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


Thursday, April 4, 2024

AI Summary. An examination of 25 years of US banking trends finds deposits—especially uninsured deposits—have grown rapidly while banks have shifted from information-intensive lending toward longer-term securities such as mortgage-backed securities and long-term Treasuries. The authors argue these trends favor strengthening liquidity regulation over expanding deposit insurance to reduce bank-run risk.

Samuel Hanson, Victoria Ivanshina, Laura Nicolae, Jeremy Stein, Adi Sunderam and Daniel Tarullo Brookings Papers On Economic Activity
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Deposits – especially uninsured deposits that create run risk – have risen sharply, while banks with the most rapid growth in deposits have shifted assets away from lending towards longer-term MBS and Treasuries. @lauramnicolae

Should regulators strengthen liquidity rules rather than expand deposit insurance?

Core argument: Bank deposits, especially uninsured deposits, have grown rapidly on the liability side of bank balance sheets over the last twenty-five years, according to an examination of banking industry trends.

To inform the ongoing discussion of the appropriate regulatory response to [such events as] the failures of three regional banks 2023, we examine trends in the banking industry over the last twenty-five years. On the liability side of bank balance sheets, deposits—and especially uninsured deposits—have grown rapidly. On the asset side, there has been a notable shift away from the information-intensive lending traditionally associated with banks and towards longer-term securities such as MBS and long-term Treasuries. We assess the main regulatory options to reduce the risk of destabilizing bank runs—expanding deposit insurance and strengthening liquidity regulation— and argue that the industry trends we document favor the latter option. Regulators may be more comfortable tightening liquidity requirements on uninsured deposits, insofar as the substantial increase in those deposits in recent decades has not been correlated with an increase in information-intensive lending.

Takeaways by Macro Roundup® AI

  1. Bank deposits, especially uninsured deposits, have grown rapidly on the liability side of bank balance sheets over the last twenty-five years, according to an examination of banking industry trends.
  2. On the asset side, banks have shifted away from the information-intensive lending traditionally associated with them and toward longer-term securities such as mortgage-backed securities and long-term Treasuries.
  3. Documented industry trends favor strengthening liquidity regulation over expanding deposit insurance to reduce the risk of destabilizing bank runs, since the increase in uninsured deposits has not been correlated with an increase in information-intensive lending.

Related Articles:

  • All Clear — Data and commentary indicate the banking panic has ended and had only a limited effect on credit availability, with overall bank lending little changed and still growing, reflecting problems at a few poorly managed banks rather than a systemic crisis. Recognition that the banking sector is not collapsing has already prompted some repricing of expected interest rate cuts.
  • Frankenstein’s Monster — Unrealized losses on bank balance sheets are consistent with a rising interest rate cycle and become a problem only when large deposit outflows force those losses to be realized. Lending rules allowing banks to borrow against securities at book value help, but do not address underwater loans or deposits leaving for higher money market yields.
  • In Today’s Banking Crisis, Echoes of the ’80s — Unrealized securities losses at recently failed banks reflect the risk of borrowing short and lending long, echoing thrifts that became insolvent as the Federal Reserve raised rates; between 1980 and 1994, 1,617 banks and 1,295 thrifts closed or received government assistance. Uninsured depositors fled fast enough to limit losses, illustrating market discipline.

AI Summary. The S&P 500 returned 11% over a quarter, with market breadth broadening beyond the largest technology stocks as the equal-weighted index rose 7%; the return came from roughly 295 basis points of improved earnings expectations, 721 basis points from a 7% expansion in the forward price-to-earnings multiple to 21x, and 40 basis points of dividends.

David Kostin Goldman Sachs
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During the tech bubble in 2000, the tech sector made up 33% of the S&P 500 but only 14% of net income. Today it makes up 30% and 20% respectively, as the current rally broadens beyond mega-cap tech stocks.

What drove the stock market's quarterly gain beyond big tech?

Core argument: Of the S&P 500's year-to-date return, +721 bp came from a 7% expansion in the forward P/E multiple to 21x, +295 bp from improved earnings expectations, and +40 bp from dividends.

The S&P 500 returned 11% in 1Q 2024 reaching a new all-time high and posted the strongest 1Q return since 2019. While strong performance by several of the largest mega-cap tech stocks (MSFT, NVDA, AMZN, GOOGL, META) helped lift the index, market breadth improved in 1Q and the equal-weight S&P 500 also rose (+7%). Components of the YTD return included +295 bp from better earnings expectations, +721 bp from a 7% expansion in the forward P/E multiple to 21x, and +40 bp from dividends. The index was led by Comm. Services (+16%) while Real Estate (-1%) fared the worst. Underneath the surface, Cyclicals outperformed Defensives by 5pp in 1Q as the market continued to price an optimistic growth outlook amid firm economic data. In 2024, we expect S&P 500 EPS will rise by 8% but the index will remain flat at 5200 as the P/E multiple contracts slightly from its current level.

Takeaways by Macro Roundup® AI

  1. Of the S&P 500's year-to-date return, +721 bp came from a 7% expansion in the forward P/E multiple to 21x, +295 bp from improved earnings expectations, and +40 bp from dividends.
  2. Communication Services led S&P 500 sectors at +16% and Real Estate lagged at -1%, while Cyclicals outperformed Defensives by 5 pp in 1Q; the forecast calls for 8% S&P 500 EPS growth in 2024 with the index flat at 5200.

Related Articles:

  • Equity Risk Premiums: Determinants, Estimation, and Implications — The implied equity risk premium for the S&P 500 — the forward-looking extra return investors demand for holding stocks over risk-free assets — has fallen to 4.23%, its lowest level since 2008, as the market has climbed.
  • Magnificent 7. Or is it Magnificent 2? — Microsoft and Nvidia's combined weight in the S&P 500 rose from 6.3% in 2021 to 12.3%, while Alphabet, Amazon, Apple, Meta, and Tesla's combined weight fell from 18% to 16.2% as they underperformed the index. The other 493 stocks rose 33.5% in value, from $23.9tn to $31.9tn.
  • 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 Summary. Real fixed investment in US multifamily construction rose more than 30% from 2019 to 2023, surpassing its pre-Great Recession peak, and apartment completions reached a 50-year high near an annual rate of 650k units. That supply surge, alongside slower income and employment growth, is cooling rental inflation, with newly signed rents rising more slowly than the pre-pandemic norm.

Joseph Politano Apricitas Economics
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Though real rents remain at a record high, a 50-year peak in apartment completions is exerting downward pressure and has sharply reduced rental inflation. @JosephPolitano

Is a surge in apartment completions slowing rental inflation?

Core argument: US apartment completions hit a 50-year high in February, approaching an annual rate of 650k units, after real fixed investment in multifamily construction climbed more than 30% between 2019 and 2023, surpassing the pre-Great Recession peak.

Real fixed investment in multifamily construction climbed more than 30% between 2019 and 2023, easily surpassing the pre-Great Recession peak. Today, those projects started in 2021/2022 are finally paying dividends as new units come online—apartment completions hit a 50-year high in February, approaching a rate of 650k per year. That surge in completions, combined with a slowdown in income and employment growth, is helping to steadily cool US rental inflation. Indices of newly signed rental prices from Zillow and ApartmentList both show prices increasing at a slower rate than the pre-pandemic norm and well below their 2022 peaks. That is actually a somewhat unusual situation—in the short term, the kind of tighter monetary policy we’ve seen over the last few years can increase measured housing inflation by driving would-be buyers into the rental market and cutting the production of new housing units. Yet while higher mortgage rates have certainly suppressed US homebuyer activity, they have not yet reduced the supply of newly-completed rental units.

Takeaways by Macro Roundup® AI

  1. US apartment completions hit a 50-year high in February, approaching an annual rate of 650k units, after real fixed investment in multifamily construction climbed more than 30% between 2019 and 2023, surpassing the pre-Great Recession peak.
  2. Newly signed rental price indices from Zillow and ApartmentList both show increases slower than the pre-pandemic norm and well below their 2022 peaks, as the completions surge combines with slowing income and employment growth.
  3. Tighter monetary policy can raise measured housing inflation in the short term by pushing would-be buyers into the rental market and cutting new housing production, yet higher mortgage rates have not yet reduced the supply of newly completed rental units.

Related Articles:

  • The Boomer-Millennial Housing Battle Cools — Demographic needs are outweighing affordability in the housing market, with the share of first-time buyers returning nearly to pre-pandemic levels despite high prices and interest rates. One in four Millennial buyers reported purchasing because they had no choice, and Millennials again make up the largest group of homebuyers.
  • The US Housing Market Is Very Quickly Becoming Unaffordable — Home prices in Las Vegas, Phoenix, Orlando, and Tampa now stand at 6 to 7x incomes, exceeding the ratios reached at the peak of the early 2000s housing bubble in each of those metro areas. All four shifted from affordable, to unaffordable, back to affordable, and into unaffordable territory again.
  • 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. U.S. inventors produced about half as many creative patents per capita in the 2000s as in the 1950s, with the overall rise in patents driven by non-creative or derivative patents. Creative patents per capita show a 75.7% correlation with productivity growth across decades.

Aakash Kalyani Federal Reserve Bank of St. Louis
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The rise in U.S. patents is increasingly driven by non-creative or derivative patents, which have historically had little positive effect on productivity growth.

Does rising patent counts hide a decline in creative invention?

Core argument: U.S. inventors produced only about half as many creative patents per capita in the 2000s as in the 1950s, a pattern in line with productivity growth.

Figure 2 plots the number of creative patents per capita and the total number of patents per capita. It shows that the number of creative patents is in line with the pattern of productivity growth: U.S. inventors produced only about half as many creative patents per capita in the 2000s than they did in the 1950s; the excess increase in patents is entirely driven by an increase in non-creative or derivative patents. The correlation between creative patents per capita and productivity growth over the decades is 75.7%.

Takeaways by Macro Roundup® AI

  1. U.S. inventors produced only about half as many creative patents per capita in the 2000s as in the 1950s, a pattern in line with productivity growth.
  2. The correlation between creative patents per capita and productivity growth across decades is 75.7%.
  3. The excess increase in patents per capita is entirely driven by an increase in non-creative or derivative patents rather than creative ones.

Related Articles:

  • Dataset Artefacts are the Hidden Drivers of the Declining Disruptiveness in Science — A reanalysis argues that the reported long-run decline in the disruptiveness of scientific papers and patents, measured by CD indices, is attributable to a relative decline in database entries recorded as having zero references. The authors find these entries are dataset artifacts, since their source documents do contain references, and that random citation behaviour reproduces the observed decline.
  • Something Is Getting Harder But It’s Not Finding Ideas — The number of researchers in the US economy has grown to 23x its 1930 level while the economy's growth rate has been constant or declining, contradicting the assumption that constant research input yields a constant growth rate. Bloom et al. explain this divergence by assuming ideas get harder to find as more are discovered.

AI Summary. China's leadership has pledged a "whole of nation" push for technological self-reliance, applying science and technology to production, with the central government's budget raising annual science and technology spending by 10%, the largest percentage increase of any category. Rhodium Group estimates China spent about $420bn, or 2.8% of GDP, on science and technology.

Economist Staff The Economist
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China is launching a new effort to drive economic growth via “new productive forces,” such as photonic computing, brain-computer interfaces, and nuclear fusion; Xi has said success will be measured by TFP growth.

How is China scaling up spending to achieve technological self-reliance?

Core argument: China spent almost 2.9trn yuan ($420bn, or 2.8% of GDP) on science and technology as of 2020, according to Rhodium Group, with the government's contribution exceeding 60% once generous tax breaks are included.

According to Mr Xi, the new productive forces will flow from the application of science and technology to production. The phrase is a signal that China’s technology push should be even more ambitious than it is today, and more tightly integrated into economic production. China’s leaders have promised a “whole of nation” effort to boost technological self-reliance. The central government’s budget, unveiled in March, increased annual spending on science and technology by 10%, the largest percentage increase of any division. Frugal innovation, this is not. As of 2020, China was spending almost 2.9trn yuan ($420bn, or 2.8% of GDP) on science and technology, according to Rhodium Group, a consultancy. The government’s contribution exceeded 60% if generous tax breaks are included. Of the recipients, a sixth ended up with universities or research institutes. Roughly 60% flowed to companies.

Takeaways by Macro Roundup® AI

  1. China spent almost 2.9trn yuan ($420bn, or 2.8% of GDP) on science and technology as of 2020, according to Rhodium Group, with the government's contribution exceeding 60% once generous tax breaks are included.
  2. China's central government budget raised annual spending on science and technology by 10%, the largest percentage increase of any division, alongside a promised "whole of nation" effort to boost technological self-reliance.
  3. Roughly 60% of China's science and technology funding flowed to companies and a sixth to universities or research institutes, with Xi Jinping arguing that new productive forces will come from applying science and technology to production.

Related Articles:

  • China’s Record Manufacturing Surplus — China's manufacturing trade surplus has reached about 2% of world GDP, exceeding the peak surpluses of export powerhouses like Japan and Germany, and shows no signs of shrinking as policy continues to emphasize advanced manufacturing capacity. The main offsetting manufactured-goods deficit is in the United States rather than commodity exporters.
  • Will Xi’s Manufacturing Plan Be Enough to Rescue China’s Economy? — World Bank data show investment has exceeded 40% of China's gross domestic product for two decades, against roughly 25% globally and 30–34% in other high-investing developing countries. Critics argue China's growth strategy built on advanced manufacturing requires expanding its share of global manufacturing, which the rest of the world is unlikely to accommodate.
  • The US-China Chip War is Escalating — China's imports of chipmaking equipment have reached record highs, with purchases rising from Japan, the Netherlands, and Singapore alongside a rebound in imports from the United States, as Chinese manufacturers work to indigenize chip production. Chinese government and military buyers have obtained some NVIDIA A100 and H100 chips that US sanctions were designed to block.

Friday, April 5, 2024

AI Summary. Traditional bank balance sheet lending has declined as a share of credit intermediation, with credit increasingly channeled through arms-length transactions such as securitization. A structural model attributes falling lending shares to lower securitization costs, savers' behavior driving bank balance sheet size, and implicit bank costs and subsidies shaping balance sheet composition.

Greg Buchak, Gregor Matvos, Tomasz Piskorski and Amit Seru National Bureau of Economic Research
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Bank balance sheet lending has declined from 60% of total private lending in 1970 to 35% in 2023. Private credit is increasingly intermediated through arms-length transactions such as securitization. @NBERpubs

Why has bank balance sheet lending declined as a share of credit?

Core argument: Traditional bank-led credit intermediation has declined sharply since the 1970s, with private credit increasingly intermediated through arms-length transactions such as securitization.

The role of traditional bank-led intermediation has declined sharply since the 1970s. Private credit is increasingly intermediated through arms-length transactions such as securitization. A structural model explores what can explain these shifts [and simulates] implications for macroprudential policies. Declines in securitization cost account for changes in aggregate lending quantities. Savers, rather than borrowers, are the main drivers of bank balance sheet size. Implicit banks’ costs and subsidies explain shifting bank balance sheet composition. Together, these forces explain the fall in the overall share of informationally sensitive bank lending in credit intermediation. Raising capital or liquidity requirements decreases lending in both early (1960s) and recent (2020’s) scenarios, but the effect is less pronounced in the latter. The substitution of bank balance sheet loans with debt securities in response to these policies explains why we observe only a fairly modest decline in aggregate lending despite a large contraction of bank balance sheet lending.

Takeaways by Macro Roundup® AI

  1. Traditional bank-led credit intermediation has declined sharply since the 1970s, with private credit increasingly intermediated through arms-length transactions such as securitization.
  2. A structural model attributes changes in aggregate lending quantities to declines in securitization costs, bank balance sheet size mainly to savers rather than borrowers, and shifting balance sheet composition to implicit bank costs and subsidies.
  3. Raising capital or liquidity requirements decreases lending in both 1960s and 2020s scenarios, though less markedly in the latter, as substitution of bank balance sheet loans with debt securities limits the decline in aggregate lending.

Related Articles:

  • The Evolution of Banking in the 21st Century: Evidence and Regulatory Implications — An examination of 25 years of US banking trends finds deposits—especially uninsured deposits—have grown rapidly while banks have shifted from information-intensive lending toward longer-term securities such as mortgage-backed securities and long-term Treasuries. The authors argue these trends favor strengthening liquidity regulation over expanding deposit insurance to reduce bank-run risk.
  • Fiscal Dominance and the Return of Zero-Interest Bank Reserve Requirements — Fiscal dominance requires governments to fund deficits at the margin with non-interest-bearing debt, and the revenue from inflation taxation—both expected and unexpected—is limited. The authors argue a US fiscal dominance episode could end the payment of interest on bank reserves and restore requirements that banks hold large zero-interest reserves against deposits.

AI Summary. Developed countries roughly tripled real per capita spending on child benefits, subsidised childcare, and parental leave between 1980 and 2019 while birth rates fell from 1.85 to 1.53 per woman. Finland's fertility rate has fallen by a third since 2010, and Korea's "baby bonus" mainly paid women already planning children.

John Burn-Murdoch Financial Times
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By her mid-thirties, the most common number of children a US or UK woman has is 0. @jburnmurdoch argues there is no evidence that fiscal transfers lift fertility in advanced economies.

Does more spending on family-friendly policies raise birth rates?

Core argument: The world's most developed countries roughly tripled real per capita spending on child benefits, subsidised childcare, and parental leave between 1980 and 2019, while their birth rates fell from 1.85 to 1.53 children per woman.

Between 1980 and 2019, the world’s most developed countries roughly tripled their real-terms per capita spending on child benefits, subsidised childcare, parental leave, and other family-friendly policies. They also saw their birth rates decline from 1.85 to 1.53 per woman. In egalitarian Finland, home to some of the most family-friendly policies in the world, the fertility rate has fallen by a third since 2010. In Hungary, famous for its extravagant payouts aimed at boosting the nation’s number of babies, fewer children were born last year than at any time since records began. Meanwhile, in Korea, the poster child of plummeting fertility, the government’s “baby bonus” programme was found to have mainly paid out to women who were already planning on having children.

Takeaways by Macro Roundup® AI

  1. The world's most developed countries roughly tripled real per capita spending on child benefits, subsidised childcare, and parental leave between 1980 and 2019, while their birth rates fell from 1.85 to 1.53 children per woman.
  2. Finland, with some of the world's most family-friendly policies, has seen its fertility rate fall by a third since 2010, and Hungary, known for extravagant pro-natal payouts, recorded fewer births last year than at any point since records began.
  3. Korea's "baby bonus" programme was found to have mainly paid out to women who were already planning on having children.

Related Articles:

  • $75,000 for a Baby? South Korean Businesses Float Incentives As Demographic Crisis Looms — South Korea's total fertility rate fell from 0.78 to 0.72 and is projected to reach 0.68, far below the 2.1 the OECD says is needed for a stable population. Military personnel numbers have dropped below 500,000, schools and universities report shrinking enrollment, and kindergartens have been converted into nursing homes.
  • Birth Rates Are Falling In The Nordics. Are Family-Friendly Policies No Longer Enough? — Falling Nordic birth rates are now driven by childlessness rather than smaller families, with roughly three-quarters of Finland's recent fertility decline attributable to people who have no children. Nearly 40% of Finnish men with low education are childless at 45, and most have no partners.
  • The Wealthy Are Starting to Have More Babies Than the Poor Again — In developed countries, men's income and education are now generally positively associated with fatherhood, with 70.1% of US men holding graduate or professional degrees having children versus 48.8% of those without a high school diploma. Among advanced economies, those where men take on more housework and child care have higher fertility rates.

AI Summary. Prices for hundreds of grocery items have risen more than 50% over five years as food companies raised prices, with recent Labor Department data showing grocery prices up 1% from a year earlier. Executives have said higher prices were needed to offset their own rising costs for ingredients, transportation, and labor.

Stephanie Stamm and Jesse Newman Wall Street Journal
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A basket of commonly purchased food items that cost $100 in 2019 had increased 36.5% by March of 2024, led by eggs and sports drinks up 40%. @WSJecon

How much less does $100 buy at the grocery store now?

Core argument: Grocery prices rose 1% in February from a year earlier, according to Labor Department data, down from a 10.2% year-over-year increase in February 2023 and close to the 1.2% pace of February 2019.

Grocery prices were up 1% in February from a year earlier, Labor Department data show. They were up 10.2% in February 2023 versus a year earlier, and were up 1.2% in February 2019 from a year earlier. Prices for hundreds of grocery items have increased more than 50% since 2019 as food companies raised their prices. Executives have said that higher prices were needed to offset their own rising costs for ingredients, transportation, and labor.

Takeaways by Macro Roundup® AI

  1. Grocery prices rose 1% in February from a year earlier, according to Labor Department data, down from a 10.2% year-over-year increase in February 2023 and close to the 1.2% pace of February 2019.
  2. Prices for hundreds of grocery items have increased more than 50% since 2019 as food companies raised their prices.
  3. Food company executives have said higher prices were needed to offset their own rising costs for ingredients, transportation, and labor.

Related Articles:

  • Fiscal Narratives for US Inflation — Fiscal theory attributes the deflation of the deep recession to a fall in real interest rates that lowered real interest costs on government debt, an effect that outweighed large deficits. The predicted deflation spiral and the hyperinflation forecast from quantitative easing both failed to materialize.
  • Just How Bad Is the US Cost-of-Living Squeeze? We Did the Math — It now takes $119.27 to buy what $100 purchased before the pandemic, with prices rising about as much since early 2020 as in the preceding decade. Groceries and electricity are each up 25% since January 2020, used cars 35%, auto insurance 33%, and rents roughly 20%.
  • 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.

AI Summary. China's economy grew 20% between 2019 and 2023 while the US grew 8%, but lower Chinese inflation and a 10% depreciation of the renminbi against the dollar caused China's dollar-measured GDP to fall from 76% to 67% of US GDP. The author argues these factors are transitory and projects China's dollar GDP will surpass the US in about a decade.

Nick Lardy Foreign Affairs
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Nick Lardy argues that the stalling of China’s economic convergence with the US is based on transitory inflation and interest-driven exchange rate factors and that China’s nominal GDP measured in US dollars will surpass the US “in about a decade.”

Nick Lardy argues that the stalling of China’s economic convergence with the US is based on transitory inflation and...

Has China's economic convergence with the United States stalled?

Core argument: China's GDP fell from 76% of U.S. GDP in 2021 to 67% in 2023, even though China's GDP was 20% larger than its 2019 level by 2023 while U.S. GDP was only 8% larger.

Take the widely held misconception that the Chinese economy’s progress in converging with the size of the U.S. economy has stalled. It is true that from 2021 to 2023, China’s GDP fell from 76% of U.S. GDP to 67%. Yet it is also true that by 2023, China’s GDP was 20% bigger than it had been in 2019, the eve of the global pandemic, while the United States’ was only 8% bigger. This apparent paradox can be explained by two factors. First, over the last few years, inflation has been lower in China than it has been in the United States. The growing gap between Chinese and U.S. interest rates reversed what had been a large inflow of foreign capital into China, ultimately depressing the value of the renminbi vis-à-vis the dollar by 10%. Converting a smaller nominal GDP to dollars at a weakened exchange rate results in a decline in the value of China’s GDP when measured in dollars relative to U.S. GDP. But these two factors are likely to be transitory. China’s nominal GDP measured in U.S. dollars will almost certainly resume converging toward that of the United States this year and is likely to surpass it in about a decade.

Takeaways by Macro Roundup® AI

  1. China's GDP fell from 76% of U.S. GDP in 2021 to 67% in 2023, even though China's GDP was 20% larger than its 2019 level by 2023 while U.S. GDP was only 8% larger.
  2. The apparent divergence is attributed to lower inflation in China than in the United States and a 10% depreciation of the renminbi against the dollar, as a widening China–U.S. interest-rate gap reversed large foreign capital inflows into China.
  3. Both factors are judged transitory, with China's nominal GDP in dollars expected to resume converging toward U.S. GDP and likely to surpass it in about a decade.

Related Articles:

  • When Will China’s GDP Overtake America’s? — China's productivity growth has slowed and its working-age population is shrinking, with the UN projecting a decline of more than 100m people aged 15-64 in the 2030s. Several forecasters project China's GDP will overtake America's sometime in the 2030s, while Capital Economics argues that if it does not, it may never happen.
  • 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 Neoclassical Growth of China — China's per capita GDP growth path closely tracks those of Japan, South Korea, and Taiwan from similar starting income levels, indicating nothing unusual about its growth rate. The authors' model projects China's per capita GDP will level off at about 41% of the US level, reflecting a slowdown in productivity catch-up.

AI Summary. The U.S. and Japan are formalizing arrangements for U.S. Navy warships to undergo maintenance, repair, and overhaul at Japanese private shipyards, initially limited to the roughly two dozen ships forward-deployed to Japan. Expanding the work to U.S.-based ships, which could ease American maintenance bottlenecks, may require congressional action.

Ken Moriyasu Nikkei Asia
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The US and Japan are enhancing defense industrial collaboration, starting with repairs on US Navy vessels in Japanese shipyards, and joint munitions production. @NikkeiAsia

The US and Japan are enhancing defense industrial collaboration, starting with repairs on US Navy vessels in Japanese...

Can Japanese shipyards help ease U.S. Navy maintenance bottlenecks?

Core argument: Biden and Kishida are expected to formalize maintenance, repairs, and overhauls of U.S. Navy warships at Japanese private shipyards, initially limited to the roughly two dozen ships forward-deployed to Japan.

Biden and Kishida are expected to formalize the process of performing maintenance, repairs, and overhauls on U.S. Navy warships at Japanese private shipyards. The U.S. Navy has already experimented with ship repairs at Mitsubishi Heavy Industries’ Yokohama Dockyard and Machinery Works. The repairs will initially be limited to the two dozen ships forward-deployed to Japan. Congressional action may be required to expand the operations to allow Japanese yards to service U.S.-based ships as well. This would help ease maintenance bottlenecks at American yards and allow ships to return to operation faster. Analysts say that in a potential future conflict between the U.S. and China in the Taiwan Strait, it would be crucial for the U.S. Navy to be able to perform quick repairs in Japan so that ships can return to battle, rather than spending weeks traveling back to the U.S. Meanwhile, co-production of assets would likely begin with munitions.

Takeaways by Macro Roundup® AI

  1. Biden and Kishida are expected to formalize maintenance, repairs, and overhauls of U.S. Navy warships at Japanese private shipyards, initially limited to the roughly two dozen ships forward-deployed to Japan.
  2. Expanding Japanese yards' work to U.S.-based ships may require congressional action, a step that would help ease maintenance bottlenecks at American yards and return ships to operation faster.
  3. Analysts say that in a potential U.S.-China conflict over the Taiwan Strait, rapid repairs in Japan would be crucial so ships can return to battle rather than spend weeks traveling to the U.S., with co-production likely beginning with munitions.

Related Articles:

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