The West and the Rest:

Shifts in the Global Balance

of Economic Power

Skagen, January 2010

 When the West ruled the Rest

Swedish St Barthélemy (1784-1878) Danish St Thomas, St John, St Croix

(1671/1733-1917)
Source: Maddison, World Economy
Source: Conference Board
But Asia’s industrial revolutions …

70 yrs 26 yrs
… mean the shift from West to East …

Source: IMF
… now looks unstoppable

Source: Goldman Sachs

(It’s happened before)

Source: Maddison
Especially in manufacturing

Source: UN
And the East is gaining fast

Source: World Bank

Very fast

Source: Conference Board

The demographics are clear

Source: United Nations

And the ‘Slight Depression’ …

Source: Economagic
… has just speeded things up

Source: IMF
We tried monetary stimulus (QE1)

Fact: Fed lent $3.3trn in emergency

loans. Goldman Sachs turned to the
Fed for funding on 84 occasions, and
Morgan Stanley 212 times.

Source: Federal Reserve

And fiscal stimulus

Source: White House; CBO

Nearly everyone in the West did it

Source: OECD
Causing a developed world debt explosion

Source: IMF
But now the hangover has begun
Debt/GDP projections

Source: BIS
Source: FT
The death of the Eurozone?

Source: FT
Debt/GDP projections (2)

Source: BIS
PIGS
‘R’
US
Source: OECD
PIGS ‘R’ US
PIGS ‘R’ US
 Can the US set its house in order?
• What the CBO
recommends to
stabilize debt/GDP by
2015
• Cut 12.5% off all adult
benefits OR
• Raise all taxes by 11%
• If we wait until 2025
• Cut 26% of all adult
benefits OR
• Raise all taxes by 26.5%
 Can the US set its house in order?
• What the CBO • White House to extend
recommends to Bush tax cuts for all and
stabilize debt/GDP by introduce a payroll tax
2015 holiday
• Cut 12.5% off all adult • Bill: $900bn for 2 years,
benefits OR of which $120bn from
• Raise all taxes by 11% high-end taxpayers
• If we wait until 2025 • NB Bond market action
• Cut 26% of all adult has already pushed up
benefits OR mortgage rates by 57
bps
• Raise all taxes by 26.5%
Now here comes the political fallout

Source: Economist
 The Chinese fear inflation
• ‘Because the United States’ issuance of dollars is
out of control and international commodity
prices are continuing to rise, China is being
attacked by imported inflation. The uncertainties
of this are causing firms big problems.’ –
Commerce Minister Chen Deming, October
• U.S. engaged in ‘uncontrolled’ and ‘irresponsible’
money printing: ‘As long as the world exercises no
restraint in issuing global currencies such as the
dollar … then the occurrence of another crisis is
inevitable.’ – Xia Bin, PBOC adviser, November
Not surprisingly

Source: IMF
With gold at +$1,300

Source: FT
Hence the quiet unwind

Down 10% since July

2009, from 13% to 10%
of total federal debt in
public hands

Source: TIC Monthly Reports

But U.S. fears deflation …

Source: Bridgewater
… from a monetarist contraction
Which leaves real rates positive …

Source: Ambrosetti
… and runs the risk of a ‘Greek tragedy’

Source: CBO
Not to mention a 1-term Presidency

Source: Economist
And rapid strategic decline

Source: White House

Hence the seductive appeal of QE2
But that just leads to currency war, no?
• If ‘the Chinese don’t take • ‘Do not work to pressure
actions [to end us on the renminbi rate …
manipulation of their Many of our exporting
currency], we have other companies would have to
means of protecting U.S. close down, migrant
interests.’ – Obama at UN workers would have to
Gen Assembly, Sept 23 return to their villages. If
China saw social and
economic turbulence,
then it would be a
disaster for the world.’ –
Wen Jiabao, Oct 6
NB Brazilian Finance Minister Guido
Mantega coined phrase ‘currency war’.
 Chimerica tells world: ‘Our currencies,
your problem’
• The U.S. prints … • … and China pegs

Real trade-weighted ex rates since Jan 08: Indonesia +18% Brazil +17% China +4% India -7%
Food price inflation YoY Turkey 16% India 16% China 10%
But who gains more from Chimerica?

NB China accounted for almost a fifth of world growth in 2010 – IMF

Source: Bridgewater
 China’s Plan: 1. Consume more

• Chinese auto sales have gone from 2m per year in 2005 to

14m, c/w U.S. 11m; Chinese demand for cars to rise 10-
fold
• China to use 20% of global energy by 2035 – up 75% since
2008 – IEA
Source: Bridgewater
 2. Import more
• China now biggest export market for Brazil
(12.5% of exports in 2009), South Africa
(10.3%), Japan (18.9%) and Australia (21.8%) –
Economist
• China accounted for about 46% of global coal
consumption in 2009 – World Coal Institute
• In 2009 consumed twice as much crude steel
as the European Union, America and Japan
combined – Economist
 3. Invest abroad more
• January 2010: Chinese investors made direct
investment in 420 overseas enterprises in 75
countries and regions: $2.4bn
• Asia 44.7%; Africa 41.8%
• Communication & transportation 33.9%;
petrochemical 24%
• Labor service personnel dispatched overseas in
January: 24,200
• Total LSP overseas ~770,000

Source: China.CN http://en.china.cn/content/d732706,cd7c6d,1912_6577.html

4. Innovate more

Source: WIPO
 Still don’t
believe me?
Educational attainment
of the population aged
25-34 years
2003

Source: OECD, Economic Survey of

the UK, October 2005
You do the Math …

Source: TIMSS
… and the Science

Source: TIMSS
The Slight Depression is a symptom …

… of a bigger shift
© Niall Ferguson 2010