Tuesday, October 20, 2009

Niall Ferguson on Yahoo Tech Ticker

The always interesting if sometimes controversial Niall Ferguson with 3 videos on Yahoo's Tech Ticker. Obviously he shares many of the same themes we have been proposing since inception on the website - heck I might have to go write my own book.

As we've noted, and he agrees, China and the US are still joined at the hip - but for those with the long view (i.e. nobody involved in the stock market) as each day passes that the Chinese domestic (internal consumption) economy grows, and each day that the US doesn't change one iota of behavior - we are headed to a time when our top creditor can end the agreement. [Jul 21, 2009: China's Plans for Replacing the Dollar] I peg it in about 10 to 12 years, about the time a floated yuan and functioning bond market are viable in China. The baby steps have just begun. [Sep 8, 2009: China to Issue Renminbi Bonds to Offshore Investors] So with a good decade ahead, that gives us time for 3 bubbles to inflate (and pop) so we can pretend everything is just dandy.

I don't want realism. I want magic! Yes, yes, magic. I try to give that to people. I do misrepresent things. I don't tell truths. I tell what ought to be truth. - Blanche DuBois

Some earlier posts involving Ferguson:

(1) U.S. Empire in Decline, in Collision Course on China

The U.S. is an empire in decline, according to Niall Ferguson, Harvard professor and author of The Ascent of Money.

"People have predicted the end of America in the past and been wrong," Ferguson concedes. "But let's face it: If you're trying to borrow $9 trillion to save your financial system...and already half your public debt held by foreigners, it's not really the conduct of rising empires, is it?"

Given its massive deficits and overseas military adventures, America today is similar to the Spanish Empire in the 17th century and Britain's in the 20th, he says. "Excessive debt is usually a predictor of subsequent trouble."

Putting a finer point on it, Ferguson says America today is comparable to Britain circa 1900: a dominant empire underestimating the rise of a new power. In Britain's case back then it was Germany; in America's case today, it's China.

"When China's economy is equal in size to that of the U.S., which could come as early as 2027...it means China becomes not only a major economic competitor - it's that already, it then becomes a diplomatic competitor and a military competitor," the history professor declares.

The most obvious sign of this is China's major naval construction program, featuring next generation submarines and up to three aircraft carriers, Ferguson says. "There's no other way of interpreting this than as a challenge to the hegemony of the U.S. in the Asia-Pacific region."

As to analysts like Stratfor's George Friedman, who downplay China's naval ambitions, Ferguson notes British experts - including Winston Churchill - were similarly complacent about Germany at the dawn of the 20th century.

"I'm not predicting World War III but we have to recognize...China is becoming more assertive, a rival not a partner," he says, adding that China's navy doesn't have to be as large as America's to pose a problem. "They don't have to have an equally large navy, just big enough to pose a strategic threat [and] cause trouble" for the U.S. Navy.

(2) The Dollar is Dying a Slow Death

The weakening dollar is dying a slow death.

"It's clear where we're headed," says Niall Ferguson "Ten years from now there will be more than one international reserve currency," he tells Tech Ticker.

Ferguson dismisses the dollar loyalists, citing the British pound – the last international reserve currency - as his example. "These things don't last forever" but don't expect it to happen overnight. "It's a long multi-decade process," he states. Even with the dollar near a 14-month low against the Euro, he claims it's not without historical precedence for the greenback to lose "another 20%" this year.

For international investors the loss is enough to offset this year's stock market gains. Not exactly great motivation for foreigners to keep buying the almighty dollar.

(3) Wake up Washington! China is Already Dumping the Dollar

Just as U.S. policymakers are too sanguine about China's military power, Harvard Professor Niall Ferguson says Washington D.C. is too complacent about China's ability to wean itself off the dollar.

With about 1.7 trillion of dollar-denominated assets (mainly Treasuries) in its foreign currency reserves, conventional wisdom goes something like this: If China were to diversify away from the dollar or merely allow the renminbi to float, much less dump its greenbacks wholesale, they would be shooting themselves in the proverbial foot. That's both as investors and because further dollar weakness would put a damper on their biggest export market. (A weaker dollar makes foreign goods more expensive for Americans, meaning Chinese imports would become less "cheap.")

This view is "slightly naive," according to Ferguson

"The idea they don't have anywhere else to go or would shoot themselves in the foot if there were a steep decline in the dollar or appreciation of their currency reassures many people in Washington ‘we can relax'," he says. "An appreciation of the renminbi may reduce value of their international reserves but increases the value of every other asset the Chinese own," most notably the commodity assets they have been buying all over the world.

China's "current strategy is to diversify out of dollars and into commodities," Ferguson says. Furthermore, China's recent pact with Brazil to conduct trade in their local currencies is a "sign of the times."

Perhaps most importantly, China's massive stimulus program is helping to generate internal consumption in the People's Republic, meaning local manufacturers are less dependent on exports. Because of the "rapid growth" of Chinese domestic consumption, Ferguson predicts China's international trade surplus could be gone by next year.

"People in Washington rather assume because the U.S. consumer was so dominant there really isn't a substitute," Ferguson says. But China's trade surplus stood at $12.9 billion in September, down about 56% from a year earlier.

From 1998-2007, China engaged in a form of vendor financing, lending money to the U.S. so the U.S. would buy Chinese goods, Ferguson explains. "I think that model has basically broken. They know it and have a new one in which we play a much less important role."

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