Unfamiliar Territory: America's New Role as Economic Runner-Up

by Lear Capital EditorialDecember 10, 2014

No one now living … has known the US economy as anything other than number one.

Americans are simply not used to coming in second place. We invented the light bulb and the telephone, the transistor and the rocket, the PC and social media. Let’s face it … Americans invented the very concept of being “first” and our technological innovations have both changed and shaped our world. So when news just broke that China has surpassed the US as the world’s largest economy, it hit many of us particularly hard.

According to the IMF, China has surpassed the US in terms of GDP based on purchasing power parity (PPP) to now become the largest economy in the world.

From second-to none, to second-to-one … it has been a long time since our financial system was runner-up, over 140 years to be exact. Aside from the obvious implications for national pride, why should we care about this historic financial news? Because it will likely change the value of our money and has long-term implications for the US economy, our personal portfolios, our overall net worth, and those of us saving for retirement.

So what happened exactly? China simply took a page out of the playbook of the West and finally embraced free market principles. Despite the Communist Party maintaining political control, China has undergone a series of economic reforms since the 1980’s that have bolstered private enterprise and tapped into the productivity of its 1.3 billion people. China is also a goliath exporter attracting mountains of foreign venture capital and is itself an aggressive global investor.

And while the Chinese are active buyers of American debt, they have made no secret of their desire to topple the US dollar as the world’s reserve currency. China has been very busy forming strategic alliances with countries like Russia, Iran, and the BRICS nations to replace the greenback with a new global currency … and they just got a LOT MORE bargaining power!

So when the dollar is toppled which many experts say is just a matter of time … demand from foreign investors will stop. The markets will fall, interest rates will rise, cash savings will tank, bonds will be crushed, cash-backed assets will evaporate, financial institutions will fail, and the Fed will print more and more paper in an effort to prop up the US economy which will invariably fall into recession once again. But this time it will be deeper, darker and no amount of stimulus will fix it.

So what can we do as investors? In a word … diversify. Now is the time to get out of cash and get into something solid. The Chinese government has not only been busy trading on the global stage, but they have also been quietly fortifying their new fiscal clout with massive amounts of gold. Chinese banks sell gold and Chinese TV stations advertise gold … and China’s private citizens now hold more than 6,000 tons of it.

So while the US may be second on the global economic podium, our citizens are still among the wealthiest in the world. American exceptionalism is alive and well and those of us that hold gold may well find that there is no greater global insurance policy to help preserve our portfolios in light of the evolving world economic order and the shifting values of paper money.

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