And what currency are they likely to trade in? While chances are that the world's major supply chains will still go to the US, chances are that they won't be trading in US Dollars. Are we prepared for that?

 

A recent article in the Wall Street Journal Marketwatch claims that the Age of America nears the end, as China's economy is poised to overtake the US by 2016, according to a fresh report by the International Monetary Fund.

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.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.

The rise of China, and the relative decline of America, is the biggest story of our time. I for one wasn't aware of it being that close. In a post on food supply chain vulnerability I imagined it to be in 15 years or so, not just 5. Well, as it turns out, it's a matter of how you count and compare economies. 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.

We are now witnessing the end of the Age of America, the article says, and I am compelled to agree. Most of us have lived in a world dominated by the U.S. for so long that there is  no longer anyone alive who remembers anything else, but it should be remembered that America overtook  Great Britain as the world’s leading economic power in the 1890s. The Age of China, however, will feel very different, because both countries enjoy very similar rules of constitutional  government, respect for civil liberties and the rights of property.  China has none of those. How will that impact trade relations? I'm just asking...

 

What the rise of China means for defense, and international affairs, has  barely been touched on, and I'm not sure many stratgegists have even  thought about it, but some are already a bit concerned:

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.”

And that is just the start of the worries.

 

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?

What do you think? Should we fear China's rise to global economic powerhouse?

 

Reference:

Wall Street Market Match: IMF Bombshell - Age of America nears end

IMF: World Economic Outlook April 2011

In a previous post I asked the question Are cheap food and cheap energy a thing of the past?, reflecting on the fact that some staple food commodities were trading at prices not seen before, and how that could impact food supply chains. Here comes another worry: food oil, as Bloomberg reports in a recent article on the supply and demand of vegetable oils that are used not only in cooking and food processing, but also as biofuels.

 

At a time when consumers are focused on food costs that are within about 3 percent of a record, stockpiles of edible oils needed to make everything from noodles to fish sticks are dropping to a three-decade low. [...] The combined stocks of nine oils will plunge 25 percent to 9.39 million metric tons this year, or about 23 days of demand, the fewest since 1974, the U.S. Department of Agriculture estimates. [..] As the global population expanded 85 percent in the past four decades, demand for edible oils rose almost ninefold.[...] Stockpiles of the oils extracted from palm fruit, palm kernel, soy, rapeseed, sunflowers, coconuts, cotton, olives and peanuts are slumping as demand climbs 6.1 percent to a record 146.4 million tons this year, outpacing a 4.2 percent gain in production, according to USDA estimates.

 

What the article is saying is that basically there isn't enough oil around to meet demand, which may cause prices to soar, hurting the profits of food giants like Unilever, but also other industries, since vegetable oils are used in everything from Hellmann’s mayonnaise to Snickers candy bars, as well as soaps, cosmetics and fuels.On the other hand, it may increase profits of oil producers, e.g. palm oil plantations in Malyasia and Indonesia. In any case, the end consumer will perhaps be the hardest hit.

 

While higher prices may be hurting food companies and consumers, they’re bolstering income for growers.

 

That said, farmers will always seek to grow the most profitable crops, thus adding to the crisis by changing what is supplied to the market:

 

Chinese growers may plant 11 percent fewer acres, seeking greater profit from cotton and corn, as prices for both crops more than doubled in the past year.

 

Personally,  I'm not much of an advocate for biofuels. Not because I don't believe  in global warming, or because I don't think we should take care of our  planet and pollute less, but because using arable land to produce fuel  rather than food when much of the world's population is starving seems  rather ludicrous to me. However, in the end, money always wins, I guess. As I said on my blog, Is it just the price we have to pay?

 

Reference

bloomberg.com: Palm Oil Advancing 23% Hurting Unilever as Stockpiles Decline to 1974 Low

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