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Daily News Analysis

Chinese economy surpasses that of the US, says IMF

Crescent International

The US economy has taken a tumble faster than anticipated. This was confirmed by the International Monetary Fund when it released figures on December 4 showing that China has surpassed the US as the world's largest economy. America had been the world's dominant economic power since 1872. No more.

Washington DC, Crescent-online
Friday December 05, 2014, 09:39 EST

China has overtaken the US as the world’s largest economy, according to the International Monetary Fund (IMF).

Releasing its latest numbers for world economies, the IMF said on December 4 that China now sits atop the world’s economic perch.

This is based on the purchasing power parity (PPP) of each country. This takes into account not only a country’s Gross Domestic Product (GDP) but also the cost of goods.

Thus, if prices of various commodities are lower in a particular country, this gives greater purchasing capacity to consumers even if their average income is lower than in other countries.

According to IMF estimates, by the end of 2014, China’s economic output will amount to $17.6 trillion. The US with $17.4 trillion will fall to second place.

The IMF projected in early October that China’s economy will be 20 percent bigger than that of the US by 2019.

Looked at another way, China’s growth means it now accounts for 16.5 percent of the global economy in real purchasing power terms, compared to the 16.3 percent for the US, according to the Financial Times of London.

The difference may not be huge in dollar terms but it is a hard knock for a country that has occupied top economic spot since 1872.

It is also a huge psychological blow. The US has suffered a string of military defeats in recent years and it is no longer taken seriously around the world.

Its economic decline, apparent for many years, will further erode its clout in the international arena.

This does not mean that the Washington warlords will give up their warmongering habits but US military threats are increasingly losing effect.

The US financial decline has come about as a result of several related factors. It suffered massive blows as a consequence of two wars it launched in Afghanistan and Iraq.

American economists have estimated the combined costs of these wars at $4 trillion. Factoring in the payouts to wounded war veterans and this comes to $6 trillion.

The US also has an external debt of more than $16 trillion. There is red all over as the US piles up more debt and interest on such debt keeps adding.

Further blows have been delivered by two other factors. First, the US dollar is fast losing its position as the world’s reserve currency.

With the emergence of euro in the global financial market, about 20 percent of global reserves have moved away from the dollar and into euro.

Additionally countries like China and Russia have entered into agreements to trade in each other’s currencies in bilateral trade instead of using the dollar.

The group of BRICS countries—Brazil, Russia, India, China and South Africa—have announced establishment of a BRICS IMF that would offer loans to Asian and African countries on concessional terms to enable them to develop their economies.

This will not only reduce the influence of western-backed IMF but also undercut the dollar.

Increasingly countries are entering barter agreements or agreeing to trade in each other’s currencies.

In addition to Russia and China, Iran has also entered into similar agreements with Russia and India. Brazil has embarked on a similar policy.

Taken together, they are a powerful indicator that the dollar is fast losing its position as the world’s reserve currency.

These developments have had a huge impact on the US economy that has thrived on borrowed money for decades.

China remains the biggest foreign holder of US government debt, holding an estimated $1.27 trillion in US Treasury bonds.

More than a year ago (November 20, 2013), the People’s Bank of China said that the country does not benefit any more from increases in its foreign-currency holdings.

Explaining reforms outlined by the Chinese government, Governor Zhou Xiaochuan wrote in an article last year that the monetary authority would “basically” end normal intervention in the currency market and broaden the Yuan’s daily trading range.

This was a vote of no confidence in the dollar.

Uncle Sam is truly on crutches now.


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