Why We're No. 1

I'd like to share with you some thoughts I offered subscribers of my Income Investor newsletter. In short, while I believe we've got work to do as a nation, I also believe in the U.S.

Prominent bond fund manager Jeff Gundlach said recently that he believes the U.S. will default. That's a big bite to chew, but it's a thought that has crossed many an investor's mind. I'm not in favor of excessive leverage, and I do believe we need to prudently monitor our debt (as our debt is, by definition, someone else's savings). I don't like paying off old bonds with new ones, but I'm not panicking just yet. We're still the world's leading economy -- and its No. 1 manufacturer as measured by output. Industrial giants General Electric (NYSE: GE  ) and 3M (NYSE: MMM  ) are still powerful forces in the global economy. Aerospace leader Boeing (NYSE: BA  ) stands with Europe's Airbus as part of the long-standing duopoly in large commercial aircraft construction. Even machinery companies like Deere (NYSE: DE  ) have spread out around the world to open new markets. So I believe the following logistics are in our favor:

  1. For a currency to have the honor of being a reserve currency, as ours is, its issuer must be a net borrower. In other words, we borrow because we need money, but people also want our dollars.
  2. With sovereign borrowing more so than with corporate or individual borrowing, credibility is currency. As I often say on our Motley Fool Money radio show, the U.S. may be a drunk driver on the road, but it's still the least-drunk driver. Would you rather have someone else's national debt?
  3. If anything were to happen to jeopardize that status, such as the gradual loss of U.S. hegemony, and hence its reserve-currency status, it would likely occur over a long time. Japan has been battling deflation for the better part of two decades, and China only recently overtook it as the world's second-largest economy.

My biggest concern is with that last point. The rosy optimists point to 20th-century data to illustrate that despite periods of high war debt, the U.S. made it through just fine. True, but the 20th century also saw the U.S.'s unprecedented rise to a global superpower. Will it always be that way?

I believe the ultimate solution rests not with American government, but with American business. As long as we continue to lead the globe in corporate governance, transparency, and productivity, we'll have the ingredients to remain the leading -- and most credible -- economy in the world.

Or at least I sure hope so. But what do you think?

James Early owns no stocks mentioned in this article. You can investigate his Motley Fool Income Investor newsletter free for 30 days. 3M is a Motley Fool Inside Value recommendation. The Motley Fool has a disclosure policy.


Read/Post Comments (7) | Recommend This Article (14)

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  • Report this Comment On August 23, 2010, at 3:01 PM, kdt34wqx wrote:

    GE has lost $470 billion of shareholder’s equity since 1999 including $270 billion since 2007. GE has also lost $47 billion of shareholder’s value since it high of $19.70 in April of 2010. Terrible decisions by terrible managers. That’s what GE is about!

  • Report this Comment On August 23, 2010, at 3:10 PM, lctycoon wrote:

    "With sovereign borrowing more so than with corporate or individual borrowing, credibility is currency. As I often say on our Motley Fool Money radio show, the U.S. may be a drunk driver on the road, but it's still the least-drunk driver. Would you rather have someone else's national debt?"

    China, Luxembourg, Switzerland, Sweden, Norway... I can think of a lot of countries whose National Debt I would rather have. Especially going forward.

    "For a currency to have the honor of being a reserve currency, as ours is, its issuer must be a net lender. In other words, we borrow because we need money, but people also want our dollars."

    I was floored when I read that. How is the USA a net lender?

    "I believe the ultimate solution rests not with American government, but with American business. As long as we continue to lead the globe in corporate governance, transparency, and productivity, we'll have the ingredients to remain the leading -- and most credible -- economy in the world."

    I'm not convinced that we're the leaders in corporate governance. Productivity perhaps...

  • Report this Comment On August 23, 2010, at 3:26 PM, XMFConnor wrote:

    "I believe the ultimate solution rests not with American government, but with American business"

    They are not independent of each other.

  • Report this Comment On August 23, 2010, at 3:43 PM, TMFJamesEarly wrote:

    Good catch, lctycoon. Fixed now.

  • Report this Comment On August 23, 2010, at 7:09 PM, plange01 wrote:

    enjoy using the #1 if the US still is it wont be by the end of this year....

  • Report this Comment On August 24, 2010, at 9:50 AM, dfrizzle03 wrote:

    "With sovereign borrowing more so than with corporate or individual borrowing, credibility is currency. As I often say on our Motley Fool Money radio show, the U.S. may be a drunk driver on the road, but it's still the least-drunk driver. Would you rather have someone else's national debt?"

    Just because you think that we are the "least drunk" out there doesn't mean that that is a good thing. Just like getting in a car when your drunk is an awful choice, so is taking on the level of debt that we have in recent years. Whether our government has binged on debt as much as other countries doesn't matter. The fact remains that we are entirely overleveraged. Take a look at some of the numbers that our government produces on our aggregate economy:

    1. Our federal government has approximately 13 trillion in debt.

    2. Our commercial banks???? 9 trillion

    3. Finally.... us as consumers???? 2.5 trillion

    So with a GDP of about 14 trillion, how does any of this make sense. Hmmm, I think that I could go to an elementary school and ask a 2nd grader if he would pay me $24 if I gave him $14. As long as he isn't the son of one of our brilliant public officials, I think that he would say no.

    So why is it so hard for our government to make the right choice?!?! Maybe it is because our government is corrupt, like it always has been. Maybe it's because our public officials are more worried about themselves and the people they know, rather than the 300 million+ people who live in this country.

    I am not a democrat, I'm not a republican... I'm an American who cares about this country and the hard working CITIZENS that make up this country. Maybe our government should take up the same position.

  • Report this Comment On August 24, 2010, at 4:03 PM, lctycoon wrote:

    Could someone explain how we are the "least drunk" out there? I provided a short list earlier in this thread of countries that have no net debt and plenty of surplus. The USA has more than $100T in unfunded liabilities (the value of all assets in this country at the top of the real estate bubble was about $56T). I've heard figures as high as $202T for the unfunded liabilities, but I don't buy those numbers. Either way though, how are we the "least drunk" out there? Yes, of the big economies, the USA looks the most solid right now (except for maybe Germany), but it sure won't in 20 years time.

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