Age of America Ending - IMF

There is a lot of triumphalismcommentary out there reflecting the apparent rise of China and its possible impact onother countries globally.  Here is someof it.

I am not nearly so sold on thisidea and mostly for the same reasons I dismissed similar pronouncements out of Japan twentyyears ago.

Developing countries have a onetime opportunity to use command based economics to catch up to the developedeconomies.  It took Japan forty years and it has taken China thirty years as it will take India.

It is at that point that theymust pay real attention to the base itself and growth naturally flat lines asincomes begin to fill in the gaps.

Japanis presently no longer in the low wage business at all and China is nowfollowing suit.  It was nice while itlasted but it does not least.

The other huge gift thesecountries experienced was and remains Pax Americana.  All their defense budgets are relatively modestbecause the USdefense budget is not.  Diverting wealthinto an unnecessary arms build up is a fool’s errand.  Even Indiaonly has to over match Pakistanwhose capacity is perhaps ten percent of India’s.

The USA does need to revamp itseconomic structure and surely will, upon which we will see US growth rates of4% plus and Chinese growth rates tailing off to nearly flat.

IMF bombshell: Age of Americanears end

BRETT ARENDS' ROI

April 25, 2011, 7:20 p.m. EDT

Commentary: China’seconomy will surpass the U.S.in 2016

By Brett Arends, MarketWatch

Victor Cha, senior adviser on Asian affairs at Washington’s Center forStrategic and International Studies, told me China’s neighbors in Asia arealready waking up to the dangers. “The region is overwhelmingly looking to the U.S. in a waythat it hasn’t done in the past,” he said. “They see the U.S. as a counterweight to China. Theyalso see American hegemony over the last half-century as fairly benign. In China they seethe rise of an economic power that is not benevolent, that can be predatory.They don’t see it as a benign hegemony.”

The rise of China,and the relative decline of America,is the biggest story of our time. You can see its implications everywhere, fromshuttered factories in the Midwest to soaringcosts of oil and other commodities. Last fall, when I attended a conference in London about agricultural investment, I was struck by thenumber of people there who told stories about Chinese interests snapping upfarmland and foodstuff supplies — from South America to China and elsewhere.

This is the result of decades during which Chinahas successfully pursued economic policies aimed at national expansion andpower, while the U.S.has embraced either free trade or, for want of a better term, economicappeasement.

“There are two systems in collision,” said Ralph Gomory, researchprofessor at NYU’s Stern business school. “They have a state-guided form ofcapitalism, 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. Thecapability erodes in the U.S.and grows in China.That’s very destructive. That is a big reason why the U.S. isbecoming more and more polarized between a small, very rich class and aneroding middle class. The people who get the profits are very different fromthe people who lost the wages.”

The next chapter of the story is just beginning.

U.S. spending spree won’t work

What the rise of Chinameans for defense, and international affairs, has barely been touched on. The U.S. is nowspending gigantic sums — from a beleaguered economy — to try to maintain itsplace in the sun. See:Pentagon spending is budget blind spot .

It’s a lesson we could learn more cheaply from the sad story of theBritish, Spanish and other empires. It doesn’t work. You can’t stay on top ifyour economy doesn’t.

Equally to the point, here is what this means economically, and forinvestors.

Some years ago I was having lunch with the smartest investor I know,London-based hedge-fund manager Crispin Odey. He made the argument that marketsare reasonably efficient, most of the time, at setting prices. Where they aremost likely to fail, though, is in correctly anticipating and pricing big,revolutionary, “paradigm” shifts — whether a rise of disruptive technologies orrevolutionary changes in geopolitics. We are living through one now.

The U.S.Treasury market continues to operate on the assumption that it will alwaysremain 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. Butthat’s all based on the Age of America.

No wonder so many have been buying gold. If the U.S. dollar ceases tobe the world’s sole reserve currency, what will be? The euro would be fine ifit acts like the old deutschemark. If it’s just the Greek drachma in drag ...not so much.

The last time the world’s dominant hegemon lost its ability to runthings singlehandedly was early in the past century. That’s when the U.S. and Germanysurpassed Great Britain.It didn’t turn out well.

Updated with IMF reaction

The International Monetary Fund has responded to my article.

In a statement sent to MarketWatch, the IMF confirmed the report, butchallenged my interpretation of the data. Comparing the U.S. and Chinese economies using“purchase-power-parity,” it argued, “is not the most appropriate measure…because PPP price levels are influenced by nontraded services, which are morerelevant domestically than globally.”

The IMF added that it prefers to compare economies using marketexchange rates, and that under this comparison the U.S.“is currently 130% bigger than China,and will still be 70% larger by 2016.”

My take?

The IMF is entitled to make its case. But its argument raises morequestions than it answers.

First, no one measure is perfect. Everybody knows that.

But that’s also true of the GDP figures themselves. Hurricane Katrina,for example, added to the U.S.GDP, because it stimulated a lot of economic activity — like providingemergency relief, and rebuilding homes. Is there anyone who seriously thinksKatrina was a net positive for the United States? All statistics needcaveats.

Second, comparing economies using simple exchange rates, as the IMFsuggests, raises huge problems.

Currency markets fluctuate. They represent international money flows,not real output.

The U.S. dollar has fallen nearly 10% against the euro so far thisyear. Does anyone suggest that the real size of the U.S.economy has shrunk by 10% in comparison with Europeover that period? The idea is absurd.

China actively suppresses the renminbi on thecurrency markets through massive dollar purchases. As a result the renminbi isdeeply undervalued on the foreign-exchange markets. Just comparing theeconomies on their exchange rates misses that altogether.

Purchasing power parity is not a perfect measure. None exists. But itmeasures the output of economies in terms of real goods and services, not justpaper money. That’s why it’s widely used to compare economies. The IMFpublishes PPP data. So does the OECD. Many economists rely on them.

Brett Arends is a seniorcolumnist for MarketWatch and a personal-finance columnist for The Wall StreetJournal.