'Chimerica,' a Special Relationship at the Crossroads

In December 2007, Harvard historian Niall Ferguson published a paper in the journal International Finance titled "'Chimerica' and the Global Asset Market Boom."¹  In the article, Ferguson argued that understanding today's global economy required concentrating on the relationship between the United States and China. 

In fact, Ferguson proposed considering the two economies to be, in reality, one economy.  This nation of Chimerica, he argued, occupies 13 percent of the world's land, is home to one-fourth of the people on Earth, and accounts for one-third of the global gross domestic product. 

As Ferguson later refined this argument in the January-February 2009 issue of The American Interest,² China and America have entered into a "largely contented marriage" in which China saves money and America spends it.  In the mid-1990s, Americans were saving about five percent of U.S. GDP, but that figure had dropped to zero by 2005. 

The Chinese, meanwhile, were saving something just less than 30 percent of Chinese GDP in the '90s, but that figure grew to 45 percent of GDP by 2005.  The bounty of savings in Asia made it vastly less expensive for the average American to borrow money, while cheap Chinese labor counteracted the forces of inflation. 

To sustain this relationship, the Chinese government intervened to prevent their currency, the yuan, also known as the renminbi, from appreciating against the dollar.  Then the Chinese used their vast capital surplus to buy U.S. Treasury bonds as well as bonds issued by Fannie Mae and Freddie Mac, thus keeping U.S. interest rates low. 

As leverage increased in America, the combination of public and private debt rose to 350 percent of GDP.  According to Newsweek,³ China now holds $2.1 trillion in securities denominated in American dollars. 

Other countries were following suit on both sides of this arrangement.  Spain, for example, ramped up its debt level, while other Asian and even Middle Eastern nations poured money into the game.  But the Chinese-American relationship was what made the global economy tick.  What was really going on was largely ignored:  Much of the savings in the world were serving to inflate a huge bubble in the U.S. real estate market. 

So, once the defaults began in the subprime market, a panic ensued, with well-known results.  The Bank of England estimated that some $2.8 trillion was lost in the mêlée.  The sudden collapse in the velocity of money and the abr... To read the full article, you must be a Trends Magazine Subscriber. To learn more, click here