Global Crisis Blog

The End of Chimerica — The End of the World?

By Shlomo Maital

  Niall Ferguson is a respected historian and economist at Harvard. Together with Moritz Schularick, Free University (Berlin), he has made a compelling and deeply troubling argument.  They show why the world economy is in deep trouble, what the solution is and — in my opinion — why the solution will not be adopted, until it is too late. [1]

        Here is a brief summary (perhaps, I admit, made more extreme) of their case:

1. “For the better part of the past decade, the world economy has been dominated by a world economic order that combined Chinese export-led development with US over-consumption.”  Under Presidents Reagan, Bush Sr., Clinton and Bush Jr., America lived beyond its means, buying cheap Chinese exports that stuffed the shelves of Wal-Mart, financed by borrowing from the Chinese (through Chinese purchase of US Treasury Bonds, over $2 trillion worth).  America enjoyed living beyond its means for nearly three decades. China loved it too, because export-led growth created jobs for hundreds of millions of Chinese migrating from farms in the West to factories in the East.  American capitalists made fortunes.  American workers were totally screwed.  America’s middle class lost its well-paying manufacturing jobs.

     Here is evidence for the last underlined sentences:  Fully  HALF  of the gain in family income, from 1993-2007, accrued to the top 1 % of income groups! [2]

 % of  total family income growth captured by top 1%  of income groups:1993-2007      50 %    

  (Clinton: 1993-2000     45 %;    Bush  2000-2007    65 % )                                           

2.  “In some ways China’s economic model in the decade 1998-2007 was similar to the one adopted by West Germany and Japan after World War II. Trade surpluses with the U.S. played a major role in propelling growth.”

    Japan and Germany too used undervalued currencies to propel exports.  But as they became wealthy, they realigned their currencies to realistic rates relative to the dollar. China refuses to do so. 

3.  “We conclude that Chimerica cannot persist for much longer in its present form. As in the 1970s, sizeable changes in exchange rates are needed to rebalance the world economy. A continuation of Chimerica at a time of dollar devaluation would give rise to new and dangerous distortions in the global economy.”

   The global conspiracy between America and China (“Chimerica”), for America to overconsume and China to oversave has now led to global crisis.  If China persists in keeping the yen-dollar rate frozen, and when (not if) the dollar drops, Chinese exports will become even more competitive relative to other currencies like the euro.  This would be disastrous.

 

    Conclusion:   The world is in deep trouble. A major fall in the dollar relative to other currencies (except the yuan/renminbi) is inevitable.  The question is only, when will it begin? And how massive will it be?   America will welcome it, because it is the only way America can hope to repay the massive dollar debt it owes to other nations. 

      If China and America do not cooperate to manage the dollar collapse, the world economy will be in huge trouble.

      China is led by shrewd leaders.  They may perceive that a collapse in the dollar is in their interest, ending forever American hegemony.  They may be willing to lose $600 b. (30 per cent of their $2 trillion dollar holdings) in return.   China may be believe it no longer depends on the world economy, having built a strong Asian ecosystem and having shifted to rising internal demand to replace some export demand. 

       I urge all readers to think very carefully about a scenario, in which the value of the dollar relative to other currencies drops by 30 per cent, and in which China continues to try to buy massive amounts of dollars to keep the yuan-dollar exchange rate at 7 RMB per dollar —   and ultimately, gives up, putting the dollar into free fall.

       With Americans used to overspending, and China stubbornly clinging to its undervalued currency,  there seems to be no other more hopeful scenario that is anchored in reality. 

  

 

 

[1] “The End of Chimerica”. Niall Ferguson and Moritz Schularick.  Harvard Business School Working Paper 10-037, Dec. 2009.

[2] “The Evolution of Top Incomes in the United States”,  Emmanuel Saez, Univ. of California, August 5, 2009.