ASIA vs AMERICA?

This month’s newsletter comes to you while I’m traveling through China, Japan, New Zealand and Australia these past several months. For better or for worse, the world around us is swiftly changing, and we need to look beyond ourselves to better understand how to preserve our future.

 

As we keep an open mind, we find there are lessons to be taken from our Asian neighbors, while they reshape the world in which we live. Make no mistake, their economies and cultures are making huge impacts on the future of our lives and assets, so it’s best to be prepared for what lies ahead. Today's newsletter is not your average travel log.

 

Our long time readers know I travel extensively. International travel is both a long time passion, and an important part of my international legal practice. To understand and appreciate the world, you need to leave your backyard - and go beyond your comfort zone - to understand what makes the world tick. The more we understand elsewhere, the more we learn to understand ourselves. The more we understand, the less we fear. It's a worn cliché, but "knowledge is power."

The way we encounter the world is always personal. To learn while traveling - not just as a tourist - we need to leave behind our personal biases and perspectives and encounter the world with a fresh mind. We all leave our countries in our national ways. An Iraqi sees Paris differently than an American. The personal is always at the core of cultural differences and disputes.

 

I’ve traveled extensively throughout the Australasia region during the past decade, and each Asian country is vastly different from the next. Many make the mistake to lump “Asia” as one homogenous group, which couldn’t be further from the truth. Cultures, languages, foods, governments, economies, and legal systems, are all as different as black and white.

 

I’ve been to China before, but I’ve wanted to better understand China this trip. This past year I’ve been taking Mandarin lessons, the Chinese language that unites the masses made up of many different local Chinese languages and dialects across the continent. For a Westerner, it is an extremely difficult language to master, with 4 different speech tones, one neutral tone, unique sound patterns, language syntax that strangely works, and speech that sounds like a song.

 

Armed with a 6,000 year historical and modern cultural understanding of China, it seems that the more I try to understand the Chinese way, the more complicated everything becomes. But then, I’m just a foreigner in the Chinese eyes.

 

Even while traveling throughout China you can't escape the American political jawboning leading up to - or following - the US elections. From afar I followed the dim witted arguments about how the US politicians - and political wanabes – found fault to America’s problems everywhere else, except at home. They’re worse than little children fighting in a sand box, pointing the finger at someone else. Worse yet, no one has a clue of what they’re ranting on about, particularly assessing blame against China for all that ails America.

 

In the meantime, the economies in many parts of the world move along at blistering speed.

 

For example, in China, modern cities - not just subdivisions and towns - are built seemingly overnight. And employment and growth are at record levels in China, and elsewhere, including Australia; the Singapore stock exchange seeks to merge with the Australian exchange creating another major global market in Australasia; central banks are raising interest rates in many countries to slow their economies down (Australia, Sweden, Korea, Brazil, Norway, Canada, China, India, and others, and more talk of following) – to name just a few positive, strong economies around the globe.

 

Yes, business is booming, wealth is being created, and the Global Dream is alive and well in many places around the world. And generally in venues where assets are not constantly under threat.

 

For those that believe China is a country to be reckoned with in the future, they are dead wrong. China’s growth, modernization, technology, willpower and much more has already arrived and is growing….at lightning speed. Not only is China currently the second largest economy – with economic growth averaging around 10% annually – it is experiencing infrastructure growth and industrialization growth much faster than the US experienced at the turn of the 20th century…..and in staggering population numbers that boggle the mind.

 

China’s growing economy with 1.3 billion people – and population movements into urban centers at rates of 300 million people in little more than a decade - must be taken seriously. Imagine the entire population of the USA moving from the rural countryside to urban centers in less than a decade, and the impact and opportunities this would create. A government that lifts 500,000,000 people out of poverty and makes huge economic, educational, technological, and infrastructure strides in less than two decades, can't be all bad. The US views China as an economic, global competitor – and there is some truth to that view – but America needs to look at China more as a global partner in a multi-cultural world. Instead, America seems to always need an enemy to fear.

 

Yes, China appears rough around the edges to outsiders; and yes, China is increasingly taking bold steps in the region and across the world to better its future. But let’s be honest: China is a country full of “contradictions”, as even Revolutionary Leader Mao Zedong pointed out.

 

Foreigners are outsiders in China, and lessons can be learned how China benefits from foreigners unlike anywhere else in the world.

 

Foreigners have always been treated differently in China - as they are around the world - but in a way that uniquely benefits China. The term in Chinese is “waishi”, and literally means “foreign affairs”. But waishi describes how to influence and at all times control foreigners, as well as Chinese citizens’ contact and perception of foreigners. Waishi encompasses all matters related to foreigners and foreign things in China and abroad. For an excellent understanding on how China uses waishi, Making the Foreign Serve China, by Anne-Marie Brady, is an excellent read.

 

Waishi is state of the art diplomacy, and it has been reduced to a bureaucratic science in China. Great efforts are built around making foreign “friends”, using foreigners to serve China’s goals, creating international relations, managing foreigners, and domestic growth and prosperity with the help of foreign money and technology. All countries have foreign policies that benefit domestic policies, but China has mastered the art.

 

Even the record breaking attendance of 73 million for this year’s Shanghai Expo – the largest gathering of humans at any event - has clear waishi attached. The truth is that the attendance numbers are “misleading”, as an overwhelming number of rural Chinese were forcefully bussed to attend the Expo for free to increase the numbers. Local party leaders had quotas to fill so the Chinese government could report a record attendance. Forced attendance, mass relocations to build the Expo center in the middle of Shanghai, and padded attendance numbers bring the success under scrutiny as China seeks to impress the world. 
 

In reality, the number of foreign visitors were actually very small (less than 5%, or under 4 million). Truth be told, the crowds of 1 million or more per day discouraged foreign visitor attendance, as I too avoided attending the Expo while in Shanghai even though I had complimentary VIP admittance passes available allowing me to jump the 6 to 10 hour queues that would have allowed us to go directly into the massive exhibit buildings, spread over a massive land area in the middle of Shanghai. Too many people for my liking. Other than to bolster China’s reputation in the world, I believe that discouraging foreign visitors from attending the Expo due to excessive crowds failed to create foreign goodwill, but this was obviously balanced against China boosting it had successfully hosted the largest attended event in the history of the world.

Waishi is complicated.

 

And too, while in China, don’t trust the labels on the products you eat or drink as genuine. False claims to brands of wine, soda, liquor, designer clothing, and much more are not true familiar products. Potential copy-cat labels on almost everything should be taken for granted, unless proven otherwise. But with so much global manufacturing originating in China today for products around the globe – including quality products with genuine designer labels – sometimes the real deal works its way into the local marketplace at substantially reduced prices. And sometimes even the knock-offs are just as good as the originals, but often not. That’s how China works. Buyer beware.

 

And another lesson to learn is that China’s star might not be as bright going forward.

 

There are anti-growth arguments that China’s rapid industrial expansion and bank lending has led to increasing unsustainable credit-to-GDP debt; that the heavy investments have led to substantial overcapacity in China’s manufacturing, real estate and infrastructure, as well as deteriorating credit quality and weakening export markets; that China’s brittle political system makes the adjustment from an export led economy to a customer driven economy very difficult; China’s unemployment levels are believed to be well in excess of 10%; that China’s price advantage is slowly eroding as labor, shipping and manufacturing costs continue to rise; and that China’s off-balance sheet debt is causing China to head down the path of America and Europe with unmanageable debt levels.

 

Nonetheless, have no doubt: China has definitely arrived as the new, big kid on the block, and is pushing its weight around in the region, and across the globe. During the past decade China’s re-emergence into the global world has been driven by exports. Half a billion people have risen out of poverty almost overnight. China now has more billionaires  than any place in the world, except the US. While China is creating wealth, the US is losing wealth. And China’s new economic influence continues to spread throughout the region, and across the globe. Even China's outward direct investment now exceeds Japan, and is closing in on the leaders, Britain and the US, as seen in this graph from UNCTAD, by J.H. Dunnings.

It's all pretty impressive when you consider that it has all been accomplished in less than two decades. China means business. Don't poke the dragon.

China and the other Southeast Asian countries are influencing your future, whether you are ready or not. How the changes affect your assets will depend on how prepared you are today.

 

If you haven’t been to China yet, I strongly encourage you to visit. China’s history goes back long before the 6,000 recorded years, and by comparison, it makes America look like a newborn. Beijing is vastly rich in cultural history, and Shanghai is a fast paced, modern, cosmopolitan city. According to China Daily, both Beijing and Shanghai’s extended populations are each around 20 million.

   

In Japan, on the other hand, the Asian culture is vastly different than in China. While the Asian continent - and China in particular - once influenced the Japanese culture, they are enormously different today. After brushing up on my Japanese language and cultural skills from earlier visits, we headed across from China to Japan to experience firsthand what’s happening today in Japan.

 

Japan offers other important lessons in protecting and enhancing assets in an increasingly global world…..in a world where America’s relative influence is eroding.

 

The Japanese culture and local infrastructure has advanced to a fine art form. Japan is organized and structured. The beauty is in the details. The people are gentile, refined, and very respectful of themselves, others, and all things around them. Things work well on an amazing scale. The cities of Japan have remarkable transportation systems. Crime is almost non-existent. Getting around the major cities is remarkably easy, and safe. The small, traditional Japanese mountain villages are breathtaking. From the art of fine dining, to personal nuances of the modest automated toilet, daily life is refined and finished.

In Japan, it’s easy to be at peace with yourself..…especially after arriving from China.

 

Japan’s economy is now the third largest in the world, after China. But in case you haven’t heard, Japan has been suffering from two decades of deflation and a worsening economy. The population is getting old, with fewer young workers to contribute into the system.

 

Immigration is for all practical purposes non-existent, and the doors remain closed to foreign immigrants. Japan's foreign reserves have swelled to record levels as the Yen advances to record highs, with zero interest rates, with its economy financed by huge domestic debt from thrifty Japanese savers. Japan holds the second worst public debt in the world, only behind Zimbabwe. Notwithstanding, the Yen is also at a record high against the US Dollar, generally seen as a flight to safety from the struggling USD and EUD.

 

For our readers old enough to remember, during the 1980s Japan was once the model of success that the rest of the business world once envied….and then things changed in 1989. History tells us that ignoring this lesson is fraught with danger. Americans need to pay close attention to the history lessons from the Japanese model.

 

In the US today, many economists argue that America is heading down the same long path of economic decline as Japan, or worse. There is strong merit to their arguments. Following Japan’s fantastic boom years of the 1980s, Japan went bust: the currency was devalued, real estate markets collapsed, unemployment took off, and the economy has continued to shrink even with the Japanese government repeatedly pumping enormous stimulus money into the domestic economy. And too, its central bankers have repeatedly – and unsuccessfully - sought to manipulate the value of the Japanese Yen downward in an attempt to recharge the economy to days of former glory.

A familiar tune in the US?

 

In Japan, during the past two decades, the repeated stimulus programs have brought increased government debt burdens, which are now some of the worse in the world.

Currency manipulation, long term, has failed. Many argue that the stimulus programs and currency debasement have actually contributed to Japan’s worsening economy, long term. Only a small number would argue they should have done more, and sooner.

 

No matter, the Japanese carry on. The future of retirement for the increasing older generation is uncertain. It’s painfully obvious that the younger generation have little hope for their future. Instead of young Samurai men preparing to make ready for the business world, many of these young men are today referred to as “herbivores” reflecting their passive nature and greater interest in personal cosmetics and hair style, than sex and money.

And by the lack of shopping bags hanging from the arms of stylish young woman in the Ginza shopping district in Tokyo – once known as Beverly Hills on steroids – it appears the desperate economy has taken its toll.

 

While China is a bull charging into the future, Japan is a cracked tea cup in the China shop delicately resting on past laurels. Great wealth is being created in China, while great wealth has been squandered in Japan.

 

And China sees opportunities in Japan. One is that Japan is weak and weakening in its global role. Not only did China recently cut off the exports of rare earth metals used in Japanese civilian and military technology manufacturing produced for the world (95% of the world supply comes from China), but China has stepped up its claim on the southern islands of Japan, said to hold the world’s largest oil reserves.

Actually, Japan is in the middle of a territorial dispute with China to the south, and Russia to the north. No doubt, the Japanese are very disturbed, and it potentially places the USA in the middle of both disputes.

 

To the south, the fresh land dispute taking on significant dimensions is over the Japanese Senkaku Islands, or the Chinese Diaoyu Islands, depending on which side you ask. The release of the video on YouTube of a Chinese fishing vessel intentionally ramming a Japanese Coast Guard boat patrolling the disputed islands, followed the diplomatic sparks between the two countries. It has now escalated into large, angry demonstrations these past weeks on the streets of Japan and China. And angry Japanese demonstrators were seen carrying the American flag alongside the Japanese flag as an apparent show of muscle.

The average person in both Japan and China is very concerned and the angry demonstrations reflect it. The vast, rich oil reserves are desperately needed by both countries, for obvious reasons. History and international law shows both sides have good claims. And even more, saving “face” of two competing nations is also at stake, both of which remember the war wounds inflicted between the two during World War II.

 

To make matters worse, to the north is Japan's boundary dispute with Russia over the Kuril Islands, immediately off northern Hokkaido, Japan. During the mist of the above China controversy, Russian President Medvedev decided to make a surprise visit last week to the Kunashiri Island, one of which Russia claimed two weeks after Japan surrendered at the end of World War II.

The fresh, dispute with Russia is another emotional sore spot for the Japanese, as the double humiliation across Japan is forcing political responses at domestic and international levels across the globe, with the USA at the center.....again. The stakes are very high, and the solution is not simple.

For a good overview of the situation, Stratfor Global Intelligence has an excellent video explaining the geopolitical situation in simple terms. Just follow this link.

China and Japan are the second and third largest economies in the world. Their systems are vastly different than the USA. But to ignore their shifting economies, the similarity in failed efforts to rebalance a failed economy, the new muscle on the beach, and geopolitical events in this region with the USA potentially at the center – and the ongoing impact it will have on the American way of life - is at your peril. Nations have drawn blood for far less.

 

Things change. Stuff happens. History is a good teacher.

 

Another important lesson to be learned, is that the more you study the different Asian cultures, the more you understand that even the very thought process of how the Asian mind thinks is very different than Westerners. It’s not just the difference in culture; the very mental processing of thought is unique. The Geography of Thought, by Richard Nesbett, is a good primer on the subject.

 

Basically, Westerners think logically, and different issues are often dealt with separately (our roots to Greek culture). The Asians, however, believe everything is intertwined and related, time is viewed in a much broader perspective (decades, generations, and centuries), relationship building is important, and honor and saving “face” is integral to the Asian cultures. And according to Asian thinking, the Western logical thought process is immature thinking. Partly for these reasons, for a Westerner, nothing is simple in China or Japan.

 

On the subject of confusion, the US is debasing its own currency by pumping out huge amounts of more cheap money…..the very cause of the financial crisis in the first place. Quantitative easing is a fancy name for debasing or devaluing the US currency, as taxpayers end up with more debt, a devalued currency, and paying more for less.

 

In the first place, if banks won’t lend, and borrowers won’t borrow, with the system already awash with cheap cash, then why will more cheap money change that? It won’t. It only sets the stage for more bubbles and busts at taxpayer’s expense. Writing checks against the future will not fix America’s financial problems, or create jobs. Look at the lessons from Japan. Ugh.

 

Even now with a more balanced-to-center Congress, sad to say, Battleship USA is still sailing in the wrong direction. In my humble opinion, it makes no difference if it leans to the right or to the left…..it needs a 180 degree change in course heading to make a real difference. Unfortunately, no one has the, umm, backbone to take bold steps to make a difference. Stepping up to the plate would mean taking heat. So it’s easier for a politician to play a populist tune that the average Joe wants to hear, but doesn’t have a clue what’s good for them. There is no leadership in America, only pandering. Ugh again.

 

Not that I’m a big fan of New York Mayor Michael Bloomberg, but this time he got it right and had some harsh criticisms for Congress and Americans: "Stop blaming the Chinese for your problems", says Bloomberg. And he's right. Look at who we’ve elected to Congress. Some can’t read. Many don’t hold passports. They certainly don’t understand Asia, and the American rhetoric is going to set off a trade war, or worse.

 “We’ve got to stop blaming the Chinese and blaming everybody else, and take a look at ourselves,” Bloomberg said.

 

The Chinese currency is the Yuan, or Renminbi, and is currently fixed to the US Dollar....that means they both go up and down together against all other currencies. Most of our readers are familiar with the claims that China has artificially deflated its currency creating a global unbalance. But since 2005 the Renminbi has gained 28% since the dollar peg, while the US Dollar Index has dropped only 14%. Truth be told, the Chinese has done more than the US has to correct imbalances....but playing that song doesn't play well for politicians selling the populist tune to the minions, as it's always easier to blame someone else for your problems.

The US has moved from anti-China rhetoric to Chinese import taxes. China retaliated with US import restrictions and reducing its export of rare earth metals needed in civilian and military technology applications. Since the Yuan is pegged to the US Dollar, as the US Dollar devalues, so does the Yuan.

It’s a case of the kettle calling the pot black, and a currency race to the bottom.

 

In the meantime, two other major currencies, the Japan Yen and the EUD, find their central bankers and governments seething with anger and stepping up rhetoric to halt the raise of their currencies against the deflating US Dollar, which hurts their domestic economic recoveries by making their exports more expensive and less competitive.

Meanwhile, tensions are brewing across the world about the US Dollar devaluation, and warning about the tide of new money creating new bubbles across the globe. Closer to home Mexico was the latest of the Latin American countries to join the Currency War. The US then responds to the criticism with QE2 one day following the US elections, creating more dollars out of thin air, and devaluing the US Dollar even further (from your pocket to theirs). Even though Treasury Secretary Timothy Geither denies a Currency War is going on today, it’s impossible to ignore the pink elephant in the middle of the room.

 

Protectionism can be an awful thing. As nationalism grows, people look inward, markets diminish, jobs and income fall, and stagnation worsens. The opposite side of the coin is globalization, which can raise the ships in all harbors. We’ve experienced the success of free markets and open economies during the past decades of globalization, and how well it works. To the contrary, the 1930s is a clear demonstration of the devastation created by closed markets and protectionism, the flip side of free and open markets.

 

Many will recall that when the GFC (global financial crisis) was first unfolding, on November 16, 2008 global leaders from around the world went on television in a co-ordinated fashion calling on the world to avoid protectionism. It will surprise few readers that even as they spoke, protectionism measures were already unfolding. In fact, within 60 days of the chorus of co-ordinated calls to avoid protectionism, 17 countries from the G-20 nations (the 20 largest economies, representing 80% of the global economy) put in place some 47 plus protectionism measures, according to the Lowry Institute.

Protectionism is the heavy hand of government, and the anti-thesis of free markets. Protectionism goes hand in hand with socialism, and should generally be avoided at all costs. But the G20 minutes released Friday offers little hope as they call for tighter financial market regulations. 

 

And America’s own unique form of socialism continues, and we have covered this in a past newsletter, titled Socialism USA Style. Border controls, currency restrictions, and foreign investment regulations continue to tighten around Americans. Entitlements – and expectations for more entitlements – continue, while abilities to pay decrease. Taxes are increasing. Real value of assets continue to fall. Too many battles are being fought abroad, and at home. Like all great empires, they rise and they fall. Some swiftly, and others slowly, and painfully. Assets can disappear swiftly in the process.

 

As famous international investor Jim Rogers was quoted this past week regarding Bernanke’s QE2: “Dr. Bernanke unfortunately does not understand economics; he does not understand currencies; and he does not understand finance. All he understands is printing money. His whole intellectual career has been based on the study of printing money. Give the man a printing press, and he’s going to run it as fast as he can.”

Go Jim.

Again in my humble opinion, Bernanke's claim that inflation is too low, is like the NYPD claiming that crime is too low. The Fed's real enemy is reality, not China.

 

More currency devaluation is inevitable. The US is only an Executive Order away from currency restrictions, with tighter border controls and increased Exit Taxes on the horizon to keep control of your money.

 

Throughout history, those who were well-prepared for changes fared well. Those that were ill-prepared did not. Think internationally, while living and enjoying life locally. Get started with a plan today.

 

My crystal ball is cloudy, so the future is unclear. But one thing that is certain, is that the future will not look like the past.

It amazes me how few Americans have an appreciation or an understanding of the world. Americans need to get out and travel and see the world and realize it really is a great place. Wealth is created, and wealth disappears. Easy come, easy go. Cash sloshes around the global tub from one side of the world to the other. Meanwhile, unfortunately, too many are unwilling to sit still on an airplane more than three hours to get to a foreign destination to visit and to learn. Probably another example of adult ADHD.

 

Protecting assets today has never been more important as the world changes. Protecting assets at home is a relatively easy, first step. Thinking globally from the comfort of your armchair is the next, important step. Creating a flexible asset protection plan, combining domestic and international components together, is what the smart ones are doing today. Protecting assets – wherever located – with an international trust is a wise first step.

 

Some people still wonder if going offshore is legal. Americans are only 4% of the global population, but everything outside the US is seen from a myopic American perspective, if notice is taken at all. Some still believe that the America way is inevitably the only way going forward, against all facts, while others have already swept the US into the historical waste bin.

For those who don’t care to idly sit by and wait for the future to unfold are discovering that the world is a great place to protect assets, do business, invest - and even live. There are plenty of good opportunities for global investment diversification, AA or better rated international banks earning superior interest rates with government insured deposits to $1M, and ways to protect assets from an American litigation-gone-crazy mania. Whether you stay at home, or go offshore, this and more are available for you too.

 

In the past I’ve written repeatedly about international trusts and how they can serve as a multi-purpose vehicle. For some it’s all about solid asset protection, or dipping their toe into offshore investment diversification, or part time retirement living. For some it's insurance against a social and political system gone amuck. And for others it about pre-migration planning, or even planning for expatriation.

 

Whatever your objective, learn how an international trust can give you better control over your future. Start here with some international planning tips.

 

Until next time….

 

David