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IMF's 'End of America'? Better to Watch the Buck

Tuesday, 26 April 2011 07:25 AM

The end of the “Age of America” is near, much nearer than you might expect, according to new data from the International Monetary Fund (IMF) reported by MarketWatch.com.

By one measure, China’s economy is expected to surpass the United States as a share of world output in just a few years.

China’s “real” economic measured in what the IMF calls “purchasing power parity,” will grow to $19 trillion by 2016 from $11.2 trillion now.

The United States will grow, too. But the U.S. economy will hit $18.8 trillion, up from $15.2 trillion today, as measured by these mathematically adjusted growth numbers.

Accordingly, China will be the larger economy at 18 percent of total world output vs. 17.7 percent from the United States.

What is purchasing power parity? A complex statistical idea, simply put it adjusts economies to match what you could actually buy with the local currency and compares it across borders. A tricky task, but the IMF tries to do it.

The future of the U.S. dollar is problematic.
(Getty photo)
Does it matter? Considered in the context of how many trillions of dollars in U.S. Treasurys are currently held by foreigners, perhaps, but it’s too easy to presume that a change in ranking of total economic size means much.

For instance, the 2010 IMF ranking of countries by income per capita has China at spot No. 94 (excluding Taiwan, No. 20).

That’s in “international dollars,” so it’s adjusted for purchasing power.

The United States comes in at No. 7 on the list. Qatar is No. 1.

Put another way, the average Chinese person has $7,519 a year in income, slightly poorer than the average Ecuadorian. Nobody is concerned that Ecuador might upset the world’s economic pecking order. The typical Portuguese person has $23,223 in adjusted income, but Portugal is literally on its knees in terms of international finance right now.

Qataris might be “rich,” but it’s not surprising for an oil exporter with less than 1.7 million residents. The typical U.S. citizen, meanwhile, had an income of $47,284.

Roughly speaking, China would have to be six times bigger to begin to replicate the U.S. experience today. Over time, too, growth there will slow from the double digits of the past decade or so to a more moderate U.S. or European pace.

China also faces similar problems as do the United States and Europe — a large elderly population and an enormous amount of recent stimulus spending to prop up their domestic economy during the crisis.

Economists talk a lot about the “zero sum game” idea. The presumption many people make in economics, for instance, is that if one side “wins” it must mean that the other side “loses,” as if economic growth were a sports event or a political race.

In that sense, the United States has been “losing” to Qatar for years now.

Even using the IMF’s latest data, the United States will see its economy grow. If China surpasses the United States in 2016, it will still have a long way to go to be able to provide even a healthy fraction of the comparative personal income. China will be bigger, but most Chinese are still very, very poor. That’s what the leadership in Beijing worries about most — a poverty-driven revolution.

Far more than average national incomes, a much larger China could demand a greater role in currency affairs far sooner than Americans would like, and that is the headline here.

The future of the U.S. dollar is problematic. If China becomes a more central player in world trade and finance, the role of the dollar as the global reserve currency could end or at least be seriously diminished. If so, import costs are sure to rise for Americans, exacting a toll that will drive down the value of personal incomes across the board.

Gas prices are shooting higher, and who knows where gold and silver will end up. Commodity prices of all types are being driven largely by bets that the U.S. dollar is finally kaput, and that America’s politicians are likely to inflate their way out of the country’s massive debt.

Ignore the IMF and watch the buck instead.

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The end of the Age of America is near, much nearer than you might expect, according to new data from the International Monetary Fund (IMF) reported by MarketWatch.com. By one measure, China s economy is expected to surpass the United States as a share of world output in...
Tuesday, 26 April 2011 07:25 AM
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