In this paper, we study the long-run effects of the largest R&D shock in U.S. history. In World War II, the newly-created Office of Scientific Research and Development (OSRD) led an expansive effort to develop technologies and medical treatments for the Allied war effort. From 1940 to 1945, OSRD engaged industrial and academic contractors in more than 2,200 R&D contracts at over $9 billion (2022 dollars), despite no pre-war tradition of funding extramural (externally-performed) R&D. At the height of the war, the U.S. government was funding the research behind nearly 1 of every 8 U.S. patents—more than five times pre-war and modern levels, and nearly twice the level at the peak of the Cold War in the 1950s and 1960s. The immediate effect of these investments was a range of technological advances which were not only instrumental to the success of the Allied campaign, but also of wide civilian value after the war ended. Its longer-run impact was to reshape the U.S. innovation system.

Related: Moonshot: Public R&D and Growth and Public R&D Spillovers and Productivity Growth and Pentagon Plans Vast AI Fleet to Counter China Threat

The figure shows the path through time of two interest rates. The lower line shows the path of the Fed’s policy rate going back to April 2022, and its projected path forward over the coming two years. The upper line shows what we call the “QT-equivalent policy rate,” which accounts for the effect of QT. The QT-equivalent rate is the policy rate needed without QT to have an effect on financial conditions equivalent to that produced by the actual policy rate with QT. What we find is that today’s policy rate of 5.375% is, under the current QT roll-off schedule, having roughly the same impact on financial conditions as a policy rate of 5.763% without QT. That’s a gap of 39bps, or 39 hundreds of a percent. But the effect of QT rises sharply going forward, as $95 billion in assets continue to roll off the balance sheet each month, before reaching a high of 100 basis points—or one full percent—in May 2025.

Related: The Grind Ahead and Inching Toward Equilibrium and Macro Outlook 2024: The Hard Part Is Over

Earlier this year, the New Tenant Rent Index (NTR) was showing significant disinflation in rent prices that have since begun passing through to decelerations in CPI shelter prices—and recently released NTR data through the third quarter suggests that even more stabilization is yet to come. Growth in Gross Labor Income—the aggregate wages and salaries of all workers in the economy—continues to decline as the labor market slows toward normal pre-pandemic growth rates. Given how tight the relationship between cyclical growth in employment/wages and housing inflation is, a deceleration in NTR has naturally followed the slower labor market of the last year.

Related: The Most Important New Disinflation Indicator and Where Is Shelter Inflation Headed? and Striking Similarities (and Differences) Between Inflation Today and In the 1970s

Affordability was worse in September than in August, as house prices and mortgage rates both increased. In September 2023, houses were the least “affordable” since 1982 when 30-year mortgage rates were over 14%. We already know affordability will be even worse in October since mortgage rates have increased further. For September: a year ago, the payment on a $500,000 house, with a 20% down payment and 6.11% 30-year mortgage rates, would be around $2,427 for principal and interest. The monthly payment for the same house, with house prices up 4.0% YoY and mortgage rates at 7.20% in September 2023, would be $2,822 - an increase of 16%. However, if we compare to two years ago, there is huge difference in monthly payments. In September 2021, the payment on a $500,000 house, with a 20% down payment and 2.90% 30-year mortgage rates, would be around $1,665 for principal and interest. The monthly payment for the same house, with house prices up 15.1% over two years and mortgage rates at 7.20% in September 2023, would be $3,125 - an increase of 88%!

Related: Higher For Longer and The 2024 Housing Outlook and America's Missing Empty Homes and With Housing, Millennials Have Much to Complain About

For decades, the biggest foreign holders of US Treasuries were central banks and sovereign wealth funds around the world.  Foreign official institutions were buying Treasuries because many countries, in particular emerging markets, were intervening to limit the appreciation of their domestic currencies because a domestic currency that is too strong hurts exports. In other words, the foreign official sector was not buying Treasuries for yield reasons but for FX reasons to support the US dollar and thereby domestic exports. With the Fed raising rates and the dollar going up, that has now changed. Foreign central banks no longer need to buy US Treasuries and US dollars to depreciate their currencies. And foreign private buyers find US yield levels attractive despite high hedging costs. The bottom line is that with the Fed raising rates and the dollar going up, yield-insensitive central banks have been selling Treasuries to limit the weakening of their domestic currencies.

Related: Preferred Habitats and Timing in the World’s Safe Asset and Resilience Redux in the US Treasury Market and Setser On Foreign Demand For Treasuries

To see how deeply Huawei and the Chinese government are now entwined, look no further than the launch in August of the new Mate 60 Pro smartphone. Huawei timed the release of the phone to coincide with US Commerce Secretary Gina Raimondo’s visit to China in part because of direct encouragement from a senior official at the top of the regime, according to a person familiar with the situation who asked not to be identified discussing sensitive matters. Huawei never disclosed technical details, but a teardown of the handset conducted by TechInsights for Bloomberg News found it was powered by SMIC’s advanced 7-nanometer processor. That suggests China is roughly five years behind the current most advanced technology. Export controls imposed by the Biden administration in 2022 were aimed at keeping China at least eight years behind.

Related: Huawei Building Secret Network for Chips, Trade Group Warns and China AI & Semiconductors Rise: US Sanctions Have Failed and China Imports Record Amount of Chipmaking Equipment

This paper’s main message is that historical mobility was lower than previously estimated in linked data. To show why, I account for two measurement issues: unrepresentative samples and measurement error. First, I account for unrepresentative samples by adding Black families, who historical studies routinely drop. Second, I address measurement error by using multiple father observations to more accurately capture his permanent economic status. Using linked census data from 1850 to 1940, I show that accounting for race and measurement error can double estimates of intergenerational persistence. Updated estimates imply that there is greater equality of opportunity today than in the past, mostly because opportunity was never that equal.

Related: Chetty and Saez Debunk the Claim That Income Mobility is Declining in the U.S. and The Inheritance Of Social Status: England, 1600 to 2022 and The Economics of Inequality in High-Wage Economies

Here is my take: In the US in 1982, the top of the first Forbes 400 list was Daniel Ludwig with nominal $2 billion. That was 85,000 times the then-median nominal family income of $23,430.  In 2023, the top of the Forbes 400 was Elon Musk with nominal $251 billion. That was 2,500,000 times the now-median nominal family income of $98,705. Now: ($251B/$99K)/($2B/$23K) = 29.8 How the f*** is the ratio of the top to the median to explode by a factor of 30 while the Auten/Splinter measures show “little change in after-tax top income shares”? Until someone comes up with an explanation for how this could be—how a 30x multiplication since 1982 of the ratio of the top of the Forbes 400 to median household income is consistent with “top income shares are lower and have increased less since 1980 than other studies… increasing government transfers and tax progressivity have resulted in… little change in after-tax top income shares…”—I am going to presume the chances are 99% that there are big things wrong in the numbers in Auten/Splinter.

Related: Income Inequality in the United States: Using Tax Data to Measure Long-Term Trends and The Economics of Inequality in High-Wage Economies

According to the new BEA estimates, the share of GDP spent on health in 2022 declined to 17.1%  from 17.5% in 2021 and 17.9% in 2020. This marks the second consecutive year of decline in health spending as a share of GDP. The estimated share in 2022 represents the smallest share of the economy spent on health since 2014 and a smaller share that was spent on health in 2019, before the start of the pandemic. Adjusting for differences in overall and medical inflation, the share of GDP spent on health in 2022 was largely unchanged from 2020 and 2021. As such, the decline in health spending as a share of GDP in 2021 and 2022 was primarily driven by high inflation in sectors outside of health and a lagging medical inflation.

Related: A Huge Threat to the U.S. Budget Has Receded. And No One Is Sure Why and Why Medicare and Social Security Are Sustainable

Remittances rose considerably in the aftermath of the balance sheet expansion following the global financial crisis of 2007-08; they went from 0.2% of GDP and 1.3% of government receipts in 2007 to 0.6% and 3.4%, respectively, in 2015. Remittances then fell due to the 2015-18 tightening cycle, but they rose again in 2020 as the Fed slashed interest rates and resumed its balance sheet expansion (additionally, GDP fell in 2020, which partly explains the positive jump). Between 2021 and 2022, remittances as a percent of GDP dropped from 0.5% to 0.3%. Once the Fed returns to earning a positive net income, it will pay down the value of the deferred asset until it reaches zero, at which point the Fed will resume sending remittances to the Treasury. As of Nov. 8, 2023, the Fed had accumulated a deferred asset of $116.9 billion. In April 2023, the New York Fed estimated that the Fed will return to positive net income in 2025. Combining those New York Fed projections with the latest data on net income, we estimate that the Fed will carry this deferred asset until mid-2027, after which it will resume transfers to the Treasury.

Related: There Is No "Stealth Fiscal Stimulus"

What we can say, with considerable certainty, is that while prices have gone up a lot since the pandemic began, most workers’ wages have risen significantly more. I’m told that real people know that inflation is still running hot, whatever the government numbers may say. Actually, the American Farm Bureau Association, a private group, tells us that Thanksgiving dinner cost 4.5% less this year than last. Gasbuddy.com, another private group, tells us that prices at the pump are down more than 30% since their peak last year. Neither turkeys nor gas prices are good measures of underlying inflation, but both show that the narrative of inflation still running wild is just not true. While the public’s negative view of the economy is a major puzzle, acknowledging that puzzle is no reason to soft-pedal the evidence that the U.S. economy is currently doing very well — indeed, much better than even optimists expected a year ago.

Related: The Economy Is Great. Why Are Americans in Such a Rotten Mood? and Are You Better Off Than You Were Four Years Ago? and Why Americans Dislike the Economy

We evaluate progress in the War on Poverty as President Lyndon B. Johnson defined it, which established a 20% baseline poverty rate and adopted an absolute standard. While the official poverty rate fell from 19.5% in 1963 to 10.5% in 2019, our absolute full-income poverty measure—which uses a fuller income measure and updates thresholds only for inflation—fell from 19.5% to 1.6%. However, we also show that relative poverty reductions have been modest. Additionally, government dependence increased over this time, with the share of working-age adults receiving under half their income from market sources more than doubling.

Related: Work Requirements and the Lost Lessons of 1996 and The Unexpected Compression: Competition at Work in the Low Wage Labor Market and The Economics of Inequality in High-Wage Economies

The data are quite clear: over the past 4 years, inflation-adjusted wages are up! This is also true if you start roughly right before the pandemic (December 2019 or January 2020 or thereabouts). And not only are inflation-adjusted wages up, they are up roughly the same amount as they were in the years before the pandemic. CPI-adjusted wages are a touch below: about 3% growth over 4 years, versus roughly 4% from 2015-2019. But PCE-adjusted wages are right on track, at around 5% cumulative 4-year growth. It’s true right now that if we start the data in January 2021, at the beginning of the Biden Presidency, CPI-adjusted wages are down slightly: about 1%. But PCE-adjusted wages are up slightly: also about 1%. But unless there is a major reversal of the trajectory of either wage or price growth, by next year these will both be positive (even if only slightly).

Related: Have Workers Gotten A Raise? and Are Real Wages Rising? and The Unexpected Compression: Competition at Work in the Low Wage Labor Market

To get a clearer picture of the economy, therefore, we need to adjust for the changing composition of the workforce and consider changes to wages in each type of job and industry. A BLS statistic, the National Compensation Survey’s Employment Cost Index, does just this. According to ECI, inflation-adjusted wages have shrunk by 3.7% since the end of 2020. While real wages rose in response to falling energy prices late last year, they have been roughly flat since. Worse, the drop in real wages erased all gains made in the late 2010s. Real wages today stand at 2015 levels, meaning Americans’ paychecks don’t go any further now than they did eight years ago.

Related: Have Workers Gotten A Raise? and Are Real Wages Rising? and The Unexpected Compression: Competition at Work in the Low Wage Labor Market

Nearly 50,000 people in the U.S. lost their lives to suicide in 2022, according to a provisional tally from the National Center for Health Statistics. The agency said the final count would likely be higher. The suicide rate of 14.3 deaths per 100,000 people reached its highest level since 1941. Suicide rates for children 10-14 and people 15-24 declined by 18% and 9%, respectively, last year from 2021, bringing suicide rates in those groups back to prepandemic levels.

Related: Suicide Rates Are up for Gen Z Across the Anglosphere, Especially for Girls and Comments On: "Accounting For the Widening Mortality Gap Between American Adults With and Without a BA" By Anne Case and Angus Deaton and How Disadvantage Became Deadly in America

Europeans are frustrated that European batteries and cars don’t qualify for U.S. consumer EV subsidies in a straightforward way (though the “leased vehicle” exception provides ample ground for trade), as well as the persistence of national security tariffs that apply to close security allies. Americans are frustrated by the contortions created by the EU’s desire to respond to China's distortions by only using measures that fit within the narrow confines clearly allowed by the WTO (The U.S. also takes a more expansive view than the EU about what the WTO allows). These competing approaches to managing the Chinese threat have led to the fracturing of the transatlantic markets for not only clean energy goods, but also dirty goods like steel that need to become clean to lower global carbon emissions.

Related: Can China Reduce Its Internal Balances Without Renewed External Imbalances? and China’s Auto Export Wave Echoes Japan's in the ’70s and Danish Weight Loss Drugs vs. Chinese Cars: Two Models of Export Booms

The China bloc accounts for half of the world’s (non-Antarctic) land mass, compared with 35% for the US bloc. It is also home to slightly more of the world’s people (46%, against 43%). But it still generates only 27% of the world’s GDP, nearly all of that in China itself, compared with 67% in the US bloc. Unsurprisingly, the China bloc is more important in industry than in GDP. Thus, its share of world industrial output was 38% in 2022, against 55% for the US bloc. Many countries wish to see the US and its allies, the dominant powers of the last two centuries, taken down more than just a peg or two. But they are more united and economically powerful than China’s group of malcontents. The event likely to change this balance quickly would be a US decision to tear its alliances to pieces.

Related: Why Xi Can No Longer Brag About the Chinese Economy and China Slowdown Means It May Never Overtake US Economy, Forecast Shows and Pettis On China's Export Strategy

Hyperglobalization refers to the exceptional period between 1992 and 2008 during which global exports grew at close to 10% a year in nominal terms while GDP increased by only 6% a year. As a result, the share of exports in national economies grew from less than 20% to more than 30% in a little bit more than 15 years. The hyper in hyperglobalization does not come from the level of trade relative to GDP, which remains high, or from levels compared with the theoretical potential of trade, which are low. Rather it comes from the change in the level of trade, which was positive before the Global Financial Crisis (GFC) and stagnant or slightly negative thereafter. After the GFC, a puzzling wedge emerged. China’s trade-to-GDP ratio plummeted by more than 30pp, from 71% to a trough of about 35%. But its global export market share continued to rise at the same heady pace, reaching nearly 15% of total exports and 22% of manufactured exports by 2022.

Related: China's Current Account Surplus Is Likely Much Bigger Than Reported and Managing Economic and Financial Entanglements With China and Pettis On China's Export Strategy

Some 75% of our planet is covered with water, but less than 1% is usable, and even this is depleting quickly. Why? Water demand is up approximately 40% over the past 40 years and is estimated to increase another 25% by 2050, yet supply has more than halved since 1970. Water supply is declining in both quality and quantity. Some 80% of global sewage is dumped into the sea without adequate treatment and microplastics have been found in 83% of tap water. Well over half (57%) of global freshwater aquifers are beyond the tipping point, and even poor infrastructure limits supply as one-third of all fresh water running through pipes globally is lost to leakage. For every +1°C increase in global temperatures, there is a 20% drop in renewable water sources. To put this in context, the average global temperature has increased by at least 1.1°C since 1880, and July 2023 was the hottest month on record.

Related: Texas Farmers Are Worried One of the State’s Most Precious Water Resources is Running Dry. You Should Be, Too and Arizona Is Running Out of Cheap Water. Investors Saw It Coming and America Is Using Up Its Groundwater Like There’s No Tomorrow

Our study builds on an intuitive idea: to recover its past investment, a lender has incentives to offer more favorable lending terms to a firm close to default to keep the firm alive. In contrast to standard intuition, we find that evergreening allows a firm with worse fundamentals—less productive and with more debt—to borrow at relatively better terms. Based on detailed U.S. loan-level data for the years 2014-19, we provide empirical support for our theory at a time when the banks were relatively well capitalized and the economy was growing steadily. Using a dynamic model of the U.S. economy, we find that evergreening has material effects on the performance of the overall economy, resulting in lower borrowing rates, higher levels of debt, and depressed overall productivity.

Related: The Grind Ahead and 40% of Companies in Russell 2000 Have Negative Earnings and Rates Are Up. We’re Just Starting to Feel the Heat

It now requires $119.27 to buy the same goods and services a family could afford with $100 before the pandemic. Since early 2020, prices have risen about as much as they had in the full 10 years preceding the health emergency. It’s hard to find an area of a household budget that’s been spared: Groceries are up 25% since January 2020. Same with electricity. Used-car prices have climbed 35%, auto insurance 33%, and rents roughly 20%.

Related: The US Consumer: Still Strong in 2024 and Fiscal Influences on Inflation in OECD Countries, 2020-2022 and Fiscal Arithmetic and the Global Inflation Outlook

The rupee has lost less than 1% of its value against the dollar this year, compared with a decline of more than 3% for the Chinese yuan, a roughly 9% fall in the South African rand, and an 11% slide in the Japanese yen. One dollar currently buys around 83 rupees. Solid management by the Reserve Bank of India, the country’s central bank, deserves much of the credit. The central bank spent decades building up the country’s foreign-exchange reserves to more than $600 billion by the first half of 2022, one the largest pools of central-bank reserves in the world. India’s central bank has had a lot of help. The economy is on track to grow more than 6% this year, bringing its gross domestic product close to $4 trillion—within reach of Germany’s, the world’s fourth-largest.

Related: Indian Stock Market Surges as Foreign Funds Buy Into National Growth Story and India Equity: An Unsung Long-Term Performance Story and India At The Centre

By the end of 2018, there was a decrease of 140,000 H-1B approvals (relative to trend) and an unprecedented spike in H-1B denial rates. Denial rates increased from about 6% in 2016 to 16% in 2018. Our event-study estimates imply that a 10 percentage point increase in H-1B denial rates increases Canadian applications by 30%. A back-of-the-envelope calculation suggests that for every four forgone H-1B visas, there is an associated increase of one Canadian application. We find that firms that were relatively more exposed to the immigrant inflow increased sales. Consistent with the increase in production, we find that a firm hired approximately 0.5 additional native workers per new immigrant. We also find that the earnings per native worker at relatively more exposed firms dropped. This result together with the fact that more exposed firms are intensive in occupations that were more impacted by U.S. restrictions, is consistent with earnings per native worker in more affected occupations declining compared to less affected ones.

Related: America’s Got Talent, but Not Nearly Enough and Top Talent, Elite Colleges, and Migration: Evidence from the Indian Institutes of Technology and The Economics of Inequality in High-Wage Economies

The massive outperformance of the “Magnificent 7” mega-cap tech stocks has been a defining feature of the equity market in 2023. The stocks should collectively outperform the remainder of the index in 2024. The 7 stocks have faster expected sales growth, higher margins, a greater re-investment ratio, and stronger balance sheets than the other 493 stocks and trade at a relative valuation in line with recent averages after accounting for expected growth. However, the risk/reward profile of this trade is not especially attractive given elevated expectations. Analyst estimates show the mega-cap tech companies growing sales at a CAGR of 11% through 2025 compared with just 3% for the rest of the S&P 500. The net margins of the Magnificent 7 are twice the margins of the rest of the index, and consensus expects this gap will persist through 2025.

Related: A Few Stocks Drive the Stock Market: Dot.com Vs. Today Vs. the Last 100 Years and Long-Term Shareholder Returns: Evidence From 64,000 Global Stocks and Birth, Death, and Wealth Creation

The divergence between the S&P7 and the S&P493 continues. Investors buying the S&P 500 today are buying seven companies that are already up 80% this year and have an average P/E ratio above 50. In fact, S&P7 valuations are beginning to look similar to the Nifty Fifty and the tech bubble in March 2000.

Related: A Few Stocks Drive the Stock Market: Dot.com Vs. Today Vs. the Last 100 Years and Long-Term Shareholder Returns: Evidence From 64,000 Global Stocks and 2024 US Equity Outlook: “All You Had To Do Was Stay”

Precommitment is, I think, the most powerful argument for dollarization (as for eurorization of, say, Greece): A country that dollarizes cannot print money to spend more than it receives in taxes. A country that dollarizes must also borrow entirely in dollars and must endure costly default rather than relatively less costly inflation if it doesn't want to repay debts. Ex post inflation and devaluation is always tempting, to pay deficits, to avoid paying debt, to transfer money from savers to borrowers, to advantage exporters, or to goose the economy ahead of elections. If a government can precommit itself to eschew inflation and devaluation, then it can borrow a lot more money on better terms, and its economy will be far better off in the long run. An independent central bank is often advocated for precommitment value. Well, locating the central bank 5,000 miles away in a country that doesn't care about your economy is as independent as you can get!

Related: Milei’s Challenge

[In the official reports] both the goods surplus, which is much smaller in the balance of payments than in the customs data, and balance on investment income, which remains in deficit even with the rise in U.S. interest rates, are suspicious. With reasonable adjustments, China's “true” current account surplus might be $300 billion larger than China officially reports. That's real money, even for China. The model implies China's overall income balance should now be back in a surplus of around $70 billion thanks to the rise in U.S. short-term interest rates. So without the unexplained deficit in investment income and the discrepancy between customs goods and balance of payments goods, and China’s current account surplus would now be around $800 billion, over 4 percent of its GDP.

Related: Managing Economic and Financial Entanglements With China and Can China Reduce Its Internal Balances Without Renewed External Imbalances? and Can China Reduce Its Internal Balances Without Renewed External Imbalances?

At the turn of the century, China produced one million college graduates. This represented 6% of the age cohort which we calculate by dividing graduates by births 24 years prior (the average age at college graduation is 23.7 in China). This has increased dramatically to 11.6 million graduates for the class of 2023, 63% of the age cohort. Over 40% of China’s college graduates are STEM majors. This compares to 18% in the US, 35% in Germany, and 26% in the OECD. While we await graduation statistics for 2024 and beyond, we believe recent university expansions have enrolled an additional 3 million students per year since 2017, taking them out of both the job and family formation market until graduation. This just so happens to coincide with both the sudden decline in births and the increase in youth unemployment.

Related: An Economic Hail Mary for China and Prominent Chinese Economist Justin Lin Paints a Rosy Picture of China’s Greying Population and A Revolution Is Coming for China’s Families

Due to population aging, GDP growth per capita and GDP growth per working-age adult have become quite different among many advanced economies over the last several decades. Countries whose GDP growth per capita performance has been lackluster, like Japan, have done surprisingly well in terms of GDP growth per working-age adult. Indeed, from 1998 to 2019, Japan has grown slightly faster than the U.S. in terms of per working-age adult: an accumulated 31.9% vs. 29.5%. Furthermore, many advanced economies appear to be on parallel balanced growth trajectories in terms of working-age adults despite important differences in levels. Motivated by this observation, we calibrate a standard neoclassical growth model in which the growth of the working-age adult population varies in line with the data for each economy. Despite the underlying demographic differences, the calibrated model tracks output per working-age adult in most economies of our sample. Our results imply that the growth behavior of mature, aging economies is not puzzling from a theoretical perspective.

Related: Fully Grown - European Vacation! and Population Aging and Economic Growth: From Demographic Dividend to Demographic Drag? and Growth in Working-Age Population Ends. That’s Not All Bad

We continue to expect the Fed’s balance sheet runoff to have modest effects on interest rates, broader financial conditions, growth, and inflation. Our rule of thumb derived from a range of studies is that 1% of GDP of balance sheet reduction is associated with a roughly 2bp rise in 10-year Treasury yields. In total, our projections for runoff imply that balance sheet normalization will have exerted around 20bp worth of upward pressure on 10-year yields since runoff started. Together with our rule of thumb that a 25bp boost to 10-year term premia from balance sheet reduction has roughly the same impact on financial conditions and growth as a 25bp rate hike, this implies that the total runoff process should have the effect of a little under one rate hike.

Related: The Grind Ahead and Resilience Redux in the US Treasury Market and A Beautiful Replenishment

The Fed’s recent Treasury market conference offered three notable insights that suggest Treasury market liquidity will continue its structural decline. First, dealer balance sheet constraints have moved from ones that could be solved through central clearing to those that would require other adjustments. Secondly, mandatory Treasury repo clearing may reduce market liquidity by raising the cost of financing due to higher collateral haircuts. Lastly, mutual funds may not become significant marginal investors in cash Treasuries as regulations encourage them to invest using Treasury futures. The official sector appears to be making adjustments that will make it more difficult for the market to absorb the upcoming deluge of Treasury issuance. At a high level, cash Treasuries can be held by investors using borrowed money or cash investors. The leveraged investors are more nimble participants as cash investor participation depend on asset inflows or the liquidation of other asset holdings. Going forward it looks like the costs of leveraged financing will increase due to mandatory cleared repo and a limited supply of repo financing that is constrained by regulatory costs. Major investors that could participate in the cash market remain incentivized to instead use Treasury futures. The Treasury market looks to continue its trend of becoming less liquid and more volatile.

Related: Resilience Redux in the US Treasury Market and How Has Treasury Market Liquidity Evolved in 2023? and Liquidity Event

The unauthorized immigrant population in the United States reached 10.5 million in 2021, according to new Pew Research Center estimates. That was a modest increase over 2019 but nearly identical to 2017. The number of unauthorized immigrants living in the U.S. in 2021 remained below its peak of 12.2 million in 2007. It was about the same size as in 2004 and lower than every year from 2005 to 2015. The U.S. foreign-born population was 14.1% of the nation’s population in 2021. That was very slightly higher than in the last five years but below the record high of 14.8% in 1890. As of 2021, the nation’s 10.5 million unauthorized immigrants represented about 3% of the total U.S. population and 22% of the foreign-born population. These shares were among the lowest since the 1990s.

Related: Monopsony, Efficiency, and the Regularization of Undocumented Immigrants and Immigrants & Their Kids Were 70% of U.S. Labor Force Growth Since 1995 and Immigrants’ Share of the U.S. Labor Force Grows to a New High

China’s surplus in manufactured goods net of commodity imports has continued to grow relative to the economic output of China’s trade partners, thanks in large part to China’s growth relative to the rest of the world. Even though the value of Chinese exports fell in 2023, this has had no impact on China’s overall balance because the amount of money spent on imports is down as well. The past few years have even seen a renewed surge in China’s surplus (properly measured) relative to China’s own GDP thanks to exceptionally weak growth in consumer spending and the sustained plunge in homebuilding. Federal spending—financed in large part by borrowing—has helped shore up private sector balance sheets and sustain demand, even as some spending elements have contained provisions that should put a floor on sales for American producers. This policy mix helps explain why China’s growing surplus has not attracted much ire, or even notice, in the U.S.

Related: Danish Weight Loss Drugs vs. Chinese Cars: Two Models of Export Booms and Can China Reduce Its Internal Balances Without Renewed External Imbalances? and As Long As The US Is Outlet For China's Surplus Rumors Of Decoupling Are Overstated

More than three-quarters of the foreign money that flowed into China’s stock market in the first seven months of the year has left, with global investors dumping more than $25bn worth of shares despite Beijing’s efforts to restore confidence in the world’s second-largest economy. The sharp selling in recent months puts net purchases by offshore investors on course for the smallest annual total since 2015, the first full year of the Stock Connect programme that links up markets in Hong Kong and mainland China.

Related: The Threat from China's Capital Flight and Net Outflow of Funds from China Hits 7-Year High in September and The Rise & Fall of Foreign Direct Investment in China

All that matters for understanding the BCRA balance sheet is the fact that the interest on BCRA securities now exceeds 100% annualised—in fact, 133%. In other words, the value of LELIQs outstanding, measured in local currency, will more than double over the next 12 months. In fact, these are rolled every one or two weeks, so properly compounding the story is even worse. But let’s say it increases by 1.3 times over the next 12 months. Then the BCRA interest bill is nearly 20% of GDP. BCRA has no choice but to monetise their interest bill—creating yet more units of local currency, requiring even more money to be sterilised, acting like a dog chasing her tail. If Milei had not been elected, with his determination to fix the central bank balance sheet, it is possible that hyperinflation would have been the next phase of monetary madness.

Related: A Brief History of Dollar Hatred

The underlying level of interest rates cannot be observed but must be estimated. There are two well-known estimates. One, from the NY Fed, suggests that underlying interest rates are still very low, while the other, from the Richmond Fed, suggests that they have been rising recently. My reading of this is that the estimate from the NY Fed – at least for now – appears more robust. Low equilibrium interest rates have important implications. Let me conclude by mentioning at least two of them. If underlying equilibrium real interest rates had risen, monetary policy would not be tight right now and would explain why we have not yet experienced a recession. On the other hand, if r* has not risen, monetary policy is tight. I’m leaning towards the latter. I think the economy has been amazingly resilient because people saved a lot coming out of the pandemic, coupled with a very expansionary fiscal policy that is also supporting growth, not that monetary policy is not tight. Second, if underlying real interest rates are low, interest rates should fall when inflation is under control and monetary policy rates are lowered. Perhaps interest rates will not become quite as low as before the pandemic (e.g. negative interest rates in Europe), but should be significantly lower than today.

Related: Measuring the Natural Rate of Interest After COVID-19 and In Search of Safe Havens: The Trust Deficit and Risk-free Investments! and What Have We Learned About the Neutral Rate?

We re-run our analysis allowing for the changing structure of issuance as the Treasury leans more on bill and shorter tenor issuance in the near-term consistent with the signal from the most recent QRF round. Interest paid on debt increasing to about 3.8% in 2030. The average interest on debt approaches 3.5% at the end of the horizon. Of course, because debt-to-GDP is close to 100% throughout, these two measures are very similar. Debt-to-GDP is expected to increase to 113% of GDP by 2030 while the gross financing need (GFN), a measure of the rolling 4Q ahead deficit plus maturing securities including bills, at first increases to nearly 45% of GDP in 2025 as T-bill issuance accelerates, but declines to about 35% of GDP in the baseline as issuance shifts to longer tenors.

Related: If Markets Are Right About Long Real Rates, Public Debt Ratios Will Increase For Some Time. We Must Make Sure That They Do Not Explode and Resilience Redux in the US Treasury Market and Preferred Habitats and Timing in the World’s Safe Asset

Microsoft is currently conducting the largest infrastructure buildout that humanity has ever seen. While that may seem like hyperbole, look at the annual spend of mega projects such as nationwide rail networks, dams, or even space programs such as the Apollo moon landings, and they all pale in comparison to the >$50 billion annual spend on datacenters Microsoft has penned in for 2024 and beyond. This infrastructure buildout is aimed squarely at accelerating the path to AGI and bringing the intelligence of generative AI to every facet of life from productivity applications to leisure.

Related: The Growing Energy Footprint of Artificial Intelligence and The Race of the AI Labs Heats Up and Will A.I. Transform the Economy, and if So, How?

This fall, The Associated Press illustrated how school attendance has cratered across the United States, using data compiled in partnership with the Stanford University education professor Thomas Dee. More than a quarter of students were chronically absent in the 2021-22 school year, up from 15 percent before the pandemic. That means an additional 6.5 million students joined the ranks of the chronically absent. The problem is pronounced in poorer districts like Oakland, Calif., where the chronic absenteeism rate exceeded 61%. But as the policy analyst Tim Daly wrote recently, absenteeism is rampant in wealthy schools, too. Consider New Trier Township High School in Illinois, a revered and highly competitive school that serves some of the country’s most affluent communities. Last spring, The Chicago Tribune reported that New Trier’s rate of chronic absenteeism got worse by class, reaching nearly 38% among its seniors.

Related: NAEP Long-Term Trend Assessment Results: Reading and Mathematics and ACT Scores Fell for Class of 2023, Sixth Consecutive Decline and Looking For Flynn Effects on a Recent Online U.S. Adult Sample: Examining Shifts Within The SAPA Project

The number of Singapore-registered family offices, which manage tens of billions of dollars of private wealth, has leapt from just 50 in 2018 to 1,100 at the end of 2022, according to the Monetary Authority of Singapore. But lawyers and advisers involved in setting up family offices said the pace of new registrations has slowed, with demand now falling as processing times stretch from less than six months to in some cases as long as 18 months. The extended wait time, the people said, was the result of a backlog of existing applications and greater scrutiny under new, stricter criteria from Singaporean authorities.

Related: The Threat from China's Capital Flight and Net Outflow of Funds from China Hits 7-Year High in September and The Rise & Fall of Foreign Direct Investment in China

Early this year, China put to sea a nuclear-powered attack submarine with a pump-jet propulsion system instead of a propeller.  It was the first time noise-reducing technology used on the latest American submarines had been seen on a Chinese submarine. A few months earlier, satellite images of China’s manufacturing base for nuclear-powered submarines in the northeastern city of Huludao showed hull sections laid out in the complex that were larger than the hull of any existing Chinese submarine. A second modern construction hall at the plant was finished in 2021, indicating plans to boost output. At the same time, the western Pacific is becoming more treacherous for U.S. submarines. Beijing has built or nearly finished several underwater sensor networks, known as the “Underwater Great Wall,” in the South China Sea and other regions around the Chinese coast. The networks give it a much better ability to detect enemy submarines.

Related: Pentagon Accuses China of Accelerating Nuclear Build-Up and US Nuclear Submarine Weak Spot In Bubble Trail: Chinese Scientists and Nearly 40% of US Attack Submarines Are Out of Commission for Repairs

The U.S. Treasury market is in the midst of major supply and demand changes. The Federal Reserve is shedding its portfolio at a rate of about $60 billion a month. Overseas buyers who were once important sources of demand—China and Japan in particular—have become less reliable lately.   Meanwhile, supply has exploded. The U.S. Treasury has issued a net $2 trillion in new debt this year, a record when excluding the pandemic borrowing spree of 2020. “U.S. issuance is way up, and foreign demand hasn’t gone up,” said Brad Setser, senior fellow at the Council on Foreign Relations. “And in some key categories—notably Japan and China—they don’t seem likely to be net buyers going forward.” In response to recent demand weakness, Treasury has shifted to issuing shorter-term bonds that are in higher demand, helping to restore market stability. Foreigners, including private investors and central banks, now own about 30% of all outstanding U.S. Treasury securities, down from roughly 43% a decade ago.

Related: Setser On Foreign Demand For Treasuries and Preferred Habitats and Timing in the World’s Safe Asset and Resilience Redux in the US Treasury Market

The factor which is probably most relevant, which is what finance people call the term premium. You can think of it in two ways. The first one is in terms of [Treasury bond] flow supply and flow demand. At this stage, there is a lot of supply and for various reasons there is less demand. There is QT, which is increasing supply from the Fed. It’s conceivable that that’s part of it. And the fact that long rates vary so much on news about the US Treasury changing the maturity of its issuance makes me think that it is probably relevant. The second one is to think of the term premium as a risk premium. I don’t think that’s it, because in that case we would see the nominal rates go up, but not rates on inflation-indexed bonds. But these rates have gone up as well. As hard as it is to imagine, there might be an emerging credit spread on T-bonds or a failed auction. And then Congress and the president would have to sit down and decide to do the right thing.  A scary alternative scenario is that Donald Trump is elected, that he puts a lackey at the Fed, who monetises some of the debt, and we get high inflation.

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We expect the FOMC to deliver its first rate cut in 2024 Q4 once core PCE inflation falls below 2.5%. We then expect one 25bp cut per quarter until 2026 Q2, when the fed funds rate would reach 3.5-3.75%. While we see rate cuts next year as optional in that they are not necessary to avoid recession, we expect the FOMC to conclude that while neutral might not be as low as the 2.5% median longer run dot, it probably is not as high as 5.25-5.5%, so some amount of normalization makes sense as inflation falls. We expect the equilibrium rate to be higher than last cycle because the post-financial crisis headwinds are behind us, much larger fiscal deficits that boost aggregate demand are likely to persist, the funds rate is approaching equilibrium from above rather than below, and the r* narrative is changing.

Related: Macro Outlook 2024: The Hard Part Is Over and Inching Toward Equilibrium and Soft Landing Summer

Higher short and now long rates continue to flow through to credit and interest costs. This is setting up a dynamic that we are calling “the grind”— a gradual decline in growth and in the health of corporate and household balance sheets —that we expect to be a dominant driver of economies and markets over the next 12-18 months. Earlier in the tightening cycle, short-term interest rates rose and dragged long-term interest rates higher. Then, beginning in October 2022 and lasting almost a year, there was a reprieve. Hikes in short-term interest rates continued, but bond yields traded sideways, reflecting market expectations for future easing combined with the Treasury circumventing the pressure on long rates by issuing T-bills. In recent months both conditions have shifted, initiating the next stage of the tightening cycle, led by long rates.

Related: Macro Outlook 2024: The Hard Part Is Over and Inching Toward Equilibrium and Why No Recession (Yet)?

During recessions, the share of unprofitable firms rises. This is not surprising. But even before the economy has entered a recession, the share of companies in the Russell 2000 with no earnings is at 40%. The bottom line is that if the economy enters a recession, a lot of middle-market companies will be vulnerable to the combination of high rates and slowing growth.

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Btw 2012 and 2020, the Democratic share of the black vote fell from 97 to 91%, according to the gold-standard data on demographic voting patterns from Catalist. And this is not just the unwinding of the Obama effect — the decline between 2016 and 2020 was as large as that from 2012 to 2016. Polls put Biden’s share of the black vote at just 80% today, a record low, dipping to 70% among young black men.

Related: Why Less Engaged Voters Are Biden’s Biggest Problem and Consistent Signs of Erosion in Black and Hispanic Support for Biden and Why Biden Is Behind, and How He Could Come Back

Improvements in labor-saving (automation) technologies are negatively related to the wage earnings of workers in affected occupation–industry cells. For instance, an increase in our exposure measure from the median to the 90th percentile is associated with a 2.5 pp decline in the total earnings of the average worker over the next five years. These earnings losses are concentrated on a subset of workers, since exposed workers experience a 1.2pp increase in the probability of involuntary job loss over the next five years. Importantly, the magnitude of these wage declines or job loss probabilities are essentially unrelated to observable measures of worker skill—measured by age, level of wage earnings relative to other workers in the same industry and occupation, and college education. Perhaps surprisingly, but consistent with our model, new labor-augmenting technologies also lead to a decline in earnings for exposed workers, though the average magnitudes are smaller. An increase in our exposure measure from the median to the 90th percentile is associated with a 1.3pp decline in earnings growth and a 0.5pp increase in the likelihood of involuntary job loss. However, unlike in the case of labor-saving technology, the effects of exposure to labor-augmenting technologies are fairly heterogeneous: it disproportionately affects white-collar workers (defined as those with college degrees, or those employed in non-manufacturing industries or in occupations emphasizing cognitive tasks); older workers; and workers that are paid more relative to their peers (other workers with similar characteristics in the same industry and occupation).

Related: Perspectives on the Labor Share and AI Isn’t Good Enough and The Economics of Inequality in High-Wage Economies

The Federal Funds market has been in an undead state for over a decade, but may now finally wither away and allow Secured Overnight Funding Rate to become the official policy rate. Almost all lending in the funds market is from Federal Home Loan Banks, who are ineligible for interest on reserves and lend in the funds market to earn a return on their cash.  Regulators are encouraging Federal Home Loan Banks to shift the composition of their cash investments away from fed funds and into interest bearing deposit accounts. The Fed funds market will likely shrink as Federal Home Loan Banks shift their cash investments towards interest bearing deposit accounts.

Related: Neutralizing QT and Probing LCLoR

Pay disruptions have been rising over most of 2023 Using Bank of America data, we define the ‘Payroll Disruptions Rate’ as the proportion of customers who previously had 12 months of regular payroll payments into their accounts, but then had three months of no payments, relative to the total number of customers with 12 consecutive months of payroll. The rate has been rising over most of 2023. Even with a drop back in the latest October data, the Payroll Disruptions Rate is higher than the two years prior to the pandemic. Pay disruptions will likely occur for a number of reasons. Most obviously if someone loses their job and takes over three months to find another. If someone exited their job for other reasons, such as the need to take care of children, this would also increase the Payroll Disruptions Rate, as would someone taking over three months to set up a direct payment into their account. But a persistent rise in the rate, is likely to indicate a weakening labor market. It remains to be seen if the October drop is just noise, or a more consequential break in the upward trend.

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China’s manufacturing prowess is also a formidable military asset. Its gigantic and modernized shipyards already build 46% of the world’s ships, enabling it to churn out several new warships and submarines a year. By contrast the U.S. shipbuilding industry, despite a century of protection, has less than 1% of world capacity, leaving the Navy to rely on just a handful of shipyards that lack the necessary workforce to handle rising demand. Deliveries are consistently late and over budget. The shift in warfare toward cheaper, unmanned vehicles also favors China, the world’s largest producer of drones. Dan Wang, a visiting scholar at Yale Law School’s Tsai China Center said the U.S. leads mainly in knowledge-intensive technologies such as artificial intelligence and biotech rather than physical products. “Imagine a future scenario in which these countries are in serious conflict and trade stops, who do you want to bet on: the country with all the large language models and biotech and business software, or the country with large and adaptive manufacturing base? My money would be on the latter.”

Related: Pentagon Plan to Buy Thousands of Drones Faces Looming Snags and U.S. Weapons Industry Unprepared for a China Conflict, Report Says and Breaking Down China’s Manufacturing

Chinese President Xi Jinping has told his US counterpart Joe Biden to stop arming Taiwan and denied Beijing has imminent plans for military aggression, in a candid exchange on the “most dangerous” issue in the bilateral relationship. During his four-hour meeting with Biden on Wednesday in California, Xi said Beijing’s preference was for peaceful reunification with Taiwan, but went on to talk about conditions in which force could be used, according to a senior US official.

Related: US To Provide Taiwan With Weapons From Its Stockpiles For First Time and US To Link Up With Taiwan and Japan Drone Fleets To Share Real-Time Data and Nearly 40% of US Attack Submarines Are Out of Commission for Repairs

The decade-long expansion starting in 2009 combined near constant inflation with continuing declines in unemployment from 10% to 3.5%. Phillips curves constructed with constant natural rates and constant slopes became untenable as this process unfolded. Our investigation of the recovery starting in 2009 concludes in favor of a declining natural rate. The logical basis for this conclusion is that the anchored inflation rate must have converged to the Fed’s target rate of 2% over such a long period of stable inflation so close to that target. A bedrock principle of the New Keynesian model is that in an economy with actual inflation equal to its anchor, the observed unemployment rate must equal the natural rate.

Related: How Far Is Labor Force Participation from Its Trend? and The Dual U.S. Labor Market Uncovered