Managed Money Reporter Newsletter Editors: Carl Spiess & Allan McGlade

Issue 244 May/June 2008

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Exerpt from www.frontlinethoughts.com

Will US remain an economic super-power?

Included in MMR Issue 244, May/June 2008, "Market Update"

The following excerpt from John Mauldin's "Thought from the frontlines" weekly e-newsletter (see www.frontlinethoughts.com) is full of surprises as it describes why some very smart people feel that despite all that is going on, the US will continue to be the dominant developed country for quite some time.

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John Mauldin writes:

Now, let me throw out a very important and interesting point. Today I am in Switzerland speaking on behalf of Bank Sarasin to their mainly institutional clients. (I should note my hosts at Sarasin were most thoughtful. It is a very impressive bank with very good people.) The conference was in German except for my speech and one by a Swedish Economics professor named Dr. Kjell Nordstrom. I attended that session and am glad I did. It was a fascinating presentation.

When I travel around the world, I am used to a certain amount of America and/or Bush bashing. It is just part of the background noise.

So, I was somewhat surprised to see the professor, in the middle of a talk on why some businesses succeed and others fail, put up a rather large flag of the United States and went on to say that the US would be the dominant developed country for his life, the life of his children and the life of their children's children. You could feel the surprise in the room. It is not what they were expecting to hear. I certainly did not.

He started out saying that someone could come to the US and within 3-5 years you could become a citizen. Making a long story short, in his native Finland it took 3-4 generations before you would be considered Finnish. He went on around the world. There are very few cultures where an immigrant can become a naturalized citizen and be accepted into the culture. China? No. Japan? No.

In Germany, the professor recently talked to the top 100 managers of Siemens. This is a company that employs 462,000 people doing business in 192 countries. In that room of the top management there were 99 Germans and one Austrian. Think of similar multi-national companies in the US. Such a room would be full of diversity.

A young lady Ph.D in physics in Lajore, Pakistan does not dream at night of immigrating to China or Germany, where opportunities would be very limited.

No, she and millions more like her dream of coming to the US. He said that 85% of the people living in Silicon Valley were immigrants. The best and brightest in the world choose to go there.

Because for him, America is not a country, but an idea. It is the idea that any person can come and make a life for themselves as an equal. And it is that freedom to rise or fall that makes the US what it is.

So, what does this have to do with Muddle Through? Let's return to the original question.

First, things are not as bad as they seem. Most of the US economy is doing just fine. Businesses have not overbuilt capacity, have large cash positions and lower debt than is normal at the end of a business cycle. In the 70's and 80's, we were much more dependent upon manufacturing for employment, and thus were subject to large increases in unemployment when too much capacity met slack demand and businesses cut back as quickly as they could. Even if we rise to 6 or 7 percent unemployment, that does not rise to the level of a major recession. (And yes, I know if you lose your job it seems like a depression.) Second, the Fed has responded, if a little late, to the credit crisis, buying time for banks to find capital. While there will be many more write-offs from bad debts and mortgage paper in the future, most banks will survive in some form. The key is that the Fed did buy us time. The banks and pension funds are still going to have to write off about twice what they already have, but not all at once. It will be several years before we are through this mess, but that is why we Muddle Through and not crash. I still contend that if the Fed had allowed Bear Stearns to crash that we would experience a soft depression. It would have been ugly. But they didn't and we won't.

And while the housing crisis is really bad if you are trying to sell a home, it is also an opportunity if you are a buyer. We will work through the excess homes that are in the market, as US population is growing and the natural demand that stems from that growth will help pick up the slack.

And the credit crisis? It will get solved, because like the Y2K problem, it must be solved if we are to survive. (I am working on a paper in which I will outline how I think this will work itself out.) And the creativity that infuses this country will rise to the occasion. Yes, I know that it was that creativity coupled with greed which caused the problem in the first place. But hopefully we will get it right this time. Again, for reasons I will outline in later letters, I have reason to believe we will.

So, I think my position in the middle is the right one. We do have very real problems and will suffer a recession. The problems will not be solved quickly. But they are not fatal problems. Time is required for the markets to heal themselves. And during that time, things will be slower than has been the case in recoveries from "normal" recessions.

- From http://www.frontlinethoughts.com/