Still the One

Latest chart/graph getting some attention from various participants and pundits is reproduced above (S&P produced it).

Relative to the rest of the world, the U.S. is in excellent position. What is not produces on the graph is the balance of attributes that guarantees the U.S. will continue as Hyperpower for at least half a century.

Optimism

The U.S. will still be the sole hyperpower once the next phase of global unrest is finished.

Of course, what the "U.S." looks like at that point may be markedly different from the contiguous continental + Alaska, Hawaii (and Puerto Rico, for all intents and purposes). Secession overtures will probably increase, both from states or blocks of states wanting to secede and from states or blocks of states wanting to eject weaker players. It remains a remote possibility, since bloody precedent was set the last time the issue was raised.

But still, I am optimistic long-term. No other nation or "Union" comes close to the cultural and legal institutional infrasctructure the U.S. enjoys. This hyperbolic talk of massive inflation and being slaves to our debtholders is silly and counter-productive. However, the austerity measures (putative and already active) will guarantee more pain ahead. The world is witnessing the slow phase-transformation from cooperation to competition. As I have said before, humanity does not "progress" in some linear form like scientific discovery...and our inability to recognize this false analogy will not prevent the cycle from changing again. Relatively speaking, peace, cooperation, and order has had a wonderful nearly 80 run.

So when the EU fails and recedes back into its traditional adversarial relationships, when China blows up in spectacular fashion under labor unrest, institutionalized corruption, and closes shop for a few decades, when Caliphates are re-established, when Russia re-starts Imperial ambitions in the Baltics, etc...where on earth is capital going to flow where it can enjoy a stable environment in which to survive and grow?

The Paper Dragon

I have written extensively on this blog regarding global investment preferences and the risk/return matrix specifically between the U.S. and China.  Specifically here, here, here, and here.

So it will be no surprise to readers here that the preferred zone of asset placement is the U.S., and China is becoming more marginalized.  The totality of all the literature anointing China as the new world hyperpower can now be safely confined to the dustbin of history.

U.S. GDP will continue to stagnate unless additional deficit spending is injected into the system.  Where will all those export from China go?  What will the accounting treatment for the warehouses full of inventory and high-rises with no-one living in them be?  These are all things we have discussed here before.  And there is a very high and rising probability it will not end well.

But hey...they were useful, were they not?

The Shanghai Composite Index (SHCOMP), which doubled in 10 months through August 2009 as the government poured $652 billion of stimulus into building roads, railways and housing, has tumbled 43 percent from its high, destroying $748 billion in market value. Only Greece’s ASE Index (ASE) has fallen more in percentage terms. The Standard & Poor’s 500 Index, the benchmark gauge of American equity, erased all of the losses from the worst recession since the Great Depression and has gained 68 percent since the China peak, reaching a record this month.

How to legitimize Asian military build-up...

...as the saying goes "I am not saying, I am juuuuuust saying"

If I were a hyperpower with a large (somewhat enigmatic, if not outrightly hostile, and with a "core ideology" at odds with my own) competitor who would normally dislike my presence in their sphere of influence, how would I go about justifying a large deployment of military assets?

"Convincing" a neighboring dictator to make some silly threats (imminent missile attack!) might be one of those ways.   Maybe this dictator actually likes American culture and...oh, I don't know...Basketball or something.

Foreign Policy is never direct, is it?  The Recapitulator notes Dennis Rodman was recently there.  I saw him at O'Hare and thought to myself "where is he going" but the Korean Peninsula was not on my top three possible destinations.

Just saying.

Context.

One of the chief areas I disagree with most economists is in the arena of context, both historically and in more theoretical arguments.

the below article regarding the remarks by Rogoff, et al., is typical of most specialized economic analysis with respect to U.S. obligations. It is also typical in the way it misses the contextual environment existing now.

"An inch wide and a mile deep" This phrase is uttered by one of my intellectual heroes, Richard Epstein, when he describes his compulsion, both in development and in furtherance of his charge as a professional academic, to seek out different lenses or facets with which to see the world. The phrase is uttered as a sort of pejorative "against specialization" where the afflicted know more and more about less and less. Its pervasive amongst most technical fields (and, alas, Economics has become inundated with its own language, complete with an acronym list that rivals the U.S. Army) and serves as blinders on a Horse...myopically leading them to a pre-determined goal but knowing very little about the adjacent terrain.

In any case, here we see the same arguments proffered about global economies and the inevitable conclusions that result from "debt". It fails to consider the difference between fiat currency regimes and the defunct gold standard. It fails to consider the geo-political apparatus that envelopes the world as it stands now. The U.S. is the sole hyperpower. It can provide instant security to any jurisdiction anywhere in the world within days. It can issue "debt" in its own currency as it sees fit, and its legal system and political stability provide the consumption engine for the world. This context is unique, durable, even self-perpetuating. Thus, analysis that depends on "traditional" measures of growth and "debt" which fails to account for these unique capabilities is doomed to fall far from the mark in terms of forecasting...because the value of these capabilities increase exponentially in times of crisis.

The shadow of an oncoming debt crisis is hindering job growth today and threatening our fiscal and economic future. The latest warning came today from “The Long-Term Budget Outlook,” an annual report from the Congressional Budget Office (CBO) which details the state of the nation’s finances. This year’s news is grim. We are on the verge of leaving the next generation with an unsustainable debt burden and a less prosperous nation.

According to economists Kenneth Rogoff and Carmen Reinhart, who have studied sovereign debt extensively, debt-to-GDP ratios of over 90 percent are associated with lower economic growth and increased risk of a severe debt crisis. According to the CBO, total U.S. debt will race across that tipping point and surpass 100 percent of the economy by the end of this year.

Globalization 3.0, The Return Of The Hyperpower

The HIRE act opens an interesting and somewhat onerous new chapter for international relations. The most important trend to observe will be liquidity requirements from foreign (non-state owned, as Central Banks and their subsidiaries are exempt from the HIRE act) banks and the resulting volatility in flows of funds. If volatility for short-term financing spikes, continued global integration could suffer.

This is a bold move by the U.S. In effect it has drawn the line in the sand by wagering the dollar will continue to be the currency of choice for international capital markets transactions and the preferred reserve currency of the world's central banks. This is UNILATERAL fabrication of a new global financial system, one in which the U.S. dollar is the apex for all bank transactions. Transgressors will be denied capital denominated in the reserve currency with major implications for international funding.

As long as the rest of the world obeys the rule-sets the U.S. promulgates in this new System, it will remain the world's hyper-power.

But there are risks. The U.S. is leveraging its military and physical weapons advantage relative to the rest of the world ("ROW") into a new era of virtual financial weaponization. However, these two capabilities are intimately connected. The success of this new financial arrangement lies with the ability of the U.S. to project military force anywhere on the planet and achieve nominal victory within days. If the rest of the world senses weakness in this crucial capability, a "run on the bank" will ensue.

This is a very, very large gamble. The ROW will go along with this "treaty" ONLY as long as the U.S. continues its real world dominance. Thus, the U.S. will likely become more aggressive to countries that run contrary to its interests.

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