While economists have taken it as a foregone conclusion that China is set to dominate the world economy eventually, Arend reports that they tend to use figures with little mooring in the real world of international markets. The biggest difference in the IMF data versus traditional forecasts is that the IMF is using gross domestic product based on purchasing power parity (PPP), as opposed to GDP based on official exchange rates.

GDP (based on PPP) is assessed by looking at a country’s earnings and spendings in fixed, standard terms — usually using the U.S. dollar as a metric, as it remains the world’s reserve currency and the benchmark currency for the world economy. Earlier forecasts have been off the mark, according to the IMF and Arend, because they’ve failed to use these figures, which paint a more accurate picture of a country’s economic power relative to the rest of the world than do GDP figures based on official exchange rates.

China has for years enforced price controls to keep the value of its yuan renminbi (RMB) artificially low. This has allowed it to manufacture and export goods at prices irresistibly cheap to global consumers. By seizing upon cheap Chinese goods, the U.S. ultimately sealed its own fate, delivering the purchasing power of the world’s largest economy to Chinese manufacturers.

Arend reports that the attendant rise of the Chinese economy will have major effects very soon:

The IMF in its analysis looks beyond exchange rates to the true, real terms picture of the economies using “purchasing power parities.” That compares what people earn and spend in real terms in their domestic economies.

Under PPP, the Chinese economy will expand from $11.2 trillion this year to $19 trillion in 2016. Meanwhile the size of the U.S. economy will rise from $15.2 trillion to $18.8 trillion. That would take America’s share of the world output down to 17.7%, the lowest in modern times. China’s would reach 18%, and rising.

Just 10 years ago, the U.S. economy was three times the size of China’s.

Later, Arend reports that the rise of China has already quietly been one of the driving factors in growing income disparity in America:

“There are two systems in collision,” said Ralph Gomory, research professor at NYU’s Stern business school. “They have a state-guided form of capitalism, and we have a much freer former of capitalism.” What we have seen, he said, is “a massive shift in capability from the U.S. to China. What we have done is traded jobs for profit. The jobs have moved to China. The capability erodes in the U.S. and grows in China. That’s very destructive. That is a big reason why the U.S. is becoming more and more polarized between a small, very rich class and an eroding middle class. The people who get the profits are very different from the people who lost the wages.”

Olivier Blanchard, chief economist for the International Monetary Fund, told French newspaper Le Monde in an interview that the U.S. has failed to provide a way out of its debt problems. The full interview is set for publication on Thursday, but Le Monde has printed some of Blanchard’s comments already. Translated from the original French, Blanchard told Le Monde:

The United States lacks a credible plan, for the medium term, to reduce its budget deficit. The debate between the two parties that concluded on April 8 with a savings plan of $39 billion was inadequate. President Barack Obama’s April 13 speech was a step in the right direction, but more concrete decisions remain to be taken.

Blanchard is well acquainted with American economic policy, having served as an economics professor at Harvard and MIT for over 30 years (PDF). His endorsement of Obama’s speech, in which the president blasted Republican cuts and championed tax hikes on the wealthiest Americans, may be a source of consternation for Republicans, who celebrated the S&P evaluation as a sign that their cuts are necessary.

Blanchard’s comments echo an official statement from the IMF last week asserting that the U.S. needs to make “major” adjustments to its fiscal policy, lest it suffer further deficits, hugely exacerbated by accompanying increases on U.S. Treasury bond interest. The IMF lumped in the U.S. with Japan, whose own tremendous national debt has been compounded by restoration costs following March’s devastating earthquake and tsunami.

Japan has since come out in support of its partner in debt. “The US is tackling fiscal issues in various ways, so I still think US treasuries are basically an attractive product for us,” Japanese Finance Minister Yoshihiko Noda said this week.

Downside risks have risen sharply. In the near term, the main risk is an escalation of financial stress and contagion, prompted by rising concern over sovereign risk. This could lead to additional increases in funding costs and weaker bank balance sheets and hence to tighter lending conditions, declining business and consumer confidence, and abrupt changes in relative exchange rates. Given trade and financial linkages, the ultimate effect could be substantially lower global demand.

In a separate report from late June, released today, the IMF said it does not expect the U.S. economy to fall into a double-dip recession, but that unemployment will stay above 9 percent throughout 2011. That translates into a long, slow recovery characterized by persistent joblessness and sluggish growth in GDP and consumer spending: “The outlook has improved in tandem with the recovery, but remaining household and financial balance sheet weaknesses — along with elevated unemployment — are likely to continue to restrain private spending.”

But the biggest risk to the U.S. recovery? Housing:

[The] backlog of foreclosures and high levels of negative equity, combined with elevated unemployment, pose risks of a double dip in housing; the continued deterioration in commercial real estate poses risks for smaller banks; and financing conditions remain tight, especially for smaller firms reliant on bank finance.

Jane’s latest whip count: if 38 Democrats buck White House pressure and stick with their “no” votes, the supplemental goes down.