TGIF: The World’s Greatest Economies

Let’s start today with a fun exercise, which may seem hard but really isn’t.

Let’s go back to 1 A.D., and I want you to pick the world’s top two economies at the time.

Then let’s jump to 300 A.D. and do the same. This is fun, so let’s do it for the years 600, 900, 1200, 1500, and 1800 A.D. (there’s a pattern here). Just tell me your top two each time (granted there may be some fussiness about individual countries versus empires and whatnot – just give it your best shot).

If your list is a jumbled mess of Rome, the Aztec Empire, the UK, the U.S., and Atlantis, then I’m sorry to say you’re wrong.

If, however, you said China and India, you’re right!

Yep, China and India were the two largest economies at each stage of my little exercise.

Let’s take a look at the numbers, based on the work of Angus Maddison.

If you’d like to see a dynamic display (auto-loading with volume) put together by the Economist, click here.

And in breaking news that you heard first here, the expert economists at ABL predict the biggest economies in the year 2100 will be (wait for it…) China and India. The return of China and India to the top two spots isn’t terribly interesting to me because it seems primarily like a math problem (assuming they can get their policies right).

What is interesting is to understand why China and India fell so far. The U.S. taking the top spot is a function not only of the things it got right, but also of everything China and India got wrong.

Since it’s Friday, let’s keep the history lesson light. A terribly oversimplified list of what went wrong in China and/or India includes: poor leadership, bad policies, ignoring or underestimating threats and rivals, picking fights they couldn’t win, failing to understand world developments, internal divisions (esp. in the face of external threats), and stubbornly resisting change.

If you had to further condense that list to a single fault, perhaps you could simply call it hubris. It’s easy to feel hubris if you’ve been on top for a long time, and hubris is just as frightening a flaw today as it was back then.

It’s interesting to view China’s new status as an economic superpower not as an emergence, but as a return. If you had to classify one country as a scrappy little upstart and another as an established economic superpower, perhaps China (and soon India) might take a different, more historic view of things. It was never a given that the U.S. would be an economic superpower, and it’s not destined for it to continue. Excellent leadership and brilliant policies (plus perhaps a bit of good fortune) have been critical to the U.S.’s rise, and they’ll continue to be needed for its success to persist.

As a complete and total hypothetical, if we were to ever change the excellent economic policies that made America great, or confront global rivals whom we may slightly underestimate, or start a potentially economically devastating trade war, it’d be good to remember the lessons of the past. Once things start to slip, as China and India can attest, it can take some time to right the ship.

Finally, to tie this back to personal finance and my recent thoughts on a safe withdrawal rate, please consider that according to Angus Maddison’s GDP estimates, China saw a massive drop in GDP from 1850 to 1870. How do you think a 4% withdrawal rate would have fared during that time period in China? The golden age of U.S. stock returns has been awesome, but there’s no guarantee it’ll continue.

Finance Links

There’s a long list of things to like about the blog Kapitalust. First, it’s incredibly well-written. Second, he’s less prolific than me, which makes me feel good about myself. Third, he always has original and interesting insights. Dipping into his archives, I found a great review of Warren Buffett’s bio \”Snowball\”, with a very important and different takeaway than the normal Warren worship.

Nelson at Financial Uproar is also a great writer, but he posts so frequently it hurts my feelings. This week he also talked about Buffett and how folksy investing quotes are a distraction to the real process – and work – of building wealth. Also of note: Nelson is still working through a batch of breakfast sandwiches he made back in December in a funny frugal fail.

Len Penzo has a good article on the 7 most popular ways to commit financial suicide. (N.B. Penzo is actually recommending you don’t do these things. His official position on financial suicide is “opposed”.) I don’t think I agree with him on having kids too early, though; there’s a vicious asymmetry between having more money and not being able to have kids at all.

A lot of folks just add up all of their financial assets – pre-tax, post-tax, loose change in the couch – and say it equals net worth. Physician on FIRE points out that some dollars are worth much more than others, which is excellent advice for retirement planning.

Are we going to see a market crash? If so, how should we invest? Andrew Hallam of AssetBuilder seems rather cavalier about the whole thing.

Finally, Mr. Early Retirement Now scanned the mountain of information available on the 4% safe withdrawal rate and said, “You know what? This is a little thin. We need more analysis. I’d like to write a post that goes deeper.” And when ERN says “a post”, he actually means 10 different posts of like 50,000 words or something. I wouldn’t recommend reading them all in one sitting, but he’s done excellent work and you can start the series here here. (If you want the Cliff Notes version: a 4% withdrawal rate apparently isn’t super safe nowadays.)

Almost Good Business Idea

When I used to work in restructuring / turnaround consulting, I got to spend some wonderful time with the accounts payable department for many a company. It made me think of an almost-good business idea: just send out very official looking invoices for $16.83 (or whatever figure you fancy, but keep it lowish) to every company in the country. Other than small matter of it being illegal, I bet it would be an incredibly lucrative enterprise. I’ll wager a lot of companies would just pay.

I was reminded of that yesterday when once again I finally broke down and called about an official-looking, due-on-receipt $50 medical lab invoice following my annual physical. The call was Kafkaesque: first she confirmed the $50 was due immediately, then she struggled for 15 minutes to explain the charges (preventative stuff should be fully covered), then she said I’d need to call my doctor, then she finally found some screen that said I didn’t owe anything. I’m not sure why their way is legal and my idea isn’t…

Teaser for Upcoming Post

The safe withdrawal rate I’m targeting.

 

Happy Friday everyone!

 

Angus Maddison, who made the historical GDP estimates herein, was a pretty interesting guy. You can read the Economist’s obituary on him here.