American dollar is losing to Canadian, Australian and even to Singaporean dollar and losing so fast that its parity changes before the flight originating from Los Angeles lands at Sydney. This rings alarms bells but nobody seems to be listening. Does the losing American dollar signal America’s loss of its economic hegemony? Will China be crowned as economic power much ahead of the estimates? Does it have anything to do with steady rise in the price of gold? The events are unfolding at pretty faster pace. The economic gurus had predicted China to be Number One economic power of the world by 2050. Some more ambitious had set this date somewhere closer to 2030. But the International Monetary Fund has rejected all those estimates and has just dropped a bombshell. 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.
According to Market Watch, the IMF assessment 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 will be the last to preside over the world’s largest economy.
Most people aren’t prepared for this because they were looking at GDP to make comparison between China and the USA using current exchange rates. 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.
The report says that this is more than a statistical story. It is the end of the Age of America or its 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.
China’s neighbors in Asia are already waking up to the new reality. 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.”
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. 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.
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 Deutschmark. If it’s just the Greek drachma in drag … not so much.