St Louis Fed President James Bullard is in the headlines today after he spoke to the Wall Street Journal about the emergence of China.

“Attitudes in the U.S. are going to have to change, because the U.S. will not permanently be the global leader,” Bullard said. “The U.S. would be playing a role to China similar to the role the U.K. plays to the U.S. today,… People think it’s 50-75 years away but it’s probably only 25 or 20 years away, something like that.”

I disagree. The 7.5% infinite growth forecasts for China underestimate the structural problems the economy must tackle.

  1. The first is pollution, there is no way the scale of air quality degradation can continue and no way people will tolerate it. That will be a significant drag on growth.
  2. Second, as China’s economy grows and wages rise it will lose competitiveness as the world’s manufacturer.
  3. Third, the wealthiest, best and brightest will continue to leave China. Freedom, economic security and clean air are powerful draws to places like California, Vancouver, New Zealand and (increasingly) Europe.

It will happen but it’s a longer timeline than he expects and there are some severe tail risks.