“Unintended Consequences is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.” - Tyler Cowen, Professor, George Mason University
According to the IMF, Germany will likely pass Japan as the third largest economy this year. Primary drivers have been sluggish Japanese growth and a weak yen.
The International Monetary Fund’s latest projections estimate Germany’s nominal gross domestic product at $4.43 trillion this year, compared with $4.23 trillion for Japan. That would leave Germany lagging only the United States and China in terms of economic size. The projections come as the yen teeters close to the 160 mark against the euro and remains within striking distance of the 33-year low against the dollar that sparked a second round of currency intervention in October last year. The euro last reached 160 yen in August 2008. The IMF figures show that Germans are likely feeling a lot better off than Japanese, too. Average gross domestic product per person in Germany is projected at $52,824 compared with $33,950 in Japan.
Net outflows of investment capital from China hit a 7-year high in September as foreign firms scaled back operations and rich Chinese shifted assets abroad.
According to China's State Administration of Foreign Exchange, which tracks monthly international financial transactions by domestic banks on behalf of businesses and households, the net outflow reached $53.9 billion in September. This is the largest amount since January 2016, when China logged a net outflow of $55.8 billion triggered by a sudden devaluation of the yuan called the "renminbi shock," among other factors. The exodus of funds related to direct investment, such as construction of manufacturing plants, was noticeable in the September figures. Wealthy Chinese are also shifting their assets abroad out of concern over the future of China, according to many analysts.
Reporting from Beijing, @eosnos found a changed country, in which cultural innovation has ground to a standstill, the young are not motivated to work or have kids, and there is a strong desire among the wealthy to leave.
More than three hundred thousand Chinese moved away last year, more than double the pace of migration a decade ago. Some are resorting to extraordinary measures. In August, a man rode a Jet Ski, loaded with extra fuel, nearly two hundred miles to South Korea. According to rights activists, he had served time in prison for wearing a T-shirt that called China’s leader “Xitler.” Others have followed arduous routes through a half-dozen countries, in the hope of reaching the U.S. This summer, authorities at America’s southern border reported a record 17,894 encounters with Chinese migrants in the previous ten months—a thirteenfold increase from a year earlier.
According to @GoldmanSachs, 90% of mortgage borrowers have a rate 2pp below current market rates, and 60% have a rate 4pp below. However limited supply means housing starts have yet to be impacted; housing starts last month were 5% above 2019 levels.
Sustained higher mortgage rates will have their most pronounced impact in 2024 on housing turnover. Nearly all mortgage borrowers have interest rates below current market rates, strongly disincentivizing them from moving. As a result, we expect the fewest annual existing home sales since the early 1990s at 3.8mn. Limited available housing supply has kept homebuilding resilient to higher interest rates: despite 3½pp higher mortgage rates today, housing starts were 5% above 2019 levels in September. While vacancy rates remain at historic lows, we expect housing starts to decline by 4% to 1.34mn in 2024, reflecting sharply fewer multifamily starts.
Lower-income workers have seen real wage gains since the pre-pandemic period; however, higher-wage workers have seen low or zero real growth depending on the measure. @ChloeNEast @WendyEdelberg
Generally speaking, we find measures of typical and aggregate pay, adjusted by PCE inflation, have grown since 2019 and have kept pace with or exceeded longer-term trends. Results are more mixed when those measures are deflated by CPI; we still see gains since 2019, but Average Hourly Earnings and Total Compensation are below longer-term trend levels. In other words, nominal pay by these measures has done relatively well in keeping up with overall costs of living, measured by the PCE. In contrast, nominal pay has done less well in keeping up with increases in the costs of goods and services that are much more salient to consumers, measured by the CPI. For higher-wage workers, the ECI suggests that nominal pay has grown about in line with or more slowly than prices, while Average Hourly Earnings and Weekly Earnings show roughly no change or some small positive changes for higher-wage workers. Again, we see that deflating by CPI points to weaker pay growth across all groups.
According to IMF estimates, eurozone cumulative deficits will fall to 3.4% of GDP in 2023, relative to 6.3% in the US. Aside from Italy, the crisis-era PIGS are running even lower deficits, ranging from 1.6% in Greece to 0.2% in Portugal.
The IMF expects combined deficits of eurozone governments will fall to 3.4% of GDP this year from 3.6% in 2022, and further to 2.7% in 2024. Those countries that were in crisis a decade ago are expected to have much smaller budget gaps. In Greece, the deficit is forecast to fall to 1.6% of GDP from 2.3% last year, while Portugal’s is expected to fall to 0.2% of GDP from 0.4%. Ireland is forecast to have a budget surplus for the second straight year. Italy and France, among others, continue to have deficits of roughly 5% of GDP.
Accounting for spillovers from other states, @stanveuger and @jeffreypclemens find that $900B federal pandemic aid translated to $878,000 of spending to create or preserve one state or local job for one year. @AEIecon
Federal assistance generated fairly small (jobs) multipliers. We found that each $878,000 in federal assistance created or preserved one state or local job-year. About a third of the effect size is driven by spillovers from other states. More important than the point estimate itself, however, are the values we can rule out on the basis of our estimates’ confidence intervals. We can rule out an estimate that federal fiscal assistance saved a state or local government job-year at a cost of less than $428,000, making fiscal assistance far less effective at supporting employment during the pandemic than during the global financial crisis.
.@OppInsights data shows that 31% of the children of the top 1% of income score 1300 or above on the SAT, as compared to 2.4% of children of the bottom 20%.
One-third of the children of the very richest families scored a 1300 or higher on the SAT, while less than 5 percent of middle-class students did, according to the data, from economists at Opportunity Insights, based at Harvard. Relatively few children in the poorest families scored that high; just one in five took the test at all. The researchers matched all students’ SAT and ACT scores for 2011, 2013 and 2015 with their parents’ federal income tax records for the prior six years.
Jean Twenge notes that the increase in young Americans identifying as gay or bisexual is matched by self-reported behavior from the General Social Survey, with 20% of young Americans 18-26 reporting having had sex with a same-sex partner.
Some reports have suggested that increases appear primarily in LGB identification, but not much in behavior. In other words, more young adults identify as LGB, but they are not necessarily acting on it. At least in the data from the General Social Survey, that does not appear to be true: There has also been a significant increase in young adults having homosexual sex (men with men and women with women). In fact, slightly more American young adults have had sex with a same-sex partner — 20% (see Figure 4) than identify as gay, lesbian, or bisexual — 18.5% (see Figure 2). The increases are even larger for 27- to 41-year-olds (the next older age group), perhaps because they have had more time to accumulate sexual partners since age 18.
A composition shift in illegal immigration over the past two years, from single men to family units, is putting stress on the border control system as they are harder to deport.
Border agents made 2.05 million arrests in the federal fiscal year that ended in September, new government data show, the second year in a row that figure has exceeded two million. In the past, the numbers have risen and fallen based on significant economic and policy changes like recessions and pandemic-era border restrictions. But they never exceeded 1.7 million and never stayed at an elevated level as long as they have the past few years. In the past, most migrants were single adults from Mexico looking for work. If caught by the Border Patrol, they could easily and quickly be deported. Now, a fast-growing share are families with children, who are difficult to deport to their home countries. The change started around 2014 and has exploded in the past two years.
The United Auto Workers are coming closer to a strike in September. Their demands would cost carmakers $80 billion over the four years of the deal.
The leader of the United Auto Workers union on Tuesday asked members to grant him the ability to call a strike, arguing contract talks with the three major Detroit carmakers are moving too slowly. Earlier this year, the UAW gave each carmaker a list of demands that included pay raises of more than 40%, inflation protection, better treatment of temporary workers, and improved perks for retirees. The UAW also wants all workers paid the same wage, regardless of the job they do or whether they work on electric vehicles. If the union got everything it demanded it would cost carmakers $80 billion over the four years of the deal, Bloomberg has reported. Related: The ‘Summer of Strikes’ Isn’t Living Up to the Hype and Unions’ Inflation Warning? and Everyone Wants to Work at UPS After Teamsters Deal
Over the last year, FDI flows into China have turned negative, as foreign multinationals have repatriated Chinese earnings they had previously reinvested. @jnordvig @EtraAlex @martin_lynge
Net FDI into China has been negative for four consecutive quarters (from Q3 2022 to Q2 2023). The bottom line is that foreign investors have shifted in recent quarters from reinvesting their earnings on their Chinese operations to repatriating those earnings. Whether this simply reflects cash management and carry considerations or is a harbinger of a slowdown in future foreign direct investment in China is too soon to say. If the recent trend to repatriate earnings is a signal about future investment intentions, it could have implications for future Chinese production and export capacity and economic growth. Either way, the repatriation of foreign investors’ profits from their Chinese operations is negative for the CNY. Related: The Mysterious $300 Billion Flow Out of China and NYC Becomes One Billionaire Family’s Haven From China Property Crash and Singapore Asks Banks to Keep Quiet on Wealth Inflows During China Boom
Chris Satterthwaite notes the overperformance of the top-5 market cap stocks is historically unusual and speculates that technological advances ranging from AI and superconductors will likely drive significant churn over the next decade.
The phenomenon of the largest stocks delivering the best returns is new, in our opinion. In fact, from 1994 to 2013, an annually rebalanced portfolio of the largest 5 stocks (“Big 5”) in the US had a comparable return to the entire S&P 500. But both portfolios significantly lagged a large-cap value portfolio (per Ken French). The last 10 years have seen a concentration of returns to the tech sector and to a few companies within that sector. This is both notable and unusual. With the advent of exciting new technologies like AI and superconductors, we think it’s plausible that the top 5 largest companies 10 years from now may look quite different from the top 5 today. In which case, a diversified portfolio would likely serve investors better than a highly concentrated size-defined portfolio. Related: Birth, Death, and Wealth Creation and Mr. Toad's Wild Ride: The Impact Of Underperforming 2020 and 2021 US IPOs and The Economics of Inequality in High-Wage Economies
Treasury’s new buyback program will allow the Treasury to “add and remove duration into the market,” an ability previously only held by the Fed. @FedGuy12
Treasury plans to issue a bit more debt at each auction with the understanding a portion of the proceeds would be used to purchase old debt. In effect, the composition of Treasuries outstanding would be tilted towards the more liquid new issues. The program could one day be deployed to influence monetary conditions. For example, Treasury could effectively ease financial conditions by issuing short dated debt to purchase longer dated debt. There is no indication of this today, but treasuries and the central banks do not always have the same goal, and conflicts between the two are common in history.
.@paulkrugman argues that at the current interest rate of inflation-protected 10-year U.S. bonds of 1.83%, economic growth makes a runaway debt spiral unlikely.
You can get a debt spiral if r is significantly larger than g; in that case rising debt leads to faster accumulation of debt, and we’re off to the races. Even after the rate surge of the past few days, the interest rate on inflation-protected 10-year U.S. bonds was 1.83%, which is close to most estimates of the economy’s sustainable growth rate. If you take the low end of such estimates, we could possibly face a debt spiral, but it would be a very slow-motion spiral. Put it this way: If r is 1.8, while g is only 1.6, stabilizing the debt ratio with debt at 100% of G.D.P. would require a primary surplus of 2% of G.D.P.; increase debt to 150%, and that required surplus would increase only to 3%. Related: Summers and Blanchard Debate the Future of Interest Rates and Interest Costs Will Grow the Fastest Over the Next 30 Years and US Fiscal Alarm Bells Are Drowning Out a Deeper Problem
Mexico became the top US trading partner earlier this year with 15.4% share of all the goods exported and imported, vs. Canada’s 15.2% and China’s 12%. @DallasFed
Mexico became the top U.S. trading partner at the beginning of 2023, with total bilateral trade between the two countries totaling $263 billion during the first four months of this year. Mexico’s gains mirror its rise in manufacturing, a key component of goods moving between it and the U.S. During the first four months of 2023, total trade of manufactured goods between Mexico and the U.S. reached $234.2 billion. Overall, Mexican imports to the U.S. totaled $157 billion; U.S. exports to Mexico reached $107 billion. Mexico–U.S. trade during the first four months of 2023 represented 15.4 percent of all the goods exported and imported by the U.S.; the Canada–U.S. share followed at 15.2 percent and then the China–U.S. share at 12.0 percent. Related: Pettis on “Friend-Shoring” and Global Trade Is Shifting, Not Reversing
A team at Purdue University has created a white paint that reflects the sun’s rays. The paint can make surfaces as much as 8° cooler than ambient air temperatures during the day and up to 19° cooler at night.
The paint’s properties are almost superheroic. It can make surfaces as much as eight degrees Fahrenheit cooler than ambient air temperatures at midday, and up to 19° cooler at night, reducing temperatures inside buildings and decreasing air-conditioning needs by as much as 40%. It is cool to the touch, even under a blazing sun, Dr. Ruan said. Unlike air-conditioners, the paint doesn’t need any energy to work, and it doesn’t warm the outside air. Jeremy Munday, a professor of electrical and computer engineering at the University of California, Davis, calculated that if materials such as Purdue’s ultra-white paint were to coat between 1% and 2% of the Earth’s surface, slightly more than half the size of the Sahara, the planet would no longer absorb more heat than it was emitting, and global temperatures would stop rising.
Coastal waters in Florida are currently between 92 and 96 degrees vs. typical averages in the upper 80s. About 40% of the world’s oceans are facing a marine heat wave according to @NOAA.
Much of Florida is seeing its warmest year on record, with temperatures running 3 to 5 degrees above normal. While some locations have been setting records since the beginning of the year, the hottest weather has come with an intense heat dome cooking the Sunshine State in recent weeks. That heat dome has made coastal waters extremely warm, including “downright shocking” temperatures of 92 to 96 degrees in the Florida Keys, meteorologist and journalist Bob Henson said Sunday in a tweet. “That’s boiling for them! More typically it would be in the upper 80s,” tweeted Jeff Berardelli, chief meteorologist and climate specialist at WFLA-TV in Tampa. The hot waters around Florida are connected to record-breaking ocean heat worldwide. About 40 percent of the world’s oceans are facing a marine heat wave, NOAA reported. That is the highest percentage on record, and it could reach 50 percent by September. Related: Climate Shocks Are Making Parts of America Uninsurable. It Just Got Worse and Global Temperatures Have Broken Records Three Times In A Week
Gregory Clark @PNASNews finds that social status in England was strongly correlated across generations between 1600 and 2022, consistent with a theory of genetic transmission of characteristics influencing status.
Using a large genealogical database of 422,374 people with rarer surnames in England the paper examines patterns of inheritance of social status in England. These correlations reveal four things. First status persists strongly across even very distant relatives, across all measures of status. Second the decline in status correlations with each step outward in the lineage is a constant 0.79, for different measures of status, and epochs from 1600 to 2022. Third of the correlations conform closely to those predicted by Ronald Fisher in 1918, for familial correlations in the presence of strong assortment in mating. In particular, the correlation in mating in the genetics underlying social outcomes [must] be 0.57 to generate the persistence rate of 0.79. Since these are observational data, there is no proof that additive genetic transmission causes social status. [Only] that whatever social processes are producing the observed outcomes have a form of transmission which mimics that of additive genetic effects, in the presence of the important social institution of strong assortative mating. [Fourth,] the constancy of status persistence across the interval 1600 to 2022 does suggest social interventions have surprisingly modest effects.”
The @BIS_org annual report notes that real wages have declined in 2022-23 by more than in past deflationary episodes, but tight labor markets could threaten the disinflation process.
While nominal wage growth has not been exceptionally strong so far, this should not provide too much comfort. Wage adjustments are still influenced by the lingering effects of the norms prevalent in the low-inflation regime, but this could change quickly. The inflation surge has severely eroded the purchasing power of households (Graph 14.A), even more than in past disinflation episodes (Graph 14.B). Some catch-up is on the cards, particularly given the strength of labour markets. While labour’s bargaining power declined significantly over the years of low inflation, recent strikes and calls for unionisation suggest that the environment is evolving. What’s more, the pass-through from prices to wages has been somewhat higher when labour markets have been tight. Related: Inflation’s Return Changes the World
.@JoanMonrasEcon argues that immigrants cluster in cities with higher wages to support remittances to family members in their native countries, and are deterred less by higher living costs than US-born workers.
A large share of immigrants keeps ties with their origin countries. Many send money, known as remittances, to family members in those countries, while others plan to eventually return to their birthplace. In either case, this means that a substantial part of immigrants’ spending, now or in the future, takes place in their origin country rather than in the city where they currently work. Hence, for immigrants, the local prices in the city where they work only matter for the fraction of their total budget spent there. This means, that, relative to native-born workers, immigrants are equally attracted to high wages in select cities but less deterred by high local prices—particularly housing. This simple mechanism can explain why immigrants concentrate so much in a small number of select cities, and why these cities tend to have the highest costs of living.
.@M_C_Klein is skeptical that “immaculate disinflation” can be achieved, noting that the Fed’s preferred inflation measure is consistently 2-3 percentage points higher than pre-pandemic.
The Fed’s preferred inflation measure is services excluding energy services and housing. That inflation rate has consistently been 2-3 percentage points faster than it was before the pandemic, with remarkably little volatility. The combined picture is not terrible, in the grand scheme of things, but it is also consistent with the claim that the last bit of excess inflation will not be squeezed out without some significant disruption to the real economy. I still hope that a truly immaculate disinflation can be achieved, but I am increasingly skeptical that it is the likeliest outcome.
.@KarstenMueIIer and @EmilVerner find that credit growth to non-tradable industries like real estate is predictive of a boom-bust output pattern and financial fragility, while credit to the tradable sector is associated with productivity growth.
Credit expansions lead to disproportionate credit growth toward non-tradable sector firms and households. This pattern is in line with theories in which these sectors are more sensitive to relaxations in financing conditions and to feedbacks through collateral values and domestic demand. The sectoral allocation of credit, in turn, has considerable predictive power for the future path of GDP and the likelihood of systemic banking crises. Credit growth to non-tradable industries predicts a boom-bust pattern in output and elevated financial fragility. Credit to the tradable sector, on the other hand, is less prone to large booms and is associated with higher future productivity growth. Our evidence suggests that previous work, which could not differentiate between different types of corporate credit, has missed an important margin of heterogeneity. Figure 7 plots the average yearly change in sectoral credit-to- GDP for five years before and after a systemic banking crisis, relative to non-crisis times. The sample includes 59 crises. Non-tradable sector credit expands more than twice as rapidly relative to GDP as tradable sector credit, surpassing the growth of household debt in the three years immediately before crises.
China is retaliating against Western export controls by restricting exports of rare earth metals that are essential to chipmaking. @FT
Trade officials were assessing the fallout from the latest escalation in the US-China technology battle after Beijing said it would impose curbs on exports of metals used in chipmaking. Gallium and germanium are among dozens of minerals classified by the US government as critical to economic and national security. The US state department did not respond to a request for comment. Related: The U.S.-China Rare Earths Battle
.@NikkeiAsia reports that the United States is restarting rare earth mining in an effort to counter China’s 70% production share.
Despite their name, most rare earths are relatively abundant -- although they are not always easy to extract. China is now the world's largest producer of rare earths by far, thanks to its decades long effort to develop the industry. Last year it accounted for an estimated 70% of output, according to the United States Geological Survey. China also has the world's largest reserves, totaling 44 million tonnes of rare-earth-oxide (REO) equivalent -- about double those of Vietnam, Brazil,, or Russia. Related: China’s Curb On Metal Exports Reverberates Across Chip Sector