Edward Conard

Top Ten New York Times Bestselling Author

  • “…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
  • “Unintended Consequences provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.” - Nouriel Roubini, New York University; Chairman, Roubini Global Economics
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
  • “…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
  • “Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
  • “Unintended Consequences is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.” - Tyler Cowen, Professor, George Mason University
  • “There are an amazing number of good ideas and interesting points made in Unintended Consequences. The thinking underlying it, and the obvious depth of understanding of the author, are very impressive.” - Steven Levitt, coauthor of Freakonomics; 2004 John Bates Clark Medal
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Friday, November 8, 2024

AI Summary. The authors find that after banking and debt crises, both national saving and investment decline, but investment falls more and does not return to its pre-crisis share within three years, improving the current account balance. They suggest persistent credit constraints may explain the weak post-crisis investment.

Menzie Chinn and Hiro Ito National Bureau of Economic Research
Date Posted:

@menzie_chinn and @hiroitopdx find that banking crises, currency crises and debt crises all move the current accounts of emerging market economies toward surplus, typically due to reductions in investment.

How do banking and debt crises affect saving, investment, and current accounts?

Core argument: Following a banking crisis, both national saving and investment fall, but investment keeps declining through one year after the crisis while saving recovers moderately, producing an improvement in the current account balance.

Figure 10 shows that when a banking crisis occurs, both national saving and investment fall, though while investment continues to fall until t0+1 [one year after the crisis], saving recovers moderately in t0+1, all of which lead to an improvement of the CAB. Although it recovers from t0+2 on, the investment ratio does not return to the pre-crisis level, hence contributing to the improving CAB. The underperformance of investment in the post-banking crisis period may be due to persistent credit constraints in the post-crisis period, such as that in many EMEs that went through banking crises during the Asian Financial Crisis. Like in the case of currency crises, the investment ratio falls significantly during and in the immediate aftermath of [a debt] crisis. The investment level starts recovering in t0+2, [but it] does not return to the pre-crisis level by t0+3. The CAB improves rapidly after the crisis because the decline in investment levels was greater than that of national saving

Takeaways by Macro Roundup® AI

  1. Following a banking crisis, both national saving and investment fall, but investment keeps declining through one year after the crisis while saving recovers moderately, producing an improvement in the current account balance.
  2. The investment ratio recovers from two years after a banking crisis but does not return to its pre-crisis level, contributing to the improving current account balance, a shortfall that may reflect persistent credit constraints such as those in emerging market economies after the Asian Financial Crisis.
  3. After a debt crisis, the investment ratio falls significantly and does not return to its pre-crisis level by three years out, and the current account balance improves rapidly because the decline in investment was greater than that in national saving.

Related Articles:

  • Corporate Debt, Boom-Bust Cycles, and Financial Crises — Using a dataset on sectoral credit exposure for 115 economies, the authors find corporate debt accounts for two-thirds of credit expansion before financial crises and three-quarters of nonperforming loans during busts, and that corporate debt expansions predict crises similarly to household debt. Recoveries are slower after corporate debt booms.
  • Credit Allocation and Macroeconomic Fluctuations — Credit expansions disproportionately channel credit to non-tradable sector firms and households, and the authors find that the sectoral allocation of credit predicts future GDP paths and the likelihood of systemic banking crises. Credit growth to non-tradable industries predicts boom-bust output patterns and elevated financial fragility, while credit to tradable industries is associated with higher future productivity growth.
  • The Puzzling Persistence of Financial Crisis — Financial crises are costly, with average declines of 5.5% of real GDP and median fiscal costs of 16% of real GDP to resolve distressed banks. The authors identify four categories of causal factors: politically motivated risk subsidies such as government support for housing credit, shifts in investor risk preferences, investor learning, and fraud.

AI Summary. Credit spreads across US investment-grade and high-yield corporates, emerging-market corporates, and collateralized loan obligation tranches trade at or near their tightest levels since Covid, driven by robust growth and strong demand for fixed income. The authors expect solid fundamentals and high yields to keep attracting inflows, leaving limited room for further compression.

Torsten Sløk, Shobhit Gupta, Rajvi Shah, and Shruti Galwankar Apollo
Date Posted:

Torsten Sløk notes that 81% of bonds globally currently trade at less than a 5% yield. US investment grade corporate bonds trade around 5.2% and high-yield around 7.1%.

Do tight credit spreads leave room for further compression?

Core argument: US investment-grade and high-yield corporates, emerging-market corporates, and CLO A–BBB tranches are trading at or near post-Covid tight spread levels.

Credit spreads have continued to rally with many segments of the market, including US IG and HY corporates, EM corporates, and CLO A-BBB tranches, trading at or near post-Covid tights. The rally in credit spreads has been driven by a combination of robust economic growth, strong fixed income demand technicals, and, in the past few days, the election outcome. We expect credit fundamentals to remain robust. This combined with elevated all-in yields and steep yield curves should continue to attract inflows into credit, which should support valuations even though room for further compression is getting more limited. Given tight valuations and beta compression, we believe the risk-reward to extend spread duration or go down the rating spectrum is not compelling. We see better value in private credit with the private-public basis still elevated.

Takeaways by Macro Roundup® AI

  1. US investment-grade and high-yield corporates, emerging-market corporates, and CLO A–BBB tranches are trading at or near post-Covid tight spread levels.
  2. The credit spread rally is attributed to robust economic growth, strong fixed income demand technicals, and the election outcome, with credit fundamentals expected to remain robust.
  3. Tight valuations and beta compression make the risk-reward of extending spread duration or moving down the rating spectrum uncompelling, with better value seen in private credit, where the private-public basis remains elevated.

Related Articles:

  • What Trump’s Win Means for the Economy — Tariffs during Trump's first term had no noticeable effect on inflation because they were relatively modest and coincided with subdued global demand, weak investment, and slack labor markets. Proposed tariffs of at least 60% on China and 10%–20% elsewhere would lift US tariff rates to their highest since the 1930s amid brisk demand, making them a greater inflation risk.
  • US Fiscal Outlook Starting to Play a Role for Long-Term Interest Rates — Long-term US interest rates are rising even as markets price in five Federal Reserve rate cuts over the coming 12 months and oil prices fall, disconnecting long rates from those drivers. This pattern suggests long rates are being pushed up by emerging concerns about US fiscal sustainability.
  • C’est la vie: Bond Vigilantes Are Back — France's government bond yield spread widened by 0.29 percentage points, more than Italy's 0.22 and Spain's 0.2, which the authors attribute to political uncertainty created by the calling of a snap national election. The French spread has remained elevated, while the Italian and Spanish spreads have come down.

AI Summary. The author argues the inflation of 2021–2022 could have been avoided only at the cost of a global depression, and that historical elections show voters do not reward incumbents who preside over disinflationary downturns. Many in the U.S. may nonetheless come to treat the episode as a cautionary tale about responding too aggressively to economic downturns.

Matt Klein The Overshoot
Date Posted:

.@M_C_Klein argues that Trump’s win might mean lower long-term interest rates, as it means an end to the Biden administration’s bias towards full employment and “a conscious choice to support unions over employers (and consumers).”

Could avoiding recent inflation have required a global depression?

Core argument: The author argues the inflation of 2021–2022 was avoidable only through policy choices that would have produced a global depression, and suspects most people, given those two options, would choose what actually occurred.

Yes, the inflation of 2021-2022 could have been avoided through different policy choices, but that would have come at the cost of a global depression. I suspect that if people understood that those were the only two options, most would choose to endure what actually happened. The U.S. elections of 1874, 1932, and 2010 do not suggest that incumbents are rewarded for presiding over disinflationary downturns. Nor, for that matter, does the experience in the rest of the world in the Great Depression. Nevertheless, it is possible that many, at least in the U.S., will look back on the past few years as a cautionary tale about the dangers of being “too aggressive” in responding to economic downturns. Inflation may have been global, but it probably did not help to have been associated with policies that opponents could point to (fairly or not) as having made things worse.

Takeaways by Macro Roundup® AI

  1. The author argues the inflation of 2021–2022 was avoidable only through policy choices that would have produced a global depression, and suspects most people, given those two options, would choose what actually occurred.
  2. The U.S. elections of 1874, 1932, and 2010, along with the rest of the world's experience in the Great Depression, do not suggest incumbents are rewarded for presiding over disinflationary downturns.
  3. The author suggests many in the U.S. may treat the past few years as a cautionary tale about being "too aggressive" in responding to downturns, since inflation was global but associated with policies opponents could point to as having made things worse.

Related Articles:

  • Why is the U.S. GDP Recovering Faster Than Other Advanced Economies? — The U.S. output advantage over other advanced economies is attributed mainly to faster labor productivity growth and secondarily to hours worked per employee. Rigid foreign labor markets and job-retention policies kept workers attached to firms producing below capacity, while the U.S. saw about 3x more sectoral worker reallocation and a surge in new firm formation.
  • Bidenomics and Its Contradictions — Bidenomics rests on the claims that growth's quality matters more than its quantity, that industrial policy should replace laissez-faire, and that trade policy should favor workers over consumers. Defining market failure that broadly—covering regional, racial and gender inequities, rural internet access and child care costs—leaves no limiting principle on government intervention.
  • Trends in Real Wage Growth among Union, Nonunion Workers — Wage changes for union and nonunion workers tend to move similarly over time, with union workers' nominal wage changes less volatile, and since 2002 both groups' wages increased at the same rate. When consumer prices grew faster than wages, real wage growth turned negative despite a strong labor market, then turned positive as inflation fell.

AI Summary. China announced a Rmb10tn ($1.4tn) fiscal package to bail out local governments and support its faltering economy, authorising them to issue bonds over three to five years to restructure most of an estimated Rmb14tn in "hidden" debts. Those debts are largely held by off-balance-sheet financing vehicles used to invest in infrastructure and property.

Joe Leahy, Wenjie Ding, Cheng Leng and Arjun Neil Alim Financial Times
Date Posted:

China is launching a $1.4T fiscal package, including authorizing local governments to issue bonds over three to five years to restructure most of an estimated $2T in off balance sheet finance vehicles.

Will a $1.4tn bond program resolve China's hidden local government debts?

Core argument: China announced a Rmb10tn ($1.4tn) fiscal package to bail out local governments and shore up its faltering economy as it braces for increased trade tensions with the US under Donald Trump.

China has announced a Rmb10tn ($1.4tn) fiscal package to bail out local governments and help shore up its faltering economy, as it braces for increased trade tensions with the US under Donald Trump. As part of the bailout, Beijing would authorise local governments to issue bonds over three to five years to restructure most of an estimated Rmb14tn in “hidden” or “implicit” debts, finance minister Lan Fo’an said in a rare press briefing at the Great Hall of the People in Beijing. These debts are mostly held by thousands of off-balance sheet finance vehicles that local governments used to invest in infrastructure and property-related sectors. Many of these bets went sour when China’s real estate market entered a deep slowdown three years ago, sinking local government finances and undermining the broader economy.

Takeaways by Macro Roundup® AI

  1. China announced a Rmb10tn ($1.4tn) fiscal package to bail out local governments and shore up its faltering economy as it braces for increased trade tensions with the US under Donald Trump.
  2. Finance minister Lan Fo'an said Beijing would authorise local governments to issue bonds over three to five years to restructure most of an estimated Rmb14tn in "hidden" or "implicit" debts.
  3. The implicit debts are mostly held by thousands of off-balance-sheet financing vehicles that local governments used to invest in infrastructure and property-related sectors, with many bets souring when China's real estate market entered a deep slowdown.

Related Articles:

  • China Economy Memo: Tempest in a Teapot or Crisis A-Brewing? — The authors argue China is heading into a protracted debt crisis in which about 40% of local government financing vehicles default, hitting regional banks most exposed to such lending. They estimate total losses for these creditors at roughly $5tn, or about 30% of China's GDP.
  • Can China’s Long-Term Growth Rate Exceed 2–3 Percent? — China invests roughly 42–44% of its GDP, while more mature, capital-intensive economies typically invest about 15–20%. Modeling a ten-year path that lowers China's investment share to 30% of GDP, the author argues the resulting growth rate depends mainly on how fast consumption grows.
  • The Rise and Fall of LGFVs — China has nearly 12,000 local government financing vehicles whose aggregated assets and liabilities equal roughly 120% and 75% of national GDP, and whose earnings before interest, taxes, and depreciation do not cover their interest payments. Their average borrowing cost of about 5% far exceeds their 1% return on assets, and 80–90% of their annual spending is funded by new debt.

AI Summary. China reported third-quarter GDP growth of 4.6%, below its official 5% annual target, amid unstable property prices and local governments unable to pay bills. Economists say structural challenges including high government debt, demographic decline, youth unemployment, and trade tensions risk a deflationary spiral like Japan's after its 1990s property bust.

Joe Leahy, Edward White and Cheng Leng Financial Times
Date Posted:

With falling property prices and many local governments unable to pay their bills, Beijing was in danger of missing its official 5% 2024 GDP growth target, prompting Xi to support fiscal stimulus for fear of a deflationary spiral.

Why did China shift toward fiscal stimulus as growth slowed?

Core argument: China reported third-quarter GDP growth of 4.6%, its lowest in 18 months, leaving Beijing in danger of missing its official 5% growth target for the year as property prices fail to stabilise and many local governments cannot pay their bills.

With property prices failing to stabilise and many local governments unable to pay their bills, Beijing was in danger of missing its official GDP growth target this year of 5%. On Friday, it reported GDP growth of 4.6% for the third quarter — the lowest growth in 18 months. Given the scale of China’s underlying structural challenges — which range from high government debt, demographic decline and youth unemployment to growing tension with trade partners — economists say Beijing has its work cut out. The stakes for Xi and China could hardly be higher. Failure could throw China into a deflationary spiral similar to that of Japan after the bursting of its real estate bubble in the 1990s, from which it has taken decades to recover. This would not only risk Xi’s strategic goal of doubling per capita GDP by 2035 and, by implication, overtaking China’s geopolitical rival, the US, as the world’s biggest economy. It could also spark discontent among a population that in recent decades has become accustomed to constant improvements in living standards.

Takeaways by Macro Roundup® AI

  1. China reported third-quarter GDP growth of 4.6%, its lowest in 18 months, leaving Beijing in danger of missing its official 5% growth target for the year as property prices fail to stabilise and many local governments cannot pay their bills.
  2. Economists say Beijing's structural challenges span high government debt, demographic decline, youth unemployment and growing tension with trade partners.
  3. Failure risks a deflationary spiral like Japan's after its 1990s real estate bubble burst, jeopardising Xi Jinping's goal of doubling per capita GDP by 2035 and, by implication, overtaking the US as the world's biggest economy.

Related Articles:

  • Assessing China’s Efforts to Increase Self-Reliance — China's import growth has been notably weaker than export growth over the past five years, and the correlation between GDP growth and import growth has run below that between GDP growth and export growth for about a decade, which could be an early sign of increasing self-reliance. China is reducing reliance on imported inputs while maintaining reliance on foreign demand.
  • 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.
  • Communist Party Priorities Complicate Plans to Revive China’s Economy — China's leadership objects to Western-style consumption-driven growth, viewing it as wasteful and at odds with the goal of making China a world-leading industrial and technological power, according to people familiar with decision-making in Beijing. Chinese officials also emphasized avoiding a current-account deficit, which would signal greater dependence on the outside world.

Monday, November 11, 2024

AI Summary. The authors argue that a burst of inflation erodes real wages when wages are sticky and job search is costly, prompting workers to switch jobs and driving up aggregate job vacancies without any additional labor market shock. This can create the appearance of a tight labor market, and four historical vacancy-to-unemployment spikes coincided with inflation persistently above 6%.

Hassan Afrouzi, Andres Blanco, Andres Drenik and Erik Hurst University of Texas at Austin Working Paper
Date Posted:

.@DrenikAndres et al argue that surging supply-induced inflation in 2021-22 reduced workers’ real wages and incentivized job-to-job transitions that led to a rise in aggregate vacancies, “even when labor markets are not particularly ‘hot.’”

Does inflation make the labor market look tighter than it is?

Core argument: The authors argue that a burst of inflation reduces real wages on impact and, with costly worker search effort and sticky wages, incentivizes job-to-job transitions that raise aggregate vacancies without any additional labor market shocks.

We illustrate how inflation can cause a large rise in vacancies through increased job-to-job transitions—creating the appearance of a tight labor market without any additional labor market shocks. A burst of inflation, all else equal, reduces real wages on impact. Costly worker search effort and sticky wages imply that a burst of inflation reduces workers’ real wages and incentivizes job-to-job transitions that lead to a rise in aggregate vacancies. Figure 21 shows 9 periods when the vacancy-to-unemployment rate spiked sharply relative to the average. Four of the peaks—marked with a red circle— occurred during periods when the inflation rate was persistently above 6% and the unemployment rate was either high by historical standards (in the mid and late 1970s) or was relatively constant. Notice that the four periods denoted with the red circles are also periods where it has been shown that aggregate supply shocks were important drivers of the observed inflation.

Takeaways by Macro Roundup® AI

  1. The authors argue that a burst of inflation reduces real wages on impact and, with costly worker search effort and sticky wages, incentivizes job-to-job transitions that raise aggregate vacancies without any additional labor market shocks.
  2. Of 9 periods identified in which the vacancy-to-unemployment rate spiked sharply relative to its average, four occurred when inflation was persistently above 6% and unemployment was either high by historical standards (mid and late 1970s) or relatively constant.
  3. The four vacancy-to-unemployment spikes coinciding with inflation persistently above 6% are also periods in which aggregate supply shocks have been shown to be important drivers of the observed inflation.

Related Articles:

  • Revisiting the Phillips and Beveridge Curves: Insights from the 2020s Inflation Surge — The authors identify a "Beveridge threshold" level of labor market tightness—the ratio of job vacancies to unemployed workers—below which the relationship between inflation and economic activity steepens and labor market adjustment occurs mainly through vacancies rather than unemployment. They estimate that during the post-pandemic inflation surge the unemployment rate fell as much as 1.08 percentage points below this threshold.
  • Real Wage Growth: The Post-Pandemic Labor Market and Beyond — Real wage gains for non-managerial workers, roughly 80% of the private workforce, exceeded both those of all workers and projections based on pre-pandemic trends, which is attributed to labor market tightness and strong demand in low-wage sectors. This compression of wage inequality has persisted even as the labor market cooled and unemployment rose above 4%.
  • 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. Europe paid 166.3% more for its primary energy mix than it would have using conventional sources, equal to 5.6% of GDP rather than 3.37%, which the author argues largely explains minimal European growth. European Union primary energy consumption has fallen 17.47% from its peak, with renewables at 16.6% of the mix and renewable electricity priced at 5x conventional.

Andrew Lees Macro Strategy Partnership
Date Posted:
Is Database:
Database
Is Important:
Important

.@MacrostrategyP argues that the EU has “traded growth for ideology” with “renewable electricity price 5x that of conventional electricity.” In March 2024 German businesses’ electricity prices were 1.7x prices in the US and 2.8x in China.

How much does Europe's costly energy mix explain its weak growth?

Core argument: Europe paid 166.3% more for its primary energy mix last year than it would have using conventional sources, equal to 5.6% of GDP rather than 3.37%, which the author argues largely explains minimal European GDP growth.

All other things being equal, Europe paid 166.3% more for its primary energy mix last year than had it used conventional energy sources. It paid 2.23 percentage points more of GDP – (5.6% rather 3.37%) - on primary energy than had its fuel mix not included renewables, which largely explains why European GDP growth has been minimal. As renewable electricity grows as a percentage of the mix, its high cost has reduced energy consumption. Since peaking in 2006, primary energy consumption across the European Union has fallen by a massive 17.47%. Renewable energy has risen to 16.6% of the primary energy mix, but in doing so, with renewable electricity price 5 times that of conventional electricity, it has reduced by a similar amount the overall energy the economy has been able to afford. Whilst GDP has held up, the economy has reshaped dramatically, with for example French and German industrial production down around 14% from their respective highs, and Italian down 25%. Beyond the reshaping of the economy to less energy intensive industries, it is also likely that the decline in primary energy use has been offset by the consumption of the internal energy gradient, and the resultant aging and loss of capital stock.

Takeaways by Macro Roundup® AI

  1. Europe paid 166.3% more for its primary energy mix last year than it would have using conventional sources, equal to 5.6% of GDP rather than 3.37%, which the author argues largely explains minimal European GDP growth.
  2. EU primary energy consumption has fallen 17.47% since peaking in 2006, as renewables rose to 16.6% of the primary energy mix at renewable electricity prices five times those of conventional electricity.
  3. French and German industrial production are down around 14% from their highs and Italian production down 25%, which the author links to a reshaping of the economy toward less energy-intensive industries.

Related Articles:

  • The Future of European Competitiveness – A Competitiveness Strategy for Europe — A European Union competitiveness report attributes the EU's labour productivity growth gap with the US largely to weaker activity in information and communications technology and large-scale digital services; excluding main ICT sectors, EU productivity was broadly at par with the US from 2000-2019. It estimates Europe's investment share must rise about 5 percentage points of GDP.
  • Draghi is Trying To Save Europe From Itself — Real disposable income per head has grown almost twice as much in the US as in the European Union since 2000, with the EU trailing the US and China in the digital revolution and only four of the world's top 50 tech companies European. If average productivity growth since 2015 persists, EU output would merely stay constant until 2050.
  • Industry is Really Worried About IRA — The president of Germany's industry federation says more than a fifth of medium-sized German companies polled were considering leaving the country. With end-user energy prices not expected to return sustainably to pre-war levels, the authors anticipate not large-scale deindustrialization but a shift away from energy-intensive production, accompanied by friction and possibly lower growth.

AI Summary. China's goods trade surplus reached a record $785bn in the first 10 months of a year, up almost 16% from the prior year, and Bloomberg calculates it would approach $1tn if it keeps widening at the same pace. Foreign direct investment liabilities fell over nine months, which would mark the first annual net outflow since 1990 if sustained.

Bloomberg Staff Bloomberg
Date Posted:
Is Database:
Database

According to a Bloomberg analysis, China’s trade surplus is set to reach almost $1T this year, with the goods surplus rising 16% y/y. FDI may be on track for the first annual net outflow since 1990.

Is China's trade surplus approaching $1 trillion as foreign investment exits?

Core argument: China's goods trade surplus reached $785 billion in the first 10 months of the year, the highest on record for that period and up almost 16% from 2023.

The difference between Chinese exports and imports is set to reach almost $1 trillion if it continues to widen at the same pace as it has in the year to date, according to Bloomberg calculations. The goods trade surplus soared to $785 billion in the first 10 months, according to data released last week, the highest on record for that period and an increase of almost 16% from 2023. Foreign companies are also pulling money from China, with foreign direct investment liabilities dropping in the first nine months of the year, according to data released on Friday. Should the decline continue for the rest of the year, it would be the first annual net outflow in FDI since at least 1990, when comparable data begins.

Takeaways by Macro Roundup® AI

  1. China's goods trade surplus reached $785 billion in the first 10 months of the year, the highest on record for that period and up almost 16% from 2023.
  2. Bloomberg calculations indicate China's trade surplus would approach $1 trillion if the gap between exports and imports keeps widening at its year-to-date pace.
  3. China's foreign direct investment liabilities fell in the first nine months of the year, and a continued decline through year-end would mark the first annual net FDI outflow since at least 1990, when comparable data begins.

Related Articles:

  • 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.
  • EU to Impose Tariffs Up to 45% on Chinese Electric Vehicles — The European Union voted to impose tariffs of up to 45% on electric vehicles made in China, lasting five years, with China vowing to protect its companies. Chinese-made electric cars rose from around 3% to more than 20% of EU electric vehicle sales over three years, with Chinese brands accounting for about 8%.
  • Trade Intervention for Freer Trade — The authors argue the United States should counter surplus countries' trade policies either by restricting their goods exports through tariffs or by restricting their capital inflows through taxes, volume limits, reserve requirements, transaction approvals, or investor eligibility rules. They contend capital controls are a more targeted alternative to uniform tariffs, which impose equal costs on more and less mercantilist countries.

AI Summary. Redistributing profits from large companies that benefited from cheaper labor abroad toward domestic workers would lower profits for many firms and equity prices, while benefiting businesses serving workers with greater purchasing power. An earlier round of US tariffs did little to re-shore production, instead lengthening supply chains as Chinese goods were re-exported through third countries.

Joseph Wang Fed Guy Blog
Date Posted:

Noting a large portion of the trade deficit is driven by US firms’ manufacturing abroad, @FedGuy12 argues a rebalancing of global trade would reduce US corporate profits and likely lead to higher inflation.

Would shifting profits from companies to workers lower equity prices?

Core argument: The first round of Trump tariffs did little to re-shore production, instead lengthening supply chains as Chinese companies sold to third countries that re-exported to the U.S., adding costs without creating U.S. jobs.

A redistribution of profits would be difficult to achieve and imply lower profits for many companies. Large companies that benefited from cheaper labor abroad would be negatively impacted. However, higher domestic wages also imply that workers have more purchasing power so businesses that cater to them would benefit. The first round of Trump tariffs was not very effective in re-shoring and simply resulted in longer supply chains where Chinese companies sold to third countries, who then in turn re-exported to the U.S. This led to a lengthening of supply chains that added costs without creating U.S. jobs. A new Trump Administration may find ways to better implement their policies. That would ultimately imply a redistribution of profits from the few to the many, which would imply lower equity prices.

Takeaways by Macro Roundup® AI

  1. The first round of Trump tariffs did little to re-shore production, instead lengthening supply chains as Chinese companies sold to third countries that re-exported to the U.S., adding costs without creating U.S. jobs.
  2. A redistribution of profits would be difficult to achieve and would imply lower profits for many companies, particularly large firms that benefited from cheaper labor abroad.
  3. Higher domestic wages would give workers more purchasing power and benefit businesses that cater to them, while a redistribution of profits from the few to the many would imply lower equity prices.

Related Articles:

  • Protectionism Is Failing and Wrongheaded: An Evaluation of the Post-2017 Shift Toward Trade Wars and Industrial Policy — Manufacturing's share of US employment has declined steadily since the end of the Second World War, with no obvious change in that rate after China joined the World Trade Organization or after the US adopted protectionist policies. The authors argue this suggests technology, including robotics and automation, primarily drives the trend.
  • Why Broad-Based Import Tariffs Can Hurt Exports and Manufacturing Jobs — Firms that both export and import account for 84% of US export value and 91% of import value, and employ more than 80% of all US manufacturing workers along with over half of workers in management, utilities, wholesale, transportation, information, and retail. These firms create over three-quarters of net new manufacturing jobs.
  • Trade Intervention for Freer Trade — The authors argue the United States should counter surplus countries' trade policies either by restricting their goods exports through tariffs or by restricting their capital inflows through taxes, volume limits, reserve requirements, transaction approvals, or investor eligibility rules. They contend capital controls are a more targeted alternative to uniform tariffs, which impose equal costs on more and less mercantilist countries.

AI Summary. The U.S. net international investment position tends to converge with cumulative current account deficits as valuation gains and losses even out, and the interest rate on that external debt tends to track Treasury yields. The author argues the end of ultra-low rates should eliminate the U.S. income surplus and push the current account deficit above 4% of GDP.

Brad Setser and Michael Weilandt Council on Foreign Relations
Date Posted:
Is Database:
Database

US net international investment income is “finally” heading below zero, and is already negative when income earned by US corporations in low-tax jurisdictions is removed. @Brad_Setser

Will higher rates erase the U.S. income surplus?

Core argument: The end of the low-for-long interest rate era should eliminate the U.S. income surplus and structurally pull the overall current account deficit above 4% of GDP, according to the author's argument.

The U.S. net international investment position tends to converge with the sum of U.S. current account deficits over time (as valuation gains and losses even out)—right now it is at a low because the dollar is strong, and U.S. equities are valued highly relative to foreign equities. The interest rate on that debt tends to map to the rate on Treasuries for deep structural reasons— And then it is just a matter of whether U.S. firms will continue to generate more income in offshore tax centers than the U.S. pays on its external debt. The low-for-long era coincided with an era of rampant corporate tax avoidance. The low-for-long has (mostly) ended, and even if the era of tax avoidance hasn't come to an end, the end of low-for-long should be enough to end the income surplus, and structurally pull the overall current account deficit to over 4% of GDP. With a rising trade deficit and a structural shift in the income balance underway, there is every reason to expect the U.S. current account deficit to continue to rise absent a large change in the dollar -- or a shock to U.S. demand.

Takeaways by Macro Roundup® AI

  1. The end of the low-for-long interest rate era should eliminate the U.S. income surplus and structurally pull the overall current account deficit above 4% of GDP, according to the author's argument.
  2. The U.S. net international investment position tends to converge with the cumulative sum of U.S. current account deficits as valuation gains and losses even out, and currently sits at a low because the dollar is strong and U.S. equities are highly valued relative to foreign equities.
  3. With a rising trade deficit and a structural shift in the income balance underway, the U.S. current account deficit is expected to keep rising absent a large change in the dollar or a shock to U.S. demand.

Related Articles:

  • Sucking The World Dry (The US Dependence on Foreign Inflows) — The author argues that negative net national savings means the United States is consuming capital rather than accumulating it, largely by selling capital stock to foreigners and spending the proceeds and by not replacing aging capital. With a negative net international investment position, the author contends U.S. spending depends on continued foreign inflows and that potential growth is declining.
  • The End of Privilege: A Reexamination of the Net Foreign Asset Position of the United States — The authors document that the U.S. net foreign asset position fell by 60 percentage points of U.S. gross domestic product between 2007 and 2021, even as U.S. current account deficits narrowed. They attribute this to a boom in the market valuation of U.S. corporations' non-financial assets, which mechanically raised the value of large foreign equity holdings in U.S. firms.
  • Do Deficits Matter: Part I — Because most US corporate profits in China are turned over to the government, which for years invested them in US government and agency debt, the US could settle much of its trade deficit with debt rather than equity. Middle Eastern trading partners instead prefer equity stakes, and overpayment has served as a tactic to overcome political obstacles to such deals.

AI Summary. Berkshire Hathaway's cash holdings have reached $325bn, or 28% of its asset value — the highest share since at least 1990. The company has bought $5.8bn of equities against $133.2bn of stock sales.

Eric Platt Financial Times
Date Posted:

Warren Buffet’s cash hoard has risen to $325B or 28% of Berkshire’s asset value, the highest level since at least 1990. The company completed $133B in stock sales in 2024 through the end of September vs. $6B in purchases.

Are cash holdings at a major investment firm hitting record highs?

Core argument: Berkshire Hathaway's cash holdings reached $325bn, or 28% of asset value, the highest share since at least 1990.

Buffett has raised Berkshire’s cash levels to unprecedented heights. At $325bn, cash now accounts for 28% of Berkshire’s asset value — the highest level since at least 1990. Buffett has also limited his buying of other stocks this year, purchasing equities worth just $5.8bn through the end of September. That sum is dwarfed by the $133.2bn of stock sales Berkshire has executed.

Takeaways by Macro Roundup® AI

  1. Berkshire Hathaway's cash holdings reached $325bn, or 28% of asset value, the highest share since at least 1990.
  2. Berkshire sold $133.2bn of stock through the end of September while purchasing just $5.8bn of equities over the same period.
  3. Warren Buffett's Apple share sales and Berkshire's cash build-up have prompted questions about his motives.

Related Articles:

  • Updating Our Long-Term Return Forecast For US Equities to Incorporate the Current High Level of Market Concentration — The authors estimate the S&P 500 will deliver an annualized nominal total return of 3% over the next 10 years, roughly 1% in real terms, modeling long-term returns as a function of starting valuation, market concentration, frequency of economic contractions, corporate profitability, and interest rates. The index returned 13% annualized over the past decade, above its 11% long-term average.
  • US Exceptionalism: Drivers of Equity Outperformance and What’s Needed for a Repeat — US companies need about 7% earnings-per-share growth to deliver a normal 4% equity risk premium above the risk-free rate, versus about 3% for other developed markets, with the highest expectations embedded in technology and the largest US tech firms. Chinese companies could generate a 4% risk premium over Chinese bonds with no earnings growth.
  • Which U.S. Stocks Generated the Highest Long-Term Returns? — Of the 29,078 U.S. common stocks in a database spanning nearly a century, 51.6% had negative cumulative returns, while 17 stocks returned more than 5m% — led by Altria at 265m%. Those top performers averaged annualized returns of just 13.47%, underscoring the value of time invested.

AI Summary. Taiwan is considering a US arms package that people familiar with the discussions say could include up to 60 F-35 fighter jets, four Advanced Hawkeye aircraft, 10 retired warships and 400 Patriot missiles, estimated to be worth more than $15bn. Previous US administrations approved Taiwan deals worth $21bn and $7bn respectively.

Demetri Sevastopulo and Kathrin Hille Financial Times
Date Posted:

Taiwan is likely to make a $15B request including 400 Patriot missiles, Aegis systems, and 60 F-35s. The Biden administration has tried to force Taipei to “prioritise stockpiling munitions and other cheaper, mobile weapons,” over large weapons systems.

Is Taiwan planning a large US arms purchase to court Washington?

Core argument: Taiwan could request as many as 60 F-35 fighters, four Advanced Hawkeyes, 10 retired warships and 400 Patriot missiles, a package Su estimated would be worth more than $15bn.

During Trump’s first term, the US approved 11 packages to Taiwan worth $21bn, including F-16 fighter jets and Abrams tanks. The Biden administration approved deals worth $7bn. It tried to force Taipei to allocate its limited defence budget differently and prioritise stockpiling munitions and other cheaper, mobile weapons suitable for attacking a superior invader over buying traditional big-ticket systems. People familiar with the discussions said Taiwan could request as many as 60 F-35 fighters, four Advanced Hawkeyes, 10 retired warships and 400 Patriot missiles — a package that Su estimated would be worth more than $15bn.

Takeaways by Macro Roundup® AI

  1. Taiwan could request as many as 60 F-35 fighters, four Advanced Hawkeyes, 10 retired warships and 400 Patriot missiles, a package Su estimated would be worth more than $15bn.
  2. The US approved 11 arms packages to Taiwan worth $21bn during Trump's first term, including F-16 fighter jets and Abrams tanks, compared with $7bn of deals approved under the Biden administration.
  3. The Biden administration tried to force Taipei to shift its limited defence budget toward stockpiling munitions and cheaper, mobile weapons suited to attacking a superior invader rather than traditional big-ticket systems.

Related Articles:

  • US To Provide Taiwan With Weapons From Its Stockpiles For First Time — The US will provide Taiwan with $345mn in weapons drawn directly from American military stockpiles, the first such transfer under an annual $1bn presidential drawdown authority approved by Congress. Previous US support for Taiwan came through approved arms sales rather than direct provision from US stocks.
  • Taiwan to Buy 400 US Anti-Ship Missiles Intended to Repel a China Invasion — Taiwan is purchasing as many as 400 land-launched Harpoon anti-ship missiles from Boeing, intended to repel a potential Chinese invasion, under a contract issued on Taiwan's behalf by the US Naval Air Systems Command. Taiwan had previously bought only ship-launched versions of the missile.
  • Pentagon Runs Low on Air-Defense Missiles as Demand Surges — U.S. stocks of some air-defense missiles are running low, raising questions about the Pentagon's readiness for conflicts in the Middle East, Europe, and a potential Pacific war. The U.S. has launched dozens of Standard Missile interceptors in single months, while the producer can make at most a few hundred a year, shared with at least 14 allied buyers.