The trillion-dollar question

The Daily Telegraph

NEWS COMMENT

Niall Ferguson

US Treasury Secretary Timothy Geithner and Chinese President Hu Jintao: Is a divorce in the cards?
EPA

WHO is going to come out of the economic crisis stronger and with the whip hand — China or America? 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.

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 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.

It was the disastrous Mississippi Bubble of 1718-19 that fatally weakened the regime in France. By 1907, a Wall Street crash could send a shockwave across the entire British empire, a harbinger of a new era of American power. Something similar may be happening as a consequence of the American financial crisis that began nearly two years ago. The flapping of a butterfly's wings may signal the waning of US hegemony and the advent of a Chinese century.

Just consider the impact of this crisis on the United States and China. According to the International Monetary Fund, the US economy will contract by 2.8 per cent this year — while China's is forecast to grow by more than 6 per cent.

Of course, China has not been wholly unscathed by the crisis. Many more Chinese than American workers have lost their jobs since this crisis began. Yet I do not believe (as some Sino-pessimists do) that the regime in Beijing faces a serious threat of social unrest. Like other rising powers in past centuries, China is imbued with a remarkable sense of patriotism. People are proud of their country's economic miracle. After two wretched centuries, they believe China is on the way back.

Even before its economy becomes the world's biggest, China can play a much more assertive role in its relations with the United States. The spouse with the money generally wins the argument, after all. Especially when the argument is about the other spouse's debts.

And what debts! The US federal government's deficit will be US$1.84 trillion ($2.65 trillion) this year — roughly half of total expenditure and nearly 13 per cent of GDP. Moreover, the Congressional Budget Office anticipates that total debt will nearly double in the decade ahead.

With the lion's share (around 70 per cent) of their $2 trillion of international reserves held in the form of US bonds, the Chinese are understandably alarmed by this tsunami of red ink.

We know pretty much what Treasury Secretary Timothy Geithner is hearing in Beijing this week because the Chinese have been grumbling about American profligacy for months. "We have lent a huge amount of money to the United States," Premier Wen Jiabao declared in March. "Of course we are concerned about the safety of our assets. To be honest, I am a little bit worried."

However, Mr Geithner knows the truth of the old adage: When you owe the bank a small amount, the bank has the power. But when you owe the bank a huge amount, it's the other way round. Mr Luo Ping, a director-general at the China Banking Regulatory Commission, put it nicely in February: "Except for US Treasuries, what can you hold? US Treasuries are the safe haven. For everyone, including China, it is the only option. We hate you guys. Once you start issuing $1 trillion to $2 trillion (of bonds) we know the dollar is going to depreciate, so we hate you guys, but there is nothing much we can do."

"We hate you guys?" Now that really does have the ring of marital breakdown. Let's hope Mr Geithner is good at ducking crockery. Like divorces, major shifts in the balance of power are seldom amicable.

From TODAYonline.com; see the source article here.

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