THE TELEGRAPH: Who is going to come out of the economic crisis stronger and with the whip hand - China or America, asks Niall Ferguson.
Two years ago, economist Moritz Schularick and I coined the word "Chimerica" to describe what we saw as the key relationship in the then-booming global economy: China plus America. Cheap Chinese labour was making US corporations highly profitable. Spendthrift American consumers, in turn, were keeping Chinese corporations busy with export orders. And the Chinese monetary authorities were converting export surpluses into dollar denominated reserves with the aim of preventing their own currency from appreciating. The unintended consequence was a multi-billion dollar credit line to the United States, financing America's deficit at rock-bottom rates.
It was those low long-term rates – combined with monetary policy errors by the Fed, excessive bank leverage and reckless financial engineering – that inflated the American property bubble, the bursting of which triggered this crisis.
To simplify the story, think of an unhappy marriage in which one partner does all the saving, while the other does all the spending. (We all know at least one couple like that.) But then the partner with the retail therapy habit maxes out on his/her credit cards. At the same time, the parsimonious partner finds her/his job under threat. What previously was a stable relationship is suddenly on the rocks.
In February, the People's Daily acknowledged the "global importance and influence" of Chimerica, but warned of an impending "period of chillness". Could this be one of those great turning points in history, when the balance of power tilts decisively away from an established power and towards a rising challenger? It is possible. Financial crises often accelerate the gradual shifting of the geopolitical tectonic plates; they are to history what earthquakes are to geology. >>> By Niall Ferguson | Monday, June 01, 2009
Niall Ferguson's 'The Ascent of Money: A Financial History of the World' is published in paperback by Penguin this week
