Edward Conard

Top Ten New York Times Bestselling Author

  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “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
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “There are an amazing number of good ideas and interesting points made in Unintended Consequences. The thinking underlying it, and the obvious depth of understanding of the author, are very impressive.” - Steven Levitt, coauthor of Freakonomics; 2004 John Bates Clark Medal
  • “…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
  • “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
  • “Unintended Consequences provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.” - Nouriel Roubini, New York University; Chairman, Roubini Global Economics
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Monday, July 29, 2024

AI Summary. The authors estimate that a 1 percentage point increase in reported consumer price inflation is associated with a roughly 0.6 percentage point rise in firms' expectations for their own prices over the year ahead, with the effect appearing only after the inflation data is published.

Ivan Yotzov, Nicholas Bloom, Philip Bunn, et al. National Bureau of Economic Research
Date Posted:

UK survey data shows that the day after the release of a 1 ppt increase in CPI, firms updated their expected own-price growth by 0.6 ppt and also expected higher cost growth and lower sales volume growth. @iyotzov @I_Am_NickBloom

How quickly do firms raise price expectations after inflation data?

Core argument: A 1 percentage point increase in CPI inflation is associated with a 0.6 percentage point rise in firms' year-ahead own-price expectations one day after the CPI release, with the coefficient remaining near 0.6 on the second day, significant at the 5% level.

After documenting that firms are attentive to CPI inflation changes, we analyse whether these changes have meaningful effects on their own-price expectations. We begin by estimating the event study specification [using daily data] with own-price expectations as the dependent variable. The results are presented in Figure 7. We find no significant effect of CPI inflation changes on own-price expectations prior to the release. However, following the release, the coefficients become positive and statistically significant. At t + 1, the result suggests that a 1 ppt increase in CPI inflation is associated with a 0.6 percentage point increase in year-ahead own-price expectations. On the second day after the release, the coefficient remains around 0.6, and is significant at the 5% level. The significant effects on t + 1 coincide with the day when firms receive a reminder email, which leads to more responses and hence more precisely estimated coefficients.

Takeaways by Macro Roundup® AI

  1. A 1 percentage point increase in CPI inflation is associated with a 0.6 percentage point rise in firms' year-ahead own-price expectations one day after the CPI release, with the coefficient remaining near 0.6 on the second day, significant at the 5% level.
  2. An event study using daily data finds no significant effect of CPI inflation changes on firms' own-price expectations before the release, with coefficients turning positive and statistically significant afterward.
  3. The significant day-after effect coincides with the day firms receive a reminder email, which leads to more responses and hence more precisely estimated coefficients.

Related Articles:

  • How Do Firms Adjust Prices in a High Inflation Environment? — Interviews and a survey of about 700 businesses find average cost-to-price passthrough in the 60% range during a period of elevated inflation, with wide variation and some firms reporting passthrough above one. Firms report that demand strength, steady profit margins, labor and nonlabor costs, and competitors' prices shape pricing decisions.
  • “Greedflation” and the Profits Equation — The increase in nominal pretax U.S. business income since late 2019 equals about 17% of the increase in consumer spending excluding imputed rent over the same period, below the roughly 21% share of such spending that quarterly pretax business income has historically represented. On this measure, profit growth has been slightly low relative to a naive expectation.
  • Big Profits and High Prices: There Is a Connection — Nonfinancial corporate profit margins rose from 13.4% to 17% before easing to 16.4%, the highest outside the pandemic period since the 1960s, with prices up 17% and profits up 41%. Had profits grown at the slower pace of labor costs, cumulative price increases would have been 12.5%.

AI Summary. A survey experiment with 9,013 Americans finds widespread misperceptions about billionaires, including a tendency to underestimate the value of a billionaire's home. Contrary to expert predictions, most informational treatments had null or negative effects on demand for taxing the ultra-wealthy, while showing a billionaire's lavish lifestyle raised support for higher taxes.

Ricardo Perez-Truglia and Jeffrey Yusof National Bureau of Economic Research
Date Posted:

A survey primed 9,013 Americans with information about American billionaires’ earnings, tax rates, tax avoidance strategies, and lavish lifestyles. In all cases, the effects on preferred tax rates were far lower than expert predictions.

How does information about billionaires affect public support for taxing them?

Core argument: In a survey experiment with 9,013 Americans, most treatments designed to raise support for taxing the ultra-wealthy had null or negative effects, contrary to expert predictions that all treatments would increase demand for taxation.

We conducted a survey experiment with a sample of 9,013Americans. We designed multiple treatments based on research on preferences for redistribution and arguments made by academics, journalists, and the general public to increase taxes on the ultra-wealthy. Our findings reveal significant misperceptions about billionaires which tend to be skewed. For example, individuals are [most] likely to under-estimate the value of the billionaire’s home. Contrary to expert predictions that all treatments would positively affect the demand for taxation, most treatments have a null or negative effect. The luxury treatment, which included visual and narrative elements about a billionaire’s lavish lifestyle, significantly increased policy support and demand for higher taxes. In contrast, the earnings treatment, which provided statistical information about the billionaire’s income, had a weaker effect on policy support and tax preferences.

Takeaways by Macro Roundup® AI

  1. In a survey experiment with 9,013 Americans, most treatments designed to raise support for taxing the ultra-wealthy had null or negative effects, contrary to expert predictions that all treatments would increase demand for taxation.
  2. The luxury treatment, combining visual and narrative elements about a billionaire's lavish lifestyle, significantly increased policy support and demand for higher taxes, while the earnings treatment providing statistical income information had a weaker effect.
  3. Survey respondents held significant, skewed misperceptions about billionaires, and were most likely to under-estimate the value of the billionaire's home.

Related Articles:

  • The Economics of Inequality in High-Wage Economies — Information technology created investment opportunities exceeding the supply of properly trained talent, while trade with low-wage economies, low-skilled immigration, trade deficits, and aging demographics eased constraints on low-skilled labor and risk-averse savings. The author argues this framework, rather than rising cronyism, explains high returns to success, slowing productivity growth, and low interest rates.
  • Income Inequality in the United States: Using Tax Data to Measure Long-Term Trends — Using administrative tax data with the Survey of Consumer Finances, the authors estimate the top 1% pre-tax income share fell from 11.1% in 1962 to 9.4% in 1979, then rose to 13.8% by 2019, a 3 percentage point rise over the full period. Their after-tax measure shows increases of only 1.4 points since 1979 and 0.2 points since 1962.
  • Taxing Billionaires: Estate Taxes and the Geographical Location of the Ultra-Wealthy — The authors estimate that US billionaires move to states without estate taxes as they age, with $80.7bn of Forbes 400 wealth escaping estate taxation as a result. They find that for the average state the added estate tax revenue exceeds forgone income tax revenue by 31%, with California a notable exception.

AI Summary. Broad measures of the dollar's real exchange rate, adjusted for inflation in major trading partners, place the currency far above historical norms, with only two earlier peaks comparable — each followed by sharp declines. Across many currency pairs, real exchange rates far out of line tend to revert toward their mean, with overvaluation typically halving in about three years.

Ken Rogoff Project Syndicate
Date Posted:

.@krogoff notes that the real dollar exchange rate is far above normal levels and investors should expect “convergence back to the mean.” A second Trump administration likely won’t have to engineer a weaker dollar.

Is the dollar overvalued enough to revert toward its historical average?

Core argument: Broad measures of the real dollar exchange rate, adjusted for relative inflation among major U.S. trading partners, show the greenback far above normal historical levels, with only the 1985 and 2002 peaks remotely comparable.

Any broad measure of the “real dollar exchange rate” adjusted for relative inflation in America’s major trading partners shows that the greenback is far above normal historical levels. Only the 1985 and 2002 peaks look remotely comparable, and on both occasions, the dollar fell sharply in the following years. Exchange rates are famously difficult to explain, much less predict, but one empirical regularity across a wide range of currency pairs and historical circumstances is that there tends to be some convergence back to mean whenever the real exchange rate is far out of line. The pace is not necessarily rapid, typically taking around three years for a real exchange rate overvaluation to reduce by half, but it is nevertheless quite discernable in the data.

Takeaways by Macro Roundup® AI

  1. Broad measures of the real dollar exchange rate, adjusted for relative inflation among major U.S. trading partners, show the greenback far above normal historical levels, with only the 1985 and 2002 peaks remotely comparable.
  2. The dollar fell sharply in the years following both the 1985 and 2002 real exchange rate peaks.
  3. Across a wide range of currency pairs and historical circumstances, real exchange rates tend to converge back toward the mean when far out of line, typically halving an overvaluation in about three years.

Related Articles:

  • How to Manage the Dollar (Part I) — US dollar policy has been non-interventionist since the mid-1990s, roughly 30 years, making the current administration's expressed preference for a weaker dollar a departure that has not been spelled out explicitly. The stated rationale is that a weaker dollar would make American exports cheaper and help rebuild domestic manufacturing employment.
  • He Helped Trump Remake Global Trade. His Work Isn’t Done — A former U.S. trade representative argues that countries running chronic trade surpluses for decades are by definition protectionist, and backs a universal 10% tariff plus a higher tariff on China to push toward globally balanced trade over time. Alternatives include import certificates tied to exports and a charge on foreign investment in U.S. assets.
  • Local Currency Returns — U.S. foreign exchange policy has rested with the Treasury since the 1933 dollar devaluation, and a president could pursue depreciation through direct intervention using the Exchange Stabilization Fund or diplomatic talks with other countries. A weaker dollar eases global financial conditions but could prompt foreign investors holding large amounts of U.S. equities to sell to avoid currency losses.

AI Summary. US home insurers posted a $15.2bn net underwriting loss, the worst since at least 2000 and more than double the prior year's, according to rating agency AM Best, amid natural disasters, inflation and population growth in at-risk areas. Such conditions have prompted insurers to exit disaster-hit markets or raise prices, creating an affordability crisis for many homeowners.

Ian Smith Financial Times
Date Posted:

US home insurers suffered net underwriting losses of $15.2B in 2023, twice their 2022 losses, driven by “a toxic mix of natural disasters, inflation, and population growth in at-risk areas.” @FT

Why are US home insurers pulling back from disaster-prone markets?

Core argument: US home insurers posted a $15.2bn net underwriting loss last year, the worst since at least 2000 and more than double the prior year's losses, according to rating agency AM Best.

US home insurers last year suffered their worst underwriting loss this century as a toxic mix of natural disasters, inflation and population growth in at-risk areas put a vital financial market under acute pressure. Insurers providing policies to homeowners suffered a $15.2bn net underwriting loss last year, according to figures from rating agency AM Best, a figure it said was the worst since at least 2000 and more than double the previous year’s losses. AM Best’s net underwriting profit measure shows premiums less claims and costs and net of reinsurance. Such performance is a big contributor to insurers’ profits alongside investment returns. The figures lay bare the underwriting conditions that have sparked a pullback by US insurers from disaster-hit areas, either exiting markets or driving up prices, creating an affordability crisis for many homeowners.

Takeaways by Macro Roundup® AI

  1. US home insurers posted a $15.2bn net underwriting loss last year, the worst since at least 2000 and more than double the prior year's losses, according to rating agency AM Best.
  2. AM Best's net underwriting profit measure counts premiums less claims and costs, net of reinsurance, and such performance contributes substantially to insurers' profits alongside investment returns.
  3. Underwriting conditions have prompted US insurers to pull back from disaster-hit areas by exiting markets or raising prices, creating an affordability crisis for many homeowners.

Related Articles:

  • Climate Change and the Geography of the U.S. Economy — The positive association between extreme heat and U.S. county population growth weakened over recent decades and disappeared entirely in the 2010s, as hot counties grew hotter. Projected climate change is predicted to shift population from the Southeast and parts of the Southwest toward the North, Mountain West, and Pacific coast.
  • Home Insurance Premiums Are Surging—and States Are Allowing It — Home insurers recorded a $16bn underwriting loss, the largest since at least 2000, according to AM Best, which expects losses to continue. An analysis by S&P Global Market Intelligence finds state-approved rate increases have averaged just 0.2 percentage point below what insurers requested, with California approving an average 21% increase.
  • Red States Will Suffer From Homeowners’ Insurance Woes — Effective homeowners' insurance rates rose 34% nationally between 2018 and 2023, with increases of 43% in Florida and 60% in Texas, and premiums equal to 5% of per capita disposable income in Louisiana, the highest in the US. Loss exposure of Florida's two state insurance backstops is estimated at 1% of the state's economic output.

AI Summary. The US Treasury disputes a paper alleging it manipulated bill issuance, saying the paper relied on outdated projections from an outside advisory panel rather than actual issuance and omitted a quarter when tax revenue let the Treasury pay down about $300bn of bills. The authors defend both choices.

Christopher Condon Bloomberg
Date Posted:

Yellen rejected the @SteveMiran @Nouriel argument that Treasury’s issuance policies are purposefully easing financial conditions to offset the Fed’s rate hikes, “There is no such strategy.”

Does the claim that the Treasury manipulated short-term debt issuance hold up?

Core argument: A senior Treasury official said the Roubini paper's bill-issuance figures come from outdated Treasury Borrowing Advisory Committee predictions rather than actual issuance, and exclude the second quarter, when tax revenue let the Treasury pay down about $300 billion of bills.

A senior Treasury official criticized the Roubini paper on several levels, including factual mistakes about the volume of Treasury bill issuance over the last year. The number provided in the paper is based not on actual issuance but on outdated predictions from the Treasury Borrowing Advisory Committee (TBAC) — an outside panel of market participants that counsels the Treasury. It also left out the second quarter of this calendar year, when tax revenue allowed the Treasury to pay down bills by about $300 billion. Miran, in an emailed response to questions, said the TBAC estimates are appropriate because those are the ones that get “priced into forward-looking markets.” He said the reason for leaving out the second quarter was because that’s when the Treasury has a surge of revenues due to tax due dates, and bill issuance naturally contracts. Miran said he and Roubini didn’t claim the Treasury was being activist in its issuance in that quarter.

Takeaways by Macro Roundup® AI

  1. A senior Treasury official said the Roubini paper's bill-issuance figures come from outdated Treasury Borrowing Advisory Committee predictions rather than actual issuance, and exclude the second quarter, when tax revenue let the Treasury pay down about $300 billion of bills.
  2. Miran defended using TBAC estimates on the grounds that those projections are what get priced into forward-looking markets, and said the second quarter was excluded because tax-due-date revenue surges naturally contract bill issuance.
  3. Miran said he and Roubini did not claim the Treasury was being activist in its issuance during the second quarter.

Related Articles:

  • ATI: Activist Treasury Issuance and the Tug-of-War Over Monetary Policy — The authors argue that by shifting its debt issuance toward shorter maturities, the US Treasury is managing financial conditions in a way that takes on core Federal Reserve functions, a practice they call "activist Treasury issuance." They estimate it has lowered 10-year yields by about 0.25 percentage points, comparable to a one-point cut in the Federal Reserve's policy rate.
  • Resilience Redux in the US Treasury Market — The authors argue that large, persistent US federal deficits and limited dealer balance-sheet flexibility will cause outstanding Treasury debt to grow rapidly relative to the market's capacity to intermediate trades, absent significant changes in market structure. They contend broad central clearing, all-to-all trading, real-time post-trade reporting, capital-regulation changes, and transparent official purchase programs could strengthen market capacity and resilience.
  • How To Tell If The US Treasury Is Having Trouble Borrowing In The Bond Market — Market depth—the quantity of US Treasury securities participants will buy or sell at given prices—is a widely cited gauge of Treasury market health. One bank's depth measure plunged and, despite rising over the past couple of years, remains well below pre-pandemic levels amid policy uncertainty and regulatory constraints on intermediaries.

AI Summary. The U.S. is establishing a new military command in Japan, initially led by a three-star general, to coordinate military operations with Japanese forces, plan joint exercises, and participate in Japan's defense if hostilities break out. The move is intended to keep pace with Japan's buildup of its own military capabilities, including a planned joint command.

Michael Gordon Wall Street Journal
Date Posted:

The US established a new military command in Japan which will have operational control of American forces in the region. The command will mirror a new joint military command that Tokyo is establishing,

Is the US deepening military coordination with Japan through a new command?

Core argument: The U.S. will establish a military command in Japan, initially led by a three-star general, to coordinate military operations with Japanese forces, plan joint exercises, and take part in Japan's defense if hostilities erupt.

The U.S. will establish a new military command in Japan to bolster security ties. The new American command, which will initially be led by a three-star general, will coordinate military operations with the Japanese side, plan joint exercises, and participate in the defense of the country if hostilities erupt. “This is actually a new type of cooperation for the U.S. and Japan, and so it’s going to take a lot of effort and we’re going to have to build some new muscles to be able to do that,” said Zack Cooper of AEI. The move is intended to keep pace with Japan’s efforts to build up its military capabilities, including a new joint military command that Japanese authorities are planning to stand up early next year.

Takeaways by Macro Roundup® AI

  1. The U.S. will establish a military command in Japan, initially led by a three-star general, to coordinate military operations with Japanese forces, plan joint exercises, and take part in Japan's defense if hostilities erupt.
  2. The U.S. command is intended to keep pace with Japan's military buildup, including a joint military command Japanese authorities plan to stand up early next year.
  3. Zack Cooper of AEI describes the arrangement as a new type of U.S.-Japan cooperation that will require considerable effort and building "new muscles.".

Related Articles:

  • Japan, U.S. Form Working Group For Joint Missile Production — Japan and the United States agreed to create working groups on joint missile production, ship and aircraft repair, and supply chain resiliency as part of a defense industry cooperation forum. U.S. officials say Japan's engineering, industrial, and manufacturing capacity is a significant addition for the U.S. defense industrial base.
  • Why is the U.S. Navy Running Out of Tomahawk Cruise Missiles? — The U.S. Navy has been firing Tomahawk land-attack cruise missiles faster than it can replace them, with opening-day strikes in Yemen expending more than 80 missiles against 30 targets. An entire year's purchase of 55 Tomahawks accounted for 68% of the precision munitions fired at the Houthis in a single day.
  • Japan Raises Military Spending To Counter China With More Missiles and Ships — Japan's defense budget rises 13% over the prior fiscal year's planned spending, part of a five-year, ¥43tn plan to lift military spending to roughly 2% of gross domestic product, versus the roughly 1% cap maintained since the 1960s. Purchases include Aegis-equipped destroyers and Tomahawk cruise missiles, with the largest share directed at the Self-Defense Forces' sustainability and resilience.

Tuesday, July 30, 2024

AI Summary. The authors argue the ratio of price to marginal cost, not market concentration, is the meaningful measure of market power. U.S. corporate pretax profits rose from 8.6% of GDP in the 1990s to 11.9% in the 2010s, but domestic profits were far flatter, with much of the gain from foreign operations.

Carl Shapiro and Ali Yurukoglu National Bureau of Economic Research
Date Posted:

.@CarlShapiro finds that empirical evidence does not show a widespread decline in US competition and that “observed changes are likely to reflect competition in action.” For example, rising corporate profits % of GDP result from rising foreign earnings.

Does rising corporate profit share show weakening domestic competition?

Core argument: U.S. corporate accounting profits before tax averaged 9.0% of GDP in the 1970s, 7.7% in the 1980s and 8.6% in the 1990s, then rose to 9.8% in the 2000s and 11.9% in the 2010s.

Concentration metrics have no chance of being informative regarding product-market power. The ratio of price to marginal cost is a far more direct and meaningful measure of market power than market concentration. The left-hand panel of Figure 1 shows corporate accounting profits before tax as a share of GDP. Corporate profits averaged 9.0% of GDP during the 1970s, 7.7% during the 1980s, and 8.6% during the 1990s, then rose to 9.8% during the 2000s and 11.9% during the 2010s. A significant portion of the rise in corporate profits as a share of GDP is attributable to the foreign operations of U.S. firms, as shown in the right-hand panel of Figure 1. [If] U.S. antitrust policy was too lax over the past 40 years, one would expect to see a significant increase in domestic profits relative to GDP. But the time series of domestic profits over that time period is significantly flatter than the time series of total profits. The increase in the income/GDP earned on foreign operations by U.S. firms is likely driven by factors such as lower trade barriers, lower transportation costs, greater value abroad of the intellectual property owned by U.S. firms, and increased trade in services.

Takeaways by Macro Roundup® AI

  1. U.S. corporate accounting profits before tax averaged 9.0% of GDP in the 1970s, 7.7% in the 1980s and 8.6% in the 1990s, then rose to 9.8% in the 2000s and 11.9% in the 2010s.
  2. A significant portion of the rise in U.S. corporate profits as a share of GDP is attributable to the foreign operations of U.S. firms, and the domestic profit series is significantly flatter than the total profit series.
  3. The ratio of price to marginal cost is a more direct and meaningful measure of market power than market concentration, which the author argues has no chance of being informative about product-market power.

Related Articles:

  • Rising Markups and Declining Business Dynamism: Evidence From the Industry Cross Section — Across industries, larger increases in markups are not associated with larger declines in business dynamism—measured by new business entry rates and gross job or worker flows—and the correlation may even be positive. The authors conclude that rising markups as commonly measured are not a major explanatory factor behind declining dynamism.
  • The Economics of Inequality in High-Wage Economies — Information technology created investment opportunities exceeding the supply of properly trained talent, while trade with low-wage economies, low-skilled immigration, trade deficits, and aging demographics eased constraints on low-skilled labor and risk-averse savings. The author argues this framework, rather than rising cronyism, explains high returns to success, slowing productivity growth, and low interest rates.
  • The Concentration Conundrum; What To Do About Market Dominance — The largest US stocks make up a bigger share of the equity market than during the 2000 technology bubble, yet their valuations are lower than in earlier bubble episodes including the Nifty 50 of the early 1970s and Japan's late-1980s bubble. Today's dominant companies are also more profitable with stronger balance sheets.

AI Summary. US dollar strength is comparable to its early-2000s peak, with cost-based real exchange rate measures such as unit labour costs as strong as at any point since the 1990s. The US current account deficit, about 3.3% of GDP, remains below prior highs, but its composition has shifted toward non-commodity goods as the shale boom erased the commodity deficit.

Jens Nordvig and Chris Marsh Money: Inside and Out
Date Posted:

.@GeneralTheorist and @jnordvig note that US dollar strength is comparable to its peak in the early 2000s; however, the current account deficit at about 3.3% of GDP is substantially smaller than in the 2000s, largely due to domestic energy production.

How strong is the dollar and what shapes the trade deficit?

Core argument: The US current account deficit stands at about 3.3% of GDP, above the pre-pandemic steady state near 2% but below the 4.1% reading through early 2022 and well below the 2006 peak, and close to mid-1980s levels.

Overall, US dollar strength is comparable to the peak in the early 2000s, though the picture is nuanced. The bilateral RER against JPY is much stronger than at any time since the 1990s, other bilateral measures are much less extreme. Meanwhile, cost-based measures of US REER, such as unit labour cost measures, are as strong as any time since the 1990s. Turning to the US current account, the external deficit today is about 3.3% of GDP which compares to the pre-pandemic steady state close to 2% of GDP though still below the 4.1% of GDP through early-2022. The deficit today remains well below the 2006 peak, a lagged response to the previous REER peak in the early-2000s, though is close to the current account deficit in the mid-1980s. Though the external deficit is below previous highs, the composition of the deficit has shifted towards non-commodity goods as the commodity deficit has disappeared since the US shale boom. In fact, relative to GDP, the US non-energy goods deficit is higher than the experience in the 2000s.

Takeaways by Macro Roundup® AI

  1. The US current account deficit stands at about 3.3% of GDP, above the pre-pandemic steady state near 2% but below the 4.1% reading through early 2022 and well below the 2006 peak, and close to mid-1980s levels.
  2. Overall US dollar strength is comparable to its early-2000s peak, with the bilateral real exchange rate against the yen much stronger than at any time since the 1990s while other bilateral measures are less extreme.
  3. The composition of the US external deficit has shifted toward non-commodity goods as the commodity deficit disappeared since the US shale boom, leaving the non-energy goods deficit higher relative to GDP than in the 2000s.

Related Articles:

  • How to Manage the Dollar (Part I) — US dollar policy has been non-interventionist since the mid-1990s, roughly 30 years, making the current administration's expressed preference for a weaker dollar a departure that has not been spelled out explicitly. The stated rationale is that a weaker dollar would make American exports cheaper and help rebuild domestic manufacturing employment.
  • Will Trump Get His Wish for a Weaker Dollar? — Broad measures of the dollar's real exchange rate, adjusted for inflation in major trading partners, place the currency far above historical norms, with only two earlier peaks comparable — each followed by sharp declines. Across many currency pairs, real exchange rates far out of line tend to revert toward their mean, with overvaluation typically halving in about three years.
  • The Changing Nexus Between Commodity Prices and the Dollar: Causes and Implications — The shale boom turned the United States into a net exporter of natural gas and of oil, altering how commodity prices relate to US trade. Where higher oil prices were historically associated with a deterioration in US terms of trade, they now correspond to an improvement.

AI Summary. Central banks will likely struggle to deliver the stimulus already priced into rate markets, and the cost of capital must rise enough to offset structurally higher government borrowing and durable private demand. Artificial intelligence spending is inflationary near-term while building capacity, but its deflationary potential is massive and could arrive fast.

Bob Prince, Greg Jensen, and Karen Karniol-Tambour Bridgewater Associates
Date Posted:

Bridgwater views the current late-cycle expansion as “unusually durable” due to increased business spending. They note AI’s deflationary potential “could hit fast,” and have an even bigger impact than globalization and automation in the 1990s and 2000s.

Must the cost of capital rise as borrowing and demand stay strong?

Core argument: Bridgewater's CIOs suspect central banks will find it very challenging to provide as much stimulation as rate markets already price in, and that the cost of capital must rise enough to compensate for structurally higher fiscal borrowing and durable private sector demand.

We suspect central banks will find it very challenging to provide as much stimulation as is already priced into rate markets, and the cost of capital will need to adjust to be high enough to compensate for structurally higher fiscal borrowing and especially durable private sector demand, such that small increases in the cost of capital probably won’t do much to slow the economy. One release valve might be the emergence of deflationary forces from the adoption of AI. Currently, AI spending in the near term is particularly inflationary because it is building up capacity without line of sight to the productivity payoffs, but the deflationary potential is massive—and could hit fast. There is potential for even larger and faster impacts than we experienced in manufacturing over the course of the 1990s and 2000s, when about 10% of the US workforce was displaced out of manufacturing sectors through the processes of globalization and industrial automation—which kept inflation low, led to rising inequality, supported corporate profits, and contributed to political and social shifts, including rising populism and a broad rethinking of trade and economic policies. An even bigger event is likely ahead of us.

Takeaways by Macro Roundup® AI

  1. Bridgewater's CIOs suspect central banks will find it very challenging to provide as much stimulation as rate markets already price in, and that the cost of capital must rise enough to compensate for structurally higher fiscal borrowing and durable private sector demand.
  2. The CIOs argue near-term AI spending is particularly inflationary because it builds capacity without line of sight to productivity payoffs, while its deflationary potential is massive and could hit fast.
  3. Globalization and industrial automation displaced about 10% of the US workforce out of manufacturing sectors across the 1990s and 2000s, keeping inflation low, raising inequality, supporting corporate profits, and contributing to rising populism; the CIOs expect an even bigger event ahead.

Related Articles:

  • The Transition to a Higher Cost of Capital — Bond yields near 4.5% sit below the 5.5% short-term interest rate, leaving little risk premium, and those yields have been enough to draw buyers back toward normal bond holdings. The author argues yields still need to rise to a sustainable cost of capital given structurally higher fiscal and inflationary spending.
  • U.S. Business Investment in the Post-COVID Expansion — Business fixed investment has held at roughly the same share of U.S. GDP as before COVID, a better outcome than after every other recession since 1980, when investment typically fell as a share of GDP and contributed less well into the recovery. American businesses invested $430bn more than if investment had followed its usual historical pattern.
  • Capital Is Making a Comeback — Tangible investment in property, factories and equipment fell from 12.5% to 8.5% of private gross domestic product, while intangible investment in intellectual property, software and process knowledge rose from about 11.5% to 16.75%. The author argues demand for tangible capital investment will now have to rise.

AI Summary. Nominal spending by U.S. consumers and businesses continues rising at roughly 5.5% a year, a pace that makes it difficult for inflation to settle at the Federal Reserve's 2% goal unless real output grows about 3.5% annually. Output is growing about 2.5%-3% while inflation has slowed toward 2.5%-3%, an improvement the author attributes to faster productivity and easing supply disruptions.

Matt Klein The Overshoot
Date Posted:

The dollar value of spending by American consumers and businesses is rising a yearly rate of ~ 5.5%. That pace is inconsistent with the Fed’s 2% target with inflation likely falling between 2.5%-3%. @M_C_Klein

Can inflation reach 2% while nominal spending grows 5.5% annually?

Core argument: Nominal spending by U.S. consumers and businesses continues to rise at roughly 5.5% a year, the pace held since mid-2022, making inflation near the Federal Reserve's 2% goal difficult unless that pace slows or real output sustainably grows 3.5% a year.

The dollar value of spending on goods and services by American consumers and businesses is still rising at the ~5.5% yearly pace that it has since the middle of 2022. Unless that changes—or unless the real production of goods and services sustainably rises by 3.5% a year—it will be difficult for inflation to persist around the Federal Reserve’s 2% yearly goal. The good news is that the mismatch is relatively small, with output growing briskly at about 2.5%-3% a year even as inflation has decelerated slightly towards 2.5%-3%. This is a big improvement from two years ago, when the split between price and volume growth was far less favorable. Accelerating productivity and the unwinding of pandemic- and war-related supply disruptions are both responsible for this benign outcome.

Takeaways by Macro Roundup® AI

  1. Nominal spending by U.S. consumers and businesses continues to rise at roughly 5.5% a year, the pace held since mid-2022, making inflation near the Federal Reserve's 2% goal difficult unless that pace slows or real output sustainably grows 3.5% a year.
  2. Real output is growing about 2.5%–3% a year while inflation has decelerated toward 2.5%–3%, a relatively small mismatch and an improvement over the far less favorable split between price and volume growth two years earlier.
  3. Accelerating productivity and the unwinding of pandemic- and war-related supply disruptions are both responsible for the more favorable division of nominal spending growth between output and prices.

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AI Summary. U.S. home insurers posted $15.2bn in net underwriting losses, their worst performance since at least 2000, and are responding by raising premiums and withdrawing coverage. State "last-resort" public insurance plans, backed by a state's policyholders or taxpayers, reached a record of just over $1.3tn in exposure, signaling growing unavailability of private coverage.

Fran Moore Briefing Book
Date Posted:

The frequency of extreme weather events causing $1B or more in damages in inflation-adjusted terms has risen from 3.3 per year in the 1980s to over 20 per year over the last five years. @ClimateFran

Are rising disaster costs straining U.S. property insurance markets?

Core argument: U.S. home insurers took $15.2 billion in net losses in 2023, their worst performance since at least 2000, and are responding by raising premiums and withdrawing coverage.

2023 saw U.S. home insurers take $15.2 billion in net losses, the worst performance since at least 2000. In response, insurers are raising premiums and withdrawing coverage and property insurance markets are looking increasingly shaky in states across the U.S. A sudden withdrawal of insurers from underwriting windstorm, hail, and wildfire risks - similar to the withdrawal from flood insurance that occurred in the early 20th century - is certainly possible. States affected by insurance withdrawals have typically established “last-resort” public plans for properties unable to find a policy in the private market. The rapid growth in these plans, which are ultimately backed by all policy-holders or taxpayers in a state, is a clear signal of growing unavailability of private insurance: total underwriting by public plans reached a new record high in 2023 at just over $1.3 trillion in exposure; Florida, California, and Louisiana all saw their plans more than quadruple in the five years from 2018 to 2023.

Takeaways by Macro Roundup® AI

  1. U.S. home insurers took $15.2 billion in net losses in 2023, their worst performance since at least 2000, and are responding by raising premiums and withdrawing coverage.
  2. Total underwriting by state "last-resort" public insurance plans reached a record of just over $1.3 trillion in exposure in 2023, with Florida, California, and Louisiana each seeing their plans more than quadruple between 2018 and 2023.
  3. State last-resort plans are ultimately backed by all policy-holders or taxpayers in a state, and their rapid growth signals growing unavailability of private property insurance.

Related Articles:

  • US Home Insurers Suffer Worst Loss This Century — US home insurers posted a $15.2bn net underwriting loss, the worst since at least 2000 and more than double the prior year's, according to rating agency AM Best, amid natural disasters, inflation and population growth in at-risk areas. Such conditions have prompted insurers to exit disaster-hit markets or raise prices, creating an affordability crisis for many homeowners.
  • Climate Change and the Geography of the U.S. Economy — The positive association between extreme heat and U.S. county population growth weakened over recent decades and disappeared entirely in the 2010s, as hot counties grew hotter. Projected climate change is predicted to shift population from the Southeast and parts of the Southwest toward the North, Mountain West, and Pacific coast.
  • Home Insurance Premiums Are Surging—and States Are Allowing It — Home insurers recorded a $16bn underwriting loss, the largest since at least 2000, according to AM Best, which expects losses to continue. An analysis by S&P Global Market Intelligence finds state-approved rate increases have averaged just 0.2 percentage point below what insurers requested, with California approving an average 21% increase.

AI Summary. Utility Con Edison's climate-risk study projects that severe weather from flooding to heat waves will intensify, with temperatures rising faster than projected and 2040 levels arriving a decade earlier. The company models higher equipment-failure rates as temperatures rise and plans network switches and submersible transformers and circuit breakers.

Phred Dvorak Wall Street Journal
Date Posted:

Con Edison is fortifying its grid in response to increasing weather-related stress. ConEd’s updated projections forecast temperature levels that were expected to prevail by 2040 now coming a decade earlier.

How are utilities hardening power grids against intensifying severe weather?

Core argument: Con Edison's climate-risk study said temperatures are likely to rise faster than it projected four years before, with levels once expected in 2040 now coming a decade earlier, and all types of severe weather expected to increase in intensity or severity.

Con Edison’s latest climate-risk study said all types of severe weather—from flooding to heat waves—are expected to increase in intensity or severity. Temperatures are likely to rise faster than it projected four years before, with levels that were expected in 2040 now coming a decade earlier. Con Edison’s engineers took those predictions and applied them to its electric systems to model its potential increase in equipment-failure rates, which go up as the temperature rises, says Christopher Jones, chief engineer for the company’s electric distribution system. To help protect the system, Con Edison is planning to add switches to its underground network that would limit the spread of any failures. The company is also proposing to counter increased flooding by replacing hundreds of underground transformers and circuit breakers with units that work underwater.

Takeaways by Macro Roundup® AI

  1. Con Edison's climate-risk study said temperatures are likely to rise faster than it projected four years before, with levels once expected in 2040 now coming a decade earlier, and all types of severe weather expected to increase in intensity or severity.
  2. Con Edison engineers applied those predictions to the company's electric systems to model potential increases in equipment-failure rates, which go up as temperatures rise, says Christopher Jones, chief engineer of the company's electric distribution system.
  3. Con Edison plans to add switches to its underground network to limit the spread of failures and proposes replacing hundreds of underground transformers and circuit breakers with units that work underwater to counter increased flooding.

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AI Summary. A Democratic presidential path that depends on winning Pennsylvania, Michigan, and Wisconsin requires sweeping all three, which is harder than carrying any one of them. One election model treats the Electoral College as a tossup when the Democratic candidate wins the national popular vote by 2 to 3 percentage points.

Nate Silver Silver Bulletin
Date Posted:

The first run of the @NateSilver538 model with Harris gives Trump a 61% probability of winning the Electoral College, vs. 73% when Biden exited the race. Harris is a “very slight” underdog in PA 43%, MI 43% and WI 47%.

How big a popular vote margin does the Electoral College require?

Core argument: The model treats the Electoral College as a tossup if Harris wins the popular vote by 2 to 3 percentage points, meaning she needs roughly a 2.5-point popular-vote margin to beat the point spread.

If an election were held today, we’d enter the evening with a lot of uncertainty about the outcome, both because the polling in the pivotal Blue Wall states (Pennsylvania, Michigan, and Wisconsin) has been close since Biden dropped out of the race and because there’s some intrinsic uncertainty about where the race stands given how much news there’s been lately. The problem with the Blue Wall strategy is that Harris needs to win all three (while also avoiding surprising losses elsewhere like New Hampshire). Although these states’ outcomes are fairly strongly correlated in the model, that’s still harder than winning just one. And while Harris has a more viable path in Georgia and North Carolina than Biden, she and the campaign still have their work cut out there. Overall, the model thinks the Electoral College would be a tossup if Harris wins the popular vote by 2 to 3 percentage points. Put differently, she basically needs to win the popular vote by 2.5 points to beat the point spread.

Takeaways by Macro Roundup® AI

  1. The model treats the Electoral College as a tossup if Harris wins the popular vote by 2 to 3 percentage points, meaning she needs roughly a 2.5-point popular-vote margin to beat the point spread.
  2. Harris's Blue Wall strategy requires winning Pennsylvania, Michigan, and Wisconsin together while avoiding surprising losses elsewhere such as New Hampshire, which is harder than winning just one state even though the three outcomes are fairly strongly correlated in the model.
  3. Polling in Pennsylvania, Michigan, and Wisconsin has been close since Biden dropped out of the race, and Harris has a more viable path in Georgia and North Carolina than Biden while still having her work cut out in those states.

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