How Much Longer Can the US Lead the Global Economy?


As a youngster watching the Olympic Games on TV, our two favourite events happened on the final day of the Games.

They were the 4 x 100 metre relay, and the 4 x 400 metre relay.

It was exciting stuff. Although the Americans always seemed to win both events.

The most exciting part of both races was the baton change. The 4 x 100m baton change involved the thrill as they tried to exchange the baton at full speed without stepping out of the change area.

The 4 x 400m baton change was more of a physical affair as runners jockeyed for position at the line, and tried to avoid other runners who were pulling up after their lap.

Sometimes it was a smooth transition. But most of the time there seemed to be some element of excitement, confusion, and occasionally disaster.

Thoughts of this sprang to mind as we considered a change of sorts happening in the world economy now. There’s plenty of excitement. An element of confusion. And most of all, the potential for disaster.

It’s what makes this ‘baton change’ perhaps the most exciting event in world financial history for the past 142 years…

A fascinating story popped up on our screen yesterday.

At first the headline intrigued us. But that was nothing compared to what we read in the first two paragraphs of the story.

In fact, as soon as we read those paragraphs we felt as though we didn’t need to read any further. It was as though it was the validation of every assumption we had made about this key economy.

This was the proof. It was as we thought it was, and this confirmed it. Importantly, it will have a major impact on how we approach investment markets for this year, and perhaps for the rest of our lifetime.

The biggest economic change in 142 years

The article in question was in yesterday’s Financial Times. The two paragraphs in question are as follows:

The US is on the brink of losing its status as the world’s largest economy, and is likely to slip behind China this year, sooner than widely anticipated, according to the world’s leading statistical agencies.

The US has been the global leader since overtaking the UK in 1872. Most economists previously thought China would pull ahead in 2019.

Stop and think about that for a moment.

The US has been the global economic leader since 1872. That’s 142 years.

That’s 10 years before the first ever Ashes test series. It’s 29 years before Australia as a nation state existed.

In all that time the US has led the world economically. But for how much longer?

If the statisticians at the International Comparison Program at the World Bank are right, then America’s dominance is about to end. The US economy is about to pass the baton — reluctantly — to the new big player in town.

And if this baton change is anything like the relay races at the Olympics, then you can be sure of a few thrills, some jostling, and even an upset or two.

OK. Comparing China’s looming economic dominance to an Olympic relay race is somewhat simplistic, arguably irrelevant, and perhaps even silly. But there is a point to this. Things change. The US hasn’t always been the economic leader.

And before that the UK wasn’t always the economic leader. And before that neither was France, or Spain, or Rome, or Greece, or Persia, or Egypt. Economies through time have always reached a peak, at which point an emerging or frontier market has taken the baton.

That’s where we are right now in the world, with the US ceding control of the global economy to China.

The new era of ‘frontier’ economies

The question is when China becomes the world’s biggest economy, can it hold on to that position?

There’s no guarantee. During the mid-1990s Japan seemed well placed to become the world’s biggest economy. It had closed the gap in GDP terms with the US and given the prevailing growth rates, Japan could have taken over as the world’s biggest economy by the early 2000s.

But that didn’t happen. The Japanese property and stock market bubbles burst, and ever since then the size of the Japanese economy has mostly gone sideways.

Nothing is ever certain. Even so, there’s no denying that China’s growth story over the past 10 years has been nothing short of astounding. But can the growth continue?

Well, we’re sure there were plenty of folks who doubted the sustainability of American growth in the 1870s. And yet that proved to be the beginning of 142 years of dominance.

And there were plenty of folks questioning China’s growth rate leading up to 2008. And yet China’s economy doubled between 2008 and 2012.

That’s not to say China will dominate for the next 142 years. Arguably, with better means of communication, new technology, and easier access to capital China will likely face competition with other emerging and frontier economies long before then.

But so what? Even if China only dominates the global economic scene for the next 50, 40 or even just the next 20 years, it’s likely to result in a huge shift of investment capital from traditional Western economies towards the frontier economies in Asia.

And if that happens, based on where things could be heading over the coming years it means that now and the years ahead could be the single best time to be an investor in the last 100-plus years.

If you’ve got any interest in building wealth (as you should), investing in China as it takes the helm as the world’s biggest economy is an opportunity no investor should miss.


PS: The prospect of this being an inflection point for the Chinese economy to become the world economic leader is a big part of why I’ve hired Ken Wangdong as Money Morning’s emerging markets analyst. Ken grew up in China, he has worked in China. And now from his base in Sydney Ken can give you the kind of insight on the Chinese people, the culture, the business practices, and most of all the investment opportunities. Read on for Ken’s take on China’s ecommerce ‘freight train’…

From the Port Phillip Publishing Library

Special Report: Secure and Protect Family Wealth for Generations

Join Money Morning on Google+