Mediocre Growth, World Inflation, Monetary Policy and Seigniorage
Carlos M. Pelaez
© Carlos M. Pelaez, 2010, 2011
Executive Summary
I Mediocre Growth
II World Inflation
III Monetary Policy
IV Trends and Cycles of Valuations of Risk Financial Assets
V Economic Indicators
VI Interest Rates
VII Conclusion
References
Executive Summary
The rate of economic growth of the US decelerated from 3.1 percent on a quarterly seasonally-adjusted year equivalent in the fourth quarter of 2010 (IVQ2010) to 1.8 percent in the first quarter of 2011 (IQ2011). The first seven months of expansion of the US economy beginning in the IIIQ2009 are mediocre compared with high growth rates in the expansions after similar deep contractions in the 1950s, 1970s and 1980s. Labor markets are plagued by 30 million in job stress, composed of the unemployed and underemployed, stagnant wages and weak hiring because of the low rate of growth of the economy.
The report on personal income and outlays of the Bureau of Economic Analysis (BEA) reveals inflation. The rate of growth of disposable personal income in current dollars in IQ2011 was 1.8 percent, equivalent to 7.4 percent annual, while the rate of growth of constant dollar or real disposable personal income was 0.6 percent or equivalent to 2.4 percent annual. The gap between current or nominal disposable income is 4.9 percent annual equivalent (1.074 divided by 1.024), reflecting accelerating inflation, which is much higher than 2.4 percent annual in IVQ2010. Current dollar personal consumption expenditures rose at the annual equivalent rate of 8.3 percent in IQ2011 while real personal consumption expenditures increased at 3.2 percent annual equivalent for a difference attributable to inflation of 4.9 percent much higher than 2.4 percent annual equivalent in IVQ2010. Inflation in the deflator of personal income and outlays is growing at the annual equivalent rate of 4.9 percent, accelerating from 2.4 percent annual from IVQ2010. The old-fashioned concept of seigniorage argues that in a situation of high fiscal deficits and inflation, the government gains before issuing money that causes increases in prices. The new seigniorage argument is not by increases in inflation resulting from increasing monetary aggregates but by the rise in valuations of assets such as commodities induced through the carry trade of near zero interest rates. The rate of growth of real disposable income declined from 2.8 percent in IVQ2010 to 2.4 percent in IQ2011 and that of real personal consumption expenditures from 3.6 percent in IVQ2010 to 3.2 percent in IQ2011. There is not yet evidence of trend but rather the appearance of a slowing rate of growth that is captured by GDP growth of 1.8 percent in IQ2011. Rates of growth of the economy fluctuate commonly in multiple quarters even with sharp upward long-term trends. Personal consumption price indexes raise the role of devil’s advocate. Headline personal consumption expenditure has jumped to 1.1 percent cumulative in IQ2011, which is equivalent to 4.5 percent annual. The price index of personal consumption expenditures excluding food and energy, used in design of monetary policy, increased by 0.5 percent in IQ2011, which is equivalent to the maximum monetary policy rate of 2.0 percent annual. The 12 months rates in Mar 2011 of headline personal consumption expenditures inflation of 1.8 percent and 0.9 percent excluding food and energy are still in the comfort region of monetary policy but may reflect past dead inflation instead of future trend. There is inflation everywhere in the world economy with the flash estimate of euro area inflation for Apr at 2.8 percent.
I Mediocre Growth. Chairman Bernanke is quoted by the FCIC (2011R, 382) stating that:
“As a scholar of the Great Depression, I honestly believe that September and October 2008 was the worst financial crisis in global history, including the Great Depression. If you look at the firms that came under pressure in that period…only one…was not at serious risk of failure…So out of maybe the 13, 13 of the most important financial institutions in the United States, 12 were at risk of failure within a period of a week or two.”
Comparisons of the credit/dollar crisis and global recession with the Great Depression are typically misleading and not rare. For example, Modigliani (1988, 399) states that in a speech President Reagan “began by suggesting that ‘we are in the worst economic mess since the Great Depression,’ a statement that an objective review of the situation would find highly exaggerated.” Much the same occurs currently in comparisons with the 1930s that provide some of the widest fluctuations of events and data required for economic research. US GDP in constant dollars fell 8.6 percent in 1930, 6.4 percent in 1931, 13.0 percent in 1932 and 1.3 percent in 1934 for a cumulative contraction of 26.5 percent and GDP in current dollars contracted by 48.9 percent (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-1; Pelaez and Pelaez, Globalization and the State, Vol. II (2008b), 205-7; for review of the academic literature on the Great Depression see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 198-217). About 40 percent of commercial banks in the US in 1929-1933, or 9440, were suspended, 79 percent of which were state banks and 21 percent national banks (Mitchener 2005, 156).
The main theme of the G20 meeting of finance ministers and governors of central banks in Paris on Feb 18-19 was the issue of global imbalances (http://www.g20.utoronto.ca/2011/2011-finance-110219-fr.html). The G20 (2011Apr15) focused at its Washington meeting on the issue of global imbalances (see Pelaez and Pelaez, The Global Recession Risk (2007), Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 180-210, Government Intervention in Globalization (2009c), 167-81). The G20 (2011Apr15) agreed in Feb on indicators for a two-step process: “These indicators are (i) public debt and fiscal deficits; and private savings rate and private debt (ii) and the external imbalance composed of the trade balance and net investment income flows and transfers, whilst taking due consideration of exchange rate, fiscal, monetary and other policies.” The G20 completed the first steep at the Apr 15 meeting by agreeing on “indicative guidelines against which each of these indicators will be assessed” (Ibid). The guidelines are not targets but rather “reference values for each available indicators allowing for identification of countries for the second step in-depth assessment” (see http://cmpassocregulationblog.blogspot.com/2011/04/fed-commodities-price-shocks-global.html). This theme has recurred over a decade (Pelaez and Pelaez, International Financial Architecture (2005), 1-62, The Global Recession Risk (2007), Globalization and the State, Vol. II (2008b) 180-213, Government Intervention in Globalization (2008c), 167-84). In a key analysis of the global imbalances, Obstfeld and Rogoff (2005, 6) find that:
“The end of the 1980s witnessed a 40 percent decline in the trade weighted dollar as the Reagan-era current account deficit closed up. Yet, the change was arguably relatively benign (though some would say that Japan’s macroeconomic response to the sharp appreciation of the yen in the late 1980s helped plant the seeds of the prolonged slump that began in the next decade). However, it may ultimately turn out that the early-1970s dollar collapse following the breakdown of the Bretton Woods system is a closer parallel. Then, as now, the United States was facing open-ended security costs, rising energy prices, a rise in retirement program costs, and the need to rebalance monetary policy.”
Historical parallels are instructive but have all the limitations of empirical research in economics. The more instructive comparisons are not with the Great Depression of the 1930s but rather with the recessions in the 1950s, 1970s and 1980s.
The growth rate and job creation in the expansion of the economy away from recession are subpar in the current expansion compared to others in the past. Four recessions are initially considered, following the reference dates of the National Bureau of Economic Research (NBER) (http://www.nber.org/cycles/cyclesmain.html ): IIQ1953-IIQ1954, IIIQ1957-IIQ1958, IIIQ1973-IQ1975 and IQ1980-IIIQ1980. The data for the earlier contractions illustrate that the growth rate and job creation in the current expansion are inferior. The sharp contractions of the 1950s and 1970s are considered in Table 1, showing the Bureau of Economic Analysis (BEA) quarter-to-quarter, seasonally adjusted (SA), yearly-equivalent growth rates of GDP. The recovery from the recession of 1953 consisted of four consecutive quarters of high percentage growth rates from IIIQ1954 to IIIQ1955: 4.6, 8.3, 12.0, 6.8 and 5.4. The recession of 1957 was followed by four consecutive high percentage growth rates from IIIQ1958 to IIQ1959: 9.7, 9.7, 8.3 and 10.5. The recession of 1973-1975 was followed by high percentage growth rates from IIQ1975 to IIQ1976: 6.9, 5.3, 9.4 and 3.0.
Table 1, Quarterly Growth Rates of GDP, % Annual Equivalent SA
| IQ | IIQ | IIIQ | IVQ | |
| 1953 | 7.7 | 3.1 | -2.4 | -6.2 |
| 1954 | -1.9 | 0.5 | 4.6 | 8.3 |
| 1955 | 12.0 | 6.8 | 5.4 | 2.3 |
| 1957 | 2.5 | -1.0 | 3.9 | -4.1 |
| 1958 | -10.4 | 2.5 | 9.7 | 9.7 |
| 1959 | 8.3 | 10.5 | -0.5 | 1.4 |
| 1973 | 10.6 | 4.7 | -2.1 | 3.9 |
| 1974 | 3.5 | 1.0 | -3.9 | 6.9 |
| 1975 | -4.8 | 3.1 | 6.9 | 5.3 |
| 1976 | 9.4 | 3.0 | 2.0 | 2.9 |
| 1979 | 0.7 | 0.4 | 2.9 | 1.1 |
| 1980 | 1.3 | -7.9 | -0.7 | 7.6 |
The NBER dates another recession in 1980 that lasted about half a year. If the two recessions from IQ1980s to IIIQ1980 and IIIQ1981 to IVQ1982 are combined, the impact on lost GDP is comparable to the revised 4.1 percent drop of the recession from IVQ2007 to IIQ2009. The recession in 1981-1982 is quite similar on its own to the 2007-2009 recession. Table 2 provides the BEA quarterly growth rates of GDP in SA yearly equivalents for the recessions of 1981-1982 and 2007 to 2009. There were four quarters of contraction in 1981-1982 ranging in rate from -1.5 percent to -6.4 percent and five quarters of contraction in 2007-2009 ranging in rate from -0.7 percent to -6.8 percent. The striking difference is that in the first seven quarters of expansion from IQ1983 to IIIQ1984, shown in Table 2 in relief, GDP grew at the high quarterly percentage growth rate of 5.1, 9.3, 8.1, 8.5, 7.1, 3.9 and 3.3 while the percentage growth rate in the first seven quarters from IIIQ2009 to IQ2011, shown in relief in Table 2, was mediocre: 1.6, 5.0, 3.7, 1.7, 2.6, 3.1 and 1.8. The data in this and the following tables incorporate the first estimate of IQ2011 by the BEA, with the growth of GDP at 1.8 percent. Inventory change contributed to initial growth but was rapidly replaced by growth in investment and demand in 1983. The key difference may be found in the negative incentive to business and household investment and business hiring from the structural shock to business models resulting from legislative restructurings and regulation with alleged benefits in the long-term but adverse short-term growth and jobs effects.
Table 2, Quarterly Growth Rates of GDP, % Annual Equivalent SA
| Q | 1981 | 1982 | 1983 | 1984 | 2008 | 2009 | 2010 |
| I | 8.6 | -6.4 | 5.1 | 7.1 | -0.7 | -4.9 | 3.7 |
| II | -3.2 | 2.2 | 9.3 | 3.9 | 0.6 | -0.7 | 1.7 |
| III | 4.9 | -1.5 | 8.1 | 3.3 | -4.0 | 1.6 | 2.6 |
| IV | -4.9 | 0.3 | 8.5 | 5.4 | -6.8 | 5.0 | 3.1 |
| 1985 | 2011 | ||||||
| I | 3.8 | 1.8 | |||||
| II | 3.4 | ||||||
| III | 6.4 | ||||||
| IV | 3.1 |
http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp4q10_3rd.pdf
The contributions to the rate of growth of GDP in percentage points (PP) are provided in Table 3. Aggregate demand, personal consumption expenditures (PCE) and gross private domestic investment (GDI) were much stronger during the expansion phase in IQ1983 to IIQ1984 than in IIIQ2009 to IQ2011.
Table 3, Contributions to the Rate of Growth of GDP in Percentage Points
| GDP | PCE | GDI | ∆ PI | Trade | GOV | |
| 2011 | ||||||
| I | 1.8 | 1.91 | 1.01 | 0.93 | -0.08 | -1.09 |
| 2010 | ||||||
| I | 3.7 | 1.33 | 3.04 | 2.64 | -0.31 | -0.32 |
| II | 1.7 | 1.54 | 2.88 | 0.82 | -3.50 | 0.80 |
| III | 2.6 | 1.67 | 1.80 | 1.61 | -1.70 | 0.79 |
| IV | 3.1 | 2.79 | -2.61 | -3.42 | 3.27 | -0.34 |
| 2009 | ||||||
| I | -4.9 | -0.34 | -6.80 | -1.09 | 2.88 | -0.61 |
| II | -0.7 | -1.12 | -2.30 | -1.03 | 1.47 | 1.24 |
| III | 1.6 | 1.41 | 1.22 | 1.10 | -1.37 | 0.33 |
| IV | 5.0 | 0.69 | 2.70 | 2.83 | 1.90 | -0.28 |
| 1982 | ||||||
| I | -6.4 | 1.62 | -7.50 | -5.47 | -0.49 | -0.03 |
| II | -2.2 | 0.90 | -0.05 | 2.35 | 0.84 | 0.50 |
| III | -1.5 | 1.92 | -0.72 | 1.15 | -3.31 | 0.57 |
| IV | 0.3 | 4.64 | -5.66 | -5.48 | -0.10 | 1.44 |
| 1983 |
|
|
|
|
|
|
| I | 5.1 | 2.54 | 2.20 | 0.94 | -0.30 | 0.63 |
| II | 9.3 | 5.22 | 5.87 | 3.51 | -2.54 | 0.75 |
| III | 8.1 | 4.66 | 4.30 | 0.60 | -2.32 | 1.48 |
| IV | 8.5 | 4.20 | 6.84 | 3.09 | -1.17 | -1.35 |
| 1984 | ||||||
| I | 8.0 | 2.35 | 7.15 | 5.07 | -2.37 | 0.86 |
| II | 7.1 | 3.75 | 2.44 | -0.30 | -0.89 | 1.79 |
| III | 3.9 | 2.02 | -0.89 | 0.21 | -0.36 | 0.62 |
| IV | 3.3 | 3.38 | 1.79 | -2.50 | -0.58 | 1.75 |
| 1985 | ||||||
| I | 3.8 | 4.34 | -2.38 | -2.94 | 0.91 | 0.95 |
Note: PCE: personal consumption expenditures; GDI: gross private domestic investment; ∆ PI: change in private inventories; Trade: net exports of goods and services; GOV: government consumption expenditures and gross investment; – is negative and no sign positive
GDP: percent change at annual rate; percentage points at annual rates
http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp4q10_3rd.pdf
Table 4 provides more detailed information on the causes of the deceleration of GDP growth from 3.1 percent in IVQ10 to 1.8 percent in IQ11. The Bureau of Economic Analysis (BEA) finds three source of contribution to GDP growth in IQ2011: (1) growth of PCE by 2.7 percent; (2) growth of exports by 4.9 percent; (3) positive contribution of private inventory investment of 0.93 PP; and (4) growth of nonresidential fixed investment (NRI) by 1.8 percent. The factors that contributed to reduction of growth in IQ2011 were: (1) decline in residential fixed incomes by 4.1 percent; (2) increase of imports by 4.4 percent, which are a deduction to GDP growth; and (3) contraction of federal and state/local government or combined government (GOV) by 5.2 percent. There are three sources causing deceleration of growth: (1) deceleration of nonresidential fixed investment (NRFI) from 7.7 percent to 1.8 percent; (2) deceleration of PCE growth from 4.0 percent in IVQ2010 to 2.7 percent in IQ2011 (with durable goods growth declining from 21.1 percent in IVQ2010 to 10.6 percent in IQ2011; (3) change of growth of 3.3 percent of RFI in IVQ2010 to -4.1 percent in IQ2011; (4) decline in growth of exports from 8.6 percent in IVQ2010 to 4.9 percent in IQ2011; (5) acceleration of decline of government consumption and expenditures (GOV) from -1.7 percent percent to negative -5.2 percent with federal government consumption and expenditures decelerating from 8.8 percent to negative 0.3 percent, caused by decline in defense expenditures, and state/local from -2/6 percent to negative 3.3 percent.
Table 4, Percentage Seasonally Adjusted Annual Equivalent Quarterly Rates of Increase
| IVQ2010 | IQ2011 | |
| GDP | 3.1 | 1.8 |
| PCE | 4.0 | 2.7 |
| Durable Goods | 21.1 | 10.6 |
| NRFI | 7.7 | 1.8 |
| RFI | 3.3 | -4.1 |
| Exports | 8.6 | 4.9 |
| Imports | -12.6 | 4.4 |
| GOV | -1.7 | -5.2 |
| Federal GOV | 8.8 | -0.3 |
| State/Local GOV | -2.6 | -3.3 |
| ∆ PI (PP) | -3.27 | 0.93 |
| Gross Domestic Purchases | -0.2 | 1.8 |
| Prices Gross Domestic Purchases | 2.1 | 3.8 |
| Prices of PCE | 1.7 | 3.8 |
| Prices of PCE Excluding Food and Energy | 0.4 | 1.5 |
| Real Disposable Personal Income | 1.9 | 2.9 |
| Personal Saving Rate | 5.6 | 5.7 |
Note: PCE: personal consumption expenditures; NRFI: nonresidential fixed investment; RFI: residential fixed investment; GOV: government consumption expenditures and gross investment; ∆ PI: change in
private inventories; GDP - ∆ PI: final sales of domestic product; PP: percentage points; Personal savings rate: savings as percent of disposable income
Source:
http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp4q10_3rd.pdf
http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp4q10_adv.pdf
Table 5 shows the percentage point (PP) contributions to the annual levels in the earlier recessions 1958-1959, 1975-1976, 1982-1983 and 2009 and 2010. The most striking contrast is in the rates of growth of annual GDP in the expansion phases of 7.2 percent in 1959, 4.5 percent in 1983 followed by 7.2 percent in 1984 and 4.1 percent in 1985 but only 2.9 percent in 2010 after six consecutive quarters of growth. The annual levels also show much stronger growth of PCEs in the expansions after the earlier contractions. PCEs contributed 1.26 PPs to GDP growth in 2010 of which 0.99 PP in goods and 0.27 PP in services. GDI deducted 3.24 PPs of GDP growth in 2009 of which -2.69 PPs by fixed investment and -0.55 PP of ∆PI and added 1.87 PPs to GDI in 2010 of which 0.48 PPs of fixed investment and 1.40 of ∆PI. Trade, or exports of goods and services net of imports, contributed 1.13 PPs in 2009 of which exports deducted 1.18 PPs and imports added 2.32 PPs. In 2010, trade deducted 0.49 PP with exports contributing 1.34 PPs and imports deducting 1.83 PPs. In 2009, Government added 0.32 PP of which 0.43 PP by the federal government and -0.11 PP by state and local government; in 2010, government added 0.21 PP of which 0.39 PP by the federal government with state and local government deducting 0.18 PP.
Table 5, Percentage Point Contributions to the Annual Growth Rate of GDP
| GDP | PCE | GDI | ∆ PI | Trade | GOV | |
| 1958 | -0.9 | 0.54 | -1.25 | -0.18 | -0.89 | 0.70 |
| 1959 | 7.2 | 3.61 | 2.80 | 0.86 | 0.00 | 0.76 |
| 1975 | -0.2 | 1.40 | -2.98 | -1.27 | 0.89 | 0.48 |
| 1976 | 5.4 | 3.51 | 2.84 | 1.41 | -1.08 | 0.10 |
| 1982 | -1.9 | 0.86 | -2.55 | -1.34 | -0.60 | 0.35 |
| 1983 | 4.5 | 3.65 | -1.45 | 0.29 | -1.35 | 0.76 |
| 1984 | 7.2 | 3.43 | 4.63 | 1.95 | -1.58 | 0.70 |
| 1985 | 4.1 | 3.32 | -0.17 | -1.06 | -0.42 | 1.41 |
| 2009 | -2.6 | -0.84 | -3.24 | -0.55 | 1.13 | 0.32 |
| 2010 | 2.9 | 1.26 | 1.87 | 1.40 | -0.49 | 0.21 |
http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp4q10_3rd.pdf
There are two types of very valuable information on income, consumption and prices in Table 6, showing monthly, quarterly and annual equivalent quarterly percentage changes, seasonally adjusted, of current dollar or nominal personal income (NPI), current dollars or nominal disposable personal income (NDPI), real or constant chained (2005) dollars DPI (RDPI), current dollars nominal personal consumption expenditures (NPCE) and constant or chained (2005) dollars PCE. First, the difference between NDPI and RDPI (NDPI/RDPI) and NPCE and RPCE (NPCE/RPCE) indicates inflation. Let the rate of inflation be π, the percentage change in nominal value NV and the change in real value rv. Then:
(1+π)(1+rv) = (1+NV) (1)
Thus, if we know (1+NV) and (1+rv), simple rearrangement of (1) provides (1+π):
(1+π) = (1+NV)/(1+rv) (2)
The growing gap between NDPI/RDPI and NPCE/RPCE is inflation and accelerating from the final quarter of 2010 to the first quarter of 2011. The gap becomes more evident in the cumulative percentages IQ2011 and IVQ2010 and their annual equivalents IQ2011 A and IVQ2010 A. The gap NDPI/RDPI in IQ2011 in Table 6 is 4.9 percent (1.074/1.024), which is much higher than in IVQ2010 of 2.4 percent (1.053/1.028). The gap NPCE/RPCE in IQ2011 in Table 6 is 4.9 percent (1.083/1.032), which is much higher than 2.4 percent (1.057/1.036) in IVQ2010. Inflation in the deflator of personal income and outlays is growing toward 5 percent per year. That is, the government is benefitting from a tax known as seigniorage. By issuing money through its central bank the government buys goods and services. In a situation of sizeable deficits and inflation, the government gains by purchasing before issuing money that causes increases in prices (see Pelaez and Pelaez, International Financial Architecture (2005), 201-12). This is a hidden but actually felt contribution of monetary accommodation to financing bloated government expenditures. The new seigniorage argument is not by increases in inflation resulting from increasing monetary aggregates but by the rise in valuations of assets such as commodities induced through the carry trade of near zero interest rates. Second, while division in quarters is arbitrary, Table 6 shows reduction in the real rates of growth of RDPI from 2.8 percent in IVQ2010 to 2.4 percent in IQ2011 and of growth of RPCE from 3.6 percent in IVQ2010 to 3.2 percent in IQ2011. There is no evidence of trend but rather the appearance of a slowing rate of growth that is captured by GDP growth of 1.8 percent in IQ2011.
Table 6, Percentage Change from Prior Month Seasonally Adjusted of Personal Income, Disposable Income and Personal Consumption Expenditures %
| NPI | NDPI | RDPI | NPCE | RPCE | |
| 2011 | |||||
| Mar | 0.5 | 0.6 | 0.1 | 0.6 | 0.2 |
| Feb | 0.4 | 0.4 | 0.0 | 0.9 | 0.5 |
| Jan | 1.1 | 0.8 | 0.5 | 0.5 | 0.1 |
| IQ2011 | 2.0 | 1.8 | 0.6 | 2.0 | 0.8 |
| IQ2011 A | 8.3 | 7.4 | 2.4 | 8.3 | 3.2 |
| 2010 | |||||
| Dec | 0.5 | 0.5 | 0.2 | 0.4 | 0.1 |
| Nov | 0.3 | 0.3 | 0.2 | 0.3 | 0.3 |
| Oct | 0.5 | 0.5 | 0.3 | 0.7 | 0.5 |
| IVQ2010 | 1.3 | 1.3 | 0.7 | 1.4 | 0.9 |
| IVQ2010 A | 5.3 | 5.3 | 2.8 | 5.7 | 3.6 |
Notes: NPI: current dollars personal income; NDPI: current dollars disposable personal income; RDPI: chained (2005) dollars DPI; NPCE: current dollars personal consumption expenditures; RPCE: chained (2005) dollars PCE; IQ11: first quarter 2011; A: annual equivalent; IVQ2010: fourth quarter 2011; A: annual equivalent
Percentage change month to month seasonally adjusted
Source: http://www.bea.gov/newsreleases/national/pi/2011/pdf/pi0311.pdf
http://www.bea.gov/newsreleases/national/pi/2011/pi0211.htm
Further information on income and consumption is provided by Table 7. The 12-month rates of increase of RDP and RPCE in the past two quarters do not show a trend of deterioration but rather very similar growth. Goods and especially durable goods have been driving growth of PCE as shown by the much higher 12-months rates of growth of real goods PCE (RPCEG) and durable goods real PCE (RPCEGD) than services real PCE (RPCES). The faster expansion of industry in the economy is derived from growth of consumption of goods and in particular of consumer durable goods while growth of consumption of services is much more moderate.
Table 7, Real Disposable Personal Income and Real Personal Consumption Expenditures Percentage Change from the Same Month a Year Earlier %
| RDPI | RPCE | RPCEG | RPCEGD | RPCES | |
| 2011 | |||||
| Mar | 2.7 | 2.7 | 4.4 | 9.3 | 1.9 |
| Feb | 2.8 | 2.9 | 5.9 | 12,8 | 1.4 |
| Jan | 2.9 | 2.8 | 5.9 | 12.2 | 1.4 |
| 2010 | |||||
| Dec | 2.2 | 2.6 | 5.5 | 10.6 | 1.2 |
| Nov | 2.5 | 2.7 | 5.4 | 10.0 | 1.4 |
| Oct | 2.6 | 2.5 | 6.0 | 12.2 | 0.9 |
Notes: RDPI: real disposable personal income; RPCE: real personal consumption expenditures (PCE); RPCEG: real PCE good; RPCEGD: RPCEG durable goods; RPCES: RPCE services
Numbers are percentage changes from the same month a year earlier
Source: http://www.bea.gov/newsreleases/national/pi/2011/pdf/pi0311.pdf
III Global Inflation. There is inflation everywhere in the world economy, with slow growth and persistently high unemployment in advanced economies. Table 8, 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). CPI inflation accelerated to 5.4 percent in China and to 2.8 percent in the euro zone that has already increased interest rates. Food prices in China soared by 11.7 percent in Mar after 11.0 percent in Feb, 10.3 percent in Jan and 9.6 percent in Dec (http://www.ft.com/cms/s/0/69aa5fcc-670d-11e0-8d88-00144feab49a.html#axzz1J7CmnPhC). PPI inflation accelerated in Japan to 2.0 percent. EUROSTAT provides a flash estimate of 2.8 percent inflation in the Monetary Union (euro area) Index of Consumer prices for Apr (http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-29042011-BP/EN/2-29042011-BP-EN.PDF). The euro area unemployment rate is estimated at 9.9 percent (http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/3-29042011-AP/EN/3-29042011-AP-EN.PDF). 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 (see section IV in http://cmpassocregulationblog.blogspot.com/2011/04/budget-quagmire-fed-commodities_10.html); (2) the tradeoff of growth and inflation in China; (3) slow growth (see http://cmpassocregulationblog.blogspot.com/2011_03_01_archive.html http://cmpassocregulationblog.blogspot.com/2011/02/mediocre-growth-raw-materials-shock-and.html), weak hiring (http://cmpassocregulationblog.blogspot.com/2011/03/slow-growth-inflation-unemployment-and.html and section III Hiring Collapse in http://cmpassocregulationblog.blogspot.com/2011/04/fed-commodities-price-shocks-global.html ) and continuing job stress of 24 to 30 million people in the US and stagnant wages in a fractured job market (http://cmpassocregulationblog.blogspot.com/2011/04/twenty-four-to-thirty-million-in-job_03.html 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 8, GDP Growth, Inflation and Unemployment in Selected Countries, Percentage Annual Rates
| GDP | CPI | PPI | UNE | |
| US | 2.9 | 2.7 | 5.8 | 8.8 |
| Japan | 2.5 | 0.0 | 2.0 | 4.6 |
| China | 9.7 | 5.4 | 7.3 | |
| UK | 1.8 | 4.0* | 5.4* output | 8.0 |
| Euro Zone | 2.0 | 2.8 | 6.6 | 9.9 |
| Germany | 4.0 | 2.4 | 6.3 | 6.3 |
| France | 1.5 | 2.2 | 6.6 | 9.6 |
| Nether-lands | 2.4 | 2.0 | 10.3 | 4.2 |
| Finland | 5.0 | 3.5 | 7.7 | 8.2 |
| Belgium | 1.8 | 3.5 | 10.2 | 7.7 |
| Portugal | 1.2 | 3.9 | 6.4 | 11.1 |
| Ireland | -1.0 | 1.2 | 3.9 | 14.9 |
| Italy | 1.5 | 2.6 | 6.1 | 8.4 |
| Greece | -6.6 | 4.3 | 8.7 | 15.1 |
| Spain | 0.6 | 3.5 | 7.6 | 21.3 |
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
*Mar Office for National Statistics
PPI http://www.statistics.gov.uk/pdfdir/ppi0411.pdf
CPI http://www.statistics.gov.uk/pdfdir/cpi0411.pdf
** Feb EUROSTAT http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-04042011-AP/EN/4-04042011-AP-EN.PDF
Source: EUROSTAT; country statistical sources http://www.census.gov/aboutus/stat_int.html
Table 9 provides data on the fiscal situation of the euro area, European Union, various member countries of the euro area, UK and US. Most countries need consolidation to reduce their budget deficits and growing debts. The adjustment is harder for countries growing more slowly or even negatively because of the difficulty in increasing revenues that depend on income growth. Government outlays are tied to mandatory programs, creating difficult choices in consolidation strategies. Sovereign risk issues may return to plague financial markets. Higher world inflation can raise borrowing costs at a time of budget and debt pressures.
Table 9, Government Outlays, Revenue, Deficit and Debt As Percent of GDP 2010 %
| Gvt Outlays | Gvt Revenue | Govt Balance | Govt Debt | |
| Euro Area | 50.4 | 44.4 | -6.0 | 85.1 |
| European Union | 50.3 | 44.0 | -6.4 | 80.0 |
| Germany | 46.6 | 43.3 | -3.3 | 83.2 |
| France | 56.2 | 49.2 | -7.0 | 81.7 |
| Nether- lands | 51.2 | 45.9 | -5.4 | 62.7 |
| Finland | 55.1 | 52.3 | -2.5 | 48.4 |
| Belgium | 53.1 | 48.9 | -4.1 | 96.8 |
| Portugal | 50.7 | 41.5 | -9.1 | 93.0 |
| Ireland | 67.0 | 34.6 | -32.4 | 96.2 |
| Italy | 50.5 | 46.0 | -4.6 | 119.0 |
| Greece | 49.5 | 39.1 | -10.5 | 142.8 |
| Spain | 45.0 | 35.7 | -9.2 | 60.1 |
| UK | 50.9 | 40.6 | -10.4 | 80.0 |
| US 2010 | 23.8 | 14.9 | -8.9 | 62.1 |
| US 2012 | 23.3 | 16.3 | -7.0 | 73.9 |
Note: Govt: government
Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-26042011-AP/EN/2-26042011-AP-EN.PDF
http://www.cbo.gov/ftpdocs/120xx/doc12085/03-10-ReducingTheDeficit.pdf
III Monetary Policy. There are now two types of information on policy by the Federal Open Market Committee of the Federal Reserve. First, there is a statement on Apr 27 of the FOMC meeting (http://www.federalreserve.gov/newsevents/press/monetary/20110427a.htm
). The analysis of the economy by the FOMC is as follows (Ibid):
“Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The unemployment rate remains elevated, and measures of underlying inflation continue to be somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Increases in the prices of energy and other commodities have pushed up inflation in recent months. The Committee expects these effects to be transitory, but it will pay close attention to the evolution of inflation and inflation expectations. The Committee continues to anticipate a gradual return to higher levels of resource utilization in a context of price stability.”
On the basis of the evaluation of the economy, the FOMC decided as follows (Ibid):
“To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to continue expanding its holdings of securities as announced in November. In particular, the Committee is maintaining its existing policy of reinvesting principal payments from its securities holdings and will complete purchases of $600 billion of longer-term Treasury securities by the end of the current quarter. The Committee will regularly review the size and composition of its securities holdings in light of incoming information and is prepared to adjust those holdings as needed to best foster maximum employment and price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.”
A key phrase in the statement is the continuing policy of “reinvesting principal payments from its securities holdings.” Another important wording is that the Fed “will complete purchases of $600 billion of longer-term Treasury securities by the end of the current quarter” (http://blogs.wsj.com/economics/2011/04/27/parsing-the-fed-how-the-statement-changed-15/). The interpretation is that the Fed will complete the purchase of $600 billion long-term securities by Jun 2011 and will indefinitely reinvest interest and maturing principal in new purchases of long-term securities. The phrase “extended period” means that fed funds rates will remain at 0 to ¼ percent until the FOMC finds different conditions in the economy and financial markets.
Second, the Chairman of the FOMC now provides a statement to the public and answers questions from members of the press in a televised interview that is available at the FRB site (http://www.federalreserve.gov/). As part of this new effort of transparency, the Fed provides the economic projections of the FOMC (http://www.federalreserve.gov/newsevents/press/monetary/fomcprojtabl20110427.pdf). There was widespread interest in the statement by Chairman Bernanke that a strong dollar is in the interest of both the US and the global economy (http://www.ft.com/cms/s/0/dcc7f60a-70ee-11e0-962a-00144feabdc0.html#axzz1KWuDCYRg). While the Fed does not view rising inflation that would be currently subdued with anchored inflationary expectations, it remains ready to act in case of a change in the inflation environment (Ibid, http://professional.wsj.com/article/SB10001424052748704099704576289030398644312.html?mod=WSJPRO_hpp_LEFTTopStories).
The 12-month rates of increase of PCE price indexes are shown in Table 10. Headline 12-month PCE inflation (PCE) has accelerated from slightly over 1 percent in the latter part of 2010 to 1.8 percent in Mar. The Fed uses PCE inflation excluding food and energy (PCEX) on the basis of research showing that current PCEX is a better indicator of headline PCE a year ahead than current headline PCE inflation. The explanation is that commodity price shocks are “mean reverting,” returning to their long-term means after spiking during shortages caused by climatic factors, geopolitical events and the like. Inflation of PCE goods (PCEG) has accelerated sharply, in spite of 12-month declining inflation of PCE durable goods (PCEG-D) while PCE services inflation (PCES) has remained around 1.2 to 1.3 percent. The last two columns of Table 10 show PCE food inflation (PCEF) and PCE energy inflation (PCEE) that have been rising sharply, especially for energy. The Fed expects these increases to revert with its indicator PCEX returning to levels that are acceptable for continuing monetary accommodation.
Table 10, Percentage Change in 12 Months of Prices of Personal Consumption Expenditures
| PCE | PCEG | PCEG -D | PCES | PCEX | PCEF | PCEE | |
| 2011 | |||||||
| Mar | 1.8 | 3.0 | -1.6 | 1.3 | 0.9 | 2.9 | 15.3 |
| Feb | 1.6 | 2.1 | -1.4 | 1.3 | 0.9 | 2.4 | 11.1 |
| Jan | 1.2 | 1.2 | -1.9 | 1.2 | 0.8 | 1.7 | 6.7 |
| 2010 | |||||||
| Dec | 1.1 | 1.0 | -2.2 | 1.2 | 0.7 | 1.2 | 7.4 |
| Nov | 1.0 | 0.6 | -2.0 | 1.3 | 0.8 | 1.3 | 4.0 |
| Oct | 1.2 | 0.8 | -1.8 | 1.4 | 0.9 | 1.3 | 6.3 |
| Sep | 1.3 | 0.5 | -1.4 | 1.7 | 1.1 | 1.3 | 4.2 |
| Aug | 1.4 | 0.6 | -1.0 | 1.7 | 1.2 | 0.7 | 4.0 |
Notes: percentage changes in price index relative to the same month a year earlier of PCE: personal consumption expenditures; PCEG: PCE goods; PCEG-D: PCE durable goods; PCEX: PCE excluding food and energy; PCEF: PCE food; PCEE: PCE energy goods and services
Source: http://www.bea.gov/newsreleases/national/pi/2011/pdf/pi0311.pdf
The role of devil’s advocate is played by data in Table 11. Headline PCE inflation (PCE) has jumped to 1.1 percent cumulative in IQ11, which is equivalent to 4.5 percent annual, with PCEG jumping to 2.4 percent cumulative and 10.0 annual equivalent, PCEG-D rising 0.3 percent cumulative or 1.2 percent annual, and PCES, PCEX and PCEF all rising to 0.5 percent or 2.0 annual. PCEE has risen to 9.8 percent cumulative or 45.3 percent annual equivalent.
Table 11, Monthly and Quarterly PCE Inflation and Annual Equivalent IQ11 and IVQ10 %
| PCE | PCEG | PCEG -D | PCES | PCEX | PCEF | PCEE | |
| 2011 | |||||||
| IQ11 | 1.1 | 2.4 | 0.3 | 0.5 | 0.5 | 0.5 | 9.8 |
| IQ11 A | 4.5 | 10.0 | 1.2 | 2.0 | 2.0 | 2.0 | 45.3 |
| Mar | 0.4 | 0.8 | 0.0 | 0.2 | 0.1 | 0.1 | 3.7 |
| Feb | 0.4 | 0.8 | 0.2 | 0.2 | 0.2 | 0.2 | 3.5 |
| Jan | 0.3 | 0.8 | 0.1 | 0.1 | 0.2 | 0.2 | 2.3 |
| IVQ10 | 0.6 | 1.0 | -0.9 | 0.3 | 0.1 | 0.1 | 7.0 |
| IVQ10 A | 2.4 | 4.1 | -3.5 | 1.2 | 0.4 | 0.4 | 31.1 |
| Dec | 0.3 | 0.6 | -0.3 | 0.1 | 0.0 | 0.0 | 4.1 |
| Nov | 0.1 | 0.0 | -0.3 | 0.1 | 0.1 | 0.1 | 0.1 |
| Oct | 0.2 | 0.4 | -0.2 | 0.1 | 0.0 | 0.0 | 2.7 |
Notes: percentage changes in a month relative to the same month for the same symbols as in Table. 1Q11: cumulative for Jan-Mar 2011; 1Q11 A: 1Q11 annual equivalent rate; 4Q10: cumulative for Oct-Dec 2010; 4Q10: annual equivalent rate
Source: http://www.bea.gov/newsreleases/national/pi/2011/pdf/pi0311.pdf
The prices paid index of the Chicago ISM survey fell 1.5 percentage points from 83.5 in Mar to 82 in Apr. The percentage of higher prices paid declined from 70 in Mar to 65 in Apr while the percentage of same prices paid rose from 27 to 35 and that of lower prices fell from 3 to 1 (https://www.ism-chicago.org/chapters/ism-ismchicago/files/ISM-CApril2011.pdf). The Thomson Reuters University of Michigan Survey of Consumers for Apr shows inflationary expectations of 4.6 percent in the next 12 months, the same as in the Mar survey and 2.9 percent for the next five years versus 3.2 percent in Mar (http://noir.bloomberg.com/apps/news?pid=newsarchive&sid=aWoDjyx9TjUM https://customers.reuters.com/community/university/default.aspx). The Weekly Petroleum Status Report of the US Energy Information Agency finds an increase in the national average retail regular gasoline price of $0.035/gallon to $3.879/gallon on Apr 25, 2011, which is $1.030 above the price a year earlier (http://www.eia.doe.gov/pub/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/current/pdf/highlights.pdf).
An important argument advanced in favor of current monetary policy is that inflation is unlikely to pick up because the weak labor market and idle capacity in the economy would not permit increases in wages and salaries and non-labor inputs that can be passed on as increases in consumer prices. Table 12 provides the evidence available from the employment cost index (ECI) of the Bureau of Labor Statistics (BLS). Monthly changes seasonally adjusted are provided for IVQ10 and IQ11 and 12 months changes not seasonally adjusted are provided for Dec 2010 and Mar 2011. There are three categories: private industry, state/local and civilian that is a combination of private and state/local. Increases in wages and salaries are 1.6 percent in 12 months for the civilian aggregate and 1.6 percent in the 12 months ending in Mar 2011 for the private sample. Benefits have been rising at higher 12 months and quarterly rates, around 3 percent, while health benefits rose at 5.0 percent in the 12 months ending in Dec 2010 and 3.4 percent in the 12 months ending in Mar 2011.
Table 12, Employment Cost Index Quarterly and 12 Months Changes %
| IVQ10 SA | IQ11 SA | 12 months Dec 10 NSA | 12 months Mar 11 NSA | |
| Civilian | ||||
| Comp | 0.4 | 0.6 | 2.0 | 2.0 |
| Wages/ Salaries | 0.4 | 0.4 | 1.6 | 1.6 |
| Benefits | 0.5 | 1.1 | 2.9 | 3.0 |
| Private | ||||
| Comp | 0.5 | 0.5 | 2.1 | 2.0 |
| Wages/ Salaries | 0.4 | 0.4 | 1.8 | 1.6 |
| Benefits | 0.5 | 1.2 | 2.9 | 3.0 |
| Health Benefits | 5.0 | 3.4 | ||
| State local Govt | ||||
| Comp | 0.5 | 0.5 | 1.8 | 1.8 |
| Wages/ Salaries | 0.4 | 0.4 | 1.2 | 1.2 |
| Benefits | 0.7 | 0.9 | 2.9 | 3.3 |
Notes: Civilian includes private industry plus state and local government; SA: seasonally adjusted; NSA: not seasonally adjusted; Comp: compensation; Govt: government
Source: http://www.bls.gov/news.release/pdf/eci.pdf
http://www.bls.gov/ect/sp/echealth.pdf
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 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 13, which consists of simulating current monetary and fiscal policies in doses much more aggressive than in the 1960s and 1970s proposed as a true rose garden without thorns (http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html). What would have been the Great Inflation and Unemployment 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 unknown path of the US debt, tax and interest rate increases to exit from unsustainable debt and the largest monetary accommodation in US history. In one of his multiple important contributions to the Great Inflation, Meltzer (2005) distinguishes between one-time price jumps, such as by oil shocks, and a “maintained” inflation rate. Meltzer (2005) uses a dummy variable to extract the one-time oil price changes, resulting in a maintained inflation rate that was never higher than 8 to 10 percent in the 1970s. There is revealing analysis of the Great Inflation and its reversal by Meltzer (2005, 2010a, 2010b).
Table 13, 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
There is a false impression that there is a monetary policy “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 14 when monetary policy 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 14 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 13 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 that ended with the rate hike that reached 22.36 percent for fed funds on Jul 22, 1981 and the Great Bond Crash of 1994.
Table 14, 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.t
Table 15, 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 15. 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 3.290 percent at the close of market on Apr 29, 2011, would be equivalent to price of 93.3759 in a hypothetical bond maturing in 10 years with coupon of 2.625 percent for price loss of 6.8 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 credit issues. Important causes of the rise in yields shown in Table 15 are expectations of rising inflation and US government debt estimated to exceed 70 percent of GDP in 2012 (http://cmpassocregulationblog.blogspot.com/2011/02/policy-inflation-growth-unemployment.html), rising from 40.8 percent of GDP in 2008 and 53.2 percent in 2009 (Table 2 in http://cmpassocregulationblog.blogspot.com/2011/04/budget-quagmire-fed-commodities_10.html). On Apr 27, the line “Reserve Bank credit” in the Fed balance sheet stood at $2657 billion, or $2.7 trillion, with portfolio of long-term securities of $2441 billion, or $2.4 trillion, consisting of $1330 Treasury nominal notes and bonds, $58 billion of notes and bonds inflation-indexed, $126 billion Federal agency debt securities and $927 billion mortgage-backed securities; reserve balances deposited with Federal Reserve Banks reached $1449 billion or $1.4 trillion (http://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1). There is no simple exit of this trap created by the highest monetary policy accommodation in US history together with the highest deficits and debt in percent of GDP since World War II.
Table 15, 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 |
| 04/08/11 | 3.576 | 92.0635 | -9.1 |
| 04/15/11 | 3.411 | 93.3874 | -7.8 |
| 04/22/11 | 3.402 | 93.4646 | -7.7 |
| 04/29/11 | 3.290 | 94.3759 | -6.8 |
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
Standard & Poor’s (2011Apr18) provides an explanation of its decision to classify the US sovereign debt outlook as “negative” while affirming the AAA rating for long-term debt and the A-+ rating for short-term debt. The reason for revision of the outlook to negative is that Standard & Poor’s finds that “there is a material risk that efforts to reduce future U.S. government budget deficits will fall well below $4 trillion and $4.4 trillion medium-term targets that Congressional leaders and the Administration separately set out earlier this month” (Ibid, 2). Credibility of the proposed reductions would require “support from a cross-section of leaders in both parties” (Ibid, 3). In the view of Standard & Poor’s, US primary general deficits, including federal, state and local while excluding interest payments, propel a steeper path of US government debt than that of other G7 countries with AAA rating even if they all start from a comparable current position.
IV Trends and Cycles of Valuations of Risk Financial Assets. Near zero interest rates encourage the carry trade of borrowing at extremely low short-term rates and taking long positions in risk financial assets such as commodities, currencies, stocks and so on. Families, investors and most everybody worldwide were encouraged to benefit from the low interest rates originating in Fed policy of 1 percent fed funds rate in 2003-2004 and housing subsidies by borrowing significantly or high leverage, ignoring potential future adverse events or taking high risks, investing fully or having little or no cash assets or low liquidity and induced easy lending or taking unsound credit decisions. The carry trade of borrowing at extremely low short-term rates and taking long positions in risk financial assets is shown in Table 16 in the form of high valuations in most risk financial assets and then eventual collapse in the form of the credit/dollar crisis and global recession after 2007. The financial crisis and global recession were caused by interest rate and housing 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)).
Table 16, 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 | 04/29 |
| Rate | 1.1423 | 1.5914 | 1.192 | 1.480 |
| CNY/USD | 01/03 | 07/21 | 7/15 | 04/29 |
| Rate | 8.2798 | 8.2765 | 6.8211 | 6.491 |
| 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
Table 16A extracts four rows of Table 16 with the Dollar/Euro (USD/EUR) exchange rate and Chinese Yuan/Dollar (CNY/USD) exchange rate that reveal pursuit of exchange rate policies resulting from monetary policy in the US and capital control/exchange rate policy in China. The ultimate intentions are the same: promoting internal economic activity at the expense of the rest of the world. The easy money policy of the US was deliberately or not but effectively to devalue the dollar from USD 1.1423/EUR on Jun 26, 2003 to USD 1.5914/EUR on Jul 14, 2008, or by 39.3 percent. The flight into dollar assets after the global recession caused revaluation to USD 1.192/EUR on Jun 7, 2010, or by 24.2 percent. After the temporary interruption of the sovereign risk issues in Europe from Apr to Jul, 2010, shown in Table 18, the dollar has devalued again to USD 1.480/EUR or by 24.2 percent. Yellen (2011AS, 6) admits that Fed monetary policy results in dollar devaluation with the objective of increasing net exports, which was the policy that Joan Robinson (1947) labeled as “beggar-my-neighbor” remedies for unemployment. China fixed the CNY to the dollar for a long period at a highly undervalued level of around CNY 8.2765/USD until it revalued to CNY 6.8211/USD until Jun 7, 2010, or by 17.6 percent and after fixing it again to the dollar, revalued to CNY 6.4910/USD on Apr 29, 2011, or by an additional 4.8 percent, for cumulative revaluation of 21.6 percent.
Table 16A, Dollar/Euro (USD/EUR) Exchange Rate and Chinese Yuan/Dollar (CNY/USD) Exchange Rate
| USD/EUR | 6/26/03 | 7/14/08 | 6/07/10 | 04/29 |
| Rate | 1.1423 | 1.5914 | 1.192 | 1.480 |
| CNY/USD | 01/03 | 07/21 | 7/15 | 04/29 |
| Rate | 8.2798 | 8.2765 | 6.8211 | 6.491 |
Source: Table 9.
Dollar devaluation did not eliminate the US current account deficit, which is projected by the International Monetary Fund (IMF) at 3.2 percent of GDP in 2011 and also in 2012, as shown in Table 17. Revaluation of the CNY has not reduced the current account surplus of China, which is projected by the IMF to increase from 5.7 percent of GDP in 2011 to 6.3 percent of GDP in 2012, as shown in Table 17.
Table 17, Fiscal Deficit, Current Account Deficit and Government Debt as % of GDP and 2011 Dollar GDP
| GDP $B | FD %GDP 2011 | CAD %GDP 2011 | Debt %GDP 2011 | FD%GDP 2012 | CAD%GDP 2012 | Debt %GDP 2012 | |
| US | 15227 | -10.6 | -3.2 | 64.8 | -10.8 | -3.2 | 72.4 |
| Japan | 5821 | -9.9 | 2.3 | 127.8 | -8.4 | 2.3 | 135.1 |
| UK | 2471 | -8.6 | -2.4 | 75.1 | -6.9 | -1.9 | 78.6 |
| Euro | 12939 | -4.4 | 0.03 | 66.9 | -3.6 | 0.05 | 68.2 |
| Ger | 3519 | -2.3 | 5.1 | 54.7 | -1.5 | 4.6 | 54.7 |
| France | 2751 | -6.0 | -2.8 | 77.9 | -5.0 | -2.7 | 79.9 |
| Italy | 2181 | -4.3 | -3.4 | 100.6 | -3.5 | -2.9 | 100.4 |
| Can | 1737 | -4.6 | -2.8 | 35.1 | -2.8 | -2.6 | 36.3 |
| China | 6516 | -1.6 | 5.7 | 17.1 | -0.9 | 6.3 | 16.3 |
| Brazil | 2090 | -2.4 | -2.6 | 39.9 | -2.6 | -2.9 | 39.4 |
Note: GER = Germany; Can = Canada; FD = fiscal deficit; CAD = current account deficit
Source: http://www.imf.org/external/pubs/ft/weo/2011/01/weodata/index.aspx
There is a new carry trade that learned from the losses after the crisis of 2007 or learned from the crisis how to avoid losses. The sharp rise in valuations of risk financial assets shown in Table 16 after the first policy round of near zero fed funds and quantitative easing by withdrawing supply with the suspension of the 30-year Treasury auction was on a smooth trend with relatively subdued fluctuations. The credit crisis and global recession have been followed by significant fluctuations originating in sovereign risk issues in Europe, doubts of continuing high growth and accelerating inflation in China, events such as in the Middle East and Japan and legislative restructuring, regulation, insufficient growth, low wages, depressed hiring and high job stress of unemployment and underemployment in the US. The “trend is your friend” motto of traders has been replaced with a “hit and realize profit” approach of managing positions to realize profits without sitting on positions. There is a trend of valuation of risk financial assets with fluctuations provoked by events of risk aversion. Table 18, which is updated for every comment, shows the deep contraction of risk financial assets after the Apr 2010 sovereign risk issues in the fourth column “∆% to Trough” and the sharp recovery after around Jul 2010 in the last column “∆% Trough to 4/29/11” with all risk financial assets in the range from 15.9 percent for European stocks to 41.5 percent for commodities, excluding Japan that has currently weaker performance because of the earthquake/tsunami, while the dollar devalued by 24.2 percent and even higher before the new bout of sovereign risk issues in Europe. Aggressive tightening by the Fed to maintain the credibility of inflation not rising above 2 percent—in contrast with timid “measured” policy during the adjustment in Jun 2004 to Jun 2006 after the earlier round of near zero interest rates—may cause another credit/dollar crisis and stress on the overall world economy. The choices may prove tough and will magnify effects on financial variables because of the corner in which policy has been driven by aggressive impulses that have resulted in the fed funds rate of 0 to ¼ percent and holdings by the Fed that move toward 30 percent of Treasury securities in circulation.
Table 18, Stock Indexes, Commodities, Dollar and 10-Year Treasury
| Peak | Trough | ∆% to Trough | ∆% Peak to 4/ | ∆% Week 4/ | ∆% Trough to 4/ | |
| DJIA | 4/26/ | 7/2/10 | -13.6 | 14.3 | 2.4 | 32.3 |
| S&P 500 | 4/23/ | 7/20/ | -16.0 | 12.0 | 1.9 | 33.4 |
| NYSE Finance | 4/15/ | 7/2/10 | -20.3 | -1.6 | 1.9 | 23.6 |
| Dow Global | 4/15/ | 7/2/10 | -18.4 | 8.1 | 2.2 | 32.4 |
| Asia Pacific | 4/15/ | 7/2/10 | -12.5 | 9.0 | 0.5 | 24.5 |
| Japan Nikkei Aver. | 4/05/ | 8/31/ | -22.5 | -13.5 | 1.7 | 11.6 |
| China Shang. | 4/15/ | 7/02 | -24.7 | -8.0 | -3.3 | 22.2 |
| STOXX 50 | 4/15/10 | 7/2/10 | -15.3 | -1.9 | 1.3 | 15.9 |
| DAX | 4/26/ | 5/25/ | -10.5 | 18.7 | 3.0 | 32.5 |
| Dollar | 11/25 2009 | 6/7 | 21.2 | 2.2 | -1.7 | -24.2 |
| DJ UBS Comm. | 1/6/ | 7/2/10 | -14.5 | 20.9 | 0.7 | 41.5 |
| 10-Year Tre. | 4/5/ | 4/6/10 | 3.986 | 3.290 |
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.
Bernanke (2010WP) and Yellen (2011AS) reveal the emphasis by the Fed on the impact of the rise of stock market valuations in stimulating consumption by wealth effects on household confidence. Table 19 shows a gain in the DJIA of 14.3 percent and of the S&P 500 of 12.5 percent since Apr 26 around the time when sovereign risk issues in Europe began to be acknowledged in financial risk asset valuations. There were still fluctuations. Reversals of valuations are possible during aggressive changes in interest rate policy.
Table 19, Percentage Changes of DJIA and S&P 500 in Selected Dates
| 2010 | ∆% DJIA from earlier date | ∆% DJIA from | ∆% S&P 500 from earlier date | ∆% S&P 500 from |
| 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 |
| Apr 8 | 0.03 | 10.5 | -0.3 | 9.6 |
| Apr 15 | -0.3 | 10.1 | -0.6 | 8.9 |
| Apr 22 | 1.3 | 11.6 | 1.3 | 10.3 |
| Apr 29 | 2.4 | 14.3 | 1.9 | 12.5 |
Source: http://online.wsj.com/mdc/public/page/mdc_us_stocks.html?mod=mdc_topnav_2_3004
Table 20, updated with every post, shows that exchange rate valuations affect a large variety of countries, in fact, almost the entire world, in magnitudes that cause major problems for domestic monetary policy and trade flows. Dollar devaluation is expected to continue because of zero fed funds rate, expectations of rising inflation and the large budget deficit of the federal government (http://professional.wsj.com/article/SB10001424052748703907004576279321350926848.html?mod=WSJ_hp_LEFTWhatsNewsCollection).
Table 20, Exchange Rates
| Peak | Trough | ∆% P/T | Apr 29 2011 | ∆T | ∆% P | |
| EUR USD | 7/15 | 6/7 2010 | 4/29 | |||
| Rate | 1.59 | 1.192 | 1.480 | |||
| ∆% | -33.4 | 19.5 | -7.4 | |||
| JPY USD | 8/18 | 9/15 | 4/29 2011 | |||
| Rate | 110.19 | 83.07 | 81.17 | |||
| ∆% | 24.6 | 2.3 | 26.3 | |||
| CHF USD | 11/21 2008 | 12/8 2009 | 4/29 2011 | |||
| Rate | 1.225 | 1.025 | 0.868 | |||
| ∆% | 16.3 | 15.3 | 29.1 | |||
| USD GBP | 7/15 | 1/2/ 2009 | 4/29 2011 | |||
| Rate | 2.006 | 1.388 | 1.671 | |||
| ∆% | -44.5 | 16.9 | -20.0 | |||
| USD AUD | 7/15 2008 | 10/27 2008 | 4/29 | |||
| Rate | 1.0215 | 1.6639 | 1.097 | |||
| ∆% | -62.9 | 45.2 | 10.8 | |||
| ZAR USD | 10/22 2008 | 8/15 | 4/29 2011 | |||
| Rate | 11.578 | 7.238 | 6.556 | |||
| ∆% | 37.5 | 9.4 | 43.4 | |||
| SGD USD | 3/3 | 8/9 | 4/29 | |||
| Rate | 1.553 | 1.348 | 1.224 | |||
| ∆% | 13.2 | 9.2 | 21.2 | |||
| HKD USD | 8/15 2008 | 12/14 2009 | 4/29 | |||
| Rate | 7.813 | 7.752 | 7.766 | |||
| ∆% | 0.8 | -0.2 | 0.6 | |||
| BRL USD | 12/5 2008 | 4/30 2010 | 4/29 2011 | |||
| Rate | 2.43 | 1.737 | 1.574 | |||
| ∆% | 28.5 | 9.3 | 35.2 | |||
| CZK USD | 2/13 2009 | 8/6 2010 | 4/29 | |||
| Rate | 22.19 | 18.693 | 16.313 | |||
| ∆% | 15.7 | 12.7 | 26.5 | |||
| SEK USD | 3/4 2009 | 8/9 2010 | 4/29 2011 | |||
| Rate | 9.313 | 7.108 | 6.037 | |||
| ∆% | 23.7 | 15.1 | 35.2 | |||
| CNY USD | 7/20 2005 | 7/15 | 4/29 | |||
| Rate | 8.2765 | 6.8211 | 6.4910 | |||
| ∆% | 17.6 | 4.8 | 21.6 |
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
V Economic Indicators. Industry continues to drive the moderate expansion of the US economy. The housing sector continues in recessive conditions. Labor markets are still weak. The Business Barometer index of the Chicago ISM fell by 3 points from 70.6 in Mar to 67.6 in Apr, still showing robust expansion. New orders also declined by 3 points from 61 in Mar to 58 in Apr, also still showing strong expansion (https://www.ism-chicago.org/chapters/ism-ismchicago/files/ISM-CApril2011.pdf). Manufacturers’ new orders for durable goods continue strong growth (http://www.census.gov/manufacturing/m3/adv/pdf/durgd.pdf). Table 21 shows increases, seasonally adjusted, of 2.5 percent in Mar relative to Feb, 0.7 percent, and Jan relative to Dec of 3.7 percent. New orders excluding transportation rose 1.3 percent in Mar, 0.6 percent in Feb but declined 2.9 percent in Jan. Excluding defense new order increased 2.3 percent in Mar, 2.0 percent in Feb and 2.9 percent in Jan. Not seasonally adjusted first quarter new orders of durable goods in 2011 were quite high relative to first quarter orders in 2010: 9.6 percent for new orders, 9.6 percent excluding transportation and 11.5 percent excluding defense. These data are not adjusted for inflation such that an increasing proportion of growth is price appreciation.
Table 21, Advanced Report Manufacturers’ New Orders for Durable Goods Not Adjusted for Inflation %
| Mar 11 SA ∆% Feb 11 | Feb 11 SA ∆% Jan 11 | Jan 11 SA ∆% Dec 10 | ∆% NSA IQ11/1Q10 | |
| New Orders | 2.5 | 0.7 | 3.7 | 9.6 |
| Ex Transport | 1.3 | 0.6 | -2.9 | 9.6 |
| Ex Defense | 2.3 | 2.0 | 2.9 | 11.5 |
Note: SA: seasonally adjusted; NSA: not seasonally adjusted
Source: http://www.census.gov/manufacturing/m3/adv/pdf/durgd.pdf
The Weekly Petroleum Status Report of the U.S. Energy Information Agency for Apr 22 finds average weekly oil imports of crude oil in the prior week of 9.3 million barrels per day or 1.2 million barrels per day higher than the earlier week. Crude oil imports averaged 8.7 million barrels per day in the past four weeks, which is higher by 724,000 barrels per day than in the earlier four-week period. US commercial crude inventories, excluding the Strategic Petroleum Reserve rose by 6.2 million barrels to reach 363.1 million barrels (http://www.eia.doe.gov/pub/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/current/pdf/highlights.pdf).
Table 22 shows the decline in the S&P Case-Shiller Home Price Indices not seasonally adjusted by 2.6 percent for the 10-city composite and 3.3 percent for the 20-city composite in Feb 2011 relative to Feb 2010. The 10-city composite is 31.5 percent lower in Feb 2011 than in Mar 2006 and the 20-city composite is 31.4 percent lower than in Mar 2006. The final two columns of Table 22 reveal the effects of housing subsidies and near zero interest rates in increasing the prices of home by 56.0 percent in 2003 to 2006 in the 10-city composite and by 50.1 percent in the 20-city composite. The increase in home prices from Feb 2000 to Feb 2006 was 42.4 percent in the 10-city composite and 35.2 percent in the 20-city composite, reflecting the policy of housing subsidy and housing affordability that led to the depressed existing conditions in real estate in the US. The S&P Case Schiller indices show that there was only one city, Washington, D.C., with an increase in home prices, 2.7 percent, in Feb 2011 relative to Feb 2010 (http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpidff--p-us----). There were new lows in Feb in home prices in ten of the 11 cities with new low in prices in Jan with the exception in Detroit where prices rose 1.0 percent. The 20-city composite is about the same as the low of Apr 2009 (Ibid).
Table 22, Percentage Changes of the 10 Cities and 20 Cities S&P/Case-Shiller Home Price Indices Not Seasonally Adjusted
| ∆% 2/2010 to 2/2011 | ∆% 3/2006 to 3/2011 | ∆% 2/2003 t0 3/2006 | ∆% 2/2000 to 2/2006 | |
| 10 cities | -2.6 | -31.5 | 56.0 | 42.4 |
| 20 cities | -3.3 | -31.4 | 50.1 | 35.2 |
The seasonally-adjusted annual rate of sales of new single-family houses in Mar 2011 was 300,000, which is 11.1 percent higher than the rate of 270,000 in Feb but 21.9 percent lower than the estimate of 384,000 in Mar 2010 (http://www.census.gov/const/newressales.pdf). Table 23 shows that new home sales not seasonally adjusted fell by 17.4 percent in the first quarter of 2011 relative to the first quarter of 2010 and by 75.1 percent relative to the first quarter of 2006 and by 78.4 percent relative to the first quarter of 2005. The first-quarter not seasonally adjusted median price of new homes sold in 2011 of $214,000 was 4.9 percent lower than $225,000 in 2010 and 10.5 percent lower than in 2006 and 6.6 percent lower than in 2005.
Table 23, Sales of First Quarter New Houses and Median Price of Houses Not Seasonally Adjusted in Thousands of Units and Thousands of Current Dollars
| 2011 | 2010 | ∆% 2011 | 2006 | ∆% 2011 | 2005 | ∆% 2011 | |
| Sales | 71 | 86 | -17.4 | 285 | -75.1 | 328 | -78.4 |
| Price* | 214 | 225 | -4.9 | 239 | -10.5 | 229 | -6.6 |
*Median Price
Sources: http://www.census.gov/const/newressales.pdf
http://www.census.gov/const/newressales_200703.pdf
http://www.census.gov/const/newressales_200603.pdf
The homeowner national vacancy rate in IQ2011 of 2.6 percent was about the same as in the IQ2010 and 0.1 percentage point lower than 2.7 percent in IVQ2010. The national vacancy rate for rental housing in IQ2011 was 9.7 percent, lower by 0.9 percentage points than in IQ2010 and 0.3 percentage points higher than in IVQ2010. The homeownership rate of 66.5 percent in IQ2011 was lower by 0.6 percentage points than 67.1 percent in IQ2010 (http://www.census.gov/hhes/www/housing/hvs/currenthvspress.pdf). The pending home sales index of the National Association of Realtors, for contracts but not closings, increased 5.1 percent in Mar relative to Feb but is 11.4 percent lower than in Mar 2010 (http://www.realtor.org/press_room/news_releases/2011/04/phs_march). Initial claims for unemployment insurance seasonally adjusted rose 25,000 in the week of Apr 23 to 429,000 from 404,000 in the week of Apr 16. Initial claims not seasonally adjusted rose by 3569 in the week of Apr 23 to 385,622 from 382,053 in the week of Apr 16, significantly lower than 429,196 a year earlier. The four-week seasonally adjusted moving average rose 9250 to 408,500 in the week of Apr 23 from 399,250 in the week of Apr 16 (http://www.dol.gov/opa/media/press/eta/ui/current.htm). Industrial new orders in the euro area rose 21.3 percent in Feb 2011 relative to Feb 2010 (http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-27042011-AP/EN/4-27042011-AP-EN.PDF).
VI Interest Rates. The 10-year Treasury note traded at yield of 3.29 percent on Apr 29, which was lower than 3.39 percent a week earlier and 3.44 percent a month earlier. The 10-year government bond of Germany traded at 3.24 percent for negative spread of only 5 basis points relative to the comparable Treasury (http://markets.ft.com/RESEARCH/Markets/Government-Bond-Spreads). The 10-year Treasury note maturing in 2/21 with coupon of 3.63 percent traded at yield of 3.29 percent or equivalent price of 102.77 (http://markets.ft.com/RESEARCH/markets/DataArchiveFetchReport?Category=BR&Type=GOV&Date=04/29/2011), which is not comparable to the price in Table 15, which is for coupon of 2.625 percent and maturity in exactly ten years for purposes of comparison with the price on Nov 4, 2010.
VII Conclusion. The US economy continues to expand at a moderate rate that is insufficient to provide required dynamism to labor markets. There is no relief in sight for the 30 million people in job stress who are afflicted by unemployment and underemployment. Hiring has weakened such that there are few available opportunities for exiting job stress or obtaining higher wages and salaries. Inflation is accelerating at the margin, eroding income and consumption. There are multiple unresolved vulnerabilities in world financial markets. (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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Pelaez, Carlos M. and Carlos A. Pelaez. 2005. International Financial Architecture. Basingstoke: Palgrave Macmillan. http://us.macmillan.com/QuickSearchResults.aspx?search=pelaez%2C+carlos&ctl00%24ctl00%24cphContent%24ucAdvSearch%24imgGo.x=26&ctl00%24ctl00%24cphContent%24ucAdvSearch%24imgGo.y=14 http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10
Pelaez, Carlos M. and Carlos A. Pelaez. 2007. The Global Recession Risk. Basingstoke: Palgrave Macmillan. http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10
Pelaez, Carlos M. and Carlos A. Pelaez. 2008a. Globalization and the State: Vol. I. Basingstoke: Palgrave Macmillan. http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10
Pelaez, Carlos M. and Carlos A. Pelaez. 2008b. Globalization and the State: Vol. II. Basingstoke: Palgrave Macmillan.
Pelaez, Carlos M. and Carlos A. Pelaez. 2008c. Government Intervention in Globalization. Basingstoke: Palgrave Macmillan. http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10
Pelaez, Carlos M. and Carlos A. Pelaez. 2009a. Financial Regulation after the Global Recession. Basingstoke: Palgrave Macmillan. http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10
Pelaez, Carlos M. and Carlos A. Pelaez. 2009b. Regulation of Banks and Finance. Basingstoke: Palgrave Macmillan.http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10
Standard & Poor’s. 2011Apr18. A closer look at the revision of the outlook on the U.S. government rating. New York, Apr 18 http://www.standardandpoors.com/servlet/BlobServer?blobheadername3=MDT-Type&blobcol=urldata&blobtable=MungoBlobs&blobheadervalue2=inline%3B+filename%3D041811RevisionUSGovernmentRating%2C1.pdf&blobheadername2=Content-Disposition&blobheadervalue1=application%2Fpdf&blobkey=id&blobheadername1=content-type&blobwhere=1243894185401&blobheadervalue3=UTF-8
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© Carlos M. Pelaez, 2010, 2011
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