Edward Conard

Top Ten New York Times Bestselling Author

  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…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
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard 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
  • “…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 comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Monday, August 26, 2024

AI Summary. When governments insulate taxpayers rather than bondholders from unfunded spending shocks, government bond yields rise as debt is marked to market, shifting the risk to bondholders — a "risky debt" regime the authors argue better fits recent experience. In that regime, large-scale central bank asset purchases give government bonds temporary price support at a net loss to taxpayers.

Roberto Gomez-Cram, Howard Kung, and Hanno Lustig Federal Reserve Bank of Kansas City
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.@HannoLustig and @rgomezcram argue the pandemic was a period of “fiscal dominance” in which bondholders insulated taxpayers from increased spending by absorbing capital losses. From March 2020 to March 2022, the government’s real debt fell by 10%.

Who bears the risk of unfunded government spending, taxpayers or bondholders?

Core argument: When governments and central banks insulate taxpayers rather than bondholders from spending shocks, bond yields rise as unfunded fiscal expansions mark government debt to market, shifting risk onto bondholders — a risky debt regime the authors find fits recent experience.

Governments and central banks can protect either taxpayers or bondholders from government spending shocks. When they choose to insulate taxpayers, government bond yields increase in response to unfunded fiscal expansions as the government debt is marked to market. The risks of unfunded spending shocks are then borne by bondholders. This risky debt regime is a better fit for recent experience. High-frequency evidence from the COVID episode links U.S. In Figure 12, the cumulative change in the Treasury portfolio valuation on large negative proposal days [in red] exhibits a smooth downward trend over the extended sample, implying that the effects are attributed to a consistent flow of fiscal news rather than a few large observations. Between March 2020 and March 2022, the effect is much larger, as shown by the significant steepening of the red line. During COVID the overall value changes shown by the blue line were primarily driven by fiscal news. [Finally], in this risky debt regime, large-scale asset purchases in response to large government spending provide temporary price support to government bonds, a net loss for taxpayers.

Takeaways by Macro Roundup® AI

  1. When governments and central banks insulate taxpayers rather than bondholders from spending shocks, bond yields rise as unfunded fiscal expansions mark government debt to market, shifting risk onto bondholders — a risky debt regime the authors find fits recent experience.
  2. Cumulative Treasury portfolio valuation changes on large negative fiscal-proposal days trend smoothly downward across the sample, implying a consistent flow of fiscal news rather than a few large observations, with marked steepening between March 2020 and March 2022.
  3. In the risky debt regime, large-scale asset purchases made in response to large government spending give government bonds temporary price support and represent a net loss for taxpayers.

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.
  • 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.
  • 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. Adopting the Simpson-Bowles fiscal consolidation when interest rates were at zero would have risked excessive disinflation, since long rates had no room to fall to provide an offsetting expansionary impulse. After the large run-up in debt and rise in real interest rates, the developing fiscal situation risks inflationary pressure, Treasury market disruption, or crowding out of private investment.

Larry Summers, Bob Rubin, Greg Jensen, et al. Bridgewater Associates
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Fiscal deficits at current levels will manifest in “substantial inflationary pressure, substantial indigestion in the Treasury markets with financial chaos, or substantial crowding out of what would be otherwise valuable private investment.” @LHSummers

Does the case for fiscal consolidation depend on the interest rate environment?

Core argument: Larry Summers says that since 2021 he has viewed the fiscal situation with growing alarm, expecting it to manifest as substantial inflationary pressure, indigestion in Treasury markets with financial chaos, or crowding out of otherwise valuable private investment.

If Simpson-Bowles had been implemented, given that we were already at zero interest rates and massive QE, there would have been a systematic risk of excessive deflation and disinflation without a healthy tool—because there wouldn’t have been any room for long rates to fall and so there wouldn’t have been any offsetting expansionary impulse. So I was very much not a fiscal hawk in the 2011-19 period. And I would stand by those judgments. But in economics, unlike physics, you have to adjust your way of thinking to the fact that the world changes quite profoundly. And in the aftermath of the big run-up of debt and the many reasons to have real interest rate increases, it has seemed to me since 2021, with growing degrees of alarm, that we have a very, very serious fiscal situation developing, which is likely to manifest itself in one of substantial inflationary pressure, substantial indigestion in the Treasury markets with financial chaos, or substantial crowding out of what would be otherwise valuable private investment.

Takeaways by Macro Roundup® AI

  1. Larry Summers says that since 2021 he has viewed the fiscal situation with growing alarm, expecting it to manifest as substantial inflationary pressure, indigestion in Treasury markets with financial chaos, or crowding out of otherwise valuable private investment.
  2. Summers argues that implementing Simpson-Bowles would have created systematic risk of excessive deflation and disinflation, because with zero interest rates and massive QE there was no room for long rates to fall to provide an offsetting expansionary impulse.
  3. Summers stands by not being a fiscal hawk in the 2011-19 period, adding that economics, unlike physics, requires adjusting one's thinking to a world that changes profoundly, citing the run-up in debt and reasons for real interest rate increases.

Related Articles:

  • Weaker Demand for Treasuries — Recent 10-year and 30-year US Treasury auctions each cleared three basis points above the yields trading minutes beforehand, signaling demand significantly weaker than the market expected. Larger and more frequent such gaps since the Federal Reserve began raising interest rates make auction metrics an early indicator of weakening Treasury demand.
  • An Update from Our CIOs: How Durable Is the Economy? — 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.
  • The Long-Term Budget Outlook Under Alternative Scenarios for the Economy and the Budget — The Congressional Budget Office projects that if private investment were more sensitive to federal deficits, debt held by the public would exceed 250% of GDP and real national income per person would be 18% ($21,300) lower than its baseline, with the average interest rate on federal debt 2pp higher.

AI Summary. A new public database estimates US inflation separately by household income, age, race, and other characteristics, using the official consumer price index methodology. Using these distributional indices, real income for the bottom fifth of households rose 2.1% rather than 12.5%, and income inequality between the top and bottom fifths grew 30% faster.

Xavier Jaravel London School of Economics
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@XJaravel finds inflation rates differ by income quintiles. Accounting for inflation inequality reduces 1983-2019 real income growth for the bottom quintile from 12.5% to 2.1%, and from 19.1% to 12.0% for the next, with little change at the top.

Does measuring inflation by household group change inequality trends?

Core argument: Real income for the bottom U.S. income quintile rose 12.5% from 1983 to 2019 under the official CPI but only 2.1% using distributional CPIs, according to the author's estimates.

This paper develops a new public database providing estimates of inflation heterogeneity across sociodemographic groups in the United States in real time. These distributional CPIs (D-CPIs) are fully consistent with the methodology of the official CPI and are available from 2002 to the present day, by household income, age, race, and other characteristics. It is simple to keep expenditure shares fixed in 2002 and build the price index in prior years using these shares, going back to 1983. Using this longer data set, I establish that D-CPIs have important implications for the measurement of long-run trends in inequality and poverty. Figure 15 plots household real income from 1983 to 2019. Real income for the bottom quintile increased by 12.5% according to the official CPI, but by only 2.1% with D-CPI. With D-CPIs, real income inequality between the top and bottom income quintiles increased 30% faster than with the nominal CPI.

Takeaways by Macro Roundup® AI

  1. Real income for the bottom U.S. income quintile rose 12.5% from 1983 to 2019 under the official CPI but only 2.1% using distributional CPIs, according to the author's estimates.
  2. Measured with distributional CPIs, real income inequality between the top and bottom U.S. income quintiles increased 30% faster than when measured with the nominal CPI.
  3. The paper builds a public database of real-time inflation estimates by household income, age, race, and other characteristics, consistent with official CPI methodology and covering 2002 to the present, extended back to 1983 using expenditure shares fixed in 2002.

Related Articles:

  • The Unexpected Compression: Competition at Work in the Low Wage Labor Market — Labor market tightness produced an unexpected compression in the US wage distribution, with disproportionate wage growth at the bottom reducing the college wage premium and reversing nearly 40% of the rise in 90-10 wage inequality since 1980. The authors attribute this in part to increased competition for low-wage workers.
  • Inflation Usually Hits America’s Poor Hardest. Not This Time — Research on the distributional effects of US inflation finds an inverted-U pattern in which middle-income households faced the highest inflation, at roughly 15.5%, compared with about 13.5% for the lowest earners and about 14% for the wealthiest. Nominal wages rose about 4.2% a year on average, with the lowest-earning quartile seeing the largest gains at 5.3%.
  • Has Pay Kept Up With Inflation? — All four measures of typical and aggregate pay have grown since 2019 when adjusted using the personal consumption expenditures price index, but show smaller increases in three measures and a decline in one when adjusted using the consumer price index. This pattern of smaller gains under consumer price index adjustment holds across time periods.

AI Summary. China's industrial output has grown about 23% since 2019 and real export volumes about 34%, while real imports rose just 6%, with the weakness concentrated in household demand. Nominal retail spending on consumer goods and meals has grown about 3.5% a year, leaving it roughly 16% below its pre-pandemic trend.

Matt Klein The Overshoot
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Noting the growing gap between demand and supply in China, @M_C_Klein depicts Chinese producers as “increasingly reliant on dumping excess output into world markets.”

Is weak household demand, not industrial strength, driving China's trade imbalance?

Core argument: China's real export volumes are up about 34% since December 2019 while real imports have risen only 6% over the past five years, and industrial output has grown about 23%, substantially less than the pre-pandemic trend implied.

China’s industrial output has grown by about 23% since December 2019—substantially less than would have been expected based on the pre-pandemic trend—but its real export volumes are up by about 34% even as its real imports have only increased by 6% over the past five years. The weakness in Chinese demand is concentrated among households. Nominal retail spending on consumer goods and meals has grown at an average rate of just 3.5% a year since 2019. That is not just an artifact of the pandemic. Nominal spending in January-July 2024 was just 3.5% higher than in January-July 2023. The current pace of retail spending is about 16% below what might have been expected based on the pre-pandemic trend, and that gap continues to grow.

Takeaways by Macro Roundup® AI

  1. China's real export volumes are up about 34% since December 2019 while real imports have risen only 6% over the past five years, and industrial output has grown about 23%, substantially less than the pre-pandemic trend implied.
  2. Chinese nominal retail spending on consumer goods and meals has grown just 3.5% a year on average since 2019, leaving the current pace about 16% below the pre-pandemic trend, a gap that continues to grow.
  3. The weakness in Chinese demand is concentrated among households, with nominal retail spending in January–July 2024 only 3.5% above the same period in 2023.

Related Articles:

  • Why China Is Starting a New Trade War — Chinese policy advisers say China's leadership is guided by building a self-sufficient industrial supply chain that could withstand severe Western sanctions and by a philosophical objection to U.S.-style consumption as wasteful. That leaves exports as the main route to stabilizing a weakened economy and replacing jobs lost in domestic construction, shifting job losses to workers abroad.
  • Why Xi Jinping Is Afraid to Unleash China’s Consumers — China's push for self-sufficiency began in the mid-2000s, and its reliance on global supply chains for inputs into its products has declined alongside that strategy, alongside a doctrine of "comprehensive national security" spanning the economy and society. Analysts argue China now gauges national power in military capacity rather than purely economic terms, making manufacturing central.
  • Managing Economic and Financial Entanglements With China — China's surplus in manufactured goods net of commodity imports has kept growing relative to trade partners' output and relative to China's own economic output, alongside weak consumer spending and falling homebuilding. U.S. federal spending financed largely by borrowing has supported private balance sheets and demand, muting attention to that surplus.

AI Summary. The 15 largest aerospace and defence contractors are forecast to generate $52bn in free cash flow in 2026, almost double their combined 2021 level, as governments increase orders for new weapons. Five top US contractors alone are projected to produce $26bn, more than twice their 2021 total.

Sylvia Pfeifer, Patrick Mathurin and Patricia Nilsson Financial Times
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According to an FT analysis, the top 15 defense contractors’ free cash flow will have doubled between 2021 and 2026 as defense spending surges.

Are rising government weapons orders doubling defense contractors' cash flow?

Core argument: The 15 leading global defence contractors are forecast to log free cash flow of $52bn in 2026, almost double their combined cash flow at the end of 2021, according to Vertical Research Partners analysis for the Financial Times.

The world’s largest aerospace and defence companies are set to rake in record levels of cash over the next three years as they benefit from a surge in government orders for new weapons amid rising geopolitical tensions. The leading 15 defence contractors are forecast to log free cash flow of $52bn in 2026, according to analysis by Vertical Research Partners for the Financial Times — almost double their combined cash flow at the end of 2021. Five top US defence contractors are forecast to generate cash flow of $26bn by the end of 2026, more than double the amount in 2021. The figures exclude Boeing, given its recent problems and heavy weighting towards civil aerospace.

Takeaways by Macro Roundup® AI

  1. The 15 leading global defence contractors are forecast to log free cash flow of $52bn in 2026, almost double their combined cash flow at the end of 2021, according to Vertical Research Partners analysis for the Financial Times.
  2. Five top US defence contractors are forecast to generate cash flow of $26bn by the end of 2026, more than double the 2021 amount, as governments increase orders for new weapons amid rising geopolitical tensions.
  3. The Vertical Research Partners figures exclude Boeing, given its recent problems and heavy weighting towards civil aerospace.

Related Articles:

  • The US and Its Allies Face a $10 Trillion Reckoning in the Race to Rearm — World defense spending reached a record $2.2tn, and security officials say military budgets may need to reach Cold War levels of as high as 4% of economic output to deliver on NATO's plans. Bloomberg Economics calculates that US and Group of Seven allies hitting that level would mean over $10tn in additional commitments over a decade.
  • 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.
  • Global Defence Groups Hiring At Fastest Rate In Decades Amid Record Orders — A survey of 20 large and medium-sized US and European defence and aerospace companies found they plan to recruit tens of thousands of workers, with 10 of them seeking to add almost 37,000 positions, or nearly 10% of their combined workforce. Demand spans apprentices to executives, including engineers, software developers, cyber security analysts, welders, and mechanics.

AI Summary. Average home prices rose from $303,600 to $422,600 and mortgage rates from 2.8% to 6.5%, doubling the average new buyer's monthly payment to $2,671 from $1,247. Housing and rental affordability indexes have been pushed to 30-year lows, and lifetime payments on an average home rise to $961,560 from $448,920.

Michael Solon Wall Street Journal
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Noting that government deficits have exceeded total home sales by 16% for the 4th time in 5 years, Michael Solon argues chronic deficits, not constraints on building or the Fed, are ultimately responsible for the decline in housing affordability.

How have rising home prices and mortgage rates changed affordability?

Core argument: The average new home buyer's monthly mortgage payment has doubled to $2,671 from $1,247, as home prices rose from $303,600 in January 2021 to $422,600 and mortgage rates went from 2.8% to 6.5%.

A house that cost $303,600 in January 2021 now costs $422,600. Mortgage rates that were 2.8% are now 6.5%. Home prices 40% higher have combined with mortgage financing costs up 125% to double new home buyers’ average monthly mortgage payment, to $2,671 from $1,247. This has pushed the housing and rental affordability indexes to 30-year lows. In 2023, the federal deficit was $1.67 trillion, more than the $1.592 trillion value of all 4.09 million homes purchased at an average price of $389,300. Since 1989, the federal government has never borrowed annually more than the dollar total of sold homes except when housing sales and the economy both plunged in the subprime crisis and in three of the last four years. What does that mean to home buyers? The combined growth in average home prices and 30-year mortgage rates equals lifetime payments of $961,560 versus $448,920. That’s $512,640 more on the average home since the start of the Biden-Harris administration.

Takeaways by Macro Roundup® AI

  1. The average new home buyer's monthly mortgage payment has doubled to $2,671 from $1,247, as home prices rose from $303,600 in January 2021 to $422,600 and mortgage rates went from 2.8% to 6.5%.
  2. Home prices 40% higher combined with mortgage financing costs up 125% have pushed the housing and rental affordability indexes to 30-year lows.
  3. The 2023 federal deficit of $1.67 trillion exceeded the $1.592 trillion value of all 4.09 million homes purchased at an average price of $389,300, a pattern absent since 1989 except during the subprime crisis and in three of the last four years.

Related Articles:

  • The Cost of Money is Part of the Cost of Living: New Evidence on the Consumer Sentiment Anomaly — Variation in the University of Michigan consumer sentiment index that inflation and unemployment cannot explain is strongly correlated with growth in consumer borrowing costs, such as mortgage and car loan rates. The authors estimate that including interest payments and homeownership costs in the consumer price index would raise measured inflation from 3% to 9%.
  • The Price of Housing in the United States — Real housing price appreciation in the United States has varied widely across regions, with West Coast cities rising earlier while prices in other regions remained comparable in real terms to decades earlier. The authors find essentially no relationship between real price growth and zoning restrictiveness in the earliest period studied, and progressively steeper gradients in later periods.
  • Housing and the American Worker — Wages net of housing costs were once substantially higher in high-density areas than low-density areas for workers both with and without college education, but over the past half-century that urban wage premium has persisted only for college-educated workers, not for those with a high school degree or less.

AI Summary. National polling shows a gender gap of roughly 39 to 51 percentage points among voters under 30, with young men favoring the Republican candidate and young women favoring the Democrat. The Republican message resonates particularly with young men without college degrees and young men of color.

Claire Cain Miller New York Times
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When the race was Biden-Trump, women aged 18-29 favored Biden by 28pp while their male peers favored Trump by 11pp, a 39pp gender gap. That gap has risen to 51pp, with young women preferring Harris by 38pp and men favoring Trump by 13pp.

Is there a wide political gender gap among young voters?

Core argument: Men aged 18–29 favored Trump by an average of 11 points while young women favored Biden by 28 points across four New York Times/Siena College national polls from December to June, a 39-point gender gap exceeding that of any older generation.

When President Biden was still in the race, men ages 18 to 29 favored Mr. Trump by an average of 11 percentage points, while young women favored Mr. Biden by 28 points, according to four national New York Times/Siena College polls conducted from last December to June. That was a 39-point gender gap — far exceeding that of any older generation. In Times/Siena polls of six swing states this month — taken after Ms. Harris became the presumptive Democratic nominee — young men favored Mr. Trump by 13 points, while young women favored Ms. Harris by 38 points, a 51-point gap. Mr. Trump’s message has been particularly resonant for young men without college degrees and young men of color. Among men under 30 who voted for Mr. Biden in 2020, those who were sticking with him in swing-state polls in May were more likely to be white and have college degrees than those shifting to Mr. Trump.

Takeaways by Macro Roundup® AI

  1. Men aged 18–29 favored Trump by an average of 11 points while young women favored Biden by 28 points across four New York Times/Siena College national polls from December to June, a 39-point gender gap exceeding that of any older generation.
  2. In Times/Siena polls of six swing states taken after Harris became the presumptive Democratic nominee, young men favored Trump by 13 points and young women favored Harris by 38 points, a 51-point gap.
  3. Among men under 30 who voted for Biden in 2020, those sticking with him in May swing-state polls were more likely to be white and hold college degrees than those shifting to Trump, whose message has resonated with young men without degrees and young men of color.

Related Articles:

  • An Unsettled Electorate: How Uncertainty and Apathy Are Shaping the 2024 Election — A survey of young registered voters finds 54% backing Biden and 46% backing Trump, with 60% of young women supporting Biden while 52% of young men support Trump. Young men are more likely than young women to say the country has gone too far in giving women equal rights, 19% versus 9%.
  • One Cohort at a Time: A New Perspective on the Declining Gender Pay Gap — The authors find the entire decline in the gender pay gap comes from newer cohorts entering with smaller-than-average gaps and older cohorts exiting with larger ones, with entry convergence driven by younger men's positional losses in the wage distribution, especially at higher-paying firms. They find labor-market exit became the sole contributor, implying no full convergence ahead.
  • Post-Pandemic Recovery for America’s Prime Age Labor Force: A Tale of Two Sexes — Prime-age women's labor force participation climbed about 5 points above its pre-pandemic level over a decade, while prime-age men's rose barely a point, only just regaining pre-pandemic levels. Despite economic expansion and labor shortages, work rates for prime-age American men are barely as high as at the trough of the severe Reagan-era recession.

Tuesday, August 27, 2024

AI Summary. The authors estimate that forecasters' perceived Federal Reserve response to inflation strengthened after interest rates lifted off from zero, with market interest rates becoming significantly more sensitive to inflation data surprises. They argue this stronger perceived response likely aided monetary policy transmission and improved the inflation-unemployment tradeoff.

Michael Bauer, Carolin Pflueger and Adi Sunderam Federal Reserve Bank of Kansas City
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.@michaelbauer_hh @CarolinPflueger and Adi Sunderam find that after the March ‘22 “liftoff,” Fed policy became increasingly sensitive to inflation surprises and that public perception of this “regime change” improved the Fed’s inflation-output tradeoff.

Did a stronger perceived inflation response improve monetary policy transmission?

Core argument: The inflation coefficient in forward-looking policy rules estimated from surveys of macroeconomic forecasters rose significantly after the Fed's liftoff from the zero lower bound in March 2022, indicating a material shift in the perceived policy response to inflation.

We document that the Fed’s perceived monetary policy response to inflation shifted materially over the post-pandemic period. In forward-looking policy rules estimated from surveys of macroeconomic forecasters, the inflation coefficient rose significantly after liftoff from the zero lower bound in March 2022. Consistent with a shift in the perceived policy response, event studies show that interest rates became significantly more sensitive to inflation data surprises following liftoff. The increase in the perceived inflation response likely aided the transmission of monetary policy to the real economy and improved the Fed’s inflation-unemployment tradeoff. The timing of this shift and additional evidence from surveys and financial markets suggest that forecasters and markets were highly uncertain about the monetary policy rule prior to liftoff and learned about it from the Fed’s rate hikes

Takeaways by Macro Roundup® AI

  1. The inflation coefficient in forward-looking policy rules estimated from surveys of macroeconomic forecasters rose significantly after the Fed's liftoff from the zero lower bound in March 2022, indicating a material shift in the perceived policy response to inflation.
  2. Event studies show interest rates became significantly more sensitive to inflation data surprises following the March 2022 liftoff, consistent with a shift in the perceived monetary policy response.

Related Articles:

  • Is the Market Repeating the Mistake It Made in January? — Markets are again over-pricing Federal Reserve rate cuts: rising CEO confidence, 3.0% consumer price inflation, and record stock prices argue against cutting, meaning the case for cuts rests on the Federal Reserve's model of a lower long-run neutral rate rather than incoming data.
  • Monetary Policy and Financial Conditions — Surprise monetary tightening is associated with significant, persistent tightening in financial conditions: a 0.1 percentage point policy surprise raises the Goldman Sachs financial conditions index by about 0.07 index points on the announcement day, with further increases over the following two weeks. Macroeconomic news, especially inflation releases, also moves financial conditions by shifting expectations about future policy.
  • The Long-Run Risk-Free Rate Is Starting to Move Higher — The Federal Reserve has raised its estimate of the long-run federal funds rate, which suggests it sees the cost of capital as durably higher. A lasting increase in the risk-free rate carries significant implications for investors.

AI Summary. US government debt is projected to rise from 100% to 200% of GDP, with deficits above $1tn annually over the next decade and $9tn of debt maturing within 12 months. Debt servicing costs equal 12% of total government outlays, and interest payments have doubled from about $1bn per day before the pandemic to nearly $2bn per day.

Torsten Sløk, Rajvi Shah, and Shruti Galwankar Apollo
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Torsten Sløk @apolloglobal argues that investors should watch for a rise in the term premium driven by “Trillion-dollar deficits as far as the eye can see.” He notes that mean auction size will increase by 27% across the yield curve in 2024.

How much is US government debt and its servicing cost rising?

Core argument: US government debt is projected to rise from 100% to 200% of GDP, with deficits exceeding $1tn every year for the next 10 years and $9tn of debt maturing over the coming 12 months.

Government debt levels are going to rise from 100% to 200% of GDP. Deficits are projected to be more than $1 trillion every year for the next 10 years. $9 trillion of government debt will mature over the coming 12 months. Since the Fed started raising rates households, pension, and insurance have been buying more Treasuries. China has lowered its holdings of Treasuries from $1.2 trillion in 2015 to $800 billion today. The weighted average maturity of debt outstanding is currently 6 years. A rising share of debt outstanding is T-bills, currently 22%. Treasury auction sizes will in 2024 increase on average 27% across the yield curve. Debt servicing costs are currently 12% of total government outlays. Interest payments have doubled from $1 billion per day before the pandemic to almost $2 billion per day in 2023.

Takeaways by Macro Roundup® AI

  1. US government debt is projected to rise from 100% to 200% of GDP, with deficits exceeding $1tn every year for the next 10 years and $9tn of debt maturing over the coming 12 months.
  2. US interest payments have doubled from $1bn per day before the pandemic to almost $2bn per day in 2023, and debt servicing costs stand at 12% of total government outlays.
  3. Treasury auction sizes are set to increase 27% on average across the yield curve in 2024, with T-bills at 22% of debt outstanding and a weighted average maturity of 6 years.

Related Articles:

  • Larry Summers and Bob Rubin Join Our CIOs to Discuss the Surprising Economic Cycle — Adopting the Simpson-Bowles fiscal consolidation when interest rates were at zero would have risked excessive disinflation, since long rates had no room to fall to provide an offsetting expansionary impulse. After the large run-up in debt and rise in real interest rates, the developing fiscal situation risks inflationary pressure, Treasury market disruption, or crowding out of private investment.
  • Weaker Demand for Treasuries — Recent 10-year and 30-year US Treasury auctions each cleared three basis points above the yields trading minutes beforehand, signaling demand significantly weaker than the market expected. Larger and more frequent such gaps since the Federal Reserve began raising interest rates make auction metrics an early indicator of weakening Treasury demand.
  • 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 authors project a presidential campaign's policy proposals would raise spending by $2.3tn and tax revenue by $1.1tn over 10 years, widening primary deficits by $2tn once economic feedback is included. They estimate GDP falls 1.3% by 2034 and wages fall 0.8%, with top-5% households worse off.

Kody Carmody, Jonathan Huntley, Ed Murphy, et al. University of Pennsylvania
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The Penn Wharton Budget Model forecasts that the Harris campaign’s tax and spending proposals would increase primary deficits by $2T over the next decade and leave GDP 1.3% smaller by 2034 relative to the @BudgetModel baseline.

How would a presidential campaign's policy proposals affect deficits, GDP, and wages?

Core argument: The analysis projects the 2024 Harris campaign proposals would raise spending by $2.3 trillion and conventional tax revenue by $1.1 trillion over 10 years, widening primary deficits by $1.2 trillion, or $2 trillion after negative economic feedback effects.

We project that spending increases by $2.3 trillion over 10 years while conventional tax revenue increases by $1.1 trillion, for a difference in primary deficits of $1.2 trillion. Accounting for negative economic feedback effects, primary deficits increase to $2 trillion. Relative to current law, GDP falls by 1.3% by 2034 and by 4% within 30 years (year 2054). Capital investment and working hours fall, thereby reducing wages by 0.8% in 2034 and by 3.3% in 2054. Low- and middle-income households in 2026 and 2034 fare better under the campaign proposals on a conventional basis, while households in the top 5% of the income distribution fare worse. These conventional gains and losses do not include the negative impact of the additional debt burden on future generations who must finance most of the spending increases.

Takeaways by Macro Roundup® AI

  1. The analysis projects the 2024 Harris campaign proposals would raise spending by $2.3 trillion and conventional tax revenue by $1.1 trillion over 10 years, widening primary deficits by $1.2 trillion, or $2 trillion after negative economic feedback effects.
  2. Relative to current law, the projections show GDP falling 1.3% by 2034 and 4% by 2054, with lower capital investment and working hours reducing wages by 0.8% in 2034 and 3.3% in 2054.
  3. On a conventional basis, low- and middle-income households fare better in 2026 and 2034 under the Harris proposals while households in the top 5% of the income distribution fare worse, excluding the added debt burden on future generations financing most of the spending increases.

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AI Summary. The global goods imbalance, measured with customs data from major economies, is larger in dollar terms than before the pandemic, and China's share has grown, with Chinese export volumes up about 12% over twelve months versus 4% for imports. The author argues China's prioritization of goods supply over household demand should widen imbalances.

Brad Setser Council on Foreign Relations
Date Posted:

.@Brad_Setser argues that the IMF’s latest report on international trade “misses the mark,” by relying on misleading Chinese current account data and that the global goods imbalance is now larger in dollar terms than it was prior to the pandemic.

Are global goods imbalances larger now than before the pandemic?

Core argument: China's export volumes rose about 12% over the last twelve months of data while import volumes rose only 4%, and the global goods imbalance, measured with customs data from major economies plus IMF data for fuel exporters, now exceeds its pre-pandemic level in dollar terms.

The global goods imbalance (using customs data from the world’s major economies and the IMF’s data for fuel-exporting economies) is now bigger than it was prior to the pandemic in dollar terms—and China’s share of the imbalance has also gone up. China’s exports have absolutely surged this year. Export volumes are up by something like 12% in the last twelve months of data while import volumes are only up 4%. [The IMF report is] a selective read of the impact of current policies and prices.China’s decision to prioritize goods supply and “new productive forces” over household demand should widen, not reduce, the global current account imbalance. Moreover, the weakening of the yuan, yen, and won in 2023 as well as the strengthening of the dollar in 2022 and 2023 should naturally lead trade imbalances to widen, not shrink. The IMF also missed some key global trends, largely because it relied on China’s misleading current account data. China changed its data methodology radically in 2022: it stopped using its customs data to calculate its balance of payments goods surplus.

Takeaways by Macro Roundup® AI

  1. China's export volumes rose about 12% over the last twelve months of data while import volumes rose only 4%, and the global goods imbalance, measured with customs data from major economies plus IMF data for fuel exporters, now exceeds its pre-pandemic level in dollar terms.
  2. China's prioritization of goods supply and "new productive forces" over household demand, along with the weakening of the yuan, yen, and won in 2023 and dollar strength in 2022 and 2023, should widen rather than shrink global current account imbalances.
  3. The IMF's External Sector Report relied on China's misleading current account data, which followed China's radical 2022 methodology change that stopped using customs data to calculate its balance of payments goods surplus.

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  • Why China Is Starting a New Trade War — Chinese policy advisers say China's leadership is guided by building a self-sufficient industrial supply chain that could withstand severe Western sanctions and by a philosophical objection to U.S.-style consumption as wasteful. That leaves exports as the main route to stabilizing a weakened economy and replacing jobs lost in domestic construction, shifting job losses to workers abroad.
  • China’s Real Economic Crisis — China's emphasis on industrial output has produced overinvestment in sectors where domestic demand is already saturated and foreign governments are wary of Chinese supply chain dominance, with surplus steel capacity eventually exceeding the combined steel output of Germany, Japan, and the United States. Similar excesses have appeared in coal, aluminum, glass, cement, robotics, and electric-vehicle batteries.
  • Chinese Weakness Is the Real “China Shock” — China's industrial output has grown about 23% since 2019 and real export volumes about 34%, while real imports rose just 6%, with the weakness concentrated in household demand. Nominal retail spending on consumer goods and meals has grown about 3.5% a year, leaving it roughly 16% below its pre-pandemic trend.

AI Summary. Post-industrial Midwestern cities facing decades of population decline are recruiting work-authorized immigrants from larger US cities to stabilize their demographics. A non-profit effort in St Louis is on track to bring about 2,000 immigrants in a year to a city that lost roughly 4,400 residents, with a goal of 15,000 arrivals by 2030.

Eva Xiao and Taylor Nicole Rogers Financial Times
Date Posted:
Is Database:
Database

.@FT notes that “a number of places in Republican-dominated areas are eager for an influx of workers” to offset demographic decline. @BrookingsInst analysis finds that between 2010 and 2020 the US White population declined by 5.1mm.

Can recruiting immigrants reverse population decline in shrinking Midwestern cities?

Core argument: St Louis's International Institute is on track to bring about 2,000 work-authorised immigrants to the city by year-end, against an outflow of roughly 4,400 residents last year.

On a tree-lined street in St Louis, a post-industrial Midwestern city whose population has been shrinking for decades, a bold project is under way to reverse the region’s deteriorating demographics. “This may be the first year [in decades] that we’ll have net zero decline in population,” says Arrey Obenson, president of the International Institute, a non-profit that has been reaching out to recent arrivals in larger cities to draw them to the Midwest. The programme is on track to bring about 2,000 immigrants by the end of the year, to a city that saw an outflow of about 4,400 residents last year. All of the migrants are authorised to work in the US. Through the International Institute’s work in St Louis, Missouri stands out in both its method and ambition — Obenson’s vision is to bring 15,000 people to the region by 2030 with other partners.

Takeaways by Macro Roundup® AI

  1. St Louis's International Institute is on track to bring about 2,000 work-authorised immigrants to the city by year-end, against an outflow of roughly 4,400 residents last year.
  2. Arrey Obenson, president of the International Institute, says this may be the first year in decades that St Louis records net zero population decline.
  3. Obenson's vision is to bring 15,000 people to the St Louis region by 2030 with other partners, drawing recent arrivals from larger US cities.

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AI Summary. Chinese semiconductor production has reached a record high, rising nearly 29% versus the first half of the prior year, with most of the growth in technologically dated chips that remain key to large downstream industries. China still depends heavily on foreign chips but continues large investments to reduce that dependence.

Joseph Politano Apricitas Economics
Date Posted:

China’s semiconductor output reached a new high in April despite US-led export controls. The growth is driven by “technologically dated chips,” not cutting-edge technologies targeted by trade sanctions. @JosephPolitano

Is China's record chip output coming mostly from older technology?

Core argument: Chinese semiconductor production rose nearly 29% versus the first half of last year and hit a record high in April, more than fully recovering from its 2022 slump.

Chinese semiconductor production has more than completely recovered from its 2022 slump, reaching a new record high in April while rising nearly 29% compared to the first half of last year. This increased production has not largely come from moving up the value chain, since the majority of the growth in Chinese semiconductor output is in technologically dated chips that nonetheless remain key for large downstream industries, however, the country also continues to make progress in closing the technological gap with cutting-edge chipmakers. China still remains highly dependent on outside chips to meet its domestic needs, but the country continues to undertake massive investments designed to wean itself off that foreign dependence. America’s buildout, while still historically large, remains much slower by comparison.

Takeaways by Macro Roundup® AI

  1. Chinese semiconductor production rose nearly 29% versus the first half of last year and hit a record high in April, more than fully recovering from its 2022 slump.
  2. The majority of the growth in Chinese semiconductor output is in technologically dated chips that remain key for large downstream industries, while China also continues closing the gap with cutting-edge chipmakers.
  3. China remains highly dependent on foreign chips for domestic needs and continues massive investments designed to end that dependence, while America's buildout, though historically large, proceeds much more slowly.

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AI Summary. IBM is closing its China research and development operations, affecting more than 1,000 employees based in Chinese cities including Beijing and Shanghai. Employees briefed on the plans said IBM is adding engineers and researchers outside China, including in Bengaluru, India.

Raffaele Huang Wall Street Journal
Date Posted:

IBM is shutting down its China-based research and development department. The closure will affect more than 1,000 people.

Are U.S. technology companies moving research and development out of China?

Core argument: IBM is closing its China research and development department, affecting more than 1,000 people based in several Chinese cities including Beijing and Shanghai, most of them in R&D labs working on products such as enterprise software.

IBM is shutting down its China research and development department, the latest retreat from the country by top U.S. technology companies. IBM has told some employees it is adding engineers and researchers in places outside China including in Bengaluru, India, according to employees who were briefed. The closure will affect more than 1,000 people, most of them working for the company’s R&D labs and focusing on the development and testing of products such as enterprise software, the employees said. They are based in several Chinese cities, including Beijing and Shanghai.

Takeaways by Macro Roundup® AI

  1. IBM is closing its China research and development department, affecting more than 1,000 people based in several Chinese cities including Beijing and Shanghai, most of them in R&D labs working on products such as enterprise software.
  2. IBM has told some employees it is adding engineers and researchers outside China, including in Bengaluru, India, according to employees who were briefed.
  3. IBM's shutdown of its China R&D operations is the latest retreat from the country by top U.S. technology companies.

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