The Hollow Men
British financial historian Niall Ferguson recently coined the term “Chimerica” to describe the growing economic interdependence between the United States and China, a relationship that he calls the key to understanding the world economy over the past decade. His vision of Chimerica is drawing increasing attention as the growing financial turmoil in both nations exposes both how deeply intertwined their economies are and how dysfunctional this relationship has become.
Initially, Chimerica—accounting for a quarter of the world’s population and over half of global economic growth over the past eight years—seemed like a “marriage made in heaven.” China exported cheap goods to the United States which were rapidly snapped up by American consumers, fueling strong growth in China and leaving Chinese savers flush with cash. This cash was then invested in the U.S., which kept interest rates in the U.S. low and provided easy credit, fueling spending binges which thereby increased demand for Chinese products. In Ferguson’s view, the cycle was both complementary and self-reinforcing:
Put simply, one half did the saving, the other half the spending. Comparing net national savings as a proportion of Gross National Income, American savings declined from above 5 percent in the mid 1990s to virtually zero by 2005, while Chinese savings surged from below 30 percent to nearly 45 percent. This divergence in saving patterns allowed a tremendous explosion of debt in the United States, for one effect of the Asian “savings glut” was to make it much cheaper for households to borrow money than would otherwise have been the case. Meanwhile, low-cost Chinese labor helped hold down inflation.
Both countries appeared to have figured out how to have it both ways; while “China’s leaders could enjoy double-digit growth without political reform,” Americans could enjoy rising wealth and consumption without increasing incomes or taxes.
As we now know, much of these gains, like the mythical chimera, were merely illusory, built upon American excesses and Chinese suppression. China kept its currency at artificially low levels in search of higher growth rates (and kept a lid on political dissent). The U.S. spent and lent recklessly, aided by an era of lax regulation. As described in this New York Times article, both countries made half-hearted attempts to address the unhealthy imbalances but the lure of easy money and growth always won out.
Until, of course, our current crisis punctured this illusion, ushering in a mutual blame game. The U.S. has been accusing China of currency manipulation and wage depression while the Chinese have been taking Americans to task for breeding corruption and failing to appreciate the virtues of financial prudence. The once-symbiotic relationship is now characterized as dangerously addictive; as Sen. Lindsay Graham recently put it, “[t]heir drug was an endless line of customers for made-in-China products. Our drug was the Chinese products and cash.”
To Ferguson, this relationship is not merely wobbling but has reached a critical crisis point: “The big question today,” in his view, “is whether Chimerica stays together or comes apart because of this crisis. If it stays together, you can see a path out of the woods. If it splits up, say goodbye to globalization.”
Naturally, whether this cycle of interdependence ever was (or can be) a truly sustainable and mutually beneficial one is hotly debated. The current consensus is that both countries need to spend their way out of the crisis, but fear—and desperation—are riding high. The U.S. needs further infusions of cash from China to finance its stimulus plans as it fears that it may run out of other options, while China needs to push its cautious savers to spend in an atmosphere of extreme uncertainty and avert social unrest. Both countries fear that each will turn to a solution that favors its own citizens at the expense of the other’s, triggering a mutually destructive race to the bottom.
While I don’t have a solution for this crisis, I’d like to propose another, hopefully more optimistic, metaphor for the rise and demise of Chimerica, one that fits with New Year’s themes of destruction, redemption, and reinvention.
To me, the whole scenario evokes The Hollow Men, T.S. Eliot’s poem of modern alienation, depicting “a modern world in which men live only for themselves, failing to choose between good and evil.” Like Eliot’s modern men, we (the U.S. and China) are the hollow men/We are the stuffed men/Leaning together/Headpiece filled with straw…Behaving as the wind behaves.
Like these hollow men stuffed with straw, the U.S. and China built up a bubble of growth that ultimately proved to be founded on not much more than straw. Straw men cannot stand alone but must lean together to stay upright, and lack the strength to withstand the winds of market or other fluctuations. Ultimately, without a solid core to bolster them amidst the storms, hollow men are doomed to collapse upon themselves: This is the way the world ends/Not with a bang but a whimper.
But Eliot’s poem also offers a path for redemption. His hollow men can escape the shadowy emptiness, the realm of paralysis caused by the refusal to face difficult choices, not by avoiding but by directly confronting their guilt and shame. In facing the truth, they become heroic—no longer formless and twisting in the wind but founded on strength and power, thereby joining Those who have crossed/With direct eyes, to death’s other Kingdom.
What does this suggest for the U.S. and China? They can choose to focus only on themselves, avoiding rather than confronting the dilemmas they face, and thereby create the disaster they fear. Iceland’s recent experiences suggest one path to a modern-day version of the tariff wars of the Great Depression, if it does turn out that Britain’s seizure of Icelandic bank assets, an attempt to protect its citizens’ deposits in these banks, was the final trigger for its financial collapse. (See this Wall Street Journal article describing Iceland’s claims that Gordon Brown’s seizure of Icelandic bank assets precipitated the collapse of Kaupthing Bank). Thus, each nation could turn inward out of fear, choosing to protect its own citizens at the expense of others.
Or each nation could confront the hollowness, set fire to the straw, and try to rebuild from a more solid footing. China appears reluctant to take the steps many economists suggest would do the most to persuade its savers to spend. It could improve farmer’s rights over their land, and directly address the reasons many are pressed to save so much, for example by providing a social safety net that includes health care and support for the elderly.
The U.S. could also repair its eroding infrastructure, addressing health care and other costs that are eating away at incomes. While many fear that China has the upper hand in its relationship with the U.S. because of its high savings rates, Ferguson himself is more optimistic, pointing to America’s economic and political resilience, stemming partly from its creation of “the world’s most benign environment for technological innovation and entrepreneurship” and its economic depth.
In other words, through various means, both countries could begin spending from a position of strength, not weakness—replacing dependency with mutual benefit and sustainability. And if that happens, perhaps Eliot’s poem could also provide a fitting farewell to the age of rapacious bankers:
We are the hollow men
We are the stuffed men
Headpiece filled with straw. Alas!
Our dried voices, when
We whisper together
Are quiet and meaningless
As wind in dry grass
Or rats’ feet over broken glass
In our dry cellar
Shape without form, shade without colour,
Paralysed force, gesture without motion;
Those who have crossed
With direct eyes, to death’s other Kingdom
Remember us – if at all – not as lost
Violent souls, but only
As the hollow men
The stuffed men.