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


Friday, August 18, 2023

AI Summary. Some measures suggest the natural rate of interest has risen and may now be near pre-2008 levels, implying that a soft landing with 2% inflation would leave the federal funds rate around 3.5–4% rather than 2.5–2.75%, and that recent Federal Reserve policy has been less restrictive than often claimed.

Tom Lawler Calculated Risk
Date Posted:

Tom Lawler argues in support of recent work by Lubik and Matthes at the Federal Reserve that shows that r* has risen over the last year. He thinks that interest rates will be persistently higher.

Has the natural rate of interest risen back toward pre-crisis levels?

Core argument: Some measures indicate the natural rate of interest, or r-star, has risen over the past year to levels not far from those prevailing just before the 2008 financial crisis.

There is in fact evidence that the natural rate of interest, or r-star, has in fact risen over the last year, and by some measures, it would appear as if r-star may be at levels not that far from those seen just prior to the financial crisis of 2008. If that were the case, then a “soft-landing scenario where inflation fell back to 2% would be one where the Federal Fund Rate fell back to the 3 ½-4% level, rather than the 2 ½-2 ¾ % level implied by the HLW model or the FOMC’s “dot plots.” In addition, if r-star has risen significantly, then recent Federal Reserve policy has not been as “restrictive” as many have suggested. If that were the case, then one would have expected the economy to have performed better than the “consensus” forecast, which in fact has been the case.

Takeaways by Macro Roundup® AI

  1. Some measures indicate the natural rate of interest, or r-star, has risen over the past year to levels not far from those prevailing just before the 2008 financial crisis.
  2. A higher r-star would imply that a soft landing with inflation back at 2% leaves the federal funds rate near 3½–4%, rather than the 2½–2¾% implied by the HLW model and the FOMC's dot plots.
  3. A significantly higher r-star would mean Federal Reserve policy has been less restrictive than many suggest, consistent with the economy outperforming the consensus forecast.

Related Articles:

  • The Evolution of Short-Run r* After the Pandemic — A model estimates that the short-run neutral real interest rate — the rate consistent with the economy operating at potential — has increased notably, to some extent outpacing the large increase in the policy rate. The model attributes this change mainly to financial shocks, reflecting financial conditions such as corporate spreads remaining resilient despite the higher policy rate.
  • What Have We Learned About the Neutral Rate? — Analysts estimate that if inflation is brought down without a recession, the Federal Reserve's policy rate will stabilize nearer 3–3.25% than the 2.5% longer-run median projection of Federal Reserve officials. Projected shifts in government debt and demographics imply a roughly 0.5 percentage point net increase in the neutral rate over the next decade.
  • The Case for “Higher for Longer”: Prices are Disinflating, But Not Wages (Yet) — Occupations with the fastest pay gains have seen wage growth normalize while pay growth elsewhere remains persistently faster, with only modest deceleration from the peak. The author argues the neutral policy rate has risen as an investment drought ends, making 5.5% short-term rates unremarkable and 4% 10-year Treasury yields potentially too low.

AI Summary. 42% of American homeowners own their homes outright with no mortgage, and among those with mortgages the median housing debt is 52% of the home's value. Homeowners with large equity cushions should be less affected by "lock-in" from low pandemic-era mortgage rates.

Joseph Politano Apricitas Economics
Date Posted:

.@JosephPolitano argues that the uptick in mortgage rates from 2.7% in 2021 to 7% two years later won’t “lock in” homeowners as fully as many expect, given that 42% of Americans own their homes outright.

Do large homeowner equity cushions limit mortgage rate lock-in?

Core argument: 42% of American homeowners own their homes with no mortgage.

What if higher mortgage rates have turned the low-rate mortgages of 2021 into golden handcuffs, locking owners into their existing homes? 42% of American homeowners own their homes with no mortgage. Most existing homeowners with mortgages have large equity cushions by virtue of purchasing before the massive pandemic-era home price appreciation. Excluding people who owned their homes free and clear, the median level of housing debt is only 52% of the value of the home, and those homeowners with large equity cushions should also be less affected by lock-in.

Takeaways by Macro Roundup® AI

  1. 42% of American homeowners own their homes with no mortgage.
  2. Among U.S. homeowners who carry mortgages, the median level of housing debt is 52% of the home's value, an equity cushion that should lessen the impact of rate lock-in.
  3. Most existing U.S. homeowners with mortgages hold large equity cushions because they purchased before pandemic-era home price appreciation.

Related Articles:

  • The “New Normal” Mortgage Rate Range — Goldman Sachs economists expect the federal funds rate to eventually stabilize at 3–3.25%, above what the Federal Reserve currently projects for the neutral rate. With a funds rate near 3.25% and a 10-year Treasury yield of 4.45%, 30-year fixed mortgage rates would sit in the low-to-mid 6% range.
  • The Great Pandemic Mortgage Refinance Boom — Fourteen million mortgages were refinanced during the COVID-era refinance boom: roughly 5m borrowers extracted a total of $430bn in home equity, while 9m refinanced without extracting equity and cut their aggregate annual housing costs by $24bn.

AI Summary. China's property sector, which accounts for 23% of GDP (26% counting imports), is yielding diminishing returns after a construction boom driven by the country's massive post-2008 investment stimulus. The author argues this debt supercycle is the best explanation for China's faltering economy and what comes next.

Ken Rogoff Project Syndicate
Date Posted:

.@krogoff argues the best lens for viewing the Chinese economy is a simple story of deleveraging after a debt “supercycle” that drove the property sector to 23% of GDP.

.@krogoff argues the best lens for viewing the Chinese economy is a simple story of deleveraging after a debt “supercycle”...

Does a debt supercycle explain China's faltering economy?

Core argument: China's property sector accounts for 23% of GDP, or 26% counting imports, and is now yielding diminishing returns after years of building housing and offices at breakneck speed.

China’s current problems can be traced back to its massive post-2008 investment stimulus, a significant portion of which fueled the real-estate construction boom. After years of building housing and offices at breakneck speed, the bloated property sector – which accounts for 23% of the country’s GDP (26% counting imports) – is now yielding diminishing returns. This comes as little surprise, as China’s housing stock and infrastructure rival that of many advanced economies while its per capita income remains comparatively low. The debt supercycle may have lasted longer than initially expected, perhaps because of the pandemic. But it was a critical piece of the story, and now, as China’s economy falters, it is the best explanation for what might come next.

Takeaways by Macro Roundup® AI

  1. China's property sector accounts for 23% of GDP, or 26% counting imports, and is now yielding diminishing returns after years of building housing and offices at breakneck speed.
  2. China's current problems trace back to its massive post-2008 investment stimulus, a significant portion of which fueled the real-estate construction boom.
  3. China's housing stock and infrastructure rival those of many advanced economies while its per capita income remains comparatively low, and the debt supercycle offers the best explanation for what may come next as the economy falters.

Related Articles:

  • Can China’s Long-Term Growth Rate Exceed 2–3 Percent? — China invests roughly 42–44% of its GDP, while more mature, capital-intensive economies typically invest about 15–20%. Modeling a ten-year path that lowers China's investment share to 30% of GDP, the author argues the resulting growth rate depends mainly on how fast consumption grows.
  • China Begins Nationwide Push to Reveal Hidden Government Debt — China's Ministry of Finance reported governments across the country held 37tn yuan ($5.1tn) in on-book debt, with no official tally of hidden debt or who owes it. The International Monetary Fund estimated local government financing vehicles held 66tn yuan ($9.2tn) of hidden debt at end-2022, up from 40tn yuan in 2019.
  • Housing, Household Debt, and the Business Cycle: An Application to China and Korea — Household debt and housing booms in China and Korea are comparable to those in the United States and United Kingdom from 2001 to 2007, and consumer spending in both countries could be quite weak. Korea's debt service ratio has risen substantially to an exceptionally high level, a pattern historically associated with slower growth.

AI Summary. Chinese property developer China Evergrande has filed for US bankruptcy protection while pursuing a restructuring agreement with international bondholders, with about $19bn in overseas liabilities. Its earlier default on dollar-denominated debt sparked a sector-wide liquidity crisis that has weighed on China's economic growth and pressured policymakers in Beijing.

Thomas Hale and Sujeet Indap Financial Times
Date Posted:

Evergrande, a Chinese property developer with $19B in overseas liabilities, has filed for bankruptcy protection in the US.

Evergrande, a Chinese property developer with $19B in overseas liabilities, has filed for bankruptcy protection in the US.

Is a major Chinese developer's default still weighing on China's growth?

Core argument: China Evergrande has filed for US bankruptcy protection while pursuing a prolonged restructuring agreement with international creditors holding billions of dollars in bonds, and carries about $19bn in overseas liabilities according to Bloomberg data.

Property developer China Evergrande has filed for bankruptcy protection in the US, as the company pursues a prolonged restructuring agreement with international creditors that hold billions of dollars in bonds. Evergrande defaulted on its dollar-denominated debts in late 2021, sparking a sector-wide liquidity crisis that has weighed on China’s economic growth and put increasing pressure on policymakers in Beijing. The company has about $19bn in overseas liabilities, according to Bloomberg data.

Takeaways by Macro Roundup® AI

  1. China Evergrande has filed for US bankruptcy protection while pursuing a prolonged restructuring agreement with international creditors holding billions of dollars in bonds, and carries about $19bn in overseas liabilities according to Bloomberg data.
  2. Evergrande's default on its dollar-denominated debts in late 2021 sparked a sector-wide liquidity crisis that has weighed on China's economic growth.
  3. The property sector liquidity crisis following Evergrande's default has put increasing pressure on policymakers in Beijing.

Related Articles:

  • Can China’s Long-Term Growth Rate Exceed 2–3 Percent? — China invests roughly 42–44% of its GDP, while more mature, capital-intensive economies typically invest about 15–20%. Modeling a ten-year path that lowers China's investment share to 30% of GDP, the author argues the resulting growth rate depends mainly on how fast consumption grows.
  • China Begins Nationwide Push to Reveal Hidden Government Debt — China's Ministry of Finance reported governments across the country held 37tn yuan ($5.1tn) in on-book debt, with no official tally of hidden debt or who owes it. The International Monetary Fund estimated local government financing vehicles held 66tn yuan ($9.2tn) of hidden debt at end-2022, up from 40tn yuan in 2019.
  • Housing, Household Debt, and the Business Cycle: An Application to China and Korea — Household debt and housing booms in China and Korea are comparable to those in the United States and United Kingdom from 2001 to 2007, and consumer spending in both countries could be quite weak. Korea's debt service ratio has risen substantially to an exceptionally high level, a pattern historically associated with slower growth.

AI Summary. Evidence does not support the view that China's growth is caught in a severe multi-year cyclical downturn. A widely noted 0.3% year-over-year decline in consumer prices largely reflected elevated food prices a year earlier, while core consumer prices excluding food and energy rose 0.8%, up from 0.4% the prior month.

Nicholas Lardy How Serious is China's Economic Slowdown?
Date Posted:

Nicholas Lardy @PIIE argues that concerns about the Chinese economy are overstated, given that core consumer prices in July rose by 0.8% once volatile food and energy prices are stripped out.

Nicholas Lardy @PIIE argues that concerns about the Chinese economy are overstated, given that core consumer prices in July...

Is China's economy caught in a severe multi-year downturn?

Core argument: China's headline consumer prices fell 0.3% year-over-year in July 2023, a decline mostly attributable to elevated food prices in the same period of 2022.

A careful reading of the present situation does not support the view that China's growth is now gripped by a severe cyclical downward spiral that will persist for several years. Falling retail prices could lead households to postpone consumption on the expectation that goods would become cheaper tomorrow. That would reduce consumption and economic growth. But the widely noted 0.3% decline in consumer prices in July 2023 compared with a year ago was mostly due to elevated food prices in the same period of 2022. Stripping out volatile prices of food and energy, core consumer prices in July rose by 0.8%, up from the 0.4% increase in June. It may be premature to raise the specter of deflation based on one month of data.

Takeaways by Macro Roundup® AI

  1. China's headline consumer prices fell 0.3% year-over-year in July 2023, a decline mostly attributable to elevated food prices in the same period of 2022.
  2. Chinese core consumer prices, excluding volatile food and energy, rose 0.8% in July 2023, up from a 0.4% increase in June, making it premature to raise the specter of deflation on one month of data.
  3. Falling retail prices can lead Chinese households to postpone consumption in expectation of cheaper goods, reducing consumption and growth, but a careful reading of the present situation does not support the view that China's growth is gripped by a severe multi-year cyclical downward spiral.

Related Articles:

  • The Neoclassical Growth of China — China's per capita GDP growth path closely tracks those of Japan, South Korea, and Taiwan from similar starting income levels, indicating nothing unusual about its growth rate. The authors' model projects China's per capita GDP will level off at about 41% of the US level, reflecting a slowdown in productivity catch-up.
  • China Stops Reporting Youth Unemployment as Economic Pressures Mount — China has said it will stop publishing youth unemployment data, which reached 21.3% and was omitted from a subsequent broader data release, alongside other data pointing to weakness in its economic recovery.
  • China Cannot Allow Jobless Young To ‘Lie Flat’ — China's job mix has shifted toward low-pay, low-skill, informal work at the expense of higher-paid, high-skill manufacturing and construction jobs, with the informal-to-formal ratio flipping from 40:60 to 60:40 over 15 years, according to a Stanford University estimate. Younger workers are over-represented in low-pay sectors and gig work.

AI Summary. Two former Google researchers have founded a Tokyo-based artificial intelligence start-up, Sakana. One is among the eight Google researchers who built the transformer, the software architecture underpinning generative AI systems including chatbots and image generators; all eight have since left Google, primarily to found their own start-ups.

Madhumita Murgia Financial Times
Date Posted:

All 8 of the Google researchers who co-wrote a 2017 paper that set off the AI boom have left the firm for startups.

All 8 of the Google researchers who co-wrote a 2017 paper that set off the AI boom have left the firm for startups.

Are leading AI researchers leaving big tech to launch their own start-ups?

Core argument: All eight Google researchers who co-authored the June 2017 transformer paper have left the company, primarily to found their own start-ups, with Jones the last of the eight to exit.

A former Google researcher who co-authored a paper that kick-started the generative AI revolution has joined forces with an ex-colleague to found a Tokyo-based artificial intelligence start-up. Jones, Sakana’s chief technology officer, was one of eight Google researchers who collaborated on building a software known as the transformer, which underpinned the rise of generative AI, including chatbots such as ChatGPT and Bard, and image generators such as Stability AI, Midjourney and Dall-E. The Transformers research paper was first published in June 2017. Since then all of its co-authors have left Google, primarily to found their own start-ups. Jones was the last of the eight to exit Google.

Takeaways by Macro Roundup® AI

  1. All eight Google researchers who co-authored the June 2017 transformer paper have left the company, primarily to found their own start-ups, with Jones the last of the eight to exit.
  2. Jones has co-founded Sakana, a Tokyo-based AI start-up, with a former Google colleague, and serves as its chief technology officer.
  3. The transformer software built by the eight Google researchers underpinned the rise of generative AI, including chatbots such as ChatGPT and Bard and image generators including Stability AI, Midjourney and Dall-E.

Related Articles:

  • The Economics of Inequality in High-Wage Economies — United States Income, Wealth, Consumption, and Inequality Diana Furchtgott-Roth
  • The Size of Firms and the Nature of Innovation — Corporate research and development spending scales proportionately with sales, but evidence indicates firms produce fewer inventions per research dollar as they grow. Larger firms' innovation is more likely to improve existing products than create new ones, and patent evidence shows bigger firms engage in more incremental innovation and cite their own patents more often.
  • The National Economic Council Gets It Wrong on the Roles of Big and Small Firms in U.S. Innovation — U.S. small firms account for 49% of employment but 16% of business R&D spending and 18.8% of patents issued, while firms with more than 25,000 workers account for 36% of R&D and the largest firms 37.4% of patents. A survey of nearly 1,000 scientists and engineers found most internationally filed patents came from firms with more than 500 employees.

Monday, August 21, 2023

AI Summary. Interest rates across the Treasury yield curve stand roughly 75 basis points above Congressional Budget Office baseline projections, with the ten-year note at 4.30%, its highest in 16 years. If that gap persists, the authors estimate it would add $2.3tn (6% of GDP) to the debt over ten years.

CRFB Staff Committee for a Responsible Federal Budget
Date Posted:

Treasury yields are 75bps above the CBO’s baseline projection. If rates remain at this level interest costs will exceed defense spending in 2024.

How much would higher-than-projected interest rates add to federal debt?

Core argument: The ten-year Treasury note closed at 4.30%, its highest level since 2007, while the three-month bill closed at 5.56% and the 30-year bond at 4.41%, all at or near 16-year highs.

The ten-year Treasury Note interest rate closed at 4.30% on Thursday, the highest since 2007. Meanwhile, the three-month Treasury Bill rate closed at 5.56% and the 30-year Treasury Bond at 4.41%. All three are at or near their highest level in 16 years. CBO's most recent baseline projections are based on a ten-year rate of 3.9% and a three-month rate of 4.6% this quarter. Based on this, we estimate that interest rates across the yield curve average about 75bps above baseline projections. If rates remain 75bps above CBO’s projections, it could add $2.3T (6% of GDP) to the debt over the next ten years and $350B (0.9% of debt-to-GDP) to the deficit in 2033. Under that scenario, interest costs would exceed combined spending on Medicaid, SSI, and SNAP as well as spending on defense by next year. By 2026, the cost of interest would reach a record high 3.3% of the economy.

Takeaways by Macro Roundup® AI

  1. The ten-year Treasury note closed at 4.30%, its highest level since 2007, while the three-month bill closed at 5.56% and the 30-year bond at 4.41%, all at or near 16-year highs.
  2. Rates across the yield curve average roughly 75bps above CBO's baseline projections, which assume a 3.9% ten-year rate and a 4.6% three-month rate this quarter.
  3. Should rates stay 75bps above CBO's projections, the estimated effect is an added $2.3 trillion (6% of GDP) to debt over ten years and $350 billion to the 2033 deficit, with interest costs reaching a record 3.3% of the economy by 2026.

Related Articles:

  • American Gothic — US tax increases since 1950 of 2% of GDP or more occurred when overall tax receipts were a much smaller share of GDP than today. Restoring the ratio of entitlement to non-defense discretionary spending to its earlier level of 2.2x would require tax increases larger than those historical precedents.
  • Is a U.S. Debt Crisis Looming? Is it Even Possible? — A debt spiral requires the interest rate on government debt to exceed the economy's growth rate; with inflation-protected 10-year U.S. bond yields near 1.83%, close to most estimates of sustainable growth, any spiral would be slow-moving. Stabilizing debt at 100% of GDP would require a 2% primary surplus.
  • US Fiscal Alarm Bells Are Drowning Out a Deeper Problem — The Congressional Budget Office projects US federal debt held by the public at 98% of national income, within 7.6 percentage points of its 1946 wartime peak and on track to exceed it by 2028. International Monetary Fund forecasts show US debt surpassing Italy's by 2028 and Greece's by the end of the decade.

AI Summary. Federal Reserve officials' median longer-run projection implies a real neutral interest rate of 0.5%, matching a widely followed New York Fed model, while a Richmond Fed model puts it at 2%. Some economists argue neutral has risen because of larger budget deficits and investment to transition to a lower-carbon economy.

Nick Timiraos Wall Street Journal
Date Posted:

The Fed is still projecting a neutral rate of .5% though some of their models show a rising r* in line with arguments that increased capital investment and chronic deficits will lead to a higher r*.

Has the neutral interest rate risen above its pre-pandemic level?

Core argument: The median Federal Reserve official's estimate of the longer-run federal funds rate fell from 4.25% in 2012 to 2.5% in 2019, implying a real neutral rate of 0.5% after subtracting 2% inflation, and the June median remained 0.5%.

Every quarter, Fed officials project where rates will settle over the longer run, which is in effect their estimate of neutral. The median estimate declined from 4.25% in 2012 to 2.5% in 2019. After subtracting inflation of 2%, that yielded a real neutral rate (sometimes called “r*” or “r-star”) of 0.5%. In June, the median was still 0.5%. That also happens to track a widely followed model co-developed by New York Fed President John Williams that also puts neutral at 0.5%. A model devised by the Richmond Fed, which before the pandemic closely tracked Williams’s model, put the real neutral rate at 2% in the first quarter. Larry Summers has recently suggested neutral has gone up because of higher deficits and the investment to transition to a lower-carbon economy.

Takeaways by Macro Roundup® AI

  1. The median Federal Reserve official's estimate of the longer-run federal funds rate fell from 4.25% in 2012 to 2.5% in 2019, implying a real neutral rate of 0.5% after subtracting 2% inflation, and the June median remained 0.5%.
  2. A model co-developed by New York Fed President John Williams also puts the real neutral rate at 0.5%, while the Richmond Fed's model, which closely tracked Williams's before the pandemic, put it at 2% in the first quarter.
  3. Larry Summers has suggested the neutral rate has risen because of higher deficits and the investment to transition to a lower-carbon economy.

Related Articles:

  • Measuring the Natural Rate of Interest After COVID-19 — Model estimates for the United States, Canada, and the Euro Area place the natural rate of interest within a few tenths of a percentage point of pre-pandemic estimates, with the main longer-term consequence of the pandemic a reduction in the natural rate of output. The authors find no evidence that the era of historically low natural rates has ended.
  • The Case for “Higher for Longer”: Prices are Disinflating, But Not Wages (Yet) — Occupations with the fastest pay gains have seen wage growth normalize while pay growth elsewhere remains persistently faster, with only modest deceleration from the peak. The author argues the neutral policy rate has risen as an investment drought ends, making 5.5% short-term rates unremarkable and 4% 10-year Treasury yields potentially too low.
  • In Search of Safe Havens: The Trust Deficit and Risk-free Investments! — Plotting US Treasury bond rates against a crude fundamental risk-free rate—actual inflation plus real GDP growth—undercuts the argument that central banks set interest rates. Central banks can nudge rates at the margin but cannot override the fundamentals of inflation and real growth.

AI Summary. Real interest rates have risen as actual and expected inflation trended lower while nominal rates trended higher, so leaving policy unchanged would tighten conditions further. Rate cuts combined with continued shrinking of the central bank balance sheet would steepen the yield curve, relieving bank margins squeezed by curve inversion.

Joseph Wang Fed Guy Blog
Date Posted:

Noting the Fed’s view that r* hasn’t gone up relative to pre-pandemic @FedGuy12 anticipates rate cuts and further QT, “The financial system needs an upwards-sloping curve to work well.”

Would rate cuts paired with balance sheet shrinkage steepen the yield curve?

Core argument: Real rates have steadily risen as actual and expected inflation trended lower while nominal rates trended higher, so policy would be unnecessarily tightening absent a change.

By any measure real rates have steadily risen as both actual and expected inflation have trended lower and nominal rates have trended higher. Without any change, policy would be unnecessarily tightening. Rates cuts and QT would together have a steepening impact on the curve and help address some concerns in the banking sector, whose margins have been squeezed by curve inversion. The Japanese experience with a persistently flat or inverted curve was poor growth and potential financial stability concerns as some investors reached for risk. This in part motivated the BOJ’s 2016 foray into YCC, which steepened the curve by raising 10 year JGB yields above the deposit rate. The financial system needs an upward-sloping curve to work well, so the Fed may be nudging it in that direction.

Takeaways by Macro Roundup® AI

  1. Real rates have steadily risen as actual and expected inflation trended lower while nominal rates trended higher, so policy would be unnecessarily tightening absent a change.
  2. Rate cuts combined with quantitative tightening would steepen the yield curve and address some concerns among banks whose margins have been squeezed by curve inversion.
  3. Japan's persistently flat or inverted curve accompanied poor growth and potential financial stability concerns as some investors reached for risk, partly motivating the Bank of Japan's 2016 yield curve control, which raised 10-year JGB yields above the deposit rate.

Related Articles:

  • Hidden to Market — Bank system liquidity is exceptionally high but is projected to decline as higher interest rates and the Federal Reserve's balance sheet runoff withdraw over $1tn from the banking system over two years. Higher rates reduce the market value of bank securities and loan portfolios, lowering the cash banks can raise against them.
  • Measuring the Natural Rate of Interest After COVID-19 — Model estimates for the United States, Canada, and the Euro Area place the natural rate of interest within a few tenths of a percentage point of pre-pandemic estimates, with the main longer-term consequence of the pandemic a reduction in the natural rate of output. The authors find no evidence that the era of historically low natural rates has ended.
  • World Economic Outlook Chapter 2 The Natural Rate of Interest: Drivers and Implications for Policy — 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.

AI Summary. The authors argue the Federal Reserve should first stabilize inflation below 3% for at least six months, then raise its inflation target to around 3% when it next updates its strategy. With interest rates at zero for nearly half of the past 20 years, a higher target would give more room to cut rates.

Jason Furman Wall Street Journal
Date Posted:

.@jasonfurman argues that once the Fed has stabilized inflation below 3% for six months it should change the target rate from 2% to 3% “to give the Fed more scope to cut interest rates and thereby stimulate the economy.”

.@jasonfurman argues that once the Fed has stabilized inflation below 3% for six months it should change the target rate...

Should the Fed raise its inflation target to 3%?

Core argument: The authors argue the Fed should first stabilize inflation below 3% for at least six months, then shift to a higher target range when it updates its overall strategy around 2025.

In the short run, the Fed should be aiming to stabilize inflation below 3% for at least six months. If it can achieve this goal, then it should shift to a higher target range for inflation when it updates its overall strategy around 2025. We have spent nearly half of the past 20 years with interest rates at the zero lower bound. Considerations led policy makers to conclude that 2% was the right number in the 1990s would lead them to consider something higher, like 3%, today to give the Fed more scope to cut interest rates and thereby stimulate the economy.

Takeaways by Macro Roundup® AI

  1. The authors argue the Fed should first stabilize inflation below 3% for at least six months, then shift to a higher target range when it updates its overall strategy around 2025.
  2. Interest rates have been at the zero lower bound for nearly half of the past 20 years, which the authors cite in arguing for a higher inflation target.
  3. The considerations that led policy makers to settle on 2% in the 1990s would, according to the authors, point to something higher like 3% today, giving the Fed more scope to cut rates and stimulate the economy.

Related Articles:

  • It is Time to Revisit the 2% Inflation Target — Inflation becomes salient—shaping wage and price decisions and more easily de-anchoring expectations—only above a threshold, with research on Google searches for "inflation" indicating US attention picks up above 3-4%. The author argues a higher inflation target is desirable for advanced economies, closer to 3% than 4%.
  • When Should We Declare Victory Over Inflation? — Modest positive inflation makes relative price and wage adjustments easier, since cutting prices or wages outright is difficult and rising prices elsewhere can accomplish the same shift. On this basis, some economists argue it is acceptable to stop disinflation at a 3% inflation rate rather than 2%.
  • What We’ve Learned About Inflation — Fiscal theory holds that a one-time $5tn fiscal expansion produces a one-time rise in the price level sufficient to inflate away $5tn of debt value, after which inflation stops even if the Federal Reserve does nothing. Raising interest rates lowers current inflation at the cost of more-persistent inflation, a beneficial smoothing.

AI Summary. Small-business survey data on price increases show a sharp rise and then a steep fall back toward pre-pandemic inflation, a pattern the author argues reflects improved supply rather than weak demand. Interest rate increases may not have caused disinflation but may have been necessary to permit disinflation driven by other forces.

Paul Krugman Krugman Wonks Out
Date Posted:

Noting that inflation has fallen without a rise in unemployment @paulkrugman argues the disinflation has been driven by improved supply as opposed to reduced demand.

Did rate hikes cause disinflation, or merely allow it?

Core argument: The National Federation of Independent Business survey shows a sharp rise in 2021-22 followed by a steep fall that has brought inflation most of the way back to prepandemic levels.

The National Federation of Independent Business survey shows a sharp rise in 2021-22, then a steep fall that has brought us most of the way back to prepandemic inflation. This really doesn’t sound like an economy in which businesses are forgoing price hikes because of weak demand. It sounds like an economy in which inflation is coming down because of improved supply, not reduced demand. Does this mean that the Fed was wrong to raise rates? Not necessarily. If it hadn’t raised rates, the economy might be running really, really hot. The Atlanta Fed’s GDPNow tracker currently shows the economy growing at 5.8 (!!!), which isn’t really plausible but does suggest a lot of heat; so the Fed may not have caused disinflation, but rate hikes may have been necessary to permit disinflation caused by other forces.

Takeaways by Macro Roundup® AI

  1. The National Federation of Independent Business survey shows a sharp rise in 2021-22 followed by a steep fall that has brought inflation most of the way back to prepandemic levels.
  2. The National Federation of Independent Business pattern suggests inflation is coming down because of improved supply rather than reduced demand, not because businesses are forgoing price hikes amid weak demand.
  3. The Atlanta Fed's GDPNow tracker shows the economy growing at 5.8 percent, a figure that is not really plausible but suggests a lot of heat, so Fed rate hikes may have been necessary to permit disinflation caused by other forces.

Related Articles:

  • The Unresolved Tension Between Prices and Incomes — Persistent per-worker income growth of about 5% a year is difficult to reconcile with forecasts of 2% inflation, since inflation reflects the gap between nominal spending growth and real production, and wages are the largest source of financing for consumer spending. Interest rates may therefore fall more slowly than market prices imply.
  • What Have We Learned About the Neutral Rate? — Analysts estimate that if inflation is brought down without a recession, the Federal Reserve's policy rate will stabilize nearer 3–3.25% than the 2.5% longer-run median projection of Federal Reserve officials. Projected shifts in government debt and demographics imply a roughly 0.5 percentage point net increase in the neutral rate over the next decade.
  • Rate Cuts — The Federal Reserve might refrain from cutting interest rates if inflation does not fall enough, or if economic growth runs above potential, unemployment pushes below its 50-year low, and financial conditions ease further. In that case, policymakers could argue the short-run neutral rate is higher than common estimates, making current policy less restrictive than assumed.

AI Summary. Meta's free Code Llama model lets companies build their own AI coding assistants that suggest code as developers type, and could draw customers away from paid tools such as Microsoft's GitHub Copilot, which runs on OpenAI technology. One person who worked on the model said firms may prefer an open-source option to safeguard their source code.

Kevin McLaughlin, Amir Efrati and Stephanie Palazzolo The Information
Date Posted:

Meta Platforms is preparing to launch open-sourced software to help developers automatically generate programming code, a move that could accelerate AI adoption and challenge proprietary software from OpenAI, Google, and startups. @theinformation

Meta Platforms is preparing to launch open-sourced software to help developers automatically generate programming code, a...

Can free open-source coding models pull customers from paid AI assistants?

Core argument: Meta's Code Llama will make it easier for companies to develop AI assistants that suggest code to developers as they type, and it could siphon customers from paid coding assistants such as Microsoft's GitHub Copilot, which is powered by OpenAI.

[Meta’s] Code Llama will make it easier for companies to develop AI assistants that automatically suggest code to developers as they type, and it could siphon customers from paid coding assistants such as Microsoft’s GitHub Copilot, which is powered by OpenAI. Generating automated code suggestions has been among the most popular uses of LLMs, as code is based on language. LLMs also power conversational text services like ChatGPT. GitHub a year ago began charging developers $10 per month for Copilot, and a slew of other coding assistant companies have raised venture funding in recent months. Companies might gravitate to using an open-source coding model to develop their own coding assistant in order to safeguard their source code, said one person who has worked on Code Llama.

Takeaways by Macro Roundup® AI

  1. Meta's Code Llama will make it easier for companies to develop AI assistants that suggest code to developers as they type, and it could siphon customers from paid coding assistants such as Microsoft's GitHub Copilot, which is powered by OpenAI.
  2. GitHub charges developers $10 per month for Copilot, and a slew of other coding assistant companies have raised venture funding.
  3. Companies might gravitate to an open-source coding model to build their own coding assistant in order to safeguard their source code, according to one person who has worked on Code Llama.

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  • Integrating the Goldman AI Report Into Our Views — Goldman Sachs estimates generative AI productivity gains based on how easily the technology applies to each occupation rather than where the largest untapped economic opportunities lie. The author argues gains in producing documents and emails are overstated, while gains in software production are far larger than Goldman anticipates.

AI Summary. Bloomberg Economics estimates US nominal growth at a 6.5% pace versus 4.8% for China, while still projecting faster real expansion in China. A stronger US dollar against the yuan has also widened the gap when output is measured in dollars.

Rebecca Choong Wilkins and Colum Murphy Bloomberg
Date Posted:

As the dollar strengthens relative to the yuan China’s GDP is declining as a percent of US GDP. In real terms China’s GDP is still growing as a percent of US.

Is US nominal growth outpacing China's despite slower real expansion?

Core argument: U.S. nominal growth is running at a 6.5% pace this year versus 4.8% for China, according to Bloomberg Economics, which still expects China to expand faster in real terms.

American nominal growth is clocking a 6.5% pace this year against 4.8% for China, according to Bloomberg Economics, which still sees the world's second-biggest economy expanding faster in real terms. The strengthening US dollar against the yuan has also contributed to China’s rival pulling away, for now, in the global race when GDP is measured in dollars.

Takeaways by Macro Roundup® AI

  1. U.S. nominal growth is running at a 6.5% pace this year versus 4.8% for China, according to Bloomberg Economics, which still expects China to expand faster in real terms.
  2. The strengthening U.S. dollar against the yuan has contributed to the U.S. pulling away from China, for now, when GDP is measured in dollars.

Related Articles:

  • How Soon and At What Height Will China’s Economy Peak? — Goldman Sachs now projects China's economy will not overtake America's until 2035 and will peak at only 14% larger, down from an earlier projection of surpassing the US in 2026 and being over 50% larger by mid-century. Capital Economics argues China will reach 90% of America's size in 2035 and then lose ground.
  • The Neoclassical Growth of China — China's per capita GDP growth path closely tracks those of Japan, South Korea, and Taiwan from similar starting income levels, indicating nothing unusual about its growth rate. The authors' model projects China's per capita GDP will level off at about 41% of the US level, reflecting a slowdown in productivity catch-up.
  • US-China Relations Have Entered a Frightening New Era — Adjusted for purchasing power, the economies of the US and its allies remain about 80% larger than those of China and Russia combined, and China's income per person is still under 30% of the US level. Even so, China's economic weight, trade role, and military make strategic confrontation dangerous, requiring transparency over aims and plans.

AI Summary. China's leadership is described as suspicious of U.S.-style consumption, viewing it as wasteful when the priority should be strengthening industrial capacity and preparing for potential conflict with the West. Officials also worry that giving individuals more control over their spending could weaken state authority without delivering the growth Beijing wants.

Lingling Wei and Stella Yifan Xie Wall Street Journal
Date Posted:

China’s leadership is suspicious of growing household consumption as a % of GDP at the expense of building industrial capacity and “girding for potential conflict with the West.”

Why does China's leadership resist shifting toward consumer-driven growth?

Core argument: Xi Jinping and some of his lieutenants view U.S.-style consumption as wasteful and favor bolstering China's industrial capabilities and preparing for potential conflict with the West, according to people with knowledge of Beijing's decision-making.

Xi and some of his lieutenants remain suspicious of U.S.-style consumption, which they see as wasteful at a time when China’s focus should be on bolstering its industrial capabilities and girding for potential conflict with the West, people with knowledge of Beijing’s decision-making say. The leadership also worries that empowering individuals to make more decisions over how they spend their money could undermine state authority, without generating the kind of growth Beijing desires.

Takeaways by Macro Roundup® AI

  1. Xi Jinping and some of his lieutenants view U.S.-style consumption as wasteful and favor bolstering China's industrial capabilities and preparing for potential conflict with the West, according to people with knowledge of Beijing's decision-making.
  2. Beijing's leadership worries that letting individuals make more decisions over how they spend their money could undermine state authority while failing to generate the growth it seeks.

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  • Can China’s Long-Term Growth Rate Exceed 2–3 Percent? — China invests roughly 42–44% of its GDP, while more mature, capital-intensive economies typically invest about 15–20%. Modeling a ten-year path that lowers China's investment share to 30% of GDP, the author argues the resulting growth rate depends mainly on how fast consumption grows.
  • China’s Defeated Youth — Urban Chinese unemployment among those aged 16 to 24 has run above 20%, about double the pre-pandemic level for that age group, with over 70% of unemployed youth in one year calculated to be graduates. Sentiment analysis of social media indicates the mood of young Chinese is growing darker.
  • Can China Fix Youth Unemployment Woes With Military Recruitment — More than 90% of China's military recruitment this year could come from recent graduates and high school students, which analysts say serves both the People's Liberation Army's modernisation targets and the country's record youth unemployment. Military academies remain less attractive to top students than leading public universities.

AI Summary. A study by a unit of China's National Health Commission estimates the country's total fertility rate fell to 1.09 from 1.30 in 2020, below Japan's 1.26. Annual births in China have fallen below 10m, down from around 18m when the one-child policy was scrapped.

Liyan Qi Wall Street Journal
Date Posted:
Is Database:
Database

.@fuxianyi expects fewer than eight million newborns in China this year, based on indicators including marriage and newborn-medical-checkup data, less than half the number in 2016 when China scrapped its one-child policy.

Has China's fertility rate fallen below Japan's?

Core argument: China's total fertility rate fell to 1.09 last year from 1.30 in 2020, according to a study by a unit of the National Health Commission cited by National Business Daily, placing it below Japan's 1.26.

China’s total fertility rate—a snapshot of the average number of babies a woman would have over her lifetime—fell to 1.09 last year, from 1.30 in 2020, according to a study by a unit of the National Health Commission cited this week by National Business Daily, a media outlet managed by the municipal government of Chengdu, the capital of Sichuan province. At 1.09, China’s rate would be below the 1.26 of Japan. Yi Fuxian, a scientist at the University of Wisconsin who has studied China’s demographics expects fewer than eight million newborns in China this year, based on indicators including marriage and newborn-medical-checkup data. That would be less than half the number in 2016, when China scrapped its one-child policy and recorded around 18 million births. By last year, the figure had fallen below 10 million.

Takeaways by Macro Roundup® AI

  1. China's total fertility rate fell to 1.09 last year from 1.30 in 2020, according to a study by a unit of the National Health Commission cited by National Business Daily, placing it below Japan's 1.26.
  2. Yi Fuxian, a scientist at the University of Wisconsin who studies China's demographics, expects fewer than eight million newborns in China this year, based on indicators including marriage and newborn-medical-checkup data.
  3. China recorded around 18 million births in 2016, the year it scrapped its one-child policy, with the figure falling below 10 million by last year.

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  • An Economic Hail Mary for China — A higher ratio of people aged 59 and over to children under 15 is strongly negatively correlated with GDP growth, as are higher median age and a larger share over 59. In China's northeastern provinces, where fertility fell a decade before the rest of the country, growth has stalled.
  • China’s Collapsing Birth and Marriage Rates Reflect a People’s Deep Pessimism — China recorded about 9.6m births, roughly half the 17.9m recorded six years earlier, and millions of young people have joined movements expressing alienation from work ("lying flat") and from Chinese society itself ("let it rot"). A viral video of a man telling pandemic enforcers "we are the last generation" spread the despairing hashtag #Lastgeneration.
  • China’s Population Likely Fell in 2022 as Births Hit New Low — An independent demographer estimates China's annual births fell to a record low of about 10m, down from 10.6m the prior year — itself the sixth straight decline and the lowest since 1949. Deaths likely exceeded the prior year's 10.1m, partly due to the spread of Covid infections.