Edward Conard

Top Ten New York Times Bestselling Author

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

Macro Roundup


Monday, November 20, 2023

AI Summary. The underlying equilibrium level of real interest rates cannot be observed and must be estimated, and two Federal Reserve estimates disagree: one suggests it remains very low while the other suggests it has been rising. If the equilibrium rate has not risen, monetary policy is currently tight, and interest rates should fall significantly once inflation is controlled.

Jesper Rangvid Rangvid's Blog
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Jesper Rangvid finds that the NY Fed’s estimate of low underlying interest rates seems robust and that the resilient economy is likely due to post-pandemic savings and expansionary fiscal policy.

Has the equilibrium level of real interest rates actually risen?

Core argument: The equilibrium interest rate cannot be observed and must be estimated, with the NY Fed's estimate indicating underlying rates remain very low while the Richmond Fed's indicates they have been rising; the author judges the NY Fed estimate more robust for now.

The underlying level of interest rates cannot be observed but must be estimated. There are two well-known estimates. One, from the NY Fed, suggests that underlying interest rates are still very low, while the other, from the Richmond Fed, suggests that they have been rising recently. My reading of this is that the estimate from the NY Fed – at least for now – appears more robust. Low equilibrium interest rates have important implications. Let me conclude by mentioning at least two of them. If underlying equilibrium real interest rates had risen, monetary policy would not be tight right now and would explain why we have not yet experienced a recession. On the other hand, if r* has not risen, monetary policy is tight. I’m leaning towards the latter. I think the economy has been amazingly resilient because people saved a lot coming out of the pandemic, coupled with a very expansionary fiscal policy that is also supporting growth, not that monetary policy is not tight. Second, if underlying real interest rates are low, interest rates should fall when inflation is under control and monetary policy rates are lowered. Perhaps interest rates will not become quite as low as before the pandemic (e.g. negative interest rates in Europe), but should be significantly lower than today.

Takeaways by Macro Roundup® AI

  1. The equilibrium interest rate cannot be observed and must be estimated, with the NY Fed's estimate indicating underlying rates remain very low while the Richmond Fed's indicates they have been rising; the author judges the NY Fed estimate more robust for now.
  2. If the equilibrium real rate has not risen, monetary policy is tight, and the author attributes the economy's resilience to large post-pandemic savings and very expansionary fiscal policy rather than to monetary policy not being tight.
  3. If underlying real interest rates are low, interest rates should fall significantly below today's levels once inflation is under control and policy rates are lowered, though perhaps not back to pre-pandemic lows such as Europe's negative rates.

Related Articles:

  • 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.
  • In Search of Safe Havens: The Trust Deficit and Risk-free Investments! — Plotting US Treasury bond rates against a crude fundamental risk-free rate—actual inflation plus real GDP growth—undercuts the argument that central banks set interest rates. Central banks can nudge rates at the margin but cannot override the fundamentals of inflation and real growth.
  • What Have We Learned About the Neutral Rate? — Analysts estimate that if inflation is brought down without a recession, the Federal Reserve's policy rate will stabilize nearer 3–3.25% than the 2.5% longer-run median projection of Federal Reserve officials. Projected shifts in government debt and demographics imply a roughly 0.5 percentage point net increase in the neutral rate over the next decade.

AI Summary. An updated analysis projects US interest paid on federal debt rising to about 3.8% in 2030 and debt-to-GDP reaching 113% by 2030, as the Treasury leans more on bills and shorter-maturity issuance. The gross financing need is projected to approach 45% of GDP before declining to about 35% as issuance shifts to longer maturities.

Chris Marsh Money: Inside and Out
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.@GeneralTheorist forecasts that, absent fiscal consolidation, federal debt will reach 113% of GDP by 2030, and that gross financing needs will exceed $11 trillion every year from 2024-2030.

How does shorter-maturity issuance affect projected federal debt and interest costs?

Core argument: Interest paid on US debt is projected to rise to about 3.8% in 2030, with the average interest on debt approaching 3.5% at the end of the horizon, the two measures similar because debt-to-GDP stays close to 100% throughout.

We re-run our analysis allowing for the changing structure of issuance as the Treasury leans more on bill and shorter tenor issuance in the near-term consistent with the signal from the most recent QRF round. Interest paid on debt increasing to about 3.8% in 2030. The average interest on debt approaches 3.5% at the end of the horizon. Of course, because debt-to-GDP is close to 100% throughout, these two measures are very similar. Debt-to-GDP is expected to increase to 113% of GDP by 2030 while the gross financing need (GFN), a measure of the rolling 4Q ahead deficit plus maturing securities including bills, at first increases to nearly 45% of GDP in 2025 as T-bill issuance accelerates, but declines to about 35% of GDP in the baseline as issuance shifts to longer tenors.

Takeaways by Macro Roundup® AI

  1. Interest paid on US debt is projected to rise to about 3.8% in 2030, with the average interest on debt approaching 3.5% at the end of the horizon, the two measures similar because debt-to-GDP stays close to 100% throughout.
  2. US debt-to-GDP is expected to increase to 113% by 2030 in an analysis re-run to allow for Treasury's near-term shift toward bill and shorter-tenor issuance consistent with the most recent quarterly refunding round.
  3. The gross financing need, the rolling four-quarter-ahead deficit plus maturing securities including bills, first rises to nearly 45% of GDP in 2025 as T-bill issuance accelerates, then declines to about 35% of GDP in the baseline as issuance shifts to longer tenors.

Related Articles:

  • If Markets Are Right About Long Real Rates, Public Debt Ratios Will Increase For Some Time. We Must Make Sure That They Do Not Explode — 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.
  • 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.
  • 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.

AI Summary. Microsoft has planned annual datacenter spending of more than $50bn, which exceeds the annual spend of megaprojects such as nationwide rail networks, dams, and the Apollo moon program. The buildout is aimed at accelerating artificial general intelligence and extending generative AI from productivity applications to leisure.

Dylan Patel and Myron Xie Semi Analysis
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Microsoft is spending at least $50bn annually on data centers going forward to power its AI push. @dylan522p notes this is “the largest infrastructure buildout that humanity has ever seen.”

Does annual datacenter spending now exceed history's largest megaprojects?

Core argument: Microsoft has penned in more than $50 billion in annual datacenter spending for 2024 and beyond, an infrastructure buildout described as the largest humanity has ever seen.

Microsoft is currently conducting the largest infrastructure buildout that humanity has ever seen. While that may seem like hyperbole, look at the annual spend of mega projects such as nationwide rail networks, dams, or even space programs such as the Apollo moon landings, and they all pale in comparison to the >$50 billion annual spend on datacenters Microsoft has penned in for 2024 and beyond. This infrastructure buildout is aimed squarely at accelerating the path to AGI and bringing the intelligence of generative AI to every facet of life from productivity applications to leisure.

Takeaways by Macro Roundup® AI

  1. Microsoft has penned in more than $50 billion in annual datacenter spending for 2024 and beyond, an infrastructure buildout described as the largest humanity has ever seen.
  2. Microsoft's datacenter spending exceeds the annual outlays of mega projects such as nationwide rail networks, dams, and space programs including the Apollo moon landings.
  3. Microsoft's infrastructure buildout, which includes the custom silicon efforts Maia 100, Athena, and Cobalt 100, is aimed at accelerating the path to artificial general intelligence and bringing generative AI to everything from productivity applications to leisure.

Related Articles:

  • The Growing Energy Footprint of Artificial Intelligence — Data centers have accounted for a relatively stable 1% of global electricity use, excluding cryptocurrency mining, but there is growing concern that the computing needed to build and run AI models could raise that share. Estimates suggest a single large language model query uses about 3 Wh of electricity, versus 0.3 Wh for a standard Google search.
  • The Race of the AI Labs Heats Up — Almost all recent artificial intelligence breakthroughs have come from large companies, largely because they hold the computing power. Amazon and Meta each produce two-thirds and four-fifths as much AI research as Stanford University respectively, while Alphabet and Microsoft produce considerably more, excluding their affiliated labs DeepMind and OpenAI.
  • Will A.I. Transform the Economy, and if So, How? — During the 1995-2005 information technology boom, productivity ended about 12% above the trend implied by growth from 1973 to 1995, and a comparable or larger gain of around 15% from artificial intelligence is plausible. If such optimistic estimates hold, growth would exceed conventional long-run estimates such as the Federal Reserve's roughly 1.8%, lifting revenue and easing debt concerns.

AI Summary. More than a quarter of US students were chronically absent in the 2021-22 school year, up from 15% before the pandemic, an increase of 6.5m students. Chronic absenteeism exceeded 61% in Oakland, California, and reached nearly 38% among seniors at an affluent Illinois high school.

New York Times Editorial Board New York Times
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The New York Times editorial board notes that pandemic era education policy “may prove to be the most damaging disruption in the history of American education.” They highlight an ongoing problem with chronic absenteeism.

The New York Times editorial board notes that pandemic era education policy “may prove to be the most damaging...

Has student absenteeism risen sharply since the pandemic?

Core argument: More than 25% of U.S. students were chronically absent in the 2021-22 school year, up from 15% before the pandemic, adding 6.5 million students to the ranks of the chronically absent, according to data compiled by The Associated Press with Stanford's Thomas Dee.

This fall, The Associated Press illustrated how school attendance has cratered across the United States, using data compiled in partnership with the Stanford University education professor Thomas Dee. More than a quarter of students were chronically absent in the 2021-22 school year, up from 15 percent before the pandemic. That means an additional 6.5 million students joined the ranks of the chronically absent. The problem is pronounced in poorer districts like Oakland, Calif., where the chronic absenteeism rate exceeded 61%. But as the policy analyst Tim Daly wrote recently, absenteeism is rampant in wealthy schools, too. Consider New Trier Township High School in Illinois, a revered and highly competitive school that serves some of the country’s most affluent communities. Last spring, The Chicago Tribune reported that New Trier’s rate of chronic absenteeism got worse by class, reaching nearly 38% among its seniors.

Takeaways by Macro Roundup® AI

  1. More than 25% of U.S. students were chronically absent in the 2021-22 school year, up from 15% before the pandemic, adding 6.5 million students to the ranks of the chronically absent, according to data compiled by The Associated Press with Stanford's Thomas Dee.
  2. Chronic absenteeism exceeded 61% in Oakland, Calif., one of the poorer districts where the problem is pronounced.
  3. New Trier Township High School in Illinois, which serves some of the country's most affluent communities, saw chronic absenteeism worsen by class, reaching nearly 38% among seniors, The Chicago Tribune reported.

Related Articles:

AI Summary. Singapore-registered family offices rose from 50 in 2018 to 1,100 at the end of 2022, according to the Monetary Authority of Singapore. Lawyers and advisers setting up such offices say new registrations have slowed and processing times have stretched from under six months to as long as 18 months amid an application backlog and stricter criteria.

Mercedes Ruehl and Leo Lewis Financial Times
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The queue to set up a family office in Singapore can now be a year and a half as the rich seek to get money out of the PRC. The number of Singapore-registered family offices has jumped from 50 in 2018 to 1,100 last year.

The queue to set up a family office in Singapore can now be a year and a half as the rich seek to get money out of the PRC. ...

Are tighter rules slowing family office registrations in Singapore?

Core argument: Singapore-registered family offices rose from 50 in 2018 to 1,100 at the end of 2022, managing tens of billions of dollars of private wealth, according to the Monetary Authority of Singapore.

The number of Singapore-registered family offices, which manage tens of billions of dollars of private wealth, has leapt from just 50 in 2018 to 1,100 at the end of 2022, according to the Monetary Authority of Singapore. But lawyers and advisers involved in setting up family offices said the pace of new registrations has slowed, with demand now falling as processing times stretch from less than six months to in some cases as long as 18 months. The extended wait time, the people said, was the result of a backlog of existing applications and greater scrutiny under new, stricter criteria from Singaporean authorities.

Takeaways by Macro Roundup® AI

  1. Singapore-registered family offices rose from 50 in 2018 to 1,100 at the end of 2022, managing tens of billions of dollars of private wealth, according to the Monetary Authority of Singapore.
  2. Processing times for Singapore family office applications have stretched from under six months to as long as 18 months, which lawyers and advisers attribute to a backlog of existing applications and stricter new criteria from Singaporean authorities.
  3. Lawyers and advisers involved in setting up Singapore family offices said the pace of new registrations has slowed and demand is now falling.

Related Articles:

  • The Threat from China’s Capital Flight — Oddities in China's official balance of payments statistics suggest its actual current account surplus may be nearly 3x the reported figure, which would make it about as large relative to world output as it has ever been. The likeliest explanation for simultaneous downward pressure on the yuan is capital flight of roughly $500bn a year.
  • Net Outflow of Funds from China Hits 7-Year High in September — China's State Administration of Foreign Exchange reported a net outflow of $53.9bn in monthly international financial transactions handled by domestic banks for businesses and households, the largest since a $55.8bn outflow tied to a sudden yuan devaluation. Outflows linked to direct investment, such as building manufacturing plants, were notable.
  • 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.

AI Summary. China has launched a nuclear-powered attack submarine using pump-jet propulsion, the first appearance on a Chinese submarine of noise-reducing technology used on the newest American submarines, and satellite images show expanded submarine construction capacity. China has also built or nearly completed underwater sensor networks around its coast that improve its ability to detect enemy submarines.

Alastair Gale Wall Street Journal
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The Chinese submarine fleet is improving rapidly in quantity and quality, as it has picked up technology from Russia and boosted its productive capacity.

Is China narrowing the US undersea warfare advantage?

Core argument: China put to sea a nuclear-powered attack submarine using pump-jet propulsion instead of a propeller, the first appearance on a Chinese submarine of noise-reducing technology used on the latest American submarines.

Early this year, China put to sea a nuclear-powered attack submarine with a pump-jet propulsion system instead of a propeller. It was the first time noise-reducing technology used on the latest American submarines had been seen on a Chinese submarine. A few months earlier, satellite images of China’s manufacturing base for nuclear-powered submarines in the northeastern city of Huludao showed hull sections laid out in the complex that were larger than the hull of any existing Chinese submarine. A second modern construction hall at the plant was finished in 2021, indicating plans to boost output. At the same time, the western Pacific is becoming more treacherous for U.S. submarines. Beijing has built or nearly finished several underwater sensor networks, known as the “Underwater Great Wall,” in the South China Sea and other regions around the Chinese coast. The networks give it a much better ability to detect enemy submarines.

Takeaways by Macro Roundup® AI

  1. China put to sea a nuclear-powered attack submarine using pump-jet propulsion instead of a propeller, the first appearance on a Chinese submarine of noise-reducing technology used on the latest American submarines.
  2. Satellite images of China's nuclear submarine manufacturing base at Huludao showed hull sections larger than the hull of any existing Chinese submarine, and a second modern construction hall completed in 2021 indicates plans to boost output.
  3. China has built or nearly finished several underwater sensor networks, known as the "Underwater Great Wall," in the South China Sea and other regions around its coast, giving it a much better ability to detect enemy submarines.

Related Articles:

  • Pentagon Accuses China of Accelerating Nuclear Build-Up — A congressionally mandated Pentagon survey estimated China's stockpile of operational nuclear warheads reached 500 and projected it would likely exceed 1,000 by 2030, while the US has 1,550 deployed strategic warheads permitted under the New Start arms control treaty. Analysts warn conventionally armed intercontinental missiles could destabilize the military balance.
  • US Nuclear Submarine Weak Spot In Bubble Trail: Chinese Scientists — Researchers at the Chinese Academy of Sciences calculate that the extremely low frequency magnetic signal generated by the bubble trail of an advanced submarine could exceed the sensitivity of advanced magnetic anomaly detectors by three to six orders of magnitude. The authors argue this offers a new approach to detecting and tracking submarines from long distances.
  • Nearly 40% of US Attack Submarines Are Out of Commission for Repairs — US Navy data show 18 of its 49 attack submarines — 37% — are out of commission for repairs because of naval shipyard delays, up from 28% and well above the 20% industry best practice. The report argues this leaves the US at a disadvantage against China's numerically larger fleet.

Tuesday, November 21, 2023

AI Summary. Because of population aging, growth in GDP per capita and GDP per working-age adult have diverged across advanced economies; from 1998 to 2019 Japan's accumulated growth per working-age adult was 31.9% versus 29.5% in the US. The authors find a standard neoclassical growth model calibrated to each country's working-age population tracks output per working-age adult in most economies.

Jesus Fernandez-Villaverde, Gustavo Ventura, and Wen Yao Working Paper
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Japan achieved GDP growth per working-age adult of 31.9% between 1998 and 2019, slightly faster than the US at 29.5%. @King_ofSweden

Does measuring growth per working-age adult change how aging economies look?

Core argument: From 1998 to 2019, Japan's accumulated GDP growth per working-age adult reached 31.9%, slightly faster than the U.S. figure of 29.5%, despite Japan's lackluster GDP growth per capita.

Due to population aging, GDP growth per capita and GDP growth per working-age adult have become quite different among many advanced economies over the last several decades. Countries whose GDP growth per capita performance has been lackluster, like Japan, have done surprisingly well in terms of GDP growth per working-age adult. Indeed, from 1998 to 2019, Japan has grown slightly faster than the U.S. in terms of per working-age adult: an accumulated 31.9% vs. 29.5%. Furthermore, many advanced economies appear to be on parallel balanced growth trajectories in terms of working-age adults despite important differences in levels. Motivated by this observation, we calibrate a standard neoclassical growth model in which the growth of the working-age adult population varies in line with the data for each economy. Despite the underlying demographic differences, the calibrated model tracks output per working-age adult in most economies of our sample. Our results imply that the growth behavior of mature, aging economies is not puzzling from a theoretical perspective.

Takeaways by Macro Roundup® AI

  1. From 1998 to 2019, Japan's accumulated GDP growth per working-age adult reached 31.9%, slightly faster than the U.S. figure of 29.5%, despite Japan's lackluster GDP growth per capita.
  2. Many advanced economies appear to be on parallel balanced growth trajectories in terms of output per working-age adult, despite important differences in levels.
  3. A standard neoclassical growth model calibrated so that working-age adult population growth matches the data for each economy tracks output per working-age adult in most of the sample, implying the growth of mature, aging economies is not theoretically puzzling.

Related Articles:

  • Fully Grown – European Vacation! — Europe's growth slowdown reflects a widespread drop in productivity growth rather than changes in physical capital accumulation, with human capital growth also mattering but varying by country. The productivity decline is larger than in the US: in countries such as the UK and France, productivity growth fell from about 2% to near zero or negative.
  • Population Aging and Economic Growth: From Demographic Dividend to Demographic Drag? — The authors estimate that a 1% increase in the working-age share of the population raises income per capita by about 1%, with an added 0.1–0.4% boost to growth in later periods. They project population aging will slow annual income per capita growth in advanced economies by 0.4–0.8 percentage points through 2050, while spurring growth in less developed countries.
  • Growth in Working-Age Population Ends. That’s Not All Bad — Immigration is the only factor keeping the US working-age population from shrinking, as about 4 million baby boomers turn 65 each year and more than 820,000 Americans aged 15–64 died last year. Forecasts project immigration will hold the US 15-to-64 population roughly constant through 2100, versus projected declines of 20% across high-income countries and 62% in China.

AI Summary. Analysts estimate that each 1% of GDP of Federal Reserve balance sheet reduction is associated with roughly a 2 basis point rise in 10-year Treasury yields, implying about 20bp of upward pressure in total. That is equivalent in its effect on financial conditions and growth to a little under one interest rate hike.

Manuel Abecasis and Praveen Korapaty Goldman Sachs
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A @GoldmanSachs forecast argues the FOMC will not moderate the pace of balance sheet reductions until late 2024. They write that the reduction is “likely already anticipated by financial markets” and therefore fully reflected in current rates.

How much do central bank balance sheet reductions raise long-term yields?

Core argument: A rule of thumb derived from a range of studies holds that balance sheet reduction equal to 1% of GDP is associated with a roughly 2bp rise in 10-year Treasury yields.

We continue to expect the Fed’s balance sheet runoff to have modest effects on interest rates, broader financial conditions, growth, and inflation. Our rule of thumb derived from a range of studies is that 1% of GDP of balance sheet reduction is associated with a roughly 2bp rise in 10-year Treasury yields. In total, our projections for runoff imply that balance sheet normalization will have exerted around 20bp worth of upward pressure on 10-year yields since runoff started. Together with our rule of thumb that a 25bp boost to 10-year term premia from balance sheet reduction has roughly the same impact on financial conditions and growth as a 25bp rate hike, this implies that the total runoff process should have the effect of a little under one rate hike.

Takeaways by Macro Roundup® AI

  1. A rule of thumb derived from a range of studies holds that balance sheet reduction equal to 1% of GDP is associated with a roughly 2bp rise in 10-year Treasury yields.
  2. Projections for the Fed's runoff imply balance sheet normalization will have exerted about 20bp of upward pressure on 10-year Treasury yields since runoff began.
  3. Under the rule of thumb that a 25bp boost to 10-year term premia from balance sheet reduction affects financial conditions and growth roughly as much as a 25bp rate hike, the total runoff process amounts to a little under one rate hike.

Related Articles:

  • The Grind Ahead — Higher short-term and long-term interest rates are flowing through to credit and interest costs, which the authors expect to produce "the grind" — a gradual decline in growth and in the health of corporate and household balance sheets — as a dominant driver of economies and markets over the next 12–18 months.
  • 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.
  • A Beautiful Replenishment — Money market funds buying Treasury bills lets bank reserves be replenished as cash moves from the Federal Reserve's overnight reverse repo facility into the Treasury's account and back out through government spending. The author argues reserves should stay abundant, allowing the Federal Reserve's balance sheet runoff to continue about two more years.

AI Summary. Regulatory changes are argued to be worsening the ability of the U.S. Treasury market to absorb large government debt issuance, as mandatory clearing of Treasury repurchase agreements raises leveraged investors' financing costs through higher collateral requirements. Mutual funds are meanwhile encouraged by regulation to use Treasury futures rather than buy Treasury securities outright, pointing to continued declines in liquidity.

Joseph Wang Fed Guy Blog
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.@FedGuy12 writes that a recent SEC proposal for mandatory repo clearing will likely reduce Treasury liquidity by increasing the cost of repo.

Are new regulations reducing liquidity in the Treasury market?

Core argument: Three insights from the Fed's Treasury market conference point to a continued structural decline in Treasury market liquidity, with dealer balance sheet constraints having moved beyond those solvable through central clearing.

The Fed’s recent Treasury market conference offered three notable insights that suggest Treasury market liquidity will continue its structural decline. First, dealer balance sheet constraints have moved from ones that could be solved through central clearing to those that would require other adjustments. Secondly, mandatory Treasury repo clearing may reduce market liquidity by raising the cost of financing due to higher collateral haircuts. Lastly, mutual funds may not become significant marginal investors in cash Treasuries as regulations encourage them to invest using Treasury futures. The official sector appears to be making adjustments that will make it more difficult for the market to absorb the upcoming deluge of Treasury issuance. At a high level, cash Treasuries can be held by investors using borrowed money or cash investors. The leveraged investors are more nimble participants as cash investor participation depend on asset inflows or the liquidation of other asset holdings. Going forward it looks like the costs of leveraged financing will increase due to mandatory cleared repo and a limited supply of repo financing that is constrained by regulatory costs. Major investors that could participate in the cash market remain incentivized to instead use Treasury futures. The Treasury market looks to continue its trend of becoming less liquid and more volatile.

Takeaways by Macro Roundup® AI

  1. Three insights from the Fed's Treasury market conference point to a continued structural decline in Treasury market liquidity, with dealer balance sheet constraints having moved beyond those solvable through central clearing.
  2. Mandatory Treasury repo clearing may reduce liquidity by raising financing costs through higher collateral haircuts, while regulatory costs constrain the supply of repo financing for leveraged investors.
  3. Mutual funds may not become significant marginal investors in cash Treasuries, as regulations encourage them to gain exposure through Treasury futures instead.

Related Articles:

  • Resilience Redux in the US Treasury Market — The authors argue that large, persistent US federal deficits and limited dealer balance-sheet flexibility will cause outstanding Treasury debt to grow rapidly relative to the market's capacity to intermediate trades, absent significant changes in market structure. They contend broad central clearing, all-to-all trading, real-time post-trade reporting, capital-regulation changes, and transparent official purchase programs could strengthen market capacity and resilience.
  • How Has Treasury Market Liquidity Evolved in 2023? — Treasury market liquidity has tracked its historical relationship with interest rate volatility, indicating liquidity has not been unusually poor given the level of rate volatility, though the two-year note shows somewhat higher-than-expected price impact. The market's capacity to smoothly handle large trading flows remains a concern for policymakers and market participants.
  • Liquidity Event — U.S. Treasuries remain the world's most liquid security, but daily cash trading volumes have not kept pace with the growth in issuance, leaving the market structurally less liquid. Principal trading firms account for 20% of cash market volumes yet withdraw when volatility rises, making their liquidity provision illusory.

AI Summary. The Pew Research Center estimates the unauthorized immigrant population in the United States at 10.5m, below its peak of 12.2m and lower than every year from 2005 to 2015. That figure represents about 3% of the total U.S. population and 22% of the foreign-born population, shares among the lowest since the 1990s.

Jeffrey Passel and Jens Manuel Krogstad Pew Research Center
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10.5mm unauthorized immigrants lived in the US in 2021, under the 2007 peak of 12.2mm. This represented about 3% of the total U.S. population and 22% of the foreign-born population, among the lowest shares since the 1990s.

How large is the unauthorized immigrant population in the US?

Core argument: Pew Research Center estimates the U.S. unauthorized immigrant population reached 10.5 million in 2021, a modest increase over 2019 but nearly identical to 2017 and below the 2007 peak of 12.2 million.

The unauthorized immigrant population in the United States reached 10.5 million in 2021, according to new Pew Research Center estimates. That was a modest increase over 2019 but nearly identical to 2017. The number of unauthorized immigrants living in the U.S. in 2021 remained below its peak of 12.2 million in 2007. It was about the same size as in 2004 and lower than every year from 2005 to 2015. The U.S. foreign-born population was 14.1% of the nation’s population in 2021. That was very slightly higher than in the last five years but below the record high of 14.8% in 1890. As of 2021, the nation’s 10.5 million unauthorized immigrants represented about 3% of the total U.S. population and 22% of the foreign-born population. These shares were among the lowest since the 1990s.

Takeaways by Macro Roundup® AI

  1. Pew Research Center estimates the U.S. unauthorized immigrant population reached 10.5 million in 2021, a modest increase over 2019 but nearly identical to 2017 and below the 2007 peak of 12.2 million.
  2. The 10.5 million unauthorized immigrants in 2021 represented about 3% of the total U.S. population and 22% of the foreign-born population, shares among the lowest since the 1990s.
  3. The U.S. foreign-born population was 14.1% of the nation's population in 2021, very slightly higher than in the prior five years but below the record high of 14.8% in 1890.

Related Articles:

  • Monopsony, Efficiency, and the Regularization of Undocumented Immigrants — A study of France's amnesty program, which regularized undocumented workers making up 2.0% of workers in Paris and nearly 1% nationwide, finds positive effects on employment and wages, particularly for male, low-skill workers. The authors argue regularization reduces employers' wage-setting power in the undocumented labor market, and estimate a rise in total French GDP of around 1%.
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AI Summary. China's surplus in manufactured goods net of commodity imports has kept growing relative to trade partners' output and relative to China's own economic output, alongside weak consumer spending and falling homebuilding. U.S. federal spending financed largely by borrowing has supported private balance sheets and demand, muting attention to that surplus.

Matt Klein The Overshoot
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China’s surplus is growing relative to GDP. @M_C_Klein notes the negative employment consequences of this has been offset by US government spending which has sustained domestic American demand and shored up private sector balance sheets.

Is China's manufacturing surplus growing while US borrowing masks its effects?

Core argument: China's surplus in manufactured goods net of commodity imports has kept growing relative to the economic output of its trade partners, driven in large part by China's growth relative to the rest of the world.

China’s surplus in manufactured goods net of commodity imports has continued to grow relative to the economic output of China’s trade partners, thanks in large part to China’s growth relative to the rest of the world. Even though the value of Chinese exports fell in 2023, this has had no impact on China’s overall balance because the amount of money spent on imports is down as well. The past few years have even seen a renewed surge in China’s surplus (properly measured) relative to China’s own GDP thanks to exceptionally weak growth in consumer spending and the sustained plunge in homebuilding. Federal spending—financed in large part by borrowing—has helped shore up private sector balance sheets and sustain demand, even as some spending elements have contained provisions that should put a floor on sales for American producers. This policy mix helps explain why China’s growing surplus has not attracted much ire, or even notice, in the U.S.

Takeaways by Macro Roundup® AI

  1. China's surplus in manufactured goods net of commodity imports has kept growing relative to the economic output of its trade partners, driven in large part by China's growth relative to the rest of the world.
  2. Chinese export values fell in 2023 without changing China's overall balance, because spending on imports declined as well, and the surplus measured against China's own GDP has surged again amid exceptionally weak consumer spending and a sustained plunge in homebuilding.
  3. U.S. federal spending, financed largely by borrowing, has shored up private sector balance sheets and sustained demand, and some spending elements contain provisions that should put a floor under sales for American producers, which helps explain why China's growing surplus has drawn little U.S. notice.

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AI Summary. More than three-quarters of the foreign money that flowed into China's stock market has since left, with global investors selling over $25bn of shares despite Beijing's efforts to restore confidence. Net purchases by offshore investors are on course for their smallest annual total since 2015.

Hudson Lockett Financial Times
Date Posted:

Three-quarters of the foreign money invested in China’s stock market in 2023 has left the country so far this year. Net investment inflows in terms of equities are at an 8-year low.

Are foreign investors pulling their money out of Chinese stocks?

Core argument: More than 75% of the foreign money that flowed into China's stock market in the first seven months of the year has left, with global investors selling over $25bn worth of shares despite Beijing's efforts to restore confidence.

More than three-quarters of the foreign money that flowed into China’s stock market in the first seven months of the year has left, with global investors dumping more than $25bn worth of shares despite Beijing’s efforts to restore confidence in the world’s second-largest economy. The sharp selling in recent months puts net purchases by offshore investors on course for the smallest annual total since 2015, the first full year of the Stock Connect programme that links up markets in Hong Kong and mainland China.

Takeaways by Macro Roundup® AI

  1. More than 75% of the foreign money that flowed into China's stock market in the first seven months of the year has left, with global investors selling over $25bn worth of shares despite Beijing's efforts to restore confidence.
  2. Net purchases of Chinese stocks by offshore investors are on course for the smallest annual total since 2015, the first full year of the Stock Connect programme linking Hong Kong and mainland markets.

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AI Summary. Interest on Argentina's central bank securities exceeds 100% annualized, at 133%, putting its interest bill at nearly 20% of GDP. The central bank must create more local currency to cover that bill, which in turn requires still more borrowing to absorb the new money.

Chris Marsh Money: Inside and Out
Date Posted:

Dollarization might be helpful for Argentina but it doesn’t solve the Central Bank of Argentina’s (BCRA) balance sheet problem; currently, it is monetizing its interest bill, driving inflation. @GeneralTheorist argues for another debt writedown.

Can a central bank escape a self-feeding money creation cycle?

Core argument: Interest on Argentina's central bank (BCRA) securities exceeds 100% annualised—133%—meaning the local-currency value of outstanding LELIQs will more than double over the next 12 months.

All that matters for understanding the BCRA balance sheet is the fact that the interest on BCRA securities now exceeds 100% annualised—in fact, 133%. In other words, the value of LELIQs outstanding, measured in local currency, will more than double over the next 12 months. In fact, these are rolled every one or two weeks, so properly compounding the story is even worse. But let’s say it increases by 1.3 times over the next 12 months. Then the BCRA interest bill is nearly 20% of GDP. BCRA has no choice but to monetise their interest bill—creating yet more units of local currency, requiring even more money to be sterilised, acting like a dog chasing her tail. If Milei had not been elected, with his determination to fix the central bank balance sheet, it is possible that hyperinflation would have been the next phase of monetary madness.

Takeaways by Macro Roundup® AI

  1. Interest on Argentina's central bank (BCRA) securities exceeds 100% annualised—133%—meaning the local-currency value of outstanding LELIQs will more than double over the next 12 months.
  2. Assuming LELIQs outstanding rise 1.3 times over 12 months, the BCRA interest bill is nearly 20% of GDP, and because the securities are rolled every one or two weeks, compounding makes the arithmetic worse.
  3. The BCRA has no choice but to monetise its interest bill, creating more local currency that in turn requires more sterilisation; without Milei's election and his determination to fix the central bank balance sheet, hyperinflation was a possible next phase.

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