Tuesday, April 26, 2011

Lee Kuan Yew: The World Needs a Strong U.S.

Lee Kuan Yew: The World Needs a Strong U.S.

A very insightful view and supports the the comments I made in the previous article.
Aivars Lode

SINGAPORE—Former Singapore Prime Minister Lee Kuan Yew said the U.S. needs to put its fiscal house in order to recover its competitiveness and suggested U.S. President Barack Obama would improve both his re-election chances and U.S. standing in Asia if he finds a way to work with Republicans and "tackles this problem."

Singapore's former Prime Minister Lee Kuan Yew, now minister mentor of the city-state, in a January photo.
.The 87-year-old founder of modern Singapore also said in a rare interview with The Wall Street Journal that he thought opposition leaders would pick up some seats in a planned election there early next month in a vote that analysts believe could be one of the most competitive in Singapore's history.

Singapore, one of the most important financial centers in Asia, has been an important ally of the U.S.—although the wealthy city-state has also taken pains to stay on good terms with other Asian powers such as China, especially as trade with those countries has grown. Still, Mr. Lee said it was in the world's interests for the U.S. to remain a pre-eminent power and fully recover from its recent economic troubles, so that it can help preserve the balance of power world-wide.

Transcript: Lee Kuan Yew
"You can print dollars but in the end, you are going to reduce the value of the dollar. When other peoples borrow money, they have got to pay back in dollars. When Americans borrow money, they just print their dollars but the cost comes with the lower value of the dollar and then inflation." —See more from the interview
.Casually dressed but formal in manner, Mr. Lee was clearly concerned about the prospect of a diminished U.S. global role, politically and financially, arguing that its international influence had been a cornerstone of Asia's rapid economic rise. His answers, delivered with a robustness that was in contrast to a somewhat frail physique, revealed a close interest in the ebb and flow of policy debates in Washington.

"The world has developed because of the stability America established," he said. "If that stability is rocked, we are going to have a different situation," he said.

Mr. Lee said he thinks a "challenge may come gradually from China," but he doubts China and the U.S. will come into serious conflict anytime soon. China needs American markets, American investments and American technology, and won't want to "upset the apple cart," he said. "While there will be keen competition, I do not see conflict."

The world faces other risks, though, including a Japan weakened by natural disasters and a turbulent Middle East, where the U.S. may be the only military that has the power to play a decisive role in settling conflicts in places such as Libya. "France has taken the lead but they do not have the equipment to settle the issue militarily," he said.

Mr. Lee's views are widely sought out because of his success in transforming Singapore, a small and ethnically diverse trade hub, into one of the world's wealthiest countries during and after his years as prime minister from 1959 until he stepped aside in 1990. He now holds the position of "minister mentor" in Singapore's cabinet. His son, Lee Hsien Loong, is Singapore's prime minister.

Despite Singapore's outsize success and reputation for transparency and efficiency, Mr. Lee has drawn criticism from human-rights groups and civil-society organizations over the years for cultivating a top-down management style that critics say limits the freedom of the press and suppresses dissent. Freedom House, a Washington-based advocacy group, last year ranked Singapore 151st in the world in press freedom, behind Liberia and Iraq.

Mr. Lee has dismissed the critics by pointing to Singapore's rise as an economic power in an unstable region and by saying that Western-style democracy isn't appropriate for all countries. He has said freedom of the press sometimes must be subordinated to the needs of nation-building.

In his interview with the Journal, he said "there may be a few seats" for the opposition in Singapore's May 7 election. Analysts have said the vote is likely to be unusually competitive with opposition leaders planning to contest nearly all seats. Mr. Lee's People's Action Party has dominated Singapore since it became a fully independent state in 1965, and in the last election in 2006 it won 82 of parliament's 84 seats.

Mr. Lee said changes to Singaporean law should allow the opposition to expand its parliamentary presence. Meanwhile, a number of issues have bothered voters over the past few years, including inflation, higher housing prices, and resentment over an influx of foreign workers that some residents say has created more competition for jobs and strained the country's resources.

Still, Mr. Lee said his PAP would "remain the strongest party."

"The economy is doing well, we have raised living standards, employment prospects, education for their children," he said.

Analysts widely agree that Mr. Lee's party will retain power for the foreseeable future, even if the opposition does post gains on May 7. But there is some uncertainty over the longer-term picture for Singapore, and how it may evolve whenever Mr. Lee leaves the stage. His wife, Kwa Geok Choo, died last year, and Mr. Lee has taken pains recently to focus Singaporeans on challenges he says they may face once he isn't around, including the potential for complacency among younger citizens who don't fully appreciate the work that went into building the city-state in previous decades.

In his interview, Mr. Lee said the growth of China and India would help bolster Singapore, as it lifts economies across the region. "We are at the crossroads between the two giants. You've got to pass Singapore to go from the Indian Ocean into the Pacific," he said.

But he cited a number of sources of conflict in what he described as "an unstable world and an unstable region." In the Middle East, he said, residents are realizing that "they have the power to change the system" in countries with monarchies and authoritarian governments, and said that the situation in Libya remains "messy." In Asia, risks include the long-running political divisions in Thailand that led to bloody protests there last year, and the latest troubles in Japan.

"The earthquake, tsunami and the breakdown of the nuclear-power plant has been a setback that will take some time for them to recover completely," he said. "During that recovery time, their momentum will not quite be the same. That is a negative for the region."

As for the U.S., Mr. Lee said he was confident it would remain strong in the long run, but it faces serious problems, including "budget deficits, debts, [and] high unemployment figures" that have "lingered on over several administrations."

"My impression is that presidents do not get re-elected if they give a hard dose of medicine to their people," he said. "So, there is a tendency to procrastinate, to postpone unpopular policies in order to win elections. So the problems have been carried forward."

U.S. President Obama "knows he has got this responsibility but he has got to tussle with the Republicans," he added. "I believe if he tackles this problem, it will improve his chances of re-election. There must be enough reasonable and thinking Americans who know that this is the only way forward to recover their competitiveness."

Mr. Lee played down the risk of major conflicts between the U.S. and China. "I do not have a crystal ball but I would say for 10, 20, 30 years, it is not in the interests of China to have other than stable relations with America, growing exports to America, imports of American technology, investments from America and sending students to America to learn." He said it helps that the U.S. is sending more students to China, which should help improve America's understanding of the country.

"Why should [Westerners] fear China?" he asked. Despite China's and India's impressive growth, "I believe the Americans will always have the advantage because of their all-embracive society, and the English language that makes it easy to attract foreign talent."

IMF Bombshell: Age of America Nears End

Eventually this will be the case however it wont be the end. We only need to look at where the UK was as the reigning currency until the USA surpassed it. Interestingly China is a whole different ball game as many Chinese don't leave their money there as they remember communism not too long ago!

Thanks Jon for the article Aivars

IMF Bombshell: Age of America Nears End
by Brett Arends
Tuesday, April 26, 2011MarketWatch

The International Monetary Fund has just dropped a bombshell, and nobody noticed.

For the first time, the international organization has set a date for the moment when the "Age of America" will end and the U.S. economy will be overtaken by that of China.

And it's a lot closer than you may think.

According to the latest IMF official forecasts, China's economy will surpass that of America in real terms in 2016 — just five years from now.

Put that in your calendar.

It provides a painful context for the budget wrangling taking place in Washington right now. It raises enormous questions about what the international security system is going to look like in just a handful of years. And it casts a deepening cloud over both the U.S. dollar and the giant Treasury market, which have been propped up for decades by their privileged status as the liabilities of the world's hegemonic power.

According to the IMF forecast, which was quietly posted on the Fund's website just two weeks ago, whoever is elected U.S. president next year — Obama? Mitt Romney? Donald Trump? — will be the last to preside over the world's largest economy.

Most people aren't prepared for this. They aren't even aware it's that close. Listen to experts of various stripes, and they will tell you this moment is decades away. The most bearish will put the figure in the mid-2020s.

But they're miscounting. They're only comparing the gross domestic products of the two countries using current exchange rates.

That's a largely meaningless comparison in real terms. Exchange rates change quickly. And China's exchange rates are phony. China artificially undervalues its currency, the renminbi, through massive intervention in the markets.

The Comparison That Really Matters

In addition to comparing the two countries based on exchange rates, the IMF analysis also looked to the true, real-terms picture of the economies using "purchasing power parities." That compares what people earn and spend in real terms in their domestic economies.

Under PPP, the Chinese economy will expand from $11.2 trillion this year to $19 trillion in 2016. Meanwhile the size of the U.S. economy will rise from $15.2 trillion to $18.8 trillion. That would take America's share of the world output down to 17.7%, the lowest in modern times. China's would reach 18%, and rising.

Just 10 years ago, the U.S. economy was three times the size of China's.

Naturally, all forecasts are fallible. Time and chance happen to them all. The actual date when China surpasses the U.S. might come even earlier than the IMF predicts, or somewhat later. If the great Chinese juggernaut blows a tire, as a growing number fear it might, it could even delay things by several years. But the outcome is scarcely in doubt.

This is more than a statistical story. It is the end of the Age of America. As a bond strategist in Europe told me two weeks ago, "We are witnessing the end of America's economic hegemony."

We have lived in a world dominated by the U.S. for so long that there is no longer anyone alive who remembers anything else. America overtook Great Britain as the world's leading economic power in the 1890s and never looked back.

And both those countries live under very similar rules of constitutional government, respect for civil liberties and the rights of property. China has none of those. The Age of China will feel very different.

Victor Cha, senior adviser on Asian affairs at Washington's Center for Strategic and International Studies, told me China's neighbors in Asia are already waking up to the dangers. "The region is overwhelmingly looking to the U.S. in a way that it hasn't done in the past," he said. "They see the U.S. as a counterweight to China. They also see American hegemony over the last half-century as fairly benign. In China they see the rise of an economic power that is not benevolent, that can be predatory. They don't see it as a benign hegemony."

The rise of China, and the relative decline of America, is the biggest story of our time. You can see its implications everywhere, from shuttered factories in the Midwest to soaring costs of oil and other commodities. Last fall, when I attended a conference in London about agricultural investment, I was struck by the number of people there who told stories about Chinese interests snapping up farmland and foodstuff supplies — from South America to China and elsewhere.

This is the result of decades during which China has successfully pursued economic policies aimed at national expansion and power, while the U.S. has embraced either free trade or, for want of a better term, economic appeasement.

"There are two systems in collision," said Ralph Gomory, research professor at NYU's Stern business school. "They have a state-guided form of capitalism, and we have a much freer former of capitalism." What we have seen, he said, is "a massive shift in capability from the U.S. to China. What we have done is traded jobs for profit. The jobs have moved to China. The capability erodes in the U.S. and grows in China. That's very destructive. That is a big reason why the U.S. is becoming more and more polarized between a small, very rich class and an eroding middle class. The people who get the profits are very different from the people who lost the wages."

The next chapter of the story is just beginning.

U.S. Spending Spree Won't Work

What the rise of China means for defense, and international affairs, has barely been touched on. The U.S. is now spending gigantic sums — from a beleaguered economy — to try to maintain its place in the sun.

It's a lesson we could learn more cheaply from the sad story of the British, Spanish and other empires. It doesn't work. You can't stay on top if your economy doesn't.

Equally to the point, here is what this means economically, and for investors.

Some years ago I was having lunch with the smartest investor I know, London-based hedge-fund manager Crispin Odey. He made the argument that markets are reasonably efficient, most of the time, at setting prices. Where they are most likely to fail, though, is in correctly anticipating and pricing big, revolutionary, "paradigm" shifts — whether a rise of disruptive technologies or revolutionary changes in geopolitics. We are living through one now.

The U.S. Treasury market continues to operate on the assumption that it will always remain the global benchmark of money. Business schools still teach students, for example, that the interest rate on the 10-year Treasury bond is the "risk-free rate" on money. And so it has been for more than a century. But that's all based on the Age of America.

No wonder so many have been buying gold. If the U.S. dollar ceases to be the world's sole reserve currency, what will be? The euro would be fine if it acts like the old deutschemark. If it's just the Greek drachma in drag ... not so much.

The last time the world's dominant hegemon lost its ability to run things singlehandedly was early in the past century. That's when the U.S. and Germany surpassed Great Britain. It didn't turn out well.

Updated With IMF Reaction

The International Monetary Fund has responded to my article.

In a statement sent to MarketWatch, the IMF confirmed the report, but challenged my interpretation of the data. Comparing the U.S. and Chinese economies using "purchase-power-parity," it argued, "is not the most appropriate measure… because PPP price levels are influenced by nontraded services, which are more relevant domestically than globally."

The IMF added that it prefers to compare economies using market exchange rates, and that under this comparison the U.S. "is currently 130% bigger than China, and will still be 70% larger by 2016."

My take?

The IMF is entitled to make its case. But its argument raises more questions than it answers.

First, no one measure is perfect. Everybody knows that.

But that's also true of the GDP figures themselves. Hurricane Katrina, for example, added to the U.S. GDP, because it stimulated a lot of economic activity — like providing emergency relief, and rebuilding homes. Is there anyone who seriously thinks Katrina was a net positive for the United States? All statistics need caveats.

Second, comparing economies using simple exchange rates, as the IMF suggests, raises huge problems.

Currency markets fluctuate. They represent international money flows, not real output.

The U.S. dollar has fallen nearly 10% against the euro so far this year. Does anyone suggest that the real size of the U.S. economy has shrunk by 10% in comparison with Europe over that period? The idea is absurd.

China actively suppresses the renminbi on the currency markets through massive dollar purchases. As a result the renminbi is deeply undervalued on the foreign-exchange markets. Just comparing the economies on their exchange rates misses that altogether.

Purchasing power parity is not a perfect measure. None exists. But it measures the output of economies in terms of real goods and services, not just paper money. That's why it's widely used to compare economies. The IMF publishes PPP data. So does the OECD. Many economists rely on them.

Brett Arends is a senior columnist for MarketWatch and a personal-finance columnist for The Wall Street Journal.