You are currently browsing the daily archive for September 24, 2011.

Innovation/Global Crisis Blog

Chimerica—The Latest ‘Twist”

By Shlomo Maital

   Chubby Checker, “The Twist”, 1960

 Harvard Business School Professor Niall Ferguson (“The Ascent of Money”) coined the phrase Chimerica, referring to the stressful symbiotic relationship between America and China, which at once have win-win (we invent things, you make them) and lose-lose (your strong currency zaps our exports) relationships.  Here is the latest Chimerica saga, a kind of ‘twist’ on the Fed’s Twist.

    As noted in this blog,  Ben Bernanke’s Fed is selling long Treasuries and buying short Treasures, for $400 b. each. Recall, demand raises the price, higher prices of bonds lower their yields. So the goal of this plan is to ‘twist’ the interest rates, lowering long term rates, and raising short term rates, to help demand for mortgages and corporate borrowing, which depend on the longer interest rates.   The ‘twist’  was tried, with little success, in the 1960’s.  (Chubby Checker’s 1960 dance version, The Twist,  was far more successful and still lives!).  It is probably a bad idea, because short term rates drive what banks pay for deposits and banks are already in trouble.  

    But again China may save the day, by ‘twisting’ back.  China may sell long-term Treasuries (remember they have billions of them), and buy short-term Treasuries, because China wants to avoid lower yields on their total Treasury holdings (recall that if China holds $3 trillion in Treasuries, a one percent drop in yield is $30 billion!  That is fully half of once per cent of its GDP. ) 

     So China may simply reverse what the Fed is doing, and thus neutralize it.  Did Ben Bernanke and the 10-person FOMC Federal Open Market Committee check with the Chinese before they made their highly-divisive move (the vote was 7-3, almost unprecedented to have 3 dissenters on an important policy shift!)?   Probably not.   So much for Chimerica.   

  •  See Tom Orlik’s piece in the on-line Financial News, “Will Chinese Twist Fight the Fed?”   

Blog entries written by Prof. Shlomo Maital

Shlomo Maital
September 2011
« Aug   Oct »