Edward Conard

Top Ten New York Times Bestselling Author

  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Friday, February 7, 2025

AI Summary. Estimates put algorithmic progress in artificial intelligence at roughly 4x per year, meaning the compute needed for a given capability level falls 4x annually, with some industry leaders arguing improvements run closer to 10x. The Bank of China announced a $140bn (1tn yuan) five-year subsidy for the AI industry chain aimed at making China self-reliant in science and technology.

Dylan Patel, AJ Kourabi, Doug O'Laughlin, and Reyk Knuhtsen Semianalysis
Date Posted:

.@dylan522p @SemiAnalysis_ notes that DeepSeek’s efficiency gains are accelerating the decline in AI inference costs, tracking the trend from GPT-4 to DeepSeek-V3 and notes, “By the end of the year do not be shocked if costs fall another 5x.”

How fast is the compute needed for given AI capability falling?

Core argument: Estimates put AI algorithmic progress at 4x per year, meaning 4x less compute is needed annually for the same capability, while Anthropic CEO Dario argues advances run faster, yielding up to 10x improvement.

Estimates put algorithmic progress at 4x per year, meaning that for every passing year, 4x less compute is needed to achieve the same capability. Dario, CEO of Anthropic argues that algorithmic advancements are even faster and can yield a 10x improvement. When investigating the cost for GPT-4, in this case, we see algorithmic improvements and optimizations creating a 10x decrease in cost and increase in capability. To be clear DeepSeek is unique in that they achieved this level of cost and capabilities first. They are unique in having released open weights, but prior Mistral and Llama models have done this in the past too. DeepSeek has achieved this level of cost but by the end of the year do not be shocked if costs fall another 5x. The Bank of China has announced a $140B (1T Yuan) subsidy over the next 5 years for the AI Industry Chain, one day after meeting the CEO and founder of DeepSeek. The goal of this subsidy is explicitly to empower China to be completely self-reliant in science and technology.

Takeaways by Macro Roundup® AI

  1. Estimates put AI algorithmic progress at 4x per year, meaning 4x less compute is needed annually for the same capability, while Anthropic CEO Dario argues advances run faster, yielding up to 10x improvement.
  2. GPT-4's cost shows algorithmic improvements and optimizations producing a 10x decrease in cost alongside increased capability, with DeepSeek first to reach this cost-capability level, though Mistral and Llama models also released open weights previously.
  3. The Bank of China announced a $140 billion (1T yuan) subsidy for the AI industry chain over five years, one day after meeting DeepSeek's CEO and founder, explicitly to make China completely self-reliant in science and technology.

Related Articles:

  • DeepSeek and the Sincerest Form of Flattery — DeepSeek appears to have trained its models about 45x more efficiently than other leading-edge models, combining existing techniques—activating only 37bn of 671bn parameters at a time, a smaller memory cache, lower-precision training, and multi-token prediction—alongside self-reinforcement learning. Training cost $5.6m, and its interface charges $0.14 per million tokens versus OpenAI's $7.50.
  • DeepSeek FAQ — Consumers and businesses stand to gain most from a future of effectively free AI products, along with big consumer tech companies, since a world of free AI makes product and distribution the decisive advantages they already hold. China also benefits, and the United States faces a choice between expanding chip export restrictions and permission-based regulation or allowing itself to compete.
  • 2025 AI Diffusion Export Controls – Microsoft Regulatory Capture, Oracle Tears, Impacts Quantified, Model Restrictions — 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.

AI Summary. Microsoft, Alphabet, Amazon and Meta reported combined capital expenditure of $246bn, up from $151bn the prior year, and forecast spending could exceed $320bn as they compete to build data centres filled with specialised AI chips. Capital spending among the "Magnificent Seven" rose 40%, versus 3.5% for the other 493 S&P 500 companies.

Stephen Morris and Rafe Uddin Financial Times
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The capex of Meta, Google, Microsoft, and Amazon is forecast to grow to at least $320B this year, up 30% y/y, “to remain at the forefront of AI large language model research.”

How much are big tech firms spending to build AI capacity?

Core argument: Microsoft, Alphabet, Amazon and Meta reported combined capital expenditure of $246bn in 2024, up from $151bn in 2023, and forecast spending could exceed $320bn this year.

Microsoft, Alphabet, Amazon and Meta have reported combined capital expenditure of $246bn in 2024, up from $151bn in 2023. They forecast spending could exceed $320bn this year as they compete to build data centres and fill them with clusters of specialised chips to remain at the forefront of AI large language model research. Spending among the “Magnificent Seven” — which also includes Apple, Nvidia and Tesla — dwarfs the rest of the US benchmark S&P 500. Their capital spending rose 40% in 2024 compared with 3.5% among the remaining 493 companies, according to Société Générale. Profits among the elite group soared by a third in the same period, versus 5% among the rest.

Takeaways by Macro Roundup® AI

  1. Microsoft, Alphabet, Amazon and Meta reported combined capital expenditure of $246bn in 2024, up from $151bn in 2023, and forecast spending could exceed $320bn this year.
  2. Microsoft, Alphabet, Amazon and Meta are competing to build data centres and fill them with clusters of specialised chips to remain at the forefront of AI large language model research.
  3. Capital spending among the "Magnificent Seven" rose 40% in 2024 versus 3.5% among the other 493 S&P 500 companies, while their profits rose by a third versus 5%, according to Société Générale.

Related Articles:

  • DeepSeek Raises Micro Risks, Macro Upside — More efficient AI model training and falling compute costs pose a near-term risk of lower AI-related capital spending, which equity analysts project will rise to $325bn by the end of 2025, though that risk is seen as limited. Cheaper, more competitive models could instead speed the buildout of AI platforms and applications, raising macroeconomic upside.
  • A Severe Case of COVIDIA: Prognosis For An AI-Driven US Equity Market — Computing cycles move from infrastructure to platforms to applications, and NVIDIA data center revenues as a share of market-wide capital spending are projected to reach levels last seen at the 1969 mainframe peak and the dot-com boom. Large cloud providers spend more than twice as much training foundational models as running them for customers.
  • Gen AI: Too Much Spend, Too Little Benefit? — The author argues generative AI is unlikely to drive revenue expansion because it helps employees find information faster rather than find better information. If AI's benefits remain limited to efficiency gains, competitors can adopt the same tools, so cost savings get arbitraged away rather than raising prices or margins.

AI Summary. European stocks have reached record highs but trail US equities, with the Stoxx Europe 600 posting its widest dollar-terms underperformance versus the S&P 500 since the index began in 1998, and US stocks trading at 22x earnings, a near 60% premium over Europe. When companies follow capital abroad, headquarters, management, and hiring can move with it.

Sagarika Jaisinghani, Pablo Mayo Cerqueiro, Jan-Patrick Barnert, and Neil Campling Bloomberg
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“US stocks on average trade at 22 times earnings, a near 60% premium over Europe.” As EU firms choose to list in the US, “headquarters, management and hiring can be pulled away too” and Europe “loses out on the next generation of ideas and companies.”

Do fragmented capital markets hold back European equities and companies?

Core argument: The Stoxx Europe 600 in 2024 posted its biggest dollar-terms underperformance versus the S&P 500 since the European benchmark's 1998 creation, even as a global rally pushed the index to record highs.

Although a global rally has lifted the Stoxx Europe 600 Index to record highs, its performance pales in comparison to the US. In 2024, the benchmark suffered its biggest underperformance in dollar terms versus the S&P 500 since the regional benchmark was created in 1998. US stocks on average trade at 22 times earnings, a near 60% premium over Europe. Scare stories about capital markets aren’t just about share prices or investor returns. When companies are driven to follow the money, then headquarters, management and hiring can be pulled away too. If they don’t have enough incentive to stay, the continent loses out on the next generation of ideas and companies it needs to stay relevant.

Takeaways by Macro Roundup® AI

  1. The Stoxx Europe 600 in 2024 posted its biggest dollar-terms underperformance versus the S&P 500 since the European benchmark's 1998 creation, even as a global rally pushed the index to record highs.
  2. US stocks trade at an average 22 times earnings, a near 60% premium over European equities.
  3. When companies are driven to follow the money, headquarters, management and hiring can be pulled away from Europe, costing the continent the next generation of ideas and companies it needs to stay relevant.

Related Articles:

  • 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.
  • 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.
  • A Visualization of Europe’s Non-Bubbly Economy — The Draghi report notes that no European Union company with a market capitalization above €100bn was founded from scratch in the past fifty years, while all six US companies valued above €1tn were. The 13 EU companies founded in that period and worth at least $10bn total about $400bn, versus nearly $30tn for their US counterparts.

AI Summary. The paper proposes making the high-tax exclusion mandatory under the US minimum tax on foreign corporate earnings, with the exclusion threshold set at the minimum tax's effective rate, so the tax applies only to income below that threshold. The authors estimate this would raise $68.5bn–$72.9bn over a decade while reducing tax-avoidance opportunities.

Kyle Pomerleau American Enterprise Institute
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.@kpomerleau argues that mandatory exclusion of high-tax foreign income for Global Intangible Low-Tax Income (GILTI) calculations would “reduce incentives to shift mobile assets to foreign jurisdictions” and raise $68.5-72.9B in 2025-35.@kpomerleau

Would a mandatory high-tax exclusion raise revenue and curb tax avoidance?

Core argument: Making the GILTI high-tax exclusion mandatory would raise between $68.5 billion and $72.9 billion between 2026 and 2035, according to the paper.

An area that deserves close inspection is Global Intangible Low-Tax Income’s structure as an overall minimum tax on foreign operations. This paper outlines a straightforward reform to GILTI: a mandatory high-tax exclusion. Under current law, corporations can elect to exclude the profits and related foreign taxes that face an effective tax rate [ETR} above a certain threshold. This reform would make this election mandatory and, as a result, GILTI would only apply to income below the exclusion threshold. The effective rate test for the mandatory high-tax exclusion, which is currently 18.9 percent (90 percent of the statutory tax rate of 21 percent), should be set at GILTI’s ETR. For example, if the corporate tax rate is 21 percent and the GILTI ETR is 13.125 percent, the high tax exclusion ETR test should be set at 62.5 percent of the domestic tax rate or 13.125 percent. This reform would reduce opportunities for tax avoidance and reduce incentives to shift mobile assets to foreign jurisdictions while having a minimal impact on complexity, [and] would raise btw $68.5 and $72.9 billion btw 2026 and 2035.

Takeaways by Macro Roundup® AI

  1. Making the GILTI high-tax exclusion mandatory would raise between $68.5 billion and $72.9 billion between 2026 and 2035, according to the paper.
  2. The paper proposes setting the high-tax exclusion effective rate test at GILTI's own effective tax rate — 13.125 percent, or 62.5 percent of a 21 percent corporate rate — rather than the current 18.9 percent threshold.
  3. Under current law corporations may elect to exclude foreign profits and related foreign taxes facing an effective tax rate above a threshold; making that election mandatory would apply GILTI only to income below the exclusion threshold.

Related Articles:

  • Making the Tax Cuts and Jobs Act Permanent: Two Revenue-Neutral, Pro-Growth Options for Tax Reform — Following the 2017 US tax law, real economic output, consumption, business investment, and payrolls grew faster than pre-law forecasts and nearly matched post-law projections, and an analysis of administrative corporate tax return data estimates firms with the average tax change raised domestic investment about 20% relative to firms with no change.
  • The Budget and Economic Outlook: 2025 to 2035 — The Congressional Budget Office projects the federal deficit will grow from $1.9tn (6.2% of GDP) to $2.7tn by 2035, well above the 3.8% of GDP average of the past 50 years. Outlays are projected to rise to 24.4% of GDP, driven by growth in Social Security and Medicare spending and rising net interest costs, while revenues reach 18.3%.
  • Interest Costs Would Explode with $5.5 Trillion Reconciliation Package — Analysts estimate that enacting $5.5tn of unoffset tax cuts and spending would raise federal interest costs by about $1.3tn over a decade, lifting annual net interest payments to $2tn, or 4.7% of GDP, by 2035 — above the prior record of 3.2% — and interest as a share of revenue to 27%.

AI Summary. Chinese researchers say they have modelled how the V-shaped surface wake of a submerged submarine generates a faint magnetic field as disturbed seawater ions interact with the Earth's geomagnetic field. They calculate that a Seawolf-class submarine at 24 knots and 30m depth produces a field of 10⁻¹² tesla, which they say is within the sensitivity range of existing airborne magnetometers.

Stephen Chen South China Morning Post
Date Posted:

Chinese researchers claim to have developed a method for tracking submarines via their magnetic fields. “The future lies in merging physics with AI. Magnetic wakes add another layer to the kill web – a system where even ghosts leave traces.” @SCMPNews

Can submarine surface wakes create magnetic signals detectable from aircraft?

Core argument: Researchers at Northwestern Polytechnical University in Xian calculate that a Seawolf-class submarine travelling at 24 knots (12.5 metres per second) and 30 metres depth generates a wake magnetic field of 10⁻¹² tesla, which they say falls within the sensitivity range of existing airborne magnetometers.

Researchers with Northwestern Polytechnical University (NPU) in Xian claim to have developed a groundbreaking method to detect even the quietest underwater vessels by harnessing the magnetic fields generated by their wakes – a discovery that could reshape naval warfare. Led by associate professor Wang Honglei, the team modelled the Kelvin wake, a V-shaped surface disturbance created by submarines as they slice through water. This wake, previously studied for radar-based imagery detection, generates a faint but detectable magnetic field when seawater ions – disturbed by the vessel’s motion – interact with the Earth’s geomagnetic field. For a Seawolf-class submarine travelling at 24 knots (12.5 metres per second) and 30 metres (98 feet) depth, the wake’s magnetic field reaches 10⁻¹² tesla – “well within the sensitivity range of existing airborne magnetometers”, according to Wang and his colleagues.

Takeaways by Macro Roundup® AI

  1. Researchers at Northwestern Polytechnical University in Xian calculate that a Seawolf-class submarine travelling at 24 knots (12.5 metres per second) and 30 metres depth generates a wake magnetic field of 10⁻¹² tesla, which they say falls within the sensitivity range of existing airborne magnetometers.
  2. The NPU team, led by associate professor Wang Honglei, modelled the V-shaped Kelvin wake created by a submarine's motion, which generates a faint magnetic field as disturbed seawater ions interact with the Earth's geomagnetic field.
  3. Wang and his colleagues claim a method to detect even the quietest underwater vessels, extending Kelvin wake analysis beyond its prior study for radar-based imagery detection.

Related Articles:

  • The Era of Total U.S. Submarine Dominance Over China Is Ending — China has launched a nuclear-powered attack submarine using pump-jet propulsion, the first appearance on a Chinese submarine of noise-reducing technology used on the newest American submarines, and satellite images show expanded submarine construction capacity. China has also built or nearly completed underwater sensor networks around its coast that improve its ability to detect enemy submarines.
  • US Nuclear Submarine Weak Spot In Bubble Trail: Chinese Scientists — Researchers at the Chinese Academy of Sciences calculate that the extremely low frequency magnetic signal generated by the bubble trail of an advanced submarine could exceed the sensitivity of advanced magnetic anomaly detectors by three to six orders of magnitude. The authors argue this offers a new approach to detecting and tracking submarines from long distances.
  • China’s Newest Nuclear Submarine Sank, Setting Back Its Military Modernization — U.S. officials say China's first Zhou-class nuclear-powered attack submarine, which features a distinctive X-shaped stern designed for greater maneuverability, sank at a shipyard near Wuhan, a setback for a priority weapons program that Chinese authorities sought to conceal.

Monday, February 10, 2025

AI Summary. An expansionary policy agenda focused on demand while neglecting supply-side impediments such as permitting obstacles, and the author argues a surge in public spending crowds out private investment. Highway spending rose 36% over a five-year period, but construction costs rose more, leaving real infrastructure spending down 17%.

Jason Furman Foreign Affairs
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Jason Furman (Obama’s former CEA chair) claims that real infrastructure spending astonishingly fell 17% during the Biden administration despite large budget increases which failed to anticipate capacity constraints that drove prices up more than spending.

Does higher public spending deliver more infrastructure when costs rise faster?

Core argument: Highway spending rose 36% from mid-2019 to mid-2024, but construction costs for asphalt, concrete, and labor rose more, leaving real infrastructure spending down 17% over the same period.

The Biden administration failed to seriously reckon with budget constraints and to contend with the effects of “crowding out,” when a surge in public-sector spending causes the private sector to invest less. The administration’s focus on the demand side came at the expense of addressing impediments to supply, such as excessive obstacles to permitting processes related to building infrastructure. As a result, infrastructure suffered an even worse fate than real wages. More than half the funds in the Bipartisan Infrastructure Law dispersed to states through early 2024 went to highway and bridge projects, prompting a spike in highway spending, which rose 36% from mid-2019 to mid-2024. But the costs associated with construction, including asphalt, concrete, and labor, increased even more, leaving real infrastructure spending down 17% over the same period. In fact, the amount of federal investment in highways during every year of the Biden administration was lower than in any year from 2003 through 2020. Biden’s putative building boom was in reality a building bust.

Takeaways by Macro Roundup® AI

  1. Highway spending rose 36% from mid-2019 to mid-2024, but construction costs for asphalt, concrete, and labor rose more, leaving real infrastructure spending down 17% over the same period.
  2. Federal investment in highways in every year of the Biden administration was lower than in any year from 2003 through 2020, making the putative building boom a building bust.
  3. The Biden administration failed to reckon with budget constraints and with crowding out, in which a surge in public-sector spending causes the private sector to invest less, while neglecting supply impediments such as permitting obstacles.

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.
  • 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.

AI Summary. An analysis estimates that the increase in US federal spending has exceeded real GDP growth by $800bn, with interest costs contributing $381bn, Medicaid $137bn, social services $125bn, and Social Security and Medicare $77bn. It estimates retiree-related expenses rose 3% while non-retiree expenses rose 30%.

Elon Musk @elonmusk
Date Posted:

Elon Musk says the Federal government’s spending increase exceeded real GDP growth since 2019 by $800B, from Medicaid ($137B), social services ($125B), Social Security and Medicare ($77B), and interest ($381B). Retiree-related expense only increased 3% while non-retirees expenses ballooned 30%.

How much has federal spending outpaced real GDP growth?

Core argument: Elon Musk says federal spending growth has exceeded real GDP growth since 2019 by $800bn, with interest costs accounting for $381bn of that figure.

[Musk asks] Any corrections or comments about these numbers?

Takeaways by Macro Roundup® AI

  1. Elon Musk says federal spending growth has exceeded real GDP growth since 2019 by $800bn, with interest costs accounting for $381bn of that figure.
  2. Musk attributes the rest of the $800bn gap to Medicaid ($137bn), social services ($125bn), and Social Security and Medicare ($77bn).
  3. Musk says retiree-related expenses rose 3% while non-retiree expenses rose 30%, and he invites corrections to his figures.

Related Articles:

  • The Budget and Economic Outlook: 2025 to 2035 — The Congressional Budget Office projects the federal deficit will grow from $1.9tn (6.2% of GDP) to $2.7tn by 2035, well above the 3.8% of GDP average of the past 50 years. Outlays are projected to rise to 24.4% of GDP, driven by growth in Social Security and Medicare spending and rising net interest costs, while revenues reach 18.3%.
  • Interest Costs Would Explode with $5.5 Trillion Reconciliation Package — Analysts estimate that enacting $5.5tn of unoffset tax cuts and spending would raise federal interest costs by about $1.3tn over a decade, lifting annual net interest payments to $2tn, or 4.7% of GDP, by 2035 — above the prior record of 3.2% — and interest as a share of revenue to 27%.
  • 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.

AI Summary. Brazil illustrates a feedback loop in which higher interest rates raise debt-servicing costs—now over 7% of GDP—which in turn lift risk premia and inflation expectations, making fiscal policy less sustainable still. U.S. long-term rates have not fallen despite Federal Reserve cuts, partly reflecting an $11tn debt increase and markets pricing the risk that debt is managed through higher inflation.

Stan Veuger and Mikkel Davies Foreign Policy
Date Posted:

Brazil is spending a fiscally “unsustainable” 7% of GDP on debt service. @stanveuger @mikkel_dav argue that the US may be on the same path to “fiscal dominance,” where “management of the debt will ultimately happen through bouts of elevated inflation.”

Can rising debt-servicing costs trap a country in higher interest rates?

Core argument: Brazil's debt-servicing cost exceeds 7% of GDP, and rate increases raise that cost further, feeding back into higher risk premia and inflation expectations that make fiscal policy still less sustainable.

Brazil’s fiscal anchors have come unmoored. An increase in interest rates causes the cost of servicing the debt—now at more than 7% of GDP—to rise, which makes fiscal policy even more unsustainable. This, in turn, feeds back into higher interest rates through a higher risk premium and higher inflation expectations, which makes fiscal policy even less sustainable—and so on. In the United States, long-term interest rates have not come down even as the Federal Reserve has been cutting the short-term interest rate. Higher interest rates reflect, at least in part, the effect of much higher debt levels and deficits in the United States. Since 2019, the U.S. debt level has increased by $11 trillion—an increase of roughly 20pp in the debt-to-GDP ratio. Market participants have begun to incorporate the risk that the United States might have to reduce the real value of its debt by allowing higher inflation, similar to what happened in 2021 and 2022. Washington [would thus be] accepting permanently higher interest rates, as markets anticipate that management of the debt will ultimately happen through bouts of elevated inflation.

Takeaways by Macro Roundup® AI

  1. Brazil's debt-servicing cost exceeds 7% of GDP, and rate increases raise that cost further, feeding back into higher risk premia and inflation expectations that make fiscal policy still less sustainable.
  2. U.S. debt has risen by $11 trillion since 2019, roughly 20 percentage points in the debt-to-GDP ratio, and higher long-term interest rates reflect at least in part the effect of these higher debt levels and deficits.
  3. U.S. long-term interest rates have not fallen even as the Federal Reserve has cut short-term rates, with market participants beginning to incorporate the risk that the United States reduces the real value of its debt by allowing higher inflation, as in 2021 and 2022.

Related Articles:

  • Fiscal Dominance and the Return of Zero-Interest Bank Reserve Requirements — Fiscal dominance requires governments to fund deficits at the margin with non-interest-bearing debt, and the revenue from inflation taxation—both expected and unexpected—is limited. The authors argue a US fiscal dominance episode could end the payment of interest on bank reserves and restore requirements that banks hold large zero-interest reserves against deposits.
  • Government Debt in Mature Economies. Safe or Risky? — When governments insulate taxpayers rather than bondholders from unfunded spending shocks, government bond yields rise as debt is marked to market, shifting the risk to bondholders — a "risky debt" regime the authors argue better fits recent experience. In that regime, large-scale central bank asset purchases give government bonds temporary price support at a net loss to taxpayers.
  • Living with High Public Debt — High public debt ratios are likely to persist because large sustained primary budget surpluses are politically unrealistic, real interest rates are already very low, faster global growth is hard to engineer, inflation is not a sustainable route to reducing debt, and financial repression is less feasible amid liberalized markets.

AI Summary. Valuation errors stem mainly from mistaken forecasts of growth, profitability, or reinvestment rather than from the discount rate, and no great company achieved greatness by finessing its cost of capital. The author suggests valuing a mature US company using the 8.35% median cost of capital and focusing analysis on growth and profit prospects.

Aswath Damodaran Musings on Markets
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At the start of 2025, the median cost of capital for an American firm is 8.5%. @AswathDamodaran argues that investments should be driven by “growth and profit prospects,” and that “hurdle rates are not where business/valuation battles are won or lost.”

Do discount rates or growth forecasts drive valuation errors?

Core argument: Damodaran argues that valuers of mature US companies pressed for time should use a cost of capital of 8.35%, the median for US companies at the start of 2025, and concentrate on growth and profit prospects instead.

Hurdle rates are not where business/valuation battles are won or lost: It is true that costs of capital are the D in a DCF, but they are not and should never be what makes or breaks a valuation. I have been badly mistaken many times, and the culprit almost always has been an error on forecasting growth, profitability or reinvestment (all of which lead into the cash flows), not the discount rate. In the same vein, I cannot think of a single great company that got to greatness because of its skill in finessing its cost of capital, and I know of plenty that are worth trillions of dollars, in spite of never having actively thought about how to optimize their costs of capital. If you are valuing a mature US company at the start of 2025, and you are in a hurry (and who isn't?), you would be well served using a cost of capital of 8.35% (the median for US companies at the start of 2025) and spending your time assessing its growth and profit prospects, and coming back to tweak the cost of capital at the end, if you have the time.

Takeaways by Macro Roundup® AI

  1. Damodaran argues that valuers of mature US companies pressed for time should use a cost of capital of 8.35%, the median for US companies at the start of 2025, and concentrate on growth and profit prospects instead.
  2. Damodaran attributes his own valuation errors almost always to mistakes in forecasting growth, profitability, or reinvestment, which feed the cash flows, rather than to the discount rate.
  3. Damodaran says he can think of no great company that reached greatness through skill in finessing its cost of capital, and knows of many worth trillions of dollars that never actively thought about optimizing it.

Related Articles:

  • Cost of Capital and Capital Allocation: Investment in the Era of “Easy Money” — The authors estimate that the weighted average cost of capital for Russell 3000 companies averaged 6.9% during the 2009-21 era of easy money versus 7.5% in the prior period, while the aggregate return on invested capital averaged 9.5% versus 9.2%. The resulting spread between returns and the cost of capital averaged 2.6 percentage points versus 1.7 points earlier.
  • Data Update 4 for 2024: Risk Enters the Equation — Across a universe of 47,698 companies, the median cost of capital for a US company is estimated at 7.9%, down from 9.6% a year earlier entirely because of declines in the price of risk, namely equity risk premiums and default spreads, though still above a historic low of 5.8%.
  • and — Across a universe of 47,698 companies, the median cost of capital for a US company is estimated at 7.9%, down from 9.6% a year earlier entirely because of declines in the price of risk, namely equity risk premiums and default spreads, though still above a historic low of 5.8%.
  • Firm Investment and the User Cost of Capital: New U.S. Corporate Tax Reform Evidence — Across a universe of 47,698 companies, the median cost of capital for a US company is estimated at 7.9%, down from 9.6% a year earlier entirely because of declines in the price of risk, namely equity risk premiums and default spreads, though still above a historic low of 5.8%.

AI Summary. Underlying wage growth appears to have undergone a modest but persistent acceleration, feeding faster nominal spending growth, and because productivity growth has not matched it, inflation has been consistently faster than before the pandemic. Across a range of measures, prices are rising about 1% a year faster than in 2017-2019.

Matt Klein The Overshoot
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.@M_C_Klein argues the final stretch to 2% inflation could be the hardest: inflation has been running ~1pp above 2017-2019 levels, with wage growth at 4.5% vs. 3% pre-pandemic, outpacing productivity growth.

Is faster wage growth outpacing productivity keeping inflation above 2%?

Core argument: Across a range of measures, prices are rising about 1% a year faster than during 2017–2019, when core PCE inflation averaged 1.6%, roughly 0.4 percentage points below the 2% target.

The challenge for policymakers concerned with getting back to 2% yearly inflation is that there seems to have been a modest but persistent acceleration in the underlying pace of wage growth, which in turn has fed into faster nominal spending growth. Since the shift in the wage growth trend has not been fully matched by an acceleration in productivity growth, at least so far, inflation has been consistently faster than before the pandemic. Across a range of measures, prices are rising about 1% a year faster than in 2017-2019 [during which core PCE growth averaged 1.6%, ~.4 pp below the 2% target.]

Takeaways by Macro Roundup® AI

  1. Across a range of measures, prices are rising about 1% a year faster than during 2017–2019, when core PCE inflation averaged 1.6%, roughly 0.4 percentage points below the 2% target.
  2. A modest but persistent acceleration in the underlying pace of wage growth appears to have fed into faster nominal spending growth, keeping inflation consistently faster than before the pandemic.
  3. The shift in the wage growth trend has not been fully matched by an acceleration in productivity growth, at least so far, complicating a return to 2% yearly inflation.

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AI Summary. Using Norwegian administrative data, the authors find that businesses owned by women experience a decline in profits after the owner becomes a parent, reaching 30% below baseline ten years after childbirth, while male-owned firms show little decline. The profit decline is most pronounced among highly capable entrepreneurs, majority owners, and women with working spouses.

John Bonney, Luigi Pistaferri, and Alessandra Voena National Bureau of Economic Research
Date Posted:

Bonney et al show that in Norwegian data there is a large “child penalty” for female, but not male, entrepreneurs. “Female-owned businesses experience a substantial decline in profits, steadily decreasing to 30% below baseline ten years post-childbirth.”

Does becoming a parent reduce profits at women-owned firms?

Core argument: Female-owned businesses in Norway show profits declining steadily to 30% below baseline ten years after childbirth, according to Norwegian administrative data on entrepreneurs.

An extensive body of work has shown that motherhood is associated with large declines in women’s employment rates, working hours, and wages—a phenomenon known as the “child penalty” The literature focuses on documenting the child penalty for workers. In this paper, we use administrative data from Norway to measure the child penalty for entrepreneurs and their businesses. Using multiple administrative data sources from Norway, we examine how firm performance changes after entrepreneurs become parents. Female-owned businesses experience a substantial decline in profits, steadily decreasing to 30% below baseline ten years post-childbirth. In contrast, male-owned businesses show [little] decline, often growing in revenues and costs after childbirth. The profit decline for female-owned firms is most pronounced among highly capable entrepreneurs, women who are majority owners, and those with working spouses.

Takeaways by Macro Roundup® AI

  1. Female-owned businesses in Norway show profits declining steadily to 30% below baseline ten years after childbirth, according to Norwegian administrative data on entrepreneurs.
  2. Male-owned Norwegian businesses show little profit decline after the owner becomes a parent, often growing in both revenues and costs.
  3. The profit decline for female-owned firms is most pronounced among highly capable entrepreneurs, women who are majority owners, and those with working spouses.

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  • Why Is Prime-Age Labor Force Participation So High? — Labor force participation among 25-to-54-year-olds rose after the pandemic shock, with women's rate exceeding its pre-pandemic peak while men's returned to its pre-pandemic level but stayed below its historical high. The authors find this participation rise can ease wage and price pressures in hot labor markets, but appears to have ended.
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AI Summary. China's Ministry of Civil Affairs reported 6.1m marriage registrations, the fewest since public records began in 1986 and less than half the 2013 peak, alongside 2.6m divorce filings. China's population shrank for a third straight year even as births rose slightly.

Bloomberg Staff Bloomberg
Date Posted:

China’s marriage registrations fell to a record low of 6.1M in 2024, down 50% from the 2013 peak. Birth rates in 2024 hit their second-lowest level since the PRC’s founding in 1949, and China’s population shrank for the third straight year.

Are marriages in China falling to record lows as its population shrinks?

Core argument: China's marriage registrations fell to 6.1 million from nearly 7.7 million in 2023, the fewest since public records began in 1986 and less than half the 2013 peak, according to the Ministry of Civil Affairs.

The number of marriage registrations fell to 6.1 million, according to statistics released by China’s Ministry of Civil Affairs on Saturday, after a post-pandemic increase to nearly 7.7 million in 2023. The tally for last year marks the fewest marriages since public records began in 1986 and is less than half the peak reached in 2013. Registrations may also have suffered last year because 2024 was an inauspicious year for marriage — known as a “Widow Year.” Some 2.6 million people also filed for divorce, up 1.1% from 2023, the data showed. China’s population shrank for the third straight year in 2024, even though births rose slightly. Some of the improvement was attributed to the belief that the Year of the Dragon in the Chinese zodiac is lucky for having children. Even so, last year saw the second-lowest number of births since the founding of the People’s Republic of China in 1949.

Takeaways by Macro Roundup® AI

  1. China's marriage registrations fell to 6.1 million from nearly 7.7 million in 2023, the fewest since public records began in 1986 and less than half the 2013 peak, according to the Ministry of Civil Affairs.
  2. Some 2.6 million people in China filed for divorce, up 1.1% from 2023, while marriage registrations may also have suffered because 2024 was an inauspicious "Widow Year.".
  3. China's population shrank for a third straight year in 2024 even as births rose slightly, an improvement partly attributed to the belief that the Year of the Dragon is lucky for childbearing; births were still the second-lowest since 1949.

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