The Ascent of Money and Chiamerica

The Ascent of Money by Niall Ferguson

The next time anyone blames Wall Street and the US Federal Reserve for the global economic downturn, throw the book at him. Not just any book but Niall Ferguson’s The Ascent of Money.

This excellent, immensely readable history of banking and finance published last year not only saw the crisis coming but was quick to pin the blame – not on America but on Chiamerica. Ferguson, an eminent British economic historian, describes how American consumers binged on cheap Chinese goods until the US economy went bust, dragging the rest of the world into a recession.

Here’s a televised part of the book dealing with Chiamerica.

Ferguson writes:

In effect, the People’s Republic of China has become banker to the United States of America.

At first sight, it may seem bizarre.Today the average American earns more than $34,000 a year… the average Chinese lives on less than $2,000. Why would the latter want to lend to the former?

The answer is that, until recently, the best way for China to employ its vast population was through exporting manufactures to the insatiably spendthrift US consumer.

To ensure that those exports were irresistibly cheap, China had to fight the tendency for the Chinese currency to strengthen against the dollar by buying literally billions of dollars on world markets…

From America’s point of view, meanwhile, the best way of keeping the good times rolling in recent years has been to import cheap Chinese goods. Moreover, by outsourcing manufacturing to China, US corporations have been able to reap the benefits of cheap labour too. And, crucially, by selling billions of dollars of bonds to the People’s Bank of China, the United States has been able to enjoy significantly lower rates of interest than would otherwise have been the case.

Welcome to the wonderful dual country of “Chiamerica” – China plus America – which accounts for just over a tenth of the world’s land surface, a quarter of its population, a third of its economic output and more than half of global economic growth in the past eight years.

For a time it seemed like a marriage made in heaven. The East Chiamericans did the saving. The West Chiamericans did the spending. Chinese imports kept down on US inflation. Chinese savings kept down US interest rates. Chinese labour kept down US wage costs. As a result, it was remarkably cheap to borrow money and remarkably profitable to run a corporation. Thanks to Chiamerica, global real interest rates – the cost of borrowing, after inflation – sank by more than a third below their average over the past fifteen years…

But there was a catch. The more China was willing to lend to the United States, the more Americans were willing to borrow. Chiamerica, in other words, was the underlying cause of the surge in bank lending, bond issuance and new derivative contracts that Planet Finance witnessed after 2000… And Chiamerica – or the Asian “savings glut” as Ben Bernanke called it – was the underlying reason why the US mortgage market was so awash with cash in 2000 that you could get a 100 per cent mortgage with no income, no job or assets.

So Chiamerica has been both a boon and a bane. Both China and America – and the rest of the world – benefited from globalization and are now suffering the consequences. But the world has become so interdependent that governments are desperate to revive global trade.

However, globalization is no guarantee of peace. Ferguson recalls:

Britain and Germany enjoyed the same close economic relationship as China and America today when the First World War broke out in 1914.

He does not say conflict is inevitable, nor does he rule it out. Ominously instead, he notes:

Some may even be tempted to say that the surge in commodity prices in the period from 2003 until 2008 reflected some unconscious market anticipation of the coming conflict.

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