It’s official: America is now No. 2

Ok, I've read through the first page and am honestly mildly humored by the responses. I understand not everyone understands economics and the such; not everyone has time for it. But people seem to misinterpret the "new" data coming out.

First off, this is when Chinas GDP is measured in PPP (Purchasing Power Parity). Micheal Pettis actually wrote a brilliant article detailing why its absurd to compare a country like China to a country like the US using PPP (I have to warn you, the Pettis article is a long but thorough read).

When measured nominally, Chinas GDP is still about 70% smaller than Americas. The nominal rate deals on current market exchange rates, and in reality, is probably the better metric to use when gauging the relative weight and size of an economy vs. another countries economy.

Getting back to the point about PPP; China measures its GDP differently than the US does. The composition of Chinas GDP is VERY different than that of Americas. So comparing the two using PPP might not be the greatest idea. I'll let an excerpt from Michael Pettis explain:

...
Here, of course, is where the PPP calculation can fall apart, and it is why the assumption should be explicitly stated. If you are comparing the US with an economy that construct GDP in a fairly similar way, Canada for example, PPP adjustments can be very illuminating because it allows you to compare like with like. But if GDP is constructed very differently than it is in the US, the second assumption is violated, in which case the PPP adjustment becomes simply another random comparison, which might or might not be better than the non-adjusted GDP numbers.

In China, it turns out, and not surprisingly, the composition of GDP is very different than it is in the US, mainly because the two countries measure debt very differently. It is not because China sets out to record debt differently – on the contrary, most people will tell you China records it in the same way the US and other countries do, and China certainly intends to. The problem is that in China bad debt is rarely recognized, repayment isn’t enforced, and default is almost non-existent. Banks simply roll bad debt over indefinitely. This makes comparisons between the two countries pretty hard. Why? It helps us to understand this if we think about the difference in the way we account for expenditures related to consumption and to investment. Normally, when you spend money on consumption, you create an expense. When you spend money on investment, you create an asset.

Let us assume that two identical companies each spend $50 on the same thing (say scientific research), but in one company the expenditure is recorded as an expense and in the other it is recorded as an asset. What would the financial statements for each company look like? The answer is pretty obvious. In the current recording period the first company would show $50 lower net profits than the second and $50 less assets and equity – remember however that there is absolutely no difference between the two companies, only in the way they record expenditures.

We should understand that this difference in accounting isn’t permanent. Over time, the second company will amortize, explicitly or implicitly, the $50 in additional assets, so that in future periods its net income will be a little lower every year, until at some point, when the expenditure (asset) is fully amortized, the two balance sheets will again look identical.

So in other words, US GDP reflects losses; Chinas, for the most part, does not. How you adjust for cost of living matters little (using PPP adjustments) when so much of Chinas mammoth GDP has been funded by credit; little of which that has actually been paid back. In other words, the GDP data coming out from China treats the money spent on building factories, suburban highrises, etc. as value created; even if those projects never bring in the money to pay back those loans (sounds sustainable, eh?). So the difference is that the US counts the debt unpaid against its GDP. China, because its financial system is underpinned by the assumption that nearly all debt (good and bad) will be paid by the government, mostly does not count its debt into its GDP figures.

And lets not forget that Chinese government researchers have come out and claimed that China has essentially wasted $6.8 trillion on "worthless" investments over the last 5 years...All contributing to this GDP figure that a lot of you don't quite seem to understand. In other words, China really isn't bigger economically. It's just fooled you all into believing it is. Actually, I take that back. Beijing has been opposed to the new World Bank PPP calculations, and its probably to save face on their part. I'll let Michael Pettis finish my post by explaining why.

....
The FT article says that the reason Beijing was opposed to the study was fear that “ leaders do not want exposure to the international pressure that comes with being the world’s largest economy, according to people familiar with Chinese official views on the matter.” The article then quotes Vinod Thomas, director-general of independent evaluation at the Asian Development Bank as saying: “They certainly don’t want to overstate the size of their economy. They are sensitive about that.”

I think this is probably correct but I think the FT and others may have missed the point. If GDP is indeed “overstated” by the failure to recognize bad debt, remember that this overstatement is not permanent. The difference will necessarily be amortized over the future, and the result will be that today’s overstatement will be matched by tomorrow’s understatement, and for those who receive my newsletter, I explained in the latest issue that the overstatement is only equal to the understatement if there are no financial distress costs associated with the excessive debt burden. If there are, and there almost certainly will be, tomorrow’s understatement will exceed today’s overstatement.

This means that if you look only at PPP adjustments, China runs the risk of becoming the world’s largest economy earlier than expected, only to slip back to second place over the next few years. This, I suspect, would be a political embarrassment, and it is very understandable why the current administration would not want it to happen.

To put it in plain English; when Chinas economy corrects itself from the added inefficiencies of debt fueled growth, it won't be regarded as the largest on any metric.

originally posted by: Iwinder
a reply to: buster2010

The reason why America fell behind is because we stopped investing in our future. We cut funding to the Dept of Education

Outside looking in from Canada, I believe that the most obvious problem was and still is the killing of manufacturing jobs and therefor the middle class with what used to be huge purchasing power.
Same deal for us at home here, so many factory's abandoned and left to rot you hardly even notice them now. What once were nuisance weeds and empty buildings are now forests. You can't see the abandoned buildings for the trees.

Regards, Iwinder

I can't help but laugh at this argument. Do you have any idea how much the US manufactures every year? Counting mining plus utilities, the US manufactures about $3 trillion every year. To put that number into proper perspective; the US manufacturing output in dollar amount is larger than your countries entire GDP! Manufacturing is a dieing jobs sector due to efficiency gains in things like automation. While manufacturing might be a dieing jobs sector, manufacturing output is the highest its ever been today in the US.

Most of the US GDP is based on internal commerce and in the service sector. Nations that depend on manufacturing for economic growth are typically limited to demand from their customers. Its not a very good economic model for sustainable growth. Growth must come from other avenues. At the most, manufacturing should compliment a countries growth rate (and it does in the US).

I think a lot of you are making too much out of this. I see a lot of blaming Obama (whom I am no fan of). But, in all reality, China has put itself in an economic hole. This will be a lot more obvious once Chinas enormous economic bubble pops.

a reply to: rock427

Of course they don't. All they see is an opportunity to attack the US.

It's correct that China produces a lot of "cheap and toxic crap", just going to the Chinese (dollar) store here makes me angry, there is no single part, not even simple items like pens, chip clips etc. which work longer than a few days. Things like appliances, electronics, lights etc. from that store are all dangerous and blow up in your face in a few days.

BUT..it's also true that this PC I am writing this message here, and YOUR computer you're reading this with is made in China.

So is your iphone, big screen TV, internet router, keyboard, stereo, MP3 player, mobile phone, tablet PC, calculator, remote control and LOTS of your clothes and shoes, even big-name brands.

We outsourced almost our entire production of goods TO China , so the fact that China just recently overtook the US as #1 world economy is certainly NOT surprising. It is indeed a result and prime example how we ourselves, our corporates etc. are the reason for our economic downfall. You simply cannot sustain outsourcing work and production elsewhere, it's a dangerous "the snake bites its own tail" game. People get poorer (because of no work, lower pay etc.), poor people buy cheaper goods, which means that even more needs to be outsourced to be able to produce cheap...and of course China profits from all of this.

>>
China is still a nation of low incomes, and by that metric the US has been far behind many countries for a long time...
>>

So is the US, or at least it's not THAT far off. Almost 70% of workers in the US today don't make enough to satisfy a nice "middle-class" life style. People live from borrowed money on their credit carts to buy their big screen TVs and iphones. Money they don't even have. The few elites and corporates like Apple, Walmart, Google, MS etc. DO NOT MAKE THE AVERAGE AMERICAN. Take away those elites and super-rich corporates and you have a majority of people in the US who work 3 jobs at once just to sustain a somewhat normal life, to pay their bills. The US as a whole is not "rich" by a long-shot, it's just that the few elites and major corporates distort the statistics. (Or: If in my neighborhood there lives a billionaire, the "average" income of my small town here would also ve very high. Except that such a statistic is meaningless, the wealth of the billionaire isn't shared with anyone else. But THIS is exactly how WE measure our nation(s) wealth....I guess it's not really different in China, just more extreme.

originally posted by: rock427

originally posted by: Iwinder
a reply to: buster2010

The reason why America fell behind is because we stopped investing in our future. We cut funding to the Dept of Education

Outside looking in from Canada, I believe that the most obvious problem was and still is the killing of manufacturing jobs and therefor the middle class with what used to be huge purchasing power.
Same deal for us at home here, so many factory's abandoned and left to rot you hardly even notice them now. What once were nuisance weeds and empty buildings are now forests. You can't see the abandoned buildings for the trees.

Regards, Iwinder

I can't help but laugh at this argument. Do you have any idea how much the US manufactures every year? Counting mining plus utilities, the US manufactures about $3 trillion every year. To put that number into proper perspective; the US manufacturing output in dollar amount is larger than your countries entire GDP! Manufacturing is a dieing jobs sector due to efficiency gains in things like automation. While manufacturing might be a dieing jobs sector, manufacturing output is the highest its ever been today in the US.

Most of the US GDP is based on internal commerce and in the service sector. Nations that depend on manufacturing for economic growth are typically limited to demand from their customers. Its not a very good economic model for sustainable growth. Growth must come from other avenues. At the most, manufacturing should compliment a countries growth rate (and it does in the US).

I think a lot of you are making too much out of this. I see a lot of blaming Obama (whom I am no fan of). But, in all reality, China has put itself in an economic hole. This will be a lot more obvious once Chinas enormous economic bubble pops.

Well slap me silly, good post and I have to offer up this tid bit If I may.
It seems accounting is not a strong point anywhere around the Globe at this time:-)

www.abovetopsecret.com...

What do you make of the data Rock? Don't get me wrong I am not being argumentative I am really asking for your opinion on the link I just put up.

Regards, Iwinder

originally posted by: Iwinder

originally posted by: rock427

originally posted by: Iwinder
a reply to: buster2010

The reason why America fell behind is because we stopped investing in our future. We cut funding to the Dept of Education

Outside looking in from Canada, I believe that the most obvious problem was and still is the killing of manufacturing jobs and therefor the middle class with what used to be huge purchasing power.
Same deal for us at home here, so many factory's abandoned and left to rot you hardly even notice them now. What once were nuisance weeds and empty buildings are now forests. You can't see the abandoned buildings for the trees.

Regards, Iwinder

I can't help but laugh at this argument. Do you have any idea how much the US manufactures every year? Counting mining plus utilities, the US manufactures about $3 trillion every year. To put that number into proper perspective; the US manufacturing output in dollar amount is larger than your countries entire GDP! Manufacturing is a dieing jobs sector due to efficiency gains in things like automation. While manufacturing might be a dieing jobs sector, manufacturing output is the highest its ever been today in the US.

Most of the US GDP is based on internal commerce and in the service sector. Nations that depend on manufacturing for economic growth are typically limited to demand from their customers. Its not a very good economic model for sustainable growth. Growth must come from other avenues. At the most, manufacturing should compliment a countries growth rate (and it does in the US).

I think a lot of you are making too much out of this. I see a lot of blaming Obama (whom I am no fan of). But, in all reality, China has put itself in an economic hole. This will be a lot more obvious once Chinas enormous economic bubble pops.

Well slap me silly, good post and I have to offer up this tid bit If I may.
It seems accounting is not a strong point anywhere around the Globe at this time:-)

www.abovetopsecret.com...

What do you make of the data Rock? Don't get me wrong I am not being argumentative I am really asking for your opinion on the link I just put up.

Regards, Iwinder

The debt is a concern. But people need to put it in perspective. When talking about a national debt, you need to also look at that nations asset wealth to get an idea of the full financial picture that country.

According to Stratfor Global intel, the combined US asset with stands at $230 trillion. To get an idea of Americas financial posistion, subtract $18 trillion from $230 trillion to understand Americas financial position.

The debt is however an issue. But people need to remember that the debt is a cumulative measure. And every year, the US asset wealth grows by about $17 trillion. Also, Chinas debt is nowhere near as low as the IMF projects it. Chinas debt is at least 200% of their GDP. They just do a phenomenal job at "hiding" it. You just have to know where to look.