Thursday, June 23, 2011

Rise and Fall

Recent trip to the US brought back some great memories. As I flew across the country meeting old friends, it reminded me of America’s massive size and power. Undoubtedly it is the capitalistic centre of the world. It was also equally clear in my two weeks in the country that it is a crossroad. Nothing proves this more than the never-ending discussions of the current political, financial and social problems on streets, bars, airports and these have more than ample coverage on media.

I have always been quite impressed and influenced by the philosophy and vision of America’s founding fathers. The country has prospered on principles of democracy, representation and individual liberty. This has manifested in the form of personal right of ownership of property that eventually led to a personal consumption culture that has made US the powerhouse it is today. But for the first time in centuries its future is uncertain.

Throughout history many strong and massive civilisations and culture have risen and collapsed. If you look back at the Greek, the Roman, Indian, Chinese ancient civilisations or more recently colonial Britain and Russia their downfall has not been brought about but one massive blow but slow accumulation of somewhat anticipated problems. Decline came about gradually due to an inability to adapt to changing environment and conditions in the world.

At first you might think I am alluding to current financial problems but I am not. Of course that is one significant problem but nothing compared to similar challenges faced by Europe. Europe’s own sovereign debt problems are contributing to its demise as a leader in the world. US on this dimension at least is much safer. With Debt/GDP ratio of around 80% it is still lot lesser than troubled European countries with over 100% and Japan with close to 200%. Also, USA has fairly efficient institutions, tax gathering mechanisms and low corruption which are certainly not the case in Greece. While financial position is a risk, I anticipate things will improve as economic cycle reverses.

USA’s long term problem and possible reason for demise is still going to be Oil. Why? Well, like almost all countries in the world, USA is heavily dependent on Oil. But there is one major structural difference. A majority of Americans live in suburbs designed around universal personal automobile use. This culture has had a huge contribution to America’s success as it encourages both home and car ownership. Home ownership in turn facilitates ownership of many other personal consumables. In addition to the suburban lifestyle which is heavily dependent on personal transport, about 90% of overall US transportation is reliant on Oil. As oil prices increase substantially it would become unsustainable for many. Even those who could afford it would be spending a higher portion of their income on ‘gas’ which would mean lesser disposable income to spend on other goods. Personal consumption accounts for 70% of US GDP.

But as Oil price rise wouldn’t that change behaviour and bring down demand? Ideally it should but unlike other countries people don’t have many transport options in US. Europe and Japan has a massive rail and metro system which is connected to the grid and can work of alternative energy sources. China, India and Brazil are making heavy investment in similar mass transit systems. Typically, these mass transit systems take about 20-30 years to fully develop. Even for 1st phase or line of a Metro system you are talking about 5-7 year development period post financial approvals. The rate of growing oil demand is not going to be offset enough by these initiatives but it does provide consumer an alternate mode of transport. However, in most parts of US that alternate does not exist.

This could be very significant and challenging problem if investments are not made now. By every account and given the financial difficulties, US is not planning any major investments in transport infrastructure in the near term. Most economic projection indicate that US would still be the 2nd or 3rd largest economy in the next 50 years but this rests on an assumption of continued 2- 3% growth rate. This could be severely tested if oil price rise predictions come true. There are many ifs and buts in this argument but ‘if’ this was true it’s not something that could be addressed overnight. It requires foresight and planning. Many a country have failed for the similar reasons, is US going to be next?

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