www.csua.org/u/t6z -> finance.yahoo.com/banking-budgeting/article/112616/imf-bombshell-age-america-end-marketwatch
MarketWatch This column has been updated to include a reaction from the IMF The International Monetary Fund has just dropped a bombshell, and nobody noticed. For the first time, the international organization has set a date for the moment when the "Age of America" will end and the US economy will be overtaken by that of China.
Buy Gold According to the latest IMF official forecasts, China's economy will surpass that of America in real terms in 2016 -- just five years from now. It provides a painful context for the budget wrangling taking place in Washington right now. It raises enormous questions about what the international security system is going to look like in just a handful of years. And it casts a deepening cloud over both the US dollar and the giant Treasury market, which have been propped up for decades by their privileged status as the liabilities of the world's hegemonic power. According to the IMF forecast, which was quietly posted on the Fund's website just two weeks ago, whoever is elected US president next year -- Obama? Listen to experts of various stripes, and they will tell you this moment is decades away. They're only comparing the gross domestic products of the two countries using current exchange rates. China artificially undervalues its currency, the renminbi, through massive intervention in the markets. The Comparison That Really Matters In addition to comparing the two countries based on exchange rates, the IMF analysis also looked to the true, real-terms picture of the economies using "purchasing power parities." That compares what people earn and spend in real terms in their domestic economies. Just 10 years ago, the US economy was three times the size of China's. The actual date when China surpasses the US might come even earlier than the IMF predicts, or somewhat later. If the great Chinese juggernaut blows a tire, as a growing number fear it might, it could even delay things by several years. As a bond strategist in Europe told me two weeks ago, "We are witnessing the end of America's economic hegemony." We have lived in a world dominated by the US for so long that there is no longer anyone alive who remembers anything else. America overtook Great Britain as the world's leading economic power in the 1890s and never looked back. And both those countries live under very similar rules of constitutional government, respect for civil liberties and the rights of property. Victor Cha, senior adviser on Asian affairs at Washington's Center for Strategic and International Studies, told me China's neighbors in Asia are already waking up to the dangers. "The region is overwhelmingly looking to the US in a way that it hasn't done in the past," he said. They also see American hegemony over the last half-century as fairly benign. In China they see the rise of an economic power that is not benevolent, that can be predatory. The rise of China, and the relative decline of America, is the biggest story of our time. You can see its implications everywhere, from shuttered factories in the Midwest to soaring costs of oil and other commodities. Last fall, when I attended a conference in London about agricultural investment, I was struck by the number of people there who told stories about Chinese interests snapping up farmland and foodstuff supplies -- from South America to China and elsewhere. This is the result of decades during which China has successfully pursued economic policies aimed at national expansion and power, while the US has embraced either free trade or, for want of a better term, economic appeasement. "There are two systems in collision," said Ralph Gomory, research professor at NYU's Stern business school. "They have a state-guided form of capitalism, and we have a much freer former of capitalism." What we have seen, he said, is "a massive shift in capability from the US to China. That is a big reason why the US is becoming more and more polarized between a small, very rich class and an eroding middle class. The people who get the profits are very different from the people who lost the wages." US Spending Spree Won't Work What the rise of China means for defense, and international affairs, has barely been touched on. The US is now spending gigantic sums -- from a beleaguered economy -- to try to maintain its place in the sun. It's a lesson we could learn more cheaply from the sad story of the British, Spanish and other empires. Equally to the point, here is what this means economically, and for investors. Some years ago I was having lunch with the smartest investor I know, London-based hedge-fund manager Crispin Odey. He made the argument that markets are reasonably efficient, most of the time, at setting prices. Where they are most likely to fail, though, is in correctly anticipating and pricing big, revolutionary, "paradigm" shifts -- whether a rise of disruptive technologies or revolutionary changes in geopolitics. The US Treasury market continues to operate on the assumption that it will always remain the global benchmark of money. Business schools still teach students, for example, that the interest rate on the 10-year Treasury bond is the "risk-free rate" on money. If the US dollar ceases to be the world's sole reserve currency, what will be? The euro would be fine if it acts like the old deutschemark. The last time the world's dominant hegemon lost its ability to run things singlehandedly was early in the past century. Updated With IMF Reaction The International Monetary Fund has responded to my article. In a statement sent to MarketWatch, the IMF confirmed the report, but challenged my interpretation of the data. Comparing the US and Chinese economies using "purchase-power-parity," it argued, "is not the most appropriate measure because PPP price levels are influenced by nontraded services, which are more relevant domestically than globally." The IMF added that it prefers to compare economies using market exchange rates, and that under this comparison the US "is currently 130% bigger than China, and will still be 70% larger by 2016." Hurricane Katrina, for example, added to the US GDP, because it stimulated a lot of economic activity -- like providing emergency relief, and rebuilding homes. Is there anyone who seriously thinks Katrina was a net positive for the United States? Second, comparing economies using simple exchange rates, as the IMF suggests, raises huge problems. They represent international money flows, not real output. The US dollar has fallen nearly 10% against the euro so far this year. Does anyone suggest that the real size of the US economy has shrunk by 10% in comparison with Europe over that period? China actively suppresses the renminbi on the currency markets through massive dollar purchases. As a result the renminbi is deeply undervalued on the foreign-exchange markets. Just comparing the economies on their exchange rates misses that altogether. But it measures the output of economies in terms of real goods and services, not just paper money.
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Report Abuse The American age will not end with our economy being 2nd in the world. The US still has a much more advanced military, has way more influence in the world than china because not many countries fear us as enemies because we generally try to do good things while china's own neighbors are afraid of them. China's Comie government will not rule china for long we already see small opposition to it every year or so and that will only continue to get larger plus if the US economy gets back on track and starts doing well then it will be harder for china to catch us and if our leaders actually start listening to the people and actually try to cooperate on finding a way to get us out of debt we'll be back on track in no time. To be honest though I think we have a possible cold war round 2 developing except with china instead of the USSR.
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