A Tale of Two Cities takes a creative approach in analyzing how the United States and China are addressing some of their economic challenges. A brief read, it offers a snapshot of supply- and demand-driven economics.
The U.S. needs a supply-driven impetus. While it has an excellent demand thrust that has remained resilient despite higher interest rates so far, it must maintain a consistent push toward building world-class infrastructure through its infrastructure stimulus initiatives. This would create jobs for less-skilled workers, increase productivity, and help reduce inflation. The best remedy for America lies in boosting supply-side economics. China, on the other hand, requires the opposite approach. It needs to stimulate demand to combat deflation. The country is planning a record $411 billion stimulus next year, with plans to tap capital markets for special long-term bonds, possibly 30- or even 50-year bonds. One innovative solution, according to The Middle Road, is zero-coupon bonds, under the concept of “debt till perpetuity,” a term coined exclusively by Nishant Malhotra. This concept involves issuing long-dated zero-coupon bonds, such as a 50-year zero-coupon bond, and rolling over similar bonds when the previous one matures. In this way, countries can effectively issue debt in perpetuity. Since zero-coupon bonds are issued at a discount and do not require interest payments until maturity, they mitigate the immediate burden of interest costs. The Middle Road anticipates a mix of plain vanilla treasury bonds and zero-coupon treasury bonds in their issuance.
The market appears ready for such offerings, as China’s last bond issue was oversubscribed. According to the SIFMA Capital Markets Outlook 2024, the U.S. holds 39.9 percent of the global $128 trillion bond market, followed by the EU (18.4 percent) and China (16.6 percent). As a nation, China boasts the second-largest bond market in the world. The stimulus will focus on boosting consumption and fostering growth in high-tech industries.
Deflation is a dreaded economic condition; it is better to address it at its onset.