Subject: 20-20 Vision

Walter Molano

Overview: 20-20 Vision

Up to a few weeks ago, the long-term outlook for the world was pretty clear. There was a consensus that China would be the dominant power by 2020, and the U.S. would be a diminished superpower. Europe would be somewhere in the middle, thriving under its world-class infrastructure and enviable social system. This vision of the not too distant future was embraced by everyone. Manufacturers began applying Sino-designs to all of their products. Service companies, such as financial and accounting firms, rushed to set up shop in Shanghai and Beijing. Any corporate maverick with the slightest sense of ambition immediately petitioned to be transferred to the Far East, and even art dealers found a new desire for Asian culture. Tiger moms across Europe, North and Latin America made sure that their children took up Mandarin lessons. Like two decades ago, when people rushed to study Japanese, Mandarin is the hottest language on the education circuit. Even I even shared this point of view, publishing "No 20/20 for 2020" in August of last year. However, things are looking quite different.

To begin with, the bloom is coming off the Chinese rose. The property bubble is imploding. The banking sector is in shambles. Consumer credit is spinning out of control, and social dissent is on the rise. The authorities in Beijing are so worried that they are clamping down on anything that whiffs of democracy-including voting for television idols. At the same time, the income gap between the rich and poor is widening. Although China's aggregate numbers are good, not everyone benefitted equally from the increase in prosperity. 

One of the main problems is the country's residency rules, which determines where people can buy properties and receive benefits. This created a two-tier social system that gave priority to individuals who were lucky enough to have been born along the coast or in major urban centers, at the expense of everyone else. Income disparity was one of the factors that sparked the revolts of the 19th century that eventually brought down the Chinese empire. Moreover, China's one-child rule is finally taking its toll. China's population growth will be negative by the end of the decade, forcing the country to dedicate more of its resources to health and elder care, instead of high technology exports. The labor pool is already shrinking, which is one of the main reasons why wages are on the rise. 

China's foreign economic policies are also starting to backfire. Its rebalancing of international reserves into non-dollar assets proved to be disastrous, and it could leave the PBOC nursing huge losses. At the same time, its attempt to secure commodity sources by investing in third world countries, particularly in Africa, is not producing the results it sought. China lost tens of billions of dollars in Libya, and there are plenty of other disaster stories. These developments are taking place against the backdrop of the Greek tragedy that is engulfing Europe. No longer the bastion of proper economic and social management, the European Union is headed for years of recession or a nasty breakup.

This leaves the U.S. as the last man standing. By taking its medicine early on, the U.S. spent the last three years deleveraging and restructuring the private sector. The corporate sector is lean and mean, and with a treasure trove of cash. U.S. banks are better capitalized than their European counterparts and household savings are on the rise. Now, the public sector is starting to get its act together. States and municipalities are slimming down, and the Federal government is about to go on a crash diet. Likewise, the U.S. economy is much more export-oriented.  With a devaluation of more than 30% during the last decade, U.S. firms are exporting aggressively. Ports, railroads and transportation companies are running at full tilt.

Therefore, the U.S. seems to be out of sync with the rest of the planet.

The good thing is that everyone else is about to go into a downturn, while the U.S. may be poised for recovery. Of course, not everything is perfect in gringolandia. The return to a more primal form of capitalism and the reduced role of the state hit the middle class very hard. Income disparity is on the rise, and this will put stress on society. The protests on Wall Street are a harbinger of what is to come. The U.S. was able to maintain a large middle class during the post war period when it was the only source of manufacturing on the planet. The rest of the industrial countries had suffered widespread damage during the war. However, the return to a more normally-distributed manufacturing environment took the advantage away from the U.S. Nevertheless, from an aggregate macro perspective, the new outlook for 2020 will put the U.S. at the top of the global food chain.