As a European immigrant who has lived more than 15 years in the US and loves this country dearly, one of the characteristics I admire the most in Americans is their eternal optimism and overall “can-do” attitude. There is no better way to see these traits than in Hollywood movies, because of the usual Happy End - be it war, natural disaster, aliens, or whatever ills befall this country. Of course, happy endings and optimism are well-founded in the last 200 years of US history. All previous challenges - political, economic - have given way to better and more prosperous times. As many have said before, it never has paid to bet on the decline of the US. And why else would have tens of million immigrants have come to this “exceptional” country called the USA?
I hate to break it to you, but there is a fly in the ointment today. History is no guarantee for the future, as many countries throughout world history have discovered. Greece, Rome, Great Britain, the Netherlands, Portugal, and Spain are just a few examples of economic fortunes and empires built and subsequently lost. In each of these instances, I wonder - what percentage of the population saw the downfall coming or was prepared for the sudden or stretched-out decline over generations?
That brings me to the current state of the US, in particular its economic future. If you visit your local bookshop, you will find a host of recent political and business books written by prominent authors that deal with our challenges: high level of debt, loss of industrial base, China taking over the world, failing education and schools, lack of modern infrastructure, or whatever the respective author uses to predict hard times and even harder choices to stop the perceived decline. Consistent with American optimism, though, all these books (usually in the final chapters) have a beautiful happy ending (could another reason be that books with sorry endings for the US probably would not sell?). No matter the book, their premise is that the US will be back to normal after some hardship, and the country’s economic and military leadership position will be assured for longer than you and I will be alive.
What do you think is ahead? How do you see the next 10, 20, or even 50 years evolving? The potential scenarios could incorporate a wide spectrum, with good arguments being made for each, and the associated consequences for you, your family, your life and business would be dramatic, no matter which scenario you choose. Will there be a great boom, structural decline, or the muddling through “new normal” of today? Let’s look at two opposite scenarios and your potential action plans:
- “Boom - Back to Greatness”: If you believe that the US will master all challenges as in the past, you will keep your life fully grounded in the US. You will send your kids to US colleges no matter the outsized tuition fees. You will invest heavily in US based assets (your home, stocks, US bonds, US dollar nominated bonds) betting on the rebound. You will continue to build your social and professional networks here. You will contribute to your 401K/IRA to maximize tax benefits. The only passport you ever need is the blue one you have got. You will not own the “barbaric relic” gold, as the US dollar will be the king of all currencies for a long time to come.
- “Structural Decline”: What would you do if you believed that there is no happy ending? What if, for whatever reason, the economy gets significantly worse and has a true depression like in the 1930s, lasting 10 years and with unemployment reaching 25%? What if trade and political tensions with China lead to war (economic, cyber, or shooting matches in the South China Sea), a kind of a replay of the decades long power struggle in the Pacific between the US and Japan, which ended in Pearl Harbor and full-scale war? What if the only way out of the current US debt trap is massive dollar printing and hyperinflation? What if gold will be confiscated again like under FDR in the early 1930s? What if this time the holding of foreign currencies or private retirement assets (read: 401Ks/IRAs) will be compromised to reduce federal debt, following similar recent moves by Argentina and Hungary? Could there be riots on the streets like in Europe?
The life you live is your implicit or explicit bet on the scenario(s) you expect. It is better to pick your assumed scenario consciously than by default. Here are a few questions to ponder:
- Do you invest everything in the “base case” scenario and disregard extreme positive or bad scenarios because you just “know” that they won’t occur anyhow?
- Do you follow a risk-averse strategy by spending some money on preparing for extreme outcomes, in particular bad ones, the now famous “black swans”? If so, how much do you invest time and energy in potential escape hatches (e.g., second passport, speaking a foreign language)?
- Do you “bet the farm” on an extreme bullish or very bad outcome? For example, if you believe in very tough times ahead for the US, you might think about selling all your US based assets, stop contributing to or dissolving your 401K/IRA, and move abroad.
- Can you find investments that will thrive in both feast or famine US scenarios (e.g., finance your kids’ Mandarin skills, acquire some property in Latin America)?
The future is unknown. Your scenarios and assigned probabilities will be different than mine. Only you can decide on what the right course of action is for you. As we are about to enter 2012, may your contemplation help you make the right choices for the upcoming years and decades! Have a happy, healthy, and prosperous New Year!
Photo Credit © Arthur Matkovskiy | Dreamstime.com
#1 Certainly not a very
Certainly not a very optimistic entry for the end of the year.
Let's see, we can answer from several points of view.
First, what about China? I am old enough to remember hearing all the same dire warnings about Japan that we are hearing about China today. Japan was going to conquer the world. They were going to own all the U.S. real estate outright within ten years. They were going to destroy the United States computer industry with their "Firth Generation" computer project. Their students were so much better than ours, soon the only jobs left for Americans would be at gas stations. I also remember the Japan that shamelessly copied intellectual property. I remember the Japan that was pushy and arrogant. All of these things are a distant memory now. All the factors that slowed Japan's rise in the 1990s are present in China today. The only difference is that China's versions of these problems (notably demographics) tend to be twice as severe as Japan's.
As for investments, at a certain point if the entire world is in flames, no investment in anything matters. This was the astute observation of the late Senator Patrick Moynihan -> ultimately, the young have to produce the goods and services for the old. At a certain point, it does not matter how you push the numbers around in the computer. The young are going to be able to produce a certain amount of goods and services which can be distributed to the old. It doesn't matter whether you called it social security, taxes, personal savings accounts, IRAs, mutual funds, IOUs written on kleenex, at a macro level it doesn't matter what the numbers say: there is still the same amount of goods and services to be distributed to the same number of elderly.
Is the U.S. at the end of its rope? Perhaps? Perhaps not. Pick up a copy of the 1972 Club of Rome book "The Limits to Growth" it was pretty convincing. By now the entire planet was supposed to have melted into a stinky polluted mess. It didn't happen. I also remember the Jimmy Carter era. The U.S. couldn't seem to do anything right. When Iran took Americans hostage, the best we could do was crash a few helicopters in their dessert. Everyone was completely depressed. However, better years followed....as did worse years...and better years again...
At a certain point, worrying about the macro-economic picture is not much more useful than worrying about the weather...