“…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
“Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
“There are an amazing number of good ideas and interesting points made in Unintended Consequences. The thinking underlying it, and the obvious depth of understanding of the author, are very impressive.” - Steven Levitt, coauthor of Freakonomics; 2004 John Bates Clark Medal
“…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
“Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
“…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
“A full-throated defense of economic dynamism.” - The Wall Street Journal
“…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
“…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
“…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
“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
“Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
AI Summary.Japan, China, South Korea and Taiwan together hold just under $30tn in gross foreign assets, a five-fold rise over two decades, and about $10tn in net foreign assets. The author argues a current account surplus dominated by investment income, which tends to be reinvested abroad, generates less currency appreciation pressure than one driven by trade.
Udith SikandGavekal
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Northeast Asia’s ~$10T in net foreign assets would yield $400B annually at 4%, versus its ~$600B mean current-account surplus. Unlike export earnings, much investment income is reinvested abroad, creating less appreciation pressure.
Does investment income create less currency appreciation pressure than trade surpluses?
Core argument: Japan, China, South Korea and Taiwan together hold just under $30tn in gross foreign assets, a five-fold increase over the past two decades, with net foreign assets of about $10tn after liabilities to foreigners.
Japan, China, South Korea and Taiwan now hold nearly US10T net. At a 4% return, those net assets would generate roughly $600B over the past decade. The composition matters for exchange rates: exporters typically convert more of their foreign earnings into local currency to meet domestic costs, while foreign investment income is more likely to be reinvested abroad. A current-account surplus increasingly driven by investment income therefore creates less appreciation pressure than an equivalent trade surplus.
Takeaways by Macro Roundup® AI
Japan, China, South Korea and Taiwan together hold just under $30tn in gross foreign assets, a five-fold increase over the past two decades, with net foreign assets of about $10tn after liabilities to foreigners.
At the current 4% federal funds rate, $10tn of net foreign assets would imply roughly $400bn a year in net investment income for the four Northeast Asian economies, against a combined current account surplus averaging about $600bn over the last decade.
A current account surplus dominated by investment income generates less appreciation pressure than one dominated by trade, as exporters are more likely to repatriate and convert dollar earnings to cover domestic input costs while investment-income earners are more likely to reinvest abroad.
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.
Who Will Win The War Of Neo-Mercantilists?— China's manufacturing export surplus is around 2% of world GDP, roughly twice the largest surplus Japan ever ran, while domestic demand has stalled. Unexplained negative net income of about $125bn on its $4tn in net foreign assets, versus an expected $100bn surplus, supports the argument that the renminbi is about 30% undervalued.
The Real Problem With Global Trade— Asia's $1.5tn trade surplus is larger as a share of world output than at any point since 1945 and is the only large surplus in the global economy. Exchange rates have a meaningful impact on trade balances: China's surplus reached about 10% of its output amid renminbi depreciation, then fell below 2% after a 40% real appreciation.
AI Summary.Foreign investors made a record $942bn in net purchases of US stocks and investment fund shares over 12 months, the highest rolling 12-month total in Treasury data going back to 1985. Foreign demand for US debt securities moved in the opposite direction, falling to a net $188bn in the second quarter from $314bn in the first.
Michael Taffe and George SteerFinancial Times
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Foreign investors bought a record net $426B of US equities and fund shares in Q2, up 62% y/y, part of a record $942B in the 12 months through July. Overseas investors bought a net $188B of US debt securities in Q2, down from $314B in Q1.
Are foreign investors shifting from US debt into US stocks?
Core argument: Foreign investors made a record $942bn in net purchases of US equities and investment fund shares in the 12 months to July, the highest rolling 12-month total in Treasury data going back to 1985.
Foreign investors made a record $942bn in net purchases of US equities and investment fund shares in the 12 months to July, accelerating a shift in overseas investment towards American stocks and away from debt. The flows represented the highest rolling 12-month total in Treasury data going back to 1985. Net purchases of US equities and investment fund shares by foreign investors jumped to $426bn in the second quarter, up 62% from the same period in 2025, and surpassing the previous quarterly record of $299bn in 2022, according to the Bureau of Economic Analysis. Foreign demand for US debt moved in the opposite direction. Overseas investors bought a net $188bn of US debt securities in the second quarter, down from $314bn in the first.
Takeaways by Macro Roundup® AI
Foreign investors made a record $942bn in net purchases of US equities and investment fund shares in the 12 months to July, the highest rolling 12-month total in Treasury data going back to 1985.
Net foreign purchases of US equities and investment fund shares reached $426bn in the second quarter, up 62% from the same period in 2025 and above the prior quarterly record of $299bn in 2022, according to the Bureau of Economic Analysis.
Overseas investors bought a net $188bn of US debt securities in the second quarter, down from $314bn in the first.
Related Articles:
World’s Unusually High Dollar Exposure Risks Fueling Selloff— Pension funds and insurers in Canada, Denmark, Australia, Taiwan, Japan and Finland hedged just 41% of their foreign-currency exposure, the lowest share since at least 2015. With some of the largest holders of US assets carrying little protection against a weaker dollar, the currency is at risk of steeper declines if sentiment turns.
Foreign Investors Prefer US Stocks To Treasuries As Debt Worries Grow— International flows into US stocks averaged 2.8% of US GDP over a year, overtaking flows into US Treasuries at 2% of GDP for the first time this century outside brief episodes during the Covid-19 pandemic and after the global financial crisis, according to Deutsche Bank analysis of US Treasury data.
A Catalyst For The AI Bubble Break— Historically, controlling for valuations, a 1% rise in the share of the market represented by initial public offerings has been associated with roughly a 4% decline in prices. With large artificial-intelligence company listings expected and share issuance exceeding buybacks, equity supply could shift from shrinking about 1% a year to growing near 5%, implying returns roughly 20% below average.
AI Summary.China faces three options as external demand weakens: shift a larger share of national income to households so consumption absorbs more output, keep relying on investment despite weak returns, or let production and growth slow. The first requires substantial changes in income distribution and saving incentives; the second risks more debt and excess capacity; the third implies higher unemployment.
Michael PettisChina Financial Markets
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“Beijing cannot choose whether China will adjust; one way or another, it will.” Pettis warns Zhongnanhai against postponing rebalancing with another round of debt-financed investment “despite increasingly weak returns.”
What choices does China face as external demand weakens?
Core argument: China faces three options: shift a larger share of national income to households so consumption absorbs more output, keep relying on investment despite weak returns, or allow production and growth to slow.
What it can choose is how painful that adjustment will be. If weaker external demand is met by encouraging more borrowing and domestic investment, regardless of whether that investment is economically justified, China risks postponing the inevitable. China therefore faces the same basic choice Japan confronted, but with deeper imbalances and less accommodating global conditions. It can shift a larger share of national income toward households and allow consumption to absorb more of what the economy produces; or it can continue relying on investment, despite increasingly weak returns; or it can allow production and growth to slow. The first choice requires a substantial change in the domestic distribution of income and the incentives to save. The second risks still more debt and excess capacity and, ultimately, a more painful adjustment. The third implies higher unemployment and weaker growth.
Takeaways by Macro Roundup® AI
China faces three options: shift a larger share of national income to households so consumption absorbs more output, keep relying on investment despite weak returns, or allow production and growth to slow.
China confronts the same basic choice Japan faced, but with deeper imbalances and less accommodating global conditions, and can choose only how painful the adjustment will be.
Meeting weaker external demand with more borrowing and domestic investment, regardless of whether it is economically justified, risks further debt and excess capacity and a more painful adjustment, while slower growth implies higher unemployment.
Related Articles:
The Year of the Trojan Fire Horse: China’s Imbalanced Economy and Unrelenting Mercantilism— About 30% of Chinese industrial companies are unprofitable "zombies" kept alive by subsidies far larger than those elsewhere, rather than exiting amid falling industrial producer prices. Countries with large increases in manufactured imports from China also saw slowdowns in domestic manufacturing, including declining manufacturing shares of output across most of Southeast Asia.
Sticking with What Works: Raising GDP Forecast on China’s Manufacturing Push— Stronger Chinese growth driven by export-oriented manufacturing may not produce net positive spillovers: for every 1pp export-driven boost to China's GDP, other economies may see a 0.1–0.3pp drag, with high-tech producers such as Europe and Japan facing greater pressure. Cheaper Chinese goods continue to exert a disinflationary impulse.
Record Influx Of University Graduates Pushes China’s Youth Unemployment Rate To 18.9%— China's urban unemployment rate for 16- to 24-year-olds excluding students reached 18.9%, the highest since the statistics agency revised its methodology to exclude students. A record influx of university graduates is entering a job market weighed down by weak domestic demand and growing adoption of artificial intelligence.
AI Summary.East Asian economies accumulated large US dollar and euro reserves by building export machines based on undervalued currencies, a strategy one analyst argues has run its course. He contends China should revalue aggressively and return to market-determined prices, since the resulting accounting losses reflect real losses already incurred.
Charles GaveGavekal
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Charles Gave argues that East Asia’s post-1997 model of undervalued currencies, which has generated >5T in FX reserves, has run its course. His prescription is aggressive China-led revaluation to shift purchasing power toward Asian consumers.
Should China revalue its currency aggressively and let markets set prices?
Core argument: Gave argues that East Asia’s strategy of building export machines on undervalued currencies to accumulate large US dollar and euro reserves has run its course.
To accumulate their huge reserves of US dollars and euros, [East Asia] built formidable export machines based on undervalued currencies. [Gave sees] only one solution: to return to market-determined prices as quickly as possible. As the leading economy in the region, China should bite the bullet and say the time has come to revalue aggressively. Yes, Asia will take accounting losses. But that does not greatly matter; the actual losses have already been taken a long time ago.
Takeaways by Macro Roundup® AI
Gave argues that East Asia’s strategy of building export machines on undervalued currencies to accumulate large US dollar and euro reserves has run its course.
Gave sees a return to market-determined prices as quickly as possible as the only solution, with China, as the region’s leading economy, revaluing aggressively.
Gave contends that the accounting losses Asia would take on revaluation do not greatly matter because the actual losses were taken long ago.
Related Articles:
The World Should Not Ignore China’s Undervalued Currency— China's reported current account surplus of about 4% of GDP is roughly 3 percentage points above the International Monetary Fund's estimated norm, implying a currency undervaluation of about 20%. Adjusting for surging gold imports and a misreported investment income deficit would lift the surplus to about 6% of GDP and the estimated undervaluation to 30–35%.
Who Will Win The War Of Neo-Mercantilists?— China's manufacturing export surplus is around 2% of world GDP, roughly twice the largest surplus Japan ever ran, while domestic demand has stalled. Unexplained negative net income of about $125bn on its $4tn in net foreign assets, versus an expected $100bn surplus, supports the argument that the renminbi is about 30% undervalued.
The Year of the Trojan Fire Horse: China’s Imbalanced Economy and Unrelenting Mercantilism— About 30% of Chinese industrial companies are unprofitable "zombies" kept alive by subsidies far larger than those elsewhere, rather than exiting amid falling industrial producer prices. Countries with large increases in manufactured imports from China also saw slowdowns in domestic manufacturing, including declining manufacturing shares of output across most of Southeast Asia.
AI Summary.A projection estimates China gains about $1.13tn in annual export value by 2030 relative to baseline while the rest of the world loses about $5.1tn, including $2.25tn for the G7. The authors attribute the net global decline to trade shifting toward Chinese goods whose export prices keep falling.
Charles Austin Jordan and Logan WrightRhodium Group
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China’s share of global exports by volume is on track to rise from 20% in 2025 to 28% by 2030. Yet China’s rising export share may depress the total value of global exports as lower-priced Chinese goods displace more expensive exports from other countries.
Do China's export share gains reduce global export values?
Core argument: The projection has China gaining roughly $1.13 trillion in annual export value by 2030 relative to the baseline scenario, while the rest of the world loses about $5.1 trillion.
The net result of our projection would suggest that China gains around $1.13 trillion in annual export value by 2030 relative to the baseline scenario, while the rest of the world loses around $5.1 trillion, with the G7 accounting for $2.25 trillion of those potential losses alone. This implies that China’s export share gains effectively destroy overall global trade values relative to the status quo due to continued declines in export prices. Regardless of which assumptions are used, China’s export share gains appear to reduce global total potential export values, because trade patterns are shifting toward Chinese goods that are declining in price.
Takeaways by Macro Roundup® AI
The projection has China gaining roughly $1.13 trillion in annual export value by 2030 relative to the baseline scenario, while the rest of the world loses about $5.1 trillion.
The G7 accounts for $2.25 trillion of the projected $5.1 trillion in export value losses borne by countries outside China.
China’s export share gains appear to reduce global total potential export values regardless of the assumptions used, because trade patterns shift toward Chinese goods whose prices continue to decline.
Related Articles:
The Year of the Trojan Fire Horse: China’s Imbalanced Economy and Unrelenting Mercantilism— About 30% of Chinese industrial companies are unprofitable "zombies" kept alive by subsidies far larger than those elsewhere, rather than exiting amid falling industrial producer prices. Countries with large increases in manufactured imports from China also saw slowdowns in domestic manufacturing, including declining manufacturing shares of output across most of Southeast Asia.
China Is Making Trade Impossible— Interviews with Chinese economists, technologists and business leaders yielded no clear answer to what products China would want to buy from the rest of the world in future, beyond commodities, luxury goods and higher education. The author argues China sees nothing it cannot eventually make better and cheaper itself, undermining trade as a two-way exchange.
Sticking with What Works: Raising GDP Forecast on China’s Manufacturing Push— Stronger Chinese growth driven by export-oriented manufacturing may not produce net positive spillovers: for every 1pp export-driven boost to China's GDP, other economies may see a 0.1–0.3pp drag, with high-tech producers such as Europe and Japan facing greater pressure. Cheaper Chinese goods continue to exert a disinflationary impulse.
AI Summary.China's export boom shows signs of cresting, with year-over-year growth leveling off at roughly 24-27% in US dollar terms, and memory chips now the biggest single swing factor for exports. Total export growth is expected to converge toward the recent trend for non-artificial-intelligence products of about 5-7%.
Andrew BatsonGavekal
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Andrew Batson argues that as the memory-chip price cycle’s impact on Chinese export growth fades, export growth in renminbi terms in 2027 “will most likely converge toward the recent trend for products outside the AI complex, which is around 5–7%.”
Is China's export boom leveling off toward slower growth?
Core argument: China’s export growth has leveled off over the past three months at roughly 24–27% year-on-year in US dollar terms and 18–20% in renminbi terms, a sign the export wave is cresting.
China’s latest extraordinary export wave is showing signs of cresting. The headline YoY growth of exports has leveled off over the past three months, staying around 24-27% in US dollar terms and 18-20% in renminbi terms. The boom in exports of products associated with investment in artificial intelligence is certainly not over, but current super-high growth rates will probably slow in coming months. Memory chips are now the biggest single swing factor for exports, and prices for some products have recently leveled off after their massive surge. While the ebb and flow of memory prices is difficult to forecast, growth of total exports in 2027 will most likely converge toward the recent trend for products outside the AI complex, which is around 5-7%. Semiconductor cycles have limited implications for China’s vast range of other exports, which are still very competitive in global markets.
Takeaways by Macro Roundup® AI
China’s export growth has leveled off over the past three months at roughly 24–27% year-on-year in US dollar terms and 18–20% in renminbi terms, a sign the export wave is cresting.
Memory chips are the biggest single swing factor for China’s exports, with prices for some products leveling off after a massive surge and super-high AI-related growth rates likely to slow in coming months.
Total Chinese export growth in 2027 will most likely converge toward the recent 5–7% trend for products outside the AI complex, which remain very competitive in global markets.
Related Articles:
China’s Share Of Global Container Exports Soars To 40%— China accounted for 40% of global container exports on a three-month rolling average, up 2.5 percentage points in nine months, according to the European Union Chamber of Commerce in China. The chamber's president argues this shows global trade imbalances are growing faster than expected.
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 Year of the Trojan Fire Horse: China’s Imbalanced Economy and Unrelenting Mercantilism— About 30% of Chinese industrial companies are unprofitable "zombies" kept alive by subsidies far larger than those elsewhere, rather than exiting amid falling industrial producer prices. Countries with large increases in manufactured imports from China also saw slowdowns in domestic manufacturing, including declining manufacturing shares of output across most of Southeast Asia.
AI Summary.China accounted for 40% of global container exports on a three-month rolling average, up 2.5 percentage points in nine months, according to the European Union Chamber of Commerce in China. The chamber's president argues this shows global trade imbalances are growing faster than expected.
Joe LeahyFinancial Times
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China’s trade surplus is on track to surpass its 2025 surplus of $1.2T. China accounted for 40% of global container exports on a rolling average over the past 3 months, a 2.5pp increase over the previous 9 months.
Are trade imbalances growing faster than expected as China's export share rises?
Core argument: China accounted for 40% of global container exports on a rolling three-month average, according to Jens Eskelund, president of the European Union Chamber of Commerce in China.
China accounted for 40% of global container exports on a rolling average over the past three months, according to the head of the European business chamber in the country, underscoring how the world’s second-largest economy is relying on trade to power economic growth. That figure also represented a 2.5 percentage point increase in just nine months, suggesting that global trade imbalances were growing more quickly than expected, said Jens Eskelund, president of the European Union Chamber of Commerce in China. “I had thought that it was perhaps only towards 2030 that China would get up close to 40%,” said Eskelund. “That of course also means that the imbalances are growing very, very considerably.”
Takeaways by Macro Roundup® AI
China accounted for 40% of global container exports on a rolling three-month average, according to Jens Eskelund, president of the European Union Chamber of Commerce in China.
China’s share of global container exports rose 2.5 percentage points in nine months, which Eskelund said suggests global trade imbalances are growing more quickly than expected.
Eskelund said he had expected China to approach a 40% share of global container exports only toward 2030, and that the imbalances are growing very considerably.
Related Articles:
The Global Economy Is Threatened Again by Trade Imbalances— The International Monetary Fund calculates that global current-account deficits plus surpluses reached 3.7% of world gross domestic product, after fluctuating between 1% and 3% until the early 2000s. The US deficit of $1.1tn is the largest single imbalance, and the Fund estimates a budget deficit of 2% of GDP raises the current-account deficit by 0.5% of GDP.
The Year of the Trojan Fire Horse: China’s Imbalanced Economy and Unrelenting Mercantilism— About 30% of Chinese industrial companies are unprofitable "zombies" kept alive by subsidies far larger than those elsewhere, rather than exiting amid falling industrial producer prices. Countries with large increases in manufactured imports from China also saw slowdowns in domestic manufacturing, including declining manufacturing shares of output across most of Southeast Asia.
Europe Has No Choice But To Intervene On Trade— Manufacturing competitiveness is argued to stem largely from lower labor costs relative to productivity, so policies that raise the household share of income weaken competitiveness while countries that suppress wages gain at trade partners' expense. The author argues Europe must therefore intervene in its external accounts to offset foreign trade intervention rather than cut wages and welfare.
AI Summary.Cumulative US borrowing from the rest of the world has reached 118% of GDP since 2000 as domestic savings fell short of investment, with growing global trade volumes boosting foreign demand for Treasuries and holding down US borrowing costs. The author argues stagnating trade and narrowing deficits shrink that funding subsidy.
Jason ThomasCarlyle
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US cumulative foreign borrowing since 2000 has reached 118% of GDP, but the US has earned more on foreign assets than foreigners earned on US liabilities. Carlyle speculates that this “exorbitant privilege” could erode if globalization unwinds.
Does shrinking global trade raise US borrowing costs?
Core argument: Cumulative US borrowing from the rest of the world has reached 118% of GDP since 2000, as domestic savings consistently fell short of domestic investment, with effective US net borrowing costs below zero until recently.
The size of the implicit US borrowing subsidy rose with global trade volumes. The growth in trade during the period of “globalization” was driven by the rise of globally-interconnected production networks, with production processes sliced into stages and distributed across borders. Businesses at each stage of the process would both invoice and get invoiced in dollars. This [plausibly] boosted demand for Treasuries to meet dollar payment obligations and backstop foreign banking systems, which placed downward pressure on Treasury yields and cheapened broader dollar funding costs.
Takeaways by Macro Roundup® AI
Cumulative US borrowing from the rest of the world has reached 118% of GDP since 2000, as domestic savings consistently fell short of domestic investment, with effective US net borrowing costs below zero until recently.
The implicit US borrowing subsidy grew with global trade volumes, as foreign demand for Treasuries to meet dollar payment obligations and backstop foreign banking systems pressed Treasury yields down and cheapened broader dollar funding costs.
Policies that scale back US external commitments, narrow the goods trade deficit, and restrict foreign adversaries’ access to dollar clearing further reduce the foreign savings available and willing to be recycled into low-yielding US assets.
Related Articles:
Global Trade Imbalances: Actual Problems, Unlikely Solutions— Foreign capital flowing into the US is shifting from government purchases of US Treasury bonds toward private foreign investment in US stocks and other riskier assets. This means a share of future gains from US productivity-enhancing investment will flow to these foreign investors, who are likely more willing to sell and exit if returns worsen.
Honey, Who Shrunk the U.S. Income Surplus?— Foreign holdings of U.S. financial assets are valued at $69tn versus $41tn of U.S. holdings abroad, a gap that has been mounting for decades. With the net liability position in interest-bearing assets at -$15tn, a 1 percentage point rise in interest rates would subtract $150bn from the U.S. net investment income balance.
