“…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
“…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
“Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
“…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
“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
“…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
“…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
“…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
“…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
“…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
“…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
“A full-throated defense of economic dynamism.” - The Wall Street Journal
AI Summary.Regression evidence suggests governments can buy current account surpluses: raising the fiscal balance by $1 tends to raise the current account by about $0.30, while issuing $1 of domestic-currency debt to buy foreign-currency assets raises it by roughly $0.50-$0.60. Combining a fiscal surplus with foreign-currency investment, as Norway and Singapore do, yields about $0.80 per $1.
Joseph Gagnon and Nishtha AgrawalPeterson Institute For International Economics
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Using annual data for 146 countries from 1985 – 2024, Gagnon and Agrawal find that a $1 increase in a country’s cyclically adjusted fiscal deficit is associated with a 22–38¢ increase in its current-account deficit, with most of the estimates ~30¢.
Can governments buy current account surpluses with fiscal and currency policy?
Core argument: Regression results suggest that raising the fiscal balance by $1 tends to raise the current account by about $0.30.
Table 1 presents regression results. The evidence strongly suggests that governments can buy current account surpluses. Raising the fiscal balance by $1 tends to raise the current account by $0.30 [Table 1, first row]. Issuing $1 of domestic currency debt to buy foreign-currency assets (foreign exchange intervention) raises the current account anywhere from $0.20 to $1.00, with a value around $0.50 to $0.60 most plausible [Rows 2 though 5]. NOF is Net Official Flows, and NOS is the stock of net official foreign assets. The most powerful policy, as exemplified by Norway and Singapore, is to run a fiscal surplus and invest the proceeds in foreign-currency assets. In that case, $1 buys a current account surplus of around $0.80 or so. The results are supported by annual panel regressions of current accounts and cross-country stock regressions of cumulated current accounts or stocks of net foreign assets. The estimated effects in the panel regressions may be biased down slightly by incomplete modeling of lagged effects.
Takeaways by Macro Roundup® AI
Regression results suggest that raising the fiscal balance by $1 tends to raise the current account by about $0.30.
Issuing $1 of domestic currency debt to buy foreign-currency assets is estimated to raise the current account by $0.20 to $1.00, with $0.50 to $0.60 most plausible.
Combining a fiscal surplus with investment of the proceeds in foreign-currency assets, as Norway and Singapore do, is estimated to buy a current account surplus of around $0.80 per $1.
Related Articles:
Understanding Global Imbalances— The US, China, Germany, and Japan account for roughly two-thirds of global current account imbalances, with the US deficit at 4% of GDP financed by capital inflows into dollar assets. The average duration of a surplus or deficit spell roughly doubled since the 1980s, building large net foreign asset and liability positions.
The U.S. Trade Deficit: Myths and Realities— Taxing capital inflows would weaken the dollar but could raise domestic interest rates and depress investment, harming long-term growth, while an interest rate cut absent recession would be inflationary and erode any real depreciation needed to durably improve the trade balance. Fiscal restraint could weaken the dollar and reduce the trade deficit.
The Dangerous Triumph Of Neo-Mercantilism— Neo-mercantilism is thriving in both China, which pairs infant-industry promotion with large trade surpluses, and in a United States focused on external deficits and protecting domestic markets. The author argues this will likely fracture the world economy, and that a new multilateral treaty could include a mechanism to combat large structural trade surpluses.
AI Summary.The US goods and services trade deficit reached $901.5bn for the year, one of the largest in data going back to 1960. US companies increased imports of computers and accessories by nearly $145bn from the prior year, an acceleration in demand that reflects large-scale artificial intelligence investment.
Vince Golle and Mark NiquetteBloomberg
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The US trade deficit was $901.5B in 2025, effectively unchanged from 2024 despite the new tariff regime. The US bilateral deficit with China fell to $202B, the smallest in 20 years, while the gap with Taiwan widened to a record $146.8B.
Is artificial intelligence investment driving a larger US trade deficit?
Core argument: The US goods and services trade deficit totaled $901.5 billion for the full year, one of the largest in Commerce Department data going back to 1960.
The US trade deficit widened in December, capping a turbulent year of erratic tariff policy. The goods and services trade gap expanded from the prior month to $70.3 billion, Commerce Department data showed Thursday. The shortfall culminated in a full-year deficit of $901.5 billion, still one of the largest in data back to 1960. Last year, US companies imported nearly $145 billion worth of computers and accessories more than they did in 2024. The acceleration in demand reflected the massive investment underway in artificial intelligence.
Takeaways by Macro Roundup® AI
The US goods and services trade deficit totaled $901.5 billion for the full year, one of the largest in Commerce Department data going back to 1960.
The monthly US trade gap widened to $70.3 billion in December from the prior month, according to Commerce Department data, capping a year of erratic tariff policy.
US companies imported nearly $145 billion more in computers and accessories than in 2024, an acceleration in demand that reflected the investment underway in artificial intelligence.
Related Articles:
The Dangerous Triumph Of Neo-Mercantilism— Neo-mercantilism is thriving in both China, which pairs infant-industry promotion with large trade surpluses, and in a United States focused on external deficits and protecting domestic markets. The author argues this will likely fracture the world economy, and that a new multilateral treaty could include a mechanism to combat large structural trade surpluses.
China Blames US For Trade Imbalances As Surplus Hits Record $1.2tn— China reported a record annual goods trade surplus of $1.2tn, with monthly exports growing 6.6% year over year in dollar terms, more than double analysts' average forecast of 3.1%. Chinese customs officials argue that other countries' restrictions on high-tech exports to China are holding down China's imports.
The Budget and Economic Outlook: 2026 to 2036— The Congressional Budget Office projects the federal deficit will grow from $1.9tn (5.8% of GDP) to $3.1tn (6.7%) over a decade, above the 3.8% averaged over the past 50 years, with rising net interest costs driving much of the increase. Federal debt held by the public is projected to rise from 101% to 120% of GDP.
AI Summary.From 2008 to 2023 the US household and corporate sectors ran average savings surpluses of 3.5% and 1.6% of GDP respectively, leaving the federal government as the dominant net borrower in the US economy. This suggests the benefit of persistent net capital inflows is the ability to run larger fiscal deficits and grow public debt.
Martin WolfFinancial Times
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Between 2008–2023, the US household and corporate sectors ran a mean surplus of 3.5% and 1.6% of GDP, respectively. “On a net basis, the US private sector does not need foreign savings,” Martin Wolf argues.
Do foreign capital inflows mainly finance larger US budget deficits?
Core argument: US households ran surplus savings averaging 3.5% of GDP and US corporates 1.6% of GDP from 2008 to 2023, and both sectors were close to balance from 1992 to 2007.
On average, the US household and corporate sectors had surplus savings of 3.5% and 1.6% of GDP, respectively, from 2008 to 2023. Even from 1992 to 2007, they were close to balance. So, on a net basis, the US private sector does not need foreign savings. The dominant net borrower in the US economy is the federal government. This analysis suggests that the benefit to the US of its persistent net capital inflows is the ability to have a larger fiscal deficit and so grow its public debt. This does not look like a good bargain.
Takeaways by Macro Roundup® AI
US households ran surplus savings averaging 3.5% of GDP and US corporates 1.6% of GDP from 2008 to 2023, and both sectors were close to balance from 1992 to 2007.
The US private sector on a net basis does not need foreign savings, and the federal government is the dominant net borrower in the US economy.
The analysis suggests the benefit to the US of persistent net capital inflows is the ability to run a larger fiscal deficit and grow public debt, which does not look like a good bargain.
Related Articles:
Trade Intervention for Freer Trade— The authors argue the United States should counter surplus countries' trade policies either by restricting their goods exports through tariffs or by restricting their capital inflows through taxes, volume limits, reserve requirements, transaction approvals, or investor eligibility rules. They contend capital controls are a more targeted alternative to uniform tariffs, which impose equal costs on more and less mercantilist countries.
The Challenge of Using Excess Global Savings— China, Germany and Japan together ran current account surpluses of $884bn in 2024, with the top 10 surplus countries at $1.568tn, offset by a US current account deficit of $1.134tn and a UK deficit of $123bn. The author argues surplus savings are funding government borrowing in creditworthy-currency countries rather than productive investment elsewhere.
The U.S. Trade Deficit: Myths and Realities— Taxing capital inflows would weaken the dollar but could raise domestic interest rates and depress investment, harming long-term growth, while an interest rate cut absent recession would be inflationary and erode any real depreciation needed to durably improve the trade balance. Fiscal restraint could weaken the dollar and reduce the trade deficit.
AI Summary.Balance-of-payments data from major creditor economies and the US indicate that recent inflows into dollar assets have come largely from private investors seeking yield rather than official reserve accumulation. In East Asia reserve flows tracked current account surpluses closely until 2014 and have since fallen well short, while Europe's outflows have long come from institutional investors and banks.
Brad SetserCouncil on Foreign Relations
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East Asian “reserves tracked the current account surplus almost perfectly until 2014,” but in the past 10 years outflows were driven by private investors seeking yield, “not state investors who are forced to hold safe assets.” @Brad_Setser
Are private investors, not official reserves, financing the US deficit?
Core argument: Data from both major creditor countries and the U.S. show that flows into dollar assets in recent years came largely from private investors seeking yield rather than state investors compelled to hold safe assets.
The actual data—from both the main creditor countries and the U.S.—is quite consistent here: it shows that the flow into dollar assets in the last few years has largely come from private investors seeking yield, not state investors who are compelled to hold safe assets. That’s true of Asia. Look at a chart of cumulative reserve flows from the balance of payments against the cumulative current account surplus of the largest East Asian surplus economies, setting aside the city-state financial centers. Reserves tracked the current account surplus almost perfectly until 2014, but have subsequently fallen well-short. If the analysis is extended to Europe, the same conclusion holds: reserve-related outflows never were the main counterpart to the euro area’s external surplus. The main outflow has long come from European institutional investors and banks looking for yield in fixed income markets abroad.
Takeaways by Macro Roundup® AI
Data from both major creditor countries and the U.S. show that flows into dollar assets in recent years came largely from private investors seeking yield rather than state investors compelled to hold safe assets.
Cumulative reserve flows of the largest East Asian surplus economies, excluding city-state financial centers, tracked their cumulative current account surplus almost perfectly until 2014 but have since fallen well short.
Reserve-related outflows were never the main counterpart to the euro area's external surplus, which has long been matched instead by European institutional investors and banks seeking yield in foreign fixed income markets.
Related Articles:
How China is Quietly Diversifying From US Treasuries— US Treasury data show China cut its official holdings of US Treasuries by more than 27% to $759bn, a faster decline than the preceding period, while raising holdings of higher-yielding agency bonds issued by government-sponsored entities such as Fannie Mae. Analysts argue China's true Treasury holdings may be higher, masked by intermediary custodians.
Our Thoughts on Large US Deficits and Their Impact on Bond Yields— Total borrowing in the US is about average despite high government deficits, as high public borrowing has contributed to the need for higher interest rates that have depressed private sector borrowing. Risk premiums on long-dated debt look about average, with no market signs that economic or debt limits are currently being hit.
Global Debt Report 2025— About 60% of fixed-rate government debt in advanced economies maturing by 2027 — roughly $9tn — was issued before the recent interest-rate tightening, with weighted average yields below 2% versus projected 10-year rates near 3.6%, implying refinancing at nearly double the original cost. France, Spain, the UK, and the US face heightened vulnerability, with maturing debt exceeding 15% of GDP.
AI Summary.China, Germany and Japan together ran current account surpluses of $884bn in 2024, with the top 10 surplus countries at $1.568tn, offset by a US current account deficit of $1.134tn and a UK deficit of $123bn. The author argues surplus savings are funding government borrowing in creditworthy-currency countries rather than productive investment elsewhere.
Martin WolfFinancial Times
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The $1.134tn current account deficit of the US absorbs the bulk of the surplus saving of China, Germany, Japan, and a host of other countries. The “domestic counterpart … is not funding of the private sector but borrowing by the government.”
Are global excess savings funding government borrowing instead of productive investment?
Core argument: China, Germany and Japan ran aggregate current account surpluses of $884bn in 2024, with the top 10 surplus countries totalling $1.568tn, offset by a US current account deficit of $1.134tn and a UK deficit of $123bn.
Today, the structural excess savings of a number of economies, notably China, Germany and Japan, are largely offset (and so activated) by the excess spending of the world’s most creditworthy country, the US (and, to a lesser extent, the UK). The figures are startling. Just these big three surplus economies ran aggregate current account surpluses of $884bn in 2024. The surpluses of the top 10 countries amounted to $1.568tn. But surpluses are only made possible by deficits. Thus the US ran a current account deficit of $1.134tn, to which the UK added $123bn. At least since the financial crisis of 2008, the domestic counterpart of this borrowing is not funding of the private sector but borrowing by the government. In sum, we now seem unable to turn surplus savings in some countries into productive investment elsewhere. One of the reasons for this is that the countries able to borrow sustainably from abroad have creditworthy currencies. This rules out most emerging and developing countries. It also, it turned out, mostly ruled out deficit members of the Eurozone. In such a world, it is hardly surprising that the dominant borrower and spender is the US government.
Takeaways by Macro Roundup® AI
China, Germany and Japan ran aggregate current account surpluses of $884bn in 2024, with the top 10 surplus countries totalling $1.568tn, offset by a US current account deficit of $1.134tn and a UK deficit of $123bn.
Since the 2008 financial crisis, the domestic counterpart of this external borrowing has been government borrowing rather than funding of the private sector.
Sustained borrowing from abroad requires a creditworthy currency, which rules out most emerging and developing countries and largely ruled out deficit members of the Eurozone, leaving the US government as the dominant borrower and spender.
Related Articles:
The Old Global Economic Order is Dead— Because sectoral savings and investment balances must sum to zero, the domestic counterpart of chronic US current account deficits has been chronic government budget deficits, with foreigners, US businesses, and US households all running savings surpluses. Since real interest rates have been low, the author argues foreign savings inflows made large fiscal deficits necessary to sustain domestic demand.
The U.S. Trade Deficit: Myths and Realities— Taxing capital inflows would weaken the dollar but could raise domestic interest rates and depress investment, harming long-term growth, while an interest rate cut absent recession would be inflationary and erode any real depreciation needed to durably improve the trade balance. Fiscal restraint could weaken the dollar and reduce the trade deficit.
The Global Trading System Was Already Broken— The authors argue globalization requires a new trade regime in which countries resolve their production, consumption, and investment imbalances domestically rather than exporting them to trade partners. They propose starting with a customs-union-style bloc of major deficit countries, which would force surplus countries to raise domestic consumption or investment or cut overproduction.
AI Summary.Overseas residents hold over $60t of U.S. assets—including roughly $13t in fixed income and $13t in equities—while U.S. residents hold $38t of foreign assets, with these positions financed in part by dollars acquired through trade. A more balanced trade relationship would reduce net dollar outflows through trade and redirect them toward U.S. manufacturers and households.
Joseph WangFed Guy Blog
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.@FedGuy12 argues that a trade war cutting US trade deficits may push yields higher as overseas investors have fewer dollars to invest in fixed-income assets.
Would more balanced trade redirect dollar flows to U.S. manufacturers and households?
Core argument: Overseas residents hold over $60t of U.S. assets while U.S. residents hold $38t of foreign assets, with the overseas holdings financed in part by dollars acquired through trade.
Overseas investors hold enormous amounts of U.S. assets that are in part financed by dollars acquired through trade. While U.S. residents hold $38t of foreign assets, overseas residents hold over $60t of U.S. assets. As of 2023, overseas investors hold around $13t in fixed income and $13t in equities, though the latter appears largely due to the price appreciation from the recent bull market where the S&P 500 has appreciated by over 20% for two consecutive years. A more balanced trade relationship would decrease the net dollar outflows through trade and re-allocate them to entities like U.S. manufacturers and households.
Takeaways by Macro Roundup® AI
Overseas residents hold over $60t of U.S. assets while U.S. residents hold $38t of foreign assets, with the overseas holdings financed in part by dollars acquired through trade.
As of 2023, overseas investors held roughly $13t in U.S. fixed income and $13t in U.S. equities, with the equity total appearing to stem largely from price appreciation as the S&P 500 rose over 20% in two consecutive years.
A more balanced trade relationship would decrease net dollar outflows through trade and re-allocate them to entities such as U.S. manufacturers and households.
Related Articles:
Can Trump Reduce the Trade Deficit?— A world of widespread tariffs would also shrink international capital flows, and because the US trade deficit is the counterpart of large capital inflows, reduced capital mobility would narrow that deficit. The author argues this would occur largely by reducing overall investment in the US economy.
United States’ Changing Net IIP— The United States' net international investment position deficit—the gap between foreign-owned US assets and US-owned foreign assets—is the largest on record and has turned negative across all major asset categories. Because much of the liability is equity, the author argues rebalancing could come through a correction in US equity values rather than a weaker dollar.
The End of Privilege: A Reexamination of the Net Foreign Asset Position of the United States— The authors document that the U.S. net foreign asset position fell by 60 percentage points of U.S. gross domestic product between 2007 and 2021, even as U.S. current account deficits narrowed. They attribute this to a boom in the market valuation of U.S. corporations' non-financial assets, which mechanically raised the value of large foreign equity holdings in U.S. firms.
AI Summary.Using U.S. Census Bureau administrative data, the authors find that rising Chinese import penetration shifted jobs from manufacturing to services far more in high human capital areas, where within-firm industry switching occurs almost exclusively, producing a net positive employment effect; in low human capital, manufacturing-dependent areas, service gains barely offset manufacturing losses.
Nicholas Bloom, Kyle Handley, André Kurmann, and Philip LuckNational Bureau of Economic Research
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.@I_Am_NickBloom et al find that areas with low human capital and high initial manufacturing share saw less services job growth to offset China shock manufacturing losses, explaining 50% of the 1997-2007 job growth gap vs. high human capital regions.
How does local human capital shape job reallocation from Chinese imports?
Core argument: Using confidential U.S. Census Bureau administrative data, the authors estimate that the China shock accounts for half of the one percentage point higher average annual job growth observed in high human capital areas.
Using confidential administrative data from the U.S. Census Bureau we revisit how the rise in Chinese import penetration has reshaped U.S. local labor markets. In high human capital areas (much of the West Coast and large cities more generally), job reallocation from manufacturing to services is higher than in low human capital areas with high manufacturing dependence (much of the South and the Midwest), primarily because within-firm reallocation and in particular industry switching occurs almost exclusively in high human capital areas. The positive effect on service jobs in high human capital areas robustly outweighs the negative effect on manufacturing jobs, implying a sizable net positive effect on total employment. In low human capital areas with high manufacturing dependence, by contrast, service job gains barely offset manufacturing job losses. Our estimates imply the China shock accounts for half of the one percentage point higher average annual job growth in high human capital areas that we observe in the data. The China shock thereby contributed to the changing geography of jobs in the U.S.
Takeaways by Macro Roundup® AI
Using confidential U.S. Census Bureau administrative data, the authors estimate that the China shock accounts for half of the one percentage point higher average annual job growth observed in high human capital areas.
In high human capital areas, including much of the West Coast and large cities, the positive effect of Chinese import penetration on service jobs outweighs the negative effect on manufacturing jobs, implying a sizable net positive effect on total employment.
Within-firm reallocation, particularly industry switching, occurs almost exclusively in high human capital areas, while in low human capital areas with high manufacturing dependence service job gains barely offset manufacturing job losses.
Related Articles:
Manufacturing Jobs Boom Not Reaching Places Hit By The China Shock— U.S. manufacturing job growth since the pandemic is occurring disproportionately in counties least exposed to Chinese import competition in the 2000s, according to an analysis of federal employment and wage data. The counties hardest hit by that import competition still have fewer manufacturing jobs than before the pandemic.
What Happened To U.S. Manufacturing?— The authors find that about half of manufacturing job destruction from Chinese import competition comes from plant closures, while about 40% of the relative effect reflects continuing plants switching their primary activity from manufacturing to services such as research, design, management, and wholesale. Gains in services offset manufacturing losses, leaving overall employment unaffected.
Trading Places: Mobility Responses of Native and Foreign-Born Adults to the China Trade Shock— U.S. local labor markets more exposed to import competition from China saw substantially larger net reductions in their foreign-born populations, with no significant reduction among native-born residents. Within exposed areas, foreign-born and native-born workers had comparably sized declines in employment-to-population ratios.
AI Summary.The author argues that negative net national savings means the United States is consuming capital rather than accumulating it, largely by selling capital stock to foreigners and spending the proceeds and by not replacing aging capital. With a negative net international investment position, the author contends U.S. spending depends on continued foreign inflows and that potential growth is declining.
Andrew LeesMacroStrategy Partnership
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Andrew Lees @MacrostrategyP argues that the US current account deficit is being funded in part by the flight of capital from Europe, which cannot continue indefinitely.
Is the US consuming capital and relying on foreign inflows?
Core argument: The author argues the U.S. net national savings deficit means the country is consuming capital rather than accumulating it, largely by selling capital stock to foreigners and spending the proceeds, and partly by not replacing aging capital stock.
With a negative net national savings deficit, rather than the U.S. accumulating capital, it is consuming it. Most of this is from selling capital stock to foreigners and consuming the proceeds, and some is more directly, from not replacing aging capital stock. Either way, without restructuring the economy, the cost of servicing the outstanding stock of debt and unproductive government spending exceeds the capacity of the domestic economy to generate savings, and with a negative net international investment position, is reliant on the generosity of foreigners to fund its spending. Without the recent questionable upward revision to the U.S. personal savings rate, the net national savings deficit would be even more substantial. Through the consumption of capital, the U.S. potential GDP growth rate is declining rapidly, dependent not on productivity but this continuous flow of funds which will eventually exhaust. Whilst this flow of funds has obviously helped drive the relative growth of the U.S. and its market performance, it has been at the expense of world growth which has continued to trend lower, meaning it is not a sustainable position.
Takeaways by Macro Roundup® AI
The author argues the U.S. net national savings deficit means the country is consuming capital rather than accumulating it, largely by selling capital stock to foreigners and spending the proceeds, and partly by not replacing aging capital stock.
With a negative net international investment position, the U.S. relies on foreign inflows to fund debt service and unproductive government spending, which the author argues exceed the domestic economy's capacity to generate savings.
The author contends U.S. potential GDP growth is declining rapidly because it depends on a continuous flow of foreign funds rather than productivity, and that this flow has come at the expense of world growth, leaving the position unsustainable.
Related Articles:
United States’ Changing Net IIP— The United States' net international investment position deficit—the gap between foreign-owned US assets and US-owned foreign assets—is the largest on record and has turned negative across all major asset categories. Because much of the liability is equity, the author argues rebalancing could come through a correction in US equity values rather than a weaker dollar.
The End of Privilege: A Reexamination of the Net Foreign Asset Position of the United States— The authors document that the U.S. net foreign asset position fell by 60 percentage points of U.S. gross domestic product between 2007 and 2021, even as U.S. current account deficits narrowed. They attribute this to a boom in the market valuation of U.S. corporations' non-financial assets, which mechanically raised the value of large foreign equity holdings in U.S. firms.
The Economics of Inequality in High-Wage Economies— Information technology created investment opportunities exceeding the supply of properly trained talent, while trade with low-wage economies, low-skilled immigration, trade deficits, and aging demographics eased constraints on low-skilled labor and risk-averse savings. The author argues this framework, rather than rising cronyism, explains high returns to success, slowing productivity growth, and low interest rates.
