Niall Ferguson: Is U.S.-China Economic Marriage on the Rocks?
As the G-2 "strategic dialogue" between the US and China gets underway in Washington, I talked
with economic historian Niall Ferguson for the Global Viewpoint Network. Ferguson is a professor of history at Harvard University and a professor of business administration at Harvard Business School. His most recent book is "The Ascent of Money: A Financial History of the World."
Nathan Gardels: Despite all the other issues on his plate, President Barack Obama's overarching challenge over the course of his administration is correcting the imbalance with China. More than anything else, as you have noted, it has been China's strategy of dollar-reserve accumulation that financed America's debt habit. Chinese savings were a key reason U.S. long-term interest rates stayed low and the borrowing binge kept going. Now that the age of leverage is over, what is the key to maintaining the partnership between the big saver and the big spender?
Niall Ferguson: My friend Moritz Schularick and I came up with the idea of "Chimerica" back at the end of 2006. We were trying to explain the global financial boom, with its correlated upward movement of virtually every asset class.
We decided the answer was that China and America had effectively fused to become a single economy: Chimerica. The Chinese did the saving, the Americans the spending. The Chinese did the exporting, the Americans the importing. The Chinese did the lending, the Americans the borrowing.
As the Chinese strategy was based on export-led growth, they had no desire to see their currency appreciate against the dollar. So they intervened consistently in currency markets, and as a result have now got international reserves totaling $2.1 trillion. Around 70 percent of these are in dollar-denominated securities, and a large proportion of these are in U.S. government bonds.
The unintended effect of this was to help finance the U.S. current account deficit at very low interest rates. Without that, it's hard to believe that U.S. financial markets would have bubbled the way they did in the period 2002-7.
The big question is now whether or not Chimerica is a marriage on the rocks. The financial crisis has brought the age of leverage to an end in the sense that America's highly indebted consumers really cannot borrow anymore. The U.S. savings rate is soaring upwards, and U.S. imports from China have declined significantly. The Chinese trade figures tell the same story: Exports have collapsed.
Of course, that doesn't mean the Chinese are going to stop buying dollars. They daren't allow their currency to appreciate when so many jobs in the export sector are under threat. But it does mean that they are questioning the "Chimerica" strategy.
I would say this is a bit like one of those marriages between a saver and a spender. It can work for a certain period of time, but then the saver gets disillusioned with the spendthrift spouse. Every time the Chinese complain about American profligacy, it reminds me of one of those domestic tiffs in which the saver says to the spender: "You maxed out on the credit cards, but now I am going to cut them up." Except that it's a threat the Chinese aren't quite ready to carry out.
Gardels: The Obama administration is seeking to borrow billions from the Chinese to finance its stimulus and bailout packages to get the economy going again. What if the Chinese don't buy those Treasuries? Why wouldn't they?
Ferguson: Let's look at the numbers. China's holdings of U.S. Treasuries rose to $801.5 billion in May, an increase of 5 percent from $763.5 billion in April. Call it $40 billion a month. And let's just imagine the Chinese do that every month through this fiscal year. That would be a credit line to the U.S. government of $480 billion. Considering the total deficit is forecast to be around $2 trillion, that means the Chinese could conceivably finance less than a quarter of total federal government borrowing (whereas a few years ago they were financing virtually the whole deficit).
The trouble is that the Chinese clearly feel they have enough U.S. government bonds. Their great anxiety is that the Obama administration's very lax fiscal policy plus the Federal Reserve's policy of quantitative easing (in layman's terms, printing money) are going to cause one or both of two things to happen: The price of U.S. bonds could fall and/or the purchasing power of the dollar could fall.
Either way the Chinese lose. Their current strategy is to shift their purchases to the short end of the yield curve, buying Treasury bills instead of 10-year bonds. But that doesn't address the currency risk
Gardels: What is China's alternative if it seeks a divorce from Chimerica?
Ferguson: I'd call it the empire or superpower option. Instead of continuing in this unhappy marriage, the Chinese can go it alone, counting on their growing economic might (their gross domestic product could equal that of the U.S. by 2030) to buy them global power in their own right.
In some ways they've already begun doing this. Their naval strategy implies a challenge to U.S. hegemony in the Asia-Pacific region. Their investments in African minerals and infrastructure look distinctly imperial to me. And now the official line from (Prime Minister) Wen Jiabao is "hasten the implementation of our 'going out' strategy and combine the utilization of foreign exchange reserves with the 'going out' of our enterprises."
That sounds like the start of a Chinese campaign to buy a lot of foreign assets. But at the same time, crucially, they need to have their own domestic consumers step up to take the place of over-leveraged Americans. China's economy is above all a manufacturing concern. If no one is going to the shopping malls, their companies are just building their inventories. So a post-Chimerican China needs to be not only an empire but also a consumer society. That means getting ordinary Chinese households to save less and spend more.
Gardels: China seems to have embraced the Special Drawing Rights idea of a basket of currencies to replace the dollar as the reserve currency. Isn't this like "serving papers" -- it shows China's intention of breaking up Chimerica over the longer term? Or, are they just hedging their bets?
Ferguson: Yes, I think they are "serving papers," or at least threatening to do so. I don't myself believe that it's practical to turn International Monetary Fund Special Drawing Rights into a new world currency. They're purely an accounting device, not proper money. But I do see the euro and the yen playing a bigger role in Chinese reserves.
I also see a day within the next five to 10 years when the Chinese will feel ready to remove their capital controls and allow their own currency, the renminbi, to develop as an international currency. At that point the Chimerican marriage really will be over. And, after all, that's what Moritz Schularick and I always said would happen. We called it "Chimerica" because we though that such an unbalanced relationship would eventually prove to be a chimera.
Gardels: What are the global strategic implications of such a divorce?
Ferguson: Imagine a new Cold War but one in which the two superpowers are economically the same size, which was never true in the old Cold War because the USSR was always a lot poorer than the USA.
Or, if you prefer an older analogy, imagine a rerun of the Anglo-German antagonism of the early 1900s, with America in the role of Britain and China in the role of imperial Germany. This is a better analogy because it captures the fact that a high level of economic integration does not necessarily prevent the growth of strategic rivalry and ultimately conflict.
We are a long way from outright warfare, of course. These things build quite slowly. But the geopolitical tectonic plates are moving, and moving fast. The end of Chimerica is causing India and the United States to become more closely aligned. It's creating an opportunity for Moscow to forge closer links to Beijing.
(c) Global Viewpoint Network
Loading comments…
Want to reply to a comment? Hint: Click "Reply" at the bottom of the comment; after being approved your comment will appear directly underneath the comment you replied to
" ... an older analogy, imagine a rerun of the Anglo-German antagonism of the early 1900s, with America in the role of Britain and China in the role of imperial Germany. This is a better analogy because it captures the fact that a high level of economic integration does not necessarily prevent the growth of strategic rivalry and ultimately conflict."
The real issue is being avoided here. Conflict is inevitable because it is profitable! The large banks of the US and Europe were funding both sides and profiting by the conflict of both world wars. There is a deeper issue here and that is the issue of a one world order and the financial elite who are pushing such an order. The relationship and actions of I.G. Farben of Germany and the American I.G. of the US of the early 20th century are prime examples of this profiteering scheme that is still being played out. China, Britain, America, ... these are just names for the engines in the money game! As for leftist and conservative ... these terms have no actual meaning at all.
The USA is committing economic suicide! When and if foreign individuals and governments stop buying our freshly printed US paper T-Bills, US paper bonds, and other paper US securities at Federal Reserve public auctions, and/or start buying these items at the foreign currency exchange equivalent of a few pennies on the dollar, the government checks, social security checks, government payroll checks, and private paychecks will then not buy very much food or anything else that we consume. Your life savings might only sustain you for a couple of weeks.
After we have sold title to all of our US real assets that have any value to foreigners as required to settle our foreign trade obligations, there will not be anything left for the foreigners will want to buy with their freshly printed paper US T-Bills, US bonds, etc. The US government will then not be able to raise any funds for any future re-industr
Foreign entities will very soon own everything of value in the USA and then become the major source of employment for US citizens. The USA population will then become employees; possibly indentured servants; or maybe even beg to become slaves owned by the foreign countries and/or foreign individuals that will own everything of value in the USA in the very near future.
Real wealth is created only when a country (or an individual family) sells something to parties outside of that country (or family) in return for a net transfer of gold or currency from other countries to that country (or family). The citizens of that country reflect their real wealth with the accumulation of grain, gold, cattle, jewels, land, factories, structures, and/or other marketable products and commodities for reserve use in times of emergency and/or also to raise the standard of living for the citizens of that country.
The people in the country that grew and harvested something from the earth, that extracted something of commercial value from the earth, that provided services (medical, dental, engineering, technology, etc.), and/or that made (manufactured or constructed) something that is consumable (or useful) that was sold outside of that country in exchange for foreign currency (or other commodities to other parties outside of that country) created wealth for that country from the currency received from the sales of those services and products and this increased the real wealth of that country (or family).
If that country bought imported things from outside of their country, but not of more value than the value of the items that they exported to foreign countries, then they would have a net positive foreign trade balance, and that would have increased the value of the real wealth assets of that country (or family).
One Party with two heads.
One dark corporate heart pumping money to both.
One dark corporate heart controling the media.
CORPORATIONS ... legal entities that were created without souls.
China own our a s s es! and WE let it happen. plain and simple
More to the point, with their unnecessary, pointless and illegal wars, baby bush and the other blood-thirsty neocons enslaved us to The Chinese.
Abusing Bush Junior is simple. Fact remains that US control of middle east, denies wannabe totalitarians strategic space.
Dobberdoss is right on China. Nixon, Kissinger, Bush Senior, Bill Clinton were not sophisticated to see through communist chinese and understand chinese potential as strategic threat.
I don't know were to begin. America we have out spent our means. A true silver or gold backed dollar is worth less than 5cents. We didn't get hear overnight and if it's even fixable, a true fix would be extreme long term. How do you pry Wall ST. and big business out of government? Then if you get over that hurdle. How do you get rid of the Federal Reserve bank? It sounds like a government agency. It's not, a handful of rich guys own our country. I'm completley disillusioned with goverment. They have voided important rights and freedoms to benefit the few. I've not lost my faith in GOD that makes all the difference. We are so much better than We the American people give ourselves credit for. We the People still make up this union. We need change. Government can't give us the change we need, it could help. It has to come from within. Not a revolution. If we stop consuming and start producing. The road to recovery though not imediate, it will be built. Tough times are ahead we need to look out for each other. No one else is going to..
I think we need a different form of government. A democracy, yes, but not a capitaliz one.
China does not allow its currency to float and thus violates both GATT and WTO treaties. If the Euro zone can effectively retaliate against this predatory behavior with add on quotas and tariffs, why can't we?
So much for Clintons line in the sand, huh?
Funny how bondguy talks about the Anglo-German relationship and the modern day comparisons. The same corpo-fascist dynasties are at play now that were then. Robber Barons who made themselves mega rich and powerful by exploiting American capitalism while at the same time bankrolling the enemy.
The similarities are disturbing,
Oh for God's sake!
Nothing, Niaill Ferguson says deserves even the barest minimum of consideration, as the self-indulgent little pri ck has an insatiable talent for neglecting his research and making snap-judgements without corroborating evidence.
Bear in mind that this is the same guy that claimed that Obama would be unwilling to utilize any form of military action in the Persian Gulf regardless of circumstances, simply on account of his comperative stances against McCain in that he actually favored diplomacy while reserving military force simply for the sake of a last resort.
If anything,Ferguson epitomizes a Harvard-ingrained mentality in that even the professors and graduates who know absolutely nothing believe that they know everything.
Or, as Dwight Eisenhower put it:
"You can always tell a Harvard man, but you can't tell him much."
Obama is moving the focus of the military to Afghanistan. Afghanistan is not on the Gulf.
Bear in mind that Ferguson is a historian of money, not of people. His insights are into the half of the story that other historians miss, though it's still only half the story..
Stop trying to redefine marriage!
Witty!
The scariest part of this is that America is not planning for this tectonic shift. We are not building our assets to compete with these developments, such as developing clean technology and a clean energy economy, fast enough to allow us to hold down our costs and sell technology to the world. By contrast, the Chinese not only have the balance-of-trade and creditor/debtor advantages, they are developing clean technologies faster than we are. They see the future and are planning for it while the US remains mired in partisan discord.
You got that right. And they don't think autos are an industry of the past, either. They can do the numbers. The game plan there is to use the domestic market to gain economies of scale and quality, including through protection and forced technology transfer, and then to export. No end in sight to trade surpluses unless someone does something about it. They are targeting Boeing, too. And the Chinese civil aircraft market is going to be big enough to give that some tailwind.
Let the "free market" (doesn't exist) rule here and the U.S. loses. Simple as that.
How many of you drive a car made in Japan or Korea? How many of you are just waiting to see what price you can steal a car made in China for? If you are guilty of owning or have in the past owned one or plan to look at one in the future please think about this: MADE WITH PRIDE IN AMERICA. Stop the bleeding of good paying jobs. Before long everone will either wear a suit or will be in prison. What will you do when 1,0000 college educated men and women apply for the same job that you so desparately need to feed your family. That job you need to replace the job you just lost to someone in China or India that will work for 1/4 of your old wages. What will you do when someone in your family gets a disease that will bankrupt your family if Obama should not get Health Care passed? What if this happens when you have no Medical Insurance? These are some topics you really need to give some serious thought to. Not some irrational idea that it could never happen to you. Someone out there is already ready to take your job at about 1/2 what you are now being paid. Think American, Buy American and most of all Be an American.
I don't disagree but a lot of the problem we face comes from the fact that Korea, Japan, and China (not to mention the EU) put a high priority on production and acquisition of foreign technology and knowhow and little on consumer choice - except, that is, for domestic products. In Japan markets for autos were closed while Japanese firms were slowly gaining ground in the U.S. Korea's auto market was completely closed until 1987 and is still effectively closed. Korean auto makers were able to operate freely in the U.S. during that entire period, even when Korea banned imports. In both cases (naturally since Korea copied Japanese tactics) consumers had to mostly do with what was available until domestic cars achieved economies of scale and quality.
The dynamic is that a free market with no plan and firms with superior technology will lose to a mercantilist, protected market with industrial policy that forces and supports technology transfer.
Not that hard a concept to understand. Give them long enough and your firms are in trouble. We still don't really get it. But ya gotta play offense and defense.
"Think American, Buy American and most of all Be an American" is fine except that the executives of American firms think private jet planes and 200 ft yatchs and the unions think $100/- per hour wages for tightening bolts; on a poorly designed / built car which then needs constant repair. I get financially punished for looking our for my brothers who DO NOT look out for me. The leaders of this country have set a fine example of being an American - just look out for number 1. My loyalty instinct is stretched pretty hard right now.
It's the oligarchs who own our industrial policy who need to reform themselves with regard to loyalty to the nation.
As soon as the American manufacturing industry stops shoving money in executive wallets and instead pours that money into something worth buying, "Buy American" is the same as saying "Buy crap you don't want". The free market decides who wins and loses, pal. Buying goods that people want doesn't make them traitors.
That said, Manufacturing Reform needs to be a A++ priority for America.
Our trading competition doesn't really have free markets. Not ones without lots of barriers to imports, anyway. Need to focus on quality is critical. You also have to be able to play full court and have everyone play by the same rules.
How many of you are wearing T-shirts, jeans or sneakers that say made in the USA? And how about those spiffy little baseball caps? Not many I am sure. When the textile industry went bottoms up I am sure the auto workers shed no tears. And are you paying attention to the Chinese buying up American businesses and property? Just food for thought.
[And are you paying attention to the Chinese buying up American businesses and property?]
Not in American fixed assets. I do recall a BusinessWeek article where agents haunt the auctions of bankrupt factories to buy up production machinery for not much more than the price of scrap metal. These were resold to Chinese enterprises that soon start up to make exactly the same products at a fraction of the cost. Sometimes the Chinese even buy up whole factories. Remember a time when 27 inch CRT TV sets could be had for
This is a very pointed and thoughtful article on how the USA lost its way as an economy. This is very scary since the average American is clueless about geopolitics and economics. We are less of a producer and more of a consumer dependent on others to provide the crude oil, manufacture or grow products for us.
It never was a marriage. A marriage requires a man and woman. What we have with America and China are two blood sucking heathens trying to get the better of each other. American is in it for immediate gratification, and China is playing the long game to bury America.
Well, that describes most marriages I've seen.
Pow! Zing!
OOOh Yea!
Exactly correct. This is why the Anglo-German rivalry of 100 years ago was such an apt comparison. What eventually happened is - England and Germany destroyed each other. The same thing is going on between China and the US now, but on an even more massive scale. Eventually the dollar will crater and China will be left holding the bag.
No point waiting any longer while the U.S. industrial base continues to weaken. Our current problems didn't start with China. They started long ago with Japan when we kept our market open even while they were closed and targeted U.S. markets and industries. Not to mention that we give access to technology with no transfer coming the other direction. And many U.S. economists found justifications (I really mean bogus rationalizations) for this. We were told that it is ok to run a trade deficit, that free trade is good (it doesn't exist),etc. Negotiations had a pattern. USTR would ask for market opening and, after a long time, get something. Then there would be more negotiations on implementation. All along we ignored the time factor.
Time to just do it and bring industry and technology home. Let our competition come to us to negotiate while we go our own way. And we should call it something nice, like "International Economic Cooperation". Not one more minute of giving the opposition a handicap. They are big players and deserve more respect than that.
Does anyone think the label G-2 sounds lame??? or is it just me?
China is in business of making money not dropping bombs. Russia has shifted its focus from war to the business of making money. Meanwhile the US has spent most the the last decade throwing trillions down black holes, fighting unnessary wars in Iraq and Afghanistan -- the first without cause, based on false intelligence, the second based on "associated ties" which could easily have been linked to the Kingdom of Saudi Arabia that hatched not only the head of al Qaeda but 15 of the 19, Sept. 11th, 2001 hijackers. Meanwhile Wall Street devised exotic mortgages and worthless derivatives helping to drag the US economy even further down that black hole. As a result the US is in a position where the China is lending the US money to save it from financial ruin. China is America's creditor, that's the bottom line and the US is a high risk client. If China is making public statements that suggesting in any way that they recognize the risk and intend to do something about it, America better believe the Chinese are already planning ahead and are doing something about it.
You must be logged in to comment. Log in or connect with
