Mitch Goldstein | Coach Mitch | November 1st, 2011Coach Mitch’s REFLECTIONS™
The U.S. economy falls to #2
China’s economy will surpass the U.S. in 2016
This article is taken from an article by Brett Arends, MarketWatch
The “Age of America” is over. page 1The “Age of America”is over. page 2
As reported in MarketWatch, in a recent report, the International Monetary Fund has given analysis which shows that soon China’s economy will be the dominant economy in the world. This news has gone virtually unnoticed in the US press.
For the first time, the IMF has concluded a date when the “Age of America” will end and the US economy will fall into second place. According to IMF calculations, China will top the US in real terms in 2016, in a mere five years. Don’t forget to mark your calendar.
China’s ascension is worrisome for the US dollar and the US Treasury market, both of which have been propped up for many decades as the dollar has been used as the world’s currency. When a country pays its liabilities with US dollars, it cedes that the US is the world’s hegemonic power, granting the US much status, influence and power, as well as a monetary lift.
Most economic and political experts are not prepared for China to accede to the pinnacle of world power this quickly; they will tell you China’s ascension is decades away. Sadly, politicians and financial experts are only comparing the gross domestic products of the two countries using current exchange rates. This is largely a meaningless comparison in real terms.
Politicians want their populations to think that leaders know what they are doing so they use whatever economic measures put them in the best light. However, comparing economies using exchange rates raises several questions. Currency markets can fluctuate wildly, just like the stock market. Do you really believe that the gross domestic product of the US falls two per cent each day just because the stock market has recently been in rampant descent? Exchange rates do not represent real output, but rather international money flows and speculation. Do you recall the talk of how speculation in oil futures was driving the price of oil up? The U.S. dollar fell nearly 10% against the euro in the first quarter of 2011; but it is silly to think that, over the same period, the US economy shrunk by 10% as compared to Europe.
The IMF also used analysis to look to the true, real-term picture of the two economies using purchasing power parities, PPP. This compares what people earn and spend in real terms in their domestic economies.
The Chinese aggressively pursue a policy of deeply undervaluing their currency, the renminbi, by purchasing massive amounts of dollars, which actively suppresses the renminbi in the foreign-exchange markets. When your currency is cheap, others can purchase your goods at a lower price. More customers’ means your factories flourish, your people have jobs and your relative standard of living rises as against others whose factories are idle and whose people have no jobs nor prospects.
Purchasing power parity is not a perfect measure of an economy but it does measure the output of economies in terms of real goods and services, not just paper money. That’s why this measure is widely used to compare economies.
By comparing purchasing power parities, it is estimated the Chinese economy will expand from $11.2 trillion this year to $19 trillion in 2016. In the same period, it is estimated the size of the U.S. economy will rise from $15.2 trillion to only $18.8 trillion. A mere ten years ago, the U.S. economy was three times the size of China’s.
Naturally, all forecasts are fallible. Unforeseen events and policy changes can happen to make any forecast problematic. The actual date when China surpasses the US might be earlier or somewhat later, depending on conditions, but most agree, the outcome is scarcely in doubt. The Indian economy is also moving ahead quickly and it too could surpass the US one day.
When China succeeds the US, it will signal the end of the “Age of America.” A primary casualty will be the end of America’s economic hegemony and with it a good deal of the awe that people feel for America. Compare being the hegemonic power to a policeman. Fifty per cent of a policeman’s job is done by the uniform and badge. People automatically give it respect and deference.
Britain ruled the world for a significant time. “The sun never sets on the British empire,” was a familiar refrain. America came into its ascendancy at the end of the 19th century and cemented her role as the world’s premier economic power after WWII.
America began as the child of Britain, and both live under a similar set of rules for government, respect for civil liberties, and a certain level of respect for the rights of property. China’s governing philosophy respects none of these. The “Age of China” will feel very different than the “Age of America.”
Already China’s neighbors in Asia are apprehensive of the dangers of a raging dragon. Southeast Asia is looking to the US as a counterweight to China and wonders why America is not pursuing its self-interest? American hegemony over the last half-century is seen as having been fairly benign. China’s rise is fearful to its neighbors because as a military and economic power, China’s history shows that it is can be predatory, just ask the Dali Lama and the people of Tibet. Asia does not see that China will be a benign hegemony. But nations have interests and they will align with whoever will protect those interests.
The relative decline of America and the rise of China is the 2nd biggest story of our time. Its implications can be seen everywhere, from closed factories in the Midwest and foreclosed communities in California, which are juxtapositioned against China’s bulging factories, burgeoning middle class, and its building boom which has caused the soaring costs of oil and other commodities. To paraphrase Ross Peroit, “That giant sucking sound you hear is China sucking up all the jobs, the energy and the accompanying influence.”
For decades China has pursued economic policies aimed at expanding their power. During this same period the US has pursued a policy of economic appeasement via very unfair free trade. The US is fair, having low or no tariffs, and China has been granted Most Favored Nation status. But China and other nations are not fair because they are protective of their native industries and business interests. The unfair free trade policies have been allowed by both political parties.
It is commonly stated that China has a state-guided form of capitalism, and that the US has a much freer form of capitalism. The two systems are in a collision course. US policy has allowed a massive shift in capacity from the US to China. We have traded jobs for profit. Corporations have moved the jobs to China in order to get the benefit of greater profits. This is a very destructive policy. The result is a US that is quickly becoming polarized between a small, very rich class and an eroding middle class and an ever expanding underclass. The people who get the profits are very different from the people who lost the wages.
History shows that a nation cannot stay on top if its economy doesn’t work. Just ask the Romans, the Spanish, the British, etc. The US is now spending gigantic sums trying to maintain both domestic programs and our hegemonic status overseas. It just doesn’t work for long.
Investors are craving the dividends made from rising profits by exporting our factories and jobs to China – but there are consequences. Early in the last century the US and Germany both surpassed Great Britain as the world’s dominant economic powers. When Britain lost its ability to run the world by itself, it didn’t take long for WW1 to break out. Domestic pressures percolate and politicians/demagogues respond.
China has just launched its first aircraft carrier and has developed a significant array of submarines and ship to ship and land based missiles, all stationed across the Taiwan Strait. The Chinese people are highly nationalistic; her leaders are aggressive, not fearful of taking millions of casualties, and they recently showed disdain toward America when, early in President GW Bush’s first term, a Chinese fighter plane collided with and downed a US military plane. The Chinese interrogated our US crew of 24 for days, at all hours, incommunicado, not allowing US inspection or representation, and then returned our airplane in pieces.
China is getting ready to assume the mantle of leadership. The language and tone of their official organs shows muscle, pride, arrogance and a calculated disrespect for America. While American leaders are seeking dialogue, the Chinese seek power. If American leaders are silly enough to give our leadership position away, the Chinese are smart enough to take it. I would love to see the blueprint as to how American leaders will stop China from doing something injurious to American interests. Sadly, American corporations cannot call for protective tariffs against Chinese imports because it is the very products our companies make in China which would be punished and stockholders would not be happy with lowered dividends. We have certainly put ourselves into a box.
The string holding the double edged Sword of Damocles is frayed. On one edge we have corporations denuding our domestic industrial base and the other edge has government monetary policy depleting our assets by issuing fiat monies so that we can continue our wars and be able to “give” 70% of the US population some level of government benefit.
However, government spending does not improve an economy. Regulation does not make products more profitable, government interference stifels hiring and investment, nor does government oversight improve the commercial environment, quite the opposite. US government spending today is about 45% of GDP, where 100 years ago it was under 10%. If our prosperity is really a function of government spending, then we should be half way to utopia; and utopia will exist when government spending is 100% of GDP.
In an interview I heard recently, Donald Trump said that in his business conversations with the Chinese, they say that they don’t understand why the US is letting them win so easily. They don’t want to import American products. They want America to build factories in China and in order to get permission to do so, the corporation must make all intellectual property available to China. This was unheard of. It’s almost as if we have put a sign on ourselves, “Kick Me.” The Arab oil cartel certainly does. They are draining every drop they can from US.
Our leaders, all 556 of them, have put US into this grievous position. To think that our policies just happen is silliness. There are 435 congresspersons, 100 Senators, 9 Supreme Court justices, the president and vice-president. These 556 citizens make our policies. Nothing happens unless they choose for it to happen.
See Coach Mitch’s “Ridiculously Simple System…” ™ for details on how to safeguard you and your family.
Wake up Americans.
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