It’s official: The end of the “Age of America” will happen in 2016.
That’s when, according the latest forecasts from the IMF, China’s economy will surpass America’s.
You might want to put the date in your calendar. Because it means that the next president of the United States will be the last to lead the world’s biggest economy.
Take a moment to digest that… A decade ago, the U.S. economy was three times the size of the Chinese economy.
The IMF figures have caused a stir. Because up until now economists have predicted that China wouldn’t overtake the U.S. until 2030.
So what has changed?
“Not much” is the simple answer. The IMF has simply looked at the situation in terms of “purchasing power parity.” This compares what people earn and spend in terms of their own economies, rather than a fixed dollar amount.
Think of it this way: You have two apartments—one in Queens and the other overlooking Central Park in Manhattan. Both are exactly the same size, have the same wooden floors and the same fitted kitchen and the same furnishings.
The true values of the apartments are the same. But the dollar value is different. Because in New York property costs more in dollar terms, as do the same floors, furnishings and fittings.
The same goes for China. The actual numbers of goods China produces—like TVs, laptops, cars—has skyrocketed relative to the U.S. But because China is a cheaper part of the world than America to produce things in, the dollar value of these goods hasn’t risen to the same extent.
When seen through the lens of purchasing power parity, the Chinese economy will grow from $11.2 trillion, where it is now, to $19 trillion by 2016. Meanwhile, the U.S. economy will go from $15.2 trillion to $18.2 trillion.
This won’t be the first time an economic superpower has come and gone. The British Empire started to crumble after World War I. From having the largest empire ever known to man and being the world’s largest creditor, Britain became a minor European power with a debt-ridden economy.
The End of the Age of America is the biggest economic story of our time. It will change how you live and how your children live. And it will affect every investment decision you make for the rest of your life.
I like to think of what’s going on in terms of “submerging” and “emerging” economies.
The submerging economies of the U.S., Europe and Japan all have lots of growth behind them and less growth ahead. They all have aging populations. And they are all struggling with unsustainable debt loads.
The emerging economies, on the other hand, have less growth behind them and lots of growth ahead. They have younger populations. And they have relatively low debt loads.
Oh…and one other thing. The emerging economies all have much higher economic growth rates than the submerging economies.
Again according to forecasts by the IMF, growth in the emerging economies is set to clock in at about 8% this year. This compares to forecast growth of between 2% and 3% in the submerging economies.
Of course, these are just forecasts. Plenty could happen between now and 2016 to prove the IMF wrong. But regardless of when the Age of America ends, unless we see a dramatic shift in the current trends we can safely say the moment is now fast approaching.
This is why it’s more important now than ever to make sure that your portfolio is diversified beyond America’s borders.
I recommend that you consider holding 50% of your stock market investments in emerging economies. Also, make sure that any investment you have in the submerging economies has revenues that come from abroad as well as from within the U.S.
The U.S. still has a lot going for it…and it would be foolish to write it off. But it looks increasingly likely that it will be sharing its power with other emerging market players.