Thirty-One Million Unemployed or Underemployed, Falling Real Disposable Income and Hourly Wages, Financial Repression, Budget/Debt Quagmire, World Financial Turbulence and World Economic Slowdown
Carlos M. Pelaez
© Carlos M. Pelaez, 2010, 2011, 2012
Executive Summary
I Thirty-One Million Unemployed or Underemployed
IA Summary of the Employment Situation
IB Number of People in Job Stress
IC Long-term and Cyclical Comparison of Employment
ID Creation of Jobs
II Falling Real Wages
III Declining Real Disposable Income
IIIA Personal Income and Expenditures
IIIB Financial Repression
IIIB1 Views of the Economy and Interest Rates
IIIB2 Financial Repression
IV Budget/Debt Quagmire
V World Financial Turbulence
IIIA Financial Risks
IIIB Appendix on Safe Haven Currencies
IIIC Appendix on Fiscal Compact
IIID Appendix on European Central Bank Large Scale Lender of Last Resort
IIIE Appendix Euro Zone Survival Risk
IIIF Appendix on Sovereign Bond Valuation
VI Global Inflation
VII World Economic Slowdown
VIIA United States
VIIB Japan
VIIC China
VIID Euro Area
VIIE Germany
VIIF France
VIIG Italy
VIIH United Kingdom
VIII Valuation of Risk Financial Assets
IX Economic Indicators
X Interest Rates
XI Conclusion
References
Appendix I The Great Inflation
References
Executive Summary
ESI Thirty-One Million Unemployed or Underemployed. Table ES1 consists of data and additional calculations using the household survey of the US Bureau of Labor Statistics (BLS), illustrating the possibility that the actual rate of unemployment could be 12.7 percent and the number of people in job stress could be around 31.3 million, which is 19.5 percent of the labor force. The first column provides for 2006 the yearly average population (POP), labor force (LF), participation rate or labor force as percent of population (PART %), employment (EMP), employment population ratio (EMP/POP %), unemployment (UEM), the unemployment rate as percent of labor force (UEM/LF Rate %) and the number of people not in the labor force (NLF). All data are unadjusted or not-seasonally-adjusted (NSA). The numbers in column 2006 are averages in millions while the monthly numbers for Jan 2011 and Dec 2011 and Jan 2012 are in thousands, not seasonally adjusted. The average yearly participation rate of the population in the labor force was in the range of 66.0 percent minimum to 67.1 percent maximum between 2000 and 2006 with the average of 66.4 percent (ftp://ftp.bls.gov/pub/special.requests/lf/aa2006/pdf/cpsaat1.pdf). Table ES1b provides the yearly labor force participation rate from 1979 to 2011. The objective of Table ES1 is to assess how many people could have left the labor force because they do not think they can find another job. Row “LF PART 66.2 %” applies the participation rate of 2006, almost equal to the rates for 2000 to 2006, to the population in Jan and Dec 2011 and Jan 2012 to obtain what would be the labor force of the US if the participation rate had not changed. In fact, the participation rate fell to 63.9 percent by Jan 2011 and was 63.8 percent in Dec 2011 and 63.4 percent in Jan 2012, suggesting that many people simply gave up on finding another job. Row “∆ NLF UEM” calculates the number of people not counted in the labor force because they could have given up on finding another job by subtracting from the labor force with participation rate of 66.2 percent (row “LF PART 66.2%”) the labor force estimated in the household survey (row “LF”). Total unemployed (row “Total UEM”) is obtained by adding unemployed in row “∆NLF UEM” to the unemployed of the household survey in row “UEM.” The row “Total UEM%” is the effective total unemployed “Total UEM” as percent of the effective labor force in row “LF PART 66.2%.” The results are that: (1) there are an estimated 6.897 million unemployed in Jan 2012 who are not counted because they left the labor force on their belief they could not find another job (∆NLF UEM); (2) the total number of unemployed is effectively 20.438 million (Total UEM) and not 13.541 million (UEM) of whom many have been unemployed long term; (3) the rate of unemployment is 12.7 percent (Total UEM%) and not 8.8 percent, not seasonally adjusted, or 8.3 percent seasonally adjusted; and (4) the number of people in job stress is close to 31.3 million by adding the 6.897 million leaving the labor force because they believe they could not find another job. The row “In Job Stress” in Table ES1 provides the number of people in job stress not seasonally adjusted at 29.554 million in Dec 2011, adding the total number of unemployed (“Total UEM”), plus those involuntarily in part-time jobs because they cannot find anything else (“Part Time Economic Reasons”) and the marginally attached to the labor force (“Marginally attached to LF”). The final row of Table ES1 shows that the number of people in job stress is equivalent to 19.5 percent of the labor force. The employment population ratio “EMP/POP %” dropped from 62.9 percent on average in 2006 to 57.6 percent in Jan 2011, 58.5 percent in Dec 2011 and 57.8 percent in Jan 2012 and the number employed (EMP) dropped from 144 million to 139.9 million. What really matters for labor input in production and wellbeing is the number of people with jobs or the employment/population ratio, which has declined and does not show signs of increasing. There are around four million fewer people working in 2011 than in 2006 and the number employed is not increasing. The number of hiring relative to the number unemployed measures the chances of becoming employed. The number of hiring in the US economy has declined by 17 million and does not show signs of increasing in an unusual recovery without hiring (http://cmpassocregulationblog.blogspot.com/2012/01/recovery-without-hiring-united-states.html).
Table ES1, US, Population, Labor Force and Unemployment, NSA
| 2006 | Jan 2011 | Dec 2011 | Jan 2012 | |
| POP | 229 | 238,704 | 240,584 | 242,269 |
| LF | 151 | 152,536 | 153,373 | 153,485 |
| PART% | 66.2 | 63.9 | 63.8 | 63.4 |
| EMP | 144 | 137,599 | 140,681 | 139,944 |
| EMP/POP% | 62.9 | 57.6 | 58.5 | 57.8 |
| UEM | 7 | 14,937 | 12,692 | 13,541 |
| UEM/LF Rate% | 4.6 | 9.8 | 8.3 | 8.8 |
| NLF | 77 | 86,168 | 87,212 | 88,784 |
| LF PART 66.2% | 158,022 | 159,267 | 160,382 | |
| ∆NLF UEM | 5,486 | 5,894 | 6,897 | |
| Total UEM | 20,423 | 18,586 | 20,438 | |
| Total UEM% | 12.9 | 11.7 | 12.7 | |
| Part Time Economic Reasons | 9,205 | 8,428 | 8,271 | |
| Marginally Attached to LF | 2,609 | 2,540 | 2,591 | |
| In Job Stress | 32,237 | 29,554 | 31,300 | |
| People in Job Stress as % Labor Force | 20.4 | 18.6 | 19.5 |
Pop: population; LF: labor force; PART: participation; EMP: employed; UEM: unemployed; NLF: not in labor force; ∆NLF UEM: additional unemployed; Total UEM is UEM + ∆NLF UEM; Total UEM% is Total UEM as percent of LF PART 66.2%; In Job Stress = Total UEM + Part Time Economic Reasons + Marginally Attached to LF
Note: the first column for 2006 is in average millions; the remaining columns are in thousands; NSA: not seasonally adjusted
The labor force participation rate of 66.2% in 2006 is applied to current population to obtain LF PART 66.2%; ∆NLF UEM is obtained by subtracting the labor force with participation of 66.2 percent from the household survey labor force LF; Total UEM is household data unemployment plus ∆NLF UEM; and total UEM% is total UEM divided by LF PART 66.2%
Sources: http://www.bls.gov/news.release/pdf/empsit.pdf
Table ES1b and Chart ES1 provide the US labor for participation rate or percentage of the labor force in population. It is not likely that simple demographic trends caused the sharp decline during the global recession and failure to recover earlier levels.
Table ES1b, US, Labor Force Participation Rate, Percent of Labor Force in Population, NSA, 1979-2011
| Year | Annual |
| 1979 | 63.7 |
| 1980 | 63.8 |
| 1981 | 63.9 |
| 1982 | 64.0 |
| 1983 | 64.0 |
| 1984 | 64.4 |
| 1985 | 64.8 |
| 1986 | 65.3 |
| 1987 | 65.6 |
| 1988 | 65.9 |
| 1989 | 66.5 |
| 1990 | 66.5 |
| 1991 | 66.2 |
| 1992 | 66.4 |
| 1993 | 66.3 |
| 1994 | 66.6 |
| 1995 | 66.6 |
| 1996 | 66.8 |
| 1997 | 67.1 |
| 1998 | 67.1 |
| 1999 | 67.1 |
| 2000 | 67.1 |
| 2001 | 66.8 |
| 2002 | 66.6 |
| 2003 | 66.2 |
| 2004 | 66.0 |
| 2005 | 66.0 |
| 2006 | 66.2 |
| 2007 | 66.0 |
| 2008 | 66.0 |
| 2009 | 65.4 |
| 2010 | 64.7 |
| 2011 | 64.1 |
Source: Bureau of Labor Statistics
Chart ES1, US, Labor Force Participation Rate, Percent of Labor Force in Population, NSA, 1979-2011
Source: Bureau of Labor Statistics
ESII Falling Real Disposable Income and Hourly Wages. Chart ES2 provides 12-month percentage changes of average weekly earnings of all employees in the US in constant dollars of 1982-1984. There is the same pattern of contraction during the global recession in 2008 and then again trend of deterioration in the recovery without hiring and inflation waves in 2011 (http://cmpassocregulationblog.blogspot.com/2012/01/world-inflation-waves-united-states.html http://cmpassocregulationblog.blogspot.com/2012/01/recovery-without-hiring-united-states.html).
Chart ES2, US, Average Weekly Earnings of All Employees NSA in Constant Dollars of 1982-1984 12-Month Percent Change 2007-2011
Source: US Bureau of Labor Statistics
Further information on income and consumption is provided by Table ES2. The 12-month rates of increase of real disposable income (RDPI) and real personal consumption expenditures (RPCE) in 2011 show a sharp trend of deterioration of RDPI from over 3 percent in the final four months of 2010 to less than 3 percent in IQ2011 and then collapsing to a range of 0.9 to 0.5 percent in May-Jul. In Aug 2011, RDPI fell 0.2 percent relative to Aug 2010 and fell 0.1 percent in every month from Sep to Nov when it fell 0.2 percent. In 2011, RDPI fell 0.1 percent. RPCE growth decelerated less sharply from close to 3 percent in IVQ 2010 to 2.3 percent in Jul, 1.7 percent in Aug, 2.1 percent in Sep, 1.8 percent in Oct, 1.6 percent in Nov and 1.4 percent in Dec. Growth rates of personal income and consumption have weakened. Goods and especially durable goods have been driving growth of PCE as shown by the much higher 12-months rates of growth of real goods PCE (RPCEG) and durable goods real PCE (RPCEGD) than services real PCE (RPCES). The faster expansion of industry in the economy is derived from growth of consumption of goods and in particular of consumer durable goods while growth of consumption of services is much more moderate. The 12-month rates of growth of RPCEGD have fallen from more than 10 percent in Sep 2010 to Feb 2011 to the range of 6.3 to 7.8 percent in the quarter May-Jul and then 6.1 percent in Aug, rebounding to 7.8 percent in Sep but falling to 6.5 percent in Oct and increasing to 7.0 percent in Nov but ending at 6.0 percent in Dec. RPCEG growth rates have fallen from over 5 percent late in 2010 and early Jan-Feb 2011 to the range of 3.4 to 4.0 percent in the quarter May-Jul and then only 2.3 percent in Dec.
Table ES2, Real Disposable Personal Income and Real Personal Consumption Expenditures Percentage Change from the Same Month a Year Earlier %
| RDPI | RPCE | RPCEG | RPCEGD | RPCES | |
| 2011 | |||||
| Dec | -0.1 | 1.4 | 2.3 | 6.0 | 1.0 |
| Nov | -0.2 | 1.6 | 2.5 | 7.0 | 1.2 |
| Oct | -0.1 | 1.8 | 2.7 | 6.5 | 1.4 |
| Sep | -0.1 | 2.1 | 3.2 | 7.8 | 1.5 |
| Aug | -0.2 | 1.7 | 2.4 | 6.1 | 1.4 |
| Jul | 0.5 | 2.3 | 3.9 | 7.1 | 1.5 |
| Jun | 0.8 | 2.0 | 3.4 | 6.3 | 1.4 |
| May | 0.9 | 2.2 | 4.0 | 7.8 | 1.4 |
| Apr | 1.6 | 2.5 | 4.7 | 9.2 | 1.4 |
| Mar | 2.4 | 2.6 | 4.5 | 9.3 | 1.7 |
| Feb | 2.7 | 2.9 | 5.9 | 12.8 | 1.4 |
| Jan | 2.8 | 2.9 | 5.8 | 12.0 | 1.5 |
| 2010 | |||||
| Dec | 3.2 | 2.8 | 5.4 | 10.2 | 1.6 |
| Nov | 3.6 | 3.2 | 5.9 | 10.2 | 1.9 |
| Oct | 3.8 | 2.9 | 6.1 | 12.2 | 1.3 |
| Sep | 3.1 | 2.7 | 5.6 | 10.5 | 1.4 |
Notes: RDPI: real disposable personal income; RPCE: real personal consumption expenditures (PCE); RPCEG: real PCE goods; RPCEGD: RPCEG durable goods; RPCES: RPCE services
Numbers are percentage changes from the same month a year earlier
Source: http://www.bea.gov/newsreleases/national/pi/2012/pdf/pi1211.pdf
Chart ES3 provides percentage quarterly changes in real disposable income from the preceding period at seasonally-adjusted annual rates from 1980 to 1989. Rates of change were high during the decade with few negative changes.
Chart ES3, US, Real Disposable Income Percentage Change from Preceding Period at Seasonally-Adjusted Annual Rates, 1980-1989
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart ES4 provides percentage quarterly changes in real disposable income from the preceding period at seasonally-adjusted annual rates from 2007 to 2011. There has been a period of positive rates followed by decline of rates and then negative rates. There is marginal improvement in IVQ2011.
Chart ES4, US, Real Disposable Income, Percentage from Preceding Period at Seasonally-Adjusted Annual Rates, 2007-2011
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart ES5 provides the 12-month percentage rates of change of wages and salaries for the entire civilian population of the Employment Cost Index (ECI) of the Bureau of Labor Statistics (BLS). The rates collapsed with the global recession and have flattened around 1.5 percent since 2010 while inflation has accelerated.
Chart ES5, US, ECI, Wages and Salaries, All Civilian 12-Month Percent Change, 2001-2011
Source: US Bureau of Labor Statistics
ESIII Budget/Debt Quagmire. There is a difficult climb from the record deficit of 9.9 percent in 2009 and cumulative deficit of $5,082 in four consecutive years of deficits exceeding one trillion dollars from 2009 to 2012, shown in Table ES3, which is a segment of data in the main text going back to 1930. There is no subsequent jump of debt as the one from 40.5 percent of GDP in 2008 to 62.8 percent of GDP in 2011 and projected by the Congressional Budget Office (CBO 2012JanBEO) at 67.7 percent in 2012.
Table ES3, United States Central Government Revenue, Expenditure, Deficit, Debt and GDP Growth 1930-2011
| Rev | Exp | Deficit | Debt | GDP |
| 2008 | 17.6 | 20.8 | -3.2 | 40.5 | -0.3 |
| 2009 | 15.1 | 25.2 | -10.1 | 54.1 | -3.5 |
| 2010s | |||||
| 2010 | 15.1 | 24.1 | -8.9 | 62.8 | 3.0 |
| 2011 | 15.4 | 24.1 | -8.7 | 67.7 | 1.7 |
Sources:
Office of Management and Budget. 2011. Historical Tables. Budget of the US Government Fiscal Year 2011. Washington, DC: OMB. CBO (2012JanBEO).
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/
The CBO (2012JanBEO) must use current law without any changes in the baseline scenario but also calculates another alternative scenario with different assumptions. In the alternative scenario shown in Table ES4 the debt/GDP ratio rises to 94.2 percent by 2022. The US is facing an unsustainable debt/GDP path.
Table ES4, US, CBO Base and Alternative Scenarios, Billions of Dollars and Percent
| Base 2012 | Alternative 2012 | Base 2013-2022 | Alternative 2013-2022 | |
| Revenue | 2,523 | 2,500 | 41,179 | 36,154 |
| % GDP | 16.3 | 16.1 | 20.4 | 17.9 |
| Outlays | 3,601 | 3,611 | 44,251 | 47,136 |
| % GDP | 23.2 | 23.3 | 21.9 | 23.4 |
| Deficit | -1,079 | -1,111 | -3,072 | -10,981 |
| % GDP | -7.0 | -7.2 | -1.5 | -5.4 |
| Debt | 11,242 | 11,275 | 15,291* | 23,232* |
| % GDP | 72.5 | 72.7 | 62.0* | 94.2 |
*Debt held by the public in 2022
Source: CBO (2012JanBEO).
The major hurdle in adjusting the fiscal situation of the US is shown in Table ES5 in terms of the rigid structure of revenues that can be increased and outlays that can be reduced. There is no painless adjustment of a debt exceeding 70 percent of GDP. On the side of revenues, taxes provide 90.8 percent of revenue in 2011 and are projected to provide 92.5 percent in the total revenues from 2013 to 2022 in the CBO projections. Thus, revenue measures are a misleading term for what are actually tax increases. The choices are especially difficult because of the risks of balancing inequity and disincentives to economic activity. Individual income taxes are projected to increase from 47.4 percent of federal government revenues in 2011 to 51.9 percent in total revenues projected by the CBO from 2013 to 2022. There are equally difficult conflicts in what the government gives away in a rigid structure of expenditures. Mandatory expenditures account for 56.3 percent of federal government outlays in 2011 and are projected to increase to 61.8 percent of the total projected by the CBO for the years 2013 to 2022. The total of Social Security plus Medicare and Medicaid accounts for 43.4 percent of federal government outlays in 2011 and is projected to increase to 51.5 percent in the total for 2013 to 2022. The inflexibility of what to cut is more evident in the first to the last row of Table ES5 with the aggregate of defense plus Social Security plus Medicare plus Medicaid accounting for 62.8 percent of expenditures in 2011, rising to 66.6 percent of the total outlays projected by the CBO from 2013 to 2022. The cuts are in discretionary spending that declines from 38.9 percent of the total in 2011 to 30.9 percent of total outlays in the CBO projection for 2013 to 2022.
Table ES5, Structure of Federal Government Revenues and Outlays, $ Billions and Percent
| 2011 | % Total | Total 2013-2022 | % Total | |
| Revenues | 2,302 | 100.00 | 41,179 | 100.00 |
| Individual Income Taxes | 1,091 | 47.4 | 21,365 | 51.9 |
| Social Insurance Taxes | 819 | 35.6 | 12,349 | 30.0 |
| Corporate Income Taxes | 181 | 7.9 | 4,360 | 10.6 |
| Other | 211 | 9.2 | 3,105 | 7.5 |
| Outlays | 3,598 | 100.00 | 44,251 | 100.0 |
| Mandatory | 2,025 | 56.3 | 27,364 | 61.8 |
| Social Security | 725 | 20.2 | 10,530 | 23.8 |
| Medicare | 560 | 15.6 | 7,820 | 17.7 |
| Medicaid | 275 | 7.6 | 4,453 | 10.1 |
| SS + Medicare + Medicaid | 1,560 | 43.4 | 22,803 | 51.5 |
| Discre- | 1,346 | 38.98 | 13,580 | 30.93 |
| Defense | 700 | 19.5 | 6,657 | 15.0 |
| Non- | 646 | 17.9 | 5,894 | 13.3 |
| Net Interest | 227 | 5.67 | 4,247 | 10.13 |
| Defense + SS + Medicare + Medicaid | 2,260 | 62.8 | 29,460 | 66.6 |
| MEMO: GDP | 14,954 | 201,660 |
Source: CBO (2012JanBEO).
I Thirty Million Unemployed or Underemployed. The employment situation report of the Bureau of Labor Statistics (BLS) of the US Department of Labor released in the first Friday of every month is critical in the analysis of social and economic conditions in the US. The objective of this section is to analyze the report released on Feb 3, 2012, for Jan 2012 (http://www.bls.gov/news.release/pdf/empsit.pdf). This section is divided into four subsections. IA Summary of the Employment Situation provides the key data on employment, job creation and wages contained in the BLS report. These data are complemented by the BLS report on hiring, job openings and separations to be released on Feb 7 (http://www.bls.gov/jlt/), which will be analyzed in the blog comment of Feb 12. IB Number of People in Job Stress provides the calculation of people unemployed or underemployed in the US using the estimates of the BLS. IC Long-term and Cyclical Comparison of Employment provides the comparison with long-term and relevant cyclical experience in the US. ID Creation of Jobs analyzes the establishment survey of the BLS that provides job creation in nonfarm payrolls. Hourly and weekly earnings and hours worked are analyzed in the following section II Falling Real Wages.
IA Summary of the Employment Situation. The Bureau of Labor Statistics (BLS) of the US Department of Labor provides both seasonally-adjusted (SA) and not-seasonally adjusted (NSA) or unadjusted data with important uses (Bureau of Labor Statistics 2012Feb3; 2011Feb11):
“Most series published by the Current Employment Statistics program reflect a regularly recurring seasonal movement that can be measured from past experience. By eliminating that part of the change attributable to the normal seasonal variation, it is possible to observe the cyclical and other nonseasonal movements in these series. Seasonally adjusted series are published monthly for selected employment, hours, and earnings estimates.”
Table I-1 provides the summary statistics of the employment situation report of the BLS. The first four rows provide the data from the establishment report of creation of nonfarm payroll jobs and remuneration of workers (for analysis of the differences in employment between the establishment report and the household survey see Abraham, Haltiwanger, Sandusky and Spletzer 2009). The US economy created 243,000 nonfarm payroll jobs in Jan SA, which is much higher than revised 203,000 created in Dec 2011. New private payroll jobs created in Jan were 257,000, which is much higher than 220,000 created in Dec. Subsection D Job Creation analyzes the types of jobs created. Average hourly earnings in Jan 2012 were $23.29, increasing 1.9 percent relative to Jan 2011 and 0.2 percent relative to Dec 2011. In Dec 2011, average hourly earnings were $23.25, increasing 1.9 percent relative to Dec 2010 and 0.1 percent relative to Nov 2011. These are nominal changes in worker wages. The following row “average hourly earnings in constant dollars” provides hourly wages in constant dollars calculated by the BLS or what is called “real wages” adjusted for inflation. Data are not available for Jan because the prices indexes of the BLS for Jan will only be released in the middle of the Feb. The second column provides changes in real wages for Dec. Average hourly earnings adjusted for inflation or in constant dollars fell 1.0 percent in Dec 2011 relative to Dec 2010 and 0 relative to Nov 2011. The fractured labor market of the US is characterized by high levels of unemployment and underemployment together with falling real wages or wages adjusted for inflation. The following section II Falling Real Wages provides more detailed analysis. Average weekly hours of US workers are relatively constant at 34.5 in Jan 2012 compared with 34.5 in Dec 2011. Another headline number widely followed is the unemployment rate or number of people unemployed as percent of the labor force. The unemployment rate calculated in the household survey fell from 8.5 percent seasonally adjusted (SA) in Dec 2011 to 8.3 percent in Jan 2012. This blog provides with every employment situation report the number of people in the US in job stress or unemployed plus underemployed calculated without seasonal adjustment (NSA) at 31.3 million in Jan 2012 and at 29.6 million in Dec 2011. The final row in Table I-1 provides the number in job stress as percent of the actual labor force at 19.5 percent in Jan 2012 and 18.6 percent in Dec 2011. The combination of high number of people in job stress, falling real wages and high number of people in poverty constitutes a socio-economic disaster.
Table I-1, US, Summary of the Employment Situation Report SA
| Jan 2012 | Dec 2011 | |
| New Nonfarm Payroll Jobs | 243,000 | 203,000 |
| New Private Payroll Jobs | 257,000 | 220,000 |
| Average Hourly Earnings | $23.29 ∆% Jan 12/Jan 11: 1.9 ∆% Jan 12/Dec 11: 0.2 | $23.25 ∆% Dec 11/Dec 10: 1.9 ∆% Dec 11/Nov11: 0.1 |
| Average Hourly Earnings in Constant Dollars | NA | $10.25 ∆% Dec 2011/Dec 2010: -1.0 ∆% Dec 2011/Nov 2011: 0.0 |
| Average Weekly Hours | 34.5 | 34.5 |
| Unemployment Rate Household Survey % of Labor Force SA | 8.3 | 8.5 |
| Number in Job Stress Unemployed and Underemployed Blog Calculation | 31.3 million NSA | 29.6 million NSA |
| In Job Stress as % Labor Force | 19.5 | 18.6 |
Source: Tables I-2, I-3, I-4, I-8, II-1 and II-3.
IB Number of People in Job Stress. There are two approaches to calculating the number of people in job stress. The first approach is calculating the number of people in job stress unemployed or underemployed with the raw data of the employment situation report as in Table I-2. The data are seasonally adjusted (SA). The first three rows provide the labor force and unemployed in million and the unemployment rate of unemployed as percent of the labor force. There is significant decrease in the number unemployed from 13.079 million in Dec 2011 to 12.758 million in Jan 2012 or decline of 339,000. Thus, the rate of unemployment falls from 8.5 percent in Dec to 8.3 percent in Jan. The labor force SA increased from 153.887 million in Dec 2011 to 154.395 million in Jan 2012 or by 508,000. An important aspect of unemployment is its persistence with 5.518 million in Jan who had been unemployed for 27 weeks or more, constituting 43.3 percent of the unemployed. The longer the period of unemployment the lower are the chances of finding another job. Another key characteristic of the current labor market is the high number of people trying to subsist with part-time job because they cannot find full-time employment or part-time for economic reasons. The number of part-time for economic reasons increased from 8.098 million in Dec to 8.230 million in Jan or by 132,000. Another category consists of people marginally attached to the labor force who have sought employment at some point but believe there may not be another job for them. The number in job stress unemployed or underemployed of 23.797 million in Jan is composed of 12.758 million unemployed (of whom 5.518 million, or 43.3 percent, unemployed for 27 weeks or more) compared with 13.097 million unemployed in Dec (of whom 5.588 million, or 42.7 percent, unemployed for 27 weeks or more), 8.230 million employed part-time for economic reasons in Jan (who suffered reductions in their work hours or could not find full-time employment) compared with 8.098 million in Dec and 2.809 million who were marginally attached to the labor force in Jan (who were not in the labor force but wanted and were available for work) compared with 2.540 million in Dec. The final row in Table I-2 provides the number in job stress as percent of the labor force: 15.4 percent in Jan equal to 15.4 percent in Dec and lower than 15.8 percent in Nov.
Table I-2, US, People in Job Stress, Millions and % SA
| 2011-2012 | Jan 2012 | Dec 2011 | Nov 2011 |
| Labor Force Millions | 154.395 | 153.887 | 153.937 |
| Unemployed | 12.758 | 13.097 | 13.323 |
| Unemployment Rate (unemployed as % labor force) | 8.3 | 8.5 | 8.7 |
| Unemployed ≥27 weeks | 5.518 | 5.588 | 5.680 |
| Unemployed ≥27 weeks % | 43.3 | 42.7 | 42.6 |
| Part Time for Economic Reasons ∆ Jan/Dec: +132 thousand ∆Jan/Sep: -1.040 million | 8.230 | 8.098 | 8.469 |
| Marginally ∆ Jan/Dec: +269 thousand ∆Jan/Oct: +298 thousand | 2.809 | 2.540 | 2.591 |
| Job Stress ∆Jan/Dec: -62 thousand ∆Jan/Oct: -1.881 million | 23.797 | 23.735 | 24.383 |
| In Job Stress as % Labor Force | 15.4 | 15.4 | 15.8 |
Source
Job Stress = Unemployed + Part Time Economic Reasons + Marginally Attached Labor Force
Source: http://www.bls.gov/news.release/pdf/empsit.pdf
Table I-3 repeats the data in Table I-2 but including Oct and additional data. What really matters is the number of people with jobs or the total employed. The final row of Table I-3 provides people employed as percent of the population. The number has remained relatively constant around 58.5 percent.
Table I-3, US, Unemployment and Underemployment, SA, Millions and Percent
| Jan 2012 | Dec 2011 | Nov 2011 | Oct 2011 | |
| Labor Force | 154.395 | 153.887 | 153.937 | 154.057 |
| Unemployed | 12.758 | 13.097 | 13.323 | 13.759 |
| UNE Rate % | 8.3 | 8.5 | 8.7 | 8.9 |
| Part Time Economic Reasons | 8.230 | 8.098 | 8.469 | 8.790 |
| Marginally Attached to Labor Force | 2.809 | 2.540 | 2.591 | 2.555 |
| In Job Stress | 23.797 | 23.735 | 24.383 | 25.104 |
| In Job Stress % Labor Force | 15.4 | 15.4 | 15.8 | 16.3 |
| Employed | 141.637 | 140.790 | 140.614 | 140.297 |
| Employment % Population | 58.5 | 58.5 | 58.5 | 58.4 |
Source: Bureau of Labor Statistics
The second approach is considered in the balance of this subsection. Charts I-1 to I-12 explain the reasons for considering another approach to calculating job stress in the US. Chart I-1 of the Bureau of Labor Statistics provides the level of employment in the US from 2001 to 2011. There was a big drop of the number of people employed from more than 146.320 million at the peak in Jan 2008 to 137.968 million at the trough in Dec 2009 with 8.352 million fewer people employed. Recovery has been anemic compared with the shallow recession of 2001 that was followed by nearly vertical growth in jobs. The number employed in Dec 2011 was 141.637 or 4.683 million fewer people with jobs.
Chart I-1, US, Employed, Thousands, SA, 2001-2011
Source: Bureau of Labor Statistics
Chart I-2 of the Bureau of Labor Statistics provides 12-month percentage changes of the number of people employed in the US from 2001 to 2011. There was recover in 2010 and 2011 but not sufficient to recover lost jobs. There are many people in the US who had jobs before the global recession who are not working now.
Chart I-2, US, Employed, 12-Month Percentage Change, 2001-2011
Source: Bureau of Labor Statistics
The foundation of the second approach derives from Chart I-3 of the Bureau of Labor Statistics providing the level of the civilian labor force in the US. The civilian labor force consists of people who are available and willing to work and who have searched for employment recently. The labor force of the US grew from 143.800 million in Jan 2001 to 154.800 million in May 2009 but has declined to 153.887 million in Dec 2011 and 154.395 million in Jan 2012. Chart 1-3 shows the flattening of the curve of expansion of the labor force and its decline in 2010 and 2011. The key issue is whether the decline in participation of the population in the labor force is the result of people giving up on finding another job.
Chart I-3, US, Civilian Labor Force, Thousands, SA, 2001-2011
Source: Bureau of Labor Statistics
Chart I-4 of the Bureau of Labor Statistics provides 12-month percentage changes of the level of the labor force in the US. The rate of growth fell almost instantaneously with the global recession and became negative from 2009 to 2011. The labor force of the US collapsed and did not recover.
Chart I-4, US, Civilian Labor Force, Thousands, SA, 12-month Percentage Change, 2001-2011
Source: Bureau of Labor Statistics
Chart I-5 of the Bureau of Labor Statistics provides the labor force participation rate in the US or labor force as percent of the population. The labor force participation rate of the US fell from 67.2 percent in Jan 2001 to around 66.2 percent in Jan 2008 and then to 63.8 percent NSA in Jan 2012. Chart I-5 shows an evident downward trend beginning with the global recession that has continued throughout the recovery beginning in IIIQ2009. The critical issue is whether people left the workforce of the US because they believe there is no longer a job for them.
Chart I-5, Civilian Labor Force Participation Rate, Percent of Population in Labor Force SA, 2001-2011
Source: Bureau of Labor Statistics
Chart I-6 of the Bureau of Labor Statistics provides the level of unemployed in the US. The number unemployed rose from the trough of 6.727 million in Oct 2007 to the peak of 15.421 million in Oct 2009, declining to 13.097 million in Dec 2011 and 12.758 in Jan 2012.
Chart I-6, US, Unemployed, Thousands, SA, 2001-2011
Source: Bureau of Labor Statistics
Chart I-7 of the Bureau of Labor Statistics provides the rate of unemployment in the US or unemployed as percent of the labor force. The rate of unemployment of the US rose from 4.2 percent in Jan 2001 to 6.2 percent in Jul 2003, declining to 4.4 percent in Mar 2007. The rate of unemployment jumped to 9.9 percent in both Nov and Dec 2009 and declined to 8.5 percent in Dec 2011 and 8.3 percent in Jan 2012.
Chart I-7, US, Unemployment Rate, 2001-2011
Source: Bureau of Labor Statistics
Chart I-8 of the Bureau of Labor Statistics provides 12-month percentage changes of the level of unemployed. There was a jump above 7.5 percent early in 2009 with subsequent decline and negative rates since 2010.
Chart I-8, US, Unemployed, 12-month Percentage Change, 2001-2011
Source: Bureau of Labor Statistics
Chart I-9 of the Bureau of Labor Statistics provides the number of people in part-time occupations because of economic reasons, that is, because they cannot find full-time employment. The number underemployed in part-time occupations rose from 3.332 million in Jan 2001 to 4.820 million in Oct 2004, falling to 3.900 million in Apr 2006. The number underemployed jumped to 9.130 million in Nov 2009, falling to 8.098 million in Dec 2011 but increasing to 8.230 million in Jan 2012. The longer the period in part-time jobs the worst are the chances of finding another full-time job.
Chart I-9, US, Part-Time for Economic Reasons, Thousands, SA, 2001-2011
Source: Bureau of Labor Statistics
Chart I-10 of the Bureau of Labor Statistics repeats the behavior of unemployment. The 12-month rate of the level of people at work part-time for economic reasons jumped in 2009 and then declined subsequently. The declines have been insufficient to reduce significantly the number of people who cannot shift from part-time to full-time employment.
Chart I-10, US, Part-Time for Economic Reasons 12-Month Percentage Change, NSA, 2001-2011
Source: Bureau of Labor Statistics
Chart I-11 of the Bureau of Labor Statistics provides the same pattern of the number marginally attached to the labor force jumping to significantly higher levels during the global recession and remaining at historically high levels. The number marginally attached to the labor force increased from 1.295 million in Jan 2001 to 1.691 million in Feb 2004. The number of marginally attached to the labor force fell to 1.299 million in Sep 2006 and increased to 2.486 million in Dec 2009. The number marginally attached to the labor force was 2.540 million in Dec 2011, increasing to 2.809 million in Jan 2012.
Chart I-11, US, Marginally-Attached to the Labor Force, Thousands, NSA, 2001-2011
Source: Bureau of Labor Statistics
Chart I-12, US, Marginally-Attached to the Labor Force 12-Month Percentage Change, NSA
Source: Bureau of Labor Statistics
Table I-4 consists of data and additional calculations using the BLS household survey, illustrating the possibility that the actual rate of unemployment could be 12.7 percent and the number of people in job stress could be around 31.3 million, which is 19.5 percent of the labor force. The first column provides for 2006 the yearly average population (POP), labor force (LF), participation rate or labor force as percent of population (PART %), employment (EMP), employment population ratio (EMP/POP %), unemployment (UEM), the unemployment rate as percent of labor force (UEM/LF Rate %) and the number of people not in the labor force (NLF). All data are unadjusted or not-seasonally-adjusted (NSA). The numbers in column 2006 are averages in millions while the monthly numbers for Jan 2011, Dec 2011 and Jan 2012 are in thousands, not seasonally adjusted. The average yearly participation rate of the population in the labor force was in the range of 66.0 percent minimum to 67.1 percent maximum between 2000 and 2006 with the average of 66.4 percent (ftp://ftp.bls.gov/pub/special.requests/lf/aa2006/pdf/cpsaat1.pdf). Table I-4b provides the yearly labor force participation rate from 1979 to 2011. The objective of Table I-4 is to assess how many people could have left the labor force because they do not think they can find another job. Row “LF PART 66.2 %” applies the participation rate of 2006, almost equal to the rates for 2000 to 2006, to the population in Jan and Dec 2011 and Jan 2012 to obtain what would be the labor force of the US if the participation rate had not changed. In fact, the participation rate fell to 63.9 percent by Jan 2011 and was 63.8 percent in Dec 2011 and 63.4 percent in Jan 2012, suggesting that many people simply gave up on finding another job. Row “∆ NLF UEM” calculates the number of people not counted in the labor force because they could have given up on finding another job by subtracting from the labor force with participation rate of 66.2 percent (row “LF PART 66.2%”) the labor force estimated in the household survey (row “LF”). Total unemployed (row “Total UEM”) is obtained by adding unemployed in row “∆NLF UEM” to the unemployed of the household survey in row “UEM.” The row “Total UEM%” is the effective total unemployed “Total UEM” as percent of the effective labor force in row “LF PART 66.2%.” The results are that: (1) there are an estimated 6.897 million unemployed in Jan 2012 who are not counted because they left the labor force on their belief they could not find another job (∆NLF UEM); (2) the total number of unemployed is effectively 20.438 million (Total UEM) and not 13.541 million (UEM) of whom many have been unemployed long term; (3) the rate of unemployment is 12.7 percent (Total UEM%) and not 8.8 percent, not seasonally adjusted, or 8.3 percent seasonally adjusted; and (4) the number of people in job stress is close to 31.3 million by adding the 6.897 million leaving the labor force because they believe they could not find another job. The row “In Job Stress” in Table I-4 provides the number of people in job stress not seasonally adjusted at 29.554 million in Dec 2011, adding the total number of unemployed (“Total UEM”), plus those involuntarily in part-time jobs because they cannot find anything else (“Part Time Economic Reasons”) and the marginally attached to the labor force (“Marginally attached to LF”). The final row of Table I-4 shows that the number of people in job stress is equivalent to 19.5 percent of the labor force. The employment population ratio “EMP/POP %” dropped from 62.9 percent on average in 2006 to 57.6 percent in Jan 2011, 58.5 percent in Dec 2011 and 57.8 percent in Jan 2012 and the number employed (EMP) dropped from 144 million to 139.9 million. What really matters for labor input in production and wellbeing is the number of people with jobs or the employment/population ratio, which has declined and does not show signs of increasing. There are around four million fewer people working in 2011 than in 2006 and the number employed is not increasing. The number of hiring relative to the number unemployed measures the chances of becoming employed. The number of hiring in the US economy has declined by 17 million and does not show signs of increasing in an unusual recovery without hiring (http://cmpassocregulationblog.blogspot.com/2012/01/recovery-without-hiring-united-states.html).
Table I-4, US, Population, Labor Force and Unemployment, NSA
| 2006 | Jan 2011 | Dec 2011 | Jan 2012 | |
| POP | 229 | 238,704 | 240,584 | 242,269 |
| LF | 151 | 152,536 | 153,373 | 153,485 |
| PART% | 66.2 | 63.9 | 63.8 | 63.4 |
| EMP | 144 | 137,599 | 140,681 | 139,944 |
| EMP/POP% | 62.9 | 57.6 | 58.5 | 57.8 |
| UEM | 7 | 14,937 | 12,692 | 13,541 |
| UEM/LF Rate% | 4.6 | 9.8 | 8.3 | 8.8 |
| NLF | 77 | 86,168 | 87,212 | 88,784 |
| LF PART 66.2% | 158,022 | 159,267 | 160,382 | |
| ∆NLF UEM | 5,486 | 5,894 | 6,897 | |
| Total UEM | 20,423 | 18,586 | 20,438 | |
| Total UEM% | 12.9 | 11.7 | 12.7 | |
| Part Time Economic Reasons | 9,205 | 8,428 | 8,271 | |
| Marginally Attached to LF | 2,609 | 2,540 | 2,591 | |
| In Job Stress | 32,237 | 29,554 | 31,300 | |
| People in Job Stress as % Labor Force | 20.4 | 18.6 | 19.5 |
Pop: population; LF: labor force; PART: participation; EMP: employed; UEM: unemployed; NLF: not in labor force; ∆NLF UEM: additional unemployed; Total UEM is UEM + ∆NLF UEM; Total UEM% is Total UEM as percent of LF PART 66.2%; In Job Stress = Total UEM + Part Time Economic Reasons + Marginally Attached to LF
Note: the first column for 2006 is in average millions; the remaining columns are in thousands; NSA: not seasonally adjusted
The labor force participation rate of 66.2% in 2006 is applied to current population to obtain LF PART 66.2%; ∆NLF UEM is obtained by subtracting the labor force with participation of 66.2 percent from the household survey labor force LF; Total UEM is household data unemployment plus ∆NLF UEM; and total UEM% is total UEM divided by LF PART 66.2%
Sources: http://www.bls.gov/news.release/pdf/empsit.pdf
Table I-4b and Chart 12-b provide the US labor for participation rate or percentage of the labor force in population. It is not likely that simple demographic trends caused the sharp decline during the global recession and failure to recover earlier levels.
Table I-4b, US, Labor Force Participation Rate, Percent of Labor Force in Population, NSA, 1979-2011
| Year | Annual |
| 1979 | 63.7 |
| 1980 | 63.8 |
| 1981 | 63.9 |
| 1982 | 64.0 |
| 1983 | 64.0 |
| 1984 | 64.4 |
| 1985 | 64.8 |
| 1986 | 65.3 |
| 1987 | 65.6 |
| 1988 | 65.9 |
| 1989 | 66.5 |
| 1990 | 66.5 |
| 1991 | 66.2 |
| 1992 | 66.4 |
| 1993 | 66.3 |
| 1994 | 66.6 |
| 1995 | 66.6 |
| 1996 | 66.8 |
| 1997 | 67.1 |
| 1998 | 67.1 |
| 1999 | 67.1 |
| 2000 | 67.1 |
| 2001 | 66.8 |
| 2002 | 66.6 |
| 2003 | 66.2 |
| 2004 | 66.0 |
| 2005 | 66.0 |
| 2006 | 66.2 |
| 2007 | 66.0 |
| 2008 | 66.0 |
| 2009 | 65.4 |
| 2010 | 64.7 |
| 2011 | 64.1 |
Source: Bureau of Labor Statistics
Chart 12b, US, Labor Force Participation Rate, Percent of Labor Force in Population, NSA, 1979-2011
Source: Bureau of Labor Statistics
IC Long-term and Cyclical Comparison of Employment. There is initial discussion here of long-term employment trends followed by cyclical comparison. Growth and employment creation have been mediocre in the expansion beginning in Jul IIIQ2009 from the contraction between Dec IVQ2007 and Jun IIQ2009 (http://www.nber.org/cycles.html). A series of charts from the database of the Bureau of Labor Statistics (BLS) provides significant insight. Chart I-13 provides the monthly employment level of the US from 1948 to 2011. The number of people employed has trebled. There are multiple contractions throughout the more than six decades but followed by resumption of the strong upward trend. The contraction after 2007 is deeper and followed by a flatter curve of job creation. Economic growth is much lower in the current expansion at 2.4 percent relative to average 6.2 percent in earlier contractions.
Chart I-13, US, Employment Level, Thousands, 1948-2011
Source: US Bureau of Labor Statistics
The steep and consistent curve of growth of the US labor force is shown in Chart I-14. The contraction beginning in Dec 2007 flattened the path of the US civilian labor force and is now followed by a flatter curve during the expansion.
Chart I-14, US, Civilian Labor Force, 1948-2011, Thousands
Source: US Bureau of Labor Statistics
The civilian labor force participation rate, or labor force as percent of population, is provided in Chart I-15 for the period from 1948 to 2011. The labor force participation rate is influenced by numerous factors such as the age of the population. There is no comparable episode in the postwar economy to the sharp collapse of the labor force participation rate in Chart I-15 during the contraction and subsequent expansion after 2007. Aging can reduce the labor force participation rate as many people retire but many may have decided to work longer as their wealth and savings have been significantly reduced. There is an important effect of many people just exiting the labor force because they believe there is no job available for them.
Chart I-15, US, Civilian Labor Force Participation Rate, 1948-2011, %
Source: US Bureau of Labor Statistics
The number of unemployed in the US jumped from 5.8 million in May 1979 to 12.1 million in Dec 1982, by 6.3 million, or 108.6 percent. The number of unemployed jumped from 6.7 million in Mar 2007 to 15.6 million in Oct 2009, by 8.9 million, or 132.8 percent. These are the two episodes with steepest increase in the level of unemployment in Chart I-16.
Chart I-16, US, Unemployed, 1948-2011, Thousands
Source: US Bureau of Labor Statistics
Chart I-17 provides the rate of unemployment of the US from 1948 to 2011. The peak of the series is 10.8 percent in both Nov and Dec 1982. The second highest rates are 10.1 percent in Oct 2009 and 9.9 percent in both Nov and Dec 2009.
Chart I-17, US, Unemployment Rate, 1948-2011
Source: US Bureau of Labor Statistics
Chart I-18 provides the number unemployed for 27 weeks and over from 1948 to 2011. The number unemployed for 27 weeks and over jumped from 510,000 in Dec 1978 to 2.9 million in Jun 1983, by 2.4 million, or 480 percent. The number of unemployed 27 weeks or over jumped from 1.1 million in May 2007 to 6.7 million in Jun 2010, by 5.6 million, or 509 percent.
Chart I-18, US, Unemployed for 27 Weeks or More, 1948-2011, Thousands
Source: US Bureau of Labor Statistics
The employment-population ratio in Chart I-19 is an important indicator of wellbeing in labor markets, measuring the number of people with jobs. The US employment-population ratio fell from 63.4 in Dec 2006 to 58.2 in Jul 2011 and stands at 57.8 NSA in Dec 2011. There is no comparable decline during an expansion in Chart I-19.
Chart I-19, US, Employment-Population Ratio, 1948-2011
Source: US Bureau of Labor Statistics
The number of people at work part-time for economic reasons because they cannot find full-time employment is provided in Chart I-20. The number of people at work part-time for economic reasons jumped from 4.1 million in Sep 2006 to a high of 9.4 million in Sep 2010 and 9.3 million in Sep 2011, or by 5.2 million, or 127 percent. Earlier increases in the 1980s and after the tough recession of 1991 were followed by rapid decrease that is still absent in the current expansion. The drop by 371,000 of the seasonally-adjusted data from Nov to Dec while actual data without seasonal adjustment show an increase by 157,000 is not very credible.
Chart I-20, US, Part-Time for Economic Reasons, 1948-2011, Thousands
Source: US Bureau of Labor Statistics
Table I-5 provides percentage change in real GDP in the United States in the 1930s, 1980s and 2000s. The recession in 1981-1982 is quite similar on its own to the 2007-2009 recession. In contrast, during the Great Depression in the four years of 1930 to 1933, GDP in constant dollars fell 26.7 percent cumulatively and fell 45.6 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7). Data are available for the 1930s only on a yearly basis. US GDP fell 4.8 percent in the two recessions from IQ1980 to IIIQ1980 and from III1981 to IVQ1981 to IVQ1982 and 5.1 percent cumulatively in the recession from IVQ2007 to IIQ2009.
Table I-5, US, Percentage Change of GDP in the 1930s, 1980s and 2000s, ∆%
| Year | GDP ∆% | Year | GDP ∆% | Year | GDP ∆% |
| 1930 | -8.6 | 1980 | -0.3 | 2000 | 4.1 |
| 1931 | -6.5 | 1981 | 2.5 | 2001 | 1.1 |
| 1932 | -13.1 | 1982 | -1.9 | 2002 | 1.8 |
| 1933 | -1.3 | 1983 | 4.5 | 2003 | 2.5 |
| 1934 | 10.9 | 1984 | 7.2 | 2004 | 3.5 |
| 1935 | 8.9 | 1985 | 4.1 | 2005 | 3.1 |
| 1936 | 13.1 | 1986 | 3.5 | 2006 | 2.7 |
| 1937 | 5.1 | 1987 | 3.2 | 2007 | 1.9 |
| 1938 | -3.4 | 1988 | 4.1 | 2008 | -0.3 |
| 1930 | 8.1 | 1989 | 3.6 | 2009 | -3.5 |
| 1940 | 8.8 | 1990 | 1.9 | 2010 | 3.0 |
| 1941 | 17.1 | 1991 | -0.2 | 2011 | 1.7 |
Source: http://www.bea.gov/iTable/index_nipa.cfm
Characteristics of the four cyclical sharp contractions are provided in Table I-6 with the first column showing the number of quarters of contraction; the second column the cumulative percentage contraction; and the final column the average quarterly rate of contraction in annual equivalent rate. There were two contractions from IQ1980 to IIIQ1980 and from IIIQ1981 to IVQ1982 separated by three quarters of expansion. The drop of output combining the declines in these two contractions is 4.8 percent, which is almost equal to the decline of 5.1 percent in the contraction from IVQ2007 to IIQ2009. In contrast, during the Great Depression in the four years of 1930 to 1933, GDP in constant dollars fell 26.7 percent cumulatively and fell 45.6 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7). The comparison of the global recession after 2007 with the Great Depression is entirely misleading.
Table I-6, US, Number of Quarters, Cumulative Percentage Contraction and Average Percentage Annual Equivalent Rate in Cyclical Contractions
| Number of Quarters | Cumulative Percentage Contraction | Average Percentage Annual Equivalent Rate | |
| IIQ1953 to IIQ1954 | 4 | -2.5 | -0.63 |
| IIIQ1957 to IIQ1958 | 3 | -3.1 | -9.0 |
| IQ1980 to IIIQ1980 | 2 | -2.2 | -1.1 |
| IIIQ1981 to IVQ1982 | 4 | -2.7 | -0.67 |
| IVQ2007 to IIQ2009 | 6 | -5.1 | -0.87 |
Source: Business Cycle Reference Dates: http://www.nber.org/cycles/cyclesmain.html
Data: http://www.bea.gov/iTable/index_nipa.cfm
Table I-7 shows the extraordinary contrast between the mediocre average annual equivalent growth rate of 2.4 percent of the US economy in the nine quarters of the current cyclical expansion and the average of 6.2 percent in the four earlier cyclical expansions. The BEA data for the three quarters of 2011 show the economy in standstill with annual equivalent growth of 1.1 percent. The expansion of IQ1983 to IVQ1985 was at the average annual growth rate of 5.7 percent.
Table I-7, US, Number of Quarters, Cumulative Growth and Average Annual Equivalent Growth Rate in Cyclical Expansions
| Number | Cumulative Growth ∆% | Average Annual Equivalent Growth Rate | |
| IIIQ 1954 to IQ1957 | 11 | 12.6 | 4.4 |
| IIQ1958 to IIQ1959 | 5 | 10.2 | 8.1 |
| IIQ1975 to IVQ1976 | 8 | 9.5 | 4.6 |
| IQ1983 to IV1985 | 13 | 19.6 | 5.7 |
| Average Four Above Expansions | 6.2 | ||
| IIIQ2009 to IVQ2011 | 10 | 6.2 | 2.4 |
Source: http://www.bea.gov/iTable/index_nipa.cfm
A group of charts from the database of the Bureau of Labor Statistics facilitate the comparison of employment in the 1980s and 2000s. The long-term charts and tables from I-5 to I-7 in the discussion above confirm the view that the comparison of the current expansion should be with that in the 1980s because of similar dimensions. Chart I-21 provides the level of employment in the US between 1979 and 1989. Employment surged after the contraction and grew rapidly during the decade.
Chart I-21, US, Employed, Thousands, 1979-1989
Source: US Bureau of Labor Statistics
The number employed in the US fell from 146.595 million in Nov 2007 to 141.637 million in Jan 2012, by 4.958 million, or 3.4 percent. Chart I-22 shows tepid recovery early in 2010 followed by near stagnation.
Chart I-22, US, Employed, Thousands, 2001-2011
Source: US Bureau of Labor Statistics
There was a steady upward trend in growth of the civilian labor force between 1979 and 1989 as shown in Chart I-23. There were fluctuations but strong long-term dynamism over an entire decade.
Chart I-23, US, Civilian Labor Force, Thousands, 1979-1989
Source: US Bureau of Labor Statistics
The civilian labor force in Chart I-24 grew steadily on an upward trend in the 2000s until it contracted together with the economy after 2007. There has not been recovery during the expansion but rather decline.
Chart I-24, US, Civilian Labor Force, Thousands, 2001-2011
Source: US Bureau of Labor Statistics
The rate of participation of the labor force in population stagnated during the stagflation and conquest of inflation in the late 1970s and early 1980s, as shown in Chart I-25. Recovery was vigorous during the expansion and lasted through the remainder of the decade.
Chart I-25, US, Civilian Labor Force Participation Rate, 1979-1989, %
Source: US Bureau of Labor Statistics
The rate of participation in the labor force declined after the recession of 2001 and stagnated until 2007, as shown in Chart I-26. The rate of participation in the labor force continued to decline both during the contraction after 2007 and the expansion after 2009.
Chart I-26, US, Civilian Labor Force Participation Rate, 2001-2011, %
Source: US Bureau of Labor Statistics
Chart I-27 provides the number unemployed during the 1980s. The number unemployed peaked at 12.051 million in Dec 1982, declining to 8.358 million in Dec 1984 during the first two years of expansion from the contraction. The number unemployed then fell to 6.667 million in Dec 1989.
Chart I-27, US, Unemployed Thousands 1979-1989
Source: US Bureau of Labor Statistics
Chart I-28 provides the number unemployed from 2001 to 2011. The number unemployed rose from 6.727 million in Oct 2006 to 15.421 million in Oct 2009, declining to 13.097 million in Dec 2011 and to 12.758 million in Jan 2012.
Chart I-28, US, Unemployed Thousands 2001-2011
Source: US Bureau of Labor Statistics
The rate of unemployment peaked at 10.8 percent in both Nov and Dec 1982, as shown in Chart I-29. The rate of unemployment dropped sharply during the expansion after 1984 and continued to decline during the rest of the decade to 5.4 percent in Dec 1989.
Chart I-29, US, Unemployment Rate, 1979-1989, %
Source: US Bureau of Labor Statistics
The rate of unemployment in the US jumped from 4.4 percent in May 2007 to 10.0 percent in Oct 2009 and 9.9 percent in both Nov and Dec 2009, as shown in Chart I-30. The rate of unemployment fluctuated at around 9.0 percent in 2011 with the somewhat less credible 8.7 percent in Nov 2011 because of the decrease of the labor force by 120,000 from Oct to Nov and then decline to 8.5 percent in Dec 2011 with decline of 50,000 of the labor force from Nov to Dec. The rate of unemployment then fell to 8.3 percent in Jan 2012.
Chart I-30, US, Unemployment Rate, 2001-2011, %
Source: US Bureau of Labor Statistics
The employment population ratio fell from around 60.1 in Dec 1979 to 57.1 in both Feb and Mar 1983, as shown in Chart I-31. The employment population ratio rose back to 59.9 in Dec 1984 and reached 63.0 later in the decade in Dec 1989.
Chart I-31, US, Employment Population Ratio, 1979-1989, %
Source: US Bureau of Labor Statistics
The US employment-population ratio has fallen from 63.4 in Dec 2006 to 58.5 in Dec 2011 and Jan 2012, as shown in Chart I-32. The employment population-ratio has stagnated during the expansion.
Chart I-32, US, Employment Population Ratio, 2001-2011, %
Source: US Bureau of Labor Statistics
The number unemployed for 27 weeks or over peaked at 2.885 million in Jun 1983 as shown in Chart I-33. The number unemployed for 27 weeks or over fell sharply during the expansion to 1.393 million in Dec 1984 and continued to decline throughout the 1980s to 0.635 million in Dec 1989.
Chart I-33, US, Number Unemployed for 27 Weeks or More 1979-1989, Thousands
Source: US Bureau of Labor Statistics
The number unemployed for 27 weeks or over rose sharply during the contraction as shown in Chart I-34 from 1.131 million in Nov 2006 to 6.730 in Apr 2010. The number of unemployed for 27 weeks remained at around 6 million during the expansion compared with somewhat above 1 million before the contraction.
Chart I-34, US, Number Unemployed for 27 Weeks or More, 2001-2011, Thousands
Source: US Bureau of Labor Statistics
The number of persons working part-time for economic reasons because they cannot find full-time work peaked during the contraction at 6.857 million in Oct 1982, as shown in Chart I-35. The number of persons at work part-time for economic reasons fell sharply during the expansion to 5.797 million in Dec 1984 and continued to fall throughout the decade to 4.817 million in Dec 1989.
Chart I-35, US, Part-Time for Economic Reasons, 1979-1989, Thousands
Source: US Bureau of Labor Statistics
The number of people working part-time because they cannot find full-time employment rose sharply during the contraction from 3.972 million in Mar 2006 to 9.130 million in Nov 2009, as shown in Chart I-36. The number of people working part-time because of failure to find an alternative occupation stagnated at a very high level during the expansion.
Chart I-36, US, Part-Time for Economic Reasons, 2001-2011, Thousands
Source: US Bureau of Labor Statistics
The number marginally attached to the labor force in Chart I-37 jumped from 1.252 million in Dec 2006 to 2.730 million in Feb 2011, remaining at a high level of 2.540 million in Dec 2011 and 2.809 million in Jan 2012.
![clip_image082[1]](file:///C:\Users\cmpelaez\AppData\Local\Temp\WindowsLiveWriter1264636800\supfiles1B97CC\image68.png "clip_image082[1]")
Chart I-37, US, Marginally Attached to the Labor Force, 2001-2011
Source: US Bureau of Labor Statistics
Total nonfarm payroll employment seasonally adjusted (SA) rose 200,000 in Dec and private payroll employment rose by 212,000. Table I-8 provides the monthly change in jobs seasonally adjusted in the prior strong contraction of 1981-1982 and the recovery in 1983 into 1984 and in the contraction of 2008-2009 and in the recovery in 2009 to 2011. All revisions have been incorporated in Table I-8. The data in the recovery periods are in relief to facilitate comparison. There is significant bias in the comparison. The average yearly civilian noninstitutional population was 174.2 million in 1983 and the civilian labor force 111.6 million, growing by 2009 to an average yearly civilian noninstitutional population of 235.8 million and civilian labor force of 154.1 million, that is, increasing by 35.4 percent and 38.1 percent, respectively (http://www.bls.gov/cps/cpsaat1.pdf). Total nonfarm payroll jobs in 1983 were 90.280 million, jumping to 94.530 million in 1984 while total nonfarm jobs in 2010 were 129.818 million declining from 130.807 million in 2009 (http://www.bls.gov/webapps/legacy/cesbtab1.htm ). What is striking about the data in Table I-8 is that the numbers of monthly increases in jobs in 1983 and 1984 are several times higher than in 2010 to 2011 even with population higher by 35.4 percent and labor force higher by 38.1 percent in 2009 relative to 1983 nearly three decades ago and total number of jobs in payrolls rose by 39.5 million in 2010 relative to 1983 or by 43.8 percent.. Growth has been mediocre in the nine quarters of expansion beginning in IIIQ2009 in comparison with earlier expansions (http://cmpassocregulationblog.blogspot.com/2012/01/mediocre-economic-growth-financial.html ) and also in terms of what is required to reduce the job stress of at least 24 million persons but likely close to 31 million. Some of the job growth and contraction in 2010 in Table I-8 is caused by the hiring and subsequent layoff of temporary workers for the 2010 census.
Table I-8, US, Monthly Change in Jobs, Number SA
| Month | 1981 | 1982 | 1983 | 2008 | 2009 | 2010 | Private |
| Jan | 95 | -327 | 225 | 41 | -818 | -40 | -40 |
| Feb | 67 | -6 | -78 | -84 | -724 | -35 | -27 |
| Mar | 104 | -129 | 173 | -95 | -799 | 189 | 141 |
| Apr | 74 | -281 | 276 | -208 | -692 | 239 | 193 |
| May | 10 | -45 | 277 | -190 | -361 | 516 | 84 |
| Jun | 196 | -243 | 378 | -198 | -482 | -167 | 92 |
| Jul | 112 | -343 | 418 | -210 | -339 | -58 | 92 |
| Aug | -36 | -158 | -308 | -274 | -231 | -51 | 128 |
| Sep | -87 | -181 | 1114 | -432 | -199 | -27 | 115 |
| Oct | -100 | -277 | 271 | -489 | -202 | 220 | 196 |
| Nov | -209 | -124 | 352 | -803 | -42 | 121 | 134 |
| Dec | -278 | -14 | 356 | -661 | -171 | 120 | 140 |
| 1984 | 2011 | Private | |||||
| Jan | 447 | 110 | 119 | ||||
| Feb | 479 | 220 | 257 | ||||
| Mar | 275 | 246 | 261 | ||||
| Apr | 363 | 251 | 264 | ||||
| May | 308 | 54 | 108 | ||||
| Jun | 379 | 84 | 102 | ||||
| Jul | 312 | 96 | 175 | ||||
| Aug | 241 | 85 | 52 | ||||
| Sep | 311 | 202 | 216 | ||||
| Oct | 286 | 112 | 139 | ||||
| Nov | 349 | 157 | 178 | ||||
| Dec | 127 | 203 | 220 | ||||
| 1985 | 2012 | Private | |||||
| Jan | 266 | 243 | 257 | ||||
| Feb | 124 | ||||||
| Mar | 346 | ||||||
| Apr | 195 | ||||||
| May | 274 | ||||||
| Jun | 145 | ||||||
| Jul | 189 | ||||||
| Aug | 193 | ||||||
| Sep | 204 | ||||||
| Oct | 187 | ||||||
| Nov | 209 | ||||||
| Dec | 168 |
Source: http://www.bls.gov/data/#employment
Charts numbered from I-38 to I-41 from the database of the Bureau of Labor Statistics provide a comparison of payroll survey data for the contractions and expansions in the 1980s and after 2007. Chart I-38 provides total nonfarm payroll jobs from 2001 to 2011. The sharp decline in total nonfarm jobs during the contraction after 2007 has been followed by initial stagnation and then tepid growth.
Chart I-38, US, Total Nonfarm Payroll Jobs SA 2001-2012
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
Total nonfarm payroll jobs grew rapidly during the expansion in 1983 and 1984 as shown in Chart I-39. Nonfarm payroll jobs continued to grow at high rates during the remainder of the 1980s.
Chart I-39, US, Total Nonfarm Payroll Jobs SA 1979-1989
Source: US Bureau of Labor Statistics
Most job creation in the US is by the private sector. Chart I-40 shows the sharp destruction of private payroll jobs during the contraction after 2007. There has been growth after 2010 but insufficient to recover higher levels of employment prevailing before the contraction. At current rates, recovery of employment may spread over several years in contrast with past expansions of the business cycle in the US.
Chart I-40, US, Total Private Payroll Jobs SA 2001-2011
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
In contrast, growth of private payroll jobs in the US recovered vigorously during the expansion in 1983 through 1985, as shown in Chart I-41. Rapid growth of creation of private jobs continued throughout the 1980s.
Chart I-41, US, Total Private Payroll Jobs SA 1979-1989
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
ID Creation of Jobs. Types of jobs created, and not only the pace of job creation, may be important. Aspects of growth of payroll jobs from Jan 2011 to Jan 2012, not seasonally adjusted (NSA), are provided in Table I-9. Total nonfarm employment increased by 1,936,000 (row A, column Change), consisting of growth of total private employment by 2,204,000 (row B, column Change) and decline by 268,000 of government employment (row C, column Change). Monthly average growth of private payroll employment has been 183,666, which is mediocre relative to 25 to 31 million in job stress, while total nonfarm employment has grown on average by only 161,333 per month. These monthly rates of job creation are insufficient to meet the demands of new entrants in the labor force and thus perpetuate unemployment and underemployment. Manufacturing employment increased by 230,000, at the monthly rate of 19,166, while private service providing employment grew by 1,769,000, at the monthly rate of 147,416. The employment situation report states: “Professional and business services continued to add jobs in January (+70,000). About half of the increase occurred in employment services (+33,000). Job gains also occurred in accounting and bookkeeping (+13,000) and in architectural and engineering services (+7,000)” (http://www.bls.gov/news.release/pdf/empsit.pdf 2). An important feature in Table I-9 is that jobs in professional and business services increased by 608,000 with temporary help services increased by 163,000. This episode of jobless recovery is characterized by part-time jobs and creation of jobs that are inferior to those that have been lost. Monetary and fiscal stimuli fail to increase consumption in a fractured job market. The BLS also finds that in Jan “employment in leisure and hospitality increased by 44,000, primarily in food services and drinking places (+33,000). Since a recent low in February 2010, food services has added 487,000 jobs (http://www.bls.gov/news.release/pdf/empsit.pdf 3). An important characteristic is that the losses of government jobs have been high in local government, 157,000 jobs lost in that past twelve months (row C3 Local), because of the higher number of employees in local government, 14.1 million relative to 4.9 million in state jobs and 2.8 million in federal jobs.
Table I-9, US, Employees in Nonfarm Payrolls Not Seasonally Adjusted in Thousands
| Jan 2011 | Jan 2012 | Change | |
| A Total Nonfarm | 128,327 | 130,263 | 1,936 |
| B Total Private | 106,199 | 108,403 | 2,204 |
| B1 Goods Producing | 17,291 | 17,726 | 435 |
| B1a Manufacturing | 11,524 | 11,754 | 230 |
| B2 Private service providing | 88,908 | 90,677 | 1,769 |
| B2a Wholesale Trade | 5,430 | 5,529 | 99 |
| B2b Retail Trade | 14,443 | 14,634 | 191 |
| B2c Transportation & Warehousing | 4,196 | 4,295 | 99 |
| B2d Financial Activities | 7,618 | 7,644 | 26 |
| B2e Professional and Business Services | 16,706 | 17,314 | 608 |
| B2e1 Temporary help services | 2,106 | 2,269 | 163 |
| B2f Health Care & Social Assistance | 16,452 | 16,777 | 325 |
| B2g Leisure & Hospitality | 12,477 | 12,821 | 344 |
| C Government | 22,128 | 21,860 | -268 |
| C1 Federal | 2,851 | 2,809 | -42 |
| C2 State | 5,037 | 4,968 | -69 |
| C3 Local | 14,240 | 14,083 | -157 |
Note: A = B+C, B = B1 + B2, C=C1 + C2 + C3
Source: http://www.bls.gov/news.release/pdf/empsit.pdf
Greater detail on the types of job created is provided in Table I-10 with SA data for Dec 2011 and Jan 2012. Strong seasonal effects are shown by the significant difference between seasonally-adjusted (SA) and not-seasonally-adjusted (NSA) data. The purpose of seasonality is to isolate nonseasonal effects. The 243,000 jobs SA total nonfarm jobs created in Jan actually correspond to job destruction of 2,689,000 jobs NSA, as shown in row A. The 257,000 total private payroll jobs SA created in Jan actually correspond to a loss of 2,211,000 jobs NSA in Jan. Adjustment for seasonality isolates nonseasonal effects that suggest improvement from Dec to Jan. The analysis of NSA job creation in the prior Table I-9 does show improvement over the 12 months ending in Jan 2012 that is not clouded by seasonal variations. In fact, the 12-month rate of job creation without seasonal adjustment is stronger indication of marginal improvement in the US job market but that is insufficient to even make a dent in the 31 million people unemployed or underemployed.
Table I-10, US, Employees on Nonfarm Payrolls and Selected Industry Detail, Thousands, SA
| Dec 2011 SA | Jan 2012 SA | ∆ | Dec 2011 NSA | Jan 2012 NSA | ∆ | |
| A Total Nonfarm | 132,166 | 132,409 | 243 | 132,952 | 130,263 | -2689 |
| B Total Private | 110,179 | 110,436 | 257 | 110,614 | 108,403 | -2,211 |
| B1 Goods Producing | 18,185 | 18,266 | 81 | 18,075 | 17,726 | -349 |
| B1a Constr. | 5,551 | 5,572 | 21 | 5,441 | 5,160 | -281 |
| B Mfg | 11,812 | 11,862 | 50 | 11,816 | 11,754 | -62 |
| B2 Private Service Providing | 91,994 | 92,170 | 176 | 92,539 | 90,677 | -1862 |
| B2a Wholesale Trade | 5,569 | 5,583 | 14 | 5581 | 5529 | -52 |
| B2b Retail Trade | 14,731 | 14,741 | 10 | 15,226 | 14,634 | -592 |
| B2c Couriers & Mess. | 521 | 520 | -1 | 618 | 517 | -101 |
| B2d Health-care & Social Assistance | 16,793 | 16,823 | 30 | 16,838 | 16,777 | -61 |
| B2De Profess. & Business Services | 17,584 | 17,654 | 70 | 17,691 | 17,314 | -377 |
| B2De1 Temp Help Services | 2,386 | 2,406 | 20 | 2,505 | 2,269 | -236 |
| B2f Leisure & Hospit. | 13,455 | 13,499 | 44 | 13,110 | 12,821 | -289 |
Notes: ∆: Absolute Change; Constr.: Construction; Mess.: Messengers; Temp: Temporary; Hospit.: Hospitality.
Source: http://www.bls.gov/news.release/pdf/empsit.pdf
The NBER dates recessions in the US from peaks to troughs as: IQ80 to IIIQ80, IIIQ81 to IV82 and IVQ07 to IIQ09 (http://www.nber.org/cycles/cyclesmain.html). Table I-11 provides total annual level nonfarm employment in the US for the 1980s and the 2000s, which is different from 12 months comparisons. Nonfarm jobs rose by 4.853 million in 1982 to 1984, or 5.4 percent, and continued rapid growth in the rest of the decade. In contrast, nonfarm jobs are down by 7.780 million in 2010 relative to 2007 and fell by 989,000 in 2010 relative to 2009 even after six quarters of GDP growth. Monetary and fiscal stimuli have failed in increasing growth to rates required for mitigating job stress. The initial growth impulse reflects a flatter growth curve in the current expansion.
Table I-11, US, Total Nonfarm Employment in Thousands
| Year | Total Nonfarm | Year | Total Nonfarm |
| 1980 | 90,528 | 2000 | 131,785 |
| 1981 | 91,289 | 2001 | 131,826 |
| 1982 | 89,677 | 2002 | 130,341 |
| 1983 | 90,280 | 2003 | 129,999 |
| 1984 | 94,530 | 2004 | 131,435 |
| 1985 | 97,511 | 2005 | 133,703 |
| 1986 | 99,474 | 2006 | 136,086 |
| 1987 | 102,088 | 2007 | 137,598 |
| 1988 | 105,345 | 2008 | 136,790 |
| 1989 | 108,014 | 2009 | 130,807 |
| 1990 | 109,487 | 2010 | 129,874 |
| 1991 | 108,374 | 2011 | 131,358 |
Source: http://www.bls.gov/data/
The highest average yearly percentage of unemployed to the labor force since 1940 was 14.6 percent in 1940 followed by 9.9 percent in 1941, 8.5 percent in 1975, 9.7 percent in 1982 and 9.6 percent in 1983 (ftp://ftp.bls.gov/pub/special.requests/lf/aa2006/pdf/cpsaat1.pdf). The rate of unemployment remained at high levels in the 1930s, rising from 3.2 percent in 1929 to 22.9 percent in 1932 in one estimate and 23.6 percent in another with real wages increasing by 16.4 percent (Margo 1993, 43; see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 214-5). There are alternative estimates of 17.2 percent or 9.5 percent for 1940 with real wages increasing by 44 percent. Employment declined sharply during the 1930s. The number of hours worked remained in 1939 at 29 percent below the level of 1929 (Cole and Ohanian 1999). Private hours worked fell in 1939 to 25 percent of the level in 1929. The policy of encouraging collusion through the National Industrial Recovery Act (NIRA), to maintain high prices, together with the National Labor Relations Act (NLRA), to maintain high wages, prevented the US economy from recovering employment levels until Roosevelt abandoned these policies toward the end of the 1930s (for review of the literature analyzing the Great Depression see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 198-217).
The Bureau of Labor Statistics (BLS) makes yearly revisions of its establishment survey (Harris 2011BA):
“With the release of data for January 2011, the Bureau of Labor Statistics (BLS) introduced its annual revision of national estimates of employment, hours, and earnings from the Current Employment Statistics (CES) monthly survey of nonfarm establishments. Each year, the CES survey realigns its sample-based estimates to incorporate universe counts of employment—a process known as benchmarking. Comprehensive counts of employment, or benchmarks, are derived primarily from unemployment insurance (UI) tax reports that nearly all employers are required to file with State Workforce Agencies.”
The number of not seasonally adjusted total private jobs in the US in Dec 2010 is 108.464 million, declining to 106.079 million in Jan 2011, or by 2.385 million, because of the adjustment of a different benchmark and not actual job losses. The not seasonally adjusted number of total private jobs in Dec 1984 is 80.250 million, declining to 78.704 million in Jan 1985, or by 1.546 million for the similar adjustment. Table I-12 attempts to measure job losses and gains in the recessions and expansions of 1981-1985 and 2007-2011. The final ten rows provide job creation from May 1983 to May 1984 and from May 2010 to May 2011, that is, at equivalent stages of the recovery from two comparable strong recessions. The row “Change ∆%” for May 1983 to May 1984 shows an increase of total nonfarm jobs by 4.9 percent and of 5.9 percent for total private jobs. The row “Change ∆%” for May 2010 to May 2011 shows an increase of total nonfarm jobs by 0.7 percent and of 1.7 percent for total private jobs. The last two rows of Table 7 provide a calculation of the number of jobs that would have been created from May 2010 to May 2011 if the rate of job creation had been the same as from May 1983 to May 1984. If total nonfarm jobs had grown between May 2010 and May 2011 by 4.9 percent, as between May 1983 and May 1984, 6.409 million jobs would have been created in the past 12 months for a difference of 5.457 million more total nonfarm jobs relative to 0.952 million jobs actually created. If total private jobs had grown between May 2010 and May 2011 by 5.9 percent as between May 1983 and May 1984, 6.337 million private jobs would have been created for a difference of 4.539 million more total private jobs relative to 1.798 million jobs actually created.
Table I-12, US, Total Nonfarm and Total Private Jobs Destroyed and Subsequently Created in Two Recessions IIIQ1981-IVQ1982 and IVQ2007-IIQ2009, Thousands and Percent
| Total Nonfarm Jobs | Total Private Jobs | |
| 06/1981 # | 92,288 | 75,969 |
| 11/1982 # | 89,482 | 73,260 |
| Change # | -2,806 | -2,709 |
| Change ∆% | -3.0 | -3.6 |
| 12/1982 # | 89,383 | 73,185 |
| 05/1984 # | 94,471 | 78,049 |
| Change # | 5,088 | 4,864 |
| Change ∆% | 5.7 | 6.6 |
| 11/2007 # | 139,090 | 116,291 |
| 05/2009 # | 131,626 | 108,601 |
| Change % | -7,464 | -7,690 |
| Change ∆% | -5.4 | -6.6 |
| 12/2009 # | 130,178 | 107,338 |
| 05/2011 # | 131,753 | 108,494 |
| Change # | 1,575 | 1,156 |
| Change ∆% | 1.2 | 1.1 |
| 05/1983 # | 90,005 | 73,667 |
| 05/1984 # | 94,471 | 78,049 |
| Change # | 4,466 | 4,382 |
| Change ∆% | 4.9 | 5.9 |
| 05/2010 # | 130,801 | 107,405 |
| 05/2011 # | 131,753 | 109,203 |
| Change # | 952 | 1,798 |
| Change ∆% | 0.7 | 1.7 |
| Change # by ∆% as in 05/1984 to 05/1985 | 6,409* | 6,337** |
| Difference in Jobs that Would Have Been Created | 5,457 = | 4,539 = |
*[(130,801x1.049)-130,801] = 6,409 thousand
**[(107,405)x1.059 – 107,405] = 6,337 thousand
Source: http://www.bls.gov/data/
II Falling Real Wages. The wage bill is the product of average weekly hours times the earnings per hour. Table II-1 provides the estimates by the Bureau of Labor Statistics (BLS) of earnings per hour seasonally adjusted, increasing from $22.86/hour in Jan 2011 to $23.29/hour in Jan 2012, or by 1.9 percent. There has been disappointment about the pace of wage increases because of rising food and energy costs that inhibit consumption and thus sales and similar concern about growth of consumption that accounts for 70 percent of GDP. Growth of consumption by decreasing savings by means of controlling interest rates in what is called financial repression may not be lasting and sound for personal finances (http://cmpassocregulationblog.blogspot.com/2012/01/mediocre-economic-growth-financial.html http://cmpassocregulationblog.blogspot.com/2011/12/slow-growth-falling-real-disposable.html http://cmpassocregulationblog.blogspot.com/2011/11/us-growth-standstill-falling-real.html http://cmpassocregulationblog.blogspot.com/2011/10/slow-growth-driven-by-reducing-savings.html). Average hourly earnings increased from $23.25 in Dec 2011 to $23.29 in Jan 2012 or by 0.2 percent. Average private weekly earnings increased $19.41 from $784.10 in Jan 2011 to $803.51 in Jan 2012 or 2.5 percent and increased 0.2 percent from Dec 2011 to Jan 2012. The inflation-adjusted wage bill can only be calculated for Dec, which is the most recent month for which there are estimates of the consumer price index. Earnings per hour (not-seasonally-adjusted (NSA)) rose from $22.79 in Dec 2010 to $23.07 in Dec 2011 or by 2.1 percent (http://www.bls.gov/data/; see Table II-3 below). Data NSA are more suitable for comparison over a year. Average weekly hours were 34.3 in Dec 2010 and 34.5 in Dec 2011 (http://www.bls.gov/data/; see Table II-2 below). The wage bill rose 1.8 percent in the 12 months ending in Dec 2011:
{[(wage bill in Dec 2011)/(wage bill in Dec 2010)]-1}100 =
{[($23.07x34.5)/($22.79x34.3)]-1]}100
= {[($795.91/$781.69)]-1}100 = 1.8%
CPI inflation was 3.0 percent in the 12 months ending in Dec 2011 (http://www.bls.gov/cpi/) for an inflation-adjusted wage-bill decline of 1.2 percent :{[(1.018/1.030)-1]100}. Energy and food price increases are similar to a “silent tax” that is highly regressive, harming the most those with lowest incomes. There are concerns that the wage bill would deteriorate in purchasing power because of renewed raw materials shock in the form of increases in prices of commodities such as the 31.1 percent steady increase in the DJ-UBS Commodity Index from Jul 2, 2010 to Sep 2, 2011. The charts of four commodity price indexes by Bloomberg show steady increase since Jul 2, 2010 that was interrupted briefly only in Nov 2010 with the sovereign issues in Europe triggered by Ireland, in Mar by the earthquake and tsunami in Japan and in the beginning of May by the decline in oil prices and sovereign risk difficulties in Europe (http://www.bloomberg.com/markets/commodities/futures/). Renewed risk aversion because of the sovereign risks in Europe has reduced the rate of increase of the DJ UBS commodity index to 17.4 percent on Feb 3, 2012, relative to Jul 2, 2010. Inflation has been rising in waves with carry trades driven by zero interest rates to commodity futures during periods of risk appetite with interruptions during risk aversion (http://cmpassocregulationblog.blogspot.com/2012/01/world-inflation-waves-united-states.html http://cmpassocregulationblog.blogspot.com/2011/12/recovery-without-hiring-world-inflation_20.html http://cmpassocregulationblog.blogspot.com/2011/11/world-inflation-waves-and-monetary_21.html).
Table II-1, US, Earnings per Hour and Average Weekly Hours SA
| Earnings per Hour | Jan 2011 | Nov 2011 | Dec 2011 | Jan 2012 |
| Total Private | $22.86 | $23.23 | $23.25 | $23.29 |
| Goods Producing | $24.34 | $24.48 | $24.57 | $24.56 |
| Service Providing | $22.51 | $22.93 | $22.94 | $22.98 |
| Average Weekly Earnings | ||||
| Total Private | $784.10 | $799.11 | $802.13 | $803.51 |
| Goods Producing | $968.73 | $976.75 | $987.71 | $992.22 |
| Service Providing | $747.33 | $763.57 | $766.20 | $767.53 |
| Average Weekly Hours | ||||
| Total Private | 34.3 | 34.4 | 34.5 | 34.5 |
| Goods Producing | 39.8 | 39.9 | 40.2 | 40.4 |
| Service Providing | 33.2 | 33.3 | 33.4 | 33.4 |
Source: http://www.bls.gov/news.release/pdf/empsit.pdf
Table II-2 provides average weekly hours of all employees in the US from 2006 to 2011. Average weekly hours fell from 34.7 in Jun 2007 to 33.7 in Jun 2009, which was the last month of the contraction. Average weekly hours rose to 34.5 in Dec 2011 and Jan 2012.
Table II-2, US, Average Weekly Hours of All Employees 2006-2012
| Year | Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec |
| 2006 | 34.4 | 34.6 | 34.5 | 34.6 | 34.6 | 34.5 | 34.5 | 34.5 | 34.6 | 34.7 | ||
| 2007 | 34.5 | 34.5 | 34.6 | 34.6 | 34.6 | 34.6 | 34.6 | 34.6 | 34.6 | 34.5 | 34.6 | 34.6 |
| 2008 | 34.6 | 34.6 | 34.6 | 34.6 | 34.6 | 34.6 | 34.5 | 34.5 | 34.4 | 34.4 | 34.2 | 34.1 |
| 2009 | 34.2 | 34.0 | 33.8 | 33.8 | 33.8 | 33.8 | 33.8 | 33.8 | 33.8 | 33.8 | 33.9 | 33.9 |
| 2010 | 34.0 | 33.9 | 34.0 | 34.1 | 34.2 | 34.1 | 34.2 | 34.2 | 34.2 | 34.3 | 34.2 | 34.3 |
| 2011 | 34.3 | 34.3 | 34.3 | 34.4 | 34.4 | 34.4 | 34.4 | 34.3 | 34.4 | 34.4 | 34.4 | 34.5 |
| 2012 | 34.5 |
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
Chart II-1 provides average weekly hours monthly from Mar 2006 to Dec 2011. Average weekly hours remained relatively stable in the period before the contraction and fell sharply during the contraction as business could not support lower production with the same labor input. Average weekly hours rose rapidly during the expansion but have stabilized at a level below that prevailing before the contraction.
Chart II-1, US, Average Weekly Hours of All Employees 2006-2011
Source: US Bureau of Labor Statistics
Calculations using BLS data of inflation-adjusted average hourly earnings are shown in Table II-3. The final column of Table II-3 (“12 Month Real ∆%”) provides inflation-adjusted average hourly earnings of all employees in the US. Average hourly earnings rose above inflation throughout the first nine months of 2007 just before the global recession that began in the final quarter of 2007 when average hourly earnings lost to inflation. In contrast, average hourly earnings of all US workers have risen less than inflation in four months in 2010 and in all but one month in 2011 and the loss has accelerated at 1.7 percent in Dec 2011, which is the most recent month for which there are consumer price index data.
Table II-3, US, Average Hourly Earnings Nominal and Inflation Adjusted, Dollars and % NSA
| AHE ALL | 12 Month | ∆% 12 Month CPI | 12 Month | |
| 2007 | ||||
| Jan* | $20.70* | 4.2* | 2.1 | 2.1* |
| Feb* | $20.79* | 4.1* | 2.4 | 1.7* |
| Mar | $20.82 | 3.7 | 2.8 | 0.9 |
| Apr | $21.05 | 3.3 | 2.6 | 0.7 |
| May | $20.83 | 3.7 | 2.7 | 1.0 |
| Jun | $20.82 | 3.8 | 2.7 | 1.1 |
| Jul | $20.99 | 3.4 | 2.4 | 1.0 |
| Aug | $20.85 | 3.5 | 2.0 | 1.5 |
| Sep | $21.18 | 4.0 | 2.8 | 1.2 |
| Oct | $21.07 | 2.7 | 3.5 | -0.8 |
| Nov | $21.13 | 3.3 | 4.3 | -0.9 |
| Dec | $21.13 | 3.3 | 4.1 | -0.8 |
| 2010 | ||||
| Jan | $22.55 | 1.9 | 2.6 | -0.7 |
| Feb | $22.61 | 1.4 | 2.1 | -0.7 |
| Mar | $22.51 | 1.2 | 2.3 | -1.1 |
| Apr | $22.56 | 1.8 | 2.2 | -0.4 |
| May | $22.63 | 2.5 | 2.0 | 0.5 |
| Jun | $22.37 | 1.7 | 1.1 | 0.6 |
| Jul | $22.44 | 1.8 | 1.2 | 0.6 |
| Aug | $22.58 | 1.7 | 1.1 | 0.6 |
| Sep | $22.63 | 1.7 | 1.1 | 0.6 |
| Oct | $22.73 | 1.9 | 1.2 | 0.7 |
| Nov | $22.72 | 1.1 | 1.1 | 0.0 |
| Dec | $22.79 | 1.7 | 1.5 | 0.2 |
| 2011 | ||||
| Jan | $23.20 | 2.9 | 1.6 | 1.3 |
| Feb | $22.03 | 1.9 | 2.1 | -0.2 |
| Mar | $22.93 | 1.9 | 2.7 | -0.8 |
| Apr | $23.00 | 1.9 | 3.2 | -1.3 |
| May | $23.09 | 2.0 | 3.6 | -1.5 |
| Jun | $22.85 | 2.1 | 3.6 | -1.4 |
| Jul | $22.98 | 2.4 | 3.6 | -1.2 |
| Aug | $22.88 | 1.3 | 3.8 | -2.4 |
| Sep | $23.09 | 2.0 | 3.9 | -1.8 |
| Oct | $23.34 | 2.7 | 3.5 | -0.8 |
| Nov | $23.26 | 2.4 | 3.4 | -0.9 |
| Dec | $23.07 | 1.2 | 3.0 | -1.7 |
Note: AHE ALL: average hourly earnings of all employees; CPI: consumer price index; Real: adjusted by CPI inflation; NA: not available
*AHE of production and nonsupervisory employees because of unavailability of data for all employees
Source: http://www.bls.gov/data/
ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt
Average hourly earnings of all US employees in the US in constant dollars of 1982-1984 from the dataset of the US Bureau of Labor Statistics (BLS) are provided in Table II-4. Average hourly earnings fell 1.0 percent after adjusting for inflation in the 12 months ending in Dec 2011. Table II-4 confirms the trend of deterioration of purchasing power of average hourly earnings in 2011. Those who still work bring back home a paycheck that buys fewer goods than a year earlier and savings in bank deposits do not pay anything because of financial repression.
Table II-4, US, Average Hourly Earnings of All Employees in Constant Dollars of 1982-1984
| Year | Jul | Aug | Sep | Oct | Nov | Dec |
| 2006 | 10.01 | 9.99 | 10.07 | 10.12 | 10.15 | 10.13 |
| 2007 | 10.12 | 10.14 | 10.13 | 10.09 | 10.05 | 10.05 |
| 2008 | 9.88 | 9.94 | 9.95 | 10.06 | 10.30 | 10.41 |
| 2009 | 10.35 | 10.34 | 10.32 | 10.32 | 10.32 | 10.32 |
| 2010 | 10.40 | 10.40 | 10.40 | 10.39 | 10.38 | 10.35 |
| 2011 | 10.26 | 10.22 | 10.20 | 10.24 | 10.25 | 10.25 |
Source: US Bureau of Labor Statistics
The deterioration of purchasing power of average hourly earnings of US workers is shown by Chart II-2 of the US Bureau of Labor Statistics. Chart II-2 plots average hourly earnings of all US employees in constant 1982-1984 dollars with evident decline from 2010 to 2011.
Chart II-2, US, Average Hourly Earnings of All Employees in Constant Dollars of 1982-1984
Source: US Bureau of Labor Statistics
Chart II-3 provides 12-month percentage changes of average hourly earnings of all employees in constant dollars of 1982-1984, that is, adjusted for inflation. There was sharp contraction of inflation-adjusted average hourly earnings of US employees during parts of 2007 and 2008. Rates of change in 12 months became positive in parts of 2009 and 2010 but then became negative again in 2011.
Chart II-3, Average Hourly Earnings of All Employees NSA 12-Month Percent Change, 1982-1984 Dollars, 2007-2011
Source: US Bureau of Labor Statistics
Average weekly earnings of all US employees in the US in constant dollars of 1982-1984 from the dataset of the US Bureau of Labor Statistics (BLS) are provided in Table II-5. Average weekly earnings fell 1.4 percent after adjusting for inflation in the 12 months ending in Aug 2011, 1.3 percent in the 12 months ending in Sep, 1.2 percent in the 12 months ending in Oct, 0.7 percent in the 12 months ending in Nov and 0.3 in the 12 months ending in Dec. Table II-5 confirms the trend of deterioration of purchasing power of average weekly earnings in 2011. Those who still work bring back home a paycheck that buys fewer goods than a year earlier.
Table II-5, US, Average Weekly Earnings of All Employees in Constant Dollars of 1982-1984
| Year | Aug | Sep | Oct | Nov | Dec |
| 2006 | 344.49 | 347.38 | 349.10 | 351.14 | 351.61 |
| 2007 | 350.68 | 350.37 | 348.21 | 347.79 | 347.77 |
| 2008 | 342.98 | 342.35 | 346.17 | 352.11 | 354.99 |
| 2009 | 349.42 | 348.87 | 348.86 | 349.85 | 349.68 |
| 2010 | 355.54 | 355.58 | 356.36 | 355.04 | 354.86 |
| 2011 | 350.48 | 351.04 | 352.09 | 352.47 | 353.76 |
Source: US Bureau of Labor Statistics
Chart II-4 provides average weekly earnings of all employees in constant dollars of 1982-1984. The same pattern emerges of sharp decline during the contraction, followed by recovery in the expansion and continuing fall from 2010 to 2011.
Chart II-4, US, Average Weekly Earnings of All Employees in Constant Dollars of 1982-1984
Source: US Bureau of Labor Statistics
Chart II-5 provides 12-month percentage changes of average weekly earnings of all employees in the US in constant dollars of 1982-1984. There is the same pattern of contraction during the global recession in 2008 and then again trend of deterioration in the recovery without hiring and inflation waves in 2011 (http://cmpassocregulationblog.blogspot.com/2012/01/world-inflation-waves-united-states.html http://cmpassocregulationblog.blogspot.com/2012/01/recovery-without-hiring-united-states.html).
Chart II-5, US, Average Weekly Earnings of All Employees NSA in Constant Dollars of 1982-1984 12-Month Percent Change 2007-2011
Source: US Bureau of Labor Statistics
II Falling Real Disposable Income and Repression of Savings. Subsection IIA Falling Real Disposable Income provides analysis of the personal income and consumption outlays of the Bureau of Economic Analysis for Nov. Subsection IIB Repression of Savings analyzes financial repression and how it is affecting savings in the US.
Subsection IIA Falling Real Disposable Income. The data on personal income and consumption have been revised back to 2003 as it the case of the national accounts (GDP revisions are covered in http://cmpassocregulationblog.blogspot.com/2011/07/growth-recession-debt-financial-risk.html). All revisions are incorporated in this subsection. Table II-1 provides monthly and annual equivalent percentage changes, seasonally adjusted, of current dollars or nominal personal income (NPI), current dollars or nominal disposable personal income (NDPI), real or constant chained (2005) dollars DPI (RDPI), current dollars nominal personal consumption expenditures (NPCE) and constant or chained (2005) dollars PCE. There are three waves of changes in personal income and expenditures in Table II-1 that correspond to inflation waves observed worldwide (http://cmpassocregulationblog.blogspot.com/2012/01/world-inflation-waves-united-states.html). In the first wave in Jan-Apr with relaxed risk aversion, nominal personal income (NPI) rose at the annual equivalent rate of 7.8 percent, nominal disposable personal income (NDPI) at 4.6 percent and nominal personal consumption expenditures (NPCE) at 6.5. Real disposable income (RDPI) stagnated and real personal consumption expenditures (RPCE) rose at annual equivalent 1.5 percent. In the second wave in May-Aug under risk aversion, NPI rose at annual equivalent 0.6, NPDI at 0.6 percent and NPCE at 2.7 percent. RDPI fell at the annual equivalent rate of 1.8 percent and RPCE crawled at 0.6 percent annual equivalent. With mixed shocks of risk aversion in the third wave from Sep to Dec, NPI rose at 3.7 percent annual equivalent, NDPI at 2.1 percent and NPCE at 2.7 percent. Real values were more dynamic with RDPI increasing at 1.5 percent annual equivalent and RPCE at 1.8 percent. There has been sharp deterioration in the annual equivalent rates in the three waves in 2011 shown in Table II-1 from the annual equivalent rates prevailing in the final quarter of 2010.
Table II-1, US, Percentage Change from Prior Month Seasonally Adjusted of Personal Income, Disposable Income and Personal Consumption Expenditures %
| NPI | NDPI | RDPI | NPCE | RPCE | |
| 2011 | |||||
| ∆% Jan-Dec 2011 | 3.8 | 2.3 | –0.1 | 3.9 | 1.4 |
| Dec | 0.5 | 0.4 | 0.3 | 0.0 | -0.1 |
| Nov | 0.1 | 0.0 | 0.0 | 0.1 | 0.1 |
| Oct | 0.4 | 0.2 | 0.3 | 0.1 | 0.1 |
| Sep | 0.2 | 0.1 | -0.1 | 0.7 | 0.5 |
| AE ∆% Sep-Dec | 3.7 | 2.1 | 1.5 | 2.7 | 1.8 |
| Aug | -0.1 | -0.1 | -0.4 | 0.1 | -0.1 |
| Jul | 0.1 | 0.1 | -0.3 | 0.8 | 0.4 |
| Jun | 0.1 | 0.1 | 0.2 | -0.2 | -0.1 |
| May | 0.1 | 0.1 | -0.1 | 0.2 | 0.0 |
| AE ∆% May-Aug | 0.6 | 0.6 | -1.8 | 2.7 | 0.6 |
| Apr | 0.2 | 0.2 | -0.2 | 0.3 | -0.1 |
| Mar | 0.5 | 0.4 | 0.0 | 0.6 | 0.2 |
| Feb | 0.6 | 0.5 | 0.1 | 0.8 | 0.4 |
| Jan | 1.2 | 0.4 | 0.1 | 0.4 | 0.0 |
| AE ∆% Jan-Apr | 7.8 | 4.6 | 0.0 | 6.5 | 1.5 |
| 2010 | |||||
| ∆% Jan-Dec 2010 | 5.1 | 4.6 | 3.3 | 4.2 | 2.8 |
| Dec | 0.5 | 0.5 | 0.2 | 0.4 | 0.1 |
| Nov | 0.1 | 0.1 | 0.0 | 0.4 | 0.3 |
| Oct | 0.5 | 0.5 | 0.3 | 0.6 | 0.4 |
| IVQ2010∆% | 1.1 | 1.1 | 0.5 | 1.4 | 0.8 |
| IVQ2010 AE ∆% | 4.5 | 4.5 | 2.0 | 5.7 | 3.2 |
Notes: NPI: current dollars personal income; NDPI: current dollars disposable personal income; RDPI: chained (2005) dollars DPI; NPCE: current dollars personal consumption expenditures; RPCE: chained (2005) dollars PCE; AE: annual equivalent; IVQ2010: fourth quarter 2010; A: annual equivalent
Percentage change month to month seasonally adjusted
Source: http://www.bea.gov/newsreleases/national/pi/2012/pdf/pi1211.pdf
Further information on income and consumption is provided by Table II-2. The 12-month rates of increase of RDPI and RPCE in 2011 show a sharp trend of deterioration of RDPI from over 3 percent in the final four months of 2010 to less than 3 percent in IQ2011 and then collapsing to a range of 0.9 to 0.5 percent in May-Jul. In Aug 2011, RDPI fell 0.2 percent relative to Aug 2010 and fell 0.1 percent in every month from Sep to Nov when it fell 0.2 percent. In 2011, RDPI fell 0.1 percent. RPCE growth decelerated less sharply from close to 3 percent in IVQ 2010 to 2.3 percent in Jul, 1.7 percent in Aug, 2.1 percent in Sep, 1.8 percent in Oct, 1.6 percent in Nov and 1.4 percent in Dec. Market participants have been concerned with data in Tables II-1 and II-2 showing more subdued growth of RPCE. Growth rates of personal income and consumption have weakened. Goods and especially durable goods have been driving growth of PCE as shown by the much higher 12-months rates of growth of real goods PCE (RPCEG) and durable goods real PCE (RPCEGD) than services real PCE (RPCES). The faster expansion of industry in the economy is derived from growth of consumption of goods and in particular of consumer durable goods while growth of consumption of services is much more moderate. The 12 months rates of growth of RPCEGD have fallen from more than 10 percent in Sep 2010 to Feb 2011 to the range of 6.3 to 7.8 percent in the quarter May-Jul and then 6.1 percent in Aug, rebounding to 7.8 percent in Sep but falling to 6.5 percent in Oct and increasing to 7.0 percent in Nov but ending at 6.0 percent in Dec. RPCEG growth rates have fallen from over 5 percent late in 2010 and early Jan-Feb 2011 to the range of 3.4 to 4.0 percent in the quarter May-Jul and then only 2.3 percent in Dec.
Table II-2, Real Disposable Personal Income and Real Personal Consumption Expenditures Percentage Change from the Same Month a Year Earlier %
| RDPI | RPCE | RPCEG | RPCEGD | RPCES | |
| 2011 | |||||
| Dec | -0.1 | 1.4 | 2.3 | 6.0 | 1.0 |
| Nov | -0.2 | 1.6 | 2.5 | 7.0 | 1.2 |
| Oct | -0.1 | 1.8 | 2.7 | 6.5 | 1.4 |
| Sep | -0.1 | 2.1 | 3.2 | 7.8 | 1.5 |
| Aug | -0.2 | 1.7 | 2.4 | 6.1 | 1.4 |
| Jul | 0.5 | 2.3 | 3.9 | 7.1 | 1.5 |
| Jun | 0.8 | 2.0 | 3.4 | 6.3 | 1.4 |
| May | 0.9 | 2.2 | 4.0 | 7.8 | 1.4 |
| Apr | 1.6 | 2.5 | 4.7 | 9.2 | 1.4 |
| Mar | 2.4 | 2.6 | 4.5 | 9.3 | 1.7 |
| Feb | 2.7 | 2.9 | 5.9 | 12.8 | 1.4 |
| Jan | 2.8 | 2.9 | 5.8 | 12.0 | 1.5 |
| 2010 | |||||
| Dec | 3.2 | 2.8 | 5.4 | 10.2 | 1.6 |
| Nov | 3.6 | 3.2 | 5.9 | 10.2 | 1.9 |
| Oct | 3.8 | 2.9 | 6.1 | 12.2 | 1.3 |
| Sep | 3.1 | 2.7 | 5.6 | 10.5 | 1.4 |
Notes: RDPI: real disposable personal income; RPCE: real personal consumption expenditures (PCE); RPCEG: real PCE goods; RPCEGD: RPCEG durable goods; RPCES: RPCE services
Numbers are percentage changes from the same month a year earlier
Source: http://www.bea.gov/newsreleases/national/pi/2012/pdf/pi1211.pdf
Chart II-1 shows US real personal consumption expenditures (RPCE) between 1995 and 2011. There is an evident drop in RPCE during the global recession in 2007 to 2009 but the slope is flatter during the current recovery than in the period before 2007.
Chart II-1, US, Real Personal Consumption Expenditures 1995-2011
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Percent changes from the prior period in seasonally-adjusted annual equivalent quarterly rates (SAAR) of real personal consumption expenditures (RPCE) are provided in Chart II-2 from 1995 to 2011. The average rate could be visualized as a horizontal line. Although there are not yet sufficient observations, it appears from Chart II-2 that the average rate of growth of RPCE was higher before the recession than during the past nine quarters of expansion that began in IIIQ2009.
Chart II-2, Percent Change from Prior Period in Real Personal Consumption Expenditure, Quarterly Seasonally Adjusted at Annual Rates 1995-2011
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Personal income and its disposition are shown in Table II-3. An important adversity is shown in Table II-3 in the form of sharp deceleration in growth of personal income from $155.3 billion in Jan 2011 relative to Dec 2010 to the contraction by $9.7 billion in Aug relative to Jul. In the same period, growth of wages and salaries fell from $55.4 billion in Jan/Dec to contraction by $7.1 billion in Aug/Jul and a second contraction by $6.9 billion in Nov/Oct. In Nov/Oct income recovered 0.1 percent but wages and salaries lost 0.2 percent. The final column of Table II-3 shows the decline of the savings rate from 5.2 percent in Dec 2010 to 3.5 percent in Nov 2011 but with recovery to 4.0 percent in Dec 2011. The mediocre recovery of the economy is significantly driven by consuming out of savings with negative growth of real disposable personal income.
Table II-3, US, Personal Income and its Disposition, Seasonally Adjusted at Annual Rates $ Billions
| Personal | Wages & | Personal | DPI | Savings | |
| Dec | 13,105.6 | 6,727.2 | 1,461.7 | 11,643.8 | |
| Nov | 13,044.3 | 6,697.7 | 1,447.6 | 11,596.7 | 4.0 |
| Change Dec/Nov | 61.3 ∆% 0.5 | 29.5 ∆% 0.4 | 14.1 ∆% 1.0 | 47.1 ∆% 0.4 | |
| Oct | 13,036.9 | 6,699.1 | 1,436.1 | 11,600.8 | 3.5 |
| Change Nov/Oct | 7.4 ∆% 0.1 | -6.9 ∆% –0.2 | 11.5 ∆% 0.8 | -4.1 ∆% 0.0 | |
| Sep | 12,990.2 | 6,658.1 | 1,413.8 | 11,576.4 | 3.6 |
| Change Oct/Sep | 46.7 | 37.2 ∆% 0.6 | 22.3 ∆% 1.6 | 24.4 ∆% 0.2 | |
| Aug | 12,969.4 | 6,630.3 | 1,405.9 | 11,563.5 | 4.1 |
| Change Sep/Aug | 20.8 | 27.8 | 7.9 | 12.9 | |
| Jul | 12,979.1 | 6,637.4 | 1,405.9 | 11,573.2 | 4.3 |
| Change Aug/Jul | -9.7 ∆% –0.1 | -7.1 ∆% –0.1 | 0.0 ∆% 0.0 | -9.7 ∆% -0.1 | |
| Jun | 12,970.1 | 6,615.1 | 1,403.2 | 11,566.9 | 5.0 |
| Change Jul/Jun | 9.0 ∆% 0.1 | 22.3 ∆% 0.3 | 2.7 ∆% 0.2 | 6.3 ∆% 0.1 | |
| May | 12,957.2 | 6,619.6 | 1,397.4 | 11,559.7 | 4.7 |
| Change | 12.9 ∆% 0.1 | -4.5 ∆% -0.1 | 5.8 ∆% 0.4 | 7.2 ∆% 0.1 | |
| Apr | 12,938.7 | 6,616.5 | 1,387.9 | 11,550.8 | 4.8 |
| Change | 18.5 ∆% 0.1 | 3.1 ∆% 0.0 | 9.5 ∆% 0.7 | 8.9 ∆% 0.1 | |
| Mar | 12,909.7 | 6,614.8 | 1,377.7 | 11,532.1 | 4.9 |
| Change | 29.0 ∆% 0.2 | 1.7 ∆% 0.0 | 10.2 ∆% 0.7 | 18.7 ∆% 0.2 | |
| Feb | 12,850.6 | 6,582.9 | 1,367.1 | 11,483.5 | 5.0 |
| Change | 59.1 ∆% 0.5 | 31.9 ∆% 0.5 | 10.6 0.8 | 48.6 ∆% 0.4 | |
| Jan | 12,780.3 | 6,536.8 | 1,352.8 | 11,427.5 | 5.2 |
| Change | 70.3 ∆% 0.6 | 46.1 ∆% 0.7 | 14.3 ∆% 1.1 | 56.0 ∆% 0.5 | |
| Dec | 12,625.0 | 6,481.4 | 1,247.6 | 11,377.3 | 5.2 |
| Change | 155.3 ∆% 1.2 | 55.4 ∆% 0.9 | 105.2 ∆% 8.4 | 50.2 ∆% 0.4 |
Source: http://www.bea.gov/newsreleases/national/pi/2012/pdf/pi1211.pdf
http://www.bea.gov/iTable/index_nipa.cfm
Chart II-3 provides personal income in the US between 1980 and 1989. These data are not adjusted for inflation that was still high in the 1980s in the exit from the Great Inflation of the 1960s and 1970s. Personal income grew steadily during the 1980s after recovery from two recessions from Jan IQ1980 to Jul IIIQ1980 and from Jul IIIQ1981 to Nov IVQ1982 (http://www.nber.org/cycles.html) with combined drop of GDP by 4.8 percent.
Chart II-3, US, Personal Income, Billion Dollars, Seasonally Adjusted at Annual Rates, 1980-1989
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
A different evolution of personal income is shown in Chart II-4. Personal income also fell during the recession from Dec IVQ2007 to Jun IIQ2009 (http://www.nber.org/cycles.html). Growth of personal income has been anemic and has stalled in 2011.
Chart II-4, US, Personal Income, Current Billions of Dollars, Seasonally Adjusted at Annual Rates, 2007-2011
Source:
http://www.bea.gov/iTable/index_nipa.cfm
Real or inflation-adjusted disposable personal income is provided in Chart II-5 from 1980 to 1989. Real disposable income after allowing for taxes and inflation grew steadily at high rates during the entire decade.
Chart II-5, US, Real Disposable Income, Billions of Chained 2005 Dollars, Seasonally Adjusted at Annual Rates 1980-1989
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
The stagnation of real disposable income is evident in Chart II-6. There was initial recovery in 2010 and then income after inflation and taxes stagnated into 2011. The 12-months percentage change in Dec of real disposable income was minus 0.1 percent.
Chart II-6, US, Real Disposable Income, Billions of Chained 2005 Dollars, Seasonally Adjusted at Annual Rates, 2007-2011
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart II-7 provides percentage quarterly changes in real disposable income from the preceding period at seasonally-adjusted annual rates from 1980 to 1989. Rates of change were high during the decade with few negative changes.
Chart II-7, US, Real Disposable Income Percentage Change from Preceding Period at Seasonally-Adjusted Annual Rates, 1980-1989
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart II-8 provides percentage quarterly changes in real disposable income from the preceding period at seasonally-adjusted annual rates from 2007 to 2011. There has been a period of positive rates followed by decline of rates and then negative rates. There is marginal improvement in IVQ2011.
![clip_image008[1]](file:///C:\Users\cmpelaez\AppData\Local\Temp\WindowsLiveWriter1264636800\supfiles1B97CC\%25RDPI07110205chart%5b3%5d.png "clip_image008[1]")
Chart, II-8, US, Real Disposable Income, Percentage from Preceding Period at Seasonally-Adjusted Annual Rates, 2007-2011
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
In the latest available report, the Bureau of Economic Analysis (BEA) estimates US personal income in Dec 2011 at the seasonally adjusted annual rate of $13,105.6 billion, as shown in Table II-3 above (http://www.bea.gov/newsreleases/national/pi/2012/pdf/pi1211.pdf Table 1, page 6). The major portion of personal income is compensation of employees of $8,349.6 billion, or 63.7 percent of the total. Wage and salary disbursements are $6,727.2 billion, of which $5,538.0 billion by private industries, and supplements to wages and salaries of employer contributions to pension and insurance funds and Social Security are $1622.3 billion. Chart II-9 provides US wage and salary disbursement by private industries in the 1980s. Growth was robust after the interruption of the recessions.
Chart II-9, US, Wage and Salary Disbursement, Private Industries, Quarterly, Seasonally Adjusted at Annual Rates Billions of Dollars, 1980-1989
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart II-10 shows US wage and salary disbursement of private industries from 2007 to 2011. There is a drop during the contraction followed by initial recovery in 2010 and then the current stagnation in 2011.
Chart II-10, US, Wage and Salary Disbursement, Private Industries, Quarterly, Seasonally Adjusted at Annual Rates, Billions of Dollars 2007-2011
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
Chart II-11 provides finer detail with monthly wage and salary disbursement of private industries from 2007 to 2011. There is decline during the contraction and a period of mild recovery with current stagnation.
Chart II-11, US, Wage and Salary Disbursement, Private Industries, Monthly, Seasonally Adjusted at Annual Rates, Billions of Dollars 2007-2011
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
IIIB Financial Repression. This section provides analysis of financial repression in US financial markets. Subsection IIIB1 Views of the Economy and Interest Rates analyzes the economic projections and interest rate views of participants in the Federal Open Market Committee (FOMC) that are used in monetary policy decisions. Subsection IIIB2 Repression of Savings provides analysis of financial repression.
IIIB1 Views of the Economy and Interest Rates. In the effort to increase transparency, the Federal Open Market Committee (FOMC) provides both economic projections of its participants and views on future paths of the policy rate that in the US is the federal funds rate or interest on interbank lending of reserves deposited at Federal Reserve Banks. These projections and views are discussed initially followed with appropriate analysis.
The statement of the FOMC at the conclusion of its meeting on Jan 25, 2012, revealed the following policy intentions (http://www.federalreserve.gov/newsevents/press/monetary/20120125a.htm):
“Information received since the Federal Open Market Committee met in December suggests that the economy has been expanding moderately, notwithstanding some slowing in global growth. While indicators point to some further improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment has slowed, and the housing sector remains depressed. Inflation has been subdued in recent months, and longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth over coming quarters to be modest and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that over coming quarters, inflation will run at levels at or below those consistent with the Committee's dual mandate.
To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and 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 late 2014.
The Committee also decided to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability. ”
There are several important issues in this statement.
1. Mandate. The FOMC 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”
2. Extending Average Maturity of Holdings of Securities. The statement of Jan 25, 2012, invokes the mandate that inflation is subdued but employment below maximum such that further accommodation is required. Accommodation consists of low interest rates. The new “Operation Twist” (http://cmpassocregulationblog.blogspot.com/2011_09_01_archive.html http://cmpassocregulationblog.blogspot.com/2011/09/collapse-of-household-income-and-wealth.html) or restructuring the portfolio of securities of the Fed by selling short-dated securities and buying long-term securities has the objective of reducing long-term interest rates. Lower interest rates would stimulate consumption and investment, or aggregate demand, increasing the rate of economic growth and thus reducing stress in job markets.
3. Target of Fed Funds Rate. The FOMC continues to maintain the target of fed funds rate at 0 to ¼ percent.
4. Advance Guidance. The FOMC increases transparency by advising on the expectation of the future path of fed funds rate. This guidance is the view that conditions such as “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 late 2014.”
5. Monitoring and Policy Focus. The FOMC reconsiders its policy continuously in accordance with available information: “The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate to promote a stronger economic recovery in a context of price stability.”
These policy statements are carefully crafted to express the intentions of the FOMC. The main objective of the statements is to communicate as clearly and firmly as possible the intentions of the FOMC to fulfill its dual mandate. During periods of low inflation and high unemployment and underemployment such as currently the FOMC may be more biased toward measures that stimulate the economy to reduce underutilization of workers and other productive resources. The FOMC also is vigilant about inflation and ready to change policy in the effort to attain its dual mandate.
The FOMC also released the economic projections of governors of the Board of Governors of the Federal Reserve and Federal Reserve Banks presidents shown in Table II-1. The Fed releases the data with careful explanations (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120125.pdf). Columns “∆% GDP,” “∆% PCE Inflation” and “∆% Core PCE Inflation” are changes “from the fourth quarter of the previous year to the fourth quarter of the year indicated.” The GDP report for IVQ2011 is analyzed in the current post of this blog in section I. The Bureau of Economic Analysis (BEA) provides the GDP report with the second estimate for IVQ2011 to be released on Feb 29 and the third estimate on Mar 29 (http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm). PCE inflation is the index of personal consumption expenditures (PCE) of the report of the Bureau of Economic Analysis (BEA) on “Personal Income and Outlays” (http://www.bea.gov/national/index.htm#personal), which is analyzed in this blog as soon as available. The next report will be released at 8:30 AM on Jan 30, 2012. PCE core inflation consists of PCE inflation excluding food and energy. Column “UNEMP %” is the rate of unemployment measured as the average civilian unemployment rate in the fourth quarter of the year. The Bureau of Labor Statistics (BLS) provides the Employment Situation Report with the civilian unemployment rate in the first Friday of every month, which is analyzed in this blog. The report for February will be released on Feb 3, 2012 (http://www.bls.gov/cps/). “Longer term projections represent each participant’s assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the economy” (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120125.pdf).
It is instructive to focus on 2012, as 2013, 2014 and longer term are too far away, and there is not much information on what will happen in 2013 and beyond. The central tendency should provide reasonable approximation of the view of the majority of members of the FOMC but the second block of numbers provides the range of projections by FOMC participants. The first row for each year shows the projection introduced after the meeting of Jan 25 and the second row “Nov PR” the projection of the Nov meeting. There are three major changes in the view.
1. Growth “GDP ∆.” The FOMC has reduced the forecast of GDP growth in 2012 from 3.3 to 3.7 percent in Jun to 2.5 to 2.9 percent in Nov and now to 2.2 to 2.7 percent at the Jan 25 meeting.
2. Rate of Unemployment “UNEM%.” The FOMC increased the rate of unemployment from 7.8 to 8.2 percent in Jun to 8.5 to 8.7 percent in Nov but has reduced it to 8.2 to 8.5 percent at the Jan 25 meeting.
3. Inflation “∆% PCE Inflation.” The FOMC changed the forecast of personal consumption expenditures (PCE) inflation from 1.5 to 2.0 percent in Jun to virtually the same of 1.4 to 2.0 percent in Nov but has reduced it to 1.4 to 1.8 percent at the Jan 25 meeting.
4. Core Inflation “∆% Core PCE Inflation.” Core inflation is PCE inflation excluding food and energy. There is again not much of a difference of the projection for 2012 in Jun of 1.4 to 2.0 percent and the Nov projection of 1.5 to 2.0 percent, which has been reduced slightly to 1.5 to 1.8 percent at the Jan 25 meeting.
Table IIIB-1, US, Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents in FOMC, January 2012 and November 2011
| ∆% GDP | UNEM % | ∆% PCE Inflation | ∆% Core PCE Inflation | |
| Central | ||||
| 2012 | 2.2 to 2.7 | 8.2 to 8.5 | 1.4 to 1.8 | 1.5 to 1.8 |
| 2013 | 2.8 to 3.2 | 7.4 to 8.1 | 1.4 to 2.0 | 1.5 to 2.0 |
| 2014 | 3.3 to 4.0 | 6.7 to 7.6 | 1.6 to 2.0 | 1.6 to 2.0 |
| Longer Run | 2.3 to 2.6 | 5.2 to 6.0 | 2.0 | |
| Range | ||||
| 2012 | 2.1 to 3.0 | 7.8 to 8.6 | 1.3 to 2.5 | 1.3 to 2.0 |
| 2013 | 2.4 to 3.8 | 7.0 to 8.2 | 1.4 to 2.3 | 1.4 to 2.0 |
| 2014 | 2.8 to 4.3 | 6.3 to 7.7 | 1.5 to 2.1 | 1.4 to 2.0 |
| Longer Run | 2.2 to 3.0 | 5.0 to 6.0 | 2.0 |
Notes: UEM: unemployment; PR: Projection
Source: http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120125.pdf
Another important decision at the FOMC meeting on Jan 25, 2012, is formal specification of the goal of inflation of 2 percent per year but without specific goal for unemployment (http://www.federalreserve.gov/newsevents/press/monetary/20120125c.htm):
“Following careful deliberations at its recent meetings, the Federal Open Market Committee (FOMC) has reached broad agreement on the following principles regarding its longer-run goals and monetary policy strategy. The Committee intends to reaffirm these principles and to make adjustments as appropriate at its annual organizational meeting each January.
The FOMC is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decisionmaking by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society.
Inflation, employment, and long-term interest rates fluctuate over time in response to economic and financial disturbances. Moreover, monetary policy actions tend to influence economic activity and prices with a lag. Therefore, the Committee's policy decisions reflect its longer-run goals, its medium-term outlook, and its assessments of the balance of risks, including risks to the financial system that could impede the attainment of the Committee's goals.
The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances.
The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee's policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments. Information about Committee participants' estimates of the longer-run normal rates of output growth and unemployment is published four times per year in the FOMC's Summary of Economic Projections. For example, in the most recent projections, FOMC participants' estimates of the longer-run normal rate of unemployment had a central tendency of 5.2 percent to 6.0 percent, roughly unchanged from last January but substantially higher than the corresponding interval several years earlier.
In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee's assessments of its maximum level. These objectives are generally complementary. However, under circumstances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate. ”
The probable intention of this specific inflation goal is to “anchor” inflationary expectations. Massive doses of monetary policy of promoting growth to reduce unemployment could conflict with inflation control. Economic agents could incorporate inflationary expectations in their decisions. As a result, the rate of unemployment could remain the same but with much higher rate of inflation (see Kydland and Prescott 1977 and Barro and Gordon 1983; 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). Strong commitment to maintaining inflation at 2 percent could control expectations of inflation.
The FOMC continues its efforts of increasing transparency that can improve the credibility of its firmness in implementing its dual mandate. Table IIIB-2 provides the views by participants of the FOMC of the levels at which they expect the fed funds rate in 2012, 2013, 2014 and the in the longer term. The table is inferred from a chart provided by the FOMC with the number of participants expecting the target of fed funds rate (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120125.pdf). There are 14 participants expecting the rate to remain at 0 to ¼ percent in 2012 and only three to be higher. Not much change is expected in 2013 either with 11 participants anticipating the rate at the current target of 0 to ¼ percent and only six expecting higher rates. The rate would still remain at 0 to ¼ percent in 2014 for six participants with five expecting the rate to be in the range of 0.5 to 1 percent and two participants expecting rates from 1 to 1.5 percent but only 4 with rates exceeding 2.5 percent. This table is consistent with the guidance statement of the FOMC that rates will remain at low levels until late in 2014.
Table IIIB-2, US, Views of Target Federal Funds Rate at Year-End of Federal Reserve Board Members and Federal Reserve Bank Presidents Participating in FOMC, January 25, 2012
| 0 to 0.25 | 0.5 to 1.0 | 1.0 to 1.5 | 1.75 to 2.0 | 2.5 to 2.75 | 3.75 to 4.5 | |
| 2012 | 14 | 1 | 2 | |||
| 2013 | 11 | 4 | 2 | |||
| 2014 | 6 | 5 | 2 | 4 | ||
| Longer Run | 17 |
Source: http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120125.pdf
Additional information is provided in Table IIIB-3 with the number of participants expecting increasing interest rates in the years from 2012 to 2016. It is evident from Table II-3 that the prevailing view in the FOMC is for interest rates to continue at low levels in future years. This view is consistent with the economic projections of low economic growth, relatively high unemployment and subdued inflation provided in Table IIIB-1.
Table IIIB-3, US, Views of Appropriate Year of Increasing Target Federal Funds Rate of Federal Reserve Board Members and Federal Reserve Bank Presidents Participating in FOMC, January 25, 2012
| Appropriate Year of Increasing Target Fed Funds Rate | Number of Participants |
| 2012 | 3 |
| 2013 | 3 |
| 2014 | 5 |
| 2015 | 4 |
| 2016 | 2 |
Source: http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120125.pdf
An intriguing question by a member of the press at the meeting of release of projections and views of fed funds rates on Jan 25, 2012, was why the FOMC does not use immediately all of its resources to prevent economic conditions as weak as those expected to prevail in 2014. A partial answer is that the FOMC has already deployed massive doses of policy. Lack of further improvement could illustrate limitations of monetary policy as well as the lack of complementary policies such as fiscal stimulus. There are other approaches of generating incentives for private initiative that could promote consumption, investment, growth and employment.
An old advice of business economists recommends: “Do not forecast but if you must forecast then forecast often.” The FOMC actually forecasts infrequently or at least reveals forecasts that are revised with long lags. Indicators followed by the comments in this blog do show strengthening growth from 0.8 percent at annual equivalent for the first half of 2011 to 1.1 percent for the first three quarters of 2011 and now 1.6 percent cumulative for 2011 as a whole. Recent recovery has been driven by decline in the savings rate from 5.2 percent in IVQ2010 to 3.7 percent in IVQ2011 while real disposable income has fallen 0.1 percent. Labor markets continue to be fractured with unemployment or underemployment of 29.6 million, weak hiring and falling real wages. Inflation has been moving on waves with fluctuations in more recent months relative to moderation in May-Jul (http://cmpassocregulationblog.blogspot.com/2012/01/world-inflation-waves-united-states.html). The translation of current trends or appearance of trends into forecasts with statistical predictive value is very difficult or nearly impossible. FOMC policy in the statement is to increase economic growth to reduce the rate of unemployment in accordance with its statutory dual mandate (http://www.federalreserve.gov/aboutthefed/mission.htm):
“The Federal Reserve System is the central bank of the United States. It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded.
Today, the Federal Reserve's duties fall into four general areas:
· conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates
· supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers
· maintaining the stability of the financial system and containing systemic risk that may arise in financial markets
· providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system”
The key phrase in this mission is: “influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates.”
The Board of Governors of the Federal Reserve and the Federal Reserve Banks has competence at the frontiers of knowledge to develop optimum projections based on the state of the art. The need for projections originates in the belief in lags in effect of monetary policy based on technical research (see Culbertson 1960, 1961, Friedman 1961, Batini and Nelson 2002, Romer and Romer 2004). Innovative research by Romer and Romer (2004, 1081) concludes:
“Estimates of the effects of policy using the new shock series indicates that monetary policy has large and statistically significant effects on real output. In our baseline specification, a shock of one percentage point starts to reduce industrial production after five months, with a maximum fall of 4.3 percent after two years. The peak effect is highly statistically significant. For prices, we find that the one-percentage point shock has little effect for almost two years, but then lowers the inflation rate by 2 to 3 percentage points. As a result, the price level is about 6 percent lower after four years. This estimate is overwhelmingly significant. The most important uncertainty concerns the lag in the impact of policy on prices: in some specifications, the price level begins falling within six months after the policy shock, while in others it is unchanged for as much as 22 months.”
In short, a monetary policy impulse implemented currently has effects in the future. Thus, monetary policy has to anticipate economic conditions in the future to determine doses and timing of policy impulses. Policy is actually based on “projections” such as those in Table II-1 (on central banking see Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 69-90, Regulation of Banks of Finance (2009b), 99-116). Bernanke (2003, 9) and Bernanke and Mishkin (1997, 106) characterize “inflation targeting” as “constrained discretion.” The constrained part means that the central bank is under the constraint of maintaining inflation at the desired level of 2.0 percent per year. The “discretion” part means that the central bank is concerned with maintaining output at the level that results in full employment. Central banks anchor inflation expectations at 2.0 percent by means of credible policy measures, that is, economic agents believe that central banks will take all required measures to prevent inflation from deviating from the goal of 2.0 percent. That credibility was lost during the stagflation of the 1960s and 1970s, which was an episode known as the Great Inflation and Unemployment (http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011_05_01_archive.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html and Appendix I The Great Inflation). A more general and practical approach is analyzed by Svensson (2003, 429) in which central banks consider specific objectives, target levels, available information and “judgment.” Svensson (2003, 466) finds that actual practice consists of targeting forecasts of inflation. In fact, central banks also target output gaps. Policy is designed to attain the inflation forecast on the basis of existing technical knowledge, empirical information and judgment with minimization of the changes in the output gap. There is as much imprecision and resulting uncertainty in this process as in managing risk exposures by finance professionals on the basis of risk management techniques, existing information and “market sentiment.” In fact, Greenspan (2004, 36-7) has compared central banking to financial risk management (see Pelaez and Pelaez, The Global Recession Risk (2007), 212-14):
“The Federal Reserve's experiences over the past two decades make it clear that uncertainty is not just a pervasive feature of the monetary policy landscape; it is the defining characteristic of that landscape. The term "uncertainty" is meant here to encompass both "Knightian uncertainty," in which the probability distribution of outcomes is unknown, and "risk," in which uncertainty of outcomes is delimited by a known probability distribution. In practice, one is never quite sure what type of uncertainty one is dealing with in real time, and it may be best to think of a continuum ranging from well-defined risks to the truly unknown.
As a consequence, the conduct of monetary policy in the United States has come to involve, at its core, crucial elements of risk management. This conceptual framework emphasizes understanding as much as possible the many sources of risk and uncertainty that policymakers face, quantifying those risks when possible, and assessing the costs associated with each of the risks. In essence, the risk management approach to monetary policymaking is an application of Bayesian decision making.”
Monetary policy is not superior in technique to “proprietary trading” by financial institutions but may actually be more difficult in implementation because of the complexity of knowledge of the entire economy with all of its institutions, including those engaged in trading. Traders can constantly observe changes in conditions that allow them to reverse risk exposures immediately or use loss limit rules. Traders also work in structures with tight chain of command. Rogue traders do cause major problems but infrequently. In contrast, central banks cannot reverse instantaneously the effects of policies because of the long and uncertain lags in effects of monetary policy. Central banks act in delegation of duties by the principals in Congress and the administration who also act in delegation of the ultimate principal consisting of electors. There is long delay in action of the electors in correcting policy errors.
It is instructive to consider the latest available full transcript of the meeting of the Federal Open Market Committee (FOMC) on Dec 2006 (FOMC 2006Dec12 at http://www.federalreserve.gov/monetarypolicy/files/FOMC20061212meeting.pdf). There was no anticipation of the global recession beginning in IVQ2007 with cumulative decline of output of 5.2 percent by IIQ2009 and legacy of 29 million people unemployed or underemployed but rather an optimistic assessment of the economy. The Vice Chairman of the FOMC Timothy Geithner outlined the forecast of the Federal Reserve Bank of New York that he presided (Ibid 56, 57 http://www.federalreserve.gov/monetarypolicy/files/FOMC20061212meeting.pdf):
“Our forecast hasn’t changed much since the last meeting. We still expect growth to move back to potential in the first half of next year and to stay in the vicinity of potential, which we think is around 3 percent, over the forecast period. The risks to the forecast may have shifted somewhat in the direction of less upside risk to inflation and more downside risk to growth. But to us, the current weakness in the economy still seems principally to stem from the direct effects of the slowdown in housing on construction activity and related parts of the manufacturing sector as well as from the reduction in automobile and auto-related production. As things now stand, the softer-than-expected recent numbers don’t argue, in our view, for a substantial reassessment of the risks in the outlook. Surveys of business sentiment outside the manufacturing sector still seem consistent with reasonable growth going forward. A slowdown of investment in equipment and software doesn’t seem to be particularly troubling to us at this point. Consumer spending seems to be growing at a fairly good pace. Employment growth, of course, is still quite solid, and growth outside the United States still looks pretty good.”
The Chairman of the Board of Governors of the Federal Reserve and of the FOMC Ben S. Bernanke expressed the following view of the economy (Ibid 79 http://www.federalreserve.gov/monetarypolicy/files/FOMC20061212meeting.pdf):
“Looking forward, again to compliment the staff, I think most people around the table accepted the general contour of the Greenbook forecast—that is, moderate growth perhaps below potential for the next few quarters but returning to potential growth later next year, with risks to the upside as well as to the downside. So far there is little evidence of spillover into consumption in particular, although obviously we have to keep an eye on that. There are a number of strong underlying conditions, including supportive financial conditions, strong profits, and a strong international economy, which are providing a cushion to the economy. At the same time, like many members of the Committee, I see a very strong labor market and a very strong services sector plus a very strong nonmanufacturing ISM, which, though it includes construction, was nevertheless still very strong. One begins to wonder a bit about the measurement of the services sector—whether or not we are understating growth and productivity in that sector. That’s a question we’ll need to continue to consider. So like most people around the table, I think that a soft landing with growth a bit below potential in the short run looks like the most likely scenario. I expect the unemployment rate to increase gradually but income growth and other factors to be sufficient to keep consumption above 2 percent, which is essentially what we need to keep the economy growing. Again, I see the risks going in both directions. A couple of other factors are like that, which I just would like to bring to your attention. One has to do with the very strong presumption we seem to have now that demand for housing has stabilized. That may be the case, but I would point out that we have seen a very sharp decline in mortgage rates. People may have a sort of mean-reverting model of mortgage rates in their minds. It could be they are looking at this as an opportunity to jump in and buy while the financial conditions are favorable. So even if rates stay low, we face some risk of a decline in demand. The counter argument to that, which I should bring up, is that if people thought that prices were going to fall much more, then they would be very reluctant to buy. That’s evidence for stabilization of demand. Another point to make about housing is that, even when starts stabilize, there are going to be ongoing effects on GDP and employment. On the GDP side, it takes about six months on average to complete residential structures. Therefore, even when starts stabilize, we’re going to continue to see declines in the contribution of residential construction to GDP.”
IIIB2 Repression of Savings. McKinnon (1973) and Shaw (1974) argue that legal restrictions on financial institutions can be detrimental to economic development. “Financial repression” is the term used in the economic literature for these restrictions (see Pelaez and Pelaez, Globalization and the State, Vol. II (2008b), 81-6). Interest rate ceilings on deposits and loans have been commonly used. Prohibition of payment of interest on demand deposits and ceilings on interest rates on time deposits were imposed by the Banking Act of 1933. These measures were justified by arguments that the banking panic of the 1930s was caused by competitive rates on bank deposits that led banks to engage in high-risk loans (Friedman, 1970, 18; see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 74-5). The objective of policy was to prevent unsound loans in banks. Savings and loan institutions complained of unfair competition from commercial banks that led to continuing controls with the objective of directing savings toward residential construction. Friedman (1970, 15) argues that controls were passive during periods when rates implied on demand deposit were zero or lower and when Regulation Q ceilings on time deposits were above market rates on time deposits. The Great Inflation or stagflation of the 1960s and 1970s changed the relevance of Regulation Q.
Most regulatory actions trigger compensatory measures by the private sector that result in outcomes that are different from those intended by regulation (Kydland and Prescott 1977). Banks offered services to their customers and loans at rates lower than market rates to compensate for the prohibition to pay interest on demand deposits (Friedman 1970, 24). The prohibition of interest on demand deposits was eventually lifted in recent times. In the second half of the 1960s, already in the beginning of the Great Inflation (DeLong 1997), market rates rose above the ceilings of Regulation Q because of higher inflation. Nobody desires savings allocated to time or savings deposits that pay less than expected inflation. This is a fact currently with zero interest rates and consumer price inflation of 3.0 percent in the 12 months ending in Dec (http://www.bls.gov/cpi/). Funding problems motivated compensatory measures by banks. Money-center banks invented the large certificate of deposit (CD) to accommodate increasing volumes of loan demand by customers. As Friedman (1970, 25) finds:
“Large negotiable CD’s were particularly hard hit by the interest rate ceiling because they are deposits of financially sophisticated individuals and institutions who have many alternatives. As already noted, they declined from a peak of $24 billion in mid-December, 1968, to less than $12 billion in early October, 1969.”
Banks created different liabilities to compensate for the decline in CDs. As Friedman (1970, 25; 1969) explains:
“The most important single replacement was almost surely ‘liabilities of US banks to foreign branches.’ Prevented from paying a market interest rate on liabilities of home offices in the United States (except to foreign official institutions that are exempt from Regulation Q), the major US banks discovered that they could do so by using the Euro-dollar market. Their European branches could accept time deposits, either on book account or as negotiable CD’s at whatever rate was required to attract them and match them on the asset side of their balance sheet with ‘due from head office.’ The head office could substitute the liability ‘due to foreign branches’ for the liability ‘due on CDs.”
Friedman (1970, 26-7) predicted the future:
“The banks have been forced into costly structural readjustments, the European banking system has been given an unnecessary competitive advantage, and London has been artificially strengthened as a financial center at the expense of New York.”
In short, Depression regulation exported the US financial system to London and offshore centers. What is vividly relevant currently from this experience is the argument by Friedman (1970, 27) that the controls affected the most people with lower incomes and wealth who were forced into accepting controlled-rates on their savings that were lower than those that would be obtained under freer markets. As Friedman (1970, 27) argues:
“These are the people who have the fewest alternative ways to invest their limited assets and are least sophisticated about the alternatives.”
Chart IIIB-1 of the Bureau of Economic Analysis (BEA) provides quarterly savings as percent of disposable income or the US savings rate from 1980 to 2011. There was a long-term downward sloping trend from 12 percent in the early 1980s to less than 2 percent in 2005-2006. The savings rate then rose during the contraction and also in the expansion. In 2011 the savings rate declined as consumption is financed with savings in part because of the disincentive or frustration of receiving a few pennies for every $10,000 of deposits in a bank. The objective of monetary policy is to reduce borrowing rates to induce consumption but it has collateral disincentive of reducing savings. The zero interest rate of monetary policy is a tax on saving. This tax is highly regressive, meaning that it affects the most people with lower income or wealth and retirees. The long-term decline of savings rates in the US has created a dependence on foreign savings to finance the deficits in the federal budget and the balance of payments.
Chart IIIB-1, US, Personal Savings as a Percentage of Disposable Personal Income, Quarterly, 1980-2011
Source: US Bureau of Economic Analysis
http://www.bea.gov/iTable/index_nipa.cfm
IV Budget/Debt Quagmire. The US is facing a major fiscal challenge. Table IV-1 provides federal revenues, expenditures, deficit and debt as percent of GDP and the yearly change in GDP in the eight decades from 1930 to 2011. The recent period of debt exceeding 90 percent of GDP based on yearly observations in Table IV-1 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 IV-1 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 in 1943. 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 IV-1. 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 subsequent jump of debt as the one from 40.5 percent of GDP in 2008 to 62.8 percent of GDP in 2011 and projected by the Congressional Budget Office (CBO 2012JanBEO) at 67.7 percent in 2012.
Table IV-1, United States Central Government Revenue, Expenditure, Deficit, Debt and GDP Growth 1930-2011
| Rev | Exp | Deficit | Debt | 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 | 36.6 | 2.7 |
| 2007 | 18.5 | 19.7 | -1.2 | 36.3 | 1.9 |
| 2008 | 17.6 | 20.8 | -3.2 | 40.5 | -0.3 |
| 2009 | 15.1 | 25.2 | -10.1 | 54.1 | -3.5 |
| 2010s | |||||
| 2010 | 15.1 | 24.1 | -8.9 | 62.8 | 3.0 |
| 2011 | 15.4 | 24.1 | -8.7 | 67.7 | 1.7 |
Sources:
Office of Management and Budget. 2011. Historical Tables. Budget of the US Government Fiscal Year 2011. Washington, DC: OMB. CBO (2012JanBEO).
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 IV-1 shows the sharp impact of the 1946 contraction of 10.9 percent of GDP. Growth rebounded strongly, as in all postwar expansion, with growth of 8.7 percent in 1950, 7.7 percent in 1951, 3.8 percent in 1952 and 3.8 percent in 4.6 percent in 1953. The data in Charts IV-1 and IV-2 are changes in the level of real GDP in a year, which is different from the seasonally-adjusted quarterly annual equivalent rates analyzed in http://cmpassocregulationblog.blogspot.com/2012/01/mediocre-economic-growth-financial.html.
Chart IV-1, Percentage Change of Real GDP 1945-2011
Source: Bureau of Economic Analysis, Department of Commerce
http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1
Yearly changes in Chart IV-2 show vigorous recovery from the contractions of 1982, 1991 and 2001. Rapid growth recovered levels of employment prior to the contraction. The anemic recovery after IIQ2009 and the current standstill have not occurred in the US postwar economy.
Chart IV-2, Percentage Change of Real GDP 1980-2011
Source: Bureau of Economic Analysis, Department of Commerce
http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1
The capital budgeting decision of business requires the calculation of present value of projects. This calculation consists of a projection toward the horizon of planning of revenues net of costs, which are discounted to present value by the weighted average cost of capital. Business invests in the projects with highest net present value. The nonpartisan Congressional Budget Office (CBO) provides a similar service. Congress and the administration send budget proposals and legislation for evaluation by the CBO of their effects on federal government revenues, expenditures, deficit or surpluses and debt. The CBO does not provide its own policy proposals but analyzes alternative policies. The CBO uses state of the art knowledge but significant uncertainty remains because of the hurdle of projecting financial and economic variables to the future.
Table IV-2 provides the latest exercise by the CBO (2012JanBEO) of projecting the fiscal accounts of the US. Table IV-2 extends data back to 1995 with the projections of the CBO from 2012 to 2022. Budget analysis in the US uses a ten-year horizon. The significant event in the data before 2011 is the budget surpluses from 1998 to 2001, from 0.8 percent of GDP in 1998 to 2.4 percent of GDP in 2000. Debt held by the public fell from 49.1 percent of GDP in 1995 to 32.5 percent of GDP in 2001.
Table IV-2, US, CBO Baseline Budget Outlook 2012-2022
| Out | Out | Deficit | Deficit | Debt | Debt | |
| 1995 | 1,516 | 20.6 | -164 | -2.2 | 3,604 | 49.1 |
| 1996 | 1,560 | 20.2 | -107 | -1.4 | 3,734 | 48.4 |
| 1997 | 1,601 | 19.5 | -22 | -0.3 | 3,772 | 45.9 |
| 1998 | 1,652 | 19.1 | +69 | +0.8 | 3,721 | 43.0 |
| 1999 | 1,702 | 18.5 | +126 | +1.4 | 3,632 | 39.4 |
| 2000 | 1,789 | 18.2 | +236 | +2.4 | 3,410 | 34.7 |
| 2001 | 1,863 | 18.2 | +128 | +1.3 | 3,320 | 32.5 |
| 2002 | 2,011 | 19.1 | -158 | -1.5 | 3,540 | 33.6 |
| 2003 | 2,159 | 19.7 | -378 | -3.4 | 3,913 | 35.6 |
| 2004 | 2,293 | 19.6 | -413 | -3.5 | 4,295 | 36.8 |
| 2005 | 2,472 | 19.9 | -318 | -2.6 | 4,592 | 36.9 |
| 2006 | 2,655 | 20.1 | -248 | -1.9 | 4,829 | 36.6 |
| 2007 | 2,729 | 19.7 | -161 | -1.2 | 5,035 | 36.3 |
| 2008 | 2,983 | 20.8 | -459 | -3.2 | 5,803 | 40.5 |
| 2009 | 3,518 | 25.2 | -1,413 | -9.9 | 7,545 | 54.1 |
| 2010 | 3,456 | 24.1 | -1,294 | -8.9 | 9,019 | 62.8 |
| 2011 | 3,598 | 24.1 | -1,296 | -8.7 | 10,128 | 67.7 |
| 2012 | 3,601 | 23.2 | -1,079 | -7.0 | 11,242 | 72.5 |
| 2013 | 3,573 | 22.5 | -585 | -3.7 | 11,945 | 75.1 |
| 2014 | 3,658 | 22.1 | -345 | -2.1 | 12,401 | 74.8 |
| 2015 | 3,836 | 21.8 | -269 | -1.5 | 12,783 | 72.6 |
| 2016 | 4,086 | 21.8 | -302 | -1.6 | 13,188 | 70.5 |
| 2017 | 4,259 | 21.6 | -220 | -1.1 | 13,509 | 68.5 |
| 2018 | 4,439 | 21.5 | -196 | -0.9 | 13,801 | 66.8 |
| 2019 | 4,714 | 21.8 | -258 | -1.2 | 14,148 | 65.5 |
| 2020 | 4,960 | 21.9 | -280 | -1.2 | 14,512 | 64.2 |
| 2021 | 5,205 | 22.0 | -279 | -1.2 | 14,872 | 63.0 |
| 2022 | 5,520 | 22.4 | -339 | -1.4 | 15,291 | 62.0 |
| 2013 | 44,251 | 21.9 | -3,072 | -1.9 | NA | NA |
Note: Out = outlays
Source: CBO (2011AugBEO); Office of Management and Budget. 2011. Historical Tables. Budget of the US Government Fiscal Year 2011. Washington, DC: OMB; CBO. 2011JanBEO. Budget and Economic Outlook. Washington, DC, Jan.
The succession of deficits of more than one trillion dollars resulted in an increase in debt held by the public from 40.5 percent of GDP in 2008 to projected 67.7 percent of GDP in 2012 for a debt explosion without parallel in data after World War II in Table IV-1. An important part of the fiscal situation is the jump in federal government expenditures from $2,983 billion in 2008 to $3,518 billion in 2009, or 17.9 percent, equivalent to an increase of federal government expenditures from 20.8 percent of GDP in 2008 to 25.2 percent of GDP in 2009.
The exercise by the CBO in Table IV-2 is not able to reduce expenditures back to 20 percent, which is a historical ceiling for the debt/GDP ratio.
Chart IV-3 of the Congressional Budget Office (CBO) shows total deficits or surpluses of the US from 2000 to 2022. There is a difficult climb from the record deficit of 9.9 percent in 2009 and cumulative deficit of $5,082 in four consecutive years of deficits exceeding one trillion dollars from 2009 to 2012. The CBO projects a baseline scenario with faster and stronger adjustment and an alternative scenario with more delayed and less successful adjustment.
Chart IV-2, US, Total Deficits or Surplus as Percent of GDP
Source: http://www.cbo.gov/
Table IV-3 provides federal revenues, outlays, deficit and debt as percent of GDP. The adjustment depends on increasing the revenues from 15.4 percent of GDP in 2011 to 21.0 percent of GDP in 2022, which is above the 40 year average of 18 percent of GDP while outlays fall only from 24.1 percent of GDP in 2011 to 22.4 percent of GDP in 2022. The last row of Table 15 provides the CBO estimates of averages for 1971 to 2010 of 18.0 percent for revenues/GDP, 21.9 percent for outlays/GDP and 37.0 percent for debt/GDP.
Table IV-3, US, CBO Projections of Federal Government Revenues, Outlays, Deficit and Debt as Percent of GDP
| Revenues | Outlays | Deficit | Debt | |
| 2011 | 15.4 | 24.1 | -8.7 | 67.7 |
| 2012 | 16.3 | 23.2 | -7.0 | 72.5 |
| 2013 | 18.8 | 22.5 | -3.7 | 75.1 |
| 2014 | 20.0 | 22.1 | -2.1 | 74.8 |
| 2015 | 20.2 | 21.8 | -1.5 | 72.6 |
| 2016 | 20.2 | 21.8 | -1.6 | 70.5 |
| 2017 | 20.5 | 21.6 | -1.1 | 68.5 |
| 2018 | 20.5 | 21.5 | -0.9 | 66.8 |
| 2019 | 20.6 | 21.8 | -1.2 | 65.5 |
| 2020 | 20.7 | 21.9 | -1.2 | 64.2 |
| 2021 | 20.9 | 22.0 | -1.2 | 63.0 |
| 2022 | 21.0 | 22.4 | -1.4 | 62.0 |
| Total 2013-2017 | 20.0 | 21.9 | -1.9 | NA |
| Total 2013-2022 | 20.4 | 21.9 | -1.5 | NA |
| Average | 18.0 | 21.9 | NA | 37.0 |
Source: CBO (2012AugBEO).
The CBO (2012JanBEO) projects economic variables required for the fiscal projections, which are shown in Table IV-4. Real GDP growth is projected at 2.0 percent in 2012 and 1.1 percent in 2013, jumping to 4.1 percent on average from 2014 to 2017 and 2.4 percent from 2018 to 2022. It is not possible to forecast another downturn that could worsen further the US fiscal situation. The CBO projects subdued inflation but the rate of unemployment remains at high levels, declining to 5.6 percent by 2017, which is the current measurement of the natural rate of unemployment. Interest rates are assumed to remain at relatively low levels but increase in the latter years of the projections. Different paths of economic variables would alter the projections of fiscal variables.
Table IV-4, US, CBO Economic Projections for Calendar Years 2012 to 2022, ∆%
| 2011 ∆% | 2012 ∆% | 2013 ∆% | 2014-2017 Average ∆% | 2018-2022 Average ∆% | |
| Real GDP | 1.6 | 2.0 | 1.1 | 4.1 | 2.5 |
| PCE Inflation | 2.6 | 1.2 | 1.3 | 1.7 | 2.0 |
| Core PCE Inflation | 1.8 | 1.2 | 1.4 | 1.6 | 2.0 |
| CPI Inflation | 3.3 | 1.4 | 1.5 | 1.9 | 2.3 |
| Core CPI | 2.2 | 1.4 | 1.6 | 1.9 | 2.2 |
| Unem- | 8.7 | 8.9 | 9.2 | 5.6 | 5.3 |
| 3-Month Treasury | 0.1 | 0.1 | 0.1 | 2.0 | 3.7 |
| 10-Year treasury Note | 2.8 | 2.3 | 2.5 | 3.8 | 5.0 |
Source: CBO (2012JanBEO).
The major hurdle in adjusting the fiscal situation of the US is shown in Table IV-5 in terms of the rigid structure of revenues that can be increased and outlays that can be reduced. There is no painless adjustment of a debt exceeding 70 percent of GDP. On the side of revenues, taxes provide 90.8 percent of revenue in 2011 and are projected to provide 92.5 percent in the total revenues from 2013 to 2022 in the CBO projections. Thus, revenue measures are a misleading term for what are actually tax increases. The choices are especially difficult because of the risks of balancing inequity and disincentives to economic activity. Individual income taxes are projected to increase from 47.4 percent of federal government revenues in 2011 to 51.9 percent in total revenues projected by the CBO from 2013 to 2022. There are equally difficult conflicts in what the government gives away in a rigid structure of expenditures. Mandatory expenditures account for 56.3 percent of federal government outlays in 2011 and are projected to increase to 61.8 percent of the total projected by the CBO for the years 2013 to 2022. The total of Social Security plus Medicare and Medicaid accounts for 43.4 percent of federal government outlays in 2011 and is projected to increase to 51.5 percent in the total for 2013 to 2022. The inflexibility of what to cut is more evident in the first to the last row of Table IV-5 with the aggregate of defense plus Social Security plus Medicare plus Medicaid accounting for 62.8 percent of expenditures in 2011, rising to 66.6 percent of the total outlays projected by the CBO from 2013 to 2022. The cuts are in discretionary spending that declines from 38.9 percent of the total in 2011 to 30.9 percent of total outlays in the CBO projection for 2013 to 2022.
Table IV-5, Structure of Federal Government Revenues and Outlays, $ Billions and Percent
| 2011 | % Total | Total 2013-2022 | % Total | |
| Revenues | 2,302 | 100.00 | 41,179 | 100.00 |
| Individual Income Taxes | 1,091 | 47.4 | 21,365 | 51.9 |
| Social Insurance Taxes | 819 | 35.6 | 12,349 | 30.0 |
| Corporate Income Taxes | 181 | 7.9 | 4,360 | 10.6 |
| Other | 211 | 9.2 | 3,105 | 7.5 |
| Outlays | 3,598 | 100.00 | 44,251 | 100.0 |
| Mandatory | 2,025 | 56.3 | 27,364 | 61.8 |
| Social Security | 725 | 20.2 | 10,530 | 23.8 |
| Medicare | 560 | 15.6 | 7,820 | 17.7 |
| Medicaid | 275 | 7.6 | 4,453 | 10.1 |
| SS + Medicare + Medicaid | 1,560 | 43.4 | 22,803 | 51.5 |
| Discre- | 1,346 | 38.98 | 13,580 | 30.93 |
| Defense | 700 | 19.5 | 6,657 | 15.0 |
| Non- | 646 | 17.9 | 5,894 | 13.3 |
| Net Interest | 227 | 5.67 | 4,247 | 10.13 |
| Defense + SS + Medicare + Medicaid | 2,260 | 62.8 | 29,460 | 66.6 |
| MEMO: GDP | 14,954 | 201,660 |
Source: CBO (2012JanBEO).
The CBO (2012JanBEO) must use current law without any changes in the baseline scenario but also calculates another alternative scenario with different assumptions. In the alternative scenario shown in Table IV-6 the debt/GDP ratio rises to 94.2 percent by 2022. The US is facing an unsustainable debt/GDP path.
Table IV-6, US, CBO Base and Alternative Scenarios, Billions of Dollars and Percent
| Base 2012 | Alternative 2012 | Base 2013-2022 | Alternative 2013-2022 | |
| Revenue | 2,523 | 2,500 | 41,179 | 36,154 |
| % GDP | 16.3 | 16.1 | 20.4 | 17.9 |
| Outlays | 3,601 | 3,611 | 44,251 | 47,136 |
| % GDP | 23.2 | 23.3 | 21.9 | 23.4 |
| Deficit | -1,079 | -1,111 | -3,072 | -10,981 |
| % GDP | -7.0 | -7.2 | -1.5 | -5.4 |
| Debt | 11,242 | 11,275 | 15,291* | 23,232* |
| % GDP | 72.5 | 72.7 | 62.0* | 94.2 |
*Debt held by the public in 2022
Source: CBO (2012JanBEO).
V World Financial Turbulence. Financial markets are being shocked by multiple factors including (1) world economic slowdown; (2) growth in China, Japan and world trade; (3) slow growth propelled by savings reduction in the US with high unemployment/underemployment; and (3) the outcome of the sovereign debt crisis in Europe. This section provides current data and analysis. Subsection IIIA Financial Risks provides analysis of the evolution of valuations of risk assets during the week. There are various appendixes at the end of this section for convenience of reference of material related to the euro area debt crisis. Subsection IIIB Appendix on Safe Haven Currencies discusses arguments and measures of currency intervention. Subsection IIIC Appendix on Fiscal Compact provides analysis of the restructuring of the fiscal affairs of the European Union in the agreement of European leaders reached on Dec 9, 2011. Subsection IIID Appendix on European Central Bank Large Scale Lender of Last Resort considers the policies of the European Central Bank. Appendix IIID Euro Zone Survival Risk analyzes the threats to survival of the European Monetary Union. Subsection IIIF Appendix on Sovereign Bond Valuation provides more technical analysis.
VA Financial Risks. The past half year has been characterized by financial turbulence, attaining unusual magnitude in recent months. Table V-1, updated with every comment in this blog, provides beginning values on Fr Jan 27 and daily values throughout the week ending on Fri Feb 3 of several financial assets. Section VIII 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 Jan 20 and the percentage change in that prior week below the label of the financial risk asset. The first five asset rows provide five 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 has been 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), modifications and new approach adopted in the Euro Summit of Oct 26 (European Commission 2011Oct26SS, 2011Oct26MRES), doubts on the larger countries in the euro zone with sovereign risks such as Spain and Italy but expanding into possibly France and Germany, the growth standstill recession and long-term unsustainable government debt in the US, worldwide deceleration of economic growth and continuing waves of inflation. The most important current shock is that resulting from the agreement by European leaders at their meeting on Dec 9 (European Council 2911Dec9), which is analyzed in VC Appendix on Fiscal Compact. European leaders reached a new agreement on Jan 30 (
http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/127631.pdf).
The dollar/euro rate is quoted as number of US dollars USD per one euro EUR, USD 1.322/EUR in the first row, first column in the block for currencies in Table V-1 for Fri Jan 27, appreciating to USD 1.3128/EUR on Mon Jan 30, or by 0.7 percent. The dollar appreciated because fewer dollars, $1.3128, were required on Jan 30 to buy one euro than $1.322 on Jan 27. Table V-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 used throughout this blog is required to maintain consistency in characterizing movements of the exchange rate in Table V-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 1.3129/EUR on Jan 30; 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 Jan 27, to the last business day of the current week, in this case Fri Feb 3, such as appreciation by 0.5 percent to USD 1.316/EUR by Feb 3; 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 0.5 percent from the rate of USD 1.322/EUR on Fri Jan 27 to the rate of USD 1.316/EUR on Fri Feb 3 {[(1.316/1.322) – 1]100 = -0.5% and depreciated by 0.1 percent from the rate of USD 1.3148 on Thu Feb 2 to USD 1.316/EUR on Fri Feb 3 {[(1.316/1.3148) -1]100 = 0.1%}. Other factors constant, appreciation of the dollar relative to the euro is caused by increasing risk aversion, with rising uncertainty on European sovereign risks increasing dollar-denominated assets with sales of risk financial investments. Funds move away from higher yielding risk financial assets to the safety of dollar investments. When risk aversion declines, funds have been moving away from safe assets in dollars to risk financial assets.
V-I, Weekly Financial Risk Assets Dec 30 to Feb 3, 2012
| Fri Dec 27, 2011 | Mon 30 | Tue 31 | Wed 1 | Thu 2 | Fri 3 |
| USD/EUR 1.322 -2.2% | 1.3128 0.7% 0.7% | 1.3078 1.1% 0.4% | 1.3158 0.5% -0.6% | 1.3148 0.5% 0.1% | 1.316 0.5% -0.1% |
| JPY/ USD 76.68 0.4% | 76.2870 0.5% 0.5% | 76.2315 0.6% 0.1% | 76.2245 0.6% 0.0% | 76.2200 0.6% 0.0% | 76.58 0.1% -0.5% |
| CHF/ USD 0.919 1.6% | 0.9180 0.1% 0.1% | 0.9207 -0.2% -0.3% | 0.9154 0.4% 0.6% | 0.9166 0.3% -0.1% | 0.919 0.0% -0.3% |
| CHF/ EUR 1.2064 0.1% | 1.2052 0.1% 0.1% | 1.2042 0.2% 0.1% | 1.2044 0.2% 0.0% | 1.2051 0.1% -0.1% | 1.2080 -0.1% -0.2% |
| USD/ AUD 1.066 0.9381 1.7% | 1.0595 0.9438 -0.6% -0.6% | 1.0615 0.9421 -0.4% 0.2% | 1.0705 0.9341 0.4% 0.8% | 1.0714 0.9334 0.5% 0.1% | 1.0772 0.9283 1.0% 0.5% |
| 10 Year T Note 1.893 | 1.85 | 1.79 | 1.83 | 1.82 | 1.923 |
| 2 Year T Note 0.215 | 0.21 | 0.21 | 0.22 | 0.22 | 0.234 |
| German Bond 2Y 0.19 10Y 1.86 | 2Y 0.17 10Y 1.79 | 2Y 0.16 10Y 1.79 | 2Y 0.18 10Y 1.85 | 2Y 0.21 10Y 1.85 | 2Y 0.20 10Y 1.93 |
| DJIA 12660.46 -0.5% | 12653.72 -0.1% -0.1% | 12632.91 -0.2% -0.2% | 12716.46 0.4% 0.7% | 12705.41 0.4% -0.1% | 12862.23 1.6% 1.2% |
| DJ Global 1928.27 1.1% | 1911.75 -0.9% -0.9 | 1915.01 -0.7% 0.2% | 1943.82 0.8% 1.5% | 1951.71 1.2% 0.4% | 1976.98 2.5% 1.3% |
| DJ Asia Pacific 1255.99 1.9% | 1247.50 -0.7% -0.7% | 1256.17 0.0% 0.7% | 1259.86 0.3% 0.3% | 1274.19 1.4% 1.1% | 1272.70 1.3% -0.1% |
| Nikkei 8841.22 0.9% | 8793.05 -0.5% -0.5% | 8802.51 -0.4% 0.1% | 8809.79 -0.4% 0.1% | 8876.82 0.4% 0.8% | 8831.93 -0.1% -0.5% |
| Shanghai 2319.12 closed 1.0% | 2285.04 -1.5% -1.5% | 2292.61 -1.1% 0.3% | 2268.08 -2.2% -1.1% | 2312.56 -0.3% 1.9% | 2330.40 0.5% 0.8% |
| DAX 6511.98 1.7% | 6444.45 -1.0% -1.0% | 6458.91 -0.8% 0.2% | 6616.64 1.6% 2.4% | 6655.63 2.2% 0.6% | 6766.67 3.9% 1.7% |
| DJ UBS Comm. 146.62 3.8% | 145.05 -1.1% -1.1% | 144.16 -1.7% -0.6% | 144.32 -1.6% 0.1% | 144.45 -1.5% 0.1% | 145.54 -0.7% 0.8% |
| WTI $ B 99.56 1.1% | 98.86 -0.7% -0.7% | 98.39 -1.2% -0.5% | 93.37 -6.2% -5.1% | 96.60 -2.9% 3.4% | 97.78 -1.8% 1.2% |
| Brent $/B 111.51 1.2% | 110.91 -0.5% -0.5% | 110.98 -0.5% 0.1% | 111.76 0.2% 0.7% | 112.46 0.8% 0.6% | 114.50 2.7% 1.8% |
| Gold $/OZ 1740.9 4.5% | 1732.1 -0.5% -0.5% | 1749.0 0.5% 1.0% | 1746.5 0.3% -0.1% | 1762.4 1.2% 0.9% | 1728.5 -0.7% -1.9% |
Note: USD: US dollar; JPY: Japanese Yen; CHF: Swiss
Franc; AUD: Australian dollar; Comm.: commodities; OZ: ounce
Sources: http://www.bloomberg.com/markets/
http://professional.wsj.com/mdc/page/marketsdata.html?mod=WSJ_hps_marketdata
Table V-1 shows mixed results in valuations of risk financial assets in the week of Jan 30 to Feb 3. Risk aversion returned in earlier weeks because of the uncertainties on rapidly moving political development in Greece, Italy, Spain and perhaps even in France and Germany. Most currency movements in Table V-1 reflect alternating bouts of risk aversion because of continuing doubts on the success of the new agreement on Europe reached in the week of Dec 9 and the new agreement reached on Jan 30. Risk aversion is observed in foreign exchange markets with daily trading of $4 trillion. The dollar had fluctuated in a tight range with hardly any changes but depreciated after advanced guidance by the Federal Open Market Committee (FOMC) that fed funds rates may remain at 0 to ¼ percent until the latter part of 2014 (http://www.federalreserve.gov/newsevents/press/monetary/20120125a.htm http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120125.pdf). The JPY appreciated initially during the week but ended only 0.1 percent stronger. VB Appendix on Safe Haven Currencies analyzes the burden on the Japanese economy of yen appreciation. The Swiss franc was flat relative to the dollar and depreciated 0.1 percent relative to the euro. The Australian dollar appreciated to USD 1.0772/AUD on Feb 3 for cumulative appreciation of 1.7 percent relative to USD 1.066/AUD on Jan 27.
Risk aversion is captured by flight of investors from risk financial assets to the government securities of the US and Germany. Increasing aversion is captured by decrease of the yield of the 10-year Treasury note from 2.326 percent on Oct 28 to 1.964 percent on Fri Nov 25, 2.065 on Dec 9 and collapse to 1.847 percent by Fr Dec 16. The yield of the 10-year Treasury rose from 1.81 percent on Mon Dec 19 to 2.027 percent on Fri Dec 23, falling to 1.871 percent on Fri Dec 30 and increasing to 1.957 percent on Jan 6 but falling again to 1.869 on Jan 13. More relaxed risk aversion is shown in the increase of the yield of the 10-year Treasury to 2.026 percent on Fri Jan 20 but renewed aversion with decline to 1.893 percent on Jan 27 and 1.923 on Feb 3, as shown in Table V-1. The 10-year Treasury yield is still at a level well below consumer price inflation of 3.0 percent in the 12 months ending in Dec (http://cmpassocregulationblog.blogspot.com/2012/01/world-inflation-waves-united-states.html). Treasury securities continue to be safe haven for investors fearing risk but with concentration in shorter maturities such as the two-year Treasury with stable low yield of 0.226 percent on Dec 16 but rising to 0.28 percent on Dec 23 and then falling to 0.239 percent on Fri Dec 30, increasing to 0.256 on Fri Jan 6 but falling to 0.225 on Jan 13. The yield of the two-year Treasury rose to 0.242 percent on Fri Jan 20 in an environment of more relaxed risk aversion but fell to 0.215 on Fri Jan 27 in another shock of aversion, standing at 0.234 on Feb 3, as shown in Table V-1. Investors are willing to sacrifice yield relative to inflation in defensive actions to avoid turbulence in valuations of risk financial assets but may be managing duration more carefully. During the financial panic of Sep 2008, funds moved away from risk exposures to government securities.
A similar risk aversion phenomenon occurred in Germany. The flash estimate of euro zone CPI inflation is at 2.7 percent for the 12 months ending in Jan 2012 (http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-01022012-AP/EN/2-01022012-AP-EN.PDF) but the yield of the two-year German government bond fell from 0.32 percent on Dec 9 to 0.22 percent on Dec 16, virtually equal to the yield of the two-year Treasury note of the US and settled at 0.23 percent on Fri Dec 23, collapsing to 0.14 percent on Fri Dec 30 and rising to 0.17 percent on Jan 6 and 0.15 percent on Jan 13. The yield of the two-year government bond of Germany increased to 0.21 percent in an environment of marginally more relaxed risk aversion on Jan 20 but fell to 0.19 percent on Jan 27 and 0.20 percent on Feb 3, as shown in Table V-1. The yield of the ten-year German government bond has also collapsed from 2.15 percent on Dec 9 to 1.85 percent on Dec 16, rising to 1.96 percent on Dec 23, falling to 1.83 percent on Dec 30, which was virtually equal to the yield of 1.871 percent of the US ten-year Treasury note. The ten-year government bond of Germany traded at 1.85 percent on Jan 6 and at 1.77 percent on Jan 13, increasing to 1.93 percent on Jan 20 but falling to 1.86 percent on Jan 27 and rising to 1.93 percent on Feb 3, as shown in Table V-1. Safety overrides inflation-adjusted yield but there could be duration aversion. Turbulence has also affected the market for German sovereign bonds.
There was strong performance of equity indexes in Table V-1 during the week of Feb 3. Germany’s Dax rose 3.9 percent. DJIA gained 1.6 percent in the week of Fri Feb 3. Dow Global increased 2.5 percent in the week of Feb 3. Japan’s Nikkei Average fell 0.1 percent. Dow Asia Pacific rose 1.3 percent.
Financial risk assets increase during moderation of risk aversion in carry trades from zero interest rates and fall during increasing risk aversion. Commodities were mixed in the week of Feb 27. The DJ UBS Commodities Index fell 0.7 percent. WTI lost 1.8 percent but Brent increased 2.7 percent. Gold lost 0.7 percent.
VB Appendix on Safe Haven Currencies. Safe-haven currencies, such as the Swiss franc (CHF) and the Japanese yen (JPY) have been under threat of appreciation but also remained relatively unchanged. A characteristic of the global recession would be struggle for maintaining competitiveness by policies of regulation, trade and devaluation (Pelaez and Pelaez, Government Intervention in Globalization: Regulation, Trade and Devaluation War (2008c)). Appreciation of the exchange rate causes two major effects on Japan.
1. Trade. Consider an example with actual data (Pelaez and Pelaez, Government Intervention in Globalization: Regulation, Trade and Devaluation Wars (2008c), 70-72). The yen traded at JPY 117.69/USD on Apr 2, 2007 and at JPY 102.77/USD on Apr 2, 2008, or appreciation of 12.7 percent. This meant that an export of JPY 10,000 to the US sold at USD 84.97 on Apr 2, 2007 [(JPY 10,000)/(USD 117.69/USD)], rising to USD 97.30 on Apr 2, 2008 [(JPY 10,000)/(JPY 102.77)]. If the goods sold by Japan were invoiced worldwide in dollars, Japanese’s companies would suffer a reduction in profit margins of 12.7 percent required to maintain the same dollar price. An export at cost of JPY 10,000 would only bring JPY 8,732 when converted at JPY 102.77 to maintain the price of USD 84.97 (USD 84.97 x JPY 102.77/USD). If profit margins were already tight, Japan would be uncompetitive and lose revenue and market share. The pain of Japan from dollar devaluation is illustrated by Table 58 in the Nov 6 comment of this blog (http://cmpassocregulationblog.blogspot.com/2011/10/slow-growth-driven-by-reducing-savings.html): The yen traded at JPY 110.19/USD on Aug 18, 2008 and at JPY 75.812/USD on Oct 28, 2011, for cumulative appreciation of 31.2 percent. Cumulative appreciation from Sep 15, 2010 (JPY 83.07/USD) to Oct 28, 2011 (JPY 75.812) was 8.7 percent. The pain of Japan from dollar devaluation continues as illustrated by Table VI-6 in Section VII Valuation of Risk Financial Assets: The yen traded at JPY 110.19/USD on Aug 18, 2008 and at JPY 78.08/USD on Dec 23, 2011, for cumulative appreciation of 29.1 percent. Cumulative appreciation from Sep 15, 2010 (JPY 83.07/USD) to Dec 23, 2011 (JPY 78.08) was 6.0 percent.
2. Foreign Earnings and Investment. Consider the case of a Japanese company receiving earnings from investment overseas. Accounting the earnings and investment in the books in Japan would also result in a loss of 12.7 percent. Accounting would show fewer yen for investment and earnings overseas.
There is a point of explosion of patience with dollar devaluation and domestic currency appreciation. Andrew Monahan, writing on “Japan intervenes on yen to cap sharp rise,” on Oct 31, 2011, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970204528204577009152325076454.html?mod=WSJPRO_hpp_MIDDLETopStories), analyzes the intervention of the Bank of Japan, at request of the Ministry of Finance, on Oct 31, 2011. Traders consulted by Monahan estimate that the Bank of Japan sold JPY 7 trillion, about $92.31 billion, against the dollar, exceeding the JPY 4.5 trillion on Aug 4, 2011. The intervention caused an increase of the yen rate to JPY 79.55/USD relative to earlier trading at a low of JPY 75.31/USD. The JPY appreciated to JPY76.88/USD by Fri Nov 18 for cumulative appreciation of 3.4 percent from JPY 79.55 just after the intervention. The JPY appreciated another 0.3 percent in the week of Nov 18 but depreciated 1.1 percent in the week of Nov 25. There was mild depreciation of 0.3 percent in the week of Dec 2 that was followed by appreciation of 0.4 percent in the week of Dec 9. The JPY was virtually unchanged in the week of Dec 16 with depreciation of 0.1 percent but depreciated by 0.5 percent in the week of Dec 23, appreciating by 1.5 percent in the week of Dec 30. Historically, interventions in yen currency markets have been unsuccessful (Pelaez and Pelaez, The Global Recession Risk (2007), 107-109). Interventions are even more difficult currently with daily trading of some $4 trillion in world currency markets. Risk aversion with zero interest rates in the US diverts hot capital movements toward safe-haven currencies such as Japan, causing appreciation of the yen. Mitsuru Obe, writing on Nov 25, on “Japanese government bonds tumble,” published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970204452104577060231493070676.html?mod=WSJ_hp_LEFTWhatsNewsCollection), analyzes the increase in yields of the Japanese government bond with 10 year maturity to a high for one month of 1.025 percent at the close of market on Nov 25. Thin markets in after-hours trading may have played an important role in this increase in yield but there may have been an effect of a dreaded reduction in positions of bonds by banks under pressure of reducing assets. The report on Japan sustainability by the IMF (2011JSRNov23, 2), analyzes how rising yields could threaten Japan:
· “As evident from recent developments, market sentiment toward sovereigns with unsustainably large fiscal imbalances can shift abruptly, with adverse effects on debt dynamics. Should JGB yields increase, they could initiate an adverse feedback loop from rising yields to deteriorating confidence, diminishing policy space, and a contracting real economy.
· Higher yields could result in a withdrawal of liquidity from global capital markets, disrupt external positions and, through contagion, put upward pressure on sovereign bond yields elsewhere.”
Exchange rate controls by the Swiss National Bank (SNB) fixing the rate at a minimum of CHF 1.20/EUR (http://www.snb.ch/en/mmr/reference/pre_20110906/source/pre_20110906.en.pdf) has prevented flight of capital into the Swiss franc. The Swiss franc remained unchanged relative to the USD in the week of Dec 23 and appreciated 0.2 percent in the week of Dec 30 relative to the USD and 0.5 percent relative to the euro, as shown in Table II-1. Risk aversion is evident in the depreciation of the Australian dollar by cumulative 2.5 percent in the week of Fr Dec 16 after no change in the week of Dec 9. In the week of Dec 23, the Australian dollar appreciated 1.9 percent, appreciating another 0.5 percent in the week of Dec 30 as shown in Table II-1. Risk appetite would be revealed by carry trades from zero interest rates in the US and Japan into high yielding currencies such as in Australia with appreciation of the Australian dollar (see Pelaez and Pelaez, Globalization and the State, Vol. II (2008b), 202-4, Pelaez and Pelaez, Government Intervention in Globalization (2008c), 70-4).
VC Appendix on Fiscal Compact. There are three types of actions in Europe to steer the euro zone away from the threats of fiscal and banking crises: (1) fiscal compact; (2) enhancement of stabilization tools and resources; and (3) bank capital requirements. The first two consist of agreements by the Euro Area Heads of State and government while the third one consists of measurements and recommendations by the European Banking Authority.
1. Fiscal Compact. The “fiscal compact” consists of (1) conciliation of fiscal policies and budgets within a “fiscal rule”; and (2) establishment of mechanisms of governance, monitoring and enforcement of the fiscal rule.
i. Fiscal Rule. The essence of the fiscal rule is that “general government budgets shall be balanced or in surplus” by compliance of members countries that “the annual structural deficit does not exceed 0.5% of nominal GDP” (European Council 2011Dec9, 3). Individual member states will create “an automatic correction mechanism that shall be triggered in the event of deviation” (European Council 2011Dec9, 3). Member states will define their automatic correction mechanisms following principles proposed by the European Commission. Those member states falling into an “excessive deficit procedure” will provide a detailed plan of structural reforms to correct excessive deficits. The European Council and European Commission will monitor yearly budget plans for consistency with adjustment of excessive deficits. Member states will report in anticipation their debt issuance plans. Deficits in excess of 3 percent of GDP and/or debt in excess of 60 percent of GDP will trigger automatic consequences.
ii. Policy Coordination and Governance. The euro area is committed to following common economic policy. In accordance, “a procedure will be established to ensure that all major economic policy reforms planned by euro area member states will be discussed and coordinated at the level of the euro area, with a view to benchmarking best practices” (European Council 2011Dec9, 5). Governance of the euro area will be strengthened with regular euro summits at least twice yearly.
2. Stabilization Tools and Resources. There are several enhancements to the bailouts of member states.
i. Facilities. The European Financial Stability Facility (EFSF) will use leverage and the European Central Bank as agent of its market operations. The European Stability Mechanism (ESM) or permanent bailout facility will be operational as soon as 90 percent of the capital commitments are ratified by member states. The ESM is planned to begin in Jul 2012.
ii. Financial Resources. The overall ceiling of the EFSF/ESM of €500 billion (USD 670 billion) will be reassessed in Mar 2012. Measures will be taken to maintain “the combined effective lending capacity of EUR 500 billion” (European Council 2011Dec9, 6). Member states will “consider, and confirm within 10 days, the provision of additional resources for the IMF of up to EUR 200 billion (USD 270 billion), in the form of bilateral loans, to ensure that the IMF has adequate resources to deal with the crisis. We are looking forward to parallel contributions from the international community” (European Council 2011Dec9, 6). Matthew Dalton and Matina Stevis, writing on Dec 20, 2011, on “Euro Zone Agrees to New IMF Loans,” published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970204791104577107974167166272.html?mod=WSJPRO_hps_MIDDLESecondNews), inform that at a meeting on Dec 20, finance ministers of the euro-zone developed plans to contribute €150 billion in bilateral loans to the IMF as provided in the agreement of Dec 9. Bailouts “will strictly adhere to the well established IMF principles and practices.” There is a specific statement on private sector involvement and its relation to recent experience: “We clearly reaffirm that the decisions taken on 21 July and 26/27 October concerning Greek debt are unique and exceptional; standardized and identical Collective Action clauses will be included, in such a way as to preserve market liquidity, in the terms and conditions of all new euro government bonds” (European Council 2011Dec9, 6). Will there be again “unique and exceptional” conditions? The ESM is authorized to take emergency decisions with “a qualified majority of 85% in case the Commission and the ECB conclude that an urgent decision related to financial assistance is needed when the financial and economic sustainability of the euro area is threatened” (European Council 2011Dec9, 6).
3. Bank Capital. The European Banking Authority (EBA) finds that European banks have a capital shortfall of €114.7 billion (http://stress-test.eba.europa.eu/capitalexercise/Press%20release%20FINAL.pdf). To avoid credit difficulties, the EBA recommends “that the credit institutions build a temporary capital buffer to reach a 9% Core Tier 1 ratio by 30 June 2012” (http://stress-test.eba.europa.eu/capitalexercise/EBA%20BS%202011%20173%20Recommendation%20FINAL.pdf 6). Patrick Jenkins, Martin Stabe and Stanley Pignal, writing on Dec 9, 2011, on “EU banks slash sovereign holdings,” published in the Financial Times (http://www.ft.com/intl/cms/s/0/a6d2fd4e-228f-11e1-acdc-00144feabdc0.html#axzz1gAlaswcW), analyze the balance sheets of European banks released by the European Banking Authority. They conclude that European banks have reduced their holdings of riskier sovereign debt of countries in Europe by €65 billion from the end of 2010 to Sep 2011. Bankers informed that the European Central Bank and hedge funds acquired those exposures that represent 13 percent of their holdings of debt to Greece, Ireland, Italy, Portugal and Spain, which are down to €513 billion by the end of IIIQ2011.
VD Appendix on European Central Bank Large Scale Lender of Last Resort. European Central Bank. The European Central Bank (ECB) has been pressured to assist in the bailouts by acquiring sovereign debts. The ECB has been providing liquidity lines to banks under pressure and has acquired sovereign debts but not in the scale desired by authorities. In an important statement to the European Parliament, the President of the ECB Mario Draghi (2011Dec1) opened the possibility of further ECB actions but after a decisive “fiscal compact:”
“What I believe our economic and monetary union needs is a new fiscal compact – a fundamental restatement of the fiscal rules together with the mutual fiscal commitments that euro area governments have made.
Just as we effectively have a compact that describes the essence of monetary policy – an independent central bank with a single objective of maintaining price stability – so a fiscal compact would enshrine the essence of fiscal rules and the government commitments taken so far, and ensure that the latter become fully credible, individually and collectively.
We might be asked whether a new fiscal compact would be enough to stabilise markets and how a credible longer-term vision can be helpful in the short term. Our answer is that it is definitely the most important element to start restoring credibility.
Other elements might follow, but the sequencing matters. And it is first and foremost important to get a commonly shared fiscal compact right. Confidence works backwards: if there is an anchor in the long term, it is easier to maintain trust in the short term. After all, investors are themselves often taking decisions with a long time horizon, especially with regard to government bonds.
A new fiscal compact would be the most important signal from euro area governments for embarking on a path of comprehensive deepening of economic integration. It would also present a clear trajectory for the future evolution of the euro area, thus framing expectations.”
An important statement of Draghi (2011Dec15) focuses on the role of central banking: “You all know that the statutes of the ECB inherited this important principle and that central bank independence and the credible pursuit of price stability go hand in hand.”
Draghi (2011Dec19) explains measures to ensure “access to funding markets” by euro zone banks:
§ “We have decided on three-year refinancing operations to support the supply of credit to the euro area economy. These measures address the risk that persistent financial markets tensions could affect the capacity of euro area banks to obtain refinancing over longer horizons.
§ Earlier, in October, the Governing Council had already decided to have two more refinancing operations with a maturity of around one year.
§ Also, it was announced then that in all refinancing operations until at least the first half of 2012 all liquidity demand by banks would be fully allotted at fixed rate.
§ Funding via the covered bonds market was also facilitated by the ECB deciding in October to introduce a new Covered Bond Purchase Programme of €40 billion.
§ Funding in US dollar is facilitated by lowering the pricing on the temporary US dollar liquidity swap arrangements.”
Lionel Barber and Ralph Atkins interviewed Mario Draghi on Dec 14 with the transcript published in the Financial Times on Dec 18 (http://www.ft.com/intl/cms/s/0/25d553ec-2972-11e1-a066-00144feabdc0.html#axzz1gzoHXOj6) as “FT interview transcript: Mario Draghi.” A critical question in the interview is if the new measures are a European version of quantitative easing. Draghi analyzes the difference between the measures of the European Central Bank (ECB) and quantitative easing such as in Japan, US and UK:
1. The measures are termed “non-standard” instead of “unconventional.” While quantitative easing attempts to lower the yield of targeted maturities, the three-year facility operates through the “bank channel.” Quantitative easing would not be feasible because the ECB is statutorily prohibited of funding central governments. The ECB would comply with its mandate of medium-term price stability.
2. There is a critical difference in the two programs. Quantitative easing has been used as a form of financial repression known as “directed lending.” For example, the purchase of mortgage-backed securities more recently or the suspension of the auctions of 30-year bonds in response to the contraction early in the 2000s has the clear objective of directing spending to housing. The ECB gives the banks entire discretion on how to use the funding within their risk/return decisions, which could include purchase of government bonds.
The question on the similarity of the ECB three-year lending facility and quantitative easing is quite valid. Tracy Alloway, writing on Oct 10, 2011, on “Investors worry over cheap ECB money side effects,” published in the Financial Times (http://www.ft.com/intl/cms/s/0/d2f87d16-f339-11e0-8383-00144feab49a.html#axzz1hAqMH1vn), analyzes the use of earlier long-term refinancing operations (LTRO) of the ECB. LTROs by the ECB in Jun, Sep and Dec 2009 lent €614 billion at 1 percent. Alloway quotes estimates of Deutsche Bank that banks used €442billion to acquire assets with higher yields. Carry trades developed from LTRO funds at 1 percent into liquid investments at a higher yield to earn highly profitable spreads. Alloway quotes estimates of Morgan Stanley that European debt of GIIPS (Greece, Ireland, Italy, Portugal and Spain) in European bank balance sheets is €700 billion. Tracy Alloway, writing on Dec 21, 2011, on “Demand for ECB loans rises to €489bn,” published in the Financial Times (http://www.ft.com/intl/cms/s/0/d6ddd0ae-2bbd-11e1-98bc-00144feabdc0.html#axzz1hAqMH1vn), informs that European banks borrowed the largest value of €489 billion in all LTROs of the ECB. Tom Fairless and David Cottle, writing on Dec 21, 2011, on “ECB sees record refinancing demand,” published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970204464404577111983838592746.html?mod=WSJPRO_hpp_LEFTTopStories), inform that the first of three operations of the ECB lent €489.19 billion, or $639.96 billion, to 523 banks. Three such LTROs could add to $1.9 trillion, which is not far from the value of quantitative easing in the US of $2.5 trillion. Fairless and Cottle find that there could be renewed hopes that banks could use the LTROs to support euro zone bond markets. It is possible that there could be official moral suasion by governments on banks to increase their holdings of government bonds or at least not to sell existing holdings. Banks are not free to choose assets in evaluation of risk and returns. Floods of cheap money at 1 percent per year induce carry trades to high-risk assets and not necessarily financing of growth with borrowing and lending decisions constrained by shocks of confidence.
The LTROs of the ECB are not very different from the liquidity facilities of the Fed during the financial crisis. Kohn (2009Sep10) finds that the trillions of dollars in facilities provided by the Fed (see Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 157-64, Regulation of Banks and Finance (2009b), 224-7) could fall under normal principles of “lender of last resort” of central banks:
“The liquidity measures we took during the financial crisis, although unprecedented in their details, were generally consistent with Bagehot's principles and aimed at short-circuiting these feedback loops. The Federal Reserve lends only against collateral that meets specific quality requirements, and it applies haircuts where appropriate. Beyond the collateral, in many cases we also have recourse to the borrowing institution for repayment. In the case of the TALF, we are backstopped by the Treasury. In addition, the terms and conditions of most of our facilities are designed to be unattractive under normal market conditions, thus preserving borrowers' incentives to obtain funds in the market when markets are operating normally. Apart from a very small number of exceptions involving systemically important institutions, such features have limited the extent to which the Federal Reserve has taken on credit risk, and the overall credit risk involved in our lending during the crisis has been small.
In Ricardo's view, if the collateral had really been good, private institutions would have lent against it. However, as has been recognized since Bagehot, private lenders, acting to protect themselves, typically severely curtail lending during a financial crisis, irrespective of the quality of the available collateral. The central bank--because it is not liquidity constrained and has the infrastructure in place to make loans against a variety of collateral--is well positioned to make those loans in the interest of financial stability, and can make them without taking on significant credit risk, as long as its lending is secured by sound collateral. A key function of the central bank is to lend in such circumstances to contain the crisis and mitigate its effects on the economy.”
The Bagehot (1873) principle is that central banks should provide a safety net, lending to temporarily illiquid but solvent banks and not to insolvent banks (see Cline 2001, 2002; Pelaez and Pelaez, International Financial Architecture (2005), 175-8). Kohn (2009Apr18) characterizes “quantitative easing” as “large scale purchases of assets:”
“Another aspect of our efforts to affect financial conditions has been the extension of our open market operations to large-scale purchases of agency mortgage-backed securities (MBS), agency debt, and longer-term Treasury debt. We initially announced our intention to undertake large-scale asset purchases last November, when the federal funds rate began to approach its zero lower bound and we needed to begin applying stimulus through other channels as the economic contraction deepened. These purchases are intended to reduce intermediate- and longer-term interest rates on mortgages and other credit to households and businesses; those rates influence decisions about investments in long-lived assets like houses, consumer durable goods, and business capital. In ordinary circumstances, the typically quite modest volume of central bank purchases and sales of such assets has only small and temporary effects on their yields. However, the extremely large volume of purchases now underway does appear to have substantially lowered yields. The decline in yields reflects "preferred habitat" behavior, meaning that there is not perfect arbitrage between the yields on longer-term assets and current and expected short-term interest rates. These preferences are likely to be especially strong in current circumstances, so that long-term asset prices rise and yields fall as the Federal Reserve acquires a significant portion of the outstanding stock of securities held by the public.”
Non-standard ECB policy and unconventional Fed policy have a common link in the scale of implementation or policy doses. Direct lending by the central bank to banks is the function “large scale lender of last resort.” If there is moral suasion by governments to coerce banks into increasing their holdings of government bonds, the correct term would be financial repression.
An important additional measure discussed by Draghi (2011Nov19) is relaxation on the collateral pledged by banks in LTROs:
“Some banks’ access to refinancing operations may be restricted by lack of eligible collateral. To overcome this, a temporary expansion of the list of collateral has been decided. Furthermore, the ECB intends to enhance the use of bank loans as collateral in Eurosystem operations. These measures should support bank lending, by increasing the amount of assets on euro area banks’ balance sheets that can be used to obtain central bank refinancing.”
There are collateral concerns about European banks. David Enrich and Sara Schaefer Muñoz, writing on Dec 28, on “European bank worry: collateral,” published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970203899504577126430202451796.html?mod=WSJPRO_hpp_LEFTTopStories), analyze the strain on bank funding from a squeeze in the availability of high-quality collateral as guarantee in funding. High-quality collateral includes government bonds and investment-grade non-government debt. There could be difficulties in funding for a bank without sufficient available high-quality collateral to offer in guarantee of loans. It is difficult to assess from bank balance sheets the availability of sufficient collateral to support bank funding requirements. There has been erosion in the quality of collateral as a result of the debt crisis and further erosion could occur. Perceptions of counterparty risk among financial institutions worsened the credit/dollar crisis of 2007 to 2009. The banking theory of Diamond and Rajan (2000, 2001a, 2001b) and the model of Diamond Dybvig (1983, 1986) provide the analysis of bank functions that explains the credit crisis of 2007 to 2008 (see Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 155-7, 48-52, Regulation of Banks and Finance (2009b), 52-66, 217-24). In fact, Rajan (2005, 339-41) anticipated the role of low interest rates in causing a hunt for yields in multiple financial markets from hedge funds to emerging markets and that low interest rates foster illiquidity. Rajan (2005, 341) argued:
“The point, therefore, is that common factors such as low interest rates—potentially caused by accommodative monetary policy—can engender excessive tolerance for risk on both sides of financial transactions.”
A critical function of banks consists of providing transformation services that convert illiquid risky loans and investment that the bank monitors into immediate liquidity such as unmonitored demand deposits. Credit in financial markets consists of the transformation of asset-backed securities (SRP) constructed with monitoring by financial institutions into unmonitored immediate liquidity by sale and repurchase agreements (SRP). In the financial crisis financial institutions distrusted the quality of their own balance sheets and those of their counterparties in SRPs. The financing counterparty distrusted that the financed counterparty would not repurchase the assets pledged in the SRP that could collapse in value below the financing provided. A critical problem was the unwillingness of banks to lend to each other in unsecured short-term loans. Emse Bartha, writing on Dec 28, on “Deposits at ECB hit high,” published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970204720204577125913779446088.html?mod=WSJ_hp_LEFTWhatsNewsCollection), informs that banks deposited €453.034 billion, or $589.72 billion, at the ECB on Dec 28, which is a record high in two consecutive days. The deposit facility is typically used by banks when they do prefer not to extend unsecured loans to other banks. In addition, banks borrowed €6.225 billion from the overnight facility on Dec 28, when in normal times only a few hundred million euro are borrowed. The collateral issues and the possible increase in counterparty risk occurred a week after large-scale lender of last resort by the ECB in the value of €489 billion in the prior week. The ECB may need to extend its lender of last resort operations.
The financial reform of the United States around the proposal of a national bank by Alexander Hamilton (1780) to develop the money economy with specialization away from the barter economy is credited with creating the financial system that brought prosperity over a long period (see Pelaez 2008). Continuing growth and prosperity together with sound financial management earned the US dollar the role as reserve currency and the AAA rating of its Treasury securities. McKinnon (2011Dec18) analyzes the resolution of the European debt crisis by comparison with the reform of Alexander Hamilton. Northern states of the US had financed the revolutionary war with the issue of paper notes that were at risk of default by 1890. Alexander Hamilton proposed the purchase of the states’ paper notes by the Federal government without haircuts. McKinnon (2011Dec18) describes the conflicts before passing the assumption bill in 1790 for federal absorption of the debts of states. Other elements in the Hamilton reform consisted of creation of a market for US Treasury bonds by their use as paid-in capital in the First Bank of the United States. McKinnon (2011Dec18) finds growth of intermediation in the US by the branching of the First Bank of the United States throughout several states, accepting deposits to provide commercial short-term credit. The reform consolidated the union of states, fiscal credibility for the union and financial intermediation required for growth. The reform also introduced low tariffs and an excise tax on whisky to service the interest on the federal debt. Trade relations among members of the euro zone are highly important to economic activity. There are two lessons drawn by McKinnon (2011Dec18) from the experience of Hamilton for the euro zone currently. (1) The reform of Hamilton included new taxes for the assumption of debts of states with concrete provisions for their credibility. (2) Commercial lending was consolidated with a trusted bank both for accepting private deposits and for commercial lending, creating the structure of financial intermediation required for growth.
VE Appendix Euro Zone Survival Risk. Markets have been dominated by rating actions of Standard & Poor’s Ratings Services (S&PRS) (2012Jan13) on 16 members of the European Monetary Union (EMU) or eurozone. The actions by S&PRS (2012Jan13) are of several types:
1. Downgrades by two notches of long-term credit ratings of Cyprus (from BBB/Watch/NegA-3+ to BB+/Neg/B), Italy (from A/Watch Neg/A-1 to BBB+/Neg/A-2), Portugal (from BBB-/Watch Neg/A-3 to BB/Neg/B) and Spain (from AA-/Watch Neg/A-1+ to A/Neg/A-1).
2. Downgrades by one notch of long-term credit ratings of Austria (from AAA/Watch Neg/A-1+ to AA+/Neg/A-1+), France (from AAA/Watch Neg/A-1+ to AA+/Neg A-1+), Malta (from A/Watch, Neg/A-1 to A-/Neg/A-2), Slovakia (from A+/Watch Neg/A-1 to A/Stable/A-1) and Slovenia (AA-/Watch Neg/A-1+ to A+/Neg/A-1).
3. Affirmation of long-term ratings of Belgium (AA/Neg/A-1+), Estonia (AA-/Neg/A-1+), Finland (AAA/Neg/A-1+), Germany (AAA/Stable/A-1+), Ireland (BBB+/Neg/A-2), Luxembourg (AAA/Neg/A-1+) and the Netherlands (AAA/Neg/A-1+) with removal from CreditWatch.
4. Negative outlook on the long-term credit ratings of Austria, Belgium, Cyprus, Estonia, Finland, France, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovenia and Spain, meaning that S&PRS (2012Jan13) finds that the ratings of these sovereigns have a chance of at least 1-to-3 of downgrades in 2012 or 2013.
S&PRS (2012Jan13) finds that measures by European policymakers may not be sufficient to contain sovereign risks in the eurozone. The sources of stress according to S&PRS (2012Jan13) are:
1. Worsening credit environment
2. Increases in risk premiums for many eurozone borrowers
3. Simultaneous attempts at reducing debts by both eurozone governments and households
4. More limited perspectives of economic growth
5. Deepening and protracted division among Europe’s policymakers in agreeing to approaches to resolve the European debt crisis
There is now only one major country in the eurozone with AAA rating of its long-term debt by S&PRS (2012Jan13): Germany. IIIE Appendix Euro Zone Survival Risk analyzes the hurdle of financial bailouts of euro area members by the strength of the credit of Germany alone. The sum of the debt of Italy, Spain, Portugal, Greece and Ireland is abouy $3531.6 billion. There is some simple “unpleasant bond arithmetic.” Suppose the entire debt burdens of the five countries with probability of default were to be guaranteed by France and Germany, which de facto would be required by continuing the euro zone. The sum of the total debt of these five countries and the debt of France and Germany is about $7385.1 billion, which would be equivalent to 126.3 percent of their combined GDP in 2010. Under this arrangement the entire debt of the euro zone including debt of France and Germany would not have nil probability of default. Debt as percent of Germany’s GDP would exceed 224 percent if including debt of France and 165 percent of German GDP if excluding French debt. The unpleasant bond arithmetic illustrates that there is a limit as to how far Germany and France can go in bailing out the countries with unsustainable sovereign debt without incurring severe pains of their own such as downgrades of their sovereign credit ratings. A central bank is not typically engaged in direct credit because of remembrance of inflation and abuse in the past. There is also a limit to operations of the European Central Bank in doubtful credit obligations. Charles Forelle, writing on Jan 14, 2012, on “Downgrade hurts euro rescue fund,” published by the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970204409004577159210191567778.html), analyzes the impact of the downgrades on the European Financial Stability Facility (EFSF). The EFSF is a special purpose vehicle that has not capital but can raise funds to be used in bailouts by issuing AAA-rated debt. S&P may cut the rating of the EFSF to the new lowest rating of the six countries with AAA rating, which are now down to four with the downgrades of France and Austria. The other rating agencies Moody’s and Fitch have not taken similar action. On Jan, S&PRS (2012Jan16) did cut the long-term credit rating of the EFSF to AA+ and affirmed the short-term credit rating at A-+. The decision is derived from the reduction in credit rating of the countries guaranteeing the EFSF. In the view of S&PRS (2012Jan16), there are not sufficient credit enhancements after the reduction in the creditworthiness of the countries guaranteeing the EFSF. The decision could be reversed if credit enhancements were provided.
The flow of cash from safe havens to risk financial assets is processed by carry trades from zero interest rates that are frustrated by episodes of risk aversion or encouraged with return of risk appetite. European sovereign risk crises are closely linked to the exposures of regional banks to government debt. An important form of financial repression consists of changing the proportions of debt held by financial institutions toward higher shares in government debt. The financial history of Latin America, for example, is rich in such policies. Bailouts in the euro zone have sanctioned “bailing in” the private sector, which means that creditors such as banks will participate by “voluntary” reduction of the principal in government debt (see Pelaez and Pelaez, International Financial Architecture (2005), 163-202). David Enrich, Sara Schaeffer Muñoz and Patricia Knowsmann, writing on “European nations pressure own banks for loans,” on Nov 29, 2011, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970204753404577066431341281676.html?mod=WSJPRO_hpp_MIDDLETopStories), provide important data and analysis on the role of banks in the European sovereign risk crisis. They assemble data from various sources showing that domestic banks hold 16.2 percent of Italy’s total government securities outstanding of €1,617.4 billion, 22.9 percent of Portugal’s total government securities of €103.9 billion and 12.3 percent of Spain’s total government securities of €535.3 billion. Capital requirements force banks to hold government securities to reduce overall risk exposure in balance sheets. Enrich, Schaeffer Muñoz and Knowsmann find information that governments are setting pressures on banks to acquire more government debt or at least to stop selling their holdings of government debt.
Bond auctions are also critical in episodes of risk aversion. David Oakley, writing on Jan 3, 2012, on “Sovereign issues draw euro to crunch point,” published by the Financial Times (http://www.ft.com/intl/cms/s/0/63b9d7ca-2bfa-11e1-98bc-00144feabdc0.html#axzz1iLNRyEbs), estimates total euro area sovereign issues in 2012 at €794 billion, much higher than the long-term average of €670 billion. Oakley finds that the sovereign issues are: Italy €220 billion, France €197 billion, Germany €178 billion and Spain €81 billion. Bond auctions will test the resilience of the euro. Victor Mallet and Robin Wigglesworth, writing on Jan 12, 2012, on “Spain and Italy raise €22bn in debt sales,” published in the Financial Times (http://www.ft.com/intl/cms/s/0/e22c4e28-3d05-11e1-ae07-00144feabdc0.html#axzz1j4euflAi), analyze debt auctions during the week. Spain placed €10 billion of new bonds with maturities in 2015 and 2016, which was twice the maximum planned for the auction. Italy placed €8.5 billion of one-year bills at average yield of 2.735 percent, which was less than one-half of the yield of 5.95 percent a month before. Italy also placed €3.5 billion of 136-day bills at 1.64 percent. There may be some hope in the sovereign debt market. The yield of Italy’s 10-year bond dropped from around 7.20 percent on Jan 9 to about 6.70 percent on Jan 13 and then to around 6.30 percent on Jan 20. The yield of Spain’s 10-year bond fell from about 6.60 percent on Jan 9 to around 5.20 percent on Jan 13 and then to 5.50 percent on Jan 20.
A combination of strong economic data in China analyzed in subsection VC and the realization of the widely expected downgrade could explain the strength of the European sovereign debt market. Emese Bartha, Art Patnaude and Nick Cawley, writing on January 17, 2012, on “European T-bills see solid demand,” published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970204555904577166363369792848.html?mod=WSJPRO_hpp_LEFTTopStories), analyze successful auctions treasury bills by Spain and Greece. A day after the downgrade, the EFSF found strong demand on Jan 17 for its six-month debt auction at the yield of 0.2664 percent, which is about the same as sovereign bills of France with the same maturity.
There may be some hope in the sovereign debt market. The yield of Italy’s 10-year bond dropped from around 7.20 percent on Jan 9 to about 6.70 percent on Jan 13 and then to around 6.30 percent on Jan 20. The yield of Spain’s 10-year bond fell from about 6.60 percent on Jan 9 to around 5.20 percent on Jan 13 and then to 5.50 percent on Jan 20. Paul Dobson, Emma Charlton and Lucy Meakin, writing on Jan 20, 2012, on “Bonds show return of crisis once ECB loans expire,” published in Bloomberg (http://www.bloomberg.com/news/2012-01-20/bonds-show-return-of-crisis-once-ecb-loans-expire-euro-credit.html), analyze sovereign debt and analysis of market participants. Large-scale lending of last resort by the European Central Bank, considered in VD Appendix on European Central Bank Large Scale Lender of Last Resort, provided ample liquidity in the euro zone for banks to borrow at 1 percent and lend at higher rates, including to government. Dobson, Charlton and Meakin trace the faster decline of yields of short-term sovereign debt relative to decline of yields of long-term sovereign debt. The significant fall of the spread of short relative to long yields could signal concern about the resolution of the sovereign debt while expanding lender of last resort operations have moderated relative short-term sovereign yields. Normal conditions would be attained if there is definitive resolution of long-term sovereign debt that would require fiscal consolidation in an environment of economic growth.
Charles Forelle and Stephen Fidler, writing on Dec 10, 2011, on “Questions place EU pact,” published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970203413304577087562993283958.html?mod=WSJPRO_hpp_LEFTTopStories#project%3DEUSUMMIT121011%26articleTabs%3Darticle), provide data, information and analysis of the agreement of Dec 9. There are multiple issues centering on whether investors will be reassured that the measures have reduced the risks of European sovereign obligations. While the European Central Bank has welcomed the measures, it is not yet clear of its future role in preventing erosion of sovereign debt values.
Another complicating factor is whether there will be further actions on sovereign debt ratings. On Dec 5, 2011, four days before the conclusion of the meeting of European leaders, Standard & Poor’s (2011Dec5) placed the sovereign ratings of 15 members of the euro zone on “CreditWatch with negative implications.” S&P finds five conditions that trigger the action: (1) worsening credit conditions in the euro area; (2) differences among member states on how to manage the debt crisis in the short run and on measures to move toward enhanced fiscal convergence; (3) household and government debt at high levels throughout large parts of the euro area; (4) increasing risk spreads on euro area sovereigns, including those with AAA ratings; and (5) increasing risks of recession in the euro zone. S&P also placed the European Financial Stability Facility (EFSF) in CreditWatch with negative implications (http://www.standardandpoors.com/ratings/articles/en/us/?articleType=HTML&assetID=1245325307963). On Dec 9, 2011, Moody’s Investors Service downgraded the ratings of the three largest French banks (http://www.moodys.com/research/Moodys-downgrades-BNP-Paribass-long-term-ratings-to-Aa3-concluding--PR_232989 http://www.moodys.com/research/Moodys-downgrades-Credit-Agricole-SAs-long-term-ratings-to-Aa3--PR_233004 http://www.moodys.com/research/Moodys-downgrades-Socit-Gnrales-long-term-ratings-to-A1--PR_232986 ).
Improving equity markets and strength of the euro appear related to developments in sovereign debt negotiations and markets. Alkman Granitsas and Costas Paris, writing on Jan 29, 2012, on “Greek debt deal, new loan agreement to finish next week,” published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970204573704577189021923288392.html?mod=WSJPRO_hpp_LEFTTopStories), inform that Greece and its private creditors were near finishing a deal of writing off €100 billion, about $132 billion, of Greece’s debt depending on the conversations between Greece, the euro area and the IMF on the new bailout. An agreement had been reached in Oct 2011 for a new package of fresh money in the amount of €130 billion to fill needs through 2015 but was contingent on haircuts reducing Greece’s debt from 160 percent of GDP to 120 percent of GDP. The new bailout would be required to prevent default by Greece of €14.4 billion maturing on Mar 20, 2012. There has been increasing improvement of sovereign bond yields. Italy’s ten-year bond yield fell from over 6.30 percent on Jan 20, 2012 to slightly above 5.90 percent on Jan 27. Spain’s ten-year bond yield fell from slightly above 5.50 percent on Jan 20 to just below 5 percent on Jan 27.
An important difference, according to Beim (2011Oct9), between large-scale buying of bonds by the central bank between the Federal Reserve of the US and the European Central Bank (ECB) is that the Fed and most banks do not buy local and state government obligations with lower creditworthiness. The European Monetary Union (EMU) that created the euro and the ECB did not include common fiscal policy and affairs. Thus, EMU cannot issue its own treasury obligations. The line “Reserve bank credit” in the Fed balance sheet for Jan 25, 2012, is $2902 billion of which $2570 billion consisting of $1565 billion US Treasury notes and bonds, $68 billion inflation-indexed bonds and notes, $101 billion Federal agency debt securities and $836 billion mortgage-backed securities (http://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1). The Fed has been careful in avoiding credit risk in its portfolio of securities. The 11 exceptional liquidity facilities of several trillion dollars created during the financial crisis (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 157-62) have not resulted in any losses. The Fed has used unconventional monetary policy without credit risk as in classical central banking.
Beim (2011Oct9, 6) argues:
“In short, the ECB system holds more than €1 trillion of debt of the banks and governments of the 17 member states. The state-by-state composition of this debt is not disclosed, but the events of the past year suggest that a disproportionate fraction of these assets are likely obligations of stressed countries. If a significant fraction of the €1 trillion were to be restructured at 40-60% discounts, the ECB would have a massive problem: who would bail out the ECB?
This is surely why the ECB has been so shrill in its antagonism to the slightest mention of default and restructuring. They need to maintain the illusion of risk-free sovereign debt because confidence in the euro itself is built upon it.”
Table V-2 provides the consolidated financial statement of the Eurosystem on Dec 31, 2010 and Dec 28, 2011. Memo items provide the sum of lines 5, “lending to euro area credit institutions related to monetary policy operations denominated in euro,” and 7, “securities of euro area residents denominated in euro,” which has increased from €1,004,174 million on Dec 31, 2010 to €1,489,759 million on Dec 28, 2011. This sum is roughly what concerns Beim (2012Oct9) because of the probable exposure relative to capital to institutions and sovereigns with higher default risk. To be sure, there is no precise knowledge of the composition of the ECB portfolio of loans and securities with weights and analysis of the risks of components. Javier E. David, writing on Jan 16, 2012, on “The risks in ECB’s crisis moves,” published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970204542404577158753459542024.html?mod=WSJ_hp_LEFTWhatsNewsCollection), informs that the estimated debt of weakest euro zone sovereigns held by the ECB is €211 billion, with Greek debt in highest immediate default risk being only 17 percent of the total. Another unknown is whether there is high risk collateral in the €489 billion three-year loans to credit institutions at 1 percent interest rates. The potential risk is the need for recapitalization of the ECB that could find similar political hurdles as the bailout fund EFSF. There is a recurring issue of whether the ECB should accept a haircut on its portfolio of Greek bonds of €40 billion acquired at discounts from face value. An article on “Haircut for the ECB? Not so fast,” published by the Wall Street Journal on Jan 28, 2012 (http://blogs.wsj.com/davos/2012/01/28/haircut-for-the-ecb-not-so-fast/), informs of the remarks by Mark Carney, Governor of the Bank of Canada and President of the Financial Stability Board (FSB) (http://www.financialstabilityboard.org/about/overview.htm), expressing what appears to be correct doctrine that there could conceivably be haircuts for official debt but that such a decision should be taken by governments and not by central banks.
Table V-2, Consolidated Financial Statement of the Eurosystem, Million EUR
| Dec 31, 2010 | Dec 28, 2011 | |
| 1 Gold and other Receivables | 367,402 | 419,822 |
| 2 Claims on Non Euro Area Residents Denominated in Foreign Currency | 223,995 | 236,826 |
| 3 Claims on Euro Area Residents Denominated in Foreign Currency | 26,941 | 95,355 |
| 4 Claims on Non-Euro Area Residents Denominated in Euro | 22,592 | 25,982 |
| 5 Lending to Euro Area Credit Institutions Related to Monetary Policy Operations Denominated in Euro | 546,747 | 879,130 |
| 6 Other Claims on Euro Area Credit Institutions Denominated in Euro | 45,654 | 94,989 |
| 7 Securities of Euro Area Residents Denominated in Euro | 457,427 | 610,629 |
| 8 General Government Debt Denominated in Euro | 34,954 | 33,928 |
| 9 Other Assets | 278,719 | 336,574 |
| TOTAL ASSETS | 2,004, 432 | 2,733,235 |
| Memo Items | ||
| Sum of 5 and 7 | 1,004,174 | 1,489,759 |
| Capital and Reserves | 78,143 | 81,481 |
Source: European Central Bank
http://www.ecb.int/press/pr/wfs/2011/html/fs110105.en.html
http://www.ecb.int/press/pr/wfs/2011/html/fs111228.en.html
Professors Ricardo Caballero and Francesco Giavazzi (2012Jan15) find that the resolution of the European sovereign crisis with survival of the euro area would require success in the restructuring of Italy. That success would be assured with growth of the Italian economy. A critical problem is that the common currency prevents Italy from devaluation to parity or the exchange rate that would permit export growth to promote internal economic activity that generates fiscal revenues for primary fiscal surplus that ensure creditworthiness. Fiscal consolidation and restructuring are important but of long-term gestation. Immediate growth of the Italian economy would consolidate the resolution of the sovereign debt crisis. Caballero and Giavazzi (2012Jan15) argue that 55 percent of the exports of Italy are to countries outside the euro area such that devaluation of 15 percent would be effective in increasing export revenue. Data in Table V-3 providing Italy’s trade with regions and countries supports the argument of Caballero and Giavazzi (2012Jan15). Italy’s exports to the European Monetary Union (EMU) are only 43.6 percent of the total. Exports to non-European Union area are growing at 15.2 percent in the 12 months ending in Nov while those to EMU are growing at 9.6 percent.
Table V-3, Italy, Exports and Imports by Regions and Countries, % Share and 12 Months ∆%
| Exports | ∆% Jan-Nov 2011/ Jan-Nov 2010 | Imports | Imports | |
| EU | 57.3 | 9.5 | 54.8 | 6.9 |
| EMU 17 | 43.6 | 9.6 | 44.6 | 6.4 |
| France | 11.6 | 11.9 | 8.8 | 4.2 |
| Germany | 13.0 | 13.2 | 16.1 | 6.4 |
| Spain | 5.8 | 2.3 | 4.6 | 8.1 |
| UK | 5.2 | -1.0 | 2.7 | 9.4 |
| Non EU | 42.7 | 15.2 | 45.2 | 15.1 |
| Europe non EU | 12.0 | 24.4 | 10.3 | 20.2 |
| USA | 6.0 | 11.9 | 3.0 | 18.5 |
| China | 2.6 | 16.5 | 7.8 | 5.3 |
| OPEC | 5.3 | -1.3 | 9.5 | -0.4 |
| Total | 100.0 | 11.9 | 100.0 | 10.6 |
Notes: EU: European Union; EMU: European Monetary Union (euro zone)
Source: http://www.istat.it/it/archivio/50960
Growth rates of Italy’s trade and major products are provided in Table V-4 for the period Jan-Nov 2011 relative to Jan-Nov 2010. Growth rates are high for the total and all segments with the exception of decline of durable goods imports of 6.4 percent. Capital goods exports increased 11.1 percent relative to a year earlier and intermediate products by 14.4 percent.
Table V-4, Italy, Exports and Imports % Share of Products in Total and ∆%
| Exports | Exports | Imports | Imports | |
| Consumer | 29.5 | 9.4 | 25.3 | 8.0 |
| Durable | 6.3 | 4.7 | 3.5 | -6.4 |
| Non | 23.2 | 10.6 | 21.8 | 10.3 |
| Capital Goods | 32.4 | 11.1 | 22.4 | 1.3 |
| Inter- | 33.5 | 14.4 | 33.9 | 13.9 |
| Energy | 4.6 | 16.1 | 18.4 | 19.6 |
| Total ex Energy | 95.4 | 11.7 | 81.6 | 8.6 |
| Total | 100.0 | 11.9 | 100.0 | 10.6 |
Source: http://www.istat.it/it/archivio/50960
Table V-5 provides Italy’s trade balance by product categories in Nov and Jan-Nov 2011. Italy’s trade balance excluding energy is a surplus of €30,523 in Jan-Nov 2011 but the energy trade balance is a deficit of €56,301 million. Italy has significant competitiveness in contrast with some other countries with debt difficulties.
Table V-5, Italy, Trade Balance by Product Categories, € Millions
| Nov 2011 | Jan-Nov 2011 | |
| Consumer Goods | 877 | 7,361 |
| Durable | 876 | 9,256 |
| Nondurable | 1 | -1,896 |
| Capital Goods | 3,075 | 33,579 |
| Intermediate Goods | 78 | -10,417 |
| Energy | -5,610 | -56,301 |
| Total ex Energy | 4,030 | 30,523 |
| Total | -1,581 | -25,778 |
Source: http://www.istat.it/it/archivio/50960
Brazil faced in the debt crisis of 1982 a more complex policy mix. Between 1977 and 1983, Brazil’s terms of trade, export prices relative to import prices, deteriorated 47 percent and 36 percent excluding oil (Pelaez 1987, 176-79; Pelaez 1986, 37-66; see Pelaez and Pelaez, The Global Recession Risk (2007), 178-87). Brazil had accumulated unsustainable foreign debt by borrowing to finance balance of payments deficits during the 1970s. Foreign lending virtually stopped. The German mark devalued strongly relative to the dollar such that Brazil’s products lost competitiveness in Germany and in multiple markets in competition with Germany. The resolution of the crisis was devaluation of the Brazilian currency by 30 percent relative to the dollar and subsequent maintenance of parity by monthly devaluation equal to inflation and indexing that resulted in financial stability by parity in external and internal interest rates avoiding capital flight. With a combination of declining imports, domestic import substitution and export growth, Brazil followed rapid growth in the US and grew out of the crisis with surprising GDP growth of 4.5 percent in 1984.
The euro zone faces a critical survival risk because several of its members may default on their sovereign obligations if not bailed out by the other members. The valuation equation of bonds is essential to understanding the stability of the euro area. An explanation is provided in this paragraph and readers interested in technical details are referred to the following Subsection IIID Appendix on Sovereign Bond Valuation. Contrary to the Wriston doctrine, investing in sovereign obligations is a credit decision. The value of a bond today is equal to the discounted value of future obligations of interest and principal until maturity. On Dec 30 the yield of the 2-year bond of the government of Greece was quoted around 100 percent. In contrast, the 2-year US Treasury note traded at 0.239 percent and the 10-year at 2.871 percent while the comparable 2-year government bond of Germany traded at 0.14 percent and the 10-year government bond of Germany traded at 1.83 percent (see Table III-1). There is no need for sovereign ratings: the perceptions of investors are of relatively higher probability of default by Greece, defying Wriston (1982), and nil probability of default of the US Treasury and the German government. The essence of the sovereign credit decision is whether the sovereign will be able to finance new debt and refinance existing debt without interrupting service of interest and principal. Prices of sovereign bonds incorporate multiple anticipations such as inflation and liquidity premiums of long-term relative to short-term debt but also risk premiums on whether the sovereign’s debt can be managed as it increases without bound. The austerity measures of Italy are designed to increase the primary surplus, or government revenues less expenditures excluding interest, to ensure investors that Italy will have the fiscal strength to manage its debt of 120 percent of GDP, which is the third largest in the world after the US and Japan. Appendix IIE links the expectations on the primary surplus to the real current value of government monetary and fiscal obligations. As Blanchard (2011SepWEO) analyzes, fiscal consolidation to increase the primary surplus is facilitated by growth of the economy. Italy and the other indebted sovereigns in Europe face the dual challenge of increasing primary surpluses while maintaining growth of the economy (for the experience of Brazil in the debt crisis of 1982 see Pelaez 1986, 1987).
Much of the analysis and concern over the euro zone centers on the lack of credibility of the debt of a few countries while there is credibility of the debt of the euro zone as a whole. In practice, there is convergence in valuations and concerns toward the fact that there may not be credibility of the euro zone as a whole. The fluctuations of financial risk assets of members of the euro zone move together with risk aversion toward the countries with lack of debt credibility. This movement raises the need to consider analytically sovereign debt valuation of the euro zone as a whole in the essential analysis of whether the single-currency will survive without major changes.
Welfare economics considers the desirability of alternative states, which in this case would be evaluating the “value” of Germany (1) within and (2) outside the euro zone. Is the sum of the wealth of euro zone countries outside of the euro zone higher than the wealth of these countries maintaining the euro zone? On the choice of indicator of welfare, Hicks (1975, 324) argues:
“Partly as a result of the Keynesian revolution, but more (perhaps) because of statistical labours that were initially quite independent of it, the Social Product has now come right back into its old place. Modern economics—especially modern applied economics—is centered upon the Social Product, the Wealth of Nations, as it was in the days of Smith and Ricardo, but as it was not in the time that came between. So if modern theory is to be effective, if it is to deal with the questions which we in our time want to have answered, the size and growth of the Social Product are among the chief things with which it must concern itself. It is of course the objective Social Product on which attention must be fixed. We have indexes of production; we do not have—it is clear we cannot have—an Index of Welfare.”
If the burden of the debt of the euro zone falls on Germany and France or only on Germany, is the wealth of Germany and France or only Germany higher after breakup of the euro zone or if maintaining the euro zone? In practice, political realities will determine the decision through elections.
The prospects of survival of the euro zone are dire. Table V-6 is constructed with IMF World Economic Outlook database for GDP in USD billions, primary net lending/borrowing as percent of GDP and general government debt as percent of GDP for selected regions and countries in 2010.
Table V-6, World and Selected Regional and Country GDP and Fiscal Situation
| GDP 2010 | Primary Net Lending Borrowing | General Government Net Debt | |
| World | 62,911.2 | ||
| Euro Zone | 12,167.8 | -3.6 | 65.9 |
| Portugal | 229.2 | -6.3 | 88.7 |
| Ireland | 206.9 | -28.9 | 78.0 |
| Greece | 305.4 | -4.9 | 142.8 |
| Spain | 1,409.9 | -7.8 | 48.8 |
| Major Advanced Economies G7 | 31,716.9 | -6.5 | 76.5 |
| United States | 14,526.6 | -8.4 | 68.3 |
| UK | 2,250.2 | -7.7 | 67.7 |
| Germany | 3,286.5 | -1.2 | 57.6 |
| France | 2,562.7 | -4.9 | 76.5 |
| Japan | 5,458.8 | -8.1 | 117.2 |
| Canada | 1,577.0 | -4.9 | 32.2 |
| Italy | 2,055.1 | -0.3 | 99.4 |
| China | 5,878.3 | -2.3 | 33.8* |
| Cyprus | 23.2 | -5.3 | 61.6 |
*Gross Debt
Source: http://www.imf.org/external/pubs/ft/weo/2011/01/weodata/index.aspx
The data in Table V-6 are used for some very simple calculations in Table V-7. The column “Net Debt USD Billions” in Table V-7 is generated by applying the percentage in Table V-6 column “General Government Net Debt % GDP 2010” to the column “GDP USD Billions.” The total debt of France and Germany in 2010 is $3853.5 billion, as shown in row “B+C” in column “Net Debt USD Billions” The sum of the debt of Italy, Spain, Portugal, Greece and Ireland is $3531.6 billion. There is some simple “unpleasant bond arithmetic” in the two final columns of Table III-5. Suppose the entire debt burdens of the five countries with probability of default were to be guaranteed by France and Germany, which de facto would be required by continuing the euro zone. The sum of the total debt of these five countries and the debt of France and Germany is shown in column “Debt as % of Germany plus France GDP” to reach $7385.1 billion, which would be equivalent to 126.3 percent of their combined GDP in 2010. Under this arrangement the entire debt of the euro zone including debt of France and Germany would not have nil probability of default. The final column provides “Debt as % of Germany GDP” that would exceed 224 percent if including debt of France and 165 percent of German GDP if excluding French debt. The unpleasant bond arithmetic illustrates that there is a limit as to how far Germany and France can go in bailing out the countries with unsustainable sovereign debt without incurring severe pains of their own such as downgrades of their sovereign credit ratings. A central bank is not typically engaged in direct credit because of remembrance of inflation and abuse in the past. There is also a limit to operations of the European Central Bank in doubtful credit obligations. Wriston (1982) would prove to be wrong again that countries do not bankrupt but would have a consolation prize that similar to LBOs the sum of the individual values of euro zone members outside the current agreement exceeds the value of the whole euro zone. Internal rescues of French and German banks may be less costly than bailing out other euro zone countries so that they do not default on French and German banks.
Table V-7, Guarantees of Debt of Sovereigns in Euro Area as Percent of GDP of Germany and France, USD Billions and %
| Net Debt USD Billions | Debt as % of Germany Plus France GDP | Debt as % of Germany GDP | |
| A Euro Area | 8,018.6 | ||
| B Germany | 1,893.0 | $7385.1 as % of $3286.5 =224.7% $5424.6 as % of $3286.5 =165.1% | |
| C France | 1,960.5 | ||
| B+C | 3,853.5 | GDP $5849.2 Total Debt $7385.1 Debt/GDP: 126.3% | |
| D Italy | 2,042.8 | ||
| E Spain | 688.0 | ||
| F Portugal | 203.3 | ||
| G Greece | 436.1 | ||
| H Ireland | 161.4 | ||
| Subtotal D+E+F+G+H | 3,531.6 |
Source: calculation with IMF data http://www.imf.org/external/pubs/ft/weo/2011/01/weodata/index.aspx
There is extremely important information in Table V-8 for the current sovereign risk crisis in the euro zone. Table III-8 provides the structure of regional and country relations of Germany’s exports and imports with newly available data for Nov. German exports to other European Union members are 59.0 percent of total exports in Nov and 59.5 percent in Jan-Nov. Exports to the euro area are 39.7 percent in Nov and 39.9 percent in Jan-Nov. Exports to third countries are only 40.9 percent of the total in Nov and 40.5 percent in Jan-Nov. There is similar distribution for imports. Economic performance in Germany is closely related to its high competitiveness in world markets. Weakness in the euro zone and the European Union in general could affect the German economy. This may be the major reason for choosing the “fiscal abuse” of the European Central Bank considered by Buiter (2011Oct31) over the breakdown of the euro zone. There is a tough analytical, empirical and forecasting doubt of growth and trade in the euro zone and the world with or without maintenance of the European Monetary Union (EMU) or euro zone.
Table V-8, Germany, Structure of Exports and Imports by Region, € Billions and ∆%
| Nov 2011 | 12 Months | Jan-Nov | Jan-Nov 2011/ | |
| Total | 94.9 | 8.3 | 976.0 | 12.1 |
| A. EU | 56.0 % 59.0 | 8.4 | 580.9 % 59.5 | 11.1 |
| Euro Area | 37.7 % 39.7 | 7.7 | 389.7 % 39.9 | 9.9 |
| Non-euro Area | 18.3 % 19.3 | 9.8 | 191.2 % 19.6 | 13.7 |
| B. Third Countries | 38.9 % 40.9 | 8.2 | 395.1 % 40.5 | 13.5 |
| Total Imports | 78.7 | 6.7 | 829.6 | 13.9 |
| C. EU Members | 50.6 % 64.3 | 10.6 | 526.7 % 63.5 | 14.7 |
| Euro Area | 35.1 % 44.6 | 8.8 | 369.4 % 44.5 | 13.8 |
| Non-euro Area | 15.5 % 19.7 | 15.1 | 157.3 % 18.9 | 17.0 |
| D. Third Countries | 28.0 % 35.6 | 0.2 | 302.9 % 36.5 | 12.4 |
Notes: Total Exports = A+B; Total Imports = C+D
VF Appendix on Sovereign Bond Valuation. There are two approaches to government finance and their implications: (1) simple unpleasant monetarist arithmetic; and (2) simple unpleasant fiscal arithmetic. Both approaches illustrate how sovereign debt can be perceived riskier under profligacy.
First, Unpleasant Monetarist Arithmetic. Fiscal policy is described by Sargent and Wallace (1981, 3, equation 1) as a time sequence of D(t), t = 1, 2,…t, …, where D is real government expenditures, excluding interest on government debt, less real tax receipts. D(t) is the real deficit excluding real interest payments measured in real time t goods. Monetary policy is described by a time sequence of H(t), t=1,2,…t, …, with H(t) being the stock of base money at time t. In order to simplify analysis, all government debt is considered as being only for one time period, in the form of a one-period bond B(t), issued at time t-1 and maturing at time t. Denote by R(t-1) the real rate of interest on the one-period bond B(t) between t-1 and t. The measurement of B(t-1) is in terms of t-1 goods and [1+R(t-1)] “is measured in time t goods per unit of time t-1 goods” (Sargent and Wallace 1981, 3). Thus, B(t-1)[1+R(t-1)] brings B(t-1) to maturing time t. B(t) represents borrowing by the government from the private sector from t to t+1 in terms of time t goods. The price level at t is denoted by p(t). The budget constraint of Sargent and Wallace (1981, 3, equation 1) is:
D(t) = {[H(t) – H(t-1)]/p(t)} + {B(t) – B(t-1)[1 + R(t-1)]} (1)
Equation (1) states that the government finances its real deficits into two portions. The first portion, {[H(t) – H(t-1)]/p(t)}, is seigniorage, or “printing money.” The second part,
{B(t) – B(t-1)[1 + R(t-1)]}, is borrowing from the public by issue of interest-bearing securities. Denote population at time t by N(t) and growing by assumption at the constant rate of n, such that:
N(t+1) = (1+n)N(t), n>-1 (2)
The per capita form of the budget constraint is obtained by dividing (1) by N(t) and rearranging:
B(t)/N(t) = {[1+R(t-1)]/(1+n)}x[B(t-1)/N(t-1)]+[D(t)/N(t)] – {[H(t)-H(t-1)]/[N(t)p(t)]} (3)
On the basis of the assumptions of equal constant rate of growth of population and real income, n, constant real rate of return on government securities exceeding growth of economic activity and quantity theory equation of demand for base money, Sargent and Wallace (1981) find that “tighter current monetary policy implies higher future inflation” under fiscal policy dominance of monetary policy. That is, the monetary authority does not permanently influence inflation, lowering inflation now with tighter policy but experiencing higher inflation in the future.
Second, Unpleasant Fiscal Arithmetic. The tool of analysis of Cochrane (2011Jan, 27, equation (16)) is the government debt valuation equation:
(Mt + Bt)/Pt = Et∫(1/Rt, t+τ)st+τdτ (4)
Equation (4) expresses the monetary, Mt, and debt, Bt, liabilities of the government, divided by the price level, Pt, in terms of the expected value discounted by the ex-post rate on government debt, Rt, t+τ, of the future primary surpluses st+τ, which are equal to Tt+τ – Gt+τ or difference between taxes, T, and government expenditures, G. Cochrane (2010A) provides the link to a web appendix demonstrating that it is possible to discount by the ex post Rt, t+τ. The second equation of Cochrane (2011Jan, 5) is:
MtV(it, ·) = PtYt (5)
Conventional analysis of monetary policy contends that fiscal authorities simply adjust primary surpluses, s, to sanction the price level determined by the monetary authority through equation (5), which deprives the debt valuation equation (4) of any role in price level determination. The simple explanation is (Cochrane 2011Jan, 5):
“We are here to think about what happens when [4] exerts more force on the price level. This change may happen by force, when debt, deficits and distorting taxes become large so the Treasury is unable or refuses to follow. Then [4] determines the price level; monetary policy must follow the fiscal lead and ‘passively’ adjust M to satisfy [5]. This change may also happen by choice; monetary policies may be deliberately passive, in which case there is nothing for the Treasury to follow and [4] determines the price level.”
An intuitive interpretation by Cochrane (2011Jan 4) is that when the current real value of government debt exceeds expected future surpluses, economic agents unload government debt to purchase private assets and goods, resulting in inflation. If the risk premium on government debt declines, government debt becomes more valuable, causing a deflationary effect. If the risk premium on government debt increases, government debt becomes less valuable, causing an inflationary effect.
There are multiple conclusions by Cochrane (2011Jan) on the debt/dollar crisis and Global recession, among which the following three:
(1) The flight to quality that magnified the recession was not from goods into money but from private-sector securities into government debt because of the risk premium on private-sector securities; monetary policy consisted of providing liquidity in private-sector markets suffering stress
(2) Increases in liquidity by open-market operations with short-term securities have no impact; quantitative easing can affect the timing but not the rate of inflation; and purchase of private debt can reverse part of the flight to quality
(3) The debt valuation equation has a similar role as the expectation shifting the Phillips curve such that a fiscal inflation can generate stagflation effects similar to those occurring from a loss of anchoring expectations.
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