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Why China’s Winning

China’s economy is on track to overtake the United States economy as the largest in the world in less than eight years, if current trends continue. In 1990, the US economy was 15 times larger than China’s economy.  Last year, it was 50% larger.  By 2030, it looks likely to be 10% smaller. 

The latest Macro Watch video discusses the principal reason behind the United States rapid relative economic decline.

The video begins by comparing the United States economic policy response to the Covid-19 pandemic with that of China.  It shows that the response in China has been very limited in scale compared with that of the US (or compared with the economic policy response in Europe and Japan, which were discussed in the previous two videos).  Even when considering the increase in total credit, the best measure of Chinese economic policy, China’s response to the crisis has been muted. In fact, it is barely noticeable.

The explanation for this is that the Chinese government succeeded in bringing the spread of the virus under control, whereas the US government has not. Consequently, the impact of the virus on China’s economy has been much less severe; and less fiscal and monetary stimulus has been required.

Next, the video compares fiscal and monetary developments, as well as credit trends, in the US and China over the past 20 years.  Details are provided for the growth in government debt, central bank assets, the money supply and total credit for both countries. 

It quickly becomes apparent that very rapid Credit Growth has been the key element in China’ success story.  Since 2003, Credit Growth has averaged more than 18% a year in China compared with 5% a year in the US.  This stark contrast in the rate of Credit Growth is the principal reason why China’s economy has grown so much more quickly than the US economy over the same period: 9.1% GDP growth per year on average in China vs. only 2.1% a year in the United States.  

If current trends continue, not only will China’s economy become larger than the US economy eight years from now, within 20 years, China will be vastly more powerful than the United States – economically, technologically and militarily.  

The video concludes by offering a strategy that would enable the United States to halt and reverse these trends, a strategy that would guarantee US national security for generations to come.

Macro Watch subscribers can log in and watch “Why China’s Winning” now. The video is 17 minutes long and contains 41 slides that can be downloaded.

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