IMF View of World Economy and Finance, Global Financial and Economic Risk and World Economic Slowdown: Part II

 

IMF View of World Economy and Finance, Global Financial and Economic Risk and World Economic Slowdown

Carlos M. Pelaez

© Carlos M. Pelaez, 2010, 2011, 2012

Executive Summary

I IMF View of World Economy and Finance

IA IMF Diagnosis and Policy

IA1 World Economy

IA2 Global Finance

IA3 Fiscal Imbalances

IA4 IMF Firewall

IB IMF Projections

II Global Financial and Economic Risk

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

II Global Financial and Economic Risk

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. Table I-1 is constructed with the database of the IMF (http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/index.aspx) to show GDP in dollars in 2010 and the growth rate of real GDP of the world and selected regional countries from 2011 to 2014. The data illustrate the concept often repeated of “two-speed recovery” of the world economy from the recession of 2007 to 2009. The IMF has lowered its forecast of the world economy to 3.5 percent in 2012 but accelerating to 4.1 percent in 2013, 4.4 percent in 2014 and 4.5 percent in 2015. Slow-speed recovery occurs in the “major advanced economies” of the G7 that account for $33,670 billion of world output of $69,660 billion, or 48.3 percent, but are projected to grow at much lower rates than world output, 2.1 percent on average from 2012 to 2015 in contrast with 4.1 percent for the world as a whole. While the world would grow 17.6 percent in the four years from 2012 to 2015, the G7 as a whole would grow 8.5 percent. The difference in dollars of 2011 is rather high: growing by 17.6 percent would add $12.3 trillion of output to the world economy, or roughly two times the output of the economy of Japan of $5,869 but growing by 8.5 percent would add $5.9 trillion of output to the world, or about the output of Japan in 2011. The “two speed” concept is in reference to the growth of the 150 countries labeled as emerging and developing economies (EMDE) with joint output in 2011 of $25,237 billion, or 36.2 percent of world output. The EMDEs would grow cumulatively 26.5 percent or at the average yearly rate of 6.1 percent, contributing $6.7 trillion from 2012 to 2015 or the equivalent of somewhat less than the GDP of $7,298 billion of China in 2011. The final four countries in Table 1 often referred as BRIC (Brazil, Russia, India, China), are large, rapidly growing emerging economies. Their combined output adds to $13,317 billion, or 19.1 percent of world output, which is equivalent to 39.6 percent of the combined output of the major advanced economies of the G7.

The JP Morgan Global Manufacturing and Services PMI^™, The JPMorgan Global Manufacturing PMI^™, produced by JP Morgan and Markit in association with ISM and IFPSM, with high association with world GDP, was only marginally lower at 54.6 in Mar compared with 55.4 in Feb, indicating the second best reading in 13 months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9406). David Hensley, Director of Global Economic Coordination at JP Morgan, finds that the PMI data suggest world GDP growth at the seasonally-adjusted annual rate of 3.0 percent in IQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9406). The JP Morgan Global Manufacturing PMI^™, produced by JP Morgan and Markit in association with ISM and IFPSM, was marginally unchanged at 52.1 in Mar relative to 51.2 in Feb, for a fourth consecutive month of increase above the borderline of 50 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9389). Higher oil and transportation prices were contributing to higher costs of inputs. David Hensley, Director of Global Economics Coordination at JPMorgan, finds that the global PMI^™ is at a low level consistently with mild growth in goods and expenditures (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9389). The HSBC Brazil Services PMI^™ with Composite PMI data, compiled by Markit, fell marginally from 55.5 in Feb to 53.4 in Mar, suggesting strong activity of the private sector (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9394). Andre Loes, Chief Economist, Brazil, at HSBC, finds that the HSBC Services PMI fell to 53.8 in Mar relative to 57.1 in Feb, but expansion of services in the Brazilian economist has continued during 32 consecutive months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9394). There is continuing strength in other indicators of the services sector. The HSBC Brazil Purchasing Managers’ Index^TM (PMI^™)m fell slightly from 51.4 in Feb to 51.1 in Mar, indicating modest business conditions in Brazilian manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9354). Andre Loes, Chief Economist, Brazil at HSBC, find improvement in output and new orders with subdued export orders (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9354).

Table V-1, IMF World Economic Outlook Database Projections of Real GDP Growth

	GDP USD 2011	Real GDP ∆% 2012	Real GDP ∆% 2013	Real GDP ∆% 2014	Real GDP ∆% 2015
World	69,660	3.5	4.1	4.4	4.5
G7	33,670	1.5	1.9	2.3	2.5
Canada	1,737	2.1	2.2	2.4	2.4
France	2,776	0.5	1.1	1.9	1.9
DE	3,577	0.6	1.5	1.3	1.3
Italy	2,199	-1.9	-0.3	0.5	1.0
Japan	5,869	2.0	1.7	1.5	1.3
UK	2,418	0.8	2.0	2.5	2.6
US	15,094	2.1	2.4	2.9	3.3
Euro Area	13,115	-0.3	0.9	1.4	1.6
DE	3,577	0.6	1.5	1.3	1.3
France	2,776	0.5	1.1	1.9	1.9
Italy	2,199	-1.9	-0.3	0.5	1.0
POT	239	-3.3	0.3	2.1	1.9
Ireland	218	0.5	2.1	2.5	2.8
Greece	303	-4.7	0.0	2.5	3.1
Spain	1,494	-1.8	0.1	1.6	1.6
EMDE	25,237	5.7	6.0	6.2	6.3
Brazil	2,493	3.0	4.2	4.0	4.1
Russia	1,850	4.0	3.9	3.9	3.9
India	1,676	6.9	7.3	7.5	7.7
China	7,298	8.2	8.8	8.7	8.7

Notes; DE: Germany; EMDE: Emerging and Developing Economies (150 countries); POT: Portugal

Source: IMF World Economic Outlook databank

http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/index.aspx

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

Table USA, US Economic Indicators

Consumer Price Index	Mar 12 months NSA ∆%: 2.7; ex food and energy ∆%: 2.3 Mar month ∆%: 0.3; ex food and energy ∆%: 0.2 Blog 4/15/12
Producer Price Index	Mar 12 months NSA ∆%: 2.8; ex food and energy ∆% 2.9 Mar month SA ∆% = 0.0; ex food and energy ∆%: 0.3 Blog 4/15/12
PCE Inflation	Feb 12 months NSA ∆%: headline 2.3; ex food and energy ∆% 1.9 Blog 04/01/12
Employment Situation	Household Survey: Jan Unemployment Rate SA 8.3% Blog calculation People in Job Stress Jan: 30.5 million NSA Establishment Survey: Feb Nonfarm Jobs +227,000; Private +233,000 jobs created  Jan 12 months Average Hourly Earnings Inflation Adjusted ∆%: minus 1.1% Blog 03/11/12
Nonfarm Hiring	Nonfarm Hiring fell from 69.4 million in 2004 to 50.1 million in 2011 or by 19.3 million Private-Sector Hiring Feb 2012 3.358 million lower by 0.818 million than 4.176 million in Feb 2006 Blog 4/15/12
GDP Growth	BEA Revised National Income Accounts back to 2003 IQ2011 SAAR ∆%: 0.4 IIQ2011 SAAR ∆%: 1.3 IIIQ2011 SAAR ∆%: 1.8 IVQ2011 ∆%: 3.0 Cumulative 2011 ∆%: 1.6 2011/2010 ∆%: 1.7 Blog 04/01/12
Personal Income and Consumption	Jan month ∆% SA Real Real Disposable Personal Income (RDPI) Feb month SA ∆% minus 0.1 Real Personal Consumption Expenditures (RPCE): 0.5 12 months NSA ∆%: RDPI: 0.3; RPCE ∆%: 1.8 Blog 04/01/2012
Quarterly Services Report	IVQ11/IIIQ11 SA ∆%: Information 0.6 Professional 1.7 Administrative -1.1 Hospitals 3.5 Blog 03/11/12
Employment Cost Index	IVQ2011 SA ∆%: 0.4 Dec 12 months ∆%: 2.0 Blog 02/05/12
Industrial Production	Mar month SA ∆%: 0.0 Feb 12 months SA ∆%: 3.8 Manufacturing Mar SA ∆% Minus 0.3 Mar 12 months SA ∆% 4.8, NSA 4.7 Capacity Utilization: 78.6 Blog 4/22/12
Productivity and Costs	Nonfarm Business Productivity IVQ2011∆% SAAE 0.9; IVQ2011/IVQ2010 ∆% 0.3; Unit Labor Costs IVQ2011 ∆% 2.8; IVQ2011/IVQ2010 ∆%: 3.1 Blog 03/11/2012
New York Fed Manufacturing Index	General Business Conditions From Mar 20.21 to Apr 6.56 New Orders: From Mar 6.84 to Apr 6.48 Blog 4/22/12
Philadelphia Fed Business Outlook Index	General Index from Mar 12.5 to Apr 8.5 New Orders from Feb 3.3 to Feb 2.7 Blog 4/22/12
Manufacturing Shipments and Orders	Feb New Orders SA ∆%: +1.3; ex transport ∆%: +0.9 Jan-Feb NSA ∆%: 10.9; ex transport ∆% 9.3 Blog 4/8/12
Durable Goods	Feb New Orders SA ∆%: minus 2.2; ex transport ∆%: 1.6 Jan-Feb 12/Jan-Feb 11 NSA New Orders ∆%: 13.5; ex transport ∆% : 10.3 Blog 04/01/12
Sales of New Motor Vehicles	Mar 2012 3,467,840; Mar 2011 3,059,805. Mar SAAR 15.10 million, Feb SAAR 15.10 million, Mar 2011 SAAR 13.07 million Blog 4/8/12
Sales of Merchant Wholesalers	Jan-Feb 2012/Jan-Feb 2010 NSA ∆%: Total 12.2; Durable Goods: 15.3; Nondurable Goods 9.9 Blog 04/15/12
Sales and Inventories of Manufacturers, Retailers and Merchant Wholesalers	Feb 12/Feb 11 NSA ∆%: Sales Total Business 11.9; Manufacturers 11.4 Retailers 10.2; Merchant Wholesalers 14.0 Blog 4/22/12
Sales for Retail and Food Services	Jan-Mar 2012/Jan-Mar 2011 ∆%: Retail and Food Services 8.2; Retail ∆% 7.9 Blog 4/22/12
Value of Construction Put in Place	Feb SAAR month SA ∆%: minus 1.1 Feb 12-month NSA: 7.8 Blog 4/8/12
Case-Shiller Home Prices	Jan 2012/Jan 2011 ∆% NSA: 10 Cities minus 3.9; 20 Cities: minus 3.8 ∆% Jan SA: 10 Cities minus 0.1 ; 20 Cities: 0.0 Blog 4/1/12
FHFA House Price Index Purchases Only	Feb SA ∆% 0.0; 12 month ∆%: minus 0.7 Blog 3/25/12
New House Sales	Feb 2012 month SAAR ∆%: minus 1.6 Feb 2012/Jan 2011 NSA ∆%: 9.3 Blog 03/25/12
Housing Starts and Permits	Mar Starts month SA ∆%: Minus 5.8; Permits ∆%: +4.5 Jan-Mar 2012/Jan-Mar 2011 NSA ∆% Starts 19.2; Permits  ∆% 30.5 Blog 4/22/12
Trade Balance	Balance Feb SA -$46,025 million versus Jan -$52,522 million Exports Feb SA ∆%: 0.1 Imports Feb SA ∆%: -2.7 Goods Exports Jan-Feb 2012/2011 NSA ∆%: 10.0 Goods Imports Jan-Feb 2011/2011 NSA ∆%: 10.0 Blog 4/15/12
Export and Import Prices	Mar 12 months NSA ∆%: Imports 3.4; Exports 0.9 Blog 4/15/12
Consumer Credit	Feb ∆% annual rate: 4.2 Blog 4/8/12
Net Foreign Purchases of Long-term Treasury Securities	Feb Net Foreign Purchases of Long-term Treasury Securities: $10.1 billion Major Holders of Treasury Securities: China $1179 billion; Japan $1096 billion; Total Foreign Treausy Holdings Feb $5100 billion Blog 4/22/12
Treasury Budget	Fiscal Year Oct-Mar 2012/2011 ∆%: Receipts 4.4; Outlays -0.3; Individual Income Taxes 1.8 Deficit Fiscal Year 2011 $1,296 billion Deficit Fiscal Year 2012 Oct-Mar $778,988 million Blog 03/18/12 CBO Forecast 2012FY Deficit $1.079 trillion Blog 4/15/2012
Flow of Funds	IVQ2011 ∆ since 2007 Assets -$7315B Real estate -$5183B Financial -$2507 Net Worth -$6743 Blog 03/11/12
Current Account Balance of Payments	IVQ2011 -$124B %GDP 3.2 Blog 03/18/12

Links to blog comments in Table USA:

04/15/12 http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring_15.html

4/8/12 http://cmpassocregulationblog.blogspot.com/2012/04/thirty-million-unemployed-or_08.html

4/1/12 http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-economic-growth-falling-real_01.html

3/25/12 http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk_25.html

3/18/12 http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk_18.html

03/11/12 http://cmpassocregulationblog.blogspot.com/2012/03/thirty-million-unemployed-or_11.html

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

Industrial production was flat in both Feb and Mar, increasing 3.8 percent in the 12 months ending in Mar, as shown in Table VA-1, with all data seasonally adjusted. In the six months ending in Mar, industrial production grew at the annual equivalent rate of 4.9 percent. Business equipment increased 0.2 percent in Mar, growing 9.6 percent in the 12 months ending in Mar and at the annual equivalent rate of 13.3 percent in the six months ending in Mar. Capacity utilization of total industry is analyzed by the Fed in its report (http://www.federalreserve.gov/releases/g17/Current/): “The rate of capacity utilization for total industry edged down to 78.6 percent, a rate 2.1 percentage points above its level from a year earlier but 1.7 percentage points below its long-run (1972-2011) average.” Manufacturing contributed $1,229 billion to US national income of $12,643 billion without capital consumption adjustment in 2010, or 9 percent of the total, according to data of the Bureau of Economic Analysis (http://www.bea.gov/iTable/index_nipa.cfm).

Table VA-1, US, Industrial Production and Capacity Utilization, SA, ∆%, % 

2011-2012	Mar	Feb	Jan	Dec	Nov	Oct	Mar 12/ Mar 11
Total	0.0	0.0	0.7	0.9	0.2	0.6	3.8
Market Groups
Final Products	-0.2	0.8	0.7	0.4	-0.3	0.6	4.3
Consumer Goods	-0.2	0.5	0.3	0.4	-0.7	0.3	2.2
Business Equipment	0.2	1.3	1.9	0.9	0.7	1.3	9.6
Non Industrial Supplies	-0.3	0.6	0.2	1.4	-0.4	-0.1	3.1
Construction	-1.3	1.9	-0.2	3.1	0.4	0.3	6.7
Materials	0.2	-0.8	0.8	1.1	0.7	0.8	3.6
Industry Groups
Manufacturing	-0.2	0.8	1.1	1.5	-0.1	0.5	4.8
Mining	0.2	-4.0	0.3	0.8	1.3	2.2	4.2
Utilities	1.5	0.1	-1.8	-3.6	0.2	-1.2	-4.6
Capacity	78.6	78.7	78.7	78.3	77.7	77.6	1.0

Sources: http://www.federalreserve.gov/releases/g17/current/

Manufacturing fell 0.2 percent in Mar seasonally adjusted, increasing 4.7 percent not seasonally adjusted in 12 months, and grew 3.6 percent in the six months ending in Mar or at the annual equivalent rate of 7.4 percent. A longer perspective of manufacturing in the US is provided by Table VA-2. There has been evident deceleration of manufacturing growth in the US from 2010 and the first three months of 2011 as shown by 12 months rates of growth. The rates of decline of manufacturing in 2009 are quite high with a drop of 18.1 percent in the 12 months ending in Apr 2009. Manufacturing recovered from this decline and led the recovery from the recession. Rates of growth appear to be returning to the levels at 3 percent or higher in the annual rates before the recession.

Table VA-2, US, Monthly and 12-Month Rates of Growth of Manufacturing ∆%

	Month SA ∆%	12-Month NSA ∆%
Mar 2012	-0.2	4.7
Feb	0.8	6.0
Jan	1.1	4.8
Dec 2011	1.5	4.3
Nov	-0.1	4.0
Oct	0.5	4.3
Sep	0.4	4.0
Aug	0.3	3.4
Jul	0.8	3.2
Jun	0.1	3.1
May	0.2	3.0
Apr	-0.6	6.0
Mar	0.7	6.0
Feb	0.1	6.3
Jan	0.7	6.3
Dec 2010	1.0	6.6
Nov	0.2	5.3
Oct	0.2	6.2
Sep	0.2	5.9
Aug	0.1	6.6
Jul	0.8	7.6
Jun	-0.1	8.1
May	1.1	7.8
Apr	0.7	6.1
Mar	0.9	5.9
Feb	0.1	0.6
Jan	1.0	6.2
Dec 2009	0.2	-3.2
Nov	0.8	-5.9
Oct	-0.04	-8.9
Sep	0.8	-10.3
Aug	1.0	-13.3
Jul	1.3	-14.9
Jun	-0.3	-17.4
May	-1.2	-17.4
Apr	-0.8	-18.1
Mar	-2.0	-17.1
Feb	0.1	-16.0
Jan	-2.7	-16.5
Dec 2008	-3.1	-14.1
Nov	-2.4	-11.5
Oct	-0.6	-9.2
Sep	-3.4	-9.0
Aug	-1.4	-5.5
Jul	-1.1	-4.1
Jun	-0.6	-3.5
May	-0.6	-2.8
Apr	-1.2	-1.5
Mar	-0.4	-0.9
Feb	-0.5	0.6
Jan	-0.3	1.9
Dec 2007	0.3	1.8
Nov	0.3	3.2
Oct	-0.5	2.8
Sep	0.5	3.2
Aug	-0.5	2.9
Jul	0.3	3.8
Jun	0.3	3.3
May	-0.2	3.5
Apr	0.7	4.0
Mar	0.7	2.8
Feb	0.5	2.0
Jan	-0.3	1.8
Dec 2006		3.2
Dec 2005		1.4
Dec 2004		2.8
Dec 2003		1.7

Source: http://www.federalreserve.gov/releases/g17/current/table1.htm

Chart VA-1 of the Board of Governors of the Federal Reserve System provides industrial production, manufacturing and capacity since the 1970s. There was acceleration of growth of industrial production, manufacturing and capacity in the 1990s because of rapid growth of productivity in the US (see Pelaez and Pelaez, The Global Recession Risk (2007), 135-44). The slopes of the curves flatten in the 2000s. Production and capacity have not recovered to the levels before the global recession.

Chart VA-1, US, Industrial Production, Capacity and Utilization

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/g17/current/ipg1.gif

The modern industrial revolution of Jensen (1993) is captured in Chart VA-2 of the Board of Governors of the Federal Reserve System (for the literature on M&A and corporate control see Pelaez and Pelaez, Regulation of Banks and Finance (2009a), 143-56, Globalization and the State, Vol. I (2008a), 49-59, Government Intervention in Globalization (2008c), 46-49). The slope of the curve of total industrial production accelerates in the 1990s to a much higher rate of growth than the curve excluding high-technology industries. Growth rates decelerate into the 2000s and output and capacity utilization have not recovered fully from the strong impact of the global recession. Growth in the current cyclical expansion has been more subdued than in the prior comparably deep contractions in the 1970s and 1980s. Chart VA-2 shows that the past recessions after World War II are the relevant ones for comparison with the recession after 2007 instead of common comparisons with the Great Depression (http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-economic-growth-falling-real.html). The bottom left-hand part of Chart VA-2 shows the strong growth of output of communication equipment, computers and semiconductor that continued from the 1990s into the 2000s. Output of semiconductors has already surpassed the level before the global recession.

Chart VA-2, US, Industrial Production, Capacity and Utilization of High Technology Industries

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/g17/current/ipg3.gif

Additional detail on industrial production and capacity utilization is provided in Chart VA-3 of the Board of Governors of the Federal Reserve System. Production of consumer durable goods fell sharply during the global recession by more than 30 percent and is still around 5 percent below the level before the contraction. Output of nondurable consumer goods fell around 10 percent and is some 5 percent below the level before the contraction. Output of business equipment fell sharply during the contraction of 2001 but began rapid growth again after 2004. An important characteristic is rapid growth of output of business equipment in the cyclical expansion after sharp contraction in the global recession. Output of defense and space only suffered reduction in the rate of growth during the global recession and surged ahead of the level before the contraction. Output of construction supplies collapsed during the global recession and is well below the level before the contraction. Output of energy materials was stagnant before the contraction but has recovered sharply above the level before the contraction.

Chart VA-3, US, Industrial Production and Capacity Utilization

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/g17/current/ipg2.gif

The index of general business conditions of the Federal Reserve Bank of New York Empire State Manufacturing Survey dropped sharply from 20.21 in Mar to 6.56 in Apr, interrupting improvement from revised minus 7.43 in Sep to 20.21 in Mar, as shown in Table VA-3. The index had been registering negative changes in the five months from Jun to Oct. The new orders segment deteriorated mildly from minus 7.52 in Sep to 13.70 in Jan, declining to 6.84 in Mar and marginally to 6.48 in Apr. There is positive but weakening reading in shipments from revised minus 8.28 in Sep to positive 22.79 in Feb, declining to 18.21 in Mar and to 6.41 in Apr. The segment of number of employees fell back into contraction territory from minus 5.43 in Sep to minus 3.66 in Nov but recovered strongly to 13.58 in Mar and 19.28 in Apr but number of weekly hours worked fell from 18.52 in Mar to 6.02 in Apr. Expectations for the next six months of the general business conditions index peaked at 54.87 in Jan, declining to a still strong 47.50 in Mar. Expectations of new orders also peaked at 53.85 in Jan, declining to a still strong 47.50 in Mar and 43.12 in Apr. There is a similar pattern of strong recovery in shipments but not as much in number of employees and hours worked.

Table VA-3, US, New York Federal Reserve Bank Empire State Manufacturing Survey Index SA

	General Index	New Orders	Ship-ments	# Workers	Average Work-week
Current
Apr 2012	6.56	6.48	6.41	19.28	6.02
Mar	20.21	6.84	18.21	13.58	18.52
Feb	19.53	9.73	22.79	11.76	7.06
Jan	13.48	13.70	21.69	12.09	6.59
Dec 2011	8.19	5.99	20.06	2.33	-2.33
Nov	0.80	-0.82	11.70	-3.66	2.44
Oct	-7.22	-0.26	2.89	3.37	-4.49
Sep	-7.43	-7.52	-8.28	-5.43	-2.17
Six Months
Apr 2012	43.12	45.78	44.58	27.71	10.84
Mar	47.50	41.98	43.21	32.10	20.99
Feb	50.38	44.71	49.41	29.41	18.82
Jan	54.87	53.85	52.75	28.57	17.58
Dec 2011	45.61	54.65	51.16	24.42	22.09
Nov	32.06	35.37	36.59	14.63	8.54
Oct	13.99	12.36	17.98	6.74	-2.25
Sep	22.93	13.04	13.04	0.0	-6.52

Source: http://www.newyorkfed.org/survey/empire/empiresurvey_overview.html

The Philadelphia Business Outlook Survey in Table VA-4 provides an optimistic reading in Oct with the movement to 10.8 away from the contraction zone of minus 22.7 in Sep and recovered to 12.5 in Mar from the decline to 3.1 in Nov but then fell to 8.5 in Apr. New orders were signaling increasing future activity, rising from contraction at minus 5.5 in Sep to positive reading but registered only 3.3 in Mar and fell further to 2.7 in Apr. There is similar behavior in shipments as in new orders. Employment or number of employees fell to 1.1 in Feb, near the contraction border of zero, but rose to 6.8 in Mar and jumped to 17.9 in Apr. The average work week also fell from 10.1 in Feb to 2.7 in Mar and then to contraction territory of minus 2.3 in Apr. Most indexes of expectations for the next six months are showing sharp increases but interruptions from Feb to Apr for the general index, new orders and shipments. Employment increased from Jan to Apr but the average work week weakened in Apr.

Table VA-4, FRB of Philadelphia Business Outlook Survey Diffusion Index SA

	General Index	New Orders	Ship-ments	# Workers	Average Work-week
Current
Apr 12	8.5	2.7	2.8	17.9	-2.3
Mar	12.5	3.3	3.5	6.8	2.7
Feb	10.2	11.7	15.0	1.1	10.1
Jan	7.3	6.9	5.7	11.6	5.0
Dec 11	6.8	10.7	9.1	11.5	2.8
Nov	3.1	3.5	6.0	10.6	7.1
Oct	10.8	8.5	13.6	5.0	4.2
Sep	-12.7	-5.5	-16.6	7.3	-6.2
Aug	-22.7	-22.2	-8.9	-0.9	-11.2
Jul	6.2	0.5	8.2	9.5	-3.9
Future
Apr 12	33.8	35.4	31.0	27.8	7.5
Mar	32.9	36.4	31.3	21.8	11.2
Feb	33.3	32.5	29.0	22.5	10.8
Jan	49.0	49.7	48.2	19.1	9.2
Dec 11	40.0	44.1	36.4	10.8	4.5
Nov	37.7	36.9	35.5	25.2	4.0
Oct	28.8	28.1	29.0	15.5	8.4
Sep	25.2	24.6	27.1	14.0	6.8
Aug	6.3	20.6	18.4	11.2	-0.7
Jul	25.8	31.2	26.1	12.9	6.6

Source: http://www.philadelphiafed.org/index.cfm

Chart VA-4 of the Federal Reserve Bank of Philadelphia is very useful, providing current and future general activity indexes from Jan 1995 to Apr 2012. The shaded areas are the recession cycle dates of the National Bureau of Economic Research (NBER) (http://www.nber.org/cycles.html). The Philadelphia Fed index dropped during the initial period of recession and then led the recovery, as industry overall. There was a second decline of the index into 2011 followed now by what hopefully could be renewed strength from late 2011 into Jan 2012 but marginal weakness in Feb with stability in Mar and Apr.

Chart VA-4, Federal Reserve Bank of Philadelphia Business Outlook Survey, Current and Future Activity Indexes

Source: Federal Reserve Bank of Philadelphia

http://www.philadelphiafed.org/index.cfm

Chart VA-5 of the Federal Reserve Bank of Philadelphia provides the index of new orders of the Business Outlook Survey. Strong growth in the beginning of 2011 was followed by a bump after Mar that lasted until Oct. The strength of the first quarter of 2011 has not been recovered.

Chart VA-5, Federal Reserve Bank of Philadelphia Business Outlook Survey, Current New Orders Diffusion Index

Source: Federal Reserve Bank of Philadelphia

http://www.philadelphiafed.org/research-and-data/regional-economy/business-outlook-survey/charts/NOC.html

Growth rates and levels of sales in billions of dollars of manufacturers, retailers and merchant wholesalers are provided in Table VA-5. Total business sales rose 0.7 percent in Feb after 0.4 percent in Jan and were up by 11.9 percent in Feb 2012 relative to Feb 2011. Sales of manufacturers increased 0.1 percent in Feb after increasing 0.6 percent in Jan and rose 11.4 percent in the 12 months ending in Feb 2012. Retailers’ sales increased 1.1 percent in Feb after increasing 0.7 percent in Jan and 10.2 percent in 12 months ending in Feb. Sales of merchant wholesalers increased 1.2 percent in Feb after zero growth in Jan and grew 14.0 percent in 12 months. These data are not adjusted for price changes such that they reflect increases in both quantities and prices.

Table VA-5, US, Percentage Changes for Sales of Manufacturers, Retailers and Merchant Wholesalers

	Feb 12/   Jan 12 ∆% SA	Feb 2012 Millions of Dollars NSA	Jan 12/ Dec 11  ∆% SA	Feb 12/ Feb 11 ∆% NSA
Total Business	0.7	1,163,219	0.4	11.9
Manufacturers	0.1	441,602	0.6	11.4
Retailers	1.1	338,014	0.7	10.2
Merchant Wholesalers	1.2	383,603	0.0	14.0

Source: US Census Bureau

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

Businesses added to inventories to replenish stocks in an environment of strong sales. Retailers added 0.6 percent to inventories in Feb and 1.1 percent in Jan with growth of 5.6 percent in 12 months, as shown in Table VA-6. Total business increased inventories by 0.6 percent in Feb, 0.6 percent in Jan and 7.5 percent in 12 months. Inventories sales/ratios of total business continued at a level close to 1.28 under judicious management to avoid costs and risks. Inventory/sales ratios of manufacturers and retailers are higher than for merchant wholesalers. There is stability in inventory/sales ratios in individual months and relative to a year earlier.

Table VA-6, US, Percentage Changes for Inventories of Manufacturers, Retailers and Merchant Wholesalers and Inventory/Sales Ratios

Inventory Change	Feb 12 Billions of Dollars NSA	Feb 12/ Jan  12 ∆% SA	Jan 12/  Dec 11 ∆% SA	Feb 12/   Feb 11 ∆% NSA
Total Business	1,575.1	0.6	0.8	7.5
Manufacturers	616.7	0.4	0.6	7.6
Retailers	474.5	0.6	1.1	5.6
Merchant Wholesalers	483.9	0.9	0.6	9.1
Inventory/ Sales Ratio NSA	Feb 12 Billions of Dollars NSA	Feb 2012 SA	Jan 2012 SA	Feb 2011 SA
Total Business	1,575.1	1.28	1.28	1.28
Manufacturers	616.7	1.33	1.33	1.32
Retailers	474.5	1.32	1.33	1.33
Merchant Wholesalers	483.9	1.17	1.17	1.17

Source: US Census Bureau

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

Inventories follow business cycles. When recession hits sales inventories pile up, declining with expansion of the economy. In a fascinating classic opus, Lloyd Meltzer (1941, 129) concludes:

“The dynamic sequences (I) through (6) were intended to show what types of behavior are possible for a system containing a sales output lag. The following conclusions seem to be the most important:

(i) An economy in which business men attempt to recoup inventory losses will always undergo cyclical fluctuations when equilibrium is disturbed, provided the economy is stable.

This is the pure inventory cycle.

(2) The assumption of stability imposes severe limitations upon the possible size of the marginal propensity to consume, particularly if the coefficient of expectation is positive.

(3) The inventory accelerator is a more powerful de-stabilizer than the ordinary acceleration principle. The difference' in stability conditions is due to the fact that the former allows for replacement demand whereas the usual analytical formulation of the latter does not. Thus, for inventories, replacement demand acts as a de-stabilizer. Whether it does so for all types of capital goods is a moot question, but I believe cases may occur in which it does not.

(4) Investment for inventory purposes cannot alter the equilibrium of income, which depends only upon the propensity to consume and the amount of non-induced investment.

(5) The apparent instability of a system containing both an accelerator and a coefficient of expectation makes further investigation of possible stabilizers highly desirable.”

Chart VA-6 shows the increase in the inventory/sales ratios during the recessions of 2001 and 2007-2009. The inventory/sales ratio fell during the expansions. The inventory/sales ratio declined to a trough in 2011, climbed and then stabilized at current levels.

Chart VA-6, Total Business Inventories/Sales Ratios 2002 to 2011

Source: US Census Bureau

http://www2.census.gov/retail/releases/historical/mtis/img/mtisbrf.gif

Sales of retail and food services increased 0.8 percent in Mar after 1.0 percent in Feb and increased 7.9 percent in Jan-Mar 2012 relative to Jan-Mar 2011, as shown in Table VA-7. Excluding motor vehicles and parts, retail sales increased 0.8 percent in Mar after increasing 0.9 percent in Feb and growing 7.7 percent in Jan-Mar relative to a year earlier. Sales of motor vehicles and parts increased 0.9 percent in Mar after 1.3 percent in Feb and 8.7 percent in Jan-Mar relative to a year earlier. Gasoline station sales increased 1.1 in Mar after jumping 3.6 percent in Feb in fluctuating prices of gasoline, increasing 10.3 percent in Jan-Mar relative to a year earlier.

Table VA-7, US, Percentage Change in Monthly Sales for Retail and Food Services, ∆%

	Mar/Feb ∆% SA	Feb/Jan ∆% SA	Jan-Mar 2012 Billion Dollars NSA	Jan-Mar 2012 from Jan-Mar 2011 ∆% NSA
Retail and Food Services	0.8	1.0	1,166.1	7.9
Excluding Motor Vehicles and Parts	0.8	0.9	951.6	7.7
Motor Vehicles & Parts	0.9	1.3	214.5	8.7
Retail	0.8	1.1	1,039.6	7.7
Building Materials	3.0	0.7	67.9	13.7
Food and Beverage	0.4	0.0	152.4	5.1
Grocery	0.3	0.0	137.6	4.8
Health & Personal Care Stores	-0.2	0.4	69.9	3.3
Clothing & Clothing Accessories Stores	0.9	2.4	52.5	10.5
Gasoline Stations	1.1	3.6	131.7	10.3
General Merchandise Stores	0.7	-0.2	149.9	5.5
Food Services & Drinking Places	0.3	0.5	126.5	9.2

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

Chart VA-7 of the US Bureau of the Census shows percentage change of retails and food services sales. Sep was strong in multiple categories but the strength did not continue in Oct, Nov and Dec. Feb was stronger a jump in auto sales after the fall in Jan. All categories increased in Mar.

Chart VA-7, US, Percentage Change of Retail and Food Services Sales

Source: US Census Bureau

http://www2.census.gov/retail/releases/historical/marts/img/martsbrf.gif

Twelve-month rates of growth of US sales of retail and food services in Mar from 2000 to 2011 are shown in Table VA-8. Nominal sales have been dynamic in 2011 and 2010 after declines of 11.7 percent in 2009 and 0.3 percent in 2008 and increase of only 3.4 percent in 2007. It is difficult to separate price and quantity effects in these nominal data.

Table VA-8, US, Percentage Change in 12-Month Sales for Retail and Food Services, ∆% NSA

Mar	12 Months ∆%
2012	7.4
2011	8.0
2010	10.6
2009	-11.7
2008	-0.3
2007	3.4
2006	6.8
2005	6.3
2004	8.7
2003	2.9
2002	1.8
2001	0.2
2000	10.3

Source: http://www.census.gov/retail/

I-8.

Seasonally-adjusted annual rates (SAAR) of housing starts and permits are shown in Table VA-9. Housing starts fell sharply by 5.8 percent in Mar and 2.8 percent in Feb after increasing 4.8 percent in Jan, falling 3.0 percent in Nov and jumping 11.8 percent in Nov. The increase of 15 percent in Sep was revised to 10.4 percent. Housing permits, indicating future activity, increasing 4.5 percent in Mar, 4.8 percent in Feb after increasing 1.6 percent in Jan. Monthly rates in starts and permits fluctuate significantly as shown in Table VA-9.

Table VA-9, US, Housing Starts and Permits SSAR Month ∆%

	Housing  Starts SAAR	Month ∆%	Housing Permits SAAR	Month ∆%
Mar 2012	654	-5.8	747	4.5
Feb	694	-2.8	715	4.8
Jan	714	4.8	682	1.6
Dec 2011	681	-3.0	671	-1.3
Nov	702	11.8	680	5.6
Oct	628	-2.8	644	9.3
Sep	646	10.4	589	-5.8
Aug	585	-4.9	625	4.0
Jul	615	0.0	601	-2.6
Jun	615	11.2	617	1.3
May	553	0.7	609	8.2
Apr	549	-7.4	563	-1.9
Mar	593	14.5	574	7.5
Feb	518	-18.6	534	-6.0
Jan	636	20.9	568	-9.8
Dec 2010	526	-4.5	630	-9.8
Nov	551	2.3	564	1.6
Oct	539	-9.7	555	-1.2
Sep	597	-1.5	562	-2.3

SAAR: Seasonally Adjusted Annual Rate

Source: US Census Bureau

http://www.census.gov/construction/nrc/pdf/newresconst.pdf

Housing starts and permits in Jan-Feb not-seasonally adjusted are provided in Table VA-10. Housing starts increased 19.2 percent in Jan-Mar 2012 relative to Jan-Mar 2011 and in the same period new permits increased 30.5 percent. Construction of new houses in the US remains at very depressed levels. Housing starts fell 67.8 percent in Jan-Mar 2012 relative to Jan-Feb 2006 and fell 66.6 percent relative to Jan-Mar 2005. Housing permits fell 66.5 in Jan-Mar 2006 relative to Jan-Mar 2012 and fell 65.0 percent in Jan-Mar 2012 from Jan-Mar 2005.

Table VA-10, US, Housing Starts and New Permits, Thousands of Units, NSA, and %

	Housing Starts	New Permits
Jan-Mar 2012	149.6	166.2
Jan-Mar 2011	125.5	127.3
∆% Jan-Mar 2012/Jan-Mar 2011	19.2	30.5
Jan-Mar 2006	464.1	496.0
∆%/Jan-Mar 2012	-67.8	-66.5
Jan-Mar 2005	448.2	475.2
∆%/ Jan-Mar 2012	-66.6	-65.0

Source: http://www.census.gov/construction/nrc/pdf/newresconst.pdf

http://www.census.gov/construction/nrc/pdf/newresconst_200703.pdf

http://www.census.gov/construction/nrc/pdf/newresconst_200603.pdf

Chart VA-8 of the US Census Bureau shows the sharp increase in construction of new houses from 2000 to 2006. Housing construction fell sharply through the recession, recovering from the trough around IIQ2009. The right-hand side of Chart VA-8 shows a mild downward trend or stagnation from mid 2010 to the present in single-family houses with a recent mild upward trend in recent months in the category of two or more units but marginal decline in Mar 2012.

Chart VA-8, US, New Housing Units Started in the US, SAAR (Seasonally Adjusted Annual Rate)

Source: US Census Bureau

http://www.census.gov/briefrm/esbr/www/esbr020.html

A longer perspective on residential construction in the US is provided by Table VA-11 with annual data from 1960 to 2011. Housing starts fell 70.5 percent from 2005 to 2011, 61.2 percent from 2000 to 2011 and 51.3 percent relative to 1960. Housing permits fell 71.7 percent from 2005 to 2011, 61.6 percent from 2000 to 2011 and 38.8 percent from 1960 to 2011. Housing starts rose 31.8 from 2000 to 2005 while housing permits grew 35.4 percent. From 1990 to 2000 housing starts increased 31.5 percent while permits increased 43.3 percent.

Table VA-11, US, Annual New Privately Owned Housing Units Authorized by Building Permits in Permit-Issuing Places and New Privately Owned Housing Units Started, Thousands

	Starts	Permits
2011	609.2	610.7
∆% 2011/2010	3.8	1.0
∆% 2011/2005	-70.5	-71.7
∆% 2011/2000	-61.2	-61.6
∆% 2011/1960	-51.3	-38.8
2010	586.9	604.6
∆% 2010/2005	-71.6	-71.9
∆% 2010/2000	-62.6	-62.0
∆% 2010/1960	-53.1	-39.4
2009	554,0	583.0
2008	905.5	905.4
2007	1,355,0	1,398.4
2006	1,800.9	1,838.9
2005	2,068.3	2,155.3
∆% 2005/2000	31.8	35.4
2004	1,955.8	2,070.1
2003	1,847.7	1,889,2
2002	1,704.9	1,747.2
2001	1,602.7	1,1637.7
2000	1,568.7	1,592.3
∆% 2000/1990	31.5	43.3
1990	1,192,7	1,110.8
1980	1,292.7	1,190.6
1970	1,433.6	1,351.5
1960	1,252.2	997.6

Source: http://www.census.gov/construction/nrc/

Risk aversion channels funds toward US long-term and short-term securities. Net foreign purchases of US long-term securities (row C in Table VA-12) fell from $102.4 billion in Jan 2012 to $10.1 billion in Feb 2012. Foreign (residents) purchases minus sales of US long-term securities (row A in Table VA-12) in Jan of minus $95.7 billion decreased to $24.8 billion in Feb 2012. Net US (residents) purchases of long-term foreign securities (row B in Table VA-12) in Jan were $6.7 billion but fell to minus $14.6 billion in Feb. In Feb,

C = A + B = $24.8 billion - $14.6 billion = $10.1 billion

There is weakening demand in Table VA-12 in Jan in A1 private purchases by residents overseas of US long-term securities of $6.2 billion of which increases in A11 Treasury securities $4.3 billion and A12 $2.3 billion agency securities and decrease of corporate bonds by $8.9 billion and increase of $8.6 billion in equities. Official purchases of Treasury securities in row A21 increased $11.1 billion. Row D shows sharp increase in Feb in purchases of short-term dollar denominated obligations. Foreign private holdings of US Treasury bills increased $25.9 billion (row D11) with foreign official holdings increasing $10.7 billion and the category other increasing $38.7 billion. Risk aversion of losses in foreign securities dominates decisions to accept zero interest rates in Treasury securities with no perception of principal losses. In the case of long-term securities, investors prefer to sacrifice inflation and possible duration risk to avoid principal losses.

Table VA-12, Net Cross-Borders Flows of US Long-Term Securities, Billion Dollars, NSA

	Feb 2011 12 Months	Feb 2012 12 Months	Jan 2012	Feb 2012
A Foreign Purchases less Sales of US LT Securities	930.2	451.7	95.7	24.8
A1 Private	743.1	277.9	61.7	6.2
A11 Treasury	471.3	243.2	50.9	4.3
A12 Agency	137.7	74.4	9.8	2.3
A13 Corporate Bonds	19.7	-50.8	-1.3	-8.9
A14 Equities	114.3	11.2	2.4	8.6
A2 Official	187.1	173.7	34.0	18.6
A21 Treasury	204.3	154.4	33.1	11.1
A22 Agency	-16.3	15.3	-0.2	7.8
A23 Corporate Bonds	-0.8	1.1	0.0	0.7
A24 Equities	-0.1	2.9	1.0	-1.0
B Net US Purchases of LT Foreign Securities	-131.2	-93.1	6.7	-14.6
B1 Foreign Bonds	-45.0	-43.3	11.1	-8.7
B2 Foreign Equities	-86.1	-49.7	-4.4	-5.9
C Net Foreign Purchases of US LT Securities	799.0	358.6	102.4	10.1
D Increase in Foreign Holdings of Dollar Denominated Short-term	-30.9	-45.3	-34.1	64.6
D1 US Treasury Bills	-21.3	-42.5	-36.9	25.9
D11 Private	42.8	29.6	-28.8	15.2
D12 Official	-64.1	-72.1	-8.0	10.7
D2 Other	-9.5	-2.8	2.7	38.7

C = A + B;

A = A1 + A2

A1 = A11 + A12 + A13 + A14

A2 = A21 + A22 + A23 + A24

B = B1 + B2

D = D1 + D2

D1 = D11 + D12

Sources: http://www.treasury.gov/resource-center/data-chart-center/tic/Pages/ticpress.aspx

Table VA-13 provides major foreign holders of US Treasury securities. China is the largest holder with $1178.9 billion in Feb 2012, increasing 2.1 percent from $1154.1 billion in Feb 2011. Japan increased its holdings from $890.4 billion in Feb 2011 to $1095.9 billion in Feb 2012. Total foreign holdings of Treasury securities rose from $4467.0 billion in Feb 2011 to $5100.3 billion in Feb 2012, or 14.2 percent. The US continues to finance its fiscal and balance of payments deficits with foreign savings.

Table VA-13, US, Major Foreign Holders of Treasury Securities $ Billions at End of Period

	Feb 2012	Jan 2012	Feb 2011
Total	5100.3	5059.1	4467.0
China	1178.9	1166.2	1154.1
Japan	1095.9	1082.8	890.4
Oil Exporters	264.5	264.8	219.0
Brazil	225.5	228.2	194.3
Caribbean Banking Centers	223.8	223.5	168.6
Taiwan	178.1	178.4	156.0
Switzerland	148.1	146.4	107.7
Russia	142.1	145.7	130.5
Hong Kong	140.5	134.3	123.9
Luxembourg	138.3	140.0	77.2
Belgium	133.6	131.4	31.9

Source: http://www.treasury.gov/resource-center/data-chart-center/tic/Pages/ticsec2.aspx#ussecs

VB. Japan. Private-sector activity in Japan expanded sharply with the Markit Composite Output PMI^™ Index advancing from 51.2 in Feb to a record 53.2 in Mar (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9396). Alex Hamilton, economist at Markit and author of the report, finds broad strength in the index through rare strengthening activity in both services and manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9396). The Markit Business Activity Index of Services increased from 51.2 in Feb to 53.2 in Mar, also showing strength (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9396). The Markit/JMMA Purchasing Managers’ Index^™, seasonally adjusted, increased from 50.5 in Feb to 51.1, for the highest reading in seven months, indicating improving manufacturing in Japan (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9346). Alex Hamilton, economist at Markit and author of the report, finds that investment goods drove the recovery and that new orders registered strong growth but that foreign demand and yen overvaluation are important risk of continuing improvement (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9346). Table JPY provides the country data table for Japan.

Table JPY, Japan, Economic Indicators

Historical GDP and CPI	1981-2010 Real GDP Growth and CPI Inflation 1981-2010 Blog 7/31/11
Corporate Goods Prices	Mar ∆% 0.6 12 months ∆% 0.6 Blog 4/15/12
Consumer Price Index	Feb NSA ∆% 0.2 Feb 12 months NSA ∆% 0.3 Blog 4/1/12
Real GDP Growth	IVQ2011 ∆%: -0.2 on IIIQ2011;  IVQ2011 SAAR minus 0.7% ∆% from quarter a year earlier: -0.6 % Blog 3/11/12
Employment Report	Feb Unemployed 2.89 million Change in unemployed since last year: minus 140 thousand Unemployment rate: 4.5% Blog 4/1/12
All Industry Indices	Jan month SA ∆% minus 1.0 12-month NSA ∆% -0.1 Blog 3/25/12
Industrial Production	Feb SA month ∆%: minus 1.6 12-month NSA ∆% -1.6 Blog 4/22/12
Machine Orders	Total Feb ∆% -14.5 Private ∆%: -3.0 Feb ∆% Excluding Volatile Orders 4.8 Blog 4/15/12
Tertiary Index	Feb month SA ∆% 0.0 Feb 12 months NSA ∆% 0.4 Blog 4/22/12
Wholesale and Retail Sales	Feb 12 months: Total ∆%: minus 0.1 Wholesale ∆%: minus 1.3 Retail ∆%: +3.5 Blog 4/1/12
Family Income and Expenditure Survey	Feb 12-month ∆% total nominal consumption 2.7, real 2.3 Blog 04/01/12
Trade Balance	Exports Mar 12 months ∆%: +5.9 Imports Mar 12 months ∆% +10.5 Blog 4/22/12

Links to blog comments in Table JPY:

4/15/22 http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring_15.html

4/1/12 http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-economic-growth-falling-real_01.html

3/25/12 http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk_25.html

03/11/12 http://cmpassocregulationblog.blogspot.com/2012/03/thirty-million-unemployed-or_11.html

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

In Feb 2012, industrial production in Japan declined 1.6 percent but increased 1.5 percent in the 12 months ending in Feb 2012, as shown in Table VB-1. Japan’s industrial production increased during two consecutive months by revised 2.3 percent in Dec 2011 and revised 0.9 percent in Jan 2012, reducing the percentage decline in 12 months from minus 3.0 percent in Dec to minus 1.6 percent in Jan 2012 and positive 1.5 percent in Feb. 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 by 1.7 percent. Industrial production was higher in 12 months for the first month in Aug by 1.6 percent and again in Oct by 0.9 percent but fell 2.9 percent in Nov and 3.0 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 2.3 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
Feb 2012	-1.6	1.5
Jan	0.9	-1.6
Dec 2011	2.3	-3.0
Nov	-1.7	-2.9
Oct	1.8	0.9
Sep	-1.9	-2.4
Aug	0.9	1.6
Jul	1.1	-1.7
Jun	3.8	-0.6
May	5.8	-4.6
Apr	2.4	-12.7
Mar	-16.2	-12.4
Feb	1.1	4.5
Jan	1.2	6.1
Dec 2010	2.4	5.9
Calendar Year
2011		-2.3
2010		16.4
2009		-21.9
2008		-3.4

Source: http://www.meti.go.jp/statistics/tyo/iip/result/pdf/press/h2a2002j.pdf

The tertiary activity index of Japan was flat in Feb but increased 2.4 percent in 12 months, as shown in Table VB-2. There was strong impact from the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 in the decline of the tertiary activity index by 5.4 percent in Mar and 3.4 percent in 12 months. The performance of the tertiary sector in the quarter Jul-Sep was weak: increase of 0.4 percent in Jul, increase of 0.1 percent in Aug and decline of 0.2 percent in Sep, after increasing 1.2 percent in Jun. The index has gained 5.4 percent in the ten months from Apr to Feb, eliminating the loss in Mar of 5.4 percent or at the annual equivalent rate of 5.9 percent. Most of the growth occurred in the quarter from Apr to Jun with gain of 4.3 percent or at annual equivalent rate of 18.1 percent.

Table VB-2, Japan, Tertiary Activity Index, ∆%

	Month ∆% SA	12 Months ∆% NSA
Feb 2012	0.0	2.4
Jan	-0.6	0.4
Dec 2011	1.6	1.2
Nov	-0.8	-0.3
Oct	0.6	0.9
Sep	-0.2	0.1
Aug	0.1	0.8
Jul	0.4	0.1
Jun	1.2	1.0
May	0.9	-0.2
Apr	2.1	-2.3
Mar	-5.4	-3.4
Feb	0.3	2.0
Jan	0.5	1.0
Dec 2010	-0.2	1.8
Nov	0.6	2.5
Oct	0.2	0.5
Sep	-0.4	1.3
Aug	0.1	2.3
Jul	0.7	1.6
Jun	0.1	1.0
May	-0.3	1.2
Dec 2009		-2.7
Dec 2008		-3.3
Dec 2007		-0.3
Dec 2006		0.6
Dec 2005		2.6
Dec 2004		1.6
Calendar Year
2011		-3.4
2010		5.1
2009		5.8

Source: http://www.meti.go.jp/statistics/tyo/sanzi/result/pdf/hv37903_201202j.pdf

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

Month and 12-month rates of growth of the tertiary activity index of Japan and components in Jan are provided in Table VB-3. Electricity, gas, heat supply and water fell 0.4 percent in Feb but increased 2.4 percent in the 12 months ending in Feb. Wholesale and retail trade decreased 1.4 percent in the month of Feb and fell 0.3 percent in 12 months. Information and communications increased 1.7 percent in Feb and grew 4.1 percent in 12 months.

Table VB-3, Japan, Tertiary Index and Components, Month and 12-Month Percentage Changes ∆%

Feb 2012	Weight	Month ∆% SA	12 Months ∆% NSA
Tertiary Index	10,000.0	0.0	2.4
Electricity, Gas, Heat Supply & Water	372.9	-0.4	4.9
Information & Communications	951.2	1.7	4.1
Wholesale & Retail Trade	2,641.2	-1.4	-0.3
Finance & Insurance	971.1	-1.0	0.5
Real Estate & Goods Rental & Leasing	903.4	0.3	-0.7
Scientific Research, Professional & Technical Services	551.3	6.3	10.3
Accommodations, Eating, Drinking	496.0	-0.3	1.4
Living-Related, Personal, Amusement Services	552.7	1.0	4.6
Learning Support	116.9	-0.6	0.6
Medical, Health Care, Welfare	921,1	0.8	5.0
Miscellaneous ex Government	626.7	-1.1	3.7

Source: http://www.meti.go.jp/statistics/tyo/sanzi/result/pdf/hv37903_201202j.pdf

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

The structure of exports and imports of Japan is in Table VB-4. Japan imports all types of raw materials and fuels at rapidly increasing prices caused by the carry trade from zero interest rates to commodities. Mineral fuels account for 36.2 percent of Japan’s imports and increased 29.5 percent in the 12 months ending in Mar. Weakness of world demand depresses prices of industrial goods. Manufactured products contribute 13.3 percent of Japan’s exports with decline of 0.1 percent in the 12 months ending in Mar. Machinery contributes 21.6 percent of Japan’s exports with increase of 4.5 percent in the 12 months ending in Mar. Electrical machinery contributes 17.9 percent of Japan’s exports with increase of 6.1 percent in the 12 months ending in Mar. The best outcome is transport equipment with share of 23.4 percent in total exports and increase of 25.4 percent in the 12 months ending in Mar. The breakdown of transport equipment in Table VB-5 shows increase of the major categories of motor vehicles of 44.7 percent: cars increased 39.2 percent with strong growth of 79.8 percent in the minor category of buses and trucks, increase of 24.2 percent for parts of motor vehicles, increase of 8.8 percent for motorcycles and decline of 16.9 percent for ships. The result of rising commodity prices and stable or declining prices of industrial products is pressure on Japan’s terms of trade.

Table VB-4, Japan, Structure and Growth of Exports and Imports % and ∆% Millions Yens

Mar 2012	Value JPY Millions	% of Total	12 Months∆%	Contribution Degree %
Exports	6,204,223	100.0	5.9	5.9
Foodstuffs	31,488	0.5	-12.7	-0.1
Raw Materials	101,361	1.6	12.7	0.2
Mineral Fuels	83,826	1.4	-17.5	-0.3
Chemicals	595,306	9.6	-8.3	-0.9
Manufactured Goods	825,406	13.3	-0.1	-0.0
Machinery	1,342,048	21.6	4.5	1.0
Electrical Machinery	1,107,481	17.9	6.1	1.1
Transport Equipment	1,448,753	23.4	25.4	5.0
Motor Vehicles	870,667	14.0	44.7	4.6
Cars	723,093	11.7	39.2	3.5
Buses & Trucks	136,182	2.2	79.8	1.0
Parts of Motor Vehicles	304,577	4.9	24.2	1.0
Motorcycles	29,162	0.5	8.8	0.0
Ships	194,762	3.1	-16.9	-0.7
Other	668,556	10.8	-0.5	-0.1
Imports	6,286,777	100.0	10.5	10.5
Foodstuffs	482,143	7.7	4.2	0.3
Raw Materials	423,854	6.7	-10.1	-0.8
Mineral Fuels	2,276,624	36.2	29.5	9.1
Chemicals	490,236	7.8	0.9	0.1
Manufactured Goods	462,512	7.4	-9.0	-0.8
Machinery	463,168	7.4	6.5	0.5
Electrical Machinery	712,115	11.3	2.6	0.3
Transport Equipment	210,798	3.4	45.9	1.2
Other	765,327	12.2	5.1	0.7

Source: http://www.customs.go.jp/toukei/latest/index_e.htm

Table VB-6 provides Japan’s exports, imports and trade balance in five-year intervals from 1950 to 1975 and then yearly from 1979 to 2011. Exports grew at the average yearly rate of 3.7 percent while imports grew at 3.1 percent per year in the years from 1979 to 2010. The global recession had a brutal impact on Japan’s trade. Exports fell 35.5 percent from 2007 to 2009 while imports fell 29.6 percent. Japan had the first trade deficit in 2011 since 1980. The monthly trade deficit in Jan 2012 is the highest in history.

Table VB-5, Japan, Exports and Imports Calendar Year 1979-2010 Billion Yens

Years	Exports	Imports	Balance
1950	298	348	-50
1955	723	889	-166
1960	1,459	1,616	-157
1965	3,042	2,940	102
1970	6,954	6,797	157
1975	16,545	17,170	-625
1979	22,531	24,245	-1,714
1980	29,382	31,995	-2,613
1981	33,468	31,464	2,004
1982	34,432	32,656	1,776
1983	34,909	30,014	4,895
1984	40,325	32,321	8,004
1985	41,955	31,084	10,871
1986	35,289	21,550	13,739
1987	33,315	21,736	11,579
1988	33,939	24,006	9,933
1989	37,822	28,978	8,844
1990	41,456	33,855	7,601
1991	42,359	31,900	10,459
1992	43,012	29,527	13,485
1993	40,202	26,826	13,376
1994	40,497	28,104	12,393
1995	41,530	31,548	9,982
1996	44,731	37,993	6,738
1997	50,937	40,956	9,981
1998	50,645	36,653	13,992
1999	47,547	35,268	12,279
2000	51,654	40,938	10,716
2001	48,979	42,415	6,564
2002	52,108	42,227	9,881
2003	54,548	44,362	10,186
2004	61,169	49,216	11,953
2005	65,656	56,949	8,707
2006	75,246	67,344	7,902
2007	83,931	73,135	10,796
2008	81,018	78,954	2,424
2009	54,170	51,499	2,671
2010	67,399	60,764	6,635
2011	65,546	68,111	-2,565

Source: http://www.customs.go.jp/toukei/suii/html/time_e.htm

The geographical breakdown of exports by imports of Japan with selected regions and countries is provided in Table VB-6 for Mar 2012. The share of Asia in Japan’s trade is more than one half, 54.6 percent of exports and 43.8 percent of imports. Within Asia, exports to China are 18.3 percent of total exports and imports from China 21.1 percent of total imports. The second largest export market for Japan in Mar 2012 is the US with share of 16.5 percent of total exports and share of imports from the US of 8.5 percent in total imports.

Table VB-6, Japan, Value and 12-Month Percentage Changes of Exports and Imports by Regions and Countries, ∆% and Millions of Yens

Mar 2012	Exports Millions Yens	12 months ∆%	Imports Millions Yens	12 months ∆%
Total	6,204,223	5.9	6,286,777	10.5
Asia	3,390,140	0.5	2,756,198	5.9
China	1,136,720	-5.9	1,327,500	3.9
USA	1,024,990	23.9	536,749	8.4
Canada	84,692	56.0	87,764	9.3
Brazil	48,430	8.1	80,044	-11.4
Mexico	71,399	1.8	33,887	23.7
Western Europe	645,761	-10.4	627,613	8.0
Germany	156,013	-2.8	184,629	13.4
France	59,932	4.5	79,818	11.6
UK	92,147	-8.1	55,615	2.1
Middle East	241,228	35.2	1,278,472	20.9
Australia	149,040	57.8	375,877	6.4

Source: http://www.customs.go.jp/toukei/latest/index_e.htm

The geographical distribution of Japan’s trade balance is provided in Table VB-7. The combined trade surpluses with the US, UK, Mexico and Western Europe of JPY 642,921 million are largely erased by the trade deficits of importing raw materials and fuels from Australia and the Middle East, adding to JPY 1,264,081 million. China typically contributes a sizeable trade deficit of Japan with deficit of JPY 190,780 million in Mar 2012.

Table VB-7, Japan, Trade Balance, Millions of Yen

Mar 2012	Millions of Yen
Total	-82,554
Asia	633,942
China	-190,780
USA	488,241
Canada	-2,802
Brazil	-31,614
Mexico	37,512
Western Europe	18,148
Germany	-28,616
France	-19,886
UK	36,532
Middle East	-1,037,244
Australia	-226,837

Source: http://www.customs.go.jp/toukei/latest/index_e.htm

VC. China. The HSBC China Services PMI^™, compiled by Markit, finds stagnating business activity in China with the HSBC Composite Output, combining manufacturing and services, declining to 49.9 in Mar from 51.8 in Feb (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9407). Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds slowing growth and weakness in export orders that require more easing measures (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9407). The HSBC Purchasing Managers’ Index^™ (PMI^™), compiled by Markit, fell to 48.3 in Mar from 49.6 in Feb, in a fourth consecutive month of declining conditions in manufacturing in China (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9361). The index for the first quarter of 2012 is the weakest since IQ2009. Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds slowing growth with weakening impulse from new export orders, requiring monetary and fiscal stimulus (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9361). Table CNY provides the country table for China.

Table CNY, China, Economic Indicators

Price Indexes for Industry	Mar 12 months ∆%: minus 0.3 Mar month ∆%: 0.3 Blog 4/15/12
Consumer Price Index	Mar month ∆%: 0.2 Mar 12 month ∆%: 3.6 Blog 4/15/12
Value Added of Industry	Mar month ∆%: 0.93 Jan-Mar 2012/Jan-Mar 2011 ∆%: 11.6 Blog 4/22/12
GDP Growth Rate	Year IQ2012 ∆%: 8.1 Quarter IQ2012 ∆%: 1.8 Blog 4/15/12
Investment in Fixed Assets	Total Jan-Mar 2012 ∆%: 20.9 Real estate development: 23.5 Blog 4/22/12
Retail Sales	Mar month ∆%: 1.2 Mar 12 month ∆%: 15.2 Jan-Mar ∆%: 14.8 Blog 4/22/12
Trade Balance	Mar balance $5.35 billion Exports ∆% 8.9 Imports ∆% 5.4 Cumulative Mar: $1.11 billion Blog 4/15/12

Links to blog comments in Table CNY:

4/15/12 http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring_15.html

Cumulative and 12-months rates of value added of industry in China are provided in Table VC-1. Value added in total industry in Jan-Mar 2012 increased 11.6 percent relative to a year earlier and 11.9 percent in the 12 months ending in Mar. Heavy industry is the driver of growth with a cumulative rate of 11.0 percent relative to a year earlier. Growth has decelerated from cumulative 14.4 percent in Jan-Mar 2011

Table VC-1, China, Growth Rate of Value Added of Industry ∆%

	Industry	Light Industry	Heavy Industry	State Owned	Private
2012
Jan-Mar	11.6	13.2	11.0	7.2	13.8
12 M Mar	11.9	13.9	11.2	8.0	13.7
Jan-Feb	11.4	12.7	10.9	7.3	13.9
12 M Dec	12.8	12.6	13.0	9.2	14.7
Jan-Dec	13.9	13.0	14.3	9.9	15.8
12 M Nov	12.4	12.4	12.4	7.8	14.4
Jan-Nov	14.0	13.0	14.4	9.9	16.0
12 M Oct	13.2	12.1	13.7	8.9	15.1
Jan-Oct	14.1	13.0	14.5	10.1	9.1
12 M Sep	13.8	12.8	14.3	9.9	16.0
Jan-Sep	14.2	13.1	14.6	10.4	16.1
12 M Aug	13.5	13.4	13.5	9.4	15.5
Jan-Aug	14.2	13.1	14.6	10.4	16.1
12 M Jul	14.0	12.8	14.5	9.5
Jan-Jul	14.3
12 M Jun	15.1	13.9	15.6	10.7	20.8
Jan-Jun	14.3	13.1	14.7	10.7	19.7
12 M May	13.3	12.9	13.5	8.9	18.7
Jan-May	14.0	12.9	14.4	10.7	19.3
12 M Apr	13.4	11.9	14.0	10.4	18.0
Jan-Apr	14.2	12.9	14.7	11.2	19.5
12 M Mar	14.8	12.8	15.6	12.9	19.2
Jan-Mar	14.4	13.1	14.9	11.4	19.8
12 M Feb	14.9	13.1	15.6	10.5	21.7
Jan-Feb	14.1	13.3	14.4	10.6	20.3

Source: http://www.stats.gov.cn/english/pressrelease/t20120416_402799082.htm

http://www.stats.gov.cn/english/pressrelease/t20120313_402791971.htm

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20120117_402779577.htmhttp://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111212_402771586.htm

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111110_402765073.htm

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111018_402759844.htm

http://www.stats.gov.cn/english/newsandcomingevents/t20110909_402753263.htm

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

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

Chart VC-1 provides cumulative growth rates of value added of industry in 2011 and Jan-Mar 2012. Growth rates of value added of industry in the first five months of 2010 were higher than in 2011 as would be expected in an earlier phase of recovery from the global recession. Growth rates have converged in the second half of 2011 to lower percentages.

Chart VC-1, China, Growth Rate of Total Value Added of Industry, Cumulative Year-on-Year ∆%

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/pressrelease/t20120416_402799082.htm

Yearly rates of growth for the past 12 months and cumulative relative to the earlier year of various segments of industrial production in China are provided in Table VC-2. Rates for Jan-Dec 2011 relative to the same period a year earlier fluctuated but remained above 10 percent with the exception of motor vehicles and crude oil. There is deceleration in Jan-Mar of the 12-month rates of change with no segment showing growth exceeding 10 percent.

Table VC-2, China, Industrial Production Operation ∆%

	Elec- tricity	Pig Iron	Cement	Crude Oil	Non- ferrous Metals	Motor Vehicles
2012
Jan-Mar	7.1	6.5	7.3	3.1	5.8	0.0
12 M Mar	7.2	10.2	7.9	2.0	3.3	5.1
Jan-Feb	7.1	4.6	4.8	4.0	8.4	-1.8
2011
12 M Dec	9.7	3.7	7.0	4.0	13.2	-6.5
Jan-Dec	12.0	8.4	16.1	4.9	10.6	3.0
12 M Nov	8.5	7.8	11.2	3.2	8.2	-1.3
Jan-Nov	12.0	13.1	17.2	5.3	10.2	3.9
12 M Oct	9.3	13.4	16.5	-0.9	3.7	1.3
Jan-Oct	12.3	13.7	18.0	5.4	10.4	5.2
12 M Sep	11.5	18.8	15.7	1.5	13.9	2.5
Jan-Sep	12.7	13.9	18.1	6.0	11.2	5.5
12 M Aug	10.0	12.9	12.8	4.5	15.6	9.5
Jan-Aug	13.0	13.1	18.4	6.6		4.7
12 M Jul	13.2	14.9	16.8	5.9	9.8	-1.3
Jan-Jul	13.3	13.0	19.2	6.9	9.9	4.0
12 M Jun	16.2	14.8	19.9	-0.7	9.8	3.6
12 M May	12.1	10.6	19.2	6.0	14.2	-1.9
12 M Apr	11.7	8.3	22.4	6.8	6.1	-1.6
12 M Mar	14.8	13.7	29.8	8.0	11.6	9.9
12 M Feb	11.7	14.5	9.1	10.9	14.4	10.3
12 M Jan	5.1	3.5	16.4	12.2	1.4	23.9
12 M Dec 2010	5.6	4.6	17.3	10.3	-1.9	27.6

M: month

Source: http://www.stats.gov.cn/english/pressrelease/t20120416_402799082.htm

http://www.stats.gov.cn/english/pressrelease/t20120313_402791971.htm

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20120117_402779577.htm

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111212_402771586.htm

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111110_402765073.htm

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111018_402759844.htm

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

http://www.stats.gov.cn/english/newsandcomingevents/t20110909_402753263.htm

Monthly growth rates of industrial production in China are provided in Table VC-3. Monthly rates have fluctuated around 1 percent. Jan and Feb 2012 are somewhat weaker but there was improvement to 1.2 percent in Mar.

Table VC-3, China, Industrial Production Operation, Month ∆%

2011	Month ∆%
Feb	0.93
Mar	1.09
Apr	0.91
May	0.94
Jun	1.33
Jul	0.80
Aug	0.90
Sep	1.09
Oct	0.85
Nov	0.86
Dec	1.10
Jan 2012	0.63
Feb	0.84
Mar	1.22

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/pressrelease/t20120416_402799082.htm

Table VC-4 provides cumulative growth of investment in fixed assets in China in 2011 relative to 2010 and in Jan-Mar 2012 relative to a year earlier. Total fixed investment has grown at a high rate fluctuating around 25 percent and fixed investment in real estate development has grown at rates in excess of 30 percent. In Jan-Dec investment in fixed assets in China grew 23.8 percent relative to a year earlier and 27.9 percent in real estate development. There was slight deceleration in the final two months of 2011 that continued into Jan-Mar 2012.

Table VC-4, China, Investment in Fixed Assets ∆% Relative to a Year Earlier

	Total	State	Real Estate Development
Jan-Mar 2012	20.9	9.0	23.5
Jan-Feb	21.5	8.8	27.8
Jan-Dec 2011	23.8	11.1	27.9
Jan-Nov	24.5	11.7	29.9
Jan-Oct	24.9	12.4	31.1
Jan-Sep	24.9	12.7	32.0
Jan-Aug	25.0	12.1	33.2
Jan-Jul	25.4	13.6	33.6
Jan-Jun	25.6	14.6	32.9
Jan-May	25.8	14.9	34.6
Jan-Apr	25.4	16.6	34.3
Jan-Mar	25.0	17.0	34.1
Jan-Feb	24.9	15.6	35.2

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/pressrelease/t20120416_402799085.htm

http://www.stats.gov.cn/english/pressrelease/t20120416_402799086.htm

Chart VC-2 provides cumulative fixed asset investment in China relative to a year earlier. Growth rose to 25.8 percent in Jan-May and then fell back to 24.9 percent in Sep and Oct, declining further to 24.5 percent in Nov and 23.8 percent in Dec with deeper drop in Jan-Feb 2012 to 21.5 percent and to 20.9 percent in Jan-Mar.

Chart VC-2, China, Investment in Fixed Assets, ∆% Cumulative over Year Earlier

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/pressrelease/t20120416_402799085.htm

Monetary policy has been used in China in the form of increases in interest rates and required reserves of banks to moderate real estate investment. These policies have been reversed because of lower inflation and weakening economic growth. Chart VC-3 shows decline of fluctuating cumulative growth rates of investment in real estate development relative to a year earlier from 35.2 percent in Jan-Feb to 31.1 percent in Jan-Oct, 29.9 percent in Jan Nov, 27.9 percent in Jan-Dec 2011, 27.9 percent in Jan-Feb 2012 and sharper decline to 23.5 percent in Jan-Mar 2012.

Chart VC-3, China, Investment in Real Estate Development, ∆% Cumulative over Year Earlier

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/pressrelease/t20120416_402799086.htm

Table VC-5 provides monthly growth rates of investment in fixed assets in China from Feb 2011 to Mar 2012. Growth rates have moderated from Nov 2011 to Mar 2012.

Table VC-5, China, Investment in Fixed Assets, Month ∆%

	Month ∆%
Feb 2011	-0.23
Mar	2.58
Apr	1.71
May	1.83
Jun	1.38
Jul	1.66
Aug	1.39
Sep	2.01
Oct	1.85
Nov	1.04
Dec	1.14
Jan 2012	1.47
Feb	1.91
Mar	0.64

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/pressrelease/t20120416_402799085.htm

Growth rates of retail sales in China monthly, 12 months and cumulative relative to a year earlier are in Table VC-6. There is still insufficient data to assess if the decline of growth rates to cumulative 14.7 percent in Feb 2012 and 14.8 percent in Mar constitutes the beginning of a downward trend.

Table VC-6, China, Total Retail Sales of Consumer Goods ∆%

	Month ∆%	12-Month ∆%	Cumulative ∆%/ Cumulative Year Earlier
2012
Mar	1.18	15.2	14.8
Feb	1.31	14.7	14.7
Jan	1.02
2011
Dec	1.45	18.1	17.1
Nov	1.29	17.3	17.0
Oct	1.34	17.2	17.0
Sep	1.37	17.7	17.0
Aug	1.34	17.0	16.9
Jul	1.28	17.2	16.8
Jun	1.43	17.7	16.8
May	1.29	16.9	16.6
Apr	1.33	17.1	16.5
Mar	1.35	17.4	17.4
Feb	1.35	11.6	15.8
Jan		19.9	19.9

Note: there are slight revisions of month relative to earlier month data but not of the month on the same month year earlier or cumulative relative to cumulative year earlier in the databank

Source: http://www.stats.gov.cn/english/pressrelease/t20120416_402799089.htm

http://www.stats.gov.cn/english/pressrelease/t20120313_402792035.htm

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20120117_402779577.htm

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111209_402771402.htm

http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20111110_402765083.htm

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

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

Chart VC-4 of the National Bureau of Statistics of China provides 12-month rates of growth of retail sales in 2011. There is again a drop into 2012 with the lowest percentage in Chart VC-4.

Chart VC-4, China, Total Retail Sales of Consumer Goods 12-Month ∆%

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/pressrelease/t20120416_402799089.htm

Table VC-7 provides monthly percentage changes of retail sales in China. Although the rate of 1.02 percent in Jan is the lowest in Table VC-7, the rate of 1.31 percent in Feb is relatively high and 1.18 percent in Mar is also relatively low.

Table VC-7, Retail Sales, Month ∆%

2011	Month ∆%
Feb	1.35
Mar	1.35
Apr	1.33
May	1.29
Jun	1.43
Jul	1.28
Aug	1.34
Sep	1.37
Oct	1.34
Nov	1.29
Dec	1.45
2012
Jan	1.02
Feb	1.31
Mar	1.18

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/pressrelease/t20120416_402799089.htm

VC Euro Area. The Markit Eurozone Composite Output Index, combining services and manufacturing activity with close association with GDP, fell from 49.3 in Feb to 49.1 in Mar (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9351). The quarterly average in Jan-Mar 2012 of 49.6 is higher than 47.2 in the final quarter of 2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9351). Chris Williamson, Chief Economist at Markit, finds that growth of services activity was not sufficient to compensate for the decline in manufacturing output for the first time in three months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9351). The economy of the euro area may have fallen in a technical recession with two consecutive quarters of contraction. The Markit Eurozone Manufacturing PMI^® declined to a three-month low at 47.7 in Mar from 49.0 in Feb (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9330). Chris Williamson, Chief Economist at Markit, finds that euro area manufacturing contracted in Mar, preventing the fall of the economy back into recession by eliminating the marginal gains in the first two months of 2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9330). Table EUR provides the economic indicators for the euro area.

Table EUR, Euro Area Economic Indicators

GDP	IVQ2011 ∆% minus 0.3; IVQ2011/IVQ2010 ∆% 0.7 Blog 3/11/12
Unemployment	Feb 2012: 10.8% unemployment rate Feb 2012: 17.134 million unemployed Blog 4/8/12
HICP	Mar month ∆%: 1.3 12 months Feb ∆%: 2.7 Blog 4/22/12
Producer Prices	Euro Zone industrial producer prices Feb ∆%: 0.6 Feb 12 months ∆%: 3.6 Blog 4/8/12
Industrial Production	Feb month ∆%: 0.5 Feb 12 months ∆%: -1.8 Blog 4/15/12
Industrial New Orders	Dec month ∆%: 1.9 Oct 12 months ∆%: minus 1.7 Blog 2/26/12
Construction Output	Feb month ∆%: minus 7.1 Jan 12-month ∆%: minus 12.9  Blog 4/22/12
Retail Sales	Feb month ∆%: -0.1 Feb 12 months ∆%: -2.1 Blog 4/8/12
Confidence and Economic Sentiment Indicator	Sentiment 93.2 Mar 2012 Confidence minus 11.8 Mar 2012 Blog 4/1/12
Trade	Jan-Feb 2012/Jan-Feb 2011 Exports ∆%: 11.0 Imports ∆%: 5.3 Feb 2012 12-month Exports ∆% 11.2 Imports ∆% 6.9 Blog 4/22/12
HICP, Rate of Unemployment and GDP	Historical from 1999 to 2011 Blog 3/18/12

Links to blog comments in Table EUR:

4/15/12 http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring_15.html

4/8/12 http://cmpassocregulationblog.blogspot.com/2012/04/thirty-million-unemployed-or_08.html

4/1/12 http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-economic-growth-falling-real_01.html

3/18/12 http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk_18.html

3/11/12 http://cmpassocregulationblog.blogspot.com/2012/03/thirty-million-unemployed-or_11.html

2/26/12 http://cmpassocregulationblog.blogspot.com/2012/02/decline-of-united-states-new-house_26.html

Construction is weak throughout most advanced economies. Growth of euro zone construction output in Table VD-1 has fluctuated with alternation of negative change. Construction output fell 7.1 percent in Feb and declined 12.9 percent in the 12 months ending in Feb. Nov is the only strong month with monthly percentage increase of 1.9 percent and 1.4 percent in 12 months. Percentage changes were negative in five of the six months from Sep to Feb.

Table VD-1, Euro Zone, Construction Output ∆%

	Month ∆%	12-Month ∆%
Feb 2012	-7.1	-12.9
Jan	-0.5	-2.7
Dec 2011	-2.1	10.1
Nov	1.9	1.4
Oct	-1.0	-1.8
Sep	-1.7	1.0

Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-18042012-AP/EN/4-18042012-AP-EN.PDF

Euro zone trade growth continues to be strong as shown in Table VD-2. Exports grew at 11.0 percent and imports at 5.3 percent in Jan-Feb 2012 relative to Jan-Feb 2011. The 12-month rate of growth of exports was 11.2 percent in Feb 2012 while imports increased 6.9 percent. At the margin, rates of growth of trade are declining in part because of moderation of commodity prices.

Table VD-2, Euro Zone, Exports, Imports and Trade Balance, Billions of Euros and Percent, NSA

	Exports	Imports
Jan-Feb 2012	288.5	293.7
Jan-Feb 2011	259.9	278.8
∆%	11.0	5.3
Feb 2012	150.0	147.2
Feb 2011	134.9	137.7
∆%	11.2	6.9
Jan 2012	138.6	146.5
Jan 2011	125.0	141.1
∆%	10.9	3.8
Trade Balance	Jan-Feb 2012	Jan-Feb 2011
€ Billions	-5.2	-19.0

Source: EUROSTAT http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/6-16042012-AP/EN/6-16042012-AP-EN.PDF

The structure of trade of the euro zone in Jan 2012 is provided in Table VD-3. Data are still not available for trade structure for Feb 2012. Manufactured exports grew 9.5 percent in Jan 2012 relative to Jan 2011 while imports grew 0.9 percent. The trade surplus in manufactured products was lower than the trade deficit in primary products in both Jan 2012 and Jan 2011.

Table VD-3, Euro Zone, Structure of Exports, Imports and Trade Balance, € Billions, NSA, ∆%

	Primary	Manufactured	Other	Total
Exports
Jan 2012 € B	22.2	112.2	4.2	138.6
Jan 2011 € B	19.1	102.5	3.4	125.0
∆%	16.2	9.5	23.5	10.9
Imports
Jan 2012 € B	54.3	89.4	2.8	146.5
Jan 2011  € B	50.0	88.6	2.5	141.1
∆%	8.6	0.9	12.0	3.8
Trade Balance € B
Jan 2012	-32.1	22.8	1.4	-7.9
Jan 2011	-30.9	13.9	0.9	-16.1

Source: EUROSTAT http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/6-16042012-AP/EN/6-16042012-AP-EN.PDF

Table DE, Germany, Economic Indicators

GDP	IVQ2011 -0.2 ∆%; IV/Q2011/IVQ2010 ∆% 1.5 2011/2010: 3.0% GDP ∆% 1992-2011 Blog 2/26/12
Consumer Price Index	Mar month SA ∆%: +0.3 Mar 12-month ∆%: 2.1 Blog 4/15/12
Producer Price Index	Mar month ∆%: 0.6 12-month NSA ∆%: 3.3 Blog 4/22/12
Industrial Production	Mfg Feb month SA ∆%: -0.3 12 months NSA: 3.2 Blog 4/8/12
Machine Orders	Feb month ∆%: 0.3 Feb 12 months ∆%: -4.5 Blog 4/8/12
Retail Sales	Feb Month ∆% 1.7 12-Month ∆% minus 1.6 Blog 4/1/12
Employment Report	Unemployment Rate Feb 5.9% Blog 4/1/12
Trade Balance	Exports Feb 12 months NSA ∆%: 8.6 Imports Feb 12 months NSA ∆%: 6.1 Exports Feb month SA ∆%: 1.6; Imports Feb month SA 3.9 Blog 4/15/12

Links to blog comments in Table DE:

04/15/12 http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring_15.html

4/8/12 http://cmpassocregulationblog.blogspot.com/2012/04/thirty-million-unemployed-or_08.html

4/1/12 http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-economic-growth-falling-real_01.html

2/26/12 http://cmpassocregulationblog.blogspot.com/2012/02/decline-of-united-states-new-house_26.html

VF France. The Markit France Composite Output Index, combining services and manufacturing with close association with French GDP, fell from 50.2 in Feb to 48.7 in Mar, for the first downturn of activity in four months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9403). Jack Kennedy, Senior Economist at Markit and author of the France Services PMI^®, finds stagnation of French services activity for a second consecutive month but improving confidence on future activity (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9403). The Markit France Manufacturing Purchasing Managers’ Index^® fell to 46.7 in Mar from 50.0 in Feb (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9340). Jack Kennedy, Senior Economist at Markit and author of the France Manufacturing PMI^®, finds that manufacturing output was restricted by the deepest decline in new orders in about years, particularly with weak internal demand (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9340).Table FR provides the country data table for France.

Table FR, France, Economic Indicators

CPI	Mar month ∆% 0.8 12 months ∆%: 2.3 4/15/12
PPI	Feb month ∆%: 0.8 Feb 12 months ∆%: 4.3 Blog 04/01/12
GDP Growth	IVQ2011/IIIQ2011 ∆%: 0.2 IVQ2011/IVQ2010 ∆%: 1.3 Blog 4/1/12
Industrial Production	Feb/Jan SA ∆%: Industrial Production 0.3; Manufacturing -1.2 Feb YOY NSA ∆%: Industrial Production -1.7; Manufacturing -1.6 Blog 4/15/12
Industrial New Orders	Mfg Dec ∆% +0.7 YOY ∆% minus 0.4 Blog 3/25/12
Consumer Spending	Feb Manufactured Goods ∆%: 1.5 Feb 12-Month Manufactured Goods ∆%: minus 1.3 Blog 4/1/12
Employment	IVQ2011 Unemployed 2.678 million Unemployment Rate: 9.4% Employment Rate: 63.8% Blog 3/4/12
Trade Balance	Feb Exports ∆%: month 1.0, 12 months 7.2 Feb Imports ∆%: month 2.8, 12 months 6.7 Blog 4/8/12
Confidence Indicators	Historical averages 100 Mar: France 95 Mfg Business Climate 96 Retail Trade 94 Services 93 Building 98 Household 82 Blog 3/25/12

Links to blog comments in Table FR:

4/15/12 http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring_15.html

4/8/12 http://cmpassocregulationblog.blogspot.com/2012/04/thirty-million-unemployed-or_08.html

4/1/12 http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-economic-growth-falling-real_01.html

3/25/12 http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk_25.html

03/04/12 http://cmpassocregulationblog.blogspot.com/2012/03/mediocre-economic-growth-flattening_04.html

VG Italy. The Markit/ADACI Business Activity Index remained almost unchanged at 44.3 in Mar relative to 44.1 in Feb, indicating sharp contraction of output of Italy’s services sector (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9396). Phil Smith, economist at Markit and author of the Italy Services PMI^®, finds that the services sector of Italy has experienced continuing contraction during the past ten months with likely contraction of GDP in IQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9396). The Markit/ADACI Purchasing Managers’ Index^® (PMI^®), remained almost unchanged at 47.9 in Mar relative to 47.8 in Feb for an eighth consecutive month of contraction of Italy’s manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9396).Table IT provides the country data table for Italy.

Table IT, Italy, Economic Indicators

Consumer Price Index	Mar month ∆%: 0.5 Mar 12-month ∆%: 3.3 Blog 4/15/12
Producer Price Index	Feb month ∆%: 0.4 Feb 12-month ∆%: 3.2 Blog 4/1/12
GDP Growth	IVQ2011/IVQ2010 SA ∆%: minus 0.4 IVQ2011/IIIQ2011 NSA ∆%: minus 0.7 Blog 3/18/12
Labor Report	Feb 2012 Participation rate 62.8% Employment ratio 56.9% Unemployment rate 9.3% Blog 4/8/12
Industrial Production	Feb month ∆%: -0.7 12 months ∆%: minus 6.8 Blog 4/15/12
Retail Sales	Jan month ∆%: 0.7 Jan 12-month ∆%: minus 0.8 Blog 3/25/12
Business Confidence	Mfg Mar 92.1, Nov 94.1 Construction Feb 81.8, Nov 87.5 Blog 4/1/12
Consumer Confidence	Consumer Confidence Mar 96.8, Feb 94.4 Economy Mar 87.4, Feb 86.8 Blog 4/1/12
Trade Balance	Balance Feb SA -€588 million versus Jan -€379 Exports Feb month SA ∆%: 0.1; Imports Feb month ∆%: 0.7 Exports 12 months NSA ∆%: +7.3 Imports 12 months NSA ∆%: 0.8 Blog 4/22/12

Links to blog comments in Table IT:

4/15/22 http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring_15.html

4/8/12 http://cmpassocregulationblog.blogspot.com/2012/04/thirty-million-unemployed-or_08.html

4/1/12 http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-economic-growth-falling-real_01.html

3/25/12 http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk_25.html

3/18/12 http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk_18.html

Exports and imports of Italy and monthly growth rates SA are provided in Table VG-1. There have been significant fluctuations. Seasonally-adjusted exports increased 0.1 percent in Feb 2012 while imports increased 0.7 percent. The SA trade balance increased from deficit of €379 million in Jan to deficit of €379 million in Feb 2012.

Table VG-1, Italy, Exports, Imports and Trade Balance SA Million Euros and Month SA ∆%

	Exports € M	Exports Month ∆%	Imports € M	Imports Month ∆%	Balance € M
Feb 2012	31,894	0.1	32.482	0.7	-588
Jan	31,876	-2.8	32,255	-0.4	-379
Dec 2011	32,781	3.9	32,388	-1.4	393
Nov	31,552	1.6	32,862	0.8	-1,310
Oct	31,045	-2.8	32,613	-1.7	-1,568
Sep	31,929	0.1	33,182	-3.8	-1,253
Aug	31,891	0.9	34,475	2.5	-2,584
Jul	31,594	1.0	33,644	2.9	-2,050
Jun	31,268	-2.4	32,698	-5.7	-1,430
May	32,042	1.8	34,691	1.1	-2,649
Apr	31,472	1.3	34,321	-0.9	-2,849
Mar	31,056	1.8	34,617	4.2	-3,561
Feb	30,504	-1.9	33,215	-1.8	-2,711
Jan	31,092	4.9	33,834	1.2	-2,742
Dec 2010	29,641	1.5	33,429	2.9	-3,788

Source: http://www.istat.it/it/archivio/59291

Italy’s trade not seasonally adjusted is provided in Table VG-2. Values are different because the data are original and not adjusted. Exports grew 7.3 percent in the 12 months ending in Feb 2012 while imports increased 0.8 percent. Twelve-month rates of growth picked up again in Aug with 14.9 percent for exports and 12.1 percent for imports. In Sep, exports grew 10.2 percent relative to a year earlier while imports grew only 3.6 percent. In Oct, exports grew 4.5 percent while imports fell 0.4 percent. In Nov, exports grew 6.5 percent in 12 months while imports grew 0.5 percent. The actual or not seasonally adjusted trade balance fell from €2905 million in Aug to surplus of €1150 million in Dec but turned into deficit of €4346 million in Jan 2012, improving to lower deficit of €1113 million in Feb 2012. Exports fell 20.9 percent and imports 22.1 percent during the global recession in 2009.

Table VG-2, Italy, Exports, Imports and Trade Balance NSA Million Euros and 12 Month ∆%

	Exports € M	Exports 12 Months ∆%	Imports € M	Imports 12 Months ∆%	Balance € M
Feb 2012	31,758	7.3	32,871	0.8	-1,113
Jan	27,271	4.3	31,617	-2.6	-4,346
Dec 2011	31,551	6.2	34,401	-7.1	1,150
Nov	32,428	6.5	34,011	0.5	-1,583
Oct	32,131	4.5	33,186	-0.4	-1,055
Sep	32,997	10.2	34,878	3.6	-1,881
Aug	24,177	14.9	27,082	12.1	-2,905
Jul	35,264	5.8	33,743	6.1	1,521
Jun	32,605	7.9	34,309	1.6	-1,704
May	33,491	19.8	35,722	18.4	-2,231
Apr	31,045	12.5	33,869	18.0	-2,824
Mar	34,418	14.0	38,203	19.8	-3,785
Feb	29,595	17.7	32,621	16.2	-3,026
Jan	26,146	24.6	32,455	28.4	-6,309
Dec 2010	29,714	20.2	32,732	31.7	-3,018
Year
2011	375,850	11.4	400,480	9.0	-24,630
2010	337,346	15.6	367,390	23.4	-30,044
2009	291,733	-20.9	297,609	-22.1	-5,876
2008	369,016	1.2	382,050	2.3	-13,034

Source: http://www.istat.it/it/archivio/59291

Growth rates of Italy’s trade and major products are provided in Table VG-3 for the period Feb 2012 relative to Feb 2011. Growth rates are high for the total and all segments of exports. Imports of nondurable goods increased 3.8 percent and imports of energy increased 29.7 percent driven by carry trades into commodities futures. The higher rate of growth of exports of 7.3 percent relative to imports of 0.8 percent may reflect weak demand in Italy.

Table VG-3, Italy, Exports and Imports % Share of Products in Total and ∆%

	Exports Share %	Exports ∆% Feb 2012/ Feb 2011	Imports Share %	Imports ∆% Feb 2012/ Feb 2011
Consumer Goods	28.9	8.0	25.0	2.5
Durable	5.9	2.8	3.0	-6.6
Non Durable	23.0	9.4	22.0	3.8
Capital Goods	32.2	5.8	20.8	-5.2
Inter- mediate Goods	34.3	6.3	34.5	-10.8
Energy	4.7	20.7	19.7	29.7
Total ex Energy	95.3	6.7	80.3	-5.4
Total	100.0	7.3	100.0	0.8

Source: http://www.istat.it/it/archivio/59291

Table VG-4 provides Italy’s trade balance by product categories in Feb 2012 and cumulative Jan-Feb 2012. Italy’s trade balance excluding energy generated surplus of €6475 million in Feb 2012 but the energy trade balance created deficit of €11,934 million. The overall deficit was €5459 million. Italy has significant competitiveness in various economic activities in contrast with some other countries with debt difficulties.

Table VG-4, Italy, Trade Balance by Product Categories, € Millions

	Feb 2012	Cumulative Jan-Feb 2012
Consumer Goods	1,264	1,425
Durable	953	1,428
Nondurable	311	-3
Capital Goods	3,161	5,160
Intermediate Goods	264	-111
Energy	-5,802	-11,934
Total ex Energy	4,689	6,475
Total	-1,113	-5,459

Source: http://www.istat.it/it/archivio/59291

Professors Ricardo Caballero and Francesco Giavazzi (2012Jan15) find that the resolution of the European sovereign crisis with survival of the euro area would require success in the restructuring of Italy. That success would be assured with growth of the Italian economy. A critical problem is that the common euro currency prevents Italy from devaluing the exchange rate to parity or the exchange rate that would permit export growth to promote internal economic activity, which could generate fiscal revenues for primary fiscal surplus that ensure creditworthiness. Fiscal consolidation and restructuring are important but of long-term gestation. Immediate growth of the Italian economy would consolidate the resolution of the sovereign debt crisis. Caballero and Giavazzi (2012Jan15) argue that 55 percent of the exports of Italy are to countries outside the euro area such that devaluation of 15 percent would be effective in increasing export revenue. Newly available data in Table VG-5 providing Italy’s trade with regions and countries supports the argument of Caballero and Giavazzi (2012Jan15). Italy’s exports to the European Monetary Union (EMU) are only 42.7 percent of the total. Exports to the non-European Union area are growing at 11.8 percent in Feb 2012 relative to Feb 2011 while those to EMU are growing at 3.5 percent.

Table VG-5, Italy, Exports and Imports by Regions and Countries, % Share and 12-Month ∆%

Feb 2012	Exports % Share	∆% Feb 2012/ Feb 2011	Imports % Share	Imports ∆% Feb 2012/ Feb 2011
EU	56.0	4.1	53.3	-2.4
EMU 17	42.7	3.5	43.2	-1.5
France	11.6	5.4	8.3	-1.5
Germany	13.1	7.4	15.6	-4.4
Spain	5.3	-7.4	4.5	-6.0
UK	4.7	9.5	2.7	-9.1
Non EU	44.0	11.8	46.7	4.6
Europe non EU	13.3	16.7	11.1	8.6
USA	6.1	21.5	3.3	7.2
China	2.7	-4.8	7.3	-11.5
OPEC	4.7	2.9	8.6	15.9
Total	100.0	7.3	100.0	0.8

Notes: EU: European Union; EMU: European Monetary Union (euro zone)

Source: http://www.istat.it/it/archivio/59291

Table VG-6 provides Italy’s trade balance by regions and countries. Italy had trade deficit of €493 million with the 17 countries of the euro zone (EMU 17) in Feb and €535 million in Jan-Feb. Depreciation to parity could permit greater competitiveness in improving the trade surpluses of €699 million in Jan-Feb with Europe non European Union and of €1093 million with the US. There is significant rigidity in the trade deficits in Jan-Feb of €3209 million with China and €4472 million with members of the Organization of Petroleum Exporting Countries (OPEC).

Table VG-6, Italy, Trade Balance by Regions and Countries, Millions of Euro 

Regions and Countries	Trade Balance Feb 2012 Millions of Euro	Trade Balance Cumulative Jan-Feb 2012 Millions of Euro
EU	439	1,199
EMU 17	-493	-535
France	964	1,796
Germany	-470	-870
Spain	158	484
UK	664	1,301
Non EU	-1,552	-6,658
Europe non EU	601	699
USA	837	1,093
China	-1,477	-3,209
OPEC	-1,892	-4,472
Total	-1,113	-5,549

Notes: EU: European Union; EMU: European Monetary Union (euro zone)

Source: http://www.istat.it/it/archivio/59291

VH United Kingdom. The Business Activity Index of the Markit/CIPS UK Services PMI^® increased from 53.8 in Feb to 55.3 in Mar for the highest reading since IIQ2010, indicating improvement over the entire IQ2012 and robust conditions in the UK’s services sector (

http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9401). Chris Williamson, Chief Economist at Markit, finds that the combination of construction, manufacturing and services activity suggests that GDP growth in the UK in IQ2012 could be as high as 0.5 percent (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9401). The Markit/CIPS UK Manufacturing Purchasing Managers’ Index^® (PMI^®) increased to 52.1 in Mar relative to 51.5 in Feb, for a high of ten months with the average reading of IQ2012 of 51.8 being the highest since IIQ2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9367). Rob Dobson, Senior Economist at Markit and author of the Markit/CIPS Manufacturing PMI^®, finds that the data suggest growth of manufacturing output of about 0.3 percent in IQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9367).Table UK provides the country data table for the UK.

Table UK, UK Economic Indicators

CPI	Mar month ∆%: 0.3 Mar 12-month ∆%: 3.5 Blog 4/22/12
Output/Input Prices	Output Prices: Mar 12 months NSA ∆%: 3.6; excluding food, petroleum ∆%: 2.5 Input Prices: Mar 12 months NSA ∆%: 5.3 Excluding ∆%: 4.3 Blog 4/15/12
GDP Growth	IVQ2011 prior quarter ∆% minus 0.3; year earlier same quarter ∆%: 0.5 Blog 4/01/12
Industrial Production	Feb 2011/Feb 2011 NSA ∆%: Production Industries minus 2.3; Manufacturing minus 1.4 Blog 4/8/12
Retail Sales	Mar month SA ∆%: 1.8 Mar 12-month NSA ∆%: 3.5 Blog 4/22/12
Labor Market	Dec-Feb Unemployment Rate: 8.3%; Claimant Count 4.9%; Earnings Growth 1.1% Blog 4/22/12
Trade Balance	Balance Feb minus ₤3396 million Exports Feb ∆%: -2.0 Dec-Feb ∆%: 1.5 Imports Feb ∆%: 0.2 Feb-Dec ∆%: 2.3 Blog 4/15/12

Links to blog comments in Table UK:

4/15/12 http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring_15.html

4/8/12 http://cmpassocregulationblog.blogspot.com/2012/04/thirty-million-unemployed-or_08.html

4/1/25 http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-economic-growth-falling-real_01.html

Labor market statistics of the UK for the quarter Dec 2011 to Feb 2012 are provided in Table VH-1. The unemployment rate fell to 8.3 percent and the number unemployed decreased 35,000 in Dec-Feb, reaching 2.666 million. There are 883,000 unemployed over one year, up 8,000 on the quarter relative to Nov-Jan, and 423,000 unemployed over two years, down 1,000 on the quarter. The employment rate is 70.4 percent. Earnings growth including bonuses was 1.1 percent over the earlier year. The claimant count or those receiving unemployment benefits stands at 4.9 percent, unchanged on Feb but up 0.4 percentage point on the year.  There are 7.94 million people working part time in Dec-Feb. The number of employees and self-employed part-time because they could not find full-time employment increased 89,000 to 1.40 million, which is the highest since 1992 when records begin. The rate of unemployment and the number unemployed in ages from 16 to 24 years are the highest since records begin in 1992 but other data show higher numbers in the mid 1980s.

Table VH-1, UK, Labor Market Statistics

	Quarter Dec 2011-Feb 2012
Unemployment Rate	8.3% -0.1 % points on quarter and +0.5 from year earlier, highest since 8.6% in Sep-Nov 1995
Number Unemployed	(1) -35,000 on quarter +148,000 from year earlier to reach 2.666 million (2) Unemployment rate 16 to 24 years of age -0.1 % points from Jul-Nov to 22.2% of that age group; number unemployed 16 to 24 years up 22,000 from Jul-Aug to 1.033 million; unemployment rate and number for 16-24 years highest since 1992 when records begin but other data show higher unemployment ages 16 to 24 in mid 1980s (3) Unemployed 16 to 24 years excluding those in full-time education 719,000 (311,000 in full-time education),down 11,000 from Sep-Nov; unemployment rate 20.5%, down 0.2 % points from Sep-Nov
Number Unemployed > one and two years	(1) Number unemployed over one year: 883,000 Dec-Feb, up 26,000 on quarter, highest since Jul-Sep 1996 (2) Number unemployed over two years: 423,000 Dec-Feb, down 1,000 on Nov-Jan
Inactivity Rate 16-64 Years of Age (Definition: Not in employment but have not been seeking employment in the past four weeks or are unable to start work in two weeks)	(1) 23.1%, down 0.1 % points on 3-month to Nov and from year earlier           (2) Economically inactive 16-64 years down 25,000 on quarter and down 29,000 on year to 9.268 million in Dec-Feb
Employment Rate	70.4% Dec-Feb, up 0.1 % points on quarter
Number Employed	(1) Up 9,000 on quarter, up 53,000 on quarter to 29.172 million but down 57,000 on year                               (2) Number of employees down 109,000 on quarter to 24.79 million, fastest decline since 1992 (when records begin)                                      (3) Self-employed +101,000 on quarter to 4.12 million, largest number since 1992            (5) Number in other job categories +26,000 to 210,000
Earnings Growth Rates Year on Year	(1) Total +1.1% (including bonuses) over year earlier, down 0.2 Nov-Jan, regular 1.6%; private sector rose 1.2 on year earlier, public sector rose 1.1% on year earlier, lowest since 2001 when comparable records begin                                   (2) Regular private +1.9% (excluding bonuses) over year earlier; regular public 1.3% on year earlier
Full-time and Part-time	(1) Number full-time 21.23 million, down 27,000 on quarter                               (2) Number part-time 7.94 million in Dec-Feb, up 80,000 on quarter (3) Number employees and self-employed working part-time because they could not find full-time employment up 89,000 to 1.40 million, highest since 1992 when records begin
Claimant Count (Jobseeker’s Allowance, JSA)	(1) Latest estimate: 1.613 million in Mar 2012; +3,600 on Feb and +145,200 on year earlier (2) Claimant count 4.9%, unchanged on Feb but up 0.4 % point on year
Labor Productivity	(1) Output per worker rose 0.5% from IIIQ2011 to IVQ2011 (2) Unit labor costs increased 1.2% from IIIQ2011 to IVQ2011

Source: http://www.ons.gov.uk/ons/dcp171778_260957.pdf

Table VH-2 UK provides indicators of the labor force survey of the UK for Dec 2011 to Feb 2012 and earlier quarters. There has been deterioration in UK labor markets with the rate of unemployment increasing from 7.7 percent in Mar-May 2011 to 8.3 percent in Dec 2011 to Feb 2012.

Table VH-2, UK, Labor Force Survey Indicators

	LFHP	EMP	PART	UNE	RATE
Dec 2011-Feb 2012	40,188	29,172	70.4	2,650	8.3
Sep-Nov 2011	40,183	29,119	70.3	2,685	8.4
Jun-Aug  2011	40,178	29,101	70.4	2,566	8.1
Mar-May 2011	40,147	29,279	70.7	2,452	7.7
Dec-Feb 2011	40,103	29,229	70.7	2,478	7.8
Dec-Feb 2010	39,909	28,820	70.3	2,491	8.0

Notes: LFHP: Labor Force Household Population Ages 16 to 64 in thousands; EMP: Employed Ages 16 to 64 in thousands; PART: Employment as % of Population Ages 16 to 64; UNE: Unemployed in thousands ; Rate: Number Unemployed as % of Employed plus Unemployed

Source: http://www.ons.gov.uk/ons/rel/lms/labour-market-statistics/april-2012/index.html

The volume of retail sales in the UK increased 1.8 percent in Mar 2012 and rose 3.5 percent in the 12 months ending in Mar, as shown in Table VH-3. There has been significant volatility in monthly retail sales in the UK.

Table VH-3, UK, Volume of Retail Sales ∆%

	Month SA ∆%	12-Month NSA ∆%
Mar 2012	1.8	3.5
Feb	-0.8	0.7
Jan	0.4	0.8
Dec 2011	0.6	5.3
Nov	-0.2	0.5
Oct	0.7	0.7
Sep	0.8	0.5
Aug	-0.5	-1.2
Jul	0.1	-0.6
Jun	0.6	-0.5
May	-1.6	-0.7
Apr	1.4	3.5
Mar	-0.4	-1.0
Feb	-0.7	0.1
Jan	1.8	3.7
Dec 2010	-1.5	-1.1

Source: http://www.ons.gov.uk/ons/rel/rsi/retail-sales/march-2012/index.html

Retail sales in the UK struggle with relatively high inflation. Table VH-2 provides 12-month percentage changes of the implied deflator of UK retail sales. The implied deflator of all retail sales increased 2.5 percent in the 12 months ending in Mar while that of sales excluding auto fuel increased 2.1 percent. The implied deflator of auto fuel sales rose to 17.0 in Sep, which is the highest 12-month increase in 2011, but then declined to 14.8 percent in Oct, 12.6 percent in Nov and 4.9 percent in Mar. The percentage change of the implied deflator of sales of food stores at 4.4 percent in Mar is also higher than for total retail sales. Increases in fuel prices at the retail level have occurred throughout most years since 2005 with exception of the decline of 9.7 percent in 2008 when commodity carry trades were reversed in the panic of the financial crisis, as shown in Table VH-4. UK inflation is particularly sensitive to increases in commodity prices.

Table VH-4, UK, Implied Deflator of Retail Sales, 12-Month Percentage Changes, ∆%

	All Retail	Ex Auto Fuel	Food Stores	Non- Food	Auto Fuel
Mar 2012	2.5	2.1	4.4	0.4	4.9
Feb	2.4	2.0	3.9	0.3	5.3
Jan	2.3	1.8	3.5	0.6	5.3
Dec 2011	2.5	1.8	4.2	0.3	9.1
Nov	3.6	2.5	4.6	1.1	12.6
Oct	4.5	3.2	5.0	1.8	14.8
Sep	4.9	3.4	6.0	1.2	17.0
Aug	5.2	3.8	5.9	2.1	16.3
Jul	4.9	3.7	5.9	1.9	14.5
Jun	4.4	3.1	6.0	0.8	14.5
May	4.4	3.2	5.5	1.5	13.2
Apr	4.1	3.1	4.7	1.7	12.3
Mar	4.1	2.7	4.2	1.5	15.0
Feb	4.7	3.4	5.4	1.6	15.1
Jan	3.8	2.6	5.3	0.8	14.5
Dec 2010	3.1	2.4	5.1	0.6	12.4
Dec 2009	3.4	2.0	2.1	1.4	17.0
Dec 2008	-0.5	0.2	6.9	-4.4	-9.7
Dec 2007	1.7	0.4	3.9	-2.0	15.4
Dec 2006	1.0	0.8	3.3	-1.1	1.1
Dec 2005	-0.4	-1.0	1.3	-2.6	6.6

Source: http://www.ons.gov.uk/ons/rel/rsi/retail-sales/march-2012/index.html

UK monthly retail volume of sales is quite volatile, as shown in Table VH-5. Total volume of sales increased 1.8 percent in Mar. There were increases in all major categories in Mar with exception of decline of 0.3 percent of food. All categories weakened with declines in Feb.

Table VH-5, UK, Growth of Retail Sales Volume by Component Groups Month SA ∆%

	All Retail	Ex Auto Fuel	Food Stores	Non- Food	Auto Fuel
Mar 2012	1.8	1.5	-0.3	3.0	4.9
Feb	-0.8	-0.7	-0.2	-1.3	-1.9
Jan	0.4	0.6	-0.5	1.3	-1.4
Dec 2011	0.6	0.5	0.7	0.5	0.9
Nov	-0.2	-0.6	-0.7	-0.9	3.1
Oct	0.7	0.6	0.6	0.8	1.4
Sep	0.8	0.8	0.1	1.7	0.1
Aug	-0.5	-0.4	0.0	-0.9	-0.8
Jul	0.1	0.1	0.9	-0.3	0.9
Jun	0.6	0.7	0.4	0.6	-1.0
May	-1.6	-1.9	-3.9	-0.7	0.9
Apr	1.4	1.6	2.4	0.8	0.1
Mar	-0.4	-0.3	1.3	-1.6	-1.0
Feb	-0.7	-0.9	-0.8	-1.2	0.5
Jan	1.8	1.2	0.4	1.8	8.0
Dec 2010	-1.5	-1.0	-1.9	-1.1	-6.3

Source: http://www.ons.gov.uk/ons/rel/rsi/retail-sales/march-2012/index.html

Percentage growth in 12 months of retail sales volume by component groups in the UK is provided in Table VH-6. Total retail sales grew 3.5 percent in the 12 months ending in Mar with increase of 3.1 percent in sales excluding auto fuel. There has been significant improvement since Aug.

Table VH-6, UK, Growth of Retail Sales Volume by Component Groups 12-Month NSA ∆%

	All Retail	Ex Auto Fuel	Food Stores	Non- Food	Auto Fuel
Mar 2012	3.5	3.1	-0.5	5.3	7.1
Feb	0.7	0.6	0.8	-0.6	1.2
Jan	0.8	0.4	-0.4	0.0	3.9
Dec 2011	5.3	4.6	3.3	4.3	14.2
Nov	0.5	0.0	-1.1	-1.5	5.3
Oct	0.7	0.5	0.5	-0.6	2.6
Sep	0.5	0.1	-0.2	-0.9	3.3
Aug	-1.2	-1.6	-0.5	-3.8	2.2
Jul	-0.6	-0.9	-1.0	-2.3	2.2
Jun	-0.5	-0.9	-3.9	-0.3	3.0
May	-0.7	-1.1	-3.2	-0.8	2.4
Apr	3.5	3.6	4.6	1.9	3.4
Mar	-1.0	-1.5	-3.1	-1.3	3.5
Feb	0.1	-0.4	-2.6	0.0	4.9
Jan	3.7	3.2	-3.1	7.9	8.2
Dec 2010	-1.1	-0.4	-2.9	0.0	-8.6
Dec 2009	0.3	1.0	3.2	-0.5	-4.1
Dec 2008	1.3	2.6	-1.1	4.3	-9.0

Source: http://www.ons.gov.uk/ons/rel/rsi/retail-sales/march-2012/index.html

Table VH-7 provides the analysis of the UK Office for National Statistics of contributions to the 12 months percentage changes of value and volume of retail sales in the UK. (1) The volume of retail sales seasonally adjusted increased 3.3 percent in the 12 months ending in Mar. Sales of predominantly food stores with weight of 41.7 decreased 0.6 percent in the 12 months ending in Mar, contributing minus 0.3 percentage points. Mostly nonfood stores with weight of 43.2 percent increased 4.6 with contribution of 2.0 percentage points. Positive contributions to 12-month percentage changes of volume were made by non-store retailing with weight of 4.9 percent, growth of 13.4 percent and positive contribution of 0.8 percentage points and automotive fuel with weight of 10.2 percent, growth of 7.2 percent and positive contribution of 0.8 percentage points. The value of retail sales increased 5.7 percent in the 12 months ending in Mar. There were positive contributions to all general categories of retails sales: 1.6 percentage points for predominantly food stores, 2.2 percentage points for mostly nonfood stores, 0.7 percentage points for non-store retailing and 1.2 percentage points for automotive fuel.

Table VH-7, UK, Value of Retail Sales 12-month ∆% and Percentage Points Contributions by Sectors

Mar 2011	Weight % of All Retailing	Volume SA 12- Month ∆%	PP Cont. % points	Value SA 12- Month ∆%	PP Cont. % points
All Retailing	100.0	3.3		5.7
Mostly Food Stores	41.7	-0.6	-0.3	3.7	1.6
Mostly Nonfood Stores
Total	43.2	4.6	2.0	5.0	2.2
Non- specialized	7.8	4.8	0.4	3.8	0.3
Textile, Clothing & Footwear	12.2	3.7	0.5	6.9	0.9
Household Goods Stores	9.7	2.5	0.2	2.0	0.2
Other	13.5	6.8	0.9	5.9	0.8
Non-store Retailing	4.9	13.4	0.8	13.1	0.7
Automotive Fuel	10.2	7.2	0.8	12.0	1.2

Cont.: Contribution

Source: http://www.ons.gov.uk/ons/rel/rsi/retail-sales/march-2012/index.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/2011/01/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 10.9 percent by Fri Apr 20, 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	4/20/2012
Rate	1.1423	1.5914	1.192	1.3218
CNY/USD	01/03 2000	07/21 2005	7/15 2008	4/20/ 2012
Rate	8.2798	8.2765	6.8211	6.3048
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 1.3218/EUR or by 10.9 percent {[(1.3218/1.192)-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 6.3048/USD on Fri Apr 20, 2012, or by an additional 7.6 percent, for cumulative revaluation of 23.8 percent. The CNY revalued by 0.3 percent in the week of Mar 23 and by 0.1 percent in the week of Mar 30. 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. The rate of CNY 6.3105/USD fixed on Mar 9 is equivalent to depreciation of the CNY by 0.2 percent relative to the USD. The rate of CNY 6.3226/USD on Mar 16, 2012 is equivalent to depreciation of the CNY by 0.2 percent relative to the USD. In two weeks, the CNY depreciated by 0.4 percent. In the week of Mar 30, China resumed revaluation of 0.1 percent to CNY 6.2976/USD. The yuan depreciated 0.1 percent in the week of Apr 6, 2012, appreciated 0.1 percent in the week of Apr 13 and depreciated 0.1 percent in the week of Apr 20, as shown in the final row of Table VI-2. The rate of CNY 6.3048/USD on Apr 20, 2012 is equivalent to revaluation of 7.6 percent from CNY 6.8211 on Jul 15, 2008 {[(6.3048/6.8211) – 1]100} and cumulative 23.8 percent from CNY 8.2765 on Jul 21, 2005 {[(6.3048/8.2765) -1]100}. 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. An important statement by the People’s Bank of China (PBC), China’s central bank, on Apr 14, 2012, announced the widening of the daily maximum band of fluctuation of the renminbi (RMB) yuan (http://www.pbc.gov.cn/publish/english/955/2012/20120414090756030448561/20120414090756030448561_.html):

“Along with the development of China’s foreign exchange market, the pricing and risk management capabilities of market participants are gradually strengthening. In order to meet market demands, promote price discovery, enhance the flexibility of RMB exchange rate in both directions, further improve the managed floating RMB exchange rate regime based on market supply and demand with reference to a basket of currencies, the People’s Bank of China has decided to enlarge the floating band of RMB’s trading prices against the US dollar and is hereby making a public announcement as follows:

Effective from April 16, 2012 onwards, the floating band of RMB’s trading prices against the US dollar in the inter-bank spot foreign exchange market is enlarged from 0.5 percent to 1 percent, i.e., on each business day, the trading prices of the RMB against the US dollar in the inter-bank spot foreign exchange market will fluctuate within a band of ±1 percent around the central parity released on the same day by the China Foreign Exchange Trade System. The spread between the RMB/USD selling and buying prices offered by the foreign exchange-designated banks to their customers shall not exceed 2 percent of the central parity, instead of 1 percent, while other provisions in the Circular of the PBC on Relevant Issues Managing the Trading Prices in the Inter-bank Foreign Exchange Market and Quoted Exchange Rates of Exchange-Designated Banks(PBC Document No.[2010]325) remain valid.

In view of the domestic and international economic and financial conditions, the People’s Bank of China will continue to fulfill its mandates in relation to the RMB exchange rate, keeping RMB exchange rate basically stable at an adaptive and equilibrium level based on market supply and demand with reference to a basket of currencies to preserve stability of the Chinese economy and financial markets.”

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	4/20 /2012
Rate	1.1423	1.5914	1.192	1.3218
CNY/USD	01/03 2000	07/21 2005	7/15 2008	4/20/2012
Rate	8.2798	8.2765	6.8211	6.3048
Weekly Rates	3/30/2012	4/6/2012	4/13/2012	4/20/2012
CNY/USD	6.2976	6.3068	6.2982	6.3048
∆% from Earlier Week*	0.1	-0.1	0.1	-0.1

*Negative sign is depreciation, positive sign is appreciation

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

The database of the World Economic Outlook (WEO) of the IMF (http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/index.aspx) is used to contract Table VI-3 with fiscal and current account imbalances projected for 2011 and 2015. The WEO finds the need to rebalance external and domestic demand (IMF 2011WEOSep xvii):

“Progress on this front has become even more important to sustain global growth. Some emerging market economies are contributing more domestic demand than is desirable (for example, several economies in Latin America); others are not contributing enough (for example, key economies in emerging Asia). The first set needs to restrain strong domestic demand by considerably reducing structural fiscal deficits and, in some cases, by further removing monetary accommodation. The second set of economies needs significant currency appreciation alongside structural reforms to reduce high surpluses of savings over investment. Such policies would help improve their resilience to shocks originating in the advanced economies as well as their medium-term growth potential.”

The IMF (2012WEOApr, XVII) explains decreasing importance of the issue of global imbalances as follows:

“The latest developments suggest that global current account imbalances are no longer expected to widen again, following their sharp reduction during the Great Recession. This is largely because the excessive consumption growth that characterized economies that ran large external deficits prior to the crisis has been wrung out and has not been offset by stronger consumption in surplus economies. Accordingly, the global economy has experienced a loss of demand and growth in all regions relative to the boom years just before the crisis. Rebalancing activity in key surplus economies toward higher consumption, supported by more market-determined exchange rates, would help strengthen their prospects as well as those of the rest of the world.”

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	15094	-7.3	-3.1	80.3	-2.3	-3.2	88.3
Japan	5869	-9.1	2.0	126.6	-5.8	2.4	155.0
UK	2418	-5.8	-1.9	78.3	-0.8	-0.4	88.1
Euro	13115	-1.6	0.3	68.4	1.1	1.2	71.3
Ger	3577	0.7	5.7	56.1	1.4	4.3	52.4
France	2776	-2.9	-2.2	80.4	0.3	-0.8	83.8
Italy	2199	0.8	-3.2	99.6	4.4	-1.6	101.5
Can	1737	-4.1	-2.8	33.3	-1.1	-2.5	37.4
China	7298	-1.2	2.7	25.8	-0.1	3.4	14.8
Brazil	2493	3.1	-2.1	36.4	3.1	-3.4	31.9

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/2012/01/weodata/weoselgr.aspx

The International Monetary Fund (IMF) provides an international safety net for prevention and resolution of international financial crises. The IMF’s Financial Sector Assessment Program (FSAP) provides analysis of the economic and financial sectors of countries (see Pelaez and Pelaez, International Financial Architecture (2005), 101-62, Globalization and the State, Vol. II (2008), 114-23). Relating economic and financial sectors is a challenging task both for theory and measurement. The IMF (2012WEOApr) provides surveillance of the world economy with its Global Economic Outlook (WEO) (http://www.imf.org/external/pubs/ft/weo/2012/01/pdf/text.pdf), of the world financial system with its Global Financial Stability Report (GFSR) (IMF 2012GFSRApr) (http://www.imf.org/external/pubs/ft/gfsr/2012/01/pdf/text.pdf) and of fiscal affairs with the Fiscal Monitor (IMF 2012FMApr) (http://www.imf.org/external/pubs/ft/fm/2012/01/pdf/fm1201.pdf). There appears to be a moment of transition in global economic and financial variables that may prove of difficult analysis and measurement. It is useful to consider global economic and financial risks, which are analyzed in the comments of this blog.

Economic risks include the following:

1. China’s Economic Growth. China is lowering its growth target to 7.5 percent per year. Lu Hui, writing on “China lowers GDP target to achieve quality economic growth, on Mar 12, 2012, published in Beijing by Xinhuanet (http://news.xinhuanet.com/english/china/2012-03/12/c_131461668.htm), informs that Premier Jiabao wrote in a government work report that the GDP growth target will be lowered to 7.5 percent to enhance the quality and level of development of China over the long term. The quarterly growth rate of GDP in IQ2012 of 1.8 percent is equivalent to 7.4 percent per year (see subsection VC at http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring_15.html). There is also ongoing political development in China during a decennial political reorganization

2. United States Economic Growth, Labor Markets and Budget/Debt Quagmire. (i) The US economy grew at 1.6 percent in 2011 (Section I in http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-economic-growth-falling-real.html). (ii) The labor market continues fractured with 29.4 million unemployed or underemployed (see Section I http://cmpassocregulationblog.blogspot.com/2012/04/thirty-million-unemployed-or.html). There are over 10 million fewer full-time jobs and hiring has collapsed (see Section II at http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring.html and earlier http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk.html). (iii) There is a difficult climb from the record deficit of 9.9 percent in 2009 and cumulative deficit of $5,082 in four consecutive years of deficits exceeding one trillion dollars from 2009 to 2012 (http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or.html). There is no subsequent jump of debt in US peacetime history as the one from 40.5 percent of GDP in 2008 to 62.8 percent of GDP in 2011 and projected by the Congressional Budget Office (CBO 2012JanBEO) at 67.7 percent in 2012. The CBO (2012JanBEO) must use current law without any changes in the baseline scenario but also calculates another alternative scenario with different assumptions. In the alternative scenario, the debt/GDP ratio rises to 94.2 percent by 2022. The US is facing an unsustainable debt/GDP path. Feldstein (2012Mar19) finds that the most troubling uncertainty in the US is the programmed tax increases projected by the CBO (2012JanBEO) under current law with federal government revenue increasing from $2.4 trillion in fiscal year 2012 to $2.9 trillion in fiscal year 2013. The increase of $512 billion of federal revenue would be about 2.9 percent of GDP, raising the share of federal revenue in GDP from 15.8 percent in fiscal year 2012 to 18.7 percent of GDP in fiscal year 2013. In the analysis of Feldstein (2012Mar19), increasing revenue would originate in higher personal tax rates, payroll tax contributions and taxes on dividends, capital gains and corporate income tax. The share of federal revenue in GDP would increase to 19.8 percent in 2014, remaining above 20 percent during the rest of the decade. Feldstein (2012Mar19) finds that such a shock of sustained tax increases would risk another recession in 2013, requiring preventive legislation to smooth tax increases

3. Economic Growth and Labor Markets in Advanced Economies. Advanced economies are growing slowly. Japan’s GDP fell 0.6 percent in IVQ2011 relative to a year earlier. The euro zone’s GDP fell 0.3 percent in IVQ2011; Germany’s GDP fell 0.2 percent in IVQ2011; and the UK’s GDP fell 0.3 percent in IVQ2011. There is still high unemployment in advanced economies

4. World Inflation Waves. Inflation continues in repetitive waves globally (see Section I Inflation Waves at http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk.html)

A list of financial uncertainties includes:

1. Euro Area Survival Risk. The resilience of the euro to fiscal and financial doubts on larger member countries is still an unknown risk. Adjustment programs consist of immediate adoption of economic reforms that would increase future growth permitting fiscal consolidation, which would reduce risk spreads on sovereign debt. Fiscal consolidation is challenging in an environment of weak economic growth as analyzed by Blanchard (2011WEOSep) and consolidation can restrict growth as analyzed by Blanchard (2012WEOApr). Adjustment of countries such as Italy requires depreciation of the currency to parity, as proposed by Caballero and Giavazzi (2012Jan15), but it is not workable within the common currency and zero interest rates in the US. Bailouts of euro area member countries with temporary liquidity challenges cannot be permanently provided by stronger members at the risk of impairing their own sovereign debt credibility

2. Foreign Exchange Wars. Exchange rate struggles continue as zero interest rates in advanced economies induce devaluation. After deep global recession, regulation, trade and devaluation wars were to be expected (Pelaez and Pelaez, Government Intervention in Globalization: Regulation, Trade and Devaluation Wars (2008c), 181): “There are significant grounds for concern on the basis of this experience. International economic cooperation and the international financial framework can collapse during extreme events. It is unlikely that there will be a repetition of the disaster of the Great Depression. However, a milder contraction can trigger regulatory, trade and exchange wars”

3. Valuation of Risk Financial Assets. Valuations of risk financial assets have reached extremely high levels in markets with lower volumes. For example, the DJIA has increased 34.5 percent since the trough of the sovereign debt crisis in Europe on Jul 2, 2010, and the S&P 500 has gained 34.8 percent. It is challenging in theory and practice to assess when variables have peaked but sustained valuations to very high levels could be followed by contractions of valuations. Jonathan Cheng, writing on “Stocks add 66 points, post first-quarter record,” published on Mar 30, 2012, in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052702303816504577313123753822852.html?mod=WSJ_Markets_LEFTTopStories&mg=reno64-sec-wsj), finds that the DJIA rose 8.1 percent in IQ2012, which is the highest since 1998, while the S&P 500 gained 12 percent

4. Duration Trap of the Zero Bound. The yield of the US 10-year Treasury rose from 2.031 percent on Mar 9, 2012, to 2.294 percent on Mar 16, 2012. Considering a 10-year Treasury with coupon of 2.625 percent and maturity in exactly 10 years, the price would fall from 105.3512 corresponding to yield of 2.031 percent to 102.9428 corresponding to yield of 2.294 percent, for loss in a week of 2.3 percent but far more in a position with leverage of 10:1. Min Zeng, writing on “Treasurys fall, ending brutal quarter,” published on Mar 30, 2012, in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052702303816504577313400029412564.html?mod=WSJ_hps_sections_markets), informs that Treasury bonds maturing in more than 20 years lost 5.52 percent in the first quarter of 2012

5. Credibility and Commitment of Central Bank Policy. There is a credibility issue of the commitment of monetary policy. The Federal Open Market Committee (FOMC) advised on its Mar 13, 2012 statement that: “To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to ¼ percent and currently anticipates that economic conditions—including low rates of resource utilization and a subdued outlook for inflation over the medium run—are likely to warrant exceptionally low levels of the federal funds rate at least through late 2014” (http://www.federalreserve.gov/newsevents/press/monetary/20120313a.htm). At its meeting on Jan 25, the FOMC began to provide to the public the specific forecasts of interest rates and other economic variables by FOMC members (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120125.pdf). These forecasts are analyzed in Section IV Global Inflation. Thomas J. Sargent and William L. Silber, writing on “The challenges of the Fed’s bid for transparency,” on Mar 20, published in the Financial Times (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120125.pdf

), analyze the costs and benefits of transparency by the Fed. In the analysis of Sargent and Silber (2012Mar20), benefits of transparency by the Fed will exceed costs if the Fed is successful in conveying to the public what policies would be implemented and how forcibly in the presence of unforeseen economic events. History has been unkind to policy commitments. The risk in this case is if the Fed would postpone adjustment because of political pressures as has occurred in the past or because of errors of evaluation and forecasting of economic and financial conditions. Both political pressures and errors abounded in the unhappy stagflation of the 1970s also known as the US Great Inflation (see 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 and Appendix I The Great Inflation; see Taylor 1993, 1997, 1998LB, 1999, 2012FP, 2012Mar27, 2012Mar28, 2012JMCB). The challenge of the Fed, in the view of Sargent and Silber 2012Mar20), is to convey to the public the need to deviate from the commitment to interest rates of zero to ¼ percent because conditions have changed instead of unwarranted inaction or policy changes. Errors have abounded such as a critical cause of the global recession pointed by Sargent and Silber (2012Mar20): “While no president is known to have explicitly pressurized Mr. Bernanke’s predecessor, Alan Greenspan, he found it easy to maintain low interest rates for too long, fuelling the credit boom and housing bubble that led to the financial crisis in 2008.” Sargent and Silber (2012Mar20) also find need of commitment of fiscal authorities to consolidation needed to attain sustainable path of debt.

The analysis by Kydland and Prescott (1977, 447-80, equation 5) uses the “expectation augmented” Phillips curve with the natural rate of unemployment of Friedman (1968) and Phelps (1968), which in the notation of Barro and Gordon (1983, 592, equation 1) is:

U_t = Uⁿ_t – α(π_t – π^e) α > 0 (1)

Where U_t is the rate of unemployment at current time t, Uⁿ_t is the natural rate of unemployment, π_t is the current rate of inflation and π^e is the expected rate of inflation by economic agents based on current information. Equation (1) expresses unemployment net of the natural rate of unemployment as a decreasing function of the gap between actual and expected rates of inflation. The system is completed by a social objective function, W, depending on inflation, π, and unemployment, U:

W = W(π_t, U_t) (2)

The policymaker maximizes the preferences of the public, (2), subject to the constraint of the tradeoff of inflation and unemployment, (1). The total differential of W set equal to zero provides an indifference map in the Cartesian plane with ordered pairs (π_t, U_t - Uⁿ) such that the consistent equilibrium is found at the tangency of an indifference curve and the Phillips curve in (1). The indifference curves are concave to the origin. The consistent policy is not optimal. Policymakers without discretionary powers following a rule of price stability would attain equilibrium with unemployment not higher than with the consistent policy. The optimal outcome is obtained by the rule of price stability, or zero inflation, and no more unemployment than under the consistent policy with nonzero inflation and the same unemployment. Taylor (1998LB) attributes the sustained boom of the US economy after the stagflation of the 1970s to following a monetary policy rule instead of discretion (see Taylor 1993, 1999).

6. Carry Trades. Commodity prices driven by zero interest rates have resumed their increasing path. Some analytical aspects of the carry trade are instructive (Pelaez and Pelaez, Globalization and the State, Vol. I (2008a), 101-5, Pelaez and Pelaez, Globalization and the State, Vol. II (2008b), 202-4), Government Intervention in Globalization: Regulation, Trade and Devaluation Wars (2008c), 70-4). Consider the following symbols: R_t is the exchange rate of a country receiving carry trade denoted in units of domestic currency per dollars at time t of initiation of the carry trade; R_t+τ is the exchange of the country receiving carry trade denoted in units of domestic currency per dollars at time t+τ when the carry trade is unwound; i_f is the domestic interest rate of the high-yielding country where investment will be made; i_usd is the interest rate on short-term dollar debt assumed to be 0.5 percent per year; i_f >i_usd, which expresses the fact that the interest rate on the foreign country is much higher than that in short-term USD (US dollars); S_t is the dollar value of the investment principal; and π is the dollar profit from the carry trade. The investment of the principal S_t in the local currency debt of the foreign country provides a profit of:

π = (1 + i_f)(R_tS_t)(1/R_t+τ) – (1 + i_usd)S_t (3)

The profit from the carry trade, π, is nonnegative when:

(1 + i_f)/ (1 + i_usd) ≥ R_t+τ/R_t (4)

In words, the difference in interest rate differentials, left-hand side of inequality (4), must exceed the percentage devaluation of the currency of the host country of the carry trade, right hand side of inequality (4). The carry trade must earn enough in the host-country interest rate to compensate for depreciation of the host-country at the time of return to USD. A simple example explains the vulnerability of the carry trade in fixed-income. Let i_f be 0.10 (10 percent), i_usd 0.005 (0.5 percent), S_t USD100 and R_t CUR 1.00/USD. Adopt the fixed-income rule of months of 30 days and years of 360 days. Consider a strategy of investing USD 100 at 10 percent for 30 days with borrowing of USD 100 at 0.5 percent for 30 days. At time t, the USD 100 are converted into CUR 100 and invested at [(30/360)10] equal to 0.833 percent for thirty days. At the end of the 30 days, assume that the rate R_t+30 is still CUR 1/USD such that the return amount from the carry trade is USD 0.833. There is still a loan to be paid [(0.005)(30/360)USD100] equal to USD 0.042. The investor receives the net amount of USD 0.833 minus USD 0.042 or US 0.791. The rate of return on the investment of the USD 100 is 0.791 percent, which is equivalent to the annual rate of return of 9.49 percent {(0.791)(360/30)}. This is incomparably better than earning 0.5 percent. There are alternatives of hedging by buying forward the exchange for conversion back into USD.

Research by the Federal Reserve Bank of St. Louis finds that the dollar declined on average by 6.56 percent in the events of quantitative easing, ranging from depreciation of 10.8 percent relative to the Japanese yen to 3.6 percent relative to the pound sterling (http://research.stlouisfed.org/wp/2010/2010-018.pdf). A critical assumption of Rudiger Dornbusch (1976) in his celebrated analysis of overshooting (Rogoff 2002MF http://www.imf.org/external/np/speeches/2001/kr/112901.pdf) is “that exchange rates and asset markets adjust fast relative to goods markets” (Rudiger Dornbusch 1976, 1162). The market response of a monetary expansion is “to induce an immediate depreciation in the exchange rate and accounts therefore for fluctuations in the exchange rate and the terms of trade. During the adjustment process, rising prices may be accompanied by an appreciating exchange rate so that the trend behavior of exchange rates stands potentially in strong contrast with the cyclical behavior of exchange rates and prices” (Dornbusch 1976, 1162). The volatility of the exchange rate “is needed to temporarily equilibrate the system in response to monetary shocks, because underlying national prices adjust so slowly” (Rogoff 2002MF http://www.imf.org/external/np/speeches/2001/kr/112901.pdf 3). The exchange rate “is identified as a critical channel for the transmission of monetary policy to aggregate demand for domestic output” (Dornbusch 1976, 1162).

In a world of exchange wars, depreciation of the host-country currency can move even faster such that the profits from the carry trade may become major losses. Depreciation is the percentage change in instants against which the interest rate of a day is in the example [(10)(1/360)] or 0.03 percent. Exchange rates move much faster in the real world as in the overshooting model of Dornbusch (1976). Profits in carry trades have greater risks but equally greater returns when the short position in zero interest rates, or borrowing, and on the dollar, are matched with truly agile financial risk assets such as commodities and equities. A simplified analysis could consider the portfolio balance equations A_ij = f(r, x) where A_ij is the demand for i = 1,2,∙∙∙n assets from j = 1,2, ∙∙∙m sectors, r the 1xn vector of rates of return, r_i, of n assets and x a vector of other relevant variables. Tobin (1969) and Brunner and Meltzer (1973) assume imperfect substitution among capital assets such that the own first derivatives of A_ij are positive, demand for an asset increases if its rate of return (interest plus capital gains) is higher, and cross first derivatives are negative, demand for an asset decreases if the rate of return of alternative assets increases. Theoretical purity would require the estimation of the complete model with all rates of return. In practice, it may be impossible to observe all rates of return such as in the critique of Roll (1976). Policy proposals and measures by the Fed have been focused on the likely impact of withdrawals of stocks of securities in specific segments, that is, of effects of one or several specific rates of return among the n possible rates. In fact, the central bank cannot influence investors and arbitrageurs to allocate funds to assets of desired categories such as asset-backed securities that would lower the costs of borrowing for mortgages and consumer loans. Floods of cheap money may simply induce carry trades in arbitrage of opportunities in fast moving assets such as currencies, commodities and equities instead of much lower returns in fixed income securities (see 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).

It is in this context of economic and financial uncertainties that decisions on portfolio choices of risk financial assets must be made. 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 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 now complicated by political developments, 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 or the “sharp shifts in risk appetite” of Blanchard (2012WEOApr, XIII). 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 4/20/12,” 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. There has been rollercoaster fluctuation in risk aversion and financial risk asset valuations: 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 weeks of Mar 2 and Mar 9. All financial values have fluctuated with events such as the surge in the week of Mar 16 on favorable news of Greece’s bailout even with new risk issues arising in the week of Mar 23 but renewed risk appetite in the week of Mar 30 because of the end of the quarter and the increase in the firewall of support of sovereign debts in the euro area. New risks developed in the week of Apr 6 with increase of yields of sovereign bonds of Spain and Italy, doubts on Fed policy and weak employment report. Asia and financial entities are experiencing their own risk environments. Financial markets were under stress in the week of Apr 13 because of the large exposure of Spanish banks to lending by the European Central Bank and the annual equivalent growth rate of China’s GDP of 7.4 percent in IQ2012. There was strength again in the week of Apr 20 because of the enhanced IMF firewall and Spain placement of debt. The highest valuations in column “∆% Trough to 4/20/12” are by US equities indexes: DJIA 34.5 percent and S&P 500 34.8 percent, driven by stronger earnings and economy in the US than in other advanced economies. The DJIA reached in intraday trading 13,331.77 on Mar 16, 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 4/20/12” had double digit gains relative to the trough around Jul 2, 2010 but now only three valuation show increase of less than 10 percent: China’s Shanghai Composite is 1.0 percent above the trough; STOXX 50 of Europe is 5.6 percent above the trough; and Japan’s Nikkei Average is 8.4 percent above the trough. DJ UBS Commodities is 11.5 percent above the trough; Dow Global is 13.2 percent above the trough; and DAX is 19.0 percent above the trough. Japan’s Nikkei Average is 8.4 percent above the trough on Aug 31, 2010 and 16.1 percent below the peak on Apr 5, 2010. The Nikkei Average closed at 9561.36 on Fri Apr 20, 2012 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata), which is 6.8 percent lower than 10,254.43 on Mar 11, 2011, on the date of the Great East Japan Earthquake/tsunami. Global risk aversion erased the earlier gains of the Nikkei. The dollar depreciated by 10.9 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 4/20/12” in Table VI-4 shows increases of most valuations of risk financial assets in the week of Apr 20, 2012, with exception of decline of 0.8 percent by Japan’s Nikkei Average and decline of 0.6 percent for DJ Asia Pacific. There are still high uncertainties on European sovereign risks, US and world growth slowdown and China’s growth tradeoffs. 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 4/20/12” that provides the percentage change from the peak in Apr 2010 before the sovereign risk event to Apr 6, 2012. Most risk financial assets had gained not only relative to the trough as shown in column “∆% Trough to 4/20/12” but also relative to the peak in column “∆% Peak to 4/20/12.” There are now only three equity indexes above the peak in Table VI-4: DJIA 16.3 percent, S&P 500 13.2 percent and Dax 6.6 percent. There are several indexes below the peak: NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) by 13.1 percent, Nikkei Average by 16.1 percent, Shanghai Composite by 23.9 percent, STOXX 50 by 10.6 percent and Dow Global by 7.7 percent. DJ UBS Commodities Index is now 4.7 percent below 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. An intriguing issue is the difference in performance of valuations of risk financial assets and economic growth and employment. Paul A. Samuelson (http://www.nobelprize.org/nobel_prizes/economics/laureates/1970/samuelson-bio.html) popularized the view of the troubled relation between stock markets and economic activity in an often-quoted phrase “the stock market has forecast nine of the last five recessions.” In the presence of zero interest rates forever, valuations of risk financial assets are likely to differ from the performance of the overall economy.

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

	Peak	Trough	∆% to Trough	∆% Peak to 4/20 /12	∆% Week 4/20/ 12	∆% Trough to 4/20 12
DJIA	4/26/ 10	7/2/10	-13.6	16.3	1.4	34.5
S&P 500	4/23/ 10	7/20/ 10	-16.0	13.2	0.6	34.8
NYSE Finance	4/15/ 10	7/2/10	-20.3	-13.1	1.0	9.0
Dow Global	4/15/ 10	7/2/10	-18.4	-7.7	0.9	13.2
Asia Pacific	4/15/ 10	7/2/10	-12.5	-2.9	-0.6	10.9
Japan Nikkei Aver.	4/05/ 10	8/31/ 10	-22.5	-16.1	-0.8	8.4
China Shang.	4/15/ 10	7/02 /10	-24.7	-23.9	2.0	1.0
STOXX 50	4/15/10	7/2/10	-15.3	-10.6	2.4	5.6
DAX	4/26/ 10	5/25/ 10	-10.5	6.6	2.5	19.0
Dollar Euro	11/25 2009	6/7 2010	21.2	12.6	-1.1	-10.9
DJ UBS Comm.	1/6/ 10	7/2/10	-14.5	-4.7	-0.9	11.5
10-Year T Note	4/5/ 10	4/6/10	3.986	1.959

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 Apr 20, 2012, shows that the S&P 500 is now 13.7 percent above the Apr 26, 2010 level and the DJIA is 16.3 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 2	0.0	15.8	0.3	13.0
Mar 9	-0.4	15.3	0.1	13.1
Mar 16	2.4	18.1	2.4	15.9
Mar 23	-1.1	16.7	-0.5	15.3
Mar 30	1.0	17.9	0.8	16.2
Apr 6	-1.1	16.6	-0.7	15.3
Apr 13	-1.6	14.7	-2.0	13.1
Apr 20	1.4	16.3	0.6	13.7

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 7.9 percent to ZAR 7.8114/USD on Apr 20, 2012, which is still 32.5 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 7.4 percent stronger at SGD 1.2484/USD on Apr 20 relative to the trough of depreciation but still stronger by 19.6 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 depreciation of 7.9 percent relative to the trough to BRL 1.8736/USD on Apr 20, 2012 but still stronger by 22.9 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 by 75 basis points for the fifth consecutive meeting of its monetary policy committee, COPOM (http://www.bcb.gov.br/textonoticia.asp?codigo=3440&IDPAI=NEWS):

“Copom reduces the Selic rate to 9.00 percent

18/04/2012 8:06:00 PM

Brasília - Continuing the adjustment process of monetary conditions, the Copom unanimously decided to reduce the Selic rate to 9.00 percent.”

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, subsequently broadened to five years, 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	Apr 20, 2012	∆T Apr 20, 2012	∆P Apr 20, 2012
EUR USD	7/15 2008	6/7 2010		4/20 2012
Rate	1.59	1.192		1.3218
∆%			-33.4		9.8	-20.3
JPY USD	8/18 2008	9/15 2010		4/20 2012
Rate	110.19	83.07		81.55
∆%			24.6		1.8	26.0
CHF USD	11/21 2008	12/8 2009		4/20 2012
Rate	1.225	1.025		0.9091
∆%			16.3		11.3	25.8
USD GBP	7/15 2008	1/2/ 2009		4/20 2012
Rate	2.006	1.388		1.6123
∆%			-44.5		13.9	-24.4
USD AUD	7/15 2008	10/27 2008		4/20 2012
Rate	1.0215	1.6639		1.038
∆%			-62.9		42.1	5.7
ZAR USD	10/22 2008	8/15 2010		4/20 2012
Rate	11.578	7.238		7.8114
∆%			37.5		-7.9	32.5
SGD USD	3/3 2009	8/9 2010		4/20 2012
Rate	1.553	1.348		1.2484
∆%			13.2		7.4	19.6
HKD USD	8/15 2008	12/14 2009		4/20 2012
Rate	7.813	7.752		7.7607
∆%			0.8		0.1	0.7
BRL USD	12/5 2008	4/30 2010		4/20 2012
Rate	2.43	1.737		1.8736
∆%			28.5		-7.9	22.9
CZK USD	2/13 2009	8/6 2010		4/20 2012
Rate	22.19	18.693		18.868
∆%			15.7		0.9	14.9
SEK USD	3/4 2009	8/9 2010		4/20 2012
Rate	9.313	7.108		6.6873
∆%			23.7		5.9	28.2
CNY USD	7/20 2005	7/15 2008		4/20 2012
Rate	8.2765	6.8211		6.3048
∆%			17.6		7.6	23.8

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

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

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

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

Chart VI-1 of the Board of Governors of the Federal Reserve System provides indexes of the dollar from 2010 to 2012. 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=%7bH10/H10/RXI$US_N.B.EU%7d

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 1.959 percent at the close of market on Fri Apr 20, 2012 would be equivalent to price of 106.0216 in a hypothetical bond maturing in 10 years with coupon of 2.625 percent for price gain of 4.7 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 price loss between Mar 9, 2012 and Mar 16, 2012 is 2.3 percent but much higher when using common leverage of 10:1. 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 Apr 18, 2012, the line “Reserve Bank credit” in the Fed balance sheet stood at $2858 billion, or $2.9 trillion, with portfolio of long-term securities of $2594 billion, or $2.6 trillion, consisting of $1577 billion Treasury nominal notes and bonds, $67 billion of notes and bonds inflation-indexed, $95 billion Federal agency debt securities and $855 billion mortgage-backed securities; reserve balances deposited with Federal Reserve Banks reached $1513 billion or $1.5 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
03/09/12	2.031	105.3512	4.0
03/16/12	2.294	102.9428	1.7
03/23/12	2.234	103.4867	2.2
03/30/12	2.214	103.6687	2.4
04/06/12	2.058	105.1010	3.8
04/13/12	1.987	105.7603	4.4
04/20/12	1.959	106.0216	4.7

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 0.2 percent to 14,503 thousand barrels per day on average in the four weeks ending on Apr 13, 2012 from 14,480 thousand barrels per day in the four weeks ending on Apr 15, 2012, as shown in Table VII-1. The rate of capacity utilization in refineries continues at a relatively high level of 84.7 percent on Apr 13, 2012, which is slightly higher than 83.1 percent on Apr 15, 2011 and slightly higher than 84.0 percent on Apr 6, 2012. Imports of crude oil increased 1.4 percent from 8,909 thousand barrels per day on average in the four weeks ending on Mar 6 to 9,033 thousand barrels per day in the week of Apr 13. The Energy Information Administration (EIA) informs that “US crude oil imports averaged 8.7 million barrels per day last week, up by 196 barrels per day from the previous week [Apr 6]” (http://www.eia.gov/pub/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/current/pdf/highlights.pdf). Slight decrease in utilization in refineries with increasing imports at the margin in the prior week resulted in increase of commercial crude oil stocks by 3.8 million barrels from 365.2 million barrels on Apr 6 to 369.0 million barrels on Apr 13. Motor gasoline production increased 0.4 percent to 8,889 thousand barrels per day in the week of Apr 13 from 8,851 thousand barrels per day on average in the week of Apr 6. Gasoline stocks decreased 3.6 million barrels and stocks of fuel oil decreased 2.9 million barrels. Supply of gasoline fell from 8,991 thousand barrels per day on Apr 15, 2011, to 8,737 thousand barrels per day on Apr 13, 2012, or by 2.8 percent, while fuel oil supply fell 0.5 percent. Part of the fall in consumption of gasoline is due to higher prices and part to the growth recession. WTI crude oil price fell 5.8 percent from $109.17/barrel on Apr 15, 2011, to $102.84/barrel on Apr 20, 2012. Gasoline prices rose 2.0 percent from Apr 18, 2011 to Apr 16, 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	4/13/12	4/6/12	4/15/11
Crude Oil Refineries Input	14,503 Week       ∆%: +0.2	14,480	14,206
Refinery Capacity Utilization %	84.7	84.0	83.1
Motor Gasoline Production	8,889 Week      ∆%: +0.4	8,851	8,911
Distillate Fuel Oil Production	4,324 Week     ∆%: +1.0	4,281	4,189
Crude Oil Imports	9,033 Week        ∆%: +1.4	8,909	8,642
Motor Gasoline Supplied	8,737 ∆% 2012/2011= -2.8%	8,638	8,991
Distillate Fuel Oil Supplied	3,785 ∆% 2012/2011 = -0.5%	3,586	3,805
	4/13/12	4/6/12	4/15/11
Crude Oil Stocks Million B	369.0     ∆= +3.8 MB	365.2	357.0
Motor Gasoline Million B	214.0    ∆= -3.6 MB	217.6	208.1
Distillate Fuel Oil Million B	129.0 ∆= -2.9 MB	131.9	148.3
WTI Crude Oil Price $/B	102.84 ∆% 2012/2011 -5.8	NA	109.17
	4/16/12	4/9/12	4/18/11
Regular Motor Gasoline $/G	3.922 ∆% 2012/2011 +2.0	3.939	3.844

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 followed by several sharp weekly increases.

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 crude oil stocks since Jun 2010. There is a recent spike in crude oil stocks.

Chart VII-2, US, Distillate Fuel 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 IIC-13, 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 decreased 2,000 from 388,000 on Mar 7 to 386,000 on Apr 14. Claims not adjusted for seasonality decreased 22,916 from 390,466 on Apr 7 to 367,550 on Apr 14. Strong seasonality is preventing clear analysis of labor markets.

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

	SA	NSA	4-week MA SA
Apr 14, 12	386,000	367,550	374,750
Apr 7, 12	388,000	390,466	369,250
Change	-2,000	-22,916	+5,500
Mar 31, 12	362,000	315,623	363,000
Prior Year	414,000	381,834	407,750

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

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

Table 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 610,522 on Apr 11, 2009 to 381,834 on Apr 9, 2011, and now to 367,550 on Apr 14, 2012. There is strong indication of significant decline in the level of layoffs in the US. Hiring has not recovered (see Section II Hiring Collapse in http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk.html).

Table VII-3, US, Unemployment Insurance Weekly Claims

	Not Seasonally Adjusted Claims	Seasonally Adjusted Claims
Apr 7, 2001	397,282	398,000
Apr 6, 2002	423,384	445,000
Apr 5, 2003	394,160	417,000
Apr 3, 2004	304,249	335,000
Apr 9, 2005	339,709	323,000
Apr 8, 2006	314,696	299,000
Apr 7, 2007	328,266	332,000
Apr 5, 2008	357,209	356,000
Apr 11, 2009	610,522	603,000
Apr 10, 2010	514,136	477,000
Apr 16, 2011	381,834	414,000
Apr 14, 2012	367,550	386,000

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 Jan to Mar 2012, CPI inflation for all items seasonally adjusted was 3.7 percent in annual equivalent, that is, compounding inflation in Jan-Mar 2012 and assuming it would be repeated for a full year. In the 12 months ending in Mar, CPI inflation of all items not seasonally adjusted was 2.7 percent. Inflation in Mar 2012 not seasonally adjusted was 0.3 percent relative to Feb 2011 (http://www.bls.gov/cpi/), which is equivalent to 3.7 percent per year. 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, 0.12 percent for six months, 0.16 percent for 12 months, 0.27 percent for two years, 0.39 percent for three years, 0.84 percent for five years, 1.35 percent for seven years, 1.96 percent for ten years and 3.12 percent for 30 years. The Irving Fisher definition of real interest rates is approximately the difference between nominal interest rates, which are those estimated by Bloomberg, and the rate of inflation expected in the term of the security, which could behave as in Table 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 Mar 2012/Mar 2011 NSA	∆% Annual Equivalent Jan-Mar 2012 SA
CPI All Items	2.7	3.7
CPI ex Food and Energy	2.3	2.0

Source: http://www.bls.gov/cpi/

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 and now 2012 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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© Carlos M. Pelaez, 2010, 2011, 2012

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