According to the International Monetary Fund (IMF), China has just overtaken the US as the world’s largest economy. Of course, this is not in terms of overall GDP, yet. It’s in terms of purchasing power. As an article in Forbes explains:
The simple logic is that prices aren’t the same in each country: A shirt will cost you less in Shanghai than in San Francisco, so it’s not entirely reasonable to compare countries without taking this into account. Though a typical person in China earns a lot less than the typical person in the US, simply converting a Chinese salary into dollars underestimates how much purchasing power that individual, and therefore that country, might have.The Economist’s Big Mac Index is a great example of these disparities.
So, we make much more money than China as a country, but our citizens are able to buy less with that money because of the costs of things here. And isn’t that what’s important? I don’t really care how much money I have in the bank account if all the money in the world can’t buy me all the things I want and need.
This news about China is troubling for many reasons. In our world, political power and purchasing power are similar. Since the US economy is largely based on our ability to incur debt, having a weak dollar on the international scene does not bode well for our future economic stability.
What if China decides to push for a shift away from the US dollar? Right now, that’s about the only thing keeping us afloat. Other countries, including China, have a vested interest in trying to keep the US dollar from collapsing. But what if China and other countries switch to the Euro or even the Yuan as the international currency? That could precipitate a chain reaction of adverse consequences. It’s really beyond time for us to wake up.