3rd Quarter 2014

Posted on October 25, 2014 · Posted in Newsletters

Observe good faith and justice toward all nations. Cultivate peace and harmony with all… The Nation which indulges toward another an habitual hatred or an habitual fondness is in some degree a slave. It is a slave to its animosity or to its affection, either of which is sufficient to lead it astray from its duty and its interest … Tis our true policy to steer clear of permanent alliances, with any portion of the foreign world. – George Washington, Farewell Address, 17 September 1796.

In the period following the American Revolution, George Washington sent John Adams to reestablish trading relations with England.  This was a controversial decision for a new nation whose birth was aided by the financial and military largess of France.  In his Farewell Address, Washington defended those actions and advised future leaders to continually reflect on our alliances.

Today, we look out onto a very different geopolitical and economic map complicated by the rise of many nations that may not share our views about human rights or political systems.  We are attempting to reconcile these differences with our desire to expand global trade and execute agreements that will advance American businesses’ opportunities around the world.  This may not be so different from what Washington saw as he looked out onto a European continent continuously at war with one another, run by monarchies in a largely repressive feudal system (the Netherlands as an exception).

Great Powers in relative decline instinctively respond by spending more on ‘security,’ and thereby divert potential resources from ‘investment’ and compound their long-term dilemma. – Paul Kennedy, The Rise and Fall of Great Powers, 1989

So what can we do as a nation to combat the rise of these emerging and populous powers in the east and south?  As pointed out by Kennedy in the above quote, we know what we should not do.  He predicts that continued deficit spending, especially on military build-up, will be the single most important reason for decline of any Great Power.  Most recently, we have witnessed the collapse of the Soviet Union brought on by increases in military spending combined with increasing costs to maintain its empire.  These ballooned from approximately 11% of their economy in the late 1960s to an unsustainable 18% by the early 1980s.  This reallocation of resources constricted their domestic economy ushering in its collapse.

As popular culture always attempts to capitalize on the current global landscape in its creations, it is interesting to review its interpretation of the current economic pecking order as seen through the prism of Hollywood’s film, “Million Dollar Arm.”  Although based on a true story, Hollywood teases out familiar themes.  Similar to films in the 1980s, America is portrayed through the failing and desperate sports agent looking to turn his company around with a long shot.  Power, which was portrayed by Japan in the ‘80s, is now depicted by the Chinese investor, Chang, who is aloof, demanding and unimpressed with the American.  Hope and the future are now seen in two affable and eager Indian baseball prospects. Obviously, you can sometimes read too deeply into a Disney production.

As we look out into future, Hollywood’s productions can lead one to contrarian conclusions.  After booming in the 1980s, Japan has experienced feeble economic growth for two and a half decades.  China, which has grown dramatically since the early 1980s, appears to be girding under the weight of overinvestment, corruption and the pressure of protests in many locations including Hong Kong.  India, and hopefully Brazil soon, are optimistically looking at renewed growth under investment and business friendly governments.

The United States, as outlined in previous newsletters, is enjoying an energy boom which may make it the largest producer in the world by decades end.  This will lead to lower costs for US businesses and consumers.  To remain competitive with these rising giants long term, we must heed the conclusions of Paul Kennedy and invest in infrastructure, education and basic research and the advice of George Washington to seek fair and free trade through alliances that benefit America’s economy and businesses.  With the partisan bickering and logjam in Washington, it is hard to visualize this in our future.  We remain hopeful as we are reminded of the quote attributed to Winston Churchill; “Americans will always do the right thing, only after they have tried everything else.”