Parsing Chimerica (China + America)

♠ Posted by Emmanuel in , at 7/02/2007 01:51:00 AM
Reader Kramladen pointed me in the direction of this recent paper by Niall Ferguson and Moritz Schularick on "Chimerica and Global Asset Markets." Supposedly, "West Chimerica" (the US) and "East Chimerica" (China) propel this economic order buoying assets markets worldwide. Minus the funky new terminology, many of the themes here echo those made in the "Bretton Woods II" argument with a handful of new flourishes. Whereas simpletons like me see asset bubbles forming worldwide due to abundant liquidity--the mess Greenspan made--these authors argue that "the asset boom has been a rational response by market actors to a fundamental macroeconomic phenomenon, namely the wedge between the returns on capital in a globalized world economy and the abnormally low cost of capital" (p. 2). That is, abnormally cheap credit c/o the PRC combined with higher returns to capital enabled by globalization have propelled asset values upwards but not to unjustifiable levels, or so they argue The paper's abstract follows which pretty much summarizes the paper's contents well:
In this essay we present a potential explanation for the persistent and, to some eyes, puzzling buoyancy of global asset markets in recent years. We argue that the current world economic conjecture is the product of a large and unusual divergence or "wedge" between the returns on capital and cost of capital. Globalization--in particular the integration of the massive Asian labor force into the world economy--has significantly increased the returns on capital. However, contrary to what economic theory might lead us to expect, the cost of capital has not increased, but actually fallen. We call this phenomenon "Chimerica" because it is a consequence of the symbiotic economic relationship between the People's Republic of China and the United States of America. The entry of Chinese labor into the world economy has significantly boosted the returns on cpaital relative to the returns on labor. At the same time, by accumulating large currency reserves and channeling them (until very recently) almost exclusively into U.S. .government securities, China has kept nominal and real long-term interest rates artificially low. In our view, it is this wedge between returns on capital and the cost of capital, rather than excess liquidity or a shortage of financial assets, that explains the boom in global asset markets as well as the recent upsurge of leveraged buy-out activity.
It's notable that Ferguson takes a more sanguine outlook here in describing the US-China economic relationship as a symbiotic one. In contrast, he described the US as a lumbering, debt-addled dinosaur called "debtlodocus" in the recent past. I have a handful of issues with this paper--mainly to do with inflation and the characterization of globalization as a very contemporary phenomenon--though it is a thought-provoking read overall. It ties into some recent posts I've made on surging numbers of high-net worth individuals; Marxist interpretations of globalization [1, 2]; and government support of "market fundamentalism" [1, 2]. A few of the tables presented are also interesting. First up is this one on soaring corporate profits in the US, especially after Bush took office:

Also notable is the markedly increasing ratio of corporate profits to GDP in various developed countries and regions:
Lastly, here is a dramatic illustration of the leveraged buy-out (private equity takeover) binge enabled by low interest rates worldwide: