Is America Still the Land of Opportunity?

Photo by: stephen.moore

When it comes to investing, is America still the most sensible place to keep your money?  This question involves a lot of elements and has no simple answer.  There are however, some pieces of conventional wisdom that may deserve a little extra attention.

Is China the Future?

Listening to the media, you would think the ascendancy of the Chinese is all but assured.  They are one of the few economies to truly start enjoying an alleged rebound from the economic crisis and were already becoming a behemoth before the latest financial woes.  Surely Asia is where the future lies.

What is often forgotten in all of this is that China is not an open society.  In the modern era we assume that the wool can’t be pulled over investors’ eyes.  China however can easily give out misleading numbers to investors.1 Moreover, because of the amount of their economy that is centrally planned, they can essentially manipulate their own markets very easily.  Their current stimulus may largely consist of creating unused infrastructure to keep their populace employed.2

Inflation: The Ugly Contest

Another supposed factor in why our money should be fleeing US Dollars is the hyper-inflation that will be driven by all the stimulus spending.  The thinking goes that any kind of recovery in the economy will be coupled with inflation from all the money that’s been printed to finance the stimulus.  While this seems reasonable, at the same time it’s been suggested that as much as 40 percent of the World’s wealth was destroyed by the financial crisis.3 With a good deal of that being in America, it seems that we may be able to survive some quantitative easing.

Moreover, those who are looking for another currency into which to move their funds may find it difficult to find another country’s currency that isn’t just as ugly as the Dollar.  Most of the European countries have used debt to finance significant stimulus as well.  Additionally these countries have less business-friendly policies than the US and may be just as slow to recover.  China and much of Asia suffer from the dangers of being net exporters, which is a dangerous position when the rest of the world isn’t buying anything.  While inflation remains a reasonable fear, it may not be quite as dangerous as it appears.

The Dollar as the Reserve Currency

Many nations are suggesting that the time has come to move away from the Dollar as the World’s reserve currency.4 Due to the staggering amount of money we’re printing, countries such as China have begun to suggest that banks should begin to use various other instruments as their reserve currencies.  While this is an understandable sentiment, several things impact this position:

• Most of these countries own a lot of US Dollars.  They don’t necessarily want to see the Dollar fall too precipitously.5

• No one is forcing the Dollar to be a reserve currency right now.  Central bankers can hold their reserves in whatever they like; they simply tend to prefer dollars for a variety of reasons.  One of the most important is the openness of American finances versus other countries.

Hedging Your Bets

All of these dangers are real.  However they are far from sure bets.  While it makes good sense to hedge your bets and reduce your exposure to the dollar, it can be very dangerous to bet the farm on the failure of the American Dollar.  While we have certainly taken some lumps lately, it’s not clear who would be the beneficiary of the end of US hegemony.  It may be premature to bet on America’s demise.

1. Economist: The Art of Chinese Massage [↩]
2. The Economist:: China’s Stimulus: Got a Light [↩]
3. Telegraph: WEF 2009: Global crisis ‘has destroyed 40pc of World’s wealth’ [↩]
4. Wall Street Journal: Inevitable End to Dollar’s Reserve Role? [↩]
5. Treasury Department: Major Foreign Holders of Treasury Securities [↩]

2 Responses to “Is America Still the Land of Opportunity?”

1. Laptop Briefcases says:

   October 1, 2009 at 3:59 pm

   Interesting points. It is true that China is a country on the way up, but that rapid growth may catch up to them in the form of insufficient infrastructure, environmental issues or political issues. They can only push so much garbage under the rug. The US is in a weak position too, but over time we will likely make it out of these problems.

2. tattoo kits says:

   December 30, 2009 at 8:52 am

   Great article! I really liked a lot of the points that you raised in ref: to China