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: Part II

 

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

 

VI Global Inflation. There is inflation everywhere in the world economy, with slow growth and persistently high unemployment in advanced economies. Table V-1 updated with every post, provides the latest annual data for GDP, consumer price index (CPI) inflation, producer price index (PPI) inflation and unemployment (UNE) for the advanced economies, China and the highly-indebted European countries with sovereign risk issues. The table now includes the Netherlands and Finland that with Germany make up the set of northern countries in the euro zone that hold key votes in the enhancement of the mechanism for solution of the sovereign risk issues (Peter Spiegel and Quentin Peel, “Europe: Northern Exposures,” Financial Times, Mar 9, 2011 http://www.ft.com/intl/cms/s/0/55eaf350-4a8b-11e0-82ab-00144feab49a.html#axzz1gAlaswcW). Newly available data on inflation is considered below in this section. Data in Table VI-1 for the euro zone and its members are updated from information provided by Eurostat but individual country information is provided in this section  as soon as available, following Table IV-1. Data for other countries in Table VI-1 are also updated with reports from their statistical agencies. Economic data for major regions and countries is considered in Section VI World Economic Slowdown following with individual country and regional data tables.

Table VI-1, GDP Growth, Inflation and Unemployment in Selected Countries, Percentage Annual Rates

	GDP	CPI	PPI	UNE
US	1.6	3.0	5.7	8.6
Japan	-0.7	-0.2	1.3	4.6
China	8.9	4.1	1.7
UK	0.8	4.2* RPI 4.8	4.8* output 8.7* input 6.9**	8.4
Euro Zone	1.4	2.7	4.3	10.4
Germany	3.0	2.8	4.0	5.5
France	1.6	2.7	4.6	9.9
Nether-lands	1.1	2.7	5.0	4.9
Finland	2.7	3.2	2.8	7.6
Belgium	1.8	3.7	4.5	7.2
Portugal	-1.7	3.8	4.4	13.6
Ireland	NA	1.7	4.4	14.5
Italy	NA	3.7	4.0	8.9
Greece	-5.2	2.8	5.7	19.2
Spain	0.8	2.9	5.2	22.9

Notes: GDP: rate of growth of GDP; CPI: change in consumer price inflation; PPI: producer price inflation; UNE: rate of unemployment; all rates relative to year earlier

*Office for National Statistics

PPI http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/december-2011/stb-producer-price-index---december-2011.html

CPI http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/december-2011/index.html

**Excluding food, beverage, tobacco and petroleum

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

Table VI-1 shows the simultaneous occurrence of low growth, inflation and unemployment in advanced economies. The US grew at 1.6 percent in IVQ2011 relative to IVQ2010 (Table 8, p 11 in http://www.bea.gov/newsreleases/national/gdp/2012/pdf/gdp4q11_adv.pdf). Japan’s GDP fell 0.7 percent in IIIQ2011 relative to IIIQ2010 and contracted 1.7 percent in IIQ2011 relative to IIQ2010 because of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 but grew at the seasonally-adjusted annual rate (SAAR) of 5.6 percent in IIIQ2011 (http://www.esri.cao.go.jp/jp/sna/sokuhou/kekka/gaiyou/main_1.pdf); the UK grew at 0.8 percent in IVQ2011 relative to IVQ2010 and GDP fell 0.2 percent in IVQ2011 relative to IIIQ2011 (http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product--preliminary-estimate/q4-2011/stb-q4-2011.html); and the Euro Zone grew at 1.4 percent in IIIQ2011 relative to IIIQ2010 (http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-06122011-AP/EN/2-06122011-AP-EN.PDF). These are stagnating or “growth recession” rates, which are positive growth rates instead of contractions but insufficient to recover employment. The rates of unemployment are quite high: 8.3 percent in the US but 19.5 percent for unemployment/underemployment (see Table I-4 in I Thirty-One Million Unemployed or Underemployed and http://cmpassocregulationblog.blogspot.com/2012/01/thirty-million-unemployed-or.html), 4.6 percent for Japan, 8.4 percent for the UK with high rates of unemployment for young people (see the labor statistics of the UK in subsection VH http://cmpassocregulationblog.blogspot.com/2012/01/world-inflation-waves-united-states_22.html) and 10.4 percent in the Euro Zone. Twelve-month rates of inflation have been quite high, even when some are moderating at the margin: 3.0 percent in the US, minus 0.2 percent for Japan, 2.7 percent for the Euro Zone and 4.2 percent for the UK. Stagflation is still an unknown event but the risk is sufficiently high to be worthy of consideration (see http://cmpassocregulationblog.blogspot.com/2011/06/risk-aversion-and-stagflation.html). The analysis of stagflation also permits the identification of important policy issues in solving vulnerabilities that have high impact on global financial risks. There are six key interrelated vulnerabilities in the world economy that have been causing global financial turbulence: (1) sovereign risk issues in Europe resulting from countries in need of fiscal consolidation and enhancement of their sovereign risk ratings (see Section V in this post and the earlier post http://cmpassocregulationblog.blogspot.com/2012/01/mediocre-economic-growth-financial.html) (2) the tradeoff of growth and inflation in China; (3) slow growth by repression of savings with de facto interest rate controls (http://cmpassocregulationblog.blogspot.com/2012/01/mediocre-economic-growth-financial.html), weak hiring (http://cmpassocregulationblog.blogspot.com/2012/01/recovery-without-hiring-united-states.html) and continuing job stress of 24 to 30 million people in the US and stagnant wages in a fractured job market (see Section I Thirty-One Million Unemployed or Underemployed and http://cmpassocregulationblog.blogspot.com/2012/01/thirty-million-unemployed-or.html); (4) the timing, dose, impact and instruments of normalizing monetary and fiscal policies (see II Budget/Debt Quagmire in http://cmpassocregulationblog.blogspot.com/2011/08/united-states-gdp-growth-standstill.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html http://cmpassocregulationblog.blogspot.com/2011/03/global-financial-risks-and-fed.html http://cmpassocregulationblog.blogspot.com/2011/02/policy-inflation-growth-unemployment.html) in advanced and emerging economies; (5) the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 that had repercussions throughout the world economy because of Japan’s share of about 9 percent in world output, role as entry point for business in Asia, key supplier of advanced components and other inputs as well as major role in finance and multiple economic activities (http://professional.wsj.com/article/SB10001424052748704461304576216950927404360.html?mod=WSJ_business_AsiaNewsBucket&mg=reno-wsj); and (6) the geopolitical events in the Middle East.

There are four waves of inflation of personal consumption expenditures (PCE) in 2011 shown in Table VI-2. These waves are in part determined by commodity price shocks originating in the carry trade from zero interest rates to positions in risk financial assets, in particular in commodity futures, which increase the prices of food and energy when there is relaxed risk aversion. Return of risk aversion causes collapse in prices. The first wave is in Jan-Apr when headline PCE inflation grew at the average annual equivalent rate of 4.6 percent and PCE inflation excluding food and energy at 2.1 percent. The drivers of inflation were increases in food prices at the annual equivalent rate of 8.7 percent and of energy prices at 41.7 percent. This behavior will prevail under zero interest rates and relaxed risk aversion because of carry trades from zero interest rates to leveraged positions in commodity futures. The second wave occurred in May and Jun when risk aversion from the European sovereign risk crisis interrupted the carry trade. PCE prices rose 0.6 percent in annual equivalent and 3.0 percent excluding food and energy. The third wave is captured by the annual equivalent rates in Jul-Sep of headline PCE inflation of 3.7 percent with subdued PCE inflation excluding food and energy of 1.6 percent while PCE food rose at 6.3 percent and PCE energy increased at 27.3 percent. In the fourth wave increased risk aversion explains the fall of the annual equivalent rate of inflation to 0.4 for headline PCE inflation and 1.6 percent for PCEX excluding food and energy. PCEF of prices of food rose at the annual equivalent rate of 0.8 percent in Oct-Dec while PCEE of prices of energy fell at the annual equivalent rate of 17.9 percent. percentIn Dec, headline PCE was 0.1 percent but 0.2 percent excluding food and energy (PCEX). Risk aversion originating in the European debt crisis caused unwinding of carry trades in commodity futures and other risk financial assets.

Table VI-2, US, Percentage Change from Prior Month of Prices of Personal Consumption Expenditures, Seasonally Adjusted Monthly ∆%

	PCE	PCEG	PCEG -D	PCES	PCEX	PCEF	PCEE
2011
Dec	0.1	-0.2	-0.2	0.2	0.2	0.2	-1.3
Nov	0.0	-0.2	-0.3	0.1	0.1	-0.1	-1.6
Oct	0.0	-0.3	-0.1	0.1	0.1	0.1	-2.0
∆% AE Oct- Dec	0.4	-2.8	-2.4	1.6	1.6	0.8	-17.9
Sep	0.2	0.3	-0.4	0.1	0.0	0.5	2.1
Aug	0.3	0.4	-0.1	0.2	0.2	0.6	1.2
Jul	0.4	0.7	-0.1	0.2	0.2	0.4	2.8
∆% AE Jul-Sep	3.7	5.7	-2.4	2.0	1.6	6.2	27.3
Jun	-0.1	-0.5	0.2	0.1	0.2	0.1	-4.5
May	0.2	0.0	0.1	0.3	0.3	0.3	-1.2
∆% AE May-Jun	0.6	-3.0	1.8	2.4	3.0	2.4	-29.4
Apr	0.3	0.6	0.2	0.2	0.2	0.4	2.3
Mar	0.4	0.8	0.0	0.2	0.1	0.9	3.7
Feb	0.4	0.8	0.2	0.2	0.2	0.8	3.5
Jan	0.4	0.8	0.1	0.2	0.2	0.7	2.3
∆% AE Jan-Apr	4.6	9.4	1.5	2.4	2.1	8.7	41.7
2010
Dec	0.3	0.6	-0.4	0.1	0.0	0.1	4.1
Nov	0.1	0.0	-0.2	0.1	0.1	0.0	0.1
Oct	0.2	0.4	-0.2	0.1	0.1	0.1	2.8
Sep	0.1	0.2	-0.2	0.1	0.0	0.3	1.2
Aug	0.2	0.3	0.1	0.1	0.1	0.1	1.7
Jul	0.2	0.5	-0.3	0.1	0.0	0.1	3.4
Jun	-0.2	-0.6	-0.3	0.1	0.1	-0.2	-3.6
May	-0.1	-0.6	-0.2	0.2	0.1	0.0	-2.9
Apr	0.0	-0.2	-0.2	0.2	0.1	0.2	-0.5
Mar	0.2	-0.1	0.0	0.3	0.2	0.2	-0.4
Feb	0.1	-0.1	-0.3	0.2	0.1	0.2	-0.2
Jan	0.2	0.5	0.2	0.1	0.1	0.2	2.7

Notes: percentage changes in price index relative to the same month a year earlier of PCE: personal consumption expenditures; PCEG: PCE goods; PCEG-D: PCE durable goods; PCES: PCE services; PCEX: PCE excluding food and energy; PCEF: PCE food; PCEE: PCE energy goods and services

Source: http://www.bea.gov/iTable/index_nipa.cfm

The charts of PCE inflation are also instructive. Chart VI-1 provides the monthly change of headline PCE price index. There is significant volatility in the monthly changes but excluding outliers fluctuations have been in a tight range between 1999 and 2011 around 0.2 percent per month.

Chart VI-1, US, Percentage Change of PCE Price Index from Prior Month, 1999-2011

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

There is similar behavior in the monthly fluctuations of the PCE price index excluding food and energy in Chart VI-2. The exclusion of commodity components eliminates negative changes with one exception. Fluctuations have been in a tight range from 0.0 percent to 0.4 percent, excluding two outliers.

Chart VI-2, US, Percentage Change of PCE Price Index Excluding Food and Energy from Prior Month, 1999-2011

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

As with all commodity prices, oscillations of the PCE price index of food in Chart VI-3 are quite wide. Monetary policy of zero interest rates has caused trends of increase such as from 2007 into the global recession and in the current expansion phase after 2010.

Chart VI-3, US, Percentage Change of PCE Price Index Food from Prior Month, 1999-2011

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

The band of fluctuation of the PCE price index of energy in Chart VI-4 is much wider. An interesting feature is the abundance of negative changes.

Chart VI-4, US, Percentage Change of PCE Price Index Energy from Prior Month, 1999-2011

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Table VI-3 provides 12 months rates of PCE inflation. While headline PCE inflation has increased from 1.5 percent in Jan to 2.9 percent in Sep and Aug, declining to 2.4 percent in Dec, PCE inflation excluding food and energy (PCEX), used as indicator in monetary policy, has increased from 1.0 percent in Jan to 1.8 percent in Dec, which is still below the tolerable maximum of 2.0 percent in monetary policy. The unintended effect of shocks of commodity prices from zero interest rates captured by PCE food prices (PCEF) and energy (PCEE) in the absence of risk aversion should be weighed in design and implementation of monetary policy.

Table VI-3, US, Percentage Change in 12 Months of Prices of Personal Consumption Expenditures ∆%

	PCE	PCEG	PCEG -D	PCES	PCEX	PCEF	PCEE
2011
Dec	2.4	3.1	-0.5	2.1	1.8	5.0	7.2
Nov	2.6	3.9	-0.6	1.9	1.7	5.0	13.1
Oct	2.7	4.2	-0.5	1.9	1.7	5.1	15.1
Sep	2.9	4.9	-0.7	2.0	1.6	5.1	20.7
Aug	2.9	4.8	-0.5	1.9	1.7	4.8	19.6
Jul	2.8	4.7	-0.2	1.8	1.6	4.3	20.2
Jun	2.6	4.5	-0.5	1.7	1.4	3.9	20.8
May	2.6	4.4	-1.0	1.7	1.3	3.6	21.9
Apr	2.4	3.9	-1.4	1.6	1.2	3.3	19.8
Mar	2.0	3.0	-1.8	1.5	1.0	3.1	16.5
Feb	1.8	2.1	-1.8	1.6	1.1	2.4	11.9
Jan	1.5	1.2	-2.3	1.6	1.0	1.8	7.9
2010
Dec	1.4	1.0	-2.5	1.5	0.9	1.3	8.3
Nov	1.2	0.4	-2.4	1.5	1.0	1.3	4.1
Oct	1.3	0.6	-2.1	1.6	1.0	1.3	6.3
Sep	1.4	0.4	-1.7	1.9	1.2	1.3	4.1
Aug	1.5	0.4	-1.4	1.9	1.4	0.7	3.8

Notes: percentage changes in price index relative to the same month a year earlier of PCE: personal consumption expenditures; PCEG: PCE goods; PCEG-D: PCE durable goods; PCES: PCE services; PCEX: PCE excluding food and energy; PCEF: PCE food; PCEE: PCE energy goods and services

Source:

http://www.bea.gov/iTable/index_nipa.cfm

The headline PCE index is shown in Chart VI-5 from 1999 to 2011. There is an evident upward trend with the bump of the global recession after IVQ2010.

Chart VI-5, US, Price Index of Personal Consumption Expenditures 1999-2011

Source: http://www.bea.gov/iTable/index_nipa.cfm

The headline consumer price index is shown in Chart IV-6. There is also an upward trend but with fluctuations.

Chart VI-6, US, Consumer Price Index, NSA, 1999-2011

Source: US Bureau of Labor Statistics

http://www.bls.gov/cpi/data.htm

The PCE price index excluding food and energy is shown in Chart VI-7. There is less pronounced long-term trend with fewer bumps because of excluding more volatile commodity items.

Chart VI-7, US, Price Index of Personal Consumption Expenditures Excluding Food and Energy 1999-2011

Source: http://www.bea.gov/iTable/index_nipa.cfm

The core consumer price index, excluding food and energy, is shown in Chart IV-8. There is also an upward trend but with fluctuations.

Chart VI-8, US, Consumer Price Index Excluding Food and Energy, NSA, 1999-2011

Source: US Bureau of Labor Statistics

http://www.bls.gov/cpi/data.htm

The PCE price index of food is shown in Chart VI-9. There is a more pronounced upward trend and sharper fluctuations.

Chart VI-9, US, Price Index of Personal Consumption Expenditures Food 1999-2011

Source: http://www.bea.gov/iTable/index_nipa.cfm

There is similar behavior in the consumer price index of food in Chart IV-10. There is an upward trend from 1999 to 2011 with a major bump in 2009 when commodity futures positions were unwound. Zero interest rates with bouts of risk aversion dominate the trend into 2011.

Chart VI-10, US, Consumer Price Index, Food, NSA, 1999-2011

Source: US Bureau of Labor Statistics

http://www.bls.gov/cpi/data.htm

The most pronounced trend of the PCE price indexes is that of energy in Chart VI-11. It is impossible to explain the hump in 2008 in the middle of the global recession without the carry trade from zero interest rates to leveraged positions in commodity futures. Risk aversion after Sep 2008 caused flight to the safe haven of government obligations. The return of risk appetite with zero interest rates caused a first wave of carry trades with another upward trend interrupted by the first European sovereign risk crisis in Apr-Jul 2010. Zero interest rates with risk appetite caused another sharp upward trend of commodity prices interrupted by risk aversion from the second sovereign crisis. In the absence of risk aversion, carry trades from zero interest rates to positions in risk financial assets will continue to cause distortions such as commodity price trends and fluctuations.

Chart VI-11, US, Price Index of Personal Consumption Expenditures Energy Goods and Services 1999-2011

Source: http://www.bea.gov/iTable/index_nipa.cfm

Chart IV-12 provides the consumer price index of energy commodities. Unconventional monetary policy of zero or near zero interest rates causes upward trends in commodity prices reflected in (1) increase from 2003 to 2007; (2) sharp increase during the global contraction in 2008; (3) collapse from 2008 into 2009 as positions in commodity futures were unwound in a flight to government obligations; (4) new upward trend after 2010; and (5) episodes of decline during risk aversion shocks such as the more recent segment during the worsening European debt crisis in Nov and Dec of 2011.

Chart VI-12, US, Consumer Price Index, Energy, NSA, 1999-2011

Source: US Bureau of Labor Statistics

http://www.bls.gov/cpi/data.htm

The producer price index of the euro zone decreased 0.2 percent in Dec after increasing 0.2 percent in Nov and 0.1 in Oct and 0.3 percent in Sep, as shown in Table VI-4. Producer price inflation has moderated since May. Energy inflation has oscillated with the shocks of risk aversion that cause unwinding of carry trade positions from zero interest rates to commodity futures. In the seven months May to Nov, energy prices fell in three and fell again 0.4 percent in Dec. Prices of capital goods have barely moved. Prices of durable consumer goods have accelerated in Jul-Nov at annual equivalent rate of 3.2 percent compared with only 1.2 percent annual equivalent in Apr-Jun but were flat in Dec.

Table VI-4, Euro Zone, Industrial Producer Prices Month ∆%

	Dec  2011	Nov 2011	Oct 2011	Sep 2011	Aug 2011	Jul 2011	Jun 2011
Industry ex Construction	-0.2	0.2	0.1	0.3	-0.2	0.4	0.0
Industry ex Construction & Energy	-0.1	-0.1	-0.1	0.0	0.1	0.1	0.1
Intermediate Goods	-0.2	-0.4	-0.4	-0.1	0.0	0.0	0.0
Energy	-0.4	1.0	0.7	1.0	-0.8	1.5	-0.3
Capital Goods	0.0	0.0	0.1	0.0	0.1	0.1	0.2
Durable Consumer Goods	0.0	0.2	0.2	0.4	0.3	0.2	0.0
Nondurable Consumer Goods	0.0	0.3	0.2	0.2	0.2	0.1	0.1

Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-02022012-AP/EN/4-02022012-AP-EN.PDF

Although moderating in recent months, 12 months rate of increase of producer prices in the euro zone continue at relatively high levels, as shown in Table VI-5. In both Sep and Aug, producer prices rose 5.8 percent relative to a year earlier but the rate fell to a revised 5.5 percent in Oct and 5.4 in Nov with further decline to 4.3 percent in Dec. Industrial prices excluding construction and energy rose 2.6 percent in the 12 months ending in Dec while energy prices rose 9.5 percent. There is major vulnerability in producer price inflation that can return together with long positions in commodity futures with carry trades from zero interest during relaxation of risk aversion.

Table VI-5, Euro Zone, Industrial Producer Prices 12 Months ∆%

	Dec  2011	Nov 2011	Oct 2011	Sep 2011	Aug 2011	Jul 2011	Jun 2011
Industry ex Construction	4.3	5.4	5.5	5.8	5.8	6.1	5.9
Industry ex Construction & Energy	2.6	3.0	3.2	3.5	3.8	4.0	4.1
Intermediate Goods	2.8	3.5	4.1	5.0	5.7	6.1	6.3
Energy	9.5	12.4	12.3	12.2	11.4	11.9	10.7
Capital Goods	1.5	1.4	1.5	1.5	1.5	1.5	1.3
Durable Consumer Goods	2.3	2.5	2.5	2.5	2.1	1.9	1.8
Nondurable Consumer Goods	3.2	3.6	3.5	3.5	3.5	3.5	3.7

Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-02022012-AP/EN/4-02022012-AP-EN.PDF

There are four waves of inflation of producer prices in France as everywhere in the world economy, as shown in Table VI-6. There was a first wave of sharply increasing inflation in the first four months of 2011 originating in the surge of commodity prices driven by carry trade from zero interest rates to commodity futures risk positions. Producer price inflation in the first four months of 2011 was at the annual equivalent rate of 11.4 percent. In the second wave, producer prices fell 0.5 percent in May and another 0.1 percent in Jun for annual equivalent inflation in May-Jun of minus 3.5 percent. In the second wave from Jul to Sep, annual equivalent producer price inflation was 2.4 percent. In the fourth wave Oct-Dec 2011, annual equivalent producer price inflation rose to 3.2 percent. The bottom part of Table VI-6 shows producer price inflation at 6.4 percent in the 12 months ending in Dec 2005 and again at 5.2 percent in the 12 months ending in Dec 2007. Producer prices fell in 2008 and 2009 during the global contraction and decline of commodity prices but returned at 5.4 percent in the 12 months ending in Dec 2010.

Table VI-6, France, Producer Price Index for the French Market, ∆%

	Month	12 Months
Dec 2011	-0.1	4.7
Nov	0.4	5.6
Oct	0.5	5.8
AE ∆% Oct-Dec	3.2
Sep	0.2	6.1
Aug	0.0	6.2
Jul	0.4	6.3
AE ∆% Jul-Sep	2.4
Jun	-0.1	6.1
May	-0.5	6.2
AE ∆% May-Jun	-3.5
Apr	1.0	6.7
Mar	0.9	6.7
Feb	0.8	6.3
Jan	0.9	5.6
AE ∆% Jan-Apr	11.4
Dec 2010	0.8	5.4
Dec 2009	0.1	-2.9
Dec 2008	-1.5	-0.2
Dec 2007	0.6	5.2
Dec 2006	-0.2	2.9
Dec 2005	0.2	6.4

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=25&date=20120131

Chart VI-13 of the Institut National de la Statistique et des Études Économiques of France provides the behavior of the producer price index of France for the various segments: import prices, foreign markets, domestic market and all markets. All the components exhibit the rise to the peak in 2008 driven by carry trades from zero interest rates of unconventional monetary policy that was of such an impulse as to drive increases in commodity prices during the global recession. Prices collapsed with the flight out of financial risk assets such as commodity positions to government obligations. Commodity price increases returned with zero interest rates and subdued risk aversion. The shock of confidence of the current European sovereign risk moderated exposures to financial risk that influenced the flatter curve of France’s producer prices followed by another mild trend of increase and moderation in Dec.

Chart VI-13, France, Producer Price Index (PPI)

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=25&date=20120131

France’s producer price index for the domestic market is shown in Table VI-7 for Dec 2011. The segment of prices of coke and refined petroleum fell 0.4 percent in Dec but increased 17.5 percent in 12 months. Manufacturing prices, with the highest weight in the index, fell 0.1 percent in Dec and rose 4.3 percent in 12 months. Mining prices fell 0.1 percent in the month and increased 6.9 percent in 12 months.

Table VI-7, France, Producer Price Index for the Domestic Market, %

Dec 2011	Weight	Month ∆%	12 Months ∆%
Total	1000	-0.1	4.7
Mining	130	-0.1	6.9
Mfg	870	-0.1	4.3
Food Products, Beverages, Tobacco	188	-0.1	4.6
Coke, Refined Petroleum	70	-0.4	17.5
Electrical, Electronic	92	0.3	2.1
Transport	79	-0.2	2.5
Other Mfg	441	-0.1	2.3

Source:  Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=25&date=20120131

Italy’s producer price inflation in Table VI-7 also has the same four waves in 2011 observed for many countries (http://cmpassocregulationblog.blogspot.com/2012/01/world-inflation-waves-united-states.html). The annual equivalent producer price inflation in the first wave Jan-Apr was 10.7 percent, which was driven by increases in commodity prices resulting from the carry trades from zero interest rates to risk financial assets, in particular leveraged positions in commodities. In the second wave, producer price inflation was minus 0.2 percent in May and flat in Jun for annual equivalent inflation rate in May-Jun of minus 1.2 percent. In the third wave, annual equivalent inflation was 2.4 percent in Jul-Sep in a pause of risk aversion. With the return of risk aversion in the fourth wave coinciding with worsening sovereign debt crisis in Europe, annual equivalent inflation fell to 0.8 percent in Oct-Dec.

Table VI-7, Italy, Industrial Prices, Internal Market

	Month ∆%	12 Months ∆%
Dec 2011	0.1	4.0
Nov	0.3	4.7
Oct	-0.2	4.7
AE ∆% Oct-Dec	0.8
Sep	0.2	4.7
Aug	0.1	4.8
Jul	0.3	4.9
AE ∆% Jul-Sep	2.4
Jun	0.0	4.6
May	-0.2	4.8
AE ∆% May-Jun	-1.2
Apr	0.7	5.6
Mar	0.8	6.2
Feb	0.7	5.8
Jan	1.2	5.3
AE ∆% Jan-Apr	10.7
Dec 2010	0.7	4.7
Year
2011		5.0
2010		3.0
2009		-5.4
2008		5.9
2007		3.3
2006		5.2
2005		4.0
2004		2.7
2003		1.6
2002		0.2
2001		1.9

Source: Istituto Nazionale di Statistica

http://www.istat.it/it/archivio/51905

Monthly and 12-month inflation of the producer price index of Italy and individual components is provided in Table VI-8. Energy prices increased 0.7 percent in Dec and rose 9.5 percent in 12 months. Producer-price inflation is positive for all components in the month of Nov with exception of decline by 0.2 percent in intermediate goods. There is higher inflation in 12 months of 3.7 percent for nondurable goods than 2.4 percent for durable goods.

Table VI-8, Italy, Industrial Prices, Internal Market, ∆%

	Dec 2011/      Nov 2011	Dec 2011/      Dec 2010
Total	0.1	4.0
Consumer Goods	0.0	3.4
Durable Goods	0.1	2.4
Nondurable	0.0	3.7
Capital Goods	0.1	1.3
Intermediate	-0.2	2.8
Energy	0.7	9.5

Source: Istituto Nazionale di Statistica

http://www.istat.it/it/archivio/51905

The Istituto Nazionale di Statistica of Italy released the preliminary estimate of Jan 2012 inflation of 0.3 percent and 3.2 percent in 12 months. The wave of commodity price increases (http://cmpassocregulationblog.blogspot.com/2011/12/recovery-without-hiring-world-inflation_20.html) in the first four months of 2011 also influenced the surge of consumer price inflation in Italy shown in Table VI-9. Annual equivalent inflation in the first four months of 2011 was 4.9 percent. The crisis of confidence or risk aversion resulted in reversal of carry trades on commodity positions. Consumer price inflation in Italy was subdued in Jun and May at 0.1 percent for annual equivalent 1.2 percent. Annual equivalent inflation in the six months Jul-Jan jumped again at 3.7 percent.

Table VI-9, Italy, Consumer Price Index

	Month	12 Months
Jan 2012	0.3	3.2
Dec 2011	0.4	3.3
Nov	-0.1	3.3
Oct	0.6	3.4
AE ∆% Oct-Jan	3.7
Sep	0.0	3.0
Aug	0.3	2.8
Jul	0.3	2.7
AE ∆% Jul-Sep	2.4
Jun	0.1	2.7
May	0.1	2.6
AE ∆% May-Jun	1.2
Apr	0.5	2.6
Mar	0.4	2.5
Feb	0.3	2.4
Jan	0.4	2.1
AE ∆% Jan-Apr	4.9
Dec 2010	0.4	1.9

Source: Istituto Nazionale di Statistica

http://www.istat.it/it/archivio/52552

Consumer price inflation in Italy by segments in Jan 2012 is provided in Table VI-10. Total consumer price inflation in Jan was 0.3 percent and 3.2 percent in 12 months. Inflation of goods was 0.8 percent and 3.9 percent in 12 months. Prices of durable goods rose 0.2 percent in Jan and increased only 1.1 percent in 12 months, as typical in most countries. Prices of energy goods jumped 3.8 percent in Jan and 15.3 percent in 12 months. Food prices increased only 0.2 percent in Jan and 2.3 percent in 12 months. Prices of services decreased 0.2 percent and rose 2.3 percent in 12 months. Transport prices, also influenced by commodity prices, decreased 0.9 percent in Jan and 4.7 percent in 12 months. Carry trades from zero interest rates to positions in commodity futures cause increases in commodity prices. Waves of inflation originate in periods when there is no risk aversion and commodity prices decline during periods of risk aversion.

Table VI-10, Italy, Consumer Price Index and Segments, Month and 12-Month ∆%

Jan 2012	Month ∆%	12-Months ∆%
Total	0.3	3.2
I Goods	0.8	3.9
Food	0.2	2.3
Energy	3.8	15.3
Durable	0.2	1.1
Nondurable	0.2	0.7
II Services	-0.2	2.3
Housing	0.8	2.5
Communications	0.1	2.0
Transport	-0.9	4.7

Source: Istituto Nazionale di Statistica

http://www.istat.it/it/archivio/52552

The International Monetary Fund (IMF) has revised its World Economic Outlook (WEO) to an environment of lower growth (IMF 2012WEOJan24):

“The global recovery is threatened by intensifying strains in the euro area and fragilities elsewhere. Financial conditions have deteriorated, growth prospects have dimmed, and downside risks have escalated. Global output is projected to expand by 3¼ percent in 2012—a downward revision of about ¾ percentage point relative to the September 2011 World Economic Outlook (WEO).”

The IMF (2012WEOJan24) projects growth of world output of 3.8 percent in 2011 and 3.3 percent in 2012 after 5.2 percent in 2010. Advanced economies would grow at only 1.6 percent in 2011, 1.2 percent in 2012 and 3.9 percent in 2013 after growing at 3.2 percent in 2010. Emerging and developing economies would drive the world economy, growing at 6.2 percent in 2011, 5.4 percent in 2012 and 5.9 percent in 2012 after growing at 7.3 percent in 2010. The IMF is forecasting deceleration of the world economy.

World economic slowing would be the consequence of the mild recession in the euro area in 2012 caused by “the rise in sovereign yields, the effects of bank deleveraging on the real economy and the impact of additional fiscal consolidation” (IMF 2012WEOJan24). After growing at 1.9 percent in 2010 and 1.6 percent in 2010, the economy of the euro area would contract by 0.5 percent in 2012 and grow at 0.8 percent in 2013. The United States would grow at 1.8 percent in both 2011 and 2012 and at 2.2 percent in 2013. The IMF (2012WEO Jan24) projects slow growth in 2012 of Germany at 0.3 percent and of France at 0.2 percent while Italy contracts 2.2 percent and Spain contracts 1.7 percent. While Germany would grow at 1.5 percent in 2013 and France at 1.0 percent, Italy would contract 0.6 percent and Spain 0.3 percent.

The IMF (2012WEOJan24) also projects a downside scenario, in which the critical risk “is intensification of the adverse feedback loops between sovereign and bank funding pressures in the euro area, resulting in much larger and more protracted bank deleveraging and sizable contractions in credit and output.” In this scenario, there is contraction of private investment by an extra 1.75 percentage points in relation to the projections of the WEO with euro area output contracting 4 percent relative to the base WEO projection. The environment could be complicated by failure in medium-term fiscal consolidation in the United States and Japan.

There is significant deceleration in world trade volume in the projections of the IMF (2012WEOJan24). Growth of the volume of world trade in goods and services decelerates from 12.7 percent in 2010 to 6.9 percent in 2011, 3.8 percent in 2012 and 5.4 percent in 2013. Under these projections there would be significant pressure in economies in stress such as Japan and Italy that require trade for growth. Even the stronger German economy is dependent on foreign trade. There is sharp deceleration of growth of exports of advanced economies from 12.2 percent in 2010 to 2.4 percent in 2012. Growth of exports of emerging and developing economies falls from 13.8 percent in 2010 to 6.1 percent in 2012. Another cause of concern in that oil prices in the projections fall only 4.9 percent in 2012, remaining at relatively high levels. Table USA provides the data table for the US.

Table USA, US Economic Indicators

Consumer Price Index	Dec 12 months NSA ∆%: 3.0; ex food and energy ∆%: 2.2 Nov month ∆%: 0.0; ex food and energy ∆%: 0.1 Blog 01/22/12
Producer Price Index	Dec 12 months NSA ∆%: 4.8; ex food and energy ∆% 3.0 Dec month SA ∆% = -0.1; ex food and energy ∆%: 0.3 Blog 01/22/12
PCE Inflation	Dec 12 months NSA ∆%: headline 2.4; ex food and energy ∆% 1.8 Blog 02/05/12
Employment Situation	Household Survey: Jan Unemployment Rate SA 8.3% Blog calculation People in Job Stress Jan: 31.3 million NSA Establishment Survey: Nov Nonfarm Jobs 243,000; Private +257,000 jobs created  Dec 12 months Average Hourly Earnings Inflation Adjusted ∆%: minus 0.9% Blog 02/05/12
Nonfarm Hiring	Nonfarm Hiring fell from 64.9 million in 2006 to 47.2 million in 2010 or by 17.7 million Private-Sector Hiring Nov 2011 3.500 million lower by 1.145 million than 4.645 million in Nov 2006 Blog 01/15/12
GDP Growth	BEA Revised National Income Accounts back to 2003 IQ2011 SAAR ∆%: 0.4 IIQ2011 SAAR ∆%: 1.3 IIIQ2011 SAAR ∆%: 1.8 IVQ2011 ∆%: 2.8 Cumulative 2011 ∆%: 1.6 2011/2010 ∆%: 1.7 Blog 01/29/12
Personal Income and Consumption	Dec month ∆% SA Real Disposable Personal Income (RDPI) 0.3 Dec month SA ∆% Real Personal Consumption Expenditures (RPCE): -0.1 12 months NSA ∆%: RDPI: -0.1; RPCE ∆%: 1.4 Blog 02/05/2011
Quarterly Services Report	IIIQ11/IIQII SA ∆%: Information 0.6 Professional 0.8 Administrative 1.7 Hospitals -0.9 Blog 12/11/11
Employment Cost Index	IVQ2011 SA ∆%: 0.4 Dec 12 months ∆%: 2.0 Blog 02/05/12
Industrial Production	Dec month SA ∆%: 0.4 Dec 12 months SA ∆%: 3.7 Capacity Utilization: 78.1 Blog 01/22/12
Productivity and Costs	Nonfarm Business Productivity IVQ2011∆% SAAE 0.7; IVQ2011/IVQ2010 ∆% 0.5; Unit Labor Costs IVQ2011 ∆% 1.2; IVQ2011/IVQ2010 ∆%: 1.3 Blog 02/05/2012
New York Fed Manufacturing Index	General Business Conditions From 8.19 Dec to Jan 13.48 New Orders: From 5.99 Dec to 13.70 Jan Blog 01/22/12
Philadelphia Fed Business Outlook Index	General Index from 6.8 Dec to 8.2 Jan New Orders from 10.7 Dec to 6.5 Jan Blog 1/22/12
Manufacturing Shipments and Orders	Dec New Orders SA ∆%: 1.1; ex transport ∆%: 0.6 2011 NSA ∆%: 12.1; ex transport ∆% 11.9 Blog 02/05/12
Durable Goods	Dec New Orders SA ∆%: 3.0; ex transport ∆%: 2.1 Jan-Dec months NSA New Orders ∆%: 10.0; ex transport ∆% : 8.7 Blog 01/29/12
Sales of New Motor Vehicles	Jan 2012 913,287; Jan 2011 819,795. Jan SAAR 14.18 million, Dec SAAR 13.56, Jan 2011 SAAR 12.69 million Blog 02/05/12
Sales of Merchant Wholesalers	Jan-Nov 2011/2010 ∆%: Total 14.4; Durable Goods: 12.3; Nondurable Goods 16.2 Blog 01/15/12
Sales and Inventories of Manufacturers, Retailers and Merchant Wholesalers	Oct 11/Oct 10 NSA ∆%: Sales Total Business 9.3; Manufacturers 9.7 Retailers 7.0; Merchant Wholesalers 11.0 Blog 01/15/12
Sales for Retail and Food Services	Jan-Dec 2011/Jan-Dec 2010 ∆%: Retail and Food Services: 7.7; Retail ∆% 7.9 Blog 01/15/12
Value of Construction Put in Place	Dec SAAR month SA ∆%: 1.5 Dec 12 months NSA: 3.7 Blog 02/05/12
Case-Shiller Home Prices	Nov 2011/Nov 2010 ∆% NSA: 10 Cities minus 1.3; 20 Cities: minus 1.3 ∆% Nov SA: 10 Cities minus 0.7 ; 20 Cities: minus 0.7 Blog 02/05/12
FHFA House Price Index Purchases Only	Nov SA ∆% 1.0; 12 month ∆%: minus 1.8 Blog 01/29/12
New House Sales	Dec month SAAR ∆%: minus 2.2 Jan-Dec 2011/Jan-Dec 2010 NSA ∆%: minus 6.2 Blog 01/29/12
Housing Starts and Permits	Dec Starts month SA ∆%: -4.1; Permits ∆%: -0.1 Jan-Dec 2011/2010 NSA ∆% Starts 3.4; Permits  ∆% 1.2 Blog 1/22/12
Trade Balance	Balance Nov SA -$47,752 million versus Oct -$43,271 million Exports Nov SA ∆%: -0.9 Imports Nov SA ∆%: 1.3 Goods Exports Jan-Nov 2011/2010 NSA ∆%: 17.0 Good Imports Jan-Nov 2011/2010 NSA ∆%: 16.1 Blog 01/15/12
Export and Import Prices	Dec 12 months NSA ∆%: Imports 8.5; Exports 3.6 Blog 01/15/12
Consumer Credit	Nov ∆% annual rate: 9.9 Blog 01/15/12
Net Foreign Purchases of Long-term Treasury Securities	Nov Net Foreign Purchases of Long-term Treasury Securities: $59.8 billion Nov versus Oct -$41.0 billion Major Holders of Treasury Securities: China $1133 billion; Japan $1039 billion  Blog 01/22/12
Treasury Budget	Fiscal Year 2012/2011 ∆%: Receipts 4.4; Outlays -2.6; Individual Income Taxes 5.6 Deficit Fiscal Year 2011 $1,296,80 million Deficit Fiscal Year 2012 Oct-Dec $321,735 million Blog 01/15/12 CBO Forecast 2012FY Deficit $1.079 trillion Blog 02/05/2012
Flow of Funds	IIQ2011 ∆ since 2007 Assets -$6311B Real estate -$5111B Financial -$1490 Net Worth -$5802 Blog 09/18/11
Current Account Balance of Payments	IIIQ2011 -131B %GDP 2.9 Blog 12/18/11

Links to blog comments in Table USA:

01/29/12 http://cmpassocregulationblog.blogspot.com/2012/01/mediocre-economic-growth-financial.html

01/22/12 http://cmpassocregulationblog.blogspot.com/2012/01/world-inflation-waves-united-states.html

1/15/12 http://cmpassocregulationblog.blogspot.com/2012/01/recovery-without-hiring-united-states_15.html

01/08/12 http://cmpassocregulationblog.blogspot.com/2012/01/thirty-million-unemployed-or_08.html

01/01/12 http://cmpassocregulationblog.blogspot.com/2012/01/financial-risk-aversion-and-collapse-of.html

12/27/11 http://cmpassocregulationblog.blogspot.com/2011/12/slow-growth-falling-real-disposable_27.html

12/18/2011 http://cmpassocregulationblog.blogspot.com/2011/12/recovery-without-hiring-world-inflation_1721.html

12/11/2011 II http://cmpassocregulationblog.blogspot.com/2011/12/euro-zone-survival-risk-world-financial_11.html

09/18/11 http://cmpassocregulationblog.blogspot.com/2011/09/collapse-of-household-income-and-wealth.html

The Bureau of Labor Statistics (BLS) of the Department of Labor provides the quarterly report on productivity and costs. The operational definition of productivity used is (http://www.bls.gov/news.release/pdf/prod2.pdf 1): “Labor productivity, or output per hour, is calculated by dividing an index of real output by an index of hours worked of all persons, including employees, proprietors, and unpaid family workers.” The BLS has revised the estimates for productivity and unit costs. Table VIIA-1 provides revised data for nonfarm business sector productivity and unit labor costs for the first three quarters of 2011 in seasonally adjusted annual equivalent (SAAE) rate and the percentage change from the same quarter a year earlier. Reflecting increases in output of 3.6 percent and of 2.9 percent in hours worked, nonfarm business sector labor productivity rose at a lower revised SAAE rate of 0.7 percent in IVQ2011, as shown in column 2 “IVQ2011 SAEE.” The increase of labor productivity from IVQ2010 to IVQ2011 was 0.8 percent, reflecting increases in output of 2.8 percent and of hours worked of 0.9 percent, as shown in column 3 “IVQ2011 YoY.” The BLS defines unit labor costs as (http://www.bls.gov/news.release/pdf/prod2.pdf 1): “BLS defines unit labor costs as the ratio of hourly compensation to labor productivity; increases in hourly compensation tend to increase unit labor costs and increases in output per hour tend to reduce them.” Unit labor costs increased at the SAAE rate of 1.2 percent in IVQ2011 and rose 1.3 percent in IVQ2011 relative to IVQ2010. Hourly compensation in IVQ2011 increased at the SAAE rate of 1.9 percent, which deflating by the estimated consumer price increase SAAE rate in IVQ2011 results in an increase of real hourly compensation by 1.0 percent. Real hourly compensation fell 1.5 percent in IVQ2011 relative to IVQ2010.

Table VIIA-1, US, Nonfarm Business Sector Productivity and Costs %

	IVQ 2011 SAAE	IVQ 2011 YoY	IIIQ 2011 SAAE	IIIQ 2011 YoY	IIQ 2011 SAAE	IIQ 2011 YoY
Productivity	0.7	0.5	1.9	0.8	-0.1	0.9
Output	3.6	2.3	2.8	2.3	1.8	2.5
Hours	2.9	1.8	0.9	1.5	2.0	1.6
Hourly Comp.	1.9	1.7	-0.3	1.4	-0.2	1.9
Real Hourly Comp.	1.0	-1.5	-3.2	-2.3	-4.1	-1.4
Unit Labor Costs	1.2	1.3	-2.1	0.5	-0.1	1.0
Unit Nonlabor Payments	-1.1	2.7	9.0	4.6	6.7	2.9
Implicit Price Deflator	0.2	1.9	2.5	2.2	2.7	1.8

Notes: SAAE: seasonally adjusted annual equivalent; Comp.: compensation; YoY: Quarter on Same Quarter Year Earlier

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

The revised increases in productivity in Table VIIA-2 of 4.1 percent in the 2010 annual average and 2.3 percent in the 2009 annual average were facilitated by reductions in hours worked of 0.1 percent in 2010 and 7.2 percent in 2009. The contraction period and the recovery period have been characterized by savings of labor inputs. Hours worked increased 1.7 percent in 2011 but output rose only 2.4 percent such that the increase in productivity was only 0.7 percent. Real hourly compensation fell 1.2 percent in 2011, interrupting increases of 2.0 percent in 2009 and 0.4 percent in 2008.

Table VIIA-2, US, Revised Nonfarm Business Sector Productivity and Costs Annual Average, ∆% Annual Average 

	2011 ∆%	2010 ∆%	2009 ∆%	2008  ∆%
Productivity	0.7	4.1	2.3	0.6
Output	2.4	4.0	-5.1	-1.5
Hours	1.7	-0.1	-7.2	-2.1
Hourly Comp.	1.9	2.1	1.6	3.4
Real Hourly Compensation	-1.2	0.4	2.0	-0.4
Unit Labor Costs	1.2	-2.0	-0.7	2.8
Unit Nonlabor Payments	3.2	5.7	3.8
Implicit Price Deflator	2.1	1.1	1.1

Notes: SAAE: seasonally adjusted annual equivalent

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

Productivity jumped in the recovery after the recession from Mar IQ2001 to Nov IVQ2001 (http://www.nber.org/cycles.html). Table VIIA-3 provides quarter on quarter and annual percentage changes in nonfarm business output per hour, or productivity, from 2001 to 2011. The annual average jumped from 2.9 percent in 2001 to 4.6 percent in 2002. Nonfarm business productivity increased at the SAAE rate of 8.8 percent in the first quarter after the recession in IQ2002. Productivity increases decline later in the expansion period. Productivity increases were mediocre during the recession from Dec IVQ2007 to Jun IIQ2009 (http://www.nber.org/cycles.html) and increased during the first phase of expansion in 2010 but collapsed in 2011.

Table VIIA-3, US, Nonfarm Business Output per Hour, Percent Change from Prior Quarter at Annual Rate, 1999-2011

Year	Qtr1	Qtr2	Qtr3	Qtr4	Annual
1999	3.9	0.3	3.3	7.1	3.3
2000	-1.5	9.4	0.1	4.0	3.4
2001	-1.3	7.4	2.5	5.8	2.9
2002	8.8	0.5	3.8	-0.2	4.6
2003	3.7	5.5	9.5	1.5	3.7
2004	0.6	3.3	0.7	0.5	2.6
2005	4.2	-0.8	3.1	-0.2	1.6
2006	2.5	0.4	-2.2	2.7	0.9
2007	-0.1	3.3	4.7	2.1	1.5
2008	-2.4	2.2	-0.7	-3.4	0.6
2009	1.3	8.0	6.5	5.5	2.3
2010	4.6	1.2	2.1	2.2	4.1
2011	-0.6	-0.1	1.9	0.7	0.7

Source: US Bureau of Labor Statistics

http://www.bls.gov/lpc/home.htm

Chart VIIA-1 of the Bureau of Labor Statistics (BLS) provides SAAE rates of nonfarm business productivity from 2001 to 2011. There is a clear pattern in both episodes of economic cycles in 2001 and 2007 of rapid expansion of productivity in the transition from contraction to expansion followed by more subdued productivity expansion. Part of the explanation is the reduction in labor utilization resulting from adjustment of business to the sudden shock of collapse of sales.

Chart VIIA-1, US, Nonfarm Business Output per Hour, Percent Change from Prior Quarter at Annual Rate, 1999-2011

Source: US Bureau of Labor Statistics

http://www.bls.gov/lpc/home.htm

Percentage changes from prior quarter at SAAE rates and annual average percentage changes of nonfarm business unit labor costs are provided in Table VIIA-4. Unit labor costs fell during the contractions with continuing negative percentage changes in the early phases of the recovery. Weak labor markets partly explain the decline in unit labor costs. As the economy moves toward full employment, labor markets tighten with increase in unit labor costs. The expansion beginning in IIIQ2009 has been characterized by high unemployment and underemployment. Table VIIA-4 shows continuing subdued unit labor costs.

Table VIIA-4, US, Nonfarm Business Unit Labor Costs, Percent Change from Prior Quarter at Annual Rate 1999-2011

Year	Qtr1	Qtr2	Qtr3	Qtr4	Annual
1999	3.0	0.5	0.1	1.6	0.9
2000	17.4	-7.4	8.6	-1.6	3.9
2001	10.9	-5.8	-1.1	-1.7	1.5
2002	-4.1	3.4	-1.6	2.2	-1.3
2003	2.8	1.4	-3.5	1.8	1.0
2004	-2.5	2.4	5.8	2.7	0.7
2005	-1.0	3.5	2.6	2.6	2.3
2006	2.9	1.3	3.6	6.8	2.8
2007	4.0	-1.9	-1.9	4.4	2.4
2008	8.7	-3.5	4.3	5.7	2.8
2009	-4.0	-1.2	-3.9	-4.1	-0.7
2010	-3.1	1.4	-0.2	-1.6	-2.0
2011	6.2	-0.1	-2.1	1.2	1.2

Source: US Bureau of Labor Statistics

http://www.bls.gov/lpc/home.htm

Chart VIIA-5 provides percentage changes quarter on quarter at SAAE rates of nonfarm business unit labor costs. With the exception of a jump of 6.2 percent in IQ2011, 2.8 percent in IIQ2011 and 1.4 percent in IIQ2010, changes in nonfarm business unit labor costs have been negative.

Chart VIIA-5, US, Nonfarm Business Unit Labor Costs, Percent Change from Prior Quarter at Annual Rate 1999-2011

Source: US Bureau of Labor Statistics

http://www.bls.gov/lpc/home.htm

Table VIIA-6 provides percentage change from prior quarter at annual rates for nonfarm business real hourly worker compensation. The expansion after the contraction of 2001 was followed by strong recovery of real hourly compensation. Real hourly compensation increased at the rate of 0.3 percent in IQ2011 but fell at annual rates of 4.1 percent in IIQ2011 and at 3.2 percent in IIIQ2011. In 2011, real hourly compensation fell 1.2 percent.

Table VIIA-6, Nonfarm Business Real Hourly Compensation, Percent Change from Prior Quarter at Annual Rate 1999-2011

Year	Qtr1	Qtr2	Qtr3	Qtr4	Annual
1999	5.4	-2.0	0.2	5.6	2.2
2000	11.4	-1.8	4.7	-0.4	4.0
2001	5.4	-1.5	0.2	4.5	1.6
2002	2.8	0.6	0.0	-0.6	1.5
2003	2.4	7.7	2.5	1.8	2.4
2004	-5.2	2.6	3.7	-1.1	0.6
2005	1.3	-0.1	-0.3	-1.3	0.6
2006	3.1	-1.8	-2.6	11.6	0.5
2007	0.0	-3.3	0.2	1.6	1.1
2008	1.4	-6.3	-2.7	12.5	-0.4
2009	-0.4	4.7	-1.3	-1.5	2.0
2010	0.2	3.1	0.4	-2.1	0.4
2011	0.3	-4.1	-3.2	1.0	-1.2

Source: US Bureau of Labor Statistics

http://www.bls.gov/lpc/home.htm

Chart VIIA-6 provides percentage change from prior quarter at annual rate of nonfarm business real hourly compensation from 2001 to 2011. There are significant fluctuations in quarterly percentage changes oscillating between positive and negative. There is no clear pattern in the two contractions in the 2000s.

Chart VIIA-6, US, Nonfarm Business Real Hourly Compensation, Percent Change from Prior Quarter at Annual Rate 2001-2011

Source: US Bureau of Labor Statistics

http://www.bls.gov/lpc/home.htm

Chart VIIA-7 provides percentage change from prior quarter at annual rate for nonfarm business output per hour from 1947 to 2011. The average would be represented by a horizontal line above zero. There is an increase in the rate of improvement of productivity in the 1990s that was not continued into the 2000s.

Chart VIIA-7, US, Nonfarm Business Output per Hour, Percent Change from Prior Quarter at Annual Rate 1947-2011

Source: US Bureau of Labor Statistics http://www.bls.gov/lpc/home.htm

Chart VIIA-8 provides percentage changes from prior quarter at annual rate for US nonfarm business unit labor costs from 1947 to 2011. The most remarkable period is the 1970s in which stagflation occurred in fluctuating but high positive percentage changes of unit labor costs. There was significant moderation of increases in unit labor costs in the 1980s. Fluctuation has characterized the 2000s.

Chart VIIA-8, US, Nonfarm Business Unit Labor Costs, Percent Change from Prior Quarter at Annual Rate 1947-2011

Source: US bureau of Labor Statistics

http://www.bls.gov/lpc/home.htm

Chart VIIA-9 provides percentage changes from the prior quarter at annual rate of nonfarm business real hourly compensation from 1947 to 2011. Negative changes have occurred more frequently and pronounced in the 2000s than during the Great Inflation of the 1970s.

Chart VIIA-9, US, Nonfarm Business Real Hourly Compensation, Percent Change from Prior Quarter at Annual Rate 1947-2011

Source: US Bureau of Labor Statistics

http://www.bls.gov/lpc/home.htm

The Bureau of Labor Statistics (BLS) of the US Department of Labor provides the quarterly employment cost index (ECI). The ECI is highly useful in several ways including: (1) how costs of employees may affect hiring decisions and thus the overall economy; (2) impact of employment costs on inflation and thus monetary policy; and (3) relation of employee costs to inflation on issues such as welfare of the working population and their ability to consume that could affect economic growth. The BLS estimates total compensation composed of wages and salaries, which are about 70 percent of total compensation, and benefits, which account for the remaining 30 percent (http://www.bls.gov/news.release/pdf/eci.pdf 1). There is vast theoretical and empirical literature on how benefits interact with wage determination. The ECI is considered initially with current data in Table VIIA-7 and subsequently with charts of the BLS on evolution over the past decade. The BLS provides data for the entire civilian population, the private sector and state/local government. The data are available quarterly and for the 12 months of the ending month of the quarter. Total compensation 12-month percentage changes have moderated for the entire civilian population, the private sector and state and local government. Wages and salaries in the 12 months ending in Dec increased at relatively subdued rates of 1.6 percent for the private sector, 1.6 percent for the entire civilian population and only 1.0 percent for state/local workers. Wages have been losing relative to headline CPI inflation of 3.0 percent in the 12 months ending in Dec (http://www.bls.gov/cpi/). Compensation benefits of the private sector increased at 3.2 percent in the 12 months ending in Dec, which is more than twice as fast as wages and salaries.

Table VIIA-7, Employment Cost Index Quarterly and 12 Months Changes %

	IIIQ11 SA	IVQ11 SA	12 M Dec 10 NSA	12 M Mar 11 NSA	12 M Jun 11 NSA	12 M Sep 11 NSA	12 M  Dec 11 NSA
Civilian
Comp	0.3	0.4	2.0	2.0	2.2	2.0	2.0
Wages/ Salaries	0.3	0.4	1.6	1.6	1.6	1.6	1.4
Benefits	0.1	0.6	2.9	3.0	3.6	3.2	3.2
Private
Comp	0.4	0.4	2.1	2.0	2.3	2.1	2.2
Wages/ Salaries	0.4	0.4	1.8	1.6	1.7	1.7	1.6
Benefits	0.1	0.7	2.9	3.0	4.0	3.3	3.6
Health Benefits			5.0	3.4	3.6	3.4	3.5
State local Govt
Comp	0.0	0.3	1.8	1.8	1.7	1.5	1.3
Wages/ Salaries	-0.2	0.3	1.2	1.2	1.2	1.0	1.0
Benefits	0.3	0.3	2.9	3.3	3.0	2.5	2.1

Notes: Civilian includes private industry plus state and local government; SA: seasonally adjusted; NSA: not seasonally adjusted; Comp: compensation; Govt: government

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

A series of charts of the BLS provides evolution of the ECI during the past decade. Percentage changes in 12 months of total civilian compensation in Chart VIIA-10 were in a range of around 3 to 4 percent before the global recession, declining to less than 2 percent with the contraction and increasing above 2 percent in the expansion. Rates have fallen and then stagnated recently.

Chart VIIA-10, US, ECI, Total Compensation, All Civilian, 12-Month Percent Change, 2001-2011

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

Chart VIIA-11 provides the 12 months percentage rates of change of wages and salaries for the entire civilian population. The rates collapsed with the global recession and have flattened around 1.5 percent since 2010 while inflation has accelerated.

Chart VIIA-11, US, ECI, Wages and Salaries, All Civilian 12-Month Percent Change, 2001-2011

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

Percentage 12-month changes of benefits of the total civilian population in Chart VIIA-12 were much higher in the first part of the 2000s, surpassing relatively subdued inflation but declined to less than 2 percent with the global recession. After 2010, there is a clear rising trend of benefit above 3 percent with decline in recent months of 2011 and then stagnation.

Chart VIIA-12, US, ECI, Total Benefits, All Civilian 12 Months Percent Change, 2001-2011

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

ECI total compensation 12-months percentage changes from 2001 to 2011 for the private sector are shown in Chart VIIA-13. Behavior is almost identical as for total compensation. Private-sector compensation has stabilized somewhat above 2 percent with inflation rising to 3.0 percent in the 12 months ending in Dec.

Chart VIIA-13, US, ECI, Total Compensation, Private Industry 12 Months Percent Change, 2001-2011

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

There is different behavior of 12 months percentage rates of private-sector wages and salaries in Chart VIIA-14. Rates fell in the first part of the decade and then rose into 2007. Rates of change in 12 months of wages and salaries in the private sector fell during the global contraction to barely above 1 percent and have not rebounded while inflation has returned.

Chart VIIA-14, US, ECI, Wages and Salaries, Private Industry, 12 Months Percent Change, 2001-2011

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

Chart VIIA-15 provides 12-month rates of change of the consumer price index of the US. Inflation has risen sharply into 2011 with 3.0 percent in the 12 months ending in Dec while wage and salary increases in the private sector have risen by 1.4 percent in the 12 months ending in Dec.

Chart VIIA-15, US, Consumer Price Index, 12-Month Percentage Change, NSA, 2001-2011

Source: US Bureau of Labor Statistics

http://www.bls.gov/cpi/data.htm

Growth of benefits has been more dynamic than total compensation and wages and salaries, as shown in Chart VIIA-16. In 2004, the 12 month rate of change exceeded 7 percent. Rates of increase of benefits costs then fell even before the global recession, touching 1 percent in late 2010, rose sharply above 3 percent in 2011 and have fallen in recent months.

Chart VIIA-16, US, ECI, Total Benefits, Private Industry, 12 Months Percent Change, 2001-2011

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

Behavior at the margin is provided by rates of change in a quarter relative to the prior quarter, as shown in Chart VIIA-17. Quarterly rates of change of total civilian compensation were high in the early 2001, fell sharply with the global recession and collapsed in recent quarters.

Chart VIIA-17, US, Employment Cost Index All Civilian Total Compensation Three-Month % Change, 2001-2011

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

Chart VIIA-18 provides the quarterly rates of change of wages and salaries of the entire civilian population. The rates of change sank below 0.5 percent per quarter and have remained subdued since the global recession.

Chart VIIA-18, US, ECI, Wages and Salaries, All Civilian, Three-Month % Change, 2001-2011

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

Quarterly rates of change of benefits of the total civilian population in Chart VIIA-19 had declined before the global recession. The rate collapsed in recent quarters.

Chart VIIA-19, US, ECI, Total Benefits, All Civilian, Three-Month % Change, 2001-2011

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

Quarterly rates of change of total compensation of the private sector in Chart VIIA-20 have not returned to the levels before the contraction except with sporadic jump in 2011 followed by contraction and stagnation in recent quarters.

Chart VIIA-20, US, ECI, Total Compensation, Private Industry, Three-Month % Change, 2001-2011

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

Quarterly rates of change of wages and salaries of the private sector in Chart VIIA-21 exhibit significant fluctuation. Quarterly rates of change have fallen below 0.5 percent in the current expansion.

Chart VIIA-21, US, ECI, Wages and Salaries, Private Industry, Three-Month % Change, 2001-2011

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

The 12-month rates of change of benefits of private industry in Chart VIIA-3 have fluctuated widely with the only negative change in 2007. The 12-month rate of private-sector benefits fell in past months.

Chart VIIA-23, US, ECI, Total Benefits, Private Industry, Three-Month % Change, 2001-2011

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

Motor vehicle sales and production in the US have been in long-term structural change. Table 33 provides the data on new motor vehicle sales and domestic car production in the US from 1990 to 2010. New motor vehicle sales grew from 14,137 thousand in 1990 to the peak of 17,806 thousand in 2000 or 29.5 percent. In that same period, domestic car production fell from 6,231 thousand in 1990 to 5,542 thousand in 2000 or -11.1 percent. New motor vehicle sales fell from 17,445 thousand in 2005 to 11,772 in 2010 or 32.5 percent while domestic car production fell from 4,321 thousand in 2005 to 2,840 thousand in 2010 or 34.3 percent. In Jan 2012, light vehicle sales accumulated to 913,287, which is higher by 11.4 percent relative to 819,795 a year earlier (http://www.motorintelligence.com/m_frameset.html). The seasonally-adjusted annual rate of light vehicle sales in the US reached 14.18 million in Jan 2012, higher than 13.56 million in Dec 2011 and higher than 12.69 million in Jan 2011 (http://www.motorintelligence.com/m_frameset.html).

Table VII-8, US, New Motor Vehicle Sales and Car Production, Thousand Units

	New Motor Vehicle Sales	New Car Sales and Leases	New Truck Sales and Leases	Domestic Car Production
1990	14,137	9,300	4,837	6,231
1991	12,725	8,589	4,136	5,454
1992	13,093	8,215	4,878	5,979
1993	14,172	8,518	5,654	5,979
1994	15,397	8,990	6,407	6,614
1995	15,106	8,536	6,470	6,340
1996	15,449	8,527	6,922	6,081
1997	15,490	8,273	7,218	5,934
1998	15,958	8,142	7,816	5,554
1999	17,401	8,697	8,704	5,638
2000	17,806	8,852	8,954	5,542
2001	17,468	8,422	9,046	4,878
2002	17,144	8,109	9,036	5,019
2003	16,968	7,611	9,357	4,510
2004	17,298	7,545	9,753	4,230
2005	17,445	7,720	9,725	4,321
2006	17,049	7,821	9,228	4,367
2007	16,460	7,618	8,683	3,924
2008	13,494	6,814	6.680	3,777
2009	10,601	5,456	5,154	2,247
2010	11,772	5,729	6,044	2,840

Source: US Census Bureau http://www.census.gov/compendia/statab/cats/wholesale_retail_trade/motor_vehicle_sales.html

Manufacturers’ shipments increased 0.7 percent in Dec after increasing while new orders increased a strong 1.1 percent in Dec, as shown in Table VIIA-9. These data are very volatile. Automobile shipments fell 3.4 percent in Nov but increased 4.8 percent in Dec. Volatility is illustrated by increase of 88.1 percent of nondefense aircraft in Nov and 18.9 percent in Dec following declines of 13.9 percent in Oct and 26.7 percent in Sep, growth of 26.2 percent in Aug and 49.9 percent in Jul but decline of 24.0 percent in Jun. Capital goods new orders, indicating investment, increased 4.6 percent in Dec and 8.0 percent in Nov after falling 5.4 percent in Oct and 2.8 percent in Sep but growing 4.7 percent in Aug after growing 3.1 percent in Jul but falling 2.4 percent in Jun. New orders of nondefense capital goods jumped 6.0 in Dec and 8.1 percent in Nov after declines of 3.5 percent in Oct and 3.5 percent in Sep but with strong growth of 5.4 percent in Aug and 4.2 percent in Jul but decline of 2.4 percent in Jun. Excluding more volatile aircraft, capital goods orders still increased 3.5 percent in Dec after falling 1.5 percent in Nov and 0.9 percent in Oct.

Table VIIA-9, US, Value of Manufacturers’ Shipments and New Orders, SA, Month ∆%

2011	Dec ∆%	Nov  ∆%	Oct    ∆%	Sep        ∆%	Aug ∆%
All Mfg Industries
S	0.7	0.2	0.5	0.3	0.1
NO	1.1	2.2	-0.2	-0.1	0.1
Excluding Transport
S	0.7	0.2	-0.1	0.6	0.7
NO	0.6	0.5	0.4	0.9	-0.1
Excluding Defense
S	0.6	0.2	0.6	0.4	0.0
NO	1.3	2.3	0.3	-0.2	0.0
Durable Goods
S	2.2	-0.2	1.5	-0.4	0.1
NO	3.0	4.2	0.1	-1.4	0.1
Machinery
S	4.3	0.7	-2.7	-1.0	5.8
NO	6.7	1.2	0.8	-1.9	-1.9
Computers & Electronic Products
S	-0.6	-3.0	1.1	-0.8	0.6
NO	0.6	-6.4	1.3	2.2	1.4
Computers
S	2.4	-12.3	9.7	3.8	-4.7
NO	-2.3	-9.0	6.1	7.3	2.5
Transport Equipment
S	0.9	-2.5	5.2	-1.9	-4.9
NO	5.4	16.6	-4.5	-7.5	0.8
Automobiles
S	4.8	-3.4	10.4	1.4	-5.5
Motor Vehicles
S	2.4	-0.2	2.7	-1.2	-5.6
NO	1.7	1.9	1.3	-2.1	-5.4
Nondefense Aircraft
S	1.2	-11.6	8.3	3.1	3.4
NO	18.9	88.1	-13.9	-26.7	26.2
Capital Goods
S	3.4	-2.0	-0.5	-0.4	3.0
NO	4.6	8.0	-5.4	-2.8	4.7
Nondefense Capital Goods
S	2.8	-2.2	0.3	-0.4	3.0
NO	6.0	9.3	-3.5	-3.5	5.4
Capital Goods ex Aircraft
S	3.1	-0.9	-0.9	-0.5	3.1
NO	3.5	-1.5	-0.9	1.4	0.9
Nondurable Goods
S NO	-0.8	0.9	-0.4	0.9	0.0

Note:Mfg: manufacturing; S: shipments; NO: new orders; Transport: transportation

Source: http://www.census.gov/manufacturing/m3/prel/pdf/s-i-o.pdf

Chart VIIA-24 of the US Census Bureau shows monthly changes in manufacturers’ new orders in the past 12 months. Trends are difficult to discern for these data because of the significant volatility.

Chart VIIA-24, US, Manufacturers’ New Orders 2010-2011 Seasonally Adjusted, Month ∆%

Source: US Census Bureau

http://www.census.gov/briefrm/esbr/www/esbr022.html

Additional perspective on manufacturers’ shipments and new orders is provided by Table VIIA-10. Values are cumulative millions of dollars in Jan-Dec 2011 not seasonally adjusted (NSA). Shipments of all manufacturing industries in 2011 total $5.4 trillion and new orders also total $5.4 trillion, growing respectively by 11.2 percent and 12.1 percent relative to the same period in 2010. Excluding transportation equipment, shipments grew 12.0 percent and new orders increased 11.9 percent. Excluding defense, shipments grew 12.0 percent and new orders grew 12.9 percent. Important information in Table VIIA-10 is the large share of nondurable goods: with shipments of $3 trillion, growing by 14.0 percent, and new orders of $3 trillion, growing by 14.0 percent, in part driven by higher prices for food and energy. Durable goods are lower in value, with shipments of $2.4 trillion, growing by 7.9 percent, and new orders of $2.4 trillion, growing by 10.0 percent. Capital goods have relatively high value of $914.7 billion for shipments, growing 5.4 percent, and new orders $981.8 billion, growing 10.9 percent, which could be a favorable sign of future investment. Excluding aircraft, capital goods shipments reached $770.3 billion, growing by 9.1 percent, and new orders $794.4 billion, growing 10.0 percent. Automobile shipments reached $63.1 billion, growing by 6.5 percent. There is no suggestion in these data that the US economy is close to recession.

Table VIIA-10, US, Value of Manufacturers’ Shipments and New Orders, NSA, Millions of Dollars 

Jan-Dec 2011	Shipments	∆% 2011/ 2010	New Orders	∆% 2011/ 2010
All Manufacturing Industries	5,357,731	11.2	5,359,085	12.1
Excluding Transport	4,795,774	12.0	4,752,296	11.9
Excluding Defense	5,238,670	12.0	5,236,505	12.9
Durable Goods	2,379,549	7.9	2,380,903	10.0
Machinery	354,349	12.2	378,729	13.4
Computers & Electronic Products	368,597	1.2	289,905	-1.9
Computers	49,983	9.3	49,773	8.6
Transport Equipment	561,957	4.4	606,789	13.7
Automobiles	63,076	6.5	NA	NA
Motor vehicles	171,297	6.4	171,771	6.7
Nondefense Aircraft	88,929	11.0	101,409	33.3
Capital Goods	914,713	5.4	981,831	10.9
Nondefense Capital Goods	822,549	9.1	886,532	14.5
Capital Goods ex Aircraft	770,300	9.1	794,362	10.0
Nondurable Goods	2,978,182	14.0	2,978,182	14.0

Note: Transport: transportation

Source: US Census Bureau

http://www.census.gov/manufacturing/m3/prel/pdf/s-i-o.pdf

Manufacturers’ new orders in the months of Oct, Nov and Dec, not seasonally adjusted are provided in Table VIIA-11 from 1992 to 2011. The level of new orders in Dec 2011 of $446,222 million is above the level of $434,133 million in Dec 2006 and slightly lower than $477,816 billion in Dec 2007. The comparison is somewhat distorted by inflation in the latter years because the data are not adjusted for inflation.

Table VIIA-11, US, Manufacturers’ New Orders NSA Millions of Dollars

Year	Oct	Nov	Dec
1992	250,738	238,753	245,841
1993	257,233	249,000	250,599
1994	280,143	277,084	279,657
1995	294,603	288,737	291,866
1996	311,265	306,883	298,661
1997	330,521	326,856	317,483
1998	323,043	313,623	319,159
1999	343,647	331,794	346,933
2000	345,596	339,253	342,367
2001	327,895	305,478	310,984
2002	332,120	314,727	315,270
2003	355,217	326,624	342,484
2004	370,121	367,104	374,934
2005	415,061	412,683	420,982
2006	423,058	416,901	434,133
2007	470,485	456,298	477,816
2008	431,450	368,944	376,947
2009	373,374	353,470	381,071
2010	407,224	398,065	422,050
2011	448,923	444,953	466,222

Source: http://www.census.gov/manufacturing/m3/

Dec was a third consecutive good month for construction spending in the US, as shown in Table VIIA-12. Construction spending at seasonally-adjusted annualized rate (SAAR) reached $816.4 billion in Dec, which was higher by 1.5 percent than in the prior month of Nov. Residential investment rose 0.7 percent in the month and nonresidential investment increased 1.9 percent. Public construction increased 1.7 percent while private construction grew 1.0 percent. Data in Table VIIA-12 show that nonresidential construction at $567.8 billion is much higher in value than residential construction at $248.5 billion while total private construction at $529.7 billion is much higher than public construction at $286.6 billion, all in SAAR.

Table VIIA-12, US, Value of Construction Put in Place in the United States Billion Dollars and Month and 12-Month ∆%  

	Dec 2011 SAAR $ Billions	Month ∆%	12 Month ∆%
Total	816.4	1.5	4.3
Residential	248.5	0.7	3.8
Nonresidential	567.8	1.9	4.5
Total Private	529.7	2.1	8.3
Private Residential	241.2	0.8	4.9
New Single Family	110.9	1.5	3.7
New Multi-Family	16.1	-0.3	18.8
Private Nonresidential	288.5	3.3	11.4
Total Public	286.6	0.5	-2.5
Public Residential	7.4	0.0	-21.7
Public Nonresidential	279.3	0.5	-1.8

SAAR: seasonally adjusted annual rate; B: billions

Source: US Census Bureau

http://www.census.gov/construction/c30/pdf/release.pdf

Further information on construction spending is provided in Table VIIA-13. The original monthly estimates not-seasonally adjusted (NSA) and their 12 months rates of change are provided in the first two columns while the SAAR and their monthly changes are provided in the final two columns. There has been improvement in construction in the US in 2011. On a monthly basis, construction fell four consecutive months from Dec 2010 to Mar 2011, increasing in eight of the nine months from Apr to Dec, with sole decline of 3.3 percent in Jul. The 12 months rates of change improved from minus 6.9 percent in Apr to the first positive 12 months percentage change of 0.8 percent in Oct followed by 0.5 percent in Nov and 3.7 percent in Dec.

Table VIIA-13, US, Value and Percentage Change in Value of Construction Put in Place, Dollars Millions and ∆%

	Value NSA Month $ Millions	12 Months ∆% NSA	Value SAAR $ Millions	Month ∆% SA*
Dec 2011	62.260	3.7	816,383	1.5
Nov	68,483	0.5	804,041	0.4
Oct	73,951	0.8	801,193	0.3
Sep	74,421	-0.3	798,972	1.1
Aug	75,838	-0.4	790,277	2.2
Jul	70,562	-3.8	773,296	-3.3
Jun	72,357	-1.5	799,568	1.5
May	67,296	-1.8	787,396	2.5
Apr	61,817	-6.9	768,226	0.7
Mar	56,731	-6.1	762,557	-0.2
Feb	51,412	-4.5	764,198	-1.0
Jan	52,278	-5.6	771,982	-1.4
Dec 2010	60,066	-6.3	782,880	-2.5

SAAR: Seasonally-adjusted Annual Rate

*Percentages are calculated with values without numbers and may differ from rounded numbers

Source: US Census Bureau http://www.census.gov/construction/c30/c30index.html

The strong contraction of the value of construction in the US is revealed by Table VIIA-14. Construction spending in Jan-Dec 2011, not seasonally adjusted, reached $787.4 billion, which is lower by 2.0 percent than $803.6 billion in the same period in 2010. The depth of the contraction is shown by the decline of construction spending from $1,192.2 billion in Jan-Dec 2006 to only $787.4 billion in the same period in 2011, or decline by minus 33.9 percent. The comparable decline from Jan-Dec 2005 to Jan-Dec 2011 is minus 31.2 percent. Construction spending Jan-Dec 2011 fell by 14.0 percent relative to the same period in 2003. Construction spending is lower by 14.0 percent in Jan-Dec 2011 relative to the same period in 2009. Construction has been weaker than the economy as a whole.

Table VIIA-14, US, Value of Construction Put in Place in the United States, Not Seasonally Adjusted, $ Billions and ∆%

Jan-Dec 2011 $ B	787.4
Jan-Dec 2010 $ B	803.6
∆% to 2011	-2.0
Jan-Dec 2009	907.8
∆% to 2011	-13.3
Jan-Dec 2006 $ B	1,192.2
∆% to 2011	-33.9
Jan-Dec 2005 $ B	1,143.7
∆% to 2011	-31.2
Jan-Dec 2003	915.7
∆% to 2011	-14.0

Source: http://www.census.gov/construction/c30/pdf/release.pdf

http://www.census.gov/construction/c30/pdf/pr201012.pdf

http://www.census.gov/construction/c30/pdf/pr200712.pdf

http://www.census.gov/construction/c30/pdf/pr200612.pdf

http://www.census.gov/construction/c30/pdf/pr200412.pdf

Monthly construction spending in the US in the quarter Oct to Dec not seasonally adjusted is shown in Table VIIA-15 for the years between 2002 and 2011. The values of $60.1 billion in Dec 2010 and $62.3 billion in Dec 2011 are lower than $63.9 billion in Dec 2002. Construction in Dec fell by 29.4 percent from the peak of $88.2 in Dec 2005 to $62.3 billion in Dec 2011. The data are not adjusted for inflation or changes in quality.

Table VIIA-15, US, Value of Construction Spending NSA Millions of Dollars

Year	Oct	Nov	Dec
2002	75,710	71,362	63,984
2003	83,133	77,915	71,050
2004	90,582	86,394	77,733
2005	102,339	97,549	88,172
2006	101,582	95,339	86,436
2007	103,847	94,822	84,218
2008	95,612	86,067	76,645
2009	79,949	71,906	64,098
2010	73,379	68,163	60,066
2011	73,951	68,483	62,260

Source: US Census Bureau http://www.census.gov/const/www/c30index.html

Chart VIIA-25 of the US Bureau of the Census shows SAARs of construction spending for the US since 1993. Construction spending surged in nearly vertical slope after the stimulus of 2003 combining near zero interest rates and subsequent slow adjustment in 17 doses of increases by 25 basis points between Jun 2004 and Jun 2006 together with other housing subsidies. Construction spending collapsed after subprime mortgages defaulted with the fed funds rate increasing from 1.00 percent in Jun 2004 to 5.25 percent in Jun 2006. Subprime mortgages were programmed for refinancing in two years after increases in homeowner equity in the assumption that fed funds rates would remain low forever or increase in small increments (Gorton 2009EFM see http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html). Price declines of houses or even uncertainty prevented refinancing of subprime mortgages that defaulted, causing the financial crisis that eventually triggered the global recession. Chart VIIA-25 shows a trend of increase in the final segment but it is difficult to assess if it will be sustained.

Chart VIIA-25, US, Construction Expenditures SAAR 1993-2011

Source: US Census Bureau

http://www.census.gov/briefrm/esbr/www/esbr050.html

Construction spending at SAARs in the quarter Oct to Dec is shown in Table VIIA-16 for the years between 2002 and 2011. There is a peak in 2005 to 2006 with subsequent collapse of SAARs.

Table VIIA-16, US, Value of Construction Spending Seasonally Adjusted Annual Rate Millions of Dollars

Year	Oct	Nov	Dec
2002	839,690	844,697	855,921
2003	925,732	925,985	948,491
2004	1,015,562	1,023,210	1,037,684
2005	1,145,663	1,156,977	1,178,305
2006	1,139,292	1,137,488	1,153,491
2007	1,152,511	1,127,558	1,108,958
2008	1,050,690	1,029,211	993,515
2009	869,374	850,732	832,565
2010	801,995	802,980	782,880
2011	801,193	804,041	816,383

Source: US Census Bureau http://www.census.gov/const/www/c30index.html

Annual available data for the value of construction put in place in the US between 1993 and 2010 are provided in Table VIIA-17. Data from 1993 to 2001 are available for public and private construction with breakdown in residential and nonresidential only for private construction. Data beginning in 2002 provide aggregate residential and nonresidential values. Total construction value put in place in the US increased 65.5 percent between 1993 and 2010 but most of the growth, 65.3 percent, concentrated in 1993 to 2000 with growth of only 0.1 percent between 2000 and 2010. Total value of construction fell 5.2 percent between 2002 and 2010 with value of nonresidential construction increasing 24.4 percent while value of residential construction fell 38.1 percent. Value of total construction fell 29.5 percent between 2005 and 2010, with value of residential construction declining 38.1 percent while value of nonresidential construction rose 14.0 percent. Value of total construction fell 31.2 percent between 2006 and 2010, with value of nonresidential construction increasing 1.4 percent while value of residential construction fell 59.9 percent. In 2002, nonresidential construction had a share of 52.6 percent in total construction while the share of residential construction was 47.4 percent. In 2010, the share of nonresidential construction in total value rose to 69.1 percent while that of residential construction fell to 30.9 percent.

Table VIIA-17, Annual Value of Construction Put in Place 1993-2010, Millions of Dollars and ∆% 

	Total	Private Nonresidential	Private Residential
1993	485,548	150,006	208,180
1994	531,892	160,438	241,033
1995	548,666	180,534	228,121
1996	599,693	195,523	257,495
1997	631,853	213,720	264,696
1998	688,515	237,394	296,343
1999	744,551	249,167	326,302
2000	802,756	275,293	346,138
2001	840,249	273,922	364,414
	Total	Total Nonresidential	Total Private Residential
2002	847,874	445,914	401,960
2003	891,497	440,246	451,251
2004	991,356	452,948	538,408
2005	1,140,136	486,629	617,507
2006	1,167,222	547,408	619,814
2007	1,152,351	651,883	500,468
2008	1,067,564	709,818	357,746
2009	903,201	649,273	253,928
2010	803,621	554,915	248,706
∆% 1993-2010	65.5
∆% 1993-2000	65.3
∆% 2000-2010	0.1
∆% 2002-2010	-5.2	24.4	-38.1
∆% 2005-2010	-29.5	14.0	-59.7
∆% 2006-2010	-31.2	1.4	-59.9

Source: http://www.census.gov/const/www/c30index.html

Table VIIA-8 shows the euphoria of prices during the boom and the subsequent decline. House prices rose 96.1 percent in the 10-city composite of the Case-Shiller home price index and 81.4 percent in the 20-city composite between Nov 2000 and Nov 2005. Prices rose around 100 percent from Nov 2000 to Nov 2006, increasing 98.9 percent for the 10-city composite and almost doubled increasing by 84.7 percent for the 20-city composite. House prices rose 38.4 percent between Nov 2003 and Nov 2005 for the 10-city composite and 34.7 percent for the 20-city composite propelled by low fed funds rates of 1.0 percent between Jun 2003 and Jun 2004 and then only increasing by 0.25 basis points at every meeting of the Federal Open Market Committee (FOMC). Simultaneously, the suspension of auctions of the 30-year Treasury bond caused decline of yields of mortgage-backed securities with resulting decrease in mortgage rates. Similarly, between Nov 2003 and Nov 2006 the 10-city index gained 40.4 percent and the 20-city index increased 37.1 percent. House prices have fallen from Nov 2006 to Nov 2011 by 32.2 for the 10-city composite and 32.3 percent for the 20-city composite. Measuring house prices is quite difficult because of the lack of homogeneity that is typical of standardized commodities. In the 12 months ending in Nov 2011, house prices fell 3.6 percent in the 10-city composite and fell 3.7 percent in the 20-city composite in what has become a second round of decreases in prices of houses in the US. The final row in Table VIIA-18 shows that house prices increased 34.9 percent between Nov 2000 and Nov 2011 for the 10-city composite and increased 24.9 percent for the 20-city composite. Standard & Poor’s Case-Shiller estimates that the declines from the peak in Jun/Jul 2006 to the values in Nov 2011 are minus 32.9 percent for both the 10-city composite and the 20-city composite. House prices have recovered 1.0 percent for the 10-city composite from the low in Apr 2009 and 0.6 percent for the 20-city composite since the low in Mar 2011 recent (http://www.standardandpoors.com/spf/docs/case-shiller/CSHomePrice_Release_013118.pdf page 3).

Table VIIA-18, US, Percentage Changes of Standard & Poor’s Case-Shiller Home Price Indices, Not Seasonally Adjusted, ∆%

	10-City Composite	20-City Composite
∆% Nov 2000 to Nov 2003	41.7	34.7
∆% Nov 2000 to Nov 2005	96.1	81.4
∆% Nov 2003 to Nov 2005	38.4	34.7
∆% Nov 2000 to Nov 2006	98.9	84.7
∆% Nov 2003 to Nov 2006	40.4	37.1
∆% Nov 2000 to Nov 2011	34.9	24.9
∆% Nov 2005 to Nov 2011	-31.2	-31.1
∆% Nov 2006 to Nov 2011	-32.2	-32.3
∆% Nov 2009 to Nov 2011	-4.1	-5.3
∆% Nov 2010 to Nov 2011	-3.6	-3.7
∆% Nov 2000 to Nov 2011	34.9	24.9

Source: http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpidff--p-us----

With the exception of Apr, house prices seasonally-adjusted have declined in every month for both the 10-city and 20-city Case-Shiller composites, as shown in Table VIIA-19. Without seasonal adjustment, house prices fell from Dec 2010 throughout Mar 2011 and then increased in every month from Apr to Aug but fell in Sep, Oct and Nov. In Nov, house prices of the 10-city composite seasonally adjusted fell 0.7 percent and also fell 0.7 percent for the 20-city composite. The not seasonally adjusted index registers declines of 1.3 percent for both the 10- and 20-city composites. Declining house prices cause multiple adverse effects of which two are quite evident. (1) There is a disincentive to buy houses in continuing price declines. (2) More mortgages could be losing fair market value relative to mortgage debt. Another possibility is a wealth effect that consumers restrain purchases because of the decline of their net worth in houses.

Table VIIA-19, US, Monthly Percentage Change of S&P Case-Shiller Home Price Indices, Seasonally Adjusted, ∆%

	10-City Composite SA	10-City Composite NSA	20-City Composite SA	20-City Composite NSA
Nov 2011	-0.7	-1.3	-0.7	-1.3
Oct	-0.6	-1.2	-0.7	-1.3
Sep	-0.6	-0.5	-0.7	-0.6
Aug	-0.3	0.1	-0.4	0.1
Jul	-0.1	0.9	-0.1	0.9
Jun	-0.1	1.0	-0.1	1.1
May	-0.03	1.0	-0.04	1.0
Apr	0.5	0.6	0.5	0.6
Mar	-0.6	-0.9	-0.7	-1.0
Feb	-0.4	-1.3	-0.3	-1.2
Jan	-0.3	-1.1	-0.2	-1.1
Dec 2010	-0.3	-0.9	-0.3	-0.9

Source: http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpidff--p-us----

Weakness in the housing sector is being considered as an important factor of the financial crisis, global recession and slow growth recession. Chairman Bernanke (2011Oct4JEC, 2-3) states:

“Other sectors of the economy are also contributing to the slower-than-expected rate of expansion. The housing sector has been a significant driver of recovery from most recessions in the United States since World War II. This time, however, a number of factors--including the overhang of distressed and foreclosed properties, tight credit conditions for builders and potential homebuyers, and the large number of “underwater” mortgages (on which homeowners owe more than their homes are worth)--have left the rate of new home construction at only about one-third of its average level in recent decades.”

The answer to these arguments can probably be found in the origins of the financial crisis and global recession. Let V(T) represent the value of the firm’s equity at time T and B stand for the promised debt of the firm to bondholders and assume that corporate management, elected by equity owners, is acting on the interests of equity owners. Robert C. Merton (1974, 453) states:

“On the maturity date T, the firm must either pay the promised payment of B to the debtholders or else the current equity will be valueless. Clearly, if at time T, V(T) > B, the firm should pay the bondholders because the value of equity will be V(T) – B > 0 whereas if they do not, the value of equity would be zero. If V(T) ≤ B, then the firm will not make the payment and default the firm to the bondholders because otherwise the equity holders would have to pay in additional money and the (formal) value of equity prior to such payments would be (V(T)- B) < 0.”

Pelaez and Pelaez (The Global Recession Risk (2007), 208-9) apply this analysis to the US housing market in 2005-2006 concluding:

“The house market [in 2006] is probably operating with low historical levels of individual equity. There is an application of structural models [Duffie and Singleton 2003] to the individual decisions on whether or not to continue paying a mortgage. The costs of sale would include realtor and legal fees. There could be a point where the expected net sale value of the real estate may be just lower than the value of the mortgage. At that point, there would be an incentive to default. The default vulnerability of securitization is unknown.”

There are multiple important determinants of the interest rate: “aggregate wealth, the distribution of wealth among investors, expected rate of return on physical investment, taxes, government policy and inflation” (Ingersoll 1987, 405). Aggregate wealth is a major driver of interest rates (Ibid, 406). Unconventional monetary policy, with zero fed funds rates and flattening of long-term yields by quantitative easing, causes uncontrollable effects on risk taking that can have profound undesirable effects on financial stability. Excessively aggressive and exotic monetary policy is the main culprit and not the inadequacy of financial management and risk controls.

The net worth of the economy depends on interest rates. In theory, “income is generally defined as the amount a consumer unit could consume (or believe that it could) while maintaining its wealth intact” (Friedman 1957, 10). Income, Y, is a flow that is obtained by applying a rate of return, r, to a stock of wealth, W, or Y = rW (Ibid). According to a subsequent restatement: “The basic idea is simply that individuals live for many years and that therefore the appropriate constraint for consumption decisions is the long-run expected yield from wealth r*W. This yield was named permanent income: Y* = r*W” (Darby 1974, 229), where * denotes permanent. The simplified relation of income and wealth can be restated as:

W = Y/r (1)

Equation (1) shows that as r goes to zero, r →0, W grows without bound, W→∞.

Lowering the interest rate near the zero bound in 2003-2004 caused the illusion of permanent increases in wealth or net worth in the balance sheets of borrowers and also of lending institutions, securitized banking and every financial institution and investor in the world. The discipline of calculating risks and returns was seriously impaired. The objective of monetary policy was to encourage borrowing, consumption and investment but the exaggerated stimulus resulted in a financial crisis of major proportions as the securitization that had worked for a long period was shocked with policy-induced excessive risk, imprudent credit, high leverage and low liquidity by the incentive to finance everything overnight at close to zero interest rates, from adjustable rate mortgages (ARMS) to asset-backed commercial paper of structured investment vehicles (SIV).

The consequences of inflating liquidity and net worth of borrowers were a global hunt for yields to protect own investments and money under management from the zero interest rates and unattractive long-term yields of Treasuries and other securities. Monetary policy distorted the calculations of risks and returns by households, business and government by providing central bank cheap money. Short-term zero interest rates encourage financing of everything with short-dated funds, explaining the SIVs created off-balance sheet to issue short-term commercial paper to purchase default-prone mortgages that were financed in overnight or short-dated sale and repurchase agreements (Pelaez and Pelaez, Financial Regulation after the Global Recession, 50-1, Regulation of Banks and Finance, 59-60, Globalization and the State Vol. I, 89-92, Globalization and the State Vol. II, 198-9, Government Intervention in Globalization, 62-3, International Financial Architecture, 144-9). ARMS were created to lower monthly mortgage payments by benefitting from lower short-dated reference rates. Financial institutions economized in liquidity that was penalized with near zero interest rates. There was no perception of risk because the monetary authority guaranteed a minimum or floor price of all assets by maintaining low interest rates forever or equivalent to writing an illusory put option on wealth. Subprime mortgages were part of the put on wealth by an illusory put on house prices. The housing subsidy of $221 billion per year created the impression of ever increasing house prices. The suspension of auctions of 30-year Treasuries was designed to increase demand for mortgage-backed securities, lowering their yield, which was equivalent to lowering the costs of housing finance and refinancing. Fannie and Freddie purchased or guaranteed $1.6 trillion of nonprime mortgages and worked with leverage of 75:1 under Congress-provided charters and lax oversight. The combination of these policies resulted in high risks because of the put option on wealth by near zero interest rates, excessive leverage because of cheap rates, low liquidity because of the penalty in the form of low interest rates and unsound credit decisions because the put option on wealth by monetary policy created the illusion that nothing could ever go wrong, causing the credit/dollar crisis and global recession (Pelaez and Pelaez, Financial Regulation after the Global Recession, 157-66, Regulation of Banks, and Finance, 217-27, International Financial Architecture, 15-18, The Global Recession Risk, 221-5, Globalization and the State Vol. II, 197-213, Government Intervention in Globalization, 182-4).

VIIB. Japan. The Markit/JMMA Purchasing Managers’ Index^™ (PMI^™) improved for a second consecutive movement from 50.2 in Dec to 50.7 in Jan but still suggesting only marginal growth (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9077). New export business grew for the first time in eleven months with improvement in demand both internal and from abroad. Alex Hamilton, economist at Markit and author of the report finds a firmer beginning of the new quarter but with weak growth of new orders resulting from limited demand from China and Europe and valuation of the yen (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9077). Table JPY provides the country table for Japan.

Table JPY, Japan, Economic Indicators

Historical GDP and CPI	1981-2010 Real GDP Growth and CPI Inflation 1981-2010 Blog 07/31/11
Corporate Goods Prices	Dec ∆% 0.1 12 months ∆% 1.3 Blog 01/22/12
Consumer Price Index	Dec NSA ∆% minus 0.0 Dec 12 months NSA ∆% -0.2 Blog 01/29/12
Real GDP Growth	IIIQ2011 ∆%: 1.4 on IIQ2011;  IIIQ2011 SAAR 5.6% ∆% from quarter a year earlier: -0.7 % Blog 12/11/11
Employment Report	Dec Unemployed 2.75 million Change in unemployed since last year: minus 240 thousand Unemployment rate: 4.6% Blog 02/05/12
All Industry Indices	Nov month SA ∆% -1.1 12 months NSA ∆% -1.3 Blog 01/22/12
Industrial Production	Dec SA month ∆%: 4.0 12 months NSA ∆% minus 4.1 Blog 02/05/12
Machine Orders	Total Nov ∆% 14.7 Private ∆%: 21.5 Nov ∆% Excluding Volatile Orders 14.8 Blog 01/22/12
Tertiary Index	Nov month SA ∆% -0.8 Nov 12 months NSA ∆% -0.8 Blog 01/22/12
Wholesale and Retail Sales	Dec 12 months: Total ∆%: minus 0.5 Wholesale ∆%: minus 1.6 Retail ∆%: +2.5 Blog 01/29/12
Family Income and Expenditure Survey	Dec 12 months ∆% total nominal consumption 0.3, real 0.5 Blog 02/05/12
Trade Balance	Exports Dec 12 months ∆%: minus 8.0 Imports Dec 12 months ∆% +8.1 Blog 1/29/12

Links to blog comments in Table JPY: 01/29/12 http://cmpassocregulationblog.blogspot.com/2012/01/mediocre-economic-growth-financial.html

1/22/12 http://cmpassocregulationblog.blogspot.com/2012/01/world-inflation-waves-united-states.html

01/01/12 http://cmpassocregulationblog.blogspot.com/2012/01/financial-risk-aversion-and-collapse-of.html

12/27/11 http://cmpassocregulationblog.blogspot.com/2011/12/slow-growth-falling-real-disposable_27.html

12/11/2011 http://cmpassocregulationblog.blogspot.com/2011/12/euro-zone-survival-risk-world-financial.html

07/31/11: http://cmpassocregulationblog.blogspot.com/2011/07/growth-recession-debt-financial-risk.html

Japan’s industrial production fell revised 2.7 percent in Nov 2011 relative to Oct and revised 4.2 percent relative to a year earlier but increased 4.0 percent in Dec, which is still 4.1 percent lower than a year earlier in Dec 2010, as shown in Table VIIB-1. In Oct, industrial production increased 2.2 percent and 0.1 percent relative to a year earlier. The decline of 4.0 percent in Sep was revised to minus 3.3 percent and in 12 months also from minus 4.0 percent to minus 3.3 percent. Monthly industrial production had climbed in every month since the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011, with exception of Sep but fell again in Nov. Industrial production was higher in 12 months for the first month in Aug by 0.4 percent and again in Oct by 0.1 percent but fell 4.2 percent lower in Nov and 4.1 percent in Dec 2011 relative to a year earlier. Industrial production fell 21.9 percent in 2009 after falling 3.4 percent in 2008 but recovered 16.4 percent in 2010. The annual average in calendar year 2011 fell 3.5 percent largely because of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011.

Table VIIB-1, Japan, Industrial Production ∆%

	∆% Month SA	∆% 12 Months NSA
Dec 2011	4.0	-4.1
Nov	-2.7	-4.2
Oct	2.2	0.1
Sep	-3.3	-3.3
Aug	0.6	0.4
Jul	0.4	-3.0
Jun	3.8	-1.7
May	6.2	-5.5
Apr	1.6	-13.6
Mar	-15.5	-13.1
Feb	1.8	2.9
Jan	0.0	4.6
Dec 2010	2.4	5.9
Calendar Year
2011		-3.5
2010		16.4
2009		-21.9
2008		-3.4

Source: http://www.meti.go.jp/statistics/tyo/iip/result/pdf/press/h2a1012j.pdf

The employment report for Japan in Dec 2011 is in Table VIIB-2. The rate of unemployment fell from 4.6 percent in Jul to 4.1 percent in Sep but increased to 4.5 percent in Nov. The number unemployed has declined by 240 thousand, or 8.0 percent, relative to a year earlier.

Table VIIB-2, Japan, Employment Report Dec 2011

Unemployed	2.75 million
Change since last year	-240 thousand; ∆% –8
Unemployment rate	4.6% SA; 0.1from prior month Nov; NSA 4.6%, 0.1 from earlier year
Population ≥ 15 years	110.4 million
Change since last year	∆% –0.1
Labor Force	64.9 million
Change since last year	∆% –0.5
Employed	62.2 million
Change since last year	% -0.2
Labor force participation rate	58.9
Change since last year	-0.2
Employment rate	56.4%
Change since last year	0.0

Source: http://www.stat.go.jp/english/data/roudou/154.htm

Chart VIIB-1 of Japan’s Statistics Bureau at the Ministry of Internal Affairs and Communications provides the unemployment rate of Japan from 2009 to 2011. The sharp decline in Sep is the best reading in 2011 but the rate increased in the final quarter of the year.

Chart VIIB-1, Japan, Unemployment Rate 2008-2011

Source: Japan, Statistics Bureau, Ministry of Internal Affairs and Communications

http://www.stat.go.jp/english/data/roudou/154.htm

During the “lost decade” of the 1990s from 1991 to 2002 (Pelaez and Pelaez, The Global Recession Risk (2007), 82-3), Japan’s GDP great at the average yearly rate of 1.0 percent, the CPI at 0.1 percent and the implicit deflator at minus 0.8 percent. Japan’s growth rate from the mid 1970s to 1992 was 4 percent (Ito 2004). Table VIIB-3 provides Japan’s rates of unemployment, participation in labor force and employment for 1968, 1975, 1980 and 1985 and yearly from 1990 to 2010. The rate of unemployment jumped from 2.1 percent in 1991 to 5.4 percent in 2002, which was a year of global economic weakness. The participation rate dropped from 63.8 percent in 1992 to 61.2 percent in 2002 and the employment rate fell from 62.4 percent in 1992 to 57.9 percent in 2002. The rate of unemployment rose from 3.9 percent in 2007 to 5.1 percent in 2010 while the participation rate fell from 60.4 percent to 59.6 percent and the employment rate fell from 58.1 percent to 56.6 percent. The global recession adversely affected labor markets in advanced economies.

Table VIIB-3, Japan, Rates of Unemployment, Participation in Labor Force and Employment, %

	Unemployment Rate	Participation Rate	Employment Rate
1968	1.2	65.9	65.1
1975	1.9	63.0	61.9
1980	2.0	63.3	62.0
1985	2.6	63.0	61.4
1990	2.1	63.3	61.9
1991	2.1	63.8	62.4
1992	2.2	64.0	62.6
1993	2.5	63.8	62.2
1994	2.9	63.8	61.8
1995	3.2	63.4	61.4
1996	3.4	63.5	61.4
1997	3.4	63.7	61.5
1998	4.1	63.3	60.7
1999	4.7	62.9	59.9
2000	4.7	62.4	59.5
2001	5.0	62.0	58.9
2002	5.4	61.2	57.9
2003	5.3	60.8	57.6
2004	4.7	60.4	57.6
2005	4.4	60.4	57.7
2006	4.1	60.4	57.9
2007	3.9	60.4	58.1
2008	4.0	60.2	57.8
2009	5.1	59.9	56.9
2010	5.1	59.6	56.6

Source: http://www.stat.go.jp/english/data/roudou/154.htm

The survey of household income and consumption of Japan in Table VIIB-4 is showing noticeable improvement in recent months relative to earlier months, which can be appreciated in the chart in the link in parentheses but followed by decline in Nov and renewed strength in Dec (http://www.stat.go.jp/english/data/kakei/156.htm). Total consumption increased 0.5 percent in real terms in Dec and 0.3 percent in nominal terms. There are a few segments of decreasing real consumption: fuel, light and water charges 2.1 percent, medical care 5.8 percent, transport and communications 2.5 percent and culture and recreation 2.9 percent. Real household income was flat; disposable income fell 1.0 percent; and consumption expenditures increased 0.9 percent.

Table VIIB-4, Japan, Family Income and Expenditure Survey 12-months ∆% Relative to a Year Earlier

Dec 2011	Nominal	Real
Households of Two or More Persons
Total Consumption	0.3	0.5
Excluding Housing, Vehicles & Remittance		-0.1
Food	0.0	0.1
Housing	7.0	7.0
Fuel, Light & Water Charges	3.0	-2.1
Furniture & Household Utensils	-1.9	5.1
Clothing & Footwear	7.6	7.6
Medical Care	-6.9	-5.8
Transport and Communications	-1.0	-2.5
Education	17.8	17.6
Culture & Recreation	-6.6	-2.9
Other Consumption Expenditures	0.4	-0.7*
Workers’ Households
Income	-0.2	0.0
Disposable Income	-1.2	-1.0
Consumption Expenditures	0.7	0.9

*Real: nominal deflated by CPI excluding imputed rent

Source: http://www.stat.go.jp/english/data/kakei/156.htm

Percentage changes in 12 months of nominal and real consumption expenditures in Japan are provided in Table VIIB-5. There was sharp decline in nominal consumption of 8.8 percent in Mar 2011 and 8.2 percent in real consumption because of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Dec was the first month in 2011 with increases in 12 months in both nominal and real consumption expenditures. Nominal consumption expenditures fell 3.2 percent in 2010 but increased 1.7 percent in real terms. Both nominal and real consumption expenditures increased in 2009, 0.3 percent and 2.1 percent, respectively.

Table VIIB-5, Japan, Family Income and Expenditure Survey 12-months ∆% Relative to a Year Earlier

	Nominal Consumption Expenditures ∆% Relative to a Year Earlier	Real Consumption Expenditures ∆% Relative to a Year Earlier
Dec 2011	0.3	0.5
Nov	-3.8	-3.2
Oct	-0.6	-0.4
Sep	-1.9	-1.9
Aug	-3.9	-4.1
Jul	-1.8	-2.1
Jun	-3.9	-3.5
May	-1.6	-1.2
Apr	-2.5	-2.0
Mar	-8.8	-8.2
Feb	-0.1	0.5
Jan	-0.9	-0.3
Dec 2010	-3.2	1.7
Dec 2009	0.3	2.1

Source: http://www.stat.go.jp/english/data/kakei/156.htm

VIIC. China. The HSBC Purchasing Managers’ Index^™ (PMI^™), compiled by Markit, summarizing conditions in China’s manufacturing nearly remained flat from 48.7 in Dec to 48.8 in Jan, suggesting marginal deterioration, which now extends over three consecutive months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9105). New orders fell marginally for a third consecutive month with moderate growth of new export business. Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC, find need of policy stimulus to ensure soft landing that could occur in the form of growth at the rate of 8 percent in IQ2012 relative to IQ2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9105). Table CNY provides the country table for China.

Table CNY, China, Economic Indicators

Price Indexes for Industry	Dec 12 months ∆%: 1.7 Jan-Dec ∆%: 6.0 Dec month ∆%: -0.3 Blog 01/15/12
Consumer Price Index	Dec month ∆%: -0.3 Dec 12 month ∆%: 4.1 Jan-Dec ∆%: 5.4 Blog 01/15/12
Value Added of Industry	Dec 12 month ∆%: 12.8 Jan-Dec 2011/Jan-Dec 2010 ∆%: 13.9 Blog 1/22/12
GDP Growth Rate	Year IVQ2011 ∆%: 8.9 Quarter IIQ2011 ∆%: 2.0 Blog 1/22/12
Investment in Fixed Assets	Total Jan-Nov ∆%: 24.4 Jan-Nov ∆% real estate development: 29.9 Blog 12/18/11
Retail Sales	Dec month ∆%: 1.41 Dec 12 month ∆%: 18.1 Jan-Nov ∆%: 17.1 Blog 1/22/12
Trade Balance	Dec balance $16.52 billion Exports ∆% 13.4 Imports ∆% 11.8 Cumulative Dec: $155.14 billion Blog 01/15/12

Links to blog comments in Table CNY:

01/22/12 http://cmpassocregulationblog.blogspot.com/2012/01/world-inflation-waves-united-states.html

01/15/12 http://cmpassocregulationblog.blogspot.com/2012/01/recovery-without-hiring-united-states_15.html

12/18/11 http://cmpassocregulationblog.blogspot.com/2011/12/recovery-without-hiring-world-inflation_1721.html

VIIC Euro Area. The Markit Eurozone Manufacturing PMI^® rose to a five-month high at 48.8 in Jan from 46.9 in Dec, still suggesting weakening business environment but at lower pace (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9078). There is significant divergence in private-sector manufacturing in the euro zone with Austria and Germany above 50 while many countries are in the contraction zone below 50. Manufacturing output in the euro zone increased in Jan, which is the first increase since Jul. Declining euro zone trade affected growth of new export orders. Chris Williamson, Chief Economist at Markit, finds encouraging performance of manufacturing that could help in preventing recession in the euro zone (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9078). Table EUR provides the country economic indicators for the euro area.

Table EUR, Euro Area Economic Indicators

GDP	IIIQ2011 ∆% 0.2; IIIQ2011/IIIQ2010 ∆% 1.4 Blog 12/04/11
Unemployment	Dec 2011: 10.4% unemployment rate Dec 2011: 16.469 million unemployed Blog 02/05/12
HICP	Dec month ∆%: 0.3 12 months Dec ∆%: 2.7 Blog 01/22/12
Producer Prices	Euro Zone industrial producer prices Dec ∆%: -0.2 Dec 12 months ∆%: 4.3 Blog 02/05/12
Industrial Production	Nov month ∆%: -0.1 Nov 12 months ∆%: -0.3 Blog 01/15/12
Industrial New Orders	Oct month ∆%: minus 1.8 Oct 12 months ∆%: 1.6 Blog 01/08/12
Construction Output	Nov month ∆%: 0.8 Nov 12 months ∆%: 0.2 Blog 01/22/12
Retail Sales	Dec month ∆%: minus 0.4 Dec 12 months ∆%: minus 1.6 Blog 02/05/12
Confidence and Economic Sentiment Indicator	Sentiment 93.4 Jan 2012 down from 107 in Dec 2010 Confidence minus 20.7 Jan 2012 down from minus 11 in Dec 2010 Blog 02/05/12
Trade	Jan-Nov 2011/2010 Exports ∆%: 13.1 Imports ∆%: 13.1 Blog 01/15/12
HICP, Rate of Unemployment and GDP	Historical from 1999 to 2011 Blog 1/22/12

Links to blog comments in Table EUR:

01/22/12 http://cmpassocregulationblog.blogspot.com/2012/01/world-inflation-waves-united-states.html

01/15/12 http://cmpassocregulationblog.blogspot.com/2012/01/recovery-without-hiring-united-states_15.html

01/08/12 http://cmpassocregulationblog.blogspot.com/2012/01/thirty-million-unemployed-or.html

12/04/11 http://cmpassocregulationblog.blogspot.com/2011/12/twenty-nine-million-in-job-stress.html

Eurostat reported the rate of unemployment in the euro area as 10.4 percent in Dec and revised 10.4 percent in Nov, as shown in Table VIID-1. The number of unemployed in Nov 2011 was 16.469, which was 0.751 million higher than in Dec 2010.

Table VIID-1, Euro Area, Unemployment Rate and Number of Unemployed, % and Millions, SA 

	Unemployment Rate %	Number Unemployed Millions
Dec 2011	10.4	16.469
Nov	10.4	16.449
Oct	10.3	16.335
Sep	10.3	16.245
Aug	10.2	16.054
Jul	10.1	15.975
Jun	10.0	15.829
May	10.0	15.758
Apr	9.9	15.653
Mar	10.0	15.665
Feb	10.0	15.656
Jan	10.0	15.684
Dec 2010	10.0	15.718

Source: EUROSTAT http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database

Table VIID-2 shows the disparity in rates of unemployment in the euro area with 10.4 for the region as a whole but 5.5 percent in Germany (http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/3-31012012-AP/EN/3-31012012-AP-EN.PDF ). At the other extreme is Spain with rate of unemployment of 22.9 percent and 5.274 million unemployed.

Table VIID-2, Unemployed and Unemployment Rate in Countries and Regions, Millions and %

Dec 2011
Euro Zone	10.4	16.469
Germany	5.5	2.327
France	9.9	2.883
Netherlands	4.9	0.437
Finland	7.6	0.202
Portugal	13.6	0.741
Ireland	14.5	0.300
Italy	8.9	2.243
Greece	NA	NA
Spain	22.9	5.274
Belgium	7.2	0.346
European Union	9.9	23.816

Source: http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database

Chart VIID-1 provides Eurosat estimates of unemployment rates in the European Union. There is significant diversity in the rates of unemployment in members of the euro zone and the European Union.

Chart VIID-1, Unemployment Rate in Various Countries and Regions

Source: EUROSTAT

http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database

Table VIID-3 provides the euro area harmonized index of consumer prices, rate of unemployment and GDP growth from 1999 to 2011. The gains in reducing the rate of unemployment to 7.6 percent by 2007 were eroded by the global recession with increase of the rate of unemployment to more than 10.0 percent. GDP growth is stalling at the margin with significant differences in the economies of member countries.

Table VIID-3, Euro Area, HICP, Rate of Unemployment and GDP

	Harmonized Index of Consumer Prices ∆%	Rate of Unemployment % Annual Average	GDP ∆%
2011	2.7	10.1	1.5*
2010	1.6	10.1	1.9
2009	0.3	9.6	-4.3
2008	3.3	7.6	0.4
2007	2.1	7.6	3.0
2006	2.2	8.5	3.3
2005	2.2	9.2	1.7
2004	2.2	9.3	2.2
2003	2.1	9.0	0.8
2002	2.3	8.5	0.9
2001	2.4	8.1	1.9
2000	2.2	8.5
1999	1.2	9.4

*EUROSTAT Forecast

Sources: EUROSTAT http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database

Advanced economies are experiencing weak demand. Table VIID-4 provides the volume of retail sales in the euro zone from Jan to Dec 2011. Retail sales fell 0.4 percent in Dec and 1.6 percent in the 12 months ending in Dec. The 12 months rates of growth have become negative since Mar with exception of 1.1 percent in Apr.

Table VIID-4, Euro Zone, Volume of Retail Sales, ∆%

	Month ∆%	12-Month ∆%
Dec 2011	-0.4	-1.6
Nov	-0.4	-1.5
Oct	0.1	-0.7
Sep	-0.6	-1.2
Aug	0.0	-0.1
Jul	0.2	-0.4
Jun	0.5	-0.8
May	-1.2	-1.8
Apr	0.7	1.1
Mar	-0.8	-1.4
Feb	0.2	1.1
Jan	0.2	0.6

Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-03022012-AP/EN/4-03022012-AP-EN.PDF

Growth rates of retail sales of the euro zone by products are in Table VIID-5. There is weakness in all products without an increase in any segment in 12-month rates of change. All product categories fell in the month of Dec.

Table VIID-5, Euro Zone, Volume of Retail Sales by Products, ∆%

Nov 2011	Month ∆%	12-Month ∆%
Total	-0.4	-1.6
Food, Drinks, Tobacco	-0.2	-1.3
Nonfood Products ex Automotive Fuel	-0.1	-1.5

Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-03022012-AP/EN/4-03022012-AP-EN.PDF

Month and 12-month rates of change of retail sales by member countries of the euro zone are shown in Table VIID-6 for Dec 2011. Retail sales are weak throughout the euro zone. The final line provides retail sales for the UK, which is not a member of the euro zone. Germany, France and the UK are the largest economies with positive growth of retail sales in the 12 months ending in Dec for France and the UK.

Table VIID-6, Euro Zone, Volume of Retail Sales by Member Countries, ∆%

Dec 2011	Month ∆%	12-Month ∆%
Euro Zone	-0.4	-1.6
Germany	-1.4	-0.9
France	-0.3	0.3
Netherlands	NA	NA
Finland	-1.0	1.9
Belgium	1.5	0.9
Portugal	2.2	-8.8
Ireland	0.0	0.8
Italy	NA	NA
Greece	NA	NA
Spain	-0.8	-5.3
UK	0.4	6.3

Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-03022012-AP/EN/4-03022012-AP-EN.PDF

The Economic Sentiment Indicator of the European Economic Commission, Economic and Financial Affairs, provides excellent correlation with the economic cycle since 1990, capturing all three recessions in the period and even the threat of recession from 1994 to 1995. The latest chart of this index accessible in the link in parenthesis shows trend of decline in 2011 that has punctured the historical average of 100 (http://ec.europa.eu/economy_finance/db_indicators/surveys/index_en.htm). This deterioration is shown in Table VIID-7 with the index falling from revised 107.6 in Feb to 93.4 in Jan.

Table VIID-7, Euro Area, Indicators of Confidence and Economic Sentiment SA

	ESI	IND	SERV	CON	RET	CONS
Historical Average	100.0	-6.6	11.1	-12.7	-8.9	-17.3
Jan 2012	93.4	-7.2	-0.6	-20.7	-15.5	-28.3
Dec 2011	92.8	-7.2	-2.6	-21.3	-12.2	-28.9
Nov	93.5	-7.3	-2.0	-20.5	-11.2	-26.0
Oct	94.4	-6.6	-0.2	-20.1	-9.9	-27.3
Sep	94.6	-6.0	-0.3	-19.3	-9.9	-29.8
Aug	98.1	-2.9	3.4	-16.8	-8.8	-26.0
Jul	102.5	0.5	7.4	-11.5	-3.7	-27.2
Jun	104.9	3.1	9.7	-10.0	-2.7	-26.8
May	105.1	3.5	8.9	-10.2	-2.5	-26.6
Apr	105.6	5.3	9.8	-12.0	-2.0	-27.3
Mar	106.7	6.2	10.3	-11.0	-1.6	-29.0
Feb	107.6	6.4	10.7	-10.3	-0.4	-26.3
Jan	106.8	6.2	9.9	-11.2	-0.6	-26.0
Dec 2010	107.0	5.3	9.8	-11.0	4.3	-26.7

ESI: Economic Sentiment Index; IND: Industry; SERV: Services; CON: Consumer; RET: Retail Trade; CONS: Construction

Source: European Commission Services 

http://ec.europa.eu/economy_finance/db_indicators/surveys/index_en.htm

VE Germany. The Markit/BME Germany Purchasing Managers’ Index^® (PMI^®)) improved significantly from 48.4 in Dec to the expansion territory at 51.0 in Jan, which is the first reading above 50 since Sep 2011 (The Markit/BME Germany Purchasing Managers’ Index^® (PMI^®)) improved). While the index is at the highest level in six month, improvement in manufacturing business is still moderate. The rate of contraction of new orders moderated in Jan but export business contracted sharply for a seventh consecutive month. Tim Moore, Senior Economist at Markit and author of the report finds improvement in manufacturing but that the decline in foreign orders influenced general decline in new orders (The Markit/BME Germany Purchasing Managers’ Index^® (PMI^®)) improved). Table DE provides the country data table for Germany.

Table DE, Germany, Economic Indicators

GDP	IIIQ2011 0.5 ∆%; III/Q2011/IIIQ2010 ∆% 2.5 Blog 11/27/11 2011/2010: 3.0% Blog 01/15/12
Consumer Price Index	Dec month SA ∆%: 0.7 Dec 12 months ∆%: 2.1 Blog 01/22/12
Producer Price Index	Dec month ∆%: -0.4 12 months NSA ∆%: 4.0 Blog 01/22/15
Industrial Production	Mfg Nov month SA ∆%: minus 1.0 12 months NSA: 1.4 Blog 12/11/11
Machine Orders	Nov month ∆%: -4.8 Nov 12 months ∆%: -4.4 Blog 01/08/12
Retail Sales	Dec Month ∆% minus 0.9 12 Months ∆% minus 1.4 Blog 02/05/12
Employment Report	Unemployment Rate 7.3% of Labor Force Blog 02/05/12
Trade Balance	Exports Nov 12 month NSA ∆%: 8.3 Imports Nov 12 months NSA ∆%: 6.7 Exports Nov month SA ∆%: 2.5; Imports Nov month SA minus 0.4 Blog 01/15/12

Links to blog comments in Table DE: 01/22/12 http://cmpassocregulationblog.blogspot.com/2012/01/world-inflation-waves-united-states.html http://cmpassocregulationblog.blogspot.com/2012/01/world-inflation-waves-united-states.html

01/15/12 http://cmpassocregulationblog.blogspot.com/2012/01/recovery-without-hiring-united-states_15.html

01/08/12 http://cmpassocregulationblog.blogspot.com/2012/01/thirty-million-unemployed-or.html

01/01/12 http://cmpassocregulationblog.blogspot.com/2012/01/financial-risk-aversion-and-collapse-of.html

12/11/11 http://cmpassocregulationblog.blogspot.com/2011/12/euro-zone-survival-risk-world-financial_11.html

The unemployment rate in Germany as percent of the labor force in Table VIIE-1 stood at 7.3 percent in Jan 2011, which is slightly higher than 6.6 percent in Dec 2011. The rate is much lower than 11.1 percent in 2005 and 9.6 percent in 2006.

Table VIIE-1, Germany, Unemployment Rate in Percent of Labor Force

	Percent of Labor Force
Jan 2012	7.3
Dec	6.6
Nov	6.4
Oct	6.5
Sep	6.6
Aug	7.0
Jul	7.0
Jun	6.9
May	7.0
Apr	7.3
Mar	7.6
Feb	7.9
Jan	7.9
Dec 2010	7.1
Dec 2009	7.8
Dec 2008	7.4
Dec 2007	8.1
Dec 2006	9.6
Dec 2005	11.1

Source: Statistisches Bundesamt Deutschland

http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/TimeSeries/EconomicIndicators/LabourMarket/Content75/arb210a,templateId=renderPrint.psml

Chart VIIE-1 of Statistisches Bundesamt Deutschland, or Federal Statistical Office of Germany, shows the long-term decline of the rate of unemployment in Germany from more than 12 percent in early 2005 to 6.6 percent in Dec 2011 and slight increase to 7.6 percent in Jan 2012.

Note: Statistics of the Federal Employment Agency. No results before 2005.

Chart VIIE-1, Germany, Unemployment Rate, Original Value, Percent

Source: Statistisches Bundesamt Deutschland

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

Retail sales in Germany adjusted for inflation are provided in Table VIIE-2. There have been sharp fluctuations in monthly and 12 months percentage changes. Retail sales fell 0.9 percent in Dec and declined 1.4 percent in 12 months.

Table VIIE-2, Retail Sales in Germany Adjusted for Inflation

	12 Months ∆% NSA	Month ∆% SA and Calendar Adjusted
Dec 2011	-0.9	-1.4
Nov	0.9	-1.0
Oct	-0.4	-0.0
Sep	1.3	0.9
Aug	3.4	-0.6
Jul	-2.0	0.3
Jun	-2.4	2.1
May	4.7	-1.2
Apr	5.0	0.4
Mar	-2.6	-1.2
Feb	2.5	-0.1
Jan	2.9	0.9
Cumulative ∆%		0.4
Dec 2010	0.4	0.5
Dec 2009	-2.2
Dec 2008	3.3
Dec 2007	-6.2
Dec 2006	1.3

Source: Statistiche Bundesamt Deutschland, Federal Statistical Office of Germany

http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/TimeSeries/EconomicIndicators/RetailTrade/Content100/kums331x12,templateId=renderPrint.psml

Chart VIIE-2 of the Statistiche Bundesamt Deutschland, Federal Statistical Office of Germany, shows retail sales at constant prices from 2007 to 2011. There appear to be fluctuations without trend.

Chart VIIE-2, Germany, Turnover in Retail Trade at Constant Prices 2005=100

Source: Statistiche Bundesamt Deutschland, Federal Statistical Office of Germany

http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/TimeSeries/EconomicIndicators/RetailTrade/Content100/kums331graf0.psml

Chart VIIE-3 of the Statistiche Bundesamt Deutschland, Federal Statistical Office of Germany, shows retail sales at current prices from 2007 to 2011. There are also sharp fluctuations but without trend.

Chart VIIE-3, Germany, Turnover in Retail Sales at Current Prices, Original Values, 2005=100

Source: Statistiche Bundesamt Deutschland, Federal Statistical Office of Germany

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

VIIF France. The pace of deterioration of manufacturing business slowed with the Markit Purchasing Managers’ Index^® (PMI^®)) fell slightly from 48.9 in Dec to 48.5 in Jan, suggesting modest deterioration of business conditions (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9104). There were additional declines in new orders and output in Jan. There was only marginal decline in foreign new orders. Jack Kennedy, Senior Economist at Markit and author of the France Manufacturing PMI^®, finds challenging conditions with special weakness in domestic demand (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9104). Table FR provides the country data table for France.

Table FR, France, Economic Indicators

CPI	Dec month ∆% 0.4 12 months ∆%: 2.5 01/15/12
PPI	Dec month ∆%: -0.1 Dec 12 months ∆%: 4.7 Blog 02/05/12
GDP Growth	IIIQ2011/IIQ2011 ∆%: 0.3 IIIQ2011/IIIQ2010 ∆%: 1.5 Blog 12/27/11
Industrial Production	Nov/Oct SA ∆%: Industrial Production 1.1; Manufacturing minus 1.3 Nov YOY NSA ∆%: Industrial Production 1.1; Manufacturing 2.2 Blog 01/15/12
Industrial New Orders	Mfg Nov ∆% 1.0 YOY ∆% 2.8 Blog 01/22/12
Consumer Spending	Dec Manufactured Goods ∆%: minus 0.7 Dec 12 Months Manufactured Goods ∆%: minus 2.4 Blog 02/05/12
Employment	IIIQ2011 Unemployed 2.631 million Unemployment Rate: 9.3% Employment Rate: 63.8% Blog 12/04/11
Trade Balance	Oct Exports ∆%: month 0.5, 12 months 6.3 Oct Imports ∆%: month minus 0.3, 12 months 7.4 Blog 12/11/11
Confidence Indicators	Historical averages 100 Dec: France 91 Mfg Business Climate 91 Retail Trade 89 Services 92 Building 100 Household 81 Blog 1/29/12

Links to blog comments in Table FR: 01/29 http://cmpassocregulationblog.blogspot.com/2012/01/mediocre-economic-growth-financial.html

01/15/12 http://cmpassocregulationblog.blogspot.com/2012/01/recovery-without-hiring-united-states_15.html

01/0812 http://cmpassocregulationblog.blogspot.com/2012/01/thirty-million-unemployed-or.html

12/27/11 http://cmpassocregulationblog.blogspot.com/2011/12/slow-growth-falling-real-disposable_27.html

12/18/11 http://cmpassocregulationblog.blogspot.com/2011/12/recovery-without-hiring-world-inflation_1721.html

12/11/11 http://cmpassocregulationblog.blogspot.com/2011/12/euro-zone-survival-risk-world-financial_11.html

12/04/11 http://cmpassocregulationblog.blogspot.com/2011/12/twenty-nine-million-in-job-stress.html

The Dec monthly report of household expenditures in consumption goods for France is in Table VIIF-1. Total consumption fell 0.7 percent in Dec 2011 and consumption of manufactured products also fell 0.7 percent. Total consumption fell 3.1 percent in Dec 2011 relative to Dec 2010 and consumption of manufactured goods fell 2.4 percent in Dec 2011 relative to Dec 2010. Internal demand is weak throughout most advanced economies.

Table VIIF-1, France, Household Expenditures in Consumption Goods, Month ∆% Chained Billion Euros Trading Days SA

	Total	Food	Eng. Goods	Energy	Mfg Goods
Dec 2011	-0.7	-1.0	0.3	-2.7	-0.7
Dec       2011/    Dec 2010	-3.1	-1.7	-1.6	-10.1	-2.4
Nov	0.1	0.0	0.5	-0.9	0.2
Oct	0.1	-0.3	0.9	-1.2	0.3
Sep	0.0	0.6	0.4	-2.6	0.1
Aug	0.4	0.2	-0.3	2.4	0.3
Jul	-0.5	-0.5	-0.8	0.5	-0.7
Jun	0.8	-0.4	1.7	1.0	0.9
May	-0.1	-1.3	-1.0	5.2	-1.0
Apr	-1.8	1.4	-2.9	-5.9	-1.3
Mar	-1.0	-0.9	-1.1	-0.7	-1.0
Feb	0.4	0.5	0.8	-0.9	0.6
Jan	-0.7	-0.1	0.1	-4.2	-0.3
Dec 2010	0.5	0.7	0.1	1.3	0.3

Eng. Goods: Engineered Goods

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=19&date=20120104

Chart VIIF-1 of Institut National de la Statistique et des Études Économiques of France provides growth of total consumption in France. Internal demand is not supporting overall economic growth.

Chart VIIF-1, France, Total Consumption of Goods, Billions of Euros Trading and Seasonally Adjusted and Quarterly ∆%

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=19&date=20120131

VIIG Italy. Italy’s Markit/ADACI Purchasing Managers’ Index^® (PMI^®)) improved further from 44.3 in Dec to 46.8 in Jan but still showing significant deterioration of business conditions for Italian manufacturers (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9093). Improvement originated in slower rhythm of decline of new orders and manufacturing product but new orders have declined during eight months. An important finding in the survey is that the declining euro relative to the dollar resulted in success of Italian entities in obtaining new business in the US. Phil Smith, Economist at Markit and author of the report, finds improvement of Italian manufacturing in moving away from contraction but with still weakening new orders (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9093). Table IT provides the country data table for Italy.

Table IT, Italy, Economic Indicators

Consumer Price Index	Jan month ∆%: 0.3 Jan 12 months ∆%: 3.3 Blog 02/05/12
Producer Price Index	Dec month ∆%: 0.1 Dec 12 months ∆%: 4.0 Blog 02/05/12
GDP Growth	IIIQ2011/IIIQ2010 SA ∆%: 0.2 IIIQ2011/IIQ2011 NSA ∆%: -0.2 Blog 12/27/11
Labor Report	Dec 2011 Participation rate 62.5% Employment ratio 56.9% Unemployment rate 8.9% Blog 02/05/12
Industrial Production	Nov month ∆%: 0.3 12 months ∆%: minus 4.1 Blog 01/15/12
Retail Sales	Nov month ∆%: minus 1.8 Nov 12 months ∆%: minus 0.3 Blog 01/29/12
Business Confidence	Mfg Jan 92.1, Sep 94.4 Construction Jan 82.2, Sep 79.0 Blog 02/05/12
Consumer Confidence	Consumer Confidence Jan 91.6, Dec 96.1 Economy Jan 75.3, Dec 77.1 Blog 01/29/12
Trade Balance	Balance Nov SA -€1417 million versus Oct -€1946 Exports Nov month SA ∆%: +3.2; Imports Nov month SA ∆%: +0.5 Exports 12 months NSA ∆%: +6.5 Imports 12 months NSA ∆%: +0.5 Blog 01/22/12

Links to blog comments in Table IT:

01/29/12 http://cmpassocregulationblog.blogspot.com/2012/01/mediocre-economic-growth-financial.html

1/22/12 http://cmpassocregulationblog.blogspot.com/2012/01/world-inflation-waves-united-states.html

01/15/12 http://cmpassocregulationblog.blogspot.com/2012/01/recovery-without-hiring-united-states_15.html

01/08/12 http://cmpassocregulationblog.blogspot.com/2012/01/thirty-million-unemployed-or.html

01/01/12 http://cmpassocregulationblog.blogspot.com/2012/01/financial-risk-aversion-and-collapse-of.html

12/27/11 http://cmpassocregulationblog.blogspot.com/2011/12/slow-growth-falling-real-disposable_27.html

Data on Italy’s labor market since 2004 are provided in Table VIIG-1. The unemployment rate has risen from 6.2 in Dec 2006 to 8.9 in Dec 2011. As in other advanced economies, unemployment has stabilized at high levels.

Table VIIG-1, Italy, Labor Report

	Participation Rate %	Employment Ratio %	Unemployment Rate %
Dec 2011	62.5	56.9	8.9
Nov	62.4	56.9	8.8
Oct	62.4	57.0	8.5
Sep	62.2	56.9	8.6
Aug	62.2	57.0	8.3
Jul	62.3	57.0	8.3
Jun	62.1	56.9	8.2
May	62.2	57.0	8.3
Apr	62.0	56.9	8.2
Mar	62.3	57.1	8.2
Feb	62.0	56.9	8.1
Jan	62.0	56.9	8.2
Dec 2010	62.0	56.9	8.1
Dec 2009	62.3	57.1	8.3
Dec 2008	62.6	58.1	7.0
Dec 2007	63.2	59.1	6.5
Dec 2006	62.5	58.5	6.1
Dec 2005	62.5	57.8	7.4
Dec 2004	62.5	57.5	7.9

Source: Istituto Nazionale di Statistica

http://www.istat.it/it/archivio/51884

Table VIIG-2 provides more detail on the labor report for Italy in Dec 2011. The level of employment fell 5,000 from Nov and 23,000 from a year earlier. Unemployment increased 20,000 in Dec and 221,000 from a year earlier. A dramatic aspect found in most advanced economies is the high rate of unemployment of youth at 31.0 percent in Dec 2011 for ages 15 to 24.

Table VIIG-2, Italy, Labor Report

Nov 2011	1000s	Change from Prior Month 1000s	∆% from Prior Month	Change from Prior Year 1000s	∆% from Prior Year
EMP	22.903	-5	0.0	-23	-0.1
UNE	2.243	20	0.9	221	10.9
INA   15-64	14.869	-34	-0.2	-186	-1.2
EMP %	56.9		0.0		-0.1
UNE %	8.9		0.1		0.8
Youth UNE %  15-24	31.0		-0.2		-0.5
INA % 15-64	37.5		-0.1		-0.5

Notes: EMP: Employed; UNE: Unemployed; INA 15-64: Inactive aged 15 to 64; EMP %: Employment Rate; UNE %: Unemployment Rate; Youth UNE % 15-24: Youth Unemployment Rate aged 15 to 24; INA % 15-64: Inactive Rate aged 15 to 64.

Source: Istituto Nazionale di Statistica

http://www.istat.it/it/archivio/51884

Table VIIG-3 provides the unemployment rate in the US for ages 16 to 19 years from 1979 to 1989. The rate peaked at 24.1 percent in Dec 1982, falling to 15.3 percent by Dec 1989.

Table VIIG-3, US, Unemployment Rate 16-19 Years of Age 1979-89, SA

Year	Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sep	Oct	Nov	Dec
1979	16.1	16.1	15.9	16.3	16.1	15.7	15.6	16.5	16.5	16.5	15.9	16.2
1980	16.5	16.6	16.3	16.2	18.6	18.9	19.1	18.9	18.0	18.4	18.5	17.6
1981	19.1	19.3	19.2	18.8	19.1	19.8	18.6	18.8	19.7	20.3	21.3	21.1
1982	22.0	22.6	21.8	22.8	22.8	22.9	24.0	23.7	23.6	23.7	24.1	24.1
1983	23.1	22.8	23.5	23.4	22.8	24.0	22.8	22.9	21.7	21.4	20.2	19.9
1984	19.5	19.4	19.8	19.2	18.7	18.2	18.8	18.7	19.2	18.6	17.7	18.8
1985	18.8	18.3	18.2	17.5	18.5	18.5	20.2	17.9	17.9	20.0	18.3	19.1
1986	18.1	18.8	18.2	19.2	18.6	19.2	18.4	18.0	18.4	17.7	18.1	17.5
1987	17.7	18.0	17.9	17.3	17.4	16.5	15.8	15.9	16.2	17.3	16.6	16.0
1988	16.1	15.6	16.6	16.0	15.3	14.2	14.8	15.4	15.5	15.1	13.9	14.8
1989	16.4	15.0	13.9	14.6	14.8	15.7	14.2	14.6	15.2	15.0	15.5	15.3

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

Chart VIIG-2 of the Bureau of Labor Statistics show the sharp rise of the unemployment rate for ages 16 to 19 years. Rapid growth of the economy lowered the rate throughout the 1980s.

Chart VIIG-2, US, Unemployment rate 16-19 Years of Age 1979-89, SA

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

Table VIIG-4 provides the unemployment rate in the US for ages 16 to 19 years from 2001 to 2011. There are sharp increases in the rate of unemployment in both recessions of 2001 and after 2007. The rate peaked at 27.0 percent in Oct 2009 and Oct 2010, falling to 23.1 percent in Dec 2011, which is sharply higher than 14.0 percent in May 2006.

Table VIIG-4, US, Unemployment Rate 16-19 Years of Age 2001-2011, SA

Year	Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sep	Oct	Nov	Dec
2001	13.8	13.7	13.8	13.9	13.4	14.2	14.4	15.6	15.2	16.0	15.9	17.0
2002	16.5	16.0	16.6	16.7	16.6	16.7	16.8	17.0	16.3	15.1	17.1	16.9
2003	17.2	17.2	17.8	17.7	17.9	19.0	18.2	16.6	17.6	17.2	15.7	16.2
2004	17.0	16.5	16.8	16.6	17.1	17.0	17.8	16.7	16.6	17.4	16.4	17.6
2005	16.2	17.5	17.1	17.8	17.8	16.3	16.1	16.1	15.5	16.1	17.0	14.9
2006	15.1	15.3	16.1	14.6	14.0	15.8	15.9	16.0	16.3	15.2	14.8	14.6
2007	14.8	14.9	14.9	15.9	15.9	16.3	15.3	15.9	15.9	15.4	16.2	16.8
2008	17.7	16.7	16.1	15.9	19.0	19.2	20.7	18.6	19.1	19.9	20.3	20.6
2009	20.7	22.2	22.2	22.3	23.4	24.7	24.3	25.1	25.9	27.0	26.8	26.7
2010	25.9	25.4	26.2	25.7	26.7	25.9	25.9	25.8	25.8	27.0	24.5	25.2
2011	25.4	23.9	24.5	24.9	24.1	24.6	24.9	25.3	24.5	24.0	23.7	23.1

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

Chart VIIG-3 provides the unemployment rate ages 16 to 19 years from 2001 to 2011. The rate rose sharply during the contraction from IVQ2007 to IIQ2009 and has stabilized at a high level.

Chart VIIG-3, US, Unemployment rate 16-19 Years of Age 2001-2011, SA

Source: US Bureau of Labor Statistics

http://www.bls.gov/data/

Italy’s index of business confidence in manufacturing and construction is provided in Table VIIG-5. There has been deterioration below the historical average of 100 since 98.5 in Aug with reading of 92.1 in Jan. Order books have fallen from minus 22 in Aug to minus 31 in Jan. There is mild improvement in construction with an increase of the index from 77.3 in Aug to 82.2 in Jan.

VIIG-5, Italy, Index of Business Confidence in Manufacturing and Construction 2005=100

	Jan	Dec	Nov	Oct	Sep
Mfg Confidence	92.1	92.5	94.0	93.8	94.4
Order Books	-31	-32	-31	-29	-28
Stocks Finished Products	1	3	1	1	1
Production Expectation	-3	0	1	-1	-1
Construction Confidence	82.2	80.2	87.2	80.6	79.0
Order Books	-47	-50	-42	-46	-50
Employment	-15	-16	-11	-19	-17

Mfg: manufacturing

Source: http://www.istat.it/it/archivio/51766

VH United Kingdom. Table UK provides the country data table for the UK.

Table UK, UK Economic Indicators

CPI	Dec month ∆%: 0.4 Nov 12 months ∆%: 4.2 Blog 01/22/12
Output/Input Prices	Output Prices: Dec 12 months NSA ∆%: 4.8; excluding food, petroleum ∆%: 3.0 Input Prices: Dec 12 months NSA ∆%: 8.7 Excluding ∆%: 6.9 Blog 01/15/12
GDP Growth	IVQ2011 prior quarter ∆% minus 0.2; year earlier same quarter ∆%: 0.8 Blog 01/29/12
Industrial Production	Nov 2011/Nov 2010 NSA ∆%: Industrial Production minus 3.1; Manufacturing minus 0.6 Blog 01/15/12
Retail Sales	Dec month SA ∆%: +0.6 Dec 12 months ∆%: +2.6 Blog 01/22/12
Labor Market	Sep/Nov Unemployment Rate: 8.4%; Claimant Count 5%; Earnings Growth 1.9% Blog 01/22/12
Trade Balance	Balance Nov minus ₤2566 million Exports Nov ∆%: -0.9 Sep/Nov ∆%: 9.0 Imports Nov ∆%: 0.8 Sep/Nov ∆%: 7.5 Blog 01/15/12

Links to blog comments in Table UK:

01/29/12 http://cmpassocregulationblog.blogspot.com/2012/01/mediocre-economic-growth-financial.html

01/22/12 http://cmpassocregulationblog.blogspot.com/2012/01/world-inflation-waves-united-states.html

01/15/12 http://cmpassocregulationblog.blogspot.com/2012/01/recovery-without-hiring-united-states_15.html

12/27/11 http://cmpassocregulationblog.blogspot.com/2011/12/slow-growth-falling-real-disposable_27.html

VIII Valuation of Risk Financial Assets. The financial crisis and global recession were caused by interest rate and housing subsidies and affordability policies that encouraged high leverage and risks, low liquidity and unsound credit (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 157-66, Regulation of Banks and Finance (2009b), 217-27, International Financial Architecture (2005), 15-18, The Global Recession Risk (2007), 221-5, Globalization and the State Vol. II (2008b), 197-213, Government Intervention in Globalization (2008c), 182-4). Several past comments of this blog elaborate on these arguments, among which: http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/01/professor-mckinnons-bubble-economy.html http://cmpassocregulationblog.blogspot.com/2011/01/world-inflation-quantitative-easing.html http://cmpassocregulationblog.blogspot.com/2011/01/treasury-yields-valuation-of-risk.html http://cmpassocregulationblog.blogspot.com/2010/11/quantitative-easing-theory-evidence-and.html http://cmpassocregulationblog.blogspot.com/2010/12/is-fed-printing-money-what-are.html 

Table VIII-1 shows the phenomenal impulse to valuations of risk financial assets originating in the initial shock of near zero interest rates in 2003-2004 with the fed funds rate at 1 percent, in fear of deflation that never materialized, and quantitative easing in the form of suspension of the auction of 30-year Treasury bonds to lower mortgage rates. World financial markets were dominated by monetary and housing policies in the US. Between 2002 and 2008, the DJ UBS Commodity Index rose 165.5 percent largely because of unconventional monetary policy encouraging carry trades from low US interest rates to long leveraged positions in commodities, exchange rates and other risk financial assets. The charts of risk financial assets show sharp increase in valuations leading to the financial crisis and then profound drops that are captured in Table VIII-1 by percentage changes of peaks and troughs. The first round of quantitative easing and near zero interest rates depreciated the dollar relative to the euro by 39.3 percent between 2003 and 2008, with revaluation of the dollar by 25.1 percent from 2008 to 2010 in the flight to dollar-denominated assets in fear of world financial risks and then devaluation of the dollar of 10.4 percent by Fri Feb 3, 2011. Dollar devaluation is a major vehicle of monetary policy in reducing the output gap that is implemented in the probably erroneous belief that devaluation will not accelerate inflation, misallocating resources toward less productive economic activities and disrupting financial markets. The last row of Table VIII-1 shows CPI inflation in the US rising from 1.9 percent in 2003 to 4.1 percent in 2007 even as monetary policy increased the fed funds rate from 1 percent in Jun 2004 to 5.25 percent in Jun 2006.

Table VIII-1, Volatility of Assets

DJIA	10/08/02-10/01/07	10/01/07-3/4/09	3/4/09- 4/6/10
∆%	87.8	-51.2	60.3
NYSE Financial	1/15/04- 6/13/07	6/13/07- 3/4/09	3/4/09- 4/16/07
∆%	42.3	-75.9	121.1
Shanghai Composite	6/10/05- 10/15/07	10/15/07- 10/30/08	10/30/08- 7/30/09
∆%	444.2	-70.8	85.3
STOXX EUROPE 50	3/10/03- 7/25/07	7/25/07- 3/9/09	3/9/09- 4/21/10
∆%	93.5	-57.9	64.3
UBS Com.	1/23/02- 7/1/08	7/1/08- 2/23/09	2/23/09- 1/6/10
∆%	165.5	-56.4	41.4
10-Year Treasury	6/10/03	6/12/07	12/31/08	4/5/10
%	3.112	5.297	2.247	3.986
USD/EUR	6/26/03	7/14/08	6/07/10	02/03 /2012
Rate	1.1423	1.5914	1.192	1.316
CNY/USD	01/03 2000	07/21 2005	7/15 2008	02/03/ 2012
Rate	8.2798	8.2765	6.8211	6.303
New House	1963	1977	2005	2009
Sales 1000s	560	819	1283	375
New House	2000	2007	2009	2010
Median Price $1000	169	247	217	203
	2003	2005	2007	2010
CPI	1.9	3.4	4.1	1.5

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

http://www.census.gov/const/www/newressalesindex_excel.html

http://federalreserve.gov/releases/h10/Hist/dat00_eu.htm

ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt

http://federalreserve.gov/releases/h10/Hist/dat00_ch.htm

Table VIII-2 extracts four rows of Table VIII-I with the Dollar/Euro (USD/EUR) exchange rate and Chinese Yuan/Dollar (CNY/USD) exchange rate that reveal pursuit of exchange rate policies resulting from monetary policy in the US and capital control/exchange rate policy in China. The ultimate intentions are the same: promoting internal economic activity at the expense of the rest of the world. The easy money policy of the US was deliberately or not but effectively to devalue the dollar from USD 1.1423/EUR on Jun 26, 2003 to USD 1.5914/EUR on Jul 14, 2008, or by 39.3 percent. The flight into dollar assets after the global recession caused revaluation to USD 1.192/EUR on Jun 7, 2010, or by 25.1 percent. After the temporary interruption of the sovereign risk issues in Europe from Apr to Jul, 2010, shown in Table VIII-4 below, the dollar has devalued again to USD 1.316/EUR or by 10.4 percent {[(1.316/1.192)-1]100}. Yellen (2011AS, 6) admits that Fed monetary policy results in dollar devaluation with the objective of increasing net exports, which was the policy that Joan Robinson (1947) labeled as “beggar-my-neighbor” remedies for unemployment. China fixed the CNY to the dollar for a long period at a highly undervalued level of around CNY 8.2765/USD subsequently revaluing to CNY 6.8211/USD until Jun 7, 2010, or by 17.6 percent and after fixing it again to the dollar, revalued to CNY 6.303/USD on Fri Feb 3, 2012, or by an additional 7.6 percent, for cumulative revaluation of 23.8 percent. China’s markets were closed during the week of Jan 27. The Dow Jones Newswires informs on Oct 15 that the premier of China Wen Jiabao announced that the Chinese yuan will not be further appreciated to prevent adverse effects on exports (http://professional.wsj.com/article/SB10001424052970203914304576632790881396896.html?mod=WSJ_hp_LEFTWhatsNewsCollection). The policy appeared to be implemented because the rate of CNY 6.3838/USD on Oct 21, 2011, amounts to a small depreciation of 0.1 percent relative to the rate of CNY 6.379/USD a week earlier on Oct 14, 2011. Table VIII-2 now includes three last rows with the CNY/USD weekly rate. The final row of Table VIII-2 shows the percentage change from the prior week with positive signs for appreciation and negative signs for depreciation. In the week of Nov 11 there was no change but the CNY depreciated by 0.2 percent in the week of Nov 18 and by a further 0.4 percent in the week of Nov 25, for cumulative depreciation of 0.6 percent in the two weeks. In the week of Dec 2, revaluation returned with appreciation of 0.3 percent. In the week of Dec 9, there was minute depreciation of 0.1 percent. Revaluation continued with 0.3 percent in the week of Dec 16 and 0.2 percent in the week of Dec 23. Revaluation accelerated in the week of Dec 30 with appreciation of 0.7 percent. A new pause occurred in the week of Jan 6, 2012, with depreciation of 0.2 percent. China fixed the rate at CNY 6.3068/USD on Jan 13, 2012, which is virtually unchanged from the prior week. China devalued the yuan relative to the dollar by 0.4 percent with the rate of CNY 6.334/USD on Jan 20. Financial markets were closed in China during the week of Jan 27. China then resumed revaluation with 0.5 percent in the week of Feb 3, 2012. Meanwhile, the Senate of the US is proceeding with a bill on China’s trade that could create a confrontation but may not be approved by the entire Congress.

Table VIII-2, Dollar/Euro (USD/EUR) Exchange Rate and Chinese Yuan/Dollar (CNY/USD) Exchange Rate

USD/EUR	12/26/03	7/14/08	6/07/10	02/03 /2012
Rate	1.1423	1.5914	1.192	1.316
CNY/USD	01/03 2000	07/21 2005	7/15 2008	01/20 2012 02/03/12
Rate	8.2798	8.2765	6.8211	6.303
Weekly Rates	01/06/2011	01/13/2011	01/27/2012	02/03/2012
CNY/USD	6.3094	6.3068	6.334	6.303
∆% from Earlier Week*	-0.2	0.04	-0.4	0.5

*Negative sign is depreciation, positive sign is appreciation

Source: Table VI-1 and same table in earlier blog posts.

Dollar devaluation did not eliminate the US current account deficit, which is projected by the International Monetary Fund (IMF) with the new database of Sep 2011 at 3.1 percent of GDP in 2011 and at 2.2 percent of GDP in 2015, as shown in Table VIII-3. Revaluation of the CNY has not reduced the current account surplus of China, which is projected by the IMF to increase from 5.2 percent of GDP in 2011 to 7.0 percent of GDP in 2015.

Table VIII-3, Fiscal Deficit, Current Account Deficit and Government Debt as % of GDP and 2011 Dollar GDP

	GDP $B 2011	FD %GDP 2011	CAD %GDP 2011	Debt %GDP 2011	FD%GDP 2015	CAD%GDP 2015	Debt %GDP 2015
US	15065	-7.9	-3.1	72.6	-3.1	-2.2	86.7
Japan	5855	-8.9	2.5	130.5	-8.4	2.4	160.0
UK	2481	-5.7	-2.7	72.9	0.4	-0.9	75.2
Euro	13355	-1.5	0.1	68.6	1.5	0.5	69.3
Ger	3629	0.4	5.0	56.9	2.1	4.7	55.3
France	2808	-3.4	-2.7	80.9	-2.5	0.6	83.9
Italy	2246	0.5	-3.5	100.4	4.5	-2.0	96.7
Can	1759	-3.7	-3.3	34.9	0.3	-2.6	35.1
China	6988	-1.6	5.2	22.2	0.1	7.0	12.9
Brazil	2518	3.2	-2.3	38.6	2.9	-3.2	34.1

Note: GER = Germany; Can = Canada; FD = fiscal deficit; CAD = current account deficit

FD is primary except total for China; Debt is net except gross for China

Source: http://www.imf.org/external/pubs/ft/weo/2011/02/weodata/index.aspx

There is a new carry trade that learned from the losses after the crisis of 2007 or learned from the crisis how to avoid losses. The sharp rise in valuations of risk financial assets shown in Table VIII-1 above after the first policy round of near zero fed funds and quantitative easing by the equivalent of withdrawing supply with the suspension of the 30-year Treasury auction was on a smooth trend with relatively subdued fluctuations. The credit crisis and global recession have been followed by significant fluctuations originating in sovereign risk issues in Europe, doubts of continuing high growth and accelerating inflation in China, events such as in the Middle East and Japan and legislative restructuring, regulation, insufficient growth, falling real wages, depressed hiring and high job stress of unemployment and underemployment in the US now with realization of growth standstill recession. The “trend is your friend” motto of traders has been replaced with a “hit and realize profit” approach of managing positions to realize profits without sitting on positions. There is a trend of valuation of risk financial assets driven by the carry trade from zero interest rates with fluctuations provoked by events of risk aversion. Table VIII-4, which is updated for every comment of this blog, shows the deep contraction of valuations of risk financial assets after the Apr 2010 sovereign risk issues in the fourth column “∆% to Trough.” There was sharp recovery after around Jul 2010 in the last column “∆% Trough to 02/03/12,” which has been recently stalling or reversing amidst profound risk aversion. “Let’s twist again” monetary policy during the week of Sep 23 caused deep worldwide risk aversion and selloff of risk financial assets (http://cmpassocregulationblog.blogspot.com/2011/09/imf-view-of-world-economy-and-finance.html http://cmpassocregulationblog.blogspot.com/2011/09/collapse-of-household-income-and-wealth.html). Monetary policy was designed to increase risk appetite but instead suffocated risk exposures. After the surge in the week of Dec 2, mixed performance of markets in the week of Dec 9, renewed risk aversion in the week of Dec 16, end-of-the-year relaxed risk aversion in thin markets in the weeks of Dec 23 and Dec 30, mixed sentiment in the weeks of Jan 6 and Jan 13 2012 and strength in the weeks of Jan 20, Jan 27 and Feb 3, there is now only one financial value with negative change in valuation in column “∆% Trough to 02/03/12:” Shanghai Composite minus 2.2 percent. Asia and financial entities are experiencing their own risk environments. The highest valuations are by US equities indexes: DJIA 32.8 percent and S&P 500 31.5 percent, driven by stronger earnings and economy in the US than in other advanced economies. The carry trade from zero interest rates to leveraged positions in risk financial assets had proved strongest for commodity exposures but US equities have regained leadership. Before the current round of risk aversion, all assets in the column “∆% Trough to 02/03/12” had double digit gains relative to the trough around Jul 2, 2010 but now only two valuations show increases of less than 10 percent: NYSE Financial is 8.6 percent above the trough; STOXX 50 Europe is 8.9 percent above the trough; and Japan’s Nikkei Average is 0.1 percent above the trough. DJ UBS Commodities is 19.3 percent above the trough; Dow Global is 16.1 percent above the trough; and DAX is 19.3 percent above the trough. Japan’s Nikkei Average is 0.1 percent above the trough on Aug 31, 2010 and 22.5 percent below the peak on Apr 5, 2010. The Nikkei Average closed at 8831.93 on Fri Feb 3, 2012, which is 13.9 percent lower than 10,254.43 on Mar 11 on the date of the Great East Japan Earthquake/tsunami. Global risk aversion erased the earlier gains of the Nikkei. The dollar depreciated by 10.4 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 02/03/12” in Table VIII-4 shows strong performance of risk financial assets in the week of Jan 27, 2012. There are still high uncertainties on European sovereign risks, US and world growth recession and China’s growth and inflation tradeoff. Sovereign problems in the “periphery” of Europe and fears of slower growth in Asia and the US cause risk aversion with trading caution instead of more aggressive risk exposures. There is a fundamental change in Table VIII-4 from the relatively upward trend with oscillations since the sovereign risk event of Apr-Jul 2010. Performance is best assessed in the column “∆% Peak to 02/03/12” that provides the percentage change from the peak in Apr 2010 before the sovereign risk event to Feb 3, 2012. Most risk financial assets had gained not only relative to the trough as shown in column “∆% Trough to 02/03/12” but also relative to the peak in column “∆% Peak to 02/03/12.” There are now only three equity indexes above the peak in Table VIII-4: DJIA 14.8 percent, S&P 500 10.5 percent and Dax 6.9 percent. There are several indexes below the peak: NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) by 13.5 percent, Nikkei Average by 22.4 percent, Shanghai Composite by 26.4 percent, STOXX 50 by 7.8 percent, Dow Global by 5.3 percent and Dow Asia Pacific by 2.7 percent. DJ UBS Commodities Index is now 0.4 percent above the peak. The factors of risk aversion have adversely affected the performance of risk financial assets. The performance relative to the peak in Apr 2010 is more important than the performance relative to the trough around early Jul because improvement could signal that conditions have returned to normal levels before European sovereign doubts in Apr 2010.

Table VIII-4, Stock Indexes, Commodities, Dollar and 10-Year Treasury  

	Peak	Trough	∆% to Trough	∆% Peak to 02/03 /12	∆% Week 02/03/ 12	∆% Trough to 02/03 12
DJIA	4/26/ 10	7/2/10	-13.6	14.8	1.6	32.8
S&P 500	4/23/ 10	7/20/ 10	-16.0	10.5	2.2	31.5
NYSE Finance	4/15/ 10	7/2/10	-20.3	-13.5	4.0	8.6
Dow Global	4/15/ 10	7/2/10	-18.4	-5.3	2.5	16.1
Asia Pacific	4/15/ 10	7/2/10	-12.5	-2.7	1.3	11.2
Japan Nikkei Aver.	4/05/ 10	8/31/ 10	-22.5	-22.5	-0.1	0.1
China Shang.	4/15/ 10	7/02 /10	-24.7	-26.4	0.5	-2.2
STOXX 50	4/15/10	7/2/10	-15.3	-7.8	2.9	8.9
DAX	4/26/ 10	5/25/ 10	-10.5	6.9	3.9	19.3
Dollar Euro	11/25 2009	6/7 2010	21.2	13.0	0.5	-10.4
DJ UBS Comm.	1/6/ 10	7/2/10	-14.5	0.4	-0.7	17.4
10-Year T Note	4/5/ 10	4/6/10	3.986	1.923

T: trough; Dollar: positive sign appreciation relative to euro (less dollars paid per euro), negative sign depreciation relative to euro (more dollars paid per euro)

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

Bernanke (2010WP) and Yellen (2011AS) reveal the emphasis of monetary policy on the impact of the rise of stock market valuations in stimulating consumption by wealth effects on household confidence. Table VIII-5 shows a gain by Apr 29, 2011 in the DJIA of 14.3 percent and of the S&P 500 of 12.5 percent since Apr 26, 2010, around the time when sovereign risk issues in Europe began to be acknowledged in financial risk asset valuations. The last row of Table VIII-5 for Feb 3, 2012, shows that the S&P 500 is now 11.0 percent above the Apr 26, 2010 level and the DJIA is 14.8 percent above the level on Apr 26, 2010. Multiple rounds of risk aversion eroded the earlier gains, showing that risk aversion can destroy market value even with zero interest rates. Relaxed risk aversion has contributed to recovery of valuations. Much the same as zero interest rates and quantitative easing have not had any effects in recovering economic activity while distorting financial markets and resource allocation.

Table VIII-5, Percentage Changes of DJIA and S&P 500 in Selected Dates

2010	∆% DJIA from  prior date	∆% DJIA from Apr 26	∆% S&P 500 from prior date	∆% S&P 500 from Apr 26
Apr 26
May 6	-6.1	-6.1	-6.9	-6.9
May 26	-5.2	-10.9	-5.4	-11.9
Jun 8	-1.2	-11.3	2.1	-12.4
Jul 2	-2.6	-13.6	-3.8	-15.7
Aug 9	10.5	-4.3	10.3	-7.0
Aug 31	-6.4	-10.6	-6.9	-13.4
Nov 5	14.2	2.1	16.8	1.0
Nov 30	-3.8	-3.8	-3.7	-2.6
Dec 17	4.4	2.5	5.3	2.6
Dec 23	0.7	3.3	1.0	3.7
Dec 31	0.03	3.3	0.07	3.8
Jan 7	0.8	4.2	1.1	4.9
Jan 14	0.9	5.2	1.7	6.7
Jan 21	0.7	5.9	-0.8	5.9
Jan 28	-0.4	5.5	-0.5	5.3
Feb 4	2.3	7.9	2.7	8.1
Feb 11	1.5	9.5	1.4	9.7
Feb 18	0.9	10.6	1.0	10.8
Feb 25	-2.1	8.3	-1.7	8.9
Mar 4	0.3	8.6	0.1	9.0
Mar 11	-1.0	7.5	-1.3	7.6
Mar 18	-1.5	5.8	-1.9	5.5
Mar 25	3.1	9.1	2.7	8.4
Apr 1	1.3	10.5	1.4	9.9
Apr 8	0.03	10.5	-0.3	9.6
Apr 15	-0.3	10.1	-0.6	8.9
Apr 22	1.3	11.6	1.3	10.3
Apr 29	2.4	14.3	1.9	12.5
May 6	-1.3	12.8	-1.7	10.6
May 13	-0.3	12.4	-0.2	10.4
May 20	-0.7	11.7	-0.3	10.0
May 27	-0.6	11.0	-0.2	9.8
Jun 3	-2.3	8.4	-2.3	7.3
Jun 10	-1.6	6.7	-2.2	4.9
Jun 17	0.4	7.1	0.04	4.9
Jun 24	-0.6	6.5	-0.2	4.6
Jul 1	5.4	12.3	5.6	10.5
Jul 8	0.6	12.9	0.3	10.9
Jul 15	-1.4	11.4	-2.1	8.6
Jul 22	1.6	13.2	2.2	10.9
Jul 29	-4.2	8.4	-3.9	6.6
Aug 05	-5.8	2.1	-7.2	-1.0
Aug 12	-1.5	0.6	-1.7	-2.7
Aug 19	-4.0	-3.5	-4.7	-7.3
Aug 26	4.3	0.7	4.7	-2.9
Sep 02	-0.4	0.3	-0.2	-3.1
Sep 09	-2.2	-1.9	-1.7	-4.8
Sep 16	4.7	2.7	5.4	0.3
Sep 23	-6.4	-3.9	-6.5	-6.2
Sep 30	1.3	-2.6	-0.4	-6.7
Oct 7	1.7	-0.9	2.1	-4.7
Oct 14	4.9	3.9	5.9	1.0
Oct 21	1.4	5.4	1.1	2.2
Oct 28	3.6	9.2	3.8	6.0
Nov 04	-2.0	6.9	-2.5	3.4
Nov 11	1.4	8.5	0.8	4.3
Nov 18	-2.9	5.3	-3.8	0.3
Nov 25	-4.8	0.2	-4.7	-4.4
Dec 02	7.0	7.3	7.4	2.7
Dec 09	1.4	8.7	0.9	3.6
Dec 16	-2.6	5.9	-2.8	0.6
Dec 23	3.6	9.7	3.7	4.4
Dec 30	-0.6	9.0	-0.6	3.8
Jan 6 2012	1.2	10.3	1.6	5.4
Jan 13	0.5	10.9	0.9	6.4
Jan 20	2.4	13.5	2.0	8.5
Jan 27	-0.5	13.0	0.1	8.6
Feb 3	1.6	14.8	2.2	11.0

Source: http://professional.wsj.com/mdc/public/page/mdc_us_stocks.html?mod=mdc_topnav_2_3014

Table VIII-6, updated with every post, shows that exchange rate valuations affect a large variety of countries, in fact, almost the entire world, in magnitudes that cause major problems for domestic monetary policy and trade flows. Dollar devaluation is expected to continue because of zero fed funds rate, expectations of rising inflation, large budget deficit of the federal government (http://professional.wsj.com/article/SB10001424052748703907004576279321350926848.html?mod=WSJ_hp_LEFTWhatsNewsCollection) and now zero interest rates indefinitely but with interruptions caused by risk aversion events. Such an event actually occurred in the week of Sep 23 reversing the devaluation of the dollar in the form of sharp appreciation of the dollar relative to other currencies from all over the world including the offshore Chinese yuan market. Column “Peak” in Table VIII-6 shows exchange rates during the crisis year of 2008. There was a flight to safety in dollar-denominated government assets as a result of the arguments in favor of TARP (Cochrane and Zingales 2009). This is evident in various exchange rates that depreciated sharply against the dollar such as the South African rand (ZAR) at the peak of depreciation of ZAR 11.578/USD on Oct 22, 2008, subsequently appreciating to the trough of ZAR 7.238/USD by Aug 15, 2010 but now depreciating by 3.8 percent to ZAR 7.514/USD on Feb 3, 2012, which is still 35.1 percent stronger than on Oct 22, 2008. An example from Asia is the Singapore Dollar (SGD) highly depreciated at the peak of SGD 1.553/USD on Mar 3, 2009 but subsequently appreciating by 13.2 percent to the trough of SGD 1.348/USD on Aug 9, 2010 but is now only 7.9 percent stronger at SGD 1.242/USD on Feb 3 relative to the trough of depreciation but still stronger by 20.0 percent relative to the peak of depreciation on Mar 3, 2009. Another example is the Brazilian real (BRL) that depreciated at the peak to BRL 2.43/USD on Dec 5, 2008 but appreciated 28.5 percent to the trough at BRL 1.737/USD on Apr 30, 2010, showing appreciation of 1.3 percent relative to the trough to BRL 1.715/USD on Feb 3, 2012 but still stronger by 29.4 percent relative to the peak on Dec 5, 2008. At one point in 2011 the Brazilian real traded at BRL 1.55/USD and in the week of Sep 23 surpassed BRL 1.90/USD in intraday trading for depreciation of more than 20 percent. The Banco Central do Brasil, Brazil’s central bank, lowered its policy rate SELIC for the third consecutive meeting of its monetary policy committee, COPOM (http://www.bcb.gov.br/textonoticia.asp?codigo=3268&IDPAI=NEWS):

“Copom reduces the Selic rate to 11.00 percent

30/11/2011 7:47:00 PM

Brasília - Continuing the process of adjustment of monetary conditions, the Copom unanimously decided to reduce the Selic rate to 11.00 percent, without bias.

The Copom understands that, by promptly mitigating the effects stemming from a more restrictive global environment, a moderate adjustment in the basic rate level is consistent with the scenario of inflation convergence to the target in 2012.”

Unconventional monetary policy of zero interest rates and quantitative easing creates trends such as the depreciation of the dollar followed by Table VIII-6 but with abrupt reversals during risk aversion. The main effects of unconventional monetary policy are on valuations of risk financial assets and not necessarily on consumption and investment or aggregate demand.

Table VIII-6, Exchange Rates

	Peak	Trough	∆% P/T	Feb 3, 2012	∆T Feb 3, 2012	∆P Feb 3, 2012
EUR USD	7/15 2008	6/7 2010		02/03 2012
Rate	1.59	1.192		1.316
∆%			-33.4		9.4	-20.8
JPY USD	8/18 2008	9/15 2010		02/03 2012
Rate	110.19	83.07		76.58
∆%			24.6		7.8	30.5
CHF USD	11/21 2008	12/8 2009		02/03 2012
Rate	1.225	1.025		0.919
∆%			16.3		10.3	24.9
USD GBP	7/15 2008	1/2/ 2009		02/03 2012
Rate	2.006	1.388		1.581
∆%			-44.5		12.2	-26.9
USD AUD	7/15 2008	10/27 2008		02/03 2012
Rate	1.0215	1.6639		1.077
∆%			-62.9		44.2	9.1
ZAR USD	10/22 2008	8/15 2010		02/03 2012
Rate	11.578	7.238		7.514
∆%			37.5		-3.8	35.1
SGD USD	3/3 2009	8/9 2010		02/03 2012
Rate	1.553	1.348		1.242
∆%			13.2		7.9	20.0
HKD USD	8/15 2008	12/14 2009		02/03 2012
Rate	7.813	7.752		7.752
∆%			0.8		0.0	0.8
BRL USD	12/5 2008	4/30 2010		02/03 2012
Rate	2.43	1.737		1.715
∆%			28.5		1.3	29.4
CZK USD	2/13 2009	8/6 2010		02/03 2012
Rate	22.19	18.693		18.95
∆%			15.7		-1.4	14.6
SEK USD	3/4 2009	8/9 2010		02/03 2012
Rate	9.313	7.108		6.677
∆%			23.7		6.1	28.3
CNY USD	7/20 2005	7/15 2008		02/03 2012
Rate	8.2765	6.8211		6.303
∆%			17.6		7.6	23.8

Symbols: USD: US dollar; EUR: euro; JPY: Japanese yen; CHF: Swiss franc; GBP: UK pound; AUD: Australian dollar; ZAR: South African rand; SGD: Singapore dollar; HKD: Hong Kong dollar; BRL: Brazil real; CZK: Czech koruna; SEK: Swedish krona; CNY: Chinese yuan; P: peak; T: trough

Note: percentages calculated with currencies expressed in units of domestic currency per dollar; negative sign means devaluation and no sign appreciation

Source: http://professional.wsj.com/mdc/public/page/mdc_currencies.html?mod=mdc_topnav_2_3000

http://federalreserve.gov/releases/h10/Hist/dat00_ch.htm

Chart VIII-1 of the Board of Governors of the Federal Reserve System provides indexes of the dollar from 2010 to 2011. The dollar depreciates during episodes of risk appetite but appreciate during risk aversion as funds seek dollar-denominated assets in avoiding financial risk.

Chart VIII-1, Broad, Major Currency, and Other Important Trading Partners Indexes for the US Dollar

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/DataDownload/Chart.aspx?rel=H10&series=122e3bcb627e8e53f1bf72a1a09cfb81&lastObs=260&from=&to=&filetype=csv&label=include&layout=seriescolumn&pp=Download&names=%7bH10/H10/JRXWTFB_N.B,H10/H10/JRXWTFN_N.B,H10/H10/JRXWTFO_N.B%7d

Table VIII-7, updated with every blog comment, provides in the second column the yield at the close of market of the 10-year Treasury note on the date in the first column. The price in the third column is calculated with the coupon of 2.625 percent of the 10-year note current at the time of the second round of quantitative easing after Nov 3, 2010 and the final column “∆% 11/04/10” calculates the percentage change of the price on the date relative to that of 101.2573 at the close of market on Nov 4, 2010, one day after the decision on quantitative easing by the Fed on Nov 3, 2010. Prices with new coupons such as 2.0 percent in recent auctions (http://www.treasurydirect.gov/RI/OFAuctions?form=extended&cusip=912828RR3) are not comparable to prices in Table VIII-7. The highest yield in the decade was 5.510 percent on May 1, 2001 that would result in a loss of principal of 22.9 percent relative to the price on Nov 4. Monetary policy has created a “duration trap” of bond prices. Duration is the percentage change in bond price resulting from a percentage change in yield or what economists call the yield elasticity of bond price. Duration is higher the lower the bond coupon and yield, all other things constant. This means that the price loss in a yield rise from low coupons and yields is much higher than with high coupons and yields. Intuitively, the higher coupon payments offset part of the price loss. Prices/yields of Treasury securities were affected by the combination of Fed purchases for its program of quantitative easing and also by the flight to dollar-denominated assets because of geopolitical risks in the Middle East, subsequently by the tragic Great East Japan Earthquake and Tsunami and now again by the sovereign risk doubts in Europe and the growth recession in the US and the world. The yield of 1.923 percent at the close of market on Fri Feb 3, 2012 would be equivalent to price of 106.3586 in a hypothetical bond maturing in 10 years with coupon of 2.625 percent for price gain of 5.3 percent relative to the price on Nov 4, 2010, one day after the decision on the second program of quantitative easing, as shown in the last row of Table VIII-7. If inflation accelerates, yields of Treasury securities may rise sharply. Yields are not observed without special yield-lowering effects such as the flight into dollars caused by the events in the Middle East, continuing purchases of Treasury securities by the Fed, the tragic Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 affecting Japan, recurring fears on European sovereign credit issues and worldwide risk aversion in the week of Sep 30 caused by “let’s twist again” monetary policy. The realization of a growth standstill recession is also influencing yields. Important causes of the earlier rise in yields shown in Table VIII-7 are expectations of rising inflation and US government debt estimated to be around 70 percent of GDP in 2012 (http://cmpassocregulationblog.blogspot.com/2011/08/united-states-gdp-growth-standstill.html http://cmpassocregulationblog.blogspot.com/2011/02/policy-inflation-growth-unemployment.html http://cmpassocregulationblog.blogspot.com/2011/04/budget-quagmire-fed-commodities_10.html), rising from 40.5 percent of GDP in 2008, 54.1 percent in 2009 (Table IV-1 in this post and Table 2 in http://cmpassocregulationblog.blogspot.com/2011/04/budget-quagmire-fed-commodities_10.html) and 67.7 percent in 2011. On Jan 4, 2012, the line “Reserve Bank credit” in the Fed balance sheet stood at $2907 billion, or $2.9 trillion, with portfolio of long-term securities of $2572 billion, or $2.6 trillion, consisting of $1566 billion Treasury nominal notes and bonds, $69 billion of notes and bonds inflation-indexed, $101 billion Federal agency debt securities and $836 billion mortgage-backed securities; reserve balances deposited with Federal Reserve Banks reached $1572 billion or $1.6 trillion (http://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1). There is no simple exit of this trap created by the highest monetary policy accommodation in US history together with the highest deficits and debt in percent of GDP since World War II. Risk aversion from various sources, discussed in section III World Financial Turbulence, has been affecting financial markets for several months. The risk is that in a reversal of risk aversion that has been typical in this cyclical expansion of the economy yields of Treasury securities may back up sharply.

Table VIII-7, Yield, Price and Percentage Change to November 4, 2010 of Ten-Year Treasury Note

Date	Yield	Price	∆% 11/04/10
05/01/01	5.510	78.0582	-22.9
06/10/03	3.112	95.8452	-5.3
06/12/07	5.297	79.4747	-21.5
12/19/08	2.213	104.4981	3.2
12/31/08	2.240	103.4295	2.1
03/19/09	2.605	100.1748	-1.1
06/09/09	3.862	89.8257	-11.3
10/07/09	3.182	95.2643	-5.9
11/27/09	3.197	95.1403	-6.0
12/31/09	3.835	90.0347	-11.1
02/09/10	3.646	91.5239	-9.6
03/04/10	3.605	91.8384	-9.3
04/05/10	3.986	88.8726	-12.2
08/31/10	2.473	101.3338	0.08
10/07/10	2.385	102.1224	0.8
10/28/10	2.658	99.7119	-1.5
11/04/10	2.481	101.2573	-
11/15/10	2.964	97.0867	-4.1
11/26/10	2.869	97.8932	-3.3
12/03/10	3.007	96.7241	-4.5
12/10/10	3.324	94.0982	-7.1
12/15/10	3.517	92.5427	-8.6
12/17/10	3.338	93.9842	-7.2
12/23/10	3.397	93.5051	-7.7
12/31/10	3.228	94.3923	-6.7
01/07/11	3.322	94.1146	-7.1
01/14/11	3.323	94.1064	-7.1
01/21/11	3.414	93.4687	-7.7
01/28/11	3.323	94.1064	-7.1
02/04/11	3.640	91.750	-9.4
02/11/11	3.643	91.5319	-9.6
02/18/11	3.582	92.0157	-9.1
02/25/11	3.414	93.3676	-7.8
03/04/11	3.494	92.7235	-8.4
03/11/11	3.401	93.4727	-7.7
03/18/11	3.273	94.5115	-6.7
03/25/11	3.435	93.1935	-7.9
04/01/11	3.445	93.1129	-8.0
04/08/11	3.576	92.0635	-9.1
04/15/11	3.411	93.3874	-7.8
04/22/11	3.402	93.4646	-7.7
04/29/11	3.290	94.3759	-6.8
05/06/11	3.147	95.5542	-5.6
05/13/11	3.173	95.3387	-5.8
05/20/11	3.146	95.5625	-5.6
05/27/11	3.068	96.2089	-4.9
06/03/11	2.990	96.8672	-4.3
06/10/11	2.973	97.0106	-4.2
06/17/11	2.937	97.3134	-3.9
06/24/11	2.872	97.8662	-3.3
07/01/11	3.186	95.2281	-5.9
07/08/11	3.022	96.5957	-4.6
07/15/11	2.905	97.5851	-3.6
07/22/11	2.964	97.0847	-4.1
07/29/11	2.795	98.5258	-2.7
08/05/11	2.566	100.5175	-0.7
08/12/11	2.249	103.3504	2.1
08/19/11	2.066	105.270	3.7
08/26/11	2.202	103.7781	2.5
09/02/11	1.992	105.7137	4.4
09/09/11	1.918	106.4055	5.1
09/16/11	2.053	101.5434	0.3
09/23/11	1.826	107.2727	5.9
09/30/11	1.912	106.4602	5.1
10/07/11	2.078	104.9161	3.6
10/14/11	2.251	103.3323	2.0
10/21/11	2.220	103.6141	2.3
10/28/11	2.326	102.6540	1.4
11/04/11	2.066	105.0270	3.7
11/11/11	2.057	105.1103	3.8
11/18/11	2.003	105.6113	4.3
11/25/11	1.964	105.9749	4.7
12/02/11	2.042	105.2492	3.9
12/09/11	2.065	105.0363	3.7
12/16/11	1.847	107.0741	5.7
12/23/11	2.027	105.3883	4.1
12/30/11	1.871	106.8476	5.5
01/06/12	1.957	106.0403	4.7
01/13/12	1.869	106.8664	5.5
01/20/12	2.026	105.3976	4.1
01/27/12	1.893	106.6404	5.3
02/03/12	1.923	106.3586	5.0

Note: price is calculated for an artificial 10-year note paying semi-annual coupon and maturing in ten years using the actual yields traded on the dates and the coupon of 2.625% on 11/04/10

Source:

http://professional.wsj.com/mdc/public/page/mdc_bonds.html?mod=mdc_topnav_2_3000

VIII Economic Indicators. Crude oil input in refineries fell to 14,511 thousand barrels per day on average in the four weeks ending on Jan 27, 2012 from 14,646 thousand barrels per day in the four weeks ending on Jan 20, 2012, as shown in Table IX-1. The rate of capacity utilization in refineries continues at a relatively high level of 83.3 percent on Jan 27, 2012, which is lower than 83.9 percent on Jan 28, 2011, and 84.1 percent on Jan 20, 2012. Imports of crude oil fell 0.4 percent from 8,976 thousand barrels per day on average in the four weeks ending on Jan 20 to 8,940 thousand barrels per day in the week of Jan 27. The Energy Information Administration (EIA) informs that “US crude oil imports averaged about 8.9 million barrels per day last week [Jan 27]” (http://www.eia.gov/pub/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/current/pdf/highlights.pdf). Slight decrease in utilization in refineries but with about flat imports at the margin in the prior week resulted in increase of commercial crude oil stocks by 4.1 million barrels from 334.8 million barrels on Jan 20 to 338.9 million barrels on Jan 27. Motor gasoline production decreased 1.2 percent from 8,751 thousand barrels per day in the week of Jan 20 to 8,940 thousand barrels per day on average in the week of Jan 27. Gasoline stocks decreased 3.0 million barrels and stocks of fuel oil decreased 0.1 million barrels. Supply of gasoline fell from 8,694 thousand barrels per day on Jan 28, 2011, to 8,060 thousand barrels per day on Jan 27, 2011, or by 7.3 percent, while fuel oil supply fell 1.7 percent. Part of the fall in consumption of gasoline is due to higher prices and part to the growth recession. Table IX-1 also shows increase in the WTI price of crude oil by 12.8 percent from Jan 28, 2011 to Jan 27, 2012. Gasoline prices rose 10.9 percent from Jan 31, 2011 to Jan 30, 2012. Increases in prices of crude oil and gasoline relative to a year earlier are moderating because year earlier prices are already reflecting the commodity price surge and commodity prices have been declining recently during worldwide risk aversion.

Table IX-1, US, Energy Information Administration Weekly Petroleum Status Report

Four Weeks Ending Thousand Barrels/Day	01/27/12	01/20/12	01/28/11
Crude Oil Refineries Input	14,511 Week       ∆%: -0.9	14,646	14,374
Refinery Capacity Utilization %	83.3	84.1	83.9
Motor Gasoline Production	8,644 Week      ∆%: –1.2	8,751	8,809
Distillate Fuel Oil Production	4,534 Week     ∆%: –1.7	4,612	4,317
Crude Oil Imports	8,940 Week        ∆%: -0.4	8,976	9,040
Motor Gasoline Supplied	8,060 ∆% 2011/2010= -7.3%	8,207	8,694
Distillate Fuel Oil Supplied	3,634 ∆% 2011/2010 = –1.7%	3,582	3,695
	1/27/12	1/20/12	1/28/11
Crude Oil Stocks Million B	338.9          ∆= +4.1 MB	334.8	343.2
Motor Gasoline Million B	230.1    ∆= –3.0 MB	227.1	236.2
Distillate Fuel Oil Million B	145.4 ∆= –0.1 MB	145.5	164.1
WTI Crude Oil Price $/B	99.47 ∆% 2011/2010 12.8	98.15	88.15
	1/30/12	1/23/12	1/31/11
Regular Motor Gasoline $/G	3.439 ∆% 2011/2010 10.9	3.389	3.101

B: barrels; G: gallon

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

Chart IX-1 of the US Energy Information Administration shows the commercial stocks of crude oil of the US. There have been fluctuations around an upward trend since 2005. Crude oil stocks trended downwardly during a few weeks but with fluctuations.

Chart IX-1, US, Weekly Crude Oil Ending Stocks

Source: US Energy Information Administration

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=WCESTUS1&f=W

Chart IX-2 of the US Energy Information Administration provides closer view of US crude oil stocks since Jun 2010. Crude oil stocks rose in a clear trend in 2011 but began to drop on a downward trend after May 2011. There is less need to stock oil after May with declining prices if it is anticipated that prices in future months may be lower. The final part of the chart shows the increase in oil stocks in the weeks of Nov 25 and Dec 2 and the declines in the weeks of Dec 9 and Dec 16 with increases in the weeks of Dec 23, Dec 30 and Jan 6, 2012. The last change in Chart IX-2 is the decrease in stocks in the week of Jan 13, moderating with the increase by 3.6 million barrels in the week of Jan 20 and an extra 4.1 million barrels in the week of Jan 27.

Chart IX-2, US, Crude Oil Stocks

Source: US Energy Information Administration

http://www.eia.gov/petroleum/

Chart IX-3 of the US Energy Information Administration shows the price of WTI crude oil since the 1980s. Chart IX-3 captures commodity price shocks during the past decade. The costly mirage of deflation was caused by the decline in oil prices during the recession of 2001. The upward trend after 2003 was promoted by the carry trade from near zero interest rates. The jump above $140/barrel during the global recession in 2008 can only be explained by the carry trade promoted by monetary policy of zero fed funds rate. After moderation of risk aversion, the carry trade returned with resulting sharp upward trend of crude prices.

Chart IX-3, US, Crude Oil Futures Contract

Source: US Energy Information Administration

http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=RCLC1&f=D

There is significant difference between initial claims for unemployment insurance adjusted and not adjusted for seasonality provided in Table IX-2. Seasonally adjusted claims decreased 12,000 from 379,000 on Jan 21, 2012 to 367,000 on Jan 28. Claims not adjusted for seasonality decreased 1,786 from 416,880 on Jan 21 to 414,094 on Jan 28. Strong seasonality is preventing clear analysis of labor markets.

Table IX-2, US, Initial Claims for Unemployment Insurance

	SA	NSA	4-week MA SA
Jan 28, 12	367,000	415,094	375,750
Jan 21, 12	379,000	416,880	377,750
Change	-12,000	-1,786	-2,000
Jan 14, 11	355,000	525,422	379,750
Prior Year	424,000	464,775	429,750

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

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

Table VIII-3 provides seasonally and not seasonally adjusted claims in the comparable week for the years from 2001 to 2012. Seasonally adjusted claims typically are lower than claims not adjusted for seasonality. Claims not seasonally adjusted have declined from 620,143 on Jan 24, 2009 to 464,775 on Jan 29, 2011, and now to 415,094 on Jan 28, 2012. There is strong indication of significant decline in the level of layoffs in the US. Hiring has not recovered (http://cmpassocregulationblog.blogspot.com/2012/01/recovery-without-hiring-united-states.html).

Table IX-3, US, Unemployment Insurance Weekly Claims

	Not Seasonally Adjusted Claims	Seasonally Adjusted Claims
Jan 27, 2001	447,386	362,000
Jan 26, 2002	431,690	414,000
Jan 25, 2003	434,888	407,000
Jan 24, 2004	382,262	353,000
Jan 22, 2005	364,704	331,000
Jan 28, 2006	318,805	282,000
Feb 3, 2007	339,018	309,000
Jan 26, 2008	369,498	368,000
Jan 24, 2009	620,143	586,000
Jan 30, 2010	538,617	501,000
Jan 29, 2011	464,775	424,000
Jan 28, 2012	415,094	367,000

Source: http://www.workforcesecurity.doleta.gov/unemploy/claims.asp

X Interest Rates. It is quite difficult to measure inflationary expectations because they tend to break abruptly from past inflation. There could still be an influence of past and current inflation in the calculation of future inflation by economic agents. Table X-1 provides inflation of the CPI. In Oct-Dec 2011, CPI inflation for all items seasonally adjusted was minus 0.4 percent in annual equivalent, that is, compounding inflation in Oct-Dec and assuming it would be repeated for a full year. In the 12 months ending in Dec, CPI inflation of all items not seasonally adjusted was 3.0 percent. The second row provides the same measurements for the CPI of all items excluding food and energy: 2.2 percent in 12 months and 2.0 percent in annual equivalent. Bloomberg provides the yield curve of US Treasury securities (http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/). The lowest yield is 0.07 percent for three months, 0.10 percent for six months, 0.12 percent for 12 months, 0.23 percent for two years, 0.32 percent for three years, 0.77 percent for five years, 1.33 percent for seven years, 1.92 percent for ten years and 3.12 percent for 30 years. The Irving Fisher definition of real interest rates is approximately the difference between nominal interest rates, which are those estimated by Bloomberg, and the rate of inflation expected in the term of the security, which could behave as in Table X-1. Real interest rates in the US have been negative during substantial periods in the past decade while monetary policy pursues a policy of attaining its “dual mandate” of (http://www.federalreserve.gov/aboutthefed/mission.htm):

“Conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates”

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

Table X-1, US, Consumer Price Index Percentage Changes 12 months NSA and Annual Equivalent ∆%

	∆% 12 Months Dec 2011/Dec 2010 NSA	∆% Annual Equivalent Oct-Dec 2011 SA
CPI All Items	3.0	-0.4
CPI ex Food and Energy	2.2	2.0

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

XI Conclusion. The US economy is in growth standstill at an annual equivalent rate in the four quarters of 2011 of 1.6 percent primarily driven by drawing on savings. Real disposable income is falling. There are around 30 million people in the US unemployed or underemployed. Real wages are falling. There is no exit from unemployment, underemployment and falling real wages because of the collapse of hiring. The euro is fighting for survival. Inflation has occurred in three waves in 2011 with higher inflation induced by carry trades from zero interest rates to commodity futures when there is subdued risk aversion. Inflation declined in the middle of the year because of unwinding carry trades as a result of financial risk aversion originating in the sovereign debt crisis of Europe. Unconventional monetary policy of zero interest rates and large-scale purchases of assets using the central bank’s balance sheet is designed to increase aggregate demand by stimulating consumption and investment. In practice, there is no control of how cheap money will be used. An alternative allocation of cheap money is through the carry trade from zero interest rates and short dollar positions to exposures in risk financial assets such as equities, commodities and so on. After a decade of unconventional monetary policy it may be prudent to return to normalcy so as to avoid adverse side effects of financial turbulence and inflation waves. Normal monetary policy would also encourage financial intermediation required for financing sound long-term projects that can stimulate economic growth and full utilization of resources. (Go to http://cmpassocregulationblog.blogspot.com/ http://sites.google.com/site/economicregulation/carlos-m-pelaez)

http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10)

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Appendix I. The Great Inflation

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

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

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

Chart I1, Brazil, Phillips Circuit 1963-1987

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

DeLong (1997, 247-8) shows that the 1970s were the only peacetime period of inflation in the US without parallel in the prior century. The price level in the US drifted upward since 1896 with jumps resulting from the two world wars: “on this scale, the inflation of the 1970s was as large an increase in the price level relative to drift as either of this century’s major wars” (DeLong, 1997, 248). Monetary policy focused on accommodating higher inflation, with emphasis solely on the mandate of promoting employment, has been blamed as deliberate or because of model error or imperfect measurement for creating the Great Inflation (http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html). As DeLong (1997) shows, the Great Inflation began in the mid 1960s, well before the oil shocks of the 1970s (see also the comment to DeLong 1997 by Taylor 1997, 276-7). TableI1 provides the change in GDP, CPI and the rate of unemployment from 1960 to 1990. There are three waves of inflation (1) in the second half of the 1960s; (2) from 1973 to 1975; and (3) from 1978 to 1981. In one of his multiple important contributions to understanding the Great Inflation, Meltzer (2005) distinguishes between one-time price jumps, such as by oil shocks, and a “maintained” inflation rate. Meltzer (2005) uses a dummy variable to extract the one-time oil price changes, resulting in a maintained inflation rate that was never higher than 8 to 10 percent in the 1970s. There is revealing analysis of the Great Inflation and its reversal by Meltzer (2005, 2010a, 2010b).

Table I1, US Annual Rate of Growth of GDP and CPI and Unemployment Rate 1960-1982

	∆% GDP	∆% CPI	UNE
1960	2.5	1.4	6.6
1961	2.3	0.7	6.0
1962	6.1	1.3	5.5
1963	4.4	1.6	5.5
1964	5.8	1.0	5.0
1965	6.4	1.9	4.0
1966	6.5	3.5	3.8
1967	2.5	3.0	3.8
1968	4.8	4.7	3.4
1969	3.1	6.2	3.5
1970	0.2	5.6	6.1
1971	3.4	3.3	6.0
1972	5.3	3.4	5.2
1973	5.8	8.7	4.9
1974	-0.6	12.3	7.2
1975	-0.2	6.9	8.2
1976	5.4	4.9	7.8
1977	4.6	6.7	6.4
1978	5.6	9.0	6.0
1979	3.1	13.3	6.0
1980	-0.3	12.5	7.2
1981	2.5	8.9	8.5
1982	-1.9	3.8	10.8
1983	4.5	3.8	8.3
1984	7.2	3.9	7.3
1985	4.1	3.8	7.0
1986	3.5	1.1	6.6
1987	3.2	4.4	5.7
1988	4.1	4.4	5,3
1989	3.6	4.6	5.4
1990	1.9	6.1	6.3

Note: GDP: Gross Domestic Product; CPI: consumer price index; UNE: rate of unemployment; CPI and UNE are at year end instead of average to obtain a complete series

Source: ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt

http://www.bea.gov/national/nipaweb/TableView.asp?SelectedTable=2&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=2009&LastYear=2010&3Place=N&Update=Update&JavaBox=no

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

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

There is a false impression of the existence of a monetary policy “science,” measurements and forecasting with which to steer the economy into “prosperity without inflation.” Market participants are remembering the Great Bond Crash of 1994 shown in Table I2 when monetary policy pursued nonexistent inflation, causing trillions of dollars of losses in fixed income worldwide while increasing the fed funds rate from 3 percent in Jan 1994 to 6 percent in Dec. The exercise in Table I2 shows a drop of the price of the 30-year bond by 18.1 percent and of the 10-year bond by 14.1 percent. CPI inflation remained almost the same and there is no valid counterfactual that inflation would have been higher without monetary policy tightening because of the long lag in effect of monetary policy on inflation (see Culbertson 1960, 1961, Friedman 1961, Batini and Nelson 2002, Romer and Romer 2004). The pursuit of nonexistent deflation during the past ten years has resulted in the largest monetary policy accommodation in history that created the 2007 financial market crash and global recession and is currently preventing smoother recovery while creating another financial crash in the future. The issue is not whether there should be a central bank and monetary policy but rather whether policy accommodation in doses from zero interest rates to trillions of dollars in the fed balance sheet endangers economic stability.

Table I2, Fed Funds Rates, Thirty and Ten Year Treasury Yields and Prices, 30-Year Mortgage Rates and 12-month CPI Inflation 1994

1994	FF	30Y	30P	10Y	10P	MOR	CPI
Jan	3.00	6.29	100	5.75	100	7.06	2.52
Feb	3.25	6.49	97.37	5.97	98.36	7.15	2.51
Mar	3.50	6.91	92.19	6.48	94.69	7.68	2.51
Apr	3.75	7.27	88.10	6.97	91.32	8.32	2.36
May	4.25	7.41	86.59	7.18	88.93	8.60	2.29
Jun	4.25	7.40	86.69	7.10	90.45	8.40	2.49
Jul	4.25	7.58	84.81	7.30	89.14	8.61	2.77
Aug	4.75	7.49	85.74	7.24	89.53	8.51	2.69
Sep	4.75	7.71	83.49	7.46	88.10	8.64	2.96
Oct	4.75	7.94	81.23	7.74	86.33	8.93	2.61
Nov	5.50	8.08	79.90	7.96	84.96	9.17	2.67
Dec	6.00	7.87	81.91	7.81	85.89	9.20	2.67

Notes: FF: fed funds rate; 30Y: yield of 30-year Treasury; 30P: price of 30-year Treasury assuming coupon equal to 6.29 percent and maturity in exactly 30 years; 10Y: yield of 10-year Treasury; 10P: price of 10-year Treasury assuming coupon equal to 5.75 percent and maturity in exactly 10 years; MOR: 30-year mortgage; CPI: percent change of CPI in 12 months

Sources: yields and mortgage rates http://www.federalreserve.gov/releases/h15/data.htm CPI ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.t

© Carlos M. Pelaez, 2010, 2011, 2012