Thursday, March 15, 2007

Chimerica: can we "yada-yada" the imbalances?

George: Listen to this. Marcy comes up and she tells me her ex-boyfriend was over late last night, and "yada yada yada, I'm really tired today." You don't think she yada yada'd sex.

Elaine: (Raising hand) I've yada yada'd sex.

George: Really?

Elaine: Yeah. I met this lawyer, we went out to dinner, I had the lobster bisk, we went back to my place, yada yada yada, I never heard from him again.

Jerry: But you yada yada'd over the best part.

Elaine: No, I mentioned the bisk.

Seinfeld

One of the recent themes of historian Niall Ferguson's views, while not, in the limited sample I've managed to find, stated as such, is accepted economic convergence. He uses the term, Chimerica, a merger of China and America, to explain the view that international imbalances are not as troubling as they might appear, at least if we could see the world from his perspective.

From the LATimes: Yet there's another way to see these supposed imbalances: as no more worrying than the doubtless very large imbalances between, say, California and Arizona. Think of the United States and the People's Republic not as two countries but as one: Chimerica. It's quite a place: just 13% of the world's land surface but a quarter of its population and fully a third of its economic output. What's more, Chimerica has accounted for about 60% of global growth in the last five years.

The relationship isn't necessarily unbalanced; more like symbiotic. East Chimericans are savers; West Chimericans are spenders. East Chimericans do manufacturing; West Chimericans do services. East Chimericans export; West Chimericans import. East Chimericans pile up reserves; West Chimericans obligingly run deficits, producing the dollar-denominated bonds that the East Chimericans crave. As in all good marriages, the differences between the two halves are complementary.

As an upstate New Yorker I have some knowledge of these imbalances to which Mr. Ferguson refers- in my case that which exists between New York City, the main provider of state income tax funds, and Albany, New York's Capital, one of the main beneficiaries of these down state funds. To say that this imbalance is not troubling is to misread New York State political history. While dissension ebbs during periods of economic growth, its always comes to the fore when growth stalls, with the most recent significant example being the mid 70s financial problems in "The City" as we upstaters refer to the Big Apple. Intra-state tensions have been a feature of New York politics for much of the past two centuries.

Even the relationship he chose, that between California and its neighbors, is not nearly as "smooth" as he asserts. Two sources of tension spring to mind, electricity and water.

During California's electricity crisis of 2000-2001, tensions arose between electricity providers, Washington State and Oregon, and electricity users, California. A drought reduced hydro-electric power generation in the two northern states and their efforts to maintain water flow and thus power generation created domestic political problems.

Water itself is also an inter state problem out west. As Mark Twain once quipped on California's perennial problem, "Whisky's for drinking; water's for fighting over." California has for years been exceeding its Colorado River water allotment, set forth in the Colorado River Compact, which is now becoming a larger inter-state issue as populations in Arizona and New Mexico have climbed.

While I'm not arguing the states around the Colorado River are planning to call out their respective National Guardsmen and take Twain's view to heart, after all, most of the guardsmen are in Iraq, glossing over the tensions that exist, albeit below the national radar, will lead to confusion when larger mergers are envisioned.

As a student of History, Mr. Ferguson is well aware that the "religious" wars in Europe between Protestants in Northern Europe and Catholics in Southern Europe had an economic aspect, an imbalance, if you will. The schism of Western Christendom, which is in the process of attempted repair via EMU some 5 Centuries later, was caused, in part, by Rome's assumption that the merged "tribes" of Europe would stay that way while the Vatican and Southern European Bankers like the Medici kept draining the North of specie.

I may be in the minority but the current attempt to re-knit Europe into a whole via economic rather than religious means is not a done deal. Thus far, in my view, liquidity and strong global growth has papered over international differences on the continent. The true test of the union will come when credit conditions tighten and the fiscally responsible are dragged down with the fiscally irresponsible. It has only been 15 years since Italy was forced to exit the ERM due to their high debt and deficit to GDP ratio. Currently Italy's debt to GDP ratio of roughly 107% is still the highest in the Euro-zone.

Back within the United States again, the willingness to accept imbalances will be tested as Congress looks to bail out sub-prime borrowers. According to Bloomberg: Federal aid ``would come at a cost,'' said Douglas Duncan, chief economist at the Mortgage Bankers Association. ``It has to be paid for and the question is would the 34 percent of homeowners who have no mortgage be willing to pay taxes to support the bailout of people who traditionally have not managed credit well?''

If, as I imagine will prove to be the case, a bail out of this sort will be a tough sell, imagine how much more difficult it would be (is) to sell to East Chimerica, as Ferguson calls China, that they need to take a 50% "hair cut" on their reserves to help out their buddies in West Chimerica.

Bridging cultural differences and regional concerns has been the main impediment to the presumed great benefits of global cooperation. While I agree in theory that a global economic unit would be far more efficient than a number of autarkies, or self-sufficient economies, simply assuming that regional imbalances within an economic unit will not be troubling seems to fly in the face of history. Keeping those imbalances small or at least understandable, i.e. rational to the sensibilities of the time, has been the key to maintaining unity.

Sadly the great Achilles Heel of the de-regulated post Bretton Woods Economic System is the inability to correct imbalances of large economic units thus allowing them to grow unchecked. When the time comes to truly address the "Chimerican" imbalances, I'll bet that term will be about as popular as Mexifornia is to the Orange County crowd.

Fighting between the haves and have nots has been going on for a long time. "We are all Americans" speeches did not solve the class wars in the US during the late 19th and early 20th Centuries, addressing the imbalances did. As Mark Twain might have put it, we'll only be able to Tom Sawyer the East Chimericans for so long.

A focus on the "placid surface" of global financial conditions, to borrow from Paul Volcker, to the exclusion of the actual economic conditions underneath recalls Korzybski's dictum, "the map is not the territory." Just because stock markets haven't crashed or other untoward financial developments haven't materialized does not mean that the "natives" aren't restless or that they are unconcerned about imbalances. I hope the current crop of Empire dreamers have something better up their sleeve than, "but the stock market didn't crash this time, why can't we globalize?"

3 comments:

STS said...

Fergusson is doing something constructive by trying on some redefinitions "for size". I tend to think of the "expanded dollar zone" to include the global supply chain behind our consumer spending. Our rapid money growth is connected with the liquidity requirements of rapidly growing Asian suppliers with dollar pegs. This gets talked about under the guise of the "conundrum", "savings glut", "hard asset shortage",etc. but we need some new vocabulary before we can even formulate the right questions.

Your comparison of EMU with the financial issues underlying the Reformation is very striking and quite useful as well.

My main worry about Chimerica is that East Chimerica will have the upper hand on the political issues. One big happy authoritarian state (crony-)capitalist empire of Chimerica. Bye-bye to 18th Century notions of Liberty. The Friedmanite economic determinism popular today (economic freedom generates political freedom) is superficially plausible and reassuring, but I'm not quite convinced it's actually ... well, you know ... "true" -- if I may be allowed such a quaintly Enlightenment-based turn of phrase.

TallIndian said...

I shudder to think where we would be if, in the early part of the 20th century, the people without tuberculosis were reluctant to pay for hospitals and other public health measures that would only have immediate benefit for the afflicted.

And how many of the 34% of homeowners without mortgages had the good fortune to work for Haliburton or other such firm in the 'private sector'

Dude said...

I'm not arguing that I don't think it would be socially better to bail out those who have been duped but rather that my view, even though I'm one of those 34%, will be the minority.

I beleive there has been far too little wealth sharing.