Issue 22: 2012

The U.S. Phoenix Rises Again

Once counted out by commentators, the United States has regained its global economic dominance — and for the most basic of reasons.


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Global trade data show the United States has once again become the biggest export destination for Chinese products, a bellwether indication of U.S. prominence as the biggest global market.1 Over the past year, Chinese exports to the United States have risen by about 10%; Europe had overtaken the United States, but fell back into recession, and imports from China dropped by 5%. As a result, the United States has returned to its position as China?s biggest export market.

Relative strength in the U.S. economy helps explain why many U.S. stocks and stocks of countries more closely tied to the United States have outperformed those of other regions of the world in the past two years. Aside from more supportive monetary and fiscal policy, the United States also is benefiting from the global rebalancing trend that differentiates this expansion from the previous one. Then, China depended on an ever-increasing trade surplus, which became a major source of the destabilizing capital flows that financed housing booms in trade-deficit countries and led to the global recession of 2008?2009.

China?s stock market has been one of the worse-performing markets IN THE WORLD DURING THE PAST TWO YEARS.

Today, China cannot rely on the developed world for the 9%?10% growth it enjoyed for three decades. It is making a difficult transition to more domestically based demand growth that is expected to result in a more moderate 7%?8% growth rate. As a result, China?s stock market has been one of the worse-performing markets in the world in the past two years.

This relative ascendancy of the U.S. economy is ironic for a couple of reasons. First, the 2008 financial crisis precipitated the global recession. This would seem to suggest that the United States would have the most difficulty recovering. Instead, China and especially Europe are having the most trouble. Real U.S. export growth has averaged more than 8% annually since the recession ended. The U.S. trade deficit, which ballooned to a record of about 6% of gross domestic product in the previous expansion, shrank by more than half during the recession. That sharp reduction put more of the burden of the recession?s adjustment process on China and other countries overly reliant on trade surpluses.

Growing Numbers: American Trade with China Click to expand

The second irony is the sharp contrast to the conventional wisdom that prevailed toward the end of the previous expansion, when popular commentators were obsessed with the decline of the U.S. economy. The future was presumed to belong to Europe, the Middle East and the emerging markets such as China.

Yet, like a phoenix from the ashes, it has risen again. Europe is facing prolonged stagnation. The Middle East is descending into chaos, and China is in danger of a hard landing.

Ever since the United States emerged in the 1920s as the world?s dominant economy, there has been recurrent speculation of a new kid on the block about to take over. In the 1930s, it was communism and fascism. After World War II, the Cold War kept that speculation alive. By the late 1970s, chronic stagflation seemed to prove that the West had failed and that planned economies were the future. Then the Soviet empire failed and Japan emerged as the next new thing. After Japan stopped growing, China emerged. But now China is facing up to structural problems accumulated during its mercantilist binge.

Throughout the past century, the simple view that the United States had a model for economic success was mostly disparaged by social commentators.


Where does this success that otherwise thoughtful people refuse to acknowledge come from? A look at the economic success of various countries around the world provides some insights. In a ranking of the world?s 25 most populous countries, the United States is No. 3 with more than 300 million people. Among these nations, the United States ranks highest in economic freedom.1 Among all countries, the United States ranks 10th in economic freedom in the latest Heritage Foundation index. The key point is that not one of the other top 10 ?free? countries in 2012 had a population greater than 50 million. Freedom correlates well with economic success. Aside from the United States, most of the other populous countries that have comparably high per capita incomes also rank highly in terms of economic freedom. Those include Japan (ranked 22), Germany (26) and the United Kingdom (14). The sphere of freedom extends well beyond the United States, and where it exists, people have some of the highest living standards on the planet.

Economic freedom is a key ingredient of economic resilience.

Economic freedom is a key ingredient of economic resilience, providing the ability to adjust to changing economic circumstances. Top-down planning by a bureaucratic committee lacks this flexibility. China is unlikely to take the leading role. Its research and development expenditures are aimed at copying the innovations of free creative people around the world. Its growth-limiting demographics are skewed by forced control of its people?s reproductive rights. Its successful entrepreneurs overwhelmingly express a preference to emigrate to free countries, with the United States and Canada the top choices. This is the comparative advantage that keeps the U.S. economy No. 1.

The United States has more immigrants than any country on earth.1 Among the top 10 countries for immigrant populations are several of the freest, most prosperous countries aside from it, including Germany, Canada, the United Kingdom and Australia. One reason the Japanese economy stopped growing is its people?s preference for ?ethnic purity,? which excludes immigrants. China ranks fourth in the number of people leaving its shores.1 Freedom attracts the best and brightest. Tyranny repels them. This seems too simple and even corny for utopian visionaries, but the proof is in the pudding.

As a percentage of national population, more Americans were born abroad than in any other highly populated country.1 And this number includes all the world?s major ethnic groups. This diversity provides connections into markets in every part of the world economy, a comparative advantage in a globalizing economy.

More than any other major economy, the United States looks like a microcosm of the world?s people living and working together in political harmony. China lacks freedom. Japan lacks people. Europe lacks political union. Given these fundamental problems, it should be easy to see the source of U.S. economic dominance. Like the people admiring the emperor?s new clothes, the pundits are imagining everything but the obvious.

1The Economist Pocket World in Figures, 2012 edition


Projections made may not come to pass due to market conditions and fluctuations. Investing involves risk. There is always the potential of losing money when you invest in securities.

Past performance is no guarantee of future results. Asset allocation, diversification and rebalancing do not assure a profit or protect against loss in declining markets.

Always consult with your independent attorney, tax advisor, investment manager, and insurance agent for final recommendations and before changing or implementing any financial, tax or estate planning strategy.


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International Investing
International investing involves special risks, including foreign taxation, currency risks, risks associated with possible differences in financial standards, and other risks associated with future political and economic developments. Investing in emerging markets may involve greater risks than investing in more developed countries. In addition, concentration of investments in a single region may result in greater volatility.