Article by Investment U
My iMac was smoking.
After writing a few weeks ago on why the U.S. dollar will remain the world’s leading reserve currency, the comments from readers came fast and furious.
“Are you stupid?” and, “How naïve you are?” were some of the more polite comments. Some suggested that before long the Chinese currency would eclipse the dollar as the world’s reserve currency.
Nonetheless, I noticed that as the euro crisis escalated, where have governments parked their precious cash? In the U.S. dollar – now trading at a three-year high. For example, the U.K. and France increased U.S. Treasury holdings 26% and 30%, respectively, in recent months.
Why are American Treasury bonds more attractive than gold, the Swiss franc, or the China yuan despite all of America’s budget and debt challenges?
It’s certainly not income with 10-year bond yields at 1.57%.
My view is that America’s strengths greatly outweigh its weaknesses, but it appears that I have more confidence in America’s future than most. A recent poll by the Chicago Council on Global Affairs indicated that 55% of those polled believe that the United States will be equaled or surpassed as a global power over the next 50 years. A group of Chinese polled believes their country will catch up to America in terms of global influence within 10 years.
And don’t think I sugarcoat the challenges America faces. More than half of my most recent book, Red, White and Bold: The New American Century, outlines these challenges and how to turn things around.
But when a country decides what currency to safeguard its billions, it’s looking beyond the headline news of GDP growth, budget deficits, or the latest job report.
They’re looking at a bigger and deeper picture, and especially institutions that promote stability, openness, flexibility, mobility and transparency.
Here are the 10 benchmarks I have come up with to measure America’s relative strengths compared to other countries, such as China:
- Protects citizen’s political, religious and economic freedoms.
- Provides educational opportunity for all.
- Ensures a strong defense and conducts a foreign policy based on the broad national interest.
- Nurtures a culture of risk taking and second chances while accepting inequality of results.
- Protects an independent judicial system and enforces the law in a fair, transparent and consistent manner.
- Prizes a tradition of service and philanthropy.
- Conserves and uses natural resources wisely.
- Demonstrates fiscal discipline and puts in place a low, fair and simple tax system.
- Maintains a quality healthcare system open to all.
Taking America for Granted
In my view, China, as a semi-market, state capitalist country would rank rather poorly on many of these benchmarks. We take for granted what is sorely missing in much of the world; due process, property rights, a free press and especially the transparent and smooth transfer of political power.
While America could use improvement across the board – its glaring weakness is fiscal discipline and tax complexity. It needs to move aggressively on both of these fronts immediately.
But on balance, America is an open, confident, flexible and transparent society with the deepest and most sophisticated financial markets in the world.
And despite its faults, the U.S. political system is the most transparent and stable in the world and much preferable to multi-party parliamentary systems such as in India, where a small Communist party coalition member can stall market reforms.
Then there’s the demographic angle. The United States, in large part due to immigration, is still growing, while most of Europe, Japan and especially Russia are rapidly declining. Most of Asia has a relatively youthful population, China being the exception, which will put tremendous strain on its budget.
America sure looks like a winner to me.
But don’t just take my word for it. The chief of Singapore’s $100-billion sovereign wealth fund, Tony Tan Keng Yam, in a recent Wall Street Journal interview, stated that:
“(Americans)… don’t see the potential in their own economy, which is one of the most innovative, open economies in the world. Foreigners seem more optimistic.”
About one-third of the fund he oversees is invested in the United States.
Finally, what markets are showing the best momentum in a turbulent world? Looking at composite (one-, three-, six-, 12-month) list of country returns, the United States leads the list followed by Malaysia, Mexico, Thailand and Singapore while India, Brazil, Russia and China are laggards.
Maybe the forward-looking markets are telling us something?
Good Investing,
Carl Delfeld
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Article by Investment U
