Edward Conard

Top Ten New York Times Bestselling Author

  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Monday, February 26, 2024

AI Summary. Variation in the University of Michigan consumer sentiment index that inflation and unemployment cannot explain is strongly correlated with growth in consumer borrowing costs, such as mortgage and car loan rates. The authors estimate that including interest payments and homeownership costs in the consumer price index would raise measured inflation from 3% to 9%.

Marijn Bolhuis, Judd Cramer, Karl Oskar Schulz and Lawrence Summers National Bureau of Economic Research
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US consumer sentiment is significantly lower than expected based on unemployment and inflation. Alternative measures of inflation that include borrowing costs can account for almost three quarters of this gap. @MA_Bolhuis @juddcramer @LHSummers

Do borrowing costs explain weak consumer sentiment that inflation and unemployment cannot?

Core argument: The authors construct alternative CPI measures in which including interest paid raises year-on-year inflation by one percentage point over the past year, and adding both personal interest payments and homeownership costs raises November inflation from 3% to 9%.

We show that the variation in the current University of Michigan Index of Consumer Sentiment, which cannot be explained by inflation and unemployment, has historically shown a strong correlation with proxies for the growth of consumer borrowing costs, such as the growth of interest rates for mortgages or car loans and the willingness of banks to extend consumer installment loans. We show that the other questions in the survey that measure consumer sentiment provide direct evidence that concerns of consumers about borrowing costs are at historic highs, surpassed only by the Volcker-era. We develop alternative CPI measures that explicitly incorporate the cost of money. When interest paid is considered as a cost borne by consumers and included in the CPI, the year-on-year inflation rate increases by one percentage point throughout the last year. When both personal interest payments and the cost of homeownership are accounted for in the CPI, the inflation rate increases from 3 to 9 percent in November. In January, after most of the research for this paper was completed, consumer sentiment jumped to its highest level since 2021. Although this is just one month of data, it appears consistent with our hypothesis. If high borrowing costs explain the consumer sentiment anomaly of 2023, then the recent moderation of the growth rate of borrowing costs in recent months could help consumers significantly in 2024, but further rises could prolong consumer dissatisfaction.

Takeaways by Macro Roundup® AI

  1. The authors construct alternative CPI measures in which including interest paid raises year-on-year inflation by one percentage point over the past year, and adding both personal interest payments and homeownership costs raises November inflation from 3% to 9%.
  2. Variation in the University of Michigan Index of Consumer Sentiment unexplained by inflation and unemployment has historically correlated strongly with proxies for growth in consumer borrowing costs, including mortgage and car loan rates and banks' willingness to extend installment loans.
  3. Other University of Michigan survey questions show consumer concerns about borrowing costs at historic highs, surpassed only by the Volcker era, and the authors argue moderating borrowing-cost growth could help consumers in 2024 while further rises could prolong dissatisfaction.

Related Articles:

  • Americans Are Suddenly a Lot More Upbeat About the Economy — The University of Michigan's consumer sentiment survey recorded a 29% rise over two months, the largest two-month increase since 1991. The improvement was broad-based across consumers of different ages, incomes, education levels, and regions.
  • Digesting Inflation — The authors estimate that inflation's drag on consumer sentiment decays about 50% per year, with a 10% inflation shock cutting sentiment by 35 index points in the current year, 16 the next, and 8 the year after. On these estimates, inflation over the prior three years is holding sentiment down by 16 index points.
  • Asymmetric Amplification and the Consumer Sentiment Gap — Consumer sentiment surveys show Republican respondents' views swing about ±15 index points relative to predicted levels depending on which party holds the presidency, while Democrats' views swing only about ±6 points. The authors estimate that adjusting for this asymmetric amplification shrinks the gap between observed and predicted consumer sentiment by 30%.

AI Summary. US households have reduced debt over the past 20 years, leaving room to borrow more if incentives improve, while companies that issued debt at low rates hold large liquidity and healthy balance sheets. That gives businesses capacity to raise investment, and business surveys indicate capital-spending sentiment is already improving.

Karen Karniol-Tambour, Larry Cofsky, and Yusuf Jailani Bridgewater Associates
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Bridgewater argues “In a tight economy with high levels of fiscal spending and a very healthy private sector, there is limited room for a pickup in private sector borrowing without reigniting inflation.”

Do household and corporate balance sheets leave room for more borrowing?

Core argument: Households have deleveraged meaningfully over the past 20 years, including during the current cycle, leaving room to take on more leverage in response to more favorable incentives.

Households have deleveraged meaningfully over the last 20 years, including during the current cycle. So, there is plenty of room for households to leverage up in response to more favorable incentives. In the direct aftermath of the COVID pandemic, companies took advantage of historically low rates by issuing a lot of debt, allowing them to build up an unprecedentedly large amount of liquidity. That, along with continued strength in corporate cash flows as economic activity remained strong, allowed companies to reduce debt issuance when yields rose and capital market volatility was elevated. The lack of new debt issuance, coupled with strong earnings, has kept corporate fundamentals in a very healthy position. With balance sheets in a healthy position, businesses have the capacity to respond to the continued strength in household spending by increasing investment. Business surveys we track indicate that capex sentiment is already improving.

Takeaways by Macro Roundup® AI

  1. Households have deleveraged meaningfully over the past 20 years, including during the current cycle, leaving room to take on more leverage in response to more favorable incentives.
  2. Companies issued large volumes of debt at historically low rates after the COVID pandemic, building an unprecedentedly large amount of liquidity that, with strong cash flows, let them curtail issuance when yields rose and capital market volatility was elevated.
  3. Light debt issuance combined with strong earnings has kept corporate fundamentals healthy, giving businesses the capacity to raise investment in response to continued strength in household spending, and business surveys indicate capex sentiment is already improving.

Related Articles:

  • U.S. Inflation Surged in January. Is It a Fluke? — Quarterly growth in the Employment Cost Index has slowed continuously and now runs roughly 1 percentage point faster on an annualized basis than just before the pandemic, while hourly private-sector pay growth has stayed stable. Despite the normalization of job-market churn, both measures of pay gains remain much faster than pre-pandemic.
  • The Big Picture: Back to the Future — The secular backdrop has shifted from disinflationary to more inflationary, with interest rates no longer near zero and real rates no longer negative. Household balance sheets are as healthy as they have been in 20 years, leaving room to borrow, while the public sector is as indebted as it has ever been.
  • 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. US federal spending equaled 23% of GDP, and the Congressional Budget Office projects it to trend slightly higher as a share of GDP while a growing deficit shifts funding toward borrowing. Deficit spending redirects cash earmarked for financial assets into goods and services, leaving the investor's wealth unchanged since cash is exchanged for Treasury debt.

Joseph Wang Fed Guy Blog
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.@FedGuy12 notes rising deficits as a % of GDP, but argues that “A nominal GDP growth rate that is comfortably higher than the interest rate suggests there will be sufficient income to service debt.”

How does deficit spending shift cash from financial assets into spending?

Core argument: Fiscal spending was 23% of GDP in 2023, and the CBO forecasts it trending slightly higher as a share of GDP over the next several years, with the funding mix shifting toward borrowing as the deficit grows.

Fiscal spending was 23% of GDP in 2023 and forecast by the CBO to slightly trend higher as a share of GDP over the next several years. The CBO also expects the source of funds to shift towards borrowings due to a growing fiscal deficit. Deficit spending may be a particularly impactful form of redistribution as it draws from pools of cash earmarked for financial assets and spends it on goods and services. Also note the investor’s wealth is unchanged as he receives a Treasury in exchange for cash, while taxation would reduce the purchasing power of the taxpayer. A nominal GDP growth rate that is comfortably higher than the interest rate suggests there will be sufficient income to service debt. One measure of the restrictiveness of interest rates is the difference between income growth and interest rates, where a smaller or negative gap indicate higher levels of restraint. The distribution of income is heterogeneous as are the spreads charged by lenders, but the two could roughly be proxied on a macro scale through the growth rate of nominal GDP and the 10 year yield. Credit spreads have historically widened when income growth is lower than interest rates. Nominal GDP has been comfortably above the 10 year yield since 2020 and recent economic indicators suggest continued strength.

Takeaways by Macro Roundup® AI

  1. Fiscal spending was 23% of GDP in 2023, and the CBO forecasts it trending slightly higher as a share of GDP over the next several years, with the funding mix shifting toward borrowing as the deficit grows.
  2. Deficit spending may be a particularly impactful form of redistribution, drawing from pools of cash earmarked for financial assets and spending it on goods and services, leaving investor wealth unchanged as cash is swapped for a Treasury, whereas taxation reduces the taxpayer's purchasing power.
  3. Nominal GDP growth has run comfortably above the 10-year yield since 2020, a gap that suggests sufficient income to service debt, while credit spreads have historically widened when income growth is lower than interest rates.

Related Articles:

  • Interest Costs Will Leapfrog Medicare and Defense This Year — The Congressional Budget Office projects net interest payments on federal debt will reach $870bn, or 3.1% of GDP, exceeding spending on national defense ($822bn) and net Medicare ($851bn). That would make interest the second-largest federal budget item after Social Security, up from $223bn in 2015 and $659bn in 2023.
  • The Budget and Economic Outlook: 2024 to 2034 — The Congressional Budget Office projects the federal budget deficit will grow from $1.6tn to $2.6tn over a decade, rising from 5.6% to 6.1% of gross domestic product. That end-point is well above the 3.7% average of the past 50 years, as outlays are projected to rise faster than revenues over most of the period.
  • When Does Federal Debt Reach Unsustainable Levels? — The authors estimate that U.S. debt held by the public cannot exceed roughly 200% of GDP even under favorable market conditions, and that under current policy the ratio reaches 175–200% within about 20 years. After that point, they argue, no tax increases or spending cuts could avert default or inflationary debt monetization.

AI Summary. By median price-to-earnings ratio, the 10 largest companies in the S&P 500 stock index are more overvalued than the top 10 were during the 1990s technology stock bubble.

Torsten Sløk Apollo
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Torsten Sløk @apolloglobal notes that based on their median PE ratio, the top 10 firms in the S&P 500 are more overvalued than they were during the 1990’s tech bubble.

Are the largest stocks more overvalued than during the tech bubble?

Core argument: Torsten Sløk of Apollo Global finds that the top 10 firms in the S&P 500, measured by median price-to-earnings ratio, are more overvalued than the top 10 firms were during the 1990s tech bubble.

The top 10 companies in the S&P 500 today are more overvalued than the top 10 companies were during the tech bubble in the mid-1990s.

Takeaways by Macro Roundup® AI

  1. Torsten Sløk of Apollo Global finds that the top 10 firms in the S&P 500, measured by median price-to-earnings ratio, are more overvalued than the top 10 firms were during the 1990s tech bubble.

Related Articles:

  • Five Easy Pieces — The rally in the seven largest US technology stocks has been driven by earnings rather than valuation: of the group's 28% return, 21 percentage points came from sales growth, 6 from margin expansion, and 1 from multiple expansion. Market concentration has reached its highest level since 1972, and large spikes in concentration have frequently coincided with or preceded prior recessions.
  • 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.
  • 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.

AI Summary. Countries covered by China's free trade agreement network took about 38% of its merchandise exports, roughly $1.3tn out of some $3.43tn shipped worldwide over a 12-month period. That free trade footprint exceeds the total worldwide exports of the Netherlands or Japan, the world's fourth- and fifth-biggest exporters.

James Kynge and Keith Fray Financial Times
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As the US and EU seek to prevent the PRC from dumping its industrial overcapacity in Western markets, Beijing will become increasingly reliant on South Asian and African markets.

How large is China's free trade agreement export footprint?

Core argument: China shipped about 38% of its worldwide merchandise exports to countries and territories covered by its free trade agreement network in the 12 months to end-October last year, according to Financial Times calculations.

Calculations by the Financial Times reveal significant progress. China’s merchandise exports to all countries and territories covered by its FTA network comprised about 38% of its worldwide exports in the 12 months to the end of October last year. Given that over this period, China — as by far the world’s biggest exporter — shipped some $3.43tn around the world, its FTA network took roughly $1.3tn of that total. To put the size of this FTA footprint into context, China exports more to its FTA network than the world’s fourth and fifth-biggest exporters, the Netherlands and Japan, did all over the world during 2022.

Takeaways by Macro Roundup® AI

  1. China shipped about 38% of its worldwide merchandise exports to countries and territories covered by its free trade agreement network in the 12 months to end-October last year, according to Financial Times calculations.
  2. China, the world's biggest exporter, sent roughly $1.3tn to its FTA partners out of the $3.43tn it shipped worldwide over that period.
  3. China's exports to its FTA network exceed what the Netherlands and Japan, the world's fourth and fifth-biggest exporters, each shipped worldwide during 2022.

Related Articles:

  • US Warns China Against Dumping Goods on Global Markets — The US has warned China that it and its allies will respond if Beijing addresses its industrial overcapacity by dumping goods on international markets. US Treasury officials say Chinese industrial support and macroeconomic policies focused on supply rather than demand risk pushing excess capacity onto world markets.
  • Can Trade Intervention Lead to Freer Trade? — China accounts for over 31% of global manufacturing but under 13% of global consumption, while the United States accounts for under 17% of manufacturing and nearly 27% of consumption. The author argues persistent surpluses reflect household subsidies to producers, and that the US could counter them with tariffs or taxes on capital inflows.
  • A Second Dose of Trump On Trade Would Differ From The First — A second Trump administration would pair a 10 percentage point tariff increase on all US trading partners with a tariff of at least 60% on Chinese imports, with advisers arguing a broad import tax addresses America's persistent pattern of trade deficits rather than bilateral imbalances. Researchers estimate China's manufacturing goods surplus reached a record of almost 2% of world GDP.

AI Summary. UK small-cap companies previously earned higher profit margins and traded at higher price-to-book valuations than continental European peers, but the margin gap has almost entirely disappeared and UK stocks now trade at a discount. The analysis uses small-caps in both regions because such firms earn most of their income domestically.

Brian Chingono Verdad
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.@verdadcap_quant compares profit margins and valuation multiples for British and European small-cap companies before and after Brexit and argues that British companies now trade at a discount to their European counterparts.

Have UK small-caps lost their profit margin and valuation edge over Europe?

Core argument: UK companies once earned higher profit margins than continental European peers, but post-Brexit that margin spread has almost entirely disappeared.

In the table margin spreads are defined as UK profit margins minus European profit margins, and valuation spreads are measured as UK Price/Book minus European Price/Book. To isolate the Brexit effect on domestic economies, the analysis is based on small-cap companies in both regions, since small-cap firms primarily generate earnings in their domestic markets. Companies in the UK used to earn higher profit margins—and trade at higher valuations—than companies in continental Europe. But, post-Brexit, the spread in margins has almost entirely disappeared, and UK stocks now trade at a discount.

Takeaways by Macro Roundup® AI

  1. UK companies once earned higher profit margins than continental European peers, but post-Brexit that margin spread has almost entirely disappeared.
  2. UK stocks, which previously traded at a valuation premium to continental Europe measured as UK Price/Book minus European Price/Book, now trade at a discount.
  3. The analysis uses small-cap companies in the UK and Europe to isolate the Brexit effect on domestic economies, since small-cap firms primarily generate earnings in their domestic markets.

Related Articles:

  • Is Britain Really As Poor As Mississippi? — Excluding London's output and population would reduce British living standards by 14%, enough to fall below the poorest US state; by comparison, removing Amsterdam would cut the Netherlands by 5%, removing Munich would cut Germany by 1%, and removing the entire San Francisco Bay Area would cut US GDP per capita by 4%.
  • Britain’s Graduates Are Being Short-Changed While America’s Are Rich — British graduates' median hourly pay of £21 (just over $26) trails the almost $36 earned by US graduates, a 27% gap that has widened from 8% roughly 15 years earlier, while non-graduates in both countries earn similar amounts. Across most of Britain, more than a third of graduates work in jobs that do not require a degree.
  • Britain’s Economic Record Since 2007 Ranks Near The Bottom Among Peer Countries — Britain's economy has grown 7% per person in real terms since 2007, ahead of Canada and France at 6% but behind the US, Australia, and Germany at 13-16%. British labor productivity rose just 4% over 15 years, compared with 6% in France and double-digit gains elsewhere.

Tuesday, February 27, 2024

AI Summary. The authors estimate about 4% of US office buildings—older, unrenovated properties with vacancy above 30%—may no longer be viable as offices, with prices in the hardest-hit cities down 15-35%. They find acquisition prices would need to fall almost 50% in the five metro areas most affected by remote work for conversion to apartments to be financially feasible.

Elsie Peng and Vinay Viswanathan Goldman Sachs
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A @GoldmanSachs analysis suggests prices for older, high-vacancy office buildings would need to fall almost 50% nationally to make residential conversion economically viable.

How far must office prices fall to make apartment conversions feasible?

Core argument: The authors estimate that about 4% of US office buildings—older, unrenovated stock with vacancy above 30%—might no longer be viable as offices, with average transaction prices down 11% since 2019, rising to 14–16% of offices in the hardest-hit cities, where prices have fallen 15–35%.

We estimate that around 4% of US office buildings—those located in suburban areas or central business districts, built 30 or more years ago, not renovated since 2000, and currently facing vacancy rates above 30%—might be no longer viable as offices. The average transaction price of these offices has declined by 11% since 2019. In the hardest-hit cities, as many as 14-16% of offices may no longer be viable by our definition, and their average transaction prices have already fallen by 15-35% since 2019. Using a discounted cash flow model, we show that current acquisition costs for struggling offices are still too high for conversion to a multifamily building to be financially feasible once we account for the high additional costs of conversion and financing. For the top 5 metropolitan areas that are most affected by remote work, we estimate that office acquisition prices would need to fall almost 50% for conversion to be financially feasible. Because the conversion process is slow and costly, available office space is likely to remain excessive and many buildings are likely to remain underutilized. As a result, we expect new office investment to remain sluggish in the next few years, resulting in a 0.2pp drag on fixed private investment growth.

Takeaways by Macro Roundup® AI

  1. The authors estimate that about 4% of US office buildings—older, unrenovated stock with vacancy above 30%—might no longer be viable as offices, with average transaction prices down 11% since 2019, rising to 14–16% of offices in the hardest-hit cities, where prices have fallen 15–35%.
  2. Using a discounted cash flow model, the authors estimate that office acquisition prices in the top 5 metropolitan areas most affected by remote work would need to fall almost 50% for office-to-multifamily conversion to be financially feasible, given high conversion and financing costs.
  3. Because conversion is slow and costly, the authors expect excess office space and underutilized buildings to persist and new office investment to remain sluggish over the next few years, resulting in a 0.2pp drag on fixed private investment growth.

Related Articles:

  • Work From Home and the Office Real Estate Apocalypse — The authors estimate New York City office values fell 45% in 2020 and 39% in the longer run, a $453bn value destruction, with lower-quality buildings hit hardest as tenants shifted to higher-quality space. They argue this has implications for local public finances and financial sector stability.
  • Remote Work, Three Years Later — Remote work has reduced office utilization but not yet office occupancy, because most firms are locked into long-duration leases. Baseline estimates suggest remote work will exert 0.8 percentage points of upward pressure on the office vacancy rate near-term, 2.3 more over the following five years, and 1.8 thereafter.
  • Financial Storm Bears Down On US Commercial Real Estate — Broker JLL estimates New York office buildings have lost $76bn in value from their most recent sales prices, with 73 worth less than their loan balances. One broker estimates only the top 10% of New York offices are not distressed by debt levels or occupancy, though low sales volumes may mask the damage.

AI Summary. Real household net worth peaked at about $13tn above its pre-pandemic projected path before falling back to that path, while real financial assets peaked roughly $10tn above trend and then dropped to about $7.3tn below it. The shortfall in financial assets is attributed mainly to lower equity holdings, which fell 17%.

Hamza Abdelrahman, Luiz Edgard Oliveira, and Adam Shapiro Federal Reserve Bank of San Francisco
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According to a @sffed analysis, real household wealth, including unrealized capital gains, is back in line with pre-pandemic projections as of Q3 2023. @ah_shapiro

Has pandemic excess household wealth returned to its pre-pandemic trend?

Core argument: Real household financial asset holdings peaked at $10 trillion above their projected path in mid-2021 before returning to the projected trend in mid-2022.

Overall real household wealth has returned to its expected pre-pandemic projection. Real net worth (blue solid line) peaked in the last quarter of 2021 at about $13 trillion higher than the projected path (blue dashed line). Since then, net worth has decreased rapidly towards its projected path. As of the third quarter of 2023, household wealth was close to its expected pre-pandemic projection. Repeating this analysis to focus on financial assets (red line), we find that household real financial asset holdings peaked at $10 trillion above their projected path in mid-2021 before returning to the projected trend in mid-2022. Since then, the decline in financial assets to about $7.3 trillion below the projected path has been mainly attributable to lower equity holdings, which decreased by 17% in 2022.

Takeaways by Macro Roundup® AI

  1. Real household financial asset holdings peaked at $10 trillion above their projected path in mid-2021 before returning to the projected trend in mid-2022.
  2. Household real financial assets have fallen to about $7.3 trillion below their projected path, a decline mainly attributable to lower equity holdings, which decreased by 17% in 2022.

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.
  • When Will There Be No More Excess Savings Left? — Post-pandemic excess savings and core consumer price inflation one year later track each other closely, with inflation rising, peaking, and declining roughly a year after excess savings did. The author argues fiscal stimulus that boosted disposable income and excess savings contributed to this inflation episode, alongside monetary policy and supply chain problems.
  • The Rich Have all the “Excess” Cash Now — 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.

AI Summary. China cannot build a developing-world trading bloc to replace the US and Europe as a source of end demand, because its trade surplus is too large and the main deficit countries outside the West are India and Turkey. India resists larger deficits with China, and Turkey needs to reduce its deficit.

Brad Setser @Brad_Setser
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Given the scale of Chinese supply, “It is fundamentally impossible for China to construct a block centered around the developing world that replaces the US/EU…as India is not prepared to run bigger deficits with China.” @Brad_Setser

Can China replace US and European demand with developing-world trade?

Core argument: Setser argues China cannot build a developing-world bloc that replaces the US and EU as sources of end demand, pointing to the size of China's surplus as the obvious problem.

It is fundamentally impossible for China to construct a block centered around the developing world that replaces the US/EU. There is an obvious problem, namely the size of China's surplus. [Aside from US/EU] the big deficits are in India and Turkey. That is a real problem for a Sinocentric block that aims to replace the US and Europe as a source of end demand. India is absolutely not prepared to run bigger deficits with China and Turkey really needs to bring its deficit down. India, remember, didn't join China's trade deal (unlike say Japan) and is exceptionally worried that Chinese exports are undermining its own manufacturing sector. Turkey competes with China in the EU market and isn't gonna give up the EU for China. The bigger point of course is that the world cannot really decouple so long as there are enormous surpluses and deficits across different parts of the global economy (and different political blocks).

Takeaways by Macro Roundup® AI

  1. Setser argues China cannot build a developing-world bloc that replaces the US and EU as sources of end demand, pointing to the size of China's surplus as the obvious problem.
  2. Outside the US and EU, the big trade deficits are in India and Turkey, and Setser holds that India is not prepared to run bigger deficits with China while Turkey needs to bring its deficit down.
  3. India declined to join China's trade deal, unlike Japan, and is worried that Chinese exports undermine its manufacturing sector, while Turkey competes with China in the EU market and will not give up the EU for China.

Related Articles:

  • China’s Plan to Reshape World Trade On Its Own Terms — Countries covered by China's free trade agreement network took about 38% of its merchandise exports, roughly $1.3tn out of some $3.43tn shipped worldwide over a 12-month period. That free trade footprint exceeds the total worldwide exports of the Netherlands or Japan, the world's fourth- and fifth-biggest exporters.
  • Can Trade Intervention Lead to Freer Trade? — China accounts for over 31% of global manufacturing but under 13% of global consumption, while the United States accounts for under 17% of manufacturing and nearly 27% of consumption. The author argues persistent surpluses reflect household subsidies to producers, and that the US could counter them with tariffs or taxes on capital inflows.
  • A Second Dose of Trump On Trade Would Differ From The First — A second Trump administration would pair a 10 percentage point tariff increase on all US trading partners with a tariff of at least 60% on Chinese imports, with advisers arguing a broad import tax addresses America's persistent pattern of trade deficits rather than bilateral imbalances. Researchers estimate China's manufacturing goods surplus reached a record of almost 2% of world GDP.

AI Summary. About 10.5m people living outside China are or once were Chinese citizens, a diaspora exceeded only by India's, Russia's, and Mexico's. Chinese citizens received more than 70% of 81,000 American investor visas issued to dollar-millionaires over a decade, and 18% of China's nearly 900 dollar-billionaires now live abroad, up from 6%.

Economist Staff The Economist
Date Posted:

Some 18% of China’s 900 dollar-billionaires now live abroad as part of the 10.5mm Chinese diaspora; 1.5% of all Chinese with investable of wealth over $1mm left the country in 2023.

Some 18% of China’s 900 dollar-billionaires now live abroad as part of the 10.5mm Chinese diaspora; 1.5% of all...

Are growing numbers of wealthy Chinese moving abroad?

Core argument: Some 18% of China's nearly 900 dollar-billionaires live abroad, up from 6% in 2019, according to Hurun's 2023 China Rich List.

There are about 10.5m people living outside China who are, or once were, Chinese citizens. Only the Indian, Russian, and Mexican diasporas are larger. Some of these Chinese are among the country’s richest people. More than 70% of the 81,000 investor visas issued by the American government to dollar-millionaires between 2010 and 2019 were given to Chinese citizens. There are signs that post-pandemic, the outflow of extreme wealth is accelerating. Some 18% of China’s nearly 900 dollar-billionaires live abroad, according to the 2023 China Rich List published by Hurun, a firm which tracks such things, up from 6% in 2019. Despite tightening capital controls, more than 13,500 people with investable wealth of $1m or more left China in 2023, according to Henley & Partners, a consultancy. It says this equates to around 1.5% of Chinese with that level of wealth. The less affluent are leaving too, often by perilous means. In 2023 nearly 53,000 Chinese were detained at the American border, compared with just over 1,000 in 2018, a far faster increase than for overall border arrests. In the first eight months of 2023, more than 13,000 Chinese tried to make it to America via the perilous Darien Gap forest area in Panama.

Takeaways by Macro Roundup® AI

  1. Some 18% of China's nearly 900 dollar-billionaires live abroad, up from 6% in 2019, according to Hurun's 2023 China Rich List.
  2. Henley & Partners reports that more than 13,500 Chinese with investable wealth of $1m or more left China in 2023, about 1.5% of Chinese at that wealth level, despite tightening capital controls.
  3. Nearly 53,000 Chinese were detained at the American border in 2023, compared with just over 1,000 in 2018, a far faster increase than for overall border arrests.

Related Articles:

  • 2023 Letter — Rising numbers of Chinese nationals are being apprehended at the US-Mexico border, with US officers encountering around 1,000 in one month early in the year and nearly 5,000 by November. Most Chinese emigrants leave through legal means, going primarily to Singapore, Japan, and Thailand.
  • America’s Southern Border Has Become A Global Crossroads — Migrants from countries other than Mexico, El Salvador, Guatemala, and Honduras made up more than half of all people apprehended at the US southern border for the first time, with Venezuelans the largest share. Crossings included 43,000 Russians, 42,000 Indians, and 24,000 Chinese, up from 4,100, 2,600, and 450 two years earlier.
  • China’s Age Of Malaise — More than 300,000 Chinese people emigrated in a single year, more than double the pace of a decade earlier, with some traveling overland through a half-dozen countries to reach the US. US authorities at the southern border recorded 17,894 encounters with Chinese migrants over ten months, a thirteenfold increase from the prior year.