Northwestern University economist Robert Gordon published a
recent paper where he outlines the causes of America's economic
supremacy, and the reasons the
growth it experienced is not likely to occur
in the future -- unlike in emerging markets (
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The general theme of his argument is that unlike emerging
markets, America has matured and has maximized growth, given the
greater opportunities afforded a young country thriving on
innovation and change.
According to Gordon the country had numerous advantages, such as
"abundant natural resources, favorable demographic trends, relative
political stability supported by the protective benefit of two
oceans", and more. As
we've pointed out before
, the catalyst for growth was, in Gordon's terms:
"three separate industrial revolutions: 1) the introduction of
steam engines and railroads, 2) the inception and widespread use of
electricity and the combustion engine, and 3) the invention of
computers, the web and mobile communications." And as quoted by
CNBC "these three interlocking events gave rise to a widespread
assumption that "economic growth is a continuous process that will
According to Gordon, future growth in consumption per capita,
which he cites as the main engine of the consumer-based U.S.
economy, could fall below 0.5% a year for an extended period of
decades. This compares poorly with the 1.9% annual growth rate
between 1860 and 2007.
Gordon also notes six main impediments preventing the U.S.
economy functioning at the same high level as in the past, as
1. changing and unfavorable demographics,
2. rising education costs and poor secondary school performance,
3. growing economic inequality,
4. increased competition due to globalization,
5. energy and environmental costs and challenges, and
6. high levels of consumer and government debt.
According to Gordon's research it took five centuries to double
the standard of living between the fourteenth and nineteenth
centuries. Between 1800 and 1900 the standard of living doubled
again. This pace topped out at an amazing 28 years between 1929 and
1957 and 31 years between 1957 and 1988. But Gordon expects the
pace of doubling to decrease back to a century between 2007 and
For emerging markets investors this means we are looking in the
right places. Although technological advancements can surely come
from the U.S., and the potential to accelerate the doubling of the
standard of living is possible, for now the catalyst for such an
acceleration is not obvious. Therefore it would seem practical to
invest in countries and regions, such as emerging markets, that are
expected to continue to grow at a faster clip.
It was recently reported that the
economy grew at a 1.7% pace
in the second quarter; higher than expected but well below
historical standards. Also low enough to not rule out the
possibility of additional easing by the Federal Reserve. This
underscores Gordon's point and emphasizes the need to invest in
The past twenty years of stock market gains can be attributed in
part to overt enthusiasm and easy money policies. While the U.S. is
in the midst of another very easy money period, we are experiencing
little results from the Fed's efforts; something akin to Japan's
liquidity trap. Current statistics bolster Gordon's arguments and
support the conviction of emerging markets investors.