Niall Ferguson has a very interesting op-ed on the symbiotic relationship between China and the United States and the role that central bankers play in it:
Two years after the taper tantrum, this was the week of the Chimerican chill. Economist Moritz Schularick and I coined the word Chimerica in these pages in 2007, combining China and America, to describe the symbiotic relationship increasingly dominating the world economy. That is even truer now, as the past several days have shown. For the first time in financial history, a sneeze in Shanghai gave Wall Street—and almost every other stock market in the world—a cold.
Before the 2008 financial crisis, Chimerica was a marriage of opposites. China saved, exported and lent. America consumed, imported and borrowed. For a few heady years, the odd couple were happy together. Not only did the glut of Chinese savings lower the cost of capital, the glut of Chinese workers reduced the cost of labor. Every asset class on the planet rallied.
But the unbalanced economic relationship between China and America posed a threat to global financial stability. That was our point in 2007: Chimerica was a chimera. Without the flow of Chinese savings into U.S. dollars back then, a result of Beijing’s large-scale intervention to keep its currency weak, American interest rates would surely have been higher and the U.S. housing bubble less inflated. Surprisingly, the 2008 financial crisis didn’t lead to a Sino-American divorce, despite mutual accusations of monetary manipulation. Instead, like any couple who spend long enough in each other’s company, the Chimericans grew ever more alike.
He seems to long for China to become more like the United States:
After the bursting of the stock bubble in June, the Chinese government resorted to a bewildering combination of market interventions, exhorting pension funds to buy and threatening sellers with prosecution. These measures have not only failed, they have also damaged the government’s credibility.
Such blunt instruments must be set aside, and the role of the People’s Bank of China (PBOC) redefined so that it becomes more Fed-like in character. China’s leaders need to see that regardless of the Fed’s official dual mandate—to promote stable prices and maximum employment—responsibility for preventing an asset-price crash lies with the central bank alone.
which I found distressing. Is it the Federal Reserve’s responsibility to stabilize asset prices? If it is it’s done a terrible job of it. In 2008 the DOW closed under 8800. It’s double that now. I don’t see how that can be construed as stabilizing asset prices or even ensuring that they only rise in an orderly fashion.
Silly me. I thought the Federal Reserve’s mandate was to preserve an elastic currency not to ensure that the stock market always goes up. Of course, as the total volume of the stock market rises out of relationship to the real economy “elastic currency” increasingly comes to mean “ensuring the stock market always goes up”. Sounds like we need a statutory redefinition of the Fed’s mandates.
Meanwhile, the use of the symbiosis metaphor to describe the relationship between the United States and China makes me queasy. It’s obviously not a commensalist relationship and, if it’s one of mutualism, from my vantage point it certainly looks as though one of the parties benefits so much while the other benefits so little it’s hardly mutual at all. Let me see, there’s a word that describes a symbiosis that is neither commensalist nor mutualist. What could that word be?
They make the same mistake most everybody else does. They base their theory on sound money principles. Trying to understand the universe without Einstein’s theories would be difficult. When time is constant at all speeds, the universe does not function properly, but after Einstein, everything falls into place. (Until it gets broken again.)
China does not “save”. They receive dollars and have few choices as what to do with them. The only US export they purchase in any quantity is financial products, or they could stuff the dollars into the mattress.
Chinese manufacturers create consumer products and export them to the US, and Americans purchase them with dollars. The Americans manufacture financial products and export them to China, and the Chinese purchase them with dollars. The Americans use those dollars as the raw materials to build more financial products and to invest in Chinese manufacturing plants.
I suspect that the authors would be aghast at the idea of sound money if they could even knew the difference.
The Fed has been powerless for the past 16 years, and eight years ago, it became painfully obvious for anybody who was willing to see. The Fed’s capacity is swamped by the private (shadow) and whatever international interconnections (visible or private). The Fed is as quaint as Bailey Brothers’ Building and Loan.
I don’t like Ferguson. The man has spent the last five years presenting himself as an economist without appearing to make any particular effort to learn what economists or economic historians know.
Not only did the glut of Chinese savings lower the cost of capital. . .
I have no idea what that means. The Chinese cannot have a savings “glut” in U.S. dollars given those dollars reside in U.S. banks; in those banks there are precisely as many assets as liabilities. It balances out. Maybe he’s arguing the Chinese just have too many dollars.
Without the flow of Chinese savings into U.S. dollars back then. . .
There is no flow of Chinese savings into dollars. The yuan cannot pump up the quantity of financial assets in the U.S. banking system.
. . .American interest rates would surely have been higher. . .
The choices of the Chinese government regarding their portfolio of financial assets do not determine interest rates in the United States.
. . .and the U.S. housing bubble less inflated.
A great deal is assumed in this: that credit expansion is a function of real interest rates, that low (though unidentified) interest rates create investment “bubbles” and that such bubbles are anything more than an his artifact of growth theory thinking. Ferguson doesn’t seem to realize accepting the notion of bubbles means the Fed shouldn’t have to look after asset prices as markets will self-correct.
. . .responsibility for preventing an asset-price crash lies with the central bank alone.
Presumably because Greenspan says so. Taking capital markets as a proxy for economic activity was almost entirely his initiative though he never articulated a clear case for why anyone should accept this.