CMP Associates Regulation Blog: Turbulence in World Financial Markets, United States Debt Quagmire and World Trade and Growth

Sunday, August 14, 2011

Carlos M. Pelaez

Executive Summary

I Financial Risk Aversion

IA Turbulence in World Financial Markets

IB European Sovereign Risk

II United States Debt Quagmire

IIA Long-term Debt in the US

IIB US Growth and Trade

III Global Inflation

IV World Trade and Growth

IVA Japan

IVB China

IVC Euro Area

IVD United Kingdom

V Valuation of Risk Financial Assets

VI Economic Indicators

VII Interest Rates

VIII Conclusion

References

Appendix I The Great Inflation

Executive Summary

Capital budgeting of projects in directly productive economic activity and trading and investing decisions by finance professionals using multiple technical methods are unfeasible during significant uncertainty. As Frank H. Knight argues (http://www.econlib.org/library/Knight/knRUP6.html#Pt.III,Ch.VII):

“It is a world of change in which we live, and a world of uncertainty. We live only by knowing something about the future; while the problems of life, or of conduct at least, arise from the fact that we know so little. This is as true of business as of other spheres of activity. The essence of the situation is action according to opinion, of greater or less foundation and value, neither entire ignorance nor complete and perfect information, but partial knowledge. If we are to understand the workings of the economic system we must examine the meaning and significance of uncertainty; and to this end some inquiry into the nature and function of knowledge itself is necessary”

The international financial system is experiencing major oscillations of valuations of risk financial assets in an environment of uncertainty reminiscent of the analysis of Frank H. Knight. These oscillations reflect interrelated risks of (1) economic performance and (2) exposures in markets and institutions.

Economic performance is interrelated with financial risk exposures but not always perfectly and in identifiable causal chains. Financial turbulence originates in multiple vulnerabilities:

1. Sovereign risks in Europe’s highly-indebted countries that communicate through bank and investment exposures to the rest of the European economy and through exposures to banks and securities in the financially stronger European countries to the rest of the world financial system

2. Unusually low growth, high unemployment/underemployment, low hiring, weak banking and financial institutions and long-term unsustainable debt path in the anemic cyclical recovery of the United States

3. Tradeoff of inflation and growth within slowing world growth/trade environment threatening continuing cyclical expansion in China, Japan and emerging Asia

4. Global inflation currently more subdued but threatening momentum during relaxation of risk aversion through the carry trade from zero interest rates in the United States to leveraged positions in risk financial assets such as commodities

This comment provides systematic worldwide analysis of indicators of economic activity and valuations of risk financial assets in search for an evaluation of the direction of world economic output and financial markets. Regional data tables summarize major economic indicators for the US, Japan, China, Euro Area (including Germany, France and Italy) and the UK. Regional data tables provide location of detailed information in the current and past comments of this blog. There is evidence of slower growth and wider fluctuations of financial risk assets in some parts of Europe while growth and financial markets appear stronger in the US and Asia. Growth recession could be defined as rates of growth that are insufficient to steer the economy back to full employment levels of economic activity. Growth recession need not result in a true recession or contraction of economic activity. The immediate concern in this uncertain environment is with the maintenance of some growth, which is superior to contraction.

Subsection IA Turbulence in World Financial Markets analyzes daily oscillations of valuations of risk financial assets during the week. Subsection IB European Sovereign Risk consider the stress of government debt and financial institutions originating in Europe. II United States Debt Quagmire focuses on the long-term unsustainable debt of the United States and indicators of the US economy. Section III Global Inflation provides the analysis of inflation in the world. IV World Trade and Growth analyzes the indicators of Japan, China, the euro area as a whole and individually Germany, France and Italy and separately also the United Kingdom. Section V Valuation of Risk Financial Assets analyzes the market values of major risk financial assets in world financial markets.

I Financial Risk Aversion. The international financial system is experiencing major oscillations of valuations of risk financial assets. These oscillations reflect interrelated risks of (1) economic performance and (2) exposures in markets and institutions.

First, economic performance. The major risk of economic performance is deceleration of world economic growth manifested in the purchasing managers’ indexes that are available immediately at the turn of the month and in estimates of monthly indicators available with variable lags. There is uncertainty about current economic conditions and significant difficulty in anticipating future economic paths. The World Bank provides an estimate of world GDP in 2005 of $44,645 billion (see Pelaez and Pelaez, Globalization and the State, Vol. I (2008a), 10-11). The high-income countries had a share of $34,687 billion, or 77 percent, of world GDP before the global recession. Generation of GDP in the world economy is concentrated in a group of countries. The approach here is to consider five regions: United States, Japan, euro area, China and the United Kingdom. There are several other important countries such as Canada, Brazil, Australia, Russia and India that are also closely integrated with the chore of the world economy. Nearly the entire world economy experienced, in varying magnitudes, stressed economic conditions during the debt/dollar crisis and global recession from 2007 to 2009. Recovery has been slow in the advanced economies with high income and somewhat faster in the other regions. Greater detail on economic performance is covered in section II United States Debt Quagmire and subsections IVA Japan, IVB China, IVC Euro Area and IVD United Kingdom in section IV World Trade and Growth.

Second, financial risk exposures. Economic performance is interrelated with financial risk exposures but not always perfectly and in identifiable causal chains. Financial turbulence originates in multiple vulnerabilities:

3. Tradeoff of inflation and growth within slowing world growth/trade environment threatening continuing cyclical expansion in China, Japan and emerging Asia

Subsection IA Turbulence in World Financial Markets analyzes daily oscillations of valuations of risk financial assets during the week. Subsection IB European Sovereign Risk consider the stress of government debt and financial institutions originating in Europe. II United States Debt Quagmire focuses on the long-term unsustainable debt of the United States and indicators of the US economy. Section III Global Inflation provides the analysis of inflation in the world. IV World Trade and Growth analyzes the indicators of Japan, China, the euro area as a whole and individually Germany, France and Italy and separately the United Kingdom. Section V Valuation of Risk Financial Assets analyzes the market values of major risk financial assets in world financial markets.

IA Turbulence in World Financial Markets. The past three months have been characterized by financial turbulence, attaining unusual magnitude in the past two weeks. Table 1, updated with every comment in this blog, provides beginning values on Aug 8 and daily values throughout the week ending on Aug 12 of a few financial variables. Section V Valuation of Risk Financial Assets provides a set of more complete values. All data are for New York time at 5 PM. The first column provides the value on Fri Aug 5 and the percentage change in that week below the label of the financial risk asset. The first five rows provide three key exchange rates versus the dollar and the percentage cumulative appreciation (positive change or no sign) or depreciation (negative change or negative sign). Positive changes constitute appreciation of the relevant exchange rate and negative changes depreciation. Financial turbulence was dominated by reactions to the new program for Greece (see section IB in http://cmpassocregulationblog.blogspot.com/2011/07/debt-and-financial-risk-aversion-and.html), doubts on the larger countries in the euro zone with sovereign risks such as Spain and Italy, the growth recession and long-term unsustainable government debt in the US, worldwide deceleration of economic growth and continuing inflation. The dollar/euro rate is quoted as number of dollars USD per one euro EUR, USD 1.428/EUR in the first row, column 1 in the block for currencies in Table 1 for Fri Aug 5, appreciating to USD 1.4183 on Mon Aug 8. Table 1 defines a country’s exchange rate as number of units of domestic currency per unit of foreign currency. USD/EUR would be the definition of the exchange rate of the US and the inverse [1/(USD/EUR)] is the definition in this convention of the rate of exchange of the euro zone, EUR/USD. A convention is required to maintain consistency in characterizing movements of the exchange rate in Table 1 as appreciation and depreciation. The first row for each of the currencies shows the exchange rate at 5 PM New York time, such as USD 1.4183/EUR on Aug 8; the second row provides the cumulative percentage appreciation or depreciation of the exchange rate from the rate on the last business day of the prior week, in this case Fri Aug 5, to the last business day of the current week, in this case Fri Aug 12, such as appreciation of 0.3 percent for the dollar to USD 1.424 by Aug 12; and the third row provides the percentage change from the prior business day to the current business day. For example, the USD appreciated (positive sign) by 0.3 percent from the rate of USD 1.428/EUR on Fri Aug 5 to the rate of USD 1.424 on Fri Aug 12 and depreciated by 0.1 percent from the rate of USD 1.4224 on Thu Aug 11 to USD 1.424 on Fri Aug 12. The political “game of chicken” in the US ended with predictable outcome of an increase in the Treasury debt ceiling (http://cmpassocregulationblog.blogspot.com/2011/07/growth-recession-debt-financial-risk.html ), with mild if any impact on risk aversion except by investors exercising abundance of caution in the unlikely case a of deciding player in the “chicken game” jumping in the abyss of selective default of US debt. Even the downgrade of the credit rating of US debt by Standard & Poor’s for the first time in over seven decades had been warned and was widely anticipated but is having only an unexpected shock of deception. The cumulative appreciation of the dollar by 0.3 percent from the rate of USD 1.428/EUR on Fri Aug 5 to USD 1.424/EUR on Fri Aug 12 is more likely influenced by (1) sudden realization of the low “growth recession” (http://cmpassocregulationblog.blogspot.com/2011/08/global-growth-recession-25-to-30.html http://cmpassocregulationblog.blogspot.com/2011/07/growth-recession-debt-financial-risk.html) of the US revealed by release on Fri Jul 29 of GDP growth of 0.4 percent in the US in IQ2011 and the preliminary estimate of 1.3 percent in IIQ2011; (2) frustrating fracture of the US job market in the employment situation report released on Aug 5; (3) evidence of growth recession worldwide in the purchasing managers’ indexes and multiple economic indicators around Aug 1; (4) flattening growth of personal income with resulting collapse of personal consumption expenditures; (5) and turbulence in financial markets as the crisis spreads to much larger countries in Europe with increasing doubts of the capacity of governments to stop the process. New developments of these issues during the week are discussed in greater detail in subsection IB European Sovereign Risk and section II United States Debt Quagmire. The drivers of financial turbulence are combinations of renewed fears of default, downgrades of Ireland, Cyprus, Greece and Spain, rise in sovereign bond spreads, fluctuating bank stocks in Italy, France, United States and other countries, weak employment report, growth recession of the US and worldwide and expected downgrading of US debt now materialized even after increase of the federal debt limit. Markets recovered with the expectation and then statement by the Council of the European Union (2011Jul21) announcing formally the Greek program (see http://cmpassocregulationblog.blogspot.com/2011/07/debt-and-financial-risk-aversion-and.html).

Table 1, Daily Valuation of Risk Financial Assets

Aug 8

Aug 9

Aug 10

Aug 11

Aug 12

USD/
EUR

1.428

0.8%

1.4183

0.7%

-0.7%

1.4359 -0.5%

-1.2%

1.4185

0.7%

1.2%

1.4224

0.4%

-0.3%

1.424

0.3%

-0.1%

JPY/
USD

78.39

-2.1%

77.619

0.9%

-0.9%

77.019

1.7%

0.8%

76.8345

1.9%

0.2%

76.8505

1.9%

0.0%

76.67

2.2%

0.2%

CHF/
USD

0.763

3.2%

0.7546

1.1%

0.7198

5.7%

4.6%

0.7264

4.8%

-0.9%

0.7625

0.1%

-4.9%

0.773

-1.3%

-1.4%

CHF/EUR
1.0945

3.3%

1.0703

2.2%

1.0336

5.6%

3.4%

1.0340

5.5%

0.04%

1.0846

0.9%

-4.9%

1.1091

-1.3%

-2.3%

USD/
AUD

1.045

0.9557 -5.1%

1.0193

0.9811

-2.7%

1.0352

0.966

-1.1%

1.5%

1.0210

0.9794

-2.5%

-1.4%

1.0341

0.9670

-1.2%

1.3%

1.035

0.9662

-1.1%

0.1%

10 Year
T Note

2.566

2.34

2.27

2.11

2.33

2.249

2 Year T Note
0.289

0.26

0.20

0.18

0.192

10 Year German Bond

2.35

2Y 0.72

10Y 2.26

2Y 0.78

10Y 2.37

0.57

10Y 2.19

0.66

10Y 2.32

0.69

10Y

2.33

DJIA

11444.61

-5.8%

-5.5%

-1.8%

3.9%

-6.4%

-4.6%

-2.6%

3.9%

-1.5%

1.1%

DJ Global

1906.46 -8.7%

-4.8%

-3.2%

1.7%

-6.2%

-3.1%

-3.5%

2.9%

-2.4%

1.1%

DJ Asia Pacific

1299.35 -7.7%

-2.6%

-4.3%

-1.8%

-2.5%

1.9%

-2.9%

-0.5%

-3.0

-0.1%

Nikkei
9299.88% -5.4%

-2.2%

-3.8%

-1.7%

-2.8%

1.1%

-3.4%

-0.6%

-3.6%

-0.2%

Shanghai

2626.42 -2.8%

-3.8%

0.0%

-2.9%

0.9%

-1.7%

1.3%

-1.3%

0.5%

DAX
6236.16 -12.9%

-5.0%

-5.0

-5.1%

-0.1%

-9.9%

-5.1%

-7.0%

3.3%

-3.8%

3.5%

DJ UBS Comm.

156.150 -4.1%

-1.9%

-2.1%

-0.2%

-0.9%

1.3%

0.7%

1.6%

0.6%

-0.2%

WTI $ B
87.030 -0.3%

80.650 -7.3%

-7.3%

80.46

-7.5%

-0.2%

81.640

-6.2%

1.5%

85.610

-1.6%

4.9%

85.390

-1.9%

-0.3%

Brent $/B

109.30 -6.3%

103.78

-5.1%

104.16

-4.7%

0.4%

105.46

-3.5%

1.2%

107.90

-1.3%

2.3%

107.88

-1.3%

0.0%

Gold $/B

1663.00 2.1%

1720.1

3.4%

1741.0

4.7%

1.2%

1792.40

7.8%

2.9%

1757.50

5.7%

-1.9%

1747.80

5.1%

-0.6%

Note: USD: US dollar; EUR: euro; JPY: Japanese Yen; CHF: Swiss Franc; AUD: Australian dollar; Comm.: commodities; Y: year

Sources:

http://www.bloomberg.com/markets/

http://professional.wsj.com/mdc/page/marketsdata.html?mod=WSJ_hps_marketdata

Important interventions or threats of interventions in key currencies are documented by Anusha Shrivastava, writing on Aug 11 on “Euro bounces as Swiss franc sinks,” published by the Wall Street Journal (http://professional.wsj.com/article/SB10001424053111903918104576501192237870896.html?mod=WSJ_hps_sections_markets). Table 1 shows that the Swiss franc (CHF) appreciated sharply by 4.8 percent relative to the USD by Aug 10 and 5.5 percent relative to the EUR. There was significant depreciation of the CHF against both the USD and EUR by 4.9 percent on Aug 11. The Swiss National Bank had lowered its policy rate to zero in an effort to arrest the inflow of foreign funds that appreciated its currency, depriving the country of international competitiveness in trade with adverse effects on the Swiss economy (http://www.snb.ch/en/mmr/reference/pre_20110803/source/pre_20110803.en.pdf):

“The Swiss National Bank (SNB) considers the Swiss franc to be massively overvalued at present. This current strength of the Swiss franc is threatening the development of the economy and increasing the downside risks to price stability in Switzerland.

The SNB will not tolerate a continual tightening of monetary conditions and is therefore taking measures against the strong Swiss franc.

Effective immediately, the SNB is aiming for a three-month Libor as close to zero as possible, narrowing the target range for the three-month Libor from 0.00–0.75% to 0.00– 0.25%. At the same time, it will very significantly increase the supply of liquidity to the Swiss franc money market over the next few days. It intends to expand banks’ sight deposits at the SNB from currently around CHF 30 billion to CHF 80 billion. Consequently, with immediate effect, the SNB will no longer renew repos and SNB Bills that fall due and will repurchase outstanding SNB Bills, until the desired level of sight deposits has been reached.”

Long CHF/short USD, long CHF/short EUR positions by traders and investors were pared down in fear of renewed intervention by the SNB. Shrivastava finds that market participating were even pondering that the SNB could peg the CHF to the EUR. The second round of intervention by the SBN was announced on Aug 10, 2011, with liquidity injections and direct currency swaps (http://www.snb.ch/en/mmr/reference/pre_20110810/source/pre_20110810.en.pdf):

“Swiss National Bank expands measures against strong Swiss franc. The substantial rise in risk aversion on the international financial markets has further intensified the overvaluation of the Swiss franc in the last few days. In the light of these developments, the Swiss National Bank (SNB) is taking additional measures against the strength of the Swiss franc. It will again significantly increase the supply of liquidity to the Swiss franc money market. The SNB aims to rapidly expand banks’ sight deposits at the SNB from currently CHF 80 billion to CHF 120 billion.

To accelerate the increase in Swiss franc liquidity, the SNB will additionally conduct foreign exchange swap transactions. The foreign exchange swap is a monetary policy instrument which the SNB uses to create Swiss franc liquidity. It was last employed in autumn 2008.

The massive overvaluation of the Swiss franc poses a threat to the development of the economy in Switzerland and has further increased the downside risks to price stability.

The SNB is keeping a close watch on developments on the foreign exchange market and on financial markets. If necessary, it will take further measures against the strength of the Swiss franc.”

Peter Garnham, writing on Aug 10 on “Swiss franc falls after SNB action,” published in the Financial Times (http://www.ft.com/intl/cms/s/0/dfbac240-c268-11e0-9ede-00144feabdc0.html#axzz1UKuOG4yd), finds that the appreciation of the CHF by 4.6 percent relative to the USD on Aug 9 was the highest in one day in about 30 years with the rate reaching a record in intraday trading at CHF 0.7085/USD for an intraday appreciation of 6.1 percent. This record CHF/USD rate was reached after the Federal Open Market Committee released its statement of what appears permanent zero interest rates (http://www.federalreserve.gov/newsevents/press/monetary/20110809a.htm):

“The Committee currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.”

Zero interest rates devalue the dollar against almost all currencies in the world and cause appreciation of risk financial assets such as commodity prices that feed producer price inflation that eventually punctures consumer prices.

Japan depends on foreign demand for its exports to continue recovery from the global recession and subsequently the devastating effects of the Mar 11 earthquake/tsunami. In similarity with the Swiss franc, the Japanese yen (JPY) has significantly appreciated because of its use as safe haven during periods of risk aversion. The JPY appreciated by 2.2 percent by Fri Aug 12 to JPY 76.67/USD, eroding the competitiveness of Japan’s products at home and in world markets. The JPY continues to be quite strong even after intervention by the Bank of Japan on behalf of the ministry of finance of Japan (http://www.boj.or.jp/en/announcements/press/danwa/dan1108a.htm/): “The Bank of Japan strongly expects that the action taken by the Ministry of Finance in the foreign exchange market will contribute to stable price formation in the market.” Past interventions have not been very successful (Pelaez and Pelaez, The Global Recession Risk (2007), 107-9). The JPY is used as safe haven from world risks even after a downgrade of its sovereign credit rating because of the country’s internal generation of savings to pay for its high debt. The Bank of Japan also decided to increase its program of quantitative easing that could have the added effect of depreciating the JPY (http://www.boj.or.jp/en/announcements/release_2011/k110804a.pdf):

“At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan decided, by a unanimous vote, to enhance monetary easing by increasing the total size of the Asset Purchase Program by about 10 trillion yen from about 40 trillion yen to about 50 trillion yen.”

Shrivastava also finds expectations of further currency interventions by Japan. In the prior week, the Bank of Japan took $52 billion of long USD/short JPY in an attempt to cool the appreciation of the JPY. Daily currency trading in the world is estimated at around $4 trillion such that interventions must be in massive doses to have impact on exchange rates.

Risk aversion causes flows of investment and trading funds away from risk financial assets into cash and relatively riskless assets in stronger countries such as the US, Germany, Switzerland and Japan. US Treasury securities and German government bonds have become safe havens for flight out of risk. As shown in Table 1, the yield of the two-year Treasury note continued its downward trend from 0.289 percent on Aug 5 to 0.192 percent by Aug 12, with buying by investors raising prices, which is equivalent to lowering yields. The yield of the 10-year note also fell from 2.566 percent on Aug 5 to 2.249 percent by Aug 12. The week was busy with auctions for 4-week bill, 3-year note, 10-year note and 30-year bond with all running normally with the exception of some disappointment in the auction of the 30-year bond. There is similar risk aversion in the euro area with investors and trading fleeing to the safety of German government bonds. Yields of 2-year and 10-year government bonds of Germany continue at relatively low levels, 0.69 percent for the 2-year and 2.33 percent for the 10-year, as shown in Table 1.

All six equity indexes in Table 1 lost value during the week with the lowest losses by the US DJIA of 1.5 percent and the Shanghai composite of 1.3 percent and the highest of 3.8 by Germany’s DAX and 3.6 percent by the Nikkei Average. The really traumatic event during the week was significant oscillations. For example, DAX lost 5 percent on Mon Jun 8 and another 5.1 percent on Wed Aug 10 but gained 3.3 percent on Aug 11 and 3.5 percent on Aug 12. The DJ Global lost 5.5 percent on Mon Aug 8 and another 4.6 percent on Wed Aug 10. The loss of DAX on Aug 10 relative to Aug 5 was 9.9 percent, or the definition of a bear market in just three trading days. This volatility is the result of a combination of realization that world economic growth is decelerating together with sovereign risks in Europe and uncertainties on inflation/growth in China, US growth/debt uncertainties and Japan’s dependence on world trade that is determined by world economic growth. Equity valuations depend on sales that in turn depend on growth. The world growth path and outcome of financial risks have become uncertain in the sense of Frank Knight that it is increasingly difficult to guess on probabilities of alternative events (http://cmpassocregulationblog.blogspot.com/2010/07/rise-of-era-of-uncertainty_29.html). Knight (1923, 565) summarizes as follows:

“All human planning and execution involve uncertainty, and a rational social order can be realized only if all persons have a rational attitude toward risk and chance”

The two oil price indicators in Table 1 lost ground during the week. Brent finished at $107.88/barrel on Aug 12, declining 1.3 percent while WTI dropped 1.9 percent to finish at $85.390/barrel. The declines paralleled risk aversion in equity markets with Brent losing 7.3 on Mon Aug 8 and WTI dropping 5.1 percent. Recovery began on Wed Aug 10 with the stimulating comment that fed funds rates will likely stay at zero for at least the next two years. The DJ UBS commodities index gained 0.6 percent in the week and gold gained another 5.1 percent.

IB European Sovereign Risk. There are euro zone countries that are relatively sound in terms of fiscal situations and financial variables, especially spreads of sovereign bonds and government debts and deficits, such as France and Germany. The test of the euro may depend on the redistribution process of bailouts analyzed by professors Zingales and Perotti (2011Jul27). The bailouts ultimately consist of (1) redistribution of wealth and income from taxpayers in the financially stronger countries to the bailed out countries; and (2) redistribution of wealth and income from the taxpayers in the financially stronger countries to creditors and shareholders of banks. Three euro zone countries have engaged in bailouts within the mechanism created by the European Union, IMF and European Central Bank: Portugal, Ireland and Greece. The combined GDPs of Portugal, Ireland and Greece add to $739 billion, which represents only 6.1 percent of the euro zone GDP of $12,192.8 billion, shown in Table 2. The problem is in the exposure of European banks to the bailed out countries and of banks worldwide to the bailed out countries and to the European banks. These exposures are much more important in relative terms of speed in propagating financial stress than the combined GDP of the bailed out countries. The turmoil during the past weeks manifested in the form of increases in the sovereign bond spreads and declines in the stock markets and bank stocks of Spain and Italy. The addition of the GDP of Spain and Italy to the bailed-out countries totals $4204 billion, which is equivalent to 34.5 percent of euro zone GDP. David Cottle writing on Jul 12 on “Italy fears rattle Europe’s markets” published by the Wall Street Journal (http://professional.wsj.com/article/SB10001424052702303812104576441302547119220.html?mod=WSJPRO_hpp_LEFTTopStories) informs that Italy’s “total capital market debt” is €1598 billion, approximately $2.2 trillion, which is the largest in the euro zone and the third largest in the world after the US and Japan. There is a cushion in that only €88 billion mature in 2011 and €190 billion mature in 2012. Perhaps the major source of concern for propagation of turbulence in Italy is that French banks had $392.6 billion in Italian government and private debt at the end of 2010, according to Bank for International Settlements (BIS) data, as informed by Fabio Benedetti-Valentini, writing on Jul 12, 2011, on “French banks face greatest Italian risk” published by Bloomberg (http://www.bloomberg.com/news/2011-07-12/france-s-bnp-credit-agricole-on-frontline-with-italian-risk.html). The international financial system could suffer major stress through the exposures to European banks.

Table 2, World and Selected Regional and Country GDP and Fiscal Situation

	GDP USD 2010 USD Billions	Primary Net Lending Borrowing % GDP 2010	General Government Net Debt % GDP 2010
World	57,920.3
Euro Zone	12,192.8	-3.6	64.3
Portugal	229.3	-4.6	79.1
Ireland	204.3	-29.7	69.4
Greece	305.4	-3.2	142.0
Spain	1,409.9	-7.8	48.8
Major Advanced Economies G7	31,891.5	-6.9	74.4
United States	14,657.8	-10.6	64.8
UK	2,247.5	-8.6	69.4
Germany	3,315.6	-3.3	53.8
France	2,582.5	-7.7	74.6
Japan	5,458.9	-9.5	117.5
Canada	1,574.1	-5.5	32.2
Italy	2,055.1	-4.6	99.6
China	5,878.3	-2.6	17.7
Cyprus	23.2	-5.4	61.6

Source: http://www.imf.org/external/pubs/ft/weo/2011/01/weodata/index.aspx

The economist Frank H. Knight considered in his 1921 classic opus Risk, Uncertainty, and Profit three different types of probability (http://www.econlib.org/library/Knight/knRUP6.html#Pt.III,Ch.VII). First, a priori probability is explained by the example of tossing the perfect die that will show a given number one-sixth of the time (see Feller 1968, 7-25). Second, there is the work of actuarial science in insurance in which past information is used to calculate the fair premium. The present value of the actuarially fair premium is equal to the expected costs of the benefits to be received from the plan, or costs weighted by probability of occurrence, if the load, or administrative costs, is assumed to be zero. Knight finds that the distinguishing characteristic of this type is that “it rests on an empirical classification of instances” (http://www.econlib.org/library/Knight/knRUP6.html#Pt.III,Ch.VII). Third, there is what Knight calls “estimates,” for which “there is no valid basis of any kind for classifying instances” and constitute an “uncertainty” (http://www.econlib.org/library/Knight/knRUP6.html#Pt.III,Ch.VII). Knight argues that “an uncertainty which can by any method be reduced to an objective, quantitatively determined probability, can be reduced to complete certainty by grouping cases.” The process of Value at Risk (VaR), measuring the maximum loss in a target horizon for a desired level of confidence, could fit into this category (Pelaez and Pelaez, International Financial Architecture, 106-12). For example, JP Morgan Chase reports a decline of the investment bank trading VaR from $170 million in 2Q09 to $72 million in 2Q10, measuring the highest loss per day 99 per cent of the time from the trading transactions of the investment bank (http://files.shareholder.com/downloads/ONE/889418027x0x387171/79855d7d-cc5f-4a91-87ed-8ca848266fd8/2Q10_ERF_Supplement_7-14-10_FINAL.pdf ). An important concept used by Knight is that change causes uncertainty.

The method used by business in reducing uncertainty is capital budgeting in investment decisions. As Knight argues in his classic work, the entrepreneur receives the difference between the selling price and cost. An entrepreneur deciding on a project would construct the “estimates” mentioned by Knight. The method is similar to the cost/benefit analysis of economics (Pelaez and Pelaez, Financial Regulation after the Global Recession, 22, Regulation of Banks and Finance, 27-32, Government Intervention in Globalization, 52-6, 87, Globalization and the State, Vol. I, 119-25) and applied in the economics of climate change (Pelaez and Pelaez, Globalization and the State, Vol. II, 59-63). The entrepreneur projects forward to the horizon or year of maturity of the investment the cash flows to be received, or revenue, and the cash flows to be paid, or costs. For each year, the projections would show net revenue, or revenue less cost. The future net revenues have to be converted into dollars of today by discounting them by another estimate of the rate of interest. The sum of the discounted net revenues is the present value of the project. The entrepreneur chooses projects with positive present value.

Capital budgeting and trading and investing decisions using multiple methods are unfeasible during significant uncertainty. As Knight argues (http://www.econlib.org/library/Knight/knRUP6.html#Pt.III,Ch.VII):

The translation back to the present of change and uncertainty in Knight’s framework is lack of “confidence,” which frustrates decisions on investment, production, hiring and consumption, by private-sector economic agents, and decisions on exposures by professionals in financial markets. An important manifestation of the lack of confidence is the doubt on the capacity of governments to steer the world economy toward an environment of confidence not only by the private sector but also within governments. Anticipations of the future are required to determine government budgets that are frustrated because of the uncertainty in projecting future revenues and even expenditures. Fiscal and monetary authorities also make decisions on anticipations of future economic conditions that are as subject to uncertainty as those of the private sector. The issue confronted by Knight that plagues private sector decisions is not different than that faced by government. As Knight states (http://www.econlib.org/library/Knight/knRUP6.html#Pt.III,Ch.VII):

“It was pointed out that the failure of competition and the emergence of profit are connected with changes in economic conditions, but that the connection is indirect. For profit arises from the fact that entrepreneurs contract for productive services in advance at fixed rates, and realize upon their use by the sale of the product in the market after it is made. Thus the competition for productive services is based upon anticipations. The prices of the productive services being the costs of production, changes in conditions give rise to profit by upsetting anticipations and producing a divergence between costs and selling price, which would otherwise be equalized by competition. If all changes were to take place in accordance with invariable and universally known laws, they could be foreseen for an indefinite period in advance of their occurrence, and would not upset the perfect apportionment of product values among the contributing agencies, and profit (or loss) would not arise. Hence it is our imperfect knowledge of the future, a consequence of change, not change as such, which is crucial for the understanding of our problem.”

In fact, government and the private sector share a common wisdom in that nobody has a clue on what to do in the present world economic deceleration and financial turbulence.

In a revealing article, Marcus Walker, Damian Paletta and Brian Blackstone, on Aug 12 on “Global crisis of confidence.” published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424053111903918104576504493072650756.html?mod=WSJPRO_hpp_LEFTTopStories), identify the financial turmoil of the week of Aug 12 as originating in the lack of confidence in financial markets on the capacity of politicians to resolve the global financial crisis. An extremely important component is the identification by Zingales and Perotti (2011Jul27) of the wealth and income redistribution from taxpayers in core countries in Europe to sovereigns and ultimately banks and investors in need of bailout. It is also likely that resolution could bring about immediate major pains in the form of losses of employment, economic activity and wealth. Different national and regional interests also prevent concerted action as politicians naturally tend to spare their constituencies of major pains. The redistributive argument of Zingales and Perotti (2011Jul27) applies not only within Europe but also internationally as politicians attempt to protect their jurisdictions and their votes.

There is new evidence on worldwide deterioration of business confidence. Sarah O’Connor, writing on Aug 11 on “Global business confidence slumps,” published by the Financial Times (http://www.ft.com/intl/cms/s/0/3bcdc066-c384-11e0-b163-00144feabdc0.html#axzz1UiTTdEPI), analyzes the results of the FT/Economist Global Business Barometer. The survey of 1500 executives around the world was conducted for the Financial Times and The Economist by the Economist Intelligence Unit between Jun 22 and Jul 29. The survey finds that confidence had eroded in corporations around the world even before the beginning of the collapse of stock markets. In a prior survey two months earlier, the number of optimistic respondents exceeded pessimistic ones by two to one. In the current survey from Jun 22 to Jul 29, 33.8 percent of respondents expected the global economy to deteriorate in the next six months compared with only 23.3 percent who believed improving economic conditions. In the prior survey 60 percent of respondents believed that economic and market risks constituted the worst risk to their companies compared with 70 percent in the survey from Jun 22 to Jul 29.

Table 3 summarizes the brutal drops in assets and net worth of US households and nonprofit organizations from 2007 to IQ2011, provided in the Fed’s quarterly report on Flow of Funds Accounts of the United States (http://www.federalreserve.gov/releases/z1/Current/z1.pdf). Real estate fell in value by $5.2 trillion and financial assets by $1.7 trillion, explaining most of the drop in net worth of $6.1 trillion. Inevitably, investors, finance professionals and everybody with savings ponders whether there will be another round of losses of two trillion dollars in financial assets. Carl Bialik, writing on Aug 13 on “Global market cap: trillions in losses, but no firm tally,” published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424053111903918104576504202401477070.html?mod=WSJ_hps_sections_markets), analyzes the meaning of the loss of market capitalization in world stock markets and the multiple estimates. The conclusion is that market capitalization may not be that meaningful because paper losses are changing with every second of trading. The wild oscillations in the current week shown in Table 1 support this view. Bialik finds that the FTSE global losses in the week of Aug 5 reached $3.785 trillion while the MSCI All Country World Index lost $2.794 trillion.

Table 3, Differences in Million of Dollars of United States Households and Nonprofit Organizations from 2007 to IQ2011

Assets	-6,606.5
Nonfinancial	-4,887.1
Real Estate	-5,180.4
Financial	-1,719.4
Liabilities	494.9
Net Worth	-6,111.6

Source: http://www.federalreserve.gov/releases/z1/Current/z1.pdf

The European Securities and Markets Authority (ESMA) issued a public statement on Aug 11 on the decision to ban short sales of financial stocks by four European nations (http://www.esma.europa.eu/popup2.php?id=7699):

“ESMA promotes harmonised regulatory action on short-selling in the EU European financial markets have been very volatile over recent weeks. The developments have raised concerns for securities markets regulators across the European Union. ESMA has been actively monitoring the markets over the last few weeks and has been exchanging information with national competent authorities on the functioning of the markets and the market infrastructure.

Given these recent market developments, ESMA wants to emphasise the requirements in the Market Abuse Directive (MAD) referring to the prohibition of the dissemination of information which gives, or is likely to give, false or misleading signals as to financial instruments, including the dissemination of rumours and false or misleading news. European competent authorities will take a firm stance against any behaviour that breaches these requirements and ESMA will support national authorities to act swiftly against any such behaviour which is clearly punishable. While short-selling can be a valid trading strategy, when used in combination with spreading false market rumours this is clearly abusive. In the area of short-selling regulation, many authorities already have either requirements for the disclosure of net short positions and/or bans of certain types of short sales in place. Recent developments have meant that all competent authorities have reinforced the monitoring of their markets and are keeping their regulatory requirements under review. ESMA has coordinated discussions between the national competent authorities, specifically on the content and timing of any possible additional measures necessary to maintain orderly markets. Today some authorities have decided to impose or extend existing short-selling bans in their respective countries. They have done so either to restrict the benefits that can be achieved from spreading false rumours or to achieve a regulatory level playing field, given the close inter-linkage between some EU markets. These measures have been aligned as far as possible in the absence of a common EU legal framework in the area of short-selling and given the very different national legal bases on which such measures can be taken.The following countries have today announced or will shortly announce new bans on short-selling or on short positions: Belgium, France, Italy and Spain. Information on these measures can be retrieved from the websites of the relevant competent authorities. The measures will take effect as of 12 August 2011”

Brooke Masters and staff reporters, writing on Aug 11 on “European quarter bans short selling,” published in the Financial Times (http://www.ft.com/intl/cms/s/0/9a55839a-c42d-11e0-ad9a-00144feabdc0.html#axzz1UiTTdEPI), analyze the bank for 15 days of short selling of financial stocks imposed by regulators in France, Italy, Spain and Belgium. Other regulators in the European Union and the United States did not participate in the ban. A major adverse effect of the ban can be explained in terms of the analysis by Cochrane and Zingales (2009Sep15) published by the Wall Street Journal on the first anniversary of the Lehman Bros collapse. They criticize as false the argument that preventing Lehman’s collapse would have prevented a fall of the S&P 500 by 45 percent, output decline of 4 percent (now revised to 5.1 percent see http://cmpassocregulationblog.blogspot.com/2011/07/growth-recession-debt-financial-risk.html), increase in the rate of unemployment from 6.2 percent to 9.7 percent and the fiscal stimulus of $784 billion on an deficit of $1.59 trillion. There were other bailouts around Lehman: Fannie and Freddie on Sep 7, AIG on Sep 16, Washington Mutual on Sep 25 and the sale of Wachovia on Sep 29 to avoid its bankruptcy. Cochrane and Zingales (2009Sep15) analyze indicators of counterparty risk and financial stress in Sep 2008. Spreads of credit default swaps (CDS) traded on Sep 22 at the same level as on Sep 12. The S&P 500 closed on Sep 19 above its level on Sep 12. Perhaps the most revealing is the indicator of bank counterparty risk LIBOR-OIS spread, or aversion of banks to lend to each other, which increased only 18 points the day Lehman collapsed but increased 60 points between Sep 23 and Sep 25 after the TARP testimony in Congress. Counterparty risk among financial institutions is considered the critical event of the financial crisis (see http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html). The request from Congress of $700 billion to withdraw toxic assets in financial institutions raised the perceptions of financial institutions that they did not know the true state of their balance sheets and those of other financial institutions (see Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), Regulation of Banks and Finance (2009b)). Cochrane and Zingales (2009Sep15) find that the financial crisis was deepened and prolonged together with its adverse effects by the alarmist approach in requesting bailout funds from Congress to withdraw “toxic assets.” In fact, it proved impossible to withdraw toxic assets because haircuts would trigger collapse of balance sheets and TARP had to change course to providing capital injections. Brooke Masters quote Abraham Lioui, professor of finance at EDHEC (http://faculty-research.edhec.com/jsp/fiche_document.jsp?CODE=1220342738497&LANGUE=1), warning that the short ban could alert markets of fundamental problems in financial institutions. If those problems do exist, the bank cannot fix them and could worsen risk aversion.

II United States Debt Quagmire. Assessing global economic growth and financial turbulence requires analysis of the large economy of the US with a correspondingly large financial sector requires. Subsection IIA Long-term Debt in the US considers US fiscal affairs and GDP growth in the past eight decades. Subsection IIB US Growth and Trade analyzes information on economic growth and trade in the United States.

IIA Long-term Debt in the US. Table 4 provides US federal government or central government revenues, expenditures, deficit and debt held by the public as percent of GDP and yearly growth of GDP from 1930 to 2011. Charts 1 and 2 of the Bureau of Economic Analysis (BEA) of the Department of Commerce provide the yearly percentages in US GDP.

Table 4, United States Central Government Revenue, Expenditure, Deficit, Debt and GDP Growth 1930-2011

	Rev % GDP	Exp % GDP	Deficit % GDP	Debt % GDP	GDP ∆%
1930	4.2	3.4	0.8		-8.6
1931	3.7	4.3	-0.6		-6.5
1932	2.8	6.9	-4.0		-13.1
1933	3.5	8.0	-4.5		-1.3
1934	4.8	10.7	-5.9		10.9
1935	5.2	9.2	-4.0		8.9
1936	5.0	10.5	-5.5		13.1
1937	6.1	8.6	-2.5		5.1
1938	7.6	7.7	-0.1		-3.4
1939	7.1	10.3	-3.2		8.1
1940s
1940	6.8	9.8	-3.0	44.2	8.8
1941	7.6	12.0	-4.3	42.3	17.1
1942	10.1	24.3	-14.2	47.0	18.5
1943	13.3	43.6	-30.3	70.9	16.4
1944	20.9	43.6	-22.7	88.3	8.1
1945	20.4	41.9	-21.5	106.2	-1.1
1946	17.7	24.8	-7.2	108.7	-10.9
1947	16.5	14.8	1.7	96.2	-0.9
1948	16.2	11.6	4.6	84.3	4.4
1949	14.5	14.3	0.2	79.0	-0.5
1950s
1950	14.4	15.6	-1.1	80.2	8.7
1951	16.1	14.2	1.9	66.9	7.7
1952	19.0	19.4	-0.4	61.6	3.8
1953	18.7	20.4	-1.7	58.6	4.6
1954	18.5	18.8	-0.3	59.5	-0.6
1955	16.5	17.3	-0.8	57.2	7.2
1956	17.5	16.5	0.9	52.0	2.0
1957	17.7	17.0	0.8	48.6	2.0
1958	17.3	17.9	-0.6	49.2	-0.9
1959	16.2	18.8	-2.6	47.9	7.2
1960s
1960	17.8	17.8	0.1	45.6	2.5
1961	17.8	18.4	-0.6	45.0	2.3
1962	17.6	18.8	-1.3	43.7	6.1
1963	17.8	18.6	-0.8	42.4	4.4
1964	17.6	18.5	-0.9	40.0	5.8
1965	17.0	17.2	-0.2	37.9	6.4
1966	17.3	17.8	-0.5	34.9	6.5
1967	18.4	19.4	-1.1	32.9	2.5
1968	17.6	20.5	-2.9	33.9	4.8
1969	19.7	19.4	0.3	29.3	3.1
1970s
1970	19.0	19.3	-0.3	28.0	0.2
1971	17.3	19.5	-2.1	28.1	3.4
1972	17.6	19.6	-2.0	27.4	5.3
1973	17.6	18.7	-1.1	26.0	5.8
1974	18.3	18.7	-0.4	23.9	-0.6
1975	17.9	21.3	-3.4	25.3	0.2
1976	17.1	21.4	-4.2	27.5	5.4
1977	18.0	20.7	-2.7	27.8	4.6
1978	18.0	20.7	-2.7	27.4	5.6
1979	18.5	20.1	-1.6	25.6	3.1
1980s
1980	19.0	21.7	-2.7	26.1	-0.3
1981	19.6	22.2	-2.6	25.8	2.5
1982	19.2	23.1	-4.0	28.7	-1.9
1983	17.5	23.5	-6.0	33.1	4.5
1984	17.3	22.2	-4.8	34.0	7.2
1985	17.7	22.8	-5.1	36.4	4.1
1986	17.5	22.5	-5.0	39.5	3.5
1987	18.4	21.6	-3.2	40.6	3.2
1988	18.2	21.3	-3.1	41.0	4.1
1989	18.4	21.2	-2.8	40.6	3.6
1990s
1990	18.0	21.9	-3.9	42.1	1.9
1991	17.8	22.3	-4.5	45.3	-0.1
1992	17.5	22.1	-4.7	48.1	3.4
1993	17.5	21.4	-3.9	49.3	2.9
1994	18.0	21.0	-2.9	49.2	4.1
1995	18.4	20.6	-2.2	49.1	2.5
1996	18.8	20.2	-1.4	48.4	3.7
1997	19.2	19.5	-0.3	45.9	4.5
1998	19.9	19.1	0.8	43.0	4.4
1999	19.8	18.5	1.4	39.4	4.8
2000s
2000	20.6	18.2	2.4	34.7	4.1
2001	19.5	18.2	1.3	32.5	1.1
2002	17.6	19.1	-1.5	33.6	1.8
2003	16.2	19.7	-3.4	35.6	2.5
2004	16.1	19.6	-3.5	36.8	3.5
2005	17.3	19.9	-2.6	36.9	3.1
2006	18.2	20.1	-1.9	36.5	2.7
2007	18.5	19.6	-1.2	36.2	1.9
2008	17.5	20.7	-3.2	40.2	-0.3
2009	14.8	24.7	-9.9	53.0	-3.5
2010s
2010	14.9	23.8	-8.9	62.1	3.0
2011	14.8	24.1	-9.3	69.0

Sources:

Office of Management and Budget. 2011. Historical Tables. Budget of the US Government Fiscal Year 2011. Washington, DC: OMB.

Bureau of Economic Analysis, Department of Commerce, http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1

Congressional Budget Office http://www.cbo.gov/

Chart 1. Percentage Change of Real GDP 1945-2010

Source: Bureau of Economic Analysis, Department of Commerce, http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1

Chart 2. Percentage Change of Real GDP 1980-2010

Source: Bureau of Economic Analysis, Department of Commerce, http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1

Reinhart and Rogoff (2010GTD, 2011CEPR) classify the dataset of 2317 observations into 20 advanced economies and 24 emerging market economies. In each of the advanced and emerging categories, the data for countries is divided into buckets according to the ratio of gross central government debt to GDP: below 30, 30 to 60, 60 to 90 and higher than 90 (Reinhart and Rogoff 2010GTD, Table 1, 4). Median and average yearly percentage growth rates of GDP are calculated for each of the buckets for advanced economies. There does not appear to be any relation for debt/GDP ratios below 90. The highest growth rates are for debt/GDP ratios below 30: 3.7 percent for the average and 3.9 for the median. Growth is significantly lower for debt/GDP ratios above 90: 1.7 for the average and 1.9 percent for the median. GDP growth rates for the intermediate buckets are in a range around 3 percent: the highest 3.4 percent average for the bucket 60 to 90 and 3.1 percent median for 30 to 60. There is even sharper contrast for the United States: 4.0 percent growth for debt/GDP ratio below 30; 3.4 percent growth for debt/GDP ratio of 30 to 60; 3.3 percent growth for debt/GDP ratio of 60 to 90; and minus 1.8 percent, contraction, of GDP for debt/GDP ratio above 90.

The recent period of debt exceeding 90 percent of GDP based on yearly observations in Table 4 is between 1944 and 1948. The debt/GDP ratio actually rose to 106.2 percent of GDP in 1945 and to 108.7 percent of GDP in 1946. GDP fell 10.9 percent in 1946, which is only matched in Table 4 by the decline of 13.1 percent in 1932. Part of the decline is explained by the bloated US economy during World War II, growing at 17.1 percent in 1941, 18.5 percent in 1942 and 16.4 percent. Expenditures as a share of GDP rose to their highest in the series: 43.6 percent in 1943, 43.6 percent in 1944 and 41.9 percent in 1945. The repetition of 43.6 percent in 1943 and 1944 is in the original source of Table 4. During the Truman administration from Apr 1945 to Jan 1953, the federal debt held by the public fell systematically from the peak of 108.7 percent of GDP in 1946 to 61.6 percent of GDP in 1952. During the Eisenhower administration from Jan 1953 to Jan 1961, the federal debt held by the public fell from 58.6 percent of GDP in 1953 to 45.6 percent of GDP in 1960. The Truman and Eisenhower debt reductions were facilitated by diverse factors such as low interest rates, lower expenditure/GDP ratios that could be attained again after lowering war outlays and less rigid structure of mandatory expenditures than currently. There is no jump of debt as the one from 40.2 percent of GDP in 2008 to 69.0 percent of GDP in 2011. The alternative fiscal scenario of the Congressional Budget Office (CBO 2011LTBO, 8) projects a debt/GDP ratio of 101percent by 2021 while the projection under an extended base line scenario is 76 percent of GDP in 2021. There is a major policy challenge of recovering the economy toward full employment while at the same time avoiding debt reaching a point where the US would have to pay risk premium spread on its Treasury securities.

IIB US Growth and Trade. The approach of Lucas (2011May19) is to evaluate the performance of the economy in terms of policies required for recovery but without neglect of efficiency in the use of productive resources and growth in long-term productive capacity. Business cycles could be analyzed as departures from a strong long-term trend of growth. Lucas (2011May19, 5) finds that real income per capita in the US multiplied by a factor of 12 between 1870 and 2010. Output in the US grows at a rate of 3 percent per year in the long-run and output per person at the rate of 2 percent. Business cycles can be measured as deviations from this long-term trend. Lucas (2011May 19, 7) provides the rates of growth of eight economies (US, UK, France, Germany, Canada, Italy, Spain and Japan) since 1870, showing that relative growth rates accelerated in countries starting from lower income levels until about the 1970s. The rate of growth of rich economies has continued at about 2 per cent per year but the income gap has stabilized. Different national policies could explain the slower reduction of income gaps. US GDP fell 30 percent below trend by 1933 and is currently about 10 percent below trend, as measured by Lucas (2011May19, 16).

The key to understanding the 2008 financial crisis in the view of Lucas (2011May19, 29-31) is the change in the structure of finance. Securitization replaced traditional banking. Securitization consists of agglutinating receivables, such as credit card debt, student loans, mortgages, car loans and so on, into one bond or security. The process received the blessing of regulators and supervisors which viewed them as credit-risk transfer, reducing concentration of credit exposures in lenders by distributing them to investors. For example, a mortgage contracted by a home buyer is insured by Fannie Mae or Freddie Mac to obtain AAA credit rating and combined with similarly rated mortgages into a bond called mortgage-backed security (MBS). More generally, the receivables of all types of obligations, including everything from credit card debts to mortgages, are combined into a bond called asset-backed security (ABS). The issue that concerns Lucas (2011May 19, 29-31) is that the ABS were converted into short-term liquidity. The acquiring investor financed the ABS in the “repo market.” Repo is a sale and repurchase agreement, which ultimately generates the cash for provided by the mortgage in the purchase of the home, credit card purchases and so on. The investor finances the ABS by a loan in which it obtains overnight or short-term cash from a financial entity with the ABS as collateral, or sale of the ABS, with the promise of repurchasing the ABS the following day or at a specified near date in the future at a contract-specified price plus the interest on the repo. (An excellent analysis is provided by Duffie (2010JEP; see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 59-60, 217-24, Financial Regulation after the Global Recession (2009a), 48-52, 153-5; see http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html). In short, what Lucas (2011May19, 29-31) argues is that securitization provided an instrument to invest funds with liquidity, or availability of funds, similar to that provided by banks. The problem is that perceptions of risk were distorted in that Lehman collateral securities were viewed as having riskless or no default properties close to those of Treasury bills. The financial crisis of 2008, in the view of Lucas (2011May19, 31) consisted of a flight from risky private-sector securities to government obligations of all terms. The crisis was ended with the Fed increasing bank reserves from $45 billion in Aug 2008 to $821 billion in Dec 2008 (Lucas 2011May19, 32).

The approach followed here is to consider the purchasing managers’ indexes for countries, regions and countries as the first available indicators and to contrast them with regular periodic indicators. Regional data tables are provided for each of the regions: United States, Japan, China, Euro Area, Germany, France, Italy and the United Kingdom. The regional data tables can be illustrated with the one for the US, Table USA. The first column lists the major indicators while the second column provides a summary of the most recent release and in the last row the date in which detailed information is covered in this blog. The archive column on the left of the blog provides the link to the blog comment for the most recent date that the indicator was analyzed. Table USA thus provides quick reference on the indicators and a link to where they are located. The three indicators of inflation show CPI inflation of 3.6 percent in Jun, PPI inflation of 7.0 percent in Jun and headline PCE inflation of 1.6 percent and ex food and energy, used by the Fed, as 1.3 percent. The latest employment situation report for Jul shows SA unemployment rate of 9.1 percent, 29.6 million people unemployed or underemployed, increase in nonfarm payroll jobs by 117,000 total and 154,000 private and decline of average hourly earnings by 1.6 percent in Jun after adjusting for inflation. Hiring has not recovered to pre-crisis levels with decline of 17.7 million in numbers of hiring per year from 2006 to 2010 and of 1.256 million in May 2011 relative to a decade earlier in May 2001. GDP growth stalled in IQ2011 at 0.5 percent seasonally adjusted annual equivalent rate (SAAR) of 0.4 percent, or 0.1 percent per quarter. IIQ2011 GDP grew at the SAAR of 1.3 percent, or 0.3 percent per quarter. Real disposable personal income (RDPI) was virtually flat in the first half of 2011 and real personal consumption expenditures that generate 70.6 percent of GDP grew at 0.0 percent in Jun. There is information on many other short-term indicators of the economy of the US in Table USA.

Table USA, US Economic Indicators

Consumer Price Index	Jun 12 months NSA ∆%: 3.6; ex food and energy ∆%: 1.6 Jun month ∆%: –0.2; ex food and energy ∆%: 0.3 Blog 07/17/11
Producer Price Index	Jun 12 months NSA ∆%: 7.0; ex food and energy ∆% 2.4 Jun month SA ∆% –0.4; ex food and energy∆%: 0.3 Blog 07/17/11
PCE Inflation	Jun 12 months NSA ∆%: headline 1.6; ex food and energy ∆% 1.3 Blog 08/07/11
Employment Situation	Household Survey: Jul Unemployment Rate SA 9.1% Blog calculation People in Job Stress Jul: 29.6 million NSA Establishment Survey: Jul Nonfarm Jobs +117,000; Private +154,000 Jun 12 months Average Hourly Earnings Inflation Adjusted ∆%: minus 1.6% Blog 08/07/11
Nonfarm Hiring	Nonfarm Hiring fell from 64.9 million in 2006 to 47.2 million in 2010 or by 17.7 million Private-Sector Hiring May 2011 4.250 million lower by 1.256 million than 5.506 million in May 2001 Blog 07/17/11
GDP Growth	BEA Revised National Income Accounts back to 2003 IQ2011 SAAR ∆%: 0.4 IIQ2011 SAAR ∆%: 1.3 Blog 07/31/11
Personal Income and Consumption	Jun month ∆% SA Real Disposable Personal Income (RDPI) 0.3 Jun month SA ∆% Real Personal Consumption Expenditures (RPCE) : 0.0 12 months NSA ∆%: RDPI: 0.3; RPCE ∆%: 1.0 Blog 08/07/11
Employment Cost Index	IIQ2011 SA ∆%: 0.7 Jun 12 months ∆%: 3.4 Blog 07/17/11
Industrial Production	Jun month SA ∆%: 0.2 Jun 12 months NSA ∆%: 3.4 Capacity Utilization: 76.7 Blog 07/17/11
New York Fed Manufacturing Index	General Business Conditions Jul: –3.76 New Orders: –5.45 Blog 07/17/11
Philadelphia Fed Business Outlook Index	General Index from –7.7 Jun to 3.2 Jul New Orders from –7.6 Jun to 0.1 Jul Blog 07/24/11
Manufacturing Shipments and Orders	Jun/May New Orders SA ∆%: –0.8; ex transport ∆%: 0.1 12 months Jun NSA ∆%: 12.5; ex transport ∆% 12.8 Blog 08/07/11
Durable Goods	Jun New Orders SA ∆%: minus 2.1; ex transport ∆%: 0.1 Jun 12 months NSA New Orders ∆%: 9.4; ex transport∆% : 9.2 Blog 07/31/11
Sales of Merchant Wholesalers	Jan-Jun 2011/2010 ∆%: Total 15.2; Durable Goods: 11.9; Nondurable Goods 17.8 Blog 08/14/11
Sales and Inventories of Manufacturers, Retailers and Merchant Wholesalers	Jun 11/Jun 10 NSA ∆%: Total Business 12.1; Manufacturers 12.3 Retailers 9.1; Merchant Wholesalers 14.6 Blog 08/14/11
Sales for Retail and Food Services	Jul 12 months ∆%: Retail and Food Services: 8.5; Retail ∆% 8.9 Blog 08/14/11
Value of Construction Put in Place	Jun SAAR month SA ∆%: 0.2 Jun 12 months NSA: –4.7 Blog 08/07/11
Case-Shiller Home Prices	May 2011/May 2010 ∆% NSA: 10 Cities –3.6; 20 Cities: –4.5 ∆% May SA: 10 Cities 0.1; 20 Cities: –0.1 Blog 07/31/11
New House Sales	Jun month SAAR ∆%: -0.9 Jan/Jun 2011/2010 NSA ∆%: –11.9 Blog 07/31/11
Housing Starts and Permits	Jun Starts month SA ∆%: 14.6; Permits ∆%: 2.5 Jan/Jun 2011/2010 NSA ∆% Starts 5.4; Permits ∆% –5.9 Blog 07/24/11
Trade Balance	Balance Jun SA -$53,067 million versus May -$50,831 million Exports Jun SA ∆%: -2.3 Imports Jun SA ∆%: -0.8 Exports Jan-Jun 2011/2010 NSA ∆%: 18.3 Imports Jan-Jun 2011/2010 NSA ∆%: 17.9 Blog 08/14/11
Export and Import Prices	Jun 12 months NSA ∆%: Imports 13.6; Exports 9.9 Blog 07/17/11
Consumer Credit	Jun ∆% annual rate: 7.7%
Net Foreign Purchases of Long-term Treasury Securities	May Net Foreign Purchases of Long-term Treasury Securities: $23.6 billion versus Apr $30.6 billion Major Holders of Treasury Securities: China $1159 billion; Japan $912 billion Blog 07/24/11
Treasury Budget	Fiscal Year to Jul 2011/2010 ∆%: Receipts 8.0; Outlays 2.4; Deficit -5.9; Individual Income Taxes 23.8 Deficit Fiscal Year to Jul 2011: $1,099,901 million Blog 08/14/11

The US trade balance of goods and services, shown in Table 5, deteriorated from deficit of $43.6 billion in Apr to $50.8 in May and $53.1 billion in Jun. The expectation of improvement because of decline of oil prices did not materialize with exports falling 2.3 percent from May into Jun while imports fell only 0.8 percent.

Table 5, Trade Balance of Goods and Services Seasonally Adjusted Millions of Dollars

	Trade Balance	Exports	Imports
Jun	-53,067	170,858	223,924
∆%		-2.3	-0.8
May	-50,831	174,960	225,792
∆%		-0.5	2.9
Apr	-43,625	175,821	219,446
∆%		1.4	-0.3
Mar	-46,824	173,390	220,215
∆%		4.9	4.2
Feb	-46,047	165,245	211,292
∆%		-1.4	-1.9
Jan	-47,925	167,582	215,507
∆%		2.2	5.4
Dec 2010	-40,454	164,006	204,459
Jan-Jun 2011	-288,319	1,027,857	1,316,176
Jan-Jun 2010	-250,165	887,636	1,137,801

Source: http://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf

The US balance of goods, consisting of exports and imports of goods only, that is, excluding services, is shown in Table 6 for the cumulative Jan-Jun. The deficit in the goods balance increased by $54.8 billion in Jan-Jun 2011 relative to Jan-Jun 2010 with an increase in the petroleum balance of $32.5 billion and an increase of $22,1 billion in the non-petroleum balance. While total goods imports grew by 17.9 percent in Jan-Jun 2011 relative to Jan-Jun 2010, petroleum exports grew by 30.5 percent and non-petroleum imports by 14.9 percent. Zero interest rates encourage the carry trade from low interest rates in the US to leveraged long positions in commodities and other risk financial assets, creating multiple distortions throughout the world economy and financial markets.

Table 6, Goods Balance, Exports and Imports $ Millions and ∆% NSA

	Jan-Jun 2011	Jan-Jun 2010	∆%
Total Balance	-373,610	-318,790
Petroleum	-168,562	-136,070
Non Petroleum	-199,967	-177,856
Total Exports	734,365	620,526	18.3
Petroleum	51,637	32,727	57.8
Non Petroleum	673,750	582,324	15.7
Total Imports	1,107,975	939,316	17.9
Petroleum	220,198	168,797	30.5
Non Petroleum	873,717	760,181	14.9

Details may not add because of rounding and seasonal adjustment

Source: http://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf

Inflation is also showing in nominal dollar values of international trade. Table 7 provides Jan-Jun 2010 and Jan-Jun 2011 exports and imports of goods in nominal dollar values and their percentage changes. Exports rose by 18.3 percent and imports by 18.1 percent. The only decline is for US exports of crude oil, which are $678 million and have share of only 0.09 percent in total exports of $730,690 million. All categories expanded by double digits percentages.

Table 7, Exports and Imports of Goods, Not Seasonally Adjusted Millions of Dollars and %

	Jan- Jun 2011 $ Millions	Jan-Jun 2010 $ Millions	∆%
Exports	730,690	617,405	18.3
Manu- factured	473,861	423,880	11.8
Agricultural Commodities	70,349	53,278	32.0
Mineral Fuels	58,953	37,045	59.1
Crude Oil	678	884	-23.3
Imports	1,082,056	916,040	18.1
Manu- factured	771,077	669,886	15.1
Agricultural Commodities	49,923	41,082	21.5
Mineral Fuels	226,298	177,430	27.5
Crude Oil	163,860	129,241	26.8

Source: http://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf

Sales of Merchant wholesalers except manufacturers’ sales branches and offices, not adjusted for seasonality or prices, grew 15.2 percent in Jan-Jun 2011 relative to Jan-Jun 2010, as shown in Table 8. Significant part of this nominal growth is caused by inflation. Durables sales rose 11.9 percent and not durable sales grew 17.8 percent. Commodity-related sales of farm products rose 50.0 percent and petroleum products grew 37.0 percent. Petroleum wholesale sales account for 27.5 percent of not durable sales and 15.5 percent of total wholesale sales. The sum petroleum and groceries sales adds to $641 billion equivalent to 49.1 percent of not durable sales and 27.5 percent of total wholesale sales, growing by 23.5 percent in the first six months of 2011 relative to the first six months of 2010. Inflation is present throughout the entire production and distribution chain.

Table 8, Sales of Merchant Wholesalers Except Manufacturers’ Sales Branches and Offices, Billions of Dollars and ∆% % NSA

	Jan-Jun 2011 $ B	Jan-Jun 2010 $ B	∆%
US Total	2,324	2,018	15.2
Durable	1,019	910	11.9
Automotive	158	145	8.9
Prof. Equip.	182	172	5.8
Comp. Equip.	97	90	7.8
Electrical	192	171	12.3
Machinery	169	140	20.7
Not Durable	1,305	1,108	17.8
Drugs	201	185	8.6
Apparel	62	61	1.6
Groceries	282	257	9.7
Farm Products	135	90	50.0
Petroleum	359	262	37.0
Petroleum plus Groceries	641	519	23.5

Sources:

http://www2.census.gov/wholesale/pdf/mwts/currentwhl.pdf

The percentage changes of sales of manufacturers, retailers and merchant wholesalers in Table 9 are not adjusted for price change. Total business sales rose 12.1 percent in Jun 2011 relative to Jun 2010 not adjusting for seasonality or price changes with sales of manufacturers increasing by 12.3 percent, sales of retailers growing by 9.1 percent and those of merchant wholesalers increasing by 14.6 percent. Here again is the presence of inflation as part of the increases is caused by prices and part by volumes. All nominal values are rising with inflation.

Table 9, Percentage Changes for Sales of Manufacturers, Retailers and Merchant Wholesalers

	Jun 11/ May 11 ∆% SA	May 11/ Apr 11 ∆% SA	Jun 11/ Jun 10 ∆% NSA
Total Business	0.4	-0.1	12.1
Manu- facturers	0.2	0.0	12.3
Retailers	0.3	-0.2	9.1
Merchant Whole- salers	0.6	-0.3	14.6

Source: http://www.census.gov/mtis/www/data/pdf/mtis_current.pdf

Wholesale inventories for total business rose at the NSA rate of 0.9 percent in May compared with decline by 0.1 for total business, as shown in Table 10. The increase in monthly sales of total business of 0.4 percent in Jun while inventories grew by 0.3 percent resulted in decrease of the inventory/sales ratio from 1.24 in May to 1.21 in Jun. Inventory/sales ratios are at roughly the same level as in Jun 2010.

Table 10, Percentage Changes for Inventories of Manufacturers, Retailers and Merchant Wholesalers and Inventory/Sales Ratios

Inventory Change	Jun 11/ May 11 ∆% SA	May 11/ Apr 11 ∆% SA	Jun 11/ Jun 10 ∆% NSA
Total Business	0.3	0.9	11.1
Manu- facturers	0.2	0.8	13.0
Retailers	0.2	0.4	5.0
Merchant Wholesalers	0.6	1.7	15.4
Inventory/ Sales Ratio NSA	Jun 2011	May 2011	Jun 2010
Total Business	1.21	1.24	1.22
Manu- facturers	1.26	1.32	1.25
Retailers	1.29	1.28	1.34
Merchant Wholesalers	1.10	1.12	1.09

Source: http://www.census.gov/mtis/www/data/pdf/mtis_current.pdf

The advance report on retail and food services sales by the US Census Bureau is found in Table 11. The aggregate for retail and food services is a good surprise with an increase of 0.5 percent in Jul relative to 0.3 percent in Jun with the 12-month rate of 8.5 percent, which may reflect some inflation. The aggregate excluding motor vehicles and parts also rose 0.5 percent in Jun after 0.2 percent in May and 8.6 percent in 12 months. Gasoline station sales fell 1.7 percent in Jun but rebounded 1.6 percent in Jul, suggesting increased consumption as gas prices continued to drop. Retail sales also increased 0.5 percent in Jun after 0.3 percent in May and 8.9 percent in 12 months.

Table 11, Percentage Change in Monthly Sales for Retail and Food Services SA

	Jul/Jun	Jun/May	12 Months ∆%
Retail and Food Services	0.5	0.3	8.5
Excluding Motor Vehicles and Parts	0.5	0.2	8.6
Motor Vehicles & Parts	0.4	0.7	8.3
Retail	0.5	0.3	8.9
Building Materials	-0.4	1.6	7.5
Food and Beverage	0.5	0.5	7.8
Grocery	0.6	0.4	8.2
Health & Personal Care Stores	0.1	0.0	4.1
Clothing & Clothing Accessories Stores	0.5	1.2	7.7
Gasoline Stations	1.6	-1.7	23.6

Source: http://www.census.gov/retail/marts/www/marts_current.pdf

The Treasury budget in the fiscal year to Jul 2011 is shown in Table 12. The deficit declined slightly by 5.9 percent relative to the same period in 2010. At 1,099,901 million the deficit is certain to exceed $1 trillion for the third consecutive year and is programmed to exceed $1 trillion in 2012. Even with the weakening recovery receipts are growing at 8.0 percent relative to 2010 and outlays by 2.4 percent. Individual income taxes have grown by 23.8 percent in the fiscal year to Jul in 2011 relative to 2010.

Table 12, Treasury Budget in Fiscal Year to Date Millions Dollars

	Jul 2011	Jul 2010	∆%
Receipts	1,893,096	1,752,541	8.0
Outlays	2,992,997	2,921,612	2.4
Deficit	-1,099,901	-1,169,071	-5.9
Individual Income Taxes	890,652	719,451	23.8

Source: http://www.fms.treas.gov/mts/mts0711.pdf

III Global Inflation. There is inflation everywhere in the world economy, with slow growth and persistently high unemployment in advanced economies. There is high association in the past 13 years between global GDP and the JP Morgan Global Manufacturing and Services PMI^TM (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8416). Expansion is a reading above 50.0 and contraction a reading below 50.0. The JP Morgan Global Manufacturing and Services PMI^TM rose from 52.3 in Jun to 52.6 in Jul, which means that world overall output, manufacturing and services, expanded at a faster rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8416). Output activity in the JP Morgan Global Services PMI^TM (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8417) rose from 52.2 in Jun to 53.1 in Jul, meaning that global services grew at a faster rate in Jul, compensating for decline in the JP Morgan Global Manufacturing PMI^TM from 52.3 in Jun to 50.6 in Jul, signaling that manufacturing was expanding at a slower rate in Jul (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8379). The index of new orders of the JP Morgan Global Manufacturing and Services PMI^TM fell from 52.0 in Jun to 51.1 in Jul, signaling expansion at a slower rate. Input prices continue to rise but at a slower rate, with the index of input prices falling from 58.6 in Jun to 56.3 in Jul. The employment index continues to increase at a slower rate, falling from 52.5 in Jun to 51.2 in Jul (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8416).

Table 13 updated with every post, provides the latest annual 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).

Table 13, GDP Growth, Inflation and Unemployment in Selected Countries, Percentage Annual Rates

	GDP	CPI	PPI	UNE
US	2.9	3.6	7.0	9.1
Japan	-0.7***	0.2	2.5	4.6
China	9.6	6.5	7.5
UK	1.8	4.5* RPI 5.2	5.9* output 18.5* input 13.1**	7.7
Euro Zone	2.5	2.5	5.9	9.9
Germany	4.8	2.4	5.6	6.0
France	2.2	2.3	6.1	9.5
Nether-lands	3.2	2.5	9.1	4.2
Finland	5.8	3.4	7.2	7.8
Belgium	3.0	3.4	9.0	7.3
Portugal	-0.7	3.3	5.9	12.4
Ireland	-1.0	1.2	5.2	14.0
Italy	1.0	3.0	4.7	8.1
Greece	-4.8	3.1	6.3	15.1
Spain	0.8	3.0	6.7	20.9

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

*Office for National Statistics

PPI http://www.statistics.gov.uk/pdfdir/ppi0811.pdf

CPI http://www.statistics.gov.uk/pdfdir/cpi0611.pdf

** Excluding food, beverage, tobacco and petroleum

http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-04042011-AP/EN/4-04042011-AP-EN.PDF

***Change from IQ2011 relative to IQ2010 http://www.esri.cao.go.jp/jp/sna/sokuhou/kekka/gaiyou/main_1.pdf

Source: EUROSTAT; country statistical sources http://www.census.gov/aboutus/stat_int.html

Table 14 provides the forecasts of the Federal Reserve Board Members and Federal Reserve Bank Presidents for the FOMC meeting in Jun. Inflation by the price index of personal consumption expenditures (PCE) was forecast for 2011 in the Apr meeting of the FOMC between 2.1 to 2.8 percent. Table 14 shows that the interval has narrowed to PCE headline inflation of between 2.3 and 2.5 percent. The FOMC focuses on core PCE inflation, which excludes food and energy. The Apr forecast of core PCE inflation was an interval between 1.3 and 1.6 percent. Table 14 shows the revision of this forecast in Jun to a higher interval between 1.5 and 1.8 percent. The Statement of the FOMC meeting on Jun 22 analyzes inflation as follows (http://www.federalreserve.gov/newsevents/press/monetary/20110622a.htm):

“Inflation has moved up recently, but the Committee anticipates that inflation will subside to levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate for an extended period.”

The FOMC statement on Aug 9 changed the “extended period” to specific 2013 (http://www.federalreserve.gov/newsevents/press/monetary/20110809a.htm):

“To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate”

Table 14, Forecasts of PCE Inflation and Core PCE Inflation by the FOMC, %

	PCE Inflation	Core PCE Inflation
2011	2.3 to 2.5	1.5 to 1.8
2012	1.5 to 2.0	1.4 to 2.0
2013	1.5 to 2.0	1.4 to 2.0
Longer Run	1.7 to 2.0

Source: http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20110622.pdf

Japan’s corporate goods price index (CGPI), formerly wholesale price index (WPI), rose 0.2 percent in Jul, after falling 0.2 percent in May but increasing in all other months in Jan-Jul. The annual equivalent rate of price increase in Jan-Jul is 4.0 percent and 2.9 percent year-on-year, as shown in Table 15. These are very high rates of price increase for Japan.

Table 15, Japan Corporate Goods Price Index (CGPI) ∆%

	Month	Year
Jul 2011	0.2	2.9
Jun	0.1	2.6
May	-0.2	2.1
Apr	0.9	2.5
Mar	0.6	2.0
Feb	0.2	1.7
Jan	0.5	1.5
AE ∆%	4.0
Dec 2010	0.4	1.2

AE: annual equivalent

Source: http://www.boj.or.jp/en/statistics/pi/cgpi_release/cgpi1107.pdf

Percentage changes of prices indexes for industry in China are shown in Table 16. The 12-month rate of PPI change in Jul is 7.5 percent and the cumulative rate in Jan-Jul 2011 relative to Jan-Jul 2010 is 7.1 percent. With the exception of durable goods, inflation is at least 4.5 percent for all goods, ranging as high as 18.9 percent for nonferrous metals.

Table 16, China, Prices Indexes for Industry ∆%

	12 Months Jul ∆%	Jan-Jul 2011/ Jan-Jul 2010 ∆%
I Producer Price Indexes	7.5	7.1
Means of Production	8.4	7.9
Mining	18.1	16.3
Raw Materials	12.1	10.6
Processing	5.8	5.9
Consumer Goods	4.8	4.4
Food	8.6	8.0
Clothing	4.5	4.2
Daily Use Articles	4.5	4.4
Durables	-0.5	-0.7
II Purchaser Price Indexes	11.0	10.4
Nonferrous Metals	18.9	15.0
Fuel and Power	12.6	10.8
Ferrous Metals	10.2	11.9
Raw Chemical Materials	13.3	12.1

Source: http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20110809_402745934.htm

The 12-month rate of increase of the consumer price index of China for Jul is 6.5 percent as shown in Table 17. Food prices rose 1.2 percent in the month of Jul and 14.8 percent in the 12 months ending in Jul. Food price increase in a population where food is a major part of the consumer basket is politically and socially sensitive. The increase in the month of Jul is 0.5 percent. Non-food prices rose only 0.1 percent in Jul and 2.9 percent in 12 months. Inflation of property values is also an important issue in China but the CPI shows an increase of only 0.1 percent for housing in Jul and 5.9 percent in 12 months.

Table 17, China, Consumer Price Index

	Jul Month ∆%	12 Month Jul ∆%	Jan/Jul 2011/ Jan/Jul 2010
Consumer Prices	0.5	6.5	5.5
Urban	0.5	6.2	5.4
Rural	0.5	7.1	6.1
Food	1.2	14.8	12.2
Non-food	0.1	2.9	2.7
Consumer Goods	0.5	3.7	4.0
Services	0.4	3.7	4.0
Commodity Categories:
Food	1.2	14.8	12.2
Tobacco, Liquor	0.2	2.8	2.3
Clothing	-0.6	2.2	1.2
Household	0.2	2.7	2.1
Healthcare and Personal	0.3	3.6	3.2
Transport Comm.	0.0	0.9	0.4
Recreation, Education	0.6	0.5	0.6
Housing	0.1	5.9	6.2

Source: http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20110809_402745925.htm

The 12-month rates of price increase of China have been accelerating from 4.9 percent in Jan to 6.5 percent in Jul, as shown in Table 18. The official target for inflation in 2011 is 4 percent, which is unlikely to be attained. Deceleration of price increases in the final part of 2011 may depend on moderation of food price increases.

Table 18, China, 12 Months Rates of Change of Consumer Price Index

	12 Month ∆%
Jul	6.5
Jun	6.4
May	5.5
Apr	5.3
Mar	5.4
Feb	4.9
Jan	4.9

Source: http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20110809_402745925.htm

http://www.stats.gov.cn/english/statisticaldata/

CPI inflation has risen moderately in France as shown in Table 19. The 12-month rate of 1.9 percent in Jul is only slightly higher than 1.8 percent in Jan and 1.8 percent in Dec. Much of the increase in inflation occurred in the quarter of Feb to Apr when energy and commodity prices were accelerating. Because of the rise in the quarter of Feb to Apr, the annual equivalent inflation rate in the first half of the year is 2.1 percent. CPI inflation fell 0.4 percent in the month of Jul.

Table 19, France, Consumer Price Index ∆%

	Month	12 Months
Jul	-0.4	1.9
Jun	0.1	2.1
May	0.1	2.0
Apr	0.3	2.1
Mar	0.8	2.0
Feb	0.5	1.6
Jan	-0.2	1.8
AE ∆%	2.1
Dec 2010	0.4	1.8

Source: http://www.insee.fr/en/themes/info-rapide.asp?id=29&date=20110812

http://www.bdm.insee.fr/bdm2/index.action?request_locale=en

CPI inflation in Germany rose from 1.7 in the 12 months ending in Dec 2010 to 2.4 percent in the 12 months ending in Jul 2011, as shown in Table 20. Inflation was also higher in the quarter Feb to Apr as a result of commodity price increases but the rate fell significantly in the quarter Apr to Jun, increasing by 0.4 percent in the month of Jul. The annual equivalent rate for the first seven months of the year is 2.3 percent, which is lower than 2.4 percent in the 12 months ending in Jul.

Table 20, Germany, Consumer Price Index ∆%

	Month	12 Months
Jul	0.4	2.4
Jun	0.1	2.3
May	0.0	2.3
Apr	0.2	2.4
Mar	0.5	2.1
Feb	0.5	2.1
Jan	-0.4	2.0
Dec 2010	1.0	1.7
AE ∆%	2.3

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2011/08/PE11__290__611,templateId=renderPrint.psml

The structure of consumer price inflation in Germany by segments is shown in Table 21. Headline inflation of 0.4 percent in Jul in the same as excluding heating oil and motor fuels, excluding household energy or excluding energy. Durable goods’ prices increased a high 1.0 percent in Jul but only 1.5 percent in 12 months. The pressure of 12-month consumer price inflation in Germany is in the energy-related goods: 12.3 percent for motor fuels, 9.8 percent for household energy and 25.6 percent for heating oil. Food prices fell in Jul and rose only 2.1 percent in 12 months.

Table 21, Germany, Consumer Price Index ∆%

Jul 2011	Month ∆%	12 Months ∆%
Total	0.4	2.4
Excluding heating oil and motor fuels	0.4	1.9
Excluding household energy	0.4	2.0
Excluding Energy	0.4	1.5
Total Goods	-0.1	3.5
Nondurable Consumer Goods	0.2	5.0
Medium-Term Life Consumer Goods	-1.5	1.6
Durable Consumer Goods	1.0	1.5
Energy Components
Motor Fuels	0.5	12.3
Household Energy	0.6	9.8
Heating Oil	1.9	25.6
Food	-0.3	2.1

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2011/08/PE11__290__611,templateId=renderPrint.psml

CPI inflation in Italy has been relatively higher than in France and Germany, as shown in Table 22. There is the same collapse of the monthly rate in Jun and May, caused by the decline in commodity prices but as in Germany CPI inflation rose 0.3 percent. There was an increase in monthly inflation in Jan of 0.4 percent instead of a decline as in France and Germany. The 12-month rate of inflation has jumped from 1.9 percent in Dec 2010 to 2.7 percent in Jun and Jul 2011.

Table 22, Italy, Consumer Price Index ∆%

	Month	12 Months
Jul	0.3	2.7
Jun	0.1	2.7
May	0.1	2.6
Apr	0.5	2.6
Mar	0.4	2.5
Feb	0.3	2.4
Jan	0.4	2.1
Dec 2010	0.4	1.9
AE ∆%	3.7

Source: http://www.istat.it/salastampa/comunicati/in_calendario/precon/20110714_00/testointegrale20110714.pdf

The Bureau of Labor Statistics (BLS) calculates labor productivity “by dividing an index of real output by an index of hours worked of all persons, including employees, proprietors and unpaid family workers” (http://www.bls.gov/news.release/pdf/prod2.pdf). Business output is measured as “a chain type, current-weighted index constructed after excluding from gross domestic product (GDP) the following outputs: general government, nonprofit institutions, and private households (Ibid). Business output had a share of 75 percent in the value of GDP in 2009 and nonfarm business output of 74 percent of 2009 GDP. Productivity measures “the changes from period to period in the amount of goods and services produced per hour” (Ibid). Various factors affect productivity such as technology, investment and others. Labor compensation “includes accrued wages and salaries, supplements, employer contributions to employee benefit plans and taxes” (Ibid). Unit labor costs are defined by BLS as “the ratio of hourly compensation to labor productivity; increases in hourly compensation tend to increase unit labor costs and increases in output per hour end to reduce them” (Ibid). Real hourly compensation is obtained by diving hourly compensation by the consumer price index. Increases in hourly compensation raise unit labor costs while increases in labor productivity could soften increases in compensation, lowering unit labor costs. The report on productivity and costs of the BLS is important because of the measurement of activity accounting for three quarters of GDP and the motivation for investment by business in exploiting opportunities for increases in productivity and decisions on the use of labor.

The BLS has revised the estimates for productivity and unit costs. Table 23 provides the data for nonfarm business sector productivity and costs for IIQ2011 as seasonally adjusted annual equivalent rate (SAAE), IIQ2011 relative to a year earlier and the revised data for IQ2011. Reflecting increases in output of 1.8 percent and of 2.0 percent in hours worked, nonfarm business sector labor productivity fell at a seasonally-adjusted annual equivalent (SAAE) rate of 0.3 percent in IQ2011, as shown in column 2 “IIQ2011 SAEE.” The year-to-year increase of labor productivity from IIQ2010 to IIQ2011 was 0.8 percent, reflecting increases in output of 2.5 percent and of hours worked of 1.6 percent, as shown in column 3 “IIQ2011 year to year.” Unit labor costs rose by 2.2 percent in IIQ2011 and by 1.3 percent in IIQ2011 year to year. Hourly compensation in IIQ2011 SAAE rose 1.9 percent, which deflated by the estimated consumer price increase SAAE in the IIQ2011 results in a decline of real hourly compensation by 2.1 percent.

Table 23, Nonfarm Business Sector Productivity and Costs %

	IIQ2011 SAAE	IIQ2011 Year to Year	IQ2011 SAAE	IQ2011 Year to Year
Produc-tivity	-0.3	0.8	-0.6	1.8
Output	1.8	2.5	0.9	3.2
Hours	2.0	1.6	1.5	1.4
Hourly Comp.	1.9	2.1	4.2	2.5
Real Hourly Comp.	-2.1	-1.2	-1.0	-2.6
Unit Labor Costs	2.2	1.3	4.8	0.7
Unit Nonlabor Payments	2.6	3.1	-0.4	3.2
Implicit Price Deflator	2.5	2.2	2.9	2.0

Notes: SAAE: seasonally adjusted annual equivalent; Comp.: compensation

Source: http://www.bls.gov/news.release/pdf/prod2.pdf

The revised increases in productivity in Table 24 of 4.1 percent in the 2010 annual average and 2.3 percent in the 2009 annual average were facilitated by reductions in hours worked of 0.1 percent in 2010 and 7.2 percent in 2009. The report on productivity and costs confirms a weak economy in IIQ2011 and losses in real hourly compensation of labor with likely adverse effects on consumption.

Table 24, Revised Nonfarm Business Sector Productivity and Costs Annual Average %

	2010 Annual Average	2009 Annual Average	2008 Annual Average
Produc-tivity	4.1	2.3	0.6
Output	4.0	-5.1	-1.5
Hours	-0.1	-7.2	-2.1
Hourly Comp.	2.1	1.6	3.4
Real Hourly Comp.	0.4	2.0	-0.4
Unit Labor Costs	-2.0	-0.7	2.8
Unit Nonlabor Payments	6.1	3.1
Implicit Price Deflator	1.3	0.7

Notes: SAAE: seasonally adjusted annual equivalent; Comp.: compensation

Source: http://www.bls.gov/news.release/pdf/prod2.pdf

Table 24A, 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 new coupons such as 3.63 percent in recent auctions (http://www.treasurydirect.gov/instit/annceresult/press/preanre/2011/2011.htm) are not comparable to prices in Table 24A. 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, subsequently by the tragic earthquake and tsunami in Japan and now again by the sovereign risk doubts in Europe and the growth recession in the US. The yield of 2.49 percent at the close of market on Fr Aug 12, 2011, would be equivalent to price of 103.3504 in a hypothetical bond maturing in 10 years with coupon of 2.625 percent for price gain of 2.1 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. The realization of a growth recession is also influencing yields. Important causes of the rise in yields shown in Table 24A 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 http://cmpassocregulationblog.blogspot.com/2011/04/budget-quagmire-fed-commodities_10.html), rising from 40.8 percent of GDP in 2008, 53.5 percent in 2009 (Table 2 in http://cmpassocregulationblog.blogspot.com/2011/04/budget-quagmire-fed-commodities_10.html) and 69 percent in 2011. On Aug 10, 2011, the line “Reserve Bank credit” in the Fed balance sheet stood at $2856 billion, or $2.8 trillion, with portfolio of long-term securities of $2626 billion, or $2.6 trillion, consisting of $1551 billion Treasury nominal notes and bonds, $66 billion of notes and bonds inflation-indexed, $112 billion Federal agency debt securities and $897 billion mortgage-backed securities; reserve balances deposited with Federal Reserve Banks reached $1626 billion or $1.6 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. Risk aversion from various sources, discussed in section I, has been affecting financial markets for several weels. The risk is that in a reversal of risk aversion that has been typical in this cyclical expansion of the economy yields of Treasury securities may back up sharply.

Table 24A, 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
05/06/11	3.147	95.5542	-5.6
05/13/11	3.173	95.3387	-5.8
05/20/11	3.146	95.5625	-5.6
05/27/11	3.068	96.2089	-4.9
06/03/11	2.990	96.8672	-4.3
06/10/11	2.973	97.0106	-4.2
06/17/11	2.937	97.3134	-3.9
06/24/11	2.872	97.8662	-3.3
07/01/11	3.186	95.2281	-5.9
07/08/11	3.022	96.5957	-4.6
07/15/11	2.905	97.5851	-3.6
07/22/11	2.964	97.0847	-4.1
07/29/11	2.795	98.5258	-2.7
08/05/11	2.566	100.5175	-0.7
08/12/11	2.249	103.3504	2.1

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

IV World Trade and Growth. The relationship of trade, capital flows and economic growth has been the subject of intensive research. The gains from international trade and the role of trade in employment and conservation of resources are also widely researched (see Pelaez and Pelaez, Globalization and the State Vol. I (2009a), Globalization and the State Vol. II (2009b) and Government Intervention in Globalization (2009c)). Trade has been an important driver of growth in the past decade; trade contracted during the global recession; and trade has been driving growth in the expansion. The JP Morgan Global PMI compiled by Markit shows that world manufacturing exports have nearly stagnated with the worst performance since Jul 2009 (http://www.markit.com/assets/en/docs/commentary/markit-economics/2011/jul/global_economy_11_07_07.pdf).

The forecasts of world output and trade growth in the revised Jun World Economic Outlook of the IMF are shown in Table 25. World output contracted by 0.5 percent in 2009 and then rebounded with growth of 5.1 percent in 2010 with the IMF projecting growth of 4.3 percent in 2011 and 4.5 percent in 2012. The contraction of 0.5 percent in 2009 is actually a much higher loss when adding GDP growth of 4 percent or more that would have occurred in the absence of the global recession. Table 25 shows strong impact of the global recession in the form of contraction of world trade by 10.8 percent. The advanced economies suffered much more with declines of 12.0 percent in exports and 12.5 percent in imports but the impact on emerging and developing economies was also strong with contraction of both exports and imports by 7.9 percent. Output growth of 5.1 percent was accompanied by double-digit increases in trade, 12.4 percent, and exports and imports of advanced economies and emerging and developing economies. Projections for 2011 and 2012 are for more moderate growth after the initial jump in 2010. New data on growth and trade are discussed below in the remainder of this section divided into four subsections, according to regions, using regional data tables: IVA Japan, IVB China, IVC Euro Area (including Germany, France and Italy) and IVD United Kingdom

Table 25, IMF Forecasts of Growth of World Output and World Trade ∆%

	2009	2010	2011	2012
Output	-0.5	5.1	4.3	4.5
Trade	-10.8	12.4	8.2	6.7
Exports
Advanced Economies	-12.0	12.3	6.8	6.1
Emerging Developing	-7.9	12.8	11.2	8.3
Imports
Advanced Economies	-12.5	11.6	6.0	5.1
Emerging Developing	-7.9	13.7	12.1	9.0

Source: http://www.imf.org/external/pubs/ft/weo/2011/update/02/index.htm

IVA Japan. The regional data table for Japan, Table JPY, provides a summary of major economic indicators and the date of the blog comment in which greater detail can be obtained. Japan’s continues robust recovery from the natural disaster in the form of the earthquake/tsunami on Mar 11. Several recent important indicators are discussed below after a brief introduction to GDP growth and inflation in Japan from 1981 to 2010.

Table JPY, Japan, Economic Indicators

Historical GDP and CPI	1981-2010 Real GDP Growth and CPI Inflation 1981-2010 Blog 07/31/11
Corporate Goods Prices	Jul ∆% 0.2 12 months ∆% 2.9 Blog 08/14/11
Consumer Price Index	Jun SA ∆% –0.1 Jun 12 months NSA ∆% 0.2 Blog 07/31/11
Real GDP Growth	IIQ2011 ∆%: –0.3 on IQ2011; Seasonally adjusted annual equivalent rate ∆%: –1.3 ∆% from quarter a year earlier: –0.9% Blog 08/14/11
Employment Report	Jun Unemployed 2.93 million Unemployment rate: 4.6% Blog 07/31/11
All Industry Index	May month SA ∆% 2.0 12 months NSA ∆% –1.5
Industrial Production	Jun SA month ∆%: 3.9 12 months NSA ∆% –1.6 Blog 07/31/11
Machine Orders	Apr-Jun 2011 ∆% –9.6 Forecast Jul –Sep 2011 ∆% –0.9 Jun ∆% Excluding Volatile Orders 7.7 Blog 08/14/2011
Tertiary Index	Jun month SA ∆% 1.19 Jun 12 months NSA ∆% 0.8 Blog 08/14/2011
Wholesale and Retail Sales	Jun 12 months: Total ∆% 2.9 Wholesale ∆%: 3.5 Retail ∆%: 1.1 Blog 07/31/11

Table 26 provides another illustration of the empirical analysis of Lucas (2011May19) that catch-up rates of growth of regions and countries relative to long-term US economic growth declined after the 1970s. Japan still had an excellent growth decade in the 1980s with very high rates of GDP growth. A major mystery is the collapse of economic growth in Japan and deceleration of prices in the 1990s that has been labeled “the lost decade” (see Pelaez and Pelaez, The Global Recession Risk (2007), 81-115). Fear of deflation and stagnation similar to that of Japan motivated unconventional monetary policy in the form of extremely low and even zero interest rates and quantitative easing or large-scale purchase of government securities for the balance sheet of central banks (see Pelaez and Pelaez, International Financial Architecture (2005), 18-28, The Global Recession Risk (2007), 83-95). Japan’s rate of GDP growth recovered in the 2000s but the economy has not regained the dynamism of the 1980s and earlier decades. Declines of CPI inflation have occurred in seven years from 2000 to 2010 and Japan continues unconventional policy in the form of zero interest rates and quantitative easing.

Table 26, Japan, Real GDP Growth and Consumer Prices ∆% from the Previous Calendar Year 1981-2010

	GDP ∆%	CPI ∆%
2010	4.0	-0.7
2009	-6.3	-1.4
2008	-1.2	1.4
2007	2.4	0.0
2006	2.0	0.3
2005	1.9	-0.3
2004	2.7	0.0
2003	1.4	-0.3
2002	0.3	-0.9
2001	0.2	-0.7
2000	2.9	-0.7
1990s
1999	-0.1	-0.3
1998	-2.0	0.6
1997	1.6	1.8
1996	2.6	0.1
1995	1.9	-0.1
1994	0.9	0.7
1993	0.2	1.3
1992	0.8	1.6
1991	3.3	3.3
1990	5.6	3.1
1980s
1989	5.4	2.3
1988	7.1	0.7
1987	4.1	0.1
1986	2.8	0.6
1985	6.3	2.0
1984	4.5	2.3
1983	3.1	1.9
1982	3.4	2.8
1981	4.2	4.9

Source: http://www.esri.cao.go.jp/en/sna/sokuhou/qe/gdemenu_ea.html

http://www.stat.go.jp/english/data/cpi/1588.htm#his

Japan’s GDP growth in Table 26 fell 0.3 in IIQ2011 relative to IQ2011 (http://www.esri.cao.go.jp/en/sna/sokuhou/qe/main_1e.pdf). The seasonally adjusted annual equivalent rate of decline is 1.3 percent. GDP contracted 0.9 percent in IIQ2011 relative to IIQ2010. The GDP report shows continuing recovery of Japan.

Table 27 Japan, Real GDP ∆% Changes from the Previous Quarter Seasonally Adjusted ∆%

	IQ	IIQ	IIIQ	IVQ
2011	-0.9	-0.3
2010	2.3	0.0	0.9	-0.7
2009	-4.8	2.1	-0.5	1.5
2008	0.7	-1.1	-1.3	-3.0
2007	1.1	0.3	-0.2	0.5
2006	0.0	1.2	0.4	0.6

Source: http://www.esri.cao.go.jp/en/sna/sokuhou/qe/gdemenu_ea.html

http://www.esri.cao.go.jp/en/sna/sokuhou/qe/main_1e.pdf

Japan’s index of tertiary industry activity covers significant part of economic activity with multiple segments: public utilities (electricity, gas, heat supply and water), information/communications, transport/postal, finance/insurance, real estate, accommodations, eating/drinking services, living-related, personal services, amusement services, learning support, medical health care/welfare, compound services and multiple services (http://www.meti.go.jp/statistics/tyo/sanzi/result/pdf/hv37903_201105j.pdf). Table 28 provides Japan’s tertiary activity index. Japan’s economy had soft conditions at the turn of the year with declines in the tertiary activity index of 0.2 percent in Dec and 0.1 percent in Jan but monthly growth resumed with 0.8 percent in Feb and 12-month rate of 2.0 percent. The earthquake/tsunami on Mar 11 caused a drop of tertiary activity of 5.9 percent with 12-month performance falling by 3.1 percent. The V-shaped recovery of Japan is shown by growth of 2.7 percent in tertiary activity in Apr and 0.8 percent in May with sharp increase of 1.9 percent in Jun such that the 12-month rate of tertiary activity finally shows increase of 0.8 percent in the 12 months ending in Jun.

Table 28, Japan, Tertiary Activity Index ∆%

	Month ∆% SA	12 Months ∆% NSA
Jun	1.9	0.8
May	0.8	-0.3
Apr	2.7	-2.3
Mar	-5.9	-3.1
Feb	0.8	2.0
Jan	-0.1	1.1
Dec 2010	-0.2	1.8

Source: http://www.meti.go.jp/statistics/tyo/sanzi/result/pdf/hv37903_201106j.pdf

More evidence on the recovery of Japan is provided by quarterly machinery orders in Table 29. In Apr-Jun, quarterly machinery orders expanded by 2.1 percent and excluding volatile orders by 2.5 percent with forecast for Jul-Sep of 0.9 percent. Nonmanufacturing orders rose 5.0 percent in Apr-Jun 2011 with forecast of 3.3 percent for Jul-Sep.

Table 29, Japan, Quarterly Machinery Orders ∆%

	Oct-Dec 2010	Jan-Mar 2011	Apr-Jun 2011	Forecast Jul-Sep 2011
Total	3.7	10.1	-9.6	-0.9
Private Sector	-0.3	3.0	2.1	1.0
Excluding Volatile Orders	-4.3	5.6	2.5	0.9
Manufact- turing	-1.7	5.3	-0.2	-0.6
Non Manufac- turing	-5.1	1.4	5.0	3.3
Gvt	-2.8	-6.0	0.9	-14.6
From Overseas	0.8	13.3	-13.1	-4.8
Through Agencies	-2.7	7.9	3.0	-8.6

Note: Mfg: manufacturing; Gvt: government

Source: http://www.esri.cao.go.jp/en/stat/juchu/1106juchu-e.html

Monthly orders of machinery in Table 30 provide further evidence of sharp recovery of the economy of Japan. Total orders increased 5.6 percent in Jun with orders for the private sector growing by 19.4 percent. Perhaps the most important good news is the increase by 7.7 percent in Jun of machinery orders excluding volatile orders.

Table 30, Japan, Machinery Orders ∆%

	Mar	Apr	May	Jun
Total	-20.4	3.1	-2.3	5.6
Private Sector	-19.8	2.8	4.9	19.4
Excluding Volatile Orders	1.0	-3.3	3.0	7.7
Manufact- turing	-0.8	-2.7	-1.4	9.3
Non Manufac- turing	0.1	2.9	-5.4	15.7
Gvt	-9.4	-1.2	10.7	-3.2
From Overseas	-10.8	-2.1	-6.6	-5.9
Through Agencies	1.2	23.3	-22.4	-6.6

Note: Mfg: manufacturing; Gvt: government

Source: http://www.esri.cao.go.jp/en/stat/juchu/1106juchu-e.html

IVB China. The HSBC China Manufacturing PMI^TM compiled by Markit fell from 50.1 in Jun to 49.3 in July, which indicates contraction, change in direction (http://www.markit.com/assets/en/docs/commentary/markit-economics/2011/aug/CN_Manufacturing_ENG_1108_PR.pdf). New orders fell close to stagnation because of weak global demand. Also in China the index fell to the lowest level since Mar 2009. New export orders fell for the third consecutive month. Employment fell for the fifth consecutive month. The HSBC China Services PMI^TM with Composite PMI Data compiled by Markit fell from 51.6 percent in Jun to near stagnation levels of 50.4 in Jul (http://www.markit.com/assets/en/docs/commentary/markit-economics/2011/aug/CN_Services_ENG_1108_PR.pdf). Manufacturing activity declined more rapidly in Jul while the service sector expanded more slowly. The Business Activity Index of services fell from 54.1 in Jun to 53.5 in Jul. Growth of services new business registered a level close to the 28-month low level reached in Apr. Inflation continued to be high but accelerating less rapidly. Growth of employment was at the lowest rate in more than two years. China’s rate of growth of industrial production rose from 13.3 percent in May to 15.1 percent in Jun. Both official data and the PMI have tracked slowing export growth in China that peaked in early 2010 (http://www.markit.com/assets/en/docs/commentary/markit-economics/2011/jul/CN_NOTE_21_07_11.pdf). Economic conditions have worsened for smaller companies relative to larger ones.

Table CNY provides the regional data table for China. Indicators show continuing high growth rates of China’s economy with relatively high inflation discussed above in section III Global Inflation. All the other indicators are discussed below as they were released

Table CNY, China, Economic Indicators

Price Indexes for Industry	Jul 12 months ∆%: 7.5 Jan-Jul ∆%: 7.1 Blog 08/14/11
Consumer Price Index	Jul month ∆%: 0.5 Jul 12 month ∆%: 6.5 Jan-Jul ∆%: 5.5 Blog 08/14/11
Value Added of Industry	Jul 12 month ∆%: 14.0 Blog 08/14/11
GDP Growth Rate	Year IIQ2011 ∆%: 9.6 Quarter IIQ2011 ∆%: 2.2 Blog 08/14/11
Investment in Fixed Assets	Jan-Jul ∆%: 25.4 Blog 08/14/11
Retail Sales	Jul month ∆%: 1.3 Jul 12 month ∆%: 17.2 Blog 08/14/11
Trade Balance	Jul $31.5 billion Exports ∆% 20.4 Imports ∆% 22.9 Jan-Jul $76.2 billion Exports ∆% 23.4 Import ∆% 26.9 Blog 08/14/11

China’s trade rebounded strongly in Jul as shown by data in Table 31. The trade balance of China jumped from $22.27 billion in Jun to $31.49 billion in Jul, reversing weak performance in the first five months of 2011. Exports jumped from $161.98 billion in Jun to $175.13 billion in Jul and grew 20.4 percent in the 12 months ending in Jul. Imports rose from $139.71 billion in Jun to $143.64 billion in Jul and grew 22.9 percent in the 12 months ending in Jul. Hopefully, this excellent performance could be related to strong world demand.

Table 31, China, Exports, Imports and Trade Balance USD Billion and ∆%

	Exports USD Billion	∆% Relative Year Earlier	Imports USD Billion	∆% Relative Year Earlier	Balance USD Billion
Jul	175.13	20.4	143.64	22.9	31.49
Jun	161.98	17.9	139.71	19.3	22.27
May	157.16	19.4	144.11	28.4	13.05
Apr	155.69	29.9	144.26	21.8	11.43
Mar	152.2	35.8	152.06	27.3	0.14
Feb	96.74	2.4	104.04	19.4	-7.3
Jan	150.73	37.7	144.27	51.0	6.46
Dec 2010	154.15	17.9	141.07	25.6	13.08

Source: http://english.customs.gov.cn/publish/portal191/

http://english.mofcom.gov.cn/static/column/statistic/BriefStatistics.html/1

China exports, imports and trade balance in Jan-July are shown in Table 32. In a remarkable turnaround, the trade balance has virtually erased the weak performance in Jan-Mar with trade deficit of $1.1 billion. Cumulative exports Jan-Jul were $1,049.4 billion in Jul, growing at 23.4 percent relative to Jan-Jul 2010. Cumulative imports were $973.2 billion in Jul, growing by 26.9 percent relative to Jan-Jul 2010. The cumulative trade balance rose from $44.9 billion in Jan-Jun to $76.2 billion in Jan-Jul. The good news could be that world demand is not as weak as expected but there is an added burden on China to prevent a flood of money and credit from the inflow of foreign exchange. Additional data are required to determine a trend.

Table 32, China, Year to Date Exports, Imports and Trade Balance USD Billion and ∆%

	Exports USD Billion	∆% Relative Year Earlier	Imports USD Billion	∆% Relative Year Earlier	Balance USD Billion
Jul	1,049.4	23.4	973.2	26.9	76.2
Jun	874.3	24.0	829.4	27.6	44.9
May	712.4	25.5	689.4	29.4	23.0
Apr	555.3	27.4	545.0	29.6	10.3
Mar	399.6	26.5	400.7	32.6	-1.1
Feb	247.47	21.3	248.36	36.0	-0.9
Jan	150.7	37.7	144.3	51.0	6.4
Dec 2010	1577.9	31.3	1394.8	38.7	183.1

Source: http://english.mofcom.gov.cn/static/column/statistic/BriefStatistics.html/1

China’s 12-month rates of growth of value added by industry continue to show a rapidly expanding economy, as shown in Table 33. Total industry grew by 14.0 percent in the 12 months ending in Jul, which is not inferior to 12 months rates in earlier months. Cumulative value added in industry grew at 14.3 percent in Jan-Jul, which is again comparable to high cumulative growth rates in earlier periods. Private-sector growth rates of industrial value added are much higher than those of state-owned enterprises.

Table 33, China, Growth Rate of Value Added of Industry ∆%

	Industry	Light Industry	Heavy Industry	State Owned	Private
12 M Jul	14.0	12.8	14.5	9.5
Jan-Jul	14.3
12 M Jun	15.1	13.9	15.6	10.7	20.8
Jan-Jun	14.3	13.1	14.7	10.7	19.7
12 M May	13.3	12.9	13.5	8.9	18.7
Jan-May	14.0	12.9	14.4	10.7	19.3
12 M Apr	13.4	11.9	14.0	10.4	18.0
Jan-Apr	14.2	12.9	14.7	11.2	19.5
12 M Mar	14.8	12.8	15.6	12.9	19.2
Jan-Mar	14.4	13.1	14.9	11.4	19.8
12 M Feb	14.9	13.1	15.6	10.5	21.7
Jan-Feb	14.1	13.3	14.4	10.6	20.3

Source: http://www.stats.gov.cn/english/newsandcomingevents/t20110810_402746176.htm

http://www.stats.gov.cn/english/statisticaldata/index.htm

Similarly dynamic growth rates of industrial production in key components are shown in Table 34. There are more fluctuations in the individual series than in the overall index of industrial production. Motor vehicle output has been relatively weak for Chinese standards.

Table 34, China, Industrial Production Operation ∆%

	Elec- tricity	Pig Iron	Cement	Crude Oil	Non- ferrous Metals	Motor Vehicles
12 M Jul	13.2	14.9	16.8	5.9	9.8	-1.3
Jan-Jul	13.3	13.0	19.2	6.9	9.9	4.0
12 M Jun	16.2	14.8	19.9	-0.7	9.8	3.6
12 M May	12.1	10.6	19.2	6.0	14.2	-1.9
12 M Apr	11.7	8.3	22.4	6.8	6.1	-1.6
12 M Mar	14.8	13.7	29.8	8.0	11.6	9.9
12 M Feb	11.7	14.5	9.1	10.9	14.4	10.3
12 M Jan	5.1	3.5	16.4	12.2	1.4	23.9
12 M Dec 2010	5.6	4.6	17.3	10.3	-1.9	27.6

Source: http://www.stats.gov.cn/english/newsandcomingevents/t20110810_402746176.htm

Customary high rates of fixed asset investment in China, as in past decades of dynamic growth (see Pelaez and Pelaez, The Global Recession Risk (2007), 56-80), are shown in cumulative Jan-Jul rates in Table 35. Total fixed asset investment has been growing at cumulative rates of 25 percent or more since Jan-Mar 2011. Housing fixed investment growth has exceeded 30 percent in cumulative rates during the first seven months of 2011. State fixed investment has cooled somewhat to the cumulative rate of 13.6 percent in Jan-Jul.

Table 35, China, Investment in Fixed Assets ∆% Relative to a Year Earlier

	Total	State	Housing
Jan-Jul	25.4	13.6	36.4
Jan-Jun	25.6	14.6	32.9
Jan-May	25.8	14.9	34.6
Jan-Apr	25.4	16.6	34.3
Jan-Mar	25.0	17.0	34.1
Jan-Feb	24.9	15.6	35.2

Source:

http://www.stats.gov.cn/english/statisticaldata/index.htm

China’s retail sales continue to grow at very high monthly and 12-months rates, as shown in Table 36. The annual equivalent rate of retail sales growth in Feb-Jul is 14.6 percent. The 12-months rate for Jul is a high 17.2 percent and the cumulative relative rate in Jan-Jul is equally high at 16.8 percent.

Table 36, China, Total Retail Sales of Consumer Goods ∆%

	Month ∆%	12 Months ∆%	Cumulative ∆%/ Cumulative Year Earlier
Jul	1.3	17.2	16.8
Jun	1.4	17.7	16.8
May	1.3	16.9	16.6
Apr	1.4	17.1	16.5
Mar	1.4	16.3	17.4
Feb	1.2	11.6	15.8
AE ∆% Feb-Jul	14.6%

Source: http://www.stats.gov.cn/english/newsandcomingevents/t20110810_402746163.htm

http://www.stats.gov.cn/english/statisticaldata/index.htm

China’s GDP growth also continues to be quite high. Table 37 shows GDP growth of 9.7 percent in IQ2011 relative to IQ2010 and 9.6 percent of IIQ2011 relative to IQ2010. Secondary industry continues to be the driver of growth.

Table 37, China, Growth Rate of GDP, ∆% Relative to a Year Earlier and ∆% Relative to Prior Quarter

	IQ2011	IIQ2011	IIIQ2011	IVQ2011
GDP	9.7	9.6
Primary Industry	3.5	3.2
Secondary Industry	11.1	11.0
Tertiary Industry	9.1	9.2
GDP ∆% Relative to Prior Quarter	2.1	2.2

Source: http://www.stats.gov.cn/english/statisticaldata/Quarterlydata/

IVC Euro Area. The regional data table for the euro zone, Table EUR, summarizes important economic indicators for the members of the European Monetary Union. Euro zone GDP is growing at 2.5 percent with significant diversity of growth experiences among the 17 members.

Table EUR, Euro Area Economic Indicators


HICP	Flash Jul 12 months ∆%: 2.5 http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-29072011-CP/EN/2-29072011-CP-EN.PDF 12 months Jun ∆%: 2.7 Blog 07/17/11
Producer Prices	Jun month ∆%: 0.0 Jun 12 months ∆%: 5.9 Blog 08/07/11
Industrial Production	Jun month ∆%: -0.7 Jun 12 months ∆%: 2.9 Blog 08/14/11
Industrial New Orders	May month ∆%: 3.6 May 12 months ∆%: 15.5 Blog 07/24/11
Construction Output	May month ∆%: –1.1 May 12 months ∆%: –1.9 Blog 07/24/11
Retail Sales	Jun month ∆%: 0.9 Jun 12 months ∆%: –0.4 Blog 08/07/11
Trade	Jan-May 2011/2010 Exports ∆%: 19.7 Imports ∆%: 20.9 Blog 07/17/11

The monthly rate of industrial production in the euro zone has been weak in the first half of 2011, as shown in Table 38. Industrial production fell by 0.7 percent in Jun with declines in all segments. The only reasonable month for industrial growth occurred in Feb.

Table 38, Euro Zone Industrial Production Month ∆%

	Jun	May	Apr	Mar	Feb	Jan
Total	-0.7	0.2	0.2	-0.1	0.5	0.1
Inter-mediate	-0.6	0.0	-0.1	-0.1	0.5	2.3
Energy	-0.4	0.4	-3.8	0.3	-1.4	-4.7
Capital Goods	-1.5	1.1	0.7	-0.7	2.2	-1.8
Durable	-2.5	-0.7	0.9	-0.2	0.8	1.1
Non Durable	-0.5	0.0	0.5	0.5	1.0	-0.1

Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-12082011-AP/EN/4-12082011-AP-EN.PDF

Weak monthly growth of industrial production has resulted in significant deceleration of the 12-month rate of industrial growth of the euro zone, as shown in Table 39. The 12-month rate peaked at 7.8 percent in Feb and steadily declined to 2.9 percent in Jun. Deceleration has occurred in all segments of industrial production.

Table 39, Euro Zone Industrial Production 12 Months ∆%

	Jun	May	Apr	Mar	Feb	Jan
Total	2.9	4.4	5.3	5.7	7.8	6.2
Inter-mediate	3.3	4.4	5.2	7.5	10.1	9.5
Energy	-5.1	-7.0	-5.3	-2.1	-2.8	-1.9
Capital Goods	7.0	10.7	10.6	11.5	15.2	13.0
Durable	-2.7	0.9	4.7	2.6	3.5	2.0
Non Durable	1.2	2.7	3.7	0.7	2.6	0.5

Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-12082011-AP/EN/4-12082011-AP-EN.PDF

The country data table for Germany is provided in Table DE. The German economy has been growing reasonably. Germany successfully restructured its economy toward strong participation in world trade.

Table DE, Germany, Economic Indicators

Consumer Price Index	Jul month SA ∆%: 0.4 Jul 12 months ∆%: 2.4 Blog 08/14/11
Producer Price Index	Jun month ∆%: 0.1 12 months NSA ∆%: 5.6 Blog 08/07/11
Industrial Production	Jun month SA ∆%: –0.9 12 months NSA: 0.9 Blog 08/07/11
Machine Orders	Jun month ∆%: 1.8 Jun 12 months ∆%: 3.0 Blog 08/07/11
Employment Report	Employment Accounts: Jun Employed 12 months NSA ∆%: 1.2 Labor Force Survey: Jun Unemployment Rate: 6.1% Blog 07/31/11
Trade Balance	Trade Balance NSA Jun €6.0 billion versus May €15.6 billion Exports Jun 12 month NSA ∆%: 3.1 (versus ∆% 19.9 May) Imports Jun 12 months NSA ∆%: 6.0 (versus ∆% 15.6 May) Exports Jun month SA ∆%: -1.2; Imports Jun month SA ∆%: 0.3 Blog 08/14/11

Germany’s exports had been growing at high 12-months rates in Jan-May but fell from a peak of 19.9 percent in May to 3.1 percent in Jun, as shown in Table 40. The 12-month rate of growth of imports also fell from 15.6 percent in May to 6.0 percent in Jun.

Table 40, Germany, Exports and Imports NSA Euro Billions and 12 Months ∆%

	Exports EURO Billions	12 Months ∆%	Imports EURO Billions	12 Months ∆%
Jun	88.3	3.1	75.6	6.0
May	92.1	19.9	77.3	15.6
Apr	84.3	13.3	73.4	20.1
Mar	98.2	15.7	79.4	17.0
Feb	84.1	21.1	72.1	27.3
Jan	78.6	24.4	68.5	24.3
Dec 2010	81.7	21.0	69.6	26.4
Nov	87.2	20.6	74.1	31.6
Oct	85.9	18.5	71.6	19.3
Sep	86.1	21.4	69.2	16.5
Aug	74.5	24.0	65.3	27.8
Jul	82.2	16.5	68.6	24.8
Jun	85.6	28.0	71.3	34.1

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/TimeSeries/EconomicIndicators/KeyIndicators/ForeignTradeBalance/liste__ahbilanz,templateId=renderPrint.psml

Table 41 shows significant monthly fluctuations in growth of exports and imports in Germany. High rates of growth of exports in a month, such as 7.2 percent in Mar and 4.3 percent in May, were followed by declines in the following month, 5.6 percent in Apr and 1.2 percent in Jun. There has been less fluctuation in import growth.

Table 41, Germany, Exports and Imports Month ∆%

	Exports	Imports
Jun	-1.2	0.3
May	4.3	3.7
Apr	-5.6	-2.5
Mar	7.2	3.1
Feb	2.7	3.9
Jan	-0.9	2.4
Dec 2010	0.5	-2.6

The country data table for France is Table FR. The salient event in France was the flat rate of GDP growth in IIQ2011.

Table FR, France, Economic Indicators

CPI
PPI	Jun month ∆%: –0.1 Jun 12 months ∆%: 6.1
GDP Growth	IIQ2011/IQ2011 ∆%: 0.0 IIQ2011/IIQ2010 ∆%: 1.6 Blog 08/14/11
Industrial Production	Jun/May SA ∆%: Industrial Production -1.6; Manufacturing –1.9 Jun 12 months NSA ∆%: Industrial Production 2.1; Manufacturing 3.8 Blog 08/14/11
Consumer Spending	Jun Manufactured Goods ∆%: 1.1 Jun Manufactured Goods ∆%: 2.2 Blog 08/07/11

France’s industrial production fell 1.6 percent in Jun relative to May and manufacturing fell 1.9 percent, as shown in Table 42. May/Apr was quite strong at 1.9 percent with manufacturing growing 1.4 percent. The quarter on quarter growth of industry was minus 0.5 percent but year-on-year growth was 2.1 percent and 3.8 percent for manufacturing.

Table 42, France, Industrial Production ∆%

	Jun/May	May/Apr	QOQ	YOY
Industry	-1.6	1.9	-0.5	2.1
Manufac- turing	-1.9	1.4	-0.4	3.8
Mining	0.9	5.5	-1.7	-8.4
Construc- ion	-0.1	-0.8	-1.5	0.6

Note: QOQ: quarter on quarter; YOY: year on year

Source: http://www.insee.fr/en/indicateurs/ind10/20110810/IPI_201106_anglais.pdf

The worrisome headline on France was the surprisingly flat growth of GDP in IIQ2011 after a healthy 0.9 percent in IQ2011, as shown in Table 43. As in most advanced economies, growth of economic activity has not returned to the high rates of 2006.

Table 43, France, Quarterly Real GDP Growth ∆%

	IQ	IIQ	IIIQ	IVQ
2011	0.9	0.0
2010	0.2	0.5	0.4	0.3
2009	-1.5	0.1	0.2	0.6
2008	0.4	-0.7	-0.3	-1.5
2007	0.6	0.5	0.4	0.2
2006	0.6	1.1	0.2	0.8

Source: http://www.bdm.insee.fr/bdm2/choixTheme.action?code=1#arbo:montrerbranches=theme1/theme9/theme10/groupe1310

Table 44 provides the growth rates of GDP of France from the current quarter to the same quarter a year earlier since 2004. The growth rates from 2004 to 2007 are relatively high for a mature economy. Growth collapsed in 2008 and France suffered GDP contractions in six quarters from IIIQ2008 to IVQ2009. The six quarters of expansion from IQ2010 to IIQ2011 have not been as dynamic as those from 2004 to 2007.

Table 44, France, Real GDP Growth Current Quarter Relative to Same Quarter Year Earlier ∆%

	IQ	IIQ	IIIQ	IVQ
2011	2.1	1.6
2010	1.1	1.5	1.6	1.4
2009	-3.9	-3.2	-2.7	-0.6
2008	1.5	0.3	-0.5	-2.1
2007	2.7	2.1	2.6	2.7
2006	2.3	3.0	2.6	2.7
2005	2.0	1.8	1.9	1.8
2004	1.9	2.7	2.3	2.4

Source: http://www.bdm.insee.fr/bdm2/choixTheme.action?code=1#arbo:montrerbranches=theme1/theme9/theme10/groupe1310

The country data table for Italy is Table IT. The Italian economy has not been very dynamic recently. GDP quarterly growth was only 0.1 percent in IQ2011 and 1.0 percent relative to IQ2010. Industrial production fell 0.6 percent in Jun and grew by only 0.2 percent relative to a year earlier.

Table IT, Italy, Economic Indicators

Consumer Price Index	Jul month ∆%: 0.3 Jun 12 months ∆%: 2.7 Blog 08/14/11
Producer Price Index	Jun month ∆%: 0.1 Jun 12 months ∆%: 2.7
GDP Growth	IQ2011/IVQ2010 SA ∆%: 0.1 IQ2011/IQ2010 NSA ∆%: 1.0 Blog 08/14/11
Industrial Production	Jun month ∆%: –0.6 12 months ∆%: 0.2 Blog 08/07/11
Trade Balance	Balance Jun SA -€ 1,944 million versus May -€ 3,114 Exports Jun month SA ∆%: -0.8 Imports Jun month SA ∆%: 4.1 Exports 12 months NSA ∆%: 8.1 Imports 12 months NSA ∆%: 3.2 Blog 08/14/11

Quarterly GDP growth of Italy in Table 45 shows contraction already in IIQ2008 but earlier growth by IIIQ2009 of 0.4 percent, becoming flat in IVQ2009. Growth picked up with 0.6 percent in IQ2010 that declined in step fashion throughout the year and settled at only 0.1 percent in both IVQ2010 and IQ2011.

Table 45, Italy, Quarterly Real GDP Growth ∆%

	IQ	IIQ	IIIQ	IV
2011	0.1
2010	0.6	0.5	0.3	0.1
2009	-3.0	-0.3	0.4	0.0
2008	0.4	-0.7	-1.1	-2.0
2007	0.2	0.1	0.2	-0.4

Source: http://www.istat.it/salastampa/comunicati/in_calendario/contitri/20110610_00/

Real GDP growth for Italy of the current quarter relative to the same quarter a year earlier is shown in Table 46. The contraction lasted for seven consecutive quarters from IIQ2008 to IVQ2009 with high yearly rates of decline. Growth has been weak in the recovery as is the case of most advanced economies.

Table 46, Italy, Real GDP Growth Current Quarter Relative to Same Quarter Year Earlier ∆%

	IQ	IIQ	IIIQ	IVQ
2011	1.0
2010	0.6	1.5	1.4	1.5
2009	-6.7	-6.3	-4.9	-3.0
2008	0.3	-0.4	-1.8	-3.4
2007	2.2	1.7	1.5	0.1

Source: http://www.istat.it/salastampa/comunicati/in_calendario/contitri/20110610_00/

Italy’s trade growth is shown in Table 47. Monthly rates of change of exports and imports seasonally adjusted have fluctuated sharply with alternating positive and negative values. The 12-months rate of growth not seasonally adjusted collapsed from high double digits to 8.1 percent in Jun for exports and 3.2 percent for imports.

Table 47, Italy, Trade Growth ∆%

	Exports Month ∆% SA	Imports Month ∆% SA	Exports 12 Months ∆% NSA	Imports 12 Months ∆% NSA
Jun	-0.8	-4.1	8.1	3.2
May	0.0	-1.0	19.9	18.9
Apr	0.7	-0.3	12.8	20.7
Mar	1.6	3.4	14.1	20.4
Feb	-1.5	-0.6	18.4	19.4
Jan	4.2	2.4	24.5	30.6
AE ∆%
Dec	0.6	0.3	20.5	30.8

Source: http://www.istat.it/salastampa/comunicati/in_calendario/comestue/20110812_00/

Italy’s trade deficit has declined significantly as shown by the SA trade data in Table 48. There are no significant variations from the levels of exports and imports in the beginning of the year to the levels in Jun. The trade deficit fell from €3,336 million in Dec 2010 to €1,944 million in Jun.

Table 48, Italy, Exports, Imports and Trade Balance SA Million Euros and Month ∆%

	Exports € M	Exports Month ∆%	Imports € M	Imports Month ∆%	Balance € M
Jun	31,090	-0.8	33,034	4.1	-1,944
May	31,332	0.0	34,446	-1.0	-3,114
Apr	31,326	0.7	34,785	-0.3	-3,459
Mar	31,111	1.6	34,894	3.4	-3,783
Feb	30,636	-1.5	33,760	-0.6	-3,124
Jan	31,095	4.2	33,972	2.4	-2,877
AE ∆%
Dec 2010	29,842	0.6	33,178	0.3	-3,336

AE: annual equivalent

Source: http://www.istat.it/salastampa/comunicati/in_calendario/comestue/20110812_00/

Italy’s exports, imports and trade balance not seasonally adjusted are shown in Table 49. The actual trade deficit without adjustments fell from €6,599 million in Jan to €1,829 billion in Jun. Recent improvements in the deficit are related to the decline in oil prices, although Italy imports oil from Libya. Commodity price increases have deteriorated the terms of trade of European economies.

Table 49, Italy, Exports, Imports and Trade Balance NSA Million Euros and 12 Month ∆%

	Exports € M	Exports 12 Months ∆%	Imports € M	Imports 12 Months ∆%	Balance € M
Jun	32,696	8.1	34,525	3.2	-1,829
May	33,612	19.9	36,014	18.9	-2,402
Apr	31,220	12.8	34,987	20.7	-3,767
Mar	34,454	14.1	38,392	20.4	-3,938
Feb	29,825	18.4	33,467	19.4	-3,642
Jan	26,163	24.5	32,762	30.6	-6,599
Dec 2010	29,792	20.5	32,511	30.8	-2,719

Source: http://www.istat.it/salastampa/comunicati/in_calendario/comestue/20110812_00/

The UK economy continues to grow at moderate rates, as shown in the country data table Table UK. IIQ2011 GDP grew 0.2 percent and 0.7 percent relative to a year earlier.

Table UK, UK Economic Indicators


CPI	Jun month ∆%: –0.1 Jun 12 months ∆%: 4.2 Blog 07/17/11
Output/Input Prices	Output Prices: Jul 12 months NSA ∆%: 5.9; excluding food, petroleum ∆%: 3.3 Input Prices: Jul 12 months NSA ∆%: 18.5 Excluding ∆%: 13.1 Blog 08/07/11
GDP Growth	IIQ2011 prior quarter ∆% 02; year earlier same quarter ∆%: 0.7 Blog 07/17/11
Industrial Production	Jun 2011/Jun 2010 NSA ∆%: Industrial Production -0.3; Manufacturing 2.1 Jun 2011/May 2011 SA ∆%: Industrial Production 0.0; Manufacturing -0.4Blog 08/14/11
Retail Sales	Jun month SA ∆%: 0.7 Jun 12 months ∆%: 0.4 Blog 07/24/11
Labor Market	Mar-May Unemployment Rate: 7.7% Blog 07/17/11
Trade Balance	Balance Jun -₤4,496 billion Exports Jun ∆%: -2.8 IIQ2011/IIQ2010 ∆%: 8.6 Imports Jun ∆%: -1.5 IIQ2011/IQ2010 ∆%: 7.3 Blog 08/14/11

UK growth of industrial production and manufacturing is shown in Table 50 in various periods. In Jun 2011 relative to Jun 2010, industrial production fell 0.3 percent but manufacturing grew 2.1 percent. In the quarter Apr-Jun 2011 relative to Apr-Jun 2010, industrial production fell 0.8 percent but manufacturing grew 2.0 percent. Industrial production was flat in Jun 2011 relative to May 2011 but manufacturing fell 0.4 percent. In the quarter Apr-Jun 2011 relative to Jan-Mar 2011, industrial production fell 1.6 percent and manufacturing fell 0.5 percent.

Table 50, UK Industrial Production and Manufacturing ∆%

	Industrial Production	Manufacturing
Jun 2011/Jun 2010	-0.3	2.1
Apr-Jun 2011/Apr-Jun 2010	-0.8	2.0
Jun 2011/May 2011	0.0	-0.4
Apr-Jun 2011/Jan-Mar 2011	-1.6	-0.5

Source: http://www.statistics.gov.uk/pdfdir/iop0811.pdf

Growth of components of industrial production in the UK is shown in Table 51. The decline of total production is caused by the decline in mining of 13.1 percent and in energy of 1.4 percent. Mining rose 0.8 percent from May to Jun 2011 and energy increased 2.0 percent but manufacturing fell 0.4 percent, resulting in flat growth of total industrial production.

Table 51, UK Industrial Production

	Jun 2011/Jun 2010	Jun 2011/May 2011
Total Production	-0.3	0.0
Mining	-13.1	0.8
Manufacturing	2.1	-0.4
Energy	-1.4	2.0

Source: http://www.statistics.gov.uk/pdfdir/iop0711.pdf

A broad perspective of UK trade in goods and services is provided in Table 52. The trade deficit of the UK in Jun 2011 is ₤4,496 million of which the surplus in services of ₤4,377 billion reduces the deficit in goods of €8,873. Exports of goods rose 11.4 percent in IIQ2011 relative to IIQ2010 and exports of services grew 3.9 percent.

Table 52, Value of UK Trade in Goods and Services, Balance of Payments Basis, ₤ Million and ∆%

	₤ Million SA Jun 2011	Month ∆% Jun 2011	IIQ2011/ IIQ2010 ∆%
Total Trade
Exports	38,031	-2.8	8.6
Imports	42,527	-1.5	7.3
Balance	-4,496
Trade in Goods
Exports	24,021	-4.8	11.4
Imports	32.894	-2.4	10.2
Balance	-8,873
Trade in Goods Excluding Oil
Exports	21,132	-3.2	10.2
Imports	28,553	-4.2	6.8
Balance	-7,421
Trade in Services
Exports	14,010	0.9	3.9
Imports	9,633	1.8	-1.6
Balance	4,377

Source: http://www.statistics.gov.uk/pdfdir/trd0811.pdf

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/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html 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 53 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 monetary and housing policies in the US. Between 2002 and 2008, the DJ UBS Commodity Index rose 165.5 percent largely because of the unconventional monetary policy 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 53 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 19.5 percent by Fri Aug 12, 2011. Dollar devaluation is a major vehicle of monetary policy in reducing the output gap that is implemented in the probably erroneous belief that devaluation will not accelerate inflation. The last row of Table 53 shows CPI inflation in the US rising from 1.9 percent in 2003 to 4.1 percent in 2007 even as monetary policy increased the fed funds rate from 1 percent in Jun 2004 to 5.25 percent in Jun 2006.

Table 53, 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	08/12 /2011
Rate	1.1423	1.5914	1.192	1.424
CNY/USD	01/03 2000	07/21 2005	7/15 2008	08/12 2011
Rate	8.2798	8.2765	6.8211	6.3898
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

Table 54 extracts four rows of Table 53 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 25.1 percent. After the temporary interruption of the sovereign risk issues in Europe from Apr to Jul, 2010, shown in Table 56 below, the dollar has devalued again to USD 1.424/EUR or by 19.5 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 6.4407/USD on Fri Aug 12, 2011, or by an additional 6.3 percent, for cumulative revaluation of 22.8 percent.

Table 54, 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	08/12 /2011
Rate	1.1423	1.5914	1.192	1.424
CNY/USD	01/03 2000	07/21 2005	7/15 2008	08/12 2011
Rate	8.2798	8.2765	6.8211	6.3898

Source: Table 53.

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 55. 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.

Table 55, 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 53 above after the first policy round of near zero fed funds and quantitative easing by the equivalent of 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, falling real wages, depressed hiring and high job stress of unemployment and underemployment in the US now with realization of slow growth recession. 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 driven by the carry trade from zero interest rates with fluctuations provoked by events of risk aversion. Table 56, which is updated for every comment of this blog, shows the deep contraction of valuations 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 08/12/11,” which is now stalling or reversing amidst profound risk aversion. Recovering risk financial assets are in the range from 1.6 percent for the Nikkei Average of Japan and 26.7 percent for the DJ UBS Commodity Index. The European stocks index STOXX 50 is now 2.1 percent below the trough on Jul 2, 2010 and the NYSE Financial Index is 1.5 percent below the trough on Jul 2, 2010. Japan’s Nikkei is 1.6 percent above the trough on Aug 31, 2010 but is 21.3 percent below the peak on Apr 5, 2010. The Nikkei Average closed at 8963.72 on Fri Aug 12, which is 12.6 percent below 10,254.43 on Mar 11 on the date of the earthquake. Global risk aversion erased the earlier gains of the Nikkei. The dollar depreciated by 19.5 percent and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 08/12/2011” shows negative performance of all financial assets, except for gain of 0.6 percent for the DJ UBS Commodity index, with DAX losing 3.8 percent, the Nikkei Average losing 3.6 percent and the NYSE Financial Index dropping 3.1 percent. The Dow Global lost 2.4 percent with losses in all stock indexes in Table 56 for a second consecutive week. There are still high uncertainties on European sovereign risks, US debt/growth recession and China’s growth and inflation tradeoff. Sovereign problems in the “periphery” of Europe and fears of slower growth in Asia and the US cause risk aversion with caution instead of more aggressive risk exposures. There is a fundamental change in Table 56 from the relatively upward trend with oscillations since the sovereign risk event of Apr-Jul 2010. Performance is best assessed in the column “∆% Peak to 8/12/11” that provides the percentage from the peak in Apr 2010 before the sovereign risk event to Jul 29. Most financial risk assets had gained not only relative to the trough as shown in column “∆% Trough to 8/12/11” but also relative to the peak in column “∆% Peak to 8/12/11.” Only two indexes are now above the peak, DJIA by 0.6 percent and DJ UBS Commodity Index by 8.3 percent. There are several indexes well below the peak: NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) by 21.5 percent, Nikkei Average by 21.3 percent, Shanghai Composite by 18.1 percent and STOXX 50 by 17.1 percent. The factors of risk aversion have adversely affected the performance of financial risk assets. The performance relative to the peak in Apr is more important than the performance relative to the trough around early Jul because improvement could signal that conditions have returned to normal levels before European sovereign doubts in Apr 2010.

Table 56, Stock Indexes, Commodities, Dollar and 10-Year Treasury

	Peak	Trough	∆% to Trough	∆% Peak to 8/ 12/11	∆% Week 8/ 12/11	∆% Trough to 8/ 12/11
DJIA	4/26/ 10	7/2/10	-13.6	0.6	-1.5	16.3
S&P 500	4/23/ 10	7/20/ 10	-16.0	-3.2	-1.7	15.3
NYSE Finance	4/15/ 10	7/2/10	-20.3	-21.5	-3.1	-1.5
Dow Global	4/15/ 10	7/2/10	-18.4	-10.8	-2.4	9.3
Asia Pacific	4/15/ 10	7/2/10	-12.5	-3.6	-3.0	10.1
Japan Nikkei Aver.	4/05/ 10	8/31/ 10	-22.5	-21.3	-3.6	1.6
China Shang.	4/15/ 10	7/02 /10	-24.7	-18.1	-1.3	8.8
STOXX 50	4/15/10	7/2/10	-15.3	-17.1	-1.4	-2.1
DAX	4/26/ 10	5/25/ 10	-10.5	-5.3	-3.8	5.8
Dollar Euro	11/25 2009	6/7 2010	21.2	5.9	0.3	-19.5
DJ UBS Comm.	1/6/ 10	7/2/10	-14.5	8.3	0.6	26.7
10-Year Tre.	4/5/ 10	4/6/10	3.986	2.566

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 of monetary policy on the impact of the rise of stock market valuations in stimulating consumption by wealth effects on household confidence. Table 57 shows a gain by Apr 29, 2011 in the DJIA of 14.3 percent and of the S&P 500 of 12.5 percent since Apr 26, 2010, around the time when sovereign risk issues in Europe began to be acknowledged in financial risk asset valuations. The last row of Table 57 for Aug 12 shows that the S&P 500 is now 2.7 percent below the Apr 26, 2010 level and the DJIA is only 0.6 percent above the level on Apr 26, 2010. Multiple rounds of risk aversion eroded the earlier gains, showing that even with zero interest rates risk aversion can destroy market value.

Table 57, 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
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
May 6	-1.3	12.8	-1.7	10.6
May 13	-0.3	12.4	-0.2	10.4
May 20	-0.7	11.7	-0.3	10.0
May 27	-0.6	11.0	-0.2	9.8
Jun 3	-2.3	8.4	-2.3	7.3
Jun 10	-1.6	6.7	-2.2	4.9
Jun 17	0.4	7.1	0.04	4.9
Jun 24	-0.6	6.5	-0.2	4.6
Jul 1	5.4	12.3	5.6	10.5
Jul 8	0.6	12.9	0.3	10.9
Jul 15	-1.4	11.4	-2.1	8.6
Jul 22	1.6	13.2	2.2	10.9
Jul 29	-4.2	8.4	-3.9	6.6
Aug 05	-5.8	2.1	-7.2	-1.0
Aug 12	-1.5	0.6	-1.7	-2.7

Source: http://online.wsj.com/mdc/public/page/mdc_us_stocks.html?mod=mdc_topnav_2_3004

Table 58, 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) but with interruptions caused by risk aversion events.

Table 58, Exchange Rates

	Peak	Trough	∆% P/T	Aug 12, 2011	∆T Aug 12 2011	∆P Aug 12 2011
EUR USD	7/15 2008	6/7 2010		8/12 2011
Rate	1.59	1.192		1.424
∆%			-33.4		16.3	-11.7
JPY USD	8/18 2008	9/15 2010		8/12 2011
Rate	110.19	83.07		76.67
∆%			24.6		7.7	30.4
CHF USD	11/21 2008	12/8 2009		8/12 2011
Rate	1.225	1.025		0.773
∆%			16.3		24.6	36.9
USD GBP	7/15 2008	1/2/ 2009		8/12 2011
Rate	2.006	1.388		1.627
∆%			-44.5		14.7	-23.3
USD AUD	7/15 2008	10/27 2008		8/12 2011
Rate	1.0215	1.6639		1.035
∆%			-62.9		41.9	5.4
ZAR USD	10/22 2008	8/15 2010		8/12 2011
Rate	11.578	7.238		7.174
∆%			37.5		0.9	38.0
SGD USD	3/3 2009	8/9 2010		8/12 2011
Rate	1.553	1.348		1.211
∆%			13.2		10.2	22.0
HKD USD	8/15 2008	12/14 2009		8/12 2011
Rate	7.813	7.752		7.793
∆%			0.8		-0.5	0.3
BRL USD	12/5 2008	4/30 2010		8/12 2011
Rate	2.43	1.737		1.607
∆%			28.5		7.5	33.9
CZK USD	2/13 2009	8/6 2010		8/12 2011
Rate	22.19	18.693		16.95
∆%			15.7		9.3	23.6
SEK USD	3/4 2009	8/9 2010		8/12 2011
Rate	9.313	7.108		6.505
∆%			23.7		8.5	30.2
CNY USD	7/20 2005	7/15 2008		8/12 2011
Rate	8.2765	6.8211		6.3898
∆%			17.6		6.3	22.8

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

VI Economic Indicators. Crude oil input in refineries rose to 15,524 thousand barrels per day on average in the four weeks ending on Aug 5 from 15,422 thousand barrels per day in the four weeks ending on Jul 29, as shown in Table 59. The rate of capacity utilization in refineries continues at a high level close to 90 percent. Imports of crude oil rose from 9,119 barrels per day on average to 9,278 barrels per day. Rising utilization with increasing imports still resulted in a increase of commercial crude oil stocks fell 5.2 million barrels from 355.0 million on Jul 29 to 349.8 million on Aug 5. Gasoline stocks fell 1.6 million barrels and stocks of fuel oil fell 0.8 million barrels. The most worrisome fact is that supply of gasoline fell from 9,445 barrels per day on Aug 6, 2010, to 9,122 barrels per day on Aug 5, 2011, or by 3.4 percent, while fuel oil supply rose 7.1 percent. Part of the fall in consumption of gasoline is due to higher prices and part to the growth recession. Table 59 also shows increase in the world oil price by 41.5 percent from Aug 6, 2010 to Aug 5, 2011. Gasoline prices rose by 32.0 percent from Aug 6, 2010 to Aug 5, 2011.

Table 59, Energy Information Administration Weekly Petroleum Status Report

Four Weeks Ending Thousand Barrels/Day	08/05/11	07/29/11	08/06/10
Crude Oil Refineries Input	15,524	15,422	15,405
Refinery Capacity Utilization %	89.4	89.0	90.3
Motor Gasoline Production	9,278	9,119	9,417
Distillate Fuel Oil Production	4,571	4,565	4,387
Crude Oil Imports	9,319	9,294	10,017
Motor Gasoline Supplied	9,122 ∆% 2011/2010= -3.4%	9,065	9,445
Distillate Fuel Oil Supplied	3,701 ∆% 2011/2010 = 7.1%	3,546	3,455
	08/05/11	07/29/11	08/06/10
Crude Oil Stocks Million B	349.8 ∆= -5.2 MB	355.0	355.0
Motor Gasoline Million B	213.6 ∆= -1.6 MB	215.2	223.4
Distillate Fuel Oil Million B	151.5 ∆= -0.8 MB	152.3	173.1
World Crude Oil Price $/B	111.32	114.59	78.68
	08/05/11	07/29/11	08/06/10
Regular Motor Gasoline $/G	3.674	3.711	2.783

B: barrels; G: gallon

Source: http://www.eia.gov/pub/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/current/pdf/highlights.pdf

Initial claims for unemployment insurance seasonally adjusted fell 7,000 to reach 395,000 in the week of Aug 6 from 402,000 in the week of Jul 30, as shown in Table 60. Claims not seasonally adjusted, or the actual estimate, rose 10,267 to reach 351,370 in the week of Aug 6 from 341,103 in the week of Jul 30.

Table 60, Initial Claims for Unemployment Insurance

	SA	NSA	4-week MA SA
Aug 6	395,000	351,370	405,000
Jul 30	402,000	341,103	408,250
Change	-7,000	+10,267	-3,250
Jul 23	401,000	369,207	414,500
Prior Year	478,000	425,471	468,750

Note: SA: seasonally adjusted; NSA: not seasonally adjusted; MA: moving average

Source: http://www.dol.gov/opa/media/press/eta/ui/current.htm

VII Interest Rates. It is quite difficult to measure inflationary expectations because they tend to break abruptly from past inflation. There could still be an influence of past and current inflation in the calculation of future inflation by economic agents. Table 61 provides inflation of the CPI. In Jan-Jun 2011, CPI inflation for all items seasonally adjusted was 3.7 percent in annual equivalent, that is, compounding inflation in the first six months and assuming it would be repeated during the second half of 2011. In the 12 months ending in Jun, CPI inflation of all items not seasonally adjusted was 3.6 percent. The second row provides the same measurements for the CPI of all items excluding food and energy: 2.6 percent annual equivalent in Jan-Jun and 1.6 percent in 12 months. Bloomberg provides the yield curve of US Treasury securities at 8:34PM New York time Aug 12 (http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/). The lowest yield is 0.00 percent for three months or zero, 0.07 percent for six months, 0.10 percent for 12 months, 0.19 percent for two years, 0.34 percent for three years, 0.98 percent for five years, 1.58 percent for seven years, 2.26 percent for ten years and 3.71 percent for 30 years. The Irving Fisher definition of real interest rates is approximately the difference between nominal interest rates, which are those estimated by Bloomberg, and the rate of inflation expected in the term of the security, which could behave as in Table 61. Real interest rates in the US have been negative during substantial periods in the past decade while monetary policy pursues a policy of attaining its “dual mandate” of (http://www.federalreserve.gov/aboutthefed/mission.htm):

“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”

Negative real rates of interest distort calculations of risk and returns from capital budgeting by firms, through lending by financial intermediaries to decisions on savings, housing and purchases of households. Inflation on near zero interest rates misallocates resources away from their most productive uses and creates uncertainty of the future path of adjustment to higher interest rates that inhibit sound decisions.

Table 61, Consumer Price Index Percentage Changes 12 months NSA and Annual Equivalent Jan-May 2011 ∆%

	∆% 12 Months Jun 2011/Jun 2010 NSA	∆% Annual Equivalent Jan-Jun 2011 SA
CPI All Items	3.6	3.7
CPI ex Food and Energy	1.6	2.6

Source: http://www.bls.gov/news.release/pdf/cpi.pdf

VIII Conclusion. Growth recession does not necessarily lead to another contraction. There is more evidence of deceleration in Europe than in the US and Asia. Financial turbulence may continue because of the shocks of risk aversion resulting from the lack of a definitive resolution of European sovereign risks

(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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Culbertson, J. M. 1960. Friedman on the lag in effect of monetary policy. Journal of Political Economy 68 (6, Dec): 617-21.

Culbertson, J. M. 1961. The lag in effect of monetary policy: reply. Journal of Political Economy 69 (5, Oct): 467-77.

De Long, J. Bradford. 1997. America’s peacetime inflation: the 1970s. In Christina D. Romer and David H. Romer, eds. Reducing inflation: motivation and strategy. Chicago: University of Chicago Press, 1997.

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Appendix I. The Great Inflation

Inflation and unemployment in the period 1966 to 1985 is analyzed by Cochrane (2011Jan, 23) by means of a Phillips circuit joining points of inflation and unemployment. Chart I1 for Brazil in Pelaez (1986, 94-5) was reprinted in The Economist in the issue of Jan 17-23, 1987 as updated by the author. Cochrane (2011Jan, 23) argues that the Phillips circuit shows the weakness in Phillips curve correlation. The explanation is by a shift in aggregate supply, rise in inflation expectations or loss of anchoring. The case of Brazil in Chart I1 cannot be explained without taking into account the increase in the fed funds rate that reached 22.36 percent on Jul 22, 1981 (http://www.federalreserve.gov/releases/h15/data.htm) in the Volcker Fed that precipitated the stress on a foreign debt bloated by financing balance of payments deficits with bank loans in the 1970s; the loans were used in projects, many of state-owned enterprises with low present value in long gestation. The combination of the insolvency of the country because of debt higher than its ability of repayment and the huge government deficit with declining revenue as the economy contracted caused adverse expectations on inflation and the economy. This interpretation is consistent with the case of the 24 emerging market economies analyzed by Reinhart and Rogoff (2010GTD, 4), concluding that “higher debt levels are associated with significantly higher levels of inflation in emerging markets. Median inflation more than doubles (from less than seven percent to 16 percent) as debt rises from the low (0 to 30 percent) range to above 90 percent. Fiscal dominance is a plausible interpretation of this pattern.”

The reading of the Phillips circuits of the 1970s by Cochrane (2011Jan, 25) is doubtful about the output gap and inflation expectations:

“So, inflation is caused by ‘tightness’ and deflation by ‘slack’ in the economy. This is not just a cause and forecasting variable, it is the cause, because given ‘slack’ we apparently do not have to worry about inflation from other sources, notwithstanding the weak correlation of [Phillips circuits]. These statements [by the Fed] do mention ‘stable inflation expectations. How does the Fed know expectations are ‘stable’ and would not come unglued once people look at deficit numbers? As I read Fed statements, almost all confidence in ‘stable’ or ‘anchored’ expectations comes from the fact that we have experienced a long period of low inflation (adaptive expectations). All these analyses ignore the stagflation experience in the 1970s, in which inflation was high even with ‘slack’ markets and little ‘demand, and ‘expectations’ moved quickly. They ignore the experience of hyperinflations and currency collapses, which happen in economies well below potential.”

Chart I1, Brazil, Phillips Circuit 1963-1987

©Carlos Manuel Pelaez, O cruzado e o austral. São Paulo: Editora Atlas, 1986, pages 94-5. Reprinted in: Brazil. Tomorrow’s Italy, The Economist, 17-23 January 1987, page 25.

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/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html 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). TableI1 provides the change in GDP, CPI and the rate of unemployment from 1960 to 1990. There are three waves of inflation (1) in the second half of the 1960s; (2) from 1973 to 1975; and (3) from 1978 to 1981. In one of his multiple important contributions to understanding 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 I1, 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.bea.gov/national/nipaweb/TableView.asp?SelectedTable=2&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=2009&LastYear=2010&3Place=N&Update=Update&JavaBox=no

http://www.bls.gov/web/empsit/cpseea01.htm

http://data.bls.gov/pdq/SurveyOutputServlet

There is a false impression of the existence of a monetary policy “science,” measurements and forecasting with which to steer the economy into “prosperity without inflation.” Market participants are remembering the Great Bond Crash of 1994 shown in Table I2 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 I2 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 monetary policy tightening because of the long lag in effect of monetary policy on inflation (see Culbertson 1960, 1961, Friedman 1961, Batini and Nelson 2002, Romer and Romer 2004). 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 while creating another financial crash in the future. The issue is not whether there should be a central bank and monetary policy but rather whether policy accommodation in doses from zero interest rates to trillions of dollars in the fed balance sheet endangers economic stability.

Table I2, 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

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