Will the US economy save the world again?   Leave a comment


Just when it seemed the end was near, Uncle Sam seems to be coming back, staggering to his feet like Bruce Willis in one of the old Die Hard movies.

In case you missed them, the plots are all roughly the same: despite a hangover and a bit of flab, armed with just a revolver and a pack of cigarettes, Bruce saves the day – no matter how many machine guns and explosives the baddies have, or how muscular they might be.

A number of the latest indicators suggest that after years of battering, there’s a chance that Uncle Sam may be on the verge of just this kind of last reel Hollywood comeback. As a commodities analyst who looked at last month’s surge in US steel production told a newspaper recently, “The US seems to think it’s saving the world again.”

Now? Really?

Certainly there are plenty of reasons we shouldn’t expect Uncle Sam to come tottering out of the flames now, if ever. Although the Iraq war is purportedly over, an endless, expensive war in Afghanistan continues – at least $113 billion in 2011 alone, which works out to about $700,000 per soldier, according to Stripes, a privately-owned newspaper for people in the US military.

Between wars and social spending, the massive government deficit keeps getting more massive. Total public debt is now $14.7 trillion – $1.1 trillion of it put on in the last year alone. As senator Everett Dirksen noted in the 1950s, “A billion here and a billion there, and pretty soon you’re talking about real money.”

Nor are things much better outside the government. Over 1.5 million homes are in foreclosure, and another 3.5 million homeowners are late with their mortgage payments. The expensive yet inadequate health-care system eats 13% of GDP and seems likely to grow even more expensive as the Baby Boomers get older.

Unemployment is officially 8.6% but unofficially some economists say it may be nearer to 20%, as many people are either chronically underemployed or have been out of work so long government statisticians don’t count them as unemployed anymore. And that’s also not counting the nearly 1% of the population that’s in prison – over 3 million people behind bars.

Americans themselves aren’t very optimistic about the situation: 72% say the US is heading in the wrong direction, according to the Rasmussen Reports, a polling group. Only 20% strongly approve of Obama, while 42% strongly disapprove. Congress earns a hefty 83% disapproval rating as well.

Perhaps it should come as no surprise that Ron Paul, a libertarian who wants to abolish the Federal Reserve and shut down the empire, is at the moment almost a credible Republican presidential candidate, while on the left, the Occupy Wall Street movement soldiers on in hopes of toppling the whole kit and financial-military-industrial caboodle.

And Yet…

Yet almost despite itself, the American economy seems to be looking up.

The endless euro crisis is one reason. In investing as in most of life, it’s always the alternative that counts, and right now, in comparison with Europe, the US looks positively stable. With a euro collapse still a real possibility, many investors have been looking West.


S&P may now say Treasury bonds are just AA+, but the investment world evidently disagrees – or at least thinks the other alternatives are worse. Treasuries rose nearly 30% this year, bid up in part by investors seeking a safe haven. All that demand has helped push yields on the 10-year bond down to just 1.9%, making them essentially zero after inflation. In September, they dropped even further, to 1.67%, their lowest level since 1945.

US stocks had a good year too – relatively. Most of the world’s major stock exchanges fell a quarter or more in 2011, making the S&P 500’s flat performance (actually a decline of .003%) seems like a sort of triumph.

Some of these numbers were driven by fear, but other homegrown indicators are also positive.

Private sector hiring is up in the US – 325,000 new jobs in December, much higher than the forecast number of 178,000 jobs, according to ADP, a payroll processing company. Layoffs seem to be bottoming out. Construction and manufacturing are both up, slightly. Perhaps most positively of all (particularly given manufacturing is still fairly miserable), demand for steel is actually higher now in the US than in Europe or Asia.

US oil imports have tumbled in the past few years, thanks in part to the rapid growth of natural gas production. Imports have declined from 60.3% in 2005 to 49.3% in 2010, according to US government figures, driven by a rise in biofuel production and new drilling in the Gulf of Mexico. At the same time, the discovery of vast deposits of shale gas is leading some analysts to predict that the US will eventually become a net natural gas exporter.

At present, government analysts estimate that there is enough gas around now to sustain the country at present rates of consumption for more than a century – double their reserve estimates just two years ago.

US companies are also sitting on at least $2.1 trillion in cash – some of it retained profits, some of it loan proceeds – all of it waiting to be ploughed into something. These iron mountains might seem prudent at the moment, given fears of a new credit crash, but between restless shareholders, leveraged-buy-out buccaneers, and legislators hungry for cash, the situation won’t last forever.

High-Octane Brazil

There are other reasons investors may find the US appealing now as well. As a developed country, the US is kind of a disaster. America has worse infant mortality than 45 other countries, lower life expectancy than 49 other countries (CIA World Factbook). It’s also one of the largest air polluters in the world.

However, if you look at it not as the richest economy in the world but as a sort of high-octane Brazil, the picture gets a lot brighter. There are any number of great universities, a solid corporate legal structure, fabulous logistics networks, and as an added bonus, wages that haven’t really risen in 40 years.

Historically, too, investors should be reassured by the US. No matter how hard times might be or how strongly anti-business the rhetoric gets, the government has almost always found a place for business in the lifeboat. For better and worse, commercial interests have been looked after by virtually every president since the early days of the Republic.

Even Franklin Roosevelt, considered by many businessmen at the time to be a traitor to his class, made restoring industrial profitability a key part of the New Deal, and arguably avoided a revolution. As he once noted, “It is an unfortunate human failing that a full pocketbook often groans more loudly than an empty stomach.”

The Next Big Thing

But the plot of this potential American recovery is still missing a crucial element: a boom. Slowly getting over a hangover isn’t very exciting. What the script really needs is a bit of hair of the dog. It could happen. The sloppiness of so many half-baked ideas, conflicting policies, and squandered capital leads to plenty of failures, but it also seems to pollinate the occasional world-shattering success. Electricity, airplanes, the automobile, the computer, the Internet – none of these advances were entirely invented in the States, but no other country marketed them better. A few possible candidates for Next Big Thing:

Medical Advances: The first completely sequenced genome was completed in 2003 at a cost of $3 billion. Now, scientists are close to getting it down to $1,000, and with those tools in every lab, a whole new level of understanding about genetics and even life itself may open up. Some people are predicting that in just a few years, babies will have their genes sequenced at birth, making it possible to get extremely early warnings about a predisposition towards all kinds of diseases and conditions.

Electric Cars: Detroit seems to be dragging its feet about electric cars a bit right yet, but all that’s really preventing electric vehicle adoption now is lack of clarity over the shape of infrastructure it needs. While the US can’t always be depended on to make the right choice in standards (cellphones were held up for years in part because of an insistence that a US-bred technology was the best) there is a chance that the government, automotive, and power industries could somehow align their goals this time round. Once that’s done, electrics could be a very big thing: electric car engines have just five moving parts and are reportedly a lot cheaper to run, which makes them exactly the right kind of technology for a disruptive innovation.

Sensitive Robots: With voice and pattern recognition improving all the time – think of Google’s experiments with driverless cars, Apple’s SIRI , the voice-controlled bot inside the new iPhone, or the wireless gesture-controlled Wii system, which makes it possible to interact with the game console without actually touching anything – it’s not too far-fetched to imagine we’re on the cusp of a big shift in computer technology. One of these days, digital buddies might drive you home from work, help your kid with his algebra, and tell you a joke if you’re looking glum.

If a robo-boom happens, odds are good that one important part of the plot won’t change: the software will be written in India and the hardware will be built in Taiwan – but some guy in California will steal all the credit. Yippee kai yay, as Bruce would say.

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Posted January 15, 2012 by avinash2060 in Economy

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