Edward Conard

Top Ten New York Times Bestselling Author

  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…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
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…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
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Wednesday, February 13, 2019

AI Summary. Debt sustainability depends on the gap between interest rates and economic growth: when the interest rate exceeds the growth rate, the debt-to-GDP ratio can accelerate, requiring large primary budget surpluses to stabilize. With debt at 300% of GDP and a 1.5-point gap, stabilization would require a surplus of 4.5% of GDP.

Paul Krugman New York Times
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Debt can’t go to infinity – it can’t exceed total wealth.

Does the gap between interest rates and growth determine debt sustainability?

Core argument: With debt at 300% of GDP and an interest rate–growth differential of 1.5%, a primary surplus of 4.5% of GDP is required to stabilize the debt ratio.

The sustainability of debt hinges on the relationship between interest rates and economic growth. If the interest rate (r) exceeds the growth rate (g), debt can snowball, with the debt-to-GDP ratio accelerating. Debt cannot surpass total wealth, and as it rises, investors demand higher returns, necessitating large primary surpluses to curb debt growth. For instance, with debt at 300% of GDP and r-g at 1.5%, a primary surplus of 4.5% of GDP is needed to stabilize debt levels. Historical precedents exist, but achieving such surpluses today poses significant political challenges, potentially leading to financial repression or restructuring.

Takeaways by Macro Roundup® AI

  1. With debt at 300% of GDP and an interest rate–growth differential of 1.5%, a primary surplus of 4.5% of GDP is required to stabilize the debt ratio.
  2. Debt sustainability hinges on whether the interest rate exceeds the growth rate, since an interest rate above the growth rate can make debt snowball, with the debt-to-GDP ratio accelerating.
  3. Debt cannot surpass total wealth, and as it rises investors demand higher returns, requiring large primary surpluses that, though historically precedented, pose political difficulty and may give way to financial repression or restructuring.

Potential useful Krugman quote on incentives and debt growth

"...What about debt? A lot depends on whether the interest rate is higher or lower than the economy’s sustainable growth rate. If rg you do have the possibility of a debt snowball: the higher the ratio of debt to GDP the faster, other things equal, that ratio will grow. And debt can’t go to infinity - it can’t exceed total wealth, and in fact as debt gets ever higher people will demand ever-increasing returns to hold it. So at some point the government would be forced to run large enough primary (non-interest) surpluses to limit debt growth.........assumes that the government always can and will run these surpluses as needed. He dismisses any concern about the incentive effects of high tax rates; certainly Very Serious People grossly exaggerate these effects, but they’re not completely imaginary.And he says nothing at all about the political difficulty of achieving the required surpluses, yet such difficulties seem likely to be central if debt gets to very high levels. A numerical example may help make the point. Imagine that one way or another we get up to debt equal to 300 percent of GDP, and that r-g =.015 - the interest rate is 1.5 percentage points above the growth rate. Then stabilizing the ratio of debt to GDP would require a primary surplus equal to 4.5 percent of GDP. That’s not impossible: Britain ran surpluses that big for several decades after Waterloo. But it’s a lot to ask of a modern polity. Are we going to slash Medicare and Social Security? Are we going to impose a value-added tax, not to finance new programs, but simply to service the debt? It’s possible, but you do have to wonder whether the temptation to engage in some form of financial repression/debt restructuring/inflation would prevail. And more to the point, investors would wonder about that, pushing r-g even higher...."

Paul Krugman, "What’s Wrong With Functional Finance? (Wonkish),"New York Times, February 12, 2019, https://www.nytimes.com/2019/02/12/opinion/whats-wrong-with-functional-finance-wonkish.html

Monday, February 18, 2019

AI Summary. The stock of negative-yielding government bonds has risen 21% to $13tn, reflecting waning economic confidence in Europe and Japan. Investors are favoring five-year German debt at yields of -0.4% while avoiding Italian securities yielding 1.8%, and negative yields intended to spur spending may instead encourage saving.

Daniel Kruger Wall Street Journal
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Negative-yielding government bonds have surged 21% since October to $13tn, reflecting waning economic confidence in Europe and Japan. @TheRealDFK

Does the growing stock of negative-yielding bonds signal weakening economic confidence?

Core argument: The stock of negative-yielding government bonds has risen 21% since October to $13tn, reversing a prior decline and reflecting waning economic confidence in Europe and Japan.

The stock of negative-yielding government bonds has surged 21% since October, reaching $13tn, reflecting waning economic confidence in Europe and Japan. This increase reverses a previous decline and highlights uncertainty over growth prospects in developed economies. The European Central Bank's [ECB] cessation of its bond purchase program in December has exacerbated slowdown concerns, with Germany, France, and Italy at odds over fiscal stimulus. Investors are opting for five-year German debt, pushing yields to -0.4%, while avoiding Italian securities yielding 1.8%. The ECB is considering reviving bank lending programs to boost the economy, but internal EU tensions and populist movements complicate policy responses. Negative yields, initially intended to spur consumption and investment, may instead lead to increased savings and reduced spending, potentially deepening the economic slowdown.

Takeaways by Macro Roundup® AI

  1. The stock of negative-yielding government bonds has risen 21% since October to $13tn, reversing a prior decline and reflecting waning economic confidence in Europe and Japan.
  2. Investors are favoring five-year German debt, pushing its yield to -0.4%, while avoiding Italian securities yielding 1.8%, after the European Central Bank ended its bond purchase program in December.
  3. Negative yields, intended to spur consumption and investment, may instead lead to increased savings and reduced spending, potentially deepening the slowdown, while Germany, France, and Italy remain at odds over fiscal stimulus.

Daniel Kruger, "Negative Yields Mount Along With Europe’s Problems,"Wall Street Journal, February 18, 2019, https://www.wsj.com/articles/negative-yields-mount-along-with-europes-problems-11550491201

Negative Yields Mount Along With Europe’s Problems

Negative Yields Mount Along With Europes Problems: Extended Excerpt Image 1


Investors around the globe are effectively paying governments to hold more than $11 trillion of their bonds, a fresh sign of ebbing economic confidence in Europe and Japan.

Negative-yielding government bonds outstanding through mid-January have risen 21% since October, reversing a steady decline that took place over the course of 2017 and much of last year, according to data from Bank of America Merrill Lynch. While the stock of negative-yielding debt still remains below its 2016 high, the proliferation of these bonds—which guarantee that a purchaser at issuance will receive less in repayment and periodic interest than they paid—underscores the uncertainty over the growth prospects in much of the developed world.

“Europe is an absolute quagmire,” said Matt Freund, co-chief investment officer at Calamos Investments. “There are significant headwinds that we’ve been talking about for a long time—now they’re showing up in the numbers.”

Negative Yields Mount Along With Europes Problems: Extended Excerpt Image 2


Negative yields have become increasingly common as growth in the region continues to slow. The European Central Bank ended its bond purchase program in December, potentially adding to economic slowdown concerns, and Germany, France and Italy disagree over added fiscal stimulus.

Investors are buying five-year German debt, sending yields down to about -0.4% from 0.03% in April, while in many cases avoiding similar-maturity Italian securities, which yield about 1.8%, versus roughly 0.6% during the same period.

Negative-yield debt hit a peak of roughly $13 trillion in 2016, according to Bank of America. Until recently it had been declining as the eurozone economy accelerated amid growing exports. The amount of negative-yielding bonds in the region first began growing substantially in 2014.

The ECB is examining reviving a program of lending to banks that analysts say could give a small boost to the economy without suggesting a turn away from the goal of normalizing policy. ECB President Mario Draghi’s term expires in October, leaving officials handcuffed by his departure, said Laura Sarlo, a sovereign-debt analyst at Loomis Sayles & Co.

At the same time, tensions are rising within Germany and France as populist movements have undermined the power of governing coalitions. That same populism has also set countries against each other, as Italy has sought EU permission to increase government spending to stimulate growth while Germany and France have tried to block that move.

The European Central Bank is examining reviving a program of lending to banks that analysts say could give a small boost to the eurozone.

“Europe cannot figure it out,” said Simona Mocuta, an economist at State Street Global Advisors. By deciding to restrict growth measures to central bank rate cuts, “you have this effect on rates, but it’s not giving you the real-economy response.“

The ECB first lowered its deposit facility rate below zero in June 2014, and has lowered it three times since, most recently to -0.4% in March 2016. The policy was intended to dissuade businesses and consumers from keeping money idle in the bank, and instead encourage more consumption and investment.

Many investors buy the debt simply because they have to. Insurance companies need bonds to ensure they can align maturing assets with expected liabilities. Many mutual funds buy the debt because they follow an index that includes the securities. Holding bonds with negative yields can also be a more palatable option for institutional investors who face a surcharge of 0.1% on cash for simply keeping deposits in a bank.

While investors who buy at current prices stand to lose money if they hold negative-yield bonds to maturity, they can be traded profitably, said John Taylor, a London-based bond manager at AllianceBernstein who has purchased five-year sovereign debt from Austria and Finland with negative yields.

Low returns on bond portfolios send investors a message that their retirement savings aren’t growing enough to meet their needs, causing them to save more and spend less, Mr. Taylor said. That is important because it suggests the policy isn’t working as intended and could lead to a deeper slowdown. The longer negative rates are in place, “the more it changes people’s behaviors,” he said.