After a weekend full of empty (or not) Chinese posturing, Marketwatch's Brent Arends has an interesting tidbit to add to the China vs US debate. "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." The year? 2016. So perhaps having a 5 year head start in selling the bonds of what will soon be even an official former superpower is not such a bad idea. "It provides a painful context for the budget wrangling taking place in Washington, D.C., 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." And here's why pretty soon America may be left without presidential candidates: "According to the IMF forecast, whoever is elected U.S. president next year — Obama? Mitt Romney? Donald Trump? — will be the last to preside over the world’s largest economy." Oh well, it was fun while it lasted.
More from MarketWatch:
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.
So what happens in a purchasing power parity world? Nothing pretty.
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 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 is rising.
Just 10 years ago, the U.S. economy was three times the size of China’s.
This is sad. Even with the rhetorical narrative paragraph breaks confirming it.
This is more than a statistical story. It is the end of the Age of America. As a bond strategist in Europe told me two weeks ago, “We are witnessing the end of America’s 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
Arends is correct: "one time" stimulus is no longer having an impact in what is a disastrous secular trend.
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.
And while nobody on Zero Hedge will need this refresher, this paradigm (yes, we hate the word) shift means bond investors are about to start getting a series of very rude awakenings. Even assuming the Fed sells an infinite number of 30 Year put options.
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 markets are reasonably efficient, most of the time, at setting prices. Where they are most likely to fail, though, is in correctly anticipating and pricing big, revolutionary, “paradigm” shifts — whether that be the rise of disruptive technologies or revolutionary changes in geopolitics. We are living through one now.
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 Deutschemark. If it’s just the Greek drachma in drag ... not so much.
And while our new Chinese overlords are not big fans of the rapidly devaluing linen/cotton combination, they sure like their shiny metals. Which is why the Hunt brother high is likely about to be taken out in a matter of days if not hours.