Crypto News: Economics Daily: Cold war costs

I'm Chris Anstey, a senior editor for economic policy in Boston, and today I'm looking at the economic effects of US-China rivalry. Send us feedback and tips to ecodaily@blooomberg.net or tweet to @economics. And if you aren't yet signed up to receive this newsletter, you can do so here.

As the US debt-limit deal works through Congress, the fiscal tightening it brings may amount to a nothing-burger for the economy.
China's manufacturing activity contracted in May as the recovery teeters.
French inflation eased to its lowest level in a year, but Italy overshot.

What US-China rivalry means for economies isn't set in stone. There's a debate, for example, on its net global impact: dividing the world into blocs suggests weaker productivity, but stepped-up investment in technology and scientific discovery could be a powerful positive.

Citigroup Inc. economists are weighing in with a look at how the elevated role of security will affect the US and China as individual economies. Their conclusion is that the impact will be very different.

The People's Bank of China building in Beijing. Bloomberg

American moves may contribute to "geoeconomic fragmentation," but there's "arguably more limited blowback" on the domestic front for the US, Johanna Chua, Citigroup's chief Asia economist, and her colleague Yuanliu Hu wrote in a note to clients Tuesday.

Beijing's national-security response to intensifying rivalry with Washington is much broader in scope, thanks especially to the need to ensure "internal stability," the duo wrote. "Safeguarding the primacy of the Chinese Communist Party" is the ultimate priority.

There's three negative consequences for growth, Chua and Hu wrote:

Stimulus Restraint

Ever since the credit surge unleashed amid the 2007-09 global financial crisis, Chinese policymakers have been wary about large-scale stimulus that intensifies risks of a debt meltdown. That hesitancy may be all the more heightened amid the US-China rivalry.

"There will be a policy bias of being 'behind the curve' on counter-cyclical policy support given strong aversion to volatility associated with leverage," the duo wrote.

Limited stimulus in the face of modest growth raise the risk of "secular stagnation," especially if industrial-sector deflation becomes embedded in expectations, they said.

State Predominance

The strengthened national-security mindset also reinforces the trend of recent years towards favoring state-owned enterprises over the private sector — which Chua and Hu said will challenge the "revival of 'animal spirits,' innovation and overall productivity growth" in the economy.

"The private sector now need to think beyond profit in terms of assessing how their businesses align with the goals of the Party, and assess risks that arise when they don't—something tech platform companies, private education and property developers had to learn the hard way."

Inward Turn

Putting an emphasis on domestic self-sufficiency in areas from food and energy to technology may help Beijing protect itself from external risks, but this is likely to involve losses in efficiency. And it presents a "less growth-friendly" face to the rest of the world, the Citigroup analysts wrote.

Most Americans are alarmed by the level of US government borrowing. Treasury Secretary Janet Yellen isn't one of them.
The European Central Bank's fight against stubbornly high inflation has revealed fragilities in the financial system.
Prime Minister Giorgia Meloni has just five months left to find a new Bank of Italy chief.
Australia's central bank is in "data-dependent mode" on interest rates as the latest inflation numbers show an acceleration.
Japan's factory output declined for the first time in three months in April.
Former Treasury Secretary Lawrence Summers sees US rates headed higher in the short-run and US taxes rising in the longer run.

One of the many objections raised about keeping rates ultra-low for a long period is that it lets companies keep going that otherwise would have failed — leaving such zombies as a drain on resources and depressing overall returns on capital.

A new IMF working paper concludes that taking steps to support an economy during a downturn can help reduce the number of so-called zombie firms — but keeping up with expansionary monetary policy for too long does indeed lead to an increase.

Notes: The zombie shares are computed as the fraction of zombie firms over the total number of firms at time t. The shadow rates are taken from Krippner (2013). Sources: Orbis database, and calculations by Jafarov and Minnella.

"Such a tradeoff is not a concern currently, when most countries are tightening their monetary policy stance, but policymakers should be mindful of it during future recessions," economists Etibar Jafarov and Enrico Minnella wrote.