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Fading U.S. dominance means opportunity for investors

Thursday, April 08, 2010


As we move further into 2010, many of us in the financial industry are realizing that the world we’ve known for all of our lives has changed forever. After the First World War, the United States essentially took over world leadership from the United Kingdom, which had held its unrivalled globe-spanning empire for all of the previous century.

The Americans have now had close to 100 years as the dominant political, economic, and military power in the world. But the torch is slowing being passed to the fast-growing emerging nations, of which Brazil, Russia, India and China (BRIC) are the biggest. This transition is coming, and there is nothing anyone can do to stop it. As investors, our best bet is to figure out how this might affect our investments and how we might take advantage of the opportunities that lie ahead.

I’ll start doing just that in my next few columns. First, let’s start with a look at the slow displacement of the American economic powerhouse.

The U.S. – a fading powerhouse

A number of issues have contributed to knocking the U.S. off its perch as the world’s sole economic superpower.

Start with technology. The tech wave contributed greatly to U.S. economic success over the past 20 years, with companies like Microsoft Corp., Google Inc., Dell Inc., Apple Inc., AOL Inc., and others achieving global market dominance. The downside is that although those companies’ head offices are in the U.S., much of the manufacturing has been shifted to Asia. In addition, outsourcing took many high-paying jobs across the Pacific (mainly to India).

Then, the 2008 credit crisis, which originated in the U.S. but spread around the world, forced the government to lend billions of dollars it doesn’t have. Add to this a huge government debt and foreign wars that will keep the U.S. in the red for many years to come. Now it looks like the government has to find billions more for healthcare reform.

This is a massive problem that is likely to require higher taxes, which Americans typically fight tooth and nail. It will require a minimum five to 10 years for the country to dig its way out of the mess it created.

While the federal and many state governments are deeply in debt, what really hurt the country is that its citizens are just as badly in debt, having used their homes as ATMs during a period of historically low interest rates to finance other real estate and luxury items they couldn’t really afford.

This whole house of cards fell apart when housing prices were beat down by the 2008 credit crisis. The average citizen now has to drag himself out of debt in an environment of tepid economic growth that won’t improve for a few years. In addition to that, rising taxes and higher energy bills are on the horizon as demand grows and the global economic recovery gathers steam, especially in emerging nations.

It has been said that this is the first time American has not led the world out of recession. In fact, it was America who brought the recession to the world, and is now paying the economic penalty.

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