Imagine it’s the year 2035. An American citizen is packing his bag and moving to another country for a better life.
He’s tired of working for the government three days a week just to pay his taxes. And he can’t stand the fact that his dollars buy less and less every year.
That American citizen is my son 20 years from now (he just had his second birthday). And the country he’s moving to is Brazil, my home country.
It’s where I’m betting there will still be growth in 25 years…as America continues to deteriorate.
Just a Few Years Ago, This Would Have Sounded Crazy
Now is this an absolute certainty? Of course not. It’s possible that America could turn things around by then.
But from everything I’m seeing, the current government is just repeating the same mistakes of past administrations. Our country continues to spend way beyond its means.
As long as we continue on this same irresponsible path, I can’t be optimistic about America’s future.
So in 20 years or so I wouldn’t be surprised if my son moved to Brazil for better opportunities. A few years ago, I would never have said that (in fact I would have called you crazy if you told me that!). But things have changed.
This latest financial crisis has blurred the definition between developed and developing nations.
Countries like Brazil, India, and China are looking much stronger than more developed U.S., U.K. and Europe. This major change in the global scenario is important because it will lead to significant currency movements.
Here are a few things you should keep in mind during the next few years…
U.S. Debt Will be a Drag on Growth
The U.S. government has prevented a major depression, but only at a terrible cost. The government debt is simply getting out of control.
In the book, This Time is Different, writers Ken Rogoff and Carmen Reinhart documented that government’s debt begins to erase long-term growth once it goes beyond 90% of gross domestic product (GDP).
Their research shows that the average growth performance of developed economies drops by around 1.75% per year when debt breaches that threshold.
As you can see in the chart below, overall U.S. government debt now stands at 97.7% of projected 2011 GDP. And that doesn’t even take into account the massive guarantees by government-owned Fannie Mae and Freddie Mac.
The IMF projects the ratio of debt to GDP to surpass 100% by 2014. This is not good for the dollar. And is one of the reasons why the Brazilian real will appreciate against the dollar in the long-term. But there are many other reasons.