America’s Fall From Top Spot

The biggest bias most Americans have, for obvious reasons, is believing the U.S. will always be on top. As an American myself, I admit I occasionally try to block out what I see coming. Trust me, I have no desire to see us dig our own grave. I am already seeing my peers struggle to find jobs in this “recovering” economy. As for Baby Boomers, they are receiving  0.1% on their savings thanks to Helicopter Ben. And the rest of us? We are seeing a cut in services because of the freezing of salaries at the federal level, which incentivized “public servants” to quit so they could retire on their salary-based pensions. Oh boy am I glad we have such selfless public servants!

That being said, the U.S. is clearly losing its position as the financial capitol of the world.  I am very confident China is going to take this title from us in most of our lifetimes, and that they will overtake us in GDP terms in the next decade or so.

Lower Interest Rates

I spoke briefly yesterday about the global shift of capital. One of the biggest fallacies out there is that lower interest rates spur economic growth. I’ve been arguing against this for a long time. All the people who said the economy would experience a V-shaped recovery back in 2009 because of lower interest rates are officially nowhere to be found.

When interest rates are low, capital will always seek out better profit opportunities (carry trade). All things being equal, capital will prefer a 10% return to a 0.18% return like you see in America. Simple right? Well what if the country offering 10% returns also has: a) an appreciating currency, and b) higher growth rates? Who wouldn’t invest their capital in these so-called “emerging economies”? This is one of the reasons why countries like India and China “slow” to a 7% growth rate while we slog through with a 1.8% growth rate. Like it or not, capital is voting big-time in favor of these future economic giants.

There are real long-term affects to this carry trade. The Fed is effectively promoting foreign investment at the expense of domestic investment. Banks are hoarding capital at the same time they are speculating in foreign markets. Better yet, we send interest payments abroad month after month. There are such gaping holes in our economy.

Orderly Decline?

Perception is an interesting thing. Perception is keeping gold from running straight to $5,000 and keeping U.S. bonds from collapsing. Unfortunately, perception can change very quickly. Did housing fall 2% year after year to reach equilibrium or did it collapse? What about stocks in 2008 and 2009?

An orderly decline is by far the least likely scenario in this crisis. Everyone who is fretting over day-to-day movements in gold and silver won’t be complaining when gold rises $100-$200 in a day. These are the kind of moves that are coming. We need to deal intelligently with this debt crisis before it starts wreaking havoc on our economy. The day of reckoning will come out of nowhere, and this is why I always advise against trading in and out of your precious metal positions. When gold spikes up dramatically, it won’t be because of higher inflation- it will be because of a collapsing debt structure.

America’s Fall From Top Spot is a post from: Expected Returns

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