According to Brad Setser, the Chinese government is buying fewer ten-year treasury notes and replacing them with three-month treasuries. This strikes me as something to pay attention to. That the Chinese are transitioning to shorter-term purchases of US dollars signals to me they are less commited to maintaining their reserves in US currency over the long term. Or perhaps not. But if the dollar is increasingly being financed by short term debt that constantly has to be reproduced, then at a minimum there is greater opportunity for foreign investors to slow or retract US debt holdings. As a result, the US is at the very least increasingly vulnerable to a quick movement out of the dollar by foreign investors. Why is this important? Because of the significant extent to which US economic performance over the past two-three decades has depended upon foreign (i.e., Chinese) financing of the dollar.
The British historian Niall Ferguson has a new book out, called The Ascent of Money: A Financial History of the World. It's also a PBS documentary. I haven't got my hands on the book yet, but I will in the next few weeks and will write about it here in this blog.
In the meantime, this week I read the NY Review of Books review of it, by Robert Skidelsky. (Here's a link, but access to read the whole thing is subscriber only.) According to Skidelsky -- again, I haven't read the book yet -- Ferguson coins a term to convey the significant integration between the Chinese and American economies: Chimerica.
Here's a quote about 'Chimerica' from Ferguson's book, via Skidelsky's review:
"Chimerica" -- China plus America -- seemed like a marriage made in heaven. The East Chimericans did the saving. The West Chimericans did the spending. [Cheap] Chinese imports kept down US inflation. Chinese savings kept down US interest rates. Chinese labour kept down US wage costs. As a result, it was remarkably cheap to borrow money and remarkably profiable to run a corporation. Thanks to Chimerica, global real interest rates . . . sank by more than a tird below their average over the past fiftenn years. Thanks to Chimerica, US corporate profits in 2006 rose by the same proportion above their average share of GDP. . . .
The more China was willing to lend to the United States, the more Americans were willing to borrow. Chimerica, in other words, is the underlying cause of the surge in bank lending, bond issuance, and new derivative contracts that Planet Finance witnessed after 2000. It was the underlying cause of the hedge fund population explosion. [It] was the underlying reason why the US mortgage market was so awash with cash in 2006 that you could get a 100 percent mortgage with no income, no hob or assets.
In sum, the standard of living that American business, consumers, and families came to enjoy over the last few decades -- and particularly this past decade -- was made possible by Chinese financing. But now it appears we face a shift in this arrangement. Indeed, evidence suggests the relationship between China and America is changing, if ever slowly. My sense tells me that shifts in the structural arrangements between China and the US is as significant an event as any that shapes America today. What will come of these shifts -- how quickly the shifts will occur, and what they will initiate -- is an open-ended question. But we should be aware, and we should plan. We should do what it takes to bend the effects of the shift in the general direction of our interests. Again, this takes planning, not ideological belief that whatever the free-market creates is naturally right.