Posted on 24 May 2019 by Elliott Morss, Morss Global Finance IntroductionIn Part 1 of this two-part series, I suggested that the largest countries measured by GDP, population, and geographic area would be the primary drivers of global futures. Here, I look at their military and economic dimensions and draw conclusions.Please share this article - Go to very top of page, right hand side, for social media buttons.Military PowerBut before getting to economic data, it is worth covering military power and influence. Consider first power as measured by military budgets. The US spends the most by far. But a good portion of its military outlays goes to ongoing wars and not to defense “investments." Saudi Arabia remains a special partner of the US, in part because of all the military
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posted on 24 May 2019
by Elliott Morss, Morss Global Finance
In Part 1 of this two-part series, I suggested that the largest countries measured by GDP, population, and geographic area would be the primary drivers of global futures. Here, I look at their military and economic dimensions and draw conclusions.
Please share this article - Go to very top of page, right hand side, for social media buttons.
But before getting to economic data, it is worth covering military power and influence. Consider first power as measured by military budgets. The US spends the most by far. But a good portion of its military outlays goes to ongoing wars and not to defense “investments." Saudi Arabia remains a special partner of the US, in part because of all the military equipment it buys from the US. While Russia’s military outlays do not compare with the US, its scientists have kept its military technologies on a par with those of the US.
Table 1. - Military Outlays, 2018
Another power measure: countries “believed" to have nuclear weapons. The Stockholm Institute lists the following: the US, Russia, the UK, France, China, India, Pakistan, Israel, and North Korea.
On military power, I think this quote by Robert Borosage on the US has relevance:
The country finds itself constantly at war. New presidents inherit the wars of their predecessors. They are faced not with deciding to go to war, but whether to accept defeat in one already in progress….And slowly, the great power declines from the inside out. The wars are costly, running up national debts. Vital investments are put off. Schools decline. Sewers leak. For a long time, circuses distract from the spreading ruin….Other societies become productive centers, capturing the new industries. Some begin providing better education for their citizens, better support for their citizens. Their taxes, not drained by the cost of wars past and present, can be devoted to what we used to call ‘domestic improvements.’
This is a very rich country…. But even wealthy countries must choose. We can afford to police the world - to sustain 800 bases across the globe, to station troops in Korea, in Japan, in Bosnia, in Europe, fight wars in Iraq and Afghanistan, sustain fleets to police the seas….South Waziristan, Yemen, Somalia, Kosovo, the Taiwan straits, the North Korean border, the seven seas - we can do this. But the result is that we are continually at war. And the wars cost - in money, in lives, in attention. And inevitably, domestic priorities, as well as emerging security threats that have no military answers, get ignored. A rich country, Adam Smith wrote, has a lot of ruin in it. We seem intent on testing the limits of that proposition."
Table 2 provides economic data on the world’s largest countries. Data in red are problematic and bear watching.
Table 2. - Economic Performance of Largest Countries
Bangladesh and Indonesia are representative emerging market nations: rapid growth supported by a growing middle class. Indonesia, unlike Bangladesh, is managing its government finances well.
A decade back, I thought Brazil had the best economic prospects for all developing nations: a deep natural resource base with China as a ready buyer. And then everything fell apart with extensive corruption uncovered that continued at least through the last election.
Today, I view China as the most impressive of all developing countries. Its production of high quality products exported to the West resulted in its per capita income increasing from about $1,000 in 2000 to more than $10,000 today. China also invested heavily in infrastructure that will allow further growth. The next decade in China will be interesting as it evolves from being an export driven country to one that provides for its rapidly growing middle class. China’s Achilles heel is that it is a resource poor nation.
India is a very different story. Its democratic form of government has resulted in stasis on some critical issues. Indians making money under current conditions do not want change. Unlike China, it has not invested in needed infrastructure. And it has done little to reduce its dependency on coal for energy. Both India and Pakistan have nuclear capabilities and an uneasy relationship. And finally, it is not at all clear how both countries will handle the growing water shortages they face.
Both Nigeria and Russia are oil exporting countries. And like most oil countries, they have encountered the “Dutch disease" whereby high currency values resulting from oil exports make it hard to compete in other products.
And then there is the US. The US is not like any other nation. It can run large government and international trade deficits without affecting its borrowing rates. How this works is explained below using its large trade deficit as an example. The dangers it could face under its current policies are also considered.
When it comes to trade, China, the US and Germany are in a class by themselves. As Table 1 indicates, China is by far the largest exporter and second only to the US as an importer. It turns out that the top ten countries in both categories are the same.
Table 3. - Leading Exporters/Importers, 2017 (mil. US$)
Table 4 lists countries with the largest trade surpluses and deficits. China and Germany lead all countries with trade surpluses. And when it comes to trade deficits, no country is even close to the US
Table 4. - Countries with Largest Trade Surpluses/Deficits, 2017(mil. US$)
Traditionally, a country’s trade balance (the difference between goods and services exports and imports) has been a pretty good indicator of whether its currency is increasing or decreasing in value. One would think that with the huge trade deficits the US has run since the ‘70s, the dollar would have lost a lot of value. And it has. Since 1998 when the Euro was established, the dollar has lost 12% against the Euro and 21% against the Yen. But more recently, the dollar has held most of its value against these two currencies even though the US continues to run large deficits. How could this happen? As will be shown below, a good part of the answer has to do with other dollar demands.
The distinction between trade in goods and services and other international transactions is somewhat artificial. In actuality, one of the largest US “exports" is securities, the most popular of which are US Treasury securities. The US also “imports" foreign securities. The data on these transactions are set forth in the following table. It appears that on a net basis, the US had a “trade surplus" of $3.5 trillion for the 2007 - 2017 period. That cut significantly into the $8.5 trillion trade deficit the US ran in that period. Also US dollars in circulation have grown from $792 billion in 2007 to $1.672 trillion in 2017 and the amount held by foreigners has probably increased significantly.
Table 5. - Long Term Security Holdings, 2007 - 2017(bil. US$)
Source: US Treasury
When I started this two part series, I thought the largest countries would determine global futures. I noted that the world has changed from blocs of countries working together on a number of important initiatives individual countries working for themselves. But now I am not so sure that futures are in the hands of the largest countries, even though the ongoing trade war between the US and China would support the “large country" case. And China’s threat to liquidate some of its US security holdings is certainly worrisome. And sure, it may come down to how Trump, Putin, and/or Xi Jinping choose to compete and collaborate?
But I am increasingly of the view that the global futures will be determined by nature and the new technologies that can do great good or damage. One of those doing great damage is well underway: labor saving automation. As I have noted in earlier posts, most jobs are not being lost to less expensive labor overseas. Rather, they are being lost to machines that can perform jobs less expensively than workers. This is a global problem and I have no solutions and I see no end in sight.
Armies require huge investments. But the technologies for small bombs, bio-terror weapons and detrimental hacking do not. Think of the efforts taken to keep small bombs off planes. People going to large sporting and other entertainment events are not carefully screened. How long will it be before a powerful bomb goes off at one of these events? And certainly, our reservoirs and electrical grids are sitting ducks.
Nature will also play an important role in our future. With India’s growing demands for energy and its reliance on coal, the world’s CO2 emissions will continue to increase well into the future. And global warming continues, water levels will rise and storms will become more intense.
Hard to predict. Probably the best thing: own securities with high yields and low payout ratios.
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