Niall Ferguson on Current Economic Prospects

Economic historian Niall Ferguson weighs in on China’s and America’s role in the current global economic crisis under the provocative headline, What “Chimerica” Hath Wrought.

The most important thing to understand about the world economy over the past decade has been the relationship between China and America. If you think of it as one economy called Chimerica, that relationship accounts for around 13 percent of the world’s land surface, a quarter of its population, about a third of its gross domestic product, and somewhere over half of the global economic growth of the past six years….

Yet commentators should hesitate before prophesying the decline and fall of the United States. It has come through disastrous financial crises before—not just the Great Depression, but also the Great Stagflation of the 1970s—and emerged with its geopolitical position enhanced. That happened in the 1940s and again in the 1980s.

Part of the reason it happened is that the United States has long offered the world’s most benign environment for technological innovation and entrepreneurship. The Depression saw a 30 percent contraction in economic output and 25 percent unemployment. But throughout the 1930s American companies continued to pioneer new ways of making and doing things: think of DuPont (nylon), Proctor & Gamble (soap powder), Revlon (cosmetics), RCA (radio) and IBM (accounting machines). In the same way, the double-digit inflation of the 1970s didn’t deter Bill Gates from founding Microsoft in 1975, or Steve Jobs from founding Apple a year later….

But the most important reason why the United States bounces back from even the worst financial crises is that these crises, bad as they seem at home, always have worse effects on America’s rivals. Think of the Great Depression. Though its macroeconomic effects were roughly equal in the United States and Germany, the political consequence in the United States was the New Deal; in Germany it was the Third Reich. Germany ended up starting the world’s worst war; the United States ended up winning it. The American credit crunch is already having much worse economic effects abroad than at home. It will be no surprise if it is also more politically disruptive to America’s rivals.

Among the other developed economies, both the Eurozone and Japan are already officially in recession, ahead of the United States. The European situation is especially precarious because, contrary to popular belief, European banks are in worse shape than their American counterparts. Average bank leverage in the United States is around 12:1. In Germany the figure is 52:1. Short-term bank liabilities are equivalent to 15 percent of U.S. GDP; the British figure is 156 percent. Indeed, the United Kingdom runs a real risk of being Greater Iceland—an economy crushed by a super-sized financial sector.

Moreover, unlike the United States, there is no single European Treasury that can implement multibillion-dollar fiscal stimulus. Monetary policy may be uniform throughout the Eurozone, but fiscal policy is still a case of every man for himself.

Emerging markets, too, have been hammered harder by the crisis than the “decoupling” thesis promised. In the year to the end of October 2008, the U.S. stock market declined by 34 percent. But Brazil’s was down 54 percent, China’s 58 percent, India’s 64 percent and Russia’s 66 percent. When Goldman Sachs christened these four countries the BRICs, they little realized that their equity markets would one day be dropping like bricks. These figures are scarcely good advertisements for the more regulated, state-led economic models favored in Beijing and Moscow.

via A&L Daily

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Filed under China, economics, Europe, Japan, U.S.

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