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Wednesday, May 7, 2014

Rethinking America's decline

We recently learned that China is poised to replace the United States as the No. 1 economic power in the world sometime later this year. Our anemic quarterly growth rate of 0.1 percent certainly lends credence to this speculation. We must seriously question those who say our nation is not in decline. They are adopting the ostrich strategy and sticking their heads in the sand

There is no question that America is the pinnacle nation of the world and is likely to remain in that position for several years, given our military strength and the depth and stability of our financial infrastructure. However, overconfidence is the frequent companion of catastrophic decline, as confirmed by numerous historical writings. If we continue our fiscally irresponsible ways, coupled with our arrogance, there exists no other possibility than self-ruination.

Our ability to print money is already in jeopardy, as other nations have been making noise about altering the international reserve-currency system to emphasize multiple currencies, elevating their status and decreasing the strength of the U.S. dollar. Our ever-increasing national debt would then place us on shaky ground. The Treasury securities we have been offering to China and others would no longer hold the same appeal, and all the borrowing we have done against the financial well-being of our progeny will come back to plague us and them.

Many who are responsible for putting us in this precarious position would argue that we don't need to worry about countries such as China replacing us, because they have too many structural problems. China is far behind us in per-capita income, creating many social issues and negatively impacting growth of the middle class, which is the most effective growth engine.

Their paucity of appropriate environmental controls has led to lethal industrial pollution, encouraging some of the intellectually gifted and mobile citizens to leave the country. China also has a weak banking system, with too much government interference, which means their currency is unlikely to be accepted by the rest of the world as the reserve currency for many years. They could, however, recognize and correct these deficiencies more rapidly than expected, thereby enhancing their position as a formidable challenger to the United States.

Even if these problems are rectified, China cannot expect continuation of its recent economic expansion, which is already dissipating. If the United States has the good sense to significantly lower its corporate-tax rate, this dissipation will accelerate. Additionally, the lack of intellectual private-property protection in China will prevent it from generating the kind of innovation that usually accompanies pinnacle-nation status.

When it comes to energy, China has large potential reserves of shale gas, but lacks natural water in those areas, making extraction difficult without new technology. We may be unable to exploit this weakness because of self-imposed, shortsighted overregulation of the energy sector in our country.

From these few examples, it can be seen that a combination of wise moves by China and unwise moves by the U.S. in the next few years could have very troubling implications for the future of our country

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