Niall Ferguson's "Chimerica"

My good friend from Arpoador sent me a link to read, Niall Fergusson's article, the "End of Chimerica." The article covers a lot of topics but the main point seems to be that the US and China had a special economic relationship (a savings glut in China financed a housing boom in the US) and now it's over. It's not that different from a point Krugman has made in the past about the US being a country where people made their livings selling houses to each other financed by debt from China. But housing booms haven't been specific to the US (Canada, UK, etc.) and lending to the US hasn't been specific to China (ever heard of Japan?). And I couldn't really find the place in the article where he showed that China has now or will anytime soon stop lending to the US. And what did China really have to do with sub-prime mortgage originators and the absence of oversight for CDS and related derivatives and all the rest of the things most people put at the origins of the crisis?

But the things above don't really bother me. It's things like going on and on about oil prices driven ever up (by China's insistence on growing at 10% a year--it certainly would be nice to be able to grow at 10% a year because a country "feels it must"). But the article was published in September 2008 and oil prices had been fallen sharply since mid-July (about 25% below the price mentioned in the article). Ferguson also goes on about US dollar depreciation when the US Dollar had also been appreciating since mid-July against most currencies. Books necessarily become out of date quickly but there's nothing to stop someone from updating an article.

This the quote that bugged me most:

History’s lesson is clear: the combination of high indebtedness and low growth is lethal to reserve currency status, provided there is an alternative.

Where to start? First how on earth could history have a clear lesson to offer on the economic conditions that lead to the decline in a country as a reserve currency? So far as I know, since we've had good economic data, there have been just 2 main reserve currencies (the pound and the dollar). And Ferguson himself admits there is no clear date for when the dollar became number one (somewhere between 1915 and the 1950s). So how on earth could we say with certainty that it is the combination of high debt and low growth that is fatal. what about inflation say, or the absolute size of your economy, or its share of world financial transactions? I would have started with those in my model. But I couldn't estimate the model because there's only one change! The worst thing is the last clause, "provided there is an alternative." What started out as a strong (probably false) declaration has now been reduced to something that can't be disproven. Because we don't know what an "alternative" is. He tells the Euro is one. But of there were many alternatives in the sense that that there are plenty of currencies countries might have chosen. Ferguson would protest that these weren't suitable alternatives... OK, so now what's history's great lesson? If you have world reserve currency and its economy is lousy and there's another currency that's a great alternative with a good economy people might switch? That's not a lesson from history. It's just common sense. And for all I know, it might not even be right (multiple equilibria are probably important for currency reserve choice).

My last complaint is the cheapshot against unnamed economists:

As this tremendous expansion in borrowing was taking place, many Panglossian economists tried to rationalise what was going on. Some argued that this was “Bretton Woods II”, a kind of system of international exchange rate management. Others called it a “stable disequilibrium”, something that could be counted on to continue for some considerable time.

So which economists said this was a stable disequilibrium? That doesn't even make any sense to this mainstream economist (although my google search did turn up an article on the topic in Economics Letters). It's not like Ferguson fails to reference other names in the article--he mentions the author of the book the Black Swan later in the same paragraph. And how about economists like Paul Krugman who had been raising alarm bells for a long time?

Full disclosure: when I read this article I was already annoyed with something Ferguson had said on BBC Forum. Asked to justify his thesis that financial events an important driver in history, he chose to pick the victory of Barack Obama:

"[The] Presidential election ... would almost certainly not have gone the way it did if it hadn't been for a huge financial crisis that reached its climax two months before people went to the polls."... "It's clear that things would have been very different if the financial crisis hadn't struck when it did" (my transcription)

Wait! it's not clear at all. There was only the shortest window where McCain was ahead in the average of the polls. And prediction markets gave McCain only a 30-40% chance of winning back in June. Sure Obama's position in the polls rose around the time that crisis worsened. But even if things hadn't gone crazy what certainty is there that McCain would have won? None at all. More likely in my view is that Obama would have just won a tighter victory. But who knows?

When we don't really know something we need to try to be a little more humble and say "clearly" a little less often.