Edward Conard

Top Ten New York Times Bestselling Author

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

Macro Roundup


Thursday, September 24, 2026

AI Summary. The rise in US bond yields, which has pushed 30-year fixed mortgage rates back above 7%, reflects higher real yields rather than higher inflation expectations, with market-based inflation breakevens barely changed over the past five years. The negative real yields that made financing exceptionally easy have reversed.

John Authers Bloomberg
Date Posted:

Authers presents real evidence that the increase in bond yields is not an alarming indication of elevated expected inflation. “Breakevens barely budged over the last five years,” he notes.

Are rising bond yields driven by real yields rather than inflation expectations?

Core argument: US 30-year fixed mortgage rates are back above 7% as bond yields return to 2007 levels, a rise the evidence attributes more to a “good” pickup in growth than to other widely cited causes.

The rise in bond yields looks alarming and has had a horrible effect on US mortgages, with 30-year fixed rates back above 7%. But the evidence is that the overall rise in yields is more a response to a “good” rise in growth, rather than to other widely cited potential causes. Consumers’ inflation concerns have risen since the Iran war drove up oil prices nearly seven months ago, but longer-term market-based inflation expectations have barely budged. Yields can be broken into real and inflation-driven components using the gap between fixed income and inflation-protected bonds (TIPS). Inflation breakevens barely budged over the last five years; real yields are now higher and account for all of the rise of the last five years. To illustrate that differently, negative real yields drove the exceptionally easy financing conditions of 2021. That’s now totally reversed.

Takeaways by Macro Roundup® AI

  1. US 30-year fixed mortgage rates are back above 7% as bond yields return to 2007 levels, a rise the evidence attributes more to a “good” pickup in growth than to other widely cited causes.
  2. Inflation breakevens, the gap between fixed income and inflation-protected bond yields, have barely budged over the last five years, so higher real yields account for all of the rise in bond yields over that period.
  3. Consumers’ inflation concerns have risen since the Iran war drove up oil prices nearly seven months ago, while longer-term market-based inflation expectations have barely moved.

Related Articles:

  • Don’t Draw The Wrong Conclusion From Treasury Yields — Ten-year real yields equal the average expected overnight rate over the next decade plus a term premium, and fiscal credibility or debt sustainability concerns would show up as a higher term premium. With the term premium and inflation expectations contained, the increase in bond yields reflects higher expected long-term overnight rates.
  • How Might Fiscal Policy Respond to the Rise of Artificial Intelligence? — The Congressional Budget Office estimates that a permanent 0.5 percentage point increase in annual productivity growth would lower publicly held federal debt after 30 years by 39% of GDP, offsetting roughly half the projected rise from 101% of GDP to 175%. Higher revenue and slower spending growth outweigh higher interest costs.
  • America’s Risky Debt: What Markets See That Policymakers Don’t — Two market-based measures suggest the safety premium investors pay to hold US Treasuries has compressed toward zero and at times reversed: the spread between top-rated corporate bonds and Treasuries after stripping out default risk, and the gap between currency-hedged foreign G10 government yields and Treasury yields at the same maturity, where longer-maturity comparisons now favor foreign bonds.

AI Summary. Yields on the longest-dated US government bonds reached their highest level in more than two decades, while the average yield on government debt worldwide stands just below 4%, the highest since 2007. A gauge of US bond market volatility also climbed, making investors more hesitant to buy despite the more attractive yields.

Alice Atkins, Ruth Carson and Elizabeth Stanton Bloomberg
Date Posted:

The US 30-year Treasury yield jumped as much as 7bp to 5.47%, its highest level since 2004. The US 10-year Treasury yield rose to 5.18%.

Are rising bond yields failing to attract hesitant investors?

Core argument: The US 30-year Treasury yield rose to its highest level since 2004 as the selloff in the longest-dated government bonds deepened.

Yields on the US’s longest-dated bonds climbed to the highest level in more than two decades. The average yield on government debt worldwide now stands within a whisker of 4%, the highest since 2007, Bloomberg’s Global Aggregate Treasuries index shows. Rising volatility is adding to the gloom, making investors more hesitant to step in even as higher yields make bonds more attractive. The ICE BofA MOVE Index, which measures US bond market swings, climbed Wednesday to the highest level since March. “Most fixed income will like higher yields, but want them to be stable there,” said Hans Mikkelsen, strategist at TD Securities. Investors are “afraid of catching a falling knife,” he said.

Takeaways by Macro Roundup® AI

  1. The US 30-year Treasury yield rose to its highest level since 2004 as the selloff in the longest-dated government bonds deepened.
  2. The average yield on government debt worldwide stands just below 4%, the highest since 2007, according to Bloomberg’s Global Aggregate Treasuries index.
  3. The ICE BofA MOVE Index of US bond market swings climbed to its highest level since March, with TD Securities strategist Hans Mikkelsen saying investors are “afraid of catching a falling knife.”.

Related Articles:

  • Interest Rates and Stock Prices: An Old Debate Resurfaces! — An estimate of the intrinsic 10-year US Treasury rate, built from actual inflation and real economic growth, far exceeded the actual 10-year Treasury rate after inflation surged, and that gap has since narrowed to roughly 4.75% actual versus 5.41% intrinsic.
  • High Yields Are Here to Stay — The authors estimate the natural inflation-adjusted rate on 10-year US Treasuries fell from about 5% in the early 1980s to roughly 1.6% in 2010-2015 and is now rising, reaching almost 2.6%. That implies a 10-year Treasury yield consistent with stable inflation of about 4.7%.
  • Soaring Bond Yields, Gaping Deficits and Towering Debts: What Could Go Wrong? — An analysis of 22 rich countries estimates that if each refinanced its entire debt at current five-year bond yields, Britain would need the largest primary surplus to stabilize its debt-to-GDP ratio, about 1.5%, followed by Italy at 1.4%, France at 1.2% and America at 1%.

AI Summary. The authors estimate roughly 57 gigawatts of operating US data center capacity against a planned development pipeline of about 509 gigawatts, which is not a completion forecast since projects may be delayed, scaled back, or abandoned. Their central scenario has 182.8 gigawatts of added capacity becoming operational through 2032, 117.2 gigawatts completed later, and 226.9 gigawatts never completed.

Stijn Van Nieuwerburgh Brookings Papers on Economic Activity
Date Posted:
Is Database:
Database
Is Important:
Important

Stijn Van Nieuwerburgh projects ~$10.3T will be spent on the AI buildout over 2025–2032, averaging 3.63% of GDP. He estimates 2/3 of that spending reflects IT equipment and one-third real estate and associated power infrastructure.

How much of the planned data center pipeline gets built?

Core argument: Using Cleanview project-level data from July 2026, the authors estimate roughly 57 GW of operating U.S. data center capacity against a planned development pipeline of roughly 509 GW, which they stress is not a completion forecast.

The required investment is enormous. A representative 200 MW AI training campus costs roughly $8.2 billion, about two-thirds of which reflects IT equipment and one-third the real estate and associated power infrastructure. We estimate that 183 GW is completed by 2032 with a further 118 GW completed after 2032. This pipeline will trigger about $10.3 trillion dollars of investment over 2025–2032. At an average of 3.63% of GDP per year, the projected buildout would be larger relative to the economy than the major U.S. canal, railroad, electrification, highway, and telecommunications investment booms. It would double the electricity consumption of the entire U.S. residential sector.

Takeaways by Macro Roundup® AI

  1. Using Cleanview project-level data from July 2026, the authors estimate roughly 57 GW of operating U.S. data center capacity against a planned development pipeline of roughly 509 GW, which they stress is not a completion forecast.
  2. The authors’ central scenario allocates the announced pipeline so that 182.8 GW of additional U.S. capacity becomes operational during 2025–32, including 19.0 GW tied to projects already operational in 2025 or 2026.
  3. The authors’ scenario has 117.2 GW of planned data center capacity completed after 2032 and 226.9 GW never completed, applying lower realization rates to more distant and less fully documented projects.

Related Articles:

  • Rear Window — Major cloud providers posted annual revenue growth of 37% at Amazon Web Services, 43% at Microsoft Azure and 82% at Google Cloud, with rising revenue backlogs of $514bn and $496bn respectively at Google Cloud and Amazon Web Services. Earnings growth appears highly contingent on continued hyperscaler capital spending and research, which rose from $460bn to $870bn.
  • AI Set to be Largest CapEx Cycle Ever … and Soon Majority Externally Financed — Hyperscaler and data-center investment is tracking toward $1.5tn annually by 2030, which in real terms would exceed the 2005-06 housing boom, the 1990s fiber peak, and the 1882 railroad peak combined. External debt and equity are projected to fund close to 90% of the buildout, making it dependent on credit markets.
  • 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.

AI Summary. By manufacturing value added China has the world's largest manufacturing sector, with the US and European Union roughly co-equal and individually smaller; netting out intra-EU trade, the EU is the largest exporter of goods and services and the US a distant third. The author argues all three are vulnerable to weaponized interdependence, with China apparently least so.

Paul Krugman Krugman Wonks Out
Date Posted:

Product-level data suggest China is less dependent on the EU and the US than they are China, even though US and EU manufacturing output jointly exceeds that of China. Krugman argues that in this tripartite world, economic power may be increasingly downstream from a bloc’s economic resilience.

How do manufacturing and trade size shape vulnerability to weaponized interdependence?

Core argument: China has by far the world’s largest manufacturing sector by value added, while the US and EU are roughly co-equal, each individually smaller than China but larger than China combined.

If we look at manufacturing value added, China has by far the biggest manufacturing sector; the US and EU are roughly co-equal, both individually smaller than China but bigger combined. Netting out intra-EU exports, the EU is the world’s largest exporter of goods and services, with the US a distant third [see figures in gallery]. [The featured image, from the Mercator Institute for China Studies, shows that from 2000–2022 the number of product categories in which the US and EU depended on China rose, while the number in which China depended on them fell. The chart excludes textiles]. The Western economies are increasingly dependent on China, and if anything the US is more dependent than the EU [by this product-count measure]. Who is vulnerable here? The three superpowers are all vulnerable to weaponized interdependence, although apparently China less than the rest. What really scares me is Taiwan. Given time, we can reconstruct a semiconductor supply chain without Taiwan. But the few years it would take would be very ugly.

Takeaways by Macro Roundup® AI

  1. China has by far the world’s largest manufacturing sector by value added, while the US and EU are roughly co-equal, each individually smaller than China but larger than China combined.
  2. Netting out intra-EU exports, the EU is the world’s largest exporter of goods and services, with the US a distant third.
  3. Mercator Institute for China Studies figures show that from 2000 to 2022 the number of product categories in which the US and EU depended on China rose while the number in which China depended on them fell, excluding textiles.

Related Articles:

  • The Real China Trump Card — Among the world's 2,000 largest companies, U.S. firms generated 38% of global profits and firms based in allied countries 35%, while Chinese firms including Hong Kong generated 16%. The U.S. leads in 20 of 27 industries and China in three, with profits used as a measure of economic chokepoints.
  • How Should We Measure Economic Power? — The authors argue profits measure economic power because they show a firm can do what others can't, and by that metric U.S. firms dominate globally—with Japan and Europe significant and China second-tier—implying greater U.S. power than GDP or industrial output comparisons suggest. The gap favoring the U.S. is most pronounced in high-tech products.
  • How to Fight an Economic War — China earned about $3.4bn from exporting rare-earth elements and magnets in a year, while the U.S. Geological Survey estimates a 30% disruption to U.S. supply of the rare-earth element neodymium alone would cut U.S. GDP by 2.2%, over $600bn. This asymmetry gives Chinese export controls their leverage.

AI Summary. A projection estimates China gains about $1.13tn in annual export value by 2030 relative to baseline while the rest of the world loses about $5.1tn, including $2.25tn for the G7. The authors attribute the net global decline to trade shifting toward Chinese goods whose export prices keep falling.

Charles Austin Jordan and Logan Wright Rhodium Group
Date Posted:
Is Database:
Database

China’s share of global exports by volume is on track to rise from 20% in 2025 to 28% by 2030. Yet China’s rising export share may depress the total value of global exports as lower-priced Chinese goods displace more expensive exports from other countries.

Do China's export share gains reduce global export values?

Core argument: The projection has China gaining roughly $1.13 trillion in annual export value by 2030 relative to the baseline scenario, while the rest of the world loses about $5.1 trillion.

The net result of our projection would suggest that China gains around $1.13 trillion in annual export value by 2030 relative to the baseline scenario, while the rest of the world loses around $5.1 trillion, with the G7 accounting for $2.25 trillion of those potential losses alone. This implies that China’s export share gains effectively destroy overall global trade values relative to the status quo due to continued declines in export prices. Regardless of which assumptions are used, China’s export share gains appear to reduce global total potential export values, because trade patterns are shifting toward Chinese goods that are declining in price.

Takeaways by Macro Roundup® AI

  1. The projection has China gaining roughly $1.13 trillion in annual export value by 2030 relative to the baseline scenario, while the rest of the world loses about $5.1 trillion.
  2. The G7 accounts for $2.25 trillion of the projected $5.1 trillion in export value losses borne by countries outside China.
  3. China’s export share gains appear to reduce global total potential export values regardless of the assumptions used, because trade patterns shift toward Chinese goods whose prices continue to decline.

Related Articles:

  • The Year of the Trojan Fire Horse: China’s Imbalanced Economy and Unrelenting Mercantilism — About 30% of Chinese industrial companies are unprofitable "zombies" kept alive by subsidies far larger than those elsewhere, rather than exiting amid falling industrial producer prices. Countries with large increases in manufactured imports from China also saw slowdowns in domestic manufacturing, including declining manufacturing shares of output across most of Southeast Asia.
  • China Is Making Trade Impossible — Interviews with Chinese economists, technologists and business leaders yielded no clear answer to what products China would want to buy from the rest of the world in future, beyond commodities, luxury goods and higher education. The author argues China sees nothing it cannot eventually make better and cheaper itself, undermining trade as a two-way exchange.
  • Sticking with What Works: Raising GDP Forecast on China’s Manufacturing Push — Stronger Chinese growth driven by export-oriented manufacturing may not produce net positive spillovers: for every 1pp export-driven boost to China's GDP, other economies may see a 0.1–0.3pp drag, with high-tech producers such as Europe and Japan facing greater pressure. Cheaper Chinese goods continue to exert a disinflationary impulse.

Friday, September 25, 2026

AI Summary. Historically, controlling for valuations, a 1% rise in the share of the market represented by initial public offerings has been associated with roughly a 4% decline in prices. With large artificial-intelligence company listings expected and share issuance exceeding buybacks, equity supply could shift from shrinking about 1% a year to growing near 5%, implying returns roughly 20% below average.

Ben Inker and John Pease GMO
Date Posted:

GMO estimates net US equity supply could increase by ~5% or more of total market capitalization over the next year. Inker and Pease note that in 1999–2000, “IPOs peaked at ~5% of total market cap. It doesn’t take much new supply to overwhelm the market.”

How does rising equity supply from new listings affect stock returns?

Core argument: Controlling for valuations, a 1% increase in the market share of IPOs has historically led to an approximate 4% decrease in prices, a multiplier the author applies to a coming surge in equity supply.

Controlling for valuations, a 1% increase in the market share of IPOs has historically led to an approximate 4% decrease in prices [Exhibit 2 in gallery]. Consider what is happening to equity supply. SpaceX’s non-Elon sales alone exceed 1% of the U.S. stock market’s value. We are likely to see IPOs from both Anthropic and OpenAI—together valued at about 5% of the U.S. stock market’s total investable market cap —over the next 12 months. For the first time in twenty years, with the brief exception of the GFC, we are seeing net dilution in the U.S. stock market (i.e., share issuance exceeding share buybacks), as the hyperscalers continue their capital expenditure spree. In aggregate, we are going from a world where equity supply was shrinking by roughly 1% per annum (with buybacks exceeding primary or secondary issuance) to one in which equity supply will be increasing by close to 5%, if not more. If you believe the 4x multiplier [implied by the regression line in Exhibit 2], this means we should expect returns that are some 20% below average (roughly 6% real) over the next 12–18 months from the headwind of rising equity supply alone.

Takeaways by Macro Roundup® AI

  1. Controlling for valuations, a 1% increase in the market share of IPOs has historically led to an approximate 4% decrease in prices, a multiplier the author applies to a coming surge in equity supply.
  2. U.S. equity supply is shifting from shrinking roughly 1% a year, with buybacks exceeding issuance, to growing close to 5% or more, the first net dilution in twenty years apart from the Global Financial Crisis.
  3. Anthropic and OpenAI, together valued at about 5% of U.S. investable market cap, are likely to go public within 12 months, while SpaceX’s non-Elon sales alone exceed 1% of the U.S. stock market’s value.

Related Articles:

  • Momentum, Rotation and the Value in Growth — After a fifteen-year stretch in which US equities, technology and growth stocks led, equity gains have broadened geographically, with the US the weakest of the major regions. The five largest US stocks now trade at a price-to-earnings ratio only marginally above the other 495, after holding a consistent premium since 2017.
  • 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.
  • One Hundred Years in the U.S. Stock Markets — Over a century, U.S. publicly traded stocks generated roughly $91tn in shareholder wealth enhancement, with returns strongly positively skewed and dominated by a relatively small number of high-performing firms. Because most possible outcomes fall below the mean in a skewed distribution, the authors argue financial planning should focus on median outcomes or the full distribution.

AI Summary. Direct carbon pricing—carbon taxes and emissions trading systems—now covers about 30% of global emissions, with most coverage coming from emissions trading systems in China and the European Union. The EU complements its system with a Carbon Border Adjustment Mechanism that prices carbon on certain high-emitting imports regardless of where they are produced.

Karen Karniol-Tambour, Jeremy Ng and Daniel Hochman Bridgewater Associates
Date Posted:

Bridgewater argues that carbon pricing is increasingly becoming an industrial-policy tool, with measures such as the EU’s CBAM supporting domestic producers by limiting carbon leakage, while carbon prices encourage investment in energy efficiency and industrial upgrading.

How much of global emissions does carbon pricing now cover?

Core argument: Direct carbon pricing, spanning carbon taxes and emissions trading systems, now covers roughly 30% of global emissions, with most of that coverage coming from emissions trading systems in China and the EU.

Carbon pricing schemes have continued to grow over the last few years. Some form of direct carbon pricing now covers ~30% of global emissions—spanning both carbon taxes and emissions trading systems. Most coverage comes from emissions trading systems in China and the EU, and these schemes are increasingly being adapted to fit their specific industrial policy goals. For example, as a complement to its domestic emissions trading system, the EU has started to implement a Carbon Border Adjustment Mechanism (CBAM), which imposes carbon pricing on certain high-emitting imports regardless of where they are produced. In a world of modern mercantilism, policy makers have increasingly emphasized the need for carbon pricing schemes to support—rather than constrain—industrial competitiveness.

Takeaways by Macro Roundup® AI

  1. Direct carbon pricing, spanning carbon taxes and emissions trading systems, now covers roughly 30% of global emissions, with most of that coverage coming from emissions trading systems in China and the EU.
  2. The EU has begun implementing a Carbon Border Adjustment Mechanism, which imposes carbon pricing on certain high-emitting imports regardless of where they are produced, as a complement to its domestic emissions trading system.
  3. Carbon pricing schemes are increasingly being adapted to fit specific industrial policy goals, with policy makers emphasizing that such schemes should support rather than constrain industrial competitiveness.

Related Articles:

  • We Are All Mercantilists Now — The postwar free-trade system depended on American soft power and broad respect for its rules, and as countries defected to mercantilist policies each defection pushed others to respond in kind. China's economic size and its use of currency management, public procurement, state subsidies and protectionism to build leading industries in electric vehicles, solar power and batteries broke the existing order.
  • Power Politics: Energy Self-Sufficiency in a Modern Mercantilist World — China leads in adding power to the grid, with more than 30,000 miles of ultra-high-voltage transmission lines versus zero in the US and lead times for large transformers of 48 weeks against a US average of 143 weeks. This positions China to accommodate new demand sources such as artificial intelligence.
  • Fighting Words: The Energy Transition in 2026 — Estimates based on primary energy overstate how much electricity is needed to replace oil in passenger cars, since electric motors convert 80%-90% of electricity into motion versus about 18% for gasoline cars. Measuring useful final energy net of waste heat avoids this "primary energy fallacy": the US consumed 45 exajoules of useful final energy versus 95 exajoules of primary energy.

AI Summary. Federal Reserve officials' assessed risks to their employment and price stability mandates had tended to move together rather than inversely, suggesting common forces were driving both. That pattern has now shifted, with officials more optimistic on growth and employment and less concerned about downside risks than before the pandemic.

Matt Klein The Overshoot
Date Posted:

About half of Fed officials now forecast that at the end of 2028 short rates will be “at least as high as they are now.” The underlying reason, Klein proposes, is not supply shocks but a persistent shift in the perceived balance of risks between inflation and unemployment.

Have central bankers' employment and inflation risk assessments stopped moving together?

Core argument: From mid-2022 until now, Fed officials’ assessments of risks to the employment mandate and the price stability mandate tended to move together, consistent with judging that the forces driving unwelcome inflation also threatened the jobs outlook.

From mid-2022 until now, Fed officials seem to have judged that all of the forces responsible for unwelcome inflation also threatened the outlook for jobs. That would explain why their assessment of the risks to the employment mandate and to the price stability mandate tended to move together [see “Aligned Mandate” in gallery]. If “normal” factors such as consumers’ access to credit or businesses’ appetite to invest were driving things, the perceived risks to the inflation and employment mandates would be uncorrelated, or even move inversely to each other. That shift has finally happened. In fact, Fed officials are now more bullish on growth and employment—and less concerned about downside risks—than they have been since before the pandemic. The latest data on private sector balance sheets, borrowing, and asset purchases can help explain why.

Takeaways by Macro Roundup® AI

  1. From mid-2022 until now, Fed officials’ assessments of risks to the employment mandate and the price stability mandate tended to move together, consistent with judging that the forces driving unwelcome inflation also threatened the jobs outlook.
  2. Fed officials are now more bullish on growth and employment, and less concerned about downside risks, than they have been since before the pandemic.
  3. If normal factors such as consumers’ access to credit or businesses’ appetite to invest were driving the economy, perceived risks to the inflation and employment mandates would be uncorrelated or move inversely, a shift that has now happened.

Related Articles:

  • Just Waiting for Disinflation is Not Enough — About 52% of consumer price index components are rising at least 3% year-over-year, down from 73% at the peak but above the 32% average from 2000 to 2020, and such breadth measures track actual inflation closely. Weighting components by spending shares makes the current episode resemble milder past inflation accelerations rather than the largest ones.
  • The Diesel Shock Is a Core Inflation Shock — The US Gulf Coast diesel crack spread cleared $100 per barrel for the first time on record, against a normal range of $15 to $30. Because diesel is an intermediate input embedded in the delivered cost of nearly every physical good, the author argues the increase migrates with a lag into core goods and services inflation.
  • Weeks Before the Midterms, Almost Everything Is Getting More Expensive — Wage gains have trailed inflation for five months, and consumer prices are 27% higher than at the start of 2021. The "misery index," the sum of the inflation and unemployment rates, stands at 7.5, up from 6.7 a year earlier.

AI Summary. East Asian economies accumulated large US dollar and euro reserves by building export machines based on undervalued currencies, a strategy one analyst argues has run its course. He contends China should revalue aggressively and return to market-determined prices, since the resulting accounting losses reflect real losses already incurred.

Charles Gave Gavekal
Date Posted:

Charles Gave argues that East Asia’s post-1997 model of undervalued currencies, which has generated >5T in FX reserves, has run its course. His prescription is aggressive China-led revaluation to shift purchasing power toward Asian consumers.

Should China revalue its currency aggressively and let markets set prices?

Core argument: Gave argues that East Asia’s strategy of building export machines on undervalued currencies to accumulate large US dollar and euro reserves has run its course.

To accumulate their huge reserves of US dollars and euros, [East Asia] built formidable export machines based on undervalued currencies. [Gave sees] only one solution: to return to market-determined prices as quickly as possible. As the leading economy in the region, China should bite the bullet and say the time has come to revalue aggressively. Yes, Asia will take accounting losses. But that does not greatly matter; the actual losses have already been taken a long time ago.

Takeaways by Macro Roundup® AI

  1. Gave argues that East Asia’s strategy of building export machines on undervalued currencies to accumulate large US dollar and euro reserves has run its course.
  2. Gave sees a return to market-determined prices as quickly as possible as the only solution, with China, as the region’s leading economy, revaluing aggressively.
  3. Gave contends that the accounting losses Asia would take on revaluation do not greatly matter because the actual losses were taken long ago.

Related Articles:

  • The World Should Not Ignore China’s Undervalued Currency — 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%.
  • 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.
  • The Year of the Trojan Fire Horse: China’s Imbalanced Economy and Unrelenting Mercantilism — About 30% of Chinese industrial companies are unprofitable "zombies" kept alive by subsidies far larger than those elsewhere, rather than exiting amid falling industrial producer prices. Countries with large increases in manufactured imports from China also saw slowdowns in domestic manufacturing, including declining manufacturing shares of output across most of Southeast Asia.