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.
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.