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This column has been updated to include a reaction from the IMF.
BOSTON (MarketWatch) — 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.
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. Brett Arends looks at the implications for the U.S. dollar and the Treasury market.
And it’s a lot closer than you may think.
According to the latest IMF official forecasts published two weeks ago, China’s economy will surpass that of America in real terms in 2016 — just five years from now.
Put that in your calendar.
It provides a painful context for the budget wrangling taking place in Washington right now. It raises enormous questions about what the international security system is going to look like in just a handful of years. And it casts a deepening cloud over both the U.S. dollar and the giant Treasury market, which have been propped up for decades by their privileged status as the liabilities of the world’s hegemonic power.
More China news: U.S., China to hold economic talks in early May, Shanghai hit by tightening, China 2011 trade surplus may shrink to 2% of GDP
According to the IMF forecast, whomever is elected U.S. president next year — Obama? Mitt Romney? Donald Trump? — will be the last to preside over the world’s largest economy.
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.
In addition to comparing the two countries based on exchange rates, the IMF analysis also looked 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.
This is more than a statistical story. It is the end of the Age of America. As a bond strategist in Europe told me two weeks ago, “We are witnessing the end of America’s economic hegemony.”
We have lived in a world dominated by the U.S. for so long that there is no longer anyone alive who remembers anything else. America overtook Great Britain as the world’s leading economic power in the 1890s and never looked back.
And both those countries live under very similar rules of constitutional government, respect for civil liberties and the rights of property. China has none of those. The Age of China will feel very different.
Victor Cha, senior adviser on Asian affairs at Washington’s Center for Strategic and International Studies, told me China’s neighbors in Asia are already waking up to the dangers. “The region is overwhelmingly looking to the U.S. in a way that it hasn’t done in the past,” he said. “They see the U.S. as a counterweight to China. They also see American hegemony over the last half-century as fairly benign. In China they see the rise of an economic power that is not benevolent, that can be predatory. They don’t see it as a benign hegemony.”
The rise of China, and the relative decline of America, is the biggest story of our time. You can see its implications everywhere, from shuttered factories in the Midwest to soaring costs of oil and other commodities. Last fall, when I attended a conference in London about agricultural investment, I was struck by the number of people there who told stories about Chinese interests snapping up farmland and foodstuff supplies — from South America to China and elsewhere.
This is the result of decades during which China has successfully pursued economic policies aimed at national expansion and power, while the U.S. has embraced either free trade or, for want of a better term, economic appeasement.
“There are two systems in collision,” said Ralph Gomory, research professor at NYU’s Stern business school. “They have a state-guided form of capitalism, and we have a much freer former of capitalism.” What we have seen, he said, is “a massive shift in capability from the U.S. to China. What we have done is traded jobs for profit. The jobs have moved to China. The capability erodes in the U.S. and grows in China. That’s very destructive. That is a big reason why the U.S. is becoming more and more polarized between a small, very rich class and an eroding middle class. The people who get the profits are very different from the people who lost the wages.”
The next chapter of the story is just beginning.
What the rise of China means for defense, and international affairs, has barely been touched on. The U.S. is now spending gigantic sums — from a beleaguered economy — to try to maintain its place in the sun. See: Pentagon spending is budget blind spot .
It’s a lesson we could learn more cheaply from the sad story of the British, Spanish and other empires. It doesn’t work. You can’t stay on top if your economy doesn’t.
Equally to the point, here is what this means economically, and for investors.
Some years ago I was having lunch with the smartest investor I know, London-based hedge-fund manager Crispin Odey. He made the argument that markets are reasonably efficient, most of the time, at setting prices. Where they are most likely to fail, though, is in correctly anticipating and pricing big, revolutionary, “paradigm” shifts — whether a rise of disruptive technologies or revolutionary changes in geopolitics. We are living through one now.
The U.S. Treasury market continues to operate on the assumption that it will always remain the global benchmark of money. Business schools still teach students, for example, that the interest rate on the 10-year Treasury bond is the “risk-free rate” on money. And so it has been for more than a century. But that’s all based on the Age of America.
No wonder so many have been buying gold. If the U.S. dollar ceases to be the world’s sole reserve currency, what will be? The euro would be fine if it acts like the old deutschemark. If it’s just the Greek drachma in drag ... not so much.
The last time the world’s dominant hegemon lost its ability to run things singlehandedly was early in the past century. That’s when the U.S. and Germany surpassed Great Britain. It didn’t turn out well.
The International Monetary Fund has responded to my article.
In a statement sent to MarketWatch, the IMF confirmed the report, but challenged my interpretation of the data. Comparing the U.S. and Chinese economies using “purchase-power-parity,” it argued, “is not the most appropriate measure… because PPP price levels are influenced by nontraded services, which are more relevant domestically than globally.”
The IMF added that it prefers to compare economies using market exchange rates, and that under this comparison the U.S. “is currently 130% bigger than China, and will still be 70% larger by 2016.”
My take?
The IMF is entitled to make its case. But its argument raises more questions than it answers.
First, no one measure is perfect. Everybody knows that.
But that’s also true of the GDP figures themselves. Hurricane Katrina, for example, added to the U.S. GDP, because it stimulated a lot of economic activity — like providing emergency relief, and rebuilding homes. Is there anyone who seriously thinks Katrina was a net positive for the United States? All statistics need caveats.
Second, comparing economies using simple exchange rates, as the IMF suggests, raises huge problems.
Currency markets fluctuate. They represent international money flows, not real output.
The U.S. dollar has fallen nearly 10% against the euro so far this year. Does anyone suggest that the real size of the U.S. economy has shrunk by 10% in comparison with Europe over that period? The idea is absurd.
China actively suppresses the renminbi on the currency markets through massive dollar purchases. As a result the renminbi is deeply undervalued on the foreign-exchange markets. Just comparing the economies on their exchange rates misses that altogether.
Purchasing power parity is not a perfect measure. None exists. But it measures the output of economies in terms of real goods and services, not just paper money. That’s why it’s widely used to compare economies. The IMF publishes PPP data. So does the OECD. Many economists rely on them.
Brett Arends is a senior columnist for MarketWatch and a personal-finance columnist for The Wall Street Journal.
JOSEPH EID/AFP/Getty Images
Libyans inspect office of Muammar Gaddafi following a NATO airstrike early April 25 )
Peter Goodspeed Apr 25, 2011 – 10:34 AM ET | Last Updated: Apr 25, 2011 10:37 AM ET
If Muammar Gaddafi hadn’t noticed over the weekend, he discovered the truth early Monday, when NATO war planes targeted his personal compound in Tripoli and destroyed a multi-storey library and office complex, while damaging a reception hall for visiting dignitaries.
The war in Libya has entered a dramatic new phase. It began last Thursday when U.S. Defence Secretary Robert Gates announced the United States’ return to direct combat in Libya with the deployment of two squadrons of Predator drone pilotless aircraft.
The drones, possibly the most sophisticated weapons in the history of warfare, will give NATO’s Libyan command the ability to peek into formerly inaccessible corners of the battlefield, 24 hours-a-day. With their sophisticated command and control systems, video surveillance and intelligence gathering capabilities and their Hellfire missiles, the Predator drones are a deadly new addition to NATO’s arsenal.
They can hover over the battlefield for hours on end and strike without warning. They can fly low to more accurately identify targets and launch precise air strikes in built up urban areas.
But their biggest benefit may be merely psychological – impressing upon Col. Gaddafi that he should consider retiring, since he can now be hunted 24 hours a day.
To drive that message home, NATO warplanes launched an attack Friday on a secret underground bunker in Col. Gaddafi’s sprawling Bab al-Azizya compound.
There was no proof the Libyan dictator was using the bunker at the time, but Col. Gaddafi’s supporters said three people were injured in the attack on what they claimed was simply a paved parking lot. But when they brought foreign reporters to the bomb site, the propaganda value of the tour was reduced by the obvious evidence of a now damaged steel-reinforced concrete roof directly under the shattered asphalt.
While U.S. officials have said they initially intend to use their Predator drones over the urban battlefield of besieged Misurata, the introduction of the drones could greatly expand NATO’s surveillance and strike capabilities in Libya.
While Washington withdrew from a combat role in Libya after the initial air strikes needed to help impose a no-fly zone, the Pentagon continued to provide NATO with targeting and intelligence information gathered by Global Hawk spy drones.
RC-135 Rivet Joint eavesdropping planes were being used to intercept communications from Libyan commanders and troops, and the information relayed to the Global Hawk drones which zoomed in to locate Libyan armoured forces and calculated their geographical coordinates.
The Global Hawks would send their target information to NATO analysts at a ground station, who would share the information with command centres that establish target priorities in Libya. Ultimately, the target co-ordinates would be relayed to AWAC command and control planes that direct NATO fighter jets on their bombing runs.
With Predator drones participating in the war, the whole process of launching an attack can be dramatically condensed.
Any electronic intercept can be relayed directly to the Predators, whose pilots work out of the Creech Air Force base, 56 kilometres northwest of Las Vegas.
Once the Predator arrives over a potential target, it can hover there for hours, while a team of trained video analysts – nicknamed “screeners” – in Okaloosa, Florida, monitor the battlefield through high-definition television screens.
Any decision to attack can be executed within seconds. That should terrify Col. Gaddafi, who he has just become the primary target in a new, computerized battle of the drones.
Monday’s attack on his leadership compound may just be the beginning of an all out campaign to personally drive him from power.
“The way to get Gaddafi to leave is have his inner circle break and turn on him,” U.S. Senator Lindsey Graham told NBC’s “Meet the Press” program on Sunday.
“I think the focus should now be to cut the head of the snake off. That’s the quickest way to end this.”
Col. Gaddafi “needs to wake up every day wondering, ‘Will this be my last?’,” he said.
National Post
A story that combines UFO cover-ups with the assassination of John F. Kennedy is a gold mine for conspiracy theorists. And that's just what author William Lester says he uncovered while conducting research for a new book on Kennedy: a memo written by JFK and addressed to the CIA in which the president requests confidential information about UFOs.
In the never-before-seen, top secret memo supposedly written on Nov. 12, 1963, the president ordered the CIA director to organize the agency's intelligence files relating to UFOs, and to debrief him on all "unknowns" by the following February. Ten days later, Kennedy was assassinated.
The newly surfaced document is bound to add fuel to the undying fire surrounding the president's death. But first things first: Is the document authentic? [Top 10 Conspiracy Theories]
'Something odd about it'
Lester, a paranormal researcher and author of the new book "A Celebration of Freedom: JFK and the New Frontier" (Wasteland Press, 2010), said he obtained the memo along with two others from the CIA under the Freedom of Information Act.
"The government regularly declassifies documents after a certain amount of time goes by, and then you have to file a request for those documents," Lester told Life's Little Mysteries.
"When I was in the process of filing, those letters had just become declassified and released to the public." This happened in 2006 or 2007, Lester said. "At the time, I think other people were getting them too."
The top secret memo hasn't turned up anywhere else besides Lester's book, however, and some archivists question its authenticity.
A research technician at the JFK Library in Boston, who asked not to be named, was unable to find a carbon copy of it in its presidential archive, which holds copies of all of JFK's letters.
"We did some research into the presidential papers to try to find any evidence of the Nov. 12, 1963 letter to the director of the CIA, John McCone," the technician told Life's Little Mysteries, a sister site of SPACE.com. Despite the fact that JFK kept carbon copies of all his letters, even the classified ones, "in searching through the president's office files -- CIA, NASA and National Security files -- we could find no evidence of this memo or anything like it."
[Ten Alien Encounters Debunked]
Furthermore, it doesn't look like other the top secret memos Kennedy wrote during his presidency.
"Something is a little odd about it," the technician said. "It is sanitized in very odd places: the director's name, the top heading of the document (which usually distinguishes which agency is generating it) and then the tiny "top secret" print at the top of letter. Top secret items are usually stamped in large dark ink on the letter."
The missing link?
Lester claims that the new declassified memo is thus the missing link in a conspiracy theory surrounding another document that many conspiracy theorists think indicates that the CIA killed Kennedy to prevent his involvement in a UFO cover-up. However, this second document, and thus the conclusion, is also suspect.
This document, called the "burned memo," was passed to the fringe media in 1999 by an anonymous source claiming to be a former CIA operative. The alleged leaker said he worked for the CIA between 1960 and 1974 and pulled the memo -- which experts have never verified as authentic -- from a fire when the agency was burning some of its most sensitive files.
In the "burned memo," the CIA director at the time (his name is blacked out) allegedly wrote: "Lancer [the CIA's codename for JFK] has made some inquiries regarding our activities, which we cannot allow. Please submit your views no later than October. Your action to this matter is critical to the continuance of the group."
The new memo, Lester said, proves JFK really was probing the CIA about UFO intelligence, and that the CIA might have taken steps to prevent this. "If Kennedy had gotten some level of control of this issue from NASA or the CIA, who's to say he wouldn't have disclosed that information to the American public? Who knows where that would have led?" Lester commented.
Given that most historians believe the "burned memo" is a fake, however, the connection to the CIA's secret plot to assassinate JFK doesn't stick.
Alternatively, even if the burned memo is fake but the newly surfaced memo is real, there are several perfectly logical reasons why Kennedy might have written it. Lester believes the president was interested in UFO intelligence for three reasons.
First, Lester said, Kennedy was concerned that UFOs seen by the Soviets would be misinterpreted by them as being U.S. aircraft behaving provocatively. This may be what Kennedy implied when he (allegedly) wrote, "It is important that we make a distinction between known and unknowns in the event the Soviets try to mistake our extended cooperation as a cover for intelligence gathering of their defense or space programs."
The second reason for Kennedy's inquiry could have been his obvious interest in space travel; at the time of his (alleged) writing, NASA was a new agency, Lester explained, and "the whole question of outer space and life in outer space was at the forefront of everybody's thinking." Third, there was a natural concern about UFOs at the time due to a spurt of incidents thought to be sightings.
In the 1960s, nearly everyone was interested in UFOs -- JFK, NASA, the CIA and citizens alike.
* Top 10 Conspiracy Theories
* Ten Alien Encounters Debunked
* Viral Video of 'Alien' in Siberia a Convincing Fake
=================================
On November 12, 1963, President John Kennedy issued two Presidential memoranda instructing NASA and the CIA to begin cooperating with the USSR on joint space missions including a lunar landing.
On the same day, a conversation occurred between Kennedy and Soviet Premier Nikita Khrushchev on the importance of sharing information concerning UFOs as they moved forward with joint space missions. Leaked documents concerning the alleged conversation and the role of the CIA in controlling UFO information directly implicate the CIA in Kennedy’s assassination ten days later.
In addition to the two Presidential memoranda cited earlier in this investigative series, another leaked document shows the extent to which Kennedy was prepared to cooperate with the Soviet Union in declassifying UFO files. The aim was to avoid the risk of a mistaken military confrontation over UFOs.
The document is allegedly a Top Secret NSA intercept of a “Hot Line” conversation between President Kennedy and Soviet Premiere Nikita Khrushchev dated November 12, 1963.
Kennedy and Khrushchev discussed the importance of their respective UFO working groups to deal with the UFO problem to avoid the risk of future conflict.
Kennedy told Khrushchev: “I have begun an initiative with our NASA to exchange information with your Academy of Sciences in which I hope will foster mutual concern over this problem and hopefully find some resolution.” Kennedy was certainly referring here to the National Security Action Memorandum released on the same day, November 12 1963. Kennedy also said, “I have also instructed our CIA to provide me with full disclosure on the phantom aspects and classified programs in which I can better assess the [UFO] situation.” While the NSA intercept has not been conclusively determined to be authentic (it has been ranked medium-to-high level of authenticity), it is consistent with the November 12 National Security Action Memorandum 271 titled: “Cooperation with the USSR on Outer Space Matters."
The risk of mistaken identification of UFOs leading to an accidental nuclear war was also allegedly considered by NATO at the same time.
According to Robert Dean, a retired Command Sergeant Major who worked at NATO headquarters from 1963-1967, in 1964 NATO issued a Cosmic Top Secret document dealing with the threat posed by UFOs being confused with a nuclear first strike by the Soviet Union.
Titled simply “The Assessment,” Dean said that it was feared that mistaken UFO sightings could start an accidental nuclear war. Dean’s statement validates the content of the alleged Hotline transcript and gives support to its authenticity.
JFK Sought UFO Files 10 Days Before His Death
A newly released letter shows that 10 days before his assassination, President John F. Kennedy wrote to the head of the CIA demanding to be shown highly confidential documents about UFOs.
Author William Lester, who is researching a new book about Kennedy, says the CIA released the letter to him under the Freedom of Information Act.
Kennedy's letter, dated Nov. 12, 1963, has the subject line "Classification review of all UFO intelligence files affecting National Security," and asks for access to those files.
A second Kennedy letter released to Lester, written on the same date, was sent to the administrator of NASA and expressed a desire for cooperation with the Soviet Union on mutual outer space activities, according to Britain's Daily Mail.
Lester told AOL News: "One of his concerns was that a lot of these UFOs were being seen over the Soviet Union, and he was very concerned that the Soviets might misinterpret these UFOs as U.S. aggression, believing it was some of our technology.
"I think this is one of the reasons why he wanted to get his hands on this information and get it away from the jurisdiction of NASA so he could say to the Soviets, 'Look, that's not us, we're not doing it.'"
The Daily Mail pushes the envelope in its coverage of the story, headlining it, "Was JFK killed because of his interest in aliens?" But AOL News acknowledges that the president's interest in UFOs shortly before his death "is likely to fuel conspiracy theories about his assassination."
The story has already sparked renewed interest in the so-called "burned memo" that a UFO investigator claimed he received from an unidentified CIA leaker in the 1990s.
According to the investigator, the leaker said he worked for the CIA between 1960 and 1974 and pulled the document, marked Top Secret, from a fire when the agency was burning some sensitive files, according to the Daily Mail.
The memo from the CIA director refers to a group of military officials and scientists allegedly appointed by President Harry Truman to investigate the possible presence of aliens on earth. It also refers to "Lancer," which was Kennedy's Secret Service code name, and states, "As you must know, Lancer has made some inquiries regarding our activities, which we cannot allow."
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