Edward Conard

Top Ten New York Times Bestselling Author

  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…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
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “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
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
  • “There are an amazing number of good ideas and interesting points made in Unintended Consequences. The thinking underlying it, and the obvious depth of understanding of the author, are very impressive.” - Steven Levitt, coauthor of Freakonomics; 2004 John Bates Clark Medal
  • “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
  • “Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
  • “…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


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.

Related Articles:

  • 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
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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.

Related Articles:

  • 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
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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.

Related Articles:

  • 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
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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.

Related Articles:

  • 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
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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.

Related Articles:

  • Why Illegal Border Crossings Are at Sustained Highs — Illegal crossings at the U.S.-Mexico border exceeded 2m for a second consecutive year, historic highs, according to government data, and rose after the expiration of a policy that allowed rapid expulsion of migrants. Families, no longer subject to detention, grew from about a fifth of border apprehensions to about half.
  • 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%.

Wednesday, November 8, 2023

AI Summary. With short-term interest rates far enough above zero, they are again the central bank's main lever for steering the economy toward equilibrium, a difficult task because policy changes affect spending, output, and inflation with lags that can span years. Equity yields have changed little while bond yields rose significantly, moving equity pricing further from equilibrium.

Bob Prince and Shane Murphy Bridgewater Associates
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Bridgewater analysis finds the US economy is close to a sustainable equilibrium, but equity earnings yields vs. bonds may indicate poor future equity returns.

Are short-term interest rates again the central bank's main lever toward equilibrium?

Core argument: Equity yields have changed little while bond yields have risen significantly, moving equity pricing further from equilibrium, a configuration last seen in 2000, which was followed by a decade of poor equity returns.

The short-term interest rate is a key variable in managing these conditions and is once again the central bank’s primary policy lever (since interest rates are far enough above zero). The central bank pulls the lever in order to steer the economy toward equilibrium. This is challenging when you start from a major disequilibrium because policy actions affect changes in spending, output, and inflation with significant lags (the process can take years), and in the meantime, markets are responding to central bank actions and having their own impact on the path of the economy. Recently, equity yields have changed little as bond yields have risen significantly, such that equity pricing has moved further from equilibrium. The last time we were here was 2000, which was followed by a decade of poor equity returns.

Takeaways by Macro Roundup® AI

  1. Equity yields have changed little while bond yields have risen significantly, moving equity pricing further from equilibrium, a configuration last seen in 2000, which was followed by a decade of poor equity returns.
  2. The short-term interest rate is again the central bank's primary policy lever now that rates are far enough above zero, and the central bank uses it to steer the economy toward equilibrium.
  3. Steering from a major disequilibrium is difficult because policy actions affect spending, output, and inflation with lags that can take years, while markets respond to central bank actions and shape the economy's path themselves.

Related Articles:

  • 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.
  • Soft Landing Summer — The estimated 12-month US recession probability has been cut to 15%, matching the postwar unconditional average implied by a recession occurring roughly once every seven years, and far below the 60% Bloomberg consensus. The authors expect interest rates to fluctuate in a higher range than in the post-2008 period.
  • 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.

AI Summary. Using administrative tax data with the Survey of Consumer Finances, the authors estimate the top 1% pre-tax income share fell from 11.1% in 1962 to 9.4% in 1979, then rose to 13.8% by 2019, a 3 percentage point rise over the full period. Their after-tax measure shows increases of only 1.4 points since 1979 and 0.2 points since 1962.

Gerald Auten and David Splinter Working Paper
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Gerald Auten and David Splinter have updated their income inequality estimate and find that the after-tax income share of the top 1% in the US has been steady since the 1960s, disproving Piketty-Saez-Zucman’s claims otherwise.

How much has the top 1% income share actually risen?

Core argument: Using administrative tax data with the Survey of Consumer Finances and other sources, the authors estimate the top 1% pre-tax income share fell from 11.1% to 9.4% between 1962 and 1979, then rose to 13.8% by 2019, a 3 percentage point increase overall.

Using administrative tax data in combination with the Survey of Consumer Finances and other data sources, this paper develops new estimates of the distribution of income in the U.S. since the 1960s. Our analysis examines levels and trends in all parts of the distribution in addition to top income shares. Our estimates for pre-tax income, based on distributing total national income, show that the top one percent share declined from 11.1% to 9.4% from 1962 to 1979 and then increased to 13.8% by 2019. Viewed over the full period, the top share increased by only 3 percentage points. While our pre-tax income measure includes labor and investment income, it provides an incomplete picture of economic resources available to individuals. A broader measure that includes Social Security benefits and other transfers lowers top one percent shares and results in a smaller increase. Our estimates for after-tax income indicate that the top one percent share increased only 1.4 percentage points since 1979 and only 0.2 percentage points since 1962.

Takeaways by Macro Roundup® AI

  1. Using administrative tax data with the Survey of Consumer Finances and other sources, the authors estimate the top 1% pre-tax income share fell from 11.1% to 9.4% between 1962 and 1979, then rose to 13.8% by 2019, a 3 percentage point increase overall.
  2. The authors estimate the top 1% after-tax income share increased 1.4 percentage points since 1979 and 0.2 percentage points since 1962.
  3. A broader income measure including Social Security benefits and other transfers lowers top 1% shares and yields a smaller increase than the authors' pre-tax measure of labor and investment income.

Related Articles:

AI Summary. Aggregate foreign demand for US bonds has been strong, in line with or above the post-global-financial-crisis norm, with Treasury purchases coming largely from private investors amid weak reserve growth and an absolute yield advantage. Foreign demand for long-term US agency bonds has been strong, with China a net buyer of agencies while selling Treasuries on net.

Brad Setser @Brad_Setser
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.@Brad_Setser finds that aggregate foreign demand for US bonds is in line with or above the post-crisis mean, but forecasts, “the bulk of new note issuance will need to be absorbed domestically (and obviously the Fed is adding to net supply)”

Is foreign demand for US bonds holding up?

Core argument: Aggregate foreign demand for US bonds has been strong, in line with or above the post-global-crisis norm, with Fed and Treasury valuation-adjusted monthly survey data showing solid overall demand and a modest shift toward Agencies over the last 12 months of data.

There is a lot of interest in foreign demand for US Treasuries (and US bonds generally) these days, given the scale of forthcoming issuance. And in aggregate foreign demand for US bonds has actually been pretty strong, in line or above the post-global crisis norm. The higher frequency data from the Fed (and now the Treasury) based on the valuation-adjusted monthly survey data tells the same story -- solid overall demand, with a modest shift toward Agencies in the last 12ms. Treasury demand appears to be coming largely from private investors -- which makes sense given that reserve growth has been weak and Treasuries offer an absolute yield pickup. China on net has sold Treasuries in the last 12ms of data even adjusting for Belgium/Euroclear. Foreign demand for long-term Agencies has been quite strong -- and China was a net buyer there over the last 12ms of data.

Takeaways by Macro Roundup® AI

  1. Aggregate foreign demand for US bonds has been strong, in line with or above the post-global-crisis norm, with Fed and Treasury valuation-adjusted monthly survey data showing solid overall demand and a modest shift toward Agencies over the last 12 months of data.
  2. Treasury demand appears to come largely from private investors rather than reserve managers, which Setser attributes to weak reserve growth and the absolute yield pickup Treasuries offer.
  3. China was a net seller of Treasuries over the last 12 months of data even after adjusting for Belgium/Euroclear, while being a net buyer of long-term Agencies, where foreign demand has been strong.

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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. Alternative inflation gauges show disinflation has been substantial, with core measures running highest because owners' equivalent rent lags actual market rents that rose and then leveled off. Inflation has come most of the way toward 2% without a recession or a large rise in unemployment.

Paul Krugman Krugman Wonks Out
Date Posted:

.@paulkrugman argues disinflation has gotten us close to the Fed’s 2% target without a recession or a large rise in unemployment. He also notes that trying to lower the price level to its pre-inflationary level is “almost always” a bad idea.

Has inflation fallen most of the way to target without rising unemployment?

Core argument: Disinflation has taken the U.S. most of the way back toward 2 percent inflation without a recession or even a large rise in unemployment, though inflation probably has not fully returned to 2 percent.

If you want a measure that’s closer to how people currently spend their money, you want the Harmonized Index of Consumer Prices. “Core” inflation is actually the highest, because owners’ equivalent rent, for technical reasons, tends to lag far behind actual market rents — which rose a lot last year but have leveled off. One reason the Fed prefers that P.C.E. deflator over the Consumer Price Index, by the way, is that it puts less weight on those questionable housing prices. The bottom line is that disinflation is real — indeed, spectacular. Are we all the way back to 2 percent inflation? Probably not, although there’s a real angels dancing on the head of a pin feel to the debate over the right measure of underlying inflation, and even over what that term really means. But we’ve gotten most of the way there, without a recession or even a large rise in unemployment.

Takeaways by Macro Roundup® AI

  1. Disinflation has taken the U.S. most of the way back toward 2 percent inflation without a recession or even a large rise in unemployment, though inflation probably has not fully returned to 2 percent.
  2. Core inflation reads highest among the measures because owners' equivalent rent, for technical reasons, lags actual market rents, which rose a lot last year before leveling off.
  3. The Federal Reserve prefers the P.C.E. deflator over the Consumer Price Index partly because it puts less weight on questionable housing prices, while the Harmonized Index of Consumer Prices comes closer to how people currently spend their money.

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  • U.S. Wage Growth Is Slowing, Somewhat — 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.
  • 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.
  • 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.

AI Summary. Nearly 110,000 Americans died of drug overdoses in a year, with more than two-thirds of those deaths caused by fentanyl, a synthetic opioid 50x as potent as heroin. A kilogram of precursor chemicals bought from Chinese manufacturers for about $800 can produce 415,000 fentanyl pills, which sell wholesale for as little as 50 cents each.

Jamie Smyth, Christine Murray, Joe Leahy, and Sun Yu Financial Times
Date Posted:

Fentanyl margins remain very attractive; $800 in raw materials can manufacture over $200,000 worth of fentanyl, or up to $1.2mm in NYC. 2/3 of 110,000 overdoses in the US last year were caused by fentanyl.

How does the global fentanyl supply chain drive American overdose deaths?

Core argument: The American overdose crisis claimed nearly 110,000 lives last year, with more than two-thirds of those deaths caused by fentanyl, a synthetic opioid 50 times as potent as heroin.

The American overdose crisis has claimed nearly 110,000 lives last year. More than two-thirds of those deaths were caused by fentanyl, a synthetic opioid 50 times as potent as heroin. A kilogram of precursor can be purchased from Chinese manufacturers for about $800, which is enough to manufacture 415,000 fentanyl pills. Each pill can be sold wholesale for as low as 50 cents in the US. Street dealers can make as much as $3 per pill in New York City, say US prosecutors. US efforts to disrupt the fentanyl supply chain are resulting in increased seizures. Analysis by the Wilson Center in August showed that fentanyl seizures at the US-Mexico border increased 164% from 2020 to 2022. By the end of August, there had already been seizures of nearly 10,000kg in 2023 — far surpassing last year’s total of 6,400kg. Most experts believe fentanyl seizures are up because the overall volume of smuggling is increasing rather than any sustained success in the battle against the cartels.

Takeaways by Macro Roundup® AI

  1. The American overdose crisis claimed nearly 110,000 lives last year, with more than two-thirds of those deaths caused by fentanyl, a synthetic opioid 50 times as potent as heroin.
  2. A kilogram of precursor costing about $800 from Chinese manufacturers yields enough fentanyl for 415,000 pills, which wholesale for as little as 50 cents each and earn New York City street dealers as much as $3 per pill, according to US prosecutors.

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