In the Odd Lots newsletter, Joe Weisenthal and Tracy Alloway discuss the bond market's potential threat to American hegemony, referencing a conversation with Carolin Pflueger of the University of Chicago and Chicago Fed. They highlight a 2024 paper titled Global Hegemony and Exorbitant Privilege, which argues that the global hegemon enjoys lower borrowing costs, creating a feedback loop that strengthens its position.
However, the paper also suggests a hegemon can lose status without direct military conflict if a rising power gains a sustained financing advantage. The authors see relevance in the US-China dynamic, noting China's massive shipbuilding capacity and the costly US conflict with Iran, which has depleted resources without a decisive victory.
A chart showing the spread between US and Chinese 10-year yields over two decades reveals that the US now pays significantly more to borrow, with a regime shift occurring post-Covid. While low Chinese yields might reflect a weak domestic economy, the authors argue they signal development, as bonds trade as a rates product rather than a credit product.
Domestic slack in China also eases resource channeling into weapons manufacturing, contrasting with tight US conditions. This financial dynamic could shift global dominance without a shot fired.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing