Will US have its ‘Sputnik Moment’ again?

Mr. El-Erian of PIMCO, says in this article that US will require a ‘Sputnik Moment’ again to regain its lost glory.

He also says that there is no one to step in US shoes. And, though world has to live with the downgrade, at core US will still be Triple-A.

Can US do it again?

Lets see…

Sputnik Moment

“Sputnik Moment” — is a visible shock to the national psyche that can unify Americans around a common vision and a renewed sense of purpose — that of halting gradual secular decline by putting the country back on the path of high growth, job creation and financial soundness.

It started with the Space Age and later ended in the Cold War between the US & The USSR.

However, I second his views on the ‘Sputnik Moment’.

Year was 1957

There are two points to be considered here:

  1. In 1957, US GDP was roughly at $460B against external debt of $270B which amounts to Debt to GDP ratio of 58%.
  2. US had Gold Standard then which was in effect till 1971 when President Nixon approved to delink dollar from Gold.

Now considering point 1, US had an enormous fiscal clout then to start a space age to compete with the USSR as Debt to GDP ratio was roughly half of total GDP. And due to this the fiscal position never went out of hand until 1971 when Gold Standard against which the US dollar was pegged was abolished and the US government had a free hand to print greenbacks at will.

2011 is not 1957

It would be difficult to have a ‘Sputnik Moment’ now. Nothing comes for free and to have that New Era, US does not have enough fiscal elasticity to move forward. The only option it seems now is to just print more money which of course will do but in return will see debt piling up further (read: debt trap).

Silver Lining

One thing US has in its favor is that US has taken debt in its own currency so in future if and when fiscal position improves, US wont have to repay by selling its currency. Moreover, US also does not have to worry much about depreciation of its currency as major holders of US Treasury bonds (China & Japan) wont allow that to happen as it would hurt them most as it will lead to a depreciation of their bonds.

Final Thought

No one likes ‘hero’ of a movie to be in trouble and same goes for US also. A prosperous US means prosperous World. But one thing is certain – There would be gradual decline of US’s economic clout. Of course, there is nothing to worry about its position for next few decades but its position would be something akin to Microsoft of 2011. With companies like Google, Facebook & Apple in the picture, Microsoft’s position has greatly been compromised.

Same could be true for US also…

Large but not important…

– Saumil Mehta

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One Response to Will US have its ‘Sputnik Moment’ again?

  1. Amit Agarwal says:

    Dear Mr. Saumil,
    I have been following your blogs for close to about 2 years. Your random musings have helped me a lot in being a value investor. Is it possible to have a live conversation with you?Please reply-claricestarling079@gmail.com

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