Edward Conard

Top Ten New York Times Bestselling Author

  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…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
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “Unintended Consequences is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.” - Tyler Cowen, Professor, George Mason University
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…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 must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Wednesday, March 20, 2024

AI Summary. The Congressional Budget Office projects the federal budget deficit will reach 8.5% of gross domestic product over a 30-year horizon, with outlays rising to 27.3% of GDP and revenues to 18.8%. The projected growth is attributed to rising interest costs, large sustained deficits excluding interest, and spending on federal health care programs, particularly Medicare.

CBO Staff Congressional Budget Office
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.@USCBO new budget outlook forecasts that federal outlays will reach 27.3% of GDP by 2054 vs.revenues of 18.8%. From 1974 to 2023 mean outlays were 21% of GDP.

How large will the federal deficit grow over 30 years?

Core argument: CBO projects the total federal budget deficit will reach 8.5% of GDP in 2054, a level exceeded since the Great Depression only during and shortly after World War II, the 2007–2009 financial crisis, and the coronavirus pandemic.

In CBO’s projections, the total federal budget deficit increases significantly in relation to gross domestic product over the next 30 years, reaching 8.5% of GDP in 2054. Since the Great Depression, that level has been exceeded only during and shortly after World War II and during the 2007–2009 financial crisis and the coronavirus pandemic. That growth results from rising interest costs and large and sustained primary deficits, which exclude net outlays for interest. Those deficits average 2.2% of GDP over the 30-year period; over the past 50 years, they averaged 1.6% of GDP. Projected primary deficits are especially large given the forecast of low unemployment rates. Measured as a percentage of GDP, federal outlays are large by historical standards and, beginning in 2028, increase in each year, reaching 27.3% of GDP in 2054. Growth in net interest costs and in spending for federal health care programs, particularly Medicare, drives those increases. Revenues, also measured as a percentage of GDP, fluctuate over the next decade and increase thereafter, reaching 18.8% of GDP in 2054.

Takeaways by Macro Roundup® AI

  1. CBO projects the total federal budget deficit will reach 8.5% of GDP in 2054, a level exceeded since the Great Depression only during and shortly after World War II, the 2007–2009 financial crisis, and the coronavirus pandemic.
  2. CBO projects primary deficits, which exclude net outlays for interest, will average 2.2% of GDP over the 30-year period, above the 1.6% average of the past 50 years, and are especially large given the forecast of low unemployment rates.
  3. CBO projects federal outlays will increase in each year beginning in 2028, reaching 27.3% of GDP in 2054, driven by growth in net interest costs and federal health care spending, particularly Medicare, while revenues reach 18.8% of GDP.

Related Articles:

  • Monthly Budget Review: August 2023 — The Congressional Budget Office estimates the federal budget deficit reached $1.5tn over the first 11 months of the fiscal year, $0.6tn more than the same period a year earlier, with revenues 10% lower and outlays 3% higher. Net interest costs on the public debt rose $149bn, or 30%, which the agency attributes mainly to significantly higher interest rates.
  • 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.
  • Did the U.S. Really Grow Out of Its World War II Debt? — Decomposing U.S. debt-to-GDP movements, the authors find the post-World War II decline from 106% to a trough of 23% was explained mostly by primary budget surpluses and interest-rate distortions from surprise inflation and pegged nominal rates; absent those, the ratio would have fallen only to 74%.

AI Summary. The authors project US federal debt at 135% of GDP in 2032 and 268% in 2052, above the Congressional Budget Office's 112% and 177%, and argue the deficit is unsustainable. Their model, which determines interest rates through supply and demand rather than historical trends, has rising real rates ratcheting up interest payments, deficits, and debt.

Mark Warshawsky, John Mantus and Gaobo Pang American Enterprise Institute
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A paper from @AEIecon Mark Warshawsky, John Mantus and Gaobo Pang uses an economic model rather than extrapolating historical trends and projects that debt-to-GDP will be 132% in 2032, compared to CBO’s 2023 projection of 115%.

Do supply-and-demand-driven interest rates imply much higher future federal debt?

Core argument: The authors project US debt-to-GDP at 135 percent in 2032 and 268 percent in 2052, compared with CBO's 112 percent and 177 percent respectively.

Within the next ten years, the federal government budget deficit will grow significantly beyond historical experience and should be regarded as unsustainable. This conclusion comes from our economic model that determines key variables simultaneously based on an analysis of supply and demand, in contrast to the official models which tend to assume a continuation of historical trends. We project that debt-to-GDP will be 135 percent in 2032 and 268 percent in 2052, compared to CBO’s 112 percent and 177 percent, respectively. Real interest rates rise in the long run, ratcheting interest payments, deficits, and debt, and vice versa. Our projection of national health expenditures relative to GDP in 2072 is 31.4 percent, compared to 28.4 percent by the Centers for Medicare & Medicaid Services (CMS). A link to their computational dashboard can be found here.

Takeaways by Macro Roundup® AI

  1. The authors project US debt-to-GDP at 135 percent in 2032 and 268 percent in 2052, compared with CBO's 112 percent and 177 percent respectively.
  2. The authors conclude the federal budget deficit will grow significantly beyond historical experience within ten years and should be regarded as unsustainable, with rising long-run real interest rates ratcheting up interest payments, deficits, and debt.
  3. The authors project national health expenditures at 31.4 percent of GDP in 2072, compared with 28.4 percent from the Centers for Medicare & Medicaid Services, using a model that determines key variables simultaneously from supply and demand rather than extrapolating historical trends.

Related Articles:

  • The Long Term Budget Outlook: 2024 to 2054 — The Congressional Budget Office projects the federal budget deficit will reach 8.5% of gross domestic product over a 30-year horizon, with outlays rising to 27.3% of GDP and revenues to 18.8%. The projected growth is attributed to rising interest costs, large sustained deficits excluding interest, and spending on federal health care programs, particularly Medicare.
  • Olivier Blanchard on Debt Explosions — The author argues that rising long-term US Treasury yields reflect a term premium driven by heavy bond supply and weaker demand, including the Federal Reserve shrinking its holdings, rather than a risk premium, since inflation-indexed yields have also risen. Risks include a failed auction or debt monetization producing high inflation.
  • From Riches to Rags: Causes of Fiscal Deterioration Since 2001 — Federal debt held by the public rose from 32% to 98% of GDP over roughly two decades, despite earlier Congressional Budget Office projections that the debt would be paid off. The authors attribute 37 percentage points to major tax cuts, 33 to discretionary spending and Medicare expansions, and 28 to recession and pandemic responses.

AI Summary. The 10-year US Treasury yield has fallen from a peak of 5% to 4.3% as inflows into US bond funds reached their highest level since 2021, despite heavy government borrowing. Goldman Sachs projects the stock of outstanding Treasuries will rise by $1.7tn this year, weighted more toward longer-dated bonds that are riskier for investors.

Kate Duguid Financial Times
Date Posted:

Despite the 10 year Treasury yield retreating from its 5% peak in October, long-dated yields might rise due increased new issuance and ongoing Fed QT.

Are Treasury yields falling despite heavy government borrowing?

Core argument: The 10-year Treasury yield has fallen from an October peak of 5% to 4.3%, with inflows into US bond funds in the first week of March hitting their highest level since 2021, according to EPFR data.

The yield on the 10-year Treasury has fallen from a peak of 5% in October to 4.3%, reflecting higher bond prices. Inflows into US bond funds in the first week of March reached the highest level since 2021, according to EPFR data. In the wake of the coronavirus pandemic, large Fed purchases thwarted the vigilantes, despite the US’s record borrowing needs. But as the Fed turned from buyer to seller, the quantity of US Treasury sales remained high, suggesting that conditions might finally be turning in the vigilantes’ favour. The quantity of Treasuries outstanding is set to rise by $1.7tn this year, according to Goldman Sachs. While this is lower than last year’s increase, it will be more weighted to longer-dated bonds, which are riskier for investors and harder for markets to digest.

Takeaways by Macro Roundup® AI

  1. The 10-year Treasury yield has fallen from an October peak of 5% to 4.3%, with inflows into US bond funds in the first week of March hitting their highest level since 2021, according to EPFR data.
  2. Goldman Sachs estimates the quantity of Treasuries outstanding will rise by $1.7tn this year, less than last year's increase but weighted more toward longer-dated bonds that are riskier for investors and harder for markets to digest.
  3. Large Fed purchases thwarted bond vigilantes after the coronavirus pandemic despite record US borrowing needs, and the Fed's shift from buyer to seller alongside continued high Treasury sales suggests conditions might be turning in the vigilantes' favour.

Related Articles:

  • In 2023 Foreign Demand for Long Term Treasuries Exceed Net Issuances — Foreign demand for long-term US Treasuries, at just over $450bn, exceeded the Treasury's net long-term issuance of just over $400bn, with that demand not coming from China. Net long-term issuance lagged the fiscal deficit—roughly 1.5% of GDP versus 6%—leaving the increase in the stock of long-term "safe" US assets modest.
  • Who Is Buying US Treasuries? — The US Treasury buyer base has shifted from yield-insensitive buyers such as sovereign wealth funds and central banks toward yield-sensitive buyers such as US households, pensions, and insurers. If the Federal Reserve cuts rates, demand from these yield-sensitive buyers could weaken, producing a steeper yield curve.
  • Preferred Habitats and Timing in the World’s Safe Asset — As the Federal Reserve shrinks its bond portfolio, the authors argue private investors, U.S. and foreign, are the more likely buyers of Treasury securities, since their purchases respond to yields and their holdings tilt toward longer-maturity bonds. Foreign governments have not materially added to their Treasury holdings in almost a decade and tend to hold shorter-maturity bonds.

AI Summary. The authors estimate that each percentage point by which market mortgage rates exceed a homeowner's original rate lowers the probability of sale by 18.1%, an effect they calculate prevented 1.33m US home sales. They estimate this supply reduction raised home prices by 5.7%, outweighing a 3.3% price decline from higher rates.

Ross Batzer, Jonah Coste, William Doerner and Michael Seiler Federal Housing Finance Agency
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For every 1pp mortgage rate increase above an American homeowner’s current rate, the probability of a sale decreases 18%. This “lock-in” effect drove a 5.7% increase in home prices between Q2 ‘22 and Q4 ‘24.

How much do rising mortgage rates reduce home sales and raise prices?

Core argument: Each percentage point by which market mortgage rates exceed a loan's origination rate reduces the probability of sale by 18.1%, according to the paper's estimates of U.S. mortgage rate lock-in.

In the United States, nearly all 50 million active mortgages have fixed rates, and most have interest rates far below prevailing market rates, creating a disincentive to sell. This paper finds that for every percentage point that market mortgage rates exceed the origination interest rate, the probability of sale is decreased by 18.1%. This mortgage rate lock-in led to a 57% reduction in home sales with fixed-rate mortgages in 2023Q4 and prevented 1.33 million sales between 2022Q2 and 2023Q4. The supply reduction increased home prices by 5.7%, outweighing the direct impact of elevated rates, which decreased prices by 3.3%. These findings underscore how mortgage rate lock-in restricts mobility, results in people not living in homes they would prefer, inflates prices, and worsens affordability.

Takeaways by Macro Roundup® AI

  1. Each percentage point by which market mortgage rates exceed a loan's origination rate reduces the probability of sale by 18.1%, according to the paper's estimates of U.S. mortgage rate lock-in.
  2. Mortgage rate lock-in cut home sales with fixed-rate mortgages by 57% in 2023Q4 and prevented 1.33 million sales between 2022Q2 and 2023Q4, the paper finds.
  3. The paper estimates that the lock-in-driven supply reduction raised home prices by 5.7%, outweighing the direct effect of elevated rates, which lowered prices by 3.3%; nearly all 50 million active U.S. mortgages carry fixed rates.

Related Articles:

  • 1.54 million Total Housing Completions in 2023 including Manufactured Homes; Most Since 2007 — Total US housing completions and placements, including manufactured homes, reached 1.543m, the most since 2007, even as total housing starts fell 9.0% year over year. Excluding manufactured homes, completions were 1.453m, up 4.5%, with construction delays leaving a near-record number of units still under construction.
  • The Distribution of Mortgage Interest Rates Outstanding — 23% of outstanding US mortgages carry an interest rate below 3%, 38% are between 3% and 4%, and only 9% were originated above 6%. With mortgage rates at 7.25%, homeowners lack incentive to move and take on a new mortgage, a key reason housing supply remains low.
  • Higher For Longer and The 2024 Housing Outlook — Sustained higher mortgage rates are expected to weigh most on housing turnover, since nearly all borrowers hold rates below market levels, discouraging moves; the authors project existing home sales of 3.8mn, the fewest annual sales since the early 1990s. Housing starts are projected to fall 4% to 1.34mn.

AI Summary. Official US border encounter statistics exclude people who evade Border Patrol agents, who in past decades made up the majority of illegal crossers. The Department of Homeland Security estimated apprehension rates of 33%–43% in the 2000s versus 81% more recently, a shift attributed mainly to most crossers intending to turn themselves in and apply for asylum.

Justin Fox Bloomberg
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Illegal immigration may not be at a record high. @foxjust argues statistics are being skewed by a change in behavior as illegals seek out government authorities to take advantage of the asylum system.

Do border encounter statistics overstate how much illegal crossings have risen?

Core argument: DHS estimates the Southwest border apprehension rate reached 81% in fiscal 2021, versus a range of 33% in 2003 to 43% in 2000 and 2009 during the 2000s.

The problem with the statistics on what US Customs and Border Protection now calls Southwest land border encounters is that they leave out people who successfully evade the agency’s agents. In past decades, these were the majority of illegal border crossers. The Department of Homeland Security estimates of the Southwest border apprehension rate in the 2000s range from 33% (in 2003) to 43% (in 2000 and 2009). In recent years, the apprehension rate has been much higher than that. According to the most recent estimate by DHS, it was 81% in the 2021 fiscal year. Going by monthly CBP “got away” estimates compiled by the Cato Institute’s David J. Bier, the apprehension rate was 79% in both the 2022 and 2023 fiscal years, and 92% in the first four months of the 2024 fiscal year. That rate has risen partly because the US-Mexico border is more tightly controlled than it used to be, but mainly it’s just that most of the people crossing the border illegally intend to turn themselves in and apply for asylum.

Takeaways by Macro Roundup® AI

  1. DHS estimates the Southwest border apprehension rate reached 81% in fiscal 2021, versus a range of 33% in 2003 to 43% in 2000 and 2009 during the 2000s.
  2. CBP "got away" estimates compiled by the Cato Institute's David J. Bier put the apprehension rate at 79% in both fiscal 2022 and 2023 and 92% in the first four months of fiscal 2024.
  3. CBP's Southwest land border encounter statistics exclude those who evade agents, who in past decades were the majority of illegal border crossers, and the apprehension rate has risen mainly because most crossers intend to turn themselves in and apply for asylum.

Related Articles:

  • New Immigration Estimates Help Make Sense Of The Pace Of Employment — The Congressional Budget Office estimates net immigration was 3.3m in 2023, versus the 1m it had projected, implying faster population and labor force growth than currently reported. The authors estimate this raised real economic growth by about 0.1 percentage point and, by lifting both production and demand, added little price or wage pressure.
  • The Demographic Outlook: 2024 to 2054 — The Congressional Budget Office projects the US population will grow from 342mm in 2024 to 383mm in 2054, an average 0.4% a year — less than half the 0.9% pace of the prior five decades. Immigration accounts for about 70% of growth over the next decade and for all population growth beginning in 2040.
  • Illegal Immigration Is a Bigger Problem Than Ever. These Five Charts Explain Why — Government data show border agents made 2.05m arrests in a single federal fiscal year, the second consecutive year above 2m, after figures never previously exceeded 1.7m or stayed elevated for as long. A growing share of migrants are families with children, who are difficult to deport to their home countries, rather than single adults from Mexico seeking work.

AI Summary. Demographic groups whose work has been more displaced by automation have seen slower real wage growth, and automation is estimated to account for about 70% of between-group wage inequality in the US since 1980. Establishments adopting artificial intelligence have slowed hiring of non-AI workers by more than they have added AI specialists.

Erik Brynjolfsson, Adam Thierer, and Daron Acemoglu American Enterprise Institute
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There is early evidence that AI’s impact on labor markets is following the path of other forms of automation. @erikbryn @AdamThierer @DAcemogluMIT

Does automation explain most of the growth in wage inequality?

Core argument: Automation explains about 70% of between-group wage inequality in the US since 1980, with demographic groups whose work was more displaced by automation seeing weaker real wage growth.

The more a demographic group’s work has been displaced by automation, the less its real wages have grown since 1980. In fact, automation explains about 70% of the between-group inequality in the US since 1980. As shown in Figure 9, establishments have slowed their hiring of non-AI workers (and much more so than they increase the number of AI specialists they hire). So overall, the early rollout of AI seems to have taken the same automation path other digital technologies of the 1980s, 1990s, and 2000s followed. This overall decline in hiring therefore confirms AI is replacing human workers in some occupations, even after accounting for AI-skilled job creation.

Takeaways by Macro Roundup® AI

  1. Automation explains about 70% of between-group wage inequality in the US since 1980, with demographic groups whose work was more displaced by automation seeing weaker real wage growth.
  2. Establishments have slowed their hiring of non-AI workers by more than they have increased their hiring of AI specialists.
  3. The early rollout of AI appears to have followed the same automation path as the digital technologies of the 1980s, 1990s, and 2000s.

Related Articles:

  • Generative AI at Work — A study of 5,179 customer support agents finds that access to a generative AI conversational assistant raised issues resolved per hour by 14% on average, with the largest gains for novice and low-skilled workers and minimal effect on experienced, highly skilled ones. The authors also find AI assistance improved customer sentiment, reduced requests for managerial intervention, and improved employee retention.
  • The Short-Term Effects of Generative Artificial Intelligence on Employment: Evidence from an Online Labor Market — Freelancers in occupations most exposed to generative AI saw employment and earnings decline, with the authors estimating a 2% drop in jobs and a 5.2% drop in monthly earnings on an online labor platform. Offering high-quality service did not mitigate the effect, and top-rated freelancers appear disproportionately hurt.
  • Here’s What We Know About Generative AI’s Impact On White-Collar Work — In a randomized study, Boston Consulting Group consultants given access to GPT-4 completed tasks 25% faster, finished 12% more tasks, and produced work rated 40% higher in quality than colleagues without the tool. Gains appeared across the skill distribution but were largest among less highly skilled employees.

Thursday, March 21, 2024

AI Summary. Japan offers investors geographic diversification, with among the lowest correlation in economic conditions to the US of any developed country, reflecting trade exposure split between the US, China, and the broader Asia region. Most sales of Japanese-listed companies are domestic, and investors remain underweight Japanese assets.

Karen Karniol-Tambour and Alexa Rozario Bridgewater Associates
Date Posted:

Bridgewater argues that Japan, India, and Brazil offer the largest opportunities for investors seeking geographic diversification as conditions in the EU and UK are closely linked to the US.

Does Japan offer investors meaningful geographic diversification from the US?

Core argument: Japan exports roughly equal amounts each year to the US and China and the most to the broader Asia region, giving it among the lowest correlations in economic conditions to the US of any developed country.

Japan stands out as one of the most diversifying places for investors and one of the few places in the world that can absorb sizable amounts of capital. It is a trade-heavy economy that sits at the crossroads of the East and West, exports almost equal amounts each year to both the US and China, and exports the most to the broader Asia region. This diversified exposure to global trade means it has among the lowest correlations in economic conditions to the US of any developed country. Not only are Japanese conditions lowly correlated to the US, but Japanese equities also provide a relatively high level of exposure to those domestic (versus global) conditions. While Japanese growth is driven by a diverse set of trade linkages, the majority of the sales for companies listed on Japanese exchanges are domestic. After decades of Japan basically not having a monetary policy cycle and relatively stagnant conditions, investors remain underweight Japanese assets.

Takeaways by Macro Roundup® AI

  1. Japan exports roughly equal amounts each year to the US and China and the most to the broader Asia region, giving it among the lowest correlations in economic conditions to the US of any developed country.
  2. The majority of sales for companies listed on Japanese exchanges are domestic, so Japanese equities provide relatively high exposure to Japan's domestic conditions rather than global conditions.
  3. Investors remain underweight Japanese assets after decades in which Japan essentially lacked a monetary policy cycle and had relatively stagnant conditions, while Japan is one of the few places able to absorb sizable amounts of capital.

Related Articles:

  • Japanese Workers Secure Biggest Pay Rise In Three Decades — Japanese companies including Honda, Nippon Steel, and ANA Holdings granted workers their largest pay rise in more than three decades, with economists expecting large firms to give unionised workers average increases above 4%, up from 3.6% the prior year. The increases strengthen the case for the Bank of Japan to begin raising interest rates.
  • Japan’s Foreign Worker Tally Tops Two Million For First Time — Japan's foreign worker count reached about 2.05 million, the most on record, a 12.4% increase from a year earlier, according to the Labor Ministry. About three in five of the roughly 319,000 establishments employing non-Japanese staff have no more than 30 employees in total.
  • How Japan’s Nikkei 225 Got Its Mojo Back — Japan's Nikkei 225 stock index has reclaimed the record peak it set more than 34 years ago, closing at 39,098.68, as global investors bet the country has escaped deflation and is on a path of sustainable growth. Gains in technology and chip-equipment shares drove the advance, with the index up over 16% since the start of the year.

AI Summary. The authors introduce EVADE, a measure of the informal economy based on observed compliance with value-added tax payments, drawing on gaps between taxes owed under national income statistics and taxes actually collected. Their estimates show informality moving counter-cyclically—rising in recessions and falling in booms, notably in Greece and Italy—while remaining more stable in France and Germany.

Francesco Pappadà and Kenneth Rogoff National Bureau of Economic Research
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Pappada and @krogoff argue the size of the “off the books” economy exhibits counter-cyclical variation over time, and that it represents nearly 30% of GDP in Southern Europe vs. World Bank estimates of 20%.

Does the informal economy grow during recessions and shrink in booms?

Core argument: EVADE (Evading Value Added Duty Economy), a measure of the informal economy built from observed compliance on VAT payments, tracks the evolution of informality over 1999–2020.

It is well known that VAT tax evasion is rampant, with social statistics showing large “tax gaps” between taxes that ought to have been collected according to national income statistics, and taxes actually collected according to tax authorities. We introduce our measure of the informal economy, Evading Value Added Duty Economy (EVADE), based on the observed compliance on VAT payments In Figure 3, we report the evolution of the informal economy over the period 1999-2020. The volatility of EVADE appears to be associated with a counter-cyclical movement of the informal economy: EVADE tends to increase in recessions and decrease in booms, in particular in a couple of GIPS countries like Greece and Italy. In France and Germany instead, the level of informality is more stable. The more pronounced variation across time than previous measures is consistent with the view suggested by the novelist Victor Hugo that informality is countercyclical.

Takeaways by Macro Roundup® AI

  1. EVADE (Evading Value Added Duty Economy), a measure of the informal economy built from observed compliance on VAT payments, tracks the evolution of informality over 1999–2020.
  2. EVADE's volatility is associated with countercyclical movement of the informal economy, rising in recessions and falling in booms, particularly in Greece and Italy, while informality is more stable in France and Germany.
  3. EVADE varies more over time than previous measures of informality, consistent with the view suggested by novelist Victor Hugo that informality is countercyclical.

Related Articles:

  • From Strength To Strength — The US produced $25.5tn in GDP, about 25% of the world total—roughly its 1990 share—while China's share stands at 18%; the US share of the G7's nominal GDP rose from 40% in 1990 to 58%. Income per person is now about 30% above western Europe and 54% above Japan, adjusted for purchasing power.
  • Europe Has Fallen Behind America and the Gap is Growing — The EU economy was somewhat larger than the US in 2008 ($16.2tn versus $14.7tn), but by 2022 the US had grown to $25tn while the EU and UK combined reached only $19.8tn. The dollar's status as the world's reserve currency allows the US to finance its ambitions without unsettling markets.
  • The Wealth of Working Nations — Because of population aging, growth in GDP per capita and GDP per working-age adult have diverged across advanced economies; from 1998 to 2019 Japan's accumulated growth per working-age adult was 31.9% versus 29.5% in the US. The authors find a standard neoclassical growth model calibrated to each country's working-age population tracks output per working-age adult in most economies.

AI Summary. Federal Reserve officials have marked up growth projections, with output growing 3.1% versus the 1% previously projected, and now expect short-term interest rates to fall by only 1.5pp after peaking rather than the 2.25pp once anticipated. Rising asset prices and the resilience of rate-sensitive sectors such as housing help explain upward revisions to "neutral" rate estimates.

Matt Klein The Overshoot
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Over the last year, US output grew 3.1% relative to the Fed’s 1% projection; stronger growth implies less urgency to cut rates despite more confidence about disinflation. @M_C_Klein

Does stronger-than-expected growth mean interest rates stay higher?

Core argument: U.S. output grew 3.1% from 2022Q4 to 2023Q4, far above the 1% previously projected, and with markups to 2024 and 2025 growth projections the cumulative impact exceeds 3% of GDP.

Output ended up growing far faster than previously projected between 2023Q4 and 2022Q4 (3.1% vs. 1%). Growth rate projections for 2024 and 2025 have also been marked up. The cumulative impact is more than 3% of GDP. Most interesting is the shift in the expected pace of rate reductions after the peak has been reached. Last summer, the consensus was that it would be appropriate to reduce the short-term interest target by about 2.25pp in the two years after rates peaked in 2023Q4. Now, the consensus is that rates should drop by only 1.5pp by the end of 2025. Since September 2023, the estimate of the “appropriate” level of rates at the end of 2026 has also ticked up. The growth impulse from rising asset prices—which also reflect optimism about real economic strength—and the resilience of rate-sensitive sectors such as housing to higher borrowing costs both help explain why many Fed officials seem to be revising up their shorter-term “neutral” rate estimates.

Takeaways by Macro Roundup® AI

  1. U.S. output grew 3.1% from 2022Q4 to 2023Q4, far above the 1% previously projected, and with markups to 2024 and 2025 growth projections the cumulative impact exceeds 3% of GDP.
  2. Fed officials' consensus now calls for only 1.5pp of rate cuts by the end of 2025, down from the roughly 2.25pp expected last summer for the two years after the 2023Q4 peak.
  3. The growth impulse from rising asset prices and the resilience of rate-sensitive sectors such as housing to higher borrowing costs help explain why many Fed officials appear to be revising up their shorter-term "neutral" rate estimates.

Related Articles:

  • Has the U.S. Economy Transitioned to a Higher Long-Run Real Interest Rate Regime? — Labor productivity growth in the U.S. nonfarm business sector has exceeded its longer-run average in three of the past five years, suggesting a possible shift to a faster productivity growth regime. Such a shift is one possible explanation for a long-run neutral real interest rate above 2%.
  • Global Natural Rates in the Long Run: Postwar Macro Trends and the Market-Implied r* in 10 Advanced Economies — Estimates for 10 advanced economies show natural interest rates have declined over the long run, though not steadily: as recently as the 1990s they ranged from 100 to 600 basis points, while by the end of the sample 4 of 10 countries had a negative natural rate and most others fell between 0 and 50 basis points.
  • Quo Vadis, r*? The Natural Rate Of Interest After The Pandemic — Estimates of the natural rate of interest across core advanced economies suggest it may have increased, though the estimates are widely dispersed and statistically uncertain. Low expected potential growth and rising longevity may weigh on the natural rate, while large fiscal deficits, age-related spending, and public investment needs for infrastructure, defense, and the green transition may push it up.

AI Summary. Mortgage rates equal the US Treasury yield plus a spread, and a lower term premium and lower lender fees brought them from 7.8% to 6.75%, with the Federal Reserve, inflation, and mortgage bond spreads contributing little. The author argues prepayment risk is overpriced by 0.4% and its compression could push rates to about 6%.

Aziz Sunderji Home Economics
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.@AzizSunderji expects 30-year mortgage rates to fall from the current 6.7% to under 6% by year-end, driven by a decline in prepayment risk as the Fed cuts rates.

What can bring mortgage rates down to 6%?

Core argument: Mortgage rates have fallen from a peak near 7.8% to 6.75% on a lower term premium and reduced lender fees, while the Fed, inflation, and the mortgage bond option-adjusted spread have not contributed.

The mortgage rate is simply the interest rate on US Treasury bonds plus a spread; each of these components is made up of sub-components. A rise in these sub-components drove mortgage rates from 3% in 2021 to near 8% at their recent peak. A lower term premium and lender fees have brought mortgage rates down from 7.8% to 6.75% today. Other factors—the Fed, inflation, and the mortgage bond OAS—have not played a part, and likely won’t in the near future. So what will get us from the current level TO 6%? A decline in prepayment risk. Prepayment risk is overpriced—by 0.4%—into mortgage rates today. Falling uncertainty around interest rates and a steeper yield curve should bring the fair value of prepayment risk down another 0.3% by year-end. Altogether, there is room for a 70 bp rally in mortgage rates as the prepayment risk premium compresses. Over the remainder of this year, prepayment risk should decline enough to bring mortgage rates down to, if not below, 6%.

Takeaways by Macro Roundup® AI

  1. Mortgage rates have fallen from a peak near 7.8% to 6.75% on a lower term premium and reduced lender fees, while the Fed, inflation, and the mortgage bond option-adjusted spread have not contributed.
  2. Prepayment risk is overpriced by 0.4% in mortgage rates today, and falling interest-rate uncertainty plus a steeper yield curve should cut the fair value of prepayment risk another 0.3% by year-end.
  3. Compression of the prepayment risk premium leaves room for a 70 bp rally in mortgage rates, which should decline to, if not below, 6% over the remainder of the year, after climbing from 3% in 2021 to near 8% at their peak.

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  • America’s Housing Rebound — Pandemic-era house price gains tracked the plunge in mortgage rates, and the initial post-pandemic price dip tracked their rise, but the rebound since early 2023 breaks that relationship and instead matches faster U.S. growth and rising risk asset prices. If mortgage rates stay near current levels, housing activity should increase further.
  • Higher For Longer and The 2024 Housing Outlook — Sustained higher mortgage rates are expected to weigh most on housing turnover, since nearly all borrowers hold rates below market levels, discouraging moves; the authors project existing home sales of 3.8mn, the fewest annual sales since the early 1990s. Housing starts are projected to fall 4% to 1.34mn.

AI Summary. Research published in The Lancet projects that 76% of 204 countries and territories will have birth rates below population replacement by 2050, rising to 97% by 2100. The share of global live births occurring in low-income countries is projected to rise from 18% to 35% by 2100, with sub-Saharan Africa accounting for half of births.

Michael Peel and Cathy Chen Financial Times
Date Posted:

.@TheLancet research forecasts that 3/4 of nations will fall under their population replacement birth rates by 2050. In the latter half of the decade, global population growth will be concentrated in low-income states in sub-Saharan Africa and Asia.

Will falling birth rates shift global births toward low-income countries?

Core argument: Research published in The Lancet projects 76% of 204 countries and territories will fall below population replacement birth rates by 2050, rising to 97% by 2100.

Research published in The Lancet projects three-quarters of nations are projected to fall below population replacement birth rates by 2050, leaving growth concentrated in a minority of low-income states in sub-Saharan Africa and Asia that face acute threats from resource shortages and climate change. The study of 204 countries and territories forecasts that 76% will dip below population replacement rates by 2050 — a number that will rise to 97% by 2100. The proportion of live births in low-income countries is projected to all but double from 18% in 2021 to 35% by the end of the century. Sub-Saharan African countries are forecast to account for half of global births by 2100.

Takeaways by Macro Roundup® AI

  1. Research published in The Lancet projects 76% of 204 countries and territories will fall below population replacement birth rates by 2050, rising to 97% by 2100.
  2. The Lancet study projects the share of global live births in low-income countries will nearly double from 18% in 2021 to 35% by 2100, with sub-Saharan African countries accounting for half of global births by 2100.
  3. The Lancet research projects population growth will be concentrated in a minority of low-income states in sub-Saharan Africa and Asia that face acute threats from resource shortages and climate change.

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  • Europe Hopes Barbed Wire Will Keep Migrants Out. It Won’t — The total length of border fences in the European Union grew from 315km to 2,163km over roughly a decade, yet unauthorised crossings made up just 0.13% of all external crossings into the EU. Most migrants arrive via the Mediterranean rather than the Balkans or the eastern land border.
  • Giorgia Meloni Calls For EU Help To Deal With Surge In Migrant Arrivals — Italy has appealed for greater European Union support as more than 12,000 people arrived from north Africa in a single week, most reaching the island of Lampedusa. Arrivals on Italian shores have surged to more than 128,600 so far this year, up from about 66,200 a year earlier.

AI Summary. The US military says all indications point to China's People's Liberation Army meeting a directive to be ready to invade Taiwan by 2027, having added more than 400 fighter aircraft and over 20 major warships in three years and doubled its ballistic and cruise missile inventory.

Roxana Tiron Bloomberg
Date Posted:

The head of US Indo-Pacific Command states that by 2027, China’s military will have the “ability to meet Xi’s preferred time-line to unify Taiwan with mainland China by force if directed.”

The head of US Indo-Pacific Command states that by 2027, China’s military will have the “ability to meet Xi’s preferred...

Is China on track to be ready to invade Taiwan by 2027?

Core argument: Admiral John Aquilino said the PLA has added more than 400 fighter aircraft and more than 20 major warships during his three years in command.

In the three years since Admiral John Aquilino took command, he said the People’s Liberation Army, or PLA, has added more than 400 fighter aircraft, along with more than 20 major warships. It’s also doubled its inventory of ballistic and cruise missiles since 2020, he said. “All indications point to the PLA meeting President Xi Jinping’s directive to be ready to invade Taiwan by 2027,” Aquilino said. “The PLA’s actions indicate their ability to meet Xi’s preferred time-line to unify Taiwan with mainland China by force if directed.”

Takeaways by Macro Roundup® AI

  1. Admiral John Aquilino said the PLA has added more than 400 fighter aircraft and more than 20 major warships during his three years in command.
  2. Aquilino said the PLA has doubled its inventory of ballistic and cruise missiles since 2020.
  3. Aquilino said all indications point to the PLA meeting Xi Jinping's directive to be ready to invade Taiwan by 2027, with the ability to unify Taiwan with mainland China by force if directed.

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  • The Taiwan Catastrophe — East Asia and the Pacific account for one-third of global GDP in purchasing-power-parity terms, roughly twice the U.S. share, and Chinese domination of the region would harm U.S. economic interests. U.S. two-way goods trade with its nine largest Asian partners besides China was nearly $940bn, about 60% larger than U.S. goods trade with China.
  • China’s Shipyards Are Ready for a Protracted War. America’s Aren’t — China produced more than half of the world's commercial shipbuilding output, while Europe accounts for about 5% and the US next to nothing, with most of the remainder built in South Korea and Japan. Analysts argue that in a protracted conflict China's wartime-scale yards could quickly accelerate production, replace lost ships, and repair damaged ones.