The Beginning of a New Beginning

We are finally seeing the beginning of a change that will lead to the end of a US-centric global economy. Change brings opportunity.

Global growth of consumerism = expansion of US brands
More middle class = US lifestyle (travel, home appliances, healthcare)
Raw material consumption at new high levels
Banking changes = liquidity surge but US must compete more for that liquidity

I think the US-centric economy was an anomaly. I also think that we are returning to the Silk Road global economy of 2000 years ago. And I think that the internet is at the heart of it all.
This may be better considered elsewhere and in more documented fashion, but let me take a stab at this.

The Death of the US-Centric Economy
Over the past 50 years, population centers have not been economic centers. 1 billion Chinese and 1 billion Indians had a pretty small share of the global economy. The same with Asia, Africa, South America, and the Middle East. I would even go so far as to say that Europe might have fallen into something akin to insignificance without the US Marshall Plan. In fact, I would argue that the only economies that grew succeeded by trading with the US: Japan, Korea, Europe, the Middle East’s oil countries, and so forth.

This economic dominance meant massive inflows of capital, the dollar as financial instrument, manufacturing and high tech leadership, and lack of competition for resources. In each of these areas, US dominance is under threat. At the same time, the emergence of new and incredibly large markets (Middle East, Russia, India, China) suggests that US dominance will grow in many new ways.

The Global Economy Shift
The world economy is still very much US centric and will be for some time. Middle Eastern ad Russian economies are one dimensional economies: oil and gas. They may vertically integrate into manufacturing plastics and chemicals, but overall they will fail. The seeds of their marginalization are already written:
* Russia’s collapsing demographics coupled with hyper-aggressiveness show a country punching far above its weight. This will lead to desperation and embarrassing mistakes. Additionally, the horrible corruption and political interference drives business away. Overall, the world economy would prefer to avoid Russia although it wants Russian resources
* Middle Eastern countries don't have a tradition that supports much of a presence on the world's economic stage beyond oil. They can't be an Israel or Singapore because they actively prevent free flow of thoughts and productivity. Oil countries depend almost exclusively on migrant labor to produce everything. (While the US leverages cheap Mexican labor, Middle Eastern countries depend on it.) Saudi Arabia wanted to replace migrant labor with its own citizens and found that none had the skills or, worse, inclination to work. The violence in the Middle East drives away investment, interestingly, the violence tends to emerge when times are good because the money is available to stoke the flames.
* But India and China are much more multi-dimensional.

I can’t help but be reminded of the Silk Road 2000 years ago. Trade between Rome and China. Raw materials from Africa were plundered and made into goods in Greece and Rome. India and China made their own goods and traded with Rome. The Middle Eastern countries played the role of traders. The New World was isolated and can’t be considered at this time.
Flash forward to today. Asia and the West make things and trade with each other. Other lands supply raw materials. The Middle East continues to be dependent on global producers.

In effect, we are returning to a familiar order where China, India and the West are the poles of economic power and wealth.

Consequences of returning to the good old days
The first thing has been deflation of manufacturing costs. The internet enabled a reduction in inventory build up aka just in time manufacturing. Additionally, it enables a broader web of suppliers. Add a dash of competition and we find incredible efficiencies and low costs. Low costs means low consumer prices.

The unleashing of the Indian and Chinese economies has been followed by the harnessing to a more integrated global economy (at first a US centric economy). Wealth has increased in many places and middle classes have arisen. Hundreds of millions more consumers have access and exposure to products that they never had before (products that are coincidentally much cheaper now, as well).

Hundreds of millions more consumers will lead to exactly two things: competition for resources and desire for the US quality of life. Competition for resources will mean higher prices as well as demand for US products. Start with the basics of infrastructure (folks want to fly and drive easier). Water and electric grids need building out. Phone and internet systems too. And then there’s healthcare, Western quality healthcare. Medicines can be copied, but faking diagnostic machines will be less welcome and less tolerated. And entertainment and leisure will boom. Indian ski slopes, anyone? How about an Indian wine industry? Or a Chinese one?
Go back to Japan in the 80s to see how a newly rich middle class behaves – luxury goods get hot.

And that is huge for the US, because it's our lifestyle and we can easily ship it over. Look at Starbucks' success in China, for a ready example. I would expect popular Western brands to invade other countries that have no existing brands of their own. Why can’t Victoria Secrets succeed in India? Western standards of food production certainly look positive in China today. Indian and Chinese companies will try and copy US style branding and shopping retail store layouts, while US companies will invade. Some brands will even invade the US, but not many. Look back at the Japanese and Korean brands in the US and you’ll see that they are isolated to manufacturing where price/performance were critical.

So US consumers will be treated to new selections and flavors. US producers will be treated to hungry new markets.

Banking is an area where I see problems and opportunities. US expertise doesn’t look very attractive in the face of the subprime fiasco. But the move to global accounting standards and access to funds will make the US expertise desired. Watch Citibank and others work to invade other countries. Same with credit card companies like Mastercard. Alternatively, the US may adopt eCash based on cell phones.

But fundamentally, the US is facing a big problem because it has to compete for liquidity and investment. As a center for intellectual capital and product development, the US outshines every country and will continue to do so for the foreseeable future. So investment in companies will continue.
I am much more concerned with investment in the US dollar. What are the consequences of competition for funds? Higher rates. Long term, I don’t think we’ll see a drop in liquidity because there’s just too much money out there. But I think that the US will suffer from a focused pullback in the housing market.

Lastly, I wonder if geopolitics will get more not less stable. In the bipolar Soviet/US war, competition existed to create marketplaces aligned with one or the other giant. While the US focused on maintaining stable trade routes, the Soviets were all about Russian plunder and empire building.

The end of the conflict meant that old animosities could arise and that false animosities would dissipate.

I think China and India will join the US in putting out conflicts that interfere with trade. China will prevent Iran from attacking oil tankers in the gulf, for example. And Israel's technology may become more important to China than access to oil. For example, as alternative fuels and technologies take hold. But this is much further out - 10 years.

I also think that India will be put on the Security Council and Britain and/or France gets booted out.

So where do we invest to take advantage of a sudden burst of hundreds of millions of new consumers dialing into the global economy?
Planes, trains and automobiles.
Electric and water grids.
Internet and cell phone service companies
Medical device makers.
Consumer products.

That’s where I think we are, with 1 or 2 exceptions.