Hacker News Reader

Comment by keiferski | Hacker News Reader

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.

So we won't be the top any longer, but we'll still be enormously dominant. So? Competition drives innovation.

All the "America is doomed" folks act as if America is going to crumble to pieces simply because we are no longer the only gorilla in the room.

View on HN

The danger comes when China has enough money to equal the US in military strength and decides it wants as much influence in World politics as America does.

The rest of the World doesn't need that complication.

The Chinese have not had a tradition of colonialism. They're just not as obsessed with controlling the world as the west is. They are assertive over neighboring areas that have been arguably part of China for a long time like Tibet, Taiwan, Macau and Hong Kong but that's pretty negligible compared to the global domination aspirations of the Soviets, the Axis powers or Colonial European powers.

They're working on it http://en.wikipedia.org/wiki/Neocolonialism#Sino-African_rel...

Yeah, because we've been doing a bang up job in that department.

I think the situation is a lot different than in the cold war. The economies of the U.S. and China are so deeply connected that neither can afford to get into a major conflict with the other.

I'm not convinced military power is actually that useful in the modern world. The US spends more on its military than the rest of the world combined, and yet it has trouble maintaining control in the poorest countries on Earth.

I'd personally be more concerned about China's economic power, but I suspect that there's a limit to how efficient China's economy can be whilst maintaining its totalitarian state.

The US spends more on its military than the rest of the world combined, and yet it has trouble maintaining control in the poorest countries on Earth.

That's largely for ethical reasons though. The US is obsessed with minimising civilian casualties. If the US were as ruthless as the great empires of the past then there'd be no problem maintaining control. Trouble in this town? Destroy it!

On the other hand, imperialism itself isn't all that useful in the modern world. Why did the Europeans go to all the trouble of setting up all those foreign empires? Why, so they could trade with the locals! Nowadays anyone can trade with anyone, and there's really no need to have political control over India just to trade with Indians.

That's largely for ethical reasons though. The US is obsessed with minimising civilian casualties.

That's certainly part of it, and I imagine that China cares far less about civilians than the US does.

But I think it's also because properly motivated individuals can cause far more damage than they could do in the past. There's a lot more technology to take advantage of, and many more targets to, well, target.

Nowadays anyone can trade with anyone, and there's really no need to have political control over India just to trade with Indians.

I think there was a degree of "take" as well as "trade", but in general I think you're right. In the past it was easy to profit from conquest, but nowadays it isn't really cost-effective. I don't think there's been a war fought so far this century that hasn't been a huge economic loss for all involved.

> Nowadays anyone can trade with anyone, and there's really no need to have political control

You're forgetting just one small thing - oil. It's still vitally necessary to the US (and everyone else). And if OPEC is left all-powerful then they can turn off the spigot at any time for any reason. Obviously Iraq is one way of getting around OPEC's power - badly misguided IMO, but undeniably successful in the narrow goal of securing a large non-OPEC source of middle eastern oil.

The broader point, though, would be that without some kind of global naval "police" then anyone finding themselves in the position to block trade might decide to. The US navy has traditionally enforced, at least by implication, the "freedom to trade" you speak of. I wish they would stick to this rather noble goal!

This is basically already happening, albeit mostly in places Americans don't "care" about. China has been quietly buying up most of Africa for the last decade, for instance.

We're not going to have another Cold War. For one thing, the American and Chinese economies are interdependent. For another, they'd both require multilateral support to act militarily in any significant capacity.

But I think the implication is a lot more than just being the second.

Once you're the second, you can't easily dictate anything anymore. Just like having multiple buyers, the seller has more options to sell the product.

There are _huge_ economic, cultural, and military benefits to being the sole superpower that don't exist for country number two.

These benefits are, in essence, virtuous cycles that give the superpower a advantages on the world stage just by virtue of already being in first place. Think of it like compound interest, or a really big ball in Katamari Damacy, only for geopolitical power. That is, the US can arrange things in its favor to make it more powerful just because it's already quite powerful and no other country is.

As an example, the United States Dollar is the de-facto reserve currency for the rest of the world. That means that the US can purchase things without having to first go through (expensive) currency exchange, giving the US an economic advantage. The reserve currency status is also a major factor that also allows the US to borrow money pretty much at will.

Similar arguments can be made about cultural, military, diplomatic, and other power.

That means that countries aspiring to be the superpower have the deck stacked against them. So when, despite this, China overtakes the US, the US will have an awful lot of catching up to do. It's not fighting for food in the streets, but it would be a fairly serious blow to the US.

That means that the US can purchase things without having to first go through (expensive) currency exchange,...

Expensive? The Bid/Ask spread for EUR-USD is (at the moment I write this) 1.4582-1.4584. Hedging your forex risk can be expensive, but exchange is not.

Well, I was thinking of relatively expensive on the scale required for country-scale commodity purchasing, but that may not be right either.

Since I gather you probably know more about monetary policy than I do, how's this logic for an explanation of the benefit of reserve currency status?

* Things (like oil) on global markets are traded in USD.

* That means countries need to accumulate or exchange for USD in order to buy things.

* This both increases the value of the USD and means the US Government can issue bonds at lower rates than they otherwise could.

[Edit: formatting]

International trade tends to drift to the most stable currency's which is why things are moving the the EURO. Then again the EU is the worlds largest economy so there could be some truth in your assumptions.

Is the Euro considered stable? The articles I've been reading predict that the Euro-zone can't last too much longer as the debt crisis spreads from Greece to Portugal to Spain to... other places that the Germans can't afford to keep bailing out.

Countries don't need to accumulate USD to participate in the oil trade [1], only liquidity providers do. If you live in China, and want to buy oil to produce widgets sold in Europe, you hold RMB and need to accept payment in EUR. So you trade RMB for USD, buy your oil, later on trade widgets for EUR, and then trade EUR for RMB (if you want dividends) or USD (to reinvest). The person selling the oil is probably going to trade the USD in for Rial's, Pesos or Loonies.

(The market maker captures 0.0002 USD in compensation for the adverse selection risk he takes on.)

The particular dollars being used for these purchases tend to be reused. They flow from the market maker to China, China to Saudi Arabia, and Saudi Arabia back to the market maker. This facilitates the real trade (oil + french wine in exchange for widgets), but is merely a bookkeeping mechanism.

The only person who needs to hold USD is the market maker. They need to hold enough reserves so that normal variation (e.g., today 5 people buy USD, tomorrow only 3 sell) doesn't deplete their supply. I don't know that much about commodities markets, but this probably is a small fraction of all dollars out there.

None of this has anything to do with T-Bills. US bonds have low interest rates because the US government is believed to be highly unlikely to default.

[1] Many countries do accumulate dollars for other purposes. For example, they might accumulate a reserve of stable currencies as a hedge against hyperinflation. Or, as in the case of China, market manipulation.

"...because the US government is believed to be highly unlikely to default."

And that belief stems largely from the status of the US as the sole superpower (at least for now). That's the point I was trying to make. I just didn't do a very good job of it.

I probably should have just picked an example of the US exercising diplomatic power, because that's much more intuitive to me than currency markets are.

(Thanks for patiently correcting me, by the way.)

>> "...because the US government is believed to be highly unlikely to default."

> And that belief stems largely from the status of the US as the sole superpower (at least for now). That's the point I was trying to make. I just didn't do a very good job of it.

US currency got its current "highly unlikely to default" status before it was the sole superpower so it's unclear how that status "stems" from being the sole superpower.

Reply on news.ycombinator.com