Edward Conard

Top Ten New York Times Bestselling Author

  • “Unintended Consequences provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.” - Nouriel Roubini, New York University; Chairman, Roubini Global Economics
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…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
  • “…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
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Monday, February 22, 2016

AI Summary. The authors estimate global long-term real interest rates fell about 450 basis points over three decades, attributing roughly 400 of those to demographics, higher within-country inequality, greater emerging-market government saving, cheaper capital goods, lower public investment, a wider gap between returns on capital and risk-free rates, and weaker expected trend growth. They argue central banks are largely rate takers.

Lukasz Rachel and Thomas Smith Bank of England
Date Posted:
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Global long-term real interest rates have decreased by 450bps over 30 years, driven by demographic forces, higher inequality, and reduced public investment. Central banks are more rate takers than makers.

What explains the decades-long decline in global real interest rates?

Core argument: Global long-term real interest rates fell roughly 450 bps over the past 30 years, with lower trend growth expectations (100 bps), demographics (90 bps), within-country inequality (45 bps), and post-Asian-crisis emerging market government saving (25 bps) among the drivers.

Over the past 30 years, global long-term real interest rates have decreased by about 450 basis points, driven largely by demographic forces (90bps), higher inequality within countries (45bps), and a shift towards higher saving by emerging market governments post-Asian crisis (25bps). Despite stable global saving and investment ratios, desired investment levels have fallen due to a decline in the relative price of capital goods (50bps) and reduced public investment (20bps). The spread between the rate of return on capital and risk-free rates has widened, further lowering desired investment and risk-free rates by 70bps. These factors, combined with lower expectations for trend growth (100bps), account for 400bps of the decline, indicating that central banks are more rate takers than makers, as looser monetary policy is a consequence, not a cause, of falling long-term rates.

Takeaways by Macro Roundup® AI

  1. Global long-term real interest rates fell roughly 450 bps over the past 30 years, with lower trend growth expectations (100 bps), demographics (90 bps), within-country inequality (45 bps), and post-Asian-crisis emerging market government saving (25 bps) among the drivers.
  2. Desired investment has fallen despite stable global saving and investment ratios, with a declining relative price of capital goods accounting for 50 bps and reduced public investment 20 bps of the drop in real rates.
  3. A widening spread between the return on capital and risk-free rates lowered desired investment and risk-free rates by a further 70 bps, and the identified factors together account for 400 bps of the decline, indicating that central banks are more rate takers than rate makers.

BofE working paper that will be presented @ Brookings in March, evidence central banks have limited control over long term interest rates

"....Long-term real interest rates across the world have fallen by about 450 basis points over the past 30 years. The co-movement in rates across both advanced and emerging economies suggests a common driver: the global neutral real rate may have fallen. In this paper we attempt to identify which secular trends could have driven such a fall. Although there is huge uncertainty, under plausible assumptionswe think we can account for around 400 basis points of the 450 basis points fall....Our analysis suggests the desired savings schedule has shifted out materially due todemographic forces (90bpsof the fall in real rates),higher inequality within countries (45bps)and a preference shift towards higher saving by emerging market governments following the Asian crisis (25bps).If this had been the whole story, we would have expected to see a steady rise in actual saving rates globally. But global saving and investment ratios have been remarkably stable over the past thirty years suggesting desired investment levels must have also fallen.We pin this decline in desired investment on a fall in the relative price of capital goods (accounting for 50bps of the fall in real rates) and a preference shift away from public investment projects (20bps). Also, we note that the rate of return on capital has not fallen by as much as risk free rates. The rising spread between these two rates has further reduced desired investment and risk free rates down (by 70bps). Together these effects can account for 300bps of the fall in global real rates....When combined, lower expectations for trend growth and shifts in desired savings and investment can account for about 400bps of the 450bps decline in the global long-term neutral rate since the 1980s...100bps explained by the deterioration in the outlook for trend growth....ever looser monetary policy is not the cause, but the consequence of the fall in long -term rates. .."

Rachel, Lukasz and Thomas Smith, Secular drivers of the global real interest rate, Bank of England, December 2015, http://www.bankofengland.co.uk/research/Documents/workingpapers/2015/swp571.pdf
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Wednesday, February 24, 2016

AI Summary. The federal financial safety net of government guarantees and insurance programs is estimated to cover $25tn in financial assets, a substantial share of the U.S. financial system. Its coverage extends beyond traditional banks to non-bank financial entities, raising questions about the balance between risk mitigation and market discipline.

John Walter Economic Quarterly
Date Posted:
Is Database:
Database

The federal financial safety net has expanded significantly, covering $25tn in financial assets, a substantial portion of the U.S. financial system.

How large has the federal financial safety net grown?

Core argument: The federal financial safety net is estimated to cover $25tn in financial assets, a substantial portion of the U.S. financial system.

The federal financial safety net has expanded significantly, with its size estimated to cover $25tn in financial assets, representing a substantial portion of the U.S. financial system. This expansion is driven by government guarantees and insurance programs, which have grown to encompass a wide range of financial institutions and products. The safety net's growth reflects increased federal intervention aimed at stabilizing the economy and preventing systemic risks. As of 2013, the safety net's coverage includes not only traditional banking institutions but also non-bank financial entities, highlighting the government's broader role in safeguarding financial stability. This expansion raises important considerations for policymakers regarding the balance between risk mitigation and market discipline, as well as the potential fiscal implications of such extensive guarantees.

Takeaways by Macro Roundup® AI

  1. The federal financial safety net is estimated to cover $25tn in financial assets, a substantial portion of the U.S. financial system.
  2. Government guarantees and insurance programs have expanded the safety net beyond traditional banking institutions to non-bank financial entities and a wide range of financial products.
  3. The scale of federal guarantees raises considerations for policymakers about the balance between risk mitigation and market discipline, along with the potential fiscal implications of such extensive coverage.

Malysheva, Nadezhda and John Walter, "How Large Has the Federal Financial Safety Net Become? (Revised February 2013)"Economic Quarterly, 2010. Available at:https://www.richmondfed.org/-/media/richmondfedorg/publications/research/working_papers/2010/pdf/wp10-03r.pdf