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A positive outlook for America

What if someone came up to you and said within five years America will be well on its way to self-sufficiency in fuel and energy and that the labor gap that exist in manufacturing with China will have significantly closed in some key industries, how would you react to these claims?  My guess is you would react much like I did this morning when a friend told me about an article written by a British business editor for the telegraph.  I looked at him in disbelief and said you got to be kidding me.  He forwarded me the link to the article.  Ambrose Evans-Pritchard, business editor for The Telegraph has a refreshing view of America five years from now.  Below is his article in its entirety.

World power swings back to America

by Ambrose Evans-Pritchard

Assumptions that the Great Republic must inevitably spiral into economic and strategic decline – so like the chatter of the late 1980s, when Japan was in vogue – will seem wildly off the mark by then.

Telegraph readers already know about the “shale gas revolution” that has turned America into the world’s number one producer of natural gas, ahead of Russia.Less known is that the technology of hydraulic fracturing – breaking rocks with jets of water – will also bring a quantum leap in shale oil supply, mostly from the Bakken fields in North Dakota, Eagle Ford in Texas, and other reserves across the Mid-West.

“The US was the single largest contributor to global oil supply growth last year, with a net 395,000 barrels per day (b/d),” said Francisco Blanch from Bank of America, comparing the Dakota fields to a new North Sea.

Total US shale output is “set to expand dramatically” as fresh sources come on stream, possibly reaching 5.5m b/d by mid-decade. This is a tenfold rise since 2009. The US already meets 72pc of its own oil needs, up from around 50pc a decade ago.

“The implications of this shift are very large for geopolitics, energy security, historical military alliances and economic activity. As US reliance on the Middle East continues to drop, Europe is turning more dependent and will likely become more exposed to rent-seeking behaviour from oligopolistic players,” said Mr Blanch.

Meanwhile, the China-US seesaw is about to swing the other way. Offshoring is out, ‘re-inshoring’ is the new fashion.

“Made in America, Again” – a report this month by Boston Consulting Group – said Chinese wage inflation running at 16pc a year for a decade has closed much of the cost gap. China is no longer the “default location” for cheap plants supplying the US.

A “tipping point” is near in computers, electrical equipment, machinery, autos and motor parts, plastics and rubber, fabricated metals, and even furniture.

“A surprising amount of work that rushed to China over the past decade could soon start to come back,” said BCG’s Harold Sirkin.

The gap in “productivity-adjusted wages” will narrow from 22pc of US levels in 2005 to 43pc (61pc for the US South) by 2015. Add in shipping costs, reliability woes, technology piracy, and the advantage shifts back to the US.

The list of “repatriates” is growing. Farouk Systems is bringing back assembly of hair dryers to Texas after counterfeiting problems; ET Water Systems has switched its irrigation products to California; Master Lock is returning to Milwaukee, and NCR is bringing back its ATM output to Georgia. NatLabs is coming home to Florida.

Boston Consulting expects up to 800,000 manufacturing jobs to return to the US by mid-decade, with a multiplier effect creating 3.2m in total. This would take some sting out of the Long Slump.

As Cleveland Fed chief Sandra Pianalto said last week, US manufacturing is “very competitive” at the current dollar exchange rate. Whether intended or not, the Fed’s zero rates and $2.3 trillion printing blitz have brought matters to an abrupt head for China.

Fed actions confronted Beijing with a Morton’s Fork of ugly choices: revalue the yuan, or hang onto the mercantilist dollar peg and import a US monetary policy that is far too loose for a red-hot economy at the top of the cycle. Either choice erodes China’s wage advantage. The Communist Party chose inflation.

Foreign exchange effects are subtle. They take a long to time play out as old plant slowly runs down, and fresh investment goes elsewhere. Yet you can see the damage to Europe from an over-strong euro in foreign direct investment (FDI) data.

Flows into the EU collapsed by 63p from 2007 to 2010 (UNCTAD data), and fell by 77pc in Italy. Flows into the US rose by 5pc.

Volkswagen is investing $4bn in America, led by its Chattanooga Passat plant. Korea’s Samsung has begun a $20bn US investment blitz. Meanwhile, Intel, GM, and Caterpillar and other US firms are opting to stay at home rather than invest abroad.

Europe has only itself to blame for the current “hollowing out” of its industrial base. It craved its own reserve currency, without understanding how costly this “exorbitant burden” might prove to be.

China and the rising reserve powers have rotated a large chunk of their $10 trillion stash into EMU bonds to reduce their dollar weighting. The result is a euro too strong for half of EMU.

The European Central Bank has since made matters worse (for Italy, Spain, Portugal, and France) by keeping rates above those of the US, UK, and Japan. That has been a deliberate policy choice. It let real M1 deposits in Italy contract at a 7pc annual rate over the summer. May it live with the consequences.

The trade-weighted dollar has been sliding for a decade, falling 37pc since 2001. This roughly replicates the post-Plaza slide in the late 1980s, which was followed – with a lag – by 3pc of GDP shrinkage in the current account deficit. The US had a surplus by 1991.

Charles Dumas and Diana Choyleva from Lombard Street Research argue that this may happen again in their new book “The American Phoenix”.

The switch in advantage to the US is relative. It does not imply a healthy US recovery. The global depression will grind on as much of the Western world tightens fiscal policy and slowly purges debt, and as China deflates its credit bubble.

Yet America retains a pack of trump cards, and not just in sixteen of the world’s top twenty universities.

It is almost the only economic power with a fertility rate above 2.0 – and therefore the ability to outgrow debt – in sharp contrast to the demographic decay awaiting Japan, China, Korea, Germany, Italy, and Russia.

Europe’s EMU soap opera has shown why it matters that America is a genuine nation, forged by shared language and the ancestral chords of memory over two centuries, with institutions that ultimately work and a real central bank able to back-stop the system.

The 21st Century may be American after all, just like the last.

Clearly Mr. Evans-Pritchard sees an America fives years from now that many Americans do not.  He sees an America back on top of the world leading the way as an economic powerhouse.  Some would say this is a very pie in the sky view of America; but everything he has written about is a very real possibility.  I believe that sometimes we get caught up in all the negativity going on from the political arena to the economic front and forget that no matter how you slice it, America is still the greatest show on earth.  One British writer reminded me of this today.

Below is a clip from the John Adams HBO miniseries.  The scene is where John Adams makes the case for independence.

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John Adams saw something that many in that room did not; an America that could be great.  Sometimes we need a gentle reminder of just who we are and what we’re capable of achieving.

Liberty forever, freedom for all!

 

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Comments
  • Steve Dennis October 27, 2011 at 5:10 AM

    I haven’t been too optimistic that America was going to turn it around soon, and even if this article is pie in the sky itdoes show us that we can turn it around. Even if only part of what the author says ends up happening it will be a step in the right direction. Perhaps there more hope for th future than have been hinking recently.
    Thanks for sharing this john, and thanks for the John Adams clip, that was a great miniseries.
    Steve Dennis recently posted..ACORN is working behind the scenes for the Occupy Wall Street movementMy Profile

    • John Carey October 28, 2011 at 5:53 AM

      I think there is good reason to be optimistic about the future Steve. If anything conservatives are continuing to wake up across the nation and they’re starting to tale an interest in the free-market again and of course our constitution.
      John Carey recently posted..A positive outlook for AmericaMy Profile

  • Harry October 27, 2011 at 10:19 AM

    I’m optimistic. It does look bleak now, but hey…remember 1979? I remember sitting the old station wagon waiting in a line of 20 cars to get $5 worth of gas. I was eight years old. I had no frame of reference back then, of course, but I can now imagine what my Mom and Dad thought… that was a bad time. Four short years later, there was a near miraculous turn around as conservative policies took root.

    The leftist power grab, i.e., Obamacare, bailouts, Porkulus, etc., spawned the Tea Party and a resurgence in the conservative movement. With the right people in positions of governmental authority, we are only a couple short years away from massive deregulation, entitlement reform, repealing Obamacare and a host of other worthy outcomes.

    We will blog, tweet, post to FaceBook, call into radio shows, challenge our leaders and activate our voting influence to the extent that we’re able. With the right strategy and relentless execution, we can overcome the leftist plague.

    Am I naive? Maybe. But I have to be, for the alternative is too horrible.
    Harry recently posted..Obama – “We Just Can’t Wait” For You to Leave Our White HouseMy Profile

    • John Carey October 28, 2011 at 6:08 AM

      As long as we conservatives stay on course and keep moving in the direction to advance conservatism then I believe we have reason to be very optimistic. I know I sometimes get caught up in all the negativity that surrounds this administration; however I do see a bright future because conservatism is on the rise again. I added you to our blogroll.

  • Jim at Conservatives on Fire October 27, 2011 at 12:54 PM

    I have on more than one occasion tried in my humble way to make the same case as Mr. Evans-Pritchard. We can be energy independent with the right policies. We can become a manufacturing power again by reforming our tax laws and by removing the most onerous of our regulatory burden. We do, however, have to drastically reduce our spending and the size of our government.
    There is one thing that could derail this vision for America. If the European Union and the Euro collapse, we will not escape the fall-out. We can, however, use these measures to rebuild America. It will just take longer.
    Jim at Conservatives on Fire recently posted..Debt Crisis in Europe Temporarily AvertedMy Profile

    • John Carey October 28, 2011 at 6:22 AM

      That is the key Jim…limiting the size and role of government in our lives. If we can just get back to a government that operates within it’s constitutional limits, America’s future will be great! That’s why we do what we do each day my friend, to remind people of that there is another option.

  • Infidel de Manahatta October 27, 2011 at 1:54 PM

    Unfortunately we will never be able to access our natural gas reserves if the environmentalists have their way. After all, “Fraking” is raaaaaaacist.
    Infidel de Manahatta recently posted..My Exclusive Interview with Vice President Joe BidenMy Profile

    • John Carey October 28, 2011 at 6:27 AM

      I can tell you this much, North Dakota is much like Deadwood was in the 1870s when gold was discovered. The Bakken Oil find has sparked economic growth in this area like I have never seen before. They are predicting by 2020 North Dakota will be the leading oil producer in the nation. And here’s the twist…they’re keeping the EPA at bay. We shall see where this takes us.