Edward Conard

Top Ten New York Times Bestselling Author

  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…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
  • “…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
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…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
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


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
Date Posted:

.@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
Date Posted:

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
Date Posted:

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.

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.
  • 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.
  • When Your Opponent Calls You ‘Communist,’ Maybe Don’t Propose Price Controls? — Proposed federal legislation would ban "grossly excessive" prices during any "atypical disruption" of a market without defining those terms, empowering the Federal Trade Commission to enforce the ban using whatever metric it chooses. The author argues this amounts to sweeping government price controls across every industry, replacing supply and demand with bureaucratic judgment.

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.

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.
  • 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.

Related Articles:

  • Without Immigrants, US Working-Age Population Would Shrink — All net US employment growth since early 2020 has been among foreign-born workers, and without immigration the US working-age population would be shrinking — a pattern likely to persist for the rest of the decade. The jump in immigration appears to be enabling a soft landing that most economists had thought impossible.
  • New Immigration Estimates Help Make Sense Of The Pace Of Employment — The Congressional Budget Office estimates net immigration was 3.3m in 2023, versus the 1m it had projected, implying faster population and labor force growth than currently reported. The authors estimate this raised real economic growth by about 0.1 percentage point and, by lifting both production and demand, added little price or wage pressure.
  • The Wealth of Working Nations — Because of population aging, growth in GDP per capita and GDP per working-age adult have diverged across advanced economies; from 1998 to 2019 Japan's accumulated growth per working-age adult was 31.9% versus 29.5% in the US. The authors find a standard neoclassical growth model calibrated to each country's working-age population tracks output per working-age adult in most economies.

AI Summary. 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.

Related Articles:

  • How China Could Swamp India’s Chip Ambitions — China is adding more chip-making capacity than the rest of the world combined, all in mature nodes, backed by government incentives worth more than $150bn, according to research consultancy Gavekal Dragonomics. Utilization rates for mature-node chip producers have fallen from nearly 100% to 65–75%, leaving India's $11bn semiconductor push facing an already well-supplied market.
  • The Goal for China’s Chip Giant: Cut Out the U.S. — Huawei's Mate 60 smartphone contained a system-on-chip made with SMIC technology comparable to the 7-nanometer process, despite Chinese chipmakers lacking access to ASML's most advanced lithography machines. Semiconductor engineers say the chips were likely made by exposing silicon to light multiple times, a technique that worsens yields and raises costs and becomes harder at more advanced nodes.
  • China AI & Semiconductors Rise: US Sanctions Have Failed — China's Kirin 9000S is a better-designed, leading-edge chip than the West realizes, developed without access to extreme ultraviolet lithography or cutting-edge US intellectual property, indicating existing export controls have not worked. The authors argue only decisive, full-scale measures—not half measures—could prevent China from mass-manufacturing chips needed for high-end military applications.

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.

Related Articles:

  • China Intensifies Push to ‘Delete America’ From Its Technology — A Chinese government directive requires state-owned companies in finance, energy, and other sectors to replace foreign software in their information technology systems by 2027, part of a broader push to remove U.S. technology. Hardware makers were targeted first, with Dell, IBM, and Cisco equipment gradually replaced by Chinese products.
  • Microsoft Asks Hundreds of China-Based AI Staff to Consider Relocating Amid U.S.-China Tensions — Microsoft has asked roughly 700 to 800 employees in its China-based cloud-computing and artificial intelligence operations, mostly Chinese-national engineers working on machine learning, to consider transferring to countries including the U.S., Ireland, Australia, and New Zealand amid escalating U.S.-China tensions.
  • China Blocks Use of Intel and AMD Chips in Government Computers — China has issued government procurement guidelines that phase out US microprocessors from Intel and AMD in state PCs and servers and sideline Microsoft's Windows and foreign database software in favor of domestic alternatives. China accounted for 27% of Intel's $54bn in sales and 15% of AMD's $23bn.

Wednesday, August 28, 2024

AI Summary. The authors estimate that Federal Reserve purchases of mortgage-backed securities narrowed the mortgage spread by 38 basis points, out of a 113 basis point decline. Without both Federal Reserve and bank purchases, they estimate the spread would have fallen just 32 basis points and stayed relatively flat.

Itamar Drechsler, Alexi Savov, Philipp Schnabl et al. Federal Reserve Bank of Kansas City
Date Posted:

The combined purchases of MBS by banks and the Fed lowered the mortgage spread by 81 bps from 2019 to 2024, about 1/2 the 2010-19 average spread. Banks were responsible for 43 bps and the Fed for 38 bps. @idrechs @AlexiSavov @schnabl_econ @DominikSupera

How much did central bank mortgage bond purchases narrow mortgage spreads?

Core argument: The actual mortgage spread fell 113 bps from early 2020 to 2021, and the authors estimate that without Fed MBS purchases it would have declined only 75 bps, implying Fed purchases compressed the spread by 38 bps.

Banks and the Fed are the largest providers of mortgage credit in the economy. The Fed’s supply of mortgage credit consists of buying or selling mortgage-backed securities (MBS) under its quantitative easing and tightening (QE and QT) programs. Banks’ supply of mortgage credit is driven by the deposits channel of monetary policy: banks increase mortgage credit when the Fed lowers interest rates and contract it when the Fed raises them. Panel B of Figure 23 plots the actual mortgage spread against counterfactual mortgage spreads without Fed purchases and without Fed and bank purchases. We obtain the counterfactual spreads by adding the estimated impact [which depends on the sum of instrumental variables estimates of the two demand elasticities] back into the actual spread. The actual mortgage spread drops sharply by 113 bps from early 2020 to 2021. We estimate that if the Fed had not purchased MBS, the spread would have declined by 75 bps over this period. This implies that Fed purchases contracted the mortgage spread by 38 bps. If we also take away bank MBS purchases, the mortgage spread declines by just 32 bps and remains relatively flat during the period.

Takeaways by Macro Roundup® AI

  1. The actual mortgage spread fell 113 bps from early 2020 to 2021, and the authors estimate that without Fed MBS purchases it would have declined only 75 bps, implying Fed purchases compressed the spread by 38 bps.
  2. Removing both Fed and bank MBS purchases, the authors estimate the mortgage spread would have declined just 32 bps and remained relatively flat over the period.
  3. Banks and the Fed are the largest providers of mortgage credit, with the Fed acting through QE and QT purchases and sales of MBS and banks expanding mortgage credit when the Fed lowers rates and contracting it when rates rise.

Related Articles:

  • Can Mortgage Rates Still Fall to 6%? — Mortgage rates equal the US Treasury yield plus a spread, and a lower term premium and lower lender fees brought them from 7.8% to 6.75%, with the Federal Reserve, inflation, and mortgage bond spreads contributing little. The author argues prepayment risk is overpriced by 0.4% and its compression could push rates to about 6%.
  • The Secular Decline of Bank Balance Sheet Lending — Traditional bank balance sheet lending has declined as a share of credit intermediation, with credit increasingly channeled through arms-length transactions such as securitization. A structural model attributes falling lending shares to lower securitization costs, savers' behavior driving bank balance sheet size, and implicit bank costs and subsidies shaping balance sheet composition.

AI Summary. California recorded over 300,000 fire episodes between 1987 and 2022, with the size, intensity, and estimated costs of these episodes increasing in recent years. Proximity to past wildfires has been associated with larger adverse effects on property values in recent years, and the authors find insurance does little to offset those effects.

Leila Bengali, Fernanda Nechio and Stephanie Stewart Federal Reserve Bank of San Francisco
Date Posted:

Wildfire risk has started to impact property values in at-risk areas of CA. Being farther from past fires boosts home values ~ 2%, and insurance does little to offset these adverse effects on property values.

Do wildfires lower nearby property values despite insurance coverage?

Core argument: CAL FIRE data record over 300,000 fire episodes in California between 1987 and 2022, with the size, intensity, and estimated costs of these episodes increasing in recent years.

Historical data from California’s state fire agency, CAL FIRE, recorded over 300,000 fire episodes in the state between 1987 and 2022. The size and intensity of these episodes have increased in recent years, along with their estimated costs. Property values have been more adversely impacted in recent years by being close to past wildfires than was the case previously. Moreover, while having insurance can help mitigate some of the costs associated with fire episodes, our results suggest that insurance does little to improve the adverse effects on property values.

Takeaways by Macro Roundup® AI

  1. CAL FIRE data record over 300,000 fire episodes in California between 1987 and 2022, with the size, intensity, and estimated costs of these episodes increasing in recent years.
  2. Proximity to past wildfires has weighed more heavily on California property values in recent years than it did previously, according to the authors' analysis.
  3. The authors' results suggest that insurance, while mitigating some costs associated with fire episodes, does little to improve the adverse effects on property values.

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.
  • Growing Costs of Natural Disasters are Stressing Property Insurance Markets — 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.
  • As Insurers Around the U.S. Bleed Cash From Climate Shocks, Homeowners Lose — Insurers lost money on homeowners coverage in 18 states, up from 12 states five years earlier and eight a decade earlier, according to a New York Times analysis of financial data. In response, insurers are raising premiums by as much as 50% or more, cutting coverage, or exiting entire states.

AI Summary. Businesses have at times moderated activity in anticipation of large policy changes and are likely to do so ahead of a national election. Because sentiment is politicized, roughly half the country will be pessimistic regardless of who wins, suggesting a soft patch in economic data that weighs on the market.

Joseph Wang Fed Guy Blog
Date Posted:

.@FedGuy12 notes a survey showing that 36% of businesses plan to postpone or scale down investments ahead of the US Presidential election, and anticipates a potential decline in consumer sentiment as half the country will be upset about the outcome.

Will election uncertainty and politicized sentiment produce a soft economic patch?

Core argument: Businesses have at times moderated activity ahead of large policy changes and will likely do so again heading into the November election, suggesting a soft patch of economic data at least through year-end.

Businesses have at times moderated their activity in anticipation of large policy changes and will likely act similarly heading into the November election. In any case, the politicization of sentiment implies that around half the country will be pessimistic coming out of the election regardless of who wins. This suggests a soft patch of economic data at least through the end of the year and that will weigh on the market.

Takeaways by Macro Roundup® AI

  1. Businesses have at times moderated activity ahead of large policy changes and will likely do so again heading into the November election, suggesting a soft patch of economic data at least through year-end.
  2. The politicization of sentiment implies roughly half the country will be pessimistic after the November election regardless of which side wins.
  3. A soft patch of economic data extending at least through the end of the year would weigh on the market.

Related Articles:

  • Why Are Americans So Displeased With The Economy? — Out-of-sample models estimated by the authors find that the tone of economic news has been more negative than economic fundamentals would predict, a gap that began before the pandemic. The negativity gap in the most recent three-year period is about one-third larger than in the prior three years.
  • It’s No Longer The Economy, Stupid — The long-standing link between economic sentiment and government popularity has disappeared in the US while remaining strong in France and Germany and, to a lesser degree, the UK. The author attributes this decoupling to hyper-partisanship, arguing that American voters' political allegiances now shape their economic perceptions rather than the reverse.
  • Asymmetric Amplification and the Consumer Sentiment Gap — Consumer sentiment surveys show Republican respondents' views swing about ±15 index points relative to predicted levels depending on which party holds the presidency, while Democrats' views swing only about ±6 points. The authors estimate that adjusting for this asymmetric amplification shrinks the gap between observed and predicted consumer sentiment by 30%.

AI Summary. Measured by the Herfindahl-Hirschman index, the sum of squared market shares, US import sourcing is the most concentrated among the United States, European Union, and China, though US diversification has increased. China's import sourcing is the most diverse, with only the European Union supplying more than 10% of its imports.

Mary Lovely and Jing Yan Peterson Institute for International Economics
Date Posted:

Between 2018 and 2023, the US has reduced its import dependence on China (as measured by the HHI,) while the EU has increased dependence.

How concentrated are US import sources compared with Europe and China?

Core argument: The US has the highest Herfindahl-Hirschman index for total imports among the three big regions in every year examined, though its sourcing has become more diversified since 2018.

The Herfindahl-Hirschman index (HHI) is calculated as the sum of squared market shares. The higher the HHI, the greater the concentration of import sources; a lower HHI indicates more variety. The US index for total imports is the highest of the three regions for every year examined. Only four trading partners each supply the United States with more than 10% of its total imports—the European Union, Canada, Mexico, and China—but diversification of its sourcing has increased since 2018. China’s import sourcing is the most diverse of the three big regions; its concentration index is substantially lower than those of the other two, figure 1 shows. Only the European Union provides more than 10% of the total value of China’s imports.

Takeaways by Macro Roundup® AI

  1. The US has the highest Herfindahl-Hirschman index for total imports among the three big regions in every year examined, though its sourcing has become more diversified since 2018.
  2. Four trading partners each supply more than 10% of total US imports — the European Union, Canada, Mexico, and China — while only the European Union supplies more than 10% of China's total import value.
  3. China's import sourcing is the most diverse of the three big regions, with a concentration index substantially lower than those of the US and the European Union.

Related Articles:

  • How Trump and Biden Have Failed To Cut Ties With China — Mexico has overtaken China as America's largest source of goods imports, and China's share of US imports has fallen by a third to about 14% since 2017 by American figures. But Chinese data and a 32% rise in China's intermediate-goods exports suggest countries like India and Vietnam repackage Chinese inputs for America.
  • The Dangerous Myth of Deglobalization — China's manufacturing surplus rose by about 1 percentage point of global GDP over a four-year span and is far larger than those of Germany and Japan. China's $800bn goods trade surplus depends on the large U.S. trade deficit, which is still indirectly financed by China through the large offshore dollar stockpiles held by Chinese exporters.
  • 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. China's trade surplus reached $852bn over a year, and Chinese goods traders have curbed sales of their foreign-currency proceeds. Federal Reserve rate normalisation could prompt a pickup in dollar sales estimated at $15–22bn a month, though a weak renminbi outlook and official resistance could limit the increase.

Martin Lynge Rasmussen Money: Inside and Out
Date Posted:

.@martin_lynge notes that Chinese goods traders have been accumulating FX, but argues that as the Fed starts to cut rates “FX sales would increase $15-22B/month compared to the pace over the past 3-12 months” of $8-15B/month.

Will falling US rates push Chinese exporters to sell dollar holdings?

Core argument: China's trade balance reached $852bn in the year to July, reflecting weak domestic demand and Chinese manufacturers' growing global market share.

China’s trade balance reached $852bn in the year to July reflecting weak domestic demand and Chinese manufacturers growing global market share. What gets less attention is the activities of Chinese goods traders who have curbed FX sales from this surplus in recent months—something that could change quickly in coming quarters as the US policy cycle turns. Fed normalisation could allow a large pickup in dollar sales by Chinese goods traders, perhaps to the tune of $15-22bn per month in the coming quarters. However, even if Dollar weakness materializes, multiple factors could lead to a smaller-than-usual increase in FX sales. More specifically, goods exporters could remain downbeat on the renminbi outlook, authorities might push back to maintain competitiveness and positive US-China rate spreads could make exporters prefer to park excess cash in FX rather than RMB.

Takeaways by Macro Roundup® AI

  1. China's trade balance reached $852bn in the year to July, reflecting weak domestic demand and Chinese manufacturers' growing global market share.
  2. Chinese goods traders have curbed FX sales out of the trade surplus in recent months, and Fed normalisation could allow dollar sales to pick up by perhaps $15–22bn per month in coming quarters.
  3. Any increase in FX sales could be smaller than usual if exporters stay downbeat on the renminbi, authorities push back to maintain competitiveness, or positive US–China rate spreads lead exporters to park excess cash in FX rather than renminbi.

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  • How to Manage the Dollar (Part II) — 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.
  • There’s No Place Like Home — 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.