Edward Conard

Top Ten New York Times Bestselling Author

  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “Unintended Consequences 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
  • “Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
  • “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 full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
  • “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
  • “…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
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Monday, August 5, 2024

AI Summary. The authors find that new types of work emerge in occupations experiencing innovations that augment their outputs or rising demand, while innovations that automate tasks or reduce demand slow the emergence of new work. They estimate that the demand-eroding effects of automation innovations have intensified over the past four decades while the demand-increasing effects of augmentation innovations have not.

David Autor, Caroline Chin, Anna Salomons, et al. The Quarterly Journal of Economics
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.@davidautor et al. find that the labor-replacing impact of automation innovations has intensified in the past four decades, while the demand-increasing effects of augmentation innovations have not.

How do automation and augmentation innovations shape the emergence of new work?

Core argument: New work emerges in occupations exposed to augmentation innovations, which raise the capabilities, quality, variety, or utility of occupational outputs, and to demand shocks that increase occupational demand.

New work emerges in response to technological innovations that complement the outputs of occupations and demand shocks that raise occupational demand. Innovations that automate tasks or reduce occupational demand slow new-work emergence. In our terminology, augmentation innovations are technologies that increase the capabilities, quality, variety, or utility of the outputs of occupations, potentially generating new demands for worker expertise and specialization. Conversely, automation innovations are technologies that substitute for the labor inputs of occupations, potentially replacing workers performing these tasks. Although the flow of augmentation and automation innovations is positively correlated across occupations, the former boosts occupational labor demand while the latter depresses it. The demand-eroding effects of automation innovations have intensified in the past four decades while the demand-increasing effects of augmentation innovations have not.

Takeaways by Macro Roundup® AI

  1. New work emerges in occupations exposed to augmentation innovations, which raise the capabilities, quality, variety, or utility of occupational outputs, and to demand shocks that increase occupational demand.
  2. Automation innovations, which substitute for occupations' labor inputs, slow the emergence of new work and depress occupational labor demand, while augmentation innovations boost it, even though the two flows are positively correlated across occupations.
  3. The demand-eroding effects of automation innovations have intensified over the past four decades, while the demand-increasing effects of augmentation innovations have not.

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.
  • Applying AI To Rebuild Middle-Class Jobs — Computerization concentrated decision-making power and resources among elite experts with college and graduate degrees, while the 60% of U.S. adults without a bachelor's degree were relegated to low-paid service jobs. Because artificial intelligence can combine information and rules with acquired experience, it could enable more workers to perform higher-stakes decision-making tasks.
  • Perspectives on the Labor Share — The share of US income going to labor reached its lowest level since the Great Depression, falling roughly 5 percentage points between 1929 and 2022 across most industries, alongside a worldwide decline of about 6 percentage points since 1980. The author argues the most plausible causes are technological, including capital-augmenting technology.

AI Summary. Permanent job losers account for just 0.1 percentage point of the 0.8 percentage point rise in the US unemployment rate from its trough, with new entrants and re-entrants to the labor force explaining nearly all of the increase. Typical worker pay is still rising a little more than 4% a year, faster than before the pandemic.

Matt Klein The Overshoot
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.@M_C_Klein argues the US jobs market is “better than it looks:” rising unemployment since 2023 has been driven by increased workforce participation and weather-related temporary layoffs in July. Wages are growing 1.5pp/year faster than in 2017-19.

Is the rise in unemployment driven by new labor force entrants?

Core argument: Permanent job losers account for just 0.1 percentage point of the total 0.8 percentage point rise in the U.S. unemployment rate since its trough, with their ranks essentially flat for over a year.

The ranks of “permanent” job losers in the unemployed have been essentially flat for over a year, accounting for just 0.1 pp of the total 0.8 pp increase in the jobless rate since the trough. The number of people who are not in the labor force but say that they want a job now has been range bound since mid-2022. New entrants to the labor force and re-entrants to the labor force explained almost the entire increase in the headline unemployment rate until this month, while the pop in July is largely attributable to a bump in temporary layoffs. Nominal wage growth has clearly decelerated from the peak of 2021H2-2022H1, but pay is still rising about 1.5 percentage points faster (annualized) than in 2017-2019. This is corroborated by the monthly data on average worker pay through July. The latest readings imply that the typical worker is still getting a pay rise of a little more than 4% a year. That is slower than the peak, but still a bit faster than before the pandemic.

Takeaways by Macro Roundup® AI

  1. Permanent job losers account for just 0.1 percentage point of the total 0.8 percentage point rise in the U.S. unemployment rate since its trough, with their ranks essentially flat for over a year.
  2. New entrants and re-entrants to the labor force explained almost the entire increase in the headline unemployment rate until July, whose jump is largely attributable to a bump in temporary layoffs.
  3. Nominal wage growth has decelerated from its 2021H2–2022H1 peak but remains about 1.5 percentage points faster annualized than in 2017–2019, implying the typical worker is getting a raise of a little more than 4% a year.

Related Articles:

  • Recent Spike in Immigration and Easing Labor Markets — States with higher per capita volumes of undocumented immigrants broadly had a lower ratio of job vacancies to unemployed workers, a common gauge of labor market tightness. Using state data, the author estimates that about one-fifth of the decline in that ratio was associated with higher immigration.
  • Measuring Unemployment Risk — The authors estimate individual unemployment risk using employment status, demographic, job, and geographic characteristics, and find that before a recession this risk is concentrated: unemployment risk is below 5% for the vast majority of employed workers. Unemployed individuals, a small share of the population, average nearly 22% risk, about 10x the average for employed (2.7%) or out-of-the-labor-force (2.4%) individuals.
  • The Dual U.S. Labor Market Uncovered — The authors identify a dual U.S. labor market in which a primary segment of about 55% of the population is almost always employed, while a secondary segment of about 14% absorbs most seasonal and business-cycle fluctuations. Workers in the secondary segment have 6x higher turnover and are 10x more likely to be unemployed than primary-segment workers.

AI Summary. State-level data show a positive association between workers quitting jobs and new-business applications, a relationship that grew stronger in the years following the pandemic's onset. Because business applications have stayed high while quits returned to earlier levels, the authors argue the surge in quitting cannot fully explain the sustained rise in new-business formation.

Michael Owyang and Marie Hogan Federal Reserve Bank of St. Louis
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A @stlouisfed analysis finds that new business applications with a high propensity to hire remain elevated over pre-pandemic levels, even as job quits decline.

Does the rise in job quits explain sustained new-business formation?

Core argument: State-level job quits and new-business applications are positively associated, with the correlation growing in magnitude during 2020-2023 and particularly in 2022, based on year-by-year state-level measurements.

We found a positive association between business applications and job quits. The strength of this relationship—which we measured by calculating the correlation between job quits and business applications at the state level within each year—varies over time, growing in magnitude during 2020 to 2023 (and particularly in 2022). This may imply that, after the lockdowns early in the pandemic, the relationship between business applications and job quits was stronger than in previous years. However, business applications have remained high through 2024 relative to the 2010s—both on aggregate and within the work-from-home-friendly industries, like professional services—while job quits have returned to previous levels. This suggests that the rise in job quits following the onset of the COVID-19 pandemic (i.e., the Great Resignation) cannot fully explain the persistent increase in applications for new businesses.

Takeaways by Macro Roundup® AI

  1. State-level job quits and new-business applications are positively associated, with the correlation growing in magnitude during 2020-2023 and particularly in 2022, based on year-by-year state-level measurements.
  2. Business applications have remained high through 2024 relative to the 2010s, both in aggregate and within work-from-home-friendly industries such as professional services, while job quits have returned to prior levels.
  3. The rise in job quits following the onset of the COVID-19 pandemic, known as the Great Resignation, cannot fully explain the persistent increase in applications for new businesses.

Related Articles:

  • Surging Business Formation in the Pandemic: Causes and Consequences? — Shifts in consumer demand and in preferences for work and lifestyle during the pandemic created entrepreneurial opportunities, and applications to start businesses produced new firms and establishments that hired workers in large numbers. The authors argue these new businesses drew in quitting workers as founders or hires, implying economic restructuring across industry, geography, and firm size and age.
  • High Tech Business Entry In The Pandemic Era — High-tech industries accounted for a disproportionate share of the surge in net new business establishments after 2019, with net entry higher in tech than non-tech industries. The authors find suggestive evidence that tech establishment births rose more for existing firms than new firms, though both categories saw elevated openings.
  • Demographic Origins of the Start-up Deficit — The authors estimate that the slowdown in US labor supply growth can explain up to 52% of the decline in the start-up rate and up to 80% of the decline in start-ups' share of employment. In their model, growing labor supply requires growing labor demand, which comes through entry of new firms or a lower real wage.

AI Summary. Microsoft, Alphabet, Amazon, and Meta together spent $106bn in the first half of the year and pledged further increases over the next 18 months, with Meta projecting capital spending could reach $40bn this year. Analysts at Dell'Oro Group expect as much as $1tn could flow into infrastructure such as data centers within five years.

Stephen Morris, Hannah Murphy, and Camilla Hodgson Financial Times
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Big Tech’s capex cycle, potentially $1T over 5 years, is driven by perceived existential risks and likely won’t slow due to market jitters. Zuckerberg said, “I’d rather risk building capacity before it is needed, rather than too late.”

Are Big Tech's AI capital spending increases set to continue?

Core argument: Microsoft, Alphabet, Amazon, and Meta spent a combined $106bn in the first six months of 2024 and pledged further increases over the next 18 months, with their collective forecasts implying AI-related investment could more than double by year-end.

Microsoft, Alphabet, Amazon, and Meta all revealed massive increases in spending in the first six months of 2024 — totalling $106B — in their latest quarterly earnings reports, as their leaders brushed off stock market jitters to pledge further investment hikes over the next 18 months. “At this point, I’d rather risk building capacity before it is needed, rather than too late,” Meta chief Mark Zuckerberg said this week, as he predicted the Facebook parent’s capital spending could hit $40bn this year. Their collective forecasts mean Big Tech’s AI-related investment could more than double by year-end. Analysts at Dell’Oro Group now expect as much as $1tn could be channelled into infrastructure such as data centres within five years, even though the companies have so far failed to convince investors that their customers are prepared to spend big on AI products and services.

Takeaways by Macro Roundup® AI

  1. Microsoft, Alphabet, Amazon, and Meta spent a combined $106bn in the first six months of 2024 and pledged further increases over the next 18 months, with their collective forecasts implying AI-related investment could more than double by year-end.
  2. Meta chief Mark Zuckerberg predicted the company's capital spending could reach $40bn this year, saying he would rather risk building capacity before it is needed than too late.
  3. Analysts at Dell'Oro Group expect as much as $1tn could be channelled into infrastructure such as data centres within five years, even as the companies have not convinced investors that customers are prepared to spend big on AI products and services.

Related Articles:

  • Are We on the Brink of an AI Investment Arms Race? — Spending on AI chips and data centers was a bit below $100bn in 2023, around 0.4% of US GDP, and the broader set of companies exposed to AI-related investment has not yet seen a major jump in sales. The authors argue the underlying dynamics point to a spending surge large enough to shape the business cycle.
  • Gen AI: Too Much Spend, Too Little Benefit? — The author argues generative AI is unlikely to drive revenue expansion because it helps employees find information faster rather than find better information. If AI's benefits remain limited to efficiency gains, competitors can adopt the same tools, so cost savings get arbitraged away rather than raising prices or margins.
  • AI’s $600B Question — Comparing spending on AI chips to historical railroad construction overlooks that high-fixed-cost, low-marginal-cost businesses without monopoly or oligopoly power tend to see prices competed down to marginal cost, and that semiconductors continually improve in cost versus performance, unlike physical infrastructure. Speculative frenzies accompany technology, but the payoff will take a long time.

AI Summary. Ecuador has suspended visa-free entry for Chinese nationals, closing the most popular access route for Chinese migrants seeking to reach the U.S. border. Tens of thousands of Chinese migrants have attempted to enter the U.S. by flying into Ecuador and crossing the Darién Gap to Mexico.

Wenxin Fan Wall Street Journal
Date Posted:

In the aftermath of Ecuador suspending visa-free travel, attempted Chinese migration to the US has shifted to Bolivia.

How does ending visa-free entry affect Chinese migration to the US?

Core argument: Ecuador suspended visa-free arrivals for Chinese nationals on July 1, closing the most popular access point for Chinese migrants seeking to reach the U.S. border.

The government of Ecuador suspended visa-free arrivals for Chinese nationals on July 1, closing the most popular access point for Chinese migrants hoping to reach the border. The move was welcomed by the U.S. Department of Homeland Security, which two days later deported 116 Chinese migrants on a charter flight from Texas to the northeastern Chinese city of Shenyang. Chinese officials, meanwhile, have been making examples of those caught and punished for the attempt. In recent years, tens of thousands of Chinese people have attempted to enter the U.S. by first journeying to Mexico through the treacherous Darién Gap that connects South and Central America, typically after flying into Ecuador. Speaking from Mexico City, a 37-year-old Chinese man who hoped to reach the U.S. border by motorbike [cited Confucius] “Oppressive governments are more terrible than tigers.”

Takeaways by Macro Roundup® AI

  1. Ecuador suspended visa-free arrivals for Chinese nationals on July 1, closing the most popular access point for Chinese migrants seeking to reach the U.S. border.
  2. The U.S. Department of Homeland Security welcomed Ecuador's move and two days later deported 116 Chinese migrants on a charter flight from Texas to Shenyang.
  3. Tens of thousands of Chinese nationals have attempted to enter the U.S. by flying into Ecuador and crossing the Darién Gap to Mexico, while Chinese officials make examples of those caught and punished.

Related Articles:

  • Ecuador Suspends Visa Deal With China As Migrants Surge — Ecuador suspended its visa waiver agreement with China, with its foreign ministry stating that nearly half of Chinese travellers who entered did not leave through regular routes or within the 90 days permitted. US Customs and Border Protection detained more than 37,000 Chinese citizens at the southern border, a 10-fold increase.
  • Why So Many Middle-Class Chinese Migrants Take Risky, Illegal Route To U.S. — U.S. Customs and Border Protection reported more than 37,000 Chinese nationals detained at the border with Mexico in a single year, roughly 10x pre-pandemic levels, with families among the fastest-growing group. United Nations data show China's annual net emigration rose above 300,000, compared with about 190,000 a year over the prior decade.
  • China to See Biggest Millionaire Exodus in 2024 as Many Head to U.S. — China is projected to see a record 15,200 high-net-worth individuals — those with at least $1m in assets — leave the country, the world's largest such outflow, according to a Henley & Partners report. The prior year's 13,800 departures went mostly to the US, Canada, and Singapore.

Tuesday, August 6, 2024

AI Summary. Deutsche Bank estimates Japanese households, pension plans, banks and the Bank of Japan built a $20tn carry trade funded by low-cost yen deposits and invested in overseas and longer-duration assets. A Bank of Japan hike of 25 basis points helped trigger a 14% yen rally, among the largest in 40 years.

Michael Cembalest J.P. Morgan
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“JP Morgan FX traders believe that there could be more carry trade unwinds ahead.” Mike Cembalest notes the unwinding of the carry trade was catalyzed by a 25bps hike “indicative of how large the unmeasurable Yen carry trade might actually be.”

How large is Japan's yen-funded carry trade?

Core argument: Deutsche Bank estimates Japan's carry trade at $20 trillion, built as years of negative policy rates led Japanese households, pension plans, state-owned banks and the Bank of Japan to fund via low-cost deposits and invest in overseas and longer-duration domestic assets.

Years of negative policy rates enticed Japanese households, pension plans, state-owned banks and the Bank of Japan itself to create what Deutsche Bank estimates as a $20 trillion carry trade in which “Japan Inc” funds itself via low-cost bank deposits and invests in overseas assets and domestic assets of longer duration. A lot of macro hedge funds piled on to do the same, funding in Yen. When the Fed began to hike in 2022, the Japanese carry trade accelerated, pushing the Yen to its weakest level since 1986. Rising core inflation and wage negotiation outcomes finally prodded the Bank of Japan to raise rates just as the Fed is projected to begin easing, driving up the Yen sharply. The recent Yen rally of 14% is among the largest seen over the last 40 years. Note how it only took a BoJ hike of 25 basis points (!!) to trigger this, which is indicative of how large the unmeasurable Yen carry trade might actually be. While the Yen is now closer to fair value based on interest rate differentials, JP Morgan FX traders believe that there could be more carry trade unwinds ahead.

Takeaways by Macro Roundup® AI

  1. Deutsche Bank estimates Japan's carry trade at $20 trillion, built as years of negative policy rates led Japanese households, pension plans, state-owned banks and the Bank of Japan to fund via low-cost deposits and invest in overseas and longer-duration domestic assets.
  2. A Bank of Japan hike of 25 basis points, coming as the Fed is projected to begin easing, helped drive a 14% Yen rally, among the largest over the last 40 years.
  3. The Yen sits closer to fair value based on interest rate differentials after weakening to its softest level since 1986 as the Fed hiked from 2022, though JP Morgan FX traders believe more carry trade unwinds lie ahead.

Related Articles:

  • The Bank of Japan’s Seductive Widow-Maker Trade — Japan's gross government debt stands at 260% of GDP, or 235% after netting out $1.25tn in foreign-exchange reserves, making the Bank of Japan reluctant to raise short-term policy rates. A 3% increase would sharply raise government debt-servicing costs and strain Japanese banks, especially if long-term rates also rose.
  • 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.
  • What About Japan? — The authors find Japan's government runs a large duration mismatch on its consolidated balance sheet, holding long-duration risky assets financed mainly with short-duration funding such as bank reserves, Treasury bills, and bonds. They estimate this carry trade has earned an ex-post excess return of about 2.13% a year above funding costs, worth more than 3% of GDP.

AI Summary. In a randomized experiment giving 1,000 individuals $1,000 per month, the authors estimate spending rose in most categories, most for housing, food, and car expenses, along with increased housing moves. Debt rose steadily to $1,600 higher by the study's end, and estimated net worth effects turned to roughly -$2,800.

Alexander Bartik, Elizabeth Rhodes, David Broockman, et al. National Bureau of Economic Research
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An experiment giving 1,000 individuals $1k per month for 3 years raised spending on housing as well as consumption, but also increased indebtedness, suggesting transfers may have little impact on the financial health of young, low-income households.

How do unconditional cash transfers affect household spending, debt, and net worth?

Core argument: In a randomized experiment assigning 1,000 individuals $1,000 per month, net worth treatment effects rose by about $1,000 by year two but fell to roughly -$2,800 by year three of the transfers.

We provide new evidence on the causal effect of unearned income on consumption, balance sheets, and financial outcomes by exploiting an experiment that randomly assigned 1000 individuals to receive $1000 per months. The spending impact is positive in most categories, and is largest for housing, food, and car expenses. The treatment increases housing units and neighborhood mobility. Figure 5 shows how net worth and its three components, real assets, financial assets, and debt, evolved over the course of the study for the treatment group and the control group. Total real assets actually rise somewhat by year two but then decline to negative point estimate by year three. Debt follows a different pattern and steadily rises over the course of the study, rising from $700 higher at midline to $1600 higher at endline. Combined, these patterns result in net worth treatment effects that slightly rise by $1000 by year 2 but then fall to roughly -$2800 by year three of the transfers. This pattern is consistent with households somewhat building up their assets at the start of the transfers but then spending down those assets by the end of the transfers.

Takeaways by Macro Roundup® AI

  1. In a randomized experiment assigning 1,000 individuals $1,000 per month, net worth treatment effects rose by about $1,000 by year two but fell to roughly -$2,800 by year three of the transfers.
  2. Debt among transfer recipients rose steadily, from $700 higher at midline to $1,600 higher at endline, while total real assets rose somewhat by year two before declining to a negative point estimate by year three.
  3. The cash transfers raised spending in most categories, with the largest increases in housing, food, and car expenses, and increased housing units and neighborhood mobility.

Related Articles:

  • The Employment Effects of a Guaranteed Income: Experimental Evidence from Two U.S. States — In a randomized experiment, 1,000 low-income individuals received $1,000/month unconditionally for three years while a control group of 2,000 received $50/month, and the transfers reduced individual income excluding transfers by about $1,500/year. The authors find no significant effects on human capital investment and conclude the transfers produced a moderate labor supply reduction not offset by other productive activities.
  • Pandemic Labor Force Participation and Net Worth Fluctuations — Applying the pre-pandemic peak labor force participation rate to the adult population implies about 3.73m "missing workers" and 3.27m "excess retirees" in the US economy. The authors estimate that wealth effects on retirement decisions among those aged 55 and over account for over 50% of the aggregate participation decline and more than 80% of excess retirements.
  • Another Wrong Way to Measure Poverty — The official U.S. poverty measure has barely changed in over 50 years because most social benefits aren't counted as recipient income, even as benefits to the average household in the bottom 20% rose from $9,700 to $45,000 in inflation-adjusted dollars; counting all benefits puts poverty at 2.5%.

AI Summary. Policies that put federal debt on a sustainable footing would improve the trade balance by reducing government spending and taxing private-sector spending power. Although US liabilities to foreigners exceed its foreign assets, borrowing costs are low enough that the country still earns more on those assets than it pays out, leaving it a net winner from international financial transactions.

Maurice Obstfeld Project Syndicate
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Maurice Obstfeld argues the Federal deficit is “a main driver of the trade deficit” and lowering spending would improve the US trade balance by reducing both government and private demand in a more efficient way than capital controls or tariffs.

Would putting federal debt on a sustainable path improve the trade balance?

Core argument: The net gain to the US from its international investment position totaled $15.12 billion in the first quarter of 2024, as America earns more on its foreign assets than it pays on its larger foreign liabilities.

Policies to place the federal debt on a sustainable footing would directly improve the trade balance by reducing government spending and taxing the spending power of the private sector. While data on international investment returns are imperfect, the US remains a net winner from its international financial transactions. Even though the country has, on net, borrowed abroad through its trade deficits, it holds vast foreign assets alongside its liabilities to foreigners. America’s liabilities exceed its assets. But, for now, US international borrowing costs are low enough that America earns more on its huge stock of foreign assets than it pays out on its even bigger foreign debts. In national balance-of-payments statistics, the net gain to the US from its international investment position totaled $15.12 billion in the first quarter of 2024. While the US certainly cannot run trade deficits forever, the current costs of those deficits hardly justify drastic action – and certainly not ineffective and damaging tariffs.

Takeaways by Macro Roundup® AI

  1. The net gain to the US from its international investment position totaled $15.12 billion in the first quarter of 2024, as America earns more on its foreign assets than it pays on its larger foreign liabilities.
  2. Policies placing the federal debt on a sustainable footing would directly improve the US trade balance by reducing government spending and taxing the private sector's spending power.
  3. The US cannot run trade deficits indefinitely, but the current costs of those deficits hardly justify drastic action, and certainly not ineffective and damaging tariffs.

Related Articles:

  • The Dangers of a US Capital Inflow Tax — A tax on foreign capital inflows large enough to balance US trade would raise real interest rates for all US borrowers, domestic and foreign-funded alike, since some foreign funding is needed whenever a trade deficit exists. The argument holds the deficit would shrink mainly through lower investment, reducing demand, growth, and innovation.
  • Can Trade Intervention Lead to Freer Trade? — China accounts for over 31% of global manufacturing but under 13% of global consumption, while the United States accounts for under 17% of manufacturing and nearly 27% of consumption. The author argues persistent surpluses reflect household subsidies to producers, and that the US could counter them with tariffs or taxes on capital inflows.
  • 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.

AI Summary. US legislation supporting semiconductors, clean energy, and infrastructure has triggered an industrial renaissance in artificial intelligence and energy, and US manufacturing capacity is now growing after declining for decades.

Torsten Sløk Apollo
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Torsten Sløk argues that the CHIPS Act, IRA, and Infrastructure Acts “have triggered a new industrial renaissance in AI and energy,” reversing a multi-decade decline in US manufacturing capacity.

Has US industrial policy revived manufacturing capacity growth?

Core argument: The CHIPS Act, the Inflation Reduction Act, and the Infrastructure Act have triggered an industrial renaissance in AI and energy.

The CHIPS Act, the Inflation Reduction Act, and the Infrastructure Act have triggered a new industrial renaissance in AI and energy. Also, US manufacturing capacity is now growing after having declined for many decades.

Takeaways by Macro Roundup® AI

  1. The CHIPS Act, the Inflation Reduction Act, and the Infrastructure Act have triggered an industrial renaissance in AI and energy.
  2. US manufacturing capacity is growing after declining for many decades.

Related Articles:

  • Business Spending Is Lining Up to Reinforce Growth — Around 70% of sectors are posting positive year-over-year profit growth, with big tech showing the largest acceleration in demand and profits but strength broadening across the economy. Companies are responding with rising capital spending growth and more optimistic investment plans, as firms typically add capacity with a slight lag after real demand picks up.
  • The Mysterious Slowdown in U.S. Manufacturing Productivity — US manufacturing labor productivity growth slowed broadly after the Great Recession, with the four largest firms in each industry averaging –0.5% growth from 2010 to 2022 versus 3.7% from 1987 to 2007, and smaller follower firms showing an identical 4.2 percentage-point decline. The authors find the slowdown spans all industries and firm sizes.
  • 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. Private credit — direct lending to businesses by nonbank institutions — accounts for about 15% of private companies' outstanding debt, with volumes comparable to leveraged loans and high-yield corporate bonds. The authors find monetary policy transmission through private credit may be muted relative to bank lending and public bond markets, given resilient credit supply.

Ahmet Degerli and Phillip Monin Federal Reserve Board
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.@FederalReserve analysis notes direct lending assets have risen from $340B in Dec. ‘21 to $751B in June ‘23, and finds that “the effects of monetary policy transmission through private credit may be muted.”

Does private credit weaken monetary policy transmission to business borrowers?

Core argument: Private credit accounts for roughly 15% of the total outstanding debt of private companies, but has grown substantially since the global financial crisis to aggregate volumes comparable to leveraged loans and high-yield corporate bonds.

Private credit refers to direct lending to businesses by nonbank institutions. Although private credit accounts for a relatively small share of the total outstanding debt of private companies, at around 15%, it has experienced substantial growth since the GFC and has become an increasingly important source of credit for businesses, with aggregate outstanding volumes comparable to leveraged loans and high-yield corporate bonds. We find that monetary policy transmission through private credit may be muted relative to bank C&I lending and public bond markets due to resilient credit supply. Direct lending has performed well in both easing and tightening monetary policy environments. Private credit fundraising appears strong when policy is tightening, suggesting that the availability of credit remains solid. Finally, high levels of dry powder – capital commitments mainly from institutional investors with long time horizons – provide a buffer against shocks. Private credit fund returns and capital raising remain relatively resilient during policy tightening cycle.

Takeaways by Macro Roundup® AI

  1. Private credit accounts for roughly 15% of the total outstanding debt of private companies, but has grown substantially since the global financial crisis to aggregate volumes comparable to leveraged loans and high-yield corporate bonds.
  2. Monetary policy transmission through private credit may be muted relative to bank commercial and industrial lending and public bond markets because of resilient credit supply, with direct lending performing well in both easing and tightening environments.
  3. Private credit fundraising and fund returns remain relatively resilient during policy tightening cycles, and high levels of dry powder committed largely by long-horizon institutional investors provide a buffer against shocks.

Related Articles:

  • Where Are All the Defaults? — One explanation for subdued high-yield bond spreads is that the lowest-quality borrowers, those most likely to default, have migrated from high-yield markets into private credit. Moody's reports the number of issuers with its lowest speculative-grade ratings has fallen, and that 62% of its rated universe is rated single-B or below.
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AI Summary. The Federal Reserve's credible guidance on how it would respond to incoming data allowed markets to adjust, with the 10-year Treasury yield falling 19 basis points to 3.8% after a jobs report and holding there through an equity sell-off. An unemployment rate of 4.3% is sufficient basis for a 50-basis-point rate cut.

Jason Furman Wall Street Journal
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.@jasonfurman notes a 19bps decline in the 10-year yield after Friday’s job report, despite the FOMC not cutting. He suggests that a 50bps cut in September may be appropriate.

Does credible Fed guidance let markets adjust before rate cuts?

Core argument: The 10-year Treasury yield fell another 19 basis points after Friday's jobs report to 3.8%, holding there on Monday despite the sell-off in equity markets.

While it’s unfortunate the Fed didn’t have the latest employment data during its meeting, the committee’s clear and credible statements about how it would respond to data in the future ensured the market adjusted appropriately, cutting the 10-year Treasury yield by another 19 basis points after Friday’s jobs report, bringing it to 3.8%, where it stayed on Monday despite the sell-off in equity markets. The unemployment rate staying at 4.3% should be more than sufficient basis for a 50-basis-point reduction at the next meeting.

Takeaways by Macro Roundup® AI

  1. The 10-year Treasury yield fell another 19 basis points after Friday's jobs report to 3.8%, holding there on Monday despite the sell-off in equity markets.
  2. The Fed's clear and credible statements about how it would respond to future data ensured the market adjusted appropriately, even though the committee lacked the latest employment data at its meeting.
  3. The unemployment rate holding at 4.3% should be more than sufficient basis for a 50-basis-point rate reduction at the Fed's next meeting.

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  • The Fed Should Not Cut Interest Rates Yet — Labor demand continues to outpace labor supply, with job openings 17% above pre-pandemic levels and average wages up 3.9% year on year. The author argues current conditions do not warrant interest rate cuts, as the risk of inflation getting stuck above 2.5% is too great.
  • Markets Think Inflation Will Be Too High For The Next 20 Years — Inflation expectations derived from the gap between regular Treasury yields and inflation-indexed Treasury yields show expected annual inflation over the next 10 and 20 years running considerably above expected inflation for the decade beginning 20 years out. Before the pandemic-era inflation surge, actual inflation and expected future inflation tracked each other closely.