The (Economic) Future of China and That of the United States: A Few Long-Term Thoughts

When analyzing current China and US-related events, it is easy to succumb to the temptation of focusing exclusively on the past (historic trade volume patterns, GDP growth rates, etc.) and the present (describing whichever issue is currently “hot” or let’s say widely-debated), without giving enough thought to the future, especially longer-term considerations.

As such, this article has one purpose and one purpose only: exposing your brain to a few future-oriented ideas so as to set in motion an intellectual chain reaction, if you will. You may or may not agree with one idea or another and in the end, it doesn’t really matter. The name of the game is giving these issues some serious thought and interpreting them as you see fit, there are few “right or wrong” answers with respect to the future. On the contrary, it would perhaps be wise to start with the quasi-axiomatic assumption that human beings are terrible at predicting the future anyway and to make it clear that you’re not trying to “predict” anything at the end of the day. Instead, you simply walk your brain through various scenarios so that, if things do indeed unfold in a matter similar to a scenario you have envisioned, you will be in a far better position to adapt than more short-sighted investors. Fair enough?

With that in mind and in no particular order, here are a few ideas worth dwelling on:

1. Currency and trade-related conflicts between China and the United States are unlikely to end anytime soon and… well, it’s nothing personal at the end of the day. We need to understand that as the economic and geopolitical context changes, so does the relationship between two nations. As such, the world’s dominant superpower was more likely to not only tolerate but even downright help China during the Deng Xiaoping days, when China was hardly an economic powerhouse on the one hand and on the other hand, with USSR-related concerns making a closer relationship with China desirable. Nowadays, with China representing the world’s #2 economy by nominal GDP and #1 economy by PPP GDP as well as a more and more assertive geopolitical contender… let’s just say it should come as no surprise that on all fronts, it is being perceived as an adversary by the United States
2. Trends cannot last forever, whether we are referring to record-breaking GDP growth rates in China’s case or the “free ride” the US is getting due to the USD being the de facto reserve currency of the world. As such, it should come as no surprise if China’s GDP growth rates continue to flatten or if the world switches from a dollar-based monetary system by one which revolves around a basket of currencies or even commodities
3. At the same time, however, mega-trends such as the US representing the world’s #1 economic superpower can persist (far) longer than pessimists would have predicted. While a lot of economists or let’s say analysts in general love bashing the United States for its various problems (which are real, there is no such thing as a perfect nation) and it’s easy to enter a state of “immediate danger is just around the corner” when following various doom and gloomers… let’s just say that even if they will end up being right, it frequently takes multiple orders of magnitude more time than they would have anticipated for that to happen
4. Black swan events don’t appear frequently but when they do, they frequently (sic) end up being game changers. As ridiculous as it may seem at first glance, China can be only one black swan geopolitical event away from embracing democracy or at least a more democratic framework, whereas on the opposite end of the spectrum, the US can be only one black swan event away from moving toward authoritarianism. Do keep in mind that true black swan events will perhaps only occur once every few decades, which is why our brains are not remarkably competent at meaningfully thinking about such potential developments. Instead, our brain is far better at adaptability, at adapting to one short-term trend after another… which is great from some perspectives (especially evolutionary ones) but something that hinders long-term preparedness, economic or otherwise
5. The same way, however, we shouldn’t overlook the proverbial elephants in the room due to an obsession with potential black swan events, for example the (in)famous demographic issues of the West and similar trends which are emerging in China, geopolitical instability hot spots such as Taiwan or Hong Kong and the list could go on. Once again, our brain’s adaptability ends up representing a weakness from an economic perspective, this time for another reason… the fact that we adapt so well to various unpleasant realities that we become intellectually numb and thereby incapable of treating them with the continuous attention they deserve
6. There is more to the future than economics. While anything from financial turbulence to actual military conflicts have been primarily caused by economic factors, that doesn’t necessarily have to always be the case. By limiting yourself to exclusively factoring in data points pertaining to the world of economics, you risk missing key pieces of the puzzle… political ones, geopolitical ones, environment-related ones if you will and the list could go on and on
7. History doesn’t repeat itself, but it does tend to rhyme. For example, were the exact same mistakes committed in the United States prior to 1929 and prior to 2007-2008? While the two case studies hardly overlap completely, it is not difficult at all to spot common denominators. The same way, is China making the exact same ideology-driven mistakes today as during the Mao Zedong regime? Not, not exactly the same but again… is it really difficult to spot common denominators?

The list above is by no means meant to be comprehensive, its only goal is convincing investors to widen their horizons. Feel free to disagree with some or even all of the items on it, feel free to add to the list whenever necessary. But whatever your decision(s) will be, never make the mistake of losing sight of the big picture by remaining stuck in the past and/or present. Among many other things, ChinaFund.com is here to help with just that.