“…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 very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
“…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
“Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
“Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
“…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
“Unintended Consequences provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.” - Nouriel Roubini, New York University; Chairman, Roubini Global Economics
“…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
“A full-throated defense of economic dynamism.” - The Wall Street Journal
“…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
“Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
AI Summary.Countries with high debt and low productive capacity face the greatest adjustment costs when trade imbalances unwind. If the U.S. reduces its trade deficit while China maintains surpluses, a politically fragmented Europe risks absorbing larger deficits by default, accelerating deindustrialization and weaker growth.
Michael PettisForeign Affairs
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Pettis suggests that if the US reduces its trade deficit while China maintains huge surpluses, a politically fragmented Europe will likely end up absorbing larger deficits, driving reduced competitiveness, deindustrialization, and weaker growth.
Will Europe bear the cost of global trade rebalancing?
Core argument: Nations where debt has risen without a corresponding expansion in productive capacity face the steepest adjustment costs when global trade imbalances correct, making fiscal and industrial composition the primary vulnerability indicators.
The eurozone is the world’s third-largest economy and its second-largest source of demand, it has economic power at its disposal, but [likely not] the political ability to exercise this power, given its fragmented policymaking institutions and the often divergent interests of its member states. If the United States is able to reduce its trade deficit and expand its share of global manufacturing while China resists an equivalent contraction in its surpluses, a politically divided Europe could be forced to take on larger deficits almost by default. The costs could include deindustrialization, rising debt, and weaker growth. This process may have begun already.
Takeaways by Macro Roundup® AI
Nations where debt has risen without a corresponding expansion in productive capacity face the steepest adjustment costs when global trade imbalances correct, making fiscal and industrial composition the primary vulnerability indicators.
As the world’s third-largest economy and second-largest source of demand, the eurozone holds meaningful economic leverage in trade rebalancing but fragmented policymaking and divergent member-state interests severely limit its ability to deploy that power.
If the U.S. shrinks its trade deficit while China resists equivalent surplus contraction, a politically divided Europe risks absorbing larger deficits by default, with deindustrialization, rising debt, and weaker growth as the likely consequences.
Related Articles:
Understanding Global Imbalances— Four economies—the United States, China, Germany, and Japan—account for roughly two-thirds of global imbalances, with current account surpluses and deficits now lasting twice as long as they did in the 1980s. Persistent imbalances have accumulated into large foreign asset and liability positions, with the United States holding net foreign liabilities
Imbalances Are Back On The Global Agenda— Global trade imbalances have returned as a major economic concern, with US net foreign liabilities rising to 24% of global output in 2024 from 6% in 2008, now financed by government borrowing rather than private debt. Historical patterns show current account imbalances reliably precede both protectionist policy and financial crisis.
Trade Intervention for Freer Trade— China comprises 17% of global GDP but 29% of manufacturing and 13% of consumption while the US is 26% of GDP, 16% of manufacturing, and 26% of consumption…
AI Summary.China's inflation-adjusted exchange rate has fallen sharply, giving Chinese manufacturers price discounts of 32% in electric vehicles, 38% in refrigerators, and 53% in shoes relative to foreign competitors. Persistent gaps of this magnitude indicate the yuan is significantly undervalued in real terms.
Greg IpWall Street Journal
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A GS analysis shows that Chinese manufacturers’ costs are 32% lower than those of their competitors, reflecting an artificially depressed yuan and price increases abroad due to supply chain disruptions and fiscal stimulus.
Is China's currency undervaluation distorting global manufacturing competition?
Core argument: China’s inflation-adjusted yuan exchange rate has plummeted since the pandemic, as goods prices fell domestically while rising in developed markets due to stimulus and supply-chain disruptions, creating a structural competitiveness advantage that nominal exchange rates have not corrected.
Goldman Sachs economists Kamakshya Trivedi and Hui Shan show goods prices have fallen in China since the pandemic while rising in developed markets because of stimulus and supply-chain disruptions. This means the inflation-adjusted yuan exchange rate has plummeted. This has increased China’s competitiveness. Goldman compared costs experienced by manufacturers in China, such as New Balance in shoes and Tesla in electric vehicles, with their costs elsewhere, and prices of Chinese companies, such as appliance manufacturer Haier, to foreign peers such as Siemens. China’s price discount is 32% in electric vehicles, 38% in refrigerators and 53% in shoes. In theory, such gaps should not persist if the yuan is fairly valued.
Takeaways by Macro Roundup® AI
China’s inflation-adjusted yuan exchange rate has plummeted since the pandemic, as goods prices fell domestically while rising in developed markets due to stimulus and supply-chain disruptions, creating a structural competitiveness advantage that nominal exchange rates have not corrected.
Goldman Sachs economists document Chinese price discounts of 32% in electric vehicles, 38% in refrigerators, and 53% in shoes versus foreign peers—gaps that economic theory holds should close if the yuan were fairly valued.
Global Views: Bending, Not Breaking— China's export-driven economy remains structurally imbalanced, with strong production and weak domestic demand set to push its current account surplus to unprecedented levels as a share of global GDP. This imbalance leaves the Chinese yuan undervalued by more than 20% against the US dollar, implying significant currency appreciation ahead.
Who Will Win The War Of Neo-Mercantilists?— Martin Wolf estimates that under reasonable assumptions, China should be earning ~$100B annually on her $4T of foreign assets. Yet, China shows an unexplained…
AI Summary.Foreign private investors now hold $6.7tn in U.S. government debt, vastly exceeding the $3.9tn held by foreign governments. This shift reflects a structural move away from official to private foreign ownership of U.S. debt over the past two decades.
Anusha Chari and Gian Maria Milesi-FerrettiBrookings Institution
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The composition of foreign ownership of U.S. Treasury debt has shifted sharply from official to private investors over the past two decades. Foreign private investors now hold $6.7T in Treasuries, vastly exceeding the $3.9T held by foreign official institutions.
Are foreign private investors replacing governments as holders of U.S. debt?
Core argument: Foreign private holdings of U.S. Treasury securities ($6.7 trillion) now exceed official holdings ($3.9 trillion) by 1.7x, reversing the official-investor dominance that characterized the pre-2008 era.
Figure 5 shows a large shift in foreign holdings of US Treasurys: a diminishing role for official investors, who accounted for the predominant share in 2008, offset by a rising role for private investors. Figure 6 shows net issuance and purchases of U.S. Treasury securities during the past 25 years. The boom in net issuance during and after the COVID pandemic is particularly striking, even after controlling for the net purchases by the Fed which reduce net market supply. Foreign net purchases show a notable shift toward private purchases relative to the 2000s. As a result, foreign private holdings of U.S. Treasury securities in mid-2025 ($6.7 trillion, including the Cayman Islands correction) vastly exceed official holdings of $3.9 trillion.
Takeaways by Macro Roundup® AI
Foreign private holdings of U.S. Treasury securities ($6.7 trillion) now exceed official holdings ($3.9 trillion) by 1.7x, reversing the official-investor dominance that characterized the pre-2008 era.
The U.S. creditor base has shifted decisively toward market-sensitive private investors since 2008, replacing the official-sector dominance that once provided more stable, policy-driven demand for Treasuries.
Tariffs and “International Payments Problems”— The worsening of the US net international investment position – from -20% of US GDP in 2010, to -53% pre-pandemic, and to -89% as of the end of 2025Q3…
Global Trade Imbalances: Actual Problems, Unlikely Solutions— The composition of foreign investment into the U.S. is shifting from government bond purchases to private equity and riskier assets, meaning future productivity gains will flow to foreign investors and capital is more likely to flee during downturns.
AI Summary.China's broad subsidies keep ~30% of industrial companies alive despite negative producer prices, flooding global markets with cheap manufactured goods that erode domestic manufacturing in importing countries.
Michael CembalestJ.P. Morgan
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Cembalest notes according to Chinese data, ~30% of Chinese industrial companies are “unprofitable zombies” that survive due to broad-based subsidies; for example, 58% of new Chinese bank loans are extended at or under its prime rate of 3%.
Does subsidizing unprofitable factories harm global manufacturing more than domestic growth?
Core argument: ~30% of Chinese industrial companies operate as unprofitable zombies sustained by state subsidies that dwarf those of any other economy, preventing the capacity reduction that negative producer prices would otherwise force.
Normally, a prolonged period of negative industrial producer prices would lead to competition and reduced capacity. Not in China, however; instead, ~30% of Chinese industrial companies are unprofitable zombies that survive due to a broad-based subsidy approach that dwarfs the rest of the world. Countries that experienced large increases in manufactured imports from China also experienced slowdowns in domestic manufacturing. From 2021 to 2024, as Chinese imports to the ASEAN region increased, every ASEAN country except for Brunei, Cambodia, and Laos experienced a decline in their manufacturing share of GDP.
Takeaways by Macro Roundup® AI
~30% of Chinese industrial companies operate as unprofitable zombies sustained by state subsidies that dwarf those of any other economy, preventing the capacity reduction that negative producer prices would otherwise force.
Related Articles:
China’s Next-Generation Industrial Policy— China's exports are shifting away from consumer goods and toward intermediate inputs and capital goods, with those categories rising 26% and 32% respectively over three years. This reflects a strategy of progressively localizing entire supply chains, embedding China deeper into global manufacturing systems as a supplier of components and machinery
Europe Has No Choice But To Intervene On Trade— Pettis argues that unless the EU is “willing to dismantle its welfare system and force down wages relative to productivity to restore competitiveness,” it must…
AI Summary.Industrial policy that boosts tradable output creates upward pressure on domestic prices and appreciates the real exchange rate, but consumption suppression can offset both effects and shift the current account toward surplus. Targeting the nominal exchange rate alone cannot correct external imbalances without accompanying changes in domestic saving and demand.
Pierre-Olivier Gourinchas, Gene Kindberg-Hanlon, Manasa Patnam, Lorenzo Rotunno, et al.Journal of Economic Perspectives
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Industrial policy that stimulates exports also raises domestic spending. To generate a current-account surplus, it must be paired with forced saving, financial repression, or related features of the Chinese model.
Does industrial policy address external imbalances without changing domestic demand?
Core argument: Industrial policy that boosts tradable output without suppressing consumption generates nontradable goods shortages, driving domestic price levels higher and appreciating the real exchange rate, ultimately worsening the current account balance.
Consider the example of policy directives to boost tradable output through the use of quantity targets. [This] creates a lopsided economy, resulting in a shortage of nontradable goods. To restore balance, the price of domestic nontradable goods would rise, increasing the overall price level and appreciating the real exchange rate, as the model-based simulations in Figure 9 show. However, these side-effects of the policy can be reversed by suppressing consumption, for instance through forced saving policies. In this case, reduced aggregate demand contains the rapid rise in nontradable prices and overall inflation. A sufficient degree of consumption repression can fully reverse the fall in saving and appreciation of the real exchange rate that would otherwise occur, subdue the relative nontradable price increase, and turn the current account balance effect from negative to positive. A policy that would seek to appreciate the nominal exchange rate of surplus countries without a change in the underlying drivers of saving and investment would only result in stronger domestic deflationary pressures. In this sense, focusing on the nominal exchange rate alone risks overstating its ability to correct external imbalances without accompanying changes in domestic demand and saving.
Takeaways by Macro Roundup® AI
Industrial policy that boosts tradable output without suppressing consumption generates nontradable goods shortages, driving domestic price levels higher and appreciating the real exchange rate, ultimately worsening the current account balance.
Consumption repression paired with tradable-sector expansion neutralizes inflationary pressure on nontradable prices, reverses real exchange rate appreciation, and shifts the current account balance from deficit to surplus.
Nominal exchange rate appreciation in surplus economies, absent changes in underlying saving and investment drivers, produces domestic deflationary pressure without correcting external imbalances.
Related Articles:
Understanding Global Imbalances— Four economies—the United States, China, Germany, and Japan—account for roughly two-thirds of global imbalances, with current account surpluses and deficits now lasting twice as long as they did in the 1980s. Persistent imbalances have accumulated into large foreign asset and liability positions, with the United States holding net foreign liabilities
Debt, Deficits & Global Imbalances— JPM reports on a Princeton conference on the prospects for reducing global imbalances by means of policies directly impacting the capital account, such as…
Why Global Imbalances Matter— Surplus economies depend on deficit countries as buyers of excess goods, giving deficit nations structural leverage despite appearing financially weak.
AI Summary.China's currency is undervalued by 20–35%, based on a current account surplus of 4–6% of GDP once gold imports and misreported investment income are accounted for.
Brad SetserCouncil on Foreign Relations
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Properly accounting for imports of gold and chips, China’s current account surplus is ~6% of GDP. Using the IMF formulation, Setser argues this implies the renminbi is undervalued btw 30–35%.
Is China's currency undervalued enough to distort global trade?
Core argument: China’s current account surplus of ~4% of GDP sits 3 percentage points above IMF norms, implying ~20% currency undervaluation—rising to 30–35% once gold imports (1.5% of GDP) and an unexplained $125 billion investment income deficit on $4 trillion in net assets are corrected.
China’s current account surplus is now reported to be around 4% of GDP—or 3 percentage points higher than what the IMF estimates it should be. That works out, using the IMF’s own calculations, to an undervaluation of roughly 20%. If adjustments are made for China’s surging gold imports (1.5% of GDP in Q2) and its obviously misreported investment income balance (China reports a deficit of $125 billion on $4 trillion in net assets, something that no one—the IMF included—can explain) the current account surplus would rise to around 6 percent of GDP and the estimated undervaluation would increase to between 30 and 35%. The upward adjustment to China’s surplus should not be controversial: the customs surplus excluding gold is now an incredible 7% of China’s GDP, the services deficit is only 1% of GDP and a long history of surpluses should lead to a positive net foreign asset position and thus external investment income (as in Korea, Taiwan and Japan).
Takeaways by Macro Roundup® AI
China’s current account surplus of ~4% of GDP sits 3 percentage points above IMF norms, implying ~20% currency undervaluation—rising to 30–35% once gold imports (1.5% of GDP) and an unexplained $125 billion investment income deficit on $4 trillion in net assets are corrected.
China’s customs surplus excluding gold reached 7% of GDP against a services deficit of only 1% of GDP, making the reported headline surplus a material understatement of external imbalance.
China’s $4 trillion net foreign asset position should generate positive investment income—as it does in Korea, Taiwan, and Japan—yet China reports a $125 billion deficit, a statistical anomaly the IMF cannot explain.
Related Articles:
Who Will Win The War Of Neo-Mercantilists?— Martin Wolf estimates that under reasonable assumptions, China should be earning ~$100B annually on her $4T of foreign assets. Yet, China shows an unexplained…
Global Views: Bending, Not Breaking— China's export-driven economy remains structurally imbalanced, with strong production and weak domestic demand set to push its current account surplus to unprecedented levels as a share of global GDP. This imbalance leaves the Chinese yuan undervalued by more than 20% against the US dollar, implying significant currency appreciation ahead.
Is China’s Surplus Really Shrinking?— China's manufacturing trade surplus, excluding gold and semiconductors, is close to 7% of GDP — an exceptionally large figure for the world's second-largest economy.
Joseph Gagnon and Nishtha AgrawalPeterson Institute For International Economics
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Using annual data for 146 countries from 1985 – 2024, Gagnon and Agrawal find that a $1 increase in a country’s cyclically adjusted fiscal deficit is associated with a 22–38¢ increase in its current-account deficit, with most of the estimates ~30¢.
Table 1 presents regression results. The evidence strongly suggests that governments can buy current account surpluses. Raising the fiscal balance by $1 tends to raise the current account by $0.30 [Table 1, first row]. Issuing $1 of domestic currency debt to buy foreign-currency assets (foreign exchange intervention) raises the current account anywhere from $0.20 to $1.00, with a value around $0.50 to $0.60 most plausible [Rows 2 though 5]. NOF is Net Official Flows, and NOS is the stock of net official foreign assets. The most powerful policy, as exemplified by Norway and Singapore, is to run a fiscal surplus and invest the proceeds in foreign-currency assets. In that case, $1 buys a current account surplus of around $0.80 or so. The results are supported by annual panel regressions of current accounts and cross-country stock regressions of cumulated current accounts or stocks of net foreign assets. The estimated effects in the panel regressions may be biased down slightly by incomplete modeling of lagged effects.
Related Articles:
Understanding Global Imbalances— Four economies—the United States, China, Germany, and Japan—account for roughly two-thirds of global imbalances, with current account surpluses and deficits now lasting twice as long as they did in the 1980s. Persistent imbalances have accumulated into large foreign asset and liability positions, with the United States holding net foreign liabilities
The U.S. Trade Deficit: Myths and Realities— Obstfeld @PIIE argues that current account deficits have not been forcibly “imposed” on the US from abroad since 2002. Rejecting Pettis’ tax on capital flows…
The Dangerous Triumph Of Neo-Mercantilism— China’s refusal to address its excess saving will likely fracture the global economy, Wolf argues. He suggests reviving Keynes’ attempt, rejected by the US at…
AI Summary.China's manufacturing trade surplus, excluding gold and semiconductors, is close to 7% of GDP — an exceptionally large figure for the world's second-largest economy.
Brad SetserCouncil On Foreign Relations
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Properly accounting for imports of gold and chips, China’s goods surplus grew $80B in H1 2026, Setser finds. China’s surplus expanded to ~7% of GDP in Q2, “an absolutely massive number for an economy as big as China.”
Does China's true manufacturing surplus remain larger than official figures suggest?
Core argument: China's manufacturing goods surplus, stripped of gold and semiconductor imports, continues to rise, with the underlying goods surplus approaching 7% of GDP — an exceptionally large external imbalance for an economy of China's scale.
The easiest way to see what is happening is just to focus on the manufacturing surplus without gold and chips. It keeps on rising. In fact, without the 1.5 pp of GDP in gold imports in q2, the goods surplus would be close to 7% of GDP -- an absolutely massive number for an economy as big as China.
Takeaways by Macro Roundup® AI
China's manufacturing goods surplus, stripped of gold and semiconductor imports, continues to rise, with the underlying goods surplus approaching 7% of GDP — an exceptionally large external imbalance for an economy of China's scale.
Gold imports alone depress China's reported goods surplus by roughly 1.5 percentage points of GDP, masking the true magnitude of structural excess production relative to domestic demand.
Related Articles:
Who Will Win The War Of Neo-Mercantilists?— Martin Wolf estimates that under reasonable assumptions, China should be earning ~$100B annually on her $4T of foreign assets. Yet, China shows an unexplained…
