Niall Ferguson and the Wall Street Journal

Appearing as the "Saturday Essay" this article in the WSJ is well worth reading, although there are some points to be challenged:

Ferguson, Niall, 2010. In china'a orbit. The Wall Street Journal, Nov. 18.

Overall, the article makes some claims that are perhaps a bit hard to support. I think historical analysis is extremely important, however like anything else there are different approaches. The article seems to overlook significant Chinese issues like health care, pollution, lack of natural resources, the implications of a fixed exchange rate, and the inflexibility of a centrally controlled economy where prices for goods are sometimes set.

I do think this statement from the article is somewhat correct:

"For many commentators, the resumption of quantitative easing by the Federal Reserve has appeared to spark a currency war between the U.S. and China. If the 'Chinese don't take actions' to end the manipulation of their currency, President Obama declared in New York in September, 'we have other means of protecting U.S. interests.' The Chinese premier Wen Jiabao was quick to respond: 'Do not work to pressure us on the renminbi rate…. Many of our exporting companies would have to close down, migrant workers would have to return to their villages. If China saw social and economic turbulence, then it would be a disaster for the world.'"

I would claim that by pegging the Yuan to the Dollar, China was first to start a currency war and has built an unsustainable situation as Chinese Premier Wen Jiabao states above. There is no support in the US to maintain the status quo in China when the basis is currency manipulation of the most severe type. Essentially, the US is subsidising Chinese economic growth and going into deeper debt to do so. This is a highly unpopular issue within US politics.

I am less clear regarding the following passage:

"Nothing is more certain to accelerate the shift of global economic power from West to East than the looming U.S. fiscal crisis. With a debt-to-revenue ratio of 312%, Greece is in dire straits already. But the debt-to-revenue ratio of the U.S. is 358%, according to Morgan Stanley. The Congressional Budget Office estimates that interest payments on the federal debt will rise from 9% of federal tax revenues to 20% in 2020, 36% in 2030 and 58% in 2040. Only America's 'exorbitant privilege' of being able to print the world's premier reserve currency gives it breathing space. Yet this very privilege is under mounting attack from the Chinese government."

It is not evident the exact meaning of "358%" mentioned above and attributed to Morgan Stanley. Perhaps this includes private debt along with public debt. If so, I am not sure this is a fair comparison to Greece. After all, the Greek economy has weak growth prospects and is much smaller.

I believe the cumulative national debt as a percentage of GDP is approaching 95%, see United States Public Debt. This is consistent with what I have read from many different sources.

The last issue worth exploring is the reason China lagged behind in wealth creation for many years. This is not an easy question to answer. My personal view is that the political system was to blame for much economic largess. Others believe that a surplus of labor precluded the application of industrialization as was done in Western society.

Americans need to focus on what needs to be done to get our economy back on track. The US economy continues to have the potential to be the growth engine for the world.