Great post Peter. Especially noteworthy section on the economics profession’s perennial infatuation with and marriage to socialist command and control economics, and monetary policy. Makes one think again of all that has been gained and lost forever since 2008– great monetary crisis. As to China’s debt pile funded economic growth model you note “It just doesn’t add up”, yet the problem on both sides is that — It Does Add Up ! :) Exhibit A 36 Trillion US debt pile. Questions remain as to where and when the fissures may emerge triggering the cascade through and across markets inflated in price and leverage.
It's almost impossible to speculate on the trigger, and even harder to make money from!
The "doesn't add up" comment is in reference to the pub test being applied to the China success story...but you are right across the ocean it most definitely does add up.
Looking closely at China over the last decade and a half, it seems very clear that the open economy model is vastly better for ordinary people excepting a relatively brief phase in developing economies when fiscal repression and industrial subsidy is the only way to produce durable comparative advantages beyond just "cheap labor," which historically is insufficient to attract capital and its know-how on its own.
Once that window closes, the only durable way to facilitate productive investment and enhance productivity is to closely align output to demand, which means curtailing fiscal repression, aligning infrastructure spending to the needs of the citizenry, transferring income to broad-based social programs in a progressive fashion...
But doing that in a world where major economic/security competitors do not, you cede a form of comparative advantage to them.
It would be better for the US and its developed-world allies to systemically decouple from China if it allowed them to maintain the open nature of their economies internally and in trade relationships with countries other than China, than to adopt the China playbook wholesale in their trade relations with everyone.
It's the only way to inoculate ourselves against being systemically deindustrialized and denuded of advanced services enterprises while not just embracing full autarky, and probably the only way to break the vicious cycle of debt accumulation.
That it would force the Party-state to completely reevaluate their own development strategy and finally invest in my friends and family at home instead of propping up negative ROIC enterprises to capture export market share... is just icing on the cake.
The difficulty with maintaining that distance is the simple fact that people really love their cheap stuff, and to not have that cheap stuff made somewhere where it pollutes their environment.
For some it's difficult to see the longer-term cost past this fact.
We have little historical precedent for such large volumes of debt from 2 superpowers. Almost everything in modern life is concentrated in these 2 countries.
I believe that China's position is much more precarious than that of the US, and its only advantage is favourable popular opinion related to consumption of Chinese manufactured goods.
It will only be the politics that ends the dance. And I can't predict politics. I don't think anyone can!
Lustig makes some great points on price discovery, Fiscal discipline through bond markets, Fed interventions / suppression of market pricing and fiscal enabling.
Great post Peter. Especially noteworthy section on the economics profession’s perennial infatuation with and marriage to socialist command and control economics, and monetary policy. Makes one think again of all that has been gained and lost forever since 2008– great monetary crisis. As to China’s debt pile funded economic growth model you note “It just doesn’t add up”, yet the problem on both sides is that — It Does Add Up ! :) Exhibit A 36 Trillion US debt pile. Questions remain as to where and when the fissures may emerge triggering the cascade through and across markets inflated in price and leverage.
It's almost impossible to speculate on the trigger, and even harder to make money from!
The "doesn't add up" comment is in reference to the pub test being applied to the China success story...but you are right across the ocean it most definitely does add up.
Looking closely at China over the last decade and a half, it seems very clear that the open economy model is vastly better for ordinary people excepting a relatively brief phase in developing economies when fiscal repression and industrial subsidy is the only way to produce durable comparative advantages beyond just "cheap labor," which historically is insufficient to attract capital and its know-how on its own.
Once that window closes, the only durable way to facilitate productive investment and enhance productivity is to closely align output to demand, which means curtailing fiscal repression, aligning infrastructure spending to the needs of the citizenry, transferring income to broad-based social programs in a progressive fashion...
But doing that in a world where major economic/security competitors do not, you cede a form of comparative advantage to them.
It would be better for the US and its developed-world allies to systemically decouple from China if it allowed them to maintain the open nature of their economies internally and in trade relationships with countries other than China, than to adopt the China playbook wholesale in their trade relations with everyone.
It's the only way to inoculate ourselves against being systemically deindustrialized and denuded of advanced services enterprises while not just embracing full autarky, and probably the only way to break the vicious cycle of debt accumulation.
That it would force the Party-state to completely reevaluate their own development strategy and finally invest in my friends and family at home instead of propping up negative ROIC enterprises to capture export market share... is just icing on the cake.
Well said.
The difficulty with maintaining that distance is the simple fact that people really love their cheap stuff, and to not have that cheap stuff made somewhere where it pollutes their environment.
For some it's difficult to see the longer-term cost past this fact.
Fantastic article. Thank you.
Great post.
With debt rising in both economies for different reasons...where do you think it stops? How long can it go before it breaks down under its own weight?
China's debt rise has no parallel in history that hasn't resulted in a deep crisis. How long can it pull off?
We have little historical precedent for such large volumes of debt from 2 superpowers. Almost everything in modern life is concentrated in these 2 countries.
I believe that China's position is much more precarious than that of the US, and its only advantage is favourable popular opinion related to consumption of Chinese manufactured goods.
It will only be the politics that ends the dance. And I can't predict politics. I don't think anyone can!
Yes both of them combined have $50 trillion economy...nearly 45% of world's economy.
Amazing work. Thank you for making your knowledge freely available.
Plumbers’ Crack :) https://www.hoover.org/sites/default/files/2025-05/Lustig-Hoover%20Monetary%20Policy%202025%20Comments.pdf
Lustig makes some great points on price discovery, Fiscal discipline through bond markets, Fed interventions / suppression of market pricing and fiscal enabling.
https://youtu.be/ymyAP90vFsM?si=iuavxbyHU9t7Tk3L