I came across an interesting blurb that was played-up in the MSM earlier this week that I wanted to comment on. A new study by the International Monetary Fund (IMF) forecasts that the so-called “Age of America” will end in 2016, according to a truly fascinating report by the Wall Street Journal’s MarketWatch. The date has been set for when the Chinese economy – measured by GDP – will officially overtake the US — and it’s only five years away! I found this very interesting because most economic forecasts I’ve come across on this issue place the dates well into the future. The most conservative or Bearish pundits put the date at around 2030; while more objective economist say it’s in the mid-2020s. One bond strategist went so far as to say ‘This is more than a statistical story. It is the end of the Age of America. We are witnessing the end of America’s economic hegemony.’
The reason for this difference is all in exchange rates, according to the MarketWatch. Because the Chinese Yuan is held artificially low, most figures are misleading. Under the more realistic figure, Chinese purchasing power will rise from $11.2 Trn this year to $19 Trn by 2016, says the IMF forecast. During the same period, US purchasing power will rise only from $15.2 Trn to $18.8 Trn. That would decrease the US share of World GDP output down to 18%, the lowest in modern times. China’s would reach 18%, and continue rising according to MarketWatch. While it is an interesting development and accurate in most regards, it is not the most normative measure of true economic performance. The problem with this analysis, however, is flawed for two reasons. First, the projections are based on a linear trend analysis that assumes the same trend into the future – a highly misleading assumption in my opinion given the possibility of sooo many exogenous factors that can distort, thereby lengthening the trend. For instance, Exchange rates change quickly. And since China’s currency exchange rates are notoriously manipulated, China artificially undervalues its currency, the Renminbi, through massive intervention in the markets rendering any comparison highly suspect. But I suspect the folks over at the IMF need to find ways to stay busy these days in the face of budget cuts…
Secondly, China is four times more populous than the US. And while China does have a burgeoning middle-class that will drive global growth and consumption in the future, the nation’s per capita purchasing power is about $7,500 per person, and China still has over 300 million citizens in poverty. So when you take the population factor into consideration and you measure national GDP on a per capita basis, the US still has a substantially higher per capita purchasing power at about $47,000 – sufficient to remain a global economic driver well into the future. One last point that Brett Arends, the author of the WSJ article makes in the video above is that the Chinese economy is currently overheated; many would say that it is an economic bubble. As we all know, economic bubble inevitably burst — a real consideration with China’s economy. In addition, political stability is another issue the Chinese need to be concerned about, as recent events have shown. So there are real risks to consider that the IMF report misses entirely. Still, the article is worth a read. Be sure to share your thoughts!
Source: MarketWatch (WSJ), NewMax Video: WSJonline.com Chart: WSJ
