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Winds of Change!

Puru Saxena
5 Aug, 2005

I want you to imagine that you are the ruler of the world's greatest civilisation. Your empire is renowned throughout the planet and your army is present in several hundred countries. You command the best technology in the world and your military strength is second to none. For over a century, no other civilisation has been able to compete with you as you have been crowned the "undisputed heavyweight champion" of the world.

Now, I also want you to imagine that due to the immense wealth and luxuries enjoyed by your people for so long, they have become complacent and used to the good times. In fact, your citizens have become so accustomed to prosperity that they live only for today without giving any regard to what tomorrow might bring. Also, your finance minister has informed you that your subjects have stopped saving, and furthermore they have taken on a record amount of debt. Moreover, your nation is engulfed in a massive consumption orgy! To add to your concerns, your nation is running low on its energy bounty. In fact, you have just realised that your nation's energy production is in decline and it now imports two-thirds of its daily energy needs.

To complicate the situation further, let us imagine that you have just got news that another giant empire, which is 1.3 billion strong, is rising rapidly on the other side of the planet. This civilisation is hungry for success while its people are hard working and frugal. In fact, their savings rate is around 30% as they believe in preparing for the proverbial rainy day. In addition, your finance minister has informed you that this empire has excellent manufacturing skills and its people are willing to work hard for a fraction of the cost when compared to your own subjects. As a matter of fact, their products are so good and cheap that your own citizens have been buying them for years now! Furthermore, this alien civilisation's energy needs are growing quickly and only recently has it started importing fuel to meet its requirements.

After listening to your confidant, you now realise that if things carry on the way they are, your empire will come under a serious threat in the future. In fact, your empire may even topple over as the other civilisation destroys you economically.

In this instance, with your back against the wall, what do you do? Obviously, in order to protect your ageing empire, you turn to your strong point where you have a clear advantage - your military.

Unfortunately, the above narration is not a fantasy but a serious and grim reality, which faces all of us today. Bush is the ruler of this ageing American empire while China is the new threat. Take a look at the sobering facts provided below -

America's economy is now worth US$ 11.2 trillion. Over the past 5 years only US$ 1.6 trillion was added to the economy while credit market debt rose sharply by US$ 7.6 trillion! In summary, it now takes a record amount of debt to produce one dollar of economic growth. America's debt to GDP ratio has ballooned to over 350% when compared to "just" 120% in the 1970's.

America faces a record-high current account deficit of $700 billion as Americans continue to consume cheap imported goods. Its savings rate is a miniscule 1% (Figure 1), while consumption now accounts for almost 70% of GDP growth. What will happen to the US economy when consumption slows down? This is one question not many economists and analysts are willing to ask!

Figure 1: United States personal savings slump!


According to Gavekal Research, American-owned assets overseas total roughly $7 trillion. Whereas, foreign-owned assets in the US equal $10 trillion. Therefore, its negative net-asset balance now comes in at around minus $3 trillion or just under 30% of GDP! Not a good sign.

Turning to the other civilisation, China, we can see that it has a current account surplus as it continues to manufacture and export to the West.

The Chinese economy is growing at 9.5% per annum with nominal GDP coming in at $1.2 trillion. Although, this figure represents only 10% of the size of the American economy, adjusted for price differences between the two nations, suddenly the Chinese economy does not seem so small!

China now produces more steel and five times more cement than America! It is also the largest consumer of copper. The Middle Kingdom is already the biggest consumer nation in the world and it is getting bigger! So, you can see that over time China will become the single most important empire in the future.

Look, I am not the only analyst who knows the economic facts presented above. The Chinese leaders also know very well that America is an economic disaster waiting to happen. In the meantime, however, they continue to "buy time" or should I say "buy treasuries"! Over the past few years, China has bought around $700 billion worth of treasury and agency debt in the US. They have done this to keep the US dollar relatively strong and long-term interest-rates artificially low in the US.

A strong bond market (low interest-rates) has kept US mortgage rates under check (Figure 2). This has fuelled a housing boom and allowed Americans to continue buying imported Chinese goods by refinancing their homes.

Figure 2: United States 30-year mortgage rate


China hopes that if this game played by "Monopoly" money continues for a while longer, its own economy and domestic demand will become strong enough to withstand a recession in the US.

In a nutshell, Asian economies are much healthier than the US economy and this trend is likely to accelerate over the coming years. Impoverished for decades, Asians now work extremely hard, they export and save, while Americans import, consume and are going deeper into debt! As a result, wealth is being transferred to the emerging economies of Asia and somewhere ahead I expect the vast difference in the standard of living between the West and the East to diminish significantly.

A lot more follows for subscribers...

5 Aug, 2005
Puru Saxena
Saxena Archives

Puru Saxena publishes Money Matters, a monthly economic report, which highlights extraordinary investment opportunities in all major markets. In addition to the monthly report, subscribers also receive "Weekly Updates" covering the recent market action. Money Matters is available by subscription from

Puru Saxena is the founder of Puru Saxena Wealth Management, his Hong Kong based firm which manages investment portfolios for individuals and corporate clients. He is a highly showcased investment manager and a regular guest on CNN, BBC World, CNBC, Bloomberg, NDTV and various radio programs.

Copyright ©2005-2015 Puru Saxena Limited. All rights reserved.

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