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


Tuesday, January 2, 2024

AI Summary. The assumption that top wealth and capital income shares move in parallel over the long run is problematic, since falling interest rates reduce interest income relative to bond wealth and widen the gap. Fully counting passthrough business income, the authors' top 1% capital income share rose 5 percentage points.

David Splinter DavidSplinter.com
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David Splinter responds to Saez @PikettyWIL @gabriel_zucman comments: “Our headline finding of relatively flat long-run top 1% after-tax income shares is robust.”

Do top wealth and capital income shares move in parallel?

Core argument: Auten and Splinter argue that when passthrough business income is fully included, their top 1% non-housing "capital" income share rose 5 percentage points from 1989 to 2019, about two-thirds of the Federal Reserve's estimated rise in top 1% wealth shares.

PSZ suggest that top wealth and capital income shares should run parallel over the long run. This is a problematic assumption. Economic changes can push down capital income shares relative to wealth shares. Most importantly, interest rates fell dramatically between 1989 and 2019—the federal funds effective rate fell from 9 to 2%. This decreased the ratio of interest-income to bond-wealth and therefore falling interest rates likely increased the gap between top income and wealth shares. Also, much of top wealth patterns are driven by passthrough business, but this is fully or two-thirds excluded from PSZ’s definition of “capital” income here. When fully including passthrough business, the Auten–Splinter top 1% non-housing “capital” income share increased by 5 percentage points between 1989 to 2019, about two-thirds of the Federal Reserve’s estimated increase in top 1% wealth shares. Therefore, the Auten-Splinter estimates are consistent with increasing top wealth shares.

Takeaways by Macro Roundup® AI

  1. Auten and Splinter argue that when passthrough business income is fully included, their top 1% non-housing "capital" income share rose 5 percentage points from 1989 to 2019, about two-thirds of the Federal Reserve's estimated rise in top 1% wealth shares.
  2. Auten and Splinter dispute the PSZ assumption that top wealth and capital income shares run parallel over the long run, noting the federal funds effective rate fell from 9% to 2% between 1989 and 2019, lowering interest income relative to bond wealth.
  3. Auten and Splinter note that much of top wealth patterns is driven by passthrough business, which PSZ's definition of "capital" income here excludes fully or by two-thirds, and conclude their own estimates are consistent with increasing top wealth shares.

Related Articles:

AI Summary. Competing studies estimate the top 1%'s share of US after-tax-and-transfer national income rose by either 6pp or 1pp, with differing estimates of pre-tax income shares explaining part of the gap and differing estimates of tax and transfer effects explaining the rest. The preponderance of evidence suggests income inequality has increased.

William Gale, John Sabelhaus, and John Sabelhaus Brookings Institution
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Weighing in on the AS/PSZ debate @WilliamGale2 John Sabelhaus @samthorpe__ argue that “the preponderance of evidence suggests that income inequality has increased” in the US and other advanced economies.

Why do estimates of rising top 1% income shares differ so widely?

Core argument: From 1960 to 2019, the after-tax-and-transfer income share of the U.S. top 1% rose by 6 percentage points according to Piketty, Saez and Zucman but only 1 point according to Auten and Splinter, a 5-point discrepancy.

From 1960 to 2019, the after-tax-and-transfer share of national income going to the top 1% rose by 6pp according to PSZ but only 1pp according to AS. Part of the difference between the two is related to their measurement of pre-tax income shares. PSZ find the top 1% share of pre-tax income rose by 6 percentage points (from 13% to 19%) and AS estimate the increase to be 4pp (from 10% to 14%). But different estimates of pre-tax income shares only explain 2 of the 5pp discrepancy. The remaining 3-point gap results from different estimates of the effects of tax and transfer policies. The preponderance of evidence suggests that income inequality has increased, both in the U.S. and in other countries. Evidence also shows U.S. inequality increasing in other measures, such as health, mortality, and wealth. It is hard to see why inequality on other dimensions would have increased, in some cases substantially, if the distribution of income had not changed.

Takeaways by Macro Roundup® AI

  1. From 1960 to 2019, the after-tax-and-transfer income share of the U.S. top 1% rose by 6 percentage points according to Piketty, Saez and Zucman but only 1 point according to Auten and Splinter, a 5-point discrepancy.
  2. Differing pre-tax income share estimates — a rise of 6 points (13% to 19%) for Piketty, Saez and Zucman versus 4 points (10% to 14%) for Auten and Splinter — explain only 2 of the 5-point gap, the remaining 3 points stemming from different estimates of tax and transfer effects.
  3. The preponderance of evidence suggests income inequality has increased in the U.S. and other countries, with U.S. inequality also rising in health, mortality and wealth, which would be hard to explain if the distribution of income had not changed.

Related Articles:

  • Income Inequality in the United States: Using Tax Data to Measure Long-Term Trends — 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.
  • Comment on Auten and Splinter (2023) — A critique argues that Auten and Splinter's methodology misallocates a large share of untaxed business and capital income to the bottom of the distribution, assuming the top 1% earns only about 15% of untaxed business income while tax data show they earn about 55% of business income overall.
  • Short Reply: Comment on Auten and Splinter (2023) — The assumption that top wealth and capital income shares move in parallel over the long run is problematic, since falling interest rates reduce interest income relative to bond wealth and widen the gap. Fully counting passthrough business income, the authors' top 1% capital income share rose 5 percentage points.

AI Summary. The "magnificent 7" megacap stocks represent an all-time-high share of US market capitalization and accounted for most equity market gains, with 72% of S&P 500 stocks underperforming the index versus a 52% average since 1980. Adjusted for higher earnings growth expectations, these megacaps look less overpriced relative to the market, though the trade is very crowded.

Michael Cembalest J.P. Morgan
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Michael Cembalest @jpmorgan argues the valuation of the magnificent 7 “largely reflects their higher margins and free cash flow.”

Are megacap stocks overpriced once higher earnings growth expectations are considered?

Core argument: 72% of S&P 500 stocks underperformed the index in 2023, the second highest share since 1980 and above the 52% average.

The percent of market cap that the “magnificent 7” represent is at an all-time high, and they accounted for most of the equity market gains in 2023. Another sign of concentration: last year also saw the second highest percentage of S&P 500 stocks underperforming the index since 1980 (72% underperformed vs 52% average). But without judicial brakes on them, the strong are getting stronger and I see little reason, other than valuations that become too high relative to the market, that this should change. While megacap stocks look increasingly expensive relative to the market, after adjusting for their higher earnings growth expectations they don’t look nearly as overpriced. The challenge is everyone seems to agree; this is a very crowded trade.

Takeaways by Macro Roundup® AI

  1. 72% of S&P 500 stocks underperformed the index in 2023, the second highest share since 1980 and above the 52% average.
  2. The "magnificent 7" account for an all-time high share of market capitalization and delivered most of the equity market's 2023 gains.
  3. Megacap stocks look increasingly expensive relative to the market, but adjusting for their higher earnings growth expectations leaves them less overpriced, with the crowdedness of the trade the main challenge.

Related Articles:

  • 2024 US Equity Outlook: “All You Had To Do Was Stay” — The seven largest US mega-cap technology stocks are projected to outperform the rest of the S&P 500, supported by faster expected sales growth, higher margins, greater reinvestment, and stronger balance sheets. Analysts expect these companies to grow sales at an 11% annual rate versus 3% for the other 493 companies, with net margins twice as high.
  • Long-Term Shareholder Returns: Evidence From 64,000 Global Stocks — A study of about 64,000 global stocks estimates net global stock market wealth creation of $75.7tn, with returns highly concentrated: the top 159 firms (0.25%) account for half of net wealth creation and the top 1,526 (2.39%) account for all of it. Fewer than half of stocks beat one-month US Treasury bills, 42.6% of non-US and 44.8% of US stocks.
  • AI Is the Latest Shiny New Toy — The seven largest S&P 500 companies have risen 80% this year and carry an average price-to-earnings ratio above 50, diverging from the other 493 companies in the index. Their valuations are beginning to resemble those of the Nifty Fifty era and the peak of the tech bubble.

AI Summary. The total market value of the S&P 500's 500 companies rose $8tn, or 24.2%, but excluding seven large technology stocks — Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla — the gain was $3tn, or 11.7%. Those seven account for 52% of the index's increase in market value.

Jesper Rangvid Rangvid's Blog
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The S&P 500 was up 24% in 2023, with 52% of the increase in market capitalization driven by the Magnificent 7. As of August, 70% of S&P gains had been driven by the Magnificent 7.

How much of the S&P 500's gain came from seven stocks?

Core argument: The S&P 500's total market value rose by $8 trillion, or 24.2%, during 2023, with the Magnificent Seven — Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla — accounting for 52% of that increase.

The total market value of all 500 stocks in the S&P 500 has increased by $8 trillion or 24.2% during 2023. Without the seven Mag7 stocks [Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla,] the value of the index would have risen by “only” USD 3 trillion, which corresponds to a return of 11.7%. In other words, the Mag7s are responsible for 52% of the increase in the total market value of all 500 stocks in the S&P 500. At the end of August, Mag7 had accounted for more than 70% of the value created by all the companies in the S&P 500. Today, that share has fallen to 52%. So it’s still a concentrated rally, but not as concentrated as it was right after the summer.

Takeaways by Macro Roundup® AI

  1. The S&P 500's total market value rose by $8 trillion, or 24.2%, during 2023, with the Magnificent Seven — Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla — accounting for 52% of that increase.
  2. Excluding the Magnificent Seven, the S&P 500's value would have risen by $3 trillion, a return of 11.7%, against the index's full 24.2% gain.
  3. The Magnificent Seven's share of value created by all S&P 500 companies fell from more than 70% at the end of August to 52%, leaving the rally concentrated but less so than after the summer.

Related Articles:

  • Long-Term Shareholder Returns: Evidence From 64,000 Global Stocks — A study of about 64,000 global stocks estimates net global stock market wealth creation of $75.7tn, with returns highly concentrated: the top 159 firms (0.25%) account for half of net wealth creation and the top 1,526 (2.39%) account for all of it. Fewer than half of stocks beat one-month US Treasury bills, 42.6% of non-US and 44.8% of US stocks.
  • A Few Stocks Drive the Stock Market: Dot.com Vs. Today Vs. the Last 100 Years — Seven large technology stocks account for nearly 30% of the S&P 500's total value, but the rise of both hyped stocks and the broader market was more extreme during the dot-com era. Historically, only a few stocks have generated most of the stock market's value creation in the US and internationally.
  • Pillow Talk — The "magnificent 7" megacap stocks represent an all-time-high share of US market capitalization and accounted for most equity market gains, with 72% of S&P 500 stocks underperforming the index versus a 52% average since 1980. Adjusted for higher earnings growth expectations, these megacaps look less overpriced relative to the market, though the trade is very crowded.

AI Summary. Roughly 50% of the most expensive quartile of US stocks remain in that quartile a year later, while about 75% of the cheapest quartile stay cheapest, with valuation multiples among the cheapest stocks tending to mean revert gradually.

Chris Satterthwaite Verdad
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.@verdadcap created a value metric on a blend of price vs. cash flow, earnings, book value, and sales, and found that half of equities in the “most expensive” quartile were in the same quartile the following year, while 30% dropped to the next quartile.

How persistent are stock valuations across expensive and cheap quartiles?

Core argument: Roughly 50% of the most expensive quartile of stocks remained in the top valuation quartile one year later, while about 30% fell to the next quartile and about 10% each dropped to the second-cheapest and cheapest quartiles.

We found that roughly 50% of the most expensive stocks (those in the top quartile) remained in the top quartile one year later. Roughly 30% dropped into the next quartile, while roughly 10% fell to the second-cheapest quartile and the cheapest quartile respectively. Since these companies have the highest valuations for the current fundamentals, we can think of this most expensive quartile as a proxy for the most “growth-y” companies. The picture overall looks slightly different for the lowest quartile of value, which represents the cheapest stocks. On average, 75% of the cheapest quartile of companies in the US remain in the cheapest quartile one year later, while 17% graduate to the second quartile, and 5% and 3% move to the third and fourth quartile respectively. Within the cheapest quartile, we find evidence that valuation multiples tend to mean revert, albeit gradually.

Takeaways by Macro Roundup® AI

  1. Roughly 50% of the most expensive quartile of stocks remained in the top valuation quartile one year later, while about 30% fell to the next quartile and about 10% each dropped to the second-cheapest and cheapest quartiles.
  2. About 75% of the cheapest quartile of U.S. companies stayed in the cheapest quartile one year later, with 17% moving to the second quartile and 5% and 3% reaching the third and fourth quartiles.
  3. Within the cheapest quartile, evidence suggests valuation multiples tend to mean revert, albeit gradually, and the most expensive quartile can serve as a proxy for the most growth-oriented companies.

Related Articles:

AI Summary. The green energy transition is likely to reduce growth for some time, and with the gap between interest rates and growth rates near zero in many countries, stabilizing debt ratios requires primary budget balances to eventually reach zero or a small surplus. That end constraint cannot be altered; the only margin governments have is how quickly they reach it.

Olivier Blanchard Peterson Institute for International Economics
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.@ojblanchard1 argues that reconciling higher spending needed to fight global warming and stabilizing debt levels will require fiscal consolidation yielding “some positive level of the ratio of primary balances to GDP.”

.@ojblanchard1 argues that reconciling higher spending needed to fight global warming and stabilizing debt levels will...

How can governments finance the green transition while stabilizing debt?

Core argument: With r − g close to zero in many countries, stabilizing the debt ratio implies primary balances eventually reaching zero, while accounting for uncertainty and requiring sustainability with probability above 50% implies a small positive ratio of primary balance to GDP.

The transition to green energy is likely to decrease growth, at least for some time. What, then, is the margin that can be used [to finance green energy and stabalize debt levels]? It is the speed at which the debt ratio is stabilized. Here is the simple math: Many countries have today a value of r − g close to zero. For the moment, assume that it is equal to zero and ignore uncertainty. Then the stabilization of the debt ratio simply implies that primary balances eventually go to zero. Now reintroduce uncertainty and the need for debt to be sustainable with high probability, thus with probability higher than 50%. The end goal must then be somewhat more ambitious, namely some positive level of the ratio of primary balances to GDP. The important point here is that the end constraint, be it zero or small positive primary balances, cannot be changed. But the speed at which it is reached is the margin the government has in order to achieve it. For the time being, however, governments have to finance themselves at the current rates, and it is reasonable for them to work under the assumption that r − g is and will (in expected value) remain equal to zero. A decrease would definitely help, but they cannot bet on it.

Takeaways by Macro Roundup® AI

  1. With r − g close to zero in many countries, stabilizing the debt ratio implies primary balances eventually reaching zero, while accounting for uncertainty and requiring sustainability with probability above 50% implies a small positive ratio of primary balance to GDP.
  2. The green energy transition is likely to decrease growth for some time, and a government's margin for financing it is the speed at which the debt ratio is stabilized, not the end constraint of zero or small positive primary balances.
  3. Governments must finance themselves at current rates, and it is reasonable for them to assume that r − g is and will in expected value remain zero, since a decrease would help but cannot be counted on.

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.
  • 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.

AI Summary. Across advanced and emerging economies that experienced a large post-Covid price surge, core inflation is estimated to have run at a 2.2% annualized pace over three months, and 1.3% in the latest month. On that basis, the authors now expect earlier and more aggressive interest-rate cuts from several major developed-market central banks.

Jan Hatzius Goldman Sachs
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Jan Hatzius @GoldmanSachs notes that globally core inflation has declined to a sequential annualized pace of 2.2% over the past three months and just 1.3% in November. He expects Y/Y core inflation in the US to be < 2.5% in Q1.

Has global core inflation fallen enough to bring earlier rate cuts?

Core argument: Core inflation across the G10 excluding Japan plus the emerging-market early hikers ran at an estimated sequential annualized pace of 2.2% over the past three months.

Global inflation continues to plummet. Averaging across the broad group of economies that saw a large and unwanted post-covid price surge—the G10 excluding Japan plus the EM early hikers—we estimate that core inflation ran at a sequential annualized pace of 2.2% over the past three months and just 1.3% in November. We therefore now see earlier and more aggressive rate cuts from several major DM central banks.

Takeaways by Macro Roundup® AI

  1. Core inflation across the G10 excluding Japan plus the emerging-market early hikers ran at an estimated sequential annualized pace of 2.2% over the past three months.
  2. Core inflation in that same group of economies is estimated at just 1.3% annualized in November, following a large and unwanted post-covid price surge.
  3. The disinflation underpins an expectation of earlier and more aggressive rate cuts from several major developed-market central banks.

Related Articles:

  • Larry Summers: We Haven’t Nailed The Landing Yet — Interest-rate cuts should wait for clear evidence that inflation has been durably returned to 2%, rather than treating a brief touch of that level as success. The market view of a soft landing with 100 basis points of Federal Reserve cuts is possible but unlikely: without a recession cuts would likely be smaller, with one larger.
  • Fiscal Influences on Inflation in OECD Countries, 2020-2022 — 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.
  • 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.

AI Summary. Because monetary policy affects inflation with long and variable lags, much recent tightening has yet to have its full effect, and the collapse in global credit creation points to weak money growth ahead. The author argues central banks over-tightened by reacting to incoming inflation rather than looking through a one-off pandemic price-level adjustment, shifting the risk toward undershooting inflation targets.

Chris Marsh Money: Inside and Out
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Given inflation has largely come down without unemployment rising but with a “collapse in global credit creation” @GeneralTheorist wonders if monetary policy overshot and 2024 might see outright deflation.

Have central banks over-tightened and risk undershooting inflation targets?

Core argument: Given the long and variable lags from policy to inflation outcomes, a substantial part of recent monetary tightening has yet to have its full effect.

Given the famous “long and variable” lags from policy to inflation outcomes, a substantial part of recent policy tightening has yet to have its full effect. The collapse in global credit creation implies the net flow of new credit is now much lower than the pre-pandemic period—suggestive of anaemic money growth ahead once the portfolio reshuffle comes to an end. The monetary overhang from the pandemic required a one-off adjustment of the price level. Since central banks target future inflation and not the price level, this ought to have been largely looked-through when setting policy in a forward-looking way. Instead, policy has been found reacting to incoming inflation and therefore over-tightening. Now that our more recent monetary overhang has now nearly worked it way through global prices, risks for monetary policymakers are now shifting from over- to under-shooting targets.

Takeaways by Macro Roundup® AI

  1. Given the long and variable lags from policy to inflation outcomes, a substantial part of recent monetary tightening has yet to have its full effect.
  2. The collapse in global credit creation implies the net flow of new credit is now much lower than in the pre-pandemic period, suggesting anaemic money growth once the portfolio reshuffle ends.
  3. The pandemic monetary overhang required a one-off price-level adjustment that forward-looking central banks targeting future inflation should largely have looked through; policy instead reacted to incoming inflation and over-tightened, shifting risks toward undershooting targets.

Related Articles:

  • The Fed Prepares for Rate Cuts. But Why? — Consumer borrowing and bank lending showed signs of stabilizing or modest acceleration, which is not what one would expect if monetary policy were actually restrictive. Setting interest rates based on past inflation readings risks shifting policy from neutral to unnecessarily stimulative, since market-implied inflation expectations have not moved in over a year.
  • 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.
  • Macro Outlook 2024: The Hard Part Is Over — Goldman Sachs projects limited recession risk, holding a 15% US recession probability, and expects tailwinds to global growth including strong real household income growth, a smaller drag from monetary and fiscal tightening, recovering manufacturing, and central banks more willing to cut rates if growth slows. It projects core inflation falling to 2–2½%.

AI Summary. Excess cash balances outside the top 1% have mostly disappeared, but the author argues their liquidation did little to finance consumer spending, which has been driven mainly by wage income. Relatively low household debt leaves many Americans room to spend above their income, potentially aided by lower interest rates.

Matt Klein The Overshoot
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While “excess savings” have largely been drawn down US saving and spending rates have normalized relative to income. Relative to the pre-pandemic period “Americans are richer than before and have much lower debt than would be expected.” @M_C_Klein

Has the depletion of excess cash balances driven consumer spending?

Core argument: "Excess" cash balances outside the top 1% have mostly disappeared, but the author argues their liquidation did little to finance consumer spending over the past two years, so spending is unlikely to slow suddenly.

“Excess” cash was not particularly important for many Americans. That means that the liquidation of that cash probably did not play (much) of a role in financing consumer spending over the past two years. And that in turn probably means that consumer spending will not suddenly slow down now that the “excess” cash balances outside of the top 1% have mostly disappeared. For better or worse, wage income has been the main driver of aggregate consumer spending throughout this period. Relatively low levels of debt—including among those who have relatively less cash on hand—means that many Americans have a lot of latent financial firepower to increase their spending above and beyond their income, should they wish to do so. That may not be attractive now, but lower interest rates could potentially change things. Zooming out, it is worth noting that the liquidation of household cash balances has coincided with surging investment in U.S. Treasury securities (potentially hedge fund activity, but that is a subject for another note) alongside slower borrowing and sustained purchases of other assets, both real and financial.

Takeaways by Macro Roundup® AI

  1. "Excess" cash balances outside the top 1% have mostly disappeared, but the author argues their liquidation did little to finance consumer spending over the past two years, so spending is unlikely to slow suddenly.
  2. Wage income has been the main driver of aggregate consumer spending throughout this period, according to the author, rather than drawdowns of cash balances.
  3. Relatively low household debt levels, including among Americans with less cash on hand, leave latent capacity to spend above income, which lower interest rates could make more attractive.

Related Articles:

  • 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.
  • The Trickling Up of Excess Savings — The authors argue that excess savings created by debt-financed government transfers do not disappear as households spend them down; instead they "trickle up" to wealthier households with lower propensities to spend, so the boost to aggregate demand fades only slowly. Their benchmark estimate puts this at roughly 5 years rather than a few quarters.
  • Spending Down Pandemic Savings Is an “Only-in-the-U.S.” Phenomenon — Household saving rose in the United States and other high-income economies during the COVID-19 pandemic, but only in the U.S. and Canada did income-support measures push incomes well above pre-pandemic trajectories, while consumption fell everywhere. The divergence between U.S. and foreign saving behavior has no clear explanation.

AI Summary. Net foreign investment in China-listed shares has fallen 87% from its peak of Rmb235bn ($33bn) to Rmb30.7bn, according to Financial Times calculations using Hong Kong Stock Connect data. The exit has been absorbed by corporate share buybacks and purchases from domestic funds and state-run financial institutions under government pressure to support valuations.

Hudson Lockett and Cheng Leng Financial Times
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87% of foreign money that flowed into China’s stock market in 2023 has already left.

Are foreign investors pulling out of Chinese stocks?

Core argument: Net foreign investment in China-listed shares has fallen 87% this year, from a peak of Rmb235bn ($33bn) in August to Rmb30.7bn, according to Financial Times calculations using Hong Kong Stock Connect data.

Since peaking at Rmb235bn ($33bn) in August, net foreign investment in China-listed shares this year has dropped 87 percent to just Rmb30.7bn, according to Financial Times calculations based on data from Hong Kong’s Stock Connect trading scheme. The exit by offshore investors has been facilitated by widespread share buybacks from listed companies in China and by large-scale purchases from domestic investment funds and state-run financial institutions — all of which are under pressure from Beijing to prop up sagging valuations.

Takeaways by Macro Roundup® AI

  1. Net foreign investment in China-listed shares has fallen 87% this year, from a peak of Rmb235bn ($33bn) in August to Rmb30.7bn, according to Financial Times calculations using Hong Kong Stock Connect data.
  2. The exit by offshore investors from China-listed shares has been facilitated by widespread buybacks from Chinese listed companies and large-scale purchases by domestic investment funds and state-run financial institutions.
  3. Chinese listed companies, domestic investment funds and state-run financial institutions buying shares are under pressure from Beijing to prop up sagging valuations.

Related Articles:

  • 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.
  • 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.
  • PE Firms Trapped in China After $1.5 Trillion Betting Spree — Private equity firms that built more than $1.5tn of assets in China face difficulty exiting investments, with secondary buyers demanding discounts of 30% to more than 60% versus roughly 15% in Europe and the US. Weak public markets and unattractive valuations have pushed buyout firms toward private sales.

Wednesday, January 3, 2024

AI Summary. The authors defend their estimates of top income shares against a critique, arguing that the critique misrepresents how differing methods explain gaps in top 1% income shares and omits relevant context. They argue their estimates are consistent with other high-quality inequality studies and that audit studies find higher income misreporting outside the top 1%.

David Splinter DavidSplinter.com
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David Splinter argues that @WilliamGale2 John Sabelhaus @samthorpe__ critique of AS misrepresents some of the results and AS’s headline finding that the US’s long-run top 1% after-tax income share being relatively flat stands.

Do methodological critiques of top income share estimates hold up?

Core argument: Auten and Splinter respond to Gale, Sabelhaus, and Thorpe by arguing that the critique misrepresents how differing methods in Auten–Splinter and Piketty–Saez–Zucman explain top 1% income share gaps and omits the reasons for those methodological differences.

This note responds to an article by Gale, Sabelhaus, and Thorpe (GST) recently posted that comments on Auten and Splinter. GST discuss levels and trends of top income shares in AS and Piketty, Saez, and Zucman. The GST analysis, however, fails to include relevant context and misrepresents some AS results. In contrast to eight points raised or implied in GST, this note explains that: (1) GST misrepresent how different approaches in AS and PSZ explain top 1% gaps and fail to discuss the reasons for those different approaches, (2) the AS estimates are consistent with other high-quality inequality studies, (3) GST ignore crucial differences between survey and tax data when considering the distribution of underreporting in tax data, (4) GST ignore the results of special audit studies that find significantly higher misreporting rates among those with negative reported incomes or in the bottom 99% relative to the top 1%, (5) the suggested limitations of the audit studies are unsubstantiated or have little impact, (6) AS presented estimates with alternative allocations of government consumption, (7) the AS allocation of deficits is more consistent with historical precedent, and (8) the implication that AS estimates are inconsistent with financial wealth inequality trends is incorrect.

Takeaways by Macro Roundup® AI

  1. Auten and Splinter respond to Gale, Sabelhaus, and Thorpe by arguing that the critique misrepresents how differing methods in Auten–Splinter and Piketty–Saez–Zucman explain top 1% income share gaps and omits the reasons for those methodological differences.
  2. Auten and Splinter contend their estimates are consistent with other high-quality inequality studies, and that special audit studies find significantly higher misreporting rates among those with negative reported incomes or in the bottom 99% than in the top 1%.
  3. Auten and Splinter state that they presented estimates using alternative allocations of government consumption, that their deficit allocation is more consistent with historical precedent, and that their estimates are not inconsistent with financial wealth inequality trends.

Related Articles:

  • Measuring Income Inequality: A Primer On The Debate — Competing studies estimate the top 1%'s share of US after-tax-and-transfer national income rose by either 6pp or 1pp, with differing estimates of pre-tax income shares explaining part of the gap and differing estimates of tax and transfer effects explaining the rest. The preponderance of evidence suggests income inequality has increased.
  • Income Inequality in the United States: Using Tax Data to Measure Long-Term Trends — 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.
  • Comment on Auten and Splinter (2023) — A critique argues that Auten and Splinter's methodology misallocates a large share of untaxed business and capital income to the bottom of the distribution, assuming the top 1% earns only about 15% of untaxed business income while tax data show they earn about 55% of business income overall.

AI Summary. Across 93 countries, the authors find that the redistribution preferences of the lowest socioeconomic group are most predictive of actual government redistribution, with middle- and top-group preferences adding no further explanatory power once bottom-group preferences are accounted for. This contrasts with assumptions that median or upper strata preferences shape policy.

Michel Marechal, Alain Cohn, Jeffrey Yusof, and Raymond Fisman National Bureau of Economic Research
Date Posted:
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Based on cross-sectional data from 93 countries, low-income individuals’ redistributive preferences are more predictive of redistribution policy than elite preferences. @alain_cohn @RFisman

Whose preferences best predict how much governments redistribute?

Core argument: Across cross-sectional data from 93 countries, the redistribution preferences of the lowest socioeconomic status group are the most predictive of actual government redistribution.

Using cross-sectional data from 93 countries, we investigate the relationship between the desired level of redistribution among citizens from different socioeconomic backgrounds and the actual extent of government redistribution. Our focus on redistribution arises from the inherent class conflicts it engenders in policy choices, allowing us to examine whose preferences shape policy formulation. Our main finding is that the lowest socioeconomic status (SES) group’s preferences are most predictive of redistribution. Controlling for preferences at the bottom of the SES distribution, neither the middle nor the top SES group’s preferences have any additional explanatory power. Contrary to prevailing assumptions regarding political influence the preferences of the lower socioeconomic group, rather than those of the median or upper strata, are most predictive of realized redistribution.

Takeaways by Macro Roundup® AI

  1. Across cross-sectional data from 93 countries, the redistribution preferences of the lowest socioeconomic status group are the most predictive of actual government redistribution.
  2. Controlling for preferences at the bottom of the socioeconomic distribution, neither middle nor top socioeconomic group preferences add explanatory power for realized redistribution.
  3. The finding that lower-status preferences, rather than those of the median or upper strata, best predict realized redistribution runs contrary to prevailing assumptions about political influence.

Related Articles:

  • ‘The Economy is Rigged’: Inequality Narratives, Fairness, and Support for Redistribution in Six Countries — In a survey experiment with 7,426 respondents across Australia, France, Germany, Switzerland, the UK, and the US, exposure to a media narrative framing inequality as the result of a system rigged in favor of the rich significantly increased support for redistributive policies in five countries, with no effect in the US.
  • Does the American Dream Foster Inequality? — Survey data show Americans are more likely than people in other Western countries to see themselves as upwardly mobile and to say hard work is essential to getting ahead. Americans are the most likely to call income inequality unfair, yet fewer than half see addressing it as the government's responsibility, versus two-thirds or more in the UK, France and Germany.
  • Calomiris on Gramm Ekelund and Early on Income Distribution — Transfer benefits phase out so quickly that the effective marginal tax rate in the lowest three income quintiles approaches 100%, meaning an extra dollar earned can cost roughly a dollar of benefits. Hours worked in the lower quintiles have plummeted, though the authors stop short of asserting a causal link.

AI Summary. Recent disinflation likely reflected both improved supply and weaker demand, but supply improvements are largely complete and an anticipated Federal Reserve pivot could revive demand at home and abroad. A weaker dollar eases global financial conditions and is typically associated with higher commodity prices, putting upward pressure on inflation.

Joseph Wang Fed Guy Blog
Date Posted:

.@FedGuy12 argues that recent disinflation in the US has been driven by one-off improvements in supply chains and higher labor force participation and that any easing of financial conditions might lead to higher demand and above-target inflation.

Is recent disinflation temporary as supply gains fade and demand revives?

Core argument: Disinflation likely stemmed from both improved supply and weaker demand, but both effects are fading, as supply improvements are largely over and the anticipated Fed pivot may rekindle demand domestically and abroad.

The recent bout of disinflation likely occurred from both improvements in supply and decreases in demand, but both effects are fading away. Supply improvements are largely over, and the Fed’s anticipated pivot may rekindle demand both domestically and abroad. In addition to raising asset prices and lowering interest rates, the anticipated Fed pivot has also eased global financial conditions by weakening the dollar. A weaker dollar is globally stimulative because it improves the balance sheets of foreign corporations borrowing in dollars and foreign banks that lend dollars. More directly, a weaker dollar is also usually directly associated with a rise in global commodity prices. Both of these effects place upward pressure on inflation. Inflation data may look very benign in the near term, but a return to a steady 2% inflation regime seems unlikely.

Takeaways by Macro Roundup® AI

  1. Disinflation likely stemmed from both improved supply and weaker demand, but both effects are fading, as supply improvements are largely over and the anticipated Fed pivot may rekindle demand domestically and abroad.
  2. The anticipated Fed pivot has eased global financial conditions by weakening the dollar, which improves the balance sheets of foreign corporations borrowing in dollars and foreign banks lending dollars, and usually accompanies rising global commodity prices.
  3. Near-term inflation data may look benign, yet a return to a steady 2% inflation regime seems unlikely given the upward pressure from a weaker dollar and reviving demand.

Related Articles:

  • The Fed Prepares for Rate Cuts. But Why? — Consumer borrowing and bank lending showed signs of stabilizing or modest acceleration, which is not what one would expect if monetary policy were actually restrictive. Setting interest rates based on past inflation readings risks shifting policy from neutral to unnecessarily stimulative, since market-implied inflation expectations have not moved in over a year.
  • 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.
  • The Case For A Mistake — Because monetary policy affects inflation with long and variable lags, much recent tightening has yet to have its full effect, and the collapse in global credit creation points to weak money growth ahead. The author argues central banks over-tightened by reacting to incoming inflation rather than looking through a one-off pandemic price-level adjustment, shifting the risk toward undershooting inflation targets.

AI Summary. U.S. Citizenship and Immigration Services data show that after the agency revised its guidance for two visa categories open to science, technology, engineering, and math workers, approvals of O-1A "extraordinary ability" visas rose nearly 30% to 4,570 and STEM green cards granted under a "national interest" waiver rose 55% to 70,240, with both holding at those levels the following year.

Jeffrey Mervis Science
Date Posted:

2022 changes to American immigration policy have led to a 30% increase in O-1A visas for foreign nationals “of extraordinary ability” to 4,570, and a 55% increase in STEM EB-2 visas to 70,240.

2022 changes to American immigration policy have led to a 30% increase in O-1A visas for foreign nationals “of...

Does revised visa guidance increase approvals for STEM workers?

Core argument: O-1A visas for "aliens of extraordinary ability" rose nearly 30% to 4,570 in the first year of revised USCIS guidance and held steady in fiscal year 2023, according to USCIS data reported by ScienceInsider.

According to newly released data from the U.S. Citizenship and Immigration Services (USCIS), more foreign-born workers in science, technology, engineering, and math (STEM) fields are enjoying happy endings. The jump comes after USCIS in January 2022 tweaked its guidance criteria relating to two visa categories available to STEM workers. One is the O-1A, a temporary visa for “aliens of extraordinary ability” that often paves the way to a green card. The second, which bestows a green card on those with advanced STEM degrees, governs a subset of an EB-2 (employment-based) visa. The USCIS data, reported exclusively by ScienceInsider, show that the number of O-1A visas awarded in the first year of the revised guidance jumped by almost 30%, to 4,570, and held steady in fiscal year 2023, which ended on 30 September. Similarly, the number of STEM EB-2 visas approved in 2022 after a “national interest” waiver shot up by 55% over 2021, to 70,240, and stayed at that level this year.

Takeaways by Macro Roundup® AI

  1. O-1A visas for "aliens of extraordinary ability" rose nearly 30% to 4,570 in the first year of revised USCIS guidance and held steady in fiscal year 2023, according to USCIS data reported by ScienceInsider.
  2. STEM EB-2 green cards approved after a "national interest" waiver climbed 55% over 2021 to 70,240 in 2022 and remained at that level in 2023, according to USCIS data.
  3. USCIS altered its guidance criteria in January 2022 for the O-1A temporary visa, which often paves the way to a green card, and for the EB-2 subset covering advanced STEM degree holders.

Related Articles:

AI Summary. North American grid reliability assessments project electricity capacity deficits over the next decade in areas where generator retirements are expected before replacement resources are in service to meet rising demand. Ten-year peak demand and energy growth forecasts are higher than at any point in the past decade, contributing to lower reserve margins.

NAERC Staff North American Electric Reliability Corporation
Date Posted:

A study from the North American Electric Reliability Corporation reports that the US and Canada will likely soon face a risk of significant shortfall of electrical generation in the face of increased demand, particularly during severe weather conditions.

Will the North American grid face electricity capacity deficits this decade?

Core argument: Electricity peak demand and energy growth forecasts over the 10-year assessment period are higher than at any point in the past decade, with peak season compound annual growth rates rising in nearly all assessment areas since the 2022 Long-Term Reliability Assessment and contributing to lower reserve margins.

Capacity deficits are projected [over the next 10 years] in areas where future generator retirements are expected before enough replacement resources are in service to meet rising demand forecasts. Energy risks are projected in areas where the future resource mix could fail to deliver the necessary supply of electricity under energy-constrained conditions. For example, subfreezing temperatures can create energy-limiting conditions by disrupting the natural gas fuel supplies to generators, leading to fuel-related derates or outages and potentially insufficient electricity supply. Electricity peak demand and energy growth forecasts over the 10-year assessment period are higher than at any point in the past decade. Since the 2022 LTRA, peak season CAGR has risen in nearly all assessment areas, contributing to an overall trend to lower reserve margins. Some of the sharpest peak demand forecast increases and growth rates can be seen in winter seasons as heating system and transportation electrification influence forecasts.

Takeaways by Macro Roundup® AI

  1. Electricity peak demand and energy growth forecasts over the 10-year assessment period are higher than at any point in the past decade, with peak season compound annual growth rates rising in nearly all assessment areas since the 2022 Long-Term Reliability Assessment and contributing to lower reserve margins.
  2. Capacity deficits are projected in areas where generator retirements are expected before enough replacement resources are in service to meet rising demand forecasts, while energy risks are projected where the future resource mix could fail to deliver sufficient electricity under energy-constrained conditions.
  3. Subfreezing temperatures can disrupt natural gas fuel supplies to generators, causing fuel-related derates or outages and potentially insufficient electricity supply, with some of the sharpest peak demand forecast increases occurring in winter seasons as heating system and transportation electrification influence forecasts.

Related Articles:

  • Elon Musk’s Latest Mission: Rev Up the Electricity Industry — U.S. electricity demand has grown at an average of 1% a year over the past 20 years, but McKinsey projects it will double by 2050 and PG&E expects a 70% rise over the next 20 years. Deloitte estimates the largest U.S. electric companies will together spend as much as $1.8tn by 2030.
  • Electricity Grids and Secure Energy Transitions — Under a scenario based on announced government pledges, global electricity demand is projected to grow 2.7% per year, more than doubling from just under 25,000 terawatt-hours to nearly 54,000 terawatt-hours by 2050. Hydrogen production via electrolysis and electric vehicles account for more than half of that projected growth.
  • Gridlock: How a Lack of Power Lines Will Delay the Age of Renewables — A study led by Lawrence Berkeley National Laboratory found nearly 2,000GW of solar, wind and storage projects waiting in queues to connect to US long-distance transmission grids, more than the installed capacity of the entire US power plant fleet. The authors find only about a fifth of such requested projects are typically built.

AI Summary. Goldman Sachs projects that artificial intelligence could drive a capital investment cycle reaching almost 2.5% of US GDP by 2032, up from 0.5% of GDP.

Jan Hatzius Goldman Sachs
Date Posted:
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Jan Hatzius @GoldmanSachs argues AI could drive a large capital investment cycle reaching almost 2.5% of US GDP by 2032, up from 0.5% of GDP this year.

Related Articles:

  • Microsoft Infrastructure – AI & CPU Custom Silicon Maia 100, Athena, Cobalt 100 — 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.
  • 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. Each Nasams air-defense system, made by Norway's Kongsberg, takes two years to build and new buyers face a multiyear backlog, prompting the plant to run 24-hour, seven-day shifts. The defense industry faces a prolonged labor crunch, struggling to find workers with niche skills willing to undergo lengthy security checks.

Alistair MacDonald, Doug Cameron, and Dasl Yoon Wall Street Journal
Date Posted:

Order books of ten of the largest Western defense firms are up 57% since 2017 to $730B, but they are facing significant labor constraints. The Pentagon is rolling out a new industrial base strategy to try to clear supply chain logjams.

Why do new air-defense system orders face multiyear waits?

Core argument: Kongsberg's Nasams air-defense system, which engages drones and other airborne threats from almost 25 miles away, takes two years to build, and new customers face an existing multiyear backlog.

A Kongsberg factory west of Oslo produces a missile-defense system that can shoot down drones and other airborne threats from almost 25 miles away. When first deployed in Ukraine in 2022, it recorded a 100% success rate shooting down cruise missiles and drones in its first few months. New customers, though, will have to wait: It takes two years to make one Nasams, and there is already a multiyear backlog. To ramp up, Kongsberg has moved to 24-hour, seven-day shifts and has workers in for some holidays when the factory would typically have been idled for maintenance. That still may not be enough. The defense industry is grappling with a prolonged labor crunch, as it scrambles to find workers with niche skills, from software development to welding, and who are willing to endure lengthy security checks.

Takeaways by Macro Roundup® AI

  1. Kongsberg's Nasams air-defense system, which engages drones and other airborne threats from almost 25 miles away, takes two years to build, and new customers face an existing multiyear backlog.
  2. Nasams recorded a 100% success rate against cruise missiles and drones in its first few months after its 2022 deployment in Ukraine.
  3. Kongsberg has shifted its factory west of Oslo to 24-hour, seven-day operation and brought workers in on some holidays normally reserved for maintenance, while the defense industry struggles to hire workers with niche skills such as software development and welding who will endure lengthy security checks.

Related Articles:

  • U.S. Weapons Industry Unprepared for a China Conflict, Report Says — A Center for Strategic and International Studies report argues the U.S. defense industrial base is not prepared for the current security environment and operates in a manner better suited to peacetime. The study recommends reassessing total munitions requirements and stockpile replenishment needs, creating a strategic munitions reserve, and setting a sustainable procurement plan.
  • It’s Not Just Ukraine and Gaza: War Is on the Rise Everywhere — The economic scale of China and the US means a conflict between them would likely be protracted, lasting months, years, or decades rather than a single battle or limited campaign. Deterring war, particularly in Asia, would require a once-in-a-generation Western construction and procurement effort and strategic stockpiles of weapons and munitions far beyond current planning.
  • The Cost of the Global Arms Race — Global defence spending rose nearly 4% in real terms to over $2tn, and new commitments and forecast increases, if implemented, are estimated to add more than $200bn a year worldwide. If countries below 2% of GDP reached that level and others added half a percentage point, outlays would rise by close to $700bn annually.

AI Summary. US Steel lagged in adopting steelmaking technology, only moving into minimills through an acquisition and a new Alabama plant, with minimills now making about 25% of its domestic output. Rival minimill producer Nucor passed US Steel in output and is now the largest US steel producer.

Brian Potter Construction Physics
Date Posted:

In 1901, US Steel’s market cap was 6.7% of US GDP. Prior to Nippon Steel’s recently announced acquisition, the company’s market cap had dropped to $8B. @_brianpotter argues US Steel demontrated a persistent lack of innovation over its long history.

How did slow adoption of minimill technology reshape US steel leadership?

Core argument: US Steel did not adopt the minimill until 2020, when it acquired a minimill company and built its own minimill in Alabama; minimills now produce around 25% of its domestic output.

The new, lean US Steel still continued to be a step behind on technological innovation. US Steel didn’t adopt the minimill until 2020 when it acquired a minimill company and built its own minimill in Alabama. (Minimills now produce around 25% of US Steel’s domestic output.) Companies like Nucor beat it to the punch with things like thin slab casting technology. Today, the momentum in the American steel industry is clearly with the minimills. An ever-larger fraction of American steel is made in electric arc furnaces. Minimill company Nucor passed US Steel in production in 2015, and today is the largest steel producer in the US. As far as I can tell, no major steelmaking technology over the last century came out of US Steel.

Takeaways by Macro Roundup® AI

  1. US Steel did not adopt the minimill until 2020, when it acquired a minimill company and built its own minimill in Alabama; minimills now produce around 25% of its domestic output.
  2. Nucor passed US Steel in production in 2015 and is now the largest US steel producer, having reached technologies such as thin slab casting first.
  3. By the author's account, no major steelmaking technology of the last century came out of US Steel, while an ever-larger fraction of American steel is made in electric arc furnaces.

Related Articles:

  • The Hamilton Index, 2023: China Is Running Away With Strategic Industries — An analysis of value-added output in 10 strategically important advanced industries, together accounting for over $10tn in global production, found China was the leading producer in seven and produced more than all other nations outside the top 10 combined. The authors argue China's gains came at the expense of the US and other advanced economies.
  • China Notes, July ’23: On Technological Momentum — China's political environment poses a threat to its technological momentum, with Chinese undergraduates in the US reporting that their parents urge them not to return to the mainland. China retains strengths independent of slowing growth and demographic drags, chiefly an entrenched workforce that continues to advance manufacturing complexity.
  • Why Xi Can No Longer Brag About the Chinese Economy — China's shipyards build 46% of the world's ships, letting it produce several warships and submarines a year, while the U.S. holds under 1% of capacity and its Navy faces late, over-budget deliveries from a few yards lacking workers. China is also the largest drone producer.

AI Summary. China's roughly $47.5tn debt pile is a symptom rather than the core problem, which is the unrecognized losses from a decade of misallocated investment into excess property, infrastructure, and manufacturing. Resolving it requires distributing asset-side losses quickly in ways that minimize financial distress costs, not just restructuring liabilities to protect the financial system.

Michael Pettis Financial Times
Date Posted:

.@michaelxpettis argues that rising Chinese debt as a % of GDP is a symptom of losses associated with non-productive investments in property, infrastructure, and manufacturing; China’s debt to GDP ratio is on par with the US.

Is China's debt a symptom of unrecognized investment losses?

Core argument: China's total debt pile of $47.5tn grew further in 2023, which may mean China has now overtaken the US in debt-to-GDP terms.

The $47.5tn total debt pile has grown further in 2023, which might mean that China has now finally overtaken the US in debt-to-GDP terms. The surge in Chinese debt is not itself the problem but rather a symptom of the problem. The real problem is the cumulative but unrecognised losses associated with the misallocation of investment over the past decade into excess property, infrastructure, and, increasingly, manufacturing. Resolving China’s debt problem is not just about resolving the liability side of the balance sheet. What matters more to the overall economy is that asset-side losses are distributed quickly and in ways that minimise financial distress costs. That is why restructuring liabilities must be about more than protecting the financial system. It must be designed to minimise additional losses.

Takeaways by Macro Roundup® AI

  1. China's total debt pile of $47.5tn grew further in 2023, which may mean China has now overtaken the US in debt-to-GDP terms.
  2. China's debt surge is a symptom rather than the problem itself, the real problem being cumulative but unrecognised losses from misallocated investment over the past decade into excess property, infrastructure, and increasingly manufacturing.
  3. Resolving China's debt requires distributing asset-side losses quickly in ways that minimise financial distress costs, so liability restructuring must go beyond protecting the financial system and be designed to minimise additional losses.

Related Articles:

  • Can China’s Long-Term Growth Rate Exceed 2–3 Percent? — China invests roughly 42–44% of its GDP, while more mature, capital-intensive economies typically invest about 15–20%. Modeling a ten-year path that lowers China's investment share to 30% of GDP, the author argues the resulting growth rate depends mainly on how fast consumption grows.
  • China Economy Memo: Tempest in a Teapot or Crisis A-Brewing? — The authors argue China is heading into a protracted debt crisis in which about 40% of local government financing vehicles default, hitting regional banks most exposed to such lending. They estimate total losses for these creditors at roughly $5tn, or about 30% of China's GDP.
  • The Debt Supercycle Comes to China — China's property sector, which accounts for 23% of GDP (26% counting imports), is yielding diminishing returns after a construction boom driven by the country's massive post-2008 investment stimulus. The author argues this debt supercycle is the best explanation for China's faltering economy and what comes next.

AI Summary. Dutch chipmaking equipment maker ASML canceled shipments of some top-of-the-line deep ultraviolet lithography machines to Chinese customers at the request of US officials, ahead of the date new Dutch export restrictions took full effect.

Cagan Koc and Jennifer Jacobs Bloomberg
Date Posted:

At the request of the Biden Administration, ASML canceled shipments to China prior to export bans coming into effect.

Does US pressure halt chip equipment shipments to China early?

Core argument: ASML canceled shipments of some machines to Chinese customers at the request of the Biden administration, weeks before export bans on high-end chipmaking equipment took effect, according to people familiar with the matter.

ASML Holding NV canceled shipments of some of its machines to China at the request of US President Joe Biden’s administration, weeks before export bans on the high-end chipmaking equipment came into effect, people familiar with the matter said. The Dutch manufacturer had licenses to ship three top-of-the-line deep ultraviolet lithography machines to Chinese firms until January when new Dutch restrictions take full effect. However, US officials reached out to ASML to ask them to immediately halt pre-scheduled shipments of some of the machines to Chinese customers, according to people familiar with the matter, who asked not to be identified because the discussions were confidential.

Takeaways by Macro Roundup® AI

  1. ASML canceled shipments of some machines to Chinese customers at the request of the Biden administration, weeks before export bans on high-end chipmaking equipment took effect, according to people familiar with the matter.
  2. ASML held licenses to ship three top-of-the-line deep ultraviolet lithography machines to Chinese firms until January, when new Dutch export restrictions take full effect.
  3. US officials contacted ASML to ask it to immediately halt pre-scheduled shipments of some of the machines, according to people familiar with the confidential discussions.

Related Articles:

  • China AI & Semiconductors Rise: US Sanctions Have Failed — China's Kirin 9000S is a better-designed, leading-edge chip than the West realizes, developed without access to extreme ultraviolet lithography or cutting-edge US intellectual property, indicating existing export controls have not worked. The authors argue only decisive, full-scale measures—not half measures—could prevent China from mass-manufacturing chips needed for high-end military applications.
  • Huawei Building Secret Network for Chips, Trade Group Warns — Huawei has entered chip production, acquiring at least two existing plants and building at least three more, part of at least 23 fabrication facilities underway in China with planned investments of more than $100bn by 2030, according to the Semiconductor Industry Association. China is on track to hold more than half of global capacity in older-generation semiconductors by around 2030.
  • Raimondo Says Commerce Needs More Money to Halt China Chip Drive — The US Commerce Department says its roughly $200m budget is inadequate to enforce semiconductor export controls aimed at limiting China's access to artificial intelligence chips, and has called for greater funding. It has warned that chips redesigned to fall just below existing thresholds will themselves be restricted, arguing national security outweighs chipmakers' short-term revenue.