CMP Associates Regulation Blog: World Inflation Waves, Financial Turbulence, Foreign Exchange Rate Realignments and World Economic Slowdown with Global Recession Risk: Part II

World Inflation Waves, Financial Turbulence, Foreign Exchange Rate Realignments and World Economic Slowdown with Global Recession Risk

Carlos M. Pelaez

Executive Summary

I World Inflation Waves

IA Appendix: Transmission of Unconventional Monetary Policy

IAi Theory

IAii Policy

IAiii Evidence

IAiv Unwinding Strategy

II United States Inflation

IIA Long-term US Inflation

IIB Current US Inflation

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 IMF revised some of the projections in its World Economic Outlook Update released on Jul 16, 2012 (http://www.imf.org/external/pubs/ft/weo/2012/update/02/index.htm). Table V-1 incorporates these revisions with lines “Rev” where appropriate. 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 3.9 percent in 2013 instead of 4.1 percent in the earlier projection, 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, 2.0 percent on average from 2012 to 2015 in contrast with 4.1 percent for the world as a whole, incorporating the revisions. While the world would grow 17.3 percent in the four years from 2012 to 2015, the G7 as a whole would grow 8.4 percent. The difference in dollars of 2011 is rather high: growing by 17.3 percent would add $12.1 trillion of output to the world economy, or roughly two times the output of the economy of Japan of $5,869 but growing by 8.4 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 26.3 percent or at the average yearly rate of 6.0 percent, contributing $6.6 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 Rev	69,660	3.5	4.1 3.9	4.4	4.5
G7 Rev	33,670	1.5 1.4	1.9 1.9	2.3	2.5
Canada	1,737	2.1	2.2	2.4	2.4
France Rev	2,776	0.5 0.3	1.1 0.8	1.9	1.9
DE Rev	3,577	0.6 1.0	1.5 1.4	1.3	1.3
Italy	2,199	-1.9	-0.3	0.5	1.0
Japan Rev	5,869	2.0 2.4	1.7 1.5	1.5	1.3
UK	2,418	0.8	2.0	2.5	2.6
US Rev	15,094	2.1 0.2	2.4 1.4	2.9	3.3
Euro Area Rev	13,115	-0.3	0.9 0.7	1.4	1.6
DE Rev	3,577	0.6 1.0	1.5 1.4	1.3	1.3
France Rev	2,776	0.5 0.3	1.1 0.8	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 Rev	1,494	-1.8 -1.5	0.1 -0.6	1.6	1.6
EMDE Rev	25,237	5.7 5.6	6.0 5.9	6.2	6.3
Brazil Rev	2,493	3.0 2.5	4.2 4.6	4.0	4.1
Russia	1,850	4.0	3.9	3.9	3.9
India Rev	1,676	6.9 6.1	7.3 6.5	7.5	7.7
China Rev	7,298	8.2 8.0	8.8 8.5	8.7	8.7

Notes: Rev: Revision of July 19, 2012; 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

http://www.imf.org/external/pubs/ft/weo/2012/update/02/index.htm

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 1.2 percent in IQ2012 and 2.8 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 IIQ2012, 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). China’s GDP grew 7.6 percent in IIQ2012 relative to IQ2011. Growth rates of GDP of China in a quarter relative to the same quarter a year earlier have been declining from 2011 to 2012. GDP was flat in the euro area in IQ2012 and fell 0.1 percent 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 0.5 percent in IQ2012 and 2.0 percent relative to a year earlier (Section I http://cmpassocregulationblog.blogspot.com/2012/07/mediocre-economic-growth-united-states.html) but with substantial underemployment and underemployment (http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html) and weak hiring (Section I and earlier http://cmpassocregulationblog.blogspot.com/2012/06/recovery-without-hiring-continuance-of.html).

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

	IQ2012/IVQ2011	IQ2012/IQ2011
United States	0.5	2.0
Japan	1.2	2.8
Euro Area	0.0	-0.1
Germany	0.5	1.7
France	0.0	0.3
Italy	-0.8	-1.4
United Kingdom	-0.3	-0.1
	IIQ2012/IQ2012	IIQ2012/IIQ2011
China	1.8	7.6

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/

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 52.1 in May to 50.3 in Jun, indicating expansion at a lower rate but close to stagnation and to the contraction zone at 50.0 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9795). This index has remained above the contraction territory of 50.0 during 34 months. Both global manufacturing and services have slowed down considerably. David Hensley, Director of Global Economic Coordination at JP Morgan, finds that the PMI data suggest world GDP growth in IIQ2012 could be the slowest in three years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9795). The JP Morgan Global Manufacturing PMI^™, produced by JP Morgan and Markit in association with ISM and IFPSM, fell to 48.9 in Jun from 50.6 in May, for the lowest reading in three years and the first change of direction to contraction since Nov 2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9762). David Hensley, Director of Global Economics Coordination at JPMorgan, finds that inventory adjustment is the driver of the only second change to contraction in the current expansion (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9762). The HSBC Brazil Composite Output Index, compiled by Markit, rose from marginal contraction of 49.6 in May to moderate expansion at 51.5 in Jun (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9775). Andre Loes, Chief Economist, Brazil, at HSBC, finds that PMI data for IIQ2012 could signal weaker activity in services, which can restrain growth of GDP in the year, although the HSBC Services PMI Business Activity Index increased from 49.7 in May to 53.0 in Jun (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9775). The HSBC Brazil Purchasing Managers’ Index^TM (PMI^™) fell to 48.5 in Jun from 49.3 in May, indicating modest business conditions in Brazilian manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9733). Andre Loes, Chief Economist, Brazil at HSBC, finds that the manufacturing index average of 49.0 in IIQ2012 is lower than the prior quarter’s average of 51.0 with Brazil experiencing competitive pressures (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9733).

VA United States. The purchasing managers’ index (PMI) of the Institute for Supply Management (ISM) Report on Business^® fell 3.8 percentage points from 53.5 in May to 49.7 in Jun, for the first contraction since Jul 2009 (http://www.ism.ws/ISMReport/MfgROB.cfm). The index of new orders fell 12.3 percentage points from 60.1 in May to 47.8 in Jun, interrupting growth in 37 months for the first contraction since Apr 2009. The Non-Manufacturing ISM Report on Business^® PMI fell 1.6 percentage points from 53.7 in May to 52.1 in Jun while the index of new orders decreased 3.9 percentage points from 55.6 in May to 55.3 in Jun (http://www.ism.ws/ISMReport/NonMfgROB.cfm). Table USA provides the country economic indicators for the US.

Table USA, US Economic Indicators

Consumer Price Index	Jun 12 months NSA ∆%: 1.7; ex food and energy ∆%: 2.2 Jun month ∆%: 0.0; ex food and energy ∆%: 0.2 Blog 7/22/12
Producer Price Index	Jun 12-month NSA ∆%: 0.7; ex food and energy ∆% 2.6 Jun month SA ∆% = 0.1; ex food and energy ∆%: 0.2 Blog 7/15/12 7/22/12
PCE Inflation	May 12-month NSA ∆%: headline 1.5; ex food and energy ∆% 1.8 Blog 7/8/12
Employment Situation	Household Survey: Jun Unemployment Rate SA 8.2% Blog calculation People in Job Stress Jun: 28.7 million NSA Establishment Survey: Jun Nonfarm Jobs +80,000; Private +84,000 jobs created May 12-month Average Hourly Earnings Inflation Adjusted ∆%: -0.6% Blog 7/8/12
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 May 2012 4.796 million lower by 1.190 million than 5.986 million in Apr May 2007 Blog 7/15/12
GDP Growth	BEA Revised National Income Accounts back to 2003 IQ2011 SAAR ∆%: 0.4 IIQ2011 SAAR ∆%: 1.3 IIIQ2011 SAAR ∆%: 1.8 IVQ2011 SAAR ∆%: 3.0 IQ2012 SAAR ∆%: 1.9 IQ2012/IQ2011 ∆%: 2.0 Blog 7/2/12
Personal Income and Consumption	May month ∆% SA Real Disposable Personal Income (RDPI) SA ∆% 0.3 Real Personal Consumption Expenditures (RPCE): 0.1 12-month May NSA ∆%: RDPI: 1.1; RPCE ∆%: 1.2 Blog 7/8/2012
Quarterly Services Report	IQ12/IQ11 SA ∆%: Information 3.8 Professional 10.3 Administrative 4.9 Hospitals 5.2 Blog 6/10/12
Employment Cost Index	IQ2012 SA ∆%: 0.4 Mar 12 months ∆%: 1.9 Blog 4/29/12
Industrial Production	Jun month SA ∆%: 0.4 Jun 12 months SA ∆%: 4.7 Manufacturing Jun SA ∆% 0.7 Jun 12 months SA ∆% 5.6, NSA 5.5 Capacity Utilization: 78.9 Blog 7/22/12
Productivity and Costs	Nonfarm Business Productivity IQ2012∆% SAAE -0.9; IQ2012/IQ2011 ∆% 0.4; Unit Labor Costs SAAE IQ2012 ∆% 1.3; IQ2012/IQ2011 ∆%: 0.9 Blog 6/10/2012
New York Fed Manufacturing Index	General Business Conditions From Jun 2.29 to Jul 7.39 New Orders: From Jun 2.18 to Jul -2.69 Blog 7/22/12
Philadelphia Fed Business Outlook Index	General Index from Jun minus 16.6 to Jul minus 12.9 New Orders from Jun minus 18.8 to Jul minus 6.9 Blog 7/22/12
Manufacturing Shipments and Orders	May New Orders SA ∆%: 0.7; ex transport ∆%: 0.4 Jan-May New Orders NSA ∆%: 6.1; ex transport ∆% 5.6 Blog 7/8/12
Durable Goods	May New Orders SA ∆%: 1.1; ex transport ∆%: 0.4 Jan-May 12/Jan-May 11 NSA New Orders ∆%: 8.1; ex transport ∆% : 7.7 Blog 7/2/12
Sales of New Motor Vehicles	Jun 2012 7,272,160; Jun 2011 6,332,566. Jun SAAR 14.08 million, May SAAR 13.78 million, Jun 2011 SAAR 11.56 million Blog 7/8/12
Sales of Merchant Wholesalers	Jan-May 2012/Jan-May 2011 NSA ∆%: Total 8.4; Durable Goods: 10.6; Nondurable Goods 6.7 Blog 7/15/12
Sales and Inventories of Manufacturers, Retailers and Merchant Wholesalers	May 12/May 11 NSA ∆%: Sales Total Business 7.2; Manufacturers 6.2 Retailers 6.9; Merchant Wholesalers 8.7 Blog 7/22/12
Sales for Retail and Food Services	Jan-Jun 2012/Jan-Jun 2011 ∆%: Retail and Food Services 6.4; Retail ∆% 6.1 Blog 7/22/12
Value of Construction Put in Place	May SAAR month SA ∆%: 0.9 May 12-month NSA: 7.4 Blog 7/8/12
Case-Shiller Home Prices	Apr 2012/Apr 2011 ∆% NSA: 10 Cities minus 2.2; 20 Cities: minus 1.9 ∆% Apr SA: 10 Cities 0.7 ; 20 Cities: 0.7 Blog 7/2/12
FHFA House Price Index Purchases Only	Apr SA ∆% 0.8; 12 month ∆%: 3.0 Blog 6/24/12
New House Sales	May 2012 month SAAR ∆%: +7.6 Jan-May 2012/Jan-May 2011 NSA ∆%: 19.4 Blog 7/2/12
Housing Starts and Permits	Jun Starts month SA ∆%: 6.9 ; Permits ∆%: -3.7 Jan-Jun 2012/Jan-Jun 2011 NSA ∆% Starts 26.5; Permits ∆% 29.1 Blog 7/22/12
Trade Balance	Balance May SA -$48684 million versus Apr -$50597 million Exports May SA ∆%: 0.2 Imports May SA ∆%: -0.7 Goods Exports Jan-May 2012/2011 NSA ∆%: 6.8 Goods Imports Jan-May 2011/2011 NSA ∆%: 7.3 Blog 7/15/12
Export and Import Prices	Jun 12-month NSA ∆%: Imports -2.1; Exports -2.6 Blog 7/15/12
Consumer Credit	May ∆% annual rate: 8.0 Blog 7/15/12
Net Foreign Purchases of Long-term Treasury Securities	May Net Foreign Purchases of Long-term Treasury Securities: $55.0 billion Major Holders of Treasury Securities: China $1169 billion; Japan $1105 billion; Total Foreign US Treasury Holdings Apr $5264 billion Blog 7/22/12
Treasury Budget	Fiscal Year Oct-Jun 2012/2011 ∆%: Receipts 5.2; Outlays 0.9; Individual Income Taxes 3.1 Deficit Fiscal Year 2011 $1,300 billion Deficit Fiscal Year 2012 Oct-Jun $904,236 million CBO Forecast 2012FY Deficit $1.171 trillion Blog 7/15/2012
Flow of Funds	IQ2012 ∆ since 2007 Assets -$4113B Real estate -$4916B Financial $367.3MM Net Worth -$3300B Blog 6/17/12
Current Account Balance of Payments	IQ2012 -$137B %GDP 3.6 Blog 06/17/12

Links to blog comments in Table USA:

7/15/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-hiring-ten-million_15.html

7/8/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html

7/2/12 http://cmpassocregulationblog.blogspot.com/2012/07/mediocre-economic-growth-united-states_03.html

6/24/12 http://cmpassocregulationblog.blogspot.com/2012/06/recovery-without-hiring-continuance-of_24.html

6/17/12 http://cmpassocregulationblog.blogspot.com/search?updated-min=2012-01-01T00:00:00-08:00&updated-max=2013-01-01T00:00:00-08:00&max-results=48

6/10/12 http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities_10.html

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

Industrial production increased 0.4 percent in Jun, as shown in Table VA-1, with all data seasonally adjusted. In the six months ending in Jun, industrial production accumulated growth of 1.6 percent at the annual equivalent rate of 3.2 percent, which is substantially lower than 4.7 percent in 12 months. Business equipment increased 1.6 percent in Jun, growing 12.9 percent in the 12 months ending in Jun and at the annual equivalent rate of 14.5 percent in the six months ending in Jun. Capacity utilization of total industry is analyzed by the Fed in its report (http://www.federalreserve.gov/releases/g17/Current/): “Capacity utilization for total industry moved up 0.2 percentage point to 78.9 percent, a rate 1.4 percentage points below its long-run (1972-2011) average.” Manufacturing contributed $1,419.9 billion to US national income of $13,693.0 billion without capital consumption adjustment in IQ2012, or 10.4 percent of the total, according to data of the Bureau of Economic Analysis (http://www.bea.gov/iTable/index_nipa.cfm see Table I-11 at http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html).

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

2012	Jun	May	Apr	Mar	Feb	Jan	Jun 12/ Jun 11
Total	0.4	-0.2	0.8	-0.5	0.4	0.7	4.7
Market Groups
Final Products	0.5	-0.2	1.0	-0.6	0.7	0.8	4.8
Consumer Goods	0.1	-0.1	0.9	-1.0	0.4	0.4	2.1
Business Equipment	1.6	0.1	1.5	0.2	1.4	2.0	12.8
Non Industrial Supplies	0.2	-0.3	0.9	-0.8	1.2	0.4	3.7
Construction	-0.3	-1.4	0.7	-0.9	2.2	0.4	4.9
Materials	0.5	-0.2	0.6	-0.4	-0.1	0.7	4.9
Industry Groups
Manufacturing	0.7	-0.7	0.7	-0.6	0.8	1.0	5.6
Mining	0.7	0.0	0.2	-0.1	-2.0	0.5	5.1
Utilities	-1.9	2.8	2.3	-0.6	1.1	-1.8	-2.3
Capacity	78.9	78.7	78.9	78.4	78.9	78.7	1.3

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

Manufacturing increased 0.7 percent in Jun seasonally adjusted, increasing 5.5 percent not seasonally adjusted in 12 months, and grew 1.9 percent in the six months ending in Jun or at the annual equivalent rate of 3.8 percent. A longer perspective of manufacturing in the US is provided by Table VA-2. There has been evident deceleration of manufacturing growth in the US from 2010 and the first three months of 2011 as shown by 12 months rates of growth but growth rates may be increasing again closer to 6 percent. The rates of decline of manufacturing in 2009 are quite high with a drop of 18.4 percent in the 12 months ending in Apr 2009. Manufacturing recovered from this decline and led the recovery from the recession. Rates of growth appear to be returning to the levels at 3 percent or higher in the annual rates before the recession.

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

	Month SA ∆%	12-Month NSA ∆%
Jun 2012	0.7	5.5
May	-0.7	5.1
Apr	0.7	5.6
Mar	-0.6	4.3
Feb	0.8	5.9
Jan	1.0	4.9
Dec 2011	1.5	4.4
Nov	0.0	4.0
Oct	0.5	4.3
Sep	0.4	4.0
Aug	0.3	3.4
Jul	0.8	3.2
Jun	0.0	3.1
May	0.2	3.0
Apr	-0.6	4.1
Mar	0.6	6.0
Feb	0.2	6.3
Jan	0.4	6.3
Dec 2010	1.0	6.6
Nov	0.2	5.5
Oct	0.1	6.6
Sep	0.2	6.7
Aug	0.0	7.1
Jul	0.8	7.3
Jun	-0.1	9.0
May	1.4	8.3
Apr	1.0	6.5
Mar	1.1	4.2
Feb	0.1	0.6
Jan	0.9	0.5
Dec 2009	0.1	-3.7
Nov	0.9	-6.6
Oct	-0.1	-9.4
Sep	0.7	-10.7
Aug	1.0	-13.7
Jul	1.2	-15.3
Jun	-0.3	-17.8
May	-1.2	-17.8
Apr	-0.8	-18.4
Mar	-2.1	-17.5
Feb	0.0	-16.3
Jan	-2.9	-16.6
Dec 2008	-3.3	-14.1
Nov	-2.4	-11.4
Oct	-0.7	-9.1
Sep	-3.4	-8.8
Aug	-1.4	-5.3
Jul	-1.1	-3.8
Jun	-0.6	-3.2
May	-0.6	-2.5
Apr	-1.1	-1.3
Mar	-0.4	-0.7
Feb	-0.4	0.8
Jan	-0.4	2.1
Dec 2007	0.3	1.9
Nov	0.4	3.2
Oct	-0.5	2.7
Sep	0.5	2.9
Aug	-0.5	2.6
Jul	0.2	3.4
Jun	0.3	2.9
May	-0.2	3.1
Apr	0.8	3.6
Mar	0.6	2.5
Feb	0.6	1.7
Jan	-0.5	1.4
Dec 2006		2.8
Dec 2005		3.4
Dec 2004		4.0
Dec 2003		1.8
Dec 2002		2.3
Dec 2001		-5.5
Dec 2000		0.4
Dec 1999		5.4
Average ∆% Dec 1986-Dec 2011		2.3
Average ∆% Dec 1986-Dec 1999		4.3
Average ∆% Dec 1999-Dec 2006		1.3
Average ∆% Dec 1999-Dec 2011		0.2

Source: http://www.federalreserve.gov/releases/g17/ipdisk/ip_nsa.txt

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

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

Source: Board of Governors of the Federal Reserve System

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

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

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

Source: Board of Governors of the Federal Reserve System

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

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

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

Source: Board of Governors of the Federal Reserve System

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

The index of general business conditions of the Federal Reserve Bank of New York Empire State Manufacturing Survey has fluctuated with increase to 7.39 in Jul 2012 from 2.29 in Jun, as shown in Table VA-3. The index had been registering negative changes in the five months from Jun to Oct 2011. The new orders segment fell to minus 2.69 in Jul, indicating mild contraction. There is positive reading in shipments increasing from 4.81 in Jun to 10.28 in Jul. The segment of number of employees rose to 18.52 in Jul. Number of weekly hours worked fell to neutral at zero in Jul 2012. Expectations for the next six months of the general business conditions index peaked at 54.87 in Jan 2012, declining to a still strong 20.20 in Jul 2012. Expectations of new orders also peaked at 53.85 in Jan 2012, declining to 13.58 in Jul 2012. There is a similar pattern of strong recovery in shipments with decline to 14.81 in Jul 2012. Number of employees fell sharply to 6.17 in Jul 2012. Hours worked collapsed minus 4.94 in Jul, indicating mild contraction.

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

	General Index	New Orders	Shipments	# Workers	Average Work-week
Current
Jul 2012	7.39	-2.69	10.28	18.52	0.0
Jun	2.29	2.18	4.81	12.37	3.09
May	17.09	8.32	24.14	20.48	12.05
Apr	6.56	6.48	6.41	19.28	6.02
Mar	20.21	6.84	18.21	13.58	18.52
Feb	19.53	9.73	22.79	11.76	7.06
Jan	13.48	13.70	21.69	12.09	6.59
Dec 2011	8.19	5.99	20.06	2.33	-2.33
Nov	0.80	-0.82	11.70	-3.66	2.44
Oct	-7.22	-0.26	2.89	3.37	-4.49
Sep	-7.43	-7.52	-8.28	-5.43	-2.17
Six Months
Jul 2012	20.20	13.58	14.81	6.17	-4.94
Jun	23.13	15.46	12.37	16.49	2.06
May	29.26	30.12	25.30	12.05	8.43
Apr	43.12	45.78	44.58	27.71	10.84
Mar	47.50	41.98	43.21	32.10	20.99
Feb	50.38	44.71	49.41	29.41	18.82
Jan	54.87	53.85	52.75	28.57	17.58
Dec 2011	45.61	54.65	51.16	24.42	22.09
Nov	32.06	35.37	36.59	14.63	8.54
Oct	13.99	12.36	17.98	6.74	-2.25
Sep	22.93	13.04	13.04	0.00	-6.52

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

The Philadelphia Business Outlook Survey in Table VA-4 provides an optimistic reading in Oct 2011 with the movement to 10.8 away from the contraction zone of minus 12.7 in Sep and recovered to 12.5 in Mar from the decline to 3.1 in Nov but then fell to 8.5 in Apr and back to contraction territory at minus 5.8 in May and even sharper contraction at minus 16.6 in Jun, easing to minus 12.9 in Jul 2012. New orders were signaling increasing future activity, rising from contraction at minus 5.5 in Sep 2011 to positive reading but registered only 3.3 in Mar 2012 and fell further to 2.7 in Apr and into contraction reading at minus 1.2 in May and sharp contraction at 18.8 in Jun, with milder contraction at minus 6.9 in Jul 2012. There is similar behavior in shipments as in new orders. Employment or number of employees fell to contraction at minus 8.4 in Jul 2012. The average work week also fell to sharp contraction at minus 19.1 in Jun 2012 and 17.3 in Jul 2012. Most indexes of expectations for the next six months are showing sharp increases but interruptions from May to Jul 2012 for the general index. Employment increased from Jan to Apr 2012, deteriorating in May and partially recovering in Jun while the average work week weakened in Apr and contracted at minus 1.1 in May and minus 0.8 in Jun but recovery at 14.5 in Jul. With most US workers on hourly remuneration, contraction of the workweek means reduction of labor income.

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

	General Index	New Orders	Ship-ments	# Workers	Average Work-week
Current
Jul 12	-12.9	-6.9	-8.6	-8.4	-17.3
Jun	-16.6	-18.8	-16.6	1.8	-19.1
May	-5.8	-1.2	3.5	-1.3	-5.4
Apr	8.5	2.7	2.8	17.9	-2.3
Mar	12.5	3.3	3.5	6.8	2.7
Feb	10.2	11.7	15.0	1.1	10.1
Jan	7.3	6.9	5.7	11.6	5.0
Dec 11	6.8	10.7	9.1	11.5	2.8
Nov	3.1	3.5	6.0	10.6	7.1
Oct	10.8	8.5	13.6	5.0	4.2
Sep	-12.7	-5.5	-16.6	7.3	-6.2
Aug	-22.7	-22.2	-8.9	-0.9	-11.2
Jul	6.2	0.5	8.2	9.5	-3.9
Future
Jul 12	19.3	26.1	19.0	11.3	14.5
Jun	19.5	38.2	38.0	18.7	-0.8
May	15.0	26.3	20.8	10.6	-1.1
Apr	33.8	35.4	31.0	27.8	7.5
Mar	32.9	36.4	31.3	21.8	11.2
Feb	33.3	32.5	29.0	22.5	10.8
Jan	49.0	49.7	48.2	19.1	9.2
Dec 11	40.0	44.1	36.4	10.8	4.5
Nov	37.7	36.9	35.5	25.2	4.0
Oct	28.8	28.1	29.0	15.5	8.4
Sep	25.2	24.6	27.1	14.0	6.8
Aug	6.3	20.6	18.4	11.2	-0.7
Jul	25.8	31.2	26.1	12.9	6.6

Source: Federal Reserve Bank of Philadelphia

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

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

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

Source: Federal Reserve Bank of Philadelphia

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

Chart VA-2 of the Federal Reserve Bank of Philadelphia provides the index of new orders of the Business Outlook Survey. Strong growth in the beginning of 2011 was followed by a bump after Mar that lasted until Oct 2011. The strength of the first quarter of 2011 has not been recovered with weakness in Apr-Jul 2012 moving into contraction territory.

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

Source: Federal Reserve Bank of Philadelphia

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

Growth rates and levels of sales in millions of dollars of manufacturers, retailers and merchant wholesalers are provided in Table VA-5. Total business sales fell 0.1 percent in May 2012 and 0.1 percent in Apr 2012 and were up by 7.2 percent in May 2012 relative to May 2011. Sales of manufacturers increased 0.5 percent in May, falling 0.2 percent in Apr and increasing 6.2 percent in the 12 months ending in May 2012. Retailers’ sales fell 0.2 percent in May, falling 0.6 percent in Apr and increased 6.9 percent in 12 months ending in May. Sales of merchant wholesalers fell 0.8 percent in May and increased 0.6 percent in Apr and 8.7 percent in 12 months. These data are not adjusted for price changes such that they reflect increases in both quantities and prices.

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

	May 12/ Apr 12 ∆% SA	May 2012 Millions of Dollars NSA	Apr 12/ Mar 12 ∆% SA	May 12/ May 11 ∆% NSA
Total Business	-0.1	1,303,073	-0.1	7.2
Manufacturers	0.5	494,259	-0.2	6.2
Retailers	-0.2	377,689	-0.6	6.9
Merchant Wholesalers	-0.8	431,125	0.6	8.7

Source: US Census Bureau http://www.census.gov/mtis/

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

Businesses added to inventories to replenish stocks in an environment of strong sales. Retailers added 1.0 percent to inventories in May and 0.8 percent in Apr with growth of 6.5 percent in 12 months, as shown in Table VA-6. Total business increased inventories by 0.3 percent in May, 0.3 percent in Apr and 6.5 percent in 12 months. Inventories sales/ratios of total business continued at a level close to 1.27 under judicious management to avoid costs and risks. Inventory/sales ratios of manufacturers and retailers are higher than for merchant wholesalers. There is stability in inventory/sales ratios in individual months and relative to a year earlier.

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

Inventory Change	May 12 Millions of Dollars NSA	May 12/ Apr 12 ∆% SA	Apr 12/ Mar 12 ∆% SA	May 12/ May 11 ∆% NSA
Total Business	1,577,003	0.3	0.3	5.3
Manufacturers	611,397	-0.2	-0.2	3.4
Retailers	486,792	1.0	0.8	6.5
Merchant Wholesalers	479,814	0.3	0.5	6.6
Inventory/ Sales Ratio NSA	May 12 Billions of Dollars NSA	May 2012 SA	Apr 2012 SA	May 2011 SA
Total Business	1,577,003	1.27	1.26	1.27
Manufacturers	610,397	1.27	1.28	1.29
Retailers	486,792	1.36	1.35	1.34
Merchant Wholesalers	479,814	1.18	1.17	1.17

Source: US Census Bureau http://www.census.gov/mtis/

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

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

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

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

This is the pure inventory cycle.

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

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

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

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

Chart VA-6 shows the increase in the inventory/sales ratios during the recessions of 2001 and 2007-2009. The inventory/sales ratio fell during the expansions. The inventory/sales ratio declined to a trough in 2011, climbed and then stabilized at current levels in 2012.

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

Source: US Census Bureau

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

Sales of retail and food services fell in two consecutive months by 0.5 percent in Jun and 0.2 percent in May 2012, increasing 6.4 percent in Jan-Jun 2012 relative to Jan-Jun 2011, as shown in Table VA-7. Excluding motor vehicles and parts, retail sales fell in two consecutive months by 0.4 percent in June 2012 and 0.4 percent May 2012, growing 5.9 percent in Jan-Jun 2012 relative to a year earlier. Sales of motor vehicles and parts fell 0.6 percent in Jun 2012 after increasing 0.8 percent in May and 8.2 percent in Jan-Jun 2012 relative to a year earlier. Gasoline station sales decreased 1.8 percent in Jun 2012 after decreasing 2.0 percent in May 2012 in declining prices of gasoline, increasing 5.5 percent in Jan-Jun 2012 relative to a year earlier.

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

	Jun/ May ∆% SA	May/Apr ∆% SA	Jan-Jun 2012 Million Dollars NSA	Jan-Jun 2012 from Jan-Jun 2011 ∆% NSA
Retail and Food Services	-0.5	-0.2	2,358,742	6.4
Excluding Motor Vehicles and Parts	-0.4	-0.4	1,939,820	5.9
Motor Vehicles & Parts	-0.6	0.8	445,922	8.2
Retail	-0.5	-0.2	2,122,920	6.1
Building Materials	-1.6	-2.0	148,635	8.1
Food and Beverage	0.1	-0.1	311,133	4.1
Grocery	0.1	-0.2	280,170	3.8
Health & Personal Care Stores	-0.7	-0.2	137,835	2.4
Clothing & Clothing Accessories Stores	0.2	0.8	109,124	6.6
Gasoline Stations	-1.8	-2.0	271,837	5.5
General Merchandise Stores	-0.2	-0.3	302,154	2.7
Food Services & Drinking Places	-0.2	-0.3	262,822	8.7

Source: US Census Bureau http://www.census.gov/retail/

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

Chart VA-5 of the US Bureau of the Census shows percentage change of retail and food services sales. Auto sales have been strongly monthly, and particularly relative to a year earlier, but with weakness in the total excluding auto sales and decline in general merchandise.

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

Source: US Census Bureau

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

Twelve-month rates of growth of US sales of retail and food services in Jun from 2000 to 2012 are shown in Table VA-8. Nominal sales have been dynamic in 2012, 2011 and 2010 after decline of 8.9 percent in 2009 and increase of only 0.6 percent in 2008. It is difficult to separate price and quantity effects in these nominal data.

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

Jun	12 Months ∆%
2012	3.6
2011	9.0
2010	4.3
2009	-8.9
2008	0.6
2007	2.8
2006	4.5
2005	9.3
2004	6.7
2003	4.2
2002	0.3
2001	2.3
2000	7.8

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

Seasonally-adjusted annual rates (SAAR) of housing starts and permits are shown in Table VA-9. Housing starts increased 6.9 percent in Jun 2012 after decreasing 4.8 percent in May 2012. Housing permits, indicating future activity, decreased 3.7 percent in Jun 2012 after declining 8.4 percent in May. Monthly rates in starts and permits fluctuate significantly as shown in Table VA-9.

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

	Housing Starts SAAR	Month ∆%	Housing Permits SAAR	Month ∆%
Jun 2012	760	6.9	755	-3.7
May	711	-4.8	784	8.4
Apr	747	5.8	723	-6.0
Mar	706	-1.7	769	8.8
Feb	718	-0.3	707	3.4
Jan	720	3.3	684	-2.4
Dec 2011	697	-1.6	701	-1.1
Nov	708	12.4	709	6.3
Oct	630	-2.6	667	8.3
Sep	647	11.4	616	-4.5
Aug	581	-5.4	645	2.9
Jul	614	-0.2	627	-0.9
Jun	615	11.6	633	1.4
May	551	-0.2	624	7.9
Apr	552	-8.0	578	-2.0
Mar	600	15.8	590	10.1
Feb	518	-18.0	536	-5.3
Jan	632	17.3	566	-10.4
Dec 2010	539	-1.1	632	12.9
Nov	545	0.4	560	0.4
Oct	543	-8.6	558	-0.9
Sep	594	-0.8	563	-3.0

SAAR: Seasonally Adjusted Annual Rate

Source: US Census Bureau

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

Housing starts and permits in Jan-Jun not-seasonally adjusted are provided in Table VA-10. Housing starts increased 26.5 percent in Jan-Jun 2012 relative to Jan-Jun 2011 and in the same period new permits increased 29.1 percent. Construction of new houses in the US remains at very depressed levels. Housing starts fell 62.9 percent in Jan-Jun 2012 relative to Jan-Jun 2006 and fell 64.3 percent relative to Jan-Jun 2005. Housing permits fell 63.3 percent in Jan-Jun 2012 relative to Jan-Jun 2006 and fell 64.8 percent in Jan-Jun 2012 from Jan-Jun 2005.

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

	Housing Starts	New Permits
Jan-Jun 2012	365.6	380.3
Jan-Jun 2011	289.1	294.6
∆% Jan-Jun 2012/Jan-Jun 2011	26.5	29.1
Jan-Jun 2006	984.9	1036.9
∆% Jan-Jun 2012/	-62.9	-63.3
Jan-Jun 2005	1023.6	1079.1
∆%/ Jan-Jun 2012	-64.3	-64.8

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

Chart VA-8 of the US Census Bureau shows the sharp increase in construction of new houses from 2000 to 2006. Housing construction fell sharply through the recession, recovering from the trough around IIQ2009. The right-hand side of Chart VA-3 shows a mild downward trend or stagnation from mid 2010 to the present in single-family houses with a recent mild upward trend in recent months in the category of two or more units but marginal decline in Mar-Jun 2012.

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

Source: US Census Bureau

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

Table VA-11 provides new housing units started in the US at seasonally adjusted annual rates (SAAR) in the first six months of the year from 2000 to 2012. SAARs have dropped from high levels around 2 million in 2005-2006 to the range of 706,000 to 760,000 in 2012, which is an improvement over the range of 551,000 to 632,000 in Jan-Jun 2011.

Table VA-11, New Housing Units Started in the US, Seasonally Adjusted Annual Rates, Thousands of Units

	Jan	Feb	Mar	Apr	May	Jun
2000	1,636	1,737	1,604	1,626	1,575	1,559
2001	1,600	1,625	1,590	1,649	1,605	1,636
2002	1,698	1,829	1,642	1,592	1,764	1,717
2003	1,853	1,629	1,726	1,643	1,751	1,867
2004	1,911	1,846	1,998	2,003	1,981	1,828
2005	2,144	2,207	1,864	2,061	2,025	2,068
2006	2,273	2,119	1,969	1,821	1,942	1,802
2007	1,409	1,480	1,495	1,490	1,415	1,448
2008	1,084	1,103	1,005	1,013	973	1,046
2009	490	582	505	478	540	585
2010	614	604	636	687	583	536
2011	632	518	600	552	551	615
2012	720	718	706	747	711	760

Source: US Census Bureau http://www.census.gov/construction/nrc/

Table VA-12 provides actual new housing units started in the US, or not seasonally adjusted, in Jan-Jun from 2000 to 2012. The number of housing units started fell from the peak of 197.9 thousand in May 2005 to 68.3 thousand in May 2012 or 65.5 percent. The number of housing units started fell from 192.8 thousand in Jun 2005 to 75.6 thousand in Jun 2012 or by 60.8 percent. The number of housing units started jumped from 60.5 thousand in Jun 2011 to 75.6 thousand in Jun 2012 or by 24.9 percent.

Table VA-12, New Housing Units Started in the US, Not Seasonally Adjusted, Thousands of Units

	Jan	Feb	Mar	Apr	May	Jun
2000	104.0	119.7	133.4	149.5	152.9	146.3
2001	106.4	108.2	133.2	151.3	154.0	155.2
2002	110.4	120.4	138.2	148.8	165.5	160.3
2003	117.8	109.7	147.2	151.2	165.0	174.5
2004	124.5	126.4	173.8	179.5	187.6	172.3
2005	142.9	149.1	156.2	184.6	197.9	192.8
2006	153.0	145.1	165.9	160.5	190.2	170.2
2007	95.0	103.1	123.8	135.6	136.5	137.8
2008	70.8	78.4	82.2	89.5	91.7	102.5
2009	31.9	39.8	42.7	42.5	52.2	59.1
2010	38.9	40.7	54.7	62.0	56.2	53.8
2011	40.2	35.4	49.9	49.0	54.0	60.5
2012	47.2	49.7	58.0	66.8	68.3	75.6

Source: US Census Bureau http://www.census.gov/construction/nrc/

A longer perspective on residential construction in the US is provided by Table VA-13 with annual data from 1960 to 2011. Housing starts fell 70.6 percent from 2005 to 2011, 61.2 percent from 2000 to 2011 and 51.4 percent relative to 1960. Housing permits fell 71.7 percent from 2005 to 2011, 60.8 percent from 2000 to 2011 and 37.4 percent from 1960 to 2011. Housing starts rose 31.8 from 2000 to 2005 while housing permits grew 35.4 percent. From 1990 to 2000 housing starts increased 31.5 percent while permits increased 43.3 percent.

Table VA-13, US, Annual New Privately Owned Housing Units Authorized by Building Permits in Permit-Issuing Places and New Privately Owned Housing Units Started, Thousands

	Starts	Permits
2011	608.8	624.1
∆% 2011/2010	3.7	3.2
∆% 2011/2005	-70.6	-71.0
∆% 2011/2000	-61.2	-60.8
∆% 2011/1960	-51.4	-37.4
2010	586.9	604.6
∆% 2010/2005	-71.6	-71.9
∆% 2010/2000	-62.6	-62.0
∆% 2010/1960	-53.1	-39.4
2009	554,0	583.0
2008	905.5	905.4
2007	1,355,0	1,398.4
2006	1,800.9	1,838.9
2005	2,068.3	2,155.3
∆% 2005/2000	31.8	35.4
2004	1,955.8	2,070.1
2003	1,847.7	1,889,2
2002	1,704.9	1,747.2
2001	1,602.7	1,636.7
2000	1,568.7	1,592.3
∆% 2000/1990	31.5	43.3
1990	1,192,7	1,110.8
1980	1,292.2	1,190.6
1970	1,433.6	1,351.5
1960	1,252.2	997.6

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

Risk aversion channels funds toward US long-term and short-term securities that finance the US balance of payments and fiscal deficits benefitting at the moment from risk flight to US dollar denominated assets. Net foreign purchases of US long-term securities (row C in Table VA-9) increased from $27.2 billion in Apr 2012 to $55.0 billion in May 2012. Foreign (residents) purchases minus sales of US long-term securities (row A in Table VA-9) in Apr of $27.9 billion increased to $50.1 billion in May 2012. Net US (residents) purchases of long-term foreign securities (row B in Table VA-9) increased from -$0.7 billion in Apr to $4.9 billion in May. In May,

C = A + B = $50.1 billion + $4.9 billion = $55.0 billion

There is increasing demand in Table VA-12 in Apr in A1 private purchases by residents overseas of US long-term securities of $19.9 billion of which increases in A11 Treasury securities of $25.1 billion, decrease in A12 of $1.1 billion in agency securities, decrease by $3.9 billion of corporate bonds and decrease of $0.2 billion in equities. Worldwide risk aversion causes flight into US Treasury obligations. Official purchases of securities in row A2 increased $30.2 billion with increase of Treasury securities of $20.8 billion, which is higher than $16.7 billion in Apr. Row D shows increase in May in purchases of short-term dollar denominated obligations. Foreign private holdings of US Treasury bills decreased $5.8 billion (row D11) with foreign official holdings increasing $14.1 billion while the category other decreased $7.6 billion. Risk aversion of default losses in foreign securities dominates decisions to accept zero interest rates in Treasury securities with no perception of principal losses. In the case of long-term securities, investors prefer to sacrifice inflation and possible duration risk to avoid principal losses.

Table VA-14, Net Cross-Borders Flows of US Long-Term Securities, Billion Dollars, NSA

	May 2011 12 Months	May 2012 12 Months	Apr 2012	May 2012
A Foreign Purchases less Sales of US LT Securities	795.8	461.2	27.9	50.1
A1 Private	602.1	280.7	14.7	19.9
A11 Treasury	365.0	297.2	21.9	25.1
A12 Agency	92.2	59.7	-7.1	-1.1
A13 Corporate Bonds	13.2	-54.3	0.2	-3.9
A14 Equities	131.6	-21.8	-0.3	-0.2
A2 Official	193.7	180.5	13.2	30.2
A21 Treasury	213.8	167.2	16.7	20.8
A22 Agency	-19.8	7.3	-6.1	8.6
A23 Corporate Bonds	-2.6	2.6	0.4	0.5
A24 Equities	2.3	3.4	2.1	0.4
B Net US Purchases of LT Foreign Securities	-189.1	24.4	-0.7	4.9
B1 Foreign Bonds	-95.7	56.2	2.5	14.4
B2 Foreign Equities	-93.4	-31.8	-3.2	-9.5
C Net Foreign Purchases of US LT Securities	606.7	485.5	27.2	55.0
D Increase in Foreign Holdings of Dollar Denominated Short-term	-58.0	-47.2	-3.7	0.7
D1 US Treasury Bills	-67.7	-19.3	-16.2	8.3
D11 Private	-24.1	44.2	-5.9	-5.8
D12 Official	-43.7	-63.5	-10.3	14.1
D2 Other	9.7	-27.9	12.5	-7.6

C = A + B;

A = A1 + A2

A1 = A11 + A12 + A13 + A14

A2 = A21 + A22 + A23 + A24

B = B1 + B2

D = D1 + D2

D1 = D11 + D12

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

http://www.treasury.gov/press-center/press-releases/pages/tg1639.ASPX

Table VA-15 provides major foreign holders of US Treasury securities. China is the largest holder with $1169.6 billion in May 2012, increasing 0.8 percent from $1159.8 billion in Apr 2011. Japan increased its holdings from $1159.8 billion in May 2011 to $1169.6 billion in May 2012 or by 0.8 percent likely in part by intervention to buy dollars against the yen to depreciate the overvalued yen/dollar rate that diminishes the competitiveness of Japan. Total foreign holdings of Treasury securities rose from $4536.6 billion in May 2011 to $5264.0 billion in May 2012, or 16.0 percent. The US continues to finance its fiscal and balance of payments deficits with foreign savings (see Pelaez and Pelaez, The Global Recession Risk (2007)).

Table VA-15, US, Major Foreign Holders of Treasury Securities $ Billions at End of Period

	May 2012	Apr 2012	May 2011
Total	5264.0	5209.8	4536.6
China	1169.6	1164.4	1159.8
Japan	1105.2	1089.8	912.4
Oil Exporters	260.9	257.1	230.6
Brazil	243.4	245.9	211.4
Caribbean Banking Centers	229.8	237.4	154.0
Taiwan	187.6	187.3	153.5
UK	161.1	135.8	344.5
Russia	154.1	155.4	115.2
Switzerland	150.5	150.1	108.3
Hong Kong	145.4	145.0	121.6
Belgium	129.8	132.3	31.4
Luxembourg	126.8	130.0	66.7

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

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 contracted at a moderate rate with the Markit Composite Output PMI^™ Index declining from 50.1 in May to 49.1 in Jun in the first contraction of activity of the private sector since Nov 2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9789). Alex Hamilton, economist at Markit and author of the report, finds deceleration originating in combination of doubts on the global economy and internal reconstruction (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9789). The Markit Business Activity Index of Services decreased from 49.8 in May to 49.3 in Jun, also showing slower pace and the second reading below 50.0 in six months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9789). The Markit/JMMA Purchasing Managers’ Index^™, seasonally adjusted, fell from 50.7 in May to 49.9 in Jun, indicating virtual standtill in manufacturing in Japan in the weakest reading in seven months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9713). Alex Hamilton, economist at Markit and author of the report, finds reduction in work originating from the reconstruction effort from the Tōhoku Hurricane and Tsunami of Mar 11, 2011 with simultaneous decline of output and new business (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9713).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 8/9/11 Table 26
Corporate Goods Prices	Jun ∆% -0.6 12 months ∆% minus 1.3 Blog 7/15/12
Consumer Price Index	May NSA ∆% -0.3; May 12 months NSA ∆% 0.2 Blog 7/8/12
Real GDP Growth	IQ2012 ∆%: 1.2 on IVQ2011; IQ2012 SAAR 4.7; ∆% from quarter a year earlier: 2.8 % Blog 6/10/12
Employment Report	May Unemployed 2.97 million Change in unemployed since last year: minus 170 thousand Unemployment rate: 4.4% Blog 7/2/12
All Industry Indices	May month SA ∆% -0.3 12-month NSA ∆% 3.2 Blog 7/22/12
Industrial Production	May SA month ∆%: -3.1 12-month NSA ∆% 6.2 Blog 7/2/12
Machine Orders	Total May ∆% -14.5 Private ∆%: -21.0 May ∆% Excluding Volatile Orders -14.8 Blog 7/15/12
Tertiary Index	May month SA ∆% 0.7 May 12 months NSA ∆% 3.0 Blog 7/15/12
Wholesale and Retail Sales	May 12 months: Total ∆%: +2.3 Wholesale ∆%: +1.8 Retail ∆%: +3.6 Blog 7/8/12
Family Income and Expenditure Survey	May 12-month ∆% total nominal consumption 4.3, real 4.0 Blog 7/8/12
Trade Balance	Exports May 12 months ∆%: +10.0 Imports May 12 months ∆% +9.3 Blog 6/24/12

Links to blog comments in Table JPY: 7/15/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-hiring-ten-million_15.html

7/8/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html

7/2/12 http://cmpassocregulationblog.blogspot.com/2012/07/mediocre-economic-growth-united-states_03.html

06/24/12 http://cmpassocregulationblog.blogspot.com/2012/06/recovery-without-hiring-continuance-of_24.html

6/10/12 http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities_10.html

8/9/11 http://cmpassocregulationblog.blogspot.com/2011/08/turbulence-in-world-financial-markets.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 1.2 percent in IQ2012 (http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities_10.html), 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 (http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities_10.html Table VB-1), 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 (http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities_10.html Table VB-1).

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	5.7	1.3	0.0	0.1	-0.1	1.2
Cont to IVQ % Change	0.25	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	-0.4
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_201205j.pdf

There are more details in Table VB-2. The all industry activity index fell 0.3 percent in May 2012 relative to Apr 2012 with increase of 0.7 percent of the tertiary or services sector, decrease of industry of 3.4 percent while construction increased 9.6 percent and government decreased 0.2 percent. Industry deducted 0.62 percentage points to growth in May while the tertiary sector added 0.46 percentage points and construction added 0.41 percentage points. It is not possible to explain the overall index by the reported contributions of components. Weakness in Sep and Aug 2011 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-Mar 2012 with modest growth in Apr and new decline in May 2012. 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
May 2012	9.6	-3.4	0.7	-0.2	-0.3
Cont to May % Change	0.41	-0.62	0.46	-0.02
Apr	-6.1	-0.2	-0.2	0.2	0.1
Mar	-5.4	1.3	-0.6	-0.1	-0.3
Feb	4.2	-1.6	0.0	-0.4	-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

Sources: http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201205j.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	-0.3	4.8	2.4	0.2	2.4	2.8
Cont to IQ % Change	-0.01	0.84	1.56	0.02
2011
IVQ	-2.8	-1.6	0.6	0.6	0.0	-0.6
IIIQ	-3.2	-0.9	0.3	-0.1	-0.1	-0.5
IIQ	-5.1	-5.8	-0.5	-0.4	-1.6	-1.8
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

Source: http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201205j.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 3.2 percent in May 2012 relative to May 2011, jumping from the low level caused by the Tōhoku or Great East Earthquake and Tsunami of Mar 11, 201. Industry increased 6.0 percent in May 2012 relative to a year earlier, adding 1.02 percentage points to growth of the all industry activity index. The tertiary sector increased 3.0 percent, adding 1.98 percentage points. Construction added 0.24 percentage points to the index and government deducted 0.08 percentage points. The percentage point contributions add to the increase of the index by 3.2 percent.

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

	CON	IND	TERT	GOVT	ALL IND
May 2012	5.9	6.0	3.0	-0.6	3.2
Cont to May % Change	0.24	1.02	1.98	-0.08
Apr	3.1	12.9	2.6	0.9	4.1
Mar	4.1	14.2	4.2	0.6	5.5
Feb	-1.6	1.5	2.4	-0.7	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	-

Source: http://www.meti.go.jp/statistics/tyo/zenkatu/result-2/pdf/hv37913_201205j.pdf

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/t20120704_402815668.htm). Table CIPMS provides this index and components from Jan to Jun 2012. The index fell from 57.3 in Mar to 55.2 in May but climbed to 56.7 in Jun, which is lower than 58.0 in Mar and 57.3 in Feb but higher than in any other of the months in 2012.

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

	Total Index	New Orders	Interm. Input Prices	Subs Prices	Exp
Jun	56.7	53.7	52.1	48.6	65.5
May	55.2	52.5	53.6	48.5	65.4
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/t20120704_402815668.htm

Chart CIPMS provides China’s nonmanufacturing purchasing managers’ index from Jun 2011 to Jun 2012. There was slowing of the general index in Apr 2012 after the increase in Jan-Mar 2012 and further decline to 55.2 in May 2012 but increase to 56.7 in Jun 2012.

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

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/pressrelease/t20120704_402815668.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/t20120703_402815318.htm). Chart CIPMM provides the index from Jun 2011 to Jun 2012. There is deceleration from 52.0 in May 2011 to marginal contraction at 49.0 in Nov 2011. Manufacturing activity recovered to 53.3 in Apr 2012 but then declined to 50.4 in May 2012 and 50.2 in Jun 2012, which is the lowest in a year with exception of contraction at 49.0 in Nov 2011.

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

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/pressrelease/t20120703_402815318.htm

The HSBC China Services PMI^™, compiled by Markit, moderating business activity in China with the HSBC Composite Output, combining manufacturing and services, decreasing from 51.9 in May to 50.6 in Jun, which is the lowest level in three months with contraction in manufacturing and slower activity in services (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9788). Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds weak employment growth, suggesting that with lower inflation there is room for further stimulus (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9788).The HSBC Purchasing Managers’ Index^™ (PMI^™), compiled by Markit, fell slightly to 48.2 in Jun from 48.4 in May, for the lowest reading in IIQ2012 since IQ2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9721). Hongbin Qu, Chief Economist, China and Co-Head of Asian Economic Research at HSBC, finds continuing slowdown in China’s economy in IIQ2012, which requires further reduction of bank reserve requirements and the policy interest rate together with fiscal measures (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9721).

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. Xinhuanet, writing on “China announces surprise rate cuts amid economic downshift,” on Jun 5, 2012 (http://news.xinhuanet.com/english/china/2012-07/05/c_131697843.htm), informs that the central bank of China People’s Bank of China reduced the one year deposit rate by 25 basis points and the one year lending rate by 31 basis points effective Jun 6, 2012. The People’s Bank of China posts the new rates (http://www.pbc.gov.cn/publish/english/955/2012/20120608171005950734495/20120608171005950734495_.html). Table CNY provides the country data table for China.

Table CNY, China, Economic Indicators

Price Indexes for Industry	Jun 12-month ∆%: minus 2.1 Jun month ∆%: minus 0.7 Blog 7/15/12
Consumer Price Index	Jun month ∆%: -0.6 Jun 12 months ∆%: 2.2 Blog 7/15/12
Value Added of Industry	Jun month ∆%: 0.76 Jan-Jun 2012/Jan-Jun 2011 ∆%: 10.5 Blog 7/15/12
GDP Growth Rate	Year IIQ2012 ∆%: 7.6 Quarter IIQ2012 ∆%: 1.8 Blog 7/15/12
Investment in Fixed Assets	Total Jan-Jun 2012 ∆%: 20.4 Real estate development: 16.6 Blog 7/15/12
Retail Sales	Jun month ∆%: 1.08 Jun 12 month ∆%: 13.7 Jan-Jun ∆%: 14.4 Blog 7/22/12
Trade Balance	Jun balance $31.7 billion Exports ∆% 11.3 Imports ∆% 6.3 Cumulative Jun: $69.4 billion Blog 7/15/12

Links to blog comments in Table CNY:

7/15/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-hiring-ten-million_15.html

Growth rates of retail sales in China monthly, 12 months and cumulative relative to a year earlier are in Table VC-1. There is still insufficient data to assess if the decline of growth rates to cumulative 14.7 percent in Feb 2012, 14.8 percent in Mar, 14.7 percent in Apr, 14.5 percent in May and 14.4 percent in Jun constitutes the beginning of a downward trend but percentage growth rates have declined in Jan-Jun 2012 relative to earlier months.

Table VC-1, China, Total Retail Sales of Consumer Goods ∆%

	Month ∆%	12-Month ∆%	Cumulative ∆%/ Cumulative Year Earlier
2012
Jun	1.08	13.7	14.4
May	1.16	13.8	14.5
Apr	1.17	14.1	14.7
Mar	1.32	15.2	14.8
Feb	1.41	14.7	14.7
Jan	0.47
2011
Dec	1.66	18.1	17.1
Nov	1.42	17.3	17.0
Oct	1.43	17.2	17.0
Sep	1.51	17.7	17.0
Aug	1.42	17.0	16.9
Jul	1.33	17.2	16.8
Jun	1.49	17.7	16.8
May	1.39	16.9	16.6
Apr	1.30	17.1	16.5
Mar	1.26	17.4	17.4
Feb	1.35	11.6	15.8
Jan		19.9	19.9

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

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/pressrelease/t20120716_402818593.htm

Chart VC-1 of the National Bureau of Statistics of China provides 12-month rates of growth of retail sales in 2011. There is again a drop into 2012 with the lowest percentages in Chart VC-1.

Chart VC-1, China, Total Retail Sales of Consumer Goods 12-Month ∆%

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/pressrelease/t20120716_402818593.htm

Table VC-2 provides monthly percentage changes of retail sales in China. Although the rate of 0.47 percent in Jan 2012 is the lowest in Table VC-2, the rate of 1.41 percent in Feb is relatively high and 1.32 percent in Mar is also relatively low followed by lower 1.17 percent in Apr, 1.16 percent in May and 1.08 percent in Jun 2012.

Table VC-2, China, Retail Sales, Month ∆%

2011	Month ∆%
Feb	1.35
Mar	1.26
Apr	1.30
May	1.39
Jun	1.49
Jul	1.33
Aug	1.42
Sep	1.51
Oct	1.43
Nov	1.42
Dec	1.66
2012
Jan	0.47
Feb	1.41
Mar	1.32
Apr	1.17
May	1.16
Jun	1.08

Source: National Bureau of Statistics of China

http://www.stats.gov.cn/english/pressrelease/t20120716_402818593.htm

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, Unemployment Rate and GDP, ∆%

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	-4.4
2010	1.6	10.1	2.0
2011	2.7	10.2	1.5
2012*			-0.3
2013*			1.0

*EUROSTAT forecast

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

The Markit Eurozone PMI^® Composite Output Index, combining services and manufacturing activity with close association with GDP, increased from 46.0 in May to 46.4 in Jun, which is still in sharp contraction (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9769) in the deepest contraction in three years. Chris Williamson, Chief Economist at Markit, finds that the data are consistent with decline of GDP at a quarterly rate of 0.6 percent IIQ2012, which could result in the third consecutive quarterly contraction of euro area GDP (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9769). The Markit Eurozone Manufacturing PMI^® was unchanged at 45.1 in Jun, which indicates the sharpest deteriorating in activity in about three years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9708). Chris Williamson, Chief Economist at Markit, finds that the index suggests manufacturing in the euro area declined at a quarterly rate of about 1 percent, exerting pressure on GDP in IIQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9708).

Table EUR, Euro Area Economic Indicators

GDP	IQ2012 ∆% 0.0; IQ2012/IQ2011 ∆% -0.1 Blog 6/10/12
Unemployment	May 2012: 11.1% unemployment rate May 2012: 17.561 million unemployed Blog 7/8/12
HICP	Jun month ∆%: -0.1 12 months Jun ∆%: 2.4 Blog 7/22/12
Producer Prices	Euro Zone industrial producer prices May ∆%: -0.5 May 12-month ∆%: 2.3 Blog 7/8/12
Industrial Production	May month ∆%: 0.6; May 12 months ∆%: -2.8 Blog 7/15/12
Retail Sales	May month ∆%: 0.6 Apr 12 months ∆%: -1.7 Blog 7/8/12
Confidence and Economic Sentiment Indicator	Sentiment 89.9 Jun 2012 Confidence minus 19.8 Jun 2012 Blog 7/2/12
Trade	Jan-May 2012/Jan-May 2011 Exports ∆%: 7.4 Imports ∆%: 2.3 May 2012 12-month Exports ∆% 5.6 Imports ∆% 0.2 Blog 7/22/12

Links to blog comments in Table EUR:

7/15/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-hiring-ten-million_15.html

7/8/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html

7/2/12 http://cmpassocregulationblog.blogspot.com/2012/07/mediocre-economic-growth-united-states_03.html

6/17/12 http://cmpassocregulationblog.blogspot.com/2012/05/world-financial-turbulence-global_27.html

6/10/12 http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities_10.html

Euro zone trade growth continues to be relatively strong as shown in Table VD-1. Exports grew at 7.4 percent and imports at 2.3 percent in Jan-May 2012 relative to Jan-May 2011. The 12-month rate of growth of exports was 5.6 percent in May 2012 while imports increased 0.2 percent. In Apr 2012, exports increased 5.9 percent in 12 months and imports decreased 0.1 percent. At the margin, rates of growth of trade are declining in part because of moderation of commodity prices.

Table VD-1, Euro Zone, Exports, Imports and Trade Balance, Billions of Euros and Percent, NSA

	Exports	Imports
Jan-May 2012	758.6	747.6
Jan-May 2011	706.1	730.7
∆%	7.4	2.3
May 2012	157.6	150.7
May 2011	149.3	150.4
∆%	5.6	0.2
Apr 2012	147.3	143.6
Apr 2011	139.1	143.7
∆%	5.9	-0.1
Trade Balance	Jan-May 2012	Jan-May 2011
€ Billions	11.0	-24.5

Source: EUROSTAT

http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/6-16072012-BP/EN/6-16072012-BP-EN.PDF

The structure of trade of the euro zone in Jan-Apr 2012 is provided in Table VD-6. Data are still not available for trade structure for May 2012. Manufactured exports increased 6.9 percent in Jan-Apr 2012 relative to Jan-Apr 2011 while imports fell 1.8 percent. The trade surplus in manufactured products was lower than the trade deficit in primary products in both Jan-Apr 2012 and Jan-Apr 2011 largely because of the commodity shock caused by carry trades.

Table VD-2, Euro Zone, Structure of Exports, Imports and Trade Balance, € Billions, NSA, ∆%

	Primary	Manufactured	Other	Total
Exports
Jan-Apr 2012 € B	94.1	489.5	17.4	601.0
Jan-Apr 2011 € B	84.4	457.8	14.7	556.9
∆%	11.5	6.9	18.4	7.9
Imports
Jan-Apr 2012 € B	223.9	362.5	10.5	596.9
Jan-Apr 2011 € B	202.4	369.0	8.9	580.3
∆%	10.6	-1.8	18.0	2.9
Trade Balance € B
Jan-Apr 2012	-129.8	126.9	7.0	4.1
Jan-Apr 2011	-118.0	88.8	5.9	-23.4

Source: EUROSTAT

http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/6-16072012-BP/EN/6-16072012-BP-EN.PDF

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 Markit Germany Composite Output Index of the Markit Germany Services PMI^®, combining manufacturing and services with close association with Germany’s GDP, fell from 49.3 in May to 48.1 in Jun, indicating marginal deterioration in private sector output for the first time in six months and the deepest in three years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9787). Tim Moore, Senior Economist at Markit and author of the report, finds that the index suggests flat GDP in Germany in IIQ2012 with possible deterioration in the future (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9787). The Markit/BME Germany Purchasing Managers’ Index^® (PMI^®), showing close association with Germany’s manufacturing output, fell from 45.2 in May to 45.0 in Jun, remaining below 50.0 during four consecutive months for the longest period since the global recession of 2008 and 2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9765). Tim Moore, Senior Economist at Markit and author of the report, finds that Germany’s manufacturing output is showing the sharpest drop in about three years with contracting orders from export markets (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9765).Table DE provides the country data table for Germany.

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	Jun month SA ∆%: -0.1 Jun 12-month NSA ∆%: 1.6 Blog 7/22/12
Producer Price Index	May month ∆%: -0.3 12-month NSA ∆%: 2.1 Blog 6/24/12
Industrial Production	Mfg May month SA ∆%: 1.9 12-month NSA: -7.0 Blog 7/8/12
Machine Orders	May month ∆%: 0.6 May 12-month ∆%: -10.6 Blog 7/8/12
Retail Sales	Apr Month ∆% 0.6 12-Month ∆% minus 3.8 Blog 6/3/12
Employment Report	Unemployment Rate May 5.5% Blog 7/2/12
Trade Balance	Exports May 12-month NSA ∆%: 0.5 Imports May 12 months NSA ∆%: -0.2 Exports May month SA ∆%: 3.9; Imports May month SA 6.3 Blog 7/15/12

Links to blog comments in Table DE:

7/15/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-hiring-ten-million_15.html

7/8/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html

7/2/12 http://cmpassocregulationblog.blogspot.com/2012/07/mediocre-economic-growth-united-states_03.html

6/24/12 http://cmpassocregulationblog.blogspot.com/2012/06/recovery-without-hiring-continuance-of_24.html

6/3/12 http://cmpassocregulationblog.blogspot.com/2012/06/mediocre-recovery-without-jobs_04.html

5/27 http://cmpassocregulationblog.blogspot.com/2012_05_01_archive.html

VF France. The Markit France Composite Output Index, combining services and manufacturing with close association with French GDP, increased from 44.6 in May to 47.3 in Jun, indicating contraction of private sector activity at a more moderate rate (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9783). Jack Kennedy, Senior Economist at Markit and author of the France Services PMI^®, finds that weak services and manufacturing survey data suggest contraction of GDP in IIQ2012 after no growth in IQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9783).The Markit France Manufacturing Purchasing Managers’ Index^® increased to 45.2 in Jun from 44.7 in May, which was the sharpest decline of the manufacturing economy in three years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9727). Jack Kennedy, Senior Economist at Markit and author of the France Manufacturing PMI^®, finds continuing deterioration in manufacturing with IIQ2012 being the weakest quarter for French manufacturing in three years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9727). Table FR provides the country data table for France.

Table FR, France, Economic Indicators

CPI	Jun month ∆% 0.0 12 months ∆%: 1.9 7/15/12
PPI	May month ∆%: -1.1 May 12 months ∆%: 2.2 Blog 7/2/12
GDP Growth	IQ2012/IVQ2011 ∆%: 0.0 IQ2012/IQ2011 ∆%: 0.3 Blog 7/2/12
Industrial Production	May SA ∆%: Manufacturing -1.0 YOY NSA ∆%: Manufacturing -4.3 Blog 7/15/12
Consumer Spending	May Manufactured Goods ∆%: 1.4 May 12-Month Manufactured Goods ∆%: 0.2 Blog 7/2/12
Employment	IQ2012 Unemployed 2.746 million Unemployment Rate: 9.6% Employment Rate: 63.8% Blog 6/10/12
Trade Balance	May Exports ∆%: month 1.3, 12 months 7.8 Apr Imports ∆%: month 0.1, 12 months 3.2 Blog 7/8/12
Confidence Indicators	Historical averages 100 Jun Mfg Business Climate 92 Blog 6/24/12

Links to blog comments in Table FR:

7/15/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-hiring-ten-million_15.html

7/8/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html

7/2/12 http://cmpassocregulationblog.blogspot.com/2012/07/mediocre-economic-growth-united-states_03.html

6/24/12 http://cmpassocregulationblog.blogspot.com/2012/06/recovery-without-hiring-continuance-of_24.html

6/10/12 http://cmpassocregulationblog.blogspot.com/2012/06/rules versus-discretionary-authorities_10.html

VG Italy. The Markit/ADACI Business Activity Index increased from 42.8 in May to 43.1 in Jun, indicating sharp contraction of output of Italy’s services sector in 13 consecutive months of contraction (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9785). Phil Smith, economist at Markit and author of the Italy Services PMI^®, finds that the combined manufacturing and services indexes suggest continuing recession in IIQ2012 at the sharpest rate since IIQ2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9785). The Markit/ADACI Purchasing Managers’ Index^® (PMI^®), fell slightly from 44.8 in May to 44.6 in Jun for nine consecutive months of contraction of Italy’s manufacturing quite sharp relative to the history of the index (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9744). Phil Smith, economist at Markit and author of the Italian Manufacturing PMI^®, finds continuing sharp contraction of new orders of manufacturing in Italy and manufacturing output lower than in the first quarter when it fell at a quarterly rate of 2 percent (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9744). Table IT provides the country data table for Italy.

Table IT, Italy, Economic Indicators

Consumer Price Index	Jun month ∆%: 0.2 Jun 12-month ∆%: 3.3 Blog 7/15/12
Producer Price Index	May month ∆%: -0.3 May 12-month ∆%: 2.3 Blog 7/2/12
GDP Growth	IQ2012/IVQ2011 SA ∆%: minus 0.8 IQ2012/IQ2011 NSA ∆%: minus 1.4 Blog 6/17/12
Labor Report	Apr 2012 Participation rate 63.4% Employment ratio 57.0% Unemployment rate 10.2% Blog 6/3/12
Industrial Production	May month ∆%: 0.8 12 months ∆%: minus 6.9 Blog 7/15/12
Retail Sales	Apr month ∆%: -1.6 Apr 12-month ∆%: -6.9 Blog 7/2/12
Business Confidence	Mfg Jun 88.9, Feb 90.9 Construction Jun 85.6, Feb 84.6 Blog 7/2/12
Trade Balance	Balance May SA €90 million versus Apr -€59 Exports May month SA ∆%: 1.4; Imports May month ∆%: 0.9 Exports 12 months NSA ∆%: +4.8 Imports 12 months NSA ∆%: minus 4.5 Blog 7/22/12

Links to blog comments in Table IT:

7/15/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-hiring-ten-million_15.html

7/2/12 http://cmpassocregulationblog.blogspot.com/2012/07/mediocre-economic-growth-united-states_03.html

6/17/12 http://cmpassocregulationblog.blogspot.com/2012/05/world-financial-turbulence-global_27.html

6/3/12 http://cmpassocregulationblog.blogspot.com/2012/06/mediocre-recovery-without-jobs_04.html

Exports and imports of Italy and monthly growth rates SA are provided in Table VG-1. There have been significant fluctuations. Seasonally-adjusted exports increased 1.4 percent in May 2012 while imports increased 0.9 percent. The SA trade balance improved from deficit of €59 million in May to surplus of €90 million in May 2012.

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

	Exports € M	Exports Month ∆%	Imports € M	Imports Month ∆%	Balance € M
Dec 2010	29,616	1.5	33,384	2.9	-3,768
2011
Jan	31,049	4.8	33,736	1.1	-2,687
Feb	30,468	-1.9	33,126	-1.8	-2,658
Mar	31,085	2.0	34,929	5.4	-3,844
Apr	31,442	1.1	34,227	-2.0	-2,785
May	32,112	2.1	34,758	1.6	-2,646
Jun	31,303	-2.5	32,729	-5.8	-1,426
Jul	31,615	1.0	33,642	2.8	-2,027
Aug	31,913	0.9	34,483	2.5	-2,570
Sep	31,934	0.1	33,167	-3.8	-1,233
Oct	31,027	-2.8	32,565	-1.8	-1,538
Nov	31,532	1.6	32,823	0.8	-1,291
Dec	32,741	3.8	32,297	-1.6	444
2012
Jan	31,822	-2.8	32,158	-0.4	-336
Feb	31,799	-0.1	32,325	0.5	-526
Mar	32,349	1.7	31,623	-2.2	726
Apr	32,339	0.0	32,398	2.5	-59
May	32,792	1.4	32,702	0.9	90

Source: Istituto Nazionale di Statistica

http://www.istat.it/it/archivio/66916

Italy’s trade not seasonally adjusted is provided in Table VG-2. Values are different because the data are original and not adjusted. Exports increased 4.8 percent in the 12 months ending in May 2012 while imports decreased 4.5 percent. Twelve-month rates of growth picked up again in Aug 2011 with 14.9 percent for exports and 12.1 percent for imports. In Sep, exports grew 10.2 percent relative to a year earlier while imports grew only 3.6 percent. In Oct, exports grew 4.5 percent while imports fell 0.4 percent. In Nov, exports grew 6.5 percent in 12 months while imports grew 0.5 percent. Exports continued to growth of 4.9 percent in Mar while imports fell 10.9 percent. The actual or not seasonally adjusted trade balance deficit fell from €2905 million in Aug to surplus of €1150 million in Dec but turned into deficit of €4346 million in Jan 2012, improving to lower deficit of €1113 million in Feb 2012 and surplus of €2067 million in Mar 2012, returning to deficit of €200 million in Apr and surplus of €1008 million in May. Exports fell 20.9 percent and imports 22.1 percent during the global recession in 2009.

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

	Exports € M	Exports 12 Months ∆%	Imports € M	Imports 12 Months ∆%	Balance € M
Dec 2010	29,714	20.2	32,732	31.7	-3,018
2011
Jan	26,146	24.6	32,455	28.4	-6,309
Feb	29,595	17.7	32,621	16.2	-3,026
Mar	34,418	14.0	38,203	19.8	-3,785
Apr	31,045	12.5	33,869	18.0	-2,824
May	33,491	19.8	35,722	18.4	-2,231
Jun	32,605	7.9	34,309	1.6	-1,704
Jul	35,264	5.8	33,743	6.1	1,521
Aug	24,177	14.9	27,082	12.1	-2,905
Sep	32,997	10.2	34,878	3.6	-1,881
Oct	32,131	4.5	33,186	-0.4	-1,055
Nov	32,428	6.5	34,011	0.5	-1,583
Dec	31,551	6.2	30,401	-7.1	1,150
2012
Jan	27,271	4.3	31,617	-2.6	-4,346
Feb	31,754	7.3	32,890	0.8	-1,136
Mar	36,107	4.9	34,040	-10.9	2,067
Apr	30,521	-1.7	30,721	-9.3	-200
May	35,108	4.8	34,100	-4.5	1,008

Source: Istituto Nazionale di Statistica

http://www.istat.it/it/archivio/66916

Growth rates of Italy’s trade and major products are provided in Table VG-3 for the period May 2012 relative to May 2011. Growth rates of imports are negative with the exception of energy. The higher rate of growth of exports of 3.9 percent relative to imports of minus 5.5 percent may reflect weak demand in Italy with GDP declining during three consecutive quarters from IIIQ2011 through IQ2012.

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

	Exports Share %	Exports ∆% Jan-May 2012/ Jan-Apr 2011	Imports Share %	Imports ∆% Jan-May 2012/ Jan-May 2011
Consumer Goods	28.9	4.6	25.0	-2.5
Durable	5.9	0.7	3.0	-8.4
Non Durable	23.0	5.8	22.0	-1.7
Capital Goods	32.2	2.8	20.8	-12.4
Inter- mediate Goods	34.3	2.4	34.5	-12.5
Energy	4.7	18.3	19.7	11.8
Total ex Energy	95.3	3.2	80.3	-9.5
Total	100.0	3.9	100.0	-5.5

Source: Istituto Nazionale di Statistica

http://www.istat.it/it/archivio/66916

Table VG-4 provides Italy’s trade balance by product categories in May 2012 and cumulative Jan-May 2012. Italy’s trade balance excluding energy generated surplus of €6089 million in May 2012 and €25,467 million in Jan-May 2012 but the energy trade balance created deficit of €5081 million in May 2012 and €28,075 million in Jan-May 2012. The overall surplus in May 2012 was €1008 million but there was an overall deficit of €2608 million in Jan-May 2012. Italy has significant competitiveness in various economic activities in contrast with some other countries with debt difficulties.

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

	May 2012	Cumulative Jan-May 2012
Consumer Goods	1,055	5,340
Durable	999	4,508
Nondurable	56	832
Capital Goods	4,673	18,747
Intermediate Goods	361	1,380
Energy	-5,081	-28,075
Total ex Energy	6,089	25,467
Total	1,008	-2,608

Source: Istituto Nazionale di Statistica

http://www.istat.it/it/archivio/66916

Professors Ricardo Caballero and Francesco Giavazzi (2012Jan15) find that the resolution of the European sovereign crisis with survival of the euro area would require success in the restructuring of Italy. That success would be assured with growth of the Italian economy. A critical problem is that the common euro currency prevents Italy from devaluing the exchange rate to parity or the exchange rate that would permit export growth to promote internal economic activity, which could generate fiscal revenues for primary fiscal surplus that ensure creditworthiness. Fiscal consolidation and restructuring are important but of long-term gestation. Immediate growth of the Italian economy would consolidate the resolution of the sovereign debt crisis. Caballero and Giavazzi (2012Jan15) argue that 55 percent of the exports of Italy are to countries outside the euro area such that devaluation of 15 percent would be effective in increasing export revenue. Newly available data in Table VG-5 providing Italy’s trade with regions and countries supports the argument of Caballero and Giavazzi (2012Jan15). Italy’s exports to the European Monetary Union (EMU) are only 42.7 percent of the total. Exports to the non-European Union area are growing at 9.3 percent in May 2012 relative to May 2011 while those to EMU are falling at 1.2 percent.

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

May 2012	Exports % Share	∆% Jan-Apr 2012/ Jan-May 2011	Imports % Share	Imports ∆% Jan-May 2012/ Jan-May 2011
EU	56.0	-0.1	53.3	-7.6
EMU 17	42.7	-1.2	43.2	-7.4
France	11.6	-0.6	8.3	-5.5
Germany	13.1	2.1	15.6	-10.0
Spain	5.3	-9.4	4.5	-8.7
UK	4.7	9.5	2.7	-13.0
Non EU	44.0	9.3	46.7	-3.1
Europe non EU	13.3	11.6	11.1	-5.5
USA	6.1	15.1	3.3	4.9
China	2.7	-11.8	7.3	-18.5
OPEC	4.7	22.1	8.6	25.2
Total	100.0	3.9	100.0	-5.5

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

Source: Istituto Nazionale di Statistica

http://www.istat.it/it/archivio/66916

Table VG-6 provides Italy’s trade balance by regions and countries. Italy had trade deficit of €549 million with the 17 countries of the euro zone (EMU 17) in May and deficit of €1214 million in Jan-May. Depreciation to parity could permit greater competitiveness in improving the trade surpluses of €3562 million in Jan-May with Europe non European Union and of €5273 million with the US. There is significant rigidity in the trade deficits in Jan-May of €6789 million with China and €9775 million with members of the Organization of Petroleum Exporting Countries (OPEC).

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

Regions and Countries	Trade Balance May 2012 Millions of Euro	Trade Balance Cumulative Jan-May 2012 Millions of Euro
EU	691	4,128
EMU 17	-549	-1,214
France	944	4,764
Germany	-750	-2,632
Spain	71	905
UK	731	3,586
Non EU	316	-6,735
Europe non EU	1,094	3,562
USA	1,858	5,273
China	-1,602	-6,789
OPEC	-1,736	-9,775
Total	1,008	-2,608

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

Source: Istituto Nazionale di Statistica

http://www.istat.it/it/archivio/66916

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 4.0 percent in 2009 after dropping revised 1.0 percent in 2008. Recovery of 1.8 percent in 2010 is relatively low compared to annual growth rates in 2007 and earlier years. Growth was only 0.8 percent in 2011. The bottom part of Table VH-UK provides average growth rates of UK GDP since 1948. The UK economy grew at 2.7 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 3.0 percent. Growth in the current cyclical expansion has been only at 1.3 percent as advanced economies struggle with weak internal demand and world trade.

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

	∆% on Prior Year
1998	3.5
1999	3.2
2000	4.2
2001	2.9
2002	2.4
2003	3.8
2004	2.9
2005	2.8
2006	2.6
2007	3.6
2008	-1.0
2009	-4.0
2010	1.8
2011	0.8
Average ∆% per Year
1948-2011	2.7
1948-1959	2.9
1960-1969	3.3
1970-1979	2.5
1980-1989	3.2
1990-1999	2.6
2000-2011	1.7
2000-2007	3.0
2009-2011	1.3

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/naa2/quarterly-national-accounts/q1-2012/index.html

http://cmpassocregulationblog.blogspot.com/2012/06/recovery-without-hiring-continuance-of_24.html

The Business Activity Index of the Markit/CIPS UK Services PMI^® fell from 53.3 in May to 51.3 in Jun with growth during 18 months but at the weakest level since Oct 2011 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9784). Chris Williamson, Chief Economist at Markit, finds that services grew only around 0.2 percent in IIQ2012, stagnating at the margin in Jun (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9784). The Markit/CIPS UK Manufacturing Purchasing Managers’ Index^® (PMI^®) increased from the three-year low of 45.9 in May to 48.6 in Jun with the average quarterly reading of 48.2 being the lowest since IIQ2009 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9748). The decline of 4.3 points in May is the second sharpest decline in the history of 20 years of the index. Rob Dobson, Senior Economist at Markit and author of the Markit/CIPS Manufacturing PMI^®, finds significant volatility from factors such as the jubilee holidays with production increase in Jun raising more favorable views but manufacturing output probably falling by around 0.5 percent in IIQ2012 (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=9748).

Table UK provides the country data table for the United Kingdom.

Table UK, UK Economic Indicators


CPI	May month ∆%: -0.1 Jun 12-month ∆%: 2.4 Blog 7/22/12
Output/Input Prices	Output Prices: Jun 12-month NSA ∆%: 2.3; excluding food, petroleum ∆%: 2.0 Input Prices: Jun 12-month NSA ∆%: -2.3 Excluding ∆%: -0.1 Blog 7/8/12
GDP Growth	IQ2012 prior quarter ∆% minus 0.3; year earlier same quarter ∆%: minus 0.2 Blog 7/2/12
Industrial Production	May 2012/May 2011 NSA ∆%: Production Industries minus 1.6; Manufacturing minus 1.7 Blog 7/15/12
Retail Sales	Jun month ∆%: 0.1 May 12-month ∆%: +1.6 Blog 7/22/12
Labor Market	Mar-May Unemployment Rate: 8.1%; Claimant Count 4.9%; Earnings Growth 1.5% Blog 7/22/12
Trade Balance	Balance May minus ₤2717 million Exports May ∆%: 4.8 Apr-Jun ∆%: 0.2 Imports May ∆%: 1.2 Apr-Jun ∆%: 3.4 Blog 7/15/12

Links to blog comments in Table UK:

7/15/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-hiring-ten-million_15.html

7/8/12 http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html

7/2/12 http://cmpassocregulationblog.blogspot.com/2012/07/mediocre-economic-growth-united-states_03.html

6/24/12 http://cmpassocregulationblog.blogspot.com/2012/06/recovery-without-hiring-continuance-of_24.html

Labor market statistics of the UK for the quarter Mar-May 2012 are provided in Table VH-1. The unemployment rate fell to 8.1 percent and the number unemployed decreased 65,000 in the quarter, reaching 2.584 million. There are 885,000 unemployed over one year, up 3,000 on the quarter, and 441,000 unemployed over two years, up 18,000 on the quarter. The employment rate is 70.7 percent. Earnings growth including bonuses was 1.5 percent over the earlier year. The claimant count or those receiving unemployment benefits stands at 4.9 percent, unchanged on the month but up 0.2 percentage point on the year. There are 7.94 million people working part time in Dec-Feb. The number of employees and self-employed part-time because they could not find full-time employment fell 6000 to 1.394 million.

Table VH-1, UK, Labor Market Statistics

	Quarter Mar-May 2012
Unemployment Rate	8.1% down 0.2 % points on quarter and +0.4 from year earlier
Number Unemployed	(1) -65,000 on quarter +132,000 from year earlier to reach 2.584 million (2) Unemployment rate 16 to 24 years of age -0.2 % points on quarter to 21.9% of that age group; number unemployed 16 to 24 years 1.024 million down 10,000 on quarter (3) Unemployed 16 to 24 years excluding those in full-time education 724,000 (314,000 in full-time education) up 6,000 on quarter; unemployment rate 20.7%, down 0.2 % points
Number Unemployed > one and two years	(1) Number unemployed over one year: 885,000, up 3,000 on quarter (2) Number unemployed over two years: 441,000, up 18,000 on quarter
Inactivity Rate 16-64 Years of Age (Definition: Not in employment but have not been seeking employment in the past four weeks or are unable to start work in two weeks)	(1) 22.9%, down 0.2 % points on quarter (2) Economically inactive 16-64 years down 61,000 on quarter and down 121,000 on year to 9.207 million
Employment Rate	70.7% Mar-May, up 0.3 % points on quarter
Number Employed	(1) Up 181,000 on quarter, +75,000 on year to 29.354 million (2) Number of employees down 109,000 on quarter to 24.79 million (3) Self-employed +101,000 on quarter to 4.12 million (5) Number in other job categories +26,000 to 210,000
Earnings Growth Rates Year on Year	(1) Total +1.5% (including bonuses) over year earlier, up 0.1 on quarter; regular 1.8% unchanged in quarter ; private sector fell from 1.2% to 0.3% on year earlier, public sector rose 1.5% on year earlier (2) Regular private +2.1% (excluding bonuses) over year earlier; regular public 0.9% on year earlier
Full-time and Part-time	(1) Number full-time 21.37 million, up 133,000 on quarter (2) Number part-time 7.94 million in Dec-Feb, up 80,000 on quarter (3) Number employees and self-employed working part-time because they could not find full-time employment 1.394 million down 6000 on quarter
Claimant Count (Jobseeker’s Allowance, JSA)	(1) Latest estimate: 1.604 million; up 6,100 in month +78,600 on year earlier (2) Claimant count 4.9%, unchanged on month but up 0.2 % point on year
Labor Productivity	(1) Output per worker fell 0.7% from IVQ2011 to IQ2012 (2) Unit labor costs increased 1.4% from IVQ2011 to IQ2012

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

Table VH-2 UK provides indicators of the labor force survey of the UK for Mar-May 2012 and earlier quarters. There has been deterioration in UK labor markets with the rate of unemployment increasing from 7.7 percent in Mar-May 2011 to 8.1 percent in Mar-May 2012.

Table VH-2, UK, Labor Force Survey Indicators

	LFHP	EMP	PART	UNE	RATE
Mar-May 2012	40,193	29,534	70.7	2,584	8.1
Dec-Feb 2012	40,188	29,172	70.4	2,650	8.3
Sep-Nov 2011	40,183	29,119	70.3	2,685	8.4
Jun-Aug 2011	40,178	29,101	70.4	2,566	8.1
Mar-May 2011	40,147	29,279	70.7	2,452	7.7
Mar-May 2010	39,964	28,969	70.5	2,475	7.9

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

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

The volume of retail sales in the UK seasonally adjusted increased 0.1 percent in Jun 2012 and increased 1.6 percent not seasonally adjusted in the 12 months ending in Jun, as shown in Table VH-3. Retail sales percentage changes in 12 months had been positive since Sep 2011 with exception of decline of 1.5 percent in Apr 2012. Cumulative growth from Sep 2011 to Mar 2012 was 3.1 percent, or at the high annual equivalent rate of 5.4 percent, which has been reduced to 1.9 percent from Sep 2011 to Jun 2012, or 2.3 percent in annual equivalent, after the sharp decline of 2.7 percent in Apr 2012. There has been significant volatility in monthly retail sales in the UK.

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

	Month ∆%	12-Month ∆%
Jun 2012	0.1	1.6
May	1.5	2.1
Apr	-2.7	-1.5
Mar	2.0	3.1
Feb	-0.7	0.9
Jan	0.2	0.8
Dec 2011	0.5	2.3
Nov	-0.3	0.2
Oct	0.7	0.6
Sep	0.7	0.4
Aug	-0.5	-1.2
Jul	0.1	-0.8
Jun	0.7	-0.7
May	-2.1	-0.8
Apr	1.8	2.1
Mar	-0.2	0.1
Feb	-0.7	0.2
Jan	1.7	3.6

Dec 2010	-1.6	-2.1

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

Retail sales in the UK struggle with relatively high inflation. Table VH-4 provides 12-month percentage changes of the implied deflator of UK retail sales. The implied deflator of all retail sales increased 0.3 percent in the 12 months ending in Jun while that of sales excluding auto fuel decreased 1.1 percent. The implied deflator of auto fuel sales rose to 16.9 percent in Sep 2011, which is the highest 12-month increase in 2011, but then declined to 14.8 percent in Oct 2011, 12.6 percent in Nov, 1.2 percent in May 2012 and minus 1.1 percent in Jun 2012. The percentage change of the implied deflator of sales of food stores at 2.2 percent in Jun 2012 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 9.5 percent in 2008 when commodity carry trades were reversed in the panic of the financial crisis, as shown in Table VH-4. UK inflation is particularly sensitive to changes in commodity prices.

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

	All Retail	Ex Auto Fuel	Food Stores	Non- Food	Auto Fuel
Jun 2012	0.3	0.6	2.2	-0.5	-1.1
May	1.2	1.3	3.1	-0.1	1.2
Apr	1.9	1.7	3.7	0.0	5.2
Mar	2.9	2.5	4.5	0.9	4.9
Feb	2.6	2.2	4.0	0.6	5.3
Jan	2.5	2.1	3.5	0.1	5.3
Dec 2011	2.8	2.1	4.3	0.6	9.1
Nov	3.8	2.7	4.6	1.4	12.6
Oct	4.6	3.4	5.0	2.1	14.7
Sep	5.1	3.6	6.1	1.5	16.9
Aug	5.4	4.0	6.0	2.3	16.2
Jul	5.1	3.8	5.9	2.1	14.4
Jun	4.6	3.3	6.1	1.0	14.5
May	4.6	3.4	5.5	2.0	13.1
Apr	4.2	3.2	4.8	1.9	12.2
Mar	4.3	2.9	4.3	1.7	14.8
Feb	4.9	3.6	5.5	2.0	15.0
Jan	4.2	3.0	5.3	1.1	14.4
Dec 2010	3.4	2.9	5.2	1.1	12.4
Dec 2009	3.6	2.4	2.1	1.7	16.8
Dec 2008	-0.3	0.4	7.1	-4.1	-9.5
Dec 2007	1.8	0.6	3.9	-1.7	15.3
Dec 2006	1.1	0.9	3.3	-1.0	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/june-2012/index.html

UK monthly retail volume of sales is quite volatile, as shown in Table VH-5. Total volume of sales increased 0.1 percent in Jun 2012. There were increases in all major categories in May 2012 after decreases in all major categories in Apr 2012 following increases in all categories in Mar 2012 with exception of minus 0.1 percent for food stores. All categories also weakened with declines in Feb 2012.

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

	All Retail	Ex Auto Fuel	Food Stores	Non- Food	Auto Fuel
Jun 2012	0.1	0.3	-0.7	1.2	-2.2
May	1.5	1.0	0.3	1.6	6.3
Apr	-2.7	-1.5	-0.7	-2.5	-13.7
Mar	2.0	1.6	-0.1	3.1	5.5
Feb	-0.7	-0.6	-0.4	-1.1	-1.3
Jan	0.2	0.5	-0.4	1.0	-2.4
Dec 2011	0.5	0.5	0.6	0.5	1.0
Nov	-0.3	-0.6	-0.7	-1.0	2.8
Oct	0.7	0.6	0.6	0.8	1.2
Sep	0.7	0.8	0.1	1.7	-0.1
Aug	-0.5	-0.5	0.0	-1.1	-0.9
Jul	0.1	0.0	0.5	0.0	0.7
Jun	0.7	0.8	1.1	0.0	-0.5
May	-2.1	-2.4	-4.3	-1.1	0.3
Apr	1.8	2.0	2.9	1.2	0.7
Mar	-0.2	-0.1	1.2	-1.3	-0.9
Feb	-0.7	-0.9	-0.7	-1.3	1.1
Jan	1.7	1.1	0.3	1.9	7.6
Dec 2010	-1.6	-1.1	-2.0	-1.2	-6.4

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

Percentage growth in 12 months of retail sales volume by component groups in the UK is provided in Table VH-6. Total retail sales increased 1.6 percent in the 12 months ending in Jun 2012 with increase of 2.2 percent in sales excluding auto fuel. Significant improvement since Aug 2011 was interrupted with sharp declines in Apr 2012.

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

	All Retail	Ex Auto Fuel	Food Stores	Non- Food	Auto Fuel
Jun 2012	1.6	2.2	-0.7	4.1	-4.6
May	2.1	2.7	1.0	2.8	-2.9
Apr	-1.5	-0.8	-3.6	0.0	-8.3
Mar	3.1	2.7	-0.2	3.8	7.0
Feb	0.9	0.9	1.1	-0.6	0.6
Jan	0.8	0.6	0.8	-0.8	3.0
Dec 2011	2.3	1.2	1.4	0.1	13.5
Nov	0.2	-0.4	-1.2	-1.6	5.2
Oct	0.6	0.4	0.4	-0.9	2.4
Sep	0.4	0.0	-0.1	-1.3	3.5
Aug	-1.2	-1.6	-0.6	-3.8	2.1
Jul	-0.8	-1.2	-1.0	-2.7	2.3
Jun	-0.7	-1.1	-4.0	-0.8	3.2
May	-0.8	-1.1	-3.3	-0.8	2.3
Apr	2.1	1.9	1.8	0.6	4.0
Mar	0.1	-0.3	-1.0	-0.7	3.9
Feb	0.2	-0.3	-2.2	0.0	4.8
Jan	3.6	3.2	-2.4	7.2	7.4
Dec 2010	-2.1	-1.5	-3.9	-0.3	-8.4
Dec 2009	1.2	1.8	2.4	0.7	-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/june-2012/index.html

Table VH-7 provides the analysis of the UK Office for National Statistics of contributions to 12-month percentage changes of value and volume of retail sales in the UK. The volume of retail sales seasonally adjusted increased 1.6 percent in the 12 months ending in Jun 2012. Sales of predominantly food stores with weight of 41.3 percent decreased 0.7 percent in the 12 months ending in Jun 2012, deducting 0.3 percentage points. Mostly nonfood stores with weight of 41.6 percent increased 4.1 percent with contribution of 1.9 percentage points. Positive contribution to 12-month percentage changes of volume was made by non-store retailing with weight of 5.3 percent, growth of 8.5 percent and positive contribution of 0.5 percentage points but automotive fuel with weight of 11.8 percent and growth of minus 4.6 percent deducted 0.5 percentage points. The value of retail sales increased 1.9 percent in the 12 months ending in Jun 2012. There were positive contributions: 0.6 percentage points for predominantly food stores and 1.5 percentage points for predominantly nonfood stores.

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

Jun 2012	Weight % of All Retailing	Volume SA 12- Month ∆%	PP Cont. % points	Value SA 12- Month ∆%	PP Cont. % points
All Retailing	100.0	1.6		1.9
Mostly Food Stores	41.3	-0.7	-0.3	1.5	0.6
Mostly Nonfood Stores
Total	41.6	4.1	1.9	3.7	1.5
Non- specialized	7.8	9.8	0.8	8.6	0.7
Textile, Clothing & Footwear	12.3	2.4	0.4	2.2	0.3
Household Goods Stores	8.8	1.6	0.2	1.8	0.2
Other	12.7	4.2	0.5	3.4	0.4
Non-store Retailing	5.3	8.5	0.5	7.4	0.4
Automotive Fuel	11.8	-4.6	-0.5	-5.2	-0.6

Cont.: Contribution

Sources: http://www.ons.gov.uk/ons/rel/rsi/retail-sales/june-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 2.0 percent by Fri Jul 20, 2012. Dollar devaluation is a major vehicle of monetary policy in reducing the output gap that is implemented in the probably erroneous belief that devaluation will not accelerate inflation, misallocating resources toward less productive economic activities and disrupting financial markets. The last row of Table VI-1 shows CPI inflation in the US rising from 1.9 percent in 2003 to 4.1 percent in 2007 even as monetary policy increased the fed funds rate from 1 percent in Jun 2004 to 5.25 percent in Jun 2006.

Table VI-1, Volatility of Assets

DJIA	10/08/02-10/01/07	10/01/07-3/4/09	3/4/09- 4/6/10
∆%	87.8	-51.2	60.3
NYSE Financial	1/15/04- 6/13/07	6/13/07- 3/4/09	3/4/09- 4/16/07
∆%	42.3	-75.9	121.1
Shanghai Composite	6/10/05- 10/15/07	10/15/07- 10/30/08	10/30/08- 7/30/09
∆%	444.2	-70.8	85.3
STOXX EUROPE 50	3/10/03- 7/25/07	7/25/07- 3/9/09	3/9/09- 4/21/10
∆%	93.5	-57.9	64.3
UBS Com.	1/23/02- 7/1/08	7/1/08- 2/23/09	2/23/09- 1/6/10
∆%	165.5	-56.4	41.4
10-Year Treasury	6/10/03	6/12/07	12/31/08	4/5/10
%	3.112	5.297	2.247	3.986
USD/EUR	6/26/03	7/14/08	6/07/10	7/20/2012
Rate	1.1423	1.5914	1.192	1.2158
CNY/USD	01/03 2000	07/21 2005	7/15 2008	7/20/ 2012
Rate	8.2798	8.2765	6.8211	6.3750
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 1.2158/EUR on Jul 20, 2012 or by 2.0 percent {[(1.2158/1.192)-1]100 = 2.0%}. 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 6.3750/USD on Fri Jul 20, 2012, or by an additional 6.5 percent, for cumulative revaluation of 23.0 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	7/20/ /2012
Rate	1.1423	1.5914	1.192	1.2158
CNY/USD	01/03 2000	07/21 2005	7/15 2008	7/20/ 2012
Rate	8.2798	8.2765	6.8211	6.3750
Weekly Rates	6/29/2012	7/6/2012	7/13/2012	7/20/ 2012
CNY/USD	6.3552	6.3658	6.3868	6.3750
∆% from Earlier Week*	0.2	-0.2	-0.3	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 Jul 20, 2012 in selected intervals. The CNY/USD revalued by 0.9 percent from Oct 28, 2012 to Apr 27, 2012. The CNY devalued by 0.2 percent relative to the USD in the week of Jul 6, 2012 and an additional 0.3 percent in the week of Jul 13, 2012 but revalued 0.2 percent in the week of Jul 20, such that, as shown in Table VI-2A, there is marginal devaluation of 0.3 percent of the CNY relative to the USD by Jul 20, 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
7/20/12	6.3750	-0.3
7/13/12	6.3868	-0.4
7/6/12	6.3658	-0.1%
6/29/12	6.3552	0.1
6/22/12	6.3650	-0.1
6/15/12	6.3678	-0.1
6/8/2012	6.3752	-0.3
6/1/2012	6.3708	-0.2
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

Chart VI-1 of the Board of Governors of the Federal Reserve System provides the CNY/USD exchange rate from 2000 to 2012 together with US recession dates in shaded areas. China fixed the CNY/USD date for a long period as shown in the horizontal segment from 2000 to 2005. There was systematic revaluation of 17.6 percent from CNY 8.2765 on Jul 21, 2005 to CNY 6.8211 on Jul 15, 2008. China fixed the CNY/USD rate until Jun 7, 2010, to avoid adverse effects on its economy from the global recession, which is shown as a horizontal segment from 2009 until mid 2010. China then continued the policy of appreciation of the CNY relative to the USD with oscillations until the beginning of 2012 when the rate began to move sideways followed by a final upward slope of devaluation that is measured in Table VI-2A. Revaluation of the CNY relative to the USD by 23.0 percent by Jul 20, 2012 has not reduced the trade surplus of China but reversal of the policy of revaluation could result in international confrontation. The upward slope in the final segment on the right of Chart VI-I is measured as depreciation of 0.3 percent in Table VI-2A, which can be reversed rapidly.

Chart VI-1, Chinese Yuan (CNY) per US Dollar (USD) 2000-2012

Note: US Recessions in Shaded Areas

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/datadownload/Choose.aspx?rel=H10

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 current account of the US balance of payments is provided in Table VI-A for IQ2011 and IQ2012. The US has a large deficit in goods or exports less imports of goods but it has a surplus in services that helps to reduce the trade account deficit or exports less imports of goods and services. The current account deficit of the US increased from $119.9 billion in IQ2011, or 3.2 percent of GDP to $137.3 billion in IQ2012, or 3.6 percent of GDP. The ratio of the current account deficit to GDP has stabilized around 3 percent of GDP compared with much higher percentages before the recession (see Pelaez and Pelaez, The Global Recession Risk (2007), Globalization and the State, Vol. II (2008b), 183-94, Government Intervention in Globalization (2008c), 167-71).

Table VI-3A, US Balance of Payments, Millions of Dollars NSA

	IQ2011	IQ2012	Difference
Goods Balance	-181,358	-194,462	-13,104
X Goods	360,917	388,501	11.0 ∆%
M Goods	-542,276	-582.963	12.9 ∆%
Services Balance	44,133	43,465	-668
X Services	147,894	154,420	9.1 ∆%
M Services	-103,761	-110,955	8.0 ∆%
Balance Goods and Services	-137,225	-150,997	-13,772
Balance Income	52,451	47,571	-4,880
Unilateral Transfers	-35,223	-33,887	1,336
Current Account Balance	-119,997	-137,313	-17,316
% GDP	IQ2011	IVQ2011	IQ2012
	3.2	3.1	3.6

X: exports; M: imports

Balance on Current Account = Balance on Goods and Services + Balance on Income + Unilateral Transfers

Source: Bureau of Economic Analysis

http://www.bea.gov/international/index.htm#bop

In their classic work on “unpleasant monetarist arithmetic,” Sargent and Wallace (1981, 2) consider a regime of domination of monetary policy by fiscal policy (emphasis added):

“Imagine that fiscal policy dominates monetary policy. The fiscal authority independently sets its budgets, announcing all current and future deficits and surpluses and thus determining the amount of revenue that must be raised through bond sales and seignorage. Under this second coordination scheme, the monetary authority faces the constraints imposed by the demand for government bonds, for it must try to finance with seignorage any discrepancy between the revenue demanded by the fiscal authority and the amount of bonds that can be sold to the public. Suppose that the demand for government bonds implies an interest rate on bonds greater than the economy’s rate of growth. Then if the fiscal authority runs deficits, the monetary authority is unable to control either the growth rate of the monetary base or inflation forever. If the principal and interest due on these additional bonds are raised by selling still more bonds, so as to continue to hold down the growth of base money, then, because the interest rate on bonds is greater than the economy’s growth rate, the real stock of bonds will growth faster than the size of the economy. This cannot go on forever, since the demand for bonds places an upper limit on the stock of bonds relative to the size of the economy. Once that limit is reached, the principal and interest due on the bonds already sold to fight inflation must be financed, at least in part, by seignorage, requiring the creation of additional base money.”

The current real value of government debt plus monetary liabilities depends on the expected discounted values of future primary surpluses or difference between tax revenue and government expenditure excluding interest payments (Cochrane 2011Jan, 27, equation (16)). There is a point when adverse expectations about the capacity of the government to generate primary surpluses to honor its obligations can result in increases in interest rates on government debt.

This analysis suggests that there may be a point of saturation of demand for United States financial liabilities without an increase in interest rates on Treasury securities. A risk premium may develop on US debt. Such premium is not apparent currently because of distressed conditions in the world economy and international financial system. Risk premiums are observed in the spread of bonds of highly indebted countries in Europe relative to bonds of the government of Germany.

The issue of global imbalances centered on the possibility of a disorderly correction (Pelaez and Pelaez, The Global Recession Risk (2007), Globalization and the State Vol. II (2008b) 183-94, Government Intervention in Globalization (2008c), 167-71). Such a correction has not occurred historically but there is no argument proving that it could not occur. The need for a correction would originate in unsustainable large and growing United States current account deficits (CAD) and net international investment position (NIIP) or excess of financial liabilities of the US held by foreigners net of financial liabilities of foreigners held by US residents. The IMF estimated that the US could maintain a CAD of two to three percent of GDP without major problems (Rajan 2004). The threat of disorderly correction is summarized by Pelaez and Pelaez, The Global Recession Risk (2007), 15):

“It is possible that foreigners may be unwilling to increase their positions in US financial assets at prevailing interest rates. An exit out of the dollar could cause major devaluation of the dollar. The depreciation of the dollar would cause inflation in the US, leading to increases in American interest rates. There would be an increase in mortgage rates followed by deterioration of real estate values. The IMF has simulated that such an adjustment would cause a decline in the rate of growth of US GDP to 0.5 percent over several years. The decline of demand in the US by four percentage points over several years would result in a world recession because the weakness in Europe and Japan could not compensate for the collapse of American demand. The probability of occurrence of an abrupt adjustment is unknown. However, the adverse effects are quite high, at least hypothetically, to warrant concern.”

The United States could be moving toward a situation typical of heavily indebted countries, requiring fiscal adjustment and increases in productivity to become more competitive internationally. The CAD and NIIP of the United States are not observed in full deterioration because the economy is well below potential. There are two complications in the current environment relative to the concern with disorderly correction in the first half of the past decade. Table VI-3B provides data on US fiscal and balance of payments imbalances. In 2007, the federal deficit of the US was $161 billion corresponding to 1.2 percent of GDP while the Congressional Budget Office (CBO 2012MarBEO, 2) estimates the federal deficit in 2012 at $1171 billion or 7.6 percent of GDP. The combined record federal deficits of the US from 2009 to 2012 are $5178 billion or 33 percent of the estimate of GDP of $15,508 billion for 2012 by the CBO (2012MarBEO, 2). Federal debt in 2007 was $5035 billion, less than the combined deficits from 2009 to 2012 of $5178 billion, and corresponded to 36.3 percent of GDP. Federal debt in 2011 was 67.7 percent of GDP and is estimated to reach 73.2 percent of GDP in 2012 (CBO2012MarBEO, 2). This situation may worsen in the future (CBO 2012LTBO):

“The budget outlook is much bleaker under the extended alternative fiscal scenario, which maintains what some analysts might consider “current policies,” as opposed to current laws. Federal debt would grow rapidly from its already high level, exceeding 90 percent of GDP in 2022. After that, the growing imbalance between revenues and spending, combined with spiraling interest payments, would swiftly push debt to higher and higher levels. Debt as a share of GDP would exceed its historical peak of 109 percent by 2026, and it would approach 200 percent in 2037.

The changes under this scenario would result in much lower revenues than would occur under the extended baseline scenario because almost all expiring tax provisions are assumed to be extended through 2022 (with the exception of the current reduction in the payroll tax rate for Social Security). After 2022, revenues under this scenario are assumed to remain at their 2022 level of 18.5 percent of GDP, just above the average of the past 40 years.

Outlays would be much higher than under the other scenario. This scenario incorporates assumptions that through 2022, lawmakers will act to prevent Medicare’s payment rates for physicians from declining; that after 2022, lawmakers will not allow various restraints on the growth of Medicare costs and health insurance subsidies to exert their full effect; and that the automatic reductions in spending required by the Budget Control Act of 2011 will not occur (although the original caps on discretionary appropriations in that law are assumed to remain in place). Finally, under this scenario, federal spending as a percentage of GDP for activities other than Social Security, the major health care programs, and interest payments is assumed to return to its average level during the past two decades, rather than fall significantly below that level, as it does under the extended baseline scenario.”

Table VI-3B, US, Current Account, NIIP, Fiscal Balance, Nominal GDP, Federal Debt and Direct Investment, Dollar Billions and %

	2000	2007	2008	2009	2010	2011
Goods & Services	-377	-697	-698	-379	-495	-559
Income	19	101	147	119	184	227
UT	-58	-115	-126	-122	-131	-133
Current Account	-416	-710	-677	-382	-442	-466
NGDP	9951	14028	14291	13939	14526	15094
Current Account % GDP	-3.8	-5.0	-4.9	-2.7	-3.4	-3.7
NIIP	-1337	-1796	-3260	-2396	-2471	NA
NIIP % GDP	-13.4	-12.8	-22.8	-17.2	-17.0	NA
Exports Goods Services Income	1425	2488	2657	2181	2519	2848
NIIP % Exports Goods Services Income	-94	-72	-123	-110	-98	NA
DIA MV	2694	5274	3102	4331	4843	NA
DIUS MV	2783	3551	2486	3027	3451	NA
Fiscal Balance	+236	-161	-459	-1413	-1294	-1300
Fiscal Balance % GDP	+2.4	-1.2	-3.2	-9.9	-8.9	-8.7
Federal Debt	3410	5035	5803	7545	9019	10128
Federal Debt % GDP	34.7	36.3	40.5	54.1	62.8	67.7
Federal Outlays	1789	2729	2983	3518	3456	3598
∆%	5.1	2.8	9.3	17.9	-1.8	4.1
% GDP	18.2	19.7	20.8	25.2	24.1	24.1
Federal Revenue	2052	2568	2524	2105	2162	2303
∆%	10.8	6.7	-1.7	-16.6	2.7	6.5
% GDP	20.6	18.5	17.6	15.1	15.1	15.4

Sources:

Notes: UT: unilateral transfers; NGDP: nominal GDP or in current dollars; NIIP: Net International Investment Position; DIA MV: US Direct Investment Abroad at Market Value; DIUS MV: Direct Investment in the US at Market Value. There are minor discrepancies in the decimal point of percentages of GDP between the balance of payments data and federal debt, outlays, revenue and deficits in which they original number of the CBO source is maintained. These discrepancies do not alter conclusions.

Sources: Balance of Payments and NIIP, Bureau of Economic Analysis (BEA) http://www.bea.gov/international/index.htm#bop

Gross Domestic Product, Bureau of Economic Analysis (BEA) http://www.bea.gov/national/index.htm#gdp

Federal Outlays, Revenues and Debt, Congressional Budget Office (CBO) http://www.cbo.gov/publication/42911

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 IIQ2012 of 1.8 percent is equivalent to 7.4 percent per year and growth in IIQ2012 relative to IIQ2011 is estimated at 7.5 percent, which is the lowest since the global recession (see subsection VC at http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-hiring-ten-million_15.html and earlier 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 1.7 percent in 2011, 1.7 percent in annual equivalent in the five quarters from IQ2011 to IQ2012 and 2.0 percent in IQ2012 relative to IQ2011 (http://cmpassocregulationblog.blogspot.com/2012/07/mediocre-economic-growth-united-states.html). (ii) The labor market continues fractured with 28.6 million unemployed or underemployed (http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real.html). There are over 10 million fewer full-time jobs and hiring has collapsed (Section I http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-hiring-ten-million.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/06/recovery-without-hiring-continuance-of.html). (iii) There is a difficult climb from the record federal deficit of 9.9 percent of GDP in 2009 and cumulative deficit of $5178 in four consecutive years of deficits exceeding one trillion dollars from 2009 to 2012 (see Section VA http://cmpassocregulationblog.blogspot.com/2012/06/destruction-of-three-trillion-dollars_17.html). There is no subsequent jump of debt in US peacetime history as the one from 40.5 percent of GDP in 2008 to 67.7 percent of GDP in 2011 and projected by the Congressional Budget Office (CBO 2012MarBEO, 2) at 73.2 percent in 2012. The CBO (2012MarBEO) must use current law without any changes in the baseline scenario but also calculates another alternative scenario with different assumptions. In the alternative scenario, the debt/GDP ratio rises to 94.2 percent by 2022. The US is facing an unsustainable debt/GDP path. Feldstein (2012Mar19) finds that the most troubling uncertainty in the US is the programmed tax increases projected by the CBO (2012JanBEO) under current law with federal government revenue increasing from $2.4 trillion in fiscal year 2012 to $2.9 trillion in fiscal year 2013. The increase of $512 billion of federal revenue would be about 2.9 percent of GDP, raising the share of federal revenue in GDP from 15.8 percent in fiscal year 2012 to 18.7 percent of GDP in fiscal year 2013. In the analysis of Feldstein (2012Mar19), increasing revenue would originate in higher personal tax rates, payroll tax contributions and taxes on dividends, capital gains and corporate income tax. The share of federal revenue in GDP would increase to 19.8 percent in 2014, remaining above 20 percent during the rest of the decade. Feldstein (2012Mar19) finds that such a shock of sustained tax increases would risk another recession in 2013, requiring preventive legislation to smooth tax increases

3. Economic Growth and Labor Markets in Advanced Economies. Advanced economies are growing slowly. Japan’s GDP fell 0.6 percent in IVQ2011 relative to a year earlier but grew 2.8 percent in IQ2012 relative to a year earlier and 1.2 percent in IQ2012 relative to IVQ2011. The euro zone’s GDP fell 0.3 percent in IVQ2011 and was flat in IQ2012, falling 0.1 percent relative to a year earlier in IQ2011; Germany’s GDP fell 0.2 percent in IVQ2011 but grew 0.5 percent in IQ2012; and the UK’s GDP fell 0.4 percent in IVQ2011 and 0.3 percent in IQ2012 and declined 0.2 percent in IQ2012 relative to IQ2011. There is still high unemployment in advanced economies

4. World Inflation Waves. Inflation continues in repetitive waves globally (see Section I Inflation Waves and earlier http://cmpassocregulationblog.blogspot.com/2012/06/destruction-of-three-trillion-dollars.html http://cmpassocregulationblog.blogspot.com/2012/05/world-inflation-waves-monetary-policy.html 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 32.4 percent since the trough of the sovereign debt crisis in Europe on Jul 2, 2010, and the S&P 500 has gained 33.3 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 Jun 20, 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 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.” (http://www.federalreserve.gov/newsevents/press/monetary/20120620a.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. 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.ft.com/intl/cms/s/0/778eb1ce-7288-11e1-9c23-00144feab49a.html#axzz1pexRlsiQ), 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 and http://cmpassocregulationblog.blogspot.com/2012/06/rules-versus-discretionary-authorities.html). 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/2011/01/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 7/20/12,” which has been recently stalling or reversing amidst profound risk aversion. “Let’s twist again” monetary policy during the week of Sep 23 caused deep worldwide risk aversion and selloff of risk financial assets (http://cmpassocregulationblog.blogspot.com/2011/09/imf-view-of-world-economy-and-finance.html http://cmpassocregulationblog.blogspot.com/2011/09/collapse-of-household-income-and-wealth.html). Monetary policy was designed to increase risk appetite but instead suffocated risk exposures. There has been rollercoaster fluctuation in risk aversion and financial risk asset valuations: surge in the week of Dec 2, 2011, 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], which was repeated in IIQ2012. 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 and exploded in the week of Jun 1. Expectations of stimulus by central banks caused valuation of risk financial assets in the week of Jun 8 and in the week of Jun 15. Expectations of major stimulus were frustrated by minor continuance of maturity extension policy in the week of Jun 22 together with doubts on the silent bank run in highly indebted euro area member countries. There was a major rally of valuations of risk financial assets in the week of Jun 29 with the announcement of new measures on bank resolutions by the European Council. New doubts surfaced in the week of Jul 6, 2012 on the implementation of the bank resolution mechanism and on the outlook for the world economy because of interest rate reductions by the European Central, Bank of England and People’s Bank of China. Risk appetite returned in the week of July 13 in relief that economic data suggests continuing high growth in China but fiscal and banking uncertainties in Spain spread to Italy in the selloff of July 20, 2012. The highest valuations in column “∆% Trough to 7/20/12” are by US equities indexes: DJIA 32.4 percent and S&P 500 33.3 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 7/20/12” 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 9.0 percent below the trough; Japan’s Nikkei Average is 1.7 percent below the trough; DJ Asia Pacific TSM is 3.9 percent above the trough; Dow Global is 5.6 percent above the trough; STOXX 50 of European equities is 6.5 percent above the trough; and NYSE Financial is 2.3 percent above the trough. DJ UBS Commodities is 17.9 percent above the trough. DAX is 16.9 percent above the trough. Japan’s Nikkei Average is 1.7 percent below the trough on Aug 31, 2010 and 23.9 percent below the peak on Apr 5, 2010. The Nikkei Average closed at 8669.87 on Fri Jul 20, 2012 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata), which is 15.5 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 2.0 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 7/20/12” in Table VI-4 shows that there were increases of valuations of risk financial assets in the week of Jul 20, 2012 such as 1.1 percent for DAX, 0.3 percent for STOXX 50 of European equities and 0.8 percent for DJ Asia Pacific TSM while Dow Global was unchanged. DJ UBS Commodities increased 4.2 percent. Other valuations decreased such as 2.2 percent for NYSE Financial, 0.6 percent Nikkei Average and 0.8 percent Shanghai Composite. The DJIA increased 0.4 percent and S&P 500 increased 0.4 percent. The USD appreciated 0.7 percent. There are still high uncertainties on European sovereign risks and banking soundness, 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 7/20/12” that provides the percentage change from the peak in Apr 2010 before the sovereign risk event to Jul 20, 2012. Most risk financial assets had gained not only relative to the trough as shown in column “∆% Trough to 7/20/12” but also relative to the peak in column “∆% Peak to 7/20/12.” There are now only three equity indexes above the peak in Table VI-4: DJIA 14.4 percent, S&P 500 11.9 percent and DAX 4.7 percent. There are several indexes below the peak: NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) by 18.5 percent, Nikkei Average by 23.9 percent, Shanghai Composite by 31.5 percent, DJ Asia Pacific by 9.0 percent, STOXX 50 by 9.8 percent and Dow Global by 13.8 percent. DJ UBS Commodities Index is now 0.8 percent above the peak. The US dollar strengthened 19.6 percent relative to 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 7/20 /12	∆% Week 7/20/12	∆% Trough to 7/20/ 12
DJIA	4/26/ 10	7/2/10	-13.6	14.4	0.4	32.4
S&P 500	4/23/ 10	7/20/ 10	-16.0	11.9	0.4	33.3
NYSE Finance	4/15/ 10	7/2/10	-20.3	-18.5	-2.2	2.3
Dow Global	4/15/ 10	7/2/10	-18.4	-13.8	0.0	5.6
Asia Pacific	4/15/ 10	7/2/10	-12.5	-9.0	0.8	3.9
Japan Nikkei Aver.	4/05/ 10	8/31/ 10	-22.5	-23.9	-0.6	-1.7
China Shang.	4/15/ 10	7/02 /10	-24.7	-31.5	-0.8	-9.0
STOXX 50	4/15/10	7/2/10	-15.3	-9.8	0.3	6.5
DAX	4/26/ 10	5/25/ 10	-10.5	4.7	1.1	16.9
Dollar Euro	11/25 2009	6/7 2010	21.2	19.6	0.7	-2.0
DJ UBS Comm.	1/6/ 10	7/2/10	-14.5	0.8	4.2	17.9
10-Year T Note	4/5/ 10	4/6/10	3.986	1.459

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 Jul 20, 2012, shows that the S&P 500 is now 12.4 percent above the Apr 26, 2010 level and the DJIA is 14.4 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
Jun 1	-2.7	8.2	-3.0	5.4
Jun 8	3.6	12.0	3.7	9.4
Jun 15	1.7	13.9	1.3	10.8
Jun 22	-1.0	12.8	-0.6	10.1
Jun 29	1.9	14.9	2.0	12.4
Jul 6	-0.8	14.0	-0.5	11.8
Jul 13	0.0	14.0	0.2	11.9
Jul 20	0.4	14.4	0.4	12.4

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, 2011 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 14.5 percent to ZAR 8.2863/USD on Jul 20, 2012, which is still 28.4 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 6.8 percent stronger at SGD 1.2560/USD on Jul 20, 2012 relative to the trough of depreciation but still stronger by 19.1 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 16.5 percent relative to the trough to BRL 2.0235/USD on Jul 20, 2012 but still stronger by 16.7 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 50 basis points for the seventh consecutive meeting of its monetary policy committee, COPOM (http://www.bcb.gov.br/textonoticia.asp?codigo=3613&IDPAI=NEWS):

“Copom reduces the Selic rate to 8.0 percent

11/07/2012 8:35:00 PM

Brasília - Continuing the adjustment process of monetary conditions, the Copom decided to reduce the Selic rate to 8.00 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	Jul 20, 2012	∆% T Jul 20, 2012	∆% P Jul 20, 2012
EUR USD	7/15 2008	6/7 2010		7/20 2012
Rate	1.59	1.192		1.2158
∆%			-33.4		1.9	-30.8
JPY USD	8/18 2008	9/15 2010		7/20 2012
Rate	110.19	83.07		78.48
∆%			24.6		5.5	28.8
CHF USD	11/21 2008	12/8 2009		7/20 2012
Rate	1.225	1.025		0.9879
∆%			16.3		3.6	19.4
USD GBP	7/15 2008	1/2/ 2009		7/20 2012
Rate	2.006	1.388		1.5621
∆%			-44.5		11.1	-28.4
USD AUD	7/15 2008	10/27 2008		7/20 2012
Rate	1.0215	1.6639		1.0378
∆%			-62.9		42.1	5.7
ZAR USD	10/22 2008	8/15 2010		7/20 2012
Rate	11.578	7.238		8.2863
∆%			37.5		-14.5	28.4
SGD USD	3/3 2009	8/9 2010		7/20 2012
Rate	1.553	1.348		1.2560
∆%			13.2		6.8	19.1
HKD USD	8/15 2008	12/14 2009		7/20 2012
Rate	7.813	7.752		7.7565
∆%			0.8		-0.1	0.7
BRL USD	12/5 2008	4/30 2010		7/20 2012
Rate	2.43	1.737		2.0235
∆%			28.5		-16.5	16.7
CZK USD	2/13 2009	8/6 2010		7/20 2012
Rate	22.19	18.693		21.042
∆%			15.7		-12.6	5.2
SEK USD	3/4 2009	8/9 2010		7/20 2012
Rate	9.313	7.108		6.9435
∆%			23.7		2.3	25.4
CNY USD	7/20 2005	7/15 2008		7/20 2012
Rate	8.2765	6.8211		6.3750
∆%			17.6		6.5	23.0

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

There are major ongoing and unresolved realignments of exchange rates in the international financial system as countries and regions seek parities that can optimize their productive structures. Seeking exchange rate parity or exchange rate optimizing internal economic activities is complex in a world of unconventional monetary policy of zero interest rates and even negative nominal interest rates of government obligations such as yield of minus 0.007 percent for the two-year government bond of Germany. Regulation, trade and devaluation conflicts should have been expected from a global recession (Pelaez and Pelaez (2007), The Global Recession Risk, Pelaez and Pelaez, Government Intervention in Globalization: Regulation, Trade and Devaluation Wars (2008a)): “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” (Pelaez and Pelaez, Government Intervention in Globalization: Regulation, Trade and Devaluation Wars (2008c), 181). Chart VI-2 of the Board of Governors of the Federal Reserve System provides the key exchange rate of US dollars (USD) per euro (EUR) from 1999 to 2012. US recession dates are in shaded areas. The rate on Jan 4, 1999, in Chart VI-2 is USD 1.1812/EUR, declining to USD 0.8279/EUR on Oct 25, 2000, or appreciation of the USD by 29.9 percent. The rate depreciated 21.9 percent to USD 1.0098/EUR on Jul 22, 2002. There was sharp devaluation of the USD of 34.9 percent to USD 1.3625/EUR on Dec 27, 2004 largely because of the 1 percent interest rate between Jun 2003 and Jun 2004 together with a form of quantitative easing by suspension of auctions of the 30-year Treasury, which was equivalent to withdrawing supply from markets. Another depreciation of 17.5 percent took the rate to USD 1.6010/EUR on Apr 22, 2008, already inside the shaded area of the global recession. The flight to the USD and obligations of the US Treasury appreciated the dollar by 22.3 percent to USD 1.2446/EUR on Oct 27, 2008. In the return of the carry trade after stress tests showed sound US bank balance sheets, the rate depreciated 21.2 percent to USD 1.5085/EUR on Nov 25, 2009. The sovereign debt crisis of Europe in the spring of 2010 caused sharp appreciation of 20.7 percent to USD 1.1959/EUR on Jun 6, 2010. Renewed risk appetite depreciated the rate 24.4 percent to USD 1.4875/USD on May 3, 2011. The rate appreciated 18.0 percent to USD 1.2199/EUR on Jul 12, 2012, which is the last point in Chart VI-2. The data in Table VI-6 is obtained from closing dates in New York published by the Wall Street Journal (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata).

Chart VI-2, US Dollars (USD) per Euro (EUR), 1999-2012

Note: US Recessions in Shaded Areas

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/datadownload/Choose.aspx?rel=H10

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-3, 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-4, 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

Chart VI-5 of the Board of Governors of the Federal Reserve System provides the rate of Japanese yen (JPY) per US dollar (USD) from 1971 to 2012. The first data point on the extreme left is JPY 357.7300/USD on Jan 4, 1971. The JPY has appreciated over the long-term relative to the USD with fluctuations along an evident long-term appreciation. Before the global recession, the JPY stood at JPY 124.0900/USD on Jun 22, 2007. The use of the JPY as safe haven is evident by sharp appreciation during the global recession to JPY 110.48/USD on Aug 15, 2008, and to JPY 87.8000/USD on Jan 21, 2009. The final data point in Chart VI-5 is JPY 78.2100/USD on Jun 1, 2012 for appreciation of 37.0 percent relative to JPY 124.0900/USD on Jun 22, 2007 before the global recession and expansion characterized by recurring bouts of risk aversion. The data in Table VI-6 is obtained from closing dates in New York published by the Wall Street Journal (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata).

Chart VI-5, Japanese Yen JPY per US Dollars USD, Monthly, 1971-2012

Note: US Recessions in Shaded Areas

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/datadownload/Choose.aspx?rel=H10

Continental territory, rich endowment of natural resources, investment in human capital, teaching and research universities, motivated labor force and entrepreneurial initiative provide Brazil with comparative advantages in multiple economic opportunities. Exchange rate parity is critical in achieving Brazil’s potential but is difficult in a world of zero interest rates. Chart IV-6 of the Board of Governors of the Federal Reserve System provides the rate of Brazilian real (BRL) per US dollar (USD) from 2000 to 2012. The rate reached BRL 3.9450/USD on Oct 10, 2002 appreciating 60.5 percent to BRL 1.5580/USD on Aug 1, 2008. The rate depreciated 68.1 percent to BRL 2.6187/USD on Dec 5, 2008 during worldwide flight from risk. The rate appreciated again by 41.3 percent to BRL 1.5375/USD on Jul 26, 2011. The final data point in Chart VI-6 is BRL 2.0904/USD on Jun 28, 2012 for depreciation of 35.9 percent. The data in Table VI-6 is obtained from closing dates in New York published by the Wall Street Journal (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata).

Chart VI-6, Brazilian Real (BRL) per US Dollar (USD) 2000-2012

Note: US Recessions in Shaded Areas

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/datadownload/Choose.aspx?rel=H10

Chart VI-7 of the Board of Governors of the Federal Reserve System provides the history of the BRL beginning with the first data point of BRL 0.8400/USD on Jan 6, 1995. The rate jumped to BRL 2.0700/USD on Jan 29, 1999 after changes in exchange rate policy and then to BRL 2.2000/USD on Mar 3, 1999. The rate depreciated 26.7 percent to BRL 2.7880/USD on Sep 21, 2001 relative to Mar 3, 1999.

Chart VI-7, Brazilian Real (BRL) per US Dollar (USD) 1995-2012

Note: US Recessions in Shaded Areas

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/datadownload/Choose.aspx?rel=H10

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 1.459 percent at the close of market on Fri Jul 20, 2012 would be equivalent to price of 110.8127 in a hypothetical bond maturing in 10 years with coupon of 2.625 percent for price gain of 9.4 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 Jun 1, 2012 and Jun 8, 2012 would have been 1.6 percent, in just a week, and much higher with leverage of 10:1 as typical in Treasury positions. 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. These losses defy annualizing. 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 Jul 18, 2012, the line “Reserve Bank credit” in the Fed balance sheet stood at $2842 billion, or $2.8 trillion, with portfolio of long-term securities of $2584 billion, or $2.6 trillion, consisting of $1561 billion Treasury nominal notes and bonds, $69 billion of notes and bonds inflation-indexed, $91 billion Federal agency debt securities and $863 billion mortgage-backed securities; reserve balances deposited with Federal Reserve Banks reached $1541 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
06/01/12	1.454	110.8618	9.5
06/08/12	1.635	109.0989	7.7
06/15/12	1.584	109.5924	8.2
06/22/12	1.676	108.7039	7.4
06/29/12	1.648	108.9734	7.6
07/06/12	1.548	109.9423	8.6
07/13/12	1.49	110.5086	9.1
07/20/12	1.459	110.8127	9.4

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

Chart VI-8 of the Board of Governors of the Federal Reserve System provides the yield of the ten-year constant maturity Treasury. There was sharp reduction of the yields from 5.44 percent on Apr 1, 2002 until they reached a low point of 3.13 percent on Jun 13, 2003. Yields rose again to 4.89 percent on Jun 14, 2004 and 5.23 percent on Jul 5, 2006. Yields declined sharply during the financial crisis, reaching 2.08 percent on Dec 18, 2008, lowered by higher prices originating in sharply increasing demand in the flight to the US dollar and obligations of the US government. Yields rose again to 4.01 percent on Apr 5, 2010 but collapsed to 2.41 percent on Oct 8, 2010 because of higher demand originating in the flight from the European sovereign risk event. During higher risk appetite, yields rose to 3.75 percent on Feb 8, 2011 and collapsed to 1.50 percent on Jul 12, 2012, which is the last data point in Chart VI-8. There has been a trend of decline of yields with oscillations. During periods of risk aversion investor seek protection in obligations of the US government, causing decline in their yields. In an eventual resolution of international financial risks with higher economic growth there could be the trauma of rising yields with significant capital losses in portfolios of government securities. The data in Table VI-7 is obtained from closing dates in New York published by the Wall Street Journal (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata).

Chart VI-8, US, Ten-Year Treasury Constant Maturity Yield 2001-2012

Note: US Recessions in Shaded Areas

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/h15/update/

VII Economic Indicators. Crude oil input in refineries decreased 0.1 percent to 15,647 thousand barrels per day on average in the four weeks ending on Jul 13, 2012 from 15,665 thousand barrels per day in the four weeks ending on Jul 6, 2012, as shown in Table VII-1. The rate of capacity utilization in refineries continues at a relatively high level of 92.3 percent on Jul 13, 2012, which is higher than 88.7 percent on Jul 15, 2011 and equal to 92.3 percent on Jul 6, 2012. Imports of crude oil decreased 1.4 percent from 8,952 thousand barrels per day on average in the four weeks ending on Jul 6 to 8,825 thousand barrels per day in the week of Jul 13. The Energy Information Administration (EIA) informs that “US crude oil imports averaged 8.9 million barrels per day last week, up by 311 thousand barrels per day from the previous week [Jul 6]” (http://www.eia.gov/pub/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/current/pdf/highlights.pdf). Decreasing utilization in refineries with increasing imports at the margin in the prior week resulted in decrease of commercial crude oil stocks by 0.8 million barrels from 378.2 million barrels on Jul 6 to 377.4 million barrels on Jul 13. Motor gasoline production decreased 0.3 percent to 9,220 thousand barrels per day in the week of Jul 13 from 9,252 thousand barrels per day on average in the week of Jul 6. Gasoline stocks decreased 1.8 million barrels and stocks of fuel oil increased 2.6 million barrels. Supply of gasoline decreased from 9,154 thousand barrels per day on Jul 15, 2011, to 8,848 thousand barrels per day on Jul 13, 2012, or by 3.3 percent, while fuel oil supply increased 1.9 percent. Part of the fall in consumption of gasoline is due to high prices and part to the growth recession. WTI crude oil price traded at $87.15/barrel on Jul 13, 2012, decreasing 10.4 percent relative to $97.24/barrel on Jul 15, 2011. Gasoline prices fell 6.9 percent from Jul 18, 2011 to Jul 16, 2012. Increases in prices of crude oil and gasoline relative to a year earlier are moderating because year earlier prices are already reflecting the commodity price surge and commodity prices have been declining recently during worldwide risk aversion. Gasoline prices 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	7/13/12	7/6/12	7/15/11
Crude Oil Refineries Input	15,647 Week ∆%: -0.1	15,665	15,350
Refinery Capacity Utilization %	92.3	92.3	88.7
Motor Gasoline Production	9,220 Week ∆%: -0.3	9,252	9,192
Distillate Fuel Oil Production	4,678 Week ∆%: +0.3	4,664	4,470
Crude Oil Imports	8,825 Week ∆%: -1.4	8952	9,234
Motor Gasoline Supplied	8,848 ∆% 2012/2011= -3.3%	8,864	9,154
Distillate Fuel Oil Supplied	3,572 ∆% 2012/2011 = 1.9%	3,606	3,505
	7/6//12	6/29/12	7/8/11
Crude Oil Stocks Million B	377.4 ∆= -0.8 MB	378.2	351.7
Motor Gasoline Million B	205.9 ∆= -1.8 MB	207.7	212.5
Distillate Fuel Oil Million B	123.5 ∆= +2.6 MB	120.9	148.5
WTI Crude Oil Price $/B	87.15 ∆% 2012/2011 -10.4	84.37	97.24
	7/16/12	7/9/12	7/18/11
Regular Motor Gasoline $/G	3.427 ∆% 2012/2011 -6.9	3.411	3.682

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 and more recent declines.

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 provides the evolution of motor gasoline stocks in the US since 2007. There have been oscillations around an downward trend in 2012 followed by recent increases.

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 at $145.29/barrel on Jul 3, 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. Risk aversion resulted in another drop in recent weeks.

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 typically significant difference between initial claims for unemployment insurance adjusted and not adjusted for seasonality provided in Table VII-2. Seasonally adjusted claims increased 34,000 from 352,000 on Jul 7, 2012, to 386,000 on Jul 14. Claims not adjusted for seasonality increased 10,768 from 442,192 on Jul 7, 2012 to 452,960 on Jul 14. Strong seasonality is preventing clear analysis of labor markets.

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

	SA	NSA	4-week MA SA
Jul 14, 12	386,000	452,960	375,500
Jul 7, 12	352,000	442,192	377,000
Change	+34,000	+10,768	-1,500
Jul 30, 12	376,000	369,826	386,250
Prior Year	418,000	470,086	418,750

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

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

Table VII-3 provides seasonally and not seasonally adjusted claims in the comparable week for the years from 2001 to 2012. Seasonally adjusted claims typically are lower than claims not adjusted for seasonality. Claims not seasonally adjusted have declined from 676,038 on Jul 11, 2009 to 473,963 on Jul 9, 2011, and 452,960 on Jul 14, 2012. There is strong indication of significant decline in the level of layoffs in the US but some doubts at the margin after the high increase in unadjusted claims in the weeks of Jun 9, 2012 and Jul 7, 2012. Hiring has not recovered (http://cmpassocregulationblog.blogspot.com/2012/07/recovery-without-jobs-stagnating-real_6867.html).

Table VII-3, US, Unemployment Insurance Weekly Claims

	Not Seasonally Adjusted Claims	Seasonally Adjusted Claims
Jul 14, 2001	524,139	405,000
Jul 13, 2002	506,718	384,00
Jul 12, 2003	552,621	412,000
Jul 10, 2004	444,531	345,000
Jul 9, 2005	437,323	338,000
Jul 8, 2006	418,363	343,000
Jul 14, 2007	383,839	317,000
Jul 12, 2008	476,071	385,000
Jul 11, 2009	677,038	546,000
Jul 10, 2010	515,991	439,000
Jul 9, 2011	473,963	410,000
Jul 14, 2012	452,960	386,000

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 four months Jan to Jun 2012, CPI inflation for all items seasonally adjusted was 1.2 percent in annual equivalent, that is, compounding inflation in Jan-Jun 2012 and assuming it would be repeated for a full year. In the 12 months ending in Jun, CPI inflation of all items not seasonally adjusted was 1.7 percent. Inflation in Jun 2012 not seasonally adjusted was minus 0.1 percent relative to May 2012 and unchanged seasonally adjusted (http://www.bls.gov/cpi/). The second row provides the same measurements for the CPI of all items excluding food and energy: 2.2 percent in 12 months and 2.2 percent in annual equivalent Jan-Jun 2012. Bloomberg provides the yield curve of US Treasury securities (http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/). The lowest yield is 0.09 percent for three months, 0.14 percent for six months, 0.15 percent for 12 months, 0.20 percent for two years, 0.28 percent for three years, 0.57 percent for five years, 0.93 percent for seven years, 1.46 percent for ten years and 2.54 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. May inflation is low because of the unwinding of carry trades from zero interest rates to commodity futures prices but could ignite again with subdued risk aversion. 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 Jun 2012/Jun 2011 NSA	∆% Annual Equivalent Jan-Jun 2012 SA
CPI All Items	1.7	1.2
CPI ex Food and Energy	2.2	2.2

Source: US Bureau of Labor Statistics

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

IX Conclusion. Table IX-1 provides the data required for broader comparison of the cyclical expansions of IQ1983 to IVQ1985 and the current one from 2009 to 2012. First, in the 13 quarters from IQ1983 to IVQ1985, GDP increased 19.6 percent at the annual equivalent rate of 5.7 percent; real disposable personal income (RDPI) increased 14.5 percent at the annual equivalent rate of 4.3 percent; RDPI per capita increased 11.5 percent at the annual equivalent rate of 3.4 percent; and population increased 2.7 percent at the annual equivalent rate of 0.8 percent. Second, in the 11 quarters of the current cyclical expansion from IIIQ2009 to IQ2012, GDP increased 6.7 percent at the annual equivalent rate of 2.4 percent; real disposable personal income (RDPI) increased 2.5 percent at the annual equivalent rate of 0.9 percent; RDPI per capita increased 0.4 percent at the annual equivalent rate of 0.1 percent; and population increased 2.1 percent at the annual equivalent rate of 0.8 percent. Third, since the beginning of the recession in IVQ2007 to IQ2012, GDP increased 1.2 percent, or barely above the level before the recession; real disposable personal income increased 2.7 percent; population increased 3.5 percent; and real disposable personal income per capita is 0.8 percent lower than the level before the recession. Real disposable personal income is the actual take home pay after inflation and taxes and real disposable income per capita is what is left per inhabitant. The current cyclical expansion is the worst in the period after World War II in terms of growth of economic activity and income. The United States grew during its history at high rates of per capita income that made its economy the largest in the world. That dynamism is disappearing.

Table IX-1, US, GDP, Real Disposable Personal Income, Real Disposable Income per Capita and Population in 1983-85 and 2007-2011, %

	# Quarters	∆%	∆% Annual Equivalent
IQ1983 to IVQ1985	13
GDP		19.6	5.7
RDPI		14.5	4.3
RDPI Per Capita		11.5	3.4
Population		2.7	0.8
IIIQ2009 to IQ2012	11
GDP		6.7	2.4
RDPI		2.5	0.9
RDPI per Capita		0.4	0.1
Population		2.1	0.8
IVQ2007 to IQ2012	18
GDP		1.2
RDPI		2.7
RDPI per Capita		-0.8
Population		3.5

RDPI: Real Disposable Personal Income

Source: US Bureau of Economic Analysis

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

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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

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Sunday, July 22, 2012

World Inflation Waves, Financial Turbulence, Foreign Exchange Rate Realignments and World Economic Slowdown with Global Recession Risk: Part II

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