Twenty Four to Thirty Million in Job Stress, 14 to 19 Million Unemployed, Low Wages, Stagflation, Regulation and Sovereign Risks
Carlos M. Pelaez
© Carlos M. Pelaez, 2010, 2011
Executive Summary
The objective of this post is to analyze in depth the employment report of the Bureau of Labor Statistics (BLS) for the month of Mar that was released on Apr 1. The seasonally adjusted rate of unemployment was estimated at 8.8 percent in Mar; the number of people in job stress was at 24.3 million (13.5 million unemployed plus 8.4 million employed part-time because they could not find another job and 2.4 million marginally attached to the labor force); and nonfarm payrolls in the establishment survey rose by 216,000 with private job creation of 230,000. An important additional calculation applying the labor participation of 66.2 prior to the global recession without seasonal adjustment finds 19.3 million unemployed for total people in job stress of 29.5 million and a seasonally unadjusted rate of unemployment of 12.2 percent. A more relevant measurement is the number of people with jobs that has declined from 144 million in 2006 to 139 million in Mar 2011, which is what matters for labor input in production and wellbeing in employment. The exit out of unemployment is through increased hiring, which has declined by 17 million per year from 2006 to 2010 (http://cmpassocregulationblog.blogspot.com/2011/03/slow-growth-inflation-unemployment-and.html). There was disappointment in financial markets after release of the employment report on Fri Apr 1 because of the stagnant private earnings per hour in the first quarter of 2011 at $22.87/hour. Average private weekly earnings actually declined slightly by 13 cents from $766.57 in Mar 2010 to $784.44 in Mar 2011. Fed policy has attempted to reduce the gap of output relative to potential by a combination of zero interest rates and large-scale purchases of securities, known as quantitative easing, working through increases in prices of commodities, devaluation of the dollar and higher spending by raising valuations of stocks. There is significant risk of repeating the Great Inflation and Unemployment of the 1970s as a result of Fed monetary policy (http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html). Inflation is everywhere in the world economy with accelerating inflation of producer price indexes and rising inflation of consumer price indexes. Advanced economies are plagued by higher inflation and high rates of unemployment, raising fears of stagflation. The exit of the Fed from zero interest rates and $2.6 trillion balance sheet could result in sharp increases in interest rates that would flatten the growth curve of the economy. US regulators continue to issue notices of rulemaking on financial regulation. Sovereign risks in Europe continue to contribute to financial turbulence with credit rating agencies lowering sovereign ratings in anticipation of losses to bondholders in the creation of the European Stability Mechanism (ESM) in 2013. Economic indicators show continuing growth of the US economy with optimistic reports of industry and decline of initial jobless claims below 400,000 but real estate and construction indicators still show significant weakness. Interest rates are not reflecting inflation expectations because of continuing Fed purchases of long-term Treasury securities and risk aversion originating in sovereign risk issues in Europe, effects on the production chain and world economy of the earthquake and tsunami in Japan, tradeoff of inflation and growth in China, Middle East uncertainties, emerging market doubts and slow growth with persistent unemployment, underemployment, stagnant wages and low hiring in the US. Interest rates and bond yields could rise sharply to reflect inflationary expectations and the debt/GDP ratio of 75 percent in 2012 as they have risen in recent weeks when risk aversion declined. The contents are as follows:
Executive Summary
I 24 to 30 Million in Job Stress
II Stagflation
III Financial Regulation
IV Sovereign Risks
V Economic Indicators
VI Interest Rates
VII Conclusion
References
I 24 to 30 Million in Job Stress. The Bureau of Labor Statistics (BLS) released on Fri, Apr 3 the employment report showing a decrease in the seasonally adjusted rate of unemployment, or unemployed as percent of the labor force, from 8.9 percent in Feb 2011 to 8.8 percent in Mar 2011 (http://www.bls.gov/news.release/pdf/empsit.pdf). The number of people in job stress is 24.3 million, compared with 24.7 million in Feb, composed of 13.5 million unemployed (of whom 6.1 million, or 45.5 percent, unemployed for 27 weeks or more) compared with 13.7 million unemployed in Feb (of whom 6.0 million, or 43.8 percent, unemployed for 27 weeks or more), 8.4 million employed part-time for economic reasons (who suffered reductions in their work hours or could not find full-time employment) compared with 8.3 million in Feb and 2.4 million who were marginally attached to the labor force (who were not in the labor force but wanted and were available for work) compared with 2.7 million in Feb (Ibid, 2). Additional information provides deeper insight. Table 1 consists of data and additional calculations using the BLS household survey, illustrating the possibility that the actual rate of unemployment could be 12.2 percent and the number of people in job stress could be closer to 30 million. The first column provides for 2006 the yearly average population (POP), labor force (LF), participation rate or labor force as percent of population (PART %), employment (EMP), the employment population ratio (EMP/POP %), unemployment (UEM), the unemployment rate as percent of labor force (UEM/LF Rate %) and the number of people not in the labor force (NLF). The numbers in column 2006 are averages in millions while the monthly numbers for Feb 2010 and Jan and Feb 2011 are in thousands, not seasonally adjusted. The average yearly participation rate of the population in the labor force was in the range of 62.0 percent minimum to 67.1 percent maximum between 2000 and 2006 with the average of 66.4 percent (ftp://ftp.bls.gov/pub/special.requests/lf/aa2006/pdf/cpsaat1.pdf). The objective of Table 1 is to assess how many people could have left the labor force because they do not think they can find another job. Row “LF PART 66.2 %” applies the participation rate of 2006, almost equal to the rates for 2000 to 2006, to the population in Mar 2010 and Feb and Mar 2011 to obtain what would be the labor force of the US if the participation rate had not changed. In fact, the participation rate fell to 63.9 percent by Feb 2011 and was 64.0 percent in Mar 2011, suggesting that many people simply gave up on finding another job. Row “∆ NLF UEM” calculates the number of people not counted in the labor force because they could have given up on finding another job by subtracting from the labor force with participation rate of 66.2 percent (row LF PART 66.2%) the labor force estimated in the household survey (row LF). Total unemployed (row “Total UEM”) is obtained by adding unemployed in row “∆NLF UEM” to the unemployed of the household survey in row “UEM.” The last row is the effective total unemployed “Total UEM” as percent of the effective labor force in row “LF PART 66.2%.” The results are that: (1) there are an estimated 5.196 million unemployed who are not counted because they left the labor force on their belief they could not find another job; (2) the total number of unemployed is effectively 19.256 million and not 14.060 million of whom many have been unemployed long term; (3) the rate of unemployment is 12.2 percent and not 9.2 percent, not seasonally adjusted, or 8.8 percent seasonally annualized; and (4) the number of people in job stress is close to 30 million because of the 5.196 million leaving the labor force because they believe they could not find another job. The employment population ratio “EMP/POP %” dropped from 62.9 percent on average in 2006 to 57.6 percent in Jan 2011, 57.8 percent in Feb 2011 and 58.1 percent in Mar 2011 and the number of employed dropped from 144 million to 139 million. What really matters for labor input in production and wellbeing is the number of people with jobs or the employment/population ratio, which has declined and does not show signs of increasing. There are almost five million less people working in 2011 than in 2006 and the number employed is not increasing. The number of hiring relative to the number unemployed measures the chances of becoming employed. The number of hiring in the US economy has declined by 17 million and does not show signs of increasing (http://cmpassocregulationblog.blogspot.com/2011/03/slow-growth-inflation-unemployment-and.html).
Table 1, Population, Labor Force and Unemployment, NSA
| 2006 | Mar 2010 | Feb 11 | Mar 11 | |
| POP | 229 | 237,159 | 238,851 | 239,000 |
| LF | 151 | 153,660 | 152,635 | 153,022 |
| PART% | 66.2 | 64.8 | 63.9 | 64.0 |
| EMP | 144 | 137,983 | 138,093 | 138,962 |
| EMP/POP% | 62.9 | 58.2 | 57.8 | 58.1 |
| UEM | 7 | 15,678 | 14,542 | 14,060 |
| UEM/LF Rate% | 4.6 | 10.2 | 9.5 | 9.2 |
| NLF | 77 | 83,499 | 86,216 | 85,997 |
| LF PART 66.2% | 156,999 | 158,119 | 158,218 | |
| ∆NLF UEM | 3,339 | 5,484 | 5,196 | |
| Total UEM | 19,017 | 20,026 | 19,256 | |
| Total UEM% | 12.1 | 12.7 | 12.2 |
Pop: population; LF: labor force; PART: participation; EMP: employed; UEM: unemployed; NLF: not in labor force; ∆NLF UEM: additional unemployed; Total UEM is UEM + ∆NLF UEM; Total UEM% is Total UEM as percent of LF PART 66.2%.
Note: the first column for 2006 is in average millions; the remaining columns are in thousands; NSA: not seasonally adjusted
The last four rows are calculated by applying the labor force participation of 66.2% in 2006 to current population to obtain LF PART 66.2%; ∆NLF UEM is obtained by subtracting the labor force with participation of 66.2 percent from the household survey labor force LF; Total UEM is household data unemployment plus ∆NLF UEM; and total UEM% is total UEM divided by LF PART 66.2%
Sources:
ftp://ftp.bls.gov/pub/special.requests/lf/aa2006/pdf/cpsaat1.pdf
http://www.bls.gov/news.release/archives/empsit_12032010.pdf
http://www.bls.gov/news.release/pdf/empsit.pdf
Total nonfarm payroll employment seasonally adjusted (SA) rose by 216,000 in Mar and private payroll employment rose by 230,000. Table 2 provides the monthly change in jobs in the prior strong contraction of 1981-1982 and the recovery in 1983 into 1984 and in the contraction of 2008-2009 and in the recovery in 2009 to 2011. The data in the recovery periods are in relief to facilitate comparison. There is significant bias in the comparison. The average yearly civilian noninstitutional population was 174.2 million in 1983 and the civilian labor force 111.6 million, growing by 2009 to an average yearly civilian noninstitutional population of 235.8 million and civilian labor force of 154.1 million, that is, increasing by 35.4 percent and 38.1 percent, respectively (http://www.bls.gov/cps/cpsaat1.pdf). Total nonfarm payroll jobs in 1983 were 90.280 million, jumping to 94.530 million in 1984 while total nonfarm jobs in 2010 were 129.818 million declining from 130.807 million in 2009 (http://www.bls.gov/webapps/legacy/cesbtab1.htm ). What is striking about the data in Table 2 is that the numbers of monthly increases in jobs in 1983 are several times higher than in 2010 even with population higher by 35.4 percent and labor force higher by 38.1 percent in 2009 relative to 1983 nearly three decades ago and total number of jobs in payrolls rose by 39.5 million in 2010 relative to 1983 or by 43.8 percent. Professor Michael Boskin of Stanford, former Chairman of the CEA, provides analysis of growth in cyclical expansions in an article for the Wall Street Journal (http://professional.wsj.com/article/SB10001424052748703882304575465462926649950.html ). The critical historical perspective is that average quarterly rates of growth in the expansions after a severe recession were incomparably higher than during the current expansion: 6.2 percent in the first four quarters and 4.5 percent in the first 12 quarters after the trough in the second quarter of 1975, 7.7 percent in the first four quarters and 5.8 percent in the first 12 quarters after the trough in the first quarter in 1983 and only 3 percent in the first four quarters and 2.9 percent forecast in the first 12 quarters after the trough in the third quarter of 2009. GDP grew at the SA quarter-on-quarter yearly-equivalent rate of 1.7 percent in IQ2010, 2.6 percent in IIIQ2010 and 3.1 percent in IVQ2010. Growth has been mediocre in the six quarters of expansion beginning in IIIQ2009 in comparison with earlier expansions (http://cmpassocregulationblog.blogspot.com/2011/03/slow-growth-inflation-unemployment-and.html http://cmpassocregulationblog.blogspot.com/2011/02/mediocre-growth-raw-materials-shock-and.html) and also in terms of what is required to reduce the job stress of at least 24 million persons but likely close to 30 million. Some of the job growth and contraction in 2010 in Table 2 is caused by the hiring and subsequent layoff of temporary workers for the 2010 census.
Table 2, Monthly Change in Jobs, Number SA
| Month | 1981 | 1982 | 1983 | 2008 | 2009 | 2010 | Private |
| Jan | 95 | -327 | 225 | -10 | -779 | 14 | 16 |
| Feb | 67 | -6 | -78 | -50 | -1266 | 39 | 62 |
| Mar | 104 | -129 | 173 | -33 | -213 | 208 | 158 |
| Apr | 74 | -281 | 276 | -149 | -528 | 313 | 241 |
| May | 10 | -45 | 277 | -231 | -387 | 432 | 51 |
| Jun | 196 | -243 | 378 | -193 | -515 | -175 | 61 |
| Jul | 112 | -343 | 418 | -210 | -346 | -66 | 117 |
| Aug | -36 | -158 | -308 | -334 | -212 | -1 | 143 |
| Sep | -87 | -181 | 1144 | 271 | -225 | -24 | 112 |
| Oct | -100 | -277 | 271 | -554 | -224 | 210 | 193 |
| Nov | -209 | 124 | 352 | -728 | 64 | 93 | 128 |
| Dec | -278 | -14 | 356 | -673 | -109 | 121 | 139 |
| 1984 | 2011 | Private | |||||
| Jan | 447 | 68 | 94 | ||||
| Feb | 479 | 194 | 240 | ||||
| Mar | 275 | 216 | 230 |
Source: http://data.bls.gov/PDQ/servlet/SurveyOutputServlet
http://www.bls.gov/webapps/legacy/cesbtab1.htm
http://www.bls.gov/schedule/archives/empsit_nr.htm#2010
http://www.bls.gov/news.release/pdf/empsit.pdf
Important aspects of growth of payroll jobs from Mar 2010 to Mar 2011, not seasonally adjusted (NSA), are provided in Table 3. Total nonfarm employment increased by 1,323,000, consisting of growth of total private employment by 1,689,000 and decline by 366,000 of government employment. Monthly average growth of private payroll employment has been 140,750 which is mediocre relative to 24 to 30 million in job stress while total nonfarm employment has grown on average by only 110,250 per month. Manufacturing employment increased by 208,000 while private service providing employment grew by 1,435,000. An important feature is that jobs in temporary help services increased by 254,000. This episode of jobless recovery is characterized by part-time jobs. An important characteristic is that the losses of government jobs have been highest in local government, 266,000 jobs lost, because of the higher number of employees in local government, 14.5 million relative to 5.3 million in state jobs and 2.8 million in federal jobs.
Table 3, Employees in Nonfarm Payrolls Not Seasonally Adjusted in Thousands
| Feb 2010 | Feb 2011 | Change | |
| A Total Nonfarm | 128,584 | 129,907 | 1,323 |
| B Total Private | 105,671 | 107,360 | 1,689 |
| B1 Goods Producing | 17,248 | 17,502 | 254 |
| B1a Manu-facturing | 11,367 | 11,575 | 208 |
| B2 Private service providing | 88,423 | 89,858 | 1,435 |
| B2a Temporary help services | 1,908 | 2,162 | 254 |
| C Government | 22,913 | 22,547 | -366 |
| C1 Federal | 2,905 | 2,832 | -73 |
| C2 State | 5,280 | 5,253 | -27 |
| C3 Local | 14,728 | 14,462 | -266 |
Note: A = B+C, B = B1 + B2, C=C1 + C2 + C3
Source:http://www.bls.gov/news.release/pdf/empsit.pdf
The NBER dates recessions in the US from peaks to troughs as: IQ80 to IIIQ80, IIIQ81 to IV82 and IVQ07 to IIQ09 (http://www.nber.org/cycles/cyclesmain.html). Table 4 provides total annual level nonfarm employment in the US for the 1980s and the 2000s, which are different from 12 months comparisons. Nonfarm jobs rose by 4.853 million in 1982 to 1984, or 5.4 percent, and continued rapid growth in the rest of the decade. In contrast, nonfarm jobs are down by 7.779 million in 2010 relative to 2007 and fell by 989,000 in 2010 relative to 2009 even after six quarters of GDP growth. Monetary and fiscal stimuli have failed in increasing growth to rates required for mitigating job stress. Disruption of business models and decisions by onerous legislative restructuring and regulation prevented recovery of growth and employment as in expansions following earlier contractions. The initial growth impulse reflects a flatter growth curve in the current expansion.
Table 4, Total Nonfarm Employment in Thousands
| Year | Total Nonfarm | Year | Total Nonfarm |
| 1980 | 90,528 | 2000 | 131,785 |
| 1981 | 91,289 | 2001 | 131,826 |
| 1982 | 89,677 | 2002 | 130,341 |
| 1983 | 90,280 | 2003 | 129,999 |
| 1984 | 94,530 | 2004 | 131,435 |
| 1985 | 97,511 | 2005 | 133,703 |
| 1986 | 99,474 | 2006 | 136,086 |
| 1987 | 102,088 | 2007 | 137,598 |
| 1988 | 105,345 | 2008 | 136,790 |
| 1989 | 108,014 | 2009 | 130,807 |
| 1990 | 109,487 | 2010 | 129,818 |
Source: http://www.bls.gov/webapps/legacy/cesbtab1.htm
The highest average yearly percentage of unemployed to the labor force since 1940 was 14.6 percent in 1940 followed by 9.9 percent in 1941, 8.5 percent in 1975, 9.7 percent in 1982 and 9.6 percent in 1983 (ftp://ftp.bls.gov/pub/special.requests/lf/aa2006/pdf/cpsaat1.pdf). The rate of unemployment remained at high levels in the 1930s, rising from 3.2 percent in 1929 to 22.9 percent in 1932 in one estimate and 23.6 percent in another with real wages increasing by 16.4 percent (Margo 1993, 43; see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 214-5). There are alternative estimates of 17.2 percent or 9.5 percent for 1940 with real wages increasing by 44 percent. Employment declined sharply during the 1930s. The number of hours worked remained 29 percent in 1939 below the level of 1929 (Cole and Ohanian 1999). Private hours worked fell in 1939 to 25 percent of the level in 1929. The policy of encouraging collusion through the National Industrial Recovery Act (NIRA), to maintain high prices, together with the National Labor Relations Act (NLRA), to maintain high wages, prevented the US economy from recovering employment levels until Roosevelt abandoned these policies toward the end of the 1930s (for review of the literature analyzing the Great Depression see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 198-217).
The wage bill is the average weekly hours times the earnings per hour. Table 5 provides the estimates by the BLS of earnings per hour, increasing from $22.48/hour in Mar 2010 to $22.87/hour in Mar 2011, or by 1.7 percent. There was disappointment in financial markets after release of the employment report on Fri Apr 1 because of the stagnant private earnings per hour in the first quarter of 2011 at $22.87/hour, shown in Table 5. Average private weekly earnings actually declined slightly by 13 cents from $766.57 in Mar 2010 to $784.44 in Mar 2011. The number of average weekly hours rose from 34.1 in Mar 2010 to 34.3 in Feb 2011, or by 0.6 percent. The wage bill before taxes rose by 2.3 percent (1.017 times 1.006). Energy and food increases are similar to a “silent tax” that is highly regressive, harming the most those with lowest incomes. There are concerns that the wage bill would deteriorate in purchasing power because of the raw materials shock in the form of increases in prices of commodities such as the 37.1 percent steady increase in the DJ-UBS Commodity Index from Jul 2, 2010 to Apr 1, 2011. The charts of four commodity price indexes by Bloomberg show steady increase since Jul 2 that was interrupted briefly only in Nov with the sovereign issues in Europe triggered by Ireland and in Mar by the earthquake and tsunami in Japan (http://noir.bloomberg.com/markets/commodities/cfutures.html).
Table 5, Earnings per Hour and Average Weekly Hours
| Earnings per Hour | Mar 10 | Jan 10 | Feb 11 | Mar 11 |
| Total Private | $22.48 | $22.86 | $22.87 | $22.87 |
| Goods Producing | $23.92 | $24.40 | $24.27 | $24.28 |
| Service Providing | $22.14 | $22.50 | $22.54 | $22.54 |
| Average Weekly Earnings | ||||
| Total Private | $766.57 | $781.81 | $784.44 | $784.44 |
| Goods Producing | $940.06 | $966.24 | $968.37 | $966.34 |
| Service Providing | $730.62 | $744.75 | $748.33 | $748.33 |
| Average Weekly Hours | ||||
| Total Private | 34.1 | 34.2 | 34.3 | 34.3 |
| Goods Producing | 39.3 | 39.6 | 39.9 | 39.8 |
| Service Providing | 33.0 | 33.1 | 33.2 | 33.2 |
Source: http://www.bls.gov/news.release/pdf/empsit.pdf
II Stagflation. There is inflation everywhere in the world economy, with slow growth and persistently high unemployment in advanced economies. Table 6, updated with every post, provides the latest yearly data for GDP, consumer price index (CPI) inflation, producer price index (PPI) inflation and unemployment (UNE) for the advanced economies, China and the highly-indebted European countries with sovereign risk issues. The table now includes the Netherlands and Finland that with Germany make up the set of northern countries in the euro zone that hold key votes in the enhancement of the mechanism for solution of the sovereign risk issues (http://www.ft.com/cms/s/0/55eaf350-4a8b-11e0-82ab-00144feab49a.html#axzz1G67TzFqs). Stagflation is still an unknown event but the risk is sufficiently high to be worthy of consideration. The analysis of stagflation also permits the identification of important policy issues in solving vulnerabilities that have high impact on global financial risks. There are six key interrelated vulnerabilities in the world economy that have been causing global financial turbulence: (1) sovereign risk issues in Europe resulting from countries in need of fiscal consolidation and enhancement of their sovereign risk ratings; (2) the tradeoff of growth and inflation in China; (3) slow growth (see http://cmpassocregulationblog.blogspot.com/2011/03/slow-growth-inflation-unemployment-and.html http://cmpassocregulationblog.blogspot.com/2011/02/mediocre-growth-raw-materials-shock-and.html) and continuing job stress of 24 to 30 million people in the US (see section above and http://cmpassocregulationblog.blogspot.com/2011/03/unemployment-and-undermployment.html); (4) the timing, dose, impact and instruments of normalizing monetary and fiscal policies (see http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html http://cmpassocregulationblog.blogspot.com/2011/03/global-financial-risks-and-fed.html http://cmpassocregulationblog.blogspot.com/2011/02/policy-inflation-growth-unemployment.html) in advanced and emerging economies; (5) the earthquake and tsunami affecting Japan that is having repercussions throughout the world economy because of Japan’s share of about 9 percent in world output, role as entry point for business in Asia, key supplier of advanced components and other inputs as well as major role in finance and multiple economic activities (http://professional.wsj.com/article/SB10001424052748704461304576216950927404360.html?mod=WSJ_business_AsiaNewsBucket&mg=reno-wsj); and (6) the geopolitical events in the Middle East.
Table 6, GDP Growth, Inflation and Unemployment in Selected Countries, Percentage Annual Rates
| GDP | CPI | PPI | UNE | |
| US | 2.9 | 2.1 | 5.6 | 8.9 |
| Japan | 2.5 | 0.0 | 1.7 | 4.6 |
| China | 9.8 | 4.9 | 7.2 | |
| UK | 1.5 | 4.4* RPI 5.5 | 5.3* output 14.6* input 8.5** | 8.0 |
| Euro Zone | 2.0 | 2.6 | 6.1 | 9.9 |
| Germany | 4.0 | 2.1 | 5.5 | 6.3 |
| France | 1.5 | 1.8 | 6.3 | 9.6 |
| Nether-lands | 2.4 | 2.0 | 10.3 | 4.3 |
| Finland | 5.0 | 3.5 | 8.1 | 8.0 |
| Belgium | 1.8 | 3.5 | 9.0 | 7.6 |
| Portugal | 1.2 | 3.5 | 5.7 | 11.1 |
| Ireland | -1.0 | 2.2 | 4.0 | 14.9 |
| Italy | 1.5 | 2.5 | 5.7 | 8.4 |
| Greece | -6.6 | 4.2 | 6.7 | 12.4 |
| Spain | 0.6 | 3.4 | 6.8 | 20.5 |
Notes: GDP: rate of growth of GDP; CPI: change in consumer price inflation; PPI: producer price inflation; UNE: rate of unemployment; all rates relative to year earlier
*Feb Office for National Statistics
http://www.statistics.gov.uk/statbase/Product.asp?vlnk=790
http://www.statistics.gov.uk/statbase/Product.asp?vlnk=868
** Jan EUROSTAT http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-02032011-AP/EN/4-02032011-AP-EN.PDF
Source: EUROSTAT; country statistical sources http://www.census.gov/aboutus/stat_int.html
Wall Street Journal Professional Factiva
Table 7 shows that the indexes of prices paid of the Institute for Supply Management (ISM) and the Chicago ISM are showing assessment replies of more than 70 percent of price increases, 26 to 27 percentof unchanged prices and 2 to 3 percent of price decreases. The indexes range from around 83 for the Chicago ISM to 85 for the US ISM. The construction of the indexes is such that:
“A PMI in excess of 42.5 percent, over a period of time, indicates that the overall economy, or gross domestic product (GDP), is generally expanding; below 42.5 percent, it is generally declining. The distance from 50 percent or 42.5 percent is indicative of the strength of the expansion or decline” (http://ism.ws/ISMReport/MfgROB.cfm).
Inflation is throughout the production and distribution chain everywhere in the world.
Table 7, Prices Paid of the US and Chicago ISM Indexes, Mar 2001
| US ISM | Chicago ISM | |
| Index | 85 | 83.5 |
| Index SA | 83.4 | |
| % Increase | 72 | 70 |
| % Same | 26 | 27 |
| % Decrease | 2 | 3 |
Sources: https://www.ism-chicago.org/chapters/ism-ismchicago/files/ISM-C%20March%202011.pdf
http://ism.ws/ISMReport/MfgROB.cfm
The dramatic event known as the Great Inflation is shown in Table 8. In celebrated political economy analysis of this episode, DeLong (1997, 256-7) finds, somewhat irreverently, that:
“It may be that for every conceivable policy there is an economist who can wear a suit and pronounce the policy sound and optimal, and that to a large degree presidents and senators get the economic advice that they ask for. It may be that a less optimistic group of advisers drawn from the academic economics community would have had no more effect on macroeconomic policy in the 1960s than advisers from the academic economics community had on fiscal policy at the beginning of the 1980s, when they pointed out that revenue projections seemed, as Martin Feldstein (1994) politely put it, ‘inconsistent with the Federal Reserve’s very tight monetary policy.”
DeLong (1997, 247-8) shows that the 1970s were the only peacetime period of inflation in the US without parallel in the prior century. The price level in the US drifted upward since 1896 with jumps resulting from the two world wars: “on this scale, the inflation of the 1970s was as large an increase in the price level relative to drift as either of this century’s major wars” (DeLong, 1997, 248). Monetary policy focused almost on accommodating higher inflation, with emphasis solely on the mandate of promoting employment, has been blamed as deliberate or because of model error or imperfect measurement for creating the Great Inflation (http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html). As DeLong (1997) shows, the Great Inflation began in the mid 1960s, well before the oil shocks of the 1970s (see also the comment to DeLong 1997 by Taylor 1997, 276-7). A counterfactual of the 1970s immediately rises out of Table 8. What would have been the Great Inflation if the Federal Reserve would have lowered interest rates to zero in 1961, in fear of deflation because of 0.7 percent CPI inflation, and purchased the equivalent of 30 percent of the Treasury debt in long-term securities, subsequently engaging in quantitative easing II in 1964 after CPI inflation of 1.0 percent? The counterfactual would not be complete without including the equivalent of $5.4 trillion fiscal deficits, as between 2009 and 2012, with the government debt/GDP ratio rising from 40.8 percent to 75.1 percent from 2008 to 2012, as in the current budget (http://cmpassocregulationblog.blogspot.com/2011/02/policy-inflation-growth-unemployment.html).
Table 8, US Annual Rate of Growth of GDP and CPI and Unemployment Rate 1960-1982
| ∆% GDP | ∆% CPI | UNE | |
| 1960 | 2.5 | 1.4 | 6.6 |
| 1961 | 2.3 | 0.7 | 6.0 |
| 1962 | 6.1 | 1.3 | 5.5 |
| 1963 | 4.4 | 1.6 | 5.5 |
| 1964 | 5.8 | 1.0 | 5.0 |
| 1965 | 6.4 | 1.9 | 4.0 |
| 1966 | 6.5 | 3.5 | 3.8 |
| 1967 | 2.5 | 3.0 | 3.8 |
| 1968 | 4.8 | 4.7 | 3.4 |
| 1969 | 3.1 | 6.2 | 3.5 |
| 1970 | 0.2 | 5.6 | 6.1 |
| 1971 | 3.4 | 3.3 | 6.0 |
| 1972 | 5.3 | 3.4 | 5.2 |
| 1973 | 5.8 | 8.7 | 4.9 |
| 1974 | -0.6 | 12.3 | 7.2 |
| 1975 | -0.2 | 6.9 | 8.2 |
| 1976 | 5.4 | 4.9 | 7.8 |
| 1977 | 4.6 | 6.7 | 6.4 |
| 1978 | 5.6 | 9.0 | 6.0 |
| 1979 | 3.1 | 13.3 | 6.0 |
| 1980 | -0.3 | 12.5 | 7.2 |
| 1981 | 2.5 | 8.9 | 8.5 |
| 1982 | -1.9 | 3.8 | 10.8 |
| 1983 | 4,5 | 3.8 | 8.3 |
| 1984 | 7.2 | 3.9 | 7.3 |
| 1985 | 4.1 | 3.8 | 7.0 |
| 1986 | 3.5 | 1.1 | 6.6 |
| 1987 | 3.2 | 4.4 | 5.7 |
| 1988 | 4.1 | 4.4 | 5,3 |
| 1989 | 3.6 | 4.6 | 5.4 |
| 1990 | 1.9 | 6.1 | 6.3 |
Note: GDP: Gross Domestic Product; CPI: consumer price index; UNE: rate of unemployment; CPI and UNE are at year end instead of average to obtain a complete series
Source: ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt
http://www.bls.gov/web/empsit/cpseea01.htm
http://data.bls.gov/pdq/SurveyOutputServlet
The impact of stagflation on financial markets could cause high risks of another financial crisis because of the zero short-term fed funds rate and low yields of long-term Treasury securities. The pressure on interest rates rising from zero is heightened by the large-scale purchases of long-term securities by the Fed that may have to unwind the position in rising inflation and/or pay higher interest on excess reserves of banks held at the Fed, thus raising borrowing costs throughout the economy. On Mar 30, the line “Reserve Bank credit” in the Fed balance sheet was $2606 billion, or $2.6 trillion, with portfolio of long-term securities of $2377 billion, or $2.4 trillion, consisting of $1249 billion of nominal Treasury notes and bonds, $59 billion of inflation-indexed notes and bonds, $132 billion of federal agency securities and $937 billion of mortgage-backed securities; “reserve balances with Federal Reserve Banks” stood at $1456 billion, or $1.5 trillion (http://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1). Table 9, updated with every blog comment, provides in the second column the yield at the close of market of the 10-year Treasury note on the date in the first column. The price in the third column is calculated with the coupon of 2.625 percent of the 10-year note current at the time of the second round of quantitative easing after Nov 3, 2010 and the final column “∆% 11/04/10” calculates the percentage change of the price on the date relative to that of 101.2573 at the close of market on Nov 4, 2010, one day after the decision on quantitative easing by the Fed on Nov 3, 2010. Prices with the new coupon of 3.63 percent in recent auctions (http://www.treasurydirect.gov/instit/annceresult/press/preanre/2011/2011.htm) are not comparable to prices in Table 9. The highest yield in the decade was 5.510 percent on May 1, 2001 that would result in a loss of principal of 22.9 percent relative to the price on Nov 4. The Fed has created a “duration trap” of bond prices. Duration is the percentage change in bond price resulting from a percentage change in yield or what economists call the yield elasticity of bond price. Duration is higher the lower the bond coupon and yield, all other things constant. This means that the price loss in a yield rise from low coupons and yields is much higher than with high coupons and yields. Intuitively, the higher coupon payments offset part of the price loss. Prices/yields of Treasury securities were affected by the combination of Fed purchases for its program of quantitative easing and also by the flight to dollar-denominated assets because of geopolitical risks in the Middle East and subsequently by the tragic earthquake and tsunami in Japan. The yield of 3.445 percent at the close of market on Apr 1 would be equivalent to price of 93.1129 in a hypothetical bond maturing in 10 years with coupon of 2.625 percent for price loss of 8.0 percent relative to the price on Nov 4, 2010, one day after the decision on the second program of quantitative easing. If inflation accelerates, yields of Treasury securities may rise sharply. Yields are not observed without special yield-lowering effects such as the flight into dollars caused by the events in the Middle East, continuing purchases of Treasury securities by the Fed, the tragic earthquake and tsunami affecting Japan and recurring fears on European sovereign issues. Important causes of the rise in yields shown in Table 9 are expectations of rising inflation and US government debt estimated to reach 75 percent in 2012 (http://cmpassocregulationblog.blogspot.com/2011/02/policy-inflation-growth-unemployment.html). There is no simple exit of this trap with the highest monetary policy accommodation in US history.
Table 9, Yield, Price and Percentage Change to November 4, 2010 of Ten-Year Treasury Note
| Date | Yield | Price | ∆% 11/04/10 |
| 05/01/01 | 5.510 | 78.0582 | -22.9 |
| 06/10/03 | 3.112 | 95.8452 | -5.3 |
| 06/12/07 | 5.297 | 79.4747 | -21.5 |
| 12/19/08 | 2.213 | 104.4981 | 3.2 |
| 12/31/08 | 2.240 | 103.4295 | 2.1 |
| 03/19/09 | 2.605 | 100.1748 | -1.1 |
| 06/09/09 | 3.862 | 89.8257 | -11.3 |
| 10/07/09 | 3.182 | 95.2643 | -5.9 |
| 11/27/09 | 3.197 | 95.1403 | -6.0 |
| 12/31/09 | 3.835 | 90.0347 | -11.1 |
| 02/09/10 | 3.646 | 91.5239 | -9.6 |
| 03/04/10 | 3.605 | 91.8384 | -9.3 |
| 04/05/10 | 3.986 | 88.8726 | -12.2 |
| 08/31/10 | 2.473 | 101.3338 | 0.08 |
| 10/07/10 | 2.385 | 102.1224 | 0.8 |
| 10/28/10 | 2.658 | 99.7119 | -1.5 |
| 11/04/10 | 2.481 | 101.2573 | - |
| 11/15/10 | 2.964 | 97.0867 | -4.1 |
| 11/26/10 | 2.869 | 97.8932 | -3.3 |
| 12/03/10 | 3.007 | 96.7241 | -4.5 |
| 12/10/10 | 3.324 | 94.0982 | -7.1 |
| 12/15/10 | 3.517 | 92.5427 | -8.6 |
| 12/17/10 | 3.338 | 93.9842 | -7.2 |
| 12/23/10 | 3.397 | 93.5051 | -7.7 |
| 12/31/10 | 3.228 | 94.3923 | -6.7 |
| 01/07/11 | 3.322 | 94.1146 | -7.1 |
| 01/14/11 | 3.323 | 94.1064 | -7.1 |
| 01/21/11 | 3.414 | 93.4687 | -7.7 |
| 01/28/11 | 3.323 | 94.1064 | -7.1 |
| 02/04/11 | 3.640 | 91.750 | -9.4 |
| 02/11/11 | 3.643 | 91.5319 | -9.6 |
| 02/18/11 | 3.582 | 92.0157 | -9.1 |
| 02/25/11 | 3.414 | 93.3676 | -7.8 |
| 03/04/11 | 3.494 | 92.7235 | -8.4 |
| 03/11/11 | 3.401 | 93.4727 | -7.7 |
| 03/18/11 | 3.273 | 94.5115 | -6.7 |
| 03/25/11 | 3.435 | 93.1935 | -7.9 |
| 04/01/11 | 3.445 | 93.1129 | -8.0 |
Note: price is calculated for an artificial 10-year note paying semi-annual coupon and maturing in ten years using the actual yields traded on the dates and the coupon of 2.625% on 11/04/10
Source:
http://online.wsj.com/mdc/public/page/mdc_bonds.html?mod=mdc_topnav_2_3020
The baseline monetary policy rule considered by Clarida, Galí and Gertler (CGG) in the analysis of the Great Inflation is a simple linear equation:
r*t = r* + β(inflation gap) + γ(output gap) (1)
Where r*t is the Fed’s target rate for the fed funds rate in period t, r* is the desired nominal rate corresponding to both inflation and output being at their target levels (CGG 2000, 150), (inflation gap) is the deviation of actual inflation from target inflation and (output gap) is the percentage difference between actual GDP and its target. The rule is forward looking because the two gaps are relative to future desired levels. The Federal Reserve of the Great Inflation virtually ignored the inflation gap, setting negligible β, with generous accommodation to tighten the output gap in the form of relatively high and positive γ. The result was major increases of both the inflation gap and output gap, manifested in high inflation rates and equally high unemployment rates. Something similar is occurring currently with the obsession of the Fed with the output gap while deflation is assumed requiring negligible β and even higher γ.
Fed policy is designed to increase inflation by increasing commodity prices and devaluing the dollar, which is not very different from the hypothesis of creating an “inflation surprise.” The analysis by Kydland and Prescott (1977, 447-80, equation 5) uses the “expectation augmented” Phillips curve with the natural rate of unemployment of Friedman (1968) and Phelps (1968), which in the notation of Barro and Gordon (1983, 592, equation 1) is:
Ut = Unt – α(πt – πe) α > 0 (2)
Where Ut is the rate of unemployment at current time t, Unt is the natural rate of unemployment, πt is the current rate of inflation and πe is the expected rate of inflation by economic agents based on current information. Equation (1) expresses unemployment net of the natural rate of unemployment as a decreasing function of the gap between actual and expected rates of inflation. The system is completed by a social objective function, W, depending on inflation, π, and unemployment, U:
W = W(πt, Ut) (3)
The policymaker maximizes the preferences of the public, (3), subject to the constraint of the tradeoff of inflation and unemployment, (2). The total differential of W set equal to zero provides an indifference map in the Cartesian plane with ordered pairs (πt, Ut - Un) such that the consistent equilibrium is found at the tangency of an indifference curve and the Phillips curve in (2). The indifference curves are concave to the origin. The consistent policy is not optimal. Policymakers without discretionary powers following a rule of price stability would attain equilibrium with unemployment not higher than with the consistent policy. The optimal outcome is obtained by the rule of price stability, or zero inflation, and not more unemployment than under the consistent policy with nonzero inflation and the same unemployment. The “inflation surprise” consists of pursuing an inflation rate that is higher than that expected by economic agents that lowers the difference between the actual and natural unemployment rate by the term – α(πt – πe) (Barro and Gordon 1983). The US risks repeating the Great Inflation and Unemployment of the 1970s (http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html).
Equation (1) gives the false impression that the Fed has the “science,” measurements and forecasting to steer the economy into “prosperity without inflation.” Market participants are remembering the Great Bond Crash of 1994 shown in Table 10 when the Fed pursued nonexistent inflation, causing trillions of dollars of losses in fixed income worldwide while increasing the fed funds rate from 3 percent in Jan 1994 to 6 percent in Dec. The exercise in Table 10 shows a drop of the price of the 30-year bond by 18.1 percent and of the 10-year bond by 14.1 percent. CPI inflation remained almost the same and there is no valid counterfactual that inflation would have been higher without Fed tightening because of the long lag in effect of monetary policy on inflation. The pursuit of nonexistent deflation during the past ten years has resulted in the largest monetary policy accommodation in history that created the 2007 financial market crash and global recession and is currently preventing smoother recovery and creating another financial crash in the future. The issue is not whether there should be a central bank and monetary policy but rather whether exotic policy accommodation in doses from zero interest rates to trillions of dollars in the fed balance sheet endangers economic stability. A glance at Table 8 shows CPI inflation of 0.7 percent in 1961, creating a counterfactual of what would have been the Great Inflation if the Fed had set the policy rate at zero and purchased a third of the outstanding Treasury debt. The symmetric inflation target of “a little less than 2 percent,” or an infinitesimal neighborhood of 2, is an extremely dangerous misplaced analogy with the Great Depression that may bring the economy closer to the relevant historical event of the Great Inflation of the 1970s and the Great Bond Crash of 1994.
Table 10, Fed Funds Rates, Thirty and Ten Year Treasury Yields and Prices, 30-Year Mortgage Rates and 12-month CPI Inflation 1994
| 1994 | FF | 30Y | 30P | 10Y | 10P | MOR | CPI |
| Jan | 3.00 | 6.29 | 100 | 5.75 | 100 | 7.06 | 2.52 |
| Feb | 3.25 | 6.49 | 97.37 | 5.97 | 98.36 | 7.15 | 2.51 |
| Mar | 3.50 | 6.91 | 92.19 | 6.48 | 94.69 | 7.68 | 2.51 |
| Apr | 3.75 | 7.27 | 88.10 | 6.97 | 91.32 | 8.32 | 2.36 |
| May | 4.25 | 7.41 | 86.59 | 7.18 | 88.93 | 8.60 | 2.29 |
| Jun | 4.25 | 7.40 | 86.69 | 7.10 | 90.45 | 8.40 | 2.49 |
| Jul | 4.25 | 7.58 | 84.81 | 7.30 | 89.14 | 8.61 | 2.77 |
| Aug | 4.75 | 7.49 | 85.74 | 7.24 | 89.53 | 8.51 | 2.69 |
| Sep | 4.75 | 7.71 | 83.49 | 7.46 | 88.10 | 8.64 | 2.96 |
| Oct | 4.75 | 7.94 | 81.23 | 7.74 | 86.33 | 8.93 | 2.61 |
| Nov | 5.50 | 8.08 | 79.90 | 7.96 | 84.96 | 9.17 | 2.67 |
| Dec | 6.00 | 7.87 | 81.91 | 7.81 | 85.89 | 9.20 | 2.67 |
Notes: FF: fed funds rate; 30Y: yield of 30-year Treasury; 30P: price of 30-year Treasury assuming coupon equal to 6.29 percent and maturity in exactly 30 years; 10Y: yield of 10-year Treasury; 10P: price of 10-year Treasury assuming coupon equal to 5.75 percent and maturity in exactly 10 years; MOR: 30-year mortgage; CPI: percent change of CPI in 12 months
Sources: yields and mortgage rates http://www.federalreserve.gov/releases/h15/data.htm CPI ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt
III Financial Regulation. Regulatory agencies are implementing the Dodd-Frank Wall Street Reform and Consumer Protection Act (http://www.gpo.gov/fdsys/pkg/BILLS-111hr4173enr/pdf/BILLS-111hr4173enr.pdf). The Board of the Office of the Comptroller of the Currency (OCC), Commission of the Federal Deposit Insurance Corporation (FDIC), Federal Housing Finance Agency (FHFA), Board of Governors of the Federal Reserve System and Department of Housing and Urban Development (HUD) have proposed a rule for implementing the credit risk retention requirements of Section 15G of the Securities Exchange Act of 1934 added by section 941 of the Dodd-Frank act (http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20110329a1.pdf). The requirement of Section 15G is that “the securitizer of asset-backed securities” should “retain not less than five percent of the credit risk of the assets collateralizing the asset-backed securities” (Ibid, 1). There are various exemptions of Section 15G, “including an exemption for asset-backed securities that are collateralized exclusively by residential mortgages that qualify as ‘qualified residential mortgages’” (Ibid, 1). The proposed rule has 233 pages of text. The entire financial system of the US and of the world is being restructured by a law resulting from political compromises often influenced by interest groups and detached from reality as Congress and the government missed another opportunity for effective regulation that protects borrowers and the system without inhibiting credit required for economic growth and hiring.
The US has a bloated structure of multiple regulators at the federal and state levels with often conflicting functions that proved ineffective in the financial crisis (for the system of US regulation see Pelaez and Pelaez, Globalization and the State, Vol. I (2008b), 30-7, Government Intervention in Globalization (2008c), 33-5, Financial Regulation after the Global Recession (2009a), 69-77). Dodd-Frank did not try to simplify this structure but rather added such things as an independent Consumer Financial Protection Bureau (http://www.consumerfinance.gov/) and Financial Stability Oversight Council (FSOC) (http://www.treasury.gov/initiatives/Pages/FSOC-index.aspx). The intent of the Dodd-Frank act is (http://www.gpo.gov/fdsys/pkg/BILLS-111hr4173enr/pdf/BILLS-111hr4173enr.pdf 1):
“To promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘too big to fail,’ to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices and for other purposes.”
The Dodd-Frank act consists of a set of broad principles that must be supplemented by hundreds of rules by regulators. The individual principles of Dodd-Frank are in many cases likely to result in financial instability instead of the intent of financial stability. For example, the FSOC has powers to dismember financial institutions that it considers may pose risk of instability. The original institution may be viable but could become unviable after dismembering. It is dubious that the regulators and supervisors that did not anticipate the crisis until it spread throughout the world have new knowledge to ensure stability in the future by having meetings in the FSOC. The Federal Reserve System had authority to prevent systemic risk (http://www.federalreserve.gov/aboutthefed/mission.htm)
“The Federal Reserve's duties fall into four general areas:
· conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates
· supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers
· maintaining the stability of the financial system and containing systemic risk that may arise in financial markets
· providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system” (emphasis added)
The Federal Reserve had had throughout its history an elite, highly qualified staff and professionally successful board governors but has not been able to prevent systemic risk or resolve it during its history. The FSOC is inferior to entrusting the Fed with systemic risk duties because committee work of multiple, antagonistic regulators delays and complicates actions, in case there is really sound knowledge of what should be done to prevent and resolve financial crises.
Former Fed Chairman Alan Greenspan (2011) finds that Dodd-Frank is not meeting the test of current times. In this view, Dodd-Frank is predicated on what Greenspan (2011) finds acceptable financial market excesses but finds that this new statute may not attain its intentions. The fact is that the financial crisis after 2007 was caused by Fed policy errors similar to those that caused and aggravated the Great Inflation and Unemployment of the 1970s. Monetary policy in the first round of fear of deflation with fed funds of 1 percent between Jun 2003 and Jun 2004 was implemented jointly with a yearly housing subsidy of $221 billion, policy of affordable housing and the purchase or guarantee of $1.6 trillion of nonprime securities by Fannie and Freddie. Short-term interest rates near zero combined with the housing stimulus distorted risk/return calculations. The carry trade consisted of borrowing at close to zero short-term interest rates and taking long positions in housing and risk financial assets such as commodities, equities, emerging equities, corporate debt, junk bonds and so on. These positions relied on rollover of short-term funding to benefit from the short-term rates in everything from adjustable rate mortgages to sale and repurchase agreements of securitized credit obligations. Liquidity was minimized because of the high alternative-return penalty of near zero interest rates. High risks were assumed in the belief that the Fed would maintain the near zero interest rates forever. Creditworthiness was ignored in the belief that increasing prices, such as in real estate, would cushion losses, such as by selling the house to cover the mortgage. Leverage was magnified because of the perceived certainty of returns in an environment of low interest rates indefinitely. The near zero interest rates of the Fed in 2003-2004 induced the causes of the credit/dollar crisis and global recession: excessive risks, high leverage, low liquidity, reliance on short-term funding and unsound credit decisions (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 157-66, Regulation of Banks and Finance (2009b), 217-27, International Financial Architecture (2005), 15-18, The Global Recession Risk (2007), 221-5, Globalization and the State Vol. II (2008b), 197-213, Government Intervention in Globalization (2008c), 182-4).
The valid argument in Greenspan (2011) is that Dodd-Frank ignores the working of the financial system such that it may cause its instability and break its functions required for credit provision to propel economic growth and hiring. The regulatory rules implementing Dodd-Frank are causing unpredictable adverse effects. Greenspan (2011) identifies five critical sources of what he calls iceberg tips.
First, credit rating. Credit securitization has been evolving over decades. For example, in 1970, the Federal Home Loan Mortgage Corporation (Freddie Mac) was chartered by the federal government to guarantee mortgages that thrift institutions bundled in securities that were acquired by investors (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 43). Most credit consists of bundling assets such as credit card receivables, auto loans, school loans and similar obligations in securities that are acquired by investors. The process is an important function of finance to tap savings of units with surplus savings that are channeled by vehicles such as securities, including stocks, to units in need of funds for consumption and investment (see Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 34-7, 48-52, Regulation of Banks and Finance (2009b), 37-44, Globalization and the State, Vol. II (2008b), 73-81, Government Intervention in Globalization, 128-31(2008c)). The system was broken by the Fed policy of near zero interest rates that induced the financing of everything with short-dated funds (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 157-66, Regulation of Banks and Finance (2009b), 217-27, International Financial Architecture (2005), 15-18, The Global Recession Risk (2007), 221-5, Globalization and the State Vol. II (2008b), 197-213, Government Intervention in Globalization (2008c), 182-4). According to Greenspan (2011), Dodd-Frank provided that credit-rating bureaus be liable legally for the ratings, causing the interruption of issue of asset-backed securities and thus of credit in 2010 until the SEC de facto suspended the credit rating requirement.
Second, debit card fees. A recent proposed rule of the Fed to implement Dodd-Frank reduced the fees that banks can charge to commercial vendors on debt-card transactions (http://edocket.access.gpo.gov/2010/pdf/2010-32061.pdf). Many lenders would suffer losses in issuing debit cards, resulting in higher compensatory fees and possible elimination of debit card services by some lenders. Exempting smaller banking institutions is not a solution because most debit card transactions are by cards issued by larger institutions such that most consumers would be affected by higher fees or service interruption with smaller lenders unable to meet all the demand for their still profitable cards. Why should shareholders of larger institutions, in particular pension and savings funds, be penalized relative to shareholders in smaller institutions? Why should vendors of commercial products using debit cards be benefitted? The lower fees to vendors of commercial products will not be passed on to consumers in the form of lower prices but rather appropriated by the vendors in the form of higher profits. Technological change in financial services will be frustrated. The introduction of the debit card provision in Dodd-Frank was unfortunate.
Third, derivatives market. In an interview at the US Chamber of Commerce, Jamie Dimon, CEO of JP Morgan Chase & Co that did not have a single quarter of losses in the financial crisis stated: “Derivatives didn’t cause the financial crisis. They are regulated. They are transparent. And they are an important financial instrument used by companies” (http://www.uschamber.com/feed/live-summit-jamie-dimon). Greenspan (2011) finds concerns that significant parts of the markets for derivatives will move outside of the US unless there is an exemption from Dodd-Frank.
Fourth, proprietary trading. There is no evidence of any type that proprietary trading caused the financial crisis after 2007 or other historical cases of financial crisis or instability. Dodd-Frank merely transferred proprietary trading to unregulated institutions. Greenspan (2011) argues that the rules are applicable to US banks worldwide but that US offices of foreign financial institutions can transfer their proprietary trading to banks in Asia, Europe or Canada. In general, Dodd-Frank has weakened the competitiveness of the US in finance relative to foreign institutions worldwide without enhancing financial stability in the US.
Fifth, remuneration of finance professionals. An important change in the modern firm is from command-and-control specialization in vertical integration toward use of human capital instead of inanimate capital in horizontal specialization (Rajan and Zingales 2000). The theory of the firm has been influenced by these changes (Rajan and Zingales 2001). Modern finance with methods for option pricing such as by Black and Scholes (1973) and Merton (1973, 1974, 1998) resulted in new methods for pricing complex financial products. Finance professionals invest in acquiring and developing this knowledge. The charter of the bank or financial institution is no longer the main source of value but rather the capacity of hiring, retaining and compensating this new type of human capital, which is a fixed cost of finance professionals and not of the company where they work. Financial companies resemble more law firms, in which the knowledge and professional reputation of the attorneys constitutes the main and human capital of the firm, instead of older types of firms depending on inanimate capital. Technology and competitive globalization have been driving these trends (see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 129-38). Dodd-Frank is intrusive in the ideal structuring of a competitive financial institution, undermining the competitiveness of the US relative to foreign banks and financial institutions, thus exporting jobs and services overseas. Greenspan (2011) raises doubts if legislation is beneficial in the competitive markets for finance professionals with high personal investments in human capital.
The conclusion of Greenspan (2011) is whether Dodd-Frank and resulting hundreds of rules can interfere with financial services required for economic growth. There is vast literature on the link between finance and growth (see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 37-44).
IV Sovereign Risks. Standard & Poor’s (2011, 10) BBB- rating “is considered lowest investment grade by participants.” Standard & Poor’s lowered the sovereign credit rating of the Republic of Ireland to “BBB+/A-2” and removed it from the CreditWatch list to stable outlook. The same BBB+ rating applies to other ratings depending on the sovereign credit of Ireland, including the “issuer credit rating of the National Asset Management Agency (NAMA) and the senior unsecured debt ratings on government-guaranteed securities of Irish banks (http://www.standardandpoors.com/ratings/articles/en/us/?assetID=1245301741237). The view of Standard & Poor’s is that the European Stability Mechanism (ESM) agreed in the European Union meeting on March 24-25, 2011 is likely to require sovereign debt restructuring as a condition of borrowing from the ESM, with senior unsecured government debt being subordinated to loans from the ESM. These conditions are “detrimental to the commercial creditors of EU sovereign ESM borrowers” (Ibid). The view of Standard & Poor’s is that the stress tests of prudential capital assessment and liquidity “are robust and that the expected €18-€19 billion (11.5% to 12.0% of GDP) net cost to the Irish state of additional recapitalization, plus the contingency buffer for the banking system” meet the expectations of Standard & Poor’s” (Ibid). The contraction of GDP of Ireland beginning in 2008 may be followed now by gradual recovery. An important aspect of Ireland’s recovery is exports of 107 percent of GDP in 2011, relative to only 30 percent for Portugal and the flexibility and competitiveness of the Irish economy. Standard & Poor’s forecasts a current account surplus of 2 percent of GDP for Ireland in 2011. Standard & Poor’s downgraded Greek sovereign debt to BB- from BB+ and Portugal’s senior debt to BBB- from BBB. Access to the ESM may require that bondholders accept losses before receiving financial support (http://professional.wsj.com/article/SB10001424052748704471904576230532021525182.html?mod=WSJPRO_hps_LEFTWhatsNews).
The government of Ireland has invested €46.3 billion into banks “that will not be recovered” (http://www.finance.gov.ie/viewdoc.asp?DocID=6749). The loss of equity capital in banks since early 2007 is €60 billion. The holders of subordinated debt have lost €10 billion. The central bank estimates on the basis of stress tests that another €24 billion are required to recapitalize the banks, including €3 billion of contingency loans (Ibid). The government is also engaging in profound reorganization of the banking system (http://www.finance.gov.ie/documents/pressreleases/2011/mn001presrev.pdf).
Portugal was able to borrow €1.33 billion in an Apr 1 auction of bonds maturing in 15 months (http://www.ft.com/cms/s/0/c518dfce-5c85-11e0-ab7c-00144feab49a.html#axzz1IOUUtVjP). The rate of 5.793 percent in the auction was lower than 6.4 percent traded in the secondary market for similar debt. The Portuguese auction calmed sovereign markets in Europe. The deficit and debt of Portugal as percent of GDP between 2007 and 2010 are shown in Table 11 with the projection for 2011 by the Instituto Nacional de Estatística, Portugal’s statistics agency (http://www.ine.pt/xportal/xmain?xpid=INE&xpgid=ine_destaques&DESTAQUESdest_boui=107694003&DESTAQUESmodo=2). The major shock was the requirement by Eurostat that Portugal include €2 billion of a cash injection into a nationalized bank and loans to companies in mass transportation as part of the deficit (http://professional.wsj.com/article/SB10001424052748703806304576234353365867030.html?mod=WSJPRO_hps_LEFTWhatsNews). As a result, the deficit increased to 8.6 percent of GDP in 2010, which is higher than the target of 7.3 percent and the 6.8 percent estimated by the government. Portugal is facing €9 billion of repayments of bonds in Apr to Jun. The President of Portugal set early election on Jun 5 to alleviate the political vacuum created by the resignation of the prime minister (http://professional.wsj.com/article/SB10001424052748703806304576234353365867030.html?mod=WSJPRO_hpp_LEFTTopStories).
Table 11, Portugal, Government Deficit and Debt as Percent of GDP
| Deficit | Debt | |
| 2007 | -3.1 | 68.3 |
| 2008 | -3.5 | 71.6 |
| 2009 | -10.0 | 82.9 |
| 2010 | -8.6 | 92.4 |
| 2011 | -4.6 | 97.3 |
V Valuation of Risk Financial Assets. The financial crisis and global recession were caused by interest rate and housing subsidies and affordability policies that encouraged high leverage and risks, low liquidity and unsound credit (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 157-66, Regulation of Banks and Finance (2009b), 217-27, International Financial Architecture (2005), 15-18, The Global Recession Risk (2007), 221-5, Globalization and the State Vol. II (2008b), 197-213, Government Intervention in Globalization (2008c), 182-4). Several past comments of this blog elaborate on these arguments, among which: http://cmpassocregulationblog.blogspot.com/2011/01/professor-mckinnons-bubble-economy.html http://cmpassocregulationblog.blogspot.com/2011/01/world-inflation-quantitative-easing.html http://cmpassocregulationblog.blogspot.com/2011/01/treasury-yields-valuation-of-risk.html http://cmpassocregulationblog.blogspot.com/2010/11/quantitative-easing-theory-evidence-and.html http://cmpassocregulationblog.blogspot.com/2010/12/is-fed-printing-money-what-are.html
Table 12 shows the phenomenal impulse to valuations of risk financial assets originating in the initial shock of near zero interest rates in 2003-2004 with the fed funds rate at 1 percent, in fear of deflation that never materialized, and quantitative easing in the form of suspension of the auction of 30-year Treasury bonds to lower mortgage rates. World financial markets were dominated by Fed and housing policy in the US. Between 2002 and 2008, the DJ UBS Commodity Index rose 165.5 percent largely because of the unconventional monetary policy of the Fed encouraging carry trade from low US interest rates to long leveraged positions in commodities, exchange rates and other risk financial assets. The charts of risk financial assets show sharp increase in valuations leading to the financial crisis and then profound drops that are captured in Table 12 by percentage changes of peaks and troughs. The first round of quantitative easing and near zero interest rates depreciated the dollar relative to the euro by 39.3 percent between 2003 and 2008, with revaluation of the dollar by 25.1 percent from 2008 to 2010 in the flight to dollar-denominated assets in fear of world financial risks and then devaluation of the dollar by 19.4 percent by Fri Apr 1, 2011. Dollar devaluation is a major vehicle of the Fed in reducing the output gap that is implemented in the erroneous belief that devaluation will not accelerate inflation. The last line of Table 12 shows CPI inflation in the US rising from 1.9 percent in 2003 to 4.1 percent in 2007 even as the Fed increased the fed funds rate from 1 percent in Jun 2004 to 5.25 percent in Jun 2006.
Table 12, Volatility of Assets| DJIA | 10/08/02-10/01/07 | 10/01/07-3/4/09 | 3/4/09- 4/6/10 | |
| ∆% | 87.8 | -51.2 | 60.3 | |
| NYSE Financial | 1/15/04- 6/13/07 | 6/13/07- 3/4/09 | 3/4/09- 4/16/07 | |
| ∆% | 42.3 | -75.9 | 121.1 | |
| Shanghai Composite | 6/10/05- 10/15/07 | 10/15/07- 10/30/08 | 10/30/08- 7/30/09 | |
| ∆% | 444.2 | -70.8 | 85.3 | |
| STOXX EUROPE 50 | 3/10/03- 7/25/07 | 7/25/07- 3/9/09 | 3/9/09- 4/21/10 | |
| ∆% | 93.5 | -57.9 | 64.3 | |
| UBS Com. | 1/23/02- 7/1/08 | 7/1/08- 2/23/09 | 2/23/09- 1/6/10 | |
| ∆% | 165.5 | -56.4 | 41.4 | |
| 10-Year Treasury | 6/10/03 | 6/12/07 | 12/31/08 | 4/5/10 |
| % | 3.112 | 5.297 | 2.247 | 3.986 |
| USD/EUR | 6/26/03 | 7/14/08 | 6/07/10 | 04/1 /2011 |
| Rate | 1.1423 | 1.5914 | 1.192 | 1.423 |
| CNY/USD | 01/03 2000 | 07/21 2005 | 7/15 2008 | 04/1 /2011 |
| Rate | 8.2798 | 8.2765 | 6.8211 | 6.5435 |
| New House | 1963 | 1977 | 2005 | 2009 |
| Sales 1000s | 560 | 819 | 1283 | 375 |
| New House | 2000 | 2007 | 2009 | 2010 |
| Median Price $1000 | 169 | 247 | 217 | 203 |
| 2003 | 2005 | 2007 | 2010 | |
| CPI | 1.9 | 3.4 | 4.1 | 1.5 |
Sources: http://online.wsj.com/mdc/page/marketsdata.html
http://www.census.gov/const/www/newressalesindex_excel.html
http://federalreserve.gov/releases/h10/Hist/dat00_eu.htm
ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt
http://federalreserve.gov/releases/h10/Hist/dat00_ch.htm
http://markets.ft.com/ft/markets/currencies.asp
The trends of valuations of global risk financial assets are dominated by the carry trade from near zero interest rates in the US to take long positions in risk financial assets. Investors and financial professionals learned from losses or how to avoid them. The carry trade is now more opportunistic in quickly realizing profits to avoid losses during periods of risk aversion resulting from events such as the European risk issues, fears of the tradeoff of growth and inflation in Asia, geopolitical events such as the ongoing Middle East oil price shock and slow growth with high unemployment, underemployment, stagnant wages and low hiring in the US together with expectations of increases in taxes and interest rates. When risk aversion is subdued, the combination of near zero interest rates of fed funds and quantitative easing creates again the dream of traders of “the trend is your friend” without as strong a belief in the Bernanke-put, or floor on risk financial asset valuations set by Fed monetary policy, as in earlier periods. Table 13 captures in the fourth column “∆% to Trough” the decline of risk financial assets resulting from the European sovereign risk issues after Apr 2010 and the sharp recovery in the last column “∆% Trough to 4/ 1/11” that was not interrupted by the second round of Ireland in late Nov. The final column “∆% Trough to 4/ 1/11” shows that after Jun there is repetition of the trend of high valuations of risk financial assets with the exception of the dollar that devalued by 19.4 percent. A major risk of world capital markets is in sustained increases in oil prices that could cause another downturn of risk financial assets similar to the one that occurred in the European sovereign risk event after Apr 2010. That risk could be significant as shown by the decline of valuations of risk financial assets in column “∆% to Trough” with high double-digit losses. The column “∆% Week 4/1/11” shows gains in the week of Apr 1 following major gains in the week of Mar 25 after losses in the week of Mar 18 following similar losses in the prior week ending on Mar 11. Risk financial assets are experiencing significant turbulence because of the joint incidence of geopolitical events in the Middle East, the Japan earthquake and sovereign risk issues in Europe.
Table 13, Stock Indexes, Commodities, Dollar and 10-Year Treasury| Peak | Trough | ∆% to Trough | ∆% Peak to 4/ 1/11 | ∆% Week 4/ 1/11 | ∆% Trough to 4/ 1/11 | |
| DJIA | 4/26/ 10 | 7/2/10 | -13.6 | 10.5 | 1.3 | 27.8 |
| S&P 500 | 4/23/ 10 | 7/20/ 10 | -16.0 | 9.5 | 1.4 | 30.3 |
| NYSE Finance | 4/15/ 10 | 7/2/10 | -20.3 | -2.5 | 1.2 | 22.4 |
| Dow Global | 4/15/ 10 | 7/2/10 | -18.4 | 5.3 | 1.4 | 29.0 |
| Asia Pacific | 4/15/ 10 | 7/2/10 | -12.5 | 5.7 | 0.8 | 20.8 |
| Japan Nikkei Aver. | 4/05/ 10 | 8/31/ 10 | -22.5 | -14.8 | 1.8 | 10.0 |
| China Shang. | 4/15/ 10 | 7/02 /10 | -24.7 | -6.2 | -0.3 | 24.5 |
| STOXX 50 | 4/15/10 | 7/2/10 | -15.3 | -3.2 | 1.1 | 14.2 |
| DAX | 4/26/ 10 | 5/25/ 10 | -10.5 | 13.4 | 3.4 | 29.6 |
| Dollar Euro | 11/25 2009 | 6/7 2010 | 21.2 | 5.9 | 1.1 | -19.4 |
| DJ UBS Comm. | 1/6/ 10 | 7/2/10 | -14.5 | 17.2 | 0.8 | 37.1 |
| 10-Year Tre. | 4/5/ 10 | 4/6/10 | 3.986 | 3.445 |
T: trough; Dollar: positive sign appreciation relative to euro (less dollars paid per euro), negative sign depreciation relative to euro (more dollars paid per euro)
Source: http://online.wsj.com/mdc/page/marketsdata.html.
Table 14, updated with every post, provides the percentage changes of the DJIA and the S&P 500 since Apr 26, around the European sovereign risk issues, from current to previous selected dates and relative to Apr 26. Chairman Bernanke (2010WP) first argued on Nov 4, 2010 that quantitative easing was also designed to increase the valuations of stocks with the objective of creating a wealth effect that would motivate consumption. The problem is that the Fed does not control effects over multiple asset classes including riskier financial assets such as commodities and exchange rates. The decline of major US stock indexes in the week of Feb 25 without full recovery in the week of Mar 4 and renewed weakness in the weeks ending on Mar 11 and Mar 18 reduced the valuations of the DJIA and S&P 500 to single digit increases since the effects of the European sovereign risk event beginning around Apr 26. There were major gains in the week of Mar 25 of 3.1 percent for the DJIA and 2.7 percent for the S&P 500 that raised valuations since Apr 26 to 9.1 percent and 8.4 percent, respectively. After new gains in the week of Apr 1, the DJIA is 10.5 percent above the level of Apr 26 and the S&P 500 is higher by 9.9 percent.
Table 14, Percentage Changes of DJIA and S&P 500 in Selected Dates
| 2010 | ∆% DJIA from earlier date | ∆% DJIA from Apr 26 | ∆% S&P 500 from earlier date | ∆% S&P 500 from Apr 26 |
| Apr 26 | ||||
| May 6 | -6.1 | -6.1 | -6.9 | -6.9 |
| May 26 | -5.2 | -10.9 | -5.4 | -11.9 |
| Jun 8 | -1.2 | -11.3 | 2.1 | -12.4 |
| Jul 2 | -2.6 | -13.6 | -3.8 | -15.7 |
| Aug 9 | 10.5 | -4.3 | 10.3 | -7.0 |
| Aug 31 | -6.4 | -10.6 | -6.9 | -13.4 |
| Nov 5 | 14.2 | 2.1 | 16.8 | 1.0 |
| Nov 30 | -3.8 | -3.8 | -3.7 | -2.6 |
| Dec 17 | 4.4 | 2.5 | 5.3 | 2.6 |
| Dec 23 | 0.7 | 3.3 | 1.0 | 3.7 |
| Dec 31 | 0.03 | 3.3 | 0.07 | 3.8 |
| Jan 7 | 0.8 | 4.2 | 1.1 | 4.9 |
| Jan 14 | 0.9 | 5.2 | 1.7 | 6.7 |
| Jan 21 | 0.7 | 5.9 | -0.8 | 5.9 |
| Jan 28 | -0.4 | 5.5 | -0.5 | 5.3 |
| Feb 4 | 2.3 | 7.9 | 2.7 | 8.1 |
| Feb 11 | 1.5 | 9.5 | 1.4 | 9.7 |
| Feb 18 | 0.9 | 10.6 | 1.0 | 10.8 |
| Feb 25 | -2.1 | 8.3 | -1.7 | 8.9 |
| Mar 4 | 0.3 | 8.6 | 0.1 | 9.0 |
| Mar 11 | -1.0 | 7.5 | -1.3 | 7.6 |
| Mar 18 | -1.5 | 5.8 | -1.9 | 5.5 |
| Mar 25 | 3.1 | 9.1 | 2.7 | 8.4 |
| Apr 1 | 1.3 | 10.5 | 1.4 | 9.9 |
Source: http://online.wsj.com/mdc/public/page/mdc_us_stocks.html?mod=mdc_topnav_2_3004
Table 15, which is updated with every post, shows in the last three rows the Chinese yuan (CNY) to US dollar (USD) exchange rate or number of CNY required to buy one USD. China fixed the rate at around 8.2765 CNY/USD for a long period until Aug 2005. That rate afforded a competitive edge to Chinese products in world markets and in competition of internally-produced goods with foreign-produced imports. China then strengthened the yuan by 17.6 percent until Jul 2008 when it fixed it to the dollar in an effort to prevent the erosion of its competitiveness in world markets and at home to protect the economy from the global recession. China resumed the revaluation of the yuan in 2010, with revaluation by 4.1 percent by Apr 1, 2011. Table 15 shows the sharp appreciation relative to the dollar of most currencies in the world, which is far higher than the Fed’s objective of attaining by quantitative easing “a moderate change in the foreign exchange value of the dollar that provides support to net exports,” as revealed for the first time by Yellen (2011AS, 6). Bernanke (2002FD) states:
“Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934. The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt's devaluation.”
Many countries have complained that Fed “nonconventional policy” of near zero interest rates and quantitative easing is designed to cause, or at least results in, competitive devaluation of the dollar that would export US unemployment to other countries. A widening differential between interest rates in the euro area and the US could further devalue the dollar, inducing carry trade from near zero interest rates in the US to risk financial assets.
Table 15, Exchange Rates
| Peak | Trough | ∆% P/T | Apr 1 2011 | ∆T Apr 1 2011 | ∆% P Apr1 2011 | |
| EUR USD | 7/15 2008 | 6/7 2010 | 4/1 2011 | |||
| Rate | 1.59 | 1.192 | 1.423 | |||
| ∆% | -33.4 | 16.2 | -11.7 | |||
| JPY USD | 8/18 2008 | 9/15 2010 | 4/1 2011 | |||
| Rate | 110.19 | 83.07 | 84.05 | |||
| ∆% | 24.6 | -1.2 | 23.7 | |||
| CHF USD | 11/21 2008 | 12/8 2009 | 4/1 2011 | |||
| Rate | 1.225 | 1.025 | 0.928 | |||
| ∆% | 16.3 | 9.5 | 24.2 | |||
| USD GBP | 7/15 2008 | 1/2/ 2009 | 4/1 2011 | |||
| Rate | 2.006 | 1.388 | 1.611 | |||
| ∆% | -44.5 | 13.8 | -24.5 | |||
| USD AUD | 7/15 2008 | 10/27 2008 | 4/1 2011 | |||
| Rate | 1.0215 | 1.6639 | 1.038 | |||
| ∆% | -62.9 | 42.1 | 5.7 | |||
| ZAR USD | 10/22 2008 | 8/15 2010 | 4/1 2011 | |||
| Rate | 11.578 | 7.238 | 6.692 | |||
| ∆% | 37.5 | 7.5 | 42.2 | |||
| SGD USD | 3/3 2009 | 8/9 2010 | 4/1 2011 | |||
| Rate | 1.553 | 1.348 | 1.26 | |||
| ∆% | 13.2 | 6.5 | 18.9 | |||
| HKD USD | 8/15 2008 | 12/14 2009 | 4/1 2011 | |||
| Rate | 7.813 | 7.752 | 7.778 | |||
| ∆% | 0.8 | -0.3 | 0.4 | |||
| BRL USD | 12/5 2008 | 4/30 2010 | 4/1 2011 | |||
| Rate | 2.43 | 1.737 | 1.609 | |||
| ∆% | 28.5 | 7.4 | 33.8 | |||
| CZK USD | 2/13 2009 | 8/6 2010 | 4/1/ 2011 | |||
| Rate | 22.19 | 18.693 | 17.174 | |||
| ∆% | 15.7 | 8.1 | 22.6 | |||
| SEK USD | 3/4 2009 | 8/9 2010 | 4/1 2011 | |||
| Rate | 9.313 | 7.108 | 6.291 | |||
| ∆% | 23.7 | 11.5 | 32.4 | |||
| CNY USD | 7/20 2005 | 7/15 2008 | 4/1/ 2011 | |||
| Rate | 8.2765 | 6.8211 | 6.5435 | |||
| ∆% | 17.6 | 4.1 | 20.9 |
Symbols: USD: US dollar; EUR: euro; JPY: Japanese yen; CHF: Swiss franc; GBP: UK pound; AUD: Australian dollar; ZAR: South African rand; SGD: Singapore dollar; HKD: Hong Kong dollar; BRL: Brazil real; CZK: Czech koruna; SEK: Swedish krona; CNY: Chinese yuan; P: peak; T: trough
Note: percentages calculated with currencies expressed in units of domestic currency per dollar; negative sign means devaluation and no sign appreciation
Source: http://online.wsj.com/mdc/public/page/mdc_currencies.html?mod=mdc_topnav_2_3000
http://federalreserve.gov/releases/h10/Hist/dat00_ch.htm
http://markets.ft.com/ft/markets/currencies.asp
VI Economic Indicators. The economy continues to grow moderately and initial jobless claims have settled below 400,000 per week but the real estate and construction sector of the economy are still weak. Personal income rose 0.3 percent in Feb; disposable personal income rose 0.3 percent in Feb but fell 0.1 percent after adjusting for inflation; and personal consumption expenditures (PCE) rose 0.7 percent in Feb but 0.3 percent after adjusting for inflation (http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm). The PCE price index rose 0.4 percent in Feb relative to Jan 2011 and 1.6 percent relative to Feb 2010; the PCE price index excluding food and energy rose 0.15 percent from Feb 2011 relative to Jan and 0.88 percent relative to Feb 2010, which is almost the same as 0.8 percent in Jan 2011 relative to Jan 2010 (http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=81&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Month&FirstYear=2010&LastYear=2011&3Place=N&Update=Update&JavaBox=no). If the monthly rate of 0.4 percent in Feb of the PCE index were repeated 12 months in a row it would accumulate to 4.9 percent. New orders in the first two months of 2011 relative to the first two months of 2010 unadjusted for price changes rose as follows: 9.9 percent for all manufacturing industries, 11.3 percent excluding transportation, 11.1 percent excluding defense, 6.9 percent for unfilled orders and 6.5 percent for durable goods orders (http://www.census.gov/manufacturing/m3/prel/pdf/s-i-o.pdf). The manufacturing index of the Institute for Supply Management (ISM) fell slightly from 61.4 in Feb to 61.2 in Mar and the new orders index fell from 68.0 in Feb to 63.3 in Mar (http://ism.ws/ISMReport/MfgROB.cfm). The Business Barometer index of the Chicago ISM rose from 65.6 in Feb to 70.8 in Mar but seasonally adjusted fell slightly from a high level of 71.2 in Feb to 70.6 in Mar; the segment of new orders rose from 68.5 in Feb to a strong 76.0 in Mar but seasonally adjusted fell slightly from 75.8 in Feb to 74.5 in Mar (https://www.ism-chicago.org/chapters/ism-ismchicago/files/ISM-C%20March%202011.pdf). The S&P Case-Shiller home price index 10-city composite fell 2.0 percent in Jan 2011 relative to Jan 2010 and the 20-city composite fell 3.1 percent in the same period. San Diego and Washington DC were the only two markets with positive year-on-year increases, 0.1 percent and 3.6 percent, respectively. There were new low index levels in Jan in the same 11 cities that registered them in Dec 2010 (http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpidff--p-us----). The National Association of Realtor’s index of pending home sales rose 2.1 percent based on contracts signed in Feb relative to Jan but is 8.2 percent lower than in Feb 2010 (http://www.realtor.org/press_room/news_releases/2011/03/pending_feb_rise). Construction spending was estimated at the seasonally adjusted rate of $760 billion in Feb 2011, lower by 1.4 percent relative to Jan and 6.8 percent below Feb 2010. Construction spending not seasonally adjusted in the first two months of 2011 was $104 billion, lower by 8.2 percent relative to $113 billion in the first two months of 2010; construction spending not seasonally adjusted is lower in the first two months of 2011 by 35.8 percent relative to $162 billion in the first two months of 2006 and 30 percent lower than $149 billion in the first two months of 2005 (http://www.census.gov/const/C30/pr200602.pdf http://www.census.gov/const/C30/release.pdf). Initial claims for unemployment insurance seasonally adjusted fell 6000 in the week of Mar 26 to 388,000 from 394,000 in the prior week; initial claims not seasonally adjusted fell 156 in the week of March 26 to 354,301 from 354,457 in the prior week; the 4-week moving average fell 3250 in the week of Mar 26 to 394,250 from 391,000 in the prior week (http://www.dol.gov/opa/media/press/eta/ui/current.htm).
VII Interest Rates. The US 10-year Treasury note traded at 3.45 percent on Apr 1, which is about the same as 3.44 percent a week earlier and 3.46 percent a month earlier; the 30-year Treasury bond traded at 4.49 percent on Apr 1, which is about the same as 4.50 percent a week earlier but somewhat lower than 4.55 percent a month earlier. The 10-year government bond of Germany traded at 3.37 percent for a shrinking negative spread of 8 basis points relative to the comparable US Treasury (http://markets.ft.com/markets/bonds.asp?ftauth=1301784619290). The US Treasury note with coupon of 3.63 percent and maturity on 2/21 traded at yield of 3.45 percent or equivalent price of 101.48 (http://markets.ft.com/ft/markets/reports/FTReport.asp?dockey=GOV-010411), which is not comparable to the price in Table 9 that is calculated with coupon of 2.625 percent and maturity in exactly 10 years for purposes of comparison with the price on Nov 4, 2010, one day before the Fed’s decision on the second round of quantitative easing.
VIII Conclusion. There is job stress for 24 to 30 million people in the US and unemployment of 14 to 19 million people. The number of people employed has declined by five million since 2006 and the number of hiring by 17 million. Monetary policy of zero interest rates and Fed balance sheet of $2.6 trillion is risking repeat of the Great Inflation and Unemployment of the 1970s. The growth path of the economy may be flattened by expectations of higher taxes and interest rates. Financial turbulence is likely to result from various sources of risk aversion in the world economy: sovereign risk issues, Middle East uncertainties, tough tradeoff of inflation and growth in China, production chain effects on the world economy resulting from the earthquake and tsunami in Japan and the risk of stagflation. (Go to http://cmpassocregulationblog.blogspot.com/ http://sites.google.com/site/economicregulation/carlos-m-pelaez)
http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10 )
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© Carlos M. Pelaez, 2010, 2011
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