USA as a Creditor Nation

I have been asked by some as to why my outlook for the US is still so negative? Granted there are a number of positive signs and it certainly looks like the first half of this year will be fine, but my negative sentiment is based on a long term view and on economic fundamentals. These long term trends will eventually overwhelm the short term stimuli implemented today.

Imagine, if you will, that the US is running a $200 billion surplus and has $2 trillion in reserves. What would you think about this country? For one the currency would be strong and foreign investment capital would be flying in. How could you get a more safe investment than investing in such a well run country? Demand for our products would far exceed that being purchased by us, our citizens would enjoy a high level of employment and there is a huge safety net for welfare, medical support and retirement. In short, things are good. The only thing to worry about would be inflation running above an "acceptable" level, but even a spike in inflation would mean that asset values are increasing to the benefit of many.

Now let's look at where the US is currently. We have massive levels of debt both at the individual and the government levels. Worse still is that total debt is growing rather than shrinking. Unemployment is stubbornly stuck at an elevated level. Inflation, while under control is being stoked by the massive influx of new dollars being printed and this could undermine the entire recovery. Housing remains weak despite massive efforts to stimulate buying and with interest rates at historical lows.

Now the first scenario is strikingly familiar. Of course the emerging economies and in particular China, are huge beneficiaries of the massive levels of debt incurred by the US. The main difference is that there is still an inherently large level of risk in investing into these countries. As an active investor in Chinese stocks I can assure you first hand that there is a level of lawlessness and a level of disdain for foreign investors. Companies seem to do what they want and answer questions later with little regard for the shareholders or the "rules" of the game as imposed by the West.

In addition, the Chinese government holds everything very close to their chest and there is a high level of skepticism for their numbers and their policies. What is said is often not done. Not that this is new to the world of politics, it is just that the state has such a heavy hand that investors are warranted to be skeptical and not to pile into the investment world of China. Furthermore foreign investment is limited and has so many strings attached that going all in is virtually impossible.

For these reasons the world is still prepared to put up with the excesses of the United States. The main question is how long will this last? With the European economy in a shambles time is still on our side. If the Euro house were in order then I would expect to see a significant appreciation in the Euro at the expense of the dollar, but that is not the case. China would need become a free market, implement legitimate laws and policies to support this system and allow foreigners to compete on an equal footing with the same rights as local citizens. This is decades away (if ever) from happening, so for now the US has time.

Will we use the time wisely? In order for me to change my long term outlook we would have to implement some severe levels of austerity. Budget surpluses would need to become the norm and the level of government debt would need to be reigned in. Can this be done? Well we did have a brief period during the Clinton era where there was a surplus. If you can remember back then, the dollar was strong and unemployment was low. Can we return there? Yes, but it would take a strong leader and at present I do not like our options, plus it appears that time is starting to run out.