The Age of America near its end - Tilted Forum Project Discussion Community

Baraka_Guru · 04-26-2011, 04:47 PM

Quote:

IMF bombshell: Age of America nears end
Commentary: China’s economy will surpass the U.S. in 2016

By Brett Arends, MarketWatch

This column has been updated to include a reaction from the IMF.

BOSTON (MarketWatch) — 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 U.S. economy will be overtaken by that of China.

And it’s a lot closer than you may think.

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.

Put that in your calendar.

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 U.S. 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.

More China news: U.S., China to hold economic talks in early May, Shanghai hit by tightening, China 2011 trade surplus may shrink to 2% of GDP

According to the IMF forecast, which was quietly posted on the Fund’s website just two weeks ago, whoever is elected U.S. president next year — Obama? Mitt Romney? Donald Trump? — will be the last to preside over the world’s largest economy.

Most people aren’t prepared for this. They aren’t even aware it’s that close. Listen to experts of various stripes, and they will tell you this moment is decades away. The most bearish will put the figure in the mid-2020s.

But they’re miscounting. They’re only comparing the gross domestic products of the two countries using current exchange rates.

That’s a largely meaningless comparison in real terms. Exchange rates change quickly. And China’s exchange rates are phony. 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.

Under PPP, the Chinese economy will expand from $11.2 trillion this year to $19 trillion in 2016. Meanwhile the size of the U.S. economy will rise from $15.2 trillion to $18.8 trillion. That would take America’s share of the world output down to 17.7%, the lowest in modern times. China’s would reach 18%, and rising.

Just 10 years ago, the U.S. economy was three times the size of China’s.

Naturally, all forecasts are fallible. Time and chance happen to them all. The actual date when China surpasses the U.S. 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. But the outcome is scarcely in doubt.

This is more than a statistical story. It is the end of the Age of America. 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 U.S. 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. China has none of those. The Age of China will feel very different.

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 U.S. in a way that it hasn’t done in the past,” he said. “They see the U.S. as a counterweight to China. 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. They don’t see it as a benign hegemony.”

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 U.S. 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 U.S. to China. What we have done is traded jobs for profit. The jobs have moved to China. The capability erodes in the U.S. and grows in China. That’s very destructive. That is a big reason why the U.S. 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.”

The next chapter of the story is just beginning.
U.S. spending spree won’t work

What the rise of China means for defense, and international affairs, has barely been touched on. The U.S. is now spending gigantic sums — from a beleaguered economy — to try to maintain its place in the sun. See: Pentagon spending is budget blind spot .

It’s a lesson we could learn more cheaply from the sad story of the British, Spanish and other empires. It doesn’t work. You can’t stay on top if your economy doesn’t.

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. We are living through one now.

The U.S. 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. And so it has been for more than a century. But that’s all based on the Age of America.

No wonder so many have been buying gold. If the U.S. 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. If it’s just the Greek drachma in drag ... not so much.

The last time the world’s dominant hegemon lost its ability to run things singlehandedly was early in the past century. That’s when the U.S. and Germany surpassed Great Britain. It didn’t turn out well.
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 U.S. 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 U.S. “is currently 130% bigger than China, and will still be 70% larger by 2016.”

My take?

The IMF is entitled to make its case. But its argument raises more questions than it answers.

First, no one measure is perfect. Everybody knows that.

But that’s also true of the GDP figures themselves. Hurricane Katrina, for example, added to the U.S. 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? All statistics need caveats.

Second, comparing economies using simple exchange rates, as the IMF suggests, raises huge problems.

Currency markets fluctuate. They represent international money flows, not real output.

The U.S. dollar has fallen nearly 10% against the euro so far this year. Does anyone suggest that the real size of the U.S. economy has shrunk by 10% in comparison with Europe over that period? The idea is absurd.

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.

Purchasing power parity is not a perfect measure. None exists. But it measures the output of economies in terms of real goods and services, not just paper money. That’s why it’s widely used to compare economies. The IMF publishes PPP data. So does the OECD. Many economists rely on them.

IMF bombshell: Age of America nears end Brett Arends' ROI - MarketWatch

I must say that this is rather interesting. I suppose all of this comes down to metrics and how you measure economic influence, etc., but by this measure, I see that this is going to happen much sooner than I had expected. I have read a number of indications suggesting that China's economy is set to surpass the U.S. economy, but I thought it was much later down the road than five years; I thought it was more than ten or twelve.

What do you think about this?
Does this suggest a shift in power/influence, or is it merely economics?
Will this pose political problems in the U.S.? Domestically? Internationally?
Is this an inevitability beyond much of the control of the U.S., or is there merely something to be fixed in the U.S. economy to keep it #1?
Is this an indication that the U.S. needs be more change-oriented with regard to retooling/rejigging its economy?

urville · 05-08-2011, 05:51 PM

This guys whole thing is selling his stuff but I wonder if there isnt some truth to it. I have seen signs of us losing our currency status.

Stansberry's Investment Advisory

ASU2003 · 05-08-2011, 07:04 PM

China has 4 times the people, and their money policies are better (fully regulated or unregulated don't work in the long run for the people). They are working harder, but not necessarily smarter. And even though they are using lots of polluting coal and gas now, their government can do stuff much faster than ours.

The problem I see is that China has expanded a little too fast. And they need to make sure the poorest people in the country keep up. I also don't know how long their factories will last if ocean shipping gets too expensive or if the employees get burnt out.

dc_dux · 05-08-2011, 07:33 PM

Quote:

Originally Posted by Baraka_Guru

IMF bombshell: Age of America nears end Brett Arends' ROI - MarketWatch

I must say that this is rather interesting. I suppose all of this comes down to metrics and how you measure economic influence, etc., but by this measure, I see that this is going to happen much sooner than I had expected. I have read a number of indications suggesting that China's economy is set to surpass the U.S. economy, but I thought it was much later down the road than five years; I thought it was more than ten or twelve.

What do you think about this?
Does this suggest a shift in power/influence, or is it merely economics?
Will this pose political problems in the U.S.? Domestically? Internationally?
Is this an inevitability beyond much of the control of the U.S., or is there merely something to be fixed in the U.S. economy to keep it #1?
Is this an indication that the U.S. needs be more change-oriented with regard to retooling/rejigging its economy?

I think the last bullet hits at the heart of the problem for the US.

We've not focused on retooling the economy. Our govt investments in in R&D have been relatively flat over the last 10 years at the same time the private sector had greater incentives to make money by producing nothing (speculating on the market) than by being innovative.

Here are a couple indicators:

Quote:

China could overtake the United States as the world's dominant publisher of scientific research by 2013, according to an analysis of global trends in science by the Royal Society....

...To compare the output of different countries, the Royal Society's report collated information on research papers published in two time periods, 1993-2003 and 2004-2008. It counted research papers that had an abstract in English and where the work had been peer-reviewed.

In both periods, the US dominated the world's science, but its share of publications dropped from 26% to 21%. China's share rose from 4.4% to 10.2%. The UK's share declined from 7.1% to 6.5% of the world's papers.

Projecting beyond 2011, the Royal Society said that the landscape would change "dramatically". "China has already overtaken the UK as the second leading producer of research publications, but some time before 2020 it is expected to surpass the US." It said this could happen as soon as 2013.

China poised to overhaul US as biggest publisher of scientific papers | Science | The Guardian

And while we responded to a message of "drill, baby, drill" and $billions/yr in tax incentives and subsidies to big oil while cutting investments in clean energy (see the 05 energy bill):

Quote:

In 2009, according to the Pew Charitable Trusts, China surpassed the United States and other members of the G-20 for the first time as the leader in clean energy investment. Last year clean energy investment in China totaled $34.6 billion, compared with $18.6 billion in the United States. Last month, Chinese officials announced they will spend $75 billion a year on clean energy.

China leading the world in clean energy investment

In order to remain competitive in a global economy, our focus has to change. Unfortunately, the money behind maintaining the status quo has made that an uphill battle.

And now, we're faced with the tough decisions of spending on education, R&R, clean energy, health technology, etc. at a time when overall spending needs to be cut.

We're in a deep hole as a result of our shortsightedness over the last 10 years and there wont be an easy way out.

KirStang · 05-08-2011, 08:45 PM

....Still waiting on Austerity measures. I wish politicians would be courageous enough to do what is necessary for this country (increased taxes, reduced benefits).

Our transportation infrastructure is overly invested in our highways, we have no genuine high speed rail, and even with our highways, we're not spending nearly enough to maintain or improve our highway infrastructure.

dc_dux · 05-08-2011, 09:10 PM

Quote:

Originally Posted by KirStang

....Still waiting on Austerity measures. I wish politicians would be courageous enough to do what is necessary for this country (increased taxes, reduced benefits).

Our transportation infrastructure is overly invested in our highways, we have no genuine high speed rail, and even with our highways, we're not spending nearly enough to maintain or improve our highway infrastructure.

I agree with you completely.

I should have included infrastructure investment, including broadband, with my list of necessary expenditures (R&D, clean energy, health technology...).

A recent report from the Organization for International Investment documents the issue.

U.S. Global Competiveness at Risk without Infrastructure Improvement, Report Finds

There are numerous areas where we need to spend (govt investments) in order to compete globally, yet at the same time, need to address the mounting debt.

ASU2003 · 05-09-2011, 05:01 AM

America needs to clean up and regulate the financial industry with income limits on certain groups of people. We need to come up with a way to make clean energy cheaper than oil, coal, and gas. And we need to get people to live healthier lives.

roachboy · 05-09-2011, 06:23 AM

can you say national security state?

seriously, all this talk about austerity is meaningless unless/until something is done to begin dismantling the national-security state and reduce the obscene levels of spending the united states wastes on the military.

but i agree basically with dc's post no. 4

Baraka_Guru · 05-09-2011, 06:44 AM

I agree with post #4 as well, but it's useful to look at all the factors because it isn't a simple problem.

The video urville posted a link to is interesting in the issues/facts it raises—though its introduction is painfully verbose. Although I don't agree with it 100% regarding the angle/solutions, etc., it outlines some of the deep-seated problems within the American economy as it relates to expectations.

For a while, I have been of the belief that there is a "correction" coming to the cost of living in the U.S. Despite what many Americans may think—of all classes—they still currently have it pretty good. Your gasoline prices are hitting "record highs" but are still 25% lower than in your oil-rich next door neighbour Canada. Food prices are cheap, mainly due to cheaply produced corn. Chinese imports and other imports from Asian nations (everything from clothes to computers) are cheap, cheap, cheap.

But it's not going to last. Something's gotta give, and it's because of a number of factors. You can blame money printing, deficit spending, bloated military budgets, global inflation due to BRIC economic activity, etc., but to blame any one of these in isolation is naive. These are all going to cause the same problem: it's going to get pretty damn expensive in the U.S., and the fallout will extent beyond American borders. We are all going to be feeling the impact.

The American way of life is not sustainable. It never was, and now it's coming to a point—as Jeff Rubin has been saying: Our world is about to get a whole lot smaller.

Globalization as we know it is going to become unhinged. Unless we get some pretty high-tech solutions and fast (i.e. this will be nearly impossible), how the global economy operates will necessarily go through a massive shift away from open channels everywhere to localized/regional developments.

The U.S. currency problem, the balance of trade problem, the debt problem: these are all symptoms of what's been true all along.

We can't keep doing this.

Charlatan · 05-09-2011, 03:58 PM

I was also reading an article this morning that suggested the US may lose its AAA rating. This sort of stuff is bad for the rest of the world as well.

KirStang · 05-11-2011, 06:45 AM

Quote:

Originally Posted by roachboy

can you say national security state?

seriously, all this talk about austerity is meaningless unless/until something is done to begin dismantling the national-security state and reduce the obscene levels of spending the united states wastes on the military.

but i agree basically with dc's post no. 4

Well, IIRC, ~20% of the national budget is on the military, ~20%is on medicaid/medicare type benefits, and another ~20% on social security. So all three should face cuts to produce a meaningful reduction in spending.

Baraka_Guru · 05-11-2011, 06:55 AM

Quote:

Originally Posted by KirStang

Well, IIRC, ~20% of the national budget is on the military, ~20%is on medicaid/medicare type benefits, and another ~20% on social security. So all three should face cuts to produce a meaningful reduction in spending.

All things considered, the national security state easily costs over a trillion dollars in the 2012 budget.

Military budget of the United States - Budget Breakdown for 2012 - Wikipedia, the free encyclopedia

And the "net interest" proportion of the budget? Much of that is from military expenditures.

National security debt. It's a killer.

KirStang · 05-11-2011, 07:11 AM

Shrug. Sure, it costs lot of money to project military power across the globe. But medicaid, social security, and other welfare benefits cost a lot of money too. I think blaming the deficit on a 'national security state' is a vast overstatement.

Federal Spending Fiscal Year 2010

---------- Post added at 11:11 AM ---------- Previous post was at 11:08 AM ----------

Latest figures show 118 boys born in China for every 100 girls, too. Combine that with a repressive government (which may be just as inept as ours) and a potential bubble, and China may not be as large of a threat everyone makes it out to be.

Baraka_Guru · 05-11-2011, 07:34 AM

Quote:

Originally Posted by KirStang

Shrug. Sure, it costs lot of money to project military power across the globe. But medicaid, social security, and other welfare benefits cost a lot of money too. I think blaming the deficit on a 'national security state' is a vast overstatement.

I don't deny that health care and social security cost a lot. I would imagine that they would be more affordable, however, if you dismantle much of the redundancies and wasted spending within the military budget.

Also, I would imagine that cuts to the military budget could run deeper before hitting detrimental effects compared to cuts to health care and social security.

There are ways to reduce the costs of health care in the U.S. There is a huge potential for improvement there. I don't know enough about social security in the U.S., but when you start yanking too heavily on things like pensions, income security, and basic items such as food and shelter during a recession and shaky recovery, it's going to cause problems.

If you think health care and social security need reform, then so be it. But when looking at annual budgets, hacking and slashing can have huge consequences.

Quote:

Latest figures show 118 boys born in China for every 100 girls, too. Combine that with a repressive government (which may be just as inept as ours) and a potential bubble, and China may not be as large of a threat everyone makes it out to be.

The challenge is in looking at the relative situation. Comparing China to America using the same criteria isn't very informative. For example, the individual savings rate in China has averaged around 40%. In America, it has fallen to zero a few years ago. Still, historical U.S. patterns are measured in fractions of a percent. We're looking at variances of less than 2% over several decades.

How fucked up is that?

The challenge for all of us is that China is a big wild card. There is little precedent for this. They're the opposite of America in a way. America went from a near free-market economy to a mixed economy during the industrial age and before the information age. China is going from a communist economy to a mixed economy during the globalized Internet age.

It's difficult. But interesting.

roachboy · 05-11-2011, 07:41 AM

typically. folk who for whatever perverse reason depend the bloated expenditures of the national-security state---to which you have to add the costs of 2 or 3 off-the-books wars----add social programs together in order to come up with a chunk of budget that offsets military expenditure.

the bottom line is that empire is expensive and the united states cannot afford it.

that's the choice that's being avoided here.

05-08-2011, 07:04 PM	#3 (permalink)
ASU2003 immoral minority Location: Back in Ohio	China has 4 times the people, and their money policies are better (fully regulated or unregulated don't work in the long run for the people). They are working harder, but not necessarily smarter. And even though they are using lots of polluting coal and gas now, their government can do stuff much faster than ours. The problem I see is that China has expanded a little too fast. And they need to make sure the poorest people in the country keep up. I also don't know how long their factories will last if ocean shipping gets too expensive or if the employees get burnt out. Last edited by ASU2003; 05-08-2011 at 07:10 PM..

05-09-2011, 06:23 AM	#8 (permalink)
roachboy Super Moderator Location: essex ma	can you say national security state? seriously, all this talk about austerity is meaningless unless/until something is done to begin dismantling the national-security state and reduce the obscene levels of spending the united states wastes on the military. but i agree basically with dc's post no. 4 __________________ a gramophone its corrugated trumpet silver handle spinning dog. such faithfulness it hear it make you sick. -kamau brathwaite

05-09-2011, 06:44 AM	#9 (permalink)
Baraka_Guru warrior bodhisattva Super Moderator Location: East-central Canada	I agree with post #4 as well, but it's useful to look at all the factors because it isn't a simple problem. The video urville posted a link to is interesting in the issues/facts it raises—though its introduction is painfully verbose. Although I don't agree with it 100% regarding the angle/solutions, etc., it outlines some of the deep-seated problems within the American economy as it relates to expectations. For a while, I have been of the belief that there is a "correction" coming to the cost of living in the U.S. Despite what many Americans may think—of all classes—they still currently have it pretty good. Your gasoline prices are hitting "record highs" but are still 25% lower than in your oil-rich next door neighbour Canada. Food prices are cheap, mainly due to cheaply produced corn. Chinese imports and other imports from Asian nations (everything from clothes to computers) are cheap, cheap, cheap. But it's not going to last. Something's gotta give, and it's because of a number of factors. You can blame money printing, deficit spending, bloated military budgets, global inflation due to BRIC economic activity, etc., but to blame any one of these in isolation is naive. These are all going to cause the same problem: it's going to get pretty damn expensive in the U.S., and the fallout will extent beyond American borders. We are all going to be feeling the impact. The American way of life is not sustainable. It never was, and now it's coming to a point—as Jeff Rubin has been saying: Our world is about to get a whole lot smaller. Globalization as we know it is going to become unhinged. Unless we get some pretty high-tech solutions and fast (i.e. this will be nearly impossible), how the global economy operates will necessarily go through a massive shift away from open channels everywhere to localized/regional developments. The U.S. currency problem, the balance of trade problem, the debt problem: these are all symptoms of what's been true all along. We can't keep doing this. __________________ Knowing that death is certain and that the time of death is uncertain, what's the most important thing? —Bhikkhuni Pema Chödrön Humankind cannot bear very much reality. —From "Burnt Norton," Four Quartets (1936), T. S. Eliot

05-09-2011, 03:58 PM	#10 (permalink)
Charlatan Getting it. Super Moderator Location: Lion City	I was also reading an article this morning that suggested the US may lose its AAA rating. This sort of stuff is bad for the rest of the world as well. __________________ "My hands are on fire. Hands are on fire. Ain't got no more time for all you charlatans and liars." - Old Man Luedecke

05-11-2011, 07:41 AM	#15 (permalink)
roachboy Super Moderator Location: essex ma	typically. folk who for whatever perverse reason depend the bloated expenditures of the national-security state---to which you have to add the costs of 2 or 3 off-the-books wars----add social programs together in order to come up with a chunk of budget that offsets military expenditure. the bottom line is that empire is expensive and the united states cannot afford it. that's the choice that's being avoided here. __________________ a gramophone its corrugated trumpet silver handle spinning dog. such faithfulness it hear it make you sick. -kamau brathwaite

05-08-2011, 05:51 PM	#2 (permalink)
urville Tilted Location: Iron Mountain	This guys whole thing is selling his stuff but I wonder if there isnt some truth to it. I have seen signs of us losing our currency status. Stansberry's Investment Advisory

05-09-2011, 05:01 AM	#7 (permalink)
ASU2003 immoral minority Location: Back in Ohio	America needs to clean up and regulate the financial industry with income limits on certain groups of people. We need to come up with a way to make clean energy cheaper than oil, coal, and gas. And we need to get people to live healthier lives.