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

Leaning together

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.

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3 Responses

  1. Frank says:

    Brilliant post–thanks for pointing out how a supposedly mutually beneficial relationship has turned into codependency.

  2. A.J. Sutter says:

    I think you’re right about how the countries became intertwined, and the illusory nature of many of the benefits each obtained from the development of their economies in recent years. But I’m not so sure that your suggestions are at all politically realistic, or that there is such a coherent lesson to be learned from history.

    You note — correctly, I think — that “”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.” But really, despite those fears, is either country going to try to make policy that balances the interests of the other country’s citizens? Don’t US domestic political realities require that the US adopt policies favorable to Americans, and then try to pressure China also to adopt policies favorable to Americans? This has pretty much been the American track record for decades in multilateral and bilateral negotiations. Similarly, it’s hard to imagine the Chinese Communist Party not adopting policies favorable to Chinese citizens, though maybe they have more imagination when it comes to asking the US to do the same.

    Second, you recommend in favor of both countries “directly confronting their guilt and shame.” But What guilt or shame do you think the Chinese government perceives? What guilt or shame — leaving aside the issue of human rights abuses, which the CCP surely does not perceive as we do — should they feel when it comes to the economy? To the extent their decisions were based on flawed theories by Nobel laureates, the World Bank, IMF et al., should the Chinese be the ones feeling guilty or ashamed? And hasn’t China done a lot that’s economically right — in Realpolitik terms, at least? Doesn’t China now wield a lot of power over the US, given its holdings of our debt? And won’t the US be even weaker if, as seems to be only a matter of time, the dollar ceases to be the sole international reserve currency? Economically, at least, the CCP seems to have been relatively skillful. (BTW, I am the farthest thing from being a fan of the CCP.) Certainly, it’s troubling to hear about how Chinese execs close up their companies and skip town in order to avoid paying their workers, to say nothing of adulterating milk and other foods, etc.; but is that a matter of government policy, or capitalists’ mores? I think it’s not at all clear that the US and China are equally “hollow” in their economic policies.

    You also recommend that Chinese savers should spend more. First question is, who are the savers? Government, business or households? If households, does Chinese society really need to become more consumeristic? (The same question could be asked of the US.) What does that do to the values in the society? But no less important, what are the environmental consequences of all that extra spending, by anyone? Is the US prepared to reduce its environmental footprint drastically, to compensate? Do you really think there is enough political will in either country to be sufficiently green (cf. your reference to “sustainability”)? While some expansion of consumption in China is inevitable, we may (once again) regret if we get what economists wish for.

    I share your wish for more of a social safety net in China, but there I think history is against us. The Chinese government has been in the process of dismantling what safety net there used to be during the past decade or so. It seems quite unrealistic to expect them to reverse policy so soon. (And BTW, as US experience has shown, consumerist attitudes also can make it difficult to maintain a social safety net, e.g. if people feel they shouldn’t have to pay higher premiums that benefit their less healthy neighbors.) OTOH, I wonder why you mention the safety net only in the Chinese context. Don’t you think the US should take the lead in this regard? Poet, heal thyself.

    In this light, it’s not clear what we are to learn from Fergsuon when he says, “If it stays together, you can see a path out of the woods. If it splits up, say goodbye to globalization.” What is the path? (And does it lead out of the woods because the woods have been chopped down, or die?) And if globalization has led to this “dysfunctional” situation, is saying goodbye to it necessarily a bad thing? You seem to assume so in your post, but the rest of your comments could, on reflection, leave one thinking otherwise.

  3. Shruti Rana says:

    With respect to U.S. and Chinese policies, my intent was to illustrate that to create a truly sustainable relationship, both countries will have to stop taking the easy or politically expedient way out—which in this case would be seeking more of the “drug” that led them into this situation in the first place. In China’s case, one risk is that it could simply push its currency down further to help its exporters instead of stimulating domestic demand or incomes. (Other issues it could “confront” include environmental damage, wage suppression, and political corruption). Obviously changing course will require political will and farsightedness, and we’ll have to wait and see what both countries do.

    I also agree that simply pushing consumers to spend more (especially if they do so by incurring more debt) in a precarious economy is not an ideal solution and carries long-term risks. However, given our need to jump-start the economy, this places the U.S. in a paradoxical situation: we need to spend and lend more to get out of the current crisis, but those are the very things that put us in this situation to begin with. One way out of this paradox, I believe, is to “spend from a position of strength” as opposed to weakness. Simply encouraging consumerism, in my view, would be perpetuating the weakness that led us to the crisis. On the other hand, for both countries, enhancing or creating social safety nets may free up consumer funds, or stop eroding incomes, and hopefully allow consumers who want or need to spend to do so from a more sustainable position.

    Also, while many fear that the U.S. is more “hollow” than China, since China was the one supplying the funds, I don’t think that it is entirely clear that the U.S. is really in a worse position, or that the U.S. won’t be able to ultimately rise above the current crisis. First, despite its claims that it pursued the more prudent financial path, China also relied on artificial and potentially unsustainable mechanisms, such as currency manipulation, to spur its growth. Furthermore, I don’t think we should discount the resilience and depth of the U.S. economy.

    Finally, I don’t think that it was globalization, but rather things like shortsighted policies and greed, which led to the current dysfunction. In my view, the current dysfunction is fixable and doesn’t need to mean the end of globalization (in a positive sense—such as economic, social, and political growth and innovation built on transnational links and exchange).