Edward Conard

Top Ten New York Times Bestselling Author

  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “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
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
  • “Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “A full-throated defense of economic dynamism.” - The Wall Street Journal
  • “…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
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Tuesday, June 3, 2025

AI Summary. A provision in US legislation would let the Treasury impose a 5% tax surcharge, rising in stages to 20%, on the US investments of countries it identifies as levying "extraterritorial and discriminatory" taxes on American companies, such as the European Union's digital services tax. The chief financial effects would be a weaker dollar and foreign markets outperforming the US.

John Authers Bloomberg
Date Posted:

Noting section 899 is “really likely to happen,” John Authers speculates the dollar will weaken. Bloomberg’s dollar index, relative to both developed and emerging currencies, is at a two-year low.

Would taxing foreign investors' US holdings weaken the dollar?

Core argument: Section 899 of the One Big Beautiful Bill Act, before the Senate, would let the Treasury secretary levy a 5% surcharge on the US investments of countries applying "extraterritorial and discriminatory" taxes, rising in stages to 20%.

Three numbers are sending a spasm of concern through Wall Street: 899. That’s the clause of the One Big Beautiful Bill Act currently before the Senate that gives the Treasury secretary the power to levy retaliatory taxes on the US investments of foreign countries that have levied “unfair taxes” on US companies. [The] Treasury must tell Congress each quarter which countries apply “extraterritorial and discriminatory” taxes (the EU’s digital services tax is a prime example), and can then levy a 5% tax surcharge on their investments in the US, which could rise in stages to 20%. This matters because: Capital flows can be stopped far more easily than trade in goods; it gives the US a new weapon for negotiations (or to shoot itself in the foot); once passed by Congress, it has stronger legal grounding than tariffs; It’s really likely to happen; and future Democratic administrations might well leave it in place. Financially, the chief effects would be to weaken the dollar, a key administration aim, and to help foreign markets outperform the US.

Takeaways by Macro Roundup® AI

  1. Section 899 of the One Big Beautiful Bill Act, before the Senate, would let the Treasury secretary levy a 5% surcharge on the US investments of countries applying "extraterritorial and discriminatory" taxes, rising in stages to 20%.
  2. Under Section 899, Treasury would report to Congress each quarter which countries impose "extraterritorial and discriminatory" taxes, with the EU's digital services tax cited as a prime example.
  3. The chief financial effects of Section 899 would be a weaker dollar, a key administration aim, and foreign markets outperforming the US.

Related Articles:

  • Obscure Tax Item in Trump’s Big Bill Alarms Wall Street — A proposed US tax provision, Section 899, would raise tax rates on individuals and companies from countries whose tax policies the US deems discriminatory, including those imposing digital services taxes on large technology firms. Analysts say the measure, which could raise rates on passive income such as interest and dividends, would further drive away foreign investors.
  • 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.
  • A User’s Guide to Restructuring the Global Trading System — During the 2018–2019 U.S.–China trade war, the effective tariff rate on Chinese imports rose 17.9 percentage points while the renminbi depreciated 13.7% against the dollar, leaving after-tariff import prices in dollars up just 4.1%. The author argues this currency offset of more than three-fourths of the tariff explains why inflation pressure was negligible.

AI Summary. Estimates attribute much of the rise in US 10-year Treasury yields to higher term premia — the extra yield investors demand for holding long-term debt — which the authors find is influenced by the size and structure of the financial sector's gross balance sheet. They argue term premia now dominate bond returns and that long-term yields drive policy rates.

Michael Howell Capital Wars
Date Posted:

Michael Howell notes that most of the recent increase in 10-year Treasury yields reflects term premia, not the policy rate. He argues that “long-term yields drive short-term policy rates, not vice versa,” suggesting “deteriorating bond returns.”

Do financial sector balance sheets drive long-term Treasury yields?

Core argument: The authors attribute much of the increase in US 10-year Treasury yields to higher term premia, whose trend they describe as both upward and robust.

The chart shows US 10-year Treasury yields and our estimates of daily term premia. Much of the recent yield increase is due to higher term premia. More worryingly, the trend in term premia looks both upward and robust. Term premia relate directly to a liquidity-driven world because they are affected by the size and composition of the gross (not net) financial sector balance sheet. Evidence shows mismatches between the maturity, credit and forex components of balance sheets can affect the level of term premia. Because conventional narratives largely ignore balance sheet size and structure, focusing instead on net rather than gross flows, they naturally downplay the impact of term premia. Key conclusions of our liquidity-based research are that: (1) fluctuating term premia have become the most important driver of bond returns (dominating policy rate expectations), and (2) long-term yields drive short-term policy rates, not vice versa. It follows that the upward drift in term premia not only suggests deteriorating bond returns, but they also warn that policy rates may prove sticky.

Takeaways by Macro Roundup® AI

  1. The authors attribute much of the increase in US 10-year Treasury yields to higher term premia, whose trend they describe as both upward and robust.
  2. The authors' liquidity-based research concludes that fluctuating term premia have become the most important driver of bond returns, dominating policy rate expectations, and that long-term yields drive short-term policy rates rather than the reverse.
  3. Term premia are affected by the size and composition of the gross financial sector balance sheet, with evidence that maturity, credit and forex mismatches can affect their level, factors that conventional narratives focused on net flows downplay.

Related Articles:

  • How To Tell If The US Treasury Is Having Trouble Borrowing In The Bond Market — Market depth—the quantity of US Treasury securities participants will buy or sell at given prices—is a widely cited gauge of Treasury market health. One bank's depth measure plunged and, despite rising over the past couple of years, remains well below pre-pandemic levels amid policy uncertainty and regulatory constraints on intermediaries.
  • How Has Treasury Market Liquidity Evolved in 2023? — Treasury market liquidity has tracked its historical relationship with interest rate volatility, indicating liquidity has not been unusually poor given the level of rate volatility, though the two-year note shows somewhat higher-than-expected price impact. The market's capacity to smoothly handle large trading flows remains a concern for policymakers and market participants.
  • Resilience Redux in the US Treasury Market

AI Summary. The dollar's share of China's cross-border transfers has fallen from 80-85% to 40-45% over roughly 15 years, with the decline driven mainly by higher renminbi flows, and the renminbi's share of global trade financing has risen from about 2% to over 7%. China's foreign exchange reserve composition and onshore trading remain dollar-dominated.

Martin Lynge Rasmussen Money Inside and Out
Date Posted:

China has reduced its reliance on the dollar with the CNY’s share of global trade finance transactions increasing from 1.9% btw 2018–2021, to 6.4% in November of last year, and 7.4% in March.

Is China reducing its dollar reliance in cross-border payments?

Core argument: The dollar's share of China's cross-border transfers has fallen structurally from 80–85% in 2010 to 40–45% now, with the vast majority of that decline driven by higher renminbi flows.

China has managed to reduce its reliance on the dollar by increasing the role of the renminbi. The dollar’s share of Chinese cross-border transfers has declined structurally in the last 15 years, from 80-85% in 2010 to 40-45% now, and the vast majority of the decline has been driven by higher renminbi flows. Relatedly, the CNH's share of global trade financing has increased from around 2% in 2021 to over 7% now (and picked up further since November), and has come at the expense of the dollar's market share. One explanation for the increasing linkage between renminbi cross-border transfers and its global market share is that the RMB is increasingly being used for 'real' economic transactions with foreigners rather than simply for cross-border transfers between Chinese entities. Against this, FX diversification has not made much progress. The dollar share of China's FX reserves, for example, seems to have remained constant in recent years. And onshore FX trading remains extremely dominated by USDCNY, with very little trading in other pairs.

Takeaways by Macro Roundup® AI

  1. The dollar's share of China's cross-border transfers has fallen structurally from 80–85% in 2010 to 40–45% now, with the vast majority of that decline driven by higher renminbi flows.
  2. The offshore renminbi's share of global trade financing rose from around 2% in 2021 to over 7% now, picking up further since November, at the expense of the dollar's market share.
  3. China's FX diversification has made little progress, with the dollar share of its FX reserves appearing constant in recent years and onshore FX trading still dominated by USDCNY.

Related Articles:

  • Asia’s $7.5 Trillion Bet on US Assets Is Suddenly Unravelling — Asia's 11 largest economies have accumulated $7.5tn in US stocks and bonds, but their annual capital flows into the US fell to $68bn, equal to just 11% of their trade surpluses with the US. Their major currencies, including the yen and yuan, trade on average 57% below exchange rates adjusted for living-cost differences.
  • The Coming Asian FX ‘Avalanche’ — Investment firm Eurizon SLJ argues that Asian exporters have hoarded much of their trade surpluses in dollar deposits rather than repatriating them, creating an overhang the firm roughly estimates at $2.5tn in China plus more from Taiwan, Malaysia, and Korea, growing about $500bn a year. It predicts this raises the risk of a non-linear dollar sell-off.
  • Top Dollar — Foreign holdings of U.S. financial assets exceed American holdings abroad, making the United States a net debtor whose liabilities are denominated in dollars while its foreign assets are largely in other currencies. U.S. foreign liabilities grew from $30tn to over $51tn while U.S. foreign assets grew from $24tn to $33tn, tripling the net debtor position from $6tn.

AI Summary. Japan's 30-year government bond yield has risen from 2.3% to just under 3.0%, matching Germany's despite Japanese government debt of 240% of GDP versus Germany's 64%. The author argues the Bank of Japan's continued bond purchases hold yields artificially low, and that market-set yields could reach 6–7%.

Robin Brooks Robin Brooks Substack
Date Posted:

Yielding 3%, Japan’s 30-year yields are “still way too low” given a debt level of 240% of GDP. The low yields are likely driven by ongoing BoJ intervention which suppressed yield; Robin Brooks argues a market-set yield would be 6 or 7%.

Are Japan's long-term bond yields held artificially low by central bank purchases?

Core argument: Japan's 30-year government bond yield has risen from 2.3% at the start of the year to just below 3.0%, which the author argues remains far too low given gross debt of 240% of GDP.

Japanese long-term yields have risen sharply, but they're still way too low. The 30-year government bond yield is up from 2.3% at the start of the year to just below 3.0% now. Japan’s debt is 240% of GDP, so long yields - even with this rise - are still way below where they should be. In comparison, Germany’s gross government debt in 2024 stood at 64%, but Japan’s 30-year government bond yield is now at exactly the same level as Germany’s. The reason for this outlier status is the continued presence of the Bank of Japan (BoJ) in Japan’s government bond market, which keeps yields artificially low. If markets were allowed to set Japan’s 30-year yield, it would presumably rise much further, perhaps to as high as 6 or 7%. Things will get worse before they get better, meaning indebtedness will rise, which only increases pressure on the BoJ to remain active in capping yields.

Takeaways by Macro Roundup® AI

  1. Japan's 30-year government bond yield has risen from 2.3% at the start of the year to just below 3.0%, which the author argues remains far too low given gross debt of 240% of GDP.
  2. Japan's 30-year yield now sits at exactly the same level as Germany's, even though Germany's gross government debt stood at 64% of GDP in 2024.
  3. The author attributes Japan's artificially low yields to the Bank of Japan's continued presence in the government bond market, and suggests market-set 30-year yields could rise as high as 6% or 7%.

Related Articles:

  • Fiscal Space and Rising Yields — The Bank of Japan purchased all of Japan's net new government debt issuance, and more, for over a decade under its bond-buying and yield curve control programs, meaning Japanese yields were set by the central bank rather than by markets. With the central bank no longer absorbing all new issuance, yields may need to rise further to attract private buyers.
  • Japan’s 40-Year Bond Sale Draws Weakest Demand Since July — An auction of about $3.5bn of 40-year Japanese government bonds drew a bid-to-cover ratio of 2.2, the weakest demand in 10 months, amid what some traders describe as a "buyers' strike" among Japanese life insurers and other domestic investors.
  • The Japanese Government Bond Market is in Trouble — Yields on 40-year Japanese government bonds have risen by a full percentage point to nearly 3.7%, which the author attributes to inflation, long-term fiscal concerns, Japanese insurers largely halting purchases of very long-term bonds under new solvency rules, and the Bank of Japan shifting from buyer to net seller while still holding over 50% of the market.

AI Summary. Europe generates far fewer companies valued above $1bn than the U.S. or China, and has about a fifth of America's venture capital in dollar terms, limiting research and development spending. The average European Union worker now produces less than 80% of what an American worker produces per hour, down from 95%.

David Luhnow, Tom Fairless, and Andrew Barnett Wall Street Journal
Date Posted:

Europe produces ~85% fewer tech unicorns than the U.S. and has just 20% of its VC funding, as fragmented markets and limited R&D investment drive lagging innovation, productivity, and long-term growth.

Is Europe falling behind the US and China in technology?

Core argument: The average EU worker produced 95% of U.S. output per hour in the late 1990s but less than 80% now, while also working fewer hours amid a cultural focus on stability, job security, and quality of life.

From software to AI, Europe is falling behind in creating global technology companies, stalling economic growth. Specifically, Europe is generating far fewer unicorns—new, privately held companies that are worth more than $1 billion—than the U.S. or China. Those it creates often have trouble growing quickly enough to go public and become dominant players—partly because Europe has 30-plus countries with different laws, languages, and customs, making it harder to scale. With only a fifth of America’s venture capital in dollar terms, there is far less private capital flowing in. This limits spending on research and development that drives innovation. Lacking innovation and new technology companies, European workers are becoming slightly less productive than their American counterparts. In the late 1990s, the average EU worker produced 95% of what their American counterparts made per hour, compared to less than 80% now. They are also working fewer hours, driven by a cultural focus on stability, job security, and quality of life.

Takeaways by Macro Roundup® AI

  1. The average EU worker produced 95% of U.S. output per hour in the late 1990s but less than 80% now, while also working fewer hours amid a cultural focus on stability, job security, and quality of life.
  2. Europe attracts only a fifth of America's venture capital in dollar terms, limiting private capital inflows and spending on the research and development that drives innovation.
  3. Europe generates far fewer unicorns—new, privately held companies worth more than $1 billion—than the U.S. or China, and those it creates often struggle to grow fast enough to go public, partly because 30-plus countries have different laws, languages, and customs.

Related Articles:

  • The Tech Industry Is Huge—and Europe’s Share of It Is Very Small — Only four of the world's top 50 technology companies are European, and venture capital technology investment in Europe is a fifth of U.S. levels. Over 50 years the U.S. created 241 companies from scratch worth more than $10bn versus 14 in Europe, by one researcher's count.
  • 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.

AI Summary. The authors estimate that hours worked fall substantially more in response to large minimum wage increases than small ones, with large statutory increases associated with a differential decline of 0.73 hours on average. The declines are larger for 16–25 year-olds without a completed high school education (-0.94 hours) than for all 16–21 year-olds (-0.51 hours).

Jeff Clemens and Michael Strain American Enterprise Institute
Date Posted:

In CPS data from 2011–2019, relatively large statutory increases in the minimum wage reduced hours for workers, ages 16–25 with less than a high school education, by about an hour per week after 4 years, while small increases did not reduce hours.

Do large minimum wage increases reduce hours worked more than small ones?

Core argument: Using CPS and ACS data under a partially pre-committed analysis plan, the authors estimate that large statutory minimum wage increases are associated with a differential decline in hours worked of -0.73 hours on average across specifications and primary samples.

Analyzing CPS and ACS data with the empirical specifications from our partially pre-committed analysis plan [outlined in previous papers],we estimate that the elasticity of hours worked with respect to the minimum wage is substantially more negative for large minimum wage increases than for small increases. Large statutory minimum wage changes are, on average, associated with a differential hours worked decline of -0.73 hours across the full set of specifications we estimate, averaging across our primary analysis samples. The estimates are more negative for the sample consisting of individuals ages 16 to 25 with less than a completed high school education (-0.94 hours) than for the larger sample of all individuals ages 16 to 21 (-0.51 hours). The hours worked declines associated with legislation rise as the increases are phased in over time. Hours worked effects for 16-25 year olds with less than a completed high school education average -0.38 hours through an endline consisting solely of 2015 and average -1.16 hours estimated through an endline consisting solely of 2019. Equivalent estimates for the “young adult” population ages 16 to 21 are -0.26 and -0.66, respectively.

Takeaways by Macro Roundup® AI

  1. Using CPS and ACS data under a partially pre-committed analysis plan, the authors estimate that large statutory minimum wage increases are associated with a differential decline in hours worked of -0.73 hours on average across specifications and primary samples.
  2. The estimated hours declines are more negative for 16–25 year olds with less than a completed high school education (-0.94 hours) than for all individuals ages 16–21 (-0.51 hours).
  3. The authors estimate hours declines rise as increases phase in, with effects for less-educated 16–25 year olds averaging -0.38 hours through a 2015 endline versus -1.16 hours through a 2019 endline (-0.26 and -0.66 for ages 16–21).

Related Articles:

  • Do Minimum Wages Reduce Job Opportunities for Blacks? — The authors find evidence that higher minimum wages reduce employment among low-skill Black workers across every group examined — teens, high school dropouts, and young workers with at most a high school education — with larger effects for Black males, while such effects are not very detectable for whites.
  • Menu Adjustment in Response to the Minimum Wage: A Return to the New Jersey-Pennsylvania Border — Comparing New Jersey restaurant menu prices with those in neighboring Pennsylvania, where the minimum wage was unchanged, the authors estimate that each $1 increase in the minimum wage raised the price of an item by 7.0 cents on average. Pass-through was larger for items requiring more employee preparation steps, adding 0.3 cents per additional step.
  • “Compensate the Losers?” Economic Policy and Partisan Realignment in the US — The authors argue that partisan realignment by education reflects Democrats' declining supply of "predistribution" policies such as job guarantees, higher minimum wages, protectionism, and stronger unions, which less-educated Americans favor while more-educated Americans prefer taxes and transfers. They estimate changing views of the parties' economic policies explain roughly half the shift.

Wednesday, June 4, 2025

AI Summary. U.S. Treasury issuance running at least $2tn a year poses a challenge to the financial system and places persistent upward pressure on yields, with no clear investor class positioned to absorb the supply. With the Federal Reserve a net seller and foreign investors cautious on dollar assets, most issuance is likely to be absorbed by hedge funds and banks.

Joseph Wang Fed Guy Blog
Date Posted:

The $2T+ in annual Treasury issues in coming years will stress the bond market as the Fed reduces its holdings and foreigners shy away from $ assets. @FedGuy suggests hedge funds and banks are best positioned to step in and increase their holdings.

Who will absorb rising Treasury issuance as yields face upward pressure?

Core argument: Treasury issuance running at least $2 trillion a year will challenge the financial system and place persistent upward pressure on yields, with no clear investor class identified as most capable of absorbing the supply.

The significant amount of issuance in the coming years will be a challenge to the financial system and place persistent upward pressure on yields. The pace of issuance will be at least $2T a year, and it is not clear which investor class will be most capable of absorbing the supply. The Fed and foreigners have been the two largest investors in coupon Treasuries in recent years. The first burst of coupon issuance during the pandemic was entirely absorbed by the Fed. The Fed continued its purchases through 2021 but [has been a net seller of Treasuries since]. Similarly, reports suggest that foreign investors are cautious on dollar assets due to the recent shifts in economic policy. The bulk of issuance going forward is likely going to be absorbed by hedge funds and banks. This can be seen in Treasury repo volumes steadily rising and can continue as long as the basis remains attractive and repo financing is readily available. Banks are also a good candidate for future Treasury purchases as they can elastically expand their balance sheet by creating credit.

Takeaways by Macro Roundup® AI

  1. Treasury issuance running at least $2 trillion a year will challenge the financial system and place persistent upward pressure on yields, with no clear investor class identified as most capable of absorbing the supply.
  2. The Fed and foreign investors have been the two largest buyers of coupon Treasuries in recent years, but the Fed has been a net seller since its purchases ended after 2021, and reports suggest foreign investors are cautious on dollar assets following shifts in economic policy.
  3. Hedge funds and banks are likely to absorb the bulk of future Treasury issuance, reflected in steadily rising Treasury repo volumes that can continue while the basis remains attractive and repo financing is readily available, with banks able to expand their balance sheets by creating credit.

Related Articles:

  • One Weird Trick — A larger share of Treasury financing done through short-term bills rather than longer-dated coupon securities would likely ease upward pressure on long-term yields, though the effect may be modest. With the deficit estimated near $1.5t, shifting toward bills would let the Treasury hold coupon sizes steady or trim them, reducing near-term supply.
  • 10 Facts About the US Treasury Market: Monitoring Demand For US Government Debt — US government debt is projected to rise from 100% to 200% of GDP, with deficits above $1tn annually over the next decade and $9tn of debt maturing within 12 months. Debt servicing costs equal 12% of total government outlays, and interest payments have doubled from about $1bn per day before the pandemic to nearly $2bn per day.

AI Summary. Markets in safe assets are not signaling imminent default or high inflation: the gap between yields on inflation-indexed and conventional US debt is around 2.3%, barely above its 2.1% average since early 2003. The gap between the cyclically adjusted earnings yield on US equities and the real interest rate was last this low in 2007.

Martin Wolf Financial Times
Date Posted:
Is Database:
Database

The 10-yr TIPS break-even, at 2.3%, is only 20 bps above its 20-year mean of 2.1%: expected inflation is anchored, but the cyclically adjusted E/P ratio minus the 10-yr TIPS yield, a measure of the equity premium, is at worryingly low June 2007 levels.

Are bond markets signaling default or high inflation ahead?

Core argument: The US break-even inflation rate, the gap between yields on index-linked and conventional debt of the same maturity, stands around 2.3%, barely above its 2.1% average since January 2003, suggesting market confidence that inflation targets will be hit over a decade.

Markets in safe assets are not screaming “default is nigh”. Nor, for that matter, are they screaming “hyperinflation (even high inflation) is nigh”. The simple way of looking at the latter is in terms of “break-even” inflation rates, which are the gaps between yields on index-linked and conventional debt of the same maturity. In the US, this spread is around 2.3%, which is barely above the average of 2.1% since January 2003. Markets seem strikingly confident that inflation targets will be hit over a 10-year period. Even a normalisation of interest rates after such a long period of ultra-low rates might prove too much for [equity valuations to absorb]. One obvious point here concerns the “equity risk premium”. A way of measuring this is by the gap between the cyclically-adjusted earning yield on US equities (the inverse of the “cyclically adjusted price/earnings ratio”) and the real interest rate. The last time the gap (which indicates expected excess long-term return on equities over Tips) was as low as it is right now was in June 2007. That is hardly a comforting thought.

Takeaways by Macro Roundup® AI

  1. The US break-even inflation rate, the gap between yields on index-linked and conventional debt of the same maturity, stands around 2.3%, barely above its 2.1% average since January 2003, suggesting market confidence that inflation targets will be hit over a decade.
  2. The gap between the cyclically adjusted earnings yield on US equities and the real interest rate, a measure of the equity risk premium, was last as low as it is now in June 2007.
  3. Markets in safe assets signal neither imminent default nor imminent high inflation, though a normalisation of interest rates after a long period of ultra-low rates might prove too much for equity valuations to absorb.

Related Articles:

  • Data Update 4 for 2025: Interest Rates, Inflation and Central Banks! — Interest rates are ultimately driven by macroeconomic fundamentals, with an "intrinsic risk-free rate" defined as the sum of the inflation rate and real GDP growth tracking the observed 10-year Treasury bond yield closely. On this view, central banks' influence comes from preferential access to data on those fundamentals, their capacity to alter them, and their credibility.
  • US Fiscal Sustainability Once More — US federal interest payments were projected to rise from 18% of tax revenues to about 22% by 2034 under the Congressional Budget Office's prior baseline. The author estimates that if the yield curve stays at current levels and policy is unchanged, that ratio would exceed 25% by 2032 and approach 30% by 2035.
  • Long-Term Bond Yields Soar Globally on Fiscal Policy Fears — Thirty-year bond yields traded above 5% in the US, near their highest since 2007, while Japan's reached the highest since records began in 1999, with weak auction demand in both and selling pressure on long-dated UK, German and Australian debt. Deutsche Bank argues higher Japanese yields draw local buyers away from US Treasuries.

AI Summary. The dollar has fallen while the trade-weighted interest rate differential between the US and the rest of the G10 has remained stable, which the author attributes to equity flows as investors reverse bets on US "exceptionalism." The author argues this weakness is likely temporary and that the dollar remains in a multi-decade strengthening cycle.

Robin Brooks Robin Brooks Substack
Date Posted:

The Dollar has fallen sharply since April 9, but trade-weighted, the US-G10 interest differential is stable. Brook argues the dollar depreciation is driven by equity outflows with bonds a “side-show,” and that dollar weakness is likely to be temporary.

Are equity flows driving the dollar's decline rather than interest rate differentials?

Core argument: The dollar has fallen sharply since the April 9 announcement of a 90-day pause on reciprocal tariffs, while the US trade-weighted interest rate differential versus the rest of the G10 has remained stable, a decoupling robust to alternative measures of the differential.

The Dollar (black line) has fallen sharply, especially since the 90-day pause of reciprocal tariffs was announced on April 9, while the trade-weighted rate differential of the US vis-à-vis the rest of the G10 has been stable (blue). Rate differentials are stable while the Dollar is falling [and this is] robust to different versions of this differential. The most benign interpretation for this decoupling is that equity flows are the principal driver of Dollar weakness. Markets had bought into US “exceptionalism” and are now reversing themselves on that theme. This may see many foreign buyers cut their allocation to US equities. This is a cyclical re-assessment of the US growth picture, expressed via equities, which would explain why bond markets and thus rate differentials are a side show. At this point, I am almost sure the decoupling is the former. Current Dollar weakness is therefore likely temporary. In my view, the Dollar is in a multi-decade strengthening cycle, which is far from over. More Dollar strength is coming.

Takeaways by Macro Roundup® AI

  1. The dollar has fallen sharply since the April 9 announcement of a 90-day pause on reciprocal tariffs, while the US trade-weighted interest rate differential versus the rest of the G10 has remained stable, a decoupling robust to alternative measures of the differential.
  2. The author attributes dollar weakness principally to equity flows, arguing markets that had bought into US "exceptionalism" are reversing, which may lead many foreign buyers to cut their allocations to US equities.
  3. The author reads the move as a cyclical re-assessment of US growth expressed through equities, with bond markets and rate differentials a side show, and judges current dollar weakness likely temporary within a multi-decade strengthening cycle.

Related Articles:

  • What Ails the US Dollar? — The US dollar's 10% decline from its peak includes about 4 percentage points attributable to euro strength following Germany's surprise fiscal stimulus, leaving the dollar roughly flat on an adjusted basis. Because reserve currency status took decades to build and has persisted through past policy swings, the author argues the weakness reflects a cyclical rerating rather than terminal decline.
  • 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.
  • Top Dollar — Foreign holdings of U.S. financial assets exceed American holdings abroad, making the United States a net debtor whose liabilities are denominated in dollars while its foreign assets are largely in other currencies. U.S. foreign liabilities grew from $30tn to over $51tn while U.S. foreign assets grew from $24tn to $33tn, tripling the net debtor position from $6tn.

AI Summary. The historical pattern in which higher U.S. interest rates coincided with a stronger dollar has broken down, with interest rates and the dollar moving in opposite directions. The author argues this pattern resembles emerging-market crises of confidence, in which international investors pull money out, causing both a falling currency and rising interest rates.

Paul Krugman Paul Krugman Substack
Date Posted:

The US is experiencing rising interest rates and a falling dollar, “the kind of thing one sees in emerging markets, where big market moves often reflect crises of confidence” that lead to capital flight.

Does a falling dollar alongside rising interest rates signal lost investor confidence?

Core argument: The historical U.S. pattern in which rising interest rates lifted the dollar by attracting foreign capital has broken down since Donald Trump returned to power, with rates rising while the dollar falls.

It used to be true that when U.S. interest rates rose, so did the dollar, because higher yields pulled in foreign capital. But since Donald Trump returned to power, that relationship has broken down. Instead, we’ve seen a combination of rising interest rates and a falling dollar: what we’ve been seeing in recent months, with interest rates and the dollar moving in opposite directions, doesn’t look like what we normally see in the United States, or for that matter advanced nations, in general. Instead, it’s the kind of thing one sees in emerging markets, where big market moves often reflect crises of confidence: international investors lose faith, pulling their money out, and capital flight causes both a falling currency and rising interest rates.

Takeaways by Macro Roundup® AI

  1. The historical U.S. pattern in which rising interest rates lifted the dollar by attracting foreign capital has broken down since Donald Trump returned to power, with rates rising while the dollar falls.
  2. Simultaneously rising interest rates and a falling currency resemble emerging-market episodes rather than typical U.S. or advanced-economy behavior, according to the author.
  3. In emerging markets, such moves often reflect crises of confidence in which international investors pull money out, and the resulting capital flight drives both a falling currency and rising interest rates.

Related Articles:

  • It’s Over — Rising bond yields outside the US appear to be drawing foreign investors back to home markets, where they can earn high yields without currency risk and higher returns than on currency-hedged US Treasuries. Higher Japanese yields reflect above-target inflation and the Bank of Japan's bond-portfolio runoff, while European yields reflect anticipated fiscal spending and issuance.
  • What Ails the US Dollar? — The US dollar's 10% decline from its peak includes about 4 percentage points attributable to euro strength following Germany's surprise fiscal stimulus, leaving the dollar roughly flat on an adjusted basis. Because reserve currency status took decades to build and has persisted through past policy swings, the author argues the weakness reflects a cyclical rerating rather than terminal decline.
  • Tariffs, the Dollar, and Equities: High-Frequency Evidence from the Liberation Day Announcement — Following a sweeping US tariff announcement, the dollar's effective exchange rate depreciated rather than appreciating as standard international macroeconomic models predict: all G10 currencies gained against the dollar while the most freely floating emerging market currencies gained less or fell. The authors read this as advanced economies rebalancing away from dollar assets.

AI Summary. The authors estimate the world total fertility rate is around 2.17, below the global replacement rate of roughly 2.21, meaning humanity is already below replacement, with fertility and births falling faster than anticipated. They project middle-income countries' fertility may fall below that of rich countries outside East Asia, with emigration compounding population decline.

Jesús Fernández-Villaverde University of Pennsylvania
Date Posted:

The world’s 2024 total fertility rate (TFR) was likely ~2.17, below the replacement rate of 2.21, notes Jesús Fernández-Villaverde, intensifying demographic challenges posed by the “welfare state.”

Is global fertility already below the replacement rate?

Core argument: Correcting for excess births, the world total fertility rate in 2024 is estimated at around 2.17 against a replacement rate of about 2.21, placing humanity already below replacement.

Correcting for excess births, the world TFR in 2024 is likely to be around 2.17 instead of 2.25. The world replacement rate is around 2.21. So, we estimate that humanity is already below the replacement rate. We are entering a whole new world: fertility and births are falling much faster than anyone anticipated. There is a good chance that the TFR of middle-income countries (e.g., Colombia, Chile, Thailand, Turkey) will fall below the TFR of rich countries (at least outside East Asia). Migration will exacerbate the situation: Colombia’s population is already declining due to high migration to the U.S. and Spain. This creates a whole range of challenges. Middle-income countries may not have the margins of maneuver that Japan has. Once you start thinking about these issues, it is hard to think about anything else: demography is destiny. The number of immigrants that the advanced would need to bring is phenomenal, causing multiple strains in society. We live in a welfare state, and this is unlikely to change anytime soon.

Takeaways by Macro Roundup® AI

  1. Correcting for excess births, the world total fertility rate in 2024 is estimated at around 2.17 against a replacement rate of about 2.21, placing humanity already below replacement.
  2. There is a good chance that the total fertility rate of middle-income countries such as Colombia, Chile, Thailand, and Turkey falls below that of rich countries outside East Asia.
  3. Migration compounds the decline, with Colombia's population already falling due to high migration to the U.S. and Spain, while middle-income countries may lack the margins of maneuver Japan has.

Related Articles:

  • World Depopulation: Prospects and Implications — The US is projected to account for a growing share of the rich world's labor force, youth, and highly educated talent, with continuing population and labor force growth and only moderate aging through 2050. Its fertility, though below replacement, exceeds that of East Asian and nearly all European countries, and sustained legal immigration is essential to this demographic advantage.
  • Rapid Fertility Decline Is an Existential Crisis — Moravec's Paradox holds that computers handle tasks humans find difficult, like advanced math, more easily than tasks humans find trivial, like making a bed — the very skills needed for elder care as populations fall. Tax breaks for fertility appear ineffective, while more and earlier marriage appears significant.
  • The Wealth of Working Nations — Because of population aging, growth in GDP per capita and GDP per working-age adult have diverged across advanced economies; from 1998 to 2019 Japan's accumulated growth per working-age adult was 31.9% versus 29.5% in the US. The authors find a standard neoclassical growth model calibrated to each country's working-age population tracks output per working-age adult in most economies.