“…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.French government borrowing costs now exceed the country's nominal income growth by about 2 percentage points, the most unfavorable gap between borrowing costs and growth in the rich world. By contrast, Spanish and Greek bond yields remain about 2 percentage points below their income growth rates.
Matthew KleinThe Overshoot
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The change in a country’s interest rate, Klein argues, should be measured against the change in nominal income growth. By that metric, France has moved from “core Europe” into the periphery – while Italy, Spain and especially Greece have moved in the opposite direction.
Do French borrowing costs now exceed its income growth?
Core argument: France’s borrowing costs exceeded its nominal income growth rate by about 2pp as of 2026Q2, and by roughly 3pp at current yields, the most unfavorable such spread in the rich world.
The problem for France is that its bond yields are surging even as its nominal income growth has slowed relative to the 2017-2019 pace, to the point that, almost uniquely among rich countries, borrowing costs there now substantially exceed growth rates. In fact, the spread between French sovereign borrowing costs and French growth rates is now the most unfavorable anywhere in the rich world. The French economy was not quite growing by 2% a year in euro terms as of 2026Q2, which was even worse than the anemic 3% yearly average nominal growth rate recorded in 2017Q1-2019Q4. As of 2026Q2, France’s cost of borrowing was therefore about 2pp higher than its income growth rate. (At current yields, the penalty is more like 3pp.) By contrast, Spanish and Greek bond yields are still about 2pp lower than their income growth rates.
Takeaways by Macro Roundup® AI
France’s borrowing costs exceeded its nominal income growth rate by about 2pp as of 2026Q2, and by roughly 3pp at current yields, the most unfavorable such spread in the rich world.
French nominal growth was running just under 2% a year in euro terms as of 2026Q2, below the 3% yearly average recorded in 2017Q1–2019Q4, even as French bond yields surged.
Spanish and Greek bond yields remain about 2pp below their nominal income growth rates, in contrast to France’s unfavorable gap.
Related Articles:
Soaring Yields Find Europe’s Weak Spot— A rapid rise in long-term US Treasury yields has highlighted vulnerabilities elsewhere, notably France, where risks are elevated. Because France is in the euro zone, any crisis there would extend to the currency area, and European stocks have sold off alongside a weakening euro.
France Seeks To Rein In Pensions And State Salaries In 2027— France plans to narrow its budget deficit to 5% of GDP by cutting state spending, capping increases to pensions and civil servant salaries, and raising taxes. Deteriorating public finances have left France borrowing at higher interest rates than Italy and Greece, with 10-year bond yields reaching their highest since 2002.
Global Debt Report 2026— Gross central government borrowing across OECD countries rose 7% to a record $17tn, about 23% of GDP, and is projected to reach roughly $18tn, or 24% of GDP. The United States and Japan account for close to 80% of the area's refinancing requirements, with the US share rising from 57% to 70%.
AI Summary.The Institute of International Finance reports global debt as a share of output rose less than 10 percentage points between 2018 and mid-2026, peaking at 337% in early 2021 before falling 27 percentage points by the end of 2023. Inflation eroded the debt burden, as it did in the UK after the Second World War.
Martin WolfFinancial Times
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Wolf notes that the global debt-to-GDP ratio rose by less than 10pp btw 2018 and June 2026: after peaking at 337% in early 2021, it fell by 27pp by the end of 2023, as inflation boosted nominal GDP and eroded the value of existing debt.
Does inflation reduce the global debt burden?
Core argument: IIF data show the global debt-to-output ratio reached a post-Covid peak of 337% in early 2021 before falling by 27 percentage points by the end of 2023, with inflation identified as the force that eroded it.
The IIF shows that between 2018 and June 2026, the rise in the ratio of global debt to output was less than 10 percentage points. The story is striking: the ratio reached a post-Covid peak of 337% in early 2021, before falling by 27 percentage points by the end of 2023. What was this magical “debt-buster”? Good old-fashioned (and supposedly “unexpected”) inflation. This is — to put it mildly — not the first time inflation has wiped out debt. It was, to take one of countless examples, an important part of the UK’s elimination of its post-second-world-war debt. For countries able to print the money in which their debt is denominated, that is often what happens.
Takeaways by Macro Roundup® AI
IIF data show the global debt-to-output ratio reached a post-Covid peak of 337% in early 2021 before falling by 27 percentage points by the end of 2023, with inflation identified as the force that eroded it.
Between 2018 and June 2026, the IIF shows the ratio of global debt to output rose by less than 10 percentage points.
Inflation has wiped out debt before, forming an important part of the UK’s elimination of its post-second-world-war debt, and often does so for countries able to print the currency in which their debt is denominated.
Related Articles:
Are Government Bonds Safe in Times of War and Pandemic?— Government bonds severely underperform in wartime, in absolute terms and relative to equities, housing, and economic growth, unlike in financial crises when bonds tend to outperform stocks. The U.S. and U.K. reduced war-driven debt-to-GDP ratios without explicit default, using surprise inflation and financial repression that shifted fiscal burdens onto bondholders.
The Coming Great Repression?— Across countries and over time, higher public debt burdens are associated with lower relative returns on government bonds, the opposite of standard risk-premium predictions. The authors estimate financial repression—making banks captive bond buyers and loading them with low-return reserves—contributed 90.7 percentage points of GDP to Britain's postwar debt reduction, versus 20.3 from surprise inflation.
Global Debt Report 2026— Gross central government borrowing across OECD countries rose 7% to a record $17tn, about 23% of GDP, and is projected to reach roughly $18tn, or 24% of GDP. The United States and Japan account for close to 80% of the area's refinancing requirements, with the US share rising from 57% to 70%.
AI Summary.Because investors can buy bonds across borders, an investment boom in one country such as the United States can draw in loanable funds from abroad and push up interest rates in other nations. The linkage is not one-for-one, since investors also weigh expected exchange-rate changes and the resulting capital gains or losses.
Paul KrugmanKrugman Wonks Out
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The nominal 10-year Treasury yield is ~ where it was during the mid-2000s housing boom, but below its level during the late-1990s and early-2000s technology boom. Krugman asks, “If we’re now looking at an even bigger investment boom, why wouldn’t we expect to see interest rates at least that high?”
Does an investment boom in one country raise interest rates abroad?
Core argument: Because investors can buy bonds across borders, an investment boom in the United States draws loanable funds from other nations and pushes their interest rates up as well.
Investors can buy bonds across borders, so an investment boom in the United States can draw in loanable funds from other nations and drive up their interest rates. The international linkage between interest rates isn’t always one-for-one. That’s mainly because investors deciding which nation’s bonds to buy don’t just look at interest rates -- they also take into account expected changes in exchange rates. For example, there was a sharp rise in U.S. interest rates in the early 1980s that was only partially matched by a rise in German rates. The reason was that this was also a period of an extremely strong dollar, which many investors believed (correctly) would prove temporary. So German investors buying U.S. bonds had to set the high interest rates they could earn against the capital losses they were likely to experience when the dollar came back to earth.
Takeaways by Macro Roundup® AI
Because investors can buy bonds across borders, an investment boom in the United States draws loanable funds from other nations and pushes their interest rates up as well.
The international linkage between interest rates is not always one-for-one, mainly because investors choosing among nations’ bonds weigh expected exchange rate changes alongside interest rates.
The sharp rise in U.S. interest rates in the early 1980s was only partially matched by German rates, as German investors buying U.S. bonds set high yields against likely capital losses when the strong dollar fell back.
Related Articles:
Financing the AI Buildout— The authors estimate roughly 57 gigawatts of operating US data center capacity against a planned development pipeline of about 509 gigawatts, which is not a completion forecast since projects may be delayed, scaled back, or abandoned. Their central scenario has 182.8 gigawatts of added capacity becoming operational through 2032, 117.2 gigawatts completed later, and 226.9 gigawatts never completed.
America’s Risky Debt: What Markets See That Policymakers Don’t— Two market-based measures suggest the safety premium investors pay to hold US Treasuries has compressed toward zero and at times reversed: the spread between top-rated corporate bonds and Treasuries after stripping out default risk, and the gap between currency-hedged foreign G10 government yields and Treasury yields at the same maturity, where longer-maturity comparisons now favor foreign bonds.
Don’t Draw The Wrong Conclusion From Treasury Yields— Ten-year real yields equal the average expected overnight rate over the next decade plus a term premium, and fiscal credibility or debt sustainability concerns would show up as a higher term premium. With the term premium and inflation expectations contained, the increase in bond yields reflects higher expected long-term overnight rates.
AI Summary.Wage gains have trailed inflation for five months, and consumer prices are 27% higher than at the start of 2021. The "misery index," the sum of the inflation and unemployment rates, stands at 7.5, up from 6.7 a year earlier.
David Uberti, Justin Lahart and Aaron ZitnerWall Street Journal
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Over the past five months, real wages as measured by average hourly earnings have declined. Okun’s “misery index” is now 7.5, just above its October 2024 level of 6.7.
Are wage gains falling behind rising consumer prices?
Core argument: Consumer prices are 27% higher than in January 2021, when Biden took office, and wage gains have failed to keep pace with inflation for five months.
For five months, wage gains haven’t kept pace with inflation and, especially with the sharp increase in gasoline prices over the past few weeks, they aren’t likely to keep up this month. University of Chicago Booth School of Business economist Christina Patterson said employees who achieve pay bumps often bear a burden. “You negotiate. You get an outside offer. You switch jobs. You threaten to leave,” she said. “All of those actions are costly. They disturb employer-employee relationships. You lose co-workers. You have to move.” Consumer prices are now 27% higher than they were in January 2021. One long-popular benchmark of economic conditions is the “misery index,” a simple summing up of the inflation and unemployment rate, it now stands at 7.5, higher than the 6.7 it was at in October 2024, just before Harris lost the presidency to Trump.
Takeaways by Macro Roundup® AI
Consumer prices are 27% higher than in January 2021, when Biden took office, and wage gains have failed to keep pace with inflation for five months.
The “misery index,” a summing of the inflation and unemployment rates devised by economist Arthur Okun, stands at 7.5, above the 6.7 recorded in October 2024 before Kamala Harris lost to Trump.
University of Chicago Booth School of Business economist Christina Patterson said workers who win pay bumps often bear a burden through negotiating, obtaining outside offers, switching jobs, or threatening to leave, actions that disturb employer-employee relationships and can require moving.
Related Articles:
The Cost of Money is Part of the Cost of Living: New Evidence on the Consumer Sentiment Anomaly— Variation in the University of Michigan consumer sentiment index that inflation and unemployment cannot explain is strongly correlated with growth in consumer borrowing costs, such as mortgage and car loan rates. The authors estimate that including interest payments and homeownership costs in the consumer price index would raise measured inflation from 3% to 9%.
Sticky Wage Norms and the Real Wage Cost of Unexpected Inflation— Firms set nominal wage increases by round-number rules—about 42% of increases below 6% fell within 0.01 percentage points of a whole or half number—and these rules rose only from about 2.7% to 3.5% as inflation peaked near 7%, contributing to falling real wages for job stayers.
Do Voters Punish Inflation or Pay Cuts? Inflation and Real Wages in U.S. Elections— An analysis of U.S. counties estimates that where wages grew faster than prices, voters supported the incumbent party more, while counties with larger real wage losses than average shifted more toward the opposition. A one-standard-deviation larger real wage loss is associated with shifts of roughly 0.10 and 0.19 percentage points in vote share and margin.
AI Summary.Ten-year real yields equal the average expected overnight rate over the next decade plus a term premium, and fiscal credibility or debt sustainability concerns would show up as a higher term premium. With the term premium and inflation expectations contained, the increase in bond yields reflects higher expected long-term overnight rates.
Stephen MiranFinancial Times
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Citing a stable term premium, Miran argues the rise in the 10-year Treasury yield most likely reflects investors “marking up their expectations for long-run economic growth, not becoming concerned over central bank or fiscal credibility.”
Do rising bond yields signal worries about debt sustainability?
Core argument: The term premium on ten-year Treasuries has been stable and sits only a hair lower than at the end of last year, whereas fiscal credibility or debt sustainability concerns would show up as an increased term premium.
Ten-year real yields are equal to the average expected overnight yield over the next ten years, plus a risk premium that investors demand for locking up their money for ten years. This term premium reflects the fact that realised overnight rates might deviate from expected overnight rates. If the market saw fiscal credibility or debt sustainability problems, this would show up in an increased term premium. But the term premium has also been stable and is only a hair lower since the end of last year. With term premium and inflation expectations contained, the recent increase in bond yields is therefore almost entirely due to higher expected overnight rates over the long term.
Takeaways by Macro Roundup® AI
The term premium on ten-year Treasuries has been stable and sits only a hair lower than at the end of last year, whereas fiscal credibility or debt sustainability concerns would show up as an increased term premium.
With term premium and inflation expectations contained, the increase in bond yields is almost entirely attributable to higher expected overnight rates over the long term.
Ten-year real yields equal the average expected overnight yield over the next ten years plus a term premium investors demand for locking up money, reflecting that realised overnight rates might deviate from expectations.
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Let the Bond Market Speak— The long-term Treasury yield is the most important price in the world, and markets aggregate information no committee possesses. The author argues the Treasury's larger buyback operations were not justified as liquidity support, since trading was orderly, volatility contained, and there were no failed auctions or forced unwinds indicating dysfunction.
What Are US Treasury Markets Really Telling Us? Part I— Comparing US Treasury yields to AAA corporate bonds combined with credit default swap insurance creates a synthetic Treasury, and the resulting spread — the convenience yield investors give up for safety and liquidity — has disappeared, suggesting investors are indifferent between the two on safety and liquidity. The author argues this is bad news for US taxpayers.
America’s Risky Debt: What Markets See That Policymakers Don’t— Two market-based measures suggest the safety premium investors pay to hold US Treasuries has compressed toward zero and at times reversed: the spread between top-rated corporate bonds and Treasuries after stripping out default risk, and the gap between currency-hedged foreign G10 government yields and Treasury yields at the same maturity, where longer-maturity comparisons now favor foreign bonds.
AI Summary.Two market-based measures suggest the safety premium investors pay to hold US Treasuries has compressed toward zero and at times reversed: the spread between top-rated corporate bonds and Treasuries after stripping out default risk, and the gap between currency-hedged foreign G10 government yields and Treasury yields at the same maturity, where longer-maturity comparisons now favor foreign bonds.
Hanno LustigAspen Economic Strategy Group
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Lustig shows the premium investors pay for Treasurys over substitutes such as AAA corporate debt and G10 sovereign debt has compressed post 2020. “Investors are now indifferent between [Treasurys] and close substitutes.”
Is the safety premium investors pay for Treasuries disappearing?
Core argument: The credit risk-adjusted AAA-Treasury spread, built by using credit default swaps to strip default-risk compensation out of corporate-bond yields, estimates the safety premium investors pay for Treasurys; since 2022 it has compressed toward zero and at points reversed.
The top panel uses the credit risk-adjusted AAA-Treasury spread. We use the CDS to strip the default-risk compensation out of the corporate-bond yield. What remains is a clean estimate of the safety premium that investors pay for Treasurys over otherwise-equivalent corporate exposure. Post-2022, it has compressed toward zero, and at points, has reversed. The bottom panel uses the Treasury Premium, defined as the difference between the synthetic-dollar foreign sovereign yield and the US Treasury yield at the same maturity. The synthetic-dollar foreign yield is constructed by swapping the coupon payments on foreign G10 sovereign bonds into dollars using the foreign-exchange forward market. This eliminates currency risk over the life of the bond, so the resulting dollar cash-flow stream is directly comparable to a US Treasury yield of the same maturity. At longer maturities, global investors now seem to prefer the safety of foreign G10 bonds.
Takeaways by Macro Roundup® AI
The credit risk-adjusted AAA-Treasury spread, built by using credit default swaps to strip default-risk compensation out of corporate-bond yields, estimates the safety premium investors pay for Treasurys; since 2022 it has compressed toward zero and at points reversed.
The Treasury Premium, the gap between synthetic-dollar G10 sovereign yields — foreign sovereign coupons swapped into dollars via the foreign-exchange forward market to eliminate currency risk — and US Treasury yields at the same maturity, suggests global investors now prefer foreign G10 bonds at longer maturities.
Related Articles:
The United States Capital Structure— Because Social Security and Medicare benefits are politically untouchable, retirees effectively hold the most senior claim on US government resources while Treasury bondholders hold the riskiest one. On this argument, bondholders absorb adverse fiscal shocks through surprise inflation, financial repression, or both.
Are Government Bonds Safe in Times of War and Pandemic?— Government bonds severely underperform in wartime, in absolute terms and relative to equities, housing, and economic growth, unlike in financial crises when bonds tend to outperform stocks. The U.S. and U.K. reduced war-driven debt-to-GDP ratios without explicit default, using surprise inflation and financial repression that shifted fiscal burdens onto bondholders.
U.S. Treasury Investors Are Long in AI— The authors find U.S. government debt has a large positive productivity beta, because the tax code makes federal revenue highly sensitive to productivity growth while spending commitments change little, leaving bondholders implicitly long productivity growth. They argue greater market confidence in sustained productivity gains from AI could substantially reprice government debt, lowering nominal yields.
AI Summary.Inflation-protected U.S. Treasury yields rose from about 3.5% in early 1997 to about 4.5% by 2000, compared with roughly 2.4% on the 10-year and 3% on the 30-year today. The author argues that this 1990s experience helps calibrate expectations if new software technologies produce a comparable acceleration in productivity growth.
Matt KleinThe Overshoot
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Klein compares measures of real rates from the 1990s productivity boom to today’s real rates, using TIPS, as well as “synthetic TIPS” derived by subtracting inflation expectations from nominal rates. Current real rates are very low by comparison.
Would faster productivity growth from new software technologies push real yields higher?
Core argument: Real yields on TIPS were roughly 3.5% when the securities were introduced at the start of 1997 and rose gradually to about 4.5% by the peak of the bubble in 2000.
Real yields on actual TIPS were ~3.5% when they first arrived at the beginning of 1997, and then rose gradually to ~4.5% by the peak of the bubble in 2000. Yields on “synthetic” TIPS derived by removing estimates of inflation expectations from nominal yields were also around 3.5% in early 1997 and 4.5% in the first half of 2000, though they were more volatile in between. The yield on the benchmark 10y TIPS is currently 2.4% while the yield on the 30y TIPS is around 3%. Knowing what actually happened in the 1990s is helpful for calibrating expectations about what could happen in the next decade, if new software technologies lead to a comparable acceleration in productivity growth.
Takeaways by Macro Roundup® AI
Real yields on TIPS were roughly 3.5% when the securities were introduced at the start of 1997 and rose gradually to about 4.5% by the peak of the bubble in 2000.
"Synthetic" TIPS yields, derived by stripping estimates of inflation expectations out of nominal yields, also stood near 3.5% in early 1997 and 4.5% in the first half of 2000, with more volatility in between.
The benchmark 10-year TIPS yields 2.4% and the 30-year TIPS around 3%, while the 1990s experience offers a guide for calibrating expectations if new software technologies deliver a comparable acceleration in productivity growth.
Related Articles:
AI, Productivity, and Rates: Part I— A San Francisco Federal Reserve model estimates that the growth contribution from rising resource utilization in recent quarters has been larger than in almost any comparable five-quarter stretch since 1947 outside recoveries from downturns. That measure is based on a modified version of the average worker's weekly hours rather than unemployment or capacity utilization.
AI and Productivity— The recent pickup in US labor productivity appears driven by higher utilization of existing capital—running factories, server racks, and hotel rooms harder—rather than by firm-level efficiency gains from AI. Adoption remains too thin and the cross-sectional evidence too weak to conclude that AI-driven productivity gains are already widespread.
Have We Entered an Era of High Productivity Growth?— Labor productivity has grown solidly while the San Francisco Federal Reserve's total factor productivity index, which adjusts for the equipment and technology workers use, has grown modestly, suggesting gains so far reflect better tools rather than broader advances. A regime-switching model puts the probability of a high-productivity regime at 57% using labor productivity and 21% using total factor productivity.
AI Summary.There is little evidence that fears of a Greek-style solvency crisis are driving U.S. interest rates, since long-term "breakeven" inflation expectations have changed little. Prices for credit default swaps, which insure against a U.S. government default, have also moved little.
Paul KrugmanKrugman Wonks Out
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Citing the stable long-term breakeven inflation rate and minimal rise in Treasury CDS prices, Krugman argues that high long-term rates reflect heavy federal borrowing, but not fears of outright default or inflation-induced debasement.
Are bond markets signaling fears about government solvency?
Core argument: Bond markets show very little evidence that fears of a Greek-style solvency crisis are driving U.S. interest rates.
There is very little evidence that fears of a Greek-style crisis are driving interest rates now. For example, if markets were really worried about U.S. solvency and the potential for the government to inflate the debt away, this should be reflected in measures that track inflation. But there has been, in fact, very little change in the “breakeven” inflation rate, a measure of long-term inflation expectations. Another indicator is the price of credit default swaps — insurance against a possible US default. These also haven’t moved much.
Takeaways by Macro Roundup® AI
Bond markets show very little evidence that fears of a Greek-style solvency crisis are driving U.S. interest rates.
The breakeven inflation rate, a measure of long-term inflation expectations, has changed very little, which would be expected to move if markets feared the U.S. government would inflate away its debt.
Prices of credit default swaps, which insure against a possible U.S. default, also have not moved much.
Related Articles:
US Bond Selloff Drives 30-Year Yields to Highest Since 2007— The yield on 30-year US Treasury bonds rose to as high as 5.34%, its highest level since 2007, amid investor concern over rising government spending, heavy sales of long-dated bonds, and inflation that has run above the Federal Reserve's target for five years. Long-term yields also rose in Canada and Europe.
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 Is Driving Up Treasury Yields: ‘It Just Touches Everything’— Investment-grade companies have sold nearly $1.5tn of bonds, up 36% from a year earlier, and some investors have sold US Treasuries to buy higher-yielding corporate debt. Bank of America economists estimate the surge in corporate-debt sales, along with more mortgage-backed securities issuance, pushed 10-year rates up by about 0.3 percentage point.
