World Financial Turbulence, Global Economic Slowdown and United States Housing: Part II

 

World Financial Turbulence, Global Economic Slowdown and United States Housing

Carlos M. Pelaez

© Carlos M. Pelaez, 2010, 2011, 2012

Executive Summary

I United States Housing Collapse

IA United States New House Sales

II United States House Prices

IIA United States House Prices

IIB Factors of US Housing Collapse

III World Financial Turbulence

IIIA Financial Risks

IIIB Appendix on Safe Haven Currencies

IIIC Appendix on Fiscal Compact

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

IIIE Appendix Euro Zone Survival Risk

IIIF Appendix on Sovereign Bond Valuation

IIIG Appendix on Deficit Financing of Growth and the Debt Crisis

IIIGA Monetary Policy with Deficit Financing of Economic Growth

IIIGB Adjustment during the Debt Crisis of the 1980s

IV Global Inflation

V World Economic Slowdown

VA United States

VB Japan

VC China

VD Euro Area

VE Germany

VF France

VG Italy

VH United Kingdom

VI Valuation of Risk Financial Assets

VII Economic Indicators

VIII Interest Rates

IX Conclusion

References

Appendix I The Great Inflation

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

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

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

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

Source: IMF World Economic Outlook databank

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

The JP Morgan Global All-Industry Output Index of the JP Morgan Manufacturing and Services PMI^™, produced by JP Morgan and Markit in association with ISM and IFPSM, with high association with world GDP, fell from 55.4 in Mar to 52.2 in Apr, which is the lowest reading in three months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9544). Sharp deceleration in services offset stronger manufacturing. David Hensley, Director of Global Economic Coordination at JP Morgan, finds that the PMI data suggest world GDP growth easing into the middle of 2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9544). The JP Morgan Global Manufacturing PMI^™, produced by JP Morgan and Markit in association with ISM and IFPSM, improved marginally at 51.4 in Apr relative to 51.1 in Mar, for a fifth consecutive month of increase above the borderline of 50 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9520). Higher oil and transportation prices were contributing to higher costs of inputs. David Hensley, Director of Global Economics Coordination at JPMorgan, finds that the global PMI^™ finds consistency of the index with global manufacturing growth at annual equivalent 2.5 percent (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9520).

The HSBC Brazil Services PMI^™ with Composite PMI data, compiled by Markit, fell marginally from 53.4 in Mar to 52.7 in Apr, suggesting sound activity of the private sector (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9533). Andre Loes, Chief Economist, Brazil, at HSBC, finds that the HSBC Services PMI increased to 54.4 in Apr relative to 53.8 in Feb, but expansion of services in the Brazilian economist has continued during 33 consecutive months even at a lower reading than 55.3 in IQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9394). There is continuing strength in other indicators of the services sector. The HSBC Brazil Purchasing Managers’ Index^TM (PMI^™) fell slightly from 51.1 in Mar to 49.3 in Apr, indicating modest business conditions in Brazilian manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9496). Andre Loes, Chief Economist, Brazil at HSBC, finds broad weakness in the index with all segments below the borderline of contraction at 50 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9496 ).

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

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

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

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

Source: IMF World Economic Outlook databank http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/weoselgr.aspx

Table V-3 provides the latest available estimates of GDP for the regions and countries followed in this blog. Growth is weak throughout most of the world. Japan’s GDP increased 1.0 percent in IQ2012 and 2.7 percent relative to a year earlier but part of the jump could be the low level a year earlier because of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Japan is experiencing difficulties with the overvalued yen because of worldwide capital flight originating in zero interest rates with risk aversion in an environment of softer growth of world trade. China grew at 1.8 percent in IQ2012, which annualizes to 7.4 percent. Xinhuanet informs that Premier Wen Jiabao considers the need for macroeconomic stimulus, arguing that “we should continue to implement proactive fiscal policy and a prudent monetary policy, while giving more priority to maintaining growth” (http://news.xinhuanet.com/english/china/2012-05/20/c_131599662.htm). Premier Wen elaborates that “the country should properly handle the relationship between maintaining growth, adjusting economic structures and managing inflationary expectations” (http://news.xinhuanet.com/english/china/2012-05/20/c_131599662.htm). GDP was flat in the euro area in IQ2012 and relative to a year earlier. Germany’s GDP increased 0.5 percent in IQ2012 and 1.7 percent relative to a year earlier. US GDP increased 0.4 percent in IQ2012 and 2.1 percent relative to a year earlier (http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-growth-with-high-unemployment.html) but with substantial underemployment and underemployment (http://cmpassocregulationblog.blogspot.com/2012/05/recovery-without-jobs-twenty-eight.html) and weak hiring (http://cmpassocregulationblog.blogspot.com/2012/05/recovery-without-hiring-ten-million.html).

Table V-3, Percentage Changes of GDP Quarter on Prior Quarter and on Same Quarter Year Earlier, ∆%

	IQ2012/IVQ2011	IQ2012/IQ2011
United States	0.4	2.1
Japan	1.0	2.7
China	1.8	8.1
Euro Area	0.0	0.0
Germany	0.5	1.7
France	0.0	0.0
Italy	-0.8	-1.3
United Kingdom	-0.3	-0.1

Source: Country Statistical Agencies

http://www.bea.gov/national/index.htm#gdp http://www.esri.cao.go.jp/en/sna/sokuhou/sokuhou_top.html http://www.stats.gov.cn/enGliSH/ http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/ https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html http://www.insee.fr/en/ http://www.istat.it/en/ http://www.ons.gov.uk/ons/rel/naa2/second-estimate-of-gdp/q1-2012/index.html

VA United States. The Markit Flash US Manufacturing Purchasing Managers’ Index^™ (PMI^™) seasonally adjusted declined from 56.0 in Apr to 53.9 in May, indicating strong conditions in US manufacturing but at the lowest pace in three months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9571). Chris Williamson, Chief Economist at Markit, finds that weaker growth could originate in slower growth in China and Europe (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9571). Table USA provides the data table for the US.

Table USA, US Economic Indicators

Consumer Price Index	Apr 12 months NSA ∆%: 2.3; ex food and energy ∆%: 2.3 Apr month ∆%: 0.0; ex food and energy ∆%: 0.2 Blog 5/20/12
Producer Price Index	Apr 12-month NSA ∆%: 1.9; ex food and energy ∆% 2.7 Apr month SA ∆% = -0.2; ex food and energy ∆%: 0.2 Blog 5/13/12 5/20/12
PCE Inflation	Mar 12-month NSA ∆%: headline 2.1; ex food and energy ∆% 2.0 Blog 5/6/12
Employment Situation	Household Survey: Apr Unemployment Rate SA 8.1% Blog calculation People in Job Stress Apr: 27.8 million NSA Establishment Survey: Apr Nonfarm Jobs +115,000; Private +130,000 jobs created  Mar 12-month Average Hourly Earnings Inflation Adjusted ∆%: minus 0.5% Blog 5/6/12
Nonfarm Hiring	Nonfarm Hiring fell from 69.4 million in 2004 to 50.1 million in 2011 or by 19.3 million Private-Sector Hiring Mar 2012 3.900 million lower by 0.873 million than 4.773 million in Mar 2006 Blog 5/13/12
GDP Growth	BEA Revised National Income Accounts back to 2003 IQ2011 SAAR ∆%: 0.4 IIQ2011 SAAR ∆%: 1.3 IIIQ2011 SAAR ∆%: 1.8 IVQ2011 ∆%: 3.0 IQ2012 SAAR ∆%: 2.2 IQ2012/IQ2011 ∆%: 2.1 Blog 4/29/12
Personal Income and Consumption	Mar month ∆% SA Real Disposable Personal Income (RDPI) Mar month SA ∆% minus 0.2 Real Personal Consumption Expenditures (RPCE): 0.1 12-month NSA ∆%: RDPI: 0.6; RPCE ∆%: 1.2 Blog 5/6/2012
Quarterly Services Report	IVQ11/IIIQ11 SA ∆%: Information 0.6 Professional 1.7 Administrative -1.1 Hospitals 3.5 Blog 03/11/12
Employment Cost Index	IQ2012 SA ∆%: 0.4 Mar 12 months ∆%: 1.9 Blog 4/29/12
Industrial Production	Apr month SA ∆%: 1.1 Apr 12 months SA ∆%: 5.2 Manufacturing Apr SA ∆% 0.6 Apr 12 months SA ∆% 5.8, NSA 5.6 Capacity Utilization: 79.2 Blog 5/20/12
Productivity and Costs	Nonfarm Business Productivity IQ2012∆% SAAE -0.5; IQ2012/IQ2011 ∆% 0.5; Unit Labor Costs SAAE IQ2012 ∆% 2.0; IQ2012/IQ2011 ∆%: 2.1 Blog 5/6/2012
New York Fed Manufacturing Index	General Business Conditions From Apr 6.56 to May 17.09 New Orders: From Apr 6.84 to May 8.32 Blog 5/20/12
Philadelphia Fed Business Outlook Index	General Index from Apr 8.5 to May minus 5.8 New Orders from Apr 2.7 to May minus 1.2 Blog 5/20/12
Manufacturing Shipments and Orders	Mar New Orders SA ∆%: -1.5; ex transport ∆%: 0.0 Jan-Mar New Orders NSA ∆%: 7.8; ex transport ∆% 7.3 Blog 5/6/12
Durable Goods	Apr New Orders SA ∆%: 0.2; ex transport ∆%: minus 0.6 Jan-Apr 12/Jan-Apr 11 NSA New Orders ∆%: 8.6; ex transport ∆% : 8.3 Blog 5/27/12
Sales of New Motor Vehicles	Apr 2012 4,651,943; Apr 2011 4,217,599. Apr SAAR 14.4 million, Mar SAAR 14/37 million, Mar 2011 SAAR 13.17 million Blog 5/6/12
Sales of Merchant Wholesalers	Jan-Mar 2012/Jan-Mar 2011 NSA ∆%: Total 9.0; Durable Goods: 11.2; Nondurable Goods 7.3 Blog 5/13/12
Sales and Inventories of Manufacturers, Retailers and Merchant Wholesalers	Mar 12/Mar 11 NSA ∆%: Sales Total Business 4.9; Manufacturers 4.1 Retailers 7.2; Merchant Wholesalers 3.9 Blog 5/20/12
Sales for Retail and Food Services	Jan-Apr 2012/Jan-Apr 2011 ∆%: Retail and Food Services 7.2; Retail ∆% 7.0 Blog 5/20/12
Value of Construction Put in Place	Mar SAAR month SA ∆%: minus 0.1 Mar 12-month NSA: 5.4 Blog 5/6/12
Case-Shiller Home Prices	Feb 2012/Feb 2011 ∆% NSA: 10 Cities minus 3.6; 20 Cities: minus 3.5 ∆% Feb SA: 10 Cities 0.1 ; 20 Cities: 0.2 Blog 4/29/12
FHFA House Price Index Purchases Only	Mar SA ∆% 1.8; 12 month ∆%: 2.7 Blog 5/27/12
New House Sales	Apr 2012 month SAAR ∆%: +3.3 Jan-Apr 2012/Jan-Apr 2011 NSA ∆%: 15.8 Blog 5/27/12
Housing Starts and Permits	Apr Starts month SA ∆%: 2.6; Permits ∆%: minus 7.0 Jan-Apr 2012/Jan-Apr 2011 NSA ∆% Starts 25.2; Permits  ∆% 29.6 Blog 5/20/12
Trade Balance	Balance Mar SA -$51,825 million versus Feb -$45,416 million Exports Mar SA ∆%: 2.9 Imports Mar SA ∆%: 5.2 Goods Exports Jan-Mar 2012/2011 NSA ∆%: 8.6 Goods Imports Jan-Mar 2011/2011 NSA ∆%: 8.6 Blog 5/13/12
Export and Import Prices	Apr 12-month NSA ∆%: Imports 0.5; Exports 0.7 Blog 5/13/12
Consumer Credit	Mar ∆% annual rate: 10.2 Blog 5/13/12
Net Foreign Purchases of Long-term Treasury Securities	Mar Net Foreign Purchases of Long-term Treasury Securities: $36.2 billion Major Holders of Treasury Securities: China $1170 billion; Japan $1083 billion; Total Foreign US Treasury Holdings Mar $5118 billion Blog 5/20/12
Treasury Budget	Fiscal Year Oct-Apr 2012/2011 ∆%: Receipts 5.6; Outlays -3.5; Individual Income Taxes 5.0 Deficit Fiscal Year 2011 $1,296 billion Deficit Fiscal Year 2012 Oct-Apr $719,859 million Blog 03/18/12 CBO Forecast 2012FY Deficit $1.079 trillion Blog 5/13/2012
Flow of Funds	IVQ2011 ∆ since 2007 Assets -$7315B Real estate -$5183B Financial -$2507 Net Worth -$6743 Blog 03/11/12
Current Account Balance of Payments	IVQ2011 -$124B %GDP 3.2 Blog 03/18/12

Links to blog comments in Table USA:

5/20/12 http://cmpassocregulationblog.blogspot.com/2012/05/world-inflation-waves-monetary-policy_20.html

5/13/12 http://cmpassocregulationblog.blogspot.com/2012/05/recovery-without-hiring-ten-million_13.html

5/6/12 http://cmpassocregulationblog.blogspot.com/2012/05/recovery-without-jobs-twenty-eight_06.html

4/29/12 http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-growth-with-high-unemployment_29.html

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

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

Manufacturers’ shipments of durable goods increased 0.7 percent after increasing 1.0 percent in Mar following decline of 0.5 percent in Feb. New orders increased 0.2 percent in Apr after falling -4.2 in Mar following increase of 2.0 percent in Feb, as shown in Table VA-1. These data are very volatile. Volatility is illustrated by decrease of 46.6 percent of nondefense aircraft in Mar and increases of 7.2 percent in Apr and 2.7 percent in Feb. New orders excluding transportation equipment fell 0.3 percent in Apr following decline of 0.8 percent in Mar. Capital goods new orders, indicating investment, fell 2.5 percent in Apr after falling 10.6 percent in Mar and increasing 3.1 percent in Feb. New orders of nondefense capital goods dropped 0.2 percent in Apr following decline of 12.1 percent in Mar. Excluding more volatile aircraft, capital goods orders decreased 1.9 percent in Apr and fell 2.2 percent in Mar. At the margin, there appears to be weakness in durable goods new orders.

Table VA-1, US, Durable Goods Value of Manufacturers’ Shipments and New Orders, SA, Month ∆%

	Apr 2012 ∆%	Mar 2012  ∆%	Feb 2012  ∆%
Total
S	0.7	1.0	-0.5
NO	0.2	-3.7	2.0
Excluding Transport
S	-0.3	0.4	0.4
NO	-0.6	-0.8	1.8
Excluding Defense
S	1.1	0.6	-0.1
NO	1.2	-3.9	1.4
Machinery
S	-2.6	4.8	2.9
NO	-2.8	-4.9	5.8
Computers & Electronic Products
S	0.9	-2.5	0.9
NO	-0.6	-0.8	4,2
Computers
S	-1.5	-6.0	0.0
NO	-3.1	-3.7	0.4
Transport Equipment
S	3.1	2.3	-2.8
NO	2.1	-10.5	2.6
Motor Vehicles
S	5.8	1.9	-0.1
NO	5.6	1.7	0.4
Nondefense Aircraft
S	5.1	-2.7	-6.7
NO	7.2	-46.6	2.7
Capital Goods
S	-1.4	2.1	-0.5
NO	-2.5	-10.6	3.1
Nondefense Capital Goods
S	-0.5	1.3	0.3
NO	-0.2	-12.1	1.9
Capital Goods ex Aircraft
S	-1.4	1.9	1.4
NO	-1.9	-2.2	2.9

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

Source: US Census Bureau

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

Chart VA-1 of the US Census Bureau shows monthly changes in manufacturers’ new orders in the past 12 months. Trends are difficult to discern for these data because of the significant volatility.

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

Source: US Census Bureau

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

Additional perspective on manufacturers’ shipments and new orders is provided by Table VA-2. Values are cumulative millions of dollars in Jan-Apr 2012 not seasonally adjusted (NSA). Shipments of all manufacturing industries in Jan-Apr 2012 total $871.7 billion and new orders total $876.1 billion, growing respectively by 9.2 percent and 8.6 percent relative to the same period in 2011. Excluding transportation equipment, shipments grew 8.9 percent and new orders increased 8.3 percent. Excluding defense, shipments grew 10.3 percent and new orders grew 10.7 percent. Important information not in Table VA-2 is the large share of nondurable goods: with shipments of $3 trillion in 2011, growing by 14.0 percent, and new orders of $3 trillion, growing by 14.0 percent, in part driven by higher prices for food and energy. Durable goods were lower in value in 2011, with shipments of $2.4 trillion, growing by 7.9 percent, and new orders of $2.4 trillion, growing by 10.0 percent. Capital goods have relatively high value of $302.1 billion for shipments, growing 7.6 percent, and new orders $328.1 billion, growing 6.8 percent, which could be a favorable sign of future investment. Excluding aircraft, capital goods shipments reached $248.2 billion, growing by 8.8 percent, and new orders $262.1 billion, growing 7.8 percent. There is no suggestion in these data that the US economy is close to recession but performance at the margin is somewhat weaker without enough data to discern trends.

Table VA-2, US, Value of Manufacturers’ Shipments and New Orders, NSA, Millions of Dollars 

Jan-Apr 2012	Shipments	∆% 2012/ 2011	New Orders	∆% 2012/  2011
Total	871,735	9.2	876,135	8.6
Excluding Transport	625,347	8.9	620,500	8.3
Excluding Defense	830,723	10.3	833,167	10.7
Machinery	125,207	11.6	132,129	4.4
Computers & Electronic Products	108,142	-1.0	87,791	5.2
Computers & Related Products	10,409	0.3	10,378	0.8
Transport Equipment	246,388	10.1	255,635	9.2
Motor Vehicles	169,617	11.6	169,438	11.5
Nondefense Aircraft	34,781	25.6	45,796	41.8
Capital Goods	302,104	7.6	328,088	6.8
Nondefense Capital Goods	270,197	10.9	294,658	12.5
Capital Goods ex Aircraft	248,155	8.8	262,109	7.8

Note: Transport: transportation

Source: US Census Bureau

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

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

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

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

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

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

Source: Policy Board, Bank of Japan

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

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

Private-sector activity in Japan expanded at lower pace with the Markit Composite Output PMI^™ Index declining from 53.2 in Mar to 51.3 in Apr (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9477). Alex Hamilton, economist at Markit and author of the report, finds softer conditions in Japan relative to Mar (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9477). The Markit Business Activity Index of Services decreased from 53.7 in Mar to 51.0 in Apr, also showing slower pace (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9477). The Markit/JMMA Purchasing Managers’ Index^™, seasonally adjusted, fell from 51.1 in Mar to 50.7 in Apr, for the highest reading in seven months, indicating marginal improvement in manufacturing in Japan (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9457). Alex Hamilton, economist at Markit and author of the report, finds that investment goods drove the recovery and that new orders registered strong growth but that foreign demand and yen overvaluation are important risk of continuing improvement (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9457). Table JPY provides the country data table for Japan.

Table JPY, Japan, Economic Indicators

Historical GDP and CPI	1981-2010 Real GDP Growth and CPI Inflation 1981-2010 Blog 7/31/11
Corporate Goods Prices	Apr ∆% 0.3 12 months ∆% minus 0.2 Blog 5/20/12
Consumer Price Index	Apr NSA ∆% 0.1 Apr 12 months NSA ∆% 0.4 Blog 5/27/12
Real GDP Growth	IQ2012 ∆%: 1.0 on IVQ2011;  IQ2012 SAAR 4.1; ∆% from quarter a year earlier: 2.7 % Blog 5/20/12
Employment Report	Mar Unemployed 3.07 million Change in unemployed since last year: minus 150 thousand Unemployment rate: 4.5% Blog 4/29/12
All Industry Indices	Mar month SA ∆% minus 0.3 12-month NSA ∆% 5.5 Blog 5/27/12
Industrial Production	Mar SA month ∆%: 1.0 12-month NSA ∆% 13.9 Blog 4/29/12
Machine Orders	Total Mar ∆% 4.1 Private ∆%: -4.3 Mar ∆% Excluding Volatile Orders -2.8 Blog 5/20/12
Tertiary Index	Mar month SA ∆% -0.6 Mar 12 months NSA ∆% 4.2 Blog 5/20/12
Wholesale and Retail Sales	Mar 12 months: Total ∆%: +3.0 Wholesale ∆%: +0.5 Retail ∆%: +10.3 Blog 4/29/12
Family Income and Expenditure Survey	Mar 12-month ∆% total nominal consumption 4.1, real 3.4 Blog 4/29/12
Trade Balance	Exports Apr 12 months ∆%: +7.9 Imports Apr 12 months ∆% +8.0 Blog 5/27/12

Links to blog comments in Table JPY:

5/20/12 http://cmpassocregulationblog.blogspot.com/2012/05/world-inflation-waves-monetary-policy_20.html

4/29/12 http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-growth-with-high-unemployment_29.html

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

The indices of all industry activity of Japan, which is an approximation of GDP or economic activity, fell to levels close to the worst point of the recession, showing the brutal impact of the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. Table VB-1 with the latest revisions shows the quarterly index which permits comparison with the movement of real GDP. The first row provides weights of the various components of the index: AG (agriculture) 1.4 percent (not shown), CON (construction) 5.7 percent, IND (industrial production) 18.3 percent, TERT (services) 63.2 percent, and GOVT (government) 11.4 percent. GDP increased 1.0 in IQ2012 (http://cmpassocregulationblog.blogspot.com/), industry increased 1.3 percent, the tertiary sector was unchanged, government increased 0.1 percent and construction increased 5.9 percent. The report shows that the all industry index decreased 0.1 percent in IQ2012. Industry contributed 0.23 percentage points to growth of the all industry index and the tertiary index contributed 0.00 percentage points. Japan had already experienced a very weak quarter in IVQ2010 with decline of the all industry index of 0.2 percent and revised unchanged GDP when it was unexpectedly hit by the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. The worst impact of the natural disaster was on construction with drop of 7.5 percent in IIQ2011 relative to IQ2011 but recovery at 3.3 percent in IIIQ2011. Industrial production fell 4.2 percent from IQ2011 into IIQ2011 but grew 5.4 percent in IIIQ2011. Many accounts had already been closed when the earthquake occurred, but there is visible decline of the index of all industry by 1.3 percent in IQ2011 caused by decline of industrial production by 1.5 percent and services by 1.0 percent with GDP falling revised 2.0 percent.

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

	CON	IND	TERT	GOVT	ALL IND	REAL GDP
Weight %	5.7	18.3	63.2	11.4	100.0
2012
IQ	5.9	1.3	0.0	0.1	-0.1	1.0
Cont to IVQ % Change	0.26	0.23	0.00	0.01
2011
IVQ	-1.5	0.4	0.5	0.2	0.5	0.0
IIIQ	3.3	5.4	1.5	0.2	2.1	1.9
IIQ	-7.5	-4.2	-0.5	0.1	-0.9	-0.3
IQ	3.2	-1.5	-1.0	-0.2	-1.3	-2.0
2010
IV Q	-1.8	-0.1	0.3	-0.3	-0.2	0.0

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

Source: http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201203j.pdf

There are more details in Table VB-2. The all industry activity index decreased 0.3 percent in Mar 2012 relative to Feb 2012 with decline of 0.6 percent of the tertiary or services sector and increase of industry of 1.3 percent while construction fell 5.1 percent and government was unchanged. Industry contributed 0.23 percentage points to growth in Mar while the tertiary sector deducted 0.40 percentage points and construction deducted 0.25 percentage points. Weakness in Sep and Aug had interrupted the sharp recovery from Apr to Jul with renewed strength in Oct but weakness again in Nov followed by strong rebound in Dec that was interrupted in Jan and Feb. The highest risk to Japan is if weakening world growth would affect Japanese exports.

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

	CON	IND	TERT	GOVT	ALL IND
Mar 2012	-5.1	1.3	-0.6	0.0	-0.3
Cont to Mar % Change	-0.25	0.23	-0.40	0.0
Feb	4.2	-1.6	0.0	-0.5	-0.1
Jan	5.6	0.9	-0.6	0.5	-0.7
Dec 2011	-1.4	2.3	1.6	-0.2	1.7
Nov	0.3	-1.7	-0.8	0.1	-0.9
Oct	-2.6	1.8	0.6	0.1	0.6
Sep	1.6	-1.9	-0.2	0.2	-0.1
Aug	1.1	0.9	0.1	-0.1	0.2
Jul	0.1	1.1	0.4	-0.2	0.5
Jun	-0.1	3.8	1.2	0.2	1.5
May	6.5	5.8	0.9	0.7	1.6
Apr	-5.1	2.4	2.1	-0.9	2.0
Mar	-10.6	-16.2	-5.4	0.7	-6.6
Feb	2.3	1.1	0.3	0.0	0.1
Jan	6.3	1.2	0.5	-0.5	0.6
Dec 2010	-0.5	2.4	-0.2	0.3	0.1
Nov	-1.4	1.6	0.6	-0.4	0.3
Oct	0.1	-1.4	0.2	-0.1	0.0
Sep	-1.9	-0.8	-0.4	-0.1	-0.4
Aug	1.6	-0.1	0.1	0.1	-0.5
Jul	0.8	0.3	0.7	0.1	1.1
Jun	-2.1	-1.5	0.1	-0.1	0.2
May	6.3	-0.1	-0.3	0.0	0.0
Apr	-3.1	0.6	1.6	-0.2	0.9

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

Source: http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201203j.pdf

Percentage changes from a year earlier in calendar years and relative to the same quarter a year earlier are provided in Table VB-3. The first row shows that services contribute 63.2 percent of the total index and industry contributes 18.3 percent for joint contribution of 81.5 percent. The fall of industrial production in 2009 was by a catastrophic 21.9 percent. Japan emerged from the crisis with industrial growth of 16.4 percent in 2010. Quarterly data show that industry is the most dynamic sector of the Japanese economy. The all-industry index fell 0.6 percent in 2011, almost equal to the revised decline of 0.7 percent in GDP. Industry fell 2.3 percent, deducting 0.43 percentage points, while the tertiary sector increased 0.1 percent, adding 0.07 percentage points. The Tōhoku or Great East Earthquake and Tsunami of Mar 11, 201, declining world trade and revaluation of the yen in fear of world financial risks interrupted the recovery of the Japanese economy from the global recession.

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

	CON	IND	TERT	GOVT	ALL IND	REAL GDP
Weight %	5.7	18.3	63.2	11.4	100.0
Calendar Year
2011	-2.0	-2.3	0.1	-0.2	-0.6	-0.7
Cont to 2011 % Change	-0.09	-0.43	0.07	-0.02
2010	-7.0	16.4	1.3	-0.7	3.1	4.4
2009	-5.6	-21.9	-5.2	0.1	-7.7	-5.5
2008	-7.6	-3.4	-1.0	-1.4	-1.9	-1.0
2012
IQ	-0.1	4.8	2.4	0.1	2.4	2.7
Cont to IQ % Change	-0.01	0.84	1.56	0.01
2011
IVQ	-2.8	-1.6	0.6	0.6	0.0	-0.5
IIIQ	-3.2	-0.9	0.3	-0.1	-0.1	-0.4
IIQ	-5.1	-5.8	-0.5	-0.4	-1.6	-1.7
IQ	2.3	-1.3	-0.3	-1.0	-0.5	-0.2
2010
IV Q	-0.6	5.9	1.6	-0.8	2.1	3.1
III Q	-3.2	14.0	1.8	-0.6	3.2	5.5
IIQ	-11.3	21.3	1.4	-0.7	3.5	4.4
IQ	-12.4	28.0	0.8	-0.5	3.9	4.9

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

Source: http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201203j.pdf

Percentage changes of a month relative to the same month a year earlier for the indices of all industry activity of Japan are shown in Table VB-4. The all industry activity index increased 5.5 percent in Mar 2012 relative to Mar 2011, jumping from the low level caused by the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 201. Industry increased 14.2 percent in Mar 2012 relative to a year earlier, adding 2.39 percentage points to growth of the all industry activity index. The tertiary sector increased 4.2 percent, adding 2.80 percentage points. Construction added 0.21 percentage points to the index and government added 0.07 percentage points.

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

	CON	IND	TERT	GOVT	ALL IND
Mar 2012	4.3	14.2	4.2	0.6	5.5
Cont to Jan % Change	0.21	2.39	2.80	0.07
Feb	-1.6	1.5	2.4	-0.8	1.6
Jan	-3.4	-1.6	0.4	0.4	-0.1
Dec 2011	-3.0	-3.0	1.2	0.8	0.2
Nov	-1.2	-2.9	-0.3	0.8	-0.7
Oct	-4.0	0.9	0.9	0.2	0.5
Sep	-0.4	-2.4	0.1	0.1	-0.3
Aug	-4.3	1.6	0.8	-1.1	0.4
Jul	-4.8	-1.7	0.1	0.5	-0.4
Jun	-4.6	-0.6	1.0	0.3	0.4
May	-6.5	-4.6	-0.2	-0.8	-1.3
Apr	-4.1	-12.7	-2.3	-0.6	-4.0
Mar	-2.8	-12.4	-3.4	0.0	-4.6
Feb	4.4	4.5	2.0	-1.4	2.1
Jan	5.9	6.1	1.0	-1.4	1.8
Dec 2010	-0.5	5.9	1.8	-0.7	2.1
Nov	-0.5	7.0	2.5	-1.9	2.7
Oct	-1.1	5.0	0.5	0.3	1.3
Sep	-2.8	12.1	1.3	-0.6	2.7
Aug	-1.7	15.5	2.3	-1.1	3.8
Jul	-5.3	14.6	1.6	-0.1	3.3
Jun	-8.3	16.6	1.0	-0.7	3.0
May	-8.1	20.7	1.2	-0.9	3.4
Apr	-17.0	27.0	1.9	-0.4	-

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

Source: http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201203j.pdf

The structure of exports and imports of Japan is in Table VB-4. Japan imports all types of raw materials and fuels at rapidly increasing prices caused by the carry trade from zero interest rates to commodities. Mineral fuels account for 36.9 percent of Japan’s imports and increased 24.6 percent in the 12 months ending in Apr. Weakness of world demand depresses prices of industrial goods. Manufactured products contribute 13.3 percent of Japan’s exports with decline of 5.2 percent in the 12 months ending in Apr. Machinery contributes 20.6 percent of Japan’s exports with decrease of 2.4 percent in the 12 months ending in Apr. Electrical machinery contributes 17.1 percent of Japan’s exports with decrease of 2.4 percent in the 12 months ending in Apr. The best outcome is transport equipment with share of 24.8 percent in total exports and increase of 81.9 percent in the 12 months ending in Apr largely because of the low level after the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011. The breakdown of transport equipment in Table VB-5 shows increase of the major categories of motor vehicles of 219.7 percent: cars increased 219.6 percent with strong growth of 220.3 percent in the minor category of buses and trucks, increase of 17.6 percent for parts of motor vehicles, increase of 26.7 percent for motorcycles and decline of 0.1 percent for ships. The result of rising commodity prices and stable or declining prices of industrial products is pressure on Japan’s terms of trade.

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

Apr 2012	Value JPY Millions	% of Total	12 Months ∆%	Contribution Degree %
Exports	5,565,500	100.0	7.9	7.9
Foodstuffs	31,039	0.6	9.8	0.1
Raw Materials	91,466	1.6	12.0	0.2
Mineral Fuels	83,249	1.5	50.5	0.5
Chemicals	560,052	10.1	-16.1	-2.1
Manufactured Goods	723,199	13.0	-5.2	-0.8
Machinery	1,145,335	20.6	-2.4	-0.5
Electrical Machinery	952,956	17.1	-1.4	-0.3
Transport Equipment	1,378,964	24.8	81.9	12.0
Motor Vehicles	816,010	14.7	219.7	10.9
Cars	687,048	12.3	219.6	9.2
Buses & Trucks	118,100	2.1	220.3	1.6
Parts of Motor Vehicles	286,575	5.1	17.6	0.8
Motorcycles	23,057	0.4	26.7	0.1
Ships	184,548	3.3	-0.1	0.0
Other	600,240	10.8	-9.5	-1.2
Imports	6,086,774	100.0	8.0	8.0
Foodstuffs	505,975	8.3	-7.3	-0.7
Raw Materials	393,990	6.5	-5.9	-0.4
Mineral Fuels	2,245,954	36.9	24.6	7.9
Chemicals	492,925	8.1	-6.5	-0.6
Manufactured Goods	463,336	7.6	-14.1	-1.4
Machinery	429,223	7.1	6.1	0.4
Electrical Machinery	644,649	10.6	13.6	1.4
Transport Equipment	190,691	3.1	40.3	1.0
Other	720,030	11.8	4.0	0.5

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

Table VB-5 provides Japan’s exports, imports and trade balance in five-year intervals from 1950 to 1975 and then yearly from 1979 to 2011. Exports grew at the average yearly rate of 3.7 percent while imports grew at 3.1 percent per year in the years from 1979 to 2010. The global recession had a brutal impact on Japan’s trade. Exports fell 35.5 percent from 2007 to 2009 while imports fell 29.6 percent. Japan had the first trade deficit in 2011 since 1980. The monthly trade deficit in Jan 2012 is the highest in history.

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

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

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

The geographical breakdown of exports by imports of Japan with selected regions and countries is provided in Table VB-6 for Apr 2012. The share of Asia in Japan’s trade is more than one half, 54.3 percent of exports and 41.9 percent of imports. Within Asia, exports to China are 17.9 percent of total exports and imports from China 20.9 percent of total imports. The second largest export market for Japan in Apr 2012 is the US with share of 17.2 percent of total exports and share of imports from the US of 8.8 percent in total imports. Western Europe has share of 10.6 percent in Japan’s exports and of 9.5 percent in imports. Deceleration of growth in China and the US and threat of recession in Europe can reduce world trade and economic activity.

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

Apr 2012	Exports Millions Yens	12 months ∆%	Imports Millions Yens	12 months ∆%
Total	5,566,500	7.9	6,086,774	8.0
Asia	3,022,935	-2.6	2,551,193	1.8
China	995,395	-7.1	1,269,607	7.5
USA	958,923	42.9	533,087	4.4
Canada	71,666	74.8	79,975	-11.4
Brazil	39,260	-1.2	78,599	33.6
Mexico	73,305	4.2	26,084	-4.7
Western Europe	589,303	-7.4	579,018	-2.9
Germany	146,299	-0.2	148,366	-7.2
France	52,473	13.8	84,907	-3.8
UK	88,183	-10.0	50,374	-6.5
Middle East	184,900	72.7	1,321,254	19.5
Australia	125,894	102.4	366,063	7.1

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

The geographical distribution of Japan’s trade balance is provided in Table VB-7. The combined trade surpluses with the US, UK, Mexico and Western Europe of JPY 521,151 million are largely erased by the trade deficits of importing raw materials and fuels from Australia and the Middle East, adding to JPY 1,376,523 million. China typically contributes a sizeable trade deficit of Japan with deficit of JPY 274,212 million in Apr 2012.

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

Apr 2012	Millions of Yen
Total	-520,274
Asia	471,742
China	-274,212
USA	425,836
Canada	-8,309
Brazil	-39,339
Mexico	47,221
Western Europe	10,285
Germany	-2,067
France	-32,434
UK	37,809
Middle East	-1,136,354
Australia	-240,169

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

VC China. China estimates an index of nonmanufacturing purchasing managers on the basis of a sample of 1200 nonmanufacturing enterprises across the country (http://www.stats.gov.cn/english/pressrelease/t20120507_402803684.htm). Table CIPMS provides this index and components from Jan to Apr 2012. Although the index fell from 58.0 in Mar to 56.1 in Apr, it is higher than in Jan and remains above the threshold of contraction of 50.0.

Table CIPMS, China, Nonmanufacturing Index of Purchasing Managers, %, Seasonally Adjusted

	Total Index	New Orders	Interm. Input Prices	Subs Prices	Exp
Apr	56.1	52.7	57.9	50.3	66.1
Mar	58.0	53.5	60.2	52.0	66.6
Feb	57.3	52.7	59.0	51.2	63.8
Jan	55.7	52.2	58.2	51.1	65.3

Notes: Interm.: Intermediate; Subs: Subscription; Exp: Business Expectations

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/pressrelease/t20120507_402803684.htm

Chart CIPMS provides the index from Apr 2011 to Apr 2012. There was slowing of the general index in Apr after the increase in Jan-Mar.

Chart CIPMS, China, Nonmanufacturing Index of Purchasing Managers, Seasonally Adjusted

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/pressrelease/t20120507_402803684.htm

China estimates a manufacturing index of purchasing managers on the basis of a sample of 820 enterprises (http://www.stats.gov.cn/english/pressrelease/t20120503_402802871.htm). Chart CIPMM provides the index from Apr 2011 to Apr 2012. There deceleration from 52.9 in Apr 2011 to marginal contraction at 49.0 in Nov 2011. Manufacturing activity recovered to 53.3 in Apr 2012.

Chart CIPMM, China, Manufacturing Index of Purchasing Managers, Seasonally Adjusted

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/pressrelease/t20120503_402802871.htm

There is slight deterioration in the HSBC Flash China Manufacturing Purchasing Managers’ Index^™ (PMI^™) compiled by Markit (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9563). The overall Flash China PMI^™ decreased from 49.3 in Apr to 48.7 in Apr for a two-month low, while the Flash China Manufacturing Output Index increased from 49.3 in Apr to 50.5 in May, at a seven-month high and above contraction territory. Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds that manufacturing in China weakened in May because of softness in exports (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9563). Multiple measures of increases in liquidity, public housing, investment in infrastructure and consumption could create the conditions for soft-landing in China.The HSBC China Services PMI^™, compiled by Markit, finds marginally improving business activity in China with the HSBC Composite Output, combining manufacturing and services, increasing from 49.9 in Mar to 51.4 in Apr (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9484). Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds that the economy of China will reach bottom in IIQ2012 because of improving conditions in services originating in new business together with moderate manufacturing conditions (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9484).The HSBC Purchasing Managers’ Index^™ (PMI^™), compiled by Markit, increased to 49.3 in Apr from 48.3 in Feb, in a six consecutive month of declining conditions in manufacturing in China but at a marginal rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9479). The index for the first quarter of 2012 was the weakest since IQ2009. Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds stabilization with likely bottom of growth of 8.1 percent growth of GDP in IQ2012 that may increase to 8.5 percent for the second half of 2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9479).

Wang Xiaotian, writing on China Daily, on “China cuts its reserve ratio again,” published by Xinhuanet on May 13, 2012 (http://news.xinhuanet.com/english/china/2012-05/13/c_131584252.htm), informs that the People’s Bank of China (PBC) (http://www.pbc.gov.cn/publish/english/963/index.html) reduced the reserve requirement imposed on Chinese lenders by 50 basis points with the objective of injecting liquidity to strengthen the economy. This is the second such reduction of reserve requirements in 2012. The reduction is estimated to release CNY 400 in China’s money market. The reserve requirement will be 20 percent for larger banks and 16.5 percent for smaller banks. The measures are intended to strengthen the economy.

Table CNY provides the country table for China.

Table CNY, China, Economic Indicators

Price Indexes for Industry	Apr 12-month ∆%: minus 0.7 Apr month ∆%: 0.2 Blog 5/13/12
Consumer Price Index	Apr month ∆%: -0.1 Apr 12 month ∆%: 3.4 Blog 5/13/12
Value Added of Industry	Mar month ∆%: 0.93 Jan-Apr 2012/Jan-Apr 2011 ∆%: 11.0 Blog 5/20/12
GDP Growth Rate	Year IQ2012 ∆%: 8.1 Quarter IQ2012 ∆%: 1.8 Blog 4/15/12
Investment in Fixed Assets	Total Jan-Apr 2012 ∆%: 20.2 Real estate development: 18.7 Blog 5/20/12
Retail Sales	Apr month ∆%: 1.1 Apr 12 month ∆%: 14.1 Jan-Apr ∆%: 14.7 Blog 5/20/12
Trade Balance	Apr balance $18.42 billion Exports ∆% 4.9 Imports ∆% 0.3 Cumulative Apr: $19.3 billion Blog 5/13/12

Links to blog comments in Table CNY:

5/20/12 http://cmpassocregulationblog.blogspot.com/2012/05/world-inflation-waves-monetary-policy_20.html

5/13/12 http://cmpassocregulationblog.blogspot.com/2012/05/recovery-without-hiring-ten-million_13.html

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

VD Euro Area. Table VD-EUR provides inflation, unemployment and real GDP growth in the euro area yearly from 1999 to 2011 together with growth forecasts of EUROSTAT for 2012 and 2013. Inflation in the euro zone remained subdued around 2 percent in the first five years of the euro zone from 1999 to 2004, as shown in Table VD-EUR. Inflation climbed above 2.0 percent after 2005, peaking at 3.3 percent in 2008 with the surge in commodity prices but falling to 0.3 percent in 2009 with the collapse of commodity prices. Inflation climbed back to 1.6 percent in 2010 and 2.7 percent in 2011. Under the regime of zero interest rates inflation returns worldwide during relaxation of risk aversion. The rate of unemployment increased in 2011 while the rate of GDP growth fell. EUROSTAT forecasts slightly negative growth of 0.3 percent in 2012 and growth of 1.0 percent in 2013.

Table VD-EUR, Euro Area, Yearly Percentage Change of Harmonized Index of Consumer Prices, and GDP ∆% and Unemployment Rate

Year	HICP ∆%	Unemployment %	GDP ∆%
1999	1.2	9.6	2.9
2000	2.2	8.7	3.8
2001	2.4	8.1	2.0
2002	2.3	8.5	0.9
2003	2.1	9.0	0.7
2004	2.2	9.3	2.2
2005	2.2	9.2	1.7
2006	2.2	8.5	3.3
2007	2.1	7.6	3.0
2008	3.3	7.6	0.4
2009	0.3	9.6	-4.3
2010	1.6	10.1	1.9
2011	2.7	10.2	1.5
2012*			-0.3
2013*			1.0

*EUROSTAT forecast

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

The Flash Eurozone PMI Composite Output Index of the Markit Flash Eurozone PMI^®, combining activity in manufacturing and services, fell from 46.7 in Apr to 45.9 in May, for a 35-month low and the eighth decline in the past nine months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9564). Chris Williamson, Chief Economist at Markit, finds that GDP could be falling at the rate of 0.5 percent in the euro area, with weaker conditions in the indebted countries spreading to France and Germany (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9564). The Markit Eurozone PMI^® Composite Output Index, combining services and manufacturing activity with close association with GDP, fell from 49.1 in Mar to 46.7 in Apr (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9542) in one of the deepest contractions since the middle of 2009. Chris Williamson, Chief Economist at Markit, finds that the data are consistent with decline of GDP at a quarterly rate of 0.5 percent in Apr, which could result in the third consecutive quarterly contraction of euro area GDP (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9542). The economy of the euro area may have fallen in a technical recession with two consecutive quarters of contraction. The Markit Eurozone Manufacturing PMI^® declined close to a three-year low at 45.9 in Apr from 47.7 in Mar (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9460). Chris Williamson, Chief Economist at Markit, finds that output in the euro area in Apr declined at a quarterly rate in excess of 2.2 percent (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9460). Table EUR provides the economic indicators for the euro area. Table EUR provides the economic indicators for the euro area.

Table EUR, Euro Area Economic Indicators

GDP	IQ2012 ∆% 0.0; IQ2012/IQ2011 ∆% 0.0 Blog 5/20/12
Unemployment	Mar 2012: 10.9% unemployment rate Mar 2012: 17.365 million unemployed Blog 5/6/12
HICP	Apr month ∆%: 0.5 12 months Apr ∆%: 2.6 Blog 5/20/12
Producer Prices	Euro Zone industrial producer prices Mar ∆%: 0.5 Feb 12-month ∆%: 3.3 Blog 5/6/12
Industrial Production	Mar month ∆%: -0.3; Mar 12 months ∆%: -2.2 Blog 5/20/12
Industrial New Orders	Dec month ∆%: 1.9 Oct 12 months ∆%: minus 1.7 Blog 2/26/12
Construction Output	Feb month ∆%: minus 7.1 Jan 12-month ∆%: minus 12.9  Blog 4/22/12
Retail Sales	Mar month ∆%: 0.3 Mar 12 months ∆%: -0.2 Blog 5/6/12
Confidence and Economic Sentiment Indicator	Sentiment 93.2 Apr 2012 Confidence minus 8.7 Apr 2012 Blog 4/29/12
Trade	Jan-Mar 2012/Jan-Mar 2011 Exports ∆%: 8.5 Imports ∆%: 3.4 Mar 2012 12-month Exports ∆% 4.4 Imports ∆% -0.4 Blog 5/20/12
HICP, Rate of Unemployment and GDP	Historical from 1999 to 2011 Blog 5/20/12

Links to blog comments in Table EUR:

5/20/12 http://cmpassocregulationblog.blogspot.com/2012/05/world-inflation-waves-monetary-policy_20.html

5/6/12 http://cmpassocregulationblog.blogspot.com/2012/05/recovery-without-jobs-twenty-eight_06.html

4/29/12 http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-growth-with-high-unemployment_29.html

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

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

VE Germany. Table VE-DE provides yearly growth rates of the German economy from 1992 to 2011, price adjusted chain-linked and price and calendar-adjusted chain-linked. Germany’s GDP fell 5.1 percent in 2009 after growing below trend at 1.1 percent in 2008. Recovery has been robust in contrast with other advanced economy. The German economy grew at 3.7 percent in 2010 and at 3.0 percent in 2011. Growth slowed in 2011 from 1.3 percent in IQ2011, 0.3 percent in IIQ2011 and 0.6 percent in IIIQ2011 to decline of 0.2 percent in IVQ2011 and growth of 0.5 percent in IQ2012. The Federal Statistical Agency of Germany analyzes the fall and recovery of the German economy (http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/VolkswirtschaftlicheGesamtrechnungen/Inlandsprodukt/Aktuell,templateId=renderPrint.psml):

“The German economy again grew strongly in 2011. The price-adjusted gross domestic product (GDP) increased by 3.0% compared with the previous year. Accordingly, the catching-up process of the German economy continued during the second year after the economic crisis. In the course of 2011, the price-adjusted GDP again exceeded its pre-crisis level. The economic recovery occurred mainly in the first half of 2011. In 2009, Germany experienced the most serious post-war recession, when GDP suffered a historic decline of 5.1%. The year 2010 was characterised by a rapid economic recovery (+3.7%).”

Table VE-DE, Germany, GDP Year ∆%

	Price Adjusted Chain-Linked	Price- and Calendar-Adjusted Chain Linked
2011	3.0	3.1
2010	3.7	3.6
2009	-5.1	-5.1
2008	1.1	0.8
2007	3.3	3.4
2006	3.7	3.9
2005	0.7	0.8
2004	1.2	0.7
2003	-0.4	-0.4
2002	0.0	0.0
2001	1.5	1.6
2000	3.1	3.3
1999	1.9	1.8
1998	1.9	1.7
1997	1.7	1.8
1996	0.8	0.8
1995	1.7	1.8
1994	2.5	2.5
1993	-1.0	-1.0
1992	1.9	1.5

Source: Statistiche Bundesamt Deutschland

https://www.destatis.de/EN/PressServices/Press/pr/2012/05/PE12_178_811.html

The Flash Germany Composite Output Index of the Markit Flash Germany PMI^®, combining manufacturing and services, fell from 50.5 in Apr to 49.6 in May, which is a six-month low (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9561). Weakness in manufacturing, with the Markit Germany Manufacturing PMI falling from 46.2 in Apr to 45.0 in May, for a 35-month low, was not compensated sufficiently by stability of the Markit Flash Germany Services Activity Index unchanged at 52.2 in both May and Apr. Tim Moore, Senior Economist at Markit, finds declining export demand driving manufacturing downturn (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9561).The Markit Eurozone PMI^® Composite Output Index, combining services and manufacturing activity with close association with GDP, fell from 49.1 in Mar to 46.7 in Apr (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9542) in one of the deepest contractions since the middle of 2009. Chris Williamson, Chief Economist at Markit, finds that the data are consistent with decline of GDP at a quarterly rate of 0.5 percent in Apr, which could result in the third consecutive quarterly contraction of euro area GDP (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9542). The economy of the euro area may have fallen in a technical recession with two consecutive quarters of contraction. The Markit Eurozone Manufacturing PMI^® declined close to a three-year low at 45.9 in Apr from 47.7 in Mar (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9460). Chris Williamson, Chief Economist at Markit, finds that output in the euro area in Apr declined at a quarterly rate in excess of 2.2 percent (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9460). Table EUR provides the economic indicators for the euro area. Table EUR provides the economic indicators for the euro area.

Table DE, Germany, Economic Indicators

GDP	IQ2012 0.5 ∆%; I/Q2012/IQ2011 ∆% 1.7 2011/2010: 3.0% GDP ∆% 1992-2011 Blog 5/27/12
Consumer Price Index	Apr month SA ∆%: +0.2 Mar 12-month ∆%: 2.1 Blog 5/13/12
Producer Price Index	Apr month ∆%: 0.2 12-month NSA ∆%: 2.4 Blog 5/20/12
Industrial Production	Mfg Mar month SA ∆%: 1.4 12-month NSA: -0.2 Blog 5/13/12
Machine Orders	Mar month ∆%: 2.2 Mar 12-month ∆%: -2.9 Blog 5/13/12
Retail Sales	Mar Month ∆% 0.8 12-Month ∆% 2/3 Blog 5/6/12
Employment Report	Unemployment Rate Mar 5.5% Blog 5/6/12
Trade Balance	Exports Mar 12-month NSA ∆%: 0.7 Imports Mar 12 months NSA ∆%: 2.6 Exports Mar month SA ∆%: 0.9; Imports Mar month SA 1.2 Blog 5/13/12

Links to blog comments in Table DE:

5/20/12 http://cmpassocregulationblog.blogspot.com/2012/05/world-inflation-waves-monetary-policy_20.html

5/13/12 http://cmpassocregulationblog.blogspot.com/2012/05/recovery-without-hiring-ten-million_13.html

5/6/12 http://cmpassocregulationblog.blogspot.com/2012/05/recovery-without-jobs-twenty-eight_06.html

Table VE-1 provides percentage change of Germany’s GDP in one quarter relative to the prior quarter from 2003 to 2012. Germany’s GDP contracted during four consecutive quarters from IIQ2008 to IQ2009. The deepest contraction was 4.0 percent in IQ2009. Growth was quite strong from IIIQ2009 to IQ2011 for cumulative growth of 6.7 percent in seven quarters or at the average rate of 0.9 percent per quarter, which is equivalent to 3.8 percent per year. Economic growth decelerated in IIQ2011 to 0.3 percent but rebounded to 0.8 percent in IIIQ2011. The economy contracted mildly by 0.2 percent in IVQ2011 and grew 0.5 percent in IQ2012.

Table VE-1, Germany Quarter GDP ∆% Relative to Prior Quarter, Seasonally and Calendar Adjusted 

	IQ	IIQ	IIIQ	IV
2012	0.5
2011	1.3	0.3	0.6	-0.2
2010	0.5	1.9	0.8	0.5
2009	-4.0	0.3	0.8	0.7
2008	1.1	-0.4	-0.4	-2.2
2007	0.7	0.6	0.9	0.3
2006	1.2	1.5	1.0	1.2
2005	-0.1	0.7	0.8	0.3
2004	0.0	0.3	-0.2	0.0
2003	-0.8	-0.1	0.5	0.4

Seasonal and calendar adjusted

Source: Statistiche Bundesamt Deutschland

https://www.destatis.de/EN/PressServices/Press/pr/2012/05/PE12_178_811.html

Table VE-2 provides percentage changes of Germany’s GDP in a quarter relative to the same quarter a year earlier. Growth was weak in the recovery from the recession of 2001 through 2005, as in most of the euro area (see Pelaez and Pelaez, The Global Recession Risk (2007), 116-46). Germany’s economy then grew robustly in 2006 and 2007 until the global recession after 2007. Germany recovered with strong growth in 2010 and vigorous 5.0 percent in IQ2011. The economy decelerated in the final three quarter of 2011, growing 1.7 percent in IQ2012 relative to IQ2011.

Table VE-2, Germany, Quarter GDP ∆% Relative to Same Quarter a Year Earlier, Calendar and Price Adjusted NSA 

	IQ	IIQ	IIIQ	IV
2012	1.7
2011	5.0	3.0	2.6	1.5
2010	2.6	4.4	4.0	3.8
2009	-6.5	-7.4	-5.0	-1.6
2008	2.1	3.1	1.1	-1.9
2007	4.3	3.4	3.3	2.2
2006	4.3	2.4	3.5	4.6
2005	-0.8	1.2	1.2	1.0
2004	1.5	1.6	0.6	0.9
2003	0.0	-1.1	-0.5	0.1

Calendar and price adjusted NSA

Source: Statistiche Bundesamt Deutschland

https://www.destatis.de/EN/PressServices/Press/pr/2012/05/PE12_178_811.html

Table VE-3 provides yearly growth rates of the German economy from 1992 to 2011, price adjusted chain-linked and price and calendar-adjusted chain-linked. Germany’s GDP fell 5.1 percent in 2009 after growing below trend at 1.1 percent in 2008. Recovery has been robust in contrast with other advanced economy. The German economy grew at 3.7 percent in 2010 and at 3.0 percent in 2011. Growth slowed in 2011 from 1.3 percent in IQ2011, 0.3 percent in IIQ2011 and 0.6 percent in IIIQ2011 to decline of 0.2 percent in IVQ2011 and growth of 0.5 percent in IQ2012. The Federal Statistical Agency of Germany analyzes the fall and recovery of the German economy (http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/VolkswirtschaftlicheGesamtrechnungen/Inlandsprodukt/Aktuell,templateId=renderPrint.psml):

“The German economy again grew strongly in 2011. The price-adjusted gross domestic product (GDP) increased by 3.0% compared with the previous year. Accordingly, the catching-up process of the German economy continued during the second year after the economic crisis. In the course of 2011, the price-adjusted GDP again exceeded its pre-crisis level. The economic recovery occurred mainly in the first half of 2011. In 2009, Germany experienced the most serious post-war recession, when GDP suffered a historic decline of 5.1%. The year 2010 was characterised by a rapid economic recovery (+3.7%).”

Table VE-3, Germany, GDP Year ∆%

	Price Adjusted Chain-Linked	Price- and Calendar-Adjusted Chain Linked
2011	3.0	3.1
2010	3.7	3.6
2009	-5.1	-5.1
2008	1.1	0.8
2007	3.3	3.4
2006	3.7	3.9
2005	0.7	0.8
2004	1.2	0.7
2003	-0.4	-0.4
2002	0.0	0.0
2001	1.5	1.6
2000	3.1	3.3
1999	1.9	1.8
1998	1.9	1.7
1997	1.7	1.8
1996	0.8	0.8
1995	1.7	1.8
1994	2.5	2.5
1993	-1.0	-1.0
1992	1.9	1.5

Source: Statistiche Bundesamt Deutschland

https://www.destatis.de/EN/PressServices/Press/pr/2012/05/PE12_178_811.html

The Statistiche Bundesamt Deutschland provides the analysis of percentage point contributions to GDP on growth from the same quarter a year earlier, shown in Table VE-4. The original data are adjusted for price but not for seasonality. There is strong internal demand, or consumption and investment, which is uncommon in advanced economies. Consumption provided 1.3 percentage points to growth in IQ2012 and grew 1.8 percent from the same quarter a year earlier. Growth of fixed capital formation (GFCF) provided 2.0 percentage points to growth of GDP in IQ2012 and grew 0.9 percent from the same quarter a year earlier. Domestic uses contributed 1.1 percentage points in IQ2012 and grew 1.2 percent from the same quarter a year earlier. Net exports contributed 0.5 percentage points in IQ2012, increasing from deduction of 0.1 percentage points in IVQ2011. The rates of growth of exports and imports fell from over 10 percent to single digits in IIQ2011 and IIIQ2011 with 5.9 percent growth of exports and 5.7 percent growth of imports in IQ2012. GDP per person in employment grew 3.6 percent in IQ2011 relative to IQ2010 but only 1.3 percent in IIQ2011, 1.1 percent in IIQ2011, 1.3 percent in IVQ2011 and minus 0.6 percent in IQ2012.

Table VE-4, Germany, Percentage Point Contributions of Use of Gross Domestic Product on Growth from Same Quarter Year earlier, Price Adjusted  

	IIQ 11 PP	∆% IIQ 11	IIIQ 11  PP	∆% IIIQ 11	IVQ11 PP	∆% IVQ 11	IQ 12 PP	∆% IQ 12
Consumption Total	1.2	1.4	1.3	1.6	0.7	0.9	1.3	1.8
Households Consumption	0.9	1.4	1.0	1.7	0.4	0.7	1.2	1.8
Government Consumption	0.4	1.6	0.3	1.1	0.3	1.6	0.1	1.9
Gross Capital Formation	0.8	6.6	0.9	6.3	0.7	6.0	2.1	-1.1
Gross Fixed Capital Formation (GFCF)	1.0	5.4	0.7	4.0	0.8	4.4	2.0	0.9
GFCF including Machinery & Equipment	0.6	9.1	0.4	6.1	0.2	2.1	0.9	2.5
GFCF in Construction	0.3	3.0	0.3	2.4	0.6	6.5	1.0	-0.5
Change in Inventories	0.1		0.5		0.2		-0.4
Domestic Uses	2.3	2.4	2.3	2.4	1.7	1.8	1.1	1.2
Net Exports	0.7		0.3		-0.1		0.5
Exports		7.6		8.0		4.6		5.9
Imports		7.0		8.3		5.6		5.6
GDP		3.0		2.6		1.5		1.7
GDP per Person in Employment		1.6		1.2		0.2		0.2
GDP per Hour Worked		1.3		1.1		1.3		-0.6

Source: Statistiche Bundesamt Deutschland

https://www.destatis.de/EN/PressServices/Press/pr/2012/05/PE12_178_811.html

Percentage changes from year earlier of gross value added by economic sectors are shown for Germany in Table VE-5. The two rows of industry ex construction and industry including manufacturing reveal sharp reductions in yearly growth rates from IQ2011 to IIQ2011, IIIQ2011 and IVQ2011 with slight improvement in IQ2012 but a lower rhythm. Finance and insurance rebounded from decline of 0.3 percent in IIQ2011 to 2.6 percent in IIIQ2011, 1.1 percent in IVQ2011 and 1.8 percent in IQ2012. Business services also grew at relatively higher rates that declined from 4.9 percent in IQ2011 and 4.2 percent in IIQ2011 to 3.5 percent in IIIQ2011 and 3.3 percent in IVQ2011, rebounding to 3.9 percent in IVQ2012.

Table VE-5, Germany, Percentage Change from Year Earlier of Gross Value Added by Economic Sector, Price Adjusted NSA

	IQ     2011	IIQ   2011	IIIQ 2011	IVQ   2011	IQ 2012
Agriculture	3.6	4.5	2.3	2.1	-0.3
Industry ex Construction	10.7	6.7	6.1	0.7	1.4
Industry including Mfg	13.6	9.3	8.1	2.4	2.6
Construction	9.5	0.4	0.0	4.6	-0.4
Trade, Transport	6.1	3.8	3.1	2.5	2.5
Information & Communications.	1.2	1.5	2.3	2.2	3.6
Finance & Insurance	0.4	-0.2	2.6	1.1	1.8
Real Estate	-0.2	0.6	0.5	1.1	1.5
Business Services	4.9	4.2	3.5	3.3	3.9
Public Services, Education & Health	0.8	0.8	0.7	1.0	0.9
Other Services	-0.6	-1.5	-1.5	-0.3	1.2
Total Gross Value Added	4.5	3.0	2.7	1.6	1.8

Source: Statistiche Bundesamt Deutschland

https://www.destatis.de/EN/PressServices/Press/pr/2012/05/PE12_178_811.html

Chart VE-1 of the Statistiche Bundesamt Deutschland (Federal Statistics Agency of Germany) provides GDP at current prices from 2003 to 2012. The German economy is productive with significant dynamism over the long term. There are fluctuations in an increasing trend since 2009.

Chart VE-1, Germany, GDP, Current Prices, Billion Euro

Source: Statistiche Bundesamt Deutschland

https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html

Chart VE-2 of the Statistiche Bundesamt Deutschland (Federal Statistics Agency of Germany) provides the index of price-adjusted chain-linked GDP of Germany from 2007 to 2012. Germany was growing rapidly before the global contraction and rebounded with significant strength along a strong upward trend.

Chart VE-2, Germany, Index of Price-Adjusted Chain-Linked GDP, 2000=100

Source: Statistiche Bundesamt Deutschland

https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html

Table VE-9 provides Germany’s GDP of €645.2 billion in IQ2012 and its uses. Private consumption is 56.1 percent of GDP and GFCF 18.4 percent with government consumption of 19.4 percent and net exports 6.2 percent.

Table VE-9, Germany, GDP and Uses, Euro Billions and %

GDP Euro Billions IQ2012	645.20
Percent Distribution of Uses
Gross Capital Formation	18.4
Private Consumption	56.1
Balance of Exports and Imports	6.2
Government Consumption	19.4

Source: Statistiche Bundesamt Deutschland

https://www.destatis.de/EN/PressServices/Press/pr/2012/05/PE12_178_811.html

VF France. The Markit Flash France Composite Output Index of the Markit Flash France PMI^® fell from 45.9 in Apr to 44.7 in May, which is a 37-month low (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9562). The Markit Flash France Manufacturing PMI fell from 46.9 in Apr to 44.4 in May, for a 36-month low. The Markit France Services Activity Index was unchanged at 45.2 in both Apr and May. Jack Kennedy, Senior Economist at Markit and author of the Flash France PMI^® finds that the survey is consistent with contraction of GDP in IIQ2012 after stagnation in IQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9562).

The Markit France Composite Output Index, combining services and manufacturing with close association with French GDP, fell from 48.7 in Mar to 45.9 in Apr, which is the lowest reading in six months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9538). Jack Kennedy, Senior Economist at Markit and author of the France Services PMI^®, finds general deteriorating conditions in France with hopes of improvement of outlook after the elections (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9538).The Markit France Manufacturing Purchasing Managers’ Index^® was virtually unchanged at 46.9 in Apr relative to 46.7 in Mar with the sharpest decline in new orders in three years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9511). Jack Kennedy, Senior Economist at Markit and author of the France Manufacturing PMI^®, finds continuing deterioration in manufacturing with trend of decline in new orders (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9511).Table FR provides the country data table for France. Table FR provides the country data table for France.

Table FR, France, Economic Indicators

CPI	Apr month ∆% 0.1 12 months ∆%: 2.1 5/20/12
PPI	Mar month ∆%: 0.5 Mar 12 months ∆%: 3.7 Blog 4/29/12
GDP Growth	IQ2012/IVQ2011 ∆%: 0.0 IQ2012/IQ2011 ∆%: 0.0 Blog 5/20/12
Industrial Production	Mar SA ∆%: Industrial Production -0.9; Manufacturing +1.4 Feb YOY NSA ∆%: Industrial Production -1.4; Manufacturing -1.7 Blog 5/13/12
Industrial New Orders	Mfg Dec ∆% +0.7 YOY ∆% minus 0.4 Blog 3/25/12
Consumer Spending	Mar Manufactured Goods ∆%: minus 1.1 Mar 12-Month Manufactured Goods ∆%: minus 1.9 Blog 4/29/12
Employment	IVQ2011 Unemployed 2.678 million Unemployment Rate: 9.4% Employment Rate: 63.8% Blog 3/4/12
Trade Balance	Mar Exports ∆%: month -1.5, 12 months 3.9 Mar Imports ∆%: month -2.6, 12 months 2.1 Blog 5/13/12
Confidence Indicators	Historical averages 100 May Mfg Business Climate 93 Blog 5/27/12

Links to blog comments in Table FR:

5/20/12 http://cmpassocregulationblog.blogspot.com/2012/05/world-inflation-waves-monetary-policy_20.html

5/13/12 http://cmpassocregulationblog.blogspot.com/2012/05/recovery-without-hiring-ten-million_13.html

4/29/12 http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-growth-with-high-unemployment_29.html

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

3/4/12 http://cmpassocregulationblog.blogspot.com/2012/03/mediocre-economic-growth-flattening_04.html

The business climate survey of the Institut National de la Statistique et des Études Économiques (INSEE) of France finds worsening conditions in Apr and May after improvement in Mar. Table VF-1 shows the INSEE business climate indicator. The headline synthetic index increased to 98 in Mar from 94 in Dec, 92 in Jan and 93 in Feb, but fell to 95 in Apr and 93 in May. The final row shows general production expectations falling to -27 in Feb, well below the average of -8 since 1976, but improving to -15 in Mar and -14 in Apr, declining sharply to -29 in May. The indicator of demand and export order levels fell to -33 in Feb, well below the average of -12 since 1976, but improved to -15 in Mar, declining to -25 in both Apr and May.

Table VF-1, France, Business Climate Indicator of Manufacturing of INSEE, General Balance of Opinion, SA

Mfg 2011-2012	Average since 1976	Jan	Feb	Mar	Apr	May
Synthetic Index	100	92	93	98	95	93
Recent Changes in Output	5	-6	-7	-8	-2	-2
Finished- Goods Inventory Level	15	16	14	11	10	12
Demand and Total Order Levels	-17	-28	-26	-20	-22	-28
Demand and Export Order Levels	-12	-26	-33	-10	-25	-25
Personal Production Expectations	5	-5	-1	8	-5	-4
General Production Expectations	-8	-36	-27	-15	-14	-29

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20120524

Chart VF-1 of the Institut National de la Statistique et des Études Économiques (INSEE) provides the history of the business climate synthetic index of INSEE since 1992. The index fell during the contractions of 1991, 2001 and 2008. After rapid recovery beginning in 2009 the synthetic index shows declining trend in 2011 with upward reversal in 2012 interrupted in Apr and May.

Chart VF-1, France, INSEE Business Climate Synthetic Index

Source: Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20120524

Chart VF-2 of the Institut National de la Statistique et des Études Économiques (INSEE) shows strong drops of the turning point indicator in the recessions of 1991, 2001 and 2008. There have been other drops of this index. The turning point indicator has fallen to levels in the direction of past contractions and after rebounding in Oct and Nov is showing declining trend in Jan with slight reversal in Feb followed by significant improvement in Mar and deterioration in Apr and May.

Chart VF-2, INSEE Business Climate Turning Point Indicator

Source: Institut National de la Statistique et des Études

http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20120524

Chart VF-3 of the Institut National de la Statistique et des Études Économiques (INSEE) of France shows the indexes of general production expectations, personal production expectations and recent changes in output. All three indexes fell during the past three contractions after 1991, 2001 and 2008. The indexes are showing downward trend in 2011 that continued in Nov, Dec and Jan 2012 with slight reversal in Feb and significant improvement in Mar that weakens in Apr and May.

Chart VF-3, Climate General Production, Personal Production and Recent Changes in Output of INSEE

Source:  Institut National de la Statistique et des Études Économiques

http://www.insee.fr/en/themes/info-rapide.asp?id=11&date=20120524

VG Italy. The Markit/ADACI Business Activity Index fell from 44.3 in Mar to 42.3 in Apr, indicating sharp contraction of output of Italy’s services sector at the lowest reading in about three years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9536). Phil Smith, economist at Markit and author of the Italy Services PMI^®, finds that the rates of contraction are approaching the ones experienced at the bottom of the 2008-2009 contraction (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9536). The Markit/ADACI Purchasing Managers’ Index^® (PMI^®), fell from 47.9 in Mar relative to 43.8 in Apr for a ninth consecutive month of contraction of Italy’s manufacturing and the sharpest since Oct (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9507). Phil Smith, economist at Markit and author of the Italian Manufacturing PMI^®, finds the sharpest fall in monthly new business in three years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9507). Table IT provides the country data table for Italy.

Table IT, Italy, Economic Indicators

Consumer Price Index	Apr month ∆%: 0.5 Apr 12-month ∆%: 3.3 Blog 5/6/12
Producer Price Index	Mar month ∆%: 0.3 Mar 12-month ∆%: 2.7 Blog 5/6/12
GDP Growth	IQ2012/IVQ2011 SA ∆%: minus 0.8 IQ2012/IQ2011 NSA ∆%: minus 1.3 Blog 5/20/12
Labor Report	Mar 2012 Participation rate 63.3% Employment ratio 57.0% Unemployment rate 9.8% Blog 5/6/12
Industrial Production	Mar month ∆%: +0.5 12 months ∆%: minus 5.8 Blog 5/13/12
Retail Sales	Mar month ∆%: -0.2 Mar 12-month ∆%: 1.7 Blog 5/27/12
Business Confidence	Mfg Apr 89.5, Dec 91.3 Construction Apr 82.9, Dec 80.5 Blog 4/29/12
Consumer Confidence	Consumer Confidence May 86.5, Apr 88.8 Economy May 64.4, Apr 71.6 Blog 5/27/12
Trade Balance	Balance Mar SA €718 million versus Feb -€440 Exports Mar month SA ∆%: 1.7; Imports Mar month ∆%: -1.9 Exports 12 months NSA ∆%: +4.9 Imports 12 months NSA ∆%: minus 10.9 Blog 5/20/12

Links to blog comments in Table IT:

5/20/12 http://cmpassocregulationblog.blogspot.com/2012/05/world-inflation-waves-monetary-policy_20.html

5/13/12 http://cmpassocregulationblog.blogspot.com/2012/05/recovery-without-hiring-ten-million_13.html

5/6/12 http://cmpassocregulationblog.blogspot.com/2012/05/recovery-without-jobs-twenty-eight_06.html

4/29/12 http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-growth-with-high-unemployment_29.html

An important part of the analysis of Blanchard (2011WEOSep, 2012WEOApr) is the much more difficult adjustment of economies with need of fiscal consolidation in the presence of weak economic growth. Demand has significantly weakened throughout the advanced economies. There are many sound fundamentals in Italy such as high income and competitive companies. The restraints consist of low economic growth with high debt/GDP ratio. Table VG-1 provides growth of retail sales for Italy. Retail sales fell 0.2 percent in Mar 2012 relative to Feb 2012, increased 1.7 percent in Mar 2012 relative to Mar 2011 and increased 0.4 percent in Jan-Mar 2012 relative to Jan-Mar 2011.

Table VG-1, Italy, Retail Sales ∆%

	Mar 2012/ Feb 2012 2012 SA	Jan-Mar 12/    Oct-Dec 11 SA	Mar 2012/ Mar 2011 NSA	Jan-Mar 2012/ Jan-Mar 2011
Total	-0.2	+0.8	+1.7	+0.4
Food	-0.2	+0.9	+3.5	+2.1
Non-food	-0.2	+0.8	+0.7	-0.5

Source: Istituto Nazionale di Statistica

http://www.istat.it/it/archivio/63168

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

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

Source: Istituto Nazionale di Statistica

http://www.istat.it/it/archivio/63168

A longer perspective of retail sales in Italy is provided by monthly and 12-month percentages in 2011 and Jan-Mar 2012 and yearly rates from 2008 to 2011 in Table VG-2. Retail sales did not decline very sharply during the global recession but rose only 0.2 percent in 2010 and fell 1.3 percent in 2011. There is an evident declining trend in 2011 but only two monthly increases of 0.6 percent in Oct and 0.5 percent in Apr and negative 12-month percentage changes in every month of 2011 with the exception of 2.2 percent in Apr 2011, 0.5 percent in Feb 2012 and 1.7 percent in Mar 2012. Retail sales grew 1.1 percent in Jan 2012 and 0.9 percent in Feb 2012, reducing sharply the 12-month percentage change from minus 3.7 percent in Dec 2011 to only minus 1.1 percent in Jan 2012 and positive 0.5 percent in the 12 months ending in Feb 2012 and 1.7 percent in the 12 months ending in Mar 2012. At the margin, retail sales fell 0.2 percent in Mar 2012.

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

	12-Month ∆% NSA	Month ∆% SA
Mar 2012	1.7	-0.2
Feb	0.5	0.9
Jan	-1.1	1.1
Dec 2011	-3.7	-0.9
Nov	-1.8	-0.6
Oct	-1.4	0.6
Sep	-1.6	-0.3
Aug	-0.3	-0.3
July	-2.3	0.0
Jun	-1.1	-0.2
May	-0.4	-0.3
Apr	2.2	0.5
Mar	-2.1	-0.1
Feb	0.0	-0.6
Jan	-1.1	-1.0
Dec 2010	0.6	0.7
2011	-1.3
2010	0.2
2009	-1.7
2008	-0.3

Source: Istituto Nazionale di Statistica

http://www.istat.it/it/archivio/63168

Italy’s index of consumer confidence is in Table VG-4. Overall confidence increased from 91.4 in Jan 2012 to 93.8 in Feb and 96.1 in Mar but fell to 88.8 in Apr and 86.5 in May. There is improvement in all categories from Feb to Mar but declines into Apr and May. Confidence on the economy jumped from 75.3 in Jan to 85.0 in Mar but fell to 71.6 in Apr and 64.4 in May while confidence on the future jumped from 78.2 in Jan to 86.3 in Mar but fell to 76.6 in Apr and 75.7 in May.

Table VG-3, Italy, Index of Consumer Confidence SA 2005=100

2012	May	Apr	Mar	Feb	Jan
Confidence	86.5	88.8	96.1	93.8	91.4
Economy	64.4	71.6	85.0	85.8	75.3
Personal	95.2	94.3	100.1	97.5	97.9
Current	96.4	96.7	102.6	100.3	102.3
Future	75.7	76.6	86.3	85.9	78.2

Source: http://www.istat.it/it/archivio/62978

VH United Kingdom. Revised annual data in Table VH-UK show the strong impact of the global recession in the UK with decline of GDP of revised 4.4 percent in 2009 after dropping revised 1.1 percent in 2008. Recovery of 2.1 percent in 2010 is relatively low compared to annual growth rates in 2007 and earlier years. Growth was only 0.7 percent in 2011. The bottom part of Table VH-1 provides average growth rates of UK GDP since 1948. The UK economy grew at 2.4 percent on average between 1948 and 2011, which is relatively high for an advanced economy. The growth rate of GDP between 2000 and 2007 is higher at 2.9 percent. Growth in the current cyclical expansion has been only at 1.4 percent as advanced economies struggle with weak internal demand and world trade.

Table VH-UK, UK, Gross Domestic Product, ∆%

	∆% on Prior Year
1998	3.8
1999	3.7
2000	4.6
2001	3.1
2002	2.6
2003	3.5
2004	2.9
2005	2.0
2006	2.6
2007	3.5
2008	-1.1
2009	-4.4
2010	2.1
2011	0.7
Average ∆% per Year
1948-2011	2.4
1948-1959	2.5
1960-1969	2.9
1970-1979	2.4
1980-1989	2.9
1990-1999	2.4
2000-2011	1.5
2000-2007	2.9
2009-2011	1.4

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/naa2/second-estimate-of-gdp/q1-2012/index.html

The Business Activity Index of the Markit/CIPS UK Services PMI^® fell from 55.3 in Mar to 53.3 in Apr for 16 consecutive monthly increases but the slowest growth since Nov (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9523). Chris Williamson, Chief Economist at Markit, finds that services continue to expand and that the data from panelists are not consistent with the economy in recession such that there is room for a change of the first estimate of IQ2012 GDP from negative to moderately positive (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9523). The Markit/CIPS UK Manufacturing Purchasing Managers’ Index^® (PMI^®) fell from revised 51.9 in Mar to 50.5 in Apr, which is above the border of contraction of 50.0 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9487). Rob Dobson, Senior Economist at Markit and author of the Markit/CIPS Manufacturing PMI^®, finds that manufacturing growth requires dynamism in new orders that was frustrated by declining foreign demand in Apr (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9487).Table UK provides the country data table for the UK.

Table UK, UK Economic Indicators

CPI	Apr month ∆%: 0.6 Apr 12-month ∆%: 3.0 Blog 5/27/12
Output/Input Prices	Output Prices: Apr 12-month NSA ∆%: 3.3; excluding food, petroleum ∆%: 2.3 Input Prices: Apr 12-month NSA ∆%: 1.2 Excluding ∆%: 2.5 Blog 5/13/12
GDP Growth	IQ2012 prior quarter ∆% minus 0.3; year earlier same quarter ∆%: minus 0.1 Blog 5/27/12
Industrial Production	Mar 2012/Mar 2011 NSA ∆%: Production Industries minus 2.6; Manufacturing minus 0.9 Blog 5/13/12
Retail Sales	Apr month SA ∆%: minus 2.3 Apr 12-month NSA ∆%: minus 2.1 Blog 5/27/12
Labor Market	Jan-Mar Unemployment Rate: 8.2%; Claimant Count 4.9%; Earnings Growth 0.6% Blog 5/20/12
Trade Balance	Balance Mar minus ₤2739 million Exports Mar ∆%: 4.1 Jan-Mar ∆%: 1.9 Imports Mar ∆%: 3.3 Jan-Mar ∆%: 4.3 Blog 5/20/12

Links to blog comments in Table UK:

5/20/12 http://cmpassocregulationblog.blogspot.com/2012/05/world-inflation-waves-monetary-policy_20.html

5/13/12 http://cmpassocregulationblog.blogspot.com/2012/05/recovery-without-hiring-ten-million_13.html

Revised annual data in Table VH-1 show the strong impact of the global recession in the UK with decline of GDP of revised 4.4 percent in 2009 after dropping revised 1.1 percent in 2008. Recovery of 2.1 percent in 2010 is relatively low compared to annual growth rates in 2007 and earlier years. Growth was only 0.7 percent in 2011. The bottom part of Table VH-1 provides average growth rates of UK GDP since 1948. The UK economy grew at 2.4 percent on average between 1948 and 2011, which is relatively high for an advanced economy. The growth rate of GDP between 2000 and 2007 is higher at 2.9 percent. Growth in the current cyclical expansion has been only at 1.4 percent as advanced economies struggle with weak internal demand and world trade.

Table VH-1, UK, Gross Domestic Product, ∆%

	∆% on Prior Year
1998	3.8
1999	3.7
2000	4.6
2001	3.1
2002	2.6
2003	3.5
2004	2.9
2005	2.0
2006	2.6
2007	3.5
2008	-1.1
2009	-4.4
2010	2.1
2011	0.7
Average ∆% per Year
1948-2011	2.4
1948-1959	2.5
1960-1969	2.9
1970-1979	2.4
1980-1989	2.9
1990-1999	2.4
2000-2011	1.5
2000-2007	2.9
2009-2011	1.4

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/naa2/second-estimate-of-gdp/q1-2012/index.html

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

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

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

Source:  UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/naa2/second-estimate-of-gdp/q1-2012/index.html

There are four periods in growth of GDP in a quarter relative to the same quarter a year earlier in the UK in the years from 2000 to the present as shown in Table VH-3. (1) Growth rates were quite high from 2000 to 2007. (2) There were six continuous quarters of contraction of GDP from IIIQ2008 to IVQ2009. Contractions relative to the quarter a year earlier were quite sharp with the highest of 5.4 percent in IVQ2008, 6.9 percent in IQ2009, 5.9 percent in IIQ2009 and 3.8 percent in IIIQ2009. (3) The economy bounced strongly with 2.5 percent in IIQ2010, 3.0 percent in IIIQ2010 and 1.7 percent in IVQ2010. (4) Recovery in 2011 has not continued at rates comparable to those in 2000 to 2007 and even relative to those in the final three quarters of 2010. Growth relative to the same quarter a year earlier fell from 1.7 percent in IVQ2010 to 1.5 percent in IQ2011, 0.4 percent in IIQ2011, 0.3 percent in IIIQ2011 and 0.5 percent in IVQ2011 but contraction of 0.3 percent in IVQ2011 relative to IIIQ201. In IQ2012, GDP fell 0.3 percent for a second consecutive quarter and fell 0.1 percent relative to a year earlier. Fiscal consolidation in an environment of weakening economic growth is much more challenging.

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

	IQ	IIQ	IIIQ	IV
2012	-0.1
2011	1.5	0.4	0.3	0.5
2010	1.2	2.5	3.0	1.7
2009	-6.9	-5.9	-3.8	-0.8
2008	3.1	0.6	-2.6	-5.4
2007	2.4	3.2	4.2	4.1
2006	3.3	2.9	2.2	2.1
2005	1.3	1.7	2.5	2.8
2004	4.3	3.4	2.5	1.7
2003	2.9	3.4	3.6	4.2
2002	2.3	2.6	2.7	3.0
2001	3.6	2.9	3.2	2.9
2000	4.7	5.2	4.2	3.7
1999	3.6	3.4	3.8	3.8
1998	3.8	3.7	3.9	4.0

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/naa2/second-estimate-of-gdp/q1-2012/index.html

Growth rates of GDP and components in a quarter from the preceding quarter are provided in Table VH-4. The first row of the table provides the weights of components. Contraction of GDP in IQ2012 resulted from sharp contraction of construction by 4.8 percent with total production declining 0.4 percent and manufacturing flat while services crawled 0.1 percent. Contraction of GDP of 0.3 percent in IVQ2011 resulted from sharp contraction of 1.3 percent in total production, with manufacturing declining 0.7 percent. Even services fell by 0.1 percent in IVQ2011. Growth of 0.6 percent in IIIQ2011 originated almost entirely in growth by services of 0.8 percent with virtually no growth by other components with exception of 0.5 percent of construction. Growth in 2011 has mostly originated in services. GDP contracted 0.5 percent in IVQ2010, 0.1 percent in IIQ2011, 0.3 percent in IIIQ2011 and 0.3 percent in IQ2012. All contributions are negative in IV2011 and services fell 0.1 percent while all contributions are negative in IQ2012 with meager growth of services of 0.1 percent and no growth of manufacturing.

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

	GDP	Total Production	Mfg	CONS	Services
Weights*	1000	154	102	76	763
IQ12	-0.3	-0.4	0.0	-4.8	0.1
IVQ11	-0.3	-1.3	-0.7	-0.2	-0.1
IIIQ11	0.6	0.1	-0.1	0.5	0.8
IIQ11	-0.1	-1.5	0.0	2.3	0.1
IQ11	0.2	-0.3	0.7	-1.5	0.9
IVQ10	-0.5	0.2	0.7	-1.4	-0.3
IIIQ10	0.7	0.2	1.3	3.1	0.6
IIQ10	1.1	1.2	1.6	8.1	0.5
IQ10	0.4	1.3	1.2	0.9	0.0
IV09	0.7	0.3	1.2	0.3	0.8
III09	0.2	-1.3	-0.9	0.6	0.4
II09	-0.2	-0.3	-0.2	-2.5	-0.2
I09	-1.6	-3.9	-4.5	-6.4	-0.8
IV08	-2.3	-4.7	-5.0	-5.1	-1.5
III08	-2.0	-1.4	-1.6	-3.7	-1.6
II08	-1.3	-1.4	-1.9	-2.0	-0.9
I08	0.0	-0.1	0.7	1.7	-0.5

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

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/naa2/second-estimate-of-gdp/q1-2012/index.html

Growth of UK value added by components on a quarter relative to the prior quarter is provided in Table VH-5. Total production fell 0.4 percent in IQ2012 with manufacturing falling 0.1 percent and construction dropping 4.8 percent. Total production fell 1.3 percent IVQ2011 with manufacturing declining 0.7 percent. Services fell 0.1 percent in IVQ2011 and grew 0.1 percent in IQ2012, reducing the support of economic activity in prior quarters. Business services & finance fell 0.3 percent in IQ2012 and 0.1 percent IVQ2011.

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

Component	2011 Q1	2011 Q2	2011Q3	2011Q4	2012Q1
Agriculture, forestry & fishing	8.0	-0.8	-0.5	-1.5	-1.9
Total Production	-0.3	-1.5	0.1	-1.3	-0.4
Mining & quarrying (Extraction)	-4.5	-8.0	-0.4	-2.6	-3.7
Manufacturing	0.7	0.0	-0.1	-0.7	-0.1
Electricity, gas, steam & air (Utilities)	-5.6	-2.0	1.6	-5.3	0.9
Water supply, sewerage etc.	5.8	-2.2	0.1	1.4	0.5
Construction	-1.5	2.3	0.5	-0.2	-4.8
Total Services	0.9	0.1	0.8	-0.1	0.1
Distribution, hotels & restaurants	0.9	0.2	0.4	-0.4	0.5
Transport, storage & communication	-0.2	0.4	1.1	-0.5	0.7
Business services & finance	1.0	0.1	1.3	-0.1	-0.3
Government & other services	1.3	0.1	0.4	0.4	0.2

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/naa2/second-estimate-of-gdp/q1-2012/index.html

Contributions to quarter on prior quarter to UK value added by components are shown in Table VH-6. In IQ2012, total production contributed 0.0 percentage points, mining and quarrying subtracted 0.1 percentage points and construction deducted 0.4 percentage points with the only positive contribution being 0.1 percentage points by services. Total production subtracted 0.2 percentage points from growth in IVQ2011 with manufacturing subtracting 0.1 percentage points. There were equal subtractions of 0.1 percentage points by utilities and distribution, hotels and restaurants. Growth in IIIQ2011 originated in contribution of 0.6 percentage points by services of which 0.4 percentage points by business services and finance and 0.1 percentage points by government. In IVQ2011, there was no contribution to growth by business services and finance with deduction of 0.1 percentage points in IQ2012 while government and other services contributed 0.1 percentage points in IVQ2011 but nothing in IQ2012.

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

Component	2011 Q1	2011 Q2	2011Q3	2011Q4	2012Q1
Agriculture, forestry & fishing	0.0	0.0	0.0	0.0	0.0
Total Production	0.0	-0.2	0.0	-0.2	0.0
Mining & quarrying (Extraction)	-0.1	-0.2	0.0	0.0	-0.1
Manufacturing	0.1	0.0	0.0	-0.1	0.0
Electricity, gas, steam & air (Utilities)	-0.1	0.0	0.0	-0.1	0.0
Water supply, sewerage etc.	0.1	0.0	0.0	0.0	0.0
Construction	-0.1	0.2	0.0	0.0	-0.4
Total Services	0.7	0.1	0.6	0.0	0.1
Distribution, hotels & restaurants	0.1	0.0	0.1	-0.1	0.1
Transport, storage & communication	0.0	0.0	0.1	-0.1	0.1
Business services & finance	0.3	0.0	0.4	0.0	-0.1
Government & other services	0.3	0.0	0.1	0.1	0.0

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/naa2/second-estimate-of-gdp/q1-2012/index.html

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

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

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

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/naa2/second-estimate-of-gdp/q1-2012/index.html

Total production subtracted 0.2 percentage points from value added in the UK in 2011 compared with addition of 0.3 percentage points in 2010, as shown in Table VH-8. Total services added 1.0 percentage points in 2010 and 1.3 percentage points in 2011 with flattening growth at the margin. The concern is with the decline of GDP at minus 0.3 percent in the final quarter of 2011 and 0.3 percent in the first quarter of 2012.

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

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

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/naa2/second-estimate-of-gdp/q1-2012/index.html

The volume of retail sales in the UK seasonally adjusted decreased 2.3 percent in Apr 2012 and decreased 2.1 percent not seasonally adjusted in the 12 months ending in Apr, as shown in Table VH-9. Retail sales percentage changes in 12 months had been positive since Sep 2011. Cumulative growth from Sep 2011 to Mar 2012 was 3.2 percent, or at the high annual equivalent rate of 5.6 percent, which has been reduced to 0.9 percent from Sep 2011 to Apr 2012, or 1.3 percent in annual equivalent, after the sharp decline of 2.3 percent in Apr 2012. There has been significant volatility in monthly retail sales in the UK.

Table VH-9, UK, Volume of Retail Sales ∆%

	Month SA ∆%	12-Month NSA ∆%
Apr 2012	-2.3	-2.1
Mar	2.0	3.4
Feb	-0.8	0.6
Jan	0.3	0.7
Dec 2011	0.5	5.3
Nov	-0.2	0.4
Oct	0.7	0.7
Sep	0.7	0.4
Aug	-0.5	-1.2
Jul	0.1	-0.6
Jun	0.5	-0.5
May	-1.9	-0.7
Apr	1.9	3.5
Mar	-0.3	-1.0
Feb	-0.7	0.1
Jan	1.8	3.7
Dec 2010	-1.6	-1.1

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

Retail sales in the UK struggle with relatively high inflation. Table VH-10 provides 12-month percentage changes of the implied deflator of UK retail sales. The implied deflator of all retail sales increased 1.7 percent in the 12 months ending in Apr while that of sales excluding auto fuel increased 1.4 percent. The implied deflator of auto fuel sales rose to 17.0 in Sep, which is the highest 12-month increase in 2011, but then declined to 14.8 percent in Oct, 12.6 percent in Nov and 5.2 percent in Apr. The percentage change of the implied deflator of sales of food stores at 3.7 percent in Apr is also higher than for total retail sales. Increases in fuel prices at the retail level have occurred throughout most years since 2005 with exception of the decline of 9.7 percent in 2008 when commodity carry trades were reversed in the panic of the financial crisis, as shown in Table VH-10. UK inflation is particularly sensitive to increases in commodity prices.

Table VH-10, UK, Implied Deflator of Retail Sales, 12-Month Percentage Changes, ∆%

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

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

UK monthly retail volume of sales is quite volatile, as shown in Table VH-11. Total volume of sales decreased 2.3 percent in Apr. There were decreases in all major categories in Apr after increases in all categories in Mar with exception of flat change for food stores. All categories also weakened with declines in Feb.

Table VH-11, UK, Growth of Retail Sales Volume by Component Groups Month SA ∆%

	All Retail	Ex Auto Fuel	Food Stores	Non- Food	Auto Fuel
Apr 2012	-2.3	-1.0	-0.6	-1.7	-13.2
Mar	2.0	1.6	0.0	2.9	5.3
Feb	-0.8	-0.7	-0.2	-1.4	-1.4
Jan	0.3	0.5	-0.3	1.1	-1.7
Dec 2011	0.5	0.5	0.6	0.5	0.5
Nov	-0.2	-0.6	-0.7	-0.9	2.8
Oct	0.7	0.6	0.6	0.8	1.2
Sep	0.7	0.8	0.1	1.6	-0.1
Aug	-0.5	-0.5	0.0	-1.0	-0.9
Jul	0.1	0.1	1.0	-0.4	0.6
Jun	0.5	0.7	0.3	0.5	-1.1
May	-1.9	-2.3	-4.2	-1.1	0.8
Apr	1.9	2.0	3.0	1.2	1.0
Mar	-0.3	-0.2	1.2	-1.4	-0.6
Feb	-0.7	-0.9	-0.8	-1.2	1.0
Jan	1.8	1.2	0.4	1.9	7.7
Dec 2010	-1.6	-1.1	-1.9	-1.2	-6.6

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

Percentage growth in 12 months of retail sales volume by component groups in the UK is provided in Table VH-12. Total retail sales fell 2.1 percent in the 12 months ending in Apr with decrease of 1.3 percent in sales excluding auto fuel. Sales excluding auto fuel fell 8.3 percent. Significant improvement since Aug 2011 was interrupted with sharp declines in Apr 2012.

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

	All Retail	Ex Auto Fuel	Food Stores	Non- Food	Auto Fuel
Apr 2012	-2.1	-1.3	-3.7	-0.8	-8.3
Mar	3.4	2.9	0.2	4.3	6.9
Feb	0.6	0.5	0.9	-1.0	1.1
Jan	0.7	0.3	-0.2	-0.3	3.9
Dec 2011	5.3	4.7	3.3	4.3	14.1
Nov	0.4	-0.1	-1.1	-1.6	5.3
Oct	0.7	0.4	0.5	-0.6	2.5
Sep	0.4	0.1	-0.2	-1.0	3.2
Aug	-1.2	-1.6	-0.5	-3.9	2.2
Jul	-0.6	-1.0	-1.0	-2.3	2.2
Jun	-0.5	-0.9	-3.9	-0.3	3.0
May	-0.7	-1.1	-3.2	-0.9	2.4
Apr	3.5	3.6	4.6	1.9	3.4
Mar	-1.0	-1.5	-3.1	-1.3	3.5
Feb	0.1	-0.4	-2.6	0.0	4.9
Jan	3.7	3.2	-3.1	7.9	8.2
Dec 2010	-1.1	-0.4	-2.9	0.0	-8.6
Dec 2009	0.3	1.0	3.2	-0.5	-4.1
Dec 2008	1.3	2.6	-1.1	4.3	-9.0

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

Table VH-13 provides the analysis of the UK Office for National Statistics of contributions to the 12 months percentage changes of value and volume of retail sales in the UK. The volume of retail sales seasonally adjusted decreased 1.1 percent in the 12 months ending in Apr. Sales of predominantly food stores with weight of 41.7 decreased 3.5 percent in the 12 months ending in Apr, contributing minus 1.4 percentage points. Mostly nonfood stores with weight of 43.2 percent increased 0.8 percent with contribution of 0.4 percentage points. Positive contribution to 12-month percentage changes of volume was made by non-store retailing with weight of 4.9 percent, growth of 13.5 percent and positive contribution of 0.7 percentage points but automotive fuel with weight of 10.2 percent and growth of minus 8.0 percent deducted 0.8 percentage points. The value of retail sales increased 0.4 percent in the 12 months ending in Apr. There were positive contributions: 0.1 percentage points for predominantly nonfood stores and 0.6 percentage points for non-store retailing.

Table VH-13, UK, Value of Retail Sales 12-month ∆% and Percentage Points Contributions by Sectors

Apr 2012	Weight % of All Retailing	Volume SA 12- Month ∆%	PP Cont. % points	Value SA 12- Month ∆%	PP Cont. % points
All Retailing	100.0	-1.1		0.4
Mostly Food Stores	41.7	-3.5	-1.4	0.1	0.0
Mostly Nonfood Stores
Total	43.2	0.8	0.4	0.2	0.1
Non- specialized	7.8	8.8	0.7	7.2	0.6
Textile, Clothing & Footwear	12.2	-7.5	-0.9	-5.5	-0.7
Household Goods Stores	9.7	3.6	0.3	1.3	0.1
Other	13.5	2.5	0.3	0.7	0.1
Non-store Retailing	4.9	13.5	0.7	12.6	0.6
Automotive Fuel	10.2	-8.0	-0.8	-3.4	-0.3

Cont.: Contribution

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

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

Table VI-1 shows the phenomenal impulse to valuations of risk financial assets originating in the initial shock of near zero interest rates in 2003-2004 with the fed funds rate at 1 percent, in fear of deflation that never materialized, and quantitative easing in the form of suspension of the auction of 30-year Treasury bonds to lower mortgage rates. World financial markets were dominated by monetary and housing policies in the US. Between 2002 and 2008, the DJ UBS Commodity Index rose 165.5 percent largely because of unconventional monetary policy encouraging carry trades from low US interest rates to long leveraged positions in commodities, exchange rates and other risk financial assets. The charts of risk financial assets show sharp increase in valuations leading to the financial crisis and then profound drops that are captured in Table VI-1 by percentage changes of peaks and troughs. The first round of quantitative easing and near zero interest rates depreciated the dollar relative to the euro by 39.3 percent between 2003 and 2008, with revaluation of the dollar by 25.1 percent from 2008 to 2010 in the flight to dollar-denominated assets in fear of world financial risks and then devaluation of the dollar of 5.0 percent by Fri May 25, 2012. Dollar devaluation is a major vehicle of monetary policy in reducing the output gap that is implemented in the probably erroneous belief that devaluation will not accelerate inflation, misallocating resources toward less productive economic activities and disrupting financial markets. The last row of Table VI-1 shows CPI inflation in the US rising from 1.9 percent in 2003 to 4.1 percent in 2007 even as monetary policy increased the fed funds rate from 1 percent in Jun 2004 to 5.25 percent in Jun 2006.

Table VI-1, Volatility of Assets

DJIA	10/08/02-10/01/07	10/01/07-3/4/09	3/4/09- 4/6/10
∆%	87.8	-51.2	60.3
NYSE Financial	1/15/04- 6/13/07	6/13/07- 3/4/09	3/4/09- 4/16/07
∆%	42.3	-75.9	121.1
Shanghai Composite	6/10/05- 10/15/07	10/15/07- 10/30/08	10/30/08- 7/30/09
∆%	444.2	-70.8	85.3
STOXX EUROPE 50	3/10/03- 7/25/07	7/25/07- 3/9/09	3/9/09- 4/21/10
∆%	93.5	-57.9	64.3
UBS Com.	1/23/02- 7/1/08	7/1/08- 2/23/09	2/23/09- 1/6/10
∆%	165.5	-56.4	41.4
10-Year Treasury	6/10/03	6/12/07	12/31/08	4/5/10
%	3.112	5.297	2.247	3.986
USD/EUR	6/26/03	7/14/08	6/07/10	5/25/2012
Rate	1.1423	1.5914	1.192	1.2518
CNY/USD	01/03 2000	07/21 2005	7/15 2008	5/25/ 2012
Rate	8.2798	8.2765	6.8211	6.3372
New House	1963	1977	2005	2009
Sales 1000s	560	819	1283	375
New House	2000	2007	2009	2010
Median Price $1000	169	247	217	203
	2003	2005	2007	2010
CPI	1.9	3.4	4.1	1.5

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

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

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

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

Table VI-2 extracts four rows of Table VI-I with the Dollar/Euro (USD/EUR) exchange rate and Chinese Yuan/Dollar (CNY/USD) exchange rate that reveal pursuit of exchange rate policies resulting from monetary policy in the US and capital control/exchange rate policy in China. The ultimate intentions are the same: promoting internal economic activity at the expense of the rest of the world. The easy money policy of the US was deliberately or not but effectively to devalue the dollar from USD 1.1423/EUR on Jun 26, 2003 to USD 1.5914/EUR on Jul 14, 2008, or by 39.3 percent. The flight into dollar assets after the global recession caused revaluation to USD 1.192/EUR on Jun 7, 2010, or by 25.1 percent. After the temporary interruption of the sovereign risk issues in Europe from Apr to Jul, 2010, shown in Table VI-4 below, the dollar has devalued again to USD 1.2518/EUR on May 25, 2012 or by 5.0 percent {[(1.2518/1.192)-1]100}. Yellen (2011AS, 6) admits that Fed monetary policy results in dollar devaluation with the objective of increasing net exports, which was the policy that Joan Robinson (1947) labeled as “beggar-my-neighbor” remedies for unemployment. Risk aversion erodes devaluation of the dollar. China fixed the CNY to the dollar for a long period at a highly undervalued level of around CNY 8.2765/USD subsequently revaluing to CNY 6.8211/USD until Jun 7, 2010, or by 17.6 percent and after fixing it again to the dollar, revalued to CNY 6.3372/USD on Fri May 25, 2012, or by an additional 7.1 percent, for cumulative revaluation of 23.4 percent.

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

USD/EUR	12/26/03	7/14/08	6/07/10	5/25 /2012
Rate	1.1423	1.5914	1.192	1.2518
CNY/USD	01/03 2000	07/21 2005	7/15 2008	5/25/2012
Rate	8.2798	8.2765	6.8211	6.3372
Weekly Rates	5/4/2012	5/11/2012	5/18/2012	5/25/2012
CNY/USD	6.2928	6.3114	6.3260	6.3372
∆% from Earlier Week*	0.1	0.1	-0.2	-0.2

*Negative sign is depreciation, positive sign is appreciation

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

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

The Dow Jones Newswires informs on Oct 15 that the premier of China Wen Jiabao announced that the Chinese yuan will not be further appreciated to prevent adverse effects on exports (http://professional.wsj.com/article/SB10001424052970203914304576632790881396896.html?mod=WSJ_hp_LEFTWhatsNewsCollection). Table VI-2A provides the CNY/USD rate from Oct 28, 2011 to May 25, 2012 in selected intervals. The CNY/USD revalued by 0.9 percent from Oct 28, 2012 to Apr 27, 2012 but the magnitude of the revaluation declined to 0.3 percent by May 25, 2012. Meanwhile, the Senate of the US is proceeding with a bill on China’s trade that could create a confrontation but may not be approved by the entire Congress. An important statement by the People’s Bank of China (PBC), China’s central bank, on Apr 14, 2012, announced the widening of the daily maximum band of fluctuation of the renminbi (RMB) yuan (http://www.pbc.gov.cn/publish/english/955/2012/20120414090756030448561/20120414090756030448561_.html):

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

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

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

Table VI-2A, Renminbi Yuan US Dollar Rate

	CNY/USD	∆% from 10/28/2011
5/25/2012	6.3372	0.3
4/27/2012	6.3016	0.9
3/23/2012	6.3008	0.9
2/3/2012	6.3030	0.9
12/30/2011	6.2940	1.0
11/25/2011	6.3816	-0.4
10/28/2011	6.3588	-

Source:

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

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

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

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

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

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

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

	GDP $B 2011	FD %GDP 2011	CAD %GDP 2011	Debt %GDP 2011	FD%GDP 2015	CAD%GDP 2015	Debt %GDP 2015
US	15094	-7.3	-3.1	80.3	-2.3	-3.2	88.3
Japan	5869	-9.1	2.0	126.6	-5.8	2.4	155.0
UK	2418	-5.8	-1.9	78.3	-0.8	-0.4	88.1
Euro	13115	-1.6	0.3	68.4	1.1	1.2	71.3
Ger	3577	0.7	5.7	56.1	1.4	4.3	52.4
France	2776	-2.9	-2.2	80.4	0.3	-0.8	83.8
Italy	2199	0.8	-3.2	99.6	4.4	-1.6	101.5
Can	1737	-4.1	-2.8	33.3	-1.1	-2.5	37.4
China	7298	-1.2	2.7	25.8	-0.1	3.4	14.8
Brazil	2493	3.1	-2.1	36.4	3.1	-3.4	31.9

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

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

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

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

Economic risks include the following:

1. China’s Economic Growth. China is lowering its growth target to 7.5 percent per year. Lu Hui, writing on “China lowers GDP target to achieve quality economic growth, on Mar 12, 2012, published in Beijing by Xinhuanet (http://news.xinhuanet.com/english/china/2012-03/12/c_131461668.htm), informs that Premier Jiabao wrote in a government work report that the GDP growth target will be lowered to 7.5 percent to enhance the quality and level of development of China over the long term. The quarterly growth rate of GDP in IQ2012 of 1.8 percent is equivalent to 7.4 percent per year (see subsection VC at http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring_15.html). There is also ongoing political development in China during a decennial political reorganization. Xinhuanet informs that Premier Wen Jiabao considers the need for macroeconomic stimulus, arguing that “we should continue to implement proactive fiscal policy and a prudent monetary policy, while giving more priority to maintaining growth” (http://news.xinhuanet.com/english/china/2012-05/20/c_131599662.htm). Premier Wen elaborates that “the country should properly handle the relationship between maintaining growth, adjusting economic structures and managing inflationary expectations” (http://news.xinhuanet.com/english/china/2012-05/20/c_131599662.htm).

2. United States Economic Growth, Labor Markets and Budget/Debt Quagmire. (i) The US economy grew at 1.6 percent in 2011 (Section I in http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-economic-growth-falling-real.html), 1.7 percent in annual equivalent in the five quarters from IQ2011 to IQ2012 and 2.1 percent in IQ2012 relative to IQ2011 (see Section I at http://cmpassocregulationblog.blogspot.com/2012/04/mediocre-growth-with-high-unemployment.html). (ii) The labor market continues fractured with 27.8 million unemployed or underemployed (see Section I at http://cmpassocregulationblog.blogspot.com/2012/05/recovery-without-jobs-twenty-eight.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/04/thirty-million-unemployed-or.html). There are over 10 million fewer full-time jobs and hiring has collapsed (see Section I at http://cmpassocregulationblog.blogspot.com/2012/05/recovery-without-hiring-ten-million.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring.html). (iii) There is a difficult climb from the record deficit of 9.9 percent in 2009 and cumulative deficit of $5,082 in four consecutive years of deficits exceeding one trillion dollars from 2009 to 2012 (http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or.html). There is no subsequent jump of debt in US peacetime history as the one from 40.5 percent of GDP in 2008 to 62.8 percent of GDP in 2011 and projected by the Congressional Budget Office (CBO 2012JanBEO) at 67.7 percent in 2012. The CBO (2012JanBEO) must use current law without any changes in the baseline scenario but also calculates another alternative scenario with different assumptions. In the alternative scenario, the debt/GDP ratio rises to 94.2 percent by 2022. The US is facing an unsustainable debt/GDP path. Feldstein (2012Mar19) finds that the most troubling uncertainty in the US is the programmed tax increases projected by the CBO (2012JanBEO) under current law with federal government revenue increasing from $2.4 trillion in fiscal year 2012 to $2.9 trillion in fiscal year 2013. The increase of $512 billion of federal revenue would be about 2.9 percent of GDP, raising the share of federal revenue in GDP from 15.8 percent in fiscal year 2012 to 18.7 percent of GDP in fiscal year 2013. In the analysis of Feldstein (2012Mar19), increasing revenue would originate in higher personal tax rates, payroll tax contributions and taxes on dividends, capital gains and corporate income tax. The share of federal revenue in GDP would increase to 19.8 percent in 2014, remaining above 20 percent during the rest of the decade. Feldstein (2012Mar19) finds that such a shock of sustained tax increases would risk another recession in 2013, requiring preventive legislation to smooth tax increases

3. Economic Growth and Labor Markets in Advanced Economies. Advanced economies are growing slowly. Japan’s GDP fell 0.5 percent in IVQ2011 relative to a year earlier but grew 2.7 percent in IQ2012 relative to a year earlier and 1.1 percent in IQ2012 relative to IVQ2011. The euro zone’s GDP fell 0.3 percent in IVQ2011 and was flat in IQ2012 relative to a year earlier; Germany’s GDP fell 0.2 percent in IVQ2011 but grew 0.5 percent in IQ2012; and the UK’s GDP fell 0.3 percent in IVQ2011 and 0.3 percent in IQ2012. There is still high unemployment in advanced economies

4. World Inflation Waves. Inflation continues in repetitive waves globally (see Section I Inflation Waves at http://cmpassocregulationblog.blogspot.com/2012/05/world-inflation-waves-monetary-policy.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring.html and http://cmpassocregulationblog.blogspot.com/2012/03/global-financial-and-economic-risk.html)

A list of financial uncertainties includes:

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

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

3. Valuation of Risk Financial Assets. Valuations of risk financial assets have reached extremely high levels in markets with lower volumes. For example, the DJIA has increased 28.6 percent since the trough of the sovereign debt crisis in Europe on Jul 2, 2010, and the S&P 500 has gained 28.9 percent. It is challenging in theory and practice to assess when variables have peaked but sustained valuations to very high levels could be followed by contractions of valuations. Jonathan Cheng, writing on “Stocks add 66 points, post first-quarter record,” published on Mar 30, 2012, in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052702303816504577313123753822852.html?mod=WSJ_Markets_LEFTTopStories&mg=reno64-sec-wsj), finds that the DJIA rose 8.1 percent in IQ2012, which is the highest since 1998, while the S&P 500 gained 12 percent. Paul A. Samuelson remarked that “the stock market has predicted nine of the last five recessions.” Another version of this phrase would be that “the stock market has predicted nine of the last five economic booms.” The tool of analysis of Cochrane (2011Jan, 27, equation (16)) is the government debt valuation equation:

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

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

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

5. Credibility and Commitment of Central Bank Policy. There is a credibility issue of the commitment of monetary policy. The Federal Open Market Committee (FOMC) advised on its Apr 25, 2012 statement that: “To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to ¼ percent and currently anticipates that economic conditions—including low rates of resource utilization and a subdued outlook for inflation over the medium run—are likely to warrant exceptionally low levels of the federal funds rate at least through late 2014” (http://www.federalreserve.gov/newsevents/press/monetary/20120425a.htm). At its meeting on Jan 25, the FOMC began to provide to the public the specific forecasts of interest rates and other economic variables by FOMC members (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120425.pdf). These forecasts are analyzed in Section IV Global Inflation. Thomas J. Sargent and William L. Silber, writing on “The challenges of the Fed’s bid for transparency,” on Mar 20, published in the Financial Times (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120125.pdf

), analyze the costs and benefits of transparency by the Fed. In the analysis of Sargent and Silber (2012Mar20), benefits of transparency by the Fed will exceed costs if the Fed is successful in conveying to the public what policies would be implemented and how forcibly in the presence of unforeseen economic events. History has been unkind to policy commitments. The risk in this case is if the Fed would postpone adjustment because of political pressures as has occurred in the past or because of errors of evaluation and forecasting of economic and financial conditions. Both political pressures and errors abounded in the unhappy stagflation of the 1970s also known as the US Great Inflation (see http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html and Appendix I The Great Inflation; see Taylor 1993, 1997, 1998LB, 1999, 2012FP, 2012Mar27, 2012Mar28, 2012JMCB). The challenge of the Fed, in the view of Sargent and Silber 2012Mar20), is to convey to the public the need to deviate from the commitment to interest rates of zero to ¼ percent because conditions have changed instead of unwarranted inaction or policy changes. Errors have abounded such as a critical cause of the global recession pointed by Sargent and Silber (2012Mar20): “While no president is known to have explicitly pressurized Mr. Bernanke’s predecessor, Alan Greenspan, he found it easy to maintain low interest rates for too long, fuelling the credit boom and housing bubble that led to the financial crisis in 2008.” Sargent and Silber (2012Mar20) also find need of commitment of fiscal authorities to consolidation needed to attain sustainable path of debt.

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

U_t = Uⁿ_t – α(π_t – π^e) α > 0 (1)

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

W = W(π_t, U_t) (2)

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

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

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

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

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

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

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

In a world of exchange wars, depreciation of the host-country currency can move even faster such that the profits from the carry trade may become major losses. Depreciation is the percentage change in instants against which the interest rate of a day is in the example [(10)(1/360)] or 0.03 percent. Exchange rates move much faster in the real world as in the overshooting model of Dornbusch (1976). Profits in carry trades have greater risks but equally greater returns when the short position in zero interest rates, or borrowing, and on the dollar, are matched with truly agile financial risk assets such as commodities and equities. A simplified analysis could consider the portfolio balance equations A_ij = f(r, x) where A_ij is the demand for i = 1,2,∙∙∙n assets from j = 1,2, ∙∙∙m sectors, r the 1xn vector of rates of return, r_i, of n assets and x a vector of other relevant variables. Tobin (1969) and Brunner and Meltzer (1973) assume imperfect substitution among capital assets such that the own first derivatives of A_ij are positive, demand for an asset increases if its rate of return (interest plus capital gains) is higher, and cross first derivatives are negative, demand for an asset decreases if the rate of return of alternative assets increases. Theoretical purity would require the estimation of the complete model with all rates of return. In practice, it may be impossible to observe all rates of return such as in the critique of Roll (1976). Policy proposals and measures by the Fed have been focused on the likely impact of withdrawals of stocks of securities in specific segments, that is, of effects of one or several specific rates of return among the n possible rates. In fact, the central bank cannot influence investors and arbitrageurs to allocate funds to assets of desired categories such as asset-backed securities that would lower the costs of borrowing for mortgages and consumer loans. Floods of cheap money may simply induce carry trades in arbitrage of opportunities in fast moving assets such as currencies, commodities and equities instead of much lower returns in fixed income securities (see http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/01/professor-mckinnons-bubble-economy.html http://cmpassocregulationblog.blogspot.com/2011/01/world-inflation-quantitative-easing.html http://cmpassocregulationblog.blogspot.com/2011/01/treasury-yields-valuation-of-risk.html http://cmpassocregulationblog.blogspot.com/2010/11/quantitative-easing-theory-evidence-and.html http://cmpassocregulationblog.blogspot.com/2010/12/is-fed-printing-money-what-are.html).

It is in this context of economic and financial uncertainties that decisions on portfolio choices of risk financial assets must be made. There is a new carry trade that learned from the losses after the crisis of 2007 or learned from the crisis how to avoid losses. The sharp rise in valuations of risk financial assets shown in Table VI-1 after the first policy round of near zero fed funds and quantitative easing by the equivalent of withdrawing supply with the suspension of the 30-year Treasury auction was on a smooth trend with relatively subdued fluctuations. The credit crisis and global recession have been followed by significant fluctuations originating in sovereign risk issues in Europe, doubts of continuing high growth and accelerating inflation in China now complicated by political developments, events such as in the Middle East and Japan and legislative restructuring, regulation, insufficient growth, falling real wages, depressed hiring and high job stress of unemployment and underemployment in the US now with realization of growth standstill. The “trend is your friend” motto of traders has been replaced with a “hit and realize profit” approach of managing positions to realize profits without sitting on positions. There is a trend of valuation of risk financial assets driven by the carry trade from zero interest rates with fluctuations provoked by events of risk aversion or the “sharp shifts in risk appetite” of Blanchard (2012WEOApr, XIII). Table VI-4, which is updated for every comment of this blog, shows the deep contraction of valuations of risk financial assets after the Apr 2010 sovereign risk issues in the fourth column “∆% to Trough.” There was sharp recovery after around Jul 2010 in the last column “∆% Trough to 5/25/12,” 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 [(1.018)⁴]. 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. Europe’s sovereign debt crisis and the fractured US job market continued to influence risk aversion in the week of May 11. Politics in Greece and banking issues in Spain were important factors of sharper risk aversion in the week of May 18. Risk aversion continued during the week of May 25. The highest valuations in column “∆% Trough to 5/25/12” are by US equities indexes: DJIA 28.6 percent and S&P 500 28.9 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 13,331.77 in intraday trading 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 5/25/12” had double digit gains relative to the trough around Jul 2, 2010 but now most valuations of equity indexes show increase of less than 10 percent: China’s Shanghai Composite is 2.1 percent below the trough; STOXX 50 of Europe is 0.5 percent below the trough; Japan’s Nikkei Average is 2.8 percent below the trough; DJ Asia Pacific TSM is 0.2 percent below the trough; Dow Global is 3.4 percent above the trough; and NYSE Financial is 0.5 percent below the trough. DJ UBS Commodities is 6.9 percent above the trough. DAX is 11.8 percent above the trough. Japan’s Nikkei Average is 2.8 percent below the trough on Aug 31, 2010 and 24.7 percent below the peak on Apr 5, 2010. The Nikkei Average closed at 8580.39 on Fri May 25, 2012 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata), which is 16.3 percent lower than 10,254.43 on Mar 11, 2011, on the date of the Tōhoku or Great East Japan Earthquake/tsunami. Global risk aversion erased the earlier gains of the Nikkei. The dollar depreciated by 5.0 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 5/25/12” in Table VI-4 shows that there were decreases of several valuations of risk financial assets in the week of May 25, 2012 such as 0.8 percent for DJ Asia Pacific, 0.4 percent for Nikkei Average, 0.5 percent for Shanghai Composite, 1.6 percent for STOXX 50 and 2.5 percent for DJ UBS Commodities. Some valuations increased such as 0.7 percent for DJIA, 1.7 percent for S&P 500, 1.4 percent for NYSE Financial, 0.4 for Dow Global and 1.1 percent for Dax. There are still high uncertainties on European sovereign risks, US and world growth slowdown and China’s growth tradeoffs. Sovereign problems in the “periphery” of Europe and fears of slower growth in Asia and the US cause risk aversion with trading caution instead of more aggressive risk exposures. There is a fundamental change in Table VI-4 from the relatively upward trend with oscillations since the sovereign risk event of Apr-Jul 2010. Performance is best assessed in the column “∆% Peak to 5/25/12” that provides the percentage change from the peak in Apr 2010 before the sovereign risk event to May 25, 2012. Most risk financial assets had gained not only relative to the trough as shown in column “∆% Trough to 5/25/12” but also relative to the peak in column “∆% Peak to 5/25/12.” There are now only three equity indexes above the peak in Table VI-4: DJIA 11.2 percent, S&P 500 8.3 percent and Dax 0.1 percent. There are several indexes below the peak: NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) by 20.8 percent, Nikkei Average by 24.7 percent, Shanghai Composite by 26.3 percent, DJ Asia Pacific by 12.6 percent, STOXX 50 by 15.8 percent, Dax by 15.8 percent and Dow Global by 15.6 percent. DJ UBS Commodities Index is now 8.6 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 2010 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 VI-4, Stock Indexes, Commodities, Dollar and 10-Year Treasury  

	Peak	Trough	∆% to Trough	∆% Peak to 5/25 /12	∆% Week 5/25/ 12	∆% Trough to 5/25 12
DJIA	4/26/ 10	7/2/10	-13.6	11.2	0.7	28.6
S&P 500	4/23/ 10	7/20/ 10	-16.0	8.3	1.7	28.9
NYSE Finance	4/15/ 10	7/2/10	-20.3	-20.8	1.4	-0.5
Dow Global	4/15/ 10	7/2/10	-18.4	-15.6	0.4	3.4
Asia Pacific	4/15/ 10	7/2/10	-12.5	-12.6	-0.8	-0.2
Japan Nikkei Aver.	4/05/ 10	8/31/ 10	-22.5	-24.7	-0.4	-2.8
China Shang.	4/15/ 10	7/02 /10	-24.7	-26.3	-0.5	-2.1
STOXX 50	4/15/10	7/2/10	-15.3	-15.8	-1.6	-0.5
DAX	4/26/ 10	5/25/ 10	-10.5	0.1	1.1	11.8
Dollar Euro	11/25 2009	6/7 2010	21.2	17.3	2.1	5.0
DJ UBS Comm.	1/6/ 10	7/2/10	-14.5	-8.6	-2.5	6.9
10-Year T Note	4/5/ 10	4/6/10	3.986	1.738

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

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

Bernanke (2010WP) and Yellen (2011AS) reveal the emphasis of monetary policy on the impact of the rise of stock market valuations in stimulating consumption by wealth effects on household confidence. Table VI-5 shows a gain by Apr 29, 2011 in the DJIA of 14.3 percent and of the S&P 500 of 12.5 percent since Apr 26, 2010, around the time when sovereign risk issues in Europe began to be acknowledged in financial risk asset valuations. The last row of Table VI-5 for May 25, 2012, shows that the S&P 500 is now 8.7 percent above the Apr 26, 2010 level and the DJIA is 11.2 percent above the level on Apr 26, 2010. Multiple rounds of risk aversion eroded earlier gains, showing that risk aversion can destroy market value even with zero interest rates. Relaxed risk aversion has contributed to recovery of valuations. Much the same as zero interest rates and quantitative easing have not had any effects in recovering economic activity while distorting financial markets and resource allocation.

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

2010	∆% DJIA from  prior date	∆% DJIA from Apr 26	∆% S&P 500 from prior date	∆% S&P 500 from Apr 26
Apr 26
May 6	-6.1	-6.1	-6.9	-6.9
May 26	-5.2	-10.9	-5.4	-11.9
Jun 8	-1.2	-11.3	2.1	-12.4
Jul 2	-2.6	-13.6	-3.8	-15.7
Aug 9	10.5	-4.3	10.3	-7.0
Aug 31	-6.4	-10.6	-6.9	-13.4
Nov 5	14.2	2.1	16.8	1.0
Nov 30	-3.8	-3.8	-3.7	-2.6
Dec 17	4.4	2.5	5.3	2.6
Dec 23	0.7	3.3	1.0	3.7
Dec 31	0.03	3.3	0.07	3.8
Jan 7	0.8	4.2	1.1	4.9
Jan 14	0.9	5.2	1.7	6.7
Jan 21	0.7	5.9	-0.8	5.9
Jan 28	-0.4	5.5	-0.5	5.3
Feb 4	2.3	7.9	2.7	8.1
Feb 11	1.5	9.5	1.4	9.7
Feb 18	0.9	10.6	1.0	10.8
Feb 25	-2.1	8.3	-1.7	8.9
Mar 4	0.3	8.6	0.1	9.0
Mar 11	-1.0	7.5	-1.3	7.6
Mar 18	-1.5	5.8	-1.9	5.5
Mar 25	3.1	9.1	2.7	8.4
Apr 1	1.3	10.5	1.4	9.9
Apr 8	0.03	10.5	-0.3	9.6
Apr 15	-0.3	10.1	-0.6	8.9
Apr 22	1.3	11.6	1.3	10.3
Apr 29	2.4	14.3	1.9	12.5
May 6	-1.3	12.8	-1.7	10.6
May 13	-0.3	12.4	-0.2	10.4
May 20	-0.7	11.7	-0.3	10.0
May 27	-0.6	11.0	-0.2	9.8
Jun 3	-2.3	8.4	-2.3	7.3
Jun 10	-1.6	6.7	-2.2	4.9
Jun 17	0.4	7.1	0.04	4.9
Jun 24	-0.6	6.5	-0.2	4.6
Jul 1	5.4	12.3	5.6	10.5
Jul 8	0.6	12.9	0.3	10.9
Jul 15	-1.4	11.4	-2.1	8.6
Jul 22	1.6	13.2	2.2	10.9
Jul 29	-4.2	8.4	-3.9	6.6
Aug 05	-5.8	2.1	-7.2	-1.0
Aug 12	-1.5	0.6	-1.7	-2.7
Aug 19	-4.0	-3.5	-4.7	-7.3
Aug 26	4.3	0.7	4.7	-2.9
Sep 02	-0.4	0.3	-0.2	-3.1
Sep 09	-2.2	-1.9	-1.7	-4.8
Sep 16	4.7	2.7	5.4	0.3
Sep 23	-6.4	-3.9	-6.5	-6.2
Sep 30	1.3	-2.6	-0.4	-6.7
Oct 7	1.7	-0.9	2.1	-4.7
Oct 14	4.9	3.9	5.9	1.0
Oct 21	1.4	5.4	1.1	2.2
Oct 28	3.6	9.2	3.8	6.0
Nov 04	-2.0	6.9	-2.5	3.4
Nov 11	1.4	8.5	0.8	4.3
Nov 18	-2.9	5.3	-3.8	0.3
Nov 25	-4.8	0.2	-4.7	-4.4
Dec 02	7.0	7.3	7.4	2.7
Dec 09	1.4	8.7	0.9	3.6
Dec 16	-2.6	5.9	-2.8	0.6
Dec 23	3.6	9.7	3.7	4.4
Dec 30	-0.6	9.0	-0.6	3.8
Jan 6 2012	1.2	10.3	1.6	5.4
Jan 13	0.5	10.9	0.9	6.4
Jan 20	2.4	13.5	2.0	8.5
Jan 27	-0.5	13.0	0.1	8.6
Feb 3	1.6	14.8	2.2	11.0
Feb 10	-0.5	14.2	-0.2	10.8
Feb 17	1.2	15.6	1.4	12.3
Feb 24	0.3	15.9	0.3	12.7
Mar 2	0.0	15.8	0.3	13.0
Mar 9	-0.4	15.3	0.1	13.1
Mar 16	2.4	18.1	2.4	15.9
Mar 23	-1.1	16.7	-0.5	15.3
Mar 30	1.0	17.9	0.8	16.2
Apr 6	-1.1	16.6	-0.7	15.3
Apr 13	-1.6	14.7	-2.0	13.1
Apr 20	1.4	16.3	0.6	13.7
Apr 27	1.5	18.1	1.8	15.8
May 4	-1.4	16.4	-2.3	12.9
May 11	-1.7	14.4	-1.1	11.7
May 18	-3.5	10.4	-4.3	6.4
May 25	0.7	11.2	1.7	8.7

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

Table VI-6, updated with every blog comment, shows that exchange rate valuations affect a large variety of countries, in fact, almost the entire world, in magnitudes that cause major problems for domestic monetary policy and trade flows. Dollar devaluation is expected to continue because of zero fed funds rate, expectations of rising inflation, large budget deficit of the federal government (http://professional.wsj.com/article/SB10001424052748703907004576279321350926848.html?mod=WSJ_hp_LEFTWhatsNewsCollection) and now zero interest rates indefinitely but with interruptions caused by risk aversion events. Such an event actually occurred in the week of Sep 23 reversing the devaluation of the dollar in the form of sharp appreciation of the dollar relative to other currencies from all over the world including the offshore Chinese yuan market. Column “Peak” in Table VI-6 shows exchange rates during the crisis year of 2008. There was a flight to safety in dollar-denominated government assets as a result of the arguments in favor of TARP (Cochrane and Zingales 2009). This is evident in various exchange rates that depreciated sharply against the dollar such as the South African rand (ZAR) at the peak of depreciation of ZAR 11.578/USD on Oct 22, 2008, subsequently appreciating to the trough of ZAR 7.238/USD by Aug 15, 2010 but now depreciating by 16.1 percent to ZAR 8.4028/USD on May 25, 2012, which is still 27.4 percent stronger than on Oct 22, 2008. An example from Asia is the Singapore Dollar (SGD) highly depreciated at the peak of SGD 1.553/USD on Mar 3, 2009 but subsequently appreciating by 13.2 percent to the trough of SGD 1.348/USD on Aug 9, 2010 but is now only 4.9 percent stronger at SGD 1.2814/USD on May 25, 2012 relative to the trough of depreciation but still stronger by 17.5 percent relative to the peak of depreciation on Mar 3, 2009. Another example is the Brazilian real (BRL) that depreciated at the peak to BRL 2.43/USD on Dec 5, 2008 but appreciated 28.5 percent to the trough at BRL 1.737/USD on Apr 30, 2010, showing depreciation of 14.4 percent relative to the trough to BRL 1.9877/USD on May 25, 2012 but still stronger by 18.1 percent relative to the peak on Dec 5, 2008. At one point in 2011 the Brazilian real traded at BRL 1.55/USD and in the week of Sep 23 surpassed BRL 1.90/USD in intraday trading for depreciation of more than 20 percent. The Banco Central do Brasil, Brazil’s central bank, lowered its policy rate SELIC by 75 basis points for the fifth consecutive meeting of its monetary policy committee, COPOM (http://www.bcb.gov.br/textonoticia.asp?codigo=3440&IDPAI=NEWS):

“Copom reduces the Selic rate to 9.00 percent

18/04/2012 8:06:00 PM

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

Jeffrey T. Lewis, writing on “Brazil steps up battle to curb real’s rise,” on Mar 1, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052970203986604577255793224099580.html?mod=WSJ_hp_LEFTWhatsNewsCollection), analyzes new measures by Brazil to prevent further appreciation of its currency, including the extension of the tax on foreign capital for three years terms, subsequently broadened to five years, and intervention in the foreign exchange market by the central bank. Unconventional monetary policy of zero interest rates and quantitative easing creates trends such as the depreciation of the dollar followed by Table VI-6 but with abrupt reversals during risk aversion. The main effects of unconventional monetary policy are on valuations of risk financial assets and not necessarily on consumption and investment or aggregate demand.

Table VI-6, Exchange Rates

	Peak	Trough	∆% P/T	May 25, 2012	∆% T May 25, 2012	∆% P May 25, 2012
EUR USD	7/15 2008	6/7 2010		5/25 2012
Rate	1.59	1.192		1.2518
∆%			-33.4		4.8	-27.0
JPY USD	8/18 2008	9/15 2010		5/25 2012
Rate	110.19	83.07		79.68
∆%			24.6		4.1	27.7
CHF USD	11/21 2008	12/8 2009		5/25 2012
Rate	1.225	1.025		0.9595
∆%			16.3		6.4	21.7
USD GBP	7/15 2008	1/2/ 2009		5/25 2012
Rate	2.006	1.388		1.5660
∆%			-44.5		11.4	-28.1
USD AUD	7/15 2008	10/27 2008		5/25 2012
Rate	1.0215	1.6639		0.9759
∆%			-62.9		38.4	-0.3
ZAR USD	10/22 2008	8/15 2010		5/25 2012
Rate	11.578	7.238		8.4028
∆%			37.5		-16.1	27.4
SGD USD	3/3 2009	8/9 2010		5/25 2012
Rate	1.553	1.348		1.2814
∆%			13.2		4.9	17.5
HKD USD	8/15 2008	12/14 2009		5/25 2012
Rate	7.813	7.752		7.7634
∆%			0.8		-0.1	0.6
BRL USD	12/5 2008	4/30 2010		5/25 2012
Rate	2.43	1.737		1.9877
∆%			28.5		-14.4	18.2
CZK USD	2/13 2009	8/6 2010		5/25 2012
Rate	22.19	18.693		20.273
∆%			15.7		-8.5	8.6
SEK USD	3/4 2009	8/9 2010		5/25 2012
Rate	9.313	7.108		7.1766
∆%			23.7		-1.0	22.9
CNY USD	7/20 2005	7/15 2008		5/25 2012
Rate	8.2765	6.8211		6.3372
∆%			17.6		7.1	23.4

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

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

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

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

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

Chart VI-1, US Dollar Currency Indexes

Source: Board of Governors of the Federal Reserve System

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

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

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

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/DataDownload/Chart.aspx?rel=H10&series=e85cfb140ce469e13bec458013262fa1&lastObs=780&from=&to=&filetype=csv&label=include&layout=seriescolumn&pp=Download&names=%7bH10/H10/RXI$US_N.B.EU%7d

Table VI-7, updated with every blog comment, provides in the second column the yield at the close of market of the 10-year Treasury note on the date in the first column. The price in the third column is calculated with the coupon of 2.625 percent of the 10-year note current at the time of the second round of quantitative easing after Nov 3, 2010 and the final column “∆% 11/04/10” calculates the percentage change of the price on the date relative to that of 101.2573 at the close of market on Nov 4, 2010, one day after the decision on quantitative easing by the Fed on Nov 3, 2010. Prices with new coupons such as 2.0 percent in recent auctions (http://www.treasurydirect.gov/RI/OFAuctions?form=extended&cusip=912828RR3) are not comparable to prices in Table VI-7. The highest yield in the decade was 5.510 percent on May 1, 2001 that would result in a loss of principal of 22.9 percent relative to the price on Nov 4. Monetary policy has created a “duration trap” of bond prices. Duration is the percentage change in bond price resulting from a percentage change in yield or what economists call the yield elasticity of bond price. Duration is higher the lower the bond coupon and yield, all other things constant. This means that the price loss in a yield rise from low coupons and yields is much higher than with high coupons and yields. Intuitively, the higher coupon payments offset part of the price loss. Prices/yields of Treasury securities were affected by the combination of Fed purchases for its program of quantitative easing and also by the flight to dollar-denominated assets because of geopolitical risks in the Middle East, subsequently by the tragic Great East Japan Earthquake and Tsunami and now again by the sovereign risk doubts in Europe and the growth recession in the US and the world. The yield of 1.738 percent at the close of market on Fri May 25, 2012 would be equivalent to price of 108.1098 in a hypothetical bond maturing in 10 years with coupon of 2.625 percent for price gain of 6.8 percent relative to the price on Nov 4, 2010, one day after the decision on the second program of quantitative easing, as shown in the first to the last row of Table VI-7. The price loss between Mar 9, 2012 and Mar 16, 2012 is 2.3 percent but much higher when using common leverage of 10:1. If inflation accelerates, yields of Treasury securities may rise sharply. Yields are not observed without special yield-lowering effects such as the flight into dollars caused by the events in the Middle East, continuing purchases of Treasury securities by the Fed, the tragic Tōhoku or Great East Earthquake and Tsunami of Mar 11, 2011 affecting Japan, recurring fears on European sovereign credit issues and worldwide risk aversion in the week of Sep 30 caused by “let’s twist again” monetary policy. The realization of a growth standstill recession is also influencing yields. Important causes of the earlier rise in yields shown in Table VI-7 are expectations of rising inflation and US government debt estimated to be around 70 percent of GDP in 2012 (http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or.html http://cmpassocregulationblog.blogspot.com/2011/08/united-states-gdp-growth-standstill.html http://cmpassocregulationblog.blogspot.com/2011/02/policy-inflation-growth-unemployment.html http://cmpassocregulationblog.blogspot.com/2011/04/budget-quagmire-fed-commodities_10.html), rising from 40.5 percent of GDP in 2008, 54.1 percent in 2009 (Table IV-1 at http://cmpassocregulationblog.blogspot.com/2012/02/thirty-one-million-unemployed-or.html and Table 2 in http://cmpassocregulationblog.blogspot.com/2011/04/budget-quagmire-fed-commodities_10.html) and 67.7 percent in 2011. On May 23, 2012, the line “Reserve Bank credit” in the Fed balance sheet stood at $2843 billion, or $2.8 trillion, with portfolio of long-term securities of $2587 billion, or $2.6 trillion, consisting of $1561 billion Treasury nominal notes and bonds, $68 billion of notes and bonds inflation-indexed, $93 billion Federal agency debt securities and $865 billion mortgage-backed securities; reserve balances deposited with Federal Reserve Banks reached $1524 billion or $1.5 trillion (http://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1). There is no simple exit of this trap created by the highest monetary policy accommodation in US history together with the highest deficits and debt in percent of GDP since World War II. Risk aversion from various sources, discussed in section III World Financial Turbulence, has been affecting financial markets for several months. The risk is that in a reversal of risk aversion that has been typical in this cyclical expansion of the economy yields of Treasury securities may back up sharply.

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

Date	Yield	Price	∆% 11/04/10
05/01/01	5.510	78.0582	-22.9
06/10/03	3.112	95.8452	-5.3
06/12/07	5.297	79.4747	-21.5
12/19/08	2.213	104.4981	3.2
12/31/08	2.240	103.4295	2.1
03/19/09	2.605	100.1748	-1.1
06/09/09	3.862	89.8257	-11.3
10/07/09	3.182	95.2643	-5.9
11/27/09	3.197	95.1403	-6.0
12/31/09	3.835	90.0347	-11.1
02/09/10	3.646	91.5239	-9.6
03/04/10	3.605	91.8384	-9.3
04/05/10	3.986	88.8726	-12.2
08/31/10	2.473	101.3338	0.08
10/07/10	2.385	102.1224	0.8
10/28/10	2.658	99.7119	-1.5
11/04/10	2.481	101.2573	-
11/15/10	2.964	97.0867	-4.1
11/26/10	2.869	97.8932	-3.3
12/03/10	3.007	96.7241	-4.5
12/10/10	3.324	94.0982	-7.1
12/15/10	3.517	92.5427	-8.6
12/17/10	3.338	93.9842	-7.2
12/23/10	3.397	93.5051	-7.7
12/31/10	3.228	94.3923	-6.7
01/07/11	3.322	94.1146	-7.1
01/14/11	3.323	94.1064	-7.1
01/21/11	3.414	93.4687	-7.7
01/28/11	3.323	94.1064	-7.1
02/04/11	3.640	91.750	-9.4
02/11/11	3.643	91.5319	-9.6
02/18/11	3.582	92.0157	-9.1
02/25/11	3.414	93.3676	-7.8
03/04/11	3.494	92.7235	-8.4
03/11/11	3.401	93.4727	-7.7
03/18/11	3.273	94.5115	-6.7
03/25/11	3.435	93.1935	-7.9
04/01/11	3.445	93.1129	-8.0
04/08/11	3.576	92.0635	-9.1
04/15/11	3.411	93.3874	-7.8
04/22/11	3.402	93.4646	-7.7
04/29/11	3.290	94.3759	-6.8
05/06/11	3.147	95.5542	-5.6
05/13/11	3.173	95.3387	-5.8
05/20/11	3.146	95.5625	-5.6
05/27/11	3.068	96.2089	-4.9
06/03/11	2.990	96.8672	-4.3
06/10/11	2.973	97.0106	-4.2
06/17/11	2.937	97.3134	-3.9
06/24/11	2.872	97.8662	-3.3
07/01/11	3.186	95.2281	-5.9
07/08/11	3.022	96.5957	-4.6
07/15/11	2.905	97.5851	-3.6
07/22/11	2.964	97.0847	-4.1
07/29/11	2.795	98.5258	-2.7
08/05/11	2.566	100.5175	-0.7
08/12/11	2.249	103.3504	2.1
08/19/11	2.066	105.270	3.7
08/26/11	2.202	103.7781	2.5
09/02/11	1.992	105.7137	4.4
09/09/11	1.918	106.4055	5.1
09/16/11	2.053	101.5434	0.3
09/23/11	1.826	107.2727	5.9
09/30/11	1.912	106.4602	5.1
10/07/11	2.078	104.9161	3.6
10/14/11	2.251	103.3323	2.0
10/21/11	2.220	103.6141	2.3
10/28/11	2.326	102.6540	1.4
11/04/11	2.066	105.0270	3.7
11/11/11	2.057	105.1103	3.8
11/18/11	2.003	105.6113	4.3
11/25/11	1.964	105.9749	4.7
12/02/11	2.042	105.2492	3.9
12/09/11	2.065	105.0363	3.7
12/16/11	1.847	107.0741	5.7
12/23/11	2.027	105.3883	4.1
12/30/11	1.871	106.8476	5.5
01/06/12	1.957	106.0403	4.7
01/13/12	1.869	106.8664	5.5
01/20/12	2.026	105.3976	4.1
01/27/12	1.893	106.6404	5.3
02/03/12	1.923	106.3586	5.0
02/10/12	1.974	105.8815	4.6
02/17/12	2.000	105.6392	4.3
02/24/12	1.977	105.8535	4.5
03/02/12	1.977	105.8535	4.5
03/09/12	2.031	105.3512	4.0
03/16/12	2.294	102.9428	1.7
03/23/12	2.234	103.4867	2.2
03/30/12	2.214	103.6687	2.4
04/06/12	2.058	105.1010	3.8
04/13/12	1.987	105.7603	4.4
04/20/12	1.959	106.0216	4.7
04/27/12	1.931	106.2836	5.0
05/04/12	1.876	106.8004	5.5
05/11/12	1.845	107.0930	5.8
05/18/12	1.714	108.3393	7.0
05/25/12	1.738	108.1098	6.8

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

Source:

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

VII Economic Indicators. Crude oil input in refineries increased 0.9 percent to 14,870 thousand barrels per day on average in the four weeks ending on May 18, 2012 from 14,743 thousand barrels per day in the four weeks ending on May 11, 2012, as shown in Table VII-1. The rate of capacity utilization in refineries continues at a relatively high level of 87.2 percent on May 18, 2012, which is higher than 83.5 percent on May 20, 2011 and higher than 86.3 percent on May 11, 2012. Imports of crude oil decreased 0.5 percent from 8,820 thousand barrels per day on average in the four weeks ending on May 11 to 8,774 thousand barrels per day in the week of May 18. The Energy Information Administration (EIA) informs that “US crude oil imports averaged nearly 8.6 million barrels per day last week, down by 298 thousand barrels per day from the previous week [May 18]” (http://www.eia.gov/pub/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/current/pdf/highlights.pdf). Increasing utilization in refineries with decreasing imports at the margin in the prior week resulted in increase of commercial crude oil stocks by 0.9 million barrels from 381.6 million barrels on May 11 to 382.5 million barrels on May 18. Motor gasoline production increased 0.4 percent to 8,979 thousand barrels per day in the week of May 18 from 8,940 thousand barrels per day on average in the week of May 11. Gasoline stocks decreased 3.3 million barrels and stocks of fuel oil decreased 0.3 million barrels. Supply of gasoline decreased from 8,961 thousand barrels per day on May 20, 2011, to 8,790 thousand barrels per day on May 18, 2012, or by 1.9 percent, while fuel oil supply decreased 3.3 percent. Part of the fall in consumption of gasoline is due to higher prices and part to the growth recession. WTI crude oil price traded at $91.51/barrel on May 18, 2012, decreasing 7.7 percent relative to $99.15/barrel on May 20, 2011. Gasoline prices fell 3.5 percent from May 23, 2011 to May 21, 2012. Increases in prices of crude oil and gasoline relative to a year earlier are moderating because year earlier prices are already reflecting the commodity price surge and commodity prices have been declining recently during worldwide risk aversion. Gasoline prices had been increasing to the highest levels at this time of the year.

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

Four Weeks Ending Thousand Barrels/Day	5/18/12	5/11/12	5/20/11
Crude Oil Refineries Input	14,870 Week       ∆%: 0.9	14,743	14,339
Refinery Capacity Utilization %	87.2	86.3	83.5
Motor Gasoline Production	8,979 Week      ∆%: 0.4	8,940	9,023
Distillate Fuel Oil Production	4,381 Week     ∆%: 1.8	4,304	4,163
Crude Oil Imports	8,774 Week        ∆%: -0.5	8,820	8,877
Motor Gasoline Supplied	8,790 ∆% 2012/2011= -1.9%	8,756	8,961
Distillate Fuel Oil Supplied	3,691 ∆% 2012/2011 = -3.3%	3,738	3,817
	5/11/12	5/4/12	5/13/11
Crude Oil Stocks Million B	382.5     ∆= +0.9 MB	381.6	370.9
Motor Gasoline Million B	201.0    ∆= -3.3 MB	204.3	209.7
Distillate Fuel Oil Million B	119.5 ∆= -0.3 MB	119.8	141.1
WTI Crude Oil Price $/B	91.51 ∆% 2012/2011 -7.7	96.03	99.15
	5/21/12	5/14/12	5/23/11
Regular Motor Gasoline $/G	3.714 ∆% 2012/2011 -3.5	3.754	3.849

B: barrels; G: gallon

Source: US Energy Information Administration

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

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

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

Source: US Energy Information Administration

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

Chart VII-2 of the US Energy Information Administration provides closer view of crude oil stocks since Jun 2010. There is a recent spike in crude oil stocks.

Chart VII-2, US, Crude Oil Stocks

Source: US Energy Information Administration

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

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

Chart VII-3, US, Crude Oil Futures Contract

Source: US Energy Information Administration

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

There is significant difference between initial claims for unemployment insurance adjusted and not adjusted for seasonality provided in Table VII-2. Seasonally adjusted claims fell 2,000 from 372,000 on May 12 to 370,000 on May 19. Claims not adjusted for seasonality increased 2,515 from 325,080 on May 12 to 327,595 on May 19. Strong seasonality is preventing clear analysis of labor markets.

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

	SA	NSA	4-week MA SA
May 19, 12	370,000	327,595	370,000
May 12, 12	372,000	325,080	375,500
Change	-2,000	+2,515	-5,500
May 5, 12	370,000	341,080	379,750
Prior Year	424,000	376,632	434,000

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

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

Table VII-3 provides seasonally and not seasonally adjusted claims in the comparable week for the years from 2001 to 2012. Seasonally adjusted claims typically are lower than claims not adjusted for seasonality. Claims not seasonally adjusted have declined from 540,925 on May 16, 2009 to 361,573 on May 14, 2011, and now to 327,595 on May 19, 2012. There is strong indication of significant decline in the level of layoffs in the US. Hiring has not recovered (see Section IA Hiring Collapse at http://cmpassocregulationblog.blogspot.com/2012/05/recovery-without-hiring-ten-million.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/04/fractured-labor-market-with-hiring.html).

Table VII-3, US, Unemployment Insurance Weekly Claims

	Not Seasonally Adjusted Claims	Seasonally Adjusted Claims
May 19, 2001	338,734	402,000
May 18, 2002	348,887	411,000
May 17, 2003	362,276	425,000
May 15, 2004	297,061	349,000
May 14, 2005	275,524	321,000
May 13, 2006	288,972	335,000
May 12, 2007	258,816	297,000
May 17, 2008	319,817	368,000
May 16, 2009	540,925	622,000
May 15, 2010	414,572	478,000
May 14, 2011	361,573	418,000
May 19, 2012	327,595	370,000

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

VIII Interest Rates. It is quite difficult to measure inflationary expectations because they tend to break abruptly from past inflation. There could still be an influence of past and current inflation in the calculation of future inflation by economic agents. Table VIII-1 provides inflation of the CPI. In the quarter Feb to Apr 2012, CPI inflation for all items seasonally adjusted was 2.8 percent in annual equivalent, that is, compounding inflation in Feb-Apr 2012 and assuming it would be repeated for a full year. In the 12 months ending in Apr, CPI inflation of all items not seasonally adjusted was 2.3 percent. Inflation in Apr 2012 not seasonally adjusted was unchanged relative to Mar 2011 (http://www.bls.gov/cpi/), which is equivalent to 0.0 percent per year. The second row provides the same measurements for the CPI of all items excluding food and energy: 2.3 percent in 12 months and 2.0 percent in annual equivalent. Bloomberg provides the yield curve of US Treasury securities (http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/). The lowest yield is 0.08 percent for three months, 0.13 percent for six months, 0.19 percent for 12 months, 0.29 percent for two years, 0.40 percent for three years, 0.76 percent for five years, 1.17 percent for seven years, 1.74 percent for ten years and 2.84 percent for 30 years. The Irving Fisher definition of real interest rates is approximately the difference between nominal interest rates, which are those estimated by Bloomberg, and the rate of inflation expected in the term of the security, which could behave as in Table VIII-1. Real interest rates in the US have been negative during substantial periods in the past decade while monetary policy pursues a policy of attaining its “dual mandate” of (http://www.federalreserve.gov/aboutthefed/mission.htm):

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

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

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

	∆% 12 Months Apr 2012/Apr 2011 NSA	∆% Annual Equivalent Feb-Apr 2012 SA
CPI All Items	2.3	2.8
CPI ex Food and Energy	2.3	2.0

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

IX Conclusion. The US economy is in growth standstill at an annual equivalent rate in the four quarters of 2011 of 1.6 percent primarily driven by drawing on savings. Real disposable income stagnates in 12 months and declines at the margin. There are around 30 million people in the US unemployed or underemployed. Real wages are falling. There is no exit from unemployment, underemployment and falling real wages because of the collapse of hiring. The euro is fighting for survival. Inflation has occurred in three waves in 2011 and now 2012 with higher inflation induced by carry trades from zero interest rates to commodity futures when there is subdued risk aversion. Inflation declined in the middle of the year because of unwinding carry trades as a result of financial risk aversion originating in the sovereign debt crisis of Europe. Unconventional monetary policy of zero interest rates and large-scale purchases of assets using the central bank’s balance sheet is designed to increase aggregate demand by stimulating consumption and investment. In practice, there is no control of how cheap money will be used. An alternative allocation of cheap money is through the carry trade from zero interest rates and short dollar positions to exposures in risk financial assets such as equities, commodities and so on. After a decade of unconventional monetary policy it may be prudent to return to normalcy so as to avoid adverse side effects of financial turbulence and inflation waves. Normal monetary policy would also encourage financial intermediation required for financing sound long-term projects that can stimulate economic growth and full utilization of resources. (Go to http://cmpassocregulationblog.blogspot.com/ http://sites.google.com/site/economicregulation/carlos-m-pelaez)

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

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Appendix I. The Great Inflation

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

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

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

Chart I1, Brazil, Phillips Circuit 1963-1987

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

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

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

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

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

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

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

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

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

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

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

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

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

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

© Carlos M. Pelaez, 2010, 2011, 2012