Edward Conard

Top Ten New York Times Bestselling Author

  • “…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 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
  • “…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 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
  • “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 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
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Tuesday, April 11, 2023

AI Summary. Real interest rates on US Treasuries have fallen by about 5 percentage points across all maturities over the past four decades, suggesting the natural rate of interest has also declined. Long-term forces driving the natural rate suggest interest rates in advanced economies will eventually converge back toward pre-pandemic levels.

Philip Barrett, Christoffer Koch, Jean-Marc Natal, Diaa Noureldin and Josef Platzer International Monetary Fund
Date Posted:

.@IMFNews writes that the core drivers of the decline in the natural rate of interest, population aging and slower total factor productivity growth, have not gone away. The IMF expects the natural rate to revert to pre-pandemic levels.

Will interest rates in advanced economies return to pre-pandemic levels?

Core argument: Real US Treasury rates across all maturities have fallen by about 5 percentage points over the last four decades once cyclical fluctuations and term premiums are stripped out, suggesting the US natural rate of interest has also declined.

Looking through cyclical fluctuations and term premiums, real rates have fallen steadily, by about 5 percentage points over the last four decades across all [US Treasuries] maturities. Given that the natural rate of interest is a long-term attractor for real rates, this suggests that the natural rate of interest has also fallen, at least in the United States. Long-term forces driving the natural rate suggest that interest will eventually converge toward pre-pandemic levels in advanced economies. While low natural rates may ease pressure on fiscal policy, they do not negate the need for fiscal responsibility. Important government support during the pandemic has strained public accounts, requiring some budget consolidation to ensure long-term debt sustainability.

Takeaways by Macro Roundup® AI

  1. Real US Treasury rates across all maturities have fallen by about 5 percentage points over the last four decades once cyclical fluctuations and term premiums are stripped out, suggesting the US natural rate of interest has also declined.
  2. Long-term forces driving the natural rate suggest interest rates in advanced economies will eventually converge toward pre-pandemic levels.
  3. Low natural rates may ease pressure on fiscal policy but do not remove the need for fiscal responsibility, as pandemic government support strained public accounts and some budget consolidation is required for long-term debt sustainability.

AI Summary. Weekly Federal Reserve data show the largest two-week cutbacks on record in total bank lending, in lending to corporations, and in lending to real estate, as banks respond to deposit outflows. Immediate banking-sector risks are fading, but this behavioral shift is beginning to weigh on the economic outlook.

Torsten Sløk Apollo
Date Posted:

Torsten Sløk @apolloglobal reports that last week saw the largest two-week cut in bank lending in US history. “In short, the credit crunch has started.”

Are banks cutting lending sharply in response to deposit outflows?

Core argument: Weekly Fed data show the largest two-week cutback in US bank lending in history following the SVB collapse and subsequent deposit outflows.

Weekly Fed data released every Friday at 4:15 pm shows how banks are responding to the SVB collapse and subsequent deposit outflows. The largest 2-week cutback in bank lending in US history. The largest 2-week cutback in bank lending to corporates in US history. Largest decline in lending to real estate on record. Fed hikes were already cooling the economy, and the latest weekly Fed data shows that the banking sector response since SVB is magnifying the speed of the slowdown. The bottom line is that the immediate risks in the banking sector are starting to fade, but the behavioral change in the banking sector is beginning to weigh on the economic outlook.

Takeaways by Macro Roundup® AI

  1. Weekly Fed data show the largest two-week cutback in US bank lending in history following the SVB collapse and subsequent deposit outflows.
  2. Bank lending to corporates registered its largest two-week decline in US history, and lending to real estate fell by the most on record, according to weekly Fed data.
  3. Fed rate hikes were already cooling the economy, and the banking sector's response since SVB is magnifying the speed of the slowdown even as immediate banking-sector risks start to fade.

AI Summary. The authors find state minimum wage increases account for only a modest share of the wage gains realized by minimum wage workers, with improving macroeconomic conditions and movement across occupations and industries appearing more important. Wage increases are the norm among minimum wage workers even absent minimum wage hikes.

Michael Strain and Jeffrey Clemens American Enterprise Institute
Date Posted:

.@MichaelRStrain @jeffreypclemens report that wage gains for near minimum-wage workers in states that increase the mandated minimum wage are similar to states without a minimum wage.

How much do minimum wage hikes drive low-wage workers' raises?

Core argument: Fewer than one-third of workers employed at the time of both Current Population Survey interviews remain in minimum wage jobs at the second interview twelve months later, the authors find.

We find that state minimum wage changes account for a modest fraction of the wage gains realized by minimum wage workers. Improvements in macroeconomic conditions and progression across occupations and industries appear to play a more significant role. We find that wage increases are the norm among minimum-wage workers, even in the absence of minimum wage increases. The twelve-month time horizon we can analyze in the Outgoing Rotation Groups of the Current Population Survey is quite far from being a career. Even over this relatively short horizon, fewer than one-third of those employed at the time of both interviews remain employed in minimum wage jobs at the time of their second interview. Second, the fact that this fraction has been quite stable over time suggests the operation of the labor market, at least with respect to the wage gains it delivers to low-wage workers, has not changed substantially over the last several decades. interview. Second, the fact that this fraction has been quite stable over time suggests the operation of the labor market, at least with respect to the wage gains it delivers to low-wage workers, has not changed substantially over the last several decades. It may be that some workers churn into and out of minimum wage jobs over a period of years.

Takeaways by Macro Roundup® AI

  1. Fewer than one-third of workers employed at the time of both Current Population Survey interviews remain in minimum wage jobs at the second interview twelve months later, the authors find.
  2. The authors find that state minimum wage changes account for a modest fraction of the wage gains realized by minimum wage workers, with improvements in macroeconomic conditions and progression across occupations and industries appearing to play a more significant role.
  3. Wage increases are the norm among minimum wage workers even absent minimum wage increases, and the authors suggest the stability of this pattern indicates the labor market's delivery of wage gains to low-wage workers has not changed substantially over several decades.

AI Summary. Pew Research Center data show 56% of Americans say they pay more than their fair share of taxes, a view held by a majority or plurality of every major demographic group. The author argues proposed social safety-net expansions cannot be financed solely by raising taxes on the small sliver of top earners and wealthiest households.

Cathy Rampell Washington Post
Date Posted:

.@crampell notes that 56% of Americans say that they pay “more than” their fair share of taxes. She argues that paying for current commitments solely by taxing the rich requires “mathematical jiujitsu,” and therefore taxes will go up across the board.

Can taxing only top earners fund safety-net expansion?

Core argument: 56 percent of Americans say they pay more than their "fair share" of taxes, according to Pew Research Center data, a view held by a majority or plurality of every major demographic group.

Most Americans — 56 percent — say they pay more than their “fair share” of taxes, Pew Research Center’s latest data shows. This belief is held by a majority or a plurality of every major demographic group. Democrats still wish to expand the social safety net, however, which requires — you guessed it! — more tax revenue. Democrats square the circle with some mathematical jiujitsu, by claiming that all those safety-net expansions can be paid for solely by soaking “the rich.” Who counts as rich, you ask? It’s a vanishingly small sliver of the population. According to Biden, only the top 3 percent of households (i.e., those earning more than $400,000 a year) can afford to pay higher taxes; according to Ocasio-Cortez, it’s instead only roughly the top 0.03 percent (i.e., those with a net worth above $100 million). Alas, there’s not remotely enough money on those would-be money trees to pay for all the things that Democrats want.

Takeaways by Macro Roundup® AI

  1. 56 percent of Americans say they pay more than their "fair share" of taxes, according to Pew Research Center data, a view held by a majority or plurality of every major demographic group.
  2. Biden holds that only the top 3 percent of households, those earning more than $400,000 a year, can afford higher taxes, while Ocasio-Cortez points to roughly the top 0.03 percent, those with net worth above $100 million.
  3. The author argues that taxing only the narrow sliver of households Democrats count as rich cannot raise nearly enough revenue to fund their desired safety-net expansions.

AI Summary. Bank deposit rates tend to lag changes in the Federal Reserve's benchmark interest rate, especially when rates are rising; the deposit "beta" measures the share of a policy rate change passed through to depositors. Deposit rates continue to lag, but pass-through is approaching levels not seen since the early 2000s.

Alena Kang-Landsberg, Stephan Luck, and Matthew Plosser Federal Reserve Bank of New York
Date Posted:

Interest payments on deposits lag the Federal Funds rate but the “deposit beta” (or the pass-through of fed funds rate raises to deposit rates) is approaching levels not seen since the financial crisis. @NYFedResearch

How much of rate hikes are banks passing to depositors?

Core argument: In 2022:Q4 the average fed funds rate reached 3.7 percent while interest-bearing deposit rates reached 1.4 percent, illustrating how deposit rates lag policy rate increases.

Deposit rates tend to lag changes in the fed funds rate, particularly during a rising interest rate environment. In 2022:Q4, the average fed funds rate reached 3.7 percent and interest-bearing deposit rates reached 1.4 percent. The deposit beta is the portion of a change in the fed funds rate that is passed on to the deposit rate. Deposit betas can be calculated for individual changes in the fed funds rate or as a cumulative measure over a tightening cycle. The charts below summarize the cumulative change in deposit rates relative to the cumulative change in the fed funds rate over the last five tightening cycles. Deposit rates continue to lag the fed funds rate, but the pass-through of policy rates is quickly approaching levels not seen since the early 2000s.

Takeaways by Macro Roundup® AI

  1. In 2022:Q4 the average fed funds rate reached 3.7 percent while interest-bearing deposit rates reached 1.4 percent, illustrating how deposit rates lag policy rate increases.
  2. The deposit beta measures the share of a change in the fed funds rate passed through to deposit rates, and can be computed for individual rate changes or cumulatively across a tightening cycle.
  3. Compared with the last five tightening cycles, deposit rates continue to lag the fed funds rate, but pass-through of policy rates is approaching levels not seen since the early 2000s.

Wednesday, April 12, 2023

AI Summary. Underlying inflation is running at about a 4.5% pace on the personal consumption measure the Federal Reserve targets and about 4% on the consumer price index, with wage growth signals ranging from 2–5%. Lagged shelter costs and possible labor cooling could slow inflation, but it would be a mistake to extrapolate a further slowdown from recent deceleration.

Jason Furman @jasonfurman
Date Posted:

.@jasonfurman argues that inflation is running at ~4% pace, and that the FOMC should lean towards a 25bp increase in the fed funds rate.

Is underlying inflation still running near 4% despite recent deceleration?

Core argument: Furman puts underlying PCE inflation at about 4.5% and CPI at roughly a 4% equivalent pace, preferring PCE because the Fed focuses on it and it is less sensitive to the treatment of housing.

In sum, the PCE has been running at about a 4.5% underlying pace, is preferable because it is what the Fed focuses on and is less sensitive to the treatment of housing. The CPI has been running at about a 4% (equivalent) underlying pace.  Wages telling us anything from 2-5%. Some reasons to expect inflation to slow, like lagged shelter & possibly labor cooling. But would be a mistake to extrapolate from the fact that inflation is slower now than 6 months ago to predict it will be even slower 6 months from now. Best to think of a ~4% pace. As for what the Fed should do in May, I lean towards a 25bp increase but I'm not 100% sure of it because I would want to understand better what is happening to credit conditions and how much work that is doing to cool the economy.

Takeaways by Macro Roundup® AI

  1. Furman puts underlying PCE inflation at about 4.5% and CPI at roughly a 4% equivalent pace, preferring PCE because the Fed focuses on it and it is less sensitive to the treatment of housing.
  2. Furman says wages indicate anything from 2-5%, and argues it would be a mistake to extrapolate from inflation being slower than six months ago to predict further slowing, settling on a roughly 4% pace.
  3. Furman leans toward a 25bp Fed increase in May but is not fully certain, wanting to better understand credit conditions and how much work they are doing to cool the economy.

AI Summary. Unrealized losses on bank balance sheets are consistent with a rising interest rate cycle and become a problem only when large deposit outflows force those losses to be realized. Lending rules allowing banks to borrow against securities at book value help, but do not address underwater loans or deposits leaving for higher money market yields.

Michael Cembalest J.P. Morgan
Date Posted:

Michael Cembalest @jpmorgan argues that the banking system is now stabilizing, with the pace of drawdowns slowing from mid-March.

Do unrealized bank losses become a problem only when deposits flee?

Core argument: Unrealized losses on bank balance sheets are consistent with a rising interest rate cycle and become a problem only when large deposit outflows force those losses to be realized.

The presence of unrealized losses on bank balance sheets is not abnormal, and is entirely consistent with a rising interest rate cycle. The problem this time: some banks were flooded with so many stimulus-related deposits at a time of low rates that their balance sheets are stuffed with low-yielding assets. And to reiterate, this is only a problem when large deposit outflows cause unrealized losses to be realized. The Fed’s new rules for the Discount Window allow banks to borrow against securities at book value rather than market value, so that should help. But it doesn’t address banks with underwater, high-quality loans or the flood of deposits departing for higher money market fund yields. Many system indicators are now stabilizing, but one news story, one rating agency action or an announcement from a single bank could reignite market/depositor concerns.

Takeaways by Macro Roundup® AI

  1. Unrealized losses on bank balance sheets are consistent with a rising interest rate cycle and become a problem only when large deposit outflows force those losses to be realized.
  2. Banks flooded with stimulus-related deposits during a period of low rates hold balance sheets stuffed with low-yielding assets, while deposits depart for higher money market fund yields.
  3. The Federal Reserve's new Discount Window rules let banks borrow against securities at book value rather than market value, but do not address banks holding underwater, high-quality loans.

AI Summary. Despite ultra-low interest rates intended to lift private investment and reduce private saving, Japan's private savings surplus—especially its corporate surplus—has remained large. Government deficits averaging 5% of GDP and net foreign asset purchases via current account surpluses averaging 3% of GDP absorbed those excess savings.

Martin Wolf Financial Times
Date Posted:

.@martinwolf_ argues that a savings glut in Japan significantly constrains its policy options and makes loose monetary policy and high deficits its best overall option. Japan’s private sector gross savings averaged 29% of GDP from 2010-19 vs 22% in the US.

Do ultra-low interest rates shrink a large private savings surplus?

Core argument: Japan's government deficits averaged 5 per cent of GDP from 2010 to 2019, absorbing and offsetting surplus private savings through an excess of government investment over government savings.

Ultra-low interest rates are, for example, intended to raise private investment and reduce private savings. But in practice, the private savings surplus, especially the corporate surplus, has remained huge. Loose monetary policy has facilitated crucial absorption (and offsetting) of surplus private savings via the excess of government investment over savings. These deficits averaged 5 per cent of GDP from 2010 to 2019. Finally, an average of 3 per cent of GDP went into net acquisition of foreign assets via Japan’s current account surpluses. So long as Japan continues to run huge excess private sector savings, policy has to find ways of either reducing or offsetting them. Japan’s economy is still trapped. It also has no easy way out.

Takeaways by Macro Roundup® AI

  1. Japan's government deficits averaged 5 per cent of GDP from 2010 to 2019, absorbing and offsetting surplus private savings through an excess of government investment over government savings.
  2. An average of 3 per cent of Japan's GDP went into net acquisition of foreign assets via the country's current account surpluses.
  3. Ultra-low interest rates were intended to raise private investment and reduce private savings, but Japan's private savings surplus, especially the corporate surplus, has remained huge, leaving the economy trapped with no easy way out.

AI Summary. China has one of the lowest retirement ages among major economies, letting women retire at 50 and men at 60 under a policy unchanged since the 1950s. Its labor ministry estimates more than 40m Chinese will retire over a five-year period while the working-age population falls by 35m.

Liyan Qi Wall Street Journal
Date Posted:

China is aging rapidly and local government pension systems are under extreme stress; retirement ages will likely hike quickly as pension funds are depleted. @WSJecon

Can China sustain one of the world's lowest retirement ages?

Core argument: China's Ministry of Human Resources and Social Security estimates more than 40 million Chinese—more than Canada's population—will retire over the five-year period ending in 2025, while the working-age population, those aged 16 to 59, is expected to drop by 35 million in the same period.

China has one of the lowest retirement ages among major economies. Under a policy unchanged since the 1950s, it allows women to retire as early as at age 50 and men at 60. Now, local governments are running out of money just as a wave of retirees hits. The Ministry of Human Resources and Social Security estimates that more than 40 million Chinese—more than the population of Canada—will retire over the five-year period ending in 2025. The working-age population—usually defined in China as those between 16 and 59—is expected to drop by 35 million in the same period, illustrating the lack of young people to make up for the shortfall in older workers. In February, a reform that threatens to cut into retirees’ medical benefits drew protests in the central Chinese city of Wuhan.

Takeaways by Macro Roundup® AI

  1. China's Ministry of Human Resources and Social Security estimates more than 40 million Chinese—more than Canada's population—will retire over the five-year period ending in 2025, while the working-age population, those aged 16 to 59, is expected to drop by 35 million in the same period.
  2. China's retirement policy, unchanged since the 1950s, allows women to retire as early as 50 and men at 60, among the lowest retirement ages of major economies.
  3. Chinese local governments are running out of money as a wave of retirees hits, and a reform threatening to cut retirees' medical benefits drew protests in Wuhan in February.

AI Summary. Melius Research has tabulated roughly $380bn of North American manufacturing "mega-projects" — investments above $1bn each — with nearly 60% of those planned facilities already under construction. In China, credit is flowing mainly to large state-owned firms, crowding out small and medium-sized private manufacturers whose margins are squeezed as the country's labor cost advantage erodes.

Brooke Sutherland and Anjani Trivedi Bloomberg
Date Posted:

As the cost of capital rises and supply chains restructure, small and medium-sized manufacturers in both China and the US are “at risk of becoming collateral damage.”

Does the manufacturing boom leave smaller companies behind?

Core argument: Melius Research has tabulated roughly $380 billion of North American manufacturing "mega-projects," each an investment greater than $1 billion, with almost 60% of those planned facilities already breaking ground.

The factory renaissance in North America is real: Melius Research has tabulated some $380 billion of “mega-projects” — defined as an investment greater than $1 billion — with almost 60% of those planned facilities already breaking ground. In China, while credit is flowing hard and fast, it’s mostly going toward large state-owned firms. That’s crowding out small and medium-sized manufacturers in the private sector, which account for a significant chunk of China’s industrial might. While the performance of these companies has improved in recent months, they remain on weaker financial footing and their profit margins are getting squeezed as China’s labor cost advantage erodes and larger companies seek to protect their own bottom lines by turning the screws on suppliers. It’s hard to see how global supply chains will bifurcate without pain, but the brunt of the financial strain may be felt by smaller companies just trying to keep up.

Takeaways by Macro Roundup® AI

  1. Melius Research has tabulated roughly $380 billion of North American manufacturing "mega-projects," each an investment greater than $1 billion, with almost 60% of those planned facilities already breaking ground.
  2. Credit in China is flowing mostly to large state-owned firms, crowding out small and medium-sized private manufacturers that account for a significant chunk of the country's industrial might.
  3. Profit margins at China's smaller manufacturers are being squeezed as the country's labor cost advantage erodes and larger companies press suppliers to protect their own bottom lines.

AI Summary. Japan's Defense Ministry signed four missile-development and procurement contracts with Mitsubishi Heavy Industries, including development of a submarine-launched cruise missile and mass production of a hypersonic glide vehicle for island defense. The ministry allocated more than ¥1.4tn ($10.5bn) to missile capabilities and is also set to buy US-made Tomahawk and Joint Air-to-Surface Standoff missiles.

Isabel Reynolds Bloomberg
Date Posted:

Japan is planning to increase its defense budget by 60% in the next five years. It authorized the development of four new missile, including a new submarine-launched cruise missile and a hypersonic glide vehicle. @markets

Japan is planning to increase its defense budget by 60% in the next five years. It authorized the development of four new...

Is Japan expanding its missile capabilities through domestic and foreign procurement?

Core argument: Japan's Defense Ministry allocated more than ¥1.4 trillion ($10.5 billion) in this year's budget to develop missile capabilities and has signed four missile-development and procurement contracts with Mitsubishi Heavy Industries, the country's biggest defense firm.

The Japanese Defense Ministry has signed four missile-development and procurement contracts with the country’s biggest defense firm, Mitsubishi Heavy Industries. The contracts include one for development of a submarine-launched cruise missile and another for mass production of a hypersonic glide vehicle for island defense, which is expected to be delivered in 2026-27.  In this year’s budget, the Defense Ministry set aside more than ¥1.4 trillion ($10.5 billion) to develop its missile capabilities. Japan is also set to buy Raytheon Technology Corp.’s Tomahawk missiles and Lockheed Martin Corp.’s Joint Air-to-Surface Standoff Missile as part of its build-up.

Takeaways by Macro Roundup® AI

  1. Japan's Defense Ministry allocated more than ¥1.4 trillion ($10.5 billion) in this year's budget to develop missile capabilities and has signed four missile-development and procurement contracts with Mitsubishi Heavy Industries, the country's biggest defense firm.
  2. The Mitsubishi Heavy contracts cover development of a submarine-launched cruise missile and mass production of a hypersonic glide vehicle for island defense, with delivery of the glide vehicle expected in 2026-27.
  3. Japan is also set to buy Raytheon Technology Corp.'s Tomahawk missiles and Lockheed Martin Corp.'s Joint Air-to-Surface Standoff Missile as part of its military build-up.