Niall Ferguson: How China's Insane Fiscal Policies Pumped Up Chimerica And Crushed America

niall ferguson

When he coined the term Chimerica in 2006, Niall Ferguson was refering to a mutually beneficial relationship: cheap money from China and wild spending from America.

But recently he has called for the end of Chimerica — seeing as America’s economy sucks and China looks a lot like bubble.

Published this week, his latest paper shows how insane fiscal policy in China created the monster.

See charts From “The End Of Chimerica”>>

China's reserve accumulation dwarfs previous efforts at export-led growth

By 2009, currency reserves equaled over 50% of China's GDP

Despite capital inflows, China continued to buy foreign currency and build reserves

High reserve accumulation has little to do with a 'savings culture'

Industrial profits grew by a factor of 8; but trade surplus grew 50% faster

Gains in productivity were not translated into exchange rate realignment...

...and the current account surplus continued to widen

Germany and Japan had success limiting wage increases (like China)...

But they also made currency revaluations to promote stability (unlike China)

Solution: Devalue the renimbi and kill Chimerica

Good for U.S.: 'Simply put, because Beijing keeps the exchange rate fixed, the dollar cannot devalue against China (and other parts of Asia) despite the large U.S. trade deficits. This makes it impossible for the American economy to earn its way out of the slump.'

Good for China: 'In brief, the sooner China faces the fact that it cannot avoid sizeable losses -- say about 20 per cent of GDP in renminbi terms -- on its dollar reserves, the better. These financial losses will be a modest price to pay for a development model that propelled China from Third World status to an economic powerhouse in less than 15 years...'

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