Economic historian Niall Ferguson is calling for the death of a monster he helped create. Well, create is probably too strong. He just named the monster.
That monster was the dual-poled, Chinese-American partnership that he dubbed “Chimerica.”
Chimerica was, of course, a double-layered portmanteau, combining the names of the two contries, with Chimera — a hybrid animal or a ghastly monster.
Writing in The Australian, he says it’s time to go, and that the relationship — characterised by cheap money from China and wreckless spending from America — is over, and it’s never coming back.
The Chimerican era is drawing to a close. Given the bursting of the debt and housing bubbles, US household savings will have to rise, and Americans will have to kick their addiction to cheap money and easy credit.
The Chinese authorities understand heavily indebted US consumers cannot be relied on to return as buyers of Chinese goods on the scale of the period up to 2007. And they dislike their exposure to US currency via close to two trillions of dollar-denominated reserve assets. The Chinese authorities are “long” the dollar like no foreign power in history, and it makes them very nervous.
Yet there is a strong temptation for both halves of Chimerica to keep this lopsided partnership going. Despite much talk of the need to reduce global imbalances, the biggest imbalance of all persists. This year, America’s trade deficit with China will be about $US200bn, the same as last year. And China has again intervened in the currency markets, buying $US300bn to keep its currency and hence its exports cheap.
During this week’s visit in China, Mr Obama had to resist the temptation to respond to these overtures with rhetoric of his own. This is not the time for big speeches, but for subtle diplomacy. Right now, Chimerica clearly serves China better than America. Call it the 10:10 deal: the Chinese get 10 per cent growth; Americans gets 10 per cent unemployment. The deal is even worse for the rest of the world – and that includes some of the US’s biggest export markets and most loyal allies. The question is: what can the US offer to make the Chinese abandon the dollar peg that has served them so well?
The authorities in Beijing must be made to see that any book losses on its reserve assets resulting from changes in the exchange rate will be a modest price to pay for the advantages it reaped from the Chimerica model: the transformation from third-world poverty to superpower status in less than 15 years. In any case, these losses would be more than compensated for by the increase in the dollar value of China’s huge stock of renminbi assets.
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