Home > China, GOLD > Chinese Know Real Value

Chinese Know Real Value

April 27, 2011


The International Monetary Fund reported without fanfare recently its projection that the candidate who wins the 2012 U.S. presidential election will be the last U.S. President to lead the world’s richest super power.

The IMF prediction is based on its calculation that within the next five years China will surpass the United States as the world’s largest economy.

The IMF forecast differs from that of most traditional forecasts, which put the date China’s economy outstrips the U.S. at least a decade or two into the future. However, those traditional forecasters are looking at value as calculated in currency—and as we at WealthCycles.com have reiterated many times, currency lies.

“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.”

The IMF bases its forecast on the only accurate way to measure value—by how much goods and services one is able to buy with any given commodity, be it currency or gold or shares of the Dow. (See the WealthCycles.com article, True Value Is Priceless.) But even though its projections of a Chinese ascendancy may be on target, there is more, much more, to that picture than what lies on the surface. China may be booming, but it’s also treading many of the same treacherous paths that nearly took down the U.S. financial sector and led to the great Financial Crisis of 2008—cheap credit, currency inflation, overpriced real estate… the similarities are numerous.

At the end of the day, China, like the U.S., like every nation on the planet, operates under a fiat currency system. Every fiat currency in history has failed or has been revalued against gold. The Chinese, who know a thing or two about history, no doubt understand this. The People’s Bank of China—China’s central bank—has for the past year been buying up gold in increasing quantities. And last month it issued a statement urging all Chinese citizens to do likewise. The time may come when the renminbi surpasses the dollar—but it’s apparent the Chinese aren’t hitching their wagons to any paper currency, at least in the long run

%d bloggers like this: