IMF Predicts The End of the “Age of America” in 2016

From the Marketwatch,

The International Monetary Fund has just dropped a bombshell, and nobody noticed.

For the first time, the international organization has set a date for the moment when the “Age of America” will end and the U.S. economy will be overtaken by that of China.

And it’s a lot closer than you may think.

According to the latest IMF official forecasts, China’s economy will surpass that of America in real terms in 2016 — just five years from now.

Put that in your calendar.

It provides a painful context for the budget wrangling taking place in Washington right now. It raises enormous questions about what the international security system is going to look like in just a handful of years. And it casts a deepening cloud over both the U.S. dollar and the giant Treasury market, which have been propped up for decades by their privileged status as the liabilities of the world’s hegemonic power...

Naturally, all forecasts are fallible. Time and chance happen to them all. The actual date when China surpasses the U.S. might come even earlier than the IMF predicts, or somewhat later. If the great Chinese juggernaut blows a tire, as a growing number fear it might, it could even delay things by several years. But the outcome is scarcely in doubt.

This is more than a statistical story. It is the end of the Age of America. As a bond strategist in Europe told me two weeks ago, “We are witnessing the end of America’s economic hegemony.”

We have lived in a world dominated by the U.S. for so long that there is no longer anyone alive who remembers anything else. America overtook Great Britain as the world’s leading economic power in the 1890s and never looked back.

Well that indeed is a bold prediction coming from the multilateral institution which failed to predict the emergence of the 2008 financial crisis.

IMF’s over reliance on econometric models makes them greatly dependent on constants as basis for their predictions. Constants do not exist in the world of human action and even in the environment (e.g. Japan’s science models failed to predict the last disaster).

In addition constant based models tend to generate linear progressions which means that methodological calculations greatly depends on data from past performances, thus subjecting them to flagrant errors from black swan ‘fat tail’ events.

I’d say that this supposed end of the “age of America” and the contemporaneous "rise of China" strongly depends on some major interrelated factors: bubble cycles, inflationism, the political resolution of the grand unwieldy fiscal deficits, state of economic freedom, and the progress of technological innovation and the scale of transition of the global economy to the information age.

Say for instance, if China’s bubble does unravel before 2016, then the IMF’s clock could suffer a substantial reversal.

To reminisce, many saw Japan as a contender to the US crown in the 1980s. Events turned out that the much heralded Japan Incorporated had been an illusion of prosperity and success brought about by funny money. Events could turn out the same for China. I am not saying it will, but it could.

Also, policies that “kick the can down the road” via inflationism may increase the fat tail risk of hyperinflation for the US, or even for the rest of the world if everyone embraces competitive devaluation as a common national monetary policy.

In other words, predicting the end of the Age of America is not going to be that simple. IMF should predict first, NOW before the Presidential primary, who will be the President of the US in 2012.

Events are as fluid as people adapt and respond to social and environmental changes.