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

Macro Roundup


Wednesday, January 15, 2025

AI Summary. The authors find that fiscal expansion and the resulting rise in Treasury supply pushed convenience yields to zero on short-term Treasurys and below zero on long-term ones, reducing the revenue the U.S. earns from issuing safe, liquid assets. They argue shortening the debt's maturity structure cannot fully offset this, and that international investors may turn to alternative long-term safe assets.

Zhengyang Jiang, Robert Richmond and Tony Zhang Social Science Research Network
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Jiang, et al. find that despite a shortened maturity structure, fiscal expansion over the last 2 decades has reduced the convenience yields of US Treasuries, which are now negative at the long end, undermining the “reserve currency status” of the dollar.

Has rising Treasury supply eroded the revenue from issuing safe assets?

Core argument: Fiscal expansion over the past two decades and the resulting rise in Treasury supply depressed convenience yields heterogeneously across maturities, driving them to zero for short-term Treasurys and into negative territory for long-term Treasurys, reducing the seigniorage revenue the U.S. earns from issuing safe, liquid assets.

The fiscal expansion in the past two decades and the resultant increase in Treasury supply depressed convenience yields heterogeneously across maturities-driving them to zero for short-term Treasurys and into negative territory for long-term Treasurys. As a result, the seigniorage revenue earned by the U.S. for issuing safe and liquid assets declined. Although the U.S. Treasury shortened its debt maturity structure in recent years, we show this adjustment is unable to fully offset the negative effect of debt quantity increase nor recover the seigniorage revenue that the U.S. historically earned. If the U.S. government’s capacity to issue long-term debt without eroding the convenience yield is limited, international investors may seek alternative safe assets to meet their long-term investment needs. This shift could reduce global demand for U.S. Treasurys, potentially impacting the U.S. dollar’s dominance in international finance and the benefits that accrue to the U.S. from its reserve currency status

Takeaways by Macro Roundup® AI

  1. Fiscal expansion over the past two decades and the resulting rise in Treasury supply depressed convenience yields heterogeneously across maturities, driving them to zero for short-term Treasurys and into negative territory for long-term Treasurys, reducing the seigniorage revenue the U.S. earns from issuing safe, liquid assets.
  2. The U.S. Treasury's shortening of its debt maturity structure does not fully offset the negative effect of the increase in debt quantity, nor does it recover the seigniorage revenue the U.S. historically earned.
  3. If the U.S. government's capacity to issue long-term debt without eroding the convenience yield is limited, international investors may seek alternative safe assets, potentially reducing global demand for Treasurys and affecting the dollar's dominance in international finance.

Related Articles:

  • The Macro-Finance Sitch: The Streams (of Falling Short-Term & Rising Long-Term U.S. Treasury Rates) Cross — The estimated term premium on long-term U.S. Treasury bonds has swung from about -0.9 percentage points, when buyers sacrificed yield to lock in rates, to about +0.5 percentage points, where they demand extra compensation for giving up flexibility. The author argues this shift reflects market microstructure and investor positioning rather than bond vigilantes reacting to fiscal policy.
  • Quantitative Tightening Around the Globe: What Have We Learned? — Announcements that central banks will shrink their balance sheets are associated with government bond yields rising 4–8 basis points at horizons of one year and longer, steepening the yield curve, with more limited effects on other financial indicators. Increased demand from domestic nonbank investors has largely offset reduced central bank bond holdings.
  • Foreign Investors and U.S. Treasuries — Foreign investors in U.S. Treasuries outperform domestic investors on a risk-adjusted basis, with private foreign investors earning 3.77% a year versus a 3.59% market return and 4.34% for U.S. private investors, whose longer-duration portfolios carry the most volatility. The authors argue this challenges the view that foreigners accept lower yields.

AI Summary. Foreign private investors increased their purchases of US Treasuries as yields rose following the Federal Reserve's interest rate increases. Japan is the largest foreign holder of US Treasuries, and recent data show continued strong Japanese demand.

Torsten Sløk Apollo
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Torsten Sløk notes foreign private buyers are still net buyers of Treasuries, with Japan as the largest foreign holder. The Fed has cut rates by 100 bps since September, but over the same period, 10-year interest rates are up 100 bps.

Do higher yields keep foreign demand for Treasuries strong?

Core argument: Foreign private investors stepped up their Treasury purchases after the Federal Reserve began raising interest rates in March 2022, attracted by the higher level of yields.

When the Fed started raising interest rates in March 2022, foreign private investors started buying a lot more Treasuries because they liked the higher level of yields. Japan is the biggest foreign holder of US Treasuries. With rates higher for longer, the latest data shows continued strong demand from Japan.

Takeaways by Macro Roundup® AI

  1. Foreign private investors stepped up their Treasury purchases after the Federal Reserve began raising interest rates in March 2022, attracted by the higher level of yields.
  2. Japan is the largest foreign holder of US Treasuries, and the latest data show continued strong Japanese demand as rates stay higher for longer.

Related Articles:

  • The Move in Long Rates Is Very Unusual — The Federal Reserve has cut its policy rate by 100 basis points while 10-year interest rates have risen by 100 basis points over the same stretch, a highly unusual divergence. Possible explanations include fiscal worries, weaker foreign demand for U.S. debt, or rate cuts that were not justified.
  • There Is No “Reverse Conundrum” Driving Up Bond Yields — Resilient growth, persistent residual inflation, and Federal Reserve officials' greater comfort about employment risks explain the rebound in market-implied forward interest rates, rather than a shift in the term premium tied to fiscal, central-bank-independence, or constitutional concerns. The simultaneous rise in long-term rates and fall in short-term rates is normalizing a long-inverted yield curve.
  • Our Thoughts on Large US Deficits and Their Impact on Bond Yields — Total borrowing in the US is about average despite high government deficits, as high public borrowing has contributed to the need for higher interest rates that have depressed private sector borrowing. Risk premiums on long-dated debt look about average, with no market signs that economic or debt limits are currently being hit.

AI Summary. The Congressional Budget Office projects the U.S. population will grow from 350m to 372m over three decades, an average of 0.2% per year, less than a quarter of the 0.9% average annual rate from 1975 to 2024. Deaths are projected to exceed births beginning in 2033, with net immigration more than accounting for population growth thereafter.

Daniel Crown and Katherine Starkey Congressional Budget Office
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.@USCBO updated population estimates forecast that beginning in 2033 annual death rates in the US will outpace annual birth rates, with subsequent population growth from 350mm in 2025 to 372mm by 2055 driven entirely by immigration.

Will immigration account for all U.S. population growth in coming decades?

Core argument: CBO projects the U.S. population rises from 350 million in 2025 to 372 million in 2055, an average 0.2% annual growth rate, less than one-quarter of the 0.9% average pace from 1975 to 2024.

In CBO’s projections, the population increases from 350 million people in 2025 to 372 million people in 2055, growing at an average rate of 0.2% per year. That rate is less than one-quarter of the average growth rate seen from 1975 to 2024 (0.9% per year). The annual number of births is projected to exceed the annual number of deaths through 2032. Those net births account for about one-sixth of projected population growth during that period; net immigration accounts for the rest. Beginning in 2033, annual deaths exceed annual births in CBO’s projections, and net immigration is projected to more than account for the population growth from 2033 to 2055.

Takeaways by Macro Roundup® AI

  1. CBO projects the U.S. population rises from 350 million in 2025 to 372 million in 2055, an average 0.2% annual growth rate, less than one-quarter of the 0.9% average pace from 1975 to 2024.
  2. CBO projects annual births exceed annual deaths through 2032, with net births accounting for about one-sixth of population growth in that period and net immigration the rest.
  3. Beginning in 2033, annual deaths exceed annual births in CBO's projections, and net immigration more than accounts for U.S. population growth from 2033 to 2055.

Related Articles:

  • Babies and the Macroeconomy — Fertility rates have fallen in nearly every country, but timing differed: some developed nations fell below the 2.1 replacement level as early as the 1970s, while others dropped to "lowest low" levels below 1.3. The author argues nations with rapid, discontinuous growth saw sharper declines as women's expectations outpaced tradition-bound men's willingness to share family time.
  • Recent Immigration Surge Has Been Largest in U.S. History — An analysis of government data finds the recent U.S. immigration surge is the largest on record, with net migration averaging 2.4m people a year from 2021 to 2023 and the foreign-born share of the population reaching 15.2% in 2023, up from 13.6% in 2020. About 60% of immigrants arriving since 2021 entered without legal authorization.
  • The Power of Demography and the Fate of East Asia — East Asia's total population has peaked and is projected to decline for at least a generation, with the pace of decline likely accelerating each decade, while US population is projected to keep growing for decades. The author argues such sustained divergence can shift the global balance of power.

AI Summary. A growing youth deficit puts earlier-aging regions on a path to declining hours worked per person and slower GDP per capita growth through 2050 than the prior quarter century. Offsetting this drag requires combining labor intensity, productivity, and age-mix measures, with productivity growth of 1–2% a year needed in most of these countries.

Anu Madgavkar, Marc Canal Noguer, Chris Bradley, Olivia White, Sven Smit, and TJ Radigan McKinsey Global Institute
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A McKinsey analysis argues that given the demographic headwinds facing advanced economies, US productivity growth will have to rise at 2.3x the trend rate of 2012-2023 to maintain the growth in GDP per capita over the last 25 years.

How can aging countries offset demographic drag on growth?

Core argument: A youth deficit has set "first wave" regions on a trajectory of declining hours worked per person and slower GDP per capita growth through 2050 than over the past quarter century.

A growing youth deficit has already set first wave regions on a trajectory for declining hours of work per person and thus slower GDP per capita growth through 2050 compared with the past quarter century. Maintaining past economic progress, let alone increasing it, will require measures to address the impact of demographic headwinds. We explore the three levers available—labor intensity, productivity, and age mix—to neutralize the drag on economic growth caused by shifting age mix. Pulling on only one of these three levers will be insufficient to achieve this goal in most countries, so using some combination of all three will be needed to maintain growth and raise living standards Assuming hours worked per capita grow at the same rate as in the past quarter century, productivity in most first wave countries would need to grow between 1 and 2% a year to maintain past GDP per capita growth. That level of increase may seem modest, but in Germany, for example, it means doubling the past decade’s average rate of annual productivity growth of 0.7%.

Takeaways by Macro Roundup® AI

  1. A youth deficit has set "first wave" regions on a trajectory of declining hours worked per person and slower GDP per capita growth through 2050 than over the past quarter century.
  2. Assuming hours worked per capita grow at their past quarter-century rate, productivity in most first wave countries would need to grow between 1 and 2% a year to maintain past GDP per capita growth.
  3. Germany would need to double its past decade's average annual productivity growth of 0.7%, and most countries will require some combination of all three levers—labor intensity, productivity, and age mix—since one alone is insufficient.

Related Articles:

  • Productivity During and Since the Pandemic — Total factor productivity growth since early 2021 has run only slightly above its 2010–19 average, suggesting the 2020 productivity surge reflected cyclical dynamics layered on a continuation of the slow pre-pandemic trend. Productivity has since grown somewhat faster than the authors' analysis predicted, but remains well below the 1995–2004 pace.
  • Technological Disruption in the Labor Market — The authors measure US labor market structure since 1880 and find 1990–2017 less disruptive than any earlier period, because past changes from general-purpose technologies like steam and electricity were so profound. They identify four recent signs of accelerating change, including a 50%+ rise in science and technology employment share since 2010.
  • Why the U.S. Economy Is Trouncing Europe’s — Only about 12% of Americans score at the highest levels on international academic tests versus 34% at the lowest, yet the U.S. has created nearly 250 companies worth over $10bn ($30tn in value) against Europe's 14, and median U.S. disposable household income is 25% above Germany's. The author argues expanding high-skilled immigration is the fastest way to accelerate growth.

AI Summary. International Energy Agency data covering nearly 70 countries show a correlation between higher shares of solar and wind and higher average household and industry electricity prices, with costs about 12 cents a kilowatt-hour where solar and wind are minimal and rising more than 5 cents for each 10% increase in their share.

Bjorn Lomborg Wall Street Journal
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.@BjornLomborg argues “real energy costs of solar and wind are far higher than what green campaigners claim,” citing heavy reliance on coal for new electrical generation capacity in price-sensitive developing countries like China, India, and Bangladesh.

Do higher shares of solar and wind mean higher electricity prices?

Core argument: International Energy Agency data from 2022 covering nearly 70 countries show a correlation between higher solar and wind shares and higher household and industry energy prices, with each 10% rise in solar and wind share associated with more than 5 cents per kilowatt-hour.

The real energy costs of solar and wind are far higher than what green campaigners claim. The International Energy Agency’s latest data (from 2022) on solar and wind power generation costs and consumption across nearly 70 countries shows a clear correlation between more solar and wind and higher average household and industry energy prices. In a country with little or no solar and wind, the average electricity cost is about 12 cents a kilowatt-hour (in today’s money). For every 10% increase in solar and wind share, the electricity cost increases by more than 5 cents a kilowatt-hour. This isn’t an outlier; these results are substantially similar to 2019, before the effects of the pandemic and the war in Ukraine. In poorer countries, where electricity consumption rose almost 5% from 2022 to 2023, most of the additions came from fossil fuels, with coal contributing more than all solar and wind additions. China during that period added more new coal than new solar and wind. Bangladesh added 13 times as much coal as solar and wind. Despite India’s ambitious solar targets, it added three times as much coal as solar and wind.

Takeaways by Macro Roundup® AI

  1. International Energy Agency data from 2022 covering nearly 70 countries show a correlation between higher solar and wind shares and higher household and industry energy prices, with each 10% rise in solar and wind share associated with more than 5 cents per kilowatt-hour.
  2. In countries with little or no solar and wind, average electricity costs about 12 cents a kilowatt-hour in today's money, and the 2022 pattern is substantially similar to 2019, before the pandemic and the war in Ukraine.
  3. Electricity consumption in poorer countries rose almost 5% from 2022 to 2023, with coal contributing more than all solar and wind additions; China added more new coal than solar and wind, Bangladesh 13 times as much, and India three times as much.

Related Articles:

  • We’re Burning More Coal Than Ever Thanks to China — The International Energy Agency estimates global coal demand reached an all-time high of 8,771m metric tons, up 1% from the prior year, as electricity demand rose faster than expected. China consumes nearly 30% more coal than the rest of the world combined, and its coal demand is projected to set records annually through at least 2027.
  • The Climate Short: Hedge Funds Pile Up Huge Bets Against Green Future — An analysis of positions voluntarily disclosed by roughly 500 hedge funds found more funds are net short batteries, solar, electric vehicles and hydrogen than long them, while more are net long fossil fuels than short oil, gas and coal. This comes despite large green stimulus programs in the US, Europe and China.
  • Growing Pains: The Renewable Transition in Adolescence — In an illustrative scenario, a California system with 20 GW of wind, 150 GW of solar and 75 GW of storage would provide only 50 GW of reliable capacity, since each added renewable unit contributes less to reliability. Levelized cost measures ignore this, so grid operators and utilities instead assess effective load-carrying capability.

AI Summary. The US Framework for Artificial Intelligence Diffusion imposes export restrictions aimed at preventing China from accessing the computing power needed to build frontier AI models. It sorts the world into three tiers — the US and 18 allies, 23 arms-embargoed nations plus Macau, and all other countries — with differing access to AI chips and caps on graphics processor purchases.

Dylan Patel, Daniel Nishball, Myron Xie, AJ Kourabi, Jeremie Eliahou Ontiveros, Reyk Knuhtsen and Ivan Chiam Semianalysis
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.@dylan522p @SemiAnalysis_ argues that new US export controls are “unprecedented in scope and scale. The regulation at its core is targeted at preventing China from accessing AI compute to build frontier models.”

How do new AI export rules restrict global chip access?

Core argument: The US Framework for Artificial Intelligence Diffusion divides the world into three tiers: Tier 1 for the US and 18 major allies and security partners, Tier 3 for 23 arms-embargoed nations plus Macau, and Tier 2 for all other countries.

The US government lobbed the largest salvo in the new technology cold war with its new Framework for Artificial Intelligence Diffusion. These new export restrictions are completely unprecedented in scope and scale, with many calling the efforts overzealous or misguided. The regulation at its core is targeted at preventing China from accessing AI compute to build frontier models. The AI Diffusion Framework divides the world into three tiers of countries with varying levels of access to AI Chips and strict caps for purchasing of GPUs: Tier 1 for the US and 18 major allies and security partners. Tier 3 for 23 Arms Embargoed Nations plus Macau. Tier 2 for all other countries – with varying degrees of relations with the US: ranging from Singapore who gets to buy F35s to Yemen who bombs US tankers!

Takeaways by Macro Roundup® AI

  1. The US Framework for Artificial Intelligence Diffusion divides the world into three tiers: Tier 1 for the US and 18 major allies and security partners, Tier 3 for 23 arms-embargoed nations plus Macau, and Tier 2 for all other countries.
  2. The AI Diffusion Framework is aimed at preventing China from accessing AI compute to build frontier models, and sets strict caps on GPU purchases.
  3. The export restrictions are unprecedented in scope and scale, with many calling the effort overzealous or misguided, and Tier 2 groups countries as disparate as Singapore and Yemen.

Related Articles:

  • The Year-End Wake-Up: The ‘Chinese Sputnik’ That Demands Our Attention — Chinese AI company DeepSeek trained its Version 3 large language model for roughly $5.6m, about 100x cheaper than Meta's Llama 3, with performance comparable to Claude 3.5 Sonnet and interface access costing 12x less than Anthropic's. The author argues US chip export controls backfired by spurring leaner engineering, and that the gap between open-source and closed-source models is narrowing rapidly.
  • Chinese Tech Groups Build AI Teams In Silicon Valley — Chinese technology groups including Alibaba, ByteDance and Meituan are expanding California offices to build artificial intelligence teams and recruit US talent, despite US export bans on the highest-end Nvidia AI chips. US-based entities owned by Chinese tech companies face no restrictions on accessing high-end AI chips through US data centres.
  • Chinese Companies Resort To Repurposing Nvidia Gaming Chips For AI — Chinese firms are developing artificial intelligence tools using processors stripped from Nvidia consumer gaming graphics cards and remounted on new circuit boards, after US export controls blocked sales of high-performance chips. Industry experts describe the practice as a rough workaround for China's shortage of high-end processors.

Thursday, January 16, 2025

AI Summary. The European Union has 30mm manufacturing jobs, and China has grown from a $4tn economy producing under 15% of global manufacturing output to an $18tn economy producing over a third, with well over 50% of global capacity in many sectors. European tariffs on Chinese electric vehicles limit import competition but do not offset lost export markets.

Sander Tordoir and Brad Setser Centre For European Reform
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.@Brad_Setser @SanderTordoir note that the EU has 30mm manufacturing workers, 2x what the US had before the 1st China Shock, and argue that for the EU a 2nd China Shock “will be associated with the loss of export markets, not just a surge in imports.”

Do tariffs on Chinese electric vehicles protect European manufacturing jobs?

Core argument: China has grown from a $4tn economy producing under 15% of global manufacturing output before the global financial crisis to an $18tn economy accounting for over a third of world manufacturing production, with well over 50% of global capacity in many important sectors.

The EU boasts 30mm manufacturing jobs: almost twice as many as the US had before the first China shock. The potential shock is also much larger this time. China was a $4T dollar economy before the global financial crisis, accounting for less than 15% of global manufacturing output; it is now a $18T economy that accounts for over a 1/3 of the world’s manufacturing production. In many important sectors, China makes up well over 50% of total global manufacturing capacity. The EU’s EV tariffs will help to protect European automotive production from Chinese imports, but they are no panacea. Even if the fairly modest tariffs limit China’s share of the EU market, they will not offset the loss of export markets. In other words, the second China shock will play out differently from the first because for many economies, including Germany, it will be associated with the loss of export markets, not just a surge in imports.

Takeaways by Macro Roundup® AI

  1. China has grown from a $4tn economy producing under 15% of global manufacturing output before the global financial crisis to an $18tn economy accounting for over a third of world manufacturing production, with well over 50% of global capacity in many important sectors.
  2. The EU has 30mn manufacturing jobs, almost twice as many as the US had before the first China shock, and the potential shock this time is much larger.
  3. The second China shock will play out differently for economies including Germany because it will be associated with the loss of export markets, not just a surge in imports, which the EU's fairly modest EV tariffs will not offset.

Related Articles:

  • Germany Is Unraveling Just When Europe Needs It Most — After five years of stagnation, Germany's economy is 5% smaller than if its pre-pandemic growth trend had continued, and Bloomberg Economics estimates most of that shortfall will be hard to recover given the loss of cheap Russian energy and German automakers struggling against Chinese rivals.
  • Will China Take Over the Global Auto Industry? — The global auto market has historically been regional, with most cars sold in a region also built there. Overcapacity in China's internal combustion sector, expanding electric-vehicle capacity, ample state bank credit, and a weaker yuan could concentrate global auto production in China absent restrictions such as the US 100% tariff on Chinese electric vehicles.
  • 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%.

AI Summary. China accounts for roughly 27% of global industrial production, up from 24% in 2018, and the United Nations projects its share will reach 45% by 2030, supported by cheap loans and subsidies that help manufacturers undercut foreign rivals on price. China's goods surplus with the US stood at $360bn, 23% larger in dollar terms than in 2018.

Jason Douglas Wall Street Journal
Date Posted:

China’s bilateral goods trade surplus with the US was $360B in 2024, 23% larger in $ terms than when Trump first imposed tariffs 7 years ago in January 2018.

Does China enter a tariff fight with a manufacturing advantage?

Core argument: China accounts for roughly 27% of global industrial production, up from 24% in 2018, according to United Nations data, with the U.N. predicting its share will reach 45% by 2030.

To shore up its position in global trade, China has poured support into its factories in the form of cheap loans and subsidies, bolstering manufacturers’ ability to keep selling at low prices and undercutting rivals abroad. China today accounts for around 27% of global industrial production, according to United Nations data, up from 24% in 2018. By 2030, the U.N. predicts, China’s share of industry will have risen to 45%—a level of dominance unmatched since the U.S.’s postwar manufacturing heyday or the U.K.’s in the 19th century. China’s goods surplus with the U.S. in 2024 was $360 billion, 23% larger in dollar terms than it was when Trump imposed tariffs in January 2018.

Takeaways by Macro Roundup® AI

  1. China accounts for roughly 27% of global industrial production, up from 24% in 2018, according to United Nations data, with the U.N. predicting its share will reach 45% by 2030.
  2. China's projected 45% share of global industry by 2030 would be a level of dominance unmatched since the U.S.'s postwar manufacturing heyday or the U.K.'s in the 19th century.
  3. China's goods surplus with the U.S. was $360 billion in 2024, 23% larger in dollar terms than when Trump imposed tariffs in January 2018, as cheap loans and subsidies bolstered manufacturers' ability to undercut rivals abroad.

Related Articles:

  • 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.
  • 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.
  • The Surprising Resilience of Globalization: An Examination of Claims of Economic Fragmentation — China's exports have grown faster than its own economy, rising by about 3 percentage points as a share of its GDP, with a nearly $1tn surge over four years. Measured against the GDP of its trading partners, China's manufactured-goods surplus has increased by about three-quarters of a percentage point of world GDP to a record high.

AI Summary. China's high investment rates face diminishing returns and the government is unwilling to promote higher consumer spending, so it compensates for weak domestic demand with large trade surpluses supported by a weaker currency. The author argues this attempt to export its policy failure will provoke a protectionist backlash from Europe, the UK, and others.

Paul Krugman Krugman Wonks Out
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.@paulkrugman notes China’s $1T 2024 trade surplus and argues “The rest of the world just isn’t going to accept China’s attempt to export its way out of policy failure. Tariffs on China are unavoidable unless China makes major policy changes.”

Will China's large trade surpluses trigger a protectionist backlash abroad?

Core argument: China runs a trillion-dollar trade surplus as extremely high investment rates meet diminishing returns and the government remains unwilling to promote higher consumer spending.

The Chinese economy is having big problems adjusting to the prospect of slower economic growth; extremely high rates of investment are no longer sustainable in the face of diminishing returns, yet the government remains unwilling to do the obvious, and promote higher consumer spending. Running big trade surpluses is one way to compensate for weak domestic demand. And China has been promoting big trade surpluses by weakening the value of its currency (“real” means adjusted for international differences in inflation, “effective” means that we’re looking at a weighted average of exchange rates against China’s trading partners). China’s attempt to export its problems (for that’s what this amounts to) will meet a protectionist backlash; in fact, this would have happened even if Trump weren’t about to take office. The rest of the world just isn’t going to accept China’s attempt to export its way out of policy failure. Trump would probably slap high tariffs on China no matter what, but that giant trade surplus means that Europe, the UK, and probably everyone else will do the same.

Takeaways by Macro Roundup® AI

  1. China runs a trillion-dollar trade surplus as extremely high investment rates meet diminishing returns and the government remains unwilling to promote higher consumer spending.
  2. China has promoted large trade surpluses by weakening its real effective exchange rate, a weighted average against trading partners adjusted for international differences in inflation.
  3. China's attempt to export its way out of policy failure will meet a protectionist backlash from Europe, the UK and probably everyone else, which would have happened even without Trump taking office.

Related Articles:

  • Chinese Trade Surplus Soars to $1 Trillion Ahead of Trump Return — China's goods trade surplus reached a record $992bn, 21% above the prior year, driven by record exports alongside weak imports held down by sluggish domestic consumption and falling commodity prices. China sells more goods than it buys from more than 165 countries, with record surpluses versus Southeast Asian nations and nearly $250bn with the European Union.
  • China’s Stunning 2024 Export Growth — Chinese export volumes are up 13% year-over-year while import volumes are up only 2%, a gap that with exports at about 20% of GDP implies a net exports contribution to Chinese growth of close to 2% of GDP. Falling Chinese export prices mean export volumes are growing much faster than the dollar value of exports.
  • Can Trump Reduce the Trade Deficit? — A world of widespread tariffs would also shrink international capital flows, and because the US trade deficit is the counterpart of large capital inflows, reduced capital mobility would narrow that deficit. The author argues this would occur largely by reducing overall investment in the US economy.

AI Summary. Rising earnings inequality is dominated by rising inequality between industries, with high-earning workers increasingly concentrated in high-earning industries and low-earning workers in low-earning ones. About 10% of 301 detailed industries account for almost all of the rising between-industry dispersion while employing less than 40% of workers.

John Haltiwanger, Henry Hyatt, and James Spletzer American Economic Review
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.@JHaltiwanger_UM finds rising US earnings inequality over 1996-2018 reflected both a rising gap in industry-specific wage premia and that “high-wage workers are increasingly sorted to high-wage industries with rising industry premia” and vice versa.

Does rising wage inequality come mainly from differences between industries?

Core argument: About 10% of the 301 detailed four-digit NAICS industries account for almost all of the rising between-industry earnings dispersion while employing less than 40% of workers, and rising between-industry inequality dominates rising earnings inequality.

Rising earnings inequality is dominated by rising between-industry inequality. High earnings workers are more likely to work in high earnings industries and with each other, and low earnings workers are more likely to work within low earnings industries and with each other. This polarization of the industry earnings and employment structure is concentrated in a relatively small number of industries. About 10% of the 301 detailed four-digit NAICS industries account for almost all of the rising between-industry dispersion, while accounting for less than 40% of employment. The top 19 high-paying industries, drawn from high-tech and STEM intensive industries, finance, mining, and selected industries in health, exhibit increases in industry pay induced by both increases in industry premia and average worker effects [reflecting human capital.] The top 11 low-paying industries, drawn from selected industries in retail and health, exhibit decreases in industry pay induced by both decreases in industry premia and average worker effects.

Takeaways by Macro Roundup® AI

  1. About 10% of the 301 detailed four-digit NAICS industries account for almost all of the rising between-industry earnings dispersion while employing less than 40% of workers, and rising between-industry inequality dominates rising earnings inequality.
  2. The top 19 high-paying industries — drawn from high-tech and STEM-intensive industries, finance, mining, and selected health industries — show increases in industry pay induced by both higher industry premia and average worker effects reflecting human capital.
  3. The top 11 low-paying industries, drawn from selected retail and health industries, show decreases in industry pay induced by both falling industry premia and falling average worker effects.

Related Articles:

  • Industries, Mega Firms, and Increasing Inequality — The authors estimate that differences between firms account for 62% of the rise in earnings inequality, driven by high-earning workers clustering in high-premium firms and industries. About 10% of detailed industries — high-tech and finance at the top, retail and some health sectors at the bottom — account for nearly all rising between-industry dispersion.
  • The Fall of the Labor Share and the Rise of Superstar Firms — The authors link the decline in labor's share of GDP in the U.S. and other countries to the rise of "superstar" firms with high markups and low labor shares, using U.S. Economic Census data showing industry sales increasingly concentrated in a few firms. The decline reflects reallocation toward these firms rather than falling labor shares within the typical firm.
  • The Economics of Inequality in High-Wage Economies — Information technology created investment opportunities exceeding the supply of properly trained talent, while trade with low-wage economies, low-skilled immigration, trade deficits, and aging demographics eased constraints on low-skilled labor and risk-averse savings. The author argues this framework, rather than rising cronyism, explains high returns to success, slowing productivity growth, and low interest rates.

AI Summary. A simple model of the relationship between long-term interest rates and Federal Reserve policy expectations shows 10-year rates sitting 40 basis points above what those expectations would predict, consistent with increases in term premium measures from the New York and San Francisco Federal Reserve Banks. Markets worry this extra premium reflects fears about fiscal sustainability.

Torsten Sløk Apollo
Date Posted:

Torsten Sløk notes that “10-year rates are now 40 basis points higher than what Fed expectations would have predicted,” and argues that the rising term premium “is driven by fears about fiscal sustainability.”

Are long-term rates higher than central bank policy expectations predict?

Core argument: A simple model of the relationship between long rates and Fed expectations shows 10-year rates running 40 basis points above what Fed expectations alone would have predicted.

Long-term interest rates have disconnected from Fed expectations, and a simple model of the relationship shows that 10-year rates are now 40 basis points higher than what Fed expectations would have predicted. The rise in long rates above and beyond what has happened with Fed expectations is consistent with the observed increase in both the New York Fed’s measure of the term premium and the San Francisco Fed’s measure of the term premium. The worry in markets is that the additional premium in long-term interest rates is driven by fears about fiscal sustainability.

Takeaways by Macro Roundup® AI

  1. A simple model of the relationship between long rates and Fed expectations shows 10-year rates running 40 basis points above what Fed expectations alone would have predicted.
  2. The rise in long-term rates beyond what Fed expectations imply is consistent with observed increases in both the New York Fed's and the San Francisco Fed's measures of the term premium.
  3. Markets worry that the additional premium in long-term interest rates is driven by fears about fiscal sustainability.

Related Articles:

  • The Move in Long Rates Is Very Unusual — The Federal Reserve has cut its policy rate by 100 basis points while 10-year interest rates have risen by 100 basis points over the same stretch, a highly unusual divergence. Possible explanations include fiscal worries, weaker foreign demand for U.S. debt, or rate cuts that were not justified.
  • There Is No “Reverse Conundrum” Driving Up Bond Yields — Resilient growth, persistent residual inflation, and Federal Reserve officials' greater comfort about employment risks explain the rebound in market-implied forward interest rates, rather than a shift in the term premium tied to fiscal, central-bank-independence, or constitutional concerns. The simultaneous rise in long-term rates and fall in short-term rates is normalizing a long-inverted yield curve.
  • Our Thoughts on Large US Deficits and Their Impact on Bond Yields — Total borrowing in the US is about average despite high government deficits, as high public borrowing has contributed to the need for higher interest rates that have depressed private sector borrowing. Risk premiums on long-dated debt look about average, with no market signs that economic or debt limits are currently being hit.

AI Summary. The yield on the benchmark 10-year U.S. Treasury note has risen to about 4.8%, roughly 1 percentage point above its September level and well above the 2% that prevailed when Republicans enacted a $1.5tn deficit-financed tax cut. Each 0.1-percentage-point rise in Treasury borrowing costs adds more than $300bn in interest expenses over a decade.

Richard Rubin and Sam Goldfarb Wall Street Journal
Date Posted:

When the TCJA was passed in 2017 the 10-year yield was ~ 2%. Since September it has risen 100 bps to hover just under 5%. At these levels “every 0.1pp increase in Treasury borrowing costs adds more than $300B in interest expenses over a decade.” @WSJ

Do higher Treasury yields raise the cost of deficit-financed tax cuts?

Core argument: The 10-year U.S. Treasury yield reached 4.8% in recent days before slipping to 4.65% Wednesday after fresh inflation data, up roughly 1 percentage point from September.

Tumbling bond prices have driven up the yield on the benchmark 10-year U.S. Treasury note to 4.8% in recent days, though it slipped Wednesday to 4.65% after fresh inflation data. That is up around 1 percentage point from September and a far cry from the 2% yields that prevailed in 2017, when Republicans enacted a $1.5 trillion deficit-financed tax cut. At the new, higher interest rates, every decision to borrow more money costs even more money. Every 0.1-percentage-point increase in Treasury borrowing costs adds more than $300 billion in interest expenses over a decade.

Takeaways by Macro Roundup® AI

  1. The 10-year U.S. Treasury yield reached 4.8% in recent days before slipping to 4.65% Wednesday after fresh inflation data, up roughly 1 percentage point from September.
  2. Every 0.1-percentage-point increase in Treasury borrowing costs adds more than $300 billion in interest expenses over a decade, making each decision to borrow more money costlier.
  3. Current yields of 4.65% to 4.8% are a far cry from the 2% yields that prevailed in 2017, when Republicans enacted a $1.5 trillion deficit-financed tax cut.

Related Articles:

  • 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.
  • 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.
  • Our Thoughts on Large US Deficits and Their Impact on Bond Yields — Total borrowing in the US is about average despite high government deficits, as high public borrowing has contributed to the need for higher interest rates that have depressed private sector borrowing. Risk premiums on long-dated debt look about average, with no market signs that economic or debt limits are currently being hit.

AI Summary. The war in Ukraine has accelerated development of drones and other unmanned systems, and the US Air Force selected Anduril and General Atomics over Lockheed, Boeing and Northrop to build and test drone prototypes for a program aimed at fielding a fleet of unmanned aircraft.

Sylvia Pfeifer and Steff Chávez Financial Times
Date Posted:

Since Trump’s win shares in US major defense contractors have underperformed the S&P 500 as investors anticipate new entrants such as Anduril earning a larger share of DOD spending.

Are newer technology firms displacing traditional defense contractors in drone programs?

Core argument: The US Air Force selected Anduril and General Atomics over Lockheed, Boeing and Northrop to build and test drone prototypes for the next phase of its collaborative combat aircraft programme, a choice seen as a seminal moment for the industry.

The war in Ukraine has turbocharged the development of drones and other unmanned systems, all of which play to the strengths of the likes of Palantir and Anduril. The latter, along with General Atomics, was selected last year by the US Air Force to build and test drone prototypes for the next phase of the service’s collaborative combat aircraft programme, which seeks to build a fleet of unmanned aerial vehicles. The companies were chosen over Lockheed, Boeing and Northrop in what was seen as a seminal moment for the industry. Even before the war in Ukraine, the Pentagon had been working to diversify its industrial base. Two years ago it established an Office of Strategic Capital, which makes private capital available to companies with technological innovations that can be used for national security.

Takeaways by Macro Roundup® AI

  1. The US Air Force selected Anduril and General Atomics over Lockheed, Boeing and Northrop to build and test drone prototypes for the next phase of its collaborative combat aircraft programme, a choice seen as a seminal moment for the industry.
  2. The war in Ukraine has accelerated development of drones and other unmanned systems, which play to the strengths of companies such as Palantir and Anduril.
  3. The Pentagon, working to diversify its industrial base even before the war in Ukraine, established an Office of Strategic Capital that makes private capital available to companies with technological innovations usable for national security.

Related Articles:

  • Palantir and Anduril Join Forces with Tech Groups to Bid for Pentagon Contracts — Palantir and Anduril are in talks with about a dozen technology companies — including SpaceX, OpenAI, autonomous-ship builder Saronic, and Scale AI — to form a consortium that would jointly bid for US government work in an effort to disrupt the oligopoly of established "prime" defense contractors.
  • US Defence Tech Start-up Anduril Raises $1.5B at $14B Valuation — US defence technology start-up Anduril Industries raised $1.5bn at a $14bn valuation, double its valuation at its previous fundraising, amid surging investment in the sector. The company will fund new manufacturing facilities intended to mass produce tens of thousands of autonomous weapons systems for the US and its allies.
  • Pentagon Plans Vast AI Fleet to Counter China Threat — The Pentagon plans to field thousands of air-, land- and sea-based artificial-intelligence systems, drones and autonomous platforms within two years to counter threats from China and other adversaries, spending hundreds of millions of dollars on systems intended to be "small, smart, cheap.