I love spring. It's a season of renewal, awakening (allergies). But this spring is feeling more and more ominous. I expect thunderstorms in spring. I wish I wasn't expecting the coming economic storm.
So, here's part 1: The IMF has declared that the "Age of America" will end in approximately 2016, when the economy of China surpasses us.
This assessment is based on "purchasing power parities," not exchange rates (which as we can see, are gross indicators affected by numerous factors, speculation not being the least). This actually compares what people can earn and spend. China has a prospering middle class, while the US has a dwindling one - and not because our population is getting richer. The age of Chinese hegemony will be quite different. One reason not cited in the source article is this contrast. Our national wealth is tied up in raw resources (property and the rights to exploit them), multinational corporations (GE) and a few very wealthy individuals who have "capitalized" on the world market changes of the last 40 years or so. Chinese wealth is in their manufacturing capabilities, equity markets to an extent and mostly in their sovereign funds. Meaning China itself can pretty much buy whatever it wants to accomplish whatever purposes it wants. And it has the capacity to make and sell things the world needs to maintain this path.
The second item of bad news is that China looks like it will be "diversifying" about $2 trillion in sovereign wealth it currently has wrapped up in US treasuries. That is a whopping 2/3 of their dollar reserves which they propose to use to invest in their own industries and markets, strategic resources (to feed those), and (other) foreign investments. Well, duh, why would they want to keep holding those $turkeys? It's not like they are earning much interest.
Source: Xinhuanet but this news has been on any number of sources during 2011.
No, it probably won't happen next month or even be completed this year. But if China decides to just quit adding dollars to the reserve (+$197 billion in Q1 2011), we will need to find other buyers and that means we will need to pay more interest. And there you have the wicked combination of rising interest and rising inflation (leading to rising interest and more inflation).
Which brings me back to the weak dollar. According to this article on CNBC. "If things were to somehow go into freefall (see below) or there were disorderly markets (see above), or if it is associated with a rise in interest rates (necessitated by above), there could be some concerns there," said Josh Feinman, chief global economist at Deutsche Bank Advisors. "But that's not happening at all. Rates in the US are still very, very low. At the margin, (a weak dollar) is a slight easing in financial conditions." Meanwhile, "Panic dollar selling is setting in," according to Dennis Gartman, a hedge fund manager and author of "The Gartman Letter."
How low can it go? Well if a 2/3 divestiture of dollar reserves by China and no market for US debt because of the free-falling dollar, and the kinds of inflation and interest we have not seen in decades is not cause for concern, I don't know what is. With just exactly what are we going to grow this economy back into some sort of stability, let alone hegemony? Selling off our assets is about all we have left.