CMP Associates Regulation Blog: Mediocre GDP Growth at 1.6 to 2.0 Percent, Sharp Contraction by 4.0 Percent of Real Personal Disposable Income in January 2013 because of Increase in Social Insurance Contributions, Contracting Investment in the Economic Cycle, World Financial Turbulence and World Economic Slowdown with Global Recession Risk: Part I

Mediocre GDP Growth at 1.6 to 2.0 Percent, Sharp Contraction by 4.0 Percent of Real Personal Disposable Income in January 2013 because of Increase in Social Insurance Contributions, Contracting Investment in the Economic Cycle, World Financial Turbulence and World Economic Slowdown with Global Recession Risk

Carlos M. Pelaez

Executive Summary

I Mediocre and Decelerating United States Economic Growth

IA Mediocre and Decelerating United States Economic Growth

IA1 Contracting Real Private Fixed Investment

IB Stagnating Real Disposable Income and Consumption Expenditures

IB1 Stagnating Real Disposable Income and Consumption Expenditures

IB2 Financial Repression

II United States Housing Collapse

IIA United States New House Sales

IIB United States House Prices

IIC Factors of United States Housing Collapse

III World Financial Turbulence

IIIA Financial Risks

IIIE Appendix Euro Zone Survival Risk

IIIF Appendix on Sovereign Bond Valuation

IV Global Inflation

V World Economic Slowdown

VA United States

VB Japan

VC China

VD Euro Area

VE Germany

VF France

VG Italy

VH United Kingdom

VI Valuation of Risk Financial Assets

VII Economic Indicators

VIII Interest Rates

IX Conclusion

References

Appendixes

Appendix I The Great Inflation

IIIB Appendix on Safe Haven Currencies

IIIC Appendix on Fiscal Compact

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

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

Executive Summary

ESI Mediocre and Decelerating United States Economic Growth. The US is experiencing the first expansion from a recession after World War II without growth, jobs (http://cmpassocregulationblog.blogspot.com/2013/02/thirty-one-million-unemployed-or.html) and hiring (http://cmpassocregulationblog.blogspot.com/2013/01/recovery-without-hiring-world-inflation.html), unsustainable government deficit/debt (http://cmpassocregulationblog.blogspot.com/2013/02/united-states-unsustainable-fiscal.html http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html) and waves of inflation (http://cmpassocregulationblog.blogspot.com/2013/02/world-inflation-waves-united-states.html) while valuations of risk financial assets approach historical highs. Long-term economic performance in the United States consisted of trend growth of GDP at 3 percent per year and of per capita GDP at 2 percent per year as measured for 1870 to 2010 by Robert E Lucas (2011May). United States real GDP grew at the average rate of 3.2 percent from 1929 to 2012 and also at 3.2 percent from 1947 to 2012 (Table I-1 at http://cmpassocregulationblog.blogspot.com/2013/02/world-inflation-waves-united-states.html), using data from the US Bureau of Economic Analysis (http://www.bea.gov/iTable/index_nipa.cfm). The economy returned to trend growth after adverse events such as wars and recessions. The key characteristic of adversities such as recessions was much higher rates of growth in expansion periods that permitted the economy to recover output, income and employment losses that occurred during the contractions. Over the business cycle the economy compensated the losses of contractions with higher growth in expansions to maintain trend growth of GDP of 3 percent and of GDP per capita of 2 percent. The expansion since the third quarter of 2009 (IIIQ2009 (Jun)) to the latest available measurement for IVQ(2012) has been at the average annual rate of 2.1 percent per quarter in contrast with 6.2 percent on average in all expansions after World War II. As a result, there are 31.4 million unemployed or underemployed in the United States for an effective unemployment rate of 19.4 percent (http://cmpassocregulationblog.blogspot.com/2013/02/thirty-one-million-unemployed-or.html).

The economy of the US can be summarized in growth of economic activity or GDP as decelerating from mediocre growth of 2.4 percent on an annual basis in 2010 and 1.8 percent in 2011 to 2.2 percent in 2012. Calculations show that actual growth is around 1.6 to 2.0 percent per year. This rate is well below 3 percent per year in trend from 1870 to 2010, which has been always recovered after events such as wars and recessions (Lucas 2011May). Growth is not only mediocre but sharply decelerating to a rhythm that is not consistent with reduction of unemployment and underemployment of 31.4 million people corresponding to 19.4 percent of the effective labor force of the United States (http://cmpassocregulationblog.blogspot.com/2013/02/thirty-one-million-unemployed-or.html). In the four quarters of 2011 and the four quarters of 2012, US real GDP grew at the seasonally-adjusted annual equivalent rates of 0.1 percent in the first quarter of 2011 (IQ2011), 2.5 percent in IIQ2011, 1.3 percent in IIIQ2011, 4.1 percent in IVQ2011, 2.0 percent in IQ2012, 1.3 percent in IIQ2012, 3.1 percent in IIIQ2012 and revised 0.1 percent in IVQ2012. GDP growth in IIIQ2012 was revised from 2.7 percent seasonally adjusted annual rate (SAAR) to 3.1 percent but mostly because of contribution of 0.73 percentage points of inventory accumulation and one-time contribution of 0.64 percentage points of expenditures in national defense that without them would have reduced growth from 3.1 percent to 1.73 percent. Equally, GDP growth in IVQ2012 is measured in the advanced estimate as 0.1 percent but mostly because of deduction of divestment of inventories of 1.55 percentage points and deduction of one-time national defense expenditures of 1.28 percentage points. The annual equivalent rate of growth of GDP for the four quarters of 2011 and the four quarters of 2012 is 2.0 percent, obtained as follows. Discounting 0.1 percent to one quarter is 0.025 percent {[(1.001)^1/4 -1]100 = 0.025}; discounting 2.5 percent to one quarter is 0.62 percent {[(1.025)^1/4 – 1]100}; discounting 1.3 percent to one quarter is 0.32 percent {[(1.013)^1/4 – 1]100}; discounting 4.1 percent to one quarter is 1.0 {[(1.04)^1/4 -1]100; discounting 2.0 percent to one quarter is 0.50 percent {[(1.020)^1/4 -1]100); discounting 1.3 percent to one quarter is 0.32 percent {[(1.013)^1/4 -1]100}; discounting 3.1 percent to one quarter is 0.77 {[(1.031)^1/4 -1]100); and discounting 0.1 percent to one quarter is 0.025 percent {[(1.001)^1/4 – 1]100}. Real GDP growth in the four quarters of 2011 and the four quarters of 2012 accumulated to 3.6 percent {[(1.00025 x 1.0062 x 1.0032 x 1.010 x 1.005 x 1.0032 x 1.0077 x 1.00025) - 1]100 = 3.6%}. This is equivalent to growth from IQ2011 to IVQ2012 obtained by dividing the seasonally-adjusted annual rate (SAAR) of IVQ2012 of $13,656.8 billion by the SAAR of IVQ2010 of $13,181.2 (http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1 and Table I-6 below) and expressing as percentage {[($13,658.8/$13,181.2) - 1]100 = 3.6%}. The growth rate in annual equivalent for the four quarters of 2011 and the four quarters of 2012 is 1.8 percent {[(1.00025 x 1.0062 x 1.0032 x 1.010 x 1.005 x 1.0032 x 1.0077 x 1.00025)^4/8 -1]100 = 1.8%], or {[($13,656.8/$13,181.2)]^4/8-1]100 = 1.8%} dividing the SAAR of IVQ2012 by the SAAR of IVQ2010 in Table I-6 below, obtaining the average for eight quarters and the annual average for one year of four quarters. Growth in the four quarters of 2012 accumulates to 1.6 percent {[(1.02)^1/4(1.013)^1/4(1.031)^1/4(1.001)^1/4 -1]100 = 1.6%}. This is equivalent to dividing the SAAR of $13,656.8 billion for IVQ2012 in Table I-6 by the SAAR of $13,441.0 billion in IVQ2011 to obtain 1.6 percent {[($13,656.8/$13,441.0) – 1]100 = 1.6%}. The US economy is still close to a standstill especially considering the GDP report in detail. Excluding growth at the SAAR of 2.5 percent in IIQ2011 and 4.1 percent in IVQ2011 while converting growth in IIIQ2012 to 1.73 percent by deducting from 3.1 percent one-time inventory accumulation of 0.73 percentage points and national defense expenditures of 0.64 percentage points and converting growth in IVQ2012 by adding 1.55 percentage points of inventory divestment and 1.28 percentage points of national defense expenditure reductions to obtain 2.84 percent, the US economy grew at 1.5 percent in the remaining six quarters {[(1.00025x1.0032x1.005x1.0032x1.0043x1.0070)^4/6 – 1]100 = 1.5%} with declining growth trend in three consecutive quarters from 4.1 percent in IVQ2011, to 2.0 percent in IQ2012, 1.3 percent in IIQ2012, 3.1 percent in IIIQ2012 that is more like 1.73 percent without inventory accumulation and national defense expenditures and 0.1 percent in IVQ2012 that is more likely 2.84 percent by adding 1.55 percentage points of inventory divestment and 1.28 percentage points of national defense expenditures. Weakness of growth is more clearly shown by adjusting the exceptional one-time contributions to growth from items that are not aggregate demand: 2.53 percentage points contributed by inventory change to growth of 4.1 percent in IVQ2011; 0.64 percentage points contributed by expenditures in national defense together with 0.73 points of inventory accumulation to growth of 3.1 percent in IIIQ2012; and deduction of 1.55 percentage points of inventory divestment and 1.28 percentage points of national defense expenditure reductions. The Bureau of Economic Analysis (BEA) of the US Department of Commerce released on Thus Feb 28, 2012, the second estimate of GDP for IVQ2012 at 0.1 percent seasonally-adjusted annual rate (SAAR) (http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp4q12_2nd.pdf). In the four quarters of 2012, the US economy is growing at the annual equivalent rate of 2.0 percent {([(1.02^1/4(1.013)^1/4(1.0173)^1/4(1.0284)^1/4]-1)100 = 2.0%} by excluding inventory accumulation of 0.73 percentage points and exceptional defense expenditures of 0.64 percentage points from growth 3.1 percent at SAAR in IIIQ2012 to obtain adjusted 1.73 percent SSAR and adding 1.28 percentage points of national defense expenditure reductions and 1.55 percentage points of inventory divestment to growth of 0.1 percent SAAR in IVQ2012 to obtain 2.84 percent.

Table I-5 shows the extraordinary contrast between the mediocre average annual equivalent growth rate of 2.1 percent of the US economy in the fourteen quarters of the current cyclical expansion from IIIQ2009 to IVQ2012 and the average of 6.2 percent in the four earlier cyclical expansions. BEA data show the US economy in standstill with annual growth of 2.4 percent in 2010 decelerating to 1.8 percent annual growth in 2011, 2.2 percent in 2012 (http://www.bea.gov/iTable/index_nipa.cfm) and cumulative 1.6 percent in the four quarters of 2012 {[(1.02)^1/4(1.013)^1/4(1.031)^1/4(1.001)^1/4 – 1]100 = 1.6%} or using the SSAR of $13,647.6 billion in IVQ2012 relative to the SAAR of $13,441.0 billion in IVQ2011 {[($13656.8/$13441.00-1]100 = 1.6%}. The US economy is growing in 2012 at the annual equivalent rate of 2.0 percent {([(1.02^1/4(1.013)^1/4(1.0173)^1/4(1.0284)^1/4]-1)100 = 2.0%} by excluding inventory accumulation of 0.73 percentage points and exceptional defense expenditures of 0.64 percentage points from growth 3.1 percent at SAAR in IIIQ2012 to obtain adjusted 1.73 percent SSAR and adding inventory divestment of 1.55 percentage points and one-time reduction national defense expenditures of 1.28 percentage points to growth of 0.1 percent in IVQ2012 to obtain adjusted SAAR of 2.84 percent. The expansion of IQ1983 to IVQ1985 was at the average annual growth rate of 5.7 percent.

Table I-5, US, Number of Quarters, Cumulative Growth and Average Annual Equivalent Growth Rate in Cyclical Expansions

	Number of Quarters	Cumulative Growth ∆%	Average Annual Equivalent Growth Rate
IIIQ 1954 to IQ1957	11	12.6	4.4
IIQ1958 to IIQ1959	5	10.2	8.1
IIQ1975 to IVQ1976	8	9.5	4.6
IQ1983 to IQ1986	13	19.6	5.7
Average Four Above Expansions			6.2
IIIQ2009 to IVQ2012	14	7.5	2.1

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

US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Chart I-8 shows US real quarterly GDP growth from 1980 to 1989. The economy contracted during the recession and then expanded vigorously throughout the 1980s, rapidly eliminating the unemployment caused by the contraction.

Chart I-8, US, Real GDP, 1980-1989

Source: US Bureau of Economic Analysis

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

Chart I-9 shows the entirely different situation of real quarterly GDP in the US between 2007 and 2012. The economy has underperformed during the first twelve quarters of expansion for the first time in the comparable contractions since the 1950s. The US economy is now in a perilous standstill.

Chart I-9, US, Real GDP, 2007-2012

Source: US Bureau of Economic Analysis

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

As shown in Tables I-4 in the text and I-5 above the loss of real GDP in the US during the contraction was 4.7 percent but the gain in the cyclical expansion has been only 7.5 percent (last row in Table I-5), using all latest revisions. As a result, the level of real GDP in IVQ2012 with the latest estimates is only higher by 2.5 percent than the level of real GDP in IVQ2007. Table I-6 provides in the second column real GDP in billions of chained 2005 dollars. The third column provides the percentage change of the quarter relative to IVQ2007; the fourth column provides the percentage change relative to the prior quarter; and the final fifth column provides the percentage change relative to the same quarter a year earlier. The contraction actually concentrated in two quarters: decline of 2.3 percent in IVQ2008 relative to the prior quarter and decline of 1.3 percent in IQ2009 relative to IVQ2008. The combined fall of GDP in IVQ2008 and IQ2009 was 3.6 percent {[(1-0.023) x (1-0.013) -1]100 = -3.6%}, or {[(IQ2009 $12,711.0)/(IIIQ2008 $13,186.9) – 1]100 = -3.6%}. Those two quarters coincided with the worst effects of the financial crisis. GDP fell 0.1 percent in IIQ2009 but grew 0.4 percent in IIIQ2009, which is the beginning of recovery in the cyclical dates of the NBER. Most of the recovery occurred in five successive quarters from IVQ2009 to IVQ2010 of growth of 1.0 percent in IVQ2009 and equal growth at 0.6 percent in IQ2010, IIQ2010, IIIQ2010 and IVQ2010 for cumulative growth in those five quarters of 3.4 percent, obtained by accumulating the quarterly rates {[(1.01 x 1.006 x 1.006 x 1.006 x 1.006) – 1]100 = 3.4%} or {[(IVQ2010 $13,181.2)/(IIIQ2009 $12,746.7) – 1]100 = 3.4%}. The economy lost momentum already in 2010 growing at 0.6 percent in each quarter, or annual equivalent 2.4 per cent {[(1.006)⁴ – 1]100 = 2.4%}, compared with annual equivalent 4.0 percent in IV2009 {[(1.01)⁴ – 1]100 = 4.0%}. The economy then stalled during the first half of 2011 with growth of 0.0025 percent in IQ2011 and 0.6 percent in IIQ2011 for combined annual equivalent rate of 1.2 percent {(1.00025 x 1.006)²}. The economy grew 0.3 percent in IIIQ2011 for annual equivalent growth of 1.2 percent in the first three quarters {[(1.00025 x 1.006 x 1.003)^4/3 -1]100 = 1.2%}. Growth picked up in IVQ2011 with 1.0 percent relative to IIIQ2011. Growth in a quarter relative to a year earlier in Table I-6 slows from over 2.4 percent during three consecutive quarters from IIQ2010 to IVQ2010 to 1.8 percent in IQ2011, 1.9 percent in IIQ2011, 1.6 percent in IIIQ2011 and 2.0 percent in IVQ2011. As shown below, growth of 1.0 percent in IVQ2011 was partly driven by inventory accumulation. In IQ2012, GDP grew 0.5 percent relative to IVQ2011 and 2.4 percent relative to IQ2011, decelerating to 0.3 percent in IIQ2012 and 2.1 percent relative to IIQ2011 and 0.8 percent in IIIQ2012 and 2.6 percent relative to IIIQ2011 largely because of inventory accumulation and national defense expenditures. Growth was nil in IVQ2012 with 1.6 percent relative to a year earlier but mostly because of 1.55 percentage points of inventory divestment and 1.28 percentage points of reduction of one-time national defense expenditures. Rates of a quarter relative to the prior quarter capture better deceleration of the economy than rates on a quarter relative to the same quarter a year earlier. The critical question for which there is not yet definitive solution is whether what lies ahead is continuing growth recession with the economy crawling and unemployment/underemployment at extremely high levels or another contraction or conventional recession. Forecasts of various sources continued to maintain high growth in 2011 without taking into consideration the continuous slowing of the economy in late 2010 and the first half of 2011. The sovereign debt crisis in the euro area is one of the common sources of doubts on the rate and direction of economic growth in the US but there is weak internal demand in the US with almost no investment and spikes of consumption driven by burning saving because of financial repression forever in the form of zero interest rates.

Table I-6, US, Real GDP and Percentage Change Relative to IVQ2007 and Prior Quarter, Billions Chained 2005 Dollars and ∆%

	Real GDP, Billions Chained 2005 Dollars	∆% Relative to IVQ2007	∆% Relative to Prior Quarter	∆% over Year Earlier
IVQ2007	13,326.0	NA	NA	2.2
IQ2008	13,266.8	-0.4	-0.4	1.6
IIQ2008	13,310.5	-0.1	0.3	1.0
IIIQ2008	13,186.9	-1.0	-0.9	-0.6
IVQ2008	12,883.5	-3.3	-2.3	-3.3
IQ2009	12,711.0	-4.6	-1.3	-4.2
IIQ2009	12,701.0	-4.7	-0.1	-4.6
IIIQ2009	12,746.7	-4.3	0.4	-3.3
IV2009	12,873.1	-3.4	1.0	-0.1
IQ2010	12,947.6	-2.8	0.6	1.9
IIQ2010	13,019.6	-2.3	0.6	2.5
IIIQ2010	13,103.5	-1.7	0.6	2.8
IVQ2010	13,181.2	-1.1	0.6	2.4
IQ2011	13,183.8	-1.1	0.0	1.8
IIQ2011	13,264.7	-0.5	0.6	1.9
IIIQ2011	13,306.9	-0.1	0.3	1.6
IV2011	13,441.0	0.9	1.0	2.0
IQ2012	13,506.4	1.4	0.5	2.4
IIQ2012	13,548.5	1.7	0.3	2.1
IIIQ2012	13,652.5	2.5	0.8	2.6
IVQ2012	13,656.8	2.5	0.0	1.6

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

ESII Contraction of Real Personal Disposable Income by 4.0 Percent in Jan 2013. There are waves of changes in personal income and expenditures in Table IIB-1 that correspond somewhat to inflation waves observed worldwide (http://cmpassocregulationblog.blogspot.com/2013/02/world-inflation-waves-united-states.html) because of the influence through price indexes. Data are distorted in Nov and Dec 2012 by the rush to realize income of all forms in anticipation of tax increases beginning in Jan 2013. There is major distortion in Jan 2013 because of higher contributions in payrolls to government social insurance that caused sharp reduction in personal income and disposable personal income. In the first wave in Jan-Apr 2011 with relaxed risk aversion, nominal personal income (NPI) increased at the annual equivalent rate of 8.4 percent, nominal disposable personal income (NDPI) at 5.8 percent and nominal personal consumption expenditures (NPCE) at 6.5 percent. Real disposable income (RDPI) increased at the annual equivalent rate of 1.5 percent and real personal consumption expenditures (RPCE) rose at annual equivalent 2.4 percent. In the second wave in May-Aug 2011 under risk aversion, NPI rose at annual equivalent 0.9 percent, NPDI at 1.2 percent and NPCE at 2.7 percent. RDPI contracted at 1.5 percent annual equivalent and RPCE crawled at 0.3 percent annual equivalent. With mixed shocks of risk aversion in the third wave from Sep to Dec 2011, NPI rose at 1.5 percent annual equivalent, NDPI at 0.9 percent and NPCE at 2.7 percent. RDPI increased at 0.3 percent annual equivalent and RPCE at 1.8 percent annual equivalent. In the fourth wave from Jan to Mar 2012, NPI increased at 8.7 percent annual equivalent and NDPI at 8.3 percent. Real disposable income (RDPI) is more dynamic in the revisions, growing at 4.5 percent annual equivalent and RPCE at 2.8 percent. The policy of repressing savings with zero interest rates stimulated growth of nominal consumption (NPCE) at the annual equivalent rate of 6.6 percent and real consumption (RPCE) at 2.8 percent. In the fifth wave in Apr-Jul 2012, NPI increased at annual equivalent 1.5 percent, NDPI at 1.2 percent and RDPI at 1.8 percent. Financial repression failed to stimulate consumption with NPCE growing at 1.2 percent annual equivalent and RPCE at 1.2 percent. In the sixth wave in Aug-Oct 2012, in another wave of carry trades into commodity futures, NPI and NDPI increased at 2.4 percent annual equivalent while real disposable income (RDPI) declined at 1.2 percent annual equivalent. Data for Nov-Dec 2012 have illusory increases: “Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf). In the seventh wave, anticipations of tax increases in Jan 2013 caused exceptional income gains that increased personal income to annual equivalent 23.8 percent in Nov-Dec 2012, nominal disposable income at 24.6 percent and real disposable personal income at 26.0 percent with likely effects on nominal personal consumption that increased at 3.0 percent and real personal consumption at 3.7 percent with subdued prices. The numbers in parentheses show that without the exceptional effects NDPI (nominal disposable personal income) increased at 5.5 percent and RDPI (real disposable personal income) at 8.7 percent. In the eighth wave, nominal personal income fell 3.6 percent in Jan 2013 or at the annual equivalent rate of decline of 35.6 percent; nominal disposable personal income fell 4.0 percent or at the annual equivalent rate of decline of 38.7 percent; real disposable income fell 4.0 percent or at the annual rate of decline of 38.7 percent; nominal personal consumption expenditures increased 0.2 percent or at the annual equivalent rate of 2.4 percent; and real personal consumption expenditures increased 0.1 percent or at the annual equivalent rate of 1.2 percent. The savings rate fell significantly from 6.4 percent in Dec 2012 to 2.4 percent in Jan 2013. The Bureau of Economic Analysis explains as follows (http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0113.pdf 3):

“Contributions for government social insurance -- a subtraction in calculating personal income -- increased $126.7 billion in January, compared with an increase of $6.3 billion in December. The

January estimate reflected increases in both employer and employee contributions for government social insurance. The January estimate of employee contributions for government social insurance reflected the expiration of the “payroll tax holiday,” that increased the social security contribution rate for employees and self-employed workers by 2.0 percentage points, or $114.1 billion at an annual rate. For additional information, see FAQ on “How did the expiration of the payroll tax holiday affect personal income for January 2013?” at www.bea.gov. The January estimate of employee contributions for government social insurance also reflected an increase in the monthly premiums paid by participants in the supplementary medical insurance program, in the hospital insurance provisions of the Patient Protection and Affordable Care Act, and in the social security taxable wage base; together, these changes added $12.8 billion to January. As noted above, employer contributions were boosted $5.9 billion in January, so the total contribution of special factors to the January change in contributions for government social insurance was $132.8 billion”

The increase was provided in the “fiscal cliff” law H.R. 8 American Taxpayer Relief Act of 2012 (http://www.gpo.gov/fdsys/pkg/BILLS-112hr8eas/pdf/BILLS-112hr8eas.pdf).

The US economy began to decelerate in mid 2010 and has not recovered the pace of growth in the early expansion phase. The Bureau of Economic Analysis (BEA) of the US Department of Commerce released on Wed Jan 28, 2012, the second estimate of GDP for IVQ2012 at 0.1 percent seasonally-adjusted annual rate (SAAR) (http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp4q12_2nd.pdf). In the four quarters of 2012, the US economy is growing at the annual equivalent rate of 2.0 percent {([(1.02^1/4(1.013)^1/4(1.0173)^1/4(1.0284)^1/4]-1)100 = 2.0%} by excluding inventory accumulation of 0.73 percentage points and exceptional defense expenditures of 0.64 percentage points from growth 3.1 percent at SAAR in IIIQ2012 to obtain adjusted 1.73 percent SSAR and adding 1.28 percentage points of national defense expenditure reductions and 1.55 percentage points of inventory divestment to growth of 0.1 percent SAAR in IVQ2012 to obtain 2.84 percent. Surprisingly, the revised data for personal income and personal consumption are much stronger than earlier until the bump in Aug 2012. RDPI stagnated in Jan-Dec 2011 with the latest revised data compared with growth of 3.3 percent in Jan-Dec 2010 but grew at annual equivalent 4.5 percent in Jan-Mar 2012 and 1.8 percent in Apr-Jul 2012. The salient deceleration is the decline of the annual equivalent rate of NPCE (nominal personal consumption expenditures) to 1.2 percent annual equivalent in Apr-Jul 2012 and of RPCE (real personal consumption expenditures) to 1.2 percent. A bump occurred in Aug 2012 with increases of commodity prices by the carry trade from zero interest rates to exposures in commodity futures and other risk financial assets. Real disposable income fell 0.2 percent in Aug 2012 or at annual equivalent minus 2.4 percent. Nominal personal consumption expenditures increased 0.3 percent in Aug 2012 or at annual equivalent 3.7 percent but stagnated in real terms. Both nominal personal income and nominal disposable income increased 0.1 percent in Aug 2012 or at 1.2 percent in annual equivalent. Real disposable income (RDPI) fell 0.1 percent in Oct 2012 while real personal consumption expenditures (RPCE) contracted 0.2 percent. RDPI increased 1.2 percent in Nov 2012 and 2.7 percent in Dec 2012 because of realization of incomes in anticipation of tax increases in Jan 2013 while RPCE increased 0.5 percent in Nov 2012 and 0.1 percent in Dec 2012.

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

	NPI	NDPI	RDPI	NPCE	RPCE
2013
Jan	-3.6	-4.0 (0.3)^a	-4.0	0.2	0.1
AE ∆% Jan	-35.6	-38.7 (3.7)^a	-38.7	2.4	1.2
2012
∆% Jan-Dec 2012***	7.0	6.9	5.4	3.6	2.1
Dec	2.6	2.7 (0.3)*	2.7 (0.5)*	0.1	0.1
Nov	1.0	1.0 (0.6)*	1.2 (0.9)*	0.4	0.5
AE ∆% Nov-Dec	23.8	24.6 (5.5)*	26.0 (8.7)*	3.0	3.7
Oct	0.0	0.0	-0.1	0.0	-0.2
Sep	0.4	0.4	0.1	0.8	0.5
Aug	0.1	0.1	-0.2	0.3	0.0
AE ∆% Aug-Oct	2.4	2.4	-1.2	4.1	1.2
Jul	0.2	0.2	0.1	0.4	0.3
Jun	0.3	0.2	0.2	0.0	-0.1
May	0.1	0.1	0.3	-0.2	0.0
Apr	0.0	0.0	0.0	0.2	0.2
AE ∆% Apr-Jul	1.5	1.2	1.8	1.2	1.2
Mar	0.5	0.5	0.2	0.3	0.0
Feb	0.7	0.6	0.3	0.8	0.4
Jan	0.9	0.9	0.6	0.5	0.3
AE ∆% Jan-Mar	8.7	8.3	4.5	6.6	2.8
2011
∆% Jan-Dec 2011*	3.6	2.5	0.0	4.2	1.7
Dec	0.3	0.3	0.2	0.1	0.0
Nov	-0.2	-0.3	-0.3	0.1	0.0
Oct	0.3	0.3	0.3	0.2	0.2
Sep	0.1	0.0	-0.1	0.5	0.4
AE ∆% Sep-Dec	1.5	0.9	0.3	2.7	1.8
Aug	0.0	0.0	-0.3	0.2	-0.1
Jul	0.1	0.2	-0.1	0.7	0.5
Jun	0.2	0.2	0.1	-0.1	-0.2
May	0.0	0.0	-0.2	0.1	-0.1
AE ∆% May-Aug	0.9	1.2	-1.5	2.7	0.3
Apr	0.3	0.3	0.0	0.4	0.0
Mar	0.1	0.1	-0.3	0.7	0.3
Feb	0.4	0.4	0.0	0.6	0.3
Jan	1.9	1.1	0.8	0.4	0.2
AE ∆% Jan-Apr	8.4	5.8	1.5	6.5	2.4
2010
∆% Jan-Dec 2010**	5.3	4.9	3.3	4.4	2.8
Dec	0.7	0.7	0.4	0.4	0.2
Nov	0.2	0.2	0.1	0.5	0.4
Oct	0.4	0.3	0.1	0.7	0.4
IVQ2010∆%	1.3	1.2	0.6	1.6	1.0
IVQ2010 AE ∆%	5.3	4.9	2.4	6.6	4.1

Notes: *Excluding exceptional income gains in Nov and Dec 2012 because of anticipated tax increases in Jan 2013 ((page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf). ^aExcluding employee contributions for government social insurance (pages 1-2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0113.pdf)Excluding NPI: current dollars personal income; NDPI: current dollars disposable personal income; RDPI: chained (2005) dollars DPI; NPCE: current dollars personal consumption expenditures; RPCE: chained (2005) dollars PCE; AE: annual equivalent; IVQ2010: fourth quarter 2010; A: annual equivalent

Percentage change month to month seasonally adjusted

*∆% Dec 2011/Dec 2010 **∆% Dec 2010/Dec 2009 *** ∆% Dec 2012/Dec 2011

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Further information on income and consumption is provided by Table IB-2. The 12-month rates of increase of RDPI and RPCE in 2011 show sharp trend of deterioration of RDPI from over 3 percent in the final four months of 2010 to less than 3 percent at the end of IQ2011 and then collapsing to a range of 0.9 to 0.0 percent in Jun-Dec 2011. Revisions shows decline of RDPI of 0.2 percent in the 12 months ending in Jan 2012 and marginal increase of 0.1 percent in the 12 months ending in Feb 2012. The significant difference is continuing growth of 12-month percentage changes of RDPI with 1.3 percent in Jun 2012, 1.5 percent in both Jul and Aug 2012 and 1.7 percent in Sep 2012 but 1.3 percent in Oct 2012 followed by 2.9 percent in Nov 2012 and 5.4 percent in Dec 2012. Increases of RDPI in Nov-Dec 2012 are explained by the BEA as: “Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf). The 12-month rate of growth of real disposable personal income fell from 5.4 percent in Dec 2012 to 0.6 percent in Jan 2013. Real disposable income fell 4.0 percent in Jan 2013, which is explained by the Bureau of Economic Analysis as follows (http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0113.pdf 1):

“The 4.0 percent decrease in January DPI mainly reflected the effect of special factors, which boosted employee contributions for government social insurance in January and which had boosted wages and salaries and personal dividends in December. Excluding these special factors and others, which are discussed more fully below, DPI increased $37.6 billion, or 0.3 percent in January, after increasing $38.6 billion, or 0.3 percent, in December.”

The increase was provided in the “fiscal cliff” law H.R. 8 American Taxpayer Relief Act of 2012 (http://www.gpo.gov/fdsys/pkg/BILLS-112hr8eas/pdf/BILLS-112hr8eas.pdf)

RPCE growth decelerated less sharply from close to 3 percent in IVQ 2010 to 1.6 percent in Mar 2012, 1.5 percent in Oct 2012, 2.0 percent in Nov 2012, 2.1 percent in Dec 2012 perhaps also with some effects of anticipations of tax increases in Jan 2013 and 2.0 percent in Jan 2013 by burning savings. Subdued growth of RPCE could affect revenues of business. Growth rates of personal consumption have weakened. Goods and especially durable goods have been driving growth of PCE as shown by the much higher 12-month rates of growth of real goods PCE (RPCEG) and durable goods real PCE (RPCEGD) than services real PCE (RPCES). The faster expansion of industry in the economy is derived from growth of consumption of goods and in particular of consumer durable goods while growth of consumption of services is much more moderate. The 12-month rates of growth of RPCEGD have fallen from around 10 percent and even higher in several months from Sep 2010 to Feb 2011 to the range of 6.6 to 9.7 percent from Jan 2012 to Jan 2013. RPCEG growth rates have fallen from around 5 percent late in 2010 and early Jan-Feb 2011 to the range of 2.4 to 3.9 percent from Jan 2012 to Jan 2013. There are limits to sustained growth on the basis of financial repression in an environment of weak labor markets and real labor remuneration.

Table IB-2, Real Disposable Personal Income and Real Personal Consumption Expenditures

Percentage Change from the Same Month a Year Earlier %

	RDPI	RPCE	RPCEG	RPCEGD	RPCES
2013
Jan	0.6	2.0	3.1	7.1	1.5
2012
Dec	5.4	2.1	3.9	9.7	1.3
Nov	2.9	2.0	3.4	9.1	1.3
Oct	1.3	1.5	2.4	6.4	1.1
Sep	1.7	1.9	3.7	8.9	1.1
Aug	1.6	1.9	3.7	8.9	0.9
Jul	1.5	1.9	3.1	7.3	1.2
Jun	1.3	2.0	3.5	8.6	1.3
May	1.3	1.9	3.0	7.4	1.4
Apr	0.7	1.8	2.4	6.5	1.5
Mar	0.7	1.6	2.6	6.6	1.1
Feb	0.1	1.9	2.7	7.4	1.5
Jan	-0.2	1.8	2.6	6.8	1.4
2011
Dec	0.0	1.7	2.5	6.0	1.3
Nov	0.3	1.9	2.6	5.8	1.5
Oct	0.7	2.3	3.2	5.9	1.8
Sep	0.5	2.4	3.4	7.0	2.0
Aug	0.4	2.1	2.6	5.3	1.9
Jul	0.9	2.8	4.1	6.4	2.1
Jun	0.9	2.4	3.4	5.3	1.9
May	1.0	2.6	3.9	6.5	2.0
Apr	1.8	3.0	4.7	8.2	2.1
Mar	2.6	3.0	4.2	7.8	2.4
Feb	3.4	3.1	5.5	11.3	1.9
Jan	3.5	3.1	5.5	11.0	1.9
2010
Dec	3.3	2.8	4.7	9.0	1.9
Nov	3.5	3.2	5.1	8.8	2.2
Oct	3.7	2.7	5.3	10.8	1.5
Sep	3.2	2.5	4.7	9.1	1.5

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

Numbers are percentage changes from the same month a year earlier

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Chart IB-1 shows US real personal consumption expenditures (RPCE) between 1995 and 2012. There is an evident drop in RPCE during the global recession in 2007 to 2009 but the slope is flatter during the current recovery than in the period before 2007.

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

Source: US Bureau of Economic Analysis

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

Percent changes from the prior period in seasonally-adjusted annual equivalent quarterly rates (SAAR) of real personal consumption expenditures (RPCE) are provided in Chart IB-2 from 1995 to 2012. The average rate could be visualized as a horizontal line. Although there are not yet sufficient observations, it appears from Chart IB-2 that the average rate of growth of RPCE was higher before the recession than during the past fourteen quarters of expansion that began in IIIQ2009.

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

Source: US Bureau of Economic Analysis

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

Personal income and its disposition are shown in Table IIB-3. The latest estimates and revisions have changed movements in three forms: (1) contraction of personal income from Dec 2012 into Jan 2013 at $505.5 billion and disposable income at $491.4 billion in seasonally adjusted annual rate (SAAR) or decline by 3.6 percent of personal income and 4.0 percent of disposable personal income, which the Bureau of Economic Analysis explains as: “The 4.0 percent decrease in January DPI mainly reflected the effect of special factors, which boosted employee contributions for government social insurance in January and which had boosted wages and salaries and personal dividends in December“ (http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0113.pdf 1) (The increase was provided in the “fiscal cliff” law H.R. 8 American Taxpayer Relief Act of 2012 http://www.gpo.gov/fdsys/pkg/BILLS-112hr8eas/pdf/BILLS-112hr8eas.pdf); (2) more dynamism in personal and disposable income in Nov and Dec 2012 that the Bureau of Economic Analysis explains as: “Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf); (3) collapse of the savings rate from 6.4 percent in Dec 2012 to 2.4 percent in Jan 2013 after stronger trend of increase of the savings rate with decline into Aug and Sep, marginal increase in Oct 2012 and Nov 2012 and jump in Dec 2012 propelled by exceptional realizations of income in anticipation of tax increases in Jan 2012. Personal income fell 505.5 billion or 3.6 percent from Dec 2012 to Jan 2013 at SAAR while disposable personal income fell $491.4 billion or 4.0 percent. Disposable personal income in current dollars or without adjusting for inflation increased from $11,708.8 billion in Jan 2012 to $11,923.2 billion in Jan 2012 by 1.8 percent or 0.6 percent adjusting for inflation (see Table IB-2). Disposable personal income in current dollars or without adjusting for inflation increased from the annual rate of $11,609.1 billion in Dec 2011 to $12,414.6 billion in Dec 2012, by 6.9 percent and 5.4 percent adjusting for inflation (see Table IB-2). Nominal wages and salaries fell $43.7 billion from Dec 2012 to Jan 2013 or by 0.6 percent. Nominal wages and salaries increased 2.9 percent from the annual rate of $6776.7 billion in Jan 2012 to $6973.1 billion in Jan 2013. Nominal wage and salary disbursements increased from the annual rate of $6687.6 billion in Dec 2011 to $7016.8 billion in Dec 2012, by 4.9 percent. From Dec 2010 to Dec 2011, wage and salary disbursements increased 3.2 percent and disposable personal income 2.5 percent. Personal savings as percent of disposable personal income, or savings rate, fell from 4.9 percent in Dec 2010 to 3.4 percent in Dec 2011, climbing back to 4.1 percent in Jun 2012 but declined to 3.7 percent in Aug 2012 and 3.3 percent in Sep 2012, increasing marginally to 3.4 percent in Oct 2012, 4.0 percent in Nov 2012 and 6.4 percent in Dec 2012 probably propelled by realization of income in Nov-Dec 2012 in anticipation of higher tax rates in Jan 2013. The savings rate collapsed to 2.4 percent in Jan 2013. Revised data suggest that economic weakness originates in increasing savings but fractured labor markets (http://cmpassocregulationblog.blogspot.com/2013/02/thirty-one-million-unemployed-or.html) and weak hiring (http://cmpassocregulationblog.blogspot.com/2013/02/recovery-without-hiring-united-states.html) are ignored in such interpretation.

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

	Personal Income	Wages & Salaries	Personal Taxes	DPI	Savings Rate %
Jan 2013	13,440.0	6,973.1	1516.8	11,923.2	2.4
Dec 2012	13,945.5	7,016.8	1,530.8	12,414.6	6.4
Change Jan 2013/Dec 2012	-505.5 ∆% -3.6	-43.7 ∆% -0.6	-14.0 ∆% -0.9	-491.4 ∆% -4.0
Nov 2012	13,592.1	6,966.9	1,503.2	12,088.9	4.0
Change Dec/Nov	353.4 ∆% 2.6	49.9 ∆% 0.7	27.6 ∆% 1.8	325.7 ∆% 2.7
Oct 2012	13,452.0	6,893.3	1,484.5	11,967.5	3.4
Change Nov/Oct	140.1 ∆% 1.0	73.6 ∆% 1.1	18.7 ∆% 1.3	121.4 ∆% 1.0
Sep 2012	13,446.0	6,909.7	1,481.3	11,964.7	3.3
Change Oct/Sep	6.0 ∆% 0.0	-16.4 ∆% -0.2	3.2 ∆% 0.2	2.8 ∆% 0.0
Aug 2012	13,395.7	6,883.4	1,475.4	11,920.3	3.7
Change Sep/Aug	50.3 ∆% 0.4	26.3 ∆% 0.4	5.9 ∆% 0.4	44.4 ∆% 0.4
Jul 2012	13,376.9	6,872.5	1,472.7	11,904.2	3.9
Change Aug/Jul	18.8 ∆% 0.1	10.9 ∆% 0.2	2.7 ∆% 0.2	16.1 ∆% 0.1
Jun 2012	13,355.9	6,858.5	1,470.0	11,885.9	4.1
Change Jul/Jun	21.0 ∆% 0.2	14.0 ∆% 0.2	2.7 ∆% 0.2	18.3 ∆% 0.2
May 2012	13,322.3	6,840.3	1,464.1	11,858.2	3.9
Change Jun/ May	33.6 ∆% 0.3	18.2 ∆% 0.3	5.9 ∆% 0.4	27.7 ∆% 0.2
Apr 2012	13,302.9	6,848.9	1,461.6	11,841.3	3.5
Change May/ Apr	19.4 ∆% 0.1	-8.6 ∆% -0.1	2.5 ∆% 0.2	16.9 ∆% 0.1
Mar	13,298.3	6,869.4	1,460.6	11,837.7	3.7
Change Apr/ Mar	4.6 ∆% 0.0	-20.5 ∆% -0.3	1.0 ∆% 0.1	3.6 ∆% 0.0
Feb 2012	13,234.7	6,831.5	1,452.0	11,782.7	3.5
Change Mar/ Feb	63.6 ∆% 0.5	37.9 ∆% 0.6	8.6 ∆% 0.6	55.0 ∆% 0.5
Jan	13,148.4	6,776.7	1,439.6	11,708.8	3.7
Change Feb/Jan	86.3 ∆% 0.7	54.8 ∆% 0.8	12.4 ∆% 0.9	73.9 ∆% 0.6
Dec 2012	13,945.5	7,016.8	1,530.8	12,414.6	6.4
Change Dec 2012/ Dec 2011	913.3 ∆% 7.0	329.2 ∆% 4.9	107.7 ∆% 7.6	805.5 ∆% 6.9
Dec 2011	13,032.2	6,687.6	1,423.1	11,609.1	3.4
Change Jan/Dec	116.2 ∆% 0.9	89.1 ∆% 1.3	16.5 ∆% 1.2	99.7 ∆% 0.9
Dec 2010	12,574.1	6,482.8	1,243.5	11,330.6	4.9
Change Dec 2011/ Dec 2010	458.1 ∆% 3.6	204.8 ∆% 3.2	179.6 ∆% 14.4	278.5 ∆% 2.5

Source: US Bureau of Economic Analysis

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

ESIII Contracting Real Private Fixed Investment. The United States economy has grown at the average yearly rate of 3 percent per year and 2 percent per year in per capita terms from 1870 to 2010, as measured by Lucas (2011May). An important characteristic of the economic cycle in the US has been rapid growth in the initial phase of expansion after recessions. In the cyclical expansions since 1950, US GDP has grown at the average rate of 6.2 percent, moving the economy back to long-term trend. Growth of GDP has been only 2.1 percent on average during the current cyclical expansion from IIIQ2009 to IVQ2012. Weakness in the current cyclical expansion has occurred in growth, labor markets and wealth, as analyzed in IB Collapse of United States Dynamism of Income Growth and Employment Creation incorporating additional data on private investment (http://cmpassocregulationblog.blogspot.com/2013/02/recovery-without-hiring-united-states.html). Inferior performance of the US economy and labor markets is the critical current issue of analysis and policy design. Table IA1-1 provides quarterly seasonally adjusted annual rates (SAAR) of growth of private fixed investment for the recessions of the 1980s and the current economic cycle. In the cyclical expansion beginning in IQ1983 (http://www.nber.org/cycles.html), real private fixed investment in the United States grew at the average annual rate of 15.3 percent in the first eight quarters from IQ1983 to IVQ1984. Growth rates fell to an average of 1.6 percent in the following eight quarters from IQ1985 to IVQ1986. There were only three quarters of contraction of private fixed investment from IQ1983 to IVQ1986. There is quite different behavior of private fixed investment in the fourteen quarters of cyclical expansion from IIIQ2009 to IVQ2012. The average annual growth rate in the first eight quarters of expansion from IIIQ2009 to IIQ2011 was 2.5 percent, which is significantly lower than 15.3 percent in the first eight quarters of expansion from IQ1983 to IVQ1984. There is only strong growth of private fixed investment in the four quarters of expansion from IIQ2011 to IQ2012 at the average annual rate of 11.9 percent. Growth has fallen from the SAAR of 15.5 percent in IIIQ2011 to 0.9 percent in IIIQ2012. Sudeep Reddy and Scott Thurm, writing on “Investment falls off a cliff,” on Nov 18, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324595904578123593211825394.html?mod=WSJPRO_hpp_LEFTTopStories) analyze the decline of private investment in the US and inform that a review by the Wall Street Journal of filing and conference calls finds that 40 of the largest publicly traded corporations in the US have announced intentions to reduce capital expenditures in 2012. The SAAR of real private fixed investment jumped to 11.2 percent in IVQ2012.

Table IA1-1, US, Quarterly Growth Rates of Real Private Fixed Investment, % Annual Equivalent SA

Q	1981	1982	1983	1984	2008	2009	2010
I	3.0	-11.6	9.0	13.1	-8.3	-30.2	-0.9
II	2.7	-13.3	16.4	17.5	-5.2	-18.5	14.5
III	0.0	-10.7	26.1	8.8	-12.3	-3.1	-1.0
IV	-1.4	0.6	25.6	7.4	-25.2	-6.0	7.6
				1985			2011
I				3.1			-1.3
II				5.1			12.4
III				-3.2			15.5
IV				7.8			10.0
				1986			2012
I				0.6			9.8
II				-1.0			4.5
III				-2.2			0.9
IV				2.7			11.2

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Chart IA1-1 of the US Bureau of Economic Analysis (BEA) provides seasonally-adjusted annual rates of growth of real private fixed investment from 1981 to 1986. Growth rates recovered sharply during the first eight quarters, which was essential in returning the economy to trend growth and eliminating unemployment and underemployment accumulated during the contractions.

Chart IA1-1, US, Real Private Fixed Investment, Seasonally-Adjusted Annual Rates Percent Change from Prior Quarter, 1981-1986

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

Weak behavior of real private fixed investment from 2007 to 2012 is shown in Chart IA1-2. Growth rates of real private fixed investment were much lower during the initial phase of expansion in the current economic cycle and have entered sharp trend of decline.

Chart IA1-2, US, Real Private Fixed Investment, Seasonally-Adjusted Annual Rates Percent Change from Prior Quarter, 2007-2012

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

Table IA1-2 provides real private fixed investment at seasonally-adjusted annual rates from IVQ2007 to IVQ2012 or for the complete economic cycle. The first column provides the quarter, the second column percentage change relative to IVQ2007, the third column the quarter percentage change in the quarter relative to the prior quarter and the final column percentage change in a quarter relative to the same quarter a year earlier. In IQ1980 gross private domestic investment in the US was $778.3 billion of 2005 dollars, growing to $965.9 billion in IVQ1985 or 24.1 percent, as shown in Table IB-2 of IB Collapse of Dynamism of United States Income Growth and Employment Creation (http://cmpassocregulationblog.blogspot.com/2013/02/recovery-without-hiring-united-states.html). Gross private domestic investment in the US decreased 9.5 percent from $2,123.6 billion of 2005 dollars in IVQ2007 to $1,921.7 billion in IVQ2012 (http://www.bea.gov/iTable/index_nipa.cfm). As shown in Table IAI-2, real private fixed investment fell 10.3 percent from $2111.5 billion of 2005 dollars in IVQ2007 to $1894.4 billion in IVQ2012. Growth of real private investment in Table IA1-2 is mediocre for all but four quarters from IIQ2011 to IQ2012.

Table IA1-2, US, Real Private Fixed Investment and Percentage Change Relative to IVQ2007 and Prior Quarter, Billions of Chained 2005 Dollars and ∆%

	Real PFI, Billions Chained 2005 Dollars	∆% Relative to IVQ2007	∆% Relative to Prior Quarter	∆% over Year Earlier
IVQ2007	2111.5	NA	-1.2	-1.0
IQ2008	2066.4	-2.1	-2.1	-2.9
IIQ2008	2039.1	-3.4	-1.3	-5.0
IIIQ2008	1973.5	-6.5	-3.2	-7.7
IV2008	1835.4	-13.1	-7.0	-13.1
IQ2009	1677.3	-20.6	-8.6	-18.8
IIQ2009	1593.7	-24.5	-5.0	-21.8
IIIQ2009	1581.2	-25.1	-0.8	-19.9
IVQ2009	1556.8	-26.3	-1.5	-15.2
IQ2010	1553.1	-26.4	-0.2	-7.4
IIQ2010	1606.5	-23.9	3.4	0.8
IIIQ2010	1602.7	-24.1	-0.2	1.4
IVQ2010	1632.3	-22.7	1.8	4.8
IQ2011	1627.0	-22.9	-0.3	4.8
IIQ2011	1675.4	-20.7	3.0	4.3
IIIQ2011	1736.8	-17.7	3.7	8.4
IVQ2011	1778.7	-15.8	2.4	9.0
IQ2012	1820.6	-13.8	2.4	11.9
IIQ2012	1840.6	-12.8	1.1	9.9
IIIQ2012	1844.8	-12.6	0.2	6.2
IVQ2012	1894.4	-10.3	2.7	6.5

PFI: Private Fixed Investment

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Chart IA1-3 provides real private fixed investment in billions of chained 2005 dollars from IV2007 to IVQ2012. Real private fixed investment has not recovered, stabilizing at a level in IVQ2012 that is 10.6 percent below the level in IVQ2007.

Chart IA1-3, US, Real Private Fixed Investment, Billions of Chained 2005 Dollars, IQ2007 to IVQ2012

Source: US Bureau of Economic Analysis

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

Chart IA1-4 provides real gross private domestic investment in chained dollars of 2005 from 1980 to 1986. Real gross private domestic investment climbed 24.1 percent in IVQ1985 above the level on IQ1980.

Chart IA1-4, US, Real Gross Private Domestic Investment, Billions of Chained 2005 Dollars at Seasonally Adjusted Annual Rate, 1980-1986

Source: US Bureau of Economic Analysis

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

Chart IA1-5 provides real gross private domestic investment in the United States in billions of dollars of 2005 from 2006 to 2012. Gross private domestic investment reached a level in IVQ2012 that was 9.5 percent lower than the level in IVQ2007.

Chart IA1-5, US, Real Gross Private Domestic Investment, Billions of Chained 2005 Dollars at Seasonally Adjusted Annual Rate, 2006-2012

Source: US Bureau of Economic Analysis

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

I Mediocre and Decelerating United States Economic Growth. The US is experiencing the first expansion from a recession after World War II without growth, jobs (http://cmpassocregulationblog.blogspot.com/2013/02/thirty-one-million-unemployed-or.html) and hiring (http://cmpassocregulationblog.blogspot.com/2013/01/recovery-without-hiring-world-inflation.html), unsustainable government deficit/debt (http://cmpassocregulationblog.blogspot.com/2013/02/united-states-unsustainable-fiscal.html http://cmpassocregulationblog.blogspot.com/2012/11/united-states-unsustainable-fiscal.html) and waves of inflation (http://cmpassocregulationblog.blogspot.com/2013/02/world-inflation-waves-united-states.html) while valuations of risk financial assets approach historical highs. Long-term economic performance in the United States consisted of trend growth of GDP at 3 percent per year and of per capita GDP at 2 percent per year as measured for 1870 to 2010 by Robert E Lucas (2011May). United States real GDP grew at the average rate of 3.2 percent from 1929 to 2012 and also at 3.2 percent from 1947 to 2012 (Table I-1 at http://cmpassocregulationblog.blogspot.com/2013/02/world-inflation-waves-united-states.html), using data from the US Bureau of Economic Analysis (http://www.bea.gov/iTable/index_nipa.cfm). The economy returned to trend growth after adverse events such as wars and recessions. The key characteristic of adversities such as recessions was much higher rates of growth in expansion periods that permitted the economy to recover output, income and employment losses that occurred during the contractions. Over the business cycle the economy compensated the losses of contractions with higher growth in expansions to maintain trend growth of GDP of 3 percent and of GDP per capita of 2 percent. The expansion since the third quarter of 2009 (IIIQ2009 (Jun)) to the latest available measurement for IVQ(2012) has been at the average annual rate of 2.1 percent per quarter in contrast with 6.2 percent on average in all expansions after World War II. As a result, there are 31.4 million unemployed or underemployed in the United States for an effective unemployment rate of 19.4 percent (http://cmpassocregulationblog.blogspot.com/2013/02/thirty-one-million-unemployed-or.html).

The objective of this section is analyzing US economic growth in the current cyclical expansion. There is initial discussion of the conventional explanation of the current recovery as being weak because of the depth of the contraction and the financial crisis and also brief discussion of the concept of “slow-growth recession.” The bulk of the section consists of comparison of the current growth experience of the US with earlier expansions after past deep contractions and consideration of recent performance.

This blog has analyzed systematically the weakness of the United States recovery in the current business cycle from IIIQ2009 to the present in comparison with the recovery from the two recessions in the 1980s from IQ1983 to IVQ1985. The United States has grown on average at 2.1 percent annual equivalent in the 14 quarters of expansion since IIIQ2009 while growth was 6.2 percent on average in recoveries after World War II and 5.7 percent from IQ1983 to IVQ1985. The conventional explanation is that the recession from IVQ2007 (Dec) to IIQ2009 (Jun) was so profound that it caused subsequent weak recovery and that historically growth after recessions with financial crises has been weaker. Michael D. Bordo (2012Sep27) and Bordo and Haubrich (2012DR) provide evidence contradicting the conventional explanation: recovery is much stronger on average after profound contractions and also much stronger after recessions with financial crises than after recessions without financial crises. Insistence on the conventional explanation prevents finding policies that can accelerate growth, employment and prosperity.

A monumental effort of data gathering, calculation and analysis by Carmen M. Reinhart and Kenneth Rogoff is highly relevant to banking crises, financial crash, debt crises and economic growth (Reinhart 2010CB; Reinhart and Rogoff 2011AF, 2011Jul14, 2011EJ, 2011CEPR, 2010FCDC, 2010GTD, 2009TD, 2009AFC, 2008TDPV; see also Reinhart and Reinhart 2011Feb, 2010AF and Reinhart and Sbrancia 2011). See http://cmpassocregulationblog.blogspot.com/2011/07/debt-and-financial-risk-aversion-and.html The dataset of Reinhart and Rogoff (2010GTD, 1) is quite unique in breadth of countries and over time periods:

“Our results incorporate data on 44 countries spanning about 200 years. Taken together, the data incorporate over 3,700 annual observations covering a wide range of political systems, institutions, exchange rate and monetary arrangements and historic circumstances. We also employ more recent data on external debt, including debt owed by government and by private entities.”

Reinhart and Rogoff (2010GTD, 2011CEPR) classify the dataset of 2317 observations into 20 advanced economies and 24 emerging market economies. In each of the advanced and emerging categories, the data for countries is divided into buckets according to the ratio of gross central government debt to GDP: below 30, 30 to 60, 60 to 90 and higher than 90 (Reinhart and Rogoff 2010GTD, Table 1, 4). Median and average yearly percentage growth rates of GDP are calculated for each of the buckets for advanced economies. There does not appear to be any relation for debt/GDP ratios below 90. The highest growth rates are for debt/GDP ratios below 30: 3.7 percent for the average and 3.9 for the median. Growth is significantly lower for debt/GDP ratios above 90: 1.7 for the average and 1.9 percent for the median. GDP growth rates for the intermediate buckets are in a range around 3 percent: the highest 3.4 percent average is for the bucket 60 to 90 and 3.1 percent median for 30 to 60. There is even sharper contrast for the United States: 4.0 percent growth for debt/GDP ratio below 30; 3.4 percent growth for debt/GDP ratio of 30 to 60; 3.3 percent growth for debt/GDP ratio of 60 to 90; and minus 1.8 percent, contraction, of GDP for debt/GDP ratio above 90.

For the five countries with systemic financial crises—Iceland, Ireland, UK, Spain and the US—real average debt levels have increased by 75 percent between 2007 and 2009 (Reinhart and Rogoff 2010GTD, Figure 1). The cumulative increase in public debt in the three years after systemic banking crisis in a group of episodes after World War II is 86 percent (Reinhart and Rogoff 2011CEPR, Figure 2, 10).

An important concept is “this time is different syndrome,” which “is rooted in the firmly-held belief that financial crises are something that happens to other people in other countries at other times; crises do not happen here and now to us” (Reinhart and Rogoff 2010FCDC, 9). There is both an arrogance and ignorance in “this time is different” syndrome, as explained by Reinhart and Rogoff (2010FCDC, 34):

“The ignorance, of course, stems from the belief that financial crises happen to other people at other time in other places. Outside a small number of experts, few people fully appreciate the universality of financial crises. The arrogance is of those who believe they have figured out how to do things better and smarter so that the boom can long continue without a crisis.”

There is sober warning by Reinhart and Rogoff (2011CEPR, 42) on the basis of the momentous effort of their scholarly data gathering, calculation and analysis:

“Despite considerable deleveraging by the private financial sector, total debt remains near its historic high in 2008. Total public sector debt during the first quarter of 2010 is 117 percent of GDP. It has only been higher during a one-year sting at 119 percent in 1945. Perhaps soaring US debt levels will not prove to be a drag on growth in the decades to come. However, if history is any guide, that is a risky proposition and over-reliance on US exceptionalism may only be one more example of the “This Time is Different” syndrome.”

As both sides of the Atlantic economy maneuver around defaults the experience on debt and growth deserves significant emphasis in research and policy. The world economy is slowing with high levels of unemployment in advanced economies. Countries do not grow themselves out of unsustainable debts but rather through de facto defaults by means of financial repression and in some cases through inflation. This time is not different.

Professor Michael D. Bordo (2012Sep27), at Rutgers University, is providing clear thought on the correct comparison of the current business cycles in the United States with those in United States history. There are two issues raised by Professor Bordo: (1) incomplete conclusions by lumping together countries with different institutions, economic policies and financial systems; and (2) the erroneous contention that growth is mediocre after financial crises and deep recessions, which is repeated daily in the media, but that Bordo and Haubrich (2012DR) persuasively demonstrate to be inconsistent with United States experience.

Depriving economic history of institutions is perilous as is illustrated by the economic history of Brazil. Douglass C. North (1994) emphasized the key role of institutions in explaining economic history. Rondo E. Cameron (1961, 1967, 1972) applied institutional analysis to banking history. Friedman and Schwartz (1963) analyzed the relation of money, income and prices in the business cycle and related the monetary policy of an important institution, the Federal Reserve System, to the Great Depression. Bordo, Choudhri and Schwartz (1995) analyze the counterfactual of what would have been economic performance if the Fed had used during the Great Depression the Friedman (1960) monetary policy rule of constant growth of money(for analysis of the Great Depression see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 198-217). Alan Meltzer (2004, 2010a,b) analyzed the Federal Reserve System over its history. The reader would be intrigued by Figure 5 in Reinhart and Rogoff (2010FCDC, 15) in which Brazil is classified in external default for seven years between 1828 and 1834 but not again until 64 years later in 1989, above the 50 years of incidence for serial default. This void has been filled in scholarly research on nineteenth-century Brazil by William R. Summerhill, Jr. (2007SC, 2007IR). There are important conclusions by Summerhill on the exceptional sample of institutional change or actually lack of change, public finance and financial repression in Brazil between 1822 an 1899, combining tools of economics, political science and history. During seven continuous decades, Brazil did not miss a single interest payment with government borrowing without repudiation of debt or default. What is really surprising is that Brazil borrowed by means of long-term bonds and even more surprising interest rates fell over time. The external debt of Brazil in 1870 was ₤41,275,961 and the domestic debt in the internal market was ₤25,708,711, or 62.3 percent of the total (Summerhill 2007IR, 73).

The experience of Brazil differed from that of Latin America (Summerhill 2007IR). During the six decades when Brazil borrowed without difficulty, Latin American countries becoming independent after 1820 engaged in total defaults, suffering hardship in borrowing abroad. The countries that borrowed again fell again in default during the nineteenth century. Venezuela defaulted in four occasions. Mexico defaulted in 1827, rescheduling its debt eight different times and servicing the debt sporadically. About 44 percent of Latin America’s sovereign debt was in default in 1855 and approximately 86 percent of total government loans defaulted in London originated in Spanish American borrowing countries.

External economies of commitment to secure private rights in sovereign credit would encourage development of private financial institutions, as postulated in classic work by North and Weingast (1989), Summerhill 2007IR, 22). This is how banking institutions critical to the Industrial Revolution were developed in England (Cameron 1967). The obstacle in Brazil found by Summerhill (2007IR) is that sovereign debt credibility was combined with financial repression. There was a break in Brazil of the chain of effects from protecting public borrowing, as in North and Weingast (1989), to development of private financial institutions. According to Pelaez 1976, 283) following Cameron (1971, 1967):

“The banking law of 1860 placed severe restrictions on two basic modern economic institutions—the corporation and the commercial bank. The growth of the volume of bank credit was one of the most significant factors of financial intermediation and economic growth in the major trading countries of the gold standard group. But Brazil placed strong restrictions on the development of banking and intermediation functions, preventing the channeling of coffee savings into domestic industry at an earlier date.”

Brazil actually abandoned the gold standard during multiple financial crises in the nineteenth century, as it should have to protect domestic economic activity. Pelaez (1975, 447) finds similar experience in the first half of nineteenth-century Brazil:

“Brazil’s experience is particularly interesting in that in the period 1808-1851 there were three types of monetary systems. Between 1808 and 1829, there was only one government-related Bank of Brazil, enjoying a perfect monopoly of banking services. No new banks were established in the 1830s after the liquidation of the Bank of Brazil in 1829. During the coffee boom in the late 1830s and 1840s, a system of banks of issue, patterned after similar institutions in the industrial countries, supplied the financial services required in the first stage of modernization of the export economy.”

Financial crises in the advanced economies were transmitted to nineteenth-century Brazil by the arrival of a ship (Pelaez and Suzigan 1981). The explanation of those crises and the economy of Brazil requires knowledge and roles of institutions, economic policies and the financial system chosen by Brazil, in agreement with Bordo (2012Sep27).

The departing theoretical framework of Bordo and Haubrich (2012DR) is the plucking model of Friedman (1964, 1988). Friedman (1988, 1) recalls “I was led to the model in the course of investigating the direction of influence between money and income. Did the common cyclical fluctuation in money and income reflect primarily the influence of money on income or of income on money?” Friedman (1964, 1988) finds useful for this purpose to analyze the relation between expansions and contractions. Analyzing the business cycle in the United States between 1870 and 1961, Friedman (1964, 15) found that “a large contraction in output tends to be followed on the average by a large business expansion; a mild contraction, by a mild expansion.” The depth of the contraction opens up more room in the movement toward full employment (Friedman 1964, 17):

“Output is viewed as bumping along the ceiling of maximum feasible output except that every now and then it is plucked down by a cyclical contraction. Given institutional rigidities and prices, the contraction takes in considerable measure the form of a decline in output. Since there is no physical limit to the decline short of zero output, the size of the decline in output can vary widely. When subsequent recovery sets in, it tends to return output to the ceiling; it cannot go beyond, so there is an upper limit to output and the amplitude of the expansion tends to be correlated with the amplitude of the contraction.”

Kim and Nelson (1999) test the asymmetric plucking model of Friedman (1964, 1988) relative to a symmetric model using reference cycles of the NBER, finding evidence supporting the Friedman model. Bordo and Haubrich (2012DR) analyze 27 cycles beginning in 1872, using various measures of financial crises while considering different regulatory and monetary regimes. The revealing conclusion of Bordo and Haubrich (2012DR, 2) is that:

“Our analysis of the data shows that steep expansions tend to follow deep contractions, though this depends heavily on when the recovery is measured. In contrast to much conventional wisdom, the stylized fact that deep contractions breed strong recoveries is particularly true when there is a financial crisis. In fact, on average, it is cycles without a financial crisis that show the weakest relation between contraction depth and recovery strength. For many configurations, the evidence for a robust bounce-back is stronger for cycles with financial crises than those without.”

The average rate of growth of real GDP in expansions after recessions with financial crises was 8 percent but only 6.9 percent on average for recessions without financial crises (Bordo 2012Sep27). Real GDP declined 12 percent in the Panic of 1907 and increased 13 percent in the recovery, consistent with the plucking model of Friedman (Bordo 2012Sep27). The comparison of recovery from IQ1983 to IVQ1985 is appropriate even when considering financial crises. There was significant financial turmoil during the 1980s. Bordo and Haubrich (2012DR, 11) identify a financial crisis in the United States starting in 1981. Benston and Kaufman (1997, 139) find that there was failure of 1150 US commercial and savings banks between 1983 and 1990, or about 8 percent of the industry in 1980, which is nearly twice more than between the establishment of the Federal Deposit Insurance Corporation in 1934 through 1983. More than 900 savings and loans associations, representing 25 percent of the industry, were closed, merged or placed in conservatorships (see Pelaez and Pelaez, Regulation of Banks and Finance (2008b), 74-7). The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) created the Resolution Trust Corporation (RTC) and the Savings Association Insurance Fund (SAIF) that received $150 billion of taxpayer funds to resolve insolvent savings and loans. The GDP of the US in 1989 was $5482.1 billion (http://www.bea.gov/iTable/index_nipa.cfm), such that the partial cost to taxpayers of that bailout was around 2.74 percent of GDP in a year. US GDP in 2011 is estimated at $15,075.7 billion, such that the bailout would be equivalent to cost to taxpayers of about $412.5 billion in current GDP terms. A major difference with the Troubled Asset Relief Program (TARP) for private-sector banks is that most of the costs were recovered with interest gains whereas in the case of savings and loans there was no recovery. Money center banks were under extraordinary pressure from the default of sovereign debt by various emerging nations that represented a large share of their net worth (see Pelaez 1986).

Bordo (2012Sep27) finds two probable explanations for the weak recovery during the current economic cycle: (1) collapse of United States housing; and (2) uncertainty originating in fiscal policy, regulation and structural changes. There are serious doubts if monetary policy is adequate to recover the economy under these conditions.

The concept of growth recession was popular during the stagflation from the late 1960s to the early 1980s. The economy of the US underperformed with several recession episodes in “stop and go” fashion of policy and economic activity while the rate of inflation rose to the highest in a peacetime period (see http://cmpassocregulationblog.blogspot.com/2011/06/risk-aversion-and-stagflation.html http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/05/global-inflation-seigniorage-monetary.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html Appendix I; see Taylor 1993, 1997, 1999, 1998LB, 2012Mar27, 2012Mar28, 2012FP, 2012JMCB). A growth recession could be defined as a period in which economic growth is insufficient to move the economy toward full employment of humans, equipment and other productive resources. The US is experiencing a dramatic slow growth recession with 31.425 million people in job stress, consisting of an effective number of unemployed of 20.354 million, 8.628 million employed part-time because they cannot find full employment and 2.433 million marginally attached to the labor force (http://cmpassocregulationblog.blogspot.com/2013/02/thirty-one-million-unemployed-or.html). The discussion of the growth recession issue in the 1970s by two recognized economists of the twentieth century, James Tobin and Paul A. Samuelson, is worth recalling.

In analysis of the design of monetary policy in 1974, Tobin (1974, 219) finds that the forecast of the President’s Council of Economic Advisers (CEA) was also the target such that monetary policy would have to be designed and implemented to attain that target. The concern was with maintaining full employment as provided in the Employment Law of 1946 (http://www.law.cornell.edu/uscode/15/1021.html http://uscode.house.gov/download/pls/15C21.txt http://www.eric.ed.gov/PDFS/ED164974.pdf) see http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html), which also created the CEA. Tobin (1974, 219) describes the forecast/target of the CEA for 1974:

“The expected and approved path appears to be quarter-to-quarter rates of growth of real gross national product in 1974 of roughly -0.5, 0.1, and 1 percent, with unemployment rising to about 5.6 percent in the second quarter and remaining there the rest of the year. The rate of price inflation would fall shortly in the second quarter, but rise slightly toward the end of the year.”

Referring to monetary policy design, Tobin (1974, 221) states: “if interest rates remain stable or rise during the current (growth) recession and recovery, this will be a unique episode in business cycle annals.” Subpar economic growth is often called a “growth recession.” The critically important concept is that economic growth is not sufficient to move the economy toward full employment, creating the social and economic adverse outcome of idle capacity and unemployed and underemployed workers, much the same as currently.

The unexpected incidence of inflation surprises during growth recessions is considered by Samuelson (1974, 76):

“Indeed, if there were in Las Vegas or New York a continuous casino on the money GNP of 1974’s fourth quarter, it would be absurd to think that the best economic forecasters could improve upon the guess posted there. Whatever knowledge and analytical skill they possess would already have been fed into the bidding. It is a manifest contradiction to think that most economists can be expected to do better than their own best performance. I am saying that the best forecasters have been poor in predicting the general price level’s movements and level even a year ahead. By Valentine’s Day 1973 the best forecasters were beginning to talk of the growth recession that we now know did set in at the end of the first quarter. Aside from their end-of-1972 forecasts, the fashionable crowd has little to blame itself for when it comes to their 1973 real GNP projections. But, of course, they did not foresee the upward surge of food and decontrolled industrial prices. This has been a recurring pattern: surprise during the event at the virulence of inflation, wisdom after the event in demonstrating that it did, after all, fit with past patterns of experience.”

Economists are known for their forecasts being second only to those of astrologers. Accurate forecasts are typically realized for the wrong reasons. In contrast with meteorologists, economists do not even agree on what happened. There is not even agreement on what caused the global recession and why the economy has reached a perilous standstill.

Historical parallels are instructive but have all the limitations of empirical research in economics. The more instructive comparisons are not with the Great Depression of the 1930s but rather with the recessions in the 1950s, 1970s and 1980s. The growth rates and job creation in the expansion of the economy away from recession are subpar in the current expansion compared to others in the past. Four recessions are initially considered, following the reference dates of the National Bureau of Economic Research (NBER) (http://www.nber.org/cycles/cyclesmain.html): IIQ1953-IIQ1954, IIIQ1957-IIQ1958, IIIQ1973-IQ1975 and IQ1980-IIIQ1980. The data for the earlier contractions illustrate that the growth rate and job creation in the current expansion are inferior. The sharp contractions of the 1950s and 1970s are considered in Table I-1, showing the Bureau of Economic Analysis (BEA) quarter-to-quarter, seasonally adjusted (SA), yearly-equivalent growth rates of GDP. The recovery from the recession of 1953 consisted of four consecutive quarters of high percentage growth rates from IIIQ1954 to IIIQ1955: 4.6, 8.3, 12.0, 6.8 and 5.4. The recession of 1957 was followed by four consecutive high percentage growth rates from IIIQ1958 to IIQ1959: 9.7, 9.7, 8.3 and 10.5. The recession of 1973-1975 was followed by high percentage growth rates from IIQ1975 to IIQ1976: 6.9, 5.3, 9.4 and 3.0. The disaster of the Great Inflation and Unemployment of the 1970, which made stagflation notorious, is even better in growth rates during the expansion phase in comparison with the current slow-growth recession.

Table I-1, US, Quarterly Growth Rates of GDP, % Annual Equivalent SA

	IQ	IIQ	IIIQ	IVQ
1953	7.7	3.1	-2.4	-6.2
1954	-1.9	0.5	4.6	8.3
1955	12.0	6.8	5.4	2.3
1957	2.5	-1.0	3.9	-4.1
1958	-10.4	2.5	9.7	9.7
1959	8.3	10.5	-0.5	1.4
1973	10.6	4.7	-2.1/	3.9
1974	3.5	1.0	-3.9	6.9
1975	-4.8	3.1	6.9	5.3
1976	9.4	3.0	2.0	2.9
1979	0.7	0.4	2.9	1.1
1980	1.3	-7.9	-0.7	7.6

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

The NBER dates another recession in 1980 that lasted about half a year. If the two recessions from IQ1980s to IIIQ1980 and IIIQ1981 to IVQ1982 are combined, the impact of lost GDP of 4.8 percent is more comparable to the latest revised 4.7 percent drop of the recession from IVQ2007 to IIQ2009. Bordo and Haubrich (2012DR, Table 1, page 24) measure the contraction beginning in IQ1980 (Jan) at -2.23 percent and the contraction beginning in IIQ1981 (Jul) at 2.64 percent for combined contraction of 4.8 percent. The recession in 1981-1982 is quite similar on its own to the 2007-2009 recession. In contrast, during the Great Depression in the four years of 1930 to 1933, GDP in constant dollars fell 26.5 percent cumulatively and fell 45.6 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7). Table I-2 provides the Bureau of Economic Analysis (BEA) quarterly growth rates of GDP in SA yearly equivalents for the recessions of 1981 to 1982 and 2007 to 2009, using the latest major revision published on Jul 29, 2011 (http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp2q11_adv.pdf) and the revision back to 2009 (http://www.bea.gov/newsreleases/national/gdp/2012/pdf/gdp2q12_adv.pdf) and the first estimate for IVQ2012 (http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp4q12_adv.pdf), which are available in the dataset of the US Bureau of Economic Analysis (http://www.bea.gov/iTable/index_nipa.cfm). There were four quarters of contraction in 1981-1982 ranging in rate from -1.5 percent to -6.4 percent and five quarters of contraction in 2007-2009 ranging in rate from -0.3 percent to -8.9 percent. The striking difference is that in the first twelve quarters of expansion from IQ1983 to IIIQ1985, shown in Table I-2 in relief, GDP grew at the high quarterly percentage growth rates of 5.1, 9.3, 8.1, 8.5, 8.0, 7.1, 3.9, 3.3, 3.8, 3.4, 6.4 and 3.1 while the percentage growth rates in the first fourteen quarters of expansion from IIIQ2009 to IVQ2012, shown in relief in Table I-2, were mediocre: 1.4, 4.0, 2.3, 2.2, 2.6, 2.4, 0.1, 2.5, 1.3, 4.1, 2.0, 1.3, 3.1 and 0.1. Asterisks denote the estimates that have been revised by the BEA in the first round of Jul 29, 2011 and double asterisks the revisions released on Jul 27, 2012. During the four quarters of 2011 GDP grew at annual equivalent rates of 0.1 percent in IQ2011, 2.5 percent in IIQ2011, 1.3 percent in IIIQ2011 and 4.1 percent in IVQ2011. The rate of growth of the US economy decelerated from seasonally-adjusted annual equivalent of 4.1 percent in IVQ2011 to 2.0 percent in IQ2012, 1.3 percent in IIQ2012, 3.1 percent in IIIQ2012, which is more like 1.7 percent without contributions of 0.73 percentage points by inventory change and 0.64 percentage points by one-time expenditures in national defense and 0.1 percent in IVQ2012, which is more like 2.84 percent without deductions of 1.55 percentage points of inventory divestment and 1.28 percent of reductions of one-time national defense expenditures. Inventory change contributed to initial growth but was rapidly replaced by growth in investment and demand in 1983. Inventory accumulation contributed 2.53 percentage points to the rate of growth of 4.1 percent in IVQ2011, which is the only relatively high rate from IQ2011 to IIIQ2012, and 0.73 percentage points to the rate of 3.1 percent in IIIQ2012. Economic growth and employment creation decelerated rapidly during 2012.

Table I-2, US, Quarterly Growth Rates of GDP, % Annual Equivalent SA

Q	1981	1982	1983	1984	2008	2009	2010
I	8.6	-6.4	5.1	8.0	-1.8*	-5.3**	2.3**
II	-3.2	2.2	9.3	7.1	1.3*	-0.3**	2.2**
III	4.9	-1.5	8.1	3.9	-3.7*	1.4**	2.6**
IV	-4.9	0.3	8.5	3.3	-8.9*	4.0**	2.4**
				1985			2011
I				3.8			0.1**
II				3.4			2.5**
III				6.4			1.3**
IV				3.1			4.1**
				1986			2012
I				3.9			2.0**
II				1.6			1.3
III				3.9			3.1
IV				1.9			0.1

*Revision of Jul 29, 2011 **Revision of Jul 27, 2012

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Chart I-1 of the Bureau of Economic Analysis (BEA) provides strong growth of real quarterly GDP in the US between 1929 and 1999. There is an evident acceleration of the rate of GDP growth in the 1990s as shown by a much sharper slope of the growth curve. Cobet and Wilson (2002) define labor productivity as the value of manufacturing output produced per unit of labor input used (see Pelaez and Pelaez, The Global Recession Risk (2007), 137-44). Between 1950 and 2000, labor productivity in the US grew less rapidly than in Germany and Japan. The major part of the increase in productivity in Germany and Japan occurred between 1950 and 1973 while the rate of productivity growth in the US was relatively subdued in several periods. While Germany and Japan reached their highest growth rates of productivity before 1973, the US accelerated its rate of productivity growth in the second half of the 1990s. Between 1950 and 2000, the rate of productivity growth in the US of 2.9 percent per year was much lower than 6.3 percent in Japan and 4.7 percent in Germany. Between 1995 and 2000, the rate of productivity growth of the US of 4.6 percent exceeded that of Japan of 3.9 percent and the rate of Germany of 2.6 percent.

Chart I-1, US, Real GDP 1929-1999

Source: US Bureau of Economic Analysis

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

Chart I-2 provides the growth of real quarterly GDP in the US between 1947 and 2012. The drop of output in the recession from IVQ2007 to IIQ2009 has been followed by anemic recovery compared with return to trend at 3.0 percent from 1870 to 2010 after events such as wars and recessions (Lucas 2011May) and a standstill that can lead to growth recession, or low rates of economic growth, but perhaps even another contraction or conventional recession.

Chart I-2, US, Real GDP 1929-2012

Source:

US Bureau of Economic Analysis

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

Chart I-3 provides real GDP percentage change on the quarter a year earlier for 1983-1984. The objective is simply to compare expansion in two recoveries from sharp contractions as shown in Table I-2. Growth rates in the early phase of the recovery in 1983 and 1984 were very high, which is the opportunity to reduce unemployment that has characterized cyclical expansion in the postwar US economy.

Chart I-3, Real GDP Percentage Change on Quarter a Year Earlier 1983-1985

Source: US Bureau of Economic Analysis

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

In contrast, growth rates in the comparable first fourteen quarters of expansion from 2009 to 2012 in Chart I-4 have been mediocre. As a result, growth has not provided the exit from unemployment and underemployment as in other cyclical expansions in the postwar period. Growth rates did not rise in V shape as in earlier expansions and then declined close to the standstill of growth recessions.

Chart I-4, US, Real GDP Percentage Change on Quarter a Year Earlier 2009-2012

Source: US Bureau of Economic Analysis

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

Table I-3 provides percentage change of real GDP in the United States in the 1930s, 1980s and 2000s. The recession in 1981-1982 is quite similar on its own to the 2007-2009 recession. In contrast, during the Great Depression in the four years of 1930 to 1933, GDP in constant dollars fell 26.7 percent cumulatively and fell 45.6 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7). Data are available for the 1930s only on a yearly basis. US GDP fell 4.8 percent in the two recessions (1) from IQ1980 to IIIQ1980 and (2) from III1981 to IVQ1981 to IVQ1982 and 4.7 percent cumulatively in the recession from IVQ2007 to IIQ2009. It is instructive to compare the first three years of the expansions in the 1980s and the current expansion. GDP grew at 4.5 percent in 1983, 7.2 percent in 1984 and 4.1 percent in 1985 while GDP grew, 2.4 percent in 2010, 1.8 percent in 2011 and 2.2 percent in 2012. Growth in the four quarters of 2012 accumulates to 1.6 percent. The US economy is growing in 2012 at the annual equivalent rate of 2.0 percent {([(1.02^1/4(1.013)^1/4(1.0173)^1/4(1.0284]-1)100 = 2.0%} by excluding inventory accumulation of 0.73 percentage points and exceptional defense expenditures of 0.64 percentage points from growth 3.1 percent at SAAR in IIIQ2012 to obtain adjusted 1.73 percent SSAR and adding inventory divestment of 1.55 percentage points and reduction of national defense expenditures of 1.28 percentage points to obtain SAAR of IVQ2012 of 2.84 percent. GDP grew at 4.1 percent in 1985 and 3.5 percent in 1986 while the forecasts of participants of the Federal Open Market Committee (FOMC) are in the range of 1.7 to 1.8 percent in 2012 and 2.3 to 3.0 percent in 2013 (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20121212.pdf).

Table I-3, US, Percentage Change of GDP in the 1930s, 1980s and 2000s, ∆%

Year	GDP ∆%	Year	GDP ∆%	Year	GDP ∆%
1930	-8.6	1980	-0.3	2000	4.1
1931	-6.5	1981	2.5	2001	1.1
1932	-13.1	1982	-1.9	2002	1.8
1933	-1.3	1983	4.5	2003	2.5
1934	10.9	1984	7.2	2004	3.5
1935	8.9	1985	4.1	2005	3.1
1936	13.1	1986	3.5	2006	2.7
1937	5.1	1987	3.2	2007	1.9
1938	-3.4	1988	4.1	2008	-0.3
1930	8.1	1989	3.6	2009	-3.1
1940	8.8	1990	1.9	2010	2.4
1941	17.1	1991	-0.2	2011	1.8
1942	18.5	1992	3.4	2012	2.2

Source: US Bureau of Economic Analysis

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

Chart I-5 provides percentage change of GDP in the US during the 1930s. There is vast literature analyzing the Great Depression (Pelaez and Pelaez, Regulation of Banks and Finance (2009), 198-217). Cole and Ohanian (1999) find that US real per capita output was 11 percent lower in 1939 than in 1929 while the typical expansion of real per capita output in the US during a decade is 31 percent. Private hours worked in the US were 25 percent lower in 1939 relative to 1929.

Chart I-5, US, Percentage Change of GDP in the 1930s

Source: US Bureau of Economic Analysis

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

In contrast, Chart I-6 shows rapid recovery from the recessions in the 1980s. High growth rates in the initial quarters of expansion eliminated the unemployment and underemployment created during the contraction. The economy then returned to grow at the trend of expansion, interrupted by another contraction in 1991.

Chart I-6, US, Percentage Change of GDP in the 1980s

Source: US Bureau of Economic Analysis

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

Chart I-7 provides the rates of growth during the 2000s. Growth rates in the initial eleven quarters of expansion have been relatively lower than during recessions after World War II. As a result, unemployment and underemployment continue at the rate of 19.4 percent of the US labor force (http://cmpassocregulationblog.blogspot.com/2013/02/thirty-one-million-unemployed-or.html) with weak hiring (http://cmpassocregulationblog.blogspot.com/2013/02/recovery-without-hiring-united-states.html).

Chart I-7, US, Percentage Change of GDP in the 2000s

Source: US Bureau of Economic Analysis

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

Characteristics of the four cyclical contractions are provided in Table I-4 with the first column showing the number of quarters of contraction; the second column the cumulative percentage contraction; and the final column the average quarterly rate of contraction. There were two contractions from IQ1980 to IIIQ1980 and from IIIQ1981 to IVQ1982 separated by three quarters of expansion. The drop of output combining the declines in these two contractions is 4.8 percent, which is almost equal to the decline of 4.7 percent in the contraction from IVQ2007 to IIQ2009. In contrast, during the Great Depression in the four years of 1930 to 1933, GDP in constant dollars fell 26.7 percent cumulatively and fell 45.6 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7). The comparison of the global recession after 2007 with the Great Depression is entirely misleading.

Table I-4, US, Number of Quarters, Cumulative Percentage Contraction and Average Percentage Annual Equivalent Rate in Cyclical Contractions

	Number of Quarters	Cumulative Percentage Contraction	Average Percentage Rate
IIQ1953 to IIQ1954	4	-2.5	-0.63
IIIQ1957 to IIQ1958	3	-3.1	-9.0
IQ1980 to IIIQ1980	2	-2.2	-1.1
IIIQ1981 to IVQ1982	4	-2.7	-0.67
IVQ2007 to IIQ2009	6	-4.7	-0.80

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

US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Table I-5, US, Number of Quarters, Cumulative Growth and Average Annual Equivalent Growth Rate in Cyclical Expansions

	Number of Quarters	Cumulative Growth ∆%	Average Annual Equivalent Growth Rate
IIIQ 1954 to IQ1957	11	12.6	4.4
IIQ1958 to IIQ1959	5	10.2	8.1
IIQ1975 to IVQ1976	8	9.5	4.6
IQ1983 to IQ1986	13	19.6	5.7
Average Four Above Expansions			6.2
IIIQ2009 to IVQ2012	14	7.5	2.1

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

US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Chart I-8, US, Real GDP, 1980-1989

Source: US Bureau of Economic Analysis

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

Chart I-9, US, Real GDP, 2007-2012

Source: US Bureau of Economic Analysis

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

As shown in Tables I-4 and I-5 above the loss of real GDP in the US during the contraction was 4.7 percent but the gain in the cyclical expansion has been only 7.5 percent (last row in Table I-5), using all latest revisions. As a result, the level of real GDP in IVQ2012 with the latest estimates is only higher by 2.5 percent than the level of real GDP in IVQ2007. Table I-6 provides in the second column real GDP in billions of chained 2005 dollars. The third column provides the percentage change of the quarter relative to IVQ2007; the fourth column provides the percentage change relative to the prior quarter; and the final fifth column provides the percentage change relative to the same quarter a year earlier. The contraction actually concentrated in two quarters: decline of 2.3 percent in IVQ2008 relative to the prior quarter and decline of 1.3 percent in IQ2009 relative to IVQ2008. The combined fall of GDP in IVQ2008 and IQ2009 was 3.6 percent {[(1-0.023) x (1-0.013) -1]100 = -3.6%}, or {[(IQ2009 $12,711.0)/(IIIQ2008 $13,186.9) – 1]100 = -3.6%}. Those two quarters coincided with the worst effects of the financial crisis. GDP fell 0.1 percent in IIQ2009 but grew 0.4 percent in IIIQ2009, which is the beginning of recovery in the cyclical dates of the NBER. Most of the recovery occurred in five successive quarters from IVQ2009 to IVQ2010 of growth of 1.0 percent in IVQ2009 and equal growth at 0.6 percent in IQ2010, IIQ2010, IIIQ2010 and IVQ2010 for cumulative growth in those five quarters of 3.4 percent, obtained by accumulating the quarterly rates {[(1.01 x 1.006 x 1.006 x 1.006 x 1.006) – 1]100 = 3.4%} or {[(IVQ2010 $13,181.2)/(IIIQ2009 $12,746.7) – 1]100 = 3.4%}. The economy lost momentum already in 2010 growing at 0.6 percent in each quarter, or annual equivalent 2.4 per cent {[(1.006)⁴ – 1]100 = 2.4%}, compared with annual equivalent 4.0 percent in IV2009 {[(1.01)⁴ – 1]100 = 4.0%}. The economy then stalled during the first half of 2011 with growth of 0.0025 percent in IQ2011 and 0.6 percent in IIQ2011 for combined annual equivalent rate of 1.2 percent {(1.00025 x 1.006)²}. The economy grew 0.3 percent in IIIQ2011 for annual equivalent growth of 1.2 percent in the first three quarters {[(1.00025 x 1.006 x 1.003)^4/3 -1]100 = 1.2%}. Growth picked up in IVQ2011 with 1.0 percent relative to IIIQ2011. Growth in a quarter relative to a year earlier in Table I-6 slows from over 2.4 percent during three consecutive quarters from IIQ2010 to IVQ2010 to 1.8 percent in IQ2011, 1.9 percent in IIQ2011, 1.6 percent in IIIQ2011 and 2.0 percent in IVQ2011. As shown below, growth of 1.0 percent in IVQ2011 was partly driven by inventory accumulation. In IQ2012, GDP grew 0.5 percent relative to IVQ2011 and 2.4 percent relative to IQ2011, decelerating to 0.3 percent in IIQ2012 and 2.1 percent relative to IIQ2011 and 0.8 percent in IIIQ2012 and 2.6 percent relative to IIIQ2011 largely because of inventory accumulation and national defense expenditures. Growth was nil in IVQ2012 with 1.6 percent relative to a year earlier but mostly because of 1.55 percentage points of inventory divestment and 1.28 percentage points of reduction of one-time national defense expenditures. Rates of a quarter relative to the prior quarter capture better deceleration of the economy than rates on a quarter relative to the same quarter a year earlier. The critical question for which there is not yet definitive solution is whether what lies ahead is continuing growth recession with the economy crawling and unemployment/underemployment at extremely high levels or another contraction or conventional recession. Forecasts of various sources continued to maintain high growth in 2011 without taking into consideration the continuous slowing of the economy in late 2010 and the first half of 2011. The sovereign debt crisis in the euro area is one of the common sources of doubts on the rate and direction of economic growth in the US but there is weak internal demand in the US with almost no investment and spikes of consumption driven by burning saving because of financial repression forever in the form of zero interest rates.

Table I-6, US, Real GDP and Percentage Change Relative to IVQ2007 and Prior Quarter, Billions Chained 2005 Dollars and ∆%

	Real GDP, Billions Chained 2005 Dollars	∆% Relative to IVQ2007	∆% Relative to Prior Quarter	∆% over Year Earlier
IVQ2007	13,326.0	NA	NA	2.2
IQ2008	13,266.8	-0.4	-0.4	1.6
IIQ2008	13,310.5	-0.1	0.3	1.0
IIIQ2008	13,186.9	-1.0	-0.9	-0.6
IVQ2008	12,883.5	-3.3	-2.3	-3.3
IQ2009	12,711.0	-4.6	-1.3	-4.2
IIQ2009	12,701.0	-4.7	-0.1	-4.6
IIIQ2009	12,746.7	-4.3	0.4	-3.3
IV2009	12,873.1	-3.4	1.0	-0.1
IQ2010	12,947.6	-2.8	0.6	1.9
IIQ2010	13,019.6	-2.3	0.6	2.5
IIIQ2010	13,103.5	-1.7	0.6	2.8
IVQ2010	13,181.2	-1.1	0.6	2.4
IQ2011	13,183.8	-1.1	0.0	1.8
IIQ2011	13,264.7	-0.5	0.6	1.9
IIIQ2011	13,306.9	-0.1	0.3	1.6
IV2011	13,441.0	0.9	1.0	2.0
IQ2012	13,506.4	1.4	0.5	2.4
IIQ2012	13,548.5	1.7	0.3	2.1
IIIQ2012	13,652.5	2.5	0.8	2.6
IVQ2012	13,656.8	2.5	0.0	1.6

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Chart I-10 provides the percentage change of real GDP from the same quarter a year earlier from 1980 to 1989. There were two contractions almost in succession in 1980 and from 1981 to 1983. The expansion was marked by initial high rates of growth as in other recession in the postwar US period during which employment lost in the contraction was recovered. Growth rates continued to be high after the initial phase of expansion.

Chart I-10, Percentage Change of Real Gross Domestic Product from Quarter a Year Earlier 1980-1989

Source: US Bureau of Economic Analysis

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

The experience of recovery after 2009 is not as complete as during the 1980s. Chart I-11 shows the much lower rates of growth in the early phase of the current expansion and how they have sharply declined from an early peak. The US missed the initial high growth rates in cyclical expansions during which unemployment and underemployment are eliminated.

Chart I-11, Percentage Change of Real Gross Domestic Product from Quarter a Year Earlier 2007-2012

Source: US Bureau of Economic Analysis

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

Chart I-12 provides growth rates from a quarter relative to the prior quarter during the 1980s. There is the same strong initial growth followed by a long period of sustained growth.

Chart I-12, Percentage Change of Real Gross Domestic Product from Prior Quarter 1980-1989

Source: US Bureau of Economic Analysis

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

Chart I-13 provides growth rates in a quarter relative to the prior quarter from 2007 to 2012. Growth in the current expansion after IIIQ2009 has not been as strong as in other postwar cyclical expansions.

Chart I-13, Percentage Change of Real Gross Domestic Product from Prior Quarter 2007-2012

Source: US Bureau of Economic Analysis

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

The revised estimates and earlier estimates from IQ2008 to IQ2012 in seasonally adjusted annual equivalent rates are shown in Table I-7. The strongest revision is for IVQ2008 for which the contraction of GDP is revised from minus 6.8 percent to minus 8.9 percent. IQ2009 is also revised from contraction of minus 4.9 percent to minus 6.7 percent but then lowered to contraction of 5.3 percent. There is only minor revision in IIIQ2008 of the contraction of minus 4.0 percent to minus 3.7 percent. Growth of 5.0 percent in IV2009 is revised to 3.8 percent and then increased to 4.0 percent. Growth in IQ2010 is lowered from 3.9 percent to 2.3 percent. Growth in IIQ2010 is upwardly revised to 3.8 percent but then lowered to 2.2 percent. The revisions do not alter the conclusion that the current expansion is much weaker than historical sharp contractions since the 1950s and is now changing into slow growth recession with higher risks of contraction.

Table I-7, US, Quarterly Growth Rates of GDP, % Annual Equivalent SA, Revised and Earlier Estimates

Quarters	Revised Estimate Jul 27, 2012	Revised Estimate Jul 29, 2011	Earlier Estimate
2008
I		-1.8	-0.7
II		1.3	0.6
III		-3.7	-4.0
IV		-8.9	-6.8
2009
I	-5.3	-6.7	-4.9
II	-0.3	-0.7	-0.7
III	1.4	1.7	1.6
IV	4.0	3.8	5.0
2010
I	2.3	3.9	3.7
II	2.2	3.8	1.7
III	2.6	2.5	2.6
IV	2.4	2.3	3.1
2011
I	0.1	0.4	1.9
II	2.5
III	1.3
IV	4.1
2012
I	2.0
II	1.3
III	3.1
IV	0.1

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Aggregate demand, personal consumption expenditures (PCE) and gross private domestic investment (GDI) were much stronger during the expansion phase in IQ1983 to IIQ1984 than in IIIQ2009 to IIIQ2012, as shown in Table I-8. GDI provided the impulse of growth in 1983 and 1984, which has not been the case from 2009 to 2012. The investment decision in the US economy has been frustrated in the current cyclical expansion. Growth of GDP in IVQ2012 at seasonally-adjusted rate of 0.1 percent consisted of positive contribution of 1.47 percentage points of personal consumption expenditures (PCE) and 0.24 percent of net trade (exports less imports) less negative deductions of 0.20 percentage points of gross private domestic investment (GDI) of which 1.55 percentage points of inventory divestment (∆PI) and negative 1.38 percentage points of government consumption expenditures and gross investment (GOV) mostly because of one-time reduction of national defense expenditures of 1.28 percentage points. Growth of GDP in IIIQ2012 of 3.1 percent at seasonally-adjusted annual rate (SAAR) consisted of positive contributions of 1.12 percentage points of personal consumption expenditures (PCE) + 0.85 percentage points of gross domestic investment (GDI) but inventory change adding 0.73 percentage points (∆ PI) plus 0.38 percentage points of net exports (net trade or exports less imports) plus 0.75 percentage points of government consumption expenditures and gross investment (GOV) but national defense expenditures adding 0.64 percentage points. While the contribution of personal consumption expenditures decreased from 1.72 percentage points in IQ2012 to 1.06 percentage points in IIIQ2012 and 1.12 percentage points in IIIQ2012, the contribution of government expenditures increased from deduction of 0.14 percentage points in IIQ2012 to adding 0.75 percentage points in IIIQ2012. The bulk of the contribution of government consisted of 0.64 percentage points of one-time national defense expenditures resulting from growth of national defense expenditures at the seasonally adjusted annual rate (SAAR) of 12.9 percent in IIIQ2012. In IVQ2012, national defense expenditures fell at the SAAR of 22.0 percent, deducting 1.28 percentage points from GDP growth. The contribution of PCE fell from 1.72 percentage points in IQ2012 to 1.06 percentage points in IIQ2012 and 1.12 percentage points in IIIQ2012 as savings decreased but increased to contribution of 1.47 percentage points in IVQ2012. The contribution of GDI decreased from 0.78 percentage points in IQ2012 to 0.09 percentage points in IIQ2012 and 0.85 percentage points in IIIQ2012 with inventory accumulation adding 0.73 percentage points in IIIQ2012 relative to deduction of 0.46 percentage points in IIQ2012. GDI deducted 0.20 percentage points from growth in IVQ2012 mostly because of inventory divestment of 1.55 percentage points. Growth in IVQ2011 was driven mainly by increase in private inventories of 2.53 percentage points. The economy of the United States has lost the dynamic growth impulse of earlier cyclical expansions with mediocre growth resulting from consumption forced by one-time effects of financial repression, national defense expenditures and inventory accumulation.

Table I-8, US, Contributions to the Rate of Growth of GDP in Percentage Points

	GDP	PCE	GDI	∆ PI	Trade	GOV
2012
I	2.0	1.72	0.78	-0.39	0.06	-0.60
II	1.3	1.06	0.09	-0.46	0.23	-0.14
III	3.1	1.12	0.85	0.73	0.38	0.75
IV	0.1	1.47	-0.20	-1.55	0.24	-1.38
2011
I	0.1	2.22	-0.68	-0.54	0.03	-1.49
II	2.5	0.70	1.40	0.01	0.54	-0.16
III	1.3	1.18	0.68	-1.07	0.02	-0.60
IV	4.1	1.45	3.72	2.53	-0.64	-0.43
2010
I	2.3	1.72	2.13	2.23	-0.83	-0.69
II	2.2	1.81	1.65	0.07	-1.81	0.59
III	2.6	1.75	1.87	1.97	-0.95	-0.06
IV	2.4	2.84	-0.75	-1.61	1.24	-0.94
2009
I	-5.3	-1.06	-7.02	-2.29	2.45	0.37
II	-0.3	-1.21	-3.52	-1.03	2.47	1.94
III	1.4	1.50	-0.14	0.19	-0.70	0.79
IV	4.0	-0.01	3.85	4.55	-0.05	0.23
1982
I	-6.4	1.62	-7.50	-5.47	-0.49	-0.03
II	2.2	0.90	-0.05	2.35	0.84	0.50
III	-1.5	1.92	-0.72	1.15	-3.31	0.57
IV	0.3	4.64	-5.66	-5.48	-0.10	1.44
1983
I	5.1	2.54	2.20	0.94	-0.30	0.63
II	9.3	5.22	5.87	3.51	-2.54	0.75
III	8.1	4.66	4.30	0.60	-2.32	1.48
IV	8.5	4.20	6.84	3.09	-1.17	-1.35
1984
I	8.0	2.35	7.15	5.07	-2.37	0.86
II	7.1	3.75	2.44	-0.30	-0.89	1.79
III	3.9	2.02	1.67	0.21	-0.36	0.62
IV	3.3	3.38	-1.26	-2.50	-0.58	1.75
1985
I	3.8	4.34	-2.38	-2.94	0.91	0.95
II	3.4	2.35	1.24	0.35	-2.01	1.85
III	6.4	4.91	-0.68	-0.16	-0.01	2.18
IV	3.1	0.54	2.72	1.45	-0.68	0.50

Note: PCE: personal consumption expenditures; GDI: gross private domestic investment; ∆ PI: change in private inventories; Trade: net exports of goods and services; GOV: government consumption expenditures and gross investment; – is negative and no sign positive

GDP: percent change at annual rate; percentage points at annual rates

Source: US Bureau of Economic Analysis

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

The Bureau of Economic Analysis (BEA) (http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp4q12_2nd.pdf 1) explains growth of GDP in IVQ2012 as follows:

“The increase in real GDP in the fourth quarter primarily reflected positive contributions from personal consumption expenditures (PCE), nonresidential fixed investment, and residential fixed investment that were partly offset by negative contributions from private inventory investment, federal government spending, exports, and state and local government spending. Imports, which are a subtraction in the calculation of GDP, decreased.

The deceleration in real GDP in the fourth quarter primarily reflected downturns in private inventory investment, in federal government spending, in exports, and in state and local government spending that were partly offset by an upturn in nonresidential fixed investment, a larger decrease in imports, and an acceleration in PCE. “

There are positive contributions to growth in IVQ2012 shown in Table I-9:

· Personal consumption expenditures (PCE) growing at 2.1 percent with increasing consumption of durable goods

· Residential fixed investment (RFI) growing at 17.5 percent

· Nonresidential fixed investment growing 9.7 percent

· Decline of imports, which are a deduction of growth, at 4.5 percent

· Exports falling at a rate of 3.9 percent lower than the rate of decline of 4.5 percent of imports

There were negative contributions in IVQ2012:

· Federal government expenditures declining at 14.8 percent mostly because of decline of national defense expenditures at 22.0 percent that deducted 1.28 percentage points from GDP growth

· Private inventory divestment that deducted 1.55 percentage points from GDP growth

· Reduction of consumption expenditures and gross investment of state and local government at 1.3 percent

The BEA explains deceleration in real GDP in IVQ2012 by:

· Contraction of government expenditures in consumption and gross investment at 14.8 percent mostly primarily because of contraction of national defense expenditures at 22.0 percent for deduction of 1.28 percentage points from GDP growth

· Subtraction of 0.20 percentage points of growth by gross private domestic investment mostly because of inventory divestment of 1.55 percentage points

Table I-9, US, Percentage Seasonally Adjusted Annual Equivalent Quarterly Rates of Increase, %

	IVQ 2011	IQ 2012	IIQ 2012	IIIQ 2012	IVQ 2012
GDP	4.1	2.0	1.3	3.1	0.1
PCE	2.0	2.4	1.5	1.6	2.1
Durable Goods	13.9	11.5	-0.2	8.9	13.8
NRFI	9.5	7.5	3.6	-1.8	9.7
RFI	12.1	20.5	8.5	13.5	17.5
Exports	1.4	4.4	5.3	1.9	-3.9
Imports	4.9	3.1	2.8	-0.6	-4.5
GOV	-2.2	-3.0	-0.7	3.9	-6.9
Federal GOV	-4.4	-4.2	-0.2	9.5	-14.8
National Defense	-10.6	-7.1	-0.2	12.9	-22.0
Cont to GDP Growth % Points	-0.60	-0.39	-0.01	0.64	-1.28
State/Local GOV	-0.7	-2.2	-1.0	0.3	-1.3
∆ PI (PP)	2.53	-0.39	-0.46	0.73	-1.55
Final Sales of Domestic Product	1.5	2.4	1.7	2.4	1.7
Gross Domestic Purchases	4.6	1.8	1.0	2.6	-0.1
Prices Gross Domestic Purchases	0.9	2.5	0.7	1.4	1.3
Prices of GDP	0.4	2.0	1.6	2.7	0.9
Prices of GDP Excluding Food and Energy	0.9	2.6	1.4	1.3	1.2
Prices of PCE	1.1	2.5	0.7	1.6	1.5
Prices of PCE Excluding Food and Energy	1.3	2.2	1.7	1.1	0.9
Prices of Market Based PCE	1.2	2.5	0.6	1.9	1.5
Prices of Market Based PCE Excluding Food and Energy	1.5	2.2	1.8	1.3	0.9
Real Disposable Personal Income*	0.3	0.2	1.1	1.6	3.2
Personal Savings As % Disposable Income	3.4	3.6	3.8	3.6	4.6

Note: PCE: personal consumption expenditures; NRFI: nonresidential fixed investment; RFI: residential fixed investment; GOV: government consumption expenditures and gross investment; ∆ PI: change in

private inventories; GDP - ∆ PI: final sales of domestic product; PP: percentage points; Personal savings rate: savings as percent of disposable income

*Percent change from quarter one year ago

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Percentage shares of GDP are shown in Table I-10. PCE is equivalent to 71.0 percent of GDP and is under pressure with stagnant real disposable income, high levels of unemployment and underemployment and higher savings rates than before the global recession, temporarily interrupted by financial repression in the form of zero interest rates. Gross private domestic investment is also growing slowly even with about two trillions of dollars in cash holdings by companies. In a slowing world economy, it may prove more difficult to grow exports faster than imports to generate higher growth. Bouts of risk aversion revalue the dollar relative to most currencies in the world as investors increase their holdings of dollar-denominated assets.

Table I-10, US, Percentage Shares of GDP, %

	IVQ2012
GDP	100.0
PCE	71.0
Goods	24.2
Durable	7.9
Nondurable	16.3
Services	46.8
Gross Private Domestic Investment	13.1
Fixed Investment	13.0
NRFI	10.4
Structures	3.0
Equipment & Software	7.5
RFI	2.6
Change in Private Inventories	0.1
Net Exports of Goods and Services	-3.4
Exports	13.8
Goods	9.7
Services	4.1
Imports	17.2
Goods	14.3
Services	2.8
Government	19.2
Federal	7.6
National Defense	5.0
Nondefense	2.6
State and Local	11.7

PCE: personal consumption expenditures; NRFI: nonresidential fixed investment; RFI: residential fixed investment

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Table I-11 shows percentage point (PP) contributions to the annual levels of GDP growth in the earlier recessions 1958-1959, 1975-1976, 1982-1983 and 2009, 2010, 2011 and 2012. The data incorporate the new revisions released by the BEA on Jul 29, 2011 and Jul 27, 2012 and the second estimate of IVQ2012 GDP released on Feb 28, 2013. The most striking contrast is in the rates of growth of annual GDP in the expansion phases of 7.2 percent in 1959, 4.5 percent in 1983 followed by 7.2 percent in 1984 and 4.1 percent in 1985 but only 2.4 percent in 2010 after six consecutive quarters of growth, 1.8 percent in 2011 after ten consecutive quarters of expansion and 2.2 percent in 2012 after 14 quarters of expansion. Annual levels also show much stronger growth of PCEs in the expansions after the earlier contractions than in the expansion after the global recession of 2007. Gross domestic investment was much stronger in the earlier expansions than in 2010, 2011 and 2012.

Table I-11, US, Percentage Point Contributions to the Annual Growth Rate of GDP

	GDP	PCE	GDI	∆ PI	Trade	GOV
1958	-0.9	0.54	-1.25	-0.18	-0.89	0.70
1959	7.2	3.61	2.80	0.86	0.00	0.76
1975	-0.2	1.40	-2.98	-1.27	0.89	0.48
1976	5.4	3.51	2.84	1.41	-1.08	0.10
1982	-1.9	0.86	-2.55	-1.34	-0.60	0.35
1983	4.5	3.65	-1.45	0.29	-1.35	0.76
1984	7.2	3.43	4.63	1.95	-1.58	0.70
1985	4.1	3.32	-0.17	-1.06	-0.42	1.41
2009	-3.1	-1.36	-3.59	-0.78	1.14	0.74
2010	2.4	1.28	1.50	1.52	-0.52	0.14
2011	1.8	1.79	0.62	-0.14	0.07	-0.67
2012	2.2	1.33	1.17	0.16	0.03	-0.34

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Table I-12 provides more detail of the contributions to growth of GDP from 2009 to 2012 using annual-level data. PCEs contributed 1.28 PPs to GDP growth in 2010 of which 0.82 percentage points (PP) in goods and 0.46 PP in services. Gross private domestic investment (GPDI) deducted 3.59 PPs of GDP growth in 2009 of which -2.80 PPs by fixed investment and -0.78 PPs of inventory change (∆PI) and added 1.50 PPs of GPDI in 2010 of which minus 0.03 PPs of fixed investment and 1.52 PPs of inventory accumulation (∆PI). Trade, or exports of goods and services net of imports, contributed 1.14 PPs in 2009 of which exports deducted 1.14 PPs and imports added 2.28 PPs. In 2010, trade deducted 0.52 PPs with exports contributing 1.29 PPs and imports deducting 1.81 PPs likely benefitting from dollar devaluation. In 2009, government added 0.74 PP of which 0.46 PPs by the federal government and 0.28 PPs by state and local government; in 2010, government added 0.14 PPs of which 0.37 PPs by the federal government with state and local government deducting 0.23 PPs. The final two columns of Table I-12 provide the estimate for 2011. PCE contributed 1.79 PPs in 2011 after 1.28 PPs in 2010. The contribution of PCE fell to 1.33 percentage points in 2012. The breakdown into goods and services is similar but with declining contributions in 2012 of goods, 0.74 PPs, and services, 0.60 PPs. Gross private domestic investment contributed 1.50 PPs in 2010 with addition of 1.52 PPs of change of private inventories but the contribution of gross private domestic investment was only 0.62 PPs in 2011. The contribution of GPDI in 2012 increased to 1.17 PPs with fixed investment increasing its contribution to 1.03 PPs and residential investment contributing 0.27 PPs for the first time since 2009. Net exports of goods and services contributed marginally in 2011 with 0.07 PPs and 0.03 PPs in 2012. The contribution of exports fell from 1.29 PPs in 2010 and 0.87 PPs in 2011 to only 0.46 PPs in 2012. Government deducted 0.67 PPs in 2011 and 0.34 PPs in 2012. The expansion since IIIQ2009 has been characterized by weak contributions of aggregate demand, which is the sum of personal consumption expenditures plus gross private domestic investment. The US did not recover strongly from the global recessions as typical in past cyclical expansions. Recoveries tend to be more sluggish as expansions mature. At the margin in IVQ2011 the acceleration of expansion was driven by inventory accumulation instead of aggregate demand of consumption and investment. Growth of PCE was partly the result of burning savings because of financial repression, which may not be sustainable in the future.

Table I-12, US, Contributions to Growth of Gross Domestic Product in Percentage Points

	2009	2010	2011	2012
GDP Growth ∆%	-3.1	2.4	1.8	2.2
Personal Consumption Expenditures (PCE)	-1.36	1.28	1.79	1.33
Goods	-0.69	0.82	0.89	0.74
Durable	-0.41	0.45	0.53	0.58
Nondurable	-0.28	0.37	0.36	0.15
Services	-0.67	0.46	0.90	0.60
Gross Private Domestic Investment (GPDI)	-3.59	1.50	0.62	1.17
Fixed Investment	-2.80	-0.03	0.76	1.03
Nonresidential	-2.08	0.07	0.80	0.76
Structures	-0.85	-0.50	0.07	0.27
Equipment, software	-1.23	0.56	0.72	0.49
Residential	-0.73	-0.09	-0.03	0.27
Change Private Inventories	-0.78	1.52	-0.14	0.14
Net Exports of Goods and Services	1.14	-0.52	0.07	0.03
Exports	-1.14	1.29	0.87	0.46
Goods	-1.05	1.11	0.65	0.41
Services	-0.10	0.18	0.22	0.05
Imports	2.28	-1.81	-0.80	-0.43
Goods	2.19	-1.74	-0.72	-0.31
Services	0.09	-0.07	-0.08	-0.12
Government Consumption Expenditures and Gross Investment	0.74	0.14	-0.67	-0.34
Federal	0.46	0.37	-0.23	-0.18
National Defense	0.31	0.17	-0.15	-0.17
Nondefense	0.16	0.20	-0.09	-0.01
State and Local	0.28	-0.23	-0.43	-0.16

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Manufacturing jobs increased 4,000 in Jan 2013 relative to Dec 2012, seasonally adjusted but decreased 90,000 in Jan 2013 relative to Dec 2012, not seasonally adjusted because of the weaker economy and international trade together with the yearly adjustment of labor statistics. In the six months ending in Jan 2013, United States national industrial production accumulated increase of 0.7 percent at the annual equivalent rate of 1.4 percent, which is lower than 2.1 percent growth in 12 months. Capacity utilization for total industry in the United States decreased 0.2 percentage points in Jan 2013 to 79.1 percent from 79.3 percent in Dec, which is 1.1 percentage points lower than the long-run average from 1972 to 2012. Manufacturing decreased 0.4 percent in Jan 2013 seasonally adjusted, increasing 2.0 percent not seasonally adjusted in 12 months, and increased 0.9 percent in the six months ending in Jan 2013 or at the annual equivalent rate of 1.8 percent. Table I-13 provides national income by industry without capital consumption adjustment (WCCA). “Private industries” or economic activities have share of 86.3 percent in US national income in IIQ2012 and 86.4 percent in IIIQ2012. Most of US national income is in the form of services. In Jan 2013, there were 132.705 million nonfarm jobs NSA in the US, according to estimates of the establishment survey of the Bureau of Labor Statistics (BLS) (http://www.bls.gov/news.release/empsit.nr0.htm Table B-1 http://cmpassocregulationblog.blogspot.com/2013/02/thirty-one-million-unemployed-or.html). Total private jobs of 110.965 million NSA in Jan 2013 accounted for 82.6 percent of total nonfarm jobs of 132.705 million, of which 11.846 million, or 10.7 percent of total private jobs and 8.9 percent of total nonfarm jobs, were in manufacturing. Private service-producing jobs were 92.929 million NSA in Jan 2013, or 70.0 percent of total nonfarm jobs and 83.8 percent of total private-sector jobs. Manufacturing has share of 11.2 percent in US national income in IIQ2011 and 11.1 percent in IIIQ2012, as shown in Table I-13. Most income in the US originates in services. Subsidies and similar measures designed to increase manufacturing jobs will not increase economic growth and employment and may actually reduce growth by diverting resources away from currently employment-creating activities because of the drain of taxation.

Table I-13, US, National Income without Capital Consumption Adjustment by Industry, Seasonally Adjusted Annual Rates, Billions of Dollars, % of Total

	SAAR IIQ2012	% Total	SAAR IIIQ2012	% Total
National Income WCCA	13,833.6	100.0	13,976.7	100.0
Domestic Industries	13,586.3	98.2	13,733.6	98.3
Private Industries	11,933.2	86.3	12,075.0	86.4
Agriculture	131.7	0.9	138.6	1.0
Mining	208.3	1.5	205.3	1.5
Utilities	214.6	1.6	216.6	1.6
Construction	583.7	4.2	589.3	4.2
Manufacturing	1548.1	11.2	1548.9	11.1
Durable Goods	894.3	6.5	892.8	6.4
Nondurable Goods	653.8	4.7	656.1	4.7
Wholesale Trade	853.5	6.2	837.8	6.0
Retail Trade	951.9	6.9	957.4	6.9
Transportation & WH	414.5	3.0	415.5	3.0
Information	499.1	3.6	504.4	3.6
Finance, Insurance, RE	2237.5	16.2	2330.6	16.7
Professional, BS	1971.7	14.3	2003.4	14.3
Education, Health Care	1378.1	10.0	1385.6	9.9
Arts, Entertainment	540.4	3.9	539.4	3.9
Other Services	400.0	2.9	402.3	2.9
Government	1653.0	11.9	1658.6	11.9
Rest of the World	247.3	1.8	243.1	1.7

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

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

IA1. Contracting Real Private Fixed Investment. The United States economy has grown at the average yearly rate of 3 percent per year and 2 percent per year in per capita terms from 1870 to 2010, as measured by Lucas (2011May). An important characteristic of the economic cycle in the US has been rapid growth in the initial phase of expansion after recessions. In the cyclical expansions since 1950, US GDP has grown at the average rate of 6.2 percent, moving the economy back to long-term trend. Growth of GDP has been only 2.1 percent on average during the current cyclical expansion from IIIQ2009 to IVQ2012. Weakness in the current cyclical expansion has occurred in growth, labor markets and wealth, as analyzed in IB Collapse of United States Dynamism of Income Growth and Employment Creation incorporating additional data on private investment (http://cmpassocregulationblog.blogspot.com/2013/02/recovery-without-hiring-united-states.html). Inferior performance of the US economy and labor markets is the critical current issue of analysis and policy design. Table IA1-1 provides quarterly seasonally adjusted annual rates (SAAR) of growth of private fixed investment for the recessions of the 1980s and the current economic cycle. In the cyclical expansion beginning in IQ1983 (http://www.nber.org/cycles.html), real private fixed investment in the United States grew at the average annual rate of 15.3 percent in the first eight quarters from IQ1983 to IVQ1984. Growth rates fell to an average of 1.6 percent in the following eight quarters from IQ1985 to IVQ1986. There were only three quarters of contraction of private fixed investment from IQ1983 to IVQ1986. There is quite different behavior of private fixed investment in the fourteen quarters of cyclical expansion from IIIQ2009 to IVQ2012. The average annual growth rate in the first eight quarters of expansion from IIIQ2009 to IIQ2011 was 2.5 percent, which is significantly lower than 15.3 percent in the first eight quarters of expansion from IQ1983 to IVQ1984. There is only strong growth of private fixed investment in the four quarters of expansion from IIQ2011 to IQ2012 at the average annual rate of 11.9 percent. Growth has fallen from the SAAR of 15.5 percent in IIIQ2011 to 0.9 percent in IIIQ2012. Sudeep Reddy and Scott Thurm, writing on “Investment falls off a cliff,” on Nov 18, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324595904578123593211825394.html?mod=WSJPRO_hpp_LEFTTopStories) analyze the decline of private investment in the US and inform that a review by the Wall Street Journal of filing and conference calls finds that 40 of the largest publicly traded corporations in the US have announced intentions to reduce capital expenditures in 2012. The SAAR of real private fixed investment jumped to 11.2 percent in IVQ2012.

Table IA1-1, US, Quarterly Growth Rates of Real Private Fixed Investment, % Annual Equivalent SA

Q	1981	1982	1983	1984	2008	2009	2010
I	3.0	-11.6	9.0	13.1	-8.3	-30.2	-0.9
II	2.7	-13.3	16.4	17.5	-5.2	-18.5	14.5
III	0.0	-10.7	26.1	8.8	-12.3	-3.1	-1.0
IV	-1.4	0.6	25.6	7.4	-25.2	-6.0	7.6
				1985			2011
I				3.1			-1.3
II				5.1			12.4
III				-3.2			15.5
IV				7.8			10.0
				1986			2012
I				0.6			9.8
II				-1.0			4.5
III				-2.2			0.9
IV				2.7			11.2

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Chart IA1-1, US, Real Private Fixed Investment, Seasonally-Adjusted Annual Rates Percent Change from Prior Quarter, 1981-1986

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

Chart IA1-2, US, Real Private Fixed Investment, Seasonally-Adjusted Annual Rates Percent Change from Prior Quarter, 2007-2012

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

Table IA1-2, US, Real Private Fixed Investment and Percentage Change Relative to IVQ2007 and Prior Quarter, Billions of Chained 2005 Dollars and ∆%

	Real PFI, Billions Chained 2005 Dollars	∆% Relative to IVQ2007	∆% Relative to Prior Quarter	∆% over Year Earlier
IVQ2007	2111.5	NA	-1.2	-1.0
IQ2008	2066.4	-2.1	-2.1	-2.9
IIQ2008	2039.1	-3.4	-1.3	-5.0
IIIQ2008	1973.5	-6.5	-3.2	-7.7
IV2008	1835.4	-13.1	-7.0	-13.1
IQ2009	1677.3	-20.6	-8.6	-18.8
IIQ2009	1593.7	-24.5	-5.0	-21.8
IIIQ2009	1581.2	-25.1	-0.8	-19.9
IVQ2009	1556.8	-26.3	-1.5	-15.2
IQ2010	1553.1	-26.4	-0.2	-7.4
IIQ2010	1606.5	-23.9	3.4	0.8
IIIQ2010	1602.7	-24.1	-0.2	1.4
IVQ2010	1632.3	-22.7	1.8	4.8
IQ2011	1627.0	-22.9	-0.3	4.8
IIQ2011	1675.4	-20.7	3.0	4.3
IIIQ2011	1736.8	-17.7	3.7	8.4
IVQ2011	1778.7	-15.8	2.4	9.0
IQ2012	1820.6	-13.8	2.4	11.9
IIQ2012	1840.6	-12.8	1.1	9.9
IIIQ2012	1844.8	-12.6	0.2	6.2
IVQ2012	1894.4	-10.3	2.7	6.5

PFI: Private Fixed Investment

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Chart IA1-3, US, Real Private Fixed Investment, Billions of Chained 2005 Dollars, IQ2007 to IVQ2012

Source: US Bureau of Economic Analysis

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

Chart IA1-4, US, Real Gross Private Domestic Investment, Billions of Chained 2005 Dollars at Seasonally Adjusted Annual Rate, 1980-1986

Source: US Bureau of Economic Analysis

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

Chart IA1-5, US, Real Gross Private Domestic Investment, Billions of Chained 2005 Dollars at Seasonally Adjusted Annual Rate, 2006-2012

Source: US Bureau of Economic Analysis

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

Table IA1-3 provides percentage shares in GDP of gross private domestic investment and its components in IVQ2012, IQ2006 and IQ2000. The share of gross private domestic investment in GDP has fallen from 17.4 percent in IQ2000 and 17.8 percent in IQ2006 to 13.1 percent in IVQ2012. There are declines in percentage shares in GDP of all components with sharp reduction of residential investment from 4.6 percent in IQ2000 and 6.2 percent in IQ2006 to 2.6 percent in IVQ2012. The share of fixed investment in GDP fell from 17.2 percent in IQ2000 and 17.3 percent in IQ2006 to 13.0 percent in IVQ2012.

Table IA1-3, Percentage Shares of Gross Private Domestic Investment and Components in Gross Domestic Product, % of GDP, IIIQ2012

	IVQ2012	IQ2006	IQ2000
Gross Private Domestic Investment	13.1	17.8	17.4
Fixed Investment	13.0	17.3	17.2
Nonresidential	10.4	11.1	12.6
Structures	3.0	3.0	3.1
Equipment and Software	7.5	8.1	9.5
Residential	2.6	6.2	4.6
Change in Private Inventories	0.1	0.5	0.2

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Broader perspective is provided in Chart IA1-6 with the percentage share of gross private domestic investment in GDP in annual data from 1929 to 2012. There was sharp drop during the current economic cycle with almost no recovery in contrast with sharp recovery after the recessions of the 1980s.

Chart IA1-6, US, Percentage Share of Gross Domestic Investment in Gross Domestic Product, Annual, 1929-2012

Source: US Bureau of Economic Analysis

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

Chart IA1-7 provides percentage shares of private fixed investment in GDP with annual data from 1929 to 2012. The sharp contraction after the recessions of the 1980s was followed by sustained recovery while the sharp drop in the current economic cycle has not been recovered.

Chart IA1-7, US, Percentage Share of Private Fixed Investment in Gross Domestic Product, Annual, 1929-2012

Source: US Bureau of Economic Analysis

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

Chart IA1-8 provides percentage shares in GDP of nonresidential investment from 1929 to 2012. There is again recovery from sharp contraction in the 1980s but inadequate recovery in the current economic cycle.

Chart IA1-8, US, Percentage Share of Nonresidential Investment in Gross Domestic Product, Annual, 1929-2012

Source: US Bureau of Economic Analysis

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

Chart IA1-9 provides percentage shares of business equipment and software in GDP with annual data from 1929 to 2012. There is again inadequate recovery in the current economic cycle.

Chart IA1-9, US, Percentage Share of Business Equipment and Software in Gross Domestic Product, Annual, 1929-2012

Source: US Bureau of Economic Analysis

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

Chart IA1-10 provides percentage shares of residential investment in GDP with annual data from 1929 to 2012. The salient characteristic of Chart IA1-10 is the vertical increase of the share of residential investment in GDP up to 2006 and subsequent collapse.

Chart IA1-10, US, Percentage Share of Residential Investment in Gross Domestic Product, Annual, 1929-2012

Source: US Bureau of Economic Analysis

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

Finer detail is provided by the quarterly share of residential investment in GDP from 1979 to 2012 in Chart IA1-11. There was protracted growth of that share that accelerated sharply into 2006 followed with nearly vertical drop. The explanation of the sharp contraction of United States housing can probably be found in the origins of the financial crisis and global recession. Let V(T) represent the value of the firm’s equity at time T and B stand for the promised debt of the firm to bondholders and assume that corporate management, elected by equity owners, is acting on the interests of equity owners. Robert C. Merton (1974, 453) states:

“On the maturity date T, the firm must either pay the promised payment of B to the debtholders or else the current equity will be valueless. Clearly, if at time T, V(T) > B, the firm should pay the bondholders because the value of equity will be V(T) – B > 0 whereas if they do not, the value of equity would be zero. If V(T) ≤ B, then the firm will not make the payment and default the firm to the bondholders because otherwise the equity holders would have to pay in additional money and the (formal) value of equity prior to such payments would be (V(T)- B) < 0.”

Pelaez and Pelaez (The Global Recession Risk (2007), 208-9) apply this analysis to the US housing market in 2005-2006 concluding:

“The house market [in 2006] is probably operating with low historical levels of individual equity. There is an application of structural models [Duffie and Singleton 2003] to the individual decisions on whether or not to continue paying a mortgage. The costs of sale would include realtor and legal fees. There could be a point where the expected net sale value of the real estate may be just lower than the value of the mortgage. At that point, there would be an incentive to default. The default vulnerability of securitization is unknown.”

There are multiple important determinants of the interest rate: “aggregate wealth, the distribution of wealth among investors, expected rate of return on physical investment, taxes, government policy and inflation” (Ingersoll 1987, 405). Aggregate wealth is a major driver of interest rates (Ibid, 406). Unconventional monetary policy, with zero fed funds rates and flattening of long-term yields by quantitative easing, causes uncontrollable effects on risk taking that can have profound undesirable effects on financial stability. Excessively aggressive and exotic monetary policy is the main culprit and not the inadequacy of financial management and risk controls.

The net worth of the economy depends on interest rates. In theory, “income is generally defined as the amount a consumer unit could consume (or believe that it could) while maintaining its wealth intact” (Friedman 1957, 10). Income, Y, is a flow that is obtained by applying a rate of return, r, to a stock of wealth, W, or Y = rW (Ibid). According to a subsequent restatement: “The basic idea is simply that individuals live for many years and that therefore the appropriate constraint for consumption decisions is the long-run expected yield from wealth r*W. This yield was named permanent income: Y* = r*W” (Darby 1974, 229), where * denotes permanent. The simplified relation of income and wealth can be restated as:

W = Y/r (1)

Equation (1) shows that as r goes to zero, r →0, W grows without bound, W→∞.

Lowering the interest rate near the zero bound in 2003-2004 caused the illusion of permanent increases in wealth or net worth in the balance sheets of borrowers and also of lending institutions, securitized banking and every financial institution and investor in the world. The discipline of calculating risks and returns was seriously impaired. The objective of monetary policy was to encourage borrowing, consumption and investment but the exaggerated stimulus resulted in a financial crisis of major proportions as the securitization that had worked for a long period was shocked with policy-induced excessive risk, imprudent credit, high leverage and low liquidity by the incentive to finance everything overnight at close to zero interest rates, from adjustable rate mortgages (ARMS) to asset-backed commercial paper of structured investment vehicles (SIV).

The consequences of inflating liquidity and net worth of borrowers were a global hunt for yields to protect own investments and money under management from the zero interest rates and unattractive long-term yields of Treasuries and other securities. Monetary policy distorted the calculations of risks and returns by households, business and government by providing central bank cheap money. Short-term zero interest rates encourage financing of everything with short-dated funds, explaining the SIVs created off-balance sheet to issue short-term commercial paper to purchase default-prone mortgages that were financed in overnight or short-dated sale and repurchase agreements (Pelaez and Pelaez, Financial Regulation after the Global Recession, 50-1, Regulation of Banks and Finance, 59-60, Globalization and the State Vol. I, 89-92, Globalization and the State Vol. II, 198-9, Government Intervention in Globalization, 62-3, International Financial Architecture, 144-9). ARMS were created to lower monthly mortgage payments by benefitting from lower short-dated reference rates. Financial institutions economized in liquidity that was penalized with near zero interest rates. There was no perception of risk because the monetary authority guaranteed a minimum or floor price of all assets by maintaining low interest rates forever or equivalent to writing an illusory put option on wealth. Subprime mortgages were part of the put on wealth by an illusory put on house prices. The housing subsidy of $221 billion per year created the impression of ever increasing house prices. The suspension of auctions of 30-year Treasuries was designed to increase demand for mortgage-backed securities, lowering their yield, which was equivalent to lowering the costs of housing finance and refinancing. Fannie and Freddie purchased or guaranteed $1.6 trillion of nonprime mortgages and worked with leverage of 75:1 under Congress-provided charters and lax oversight. The combination of these policies resulted in high risks because of the put option on wealth by near zero interest rates, excessive leverage because of cheap rates, low liquidity because of the penalty in the form of low interest rates and unsound credit decisions because the put option on wealth by monetary policy created the illusion that nothing could ever go wrong, causing the credit/dollar crisis and global recession (Pelaez and Pelaez, Financial Regulation after the Global Recession, 157-66, Regulation of Banks, and Finance, 217-27, International Financial Architecture, 15-18, The Global Recession Risk, 221-5, Globalization and the State Vol. II, 197-213, Government Intervention in Globalization, 182-4).

Chart IA1-11, US, Percentage Share of Residential Investment in Gross Domestic Product, Quarterly, 1979-2012

Source: US Bureau of Economic Analysis

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

Table IA1-4 provides the seasonally-adjusted annual rate of real GDP percentage change and contributions in percentage points in annual equivalent rate of gross domestic investment (GDI), real private fixed investment (PFI), nonresidential investment (NRES), business equipment and software (BES), residential investment (RES) and change in inventories (∆INV) for the cyclical expansions from IQ1983 to IVQ1985 and from IIIQ2009 to IVQ2012. GDI provided strong percentage points contributions to GDP growth in the critical first year of expansion in 1983 and also in several quarters in 1984 and 1985 while it has been muted in the cyclical expansion since IIIQ2009 with contributions largely only from IQ2010 to IVQ2011, deducting 0.20 percentage points in IVQ2012 most because of minus 1.55 percentage points of inventory accumulation while private fixed investment contributed 1.36 percentage points, nonresidential investment 0.96 percentage points, business equipment and software 0.79 percentage points and residential investment 0.40 percentage points. Much of the strong performance of GDI in the cyclical expansion after IQ1983 originated in contributions by real private fixed investment (PFI). Nonresidential investment also contributed strongly to growth in the expansion of the 1980s but has been muted in the current expansion. The contribution of business equipment and software collapsed to negative 0.19 percentage points in IIIQ2012 as business scales down investment but rebounded with 0.79 percentage points in IVQ2012. Residential investment (RES) was relatively strong in 1983 but was muted in following quarters and it only contributed significantly in the current cycle to growth of GDP in the four quarters of 2012.

Table IA1-4, US, Contributions to the Rate of Growth of Real GDP in Percentage Points

	GDP	GDI	PFI	NRES	BES	RES	∆INV
2012
I	2.0	0.78	1.18	0.74	0.39	0.43	-0.39
II	1.3	0.09	0.56	0.36	0.35	0.19	-0.46
III	3.1	0.85	0.12	-0.19	-0.19	0.31	0.73
IV	0.1	-0.20	1.36	0.96	0.79	0.40	-1.55
2011
I	0.1	-0.68	-0.14	-0.11	0.72	-0.03	-0.54
II	2.5	1.40	1.39	1.30	0.53	0.09	0.01
III	1.3	0.68	1.75	1.71	1.20	0.03	-1.07
IV	4.1	3.72	1.19	0.93	0.62	0.26	2.53
2010
I	2.3	2.13	-0.10	0.20	0.90	-0.30	2.23
II	2.2	1.65	1.58	1.07	0.76	0.51	0.07
III	2.6	1.87	-0.10	0.70	0.76	-0.80	1.97
IV	2.4	-0.75	0.87	0.83	0.60	0.03	-1.61
2009
I	-5.3	-7.02	-4.73	-3.54	-2.16	-1.18	-2.29
II	-0.3	-3.52	-2.49	-1.86	-0.54	-0.63	-1.03
III	1.4	-0.14	-0.32	-0.73	0.25	0.40	0.19
IV	4.0	3.85	-0.69	-0.57	0.40	-0.12	4.55
1982
I	-6.4	-7.50	-2.04	-1.25	-0.47	-0.79	-5.47
II	2.2	-0.05	-2.40	-1.98	-1.19	-0.42	2.35
III	-1.5	-0.72	-1.87	-1.82	-0.57	-0.04	1.15
IV	0.3	-5.66	-0.18	-1.09	-0.60	0.92	-5.48
1983
I	5.1	2.20	1.26	-1.02	-0.18	2.28	0.94
II	9.3	5.87	2.36	0.52	1.40	1.84	3.51
III	8.1	4.30	3.70	2.02	1.62	1.68	0.60
IV	8.5	6.84	3.76	2.98	2.50	0.77	3.09
1984
I	8.0	7.15	2.08	1.55	0.57	0.52	5.07
II	7.1	2.44	2.74	2.39	1.50	0.35	-0.30
III	3.9	1.67	1.45	1.62	1.05	-0.17	0.21
IV	3.3	-1.26	1.24	1.22	1.03	0.02	-2.50
1985
I	3.8	-2.38	0.57	0.62	-0.16	-0.06	-2.94
II	3.4	1.24	0.88	0.74	0.75	0.14	0.35
III	6.4	-0.68	-0.53	-0.75	-0.37	0.23	-0.16
IV	3.1	2.72	1.27	0.85	0.62	0.42	1.45

GDP: Gross Domestic Product; GDI: Gross Domestic Investment; PFI: Private Fixed Investment; NRES: Nonresidential; BES: Business Equipment and Software; RES: Residential; ∆INV: Change in Private Inventories.

GDI = PFI + ∆INV, may not add exactly because of errors of rounding.

GDP: seasonally-adjusted annual equivalent rate of growth in a quarter; components: percentage points at annual rate.

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

IB Stagnating Real Disposable Income and Consumption Expenditures. There are waves of changes in personal income and expenditures in Table IIB-1 that correspond somewhat to inflation waves observed worldwide (http://cmpassocregulationblog.blogspot.com/2013/02/world-inflation-waves-united-states.html) because of the influence through price indexes. Data are distorted in Nov and Dec 2012 by the rush to realize income of all forms in anticipation of tax increases beginning in Jan 2013. There is major distortion in Jan 2013 because of higher contributions in payrolls to government social insurance that caused sharp reduction in personal income and disposable personal income. In the first wave in Jan-Apr 2011 with relaxed risk aversion, nominal personal income (NPI) increased at the annual equivalent rate of 8.4 percent, nominal disposable personal income (NDPI) at 5.8 percent and nominal personal consumption expenditures (NPCE) at 6.5 percent. Real disposable income (RDPI) increased at the annual equivalent rate of 1.5 percent and real personal consumption expenditures (RPCE) rose at annual equivalent 2.4 percent. In the second wave in May-Aug 2011 under risk aversion, NPI rose at annual equivalent 0.9 percent, NPDI at 1.2 percent and NPCE at 2.7 percent. RDPI contracted at 1.5 percent annual equivalent and RPCE crawled at 0.3 percent annual equivalent. With mixed shocks of risk aversion in the third wave from Sep to Dec 2011, NPI rose at 1.5 percent annual equivalent, NDPI at 0.9 percent and NPCE at 2.7 percent. RDPI increased at 0.3 percent annual equivalent and RPCE at 1.8 percent annual equivalent. In the fourth wave from Jan to Mar 2012, NPI increased at 8.7 percent annual equivalent and NDPI at 8.3 percent. Real disposable income (RDPI) is more dynamic in the revisions, growing at 4.5 percent annual equivalent and RPCE at 2.8 percent. The policy of repressing savings with zero interest rates stimulated growth of nominal consumption (NPCE) at the annual equivalent rate of 6.6 percent and real consumption (RPCE) at 2.8 percent. In the fifth wave in Apr-Jul 2012, NPI increased at annual equivalent 1.5 percent, NDPI at 1.2 percent and RDPI at 1.8 percent. Financial repression failed to stimulate consumption with NPCE growing at 1.2 percent annual equivalent and RPCE at 1.2 percent. In the sixth wave in Aug-Oct 2012, in another wave of carry trades into commodity futures, NPI and NDPI increased at 2.4 percent annual equivalent while real disposable income (RDPI) declined at 1.2 percent annual equivalent. Data for Nov-Dec 2012 have illusory increases: “Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf). In the seventh wave, anticipations of tax increases in Jan 2013 caused exceptional income gains that increased personal income to annual equivalent 23.8 percent in Nov-Dec 2012, nominal disposable income at 24.6 percent and real disposable personal income at 26.0 percent with likely effects on nominal personal consumption that increased at 3.0 percent and real personal consumption at 3.7 percent with subdued prices. The numbers in parentheses show that without the exceptional effects NDPI (nominal disposable personal income) increased at 5.5 percent and RDPI (real disposable personal income) at 8.7 percent. In the eighth wave, nominal personal income fell 3.6 percent in Jan 2013 or at the annual equivalent rate of decline of 35.6 percent; nominal disposable personal income fell 4.0 percent or at the annual equivalent rate of decline of 38.7 percent; real disposable income fell 4.0 percent or at the annual rate of decline of 38.7 percent; nominal personal consumption expenditures increased 0.2 percent or at the annual equivalent rate of 2.4 percent; and real personal consumption expenditures increased 0.1 percent or at the annual equivalent rate of 1.2 percent. The savings rate fell significantly from 6.4 percent in Dec 2012 to 2.4 percent in Jan 2013. The Bureau of Economic Analysis explains as follows (http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0113.pdf 3):

“Contributions for government social insurance -- a subtraction in calculating personal income -- increased $126.7 billion in January, compared with an increase of $6.3 billion in December. The

The increase was provided in the “fiscal cliff” law H.R. 8 American Taxpayer Relief Act of 2012 (http://www.gpo.gov/fdsys/pkg/BILLS-112hr8eas/pdf/BILLS-112hr8eas.pdf).

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

	NPI	NDPI	RDPI	NPCE	RPCE
2013
Jan	-3.6	-4.0 (0.3)^a	-4.0	0.2	0.1
AE ∆% Jan	-35.6	-38.7 (3.7)^a	-38.7	2.4	1.2
2012
∆% Jan-Dec 2012***	7.0	6.9	5.4	3.6	2.1
Dec	2.6	2.7 (0.3)*	2.7 (0.5)*	0.1	0.1
Nov	1.0	1.0 (0.6)*	1.2 (0.9)*	0.4	0.5
AE ∆% Nov-Dec	23.8	24.6 (5.5)*	26.0 (8.7)*	3.0	3.7
Oct	0.0	0.0	-0.1	0.0	-0.2
Sep	0.4	0.4	0.1	0.8	0.5
Aug	0.1	0.1	-0.2	0.3	0.0
AE ∆% Aug-Oct	2.4	2.4	-1.2	4.1	1.2
Jul	0.2	0.2	0.1	0.4	0.3
Jun	0.3	0.2	0.2	0.0	-0.1
May	0.1	0.1	0.3	-0.2	0.0
Apr	0.0	0.0	0.0	0.2	0.2
AE ∆% Apr-Jul	1.5	1.2	1.8	1.2	1.2
Mar	0.5	0.5	0.2	0.3	0.0
Feb	0.7	0.6	0.3	0.8	0.4
Jan	0.9	0.9	0.6	0.5	0.3
AE ∆% Jan-Mar	8.7	8.3	4.5	6.6	2.8
2011
∆% Jan-Dec 2011*	3.6	2.5	0.0	4.2	1.7
Dec	0.3	0.3	0.2	0.1	0.0
Nov	-0.2	-0.3	-0.3	0.1	0.0
Oct	0.3	0.3	0.3	0.2	0.2
Sep	0.1	0.0	-0.1	0.5	0.4
AE ∆% Sep-Dec	1.5	0.9	0.3	2.7	1.8
Aug	0.0	0.0	-0.3	0.2	-0.1
Jul	0.1	0.2	-0.1	0.7	0.5
Jun	0.2	0.2	0.1	-0.1	-0.2
May	0.0	0.0	-0.2	0.1	-0.1
AE ∆% May-Aug	0.9	1.2	-1.5	2.7	0.3
Apr	0.3	0.3	0.0	0.4	0.0
Mar	0.1	0.1	-0.3	0.7	0.3
Feb	0.4	0.4	0.0	0.6	0.3
Jan	1.9	1.1	0.8	0.4	0.2
AE ∆% Jan-Apr	8.4	5.8	1.5	6.5	2.4
2010
∆% Jan-Dec 2010**	5.3	4.9	3.3	4.4	2.8
Dec	0.7	0.7	0.4	0.4	0.2
Nov	0.2	0.2	0.1	0.5	0.4
Oct	0.4	0.3	0.1	0.7	0.4
IVQ2010∆%	1.3	1.2	0.6	1.6	1.0
IVQ2010 AE ∆%	5.3	4.9	2.4	6.6	4.1

Percentage change month to month seasonally adjusted

*∆% Dec 2011/Dec 2010 **∆% Dec 2010/Dec 2009 *** ∆% Dec 2012/Dec 2011

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

The increase was provided in the “fiscal cliff” law H.R. 8 American Taxpayer Relief Act of 2012 (http://www.gpo.gov/fdsys/pkg/BILLS-112hr8eas/pdf/BILLS-112hr8eas.pdf)

Table IB-2, Real Disposable Personal Income and Real Personal Consumption Expenditures

Percentage Change from the Same Month a Year Earlier %

	RDPI	RPCE	RPCEG	RPCEGD	RPCES
2013
Jan	0.6	2.0	3.1	7.1	1.5
2012
Dec	5.4	2.1	3.9	9.7	1.3
Nov	2.9	2.0	3.4	9.1	1.3
Oct	1.3	1.5	2.4	6.4	1.1
Sep	1.7	1.9	3.7	8.9	1.1
Aug	1.6	1.9	3.7	8.9	0.9
Jul	1.5	1.9	3.1	7.3	1.2
Jun	1.3	2.0	3.5	8.6	1.3
May	1.3	1.9	3.0	7.4	1.4
Apr	0.7	1.8	2.4	6.5	1.5
Mar	0.7	1.6	2.6	6.6	1.1
Feb	0.1	1.9	2.7	7.4	1.5
Jan	-0.2	1.8	2.6	6.8	1.4
2011
Dec	0.0	1.7	2.5	6.0	1.3
Nov	0.3	1.9	2.6	5.8	1.5
Oct	0.7	2.3	3.2	5.9	1.8
Sep	0.5	2.4	3.4	7.0	2.0
Aug	0.4	2.1	2.6	5.3	1.9
Jul	0.9	2.8	4.1	6.4	2.1
Jun	0.9	2.4	3.4	5.3	1.9
May	1.0	2.6	3.9	6.5	2.0
Apr	1.8	3.0	4.7	8.2	2.1
Mar	2.6	3.0	4.2	7.8	2.4
Feb	3.4	3.1	5.5	11.3	1.9
Jan	3.5	3.1	5.5	11.0	1.9
2010
Dec	3.3	2.8	4.7	9.0	1.9
Nov	3.5	3.2	5.1	8.8	2.2
Oct	3.7	2.7	5.3	10.8	1.5
Sep	3.2	2.5	4.7	9.1	1.5

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

Numbers are percentage changes from the same month a year earlier

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

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

Source: US Bureau of Economic Analysis

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

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

Source: US Bureau of Economic Analysis

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

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

	Personal Income	Wages & Salaries	Personal Taxes	DPI	Savings Rate %
Jan 2013	13,440.0	6,973.1	1516.8	11,923.2	2.4
Dec 2012	13,945.5	7,016.8	1,530.8	12,414.6	6.4
Change Jan 2013/Dec 2012	-505.5 ∆% -3.6	-43.7 ∆% -0.6	-14.0 ∆% -0.9	-491.4 ∆% -4.0
Nov 2012	13,592.1	6,966.9	1,503.2	12,088.9	4.0
Change Dec/Nov	353.4 ∆% 2.6	49.9 ∆% 0.7	27.6 ∆% 1.8	325.7 ∆% 2.7
Oct 2012	13,452.0	6,893.3	1,484.5	11,967.5	3.4
Change Nov/Oct	140.1 ∆% 1.0	73.6 ∆% 1.1	18.7 ∆% 1.3	121.4 ∆% 1.0
Sep 2012	13,446.0	6,909.7	1,481.3	11,964.7	3.3
Change Oct/Sep	6.0 ∆% 0.0	-16.4 ∆% -0.2	3.2 ∆% 0.2	2.8 ∆% 0.0
Aug 2012	13,395.7	6,883.4	1,475.4	11,920.3	3.7
Change Sep/Aug	50.3 ∆% 0.4	26.3 ∆% 0.4	5.9 ∆% 0.4	44.4 ∆% 0.4
Jul 2012	13,376.9	6,872.5	1,472.7	11,904.2	3.9
Change Aug/Jul	18.8 ∆% 0.1	10.9 ∆% 0.2	2.7 ∆% 0.2	16.1 ∆% 0.1
Jun 2012	13,355.9	6,858.5	1,470.0	11,885.9	4.1
Change Jul/Jun	21.0 ∆% 0.2	14.0 ∆% 0.2	2.7 ∆% 0.2	18.3 ∆% 0.2
May 2012	13,322.3	6,840.3	1,464.1	11,858.2	3.9
Change Jun/ May	33.6 ∆% 0.3	18.2 ∆% 0.3	5.9 ∆% 0.4	27.7 ∆% 0.2
Apr 2012	13,302.9	6,848.9	1,461.6	11,841.3	3.5
Change May/ Apr	19.4 ∆% 0.1	-8.6 ∆% -0.1	2.5 ∆% 0.2	16.9 ∆% 0.1
Mar	13,298.3	6,869.4	1,460.6	11,837.7	3.7
Change Apr/ Mar	4.6 ∆% 0.0	-20.5 ∆% -0.3	1.0 ∆% 0.1	3.6 ∆% 0.0
Feb 2012	13,234.7	6,831.5	1,452.0	11,782.7	3.5
Change Mar/ Feb	63.6 ∆% 0.5	37.9 ∆% 0.6	8.6 ∆% 0.6	55.0 ∆% 0.5
Jan	13,148.4	6,776.7	1,439.6	11,708.8	3.7
Change Feb/Jan	86.3 ∆% 0.7	54.8 ∆% 0.8	12.4 ∆% 0.9	73.9 ∆% 0.6
Dec 2012	13,945.5	7,016.8	1,530.8	12,414.6	6.4
Change Dec 2012/ Dec 2011	913.3 ∆% 7.0	329.2 ∆% 4.9	107.7 ∆% 7.6	805.5 ∆% 6.9
Dec 2011	13,032.2	6,687.6	1,423.1	11,609.1	3.4
Change Jan/Dec	116.2 ∆% 0.9	89.1 ∆% 1.3	16.5 ∆% 1.2	99.7 ∆% 0.9
Dec 2010	12,574.1	6,482.8	1,243.5	11,330.6	4.9
Change Dec 2011/ Dec 2010	458.1 ∆% 3.6	204.8 ∆% 3.2	179.6 ∆% 14.4	278.5 ∆% 2.5

Source: US Bureau of Economic Analysis

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

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

Chart IB-4, US, Personal Income, Billion Dollars, Quarterly Seasonally Adjusted at Annual Rates, 1980-1989

Source: US Bureau of Economic Analysis

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

A different evolution of personal income is shown in Chart IB-4. Personal income also fell during the recession from Dec IVQ2007 to Jun IIQ2009 (http://www.nber.org/cycles.html). Growth of personal income during the expansion has been tepid even with the new revisions. In IVQ2012, nominal disposable personal income grew at the SAAR of 7.8 percent and real disposable personal income at 6.2 percent (http://www.bea.gov/iTable/index_nipa.cfm), which the BEA explains as: “Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf pages 1-2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0113.pdf). The increase was provided in the “fiscal cliff” law H.R. 8 American Taxpayer Relief Act of 2012 (http://www.gpo.gov/fdsys/pkg/BILLS-112hr8eas/pdf/BILLS-112hr8eas.pdf).

Chart IB-4, US, Personal Income, Current Billions of Dollars, Quarterly Seasonally Adjusted at Annual Rates, 2007-2012

Source: US Bureau of Economic Analysis

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

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

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

Source: US Bureau of Economic Analysis

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

Much weaker performance of real disposable income is evident in Chart IB-6. There was initial recovery in 2010 and then income after inflation and taxes stagnated into 2011. There is more dynamism with the new revisions for the first half of 2012. In IVQ2012, nominal disposable personal income grew at the SAAR of 7.8 percent and real disposable personal income at 6.2 percent (http://www.bea.gov/iTable/index_nipa.cfm), which the BEA explains as: “Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates that eventually occurred in the “fiscal cliff” law H.R. 8 American Taxpayer Relief Act of 2012 (http://www.gpo.gov/fdsys/pkg/BILLS-112hr8eas/pdf/BILLS-112hr8eas.pdf). Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf pages 1-2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0113.pdf).

Chart IB-6, US, Real Disposable Income, Billions of Chained 2005 Dollars, Seasonally Adjusted at Annual Rates, 2007-2012

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

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

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

Source: US Bureau of Economic Analysis

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

Chart IB-8 provides percentage quarterly changes in real disposable income from the preceding period at seasonally-adjusted annual rates from 2007 to 2012. There has been a period of positive rates followed by decline of rates and then negative and low rates in 2011. Recovery in 2012 has not reproduced the dynamism of the brief early phase of expansion. In IVQ2012, nominal disposable personal income grew at the SAAR of 7.8 percent and real disposable personal income at 6.2 percent, which the BEA explains as: Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf).

Chart, IB-8, US, Real Disposable Income, Percentage Change from Preceding Period at Seasonally-Adjusted Annual Rates, 2007-2012

Source: US Bureau of Economic Analysis

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

In the latest available report, the Bureau of Economic Analysis (BEA) estimates US personal income in Jan 2013 at the seasonally adjusted annual rate of $13,440.0 billion, as shown in Table IB-3 above (see Table 1 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0113.pdf). The major portion of personal income is compensation of employees of $8,689.0 billion, or 64.7 percent of the total. Wage and salary disbursements are $6,973.1 billion, of which $5,767.8 billion by private industries and supplements to wages and salaries of $1,715.9 billion (employer contributions to pension and insurance funds are $1,191.2 billion and contributions to social insurance are $524.7 billion). In Dec 1985, US personal income was $3,596.4 billion at SAAR (http://www.bea.gov/iTable/index_nipa.cfm). Compensation of employees was $2,498.5 billion, or 69.5 percent of the total. Wage and salary disbursement were $2.056.3 billion of which $1671.0 billion by private industries. Supplements to wages and salaries were $442.2 billion with employer contributions to pension and insurance funds of $289.4 billion and $152.9 billion to government social insurance. Chart IB-9 provides US wage and salary disbursement by private industries in the 1980s. Growth was robust after the interruption of the recessions.

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

Source: US Bureau of Economic Analysis

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

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

Chart IB-10, US, Wage and Salary Disbursement, Private Industries, Quarterly, Seasonally Adjusted at Annual Rates, Billions of Dollars 2007-2012

Source: US Bureau of Economic Analysis

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

Chart IB-11 provides finer detail with monthly wage and salary disbursement of private industries from 2007 to 2013. There is decline during the contraction and a period of mild recovery followed by stagnation and recent recovery that is weaker than in earlier expansion periods of the business cycle. There is decline in Jan 2013 because of the higher contributions to government social insurance.

Chart IB-11, US, Wage and Salary Disbursement, Private Industries, Monthly, Seasonally Adjusted at Annual Rates, Billions of Dollars 2007-2013

Source: US Bureau of Economic Analysis

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

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

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

Source: US Bureau of Economic Analysis

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

Chart IB-13 provides monthly real disposable personal per capita income from 2007 to 2013. There was initial recovery from the drop during the global recession followed by stagnation. Real per capita disposable income increased 1.1 percent from $32,610 in chained dollars of 2005 in Oct 2012 to $32,972 in Nov 2012 and 2.7 percent to $33,847 in Dec 2012 for cumulative increase of 3.8 percent from Oct 2012 to Dec 2012 (data at http://www.bea.gov/iTable/index_nipa.cfm). This increase is shown in a jump in the final segment in Chart IB-13 with Nov-Dec 2012. The BEA explains as: Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf). Real disposable personal income fell from $33,847 in Dec 2012 to $32,483 in Jan 2013 or by 4.0 percent, which is explained by the Bureau of Economic Analysis as follows (http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0113.pdf 1):

The increase was provided in the “fiscal cliff” law H.R. 8 American Taxpayer Relief Act of 2012 (http://www.gpo.gov/fdsys/pkg/BILLS-112hr8eas/pdf/BILLS-112hr8eas.pdf).

Chart IB-13, US, Real Disposable Per Capita Income, Monthly, Seasonally Adjusted at Annual Rates, Billions of Dollars 2007-2013

Source: US Bureau of Economic Analysis

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

IB2 Financial Repression. McKinnon (1973) and Shaw (1974) argue that legal restrictions on financial institutions can be detrimental to economic development. “Financial repression” is the term used in the economic literature for these restrictions (see Pelaez and Pelaez, Globalization and the State, Vol. II (2008b), 81-6). Interest rate ceilings on deposits and loans have been commonly used. Prohibition of payment of interest on demand deposits and ceilings on interest rates on time deposits were imposed by the Banking Act of 1933. These measures were justified by arguments that the banking panic of the 1930s was caused by competitive rates on bank deposits that led banks to engage in high-risk loans (Friedman, 1970, 18; see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 74-5). The objective of policy was to prevent unsound loans in banks. Savings and loan institutions complained of unfair competition from commercial banks that led to continuing controls with the objective of directing savings toward residential construction. Friedman (1970, 15) argues that controls were passive during periods when rates implied on demand deposit were zero or lower and when Regulation Q ceilings on time deposits were above market rates on time deposits. The Great Inflation or stagflation of the 1960s and 1970s changed the relevance of Regulation Q.

Most regulatory actions trigger compensatory measures by the private sector that result in outcomes that are different from those intended by regulation (Kydland and Prescott 1977). Banks offered services to their customers and loans at rates lower than market rates to compensate for the prohibition to pay interest on demand deposits (Friedman 1970, 24). The prohibition of interest on demand deposits was eventually lifted in recent times. In the second half of the 1960s, already in the beginning of the Great Inflation (DeLong 1997), market rates rose above the ceilings of Regulation Q because of higher inflation. Nobody desires savings allocated to time or savings deposits that pay less than expected inflation. This is a fact currently with zero interest rates and consumer price inflation of 1.7 percent in the 12 months ending in Dec 2012 (http://www.bls.gov/cpi/) but rising during waves of carry trades from zero interest rates to commodity futures exposures (http://cmpassocregulationblog.blogspot.com/2013/01/recovery-without-hiring-world-inflation.html). Funding problems motivated compensatory measures by banks. Money-center banks developed the large certificate of deposit (CD) to accommodate increasing volumes of loan demand by customers. As Friedman (1970, 25) finds:

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

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

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

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

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

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

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

Chart IB-14 of the Bureau of Economic Analysis (BEA) provides quarterly savings as percent of disposable income or the US savings rate from 1980 to 2012. There was a long-term downward sloping trend from 12 percent in the early 1980s to less than 2 percent in 2005-2006. The savings rate then rose during the contraction and also in the expansion. In 2011 and into 2012 the savings rate declined as consumption is financed with savings in part because of the disincentive or frustration of receiving a few pennies for every $10,000 of deposits in a bank. The savings rate increased in the final segment of Chart IB-14 in 2012 followed by another decline because of the pain of the opportunity cost of zero remuneration for hard-earned savings. Swelling realization of income in Oct-Dec 2012 in anticipation of tax increases in Jan 2012 caused the jump of the savings rate to 6.4 percent in Dec 2012. The BEA explains as: Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf). The savings rate then collapsed to 2.4 percent in Jan 2013 in part because of the decline of 4.0 percent in real disposable personal income. The decline of personal income was caused by increasing contributions to government social insurance (http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0113.pdf 1). The objective of monetary policy is to reduce borrowing rates to induce consumption but it has collateral disincentive of reducing savings and misallocating resources away from their best uses. The zero interest rate of monetary policy is a tax on saving. This tax is highly regressive, meaning that it affects the most people with lower income or wealth and retirees. The long-term decline of savings rates in the US has created a dependence on foreign savings to finance the deficits in the federal budget and the balance of payments.

Chart IB-14, US, Personal Savings as a Percentage of Disposable Personal Income, Quarterly, 1980-2012

Source: US Bureau of Economic Analysis

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

Chart IA-15 of the US Bureau of Economic Analysis provides personal savings as percent of personal disposable income, or savings ratio, from Jan 2007 to Jan 2013. The uncertainties caused by the global recession resulted in sharp increase in the savings ratio that peaked at 8.3 percent in May 2008 (http://www.bea.gov/iTable/index_nipa.cfm). The second highest ratio occurred at 6.7 percent in May 2009. There was another rising trend until 5.8 percent in Jun 2010 and then steady downward trend until trough of 3.2 percent in Nov 2011, which was followed by an upward trend with 4.1 percent in Jun 2012 but decline to 3.7 percent in Aug 2012, 3.3 percent in Sep 2012, 3.4 percent in Oct and increase to 4.0 percent in Nov 2012 followed by jump to 6.4 percent in Dec 2012. Swelling realization of income in Oct-Dec 2012 in anticipation of tax increases in Jan 2012 caused the jump of the savings rate to 6.4 percent in Dec 2012. The BEA explains as: Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf). There was a reverse effect in Jan 2013 with decline of the savings rate to 2.4 percent. Real disposable personal income fell from $33,847 in Dec 2012 to $32,483 in Jan 2013 or by 4.0 percent, which is explained by the Bureau of Economic Analysis as follows (http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0113.pdf 1):

Consumption was maintained by burning savings because of the drain of decline of real disposable personal income by 4.0 percent. Permanent manipulation of the entire spectrum of interest rates with monetary policy measures distorts the compass of resource allocation with inferior outcomes of future growth, employment and prosperity and dubious redistribution of income and wealth worsening the most the personal welfare of people without vast capital and financial relations to manage their savings.

Chart IB-15, US, Personal Savings as a Percentage of Disposable Income, Monthly 2007-2013

Source: US Bureau of Economic Analysis

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

II United States Housing Collapse. The objective of this section is to provide the latest data and analysis of US housing. Subsection IIA United New House Sales analyzes the collapse of US new house sales. Subsection IIB United States House Prices considers the latest available data on house prices. Subsection IIC Factors of US Housing Collapse provides the analysis of the causes of the housing crisis of the US.

IIA United States New House Sales. Data and other information continue to provide depressed conditions in the US housing market in a longer perspective with recent improvement that has slowed at the margin. Table II-1 shows sales of new houses in the US at seasonally-adjusted annual equivalent rate (SAAR). House sales fell in eight of twenty one months from Jan 2011 to Sep 2012 but mostly concentrated in Jan-Feb 2011 and May-Aug 2011. In Jan-Apr 2012, house prices increased at the annual equivalent rate of 17.6 percent and at 15.1 percent in May-Sep 2012. There was significant strength in Sep-Dec 2011 with annual equivalent rate of 56.4 percent. Sales of new houses fell 3.8 percent in Dec 2012 and 4.0 percent in Oct 2012 with increase of 8.0 percent in Nov 2012. Sales of new houses rebounded 15.6 percent in Jan 2013 with annual equivalent rate of 53.3 percent in Oct 2012 to Jan 2013. The annual equivalent rate in May-Aug 2011 was minus 18.1 percent and minus 12.2 percent in Jan-Apr 2011 but after increase of 13.6 percent in Dec 2010. Robbie Whelan and Conor Dougherty, writing on “Builders fuel home sale rise,” on Feb 26, 2013, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324338604578327982067761860.html), analyze how builders have provided financial assistance to home buyers, including those short of cash and with weaker credit background, explaining the rise in new home sales and the highest gap between prices of new and existing houses.

Table II-1, US, Sales of New Houses at Seasonally-Adjusted (SA) Annual Equivalent Rate, Thousands and %

	SA Annual Rate Thousands	∆%
Jan 2013	437	15.6
Dec 2012	378	-3.8
Nov	393	8.0
Oct	364	-4.0
AE ∆% Oct-Jan		53.3
Sep	379	3.3
Aug	367	0.3
Jul	366	1.7
Jun	360	-2.4
May	369	3.1
AE ∆% May-Sep		15.1
Apr	358	1.7
Mar	352	-3.8
Feb	366	7.9
Jan	339	0.0
AE ∆% Jan-Apr		17.6
Dec 2011	339	3.7
Nov	327	4.1
Oct	314	2.6
Sep	306	4.8
AE ∆% Sep-Dec		56.4
Aug	292	-1.7
Jul	297	-2.3
Jun	304	-1.3
May	308	-1.3
AE ∆% May-Aug		-18.1
Apr	312	3.7
Mar	301	10.3
Feb	273	-11.4
Jan	308	-5.5
AE ∆% Jan-Apr		-12.2
Dec 2010	326	13.6

AE: Annual Equivalent

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

There is additional information of the report of new house sales in Table II-2. The stock of unsold houses stabilized in Apr-Aug 2011 at average 6.6 monthly equivalent sales at current sales rates and then dropped to 4.7 in Jul-Aug 2012, increasing to 4.8 in Oct 2012, 4.5 in Nov 2012 and 4.8 percent in Dec 2012. Inventories dropped to 4.1 in Jan 2013. Robbie Whelan and Conor Dougherty, writing on “Builders fuel home sale rise,” on Feb 26, 2013, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324338604578327982067761860.html), find that inventories of houses have declined as investors acquire distressed houses of higher quality Median and average house prices oscillate. In Jan 2013, median prices of new houses sold not seasonally adjusted (NSA) decreased 9.4 percent but after increasing 2.1 percent in Dec 2012. Average prices decreased 5.0 percent in Jan 2013 after increasing 3.3 percent in Dec 2012. Between Dec 2010 and Jan 2013 median prices fell 6.1 percent and average prices fell 1.9 percent because of sharp decline of prices in Jan 2013. Between Dec 2010 and Dec 2012, median prices increased 3.6 percent and average prices increased 3.4 percent. Price increases concentrated in 2012 with increase of median prices of 14.3 percent from Dec 2011 to Dec 2012 and of average prices of 14.7 percent. There are only nine months with price increases in both median and average house prices: Apr 2011 with 1.9 percent in median prices and 3.1 percent in average prices, Jun 2011 with 8.2 percent in median prices and 3.9 percent in average prices, Oct 2011 with 3.6 percent in median prices and 1.1 percent in average prices, Dec 2011 with 2.0 percent in median prices and 5.2 percent in average prices, Jan 2012 with 1.4 percent in median prices and 1.1 percent in average prices, Feb 2012 with 8.2 percent in median prices and 3.1 percent in average prices, Jul with 2.1 percent in median and 3.9 percent in average, Aug 2012 with 6.7 percent in median prices and 8.2 percent in average prices and Dec 2012 with 2.1 percent in median prices and 3.3 percent in average prices.

Table II-2, US, New House Stocks and Median and Average New Homes Sales Price

	Unsold* Stocks in Equiv. Months of Sales SA %	Median New House Sales Price USD NSA	Month ∆%	Average New House Sales Price USD NSA	Month ∆%
Jan 2013	4.1	226,400	-9.4	286,300	-5.0
Dec 2012	4.8	249,800	2.1	301,500	3.3
Nov	4.5	244,600	-1.1	291,800	2.2
Oct	4.8	247,200	-2.9	285,400	-4.1
Sep	4.6	254,600	0.6	297,700	-2.6
Aug	4.7	253,200	6.7	305,500	8.2
Jul	4.7	237,400	2.1	282,300	3.9
Jun	4.8	232,600	-2.8	271,800	-3.2
May	4.7	239,200	1.2	280,900	-2.4
Apr	4.9	236,400	-1.4	287,900	1.5
Mar	4.9	239,800	0.0	283,600	3.5
Feb	4.8	239,900	8.2	274,000	3.1
Jan	5.3	221,700	1.4	265,700	1.1
Dec 2011	5.4	218,600	2.0	262,900	5.2
Nov	5.7	214,300	-4.7	250,000	-3.2
Oct	6.1	224,800	3.6	258,300	1.1
Sep	6.3	217,000	-1.2	255,400	-1.5
Aug	6.6	219,600	-4.5	259,300	-4.1
Jul	6.7	229,900	-4.3	270,300	-1.0
Jun	6.6	240,200	8.2	273,100	3.9
May	6.6	222,000	-1.2	262,700	-2.3
Apr	6.7	224,700	1.9	268,900	3.1
Mar	7.1	220,500	0.2	260,800	-0.8
Feb	8.0	220,100	-8.3	262,800	-4.7
Jan	7.3	240,100	-0.5	275,700	-5.5
Dec 2010	7.0	241,200	9.8	291,700	3.5

*Percent of new houses for sale relative to houses sold

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

The depressed level of residential construction and new house sales in the US is evident in Table II-3 providing new house sales not seasonally adjusted in Jan of various years. Sales of new houses in Jan 2013 are substantially lower than in any year between 1963 and 2013 with the exception of 2009 to 2012. There are only four increases of 34.8 percent relative to Jan 2012, 47.6 percent relative to Jan 2011, 29.2 percent relative to Jan 2010 and 29.2 percent relative to Jan 2009. Sales of new houses in Jan 2013 are lower by 29.5 percent relative to Jan 2008, 53.0 percent relative to 2007, 65.2 percent relative to 2006 and 66.3 percent relative to 2005. The housing boom peaked in 2005 and 2006 when increases in fed funds rates to 5.25 percent in Jun 2006 from 1.0 percent in Jun 2004 affected subprime mortgages that were programmed for refinancing in two or three years on the expectation that price increases forever would raise home equity. Higher home equity would permit refinancing under feasible mortgages incorporating full payment of principal and interest (Gorton 2009EFM; see other references in http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html). Sales of new houses in Jan 2013 relative to the same period in 2004 fell 65.2 percent and 59.2 percent relative to the same period in 2003. Similar percentage declines are also observed for 2012 relative to years from 2000 to 2004. Sales of new houses in Jan 2013 fell 34.0 per cent relative to the same period in 1995. The population of the US was 179.3 million in 1960 and 281.4 million in 2000 (Hobbs and Stoops 2002, 16). Detailed historical census reports are available from the US Census Bureau at (http://www.census.gov/population/www/censusdata/hiscendata.html). The US population reached 308.7 million in 2010 (http://2010.census.gov/2010census/data/). The US population increased by 129.4 million from 1960 to 2010 or 72.2 percent. The final row of Table II-3 reveals catastrophic data: sales of new houses in Jan 2013 of 31 thousand units are lower by 26.2 percent relative to 42 thousand units houses sold in Jan 1963, the first year when data become available, while population increased 72.2 percent.

Table II-3, US, Sales of New Houses Not Seasonally Adjusted, Thousands and %

	Not Seasonally Adjusted Thousands
Jan 2013	31
Jan 2012	23
∆% Jan 2013/Jan 2012	34.8
Jan 2011	21
∆% Jan 2013/Jan 2011	47.6
Jan 2010	24
∆% Jan 2013/ Jan 2010	29.2
Jan 2009	24
∆% Jan 2013/ Jan 2009	29.2
Jan 2008	44
∆% Jan 2013/ Jan 2008	-29.5
Jan 2007	66
∆% Jan 2013/ Jan-Dec 2007	-53.0
Jan 2006	89
∆% Jan 2013/Jan 2006	-65.2
Jan 2005	92
∆% Jan 2013/Jan 2005	-66.3
Jan 2004	89
∆% Jan 2013/Jan 2004	-65.2
Jan 2003	76
∆% Jan 2013/ Jan 2003	-59.2
Jan 2002	66
∆% Jan 2013/ Jan 2002	-53.0
Jan 2001	72
∆% Jan-Dec 2013/ Jan 2001	-56.9
Jan 2000	67
∆% Jan 2013/ Jan 2000	-53.7
Jan 1995	47
∆% Jan 2013/ Jan 1995	-34.0
Jan 1963	42
∆% Jan-Dec 2013/ Jan 1963	-26.2

*Computed using unrounded data

Source: US Census Bureau

http://www.census.gov/construction/nrs/

Table II-4 provides the entire available annual series of new house sales from 1963 to 2012. The revised level of 306 thousand new houses sold in 2011 is the lowest since 560 thousand in 1963 in the 48 years of available data while the level of 367 thousand in 2012 is only higher than 323 thousand in 2010. The population of the US increased 129.4 million from 179.3 million in 1960 to 308.7 million in 2010, or 72.2 percent. In fact, there is no year from 1963 to 2012 in Table II-4 with sales of new houses below 400 thousand with the exception of the immediately preceding years of 2009, 2010, 2011 and 2012.

Table II-4, US, New Houses Sold, NSA Thousands

1963	560
1964	565
1965	575
1966	461
1967	487
1968	490
1969	448
1970	485
1971	656
1972	718
1973	634
1974	519
1975	549
1976	646
1977	819
1978	817
1979	709
1980	545
1981	436
1982	412
1983	623
1984	639
1985	688
1986	750
1987	671
1988	676
1989	650
1990	534
1991	509
1992	610
1993	666
1994	670
1995	667
1996	757
1997	804
1998	886
1999	880
2000	877
2001	908
2002	973
2003	1,086
2004	1,203
2005	1,283
2006	1,051
2007	776
2008	485
2009	375
2010	323
2011	306
2012	367

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

Chart II-1 of the US Bureau of the Census shows the sharp decline of sales of new houses in the US. Sales rose temporarily until about mid 2010 but then declined to a lower plateau.

Chart II-1, US, New One-Family Houses Sold in the US, SAAR (Seasonally-Adjusted Annual Rate)

Source: US Census Bureau

http://www.census.gov/briefrm/esbr/www/esbr051.html

Chart II-2 of the US Bureau of the Census provides the entire monthly sample of new houses sold in the US between Jan 1963 and Jan 2013 without seasonal adjustment. The series is almost stationary until the 1990s. There is sharp upward trend from the early 1990s to 2005-2006 after which new single-family houses sold collapse to levels below those in the beginning of the series in the 1960s.

Chart II-2, US, New Single-family Houses Sold, NSA, 1963-2013

Source: US Census Bureau

http://www.census.gov/construction/nrs/

Percentage changes and average rates of growth of new house sales for selected periods are shown in Table II-5. The percentage change of new house sales from 1963 to 2012 is minus 34.5 percent. Between 1991 and 2001, sales of new houses rose 78.4 percent at the average yearly rate of 5.9 percent. Between 1995 and 2005 sales of new houses increased 92.4 percent at the yearly rate of 6.8 percent. There are similar rates in all years from 2000 to 2005. The boom in housing construction and sales began in the 1980s and 1990s. The collapse of real estate culminated several decades of housing subsidies and policies to lower mortgage rates and borrowing terms (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009b), 42-8). Sales of new houses sold in 2011 fell 45.0 percent relative to the same period in 1995.

Table II-5, US, Percentage Change and Average Yearly Rate of Growth of Sales of New One-Family Houses

	∆%	Average Yearly % Rate
1963-2012	-34.5	NA
1991-2001	78.4	5.9
1995-2005	92.4	6.8
2000-2005	46.3	7.9
1995-2012	-45.0	NA
2000-2012	-58.2	NA
2005-2012	-71.4	NA

NA: Not Applicable

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

The available historical annual data of median and average prices of new houses sold in the US between 1963 and 2012 is provided in Table II-6. On a yearly basis, median and average prices reached a peak in 2007 and then fell substantially.

Table II-6, US, Median and Average Prices of New Houses Sold, Annual Data

1963	$18,000	$19,300
1964	$18,900	$20,500
1965	$20,000	$21,500
1966	$21,400	$23,300
1967	$22,700	$24,600
1968	$24,700	$26,600
1969	$25,600	$27,900
1970	$23,400	$26,600
1971	$25,200	$28,300
1972	$27,600	$30,500
1973	$32,500	$35,500
1974	$35,900	$38,900
1975	$39,300	$42,600
1976	$44,200	$48,000
1977	$48,800	$54,200
1978	$55,700	$62,500
1979	$62,900	$71,800
1980	$64,600	$76,400
1981	$68,900	$83,000
1982	$69,300	$83,900
1983	$75,300	$89,800
1984	$79,900	$97,600
1985	$84,300	$100,800
1986	$92,000	$111,900
1987	$104,500	$127,200
1988	$112,500	$138,300
1989	$120,000	$148,800
1990	$122,900	$149,800
1991	$120,000	$147,200
1992	$121,500	$144,100
1993	$126,500	$147,700
1994	$130,000	$154,500
1995	$133,900	$158,700
1996	$140,000	$166,400
1997	$146,000	$176,200
1998	$152,500	$181,900
1999	$161,000	$195,600
2000	$169,000	$207,000
2001	$175,200	$213,200
2002	$187,600	$228,700
2003	$195,000	$246,300
2004	$221,000	$274,500
2005	$240,900	$297,000
2006	$246,500	$305,900
2007	$247,900	$313,600
2008	$232,100	$292,600
2009	$216,700	$270,900
2010	$221,800	$272,900
2011	$227,200	$267,900
2012	$245,000	$289,500

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

Percentage changes of median and average prices of new houses sold in selected years are shown in Table II-7. Prices rose sharply between 2000 and 2005. In fact, prices in 2012 are higher than in 2000. Between 2006 and 2012, median prices of new houses sold fell 1.2 percent and average prices fell 5.7 percent. Between 2011 and 2012, median prices increased 7.2 percent and average prices increased7.7 percent.

Table II-7, US, Percentage Change of New Houses Median and Average Prices, NSA, ∆%

	Median New Home Sales Prices ∆%	Average New Home Sales Prices ∆%
∆% 2000 to 2003	15.4	18.9
∆% 2000 to 2005	42.5	43.5
∆% 2000 to 2012	45.0	39.9
∆% 2005 to 2012	1.7	-2.5
∆% 2000 to 2006	45.9	47.8
∆% 2006 to 2012	-0.6	-5.4
∆% 2009 to 2012	13.1	6.9
∆% 2010 to 2012	10.5	6.1
∆% 2011 to 2012	7.8	8.1

Source: US Census Bureau

http://www.census.gov/construction/nrs/

Chart II-3 of the US Census Bureau provides the entire series of new single-family sales median prices from Jan 1963 to Jan 2013. There is long-term sharp upward trend with few declines until the current collapse. Median prices increased sharply during the Great Inflation of the 1960s and 1970s and paused during the savings and loans crisis of the late 1980s and the recession of 1991. Housing subsidies throughout the 1990s caused sharp upward trend of median new house prices that accelerated after the fed funds rate of 1 percent from 2003 to 2004. There was sharp reduction of prices after 2006 with recovery recently toward earlier prices.

Chart II-3, US, Median Sales Price of New Single-family Houses Sold, US Dollars, NSA, 1963-2013

Source: US Census Bureau

http://www.census.gov/construction/nrs/

Chart II-4 of the US Census Bureau provides average prices of new houses sold from the mid 1970s to Jan 2013. There is similar behavior as with median prices of new houses sold in Chart II-3. The only stress occurred in price pauses during the savings and loans crisis of the late 1980s and the collapse after 2006 with recent recovery.

Chart II-4, US, Average Sales Price of New Single-family Houses Sold, US Dollars, NSA, 1975-2013

Source: US Census Bureau

http://www.census.gov/construction/nrs/

IIB United States House Prices. The Federal Housing Finance Agency (FHFA), which regulates Fannie Mae and Freddie Mac, provides the FHFA House Price Index (HPI) that “is calculated using home sales price information from Fannie Mae and Freddie Mac-acquired mortgages” (http://fhfa.gov/webfiles/24216/q22012hpi.pdf 1). Table IIB-1 provides the FHFA HPI for purchases only, which shows behavior similar to that of the Case-Shiller index but with lower magnitudes. House prices catapulted from 2000 to 2003, 2005 and 2006. From IVQ2000 to IVQ2006, the index for the US as a whole rose 55.1 percent, with 62.3 percent for New England, 72.4 percent for Middle Atlantic, 70.9 percent for South Atlantic but only by 33.2 percent for East South Central. Prices fell relative to 2012 for all years from 2005 to 2007. Prices for the US increased 3.0 in IVQ2012 relative to IVQ2010 and 5.5 percent from IVQ2011 to IVQ2012. From IVQ2000 to IVQ2011, prices rose for the US and the four regions in Table IIB-1.

Table IIB-1, US, FHFA House Price Index Purchases Only NSA ∆%

	United States	New England	Middle Atlantic	South Atlantic	East South Central
4Q2000 to 4Q2003	24.0	40.6	35.9	25.9	11.1
4Q2000 to 4Q2005	50.5	65.3	67.9	62.7	25.5
4Q2000 to 4Q2006	55.1	62.3	72.4	70.9	33.2
4Q2005 t0 4Q2012	-12.2	-13.7	-6.8	-18.1	0.9
4Q2006 to 4Q2012	-14.8	-12.2	-9.3	-22.0	-4.9
4Q2007 to 4Q2012	-12.7	-10.4	-9.7	-19.2	-6.7
4Q2010 to 4Q2012	3.0	-2.0	-2.6	2.7	2.4
4Q2011 to 4Q2012	5.5 144.29	0.5 138.64	1.2 127.44	5.5 140.24	2.9 145.96
4Q2000 to 4Q2012	32.2	42.6	56.4	33.4	26.7

Source: Federal Housing Finance Agency http://fhfa.gov/Default.aspx?Page=14

Data of the FHFA HPI for the remaining US regions are provided in Table IIB-2. Behavior is not very different than in Table IIB-1 with the exception of East North Central. House prices in the Pacific region doubled between 2000 and 2006. Although prices of houses declined sharply from 2005 to 2012, there was still appreciation relative to 2000.

Table IIB-2, US, FHFA House Price Index Purchases Only NSA ∆%

	West South Central	West North Central	East North Central	Mountain	Pacific
4Q2000 to 4Q2003	11.2	18.3	14.8	18.9	44.5
4Q2000 to 4Q2005	23.9	31.1	23.9	57.9	107.6
4Q2000 to 4Q2006	31.7	34.0	23.9	68.9	108.5
4Q2005 to 4Q2012	13.9	-3.3	-14.3	-16.7	-31.4
4Q2006 to 4Q2012	7.1	-5.4	-14.3	-22.0	-31.7
4Q2007 to 4Q2012	3.5	-4.8	-11.4	-19.4	-24.4
4Q2010 to 4Q2012	6.7	3.3	0.3	9.4	5.7
4Q2011 to 4Q2012	5.4 144.55	4.7 158.66	2.9 155.19	13.9 172.54	10.9 132.08
4Q2000 to 4Q2012	42.1	26.8	6.2	31.6	42.4

Source: Federal Housing Finance Agency http://fhfa.gov/Default.aspx?Page=14

Chart IIB-1 of the Federal Housing Finance Agency shows the Housing Price Index four-quarter price change from IVQ2001 to IVQ2012. House prices appreciated sharply from 1998 to 2005 and then fell rapidly. Recovery began already after IIQ2008 but there was another decline after IIIQ2010. The rate of decline improved in the second half of 2011 and into 2012 with movement into positive territory in IIQ2012, IIIQ2012 and IVQ2012.

Chart IIB-1, US, Federal Housing Finance Agency House Price Index Four Quarter Price Change

Source: Federal Housing Finance Agency

http://fhfa.gov/Default.aspx?Page=14

Monthly and 12-month percentage changes of the FHFA House Price Index are provided in Table IIB-3. Percentage monthly increases of the FHFA index were positive from Apr to Jul 2011 while 12 months percentage changes improved steadily from more or equal to minus 6 percent in Mar to May 2011 to minus 4.4 percent in Jun 2011. The FHFA house price index fell 0.7 percent in Oct 2011 and fell 3.2 percent in the 12 months ending in Oct. There was significant recovery in Nov 2012 with increase in the house price index of 0.5 percent and reduction of the 12-month rate of decline to 2.2 percent. The house price index rose 0.3 percent in Dec 2011 and the 12-month percentage change fell to minus 1.2 percent. There was further improvement with revised decline of 0.2 percent in Jan 2012 and decline of the 12-month percentage change to minus 1.0 percent. The index changed to positive change of 0.2 percent in Feb 2012 and increase of 0.3 percent in the 12 months ending in Feb 2012. There was strong improvement in Mar 2012 with gain in prices of 1.5 percent and 2.4 percent in 12 months. The house price index of FHFA increased 0.7 percent in Apr 2012 and 3.0 percent in 12 months and improvement continued with increase of 0.6 percent in May 2012 and 3.8 percent in the 12 months ending in May 2012. Improvement consolidated with increase of 0.6 percent in Jun 2012 and 3.9 percent in 12 months. In Jul 2012, the house price index increased 0.1 percent and 3.8 percent in 12 months. Strong increase of 0.4 percent in Aug 2012 pulled the 12-month change to 4.4 percent. There was another increase of 0.6 percent in Oct and 5.5 percent in 12 months followed by increase of 0.4 percent in Nov 2012 and 5.7 percent in 12 months. The FHFA house price indexed increased 0.6 percent in Dec 2012 and 5.9 percent in 12 months.

Table IIB-3, US, FHFA House Price Index Purchases Only SA. Month and NSA 12-Month ∆%

	Month ∆% SA	12 Month ∆% NSA
Dec 2012	0.6	5.9
Nov	0.4	5.5
Oct	0.6	5.5
Sep	0.1	4.2
Aug	0.4	4.4
Jul	0.1	3.8
Jun	0.6	3.9
May	0.6	3.8
Apr	0.7	3.0
Mar	1.5	2.4
Feb	0.2	0.3
Jan	-0.2	-1.0
Dec 2011	0.3	-1.2
Nov	0.5	-2.2
Oct	-0.7	-3.2
Sep	0.3	-2.5
Aug	-0.2	-3.8
Jul	0.2	-3.6
Jun	0.5	-4.4
May	-0.1	-6.0
Apr	0.1	-5.9
Mar	-0.6	-6.0
Feb	-1.1	-5.2
Jan	-0.5	-4.7
Dec 2010		-4.0
Dec 2009		-1.9
Dec 2008		-9.8
Dec 2007		-3.1
Dec 2006		2.5
Dec 2005		9.8
Dec 2004		10.2
Dec 2003		8.0
Dec 2002		7.8
Dec 2001		6.7
Dec 2000		7.2
Dec 1999		6.2
Dec 1998		5.9
Dec 1997		3.4
Dec 1996		2.8
Dec 1995		2.9
Dec 1994		2.6
Dec 1993		3.1
Dec 1992		2.4

Source: Federal Housing Finance Agency http://fhfa.gov/Default.aspx?Page=14

The bottom part of Table IIB-3 provides 12-month percentage changes of the FHFA house price index since 1992 when data become available for 1991. Table IIB-4 provides percentage changes and average rates of percent change per year for various periods. Between 1992 and 2012, the FHFA house price index increased 85.1 percent at the yearly average rate of 3.1 percent. In the period 1992-2000, the FHFA house price index increased 39.4 percent at the average yearly rate of 4.2 percent. The rate of price increase accelerated to 7.5 percent in the period 2000-2003 and to 8.5 percent in 2000-2005 and 7.5 percent in 2000-2006. At the margin the average rate jumped to 10.0 percent in 2003-2005 and 7.5 percent in 2003-2006. House prices measured by the FHFA house price index declined 13.9 percent between 2006 and 2012 and 11.7 percent between 2005 and 2011.

Table IIB-4, US, FHFA House Price Index, Percentage Change and Average Rate of Percentage Change per Year, Selected Dates 1992-2011

Dec	∆%	Average ∆% per Year
1992-2012	85.1	3.1
1992-2000	39.4	4.2
2000-2003	24.3	7.5
2000-2005	50.4	8.5
2003-2005	21.0	10.0
2005-2012	-11.7	NA
2000-2006	54.3	7.5
2003-2006	24.1	7.5
2006-2012	-13.9	NA

Source: Source: Federal Housing Finance Agency http://fhfa.gov/Default.aspx?Page=14

Table VA-4 shows the euphoria of prices during the housing boom and the subsequent decline. House prices rose 95.4 percent in the 10-city composite of the Case-Shiller home price index and 81.0 percent in the 20-city composite between Dec 2000 and Dec 2005. Prices rose around 100 percent from Dec 2000 to Dec 2006, increasing 95.8 percent for the 10-city composite and 82.2 percent for the 20-city composite. House prices rose 37.6 percent between Dec 2003 and Dec 2005 for the 10-city composite and 34.2 percent for the 20-city composite propelled by low fed funds rates of 1.0 percent between Jun 2003 and Jun 2004 and then only increasing by 0.25 basis points at every meeting of the Federal Open Market Committee (FOMC) until Jun 2006, reaching 5.25 percent. Simultaneously, the suspension of auctions of the 30-year Treasury bond caused decline of yields of mortgage-backed securities with intended decrease in mortgage rates. Similarly, between Dec 2003 and Dec 2006 the 10-city index gained 37.9 percent and the 20-city index increased 35.1 percent. House prices have fallen from Dec 2006 to Dec 2012 by 28.7percent for the 10-city composite and 28.2 percent for the 20-city composite. Measuring house prices is quite difficult because of the lack of homogeneity that is typical of standardized commodities. In the 12 months ending in Dec 2012, house prices increased 5.9 percent in the 10-city composite and increased 6.8 percent in the 20-city composite. Table VA-4 also shows that house prices increased 39.6 percent between Dec 2000 and Dec 2012 for the 10-city composite and increased 30.8 percent for the 20-city composite. House prices are close to the lowest level since peaks during the boom before the financial crisis and global recession. The 10-city composite fell 30.0 percent from the peak in Jun 2006 to Dec 2012 and the 20-city composite fell 29.3 percent from the peak in Jul 2006 to Dec 2012. The final part of Table VA-4 provides average annual percentage rates of growth of the house price indexes of Standard & Poor’s Case-Shiller. The average annual growth rate between Dec 1987 and Dec 2012 for the 10-city composite was 3.3 percent. Data for the 20-city composite are available only beginning in Jan 2000. House prices accelerated in the 1990s with the average rate of the 10-city composite of 5.0 percent between Dec 1992 and Dec 2000 while the average rate for the period Dec 1987 to Dec 2000 was 3.8 percent. Although the global recession affecting the US between IVQ2007 (Dec) and IIQ2009 (Jun) caused decline of house prices of slightly above 30 percent, the average annual growth rate of the 10-city composite between Dec 2000 and Dec 2012 was 2.8 percent while the rate of the 20-city composite was 2.3 percent.

Table VA-4, US, Percentage Changes of Standard & Poor’s Case-Shiller Home Price Indices, Not Seasonally Adjusted, ∆%

	10-City Composite	20-City Composite
∆% Dec 2000 to Dec 2003	42.0	34.9
∆% Dec 2000 to Dec 2005	95.4	81.0
∆% Dec 2003 to Dec 2005	37.6	34.2
∆% Dec 2000 to Dec 2006	95.8	82.2
∆% Dec 2003 to Dec 2006	37.9	35.1
∆% Dec 2005 to Dec 2012	-28.6	-27.7
∆% Dec 2006 to Dec 2012	-28.7	-28.2
∆% Dec 2009 to Dec 2012	0.2	0.0
∆% Dec 2010 to Dec 2012	1.6	2.5
∆% Dec 2011 to Dec 2012	5.9	6.8
∆% Dec 2000 to Dec 2012	39.6	30.8
∆% Peak Jun 2006 Dec 2012	-30.0
∆% Peak Jul 2006 Dec 2012		-29.3
Average ∆% Dec 1987-Dec 2012	3.3	NA
Average ∆% Dec 1987-Dec 2000	3.8	NA
Average ∆% Dec 1992-Dec 2000	5.0	NA
Average ∆% Dec 2000-Dec 2012	2.8	2.3

Source: http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpidff--p-us----

With the exception of Apr 2011, house prices seasonally-adjusted declined in every month for both the 10-city and 20-city Case-Shiller composites from Dec 2010 to Jan 2012, as shown in Table VA-5. The most important seasonal factor in house prices is school changes for wealthier homeowners with more expensive houses. Without seasonal adjustment, house prices fell from Dec 2010 throughout Mar 2011 and then increased in every month from Apr to Aug 2011 but fell in every month from Sep 2011 to Feb 2012. The not seasonally adjusted index increases from Apr 2012 to Sep 2012 for both the 10- and 20-city composites while the seasonally adjusted index also increases in every month from Apr 2012 to Sep 2012. The index without seasonal adjustment fell 0.2 percent in Nov 2012 for the 10-city composite and fell 0.1 percent for the 20-city composite while the seasonally-adjusted index increased 0.6 percent for the 10-city composite and 0.6 percent for the 20-city composite. The seasonally adjusted index increased 0.9 percent for both composites in Dec 2012 while the not seasonally adjusted index increased 0.2 percent for both composites. Declining house prices cause multiple adverse effects of which two are quite evident. (1) There is a disincentive to buy houses in continuing price declines. (2) More mortgages could be losing fair market value relative to mortgage debt. Another possibility is a wealth effect that consumers restrain purchases because of the decline of their net worth in houses.

Table VA-5, US, Monthly Percentage Change of S&P Case-Shiller Home Price Indices, Seasonally Adjusted and Not Seasonally Adjusted, ∆%

	10-City Composite SA	10-City Composite NSA	20-City Composite SA	20-City Composite NSA
Dec 2012	0.9	0.2	0.9	0.2
Nov	0.5	-0.2	0.6	-0.1
Oct	0.6	-0.2	0.6	-0.2
Sep	0.3	0.2	0.4	0.2
Aug	0.4	0.8	0.5	0.8
Jul	0.2	1.4	0.3	1.5
Jun	1.0	2.1	1.0	2.3
May	0.9	2.2	0.9	2.4
Apr	0.7	1.4	1.1	1.4
Mar	0.5	-0.1	0.3	0.0
Feb	0.0	-0.9	0.2	-0.8
Jan	-0.2	-1.1	-0.1	-1.0
Dec 2011	-0.6	-1.2	-0.4	-1.2
Nov	-0.7	-1.4	-0.6	-1.3
Oct	-0.6	-1.3	-0.6	-1.3
Sep	-0.5	-0.6	-0.6	-0.7
Aug	-0.3	0.1	-0.4	0.1
Jul	-0.3	0.9	-0.2	1.0
Jun	-0.1	1.0	-0.1	1.2
May	-0.3	1.0	-0.3	1.0
Apr	0.0	0.6	0.2	0.6
Mar	-0.3	-1.0	-0.7	-1.0
Feb	-0.4	-1.3	-0.3	-1.2
Jan	-0.2	-1.1	-0.2	-1.1
Dec 2010	-0.3	-0.9	-0.3	-0.9

Source: http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpidff--p-us----

III World Financial Turbulence. Financial markets are being shocked by multiple factors including (1) world economic slowdown; (2) slowing growth in China with political development and slowing growth in Japan and world trade; (3) slow growth propelled by savings/investment reduction in the US with high unemployment/underemployment, falling wages, hiring collapse, contraction of real private fixed investment, decline of wealth of households over the business cycle by 10.9 percent adjusted for inflation while growing 617.2 percent adjusted for inflation from IVQ1945 to IIIQ2012 and unsustainable fiscal deficit/debt threatening prosperity that can cause risk premium on Treasury debt with Himalayan interest rate hikes; and (3) the outcome of the sovereign debt crisis in Europe. This section provides current data and analysis. Subsection IIIA Financial Risks provides analysis of the evolution of valuations of risk financial assets during the week. There are various appendixes for convenience of reference of material related to the euro area debt crisis. Some of this material is updated in Subsection IIIA when new data are available and then maintained in the appendixes for future reference until updated again in Subsection IIIA. Subsection IIIB Appendix on Safe Haven Currencies discusses arguments and measures of currency intervention and is available in the Appendixes section at the end of the blog comment. Subsection IIIC Appendix on Fiscal Compact provides analysis of the restructuring of the fiscal affairs of the European Union in the agreement of European leaders reached on Dec 9, 2011 and is available in the Appendixes section at the end of the blog comment. Subsection IIID Appendix on European Central Bank Large Scale Lender of Last Resort considers the policies of the European Central Bank and is available in the Appendixes section at the end of the blog comment. Appendix IIIE Euro Zone Survival Risk analyzes the threats to survival of the European Monetary Union and is available following Subsection IIIA. Subsection IIIF Appendix on Sovereign Bond Valuation provides more technical analysis and is available following Subsection IIIA. Subsection IIIG Appendix on Deficit Financing of Growth and the Debt Crisis provides analysis of proposals to finance growth with budget deficits together with experience of the economic history of Brazil and is available in the Appendixes section at the end of the blog comment.

IIIA Financial Risks. The past half year has been characterized by financial turbulence, attaining unusual magnitude in recent months. Table III-1, updated with every comment in this blog, provides beginning values on Fr Feb 22 and daily values throughout the week ending on Mar 1, 2013 of various financial assets. Section VI Valuation of Risk Financial Assets provides a set of more complete values. All data are for New York time at 5 PM. The first column provides the value on Fri Feb 22 and the percentage change in that prior week below the label of the financial risk asset. For example, the first column “Fri Feb 22, 2012”, first row “USD/EUR 1.390 1.3%,” provides the information that the US dollar (USD) appreciated 1.3 percent to USD 1.3190/EUR in the week ending on Fri Feb 22 relative to the exchange rate on Fri Feb 15. The first five asset rows provide five key exchange rates versus the dollar and the percentage cumulative appreciation (positive change or no sign) or depreciation (negative change or negative sign). Positive changes constitute appreciation of the relevant exchange rate and negative changes depreciation. Financial turbulence has been dominated by reactions to the new program for Greece (see section IB in http://cmpassocregulationblog.blogspot.com/2011/07/debt-and-financial-risk-aversion-and.html), modifications and new approach adopted in the Euro Summit of Oct 26 (European Commission 2011Oct26SS, 2011Oct26MRES), doubts on the larger countries in the euro zone with sovereign risks such as Spain and Italy but expanding into possibly France and Germany, the growth standstill recession and long-term unsustainable government debt in the US, worldwide deceleration of economic growth and continuing waves of inflation. The most important current shock is that resulting from the agreement by European leaders at their meeting on Dec 9 (European Council 2911Dec9), which is analyzed in IIIC Appendix on Fiscal Compact. European leaders reached a new agreement on Jan 30 (http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/127631.pdf) and another agreement on Jun 29, 2012 (http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/131388.pdf).

The dollar/euro rate is quoted as number of US dollars USD per one euro EUR, USD 1.3190/EUR in the first row, first column in the block for currencies in Table III-1 for Fri Feb 22, appreciating to USD 1.3062/EUR on Mon Feb 25, 2013, or by 1.0 percent. The dollar appreciated because fewer dollars, $1.3062, were required on Mon Feb 25 to buy one euro than $1.3190 on Feb 22. Table III-1 defines a country’s exchange rate as number of units of domestic currency per unit of foreign currency. USD/EUR would be the definition of the exchange rate of the US and the inverse [1/(USD/EUR)] is the definition in this convention of the rate of exchange of the euro zone, EUR/USD. A convention used throughout this blog is required to maintain consistency in characterizing movements of the exchange rate such as in Table III-1 as appreciation and depreciation. The first row for each of the currencies shows the exchange rate at 5 PM New York time, such as USD 1.3190/EUR on Feb 22; the second row provides the cumulative percentage appreciation or depreciation of the exchange rate from the rate on the last business day of the prior week, in this case Fri Feb 22, to the last business day of the current week, in this case Fri Mar 1, such as appreciation to USD 1.3020/EUR by Mar 1; and the third row provides the percentage change from the prior business day to the current business day. For example, the USD appreciated (denoted by positive sign) by 1.3 percent from the rate of USD 1.3190/EUR on Fri Feb 22 to the rate of USD 1.3020/EUR on Fri Mar 1 {[(1.3020/1.3190) – 1]100 = -1.3%} and appreciated (denoted by positive sign) by 0.3 percent from the rate of USD 1.3057 on Thu Feb 28 to USD 1.3020/EUR on Fri Mar 1 {[(1.3020/1.3057) -1]100 = -0.3%}. Other factors constant, appreciation of the dollar relative to the euro is caused by increasing risk aversion, with rising uncertainty on European sovereign risks increasing dollar-denominated assets with sales of risk financial investments. Funds move away from higher yielding risk financial assets to the safety of dollar investments. When risk aversion declines, funds have been moving away from safe assets in dollars to risk financial assets, depreciating the dollar.

Table III-I, Weekly Financial Risk Assets Feb 25 to Mar 1, 2013

Fri Feb 22, 2013

M 25

Tue 26

W 27

Thu 28

Fr 1

USD/EUR

1.3190

1.3%

1.3062

1.0%

1.3061

1.0%

0.0%

1.3136

0.4%

0.6%

1.3057

1.0%

0.6%

1.3020

1.3%

0.3%

JPY/ USD

93.41

0.1%

91.82

1.7%

91.98

1.5%

-0.2%

92.23

1.3%

-0.3%

92.56

0.9%

-0.4%

93.59

-0.2%

-1.1%

CHF/ USD

0.9296

-0.8%

0.9321

-0.3%

0.9320

-0.3%

0.0%

0.9296

0.0%

0.3%

0.9367

-0.8%

0.9428

-1.4%

-0.7%

CHF/ EUR

1.2259

0.5%

1.2175

0.7%

1.2172

0.7%

0.0%

1.2212

0.4%

-0.3%

1.2228

0.3%

-0.1%

1.2280

-0.2%

-0.4%

USD/ AUD

1.0321

0.9689

0.2%

1.0258

0.9748

-0.6%

1.0229

0.9776

-0.9%

-0.3%

1.0235

0.9770

-0.8%

0.1%

1.0215

0.9790

-1.0%

-0.2%

1.0204

0.9800

-1.1%

-0.1%

10 Year T Note

1.967

1.865

1.888

1.899

1.878

1.842

2 Year T Note

0.252

0.24

0.248

0.24

0.236

German Bond

2Y 0.13 10Y 1.57

2Y 0.12 10Y 1.56

2Y 0.07 10Y 1.45

2Y 0.04 10Y 1.45

2Y 0.03 10Y 1.41

DJIA

14000.57

0.1%

13784.17

-1.5%

13900.13

-0.7%

0.8%

14075.37

0.5%

1.3%

14054.49

0.4%

-0.1%

14089.66

0.6%

0.3%

DJ Global

2086.01

-0.6%

2079.77

-0.3%

2061.40

-1.2%

-0.9%

2080.99

-0.2%

0.9%

2089.05

0.1%

0.4%

2078.95

-0.3%

-0.5%

DJ Asia Pacific

1358.81

0.7%

1365.36

0.5%

1359.13

0.0%

-0.5%

1357.45

-0.1%

1374.71

1.2%

1.3%

1371.29

0.9%

-0.3%

Nikkei

11385.94

1.9%

11662.52

2.4%

11398.81

0.1%

-2.3%

11253.97

-1.2%

-1.3%

11559.36

1.5%

2.7%

11606.38

1.9%

0.4%

Shanghai

2314.16

-4.9%

2325.73

0.5%

2293.34

-0.9%

-1.4%

2313.22

0.0%

0.9%

2365.59

2.2%

2.3%

2359.51

2.0%

-0.3%

DAX

7661.91

0.9%

7773.19

1.5%

7597.11

-0.8%

-2.3%

7675.83

0.2%

1.0%

7741.70

1.0%

0.9%

7708.16

0.6%

-0.4%

DJ UBS

Comm.

136.69

-1.8%

137.12

0.3%

137.08

0.3%

0.0%

136.59

-0.1%

-0.4%

136.57

-0.1%

0.0%

135.77

-0.7%

-0.6%

WTI $ B

93.38

-2.7%

92.08

-1.4%

92.65

-0.8%

0.6%

92.85

-0.6%

0.2%

91.75

-1.7%

-1.2%

90.94

-2.6%

-0.9%

Brent $/B

114.26

-3.0%

113.44

-0.7%

112.81

-1.3%

-0.6%

111.90

-2.1%

-0.8%

110.94

-2.9%

-0.9%

110.68

-3.1%

-0.2%

Gold $/OZ

1579.80

-1.8%

1593.0

0.8%

1613.6

2.1%

1.3%

1596.5

1.1%

-1.1%

1579.5

0.0%

-1.1%

1575.4

-0.3%

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

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

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

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

Discussion of current and recent risk-determining events is followed below by analysis of risk-measuring yields of the US and Germany and the USD/EUR rate. The overwhelming risk factor is the unsustainable Treasury deficit/debt of the United States (http://cmpassocregulationblog.blogspot.com/2013/02/united-states-unsustainable-fiscal.html). Another rising risk is division within the Federal Open Market Committee (FOMC) on risks and benefits of current policies as expressed in the minutes of the meeting held on Jan 29-30, 2013 (http://www.federalreserve.gov/monetarypolicy/files/fomcminutes20130130.pdf 13):

“However, many participants also expressed some concerns about potential costs and risks arising from further asset purchases. Several participants discussed the possible complications that additional purchases could cause for the eventual withdrawal of policy accommodation, a few mentioned the prospect of inflationary risks, and some noted that further asset purchases could foster market behavior that could undermine financial stability. Several participants noted that a very large portfolio of long-duration assets would, under certain circumstances, expose the Federal Reserve to significant capital losses when these holdings were unwound, but others pointed to offsetting factors and one noted that losses would not impede the effective operation of monetary policy.

Jon Hilsenrath and Victoria McGrane, writing on “Fed slip over how long to keep cash spigot open,” published on Feb 20, 2013 in the Wall street Journal (http://professional.wsj.com/article/SB10001424127887323511804578298121033876536.html), analyze the minutes of the Fed, comments by members of the FOMC and data showing increase in holdings of riskier debt by investors, record issuance of junk bonds, mortgage securities and corporate loans.

A competing event is the high level of valuations of risk financial assets (http://cmpassocregulationblog.blogspot.com/2013/01/peaking-valuation-of-risk-financial.html). The DJIA closed at 14,075.36 on Fri Mar 1, 2013, which is only 0.6 percent from the value of 14,157.38 reached on Oct 15, 2007. The DJIA closed above 14,000 in three consecutive days: 14,075.37 on Wed Feb 27, 2013, 14,054.49 on Thu Feb 28, 2013 and 14,089.66 on Fri Mar 1, 2013. The DJIA fell 0.8 percent on Feb 20, 2013, when the minutes of the FOMC were released at 2:00 PM but recovered to 14,000.57 at the closing on Feb 22, 2013. The DJIA closed at 14,018.70 on Tue Feb 12 and at 13981.76 on Fri Feb 15. The DJIA closed at 14009.79 on Fri Feb 1, which is the first valuation above 14,000 since Oct 2007 when the DJIA reached historical highs.

Matt Jarzemsky, writing on “S&P 500 closes above 1500,” on Jan 25, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887323539804578263331715973390.html?mod=WSJ_hp_LEFTWhatsNewsCollection), finds that the DJIA closed on Fri Jun 25, 2013 at 13,895.98, or 1.9 percent below its record high of 14,164.53 in Oct 2007 while S&P 500 closed at 1502.96. DJIA closed at 13,984.80 on Oct 15, 2007, or only 0.6 percent higher than 13,895.98 at the close of markets on Jan 25, 2013, reaching a high of 14,157.38 on Oct 15, 2007, which is only 1.9 percent higher than 13,895.98 at the close on Jan 25, 2013 (using interactive chart data at http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata). The S&P 500 closed at 1502.96 on Jan 25, 2013, which is only 3.0 percent from the close at 1458.71 on Oct 15, 2007, and 4.1 percent from the high at 1564.74 on Oct 15, 2007 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata). Rita Nazareth and Sarah Pringle, writing on “Dow Average rises to 5-year high amid debt-ceiling talks,” on Jan 18, 2012, published in Bloomberg (http://www.bloomberg.com/news/2013-01-18/u-s-stock-futures-little-changed-before-earnings-data.html), find that the DJIA reached on Jan 18, 2012, the highest level in five years at 13,649.70 with volume of 6.6 billion shares in US exchanges, which is higher by 6.9 percent than the average in three months. Vito J. Bacanelli, writing on “GOP proposal lifts Dow to five-year high,” on Jan 19, 2013, published by Barron’s (http://online.barrons.com/article/SB50001424052748703596604578235762819811322.html?mod=BOL_hpp_mag#articleTabs_article%3D1), finds that the closing level of 13,649.70 on Jan 18, 2013, is the highest close since Dec 10, 2007, only 4 percent lower than the all-time high and the best start for a year since 1997. The Wall Street Journal finds a 52-week high of 13661.87 on Oct 5, 2012 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata). The S&P 500 at 1485.98 is 5 percent below its all time high of 1565 in 2007. An important risk event is the reduction of growth prospects in the euro zone discussed by European Central Bank President Mario Draghi in “Introductory statement to the press conference,” on Dec 6, 2012 (http://www.ecb.int/press/pressconf/2012/html/is121206.en.html):

“This assessment is reflected in the December 2012 Eurosystem staff macroeconomic projections for the euro area, which foresee annual real GDP growth in a range between -0.6% and -0.4% for 2012, between -0.9% and 0.3% for 2013 and between 0.2% and 2.2% for 2014. Compared with the September 2012 ECB staff macroeconomic projections, the ranges for 2012 and 2013 have been revised downwards.

The Governing Council continues to see downside risks to the economic outlook for the euro area. These are mainly related to uncertainties about the resolution of sovereign debt and governance issues in the euro area, geopolitical issues and fiscal policy decisions in the United States possibly dampening sentiment for longer than currently assumed and delaying further the recovery of private investment, employment and consumption.”

Reuters, writing on “Bundesbank cuts German growth forecast,” on Dec 7, 2012, published in the Financial Times (http://www.ft.com/intl/cms/s/0/8e845114-4045-11e2-8f90-00144feabdc0.html#axzz2EMQxzs3u), informs that the central bank of Germany, Deutsche Bundesbank reduced its forecast of growth for the economy of Germany to 0.7 percent in 2012 from an earlier forecast of 1.0 percent in Jun and to 0.4 percent in 2012 from an earlier forecast of 1.6 percent while the forecast for 2014 is at 1.9 percent.

The major risk event during earlier weeks was sharp decline of sovereign yields with the yield on the ten-year bond of Spain falling to 5.309 percent and that of the ten-year bond of Italy falling to 4.473 percent on Fri Nov 30, 2012 and 5.366 percent for the ten-year of Spain and 4.527 percent for the ten-year of Italy on Fri Nov 14, 2012 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata). Vanessa Mock and Frances Robinson, writing on “EU approves Spanish bank’s restructuring plans,” on Nov 28, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887323751104578146520774638316.html?mod=WSJ_hp_LEFTWhatsNewsCollection), inform that the European Union regulators approved restructuring of four Spanish banks (Bankia, NCG Banco, Catalunya Banc and Banco de Valencia), which helped to calm sovereign debt markets. Harriet Torry and James Angelo, writing on “Germany approves Greek aid,” on Nov 30, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887323751104578150532603095790.html?mod=WSJ_hp_LEFTWhatsNewsCollection), inform that the German parliament approved the plan to provide Greece a tranche of €44 billion in promised financial support, which is subject to sustainability analysis of the bond repurchase program later in Dec 2012. A hurdle for sustainability of repurchasing debt is that Greece’s sovereign bonds have appreciated significantly from around 24 percent for the bond maturing in 21 years and 20 percent for the bond maturing in 31 years in Aug 2012 to around 17 percent for the 21-year maturity and 15 percent for the 31-year maturing in Nov 2012. Declining years are equivalent to increasing prices, making the repurchase more expensive. Debt repurchase is intended to reduce bonds in circulation, turning Greek debt more manageable. Ben McLannahan, writing on “Japan unveils $11bn stimulus package,” on Nov 30, 2012, published in the Financial Times (http://www.ft.com/intl/cms/s/0/adc0569a-3aa5-11e2-baac-00144feabdc0.html#axzz2DibFFquN

), informs that the cabinet in Japan approved another stimulus program of $11 billion, which is twice larger than another stimulus plan in late Oct and close to elections in Dec. Henry Sender, writing on “Tokyo faces weak yen and high bond yields,” published on Nov 29, 2012 in the Financial Times (http://www.ft.com/intl/cms/s/0/9a7178d0-393d-11e2-afa8-00144feabdc0.html#axzz2DibFFquN), analyzes concerns of regulators on duration of bond holdings in an environment of likelihood of increasing yields and yen depreciation.

First, Risk-Determining Events. The European Council statement on Nov 23, 2012 asked the President of the European Commission “to continue the work and pursue consultations in the coming weeks to find a consensus among the 27 over the Union’s Multiannual Financial Framework for the period 2014-2020” (http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/133723.pdf) Discussions will continue in the effort to reach agreement on a budget: “A European budget is important for the cohesion of the Union and for jobs and growth in all our countries” (http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/ec/133723.pdf). There is disagreement between the group of countries requiring financial assistance and those providing bailout funds. Gabrielle Steinhauser and Costas Paris, writing on “Greek bond rally puts buyback in doubt,” on Nov 23, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324352004578136362599130992.html?mg=reno64-wsj) find a new hurdle in rising prices of Greek sovereign debt that may make more difficult buybacks of debt held by investors. European finance ministers continue their efforts to reach an agreement for Greece that meets with approval of the European Central Bank and the IMF. The European Council (2012Oct19 http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/133004.pdf ) reached conclusions on strengthening the euro area and providing unified financial supervision:

“The European Council called for work to proceed on the proposals on the Single Supervisory Mechanism as a matter of priority with the objective of agreeing on the legislative framework by 1st January 2013 and agreed on a number of orientations to that end. It also took note of issues relating to the integrated budgetary and economic policy frameworks and democratic legitimacy and accountability which should be further explored. It agreed that the process towards deeper economic and monetary union should build on the EU's institutional and legal framework and be characterised by openness and transparency towards non-euro area Member States and respect for the integrity of the Single Market. It looked forward to a specific and time-bound roadmap to be presented at its December 2012 meeting, so that it can move ahead on all essential building blocks on which a genuine EMU should be based.”

Buiter (2012Oct15) finds that resolution of the euro crisis requires full banking union together with restructuring the sovereign debt of at least four and possibly total seven European countries. The Bank of Spain released new data on doubtful debtors in Spain’s credit institutions (http://www.bde.es/bde/en/secciones/prensa/Agenda/Datos_de_credit_a6cd708c59cf931.html). In 2006, the value of doubtful credits reached €10,859 million or 0.7 percent of total credit of €1,508,626 million. In Aug 2012, doubtful credit reached €178,579 million or 10.5 percent of total credit of €1,698,714 million.

There are three critical factors influencing world financial markets. (1) Spain could request formal bailout from the European Stability Mechanism (ESM) that may also affect Italy’s international borrowing. David Roman and Jonathan House, writing on “Spain risks backlash with budget plan,” on Sep 27, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390443916104578021692765950384.html?mod=WSJ_hp_LEFTWhatsNewsCollection) analyze Spain’s proposal of reducing government expenditures by €13 billion, or around $16.7 billion, increasing taxes in 2013, establishing limits on early retirement and cutting the deficit by €65 billion through 2014. Banco de España, Bank of Spain, contracted consulting company Oliver Wyman to conduct rigorous stress tests of the resilience of its banking system. (Stress tests and their use are analyzed by Pelaez and Pelaez Globalization and the State Vol. I (2008b), 95-100, International Financial Architecture (2005) 112-6, 123-4, 130-3).) The results are available from Banco de España (http://www.bde.es/bde/en/secciones/prensa/infointeres/reestructuracion/ http://www.bde.es/f/webbde/SSICOM/20120928/informe_ow280912e.pdf). The assumptions of the adverse scenario used by Oliver Wyman are quite tough for the three-year period from 2012 to 2014: “6.5 percent cumulative decline of GDP, unemployment rising to 27.2 percent and further declines of 25 percent of house prices and 60 percent of land prices (http://www.bde.es/f/webbde/SSICOM/20120928/informe_ow280912e.pdf). Fourteen banks were stress tested with capital needs estimates of seven banks totaling €59.3 billion. The three largest banks of Spain, Banco Santander (http://www.santander.com/csgs/Satellite/CFWCSancomQP01/es_ES/Corporativo.html), BBVA (http://www.bbva.com/TLBB/tlbb/jsp/ing/home/index.jsp) and Caixabank (http://www.caixabank.com/index_en.html), with 43 percent of exposure under analysis, have excess capital of €37 billion in the adverse scenario in contradiction with theories that large, international banks are necessarily riskier. Jonathan House, writing on “Spain expects wider deficit on bank aid,” on Sep 30, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390444138104578028484168511130.html?mod=WSJPRO_hpp_LEFTTopStories), analyzes the 2013 budget plan of Spain that will increase the deficit of 7.4 percent of GDP in 2012, which is above the target of 6.3 percent under commitment with the European Union. The ratio of debt to GDP will increase to 85.3 percent in 2012 and 90.5 percent in 2013 while the 27 members of the European Union have an average debt/GDP ratio of 83 percent at the end of IIQ2012. (2) Symmetric inflation targets appear to have been abandoned in favor of a self-imposed single jobs mandate of easing monetary policy even after the economy grows again at or close to potential output. Monetary easing by unconventional measures is now apparently open ended in perpetuity as provided in the statement of the meeting of the Federal Open Market Committee (FOMC) on Sep 13, 2012 (http://www.federalreserve.gov/newsevents/press/monetary/20120913a.htm):

“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 agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.”

In fact, it is evident to the public that this policy will be abandoned if inflation costs rise. There is the concern of the production and employment costs of controlling future inflation.

(2) The European Central Bank (ECB) approved a new program of bond purchases under the name “Outright Monetary Transactions” (OMT). The ECB will purchase sovereign bonds of euro zone member countries that have a program of conditionality under the European Financial Stability Facility (EFSF) that is converting into the European Stability Mechanism (ESM). These programs provide enhancing the solvency of member countries in a transition period of structural reforms and fiscal adjustment. The purchase of bonds by the ECB would maintain debt costs of sovereigns at sufficiently low levels to permit adjustment under the EFSF/ESM programs. Purchases of bonds are not limited quantitatively with discretion by the ECB as to how much is necessary to support countries with adjustment programs. Another feature of the OMT of the ECB is sterilization of bond purchases: funds injected to pay for the bonds would be withdrawn or sterilized by ECB transactions. The statement by the European Central Bank on the program of OTM is as follows (http://www.ecb.int/press/pr/date/2012/html/pr120906_1.en.html):

“6 September 2012 - Technical features of Outright Monetary Transactions

As announced on 2 August 2012, the Governing Council of the European Central Bank (ECB) has today taken decisions on a number of technical features regarding the Eurosystem’s outright transactions in secondary sovereign bond markets that aim at safeguarding an appropriate monetary policy transmission and the singleness of the monetary policy. These will be known as Outright Monetary Transactions (OMTs) and will be conducted within the following framework:

Conditionality

A necessary condition for Outright Monetary Transactions is strict and effective conditionality attached to an appropriate European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) programme. Such programmes can take the form of a full EFSF/ESM macroeconomic adjustment programme or a precautionary programme (Enhanced Conditions Credit Line), provided that they include the possibility of EFSF/ESM primary market purchases. The involvement of the IMF shall also be sought for the design of the country-specific conditionality and the monitoring of such a programme.

The Governing Council will consider Outright Monetary Transactions to the extent that they are warranted from a monetary policy perspective as long as programme conditionality is fully respected, and terminate them once their objectives are achieved or when there is non-compliance with the macroeconomic adjustment or precautionary programme.

Following a thorough assessment, the Governing Council will decide on the start, continuation and suspension of Outright Monetary Transactions in full discretion and acting in accordance with its monetary policy mandate.

Coverage

Outright Monetary Transactions will be considered for future cases of EFSF/ESM macroeconomic adjustment programmes or precautionary programmes as specified above. They may also be considered for Member States currently under a macroeconomic adjustment programme when they will be regaining bond market access.

Transactions will be focused on the shorter part of the yield curve, and in particular on sovereign bonds with a maturity of between one and three years.

No ex ante quantitative limits are set on the size of Outright Monetary Transactions.

Creditor treatment

The Eurosystem intends to clarify in the legal act concerning Outright Monetary Transactions that it accepts the same (pari passu) treatment as private or other creditors with respect to bonds issued by euro area countries and purchased by the Eurosystem through Outright Monetary Transactions, in accordance with the terms of such bonds.

Sterilisation

The liquidity created through Outright Monetary Transactions will be fully sterilised.

Transparency

Aggregate Outright Monetary Transaction holdings and their market values will be published on a weekly basis. Publication of the average duration of Outright Monetary Transaction holdings and the breakdown by country will take place on a monthly basis.

Securities Markets Programme

Following today’s decision on Outright Monetary Transactions, the Securities Markets Programme (SMP) is herewith terminated. The liquidity injected through the SMP will continue to be absorbed as in the past, and the existing securities in the SMP portfolio will be held to maturity.”

Jon Hilsenrath, writing on “Fed sets stage for stimulus,” on Aug 31, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390443864204577623220212805132.html?mod=WSJ_hp_LEFTWhatsNewsCollection), analyzes the essay presented by Chairman Bernanke at the Jackson Hole meeting of central bankers, as defending past stimulus with unconventional measures of monetary policy that could be used to reduce extremely high unemployment. Chairman Bernanke (2012JHAug31, 18-9) does support further unconventional monetary policy impulses if required by economic conditions (http://www.federalreserve.gov/newsevents/speech/bernanke20120831a.htm):

“Over the past five years, the Federal Reserve has acted to support economic growth and foster job creation, and it is important to achieve further progress, particularly in the labor market. Taking due account of the uncertainties and limits of its policy tools, the Federal Reserve will provide additional policy accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.”

Professor John H Cochrane (2012Aug31), at the University of Chicago Booth School of Business, writing on “The Federal Reserve: from central bank to central planner,” on Aug 31, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390444812704577609384030304936.html?mod=WSJ_hps_sections_opinion), analyzes that the departure of central banks from open market operations into purchase of assets with risks to taxpayers and direct allocation of credit subject to political influence has caused them to abandon their political independence and accountability. Cochrane (2012Aug31) finds a return to the proposition of Milton Friedman in the 1960s that central banks can cause inflation and macroeconomic instability.

Mario Draghi (2012Aug29), President of the European Central Bank, also reiterated the need of exceptional and unconventional central bank policies (http://www.ecb.int/press/key/date/2012/html/sp120829.en.html):

“Yet it should be understood that fulfilling our mandate sometimes requires us to go beyond standard monetary policy tools. When markets are fragmented or influenced by irrational fears, our monetary policy signals do not reach citizens evenly across the euro area. We have to fix such blockages to ensure a single monetary policy and therefore price stability for all euro area citizens. This may at times require exceptional measures. But this is our responsibility as the central bank of the euro area as a whole.

The ECB is not a political institution. But it is committed to its responsibilities as an institution of the European Union. As such, we never lose sight of our mission to guarantee a strong and stable currency. The banknotes that we issue bear the European flag and are a powerful symbol of European identity.”

Buiter (2011Oct31) analyzes that the European Financial Stability Fund (EFSF) would need a “bigger bazooka” to bail out euro members in difficulties that could possibly be provided by the ECB. Buiter (2012Oct15) finds that resolution of the euro crisis requires full banking union together with restructuring the sovereign debt of at least four and possibly total seven European countries. Table III-7 in IIIE Appendix Euro Zone Survival Risk below provides the combined GDP in 2012 of the highly indebted euro zone members estimated in the latest World Economic Outlook of the IMF at $4167 billion or 33.1 percent of total euro zone GDP of $12,586 billion. Using the WEO of the IMF, Table III-8 in IIIE Appendix Euro Zone Survival Risk below provides debt of the highly indebted euro zone members at $3927.8 billion in 2012 that increases to $5809.9 billion when adding Germany’s debt, corresponding to 167.0 percent of Germany’s GDP. There are additional sources of debt in bailing out banks. The dimensions of the problem may require more firepower than a bazooka perhaps that of the largest conventional bomb of all times of 44,000 pounds experimentally detonated only once by the US in 1948 (http://www.airpower.au.af.mil/airchronicles/aureview/1967/mar-apr/coker.html).

Second, Risk-Measuring Yields and Exchange Rate. The ten-year government bond of Spain was quoted at 6.868 percent on Aug 10, 2012, declining to 6.447 percent on Aug 17 and 6.403 percent on Aug 24, 2012, and the ten-year government bond of Italy fell from 5.894 percent on Aug 10, 2012 to 5.709 percent on Aug 17 and 5.618 percent on Aug 24, 2012. The yield of the ten-year sovereign bond of Spain traded at 5.122 percent on Mar 4, 2012 and that of the ten-year sovereign bond of Italy at 4.779 percent (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata). Risk aversion is captured by flight of investors from risk financial assets to the government securities of the US and Germany. Diminishing aversion is captured by increase of the yield of the two- and ten-year Treasury notes and the two- and ten-year government bonds of Germany. Table III-1A provides yields of US and German governments bonds and the rate of USD/EUR. Yields of US and German government bonds decline during shocks of risk aversion and the dollar strengthens in the form of fewer dollars required to buy one euro. The yield of the US ten-year Treasury note fell from 2.202 percent on Aug 26, 2011 to 1.459 percent on Jul 20, 2012, reminiscent of experience during the Treasury-Fed accord of the 1940s that placed a ceiling on long-term Treasury debt (Hetzel and Leach 2001), while the yield of the ten-year government bond of Germany fell from 2.16 percent to 1.17 percent. In the week of Mar 1, 2013, the yield of the two-year Treasury decreased to 0.236 percent and that of the ten-year Treasury decreased to 1.842 percent while the two-year bond of Germany decreased to 0.03 percent and the ten-year decreased to 1.41 percent; and the dollar appreciated to USD 1.3020/EUR. The zero interest rates for the monetary policy rate of the US, or fed funds rate, carry trades ensure devaluation of the dollar if there is no risk aversion but the dollar appreciates in flight to safe haven during episodes of risk aversion. Unconventional monetary policy induces significant global financial instability, excessive risks and low liquidity. The ten-year Treasury yield is about equal to consumer price inflation of 1.6 percent in the 12 months ending in Jan 2013 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/01/recovery-without-hiring-world-inflation.html) and the expectation of higher inflation if risk aversion diminishes. Treasury securities continue to be safe haven for investors fearing risk but with concentration in shorter maturities such as the two-year Treasury. The lower part of Table III-1A provides the same flight to government securities of the US and Germany and the USD during the financial crisis and global recession and the beginning of the European debt crisis in the spring of 2010 with the USD trading at USD 1.192/EUR on Jun 7, 2010.

Table III-1A, Two- and Ten-Year Yields of Government Bonds of the US and Germany and US Dollar/EUR Exchange rate

	US 2Y	US 10Y	DE 2Y	DE 10Y	USD/ EUR
3/1/13	0.236	1.842	0.03	1.41	1.3020
2/22/13	0.252	1.967	0.13	1.57	1.3190
2/15/13	0.268	2.007	0.19	1.65	1.3362
2/8/13	0.252	1.949	0.18	1.61	1.3365
2/1/13	0.26	2.024	0.25	1.67	1.3642
1/25/13	0.278	1.947	0.26	1.64	1.3459
1/18/13	0.252	1.84	0.18	1.56	1.3321
1/11/13	0.247	1.862	0.13	1.58	1.3343
1/4/13	0.262	1.898	0.08	1.54	1.3069
12/28/12	0.252	1.699	-0.01	1.31	1.3218
12/21/12	0.272	1.77	-0.01	1.38	1.3189
12/14/12	0.232	1.704	-0.04	1.35	1.3162
12/7/12	0.256	1.625	-0.08	1.30	1.2926
11/30/12	0.248	1.612	0.01	1.39	1.2987
11/23/12	0.273	1.691	0.00	1.44	1.2975
11/16/12	0.24	1.584	-0.03	1.33	1.2743
11/9/12	0.256	1.614	-0.03	1.35	1.2711
11/2/12	0.274	1.715	0.01	1.45	1.2838
10/26/12	0.299	1.748	0.05	1.54	1.2942
10/19/12	0.296	1.766	0.11	1.59	1.3023
10/12/12	0.264	1.663	0.04	1.45	1.2953
10/5/12	0.26	1.737	0.06	1.52	1.3036
9/28/12	0.236	1.631	0.02	1.44	1.2859
9/21/12	0.26	1.753	0.04	1.60	1.2981
9/14/12	0.252	1.863	0.10	1.71	1.3130
9/7/12	0.252	1.668	0.03	1.52	1.2816
8/31/12	0.225	1.543	-0.03	1.33	1.2575
8/24/12	0.266	1.684	-0.01	1.35	1.2512
8/17/12	0.288	1.814	-0.04	1.50	1.2335
8/10/12	0.267	1.658	-0.07	1.38	1.2290
8/3/12	0.242	1.569	-0.02	1.42	1.2387
7/27/12	0.244	1.544	-0.03	1.40	1.2320
7/20/12	0.207	1.459	-0.07	1.17	1.2158
7/13/12	0.24	1.49	-0.04	1.26	1.2248
7/6/12	0.272	1.548	-0.01	1.33	1.2288
6/29/12	0.305	1.648	0.12	1.58	1.2661
6/22/12	0.309	1.676	0.14	1.58	1.2570
6/15/12	0.272	1.584	0.07	1.44	1.2640
6/8/12	0.268	1.635	0.04	1.33	1.2517
6/1/12	0.248	1.454	0.01	1.17	1.2435
5/25/12	0.291	1.738	0.05	1.37	1.2518
5/18/12	0.292	1.714	0.05	1.43	1.2780
5/11/12	0.248	1.845	0.09	1.52	1.2917
5/4/12	0.256	1.876	0.08	1.58	1.3084
4/6/12	0.31	2.058	0.14	1.74	1.3096
3/30/12	0.335	2.214	0.21	1.79	1.3340
3/2/12	0.29	1.977	0.16	1.80	1.3190
2/24/12	0.307	1.977	0.24	1.88	1.3449
1/6/12	0.256	1.957	0.17	1.85	1.2720
12/30/11	0.239	1.871	0.14	1.83	1.2944
8/26/11	0.20	2.202	0.65	2.16	1.450
8/19/11	0.192	2.066	0.65	2.11	1.4390
6/7/10	0.74	3.17	0.49	2.56	1.192
3/5/09	0.89	2.83	1.19	3.01	1.254
12/17/08	0.73	2.20	1.94	3.00	1.442
10/27/08	1.57	3.79	2.61	3.76	1.246
7/14/08	2.47	3.88	4.38	4.40	1.5914
6/26/03	1.41	3.55	NA	3.62	1.1423

Note: DE: Germany

Source:

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

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

http://www.federalreserve.gov/releases/h15/data.htm

http://www.bundesbank.de/Navigation/EN/Statistics/Time_series_databases/Macro_economic_time_series/macro_economic_time_series_node.html?anker=GELDZINS

http://www.ecb.int/stats/money/long/html/index.en.html

Chart III-1A of the Board of Governors of the Federal Reserve System provides the ten-year, two-year and one-month Treasury constant maturity yields together with the yield of the corporate bond with Moody’s rating of Baa. The riskier yield of the Baa corporate bond exceeds the relatively riskless yields of the Treasury securities. The beginning yields in Chart III-1A for July 31, 2001, are 3.67 percent for one month, 3.79 percent for two years, 5.07 percent for ten years and 7.85 percent for the Baa corporate bond. On July 30, 2007, yields inverted with the one month at 4.95 percent, the two-year at 4.59 percent and the ten year at 5.82 percent with the yield of the Baa corporate bond at 6.70 percent. Another interesting point is for Oct 31, 2008, with the yield of the Baa jumping to 9.54 percent and the Treasury yields declining: one month 0.12 percent, two years 1.56 percent and ten years 4.01 percent during a flight to the dollar and government securities analyzed by Cochrane and Zingales (2009). Another spike in the series is for Apr 4, 2006 with the yield of the corporate Baa bond at 8.63 and the Treasury yields of 0.12 percent for one month, 0.94 for two years and 2.95 percent for ten years. During the beginning of the flight from risk financial assets to US government securities (see Cochrane and Zingales 2009), the one-month yield was 0.07 percent, the two-year yield 1.64 percent and the ten-year yield 3.41. The combination of zero fed funds rate and quantitative easing caused sharp decline of the yields from 2008 and 2009. Yield declines have also occurred during periods of financial risk aversion, including the current one of stress of financial markets in Europe. The final point of Chart III1-A is for Feb 28, 2013, with the one-month yield at 0.07 percent, the two-year at 0.25 percent, the ten-year at 1.89 percent and the corporate Baa bond at 4.78 percent.

Chart III-1A, US, Ten-Year, Two-Year and One-Month Treasury Constant Maturity Yields and Yield of Moody’s Baa Corporate Bond, Jul 31, 2001-Feb 28, 2013

Note: US Recessions in shaded areas

Source: Board of Governors of the Federal Reserve System

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

Kate Linebaugh, writing on “Falling revenue dings stocks,” on Oct 20, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390444592704578066933466076070.html?mod=WSJPRO_hpp_LEFTTopStories), identifies a key financial vulnerability: falling revenues across markets for United States reporting companies. Global economic slowdown is reducing corporate sales and squeezing corporate strategies. Linebaugh quotes data from Thomson Reuters that 100 companies of the S&P 500 index have reported declining revenue only 1 percent higher in Jun-Sep 2012 relative to Jun-Sep 2011 but about 60 percent of the companies are reporting lower sales than expected by analysts with expectation that revenue for the S&P 500 will be lower in Jun-Sep 2012 for the entities represented in the index. Results of US companies are likely repeated worldwide. The basic valuation equation that is also used in capital budgeting postulates that the value of stocks or of an investment project is given by:

Where R_τ is expected revenue in the time horizon from τ =1 to T; C_τ denotes costs; and ρ is an appropriate rate of discount. In words, the value today of a stock or investment project is the net revenue, or revenue less costs, in the investment period from τ =1 to T discounted to the present by an appropriate rate of discount. In the current weak economy, revenues have been increasing more slowly than anticipated in investment plans. An increase in interest rates would affect discount rates used in calculations of present value, resulting in frustration of investment decisions. If V represents value of the stock or investment project, as ρ → ∞, meaning that interest rates increase without bound, then V → 0, or

declines.

There was mixed performance in equity indexes with many indexes gaining in Table III-1 in the week ending on Mar 1, 2013. Stagnating revenues are causing reevaluation of discounted net earnings with deteriorating views on the world economy and United States fiscal sustainability but investors have been driving indexes higher. DJIA increased 0.3 percent on Mar 1, increasing 0.6 percent in the week. Germany’s Dax decreased 0.4 percent on Fri Mar 1 and increased 0.6 percent in the week. Dow Global decreased 0.5 percent on Mar 1 and decreased 0.3 percent in the week. Japan’s Nikkei Average increased 0.4 percent on Fri Mar 1 and increased 1.9 percent in the week as the yen continues to be oscillating but relatively weaker and the stock market gains in expectations of fiscal stimulus by a new administration. Dow Asia Pacific TSM decreased 0.3 percent on Mar 1 and increased 0.9 percent in the week while Shanghai Composite that was closed in the week of Feb 15, 2013 because of the Chinese New Year decreased 0.3 percent on Mar 1 and increased 2.0 percent in the week of Mar 1, falling below 2000 to close at 1980.13 on Fri Nov 30 but closing at 2359.51 on Fri Mar 1. There is evident trend of deceleration of the world economy that could affect corporate revenue and equity valuations, causing oscillation in equity markets with increases during favorable risk appetite.

Commodities were weaker in the week of Mar 1, 2013. The DJ UBS Commodities Index decreased 0.6 percent on Fri Mar 1 and decreased 0.7 percent in the week, as shown in Table III-1. WTI decreased 2.6 percent in the week of Mar 1 while Brent decreased 3.1 percent in the week. Gold decreased 0.3 percent on Fri Mar 1 and decreased 0.3 percent in the week.

Table III-2 provides an update of the consolidated financial statement of the Eurosystem. The balance sheet has swollen with the long-term refinancing operations (LTROs). Line 5 “Lending to Euro Area Credit Institutions Related to Monetary Policy” increased from €546,747 million on Dec 31, 2010, to €879,130 million on Dec 28, 2011 and €1,008,537 million on Feb 22, 2013. The sum of line 5 and line 7 (“Securities of Euro Area Residents Denominated in Euro”) has increased to €1,616,029 million in the statement of Feb 22, 2013. There is high credit risk in these transactions with capital of only €86,035 million as analyzed by Cochrane (2012Aug31).

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

	Dec 31, 2010	Dec 28, 2011	Feb 22, 2013
1 Gold and other Receivables	367,402	419,822	438,690
2 Claims on Non Euro Area Residents Denominated in Foreign Currency	223,995	236,826	253,120
3 Claims on Euro Area Residents Denominated in Foreign Currency	26,941	95,355	28,071
4 Claims on Non-Euro Area Residents Denominated in Euro	22,592	25,982	20,507
5 Lending to Euro Area Credit Institutions Related to Monetary Policy Operations Denominated in Euro	546,747	879,130	1,008,537
6 Other Claims on Euro Area Credit Institutions Denominated in Euro	45,654	94,989	80,121
7 Securities of Euro Area Residents Denominated in Euro	457,427	610,629	607,492
8 General Government Debt Denominated in Euro	34,954	33,928	29,912
9 Other Assets	278,719	336,574	282,375
TOTAL ASSETS	2,004, 432	2,733,235	2,748,823
Memo Items
Sum of 5 and 7	1,004,174	1,489,759	1,616,029
Capital and Reserves	78,143	85,748	86,035