CMP Associates Regulation Blog

Chart ESI-1, US, Labor Force Participation Rate, Percent of Labor Force in Population, NSA, 1979-2011

Source: Bureau of Labor Statistics

Total nonfarm payroll employment seasonally adjusted (SA) increased 115,000 in Apr 2012 and private payroll employment rose by 130,000. The number of nonfarm jobs and private jobs created has been declining in the first four months of 2012 from 275,000 in Jan to 115,000 in Apr. Table ESI-3 provides the monthly change in jobs seasonally adjusted in the prior strong contraction of 1981-1982 and the recovery in 1983 into 1984 and in the contraction of 2008-2009 and in the recovery in 2009 to 2012. All revisions have been incorporated in Table ESI-3. The data in the recovery periods are in relief to facilitate comparison. There is significant bias in the comparison. The average yearly civilian noninstitutional population was 174.2 million in 1983 and the civilian labor force 111.6 million, growing by 2009 to an average yearly civilian noninstitutional population of 235.8 million and civilian labor force of 154.1 million, that is, increasing by 35.4 percent and 38.1 percent, respectively (http://www.bls.gov/data/). Total nonfarm payroll jobs in 1983 were 90.280 million, jumping to 94.530 million in 1984 while total nonfarm jobs in 2010 were 129.874 million declining from 130.807 million in 2009 (http://www.bls.gov/data/). What is striking about the data in Table ESI-3 is that the numbers of monthly increases in jobs in 1983 and 1984 are several times higher than in 2010 to 2011 even with population higher by 35.4 percent and labor force higher by 38.1 percent in 2009 relative to 1983 nearly three decades ago and total number of jobs in payrolls rose by 39.5 million in 2010 relative to 1983 or by 43.8 percent. Growth has been mediocre in the eleven quarters of expansion beginning in IIIQ2009 in comparison with earlier expansions (http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-growth-with-high-unemployment.html) and also in terms of what is required to reduce the job stress of at least 24 million persons but likely close to 30 million. Some of the job growth and contraction in 2010 in Table ESI-3 is caused by the hiring and subsequent layoff of temporary workers for the 2010 census.

Table ESI-3, US, Monthly Change in Jobs, Number SA

Month	1981	1982	1983	2008	2009	2010	Private
Jan	95	-327	225	41	-818	-40	-40
Feb	67	-6	-78	-84	-724	-35	-27
Mar	104	-129	173	-95	-799	189	141
Apr	74	-281	276	-208	-692	239	193
May	10	-45	277	-190	-361	516	84
Jun	196	-243	378	-198	-482	-167	92
Jul	112	-343	418	-210	-339	-58	92
Aug	-36	-158	-308	-274	-231	-51	128
Sep	-87	-181	1114	-432	-199	-27	115
Oct	-100	-277	271	-489	-202	220	196
Nov	-209	-124	352	-803	-42	121	134
Dec	-278	-14	356	-661	-171	120	140
			1984			2011	Private
Jan			447			110	119
Feb			479			220	257
Mar			275			246	261
Apr			363			251	264
May			308			54	108
Jun			379			84	102
Jul			312			96	175
Aug			241			85	52
Sep			311			202	216
Oct			286			112	139
Nov			349			157	178
Dec			127			223	234
			1985			2012	Private
Jan			266			275	277
Feb			124			259	254
Mar			346			154	166
Apr			195			115	130
May			274
Jun			145
Jul			189
Aug			193
Sep			204
Oct			187
Nov			209
Dec			168

Source: US Bureau of Labor Statistics

Charts from the database of the Bureau of Labor Statistics provide a comparison of payroll survey data for the contractions and expansions in the 1980s and after 2007. Chart ESI-2 provides total nonfarm payroll jobs from 2001 to 2012. The sharp decline in total nonfarm jobs during the contraction after 2007 has been followed by initial stagnation and then tepid growth.

Chart ESI-2, US, Total Nonfarm Payroll Jobs SA 2001-2012

Source: US Bureau of Labor Statistics http://www.bls.gov/data/

Total nonfarm payroll jobs grew rapidly during the expansion in 1983 and 1984 as shown in Chart ESI-3. Nonfarm payroll jobs continued to grow at high rates during the remainder of the 1980s.

Chart ESI-3, US, Total Nonfarm Payroll Jobs SA 1979-1989

Source: US Bureau of Labor Statistics

Most job creation in the US is by the private sector. Chart ESI-4 shows the sharp destruction of private payroll jobs during the contraction after 2007. There has been growth after 2010 but insufficient to recover higher levels of employment prevailing before the contraction. At current rates, recovery of employment may spread over several years in contrast with past expansions of the business cycle in the US.

Chart ESI-4, US, Total Private Payroll Jobs SA 2001-2012

Source: US Bureau of Labor Statistics http://www.bls.gov/data/

In contrast, growth of private payroll jobs in the US recovered vigorously during the expansion in 1983 through 1985, as shown in Chart ESI-5. Rapid growth of creation of private jobs continued throughout the 1980s.

Chart ESI-5, US, Total Private Payroll Jobs SA 1979-1989

Source: US Bureau of Labor Statistics http://www.bls.gov/data/

Table ESI-4 provides national income by industry without capital consumption adjustment (WCCA). “Private industries” or economic activities have share of 85.9 percent in US national income. Most of US national income is in the form of services. In Apr 2012, there were 132.9 million nonfarm jobs in the US, according to estimates of the establishment survey of the Bureau of Labor Statistics (BLS) (http://www.bls.gov/news.release/pdf/empsit.pdf Table B-1, 28). Total private jobs of 110.6 million NSA in Apr 2012 accounted for 83.2 percent of total nonfarm jobs of 132.9 million, of which 11.9 million, or 10.8 percent of total private jobs and 8.9 percent of total nonfarm jobs, were in manufacturing. Private service-producing jobs were 92.5 million NSA in Apr 2012, or 69.6 percent of total nonfarm jobs and 83.6 percent of total private-sector jobs. Manufacturing has share of 10.0 in US national income, as shown in Table ESI-4. Most income in the US originates in services. Subsidies and similar measures designed to increase manufacturing jobs will not increase economic growth and employment and may actually reduce growth by diverting resources away from currently employment-creating activities because of the drain of taxation.

Table ESI-4, US, National Income without Capital Consumption Adjustment by Industry, Seasonally Adjusted Annual Rates, Billions of Dollars, % of Total

	SAAR IVQ2011	% Total
National Income WCCA	13,332.0	100.0
Domestic Industries	13,105.7	98.3
Private Industries	11,458.8	85.9
Agriculture	133.1	1.0
Mining	170.9	1.3
Utilities	169.3	1.3
Construction	544.5	4.1
Manufacturing	1330.9	10.0
Durable Goods	770.8	5.8
Nondurable Goods	560.1	4.2
Wholesale Trade	764.2	5.7
Retail Trade	906.1	6.8
Transportation & WH	372.0	2.8
Information	441.2	3.3
Finance, insurance, RE	2452.9	18.4
Professional, BS	1893.8	14.2
Education, Health Care	1370.8	10.3
Arts, Entertainment	519.1	3.9
Other Services	390.2	2.9
Government	1646.9	12.4
Rest of the World	226.3	1.7

Notes: SSAR: Seasonally-Adjusted Annual Rate; WCCA: Without Capital Consumption Adjustment by Industry; WH: Warehousing; RE, includes rental and leasing: Real Estate; Art, Entertainment includes recreation, accommodation and food services; BS: business services

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

ESII Falling Real Wages. Calculations using BLS data of inflation-adjusted average hourly earnings are shown in Table ESII-1. The final column of Table ESII-1 (“12 Month Real ∆%”) provides inflation-adjusted average hourly earnings of all employees in the US. Average hourly earnings rose above inflation throughout the first nine months of 2007 just before the global recession that began in the final quarter of 2007 when average hourly earnings lost to inflation. In contrast, average hourly earnings of all US workers have risen less than inflation in four months in 2010 and in all but the first month in 2011 and the loss accelerated at 1.8 percent in Sep 2011, declining to a real loss of 1.1 percent in Feb 2012 and 0.6 percent in Mar 2012, which is the most recent month for which there are consumer price index data.

Table ESII-1, US, Average Hourly Earnings Nominal and Inflation Adjusted, Dollars and % NSA

	AHE ALL	12 Month Nominal ∆%	∆% 12 Month CPI	12 Month Real ∆%
2007
Jan*	$20.70*	4.2*	2.1	2.1*
Feb*	$20.79*	4.1*	2.4	1.7*
Mar	$20.82	3.7	2.8	0.9
Apr	$21.05	3.3	2.6	0.7
May	$20.83	3.7	2.7	1.0
Jun	$20.82	3.8	2.7	1.1
Jul	$20.99	3.4	2.4	1.0
Aug	$20.85	3.5	2.0	1.5
Sep	$21.18	4.0	2.8	1.2
Oct	$21.07	2.7	3.5	-0.8
Nov	$21.13	3.3	4.3	-0.9
Dec	$21.37	3.7	4.1	-0.4
2010
Jan	$22.55	2.0	2.6	-0.6
Feb	$22.61	1.4	2.1	-0.7
Mar	$22.51	1.2	2.3	-1.1
Apr	$22.56	1.8	2.2	-0.4
May	$22.63	2.5	2.0	0.5
Jun	$22.37	1.7	1.1	0.6
Jul	$22.44	1.8	1.2	0.6
Aug	$22.58	1.7	1.1	0.6
Sep	$22.63	1.8	1.1	0.7
Oct	$22.73	1.9	1.2	0.7
Nov	$22.72	1.1	1.1	0.0
Dec	$22.79	1.7	1.5	0.2
2011
Jan	$23.20	2.9	1.6	1.3
Feb	$23.03	1.9	2.1	-0.2
Mar	$22.93	1.9	2.7	-0.8
Apr	$23.00	2.0	3.2	-1.2
May	$23.09	2.0	3.6	-1.5
Jun	$22.85	2.1	3.6	-1.4
Jul	$22.98	2.4	3.6	-1.2
Aug	$22.88	1.3	3.8	-2.4
Sep	$23.09	2.0	3.9	-1.8
Oct	$23.34	2.7	3.5	-0.8
Nov	$23.19	2.1	3.4	-1.3
Dec	$23.26	2.1	3.0	-0.9
2012
Jan	$23.61	1.8	2.9	-1.1
Feb	$23.45	1.8	2.9	-1.1
Mar	$23.41	2.1	2.7	-0.6
Apr	$23.62	2.7

Note: AHE ALL: average hourly earnings of all employees; CPI: consumer price index; Real: adjusted by CPI inflation; NA: not available

*AHE of production and nonsupervisory employees because of unavailability of data for all employees

Average hourly earnings of all US employees in the US in constant dollars of 1982-1984 from the dataset of the US Bureau of Labor Statistics (BLS) are provided in Table ESII-2. Average hourly earnings fell 0.5 percent after adjusting for inflation in the 12 months ending in Mar 2012. Table ESII-2 confirms the trend of deterioration of purchasing power of average hourly earnings in 2011 and into 2012. Those who still work bring back home a paycheck that buys fewer goods than a year earlier and savings in bank deposits do not pay anything because of financial repression (Section II and earlier at http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-economic-growth-falling-real.html).

Table ESII-2, US, Average Hourly Earnings of All Employees in Constant Dollars of 1982-1984

Year	Jan	Feb	Mar	Oct	Nov	Dec
2006			10.05	10.17	10.15	10.21
2007	10.23	10.22	10.14	10.08	10.05	10.17
2008	10.11	10.12	10.11	10.06	10.37	10.47
2009	10.47	10.50	10.46	10.32	10.39	10.38
2010	10.41	10.43	10.34	10.39	10.38	10.40
2011	10.53	10.41	10.26	10.31	10.25	10.31
2012	10.42	10.30	10.21

Source: US Bureau of Labor Statistics

The deterioration of purchasing power of average hourly earnings of US workers is shown by Chart ESII-1 of the US Bureau of Labor Statistics. Chart ESII-1 plots average hourly earnings of all US employees in constant 1982-1984 dollars with evident decline from 2010 to 2012.

Chart ESII-1, US, Average Hourly Earnings of All Employees in Constant Dollars of 1982-1984, SA 2006-2012

Source: US Bureau of Labor Statistics

Chart ESII-2 provides 12-month percentage changes of average hourly earnings of all employees in constant dollars of 1982-1984, that is, adjusted for inflation. There was sharp contraction of inflation-adjusted average hourly earnings of US employees during parts of 2007 and 2008. Rates of change in 12 months became positive in parts of 2009 and 2010 but then became negative again in 2011 and now into 2012.

Chart ESII-2, Average Hourly Earnings of All Employees NSA 12-Month Percent Change, 1982-1984 Dollars, NSA 2007-2012

Source: US Bureau of Labor Statistics

Average weekly earnings of all US employees in the US in constant dollars of 1982-1984 from the dataset of the US Bureau of Labor Statistics (BLS) are provided in Table ESII-3. Average weekly earnings fell 0.9 percent after adjusting for inflation in the 12 months ending in Sep 2011, increased 0.9 percent in the 12 months ending in Oct, fell 0.7 percent in the 12 months ending in Nov and 0.3 in the 12 months ending in Dec, declining 0.3 percent in the 12 months ending in Jan 2012 and 0.4 percent in the 12 months ending in Feb 2012. Average weekly earnings in constant dollars were flat in Mar 2012 relative to Mar 2011, increasing 0.04 percent. Table ESII-3 confirms the trend of deterioration of purchasing power of average weekly earnings in 2011 and into 2012. Those who still work bring back home a paycheck that buys fewer goods than a year earlier. The fractured US job market does not provide an opportunity for advancement as in past booms following recessions.

Table ESII-3, US, Average Weekly Earnings of All Employees in Constant Dollars of 1982-1984, NSA 2007-2012

Year	Jan	Feb	Mar	Nov	Dec
2006			343.71	349.12	353.37
2007	348.72	349.40	347.76	346.85	356.11
2008	345.92	346.21	351.70	358.83	357.17
2009	353.94	359.26	355.65	356.43	351.95
2010	350.71	350.51	349.60	355.12	355.61
2011	360.29	353.81	349.90	352.62	354.56
2012	359.36	352.27	350.04

Source: US Bureau of Labor Statistics

Chart ESII-3 provides average weekly earnings of all employees in constant dollars of 1982-1984. The same pattern emerges of sharp decline during the contraction, followed by recovery in the expansion and continuing fall from 2010 to 2011.

Chart ESII-3, US, Average Weekly Earnings of All Employees in Constant Dollars of 1982-1984, SA 2006-2012

Source: US Bureau of Labor Statistics

Chart ESII-4 provides 12-month percentage changes of average weekly earnings of all employees in the US in constant dollars of 1982-1984. There is the same pattern of contraction during the global recession in 2008 and then again trend of deterioration in the recovery without hiring and inflation waves in 2011 (http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring.html http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk.html http://cmpassocregulationblog.blogspot.com/2012/02/world-inflation-waves-united-states.html http://cmpassocregulationblog.blogspot.com/2012/01/world-inflation-waves-united-states.html http://cmpassocregulationblog.blogspot.com/2012/01/recovery-without-hiring-united-states.html).

Chart ESII-4, US, Average Weekly Earnings of All Employees NSA in Constant Dollars of 1982-1984 12-Month Percent Change, NSA 2007-2011

Source: US Bureau of Labor Statistics

ESIII Stagnating Real Disposable Income and Consumption Expenditures. The data on personal income and consumption have been revised back to 2003 as it the case of the national accounts (GDP revisions are covered in http://cmpassocregulationblog.blogspot.com/2011/07/growth-recession-debt-financial-risk.html). All revisions are incorporated in this subsection. Table ESIII-1 provides monthly and annual equivalent percentage changes, seasonally adjusted, of current dollars or nominal personal income (NPI), current dollars or nominal disposable personal income (NDPI), real or constant chained (2005) dollars DPI (RDPI), current dollars nominal personal consumption expenditures (NPCE) and constant or chained (2005) dollars PCE. There are four waves of changes in personal income and expenditures in Table ESIII-1 that correspond to inflation waves observed worldwide (http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring.html). In the first wave in Jan-Apr with relaxed risk aversion, nominal personal income (NPI) increased at the annual equivalent rate of 7.8 percent, nominal disposable personal income (NDPI) at 4.6 percent and nominal personal consumption expenditures (NPCE) at 6.5. Real disposable income (RDPI) stagnated and real personal consumption expenditures (RPCE) rose at annual equivalent 1.5 percent. In the second wave in May-Aug under risk aversion, NPI rose at annual equivalent 2.4 percent, NPDI at 2.7 percent and NPCE at 2.7 percent. RDPI stagnated at 0.3 percent annual equivalent and RPCE crawled at 0.6 percent annual equivalent. With mixed shocks of risk aversion in the third wave from Sep to Dec, NPI rose at 3.7 percent annual equivalent, NDPI at 3.0 percent and NPCE at 3.0 percent. Real values were more dynamic than in the earlier wave with RDPI increasing at 1.8 percent annual equivalent and RPCE at 2.1 percent annual equivalent. In the fourth wave from Jan to Mar 2012, NPI increased to 4.1 percent annual equivalent and NDPI at 2.8 percent but real disposable income (RDPI) stagnated again. The policy of repressing savings with zero interest rates stimulated growth of nominal consumption (NPCE) at the annual equivalent rate of 7.0 percent and real consumption (RPCE) at 3.7 percent. There has been sharp deterioration in the annual equivalent rates in the four waves in 2011 and 2012 shown in Table ESIII-1 from the annual equivalent rates prevailing in the final quarter of 2010 with lower equivalent rate of real personal consumption expenditures of 2.8 percent but based on growth of real disposable income at 3.2 percent annual equivalent. The US economy began to decelerate in mid 2010 and has not recovered the pace of growth in the early expansion phase.

Table ESIII-1, US, Percentage Change from Prior Month Seasonally Adjusted of Personal Income, Disposable Income and Personal Consumption Expenditures %

	NPI	NDPI	RDPI	NPCE	RPCE
2012
Mar	0.4	0.4	0.2	0.3	0.1
Feb	0.3	0.2	-0.1	0.9	0.5
Jan	0.3	0.1	-0.1	0.5	0.3
∆% Jan-Mar	4.1	2.8	0.0	7.0	3.7
2011
∆% Jan-Dec 2011*	4.6	3.4	0.8	4.1	1.5
Dec	0.4	0.4	0.3	0.2	0.1
Nov	0.1	0.0	-0.1	0.0	0.0
Oct	0.4	0.3	0.3	0.2	0.2
Sep	0.3	0.3	0.1	0.7	0.5
AE ∆% Sep-Dec	3.7	3.0	1.8	3.0	2.1
Aug	0.1	0.2	-0.1	0.1	-0.1
Jul	0.5	0.5	0.1	0.8	0.4
Jun	0.1	0.1	0.2	-0.2	-0.1
May	0.1	0.1	-0.1	0.2	0.0
AE ∆% May-Aug	2.4	2.7	0.3	2.7	0.6
Apr	0.2	0.2	-0.2	0.3	-0.1
Mar	0.5	0.4	0.0	0.6	0.2
Feb	0.6	0.5	0.1	0.8	0.4
Jan	1.2	0.4	0.1	0.4	0.0
AE ∆% Jan-Apr	7.8	4.6	0.0	6.5	1.5
2010
∆% Jan-Dec 2010	5.1	4.6	3.2	4.2	2.8
Dec	0.5	0.5	0.2	0.4	0.1
Nov	0.1	0.1	0.0	0.4	0.3
Oct	0.5	0.5	0.3	0.6	0.4
IVQ2010∆%	1.1	1.1	0.5	1.4	0.8
IVQ2010 AE ∆%	4.5	4.5	2.0	5.7	3.2

Notes: NPI: current dollars personal income; NDPI: current dollars disposable personal income; RDPI: chained (2005) dollars DPI; NPCE: current dollars personal consumption expenditures; RPCE: chained (2005) dollars PCE; AE: annual equivalent; IVQ2010: fourth quarter 2010; A: annual equivalent

Percentage change month to month seasonally adjusted

*∆% Dec 2011/Dec 2010

http://www.bea.gov/newsreleases/national/pi/2012/pdf/pi0312.pdf

Chart ESIII-1 provides monthly real disposable personal income per capita from 1980 to 1989. This is the ultimate measure of well being in receiving income by obtaining the value per inhabitant. The measure cannot adjust for the distribution of income. Real disposable personal income per capital grew rapidly during the expansion after 1983 and continued growing during the rest of the decade.

Chart ESIII-1, US, Real Disposable Per Capital Income, Monthly, Seasonally Adjusted at Annual Rates, Billions of Dollars 1980-1989

Source: US Bureau of Economic Analysis

Chart ESIII-2 provides monthly real disposable personal per capita income from 2007 to 2012. There was initial recovery from the drop during the global recession followed by stagnation.

Chart ESIII-2, US, Real Disposable Per Capita Income, Monthly, Seasonally Adjusted at Annual Rates, Billions of Dollars 2007-2012

Source: US Bureau of Economic Analysis

Table ESIII-2 provides the data required for broader comparison of the cyclical expansions of IQ1983 to IVQ1985 and the current one from 2009 to 2012. First, in the 13 quarters from IQ1983 to IVQ1985, GDP increased 19.6 percent at the annual equivalent rate of 5.7 percent; real disposable personal income (RDPI) increased 15.9 percent at the annual equivalent rate of 4.6 percent; RDPI per capital increased 12.6 percent at the annual equivalent rate of 3.7 percent; and population increased 2.9 percent at the annual equivalent rate of 0.9 percent. Second, in the 11 quarters of the current cyclical expansion from IIIQ2009 to IIQ2012, GDP increased 6.8 percent at the annual equivalent rate of 2.4 percent; real disposable personal income (RDPI) increased 4.3 percent at the annual equivalent rate of 1.5 percent; RDPI per capita increased 2.4 percent at the annual equivalent rate of 0.9 percent; and population increased 1.9 percent at the annual equivalent rate of 0.7 percent. Real disposable personal income is the actual take home pay after inflation and taxes and real disposable income is what is left per inhabitant. The current cyclical expansion is the worst in the period after World War II in terms of growth of economic activity and income.

Table ESIII-2, US, GDP, Real Disposable Personal Income, Real Disposable Income per Capita and Population in 1983-85 and 2007-2011, %

	# Quarters	∆%	∆% Annual Equivalent
IQ1983 to IVQ1985	13
GDP		19.6	5.7
RDPI		15.9	4.6
RDPI Per Capita		12.6	3.7
Population		2.9	0.9
IIIQ2009 to IQ2012	11
GDP		6.8	2.4
RDPI		4.3	1.5
RDPI per Capita		2.4	0.9
Population		1.9	0.7

RDPI: Real Disposable Personal Income

Source: US Bureau of Economic Analysis

ESIV Financial Repression. Chart ESIV-1 of the US Bureau of Economic Analysis provides personal savings as percent of personal disposable income, or savings ratio, from Jan 2007 to Feb 2012. The uncertainties caused by the global recession resulted in sharp increase in the savings ratio that peaked at 8.3 percent in May 2008. The second highest ratio occurred at 7.1 percent in May 2009. There was another rising trend until 5.8 percent in Jun 2006 and then steady downward trend until 3.7 percent in Feb 2012. Permanent manipulation of the entire spectrum of interest rates with monetary policy measures distorts the compass of resource allocation with inferior outcomes of future growth, employment and prosperity and dubious redistribution of income and wealth affecting the most people without vast capital and relations to manage their savings.

Chart ESIV-1, US, Personal Savings as a Percentage of Disposable Income, Monthly 2007-2012

Source: US Bureau of Economic Analysis

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

ESV Macroeconomic Adjustment Policy. Blanchard (2012WEOApr) finds that interest rates close to zero in advanced economies have not induced higher economic growth because of two main factors—fiscal consolidation and deleveraging—that restrict economic growth in the short-term. First, Blanchard (2012WEOApr, XIII) finds that assuming a multiplier of unity of the fiscal deficit on GDP, decrease of the cyclically-adjusted deficit of advanced economies by 1 percent would reduce economic growth by one percentage point. Second, deleveraging by banks, occurring mainly in Europe, tightens credit supply with similar reduction of euro area economic growth by one percentage point in 2012. The baseline of the World Economic Outlook (WEO) of the IMF (2012WEOApr) for Apr 2012 incorporates both effects, which results in weak economic growth, in particular in Europe, and prolonged unemployment. An important analysis by Blanchard (2012WEOApr, XIII) is that “financial uncertainty, together with sharp shifts in risk appetite, has led to volatile capital flows.” Blanchard (2012WEOApr) still finds that the greatest vulnerability is another profound crisis in Europe (ECB). Crisis prevention should buttress the resilience of affected countries during those shifts in risk appetite. The role of the enhanced firewall of the IMF, European Union (EU) and European Central Bank is gaining time during which countries could engage in fiscal consolidation and structural reforms that would diminish the shifts in risk appetite, preventing devastating effects of financial crises. Volatility in capital flows is equivalent to volatility of valuations of risk financial assets. The challenge to the policy mix consists in balancing the adverse short-term effects of fiscal consolidation and deleveraging with the beneficial long-term effects of eliminating the vulnerability to shocks of risk aversion. Blanchard (2012WEOApr) finds that policy should seek short-term credibility while implementing measures that restrict the path of expenditures together with simultaneous development of institutions and rules that constrain deficits and spending in the future. There is similar policy challenge in deleveraging banks, which is required for sound lending institutions, but without causing an adverse credit crunch. Advanced economies face a tough policy challenge of increasing demand and potential growth.

The President of the European Central Bank (ECB) Mario Draghi (2012May3) also outlines the appropriate policy mix for successful adjustment:

“It is of utmost importance to ensure fiscal sustainability and sustainable growth in the euro area. Most euro area countries made good progress in terms of fiscal consolidation in 2011. While the necessary comprehensive fiscal adjustment is weighing on near-term economic growth, its successful implementation will contribute to the sustainability of public finances and thereby to the lowering of sovereign risk premia. In an environment of enhanced confidence in fiscal balances, private sector activity should also be fostered, supporting private investment and medium-term growth.

At the same time, together with fiscal consolidation, growth and growth potential in the euro area need to be enhanced by decisive structural reforms. In this context, facilitating entrepreneurial activities, the start-up of new firms and job creation is crucial. Policies aimed at enhancing competition in product markets and increasing the wage and employment adjustment capacity of firms will foster innovation, promote job creation and boost longer-term growth prospects. Reforms in these areas are particularly important for countries which have suffered significant losses in cost competitiveness and need to stimulate productivity and improve trade performance.

In this context, let me make a few remarks on the adjustment process within the euro area. As we know from the experience of other large currency areas, regional divergences in economic developments are a normal feature. However, considerable imbalances have accumulated in the last decade in several euro area countries and they are now in the process of being corrected.

As concerns the monetary policy stance of the ECB, it has to be focused on the euro area. Our primary objective remains to maintain price stability over the medium term. This is the best contribution of monetary policy to fostering growth and job creation in the euro area.

Addressing divergences among individual euro area countries is the task of national governments. They must undertake determined policy actions to address major imbalances and vulnerabilities in the fiscal, financial and structural domains. We note that progress is being made in many countries, but several governments need to be more ambitious. Ensuring sound fiscal balances, financial stability and competitiveness in all euro area countries is in our common interest.”

Economic policy during the debt crisis of 1983 may be useful in analyzing the options of the euro area. Brazil successfully combined fiscal consolidation, structural reforms to eliminate subsidies and devaluation to parity. Brazil’s terms of trade, or export prices relative to import prices, deteriorated by 47 percent from 1977 to 1983 (Pelaez 1986, 46). Table ESV-1 provides selected economic indicators of the economy of Brazil from 1970 to 1985. In 1983, Brazil’s inflation was 164.9 percent, GDP fell 3.2 percent, idle capacity in manufacturing reached 24.0 percent and Brazil had an unsustainable foreign debt. US money center banks would have had negative capital if loans to emerging countries could have been marked according to loss given default and probability of default (for credit risk models see Pelaez and Pelaez (2005), International Financial Architecture, 134-54). Brazil’s current account of the balance of payments shrank from $16,310 million in 1982 to $6,837 million in 1983 because of the abrupt cessation of foreign capital inflows with resulting contraction of Brazil’s GDP by 3.2 percent. An important part of adjustment consisted of agile coordination of domestic production to cushion the impact of drastic reduction in imports. In 1984, Brazil had a surplus of $45 million in current account, the economy grew at 4.5 percent and inflation was stabilized at 232.9 percent.

Table ESV-1, Brazil, Selected Economic Indicators 1970-1985

	Inflation ∆%	GDP Growth ∆%	Idle Capacity in MFG %	BOP Current Account USD MM
1985	223.4	7.4	19.8	-630
1984	232.9	4.5	22.6	45
1983	164.9	-3.2	24.0	-6,837
1982	94.0	0.9	15.2	-16,310
1981	113.0	-1.6	12.3	-11,374
1980	109.2	7.2	3.5	-12,886
1979	55.4	6.4	4.1	-10,742
1978	38.9	5.0	3.3	-6,990
1977	40.6	5.7	3.2	-4,037
1976	40.4	9.7	0.0	-6,013
1975	27.8	5.4	3.0	-6,711
1974	29.1	9.7	0.1	-7,122
1973	15.4	13.6	0.3	-1,688
1972	17.7	11.1	6.5	-1,489
1971	21.5	12.0	9.8	-1,307
1970	19.3	8.8	12.2	-562

Source: Carlos 21.5Manuel Pelaez, O Cruzado e o Austral: São Paulo, Editora Atlas, 1986, 86.

Chart ESV-1 provides the tortuous Phillips Circuit of Brazil from 1963 to 1987. There were no reliable consumer price index and unemployment data in Brazil for that period. Chart III-1 used the more reliable indicator of inflation, the wholesale price index, and idle capacity of manufacturing as a proxy of unemployment in large urban centers.

Chart ESV-1, Brazil’s 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.

A key to success in stabilizing an economy with significant risk aversion is finding parity of internal and external interest rates. Brazil implemented fiscal consolidation and reforms that are advisable in explosive foreign debt environments. In addition, Brazil had the capacity to find parity in external and internal interest rates to prevent capital flight and disruption of balance sheets (for analysis of balance sheets, interest rates, indexing, devaluation, financial instruments and asset/liability management in that period see Pelaez and Pelaez (2007), The Global Recession Risk: Dollar Devaluation and the World Economy, 178-87). Table ESV-2 provides monthly percentage changes of inflation, devaluation and indexing and the monthly percent overnight interest rate. Parity was attained by means of a simple inequality:

Cost of Domestic Loan ≥ Cost of Foreign Loan

This ordering was attained in practice by setting the domestic interest rate of the overnight interest rate plus spread higher than indexing of government securities with lower spread than loans in turn higher than devaluation plus spread of foreign loans. Interest parity required equality of inflation, devaluation and indexing. Brazil devalued the cruzeiro by 30 percent in 1983 because the depreciation of the German mark DM relative to the USD had eroded the competitiveness of Brazil’s products in Germany and in competition with German goods worldwide. The database of the Board of Governors of the Federal Reserve System quotes DM 1.7829/USD on Mar 3, 1980 and DM 2.4425/USD on Mar 15, 1983 (http://www.federalreserve.gov/releases/h10/hist/dat89_ge.htm) for devaluation of 37.0 percent. Parity of costs and rates of domestic and foreign loans and assets required ensuring that there would not be appreciation of the exchange rate, inducing capital flight that would have reversed stabilization. One of the main problems of adjustment of members of the euro area with high debts is that they cannot adjust the exchange rate because of the common euro currency. This is not an argument in favor of breaking the euro area because there would be also major problems of adjustment such as exiting the euro in favor of a new Drachma in the case of Greece. Another hurdle of adjustment in the euro area is that Brazil could have moved swiftly to adjust its economy in 1983 but the euro area has major sovereignty and distribution of taxation hurdles in moving rapidly.

Table ESV-2, Brazil, Inflation, Devaluation, Overnight Interest Rate and Indexing, Percent Per Month

1984	Inflation IGP ∆%	Devaluation ∆%	Overnight Interest Rate %	Indexing ∆%
Jan	9.8	9.8	10.0	9.8
Feb	12.3	12.3	12.2	12.3
Mar	10.0	10.1	11.3	10.0
Apr	8.9	8.8	10.1	8.9
May	8.9	8.9	9.8	8.9
Jun	9.2	9.2	10.2	9.2
Jul	10.3	10.2	11.9	10.3
Aug	10.6	10.6	11.0	10.6
Sep	10.5	10.5	11.9	10.5
Oct	12.6	12.6	12.9	12.6
Nov	9.9	9.9	10.9	9.9
Dec	10.5	10.5	11.5	10.5

Source: Carlos Manuel Pelaez, O Cruzado e o Austral: São Paulo, Editora Atlas, 1986, 86.

ESVI Global Financial and Economic Risk. 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 provides surveillance of the world economy with its Global Economic Outlook (WEO) (http://www.imf.org/external/pubs/ft/weo/2012/update/01/index.htm), of the world financial system with its Global Financial Stability Report (GFSR) (http://www.imf.org/external/pubs/ft/fmu/eng/2012/01/index.htm) and of fiscal affairs with the Fiscal Monitor (http://www.imf.org/external/pubs/ft/fm/2012/update/01/fmindex.htm). 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 a summary of global economic and financial risks, which are analyzed in detail in the comments of this blog in Section VI Valuation of Risk Financial Assets, Table VI-4.

Economic risks include the following:

1. China’s Economic Growth. China is lowering its growth target to 7.5 percent per year. The growth rate of GDP of China in the first quarter of 2012 of 1.8 percent is equivalent to 7.4 percent per year

2. United States Economic Growth, Labor Markets and Budget/Debt Quagmire. The US is growing slowly with 30.5 million in job stress, fewer 10 million full-time jobs, high youth unemployment, historically-low hiring and declining real wages.

3. Economic Growth and Labor Markets in Advanced Economies. Advanced economies are growing slowly. 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/2012/03/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.

2. Foreign Exchange Wars. Exchange rate struggles continue as zero interest rates in advanced economies induce devaluation of their currencies.

3. Valuation of Risk Financial Assets. Valuations of risk financial assets have reached extremely high levels in markets with lower volumes.

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 (Sargent and Silber 2012Mar20).

6. Carry Trades. Commodity prices driven by zero interest rates have resumed their increasing path

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 in the text 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 ESVI-1, 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 5/4/12,” 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. Risk aversion returned in the week of May 4 because of the expectation of elections in Europe and the new trend of deterioration of job creation in the US. The highest valuations in column “∆% Trough to 5/4/12” are by US equities indexes: DJIA 34.6 percent and S&P 500 33.9 percent, driven by stronger earnings and economy in the US than in other advanced economies but with doubts on the relation of business revenue to the weakening economy and fractured job market. 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 5/4/12” had double digit gains relative to the trough around Jul 2, 2010 but now only four valuation show increase of less than 10 percent: China’s Shanghai Composite is 2.9 percent above the trough; STOXX 50 of Europe is 3.2 percent above the trough; Japan’s Nikkei Average is 6.3 percent above the trough; and NYSE Financial is 7.4 percent above the trough. DJ UBS Commodities is 10.6 percent above the trough; Dow Global is 11.2 percent above the trough; DJ Asia Pacific is 10.7 percent above the trough; and DAX is 15.7 percent above the trough. Japan’s Nikkei Average is 6.3 percent above the trough on Aug 31, 2010 and 17.7 percent below the peak on Apr 5, 2010. The Nikkei Average closed at 9380.25 on Fri May 4, 2012 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata), which is 8.5 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 9.8 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 5/4/12” in Table ESVI-1 shows that with exception of increase of 2.9 percent of China’s Shanghai Composite there were decreases of all valuations of risk financial assets in the week of May 4, 2012 such as 1.4 percent for DJIA, 2.4 percent for S&P 500, 3.1 percent for NYSE Financial, 2.7 percent for Dow Global, 0.2 percent for DJ Asia Pacific, 3.5 percent for Dax and 2.5 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 ESVI-1 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 5/4/12” that provides the percentage change from the peak in Apr 2010 before the sovereign risk event to May 4, 2012. Most risk financial assets had gained not only relative to the trough as shown in column “∆% Trough to 5/4/12” but also relative to the peak in column “∆% Peak to 5/4/12.” There are now only three equity indexes above the peak in Table ESVI-1: DJIA 16.4 percent, S&P 500 12.5 percent and Dax 3.6 percent. There are several indexes below the peak: NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) by 14.4 percent, Nikkei Average by 17.7 percent, Shanghai Composite by 22.5 percent, STOXX 50 by 12.6 percent and Dow Global by 9.3 percent. DJ UBS Commodities Index is now 2.5 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 elusive 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 ESVI-1, Stock Indexes, Commodities, Dollar and 10-Year Treasury

	Peak	Trough	∆% to Trough	∆% Peak to 5/4 /12	∆% Week 5/4/ 12	∆% Trough to 5/4 12
DJIA	4/26/ 10	7/2/10	-13.6	16.4	-1.4	34.6
S&P 500	4/23/ 10	7/20/ 10	-16.0	12.5	-2.4	33.9
NYSE Finance	4/15/ 10	7/2/10	-20.3	-14.4	-3.1	7.4
Dow Global	4/15/ 10	7/2/10	-18.4	-9.3	-2.7	11.2
Asia Pacific	4/15/ 10	7/2/10	-12.5	-3.1	-0.2	10.7
Japan Nikkei Aver.	4/05/ 10	8/31/ 10	-22.5	-17.7	-1.5	6.3
China Shang.	4/15/ 10	7/02 /10	-24.7	-22.5	2.3	2.9
STOXX 50	4/15/10	7/2/10	-15.3	-12.6	-2.2	3.2
DAX	4/26/ 10	5/25/ 10	-10.5	3.6	-3.5	15.7
Dollar Euro	11/25 2009	6/7 2010	21.2	13.5	1.3	9.8
DJ UBS Comm.	1/6/ 10	7/2/10	-14.5	-5.4	-2.5	10.6
10-Year T Note	4/5/ 10	4/6/10	3.986	1.876

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)

I Twenty Eight Million Unemployed or Underemployed. The employment situation report of the Bureau of Labor Statistics (BLS) of the US Department of Labor released in the first Friday of every month is critical in the analysis of social and economic conditions in the US. The objective of this section is to analyze the report released on May 4, 2012, for Mar 2012 (http://www.bls.gov/news.release/pdf/empsit.pdf). This section is divided into two subsections. IA Twenty Eight Million Unemployed or Underemployed provides the key data on employment and job creation contained in the BLS report. These data are complemented by the BLS report on hiring, job openings and separations to be released on May 8 (http://www.bls.gov/jlt/), which will be analyzed in this blog’s comment of May 13. IB Falling Real Wages analyzes wages and hours worked. IA1 Summary of the Employment Situation provides brief analysis of the employment situation. IA2 Number of People in Job Stress provides the calculation of people unemployed or underemployed in the US using the estimates of the BLS. IA3 Long-term and Cyclical Comparison of Employment provides the comparison with long-term and relevant cyclical experience in the US. IA4 Creation of Jobs analyzes the establishment survey of the BLS that provides job creation in nonfarm payrolls. Hourly and weekly earnings and hours worked are analyzed in the following section IB Falling Real Wages.

IA1 Summary of the Employment Situation. The Bureau of Labor Statistics (BLS) of the US Department of Labor provides both seasonally-adjusted (SA) and not-seasonally adjusted (NSA) or unadjusted data with important uses (Bureau of Labor Statistics 2012Feb3; 2011Feb11):

“Most series published by the Current Employment Statistics program reflect a regularly recurring seasonal movement that can be measured from past experience. By eliminating that part of the change attributable to the normal seasonal variation, it is possible to observe the cyclical and other nonseasonal movements in these series. Seasonally adjusted series are published monthly for selected employment, hours, and earnings estimates.”

Table I-1 provides the summary statistics of the employment situation report of the BLS. The first four rows provide the data from the establishment report of creation of nonfarm payroll jobs and remuneration of workers (for analysis of the differences in employment between the establishment report and the household survey see Abraham, Haltiwanger, Sandusky and Spletzer 2009). The US economy created 115,000 nonfarm payroll jobs in Apr seasonally adjusted (SA), which is lower than revised 154,000 created in Mar 2012, 259,000 created in Feb 2012 and 277,000 created in Jan 2012 in what could be an adverse downward trend. New private payroll jobs created in Apr were 130,000, which is also lower than revised 166,000 created in Mar, 254,000 created in Feb and 277,000 in Jan. Subsection IA4 Job Creation analyzes the types of jobs created. Average hourly earnings in Apr 2012 were $23.62 not seasonally adjusted (NSA), increasing 2.7 percent relative to Apr 2012 and flat relative to Mar 2012 seasonally adjusted. In Mar 2012, average hourly earnings not seasonally adjusted were $23.41, increasing 2.1 percent relative to Mar 2011 and increasing 0.2 percent seasonally adjusted relative to Feb 2012. These are nominal changes in worker wages. The following row “average hourly earnings in constant dollars” provides hourly wages in constant dollars calculated by the BLS or what is called “real wages” adjusted for inflation. Data are not available for Apr because the prices indexes of the BLS for Apr will only be released on May 15 (http://www.bls.gov/cpi/), which will be covered in this blog’s comment on May 20. The second column provides changes in real wages for Mar. Average hourly earnings adjusted for inflation or in constant dollars fell 0.5 percent in Mar 2012 relative to Mar 2011. The fractured labor market of the US is characterized by high levels of unemployment and underemployment together with falling real wages or wages adjusted for inflation. The following section IB Falling Real Wages provides more detailed analysis. Average weekly hours of US workers are unchanged at 34.5 in both Apr and Mar 2012. Another headline number widely followed is the unemployment rate or number of people unemployed as percent of the labor force. The unemployment rate calculated in the household survey fell from 8.2 percent in Mar 2012 to 8.1 percent in Apr 2012. This blog provides with every employment situation report the number of people in the US in job stress or unemployed plus underemployed calculated without seasonal adjustment (NSA) at 27.8 million in Apr 2012 and at 29.4 million in Mar 2012. The final row in Table I-1 provides the number in job stress as percent of the actual labor force calculated at 17. 3 percent in Apr and at 18.3 percent in Mar 2012. The combination of high number of people in job stress, falling real wages and high number of people in poverty constitutes a socio-economic disaster.

Table I-1, US, Summary of the Employment Situation Report SA

	Apr 2012	Mar 2012
New Nonfarm Payroll Jobs	115,000	154,000
New Private Payroll Jobs	130,000	166,000
Average Hourly Earnings	$23.62 ∆% Apr 12/Apr 11 NSA: 2.7 ∆% Apr 12/Mar 12 SA: 0.0	$23.41 ∆% Mar 12/Mar 11 NSA: 2.1 ∆% Mar 12/Feb 12 SA: 0.2
Average Hourly Earnings in Constant Dollars	$10.30	$10.21 ∆% Mar 2012/Mar 2011: -0.5
Average Weekly Hours	34.5	34.5
Unemployment Rate Household Survey % of Labor Force SA	8.1	8.2
Number in Job Stress Unemployed and Underemployed Blog Calculation	27.8 million NSA	29.4 million NSA
In Job Stress as % Labor Force	17.3	18.3

Source: Tables I-2, I-3, I-4, I-8, IB-1, IB-3 and IB-4.

IA2 Number of People in Job Stress. There are two approaches to calculating the number of people in job stress. The first approach consists of calculating the number of people in job stress unemployed or underemployed with the raw data of the employment situation report as in Table I-2. The data are seasonally adjusted (SA). The first three rows provide the labor force and unemployed in million and the unemployment rate of unemployed as percent of the labor force. There is decrease in the number unemployed from 12.806 million in Feb 2012 to 12.500 million in Apr 2012 or decline of 306,000. Thus, the rate of unemployment falls from 8.3 percent in Feb 2012 to 8.1 percent in Apr 2012. The labor force SA fell from 154,871 million in Feb 2012 to 154.365 million in Apr 2012 or by 236,000. The unemployment rate is the ratio of the number unemployed to the labor force such that the decrease in the unemployment rate in Apr 2012 is partly the result of reduction of the labor force. An important aspect of unemployment is its persistence with 5.101 million in Apr who had been unemployed for 27 weeks or more, constituting 40.8 percent of the unemployed. The longer the period of unemployment the lower are the chances of finding another job. Another key characteristic of the current labor market is the high number of people trying to subsist with part-time jobs because they cannot find full-time employment or part-time for economic reasons. The BLS explains as follows: “these individuals were working part time because their hours had been cut back or because they were unable to find a full-time job” (http://www.bls.gov/news.release/pdf/empsit.pdf 2). The number of part-time for economic reasons decreased from 8.119 million in Feb 2012 to 7.853 million in Apr 2012 or by 266,000. Another category consists of people marginally attached to the labor force who have sought employment at some point but believe there may not be another job for them. The BLS explains as follows: “these individuals were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had searched for work in the 4 weeks preceding the survey” (http://www.bls.gov/news.release/pdf/empsit.pdf 2). The number in job stress unemployed or underemployed of 22.716 million in Apr is composed of 12.500 million unemployed (of whom 5.101 million, or 40.8 percent, unemployed for 27 weeks or more) compared with 12.673 million unemployed in Mar (of whom 5.308 million, or 41.9 percent, unemployed for 27 weeks or more), 7.853 million employed part-time for economic reasons in Apr (who suffered reductions in their work hours or could not find full-time employment) compared with 7.762 million in Mar and 2.363 million who were marginally attached to the labor force in Apr (who were not in the labor force but wanted and were available for work) compared with 2.352 million in Mar. The final row in Table I-2 provides the number in job stress as percent of the labor force: 14.7 percent in Apr, which is equal to 14.7 percent in Mar and marginally lower relative to 15.2 percent in Feb.

Table I-2, US, People in Job Stress, Millions and % SA

2012	Apr 2012	Mar 2012	Feb 2012
Labor Force Millions	154.365	154.707	154.871
Unemployed Millions	12.500	12.673	12.806
Unemployment Rate (unemployed as % labor force)	8.1	8.2	8.3
Unemployed ≥27 weeks Millions	5.101	5.308	5.426
Unemployed ≥27 weeks %	40.8	41.9	42.4
Part Time for Economic Reasons Millions ∆ Apr 2012/Dec 2011: -245 thousand ∆Apr 2012/Sep 2011: -1.417 million	7.853	7.762	8.119
Marginally Attached to Labor Force Millions ∆Apr 2012/Sep 2011: -148 thousand ∆Apr 2012/Mar 2012: -11 thousand	2.363	2.352	2.608
Job Stress Millions ∆Mar/Dec: -948 thousand ∆Feb/Sep: -2.145 million	22.716	22.787	23.533
In Job Stress as % Labor Force	14.7	14.7	15.2

Job Stress = Unemployed + Part Time Economic Reasons + Marginally Attached Labor Force

Source: US Bureau of Labor Statistics

Table I-3 repeats the data in Table I-2 but including Jan and additional data. What really matters is the number of people with jobs or the total employed. The final row of Table I-3 provides people employed as percent of the population or employment to population ratio. The number has remained relatively constant around 58.5 percent.

Table I-3, US, Unemployment and Underemployment, SA, Millions and Percent

	Apr 2012	Mar 2012	Feb 2012	Jan 2012
Labor Force	154.365	154.707	154.871	154.395
Unemployed	12.500	12.673	12.806	12.758
UNE Rate %	8.1	8.2	8.3	8.3
Part Time Economic Reasons	7.853	7.672	8.119	8.230
Marginally Attached to Labor Force	2.363	2.352	2.608	2.809
In Job Stress	22.716	22.697	23.533	23.797
In Job Stress % Labor Force	14.7	14.7	15.2	15.4
Employed	141.865	142.034	142.065	141.637
Employment % Population	58.4	58.5	58.6	58.5

Source: US Bureau of Labor Statistics

The second approach is considered in the balance of this subsection. Charts I-1 to I-12 explain the reasons for considering another approach to calculating job stress in the US. Chart I-1 of the Bureau of Labor Statistics provides the level of employment in the US from 2001 to 2012. There was a big drop of the number of people employed from 147.315 million at the peak in Jul 2007 (NSA) to 136.809 million at the trough in Jan 2010 (NSA) with 10.506 million fewer people employed. Recovery has been anemic compared with the shallow recession of 2001 that was followed by nearly vertical growth in jobs. The number employed in Apr 2012 was 141,995 (NSA) or 5.320 million fewer people with jobs.

Chart I-1, US, Employed, Thousands, SA, 2001-2012

Source: Bureau of Labor Statistics

Chart I-2 of the Bureau of Labor Statistics provides 12-month percentage changes of the number of people employed in the US from 2001 to 2012. There was recovery in 2010 and 2011 but not sufficient to recover lost jobs. There are many people in the US who had jobs before the global recession who are not working now.

Chart I-2, US, Employed, 12-Month Percentage Change NSA, 2001-2012

Source: Bureau of Labor Statistics

The foundation of the second approach derives from Chart I-3 of the Bureau of Labor Statistics providing the level of the civilian labor force in the US. The civilian labor force consists of people who are available and willing to work and who have searched for employment recently. The labor force of the US grew from 142.828 million in Jan 2001 to 156.255 million in Jul 2009 but has declined to 154,316 million in Mar 2012 and 153,905 million in Apr 2012, all numbers not seasonally adjusted. Chart 1-3 shows the flattening of the curve of expansion of the labor force and its decline in 2010 and 2011. The level of the labor force in the US has stagnated. The key issue is whether the decline in participation of the population in the labor force is the result of people giving up on finding another job.

Chart I-3, US, Civilian Labor Force, Thousands, SA, 2001-2012

Source: Bureau of Labor Statistics

Chart I-4 of the Bureau of Labor Statistics provides 12-month percentage changes of the level of the labor force in the US. The rate of growth fell almost instantaneously with the global recession and became negative from 2009 to 2011. The labor force of the US collapsed and did not recover.

Chart I-4, US, Civilian Labor Force, Thousands, NSA, 12-month Percentage Change, 2001-2012

Source: Bureau of Labor Statistics

Chart I-5 of the Bureau of Labor Statistics provides the labor force participation rate in the US or labor force as percent of the population. The labor force participation rate of the US fell from 66.8 percent in Jan 2001 to 63.4 percent NSA in Apr 2012, all number not seasonally adjusted. Chart I-5 shows an evident downward trend beginning with the global recession that has continued throughout the recovery beginning in IIIQ2009. The critical issue is whether people left the workforce of the US because they believe there is no longer a job for them.

Chart I-5, Civilian Labor Force Participation Rate, Percent of Population in Labor Force SA, 2001-2012

Source: Bureau of Labor Statistics

Chart I-6 of the Bureau of Labor Statistics provides the level of unemployed in the US. The number unemployed rose from the trough of 6.272 million in Oct 2006 to the peak of 15.991 million in Feb 2010, declining to 11.910 million in Apr 2012, all numbers not seasonally adjusted.

Chart I-6, US, Unemployed, Thousands, SA, 2001-2012

Source: Bureau of Labor Statistics

Chart I-7 of the Bureau of Labor Statistics provides the rate of unemployment in the US or unemployed as percent of the labor force. The rate of unemployment of the US rose from 4.7 percent in Jan 2001 to 6.5 percent in Jun 2003, declining to 4.1 percent in Oct 2006. The rate of unemployment jumped to 10.6 percent in Jan 2010 and declined to 7.7 percent in Apr 2012, all numbers not seasonally adjusted.

Chart I-7, US, Unemployment Rate, 2001-2012

Source: Bureau of Labor Statistics

Chart I-8 of the Bureau of Labor Statistics provides 12-month percentage changes of the level of unemployed. There was a jump above 7.5 percent early in 2009 with subsequent decline and negative rates since 2010.

Chart I-8, US, Unemployed, 12-month Percentage Change, 2001-2012

Source: Bureau of Labor Statistics

Chart I-9 of the Bureau of Labor Statistics provides the number of people in part-time occupations because of economic reasons, that is, because they cannot find full-time employment. The number underemployed in part-time occupations rose from 3.332 million in Jan 2001 to 4.820 million in Oct 2004, falling to 3.900 million in Apr 2006. The number underemployed seasonally adjusted jumped to 9.130 million in Nov 2009, falling to 8.098 million in Dec 2011 but increasing to 8.230 million in Jan 2012 and 8.119 million in Feb 2012 but then falling to 7.853 million in Apr 2012. Without seasonally adjustment the number employed part-time for economic reasons reached 9,354 million in Dec 2009, declining to 8.918 million in Jan 2012 and 7.694 million in Apr 2012. The longer the period in part-time jobs the worst are the chances of finding another full-time job.

Chart I-9, US, Part-Time for Economic Reasons, Thousands, SA, 2001-2012

Source: Bureau of Labor Statistics

Chart I-10 of the Bureau of Labor Statistics repeats the behavior of unemployment. The 12-month rate of the level of people at work part-time for economic reasons jumped in 2009 and then declined subsequently. The declines have been insufficient to reduce significantly the number of people who cannot shift from part-time to full-time employment.

Chart I-10, US, Part-Time for Economic Reasons 12-Month Percentage Change, 2001-2011

Source: Bureau of Labor Statistics

Chart I-11 of the Bureau of Labor Statistics provides the same pattern of the number marginally attached to the labor force jumping to significantly higher levels during the global recession and remaining at historically high levels. The number marginally attached to the labor force increased from 1.295 million in Jan 2001 to 1.691 million in Feb 2004. The number of marginally attached to the labor force fell to 1.299 million in Sep 2006 and increased to 2.486 million in Dec 2009. The number marginally attached to the labor force was 2.540 million in Dec 2011, increasing to 2.809 million in Jan 2012, falling to 2.608 million in Feb 2012, 2.352 million in Mar 2012 and 2.363 million in Apr 2012.

Chart I-11, US, Marginally-Attached to the Labor Force, Thousands, NSA, 2001-2012

Source: Bureau of Labor Statistics

Chart I-12 provides 12-month percentage changes of the marginally-attached to the labor force from 2001 to 2012. There was a big percentage jump during the global recession followed by declines in percentage changes but insufficient negative changes.

Chart I-12, US, Marginally-Attached to the Labor Force 12-Month Percentage Change, NSA, 2001-2012

Source: Bureau of Labor Statistics

Table I-4 consists of data and additional calculations using the BLS household survey, illustrating the possibility that the actual rate of unemployment could be 11.7 percent and the number of people in job stress could be around 27.8 million, which is 17.3 percent of the labor force. The first column provides for 2006 the yearly average population (POP), labor force (LF), participation rate or labor force as percent of population (PART %), employment (EMP), employment population ratio (EMP/POP %), unemployment (UEM), the unemployment rate as percent of labor force (UEM/LF Rate %) and the number of people not in the labor force (NLF). All data are unadjusted or not-seasonally-adjusted (NSA). The numbers in column 2006 are averages in millions while the monthly numbers for Apr 2011, Mar 2012 and Apr 2012 are in thousands, not seasonally adjusted. The average yearly participation rate of the population in the labor force was in the range of 66.0 percent minimum to 67.1 percent maximum between 2000 and 2006 with the average of 66.4 percent (ftp://ftp.bls.gov/pub/special.requests/lf/aa2006/pdf/cpsaat1.pdf). Table I-4b provides the yearly labor force participation rate from 1979 to 2012. The objective of Table I-4 is to assess how many people could have left the labor force because they do not think they can find another job. Row “LF PART 66.2 %” applies the participation rate of 2006, almost equal to the rates for 2000 to 2006, to the population in Apr and Mar 2012 and Apr 2011 to obtain what would be the labor force of the US if the participation rate had not changed. In fact, the participation rate fell to 63.9 percent by Apr 2011 and was 63.6 percent in Mar 2012 and 63.4 percent in Apr 2012, suggesting that many people simply gave up on finding another job. Row “∆ NLF UEM” calculates the number of people not counted in the labor force because they could have given up on finding another job by subtracting from the labor force with participation rate of 66.2 percent (row “LF PART 66.2%”) the labor force estimated in the household survey (row “LF”). Total unemployed (row “Total UEM”) is obtained by adding unemployed in row “∆NLF UEM” to the unemployed of the household survey in row “UEM.” The row “Total UEM%” is the effective total unemployed “Total UEM” as percent of the effective labor force in row “LF PART 66.2%.” The results are that: (1) there are an estimated 6.818 million unemployed in Apr 2012 who are not counted because they left the labor force on their belief they could not find another job (∆NLF UEM); (2) the total number of unemployed is effectively 18.728 million (Total UEM) and not 11.910 million (UEM) of whom many have been unemployed long term; (3) the rate of unemployment is 11.7 percent (Total UEM%) and not 7.7 percent, not seasonally adjusted, or 8.1 percent seasonally adjusted; and (4) the number of people in job stress is close to 27.8 million by adding the 6.818 million leaving the labor force because they believe they could not find another job. The row “In Job Stress” in Table I-4 provides the number of people in job stress not seasonally adjusted at 27.8 million in Apr 2012, adding the total number of unemployed (“Total UEM”), plus those involuntarily in part-time jobs because they cannot find anything else (“Part Time Economic Reasons”) and the marginally attached to the labor force (“Marginally attached to LF”). The final row of Table I-4 shows that the number of people in job stress is equivalent to 17.3 percent of the labor force in Apr 2012. The employment population ratio “EMP/POP %” dropped from 62.9 percent on average in 2006 to 58.4 percent in Apr 2011, 58.3 percent in Mar 2012 and 58.5 percent in Apr 2012; the number employed (EMP) dropped from 144 million to 141.9 million. What really matters for labor input in production and wellbeing is the number of people with jobs or the employment/population ratio, which has declined and does not show signs of increasing. There are around four million fewer people working in 2012 than in 2006 and the number employed is not increasing. The number of hiring relative to the number unemployed measures the chances of becoming employed. The number of hiring in the US economy has declined by 17 million and does not show signs of increasing in an unusual recovery without hiring (http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring.html).

Table I-4, US, Population, Labor Force and Unemployment, NSA

	2006	Apr 2011	Mar 2012	Apr 2012
POP	229	239,146	242,604	242,784
LF	151	152,898	154,316	153,905
PART%	66.2	63.9	63.6	63.4
EMP	144	139,661	141,412	141,995
EMP/POP%	62.9	58.4	58.3	58.5
UEM	7	13,237	12,904	11,910
UEM/LF Rate%	4.6	8.7	8.4	7.7
NLF	77	86,248	88,288	88,879
LF PART 66.2%		158,315	160,604	160,723
∆NLF UEM		5,417	6,288	6,818
Total UEM		18,654	19,192	18,728
Total UEM%		11.8	11.9	11.7
Part Time Economic Reasons		8,425	7,867	7,694
Marginally Attached to LF		2,466	2,352	2,363
In Job Stress		29,545	29,411	27,785
People in Job Stress as % Labor Force		18.7	18.3	17.3

Note: the first column for 2006 is in average millions; the remaining columns are in thousands; NSA: not seasonally adjusted

Sources: US Bureau of Labor Statistics http://www.bls.gov/news.release/pdf/empsit.pdf

Table I-4b and Chart 12-b provide the US labor force participation rate or percentage of the labor force in population. It is not likely that simple demographic trends caused the sharp decline during the global recession and failure to recover earlier levels.

Table I-4b, US, Labor Force Participation Rate, Percent of Labor Force in Population, NSA, 1979-2012

Year	Feb	Mar	Apr	Annual
1979	63.0	63.2	62.9	63.7
1980	63.2	63.2	63.2	63.8
1981	63.2	63.5	63.6	63.9
1982	63.2	63.4	63.3	64.0
1983	63.2	63.3	63.2	64.0
1984	63.4	63.6	63.7	64.4
1985	64.0	64.4	64.3	64.8
1986	64.4	64.6	64.6	65.3
1987	64.8	65.0	64.9	65.6
1988	65.2	65.2	65.3	65.9
1989	65.6	65.7	65.9	66.5
1990	66.0	66.2	66.1	66.5
1991	65.7	65.9	66.0	66.2
1992	65.8	66.0	66.0	66.4
1993	65.8	65.8	65.6	66.3
1994	66.2	66.1	66.0	66.6
1995	66.2	66.4	66.4	66.6
1996	66.1	66.4	66.2	66.8
1997	66.5	66.9	66.7	67.1
1998	66.7	67.0	66.6	67.1
1999	66.8	66.9	66.7	67.1
2000	67.0	67.1	67.0	67.1
2001	66.8	67.0	66.7	66.8
2002	66.6	66.6	66.4	66.6
2003	66.2	66.2	66.2	66.2
2004	65.7	65.8	65.7	66.0
2005	65.6	65.6	65.8	66.0
2006	65.7	65.8	65.8	66.2
2007	65.8	65.9	65.7	66.0
2008	65.5	65.7	65.7	66.0
2009	65.5	65.4	65.4	65.4
2010	64.6	64.8	64.9	64.7
2011	63.9	64.0	63.9	64.1
2012	63.6	63.6	63.4

Source: Bureau of Labor Statistics

Chart 12b, US, Labor Force Participation Rate, Percent of Labor Force in Population, NSA, 1979-2011

Source: Bureau of Labor Statistics

IA3 Long-term and Cyclical Comparison of Employment. There is initial discussion here of long-term employment trends followed by cyclical comparison. Growth and employment creation have been mediocre in the expansion beginning in Jul IIIQ2009 from the contraction between Dec IVQ2007 and Jun IIQ2009 (http://www.nber.org/cycles.html). A series of charts from the database of the Bureau of Labor Statistics (BLS) provides significant insight. Chart I-13 provides the monthly employment level of the US from 1948 to 2012. The number of people employed has trebled. There are multiple contractions throughout the more than six decades but followed by resumption of the strong upward trend. The contraction after 2007 is deeper and followed by a flatter curve of job creation. Economic growth is much lower in the current expansion at 2.4 percent relative to average 6.2 percent in expansions after earlier contractions.

Chart I-13, US, Employment Level, Thousands, 1948-2012

Source: US Bureau of Labor Statistics

The steep and consistent curve of growth of the US labor force is shown in Chart I-14. The contraction beginning in Dec 2007 flattened the path of the US civilian labor force and is now followed by a flatter curve during the current expansion.

Chart I-14, US, Civilian Labor Force, 1948-2012, Thousands

Source: US Bureau of Labor Statistics

Chart I-15 for the period from 1948 to 2012. The labor force participation rate is influenced by numerous factors such as the age of the population. There is no comparable episode in the postwar economy to the sharp collapse of the labor force participation rate in Chart I-15 during the contraction and subsequent expansion after 2007. Aging can reduce the labor force participation rate as many people retire but many may have decided to work longer as their wealth and savings have been significantly reduced. There is an important effect of many people just exiting the labor force because they believe there is no job available for them.

Chart I-15, US, Civilian Labor Force Participation Rate, 1947-2012, %

Source: US Bureau of Labor Statistics

The number of unemployed in the US jumped from 5.8 million in May 1979 to 12.1 million in Dec 1982, by 6.3 million, or 108.6 percent. The number of unemployed jumped from 6.7 million in Mar 2007 to 15.6 million in Oct 2009, by 8.9 million, or 132.8 percent. These are the two episodes with steepest increase in the level of unemployment in Chart I-16.

Chart I-16, US, Unemployed, 1947-2012, Thousands

Source: US Bureau of Labor Statistics

Chart I-17 provides the rate of unemployment of the US from 1948 to 2012. The peak of the series is 10.8 percent in both Nov and Dec 1982. The second highest rates are 10.1 percent in Oct 2009 and 9.9 percent in both Nov and Dec 2009.

Chart I-17, US, Unemployment Rate, 1947-2012

Source: US Bureau of Labor Statistics

Chart I-18 provides the number unemployed for 27 weeks and over from 1948 to 2012. The number unemployed for 27 weeks and over jumped from 510,000 in Dec 1978 to 2.9 million in Jun 1983, by 2.4 million, or 480 percent. The number of unemployed 27 weeks or over jumped from 1.1 million in May 2007 to 6.7 million in Jun 2010, by 5.6 million, or 509 percent.

Chart I-18, US, Unemployed for 27 Weeks or More, 1948-2012, Thousands

Source: US Bureau of Labor Statistics

The employment-population ratio in Chart I-19 is an important indicator of wellbeing in labor markets, measuring the number of people with jobs. The US employment-population ratio fell from 63.4 in Dec 2006 to 58.2 in Jul 2011 and stands at 58.5 NSA in Apr 2012. There is no comparable decline during an expansion in Chart I-19.

Chart I-19, US, Employment-Population Ratio, 1948-2012

Source: US Bureau of Labor Statistics

The number of people at work part-time for economic reasons because they cannot find full-time employment is provided in Chart I-20. The number of people at work part-time for economic reasons jumped from 4.1 million in Sep 2006 to a high of 9.4 million in Sep 2010 and 9.3 million in Sep 2011, or by 5.2 million, or 127 percent. Earlier increases in the 1980s and after the tough recession of 1991 were followed by rapid decrease that is still absent in the current expansion. The drop by 371,000 of the seasonally-adjusted data from Nov to Dec while actual data without seasonal adjustment show an increase by 157,000 is not very credible.

Chart I-20, US, Part-Time for Economic Reasons, 1955-2012, Thousands

Source: US Bureau of Labor Statistics

Table I-5 provides percentage change in real GDP in the United States in the 1930s, 1980s and 2000s. The recession in 1981-1982 is quite similar on its own to the 2007-2009 recession. In contrast, during the Great Depression in the four years of 1930 to 1933, GDP in constant dollars fell 26.7 percent cumulatively and fell 45.6 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7). Data are available for the 1930s only on a yearly basis. US GDP fell 4.8 percent in the two recessions from IQ1980 to IIIQ1980 and from III1981 to IVQ1981 to IVQ1982 and 5.1 percent cumulatively in the recession from IVQ2007 to IIQ2009.

Table I-5, US, Percentage Change of GDP in the 1930s, 1980s and 2000s, ∆%

Year	GDP ∆%	Year	GDP ∆%	Year	GDP ∆%
1930	-8.6	1980	-0.3	2000	4.1
1931	-6.5	1981	2.5	2001	1.1
1932	-13.1	1982	-1.9	2002	1.8
1933	-1.3	1983	4.5	2003	2.5
1934	10.9	1984	7.2	2004	3.5
1935	8.9	1985	4.1	2005	3.1
1936	13.1	1986	3.5	2006	2.7
1937	5.1	1987	3.2	2007	1.9
1938	-3.4	1988	4.1	2008	-0.3
1930	8.1	1989	3.6	2009	-3.5
1940	8.8	1990	1.9	2010	3.0
1941	17.1	1991	-0.2	2011	1.7

Characteristics of the four cyclical contractions are provided in Table I-6 with the first column showing the number of quarters of contraction; the second column the cumulative percentage contraction; and the final column the average quarterly rate of contraction. There were two contractions from IQ1980 to IIIQ1980 and from IIIQ1981 to IVQ1982 separated by three quarters of expansion. The drop of output combining the declines in these two contractions is 4.8 percent, which is almost equal to the decline of 5.1 percent in the contraction from IVQ2007 to IIQ2009. In contrast, during the Great Depression in the four years of 1930 to 1933, GDP in constant dollars fell 26.7 percent cumulatively and fell 45.6 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7). The comparison of the global recession after 2007 with the Great Depression is entirely misleading.

Table I-6, US, Number of Quarters, Cumulative Percentage Contraction and Average Percentage Annual Equivalent Rate in Cyclical Contractions

	Number of Quarters	Cumulative Percentage Contraction	Average Percentage Rate
IIQ1953 to IIQ1954	4	-2.5	-0.63
IIIQ1957 to IIQ1958	3	-3.1	-9.0
IQ1980 to IIIQ1980	2	-2.2	-1.1
IIIQ1981 to IVQ1982	4	-2.7	-0.67
IVQ2007 to IIQ2009	6	-5.1	-0.87

Source: Business Cycle Reference Dates: http://www.nber.org/cycles/cyclesmain.html

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

Table I-7 shows the extraordinary contrast between the mediocre average annual equivalent growth rate of 2.45 percent of the US economy in the ten quarters of the current cyclical expansion from IIIQ2009 to IVQ2011 and the average of 6.2 percent in the four earlier cyclical expansions. The growth rate in the expansion from IIIQ2009 to IQ2012 is equivalent to 2.4 percent per year. The expansion of IQ1983 to IVQ1985 was at the average annual growth rate of 5.7 percent.

Table I-7, US, Number of Quarters, Cumulative Growth and Average Annual Equivalent Growth Rate in Cyclical Expansions

	Number of Quarters	Cumulative Growth ∆%	Average Annual Equivalent Growth Rate
IIIQ 1954 to IQ1957	11	12.6	4.4
IIQ1958 to IIQ1959	5	10.2	8.1
IIQ1975 to IVQ1976	8	9.5	4.6
IQ1983 to IV1985	13	19.6	5.7
Average Four Above Expansions			6.2
IIIQ2009 to IQ2012	11	6.8	2.4

A group of charts from the database of the Bureau of Labor Statistics facilitate the comparison of employment in the 1980s and 2000s. The long-term charts and tables from I-5 to I-7 in the discussion above confirm the view that the comparison of the current expansion should be with that in the 1980s because of similar dimensions. Chart I-21 provides the level of employment in the US between 1979 and 1989. Employment surged after the contraction and grew rapidly during the decade.

Chart I-21, US, Employed, Thousands, 1979-1989

Source: US Bureau of Labor Statistics

The number employed in the US fell from 147.315 million in Jul 2007 to 141.995 million in Apr 2012, by 5.320 million, or 3.6 percent, using not-seasonally-adjusted data. Chart I-22 shows tepid recovery early in 2010 followed by near stagnation and marginal expansion.

Chart I-22, US, Employed, Thousands, 2001-2012

Source: US Bureau of Labor Statistics

There was a steady upward trend in growth of the civilian labor force between 1979 and 1989 as shown in Chart I-23. There were fluctuations but strong long-term dynamism over an entire decade.

Chart I-23, US, Civilian Labor Force, Thousands, 1979-1989

Source: US Bureau of Labor Statistics

The civilian labor force in Chart I-24 grew steadily on an upward trend in the 2000s until it contracted together with the economy after 2007. There has not been recovery during the expansion but rather decline and marginal turn of the year into 2012 expansion.

Chart I-24, US, Civilian Labor Force, Thousands, 2001-2012

Source: US Bureau of Labor Statistics

The rate of participation of the labor force in population stagnated during the stagflation and conquest of inflation in the late 1970s and early 1980s, as shown in Chart I-25. Recovery was vigorous during the expansion and lasted through the remainder of the decade.

Chart I-25, US, Civilian Labor Force Participation Rate, 1979-1989, %

Source: US Bureau of Labor Statistics

The rate of participation in the labor force declined after the recession of 2001 and stagnated until 2007, as shown in Chart I-26. The rate of participation in the labor force continued to decline both during the contraction after 2007 and the expansion after 2009 with marginal expansion at the turn of the year into 2012, which is reversed at the tail of the curve.

Chart I-26, US, Civilian Labor Force Participation Rate, 2001-2012, %

Source: US Bureau of Labor Statistics

Chart I-27 provides the number unemployed during the 1980s. The number unemployed peaked at 12.051 million in Dec 1982 seasonally adjusted and 12.517 in Jan 1983 million not seasonally adjusted, declining to 8.358 million in Dec 1984 seasonally adjusted and 7.978 million not seasonally adjusted during the first two years of expansion from the contraction. The number unemployed then fell to 6.667 million in Dec 1989 seasonally adjusted and 6.300 million not seasonally adjusted.

Chart I-27, US, Unemployed Thousands 1979-1989

Source: US Bureau of Labor Statistics

Chart I-28 provides the number unemployed from 2001 to 2012. Using seasonally adjusted data, the number unemployed rose from 6.727 million in Oct 2006 to 15.421 million in Oct 2009, declining to 13.097 million in Dec 2011 and to 12.500 million in Apr 2012. Using data not seasonally adjusted, the number unemployed rose from 6.272 million in Oct 2006 to 16.147 million in Jan 2010, declining to 11.910 million in Apr 2012.

Chart I-28, US, Unemployed Thousands 2001-2012

Source: US Bureau of Labor Statistics

The rate of unemployment peaked at 10.8 percent in both Nov and Dec 1982 seasonally adjusted, as shown in Chart I-29. The rate of unemployment dropped sharply during the expansion after 1984 and continued to decline during the rest of the decade to 5.4 percent in Dec 1989. Using not seasonally adjusted data, the rate of unemployment peaked at 11.4 percent in Jan 1983, declining to 7.0 percent in Dec 1984 and 5.1 percent in Dec 1989.

Chart I-29, US, Unemployment Rate, 1979-1989, %

Source: US Bureau of Labor Statistics

The rate of unemployment in the US seasonally adjusted jumped from 4.4 percent in May 2007 to 10.0 percent in Oct 2009 and 9.9 percent in both Nov and Dec 2009, as shown in Chart I-30. The rate of unemployment fluctuated at around 9.0 percent in 2011 with the somewhat less credible 8.7 percent in Nov 2011 because of the decrease of the labor force by 120,000 from Oct to Nov and then declind to 8.5 percent in Dec 2011 with decline of 50,000 of the labor force from Nov to Dec. The rate of unemployment then fell to 8.3 percent in Jan and Feb 2012 and then to 8.2 percent in Mar 2012 and 8.1 percent in Apr 2012 with another decline of the labor force. Using not seasonally adjusted data, the rate of unemployment rose from 4.3 percent in Apr and May 2007 to 10.6 percent in Jan 2010, declining to 7.7 percent in Apr 2012.

Chart I-30, US, Unemployment Rate, 2001-2012, %

Source: US Bureau of Labor Statistics

The employment population ratio seasonally adjusted fell from around 60.1 in Dec 1979 to 57.1 in both Feb and Mar 1983, as shown in Chart I-31. The employment population ratio seasonally adjusted rose back to 59.9 in Dec 1984 and reached 63.0 later in the decade in Dec 1989. Using not seasonally adjusted data, the employment population ratio dropped from 60.4 percent in Oct 1979 to 56.1 percent in Jan 1983, increasing to 59.8 in Dec 1984 and to 62.9 percent in Dec 1989.

Chart I-31, US, Employment Population Ratio, 1979-1989, %

Source: US Bureau of Labor Statistics

The US employment-population ratio seasonally adjusted has fallen from 63.4 in Dec 2006 to 58.5 in Dec 2011 and Jan 2012, increasing to 58.6 percent in Feb 2012 and falling back to 58.5 percent in Mar 2012 and 58.4 percent in Apr 2012, as shown in Chart I-32. The employment population-ratio has stagnated during the expansion. Using not seasonally adjusted data, the employment population ratio fell from 63.6 percent in Jul 2006 to 57.6 percent in Jan 2011 and 58.5 percent in Apr 2012.

Chart I-32, US, Employment Population Ratio, 2001-2012, %

Source: US Bureau of Labor Statistics

The number unemployed for 27 weeks or over peaked at 2.885 million in Jun 1983 as shown in Chart I-33. The number unemployed for 27 weeks or over fell sharply during the expansion to 1.393 million in Dec 1984 and continued to decline throughout the 1980s to 0.635 million in Dec 1989.

Chart I-33, US, Number Unemployed for 27 Weeks or More 1979-1989, Thousands

Source: US Bureau of Labor Statistics

The number unemployed for 27 weeks or over, seasonally adjusted, increased sharply during the contraction as shown in Chart I-34 from 1.131 million in Nov 2006 to 6.730 in Apr 2010. The number of unemployed for 27 weeks remained at around 6 million during the expansion compared with somewhat above 1 million before the contraction, falling to 5.101 in Apr 2012.

Chart I-34, US, Number Unemployed for 27 Weeks or More, 2001-2012, Thousands

Source: US Bureau of Labor Statistics

The number of persons working part-time for economic reasons because they cannot find full-time work peaked during the contraction at 6.857 million in Oct 1982, as shown in Chart I-35. The number of persons at work part-time for economic reasons fell sharply during the expansion to 5.797 million in Dec 1984 and continued to fall throughout the decade to 4.817 million in Dec 1989.

Chart I-35, US, Part-Time for Economic Reasons, 1979-1989, Thousands

Source: US Bureau of Labor Statistics

The number of people working part-time because they cannot find full-time employment, not seasonally adjusted, increased sharply during the contraction from 3.972 million in Mar 2006, not seasonally adjusted, to 9.130 million in Nov 2009, as shown in Chart I-36. The number of people working part-time because of failure to find an alternative occupation stagnated at a very high level during the expansion, declining to 7.853 million in Apr 2012.

Chart I-36, US, Part-Time for Economic Reasons, 2001-2012, Thousands

Source: US Bureau of Labor Statistics

The number marginally attached to the labor force in Chart I-37 jumped from 1.252 million in Dec 2006 to 2.730 million in Feb 2011, remaining at a high level of 2.540 million in Dec 2011, 2.809 million in Jan 2012, 2.608 million in Feb 2012, 2.352 million in Mar 2012 and 2.363 million in Apr 2012.

Chart I-37, US, Marginally Attached to the Labor Force, 2001-2012

Source: US Bureau of Labor Statistics

Total nonfarm payroll employment seasonally adjusted (SA) increased 115,000 in Apr 2012 and private payroll employment rose by 130,000. The number of nonfarm jobs and private jobs created has been declining in the first four months of 2012 from 275,000 in Jan to 115,000 in Apr. Table I-8 provides the monthly change in jobs seasonally adjusted in the prior strong contraction of 1981-1982 and the recovery in 1983 into 1984 and in the contraction of 2008-2009 and in the recovery in 2009 to 2012. All revisions have been incorporated in Table I-8. The data in the recovery periods are in relief to facilitate comparison. There is significant bias in the comparison. The average yearly civilian noninstitutional population was 174.2 million in 1983 and the civilian labor force 111.6 million, growing by 2009 to an average yearly civilian noninstitutional population of 235.8 million and civilian labor force of 154.1 million, that is, increasing by 35.4 percent and 38.1 percent, respectively (http://www.bls.gov/data/). Total nonfarm payroll jobs in 1983 were 90.280 million, jumping to 94.530 million in 1984 while total nonfarm jobs in 2010 were 129.874 million declining from 130.807 million in 2009 (http://www.bls.gov/data/). What is striking about the data in Table I-8 is that the numbers of monthly increases in jobs in 1983 and 1984 are several times higher than in 2010 to 2011 even with population higher by 35.4 percent and labor force higher by 38.1 percent in 2009 relative to 1983 nearly three decades ago and total number of jobs in payrolls rose by 39.5 million in 2010 relative to 1983 or by 43.8 percent. Growth has been mediocre in the eleven quarters of expansion beginning in IIIQ2009 in comparison with earlier expansions (http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-growth-with-high-unemployment.html) and also in terms of what is required to reduce the job stress of at least 24 million persons but likely close to 30 million. Some of the job growth and contraction in 2010 in Table I-8 is caused by the hiring and subsequent layoff of temporary workers for the 2010 census.

Table I-8, US, Monthly Change in Jobs, Number SA

Month	1981	1982	1983	2008	2009	2010	Private
Jan	95	-327	225	41	-818	-40	-40
Feb	67	-6	-78	-84	-724	-35	-27
Mar	104	-129	173	-95	-799	189	141
Apr	74	-281	276	-208	-692	239	193
May	10	-45	277	-190	-361	516	84
Jun	196	-243	378	-198	-482	-167	92
Jul	112	-343	418	-210	-339	-58	92
Aug	-36	-158	-308	-274	-231	-51	128
Sep	-87	-181	1114	-432	-199	-27	115
Oct	-100	-277	271	-489	-202	220	196
Nov	-209	-124	352	-803	-42	121	134
Dec	-278	-14	356	-661	-171	120	140
			1984			2011	Private
Jan			447			110	119
Feb			479			220	257
Mar			275			246	261
Apr			363			251	264
May			308			54	108
Jun			379			84	102
Jul			312			96	175
Aug			241			85	52
Sep			311			202	216
Oct			286			112	139
Nov			349			157	178
Dec			127			223	234
			1985			2012	Private
Jan			266			275	277
Feb			124			259	254
Mar			346			154	166
Apr			195			115	130
May			274
Jun			145
Jul			189
Aug			193
Sep			204
Oct			187
Nov			209
Dec			168

Source: US Bureau of Labor Statistics

Charts numbered from I-38 to I-41 from the database of the Bureau of Labor Statistics provide a comparison of payroll survey data for the contractions and expansions in the 1980s and after 2007. Chart I-38 provides total nonfarm payroll jobs from 2001 to 2012. The sharp decline in total nonfarm jobs during the contraction after 2007 has been followed by initial stagnation and then tepid growth.

Chart I-38, US, Total Nonfarm Payroll Jobs SA 2001-2012

Source: US Bureau of Labor Statistics http://www.bls.gov/data/

Total nonfarm payroll jobs grew rapidly during the expansion in 1983 and 1984 as shown in Chart I-39. Nonfarm payroll jobs continued to grow at high rates during the remainder of the 1980s.

Chart I-39, US, Total Nonfarm Payroll Jobs SA 1979-1989

Source: US Bureau of Labor Statistics

Most job creation in the US is by the private sector. Chart I-40 shows the sharp destruction of private payroll jobs during the contraction after 2007. There has been growth after 2010 but insufficient to recover higher levels of employment prevailing before the contraction. At current rates, recovery of employment may spread over several years in contrast with past expansions of the business cycle in the US.

Chart I-40, US, Total Private Payroll Jobs SA 2001-2012

Source: US Bureau of Labor Statistics http://www.bls.gov/data/

In contrast, growth of private payroll jobs in the US recovered vigorously during the expansion in 1983 through 1985, as shown in Chart I-41. Rapid growth of creation of private jobs continued throughout the 1980s.

Chart I-41, US, Total Private Payroll Jobs SA 1979-1989

Source: US Bureau of Labor Statistics http://www.bls.gov/data/

IA4 Creation of Jobs. Types of jobs created, and not only the pace of job creation, may be important. Aspects of growth of payroll jobs from Apr 2011 to Apr 2012, not seasonally adjusted (NSA), are provided in Table I-9. Total nonfarm employment increased by 1,727,000 (row A, column Change), consisting of growth of total private employment by 1,944,000 (row B, column Change) and decline by 217,000 of government employment (row C, column Change). Monthly average growth of private payroll employment has been 162,000, which is mediocre relative to 24 to 30 million in job stress, while total nonfarm employment has grown on average by only 143,917 per month. These monthly rates of job creation are insufficient to meet the demands of new entrants in the labor force and thus perpetuate unemployment and underemployment. Manufacturing employment increased by 236,000, at the monthly rate of 19,667, while private service providing employment grew by 1,599,000, at the monthly rate of 133,250. The employment situation report states: “Employment in professional and business services increased by 62,000. Since a recent low point in Sep 2009, employment in this industry has grown by 1.5 million. In April, employment in temporary help services edged up by 21,000” (http://www.bls.gov/news.release/pdf/empsit.pdf 2). An important feature in Table I-9 is that jobs in professional and business services increased by 582,000 with temporary help services increasing by 184,000. This episode of jobless recovery is characterized by part-time jobs and creation of jobs that are inferior to those that have been lost. Monetary and fiscal stimuli fail to increase consumption in a fractured job market. The BLS also finds that “within leisure and hospitality, employment in food services and drinking places continued to trend up (+20,000) in Apr). Since Feb 2010, food services and drinking places has added 576,000 jobs” (http://www.bls.gov/news.release/pdf/empsit.pdf 2). An important characteristic is that the losses of government jobs have been high in local government, 136,000 jobs lost in the past twelve months (row C3 Local), because of the higher number of employees in local government, 14.4 million relative to 5.2 million in state jobs and 2.8 million in federal jobs.

Table I-9, US, Employees in Nonfarm Payrolls Not Seasonally Adjusted, in Thousands

	Apr 2011	Apr 2012	Change
A Total Nonfarm	131,240	132,967	1,727
B Total Private	108,619	110,563	1,944
B1 Goods Producing	17,755	18,100	345
B1a Manufacturing	11,643	11,879	236
B2 Private service providing	90,864	92,463	1,599
B2a Wholesale Trade	5,505	5,587	82
B2b Retail Trade	14,477	14,587	110
B2c Transportation & Warehousing	4,248	4,312	64
B2d Financial Activities	7,648	7,691	43
B2e Professional and Business Services	17,236	17,818	582
B2e1 Temporary help services	2,246	2,430	184
B2f Health Care & Social Assistance	16,576	16,925	349
B2g Leisure & Hospitality	13,224	13,515	291
C Government	22,621	22,404	-217
C1 Federal	2,873	2,821	-52
C2 State	5,241	5,212	-29
C3 Local	14,507	14,371	-136

Note: A = B+C, B = B1 + B2, C=C1 + C2 + C3

Source: http://bls.gov/news.release/pdf/empsit.pdf

Greater detail on the types of job created is provided in Table I-10 with SA data for Apr and Mar 2012. Strong seasonal effects are shown by the significant difference between seasonally-adjusted (SA) and not-seasonally-adjusted (NSA) data. The purpose of seasonality is to isolate nonseasonal effects. The 115,000 jobs SA total nonfarm jobs created in Apr relative to Mar actually correspond to job increase of 896,000 jobs NSA, as shown in row A. The 130,000 total private payroll jobs SA created in Apr relative to Mar actually correspond to increase of 896,000 jobs NSA in Feb. Adjustment for seasonality isolates nonseasonal effects that suggest improvement from Dec to Jan, Feb and Mar. The analysis of NSA job creation in the prior Table I-9 does show improvement over the 12 months ending in Apr 2012 that is not clouded by seasonal variations but significant reduction in number of jobs created. In fact, the 12-month rate of job creation without seasonal adjustment is stronger indication of marginal improvement in the US job market but that is insufficient to even make a dent in about 30 million people unemployed or underemployed.

Table I-10, US, Employees on Nonfarm Payrolls and Selected Industry Detail, Thousands, SA

	Apr 2012 SA	Mar 2012 SA	∆	Apr 2012 NSA	Mar 2012 NSA	∆
A Total Nonfarm	132,989	132,874	115	132,967	132,071	896
B Total Private	111,020	110,890	130	110,563	109,667	896
B1 Goods Producing	18,342	18,328	14	18,100	17,889	211
B1a Constr.	5,558	5,560	-2	5,394	5,223	171
B Mfg	11,947	11,931	16	11,879	11,844	35
B2 Private Service Providing	92,678	92,562	116	92,463	91,778	685
B2a Wholesale Trade	5,601	5,593	8	5,587	5,563	24
B2b Retail Trade	14,750	14,720	-30	14,587	14,489	98
B2c Couriers & Mess.	521	529	-8	511	519	-8
B2d Health-care & Social Assistance	16,925	16,907	18	16,924	16,896	28
B2De Profess. & Business Services	17,860	17,798	62	17,818	17,602	216
B2De1 Temp Help Services	2,494	2,473	21	2,430	2,382	48
B2f Leisure & Hospit.	13,612	13,600	12	13,515	13,230	285

Notes: ∆: Absolute Change; Constr.: Construction; Mess.: Messengers; Temp: Temporary; Hospit.: Hospitality.

Source: http://bls.gov/news.release/pdf/empsit.pdf

Table I-11 provides national income by industry without capital consumption adjustment (WCCA). “Private industries” or economic activities have share of 85.9 percent in US national income. Most of US national income is in the form of services. In Apr 2012, there were 132.9 million nonfarm jobs in the US, according to estimates of the establishment survey of the Bureau of Labor Statistics (BLS) (http://www.bls.gov/news.release/pdf/empsit.pdf Table B-1, 28). Total private jobs of 110.6 million NSA in Apr 2012 accounted for 83.2 percent of total nonfarm jobs of 132.9 million, of which 11.9 million, or 10.8 percent of total private jobs and 8.9 percent of total nonfarm jobs, were in manufacturing. Private service-producing jobs were 92.5 million NSA in Apr 2012, or 69.6 percent of total nonfarm jobs and 83.6 percent of total private-sector jobs. Manufacturing has share of 10.0 in US national income, as shown in Table I-11. Most income in the US originates in services. Subsidies and similar measures designed to increase manufacturing jobs will not increase economic growth and employment and may actually reduce growth by diverting resources away from currently employment-creating activities because of the drain of taxation.

Table I-11, US, National Income without Capital Consumption Adjustment by Industry, Seasonally Adjusted Annual Rates, Billions of Dollars, % of Total

	SAAR IVQ2011	% Total
National Income WCCA	13,332.0	100.0
Domestic Industries	13,105.7	98.3
Private Industries	11,458.8	85.9
Agriculture	133.1	1.0
Mining	170.9	1.3
Utilities	169.3	1.3
Construction	544.5	4.1
Manufacturing	1330.9	10.0
Durable Goods	770.8	5.8
Nondurable Goods	560.1	4.2
Wholesale Trade	764.2	5.7
Retail Trade	906.1	6.8
Transportation & WH	372.0	2.8
Information	441.2	3.3
Finance, insurance, RE	2452.9	18.4
Professional, BS	1893.8	14.2
Education, Health Care	1370.8	10.3
Arts, Entertainment	519.1	3.9
Other Services	390.2	2.9
Government	1646.9	12.4
Rest of the World	226.3	1.7

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

The NBER dates recessions in the US from peaks to troughs as: IQ80 to IIIQ80, IIIQ81 to IV82 and IVQ07 to IIQ09 (http://www.nber.org/cycles/cyclesmain.html). Table I-12 provides total annual level nonfarm employment in the US for the 1980s and the 2000s, which is different from 12 months comparisons. Nonfarm jobs rose by 4.853 million in 1982 to 1984, or 5.4 percent, and continued rapid growth in the rest of the decade. In contrast, nonfarm jobs are down by 7.780 million in 2010 relative to 2007 and fell by 989,000 in 2010 relative to 2009 even after six quarters of GDP growth. Monetary and fiscal stimuli have failed in increasing growth to rates required for mitigating job stress. The initial growth impulse reflects a flatter growth curve in the current expansion.

Table I-12, US, Total Nonfarm Employment in Thousands

Year	Total Nonfarm	Year	Total Nonfarm
1980	90,528	2000	131,785
1981	91,289	2001	131,826
1982	89,677	2002	130,341
1983	90,280	2003	129,999
1984	94,530	2004	131,435
1985	97,511	2005	133,703
1986	99,474	2006	136,086
1987	102,088	2007	137,598
1988	105,345	2008	136,790
1989	108,014	2009	130,807
1990	109,487	2010	129,874
1991	108,374	2011	131,359

The highest average yearly percentage of unemployed to the labor force since 1940 was 14.6 percent in 1940 followed by 9.9 percent in 1941, 8.5 percent in 1975, 9.7 percent in 1982 and 9.6 percent in 1983 (ftp://ftp.bls.gov/pub/special.requests/lf/aa2006/pdf/cpsaat1.pdf). The rate of unemployment remained at high levels in the 1930s, rising from 3.2 percent in 1929 to 22.9 percent in 1932 in one estimate and 23.6 percent in another with real wages increasing by 16.4 percent (Margo 1993, 43; see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 214-5). There are alternative estimates of 17.2 percent or 9.5 percent for 1940 with real wages increasing by 44 percent. Employment declined sharply during the 1930s. The number of hours worked remained in 1939 at 29 percent below the level of 1929 (Cole and Ohanian 1999). Private hours worked fell in 1939 to 25 percent of the level in 1929. The policy of encouraging collusion through the National Industrial Recovery Act (NIRA), to maintain high prices, together with the National Labor Relations Act (NLRA), to maintain high wages, prevented the US economy from recovering employment levels until Roosevelt abandoned these policies toward the end of the 1930s (for review of the literature analyzing the Great Depression see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 198-217).

The Bureau of Labor Statistics (BLS) makes yearly revisions of its establishment survey (Harris 2011BA):

“With the release of data for January 2011, the Bureau of Labor Statistics (BLS) introduced its annual revision of national estimates of employment, hours, and earnings from the Current Employment Statistics (CES) monthly survey of nonfarm establishments. Each year, the CES survey realigns its sample-based estimates to incorporate universe counts of employment—a process known as benchmarking. Comprehensive counts of employment, or benchmarks, are derived primarily from unemployment insurance (UI) tax reports that nearly all employers are required to file with State Workforce Agencies.”

The number of not seasonally adjusted total private jobs in the US in Dec 2010 is 108.464 million, declining to 106.079 million in Jan 2011, or by 2.385 million, because of the adjustment of a different benchmark and not actual job losses. The not seasonally adjusted number of total private jobs in Dec 1984 is 80.250 million, declining to 78.704 million in Jan 1985, or by 1.546 million for the similar adjustment. Table I-13 attempts to measure job losses and gains in the recessions and expansions of 1981-1985 and 2007-2011. The final ten rows provide job creation from May 1983 to May 1984 and from May 2010 to May 2011, that is, at equivalent stages of the recovery from two comparable strong recessions. The row “Change ∆%” for May 1983 to May 1984 shows an increase of total nonfarm jobs by 4.9 percent and of 5.9 percent for total private jobs. The row “Change ∆%” for May 2010 to May 2011 shows an increase of total nonfarm jobs by 0.7 percent and of 1.7 percent for total private jobs. The last two rows of Table 7 provide a calculation of the number of jobs that would have been created from May 2010 to May 2011 if the rate of job creation had been the same as from May 1983 to May 1984. If total nonfarm jobs had grown between May 2010 and May 2011 by 4.9 percent, as between May 1983 and May 1984, 6.409 million jobs would have been created in the past 12 months for a difference of 5.457 million more total nonfarm jobs relative to 0.952 million jobs actually created. If total private jobs had grown between May 2010 and May 2011 by 5.9 percent as between May 1983 and May 1984, 6.337 million private jobs would have been created for a difference of 4.539 million more total private jobs relative to 1.798 million jobs actually created.

Table I-13, US, Total Nonfarm and Total Private Jobs Destroyed and Subsequently Created in

Two Recessions IIIQ1981-IVQ1982 and IVQ2007-IIQ2009, Thousands and Percent

	Total Nonfarm Jobs	Total Private Jobs
06/1981 #	92,288	75,969
11/1982 #	89,482	73,260
Change #	-2,806	-2,709
Change ∆%	-3.0	-3.6
12/1982 #	89,383	73,185
05/1984 #	94,471	78,049
Change #	5,088	4,864
Change ∆%	5.7	6.6
11/2007 #	139,090	116,291
05/2009 #	131,626	108,601
Change %	-7,464	-7,690
Change ∆%	-5.4	-6.6
12/2009 #	130,178	107,338
05/2011 #	131,753	108,494
Change #	1,575	1,156
Change ∆%	1.2	1.1
05/1983 #	90,005	73,667
05/1984 #	94,471	78,049
Change #	4,466	4,382
Change ∆%	4.9	5.9
05/2010 #	130,801	107,405
05/2011 #	131,753	109,203
Change #	952	1,798
Change ∆%	0.7	1.7
Change # by ∆% as in 05/1984 to 05/1985	6,409*	6,337**
Difference in Jobs that Would Have Been Created	5,457 = 6,409-952	4,539 = 6,337-1,798

*[(130,801x1.049)-130,801] = 6,409 thousand

**[(107,405)x1.059 – 107,405] = 6,337 thousand

IB Falling Real Wages. The wage bill is the product of average weekly hours times the earnings per hour. Table IB-1 provides the estimates by the Bureau of Labor Statistics (BLS) of earnings per hour seasonally adjusted, increasing from $22.97/hour in Apr 2011 to $23.38/hour in Apr 2012, or by 1.8 percent. There has been disappointment about the pace of wage increases because of rising food and energy costs that inhibit consumption and thus sales and similar concern about growth of consumption that accounts for about 70 percent of GDP. Growth of consumption by decreasing savings by means of controlling interest rates in what is called financial repression may not be lasting and sound for personal finances (http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-growth-with-high-unemployment.html http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-economic-growth-falling-real.html http://cmpassocregulationblog.blogspot.com/2012/03/mediocre-economic-growth-flattening.html http://cmpassocregulationblog.blogspot.com/2012/01/mediocre-economic-growth-financial.html http://cmpassocregulationblog.blogspot.com/2011/12/slow-growth-falling-real-disposable.html http://cmpassocregulationblog.blogspot.com/2011/11/us-growth-standstill-falling-real.html http://cmpassocregulationblog.blogspot.com/2011/10/slow-growth-driven-by-reducing-savings.html). Average hourly earnings seasonally were virtually flat from $23.37 in Mar 2012 to $23.38 in Apr 2012 or increasing by 0.04 percent. Average private weekly earnings increased $16.44 from $790.17 in Apr 2011 to $806.61 in Apr 2012 or 2.1 percent and were virtually flat $806.27 from Mar 2012 to $806.61 in Apr 2012 or increasing 0.04 percent. The inflation-adjusted wage bill can only be calculated for Mar, which is the most recent month for which there are estimates of the consumer price index. Earnings per hour (not-seasonally-adjusted (NSA)) rose from $22.93 in Mar 2011 to $23.41 in Mar 2012 or by 2.1 percent (http://www.bls.gov/data/; see Table II-3 below). Data NSA are more suitable for comparison over a year. Average weekly hours NSA were 34.1 in Mar 2011 and 34.3 in Mar 2012 (http://www.bls.gov/data/; see Table II-2 below). The wage bill rose 2.7 percent in the 12 months ending in Mar 2012:

{[(wage bill in Mar 2012)/(wage bill in Mar 2011)]-1}100 =

{[($23.41x34.3)/($22.93x34.1)]-1]}100

= {[($802.96/$781.91)]-1}100 = 2.7%

CPI inflation was 2.7 percent in the 12 months ending in Mar 2012 (http://www.bls.gov/cpi/) for an inflation-adjusted wage-bill change of 0.0 percent :{[(1.027/1.027)-1]100}. Energy and food price increases are similar to a “silent tax” that is highly regressive, harming the most those with lowest incomes. There are concerns that the wage bill would deteriorate in purchasing power because of renewed raw materials shock in the form of increases in prices of commodities such as the 31.1 percent steady increase in the DJ-UBS Commodity Index from Jul 2, 2010 to Sep 2, 2011. The charts of four commodity price indexes by Bloomberg show steady increase since Jul 2, 2010 that was interrupted briefly only in Nov 2010 with the sovereign issues in Europe triggered by Ireland, in Mar by the earthquake and tsunami in Japan and in the beginning of May by the decline in oil prices and sovereign risk difficulties in Europe (http://www.bloomberg.com/markets/commodities/futures/). Renewed risk aversion because of the sovereign risks in Europe has reduced the rate of increase of the DJ UBS commodity index to 10.6 percent on May 4, 2012, relative to Jul 2, 2010 (see Table VI-4). Inflation has been rising in waves with carry trades driven by zero interest rates to commodity futures during periods of risk appetite with interruptions during risk aversion (http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring.html http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk.html http://cmpassocregulationblog.blogspot.com/2012/02/world-inflation-waves-united-states.html http://cmpassocregulationblog.blogspot.com/2012/01/world-inflation-waves-united-states.html http://cmpassocregulationblog.blogspot.com/2011/12/recovery-without-hiring-world-inflation_20.html http://cmpassocregulationblog.blogspot.com/2011/11/world-inflation-waves-and-monetary_21.html).

Table IB-1, US, Earnings per Hour and Average Weekly Hours SA

Earnings per Hour	Apr 2011	Feb 2012	Mar 2012	Apr 2012
Total Private	$22.97	$23.33	$23.37	$23.38
Goods Producing	$24.35	$24.62	$24.66	$24.69
Service Providing	$22.64	$23.03	$23.07	$23.07
Average Weekly Earnings
Total Private	$790.17	$807.22	$806.27	$806.61
Goods Producing	$969.13	$997.11	$991.33	$997.48
Service Providing	$753.91	$769.20	$770.54	$768.23
Average Weekly Hours
Total Private	34.4	34.6	34.5	34.5
Goods Producing	39.8	40.5	40.2	40.4
Service Providing	33.3	33.4	33.4	33.3

Source: http://bls.gov/news.release/pdf/empsit.pdf

Table IB-2 provides average weekly hours of all employees in the US from 2006 to 2012. Average weekly hours fell from 34.7 in Jun 2007 to 33.8 in Jun 2009, which was the last month of the contraction. Average weekly hours rose to 34.4 in Dec 2011 but fell to 34.2 in Feb 2012 and 34.3 in Mar 2012, rising to 34.6 in Apr 2012.

Table IB-2, US, Average Weekly Hours of All Employees, NSA 2006-2012

Year	Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sep	Oct	Nov	Dec
2006			34.2	34.6	34.3	34.6	34.9	34.6	34.5	34.9	34.4	34.6
2007	34.1	34.2	34.3	34.7	34.4	34.7	34.9	34.7	35.0	34.5	34.5	35.0
2008	34.2	34.2	34.8	34.4	34.4	34.9	34.5	34.6	34.4	34.4	34.6	34.1
2009	33.8	34.2	34.0	33.6	33.7	33.8	33.8	34.3	33.7	33.8	34.3	33.9
2010	33.7	33.6	33.8	34.0	34.4	34.1	34.2	34.7	34.1	34.3	34.2	34.2
2011	34.2	34.0	34.1	34.3	34.6	34.4	34.4	34.4	34.4	34.9	34.4	34.4
2012	34.5	34.2	34.3	34.6

Source: US Bureau of Labor Statistics http://www.bls.gov/data/

Chart IB-1 provides average weekly hours monthly from Mar 2006 to Mar 2012. Average weekly hours remained relatively stable in the period before the contraction and fell sharply during the contraction as business could not support lower production with the same labor input. Average weekly hours rose rapidly during the expansion but have stabilized at a level below that prevailing before the contraction.

Chart IB-1, US, Average Weekly Hours of All Employees, SA 2006-2012

Source: US Bureau of Labor Statistics

Calculations using BLS data of inflation-adjusted average hourly earnings are shown in Table IB-3. The final column of Table IB-3 (“12 Month Real ∆%”) provides inflation-adjusted average hourly earnings of all employees in the US. Average hourly earnings rose above inflation throughout the first nine months of 2007 just before the global recession that began in the final quarter of 2007 when average hourly earnings lost to inflation. In contrast, average hourly earnings of all US workers have risen less than inflation in four months in 2010 and in all but the first month in 2011 and the loss accelerated at 1.8 percent in Sep 2011, declining to a real loss of 1.1 percent in Feb 2012 and 0.6 percent in Mar 2012, which is the most recent month for which there are consumer price index data.

Table IB-3, US, Average Hourly Earnings Nominal and Inflation Adjusted, Dollars and % NSA

	AHE ALL	12 Month Nominal ∆%	∆% 12 Month CPI	12 Month Real ∆%
2007
Jan*	$20.70*	4.2*	2.1	2.1*
Feb*	$20.79*	4.1*	2.4	1.7*
Mar	$20.82	3.7	2.8	0.9
Apr	$21.05	3.3	2.6	0.7
May	$20.83	3.7	2.7	1.0
Jun	$20.82	3.8	2.7	1.1
Jul	$20.99	3.4	2.4	1.0
Aug	$20.85	3.5	2.0	1.5
Sep	$21.18	4.0	2.8	1.2
Oct	$21.07	2.7	3.5	-0.8
Nov	$21.13	3.3	4.3	-0.9
Dec	$21.37	3.7	4.1	-0.4
2010
Jan	$22.55	2.0	2.6	-0.6
Feb	$22.61	1.4	2.1	-0.7
Mar	$22.51	1.2	2.3	-1.1
Apr	$22.56	1.8	2.2	-0.4
May	$22.63	2.5	2.0	0.5
Jun	$22.37	1.7	1.1	0.6
Jul	$22.44	1.8	1.2	0.6
Aug	$22.58	1.7	1.1	0.6
Sep	$22.63	1.8	1.1	0.7
Oct	$22.73	1.9	1.2	0.7
Nov	$22.72	1.1	1.1	0.0
Dec	$22.79	1.7	1.5	0.2
2011
Jan	$23.20	2.9	1.6	1.3
Feb	$23.03	1.9	2.1	-0.2
Mar	$22.93	1.9	2.7	-0.8
Apr	$23.00	2.0	3.2	-1.2
May	$23.09	2.0	3.6	-1.5
Jun	$22.85	2.1	3.6	-1.4
Jul	$22.98	2.4	3.6	-1.2
Aug	$22.88	1.3	3.8	-2.4
Sep	$23.09	2.0	3.9	-1.8
Oct	$23.34	2.7	3.5	-0.8
Nov	$23.19	2.1	3.4	-1.3
Dec	$23.26	2.1	3.0	-0.9
2012
Jan	$23.61	1.8	2.9	-1.1
Feb	$23.45	1.8	2.9	-1.1
Mar	$23.41	2.1	2.7	-0.6
Apr	$23.62	2.7

Note: AHE ALL: average hourly earnings of all employees; CPI: consumer price index; Real: adjusted by CPI inflation; NA: not available

*AHE of production and nonsupervisory employees because of unavailability of data for all employees

Average hourly earnings of all US employees in the US in constant dollars of 1982-1984 from the dataset of the US Bureau of Labor Statistics (BLS) are provided in Table IB-4. Average hourly earnings fell 0.5 percent after adjusting for inflation in the 12 months ending in Mar 2012. Table IB-4 confirms the trend of deterioration of purchasing power of average hourly earnings in 2011 and into 2012. Those who still work bring back home a paycheck that buys fewer goods than a year earlier and savings in bank deposits do not pay anything because of financial repression (Section II and earlier at http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-economic-growth-falling-real.html).

Table IB-4, US, Average Hourly Earnings of All Employees in Constant Dollars of 1982-1984

Year	Jan	Feb	Mar	Oct	Nov	Dec
2006			10.05	10.17	10.15	10.21
2007	10.23	10.22	10.14	10.08	10.05	10.17
2008	10.11	10.12	10.11	10.06	10.37	10.47
2009	10.47	10.50	10.46	10.32	10.39	10.38
2010	10.41	10.43	10.34	10.39	10.38	10.40
2011	10.53	10.41	10.26	10.31	10.25	10.31
2012	10.42	10.30	10.21

Source: US Bureau of Labor Statistics

The deterioration of purchasing power of average hourly earnings of US workers is shown by Chart IB-2 of the US Bureau of Labor Statistics. Chart IB-2 plots average hourly earnings of all US employees in constant 1982-1984 dollars with evident decline from 2010 to 2012.

Chart IB-2, US, Average Hourly Earnings of All Employees in Constant Dollars of 1982-1984, SA 2006-2012

Source: US Bureau of Labor Statistics

Chart IB-3 provides 12-month percentage changes of average hourly earnings of all employees in constant dollars of 1982-1984, that is, adjusted for inflation. There was sharp contraction of inflation-adjusted average hourly earnings of US employees during parts of 2007 and 2008. Rates of change in 12 months became positive in parts of 2009 and 2010 but then became negative again in 2011 and now into 2012.

Chart IB-3, Average Hourly Earnings of All Employees NSA 12-Month Percent Change, 1982-1984 Dollars, NSA 2007-2012

Source: US Bureau of Labor Statistics

Average weekly earnings of all US employees in the US in constant dollars of 1982-1984 from the dataset of the US Bureau of Labor Statistics (BLS) are provided in Table IB-5. Average weekly earnings fell 0.9 percent after adjusting for inflation in the 12 months ending in Sep 2011, increased 0.9 percent in the 12 months ending in Oct, fell 0.7 percent in the 12 months ending in Nov and 0.3 in the 12 months ending in Dec, declining 0.3 percent in the 12 months ending in Jan 2012 and 0.4 percent in the 12 months ending in Feb 2012. Average weekly earnings in constant dollars were flat in Mar 2012 relative to Mar 2011, increasing 0.04 percent. Table IB-5 confirms the trend of deterioration of purchasing power of average weekly earnings in 2011 and into 2012. Those who still work bring back home a paycheck that buys fewer goods than a year earlier. The fractured US job market does not provide an opportunity for advancement as in past booms following recessions.

Table IB-5, US, Average Weekly Earnings of All Employees in Constant Dollars of 1982-1984, NSA 2007-2012

Year	Jan	Feb	Mar	Nov	Dec
2006			343.71	349.12	353.37
2007	348.72	349.40	347.76	346.85	356.11
2008	345.92	346.21	351.70	358.83	357.17
2009	353.94	359.26	355.65	356.43	351.95
2010	350.71	350.51	349.60	355.12	355.61
2011	360.29	353.81	349.90	352.62	354.56
2012	359.36	352.27	350.04

Source: US Bureau of Labor Statistics

Chart IB-4 provides average weekly earnings of all employees in constant dollars of 1982-1984. The same pattern emerges of sharp decline during the contraction, followed by recovery in the expansion and continuing fall from 2010 to 2011.

Chart IB-4, US, Average Weekly Earnings of All Employees in Constant Dollars of 1982-1984, SA 2006-2012

Source: US Bureau of Labor Statistics

Chart IB-5 provides 12-month percentage changes of average weekly earnings of all employees in the US in constant dollars of 1982-1984. There is the same pattern of contraction during the global recession in 2008 and then again trend of deterioration in the recovery without hiring and inflation waves in 2011 (http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring.html http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk.html http://cmpassocregulationblog.blogspot.com/2012/02/world-inflation-waves-united-states.html http://cmpassocregulationblog.blogspot.com/2012/01/world-inflation-waves-united-states.html http://cmpassocregulationblog.blogspot.com/2012/01/recovery-without-hiring-united-states.html).

Chart IB-5, US, Average Weekly Earnings of All Employees NSA in Constant Dollars of 1982-1984 12-Month Percent Change, NSA 2007-2011

Source: US Bureau of Labor Statistics

II Stagnating Real Disposable Income and Consumption Expenditures. Subsection IIA Stagnating Real Disposable Income and Consumption Expenditures provides analysis of the personal income and consumption outlays of the Bureau of Economic Analysis for Jan 2012. Subsection IIB Repression of Savings analyzes financial repression and how it is affecting savings and wealth allocation in the US.

Subsection IIA Stagnating Real Disposable Income and Consumption Expenditures. The data on personal income and consumption have been revised back to 2003 as it the case of the national accounts (GDP revisions are covered in http://cmpassocregulationblog.blogspot.com/2011/07/growth-recession-debt-financial-risk.html). All revisions are incorporated in this subsection. Table II-1 provides monthly and annual equivalent percentage changes, seasonally adjusted, of current dollars or nominal personal income (NPI), current dollars or nominal disposable personal income (NDPI), real or constant chained (2005) dollars DPI (RDPI), current dollars nominal personal consumption expenditures (NPCE) and constant or chained (2005) dollars PCE. There are four waves of changes in personal income and expenditures in Table II-1 that correspond to inflation waves observed worldwide (http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring.html). In the first wave in Jan-Apr with relaxed risk aversion, nominal personal income (NPI) increased at the annual equivalent rate of 7.8 percent, nominal disposable personal income (NDPI) at 4.6 percent and nominal personal consumption expenditures (NPCE) at 6.5. Real disposable income (RDPI) stagnated and real personal consumption expenditures (RPCE) rose at annual equivalent 1.5 percent. In the second wave in May-Aug under risk aversion, NPI rose at annual equivalent 2.4 percent, NPDI at 2.7 percent and NPCE at 2.7 percent. RDPI stagnated at 0.3 percent annual equivalent and RPCE crawled at 0.6 percent annual equivalent. With mixed shocks of risk aversion in the third wave from Sep to Dec, NPI rose at 3.7 percent annual equivalent, NDPI at 3.0 percent and NPCE at 3.0 percent. Real values were more dynamic than in the earlier wave with RDPI increasing at 1.8 percent annual equivalent and RPCE at 2.1 percent annual equivalent. In the fourth wave from Jan to Mar 2012, NPI increased to 4.1 percent annual equivalent and NDPI at 2.8 percent but real disposable income (RDPI) stagnated again. The policy of repressing savings with zero interest rates stimulated growth of nominal consumption (NPCE) at the annual equivalent rate of 7.0 percent and real consumption (RPCE) at 3.7 percent. There has been sharp deterioration in the annual equivalent rates in the four waves in 2011 and 2012 shown in Table II-1 from the annual equivalent rates prevailing in the final quarter of 2010 with lower equivalent rate of real personal consumption expenditures of 2.8 percent but based on growth of real disposable income at 3.2 percent annual equivalent. The US economy began to decelerate in mid 2010 and has not recovered the pace of growth in the early expansion phase.

Table II-1, US, Percentage Change from Prior Month Seasonally Adjusted of Personal Income, Disposable Income and Personal Consumption Expenditures %

	NPI	NDPI	RDPI	NPCE	RPCE
2012
Mar	0.4	0.4	0.2	0.3	0.1
Feb	0.3	0.2	-0.1	0.9	0.5
Jan	0.3	0.1	-0.1	0.5	0.3
∆% Jan-Mar	4.1	2.8	0.0	7.0	3.7
2011
∆% Jan-Dec 2011*	4.6	3.4	0.8	4.1	1.5
Dec	0.4	0.4	0.3	0.2	0.1
Nov	0.1	0.0	-0.1	0.0	0.0
Oct	0.4	0.3	0.3	0.2	0.2
Sep	0.3	0.3	0.1	0.7	0.5
AE ∆% Sep-Dec	3.7	3.0	1.8	3.0	2.1
Aug	0.1	0.2	-0.1	0.1	-0.1
Jul	0.5	0.5	0.1	0.8	0.4
Jun	0.1	0.1	0.2	-0.2	-0.1
May	0.1	0.1	-0.1	0.2	0.0
AE ∆% May-Aug	2.4	2.7	0.3	2.7	0.6
Apr	0.2	0.2	-0.2	0.3	-0.1
Mar	0.5	0.4	0.0	0.6	0.2
Feb	0.6	0.5	0.1	0.8	0.4
Jan	1.2	0.4	0.1	0.4	0.0
AE ∆% Jan-Apr	7.8	4.6	0.0	6.5	1.5
2010
∆% Jan-Dec 2010	5.1	4.6	3.2	4.2	2.8
Dec	0.5	0.5	0.2	0.4	0.1
Nov	0.1	0.1	0.0	0.4	0.3
Oct	0.5	0.5	0.3	0.6	0.4
IVQ2010∆%	1.1	1.1	0.5	1.4	0.8
IVQ2010 AE ∆%	4.5	4.5	2.0	5.7	3.2

Percentage change month to month seasonally adjusted

*∆% Dec 2011/Dec 2010

http://www.bea.gov/newsreleases/national/pi/2012/pdf/pi0312.pdf

Further information on income and consumption is provided by Table II-2. The 12-month rates of increase of RDPI and RPCE in 2011 show a sharp trend of deterioration of RDPI from over 3 percent in the final four months of 2010 to less than 3 percent in IQ2011 and then collapsing to a range of 0.9 to 0.5 percent in May-Aug. The BEA has revised earlier data showing RDPI falling 0.1 percent in 2011 to growth of 0.8 percent in the 12 months ending in Dec 2011. In the 12 months ending in Mar 2012, RDPI grew 0.6 percent compared with growth of 3.2 percent in the 12 months ending in Dec 2010, confirming the deceleration of income recovery in the US. RPCE growth decelerated less sharply from close to 3 percent in IVQ 2010 to 2.3 percent in Jul, 1.7 percent in Aug, 2.1 percent in Sep, 1.9 percent in Oct, 1.5 percent in Nov, 1.5 percent in Dec, 1.8 percent in Jan, 2.0 percent in Feb and 1.8 percent in Mar. Subdued growth of RPCE could affect revenues of business. Growth rates of personal income and consumption have weakened. Goods and especially durable goods have been driving growth of PCE as shown by the much higher 12-month rates of growth of real goods PCE (RPCEG) and durable goods real PCE (RPCEGD) than services real PCE (RPCES). The faster expansion of industry in the economy is derived from growth of consumption of goods and in particular of consumer durable goods while growth of consumption of services is much more moderate. The 12-month rates of growth of RPCEGD have fallen from more than 10 percent in Sep 2010 to Feb 2011 to over 7 percent in the quarter Jan-Mar 2012. RPCEG growth rates have fallen from over 5 percent late in 2010 and early Jan-Feb 2011 to the range of 2.7 to 3.0 percent in Jan-Mar 2012.

Table II-2, Real Disposable Personal Income and Real Personal Consumption Expenditures Percentage Change from the Same Month a Year Earlier %

	RDPI	RPCE	RPCEG	RPCEGD	RPCES
2012
Mar	0.6	1.8	3.0	7.6	1.2
Feb	0.5	2.0	2.7	7.7	1.6
Jan	0.6	1.8	2.8	7.4	1.3
2011
Dec	0.8	1.5	2.4	7.0	1.1
Nov	0.7	1.5	2.2	6.7	1.2
Oct	0.8	1.9	2.7	6.6	1.5
Sep	0.8	2.1	3.2	7.8	1.5
Aug	0.5	1.7	2.4	6.1	1.4
Jul	0.9	2.3	3.9	7.1	1.5
Jun	0.8	2.0	3.4	6.3	1.4
May	0.9	2.2	4.0	7.8	1.4
Apr	1.6	2.5	4.7	9.2	1.4
Mar	2.4	2.6	4.5	9.3	1.7
Feb	2.7	2.9	5.9	12.8	1.4
Jan	2.8	2.9	5.8	12.0	1.5
2010
Dec	3.2	2.8	5.4	10.2	1.6
Nov	3.6	3.2	5.9	10.2	1.9
Oct	3.8	2.9	6.1	12.2	1.3
Sep	3.1	2.7	5.6	10.5	1.4

Notes: RDPI: real disposable personal income; RPCE: real personal consumption expenditures (PCE); RPCEG: real PCE goods; RPCEGD: RPCEG durable goods; RPCES: RPCE services

Numbers are percentage changes from the same month a year earlier

Source: http://www.bea.gov/newsreleases/national/pi/2012/pdf/pi0312.pdf

Chart II-1 shows US real personal consumption expenditures (RPCE) between 1995 and 2011. There is an evident drop in RPCE during the global recession in 2007 to 2009 but the slope is flatter during the current recovery than in the period before 2007.

Chart II-1, US, Real Personal Consumption Expenditures Seasonally Adjusted at Annual Rates 1995-2012

Source: US Bureau of Economic Analysis

Percent changes from the prior period in seasonally-adjusted annual equivalent quarterly rates (SAAR) of real personal consumption expenditures (RPCE) are provided in Chart II-2 from 1995 to 2011. The average rate could be visualized as a horizontal line. Although there are not yet sufficient observations, it appears from Chart II-2 that the average rate of growth of RPCE was higher before the recession than during the past eleven quarters of expansion that began in IIIQ2009.

Chart II-2, Percent Change from Prior Period in Real Personal Consumption Expenditure, Quarterly Seasonally Adjusted at Annual Rates 1995-2012

Source: US Bureau of Economic Analysis

Personal income and its disposition are shown in Table II-3. An important adversity is shown in Table II-3 in the form of sharp deceleration in growth of personal income from $155.3 billion in Jan 2011 relative to Dec 2010 to nil growth in May and Jun. In the same period, growth of wages and salaries fell from $55.4 billion in Jan 2011/Dec 2010 to contraction by $4.5 billion in Jun/May. In Nov/Oct income crawled 0.1 percent and wages and salaries were flat. The final column of Table II-3 shows the decline of the savings rate from 5.2 percent in Dec 2010 to 4.4 percent in Nov 2011 and stability at 4.3 percent in Jan 2012 followed by decline to 3.7 percent in Feb 2012 and 3.8 percent in Mar 2012. The mediocre recovery of the economy is significantly driven by consuming out of savings with stagnating real disposable personal income that fell in both Jan and Feb 2012 and was flat in Jan-Mar 2012, as shown in Table II-1 above. The collapse of hiring and 10 million fewer full-time jobs prevents advancement to higher incomes and consumption (http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring.html).

Table II-3, US, Personal Income and its Disposition, Seasonally Adjusted at Annual Rates $ Billions

	Personal Income	Wages & Salaries	Personal Taxes	DPI	Savings Rate %
Mar	13,328.4	6,905.4	1,477.4	11,851.0	3.8
Feb 2012	13,278.1	6,886.7	1,469.6	11,808.5	3.7
Change Mar/Feb	50.3 ∆% 0.4	18.7 ∆% 0.3	7.8 ∆% 0.5	42.5 ∆% 0.4
Jan	13,238.5	6,861.9	1,459.4	11,779.1	4.3
Change Jan/Feb	39.6 ∆% 0.3	24.8 ∆% 0.4	10.2 ∆% 0.7	29.4 ∆% 0.2
Dec 2011	13,201.7	6,831.5	1,438.2	11,763.5	4.7
Change Jan/Dec	36.8 ∆% 0.3	30.4 ∆% 0.4	21.2 ∆% 1.5	15.6 ∆% 0.1
Nov	13,146.1	6,804.3	1,428.4	11,717.7	4.4
Change Dec/Nov	55.6 ∆% 0.4	27.2 ∆% 0.4	9.8 ∆% 0.7	45.8 ∆% 0.4
Oct	13,138.6	6,804.5	1,424.1	11,714.4	4.5
Change Nov/Oct	7.5 ∆% 0.1	-0.2 ∆% 0.0	4.3 ∆% 0.3	3.3 ∆% 0.0
Sep	13,088.1	6,763.3	1,413.4	11,675.4	4.3
Change Oct/Sep	50.5 ∆% 0.4	41.2 ∆% 0.6	10.7 ∆% 0.8	39.0 ∆% 0.3
Aug	13,049.1	6,715.3	1,406.0	11,643.1	4.7
Change Sep/Aug	39.0 ∆% 0.3	48.0 ∆% 0.7	7.4 ∆% 0.5	32.3 ∆% 0.3
Jul	13,032.5	6,694.4	1,407.8	11,624.6	4.7
Change Aug/Jul	16.6 ∆% 0.1	20.9 ∆% 0.3	-1.8 ∆% –0.1	18.5 ∆% 0.2
Jun	12,970.1	6,615.1	1,403.2	11,566.9	5.0
Change Jul/Jun	62.4 ∆% 0.5	79.3 ∆% 1.2	4.6 ∆% 0.3	6.3 ∆% 0.1
May	12,957.2	6,619.6	1,397.4	11,559.7	4.7
Change Jun/ May	12.9 ∆% 0.1	-4.5 ∆% -0.1	5.8 ∆% 0.4	7.2 ∆% 0.1
Apr	12,938.7	6,616.5	1,387.9	11,550.8	4.8
Change May/ Apr	18.5 ∆% 0.1	3.1 ∆% 0.0	9.5 ∆% 0.7	8.9 ∆% 0.1
Mar	12,909.7	6,614.8	1,377.7	11,532.1	4.9
Change Apr/ Mar	29.0 ∆% 0.2	1.7 ∆% 0.0	10.2 ∆% 0.7	18.7 ∆% 0.2
Feb	12,850.6	6,582.9	1,367.1	11,483.5	5.0
Change Mar/ Feb	59.1 ∆% 0.5	31.9 ∆% 0.5	10.6 0.8	48.6 ∆% 0.4
Jan	12,780.3	6,536.8	1,352.8	11,427.5	5.2
Change Feb/Jan	70.3 ∆% 0.6	46.1 ∆% 0.7	14.3 ∆% 1.1	56.0 ∆% 0.5
Dec 2010	12,625.0	6,481.4	1,247.6	11,377.3	5.2
Change Jan/ Dec	155.3 ∆% 1.2	55.4 ∆% 0.9	105.2 ∆% 8.4	50.2 ∆% 0.4

Chart II-3 provides personal income in the US between 1980 and 1989. These data are not adjusted for inflation that was still high in the 1980s in the exit from the Great Inflation of the 1960s and 1970s. Personal income grew steadily during the 1980s after recovery from two recessions from Jan IQ1980 to Jul IIIQ1980 and from Jul IIIQ1981 to Nov IVQ1982 (http://www.nber.org/cycles.html) with combined drop of GDP by 4.8 percent.

Chart II-3, US, Personal Income, Billion Dollars, Seasonally Adjusted at Annual Rates, 1980-1989

Source: US Bureau of Economic Analysis

A different evolution of personal income is shown in Chart II-4. Personal income also fell during the recession from Dec IVQ2007 to Jun IIQ2009 (http://www.nber.org/cycles.html). Growth of personal income has been anemic and stalled in 2011 and into 2012.

Chart II-4, US, Personal Income, Current Billions of Dollars, Seasonally Adjusted at Annual Rates, 2007-2011

Source:

Real or inflation-adjusted disposable personal income is provided in Chart II-5 from 1980 to 1989. Real disposable income after allowing for taxes and inflation grew steadily at high rates during the entire decade.

Chart II-5, US, Real Disposable Income, Billions of Chained 2005 Dollars, Seasonally Adjusted at Annual Rates 1980-1989

Source: US Bureau of Economic Analysis

The stagnation of real disposable income is evident in Chart II-6. There was initial recovery in 2010 and then income after inflation and taxes stagnated into 2011. The 12-month percentage change of real disposable income in Mar 2012 was 0.6 percent compared with 2.8 percent in Jan 2011 and 3.2 percent in Dec 2010. Real disposable income fell in Jan-Feb 2012 at the annual equivalent rate of 1.2 percent and was flat in Jan-Mar 2012.

Chart II-6, US, Real Disposable Income, Billions of Chained 2005 Dollars, Seasonally Adjusted at Annual Rates, 2007-2011

Source: US Bureau of Economic Analysis

Chart II-7 provides percentage quarterly changes in real disposable income from the preceding period at seasonally-adjusted annual rates from 1980 to 1989. Rates of change were high during the decade with few negative changes.

Chart II-7, US, Real Disposable Income Percentage Change from Preceding Period at Seasonally-Adjusted Annual Rates, 1980-1989

Source: US Bureau of Economic Analysis

Chart II-8 provides percentage quarterly changes in real disposable income from the preceding period at seasonally-adjusted annual rates from 2007 to 2012. There has been a period of positive rates followed by decline of rates and then negative and low rates. There is marginal improvement in IVQ2011 but mediocre compared with the early phase of expansion. Real disposable income collapsed after IIQ2011 and has not recovered its earlier dynamism. Real personal disposable income in chained 2005 dollars was $10,232.4 billion in IVQ2011 and $10,242.4 billion in IIQ2012 for increase of 0.097 percent {[($10,242.4/$10,232.4)-1]100 = 0.097%}. Real disposable personal income in 2005 chained dollars was $10,252.4 billion in Dec 2011 and $10,250.3 billion in Mar 2012 for minus 0.0205 percent {[($10,250.3/$10,252.4) – 1]100 = -0.0205%}. Monthly data of real disposable income show zero growth in Jan-Mar and decline of 0.2 percent from $10,252.4 billion in Dec to $10,234.8 billion in Jan {[($10,234.8/$10,252.4)-1] = -0.172%} (data from http://www.bea.gov/iTable/index_nipa.cfm). Real disposable income per person fell from $32,744 billion in Dec 2012 to $32,685 billion in Mar 2012 or 0.2% {[($32,685/$32,744)-1]100 = -0.18%}.

Chart, II-8, US, Real Disposable Income, Percentage Change from Preceding Period at Seasonally-Adjusted Annual Rates, 2007-2011

Source: US Bureau of Economic Analysis

In the latest available report, the Bureau of Economic Analysis (BEA) estimates US personal income in Jan 2012 at the seasonally adjusted annual rate of $13,328.4 billion, as shown in Table II-3 above (http://www.bea.gov/newsreleases/national/pi/2012/pdf/pi0312.pdf Table 1, page 6). The major portion of personal income is compensation of employees of $8,549.3 billion, or 64.1 percent of the total. Wage and salary disbursements are $6,905.4 billion, of which $5,711.5 billion by private industries and supplements to wages and salaries of $1,643.8 billion (employer contributions to pension and insurance funds are $1,126.7 billion and contributions to social insurance are $517.2 billion). Chart II-9 provides US wage and salary disbursement by private industries in the 1980s. Growth was robust after the interruption of the recessions.

Chart II-9, US, Wage and Salary Disbursement, Private Industries, Quarterly, Seasonally Adjusted at Annual Rates Billions of Dollars, 1980-1989

Source: US Bureau of Economic Analysis

Chart II-10 shows US wage and salary disbursement of private industries from 2007 to 2011. There is a drop during the contraction followed by initial recovery in 2010 and then the current stagnation in 2011 and 2012.

Chart II-10, US, Wage and Salary Disbursement, Private Industries, Quarterly, Seasonally Adjusted at Annual Rates, Billions of Dollars 2007-2011

Source: US Bureau of Economic Analysis

Chart II-11 provides finer detail with monthly wage and salary disbursement of private industries from 2007 to 2012. There is decline during the contraction and a period of mild recovery with current stagnation.

Chart II-11, US, Wage and Salary Disbursement, Private Industries, Monthly, Seasonally Adjusted at Annual Rates, Billions of Dollars 2007-2012

Source: US Bureau of Economic Analysis

Chart II-12 provides monthly real disposable personal income per capita from 1980 to 1989. This is the ultimate measure of well being in receiving income by obtaining the value per inhabitant. The measure cannot adjust for the distribution of income. Real disposable personal income per capital grew rapidly during the expansion after 1983 and continued growing during the rest of the decade.

Chart II-12, US, Real Disposable Per Capital Income, Monthly, Seasonally Adjusted at Annual Rates, Billions of Dollars 1980-1989

Source: US Bureau of Economic Analysis

Chart II-13 provides monthly real disposable personal per capita income from 2007 to 2012. There was initial recovery from the drop during the global recession followed by stagnation.

Chart II-13, US, Real Disposable Per Capita Income, Monthly, Seasonally Adjusted at Annual Rates, Billions of Dollars 2007-2012

Source: US Bureau of Economic Analysis

Table II-4 provides the data required for broader comparison of the cyclical expansions of IQ1983 to IVQ1985 and the current one from 2009 to 2012. First, in the 13 quarters from IQ1983 to IVQ1985, GDP increased 19.6 percent at the annual equivalent rate of 5.7 percent; real disposable personal income (RDPI) increased 15.9 percent at the annual equivalent rate of 4.6 percent; RDPI per capital increased 12.6 percent at the annual equivalent rate of 3.7 percent; and population increased 2.9 percent at the annual equivalent rate of 0.9 percent. Second, in the 11 quarters of the current cyclical expansion from IIIQ2009 to IIQ2012, GDP increased 6.8 percent at the annual equivalent rate of 2.4 percent; real disposable personal income (RDPI) increased 4.3 percent at the annual equivalent rate of 1.5 percent; RDPI per capita increased 2.4 percent at the annual equivalent rate of 0.9 percent; and population increased 1.9 percent at the annual equivalent rate of 0.7 percent. Real disposable personal income is the actual take home pay after inflation and taxes and real disposable income is what is left per inhabitant. The current cyclical expansion is the worst in the period after World War II in terms of growth of economic activity and income.

Table II-4, US, GDP, Real Disposable Personal Income, Real Disposable Income per Capita and Population in 1983-85 and 2007-2011, %

	# Quarters	∆%	∆% Annual Equivalent
IQ1983 to IVQ1985	13
GDP		19.6	5.7
RDPI		15.9	4.6
RDPI Per Capita		12.6	3.7
Population		2.9	0.9
IIIQ2009 to IQ2012	11
GDP		6.8	2.4
RDPI		4.3	1.5
RDPI per Capita		2.4	0.9
Population		1.9	0.7

RDPI: Real Disposable Personal Income

Source: US Bureau of Economic Analysis

IIB Financial Repression. McKinnon (1973) and Shaw (1974) argue that legal restrictions on financial institutions can be detrimental to economic development. “Financial repression” is the term used in the economic literature for these restrictions (see Pelaez and Pelaez, Globalization and the State, Vol. II (2008b), 81-6). Interest rate ceilings on deposits and loans have been commonly used. Prohibition of payment of interest on demand deposits and ceilings on interest rates on time deposits were imposed by the Banking Act of 1933. These measures were justified by arguments that the banking panic of the 1930s was caused by competitive rates on bank deposits that led banks to engage in high-risk loans (Friedman, 1970, 18; see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 74-5). The objective of policy was to prevent unsound loans in banks. Savings and loan institutions complained of unfair competition from commercial banks that led to continuing controls with the objective of directing savings toward residential construction. Friedman (1970, 15) argues that controls were passive during periods when rates implied on demand deposit were zero or lower and when Regulation Q ceilings on time deposits were above market rates on time deposits. The Great Inflation or stagflation of the 1960s and 1970s changed the relevance of Regulation Q.

Most regulatory actions trigger compensatory measures by the private sector that result in outcomes that are different from those intended by regulation (Kydland and Prescott 1977). Banks offered services to their customers and loans at rates lower than market rates to compensate for the prohibition to pay interest on demand deposits (Friedman 1970, 24). The prohibition of interest on demand deposits was eventually lifted in recent times. In the second half of the 1960s, already in the beginning of the Great Inflation (DeLong 1997), market rates rose above the ceilings of Regulation Q because of higher inflation. Nobody desires savings allocated to time or savings deposits that pay less than expected inflation. This is a fact currently with zero interest rates and consumer price inflation of 2.9 percent in the 12 months ending in Feb (http://www.bls.gov/cpi/). Funding problems motivated compensatory measures by banks. Money-center banks developed the large certificate of deposit (CD) to accommodate increasing volumes of loan demand by customers. As Friedman (1970, 25) finds:

“Large negotiable CD’s were particularly hard hit by the interest rate ceiling because they are deposits of financially sophisticated individuals and institutions who have many alternatives. As already noted, they declined from a peak of $24 billion in mid-December, 1968, to less than $12 billion in early October, 1969.”

Banks created different liabilities to compensate for the decline in CDs. As Friedman (1970, 25; 1969) explains:

“The most important single replacement was almost surely ‘liabilities of US banks to foreign branches.’ Prevented from paying a market interest rate on liabilities of home offices in the United States (except to foreign official institutions that are exempt from Regulation Q), the major US banks discovered that they could do so by using the Euro-dollar market. Their European branches could accept time deposits, either on book account or as negotiable CD’s at whatever rate was required to attract them and match them on the asset side of their balance sheet with ‘due from head office.’ The head office could substitute the liability ‘due to foreign branches’ for the liability ‘due on CDs.”

Friedman (1970, 26-7) predicted the future:

“The banks have been forced into costly structural readjustments, the European banking system has been given an unnecessary competitive advantage, and London has been artificially strengthened as a financial center at the expense of New York.”

In short, Depression regulation exported the US financial system to London and offshore centers. What is vividly relevant currently from this experience is the argument by Friedman (1970, 27) that the controls affected the most people with lower incomes and wealth who were forced into accepting controlled-rates on their savings that were lower than those that would be obtained under freer markets. As Friedman (1970, 27) argues:

“These are the people who have the fewest alternative ways to invest their limited assets and are least sophisticated about the alternatives.”

Chart IIB-1 of the Bureau of Economic Analysis (BEA) provides quarterly savings as percent of disposable income or the US savings rate from 1980 to 2011. There was a long-term downward sloping trend from 12 percent in the early 1980s to less than 2 percent in 2005-2006. The savings rate then rose during the contraction and also in the expansion. In 2011 the savings rate declined as consumption is financed with savings in part because of the disincentive or frustration of receiving a few pennies for every $10,000 of deposits in a bank. The objective of monetary policy is to reduce borrowing rates to induce consumption but it has collateral disincentive of reducing savings. The zero interest rate of monetary policy is a tax on saving. This tax is highly regressive, meaning that it affects the most people with lower income or wealth and retirees. The long-term decline of savings rates in the US has created a dependence on foreign savings to finance the deficits in the federal budget and the balance of payments.

Chart IIB-1, US, Personal Savings as a Percentage of Disposable Personal Income, Quarterly, 1980-2012

Source: US Bureau of Economic Analysis

Chart IIB-2 of the US Bureau of Economic Analysis provides personal savings as percent of personal disposable income, or savings ratio, from Jan 2007 to Feb 2012. The uncertainties caused by the global recession resulted in sharp increase in the savings ratio that peaked at 8.3 percent in May 2008. The second highest ratio occurred at 7.1 percent in May 2009. There was another rising trend until 5.8 percent in Jun 2006 and then steady downward trend until 3.7 percent in Feb 2012. Permanent manipulation of the entire spectrum of interest rates with monetary policy measures distorts the compass of resource allocation with inferior outcomes of future growth, employment and prosperity and dubious redistribution of income and wealth affecting the most people without vast capital and relations to manage their savings.

Chart IIB-2, US, Personal Savings as a Percentage of Disposable Income, Monthly 2007-2012

Source: US Bureau of Economic Analysis

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

III World Financial Turbulence. Financial markets are being shocked by multiple factors including (1) world economic slowdown; (2) growth in China with political development, Japan and world trade; (3) slow growth propelled by savings reduction in the US with high unemployment/underemployment, falling wages and hiring collapse; and (3) the outcome of the sovereign debt crisis in Europe. This section provides current data and analysis. Subsection IIIA Financial Risks provides analysis of the evolution of valuations of risk assets during the week. There are various appendixes at the end of this section for convenience of reference of material related to the euro area debt crisis. Some of this material is updated in Subsection IIIA when new data are available and then maintained in the appendixes for future reference until updated again in Subsection IIIA. Subsection IIIB Appendix on Safe Haven Currencies discusses arguments and measures of currency intervention. Subsection IIIC Appendix on Fiscal Compact provides analysis of the restructuring of the fiscal affairs of the European Union in the agreement of European leaders reached on Dec 9, 2011. Subsection IIID Appendix on European Central Bank Large Scale Lender of Last Resort considers the policies of the European Central Bank. Appendix IIIE Euro Zone Survival Risk analyzes the threats to survival of the European Monetary Union. Subsection IIIF Appendix on Sovereign Bond Valuation provides more technical analysis.

IIIA Financial Risks. The past half year has been characterized by financial turbulence, attaining unusual magnitude in recent months. Table III-1, updated with every comment in this blog, provides beginning values on Fr Apr 27 and daily values throughout the week ending on Fri May 4 of various financial assets. Section VI Valuation of Risk Financial Assets provides a set of more complete values. All data are for New York time at 5 PM. The first column provides the value on Fri Apr 27 and the percentage change in that prior week below the label of the financial risk asset. For example, the US dollar (USD) depreciated 0.2 percent to USD 1.3253/EUR in the week ending on Apr 27. The first five asset rows provide five key exchange rates versus the dollar and the percentage cumulative appreciation (positive change or no sign) or depreciation (negative change or negative sign). Positive changes constitute appreciation of the relevant exchange rate and negative changes depreciation. Financial turbulence has been dominated by reactions to the new program for Greece (see section IB in http://cmpassocregulationblog.blogspot.com/2011/07/debt-and-financial-risk-aversion-and.html), modifications and new approach adopted in the Euro Summit of Oct 26 (European Commission 2011Oct26SS, 2011Oct26MRES), doubts on the larger countries in the euro zone with sovereign risks such as Spain and Italy but expanding into possibly France and Germany, the growth standstill recession and long-term unsustainable government debt in the US, worldwide deceleration of economic growth and continuing waves of inflation. The most important current shock is that resulting from the agreement by European leaders at their meeting on Dec 9 (European Council 2911Dec9), which is analyzed in IIIC Appendix on Fiscal Compact. European leaders reached a new agreement on Jan 30 (http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/127631.pdf).

The dollar/euro rate is quoted as number of US dollars USD per one euro EUR, USD 1.3253/EUR in the first row, first column in the block for currencies in Table III-1 for Fri Apr 27, appreciating to USD 1.3240/EUR on Mon Apr 30, or by 0.1 percent. The dollar appreciated because fewer dollars, $1.3240, were required on Mon Apr 30 to buy one euro than $1.3253 on Apr 27. Table III-1 defines a country’s exchange rate as number of units of domestic currency per unit of foreign currency. USD/EUR would be the definition of the exchange rate of the US and the inverse [1/(USD/EUR)] is the definition in this convention of the rate of exchange of the euro zone, EUR/USD. A convention used throughout this blog is required to maintain consistency in characterizing movements of the exchange rate in Table III-1 as appreciation and depreciation. The first row for each of the currencies shows the exchange rate at 5 PM New York time, such as USD 1.3240/EUR on Apr 30; the second row provides the cumulative percentage appreciation or depreciation of the exchange rate from the rate on the last business day of the prior week, in this case Fri Apr 27, to the last business day of the current week, in this case Fri May 4, such as appreciation by 1.3 percent to USD 1.3084/EUR by May 4; and the third row provides the percentage change from the prior business day to the current business day. For example, the USD appreciated (denoted by positive sign) by 1.3 percent from the rate of USD 1.3253/EUR on Fri Apr 27 to the rate of USD 1.3084/EUR on Fri May 4 {[(1.3084/1.3253) – 1]100 = -1.3%} and appreciated (denoted by positive sign) by 0.5 percent from the rate of USD 1.3151 on Thu May 3 to USD 1.3084/EUR on Fri May 4 {[(1.3084/1.3151) -1]100 = -0.5%}. Other factors constant, appreciation of the dollar relative to the euro is caused by increasing risk aversion, with rising uncertainty on European sovereign risks increasing dollar-denominated assets with sales of risk financial investments. Funds move away from higher yielding risk financial assets to the safety of dollar investments. When risk aversion declines, funds have been moving away from safe assets in dollars to risk financial assets, depreciating the dollar.

Table III-I, Weekly Financial Risk Assets Apr 30 to May 4, 2012

Fri Feb 27, 2012

M 30

Tue 1

W 2

Thu 3

Fr 4

USD/EUR

1.3253

-0.2%

1.3240

0.1%

1.3235

0.1%

0.0%

1.3157

0.7%

0.6%

1.3151

0.8%

0.0%

1.3084

1.3%

0.5%

JPY/ USD

80.27

1.5%

79.83

0.5%

80.14

0.2%

-0.4%

80.13

0.2%

0.0%

80.20

0.1%

-0.1%

79.84

0.5%

0.4%

CHF/ USD

0.9065

0.3%

0.9075

-0.1%

0.9079

-0.2%

0.0%

0.9132

-0.7%

-0.6%

0.9136

-0.8%

0.0%

0.9181

-1.3%

-0.5%

CHF/ EUR

1.2014

0.0%

1.2014

0.0%

1.2016

0.0%

1.2015

0.0%

1.2014

0.0%

1.2012

0.0%

USD/ AUD

1.0471

0.9550

0.9%

1.0429

0.9589

-0.4%

1.0333

0.9678

-1.3%

-0.9%

1.0335

0.9676

-1.3%

0.0%

1.0258

0.9748

-2.1%

-0.7%

1.0173

0.9830

-2.9%

-0.8%

10 Year T Note

1.931

1.92

1.94

1.93

1.92

1.876

2 Year T Note

0.26

0.27

0.26

0.256

German Bond

2Y 0.10 10Y 1.70

2Y 0.08 10Y 1.66

2Y 0.08 10Y 1.61

2Y 0.09 10Y 1.61

2Y 0.08 10Y 1.58

DJIA

13228.31

1.5%

13213.63

-0.1%

13279.32

0.4%

0.5%

13268.57

0.3%

-0.1%

13206.59

-0.2%

-0.5%

13038.27

-1.4%

-1.3%

DJ Global

1946.39

1.0%

1940.16

-0.3%

1940.70

-0.3%

0.0%

1934.05

-0.6%

-0.3%

1920.55

-1.3%

-0.7%

1893.39

-2.7%

-1.4%

DJ Asia Pacific

1269.26

-0.1%

1278.99

0.8%

1268.60

-0.1%

-0.8%

1275.43

0.5%

1270.17

0.1%

-0.4%

1266.78

-0.2%

-0.3%

Nikkei

9520.89

-0.4%

9520.89

-0.4%

9350.95

-1.8%

9380.25

-1.5%

0.3%

9380.25

-1.5%

0.3%

9380.25

-1.5%

0.3%

Shanghai

2396.32

-0.4%

2396.32

-0.4%

2396.32

-0.4%

2438.44

1.8%

2440.08

1.8%

0.1%

2452.01

2.3%

0.5%

DAX

6801.32

0.8%

6761.19

-0.6%

6761.19

-0.6%

6710.77

-1.3%

-0.8%

6694.44

-1.6%

-0.2%

6561.47

-3.5%

-2.0%

DJ UBS

Comm.

140.63

1.8%

141.29

0.5%

141.53

0.2%

139.21

-1.6%

136.69

-1.2%

137.14

-0.9%

WTI $ B

104.82

0.8%

104.84

0.0%

106.03

1.2%

1.1%

105.37

0.5%

-0.6%

102.53

-2.2%

-2.7%

98.50

-6.0%

-3.9%

Brent $/B

119.55

0.6%

119.30

-0.2%

119.63

0.1%

0.3%

118.24

-1.1%

-1.2%

116.06

-2.9%

-1.8%

113.35

-5.2%

-2.3%

Gold $/OZ

1663.0

1.2%

1665.70

0.2%

1662.4

0.0%

-0.2%

1665.0

0.1%

0.2%

1636.5

-1.6%

-1.7%

1642.4

-1.2%

0.4%

Note: USD: US dollar; JPY: Japanese Yen; CHF: Swiss

Franc; AUD: Australian dollar; Comm.: commodities; OZ: ounce

Sources: http://www.bloomberg.com/markets/

Economic and financial risks in the euro area are increasingly being dominated by analytical and political disagreement on conflicts of fiscal adjustment, financial stability, economic growth and employment. Political development is beginning to push for alternative paths of policy. Blanchard (2012WEOApr) and Draghi (2012May3) provide analysis of appropriate directions of policy.

Blanchard (2012WEOApr) finds that interest rates close to zero in advanced economies have not induced higher economic growth because of two main factors—fiscal consolidation and deleveraging—that restrict economic growth in the short-term. First, Blanchard (2012WEOApr, XIII) finds that assuming a multiplier of unity of the fiscal deficit on GDP, decrease of the cyclically-adjusted deficit of advanced economies by 1 percent would reduce economic growth by one percentage point. Second, deleveraging by banks, occurring mainly in Europe, tightens credit supply with similar reduction of euro area economic growth by one percentage point in 2012. The baseline of the World Economic Outlook (WEO) of the IMF (2012WEOApr) for Apr 2012 incorporates both effects, which results in weak economic growth, in particular in Europe, and prolonged unemployment. An important analysis by Blanchard (2012WEOApr, XIII) is that “financial uncertainty, together with sharp shifts in risk appetite, has led to volatile capital flows.” Blanchard (2012WEOApr) still finds that the greatest vulnerability is another profound crisis in Europe (ECB). Crisis prevention should buttress the resilience of affected countries during those shifts in risk appetite. The role of the enhanced firewall of the IMF, European Union (EU) and European Central Bank is gaining time during which countries could engage in fiscal consolidation and structural reforms that would diminish the shifts in risk appetite, preventing devastating effects of financial crises. Volatility in capital flows is equivalent to volatility of valuations of risk financial assets. The challenge to the policy mix consists in balancing the adverse short-term effects of fiscal consolidation and deleveraging with the beneficial long-term effects of eliminating the vulnerability to shocks of risk aversion. Blanchard (2012WEOApr) finds that policy should seek short-term credibility while implementing measures that restrict the path of expenditures together with simultaneous development of institutions and rules that constrain deficits and spending in the future. There is similar policy challenge in deleveraging banks, which is required for sound lending institutions, but without causing an adverse credit crunch. Advanced economies face a tough policy challenge of increasing demand and potential growth.

The President of the European Central Bank (ECB) Mario Draghi (2012May3) also outlines the appropriate policy mix for successful adjustment:

Economic policy during the debt crisis of 1983 may be useful in analyzing the options of the euro area. Brazil successfully combined fiscal consolidation, structural reforms to eliminate subsidies and devaluation to parity. Brazil’s terms of trade, or export prices relative to import prices, deteriorated by 47 percent from 1977 to 1983 (Pelaez 1986, 46). Table III-1A provides selected economic indicators of the economy of Brazil from 1970 to 1985. In 1983, Brazil’s inflation was 164.9 percent, GDP fell 3.2 percent, idle capacity in manufacturing reached 24.0 percent and Brazil had an unsustainable foreign debt. US money center banks would have had negative capital if loans to emerging countries could have been marked according to loss given default and probability of default (for credit risk models see Pelaez and Pelaez (2005), International Financial Architecture, 134-54). Brazil’s current account of the balance of payments shrank from $16,310 million in 1982 to $6,837 million in 1983 because of the abrupt cessation of foreign capital inflows with resulting contraction of Brazil’s GDP by 3.2 percent. An important part of adjustment consisted of agile coordination of domestic production to cushion the impact of drastic reduction in imports. In 1984, Brazil had a surplus of $45 million in current account, the economy grew at 4.5 percent and inflation was stabilized at 232.9 percent.

Table III-1A, Brazil, Selected Economic Indicators 1970-1985

	Inflation ∆%	GDP Growth ∆%	Idle Capacity in MFG %	BOP Current Account USD MM
1985	223.4	7.4	19.8	-630
1984	232.9	4.5	22.6	45
1983	164.9	-3.2	24.0	-6,837
1982	94.0	0.9	15.2	-16,310
1981	113.0	-1.6	12.3	-11,374
1980	109.2	7.2	3.5	-12,886
1979	55.4	6.4	4.1	-10,742
1978	38.9	5.0	3.3	-6,990
1977	40.6	5.7	3.2	-4,037
1976	40.4	9.7	0.0	-6,013
1975	27.8	5.4	3.0	-6,711
1974	29.1	9.7	0.1	-7,122
1973	15.4	13.6	0.3	-1,688
1972	17.7	11.1	6.5	-1,489
1971	21.5	12.0	9.8	-1,307
1970	19.3	8.8	12.2	-562

Source: Carlos 21.5Manuel Pelaez, O Cruzado e o Austral: São Paulo, Editora Atlas, 1986, 86.

Chart III-1 provides the tortuous Phillips Circuit of Brazil from 1963 to 1987. There were no reliable consumer price index and unemployment data in Brazil for that period. Chart III-1 used the more reliable indicator of inflation, the wholesale price index, and idle capacity of manufacturing as a proxy of unemployment in large urban centers.

Chart III-1, Brazil’s 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.

A key to success in stabilizing an economy with significant risk aversion is finding parity of internal and external interest rates. Brazil implemented fiscal consolidation and reforms that are advisable in explosive foreign debt environments. In addition, Brazil had the capacity to find parity in external and internal interest rates to prevent capital flight and disruption of balance sheets (for analysis of balance sheets, interest rates, indexing, devaluation, financial instruments and asset/liability management in that period see Pelaez and Pelaez (2007), The Global Recession Risk: Dollar Devaluation and the World Economy, 178-87). Table III-1B provides monthly percentage changes of inflation, devaluation and indexing and the monthly percent overnight interest rate. Parity was attained by means of a simple inequality:

Cost of Domestic Loan ≥ Cost of Foreign Loan

This ordering was attained in practice by setting the domestic interest rate of the overnight interest rate plus spread higher than indexing of government securities with lower spread than loans in turn higher than devaluation plus spread of foreign loans. Interest parity required equality of inflation, devaluation and indexing. Brazil devalued the cruzeiro by 30 percent in 1983 because the depreciation of the German mark DM relative to the USD had eroded the competitiveness of Brazil’s products in Germany and in competition with German goods worldwide. The database of the Board of Governors of the Federal Reserve System quotes DM 1.7829/USD on Mar 3 1980 and DM 2.4425/USD on Mar 15, 1983 (http://www.federalreserve.gov/releases/h10/hist/dat89_ge.htm) for devaluation of 37.0 percent. Parity of costs and rates of domestic and foreign loans and assets required ensuring that there would not be appreciation of the exchange rate, inducing capital flight in expectation of future devaluation that would have reversed stabilization. One of the main problems of adjustment of members of the euro area with high debts is that they cannot adjust the exchange rate because of the common euro currency. This is not an argument in favor of breaking the euro area because there would be also major problems of adjustment such as exiting the euro in favor of a new Drachma in the case of Greece. Another hurdle of adjustment in the euro area is that Brazil could have moved swiftly to adjust its economy in 1983 but the euro area has major sovereignty and distribution of taxation hurdles in moving rapidly.

Table III-1B, Brazil, Inflation, Devaluation, Overnight Interest Rate and Indexing, Percent Per Month

1984	Inflation IGP ∆%	Devaluation ∆%	Overnight Interest Rate %	Indexing ∆%
Jan	9.8	9.8	10.0	9.8
Feb	12.3	12.3	12.2	12.3
Mar	10.0	10.1	11.3	10.0
Apr	8.9	8.8	10.1	8.9
May	8.9	8.9	9.8	8.9
Jun	9.2	9.2	10.2	9.2
Jul	10.3	10.2	11.9	10.3
Aug	10.6	10.6	11.0	10.6
Sep	10.5	10.5	11.9	10.5
Oct	12.6	12.6	12.9	12.6
Nov	9.9	9.9	10.9	9.9
Dec	10.5	10.5	11.5	10.5

Source: Carlos Manuel Pelaez, O Cruzado e o Austral: São Paulo, Editora Atlas, 1986, 86.

Spain continues to drive euro area credit risk with hurdles in adjusting its high fiscal deficit, domestic economic recession, high unemployment and unresolved bank balance sheets. Spain’s National Statistics Institute, Instituto Nacional de Estadística (INE), released on Apr 27 its “Economically Active Population Survey” for IQ2012 (http://www.ine.es/en/daco/daco42/daco4211/epa0112_en.pdf). INE’s summary of the survey is as follows (http://www.ine.es/en/daco/daco42/daco4211/epa0112_en.pdf):

“ Employment in the first quarter of 2012 registers a decrease of 374,300 persons, reaching a total of 17,433,200 employed persons. The interannual employment variation rate stands at –3.96%.

The economically active population drops by 8,400 persons this quarter. The number of unemployed persons increases by 365,900 persons, the total number thus standing at 5,639,500.

The unemployment rate grows 1.59 points, standing at 24.44%. In turn, the

activity rate remains at 59.94%.

The loss of employment is almost three times higher among men (278,300 less) than among women (96,000 less). Conversely, the loss of employment increases almost the same between men and women.

All sectors record a reduction in the number of employed persons this quarter.

Wage-earners with a permanent contract decrease by 138,400, and wage earners with a temporary contract do so by 279,600.

The number of households with all of their active members unemployed increases

by 153,400 this quarter, standing at 1,728,400.

By Autonomous Community, the unemployment rate fluctuates between 13.55% in País Vasco and 33.17% in Andalucía. The activity rate fluctuates between 51.33%, recorded in Principado de Asturias, and 64.77%, registered in Illes Balears.

Employment registers its greatest decreases in Andalucia, Cataluña and Comunitat Valenciana, and the greatest decrease in unemployment. Comunidad de Madrid was the only Autonomous Community that registers an increase in employment. The unemployment increases in all Autonomous Communities.”

The Bank of Spain released on Apr 18 new worrisome data on delinquent credit in Spain’s credit institutions (http://www.bde.es/webbde/es/secciones/prensa/Agenda/Datos_de_credit_c62379ebaa85631.html). The aggregate balance sheet of institutions supervised by the Bank of Spain registered total credit of €1,508,626 million in 2006 with delinquent credit of €10,859 million or 0.7 percent. The latest available data for Feb 2012 registers total credit of €1,763,312 million with delinquent credit of €143,815 million or 8.2 percent. Total credit has contracted from a peak of €1,869,882 million in 2008 to €1,763,313 on Feb 2012 or by 5.7 percent. Delinquent credit has risen from €10,859 million in 2006 to €143,815 million in Feb 2012 or by 1224 percent. The credit standing of Spain may be further imperiled if the country is forced into bank nationalizations or absorptions of bad loans by the government. There is troubled history of government ownership and control of banks (Pelaez and Pelaez, Regulation of Banks and Finance: Theory and Policy after the Credit Crisis (2009b), 227-9; Pelaez 1975, Pelaez and Suzigan 1981, following Cameron 1961, 1967, 1972). Christopher Bjork and Jonathan House, writing on “Spanish banks’ ECB borrowing hits high,” on Apr 13, published by the Wall Street Journal (http://professional.wsj.com/article/SB10001424052702304356604577341133498311916.html?mod=WSJ_hp_LEFTWhatsNewsCollection), analyze the impact on valuations of risk financial assets from new data on Spanish bank borrowing. The Bank of Spain, as quoted by Bjork and House, provided information on average Spanish bank borrowing from the European Central Bank increasing from €169.85 billion in Feb to €316.3 billion in Mar, or USD 417.10 billion, which are substantially higher than €106.3 billion before long-term refinancing operations (LTRO). Spain borrowed 28 percent of lending of €1.1 trillion by the ECB to banks in the euro zone. A crucial fact provided by Bjork and House is that Spanish banks devoted €40.6 billion of their assigned LTROs to buying Spanish government debt, which is equivalent to one half of the needs of Spain in 2012. LTROs are effectively a bailout of Spain in which the European Central Bank (ECB) is taking credit risks in contrast with mostly rate risks in quantitative easing by the Fed.

A critical development in the resolution of the European debt crisis is the increase in available resources of the IMF announced in a joint statement of the IMFC and the Group of 20 Finance Ministers and Central Bank Governors (IMFC 2012Apr20):

“There are firm commitments to increase resources made available to the IMF by over $430 billion in addition to the quota increase under the 2010 reform. These resources will be available for the whole membership of the IMF, and not earmarked for any particular region.”

Resources are not earmarked for the European debt crisis but it is the most threatening current vulnerability in the world economy.

The JPY reversed recent depreciation, appreciating 0.5 percent during the week of May 4. Japan’s has not been very successful in the past in foreign exchange interventions (Pelaez and Pelaez, The Global Recession Risk (2007), 107-9). Japan is currently combining unconventional monetary policy and exchange intervention. The Policy Board of the Bank of Japan decided at its meeting on Apr 27, 2012 to enhance monetary easing as follows (http://www.boj.or.jp/en/announcements/release_2012/k120427a.pdf):

“1. At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan made the following decisions, by a unanimous vote, regarding the Asset Purchase Program (hereafter referred to as "the Program").

(1) The Bank decided to increase the total size of the Program by about 5 trillion yen, from about 65 trillion yen to about 70 trillion yen, with the following changes in its composition.

(a) An increase in the purchase of Japanese government bonds (JGBs) by about 10 trillion yen

(b) An increase in the purchases of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) by about 200 billion yen and 10 billion yen, respectively

(c) A reduction in the maximum outstanding amount of the Bank's fixed-rate funds-supplying operation against pooled collateral with a six-month term, by about 5 trillion yen, taking into account the recent episodes of undersubscription

(2) With the aim of smoothly conducting the large-scale purchases after today's increase and encouraging a decline in longer-term interest rates effectively, the Bank decided to extend the remaining maturity of JGBs to be purchased under the Program from "one to two years" to "one to three years." It also decided to extend the remaining maturity of corporate bonds to be purchased under the Program just as is the case of JGBs.

(3) The Bank decided to increase the outstanding amount of the Program to about 70 trillion yen by around end-June 2013, while maintaining the existing schedule of increasing the outstanding amount of the Program to about 65 trillion yen by around end-2012.”

The Policy Board of the Bank of Japan decided at its meeting on April 10, 2010 to continue “powerful easing” (http://www.boj.or.jp/en/announcements/release_2012/k120410a.pdf 2):

“The Bank recognizes that Japan's economy faces the critical challenge of overcoming deflation and returning to a sustainable growth path with price stability. The goal of overcoming deflation will be achieved both through efforts to strengthen the economy's growth potential and support from the financial side. With this in mind, the Bank will pursue powerful monetary easing, and will support private financial institutions in their efforts to strengthen the foundations for Japan's economic growth via the fund-provisioning measure to support strengthening the foundations for economic growth. At today's meeting, as shown in the Attachment, the Bank established detailed rules for a new U.S. dollar lending arrangement equivalent to 1 trillion yen, of which a preliminary outline was released at the previous meeting in March.”

The Policy Board of the Bank of Japan decided three important measures of enhancing monetary easing at the meeting held on Feb 14, 2012 (Bank of Japan 2012EME, 2012PSG and 2012APP). First, the Bank of Japan (2012Feb14EME, 2012Feb14PSG) adopted a “price stability goal” for the “medium term” of 2 percent of the “year-on-year rate of change of the CPI” with the immediate goal of inflation of 1 percent. Japan’s CPI inflation in the 12 months ending in Dec was minus 0.2 percent. Second, the Bank of Japan (2012Feb14EME, 1-2) will conduct “virtually zero interest rate policy” by maintaining “the uncollateralized overnight call rate at around 0 to 0.1 percent.” Third, the Bank of Japan (20012Feb13EME, 2014Feb14APP) is increasing the size of its quantitative easing:

“The Bank increases the total size of the Asset Purchase Program by about 10 trillion yen, from about 55 trillion yen to about 65 trillion yen. The increase in the Program is earmarked for the purchase of Japanese government bonds. By fully implementing the Program including the additional expansion decided today, by the end of 2012, the amount outstanding of the Program will be increased by about 22 trillion yen from the current level of around 43 trillion yen.”

IIIB Appendix on Safe Haven Currencies analyzes the burden on the Japanese economy of yen appreciation. Policy rates close to zero by major central banks in the world together with quantitative easing tend to depreciate currencies. Monetary policy is an indirect form of currency intervention.

The Swiss franc depreciated 1.3 percent in the week of May 4 to CHF 0.9181/USD relative to the dollar and remained unchanged relative to the euro to CHF 1.2012/EUR, as shown in Table III-1. The important event was appreciation of 0.3 percent by Apr 6 relative to the euro to the very bottom of the exchange rate floor at CHF 1.2009/EUR. William L. Watts, writing on “Euro weakness triggers Swissie showdown,” on Apr 5, published by MarketWatch (http://www.marketwatch.com/story/euro-weakness-triggers-swissie-showdown-2012-04-05), quotes exchange strategists claiming that at point on Apr 5 the Swiss franc traded at CHF 1.1990/EUR. Some participants believe that there was intervention by the Swiss National Bank to defend the floor of CHF `1.2000/EUR. The Australian dollar appreciated 0.1 percent to USD 1.0378/AUD by Apr 20 because of unfavorable environment for carry trades. The AUD is considered a carry trade commodity currency.

Risk aversion is captured by flight of investors from risk financial assets to the government securities of the US and Germany. Increasing aversion is captured by decrease of the yield of the ten-year Treasury. As shown in past updates of Table III-1, the ten-year Treasury yield fell from 2.234 percent on Mar 23 to 2.214 percent on Mar 30, collapsing to 2.058 percent on Apr 6 after the employment report and declining further to 1.987 percent on Apr 13, 1.959 percent on Apr 20 and 1.931 percent on Apr 27 because of increasing risk aversion. Elections in Europe and the weak employment report in Section I motivated further decline of the 10-year yield to 1.876 on May 4. The ten-year Treasury yield is still at a level well below consumer price inflation of 2.7 percent in the 12 months ending in Mar (see subsection IB United States Inflation at http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring.html). Treasury securities continue to be safe haven for investors fearing risk but with concentration in shorter maturities such as the two-year Treasury. As shown in past updates of Table III-1, the two-year Treasury yield fell marginally from 0.35 percent on Mar 23 to 0.335 percent on Mar 30 and then to 0.31 percent on Apr 6 and 0.27 percent on Apr 13, remaining almost unchanged at 0.268 percent on Apr 20 and 0.26 percent on Apr 27, virtually unchanged at 0.256 percent on May 4. Investors are willing to sacrifice yield relative to inflation in defensive actions to avoid turbulence in valuations of risk financial assets but may be managing duration more carefully. During the financial panic of Sep 2008, funds moved away from risk exposures to government securities. The latest statement of the Federal Open Market Committee (FOMC) on Apr 25, 2012 does not have sufficient changes suggesting that it contributed to the rise in Treasury yields (http://www.federalreserve.gov/newsevents/press/monetary/20120425a.htm). The statement continues to consider inflation low, unemployment high and growth at a moderate pace. Because of the “slack” in the economy, the FOMC anticipates maintaining the zero interest rate policy until 2014 (http://www.federalreserve.gov/newsevents/press/monetary/20120425a.htm):

“In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.”

A similar risk aversion phenomenon occurred in Germany. Eurostat confirmed euro zone CPI inflation is at 2.7 percent for the 12 months ending in Mar 2012 but jumping 1.3 percent in the month of Mar (http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-17042012-AP/EN/2-17042012-AP-EN.PDF See Tables IV-4 through IV-7 at http://cmpassocregulationblog.blogspot.com/2012/04/imf-view-of-world-economy-and-finance.html) but the yield of the two-year German government bond fell from 0.23 percent on Mar 23 to 0.21 percent on Mar 30, 0.14 percent on Apr 6 and 0.13 percent on Apr 13 with 0.14 percent on Apr 20 and 0.10 percent on Apr 27, falling further to 0.08 percent on May 4, while the yield of the ten-year German government bond fell from 1.87 on Mar 23 to 1.79 percent on Mar 30 and then to 1.74 on Apr 6 and also on Apr 13 with 1.71 percent on Apr 20 and 1.70 percent on Apr 27, as shown in Table III-1 and past updates. On May 4, the 10-year yield of Germany fell further to 1.58 percent. Safety overrides inflation-adjusted yield but there could be duration aversion. Turbulence has also affected the market for German sovereign bonds.

Equity indexes in Table III-1 were mostly weak during the week of May 4. Germany’s Dax fell 3.5 percent while DJIA fell 1.4 percent in the week of May 4 and Dow Global dropped 2.7 percent. Japan’s Nikkei Average interrupted recent increases with decline of 3.9 percent in the week of Apr 6, decline of 0.5 percent in the week of Apr 13 and declines of 0.8 percent in the week of Apr 20, 0.4 percent in the week of Apr 27 and 1.5 percent in the week of May 4. Dow Asia Pacific dropped 0.2 percent in the week of May 4 while Shanghai’s composite increased 2.3 percent.

Commodities fell during the week of May 4. The DJ UBS Commodities Index decreased 0.9 percent. WTI dropped 6.0 percent and Brent decreased 5.2 percent. Gold fell 1.2 percent.

Risk aversion during the week of Mar 2, 2012, was dominated by the long-term refinancing operations (LTRO) of the European Central Bank. LTROs and related principles are analyzed in subsection IIID Appendix on European Central Bank Large Scale Lender of Last Resort. First, as analyzed by David Enrich, writing on “ECB allots €529.5 billion in long-term refinancing operations,” published on Feb 29, 2012 by the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970203986604577252803223310964.html?mod=WSJ_hp_LEFTWhatsNewsCollection), the ECB provided a second round of three-year loans at 1.0 percent to about 800 banks. The earlier round provided €489 billion to more than 500 banks. Second, the ECB sets the fixed-rate for main refinancing operations at 1.00 percent and the overnight deposit facility at 0.25 percent (http://www.ecb.int/home/html/index.en.html) for negative spread of 75 basis points. That is, if a bank borrows at 1.0 percent for three years through the LTRO and deposits overnight at the ECB, it incurs negative spread of 75 basis points. An alternative allocation could be to lend for a positive spread to other banks. Richard Milne, writing on “Banks deposit record cash with ECB,” on Mar 2, 2012, published in the Financial Times (http://www.ft.com/intl/cms/s/0/9798fd36-644a-11e1-b30e-00144feabdc0.html#axzz1nxeicB6H), provides important information and analysis that banks deposited a record €776.9 billion at the ECB on Fri Mar 2 at interest receipt of 0.25 percent, just two days after receiving €529.5 billion of LTRO loans at interest cost of 1.0 percent. The main issue here is whether there is ongoing perceptions of high risks in counterparties in financial transactions that froze credit markets in 2008 (see Pelaez and Pelaez, Regulation of Banks and Finance (2009a), 57-60, 217-27, Financial Regulation after the Global Recession (2009b), 155-67). Richard Milne and Mary Watkins, writing on “European finance: the leaning tower of perils,” on Mar 27, 2012, published in the Financial Times (http://www.ft.com/intl/cms/s/0/82205f6e-7735-11e1-baf3-00144feab49a.html#axzz1qOqWaqF2), raise concerns that the large volume of LTROs can create future problems for banks and the euro area. An important issue is if the cheap loans at 1 percent for three-year terms finance the carry trade into securities of the governments of banks. Balance sheets of banks may be stressed during future sovereign-credit events. Sam Jones, writing on “ECB liquidity fuels high stakes hedging,” on Apr 4, 2012, published in the Financial Times (http://www.ft.com/intl/cms/s/0/cb74d63a-7e75-11e1-b009-00144feab49a.html#axzz1qyDYxLjS), analyzes unusually high spreads in government bond markets in Europe that could have been caused by LTROs. There has been active relative value arbitrage of these spreads similar to the strategies of Long-Term Capital Management (LTCM) of capturing high spreads in mortgage-backed securities jointly with hedges in Treasury securities (on LTCM see Pelaez and Pelaez, International Financial Architecture (2005), 108-12, 87-9, The Global Recession Risk (2007) 12-3, 102, 176, Globalization and the State, Vol. I (2008a), 59-64).

Table III-1C provides an update of the consolidated financial statement of the Eurosystem. The balance sheet has swollen with the LTROs. Line 5 “Lending to Euro Area Credit Institutions Related to Monetary Policy” increasing from €546,747 million on Dec 31, 2010, to €870,130 million on Dec 28, 2011 and €1,139,373 million on Apr 27, 2012. The sum of line 5 and line 7 (“Securities of Euro Area Residents Denominated in Euro”) has increased to €1,747,659 million in the statement of Apr 27.

Table III-1C, Consolidated Financial Statement of the Eurosystem, Million EUR

	Dec 31, 2010	Dec 28, 2011	Apr 27, 2012
1 Gold and other Receivables	367,402	419,822	432,705
2 Claims on Non Euro Area Residents Denominated in Foreign Currency	223,995	236,826	241,240
3 Claims on Euro Area Residents Denominated in Foreign Currency	26,941	95,355	52,449
4 Claims on Non-Euro Area Residents Denominated in Euro	22,592	25,982	20,271
5 Lending to Euro Area Credit Institutions Related to Monetary Policy Operations Denominated in Euro	546,747	879,130	1,139,372
6 Other Claims on Euro Area Credit Institutions Denominated in Euro	45,654	94,989	184,738
7 Securities of Euro Area Residents Denominated in Euro	457,427	610,629	608,287
8 General Government Debt Denominated in Euro	34,954	33,928	31,131
9 Other Assets	278,719	336,574	251,910
TOTAL ASSETS	2,004, 432	2,733,235	2,962,103
Memo Items
Sum of 5 and 7	1,004,174	1,489,759	1,747,659
Capital and Reserves	78,143	81,481	85,532

Source: European Central Bank

http://www.ecb.int/press/pr/wfs/2011/html/fs110105.en.html

http://www.ecb.int/press/pr/wfs/2011/html/fs111228.en.html

http://www.ecb.int/press/pr/wfs/2012/html/fs120502.en.html

IIIB Appendix on Safe Haven Currencies. Safe-haven currencies, such as the Swiss franc (CHF) and the Japanese yen (JPY) have been under threat of appreciation but also remained relatively unchanged. A characteristic of the global recession would be struggle for maintaining competitiveness by policies of regulation, trade and devaluation (Pelaez and Pelaez, Government Intervention in Globalization: Regulation, Trade and Devaluation War (2008c)). Appreciation of the exchange rate causes two major effects on Japan.

1. Trade. Consider an example with actual data (Pelaez and Pelaez, Government Intervention in Globalization: Regulation, Trade and Devaluation Wars (2008c), 70-72). The yen traded at JPY 117.69/USD on Apr 2, 2007 and at JPY 102.77/USD on Apr 2, 2008, or appreciation of 12.7 percent. This meant that an export of JPY 10,000 to the US sold at USD 84.97 on Apr 2, 2007 [(JPY 10,000)/(USD 117.69/USD)], rising to USD 97.30 on Apr 2, 2008 [(JPY 10,000)/(JPY 102.77)]. If the goods sold by Japan were invoiced worldwide in dollars, Japanese’s companies would suffer a reduction in profit margins of 12.7 percent required to maintain the same dollar price. An export at cost of JPY 10,000 would only bring JPY 8,732 when converted at JPY 102.77 to maintain the price of USD 84.97 (USD 84.97 x JPY 102.77/USD). If profit margins were already tight, Japan would be uncompetitive and lose revenue and market share. The pain of Japan from dollar devaluation is illustrated by Table 58 in the Nov 6 comment of this blog (http://cmpassocregulationblog.blogspot.com/2011/10/slow-growth-driven-by-reducing-savings.html): The yen traded at JPY 110.19/USD on Aug 18, 2008 and at JPY 75.812/USD on Oct 28, 2011, for cumulative appreciation of 31.2 percent. Cumulative appreciation from Sep 15, 2010 (JPY 83.07/USD) to Oct 28, 2011 (JPY 75.812) was 8.7 percent. The pain of Japan from dollar devaluation continues as illustrated by Table VI-6 in Section VII Valuation of Risk Financial Assets: The yen traded at JPY 110.19/USD on Aug 18, 2008 and at JPY 78.08/USD on Dec 23, 2011, for cumulative appreciation of 29.1 percent. Cumulative appreciation from Sep 15, 2010 (JPY 83.07/USD) to Dec 23, 2011 (JPY 78.08) was 6.0 percent.

2. Foreign Earnings and Investment. Consider the case of a Japanese company receiving earnings from investment overseas. Accounting the earnings and investment in the books in Japan would also result in a loss of 12.7 percent. Accounting would show fewer yen for investment and earnings overseas.

There is a point of explosion of patience with dollar devaluation and domestic currency appreciation. Andrew Monahan, writing on “Japan intervenes on yen to cap sharp rise,” on Oct 31, 2011, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970204528204577009152325076454.html?mod=WSJPRO_hpp_MIDDLETopStories), analyzes the intervention of the Bank of Japan, at request of the Ministry of Finance, on Oct 31, 2011. Traders consulted by Monahan estimate that the Bank of Japan sold JPY 7 trillion, about $92.31 billion, against the dollar, exceeding the JPY 4.5 trillion on Aug 4, 2011. The intervention caused an increase of the yen rate to JPY 79.55/USD relative to earlier trading at a low of JPY 75.31/USD. The JPY appreciated to JPY76.88/USD by Fri Nov 18 for cumulative appreciation of 3.4 percent from JPY 79.55 just after the intervention. The JPY appreciated another 0.3 percent in the week of Nov 18 but depreciated 1.1 percent in the week of Nov 25. There was mild depreciation of 0.3 percent in the week of Dec 2 that was followed by appreciation of 0.4 percent in the week of Dec 9. The JPY was virtually unchanged in the week of Dec 16 with depreciation of 0.1 percent but depreciated by 0.5 percent in the week of Dec 23, appreciating by 1.5 percent in the week of Dec 30. Historically, interventions in yen currency markets have been unsuccessful (Pelaez and Pelaez, The Global Recession Risk (2007), 107-109). Interventions are even more difficult currently with daily trading of some $4 trillion in world currency markets. Risk aversion with zero interest rates in the US diverts hot capital movements toward safe-haven currencies such as Japan, causing appreciation of the yen. Mitsuru Obe, writing on Nov 25, on “Japanese government bonds tumble,” published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970204452104577060231493070676.html?mod=WSJ_hp_LEFTWhatsNewsCollection), analyzes the increase in yields of the Japanese government bond with 10 year maturity to a high for one month of 1.025 percent at the close of market on Nov 25. Thin markets in after-hours trading may have played an important role in this increase in yield but there may have been an effect of a dreaded reduction in positions of bonds by banks under pressure of reducing assets. The report on Japan sustainability by the IMF (2011JSRNov23, 2), analyzes how rising yields could threaten Japan:

· “As evident from recent developments, market sentiment toward sovereigns with unsustainably large fiscal imbalances can shift abruptly, with adverse effects on debt dynamics. Should JGB yields increase, they could initiate an adverse feedback loop from rising yields to deteriorating confidence, diminishing policy space, and a contracting real economy.

· Higher yields could result in a withdrawal of liquidity from global capital markets, disrupt external positions and, through contagion, put upward pressure on sovereign bond yields elsewhere.”

Exchange rate controls by the Swiss National Bank (SNB) fixing the rate at a minimum of CHF 1.20/EUR (http://www.snb.ch/en/mmr/reference/pre_20110906/source/pre_20110906.en.pdf) has prevented flight of capital into the Swiss franc. The Swiss franc remained unchanged relative to the USD in the week of Dec 23 and appreciated 0.2 percent in the week of Dec 30 relative to the USD and 0.5 percent relative to the euro, as shown in Table II-1. Risk aversion is evident in the depreciation of the Australian dollar by cumulative 2.5 percent in the week of Fr Dec 16 after no change in the week of Dec 9. In the week of Dec 23, the Australian dollar appreciated 1.9 percent, appreciating another 0.5 percent in the week of Dec 30 as shown in Table II-1. Risk appetite would be revealed by carry trades from zero interest rates in the US and Japan into high yielding currencies such as in Australia with appreciation of the Australian dollar (see Pelaez and Pelaez, Globalization and the State, Vol. II (2008b), 202-4, Pelaez and Pelaez, Government Intervention in Globalization (2008c), 70-4).

IIIC Appendix on Fiscal Compact. There are three types of actions in Europe to steer the euro zone away from the threats of fiscal and banking crises: (1) fiscal compact; (2) enhancement of stabilization tools and resources; and (3) bank capital requirements. The first two consist of agreements by the Euro Area Heads of State and government while the third one consists of measurements and recommendations by the European Banking Authority.

1. Fiscal Compact. The “fiscal compact” consists of (1) conciliation of fiscal policies and budgets within a “fiscal rule”; and (2) establishment of mechanisms of governance, monitoring and enforcement of the fiscal rule.

i. Fiscal Rule. The essence of the fiscal rule is that “general government budgets shall be balanced or in surplus” by compliance of members countries that “the annual structural deficit does not exceed 0.5% of nominal GDP” (European Council 2011Dec9, 3). Individual member states will create “an automatic correction mechanism that shall be triggered in the event of deviation” (European Council 2011Dec9, 3). Member states will define their automatic correction mechanisms following principles proposed by the European Commission. Those member states falling into an “excessive deficit procedure” will provide a detailed plan of structural reforms to correct excessive deficits. The European Council and European Commission will monitor yearly budget plans for consistency with adjustment of excessive deficits. Member states will report in anticipation their debt issuance plans. Deficits in excess of 3 percent of GDP and/or debt in excess of 60 percent of GDP will trigger automatic consequences.

ii. Policy Coordination and Governance. The euro area is committed to following common economic policy. In accordance, “a procedure will be established to ensure that all major economic policy reforms planned by euro area member states will be discussed and coordinated at the level of the euro area, with a view to benchmarking best practices” (European Council 2011Dec9, 5). Governance of the euro area will be strengthened with regular euro summits at least twice yearly.

2. Stabilization Tools and Resources. There are several enhancements to the bailouts of member states.

i. Facilities. The European Financial Stability Facility (EFSF) will use leverage and the European Central Bank as agent of its market operations. The European Stability Mechanism (ESM) or permanent bailout facility will be operational as soon as 90 percent of the capital commitments are ratified by member states. The ESM is planned to begin in Jul 2012.

ii. Financial Resources. The overall ceiling of the EFSF/ESM of €500 billion (USD 670 billion) will be reassessed in Mar 2012. Measures will be taken to maintain “the combined effective lending capacity of EUR 500 billion” (European Council 2011Dec9, 6). Member states will “consider, and confirm within 10 days, the provision of additional resources for the IMF of up to EUR 200 billion (USD 270 billion), in the form of bilateral loans, to ensure that the IMF has adequate resources to deal with the crisis. We are looking forward to parallel contributions from the international community” (European Council 2011Dec9, 6). Matthew Dalton and Matina Stevis, writing on Dec 20, 2011, on “Euro Zone Agrees to New IMF Loans,” published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970204791104577107974167166272.html?mod=WSJPRO_hps_MIDDLESecondNews), inform that at a meeting on Dec 20, finance ministers of the euro-zone developed plans to contribute €150 billion in bilateral loans to the IMF as provided in the agreement of Dec 9. Bailouts “will strictly adhere to the well established IMF principles and practices.” There is a specific statement on private sector involvement and its relation to recent experience: “We clearly reaffirm that the decisions taken on 21 July and 26/27 October concerning Greek debt are unique and exceptional; standardized and identical Collective Action clauses will be included, in such a way as to preserve market liquidity, in the terms and conditions of all new euro government bonds” (European Council 2011Dec9, 6). Will there be again “unique and exceptional” conditions? The ESM is authorized to take emergency decisions with “a qualified majority of 85% in case the Commission and the ECB conclude that an urgent decision related to financial assistance is needed when the financial and economic sustainability of the euro area is threatened” (European Council 2011Dec9, 6).

3. Bank Capital. The European Banking Authority (EBA) finds that European banks have a capital shortfall of €114.7 billion (http://stress-test.eba.europa.eu/capitalexercise/Press%20release%20FINAL.pdf). To avoid credit difficulties, the EBA recommends “that the credit institutions build a temporary capital buffer to reach a 9% Core Tier 1 ratio by 30 June 2012” (http://stress-test.eba.europa.eu/capitalexercise/EBA%20BS%202011%20173%20Recommendation%20FINAL.pdf 6). Patrick Jenkins, Martin Stabe and Stanley Pignal, writing on Dec 9, 2011, on “EU banks slash sovereign holdings,” published in the Financial Times (http://www.ft.com/intl/cms/s/0/a6d2fd4e-228f-11e1-acdc-00144feabdc0.html#axzz1gAlaswcW), analyze the balance sheets of European banks released by the European Banking Authority. They conclude that European banks have reduced their holdings of riskier sovereign debt of countries in Europe by €65 billion from the end of 2010 to Sep 2011. Bankers informed that the European Central Bank and hedge funds acquired those exposures that represent 13 percent of their holdings of debt to Greece, Ireland, Italy, Portugal and Spain, which are down to €513 billion by the end of IIIQ2011.

The members of the European Monetary Union (EMU), or euro area, established the European Financial Stability Facility (EFSF), on May 9, 2010, to (http://www.efsf.europa.eu/about/index.htm):

“Provide loans to countries in financial difficulties
Intervene in the debt primary and secondary markets. Intervention in the secondary market will be only on the basis of an ECB analysis recognising the existence of exceptional financial market circumstances and risks to financial stability
Act on the basis of a precautionary programme
Finance recapitalisations of financial institutions through loans to governments”

The EFSF will be replaced by the permanent European Stability Mechanism (ESM) in 2013. On Mar 30, 2012, members of the euro area reached an agreement providing for sufficient funding required in rescue programs of members countries facing funding and fiscal difficulties and the transition from the EFSF to the ESM. The agreement of Mar 30, 2012 of the euro area members provides for the following (http://www.consilium.europa.eu/media/1513204/eurogroup_statement_30_march_12.pdf):

· Acceleration of ESM paid-in capital. The acceleration of paid-in capital for the ESM provides for two tranches paid in 2012, in July and Oct; another two tranches in 2013; and a final tranche in the first half of 2014. There could be acceleration of paid-in capital is required to maintain a 15 percent relation of paid-in capital and the outstanding issue of the ESM

· ESM Operation and EFSF transition. ESM will assume all new rescue programs beginning in Jul 2012. EFSF will administer programs begun before initiation of ESM activities. There will be a transition period for the EFSF until mid 2013 in which it can engage in new programs if required to maintain the full lending limit of €500 billion.

· Increase of ESM/EFSF lending limit. The combined ceiling of the ESM and EFSF will be increased to €700 billion to facilitate operation of the transition of the EFSF to the ESM. The ESM lending ceiling will be €500 billion by mid 2013. The combined lending ceiling of the ESM and EFSF will continue to €700 billion

· Prior lending. The bilateral Greek loan facility of €53 billion and €49 billion of the EFSF have been paid-out in supporting programs of countries: “all together the euro area is mobilizing an overall firewall of approximately EUR 800 billion, more than USD 1 trillion” (http://www.consilium.europa.eu/media/1513204/eurogroup_statement_30_march_12.pdf)

· Bilateral IMF contributions. Members of the euro area have made commitments of bilateral contributions to the IMF of €150 billion

A key development in the bailout of Greece is the approval by the Executive Board of the International Monetary Fund (IMF) on Mar 15, 2012, of a new four-year financing in the value of €28 billion to be disbursed in equal quarterly disbursements (http://www.imf.org/external/np/tr/2012/tr031512.htm). The sovereign debt crisis of Europe has moderated significantly with the elimination of immediate default of Greece. New economic and financial risk factors have developed, which are covered in VI Valuation of Risk Financial Assets and V World Economic Slowdown.

IIID Appendix on European Central Bank Large Scale Lender of Last Resort. European Central Bank. The European Central Bank (ECB) has been pressured to assist in the bailouts by acquiring sovereign debts. The ECB has been providing liquidity lines to banks under pressure and has acquired sovereign debts but not in the scale desired by authorities. In an important statement to the European Parliament, the President of the ECB Mario Draghi (2011Dec1) opened the possibility of further ECB actions but after a decisive “fiscal compact:”

“What I believe our economic and monetary union needs is a new fiscal compact – a fundamental restatement of the fiscal rules together with the mutual fiscal commitments that euro area governments have made.

Just as we effectively have a compact that describes the essence of monetary policy – an independent central bank with a single objective of maintaining price stability – so a fiscal compact would enshrine the essence of fiscal rules and the government commitments taken so far, and ensure that the latter become fully credible, individually and collectively.

We might be asked whether a new fiscal compact would be enough to stabilise markets and how a credible longer-term vision can be helpful in the short term. Our answer is that it is definitely the most important element to start restoring credibility.

Other elements might follow, but the sequencing matters. And it is first and foremost important to get a commonly shared fiscal compact right. Confidence works backwards: if there is an anchor in the long term, it is easier to maintain trust in the short term. After all, investors are themselves often taking decisions with a long time horizon, especially with regard to government bonds.

A new fiscal compact would be the most important signal from euro area governments for embarking on a path of comprehensive deepening of economic integration. It would also present a clear trajectory for the future evolution of the euro area, thus framing expectations.”

An important statement of Draghi (2011Dec15) focuses on the role of central banking: “You all know that the statutes of the ECB inherited this important principle and that central bank independence and the credible pursuit of price stability go hand in hand.”

Draghi (2011Dec19) explains measures to ensure “access to funding markets” by euro zone banks:

§ “We have decided on three-year refinancing operations to support the supply of credit to the euro area economy. These measures address the risk that persistent financial markets tensions could affect the capacity of euro area banks to obtain refinancing over longer horizons.

§ Earlier, in October, the Governing Council had already decided to have two more refinancing operations with a maturity of around one year.

§ Also, it was announced then that in all refinancing operations until at least the first half of 2012 all liquidity demand by banks would be fully allotted at fixed rate.

§ Funding via the covered bonds market was also facilitated by the ECB deciding in October to introduce a new Covered Bond Purchase Programme of €40 billion.

§ Funding in US dollar is facilitated by lowering the pricing on the temporary US dollar liquidity swap arrangements.”

Lionel Barber and Ralph Atkins interviewed Mario Draghi on Dec 14 with the transcript published in the Financial Times on Dec 18 (http://www.ft.com/intl/cms/s/0/25d553ec-2972-11e1-a066-00144feabdc0.html#axzz1gzoHXOj6) as “FT interview transcript: Mario Draghi.” A critical question in the interview is if the new measures are a European version of quantitative easing. Draghi analyzes the difference between the measures of the European Central Bank (ECB) and quantitative easing such as in Japan, US and UK:

1. The measures are termed “non-standard” instead of “unconventional.” While quantitative easing attempts to lower the yield of targeted maturities, the three-year facility operates through the “bank channel.” Quantitative easing would not be feasible because the ECB is statutorily prohibited of funding central governments. The ECB would comply with its mandate of medium-term price stability.

2. There is a critical difference in the two programs. Quantitative easing has been used as a form of financial repression known as “directed lending.” For example, the purchase of mortgage-backed securities more recently or the suspension of the auctions of 30-year bonds in response to the contraction early in the 2000s has the clear objective of directing spending to housing. The ECB gives the banks entire discretion on how to use the funding within their risk/return decisions, which could include purchase of government bonds.

The question on the similarity of the ECB three-year lending facility and quantitative easing is quite valid. Tracy Alloway, writing on Oct 10, 2011, on “Investors worry over cheap ECB money side effects,” published in the Financial Times (http://www.ft.com/intl/cms/s/0/d2f87d16-f339-11e0-8383-00144feab49a.html#axzz1hAqMH1vn), analyzes the use of earlier long-term refinancing operations (LTRO) of the ECB. LTROs by the ECB in Jun, Sep and Dec 2009 lent €614 billion at 1 percent. Alloway quotes estimates of Deutsche Bank that banks used €442billion to acquire assets with higher yields. Carry trades developed from LTRO funds at 1 percent into liquid investments at a higher yield to earn highly profitable spreads. Alloway quotes estimates of Morgan Stanley that European debt of GIIPS (Greece, Ireland, Italy, Portugal and Spain) in European bank balance sheets is €700 billion. Tracy Alloway, writing on Dec 21, 2011, on “Demand for ECB loans rises to €489bn,” published in the Financial Times (http://www.ft.com/intl/cms/s/0/d6ddd0ae-2bbd-11e1-98bc-00144feabdc0.html#axzz1hAqMH1vn), informs that European banks borrowed the largest value of €489 billion in all LTROs of the ECB. Tom Fairless and David Cottle, writing on Dec 21, 2011, on “ECB sees record refinancing demand,” published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970204464404577111983838592746.html?mod=WSJPRO_hpp_LEFTTopStories), inform that the first of three operations of the ECB lent €489.19 billion, or $639.96 billion, to 523 banks. Three such LTROs could add to $1.9 trillion, which is not far from the value of quantitative easing in the US of $2.5 trillion. Fairless and Cottle find that there could be renewed hopes that banks could use the LTROs to support euro zone bond markets. It is possible that there could be official moral suasion by governments on banks to increase their holdings of government bonds or at least not to sell existing holdings. Banks are not free to choose assets in evaluation of risk and returns. Floods of cheap money at 1 percent per year induce carry trades to high-risk assets and not necessarily financing of growth with borrowing and lending decisions constrained by shocks of confidence.

The LTROs of the ECB are not very different from the liquidity facilities of the Fed during the financial crisis. Kohn (2009Sep10) finds that the trillions of dollars in facilities provided by the Fed (see Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 157-64, Regulation of Banks and Finance (2009b), 224-7) could fall under normal principles of “lender of last resort” of central banks:

“The liquidity measures we took during the financial crisis, although unprecedented in their details, were generally consistent with Bagehot's principles and aimed at short-circuiting these feedback loops. The Federal Reserve lends only against collateral that meets specific quality requirements, and it applies haircuts where appropriate. Beyond the collateral, in many cases we also have recourse to the borrowing institution for repayment. In the case of the TALF, we are backstopped by the Treasury. In addition, the terms and conditions of most of our facilities are designed to be unattractive under normal market conditions, thus preserving borrowers' incentives to obtain funds in the market when markets are operating normally. Apart from a very small number of exceptions involving systemically important institutions, such features have limited the extent to which the Federal Reserve has taken on credit risk, and the overall credit risk involved in our lending during the crisis has been small.

In Ricardo's view, if the collateral had really been good, private institutions would have lent against it. However, as has been recognized since Bagehot, private lenders, acting to protect themselves, typically severely curtail lending during a financial crisis, irrespective of the quality of the available collateral.The central bank--because it is not liquidity constrained and has the infrastructure in place to make loans against a variety of collateral--is well positioned to make those loans in the interest of financial stability, and can make them without taking on significant credit risk, as long as its lending is secured by sound collateral. A key function of the central bank is to lend in such circumstances to contain the crisis and mitigate its effects on the economy.”

The Bagehot (1873) principle is that central banks should provide a safety net, lending to temporarily illiquid but solvent banks and not to insolvent banks (see Cline 2001, 2002; Pelaez and Pelaez, International Financial Architecture (2005), 175-8). Kohn (2009Apr18) characterizes “quantitative easing” as “large scale purchases of assets:”

“Another aspect of our efforts to affect financial conditions has been the extension of our open market operations to large-scale purchases of agency mortgage-backed securities (MBS), agency debt, and longer-term Treasury debt. We initially announced our intention to undertake large-scale asset purchases last November, when the federal funds rate began to approach its zero lower bound and we needed to begin applying stimulus through other channels as the economic contraction deepened. These purchases are intended to reduce intermediate- and longer-term interest rates on mortgages and other credit to households and businesses; those rates influence decisions about investments in long-lived assets like houses, consumer durable goods, and business capital. In ordinary circumstances, the typically quite modest volume of central bank purchases and sales of such assets has only small and temporary effects on their yields. However, the extremely large volume of purchases now underway does appear to have substantially lowered yields. The decline in yields reflects "preferred habitat" behavior, meaning that there is not perfect arbitrage between the yields on longer-term assets and current and expected short-term interest rates. These preferences are likely to be especially strong in current circumstances, so that long-term asset prices rise and yields fall as the Federal Reserve acquires a significant portion of the outstanding stock of securities held by the public.”

Non-standard ECB policy and unconventional Fed policy have a common link in the scale of implementation or policy doses. Direct lending by the central bank to banks is the function “large scale lender of last resort.” If there is moral suasion by governments to coerce banks into increasing their holdings of government bonds, the correct term would be financial repression.

An important additional measure discussed by Draghi (2011Nov19) is relaxation on the collateral pledged by banks in LTROs:

“Some banks’ access to refinancing operations may be restricted by lack of eligible collateral. To overcome this, a temporary expansion of the list of collateral has been decided. Furthermore, the ECB intends to enhance the use of bank loans as collateral in Eurosystem operations. These measures should support bank lending, by increasing the amount of assets on euro area banks’ balance sheets that can be used to obtain central bank refinancing.”

There are collateral concerns about European banks. David Enrich and Sara Schaefer Muñoz, writing on Dec 28, on “European bank worry: collateral,” published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970203899504577126430202451796.html?mod=WSJPRO_hpp_LEFTTopStories), analyze the strain on bank funding from a squeeze in the availability of high-quality collateral as guarantee in funding. High-quality collateral includes government bonds and investment-grade non-government debt. There could be difficulties in funding for a bank without sufficient available high-quality collateral to offer in guarantee of loans. It is difficult to assess from bank balance sheets the availability of sufficient collateral to support bank funding requirements. There has been erosion in the quality of collateral as a result of the debt crisis and further erosion could occur. Perceptions of counterparty risk among financial institutions worsened the credit/dollar crisis of 2007 to 2009. The banking theory of Diamond and Rajan (2000, 2001a, 2001b) and the model of Diamond Dybvig (1983, 1986) provide the analysis of bank functions that explains the credit crisis of 2007 to 2008 (see Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 155-7, 48-52, Regulation of Banks and Finance (2009b), 52-66, 217-24). In fact, Rajan (2005, 339-41) anticipated the role of low interest rates in causing a hunt for yields in multiple financial markets from hedge funds to emerging markets and that low interest rates foster illiquidity. Rajan (2005, 341) argued:

“The point, therefore, is that common factors such as low interest rates—potentially caused by accommodative monetary policy—can engender excessive tolerance for risk on both sides of financial transactions.”

A critical function of banks consists of providing transformation services that convert illiquid risky loans and investment that the bank monitors into immediate liquidity such as unmonitored demand deposits. Credit in financial markets consists of the transformation of asset-backed securities (SRP) constructed with monitoring by financial institutions into unmonitored immediate liquidity by sale and repurchase agreements (SRP). In the financial crisis financial institutions distrusted the quality of their own balance sheets and those of their counterparties in SRPs. The financing counterparty distrusted that the financed counterparty would not repurchase the assets pledged in the SRP that could collapse in value below the financing provided. A critical problem was the unwillingness of banks to lend to each other in unsecured short-term loans. Emse Bartha, writing on Dec 28, on “Deposits at ECB hit high,” published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970204720204577125913779446088.html?mod=WSJ_hp_LEFTWhatsNewsCollection), informs that banks deposited €453.034 billion, or $589.72 billion, at the ECB on Dec 28, which is a record high in two consecutive days. The deposit facility is typically used by banks when they do prefer not to extend unsecured loans to other banks. In addition, banks borrowed €6.225 billion from the overnight facility on Dec 28, when in normal times only a few hundred million euro are borrowed. The collateral issues and the possible increase in counterparty risk occurred a week after large-scale lender of last resort by the ECB in the value of €489 billion in the prior week. The ECB may need to extend its lender of last resort operations.

The financial reform of the United States around the proposal of a national bank by Alexander Hamilton (1780) to develop the money economy with specialization away from the barter economy is credited with creating the financial system that brought prosperity over a long period (see Pelaez 2008). Continuing growth and prosperity together with sound financial management earned the US dollar the role as reserve currency and the AAA rating of its Treasury securities. McKinnon (2011Dec18) analyzes the resolution of the European debt crisis by comparison with the reform of Alexander Hamilton. Northern states of the US had financed the revolutionary war with the issue of paper notes that were at risk of default by 1890. Alexander Hamilton proposed the purchase of the states’ paper notes by the Federal government without haircuts. McKinnon (2011Dec18) describes the conflicts before passing the assumption bill in 1790 for federal absorption of the debts of states. Other elements in the Hamilton reform consisted of creation of a market for US Treasury bonds by their use as paid-in capital in the First Bank of the United States. McKinnon (2011Dec18) finds growth of intermediation in the US by the branching of the First Bank of the United States throughout several states, accepting deposits to provide commercial short-term credit. The reform consolidated the union of states, fiscal credibility for the union and financial intermediation required for growth. The reform also introduced low tariffs and an excise tax on whisky to service the interest on the federal debt. Trade relations among members of the euro zone are highly important to economic activity. There are two lessons drawn by McKinnon (2011Dec18) from the experience of Hamilton for the euro zone currently. (1) The reform of Hamilton included new taxes for the assumption of debts of states with concrete provisions for their credibility. (2) Commercial lending was consolidated with a trusted bank both for accepting private deposits and for commercial lending, creating the structure of financial intermediation required for growth.

IIIE Appendix Euro Zone Survival Risk. Markets have been dominated by rating actions of Standard & Poor’s Ratings Services (S&PRS) (2012Jan13) on 16 members of the European Monetary Union (EMU) or eurozone. The actions by S&PRS (2012Jan13) are of several types:

1. Downgrades by two notches of long-term credit ratings of Cyprus (from BBB/Watch/NegA-3+ to BB+/Neg/B), Italy (from A/Watch Neg/A-1 to BBB+/Neg/A-2), Portugal (from BBB-/Watch Neg/A-3 to BB/Neg/B) and Spain (from AA-/Watch Neg/A-1+ to A/Neg/A-1).

2. Downgrades by one notch of long-term credit ratings of Austria (from AAA/Watch Neg/A-1+ to AA+/Neg/A-1+), France (from AAA/Watch Neg/A-1+ to AA+/Neg A-1+), Malta (from A/Watch, Neg/A-1 to A-/Neg/A-2), Slovakia (from A+/Watch Neg/A-1 to A/Stable/A-1) and Slovenia (AA-/Watch Neg/A-1+ to A+/Neg/A-1).

3. Affirmation of long-term ratings of Belgium (AA/Neg/A-1+), Estonia (AA-/Neg/A-1+), Finland (AAA/Neg/A-1+), Germany (AAA/Stable/A-1+), Ireland (BBB+/Neg/A-2), Luxembourg (AAA/Neg/A-1+) and the Netherlands (AAA/Neg/A-1+) with removal from CreditWatch.

4. Negative outlook on the long-term credit ratings of Austria, Belgium, Cyprus, Estonia, Finland, France, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovenia and Spain, meaning that S&PRS (2012Jan13) finds that the ratings of these sovereigns have a chance of at least 1-to-3 of downgrades in 2012 or 2013.

S&PRS (2012Jan13) finds that measures by European policymakers may not be sufficient to contain sovereign risks in the eurozone. The sources of stress according to S&PRS (2012Jan13) are:

1. Worsening credit environment

2. Increases in risk premiums for many eurozone borrowers

3. Simultaneous attempts at reducing debts by both eurozone governments and households

4. More limited perspectives of economic growth

5. Deepening and protracted division among Europe’s policymakers in agreeing to approaches to resolve the European debt crisis

There is now only one major country in the eurozone with AAA rating of its long-term debt by S&PRS (2012Jan13): Germany. IIIE Appendix Euro Zone Survival Risk analyzes the hurdle of financial bailouts of euro area members by the strength of the credit of Germany alone. The sum of the debt of Italy, Spain, Portugal, Greece and Ireland is abouy $3531.6 billion. There is some simple “unpleasant bond arithmetic.” Suppose the entire debt burdens of the five countries with probability of default were to be guaranteed by France and Germany, which de facto would be required by continuing the euro zone. The sum of the total debt of these five countries and the debt of France and Germany is about $7385.1 billion, which would be equivalent to 126.3 percent of their combined GDP in 2010. Under this arrangement the entire debt of the euro zone including debt of France and Germany would not have nil probability of default. Debt as percent of Germany’s GDP would exceed 224 percent if including debt of France and 165 percent of German GDP if excluding French debt. The unpleasant bond arithmetic illustrates that there is a limit as to how far Germany and France can go in bailing out the countries with unsustainable sovereign debt without incurring severe pains of their own such as downgrades of their sovereign credit ratings. A central bank is not typically engaged in direct credit because of remembrance of inflation and abuse in the past. There is also a limit to operations of the European Central Bank in doubtful credit obligations. Charles Forelle, writing on Jan 14, 2012, on “Downgrade hurts euro rescue fund,” published by the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970204409004577159210191567778.html), analyzes the impact of the downgrades on the European Financial Stability Facility (EFSF). The EFSF is a special purpose vehicle that has not capital but can raise funds to be used in bailouts by issuing AAA-rated debt. S&P may cut the rating of the EFSF to the new lowest rating of the six countries with AAA rating, which are now down to four with the downgrades of France and Austria. The other rating agencies Moody’s and Fitch have not taken similar action. On Jan, S&PRS (2012Jan16) did cut the long-term credit rating of the EFSF to AA+ and affirmed the short-term credit rating at A-+. The decision is derived from the reduction in credit rating of the countries guaranteeing the EFSF. In the view of S&PRS (2012Jan16), there are not sufficient credit enhancements after the reduction in the creditworthiness of the countries guaranteeing the EFSF. The decision could be reversed if credit enhancements were provided.

The flow of cash from safe havens to risk financial assets is processed by carry trades from zero interest rates that are frustrated by episodes of risk aversion or encouraged with return of risk appetite. European sovereign risk crises are closely linked to the exposures of regional banks to government debt. An important form of financial repression consists of changing the proportions of debt held by financial institutions toward higher shares in government debt. The financial history of Latin America, for example, is rich in such policies. Bailouts in the euro zone have sanctioned “bailing in” the private sector, which means that creditors such as banks will participate by “voluntary” reduction of the principal in government debt (see Pelaez and Pelaez, International Financial Architecture (2005), 163-202). David Enrich, Sara Schaeffer Muñoz and Patricia Knowsmann, writing on “European nations pressure own banks for loans,” on Nov 29, 2011, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970204753404577066431341281676.html?mod=WSJPRO_hpp_MIDDLETopStories), provide important data and analysis on the role of banks in the European sovereign risk crisis. They assemble data from various sources showing that domestic banks hold 16.2 percent of Italy’s total government securities outstanding of €1,617.4 billion, 22.9 percent of Portugal’s total government securities of €103.9 billion and 12.3 percent of Spain’s total government securities of €535.3 billion. Capital requirements force banks to hold government securities to reduce overall risk exposure in balance sheets. Enrich, Schaeffer Muñoz and Knowsmann find information that governments are setting pressures on banks to acquire more government debt or at least to stop selling their holdings of government debt.

Bond auctions are also critical in episodes of risk aversion. David Oakley, writing on Jan 3, 2012, on “Sovereign issues draw euro to crunch point,” published by the Financial Times (http://www.ft.com/intl/cms/s/0/63b9d7ca-2bfa-11e1-98bc-00144feabdc0.html#axzz1iLNRyEbs), estimates total euro area sovereign issues in 2012 at €794 billion, much higher than the long-term average of €670 billion. Oakley finds that the sovereign issues are: Italy €220 billion, France €197 billion, Germany €178 billion and Spain €81 billion. Bond auctions will test the resilience of the euro. Victor Mallet and Robin Wigglesworth, writing on Jan 12, 2012, on “Spain and Italy raise €22bn in debt sales,” published in the Financial Times (http://www.ft.com/intl/cms/s/0/e22c4e28-3d05-11e1-ae07-00144feabdc0.html#axzz1j4euflAi), analyze debt auctions during the week. Spain placed €10 billion of new bonds with maturities in 2015 and 2016, which was twice the maximum planned for the auction. Italy placed €8.5 billion of one-year bills at average yield of 2.735 percent, which was less than one-half of the yield of 5.95 percent a month before. Italy also placed €3.5 billion of 136-day bills at 1.64 percent. There may be some hope in the sovereign debt market. The yield of Italy’s 10-year bond dropped from around 7.20 percent on Jan 9 to about 6.70 percent on Jan 13 and then to around 6.30 percent on Jan 20. The yield of Spain’s 10-year bond fell from about 6.60 percent on Jan 9 to around 5.20 percent on Jan 13 and then to 5.50 percent on Jan 20.

A combination of strong economic data in China analyzed in subsection VC and the realization of the widely expected downgrade could explain the strength of the European sovereign debt market. Emese Bartha, Art Patnaude and Nick Cawley, writing on January 17, 2012, on “European T-bills see solid demand,” published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970204555904577166363369792848.html?mod=WSJPRO_hpp_LEFTTopStories), analyze successful auctions treasury bills by Spain and Greece. A day after the downgrade, the EFSF found strong demand on Jan 17 for its six-month debt auction at the yield of 0.2664 percent, which is about the same as sovereign bills of France with the same maturity.

There may be some hope in the sovereign debt market. The yield of Italy’s 10-year bond dropped from around 7.20 percent on Jan 9 to about 6.70 percent on Jan 13 and then to around 6.30 percent on Jan 20. The yield of Spain’s 10-year bond fell from about 6.60 percent on Jan 9 to around 5.20 percent on Jan 13 and then to 5.50 percent on Jan 20. Paul Dobson, Emma Charlton and Lucy Meakin, writing on Jan 20, 2012, on “Bonds show return of crisis once ECB loans expire,” published in Bloomberg (http://www.bloomberg.com/news/2012-01-20/bonds-show-return-of-crisis-once-ecb-loans-expire-euro-credit.html), analyze sovereign debt and analysis of market participants. Large-scale lending of last resort by the European Central Bank, considered in VD Appendix on European Central Bank Large Scale Lender of Last Resort, provided ample liquidity in the euro zone for banks to borrow at 1 percent and lend at higher rates, including to government. Dobson, Charlton and Meakin trace the faster decline of yields of short-term sovereign debt relative to decline of yields of long-term sovereign debt. The significant fall of the spread of short relative to long yields could signal concern about the resolution of the sovereign debt while expanding lender of last resort operations have moderated relative short-term sovereign yields. Normal conditions would be attained if there is definitive resolution of long-term sovereign debt that would require fiscal consolidation in an environment of economic growth.

Charles Forelle and Stephen Fidler, writing on Dec 10, 2011, on “Questions place EU pact,” published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970203413304577087562993283958.html?mod=WSJPRO_hpp_LEFTTopStories#project%3DEUSUMMIT121011%26articleTabs%3Darticle), provide data, information and analysis of the agreement of Dec 9. There are multiple issues centering on whether investors will be reassured that the measures have reduced the risks of European sovereign obligations. While the European Central Bank has welcomed the measures, it is not yet clear of its future role in preventing erosion of sovereign debt values.

Another complicating factor is whether there will be further actions on sovereign debt ratings. On Dec 5, 2011, four days before the conclusion of the meeting of European leaders, Standard & Poor’s (2011Dec5) placed the sovereign ratings of 15 members of the euro zone on “CreditWatch with negative implications.” S&P finds five conditions that trigger the action: (1) worsening credit conditions in the euro area; (2) differences among member states on how to manage the debt crisis in the short run and on measures to move toward enhanced fiscal convergence; (3) household and government debt at high levels throughout large parts of the euro area; (4) increasing risk spreads on euro area sovereigns, including those with AAA ratings; and (5) increasing risks of recession in the euro zone. S&P also placed the European Financial Stability Facility (EFSF) in CreditWatch with negative implications (http://www.standardandpoors.com/ratings/articles/en/us/?articleType=HTML&assetID=1245325307963). On Dec 9, 2011, Moody’s Investors Service downgraded the ratings of the three largest French banks (http://www.moodys.com/research/Moodys-downgrades-BNP-Paribass-long-term-ratings-to-Aa3-concluding--PR_232989 http://www.moodys.com/research/Moodys-downgrades-Credit-Agricole-SAs-long-term-ratings-to-Aa3--PR_233004 http://www.moodys.com/research/Moodys-downgrades-Socit-Gnrales-long-term-ratings-to-A1--PR_232986 ).

Improving equity markets and strength of the euro appear related to developments in sovereign debt negotiations and markets. Alkman Granitsas and Costas Paris, writing on Jan 29, 2012, on “Greek debt deal, new loan agreement to finish next week,” published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970204573704577189021923288392.html?mod=WSJPRO_hpp_LEFTTopStories), inform that Greece and its private creditors were near finishing a deal of writing off €100 billion, about $132 billion, of Greece’s debt depending on the conversations between Greece, the euro area and the IMF on the new bailout. An agreement had been reached in Oct 2011 for a new package of fresh money in the amount of €130 billion to fill needs through 2015 but was contingent on haircuts reducing Greece’s debt from 160 percent of GDP to 120 percent of GDP. The new bailout would be required to prevent default by Greece of €14.4 billion maturing on Mar 20, 2012. There has been increasing improvement of sovereign bond yields. Italy’s ten-year bond yield fell from over 6.30 percent on Jan 20, 2012 to slightly above 5.90 percent on Jan 27. Spain’s ten-year bond yield fell from slightly above 5.50 percent on Jan 20 to just below 5 percent on Jan 27.

An important difference, according to Beim (2011Oct9), between large-scale buying of bonds by the central bank between the Federal Reserve of the US and the European Central Bank (ECB) is that the Fed and most banks do not buy local and state government obligations with lower creditworthiness. The European Monetary Union (EMU) that created the euro and the ECB did not include common fiscal policy and affairs. Thus, EMU cannot issue its own treasury obligations. The line “Reserve bank credit” in the Fed balance sheet for Jan 25, 2012, is $2902 billion of which $2570 billion consisting of $1565 billion US Treasury notes and bonds, $68 billion inflation-indexed bonds and notes, $101 billion Federal agency debt securities and $836 billion mortgage-backed securities (http://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1). The Fed has been careful in avoiding credit risk in its portfolio of securities. The 11 exceptional liquidity facilities of several trillion dollars created during the financial crisis (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 157-62) have not resulted in any losses. The Fed has used unconventional monetary policy without credit risk as in classical central banking.

Beim (2011Oct9, 6) argues:

“In short, the ECB system holds more than €1 trillion of debt of the banks and governments of the 17 member states. The state-by-state composition of this debt is not disclosed, but the events of the past year suggest that a disproportionate fraction of these assets are likely obligations of stressed countries. If a significant fraction of the €1 trillion were to be restructured at 40-60% discounts, the ECB would have a massive problem: who would bail out the ECB?

This is surely why the ECB has been so shrill in its antagonism to the slightest mention of default and restructuring. They need to maintain the illusion of risk-free sovereign debt because confidence in the euro itself is built upon it.”

Table III-2 provides an update of the consolidated financial statement of the Eurosystem. The balance sheet has swollen with the LTROs. Line 5 “Lending to Euro Area Credit Institutions Related to Monetary Policy” increasing from €546,747 million on Dec 31, 2010, to €870,130 million on Dec 28, 2011 and €1,139,373 million on Apr 27, 2012. The sum of line 5 and line 7 (“Securities of Euro Area Residents Denominated in Euro”) has increased to €1,747,659 million in the statement of Apr 27.

This sum is roughly what concerns Beim (2012Oct9) because of the probable exposure relative to capital to institutions and sovereigns with higher default risk. To be sure, there is no precise knowledge of the composition of the ECB portfolio of loans and securities with weights and analysis of the risks of components. Javier E. David, writing on Jan 16, 2012, on “The risks in ECB’s crisis moves,” published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970204542404577158753459542024.html?mod=WSJ_hp_LEFTWhatsNewsCollection), informs that the estimated debt of weakest euro zone sovereigns held by the ECB is €211 billion, with Greek debt in highest immediate default risk being only 17 percent of the total. Another unknown is whether there is high risk collateral in the €489 billion three-year loans to credit institutions at 1 percent interest rates. The potential risk is the need for recapitalization of the ECB that could find similar political hurdles as the bailout fund EFSF. There is a recurring issue of whether the ECB should accept a haircut on its portfolio of Greek bonds of €40 billion acquired at discounts from face value. An article on “Haircut for the ECB? Not so fast,” published by the Wall Street Journal on Jan 28, 2012 (http://blogs.wsj.com/davos/2012/01/28/haircut-for-the-ecb-not-so-fast/), informs of the remarks by Mark Carney, Governor of the Bank of Canada and President of the Financial Stability Board (FSB) (http://www.financialstabilityboard.org/about/overview.htm), expressing what appears to be correct doctrine that there could conceivably be haircuts for official debt but that such a decision should be taken by governments and not by central banks.

Table III-2, Consolidated Financial Statement of the Eurosystem, Million EUR

	Dec 31, 2010	Dec 28, 2011	Apr 27, 2012
1 Gold and other Receivables	367,402	419,822	432,705
2 Claims on Non Euro Area Residents Denominated in Foreign Currency	223,995	236,826	241,240
3 Claims on Euro Area Residents Denominated in Foreign Currency	26,941	95,355	52,449
4 Claims on Non-Euro Area Residents Denominated in Euro	22,592	25,982	20,271
5 Lending to Euro Area Credit Institutions Related to Monetary Policy Operations Denominated in Euro	546,747	879,130	1,139,372
6 Other Claims on Euro Area Credit Institutions Denominated in Euro	45,654	94,989	184,738
7 Securities of Euro Area Residents Denominated in Euro	457,427	610,629	608,287
8 General Government Debt Denominated in Euro	34,954	33,928	31,131
9 Other Assets	278,719	336,574	251,910
TOTAL ASSETS	2,004, 432	2,733,235	2,962,103
Memo Items
Sum of 5 and 7	1,004,174	1,489,759	1,747,659
Capital and Reserves	78,143	81,481	85,532

Source: European Central Bank

http://www.ecb.int/press/pr/wfs/2011/html/fs110105.en.html

http://www.ecb.int/press/pr/wfs/2011/html/fs111228.en.html

http://www.ecb.int/press/pr/wfs/2012/html/fs120502.en.html

Professors Ricardo Caballero and Francesco Giavazzi (2012Jan15) find that the resolution of the European sovereign crisis with survival of the euro area would require success in the restructuring of Italy. That success would be assured with growth of the Italian economy. A critical problem is that the common euro currency prevents Italy from devaluing the exchange rate to parity or the exchange rate that would permit export growth to promote internal economic activity, which could generate fiscal revenues for primary fiscal surplus that ensure creditworthiness. Fiscal consolidation and restructuring are important but of long-term gestation. Immediate growth of the Italian economy would consolidate the resolution of the sovereign debt crisis. Caballero and Giavazzi (2012Jan15) argue that 55 percent of the exports of Italy are to countries outside the euro area such that devaluation of 15 percent would be effective in increasing export revenue. Newly available data in Table III-3 providing Italy’s trade with regions and countries supports the argument of Caballero and Giavazzi (2012Jan15). Italy’s exports to the European Monetary Union (EMU) are only 42.7 percent of the total. Exports to the non-European Union area are growing at 11.8 percent in Feb 2012 relative to Feb 2011 while those to EMU are growing at 3.5 percent.

Table III-3, Italy, Exports and Imports by Regions and Countries, % Share and 12-Month ∆%

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

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

Table III-4 provides Italy’s trade balance by regions and countries. Italy had trade deficit of €493 million with the 17 countries of the euro zone (EMU 17) in Feb and €535 million in Jan-Feb. Depreciation to parity could permit greater competitiveness in improving the trade surpluses of €699 million in Jan-Feb with Europe non European Union and of €1093 million with the US. There is significant rigidity in the trade deficits in Jan-Feb of €3209 million with China and €4472 million with members of the Organization of Petroleum Exporting Countries (OPEC).

Table III-4, Italy, Trade Balance by Regions and Countries, Millions of Euro

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

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

Growth rates of Italy’s trade and major products are provided in Table III-5 for the period Feb 2012 relative to Feb 2011. Growth rates are high for the total and all segments of exports. Imports of nondurable goods increased 3.8 percent and imports of energy increased 29.7 percent driven by carry trades into commodities futures. The higher rate of growth of exports of 7.3 percent relative to imports of 0.8 percent may reflect weak demand in Italy.

Table III-5, Italy, Exports and Imports % Share of Products in Total and ∆%

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

Table III-6 provides Italy’s trade balance by product categories in Feb 2012 and cumulative Jan-Feb 2012. Italy’s trade balance excluding energy generated surplus of €6475 million in Feb 2012 but the energy trade balance created deficit of €11,934 million. The overall deficit was €5459 million. Italy has significant competitiveness in various economic activities in contrast with some other countries with debt difficulties.

Table III-6, Italy, Trade Balance by Product Categories, € Millions

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