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This edition was written by Elijah Asdourian, Alex Conner, Georgia Nabors, and Louise Sheiner.
The share of income in the United States that goes to labor is at its lowest since the Great Depression and down about 7 percentage points since World War II. Using U.S. national accounts data since 1929 and national accounts data for other large economies since 1950, Loukas Karabarbounis of the University of Minnesota finds that declining labor shares are the norm across most industries in the U.S. and across most of the world’s large economies. He argues that the most likely causes of the decline in labor share are technological. “Automation decreases the number of tasks which are produced only with labor,” Karabarbounis writes, allowing capital to do more of the work in the economy. He also argues that the technological progress driving the decline in labor share may increase income inequality between skilled and unskilled workers, as “skilled labor is more complementary to capital than unskilled labor is.”
Viral Acharya and Toomas Laarits of New York University examine the joint movement of stock returns and Treasury yields between 2005 and 2022 to show that the evolution of the convenience yield – the higher price investors pay for Treasuries versus a portfolio with similar risk-return characteristics – is consistent with investors hedging against poor equity returns, inflation, and default risk. The authors decompose the covariance into a convenience yield component (proxied by the difference between matched TIPS and nominal Treasuries after accounting for inflation swaps), a default risk component, and a residual. They find that during periods of market stress, convenience yields rise as investors put greater weight on the safety of Treasuries, but during periods of rising inflation, convenience yields fall because inflation erodes the ability of investors to hedge with Treasuries. The authors also show that the convenience yield falls during periods of high perceived default risk, like immediately before debt-ceiling standoffs. They conclude that “the convenience yield of government bonds must be ‘earned’ by the central bank and the government by ensuring bonds retain their hedging properties for unexpected shocks faced by households, investors, financial firms, and corporations.”
Using transaction-level data from consumer bank and credit card accounts from 2010 to 2023, Darren Aiello of Brigham Young University and co-authors find that the demographic composition of cryptocurrency investors generally mirrors the wider population. About 18% of individuals are crypto investors. These investors span the entire income distribution, although high-income individuals invest larger amounts. Early adopters of crypto, however, generally have higher incomes and are more financially secure. The authors find that crypto investment rises following periods of strong Bitcoin returns and after positive shocks to a consumer’s income. The dollar amount invested in crypto spiked temporarily after the COVID-19 stimulus payments, although to a lesser extent than the uptick observed in traditional asset classes. Households in high inflation environments increased their crypto holdings, likely because crypto is viewed as a hedge against volatility in conventional markets, the authors say.
“In my view, our financial system is substantially more resilient than it was in the mid-2000s, reflecting progress by regulators and the private sector in boosting resilience. That said, we cannot be complacent, and I see some important risks… One key set of vulnerabilities stems from valuation pressures… This year, asset valuations have generally risen notably above their historical levels. In particular, prices of residential and commercial properties remain above levels historically associated with fundamentals… Another notable market development has been the significant increase in longer-term bond yields since June. Decompositions between changes in expected rates and term premiums depend on the specific models and assumptions used, but I would say that an expectation of higher near-term policy rates does not appear to be causing the increase in longer-term rates. Valuation pressures are especially concerning if they are associated with excessive borrowing," says Lisa D. Cook, Member of the Federal Reserve Board of Governors.
"...Now to financial-sector leverage… The banking sector remains sound and resilient overall. Most banks continue to report solid capital levels well above regulatory requirements. The rise in interest rates over the past two years has contributed to robust bank profitability, as banks earned higher interest income on floating-rate loans while interest expense on many deposits remained well below market rates... Some nonbanks can be quite leveraged. For example, available data suggest that hedge fund leverage remains elevated, especially for the largest hedge funds… Looking at funding… In the banking industry, the deposit volatility that we saw earlier this year has abated. That said, some banks have had to turn to higher-cost funding sources to make up for lost deposits and face reduced market values for investment securities. Outside of banking, we also monitor a wide range of nonbank financial institutions… such as money market funds, open-end funds, insurers, central counterparties, and digital assets. Many of their activities give rise to a liquidity mismatch that could amplify market stress… I think the Securities and Exchange Commission’s recent reform on money market funds and proposal for open-end funds are encouraging steps toward mitigating funding risks arising from nonbanks.”
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