America: Decline or Revival?

As my American friends fire up the barbeque on this Independence Day weekend, I invite them (and my other readers) to ponder the long-term fate of America.


The end of Pax Americana?
The past few weeks has seen more bad news for American standing and influence. The Chinese are questioning the long-term supremacy of the US Dollar as reserve currency again:

Top officials, including Premier Wen Jiabao, have openly expressed concern about Chinese investment in the US. The country has also actively mooted the idea of a super sovereign reserve currency to replace the dollar.

Besides, it has also sought to promote the use of the yuan for foreign trade and investment; a first step, some think, toward challenging the dollar's status as the preferred currency of international trade and capital flow.

Meanwhile, Econbrowser reports that the US continues to go into debt, as it moved from a net debtor in the 1980s to a deeply indebted position today.


Or revival?
On the other hand, John Mauldin recently posted a remarkably optimistic view of American revival, based on the work of Neil Howe [emphasis mine]:

The potentially good news…is that the Crisis we're now entering will change pretty much everything. While this change will entail a great deal of pain and a reduced standard of living for a large number of people, by the time the Crisis subsides, society will have pretty much remade itself in ways that no one can predict at this point…

Neil Howe turns to his generational profiles and points out that the rising societal power today belongs to the generation he calls the Millennials, individuals born between 1982 and 2004. They are a "Hero" generation, just like the G.I. Generation that coped so well with the turmoil of the Great Depression and World War II -- the last Fourth Turning. Coddled as children, the G.I.s were ultimately called upon to help society through a dark and dangerous period and rose to the occasion…

[These] periods have always resulted in the nation redefining who we are in some essential way. That was certainly the case during the American Revolution, when we transitioned from a British colony into a collection of independent states -- and the Civil War, when those states were hammered into a single nation. And, again, after World War II, when the U.S. went from being a relatively isolated nation to a global empire. A wild card, for instance a terrorist nuke going off in a city anywhere on the planet, could similarly take the country, and the world, into unforeseeable new directions.

Of course, this optimistic view is highly dependent on America getting through the crisis intact.


A Singularity in history
Does America decline or will we see a new Renaissance?

I believe that we are approaching a Singularity, or a discontinuity, in history. All that we know is that we are approaching a Singularity but we cannot forecast what happens afterwards (that’s why it’s called a Singularity).

Consider the words of blogger Fabius Maximus, who wrote the following in February 2007, well before the onset of the current financial crisis, about the Singularity and the challenges that Americans face:

This transition will be like a singularity in astrophysics, a point where the rules breakdown – and beyond which we cannot see.

Such trials appear throughout history. Consider Russia in 1942. Ruled by a madman. Their government had betrayed the hopes of the revolution, killed tens of millions, and reduced the nation to poverty. Most of their generals were dead, their armies were in full retreat, and vast areas were controlled by a ruthless invader.

The mark of a great people is the ability to carry on when all is lost, including hope. We can learn much from the Russian people’s behavior in WWII.

For investors, such a scenario involves a high degree of market volatility and fat-tailed returns. Be prepared.