And now, it's FIVE

By Kevin Freeman
April 25, 2011Apr 25, 2011

One of the most-cited objections to the concept of Global Economic Warfare has to do with the perception that the Chinese would avoid economic disruption at all costs. The idea has been that the Chinese would suffer more from any downturn than the more developed United States. Under this concept, it would be impossible to imagine that China had any part whatsoever in the 2008 decline. Those who believe this will argue that China would never engage in Economic Warfare.

The reality, as we have documented, is that the managed Chinese economy has been extremely aggressive in many areas of Economic Warfare. In fact, they have followed the playbook outlined in Unrestricted Warfare in many ways, including resources warfare (such as buying up and restricting rare earth minerals), cyber warfare (numerous documented cases of cyber attacks), and threats to use economic weapons (including dumping U.S. Treasury bonds if needed). Even over the weekend a Chinese banker suggested that the nation reduce its U.S. dollar holdings by approximately two-thirds:

"Xia Bin, a member of the monetary policy committee of the central bank, said on Tuesday that 1 trillion U.S. dollars would be sufficient. He added that China should invest its foreign exchange reserves more strategically, using them to acquire resources and technology needed for the real economy."

At the same time, China announced plans to create a new Sovereign Wealth Fund, presumably with the other $2 trillion of reserves (or some portion thereof).

So, we have evidence that Economic Warfare is underway. But, can we test the hypothesis that it will hurt the Chinese more than us? To consider this, we must revisit our March 3, 2011 post titled Economic Reality?:

Before the 2008 crash, it was common belief that the Chinese economy would overtake the United States in 40-50 years. Then, near the lows in March 2009, Jim O'Neill from Goldman Sachs altered his forecast to suggest that China would overtake the U.S. in "less than 20 years." Now, after the smoke has cleared, the latest forecast from Citi suggests that even with strong domestic growth, China will become the world's largest economy in less than a decade.

It is important to note that this matches precisely with what we believe is the goal of the latest Five Year Plan from the Chinese Communist Party:

"The goal of the national 12th FYP (Five Year Plan) is to smooth the way for the Chinese economy to overtake that of the U.S. in ten years or less. The military MFYP's objectives are similar: to expeditiously close the gap between the PLA's capacity and that of the U.S. armed forces."

Less than two months later, the forecast has been revised again. This time, the International Monetary Fund (IMF) is projecting that the Chinese economy will surpass the United States by 2016. The key to this new forecast is a decline in the value of the dollar relative to the Chinese Yuan:

IMF bombshell: Age of America nears end

Commentary: China's economy will surpass the U.S. in 2016
April 25, 2011 
Age of America About to 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. 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.

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.

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.

All posts Copyright (c) 2011 Kevin Freeman, All Rights Reserved