Why America's 'Soft Power' Is More Important Than Ever

The rest of the world is still watching... Why America's 'soft power' is more important than ever... This could crack an empire... It's perception and reality... Why it all matters...

Today, the United States is winning – almost in spite of itself...

The American economy is the world's largest – as is its military. The country's geopolitical influence is virtually uncontested...

You can buy anything, anywhere with a few crisp Ben Franklins... American culture, from Friends to fast food, spreads faster than any other country's way of life... English – particularly the American brand – is the de facto world language.

But when you're ahead, it's easy to forget that winning isn't forever...

LeBron James won't be the best basketball player on the court indefinitely... That stock that has been rising every day over the past month might not go up tomorrow... And like the Roman, Spanish, and British empires before it, the American empire will eventually end.

On that note, with glasses half empty, "eventually" could be closer than it appears – like traffic in your car's side-view mirror.

With historically high levels of inequality and divisiveness... roughly 229,000 Americans who have reportedly died of COVID-19... infrastructure that in many parts of the country is more warzone than Wichita... a Federal Reserve that's printing money like Parker Brothers... and $27 trillion in national debt...

The "End of America" might be close, if it isn't already here.

But I (Kim Iskyan) am not here to doom-and-gloom you heading into this weekend...

In fact, it's just the opposite... In today's Digest, I want to explain that the U.S. has a unique opportunity to reestablish itself as the predominant power on Earth – and to continue to win – for generations to come.

The path is surprisingly simple... All the U.S. has to do is not miss the slam dunk.

And a lot more than just the future of the U.S. and the prosperity and freedom of your kids and grandkids is at stake – which is already a lot, of course. We're also talking about the future of the rest of the world.

You see, from inside America, it's easy to forget that for much of the rest of the world, the U.S. is like a second home team.

I've lived two-thirds of my life outside the U.S., in nine different countries, and I've visited around 100 nations... And it has always amazed me how everyone from bartenders in Harare (Zimbabwe), to agriculture tycoons in Buenos Aires (Argentina), to three-wheeler drivers in Colombo (Sri Lanka), to my buddy Alex a few villages away here in Dublin (Ireland) knows more about the U.S. and its politics and trajectory than... well, even many Americans.

(And that's not just now, during an exceptionally heated and high-stakes election. It's all the time... whether it's the time of George W. Bush or Donald Trump, dot-com bust or commodities boom, Kim Kardashian or Paris Hilton.)

The rest of the world follows the U.S. like their lives depend on it...

That's because, well... they often do.

American policies often are more important to Brazilians, South Africans, and Australians than whatever policy stew their own local politicians cook up.

In a butterfly-effect world – where a seemingly minor event can have an outsized, significant, and unexpected impact far away – the U.S. is a swarm.

For example, when the U.S. boosts the tariff on soybeans by a few percentage points... or redirects the path of an aircraft carrier... cuts carbon-emission requirements in coal regions... tweaks immigration requirements for certain professions... announces a subsidy for electric-car makers... grants a White House audience with the opposition leader of a dictatorship... increases the number of troops in a war zone... few Americans, except those directly affected, might even notice.

But the ripples of seemingly minor policies like these are a tsunami to Brazilian soya producers... Indian software programmers... Taiwanese naval officers... or families in downtown Baghdad.

These made-in-America moves can destroy or lift up faraway families, communities, countries, and governments in ways that American policymakers – focused on their own constituencies and reelection prospects – often don't recognize.

Sometimes the impact is intentional – when the U.S. is strategic and focused in its policies. Other times, it's lumbering through the china shop of the global geo-economy, breaking glass and knocking over tchotchkes in a department store of unintended consequences.

America's impact on the global markets is similar...

An interest rate cut or hike by the Fed... a rising or falling U.S. dollar... American sanctions on a country's banking system or its biggest businessman... a big pandemic stimulus package that adds trillions of dollars to the global economy... all often have a bigger impact on specific markets than what's happening locally.

When I was a Russian stock market analyst years ago, any price target or market forecast was subject to the caveat of "global market sentiment." That was not-so-secret code for how much cash the U.S. Fed was pumping into world markets, as well as other factors on the minds of global investors that had absolutely nothing to do with Russia.

But while the impact of the U.S. on the rest of the world is large, it's slowly declining...

In 1960, the American economy accounted for 40% of global gross domestic product ("GDP"). Today, it's around half that percentage.

In 2000, 80% of the countries of the world traded more with the U.S. than with China. By 2018 that had nearly flipped, with two-thirds of countries having greater trade volumes with China.

The U.S. still has the world's strongest military... That's critical, but in a world of suitcase nukes and suicide bombers, it matters a lot less than it used to.

Fortunately for the U.S., there's another dimension of power that's in some ways a lot more important than the so-called "hard power" of military hardware and economic might.

This other kind of strength is what legendary political scientist Joseph Nye coined "soft power."

And this concept – combined with hard power – is the key ingredient of "winning"... which I'm defining here as long-term prosperity and peace, but which isn't possible within only a walled garden, because eventually, that garden will wither and die.

Here's why 'soft power' is so strong...

Soft power is the ability of a country to influence – and convert the preferences and behavior of – countries, companies, and communities by using attraction or persuasion... rather than force or coercion.

Soft power is how Mark Twain's Tom Sawyer got everyone else to paint the white fence... It's also in the arsenal of any parent who has had to handle a cranky kid in the grocery store checkout line.

Soft power is about winning hearts and minds – through leadership, values, and weapons of mass influence, rather than of mass destruction.

Marketing consultancy Brand Finance surveyed tens of thousands of people around the world this year to assess the presence, reputation, and impact – in other words, influence – of different countries on the global stage.

The survey is based on business, governance, culture and heritage, media, education, and other parameters.

And according to Brand Finance's Global Soft Power Index 2020, the U.S. is 'the only soft power superpower'...

Germany came in a distant second, followed by the United Kingdom. China was fifth, hampered by "the failure to [combine] strong influence with positive reputation," as Brand Finance explained.

Soft power is the transmission of American ideals and values – independence, diversity, generosity, opportunity, and equality – through the country's trade relationships, how the American government treats its friends and enemies, and how it does business.

American universities, the country's history and culture, and its sport and entertainment options also project soft power.

In other words, soft power is about a lot of things...

Like Hollywood, the Statue of Liberty, the Constitution, Michael Jordan, McDonald's, JFK, Harvard, Silicon Valley, and Brad Pitt.

When you meet a guy in Bangladesh who wants to move to Manhattan and picked up an American accent from watching all 10 seasons of Friends, that's soft power...

It's also the Marshall Plan, when the U.S. extended aid to western Europe to help it rebuild after World War II...

It's Muskie Fellowships, a U.S. government program that brought smart young people from the former Soviet Union to the U.S. for graduate studies at American universities... the more than 100 countries that receive U.S. foreign aid... and American embassies around the world that show by example what the "stars and stripes" is all about.

As the British newspaper The Independent explained in March...

American supremacy in the world since the Second World War has been rooted in its unique capacity to get things done internationally by persuasion or by the threat or use of force.

It might sound strange to talk about the impact of Bruce Springsteen and George Washington in the same breath as the hard power of soldiers with their boots on the ground, F-16 fighter jets, and geopolitical chess...

But the images of The Boss and America's first president both reflect the idea of soft power via American ideals, culture, and values...

This power – some might call it "perception" – has helped the U.S. attract and keep supporters, allies, and partners for decades... And it's what compels, attracts, and keeps the world fascinated with America.

But the empires that last the longest in history use a combination of soft power and hard power...

Take the Romans, for example...

The Roman empire built 50,000 miles of road and pioneered the notion of citizenship. It combined that kind of soft power with its overwhelming hard power of gladiators and centurions to win over conquered populations.

The reason we still talk about the Romans – and that they're not just a footnote of history, like so many impermanent "empires" over time – is because they were so effective at combining the two powers.

The trick to an enduring power – and to the U.S. continuing to win – is this...

Have a broad and deep reserve of soft power – with hard power to back it up when necessary.

Soft power is like the charismatic and smart kid who everyone likes. It's the person who gets – and keeps – others on his side for the long haul because he's a leader of people.

Hard power is what the bully on the block projects... He doesn't inspire loyalty, but he gets his way, at least in the short term.

Countries that "win" have to find the right mix... Emotion with no muscle isn't enduring – but neither is all might with no soft power.

In recent years, the U.S. has been a hard-power bully – and walked away from soft-power slam dunks...

The U.S. has ignored or abandoned long-held security and multilateral arrangements and commitments – like its wavering support for NATO, leaving the Paris Climate Agreement, and ending funding for the World Health Organization.

It has turned trade negotiations into weapons of mutual destruction and approached economic relations like they're one-off deals... rather than an opportunity to build long-term relationships.

It has barred immigrants of particular religions and ethnicities, and put the children of would-be immigrants in cages.

And what's widely seen abroad as historic mismanagement by the U.S. of the COVID-19 pandemic has undercut the credibility of the American government. (I wish I had a nickel for every time someone in Singapore – the ultra-law-abiding country where I used to live – asked me why some Americans refuse to wear masks.)

The U.S. government has treated its own citizens in ways that undercuts how much of the world views American competence, intelligence, and culture.

As a result, the American brand – the essence of soft power – is suffering...

The Financial Times wrote in early October about "why Europeans no longer dream of America." From the article...

It was once seen as a place of reinvention – but our attitudes to the U.S. are shifting from envy to compassion.

My Irish friend, Alex, lived in Boston for a few years two decades ago, back when "everyone couldn't wait to get out of bloody Dublin and go to America," he told me recently.

And today? "Nah, nobody wants to go at all. America isn't the place to be any longer. It's in the past."

A mid-September poll by the Pew Research Center reported that the image of the U.S. abroad has plummeted in recent years, with "positive views of the U.S... at or near an all-time low in most countries" surveyed.

The two biggest causes, Pew said, are the perception abroad that the U.S. has mishandled the pandemic, and negative views of President Trump.

To many Americans, the U.S. being relieved of this burden of responsibility might be a good thing...

For those folks, the cost of leading by example is too high, and the short-term returns on long-held alliances are poor. Immigrants are seen as a further strain on frayed social safety nets. To many people, building walls – rather than burnishing the Statue of Liberty – is just part of the evolution of winning... never mind the cost to soft power.

Maybe they're right. But a superpower that rules by hard power alone – or with one soft-power arm tied behind its back, even by design – is painting itself into a corner.

If your only geopolitical tool is the hammer of hard power, everything looks like a nail – from a global pandemic to trade negotiations with the European Union to forest fires in Brazil to abuses of human rights in China. Those are the types of battles that can only be won by a combination of soft and hard power... and hard power alone might do more damage than good.

As Foreign Policy magazine explained in 2018...

For centuries, hard power politics resulted in immeasurable human suffering. Just in the 20th century alone, hard power drove two world wars and a long Cold War that threatened to annihilate mankind.

In short, of course there's a time for hard power... especially to defend yourself. But relying too much on armies, missiles, and steel-toed threats, while destroying key elements of soft power, makes the world a less cooperative and more dangerous place – for Americans, and for everyone else.

Soft power serves a critical economic purpose, too...

Soft power is essential in attracting the world's smartest people to the U.S. Nearly two out of every five people in Silicon Valley were born outside the country.

According to bipartisan immigration think tank New American Economy, as of 2018, about 44% of Fortune 500 companies were founded by an immigrant or the child of immigrants. The CEOs of Microsoft (MSFT) and Alphabet (GOOGL) were born abroad... as well as one of the founders of Alphabet.

Soft power draws the best and the brightest to the U.S. They'll go elsewhere if they don't think the U.S. is an attractive destination – or if immigration policies of the past few years remain in place, and they're actively discouraged from going to the U.S.

In the midst of American winning, it's hard to imagine a time when the U.S. isn't a hotbed of technology and innovation. It won't be, though, without the right people... and that will damage the American economy in a significant and lasting way.

I'm not just talking about computer geeks, math nerds, and artificial intelligence experts, either... Immigration is essential to America's long-term economic growth. As we wrote in the September 24 Digest, economic growth is a function of productivity and population (that is... more people, working more efficiently).

The number of people of working age in the U.S. started to fall in early 2019 – for the first time ever. And that trend is going to accelerate with the ongoing decline in the fertility rate in America, which nearly hit an all-time low in 2018.

Much of Europe and Japan face stagnant economic growth – and stock markets mostly stuck in neutral – today because of bad demographics and stalled productivity.

Economic growth and stock market performance can have little to do with each other in the short term. But over the long term, corporate earnings – which are ultimately driven by the economic trends of a particular market – matter a lot.

Immigration is the unique American trump card in this equation... As long as foreigners bolster the American workforce, the economy – and stock market – will have an easier time continuing to grow.

But that only happens with soft power.

Fortunately for the U.S., soft power has a long shelf life...

Even though the British empire collapsed decades ago, the U.K. is still near the top of the global soft power charts – thanks in part to the BBC World Service, William Shakespeare, the British royal family, the University of Oxford, and the language you're reading right now.

The hit American TV sitcom Friends went off the air in 2004. Yet the magic of streaming – and pirate websites – ensure that the American cultural and social values reflected in the lighthearted comedy about 20-somethings finding their way in Manhattan will remain a staple of how the rest of the world views the U.S. so long as the show is available.

This is a long way of saying, it takes a lot for a country to lose its "soft power superpower" status...

We're just days away from on an election that could mean a lot about how the U.S. is viewed abroad...

The U.S. is big enough that it's easy to feel like the rest of the world doesn't exist... That's partly why 58% of Americans don't even own a passport.

But American leadership matters. It matters to Americans... It matters to the rest of the world... And it matters for America's standing in the world.

As we've shared in the Digest this week, there will likely be short-term impacts on the markets. (And among other things, you'll want to watch our special 2020 pre-election briefing with former presidential candidate Ron Paul to learn more about that point.)

Yet if you use history as a guide, in the longer run, a presidential election result – or the makeup of Congress – tends to not matter as much for stock market performance...

But in many other ways, the result does matter in the long term... In any given year and in any country that allows its citizens to choose, an election could be a referendum on "soft power" and "hard power"...

These powers aren't as easily measurable as a stock price, or the status of the U.S. dollar, but they're probably just as, if not more, meaningful to an economy in the long run.

It all matters, and the world is watching.

New 52-week highs (as of 10/29/20): Southern Copper (SCCO).

In today's mailbag, a subscriber shares his thoughts on Bill McGilton's Tuesday Digest about the new "gambling game" for novice investors and the economy. Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

Shame on you people who have taken your stimulus checks and put it all on risky stocks! You should have done like I did, put it all on Bitcoin." – Paid-up subscriber Terry G.

Corey McLaughlin comment: Terry, it's hard to tell for sure, but we sense some sarcasm here...

You've done well if you really did put your entire stimulus check into bitcoin. Its price has roughly doubled since the first checks went out in mid-April – up to around $13,500 as I write.

But we don't want to just publish your comment and have folks take it as an endorsement.

As we always remind readers... yes, we believe you should own some bitcoin today. And while we're not saying you did this, we wanted to take this opportunity to make it clear that we don't suggest putting all your wealth into bitcoin (or any asset).

Crypto Capital editor Eric Wade actually recommends doing almost the opposite – to instead allocate a tiny amount to bitcoin and cryptocurrencies as part of a well-diversified overall portfolio.

At the same time, though, we could see how a stimulus check would represent a small portion of someone's wealth... So if that's the case – and assuming the rest of your financial house is in order – it might not be a bad idea to take that government money and put it into bitcoin, or any other potential inflation hedge.

Regards,

Kim Iskyan
Dublin, Ireland
October 30, 2020