“Unintended Consequences is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.” - Tyler Cowen, Professor, George Mason University
“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
“…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
“There are an amazing number of good ideas and interesting points made in Unintended Consequences. The thinking underlying it, and the obvious depth of understanding of the author, are very impressive.” - Steven Levitt, coauthor of Freakonomics; 2004 John Bates Clark Medal
“…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
“…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
“…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
“…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
“…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
“…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
“…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

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The Coming Great Repression?

Marijn Bolhuis, Jakree Koosakul, Neil Shenai, and Jie Yang International Monetary Fund

Date Posted:: August 11, 2026

Historically, sovereign yields fell relative to private returns as debt rose, driven by liquidity and portfolio rules creating captive buyers for government liabilities. Peaking in WWII, such financial repression may return as debt rises.

Across countries and over time, higher public debt burdens are associated with lower relative returns on government bonds—the opposite of what standard risk premium models would predict (Figure 1a). At postwar peaks, relative yields fell to about −4% in Britain as debt neared 250% of GDP and −3% in the US; Japan later repeated the pattern (Figures 1b–d). Fiscal repression makes banks captive bond buyers; monetary repression places low-return reserves on their balance sheets (Table 1). Both indicators peaked after WWII, fell with liberalisation, and rose after the GFC (Figure 4). Repression contributed an estimated 90.7 percentage points of GDP to British debt reduction in 1945–55, versus 20.3 from surprise inflation and 3.9 from primary surpluses (Table 3; Figure 11). Cumulative savings averaged 9.8 points of GDP across advanced economies in 2008–20 (Table 3).

Takeaways by Macro Roundup^® AI

Financial repression delivered an estimated 90.7 percentage points of GDP in British debt reduction between 1945–55, dwarfing contributions from surprise inflation (20.3 pts) and primary surpluses (3.9 pts).
Across advanced economies, repression generated cumulative savings averaging 9.8 percentage points of GDP in 2008–20, establishing it as the dominant mechanism for managing elevated post-crisis debt burdens.
At postwar debt peaks near 250% of GDP, British government bond yields fell to approximately −4% relative to benchmarks, inverting the risk premium relationship standard models predict.

Signs of Stress in Money Markets

Torsten Sløk Apollo

Date Posted:: November 10, 2025
Is Database:: Database

QT, increased t-bill issuance, and the govt shutdown are all draining reserves from the banking system, putting upward pressure on money market spreads. Sløk suggests we may be “nearing the point” of switching from an ample to a scarce reserves regime.

Fed balance sheet reduction and heavy T-bill issuance are putting upward pressure on spreads in money markets. The ongoing government shutdown has amplified this dynamic, as the Treasury General Account balance has risen with delayed federal spending, further draining reserves from the banking system. With fewer reserves, funding markets face heightened competition for cash, pushing SOFR and TGCR above the IORB. Money market funds shifting from the Fed’s reverse repo facility to higher-yielding assets, combined with year-end balance sheet constraints, are adding to the strain. The bottom line is that the financial system is nearing the point where reserves are no longer ample. We are watching this development very closely because if rate volatility in funding markets persists, it could begin to have consequences for credit markets.

There is No Alternative (TINA)

Robin Brooks Robin Brooks Substack

Date Posted:: June 6, 2025
Is Database:: Database

“The EU is styling itself as the big alternative to the US,” Brooks writes, but “the mess EU has made on Russia sanctions [via Kyrgyzstan]” belies its fitness. “You can do that, but you can’t then also pretend to be an alternative to Dollar hegemony.”

The current wave of Dollar bearishness has two pillars. The first is a short-term, cyclical pillar, whereby tariffs damage the US more than the rest of the world. [However],there are early signs that inflation in the US is about to pick up, while - under the weight of tariffs - inflation is slowing in the Euro zone and China. This kind of divergence in inflation is [actually] bullish for the Dollar because it forces the Fed to stay more hawkish than other central banks. The second pillar of Dollar bearishness revolves around a loss of reserve currency status. The EU is styling itself as the big alternative to the US, but - given the mess the EU has made on Russia sanctions - that just isn’t credible. The chart shows exports from various countries to Kyrgyzstan, one of the main transshipment hubs for Western goods to Russia. The US (orange) and the UK (green) kept a tight lid on this stuff, while countries like Germany (black) and Italy (purple) have seen a transshipment boom that is ongoing. In Brussels, this stuff is an open secret and - more than three years after the invasion of Ukraine - key policy makers continue to turn a blind eye. You can do that, but you can’t then also pretend to be an alternative to Dollar hegemony.

How Negative Can Rates Go?

Paul Krugman Science

Date Posted:: September 9, 2022
Is Database:: Database

Negative interest rates are not a problem of people holding cash instead of bank deposits, but rather of storage costs associated with holding currency.

Interest rates can indeed go negative, challenging the assumption that people would simply hold currency instead. The key factor in determining the lower bound of interest rates is not the utility of bank deposits over cash but rather the storage costs associated with holding currency. In a liquidity trap, where interest rates on safe assets are zero or lower, liquidity has no opportunity cost, and people hold money solely as a store of value. This shifts the focus to storage costs as the primary consideration for the marginal holder. The implications are significant for monetary policy, as understanding these dynamics can help policymakers navigate the complexities of negative interest rates and their impact on economic behavior.

Paul Krugman, "How Negative Can Rates Go?," March 3, 2015, The Conscience Of A Liberal, https://archive.nytimes.com/krugman.blogs.nytimes.com/2015/03/06/the-below-zero-lower-bound/

We now know that interest rates can, in fact, go negative; those of us who dismissed the possibility by saying that people could simply hold currency were clearly too casual about it. But how low? Evan Soltas is getting some attention with an interesting attempt to find the true lower bound on interest rates; David Keohane cited a similar, more detailed estimate a month ago.

But it seems to me that all such estimates that I’ve seen involve a misconception. (Maybe it’s me, so I’m happy to stand corrected.)

In both the Soltas and Keohane pieces, there’s a discussion of storage costs for currency, which are not as trivial as one might have assumed. But they go on to say that the real lower bound comes from the fact that bank deposits are more useful than currency in a safe, because you can write checks and all that. Basically, in the modern world deposits are actually more liquid than cash, at least for most transactions that don’t involve controlled substances or concrete overshoes.

But you need to think about the incentives for holding a dollar in one form or the other at the margin, and I think that changes the story.

In normal times, we invoke the convenience of money — its extra liquidity — to explain why people hold money at zero or at any rate low interest rates when there are other safe assets offering higher yields. We think of money demand as determined by people increasing their holdings up to the point where the opportunity cost of holding money, the interest rate on other safe assets, equals its utility from increased liquidity.

Once interest rates on safe assets are zero or lower, however, liquidity has no opportunity cost; people will saturate themselves with it. That’s why we call it a liquidity trap! And what this means is that the marginal dollar of money holdings is being held solely as a store of value — the medium of exchange utility is irrelevant.

This in turn should mean that the usefulness of deposits is irrelevant in trying to find the true lower bound. The marginal holder is simply looking for a store of value, and the only question should therefore be storage costs.

And I am pinching myself at the realization that this seemingly whimsical and arcane discussion is turning out to have real policy significance.

Quantitative Easing and Monetary Aggregates

Paul Krugman The Conscience Of A Liberal

Date Posted:: September 9, 2022
Is Database:: Database

Krugman 1998 “Under liquidity trap conditions, an increase in high powered money will have little effect on broad aggregates.”

Under liquidity trap conditions, as highlighted by Krugman in 1998, increasing high-powered money has minimal impact on broad aggregates, a theory supported by historical data. During the 1930s and Japan's early 2000s quantitative easing, the monetary base expanded significantly, yet M2 growth remained stagnant, confirming the predicted ineffectiveness of such monetary policies. This disconnect between monetary base expansion and broader economic impact underscores the limitations of quantitative easing in stimulating bank deposits and credit. Despite these findings, many economists continue to overlook the empirical evidence, suggesting a gap between theoretical predictions and policy acceptance. The persistence of this debate highlights the need for a more data-driven approach to monetary policy, especially in environments where traditional tools fail to yield expected outcomes.

Paul Krugman, “Quantitative Easing and Monetary Aggregates,”The Conscience Of A Liberal, February 26, 2015, https://archive.nytimes.com/krugman.blogs.nytimes.com/2015/02/26/quantitative-easing-and-monetary-aggregates/

Quantitative Easing and Monetary Aggregates

I haven’t had time for the broader discussion of cognitive closure, but one more thing about Meltzer and all that: I get especially annoyed when economists who have been wrongly predicting inflation say that it’s not their fault — who could have known that banks would just sit on all those reserves? The answer is, anyone who had paid attention should have known that would happen.

Let me quote myself, from my 1998 — yes, 1998 — paper on the liquidity trap: “The point is important and bears repeating: under liquidity trap conditions, the normal expectation is that an increase in high-powered money will have little effect on broad aggregates, and may even lead to a decline in bank deposits and a larger decline in bank credit.”

I presented data from the 1930s that seemed to confirm that point; a few years later Japan gave us another experiment, when it tried quantitative easing. Here’s how it went, with the monetary base and M2 both shown with January 2001=100:

Quantitative Easing and Monetary Aggregates: Extended Excerpt Image 1

So theory and experience both predicted exactly the sterility of monetary base expansion that we saw in practice. And, you know, that’s the kind of successful prediction that is supposed to change peoples’ minds: if you’re that wrong about how an experiment turned out, and someone else made a prediction you considered foolish but turned out completely right, you’re supposed to concede that just maybe, possibly, they were on to something.

The fact that essentially nobody on that side of the debate has budged in the slightest tells us that whatever it is they’ve been doing, it’s not scientific research.

Inclusive Monetary Policy: How Tight Labor Markets Facilitate Broad-Based Employment Growth

Nittai Bergman Becker Friedman Institute

Date Posted:: April 18, 2022
Is Database:: Database

Expansionary monetary policy boosts employment for workers with weak labor force attachment, such as Blacks, high school dropouts, and women, especially in tight labor markets.

Expansionary monetary policy significantly boosts employment for workers with weak labor force attachment, such as Blacks, high school dropouts, and women, especially in tight labor markets. A one standard deviation drop in the federal funds rate increases Black employment growth by 0.91 percentage points more in tight markets (90th percentile) than in slack ones (10th percentile), representing 9% of their mean two-year growth. Similarly, for high school non-completers, employment growth rises by 0.39 percentage points more in tight markets, equating to 18% of their mean growth. These effects are persistent, peaking 7-9 quarters post-rate decrease and lasting up to four years. The Federal Reserve's shift to average inflation targeting further supports these groups by maintaining low rates longer, though it may also heighten inflation and wealth inequality.

"...Expansionary monetary policy has heterogeneous effects on the labor force, with labor market tightness playing an important mediating role. We show empirically that expansionary monetary policy benefits the employment of workers with weak labor force attachment more in tight labor markets than in slack ones. This pattern holds across racial, education, and sex categories, as the employment benefits for Blacks, high school dropouts, and women increase with labor market tightness. The beneficial impact of monetary policy on less-attached workers is economically sizeable and long lasting. Using a New Keynesian model with workers of heterogeneous types, we analyze how labor market tightness transmits changes in monetary policy into employment growth of workers of different types. The model predicts that the expansionary effect of monetary policy on the employment of less-attached workers is stronger in tighter labor markets. We further show that a monetary policy that follows an average inflation targeting rule particularly benefits less-attached workers. By keeping rates low for longer, employment becomes more inclusive. Similarly, a flatter Philips curve enables the central bank to maintain low rates, implying that expansionary monetary shocks lead to larger and more persistent increases in the employment of low labor force participation workers. Our empirical and theoretical results both suggest that sustained expansionary monetary policy, which tightens labor markets, facilitates robust employment growth among less attached workers. Our findings thus imply that the Federal Reserve’s recent change in its conduct of monetary policy from strict to average inflation targeting will benefit the employment of female, minority, and low skilled workers. At the same time, expansionary monetary policy increases inflationary pressure and may also foster wealth inequality by raising asset prices (Amberg et al., 2021; Peydró et al., 2021). Managing the tradeoff between broad-based employment goals, inflation targets, and wealth inequality is an important topic of further research...."

Nittai Bergman, David Matsa, and Michael Weber," Inclusive Monetary Policy: How Tight Labor Markets Facilitate Broad-Based Employment Growth,"Becker Friedman Institute, January 2022, https://bfi.uchicago.edu/wp-content/uploads/2022/01/BFI_WP_2022-03.pdf

“…The employment response of Whites, however, differs from that of Blacks. Column 2 of Table 3 reports estimates of equation (3) for Whites. In contrast to Blacks, the b1 coefficient for Whites is much smaller and not statistically significant...The difference in the Black and White coefficient estimates is highly statistically significant (p < 0.01)...."

“..Panel B of Table 3 presents a similar heterogeneity analysis with respect to educational attainment, reporting results for those who did not complete high school in column 3, high school graduates in column 4, those with some college education in column 5, and bachelor’s degree holders in column 6.8 We find that in response to monetary easing, the increase in employment growth among workers who did not complete high school is larger when labor markets are tight than when they are slack (column 3). The b1 coefficient implies that a one standard deviation drop in the federal funds rate is associated with 0.39 percentage point greater two-year employment growth in tight labor markets (90th percentile) than in slack ones (10th percentile). This magnitude corresponds to approximately 18% of unskilled workers’ mean two-year employment growth...For workers with greater educational attainment, in contrast, the b1 coefficient estimates are close to zero and not statistically significant (columns 4-6)…”

“…Our empirical analysis explores monetary policy’s heterogeneous effects with respect to workers’ race, education, and sex. We investigate how expansionary monetary policy promotes employment growth for each group across local labor markets with different tightness. We find that for demographic groups with lower average labor market attachment—Blacks, the least educated, and women—expansionary monetary policy has a larger effect on employment growth in tighter labor markets. Because expansionary monetary policy tightens labor markets...this finding implies that sustaining expansionary monetary policy over longer time periods is particularly helpful to these demographic groups...Our results show that for demographic groups with low average labor market attachment—Blacks, the least educated, and women—monetary expansions have a larger effect on employment growth in tight labor markets, which we measure using the market’s aggregate prime-age employment-to-population ratio. This effect is economically large. For example, we find that a one standard deviation drop in the federal funds rate increases subsequent two-year Black employment growth by 0.91 percentage points more in tight labor markets (90th percentile) than in slack labor markets (10th percentile).Similarly, for workers who did not complete high school, a one standard deviation drop in the federal funds rate increases employment growth over the subsequent two years by 0.39 percentage points more in tight labor markets than in slack ones. This additional impact of monetary policy in tight labor markets is sizable, corresponding to 9% and 18% of the mean employment growth rates for Blacks and high school non-completers over the sample period, respectively....

The effect is seemingly persistent

“..The effects on less-attached workers are persistent. We find that monetary policy’s incremental effect on less-attached workers’ employment growth in tight labor markets peaks 7 to 9 quarters after interest rates decreases. Although monetary policy’s incremental effect wanes over time, its cumulative effect is long lasting. For example, the differential effect of monetary policy on cumulative Black employment growth in tight versus slack labor markets persists even four years after the federal funds rate decreases…”

The Evidence

“…Table 3 presents OLS estimates of equation (3). Each column in Table 3 examines the employment growth of a different demographic group. Panel A of the table examines heterogeneity with respect to workers’ race, presenting results for Blacks in column 1 and Whites in column 2. For Blacks, the coefficient on the interaction between the federal funds rate and local labor market tightness, b1, is negative, sizable, and statistically significant. This coefficient implies that a monetary easing is associated with greater Black employment growth in tight labor markets as compared to in slack ones.To assess the magnitude of this estimate, consider the effect of a one standard deviation (2.25 percentage point) decrease in the federal funds rate. Our estimate implies that, over the subsequent two years, this drop in the federal funds rate is associated with a 0.91 percentage point larger increase in Black employment growth in labor markets at the 90th percentile of employment-to-population (86%) than in labor markets at the 10th percentile of employment-to-population (49%).This additional boost in employment growth in tighter labor markets is sizable, corresponding to 9% of the mean two-year Black employment growth over the sample period…”

Inclusive Monetary Policy: How Tight Labor Markets Facilitate Broad-Based Employment Growth: Extended Excerpt Image 1

“..Figure 1 plots, for a given point in time, predicted black employment growth across labor markets with different degrees of tightness. Specifically, the figure plots the predicted differential effect of a one standard deviation cut in the federal funds rate on two-year Black employment growth across labor markets in each decile of tightness in the fourth quarter of 2000. (Figures for other points in time look similar with slight variations arising from the contemporaneous distribution of labor market tightness across deciles.) We plot the additional employment growth predicted for each decile (based on its mean employment-to-population ratio) relative to that for the lowest decile. The figure shows the substantial heterogeneity across labor markets in the effect of a monetary expansion on subsequent Black employment growth: after a monetary expansion, Black employment grows more rapidly in tighter labor markets.The estimates predict that a one standard deviation drop in the federal funds rate in Q4 of 2000 would have increased subsequent 2-year black employment growth by a quarter percentage point more in labor markets in the second decile of tightness than in the first. The effect is larger in each incremental decile, with the relative effect being twice as large in the fourth decile than in the second decile, more than three times as large in the seventh decile, and more than five times as large in the tenth decile….”
Impact on higher quality workers limited to non-existent

The Feds Obama-Era Hangover

Phil Gramm Wall Street Journal

Date Posted:: January 2, 2019
Is Database:: Database

The Fed is now an interest-rate taker, not maker, as it must respond to changes in market interest rates to maintain a stable money supply.

During the Obama era, the Fed acquired or offset 45% of all federal debt issued, a significant increase compared to the share purchased during World War II. Historically, banks held few excess reserves as the Fed did not pay interest on them, but this changed when the Fed began paying interest on reserves. Now, if market interest rates rise and the Fed does not adjust the rate it pays on reserves, banks increase lending, leading to an increase in the money supply. Consequently, to maintain a stable money supply, the Fed must respond to changes in market interest rates, effectively making it an interest-rate taker rather than a maker. This shift underscores the Fed's reactive stance in monetary policy, driven by external market conditions rather than proactive rate setting.

"...By buying Treasurys and mortgage-backed securities, the Fed acquired or offset some 45% of all federal debt issued during the Obama era—about four times the share of federal debt the Fed purchased during World War II..... Historically, banks held few excess reserves as the Fed did not pay interest on them. The money supply changed when the Fed altered bank reserves through lending or buying and selling securities. Now if market interest rates rise and the Fed does not act by raising the rate it pays on reserves, the money supply increases as banks increase lending. As a result, to maintain any given money supply, the Fed must respond to changes in market interest rates. In doing so the Fed becomes an interest-rate follower, not a leader...."
Phil Gramm and Thomas Savings, "The Fed’s Obama-Era Hangover,"Wall Street Journal, January 1, 2018, https://www.wsj.com/articles/the-feds-obama-era-hangover-11546374393

Historically, sovereign yields fell relative to private returns as debt rose, driven by liquidity and portfolio rules creating captive buyers for government liabilities. Peaking in WWII, such financial repression may return as debt rises.

Does financial repression offer governments a hidden path to debt reduction?

Takeaways by Macro Roundup® AI

Related Articles:

QT, increased t-bill issuance, and the govt shutdown are all draining reserves from the banking system, putting upward pressure on money market spreads. Sløk suggests we may be “nearing the point” of switching from an ample to a scarce reserves regime.

Related Articles:

“The EU is styling itself as the big alternative to the US,” Brooks writes, but “the mess EU has made on Russia sanctions [via Kyrgyzstan]” belies its fitness. “You can do that, but you can’t then also pretend to be an alternative to Dollar hegemony.”

Related Articles:

Negative interest rates are not a problem of people holding cash instead of bank deposits, but rather of storage costs associated with holding currency.

Krugman 1998 “Under liquidity trap conditions, an increase in high powered money will have little effect on broad aggregates.”

Expansionary monetary policy boosts employment for workers with weak labor force attachment, such as Blacks, high school dropouts, and women, especially in tight labor markets.

The Fed is now an interest-rate taker, not maker, as it must respond to changes in market interest rates to maintain a stable money supply.

Takeaways by Macro Roundup^® AI