American Exceptionalism Will Dominate the 21st Century

American Exceptionalism has routinely been underestimated by America’s adversaries. We have argued for the last year that powerful trends are reshaping U.S. that will lead to result a rebirth of American manufacturing, coupled with positive business trends, and just as powerful political trends are shrinking the size of government and its capacity to intervene in the economy. The combination of these trends will create a sustained upward spike in the American economy.

Last week the Financial Times newspaper published an editorial: “America Must Manage Its Decline“. The jest of the FT article was that United States must develop an effect foreign policy, similar to Great Britain’s in 1945, to manage her economic and political decline:

“If America were able openly to acknowledge that its global power is in decline, it would be much easier to have a rational debate about what to do about it. Denial is not a strategy.”

President Obama, the American press, the rabid right wing, and even a Harvard professor were all excoriated by the FT for their pathetic reliance on such homilies as: “Decline is not a condition. Decline is a choice.” From the high floor in the FT’s office tower, the author cynically snarled down at America’s inability to take “determined action” to increase higher education funding and “self-indulgent episodes such as the summer’s near-debt default” as prime evidence of America’s “declinism” and the inevitable rise to economic dominance by China.

What the FT fails to understand is that “determined action” to a European is collectivist government spending. Whereas, after $5 trillion of deficit spending, a credit downgrade, and three years of no job growth; the average American is demanding determined action to downsize government. Americans are baffled as to why Europeans bailout Portuguese, Greeks, Italians, and Spanish; so their public employees can enjoy 35 hour workweeks and retirement at age 50.

The pain of the “Great Recession” has motivated American families to cut spending, pay down debt, and increase savings. The $5 trillion torrent of spending authorized by Congress from 2008 to 2010, in an attempt to drive consumer spending back to the levels of 2007, failed because Americans took the stimulus money and saved or paid down debt. From 1990 to mid-2007, the average American household savings rate fell from 9% to negative 1% — the lowest of any advanced country in the world. But over the last three years the personal savings rate has recovered to over 5%. The household debt, as a share of personal disposable income, rose from 105% in 1990 to a peak of 130% in mid-2007, but has been paid down to 114.6%. We estimate that Americans are 2/3 through the deleveraging process will back to 1990 levels by next year.

The U.S. political establishment has also finally hit the wall on profligate borrowing and spending with the recent S&P credit downgrade and warnings by Merrill Lynch that the America could suffer another downgrade by the end of the year. With voters poised to punish spendthrift politicians in 2012, the “Super Committee” on debt reduction has been extraordinarily quiet. This is a sign the committee members are scared enough to avoid partisan political leaking.

The U.S. engineered the 1994 agreement that allowed China to devalue their currency by 68% and set a tax rate at a 40% discount to the U.S. and Japan. The result was a fantastic political success of turning China to capitalism. The negative has been a substantial U.S. outsource of manufacturing labor to China.

But due to America’s exceptional 2% annual productivity growth; the terms of trade are increasingly favoring the U.S. versus China. American manufacturing, according to the highly respected Lombard Street Research, is “rising like a phoenix”. The Chinese “productivity-adjusted wages” have jumped from 22% of US levels in 2005, to 43% today, and will be 61% by 2015. Furthermore, America is approaching energy independence by now supplying 72% of its oil needs and soon passing Russia as the world’s natural gas leader. Add the costs of trans-pacific shipping, reliability woes, technology piracy, and the production advantage for sales, and thee American market is fast trending back to the United States.

Paul Kennedy of Yale University wrote a powerful book in 1989 called the “Rise and Fall of the Great Powers”. Kennedy’s prediction the United States would lose its world dominance to Japan was accepted by the American press and academic community as gospel truth. But it would be Japan that stagnated for two decades and United States that became even more dominant. Once again, America increasingly looks positioned to economically dominate the 21st Century.