With 10% Growth, Will China Overtake the U.S.  Economy sooner than we think?

No sooner had we looked at this topic, than the bona fide gurus came out shooting. We noted earlier that US tax revenues were down by one third. Decreases in collections like this have not been experienced in almost 30 years. Unemployment was up, housing down. We have an 11.3 trillion dollar debt. We are in a recession.

Bill Gross of Pimco sounded the grim prognosis bell. He sees higher and continued unemployment staying in the 7-8 % range. Others see it even higher and in double digits. Growth will be nonexistent almost. We may see 1-2 % annual growth over five years instead of the more normal 2-3%. We will have decreased market returns and decreased corporate earnings. The US dollar will continue to be challenged and may be replaced as the world reserve currency. Richard Russell of Dow Theory Letters says the dollar is “on the edge of the cliff.” If it goes over, it will be a totally new ball game. Hyperinflation of devastating levels will occur. As it is, Bill Gross sees inflation in place over the next 3-5 years. The anti –dollar action already is punishing the 30 year bond and pushing mortgage rates up.

There is some good news of a fashion though. The stock markets of the US have rebounded somewhat over the recent months. The S&P 500 is up 1.8% from January. Emerging markets and other world index (non US) markets are also up 36% and 5.4%, respectively since the beginning of the year. The BRIC countries are especially running away from the developed countries markets. But what happens when this stimulus in the US and China and the UK etc ends? It can’t last.

The picture is grim, gloomy and bleak indeed. Dolan in Barron’s (May 25) looks at this. If our economy grows a 1-2% a year, we cannot grow out of this problem. We need 8% growth. China has 10% now. Can we do it? What can we do?

There are several alternatives to look at. One group would suggest continuing what we are now doing: austere government planning. We put in place a five year (or ten or twenty, whatever is needed) Soviet plan where everything will be controlled. Here, we would have continued government intervention in business, banks and the environment. End the use of coal and oil. Others suggest the old American can do program of supporting business and innovation. Do nothing extreme. End the anti-business sentiment and populist attack. Let the free market work again. France has 70-80% of their power from nuclear facilities—and safely. Why can’t we? We need to grow out of this and the current policies do not allow for growth—just control of business and re-direction of wealth. Unless we alter our path, things will get grimmer.