The Great Reset short video talks about the fate of Chimerica, the long-time dominant economic power involving two states - the United States of America and the People’s Republic of China.
According to this video, once Chimerica dominated the world economy. This ‘monster economy’ led the world by
spending (US) and saving strategy (China). The American economy was paying
China with many dollars while China, looking for a good place to store these
dollars, lent these back to US. However, as this course continued, the US economy
bubbled and eventually crashed. This hurt the ‘monster economy’ very much and
caused the rise of four ‘grim reapers’ namely: the rising public debt,
increased government intervention, creeping protectionism and the rise of
saving and the decline in spending. Despite what is happening, Chimerica lives on but the global
imbalances remain. The world, then, continues to witness this cycle of bubble
and burst. In this unwanted situation, Chimerica
responds by breaking up: US saves more and consumes less, while China spends
more but it is not able to replace that of US. The problem, however, is when US
demand freezes, Chimerica would be in
an endless free fall. This economic turmoil also causes social and political
unrest, threatening world’s peace and order and freezing international trade. This
leads to a question of how the world can survive the Great Depression II, can
be ready for the Great Reset or will see the end of Chimerica.
The message of this video about the
Great Depression II is, for me, not anymore true these days and though I
believe that there is a reset in the global economy, Chimerica will still survive.
To begin, Chimerica (from chimera
which means monstrous hybrid) was termed by Niall Ferguson and Moritz
Schularick in 2007 and used to describe the combination of the Chinese and
American economies forming the major engine of the world economy (Ferguson
2010). It is the combination of Chinese
export-led development and American overconsumption. For China, this financial
marriage was due to its potential to propel the economy forward by means of
export-led growth ; while, for US, the monstrous economy meant being able to
consume more, save less, and still, maintain low interest rates and a stable
rate of investment (Ferguson 2010).
Unfortunately,
this symbiotic relationship was marred by politics- as state intervened, the
invisible hand got distorted. Since
China’s financial system is owned and managed by its one-party government, the
latter can intervene in the forex market and maintain control over domestic
money aggregates at the same time (Ferguson 2010). This currency intervention
led to a “vast accumulation of dollar-denominated securities in the reserves of
the People’s Bank of China and the State Agency for Foreign Exchange” (Ferguson
2010 p.4). By 2009, China’s dollar reserves reached up to 12% of US GDP. In US,
this caused lower interest rates, thereby increasing consumption and widening
gap between savings and investment (Ferguson 2010). The problem of housing
bubble then existed in the American economy.
Facing decline in
global demand, today, US private savings are rising again in exchange for mounting
deficits. Meanwhile, China’s economy responds by investing into domestic
constructions and infrastructures, thereby increasing domestic demand (Ferguson
2010). These responses halt the Great Depression II but, yes, the video is
right for saying that imbalances remain- the American economy having problem on
trade deficits while, despite of increase in domestic demand, China’s surplus
remains (brought by state policies of subsidizing exports and taxing domestic
consumption).
Nevertheless, statistical
figures show that Chimerica, though
constantly predicted to fall, will still be the world’s superpower at least for
two more decades. With low labor cost, high saving rates and competitive
exchange rate, China’s share in global GDP will continue to increase. If
China’s economy growth rate continues to increase by 7.5% a year and yuan
appreciating by 3% a year, it could overtake US by 2020 (Piatkowski 2011).
Meanwhile, the American economy, with positive demographics, strong macroeconomic
policies and flexible labor markets, can continue to grow at a stable pace of
2.5% by 2025 (Piatkowski 2011). Also, though challenged, the prestige of US
dollar as the premier reserve currency will continue to allow it to borrow
abroad in low interest rate (Piatkowski 2011). Indeed, the global financial
crisis of 2008-2010 only hurt Chimerica
in the short term, but the prospect of growth still continues. Another probable
reason is the changing perception on capitalism of the Chinese people, at least
the intellectuals, paving a desire for greater liberalism and, consequently, a
chance for reduced state intervention.
In terms of
international relationships, since according to the social constructivism
theory, just one’s show of aggressiveness stimulates others to retaliate, China
would not want the international community to go against it as its national
interest is growth. Furthermore , I believe, that in the international
community today, a hard-headed state would not remain to be such when economic
sanctions are already being imposed upon it as the world has already witnessed
its negative impact several times (as in the case of North Korea). In addition,
with US urge to impose tariff on China’s exports and the pressure from the
international community, China would make ways to protect its interest (i.e.
through revaluation of its currency) and, consequently, not necessarily
intentionally, make the world a bit far from the brink of another ‘Great
Depression’. Hence, despite the economic war of imbalances, the Sino-US
relationship is likely to stay peaceful at least on the surface of the
international community.
With unexpected
mishaps that can be brought by e.g. climate change, policy change, and
political conflicts, we will never know what would exactly happen. But, as of
the moment, the fall of Chimerica is
too soon to be anticipated.
Sources:
Ferguson, Niall. “The End of Chimerica: Amicable Divorce
or Currency War?”. US: 2010. Accessed February 22, 2013.
Piatkowski, Marcin. “The Inexorable Rise of Chimerica:
The Long Term Scenario”. Warsaw: 2011. Accessed February 12, 2013. URL: http://www.tiger.edu.pl/publikacje/TWPNo122_Piatkowski.pdf
(I wrote this paper for my Economics
190.1 class in UP Diliman)
