Update No. 44 – 27/01/12

We clawed back some of the gap between EGP Fund No. 1 Pty Ltd and our benchmark, we still trail by 1.01% since January 1, though our all-time lead is back above 9%.  Some good results over reporting season should put us back on the right side of the scorecard in this period and extend our all-time lead.

I have been thinking somewhat about China and the U.S. again this week.  I know a couple of desperate sinophiles who continually explain to me why the 21^st century belongs to China.  I should point out here, that barring some major unforeseen disaster in the Chinese economy, it is undisputable that Chinese GDP will in the near future exceed that of the US.  I think the second half of the 21^st century almost certainly belongs to China, but any predictions earlier than that are almost certainly incorrect, here’s why:

The key problem I have with popular thinking is equating GDP with accumulated wealth.  They are very different things.  According to Boston Consulting Group, North America held 31.4% of global wealth or about $38.2 trillion (in 2010).  The Wall Street Journal calculates US wealth at $54.6 trillion; China evidently possessed approximately 30.2% of the US figure at $16.5 trillion.  These figures are necessarily difficult to pinpoint accurately, I shall use a midpoint in my assessment.

According to the IMF, US saving rates have averaged 15.6% of GDP over the last 20 years, while China’s has been more like 34.8%.  If we assume these savings rates continue indefinitely (China’s will obviously decline, the US, if they’re smart will start to increase theirs), we further assume that Chinese GDP grows in a straight line at 7.5% per annum (obviously unsustainable), with the US growing at only 2.5%.  Under these assumptions (which it must be said are VERY favourable to the Chinese and VERY unfavourable to the US) then China will have not have accumulated an equal amount of underlying wealth to the United States until at least the mid 2030’s.  This is despite the fact that their GDP will almost certainly exceed the US much sooner than that.  Based on a more modest model, it is more likely the US will remain the richest country in the world for at least the next 30-40 years.  Growing a very large economy is very much more difficult than growing a small economy, it should be remembered that the US had 8.3 times the GDP of the United Kingdom in 1970 and only 6.5 times in 2009. In any case, unless I’m inaccurate in my calculations, I will be a very old man (if I even make it that far…) before China on any measure other than GDP will be called the wealthiest country in the world. The US faces many problems, most importantly structural changes which will help reduce debt as a proportion of GDP; many other advanced economies face similar issues.  Worrying about being knocked off the perch as the wealthiest country in the world can be put on the back-burner – Tony Hansen 27/01/12.

EGP Fund No. 1 Pty Ltd. Up by 4.71%, lagging the benchmark by 1.01% since January 1^st. Since inception, EGP Fund No. 1 Pty Ltd is Up by 0.79%, leading the benchmark by 9.17% all-time (April 1^st 2011).