prosperity in the U.S. economy. If you look at 15 different measures of the rule of law as they exist in countries all around the world today - unfortunately the U.S. does not rank at the top it any category. However, Hong Kong beats the US on every single rule of law and ranks in the top levels on every single measure.

The problem is that the U.S. has a "rule of lawyers". As an example "Dodd-Frank" is the largest single employment scheme for lawyers in the history of the U.S.  However, when it comes to the private sector, which has to live with the implications of the bill, it massively increases costs, reduces competition and impacts future prosperity.

Six Questions for the Post-Western World

1) Can the rule of law come to China? - While Hong Kong has a very strong and stable rule of law the PRC (Peoples Republic of China) doesn't.  In fact, the PRC is at the bottom of the list in every single category.

2) Can India go from the tortoise to hare?  It has freedom of the press, free elections, capitalism and competition but still struggles with growth.

3) Can the Muslim world have a reformation?  Will there be a transition that will take religion out of politics and capitalism.

4) Can the West solve the clash of generations?  This is a critical question with almost immediate conseqences as it is the Baby Boomers vs. their own kids.  It is not the 99% vs. 1% as the current administration wishes you to believe.  If the youth were rational they would support a plan to immediately reform medicare and medicaid before they have to pay for it.

5) Can Africa overcome Malthus?  Can the economic possibilities that exist in Africa, which are numerous, overcome the coming population explosion.

6) Can the resource curse become a blessing?  The richest mineral countries are Russia, U.S. and Austrailia.  The poorest resource countries are Niger, Nambia, and Bolivia. The curse of the low resources on the third world will remain an issue.

The implications of these six questions impact everyting from investing, to living and the the future of our economy.

IMPORTANT QUESTIONS

There is $6-10 Trillion in currency printing coming in the next two years (2013-2014) - will it cause inflation? 

Expansion of monetary base does not immediately transfer into inflation. It is the "expectations of consumers and banks" that creates inflationary pressures.  The mistake is thinking that inflation is around the corner. There are too many deflationary forces in the world today. These structural deflationary forces are keeping overall inflation low and could remain so for quite some time.

What is your view on the EU? 

The creation of the monetary union in Europe was a dangerous experiment. However, the European Union will survive, however, it will be a painful and tedius process.  This process will include a transition from a loose confederacy to a constiutional structure in the next couple of years. AT THIS POINT I DON'T BELIEVE THE UNION WILL SURVIVE. 

What is your view on technology - will there be another tech supercycle? Where does the US stand? 

You can cope with a really large debt without default if you have a major revolution in industry such as the railroad revolution in Victorian England.  However, another industrial revolution, like the technology revolution, is unlikely to happen again in the U.S.  In the past century the government was responsible for pushes from things like the"Manhatten Project" to NASA and the space race.  These government sponsored programs spun off massive private industries and technological innovations. 

However, today the government is shrinking the very programs that lead to innovation like NASA and Defense.  The shrinking of government support in the areas of development and exploration, is reducing that probabiltiy. China, on the other hand, is making massive investments in innovation, exploration and development. Silicon valley will continue to innovate and Wall Street will bring companies public but today we are achieving Facebook - not the Manhatten Project or what the railoroads did for Victorian England.

What would you recommend to the next president in order to fix the country? 

The U.S. is still better off than Europe. We must get back to our basic principals. While we pretend to address problems and pretend to make changes - there will come a point to where the U.S. will start doing the right thing.  It will be by force rather than choice but it will occur.  If I spoke with the President I would tell him that: 1) You must recognize the problems with Congress. There has to be structural change to the legislative process. There needs to be sunset provisions in place for every piece of legislation passed.  2) The President MUST LEAD. Not delegate.