Is The United States is Becoming a Banana Republic?
by David Fessler, Investment U Senior Analyst
Friday, September 23, 2011
The term “banana republic” was first coined by O. Henry in his 1904 book Cabbages and Kings. It referred to the fictional Republic of Anchuria – a servile dictatorship engaging in the large-scale production of bananas.
In our current political lexicon, it refers to a melding of government and private enterprise. The public incurs the expenses, while the profits are taken in by the private companies.
In the United States, we see this in government subsidized – or in the case of GM, bailed out – companies that retain profits. These companies, such as Freddie and Fannie, were made possible by you, the taxpayer.
Devaluing Our Nation’s Currency
This type of activity effectively reduces a nation’s currency to devalued paper money. As this devaluation continues, it becomes increasingly difficult for the country to borrow money, and the currency becomes more useless as a means of payment.
The whole scenario stymies growth. Take a look at the woefully small GDP growth in the United States and you begin to get the picture. The government has pumped trillions of dollars into the system in an attempt to get the economy moving again. That effort has failed miserably.
Meaningful solutions to the problem would require meaningful action on the part of Congress. Well, forget it…
Political gridlock in Washington will continue, especially in an election year.
Surprised…? Don’t be.
Even with an approval rating around 12 percent at last count, Congressional members wouldn’t think of voting on anything that could raise the ire of any special interest groups that closely watch them. Gridlock is here to stay, perhaps for a long time.
China’s Fast-Growing Economy Overtakes U.S. in 2040
Then there’s the China factor. In the past, China has been a willing buyer of U.S. debt…
Not so these days.
China is beginning to ratchet back its purchases of U.S. dollar-denominated financial instruments in favor of the euro.
That’s because 30 percent of China’s economy depends on exports, and U.S. consumers aren’t spending like they used to. Now China is scouring the globe in search of new customers, and Europe is high on its list.
Fast-forward to 2040. The United States is replaced by China as the world’s largest economy. Take a look at the graph below, courtesy of mining giant Rio Tinto plc (NYSE: RIO).
It concludes that we are smack dab in the center of a “momentous swing in economic power.” The chart may seem a bit confusing at first, but it tells three stories:
- How large various economies will be in 2040 compared to 2010 (the size of each circle).
- How fast each will be growing (percent GDP shown along the bottom).
- How wealthy individuals will be who live there (GDP per capita on the left).
Surprising Global Economic Projections
India, not China, will be the world’s fastest growing economy by 2040. According to Rio Tinto, it will have at least quadrupled in size.
Equally surprising is the limited growth prospects for both Brazil and Russia, once thought to be part of the BRIC group of emerging, fast-growth countries.
China’s economy will be four times as large, as well, and per capita income will have risen by 200 to 300 percent, to around $30,000 per person.
The U.S. economy will be slightly larger, and will have raised its per capita income by 50 percent. That will be largely due to a smaller population, and a decrease in annual GDP growth to just below two percent.
The bottom line for the United States is that stagnant growth could continue for decades. Get used to it. Plan for it.
How to Play the Banana Republic Scenario
Is the United States destined to become a banana republic? We don’t know. But there are companies that will benefit even if it does.
Economic growth in India and China takes cheap energy, and lots of commodities, many of which have to be mined. Rio Tinto is one of the dominant miners of commodities in the world. It will surely benefit from the continued growth, even if it’s at a slower pace than previously thought.
Caterpillar Inc. (NYSE: CAT) is one of the largest makers of heavy equipment, including mining equipment, in the world. Both CAT and RIO are globally diversified companies. Both yield just over two percent, share prices are at rock bottom (no pun intended) and both trade at ridiculously low PEs.
Good Investing,
David Fessler
Article by Investment U
