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
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  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
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  • “…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
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Upside of Inequality Oxford Unintended Consequences

Macro Roundup


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.

Thursday, October 5, 2023

AI Summary. The equity risk premium fell over the first half of the year and then held relatively steady, leaving the expected return on equities higher as risk-free rates rose. The author argues that quarterly moves in stock and corporate bond prices came largely from rising interest rates rather than a heightened fear of risk.

Aswath Damodaran Musings on Markets
Date Posted:

.@AswathDamodaran writes that recent weakness in equities has primarily been driven by the change in the risk-free rate. He notes that the equity risk premium has declined from 5.9% in January of this year to 4.8% at the start of October.

Are rising interest rates, not risk fears, driving stock price moves?

Core argument: The equity risk premium fell from 5.94% on January 1, 2023 to 5.00% on July 1, 2023, then held relatively stable through the third quarter at 4.84% on October 1, 2023.

The equity risk premium declined in the first half of the year, from 5.94% on January 1, 2023, to 5.00% on July 1, 2023, but has been relatively stable in the third quarter, albeit on top of higher risk-free rates. Thus, the equity risk premium of 4.84% on October 1, 2023, when added to the ten-year T.Bond rate of 4.58% on that day yields an expected return on equity of 9.42%, up from 8.81% on July 1, 2023. Put simply, notwithstanding the ups and downs in stock prices and interest rates in the third quarter of 2023, there is little evidence that changes in the pricing of risk had much to do with the volatility. Much of the change in stock and corporate bond prices in the third quarter has come from rising interest rates, not a heightened fear factor.

Takeaways by Macro Roundup® AI

  1. The equity risk premium fell from 5.94% on January 1, 2023 to 5.00% on July 1, 2023, then held relatively stable through the third quarter at 4.84% on October 1, 2023.
  2. The expected return on equity rose to 9.42% on October 1, 2023 from 8.81% on July 1, 2023, as the 4.84% equity risk premium was added to a ten-year Treasury bond rate of 4.58%.
  3. Much of the third-quarter 2023 change in stock and corporate bond prices came from rising interest rates rather than a heightened fear factor, with little evidence that shifts in the pricing of risk drove the volatility.

Related Articles:

  • A Few Stocks Drive the Stock Market: Dot.com Vs. Today vs. the Last 100 Years — Seven large technology stocks account for nearly 30% of the S&P 500's total value, but the rise of both hyped stocks and the broader market was more extreme during the dot-com era. Historically, only a few stocks have generated most of the stock market's value creation in the US and internationally.
  • Mr. Toad’s Wild Ride: The Impact Of Underperforming 2020 and 2021 US IPOs — Between 40% and 60% of US initial public offerings generate negative returns even in favorable periods, so average IPO returns far exceed median returns and depend on a small set of large winners. Excluding just the top 3% of IPOs turns average net returns negative and cuts average absolute returns by more than half.
  • Long-Term Shareholder Returns: Evidence From 64,000 Global Stocks — A study of about 64,000 global stocks estimates net global stock market wealth creation of $75.7tn, with returns highly concentrated: the top 159 firms (0.25%) account for half of net wealth creation and the top 1,526 (2.39%) account for all of it. Fewer than half of stocks beat one-month US Treasury bills, 42.6% of non-US and 44.8% of US stocks.

AI Summary. US Treasury auction sizes are projected to rise an average of 23% across maturities under the Treasury Borrowing Advisory Committee's neutral issuance scenario, including 37% for 3-year notes and 28% for 5-year notes. The analysis argues this growth in government debt supply pulls investor dollars away from other fixed-income assets such as investment grade credit.

Torsten Sløk Apollo
Date Posted:

Torsten Sløk @apolloglobal notes that Treasury auction sizes in 2024 will increase 23% on average across the yield curve.

Does rising Treasury issuance crowd out demand for other fixed income?

Core argument: Treasury auction sizes will rise an average of 23% across the yield curve in 2024, according to the Treasury Borrowing Advisory Committee's neutral issuance scenario.

Treasury auction sizes will increase on average 23% in 2024 across the yield curve. This forecast comes from the Treasury Borrowing Advisory Committee’s neutral issuance scenario. The 37% increase in issuance of 3-year notes and the 28% increase in issuance of 5-year notes will in 2024 stress-test demand for Treasuries in the belly of the curve. This dramatic growth in the supply of the risk-free asset is “pulling dollars away” from other fixed-income assets, including investment grade credit, as investors substitute away from spread products toward Treasuries. The bottom line is that the world only saves a limited amount of dollars every year, and the significant growth in the size of the Treasury market is at risk in 2024 of crowding out demand for other types of fixed income.

Takeaways by Macro Roundup® AI

  1. Treasury auction sizes will rise an average of 23% across the yield curve in 2024, according to the Treasury Borrowing Advisory Committee's neutral issuance scenario.
  2. Issuance of 3-year notes will increase 37% and 5-year notes 28% in 2024, stress-testing demand for Treasuries in the belly of the curve.
  3. Growth in the supply of Treasuries is pulling dollars away from other fixed-income assets, including investment grade credit, and risks crowding out demand for other fixed income in 2024.

Related Articles:

  • 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.
  • 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.
  • The High Cost of Borrowing at Low Rates — 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.

AI Summary. Most of the increase in Treasury yields comes from the term premium, a component unrelated to inflation or short-term rates, and wide government deficits are a leading suspected cause. Real, inflation-adjusted Treasury yields of 2.4% are comparable to the mid-2000s and below 1990s levels, when U.S. debt and deficits were much lower.

Greg Ip Wall Street Journal
Date Posted:

Despite a growing long-term Federal deficit as a share of GDP, @greg_ip notes at 2.4% real Treasury yields are still lower than during the 1990s, when the U.S. government’s debt level and deficits were significantly lower.

Are wide government deficits pushing up long-term Treasury yields?

Core argument: Most of the rise in Treasury yields comes from the term premium, a component unrelated to inflation or short-term rates, with widening government deficits named as a prime suspect among the numerous factors affecting it.

Most of the increase is due to the part of yields, called the term premium, which has nothing to do with inflation or short-term rates. Numerous factors affect the term premium, and rising government deficits are a prime suspect. Deficits have been wide for years. There’s not much sign that this has yet imposed a penalty. Investors still project that the Fed will get inflation down to its 2% goal. At 2.4%, real (inflation-adjusted) Treasury yields are comparable to those in the mid-2000s and lower than in the 1990s, when the U.S. government’s debts and deficits were much lower.

Takeaways by Macro Roundup® AI

  1. Most of the rise in Treasury yields comes from the term premium, a component unrelated to inflation or short-term rates, with widening government deficits named as a prime suspect among the numerous factors affecting it.
  2. Real, inflation-adjusted Treasury yields of 2.4% are comparable to those of the mid-2000s and lower than in the 1990s, when U.S. government debts and deficits were much lower.
  3. Deficits have been wide for years with little sign of a penalty so far, and investors still project that the Federal Reserve will bring inflation down to its 2% goal.

Related Articles:

  • 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.
  • Will A.I. Transform the Economy, and if So, How? — 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.
  • 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.

AI Summary. Average annual real per capita spending growth in the US Medicare program fell from 5.2% in 1987-1996 to 2.7% in 1996-2005 and 0.7% in 2006-2022, a slowdown most plausibly attributed to congressionally mandated payment reforms and cuts. With enrollment projected to rise from 66m to 83m by 2040, aggregate costs are expected to grow rapidly.

James Capretta American Enterprise Institute
Date Posted:

James Capretta @AEIecon notes while the increase in per-capita Medicare spending has slowed, there are reasons for pessimism going forward, as congressionally mandated cuts in Medicare reimbursement rates leave them 40-60% below private rates.

Has slowing per-person Medicare spending growth solved the program's cost problem?

Core argument: Medicare's average annual real per capita spending growth fell from 5.2% in 1987–1996 to 2.7% in 1996–2005 and 0.7% in 2006–2022, according to National Health Expenditure data.

According to NHE data, between 1987 and 1996, the average annual real per capita growth rate within Medicare was 5.2%. From 1996 to 2005, the rate was cut roughly in half, to 2.7%. From 2006 to 2022, it dropped again, to 0.7%. Why did the downward trend begin nearly three decades ago and not in 2011? While there are likely many explanations, the most obvious is the steady implementation of congressionally mandated payment reforms (and cuts). The reasons for the current slowdown may not be sustainable: For example, payments per service under current law are not expected to keep up with inflation and therefore may not be sufficient to ensure full access to care for the program’s beneficiaries. By 2040, Medicare’s payments for physician services and hospital care are expected to be just 40% and 55-60%, respectively, of the average amounts paid by commercial insurers. With aging baby boomers pushing enrollment up from 66 million today to 83 million by 2040, aggregate costs will grow very rapidly over the coming three decades.

Takeaways by Macro Roundup® AI

  1. Medicare's average annual real per capita spending growth fell from 5.2% in 1987–1996 to 2.7% in 1996–2005 and 0.7% in 2006–2022, according to National Health Expenditure data.
  2. The most obvious explanation for Medicare's spending slowdown, which began nearly three decades ago rather than in 2011, is the steady implementation of congressionally mandated payment reforms and cuts.
  3. By 2040, Medicare payments for physician services and hospital care are expected to be 40% and 55–60%, respectively, of average commercial insurer payments, while enrollment rises from 66 million to 83 million.

Related Articles:

  • A Huge Threat to the U.S. Budget Has Receded. And No One Is Sure Why — Spending per Medicare beneficiary in the US has nearly leveled off over more than a decade, though total enrollment has grown as baby boomers age. Policy changes including cuts to hospital and private plan payments explain some savings, but the Congressional Budget Office attributes most of its lowered forecasts to "technical adjustments" in public health and medical practice.
  • Why Medicare and Social Security Are Sustainable — Growth in U.S. health spending above GDP growth has slowed considerably, and the Congressional Budget Office projects social insurance spending will eventually rise by about 5 percentage points of GDP, half of that from assumed health cost increases. The author argues better incentives for medically effective care could hold cost growth well below those projections.

AI Summary. Adjusted for purchasing power, the EU's GDP is roughly 95% of America's, the same share as a decade earlier, while at market exchange rates US prices went from 5.4% above EU levels to 46% higher, largely because of a strong dollar. GDP per person has still grown faster in America than in most of Western Europe.

Economist Staff The Economist
Date Posted:

Adjusting for purchasing-power parity (PPP) the EU’s GDP is ~ 95% of the US, unchanged over the past decade. GDP per person at PPP has grown faster in the US than in most of the EU, but on a per-hour basis, several EU nations are more productive.

Does Europe's economic gap with America shrink when adjusting for purchasing power?

Core argument: U.S. prices stood just 5.4% above EU prices at market exchange rates in 2012, but the gap has widened to 46%, largely thanks to a strong dollar.

Europe’s economic performance looks far better at PPP than in nominal terms. In 2012 prices in America were just 5.4% higher than in the EU at market exchange rates. Today, the gap is 46%, largely thanks to a strong dollar. Adjusting for PPP, the EU’s GDP is roughly 95% of America’s, the same as it was ten years ago. Still, PPP-adjusted GDP per person has grown faster in America than in most of Western Europe.

Takeaways by Macro Roundup® AI

  1. U.S. prices stood just 5.4% above EU prices at market exchange rates in 2012, but the gap has widened to 46%, largely thanks to a strong dollar.
  2. Adjusted for purchasing power parity, the EU's GDP is roughly 95% of America's, the same share as ten years ago.
  3. PPP-adjusted GDP per person has grown faster in America than in most of Western Europe.

Related Articles:

  • From Strength To Strength — The US produced $25.5tn in GDP, about 25% of the world total—roughly its 1990 share—while China's share stands at 18%; the US share of the G7's nominal GDP rose from 40% in 1990 to 58%. Income per person is now about 30% above western Europe and 54% above Japan, adjusted for purchasing power.
  • Fully Grown – European Vacation! — Europe's growth slowdown reflects a widespread drop in productivity growth rather than changes in physical capital accumulation, with human capital growth also mattering but varying by country. The productivity decline is larger than in the US: in countries such as the UK and France, productivity growth fell from about 2% to near zero or negative.
  • Europe Has Fallen Behind America and the Gap is Growing — The EU economy was somewhat larger than the US in 2008 ($16.2tn versus $14.7tn), but by 2022 the US had grown to $25tn while the EU and UK combined reached only $19.8tn. The dollar's status as the world's reserve currency allows the US to finance its ambitions without unsettling markets.

AI Summary. The Copernicus Climate Change Service reported a September global average temperature of 16.38C, 0.5C above the previous warmest September and 1.75C above the pre-industrial 1850-1900 baseline, putting the year on course to be the hottest on record. The service also found Antarctic sea ice at record lows for the time of year.

Attracta Mooney, Steven Bernard, Chris Campbell, and Aime Williams Financial Times
Date Posted:

2023 was the hottest September on record. The mean global temperature in September was 1.75°C warmer than the pre-industrial period.

Are global temperatures setting new records by unusually wide margins?

Core argument: September's global average temperature of 16.38C was 0.5C above the previous warmest September in 2020, a margin described as extraordinary, and 0.93C above the 1991–2020 September average.

Scientists at the Copernicus Climate Change Service said 2023 was on course to be the hottest on record, after the average global temperature in September was 1.75C degrees warmer than the pre-industrial period of 1850-1900 before human-induced climate change began to take effect. The monitoring service also found Antarctic sea ice levels remained at record lows for the time of year. Last month’s global average temperature of 16.38C was 0.5C above the previous warmest September in 2020, it said, and 0.93C above the 1991-2020 average for the month.

Takeaways by Macro Roundup® AI

  1. September's global average temperature of 16.38C was 0.5C above the previous warmest September in 2020, a margin described as extraordinary, and 0.93C above the 1991–2020 September average.
  2. Copernicus Climate Change Service scientists said September's average global temperature ran 1.75C warmer than the pre-industrial period of 1850–1900, putting 2023 on course to be the hottest year on record.
  3. Antarctic sea ice levels remained at record lows for the time of year, according to the Copernicus Climate Change Service.

Related Articles:

  • Missing Ice and Bleached Coral: The Sudden Warming of the Oceans — Average global sea surface temperatures have risen by just over 0.1C (0.2F) per decade since 1970, about half the pace of the atmosphere, with the increase over the past year closer to 0.2C (0.4F) and far more intense marine heatwaves in some regions. Europe's Copernicus Climate Change Service reported a record average sea surface temperature just short of 21C (70F).
  • 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.
  • What Happens in Antarctica, Doesn’t Stay in Antarctica — Antarctic sea-ice extent reached a level three times further from the average than any previously recorded in July, and only 0.2–0.4% of the continent is currently exposed above the ice. Further warming is likely to expose more land, reducing the surface's reflectivity and increasing the heat the planet absorbs.

AI Summary. Progressive is dropping 100,000 home insurance policies in Florida, cutting half of its home policies in the state. The Insurance Information Institute anticipates the reduction will include 47,000 policies typically used for second homes and 53,000 policies covering high-risk properties.

Real Deal Staff The Real Deal
Date Posted:

Progressive is dropping at least 100,000 home insurance policies in Florida, half of its current home policies in the state. Florida’s state-backed Citizens, intended as an insurer of last resort, currently has an 18% market share.

Progressive is dropping at least 100,000 home insurance policies in Florida, half of its current home policies in the state....

Are insurers pulling back from high-risk home coverage in Florida?

Core argument: Progressive confirmed it is dropping 100,000 home insurance policies in Florida, half of its home policies in the state, with a first wave of non-renewal notices going out in December.

Another insurer is pulling back from the Sunshine State. Progressive confirmed it is dropping 100,000 home insurance policies across Florida, with a first wave of non-renewal notices going out in December. The move will cut half of Progressive’s home policies in the state. The Insurance Information Institute anticipates Progressive will cut 47,000 DP3 policies, which are typically used for second homes, and 53,000 policies for “high-risk properties,” the publication reported. The latest cut of 100,000 policies adds to the heap of 56,000 policies Progressive didn’t renew last year in Florida.

Takeaways by Macro Roundup® AI

  1. Progressive confirmed it is dropping 100,000 home insurance policies in Florida, half of its home policies in the state, with a first wave of non-renewal notices going out in December.
  2. The Insurance Information Institute anticipates Progressive's cut will include 47,000 DP3 policies, typically used for second homes, and 53,000 policies for "high-risk properties.".
  3. Progressive's 100,000-policy reduction follows 56,000 Florida policies the insurer declined to renew last year.

Related Articles:

  • Farmers Insurance Limits Sales in Florida, California Amid Storm, Wildfire Risks — Farmers Insurance is limiting homeowners policy sales in Florida and California, hurricane- and wildfire-prone states, joining other large insurers in pulling back. In Florida it is ending sales of home, auto, and umbrella policies under its own brand — about 30% of the policies it sells there, affecting roughly 89,000 policies.
  • Why California and Florida Have Become Almost Uninsurable — Wildfires in California and hurricanes in Florida have generated large volumes of insurance claims, while higher housing prices and construction and repair costs have made each claim more expensive. Insurers have also faced costlier reinsurance, with worldwide average reinsurance rates up about a quarter in one year and another third the next, according to reinsurance broker Howden Tiger.
  • Parts of America are Becoming Uninsurable — Florida's average home insurance premium reached about $6,000, over 3x the national average and up 42% year-on-year, yet insurers are exiting, leaving the state-backed insurer of last resort with the largest market share and $608bn of insured assets. In California, consumer-protection rules prevent premiums from covering rising wildfire and reinsurance costs.