Edward Conard

Top Ten New York Times Bestselling Author

  • “Unintended Consequences is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.” - Tyler Cowen, Professor, George Mason University
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…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
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…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 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
  • “Unintended Consequences provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.” - Nouriel Roubini, New York University; Chairman, Roubini Global Economics
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Friday, May 16, 2025

AI Summary. U.S. artificial intelligence agreements with the United Arab Emirates and Saudi Arabia bypass prior export-control rules, unlocking large-scale Gulf capital for AI infrastructure both in the region and in the United States. The author argues the deals tie both states more closely to American technology and position the energy-rich Gulf as a major AI hub.

Dylan Patel, Jeremie Eliahou Ontiveros, AJ Kourabi, Ivan Chiam, et al. Semianalysis
Date Posted:

The Semianalysis team argues the US-KSA/UAE AI deals are “complete wins,” helping American AI work around the energy bottleneck. They forecast 6 GW of ME operational data center capacity by 2030.

Do Gulf AI deals unlock capital and deepen reliance on US technology?

Core argument: The U.S. AI pacts with the UAE and Saudi Arabia bypass the AI-Diffusion export-control framework, opening a trillion-dollar flow of capital for AI infrastructure that, in the author's view, outweighs any drag from looming tariff fights and also funds U.S. build-outs.

The new U.S. pacts with the UAE and Saudi Arabia reshape the AI landscape on three fronts: Macro. By sidestepping the old AI‑Diffusion export‑control framework, Washington has opened a trillion‑dollar floodgate of capital for AI infrastructure. That inflow outweighs any drag from looming tariff fights and will finance build‑outs not only in the Gulf but back home, putting more racks of GPUs on U.S. soil. Geopolitical. Abu Dhabi and Riyadh are now tied more closely to U.S. technology stacks. If Washington enforces tight security protocols, the alliances will deepen the region’s reliance on American hardware and software and pull both states further into the U.S. orbit. Infrastructure. Energy‑rich Gulf nations join the roster of trusted partners just as U.S. data‑center grids hit their physical limits. Europe could have relieved the bottleneck but stumbled on power shortages and slow permitting. The Middle East, flush with cheap energy and capital, is poised to become the next regional AI hub.

Takeaways by Macro Roundup® AI

  1. The U.S. AI pacts with the UAE and Saudi Arabia bypass the AI-Diffusion export-control framework, opening a trillion-dollar flow of capital for AI infrastructure that, in the author's view, outweighs any drag from looming tariff fights and also funds U.S. build-outs.
  2. The agreements tie Abu Dhabi and Riyadh more closely to U.S. technology stacks, and the author argues that if Washington enforces tight security protocols, the alliances will deepen the region's reliance on American hardware and software.
  3. Energy-rich Gulf states join the roster of trusted AI partners as U.S. data-center grids hit physical limits and Europe stumbles on power shortages and slow permitting, leaving the Middle East poised, in the author's view, to become the next regional AI hub.

Related Articles:

  • Back to our Regularly Scheduled Programming — The four largest US hyperscalers spent $440bn on capital expenditure and research in 2024, with $596bn projected for 2025, a 35% increase, leaving large gaps between AI spending and AI revenues. These firms account for more than half of all capital expenditure growth in the US equity market.
  • Electricity 2025 — US electricity demand is projected to grow about 2% annually over 2025-2027, an upward revision from an earlier 1% forecast. A study commissioned by the US Department of Energy found data centre electricity use rose from about 60 TWh in 2014 to 176 TWh in 2023, and could reach 325-580 TWh by 2028.
  • After More Than a Decade of Little Change, U.S. Electricity Consumption is Rising Again — U.S. electricity consumption is projected to rise to new record highs, growing an average 1.7% per year, in contrast with the relatively flat demand from the mid-2000s to the early 2020s. The commercial sector, which includes data centers, and the industrial sector are projected to grow faster, at 2.6% and 2.1% per year, versus 0.7% for households.

AI Summary. The authors estimate that all 2025 US tariffs raise the short-run price level by 1.7%, equal to an average consumer loss of $2,800 per household, cut real GDP growth by 0.7 percentage points, and leave the economy persistently 0.4% smaller, or $110bn annually. They project the tariffs raise $2.7tn over 2026-35, $300bn more than under a 145% China rate.

Ernie Tedeschi Yale University
Date Posted:

The revised tariffs raise the U.S. price level by 1.4% in the short run, down from 1.7%, per Yale Lab simulations by @ernietedeschi. They reduce long-run US GDP by 0.4%, with a 1.5–2% increase in manufacturing and a 3% decline in construction.

How much do 2025 tariffs cost households, growth, and raise in revenue?

Core argument: All 2025 U.S. tariffs raise the price level by 1.7% in the short run, equal to an average consumer loss of $2,800 per household in 2024$, with $1,300 in annual pre-substitution losses for households at the bottom of the income distribution.

Judged by effects on the price level and GDP, the May 12 changes to the China rate alone reduce the negative economic impact of all 2025 tariffs to date by 40%; the US-UK trade deal and auto tariff rebate have only minor impacts. The price level from all 2025 tariffs rises by 1.7% in the short-run, the equivalent of an average per household consumer loss of $2,800 in 2024$. Annual pre-substitution losses for households at the bottom of the income distribution are $1,300. The post-substitution price increase settles at 1.4%, a $2,300 loss per household. US real GDP growth is -0.7pp lower from all 2025 tariffs. In the long-run, the US economy is persistently -0.4% smaller respectively, the equivalent of $110 billion annually in 2024$. All tariffs to date in 2025 raise $2.7 trillion over 2026-35, with $394 billion in negative dynamic revenue effects. This is $300 billion more than under the higher 145% China tariffs, showing how far from revenue-optimal levels those rates were.

Takeaways by Macro Roundup® AI

  1. All 2025 U.S. tariffs raise the price level by 1.7% in the short run, equal to an average consumer loss of $2,800 per household in 2024$, with $1,300 in annual pre-substitution losses for households at the bottom of the income distribution.
  2. The May 12 reduction in the China tariff rate alone cuts the negative price-level and GDP impact of all 2025 tariffs to date by 40%, while the US-UK trade deal and auto tariff rebate have only minor impacts.
  3. All 2025 tariffs to date raise $2.7 trillion over 2026–35, with $394 billion in negative dynamic revenue effects, $300 billion more than under the higher 145% China tariffs, indicating how far those rates were from revenue-optimal levels.

Related Articles:

  • De-Escalation — New U.S. tariffs act like a sudden corporate tax increase worth hundreds of billions, and with the dollar weakening and a global minimum tariff limiting substitution toward other suppliers, importing companies likely absorb much of the cost through higher input prices and lower sales volumes. Forward earnings estimates remain elevated, suggesting this hit is not priced in.
  • Why Didn’t Tariffs Push up the U.S. Dollar? — The US dollar was exceptionally strong at a level implying an ever-shrinking export base and an ever-growing trade deficit, requiring continually larger foreign inflows at ever more inflated dollar and US equity valuations to sustain. Even after its recent slide, the dollar remains strong by almost all measures.
  • Help for the Heartland? The Employment and Electoral Effects of the Trump Tariffs in the United States — The authors find that the combined effect of U.S.-China trade war import tariffs, retaliatory tariffs, and farm subsidies on employment in exposed U.S. locations was at best a wash and possibly mildly negative, while residents of tariff-protected areas became less likely to identify as Democrats and more likely to vote Republican.

AI Summary. A 90-day pause in the US-China trade war is projected to leave the increase in the US effective tariff rate at +13 percentage points, down from a prior estimate of +15, assuming reviewed pharmaceutical and semiconductor tariffs take effect. At very high tariff levels, import substitution and rerouting limit further increases.

Jan Hatzius, Alec Phillips, David Mericle and Ronnie Walker Goldman Sachs
Date Posted:

Goldman has lowered its 2025 recession odds to 35% from 45%. Its baseline had already reflected a significant reduction of tariffs on China.

Does a trade war pause meaningfully lower the effective tariff rate?

Core argument: Goldman Sachs expects the 90-day US-China trade war pause to leave the US effective tariff rate increase at +13pp in 2025, down from its previous baseline of +15pp, assuming sectoral tariffs on pharmaceuticals and semiconductors under review take effect.

We expect [the 90 day Trade War pause] to leave the US effective tariff rate increase at +13pp in 2025 vs. our previous baseline of +15pp, assuming that sectoral tariffs (pharma and semis) the Trump administration is reviewing take effect. The limited change to our baseline for the effective tariff rate reflects 1) that we had already assumed in our forecasts that both sides would reduce their very high tariff rates and 2) that at very high levels of tariffs, substitution and rerouting of imports toward lower-tariff countries limit the impact of further increases on the overall effective tariff rate.

Takeaways by Macro Roundup® AI

  1. Goldman Sachs expects the 90-day US-China trade war pause to leave the US effective tariff rate increase at +13pp in 2025, down from its previous baseline of +15pp, assuming sectoral tariffs on pharmaceuticals and semiconductors under review take effect.
  2. Goldman Sachs raised its US growth forecast and lowered its recession odds following the US-China trade deal.
  3. The limited revision to Goldman Sachs' effective tariff rate baseline reflects its prior assumption that both sides would reduce very high tariff rates and that, at very high tariff levels, substitution and rerouting of imports toward lower-tariff countries limit the impact of further increases.

Related Articles:

  • What Are US Tariffs On China Now? — The average effective US tariff rate on Chinese goods is estimated at about 48%, up roughly 30 percentage points from about 18%. The increase reflects two 10-percentage-point hikes the US linked to fentanyl plus an additional 10-percentage-point universal tariff, with exclusions and metals and auto tariffs roughly offsetting.
  • Global Views: On the Precipice — Strategists argue risk asset markets have already priced in a modest economic upside surprise and warn against chasing the rally ahead of what they expect to be significant price increases, supply chain disruptions, and job losses. Their strongest market views are a weaker dollar and a higher gold price.
  • It Takes Time to Rebuild Trust — A US-China trade deal removes the tail risk of a complete collapse in trade between the two countries, with the probability of a US recession estimated at 30%. Tourism into the US accounts for 10% of GDP, and a 30%-40% decline in visitor arrivals from Canada and Europe is weighing on US airlines, hotels, and restaurants.

AI Summary. The US accounts for nearly half of global trade deficits, and together with the UK and Canada roughly two-thirds, while China accounts for nearly half of global surpluses. Either global surpluses must fall — meaning China's surplus must fall — or Europe must run the large deficits needed to offset them.

Finbarr Bermingham South China Morning Post
Date Posted:

Noting that the US absorbs ~ half of global surpluses (~⅔ when joined by the UK and Canada), Europe risks becoming a “shock absorber” of surpluses if the Anglosphere reduces trade deficits. @michaelxpettis

Must Europe absorb global surpluses if China's surplus does not shrink?

Core argument: Michael Pettis notes the US accounts for nearly half of global trade deficits, and together with the UK and Canada roughly two-thirds.

[Michael Pettis said] “Europe might not become a pole at all, but rather a shock absorber – forced to adjust to the choices of others without shaping the outcomes. I say this because of some pretty simple arithmetic. The US currently represents nearly half of global deficits, and with the UK and Canada they together comprise roughly two-thirds of all deficits. Either global surpluses must come down – and with China accounting for nearly half of global surpluses, this means that China’s surplus must come down – or some other part of the world must run the large deficits needed to balance global surpluses, and for all practical purposes this mostly means Europe.”

Takeaways by Macro Roundup® AI

  1. Michael Pettis notes the US accounts for nearly half of global trade deficits, and together with the UK and Canada roughly two-thirds.
  2. Pettis argues that because China accounts for nearly half of global surpluses, either China's surplus must fall or another region—for practical purposes Europe—must run the large deficits needed to balance global surpluses.
  3. Pettis warns Europe might not become a pole at all but rather a shock absorber, forced to adjust to the choices of others without shaping the outcomes.

Related Articles:

  • US-China Trade Clash Risks Making Europe Dumping Ground for Cheap Goods — China's trade surplus with the European Union reached a record $90bn over four months, fueling concerns that the bloc could become a dumping ground for cheap Chinese goods facing higher US import barriers. Most rerouting of Chinese exports currently passes through Latin America and Southeast Asia.
  • How German Industry Can Survive the Second China Shock — 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.
  • The Challenge of Using Excess Global Savings — China, Germany and Japan together ran current account surpluses of $884bn in 2024, with the top 10 surplus countries at $1.568tn, offset by a US current account deficit of $1.134tn and a UK deficit of $123bn. The author argues surplus savings are funding government borrowing in creditworthy-currency countries rather than productive investment elsewhere.

AI Summary. As women's earnings and full-time employment rates converge with men's, geographic mobility would be expected to decline, since couples with similar earnings are less likely to relocate than those with unequal earnings. The convergence may also raise child care needs, encouraging families to locate near relatives who can help.

Urvi Neelakantan, John Bailey Jones and Yue Li Federal Reserve Bank of Richmond
Date Posted:
Is Database:
Database

Btw 1996 and 2024, geographic mobility as measured by interstate migration declined for all age groups, particularly the 25–34 cohort. A FRBR note argues the decline is driven by the rise of dual earning couples and aging.

Does the convergence of men's and women's earnings reduce geographic mobility?

Core argument: As women's earnings and full-time employment rates approach those of men, geographic mobility would be expected to fall, in part because dual-earner couples with similar incomes become more common.

As the earnings and full-time employment rates of women approach those of men, we should expect geographic mobility to fall for a few reasons. First, dual-earner couples with similar incomes would become more common [and] couples with similar earnings are less likely to relocate than those with unequal earnings. The convergence of earnings and employment between men and women may also increase the need for child care. This in turn could affect geographic mobility by encouraging individuals or couples with children to locate near relatives who can help with child care.

Takeaways by Macro Roundup® AI

  1. As women's earnings and full-time employment rates approach those of men, geographic mobility would be expected to fall, in part because dual-earner couples with similar incomes become more common.
  2. Couples with similar earnings are less likely to relocate than couples with unequal earnings.
  3. The convergence of earnings and employment between men and women may increase the need for child care, which could encourage individuals or couples with children to locate near relatives who can help.

Related Articles:

  • Americans Are Still Adventurous. They Just Hate Moving — The share of Americans moving across state lines each year has stopped declining, and by a measure tracking where 30-somethings were born, interstate mobility never fell much. In 2022, 49% of US residents in their 30s were born outside their state of residence — slightly below 2010 but above any point in the 20th century.
  • Where is Standard of Living the Highest? Local Prices and the Geography of Consumption — The authors estimate that geographical differences in cost of living are especially large for low-income US households, and that expensive cities offer college graduates a standard of living similar to affordable cities while offering less-educated households a lower one. A high school dropout household moving from the most affordable to the most expensive commuting zone would see consumption fall 18.5%.
  • Household Mobility and Mortgage Rate Lock — The authors estimate that mortgage rate lock-in reduced cumulative household moves across ZIP codes from about 7.3% to 6.1% over a year, preventing roughly 800,000 moves. They calculate the resulting deadweight loss at about $296 per household, or around $20bn in aggregate.

Monday, May 19, 2025

AI Summary. Manufacturing has fallen by 15 points of GDP while the trade balance deteriorated by only 4 points, so the trade deficit cannot be the main explanation of deindustrialization. Since a dollar spent on U.S. manufactures yields about 63 cents of manufacturing value added, eliminating the manufacturing trade deficit would add roughly 2.5 points of GDP.

Paul Krugman Paul Krugman
Date Posted:

Paul Krugman notes that “manufacturing has declined by 15pp of GDP but the trade balance has deteriorated by only 4pp. This tells us that the trade deficit can’t be the main explanation of deindustrialization.”

Is the trade deficit the main cause of manufacturing's decline?

Core argument: Manufacturing has fallen by 15 points of GDP while the trade balance deteriorated by only 4 points, which the author argues means the trade deficit cannot be the main explanation of deindustrialization.

Manufacturing has declined by 15 points of GDP, but the trade balance has deteriorated by only 4 points. This tells us that the trade deficit can’t be the main explanation of deindustrialization. And even 4 points is clearly an overstatement. When you spend a dollar on U.S. manufactured goods, not all the money stays in manufacturing. Some of it “leaks out” to other parts of the economy, mainly because industrial firms buy a lot of services. My read of the input-output tables (you don’t want to know) says that on average a dollar spent on U.S. manufactures translates into only 63 cents of manufacturing value added. So imagine that we could somehow eliminate our manufacturing trade deficit. Given what I’ve said, that would increase manufacturing value-added by 4*0.63 = ~2.5 points of GDP, that is, from around 10 to around 12.5 — not nothing, but a far cry from the 25 percent people remember as the good old days.

Takeaways by Macro Roundup® AI

  1. Manufacturing has fallen by 15 points of GDP while the trade balance deteriorated by only 4 points, which the author argues means the trade deficit cannot be the main explanation of deindustrialization.
  2. The author's read of the input-output tables indicates that a dollar spent on U.S. manufactures translates into only 63 cents of manufacturing value added, mainly because industrial firms buy a lot of services.
  3. Eliminating the U.S. manufacturing trade deficit would, by the author's estimate, raise manufacturing value added by about 2.5 points of GDP, from around 10 to around 12.5, far below the 25 percent share people remember.

Related Articles:

  • A Note on Trade Deficits and Manufacturing — The U.S. manufactures trade deficit of about 4% of GDP, if eliminated, is estimated to raise manufacturing value-added by roughly 2.5 percentage points of GDP — about a quarter larger than the current 10% share — because manufacturers also buy many services. That would reverse only about 2.5 of the roughly 17-point fall in manufacturing's employment share since 1970.
  • The Mysterious Slowdown in U.S. Manufacturing Productivity — US manufacturing labor productivity growth slowed broadly after the Great Recession, with the four largest firms in each industry averaging –0.5% growth from 2010 to 2022 versus 3.7% from 1987 to 2007, and smaller follower firms showing an identical 4.2 percentage-point decline. The authors find the slowdown spans all industries and firm sizes.
  • The R&D Puzzle in U.S. Manufacturing Productivity Growth — Research and development spending in U.S. manufacturing has been rising relative to output and hours worked while productivity has been flat, which suggests the ability of research and development to boost productivity growth has been declining.

AI Summary. Given a U.S. current account deficit, some domestic sector must be a net seller of financial assets, and the federal government is best suited to that role because its liabilities are easy to service and have served investors as hedges. The author argues borrowing and monetary policy should target adequate private-sector nominal income rather than the budget balance itself.

Matt Klein The Overshoot
Date Posted:

Excess foreign saving is a given, Klein asserts, and must be absorbed by “some combination of U.S. domestic entities…that are net sellers of financial assets.” Low private US debt issuance suggests limited room for federal deficit reduction, he argues.

Should federal borrowing target nominal income rather than the budget balance?

Core argument: U.S. private indebtedness sits at its lowest level since 2000, though still high, while total debt issuance remains remarkably low, which the author reads as a favorable outcome.

If the current account deficit is taken as a given, then there must be some combination of U.S. domestic entities on the other side that are net sellers of financial assets. None of those entities has a track record of consistently translating massive issuance into productive investments. But the federal government at least has the virtue of being able to issue liabilities that are reliably easy to service out of current income and that, historically, have been useful to investors as hedges for risk assets during downturns. Rather than targeting the budget balance for its own sake, federal borrowing and monetary policy together should be the output of a process aimed at supplying enough nominal income to the domestic private sector (but not too much). In particular, the goals should be ensuring that there is enough spending to keep businesses investing and hiring, while also minimizing the need for (or appeal of) excessive private borrowing. From this perspective, the past few years look pretty good. Private indebtedness is at its lowest since 2000, albeit still high, while total debt issuance remains remarkably low.

Takeaways by Macro Roundup® AI

  1. U.S. private indebtedness sits at its lowest level since 2000, though still high, while total debt issuance remains remarkably low, which the author reads as a favorable outcome.
  2. Taking the U.S. current account deficit as given requires some combination of domestic entities to be net sellers of financial assets, and the author argues none has consistently translated massive issuance into productive investments.
  3. The author argues federal borrowing and monetary policy should jointly aim at supplying enough nominal income to the domestic private sector to keep businesses investing and hiring while minimizing excessive private borrowing, rather than targeting the budget balance itself.

Related Articles:

  • 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.
  • Larry Summers and Bob Rubin Join Our CIOs to Discuss the Surprising Economic Cycle — Adopting the Simpson-Bowles fiscal consolidation when interest rates were at zero would have risked excessive disinflation, since long rates had no room to fall to provide an offsetting expansionary impulse. After the large run-up in debt and rise in real interest rates, the developing fiscal situation risks inflationary pressure, Treasury market disruption, or crowding out of private investment.
  • The Long-Term Budget Outlook: 2025 to 2055 — The Congressional Budget Office projects the 10-year Treasury note interest rate will average 3.8% over 2025–2055, close to its 3.7% average over the prior three decades, with the inflation-adjusted rate averaging 1.5%. It assesses that long-run rates are largely set by structural factors including demographics, saving and investment behavior, and federal debt.

AI Summary. Moody's downgraded the US credit rating to Aa1 from Aaa, becoming the last of the three main rating firms to strip the country of its top-tier grade, after S&P and Fitch moved earlier. Long-term Treasury yields rose, with the 30-year reaching 5.03%, and the dollar fell against all its Group-of-10 peers.

Alice Atkins and Naomi Tajitsu Bloomberg
Date Posted:

Prices of long-dated Treasuries are falling, with the 30-year yield rising 9bps to 5.03%, its highest level since November 2023. The 10-year rose 7bps to 4.56%, still under its January yield of 4.79%.

Does a credit downgrade lift Treasury yields and weaken the dollar?

Core argument: The 30-year Treasury yield rose as much as nine basis points to 5.03%, its highest since November 2023, while the 10-year climbed seven basis points to 4.56%, after Moody's downgraded the US to Aa1 from Aaa.

The 30-year yield rose as much as nine basis points to 5.03%, the highest since November 2023. The benchmark 10-year rate climbed seven basis points to 4.56%. The dollar fell against all of its Group-of-10 peers, with the euro surging over 1% to $1.1288. Moody’s announced Friday it was downgrading the US to Aa1 from Aaa, reinforcing Wall Street’s growing worries over the nation’s fiscal outlook as Capitol Hill debates even more unfunded tax cuts. Moody’s was the last of the three main rating firms to remove the US top-tier rating. S&P Global Ratings was the first to move in 2011, while Fitch Ratings followed in 2023 — both have the nation at AA+.

Takeaways by Macro Roundup® AI

  1. The 30-year Treasury yield rose as much as nine basis points to 5.03%, its highest since November 2023, while the 10-year climbed seven basis points to 4.56%, after Moody's downgraded the US to Aa1 from Aaa.
  2. The dollar fell against all of its Group-of-10 peers, with the euro surging over 1% to $1.1288.
  3. Moody's was the last of the three main rating firms to remove the US top-tier rating, following S&P Global Ratings in 2011 and Fitch Ratings in 2023, both of which have the nation at AA+.

Related Articles:

  • The Long-Term Budget Outlook: 2025 to 2055 — The Congressional Budget Office projects the 10-year Treasury note interest rate will average 3.8% over 2025–2055, close to its 3.7% average over the prior three decades, with the inflation-adjusted rate averaging 1.5%. It assesses that long-run rates are largely set by structural factors including demographics, saving and investment behavior, and federal debt.
  • Larry Summers and Bob Rubin Join Our CIOs to Discuss the Surprising Economic Cycle — Adopting the Simpson-Bowles fiscal consolidation when interest rates were at zero would have risked excessive disinflation, since long rates had no room to fall to provide an offsetting expansionary impulse. After the large run-up in debt and rise in real interest rates, the developing fiscal situation risks inflationary pressure, Treasury market disruption, or crowding out of private investment.
  • The Long-Term Budget Outlook Under Alternative Scenarios for the Economy and the Budget — The Congressional Budget Office projects that if private investment were more sensitive to federal deficits, debt held by the public would exceed 250% of GDP and real national income per person would be 18% ($21,300) lower than its baseline, with the average interest rate on federal debt 2pp higher.

AI Summary. The 5-year, 5-year forward real US interest rate stands at 2.5%, the highest since 2010 and above levels seen during past periods of Federal Reserve tightening. Long-term real rates rising while the Federal Reserve contemplates further cuts is unusual and raises concerns for US debt sustainability.

Robin Brooks Robin Brooks Substack
Date Posted:

“Worrying things are happening” @robin_j_brooks argues, citing the steep rise in real long-term yields. The “5y5y forward real interest rate now stands at 2.5%, which is the highest level going all the way back to 2010.”

Are rising long-term real interest rates a concern for US debt sustainability?

Core argument: The US 5y5y forward real interest rate stands at 2.5%, the highest level going back to 2010, and far exceeds levels reached during the 2013 "taper tantrum" or the 2022/23 hiking cycle.

You can break down nominal US interest rates into market expectations for inflation - what’s called breakeven inflation - and the real interest rate, a residual that’s left when you subtract breakeven inflation from the nominal yield. The chart shows these three things, with one added twist. It does this decomposition for 5y5y forward yield, which is the second half of the 10-year yield when you take out the “front-end” 5-year interest rate. This perspective shines a light on longer-term interest rates, which are so important for US debt sustainability. This is where recent trends are worrying. The 5y5y forward real interest rate (blue line) now stands at 2.5%, which is the highest level going all the way back to 2010. Most importantly, it far exceeds levels seen during hawkish Fed episodes, like the 2013 “taper tantrum” or the 2022/23 hiking cycle after the COVID inflation scare. If anything, the Fed is now contemplating further cuts as the economy weakens, weighed down by tariffs, so the fact that real long-term interest rates are rising at this juncture is highly unusual and worrying.

Takeaways by Macro Roundup® AI

  1. The US 5y5y forward real interest rate stands at 2.5%, the highest level going back to 2010, and far exceeds levels reached during the 2013 "taper tantrum" or the 2022/23 hiking cycle.
  2. Decomposing the 5y5y forward yield into breakeven inflation and a residual real rate isolates longer-term interest rates, which the author identifies as important for US debt sustainability.
  3. Long-term real interest rates are rising even as the Federal Reserve contemplates further cuts with the economy weakening under tariffs, a combination the author calls highly unusual and worrying.

Related Articles:

  • 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.
  • The Long-Term Budget Outlook: 2025 to 2055 — The Congressional Budget Office projects the 10-year Treasury note interest rate will average 3.8% over 2025–2055, close to its 3.7% average over the prior three decades, with the inflation-adjusted rate averaging 1.5%. It assesses that long-run rates are largely set by structural factors including demographics, saving and investment behavior, and federal debt.
  • Global Debt Report 2025 — About 60% of fixed-rate government debt in advanced economies maturing by 2027 — roughly $9tn — was issued before the recent interest-rate tightening, with weighted average yields below 2% versus projected 10-year rates near 3.6%, implying refinancing at nearly double the original cost. France, Spain, the UK, and the US face heightened vulnerability, with maturing debt exceeding 15% of GDP.

AI Summary. China's recorded US Treasury holdings fell to $765bn, below the UK's $779bn, making Britain the second-largest holder for the first time since the start of the century. China has gradually reduced official holdings from a peak above $1.3tn, diversifying into US agency bonds and gold, and analysts believe it increasingly uses third-party custodians that obscure its true holdings.

Arjun Neil Alim and Haohsiang Ko Financial Times
Date Posted:

Chinese official holdings of long-term Treasuries fell below those of the UK for the first time since 2000, although this does not adjust for Chinese custodial holdings in Luxembourg and Belgium.

Has China slipped behind the UK in recorded Treasury holdings?

Core argument: China's recorded Treasury holdings fell to $765bn at the end of March from $784bn the prior month, dropping below the UK's $779bn for the first time since the start of the century.

China’s recorded holdings of Treasuries have fallen below those of the UK for the first time since the start of the century, underlining an ongoing shift in Beijing’s management of its foreign reserves. The value of Treasuries held by Chinese investors, as recorded by US banks and custodians, fell to $765bn at the end of March, down from $784bn in the previous month. Those held by UK investors rose almost $30bn to $779bn. Beijing has been gradually reducing its official holdings of US treasuries from a peak of more than $1.3tn in 2011, diversifying into other assets including US agency bonds and gold. Some of the fall in the value of China’s holdings could also reflect market moves. Analysts believe China also holds a growing proportion of its US assets through third party custodians, including Euroclear in Belgium and Clearstream in Luxembourg, which obscures the true level of its holdings. Luxembourg’s Treasury holdings by value were flat in March while Belgium’s increased by $7.4bn from February.

Takeaways by Macro Roundup® AI

  1. China's recorded Treasury holdings fell to $765bn at the end of March from $784bn the prior month, dropping below the UK's $779bn for the first time since the start of the century.
  2. Beijing has been gradually reducing official Treasury holdings from a peak above $1.3tn in 2011, diversifying into other assets including US agency bonds and gold, though some of the decline in value could reflect market moves.
  3. Analysts believe China holds a growing share of its US assets through third-party custodians including Euroclear in Belgium and Clearstream in Luxembourg, obscuring its true holdings; Belgium's recorded Treasuries rose $7.4bn in March while Luxembourg's were flat.

Related Articles:

  • How China is Quietly Diversifying From US Treasuries — US Treasury data show China cut its official holdings of US Treasuries by more than 27% to $759bn, a faster decline than the preceding period, while raising holdings of higher-yielding agency bonds issued by government-sponsored entities such as Fannie Mae. Analysts argue China's true Treasury holdings may be higher, masked by intermediary custodians.
  • Are Foreigners Selling US Assets? — European and Japanese investors hold roughly 30% and 20% of their fixed income in foreign debt, versus under 10% for US investors, with US bonds making up about 15% of Eurozone and Japanese portfolios. Because foreign investors are less sticky than domestic ones, turmoil in US bond markets has greater potential to unsettle them.
  • China’s Holdings of US Treasuries Fall to Lowest Level Since 2009 — Chinese investors' holdings of US government debt fell by $57bn to $759bn, the lowest level since 2009 according to US Treasury data, which excludes Chinese-owned Treasuries held in accounts in other countries. The reported decline was likely exaggerated by assets shifting to securities depositaries in Belgium and Luxembourg.

AI Summary. Tax legislation is estimated to widen an anticipated $2tn annual US fiscal deficit by a few hundred billion in the near term, testing investor appetite for dollar assets. Dollar weakness alongside higher long-term yields would signal a regime in which fiscal stimulus is negative for risk assets.

Joseph Wang Fed Guy Blog
Date Posted:
Is Database:
Database

Pending legislation will raise the “anticipated $2T annual fiscal deficit by a few $100bn in the near term” and “test the market’s appetite for dollar assets” in a period of fragile investor confidence, making fiscal stimulus risk negative for stocks.

Is investor appetite for dollar assets being tested by wider deficits?

Core argument: The tax legislation is estimated to widen the anticipated $2tn annual fiscal deficit by a few hundred billion dollars in the near term, and its front-loaded design tests the market's appetite for dollar assets.

The upcoming tax legislation is front-loaded and looks to test the market’s appetite for dollar assets at a time when investor confidence appears fragile. The current legislation is estimated to further expand the anticipated $2T annual fiscal deficit by a few hundred billion in the near term. While 10-year yields are comfortably below 5%, 30-year yields have steadily crept up towards multi-year highs. The large fiscal stimulus is coming at a time when there are clear signs of a regime change. The key price to watch would be the dollar, where dollar weakness amidst higher rates suggests we are now in a regime where fiscal stimulus is risk negative. The market helped pressure Trump to relent on his Liberation Day tariffs, and it may also compel him to moderate his big beautiful bill.

Takeaways by Macro Roundup® AI

  1. The tax legislation is estimated to widen the anticipated $2tn annual fiscal deficit by a few hundred billion dollars in the near term, and its front-loaded design tests the market's appetite for dollar assets.
  2. Ten-year yields remain comfortably below 5%, while 30-year yields have crept steadily toward multi-year highs.
  3. Dollar weakness alongside higher rates suggests a regime in which fiscal stimulus is risk negative, and the market pressure that pushed Trump to relent on his Liberation Day tariffs may also compel him to moderate his bill.

Related Articles:

  • The Worrying Fall in the Dollar — The dollar has risen on tariff reductions and fallen on tariff increases, a pattern the author calls unusual because tariffs on the rest of the world would be expected to strengthen the dollar. The author argues markets punished US policy volatility and that the dollar remains below the level implied by forward interest-rate differentials against other advanced economies.
  • 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.
  • Kenneth Rogoff on Monetary Moves, Fiscal Gambits, and Classical Chess — The author argues the US is likely to see another burst of inflation within roughly five to seven years, cumulatively 20–25% above the 2% target, which would erode the debt as an earlier episode did. He expects markets to respond by demanding higher interest rates, forcing difficult choices.

AI Summary. Owning a medium-size regional business — auto dealerships, beverage distributors, grocery stores, dental practices, law firms — is the largest source of income for the top 1% of US earners. Analysis of anonymized tax data finds such business ownership generated 34.9% of top 1% income in 2022, up from 30.3% in 2014, and 43.1% for the top 0.1%.

Juliet Chung Wall Street Journal
Date Posted:

The largest source of income for the 1% highest earners was business ownership, which generated 34.9%, in 2022 up from 30.3% in 2014. Top 0.1% earners saw 43.1% of their income coming from business ownership in 2022, compared with 37.3% in 2014.

What is the largest income source for top US earners?

Core argument: Ownership of medium-size regional businesses generated 34.9% of income for the top 1% of U.S. earners in 2022, up from 30.3% in 2014, according to Owen Zidar and Eric Zwick's analysis of anonymized tax data from 2000 through 2022.

The largest source of income for the 1% highest earners in the U.S. isn’t being a partner at an investment bank or launching a one-in-a-million tech startup. It is owning a medium-size regional business. Many of them are distinctly boring and extremely lucrative, like auto dealerships, beverage distributors, grocery stores, dental practices and law firms. [Owen Zidar and Eric Zwick] analysis of anonymized tax data from 2000 through 2022 suggests the importance of such business ownership to the U.S. economy has grown. The share of income that ownership generates has increased to 34.9% in 2022 from 30.3% in 2014 for the top 1% earners. It has increased even more at the topmost levels. The top 0.1% highest-earners saw 43.1% of their income come from such business ownership in 2022, compared with 37.3% in 2014. (The minimum income threshold in 2022 to qualify for the top 0.1% of earners was $2.3 million, according to Zidar.)

Takeaways by Macro Roundup® AI

  1. Ownership of medium-size regional businesses generated 34.9% of income for the top 1% of U.S. earners in 2022, up from 30.3% in 2014, according to Owen Zidar and Eric Zwick's analysis of anonymized tax data from 2000 through 2022.
  2. Among the top 0.1% of U.S. earners, 43.1% of income came from such business ownership in 2022 versus 37.3% in 2014, with the 2022 income threshold for that group at $2.3 million, according to Zidar.
  3. The largest source of income for the top 1% of U.S. earners is owning businesses such as auto dealerships, beverage distributors, grocery stores, dental practices and law firms, rather than investment banking partnerships or tech startups.

Related Articles:

  • Capitalists in the Twenty-First Century — Most income at the top of the US distribution is non-wage income, primarily profits from closely-held, mid-market firms in skill-intensive industries owned by working-age individuals. The authors find private business profit falls by three-quarters after an owner retires or dies prematurely, indicating most top earners are "working rich" deriving income from human capital.
  • Top Wealth in the United States: New Estimates and Implications for Taxing the Rich — New estimates of U.S. wealth distribution indicate the top 10% of households hold 68.7% of total wealth and the top 1% hold 31.2%, with the top 1% holding as much as the bottom 90% combined. Median wealth for white households is $171,000, about 10x the $17,100 median for Black households.
  • 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.