Tuesday, April 22, 2008

Guest Post: Is America in Economic Decline?

The following is a guest post from chicagodudewhotrades, a poster at Little Green Footballs. He's put together the following piece about the US and world economy. If you have questions, he's provided his email address (chicagodudewhotrades@gmail.com) or you can post your comments as usual. Without further ado: Is America in economic decline?

Everyday, it seems there is a new economic statistic about a weakening US economy or a news report about the US$ dropping in value against other currencies. My answer is: NO. Maybe right now the dollar is at a low level and portions of the American economy could be better, but the overall economy is solid and the dollar weakness is temporary. If you read history, it seems to be a good rule to never underestimate the American people or our economy. In fact, i think some of the nation's best economic times lie ahead.

I'm writing this mostly because I'm a member of a very popular website called Little Green Footballs (www.littlegreenfootballs.com). Due to my online name (chicagodudewhotrades) I get asked a lot of stock market and economic questions by my fellow LGF'ers. Writing this I hope will help my LGF friends out. This is my first attempt at writing something like this, so don't beat me up too bad!!!

I'm also writing this because I get tired of the mostly negative coverage of the economy by the national media. This is my small attempt to try and convince my fellow Americans that the economy isn't as bad as portrayed.

What gives me the right to write about economic issues? In a word: Nothing. I'm not a economist or a CEO of a business. I don't have a Ph.D in Economics or International Finance. The bulk of my professional trading experience comes from several years spent working as a clerk in the trading pits of the Chicago Mercantile Exchange. However, I have been able to make a decent living from day-trading the last few years. Day-trading is a very brutal, Darwinian profession. You either make money at this or go bankrupt. I'm still doing this, so I figure my ideas and advice have some credibility.

I think the best way to explain why I believe America's best economic days are ahead of us is to run down what is happening in the world and what I think may happen in the future.

The European Union has become a huge entity whose member states have a combined population of nearly 500 Million (1). However, I have come to believe that they are too big, too slow ,and most damaging, too bureaucratic.

Yes, right now the Euro is doing well against the Dollar. However, people seem to forget that a few years ago, the euro was trading at a record low of 82 cents against the dollar. (2)

Inflation is above the European Central Bank's public goal of 2% and rising (3). Western Europe has also always had systematic higher unemployment historically than the US. Eventually, economic fundamentals like these will catch up to the Euro.

You may read a lot about the grim future of Social Security. That is true. Basically, starting in a few years, more money will start being taken out of the program than going into it. However, Europe faces the same demographic issue. The big difference is that the working-age population of Europe is declining while America's is increasing.

Today when you think of Asia, one country comes to mind: China. China is a huge country with a huge population. Because of low wages, China has become the manufacturing center of the world. All that manufacturing has brought huge sums of wealth into China.

But China has many issues. All that manufacturing has lead to huge environmental problems (4). Thanks to China's brutal 1-child policy and a Asian cultural preference for male babies, China has demographic imbalances in their youngest generations. How can a nation be successful with a demographic imbalance like that? China's biggest problem however, may be it's own Communist government. Folks, I don't know any other way to say it.: Communism , Socialism, etc, just doesn't work.. Eventually, China will pay a huge price because of their system of government. Free, democratic, open market economies work, nothing else comes close. It is truly that simple and basic.

It is hard to write off a entire continent, but unfortunately that is what I'm basically doing with Africa. I don't think Africa has moved beyond a tribal identity yet. They will not grow or be economically successful until the people of Africa start thinking in terms of national identities and not just tribal.

Middle East
Currently the Middle East is doing well because of high oil prices that bring huge amounts of wealth into their nations. Historically, however nations with commodity-dependent economies do not succeed in the long run. There is a theory in economic circles called the "commodity curse" . The theory states that commodity-dependent nations get politically and economically lazy because of the easy money pouring into their economy. I think this will happen in the Middle East someday. The Mid-East has one principle export: oil. What happens when that export runs out? There are questions about the true proven reserves of both Saudi Arabia and Kuwait (5). Back in the late 1990's when oil prices were low. Saudi government bonds were rated "junk" status. This will give you a idea of what happens to the economic prospects of the region when the wells run dry.

Latin America
Latin America seems to be taken a turn for the worse lately. A couple governments seem to be going back down the Socialist path. Once again, democratic free market economies work, everything else doesn't come close. Democratic open market Brazil and Colombia are doing well. The ones going down the socialist path like Venezuela and Bolivia will have problems.

I see some parallels between the Middle East of today and the Japan of the 1980's. Remember how everyone thought back then that "Japan, Inc." was going to be the world's largest economy and how they would be the globe's dominant economic power? How did that work out for Japan? I do think that the sub-prime mess and resulting housing price slump will continue to hurt the American economy.But this is a incredibly flexible economy that will survive this mess. In fact, i think the sub-prime problem will hurt other economies worse than ours just because our national economy is so resilient and others aren't.

1. Website of the European Union www.europa.eu
2. Wikipedia's entry for the Euro Currency
3. Website of the European Central Bank www.ecb.eu
4. Financial Times article. China Report. Environment: 'Devasting price to pay for rampant growth' By Jamil Anderlini. Published: 9 Oct 2007
5. Reuters. "Kuwait oil reserves only half official estimate-PIW" . Published 20 Jan 2006


Timothy said...

Very helpful. My father has worked in the business since his early 20's, so he has a bit more than 50 years experience and he would probably agree with most of your assessments, especially the one about OUR economy. A lot is made of houses lost due to variable rates, but that only includes about 2 percent of the loans on the market. So its still rather sound. The key is to look outside the Drive By Media for real information on the economy. Their template is always: doom and gloom when a Republican is in the White House.

BTW, I think Dee had a post yesterday about how the economy, where it has declined, has done so since the Dems took control of both houses of Congress.

Anna said...

Timohty I am sure ChiDude will appreciate your comments. I did see what Dee posted. To almost quote FDR, 'all the economy has to fear is fear itself.'

Must restrain the politicians from doing something jsut to prove they are doing something. They will probably muck it up.