Mediocre Growth with High Unemployment and Underemployment, United States Housing, Global Financial and Economic Risk and World Economic Slowdown: Part II

 

Mediocre Growth with High Unemployment and Underemployment, United States Housing, Global Financial and Economic Risk and World Economic Slowdown

Carlos M. Pelaez

© Carlos M. Pelaez, 2010, 2011, 2012

Executive Summary

I Mediocre Economic Growth

II United States Housing

IIA United States New House Sales

IIB United States House Prices

IIC Factors of US Housing Collapse

III World Financial Turbulence

IIIA Financial Risks

IIIB Appendix on Safe Haven Currencies

IIIC Appendix on Fiscal Compact

IIID Appendix on European Central Bank Large Scale Lender of Last Resort

IIIE Appendix Euro Zone Survival Risk

IIIF Appendix on Sovereign Bond Valuation

IV Global Inflation

V World Economic Slowdown

VA United States

VB Japan

VC China

VD Euro Area

VE Germany

VF France

VG Italy

VH United Kingdom

VI Valuation of Risk Financial Assets

VII Economic Indicators

VIII Interest Rates

IX Conclusion

References

Appendix I The Great Inflation

 

V World Economic Slowdown. 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

Continuing high rates of unemployment in advanced economies constitute another characteristic of the database of the WEO (http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/index.aspx). Table V-2 is constructed with the WEO database to provide rates of unemployment from 2011 to 2015 for major countries and regions. In fact, unemployment rates for 2011 in Table ESV-2 are high for all countries: unusually high for countries with high rates most of the time and unusually high for countries with low rates most of the time. The rates of unemployment are particularly high for the countries with sovereign debt difficulties in Europe: 12.7 percent for Portugal (POT), 14.4 percent for Ireland, 17.3 percent for Greece, 21.6 percent for Spain and 8.4 percent for Italy, which is lower but still high. The G7 rate of unemployment is 7.7 percent. Unemployment rates are not likely to decrease substantially if slow growth persists in advanced economies.

Table V-2, IMF World Economic Outlook Database Projections of Unemployment Rate as Percent of Labor Force

	% Labor Force 2011	% Labor Force 2012	% Labor Force 2013	% Labor Force 2014	% Labor Force 2015
World	NA	NA	NA	NA	NA
G7	7.7	7.4	7.3	7.0	6.7
Canada	7.5	7.4	7.3	7.1	6.9
France	9.7	9.9	10.1	9.8	9.4
DE	6.0	5.6	5.5	5.3	5.3
Italy	8.4	9.5	9.7	9.8	9.5
Japan	4.5	4.5	4.4	4.3	4.2
UK	8.0	8.3	8.2	7.8	7.4
US	8.9	8.2	7.9	7.5	6.9
Euro Area	10.1	10.9	10.8	10.5	10.1
DE	6.0	5.6	5.5	5.3	5.3
France	9.7	9.9	10.1	9.8	9.4
Italy	8.4	9.5	9.7	9.8	9.5
POT	12.7	14.3	13.9	13.2	12.4
Ireland	14.4	14.5	13.8	12.9	12.0
Greece	17.3	19.4	19.4	18.2	16.8
Spain	21.6	24.2	23.9	22.8	21.9
EMDE	NA	NA	NA	NA	NA
Brazil	6.0	6.0	6.5	7.0	7.0
Russia	7.5	6.5	6.0	6.0	6.0
India	NA	NA	NA	NA	NA
China	4.1	4.0	4.0	4.0	4.0

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

Source: IMF World Economic Outlook databank http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/weoselgr.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 IQ2012 SAAR ∆%: 2.2 IQ2012/IQ2011 ∆%: 2.1 Blog 4/29/12
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	IQ2012 SA ∆%: 0.4 Mar 12 months ∆%: 1.9 Blog 4/29/12
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 3/11/2012
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	Mar New Orders SA ∆%: minus 4.2; ex transport ∆%: minus 1.1 Jan-Mar 12/Jan-Mar 11 NSA New Orders ∆%: 9.1; ex transport ∆% : 8.2 Blog 4/29/12
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 4/15/12
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	Feb 2012/Feb 2011 ∆% NSA: 10 Cities minus 3.6; 20 Cities: minus 3.5 ∆% Feb SA: 10 Cities 0.1 ; 20 Cities: 0.2 Blog 4/29/12
FHFA House Price Index Purchases Only	Feb SA ∆% 0.3; 12 month ∆%: 0.4 Blog 4/29/12
New House Sales	Mar 2012 month SAAR ∆%: minus 7.1 Jan-Mar 2012/Jan-Mar 2011 NSA ∆%: 16.9 Blog 4/29/12
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:

04/22/12 http://cmpassocregulationblog.blogspot.com/2012/04/imf-view-of-world-economy-and-finance_22.html

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

3/18/12 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

The Bureau of Labor Statistics (BLS) of the US Department of Labor provides the quarterly employment cost index (ECI). The ECI is highly useful in several ways including: (1) how costs of employees may affect hiring decisions and thus the overall economy; (2) impact of employment costs on inflation and thus monetary policy; and (3) relation of employee costs to inflation on issues such as welfare of the working population and their ability to consume that could affect economic growth. The BLS estimates total compensation composed of wages and salaries, which are about 70 percent of total compensation, and benefits, accounting for the remaining 30 percent (http://www.bls.gov/news.release/pdf/eci.pdf 1). There is vast theoretical and empirical literature on how benefits interact with wage determination. The ECI is considered initially with current data in Table VA-1 and subsequently with charts of the BLS on evolution over the past decade. The BLS provides data for the entire civilian population, the private sector and state/local government. The data are available quarterly and for the 12 months of the ending month of the quarter. Total compensation 12-month percentage changes have moderated for the entire civilian population, the private sector and state and local government. Wages and salaries in the 12 months ending in Mar 2012 increased at relatively subdued rates of 2.1 percent for the private sector, 1.7 percent for the entire civilian population and only 1.5 percent for state/local workers. Wages have been losing relative to headline CPI inflation of 2.7 percent in the 12 months ending in Mar (http://www.bls.gov/cpi/). Compensation benefits of the private sector increased at 2.8 percent in the 12 months ending in Mar, which is much faster than 1.9 percent for wages and salaries. Benefits increased 3.6 percent in the 12 months ending in Dec 2011.

Table VA-1, Employment Cost Index Quarterly and 12 Months Changes %

	IVQ11 SA	IQ12 SA	12 M Mar 11 NSA	12 M Jun 11 NSA	12 M Sep 11 NSA	12 M  Dec 11 NSA	12 M  Mar 12 NSA
Civilian
Comp	0.5	0.4	2.0	2.2	2.0	2.0	1.9
Wages/ Salaries	0.3	0.5	1.6	1.6	1.6	1.4	1.7
Benefits	0.7	0.5	3.0	3.6	3.2	3.2	2.7
Private
Comp	0.5	0.4	2.0	2.3	2.1	2.2	2.1
Wages/ Salaries	0.4	0.5	1.6	1.7	1.7	1.6	1.9
Benefits	0.8	0.3	3.0	4.0	3.3	3.6	2.8
State local Govt
Comp	0.3	0.7	1.8	1.7	1.5	1.3	1.5
Wages/ Salaries	0.3	0.4	1.2	1.2	1.0	1.0	1.0
Benefits	0.4	1.1	3.3	3.0	2.5	2.1	2.3

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

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

A series of charts of the BLS provides evolution of the ECI during the past decade. Percentage changes in 12 months of total civilian compensation in Chart VA-1 were in a range of around 3 to 4 percent before the global recession, declining to less than 2 percent with the contraction and increasing above 2 percent in the expansion. Recently, rates have fallen, stagnated and then fell again.

Chart VA-1, US, ECI, Total Compensation, All Civilian, 12-Month Percent Change, 2001-2012

Source: US Bureau of Labor Statistics

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

Chart VA-2 provides the 12 months percentage rates of change of wages and salaries for the entire civilian population. The rates collapsed with the global recession and have flattened around 1.5 percent since 2010 while inflation has accelerated.

Chart VA-2, US, ECI, Wages and Salaries, All Civilian 12-Month Percent Change, 2001-2012

Source: US Bureau of Labor Statistics

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

Percentage 12-month changes of benefits of the total civilian population in Chart VA-3 were much higher in the first part of the 2000s, surpassing relatively subdued inflation but declined to less than 2 percent with the global recession. After 2010, there is a clear rising trend of benefit above 3 percent with decline in recent months of 2011 and then stagnation followed by decline in the first quarter of 2012.

Chart VA-3, US, ECI, Total Benefits, All Civilian 12 Months Percent Change, 2001-2012

Source: US Bureau of Labor Statistics

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

ECI total compensation 12-months percentage changes from 2001 to 2011 for the private sector are shown in Chart VA-4. Behavior is almost identical as for total compensation. Private-sector compensation has stabilized somewhat above 2 percent with inflation rising to 2.7 percent in the 12 months ending in Mar.

Chart VA-4, US, ECI, Total Compensation, Private Industry 12 Months Percent Change, 2001-2012

Source: US Bureau of Labor Statistics

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

There is different behavior of 12 months percentage rates of private-sector wages and salaries in Chart VA-5. Rates fell in the first part of the decade and then rose into 2007. Rates of change in 12 months of wages and salaries in the private sector fell during the global contraction to barely above 1 percent and have not rebounded while inflation has returned.

Chart VA-5, US, ECI, Wages and Salaries, Private Industry, 12 Months Percent Change, 2001-2012

Source: US Bureau of Labor Statistics

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

Chart VA-6 provides 12-month rates of change of the consumer price index of the US. Inflation has risen sharply into 2011 with 3.0 percent in the 12 months ending in Dec while wage and salary increases in the private sector have risen by 1.6 percent in the 12 months ending in Dec. Wages and salaries rose 1.9 percent in the 12 months ending in Mar while inflation was 2.7 percent in the 12 months ending in Mar.

Chart VA-6, US, Consumer Price Index, 12-Month Percentage Change, NSA, 2001-2012

Source: US Bureau of Labor Statistics

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

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

Chart VA-7, US, ECI, Total Benefits, Private Industry, 12 Months Percent Change, 2001-2012

Source: US Bureau of Labor Statistics

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

Behavior at the margin is provided by rates of change in a quarter relative to the prior quarter, as shown in Chart VA-8. Quarterly rates of change of total civilian compensation were high in the early 2000s, fell sharply with the global recession and collapsed in recent quarters.

Chart VA-8, US, Employment Cost Index All Civilian Total Compensation Three-Month % Change, 2001-2012

Source: US Bureau of Labor Statistics

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

Chart VA-9 provides the quarterly rates of change of wages and salaries of the entire civilian population. The rates of change sank below 0.5 percent per quarter and have remained subdued since the global recession.

Chart VA-9, US, ECI, Wages and Salaries, All Civilian, Three-Month % Change, 2001-2012

Source: US Bureau of Labor Statistics

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

Quarterly rates of change of benefits of the total civilian population in Chart VA-10 had declined before the global recession. The rate collapsed in recent quarters.

Chart VA-10, US, ECI, Total Benefits, All Civilian, Three-Month % Change, 2001-2012

Source: US Bureau of Labor Statistics

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

Quarterly rates of change of total compensation of the private sector in Chart VA-11 have not returned to the levels before the contraction except with sporadic jump in 2011 followed by contraction and stagnation in recent quarters.

Chart VA-11, US, ECI, Total Compensation, Private Industry, Three-Month % Change, 2001-2012

Source: US Bureau of Labor Statistics

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

Quarterly rates of change of wages and salaries of the private sector in Chart VA-12 show significant fluctuation. Quarterly rates of change have fallen below 0.5 percent in the current expansion.

Chart VA-12, US, ECI, Wages and Salaries, Private Industry, Three-Month % Change, 2001-2012

Source: US Bureau of Labor Statistics

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

The 12-month rates of change of benefits of private industry in Chart VA-13 have fluctuated widely with the only negative change in 2007. The 12-month rate of private-sector benefits fell in past months.

Chart VA-13, US, ECI, Total Benefits, Private Industry, Three-Month % Change, 2001-2012

Source: US Bureau of Labor Statistics

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

Manufacturers’ shipments of durable goods increased 1.0 percent in Mar after declining revised 0.3 percent in Feb while new orders fell -4.2 in Mar after increasing 1.9 percent in Feb and decreasing 3.5 percent in Jan, as shown in Table VA-2. These data are very volatile. Volatility is illustrated by decrease of 47.6 percent of nondefense aircraft in Mar after declines of 2.1 percent in Feb and 17.3 percent in Jan. New orders excluding transportation equipment fell 1.1 percent in Mar. Capital goods new orders, indicating investment, fell 8.9 percent in Mar, after increasing 1.8 percent in Feb and decreasing 3.4 percent in Jan. New orders of nondefense capital goods dropped 10.5 percent in Mar. Excluding more volatile aircraft, capital goods orders decreased 0.8 percent in Mar.

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

	Mar 2012  ∆%	Feb 2012  ∆%	Jan 2012 ∆%
Total
S	1.0	-0.3	0.1
NO	-4.2	1.9	-3.5
Excluding Transport
S	0.8	0.3	-1.6
NO	-1.1	1.9	-2.8
Excluding Defense
S	0.6	0.1	0.1
NO	-4.6	1.5	-4.0
Machinery
S	6.5	3.1	-5.4
NO	-2.6	7.9	-8.8
Computers & Electronic Products
S	-2.4	0.8	-0.5
NO	-1.8	2.3	2.4
Computers
S	-4.6	-1.6	-4.6
NO	-0.6	1.3	-7.7
Transport Equipment
S	1.3	-2.2	5.7
NO	-12.5	1.8	-5.2
Motor Vehicles
S	0.3	1.3	2.2
NO	0.1	2.0	1.3
Nondefense Aircraft
S	-2.4	-6.2	16.2
NO	-47.6	-2.1	-17.2
Capital Goods
S	2.5	-0.3	-0.9
NO	-8.9	1.8	-3.4
Nondefense Capital Goods
S	2.0	0.5	-0.8
NO	-10.5	1.0	-5.0
Capital Goods ex Aircraft
S	2.6	1.4	-2.8
NO	-0.8	2.8	-3.4

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

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

Chart VA-14 of the US Census Bureau shows monthly changes in manufacturers’ new orders in the past 12 months. Trends are difficult to discern for these data because of the significant volatility.

Chart VA-14, US, Manufacturers’ New Orders 2010-2011 Seasonally Adjusted, Month ∆%

Source: US Census Bureau

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

Additional perspective on manufacturers’ shipments and new orders is provided by Table VA-3. Values are cumulative millions of dollars in Jan-Mar 2012 not seasonally adjusted (NSA). Shipments of all manufacturing industries in Jan-Mar 2012 total $612.3 billion and new orders total $625.6 billion, growing respectively by 9.1 percent and also 9.1 percent relative to the same period in 2011. Excluding transportation equipment, shipments grew 9.0 percent and new orders increased 8.2 percent. Excluding defense, shipments grew 10.0 percent and new orders grew 10.8 percent. Important information not in Table VA-2 is the large share of nondurable goods: with shipments of $3 trillion in 2011, growing by 14.0 percent, and new orders of $3 trillion, growing by 14.0 percent, in part driven by higher prices for food and energy. Durable goods were lower in value in 2011, with shipments of $2.4 trillion, growing by 7.9 percent, and new orders of $2.4 trillion, growing by 10.0 percent. Capital goods have relatively high value of $231.5 billion for shipments, growing 7.9 percent, and new orders $258.4 billion, growing 9.4 percent, which could be a favorable sign of future investment. Excluding aircraft, capital goods shipments reached $194.9 billion, growing by 8.4 percent, and new orders $204.9 billion, growing 8.3 percent. There is no suggestion in these data that the US economy is close to recession.

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

Jan-Mar 2012	Shipments	∆% 2012/ 2011	New Orders	∆% 2012/  2011
Total	612,277	9.1	625,589	9.1
Excluding Transport	463,326	9.0	461,702	8.2
Excluding Defense	584,038	10.0	593,276	10.8
Machinery	93,578	13.1	100,009	10.1
Computers & Electronic Products	85,999	-1.6	71,217	0.3
Computers & Related Products	14,018	-6.7	13,818	-6.6
Transport Equipment	148,951	9.2	163,887	11.6
Motor Vehicles	95,184	9.6	95,130	9.4
Nondefense Aircraft	24,506	25.2	38,472	51.3
Capital Goods	231,455	7.9	258,421	9.4
Nondefense Capital Goods	210,037	10.2	233,575	14.0
Capital Goods ex Aircraft	194,977	8.4	204,971	8.3

Note: Transport: transportation

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

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 VB-BOJF provides the forecasts of economic activity and inflation in Japan by the majority of members of the Policy Board of the Bank of Japan, which is part of their Outlook for Economic Activity and Prices (http://www.boj.or.jp/en/mopo/outlook/gor1204a.pdf

http://www.boj.or.jp/en/mopo/outlook/gor1204b.pdf). For fiscal 2012, the forecast is of growth of GDP between 2.1 and 2.4 percent, with domestic producer price inflation (Corporate Goods Price Index, CGPI) in the range of 0.4 to 0.7 percent and the all items CPI less fresh food of 0.1 to 0.4 percent.

Table VB-BOJF, Bank of Japan, Forecasts of the Majority of Members of the Policy Board, % Year on Year

Fiscal Year Date of Forecast	Real GDP	Domestic CGPI	CPI All Items Less Fresh Food
2011
Apr 2012	-0.2 to –0.2 [-0.2]	+1.7	0.0
Jan 2012	-0.4 to –0.3 [-0.4]	+1.8 to +1.9 [+1.8]	-0.1 to 0.0 [-0.1]
2012
Apr 2012	+2.1 to +2.4 [+2.3]	+0.4 to +0.7 [+0.6]	+0.1 to +0.4 [+0.3]
Jan 2012	+1.8 to +2.1 [+2.0]	-0.1 to +0.2 [+0.1]	0.0 to +0.2 [+0.1]
2013
Apr 2012	+1.6 to +1.8 [+1.7]	+0.7 to +0.9 [+0.8]	+0.5 to +0.7 [+0.7]
Jan 2012	+1.4 to +1.7 [+1.6]	+0.6 to 1.0 [+0.8]	+0.4 to +0.5 [+0.5]

Figures in brackets are the median of forecasts of Policy Board members

Source: Policy Board, Bank of Japan

http://www.boj.or.jp/en/mopo/outlook/gor1204a.pdf

http://www.boj.or.jp/en/mopo/outlook/gor1204b.pdf

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	Mar NSA ∆% 0.5 Mar 12 months NSA ∆% 0.5 Blog 4/29/12
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	Mar Unemployed 3.07 million Change in unemployed since last year: minus 150 thousand Unemployment rate: 4.5% Blog 4/29/12
All Industry Indices	Feb month SA ∆% minus 0.1 12-month NSA ∆% 1.3 Blog 4/29/12
Industrial Production	Mar SA month ∆%: 1.0 12-month NSA ∆% 13.9 Blog 4/29/12
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	Mar 12 months: Total ∆%: +3.0 Wholesale ∆%: +0.5 Retail ∆%: +10.3 Blog 4/29/12
Family Income and Expenditure Survey	Mar 12-month ∆% total nominal consumption 4.1, real 3.4 Blog 4/29/12
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:

4/22/12 http://cmpassocregulationblog.blogspot.com/2012/04/imf-view-of-world-economy-and-finance_22.html

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

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

7/31/11: http://cmpassocregulationblog.blogspot.com/2011/07/growth-recession-debt-financial-risk.html

The indices of all industry activity of Japan, which is an approximation of GDP or economic activity, fell to levels close to the worst point of the recession, showing the brutal impact of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Table VB-1 with the latest revisions shows the quarterly index which permits comparison with the movement of real GDP. The first row provides weights of the various components of the index: AG (agriculture) 1.4 percent (not shown), CON (construction) 5.7 percent, IND (industrial production) 18.3 percent, TERT (services) 63.2 percent, and GOVT (government) 11.4 percent. GDP fell revised 0.2 percent in IVQ2011 (http://cmpassocregulationblog.blogspot.com/2012/03/thirty-million-unemployed-or_11.html), industry increased 0.4 percent and the tertiary sector increased 0.5 percent. The all industry index increased revised 0.5 percent in IVQ2011. Industry contributed minus 0.08 percentage points to growth of the all industry index and the tertiary index contributed 0.33 percentage points. Construction fell 1.5 percent in IVQ2011, with deduction of 0.07 percentage points and government increased 0.2 percent, adding 0.04 percentage points. Japan had already experienced a very weak quarter in IVQ2010 with decline of the all industry index of 0.2 percent and decline of GDP of revised 0.2 percent when it was unexpectedly hit by the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. The worst impact of the natural disaster was on construction with drop of 7.5 percent in IIQ2011 relative to IQ2011 but recovery at 3.3 percent in IIIQ2011. Industrial production fell 4.2 percent from IQ2011 into IIQ2011 but grew 5.4 percent in IIIQ2011. Many accounts had already been closed when the earthquake occurred, but there is visible decline of the index of all industry by 1.3 percent in IQ2011 caused by decline of industrial production by 1.5 percent and services by 1.0 percent with GDP falling 1.8 percent.

Table VB-1, Japan, Indices of All Industry Activity Percentage Change from Prior Quarter SA ∆%

	CON	IND	TERT	GOVT	ALL IND	REAL GDP
Weight %	5.7	18.3	63.2	11.4	100.0
2011
IVQ	-1.5	0.4	0.5	0.2	0.5	-0.2
Cont to IVQ % Change	-0.07	0.08	0.33	0.02
IIIQ	3.3	5.4	1.5	0.2	2.1	1.7
IIQ	-7.5	-4.2	-0.5	0.1	-0.9	-0.3
IQ	3.2	-1.5	-1.0	-0.2	-1.3	-1.8
2010
IV Q	-1.8	-0.1	0.3	-0.3	-0.2	-0.2

AG: indices of agriculture, forestry and fisheries has weight of 1.4% and is not included in official report or in this table; CON: indices of construction industry activity; IND: indices of industrial production; TERT: indices of tertiary industry activity; GOVT: indices of government services, etc.; ALL IND: indices of all industry activity

Source: http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201202j.pdf

There are more details in Table VB-2. The all industry activity index decreased 0.1 percent in Feb 2012 relative to Jan 2012 with no change of the tertiary or services sector and decrease of industry of 1.6 percent while construction increased 4.0 percent and government decreased 0.8 percent. Industry deducted 0.29 percentage points from growth in Feb while the tertiary sector had no impact with addition of 0.19 percentage points by construction and deduction of 0.10 percentage points by government. Weakness in Sep and Aug had interrupted the sharp recovery from Apr to Jul with renewed strength in Oct but weakness again in Nov followed by strong rebound in Dec that was interrupted in January. The highest risk to Japan is if weakening world growth would affect Japanese exports.

Table VB-2, Japan, Indices of All Industry Activity Percentage Change from Prior Month SA ∆%

	CON	IND	TERT	GOVT	ALL IND
Feb 2012	4.0	-1.6	0.0	-0.8	-0.1
Cont to Jan % Change	0.19	-0.29	0.0	-0.10
Jan 2012	5.6	0.9	-0.6	-1.5	-1.0
Dec 2011	-1.4	2.3	1.6	-0.2	1.7
Nov	0.3	-1.7	-0.8	0.1	-0.9
Oct	-2.6	1.8	0.6	0.1	0.6
Sep	1.6	-1.9	-0.2	0.2	-0.1
Aug	1.1	0.9	0.1	-0.1	0.2
Jul	0.1	1.1	0.4	-0.2	0.5
Jun	-0.1	3.8	1.2	0.2	1.5
May	6.5	5.8	0.9	0.7	1.6
Apr	-5.1	2.4	2.1	-0.9	2.0
Mar	-10.6	-16.2	-5.4	0.7	-6.6
Feb	2.3	1.1	0.3	0.0	0.1
Jan	6.3	1.2	0.5	-0.5	0.6
Dec 2010	-0.5	2.4	-0.2	0.3	0.1
Nov	-1.4	1.6	0.6	-0.4	0.3
Oct	0.1	-1.4	0.2	-0.1	0.0
Sep	-1.9	-0.8	-0.4	-0.1	-0.4
Aug	1.6	-0.1	0.1	0.1	-0.5
Jul	0.8	0.3	0.7	0.1	1.1
Jun	-2.1	-1.5	0.1	-0.1	0.2
May	6.3	-0.1	-0.3	0.0	0.0
Apr	-3.1	0.6	1.6	-0.2	0.9

AG: indices of agriculture, forestry and fisheries has weight of 1.4% and is not included in official report or in this table; CON: indices of construction industry activity; IND: indices of industrial production; TERT: indices of tertiary industry activity; GOVT: indices of government services, etc.; ALL IND: indices of all industry activity

Source: http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201202j.pdf

Percentage changes from a year earlier in calendar years and relative to the same quarter a year earlier are provided in Table VB-3. The first row shows that services contribute 63.2 percent of the total index and industry contributes 18.3 percent for joint contribution of 81.5 percent. The fall of industrial production in 2009 was by a catastrophic 21.9 percent. Japan emerged from the crisis with industrial growth of 16.4 percent in 2010. Quarterly data show that industry is the most dynamic sector of the Japanese economy. The all-industry index fell 0.6 percent in 2011, almost equal to the revised decline of 0.7 percent in GDP (http://cmpassocregulationblog.blogspot.com/2012/03/thirty-million-unemployed-or_11.html). Industry fell 2.3 percent, deducting 0.43 percentage points, while the tertiary sector was flat. The Tōhoku or Great East Earthquake and Tsunami of Mar 11, 201, declining world trade and revaluation of the yen in fear of world financial risks interrupted the recovery of the Japanese economy from the global recession.

Table VB-3, Japan, Indices of All Industry Activity Percentage Change from Earlier Calendar Year and Same Quarter Year Earlier NSA ∆%

	CON	IND	TERT	GOVT	ALL IND	REAL GDP
Weight %	5.7	18.3	63.2	11.4	100.0
Calendar Year
2011	-2.0	-2.3	0.1	-0.2	-0.6	-0.7
Cont to 2011 % Change	-0.09	-0.43	0.07	-0.02
2010	-7.0	16.4	1.3	-0.7	3.1	4.4
2009	-5.6	-21.9	-5.2	0.1	-7.7	-5.5
2008	-7.6	-3.4	-1.0	-1.4	-1.9	-1.0
2011
IVQ	-2.8	-1.6	0.6	0.6	0.0	-0.6
Cont to IVQ % Change	-0.14	-0.30	0.39	0.07
IIIQ	-3.2	-0.9	0.3	-0.1	-0.1	-0.4
IIQ	-5.1	-5.8	-0.5	-0.4	-1.6	-1.7
IQ	2.3	-1.3	-0.3	-1.0	-0.5	-0.3
2010
IV Q	-0.6	5.9	1.6	-0.8	2.1	3.1
III Q	-3.2	14.0	1.8	-0.6	3.2	5.5
IIQ	-11.3	21.3	1.4	-0.7	3.5	4.4
IQ	-12.4	28.0	0.8	-0.5	3.9	4.8

AG: indices of agriculture, forestry and fisheries has weight of 1.4% and is not included in official report or in this table; CON: indices of construction industry activity; IND: indices of industrial production; TERT: indices of tertiary industry activity; GOVT: indices of government services, etc.; ALL IND: indices of all industry activity

Source: http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201202j.pdf

Percentage changes of a month relative to the same month a year earlier for the indices of all industry activity of Japan are shown in Table VB-4. The all industry activity index increased 1.3 percent in Feb 2012 relative to Feb 2011. Industry increased 1.5 percent in Feb 2012 relative to a year earlier, adding 0.28 percentage points from growth of the all industry activity index. The tertiary sector increased 2.4 percent, adding 1.51 percentage points. Construction reduced the index by 0.09 percentage points while government reduced it by 0.38 percentage points.

Table VB-4, Japan, Indices of All Industry Activity Percentage Change from Same Month Year Earlier NSA ∆%

	CON	IND	TERT	GOVT	ALL IND
Feb 2012	-1.7	1.5	2.4	-3.1	1.3
Cont to Jan % Change	-0.09	0.28	1.51	-0.38
Jan	-3.4	-1.6	0.4	-1.6	-0.4
Dec 2011	-3.0	-3.0	1.2	0.8	0.2
Nov	-1.2	-2.9	-0.3	0.8	-0.7
Oct	-4.0	0.9	0.9	0.2	0.5
Sep	-0.4	-2.4	0.1	0.1	-0.3
Aug	-4.3	1.6	0.8	-1.1	0.4
Jul	-4.8	-1.7	0.1	0.5	-0.4
Jun	-4.6	-0.6	1.0	0.3	0.4
May	-6.5	-4.6	-0.2	-0.8	-1.3
Apr	-4.1	-12.7	-2.3	-0.6	-4.0
Mar	-2.8	-12.4	-3.4	0.0	-4.6
Feb	4.4	4.5	2.0	-1.4	2.1
Jan	5.9	6.1	1.0	-1.4	1.8
Dec 2010	-0.5	5.9	1.8	-0.7	2.1
Nov	-0.5	7.0	2.5	-1.9	2.7
Oct	-1.1	5.0	0.5	0.3	1.3
Sep	-2.8	12.1	1.3	-0.6	2.7
Aug	-1.7	15.5	2.3	-1.1	3.8
Jul	-5.3	14.6	1.6	-0.1	3.3
Jun	-8.3	16.6	1.0	-0.7	3.0
May	-8.1	20.7	1.2	-0.9	3.4
Apr	-17.0	27.0	1.9	-0.4	-

AG: indices of agriculture, forestry and fisheries has weight of 1.4% and is not included in official report or in this table; CON: indices of construction industry activity; IND: indices of industrial production; TERT: indices of tertiary industry activity; GOVT: indices of government services, etc.; ALL IND: indices of all industry activity

Source: http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201202j.pdf

In Mar 2012, industrial production in Japan increased 1.0 percent and increased 13.9 percent in the 12 months ending in Mar 2012, as shown in Table VB-5. 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-5, Japan, Industrial Production ∆%

	∆% Month SA	∆% 12 Months NSA
Mar 2012	1.0	13.9
Feb	-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/h2a1003j.pdf

The employment report for Japan in Dec 2011 is in Table VB-6. The rate of unemployment fell from 4.6 percent in Jul to 4.1 percent in Sep but increased to 4.6 percent in Jan, falling to 4.5 percent in Feb, remaining at 4.5 percent in Mar. The number unemployed has declined by 150 thousand, or 4.7 percent lower relative to a year earlier.

Table VB-6, Japan, Employment Report Mar 2012 

Unemployed	3.07 million
Change since last year	-150 thousand; ∆% –4.7
Unemployment rate	4.5% SA unchanged; NSA 4.7%, -0.2 from earlier year
Population ≥ 15 years	111.0 million
Change since last year	∆% –0.1
Labor Force	65.2 million
Change since last year	∆% –0.6
Employed	62.15 million
Change since last year	% -0.4
Labor force participation rate	58.7
Change since last year	-0.3
Employment rate	56.0%
Change since last year	-0.1

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

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

Chart VB-1 of Japan’s Statistics Bureau at the Ministry of Internal Affairs and Communications provides the unemployment rate of Japan from 2009 to 2011. The sharp decline in Sep is the best reading in 2011 but the rate increased in the final quarter of the year, declining in Feb 2012 and stabilizing in Mar 2012.

Chart VB-1, Japan, Unemployment Rate

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

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

During the “lost decade” of the 1990s from 1991 to 2002 (Pelaez and Pelaez, The Global Recession Risk (2007), 82-3), Japan’s GDP grew at the average yearly rate of 1.0 percent, the CPI at 0.1 percent and the implicit deflator at minus 0.8 percent. Japan’s growth rate from the mid 1970s to 1992 was 4 percent (Ito 2004). Table VB-3 provides Japan’s rates of unemployment, participation in labor force and employment for 1968, 1975, 1980 and 1985 and yearly from 1990 to 2011. The rate of unemployment jumped from 2.1 percent in 1991 to 5.4 percent in 2002, which was a year of global economic weakness. The participation rate dropped from 63.8 percent in 1992 to 61.2 percent in 2002 and the employment rate fell from 62.4 percent in 1992 to 57.9 percent in 2002. The rate of unemployment rose from 3.9 percent in 2007 to 5.1 percent in 2010, falling to 4.5 percent in 2011, while the participation rate fell from 60.4 percent to 59.6 percent, falling to 59.3 percent in 2011, and the employment rate fell from 58.1 percent to 56.6 percent in both 2010 and 2011. The global recession adversely affected labor markets in advanced economies.

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

	Unemployment Rate	Participation Rate	Employment Rate
1968	1.2	65.9	65.1
1975	1.9	63.0	61.9
1980	2.0	63.3	62.0
1985	2.6	63.0	61.4
1990	2.1	63.3	61.9
1991	2.1	63.8	62.4
1992	2.2	64.0	62.6
1993	2.5	63.8	62.2
1994	2.9	63.8	61.8
1995	3.2	63.4	61.4
1996	3.4	63.5	61.4
1997	3.4	63.7	61.5
1998	4.1	63.3	60.7
1999	4.7	62.9	59.9
2000	4.7	62.4	59.5
2001	5.0	62.0	58.9
2002	5.4	61.2	57.9
2003	5.3	60.8	57.6
2004	4.7	60.4	57.6
2005	4.4	60.4	57.7
2006	4.1	60.4	57.9
2007	3.9	60.4	58.1
2008	4.0	60.2	57.8
2009	5.1	59.9	56.9
2010	5.1	59.6	56.6
2011	4.5	59.3	56.6

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

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

Japan is experiencing weak internal demand as in most advanced economies. Table VB-4 provides Japan’s wholesale and retail sales. Retail sales increased 10.3 percent in the 12 months ending in Mar while total sales increased 3.0 percent and wholesale sales increased 0.5 percent. Retail sales are struggling to recover from the deep drops in Mar and Apr following the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Retail sales have been increasing in 12-month percentage changes from Dec 2011 to Mar 2012.

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

	Total	Wholesale	Retail
Mar 2012	3.0	0.5	10.3
Feb	-0.1	-1.3	3.4
Jan	-2.0	-3.5	1.8
Dec 2011	-0.8	-2.0	2.5
Nov	-2.3	-2.4	-2.2
Oct	1.1	0.8	1.9
Sep	0.3	0.8	-1.1
Aug	3.1	5.2	-2.6
Jul	2.3	3.0	0.6
Jun	3.1	3.8	1.2
May	1.3	2.3	-1.3
Apr	-2.6	-1.7	-4.8
Mar	-1.3	1.2	-8.3
Feb	5.3	7.2	0.1
Jan	3.3	4.6	0.1
Dec 2010	3.5	5.7	-2.1
Calendar Year
2011	1.0	1.8	-1.2
2010	1.5	1.1	2.5
2009	-20.5	-25.6	-2.3
2008	1.2	1.5	0.3

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

The survey of household income and consumption of Japan in Table VB-5 is showing noticeable improvement in recent months relative to earlier months, which can be appreciated in the chart in the link in parentheses but followed by decline in Nov, renewed strength in Dec, another decline in Jan 2012 and increase in Feb and Mar 2012 (http://www.stat.go.jp/english/data/kakei/156.htm). Total consumption increased 3.4 percent in real terms in Mar and 4.1 percent in nominal terms. There are only two segments of decreasing real consumption: housing falling 2.4 percent in nominal terms and 2.2 percent in real terms and other consumption expenditures declining 0.8 percent in nominal terms and 1.5 percent in real terms. Real household income increased 4.3 percent; real disposable income increased 3.7 percent; and real consumption expenditures increased 4.3 percent.

Table VB-6, Japan, Family Income and Expenditure Survey 12-months ∆% Relative to a Year Earlier

Mar 2012	Nominal	Real
Households of Two or More Persons
Total Consumption	4.1	3.4
Excluding Housing, Vehicles & Remittance		3.3
Food	3.3	1.8
Housing	-2.4	-2.2
Fuel, Light & Water Charges	6.0	1.2
Furniture & Household Utensils	11.2	15.0
Clothing & Footwear	10.5	10.2
Medical Care	0.9	1.7
Transport and Communications	8.2	7.1
Education	10.7	10.4
Culture & Recreation	7.8	9.1
Other Consumption Expenditures	-0.8	-1.5*
Workers’ Households
Income	5.0	4.3
Disposable Income	4.4	3.7
Consumption Expenditures	5.0	4.3

*Real: nominal deflated by CPI excluding imputed rent

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

Percentage changes in 12 months of nominal and real consumption expenditures in Japan are provided in Table VB-6. There was sharp decline in nominal consumption of 8.8 percent in Mar 2011 and 8.2 percent in real consumption because of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Dec was the first month in 2011 with increases in 12 months in both nominal and real consumption expenditures followed by Feb and Mar 2012. Nominal consumption increased 4.1 percent in Mar 2012 and real consumption expenditures increased 3.4 percent. Nominal consumption expenditures fell 3.2 percent in 2010 and 3.3 percent in real terms. Both nominal and real consumption expenditures increased in 2009, 0.3 percent and 2.1 percent, respectively.

Table VB-7, Japan, Family Income and Expenditure Survey 12-months ∆% Relative to a Year Earlier

	Nominal Consumption Expenditures ∆% Relative to a Year Earlier	Real Consumption Expenditures ∆% Relative to a Year Earlier
Mar 2012	4.1	3.4
Feb	2.7	2.3
Jan	-2.1	-2.3
Dec 2011	0.3	0.5
Nov	-3.8	-3.2
Oct	-0.6	-0.4
Sep	-1.9	-1.9
Aug	-3.9	-4.1
Jul	-1.8	-2.1
Jun	-3.9	-3.5
May	-1.6	-1.2
Apr	-2.5	-2.0
Mar	-8.8	-8.2
Feb	-0.1	0.5
Jan	-0.9	-0.3
Dec 2010	-3.2	-3.3
Dec 2009	0.3	2.1

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

VC. China. There is slight improvement in the HSBC Flash China Manufacturing Purchasing Managers’ Index^™ (PMI^™) compiled by Markit (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9436). The overall Flash China PMI^™ increased from 48.3 in Mar to 49.1 in Apr while the Flash China Manufacturing Output Index increased from 47.3 in Mar to 49.1 in Apr, both at a two-month high but still in contraction territory. Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC finds that policy easing measures are beginning to have positive effects but that output and growth of demand remain at relatively low levels, requiring acceleration of monetary policy easing in IIQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9436). 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:

4/22/12 http://cmpassocregulationblog.blogspot.com/2012/04/imf-view-of-world-economy-and-finance_22.html

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

VC Euro Area. The Flash Eurozone PMI Composite Output Index of the Markit Flash Eurozone PMI^®, combining activity in manufacturing and services, fell from 49.1 in Mar to 47.4 in Apr, for a five-month low and the seventh decline in the past eight months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9436). Chris Williamson, Chief Economist at Markit, finds sharper rate of decline of the euro area economy in what could be an extended recession (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9438). 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 Apr 2012 Confidence minus 8.7 Apr 2012 Blog 4/29/12
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:

4/2/12 http://cmpassocregulationblog.blogspot.com/2012/04/imf-view-of-world-economy-and-finance_22.html

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

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

The Economic Sentiment Indicator of the European Economic Commission, Economic and Financial Affairs, provides excellent correlation with the economic cycle since 1990, capturing all three recessions in the period and even the threat of recession from 1994 to 1995. The latest chart of this index accessible in the link in parenthesis shows trend of decline in 2011 that has punctured the historical average of 100 (http://ec.europa.eu/economy_finance/db_indicators/surveys/index_en.htm). This deterioration is shown in Table VD-1 with the index falling from 104.9 in May 2011 to 93.2 in Mar 2012, remaining at 93.2 in Apr 2012.

Table VD-1, Euro Area, Indicators of Confidence and Economic Sentiment SA

	ESI	IND	SERV	CON	RET	CONS
Historical Average	100.0	-7.0	10.0	-11.8	-6.6	-18.8
Apr 2012	93.2	-7.7	-3.7	-20.2	-8.7	-30.3
Mar	93.2	-7.1	-3.5	-19.3	-11.3	-29.0
Feb	94.0	-5.3	-4.4	-20.1	-11.9	-28.6
Jan	92.8	-7.2	-3.2	-20.8	-14.0	-30.6
Dec 2011	91.6	-7.7	-6.1	-22.1	-11.3	-31.9
Nov	92.6	-7.6	-4.9	-20.9	-13.4	-28.5
Oct	93.6	-6.7	-2.7	-20.5	-12.0	-29.3
Sep	93.6	-5.8	-4.0	-19.3	-12.8	-31.2
Aug	97.1	-2.6	-1.0	-17.0	-10.7	-28.4
Jul	101.9	-0.2	6.1	-12.6	-4.8	-27.5
Jun	104.1	2.5	6.5	-11.2	-2.4	-29.1
May	104.9	3.1	7.5	-11.0	-2.6	-27.7
Apr	104.7	4.9	7.2	-14.1	-3.4	-28.6
Mar	106.8	6.1	10.1	-13.0	0.3	-30.5

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

Source: European Commission Services 

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

VE Germany. The Flash Germany Composite Output Index of the Markit Flash Germany PMI^®, combining manufacturing and services, fell from 51.6 in Mar to 50.9 in Apr, which is a five-month low (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9445). Weakness in manufacturing, with the Markit Germany Manufacturing PMI falling from 48.4 in Mar to 46.3 in Apr, for a 33-month low, was not compensated sufficiently by the increase of the Markit Flash Germany Services Activity Index increasing from 52.1 in Mar to 52.6 in Apr. Tim Moore, Senior Economist at Markit, finds declining export demand from southern Europe even with remaining strength in sales to emerging Asia and the US (

http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9445). The Markit Germany Composite Output Index, combining services and manufacturing activity with high association with German GDP, fell from 53.2 in Feb to 51.6 in Mar, indicating modest growth of private-sector activity but at the lowest rate in the quarter (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9330). Tim Moore, Senior Economist at Markit and author of the report, finds that the index is consistent with growth of GDP of only 0.2 percent in IQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9330). The Markit/BME Germany Purchasing Managers’ Index^® (PMI^®) fell from 50.2 in Feb to 48.4 in Mar, which is the lowest since Dec 2011, indicating modest conditions in manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9362). Tim Moore, Senior Economist at Markit and author of the report, finds that the contraction of export orders in Germany during nine months is the longest in ten years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9362). Table DE provides the country data table for Germany.

Table DE, Germany, Economic Indicators

GDP	IVQ2011 -0.2 ∆%; IV/Q2011/IVQ2010 ∆% 1.5 2011/2010: 3.0% GDP ∆% 1992-2011 Blog 2/26/12
Consumer Price Index	Apr month SA ∆%: +0.1 Mar 12-month ∆%: 2.0 Blog 4/29/12
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:

4/22/12 http://cmpassocregulationblog.blogspot.com/2012/04/imf-view-of-world-economy-and-finance_22.html

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 Flash France Composite Output Index of the Markit Flash France PMI^® fell from 48.7 in Mar to 46.8 in Apr, which is a six-month low (

http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9435). The Markit FranceManufacturing PMI increased from 46.7 in Mar, Markit France Services Activity Index fell from 50.1 in Mar to 46.4 in Apr, resulting in the contraction of the composite index. Jack Kennedy, Senior Economist at Markit and author of the Flash France PMI^® finds that decisions by households and business may resume after the elections but that demand continues to be timid (

http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9435). 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	Mar month ∆%: 0.5 Mar 12 months ∆%: 3.7 Blog 4/29/12
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	Mar Manufactured Goods ∆%: minus 1.1 Mar 12-Month Manufactured Goods ∆%: minus 1.9 Blog 4/29/12
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 Apr Mfg Business Climate 95 Blog 4/29/12

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

The Mar monthly report of household expenditures in consumption goods for France is in Table VF-1. Total consumption fell 2.9 percent in Mar 2012 after growing 2.9 percent in Feb driven by energy expenditures increasing 11.7 percent during bitter cold weather in Feb (http://www.insee.fr/en/themes/info-rapide.asp?id=19&date=20120330) but declining 11.3 percent in milder weather in Mar. Consumption of manufactured products fell 1.1 percent in Mar. Total consumption fell 2.0 percent in Mar 2012 relative to Mar 2011 and consumption of manufactured goods fell 1.9 percent in Mar 2012 relative to Mar 2011. Internal demand is weak throughout most advanced economies.

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

	Total	Food	Eng. Goods	Energy	Mfg Goods
Mar 2012	-2.9	-2.3	0.3	-11.3	-1.1
Mar       2012/    Mar 2011	-2.0	-1.0	-2.3	-3.0	-1.9
Feb 2012	2.9	1.3	0.7	11.6	1.5
Jan	-0.5	1.5	-3.2	2.5	-1.0
Dec 2011	-0.3	-1.0	1.0	-2.5	-0.3
Nov	0.1	0.0	0.6	-1.0	0.2
Oct	0.2	-0.2	1.0	-0.9	0.4
Sep	-0.1	0.6	0.3	-2.5	0.1
Aug	0.3	0.2	-0.3	2.5	0.3
Jul	-0.4	-0.4	-0.8	0.5	-0.7
Jun	0.8	-0.4	1.8	1.0	1.0
May	-0.2	-1.4	-1.0	5.0	-1.0
Apr	-1.8	1.1	-2.6	-6.1	-1.2
Mar	-0.8	-0.3	-1.3	-0.5	-0.8
Feb	0.3	0.4	0.9	-1.2	0.6
Jan	-0.7	-0.3	0.1	-3.8	-0.2
Dec 2010	0.6	0.7	0.2	1.4	0.4

Eng. Goods: Engineered Goods

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=19&date=20120427

Chart VF-1 of Institut National de la Statistique et des Études Économiques of France provides growth of total consumption in France. Internal demand is not supporting overall economic growth. Two-thirds of the increase of consumption in Feb 2012 is attributed to higher consumption of energy during bitter cold weather and the drop in Mar reversed expenditures in energy under milder weather.

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

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=19&date=20120427

The business climate survey of the Institut National de la Statistique et des Études Économiques (INSEE) of France finds worsening conditions in Mar after improvement in Apr. Table VF-2 shows the INSEE business climate indicator. The headline synthetic index increased to 98 in Mar from 94 in Dec, 92 in Jan and 93 in Feb, but fell to 95 in Apr. The final row shows general production expectations falling to -27 in Feb, well below the average of -8 since 1976, but improving to -15 in Mar and -14 in Apr. The indicator of demand and export order levels fell to -33 in Feb, well below the average of -12 since 1976 but improved to -15 in Mar, declining to 20 in Apr.

Table VF-2, France, Business Climate Indicator of Manufacturing of INSEE, General Balance of Opinion, SA

Mfg 2011-2012	Average since 1976	Dec	Jan	Feb	Mar	Apr
Synthetic Index	100	94	92	93	98	95
Recent Changes in Output	5	-5	-6	-7	-8	-2
Finished- Goods Inventory Level	15	15	16	14	11	10
Demand and Total Order Levels	-17	-26	-28	-26	-20	-24
Demand and Export Order Levels	-12	-20	-26	-33	-15	-20
Personal Production Expectations	5	-1	-5	-1	8	-4
General Production Expectations	-8	-36	-36	-27	-15	-14

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20120423

Chart VF-2 of the Institut National de la Statistique et des Études Économiques (INSEE) provides the history of the business climate synthetic index of INSEE since 1992. The index fell during the contractions of 1991, 2001 and 2008. After rapid recovery beginning in 2009 the synthetic index shows declining trend in 2011 with upward reversal in 2012 interrupted in Mar 2012.

Chart VF-2, France, INSEE Business Climate Synthetic Index

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20120423

Chart VF-3 of the Institut National de la Statistique et des Études Économiques (INSEE) shows strong drops of the turning point indicator in the recessions of 1991, 2001 and 2008. There have been other drops of this index. The turning point indicator has fallen to levels in the direction of past contractions and after rebounding in Oct and Nov is showing declining trend in Jan with slight reversal in Feb followed by significant improvement in Mar and deterioration in Apr.

Chart VF-3, INSEE Business Climate Turning Point Indicator

Source: Institut National de la Statistique et des Études

http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20120423

Chart VF-4 of the Institut National de la Statistique et des Études Économiques (INSEE) of France shows the indexes of general production expectations, personal production expectations and recent changes in output. All three indexes fell during the past three contractions after 1991, 2001 and 2008. The indexes are showing downward trend in 2011 that continued in Nov, Dec and Jan with slight reversal in Feb and significant improvement in Mar that stalls in Apr.

Chart VF-4, Climate General Production, Personal Production and Recent Changes in Output of INSEE

Source:  Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20120423

http://www.insee.fr/en/themes/info-rapide.asp?id=19&date=20120427

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	Feb month ∆%: 0.6 Feb 12-month ∆%: 0.1 Blog 4/29/12
Business Confidence	Mfg Apr 89.5, Dec 91.3 Construction Apr 82.9, Dec 80.5 Blog 4/29/12
Consumer Confidence	Consumer Confidence Apr 89.0, Mar 96.3 Economy Apr 72.1, Mar 85.4 Blog 4/29/12
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:

4/22/12 http://cmpassocregulationblog.blogspot.com/2012/04/imf-view-of-world-economy-and-finance_22.html

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

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

An important part of the analysis of Blanchard (2011WEOSep, 2012WEOApr) is the much more difficult adjustment of economies with need of fiscal consolidation in the presence of weak economic growth. Demand has significantly weakened throughout the advanced economies. There are many sound fundamentals in Italy such as high income and competitive companies. The restraints consist of low economic growth with high debt/GDP ratio. Table VG-1 provides growth of retail sales for Italy. Retail sales increased 0.7 percent in Feb 2012 relative to Jan 2012, increased 0.1 percent in Feb 2012 relative to Feb 2011 and declined 0.6 percent in Jan-Feb 2012 relative to Jan-Feb 2011.

Table VG-1, Italy, Retail Sales ∆%

	Feb 2012/  Jan 2012 SA	Dec 11-Feb 12/    Sep-Nov 11 SA	Feb 2012/ Feb 2011 NSA	Jan-Feb 2012/ Jan-Feb 2011
Total	0.6	-0.2	0.1	-0.6
Food	0.7	-0.1	2.3	1.2
Non-food	0.6	-0.2	-1.0	-1.4

Source: Istituto Nazionale di Statistica

http://www.istat.it/it/archivio/60120

Chart VG-1 provides 12-month percentage changes of retail sales in Italy. There are only positive changes in Dec 2010 and Apr 2011. Retail sales fell relative to a year earlier in most months of 2011 with improvement in Jan and Feb 2012.

Chart VG-1, Italy, Percentage Changes of Retail Sales in 12 Months

Source: Istituto Nazionale di Statistica

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

A longer perspective of retail sales in Italy is provided by monthly and 12-month percentages in 2011 and Jan-Feb 2012 and yearly rates from 2008 to 2011 in Table VG-2. Retail sales did not decline very sharply during the global recession but rose only 0.2 percent in 2010 and fell 1.3 percent in 2011. There is an evident declining trend in 2011 but only two monthly increases of 0.5 percent in Oct and 0.3 percent in Apr and negative 12-month percentage changes in every month of 2011 with the exception of 2.2 percent in Apr and zero percent in Feb. Retail sales grew 1.1 percent in Jan 2012 and 0.6 percent in Feb 2012, reducing sharply the 12-month percentage change from minus 3.7 percent in Dec 2011 to only minus 1.1 percent in Jan 2012 and positive 0.1 percent in the 12 months ending in Feb 2012.

Table VG-2, Italy, Retail Sales Month and 12-Month ∆%

	12-Month ∆% NSA	Month ∆% SA
Feb 2012	0.1	0.6
Jan	-1.1	1.1
Dec 2011	-3.7	-0.8
Nov	-1.8	-0.7
Oct	-1.4	0.6
Sep	-1.6	-0.4
Aug	-0.3	-0.3
July	-2.3	0.0
Jun	-1.1	-0.2
May	-0.4	-0.3
Apr	2.2	0.3
Mar	-2.1	0.1
Feb	0.0	-0.5
Jan	-1.1	-1.0
Dec 2010	0.6	0.6
2011	-1.3
2010	0.2
2009	-1.7
2008	-0.3

Source: Istituto Nazionale di Statistica

http://www.istat.it/it/archivio/60120

Italy’s index of business confidence in manufacturing and construction is provided in Table VG-3. There has been deterioration of manufacturing confidence below the historical average of 100 from 91.3 in Dec with reading of 89.5 in Apr. Order books have fallen from minus 34 in Dec to minus 39 in Apr. There is mild improvement in construction with an increase of the index from 80.5 in Dec to 82.9 in Apr.

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

	Apr	Mar	Feb	Jan	Dec
Mfg Confidence	89.5	91.1	91.0	91.5	91.3
Order Books	-39	-39	-37	-33	-34
Stocks Finished Products	1	1	2	2	3
Production Expectation	-4	0	-1	-3	-1
Construction Confidence	82.9	81.8	82.6	82.4	80.5
Order Books	-47	-50	-50	-47	-50
Employment	-14	-13	-12	-15	-15

Mfg: manufacturing

Source: http://www.istat.it/it/archivio/60000

Italy’s index of consumer confidence is in Table VG-4. Overall confidence increased from 91.7 in Dec 2011 to 96.3 in Mar 2012 but fell to 89.0 in Apr. There is improvement in all categories from Feb to Mar but declines into Apr. Confidence on the economy jumped from 75.6 in Jan to 85.4 in Mar but fell to 72.1 in Apr while confidence on the future jumped from 78.2 in Jan to 86.3 in Mar but fell to 76.6 in Apr.

Table VG-4, Italy, Index of Consumer Confidence SA 2005=100

2011-2012	Apr	Mar	Feb	Jan 12	Dec 11
Confidence	89.0	96.3	93.9	91.5	91.7
Economy	72.1	85.4	86.1	75.6	77.4
Personal	94.3	100.1	97.5	97.9	97.3
Current	96.7	102.6	100.3	102.3	98.4
Future	76.6	86.3	85.9	78.2	81.4

Source:

http://www.istat.it/it/archivio/59733

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	IQ2012 prior quarter ∆% minus 0.2; year earlier same quarter ∆%: 0.0 Blog 4/29/12
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:

4/22/12 http://cmpassocregulationblog.blogspot.com/2012/04/imf-view-of-world-economy-and-finance_22.html

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

Revised annual data in Table VH-1 show the strong impact of the global recession in the UK with decline of GDP of revised 4.6 percent in 2009 after dropping revised 0.9 percent in 2008. Recovery of 2.1 percent in 2010 is relatively low compared to annual growth rates in 2007 and earlier years. Growth was only 0.6 percent in 2011. The bottom part of Table VH-1 provides average growth rates of UK GDP since 1948. The UK economy grew at 2.4 percent on average between 1948 and 2011, which is relatively high for an advanced economy. The growth rate of GDP between 2000 and 2007 is higher at 2.9 percent. Growth in the current cyclical expansion has been only at 1.3 percent as advanced economies struggle with weak internal demand and world trade.

Table VH-1, UK, Gross Value Added at Chained Volume Measures Basic Prices, ∆%

	∆% on Prior Year
1998	4.1
1999	3.8
2000	4.6
2001	2.9
2002	2.4
2003	3.6
2004	2.8
2005	2.3
2006	2.5
2007	3.5
2008	-0.9
2009	-4.6
2010	2.1
2011	0.6
Average ∆% per Year
1948-2011	2.4
1948-1959	2.5
1960-1969	3.2
1970-1979	2.4
1980-1989	2.9
1990-1999	2.5
2000-2011	1.5
2000-2007	2.9
2009-2011	1.3

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product--preliminary-estimate/q1-2012/index.html

The UK Office for National Statistics has revised the national accounts since 1998 (http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/impact-of-changes-in-national-accounts-and-economic-commentary-for-q2-2011/index.html). The new data, additions and revisions are analyzed here. Table VH-2 provides quarter on quarter chained value measures of GDP since 2000. Growth in IIQ2011 was reduced to minus 0.1 percent. The third estimate for IIIQ2011 is lower at 0.6 percent. The third estimate for IVQ2011 is contraction of 0.3 percent, which is higher than contraction of 0.2 percent in the second estimate. The GDP of the UK contracted in a second consecutive quarter by 0.2 percent in the first estimate for IQ2012. Recovery in the UK has been subdued relative to the rates prevailing before the global recession. Most advanced economies are underperforming relative to the period before the global recession.

Table VH-2, UK, Percentage Change of GDP from Prior Quarter, Chained Value Measures ∆%

	IQ	IIQ	IIIQ	IV
2012	-0.2
2011	0.2	-0.1	0.6	-0.3
2010	0.4	1.1	0.7	-0.5
2009	-1.6	-0.2	0.2	0.7
2008	0.0	-1.3	-2.0	-2.3
2007	1.1	1.2	1.2	0.6
2006	0.8	0.4	0.2	0.7
2005	0.3	0.8	0.8	0.8
2004	0.8	0.4	0.1	0.5
2003	0.7	1.2	1.0	1.2
2002	0.8	0.7	0.8	0.7
2001	1.4	0.4	0.7	0.4
2000	1.4	1.1	0.4	0.7
1999	0.6	0.6	1.4	1.2
1998	0.9	0.8	1.0	1.2

Source:  UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product--preliminary-estimate/q1-2012/index.html

There are four periods in growth of GDP in a quarter relative to the same quarter a year earlier in the UK in the years from 2000 to the present as shown in Table VH-3. (1) Growth rates were quite high from 2000 to 2007. (2) There were six continuous quarters of contraction of GDP from IIIQ2008 to IVQ2009. Contractions relative to the quarter a year earlier were quite sharp with the highest of 5.4 percent in IVQ2008, 6.9 percent in IQ2009, 5.9 percent in IIQ2009 and 3.8 percent in IIIQ2009. (3) The economy bounced strongly with 2.5 percent in IIQ2010, 3.0 percent in IIIQ2010 and 1.7 percent in IVQ2010. (4) Recovery in 2011 has not continued at rates comparable to those in 2000 to 2007 and even relative to those in the final three quarters of 2010. Growth relative to the same quarter a year earlier fell from 1.7 percent in IVQ2010 to 1.5 percent in IQ2011, 0.4 percent in IIQ2011, 0.3 percent in IIIQ2011 and 0.5 percent in IVQ2011 but contraction of 0.3 percent in IVQ2011 relative to IIIQ2011. In IQ2012, GDP fell 0.2 percent for a second consecutive quarter and was flat relative to a year earlier. Fiscal consolidation in an environment of weakening economic growth is much more challenging.

Table VH-3, UK, Percentage Change of GDP from Same Quarter a Year Earlier, Chained Value Measures ∆%

	IQ	IIQ	IIIQ	IV
2012	0.0
2011	1.5	0.4	0.3	0.5
2010	1.2	2.5	3.0	1.7
2009	-6.9	-5.9	-3.8	-0.8
2008	3.1	0.6	-2.6	-5.4
2007	2.4	3.2	4.2	4.1
2006	3.3	2.9	2.2	2.1
2005	1.3	1.7	2.5	2.8
2004	4.3	3.4	2.5	1.7
2003	2.9	3.4	3.6	4.2
2002	2.3	2.6	2.7	3.0
2001	3.6	2.9	3.2	2.9
2000	4.7	5.2	4.2	3.7
1999	3.6	3.4	3.8	3.8
1998	3.8	3.7	3.9	4.0

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product--preliminary-estimate/q1-2012/index.html

Growth rates of GDP and components in a quarter from the preceding quarter are provided in Table VH-4. The first row of the table provides the weights of components. Contraction of GDP in IQ2012 resulted from sharp contraction of construction by 3.0 percent with total production declining 0.4 percent and manufacturing 0.1 percent while services crawled 0.1 percent. Contraction of GDP of 0.3 percent in IVQ2011 resulted from sharp contraction of 1.3 percent in total production, with manufacturing declining 0.7 percent. Even services fell by 0.1 percent in IVQ2011. Growth of 0.6 percent in IIIQ2011 originated almost entirely in growth by services of 0.8 percent with virtually no growth by other components with exception of 0.5 percent of construction. Growth in 2011 has mostly originated in services. GDP contracted 0.5 percent in IVQ2010, 0.1 percent in IIQ2011, 0.3 percent in IIIQ2011 and 0.2 percent in IQ2012. All contributions are negative in IV2011 and services fell 0.1 percent while all contributions are negative in IQ2012 with meager growth of services of 0.1 percent.

Table VH-4, UK, GDP and Gross Value Added by Components, ∆% on Prior Quarter 

	GDP	Total Production	Mfg	CONS	Services
Weights*	1000	154	102	76	763
IQ12	-0.2	-0.4	-0.1	-3.0	0.1
IVQ11	-0.3	-1.3	-0.7	-0.2	-0.1
IIIQ11	0.6	0.1	-0.1	0.5	0.8
IIQ11	-0.1	-1.5	0.0	2.3	0.1
IQ11	0.2	-0.3	0.7	-1.5	0.9
IVQ10	-0.5	0.2	0.7	-1.4	-0.3
IIIQ10	0.7	0.2	1.3	3.1	0.6
IIQ10	1.1	1.2	1.6	8.1	0.5
IQ10	0.4	1.3	1.2	0.9	0.0
IV09	0.7	0.3	1.2	0.3	0.8
III09	0.2	-1.3	-0.9	0.6	0.4
II09	-0.2	-0.3	-0.2	-2.5	-0.2
I09	-1.6	-3.9	-4.5	-6.4	-0.8
IV08	-2.3	-4.7	-5.0	-5.1	-1.5
III08	-2.0	-1.4	-1.6	-3.7	-1.6
II08	-1.3	-1.4	-1.9	-2.0	-0.9
I08	0.0	-0.1	0.7	1.7	-0.5

Note: CONS: construction; * Weights may not add to total because of rounding

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product--preliminary-estimate/q1-2012/index.html

Growth of UK value added by components on a quarter relative to the prior quarter is provided in Table VH-5. Total production fell 0.1 percent in IQ2012 with manufacturing falling 0.1 percent and construction dropping 3.0 percent. Total production fell 1.3 percent IVQ2011 with manufacturing declining 0.7 percent. Services fell 0.1 percent in IVQ2011, reducing the support of economic activity in prior quarters. Business services & finance fell 0.1 percent in both IQ2012 and IVQ2011.

VH-5, UK, Quarter on Quarter Growth of Growth Value Added by Components, ∆% on Prior Quarter

Component	2011 Q1	2011 Q2	2011Q3	2011Q4	2012Q1
Agriculture, forestry & fishing	8.0	-0.8	-0.5	-1.5	-1.9
Total Production	-0.3	-1.5	0.1	-1.3	-0.4
Mining & quarrying (Extraction)	-4.5	-8.0	-0.4	-2.6	-3.6
Manufacturing	0.7	-	-0.1	-0.7	-0.1
Electricity, gas, steam & air (Utilities)	-5.6	-2.0	1.6	-5.3	1.3
Water supply, sewerage etc.	5.8	-2.2	0.1	1.4	0.5
Construction	-1.5	2.3	0.5	-0.2	-3.0
Total Services	0.9	0.1	0.8	-0.1	0.1
Distribution, hotels & restaurants	0.9	0.2	0.4	-0.4	0.1
Transport, storage & communication	-0.2	0.4	1.1	-0.5	0.4
Business services & finance	1.0	0.1	1.3	-0.1	-0.1
Government & other services	1.3	0.1	0.4	0.4	0.2

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product--preliminary-estimate/q1-2012/index.html

Contributions to quarter on prior quarter to UK value added by components are shown in Table VH-6. In IQ2012, total production subtracted 0.1 percentage points, mining and quarrying subtracted 0.1 percentage points and construction deducted 0.2 percentage points with the only positive contribution being 0.1 percentage points by services. Total production subtracted 0.2 percentage points from growth in IVQ2011 with manufacturing subtracting 0.1 percentage points. There were equal subtractions of 0.1 percentage points by utilities and distribution, hotels and restaurants. Growth in IIIQ2011 originated in contribution of 0.7 percentage points by services of which 0.4 percentage points by business services and finance and 0.1 percentage points by government. In IVQ2011 and IQ2012, there were no contributions to growth by business services and finance while government and other services contributed 0.1 percentage points in IVQ2011 but nothing in IQ2012.

Table VH-6, UK, Contribution to Quarter on Prior Quarter of Growth of Value Added by Components, %

Component	2011 Q1	2011 Q2	2011Q3	2011Q4	2012Q1
Agriculture, forestry & fishing	0.0	0.0	0.0	0.0	0.0
Total Production	0.0	-0.2	0.0	-0.2	-0.1
Mining & quarrying (Extraction)	-0.1	-0.2	0.0	0.0	-0.1
Manufacturing	0.1	0.0	0.0	-0.1	0.0
Electricity, gas, steam & air (Utilities)	-0.1	0.0	0.0	-0.1	0.0
Water supply, sewerage etc.	0.1	0.0	0.0	0.0	0.0
Construction	-0.1	0.2	0.0	0.0	-0.2
Total Services	0.7	0.1	0.7	-0.1	0.1
Distribution, hotels & restaurants	0.1	0.0	0.1	-0.1	0.0
Transport, storage & communication	0.0	0.0	0.1	-0.1	0.0
Business services & finance	0.3	0.0	0.4	0.0	0.0
Government & other services	0.3	0.0	0.1	0.1	0.0

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product--preliminary-estimate/q1-2012/index.html

Table VH-7 provides UK growth of value added by components relative to a year earlier. There was significant deceleration in growth of total production from 1.9 percent in 2010 to minus 1.2 percent in 2011. Manufacturing growth fell from 3.7 percent in 2010 to 2.0 percent in 2011. Construction growth fell from 8.2 percent in 2010 to 2.8 percent in 2011. Total services grew at 3.3 percent in 2006 and 4.4 percent in 2007 to decline 0.5 percent in 2008 and 2.6 percent in 2009. Growth of services in 2010 and 2011 has been more moderate at 1.4 percent and 1.6 percent, respectively.

Table VH-7, UK, Year on Year Growth of Value Added by Components, ∆% on Prior Year

Component	2007	2008	2009	2010	2011
Agriculture, forestry & fishing	-3.7	16.2	-15.2	-1.5	-2.0
Total Production	0.5	-2.8	-9.0	1.9	-1.2
Mining & quarrying (Extraction)	-2.5	-6.5	-9.0	-4.9	-15.2
Manufacturing	0.8	-2.6	-9.6	3.7	2.0
Electricity, gas, steam & air (Utilities)	0.8	0.5	-4.8	3.5	-5.6
Water supply, sewerage etc.	3.0	-1.8	-8.1	-1.6	4.6
Construction	2.1	-2.8	-13.5	8.2	2.8
Total Services	4.4	-0.5	-2.6	1.4	1.6
Distribution, hotels & restaurants	4.8	-2.8	-4.6	1.5	0.7
Transport, storage & communication	5.8	-0.2	-5.7	3.0	1.3
Business services & finance	6.4	-0.2	-4.3	1.3	2.1
Government & other services	1.0	0.4	2.3	0.7	1.5

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product--preliminary-estimate/q1-2012/index.html

Total production subtracted 0.2 percentage points from value added in the UK in 2011 compared with addition of 0.3 percentage points in 2010, as shown in Table VH-8. Total services added 1.1 percentage points in 2010 and 1.2 percentage points in 2011 with flattening growth at the margin. The concern is with the decline of GDP at minus 0.3 percent in the final quarter of 2011 and 0.2 percent in the first quarter of 2012.

VH-8, UK, Contribution to Growth on Prior Year of Value Added by Components, %

Component	2007	2008	2009	2010	2011
Agriculture, forestry & fishing	0.0	0.1	-0.1	0.0	0.0
Total Production	0.1	-0.4	-1.4	0.3	-0.2
Mining & quarrying (Extraction)	-0.1	-0.2	-0.2	-0.1	-0.3
Manufacturing	0.1	-0.3	-1.0	0.4	0.2
Electricity, gas, steam & air (Utilities)	0.0	0.0	-0.1	0.1	-0.1
Water supply, sewerage etc.	0.0	0.0	-0.1	0.0	0.1
Construction	0.2	-0.2	-1.0	0.6	0.2
Total Services	3.3	-0.4	-2.0	1.1	1.2
Distribution, hotels & restaurants	0.7	-0.4	-0.6	0.2	0.1
Transport, storage & communication	0.6	0.0	-0.6	0.3	0.1
Business services & finance	1.7	-0.1	-1.3	0.4	0.6
Government & other services	0.2	0.1	0.5	0.2	0.4

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/gva/gross-domestic-product--preliminary-estimate/q1-2012/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 11.2 percent by Fri Apr 27, 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	4/27/2012
Rate	1.1423	1.5914	1.192	1.3253
CNY/USD	01/03 2000	07/21 2005	7/15 2008	4/27/ 2012
Rate	8.2798	8.2765	6.8211	6.3016
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 1.3253/EUR on Apr 27, 2012 or by 11.2 percent {[(1.3253/1.192)-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 6.3016/USD on Fri Apr 27, 2012, or by an additional 7.6 percent, for cumulative revaluation of 23.9 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, depreciated 0.1 percent in the week of Apr 20 and appreciated 0.1 percent in the week of Apr 27, as shown in the final row of Table VI-2. The rate of CNY 6.3016/USD on Apr 27, 2012 is equivalent to revaluation of 7.6 percent from CNY 6.8211 on Jul 15, 2008 {[(6.3016/6.8211) – 1]100} and cumulative 23.9 percent from CNY 8.2765 on Jul 21, 2005 {[(6.3016/8.2765) -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	4/27 /2012
Rate	1.1423	1.5914	1.192	1.3253
CNY/USD	01/03 2000	07/21 2005	7/15 2008	4/27/2012
Rate	8.2798	8.2765	6.8211	6.3016
Weekly Rates	4/6/2012	4/13/2012	4/20/2012	4/27/2012
CNY/USD	6.3068	6.2982	6.3048	6.3016
∆% 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), 1.7 percent in annual equivalent in the five quarter from IQ2011 to IQ2012 and 2.1 percent in IQ2012 relative to IQ2011 (see Section I). (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 and 0.2 percent in IQ2012. 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 36.6 percent since the trough of the sovereign debt crisis in Europe on Jul 2, 2010, and the S&P 500 has gained 37.2 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. Paul A. Samuelson remarked that “the stock market has predicted nine of the last five recessions.” The inverse of this phrase would be that “the stock market has predicted nine of the last five economic booms.” The tool of analysis of Cochrane (2011Jan, 27, equation (16)) is the government debt valuation equation:

(M_t + B_t)/P_t = E_t∫(1/R_{t, t+τ})s_t+τdτ (1)

Equation (1) expresses the monetary, M_t, and debt, B_t, liabilities of the government, divided by the price level, P_t, in terms of the expected value discounted by the ex-post rate on government debt, R_{t, t+τ}, of the future primary surpluses s_t+τ, which are equal to T_t+τ – G_t+τ or difference between taxes, T, and government expenditures, G. Cochrane (2010A) provides the link to a web appendix demonstrating that it is possible to discount by the ex post R_{t, t+τ}. The present value of the firm can also be expressed as the discounted future value of net cash flows. Equities can inflate beyond sound values if cash flows that depend on economic activity prove to be illusory in continuing mediocre growth

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, continuing into the week of Apr 27. The highest valuations in column “∆% Trough to 4/27/12” are by US equities indexes: DJIA 36.6 percent and S&P 500 37.2 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, almost all assets in the column “∆% Trough to 4/27/12” 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 0.6 percent above the trough; STOXX 50 of Europe is 5.5 percent above the trough; and Japan’s Nikkei Average is 7.9 percent above the trough. DJ UBS Commodities is 13.4 percent above the trough; Dow Global is 14.3 percent above the trough; and DAX is 19.9 percent above the trough. Japan’s Nikkei Average is 7.9 percent above the trough on Aug 31, 2010 and 16.4 percent below the peak on Apr 5, 2010. The Nikkei Average closed at 9520.89 on Fri Apr 27, 2012 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata), which is 7.2 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 11.2 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 4/27/12” in Table VI-4 shows increases of several valuations of risk financial assets in the week of Apr 27, 2012 such as 1.5 percent for DJIA, 1.8 percent for S&P 500, 1.8 percent for NYSE Financial, 1.0 percent for Dow Global, 0.8 percent for Dax and 1.8 percent for DJ UBS Commodities. 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 4/27/12” 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 4/27/12” 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 18.1 percent, S&P 500 15.3 percent and Dax 7.4 percent. There are several indexes below the peak: NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) by 11.6 percent, Nikkei Average by 16.4 percent, Shanghai Composite by 24.3 percent, STOXX 50 by 10.6 percent and Dow Global by 6.7 percent. DJ UBS Commodities Index is now 3.0 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 predicted 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. The interrelations of financial and economic variables prove difficult to analyze and measure.

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

	Peak	Trough	∆% to Trough	∆% Peak to 4/27 /12	∆% Week 4/27/ 12	∆% Trough to 4/27 12
DJIA	4/26/ 10	7/2/10	-13.6	18.1	1.5	36.6
S&P 500	4/23/ 10	7/20/ 10	-16.0	15.3	1.8	37.2
NYSE Finance	4/15/ 10	7/2/10	-20.3	-11.6	1.8	10.9
Dow Global	4/15/ 10	7/2/10	-18.4	-6.7	1.0	14.3
Asia Pacific	4/15/ 10	7/2/10	-12.5	-2.9	-0.1	10.9
Japan Nikkei Aver.	4/05/ 10	8/31/ 10	-22.5	-16.4	-0.4	7.9
China Shang.	4/15/ 10	7/02 /10	-24.7	-24.3	-0.4	0.6
STOXX 50	4/15/10	7/2/10	-15.3	-10.6	-0.1	5.5
DAX	4/26/ 10	5/25/ 10	-10.5	7.4	0.8	19.9
Dollar Euro	11/25 2009	6/7 2010	21.2	12.4	-0.3	-11.2
DJ UBS Comm.	1/6/ 10	7/2/10	-14.5	-3.0	1.8	13.4
10-Year T Note	4/5/ 10	4/6/10	3.986	1.931

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 15.8 percent above the Apr 26, 2010 level and the DJIA is 18.1 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
Apr 27	1.5	18.1	1.8	15.8

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 7.0 percent to ZAR 7.7452/USD on Apr 27, 2012, which is still 33.1 percent stronger than on Oct 22, 2008. An example from Asia is the Singapore Dollar (SGD) highly depreciated at the peak of SGD 1.553/USD on Mar 3, 2009 but subsequently appreciating by 13.2 percent to the trough of SGD 1.348/USD on Aug 9, 2010 but is now only 8.2 percent stronger at SGD 1.2373/USD on Apr 27 relative to the trough of depreciation but still stronger by 20.3 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 1.8877/USD on Apr 27, 2012 but still stronger by 22.3 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 27, 2012	∆T Apr 27, 2012	∆P Apr 27, 2012
EUR USD	7/15 2008	6/7 2010		4/27 2012
Rate	1.59	1.192		1.3253
∆%			-33.4		10.1	-20.0
JPY USD	8/18 2008	9/15 2010		4/27 2012
Rate	110.19	83.07		80.27
∆%			24.6		3.4	27.2
CHF USD	11/21 2008	12/8 2009		4/27 2012
Rate	1.225	1.025		0.9065
∆%			16.3		11.6	26.0
USD GBP	7/15 2008	1/2/ 2009		4/27 2012
Rate	2.006	1.388		1.6266
∆%			-44.5		14.7	-23.3
USD AUD	7/15 2008	10/27 2008		4/27 2012
Rate	1.0215	1.6639		1.0471
∆%			-62.9		42.6	6.5
ZAR USD	10/22 2008	8/15 2010		4/27 2012
Rate	11.578	7.238		7.7452
∆%			37.5		-7.0	33.1
SGD USD	3/3 2009	8/9 2010		4/27 2012
Rate	1.553	1.348		1.2373
∆%			13.2		8.2	20.3
HKD USD	8/15 2008	12/14 2009		4/27 2012
Rate	7.813	7.752		7.7596
∆%			0.8		0.1	0.7
BRL USD	12/5 2008	4/30 2010		4/27 2012
Rate	2.43	1.737		1.8877
∆%			28.5		-8.7	22.3
CZK USD	2/13 2009	8/6 2010		4/27 2012
Rate	22.19	18.693		18.737
∆%			15.7		-0.2	15.6
SEK USD	3/4 2009	8/9 2010		4/27 2012
Rate	9.313	7.108		6.7155
∆%			23.7		5.5	27.9
CNY USD	7/20 2005	7/15 2008		4/27 2012
Rate	8.2765	6.8211		6.3016
∆%			17.6		7.6	23.9

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

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

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

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

Chart VI-1 of the Board of Governors of the Federal Reserve System provides indexes of the dollar from 2010 to 2012. The dollar depreciates during episodes of risk appetite but appreciate during risk aversion as funds seek dollar-denominated assets in avoiding financial risk.

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 1.931 percent at the close of market on Fri Apr 27, 2012 would be equivalent to price of 106.2836 in a hypothetical bond maturing in 10 years with coupon of 2.625 percent for price gain of 5.0 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 25, 2012, the line “Reserve Bank credit” in the Fed balance sheet stood at $2849 billion, or $2.9 trillion, with portfolio of long-term securities of $2583 billion, or $2.6 trillion, consisting of $1573 billion Treasury nominal notes and bonds, $67 billion of notes and bonds inflation-indexed, $95 billion Federal agency debt securities and $848 billion mortgage-backed securities; reserve balances deposited with Federal Reserve Banks reached $1524 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
04/27/12	1.931	106.2836	5.0

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

Source:

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

VII Economic Indicators. Crude oil input in refineries increased 0.04 percent to 14,509 thousand barrels per day on average in the four weeks ending on Apr 20, 2012 from 14,503 thousand barrels per day in the four weeks ending on Apr 13, 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 higher than 82.7 percent on Apr 22, 2011 and equal to 84.7 percent on Apr 13, 2012. Imports of crude oil decreased 1.4 percent from 9,033 thousand barrels per day on average in the four weeks ending on Mar 13 to 8,907 thousand barrels per day in the week of Apr 20. The Energy Information Administration (EIA) informs that “US crude oil imports averaged 8.8 million barrels per day last week, up by 48 thousand barrels per day from the previous week [Apr 13]” (http://www.eia.gov/pub/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/current/pdf/highlights.pdf). Similar use in utilization in refineries with increasing imports at the margin in the prior week resulted in increase of commercial crude oil stocks by 4.0 million barrels from 369.0 million barrels on Apr 13 to 373.0 million barrels on Apr 20. Motor gasoline production increased 0.1 percent to 8,897 thousand barrels per day in the week of Apr 20 from 8,889 thousand barrels per day on average in the week of Apr 13. Gasoline stocks decreased 2.3 million barrels and stocks of fuel oil decreased 3.1 million barrels. Supply of gasoline fell from 9,061 thousand barrels per day on Apr 22, 2011, to 8,684 thousand barrels per day on Apr 20, 2012, or by 4.2 percent, while fuel oil supply increased 0.1 percent. Part of the fall in consumption of gasoline is due to higher prices and part to the growth recession. WTI crude oil price traded at $103.58/barrel on Apr 20, 2012. Gasoline prices fell 0.2 percent from Apr 25, 2011 to Apr 23, 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	4/20/12	4/13/12	4/22/11
Crude Oil Refineries Input	14,509 Week       ∆%: +0.04	14,503	14,142
Refinery Capacity Utilization %	84.7	84.7	82.7
Motor Gasoline Production	8,897 Week      ∆%: +0.1	8,889	8,947
Distillate Fuel Oil Production	4,302 Week     ∆%: -0.5	4,324	4,145
Crude Oil Imports	8,907 Week        ∆%: -1.4	9,033	8,676
Motor Gasoline Supplied	8,684 ∆% 2012/2011= -4.2%	8,737	9,061
Distillate Fuel Oil Supplied	3,835 ∆% 2012/2011 = 0.1%	3,785	3,830
	4/20/12	4/13/12	4/22/11
Crude Oil Stocks Million B	373.0     ∆= +4.0 MB	369.0	363.1
Motor Gasoline Million B	211.7    ∆= -2.3 MB	214.0	205.6
Distillate Fuel Oil Million B	125.9 ∆= -3.1 MB	129.0	146.5
WTI Crude Oil Price $/B	103.58 ∆% 2012/2011 NA	102.84	NA
	4/23/12	4/16/12	4/25/11
Regular Motor Gasoline $/G	3.870 ∆% 2012/2011 -0.2	3.922	3.879

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 VII-3, US, Crude Oil Futures Contract

Source: US Energy Information Administration

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

There is significant difference between initial claims for unemployment insurance adjusted and not adjusted for seasonality provided in Table VII-2. Seasonally adjusted claims decreased 1,000 from 389,000 on Apr 14 to 389,000 on Apr 21. Claims not adjusted for seasonality decreased 3,484 from 370,227 on Apr 14 to 366,743 on Apr 21. 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 21, 12	388,000	366,743	381,750
Apr 14, 12	389,000	370,227	375,500
Change	-1,000	-3,484	+6,250
Apr 7, 12	388,000	390,064	369,250
Prior Year	426,000	387,867	414,000

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 599,564 on Apr 18, 2009 to 381,834 on Apr 9, 2011, and now to 366,743 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 14, 2001	346,981	383,000
Apr 13, 2002	428,834	442,000
Apr 12, 2003	434,911	434,000
Apr 17, 2004	334,965	364,000
Apr 16, 2005	285,657	307,000
Apr 15, 2006	268,472	299,000
Apr 14, 2007	317,917	327,000
Apr 12, 2008	370,960	365,000
Apr 18, 2009	596,564	646,000
Apr 17, 2010	436,814	476,000
Apr 16, 2011	381,834	414,000
Apr 21, 2012	366,743	388,000

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 0.09 percent for three months, 0.14 percent for six months, 0.17 percent for 12 months, 0.26 percent for two years, 0.38 percent for three years, 0.83 percent for five years, 1.34 percent for seven years, 1.93 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)

References

Abraham, Katharine G., John C. Haltiwanger, Kristin Sandusky and James Spletzer. 2009. Exploring differences in employment between household and establishment data. Cambridge, MA, National Bureau of Economic Research, Mar 2009.

Bagehot, Walter. 1873. Lombard Street, 14^th edn. London: Kegan, Paul & Co, 1917.

Ball, Laurence and N. Gregory Mankiw. 2002. The NAIRU in theory and practice. Journal of Economic Perspectives 16 (4, Autumn): 115-36.

Bank of Japan. 2012Feb14APP. Amendment to “Principal Terms and Conditions for the Asset Purchase Program.” Tokyo, Bank of Japan, Feb 14 http://www.boj.or.jp/en/announcements/release_2012/rel120214a.pdf

Bank of Japan. 2012Feb14PSG. The price stability goal in the medium to long term. Tokyo, Bank of Japan, Feb 14 http://www.boj.or.jp/en/announcements/release_2012/k120214b.pdf

Bank of Japan. 2012Feb14EME. Enhancement of monetary easing. Tokyo, Bank of Japan, Feb 14 http://www.boj.or.jp/en/announcements/release_2012/k120214a.pdf

Barro, Robert J. and David B. Gordon. 1983. A positive theory of monetary policy in a natural rate model. Journal of Political Economy 91 (4, Aug): 589-610.

Barsky, Robert B. and Lutz Kilian. 2004. Oil and the macroeconomy since the 1970s. Journal of Economic Perspectives 18 (4, Autumn): 115-34.

Beim, David O. 2011Oct9. Can the euro be saved? New York City, Columbia University, Oct 9 http://www1.gsb.columbia.edu/mygsb/faculty/research/pubfiles/5573/Can%20the%20Euro%20be%20Saved.pdf

Black, Fischer and Myron Scholes. 1973. The pricing of options and corporate liabilities. Journal of Political Economy 81 (May/June): 637-54.

Batini, Nicoletta and Edward Nelson. 2002. The lag from monetary policy actions to inflation: Friedman revisited. London, Bank of England, External MPC Unit Discussion Paper No. 6, Jan.

Bernanke, Ben S. 2003. A perspective on inflation targeting. Business Economics 38 (3, Jul): 7–15.

Bernanke, Ben S. 2010WP. What the Fed did and why: supporting the recovery and sustaining price stability. Washington Post, Nov 4. http://www.washingtonpost.com/wp-dyn/content/article/2010/11/03/AR2010110307372_pf.html

Bernanke, Ben S. 2011Oct4JEC. Statement. Washington, DC, Joint Economic Committee, US Congress, Oct 4 http://www.federalreserve.gov/newsevents/testimony/bernanke20111004a.pdf

Bernanke, Ben S. and Frederic S. Mishkin. 1997. Inflation targeting: a new framework for monetary policy? Journal of Economic Perspectives 11 (2, Spring): 97–116.

Blanchard, Olivier. 2011WEOSep. Foreword to IMF 2011WEOSep: XIII-XIV.

Blanchard, Olivier. 2012WEOApr. Foreword to IMF 2012WEOApr: XIII-XIV

Blanchard, Olivier and Lawrence F. Katz. 1997. What we know and do not know about the natural rate of unemployment. Journal of Economic Perspectives 11 (1, Winter): 51-72.

Buiter, Willem. 2011Oct31. EFSF needs bigger bazooka to maximize its firepower. Financial Times, Oct 31 http://www.ft.com/intl/cms/s/0/c4886f7a-03d3-11e1-bbc5-00144feabdc0.html#axzz1cMoq63R5

Bureau of Labor Statistics. 2011Feb11. Overview of seasonal adjustment of the current employment statistics program. Washington, Feb 11, 2011 http://www.bls.gov/ces/cessa_oview.pdf

Bureau of Labor Statistics. 2012Feb3. Seasonal adjustment files and documentation. Washington, BLD, Feb 3 http://www.bls.gov/web/empsit/cesseasadj.htm

Caballero, Ricardo and Francsco Giavazzi. 2012Jan15. Parity may be euro’s last chance. Bloomberg, Jan 15 http://www.bloomberg.com/news/2012-01-16/dollar-parity-may-be-euro-salvation-commentary-by-caballero-and-giavazzi.html

Brunner, Karl and Allan H. Meltzer. 1973. Mr. Hicks and the “monetarists.” Economica NS 40 (157, Feb): 44-59.

Cameron, Rondo E. 1961. France and the economic development of Europe 1800-1914: conquests of peace and seeds of war. Princeton: Princeton University Press.

Cameron, Rondo E. 1967. Banking in the early stages of industrialization. Oxford: Oxford University Press.

Cameron, Rondo E. 1972. Banking and economic development. Oxford: Oxford University Press.

Cameron, Rondo E., V.I. Bovkyn, Richard Sylla, Mira Wilkins, Boris Anan’ich, and A. A. Fursenko, eds. 1992. International Banking 1870-1914. Oxford: Oxford University Press.

CBO. 2012JanBEO. The budget and economic outlook: fiscal years 2012 to 2022. Washington, DC: Congressional Budget Office, Jan http://www.cbo.gov/ftpdocs/126xx/doc12699/01-31-2012_Outlook.pdf

Cline, William. 2001. The role of the private sector in resolving financial crises in emerging markets. Cambridge, MA, NBER, Jun.

Cline, William. 2002. Private sector involvement: definition, measurement and implementation. London, Bank of England Conference, Jul-23-4.

Cobet, Aaron E. and Gregory A. Wilson. 2002. Comparing 50 years of labor productivity in US and foreign manufacturing. Monthly Labor Review (Jun): 51-65.

Cochrane, John A. 2010A. The government debt valuation equation. An appendix to “Understanding policy.” http://faculty.chicagobooth.edu/john.cochrane/research/Papers/

Cochrane, John H. 2011Jan. Understanding policy in the great recession: some unpleasant fiscal arithmetic. European Economic Review 55 (1, Jan): 2-30.

Cochrane, John H. and Luigi Zingales. 2009. Lehman and the financial crisis. Wall Street Journal, Sep 15.

Cole, Harold L. and Lee E. Ohanian. 1999. The Great Depression in the United States from a neoclassical perspective. Federal Reserve Bank of Minneapolis Quarterly Review 23 (1, Winter): 2-24.

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

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

Darby, Michael R. Darby. 1974. The permanent income theory of consumption—a restatement. Quarterly Journal of Economics (88, 2): 228-50.

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

Draghi, Mario. 2011Dec1. Introductory statement by Mario Draghi, President of the ECB. Brussels, Hearing before the Plenary of the European Parliament, Dec 1 http://www.ecb.int/press/key/date/2011/html/sp111201.en.html

Draghi, Mario. 2011Dec8. Introductory statement to the press conference. Frankfurt am Main, ECB, Dec 8 http://www.ecb.int/press/pressconf/2011/html/is111208.en.html

Duffie, Darell and Kenneth J. Singleton. 2003. Credit risk: pricing, measurement and management. Princeton: Princeton University Press.

European Council. 2011Dec9. Statements by the euro area heads of state or government. Brussels, European Union, Dec 9 http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/126658.pdf

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

Diamond, Douglas W. and Philip H. Dybvig. 1983. Bank runs, deposit insurance and liquidity. Journal of Political Economy 91 (3, Jun): 401-49.

Diamond, Douglas W. and Philip H. Dybvig. 1986. Banking theory, deposit insurance and bank regulation. Journal of Business 59 (1, Jan): 55-68.

Diamond, Douglas W. and Raghuram G. Rajan. 2000. A theory of bank capital. Journal of Finance 55 (6, Dec): 2431-65.

Diamond, Douglas W. and Raghuram G. Rajan. 2001a. Banks and liquidity. American Economic Review 91 (2, May): 422-5.

Diamond, Douglas W. and Raghuram G. Rajan. 2001b. Banks and liquidity. American Economic Review 91 (2, May): 422-5.

Dornbusch, Rudiger. 1976. Expectations and exchange rate dynamics. Journal of Political Economy 84 (6, Dec): 1161-76.

Draghi, Mario. 2011Dec15. The euro, monetary stability and the design of a fiscal compact. Berlin, Dec 15 http://www.ecb.int/press/key/date/2011/html/sp111215.en.html

European Central Bank. 2011MBDec. Editorial. Monthly Bulletin December 2011, 5-9 http://www.ecb.int/pub/pdf/mobu/mb201112en.pdf

European Commission. 2011Oct26SS. Euro summit statement. Brussels, European Commission, Oct 26 http://ec.europa.eu/news/economy/111027_en.htm

European Commission. 2011Oct26MRES. Main results of Euro Summit. Brussels, European Commission, Oct 26 http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/125645.pdf

European Council. 2011Dec9. Statements by the euro area heads of state or government. Brussels, European Union, Dec 9 http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/126658.pdf

Feldstein, Martin. 2012Mar19. Obama’s tax hikes threaten a new US recession. Financial Times, Mar 19 http://www.ft.com/intl/cms/s/0/0d0e7acc-6f7d-11e1-9c57-00144feab49a.html#axzz1pexRlsiQ

Friedman, Milton. 1957. A Theory of the Consumption Function. Princeton: Princeton University Press.

Friedman, Milton. 1961. The lag in effect of monetary policy. Journal of Political Economy 69 (5, Oct): 447-66.

Friedman, Milton. 1968. The role of monetary policy. American Economic Review 58 (1, Mar): 1-17.

Friedman, Milton. 1970. Controls on interest rates paid by banks. Journal of Money, Credit and Banking 2 (1, Feb): 15-32.

FOMC. 2006Dec12. Meeting of the Federal Open Market Committee December 12, 2006. Washington, DC, Federal Reserve, Dec 12 http://www.federalreserve.gov/monetarypolicy/files/FOMC20061212meeting.pdf

Gorton, Gary. 2009EFM. The subprime panic. European Financial Management 15 (1): 10-46.

Greenspan, Alan. 2004. Risk and uncertainty in monetary policy. American Economic Review 94 (2, May): 33-40. Also available at http://www.federalreserve.gov/boarddocs/speeches/2004/20040103/default.htm

Hamilton, Alexander. 1780. The national Bank. In Henry Cabot Lodge, ed. The works of Alexander Hamilton. New York and London: G. P. Putnam & Sons, 1904: 319-45. http://oll.libertyfund.org/?option=com_staticxt&staticfile=show.php%3Ftitle=1380&chapter=64319&layout=html#a_1594266

Harris, Jennifer M. 2011BA. Benchmark article. Washington, DC, Bureau of Labor Statistics http://www.bls.gov/ces/cesbmart.pdf

Hicks, John R. 1975. The scope and status of welfare economics. Oxford Economic Papers 27 (3): 307-26.

Hobbs, Frank and Nicole Stoops. 2002. Demographic trends in the 20^th century. Washington, DC, US Government Printing Office http://www.census.gov/prod/2002pubs/censr-4.pdf

IMF. 2011WEOSep. World economic outlook Sep 11: slowing growth, rising risks. Washington, DC, IMF Sep http://www.imf.org/external/pubs/ft/weo/2011/02/pdf/text.pdf

IMF. 2011JSRNov23. Japan sustainability report. Washington, DC, IMF, Nov 23 http://www.imf.org/external/np/country/2011/mapjapanpdf.pdf

IMF. 2012GFSRJan24. Global Financial Stability Report: market update. Washington, DC, IMF, Jan 24 http://www.imf.org/external/pubs/ft/fmu/eng/2012/01/index.htm

IMF. 2012FMJan24. Fiscal Monitor Update. Washington, DC, IMF, Jan 24 http://www.imf.org/external/pubs/ft/fm/2012/update/01/fmindex.htm

IMF. 2012WEOJan24. World Economic Outlook Update: an update of the key WEO projections. Washington, DC, IMF, Jan 24 http://www.imf.org/external/pubs/ft/weo/2012/update/01/index.htm

IMF. 2012WEOApr. World Economic Outlook April 2012: growth resuming, dangers remains. Washington, DC, IMF, 2012, Apr http://www.imf.org/external/pubs/ft/weo/2012/01/pdf/text.pdf

IMF. 2012GFSRApr. Global financial stability report: the quest for lasting stability. Washington, DC, IMF 2012, Apr http://www.imf.org/external/pubs/ft/gfsr/2012/01/pdf/text.pdf

IMF. 2012FMApr. Fiscal monitor: balancing fiscal policy risks. Washington, DC, IMF, Apr

http://www.imf.org/external/pubs/ft/fm/2012/01/pdf/fm1201.pdf

IMFC. 2012Apr20. Joint Statement of the International Monetary and Financial Committee and the Group of 20 Finance Ministers and Central Bank Governors on IMF Resources. Washington, DC, IMF, Apr 20 http://www.imf.org/external/np/sec/pr/2012/pr12144.htm

IMFC. 2012Apr21. Communiqué of the Twenty-Fifth Meeting of the IMFC. Washington, DC, IMF, Apr 21 http://www.imf.org/external/np/sec/pr/2012/pr12145.htm

Ingersoll, Jonathan. 1987. Theory of Financial Decision Making. New Jersey: Rowman.

Ito, Takatoshi. Interventions and Japanese economic recovery. YenMacro, Michigan 2004 1 http://www.fordschool.umich.edu/rsie/Conferences/CGP/Oct2004Papers/Ito.pdf

Jensen, Michael C. 1993. The modern industrial revolution, exit and the failure of internal control systems. Journal of Finance 48 (3, Jul): 831-80.

Kohn, Donald L. 2009Apr18. Monetary policy in the financial crisis. Nashville, TN, Conference in Honor of Dewey Daane, Apr 18 http://www.federalreserve.gov/newsevents/speech/kohn20090418a.htm

Kohn, Donald L. 2009Sep10. Comments on “Interpreting the Unconventional US Monetary policy of 2007-2009.” Washington, Brookings Institution, Sep 10 http://www.federalreserve.gov/newsevents/speech/kohn20090910a.htm

Kydland, Finn E. and Edward C. Prescott. 1977. Rules rather than discretion: the inconsistency of optimal plans. Journal of Political Economy 85 (3, Jun): 473-92.

Lazear, Edward P. 2012Jan19. The jobs picture is still far from rosy. Wall Street Journal, Jan 19 http://professional.wsj.com/article/SB10001424052970204468004577165292033648810.html

Lazear, Edward P. and James R. Spletzer. 2012Mar. Hiring, churn and the business cycle. Cambridge, MA, NBER, Mar http://www.nber.org/papers/w17910

McKinnon, Ronald I. 1973. Money and Capital in Economic Development. Washington, DC: Brookings Institution.

McKinnon, Ronald I. 2011Dec18. Oh, for Alexander Hamilton to save Europe! Financial Times, Dec 18 http://www.ft.com/intl/cms/s/0/811611d6-273a-11e1-b7ec-00144feabdc0.html#axzz1gzoHXOj6

Meltzer, Allan H. 2005. Origins of the Great Inflation. Federal Reserve Bank of St. Louis Review 87 (2, Part 2, Mar/Apr): 145-72.

Meltzer, Allan H. 2010a. A history of the Federal Reserve, Volume 2, Book 1, 1951-1969. Chicago: University of Chicago Press.

Meltzer, Allan H. 2010b. A history of the Federal Reserve, Volume 2, Book 2, 1970-1986. Chicago: University of Chicago Press.

Metzler, Lloyd A. The nature and stability of inventory cycles. 1941. Review of Economics and Statistics 23 (3, Aug): 113-29.

Merton, Robert C. 1973. Theory of rational option pricing. Bell Journal of Economics and Management Science 4 (1, Spring): 141-83.

Merton, Robert C. 1974. On the pricing of corporate debt: the risk structure of interest rates. Journal of Finance 29 (2, May): 449-70.

Merton, Robert C. 1998. Applications of option-pricing theory: twenty-five years later. American Economic Review 88 (3): 323-49.

Pelaez, Carlos A. 2008. The reform of Alexander Hamilton. Philadelphia, University of Pennsylvania Law School, Unpublished manuscript.

Pelaez, Carlos M. and Carlos A. Pelaez. 2005. International Financial Architecture. Basingstoke: Palgrave Macmillan. http://us.macmillan.com/QuickSearchResults.aspx?search=pelaez%2C+carlos&ctl00%24ctl00%24cphContent%24ucAdvSearch%24imgGo.x=26&ctl00%24ctl00%24cphContent%24ucAdvSearch%24imgGo.y=14 http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10

Pelaez, Carlos M. and Carlos A. Pelaez. 2007. The Global Recession Risk. Basingstoke: Palgrave Macmillan. http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10

Pelaez, Carlos M. and Carlos A. Pelaez. 2008a. Globalization and the State: Vol. I. Basingstoke: Palgrave Macmillan. http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10

Pelaez, Carlos M. and Carlos A. Pelaez. 2008b. Globalization and the State: Vol. II. Basingstoke: Palgrave Macmillan.

Pelaez, Carlos M. and Carlos A. Pelaez. 2008c. Government Intervention in Globalization. Basingstoke: Palgrave Macmillan. http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10

Pelaez, Carlos M. and Carlos A. Pelaez. 2009a. Financial Regulation after the Global Recession. Basingstoke: Palgrave Macmillan. http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10

Pelaez, Carlos M. and Carlos A. Pelaez. 2009b. Regulation of Banks and Finance. Basingstoke: Palgrave Macmillan.http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10

Pelaez, Carlos Manuel. 1975. The establishment of banking institutions in a backward economy: Brazil, 1800-1851. Business History Review 49 (4, Winter): 446-72.

Pelaez, Carlos Manuel. 1986. O Cruzado e o Austral. São Paulo: Editora Atlas.

Pelaez, Carlos Manuel. 1987. Economia Brasileira Contemporânea. São Paulo: Editora Atlas.

Pelaez, Carlos Manuel and Wilson Suzigan. História Monetária do Brasil, Segunda Edição. Brasília: Coleção Temas Brasileiros, Editora Universidade de Brasília.

Phelps, Edmund S. 1968. Money-wage dynamics and labor market equilibrium. Journal of Political Economy 76 (4, 2, Jul-Aug): 678-711.

Reinhart, Carmen M. and Kenneth Rogoff. 2010GTD. Growth in a time of debt. American Economic Review 100 (2): 1-9.

Rajan, Raghuram G. 2005. Has financial development made the world riskier? Jackson Hole, WY, Symposium sponsored by the Federal Reserve Bank of Kansas City. http://www.kc.frb.org/publicat/sympos/2005/PDF/Rajan2005.pdf

Rajan, Raghuram G. and Luigi Zingales. 2001. The influence of the financial revolution on the nature of the firm. American Economic Review 91 (2): 206-11.

Robinson, Joan. 1947. Beggar-my-neighbour remedies for unemployment. In Joan Robinson, Essays in the Theory of Employment, Oxford, Basil Blackwell, 1947.

Rogoff, Kenneth. 2002MF. Dornbusch’s overshooting model after twenty-five years. Washington, DC, IMF, Mundell-Fleming Lecture http://www.imf.org/external/np/speeches/2001/kr/112901.pdf

Roll, Richard. 1977. A critique of the asset pricing theory’s tests. Part I: on past and potential testability of the theory. Journal of Financial Economics 4 (2, Mar): 129-76.

Romer, Christina D. and David H. Romer. 2004. A new measure of monetary shocks: derivation and implications. American Economic Review 94 (4, Sep): 1055-84.

Samuelson, Paul A. 1974. Lessons from the current economic expansion. American Economic Review 64 (2, May): 75-7.

Sargent, Thomas J. and Neil Wallace. 1973. The stability of models of money and growth with perfect foresight. Econometrica 41 (6, Nov): 1043-8.

Sargent, Thomas J. and Neil Wallace. 1981. Some unpleasant monetarist arithmetic. Federal Reserve Bank of Minneapolis Quarterly Review 5 (3, Fall): 1-17.

Sargent, Thomas J. and William L. Silber. 2012Mar20. The challenges of the Fed’s bid for transparency. Financial Times, Mar 20 http://www.ft.com/intl/cms/s/0/778eb1ce-7288-11e1-9c23-00144feab49a.html#axzz1pexRlsiQ

Shaw, Edward S. 1973. Financial Deepening in Economic Development. New York: Oxford University Press.

Standard & Poor’s Rating Services (S&PRS). 2012Jan13. Standard & Poor’s takes various rating actions on 16 eurozone sovereign governments. Frankfurt, S&P Rating Services, Jan 13 http://www.standardandpoors.com/ratings/articles/en/us/?articleType=HTML&assetID=1245327294763

Standard & Poor’s Rating Services (S&PRS). 2012Jan16. European Financial Stability Facility long-term Ratings Cut to ‘AA+’; short-term ratings affirmed; outlook developing. Frankfurt, S&P Rating Services, Jan 16 http://www.standardandpoors.com/ratings/articles/en/us/?articleType=HTML&assetID=1245327337060

Svensson, Lars E. 2003. What is wrong with Taylor rules? Using judgment in monetary policy through targeting rules. Journal of Economic Literature 41 (2 Jun): 426–77.

Taylor, John B. 1993. Discretion versus policy rules in practice. Carnegie-Rochester Conference Series on Public Policy 39 (1993): 195-214.

Taylor, John B. 1997. Comment. In Christina Romer and David Romer, eds. Reducing inflation: motivation and strategy. Chicago: University of Chicago Press.

Taylor, John B. 1998LB. Monetary policy and the long boom. Federal Reserve Bank of St. Louis Review (Nov-Dec): 3-11.

Taylor, John B. 1999. An historical analysis of monetary policy rules. In John B. Taylor, ed. Monetary policy rules. Chicago: University of Chicago Press.

Taylor, John B. 2012FP. First principles: five keys to restoring America’s prosperity. New York: W. W. Norton.

Taylor, John B. 2012Mar27. Testimony before the Joint Economic Committee at the Hearing on “Monetary Policy Going Forward: Why a Sound Dollar Boosts Growth and Employment.” Washington, DC, JEC, Mar 27 http://jec.senate.gov/republicans/public/?a=Files.Serve&File_id=f002b5f0-9fc0-45f9-9d53-e563137c040e

Taylor, John B. 2012Mar28. The dangers of an interventionist Fed. Wall Street Journal, Mar 28 http://professional.wsj.com/article/SB10001424052702303816504577307403971824094.html?mod=WSJ_hps_sections_opinion

Taylor, John B. 2012JMCB. Monetary policy rules work and discretion doesn’t: a tale of two eras. Palo Alto, CA, Stanford University, Mar 2012, forthcoming in the Journal of Money, Credit and Banking, 2012 http://www.stanford.edu/~johntayl/JMCB%20lecture.pdf

Tobin, James. 1969. A general equilibrium approach to monetary theory. Journal of Money, Credit and Banking 1 (1, Feb): 15-29.

Tobin, James. 1974. Monetary policy in 1974 and beyond. Brookings Papers on Economic Activity 1 (1974): 219-32.

Wriston, Walter B. 1982. Banking against disaster. New York Times, Sep 14.

Yellen, Janet L. 2011AS. The Federal’s Reserve’s asset purchase program. Denver, Colorado, Allied Social Science Association Annual Meeting, Jan 8 http://federalreserve.gov/newsevents/speech/yellen20110108a.pdf

Zingales, Luigi. 2000. In search of new foundations. Journal of Finance 55 (4, Aug): 1623-54.

© 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