The Global Economy in Crisis and the Different Ways of Handling It.

• 24-Aug-22
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Photo by Pixabay: https://www.pexels.com/photo/bank-banking-banknotes-business-210574/

In the last week, many central bankers were wagging their tongues. They all found it necessary to address the issue at the heart of every economic report published these days - of whether the battle against inflation in western economies was succeeding. And whether the battle against inflation would bring another problem that would be equally onerous – recession.

 

In the largest western economies that are most badly affected by inflation, the US and the EU, the combined problem is daunting.

 

The US economy’s inflation rate is now at 8.5%, a little lower the 9.1 % reported a month earlier.  In the UK, the rate of inflation came in at 10.1 percent last week. Inflation rates in the EU are not far behind. It is far too early to conclude that inflation has peaked.

 

Recession is also beginning to rear its ugly head, in spite of good employment numbers Stateside.

 

Among the frontline warriors - the central bankers in the US - with the purported power to raise interest rates so that inflation may be curtailed, they are sending diverging signals over the size of the next interest rate hike ahead of next week’s annual economic pow-wow to be held in Jackson Hole, Wyoming. One thing is for certain. The Fed remains hawkish, and in recent public statements, left no doubt that they would keep the pressure up, in spite of the fact there has already been some moderation in energy and gasoline prices. There is a lot of expectation on Chairman Powell’s speech next week, and he is expected to be more in line with reality this year compared to last, when he said inflation was “likely to prove temporary.”    Remember his embarrassing, out-of-touch “it’s transistory” chant through most of last year?

 

But the goals are exacting. The US central bank wants to bring inflation back down to their target of 2 percent. That’s seems like a bridge too far, at this time when the underlying causes of the inflation are not all demand-driven that can be controlled by interest rates.

 

Then there is the effort on Biden’s Inflation Reduction Act. I have covered that last week, and since then, many American economists have come up with their views and analyses of the apparent legislative success by the president.

 

I still maintain the comment that the headline label “inflation reduction” is a misleading slogan. Most of the Act is about clean energy and tax increases and not much about addressing the cost-of-living problems faced by most Americans.                                       The bill includes the lowering of prices on prescription drugs, increasing the generosity of Medicare benefits and encouraging the development of renewable energy and reducing the impact of climate change. It would also push up taxes on some corporations and sharpen the ability of the IRS to crack down on rich people evading taxes. If successful, it is even intended to lower, very modestly, the federal deficit.

 

But “inflation reducing”, it is not.

 

If you are an American facing cost-of-living increases, and expect the Inflation Reduction rhetoric to turn into concrete executive action, then you’ve been fooled. Again. The nature of politics in the country just does not allow a spade to be called a spade, because calling it what it really is, such as a Green/Clean Energy Act (or whatever), which is a very good thing in itself, would have conjured up images of all kinds of job-killing policies against fossil fuel industries, and that profile would have doomed the legislative process.

 

For the rest of us in the world, it is not our problem. With that said, it is a sign of yet another decline in the state of the American union, in which subterfuge and propaganda have to be used to bring about positive action that would be desirable for the country and the planet.

Instead, it is told like there would be concrete action against the most pressing problem of the times, which is inflation.

 

And “inflation reducing”, it is not.

 

As I see it, the actual inflation battle is left entirely in the hands of the civil servants, the Fed, and not the political leadership. And since there is not going to be a fine-tuning dial on the inflation vs recession policy mix, we can almost expect that there will be over-reaction in the fight against inflation given the declared lofty goal of bringing inflation back down to 2 percent. To have a lofty goal like that is just not practicable.

 

So expect the pendulum, which swung too far during the Covid economic fix of 2020-2021, to now swing in the opposite direction in the current inflation fighting mood. It will create the next round of unemployment and slowing economic activity, plus a crushing blow on their real estate market. And the overall indebtedness of Americans.

 

The US economy is in trouble.

 

This is not to say that it is the only economy in trouble, and as we already know, in a story told explicitly by its currency, the EU is also in deep shit. And in that case, it is self-imposed through its economic war against Russia, led by a foolish tendency to follow leadership by the US even when the sanctions are against the interests of the EU. There is also a misguided sense of justice to support arguably the most corrupt regime in the world, Ukraine, with a leadership under Zellensky more interested in diverting economic and military aid (all paid by the west) into their own pockets than in actually fighting the invader.

 

These are two very damning actions that the Europeans will regret as soon as the winter arrives. Much has been said in previous Weekly Commentaries about this, and there is no sign of a change in mood among the leaders of Europe (or what’s left of those governments that haven’t been dumped by their electorates), until 2 minute frigid showers once a week wake them up.

 

On the other hand, the Russian economy is now no longer in trouble. After having to adjust quickly to the largest number of sanctions ever launched in history, Russia has survived and is now recovering, contrary to what 2 western, politically motivated, analysts, at Yale, sponsored by the State Department, are saying. Jeffrey Sonnenfeld and Steven Tian wrote in a report entitled “Ëconomic Impact of Sanctions on Russia” that they studied data which led them to the conclusion that Russia was suffering from an economic slowdown that would end the war.

 

Really? That study was for the State Department, so what would we expect them to say? But what is the actual situation?

 

Well, I will let other western mainstream media take this question. Here is a Financial Times, no fan of Putin, article published less than one month ago, reporting on the Russian economy:

 

 

Russia cuts rates sharply as inflation outlook improves”

By Polina Ivanova and Chris Giles, London, July 23

“Russia’s central bank has cut interest rates in a surprise move that it said was in response to a slowdown in inflation and an improved GDP forecast.

 

The decision to cut rates to 8 per cent on Friday, from 9.5 per cent in June, suggests that the central bank believes Russia is weathering the storm of western sanctions imposed over its invasion of Ukraine better than it had feared.

 

The central bank lifted rates to 20 per cent after Moscow’s decision to go to war in late February, as the state lender sought to stabilise the rouble. Since then it has gradually unwound the increase, with rates now below where they were just before the invasion.

 

But the latest cut was significantly sharper than expected and contrasts with the recent large rate increases in the eurozone and US.

 

“A cut of 150 basis points is a big surprise to both us and the market,” Sofya Donets, Russia economist at Renaissance Capital, wrote in a note to clients.

 

“It was an unexpected decision for the market,” said Yuri Popov, interest rate strategist at SberCIB, the investment branch of Russian state lender Sberbank. Analysts had anticipated a decrease of 50 basis points, he said.

 

Donets said two factors were behind the rate cut: current inflation dynamics and inflation expectations.

 

“We may see a second month of deflation in July, while August-September are traditionally favourable months for price dynamics. This is reflected in a significant revision to the 2022 inflation forecast by the regulator,” she wrote.

 

The Russian central bank said inflation had fallen from 17.1 per cent in May to 15.9 per cent in June. It expected annual inflation to fall to between 12 and 15 per cent by the end of this year. In late April, it had predicted annual inflation of between 18 and 23 per cent in 2022.

 

“We still believe the main reason for the decline in inflation is the price correction after the spike in March,” central bank governor Elvira Nabiullina said at a press conference after the rate decision was announced. “Now the situation has changed. The rouble has significantly strengthened.”

 

The rouble slipped below 58 to the US dollar after the central bank announced the rate cut. In the fortnight after the invasion, the currency lost almost half its value, reaching 150 to the dollar. It has been rising steadily since, aided by stringent capital controls.

 

The central bank said it would consider further rate cuts later in the year. Its next meeting is set for September 16.

 

The decision was partly motivated by the risk of the rouble weakening in the event of a global recession or “a strengthening of external trade and financial restrictions, which would have a pro-inflationary effect”, Popov wrote in a note.

 

It was also driven by an updated assessment of the health of the country’s economy. Although the outlook for the Russian economy remains poor, the central bank’s expectations have been revised higher.

 

This picture contrasts with the gloom in the global economy, with China struggling to bounce back from Covid-19 lockdowns, financial markets increasingly expecting a US recession and European economies hit by high gas prices.

 

“Incoming data indicate that the economic downturn will be more protracted in time and perhaps less deep,” said Nabiullina, referring to the hit Russia has taken as a result of the Ukraine invasion.

 

The Russian central bank said in its statement announcing the rate decision that the decline in business activity had been slower than it had forecast in its June statement.

 

Russian companies were still facing challenges as sanctions and embargoes hit supply chains, it said. But business sentiment was “gradually improving” as businesses found new suppliers and markets.

 

“The decline in GDP is projected to be smaller, largely due to a more moderate reduction in exports. This is primarily due to the redistribution of oil exports to new markets,” said Nabiullina.

 

As a result, the central bank said it was changing its forecast for Russia’s GDP this year and now expected a decline of between 4 and 6 per cent, driven by supply-side factors. In April, the bank predicted a GDP drop of between 8 and 10 per cent for 2022. It expects a return to growth by 2024.

 

However, restrictions on the withdrawal of foreign currency — introduced immediately after Russia’s invasion of Ukraine — would be extended when they come up for review in September, said Nabiullina.”

 

And here is an August update of the views of FT on the Russian economy at no less a level than its Editorial Board:

Russia’s economy is staggering, but still on its feet The Editorial Board, 20 Aug

“Not since the Soviet collapse has Russia faced an economic upheaval of the scale provoked by western sanctions after its invasion of Ukraine. Half its $640bn foreign exchange reserves are frozen, several of its top banks have been cut off from the international payments system and Urals crude, thanks to sanctions risks, is selling at about a $20 a barrel discount to international prices. About 1,000 western companies, accounting by one estimate for 40 per cent of Russian gross domestic product, have curtailed operations.

 

And yet, six months after Vladimir Putin’s aggression triggered the toughest western sanctions against Moscow, Russia’s economy is holding up better than many had expected. Though the war seems, at least for now, at stalemate, and Turkey’s president Recep Tayyip Erdoğan claims Putin is ready for a negotiated solution, sanctions have not yet eroded Moscow’s ability to fight on.

 

Swift moves by Moscow’s central bank to impose capital controls and sharply raise interest rates have stabilised the rouble. Higher global oil prices overall have offset the “Russia discount”, and rising sales to China, India and Turkey helped to counteract declining exports to the EU. The International Energy Agency estimates Russian oil production last month was less than 3 per cent below prewar levels.

 

Many withdrawing western companies, moreover, have not left completely or have sold to local buyers, so assets are still operating. Increased trade with big emerging markets, notably Turkey, has provided another cushion. Russia’s central bank now foresees GDP shrinking by an onerous but not catastrophic 4 to 6 per cent this year; the IMF projects a 6 per cent decline, down from a forecast 8.5 per cent in April.

 

With European populations facing unprecedented heating bill increases, less used to hardship than Russians, and more prone to taking to the streets, Putin may calculate Russia is better placed to withstand the economic pain than many of its western counterparts.

 

He would be wrong. Sanctions were never likely to lead to an immediate collapse of the Russian economy. Over time, though, the western measures are a tightening noose, and the costs for Russia will accumulate.

 

Western democracies will have to persevere: they still need to do more to shrink Russia’s energy revenues, while tweaking the design of a coming EU oil embargo to ensure it does not hurt the democratic world more than Moscow. They must better prepare their populations, through messaging and direct support, for energy price rises, and step up efforts to dissuade Beijing, Delhi and Ankara from helping Moscow to weather sanctions.

 

The pain of energy decoupling is likely to be shorter for the west than for Russia; the EU can, for example, already see a realistic path to life without Russian gas, while lack of infrastructure means it will take years for Moscow to redirect gas exports to China. The biggest impact for Russia may not be the loss of western energy markets but of western technology and components — which Beijing or others cannot entirely replace

— hampering manufacturing and its natural resources industries, as well as its military-industrial complex.

 

There are parallels with the restrictions on high-tech exports to the Soviet Union after its 1979 invasion of Afghanistan. These curbed Soviet growth and deepened its technological backwardness, which combined with falling energy prices to provoke a deep crisis by the late 1980s. Sanctions may not yet have degraded Putin’s ability to wage his war in Ukraine. But by incurring them Russia’s president may have degraded his ability to prosecute a long campaign — or to launch a similar large-scale conventional war in the future.

 

End the war with sanctions? It is known that Russia is firing 70,000 artillery shells a day vs 5000 by Ukraine, supplied by the ENTIRE NATO…what gives???

 

And here is a chart of the Ruble today, one month after they cut interest rates in July, which some western analysts who are deluding themselves that the rise in the ruble is due to capital controls (eg high interest rates). If the rise in the Russian currency is due to capital controls, then their removal, like the interest rate cut a month ago, should have led to the collapse of the Ruble, no?

 

Here is the latest chart of the Ruble against the US Dollar…

 

If my eyes are not playing tricks, what I see is a stabilization of the Ruble over the last one month, after interest rates were slashed by the Russian Central Bank. And in the last week, it is RISING, even as all currencies are being hammered by the fastest rise in the USD in a week for the last two years. This also means that relative to most currencies in the world, especially the Euro, the Ruble is arguably the strongest currency in the world last week.

 

That cannot be the result of artificial capital controls since the Russia central bank has relaxed those since the early days of the war in Ukraine.

 

It is instead a reflection of how the global economy has re-focused on the key role of basic commodities in economic production and for those countries that possess that valuable stuff, they are now strong economies and they own strong currencies.

 

Those predicting a collapse of the Russian economy and the Ruble becoming rubble are simply wrong. And unwilling to face up to the facts that are emerging.

 

As with the military analysts, who are continuing to say that Ukraine is winning the war, although with much less hoopla these days…

 

There is zero evidence that the Ukrainian fighters have not stopped losing territory to the Russian army, much less regain territory for any time longer than one week each time they boast about such “victories” before they lose it back. The million man army that is supposed to have started a counter offensive against the Russians in the south at the city of Kherson has never materialized and has totally discredited all those who cheered it on, including the great leader and hero of the resistance, Volodymyr Zellensky.

 

The truth is that every day, the Ukrainians are losing men, equipment and territory. Every single day. The key village of Peski on the Donbas front has just been captured and Soledar city is also being threatened.                                                  These are names that mean nothing to us who don’t live in the Donbas, but while most of us ignore them in our consciousness, the US (and much less so, Europe) keep sending money and weapons into the black hole that is Ukraine to stabilize a war that show no signs of being stabilized.

 

Biden has just sent another bunch of money to Kyiv. Not to win the war, but really, not to lose face in an increasingly evident disaster of a war instigated by deep Russophobia.

 

I even suspect Putin is deliberately fighting a slow war because the more it drags out, the more likely the EU economy will break before Russia’s one would. Forget Ukraine, that pitiful country and its battered people who won’t recover in two generations, if not longer. The economic frontline is now manned by the EU, and if Russia holds out in the sanctions, it would be Europe that will collapse from the feedback of the sanctions. Just look at the Euro- Ruble exchange rate for the last three months. The Ruble is rising strongly after some consolidation and it is a sign of things to come, as Russia seems to have gained the upper- hand in the economic contest, initiated by the Americans and the Europeans themselves.

 

 

There seems little doubt how the military and economic battle in Europe will shape up in the remaining days of summer.

Another part of the global economy in trouble. Let’s move on.

 

As far as economic performance is concerned, China is also not doing well. But its problems are not self-inflicted by overseas adventure and an attempt to maintain a global hegemony.

They are the problems that are encountered in the normal development cycle of a fast growing economy.

 

Kevin Rudd, former Prime Minister of Australia, head of the Asia Society (a think tank in NYC) and newly minted Oxford PhD, gave a talk on China just a few days ago. The link to this speech, “China’s Shifting Economy and Politics”, is shown below:

 

https://youtu.be/mXHL_L5EaBs

 

This is an interesting talk in the usual Rudd fashion, filled with a self-depreciating style and subtle allusions rather than Australian brashness. It is diplomatically and skilfully crafted to

 

give a view of China that is descriptive of a general decline in both its economy and a change of direction in the internal politics of the CCP under Xi Jinping.                        By comparison, this talk is far better, far more analytical, than the crap by the Yale economists cited above, forecasting doom and gloom in Russia.

 

The crux of Rudd’s analysis is as follows:

1.   The upcoming 20th party congress is a major event in which Xi will extend his stewardship of the Chinese economy for possibly another, not one, but three 5 year terms.

2.   This is a change in direction from the last major party congress forty years ago at the 12 party Congress when Deng Xiaoping “released China’s factors of production” and launched the great Chinese development cycle we have all had the good fortune to witness. During the Deng era, foreign policy of China was subtle, with the emphasis on biding time and not fully revealing the country’s full intentions or its resources at hand.

3.   Xi has changed that course and has embarked on a path that would lead to the explicit rejuvenation of the great Chinese state, revered throughout its history and having its place at the pinnacle of the world. And unlike Deng who reversed Mao’s policy on the concentration of power in the hands of one man, Xi has turned that on its head as well. This is the new reality in Chinese politics – a permanent leader.

4.   The Chinese economy has been tremendously successful since Deng’s 1979 reforms. Recently, that success has begun to fade. Partly due to Covid lockdowns but even before that struck, the economy has systematically shifted gears to move to the left, ie socialism, with a renewed emphasis on industrial planning by the state, SOEs rather than private enterprise in the driver’s seat and policies such as common prosperity that would hollow out entrepreneurship. This systematic shift of economy policy to overt socialism has damaged the tech sector, private enterprise and what was essentially Deng’s “white cat, black cat” strategy, with mixed equity arrangements in the economy becoming more the mainstream, speculative activities in finance and property being cracked down upon, wealth redistribution through “common prosperity” and the “dual economy” with greater reliance on domestic consumption while still pushing for larger net exports.

5.   The shift to the left has a palpable effect on capital formation in the economy, and foreign direct investment. Consequently, the GDP growth rate has been sliding.

6.   Rudd says that this – the slide from a 10 percent GDP growth to a trend of about 3 percent – is evidently due to Xi.

7.   These policies have impacted negatively on productivity growth with declines in consumption and investment.

8.   The Xi government is doubling down on government infrastructure and net exports to drive growth.

9.   Xi Jinping is preparing the CCP for long term ideological conflict with the US. It is a race that China is committed to win. Xi Jinping will be a formidable leader against which the US will have to contest over the next 15 years. In this strategic conflict, the economy will be relegated to a lower level of importance as China shifts its emphasis to beating the US as its top priority.

 

The above are Kevin Rudd’s views.  Not mine.

 

If Dr Rudd’s lecture is representative of the western view on China’s perspective about its role in the world, then it lacks the perspective of how Xi’s departure from the capitalist economic development model originally came about. Listening to Rudd, the narrative is that Xi is a Maoist at heart, set from the beginning to pursuing an ideologic state-sponsored economic model of development. I don’t agree.

 

Dr Rudd did not relate the history of how Xi and his team have come to be convinced that the full-fledged capitalist model is not the best path forward for China, and that it was economically “necessary” rather than ideologically “preferable” to execute the decisive turn to the left.

 

In short, I would humbly argue that the Chinese change of direction to become different from the American model is a reaction to the changing circumstances facing it rather than a self- inspired ideological course of action.

 

As a matter of fact, it is the collective west, who are extremely ideological in continuing to pursue the capitalist economic model, rather than a model of capitalism pragmatically adapted to local characteristics that would smoothen out many inherent problems, including the one of a widening rich-poor dichotomy in the population that will ultimately lead to social breakdown.

 

Let me explain my view.

 

First of all, Chinese politicians are not ideological. Arguably not even in the case of Mao Tse-tung. Ideology is just a tool to achieve an end. In the case of Mao, that end was absolute power. That non-ideological orientation of Chinese leaders is a general rule of thumb. Frankly, the country is just too big to be governed by a single ideology. And smart people would know that.

 

Xi Jinping is a very experienced economic practitioner. He has led at different levels of government, including the very prosperous Fujian Province and success in the only criterion by which Chinese leaders make it to the top. Xi is extremely adept and experienced at running an economy.

 

In the years before he was elected CCP leader, the economic model that Kevin Rudd attributed to the reforms of Deng Xiaoping was actually running out of steam. Not in terms of the absolute growth rate (sometimes exceeding 10 percent GDP growth even in the first decade of the 21st century, from 2002 to 2012, but which was showing signs of stress. By that standard of GDP growth, which was the only criterion analysed by Dr Rudd, that growth has indeed slowed down since Xi took over. Some may even say irreversibly.

 

But since I was working and living in China at that time of Xi’s assumption of power, I distinctly remember that the problem which the Chinese government under the new administration had to tackle was not absolute growth. Ten percent almost every year was already good enough (the best provinces were doing 12-14%), but there were new priorities which led them to spurn some of that growth to engender solutions to new problems.

 

What were those?

 

The most important one to Xi Jinping, as I remember reading about it, was to quell serious corruption in the economy. In true Chinese tradition over five thousand years of history, Chinese people are very good businessmen. In just thirty years, even after the decades of Maoist economics, the Chinese quickly relearnt how to make money fast. Part of that culture invariably involved corruption. Since the economy was centrally organized, CCP members were power brokers and can easily enrich themselves in an economy flush with money.

 

The most prevalent form of corruption was in the housing market. At that time, except for the tech companies, most tycoons that came to be were almost all property developers. That would be like 95 out of 100 rich people in the country. That wealth from property markets was not because they were savvy and picked the right projects that took off, but because they were able to work in cahoots with local government officials, who transformed, for example, low cost farm land into the local shopping mall, for a cut of profits at the stroke of the proverbial pen. There was rampant corruption.

 

By around 2010, especially after the $4 trillion RMB stimulus package that was launched with China’s participation in the rescue of the global financial system wrecked by American investment bankers, when all the money went into real estate development, and enriched countless local officials working corruptly to develop real estate with free-wheeling and hard

 

drinking entrepreneurs, something fundamental was at play. Corruption in the latter part of President Hu Jintao’s presidency was extreme.

 

When Xi Jinping became President, he identified this to be a problem that will break the CCP and sent China back to the 1920’s. With a determination that made the west brand him as an autocrat, he went about methodically to purge society of all these corrupt officials and their channels of making money illegally. He called it a necessary step to take and he recognised it to be a fight for the survival of the CCP and China. And he took on people who were more elevated in the system than he was in 2012, such as Bo Xilai and Zhou Yongkang, politicians who are very close to the pinnacle of the CCP.      Had he not been as ruthlessly efficient as he was, Xi would likely have ended up dead or in jail.

 

He succeeded, as by the nature of the gritty task he had to undertake, he became by definition all powerful. In the history of China, wise emperors are never weaklings and nice guys.

They all ruled with an iron hand. In imperial China, they decapitated political opponents. Why would westerners understand that history?

 

Being a Chinese speaker, I was able to interact with Chinese people at all levels during those early years of the Xi presidency, and it was fascinating to study his actions. It was not obvious to me that the anti-corruption campaign would work in the beginning, given the massiveness of the problem and how deep it was entrenched. Given that it did eventually work, I make no apologies for being a fan of Xi Jinping.

 

We cannot forget the fact that because the real estate sector is a very big part of the Chinese economy, and corruption was a major propellant for big projects, the curbing of corruption would obviously have a dampening effect on its growth.                                 As a matter of fact, the practices of the market that were first embedded in the system in the first decade of this century, if left completely capitalist and free-wheeling, will cause Lehman-like problems in the future.

When Beijing clamped down on it, it is viewed by the west as a reassertion of leftist policies. What can I say to these critics with no sense of economic history.

 

The other major trend which Xi Jinping has to reverse after thirty years of unfettered capitalism was the huge rich-poor divide that had emerged. Unequal societies, he was said to have concluded, would break Chinese society and lead to civil strife.

 

After the war on corruption, he has more recently started the campaign against unequal distribution of wealth. This is a step in the right direction. It will reduce growth but unlike what western analysts like Dr Rudd say, I see greater wisdom in the Xi government than the west is giving it credit for.

 

Finally, my humble opinion is that there is no question that Xi is obsessed with a sense of China’s history, its greatness, so to speak, and in his thinking it is time for China to gain its proper place in the 21st century world. His patriotism and his sense of mission cannot be questioned. He would be the last person to follow other people’s footsteps and maintain a status quo based on inertia.

 

Xi became president in 2012 which is in the second term of Barrack Obama, and it was then that the US started to “pivot to Asia”. By 2017, when Trump came into power, the populist politics of the new White House have translated into adversarial foreign and commercial policies against China. With Biden continuing to step up the rhetoric about strategic competition from Beijing, how else should we expect Xi to react? For example, the latest Taiwan actions are provocations to the existing order which were adopted in no uncertain terms as recently as George W Bush.

 

And one should not forget that these folks in Beijing are pretty savvy people. In the last ten years, the state of the union in the US is obviously deteriorating, and American “exceptionalism” is going down the tubes. This is observable to the rest of the world. Even American thinkers are describing this new phenomenon honestly. The following Wall Street Journal Opinion piece is one such assessment.

 

 

Can the U.S. Become Exceptional Again?

It would take a renewed respect for work, laws, fiscal responsibility, enterprise and education By Richard Vedder

Aug 19, 2022

 

“American exceptionalism” isn’t a jingoistic fantasy. For two centuries it’s been based solidly on empirical realities. Output in the new United States in 1776 was perhaps a quarter of that in its mother country, Great Britain. Only a century later, the U.S. was producing more goods than the British, and by its bicentennial in 1976 the U.S. was the world’s premier superpower.

 

Signs of extraordinary accomplishment were everywhere. The U.S. witnessed the largest sustained in- migration the world had ever known, as people flocked to American shores. There were so many that the nation decided to restrict admission rather severely beginning in the 1920s. U.S. global leadership didn’t come from random luck, superior location or natural resources. It’s 20th century rival, the Soviet Union, had far more people and land and at least as many valuable minerals in 1976.

 

But fast-forward to 2022, and things don’t look the same. American economic superiority has declined markedly. Polls show that a sizable majority of Americans believe the nation is heading in the wrong direc- tion. Annual output growth has declined considerably (to 2.35% between 2000 and 2020 from 3.93% be- tween 1950 and 1970). America’s enviable reputation for curbing misery, poverty and cruelty—at home and abroad—has eroded, too. The ignominious retreat from Afghanistan is only one example. America doesn’t seem so “exceptional” anymore.

 

To understand why, let’s consider five relevant factors.

 

• A sharply declining work ethic. In January 2000, 64.6% of the non-institutionalized working-age popu- lation was employed. By July 2022, that share had fallen to 60%. Had the proportion remained at its 2000 level, the U.S. workforce would have seen 12.1 million new entries—well above the Bureau of Labor Sta- tistics’ estimate of job vacancies today. While the pandemic initially played a role in limiting labor-force par- ticipation, the current shortage reflects a different culprit: enormous increases in government payments, such as outsize food-stamp and Medicaid benefits.

 

• A declining sense of fiscal responsibility. In the nation’s first 140 years, the federal government ran 101 an- nual budget surpluses and only 39 deficits. That changed with the Keynesian revolution of the 1930s, which has only intensified this century. The gross national debt now exceeds yearly gross domestic product—some- thing previously seen only on rare occasions, such as the period immediately following World War II. The last time the U.S. balanced its budget was 21 years ago, in fiscal 2001. Deficits have since risen under Re- publican and Democratic presidents. Even more ominous are the underfunded liabilities for Social Security and Medicare, which will impose severe burdens on the next generation of Americans. Rather than address this, the Biden administration has added to the fiscal mayhem by pausing or cancelling student-loan obliga- tions.

 

• A growing disrespect for laws, rules and religious commandments. With some conspicuous exceptions— namely, slavery and segregation—Americans have historically been a rules-abiding people, respecting laws embraced by secular and religious tradition. National peace and prosperity depended in large part on the public’s appreciation for property and human rights. People obeyed financial agreements and considered harming others to be not only illegal but sinful.

 

In recent decades that conception has become far less widespread. Church membership plummeted to 47% in 2020 from 70% in 1999. The reduction in serious crime beginning in the 1980s has reversed with a vengeance. Large-scale riots break out on the occasion of perceived injustices—such as the use of violence by police—which lead to damaged property, lost lives and enhanced fear and mistrust. “Thou shall not kill” and “thou shall not steal” no longer command the fearful respect they once did.

 

• A decline in respect for free markets and a rising collectivism that erodes investment and entrepreneurship. It’s no accident that the Industrial Revolution and its aftermath occurred because of the ascendance of thinkers such as Adam Smith and John Locke and inventor-entrepreneurs such as James Watt, Thomas Edi- son and Steve Jobs. Limits imposed by kings and bishops were displaced by market-provided incentives for entrepreneurs. What Deirdre McCloskey aptly termed the “Great Enrichment”—the onset of extra-ordinary growth in income beginning in the early 1800s—reached its greatest expression in America. Yet today collec- tivist governmental power and regulation undermine such entrepreneurial initiatives, from fracking to healthcare.

 

• A rise in ignorance. Despite having immediate access to more information than their parents could have dreamed of, today’s youth increasingly know less about the world around them. On the 2018 Program for International Student Assessment—an international evaluation in math, science and reading for 15-year-old students—Americans scored lower than their peers in Asian powerhouses such as China and Japan and in European allies from the U.K. to Germany.

 

American universities are subordinating academic achievement to ideology while constricting free expres- sion—the lifeblood of intellectual advancement and prosperity. Teachers unions restrict competition. Knowl- edge of the past is particularly spotty as schools either down play or distort the nation’s history. The effect is a decline in patriotism and love of country, which loosens the glue of national unity embodied in the motto E pluribus unum.

 

Adversity isn’t new to America. George Washington’s army faced it at Valley Forge. Abraham Lincoln con- fronted it during the Civil War. The nation endured it in the Pearl Harbor and 9/11 attacks. The U.S. has met and overcome perilous challenges before. But to be exceptional again will require reclaiming and practicing what makes America uniquely special. It’ll require a project of rediscovery—of finding something that not so long ago the nation abandoned.

 

Mr. Vedder is an emeritus professor of economics at Ohio University, a senior fellow at the Independent Institute, and author of “Restoring the Promise: Higher Education in America.”

 

 

These are all damning characteristics of the American nation in relative decline, even if it is still absolutely powerful economically and militarily.

 

Why the hell would Xi Jinping want to adopt policies that will make China more like the US? It is a road to hell.

 

The decline of the US in the last ten years is obvious to all observant analysts and certainly to the highly intelligent leadership in China. In this context, why would they want to play second fiddle to a country they view as being in decline, with inferior values. That basically addresses Kevin Rudd’s valid contention that China is moving to assert itself as an equal world leader when the America that was admired by not just China but by all the world for the first six decades since 1945 has essentially lost its way in the last two when it adopted a violent and deceitful approach in its confrontation against the Muslim world since Sep 11 2001.

 

When during this period of America’s relative decline, the Chinese under Xi want to seek a different path, it is criticised as being wolf-warrior like. Of challenging the established order, an order that has led to crippling inequality of income that will surely lead to social discontent and revolution. And of breaking out to be on its own agenda and developmental path, in line with its own traditions and values.

 

Isn’t it obvious why?

 

 

Wai Cheong

Investment Committee

The writer has been in financial services for more than forty years. He graduated with First Class Honours in Economics and Statistics, winning a prize in 1976 for being top student for the whole university in his year. He also holds an MBA with Honors from the University of Chicago. He is a Chartered Financial Analyst.