.@M_C_Klein cites the end of a spike in compensation for low-skilled workers and longer-term forward real interest rates well within their post-financial crisis range and argues against a deliberate economic downturn to curb inflation.
In the US, the earlier spike in lower-end wages relative to other workers' pay has completely stopped, while the split between labor income and profits has, if anything, moved in favor of investors. For better or worse, the popular and elite reactions to the inflation outbreak suggest that policymakers are not going to respond to future downturns the way they did to the pandemic. Soft budget constraints do not appear to be on the menu. And while there have been some constructive increases in public investment (and military spending) in the major economies, they do not seem large enough to move the needle. Financial markets may be wrong, but it is noteworthy that longer-term forward real interest rates are well within their post-financial crisis range, even if they have jumped over the past 12 months.
China reported almost 28,000 new Covid cases on Tuesday, with outbreaks in Beijing, Guangzhou, and Chongqing. Lockdowns are more extensive than during the Shanghai outbreak that slowed annual economic growth to 0.4% in Q2. @ft
Covid-19 cases in China are spiraling towards record highs, forcing officials to lock down again large swaths of the country. The world's second-biggest economy reported almost 28,000 new Covid cases on Tuesday, with outbreaks in Beijing, the southern manufacturing hub of Guangzhou, and the southwestern metropolis of Chongqing continuing to grow. Covid restrictions have hit areas responsible for one-fifth of China's gross domestic product. Officials in Beijing shut most non-essential businesses in the city's largest district, Chaoyang, which has a population of 3.4mn, and have closed restaurants and other entertainment venues in much of the city while telling residents to work from home.
Researchers at @NewYorkFed evaluate the pass-through of the fed funds rate to deposit rates (that is, deposit betas) over the past several interest rate cycles, and discuss factors that affect deposit rates.
We can observe that the gap [between the deposit rate and the Fed funds rate] is negative when rates are near zero (and deposit levels are high) and positive when rates rise. As a consequence, post-GFC and before the 1994 tightening, deposits were more attractive to depositors, and deposit supply was high relative to loans. However, as rates rise, the gap increases, depositors move elsewhere, banks raise their rates, and cumulative deposit betas rise. Since the 1990s, the response of deposits to monetary policy has been attenuated. This can be explained by the growth in deposits over the post-crisis period relative to investment opportunities.
.@WSJ notes that the Fed has been raising rates at the fastest pace in four decades (+375 basis points in 9 months.) Key variables such as housing starts have declined much more rapidly than in previous cycles.
The Nobel Prize-winning economist Milton Friedman famously argued that "monetary actions affect economic conditions only after a lag that is both long and variable." Historically, housing starts begin to decline within two years of a Fed hike. New home construction fell by 24% from the Fed increase in March to July. Declines in home construction that follow Fed rate increases can take years before they bottom out.
Bridgewater notes that recent market conditions do not fit the historical pattern. Typically, rising discount rates and risk premiums lead to declining asset prices, which in turn leads to declining economic activity and earnings, and more pressure on equities.
There is typically a meaningful increase in equity expected returns (shown below in excess of cash) before the turn in the market because investors need to be incentivized back into equities and out of safe assets following significant losses. Today, based on our read, the re-rating of equity prices has a way to go. Our estimate for long-term excess expected returns remains relatively low compared to history. Consistent with that, analyst consensus for long-term corporate cash flow growth has barely budged over the last year, not yet reflecting the cooling of the economy we expect to see.
@bloomberg reports that the dollar value of global debt as a share of the global economy is 20 percentage points under its pandemic peak, as a result of inflation and a sharply appreciated dollar.
Total debt declined $6.4 trillion in the three months through September, to about $290 trillion, the IIF said in its quarterly Global Debt Monitor published Tuesday in Washington. That drop is amplified by the surging dollar, which makes loans denominated in other currencies look smaller when they’re measured in greenbacks. As a share of the world economy, debt has dropped to 343% -- about 20 percentage points below its pandemic peak last year. Soaring inflation in many economies has helped erode debt burdens measured against the size of economic output because the nominal value of gross domestic product has risen rapidly.
.@caseybmulligan and @TomasPhilipson estimate that The Inflation Reduction Act will reduce healthcare subsidies by $30B starting in 2025, leading to benefit cuts and premium increases for seniors. @WSJ
The Inflation Reduction Act will lead to benefit cuts and premium increases for seniors. We estimate that beginning in 2025, plan subsidies—specifically, the reinsurance subsidies for the beneficiaries with the most drug spending—will be cut $30 billion, out of revenue that currently totals about $110 billion. With $30 billion less to finance prescription benefits, something will have to give. Traditional Medicare members face a difficult choice in 2025: either take drastic cuts in drug coverage or switch to Medicare Advantage plans that cover prescriptions but may not cover the hospitals and doctors who are currently providing them care.
.@paulkrugman argues that once the demand shock from pandemic aid fades, “we’ll probably be back to a situation in which too much saving is chasing too few investment opportunities, and interest rates will be revisiting their old lows.”
Once [the economic boost from pandemic aid fades away,] we’ll probably be back where we were before the pandemic, with weak private investment demand holding interest rates down. Last time I wrote about this I stressed demography — the drastic slowdown in growth of the working-age population — plus what looks like disappointing rates of technological progress. Let me now put it a different way. [The macroeconomic accelerator effect] tells us that investment spending will only remain high if we expect rapid economic growth. And what we know now doesn’t support that expectation. What all this suggests to me is that the era of cheap money is not, in fact, over. A few years from now, we’ll probably be back to a situation in which too much saving is chasing too few investment opportunities, and interest rates will be revisiting their old lows
Excess savings associated with the pandemic, which are somewhere in the $1.2-$1.8T range, should provide support for the economy through the end of next year according to a range of estimates. @WSJ
Headed into the third quarter of this year, households still had about $1.2 trillion to $1.8 trillion in “excess savings”—the amount above what they would have saved had there been no pandemic. Economists’ estimates for how much consumers have left vary. JPMorgan Chase & Co. put the hoard at about $1.2 to $1.8 trillion in the third quarter and said it could be entirely spent by the second half of next year. Goldman Sachs economists estimate households have drawn down about 25% of excess savings and will have spent about 60% by the end of 2023. Ian Shepherdson, chief economist of Pantheon Macroeconomics, puts it at $1.3 trillion and estimates that at the current rate of rundown, that could last another year or so.
Former Fed bond trader Joseph Wang notes that higher interest rates subsidize consumption by increasing private sector interest income from public sector liabilities. He argues, “the current policy stance may not be effective in moving inflation back to 2%.” @FedGuy12
The economic impact of higher rates is mixed because it also subsidizes consumption by increasing private sector interest income from public sector liabilities. While private sector interest expenditures merely redistribute income among private actors, public sector interest rate expenditures increase the overall spending power of the private sector. If rates are higher for longer, the interest payments will easily exceed $1t next year. The aggressive rate hikes have thus far appeared to have a limited effect on dampening inflation. With the policy rate much closer to the terminal rate than 0% and financial markets stabilizing, the stock effect of monetary policy appears to be waning. If the flow effects are mixed, then the current policy stance may not be effective in moving inflation back to 2%
.@foxjust at @bloomberg argues that the lag between the new leases rent measure and the CPI’s shelter component may mean the Fed “was behind the curve when it started raising interest rates in March and could end up late again in pivoting to easier monetary policy.”
The most important of those implications would seem to be that the Federal Reserve’s policy-making committee was behind the curve when it started raising interest rates in March — a year after rents on new leases started exploding — and could end up late again in pivoting to easier monetary policy long after rents have started to fall. I ran the idea of switching to a new-leases rent measure by Princeton economist and former Fed Vice Chairman Alan Blinder, who wrote an influential paper in 1980 urging the switch to owner’s equivalent rent. He emailed, “For most purposes, making that change would be a terrible idea. It would reflect the prices paid by a small, and not representative, minority. That said, if the BLS (or anyone) wants to create a leading indicator of inflation, using rents on new leases would be quite sensible.”
A 2019 RAND study found 60% of American men in the 26-35 cohort who failed to graduate from high school had been arrested by age 26, and their arrest rate has been going up over time, reports @adam_tooze
60% of young men in America with less than high-school education have been arrested at least once by age 26. Strikingly, the report’s author James P. Smith found that the arrest rate has increased dramatically over time. Black men were significantly more likely to have been arrested. Of black men aged 26-35 in the study, 33% had been arrested by age 26 versus 23% for white men. Education plays an outsized role in explaining racial arrest differences, especially for men in the 26–35 age group. The overall higher rate of arrests by 26 among black adults in the 26–35 age group correlates with lower education levels. The study also found that having a more educated father was associated with lower rates of arrests and convictions by 26.
The MSCI India Index has outperformed the MSCI China Index through April 2022, according to @Wellington_Mgmt research, as noted by @tylercowen
Figure 1 shows the cumulative total returns posted by the S&P 500 Index, the MSCI China Index, and the MSCI India Index from December 31, 1992, through April 20, 2022. Our clients have been uniformly surprised that China’s long-term performance has been so much lower than that of the US and India, especially given all the investor focus on China in recent years. And they’ve been even more surprised that India – a market many clients have more or less ignored – has fared so well over the long run.
New research cast doubts on the impact of Made In China 2025, at least through 2018 “we see little statistical evidence of productivity improvement or increases in R&D expenditure, patenting and profitability”
Using a Difference-in-Differences approach, we find evidence that participation [in Made In China 2025] enables firms to receive more innovation subsidies, which appears to induce increases in R&D intensity. However, there is no evidence that participation increases domestic and foreign patenting, labor productivity, TFP, or profitability of participating firms, suggesting the most important goals of the policy are still unrealized. There is no statistically significant evidence (at a 5% significance level) of positive effects of the “Made in China 2025” initiative on total subsidies, Chinese invention patents, US utility patents, log labor productivity, TFP, and profit margin.
Two Aegis-equipped Japanese destroyers successfully intercepted mock ballistic missiles during tests off the coast of Hawaii earlier this month. Japan added two more vessels to its Aegis-equipped fleet and now has a total of 8 operational.
Japan added two more vessels to its fleet of Aegis-equipped destroyers, raising to eight the number of ships capable of intercepting ballistic missiles. Two Maya-class Aegis destroyers, the Maya and the Haguro, successfully intercepted mock ballistic missiles during tests off the coast of Hawaii earlier this month, the Defense Ministry said Monday. In addition, the Maya fired the Standard Missile-3 Block 2A, the interceptor missile developed by the US and Japan. This marks the first time a Japan Maritime Self-Defense Force vessel launched an interceptor from the state-of-the-art Block 2A system.
New official Chinese numbers show over 40% of 31 provincial-level jurisdictions reported more deaths than births last year. Total population grew by 480,000 to 1.4B in 2021, the smallest increase since 1962, with births down 11.5% from 2021. @SCMPNews
Among China’s 31 provincial-level jurisdictions, 13 reported more deaths than births last year. Those 13 comprised the wealthy regions of Shanghai, Jiangsu, and Tianjin; the central provinces of Sichuan, Chongqing, Hunan, and Hubei; Hebei, Shanxi, and the Inner Mongolia autonomous region in the north and northwest; and the northeastern rust-belt provinces of Liaoning, Jilin, and Heilongjiang. China has shined a bit more light on its demographic crisis, with newly released figures showing that more than a third of its provinces saw their populations shrink last year. Chinese mothers gave birth to just 10.62 million babies in 2021 – an 11.5% decline from 2020.
Large scale decoupling isn’t showing up in the Chinese trade data. Chinese exports to the US rose to 2.5% of GDP in Q3 ‘22, up from about 2.25% on average from 2010 to 2018. @Brad_Setser
I don't think there has been much of a shift in global supply chains out of China. If you trust the Chinese data -- the Chinese data here may be better, as the US data is influenced by tariff avoidance -- US imports from China are slightly higher (as a share of GDP) than before the trade war. China's overall data tells a story of the reglobalization of China's economy after the pandemic. Exports to GDP had been trending down from 2010 to 2018 -- but have moved up strongly in the past year. And there is no sign that the G-7 has already decoupled from China as a source of supply! (imports from China have boomed in the last 3 years) So decoupling, in my view, is a forecast -- not a current reality. The pandemic increased the world's reliance on China as a source of manufactured supply and increased China's reliance on exports for demand!
The Oswald Misery Index (2 x unemployment + inflation ) was 15% in October, on par with the 20% peaks in the aftermath of the financial crisis. @WSJ
Since the early 1990s, the Misery Index has only been higher during the 2007-09 recession and its aftermath and for a couple of months in 2020 during the early lockdowns. Importantly, though, the two factors didn't necessarily carry the same weight, as the Misery Index implies. [Andrew Oswald, a professor at the University of Warwick, found that] a 1-percentage-point increase in the unemployment rate had an equivalent impact on happiness as a 1.97-point increase in the inflation rate. [If Oswald] were to construct a Misery Index, he would make a simple modification: Multiply the unemployment rate by two and add it to the inflation rate. His index was 20% in 2010 and 15.1% now. By putting extra weight on unemployment, the index helps explain why 2010 was so much worse for Democrats.
Masayoshi Son, chief executive and founder of SoftBank, owes the company close to $5B from loans that enabled his investments in the company’s tech funds. @ft
Masayoshi Son personally owes SoftBank close to $5bn because of growing losses on the Japanese conglomerate's technology bets, which have also rendered the value of his stake in the group's second Vision Fund worthless. The billionaire's ballooning personal liabilities, discovered through a Financial Times analysis of SoftBank's recent filings, comes as the world's biggest tech investor was hammered by plunging tech stocks and valuations in private companies over the past year.