Random thought. It was luck that the companies best suited to building out AI happened to be immensely profitable quasimonopolists. They could finance the first leg of the buildout internally without having to meet external ROIC tests. Though they are now issuing debt, that debt is backed by the hyperscalers' non-AI cash flows, not the AI itself. In other words, the AI capex boom has been possible because the technology has never had to prove its profitability. That wasn't the case with the TMT or other prior booms, which went bust when the capex ran too far ahead of the prospective profits.

You would need an extra full percentage point of additional total factor productivity growth every year for the next 10 years just to stabilize debt-to-GDP. It's plausible we may get that magnitude of boost from AI for *some* years. But I would not bet we get that for *ten* years

Scott Bessent to Reuters: “The world cannot have a China with a $1.2 trillion trade surplus…They need to rebalance their economy…The rest of the world is going to have to examine their terms of trade with China.”

Thanks @Brad_Setser. Your work on estimating the true size of China's current account surplus is thoughtful and helpful. Agree that there are important measurement issues and the income balance of China seems badly off. No disagreement here. The question is how does the measure of the current account surplus map to estimates of undervaluation. Here your procedure is the same as the IMF's, except that you start out with a larger CA surplus. My concern is with people reading more into what this estimate is relative to what it can possibly convey. As I mentioned in my previous post the IMF methodology involves estimating how much the renminbi would need to appreciate (given an empirical estimate of elasticity of the current account to the real exchange rate) to close the current account gap over the medium-term *IF* all else was held equal, that is if there was a way to do this with no change in any component of aggregate demand in the country, and *IF* there was no feedback from changes in the real exchange rate to aggregate demand. It is therefore not a statement that the problem is necessarily the exchange rate. For instance, the IMF estimates the dollar to be overvalued by around 20%. This does not mean that the expectation is that over the next 3-5 years the dollar will necessarily need to depreciate by 20%. Many combinations of real exchange rate movements, demand, supply, can close the gap. This is why, ultimately, when discussing how to adjust imbalances the approach of what macropolicies will generate balanced growth and fix imbalance is my preferred approach. I know it is not yours, but we can agree to disagree :)

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I very much agree Without a significant currency appreciation -- or massive change in China's growth model that leads to a currency appreciation -- China will continue to grow through net exports 2/

China's surplus is becoming a collective action problem for the rest of the industrial world. If America alone closes its market, Chinese production spills more heavily into Europe, Canada, Latin America, etc. Ip's proposal of a new Plaza Accord for the yuan is similar to Michael Pettis' call for a customs union. Both ideas speak to the same conclusion: coordinated refusal to continue absorbing China's surplus. Failure to do risks the entire Western effort toward reindustrializing, especially in the U.S. where the location of productive capacity is increasingly a national security question rather than a purely economic one. This is why America increasingly wants more unified policing from allies in its trade negotiations. The system has to change.

"A currency accord, enforced with tariffs, might be the only way to get China to act. The time may be ripe. Frustration with China is boiling over, especially in Europe." @greg_ip via @WSJ

Indeed. My work suggests China's current account surplus should have tracked the movement in its non gold customs surplus -- and thus the true surplus is $1.2 trillion/ 5.5% of GDP or so, 1.5 pp of GDP more than the reported 4 pp surplus

We need a new Plaza Accord, to revalue the yuan. China's exploding trade surplus hurts everyone else, but it ignores pleas to pivot from exports to consumption. A yuan revaluation, backed w/threat of tariffs, may be the only solution. My latest:

Remarkable criticism of Treasury Sec Scott Bessent by his former boss, Stan Druckenmiller, esp this: "Once markets believe Treasury is defending a price, every rise in yields becomes a test of official resolve, and the operations must grow to survive the tests."

9 tech cos had~$3T of off-balance-sheet commitments, mostly AI-related, an analysis of securities filings shows, about triple what the companies owe under their outstanding leases and long-term borrowings. Eye-opening report by @rudegeair and @pswsj

This Warsh contradiction has been nagging at me. At Sintra at the start of the month, he took comfort at the recent decline in bond yields, implying bond markets understood low inflation was on the way. Today, he took comfort at *higher* bond yields, saying they will deliver low inflation. How can this be: that lower bond yields are reasons to feel good about inflation, but higher bond yields are not a reason to feel bad about it? Without him articulating a monetary and economic framework, these statements make it feel like he's winging it.

One problem with using pricing information from big box retailers like Walmart is that they are a small share of the consumption basket, with no footprint in huge categories like housing, health care. To date, alternative inflation data based on retailers hasn't been a reliable predictor of CPI or PCE.