News & Analysis
IMF Taps China as #1 Power, Roubini Disagrees
IMF bombshell: Age of America nears end . . . 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. Brett Arends looks at the implications for the U.S. dollar and the Treasury market. 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. – MarketWatch
Dominant Social Theme: America is finished and Anglo-American elites are in disarray.
Free-Market Analysis: Brett Arends has what every journalist seeks, an important scoop regarding a large organization, the International Monetary Fund, and a new perspective that shakes common wisdom. Put that in your calendar, he almost shouts. "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." Wow. Here's more:
According to the IMF forecast, whomever 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 IMF in its analysis looks beyond exchange rates 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.
We find this interesting because just a couple of days ago, we posted an editorial by Daily Bell Chief Editor Anthony Wile, "IMF Austerity Is Headed to America – Watch Out!," that promoted the same kind of approach to China/America comparisons. Here's an excerpt:
… Rob Arnott of Research Affiliates, "a Newport Beach, Calif., investment management firm with some $50 billion under management" writes a monthly newsletter [and] claims that the US economy hasn't been providing additional prosperity for at least a decade or longer. He believes the reason this isn't more widely understood is because the government produced Gross Domestic Product (GDP) is offering false signals. "[It] actually tracks consumption, irresponsible or otherwise, rather than real wealth generation."
… The idea is that US policy-makers ought to focus on Structural GDP and Private Sector GDP – numerical indicators that strip out misleading government spending – to get a better sense of the US's underlying economic situation. But the real message in Barr's article, like the FT's, has to do with IMF-style remedies in my view. The phrase "less ridiculous tax code" seems to bear that out.
Now only a couple of days later we have the IMF coming out and saying approximately the same thing – use another measurement of GDP to arrive at better comparisons about how American and China are to be compared. It's impossible to forecast a dominant social theme from two or three instances of a rhetorical and data trend in the mainstream press but we are always suspicious.
We believe the powers-that-be are trying to bludgeon America into the kind of austerity that Europe is currently undergoing. Explaining to Americans that hegemony is lost, that empire is over and that they must accept straightened circumstances could be construed as part of a promotional effort aimed at laying the groundwork for austerity.
Why austerity? It's all part of the same effort by the Anglo-American elites running the show. Make people miserable, control their prosperity, provide them with circumstances that will give rise to the belief that the system as it is has failed – and then offer them something else, perhaps a more globalized financial system complete with a new global currency.
Arends qualifies his argument as any good reporter should. "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 of course is not a view we have shared, not for several years now. We've written dozens of articles on how China expanded far too rapidly during the early and mid-2000s and must now pay the price in terms of fairly uncontrollable price inflation. China has in fact embarked on a series of rate hikes that we figure will bring the party to a screeching halt sooner or later. In the past year, we've been gratified so see that some in the alternative and mainstream press agree with us. Most recently, we noticed, the Big Bear Himself – Nouriel Roubini – has posted an article at Project Syndicate, that agrees with this perspective. Roubini is the Chairman of Roubini Global Economics and professor of Economics at the Stern School of Business at NYU. Here's an excerpt from his article:
China's Bad Growth Bet . . . I recently took two trips to China just as the government launched its 12th Five-Year Plan to rebalance the country's long-term growth model. My visits deepened my view that there is a potentially destabilizing contradiction between China's short- and medium-term economic performance. China's economy is overheating now, but, over time, its current overinvestment will prove deflationary both domestically and globally. Once increasing fixed investment becomes impossible – most likely after 2013 – China is poised for a sharp slowdown. Instead of focusing on securing a soft landing today, Chinese policymakers should be worrying about the brick wall that economic growth may hit in the second half of the quinquennium.
China has grown for the last few decades on the back of export-led industrialization and a weak currency, which have resulted in high corporate and household savings rates and reliance on net exports and fixed investment (infrastructure, real estate, and industrial capacity for import-competing and export sectors). ... The fixed-investment share of GDP has increased further in 2010-2011, to almost 50%. The problem, of course, is that no country can be productive enough to reinvest 50% of GDP in new capital stock without eventually facing immense overcapacity and a staggering non-performing loan problem. China is rife with overinvestment in physical capital, infrastructure, and property.
To a visitor, this is evident in sleek but empty airports and bullet trains (which will reduce the need for the 45 planned airports), highways to nowhere, thousands of colossal new central and provincial government buildings, ghost towns, and brand-new aluminum smelters kept closed to prevent global prices from plunging. Commercial and high-end residential investment has been excessive, automobile capacity has outstripped even the recent surge in sales, and overcapacity in steel, cement, and other manufacturing sectors is increasing further.
In the short run, the investment boom will fuel inflation, owing to the highly resource-intensive character of growth. But overcapacity will lead inevitably to serious deflationary pressures, starting with the manufacturing and real-estate sectors. Eventually, most likely after 2013, China will suffer a hard landing. All historical episodes of excessive investment – including East Asia in the 1990's – have ended with a financial crisis and/or a long period of slow growth.
To avoid this fate, China needs to save less, reduce fixed investment, cut net exports as a share of GDP, and boost the share of consumption. The trouble is that the reasons the Chinese save so much and consume so little are structural. It will take two decades of reforms to change the incentive to overinvest.
Notice Roubini's prescription? Fiat money is just a terrible economic system, no matter what arguments its supporters make. Roubini explains that if China wants to continue the arc of its current "prosperity," the Chinese will have to be taught to save less and consume more! This is of course exactly what got America (and Europe) into the trap that it is in.
It is sad when even the most skeptical and "hard-headed" of modern economic observers can find no better prescription for prosperity than "save less, spend more." It shows how perverse modern economics really are. Countries that adopt these counter-intuitive commandments will position themselves to do better in the future. Sure they will. Just look at the US and Europe.
It is all a massive, titanic con job in our view. Save less and spend more. This is the advice one might give to a practitioner of a Ponzi scheme who is contemplating how to secure his business for at least a little longer before all the cards come tumbling down. It is not a prescription for rational prosperity but for staving of the inevitable. Save less, spend more.
Our point has been that China is headed for a hard landing now. Roubini believes that a hard landing will not arrive today but tomorrow, maybe around 2013. "All historical episodes of excessive investment – including East Asia in the 1990's – have ended with a financial crisis and/or a long period of slow growth." It's not just East Asia, in fact. It's Europe and America, too. The system doesn't work. In fact we would argue it's not supposed to work. It's not a prosperity maker. It's a misery maker and it's supposed to set the table for an increasingly evident structural realignment that will lead to greater and greater world government (UN) and even a world currency (IMF).
That's why we're skeptical of Arends article about the IMF. The people running the IMF aren't stupid. They surely see the empty cities being built in China as we speak. They surely are aware of the price controls that the Chinese leaders have desperately placed on the housing sector. They know they price of food keeps rising and the Chinese are screwing up rates as fast as they can without causing a "hard landing."
We are not so sure as Roubini that that hard landing isn't in the offing sooner than 2013. But however you want to analyze it, suggesting that China is going to overtake America as the world's largest economy is perhaps a bit premature. We remember the predictions regarding the Japanese economy in the 1980s and look how that turned out.
We're not sure the IMF believes its own projections. We surely don't believe that China can spend its way to wealth either, no matter what Roubini suggests. Central banking and fiat money has created a mess not just in the West but around the world, and the Chinese are struggling in that trap just as much as the West is. The result in our view will be continued pressure by the elites for a one-world government and a one-world currency.
Conclusion: But all this is happening way to fast. Chinese growth has been way too explosive. When the downturn naturally comes, we believe the Chinese citizens will turn their anger toward the current government. The China of tomorrow may be SMALLER than the China of today because of internal dyamics. What's going on today is not a race to the top. It's a race to the bottom.
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Posted by The Daily Bell on 04/28/11 09:30 AM
Agreed. The Saudis are very much part of the "system."
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Posted by Reader on 04/28/11 09:27 AM
why not? In any case, anything backed by oil and gas, especially the reserves in Islamic countries, is good enough as backup for any currency I will add that if all Islamic currencies were hard currency, a block of 1.6 Billion customers would appear and Trade would boom for the benefit of all. Unfortunately, the english and saudi upper class are both stupid and evil, and hence, useless to humanity and progress.
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Posted by Alexander Doty on 04/27/11 02:58 AM
Cannot the production of fiat currency be a viable way to fund government expenditure as long as government expenditure is proportionately small in relation to the overall economy?
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Posted by Reader on 04/27/11 02:49 AM
I regret to use the term but the people at the world bank and IMF are the sort of people that are deservedly described (to use a term used in certain American military circles) as weasels. There is no way a Weasel or group of financial Weasels have the intellectual depth or good horse sense to organize and implement a one world government. That would be expecting far too much from their innate capabilities and values.
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Posted by bionic mosquito on 04/26/11 10:15 PM
DB: We believe the powers-that-be are trying to bludgeon America into the kind of austerity that Europe is currently undergoing. Explaining to Americans that hegemony is lost, that empire is over and that they must accept straightened circumstances could be construed as part of a promotional effort aimed at laying the groundwork for austerity.
BM: This may not go over so easily in America, as it has not gone over easily elsewhere in the world. However, I think the reasons why are much different.
In the US, there is this fervent belief in American exceptionalism. A faith in the good intentions of government. A faith and trust that the boys in the military are serving the nation; that this service is done in sacrifice, not just for the good of the US, but for the good of the world. That only America has the wisdom, compassion, judgment, courage, etc., to perform such necessary work in a manner that, if the rest of the world wasn't so stupid, others would see the same way. Americans cry when the F-16s fly overhead before a football game.
This belief system is so well engrained in the people, that to take it away will be comparable to attempting to forcibly take away from the pious his religion in order to replace it with another. It will not be successful; because if it is successful it will leave someone who will never believe in any religion again. In the case of those in the US, it will leave a population that will not accept another (even higher) centralized state.
(To compare the US population to that of much of the rest of the world: in Greece, for example, they are quite aware that their politicians and government is on the take; this is why they protest. In the US, many believe that the politicians and the government are really trying to work for good. It is a difference of better seeing reality vs. living in a dream. The problem: when the dream is shattered, the dreamer will not accept the next dream.)
For these reasons, it will not be explained to Americans that hegemony is lost. To the extent America ever really had hegemony, it has been taken step by step, and as covertly as has been possible given the communication avenues available over the decades.
(As the latest example of this relatively covert transition, while Presidents since Truman have gone to war without congressional declarations, at least they made a show of it. Obama didn't even bother to give a speech to Congress.)
So I don't know that austerity will come to America, at least not by desire of the elite. They need the money flowing to keep this population believing (as the population will wake up if the goodies stop flowing from Washington), at least believing until enough building blocks are in place that the actions of the American population are no longer so important.
This seems to be the juggling game of the elite.
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Posted by The Daily Bell on 04/26/11 07:51 PM
An interesting take, Bluebird. Time will tell ...
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Posted by Bluebird on 04/26/11 03:24 PM
We have been given a reprieve!
I was waiting for the Daily Bell's input on this story. I realize mine is a rather simplistic view (and possibly delusional), but I will share it anyway. I have long felt that all the 2012 hype about doomsday was created by the elite and have felt the hammer was going to fall during that year. They have raced to get everything into place by then, but as we see, it appears all is not coming together as fast as planned. The wars have not served their purpose. Now we see a new goal line. We have 4 more years to worry and bully the world! China was to be the new kid on the power block, but alas, the NWO is not in place yet.
The taxes on breathing that was to provide the income flow has been sabotaged. Now they have to get tough and make it a crime to harm mother nature and use force to extract the blood money. All is not lost! Okay, maybe this is a stretch. But I do look on the bright side. At least they predict the USA will have a 3 trillion dollar rise in economy in that 5 years. ?? Let me guess, all in green products industry? Wonder who will hit bottom first?
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Posted by bionic mosquito on 04/26/11 01:27 PM
DB, I still have no comment from you regarding my lost post. Do you have it?
In any case, this is a different post, related only to the missing one by the above article:
NR: To avoid this fate, China needs to save less, reduce fixed investment, cut net exports as a share of GDP, and boost the share of consumption.
DB: It is sad when even the most skeptical and "hard-headed" of modern economic observers can find no better prescription for prosperity than "save less, spend more." It shows how perverse modern economics really are.
BM: There are, of course, times when saving less and spending more is the right answer. As DB regularly points out, performing a proper analysis in a world of fiat money, mercantilist economic policies, and continuous interventions is quite difficult.
In the case of save or spend, free market interest rates would tell us if saving or spending was preferred. But of course, we have no such reliable signals.
When it comes to China, the advice could be correct. It is an economy quite controlled by the state, with the state directing significant capital investment. In other words, forced saving.
In the US, the inflation is directed primarily at consumption; look at the state of infrastructure in the US; it is a disaster. As opposed to China, in the US almost all of the government spending is made up of transfer payments. In other words, forced consumption.
In China, it appears most if not all of the inflation is being directed to capital projects. We see anecdotal evidence of this daily. Bullet trains to transport $1 per day workers home for the holidays? Would a market derived economy send such a signal?
Inflation always transfers purchasing power, even if there is no measured impact on the general price level. In the case of China, it seems the purchasing power is being transferred from spending to saving; the forced savings being manifest in these wasteful capital projects.
After all, the majority of the population lives in poverty and would certainly prefer an extra bowl of rice as opposed to a high speed train or an empty apartment complex. At least that is my guess. But again, it can only be a guess because there are no true market signals to tell us much of anything.
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Posted by KurtKallenbach on 04/26/11 12:42 PM
The entire planet needs to wake up and walk away from the thieves at the IMF. That means their PRIVATE fiat currency system. They have single-handedly ruined every economy across the globe. That, of course, has been their plan all along with a one world currency as their ultimate goal.
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Posted by Stanley Macsai on 04/26/11 11:58 AM
Sorry for not being clear enough, I did not mean to be critical.
China is coming out of planned economy and it resulted in a massive number of people attaining high standards of living from previous do not have. I do not see them returning to planned economy and subsequent poverty, it would carry much risk. (Unlike the West, which has not learned the lesson on the evils of it.)
In my view they need to give way to private endeavors and gradually (or quickly) abandon central planning to survive as political class.
It is quite contrary to the West, where direction is just the opposite. A gradual merge into central planning (fascism, socialism, etc.)
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Posted by Bischoff on 04/26/11 11:48 AM
"We believe the powers-that-be are trying to bludgeon America into the kind of austerity that Europe is currently undergoing. Explaining to Americans that hegemony is lost, that empire is over and that they must accept straightened circumstances could be construed as part of a promotional effort aimed at laying the groundwork for austerity."
A vibrant economy is not the product of central government planning. It didn't work for the Soviets, it won't work for the People's Republic of China and it certainly won't work for this country with the direction Obama has taken.
It is local government control, capitalist enterprise, equal access to land and "free markets" which create a vibrant economy and bring prosperity to populations.
There is no better governmental frame work in existence anywhere to guarantee prosperity to people than the U.S. Constitution. Had Americans adhered to its provisions and to the ideas of the founders, we would not be talking about this subject today.
To evaluate the China vs. U.S. economic competition from a central government point of view, validates the idea of central control over economies. It places attention on a competition that deserves no attention, unless the idea is power instead of prosperity.
Americans don't need a world empire to live in prosperity. There are plenty of natural resources in this country to allow a continued high living standard. The question is access to the natural resources and who controls them.
Let's rid the U.S. Constitution of a couple of "anti" constitutional amendments, and let's get back to small government control. It is small government which is empowered and protected by the original U.S. Constitution of 1787/1789. If China copies that model, the Chinese people will experience prosperity along with us.
The economic competition between China and the U.S. should manifest itself in "Free Trade" among its peoples, not which government can better control their people and their economy.
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Posted by bionic mosquito on 04/26/11 10:15 AM
DB
My post went into never never land. No message that it is being reviewed (as I would get in the old system; at least an affirmation that the post went to you).
I submitted it twice, same result. A response stating it was received and being reviewed would be helpful.
Thanks
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Posted by bionic mosquito on 04/26/11 10:12 AM
DB: We believe the powers-that-be are trying to bludgeon America into the kind of austerity that Europe is currently undergoing. Explaining to Americans that hegemony is lost, that empire is over and that they must accept straightened circumstances could be construed as part of a promotional effort aimed at laying the groundwork for austerity.
BM: This may not go over so easily in America, as it has not gone over easily elsewhere in the world. However, I think the reasons why are much different.
In the US, there is this fervent belief in American exceptionalism. A faith in the good intentions of government. A faith and trust that the boys in the military are serving the nation; that this service is done in sacrifice, not just for the good of the US, but for the good of the world. That only America has the wisdom, compassion, judgment, courage, etc., to perform such necessary work in a manner that, if the rest of the world wasn't so stupid, others would see the same way. Americans cry when the F-16s fly overhead before a football game.
This belief system is so well engrained in the people, that to take it away will be comparable to attempting to forcibly strip from the pious his religion in order to replace it with another. It will not be successful; because if it is successful it will leave someone who will never believe in religion again. In the case of those in the US, it will leave a population that will not accept another (even higher) centralized state.
(To compare the US population to that of much of the rest of the world: in Greece, for example, they are quite aware that their politicians and government is on the take; this is why they protest. In the US, many believe that the politicians and the government are really trying to work for good. It is a difference of better seeing reality vs. living in a dream.)
For these reasons, it will not be explained to Americans that hegemony is lost. To the extent America ever really had hegemony, it has been taken step by step, and as covertly as has been possible given the communication avenues available over the decades.
(As the latest example of this relatively covert transition, while Presidents since Truman have gone to war without congressional declarations, at least they made a show of it. Obama didn't even bother to give a speech to Congress.)
So I don't know that austerity will come to America, at least not by desire of the elite. They need the money flowing to keep this population believing (as the population will wake up if the goodies stop flowing from Washington), at least believing until enough building blocks are in place that the actions of the American population are no longer so important.
This seems to be the juggling game of the elite.
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Posted by John Danforth on 04/26/11 08:42 AM
"Spend more, save less." It looks like that's exactly what the central government of China has been doing. If it wants to 'currency manipulate', the only way to do that is to inflate at the same or better rate than the U.S. That's the real race to the bottom. Political economics gives a perverse incentive to politicians to keep printing money faster than trading partners so they can claim it helps exports. And besides, they get to spend all that printed money, too. When things get heated, they can slap import duties on products and claim it helps domestic industry (by taxing the snot out of their own people, ha!). Which they get to spend, too. Who could say no to that, when the milk cows never catch on to the game?
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Posted by The Daily Bell on 04/26/11 08:19 AM
We've suggested China is on the way to a hard landing. Roubini says the same. Don't see how that is ambiguous ....
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Posted by The Daily Bell on 04/26/11 08:19 AM
We've suggested China is on the way to a hard landing. Roubini says the same. Don't see how that is ambiguous ....
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Posted by Stanley Macsai on 04/26/11 06:33 AM
There seems to be two points of view present making DB argument somewhat ambiguous.
Savings (capital formation) is to be borrowed to increase amount of available goods and services hence to boost welfare. China being a command economy (central planning) they surely are infested with all the ills of an elite driven development. If they allow domestic customers to consume, it surely will create opportunities for small, medium sized private firms to grow filling real needs of their local customer base, instead of a mega-developments as outlined in their 5 years plans and also driven by multinationals. It would seem a logical course of action for China to take. It would also unleash creative power to fill the gaps left by central planners. End result could be increased freedom there. But China (gov) needs to abandon keeping US and EU afloat by buying government debt by taking funds away from citizens centrally and sending it oversees. I see more of an opportunity here for a sustained (resource misallocation free) growth, even if conflicts arise, rather than a race to the bottom.
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Posted by Mountainview on 04/26/11 05:37 AM
The thing about China is: They set their own agenda! The US, the IMF and the ECB, all try to pressure China to move. But China goes it step by step.
Currently they have problems of too much growth combined with inflation and people hopping from job to job, exactly the opposite of the US.
The final destination is clear and fits well with the "Middle Kingdom"'s ambition... Anglo-American elite watch out!
