Edward Conard

Top Ten New York Times Bestselling Author

  • “…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 fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “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
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Monday, November 6, 2023

AI Summary. The authors find Japan's government runs a large duration mismatch on its consolidated balance sheet, holding long-duration risky assets financed mainly with short-duration funding such as bank reserves, Treasury bills, and bonds. They estimate this carry trade has earned an ex-post excess return of about 2.13% a year above funding costs, worth more than 3% of GDP.

YiLi Chien, Harold Cole and Hanno Lustig Federal Reserve Bank of St. Louis
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A new @stlouisfed piece contends that the Japanese government takes on both duration and currency risk as it borrows short to invest in long-duration assets including foreign equities, domestic equities, and foreign debt. @HannoLustig

Does a government carry trade earn large returns on its balance sheet?

Core argument: Japan's government has realized an ex-post excess return of about 2.13% per annum above its funding cost by holding long-duration risky assets financed with mostly short-duration funding in the form of bank reserves, T-bills, and bonds.

We show that Japan’s government has engineered a sizeable duration mismatch on its consolidated balance sheet. The Japanese government implements a sizeable carry trade, and it earns high realized asset returns while its borrowing rates decline. Japan’s government has realized an ex-post excess return of about 2.13% per annum above its funding cost by going long in long-duration risky assets, financed with mostly short-duration funding in the form of bank reserves, T-bills, and bonds. This investment strategy has allowed the government to earn more than 3% of GDP from its risky investments.

Takeaways by Macro Roundup® AI

  1. Japan's government has realized an ex-post excess return of about 2.13% per annum above its funding cost by holding long-duration risky assets financed with mostly short-duration funding in the form of bank reserves, T-bills, and bonds.
  2. Japan's government has engineered a sizeable duration mismatch on its consolidated balance sheet, implementing a carry trade that earns high realized asset returns while its borrowing rates decline.
  3. Japan's government has earned more than 3% of GDP from its risky investments under this strategy.

Related Articles:

  • The Bank of Japan’s Seductive Widow-Maker Trade — Japan's gross government debt stands at 260% of GDP, or 235% after netting out $1.25tn in foreign-exchange reserves, making the Bank of Japan reluctant to raise short-term policy rates. A 3% increase would sharply raise government debt-servicing costs and strain Japanese banks, especially if long-term rates also rose.
  • Japan Demographic Woes Deepen as Birthrate Hits Record Low — Japan's fertility rate fell for a seventh consecutive year to a record low of about 1.26 children per woman, far below the 2.07 rate considered necessary to maintain a stable population. Births fell 5% to 770,747, a record low, while deaths rose 9% to a record 1.57m.
  • Inflation in The *Very* Long Run — Japan's experience indicates an aging society is not inherently inflationary: despite decades of a shrinking working-age population, its total number of workers has risen as women entered paid employment and people in their 60s and 70s stayed in or returned to work. The US is projected to have more favorable demographics than most other rich countries and China.

AI Summary. Under the Treasury Borrowing Advisory Council's recommendation, roughly $1.8t of new money would be raised through longer-dated coupon securities and about $700bn through short-term bills, lifting bills to around 22% of marketable debt outstanding. The author argues the more likely sequence is a sharp rise in yields that triggers recession and rate cuts, which then generate strong Treasury demand.

Joseph Wang Fed Guy Blog
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.@FedGuy12 argues the bond bear market is likely to resume, as issuance remains at a historical high, the Fed has left the market, and private demand looks weak.

Will rising bill issuance be enough to support Treasury demand?

Core argument: Under the Treasury Borrowing Advisory Council's recommendation, coupon issuance would raise about $1.8t of new money next calendar year, leaving net bill issuance near $700b assuming $2.5t of privately held borrowing over 12 months.

The share of bills is set to gradually rise next year, but the trajectory of the increase may not be aggressive enough to support the market. Under Treasury Borrowing Advisory Council’s recommendation, the amount of new money raised next calendar year through coupons would be around $1.8t. Assuming $2.5t in privately held borrowing for 12 calendar months, net bill issuance next year looks to be around $700b. This would take some pressure off the market by increasing the share of bills to around 22% of marketable debt outstanding. A recession and rate cuts would likely boost Treasury demand, but current U.S. economic strength suggests they are more likely to occur later next year after the market is forced to digest a significant amount of issuance. The more likely sequence may be a sharp rise in yields that then leads to both a recession and rate cuts, which together finally create strong demand for Treasuries.

Takeaways by Macro Roundup® AI

  1. Under the Treasury Borrowing Advisory Council's recommendation, coupon issuance would raise about $1.8t of new money next calendar year, leaving net bill issuance near $700b assuming $2.5t of privately held borrowing over 12 months.
  2. Net bill issuance of roughly $700b would lift bills to about 22% of marketable debt outstanding, taking some pressure off the market, though the pace of the increase may not be aggressive enough to support it.
  3. Current U.S. economic strength suggests a recession and rate cuts, which would boost Treasury demand, are more likely later next year, with the probable sequence being a sharp rise in yields that then leads to both.

Related Articles:

  • US Treasury To Slow Pace Of Longer-Dated Debt Issuance — The US Treasury said it will keep raising two- and five-year note auction sizes by $3bn per month while slowing increases in longer-dated debt, lifting 10-year note auctions by $2bn and 30-year bond auctions by $1bn. Its quarterly refunding will total $112bn, down from $114bn.
  • Preferred Habitats and Timing in the World’s Safe Asset — As the Federal Reserve shrinks its bond portfolio, the authors argue private investors, U.S. and foreign, are the more likely buyers of Treasury securities, since their purchases respond to yields and their holdings tilt toward longer-maturity bonds. Foreign governments have not materially added to their Treasury holdings in almost a decade and tend to hold shorter-maturity bonds.
  • 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.

AI Summary. Foreign ownership of US government debt has fallen from 33% to 23% over the past decade.

Torsten Sløk Apollo
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Torsten Sløk @apolloglobal notes that over the last decade, the foreign ownership of US government bonds has fallen from 33% to 23%.

Is foreign ownership of US government debt declining?

Core argument: Foreign ownership of US government bonds has fallen from 33% to 23% over the last decade, according to Torsten Sløk of Apollo Global.

A decade ago, foreigners owned 33% of US government debt. That number has now declined to 23%.

Takeaways by Macro Roundup® AI

  1. Foreign ownership of US government bonds has fallen from 33% to 23% over the last decade, according to Torsten Sløk of Apollo Global.

Related Articles:

  • Preferred Habitats and Timing in the World’s Safe Asset — As the Federal Reserve shrinks its bond portfolio, the authors argue private investors, U.S. and foreign, are the more likely buyers of Treasury securities, since their purchases respond to yields and their holdings tilt toward longer-maturity bonds. Foreign governments have not materially added to their Treasury holdings in almost a decade and tend to hold shorter-maturity bonds.
  • US Treasury To Slow Pace Of Longer-Dated Debt Issuance — The US Treasury said it will keep raising two- and five-year note auction sizes by $3bn per month while slowing increases in longer-dated debt, lifting 10-year note auctions by $2bn and 30-year bond auctions by $1bn. Its quarterly refunding will total $112bn, down from $114bn.
  • 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.

AI Summary. Average funding costs in the $8.6tn US investment-grade corporate bond market exceed 6%, roughly 3x their lows of below 2%, while average coupons in the $1.3tn high-yield market are 9.4%, more than double their lows. Moody's projects the US default rate will peak at 5.4%, or as high as 14% if conditions worsen.

Harriet Clarfelt Financial Times
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$1.3T of speculative-grade corporate borrowing is facing refinancing over the next three years, at rates more than double their 2021 lows. Moody’s predicts the US default rate will peak at 5.4% in January but could soar as high as 14%.

Can companies handle corporate borrowing costs that have tripled?

Core argument: Average funding costs in the $8.6tn investment-grade corporate bond market now exceed 6%, three times their lows of below 2% in late 2020, though market participants remain relatively sanguine about these high-quality issuers, according to Ice BofA data.

Average funding costs for the $8.6tn market in the highest quality corporate bonds, known as investment grade, are now above 6%, according to Ice BofA data. Although that is three times their lows of below 2% in late 2020, market participants are relatively sanguine about the health of these high-quality companies. There is more concern about less creditworthy borrowers in the $1.3tn non-investment grade market, often called junk or high-yield. Coupons now average 9.4%, more than double their lows in late 2021. Moody’s predicts the US default rate will peak at 5.4% in January, but if conditions worsen it could soar as high as 14%.

Takeaways by Macro Roundup® AI

  1. Average funding costs in the $8.6tn investment-grade corporate bond market now exceed 6%, three times their lows of below 2% in late 2020, though market participants remain relatively sanguine about these high-quality issuers, according to Ice BofA data.
  2. Coupons in the $1.3tn non-investment-grade market average 9.4%, more than double their late-2021 lows, and less creditworthy borrowers draw greater concern.
  3. Moody's predicts the US default rate will peak at 5.4% in January, but that it could reach as high as 14% if conditions worsen.

Related Articles:

  • Credit Market Outlook: Default Rates Rising, But Credit Spreads Remain Tight — 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.
  • 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.
  • The Corporate Debt Maturity Wall: Implications for Capex and Employment — The authors estimate the average interest rate on outstanding corporate debt will rise from 4.20% to 4.50%, lifting private sector interest expense as a share of gross output by 0.25 percentage points. They project this would reduce capital spending growth by up to 0.25 percentage points and labor cost growth by up to 0.15.

AI Summary. A model projects the inflation-adjusted natural interest rate rising about a percentage point from a 1.7% trough to 2.7% by 2050, implying 10-year US Treasury yields of 4.5%–5%. The authors estimate wide fiscal deficits, climate investment, and faster growth could lift the natural rate to 4%, implying roughly 6% yields.

Jamie Rush, Martin Ademmer, Maeva Cousin, and Tom Orlik Bloomberg
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A @markets analysis suggests the natural rate of interest in the US will rise to 2.7% by 2050, implying 10-year Treasury yield somewhere between 4.5-5%, though higher investment levels could leave the yield at 6%.

Will the natural interest rate keep rising through midcentury?

Core argument: The model projects the natural rate of interest rising about a percentage point from a trough of 1.7% in the mid-2010s to 2.7% by 2050, implying nominal 10-year Treasury yields of 4.5% to 5%.

Our model shows a rise of about a pp from a trough of 1.7% in the mid-2010s to 2.7% by 2050. In nominal terms, that means 10-year Treasury yields could settle somewhere between 4.5% and 5%. And the risks are skewed toward even higher borrowing costs than our baseline suggests. If the government doesn’t get its finances in order, fiscal deficits will stay wide. The fight against climate change will require massive investment. BloombergNEF estimates getting the energy network in shape to achieve net-zero carbon emissions will cost $30 trillion. And leaps forward in artificial intelligence and other technologies might yet boost productivity—resulting in faster trend growth. High government borrowing, more spending to fight climate change, and faster growth would all drive the natural rate higher. According to our estimates, the combined impact would push the natural rate to 4%, translating to a nominal 10-year bond yield of about 6%.

Takeaways by Macro Roundup® AI

  1. The model projects the natural rate of interest rising about a percentage point from a trough of 1.7% in the mid-2010s to 2.7% by 2050, implying nominal 10-year Treasury yields of 4.5% to 5%.
  2. Wide fiscal deficits, climate spending, and faster trend growth from artificial intelligence and other technologies would together push the natural rate to 4%, translating to a nominal 10-year bond yield of about 6%.
  3. BloombergNEF estimates that getting the energy network in shape to achieve net-zero carbon emissions will cost $30 trillion.

Related Articles:

  • Are High Interest Rates the New Normal? — The rise in interest rates reflects higher real interest rates rather than inflation expectations, since breakeven rates—the gap between yields on ordinary bonds and inflation-indexed bonds—indicate markets expect inflation to stay under control. Real rates well above 2%, up from below 1% before the pandemic, may prove transitory.
  • Global Natural Rates in the Long Run: Postwar Macro Trends and the Market-Implied r* in 10 Advanced Economies — Estimates for 10 advanced economies show natural interest rates have declined over the long run, though not steadily: as recently as the 1990s they ranged from 100 to 600 basis points, while by the end of the sample 4 of 10 countries had a negative natural rate and most others fell between 0 and 50 basis points.
  • Measuring the Natural Rate of Interest After COVID-19 — Model estimates for the United States, Canada, and the Euro Area place the natural rate of interest within a few tenths of a percentage point of pre-pandemic estimates, with the main longer-term consequence of the pandemic a reduction in the natural rate of output. The authors find no evidence that the era of historically low natural rates has ended.

AI Summary. Foreign firms withdrew more than $160bn in earnings from China over six consecutive quarters, according to an analysis of Chinese data. These profit outflows pushed overall foreign direct investment in China negative in a quarter for the first time in 25 years.

Jason Douglas and Weilun Soon Wall Street Journal
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Foreign firms repatriated at least $160B of their Chinese earnings over the past 6 quarters. Historically, foreign firms have reinvested their Chinese earnings.

Are foreign firms pulling earnings out of China?

Core argument: Foreign firms pulled more than $160 billion in total earnings out of China over six consecutive quarters through the end of September, according to an analysis of Chinese data.

Foreign firms yanked more than $160 billion in total earnings from China during six successive quarters through the end of September, according to an analysis of Chinese data, an unusually sustained run of profit outflows that shows how much the country’s appeal is waning for foreign capital. The torrent of earnings leaving China pushed overall foreign direct investment in the world’s second-largest economy into the red in the third quarter for the first time in a quarter of a century.

Takeaways by Macro Roundup® AI

  1. Foreign firms pulled more than $160 billion in total earnings out of China over six consecutive quarters through the end of September, according to an analysis of Chinese data.
  2. China's overall foreign direct investment turned negative in the third quarter for the first time in 25 years, pushed into the red by the outflow of foreign firms' earnings.
  3. The six-quarter run of profit outflows marks an unusually sustained stretch that indicates China's appeal to foreign capital is waning.

Related Articles:

  • China Suffers Plunging Foreign Direct Investment Amid Geopolitical Tensions — Foreign direct investment into China is falling across multiple measures, with one month showing a 34% year-on-year drop to Rmb72.8bn ($10bn), the steepest decline since monthly figures became available in 2014. After rising 15% year on year early in the year, inflows have posted double-digit percentage declines each month since.
  • The Rise & Fall of Foreign Direct Investment in China — Net foreign direct investment into China has been negative for four consecutive quarters, as foreign investors shifted from reinvesting earnings from their Chinese operations to repatriating them. Whether this reflects cash management or signals a future slowdown in foreign direct investment is unclear, but the repatriation of profits is negative for China's currency.
  • China’s Age Of Malaise — More than 300,000 Chinese people emigrated in a single year, more than double the pace of a decade earlier, with some traveling overland through a half-dozen countries to reach the US. US authorities at the southern border recorded 17,894 encounters with Chinese migrants over ten months, a thirteenfold increase from the prior year.

AI Summary. Childlessness rose first among women in their early 20s and then at successively older ages, tracking the millennial generation as it aged; sources consulted pointed to the broader economic climate. Much of the rise could be erased if women follow through on delayed family plans, but time for a reversal may be running out.

Andrew Van Dam Washington Post
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A @washingtonpost analysis finds 34.6% of American women 25-44 have never had a child, up 13pp from 1980. Single-child families have stayed steady at ~ 20% over that time period, while families with 4 or more children declined significantly.

Why is childlessness rising as a generation ages?

Core argument: Childlessness among women in their early 20s rose sharply beginning around 2002, when the first millennials, born in 1981, entered that age group, with a similar jump for women in their later 20s in 2006.

Women in their early 20s embraced childlessness first, with a sharp rise beginning around 2002. That happens to be when the first millennials, born in 1981, entered that age group. For women in their later 20s, the jump in childlessness happened in 2006, just as the first millennials arrived. As you ascend the age spectrum, the millennial echo follows. When the oldest millennials hit their 40s, even 40-year-olds become more likely to go childless. Just about every source we consulted pointed to the broader economic climate. If women are able to follow through on their delayed family plans, much of the rise in childlessness could be erased, but with older millennials in their 40s, time for a reversal may be running out.

Takeaways by Macro Roundup® AI

  1. Childlessness among women in their early 20s rose sharply beginning around 2002, when the first millennials, born in 1981, entered that age group, with a similar jump for women in their later 20s in 2006.
  2. The rise in childlessness follows the millennial cohort as it ages, with 40-year-olds becoming more likely to go childless once the oldest millennials reached their 40s.
  3. Nearly every source consulted pointed to the broader economic climate, and much of the rise in childlessness could be erased if women follow through on delayed family plans, though time for a reversal may be running out for older millennials.

Related Articles:

  • Young Adults in the U.S. Are Reaching Key Life Milestones Later Than in the Past — Pew Research Center analysis of Census Bureau data finds 21-year-olds in the US are less likely than their counterparts four decades earlier to have a full-time job, be financially independent, live on their own, be married, or have a child. Among 21-year-olds, 39% worked full time versus 64% four decades earlier, and a quarter were financially independent versus 42%.
  • A Visual Breakdown of America’s Stagnating Number of Births — About 3.66m babies were born in the U.S. in 2022, essentially unchanged from 2021 and 15% below the 2007 peak, with birthrates falling 3% among teens aged 15–19 and 2% among women aged 20–24. Increases were concentrated among women aged 35 to 44.
  • Why Americans Are Having Fewer Babies — Sociologists find that US women born in the late 1980s had, on average, about one child fewer by their early 30s than they had intended, roughly double the shortfall for women born two decades earlier. The median age at which women give birth is 30, three years older than in 1990.

AI Summary. Polling shows a broad decline in President Biden's standing across virtually every demographic group, with the steepest losses among young, Black, and Hispanic voters. Biden holds only a narrow lead among nonwhite voters under 45, a group that reported backing him by nearly 40 points in the prior election.

Nate Cohn New York Times
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Trump is leading Biden in five of six swing states driven by a decline in Biden support among young non-white voters. @Nate_Cohn

Is the incumbent president losing support across every demographic group?

Core argument: Biden barely leads among nonwhite voters under 45, a group that reported backing him by almost 40 points in the last election.

The deterioration in Mr. Biden’s standing is broad, spanning virtually every demographic group, yet it yields an especially deep blow to his electoral support among young, Black, and Hispanic voters, with Mr. Trump obtaining previously unimaginable levels of support with them. Mr. Biden barely leads at all among nonwhite voters under 45, even though the same voters reported backing Mr. Biden by almost 40 points in the last election.

Takeaways by Macro Roundup® AI

  1. Biden barely leads among nonwhite voters under 45, a group that reported backing him by almost 40 points in the last election.
  2. The deterioration in Biden's standing spans virtually every demographic group, while hitting his support among young, Black, and Hispanic voters especially hard.
  3. Trump is obtaining previously unimaginable levels of support among young, Black, and Hispanic voters.

Related Articles:

  • Can Democrats Survive the Looming Crisis in New York City’s Outer Boroughs? — Just over a third of the decline in the Democratic margin of victory came from the suburbs, with New York City voters—through a mix of defection and abstention—accounting for most of the rest. Precincts that are at least three-quarters Hispanic or Asian swung 58 and 52 points toward Republicans, versus 32 points in white and 8 points in black precincts.
  • Trump’s Electoral College Edge Seems to Be Fading — Polling suggests the demographic basis of the Republican candidate's Electoral College advantage may be eroding, with relative Democratic resilience among white voters and Republican strength among nonwhite voters. Because nonwhite voters are underrepresented in the most critical battleground states, such gains would tend to boost the national vote more than the battlegrounds.
  • Why Less Engaged Voters Are Biden’s Biggest Problem — Times/Siena survey data indicate that Democrats and Biden voters were somewhat more likely than Republicans and Trump voters to skip the midterm election, implying the presidential electorate was more Democratic. Yet the same data indicate higher turnout would not help Biden now, even though it would bring more Democratic and Biden voters to the polls.

Tuesday, November 7, 2023

AI Summary. Across 21 economies, the authors find that headline and core inflation responded positively to a measure of government spending increases scaled by pre-pandemic debt-to-GDP and average debt duration. Estimated coefficients of 0.4–0.5 suggest 40–50% of the extra spending was financed through inflation, with the rest through conventional public finance.

Robert Barro and Francesco Bianchi National Bureau of Economic Research
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Robert Barro and @Francesco_Bia find that 40-50% of pandemic-era OECD government financing came from the effect of unexpected inflation on the real value of public debt, consistent with the fiscal theory of the price level.

How much of pandemic spending increases was financed through inflation?

Core argument: Across 21 economies—20 non-Euro-zone OECD countries and an aggregate of 17 Euro-zone countries—estimated coefficients of 0.4–0.5 link inflation to scaled government spending, suggesting 40–50% of extra spending was financed through inflation and 50–60% through conventional intertemporal public finance.

We show for a sample of 21 economies—20 non-Euro-zone OECD countries and an aggregated version of 17 Euro-zone countries—that headline and core inflation rates in 2020-2022 responded positively to a theory-motivated government-spending variable. This variable includes cumulated increases in spending-GDP ratios divided by the pre-pandemic level of the debt-to-GDP ratio and by the average duration of the outstanding debt. In contrast, across 17 Euro-zone countries, differences in the government-spending variable do not generate significant differences in inflation rates. We also find in the sample of 21 economies that, while positive and statistically significant, the coefficient that gauges the response of the inflation rate to the scaled measure of government spending is significantly less than one, the value predicted when all of the extra spending is “paid for” through surprise inflation. The point estimates of coefficients of 0.4-0.5 suggest that 40-50% of the extra spending was financed through inflation, whereas the remaining 50-60% was paid for through the more conventional method of intertemporal public finance that involves increases in current or prospective government revenue or cuts in prospective future spending.

Takeaways by Macro Roundup® AI

  1. Across 21 economies—20 non-Euro-zone OECD countries and an aggregate of 17 Euro-zone countries—estimated coefficients of 0.4–0.5 link inflation to scaled government spending, suggesting 40–50% of extra spending was financed through inflation and 50–60% through conventional intertemporal public finance.
  2. Headline and core inflation rates in 2020-2022 responded positively to a government-spending variable defined as cumulated increases in spending-GDP ratios divided by the pre-pandemic debt-to-GDP ratio and by the average duration of outstanding debt.
  3. Within the 17 Euro-zone countries, differences in the government-spending variable do not generate significant differences in inflation rates, in contrast with the sample of 21 economies.

Related Articles:

  • What We’ve Learned About Inflation — Fiscal theory holds that a one-time $5tn fiscal expansion produces a one-time rise in the price level sufficient to inflate away $5tn of debt value, after which inflation stops even if the Federal Reserve does nothing. Raising interest rates lowers current inflation at the cost of more-persistent inflation, a beneficial smoothing.
  • Fiscal Arithmetic and the Global Inflation Outlook — Across advanced economies, core inflation is significantly positively associated with growth in government debt since the start of the pandemic, and the authors expect this decade's fiscal expansions to shift price levels permanently higher. They argue this differs from permanently higher inflation, projecting inflation to diminish as temporary deficits normalize, with medium-term inflation expectations still anchored near central bank targets.
  • When Will There Be No More Excess Savings Left? — Post-pandemic excess savings and core consumer price inflation one year later track each other closely, with inflation rising, peaking, and declining roughly a year after excess savings did. The author argues fiscal stimulus that boosted disposable income and excess savings contributed to this inflation episode, alongside monetary policy and supply chain problems.

AI Summary. Stabilizing public debt ratios would require cutting primary deficits to zero, which the author argues no government can do quickly without risking recession and boosting support for populist parties. With a US primary deficit around 4% and a dysfunctional budget process, the debt ratio is likely to keep rising for some time.

Olivier Blanchard Peterson Institute for International Economics
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.@ojblanchard1 writes that the rapid and unexpected move up in rates means that advanced economies will need to move towards primary balance quickly to avoid an explosion of debt-to-GDP ratios.

.@ojblanchard1 writes that the rapid and unexpected move up in rates means that advanced economies will need to move towards...

Will public debt ratios keep rising if deficits cannot be cut quickly?

Core argument: Stabilizing the public debt ratio requires reducing primary deficits to zero, which, the author argues, no government can accomplish quickly for both economic and political reasons.

Stabilizing the debt ratio implies reducing primary deficits to zero. For both economic and political reasons, there is no way governments can do this quickly. A drastic, immediate consolidation would most likely be catastrophic, both economically in triggering a recession, and politically, by increasing the share of votes going to populist parties. In the United States, where the primary deficit is around 4 percent and (r - g) looks positive at this point, the challenge is even stronger. And, given the current budget process dysfunction, one must worry that the adjustment will not take place any time soon. Thus, the debt ratio is likely to increase for quite some time. We have to hope that it will not eventually explode.

Takeaways by Macro Roundup® AI

  1. Stabilizing the public debt ratio requires reducing primary deficits to zero, which, the author argues, no government can accomplish quickly for both economic and political reasons.
  2. The U.S. primary deficit of around 4 percent, combined with a positive (r − g), makes the fiscal challenge stronger, and budget process dysfunction gives reason to worry that adjustment will not come soon.
  3. A drastic, immediate fiscal consolidation would most likely be catastrophic, according to the author, triggering a recession and increasing the share of votes going to populist parties.

Related Articles:

  • R versus G and the National Debt — National debt is considered sustainable when it grows more slowly than gross domestic product, so when the average interest rate on government debt (R) is below the economy's growth rate (G), debt can be sustainable even if non-interest spending exceeds revenue. R has been below G over the past 15 years.
  • 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.
  • Is the Fiscal Picture Getting Better or Worse? Yes. — The widening federal deficit reflected a sharp fall in tax receipts as a windfall from stock prices and inflation faded, plus rising interest payments, rather than new spending programs. The U.S. collects a lower share of income in taxes than other major economies, making higher revenue a reasonable alternative to cutting essential spending.

AI Summary. The benchmark 10-year US Treasury yield has fallen more than 40 basis points from its recent high. The authors attribute the decline to a government debt refunding plan implying less long-term bond supply than investors expected, economic data cooling in manufacturing surveys and the labor market, and short positioning among some investors at longer maturities.

Praveen Korapaty, Simon Freycenet, Ravi Raj and Gustavo Pereira Goldman Sachs
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.@GoldmanSachs writes that the sharp drop in rates last week was driven by portfolio positioning, and suggests that investors have recently overweighted the impact of Treasury supply on rates.

Why have long-term Treasury yields fallen sharply?

Core argument: The benchmark 10-year U.S. Treasury yield fell more than 40 bps over the week, after having stood only 5 bps below its recent high as of the prior Tuesday's close.

UST yields declined sharply over the course of the week—the benchmark 10y yield, which was only 5bp below its recent high as of last Tuesday’s close is now over 40bp lower. This move lower was aided by a trio of factors. First, the refunding meeting suggested less duration supply was in the offing relative to what many investors expected. We have been of the view for a while now that investors were overestimating the effects of supply on market-clearing yield levels, and the dominance of price-sensitive marginal investors meant more volatility in longer-term bond yields with swings in the macro outlook rather than simply higher yields. Second, following last month’s strong economic momentum, macro data have finally begun to show signs of cooling—both ISM reports and the labor market report surprised to the downside. Third, we think positioning was somewhat short in at least a portion of the investor base, particularly at the long end (we do think there are substantial structural overweights at shorter maturities).

Takeaways by Macro Roundup® AI

  1. The benchmark 10-year U.S. Treasury yield fell more than 40 bps over the week, after having stood only 5 bps below its recent high as of the prior Tuesday's close.
  2. The authors attribute the yield decline to three factors: a refunding meeting suggesting less duration supply than many investors expected, downside surprises in both ISM reports and the labor market report, and somewhat short positioning at the long end.
  3. The authors argue investors have been overestimating the effect of supply on market-clearing yield levels, with price-sensitive marginal investors producing more volatility in longer-term bond yields as the macro outlook swings rather than simply higher yields.

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  • Just One More — Under the Treasury Borrowing Advisory Council's recommendation, roughly $1.8t of new money would be raised through longer-dated coupon securities and about $700bn through short-term bills, lifting bills to around 22% of marketable debt outstanding. The author argues the more likely sequence is a sharp rise in yields that triggers recession and rate cuts, which then generate strong Treasury demand.
  • Preferred Habitats and Timing in the World’s Safe Asset — As the Federal Reserve shrinks its bond portfolio, the authors argue private investors, U.S. and foreign, are the more likely buyers of Treasury securities, since their purchases respond to yields and their holdings tilt toward longer-maturity bonds. Foreign governments have not materially added to their Treasury holdings in almost a decade and tend to hold shorter-maturity bonds.
  • 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.

AI Summary. U.S. wage growth has slowed substantially without a large rise in joblessness, though wages are still rising faster than in the decade before the pandemic, at a pace comparable to the late 1990s and 2006-2007. The author argues much of the earlier outsized pay gains reflected one-off job market churn and sectoral shifts.

Matt Klein The Overshoot
Date Posted:

Nominal wage gains are running ahead of the pre-pandemic period and are now in line with the pre-crisis period and the late 1990s according to @M_C_Klein. He notes wage growth has slowed without an increase in unemployment.

Is wage growth slowing without a rise in unemployment?

Core argument: U.S. wage growth has slowed sharply to a pace comparable to the late 1990s and 2006–2007, though it remains faster than in the decade before the pandemic.

The biggest source of underlying inflationary pressure in the U.S. economy—unusually rapid wage growth—has been receding rapidly in recent months, although not by enough (yet) for policymakers to be confident that they are on track to reaching their 2% yearly inflation goal. The question is whether this process will continue, and if not, what that would mean for interest rates. American workers’ wages are still rising faster than in the decade before the pandemic, but the pace of increases has slowed sharply and is now comparable to the late 1990s and 2006-2007. So far, wage growth has slowed substantially without much increase in joblessness or precarity. That is good news for workers, as well as a welcome vindication for those of us who believed that much of the outsized pay gains in 2021H2-2022H1 were one-offs associated with job market churn, reset expectations of working conditions, and sectoral shifts. The question is whether the slowdown we have already experienced is sufficient to satisfy Fed officials—and if not, what it would take for wage growth to slow even more.

Takeaways by Macro Roundup® AI

  1. U.S. wage growth has slowed sharply to a pace comparable to the late 1990s and 2006–2007, though it remains faster than in the decade before the pandemic.
  2. The wage slowdown has occurred without much increase in joblessness or precarity, supporting the view that outsized pay gains in 2021H2–2022H1 were one-offs tied to job market churn, reset expectations of working conditions, and sectoral shifts.
  3. Wage growth, the biggest source of underlying U.S. inflationary pressure, has not yet receded enough for policymakers to be confident of reaching the 2% yearly inflation goal.

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  • Is the Fed Peaking Too Soon? — Price increases have decelerated from about 6% to 3% a year while growth in the dollar value of spending and incomes has slowed much less, from about 7% to 6%, translating into faster growth in American living standards. The author argues real growth may slow, but it is less clear why nominal growth would.
  • Why No Recession (Yet)? — Real interest rates have risen by almost 10 percentage points, compared with 4 points during the 2004–2006 tightening, yet activity has held up because households entered the episode with large savings accumulated during the pandemic. As those surplus savings are used up and borrowers refinance at higher rates, the full impact of tightening has not yet been felt.
  • An Update from Our CIOs: Entering the Second Stage of Tightening — A second stage of the monetary tightening cycle is led by long-term interest rates: after a period when short-term rate hikes continued but bond yields traded sideways, long-term yields resumed rising. The earlier reprieve reflected market expectations of future easing and Treasury issuance shifted toward short-term bills funded by excess central bank reserves.

AI Summary. Delinquency rates have risen from historic lows across most credit products, with auto loan and credit card delinquencies exceeding pre-pandemic levels while mortgage transitions into delinquency remain below them. The increase is broad-based across income groups and regions but disproportionately driven by Millennials, borrowers with auto or student loans, and those with relatively higher credit card balances.

Andrew Haughwout, Donghoon Lee, Daniel Mangrum, Belicia Rodriguez, Joelle Scally, Wilbert van der Klaauw, and Crystal Wang Federal Reserve Bank of New York
Date Posted:

The @NewYorkFed household debt report for Q1 2023 finds the largest annual increase in credit card balances since 1999. Credit card delinquencies are now above pre-pandemic levels.

Who is driving the rise in credit card delinquencies?

Core argument: Credit card and auto loan delinquency rates have surpassed pre-pandemic levels and continue to rise, while the transition rate into delinquency for mortgages, the largest share of household debt, remains below its pre-pandemic level.

Delinquency rates on most credit product types have been rising from historic lows since the middle of 2021. The transition rate into delinquency remains below the pre-pandemic level for mortgages, which comprise the largest share of household debt, but auto loan and credit card delinquencies have surpassed pre-pandemic levels and continue to rise. While the growth in auto loan delinquency has appeared to moderate over recent quarters, credit card delinquency rates have risen at a sharper pace. Even though the increase in delinquency appears to be broad-based across income groups and regions, it is disproportionately driven by Millennials, those with auto or student loans, and those with relatively higher credit card balances.

Takeaways by Macro Roundup® AI

  1. Credit card and auto loan delinquency rates have surpassed pre-pandemic levels and continue to rise, while the transition rate into delinquency for mortgages, the largest share of household debt, remains below its pre-pandemic level.
  2. Credit card delinquency rates have risen at a sharper pace even as growth in auto loan delinquency has moderated, with delinquencies on most credit product types climbing from historic lows since the middle of 2021.
  3. The rise in delinquency is broad-based across income groups and regions but is disproportionately driven by Millennials, borrowers with auto or student loans, and those carrying relatively higher credit card balances.

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  • When Will There Be No More Excess Savings Left? — Post-pandemic excess savings and core consumer price inflation one year later track each other closely, with inflation rising, peaking, and declining roughly a year after excess savings did. The author argues fiscal stimulus that boosted disposable income and excess savings contributed to this inflation episode, alongside monetary policy and supply chain problems.
  • Accumulated Savings During the Pandemic: An International Comparison with Historical Perspective — The authors construct measures of excess household savings accumulated during the COVID-19 pandemic and find they have been unwound in the United States, declined in advanced foreign economies, and slowed in emerging market economies. Past recessions featured smaller increases in excess savings and greater persistence in the accumulated stock.
  • Excess No More? Dwindling Pandemic Savings — Research on U.S. household savings after the pandemic recession points to rapid accumulation and then drawdown of excess savings, with cumulative drawdowns exceeding $1.9tn and less than $190bn of excess savings remaining in the aggregate economy. The authors estimate that if recent drawdown rates persist, aggregate excess savings would be depleted.

AI Summary. China accounts for 18% of global GDP but 13% of global consumption and 32% of global investment, with each dollar of Chinese investment offset by only $1.3 of consumption versus $4.1 outside China. If China grew 4-5% annually for a decade while relying on investment, its share of global investment would rise to 37%.

Michael Pettis Financial Times
Date Posted:
Is Database:
Database

China accounts for 18% of global GDP, 13% of global consumption, and 32% of global investment. If China grows at 4-5% and maintains its current ratio of investment to consumption, its share of investment would rise to 37%. @michaelxpettis

China accounts for 18% of global GDP, 13% of global consumption, and 32% of global investment. If China grows at 4-5% and...

Can China keep relying on investment to drive its growth?

Core argument: China accounts for 18% of global GDP but just 13% of global consumption and 32% of global investment, with every dollar of Chinese investment offset by only $1.3 of consumption.

While China accounts for 18% of global GDP, it accounts for only 13% of global consumption and an astonishing 32% of global investment. Every dollar of investment in the global economy is balanced by $3.2 dollars of consumption and by $4.1 in the world excluding China. In China, however, it is offset by only $1.3 of consumption. What is more, if China were to grow by 4-5 percent a year on average for the next decade, while maintaining its current reliance on investment to drive that growth, its share of global GDP would rise to 21% over the decade, but its share of global investment would rise much more — to 37% . Alternatively, if we assume that every dollar of investment globally should continue to be balanced by roughly $3.2 dollars of consumption, the rest of the world would have to reduce the investment share of its own GDP by a full percentage point a year to accommodate China.

Takeaways by Macro Roundup® AI

  1. China accounts for 18% of global GDP but just 13% of global consumption and 32% of global investment, with every dollar of Chinese investment offset by only $1.3 of consumption.
  2. Globally each dollar of investment is balanced by $3.2 of consumption, rising to $4.1 in the world excluding China.

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  • Can China Reduce Its Internal Balances Without Renewed External Imbalances? — China's headline goods trade surplus is about 5% of its GDP, with the underlying surplus in manufactured goods close to 10% of GDP. The author argues that if China relies on interest rate cuts, exchange rate liberalization, and a weak yuan to offset its property downturn, its trade surplus could reach record levels relative to trading partners' output.
  • Can China’s Long-Term Growth Rate Exceed 2–3 Percent? — China invests roughly 42–44% of its GDP, while more mature, capital-intensive economies typically invest about 15–20%. Modeling a ten-year path that lowers China's investment share to 30% of GDP, the author argues the resulting growth rate depends mainly on how fast consumption grows.
  • China’s Auto Export Wave Echoes Japan’s in the ’70s — The shift from petroleum-fueled internal combustion vehicles to electric vehicles moves resource leverage from Persian Gulf oil producers to critical minerals, with China holding more than half of global processing capacity for lithium, cobalt, and graphite and about a third for nickel. Chinese companies have spent $4.5bn acquiring stakes in nearly 20 lithium mines, mostly in Latin America and Africa.

AI Summary. US Customs and Border Protection data show arrests at the Southwest border of migrants from distant countries including China, India, Mauritania, and Senegal tripled to 214,000 in a fiscal year from 70,000 the prior year, after fewer than 19,000 Asian and African migrants were apprehended two years earlier. Human smuggling networks are widening their reach globally.

Santiago Pérez Wall Street Journal
Date Posted:

Arrests at the American SW border of migrants from China, India, and other distant countries tripled to 214,000 during the fiscal year ending in September according to U.S. Customs and Border Protection.

Arrests at the American SW border of migrants from China, India, and other distant countries tripled to 214,000 during the...

Are arrests of migrants from distant countries rising at the border?

Core argument: Arrests at the U.S. Southwest border of migrants from China, India, Mauritania, Senegal, and other distant countries tripled to 214,000 in the fiscal year ended September, from 70,000 the prior fiscal year, according to U.S. Customs and Border Protection data.

Hundreds of thousands of migrants from all over the world are making their way to the Southwest border, with U.S. and Mexican authorities reporting a surge in apprehensions of people from Asia and Africa as human smuggling networks widen their reach across the globe. Arrests at the Southwest border of migrants from China, India, and other distant countries, including Mauritania and Senegal, tripled to 214,000 during the fiscal year that ended in September from 70,000 in the previous fiscal year, according to U.S. Customs and Border Protection data. Fewer than 19,000 migrants from Asia and Africa were apprehended in the fiscal year ended September 2021. “The increase in migration from Asia and Africa is remarkable,” said Enrique Lucero, head of the migrant support unit of the Tijuana city government, across from San Diego. “These days, we are dealing with 120 nationalities and 60 different languages.”

Takeaways by Macro Roundup® AI

  1. Arrests at the U.S. Southwest border of migrants from China, India, Mauritania, Senegal, and other distant countries tripled to 214,000 in the fiscal year ended September, from 70,000 the prior fiscal year, according to U.S. Customs and Border Protection data.
  2. Fewer than 19,000 migrants from Asia and Africa were apprehended in the fiscal year ended September 2021.
  3. Enrique Lucero, head of the Tijuana city government's migrant support unit, called the increase in migration from Asia and Africa remarkable and said the city is dealing with 120 nationalities and 60 different languages.

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  • Illegal Immigration Is a Bigger Problem Than Ever. These Five Charts Explain Why — Government data show border agents made 2.05m arrests in a single federal fiscal year, the second consecutive year above 2m, after figures never previously exceeded 1.7m or stayed elevated for as long. A growing share of migrants are families with children, who are difficult to deport to their home countries, rather than single adults from Mexico seeking work.
  • Immigrants & Their Kids Were 70% of U.S. Labor Force Growth Since 1995 — U.S. labor force data show immigrants accounted for 49% of labor force growth over roughly the past three decades and their children another 21%, together about 70% of an increase of nearly 32.8m workers. Immigrants rose from about 10% to 18% of the labor force, and immigrants plus their children from 18% to 29%.