The Nomad Economist
Premiered Mar 8, 2022
If you asked people in the 1600s who would be the dominant global power, most would have said Spain. They would have been proven wrong within 100 years.
If you asked people in the late 1800s who would be the dominant global power, most would have said Great Britain. Huge empire, coming out of the industrial revolution, huge navy, etc. And they would have been wrong within 50 years.
If you asked people in the 1960s who would be the dominant global power, 50% would have said the US, 50% would have said the Soviet Union. Half of those people would have been proven wrong in a short 30 years.
If you asked Americans in the 1980s who would be the dominant global power, I bet 60-70% might have said Japan. They would have been proven wrong in a mere 10-20 years.
Shit happens. And it happens quickly. And that pace has only picked up as globalization takes hold. I think right now, and people by nature assume the US or China is going to dominate and continue dominating. And while that may ultimately prove to be correct, I think we should at least try to challenge that assertion.
The US is in a very similar situation to Great Britain at the height of the industrial revolution. And this too shall pass. Maybe in 20 years. Maybe in 200.
As an investor, I like to think in terms of odds. So here’s a mental exercise: Let’s pretend there is a 40% actual probability that China becomes the next great superpower (let’s say that was plausible). But It seems like some people think that the number is closer to 80-90%. Basically, a foregone conclusion.
I’d like to call that an overvalued asset. Betting on that is a low-return proposition. Now let’s also pretend a country like Australia or Nigeria has a 1 in 10,000 chance of somehow becoming the next global superpower (maybe plausible), but it seems like people are effectively writing them off and pricing in a 1 in a million chance of that happening (if not lower).
As an investor, I’d call that an undervalued asset, because if those assumptions are anywhere near correct, my expected value on that investment is 100 times.
That mispricing is something we ought to pay attention to. I want to be prepared for the unexpected. Think of it as buying a cheap option. A lot could happen in 30 years.
The EU doesn’t have the cohesiveness. India won’t even catch up to the US in terms of GDP until the middle of the century, and even then, it will be spending whatever surplus it has in building infrastructure that its people will be demanding. Russia’s power is shrinking with her population, even while she’s industrializing.
Brazil’s population is stagnant and hovers around 200 million. Moreover, her internal politics and focus aren’t on becoming a military superpower. Japan’s chances passed at the end of the ’80s. So all we’re left with is China.
All estimates put China’s GDP ahead of the US by 20 – 30 percent by 2050. But even then she won’t have the same ability to project herself as the USA (though, will undoubtedly have a massive projection capability) because of three burdensome factors.
The stagnant and aging population is not putting the same number of workers in the factories and will be heavily taxing the growing social security payments (that the Chinese public rightly demands). The oppressive government fears the Chinese people more than it does US hegemony.
This requires a massive security state infrastructure that doesn’t have a comparison in the west. China spends as much on internal security as she does on external defense. Rising wages in China eliminates the massive draw for textile manufacturers to set up shop in China, conversely requiring state investment to keep the economy going (not a bad thing to have wages rise).
Even still, by 2050, China will only have half US’s GDP PCI and will be needing a higher percentage of that wealth to pay for all of the above-mentioned necessities. This doesn’t mean that the Chinese won’t be a superpower and will not challenge the American hegemony. That’s not even up for debate anymore.
By 2030, China will likely be spending around the same amount as the US in its military. But China isn’t an island.
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