Friday, April 29, 2011

End of an Age

According to official International Monetary Fund (IMF) forecasts released earlier this week, the “Age of America” is coming quickly to its end.  The report provides projections for the growth in size of major economies worldwide and has calculated the year in which China’s economy will be larger than the U.S.’s in real terms (purchasing power adjusted).  And it’s a lot closer than you may think. 

Leading economists have previously interpreted this “crossover” point to be one that would occur decades into the future.  Some of the most bearish on the U.S. economy have given it until the mid 2020’s.  However, the recent IMF report pegged this date in the year 2016.  Think of it- just five years from now the U.S. will not be the leading global economic power that it has been since its emergence from the Great Depression.  Consequences for the dollar, our ability to borrow and our power in the global community will be severely affected.

As a technical note, the IMF is using an approach to the calculations for this crossover that has not been heavily considered in the past.  It makes a tremendous amount of sense- they use Purchasing Power Parity- an adjustment based on the prices of goods and services in countries being compared.  This adjusts for price differences for goods and services between countries rather than relying on currency exchange rates (that are often manipulated by central banks thus providing false measurements).