Edward Conard

Top Ten New York Times Bestselling Author

  • “…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 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 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
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…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 comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Friday, July 31, 2026

AI Summary. The dollar fell on concerns the Federal Reserve won't act forcefully enough to contain inflation, declining even as US yields rose — a pattern analysts attribute to doubts about the central bank's credibility. Long-dated Treasury yields reached their highest since 2007, and Japanese intervention to support the yen added pressure on the dollar.

Alice Atkins Bloomberg
Date Posted:

Bloomberg’s Dollar Spot Index fell 1.2% over five days. Although long-term US yields rose, “FOMC messaging” prompted the market to mark down the expected policy rate a year ahead, suggesting that the rise in yields reflected increased inflation concerns.

Is the dollar falling on doubts about the Fed's inflation resolve?

Core argument: The dollar headed for its worst week in three months, with Bloomberg's Dollar Spot Index near its weakest level in over a month, on concerns the Federal Reserve won't move forcefully enough to contain inflation.

The dollar headed for its worst week in three months on concerns the Federal Reserve won’t move forcefully enough to contain inflation. Bloomberg’s Dollar Spot Index remains near the weakest level in over a month. The greenback’s retreat despite higher US yields — which would typically support the currency — reflects angst over the Fed’s credibility. Chair Kevin Warsh is facing scrutiny after his messaging stoked worries that the central bank may hold off raising rates and allow inflation to remain above target. Long-dated Treasury yields are at their highest since 2007. The simultaneous drop in Treasuries and the dollar “feels very ‘emerging market’,” said Randhir Prakash, managing director at Gavekal Wealth. Investors are starting to signal displeasure at the path of US policy, he said, which is “bearish for both Treasuries and the US dollar.” Efforts by Japanese authorities to shore up the yen also added to pressure on the greenback. Intervention saw the Japanese currency surge as much as 3.3% versus the dollar in New York trading on Thursday, though it has since pared the advance after the Bank of Japan left interest rates unchanged on Friday.

Takeaways by Macro Roundup® AI

  1. The dollar headed for its worst week in three months, with Bloomberg's Dollar Spot Index near its weakest level in over a month, on concerns the Federal Reserve won't move forcefully enough to contain inflation.
  2. The dollar retreated despite higher US yields, which would typically support the currency, with long-dated Treasury yields at their highest since 2007 and Chair Kevin Warsh facing scrutiny after messaging that stoked worries the Fed may hold off raising rates.
  3. The yen surged as much as 3.3% against the dollar in New York trading on Thursday after Japanese intervention, though it pared the advance after the Bank of Japan left interest rates unchanged on Friday.

Related Articles:

  • Peak Dollar Strength — Net positioning across major currencies shows markets are broadly long the US dollar. The author argues this bullishness is misplaced because the Federal Reserve is less hawkish than markets assume and falling oil prices should pull inflation down, leaving the dollar at peak strength.
  • The Dollar has Further to Fall — The author argues the dollar has considerably further to fall, noting Federal Reserve data show its real value nearly two standard deviations above its average since 1973, a level matched only twice before, each followed by depreciations of 25-30%. Financing the $1.1tn US current account deficit requires matching net capital inflows.
  • The Dollar’s Hidden Dependence on the AI Trade — Net foreign inflows into US equities have reached a record high, driven in large part by overseas investors seeking artificial intelligence exposure unavailable in their home markets. Because most foreign equity investors leave currency risk unhedged, a pullback in these inflows if AI disappoints poses a significant downside risk to the US dollar.

AI Summary. The Big Mac index, which compares burger prices across countries converted into dollars, shows currency misalignments in either direction at their widest since the mid-1990s, with American inflation, an undervalued Chinese yuan, and a falling yen cited as contributors. Big Mac prices also reflect domestic supply and demand for nontradeable goods.

Economist Staff The Economist
Date Posted:

American inflation since 2021, the “growing prominence of an undervalued Chinese yuan” and the “plunging yen” have left the Economist’s Big Mac Index measure of departures from PPP at its highest since the mid-1990s.

How wide are currency misalignments according to burger prices?

Core argument: A Big Mac costs about 20% less in Japan than in China, with the plunging yen and an undervalued Chinese yuan among the contributors to currency misalignment.

Why does a Big Mac cost so much more in some countries than in others? [Many of the key factors are less about internal finance than about domestic supply and demand conditions that affect the price of nontradeables or “home goods.”] But nominal exchange rates are also a big part of the story. Currencies are once again moving out of whack. According to the Big Mac index, the world price of burgers (converted into dollars, then averaged across countries, weighted by their GDP) moved closer to the American price in the first decade of this century. But since 2010 it has once again diverged. Recent editions of the index show that currency misalignments in either direction are at their widest since the mid-1990s. American inflation after 2021 is one culprit. The growing prominence of an undervalued Chinese yuan is another. A third contributor is the plunging yen. Incredibly, it is now about 20% cheaper to buy a Big Mac in Japan than in China.

Takeaways by Macro Roundup® AI

  1. A Big Mac costs about 20% less in Japan than in China, with the plunging yen and an undervalued Chinese yuan among the contributors to currency misalignment.
  2. Recent editions of the Big Mac index show currency misalignments in either direction at their widest since the mid-1990s, with American inflation after 2021 cited as one culprit.

Related Articles:

  • Currency Moves Can Drive Rebalancing — Trade responds to exchange-rate changes with a lag of roughly 8 to 12 quarters, and after the dollar fell from its mid-1980s peak the US trade deficit dropped from about 3% to about 1% of GDP while Japan's surplus fell from 4% to 2%. The author argues currency appreciation, not fiscal consolidation, drove that rebalancing.
  • The Dollar has Further to Fall — The author argues the dollar has considerably further to fall, noting Federal Reserve data show its real value nearly two standard deviations above its average since 1973, a level matched only twice before, each followed by depreciations of 25-30%. Financing the $1.1tn US current account deficit requires matching net capital inflows.
  • Peak Dollar Strength — Net positioning across major currencies shows markets are broadly long the US dollar. The author argues this bullishness is misplaced because the Federal Reserve is less hawkish than markets assume and falling oil prices should pull inflation down, leaving the dollar at peak strength.

AI Summary. Google, Amazon, Microsoft and Meta have together spent $1.1tn on capital investment since the start of the artificial intelligence boom in 2023, according to the companies' earnings reports. Executives at several of the firms told analysts the spending would continue to reduce free cash flow in coming quarters.

Ryan McMorrow, Rafe Rosner-Uddin and Hannah Murphy Financial Times
Date Posted:
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Google, Amazon, Microsoft and Meta’s combined free cash flow fell to a decadal low of ~$7B as their capex continues to rise.

How much have big tech firms spent on AI investment?

Core argument: Combined capital spending by Google, Amazon, Microsoft and Meta from the start of the AI boom in 2023 through the end of June reached $1.1tn, according to the four companies' earnings reports.

Combined capital spending by Google, Amazon, Microsoft and Meta from the beginning of the AI boom in 2023 to the end of June hit $1.1tn, according to earnings reports from the four companies in the past two weeks. Several top executives acknowledged to analysts that the outlay on AI would continue to sap free cash flow in coming quarters. The free cash flow metric is closely watched as a measure of the cash companies have left to service debt or return to shareholders after covering their operating costs and capital spending.

Takeaways by Macro Roundup® AI

  1. Combined capital spending by Google, Amazon, Microsoft and Meta from the start of the AI boom in 2023 through the end of June reached $1.1tn, according to the four companies' earnings reports.
  2. Several top executives at Google, Amazon, Microsoft and Meta told analysts that AI outlays would continue to sap free cash flow in coming quarters.
  3. Free cash flow is closely watched as a measure of the cash companies have left to service debt or return to shareholders after covering operating costs and capital spending.

Related Articles:

  • The Summer I Turned Pretty — A warning sign in a boom cycle is when companies closest to final demand weaken while capital spending beneficiaries keep thriving, as when telecom operators' shares rolled over while communications equipment stocks kept rising. Semiconductor stock prices and free cash flow are soaring while large cloud providers' shares stagnate and their free cash flow plummets.
  • The Market Is Asking Questions — Markets are weighing whether the trillions committed upfront to AI data centers, chips, and power will generate returns above the cost of capital before those assets depreciate. With the buildout increasingly funded by debt rather than internal cash flow and borrowing spreads widening, financing costs could rise until new data-center spending no longer clears its return hurdle.
  • The Magnificent Seven Are Riding Into the Sunset — Companies have steadily "de-equitized" through buybacks and cash-funded mergers, supporting share prices, but Barclays projects equity supply could rise for the first time in decades as large cloud computing firms fund capital spending. Their high valuation multiples make equity cheaper than debt, and that re-equitization would weigh on share prices.

AI Summary. Japan's annual births have fallen to roughly a quarter of their 1947 peak — about 686,000 versus over 2.7m — and are also below the level recorded in 1873, when Japan first began collecting such numbers. Fertility levels around the world are still falling.

Nicholas Eberstadt American Enterprise Institute
Date Posted:

China’s total births in 2025 were about on par with those of the Qing Dynasty in the 1750s. Japan’s 2025 births were on par with those of the Tokugawa shogunate in the late 1600’s.

Have annual births fallen below levels recorded over 150 years ago?

Core argument: Japan recorded 686,000 births in 2024, barely a quarter of its 1947 peak of over 2.7 million.

The admirable Human Mortality Database, pioneered by researchers at Berkeley and Rostock, Germany, offers careful reconstructions of such historical birth numbers for dozens of developed countries. We can use their figures for our comparisons. Start with Japan. By 2024, the Japanese birth level was barely a quarter of its peak in 1947, 77 years earlier (686,000 vs. over 2.7 million). But Japan’s 2024 level was also significantly lower than the corresponding total for 1873—over 150 years earlier, at the dawn of the Meiji era, when Japan first started gathering such numbers. And remember—fertility levels around the world are still falling.

Takeaways by Macro Roundup® AI

  1. Japan recorded 686,000 births in 2024, barely a quarter of its 1947 peak of over 2.7 million.
  2. Japan's 2024 birth total was also lower than its 1873 figure, at the dawn of the Meiji era when Japan first began gathering such numbers over 150 years earlier.
  3. The Human Mortality Database, pioneered by researchers at Berkeley and Rostock, Germany, provides reconstructions of historical birth numbers for dozens of developed countries, and fertility levels worldwide continue to fall.

Related Articles:

  • Depopulation Globally and in the Asia-Pacific: The Shape of Things to Come — Population aging and fertility below replacement levels are connected to a revolution in family structure in which families grow smaller, fewer people marry, and voluntary childlessness becomes common across countries. As a result, families become less able to bear the demands that may be placed on them.
  • The Demographic Future of Humanity: Facts and Consequences — 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.
  • Baby Busts and Growth Booms: Demographic Change and the Macroeconomy — A 1pp lower birth rate 20 years earlier is associated with 22 log points higher output per worker 20 years later and 29 log points higher after 40 years, about 0.73pp faster annual growth. The authors find lower birth rates are also associated with more labor-saving patents, larger high-tech shares, and higher productivity growth.

Monday, August 3, 2026

AI Summary. A Federal Reserve press conference that offered no forward guidance left the market's projected path for interest rates barely changed, since investors form their own view from the data. But the 30-year inflation-protected Treasury yield has only been higher for a few days at the worst of the 2008 crisis, suggesting possible damage to the Federal Reserve's credibility.

John Authers Bloomberg
Date Posted:
Is Database:
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The 30-year TIPS yield is at an all-time high – excluding a few days during the 2008 crisis.

Do rising long-term real yields signal damage to central bank credibility?

Core argument: The 30-year TIPS yield has been higher only for a few days at the worst of the 2008 crisis, which suggests possible damage to the Federal Reserve's credibility.

Kevin Warsh raised more questions than he answered at his press conference last Wednesday. Non-farm payrolls this week, and interventions from other Fed officials, might clarify things. For now, two points. First, Warsh confused people, but the point of not offering guidance is that the market forms its own view from the data, and the projected course of interest rates at the end of the week was barely changed. Second, something is afoot in long-term yields, which suggests possible damage to the Fed’s credibility. The 30-year TIPS (Treasury Inflation-Protected Security) yield has only ever been higher for a few days at the worst of the 2008 crisis. That’s not good.

Takeaways by Macro Roundup® AI

  1. The 30-year TIPS yield has been higher only for a few days at the worst of the 2008 crisis, which suggests possible damage to the Federal Reserve's credibility.
  2. Kevin Warsh's press conference confused market participants, yet the projected course of interest rates was barely changed by the end of the week, consistent with markets forming their own view from the data.
  3. Non-farm payrolls data and interventions from other Federal Reserve officials may clarify the questions left unanswered by Kevin Warsh's press conference.

Related Articles:

  • US 30-Year Yield Soars to Highest Since ‘07 After Fed Stands Pat — The 30-year US Treasury yield rose more than 10 basis points to a 19-year high after the Federal Reserve left rates unchanged, while two-year yields fell to 4.23%, 10-year yields rose to 4.66%, and the dollar dropped. Interest-rate swaps priced roughly 60% odds of a rate increase in September.
  • Are Government Bonds Safe in Times of War and Pandemic? — Government bonds severely underperform in wartime, in absolute terms and relative to equities, housing, and economic growth, unlike in financial crises when bonds tend to outperform stocks. The U.S. and U.K. reduced war-driven debt-to-GDP ratios without explicit default, using surprise inflation and financial repression that shifted fiscal burdens onto bondholders.
  • Global Debt Report 2026 — Gross central government borrowing across OECD countries rose 7% to a record $17tn, about 23% of GDP, and is projected to reach roughly $18tn, or 24% of GDP. The United States and Japan account for close to 80% of the area's refinancing requirements, with the US share rising from 57% to 70%.

AI Summary. A study of China's imperial civil service examination estimates that both exam performance and ties to powerful examiners had larger effects on career outcomes for high-performing candidates, indicating merit and networks were complements rather than substitutes. The authors argue this complementarity makes the influence of networks harder to distinguish from merit.

Ying Bai and Ruixue Jia National Bureau of Economic Research
Date Posted:
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From 1644–1905, Qing China staffed its bureaucracy through exams and patronage. Only 12.6% of exam graduates reached top office, but patronage favored stronger performers, illustrating how merit and connections can be complements rather than substitutes.

Do merit and connections reinforce each other in civil service careers?

Core argument: In China's imperial examination system, exam performance mattered more for candidates in the high-performing category, consistent with an institutional design that steered that elite group toward more prestigious careers.

Figure 5 studies the interplay between merit and networks by estimating the effects of exam performance and ties to powerful examiners separately for the high- and low-performing categories. The left panel shows the effects of exam performance for the two categories, while the right panel presents those of examiner power. Two patterns stand out. First, exam performance matters more for the high category, consistent with the institutional design that steered this elite group toward more prestigious careers. Second, ties to powerful examiners are also more valuable for the high category, pointing to a complementarity between merit and networks. To understand the implications of our finding on complementarity, it is useful to contrast it with the counterfactual of substitution. When merit and networks are complements (rather than substitutes), those who attained top office tend to exhibit both stronger exam performance and stronger connections. By contrast, under substitution, strong networks would compensate for weaker exam performance, and vice versa. Complementarity implies [a higher degree of meritocracy than substitution, as] successful candidates appear to have had better performance. Second, complementarity makes it harder to identify the influence of networks: their effects can operate under the guise of merit rather than as a visible substitute for it.

Takeaways by Macro Roundup® AI

  1. In China's imperial examination system, exam performance mattered more for candidates in the high-performing category, consistent with an institutional design that steered that elite group toward more prestigious careers.
  2. Ties to powerful examiners were also more valuable for the high-performing category, pointing to complementarity between merit and networks rather than substitution.
  3. Complementarity implies a higher degree of meritocracy than substitution, since those attaining top office tended to show both stronger exam performance and stronger connections, and it makes the influence of networks harder to identify because it can operate under the guise of merit.

Related Articles:

  • Elite Strategies for Big Shocks: The Case of the Fall of the Ming — A study of China's Ming-to-Qing dynastic transition finds elite families in Central China lost influence in the short run but their descendants regained and tightened their hold on power under the new dynasty, even as the hardest-hit regions stayed worse off. The authors attribute the recovery to emphasis on portable civil-service exam skills.
  • The Inheritance Of Social Status: England, 1600 to 2022 — Using a genealogical database of 422,374 English people with rarer surnames, the authors find social status persists strongly even among distant relatives, with status correlations declining by a constant factor of 0.79 per step in the lineage across all status measures and eras studied. The authors argue this constancy suggests social interventions have modest effects.
  • For Whom the Bell Curve Tolls: A Lineage of 400,000 English Individuals 1750-2020 Shows Genetics Determines Most Social Outcomes — A study of 402,000 English individuals across 1750–2020 estimates an intergenerational occupational status correlation of 0.88 and a genetic correlation between spouses of 0.76, which the authors interpret as a strong genetic basis for the persistence of social status. The authors argue that highly assortative mating around status genetics limits what policy can do to raise social mobility.

AI Summary. The yen's rebound from a four-decade low points to US-Japan joint intervention larger than earlier episodes in which US contributions stayed under $1bn, with Japan alone estimated to have spent $53bn in a single day. Expectations are building for interest-rate increases by both the Federal Reserve and the Bank of Japan.

Erica Yokoyama, Yoshiaki Nohara, and Kanoko Matsuyama Bloomberg
Date Posted:

The US and Japan will keep supporting the yen—the BOJ through higher rates, and the US by buying yen with euros or dollars and letting Japan borrow dollars against Treasuries rather than sell them outright, protecting Treasury-market functioning.

Can joint currency intervention reverse a four-decade currency low?

Core argument: Japan is estimated to have spent $53 billion on Thursday supporting the yen, a likely single-day record, after the currency hit a four-decade low.

It's still unclear how much Washington spent to help lift the yen from its four-decade low. But the currency’s rebound points at interventions larger than in 1998 and 2011, when US contributions didn’t surpass the $1 billion mark. Japan alone is estimated to have spent $53 billion on Thursday — a likely single-day record. Speculation is emerging of further joint moves. Expectations are rising for the Federal Reserve and Bank of Japan to raise interest rates in September, after the central bank in Tokyo held its benchmark rate on Friday but flagged inflation risks. Doubts over Prime Minister Sanae Takaichi’s big spending plans also raise the likelihood of renewed yen weakening, furthering the case for joint action.

Takeaways by Macro Roundup® AI

  1. Japan is estimated to have spent $53 billion on Thursday supporting the yen, a likely single-day record, after the currency hit a four-decade low.
  2. The yen's rebound points to US intervention larger than in 1998 and 2011, when Washington's contributions did not exceed $1 billion, though the amount spent remains unclear.
  3. Expectations are rising for the Federal Reserve and Bank of Japan to raise interest rates in September, after the Bank of Japan held its benchmark rate while flagging inflation risks.

Related Articles:

  • Shadow Government Bond Yields in the G10 — The author estimates "shadow" 30-year government bond yields for Germany, Spain, Italy, Greece and Japan — what long-term yields would be if central banks withdrew support such as Japanese government bond purchases and the European Central Bank's backstop facilities. These estimates assume no outright central bank selling, so they represent a lower bound on how high yields could go.
  • Global Debt Report 2026 — Gross central government borrowing across OECD countries rose 7% to a record $17tn, about 23% of GDP, and is projected to reach roughly $18tn, or 24% of GDP. The United States and Japan account for close to 80% of the area's refinancing requirements, with the US share rising from 57% to 70%.
  • Yen Hits Four-Decade Low in Historic Slide That’s Rattled Japan — The yen weakened past 161.95 per dollar to its lowest level since 1986, putting traders on alert for Japanese intervention to support the currency. The weak yen is lifting exporters' profits and Japanese stocks to record highs while raising import costs for oil and gas and fueling inflation that hurts consumers.

AI Summary. A concentrated set of highly correlated assets financed with 3-4x leverage meant a large move in one part of the market forced selling elsewhere. Funds holding no idle cash sold liquid winners such as semiconductors and other artificial intelligence names to fund SpaceX purchases, with index inclusion triggering further forced reallocation.

Paul Kedrosky Applied Complexity
Date Posted:

Kedrosky argues the catalyst for the blowup of a highly leveraged hedge fund last week was the SpaceX IPO, which forced selling of winners to fund purchases of SpaceX stock.

How does leverage in concentrated correlated assets spread selling across markets?

Core argument: Situational Awareness argues that a concentrated set of highly correlated assets financed with 3–4x leverage meant a large move in one part of the system forced selling everywhere else.

[Situational Awareness] owned a concentrated set of highly correlated assets, financed with 3-4x leverage, enough that a large move in one part of the system forced selling everywhere else. SpaceX provided the initial disturbance in this complex and tightly-coupled system. Its enormous valuation, combined with a relatively small public float, created a rebalancing problem. Funds do not keep idle piles of cash waiting for a major new listing. They sell what they already own to buy what they want to or must own, and they sell the most liquid names (because it's easy), and usually the winners (to lock in gains). That meant selling semiconductors and other AI winners to fund SpaceX purchases. Its subsequent addition to the Nasdaq-100 index triggered another round of forced reallocation, made more violent and systemic by all the ETF-abetted leverage in the system, like SOXL, but especially single-name ETFs. When SpaceX itself began falling, the pressure evolved, but the damage had been done.

Takeaways by Macro Roundup® AI

  1. Situational Awareness argues that a concentrated set of highly correlated assets financed with 3–4x leverage meant a large move in one part of the system forced selling everywhere else.
  2. SpaceX's enormous valuation combined with a relatively small public float created a rebalancing problem, as funds, holding no idle cash, sold the most liquid names — semiconductors and other AI winners — to fund SpaceX purchases.
  3. SpaceX's addition to the Nasdaq-100 triggered another round of forced reallocation, made more violent and systemic by ETF-abetted leverage such as SOXL and especially single-name ETFs, according to Situational Awareness.

Related Articles:

  • The Coming Mega-IPO Flow & Funding Problem of 2026 — Adjusted for inflation, SpaceX alone would rank as the second-largest initial public offering ever, behind Saudi Aramco, and three such listings together would exceed the entire 1995–2000 dot-com wave. Funding that equity supply requires selling existing holdings, and index rule changes make passive funds forced buyers, pressuring large-cap technology stocks.
  • SpaceX and OpenAI Are Ending Wall Street’s Era of Stock Scarcity — JPMorgan projects that share sales will add roughly $1.5tn of stock to the US equity market over the next two years even after buybacks, which would be the strongest net equity issuance since at least the late 1990s. Equity has grown cheaper relative to debt as a funding source.
  • SpaceX — To Boldly Raise Money Where No IPO Has Gone Before — Goldman Sachs research finds that large companies floating 7% or less of their shares at initial public offering have 54% of shares in circulation two years later, while across its full sample of listings a 24% float at debut became 69% within 24 months.

AI Summary. China's reported current account surplus of about 4% of GDP is roughly 3 percentage points above the International Monetary Fund's estimated norm, implying a currency undervaluation of about 20%. Adjusting for surging gold imports and a misreported investment income deficit would lift the surplus to about 6% of GDP and the estimated undervaluation to 30–35%.

Brad Setser Council on Foreign Relations
Date Posted:

Properly accounting for imports of gold and chips, China’s current account surplus is ~6% of GDP. Using the IMF formulation, Setser argues this implies the renminbi is undervalued btw 30–35%.

How undervalued is China's currency given its current account surplus?

Core argument: China's reported current account surplus of roughly 4% of GDP sits 3 percentage points above the IMF's estimated norm, implying a currency undervaluation of roughly 20% using the IMF's own calculations.

China’s current account surplus is now reported to be around 4% of GDP—or 3 percentage points higher than what the IMF estimates it should be. That works out, using the IMF’s own calculations, to an undervaluation of roughly 20%. If adjustments are made for China’s surging gold imports (1.5% of GDP in Q2) and its obviously misreported investment income balance (China reports a deficit of $125 billion on $4 trillion in net assets, something that no one—the IMF included—can explain) the current account surplus would rise to around 6 percent of GDP and the estimated undervaluation would increase to between 30 and 35%. The upward adjustment to China’s surplus should not be controversial: the customs surplus excluding gold is now an incredible 7% of China’s GDP, the services deficit is only 1% of GDP and a long history of surpluses should lead to a positive net foreign asset position and thus external investment income (as in Korea, Taiwan and Japan).

Takeaways by Macro Roundup® AI

  1. China's reported current account surplus of roughly 4% of GDP sits 3 percentage points above the IMF's estimated norm, implying a currency undervaluation of roughly 20% using the IMF's own calculations.
  2. Adjusting for China's gold imports (1.5% of GDP in the second quarter) and its unexplained investment income deficit of $125 billion on $4 trillion of net assets would lift the surplus to about 6% of GDP and the estimated undervaluation to 30–35%.
  3. China's customs surplus excluding gold stands at 7% of GDP against a services deficit of only 1% of GDP, and its long history of surpluses should yield positive external investment income, as in Korea, Taiwan and Japan.

Related Articles:

  • Who Will Win The War Of Neo-Mercantilists? — China's manufacturing export surplus is around 2% of world GDP, roughly twice the largest surplus Japan ever ran, while domestic demand has stalled. Unexplained negative net income of about $125bn on its $4tn in net foreign assets, versus an expected $100bn surplus, supports the argument that the renminbi is about 30% undervalued.
  • Global Views: Bending, Not Breaking — China's export-oriented goods sector is supporting GDP growth of 5% year-on-year, with growth forecast at 4.7% for 2026, though the economy remains highly unbalanced. The authors expect strong production and sluggish demand to push the current account surplus further to record levels as a share of global output, leaving the yuan undervalued by more than 20% against the dollar.
  • Is China’s Surplus Really Shrinking? — China's manufacturing surplus excluding gold and semiconductors keeps rising. Excluding gold imports equal to 1.5 percentage points of GDP, China's goods surplus would be close to 7% of GDP.