Not all of Mr. Arends analysis is accurate, but the main point is.

We all know that the US is is in serious economic trouble. The problem is that few people seem to realize the underlying cause of all this: a combination of environmental degradation, overpopulation, and corporatism.

In any case, what does it say that the only significant Communist power remaining in the world will soon be the number one economy? And how will this affect the lives of US citizens?

Evidently, we will soon find out.

IMF bombshell: Age of America nears end

Commentary: China’s economy will surpass the U.S. in 2016

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.

by Brett Arends, MarketWatch

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.

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.

China’s economy will be the world’s largest within five years or so.

China vs USABut 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.

Brett Arends is a senior columnist for MarketWatch and a personal-finance columnist for The Wall Street Journal.

Original post on Market Watch

35 Responses to “And the Silver Goes To… the US?”

  1. ellinski hado says:

    Jiwa mines and Miner BOJ chief sticks to recovery view amid euro debt: TOKYO (Reuters) – Bank of Japan Governor …


  3. If you think the economy is bad in the United States these days, you need only look to Europe to see that things could indeed be worse. The “slowing global economic recovery,” if you’re the glass-is-half-full type, has automakers pondering just what the future holds. One of those automakers is Porsche, which now seems to have…

  4. more stimulus money,,so we can live this lifestyle,, 4 a few more yrs..look at the bright side..after the collaspe.. no more stress..or asshole co-workers…SOUNDS GREAT 2 ME…

  5. dareson maj says:

    this guy reminds me of glenn beck. “this is the real goal of the ______” Obama or republican />
    thats not a good thing. beck is a douche.

  6. lol I love u for tht one cause my business is recession free, but still I feel for my peeps

  7. awesome i get it now… my parents have a silver store… like jewlery…. does that count.. or is it just those silver coins :P…. ad its 92.5 silver…..

  8. Well after conversations with Donna from X (Season 2) and Jason from Swagger Crew (Season 5) the performances are sometimes done twice, mostly to add camera angles and other stuff. In season 5 during the infamous Blueprint/Saltare/Static Noyze group performance, Blueprint asked if they could attempt the performance over and the producers allowed it. Somewhere around here they actually have the performance without the horrible messups.

  9. July 1, 2011 Where is Barbara West now along her Republican consultant husband? She no longer works for WFTV in Orlando.

  10. tropowicz says:

    please lets all make sure that we understand that brazil getting richer is good for the UK!, and also that Brazil is still a poor country and the UK is still a rich country! develonping in diferent nations is essential for a balance in the world! less immigrants and pressure in developed nations and more life quality in developing nations!

  11. omg i missed that and i usally good at noticing things like that, could be a bird, but it leaves a white long trail behind it so doubt it very intresting could be a sea urchin escaping the dark bowels of brown!!! lol

  12. severe laws as in what? imo, and the way I took that, basically the same as communism. After all, the communists have severe laws and strong leaders to enforce them…

  13. mil dunlan says:

    both with and against, Im for that we should be avaible to choose what we want to do for living, but there is a serious amount of prostitutes that is it because they dont have a choice, so again both with and against

  14. Yes he was honest the Recession was “deeper” than thought. The Deficit will be CUT in half by 2013.

  15. wata bastollane says:

    The Impact of the Subprime Crisis: Leading Lawyers on Understanding the Factors Responsible, Minimizing the Financial Impact for Clients, and Recognizing the Effects of the Recession on Law Reviews –

  16. You know your gettin old when you wake up in a cold sweat cos in your dream u were abroad and went over your phone data allowance

  17. barescucci shillass says:

    yeh hai salman khan wo shive sena k kute lund kha rhe hain srk ka to salman khan help kar rha hai sale shive sena k kute lund q khate hain khans actors k sala baal thakre kute bhrwa

  18. laerg silberg says:

    How to Make Money Online And Do it Right the First Time (DISCUSSION) : There is one good thing about a bad economy and..

  19. gantvorie tajduh says:

    Congress is full of puppets, the strings made of dollar bills being yanked by the Rothschilds, the Goldman Sachs, the Cochs, the Bernankes, and all of the other super wealthy 1% of the world that own half of the planet.

  20. ger kolom says:

    I think it is because of Nickelodeon and Disney and because Miranda must be harded to “book” to make an episode. If that makes sence…

  21. Citigroup was one of four large US banks that flunked stress tests aimed at seeing how they would hold up in a new economic crisis, Federal Reserve data showed Tuesday.

  22. harizzi rani says:

    (Reuters) – Here is a look at Spain’s economy since 2008 as workers walk out on strike a day before a new austerity budget. 2007: – Spain has a public account surplus of more than 2 percent of gross domestic product and the economy grows by 3.5 percent, largely due to a construction boom. By 2008, the bubble has burst, the surplus has become a deficit and growth has fallen to 0.9 percent. March 2008: – Prime Minister Jose Luis Rodriguez Zapatero wins a second term in office but fails to secure an outright majority in parliament. …

  23. PERAMA, Greece (Reuters) – A “humanitarian crisis” is unfolding in an impoverished Greek city where a deepening economic crisis has left thousands seeking food from an international charity more used to helping refugees and bringing aid to famine or disaster zones. Once home to a thriving shipbuilding industry, the city of Perama near Athens has seen its wane over the years as buyers abandoned it for cheaper options outside Greece. The country’s financial crisis is the latest blow – pushing up unemployment in the area to 60 percent, triple the national average. …

  24. anti banel says:

    “my rhymes aint mild theyre like titties on girls gone wild people be protestin but i keep progressin they be pressin on this recession”

  25. minn bilipper says:

    After the worst week of the year for U.S. stocks, investors will be looking for signs of whether the U.S. economy can continue to recover in the face of ongoing about Greece, Spain and …

  26. bane otan says:

    is over all in charge of London Olympics?A fine display so far in midst of economic crisis.Another challenge to Rio?

  27. enridge custen says:

    News Summary: Gold languishes on slower growth
    News Summary: Gold languishes on slower growth Associated Press Copyright 2012 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed. Published 12:43 p.m., Monday, August 13, 2012 LETHARGIC GOLD: The price of gold has been languishing this summer, much like the global economy. Gold dropped $10.20 to end at $1,612.60 per ounce. That’s …

  28. I Don’t Get It , We’re Going Throu Recession & There’s Game Shows That Seems To Jus Give Away Money For Answering Questions Right /:

  29. Did you see the photo of Biden with the biker “chick” on his lap? Thats a politician being with average people!

  30. transson strachidem says:

    we really are in a recession, i remember last year your dressed up and got a free burrito , this year you dr …

  31. graniak stra says:

    أكد على شرف الدين، رئيس غرفة صناعة الحبوب بإتحاد الصناعات، على أن مصر لا تملك من مخزون القمح سوي ما يكفي لمدة ثلاثة شهور

  32. DO AMERICA A FAVOR: Tell a friend the GOP is holding the economy hostage to save the richest 4 cent tax break on each dollar …

  33. THE worst of the economic crisis may be over, Taoiseach Enda Kenny has said. Mr Kenny is addressing the European Parliament in Strasbourg this morning to outline the Government’s priorities for …

  34. I wish that I didn’t have to waste so much time as an anti-economic crisis activist. I’d much rather put that energ …

  35. floraitike peschake says:

    Obama State Of The Union To Refocus On Economy/ Refocus? Just replay his speeches from the last four years! Better than stereo! Or ECHO!

Leave a Reply

Your email address will not be published. Required fields are marked *