Two of the leading experts on the world's biggest economies warn that both countries face serious challenges in the years ahead, and not just over trade with each other.
Speaking on the sidelines of the UBS investment conference in Sydney, US Federal Reserve chair contender Marc Sumerlin and veteran China observer Michael Pettis shared their concerns about the world's economic superpowers.
Mr Sumerlin, who was recently interviewed by US Treasury Secretary Scott Bessent for the role of Fed chair — which becomes vacant in May — said he was not worried about recent increases in US inflation, which he does not believe will be sustained.
However, he is increasingly concerned about a slowdown in the US economy, which is why he thinks the Fed needs to cut interest rates again in December and perhaps a couple more times next year.
"We put a tax on the economy, tariffs, that slowed down job creation," he told The Business.
"We're very close to having no new jobs created, and if you roll the economy into recession, it takes you like four years to recover, and so that has to be foremost at the front of the Fed's mind."
On top of the general economic slowdown, Mr Sumerlin said there are some signs that artificial intelligence (AI) is slowing the rate of job creation in the US, even if it is not yet directly replacing workers.
"I'm very worried that companies now are going to say, 'I'm not getting the returns on AI right now, but I can see it coming and so I'm going to stop hiring young people now,' and we can see the unemployment rate going up for recent college graduates," he observed.
"And so it looks like before we get the good part of AI, we might get the bad part first, which is less hiring."
'Beginning of a bubble forming'
However, Mr Sumerlin said there are legitimate reasons for the Federal Reserve to be cautious about cutting interest rates too far in the US.
US President Donald Trump has recently posted on his social media account about giving all Americans not on high incomes, a $US2,000 tariff "dividend" — an idea which Mr Sumerlin, a one-time economic adviser to former US president George W Bush, said could stoke inflation.
"I would probably be more worried about inflation if they were taking the tariff revenue and flipping it around and turning it into a big tax cut," he told The Business.
"To give everyone in America a $US2,000 tax cut would cost about $US700 billion, and the tariffs are raising about $US300 billion. And so if you literally did that … there would be a much higher chance that you would get inflation going."
Mr Sumerlin said the other thing that would make the next Fed chair's job difficult was the growing risk of a debt bubble forming in the AI sector, where massive investments have recently been announced.
"I think we are in the beginning of a bubble forming," Mr Sumerlin warned.
"Valuations are high, and it looks like some of the credit decisions are starting to take hold, but we're in the very early stages."
Mr Sumerlin said investments in AI were now moving well beyond the cash flows generated by the big tech firms behind them and will need to be funded by an increasing amount of debt.
"September is when these giant circular deals happened, and the companies are pledging money that they don't have, and so we know that that's going to have to be done with debt, probably in private markets, and that's the point at which it starts to be concerning," he added.
Even without a debt-fuelled bubble, Mr Sumerlin warned that the elevated risk of a share price crash was a threat to the US economy.
"A 20 per cent drop in equities is the level that could start to make you roll over into recession."
'China has an arithmetic problem'
While the US economy faces challenges, Peking University finance professor and Carnegie Endowment for International Peace senior fellow Michael Pettis said its superpower rival, China, has its own deep structural problems.
"China has an arithmetic problem. It's investing way too much," he told The Business.
"But if you have a GDP growth target, and you can't get consumption to grow more quickly, you can't allow investment to grow more slowly because together they add up to growth.
"And so what's been happening, basically since 2009, is every time there's a problem in the economy, China ramps up investment in another sector.
"They're overinvested almost across the board, so policy consists of trying to find out which sectors are least likely to be harmed by additional overinvestment."
Professor Pettis said that, to curry favour with the central government, local governments had skewed overinvestment into areas such as solar panels, batteries, electric vehicles and other industries deemed a priority by Beijing.
"And so resources poured into those areas to the point where it was almost impossible for anyone to make money," he observed.
"Most people were actually selling below the variable cost, and that, of course, makes no sense at all economically, but it made a lot of sense politically.
"Beijing stepped in around May and said price competition in these areas is so vicious and so harmful that we have to stop it. And so they're trying to move investment out of those areas."
Iron ore prices to plunge once China ends overinvestment
Another area where Chinese overinvestment has historically been directed is infrastructure, as well as property, before a central government crackdown drove a real estate crunch that China is still to recover from.
"Iron ore prices are extremely high, largely because China has the highest investment share in the world as a share of GDP, and it needs urgently to bring it down, but it can't," Professor Pettis explained.
"As long as it keeps overinvesting, however, debt's going to continue to grow and, at some point, that has to stop.
"When that happens, Chinese investment will drop much more quickly than Chinese GDP, and investment, particularly in property and infrastructure, will drop even more quickly, and that should be terrible for iron ore prices.
"Now, when will that happen? We don't know. It could happen in two years, it could happen in five years, but eventually it will happen."
In the meantime, China and the US continue to circle each other in a trade war that Professor Pettis believes will not be resolved quickly, even if both sides make temporary tactical concessions.
"The US trade deficit continues to expand. The Chinese trade surplus this month, it contracted a bit, but it's been expanding so rapidly," he said.
"Ultimately, until these things are resolved, the pressures aren't going to go away, and they're clearly not being resolved. We still have a long way to go before this gets fixed."
New Fed chair decision still up to two months away
As for the future of monetary policy in the US, Mr Sumerlin does expect rates to fall further.
"I think that the Fed does one more cut," he said.
"I don't know if it's going to be December — they've gotten pretty hawkish — and then they wait for the new chair.
"And, in May, Chairman Jerome Powell is going to get replaced by someone that President Trump picks.
"The president has expressed a very strong view that interest rates should be lower, and so I'd expect that the new chair will probably be lowering rates by another 50 basis points, so another half of a percentage point, once they come into office."
As for who that next chair will be, Mr Sumerlin said we could still be two months away from finding out, despite having his interview with the Treasury secretary around a month ago.
"The Treasury secretary said that, of the 11 candidates, he's going to send three or four names to President Trump after Thanksgiving," he told The Business.
"And then President Trump will interview those candidates during December. And so I would expect sometime between mid-December to mid-January that the new Fed chair would be announced."
