Niall Ferguson Interview (2006): Conversations with History; Institute of International Studies, UC Berkeley

The War of the World: Conversation with Niall Ferguson, Laurence A. Tisch Professor of History, Harvard University; October 19, 2006, by Harry Kreisler

 

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Thoughts on the Economy

Your distinguished career involves work on international economic institutions and the relationship of money to power. How dicey a situation are we in today in the international economy? One has only to think of the U.S. debts, the Chinese surpluses, and the Middle Eastern, and other countries, producing oil and the wealth that they have. Is this something that, in addition to the region of the Middle East fitting your pattern -- is this something that we should worry about?

Yes, global imbalances are a fascinating subject. We are in an extraordinary world in which Americans don't save, but finance their exceptionally high living standards by borrowing the savings of much poorer Asians who save upwards of a third, if not a half, of their incomes. This enormous transfer goes through a strange route whereby the People's Bank of China buys American bonds and bank notes and short-term treasury bills ...

Approaching a trillion dollars now.

It's an astonishing number. You could do an awful lot with that, and yet it sits there in the reserves of the People's Bank of China, earning interest, not a very high rate of interest, which is then duly paid by the United States Treasury. This is a relationship that many Americans are baffled by. It's great, as long as it lasts, because in a sense this is a low interest rate credit facility from the rest of the world to the United States, and it allows Americans to drive bigger cars, own larger houses, and import many, many more cheap electronic goods than they otherwise would be able to.

This reminds me of nothing more than the position of the British empire in its twilight years. For most of its existence the British empire was a creditor empire. It lent out the money rather than borrowing it. But after World War II, in fact during World War II, Britain's empire became an indebted empire and indeed, it relied very heavily on an overdraft facility from the United States. Now, running an empire when you are a borrower is a different ball game because at some point your creditors may call up and say, "We're not sure we like what you're doing and you'd better stop doing it, otherwise this credit line is going to be terminated." That happened to Britain in 1956 during the Suez crisis when the Eisenhower administration effectively pulled the plug on the British presence in Egypt by saying, "We won't support the pound if this continues." At least that was a part of the reason for the collapse of the Suez policy.

It's not unimaginable that somewhere down the line the United States could find its own foreign policy room for maneuver limited by its dependence on particularly Asian central banks. We shouldn't forget also that the Middle East, as it accumulates earnings through oil exports is also part of the source of funding for America's deficit, so we're in the ghastly situation whereby one of America's principle allies, Saudi Arabia, earns very huge amounts of money from its oil exports and then channels much of that money into Pakistani madrases where fundamentalist Wahabist Islam is taught. This is why I coined the phrase "the axis of allies" to describe the central problem of American strategy at the moment; but the real trouble, if you're worried about radical Islam, is actually in your allies' camp rather than among, say, North Korea or, for that matter, Iran.

So, if China and the U.S., or the two empires, one declining and one emerging -- then this is a new twist, this very high interdependence, although these was high interdependence before World War II, but this is qualitatively of a different level. Isn't it?

I think it's quantitatively bigger. There's no question that before 1914 the Russian empire was very heavily dependent on French capital; after World War II the British empire was very heavily dependent on American capital. A lot depends on just how relations between China and the United States progress. If they're harmonious and there's a Sino-American friendship, then the deal could be perpetuated for quite some time. It certainly serves China's purposes to have Americans consume by importing exports from China's manufacturing zone, so it's not as if this is a bad deal from a Chinese point of view, just in the same way that having a good relationship between the United States and the United Kingdom meant that the decline and fall of Britain's empire was in some measure cushioned. Empires don't decline at the same rate. We need to bear that in mind.

One of the points I make in the book is that there's no standard duration for empires. Some of very short-lived, like Hitler's, some last a very long time like the Ottoman empire, somewhere in the middle you find the European empires. We don't know how long the American empire (if you will forgive my using that controversial phrase) will last. We don't know how long the United States will be the dominant power in East Asia; it may even have ceased to be already because there isn't a standard time frame. Some empires collapse really quickly. My sense is that the United States is going to experience a sort of bumpy downward slope and it won't be an instantaneous collapse, because the U.S. still has an awful lot going for it as an economy and as a society. It's not very good at governing far away, hot, poor, dangerous countries, but it's good in an awful lot of other things, and that we shouldn't lose sight of.

Niall, on that note, I want to thank you for writing the book which I will show our audience again and recommend very highly. And so, thank you very much for joining us on our program and thank you for writing the book.

Thank you, Harry.

And thank you very much for joining us for this Conversation with History.

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