Niall Ferguson: The U.S. and China both need economic rehab. Yet, If Beijing and Washington try to exit at the same time, the global economy could take a big hit….
both countries confront surprisingly similar challenges. Both economies suffer from a severe debt overhang and have become addicted to ultra-loose financial conditions. Both know the medication cannot continue forever. But neither Washington nor Beijing knows how to reduce the dose, much less to quit.
For some economists, the right time to tighten monetary policy is always never. But there are dangers in procrastination. Having blinked once, both the Fed and the PBOC may soon have a credibility problem. The longer they wait, the frothier asset markets become (stocks in the U.S. and big city housing in China are both up around 20% this year). That may perhaps advance recovery through the “portfolio channel”; it also advances inequality by favoring those with the biggest portfolios. And enriching the rich is not the stated policy objective of either the American Democratic Party or the Chinese Communist Party.
Meanwhile, the more monetary policy is regarded as “the only game in town,” the less pressure there is on politicians to think seriously about either fiscal or structural reforms. Finally, if monetary policy is too loose for too long, history suggests it can increase the probability of a disorderly asset-price crash. It is not hard to imagine such a scenario in a China that has acquired American levels of leverage, plus a bunch of shaky shadow banks.
With Europe emerging only slowly from the euro’s near-death experience, the rest of the world must watch nervously to see what policy makers in Washington and Beijing decide to do. One thing is already clear from the wobble in global bond markets this summer, which exposed the vulnerability of emerging markets with large current account deficits: If Beijing and Washington try to exit at the same time, the global economy could take a big hit.
Coordination and sequencing are therefore essential. These will become all the more vital if China’s leaders are in earnest—as is rumored in Beijing ahead of this month’s Third Plenum—about liberalizing their financial sector and capital account, steps that can only increase Sino-American economic interdependence. The Chimerican couple need to go to rehab soon—but separately.
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Niall Ferguson is one of the world’s leading historians of the global economy and author of such internationally-acclaimed works as The Ascent of Money, The Pity of War, The Cash Nexus: Money and Power in the Modern World, Empire: The Rise and Demise of the British World Order, Lessons for Global Power, and The War of the World: Twentieth Century Conflict and the Descent of the West. His new book, Civilization: The West and the Rest, is an international bestseller and basis for a multi-part television documentary.
Controversial, expansive, and eloquent, Ferguson has been called “the most talented British historian of his generation”. But the ambitious themes he explores in his work have urgent relevance to the present as well as the past: the costs and benefits of economic globalization; the interface between finance and politics; the lessons to be learned from the British experience of empire; and most recently, the strengths and limitation of American global power.