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"Chimerica" is a term used to describe the closely interlocked economies of China and the United States. This term is a combination of "China" and "America," and it plays on the word "chimera," the mixed-species monster of Greek myth. The term was created by economists Moritz Schularick and Niall Ferguson to refer to the unique symbiosis between the two economies from 1996 to 2006. During that time, the economies of China and the U.S. became so intertwined and mutually reliant that Schularick and Ferguson found it useful to treat the two nations as two sectors in a single enormous economy.
The Chimerica model is rooted in China's reliance on exports to drive its economy and the United States' increasing budget deficit. By keeping its own currency artificially weak against other world currencies, China increased the value of its exports. Manufacturing has been a huge part of China's economy, so this currency control was an important component in China's enormous economic growth from 1996 to 2006. To prevent inflation, China purchased significant portions of the United States' debt in the form of treasury notes. This also contributed to a policy of savings and capital buildup meant to cushion the Chinese economy against future financial disasters.
Meanwhile, the United States used the line of credit offered by the Chinese to keep interest rates artificially low, encouraging U.S. businesses and citizens to invest rather than save. This also led to an increased budget deficit. Money could be borrowed from the Chinese at such low rates that there was little political or short-term economic gain in reducing the deficit or paying down the national debt. As spending increased and savings were leveraged into investments, assets and resources around the world rose steeply in value.
In the years leading up to the financial crisis of 2007, Chimerica was a symbiotic relationship that benefited both participants and drove economic growth in many other countries. China essentially funded the climate of increased consumer spending in the United States, which led to greater demand for Chinese imports by buyers in the U.S. The Chinese strategy of purchasing U.S. debt to prevent inflation also resulted in China building up large stockpiles of US Dollars, which directly linked the savings of Chinese citizens, businesses and government agencies to the value of the US Dollar.
Following the subprime mortgage crisis of 2007, the relationship between the two countries began to grow more distant. Schularick and Ferguson argued that the Chimerica dynamic set the stage for the United States' housing bubble by artificially lowering interest rates and encouraging lenders and borrowers to engage in risky behavior. China's stockpiles of treasury notes lost some of their stability as the US Dollar weakened and the budget deficit grew. The recession caused demands for Chinese imports to fall as consumer spending in the United States was curbed. According to Ferguson, this burgeoning rift in 2007 marked the end of the Chimerican era.
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