Asia Sentinel

Over the past half-century, the United States has seen its global dominance in dozens of industries slip away, mostly to Asia, and particularly to China and Japan, not to mention a continuing procession of tiger economies. Taiwan and Korea have certainly benefited.

But one plum that the country has maintained until now is a gargantuan financial services industry, whose contribution to gross domestic product more than tripled between 1947 and 2005. However, the current global financial crisis, manufactured on Wall Street and exported to the entire world, may result in the US losing its financial crown as well.

Once upon a time America owned the automobile industry. But after several decades of excessive taxation, onerous government regulation, union extortion, and a crushing lack of foresight and innovation, the US no longer dominates an industry that it practically invented. Just as Detroit no longer claims center stage in the world automobile marketplace, soon New York will lose its position at the center of global capital markets.

In the first place, the center of finance tends to go where the money is. Right now all the money is coming from Asia and the Middle East where, as Asia Sentinel pointed out last week, 11 countries have amassed nearly US$4 trillion in reserves. When the US was the world’s greatest creditor nation and its largest supplier of capital it made perfect sense for that capital to be allocated to the US. But why should the Chinese send their savings to New York only to have it re-invested back in China? Wouldn’t it make more sense for the Chinese to allocate their capital locally rather then outsourcing the job to us?

In the second place, when the strength of the US dollar was highly regarded, it made sense for global savers to allocate substantial percentages of their savings to dollar-denominated investments. This preference gave Wall Street a competitive advantage in attracting capital. However, now that confidence in the dollar has evaporated, perhaps permanently, this advantage has been lost.

Further, investment in the US was encouraged by America’s respect for private property, low taxes, and minimal government regulation. However, this advantage has been lost as other nations have strengthened their private property laws, deregulated, and lowered taxes, while the US has done the opposite. As a result, thus far this century, the returns on US-based investments have far underperformed those achieved in every other major market.

Most importantly, Wall Street’s reputation, once its greatest asset, is also in jeopardy. Just as Detroit lost its reputation for high quality cars, bankrupted dotcoms and worthless subprime debt are creating similar problems for Wall Street. You can’t expect to keep your customers if you continually sell them shoddy merchandise. Wall Street has spread hundred of billions of dollars in losses around the world and in so doing shattered its reputation with some of its best customers.

However, in the last few years Wall Street has not only screwed customers but their own shareholders as well. At one time all of the country’s major investment banks, such as Goldman Sachs, Lehman Brothers, Morgan Stanley, Bear Stearns, Smith Barney, Shearson, EF Hutton, Kidder Peabody and Solomon Brothers, were private partnerships.

However, during the 1990s they all went public (of course many merged first so they no longer exist as independent firms). Goldman Sachs was the last to go public in 1999. The transition allowed Wall Street partners to cash out, transferring future risk to new shareholders. In so doing they were able to capitalize on bubble valuations, yet through lavish bonus compensation packages, still keep the lion’s share of the profits for themselves. In other words they got to have their cake and eat it too.

As a result of this transfer of risk, the business models of America’s leading financial institutions shifted, with profits coming from riskier sources such as proprietary trading and structured finance. To line their own pockets, Wall Street’s bankers willingly exposed their shareholders to risk that they would never have assumed with their own capital.

This moral hazard set the stage for the enormous losses shareholders are now suffering, and are a direct consequence of the phony profits booked in prior years. However, while shareholders are left holding the bag, Wall Street’s former partners now turned employees have already walked away with huge IPO and stock option windfalls, as well as lavish bonuses paid on phantom profits.

The coming crash will plainly expose these conflicts of interest, and the reaction will be severe. In the end, finance and banking, like manufacturing, will be yet another industry lost to foreign competition. The new financial capitals will likely be in Asia, the Middle East, and Europe. New York will certainly still have a role to play, but much like Detroit, it will be but a shadow of its former self.

Peter D. Schiff ( This e-mail address is being protected from spam bots, you need JavaScript enabled to view it ) is president of Euro Pacific Capital, Inc of Darien, Connecticut, USA. He publishes the free, on-line investment newsletter http://www.europac.net/newsletter/newsletter.asp

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Made in China
written by Jeff W , March 31, 2009

"the U.S. hasn't necessarily been "losing" industries but rather giving them away to pursue others"
Tell that to all the workers who lost jobs in the electronics, clothing, shoes and now manufacturing industries. GM is going the same way. They will be selling GM cars made in China. Its the only way to make GM profitable. Nowhere in the article does Washington even mention saving jobs.

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written by Liang1a , January 29, 2008

The country with the largest number of scientists and engineers with doctorate degrees is the country with the most advanced technologies. And that is the US. Therefore, America can look forward to being the most advanced country in the world for a long time to come. The only country that is likely to overtake America in the next 30 years is China. But at the rate China is going - with all its best scientists and engineers running off to America or stay in China but work for foreign companies that have set up R&D facilities in China - it is unlikely that China will overtake America even in 30 years.

That being said, America also cannot keep incurring foreign debt. Otherwise, it will have to sell out its best corporations to foreign buyers. The biggest drain on US dollars is oil. If America can build hundreds of nuclear power plants of the new generation, and build fuel cell cars, then it could reduce oil import to zero in 10 to 20 years. America also should increase R&D in automation. The reason why GM can't compete is because it uses much less automation than Toyota and other foreign car makers manufacturing in America. America's loss of technological advantage in auto industry is self-inflicted and should not have occurred since America obviously has overall technological advantage.

But finanacially America will definitely lose its dominant place to China because if China is only 40% developed it will have an economy that is twice as big as America's. But China must deveop its own internal economy or it will never achieve even 40% development. And even if China isn't technologically competitive with America overall, it could still be dominant in a large number of sectors such as jumbo jets or fuel cell cars for example. So together with the world's biggest economy and some of the world's most advanced technologies, China would be able to replace America as the dominant financial center of the world. And the future financial capitals will be Shanghai, Hong Kong, and Singapore.

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Give Pete a break Malaysian!
written by Jon , January 28, 2008

Hey, Pete makes out good when investments shift to the "EURO-PAC" area - out of the American market, just let the guy make a dime Malaysian person!

To comment on the article, the U.S. hasn't necessarily been "losing" industries but rather giving them away to pursue others.

First, the U.S. has created the new financial industries of the world with dollars from buying their goods and services. The last thing the Arabs and Chinese want right now is a depression in the U.S., their largest market. It would be a nice dream of theirs to "de-couple" from the U.S., but not anytime soon!

If you know anything about American economics, you should know that the American business culture is unique in that it thrives on risk. It also consummates innovations and provides the world with all that is new.

One deathly matter of business the U.S. must deal with to prevent implosion is the lack of spirit in the U.S. congress to embrace progressive ideas in legislating and funding r&d initiatives.

Asia is impressive, America is changing, but we will all be better off with a strong America rather then a weaker one.

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Americans are still leading
written by Malaysian , January 28, 2008

American are still leading in software, space technology, finance and the best environment on earth for entrepreneurs to become wealthy. It is a long way before anybody can catch up with them. So many R&D scientist from China, India, Japan, Europe and Middle East are migrating to USA. Because only in US, the highly talented and hardworking are recognise and paid highly.

China is still run by communist party, India is too poor and have huge traditional culture obstruction to progress, such as the Caste system. Japan is too homogeneus and it kills the dynamism in the economy. 99% of people in Japan are Japanese. Europe has a humongous welfare system that burdens the nation.

So only in USA, where entreprenuers are most likely to become wealthy more than any other country on earth. Except for the huge crime rate in USA, everthing is normal.

Don't understand about Americans not wanting to ban guns from the street.

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