Brazil is The New America: How Brazil Offers Upward Mobility in a Collapsing World

By 04 November, 2012

Brazil is The New America: How Brazil Offers Upward Mobility in a Collapsing World by James Dale Davidson explores the idea that Brazil’s time – for so long a thing of the future – may at last have come. Davidson, who has spent over 40 years in business, is the author of number of books and editor of Strategic Investment.

God’s a Brazilian?

The preamble is straightforward. Brazil is set for rapid expansion and the US – weighed down by debt and long past its peak oil dominance – is on the wane. People have written off the US before and come unstuck but there are sound reasons for thinking that Davidson might be on to something.

It isn’t just a matter of Brazil’s comparative lack of indebtedness. The confluence of foresight, commercial acuity, scientific research, investment, demographics, mineral riches, bountiful energy from renewable (82% compared with just 11% for the US) and non-renewable sources (notably vast capacity in hydroelectricity, oil, natural gas, coal, uranium and biofuels), climate, an abundance of fresh water (25% of the world’s total from just 5.7% of its land area) and 400m hectares of cultivable land (of which only 50m is presently farmed) underscore the thesis.

Power to the people

Incomes in Brazil are rising by 2.7% per annum and have doubled in the last 10 years with only a low credit expansion per capita GDP. US citizens, on the other hand, owe 40 times what Brazilians owe on plastic. Davidson’s argument is that sound banking regulations, interest rates that favour savers over borrowers and the lessons learned from hyperinflation regarding fiat money shows that contrary to what he says, sound money doesn’t need the gold standard just sensible interest rates. Over this same period 40m people have been lifted out of poverty and the country has created over 15,023,633 jobs in the same time the US has created 150,000.

Banking on banks, eh?

Davidson sees the next 25 years for Brazil as crucial. In the 1990s – during the era of hyperinflation – its ratio of peak earners and spenders to non-productive citizens (i.e. those too young or retired) was 7:10. In the next 25 years this ratio will be 10:4, which he rightly claims as a unique opportunity, on the proviso that it educates, invests and modernises.

R is for regulation

In 1994, Brazil had 40 insolvent banks. Banespa (Bank of the State of São Paulo) claimed to have assets of $30bn but in reality it was -$25bn in the wrong. Then came the Plano Real. Banks were stopped from lending to shareholders; leading bank officials couldn’t hold current accounts with their employers; state banks couldn’t lend to government and regional banks couldn’t buy government bonds. It might be relevant that as of June 2002, Brazilian government loans yielded 17.7% and business loans, 38.38%. The average yield to the banks on consumer loans was 60.57%. The present level of mortgage debt is 75% of GDP in US, whereas Brazil has the rather more modest figure of 2%. Who says regulation doesn’t work?

What’s more, when the top 20 US banks retained reserves to capital ratios of 5-8%, the Brazilian minimum was 11%; some have 16%. Before the 2008 crisis hit, Brazilian banks had to sequester 30% of their deposits with the Central Bank. Meanwhile, back in the US, banks had 3% on deposit with the Federal Reserve and they included ‘vault’ cash in their reserve declarations. When the financial meltdown occurred, total reserve balances on deposit with the Federal Reserve were $9.5bn when system liabilities were $13.5trillion.

Long on Latitude

The book is annoyingly tangential and contradictory at times but whilst some of these asides are overly long they do add rather than subtract from the argument.

It starts with Brazil and then disappears like Colonel Percy Fawcett in search of the Lost City of Z. When it does resurface – unlike the Colonel – it talks about ancient Egypt, ancient Greece, the Roman Empire and the British Empire. Then there is some sniping along the way – sometimes funny, oddly silly, occasionally misplaced and at times, spot on.

There’s Austrian economics (which always knows what to do after the event); the refrain that low tax equals high growth; how the gold standard is preferable to fiat money; productivity and relative labour costs; social security and Medicare; the inanity of doling out unsecured loans; fractional banking; the phantom economics of the empty wallet and non-savings; the empty promise of renewables; anthropogenic climate change; the influence of sunspots and the possibility of a protracted period of global cooling plus Obama’s failure to raise the USS Tanking Economy in four years et al. You could be listening to a golf club or pub raconteur – except this isn’t a shaggy dog story and it is anything but boring.

Power and the glory

However, the key element – that nothing happens economically or gives you such a competitive advantage as access to power at the highest BTU (British Thermal Unit/energy) – is well made, persuasive and supported with empirical evidence. Similarly, when you begin to stack up Brazil’s natural abundance (seen in energy, agriculture, water and demographics) this only compounds the problem for the US, Japan and Europe, which are becoming increasingly energy poor, non-productive, and reliant on imports leveraged on cheap credit. Davidson notes tellingly: “Governments can print money but they cannot print BTUs.”

Energy use in Brazil is now expanding at 10 times the rate of the US – but crucially – entirely from its own domestic resources.

The American century

Enter the US. Two wars in Europe and the peaking of peak coal in 1913 did for the British Empire and then it was America’s turn, pumped up on the ruin of Europe, vast energy independence (particularly oil but also coal), huge agricultural potential, an abundance of raw materials and, vitally, the appropriate demographics.

The Americans made the most of it. Now, out of 113m US households only 16m live below the poverty line, yet if you take into account low incomes some 48% citizens live in straightened circumstances.

Savings have shrunk from over 20% in 1981 (as a percentage of GDP) to just 10.2% in 2009. What’s more wages have stagnated. At this point it might be worth mentioning that higher tax regimes from Eisenhower onwards created the surge in the US middle class but Davidson is too concerned with his low tax mantra to bother about this. Instead, we are treated to Nixon’s decision to get off the gold standard and the emergence of fiat money.

Spreading it thin

The US domestically produced energy resources peaked in 1950. From 1947-1973, median family incomes doubled but rose by just 25% between 1973 and 2004. There is no mention, rather strangely given the available statistics, of the role played by the generous taxation rates for the super-wealthy and the offshoring of US industry for the collapse in the US middle class. Suburban poverty in the US was up 53% in 2008. Furthermore, vehicular use peaked in 2007 at 3.3trillion miles along with gasoline use. It now seems like a very distant memory when the US’ sprawling suburbs could count on gasoline at $0.30.

The US has an average of three cars per family – many of them gas-guzzling SUVs. Whilst new oil users stand at a low base, higher users will quickly succumb to difficulties with price fluctuations. This lesson will be learned more quickly in the sprawl of Los Angeles and San Diego than it will in high density cities of São Paulo, Mumbai or Shanghai.

Whilst growth in the US is still predicted to double to $38trillion by 2050, Davidson argues that it’ll be lucky to be half that. It is unquestionable that the $16trillion debt burden the US is carrying – whether inflated away or shored-up with government bonds – will pose something of a major drag on the US’ ability to crawl out of the mire.

The girl from Burger King

When assaying the future and pitfalls, Davidson lingers on the lingerie and goes dreamy-eyed as he remembers “Heloisa” – the iconic Girl from Ipanema – reincarnated in the pages of Playboy whilst her companheras pile into the trans fats and high fructose syrup courtesy of their new found living standards. Whether she or they will lumber along the sands nursing a bad case Type II diabetes remains to be seen.

Davidson is right, though, the Americans have blown it. As for the Brazilians, if they cock up this extraordinary bounty of riches, they won’t be able to blame God for their shortcomings.

Brazil is The New America: How Brazil Offers Upward Mobility in a Collapsing World is available from Amazon and other bookstores

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