Mediocre Economic Growth, Flattening Real Disposable Income and Consumption Expenditures, World Financial Turbulence and Economic Slowdown: Part II

 

Mediocre Economic Growth, Flattening Real Disposable Income and Consumption Expenditures, World Financial Turbulence and Economic Slowdown

Carlos M. Pelaez

© Carlos M. Pelaez, 2010, 2011, 2012

Executive Summary

I Mediocre Economic Growth

II Flattening Real Disposable Income and Consumption Expenditures

IIA Flattening Real Disposable Income and Consumption Expenditures

IIB Financial Repression

III 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

IV Global Inflation

V World Economic Slowdown

VA United States

VB Japan

VC China

VD Euro Area

VE Germany

VF France

VG Italy

VH United Kingdom

VI Valuation of Risk Financial Assets

VII Economic Indicators

VIII Interest Rates

IX Conclusion

References

Appendix I The Great Inflation

 

V World Economic Slowdown. 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.

The JP Morgan Global Manufacturing & Services PMI^™, produced by JP Morgan and Markit in association with ISM and IPFSM, rose to 54.6 in Jan from 52.7 in Dec, indicating expansion at a faster rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9159). This index is highly correlated with global GDP, indicating continued growth of the global economy for nearly two years and a half. The US economy drove growth in the global economy in Dec and Jan. New orders are expanding at a faster rate, increasing from 51.5 in Dec to 54.0 in Jan, suggesting further increase in business ahead. The HSBC Brazil Composite Output Index of the HSBC Brazil Services PMI^™, compiled by Markit, rose from 53.2 in Dec to 53.8 in Jan (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9156). Andre Loes, Chief Economist of HSBC in Brazil, finds that the increase of the services HSBC PMI for Brazil from 54.8 in Dec to 55.0 in Jan, which is the highest level since Mar 2010, strengthen the belief that the worst period of deceleration has already occurred (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9156).

VA United States. Table USA provides the data table for the US.

Table USA, US Economic Indicators

Consumer Price Index	Jan 12 months NSA ∆%: 2.9; ex food and energy ∆%: 2.3 Jan month ∆%: 0.2; ex food and energy ∆%: 0.2 Blog 02/19/12
Producer Price Index	Jan 12 months NSA ∆%: 4.1; ex food and energy ∆% 3.0 Jan month SA ∆% = 0.1; ex food and energy ∆%: 0.4 Blog 02/19/12
PCE Inflation	Jan 12 months NSA ∆%: headline 2.4; ex food and energy ∆% 1.9 Blog 03/04/12
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 Dec 2011 2.747 million lower by 0.955 million than 3.702 million in Dec 2006 Blog 02/12/12
GDP Growth	BEA Revised National Income Accounts back to 2003 IQ2011 SAAR ∆%: 0.4 IIQ2011 SAAR ∆%: 1.3 IIIQ2011 SAAR ∆%: 1.8 IVQ2011 ∆%: 3.0 Cumulative 2011 ∆%: 1.6 2011/2010 ∆%: 1.7 Blog 03/04/12
Personal Income and Consumption	Jan month ∆% SA Real Disposable Personal Income (RDPI) minus 0.1 Jan month SA ∆% Real Personal Consumption Expenditures (RPCE): 0.0 12 months NSA ∆%: RDPI: 0.6; RPCE ∆%: 1.2 Blog 03/04/2012
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	Jan month SA ∆%: 0.0 Dec 12 months SA ∆%: 3.4 Capacity Utilization: 78.5 Blog 02/19/12
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 Jan 13.48 to Feb 19.53 New Orders: From Dec 13.70 to Jan 9.73 Blog 02/19/12
Philadelphia Fed Business Outlook Index	General Index from Jan 7.3 to Feb 10.2 New Orders from Jan 6.9 to Feb 11.7 Blog 02/19/12
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	Jan New Orders SA ∆%: minus 4.0; ex transport ∆%: minus 3.2 Jan 12-month NSA New Orders ∆%: 8.8; ex transport ∆% : 6.6 Blog 03/04/12
Sales of New Motor Vehicles	Feb 2012 2,062,683; Feb 2011 1,813,182. Feb SAAR 15.10 million, Dec SAAR 13.56, Feb 2011 SAAR 13.29 million Blog 03/04/12
Sales of Merchant Wholesalers	Jan-Dec 2011/2010 ∆%: Total 13.9; Durable Goods: 12.1; Nondurable Goods 15.4 Blog 02/12/12
Sales and Inventories of Manufacturers, Retailers and Merchant Wholesalers	Dec 11/Dec 10 NSA ∆%: Sales Total Business 7.2; Manufacturers 7.0 Retailers 5.6; Merchant Wholesalers 9.0 Blog 02/19/12
Sales for Retail and Food Services	Jan 2012/Jan 2011 ∆%: Retail and Food Services: 5.6; Retail ∆% 5/4 Blog 02/19/12
Value of Construction Put in Place	Jan SAAR month SA ∆%: minus 0.1 Jan 12-month NSA: 8.0 Blog 03/04/12
Case-Shiller Home Prices	Dec 2011/Dec 2010 ∆% NSA: 10 Cities minus 3.9; 20 Cities: minus 4.0 ∆% Dec SA: 10 Cities minus 0.5 ; 20 Cities: minus 0.5 Blog 03/04/12
FHFA House Price Index Purchases Only	Dec SA ∆% 0.7; 12 month ∆%: minus 0.7 Blog 02/26/12
New House Sales	Jan 2012 month SAAR ∆%: minus 0.9 Jan 2012/Jan 2011 NSA ∆%: 4.8 Blog 02/26/12
Housing Starts and Permits	Jan Starts month SA ∆%: 1.5; Permits ∆%: 0.7 Jan 2011/Jan 2010 NSA ∆% Starts 14.2; Permits  ∆% -3.5 Blog 2/19/12
Trade Balance	Balance Dec SA -$48,800 million versus Nov -$47,058 million Exports Dec SA ∆%: 0.7 Imports Dec SA ∆%: 1.0 Goods Exports Jan-Dec 2011/2010 NSA ∆%: 6.3 Good Imports Jan-Dec 2011/2010 NSA ∆%: 15.5 Blog 02/12/12
Export and Import Prices	Dec 12 months NSA ∆%: Imports 8.5; Exports 3.6 Blog 02/19/12
Consumer Credit	Dec ∆% annual rate: 9.3 Blog 02/12/12
Net Foreign Purchases of Long-term Treasury Securities	Nov Net Foreign Purchases of Long-term Treasury Securities: $17.9 billion Dec versus Nov $61.3 billion Major Holders of Treasury Securities: China $1101 billion; Japan $1042 billion  Blog 02/19/12
Treasury Budget	Fiscal Year 2012/2011 ∆%: Receipts 4.1; Outlays -3.2; Individual Income Taxes 4.9 Deficit Fiscal Year 2011 $1,296 billion Deficit Fiscal Year 2012 Oct-Jan $418,756 million Blog 02/12/12 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:

02/16/12 http://cmpassocregulationblog.blogspot.com/2012/02/decline-of-united-states-new-house_26.html

02/19/12 http://cmpassocregulationblog.blogspot.com/2012/02/world-inflation-waves-united-states_19.html

02/12/12 http://cmpassocregulationblog.blogspot.com/2012/02/hiring-collapse-ten-million-fewer-full_12.html

02/05/12 http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or_05.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

Motor vehicle sales and production in the US have been in long-term structural change. Table VA-1 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 Feb 2012, light vehicle sales accumulated to 2,062,683, which is higher by 13.8 percent relative to 1,813,182 a year earlier (http://www.motorintelligence.com/m_frameset.html). The seasonally-adjusted annual rate of light vehicle sales in the US reached 15.10 million in Feb 2012, higher than 13.56 million in Dec 2011 and higher than 13.29 million in Feb 2011 (http://www.motorintelligence.com/m_frameset.html).

Table VA-1, 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 0.4 percent in Jan after increasing 1.9 percent in Dec while new orders fell sharply in Jan by 4.0 percent after increasing 3.2 percent in Dec, as shown in Table VA-2. These data are very volatile. Volatility is illustrated by increase of 88.1 percent of nondefense aircraft in Nov and revised 21.0 percent in Dec followed by decline of 19.0 percent in Jan. New orders excluding transportation equipment fell 3.2 percent. Capital goods new orders, indicating investment, fell sharply in Jan by 5.0 percent, after increasing 5.1 percent in Dec and 8.0 percent in Nov. New orders of nondefense capital goods fell 6.3 percent in Jan after jumping 6.8 in Dec and 9.3 percent in Nov. Excluding more volatile aircraft, capital goods orders still fell 4.5 percent in Jan after increasing 3.4 percent in Dec.

Table VA-2, US, Durable Goods Value of Manufacturers’ Shipments and New Orders, SA, Month ∆%

	Jan 2012 ∆%	Dec 2011  ∆%	Nov  ∆%
Total
S	0.4	1.9	-0.2
NO	-4.0	3.2	4.2
Excluding Transport
S	1.1	2.2	0.5
NO	-3.2	2.1	0.3
Excluding Defense
S	0.3	1.7	-0.4
NO	-4.5	3.8	4.5
Machinery
S	-5.7	4.0	0.7
NO	-10.4	6.5	1.2
Computers & Electronic Products
S	0.3	-1.0	-3.0
NO	0.8	-0.7	-6.4
Computers
S	-7.0	-2.6	-9.7
NO	-10.1	-5.9	-7.3
Transport Equipment
S	5.4	1.0	-2.5
NO	-6.1	6.4	16.6
Motor Vehicles
S	1.9	1.0	-1.0
NO	0.9	1.1	0.0
Nondefense Aircraft
S	17.4	1.0	-11.6
NO	-19.0	21.0	88.1
Capital Goods
S	-1.1	3.3	-2.0
NO	-5.0	5.1	8.0
Nondefense Capital Goods
S	-0.9	2.6	-2.2
NO	-6.3	6.8	9.3
Capital Goods ex Aircraft
S	-3.1	2.8	-0.9
NO	-4.5	3.4	-1.5

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

Source:  http://www.census.gov/manufacturing/m3/adv/pdf/durgd.pdf

Chart VA-1 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 VA-1, US, Manufacturers’ New Orders 2010-2011 Seasonally Adjusted, Month ∆%

Source: US Census Bureau

http://www.census.gov/briefrm/esbr/www/esbr021.html

Additional perspective on manufacturers’ shipments and new orders is provided by Table VA-3. Values are cumulative millions of dollars in Jan 2012 not seasonally adjusted (NSA). Shipments of all manufacturing industries in Jan 2012 total $187.9 billion and new orders total $190.8 billion, growing respectively by 9.9 percent and 8.8 percent relative to the same period in 2011. Excluding transportation equipment, shipments grew 12.0 percent and new orders increased 11.9 percent. Excluding defense, shipments grew 9.2 percent and new orders grew 6.6 percent. Important information not in Table VA-3 is the large share of nondurable goods: with shipments of $3 trillion in 2011, 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 were lower in value in 2011, 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 $67.9 billion for shipments, growing 7.6 percent, and new orders $78.1 billion, growing 10.3 percent, which could be a favorable sign of future investment. Excluding aircraft, capital goods shipments reached $57.9 billion, growing by 6.5 percent, and new orders $61.6 billion, growing 6.5 percent. There is no suggestion in these data that the US economy is close to recession.

Table VA-3, US, Value of Manufacturers’ Shipments and New Orders, NSA, Millions of Dollars 

Jan 2012	Shipments	∆% 2012/ 2011	New Orders	∆% 2012/ 2011
Total	187,881	9.9	190,821	8.8
Excluding Transport	144,577	9.2	141,150	6.6
Excluding Defense	179,732	10.5	182,443	12.7
Machinery	26,848	10.7	29,303	4.3
Computers & Electronic Products	28,276	-4.2	20,280	-5.0
Computers & Related Products	4,229	-10.7	3,989	-13.0
Transport Equipment	43,304	12.6	49,671	15.6
Motor Vehicles	28,533	12.9	28,520	12.2
Nondefense Aircraft	6,673	36.7	12,983	169.9
Capital Goods	67,939	7.6	78,079	10.3
Nondefense Capital Goods	61,849	9.3	72,019	21.5
Capital Goods ex Aircraft	57,949	6.5	61,554	6.5

Note: Transport: transportation

Source: US Census Bureau

http://www.census.gov/manufacturing/m3/adv/pdf/durgd.pdf

Jan interrupted three consecutive good months for construction spending in the US with decline of 0.1 percent, as shown in Table VA-4. Construction spending at seasonally-adjusted annualized rate (SAAR) reached $827.0 billion in Jan, which was lower by 0.1 percent than in the prior month of Dec. Residential investment rose 1.6 percent in the month and nonresidential investment decreased 0.8 percent. Public construction fell 0.2 percent while private construction was flat. Data in Table VA-4 show that nonresidential construction at $566.4 billion is much higher in value than residential construction at $260.6 billion while total private construction at $538.7 billion is much higher than public construction at $288.3 billion, all in SAAR.

Table VA-4, US, Value of Construction Put in Place in the United States Seasonally Adjusted Annual Rate Billion Dollars and Month and 12-Month ∆%  

	Jan 2012   SAAR               $ Billions	Month ∆%	12-Month ∆%
Total	827.0	-0.1	7.1
Residential	260.6	1.6	5.4
Nonresidential	566.4	-0.8	7.9
Total Private	538.7	0.0	11.7
Private Residential	253.6	1.8	6.7
New Single Family	113.9	2.5	5.5
New Multi-Family	16.2	0.7	20.0
Private Nonresidential	285.0	-1.5	16.6
Total Public	288.3	-0.2	-0.5
Public Residential	7.0	-3.4	-27.7
Public Nonresidential	281.3	-0.1	0.4

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 VA-5. The original monthly estimates not-seasonally adjusted (NSA) and their 12-month 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 2.4 percent in Nov, 5.5 percent in Dec and 8.0 percent in Jan.

Table VA-5, US, Value and Percentage Change in Value of Construction Put in Place, Dollars Millions and ∆%

	Value NSA Month $ Millions	12-Month ∆% NSA	Value SAAR $ Millions	Month ∆% SA*
Jan 2012	56,459	8.0	827,001	-0.1
Dec 2011	63,355	5.5	827,628	1.4
Nov	69,773	2.4	816,042	1.9
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	-5.8	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 VA-6. Construction spending in Jan 2012, not seasonally adjusted, reached $56.5 billion, which is higher by 8.0 percent than $52.3 billion in the same period in 2011. The depth of the contraction is shown by the decline of construction spending from $81.1 billion in Jan 2006 to only $56.5 billion in the same period in 2012, or decline by minus 30.3 percent. The comparable decline from Jan 2005 to Jan 2012 is minus 21.0 percent. Construction spending Jan 2012 fell by 5.7 percent relative to the same period in 2003. Construction spending is lower by 15.7 percent in Jan 2012 relative to the same period in 2009. Construction has been weaker than the economy as a whole.

Table VA-6, US, Value of Construction Put in Place in the United States, Not Seasonally Adjusted, $ Billions and ∆%

Jan 2012 $ B	56.459
Jan 2011 $ B	52.278
∆% to 2011	8.0
Jan 2010	55,368
∆% to 2011	2.0
Jan 2009	66,944
∆% to 2011	-15.7
Jan 2006 $ B	81,058
∆% to 2011	-30.3
Jan 2005 $ B	71,474
∆% to 2011	-21.0
Jan 2003	59,877
∆% to 2011	-5.7

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

Monthly construction spending in the US in the quarter Nov to Jan not seasonally adjusted is shown in Table VA-7 for the years between 2002 and 2011. The values of $56.5 billion in Jan 2012 and $52.3 billion in Jan 2011 are lower than $59.5 billion in Dec 2002. Construction in Jan 2012 fell by 30.3 percent from the peak of $81.1 in Jan 2006 to $56.5 billion in Jan 2012. The data are not adjusted for inflation or changes in quality.

Table VA-7, US, Value of Construction Spending NSA Millions of Dollars

Year	Jan 2012	Nov 2011	Dec 2011
2002	59,516	71,362	63,984
2003	59,877	77,915	71,050
2004	64,934	86,394	77,733
2005	71,474	97,549	88,172
2006	81,058	95,339	86,436
2007	79,406	94,822	84,218
2008	77,349	86,067	76,645
2009	66,944	71,906	64,098
2010	55,368	68,163	60,066
2011	52,278	69,773	63,355
2012	56,459	NA	NA

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

Chart VA-2 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 V-2 shows a trend of increase in the final segment but it is difficult to assess if it will be sustained.

Chart VA-2, 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 Nov to Jan is shown in Table VA-8 for the years between 2002 and 2011. There is a peak in 2005 to 2006 with subsequent collapse of SAARs.

Table VA-8, US, Value of Construction Spending Seasonally Adjusted Annual Rate Millions of Dollars

Year	Jan	Nov	Dec
2002	858,654	844,697	855,921
2003	863,855	925,985	948,491
2004	938,826	1,023,210	1,037,684
2005	1,036,187	1,156,977	1,178,305
2006	1,183,861	1,137,488	1,153,491
2007	1,149,899	1,127,558	1,108,958
2008	1,106,047	1,029,211	993,515
2009	962,704	850,732	832,565
2010	813,408	802,980	782,880
2011	771,982	816,042	827,628
2012	827,001	NA	NA

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 VA-9, 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 VA-11 shows the euphoria of prices during the boom and the subsequent decline. House prices rose 95.4 percent in the 10-city composite of the Case-Shiller home price index and 81.0 percent in the 20-city composite between Dec 2000 and Dec 2005. Prices rose around 100 percent from Dec 2000 to Dec 2006, increasing 95.8 percent for the 10-city composite and almost doubled increasing by 82.2 percent for the 20-city composite. House prices rose 37.6 percent between Dec 2003 and Dec 2005 for the 10-city composite and 34.2 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 Dec 2003 and Dec 2006 the 10-city index gained 37.9 percent and the 20-city index increased 35.1 percent. House prices have fallen from Dec 2006 to Dec 2011 by 32.6 for the 10-city composite and 32.8 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 Dec 2011, house prices fell 3.9 percent in the 10-city composite and fell 4.0 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 VA-10 shows that house prices increased 32.0 percent between Dec 2000 and Dec 2011 for the 10-city composite and increased 22.5 percent for the 20-city composite. Standard & Poor’s Case-Shiller estimates that the declines from the peak in IIQ2006 to the values in IVQ2011 are minus 33.8 percent for both the 10-city composite and the 20-city composite. House prices have hit record lows (http://www.standardandpoors.com/servlet/BlobServer?blobheadername3=MDT-Type&blobcol=urldocumentfile&blobtable=SPComSecureDocument&blobheadervalue2=inline%3B+filename%3Ddownload.pdf&blobheadername2=Content-Disposition&blobheadervalue1=application%2Fpdf&blobkey=id&blobheadername1=content-type&blobwhere=1245329497678&blobheadervalue3=abinary%3B+charset%3DUTF-8&blobnocache=true page 2).

Table VA-10, US, Percentage Changes of Standard & Poor’s Case-Shiller Home Price Indices, Not Seasonally Adjusted, ∆%

	10-City Composite	20-City Composite
∆% Dec 2000 to Dec 2003	42.0	34.9
∆% Dec 2000 to Dec 2005	95.4	81.0
∆% Dec 2003 to Dec 2005	37.6	34.2
∆% Dec 2000 to Dec 2006	95.8	82.2
∆% Dec 2003 to Dec 2006	37.9	35.1
∆% Dec 2005 to Dec 2011	-32.5	-32.3
∆% Dec 2006 to Dec 2011	-32.6	-32.8
∆% Dec 2009 to Dec 2011	-5.2	-6.3
∆% Dec 2010 to Dec 2011	-3.9	-4.0
∆% Dec 2000 to Dec 2011	32.0	22.5

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 VA-11. 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 every month from Sep to Dec. In Dec, house prices of the 10-city composite seasonally adjusted fell 0.5 percent and also fell 0.5 percent for the 20-city composite. The not seasonally adjusted index registers declines in Dec of 1.1 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 VA-11, 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
Dec 2011	-0.5	-1.1	-0.5	-1.1
Nov	-0.8	-1.3	-0.7	-1.3
Oct	-0.7	-1.3	-0.7	-1.3
Sep	-0.6	-0.6	-0.7	-0.7
Aug	-0.3	0.1	-0.4	0.0
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	-0.4	-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).

VB. 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	Jan ∆% -0.1 12 months ∆% 0.5 Blog 02/12/12
Consumer Price Index	Jan NSA ∆% 0.2 Jan 12 months NSA ∆% 0.1 Blog 03/04/12
Real GDP Growth	IVQ2011 ∆%: -0.6 on IIIQ2011;  IVQ2011 SAAR minus 2.3% ∆% from quarter a year earlier: -1.0 % Blog 2/19/12
Employment Report	Jan Unemployed 2.91 million Change in unemployed since last year: minus 190 thousand Unemployment rate: 4.6% Blog 03/04/12
All Industry Indices	Dec month SA ∆% 1.3 12 months NSA ∆% -0.5 Blog 02/26/12
Industrial Production	Jan SA month ∆%: 2.0 12 months NSA ∆% minus 1.2 Blog 03/04/12
Machine Orders	Total Dec ∆% minus 7.2 Private ∆%: minus 22.2 Dec ∆% Excluding Volatile Orders minus 7.1 Blog 02/12/12
Tertiary Index	Dec month SA ∆% 0.6 Dec 12 months NSA ∆% 1.4 Blog 02/19/12
Wholesale and Retail Sales	Jan 12 months: Total ∆%: minus 2.1 Wholesale ∆%: minus 3.6 Retail ∆%: +1.9 Blog 03/04/12
Family Income and Expenditure Survey	Jan 12 months ∆% total nominal consumption minus 2.1, real minus 2.3 Blog 03/04/12
Trade Balance	Exports Jan 12 months ∆%: minus 9.3 Imports Jan 12 months ∆% +9.8 Blog 02/26/12

Links to blog comments in Table JPY:

02/26/12 http://cmpassocregulationblog.blogspot.com/2012/02/decline-of-united-states-new-house_26.html

02/19/12 http://cmpassocregulationblog.blogspot.com/2012/02/world-inflation-waves-united-states_19.html

02/12/12 http://cmpassocregulationblog.blogspot.com/2012/02/hiring-collapse-ten-million-fewer-full_12.html

02/05/12 http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or_05.html

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

Japan’s industrial production increased during two consecutive months by 3.8 percent in Dec 2011 and 2.0 percent in Jan 2012, reducing the percentage decline in 12 months from minus 4.3 percent in Dec to minus 1.2 percent in Jan 2012, as shown in Table VIIB-1. 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 4.3 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 VB-1, Japan, Industrial Production ∆%

	∆% Month SA	∆% 12 Months NSA
Jan 2012	2.0	-1.2
Dec 2011	3.8	-4.3
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/h2a1001j.pdf

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

Table VB-2, Japan, Employment Report Jan 2012 

Unemployed	2.91 million
Change since last year	-190 thousand; ∆% –6.1
Unemployment rate	4.6% SA; 0.1 from prior month Dec; NSA 4.5%, -0.3 from earlier year
Population ≥ 15 years	111.0 million
Change since last year	∆% –0.2
Labor Force	65.0 million
Change since last year	∆% –1.0
Employed	62.1 million
Change since last year	% -0.8
Labor force participation rate	58.6
Change since last year	-0.4
Employment rate	55.9%
Change since last year	-0.3

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

Chart VB-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 VB-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 grew 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 VB-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 VB-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

Japan is experiencing weak internal demand as in most advanced economies. Table VB-2 provides Japan’s wholesale and retail sales. Retail sales increased 1.9 percent in the 12 months ending in Jan while total sales fell 2.1 percent and wholesale sales fell 3.6 percent. Retail sales have not recovered yet from the deep drops in Mar and Apr following the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Wholesale sales had been driving total sales but 12-month percentage changes began to contract in Nov and Dec.

Table VB-4, Japan, Wholesale and Retail Sales 12 Month ∆%

	Total	Wholesale	Retail
Jan 2012	-2.1	-3.6	1.9
Dec 2011	-0.8	-2.0	2.5
Nov	-2.3	-2.4	-2.2
Oct	1.1	0.8	1.9
Sep	0.3	0.8	-1.1
Aug	3.1	5.2	-2.6
Jul	2.3	3.0	0.6
Jun	3.1	3.8	1.2
May	1.3	2.3	-1.3
Apr	-2.6	-1.7	-4.8
Mar	-1.3	1.2	-8.3
Feb	5.3	7.2	0.1
Jan	3.3	4.6	0.1
Dec 2010	3.5	5.7	-2.1
Calendar Year
2011	1.0	1.8	-1.2
2010	1.5	1.1	2.5
2009	-20.5	-25.6	-2.3
2008	1.2	1.5	0.3

Source: http://www.meti.go.jp/english/statistics/tyo/syoudou/index.html

The survey of household income and consumption of Japan in Table VB-5 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, renewed strength in Dec and another decline in Jan 2012 (http://www.stat.go.jp/english/data/kakei/156.htm). Total consumption decreased 2.3 percent in real terms in Jan and 2.1 percent in nominal terms. There are a various segments of decreasing real consumption: fuel, light and water charges 0.9 percent, medical care 8.7 percent, transport and communications 5.5 percent, housing 2.6 percent and culture and recreation 0.3 percent. Real household income increased 2.4 percent; disposable income increased 1.3 percent; and consumption expenditures decreased 2.8 percent.

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

Jan 2012	Nominal	Real
Households of Two or More Persons
Total Consumption	-2.1	-2.3
Excluding Housing, Vehicles & Remittance		-1.4
Food	1.6	0.6
Housing	-2.7	-2.6
Fuel, Light & Water Charges	3.8	-0.9
Furniture & Household Utensils	-2.3	0.6
Clothing & Footwear	5.1	4.4
Medical Care	-9.7	-8.7
Transport and Communications	-4.3	-5.5
Education	-7.3	-7.5
Culture & Recreation	-4.4	-0.3
Other Consumption Expenditures	-4.5	-4.7*
Workers’ Households
Income	2.6	2.4
Disposable Income	1.5	1.3
Consumption Expenditures	-2.6	-2.8

*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 VB-6. 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 income fell 2.1 percent in Jan 2012 and real expenditures fell 2.3 percent. Nominal consumption expenditures fell 3.2 percent in 2010 and 3.3 percent in real terms. Both nominal and real consumption expenditures increased in 2009, 0.3 percent and 2.1 percent, respectively

Table VB-6, 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
Jan 2012	-2.1	-2.3
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	-3.3
Dec 2009	0.3	2.1

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

VC. 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). The HSBC Composite Output Index for China, compiled by Markit, registered a decline from 50.8 in Dec to 49.7 in Jan, suggesting stagnation of private-sector business activity (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9153). Growth of services compensated weakness of manufacturing. Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC, finds that policy measures are required to steer the economy toward higher growth (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9153). The HSBC Flash China Purchasing Managers’ Index^™ (PMI^™), compiled by Markit, summarizing conditions in China’s manufacturing nearly remained rose from 48.8 in Jan to 49.7 in Feb, suggesting marginal deterioration, which is the highest reading in four months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9181). Manufacturing output rose to a four-month high at 50.1 New export orders changed direction to contraction. Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC, finds that the index confirms slowdown and that the marginal improvement originates in higher production during the Chinese New Year. Easing monetary policy under softer infaltion would be advisable (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9181).

Table CNY provides the country table for China.

Table CNY, China, Economic Indicators

Price Indexes for Industry	Jan 12 months ∆%: 0.7 Jan month ∆%: -0.1 Blog 02/12/12
Consumer Price Index	Jan month ∆%: 1.5 Jan 12 month ∆%: 4.5 Blog 02/12/12
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-Dec ∆%: 23.8 Jan-Dec ∆% real estate development: 27.9 Blog 01/22/11
Retail Sales	Dec month ∆%: 1.41 Dec 12 month ∆%: 18.1 Jan-Nov ∆%: 17.1 Blog 1/22/12
Trade Balance	Jan balance $27.28 billion Exports ∆% -0.5 Imports ∆% -15.3 Cumulative Jan: $27.28 billion Blog 02/12/12

Links to blog comments in Table CNY:

02/12/12 http://cmpassocregulationblog.blogspot.com/2012/02/hiring-collapse-ten-million-fewer-full_12.html

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

VC Euro Area. The Markit Eurozone PMI^® Composite Output Index rose from 48.3 in Dec to 50.4 in Jan, which is the first reading above the contraction zone at 50.0 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9150). Chris Williamson, Chief Economist at Markit, finds that the improvement in Jan suggests stabilization after weak activity in the final four months of 2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9150). 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). The Markit Flash Eurozone PMI^® Composite Output Index that is highly associated with euro zone GDP fell slightly from 50.4 in Jan to 49.7 in Feb, which even in the contraction region is the second highest reading in six months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9184). Services fell below 50 but still stood at the highest level in six months while manufacturing output remained at 50.4. Chris Williamson, Chief Economist at Markit, finds improvement relative to performance in late 2011 but continuing risk of recession such that stronger demand is required for reasonable economic growth (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9184). Table EUR provides the country economic indicators for the euro area.

Table EUR, Euro Area Economic Indicators

GDP	IVQ2011 ∆% minus 0.3; IVQ2011/IVQ2010 ∆% 0.7 Blog 02/019/12
Unemployment	Jan 2012: 10.7% unemployment rate Jan 2012: 16.925 million unemployed Blog 03/04/12
HICP	Jan month ∆%: minus 0.8 12 months Jan ∆%: 2.6 Blog 03/04/12
Producer Prices	Euro Zone industrial producer prices Jan ∆%: 0.7 Jan 12 months ∆%: 3.7 Blog 03/04/12
Industrial Production	Dec month ∆%: -1.1 Nov 12 months ∆%: -2.0 Blog 02/19/12
Industrial New Orders	Dec month ∆%: 1.9 Oct 12 months ∆%: minus 1.7 Blog 02/26/12
Construction Output	Dec month ∆%: 0.3 Dec 12 months ∆%: 7.8 Blog 02/19/12
Retail Sales	Dec month ∆%: minus 0.4 Dec 12 months ∆%: minus 1.6 Blog 02/05/12
Confidence and Economic Sentiment Indicator	Sentiment 93.9 Feb 2012 down from 107 in Dec 2010 Confidence minus 20.1 Jan 2012 down from minus 11 in Dec 2010 Blog 03/04/12
Trade	Jan-Dec 2011/2010 Exports ∆%: 12.7 Imports ∆%: 12.2 Blog 02/19/12
HICP, Rate of Unemployment and GDP	Historical from 1999 to 2011 Blog 02/05/12

Links to blog comments in Table EUR:

02/26/12 http://cmpassocregulationblog.blogspot.com/2012/02/decline-of-united-states-new-house_26.html

02/19/12 http://cmpassocregulationblog.blogspot.com/2012/02/world-inflation-waves-united-states_19.html

02/05/12 http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or.html

Eurostat reported the rate of unemployment in the euro area as 10.7 percent in Jan 2012 and revised 10.6 percent in Dec, 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 VD-1, Euro Area, Unemployment Rate and Number of Unemployed, % and Millions, SA 

	Unemployment Rate %	Number Unemployed Millions
Jan 2012	10.7	16.925
Dec 2011	10.6	16.740
Nov	10.5	16.644
Oct	10.4	16.437
Sep	10.3	16.272
Aug	10.2	16.045
Jul	10.1	15.959
Jun	10.0	15.805
May	10.0	15.741
Apr	9.9	15.646
Mar	10.0	15.665
Feb	10.0	15.679
Jan	10.0	15.704
Dec 2010	10.0	15.763

Source: EUROSTAT

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

Table VD-2 shows the disparity in rates of unemployment in the euro area with 10.7 for the region as a whole and 16.469 million unemployed but 5.8 percent in Germany and 2.452 million unemployed (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 23.3 percent and 5.390 million unemployed.

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

Jan 2012	Unemployment Rate %	Unemployed Millions
Euro Zone	10.7	16.469
Germany	5.8	2.452
France	10.0	2.919
Netherlands	5.0	0.440
Finland	7.5	0.200
Portugal	14.8	0.801
Ireland	14.8	0.306
Italy	9.2	2.312
Greece	NA	NA
Spain	23.3	5.390
Belgium	7.4	0.346
European Union	10.1	24.325

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

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

Source: EUROSTAT

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

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 VD-3 with the index falling from revised 106.8 in Mar 2011 to 93.9 in Feb 2012.

Table VD-3, Euro Area, Indicators of Confidence and Economic Sentiment SA

	ESI	IND	SERV	CON	RET	CONS
Historical Average	100.0	-7.0	10.2	-11.8	-6.6	-18.7
Feb 2012	93.9	-5.4	-4.3	-20.1	-12.0	-28.5
Jan	92.8	-7.2	-3.2	-20.8	-14.0	-30.6
Dec 2011	91.6	-7.7	-6.1	-22.1	-11.3	-31.9
Nov	92.6	-7.6	-4.9	-20.9	-13.4	-28.5
Oct	93.6	-6.7	-2.7	-20.5	-12.0	-29.3
Sep	93.6	-5.8	-4.0	-19.3	-12.8	-31.2
Aug	97.1	-2.6	-1.0	-17.0	-10.7	-28.4
Jul	101.9	-0.2	6.1	-12.6	-4.8	-27.5
Jun	104.1	2.5	6.5	-11.2	-2.4	-29.1
May	104.9	3.1	7.5	-11.0	-2.6	-27.7
Apr	104.7	4.9	7.2	-14.1	-3.4	-28.6
Mar	106.8	6.1	10.1	-13.0	0.3	-30.5

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 Germany Services Business Activity Index of the Markit Germany Services PMI^® rose from 52.4 in Dec to 53.7 in Jan, for a fourth consecutive month of expansion above 50, such that the Markit Germany Composite Output Index rose from 51.3 in Dec to 53.9 in Dec (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9128), indicating expansion at a faster rate in Germany’s private-sector activity. 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). The Markit Flash Germany Composite Output Index of the Markit Flash Germany PMI^®, which is highly associated with German GDP, fell to 52.9 in Feb from 53.9 in Jan (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9183). Growth originated in the services sector with significant decline of new export orders for manufacturing. Tim Moore, Senior Economist at Markit, finds that German GDP is recovering moderately from the decline in IVQ2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9183). Table DE provides the country data table for Germany.

Table DE, Germany, Economic Indicators

GDP	IVQ2011 -0.2 ∆%; IV/Q2011/IVQ2010 ∆% 1.5 2011/2010: 3.0% GDP ∆% 1992-2011 Blog 02/26/12
Consumer Price Index	Jan month SA ∆%: -0.4 Jan 12 months ∆%: 2.1 Blog 02/12/12
Producer Price Index	Jan month ∆%: 0.6 12-month NSA ∆%: 3.4 Blog 02/19/12
Industrial Production	Mfg Dec month SA ∆%: minus 2.7 12 months NSA: 0.7 Blog 02/12/12
Machine Orders	Dec month ∆%: 1.7 Dec 12 months ∆%: 0.0 Blog 02/12/12
Retail Sales	Jan Month ∆% minus 1.6 12-Month ∆% 1.6 Blog 03/04/12
Employment Report	Unemployment Rate Feb 7.4% of Labor Force Blog 03/04/12
Trade Balance	Exports Dec 12 months NSA ∆%: 5.0 Imports Nov 12 months NSA ∆%: 5.4 Exports Dec month SA ∆%: minus 4.3; Imports Dec month SA minus 3.9 Blog 02/12/12

Links to blog comments in Table DE:

02/26/12 http://cmpassocregulationblog.blogspot.com/2012/02/decline-of-united-states-new-house_26.html

02/19/12 http://cmpassocregulationblog.blogspot.com/2012/02/world-inflation-waves-united-states_19.html

02/12/12 http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or_05.html

The unemployment rate in Germany as percent of the labor force in Table VE-1 stood at 7.4 percent in Feb 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 VE-1, Germany, Unemployment Rate in Percent of Labor Force

	Percent of Labor Force
Feb 2012	7.4
Jan	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/KeyIndicators/UnemploymentRate/liste__alqinsg,templateId=renderPrint.psml

Chart VE-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 7.3 percent in Jan 2012 and 7.4 percent in Feb 2012.

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

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

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 VE-2. There have been sharp fluctuations in monthly and 12 months percentage changes. Retail sales fell 1.6 percent in Jan and increased 1.6 percent in 12 months.

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

	12-Month ∆% NSA	Month ∆% SA and Calendar Adjusted
Jan 2012	1.6	-1.6
Dec 2011	0.3	0.1
Nov	1.3	-0.3
Oct	-0.3	-0.2
Sep	1.5	0.6
Aug	3.5	-0.5
Jul	-2.0	0.2
Jun	-2.3	2.8
May	4.7	-1.9
Apr	5.0	0.5
Mar	-2.6	-1.2
Feb	2.5	0.0
Jan	2.9	0.6
Dec 2010	0.6	0.7
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/KeyIndicators/TurnoverRetailTrade/liste__ehums,templateId=renderPrint.psml

Chart VE-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 VE-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 VE-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 VE-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

VF France. The Markit France Services Activity Index of the Markit France Services PMI^® rose from 50.3 in Dec to 52.3 in Jan such that the Markit France Composite Output Index increased from stability at 50 in Dec to growth at 51.2 in Jan, which is a high in five months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9154). 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). The Flash France Composite Output Index of the Markit Flash France PMI^®, which is highly associated with French GDP, fell from 51.2 in Jan to 50.6 in Feb while the Markit Flash France Manufacturing PMI^® rose to a seven-month high and the manufacturing output index to an eight-month high (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9182). There was an increase in foreign orders for the first time in seven months. Jack Kennedy, Senior Economist at Markit and author of the Flash France PMI^®, finds that the French economy is in expanding impulse with a more promising IQ2012 than expected at the end of 2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9182). Table FR provides the country data table for France.

Table FR, France, Economic Indicators

CPI	Jan month ∆% minus 0.4 12 months ∆%: 2.4 02/26/12
PPI	Jan month ∆%: 0.6 Jan 12 months ∆%: 4.2 Blog 03/04/12
GDP Growth	IVQ2011/IIIQ2011 ∆%: 0.2 IVQ2011/IVQ2010 ∆%: 1.4 Blog 02/19/12
Industrial Production	Dec/Nov SA ∆%: Industrial Production minus 1.4; Manufacturing minus 1.4 Dec YOY NSA ∆%: Industrial Production 0.6; Manufacturing 2.1 Blog 02/12/12
Industrial New Orders	Mfg Dec ∆% minus 0.1 YOY ∆% 0.8 Blog 02/26/12
Consumer Spending	Jan Manufactured Goods ∆%: minus 0.8 Jan 12-Month Manufactured Goods ∆%: minus 2.4 Blog 03/04/12
Employment	IVQ2011 Unemployed 2.678 million Unemployment Rate: 9.4% Employment Rate: 63.8% Blog 03/04/12
Trade Balance	Dec Exports ∆%: month minus 2.7, 12 months 7.2 Dec Imports ∆%: month minus 0.4, 12 months 5.3 Blog 02/12/12
Confidence Indicators	Historical averages 100 Feb: France 91 Mfg Business Climate 92 Retail Trade 89 Services 95 Building 99 Household 82 Blog 02/26/12

Links to blog comments in Table FR:

02/26/12 http://cmpassocregulationblog.blogspot.com/2012/02/decline-of-united-states-new-house_26.html

02/19/12 http://cmpassocregulationblog.blogspot.com/2012/02/world-inflation-waves-united-states_19.html

02/12/12 http://cmpassocregulationblog.blogspot.com/2012/02/hiring-collapse-ten-million-fewer-full_12.html

The number of unemployed in France rose from 2.085 million in IV2007, for a rate of unemployment of 7.5 percent, to 2.678 million in IVQ2011, for a rate of unemployment of 9.4 percent, as shown in Table VF-1. At the same time, the rate of employment fell from 64.6 percent in IV2007 to 63.8 percent in IVQ2011. 

Table VF-1, France Unemployed and Unemployment Rate, Millions and %

	Unemployed Millions	Unemployed Percent	Employment Rate
IVQ2011	2.678	9.4	63.8
IIIQ2011	2.628	9.3	63.8
IIQ2011	2.586	9.1	63.9
IQ2011	2.619	9.2	63.8
IVQ2010	2.627	9.3	63.8
IIIQ2010	2.648	9.3	63.9
IIQ2010	2.641	9.3	63.9
IQ2010	2.693	9.5	63.9
IVQ2009	2.702	9.6	63.7
IIIQ2009	2.592	9.2	63.9
IIQ2009	2.601	9.2	64.2
IQ2009	2.430	8.6	64.4
IVQ2008	2.174	7.7	64.8
IIIQ2008	2.064	7.4	64.8
IIQ2008	2.036	7.3	64.8
IQ2008	1.993	7.1	64.9
IV2007	2.085	7.5	64.6
IIIQ2007	2.214	8.0	64.4
IIQ2007	2.256	8.1	64.1
IQ2007	2.344	8.5	63.9
IVQ2006	2.316	8.4	63.9
IVQ2005	2.485	9.1	63.5
IVQ2004	2.426	8.9	63.7
IVQ2003	2.367	8.8	63.8
IVQ2002	2.148	8.0
IVQ2001	2.022	7.6
IVQ2000	2.133	8.1
IVQ1999	2.479	9.5
IVQ1995	2.583	10.1
IVQ1990	1.975	7.9
IVQ1985	2.263	9.2
IVQ1980	1.391	5.8
IVQ1975	0.841	3.7

Source: http://www.insee.fr/en/themes/info-rapide.asp?id=14&date=20120301

Chart VF-1 of the Institut National de la Statistique et des Études Économiques provides an excellent view of the unemployment rate in France. The rate of unemployment rose from 2003 to 2006 and then fell sharply in 2007. The global recession caused sharp increase in the French rate of unemployment that has declined from the peak, stabilized at a high level and is climbing again.

Chart VF-1, France, Unemployment Rate International Labor Organization Criterion, Seasonally Adjusted Average over Quarter, Percent

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=14&date=20120301

The Jan monthly report of household expenditures in consumption goods for France is in Table VF-1. Total consumption fell 0.4 percent in Jan 2012 and consumption of manufactured products also fell 0.8 percent. Total consumption fell 2.2 percent in Jan 2012 relative to Jan 2011 and consumption of manufactured goods fell 2.4 percent in Jan 2012 relative to Jan 2011. Internal demand is weak throughout most advanced economies.

Table VF-2, France, Household Expenditures in Consumption Goods, Month ∆% Chained Billion Euros Trading Days SA

	Total	Food	Eng. Goods	Energy	Mfg Goods
Jan 2012	-0.4	1.4	-2.7	2.0	-0.8
Jan       2012/    Jan 2011	-2.2	0.1	-3.3	-4.2	-2.4
Dec 2011	-0.2	-1.0	1.3	-2.4	-0.1
Nov	0.0	-0.1	0.5	-1.0	0.1
Oct	0.2	-0.2	1.0	-1.2	0.3
Sep	-0.1	0.6	0.3	-2.6	0.0
Aug	0.3	0.3	-0.4	2.5	0.3
Jul	-0.5	-0.5	-0.8	0.5	-0.7
Jun	0.8	-0.3	1.7	1.0	1.0
May	-0.1	-1.3	-0.9	5.1	-0.9
Apr	-1.8	1.4	-2.9	-5.9	-1.2
Mar	-0.9	-0.9	-1.0	-0.8	-1.0
Feb	0.4	0.8	0.7	-1.1	0.6
Jan	-0.7	-0.3	0.2	-4.0	-0.2
Dec 2010	0.7	0.6	0.4	1.5	0.5

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=20120229

Chart VF-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 VF-2, 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=20120229

VG Italy. The Markit/ADACI Business Activity Index of the Markit/ADACI Italy Services PMI^® increased from 44.5 in Dec to 44.8 in Jan, indicating sharp contraction in services output in Italy (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9146). 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	Feb month ∆%: 0.4 Feb 12 months ∆%: 3.3 Blog 03/04/12
Producer Price Index	Dec month ∆%: 0.1 Dec 12 months ∆%: 4.0 Blog 02/05/12
GDP Growth	IVQ2011/IVQ2010 SA ∆%: minus 0.5 IVQ2011/IIIQ2011 NSA ∆%: minus 0.7 Blog 02/19/12
Labor Report	Jan 2012 Participation rate 62.7% Employment ratio 57.0% Unemployment rate 9.2% Blog 03/04/12
Industrial Production	Dec month ∆%: 1.4 12 months ∆%: minus 1.7 Blog 02/12/12
Retail Sales	Dec month ∆%: minus 1.1 Dec 12 months ∆%: minus 3.7 Blog 02/26/12
Business Confidence	Mfg Feb 91.5, Oct 93.8 Construction Feb 82.5, Oct 80.7 Blog 03/04/12
Consumer Confidence	Consumer Confidence Jan 91.6, Dec 96.1 Economy Jan 75.3, Dec 77.1 Blog 01/29/12
Trade Balance	Balance Dec SA €613 million versus Nov -€948 Exports Dec month SA ∆%: +4.2; Imports Dec month SA ∆%: -0.8 Exports 12 months NSA ∆%: +5.7 Imports 12 months NSA ∆%: -8.4 Blog 02/12/12

Links to blog comments in Table IT:

02/26/12 http://cmpassocregulationblog.blogspot.com/2012/02/decline-of-united-states-new-house_26.html

02/19/12 http://cmpassocregulationblog.blogspot.com/2012/02/world-inflation-waves-united-states_19.html

02/12/12 http://cmpassocregulationblog.blogspot.com/2012/02/hiring-collapse-ten-million-fewer-full_12.html

02/05/12 http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or.html

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

Data on Italy’s labor market since 2004 are provided in Table VG-1. The unemployment rate has risen from 6.1 in Dec 2006 to 9.2 in Jan 2012. As in other advanced economies, unemployment has stabilized at high levels.

Table VG-1, Italy, Labor Report

	Participation Rate %	Employment Ratio %	Unemployment Rate %
Jan 2012	62.7	57.0	9.2
Dec 2011	62.6	56.9	8.9
Nov	62.4	56.8	8.8
Oct	62.3	56.9	8.5
Sep	62.2	56.8	8.6
Aug	62.2	57.0	8.3
Jul	62.3	57.1	8.3
Jun	62.1	56.9	8.2
May	62.1	56.9	8.2
Apr	62.0	56.9	8.2
Mar	62.3	57.1	8.2
Feb	62.0	56.9	8.2
Jan	61.9	56.8	8.1
Dec 2010	62.0	56.9	8.1
Dec 2009	62.3	57.1	8.3
Dec 2008	62.5	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/55347

Table VG-2 provides more detail on the labor report for Italy in Feb 2012. The level of employment increased 18,000 from Dec and 40,000 from a year earlier. Unemployment increased 64,000 in Jan and 286,000 from a year earlier. A dramatic aspect found in most advanced economies is the high rate of unemployment of youth at 31.1 percent in Dec 2011 for ages 15 to 24.

Table VG-2, Italy, Labor Report

Jan 2012	1000s	Change from Prior Month 1000s	∆% from Prior Month	Change from Prior Year 1000s	∆% from Prior Year
EMP	22.935	18	0.1	40	0.2
UNE	2.312	64	2.8	286	14.1
INA   15-64	14.782	-63	-0.4	-313	-2.1
EMP %	57.0		0.1		0.2
UNE %	9.2		0.2		1.0
Youth UNE %  15-24	31.1		0.1		-0.8
INA % 15-64	37.3		-0.1		-0.8

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/55347

Chart VG-1 of the Istituto Nazionale di Statistica provides the rate of unemployment in Italy. The rate stabilized in 2011 at around 8 percent until mid year and then climbed to 9.2 percent in Jan 2012.

Chart VG-1, Italy, Rate of Unemployment, %

Source: Istituto Nazionale di Statistica

http://www.istat.it/en/

Italy’s index of business confidence in manufacturing and construction is provided in Table VG-3. There has been deterioration below the historical average of 100 since 98.5 in Aug with reading of 91.5 in Feb. Order books have fallen from minus 22 in Aug to minus 36 in Feb. There is mild improvement in construction with an increase of the index from 77.3 in Aug to 82.5 in Feb.

VG-3, Italy, Index of Business Confidence in Manufacturing and Construction 2005=100

	Feb	Jan	Dec	Nov	Oct
Mfg Confidence	91.5	92.1	92.5	94.0	93.8
Order Books	-36	-32	-33	-32	-30
Stocks Finished Products	2	1	3	1	1
Production Expectation	0	-3	0	2	-1
Construction Confidence	82.5	82.4	80.4	87.4	80.7
Order Books	-50	-47	-50	-42	-46
Employment	-12	-15	-16	-11	-19

Mfg: manufacturing

http://www.istat.it/it/archivio/55063

VH United Kingdom. The Markit/CIPS UK Services PMI^® rose from 54.0 in Dec to 56.0 in Jan (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9155). Chris Williamson, Chief Economist at Markit, finds strength in services, manufacturing and construction, constituting significant improvement over IVQ2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9155). Table UK provides the country data table for the UK.

Table UK, UK Economic Indicators

CPI	Jan month ∆%: -0.5 Dec 12-month ∆%: 3.6 Blog 02/19/12
Output/Input Prices	Output Prices: Jan 12 months NSA ∆%: 4.1; excluding food, petroleum ∆%: 2.4 Input Prices: Jan 12 months NSA ∆%: 7.0 Excluding ∆%: 5.4 Blog 02/12/12
GDP Growth	IVQ2011 prior quarter ∆% minus 0.2; year earlier same quarter ∆%: 0.7 Blog 02/26/12
Industrial Production	Dec 2011/Dec 2010 NSA ∆%: Industrial Production minus 3.3; Manufacturing 0.8 Blog 02/12/12
Retail Sales	Jan month SA ∆%: +0.9 Dec 12 months ∆%: +2.0 Blog 02/19/12
Labor Market	Oct-Dec Unemployment Rate: 8.4%; Claimant Count 5%; Earnings Growth 2.0% Blog 02/12/19
Trade Balance	Balance Dec minus ₤1109 million Exports Dec ∆%: 0.5 Oct/Dec ∆%: 7.8 Imports Dec ∆%: 0.9 Oct/Dec ∆%: 4.1 Blog 02/12/12

Links to blog comments in Table UK:

02/26/12 http://cmpassocregulationblog.blogspot.com/2012/02/decline-of-united-states-new-house_26.html

02/19/12 http://cmpassocregulationblog.blogspot.com/2012/02/world-inflation-waves-united-states_19.html

02/12/12 http://cmpassocregulationblog.blogspot.com/2012/02/hiring-collapse-ten-million-fewer-full_12.html

VI 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 VI-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 VI-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 10.7 percent by Fri Mar 2, 2012. 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 VI-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 VI-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	03/02 /2012
Rate	1.1423	1.5914	1.192	1.319
CNY/USD	01/03 2000	07/21 2005	7/15 2008	03/02/ 2012
Rate	8.2798	8.2765	6.8211	6.2992
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

Table VI-2 extracts four rows of Table VI-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 VI-4 below, the dollar has devalued again to USD 1.319/EUR or by 10.7 percent {[(1.319/1.192)-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 6.2992/USD on Fri Mar 2, 2012, or by an additional 7.7 percent, for cumulative revaluation of 23.9 percent. 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 VI-2 now includes three last rows with the CNY/USD weekly rate. The final row of Table VI-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. In the week of Feb 10 China revalued by an additional 0.1 percent. There was marginal devaluation of 0.1 percent in the week of Feb 17. The rate remained virtually unchanged at CNY 6.2986 in the week of Feb 24. There was virtually no change to the rate of 6.2992 on Mar 2. 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 VI-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	03/02 /2012
Rate	1.1423	1.5914	1.192	1.319
CNY/USD	01/03 2000	07/21 2005	7/15 2008	03/02/ 2012
Rate	8.2798	8.2765	6.8211	6.2992
Weekly Rates	02/10/12	02/17/  2012	02/24/  2012	03/02/  2012
CNY/USD	6.2944	6.2982	6.2986	6.2992
∆% from Earlier Week*	0.1	-0.1	-0.1	0.0

*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 VI-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 VI-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 VI-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. 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 VI-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 02/24/12,” 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 followed by weakness in the week of Feb 10 but strength in the weeks of Feb 17 and 24 followed by uncertainty on financial counterparty risk in the week of Mar 2, all financial values show positive change in valuation in column “∆% Trough to 03/02/12.” Asia and financial entities are experiencing their own risk environments. The highest valuations are by US equities indexes: DJIA 34.0 percent and S&P 500 33.9 percent, driven by stronger earnings and economy in the US than in other advanced economies. The DJIA reached 13,087.16 in intraday trading on Feb 29, which is the highest level in 52 weeks (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata). 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 03/02/12” had double digit gains relative to the trough around Jul 2, 2010 but now only three valuations show increases of less than 10 percent: NYSE Financial is 9.3 percent above the trough; STOXX 50 Europe is 9.0 percent above the trough; and China’s Shanghai Composite is 3.3 percent above the trough. DJ UBS Commodities is 20.5 percent above the trough; Dow Global is 17.5 percent above the trough; and DAX is 22.1 percent above the trough. Japan’s Nikkei Average is 10.8 percent above the trough on Aug 31, 2010 and 14.2 percent below the peak on Apr 5, 2010. The Nikkei Average closed at 9777.03 on Fri Mar 2, 2012 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata), which is 4.7 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 10.7 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 03/02/12” in Table VI-4 shows positive performance of risk financial assets in the week of Feb 24, 2012 with the exception of decline of 0.1 percent for the Dow Global. There are still high uncertainties on European sovereign risks, US and world growth slowdown 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 VI-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 03/02/12” that provides the percentage change from the peak in Apr 2010 before the sovereign risk event to Mar 3, 2012. Most risk financial assets had gained not only relative to the trough as shown in column “∆% Trough to 03/02/12” but also relative to the peak in column “∆% Peak to 03/02/12.” There are now only four equity indexes above the peak in Table VI-4: DJIA 15.8 percent, S&P 500 12.5 percent, Dax 9.3 percent and Dow Asia Pacific 0.3 percent. There are several indexes below the peak: NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) by 12.9 percent, Nikkei Average by 14.2 percent, Shanghai Composite by 22.3 percent, STOXX 50 by 7.7 percent and Dow Global by 4.2 percent. DJ UBS Commodities Index is now 1.9 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 VI-4, Stock Indexes, Commodities, Dollar and 10-Year Treasury  

	Peak	Trough	∆% to Trough	∆% Peak to 03/02 /12	∆% Week 03/02/ 12	∆% Trough to 03/02 12
DJIA	4/26/ 10	7/2/10	-13.6	15.8	0.0	34.0
S&P 500	4/23/ 10	7/20/ 10	-16.0	12.5	0.3	33.9
NYSE Finance	4/15/ 10	7/2/10	-20.3	-12.9	0.6	9.3
Dow Global	4/15/ 10	7/2/10	-18.4	-4.2	-0.1	7.4
Asia Pacific	4/15/ 10	7/2/10	-12.5	0.3	0.2	14.6
Japan Nikkei Aver.	4/05/ 10	8/31/ 10	-22.5	-14.2	1.3	10.8
China Shang.	4/15/ 10	7/02 /10	-24.7	-22.3	0.9	3.3
STOXX 50	4/15/10	7/2/10	-15.3	-7.7	0.7	9.0
DAX	4/26/ 10	5/25/ 10	-10.5	9.3	0.8	22.1
Dollar Euro	11/25 2009	6/7 2010	21.2	12.8	1.9	-10.7
DJ UBS Comm.	1/6/ 10	7/2/10	-14.5	1.8	-1.1	19.1
10-Year T Note	4/5/ 10	4/6/10	3.986	1.977

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 VI-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 VI-5 for Mar 3, 2012, shows that the S&P 500 is now 13.0 percent above the Apr 26, 2010 level and the DJIA is 15.8 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 VI-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
Feb 10	-0.5	14.2	-0.2	10.8
Feb 17	1.2	15.6	1.4	12.3
Feb 24	0.3	15.9	0.3	12.7
Mar 3	0.0	15.8	0.3	13.0

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

Table VI-6, updated with every blog comment, 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 VI-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 7.515/USD on Mar 4, 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 7.1 percent stronger at SGD 1.252/USD on Mar relative to the trough of depreciation but still stronger by 19.4 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 0.4 percent relative to the trough to BRL 1.7303/USD on Mar 3, 2012 but still stronger by 28.8 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.”

Jeffrey T. Lewis, writing on “Brazil steps up battle to curb real’s rise,” on Mar 1, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970203986604577255793224099580.html?mod=WSJ_hp_LEFTWhatsNewsCollection), analyzes new measures by Brazil to prevent further appreciation of its currency, including the extension of the tax on foreign capital for three years terms and intervention in the foreign exchange market by the central bank. Unconventional monetary policy of zero interest rates and quantitative easing creates trends such as the depreciation of the dollar followed by Table VI-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 VI-6, Exchange Rates

	Peak	Trough	∆% P/T	Mar 2, 2012	∆T Mar 2, 2012	∆P Mar 2, 2012
EUR USD	7/15 2008	6/7 2010		03/2 2012
Rate	1.59	1.192		1.319
∆%			-33.4		9.6	-20.6
JPY USD	8/18 2008	9/15 2010		03/2 2012
Rate	110.19	83.07		81.78
∆%			24.6		1.6	25.8
CHF USD	11/21 2008	12/8 2009		03/2 2012
Rate	1.225	1.025		0.913
∆%			16.3		10.9	25.5
USD GBP	7/15 2008	1/2/ 2009		03/2 2012
Rate	2.006	1.388		1.583
∆%			-44.5		12.3	-26.7
USD AUD	7/15 2008	10/27 2008		03/2 2012
Rate	1.0215	1.6639		1.076
∆%			-62.9		44.1	9.0
ZAR USD	10/22 2008	8/15 2010		03/2 2012
Rate	11.578	7.238		7.515
∆%			37.5		-3.8	35.1
SGD USD	3/3 2009	8/9 2010		03/2 2012
Rate	1.553	1.348		1.252
∆%			13.2		7.1	19.4
HKD USD	8/15 2008	12/14 2009		03/2 2012
Rate	7.813	7.752		7.759
∆%			0.8		-0.1	0.7
BRL USD	12/5 2008	4/30 2010		03/2 2012
Rate	2.43	1.737		1.7303
∆%			28.5		0.4	28.8
CZK USD	2/13 2009	8/6 2010		03/2 2012
Rate	22.19	18.693		18.727
∆%			15.7		-0.2	15.6
SEK USD	3/4 2009	8/9 2010		03/2 2012
Rate	9.313	7.108		6.677
∆%			23.7		6.1	28.3
CNY USD	7/20 2005	7/15 2008		03/2 2012
Rate	8.2765	6.8211		6.2992
∆%			17.6		7.7	23.9

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

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

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

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

Chart VI-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 VI-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

Chart VI-2 of the Board of Governors of the Federal Reserve System provides the exchange rate of the US relative to the euro, or USD/EUR. During maintenance of the policy of zero fed funds rates the dollar appreciates during periods of significant risk aversion such as the flight into US government obligations in late 2008 and early 2009 and during the various fears generated by the European sovereign debt crisis.

Chart VI-2, US Dollars per Euro, 2009-2012

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/DataDownload/Chart.aspx?rel=H10&series=e85cfb140ce469e13bec458013262fa1&lastObs=780&from=&to=&filetype=csv&label=include&layout=seriescolumn&pp=Download&names={H10/H10/RXI$US_N.B.EU}

Table VI-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 VI-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 1.977 percent at the close of market on Fri Feb 24, 2012 would be equivalent to price of 105.8535 in a hypothetical bond maturing in 10 years with coupon of 2.625 percent for price gain of 4.5 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 first to the last row of Table VI-7. The law row in Table VI-7 shows that the yield on Mar 2, 2012, was also 1.977 with the same price of 105.8535 and change of 4.5 percent relative to the price on Nov 4, 2010. 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 VI-7 are expectations of rising inflation and US government debt estimated to be around 70 percent of GDP in 2012 (http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or.html 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 at http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or.html and Table 2 in http://cmpassocregulationblog.blogspot.com/2011/04/budget-quagmire-fed-commodities_10.html) and 67.7 percent in 2011. On Feb 29, 2012, the line “Reserve Bank credit” in the Fed balance sheet stood at $2908 billion, or $2.9 trillion, with portfolio of long-term securities of $2576 billion, or $2.6 trillion, consisting of $1565 billion Treasury nominal notes and bonds, $69 billion of notes and bonds inflation-indexed, $101 billion Federal agency debt securities and $841 billion mortgage-backed securities; reserve balances deposited with Federal Reserve Banks reached $1605 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 VI-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
02/10/12	1.974	105.8815	4.6
02/17/12	2.000	105.6392	4.3
02/24/12	1.977	105.8535	4.5
03/02/12	1.977	105.8535	4.5

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

VII Economic Indicators. Crude oil input in refineries increased 0.7 percent to 14,653 thousand barrels per day on average in the four weeks ending on Feb 24, 2012 from 14,556 thousand barrels per day in the four weeks ending on Feb 17, 2012, as shown in Table VII-1. The rate of capacity utilization in refineries continues at a relatively high level of 84.0 percent on Feb 24, 2012, which is higher than 81.6 percent on Feb 25, 2011 and 83.5 percent on Feb 17, 2012. Imports of crude oil increased 0.9 percent from 8,748 thousand barrels per day on average in the four weeks ending on Feb 17 to 8,825 thousand barrels per day in the week of Feb 24. The Energy Information Administration (EIA) informs that “US crude oil imports averaged about 9.2 million barrels per day last week, up by 96 thousand barrels per day from the previous week [Feb 24]” (http://www.eia.gov/pub/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/current/pdf/highlights.pdf). Slight increase in utilization in refineries with increasing imports at the margin in the prior week resulted in increase of commercial crude oil stocks by 4.2 million barrels from 340.7 million barrels on Feb 17 to 344.9 million barrels on Feb 24. Motor gasoline production increased 0.8 percent to 8,810 thousand barrels per day in the week of Feb 24 from 8,738 thousand barrels per day on average in the week of Feb 17. Gasoline stocks decreased 1.6 million barrels and stocks of fuel oil decreased 2.1 million barrels. Supply of gasoline fell from 8,899 thousand barrels per day on Feb 25, 2011, to 8,299 thousand barrels per day on Feb 24, 2012, or by 6.7 percent, while fuel oil supply fell 5.1 percent. Part of the fall in consumption of gasoline is due to higher prices and part to the growth recession. Table VII-1 also shows increase in the WTI price of crude oil by 13.3 percent from Feb 25, 2011 to Feb 24, 2012. Gasoline prices rose 10.0 percent from Feb 28, 2011 to Feb 27, 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. Gasoline prices are increasing to the highest levels at this time of the year.

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

Four Weeks Ending Thousand Barrels/Day	02/24/12	02/17/12	02/25/11
Crude Oil Refineries Input	14,653 Week       ∆%: +0.7	14,556	13,885
Refinery Capacity Utilization %	84.0	83.5	81.6
Motor Gasoline Production	8,810 Week      ∆%: +0.8	8,738	9,154
Distillate Fuel Oil Production	4,366 Week     ∆%: -1.3	4,425	4,090
Crude Oil Imports	8,825 Week        ∆%: +0.9	8,748	8,290
Motor Gasoline Supplied	8,299 ∆% 2012/2011= -6.7%	8,213	8,899
Distillate Fuel Oil Supplied	3,561 ∆% 2012/2011 = -5.1%	3,577	3,753
	02/24/12	02/17/12	02/25/11
Crude Oil Stocks Million B	344.9         ∆= +4.2 MB	340.7	346.4
Motor Gasoline Million B	229.9    ∆= -1.6 MB	231.5	234.7
Distillate Fuel Oil Million B	141.4 ∆= -2.1 MB	143.5	159.2
WTI Crude Oil Price $/B	109.39 ∆% 2012/2011 13.3	103.27	96.52
	02/27/12	2/20/12	2/28/11
Regular Motor Gasoline $/G	3.721 ∆% 2012/2011 10.0	3.591	3.383

B: barrels; G: gallon

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

Chart VII-1 of the US Energy Information Administration shows 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 VII-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 VII-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 VII-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 and 0.3 million barrels in the week of Feb 3. Stocks declined marginally in the week of Feb 10 but increased in the weeks of Feb 17 and Feb 24.

Chart VII-2, US, Crude Oil Stocks

Source: US Energy Information Administration

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

Chart VII-3 of the US Energy Information Administration shows the price of WTI crude oil since the 1980s. Chart VII-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 VII-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 VII-2. Seasonally adjusted claims declined by 2,000 from 353,000 on Feb 18 to 351,000 on Feb 25.. Claims not adjusted for seasonality decreased 14,717 from 346,623 on Feb 18 to 331,906 on Feb 25. Strong seasonality is preventing clear analysis of labor markets.

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

	SA	NSA	4-week MA SA
Feb 25, 12	351,000	331,906	354,000
Feb 18, 12	353,000	346,623	359,500
Change	-2,000	-14,717	-5,500
Feb 11, 12	351,000	365,014	366,000
Prior Year	375,000	353,797	392,500

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

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

Table VII-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 605,668 on Feb 21, 2009 to 353,797 on Feb 26, 2011, and now to 331,906 on Feb 25, 2012. There is strong indication of significant decline in the level of layoffs in the US. Hiring has not recovered (Section I Hiring Collapse in http://cmpassocregulationblog.blogspot.com/2012/02/hiring-collapse-ten-million-fewer-full.html and http://cmpassocregulationblog.blogspot.com/2012/01/recovery-without-hiring-united-states.html).

Table VII-3, US, Unemployment Insurance Weekly Claims

	Not Seasonally Adjusted Claims	Seasonally Adjusted Claims
Feb 24, 2001	358.591	386,000
Feb 23, 2002	367,504	398,000
Feb 22, 2003	387,536	421,000
Feb 21, 2004	328,171	359,000
Feb 26, 2005	290,776	314,000
Feb 25, 2006	272,478	293,000
Feb 24, 2007	299,000	318,000
Feb 23, 2008	330,013	349,000
Feb 21, 2009	605,668	641,000
Feb 27, 2010	474,662	475,000
Feb 26, 2011	353,797	375,000
Feb 25, 2012	331,906	351,000

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

VIII 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 VIII-1 provides inflation of the CPI. In the quarter Nov 2011 to Jan 2012, CPI inflation for all items seasonally adjusted was 1.2 percent in annual equivalent, that is, compounding inflation in Nov-Jan and assuming it would be repeated for a full year. In the 12 months ending in Jan, CPI inflation of all items not seasonally adjusted was 2.9 percent. Inflation in Jan 2012 not seasonally adjusted was 0.4 percent relative to Dec 2011 (http://www.bls.gov/cpi/). The second row provides the same measurements for the CPI of all items excluding food and energy: 2.3 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, 0.11 percent for six months, 0.15 percent for 12 months, 0.27 percent for two years, 0.39 percent for three years, 0.84 percent for five years, 1.38 percent for seven years, 1.98 percent for ten years and 3.11 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 VIII-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 VIII-1, US, Consumer Price Index Percentage Changes 12 months NSA and Annual Equivalent ∆%

	∆% 12 Months Jan 2012/Jan 2012 NSA	∆% Annual Equivalent Nov 2011-Jan 2012 SA
CPI All Items	2.9	1.2
CPI ex Food and Energy	2.3	2.0

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

IX 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 stagnates in 12 months and declines at the margin. 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