Monday, March 2, 2009

Chimerica to the Rescue?

Harvard history professor, Niall Ferguson, posits that the most important concept propping up the world's economies and social stability today is "Chimerica."

Here is a snippet of his explanation on his theoretical entity in a recent article from


Heather Scoffield: Is the U.S. able to escape with less pain (in the current financial crisis) because it has more resources to throw at its problems?

Niall Ferguson: “Partly because they can throw so much at it, and they can do it at a lower cost than anybody else, because the U.S. retains the safe-haven status, which makes the world so unfair. Here is the world's biggest economy, which gave us subprime mortgages, rampant securitization, the collateralized debt obligation, Lehmann Brothers, Merrill Lynch. It is, in a sense, the fons et origo of this crisis. And yet, because it retains safe-haven status, in a global crisis, investors want to increase their exposure to the U.S. Hence, the dollar rally. Hence 10-year Treasuries down below 3 per cent yields. It's almost paradoxical that an American crisis ... reinforces the status of the United States as a safe haven.”

Heather Scoffield: Surely that safe-haven status would be revoked if China loses faith in the U.S. ability to finance its debt?

Niall Ferguson: As you know, Chimerica – the fusion of China and America – is one of my big ideas. It's really the key to how the global financial system works, and has been now for about a decade. At the end of The Ascent of Money, I speculate about whether or not that relationship will survive. If it breaks down, then all bets are off, for the U.S. and indeed for Asia. I think that's really the key point. Both sides stand to lose from a breakdown of Chimerica, which is why both sides are affirming a commitment to it.”

“It's very interesting that the Chinese in the last week were saying such soothing things around the [Secretary of State Hillary] Clinton visit. This was only days after Treasury Secretary Tim Geithner used the dreaded ‘m' word – currency manipulation.

Heather Scoffield: Why would the U.S. administration poke a stick in China's eye like that?

Niall Ferguson: “You obviously have to recognize that Democrats have been more hawkish on China for some time, than the Republicans ... But I think Tim Geithner is smart enough to know that this is a very dangerous game to play and I would be very surprised if you heard that word again pass his lips.”

Heather Scoffield: Did the Clinton visit improve the China-U.S. relationship?

Niall Ferguson: It looks like it....The line is very clear from China. They've consistently made their position clear. They want the status quo. They do not want this thing to break down... It's a very good bilateral relation. That bilateral will is important here. The Chinese believe in Chimerica maybe even more than Americans do.

Read the full interview here
Before finding this article, I'd never heard of Ferguson. Based on a cursory glance at his Wikipedia page, it sounds like his career is not without controversy. He's been accused by some of being a right-wing apologist for the US "empire" and a sloppy academic.

So I'm not sure exactly what to say of Ferguson as a source of information. Saying that, I found this interview very thought-provoking. This probably is not much of a surprise to readers of this blog who've witnessed me trying to make sense of the financial crisis over the past few months.

Although the idea of "Chimerica" surely would freak out a lot of people both in China and the US, I quite like the idea. It is very reassuring to me.

On a personal level, I like the idea that the two countries I'm connected to at the hip have a very good reason to keep good relations with the other. And then aside from my personal biases and on a more intellectual level, I find Ferguson's idea of Chimerica, on it surface, to be quite logical. The world's only current superpower and the superpower-in-waiting seem to need each other pretty badly.

In a financial sense, I believe the Taoist yin yang is a pretty good way to think of the countries' relationship.

The US is addicted to debt and consumption. Meanwhile, China has the world's largest population and is a nation of savers. The US demands an unbelievable amount of stuff that it can't afford. China has the ability to produce that stuff as well as finance the US' debt. The US gets to keep its incredibly high standard of living and China stimulates the demand its rapidly-growing exporting-based economy requires.

Both countries win.

In the last question of the interview, Ferguson again touches on Chimerica:

Heather Scoffield: We've discussed many possible nasty outcomes to this crisis. Is there a way out?

Niall Ferguson: “We've discussed two reasons to non-suicidal. I'm trying to stay cheerful. One is that Chimerica is holding up. The Chinese don't seem to want to get divorced from their American spouse.”

“The other is that this isn't leading to World War Three or Four, depending on how many world wars you think there have been. There will be instability, but I don't see that instability producing something as huge as the 20th century conflicts. But it's hard to see a simple and quick macroeconomic happy ending. That I really struggle to visualize.


For the sake of my two countries - China and America - as well as the rest of the world, I truly hope that this Chimerica marriage of convenience stays in tact.

One could very well argue that this yin and yang relationship got us into the crisis in the first place. So it might be tempting to think that it could be a good thing to end it now. But when I look at the broad picture and the possible consequences of a fracturing of the two counties' ties, I'd take my chances of Chimerica.

Although it's been a rocky, bubble-based relationship so far, it makes sense to me that Chimerica could thrive in a more sober, post-2007 financial crisis.


Anonymous said...

White people leading the global.Yellow people work as poor waged slaves. So, where is the fucking democracy and freedom you promised to export. Tell me ,please,I can not see win on this side.

Thomas said...

As Anonymous has argued, but using somewhat different words:

I don't think it's necessarily mutually beneficient that China always has a large account surplus that it invests in low-yielding US treasury bonds. So far, it has served China's interest. But China cannot go on to build up more and more claims against the American taxpayer. There is a limit, and eventually, something's gotta give: It's not beneficial for China if US treasury bonds are devalued by inflation. And if there is no inflation, there will be a bill to pay by the American taxpayer eventually, and the bill won't be pretty. Whatever happens, the trend of the last few years is not sustainble, and there will have to be some sort of unwinding. How it happens remains to be seen.

As for Ferguson, I think he's basically a historian, not an economist. Doesn't disqualify him from writing about economics, but it may mean that he didn't think through the long-term economic consequences of his argument.