The Break Up of Chimerica

By Kindred Winecoff

Niall Ferguson, with all kinds of good stuff:

We are living through a challenge to a phenomenon Moritz Schularick and I have christened “Chimerica.” In this view, the most important thing to understand about the world economy over the past decade has been the relationship between China and America. If you think of it as one economy called Chimerica, that relationship accounts for around 13 percent of the world’s land surface, a quarter of its population, about a third of its gross domestic product, and somewhere over half of the global economic growth of the past six years.

For a time, it was a symbiotic relationship that seemed like a marriage made in heaven. Put simply, one half did the saving, the other half the spending. Comparing net national savings as a proportion of Gross National Income, American savings declined from above 5 percent in the mid 1990s to virtually zero by 2005, while Chinese savings surged from below 30 percent to nearly 45 percent. This divergence in saving patterns allowed a tremendous explosion of debt in the United States, for one effect of the Asian “savings glut” was to make it much cheaper for households to borrow money than would otherwise have been the case.

Of course that "arrangement" is unraveling, as the Great Adjustment progresses. There is more:

Among the other developed economies, both the Eurozone and Japan are already officially in recession, ahead of the United States. The European situation is especially precarious because, contrary to popular belief, European banks are in worse shape than their American counterparts. Average bank leverage in the United States is around 12:1. In Germany the figure is 52:1. Short-term bank liabilities are equivalent to 15 percent of U.S. GDP; the British figure is 156 percent. Indeed, the United Kingdom runs a real risk of being Greater Iceland—an economy crushed by a super-sized financial sector.

Emerging markets, too, have been hammered harder by the crisis than the “decoupling” thesis promised. In the year to the end of October 2008, the U.S. stock market declined by 34 percent. But Brazil’s was down 54 percent, China’s 58 percent, India’s 64 percent and Russia’s 66 percent. When Goldman Sachs christened these four countries the BRICs, they little realized that their equity markets would one day be dropping like bricks.

These figures are scarcely good advertisements for the more regulated, state-led economic models favored in Beijing and Moscow.

The financial crisis is especially bad news for energy exporters: not only belligerent Russia, whose leaders yearn for a reconstituted Soviet empire, but also those other thorns in the side of the United States, Iran and Venezuela. Any oil price below $94 a barrel is bad news for Venezuela’s fragile finances; any price below $55 spells trouble for Iran.

What does it mean? The U.S. is actually remarkably well-positioned to ride out this storm compared to almost every other country; whether developed or emerging, more or less regulated, net importer or exporter. Remember that when you hear that The American Century is over, or capitalism is dead, or any other similar sentiment.

Comments

[Moon Kil Woong:]

1) US bank lending after the Base 1 accord has a lot of off balance sheet leverage. How much is anyone's guess because you'll never find out until they go belly up. That's why they don't like loaning to each other without government guarantees.

2) If you look around China, if the recession gets worse there (and it hardly has even gotten bad comparatively) it's going to get really nasty. Protests, riots, calls for communist revolutions. That would place the Chimerica you speak of in a really bad situation.

3) Yes Europe is a basket case, but the US is falling compared to Asia in general. America needs to actually invest in infrastructure. America's wireless network is terrible compared to Asia as is it's Internet service. America's communication services are also incredibly expensive. America's levy's dikes, roads, and bridges are aging fast.

However worse still, America has been falling behind in every metric of healthcare for decades now. All Europe, even Eastern Europe is beating it in every metric of healthcare as is All Asia.

The reason why I say this is because we need to think long and hard about what we are going to do if we spend more money than several third world nations make in a whole year.

Will we just be patriotic and say we are great or will we live up to the expectation we have for ourselves and spend it in a way that will advance our standard of living and that of our kids. So far, I can say, of the 1.5 trillion dollars the Federal reserve made in their balance sheet and the $350 billion spent in TARP, the US has failed in setting the stage for future resurgence that will help keep America on top.

I hope tomorrow is better. Money and spending money isn't the answer. Spending money to create something productive is what counts.

2008 Dec 22 05:29 AM

[Ricard:]

This is a depressing article. If we have been so irresponsible to cause a crisis, and we are actually the most responsible of the bunch...wtf has Europe been doing all this time?? We have been providing them with military protection at our expense to boot...

2008 Dec 22 10:57 AM

[HaavBline:]

Readers are better off reading the original article by Niall Ferguson then this article. This author seemed to have missed the real conclusion from the original Ferguson thesis.

Most importantly, Niall Ferguson was NOT predicting "The Break Up of Chimerica". On the contrary, "it is much too early to conclude that in geopolitical terms the American century is over, or that China solo is about to take over from Chimerica.". Inn other words, Ferguson saw it more likely that Chimerica continues.

2008 Dec 22 10:17 PM

[HaavBline:]

The Chinese model has a lot of problems. But they know that. And they are cautious and vigilent in preventing their problems from turning into disaster. They don't sell their model to other countries. They reasily admit that each country should find the best model for itself,

The American system is superior in many ways, but it is not perfect. But we refuse to even question the falliability of free market, self-regulatory capitalism.

China will not be competing against USA about development models. The question is weather Americans will be too arrogant to objectively inspect the short comings in our own system.

2008 Dec 25 02:43 AM

[Kindred Win...:]

Have I misread? Did you read the last part of my post? "Chimerica" refers to more than just the U.S., which seems to be Ferguson's whole point. Chimerica could collapse at the same time that America gains relative economic power.

Ferguson uses the past tense to speak of the "Chimeric" relationship between China and America, viz.: "The crucial mechanism that bound the two halves of Chimerica together was currency intervention." He is trying to convey that the old system of massive imbalances was always unsustainable in the long run, as we are now seeing. The U.S. will still have a large, perhaps dominant, role moving forward but its economic relationship with China must mature.

I do agree that readers should click through to the original piece. That is, after all, what I linked to it in the first place and complimented it in my opening line.

On Dec 22 10:17 PM HaavBline wrote:

> Readers are better off reading the original article by Niall Ferguson
> then this article. This author seemed to have missed the real conclusion
> from the original Ferguson thesis.
>
> Most importantly, Niall Ferguson was NOT predicting "The Break Up
> of Chimerica". On the contrary, "it is much too early to conclude
> that in geopolitical terms the American century is over, or that
> China solo is about to take over from Chimerica.". Inn other words,
> Ferguson saw it more likely that Chimerica continues.

2008 Dec 27 01:07 AM