america and china puzzle pieces

Chimerica In Crisis: Watch Free Video

The development of the economic relationship between the United States and China over the last 30 years has profoundly altered the structure of the global economy. It has been the centerpiece of Globalization. The world has been transformed by it, not just economically, but politically as well. In 2006, the historian Niall Ferguson coined the term Chimerica to describe that relationship.

Ferguson wrote: “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 around 60% of global growth in the past five years.”

Indeed, looked at this way, Chimerica is the greatest economic superpower the world has ever known. Chimerican GDP is now $28 trillion – 36% of world GDP. Total credit in Chimerica is more than $85 trillion and Chimerican central bank assets are nearly $10 trillion.

Following the breakdown of the Bretton Woods International Monetary System in the early 1970s, Chimerica emerged due to a combination of market forces and coordinated US-Chinese government policies designed to bring it about and support its growth.

At its core, the Chimerican relationship worked as follows: Americans spent and imported, while the Chinese saved and exported. The US trade deficit with China rose from next to nothing in 1985 to US$367 billion in 2015. Over that same period, China’s central bank printed the equivalent of nearly US$4 trillion and lent most of it to the United States to finance the growing US debt.

Practically everyone in China benefited from this arrangement. In the United States, most of the benefits accrued to the wealthiest classes. The wages of the majority stagnated and income inequality increased. During the process, the structure of the US economy (and the global economy) was rebuilt around the new Chimerican reality.

Chimerica is now on the brink of crisis, however. It is at risk of collapsing into a severe recession. If it does, the global ramifications will be devastating.

Since the crisis of 2008 began, US and Chinese interests have begun to diverge. Consequently, the Chimerican relationship has become increasingly frayed. The United States is no longer economically strong enough to keep up its end of the bargain, while China’s economic bubble has grown so large that it has become unstable domestically and destabilizing internationally.

With China now slowing sharply and the US unlikely to rebound, Chimerica is shifting from being the driver of global growth to being a drag on growth and a source of destabilizing deflation. In 2015, Chimerica’s imports contracted by 9%. Exports fell by 4%. Chimerican central bank assets shrank by 5%. Credit grew by only 4%. This hard landing has already dealt a severe blow to the global economy.

Further deterioration is likely. The weaker Chimerican growth becomes the more strained US-Chinese relations will become. If Chimerica ends in divorce involving trade tariffs, a global depression will follow. The consequences could be catastrophic, both economically and politically.

Over the last two months, I have made five Macro Watch videos on the economic hard landing now unfolding in China. Today, I would like to share the second of those videos with the Rich Dad community. It describes the mind-blowing investment boom that blew China’s economy into the largest economic bubble the world has ever witnessed. Here’s the link (just click and watch, no password is required):

If you would like to learn more about how the economic crisis in China is likely to impact the rest of the world and what that could mean for you, please subscribe to my video-newsletter, Macro Watch:

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Original publish date: July 01, 2016

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