Edward Conard

Top Ten New York Times Bestselling Author

  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…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
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Tuesday, October 3, 2023

AI Summary. The US is running a primary deficit—excluding interest costs—much larger than its historical norm, at a point in the business cycle when deficits would normally be smaller than usual. The average interest rate on federal debt is projected to remain at or below the rate of nominal GDP growth over the next decade.

Tim Krupa and Alec Phillips Goldman Sachs
Date Posted:

A @GoldmanSachs analysis notes that the rise in real interest expense as a percentage of US GDP requires primary (ex-interest) deficit reduction comparable to the 1993 fiscal adjustment to stabilize the debt-to-GDP ratio.

Is the primary deficit, not interest costs, the bigger fiscal problem?

Core argument: The US primary (ex-interest) deficit is much larger than its historical norm, and it is occurring at a point in the business cycle when deficits would normally be smaller than usual.

The greater challenge facing US fiscal policy is not new: the US is running a primary (ex-interest) deficit much larger than has been the case historically, and it is happening at a point in the business cycle when the deficit would normally be smaller than usual. When interest expense rose sharply in the 1980s, fiscal policymakers reacted by shrinking the primary (ex-interest) deficit. The largest fiscal adjustment from that period, enacted in 1993, would be sufficient if enacted now to offset the additional interest expense we project (relative to 2021) after 5 years. The average interest rate on federal debt is likely to remain at or below the rate of nominal GDP growth for the next decade, and this relationship is likely to be more benign than the historical average over the next five years.

Takeaways by Macro Roundup® AI

  1. The US primary (ex-interest) deficit is much larger than its historical norm, and it is occurring at a point in the business cycle when deficits would normally be smaller than usual.
  2. When interest expense rose sharply in the 1980s, fiscal policymakers responded by shrinking the primary deficit, and the largest adjustment from that period, enacted in 1993, would be sufficient if enacted now to offset projected additional interest expense relative to 2021 after five years.
  3. The average interest rate on federal debt is likely to remain at or below the rate of nominal GDP growth for the next decade, with that relationship likely more benign than the historical average over the next five years.

Related Articles:

  • Maxing Out — Hedge funds became a major buyer of US Treasuries after the Federal Reserve and commercial banks stepped back, financing those purchases through dealer repurchase agreements that grew rapidly and then stalled. If these leveraged buyers are hitting financing limits set by dealer balance sheet costs, a new marginal buyer must emerge to absorb upcoming issuance.
  • Resilience Redux in the US Treasury Market — 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.
  • Living with High Public Debt — 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.

AI Summary. China's slowing growth and weaker exports to the US leave it fewer dollars to recycle into Treasuries, and it has sold $300bn of Treasuries since 2021. The author argues this, alongside rising Treasury issuance and Federal Reserve balance-sheet runoff, will keep the cost of capital higher regardless of the business cycle.

Torsten Sløk Apollo
Date Posted:

Torsten Sløk suggests that slowing growth in China might be the dominant cause of the recent weakness in Treasuries. @apolloglobal

Is reduced Chinese Treasury buying pushing US long rates higher?

Core argument: China has sold $300 billion in Treasuries since 2021, with the pace faster in recent months, as slowing growth and lower Chinese exports to the US leave China fewer dollars to recycle into Treasuries.

Maybe China is behind the rise in US long rates. Growth in China is slowing for cyclical and structural reasons, and Chinese exports to the US are lower. As a result, China has fewer dollars to recycle into Treasuries. In fact, China has been selling $300 billion in Treasuries since 2021, and the pace of Chinese selling has been faster in recent months. If slowing growth in China is a source of higher US rates—together with the US sovereign downgrade, Fed QT, Japan YCC exit, and rising US Treasury issuance—then a bad US employment report on Friday may not result in dramatically lower rates. The bottom line is that the cost of capital will likely stay permanently higher for reasons that have little to do with the business cycle, and it was the period with essentially zero interest rates from 2008 to 2020 that was unusual.

Takeaways by Macro Roundup® AI

  1. China has sold $300 billion in Treasuries since 2021, with the pace faster in recent months, as slowing growth and lower Chinese exports to the US leave China fewer dollars to recycle into Treasuries.
  2. Slowing Chinese growth may be pushing US long rates higher alongside the US sovereign downgrade, Fed quantitative tightening, Japan's exit from yield curve control, and rising US Treasury issuance, so a weak US employment report may not bring dramatically lower rates.
  3. The cost of capital will likely stay permanently higher for reasons with little to do with the business cycle, making the 2008–2020 period of essentially zero interest rates the unusual episode.

Related Articles:

  • Setser On Chinese “De-Dollarizing” — There is no good evidence that China has reduced its dollar exposure; accounting for the higher dollar share of its hidden reserves, China's dollar holdings have likely increased. Rather than shifting out of dollars, China has moved from US-custodied Treasuries to offshore custodians and risk assets such as agency bonds and equities.
  • Shadow Reserves — How China Hides Trillions of Dollars of Hard Currency — Institutions reporting to China's central government likely hold closer to $6tn in foreign assets than the $3.12tn officially reported as reserves, with the state banking system the main vehicle for holding these uncounted foreign currency assets. China remains a massive global creditor whose foreign exchange accumulation is felt worldwide.
  • Sester On Sløk — Reported declines in foreign Treasury holdings reflect valuation changes and custody shifts rather than dramatic selling, with purchases across most of the prior year, sales in the first quarter, and moderating sales since. China's Treasury bid has not stopped; it has shifted toward agency bonds and offshore custodians.

AI Summary. Reported declines in foreign Treasury holdings reflect valuation changes and custody shifts rather than dramatic selling, with purchases across most of the prior year, sales in the first quarter, and moderating sales since. China's Treasury bid has not stopped; it has shifted toward agency bonds and offshore custodians.

Brad Setser @Brad_Setser
Date Posted:

.@Brad_Setser argues that Torsten Sløk’s analysis of Chinese sales of Treasuries is misleading as it excludes Chinese offshore custodians and rotation into agencies.

Are foreign holders selling Treasuries, or do valuation and custody explain declines?

Core argument: Setser argues Sløk's major foreign holdings table fails to adjust for valuation changes, Euroclear, and Agencies, and that the available data show purchases for most of last year, sales in Q1, and moderating sales in recent months.

Sløk's charts of the day are generally great but he forgot to adjust the major foreign holdings table for valuation changes, Euroclear, and Agencies. The available data shows purchases for most of last year, sales in Q1, and a moderation of those sales in the last few months. Nothing dramatic. The Chinese data doesn't suggest informal PBOC reserves sales to date -- all the action has been through the state banks, and the sums there have been modest/the state banks wouldn't need to use their bonds to fund intervention. Has the Chinese bid for Treasuries stopped? No. But China has shifted toward Agencies and holds more of its Treasuries in offshore custodians. This should be the definitive flow chart --not a chart changing the valuation of US custodied Treasuries!

Takeaways by Macro Roundup® AI

  1. Setser argues Sløk's major foreign holdings table fails to adjust for valuation changes, Euroclear, and Agencies, and that the available data show purchases for most of last year, sales in Q1, and moderating sales in recent months.
  2. Setser finds that the Chinese data do not suggest informal PBOC reserve sales to date, with the action running through the state banks in modest sums that would not require selling their bonds to fund intervention.
  3. Setser argues the Chinese bid for Treasuries has not stopped, but that China has shifted toward Agencies and holds more of its Treasuries with offshore custodians.

Related Articles:

  • Is China the Source of Higher US Long Rates? — China's slowing growth and weaker exports to the US leave it fewer dollars to recycle into Treasuries, and it has sold $300bn of Treasuries since 2021. The author argues this, alongside rising Treasury issuance and Federal Reserve balance-sheet runoff, will keep the cost of capital higher regardless of the business cycle.
  • Setser On Chinese “De-Dollarizing” — There is no good evidence that China has reduced its dollar exposure; accounting for the higher dollar share of its hidden reserves, China's dollar holdings have likely increased. Rather than shifting out of dollars, China has moved from US-custodied Treasuries to offshore custodians and risk assets such as agency bonds and equities.
  • Shadow Reserves — How China Hides Trillions of Dollars of Hard Currency — Institutions reporting to China's central government likely hold closer to $6tn in foreign assets than the $3.12tn officially reported as reserves, with the state banking system the main vehicle for holding these uncounted foreign currency assets. China remains a massive global creditor whose foreign exchange accumulation is felt worldwide.

AI Summary. The US dollar's strength has pushed the yen close to the 150 yen per dollar level at which Japanese authorities are widely expected to intervene to support the currency. Such intervention would likely push bond yields higher, undercutting bets that yields will soon fall.

John Authers Bloomberg
Date Posted:

The weakening of the yen relative to the dollar will likely force an intervention that will put additional upward pressure on yields. @johnauthers

Does currency intervention abroad push bond yields higher?

Core argument: The yen came within a whisker of falling below Y150/$, a level at which many assume Japanese authorities would feel obliged to intervene to prop up the currency, as they did when it briefly topped that level a year ago.

In currencies, the US dollar continued its recent rampaging strength, with the yen coming within a whisker of dropping below the level of Y150/$, at which many assume the Japanese authorities would feel obliged to step in to prop up the currency, as they did when it briefly topped that level a year ago. Any intervention by Japanese authorities would likely send yields further upward, so this is a reason for caution about betting on them to fall in short order. The logic is that the Federal Reserve will be happy for yields to rise until they “break something,” at which point bonds’ prices would rise as their yields fell. That makes sense, but if the first thing to break is the patience of the Ministry of Finance in Tokyo, then such a bet on buying bonds would lose money.

Takeaways by Macro Roundup® AI

  1. The yen came within a whisker of falling below Y150/$, a level at which many assume Japanese authorities would feel obliged to intervene to prop up the currency, as they did when it briefly topped that level a year ago.
  2. Intervention by Japanese authorities would likely push yields further upward, a reason for caution about betting on yields to fall in short order.
  3. The argument that the Federal Reserve will welcome rising yields until they "break something," at which point bond prices would rise and yields fall, would lose money as a trade if the first thing to break is the patience of Tokyo's Ministry of Finance.

Related Articles:

  • BOJ Shock Has Wall Street Gaming Out the Global Spillovers — The Bank of Japan has signaled it will allow yields to trade toward 1% from roughly 0.5%, though its intervention in the market suggests that shift is not imminent. With Japanese domestic investors holding around $2.5tn of US stocks, bonds and credit, Wall Street is weighing volatile spillovers that could reinforce higher-for-longer interest rates.
  • Why Are Long Rates Going Up? — The rise in long-term interest rates is attributed less to shifting Federal Reserve expectations than to the US sovereign credit downgrade, Japan's exit from yield curve control, the Federal Reserve shrinking its balance sheet, fewer dollars for China to recycle as exports fall, the US budget deficit, and larger Treasury auctions.
  • 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. U.S. petroleum product exports reached nearly 6.0m barrels per day in the first half of the year, 2% above the same period a year earlier and the highest first-half total in records dating to 1981. The rise over the 2000s and 2010s reflects factors including greater competitiveness and efficiency at U.S. Gulf Coast refineries and increasing hydrocarbon gas liquids production.

Kevin Hack Energy Information Administration
Date Posted:

US petroleum product exports hit a new record of nearly 6 million barrels per day in the first half of this year, 2% up vs. 2022. @EIAgov

Are U.S. petroleum product exports reaching record highs?

Core argument: U.S. petroleum product exports averaged nearly 6.0 million barrels per day in the first half of 2023, 2% more than in the same period of 2022.

U.S. petroleum product exports totaled nearly 6.0 million barrels per day (b/d) in the first half of 2023, 2% more than during the same period in 2022. The first half of 2023 saw the most U.S. petroleum product exports during the first six months of any year in our Petroleum Supply Monthly data, which date back to 1981. U.S. petroleum product exports increased significantly in the 2000s and 2010s because of a number of factors, including the increasing competitiveness and efficiency of production at U.S. refineries along the U.S. Gulf Coast and increasing hydrocarbon gas liquids (HGLs) production associated with rising U.S. upstream oil and natural gas production.

Takeaways by Macro Roundup® AI

  1. U.S. petroleum product exports averaged nearly 6.0 million barrels per day in the first half of 2023, 2% more than in the same period of 2022.
  2. The first half of 2023 marked the highest U.S. petroleum product exports for any January–June period in Petroleum Supply Monthly data dating back to 1981.
  3. U.S. petroleum product exports rose significantly in the 2000s and 2010s because of factors including greater competitiveness and efficiency at U.S. Gulf Coast refineries and rising hydrocarbon gas liquids production associated with increasing upstream oil and natural gas output.

Related Articles:

  • The Changing Nexus Between Commodity Prices and the Dollar: Causes and Implications — The shale boom turned the United States into a net exporter of natural gas and of oil, altering how commodity prices relate to US trade. Where higher oil prices were historically associated with a deterioration in US terms of trade, they now correspond to an improvement.
  • U.S. Oil Boom Blunts OPEC’s Pricing Power — U.S. shale drilling and fracking costs have fallen 36% since 2014 even as recovered oil volumes have risen, according to J.P. Morgan. One major producer can now earn as much from $42-a-barrel oil as it once did at $86, while Saudi Arabia's budget is estimated to require $81 a barrel.
  • Portfolio Nuclear — The US is in its fifth year of net energy independence, with domestic oil and gas production at all-time highs across four consecutive administrations. Wind and solar now supply 15% of the grid, allowing more coal and liquefied natural gas to be exported.

AI Summary. New Bureau of Labor Statistics estimates show hybrid remote work is substantially less common than other surveys indicated, while fully remote work matches other estimates at about one in ten workers, making fully remote slightly more common than hybrid. Nearly one in five college-educated workers are fully remote, and nearly 40% of advanced-degree holders work hybrid or fully remote.

Adam Ozimek and Eric Carlson Economic Innovation Group
Date Posted:

According to new BLS numbers, 19.5% of American workers worked remotely during August 2023 with the majority of those workers, 53%, being fully remote. Among college graduates, nearly 20% are fully remote. @ModeledBehavior and Eric Carlson

Is hybrid remote work less common than other surveys suggest?

Core argument: New BLS data show hybrid remote work to be substantially lower than other surveys estimated, while fully remote work sits near other surveys' figure of about one in ten workers, leaving fully remote slightly more common than hybrid.

A new estimate of remote work from the Bureau of Labor Statistics (BLS) suggests that remote work is less common than previously thought. While the new BLS data reveals hybrid remote work to be substantially lower than other surveys estimated, fully remote work is close to where other surveys show, at around one out of ten workers. As a result, fully remote work appears slightly more common than hybrid remote work. Looking at the college-educated, nearly one in five are fully remote. Among advanced degree holders, nearly 40% are hybrid or fully remote. Among skilled workers, remote working is now a substantial share of the labor force, including fully remote.

Takeaways by Macro Roundup® AI

  1. New BLS data show hybrid remote work to be substantially lower than other surveys estimated, while fully remote work sits near other surveys' figure of about one in ten workers, leaving fully remote slightly more common than hybrid.
  2. Nearly one in five college-educated workers are fully remote, and nearly 40% of advanced degree holders work hybrid or fully remote, according to the BLS estimate.
  3. Remote work, including fully remote arrangements, accounts for a substantial share of the skilled labor force.

Related Articles:

  • Working Remotely? Selection, Treatment, and the Market for Remote Work — Using data from a Fortune 500 firm that hired both remote and on-site workers, the authors estimate that shifting on-site workers to remote lowered their hourly calls by 4% relative to already-remote workers, accounting for one third of the productivity gap; worker selection explained the other two thirds.
  • Remote Work, Three Years Later — Remote work has reduced office utilization but not yet office occupancy, because most firms are locked into long-duration leases. Baseline estimates suggest remote work will exert 0.8 percentage points of upward pressure on the office vacancy rate near-term, 2.3 more over the following five years, and 1.8 thereafter.
  • Central Business Districts: City Strugglers — Consumer spending in central business districts remains below pre-pandemic levels in northern and western US cities while southern city centers show strong growth, a gap attributed largely to migration patterns rather than differences in working from home. Cities with population gains show spending roughly 20% above pre-pandemic levels, while those with population losses are down about 20%.

Wednesday, October 4, 2023

AI Summary. The dollar share of China's foreign exchange reserves appears broadly stable, with holdings of US assets around $1.8–1.9tn once Treasuries held through offshore custodians such as Belgium's Euroclear are included. Excluding US equities, China's US bond holdings have consistently equaled roughly 50% of its reported reserves.

Brad Setser Council on Foreign Relations
Date Posted:

The dollar share of China’s reserves has been broadly stable since 2015 at 50%. Since 2015 the only evolution has been a rotation into agencies. @Brad_Setser

Is China moving its reserves away from the dollar?

Core argument: China's holdings of U.S. assets appear basically stable at $1.8–$1.9 trillion once a simple adjustment is made for Treasuries held by offshore custodians such as Belgium's Euroclear.

The best evidence available suggests that the dollar share in China’s reserves has been broadly stable since 2015 (if not a bit before). If a simple adjustment is made for Treasuries held by offshore custodians like Belgium's Euroclear, China’s reported holdings of US assets look to be basically stable at between $1.8 and $1.9 trillion. After netting out China's substantial holdings of U.S. equities, China's holdings of U.S. bonds, after adjusting for China's suspected Euroclear custodial account, have consistently been around 50% of China's reported reserves. Nothing all that surprising.

Takeaways by Macro Roundup® AI

  1. China's holdings of U.S. assets appear basically stable at $1.8–$1.9 trillion once a simple adjustment is made for Treasuries held by offshore custodians such as Belgium's Euroclear.
  2. The dollar share of China's reserves has been broadly stable since 2015, if not somewhat earlier, according to the best evidence available.
  3. After netting out China's substantial U.S. equity holdings and adjusting for its suspected Euroclear custodial account, China's U.S. bond holdings have consistently been around 50% of its reported reserves.

Related Articles:

  • Is China the Source of Higher US Long Rates? — China's slowing growth and weaker exports to the US leave it fewer dollars to recycle into Treasuries, and it has sold $300bn of Treasuries since 2021. The author argues this, alongside rising Treasury issuance and Federal Reserve balance-sheet runoff, will keep the cost of capital higher regardless of the business cycle.
  • Shadow Reserves — How China Hides Trillions of Dollars of Hard Currency — Institutions reporting to China's central government likely hold closer to $6tn in foreign assets than the $3.12tn officially reported as reserves, with the state banking system the main vehicle for holding these uncounted foreign currency assets. China remains a massive global creditor whose foreign exchange accumulation is felt worldwide.

AI Summary. During the 1995-2005 information technology boom, productivity ended about 12% above the trend implied by growth from 1973 to 1995, and a comparable or larger gain of around 15% from artificial intelligence is plausible. If such optimistic estimates hold, growth would exceed conventional long-run estimates such as the Federal Reserve's roughly 1.8%, lifting revenue and easing debt concerns.

Paul Krugman Krugman Wonks Out
Date Posted:

.@paulkrugman notes a TFP surge between 1995-2005 that left US productivity 12% above its 1973-95 trend and suggests that AI may increase productivity by 15% over the next decade, driving GDP growth above the Fed’s estimate of 1.8% per year.

Could AI lift productivity enough to ease debt concerns?

Core argument: By the end of the 1995–2005 productivity surge, U.S. productivity stood about 12% above the trend implied by 1973–1995 growth, according to the author's plot of log productivity.

Here’s a view of the 1995-2005 boom, in which I show the natural log of productivity — so that a straight line corresponds to steady growth — and plot a continuation of the growth rate from 1973 to 1995 (the red line), so that you can see how actual growth compared. By the time the productivity surge tapered off, productivity was about 12% higher than the previous trend would have led you to expect it would be. Since A.I. is arguably an even more profound innovation than the technologies that drove the 1995-2005 boom, 15% isn’t at all unreasonable. If optimistic estimates of the boost from the technology are at all right, growth will be much higher than conventional estimates of the economy’s long-run sustainable growth rate, like those of the Federal Reserve, which put it at around 1.8% over the next decade. [If that’s the case] debt won’t be a big concern after all — especially because faster growth will boost revenue and reduce the budget deficit.

Takeaways by Macro Roundup® AI

  1. By the end of the 1995–2005 productivity surge, U.S. productivity stood about 12% above the trend implied by 1973–1995 growth, according to the author's plot of log productivity.
  2. The author argues that because A.I. is arguably an even more profound innovation than the technologies behind the 1995–2005 boom, a 15% productivity gain above trend is not unreasonable.
  3. The author contends that if optimistic estimates of A.I.'s boost hold, growth will exceed conventional long-run estimates such as the Federal Reserve's roughly 1.8% over the next decade, easing debt concerns as faster growth lifts revenue and reduces the deficit.

Related Articles:

  • 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.
  • The Outlook for Long-Term Economic Growth — Growth theory holds that long-run growth in living standards is determined by growth in the worldwide number of people searching for ideas, and growth accounting for the US suggests temporary boosts from rising educational attainment and idea investment could fade. Potential offsets include China and India, better talent allocation, and artificial intelligence.
  • AI, Mass Evolution, and Weickian Loops — Early consumer artificial intelligence applications have largely been wrappers around marketing copy, image generation, and office tasks like spreadsheets and presentations. In shared spaces such as the image generator Midjourney's Discord server, users can see each other's prompts and results and iterate on them in real time, producing rapid collective experimentation and greater sophistication.

AI Summary. The authors estimate that nearly 60% of US debt originated when the average ten-year Treasury rate was below 3%, and 75% when three-month Treasuries paid below 3%. That debt is now being rolled over into Treasuries paying 4.5%–5.6%, a rollover risk the authors argue policymakers failed to account for.

CRFB Staff Committee for a Responsible Federal Budget
Date Posted:

60% of outstanding US debt was issued when ten-year Treasury rates were below 3% according to a @BudgetHawks analysis. As the Treasury refinances this debt at rates between 4.5% and 5.6%, interest payments will soon exceed defense spending.

Did borrowing when rates were low drive today's rising interest costs?

Core argument: The authors estimate that nearly 60% of U.S. debt originated when the average ten-year Treasury yield was below 3%, and 75% originated when three-month Treasuries paid less than 3%.

Most of the exploding interest costs resulted from borrowing when interest rates were low. We estimate that nearly 60% of our debt originated when the average interest rate on ten-year Treasury notes was less than 3%, while 75% of current debt originated when three-month Treasuries paid less than 3%. That debt, borrowed at low rates, is now being rolled over into Treasuries paying interest rates between 4.5 and 5.6%. Though borrowing seemed cheap during those periods, policymakers failed to account for rollover risk, and we are now facing the cost.

Takeaways by Macro Roundup® AI

  1. The authors estimate that nearly 60% of U.S. debt originated when the average ten-year Treasury yield was below 3%, and 75% originated when three-month Treasuries paid less than 3%.
  2. Debt borrowed at low rates is now being rolled over into Treasuries paying between 4.5% and 5.6%, which the authors identify as the source of most of the exploding interest costs.
  3. The authors argue that borrowing seemed cheap during the low-rate periods but policymakers failed to account for rollover risk.

Related Articles:

  • U.S. Deficit Explodes Even As Economy Grows — The Committee for a Responsible Federal Budget projects the federal deficit will roughly double to about $2tn for the fiscal year, driven by higher interest payments and lower tax receipts despite robust economic growth. After falling from close to $3tn to roughly $1tn in its largest-ever decline, the deficit turned upward rather than returning to pre-pandemic levels.
  • Interest Expense: A Bigger Impact on Deficits than Debt — The US is running a primary deficit—excluding interest costs—much larger than its historical norm, at a point in the business cycle when deficits would normally be smaller than usual. The average interest rate on federal debt is projected to remain at or below the rate of nominal GDP growth over the next decade.
  • Interest Costs Will Grow the Fastest Over the Next 30 Years — The Congressional Budget Office projects federal spending will reach 29.1% of GDP over three decades, with net interest on the national debt rising from 1.9% of GDP to 6.7%, or $5.4tn. Under that projection, interest becomes the largest single federal budget line item, surpassing Social Security, Medicare, and Medicaid.

AI Summary. Revisions to U.S. GDP data raised real fixed investment by more than 6.4%, lifting its cumulative growth since early 2019 from 5.8% to 8.7%, with manufacturing, housing, software, and power investment all revised up. Updated software methodology, which counts some in-house tech labor as investment, raised real private fixed software investment by 12%.

Joseph Politano Apricitas Economics
Date Posted:

Recent revisions @BEA_News show US GDP is 1.7% higher than prior estimates. Real fixed investment was revised up 6.4%, increasing cumulative growth since 2019 from 5.8% to 8.7%. @JosephPolitano

Has US investment growth been stronger than initially reported?

Core argument: Real fixed investment was revised up by more than 6.4%, lifting cumulative growth since early 2019 from 5.8% to 8.7%, a large share of the upward revisions to US GDP data.

A large chunk of the upward revisions to GDP data came from increases in real fixed investment, which was raised by more than 6.4% and saw its cumulative growth since early 2019 increase from 5.8% to 8.7%. That means the investment and construction boom we’ve seen over the last few years has actually been stronger than first reported—with manufacturing, housing, software, and power investments all being revised upward. The revisions to software data and methodologies, which included updates that now treat a portion of labor from an expanded pool of workers in various tech occupations as in-house investments, raised real private fixed software investment by 12%. This also spilled over into higher estimates of public-sector software investments, both inside and outside of the defense sector, and upward revisions to the real output of the US information industry.

Takeaways by Macro Roundup® AI

  1. Real fixed investment was revised up by more than 6.4%, lifting cumulative growth since early 2019 from 5.8% to 8.7%, a large share of the upward revisions to US GDP data.
  2. Revised software data and methodologies, which now treat part of the labor of an expanded pool of tech workers as in-house investment, raised real private fixed software investment by 12%.
  3. The software revisions also raised estimates of public-sector software investment, both inside and outside defense, and the real output of the US information industry.

Related Articles:

  • An American Investment Boom Would Be Good for the World — A substantial rise in U.S. investment would likely require greater output from existing labor and capital plus higher imports, since there is little appetite to cut current consumption and little scope to export less. Foreign producers stand to benefit even where investment subsidies carry local-content restrictions.
  • Making Manufacturing Great Again — US manufacturing construction spending has more than doubled over the past year and risen as a share of gross domestic product, a surge attributed to two laws: the Inflation Reduction Act, whose core is green energy subsidies, and the CHIPS Act, which promotes domestic semiconductor production.
  • 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 author argues a soft landing is unlikely because the Federal Reserve controls base interest rates but not credit spreads. With core inflation near 3.9%, the Fed stays hawkish as unemployment rises, and once it turns dovish, slowing corporate earnings widen credit spreads, pushing capital costs higher.

Torsten Sløk Apollo
Date Posted:

Torsten Sløk @apolloglobal argues a recession will get underway when monthly non-farm payrolls start moving below 100,000, the level consistent with population growth.

Does limited Fed control over credit spreads make a soft landing unlikely?

Core argument: Once nonfarm payrolls move below 100,000, credit spreads will widen as investors read the weakness as a sign that corporate earnings are about to slow, the author argues.

Once nonfarm payrolls start moving below 100,000, credit spreads will widen because investors will take it as a sign that corporate earnings are about to slow down. But with core PCE inflation at 3.9%, the Fed cannot turn dovish. As a result, the Fed will continue to be hawkish even as the unemployment rate starts moving higher. Once the recession finally begins, the Fed can turn dovish and start to lower base rates. But the costs of capital will not decline because at that time corporate earnings will be slowing, and therefore, credit spreads will likely be widening further. The bottom line is that even if we get weak data and the Fed, after a few soft prints in nonfarm payrolls, starts turning dovish, the costs of capital will move higher. In short, the Fed controls the base rate but doesn’t control credit spreads, and that is the reason why a soft landing is unlikely.

Takeaways by Macro Roundup® AI

  1. Once nonfarm payrolls move below 100,000, credit spreads will widen as investors read the weakness as a sign that corporate earnings are about to slow, the author argues.
  2. With core PCE inflation at 3.9%, the Fed cannot turn dovish and will stay hawkish even as the unemployment rate moves higher, the author argues.
  3. The Fed controls the base rate but not credit spreads, so the cost of capital will move higher even after the Fed turns dovish, which is why the author sees a soft landing as unlikely.

Related Articles:

  • Soft Landing Summer — The estimated 12-month US recession probability has been cut to 15%, matching the postwar unconditional average implied by a recession occurring roughly once every seven years, and far below the 60% Bloomberg consensus. The authors expect interest rates to fluctuate in a higher range than in the post-2008 period.
  • Breaking Down the Sources of US Economic Resilience — The US government has funded essentially all of its increased deficit by issuing short-term Treasury bills and drawing down cash reserves rather than selling longer-dated debt, limiting the effect on market liquidity so far. The authors expect that pressure is delayed rather than eliminated, with issuance shifting toward longer maturities as the deficit stays elevated.
  • Has the Fed Tightened Enough? Guideposts to Consider — 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.

AI Summary. Kaiser Permanente health care workers launched the largest health care strike in US history, a three-day walkout that could stall services for nearly 13mm people across at least six states. The strike is one of several high-profile US labor disputes attributed to a tight labor market, high inflation, and record corporate profits.

Ian Kullgren Bloomberg
Date Posted:

75,000 Kaiser Permanente healthcare workers went on strike Wednesday, the largest healthcare sector strike since 1990. 50,000 Vegas hospitality workers might soon join them on the picket line as labor activity increases nationwide.

75,000 Kaiser Permanente healthcare workers went on strike Wednesday, the largest healthcare sector strike since 1990....

Are a tight labor market, inflation, and high profits driving more strikes?

Core argument: Kaiser Permanente workers launched the largest health care strike in US history, a three-day walkout that could stall services for nearly 13mm people across at least half a dozen states.

The three-day strike could stall services for nearly 13mm people in at least half a dozen states. The Kaiser strike is the latest in a string of high-profile labor disputes fueled by a tight labor market, high inflation, and record corporate profits that have left workers both resentful and emboldened. The United Auto Workers has steadily expanded a strike against the Detroit automakers that started Sept. 14, demanding raises as high as 40% and the end of job tiers. The Writers Guild of America last week reached a tentative agreement to end a five-month strike over artificial intelligence and streaming pay, while SAG-AFTRA actors remain on the picket line. And in Las Vegas, more than 50,000 hospitality workers could soon walk off the job over staff cuts and increased workloads—complaints that aren’t so different from the healthcare workers.

Takeaways by Macro Roundup® AI

  1. Kaiser Permanente workers launched the largest health care strike in US history, a three-day walkout that could stall services for nearly 13mm people across at least half a dozen states.
  2. The United Auto Workers has steadily expanded its strike against the Detroit automakers begun Sept. 14, demanding raises as high as 40% and an end to job tiers.
  3. The Writers Guild of America reached a tentative agreement to end a five-month strike over artificial intelligence and streaming pay, while SAG-AFTRA actors remain on the picket line and more than 50,000 Las Vegas hospitality workers could walk off over staff cuts and increased workloads.

Related Articles:

  • Unions’ Inflation Warning? — The share of people aged 16 and over working or looking for work fell when the pandemic hit and has only partly recovered, with population aging accounting for most of the remaining shortfall. That implies economic activity must run at a lower level to avoid persistent wage and price inflation.
  • 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.