Edward Conard

Top Ten New York Times Bestselling Author

  • “Unintended Consequences provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.” - Nouriel Roubini, New York University; Chairman, Roubini Global Economics
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Monday, August 28, 2023

AI Summary. Fiscal dominance requires governments to fund deficits at the margin with non-interest-bearing debt, and the revenue from inflation taxation—both expected and unexpected—is limited. The authors argue a US fiscal dominance episode could end the payment of interest on bank reserves and restore requirements that banks hold large zero-interest reserves against deposits.

Charles Calomiris Federal Reserve Bank of St. Louis
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.@cwcalomiris argues high American public debt levels and chronic deficits may lead toward an era of “fiscal dominance,” in which the government forces banks to hold non-interest-bearing debt.

.@cwcalomiris argues high American public debt levels and chronic deficits may lead toward an era of “fiscal...

How would fiscal dominance change interest payments on bank reserves?

Core argument: Fiscal dominance, defined as the government's need to fund deficits at the margin with non-interest-bearing debts, relies on inflation taxation composed of expected and unexpected components, both limited in their capacity to fund real government expenditures.

The essence of fiscal dominance is the need for the government to fund its deficits on the margin with non-interest-bearing debts. Inflation taxation has two components: expected and unexpected inflation taxation. Both are limited in their ability to fund real government expenditures. The expected component of inflation taxation (per period) is the product of the nominal interest rate and the inflation tax base, which consists of all non-interest bearing government debt. Unexpected inflation taxation occurs when the nominal value of outstanding government debt falls unexpectedly (thereby taxing government debtholders), and this component is also limited by the ability of government to surprise markets by creating unanticipated inflation. It is quite possible that a fiscal dominance episode in the US would result in not only the end of the policy of paying interest on reserves, but also a return to requiring banks to hold a large fraction of their deposit liabilities as zero-interest reserves.

Takeaways by Macro Roundup® AI

  1. Fiscal dominance, defined as the government's need to fund deficits at the margin with non-interest-bearing debts, relies on inflation taxation composed of expected and unexpected components, both limited in their capacity to fund real government expenditures.
  2. The expected component of inflation taxation per period equals the nominal interest rate multiplied by the inflation tax base, which consists of all non-interest-bearing government debt.
  3. A fiscal dominance episode in the US could end the policy of paying interest on reserves and bring back requirements that banks hold a large fraction of their deposit liabilities as zero-interest reserves.

Related Articles:

  • The Return of Quantitative Easing — The Congressional Budget Office projects the US government will need to sell an average of $2tn of Treasuries annually over the next decade, with Federal Reserve holdings of Treasuries rising to $7.5tn by 2033 from nearly $5tn. The author argues those spending projections are too low, implying holdings of at least $10tn.
  • 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.
  • The 2023 Long-Term Budget Outlook — The Congressional Budget Office projects the federal deficit falls from 5.8% of gross domestic product to 5.0% before rising every year to 10% of GDP over three decades, a level exceeded only during World War II and the pandemic. Federal debt held by the public is projected to reach 181% of GDP.

AI Summary. High public debt ratios are likely to persist because large sustained primary budget surpluses are politically unrealistic, real interest rates are already very low, faster global growth is hard to engineer, inflation is not a sustainable route to reducing debt, and financial repression is less feasible amid liberalized markets.

Serkan Arslanalp and Barry Eichengreen Federal Reserve Bank of Kansas City
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.@B_Eichengreen argues that high public debt levels are here to stay and that methods to suppress interest rates are “less feasible than in the past.” This means chronic fiscal deficits will need to be reduced even in countries that issue safe assets.

Are high public debt levels here to stay?

Core argument: High public debts are here to stay, the author argues, because large, persistent primary budget surpluses are not in the political cards and the other routes to reducing debt ratios are each implausible.

Large, persistent primary budget surpluses are not in the political cards. It is difficult to imagine more favorable interest-rate-growth-rate differentials (favorable interest-rate-growth-rate differentials reducing debt ratios in an accounting sense). Real interest rates have trended downward to very low levels. It is hard to foresee them falling still lower. Faster global growth is pleasant to imagine but difficult to engineer. Inflation is not a sustainable route to reducing high public debts. Statutory ceilings on interest rates and related measures of financial repression are less feasible than in the past. Investors opposed to the widespread application of repressive policies are a more powerful lobby. Financial liberalization, internal and external, is an economic fact of life. The genie is out of the bottle. All of which is to say that, for better or worse, high public debts are here to stay.

Takeaways by Macro Roundup® AI

  1. High public debts are here to stay, the author argues, because large, persistent primary budget surpluses are not in the political cards and the other routes to reducing debt ratios are each implausible.
  2. Real interest rates have trended downward to very low levels and are hard to foresee falling still lower, while faster global growth is pleasant to imagine but difficult to engineer.
  3. Inflation is not a sustainable route to reducing high public debts, and statutory interest-rate ceilings and related financial repression are less feasible than in the past given financial liberalization and a more powerful investor lobby opposed to repressive policies.

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.
  • Did the U.S. Really Grow Out of Its World War II Debt? — Decomposing U.S. debt-to-GDP movements, the authors find the post-World War II decline from 106% to a trough of 23% was explained mostly by primary budget surpluses and interest-rate distortions from surprise inflation and pegged nominal rates; absent those, the ratio would have fallen only to 74%.

AI Summary. The neutral interest rate is argued to be low because investment demand tracks expected growth, and U.S. growth prospects are held down by stalled working-age population growth and slow productivity gains. Larger budget deficits and an industrial-policy-driven manufacturing investment boom could have raised it, though manufacturing is a small share of overall investment.

Paul Krugman Krugman Wonks Out
Date Posted:

.@PaulKrugman notes that after a long period of general agreement that r* was very low, there is now active disagreement about the level of r*, with some, including the Richmond Fed, believing that r* has increased substantially.

Why does the neutral interest rate remain low?

Core argument: Pre-Covid explanations for low r* rested on weak investment demand tied to stalled growth in the working-age population and slow productivity growth since the mid-2000s, and the demographic piece of that story is unchanged.

Many of us thought we had a pretty good understanding of the forces behind low r* before Covid struck. Investment demand is largely driven by expectations about future economic growth, and prospects for U.S. growth seemed low in part because of demography — growth in the working-age population has stalled — and in part because, despite all the hype about technology, productivity has grown slowly since the mid-2000s. The demographic story hasn’t changed. There are a couple of other forces that might have increased r*. Budget deficits have gotten bigger, which could be providing a fiscal boost. The Biden administration’s industrial policies seem to be catalyzing a boom in manufacturing investment. But manufacturing investment isn’t that big a part of overall investment spending, so it’s not clear how much this matters for interest rates. One possible reason to think that r* may have risen is the surprising resilience of the economy in the face of Fed rate hikes.

Takeaways by Macro Roundup® AI

  1. Pre-Covid explanations for low r* rested on weak investment demand tied to stalled growth in the working-age population and slow productivity growth since the mid-2000s, and the demographic piece of that story is unchanged.
  2. Larger budget deficits and the Biden administration's industrial policies, which appear to be catalyzing a boom in manufacturing investment, are candidate forces pushing r* higher, though manufacturing is not a large share of overall investment spending.
  3. The economy's surprising resilience in the face of Federal Reserve rate hikes is one possible reason to think r* has risen.

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.
  • 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. Nearly half the world's oceans are experiencing a marine heatwave, defined as warmer than 90% of previous temperature observations for the same date. Beyond climate change and the El Niño/La Niña cycle, researchers are investigating whether rules cutting ships' sulfur particle pollution and water vapor from an underwater volcanic eruption are contributing, with the magnitude disputed.

Eric Niiler Wall Street Journal
Date Posted:

Half the world’s oceans are experiencing a marine heatwave. As the Gulf of Maine warms, the lobster catch has fallen by 26% since 2016 and is now “162 miles northward and nearly 70 feet deeper.”

What is driving marine heatwaves across half the world's oceans?

Core argument: Nearly half the world's oceans are experiencing a marine heatwave, defined as water warmer than 90% of previous temperature observations recorded on the same date.

This summer, nearly half the world’s oceans are experiencing a marine heatwave, defined as warmer than 90% of previous temperature observations on the same date. There are other possible explanations in addition to climate change and the El Niño/La Niña cycle. New pollution rules have cut airborne sulfur aerosol particles released by commercial ships over parts of the ocean, clearing the air and allowing more sunlight to reach the ocean surface. That in turn might be heating the water along some shipping routes, although the amount is in dispute. In January 2022, an underwater volcano near Tonga blasted 50 million tons of water vapor into the stratosphere. Some researchers believe that vapor might be acting as a planet-warming greenhouse gas and nudging up ocean temperatures. Both theories are still under investigation, and their overall impact is up for debate.

Takeaways by Macro Roundup® AI

  1. Nearly half the world's oceans are experiencing a marine heatwave, defined as water warmer than 90% of previous temperature observations recorded on the same date.
  2. Pollution rules that cut sulfur aerosol particles from commercial ships have cleared the air over parts of the ocean, allowing more sunlight to reach the surface and possibly heating water along some shipping routes, though the magnitude is disputed.
  3. An underwater volcano near Tonga blasted 50 million tons of water vapor into the stratosphere in January 2022, and some researchers believe that vapor might be acting as a planet-warming greenhouse gas that nudges up ocean temperatures.

Related Articles:

  • Long-term Surface Impact of Hunga Tonga-Hunga Ha’apai-like Stratospheric Water Vapor Injection — A volcanic eruption that injected large amounts of water vapor — a strong greenhouse gas — into the stratosphere is estimated to have raised surface temperatures by more than 1.5°C across large regions for several years, while cooling some areas by close to 1°C. The authors suggest a possible link to tropical Pacific sea surface temperatures that warrants further investigation.
  • The Rapid Loss Of Antarctic Sea Ice Brings Grim Scenarios Into View — Unusual wind and wave patterns are a leading short-term explanation for the loss of Antarctic sea ice, which holds the continent's coastal ice shelves in place. If those shelves collapsed, continental ice could flow rapidly into the oceans; the West Antarctic ice sheet alone holds enough water to raise global sea level by 11 feet.
  • Warming Could Push the Atlantic Past a ‘Tipping Point’ This Century — New research projects that the Atlantic Meridional Overturning Circulation, the network of ocean currents shaping North Atlantic climate, could collapse around midcentury as human-driven warming slows it. A much weaker circulation could cool much of the Northern Hemisphere, speed sea-level rise along North American and European coasts, and reduce rainfall in Africa's Sahel and Asian monsoon regions.

AI Summary. The United Auto Workers union has demanded a 46% raise, a return to traditional pensions, and a 32-hour work week from the three Detroit automakers. The companies say meeting those demands would raise labor costs by $80bn and lift total pay and benefit expenses to more than $150 an hour from about $64.

Keith Naughton, Gabrielle Coppola and David Welch Bloomberg
Date Posted:

The UAW is making demands of the Big Three that would cost an additional $80 billion over the course of the contract. Bloomberg notes total hourly pay and benefits expenses would rise from about $64 now to $150.

Would union demands more than double automakers' hourly labor costs?

Core argument: United Auto Workers president Shawn Fain has declared "war" on the Detroit Three automakers with contract demands he himself calls "audacious," including a 46% raise, a return to traditional pensions and a 32-hour work week.

Shawn Fain, president of the United Auto Workers union since March, has declared “war” on the Detroit Three automakers, with contract demands that even he calls “audacious,” including proposals for a 46% raise, a return to traditional pensions and a 32-hour work week. The automakers counter that meeting those demands would threaten their existence, driving up labor costs by $80 billion and increasing total pay and benefit expenses to more than $150 an hour, from about $64 now, Bloomberg has reported. Higher labor costs contributed to Chrysler, Ford and GM’s lack of price competitiveness against foreign brands in the 1990s and 2000s.

Takeaways by Macro Roundup® AI

  1. United Auto Workers president Shawn Fain has declared "war" on the Detroit Three automakers with contract demands he himself calls "audacious," including a 46% raise, a return to traditional pensions and a 32-hour work week.
  2. The Detroit automakers say meeting the union's demands would drive up labor costs by $80 billion and raise total pay and benefit expenses to more than $150 an hour, from about $64 now, threatening their existence, according to Bloomberg.
  3. Higher labor costs contributed to Chrysler, Ford and GM's lack of price competitiveness against foreign brands in the 1990s and 2000s.

Related Articles:

  • UAW Warns Contract Talks With Big Three Carmakers Are Moving ‘Too Slow’ — The United Auto Workers union sought authorization to call a strike, arguing contract talks with the three major Detroit carmakers are moving too slowly. Its demands include pay raises of more than 40%, inflation protection, and equal wages across jobs, which Bloomberg has reported would cost carmakers $80bn over four years.
  • The ‘Summer of Strikes’ Isn’t Living Up to the Hype — Recent strike waves differ in composition: earlier ones were dominated by teachers and other state and local government workers, while current strikers are mostly private-sector employees, often organizing location-by-location in stoppages too small to appear in Bureau of Labor Statistics counts. The Cornell-ILR Labor Action Tracker recorded 224,000 workers in stoppages versus the Bureau's 120,600.
  • Everyone Wants to Work at UPS After Teamsters Deal — UPS lowered its full-year profit forecast, citing the volume impact from labor negotiations and costs tied to its tentative labor agreement. Under the five-year contract, full-time drivers are set to earn about $170,000 in annual pay and benefits by its end, while part-time union employees earn at least $25.75 an hour plus full health care and pension benefits.

AI Summary. Data on more than 370 Apple suppliers and their factory locations show the company's manufacturing network spreading across the developing world, with Vietnam and India the biggest gainers. US and Japanese producers have reduced their China footprint as Chinese firms join the supplier list, though China still houses most Apple device factories.

Bloomberg Staff Bloomberg
Date Posted:

According to a Bloomberg analysis, Apple’s suppliers are following Apple out of China with Vietnam and India being the biggest winners. 7% of iPhones were manufactured in India last year.

Is smartphone manufacturing shifting away from China to other countries?

Core argument: Bloomberg's data on more than 370 Apple suppliers and their factory locations shows Vietnam and India as the biggest winners from the company's shifting production, with smaller manufacturing hot spots emerging elsewhere in Asia.

Data compiled by Bloomberg on more than 370 suppliers and their factory locations reveals which of Apple’s manufacturing partners are building new capacity and where. The result is the clearest picture yet of all the ways the Cupertino, California-based company’s network of producers increasingly crisscrosses the developing world. Vietnam and India are the biggest winners, with smaller production hot spots appearing elsewhere in Asia. Producers from the US and Japan have reduced their footprint in China, even as Chinese firms join the supplier list at a rapid clip. China still houses the majority of Apple’s device-making factories, and will remain an integral part of the company’s supply chain. But the shift to a more diffuse production network is undeniable and accelerating.

Takeaways by Macro Roundup® AI

  1. Bloomberg's data on more than 370 Apple suppliers and their factory locations shows Vietnam and India as the biggest winners from the company's shifting production, with smaller manufacturing hot spots emerging elsewhere in Asia.
  2. US and Japanese producers have reduced their manufacturing footprint in China, while Chinese firms are joining Apple's supplier list at a rapid clip.
  3. China still houses the majority of Apple's device-making factories and will remain an integral part of the company's supply chain, even as the shift to a more diffuse production network accelerates.

Related Articles:

  • What it Would Take for Apple to Disentangle itself from China — Some supply chain experts argue India's phone manufacturing growth is overstated, noting the 200M phones made there last year are mostly models selling for $250 or less, while iPhones average near $1,000 and require more sophisticated automation and labor. One analyst projects Apple shifts just 10% of iPhone production outside China by 2030, or at most 20%.
  • Apple’s Complex, Secretive Gamble to Move Beyond China — Apple is shifting some production out of China—iPhones and accessories to India, AirPods and Mac assembly to Vietnam, some Mac output to Malaysia, and simpler products to Ireland—while planning to retain extensive Chinese operations. Its leadership is concerned that moving too much capacity too quickly could prompt Chinese retaliation or nationalist consumer backlash.
  • India Equity: An Unsung Long-Term Performance Story — Cumulative total returns for Indian equities have been comparable to or better than US equities over roughly three decades, while Chinese equities have lagged both, according to index data for the MSCI India, S&P 500, and MSCI China indexes.

AI Summary. China's leadership objects to Western-style consumption-driven growth, viewing it as wasteful and at odds with the goal of making China a world-leading industrial and technological power, according to people familiar with decision-making in Beijing. Chinese officials also emphasized avoiding a current-account deficit, which would signal greater dependence on the outside world.

Lingling Wei and Stella Yifan Xie Wall Street Journal
Date Posted:
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Xi Jinping is opposed to domestic consumption growth, according to well-sourced reporters @Lingling_Wei and @yifanxie. This implies that persistent imbalances with the West are a goal of the central government.

Do Communist Party priorities block a shift toward consumption-driven growth?

Core argument: Xi Jinping holds deep-rooted philosophical objections to Western-style consumption-driven growth, viewing it as wasteful and at odds with his goal of making China a world-leading industrial and technological powerhouse, according to people familiar with decision-making in Beijing.

Xi Jinping has deep-rooted philosophical objections to Western-style consumption-driven growth, people familiar with decision-making in Beijing say. Xi sees such growth as wasteful and at odds with his goal of making China a world-leading industrial and technological powerhouse. Chinese officials also emphasized avoiding a current-account deficit, which would signal greater dependence on the outside world at a time of simmering tensions between Beijing and the West. Chinese officials told their counterparts at multinational institutions that the many hardships Xi survived during the Cultural Revolution—when he lived in a cave and dug ditches—helped shape his view that austerity breeds prosperity, the people said. “The message from the Chinese is that Western-style social support would only encourage laziness,” one person familiar with the meetings said.

Takeaways by Macro Roundup® AI

  1. Xi Jinping holds deep-rooted philosophical objections to Western-style consumption-driven growth, viewing it as wasteful and at odds with his goal of making China a world-leading industrial and technological powerhouse, according to people familiar with decision-making in Beijing.
  2. Chinese officials emphasized avoiding a current-account deficit, which would signal greater dependence on the outside world at a time of simmering tensions between Beijing and the West.
  3. Chinese officials told counterparts at multinational institutions that the hardships Xi survived during the Cultural Revolution, when he lived in a cave and dug ditches, helped shape his view that austerity breeds prosperity, according to people familiar with the meetings.

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’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.
  • China Is Now Growing Slower Than the U.S. — China's central bank and other banks sold more foreign currency and foreign-exchange forwards in a single month than in any month since January 2017. Because Chinese entities have been large buyers of mortgage-backed securities backed by Fannie Mae, Freddie Mac, and Ginnie Mae, a shift toward selling or buying less could affect those spreads and interest rate volatility.

Tuesday, August 29, 2023

AI Summary. The authors argue that large, persistent US federal deficits and limited dealer balance-sheet flexibility will cause outstanding Treasury debt to grow rapidly relative to the market's capacity to intermediate trades, absent significant changes in market structure. They contend broad central clearing, all-to-all trading, real-time post-trade reporting, capital-regulation changes, and transparent official purchase programs could strengthen market capacity and resilience.

Darrell Duffie Federal Reserve Bank of Kansas City
Date Posted:
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Since 2007, the ratio of Treasuries outstanding to primary dealer assets has increased by a factor of four. @DuffieDarrell argues that this will drive increasing illiquidity in the Treasury market.

Can market structure reforms keep Treasury trading capacity growing with debt?

Core argument: Treasuries outstanding will keep growing rapidly relative to the market's intermediation capacity, driven by large and persistent US fiscal deficits and the limited flexibility of dealer balance sheets, absent significant improvements in market structure.

The total amount of Treasuries outstanding will continue to grow rapidly relative to the intermediation capacity of the market because of large and persistent US fiscal deficits and the limited flexibility of dealer balance sheets, unless there are significant improvements in market structure. Broad central clearing and all-to-all trade have the potential to add importantly to market capacity and resilience. Additional improvements in intermediation capacity can likely be achieved with real-time post-trade transaction reporting and improvements in the form of capital regulation, especially the Supplementary Leverage Ratio. Backstopping the liquidity of this market with transparent official-sector purchase programs will further buttress market resilience.

Takeaways by Macro Roundup® AI

  1. Treasuries outstanding will keep growing rapidly relative to the market's intermediation capacity, driven by large and persistent US fiscal deficits and the limited flexibility of dealer balance sheets, absent significant improvements in market structure.
  2. Broad central clearing and all-to-all trading have the potential to add importantly to Treasury market capacity and resilience.
  3. Real-time post-trade transaction reporting and improvements in capital regulation, especially the Supplementary Leverage Ratio, can likely add intermediation capacity, while transparent official-sector purchase programs backstopping liquidity would further buttress Treasury market resilience.

Related Articles:

  • JPMorgan Says Treasuries Coping Amid Worst Liquidity Since 2020 — Strategists at JPMorgan Chase argue that deteriorated liquidity in the US Treasury market is not a financial stability concern and need not deter the Federal Reserve from continuing rate hikes. They note the price impact of each trade remains below crisis levels, with the largest dislocations in Treasuries maturing in 7 to 10 years.
  • Raising Anchor — The Bank of Japan's low interest rate policy anchors global bond yields, and that anchor is set to move higher, making U.S. Treasury bonds less attractive to Japanese investors. With this marginal source of demand fading as Treasury supply is set to increase, U.S. yields are likely to drift higher.

AI Summary. Wage growth of about 2.5% would be consistent with 2% inflation given low recent-trend productivity growth, but wage growth is running near 4.5%. On this view inflation is more likely to level out at its current rate than keep falling, pushing the Federal Reserve toward further tightening through rate rises or holding rates high.

Bob Prince and Aaron Goone Bridgewater Associates
Date Posted:

Noting high nominal wage growth, Bridgewater argues that inflation is likely leveling out at its current rate which implies downside risk to asset prices.

Does wage growth signal inflation will stall above target?

Core argument: Wage growth of about 2.5% would be consistent with 2% inflation today, given low recent-trend productivity growth and more neutral income from assets and deficit-financed government transfers, but wage growth is running near 4.5%.

Today, about 2.5% wage growth would be consistent with 2% inflation, as recent-trend productivity growth has been low and other sources of income (from assets and government-deficit-financed transfers) are more neutral. With wage growth currently running at around 4.5%, we’re far away from this level. We’re more likely to see inflation level out at its current rate rather than continue to decline like it has over the past year. This would push the Fed to continue tightening and, with a short pause and return toward easing being priced in, could come through the form of either rate rises or holding rates at high levels. This makes assets especially vulnerable to another round of tighter policy.

Takeaways by Macro Roundup® AI

  1. Wage growth of about 2.5% would be consistent with 2% inflation today, given low recent-trend productivity growth and more neutral income from assets and deficit-financed government transfers, but wage growth is running near 4.5%.
  2. Inflation is more likely to level out at its present rate than to keep declining as it has over the past year, which would push the Federal Reserve to continue tightening through rate rises or holding rates at high levels.
  3. With a short pause and a return toward easing priced in, assets are especially vulnerable to another round of tighter policy.

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.
  • The Tightening Cycle Is Approaching Stage 3: Guideposts We’re Watching — The authors argue that corporate earnings must fall to trigger the layoffs needed to slow wage growth, a prerequisite for sustainably returning inflation to 2%, and they see odds favoring an economic downturn. Absent that downturn, they expect inflation to stay above central bank targets, keeping short-term interest rates higher than markets anticipate.
  • 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. Market pricing of future inflation expectations and longer-dated real yields has been creeping up, potentially reflecting some probability of both a higher inflation target and a higher neutral interest rate. This implies today's higher nominal rates are here to stay and may trend higher.

Joseph Wang Fed Guy Blog
Date Posted:

Citing a rise in 5 and 10-year TIPS yields, @FedGuy12 notes some investors are pricing in a world with a higher r*.

Are markets pricing in higher inflation expectations and neutral rates?

Core argument: Market-based measures of longer-dated real yields and future inflation expectations have been creeping up, potentially pricing in some probability of both a higher inflation target and a higher neutral rate (r*).

One market based measure of longer dated real yields has steadily risen and appears to indicate such a possibility. Market pricing indicates that some investors have a clearer vision of the future. Market pricing of future inflation expectations and longer dated real rates have been creeping up, potentially pricing in some probability of both a higher inflation target and a higher r*. Together this implies that the higher nominal rates we see today are here to stay and may even trend higher as the future unfolds. The Fed is a conservative institution and would be hesitant to make any big changes to its approach to policy. If the future looks different from the past, the Fed will be among the last to know.

Takeaways by Macro Roundup® AI

  1. Market-based measures of longer-dated real yields and future inflation expectations have been creeping up, potentially pricing in some probability of both a higher inflation target and a higher neutral rate (r*).
  2. The rise in market pricing of real rates and inflation expectations implies that today's higher nominal rates are here to stay and may trend higher.
  3. The Federal Reserve is a conservative institution hesitant to make big changes to its policy approach, and if the future looks different from the past, the Fed will be among the last to know.

Related Articles:

  • Hitch Your Wagon to R-Star — The neutral interest rate is argued to be low because investment demand tracks expected growth, and U.S. growth prospects are held down by stalled working-age population growth and slow productivity gains. Larger budget deficits and an industrial-policy-driven manufacturing investment boom could have raised it, though manufacturing is a small share of overall investment.
  • 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.
  • 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.

AI Summary. The rise in US 10-year Treasury yields has occurred almost entirely during New York trading hours rather than Tokyo hours, suggesting the Bank of Japan's exit from yield curve control is not the driver. Likely drivers instead include the US sovereign downgrade, Federal Reserve balance-sheet runoff, the budget deficit, and larger Treasury auctions.

Torsten Sløk Apollo
Date Posted:

Torsten Sløk @apolloglobal argues that reduced Japanese demand for Treasuries is a minor factor in rising long-term interest rates.

Are Japanese policy changes driving US long-term interest rates higher?

Core argument: Since the Bank of Japan's yield curve control exit surprise in late July, the rise in US 10-year yields has occurred almost entirely during New York trading hours rather than Tokyo hours.

One way to better understand the impact of BoJ YCC exit on Japanese demand for US Treasuries is to look at how much of the recent increase in US long-term interest rates has happened during Tokyo trading hours. Since the BoJ YCC exit surprise in late July, the move higher in 10s has occurred almost entirely during New York trading hours. This suggests that US rates are not driven higher by Japanese investors during Tokyo trading hours. Hence, BoJ YCC exit doesn’t seem to be the reason long rates have increased over the past month. Instead, likely drivers of US rates over the past month are the US sovereign downgrade, fewer dollars for China to recycle in a falling exports environment, Fed QT, the significant budget deficit, the large stock of T-bills, and the Treasury’s intention to increase coupon auction sizes.

Takeaways by Macro Roundup® AI

  1. Since the Bank of Japan's yield curve control exit surprise in late July, the rise in US 10-year yields has occurred almost entirely during New York trading hours rather than Tokyo hours.
  2. The concentration of the US long-rate move in New York hours suggests Japanese investors are not driving US rates higher, and that the BoJ's yield curve control exit is not the reason long rates rose over the past month.
  3. Likely drivers of US rates over the past month include the US sovereign downgrade, fewer dollars for China to recycle as exports fall, Fed quantitative tightening, the large budget deficit, the big stock of T-bills, and the Treasury's intention to increase coupon auction sizes.

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AI Summary. The authors estimate that a 100bps monetary tightening reduces investment in intellectual property by about 1%, research and development spending at public firms by about 3%, venture capital investment by up to 25%, and patenting in important technologies by up to 9%.

Yueran Ma and Kaspar Zimmermann Federal Reserve Bank of Kansas City
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Historically monetary tightening has had an impact on risk capital: 100bps of tightening is associated with a 1-3pp decline in R&D spending and a 25% decline in VC investment over the following 1-3 year period.

Does monetary tightening reduce research, venture capital, and patenting?

Core argument: A 100bps monetary tightening shock lowers investment in intellectual property products in the national accounts by about 1%, a magnitude comparable to the decline in traditional physical investment, and cuts R&D spending among Compustat public firms by about 3%.

We normalize the shock to tightening by 100bps. Investment in intellectual property products (IPP) in the national accounts (NIPA) declines by about 1%. The magnitude is comparable to the decline in traditional investment in physical assets. R&D spending in Compustat data for public firms declines by about 3%. VC investment is more volatile, and declines by as much as 25% at a horizon of 1 to 3 years after the monetary policy shock. Patenting in important technologies declines by up to 9% 2 to 4 years after the shock. An aggregate innovation index constructed using estimates of the economic value of patents also declines by up to 9%. Based on estimates of the output and total factor productivity (TFP) sensitivity to the aggregate innovation index, a 9% decline in the index can contribute to 1% lower real output and 0.5% lower TFP 5 years later.

Takeaways by Macro Roundup® AI

  1. A 100bps monetary tightening shock lowers investment in intellectual property products in the national accounts by about 1%, a magnitude comparable to the decline in traditional physical investment, and cuts R&D spending among Compustat public firms by about 3%.
  2. Venture capital investment is more volatile, declining by as much as 25% one to three years after a 100bps tightening shock, while patenting in important technologies falls by up to 9% two to four years after.
  3. An aggregate innovation index built from estimates of the economic value of patents declines by up to 9%, which, based on estimated output and TFP sensitivities, can contribute to 1% lower real output and 0.5% lower total factor productivity five years later.

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AI Summary. The college wage premium is largest for Asian workers, whose college graduates earn more than twice what high school graduates earn — about a 120% premium versus roughly 70–80% for Black, Hispanic, and White workers. The premium has edged down slightly for all groups except Hispanic workers since the pandemic recession.

Leila Bengali, Marcus Sander, Robert G. Valletta and Cindy Zhao Federal Reserve Bank of San Francisco
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The decline in the college wage premium has been driven by faster wage growth for high school workers rather than slower wage growth for college graduates. @sffed

Does the college wage premium differ by race and ethnicity?

Core argument: The college wage premium for Asian workers is about 120%, with college graduates earning more than twice what high school graduates earn, compared with about 70–80% for Black, Hispanic, and White workers.

The college wage premium is especially large for Asian workers, with college graduates earning more than twice what high school graduates earn. This reflects about a 120% premium, compared with about a 70–80% premium for the other three racial/ethnic groups. The college wage gap is also somewhat larger for Black workers than for Hispanic and White workers, although the premiums for those groups have largely converged in recent years. All four groups saw gains through at least the early part of the recovery from the 2007–09 recession. While the premium continued to rise for Asian workers, the premium flattened for White workers in the latter half of the recovery and fell for Hispanic and Black workers. Moreover, since the 2020 pandemic recession, the college wage premium edged down slightly for all groups except Hispanic workers.

Takeaways by Macro Roundup® AI

  1. The college wage premium for Asian workers is about 120%, with college graduates earning more than twice what high school graduates earn, compared with about 70–80% for Black, Hispanic, and White workers.
  2. The college wage premium is somewhat larger for Black workers than for Hispanic and White workers, though the premiums for those groups have largely converged.
  3. All four racial and ethnic groups gained through at least the early part of the recovery from the 2007–09 recession, after which the premium kept rising for Asian workers, flattened for White workers, and fell for Hispanic and Black workers.

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  • Why Do Wages Grow Faster for Educated Workers? — College graduates sort into professional, non-routine occupations where wages rise much more with job tenure, and the author estimates this occupational sorting explains at least half of the life-cycle growth in the college wage premium. That premium is estimated at 22% at age 26, 49% at age 40, and 56% at age 60.
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AI Summary. Sub-Saharan Africa is projected to account for half of global population growth through 2050 and to hold a third of the world's people by the end of the century, up from 14%. Its population is growing 3x faster than the rest of the world, concentrating rapid growth in countries where nearly half have gross national income per person below $1,135.

Ashley Ahn Foreign Policy
Date Posted:

According to current UN projections half of global population growth btw 2022 and 2050 will take place in sub-Saharan Africa. Current UN estimates project sub-Saharan Africa to have 33% of the global population by 2100 relative to 14% in 2019. @ashleyahn88

Is future global population growth concentrated in the world's poorest countries?

Core argument: Sub-Saharan Africa will account for half of global population growth from 2022 to 2050, and the region's population is growing three times faster than the rest of the world.

Half of the global population growth from 2022 to 2050 will occur in sub-Saharan Africa. The region’s population is currently growing three times faster than the rest of the world, and by the end of the century, it will be home to a third of all people in the world, compared to only 14% in 2019. This means that the burden of rapid population growth will fall on some of the poorest countries in the world, with nearly half of the region having a gross national income per capita below $1,135, and in places that are among the most vulnerable to climate change.

Takeaways by Macro Roundup® AI

  1. Sub-Saharan Africa will account for half of global population growth from 2022 to 2050, and the region's population is growing three times faster than the rest of the world.
  2. Sub-Saharan Africa will be home to a third of the world's people by the end of the century, up from 14% in 2019.
  3. Nearly half of sub-Saharan Africa has a gross national income per capita below $1,135, leaving the burden of rapid population growth on some of the world's poorest countries and places most vulnerable to climate change.

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