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US to Stay Top Global Economic and Financial Powerhouse Despite China's Antics

US to Stay Top Global Economic and Financial Powerhouse Despite China's Antics
(Dollar Photo Club)

Wednesday, 11 May 2016 10:31 AM Current | Bio | Archive

Chinese newspaper “People’s Daily” published an interview with what they called an “authoritative” insider (this means “very” close to the senior leadership of the ruling party) talking about whether stimulus should continuously be used to push the Chinese economy.

The insider said: “High leverage will inevitably bring about high risks, which could lead to a systemic financial crisis, negative economic growth, and could even wipe out people's savings … to push the economy by increasing leverage is unnecessary and the wrong choice ... and adds, the stock market, foreign currency and real estate market should play their roles and respect the law of development, which does not guarantee economic growth.”

This certainly prompts warning lights about how China’s growth path will unfold and the impact on its overall financial system. 

What the authoritative insider said is of course nothing else than sound economics as it underlines the reality, which will not please China-based long-term investors, and makes it crystal clear that structural reforms will subdue Chinese growth and that debt cannot be used to support growth forever. Dealing with excess capacity and zombie companies early on is prudent, if not necessary.

Now, to what extent this sound economics theory is going to translate in economic reality is another question that only time can tell.

For now, there is no doubt that China’s costs of its continuously rising overall leverage can be sustained in the short term, but there is no doubt whatsoever that it is not sustainable in the long-term.

Investors could do well keeping in mind that a sub-6 percent growth scenario could be well in the cards because if its monetary policy stays loose for too long there is no doubt it will push up inflation down the road.

The day we should get there, which is of course not certain, then the world will face serious difficulties that could lead to something similar or even exceed the financial crisis of 2008.

That said, I think, of all the big economies in the world, the U.S. should remain one of the best protected against the coming Chinese challenges as its GDP is for more the 80 percent generated internally and U.S. exports of goods and services represent only 13.4 percent of its GDP, according to the data as communicated by the World Bank.

All this is important as of lately way too many investors have gotten completely confused by all that hype about China that was going to become the world’s leading economic powerhouse in the not so far future.

Fact is, and it doesn’t matter if we like it or not, but the United States is going to remain the leading economic and financial powerhouse in the world for quite some time to come.

Investors shouldn’t get confused by the fact that the Chinese yuan will come alongside the U.S. dollar, the euro, the British pound and the Japanese yen in the IMF’s reserve-currency basket in October.

The U.S. dollar may not quite be the legendary unmoved mover of yesteryear, but at present nothing permits us to state it won’t keep for years to come its dominance in the international monetary and financial system (IMFS) as a means of payment, a store of value and a unit of account.

As a long-term investor, I would still have the U.S. dollar, by far, on top of my currencies preference list.

We all know nothing is written in stone, but Goldman Sachs’ note stating they expect the dollar to advance by about 15 percent during the next two years as U.S. monetary policy normalizes may be worth keeping in mind.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.

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As a long-term investor, I would still have the U.S. dollar, by far, on top of my currencies preference list.
investors, china, dollar, currency
Wednesday, 11 May 2016 10:31 AM
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