Prospects For A Puzzling 2025

Part 1: A Big US-China ‘Deal’ Is Needed

2024 has been a confusing year for investors and not least because, oddly, gold bullion and the S&P500 index have both recorded solid near-25% gains. On top, the Japanese Yen, which nearly every commentator argued a year ago was then seriously undervalued, weakened still further. Latest events continue to confound, because the World’s two most important bond markets are currently diverging: yields are collapsing in China and steadily rising in the US. Set against the backdrop of monetary inflation, these reports likely tell us that China’s economy is skidding closer towards debt deflation, whereas America’s public sector faces funding issues that extend well-beyond the upcoming debt ceiling pantomime.

In our view, China explains much about our Topsy-turvey World. The major issue confronting the global economy in 2025 is the same issue it has faced for the past quarter century: how to accommodate China? an economy with nearly five times the working population as the US, with aspirations to match US productivity and challenge her financial and political hegemony.

It seems clear that China has lately lost much of her edge compared to the US. Evidence the following estimates of the marginal returns on capital, projected out to 2029 using IMF data. A post-GFC slump in relative returns is obvious. China’s marginal returns have plunged from around 14% to barely 5%. Concurrently, the German economy has also suffered, whereas the US seems on a gently rising uptrend. Whatever, America’s marginal return on capital is now at least as good as China’s.