Below are some of the most interesting things I came across this week. Click here to subscribe to our free weekly newsletter and get this post delivered to your inbox each Saturday morning.
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The Japanese yen has been in the news recently. As George Goncalves tells The New York Times, “If you connect all those dots, this is the quintessential global macro dilemma that we knew would happen and it’s starting to bubble up to the surface.”
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As James Mackintosh writes, there are important ramifications for U.S. policy: “Put simply: America is printing dollars so Japan can buy yen. Like QE it expands the Fed balance sheet and pumps billions of dollars into the economy.” In so doing, “the Fed is being roped into easing monetary conditions when it should be moving to tighten them.”
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This comes at a precarious time for the Fed. “A chairman who names his target, explains his reaction function, and then demonstrates that he will act on it makes the fiscal authority’s problem harder and his own easier, while a chairman who names nothing at all makes precisely the opposite trade,” argues Lars Christensen.
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Meanwhile, the economy is undergoing a very important transition. Eric Basmajian explains, “The AI boom is a reallocation away from long-lived assets toward shorter-lived ones. Shorter-lived assets carry enormous replacement bills. The boom raises measured investment today and raises depreciation almost as fast tomorrow.”
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Not only is it distorting the economy, as Joachim Klement writes, “US corporate earnings are already running 60% above trend, with rapid growth still expected for years, mostly thanks to the AI boom. But the questionable economics of AI data centres could pop this bubble, sending earnings tumbling back to their long-term average.”
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