Edward Conard

Top Ten New York Times Bestselling Author

  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…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 comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…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
  • “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 must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…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 must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “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
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Tuesday, March 14, 2023

AI Summary. U.S. consumer prices rose 6% year-over-year in February, down from 6.4% the prior month, according to the Labor Department. Excluding food and energy, prices rose 5.5% year-over-year versus 5.6% the prior month, though the monthly core increase picked up to 0.5% from 0.4%.

Gabriel Rubin Wall Street Journal
Date Posted:

CPI rose at the slowest rate since September 2021 in February increasing 6% y/y a decline from 6.4% in December. @WSJecon

Is inflation slowing even as monthly core price gains accelerate?

Core argument: U.S. consumer prices rose 6% in February from a year earlier, down from 6.4% in January and the slowest pace since September 2021, the Labor Department said.

The consumer-price index, a closely watched inflation gauge, rose 6% in February from a year earlier, versus a 6.4% gain the prior month, the Labor Department said Tuesday, the slowest pace since September 2021. When excluding volatile food and energy prices, consumer prices advanced 5.5% from a year earlier in February compared with 5.6% in January. Economists view so-called core prices as a better indicator of future inflation. Core prices increased by 0.5% in February compared with a 0.4% monthly gain in January.

Takeaways by Macro Roundup® AI

  1. U.S. consumer prices rose 6% in February from a year earlier, down from 6.4% in January and the slowest pace since September 2021, the Labor Department said.
  2. Core consumer prices, which exclude food and energy and which economists view as a better indicator of future inflation, rose 5.5% year over year in February versus 5.6% in January.
  3. Core prices increased 0.5% in February from the prior month, up from a 0.4% monthly gain in January.

AI Summary. US consumer price data show goods prices flat while core services prices rise strongly, with every measure of consumer price inflation down from its peak but still far too high and showing no sign of falling. The decline is attributed partly to genuinely transitory inflation and partly to Federal Reserve rate hikes that kept long-run inflation expectations anchored.

Jason Furman @jasonfurman
Date Posted:

.@jasonfurman notes that by every measure CPI inflation has peaked but CPI is “still way too high and no sign of falling…But for the banking turmoil this would have been a lock for a 50bp increase at the next mtg.”

Is consumer price inflation down from its peak but still too high?

Core argument: Jason Furman notes goods prices are flat while core services prices are rising strongly, leaving every measure of CPI inflation down from its summer peak but still way too high with no sign of falling.

The broad story remains the same: goods prices are flat, but core services are rising strongly. (Overall CPI) has come down a lot from the scary times. Economists focus less on it because it is a poor indicator of the "signal" of what future inflation will look like. Every measure of CPI inflation is down from its peak over the summer, partly because some of that inflation was truly transitory and partly because the Fed's rate hikes has kept the economy from getting much hotter and kept long-run inflation expectations anchored. That is good. But, still way too high and no sign of falling. But for the banking turmoil this would have been a lock for a 50bp increase at the next mtg. I don't recommend or expect that to happen. But I would be surprised & disappointed if the Fed pauses after 2 hot CPI reports in a row.

Takeaways by Macro Roundup® AI

  1. Jason Furman notes goods prices are flat while core services prices are rising strongly, leaving every measure of CPI inflation down from its summer peak but still way too high with no sign of falling.
  2. Furman attributes the decline in CPI inflation partly to inflation that was truly transitory and partly to the Fed's rate hikes keeping the economy from getting much hotter and long-run inflation expectations anchored.
  3. Absent the banking turmoil, Furman says the report would have been a lock for a 50bp increase at the next meeting; he neither recommends nor expects that, but would be surprised and disappointed by a pause after two hot CPI reports.

AI Summary. Uninsured domestic deposits at U.S. federally insured banks totaled $7.7tn against $10tn of insured deposits, with uninsured balances down about 9% ($780bn) while insured deposits keep rising. Because insured deposits closely match banks' outstanding loans to the real economy, the author argues banks could still lend even if all uninsured deposits shifted to money funds.

Matt Klein The Overshoot
Date Posted:

.@M_C_Klein questions the policy of unlimited deposit insurance, and suggests that the public would be better off “If instead we maintain the $250,000 deposit insurance limit and let uninsured deposits migrate to money-market funds.”

Could banks still lend to the real economy without uninsured deposits?

Core argument: Uninsured domestic deposits in the FDIC-insured banking system totaled $7.7 trillion at the end of 2022 versus $10 trillion in insured deposits, with uninsured deposits down about 9% ($780 billion) since the end of 2021 while insured deposits continued to rise.

For the FDIC-insured banking system as a whole, uninsured domestic deposits were worth $7.7 trillion at the end of 2022, while insured deposits were worth $10 trillion. Uninsured deposits have been leaving the banks since the end of 2021, down about 9% ($780 billion) whereas insured deposits continue to rise.  As it happens, insured deposits in the banking system correspond almost perfectly to banks’ outstanding loans to the real economy. If, hypothetically, all of the uninsured deposits in the U.S. left the banks and went into money funds, the banks could still do the valuable work that they ostensibly do. Moreover, the holders of those uninsured deposits would end up with safer and higher-yielding assets that do not require implicit and explicit transfers to bankers and bank shareholders. The transition could be disruptive if it happened all at once, but there is no inherent reason to fear a world where the banking sector has shrunk substantially.

Takeaways by Macro Roundup® AI

  1. Uninsured domestic deposits in the FDIC-insured banking system totaled $7.7 trillion at the end of 2022 versus $10 trillion in insured deposits, with uninsured deposits down about 9% ($780 billion) since the end of 2021 while insured deposits continued to rise.
  2. Insured deposits in the U.S. banking system correspond almost perfectly to banks' outstanding loans to the real economy, so banks could still do the work they ostensibly do even if all uninsured deposits moved into money funds.
  3. Holders of uninsured deposits that shifted into money funds would end up with safer and higher-yielding assets that do not require implicit and explicit transfers to bankers and bank shareholders, though the transition could be disruptive if it happened all at once.

AI Summary. The US approved ConocoPhillips' roughly $7bn Willow oil-drilling project in Alaska's National Petroleum Reserve, over objections from environmentalists and many Democrats. The company expects the project to produce about 180,000 barrels of oil a day at peak, equivalent to about 40% of Alaska's current crude production.

Benoît Morenne Wall Street Journal
Date Posted:

The Biden administration has given a green light to an Alaskan oil drilling project that will eventually produce 180,000bpd which is about 40% of current Alaskan output. @WSJ

The Biden administration has given a green light to an Alaskan oil drilling project that will eventually produce 180,000bpd...

Will a new Arctic drilling project boost Alaska's oil production?

Core argument: ConocoPhillips expects its roughly $7 billion Willow project in Alaska's National Petroleum Reserve to produce about 180,000 barrels of oil a day at peak, equivalent to about 40% of Alaska's current crude production.

The Biden administration approved the massive Willow oil-drilling project in the Alaskan Arctic over the objections of environmentalists and many Democrats who wanted the project scuttled. The green light means Houston-based ConocoPhillips can start construction on its roughly $7 billion project in Alaska’s National Petroleum Reserve, which the company expects will produce about 180,000 barrels of oil a day at its peak—equivalent to about 40% of Alaska’s current crude production.

Takeaways by Macro Roundup® AI

  1. ConocoPhillips expects its roughly $7 billion Willow project in Alaska's National Petroleum Reserve to produce about 180,000 barrels of oil a day at peak, equivalent to about 40% of Alaska's current crude production.
  2. The Biden administration approved the Willow oil-drilling project in the Alaskan Arctic over the objections of environmentalists and many Democrats who wanted the project scuttled.
  3. The approval allows Houston-based ConocoPhillips to begin construction on the Willow project in Alaska's National Petroleum Reserve.

AI Summary. The US, UK and Australia have unveiled a decades-long plan to supply Australia with nuclear-powered submarines, with the UK and Australia co-building a new design and each planning at least eight boats. Australia will also invest in US and UK shipyards to boost strained manufacturing capacity.

Demetri Sevastopulo and Jasmine Cameron-Chileshe Financial Times
Date Posted:

The US, Australia and the UK formally announced the Aukus agreement; in the short term American submarines will start operating out of Perth in 2027, with new submarines coming on line in the early 2040s. @FT

The US, Australia and the UK formally announced the Aukus agreement; in the short term American submarines will start...

How will allies supply Australia with nuclear-powered submarines?

Core argument: The UK and Australia each plan to build at least eight multibillion-dollar nuclear-powered submarines under the three-stage Aukus plan, with Australia and Britain co-building a new submarine.

The US, UK and Australia have unveiled a decades-long project to supply Canberra with nuclear-powered submarines, entering a historic partnership that binds the allies more tightly as they counter China in the Indo-Pacific. Under the three-stage plan, Australia and Britain will co-build a new submarine. The UK and Australia each plan to build at least eight of the multibillion-dollar submarines. The first Australian boats will not enter service until the early 2040s, with the full fleets being built over the following two decades. Australia will also invest in the US and UK’s defense industrial base, an unprecedented move aimed at boosting manufacturing capacity at strained shipyards.

Takeaways by Macro Roundup® AI

  1. The UK and Australia each plan to build at least eight multibillion-dollar nuclear-powered submarines under the three-stage Aukus plan, with Australia and Britain co-building a new submarine.
  2. The first Australian nuclear-powered submarines will not enter service until the early 2040s, with the full fleets built over the following two decades.
  3. Australia will invest in the US and UK defense industrial base, an unprecedented move aimed at boosting manufacturing capacity at strained shipyards.

AI Summary. Using satellite observations of terrestrial water storage, the authors identified 1,056 extreme drought and wet events and found their total intensity was strongly correlated with global mean temperature, more so than with El Niño Southern Oscillation or other climate indicators. They suggest continued warming will cause more frequent, severe, longer and/or larger droughts and wet extremes.

Matthew Rodell and Bailing Li Nature Water
Date Posted:

Both extreme droughts and periods of increased rainfall have increased in frequency over the 2002-2021 period. @Nature

Both extreme droughts and periods of increased rainfall have increased in frequency over the 2002-2021 period. @Nature

How closely does global temperature track the intensity of hydroclimatic extremes?

Core argument: GRACE and GRACE-FO satellite observations of terrestrial water storage delineated 1,056 extreme droughts and pluvials during 2002–2021, with an ongoing pluvial that began in 2019 and engulfed central Africa dwarfing all other events.

Distortion of the water cycle, particularly of its extremes (droughts and pluvials), will be among the most conspicuous consequences of climate change. Here we applied a novel approach with terrestrial water storage observations from the GRACE and GRACE-FO satellites to delineate and characterize 1,056 extreme events during 2002–2021. Dwarfing all other events was an ongoing pluvial that began in 2019 and engulfed central Africa. Total intensity of extreme events was strongly correlated with global mean temperature, more so than with the El Niño Southern Oscillation or other climate indicators, suggesting that continued warming of the planet will cause more frequent, more severe, longer and/or larger droughts and pluvials. In three regions, including a vast swath extending from southern Europe to south-western China, the ratio of wet to dry extreme events decreased substantially over the study period, while the opposite was true in two regions, including sub-Saharan Africa from 5° N to 20° N.

Takeaways by Macro Roundup® AI

  1. GRACE and GRACE-FO satellite observations of terrestrial water storage delineated 1,056 extreme droughts and pluvials during 2002–2021, with an ongoing pluvial that began in 2019 and engulfed central Africa dwarfing all other events.
  2. Total intensity of extreme events correlated more strongly with global mean temperature than with the El Niño Southern Oscillation or other climate indicators, suggesting continued warming will cause more frequent, more severe, longer and/or larger droughts and pluvials.
  3. The ratio of wet to dry extreme events decreased substantially in three regions, including a vast swath from southern Europe to south-western China, while increasing in two regions, including sub-Saharan Africa from 5° N to 20° N.

AI Summary. U.S. consumer prices rose 6% year-over-year, down from 6.4% the prior month, while core prices excluding food and energy rose 5.5% versus 5.6%, with monthly core prices up 0.5% led by a 0.8% rise in shelter costs. The Federal Reserve faces balancing interest rate increases against banking sector instability.

Gabriel Rubin Wall Street Journal
Date Posted:
Is Database:
Database

U.S. inflation cooled in February with CPI rising 6% YoY, down from 6.4% in January. Core prices increased 5.5% YoY, driven by a 0.8% increase in shelter costs.

Is inflation cooling even as banking instability complicates rate decisions?

Core argument: U.S. CPI rose 6% year-over-year in February 2023, down from 6.4% in January and the slowest pace since September 2021, though still above the pre-pandemic rate of just over 2%.

In February 2023, U.S. inflation showed signs of cooling, with the Consumer Price Index (CPI) rising 6% year-over-year, down from 6.4% in January, marking the slowest pace since September 2021. Core prices, excluding food and energy, increased by 5.5% compared to 5.6% in January, indicating persistent price pressures. Monthly data revealed a 0.5% rise in core prices, the largest in five months, driven by a 0.8% increase in shelter costs. Despite easing inflation, the Federal Reserve faces challenges balancing interest rate hikes to control inflation while addressing banking sector instability following the collapse of Silicon Valley Bank. Investors anticipate a 25 basis point rate increase at the Fed's upcoming meeting, with a focus on maintaining financial stability. The Fed's actions are crucial as inflation remains above the pre-pandemic rate of just over 2%, impacting consumer behavior and economic dynamics.

Takeaways by Macro Roundup® AI

  1. U.S. CPI rose 6% year-over-year in February 2023, down from 6.4% in January and the slowest pace since September 2021, though still above the pre-pandemic rate of just over 2%.
  2. Core prices excluding food and energy rose 5.5% year-over-year, versus 5.6% in January, while monthly core prices increased 0.5%, the largest gain in five months, driven by a 0.8% rise in shelter costs.
  3. Investors anticipate a 25 basis point rate increase at the Federal Reserve's upcoming meeting as the Fed balances controlling inflation against banking sector instability following the collapse of Silicon Valley Bank.

CPI rose at the slowest rate since September 2021 in February increasing 6% y/y a decline from 6.4% in December.

“…The consumer-price index, a closely watched inflation gauge, rose 6% in February from a year earlier, versus a 6.4% gain the prior month, the Labor Department said Tuesday, the slowest pace since September 2021. When excluding volatile food and energy prices, consumer prices advanced 5.5% from a year earlier in February compared with 5.6% in January. Economists view so-called core prices as a better indicator of future inflation. Core prices increased by 0.5% in February compared with a 0.4% monthly gain in January…”

Gabriel Rubin and Nick Timiraos, "U.S. Inflation Cooled in February as Fed Confronts Bank Failures,"Wall Street Journal, March 14, 2023, https://www.wsj.com/articles/inflation-report-arrives-as-fed-confronts-bank-failures-5f0e10ae

U.S. Inflation Cooled in February as Fed Confronts Bank Failures

Inflation eased in February but remained stubbornly high, presenting a challenge for the Federal Reserve as it confronts how to slow the economy with higher interest rates at the same time it moves to stem banking problems.

The consumer-price index, a closely watched inflation gauge, rose 6% in February from a year earlier, down from a 6.4% gain the prior month, the Labor Department said. It was the smallest increase since September 2021. When excluding volatile food and energy costs, prices advanced a slightly slower 5.5%. Economists view so-called core prices as a better indicator of future inflation.

Monthly data showed price pressures persisted in many corners of the economy. Core prices increased by a seasonally adjusted 0.5% in February, the largest monthly gain in five months. Shelter costs rose 0.8% over the month, matching the largest monthly gain since the 1980s.

Economists said Tuesday’s consumer-price index report underscored the urgency of the Fed’s inflation fight. Several said they thought it made officials more likely to raise rates next week by a quarter percentage point as long as the banking sector didn’t appear to come under additional stress ahead of its rate decision.

The Fed’s March 21-22 meeting could feature an intense debate over the benefits of holding rates unchanged to provide more time to see if the banking crisis eases versus continuing to raise rates to avoid creating new confusion over the central bank’s approach to controlling inflation.

U.S. Inflation Cooled in February as Fed Confronts Bank Failures: Extended Excerpt Image 1


Prices for airfare and lodging also rose in February. Gasoline and food prices both increased last month, but at a slower pace than in January. Consumers paid less last month to heat their homes, and prices for medical services and used cars also fell.

Elevated inflation, combined with a strong labor market and solid consumer spending, appeared to put the Fed in a position to consider a larger interest-rate increase at its next meeting. But the collapse of Silicon Valley Bank and other financial institutions could lead the central bank to move more cautiously to assess the state of the financial system.

Investors in interest-rate futures markets on Tuesday placed a roughly 85% probability of a quarter-point increase at next week’s meeting, compared with a 15% chance of no increase, according to CME Group.

“The Fed still has more work to do” to bring inflation back to near its 2% target, said Michael Gapen, chief U.S. economist for Bank of America. “If the Fed is successful at corralling the recent market volatility and ringfencing the traditional banking sector, then it should be able to continue its gradual pace of rate hikes until monetary policy is sufficiently restrictive.”

U.S. Inflation Cooled in February as Fed Confronts Bank Failures: Extended Excerpt Image 2


Other economists said February consumer inflation figures were more likely to extend the Fed’s rate increase cycle later into the summer, with officials foregoing an increase next week.

“We think Fed officials will be reluctant to take the risk that monetary policy actions could work at cross-purposes with financial stability policy by worsening banks’ balance sheet problems and undermining confidence,” said Jan Hatzius, chief economist at Goldman Sachs.

The bank expects the Fed to raise interest rates to around 5.4% this year, resuming rate increases after holding steady next week.

Fed officials slowed their pace of rate increases last month when they increased their benchmark rate by a quarter-percentage-point to a range between 4.5% and 4.75%. Sharply higher interest rates exacerbated problematic risk-taking decisions at the $110 billion Signature Bank and $209 billion Silicon Valley Bank, which were taken over by government regulators.

U.S. Inflation Cooled in February as Fed Confronts Bank Failures: Extended Excerpt Image 3


Hot core inflation—prices rose 5.2% over the last three months at an annualized rate—has run well above economists’ expectations and further highlights the tension between the Fed’s financial-stability and price-stability goals. That could force markets “to reconsider what we see as an ill-founded view that the SVB crisis means the Fed is likely done raising rates,” said Krishna Guha, vice chairman of Evercore ISI.

Before the bank failures, the broader economy showed surprising strength to start the year. Spending at retailers and restaurants rose in January at the fastest monthly rate in nearly two years, and employers added more than 800,000 jobs during the first two months of the year.

At First Watch Restaurants, Inc., a chain of more than 400 breakfast and lunch cafes, there has been little sign of a consumer pullback. While labor and related costs rose by 11.4% in 2022, the company raised menu prices by an average of 7.8% during the year, after being able to keep prices flat during 2021. Annual supplier contracts have helped keep the chain’s food costs predictable, while same-restaurant sales rose 14.5% compared with 2021.

To capitalize on eager customers, the company is working to keep wait times low during peak periods such as weekend mornings. It is experimenting with different kitchen configurations and specialized roles such as dedicated beverage runners to free up servers.

“We have unfulfilled demand that’s right at our front door,” First Watch Chief Executive Chris Tomasso said. “We’re investing in improvement and processes and equipment and things such as that to capture that demand.”

Still, some signs of cooling have emerged. Economists estimate that retail spending declined in February. The Commerce Department will release new consumer data on Wednesday.

Wage growth moderated last month, suggesting that tight labor markets aren’t leading to rapid increases in workers’ paychecks. And job openings, while still well exceeding the number of unemployed seeking work, fell in January, the Labor Department said. Private-sector job postings estimates show continued cooling demand for labor.

While consumer inflation is down from its recent peak last June, it is still well elevated from a prepandemic rate of just over 2%. High prices have caused some consumers to pull back and seek cheaper alternatives.

Ruby Koch-Fienberg and Ben Surface, of Dover, N.Y., shopped around for a contractor who would replace a malfunctioning wood-burning stove and demolish its damaged chimney. They were told that there was little chance the work could be completed this winter, given the backlogs of work, and the job could cost thousands of dollars.

They are now contemplating doing the chimney demolition themselves.

“We could save up to $8,000 and have a really fun weekend,” Ms. Koch-Fienberg said.

Wednesday, March 15, 2023

AI Summary. A paper argues that a large rise in the volatility of costs can free a significant share of goods and services prices from stickiness, nearly collapsing price rigidity even if average costs are unchanged. Its empirical analysis finds a large increase in cost volatility around a burst of inflation, followed by a reversal.

Robert Hall National Bureau of Economic Research
Date Posted:
Is Database:
Database

Robert Hall argues that a substantial rise in the volatility of costs can free the prices of a significant fraction of goods and services prices from the grip of New Keynesian “zone of inaction.” @NBERpubs

Does higher cost volatility break price stickiness and unleash inflation?

Core argument: The paper argues that a rise in the volatility of costs, even with the average level of cost unchanged, can free a significant fraction of prices from New Keynesian stickiness and trigger a near collapse of price stickiness.

The basic idea of this paper is that a substantial rise in the volatility of costs and other determinants of prices can completely free the prices of a significant fraction of goods and services from the grip of New Keynesian stickiness, when the volatility of cost rises. There is a critical configuration of the model such that at lower values of the of the cost volatility, the price is a constant over time—resetting never occurs, except possibly to bring the price into the zone of indifference at the beginning of time.  The surprising implication of this investigation is that an increase in the volatility of cost that leaves the average level of cost unchanged can trigger a near collapse of price stickiness.  The next section of the paper presents an empirical analysis demonstrating a large increase in cost volatility around the time of a burst of inflation during and after the pandemic, followed by a reversal.

Takeaways by Macro Roundup® AI

  1. The paper argues that a rise in the volatility of costs, even with the average level of cost unchanged, can free a significant fraction of prices from New Keynesian stickiness and trigger a near collapse of price stickiness.
  2. In the model, below a critical level of cost volatility, prices remain constant over time and resetting never occurs, except possibly an initial reset bringing the price into the zone of indifference.
  3. The paper's empirical analysis documents a large increase in cost volatility around the time of the burst of inflation during and after the pandemic, followed by a reversal.

AI Summary. Liquidity in the US Treasury market has deteriorated as a banking crisis clouds the outlook for Federal Reserve monetary policy. Bid-ask spreads on 2-, 10- and 30-year US government bonds jumped to their highest level in at least six months, and the 10-year yield swung in a 34-basis-point range, the widest since the onset of the pandemic.

Masaki Kondo Bloomberg
Date Posted:

Bid-ask spreads for treasuries are widening with the 10-year yield moving 34bps Monday, the largest gap since the start of the pandemic. @markets

Does banking sector turmoil worsen liquidity in the Treasury market?

Core argument: Bid-ask spreads on 2-, 10- and 30-year US Treasuries jumped to their highest level in at least six months on Tuesday, according to data compiled by Bloomberg.

Liquidity in the world’s largest bond market is evaporating as the US banking crisis muddies the outlook for the Federal Reserve’s monetary policy. Bid-ask spreads on two-, 10- and 30-year US government bonds jumped to the highest level in at least six months on Tuesday, according to data compiled by Bloomberg. The 10-year yield swung in a 34-basis point range on Monday, the biggest gap since the onset of the pandemic in 2020.

Takeaways by Macro Roundup® AI

  1. Bid-ask spreads on 2-, 10- and 30-year US Treasuries jumped to their highest level in at least six months on Tuesday, according to data compiled by Bloomberg.
  2. The 10-year Treasury yield swung in a 34-basis-point range on Monday, the biggest gap since the onset of the pandemic in 2020.
  3. Liquidity in the US Treasury market is evaporating as the US banking crisis muddies the outlook for Federal Reserve monetary policy.

AI Summary. The authors estimate the market value of U.S. banking system assets is $2tn below book value, with marked-to-market assets down 10% on average and 20% at the worst-affected 5% of banks. They argue uninsured debt relative to assets determines which banks risk insolvency, since uninsured depositors can lose money and have incentives to run.

Erica Xuewei Jiang, Gregor Matvos, et al Social Science Research Network
Date Posted:

Mark-to-market losses in the banking system are concentrated in large banks but not the global systemically important banks. @EXjiang

How much have rising rates cut bank asset values and solvency?

Core argument: The U.S. banking system's market value of assets is $2 trillion lower than book value when loan portfolios held to maturity are accounted for, with marked-to-market assets down an average of 10% across all banks.

The U.S. banking system’s market value of assets is $2 trillion lower than suggested by their book value of assets accounting for loan portfolios held to maturity. Marked-to-market bank assets have declined by an average of 10% across all the banks, with the bottom 5th percentile experiencing a decline of 20%. We illustrate that uninsured leverage (i.e., Uninsured Debt/Assets) is the key to understanding whether these losses would lead to some banks in the U.S. becoming insolvent-- unlike insured depositors, uninsured depositors stand to lose a part of their deposits if the bank fails, potentially giving them incentives to run.  If uninsured deposit withdrawals cause even small fire sales, substantially more banks are at risk. Overall, these calculations suggest that recent declines in bank asset values very significantly increased the fragility of the US banking system to uninsured depositor runs.

Takeaways by Macro Roundup® AI

  1. The U.S. banking system's market value of assets is $2 trillion lower than book value when loan portfolios held to maturity are accounted for, with marked-to-market assets down an average of 10% across all banks.
  2. Banks in the bottom 5th percentile saw marked-to-market asset declines of 20%, and uninsured leverage — uninsured debt to assets — is the key to understanding whether such losses would render banks insolvent.
  3. Uninsured depositors stand to lose part of their deposits if a bank fails, potentially giving them incentives to run, and withdrawals causing even small fire sales would put substantially more U.S. banks at risk.

AI Summary. An index of office property real estate investment trusts has halved over 12 months, falling to a level first reached in 1996, while one of New York City's biggest office developers is worth barely more than at the turn of the millennium. Because such developers are heavily leveraged, failure to repay loans could create wider problems.

John Authors Bloomberg
Date Posted:

.@johnauthers worries about the highly leveraged commercial real estate sector. Vornado’s market cap is back at its January 2000 level and Bloomberg Office Property REIT index has halved in the past year. @markets

Do falling office property values threaten lenders more broadly?

Core argument: Vornado Realty Trust, one of the largest developers of New York City office property, has a market capitalization barely above where it stood at the turn of the millennium.

The market cap of Vornado Realty Trust, one of the biggest developers of office property in New York City is now worth barely any more than it was at the turn of the millennium. Bloomberg’s index of office property real estate investment trusts (REITs) is still above its worst level from the GFC, but it’s halved in the last 12 months to a point it first reached in September of 1996. Few people are terribly bothered by the prospect of property developers losing money. The problem is that such developers tend to be heavily leveraged. If they’re not able to repay their loans, that could be a problem for everyone. Keep an eye on the skyscrapers.

Takeaways by Macro Roundup® AI

  1. Vornado Realty Trust, one of the largest developers of New York City office property, has a market capitalization barely above where it stood at the turn of the millennium.
  2. Office property developers tend to be heavily leveraged, and their inability to repay loans would pose a problem beyond the developers themselves.

AI Summary. Banking-sector stress that constricts credit is consistent with, rather than an obstacle to, the Federal Reserve's approach to lowering inflation, since the main mechanism by which higher interest rates slow the economy is tighter financial conditions and reduced borrowing for investment and consumer durables. Containing inflation by other means would require reducing fiscal stimulus.

John Cochrane The Grumpy Economist
Date Posted:

.@JohnHCochrane notes that SVB failure is a feature of Fed policy, not a bug as “constricting credit” and “tightening financial conditions” are the mechanisms through which monetary policy addresses inflation.

.@JohnHCochrane notes that SVB failure is a feature of Fed policy, not a bug as “constricting credit” and...

Does banking stress that tightens credit help lower inflation?

Core argument: John Cochrane argues that bank troubles constricting credit are a feature rather than a bug of the Fed's anti-inflation strategy, since tightening financial conditions is, in the Fed's view, the main channel through which higher rates slow the economy.

There is much commentary that bank troubles will interfere with the Fed's plan to lower inflation by raising rates. Actually, this is a feature not a bug. The main mechanism by which, in the Fed's view, raising interest rates slows the economy and lowers inflation is by "constricting credit," "tightening financial conditions," lowering borrowing that finances investment and consumer durables purchases.  The Fed didn't want runs, no, but it wants the result. If you don't like that, well, we need to think of other ways to contain inflation, like taking the fiscal gasoline off the fire.

Takeaways by Macro Roundup® AI

  1. John Cochrane argues that bank troubles constricting credit are a feature rather than a bug of the Fed's anti-inflation strategy, since tightening financial conditions is, in the Fed's view, the main channel through which higher rates slow the economy.
  2. Cochrane notes the Fed did not want bank runs but does want their result: lower borrowing that finances investment and consumer durables purchases.
  3. Cochrane contends that those who dislike disinflation working through constricted credit need other ways to contain inflation, such as taking the fiscal gasoline off the fire.

AI Summary. France's government has proposed raising the legal retirement age by two years to 64, arguing the change is needed to preserve the pension system and bring the national deficit, 5% of economic output, toward the European Union's 3% target. France spends about 14.5% of economic output on pensions, versus 7.5% in the US and 10.4% in Germany.

Noemie Bisserbe Wall Street Journal
Date Posted:

Ruling out tax hikes, the French government is attempting to raise the retirement age to extend the viability of the country’s pay-as-you-go retirement system. France spends about 14.5% of economic output on pensions relative to 7.5% in the US. @WSJ

Does high pension spending require raising the retirement age?

Core argument: France spends around 14.5% of its economic output on pensions, compared with 10.4% in Germany and 7.5% in the U.S., according to the OECD, while Emmanuel Macron has proposed raising the legal retirement age by two years to 64.

French President Emmanuel Macron has proposed an overhaul of the country’s pension system centered on raising the legal age of retirement by two years to 64. The legislation, which is currently before parliament, has triggered waves of protests and strikes that have taken a toll on France’s economy.  Mr. Macron says the changes are necessary to save France’s pension system from collapse and maintain fiscal discipline. He wants to bring the national deficit—which was 5% of gross domestic product last year—back in line with the European Union’s 3% target while also boosting France’s military budget amid the war in Ukraine. France spends around 14.5% of its economic output on pensions, compared with 7.5% in the U.S. and 10.4% in Germany, according to the Organization for Economic Cooperation and Development, a club of rich nations. France ranked second out of 38 OECD countries in terms of tax-to-GDP ratio in 2021, according to the OECD, at 45.1%, compared with the OECD average of 34.1% and 26.6% in the U.S.

Takeaways by Macro Roundup® AI

  1. France spends around 14.5% of its economic output on pensions, compared with 10.4% in Germany and 7.5% in the U.S., according to the OECD, while Emmanuel Macron has proposed raising the legal retirement age by two years to 64.
  2. Emmanuel Macron says the pension overhaul is needed to save France's pension system from collapse and to bring the deficit, 5% of GDP last year, back in line with the EU's 3% target while boosting military spending amid the war in Ukraine.
  3. France ranked second out of 38 OECD countries in tax-to-GDP ratio in 2021 at 45.1%, compared with the OECD average of 34.1% and 26.6% in the U.S.

AI Summary. A bank failure of this kind is described as a classic stage of the short-term debt cycle, in which tight money aimed at curbing credit growth and inflation triggers a self-reinforcing debt contraction that spreads by contagion until central banks ease. Each easing seeds the next debt problem, building toward an eventual restructuring and debt monetization.

Ray Dalio LinkedIn
Date Posted:

.@RayDalio argues that the SVB bank run is evidence we are in the early stage of the debt-contraction cycle.

Are bank failures a predictable stage of the short-term debt cycle?

Core argument: Dalio characterizes the Silicon Valley Bank failure as a classic bubble-bursting phase of the short-term debt cycle, which he says lasts about seven years, give or take about three.

[SVB] is a very classic event in the very classic bubble-bursting part of the short-term debt cycle (which lasts about seven years, give or take about three) in which the tight money to curtail credit growth and inflation leads to a self-reinforcing debt-credit contraction that takes place via a domino-falling-like contagion process that continues until central banks create easy money that negates the debt-credit contraction, thus producing more new credit and debt, which creates the seeds for the next big debt problem until these short-term cycles build up the debt assets and liabilities to the point that they are unsustainable and the whole thing collapses in a debt restructuring and debt monetization (which typically happens about once every 75 years, give or take about 25 years).

Takeaways by Macro Roundup® AI

  1. Dalio characterizes the Silicon Valley Bank failure as a classic bubble-bursting phase of the short-term debt cycle, which he says lasts about seven years, give or take about three.
  2. Dalio argues that tight money aimed at curtailing credit growth and inflation produces a self-reinforcing debt-credit contraction that spreads by domino-like contagion until central banks create easy money to negate it.
  3. Dalio holds that each easy-money response generates new credit and debt that seed the next debt problem, until accumulated debt assets and liabilities become unsustainable and collapse into debt restructuring and monetization roughly once every 75 years, give or take about 25.