With the long-term demographic context suggesting growth will disappoint policymakers, we may also project that they may try a variety the main policy that falls into this camp is the extensive use of debt, both government and private sector. According to the Bank for International 253% of GDP for 2Q/18, and for the US the number is 249% of GDP. of the debt between the two countries. Both countries’ debt is mostly denominated in its own currency. Issuing debt in large amounts in currencies one does not control is a proven recipe for a debt crisis, but this is not the case here. Also, China’s debt is mostly domestically owned, while considerable quantities of U.S. debt are owned by foreigners. This has not been an issue for the US, given the status of the U.S. dollar as the world’s premier reserve currency. Still, if more and more countries choose to diversify their foreign reserves, over time the reserve currency advantage for the US will diminish.
The bottom line is that for both China and the US, adding more debt may no longer grow the economy at a faster rate. Indeed, China and the US are at a place where too rapid expansion of debt may increase the may come into question and impact credit ratings. The key takeaways here are that China’s favored policy tool for economics management – pushing new bank loans into the economy – may have hit the wall of diminishing returns and no longer works as well as it once did. The US may also have hit a wall on the use of government debt to stimulate the economy. There is no doubt the U.S. tax cut goosed economic growth potential mean – or the 2.0% to 2.5% range.
Against a backdrop of aging populations and excessive use of debt, one might argue the US-initiated trade war came at a tough time for both countries. China’s stock market has been hit much harder by the trade war than equities in the US. For U.S. soybeans, a target of China, prices fell sharply in May-July 2018 and since have partially recovered as trade tensions appeared to ease late last year. For the U.S. auto industry, the already stagnating. The stock prices of Ford and Fiat-Chrysler were as well. Chinese exports held up well at the start of the trade war but slowed quite materially as the year ended. Our research has indicated behavioral feedback loops have kicked in and made the picture a little worse for both countries.
29 | ADMISI - The Ghost In The Machine | January/February 2019
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