Edward Conard

Top Ten New York Times Bestselling Author

  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…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
  • “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
  • “Unintended Consequences is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.” - Tyler Cowen, Professor, George Mason University
  • “Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…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 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
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Thursday, October 19, 2023

AI Summary. Under a scenario based on announced government pledges, global electricity demand is projected to grow 2.7% per year, more than doubling from just under 25,000 terawatt-hours to nearly 54,000 terawatt-hours by 2050. Hydrogen production via electrolysis and electric vehicles account for more than half of that projected growth.

Pablo Hevia-Koch, Brent Wanner, and Rena Kuwahata Energy Information Administration
Date Posted:

An @EIAgov analysis notes global electrical production needs to grow 20% faster this decade than it did in the previous decade. They estimate that 80mm kilometers of grid (the equivalent of the current grid) needs to be built by 2040.

How much will global electricity demand grow by 2050?

Core argument: Global electricity demand is projected to grow 2.7% per year in the Announced Pledges Scenario (APS), more than doubling from just under 25,000 TWh in 2021 to nearly 54,000 TWh in 2050.

Global electricity demand is projected to increase at a rate of 2.7% per year in the APS, more than doubling from just under 25,000 TWh in 2021 to nearly 54,000 TWh in 2050. The buildings sector continues to consume the most electricity, followed closely by industry, each accounting for more than one-third of total demand throughout the period. Transport makes up just 2% of global electricity demand currently, but this rises to 15% in 2050. Hydrogen production via electrolysis adds significantly to electricity demand growth, from less than 2 TWh in 2021 to over 5,700 TWh in 2050 in the APS. More rapid electrification of end uses in the NZE Scenario further accelerates electricity demand growth to 3.2% per year to 2050, reaching over 62,000 TWh in 2050. Demand growth is expected to be accompanied by improvements in efficiency. Hydrogen production and EVs account for more than half the growth in electricity demand to 2050.

Takeaways by Macro Roundup® AI

  1. Global electricity demand is projected to grow 2.7% per year in the Announced Pledges Scenario (APS), more than doubling from just under 25,000 TWh in 2021 to nearly 54,000 TWh in 2050.
  2. Hydrogen production and electric vehicles account for more than half the growth in global electricity demand to 2050, with electrolysis-based hydrogen rising from less than 2 TWh in 2021 to over 5,700 TWh in 2050 in the APS.
  3. Buildings and industry each account for more than one-third of global electricity demand throughout the period, while transport rises from 2% to 15% in 2050; in the Net Zero Emissions Scenario demand grows 3.2% per year to over 62,000 TWh.

Related Articles:

  • Gridlock: How a Lack of Power Lines Will Delay the Age of Renewables — A study led by Lawrence Berkeley National Laboratory found nearly 2,000GW of solar, wind and storage projects waiting in queues to connect to US long-distance transmission grids, more than the installed capacity of the entire US power plant fleet. The authors find only about a fifth of such requested projects are typically built.
  • Elon Musk’s Latest Mission: Rev Up the Electricity Industry — U.S. electricity demand has grown at an average of 1% a year over the past 20 years, but McKinsey projects it will double by 2050 and PG&E expects a 70% rise over the next 20 years. Deloitte estimates the largest U.S. electric companies will together spend as much as $1.8tn by 2030.
  • 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. Structural renormalization has occurred globally as market economies move toward a long-run tendency of surplus, while budget constraints have not had to harden and financial conditions are no tighter—if anything slightly looser—than a year earlier. That combination has lifted optimism and economic expectations and underpins the Federal Reserve's greater confidence in keeping rates higher for longer.

Joseph Politano Apricitas Economics
Date Posted:

.@JosephPolitano argues many pandemic-era supply constraints have resolved themselves as market economics “move towards their long-run tendency of surplus.”

How does a shift toward surplus support higher rates for longer?

Core argument: Market economies worldwide have undergone structural renormalization toward their long-run tendency of surplus, while budget constraints have not had to harden significantly.

A large amount of structural renormalization has occurred across the globe as market economies move towards their long-run tendency of surplus. Meanwhile, budget constraints haven’t had to harden significantly—financial conditions aren’t meaningfully much tighter than they were this last time last year, if anything they’re a tad looser. That powerful combination is what has allowed optimism and economic expectations to improve so much over the last year—and is a large part of why the Fed feels more confident in keeping rates “higher for longer.”

Takeaways by Macro Roundup® AI

  1. Market economies worldwide have undergone structural renormalization toward their long-run tendency of surplus, while budget constraints have not had to harden significantly.
  2. Financial conditions are not meaningfully tighter than a year earlier and are, if anything, slightly looser, a factor in the Federal Reserve's greater confidence in keeping rates "higher for longer.".
  3. The combination of structural renormalization and unhardened budget constraints is credited for the improvement in optimism and economic expectations over the past year.

Related Articles:

  • Supply-Side Expansion Has Driven the Decline in Inflation — A decomposition of price and quantity growth across items indicates that most of the decline in inflation came from supply-side expansion, where price increases slowed while quantity growth picked up. The author argues that resolving supply shocks combined with a modest easing of demand brought inflation down without a cost to the level of employment.
  • The “Easy Disinflation” Is (Mostly) Over. The Fed Grapples With What Comes Next — Most consumers' nominal incomes continue to rise faster than before the pandemic without commensurate increases in output or offsetting changes in saving. Excluding volatile pay changes for managerial workers and lower-paid workers in the industries hit hardest by the pandemic, hourly pay has risen at about a 5% annual rate in almost every month.

AI Summary. Small business payments to hiring firms, a leading indicator for payrolls, are gradually returning to 2019 levels, consistent with a labor market normalizing toward trend growth. Bank of America internal data show US consumer spending holding up, pointing to healthy small business revenues, while higher interest rates and labor quality have become greater concerns.

Anna Zhou and Taylor Bowley Bank of America
Date Posted:

According to @BankofAmerica internal data small business hiring remains strong though owners are expressing greater concern over the quality of labor relative to a year ago. Inflation remains their largest concern.

Is the small business labor market normalizing toward trend growth?

Core argument: Small business payments to hiring firms, a leading indicator for payrolls, are gradually returning to 2019 levels, consistent with a labor market normalizing to trend growth.

Small business payments to hiring firms, a leading indicator for payrolls, are gradually returning to 2019 levels. This is in line with the view that the labor market is normalizing to its trend growth. Overall, small businesses continue to face crosscurrents. On the positive side, US consumer spending has held up well, according to Bank of America internal data, which, in turn, points to healthy revenues for small businesses. However, higher interest rates and quality of labor have become more of a concern relative to a year ago.

Takeaways by Macro Roundup® AI

  1. Small business payments to hiring firms, a leading indicator for payrolls, are gradually returning to 2019 levels, consistent with a labor market normalizing to trend growth.
  2. US consumer spending has held up well, according to Bank of America internal data, which points to healthy revenues for small businesses.
  3. Higher interest rates and quality of labor have become more of a concern for small businesses relative to a year ago.

Related Articles:

  • The Impact of Higher Rates on Small Businesses — Analysts estimate higher interest rates will raise small businesses' interest burden from roughly 5.8% of revenues to about 7%, and eventually to just under 8% as term loans mature—above the pre-pandemic 6.8% but similar to the mid-1990s. Because small businesses are about 15% of private-sector gross output, they project a drag on economywide GDP growth of about 0.1pp.
  • Business Formation Boom — U.S. high-propensity business applications — those more likely to become employers — ran 40% above their 2019 average, according to Census Bureau data, with the elevated pace persisting after the pandemic. Business deaths also rose, but the net effect still points to strong growth in business formation.
  • Surging Business Formation in the Pandemic: Causes and Consequences? — Shifts in consumer demand and in preferences for work and lifestyle during the pandemic created entrepreneurial opportunities, and applications to start businesses produced new firms and establishments that hired workers in large numbers. The authors argue these new businesses drew in quitting workers as founders or hires, implying economic restructuring across industry, geography, and firm size and age.

AI Summary. India has averaged real GDP growth above 6% a year for three decades, and unlike China's growth, it has translated into equity returns, with the Sensex matching or beating the S&P 500 over 30-, 20-, 10-, and five-year spans. Analysis attributes the growth to rising total factor productivity, with contributions from services exports and improved basic infrastructure.

Robert Armstrong, Ethan Wu, and Adam Tooze Financial Times
Date Posted:

The Indian stock market’s strong performance has been driven by robust total factor productivity growth of 1.3% from 2007-2022 vs. 0.9% for 1990-2006, stemming mainly from improvements in basic infrastructure. @rbrtrmstrng @EthanYWu

Has India's economic growth translated into stock market returns?

Core argument: India has averaged real GDP growth of more than 6% a year for the past 30 years, and unlike China's growth, that expansion has translated into stock market returns.

The strongest reason for weighing this slice towards India is not just that the country has averaged real GDP growth of more than 6% a year for the past 30 years; that growth has also translated into stock market returns in a way that China’s growth, for example, has not. Over the past 30, 20, 10, and five years, the Sensex has performed as well or better than the S&P 500, leaving other big markets far behind. India’s growth story is built on its remarkable increase in total factor productivity, the economy’s ability to generate output from a given amount of labour and capital. Aditya Suresh of Macquarie notes that TFP’s contribution to headline growth has averaged 1.3% between 2007 and 2022, against 0.9% in 1990-2006, far outpacing other EMs. Partly, the TFP boost has come from efficiency improvements in certain sectors, such as services exports (think ecommerce or consulting). But the biggest improvement is undoubtedly from better basic infrastructure.

Takeaways by Macro Roundup® AI

  1. India has averaged real GDP growth of more than 6% a year for the past 30 years, and unlike China's growth, that expansion has translated into stock market returns.
  2. Over the past 30-, 20-, 10-, and five-year horizons, India's Sensex has performed as well as or better than the S&P 500, leaving other large markets far behind.
  3. Aditya Suresh of Macquarie notes that total factor productivity's contribution to India's headline growth averaged 1.3% in 2007–2022 versus 0.9% in 1990–2006, far outpacing other emerging markets, with the largest improvement coming from better basic infrastructure.

Related Articles:

  • Indian Stock Market Surges as Foreign Funds Buy Into National Growth Story — Indian equities rose $440bn to more than $3.5tn in value, making India the world's fifth-largest stock market after the US, China, Japan, and Hong Kong, ahead of France and the UK. Foreign portfolio investors added a net $9.4bn to Indian shares in the quarter, with analysts attributing the bulk of this year's inflows to passive index buying.
  • 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.
  • The Path to 2075 — Capital Market Size and Opportunity — Projections see the US share of global equity market value falling from 42% to 35% by 2030, 27% by 2050 and 22% by 2075, while India's share rises from about 2.5-3% to 8% by 2050 and 12% by 2075. China's share is projected to rise from 10% to 15% by 2050 before easing to about 13.5% by 2075.

AI Summary. The authors argue China is heading into a protracted debt crisis in which about 40% of local government financing vehicles default, hitting regional banks most exposed to such lending. They estimate total losses for these creditors at roughly $5tn, or about 30% of China's GDP.

Damien Ma and Houze Song Macro Polo
Date Posted:
Is Database:
Database

According to @damienics and @hzsong, China is heading toward a protracted debt crisis which will see 40% of local government financing vehicles default with total losses of $5T or ~30% of China’s GDP. @MacroPoloChina

How large are China's local government debt losses likely to be?

Core argument: The authors project that around 40% of China's local government financing vehicles will default, producing roughly $5 trillion in total losses for LGFV creditors, or about 30% of China's GDP.

China is likely heading into a messy and protracted debt debacle that will be at least equal in magnitude to the state-owned enterprises (SOEs) debt drama in the late 1990s. Except the outcome this time will likely be a prolonged economic malaise. At a fundamental level, most if not all economic crises are essentially debt crises in various guises. China’s is no exception. We believe the property sector crisis, which has largely peaked, is just a preview of the main event, which will see around 40% of local government financing vehicles (LGFVs) default on their debt. Defaults of this magnitude will affect regional banks that are most exposed to LGFV lending. We estimate total loss for LGFV creditors (including financial institutions such as banks and LGFV supplier/contractors) to be in the neighborhood of $5 trillion, or ~30% of China’s GDP.

Takeaways by Macro Roundup® AI

  1. The authors project that around 40% of China's local government financing vehicles will default, producing roughly $5 trillion in total losses for LGFV creditors, or about 30% of China's GDP.
  2. The authors argue China is heading into a messy and protracted debt debacle at least equal in magnitude to the state-owned enterprise debt drama of the late 1990s, with prolonged economic malaise the likely outcome.
  3. The authors describe China's property sector crisis as having largely peaked and as a preview of LGFV defaults expected to affect regional banks most exposed to LGFV lending.

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.
  • The Neoclassical Growth of China — China's per capita GDP growth path closely tracks those of Japan, South Korea, and Taiwan from similar starting income levels, indicating nothing unusual about its growth rate. The authors' model projects China's per capita GDP will level off at about 41% of the US level, reflecting a slowdown in productivity catch-up.
  • China’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.

AI Summary. Declining contributions from labor and capital are projected to hold China's income growth below 4% unless total factor productivity growth accelerates, which the authors argue is unlikely given that China's productivity growth has already averaged 1.8% since 2009. Only five of the 43 countries that previously reached China's income level sustained that pace over the following 13 years.

Hunter Clark and Matthew Higgins Federal Reserve Bank of New York
Date Posted:

Citing research suggesting China’s TFP growth may have fallen to “about zero,” a @NewYorkFed analysis argues China is unlikely to reach mid-level developed country GDP per capita by 2035.

Will slowing labor and capital growth hold China's income growth below 4%?

Core argument: Reduced contributions from labor and capital are expected to hold China's income growth below 4% unless total factor productivity (TFP) growth accelerates enough to offset the decline.

We expect reduced contributions from labor and capital to hold income growth below 4% absent an offsetting acceleration in TFP (total factor productivity) growth. A surge in TFP growth, however, seems unlikely, since productivity growth in China is already quite high, averaging 1.8% since 2009. Only five of the forty-three countries that reached China’s current income level in the past saw TFP growth that high over the subsequent thirteen years. Not one managed to exceed this pace by more than a few tenths of a percentage point. In short, China will need to achieve TFP growth in excess of the fastest historical precedents to meet official income goals. Moreover, these estimates assume that the official growth figures are accurate. If the lower growth rates of Harry Wu's work are correct, TFP growth has already fallen to about zero.

Takeaways by Macro Roundup® AI

  1. Reduced contributions from labor and capital are expected to hold China's income growth below 4% unless total factor productivity (TFP) growth accelerates enough to offset the decline.
  2. China's TFP growth has averaged 1.8% since 2009, and only five of the 43 countries that previously reached China's current income level matched that pace over the following 13 years, none exceeding it by more than a few tenths of a percentage point.
  3. Meeting China's official income goals would require TFP growth beyond the fastest historical precedents, and if Harry Wu's lower growth estimates are correct, China's TFP growth has already fallen to about zero.

Related Articles:

  • China Slowdown Means It May Never Overtake US Economy, Forecast Shows — Bloomberg Economics projects China's growth slowing to 3.5% by 2030 and near 1% by 2050, below its earlier forecasts of 4.3% and 1.6%. On that path, China's economy would surpass the US only in the mid-2040s, by a small margin, before falling back behind; US potential growth is projected to drift down to 1.5% by 2050.
  • How Soon and At What Height Will China’s Economy Peak? — Goldman Sachs now projects China's economy will not overtake America's until 2035 and will peak at only 14% larger, down from an earlier projection of surpassing the US in 2026 and being over 50% larger by mid-century. Capital Economics argues China will reach 90% of America's size in 2035 and then lose ground.
  • After Years of Sharp Decline, Will China’s Birth Rate Rebound? — China's annual births fell from 18.83m in 2016 to 9.56m, with yearly declines ranging from 3.81% to 17.95%. Census-based projections indicate the number of women of childbearing age is declining by about 4m annually over a five-year period.

Friday, October 20, 2023

AI Summary. The authors document that the U.S. net foreign asset position fell by 60 percentage points of U.S. gross domestic product between 2007 and 2021, even as U.S. current account deficits narrowed. They attribute this to a boom in the market valuation of U.S. corporations' non-financial assets, which mechanically raised the value of large foreign equity holdings in U.S. firms.

Andrew Atkeson Jonathan Heathcote and Fabrizio Perri National Bureau of Economic Research
Date Posted:

.@Jonheathcote finds the deterioration of America’s net foreign asset position was driven by the overperformance of American equities held by overseas holders relative to the underperformance of American holdings overseas.

Why has the U.S. net foreign asset position fallen despite smaller deficits?

Core argument: The U.S. net foreign asset position fell by 60pp of GDP from 2007 into 2021 before rebounding somewhat in the first three quarters of 2022, even as U.S. current account deficits narrowed relative to the early 2000s.

In sharp contrast to this prior experience, from 2007 into 2021 the U.S. NFA position declined precipitously — by 60pp of U.S. GDP — before bouncing back somewhat in the first three quarters of 2022. And this has occurred despite the fact that U.S. current account deficits have narrowed relative to the early 2000s. We document that this unprecedented decline in the U.S. NFA position has been driven by a boom in the market valuation of the non-financial assets in U.S. corporations. Because foreigners’ gross holdings of equity in U.S. corporations have grown to be very large, this boom has mechanically increased the market value of U.S. liabilities to the rest of the world (henceforth, ROW). There has not been a similar boom in the valuation of corporations in the ROW over this time period, so U.S. residents have not enjoyed a similar revaluation of their gross foreign equity assets.

Takeaways by Macro Roundup® AI

  1. The U.S. net foreign asset position fell by 60pp of GDP from 2007 into 2021 before rebounding somewhat in the first three quarters of 2022, even as U.S. current account deficits narrowed relative to the early 2000s.
  2. The authors attribute the decline in the U.S. net foreign asset position to a boom in the market valuation of non-financial assets in U.S. corporations, which mechanically raised the market value of U.S. liabilities to the rest of the world given foreigners' very large gross equity holdings.
  3. Corporations in the rest of the world saw no comparable valuation boom over this period, so U.S. residents did not enjoy a similar revaluation of their gross foreign equity assets.

Related Articles:

  • The Economics of Inequality in High-Wage Economies — United States Income, Wealth, Consumption, and Inequality Diana Furchtgott-Roth
  • The Case For Continued American Equity Exceptionalism — Continued outperformance by US stocks is plausible because the US is positioned to capture a sizeable share of productivity gains from technologies such as artificial intelligence, while a moderating global economy would weigh on more cyclically oriented markets abroad. One study attributes 39% of 15-year equity returns to domestic economic performance.
  • 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. The author argues the market-equilibrium real interest rate may be largely a social fact rather than something grounded in technology or stable human preferences: if people believe the neutral rate is higher and spend accordingly, it becomes higher regardless of whether the belief is well founded.

Brad DeLong Brad DeLong's Grasping Reality
Date Posted:

.@delong finds potential structural factors for higher r* unconvincing and proposes a social explanation, “if people permanently think r* is higher, it is, whether or not there is good reason for their thoughts.”

Is the neutral real interest rate a social fact rather than fundamentals?

Core argument: Optimism about the future is prompting spending and a belief that the neutral real rate r* is higher, and if people permanently think r* is higher, it is, whether or not there is good reason for that belief.

People are seeing something that is making them more optimistic about the future—and are spending. They think r* is higher, and if people permanently think r* is higher, it is, whether or not there is good reason for their thoughts. This is a very, very hard argument to refute, or even to think about. It is that the market-equilibrium interest rate is much more a social fact, without secure grounding in technologies, or in permanent or persistent factors affecting human utilities and behavior, at least as we neoclassical economists think of it. I, at least, can get no purchase on this argument. So I throw it over the wall to the sociologists and psychologists, and hope someone over there catches it.

Takeaways by Macro Roundup® AI

  1. Optimism about the future is prompting spending and a belief that the neutral real rate r* is higher, and if people permanently think r* is higher, it is, whether or not there is good reason for that belief.
  2. On this argument, the market-equilibrium interest rate is largely a social fact without secure grounding in technologies or in persistent factors affecting human utilities and behavior as neoclassical economists conceive them.
  3. DeLong says he can get no purchase on the argument that beliefs set r*, and throws it over the wall to sociologists and psychologists.

Related Articles:

  • What Is the Ten-Year Real Rate Going to Be? I: How We Got Here — A return of bond yields to their 2010s lows is unlikely, though the author expects some mean reversion, guessing roughly 0.5 percentage points. Demand for US Treasuries from wealthy emerging-market investors, sovereign wealth funds, and exchange reserves continues to scale with global wealth, so the author argues the safe-asset shortage holding down Treasury rates is not over.
  • Why We Should, but Won’t, Reduce the Budget Deficit — High interest rates will likely crowd out private investment and weaken long-term growth prospects. Because Social Security, health care, other safety-net programs, defense, and interest payments make up most federal spending, leaving only a small and already squeezed slice of nondefense discretionary spending, deficit reduction requires either cutting popular benefits or raising taxes.
  • 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 Penn Wharton Budget Model projects federal debt rising from 98% of GDP to 189% by 2050, versus the Congressional Budget Office's 169%, and 208% if the real average borrowing rate runs 50 basis points above its 2.3% forecast. The authors argue a debt crisis has been avoided only because market participants assume a tax and spending correction is coming.

James Capretta American Enterprise Institute
Date Posted:

.@AEIecon cites Penn Wharton Budget Model’s analysis suggesting. “If and when the market consensus shifts toward assuming a [tax and spending] fix is not coming after all, a debt crisis would emerge in short order.”

.@AEIecon cites Penn Wharton Budget Model’s analysis suggesting. “If and when the market consensus shifts toward...

How high will federal debt climb without a tax and spending correction?

Core argument: The Penn Wharton Budget Model projects federal debt rising from 98% of GDP in 2023 to 189% in 2050, above the Congressional Budget Office's forecast of 169% of GDP that year.

The Penn Wharton Budget Model (PWBM) notes that the only reason a debt crisis has not already occurred is that market participants assume a tax and spending correction is coming at some point. The PWBM brief also outlines the effects of real interest rate increases on future debt projections. In the base case, the authors project federal debt rising from 98% of GDP in 2023 to 189% in 2050. The Congressional Budget Office (CBO) forecast shows debt reaching 169 percent of GDP that same year. If the real average interest rate for U.S. borrowing rises by 50 basis points above the PWBM forecast of 2.3%, then federal debt would climb to 208% of GDP in 2050.

Takeaways by Macro Roundup® AI

  1. The Penn Wharton Budget Model projects federal debt rising from 98% of GDP in 2023 to 189% in 2050, above the Congressional Budget Office's forecast of 169% of GDP that year.
  2. If the real average interest rate on U.S. borrowing rises 50 basis points above the Penn Wharton Budget Model's forecast of 2.3%, federal debt would reach 208% of GDP in 2050.
  3. The Penn Wharton Budget Model argues that a debt crisis has not yet occurred only because market participants assume a tax and spending correction is coming at some point.

Related Articles:

  • When Does Federal Debt Reach Unsustainable Levels? — The authors estimate that U.S. debt held by the public cannot exceed roughly 200% of GDP even under favorable market conditions, and that under current policy the ratio reaches 175–200% within about 20 years. After that point, they argue, no tax increases or spending cuts could avert default or inflationary debt monetization.
  • 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.
  • 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. Higher borrowing costs are weighing on corporate earnings and interest coverage, with bankruptcy filings rising and default rates projected to keep rising, particularly among middle-market companies. Lagged effects of monetary policy are slowing consumer credit growth, with auto and credit card delinquencies rising and bank lending standards tightening.

Torsten Sløk, Jyoti Agarwal, and Rajvi Shah Apollo
Date Posted:

Torsten Sløk @apolloglobal argues a default cycle is underway.

Are higher borrowing costs pushing corporate defaults and consumer delinquencies higher?

Core argument: A default cycle has begun with bankruptcy filings rising, and default rates are projected to keep climbing over the coming quarters, affecting middle market companies in particular, even as credit spreads remain tight.

Up in quality: With the Fed keeping rates higher for longer, higher debt costs will continue to weigh on earnings and interest coverage ratios over the coming quarters, and both IG and HY companies will experience higher refinancing costs. Large cap: A default cycle has started with bankruptcy filings rising, and default rates will continue to rise over the coming quarters, impacting in particular middle market companies. Lend to firms with low leverage and high interest coverage ratios: Lagged effects of monetary policy are slowing consumer credit growth with auto and credit card delinquencies rising and bank lending conditions tightening, leading to a significant slowing of loan growth impacting consumers and firms with weak balance sheets.

Takeaways by Macro Roundup® AI

  1. A default cycle has begun with bankruptcy filings rising, and default rates are projected to keep climbing over the coming quarters, affecting middle market companies in particular, even as credit spreads remain tight.
  2. With the Federal Reserve keeping rates higher for longer, higher debt costs will continue to weigh on earnings and interest coverage ratios, and both investment grade and high yield companies will face higher refinancing costs.
  3. Lagged effects of monetary policy are slowing consumer credit growth, with auto and credit card delinquencies rising and bank lending conditions tightening, producing a significant slowing of loan growth that affects consumers and firms with weak balance sheets.

Related Articles:

  • Where Are All the Defaults? — One explanation for subdued high-yield bond spreads is that the lowest-quality borrowers, those most likely to default, have migrated from high-yield markets into private credit. Moody's reports the number of issuers with its lowest speculative-grade ratings has fallen, and that 62% of its rated universe is rated single-B or below.
  • Rates Are Up. We’re Just Starting to Feel the Heat — U.S. companies have $600bn in corporate debt maturing this year, a total Goldman Sachs data show rising to more than $1tn a year from 2025 through 2028. Those debt loads, combined with higher financing costs, may cut into corporate profits, investor returns, innovation spending, and hiring, with some analysts expecting credit-rating downgrades.
  • How Is the Corporate Bond Market Functioning as Interest Rates Increase? — The Investment Grade Corporate Bond Market Distress Index has risen only modestly during the current interest-rate tightening cycle and has recently trended sideways, with its peak not substantially above the level reached during the earlier 2015 tightening cycle.

AI Summary. A congressionally mandated Pentagon survey estimated China's stockpile of operational nuclear warheads reached 500 and projected it would likely exceed 1,000 by 2030, while the US has 1,550 deployed strategic warheads permitted under the New Start arms control treaty. Analysts warn conventionally armed intercontinental missiles could destabilize the military balance.

Demetri Sevastopulo Financial Times
Date Posted:

According to a new Pentagon report, China is accelerating the expansion of its nuclear arsenal and likely developing conventional ICBMs to target major US population centers.

According to a new Pentagon report, China is accelerating the expansion of its nuclear arsenal and likely developing...

Is China expanding its nuclear arsenal faster than expected?

Core argument: China's stockpile of operational nuclear warheads reached 500 by May 2023, putting it on track to exceed projections, according to the annual Pentagon survey of Chinese military capabilities mandated by Congress.

An annual survey of Chinese military capabilities mandated by Congress said its stockpile of operational nuclear warheads reached 500 by May 2023, putting it on track to exceed projections. It forecast that China would likely have more than 1,000 operational nuclear warheads by 2030. The US has 1,550 deployed strategic nuclear warheads, as permitted under the New Start arms control treaty. Dennis Wilder, a former top CIA China expert, said the warning about conventional ICBMs was very concerning because they could destabilise the military balance and complicate the situation for military planners. “China could, in a US-China crisis, for the first time threaten strikes against major US population centers without having to cross the nuclear threshold, which risks a massive US nuclear barrage in response.”

Takeaways by Macro Roundup® AI

  1. China's stockpile of operational nuclear warheads reached 500 by May 2023, putting it on track to exceed projections, according to the annual Pentagon survey of Chinese military capabilities mandated by Congress.
  2. The Pentagon survey forecasts that China will likely have more than 1,000 operational nuclear warheads by 2030, while the US has 1,550 deployed strategic warheads, as permitted under the New Start arms control treaty.
  3. Dennis Wilder, a former top CIA China expert, called the warning about conventional ICBMs very concerning, saying China could in a crisis threaten strikes on major US population centers without crossing the nuclear threshold.

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