Recovery without Hiring, Ten Million Fewer Full-time Jobs, Youth and Middle-age Unemployment, United States International Trade, Peaking Valuations of Risk Financial Assets, World Economic Slowdown and Global Recession Risk
Carlos M. Pelaez
© Carlos M. Pelaez, 2010, 2011, 2012, 2013
Executive Summary
I Recovery without Hiring
IA1 Hiring Collapse
IA2 Labor Underutilization
IA3 Ten Million Fewer Full-time Job
IA4 Youth and Middle-Aged Unemployment
II United States International Trade
IIA1 United States International Trade
IIA2 United States Import and Export Prices
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
I Recovery without Hiring. Professor Edward P. Lazear (2012Jan19) at Stanford University finds that recovery of hiring in the US to peaks attained in 2007 requires an increase of hiring by 30 percent while hiring levels have increased by only 4 percent since Jan 2009. The high level of unemployment with low level of hiring reduces the statistical probability that the unemployed will find a job. According to Lazear (2012Jan19), the probability of finding a new job currently is about one third of the probability of finding a job in 2007. Improvements in labor markets have not increased the probability of finding a new job. Lazear (2012Jan19) quotes an essay coauthored with James R. Spletzer in the American Economic Review (Lazear and Spletzer 2012Mar, 2012May) on the concept of churn. A dynamic labor market occurs when a similar amount of workers is hired as those who are separated. This replacement of separated workers is called churn, which explains about two-thirds of total hiring. Typically, wage increases received in a new job are higher by 8 percent. Lazear (2012Jan19) argues that churn has declined 35 percent from the level before the recession in IVQ2007. Because of the collapse of churn there are no opportunities in escaping falling real wages by moving to another job. As this blog argues, there are meager chances of escaping unemployment because of the collapse of hiring and those employed cannot escape falling real wages by moving to another job (http://cmpassocregulationblog.blogspot.com/2013/03/thirty-one-million-unemployed-or.html). Lazear and Spletzer (2012Mar, 1) argue that reductions of churn reduce the operational effectiveness of labor markets. Churn is part of the allocation of resources or in this case labor to occupations of higher marginal returns. The decline in churn can harm static and dynamic economic efficiency. Losses from decline of churn during recessions can affect an economy over the long-term by preventing optimal growth trajectories because resources are not used in the occupations where they provide highest marginal returns. Lazear and Spletzer (2012Mar 7-8) conclude that: “under a number of assumptions, we estimate that the loss in output during the recession [of 2007 to 2009] and its aftermath resulting from reduced churn equaled $208 billion. On an annual basis, this amounts to about .4% of GDP for a period of 3½ years.”
There are two additional facts discussed below: (1) there are about ten million fewer full-time jobs currently than before the recession of 2008 and 2009; and (2) the extremely high and rigid rate of youth unemployment is denying an early start to young people ages 16 to 24 years while unemployment of ages 45 years or over has swelled An important characteristic of the current fractured labor market of the US is the closing of the avenue for exiting unemployment and underemployment normally available through dynamic hiring. Another avenue that is closed is the opportunity for advancement in moving to new jobs that pay better salaries and benefits again because of the collapse of hiring in the United States. Those who are unemployed or underemployed cannot find a new job even accepting lower wages and no benefits. The employed cannot escape declining inflation-adjusted earnings because there is no hiring. The objective of this section is to analyze hiring and labor underutilization in the United States.
Blanchard and Katz (1997, 53 consider an appropriate measure of job stress:
“The right measure of the state of the labor market is the exit rate from unemployment, defined as the number of hires divided by the number unemployed, rather than the unemployment rate itself. What matters to the unemployed is not how many of them there are, but how many of them there are in relation to the number of hires by firms.”
The natural rate of unemployment and the similar NAIRU are quite difficult to estimate in practice (Ibid; see Ball and Mankiw 2002).
The Bureau of Labor Statistics (BLS) created the Job Openings and Labor Turnover Survey (JOLTS) with the purpose that (http://www.bls.gov/jlt/jltover.htm#purpose):
“These data serve as demand-side indicators of labor shortages at the national level. Prior to JOLTS, there was no economic indicator of the unmet demand for labor with which to assess the presence or extent of labor shortages in the United States. The availability of unfilled jobs—the jobs opening rate—is an important measure of tightness of job markets, parallel to existing measures of unemployment.”
The BLS collects data from about 16,000 US business establishments in nonagricultural industries through the 50 states and DC. The data are released monthly and constitute an important complement to other data provided by the BLS (see also Lazear and Spletzer 2012Mar, 6-7).
Hiring in the nonfarm sector (HNF) has declined from 63.8 million in 2006 to 52.0 million in 2012 or by 11.8 million while hiring in the private sector (HP) has declined from 59.5 million in 2006 to 48.5 million in 2012 or by 11.0 million, as shown in Table I-1. The ratio of nonfarm hiring to employment (RNF) has fallen from 47.2 in 2005 to 38.9 in 2012 and in the private sector (RHP) from 52.1 in 2006 to 43.4 in 2012. The collapse of hiring in the US has not been followed by dynamic labor markets because of the low rate of economic growth of 2.1 percent in the first fourteen quarters of expansion from IIIQ2009 to IVQ2012 (see table I-5 in http://cmpassocregulationblog.blogspot.com/2013/04/mediocre-and-decelerating-united-states.html). Boskin (2010Sep) measures that the US economy grew at 6.2 percent in the first four quarters and 4.5 percent in the first 12 quarters after the trough in the second quarter of 1975; and at 7.7 percent in the first four quarters and 5.8 percent in the first 12 quarters after the trough in the first quarter of 1983 (Professor Michael J. Boskin, Summer of Discontent, Wall Street Journal, Sep 2, 2010 http://professional.wsj.com/article/SB10001424052748703882304575465462926649950.html).
Table I-1, US, Annual Total Nonfarm Hiring (HNF) and Total Private Hiring (HP) in the US and Percentage of Total Employment
| HNF | Rate RNF | HP | Rate HP | |
| 2001 | 62,948 | 47.8 | 58,825 | 53.1 |
| 2002 | 58,583 | 44.9 | 54,759 | 50.3 |
| 2003 | 56,451 | 43.4 | 53,056 | 48.9 |
| 2004 | 60,367 | 45.9 | 56,617 | 51.6 |
| 2005 | 63,150 | 47.2 | 59,372 | 53.1 |
| 2006 | 63,773 | 46.9 | 59,494 | 52.1 |
| 2007 | 62,421 | 45.4 | 58,035 | 50.3 |
| 2008 | 55,128 | 40.3 | 51,591 | 45.1 |
| 2009 | 46,357 | 35.4 | 43,031 | 39.8 |
| 2010 | 48,607 | 37.4 | 44,788 | 41.7 |
| 2011 | 49,675 | 37.8 | 46,552 | 42.5 |
| 2012 | 51,991 | 38.9 | 48,493 | 43.4 |
Source: Bureau of Labor Statistics http://www.bls.gov/jlt/
Chart I-1 shows the annual level of total nonfarm hiring (HNF) that collapsed during the global recession after 2007 in contrast with milder decline in the shallow recession of 2001. Nonfarm hiring has not been recovered, remaining at a depressed level.
Chart I-1, US, Level Total Nonfarm Hiring (HNF), Annual, 2001-2012
Source: US Bureau of Labor Statistics
Chart I-2 shows the ratio or rate of nonfarm hiring to employment (RNF) that also fell much more in the recession of 2007 to 2009 than in the shallow recession of 2001. Recovery is weak.
Chart I-2, US, Rate Total Nonfarm Hiring (HNF), Annual, 2001-2012
Source: US Bureau of Labor Statistics
Yearly percentage changes of total nonfarm hiring (HNF) are provided in Table I-2. There were much milder declines in 2002 of 6.9 percent and 3.6 percent in 2003 followed by strong rebounds of 6.9 percent in 2004 and 4.6 percent in 2005. In contrast, the contractions of nonfarm hiring in the recession after 2007 were much sharper in percentage points: 2.1 in 2007, 11.7 in 2008 and 15.9 percent in 2009. On a yearly basis, nonfarm hiring grew 4.9 percent in 2010 relative to 2009, 2.2 percent in 2011 and 4.7 percent in 2012.
Table I-2, US, Annual Total Nonfarm Hiring (HNF), Annual Percentage Change, 2002-2012
| Year | Annual |
| 2002 | -6.9 |
| 2003 | -3.6 |
| 2004 | 6.9 |
| 2005 | 4.6 |
| 2006 | 1.0 |
| 2007 | -2.1 |
| 2008 | -11.7 |
| 2009 | -15.9 |
| 2010 | 4.9 |
| 2011 | 2.2 |
| 2012 | 4.7 |
Source: Bureau of Labor Statistics http://www.bls.gov/jlt/
Chart I-3 plots yearly percentage changes of nonfarm hiring. Percentage declines after 2007 were quite sharp.
Chart I-3, US, Annual Total Nonfarm Hiring (HNF), Annual Percentage Change, 2001-2012
Source: Bureau of Labor Statistics
Total private hiring (HP) yearly data are provided in Chart I-4. There has been sharp contraction of total private hiring in the US and only milder recovery from 2010 to 2012.
Chart I-4, US, Total Private Hiring Level, Annual, 2001-2012
Source: Bureau of Labor Statistics
Chart I-5 plots the rate of total private hiring relative to employment (RHP). The rate collapsed during the global recession after 2007 with insufficient recovery.
Chart I-5, US, Rate Total Private Hiring, Annual, 2001-2012
Source: Bureau of Labor Statistics
Total nonfarm hiring (HNF), total private hiring (HP) and their respective rates are provided for the month of Feb in the years from 2001 to 2013 in Table I-3. Hiring numbers are in thousands. There is virtually no recovery in HNF from 3283 thousand (or 3.3 million) in Feb 2009 to 3124 thousand in Feb 2010, 3328 thousand in Feb 2011, 3683 thousand in Feb 2012 and 3632 thousand in Jan 2013 for cumulative gain of 10.6 percent. HP rose from 3102 thousand in Feb 2009 to 3166 thousand in Feb 2011, 3466 thousand in Feb 2012 and 3415 in Feb 2013 for cumulative gain of 10.1 percent. HNF has fallen from 4421 in Feb 2006 to 3632 in Feb 2012 or by 17.8 percent. HP has fallen from 4176 in Feb 2005 to 3415 in Feb 2013 or by 18.2 percent. The labor market continues to be fractured, failing to provide an opportunity to exit from unemployment/underemployment or to find an opportunity for advancement away from declining inflation-adjusted earnings.
Table I-3, US, Total Nonfarm Hiring (HNF) and Total Private Hiring (HP) in the US in Thousands and in Percentage of Total Employment Not Seasonally Adjusted
| HNF | Rate RNF | HP | Rate HP | |
| 2001 Feb | 4399 | 3.4 | 4136 | 3.8 |
| 2002 Feb | 4007 | 3.1 | 3774 | 3.5 |
| 2003 Feb | 3821 | 3.0 | 3617 | 3.4 |
| 2004 Feb | 3840 | 3.0 | 3618 | 3.4 |
| 2005 Feb | 4305 | 3.3 | 4079 | 3.7 |
| 2006 Feb | 4421 | 3.3 | 4176 | 3.7 |
| 2007 Feb | 4265 | 3.1 | 4001 | 3.5 |
| 2008 Feb | 4007 | 2.9 | 3786 | 3.3 |
| 2009 Feb | 3283 | 2.5 | 3102 | 2.9 |
| 2010 Feb | 3124 | 2.4 | 2924 | 2.8 |
| 2011 Feb | 3328 | 2.6 | 3166 | 3.0 |
| 2012 Feb | 3683 | 2.8 | 3466 | 3.2 |
| 2013 Feb | 3632 | 2.7 | 3415 | 3.1 |
Source: Bureau of Labor Statistics http://www.bls.gov/jlt/
Chart I-6 provides total nonfarm hiring on a monthly basis from 2001 to 2013. Nonfarm hiring rebounded in early 2010 but then fell and stabilized at a lower level than the early peak not-seasonally adjusted (NSA) of 4774 in May 2010 until it surpassed it with 4883 in Jun 2011 but declined to 3013 in Dec 2012. Nonfarm hiring fell again in Dec 2011 to 2990 from 3827 in Nov and to revised 3683 in Feb 2012, increasing to 4210 in Mar 2012, 3013 in Dec 2012 and 4128 in Jan 2013 and declining to 3632 in Feb 2013. Chart I-6 provides seasonally adjusted (SA) monthly data. The number of seasonally-adjusted hires in Aug 2011 was 4187 thousand, increasing to revised 4489 thousand in Feb 2012, or 7.2 percent, moving to 4195 in Dec 2012 for cumulative increase of 0.5 percent from 4174 in Dec 2011 and 4418 in Mar 2013 for increase of 5.3 percent relative to 4195 in Dec 2012. The number of hires not seasonally adjusted was 4883 in Jun 2011, falling to 2990 in Dec 2011 but increasing to 4013 in Jan 2012 and declining to 3013 in Dec 2012. The number of nonfarm hiring not seasonally adjusted fell by 38.8 percent from 4883 in Jun 2011 to 2990 in Dec 2011 and fell 41.3 percent from 5130 in Jun 2012 to 3013 in Dec 2012 in a yearly-repeated seasonal pattern.
Chart I-6, US, Total Nonfarm Hiring (HNF), 2001-2013 Month SA
Source: Bureau of Labor Statistics
Similar behavior occurs in the rate of nonfarm hiring in Chart I-7. Recovery in early 2010 was followed by decline and stabilization at a lower level but with stability in monthly SA estimates of 3.2 in Aug 2011 to 3.2 in Jan 2012, increasing to 3.4 in May 2012 and falling to 3.3 in Jun and 3.1Jul 2012, increasing to 3.3 in Aug 2012 but falling to 3.1 in Dec 2012 and 3.3 in Feb 2013. The rate not seasonally adjusted fell from 3.7 in Jun 2011 to 2.2 in Dec 2012, climbing to 3.8 in Jun 2012 but falling to 2.2 in Dec 2012 and 2.7 in Feb 2013. Rates of nonfarm hiring NSA were in the range of 2.8 (Dec) to 4.5 (Jun) in 2006.
Chart I-7, US, Rate Total Nonfarm Hiring, Month SA 2001-2013
Source: Bureau of Labor Statistics
There is only milder improvement in total private hiring shown in Chart I-8. Hiring private (HP) rose in 2010 with stability and renewed increase in 2011 followed by almost stationary series in 2012. The number of private hiring seasonally adjusted fell from 4026 thousand in Sep 2011 to 3876 in Dec 2011 or by 3.7 percent, increasing to 3915 in Jan 2012 or decline by 2.8 percent relative to the level in Sep 2011 but decreasing to 3934 in Sep 2012 or lower by 2.3 percent relative to Sep 2011 and decreasing to 3915 in Dec 2012 for change of 0.0 percent relative to 3915 in Jan 2012. The number of private hiring not seasonally adjusted fell from 4504 in Jun 2011 to 2809 in Dec 2011 or by 37.6 percent, reaching 3749 in Jan 2012 or decline of 16.8 percent relative to Jun 2011 and moving to 2842 in Dec 2012 or 39.8 percent lower relative to 4724 in Jun 2012. Companies do not hire in the latter part of the year that explains the high seasonality in year-end employment data. For example, NSA private hiring fell from 5661 in Jun 2006 to 3635 in Dec 2006 or by 35.8 percent. Private hiring NSA data are useful in showing the huge declines from the period before the global recession. In Jul 2006 private hiring NSA was 5555, declining to 4245 in Jul 2011 or by 23.6 percent and to 4277 in Jul 2012 or lower by 23.0 percent relative to Jul 2006. Private hiring NSA fell from 5215 in Sep 2005 to 4005 in Sep 2012 or 23.2 percent and fell from 3635 in Dec 2006 to 2842 in Dec 2012 or 21.8 percent. The conclusion is that private hiring in the US is around 20 percent below the hiring before the global recession. The main problem in recovery of the US labor market has been the low rate of growth of 2.1 percent in the fourteen quarters of expansion of the economy from IIIQ2009 to IVQ2012 (see table I-5 in http://cmpassocregulationblog.blogspot.com/2013/04/mediocre-and-decelerating-united-states.html). Boskin (2010Sep) measures that the US economy grew at 6.2 percent in the first four quarters and 4.5 percent in the first 12 quarters after the trough in the second quarter of 1975; and at 7.7 percent in the first four quarters and 5.8 percent in the first 12 quarters after the trough in the first quarter of 1983 (Professor Michael J. Boskin, Summer of Discontent, Wall Street Journal, Sep 2, 2010 http://professional.wsj.com/article/SB10001424052748703882304575465462926649950.html).The US missed the opportunity to recover employment as in past cyclical expansions from contractions.
Chart I-8, US, Total Private Hiring Month SA 2001-2013
Source: Bureau of Labor Statistics
Chart I-9 shows similar behavior in the rate of private hiring. The rate in 2011 in monthly SA data did not rise significantly above the peak in 2010. The rate seasonally adjusted fell from 3.6 in Sep 2011 to 3.5 in Dec 2011 and reached 3.5 in Dec 2012 and 3.6 in Feb 2013. The rate not seasonally adjusted (NSA) fell from 3.7 in Sep 2011 to 2.5 in Dec 2011, increasing to 3.8 in Oct 2012 but falling to 2.5 in Dec 2012 and 3.1 in Feb 2013. The NSA rate of private hiring fell from 4.8 in Jul 2006 to 3.4 in Aug 2009 but recovery was insufficient to only 3.8 in Aug 2012, 2.5 in Dec 2012 and 3.1 in Feb 2013.
Chart I-9, US, Rate Total Private Hiring Month SA 2001-2013
Source: Bureau of Labor Statistics
ESII Ten Million Fewer Full-time Jobs. There is strong seasonality in US labor markets around the end of the year. The number employed part-time for economic reasons because they could not find full-time employment fell from 9.101 million in Sep 2011 to 8.043 million in Aug 2012, seasonally adjusted, or decline of 1.058 million in nine months, as shown in Table I-9, but then rebounded to 8.607 million in Sep 2012 for increase of 564,000 in one month from Aug to Sep 2012, declining to 8.286 million in Oct 2012 or by 321,000 again in one month, further declining to 8.138 million in Nov 2012 for another major one-month decline of 148,000 and 7.918 million in Dec 2012 or fewer 220,000 in just one month. The number employed part-time for economic reasons increased to 7.973 million in Jan 2013 or 55,000 more than in Dec 2012 and to 7,988 million in Feb 2013, declining to 7.638 million in Mar 2013 There is an increase of 243,000 in part-time for economic reasons from Aug 2012 to Oct 2012 and of 95,000 from Aug 2012 to Nov 2012. The number employed full-time increased from 112.871 million in Oct 2011 to 115.145 million in Mar 2012 or 2.274 million but then fell to 114.300 million in May 2012 or 0.845 million fewer full-time employed than in Mar 2012. The number employed full-time increased from 114.492 million in Aug 2012 to 115.469 million in Oct 2012 or increase of 0.977 million full-time jobs in two months and further to 115.918 million in Jan 2013 or increase of 1.426 million more full-time jobs in four months from Aug 2012 to Jan 2013. The number of full time jobs decreased slightly to 115.841 in Feb 2013, increasing to 115.903 million in Mar 2013. Benchmark and seasonality-factors adjustments at the turn of every year could affect comparability of labor market indicators (http://cmpassocregulationblog.blogspot.com/2013/02/thirty-one-million-unemployed-or.html http://cmpassocregulationblog.blogspot.com/2013/03/thirty-one-million-unemployed-or.html). The number of employed part-time for economic reasons actually increased without seasonal adjustment from 8.271 million in Nov 2011 to 8.428 million in Dec 2011 or by 157,000 and then to 8.918 million in Jan 2012 or by an additional 490,000 for cumulative increase from Nov 2011 to Jan 2012 of 647,000. The level of employed part-time for economic reasons then fell from 8.918 million in Jan 2012 to 7.867 million in Mar 2012 or by 1.0151 million and to 7.694 million in Apr 2012 or 1.224 million fewer relative to Jan 2012. In Aug 2012, the number employed part-time for economic reasons reached 7.842 million NSA or 148,000 more than in Apr 2012. The number employed part-time for economic reasons increased from 7.842 million in Aug 2012 to 8.110 million in Sep 2012 or by 3.4 percent. The number part-time for economic reasons fell from 8.110 million in Sep 2012 to 7.870 million in Oct 2012 or by 240.000 in one month. The number employed part-time for economic reasons NSA increased to 8.628 million in Jan 2013 or 758,000 more than in Oct 2012. The number employed part-time for economic reasons fell to 8.298 million in Feb 2013, which is lower by 330,000 relative to 8.628 million in Jan 2013 but higher by 428,000 relative to 7.870 million in Oct 2012. The number employed part time for economic reasons fell to 7.734 million in Mar 2013 or 564,000 less than in Feb 2013. The number employed full time without seasonal adjustment fell from 113.138 million in Nov 2011 to 113.050 million in Dec 2011 or by 88,000 and fell further to 111.879 in Jan 2012 for cumulative decrease of 1.259 million. The number employed full-time not seasonally adjusted fell from 113.138 million in Nov 2011 to 112.587 million in Feb 2012 or by 551.000 but increased to 116.214 million in Aug 2012 or 3.076 million more full-time jobs than in Nov 2011. The number employed full-time not seasonally adjusted decreased from 116.214 million in Aug 2012 to 115.678 million in Sep 2012 for loss of 536,000 full-time jobs and rose to 116.045 million in Oct 2012 or by 367,000 full-time jobs in one month relative to Sep 2012. The number employed full-time NSA fell from 116.045 million in Oct 2012 to 115.515 million in Nov 2012 or decline of 530.000 in one month. The number employed full-time fell from 115.515 in Nov 2012 to 115.079 million in Dec 2012 or decline by 436,000 in one month. The number employed full time fell from 115.079 million in Dec 2012 to 113.868 million in Jan 2013 or decline of 1.211 million in one month. The number of full time jobs increased to 114.191 in Feb 2012 or by 323,000 in one month and increased to 114.796 million in Mar 2013 for cumulative increase from Jan by 928,000 full-time jobs but decrease of 283,000 from Dec 2012. Comparisons over long periods require use of NSA data. The number with full-time jobs fell from a high of 123.219 million in Jul 2007 to 108.777 million in Jan 2010 or by 14.442 million. The number with full-time jobs in Mar 2013 is 114.796 million, which is lower by 8.423 million relative to the peak of 123.219 million in Jul 2007. The magnitude of the stress in US labor markets is magnified by the increase in the civilian noninstitutional population of the United States from 231.958 million in Jul 2007 to 244.995 million in Mar 2013 or by 13.037 million (http://www.bls.gov/data/) while in the same period the number of full-time jobs fell 8.243 million. There appear to be around 10 million fewer full-time jobs in the US than before the global recession while population increased around 13 million. Growth at 2.1 percent on average in the fourteen quarters of expansion from IIIQ2009 to IVQ2012 is the main culprit of the fractured US labor market (see table I-5 in http://cmpassocregulationblog.blogspot.com/2013/04/mediocre-and-decelerating-united-states.html). Boskin (2010Sep) measures that the US economy grew at 6.2 percent in the first four quarters and 4.5 percent in the first 12 quarters after the trough in the second quarter of 1975; and at 7.7 percent in the first four quarters and 5.8 percent in the first 12 quarters after the trough in the first quarter of 1983 (Professor Michael J. Boskin, Summer of Discontent, Wall Street Journal, Sep 2, 2010 http://professional.wsj.com/article/SB10001424052748703882304575465462926649950.html).
Table I-9, US, Employed Part-time for Economic Reasons, Thousands, and Full-time, Millions
| Part-time Thousands | Full-time Millions | |
| Seasonally Adjusted | ||
| Mar 2013 | 7,638 | 115.903 |
| Feb 2013 | 7,988 | 115.841 |
| Jan 2013 | 7,973 | 115.918 |
| Dec 2012 | 7,918 | 115.868 |
| Nov 2012 | 8,138 | 115.665 |
| Oct 2012 | 8,286 | 115.469 |
| Sep 2012 | 8,607 | 115.259 |
| Aug 2012 | 8,043 | 114.492 |
| Jul 2012 | 8,245 | 114.478 |
| Jun 2012 | 8,210 | 114.606 |
| May 2012 | 8,116 | 114.300 |
| Apr 2012 | 7,896 | 114.441 |
| Mar 2012 | 7,664 | 115.145 |
| Feb 2012 | 8,127 | 114.263 |
| Jan 2012 | 8,220 | 113.833 |
| Dec 2011 | 8,168 | 113.820 |
| Nov 2011 | 8,436 | 113.217 |
| Oct 2011 | 8,726 | 112.871 |
| Sep 2011 | 9,101 | 112.541 |
| Aug 2011 | 8,816 | 112.555 |
| Jul 2011 | 8,416 | 112.141 |
| Not Seasonally Adjusted | ||
| Mar 2013 | 7,734 | 114.796 |
| Feb 2013 | 8,298 | 114.191 |
| Jan 2013 | 8,628 | 113.868 |
| Dec 2012 | 8,116 | 115.079 |
| Nov 2012 | 7,994 | 115.515 |
| Oct 2012 | 7,870 | 116.045 |
| Sep 2012 | 8,110 | 115.678 |
| Aug 2012 | 7,842 | 116.214 |
| Jul 2012 | 8,316 | 116.131 |
| Jun 2012 | 8,394 | 116.024 |
| May 2012 | 7,837 | 114.634 |
| Apr 2012 | 7,694 | 113.999 |
| Mar 2012 | 7,867 | 113.916 |
| Feb 2012 | 8,455 | 112.587 |
| Jan 2012 | 8,918 | 111.879 |
| Dec 2011 | 8,428 | 113.050 |
| Nov 2011 | 8,271 | 113.138 |
| Oct 2011 | 8,258 | 113.456 |
| Sep 2011 | 8,541 | 112.980 |
| Aug 2011 | 8,604 | 114.286 |
| Jul 2011 | 8,514 | 113.759 |
| Jun 2011 | 8,738 | 113.255 |
| May 2011 | 8,270 | 112.618 |
| Apr 2011 | 8,425 | 111.844 |
| Mar 2011 | 8,737 | 111.186 |
| Feb 2011 | 8,749 | 110.731 |
| Jan 2011 | 9,187 | 110.373 |
| Dec 2010 | 9,205 | 111.207 |
| Nov 2010 | 8,670 | 111.348 |
| Oct 2010 | 8,408 | 112.342 |
| Sep 2010 | 8,628 | 112.385 |
| Aug 2010 | 8,628 | 113.508 |
| Jul 2010 | 8,737 | 113.974 |
| Jun 2010 | 8,867 | 113.856 |
| May 2010 | 8,513 | 112.809 |
| Apr 2010 | 8,921 | 111.391 |
| Mar 2010 | 9,343 | 109.877 |
| Feb 2010 | 9,282 | 109.100 |
| Jan 2010 | 9,290 | 108.777 (low) |
| Dec 2009 | 9,354 (high) | 109.875 |
| Nov 2009 | 8,894 | 111.274 |
| Oct 2009 | 8,474 | 111.599 |
| Sep 2009 | 8,255 | 111.991 |
| Aug 2009 | 8,835 | 113.863 |
| Jul 2009 | 9,103 | 114.184 |
| Jun 2009 | 9,301 | 114.014 |
| May 2009 | 8,785 | 113.083 |
| Apr 2009 | 8,648 | 112.746 |
| Mar 2009 | 9,305 | 112.215 |
| Feb 2009 | 9,170 | 112.947 |
| Jan 2009 | 8,829 | 113.815 |
| Dec 2008 | 8,250 | 116.422 |
| Nov 2008 | 7,135 | 118.432 |
| Oct 2008 | 6,267 | 120.020 |
| Sep 2008 | 5,701 | 120.213 |
| Aug 2008 | 5,736 | 121.556 |
| Jul 2008 | 6,054 | 122.378 |
| Jun 2008 | 5,697 | 121.845 |
| May 2008 | 5,096 | 120.809 |
| Apr 2008 | 5,071 | 120.027 |
| Mar 2008 | 5,038 | 119.875 |
| Feb 2008 | 5,114 | 119.452 |
| Jan 2008 | 5,340 | 119.332 |
| Dec 2007 | 4,750 | 121.042 |
| Nov 2007 | 4,374 | 121.846 |
| Oct 2007 | 4,028 | 122.006 |
| Sep 2007 | 4,137 | 121.728 |
| Aug 2007 | 4,494 | 122.870 |
| Jul 2007 | 4,516 | 123.219 (high) |
| Jun 2007 | 4,469 | 122.150 |
| May 2007 | 4,315 | 120.846 |
| Apr 2007 | 4,205 | 119.609 |
| Mar 2007 | 4,384 | 119.640 |
| Feb 2007 | 4,417 | 119.041 |
| Jan 2007 | 4,726 | 119.094 |
| Dec 2006 | 4,281 | 120.371 |
| Nov 2006 | 4,054 | 120.507 |
| Oct 2006 | 4,010 | 121.199 |
| Sep 2006 | 3,735 (low) | 120.780 |
| Aug 2006 | 4,104 | 121.979 |
| Jul 2006 | 4,450 | 121.951 |
| Jun 2006 | 4,456 | 121.070 |
| May 2006 | 3,968 | 118.925 |
| Apr 2006 | 3,787 | 118.559 |
| Mar 2006 | 4,097 | 117.693 |
| Feb 2006 | 4,403 | 116.823 |
| Jan 2006 | 4,597 | 116.395 |
Source: US Bureau of Labor Statistics http://www.bls.gov/
People lose their marketable job skills after prolonged unemployment and find increasing difficulty in finding another job. Chart I-18 shows the sharp rise in unemployed over 27 weeks and stabilization at an extremely high level.
Chart I-18, US, Number Unemployed for 27 Weeks or Over, Thousands SA Month 2001-2013
Sources: US Bureau of Labor Statistics
Another segment of U6 consists of people marginally attached to the labor force who continue to seek employment but less frequently on the frustration there may not be a job for them. Chart I-19 shows the sharp rise in people marginally attached to the labor force after 2007 and subsequent stabilization.
Chart I-19, US, Marginally Attached to the Labor Force, NSA Month 2001-2013
Sources: US Bureau of Labor Statistics
Chart I-20 reveals the fracture in the US labor market. The number of workers with full-time jobs not-seasonally-adjusted rose with fluctuations from 2002 to a peak in 2007, collapsing during the global recession. The terrible state of the job market is shown in the segment from 2009 to 2013 with fluctuations around the typical behavior of a stationary series: there is no improvement in the United States in creating full-time jobs.
Chart I-20, US, Full-time Employed, Thousands, NSA, 2001-2013
Sources: US Bureau of Labor Statistics
Chart I-20A provides the noninstitutional civilian population of the United States from 2001 to 2013. There is clear trend of increase of the population while the number of full-time jobs collapsed after 2008 without sufficient recovery as shown in the preceding Chart I-20.
Chart I-20A, US, Noninstitutional Civilian Population, 2001-2013
Sources: US Bureau of Labor Statistics
Chart I-20B provides number of full-time jobs in the US from 1968 to 2013. There were multiple recessions followed by expansions without contraction of full-time jobs without recovery as during the period after 2008.
Chart I-20B, US, Full-time Employed, Thousands, NSA, 1968-2013
Sources: US Bureau of Labor Statistics
Chart I-20C provides the noninstitutional civilian population of the United States from 1968 to 2013. Population expanded at a relatively constant rate of increase with the assurance of creation of full-time jobs that has been broken since 2008.
Chart I-20C, US, Noninstitutional Civilian Population, 1968-2013
Sources: US Bureau of Labor Statistics
ESIII Youth Unemployment and Middle-Aged Unemployment. The United States is experiencing high youth unemployment as in European economies. Table I-10 provides the employment level for ages 16 to 24 years of age estimated by the Bureau of Labor Statistics. On an annual basis, youth employment fell from 20.041 million in 2006 to 17.362 million in 2011 or 2.679 million fewer youth jobs and to 17.834 million in 2012 or 2.207 million fewer jobs. During the seasonal peak months of youth employment in the summer from Jun to Aug, youth employment has fallen by more than two million jobs relative to 21.914 million in Jul 2006 with 19.461 million in Jul 2012 for 2.453 million fewer youth jobs. There are two hardships behind these data. First, young people cannot find employment after finishing high-school and college, reducing prospects for achievement in older age. Second, students with more modest means cannot find employment to keep them in college.
Table I-10, US, Employment Level 16-24 Years, Thousands, NSA
| Year | Jan | Feb | Mar | Apr | Dec | Annual |
| 2001 | 19678 | 19745 | 19800 | 19778 | 19547 | 20088 |
| 2002 | 18653 | 19074 | 19091 | 19108 | 19394 | 19683 |
| 2003 | 18811 | 18880 | 18709 | 18873 | 19136 | 19351 |
| 2004 | 18852 | 18841 | 18752 | 19184 | 19619 | 19630 |
| 2005 | 18858 | 18670 | 18989 | 19071 | 19733 | 19770 |
| 2006 | 19003 | 19182 | 19291 | 19406 | 20129 | 20041 |
| 2007 | 19407 | 19415 | 19538 | 19368 | 19361 | 19875 |
| 2008 | 18724 | 18546 | 18745 | 19161 | 18378 | 19202 |
| 2009 | 17467 | 17606 | 17564 | 17739 | 16615 | 17601 |
| 2010 | 16166 | 16412 | 16587 | 16764 | 16727 | 17077 |
| 2011 | 16512 | 16638 | 16898 | 16970 | 17234 | 17362 |
| 2012 | 16944 | 17150 | 17301 | 17387 | 17604 | 17834 |
| 2013 | 17183 | 17257 | 17271 |
Source: US Bureau of Labor Statistics http://www.bls.gov/
Chart I-21 provides US employment level ages 16 to 24 years from 2002 to 2013. Employment level is sharply lower in Jun 2012 relative to the peak in 2007.
Chart I-21, US, Employment Level 16-24 Years, Thousands SA, 2001-2013
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
Table I-11 provides US unemployment level ages 16 to 24 years. The number unemployed ages 16 to 24 years increased from 2342 thousand in 2007 to 3634 thousand in 2011 or by 1.292 million and 3451 thousand in 2012 or by 1.109 million. This situation may persist for many years.
Table I-11, US, Unemployment Level 16-24 Years, Thousands NSA
| Year | Jan | Feb | Mar | Apr | Dec | Annual |
| 2001 | 2250 | 2258 | 2253 | 2095 | 2412 | 2371 |
| 2002 | 2754 | 2731 | 2822 | 2515 | 2374 | 2683 |
| 2003 | 2748 | 2740 | 2601 | 2572 | 2248 | 2746 |
| 2004 | 2767 | 2631 | 2588 | 2387 | 2294 | 2638 |
| 2005 | 2661 | 2787 | 2520 | 2398 | 2055 | 2521 |
| 2006 | 2366 | 2433 | 2216 | 2092 | 2007 | 2353 |
| 2007 | 2363 | 2230 | 2096 | 2074 | 2323 | 2342 |
| 2008 | 2633 | 2480 | 2347 | 2196 | 2928 | 2830 |
| 2009 | 3278 | 3457 | 3371 | 3321 | 3532 | 3760 |
| 2010 | 3983 | 3888 | 3748 | 3803 | 3352 | 3857 |
| 2011 | 3851 | 3696 | 3520 | 3365 | 3161 | 3634 |
| 2012 | 3416 | 3507 | 3294 | 3175 | 3153 | 3451 |
| 2013 | 3674 | 3449 | 3261 |
Source: US Bureau of Labor Statistics http://www.bls.gov/
Chart I-22 provides the unemployment level ages 16 to 24 from 2002 to 2012. The level rose sharply from 2007 to 2010 with tepid improvement into 2012 and deterioration into 2013.
Chart I-22, US, Unemployment Level 16-24 Years, Thousands SA, 2001-2013
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
Table I-12 provides the rate of unemployment of young peoples in ages 16 to 24 years. The annual rate jumped from 10.5 percent in 2007 to 18.4 percent in 2010, 17.3 percent in 2011 and 16.2 percent in 2012. During the seasonal peak in Jul the rate of youth unemployed was 18.1 percent in Jul 2011 and 17.1 percent in Jul 2012 compared with 10.8 percent in Jul 2007.
Table I-12, US, Unemployment Rate 16-24 Years, Thousands, NSA
| Year | Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Dec | Annual |
| 2001 | 10.3 | 10.3 | 10.2 | 9.6 | 10.0 | 11.6 | 10.5 | 10.7 | 11.0 | 10.6 |
| 2002 | 12.9 | 12.5 | 12.9 | 11.6 | 11.6 | 13.2 | 12.4 | 11.5 | 10.9 | 12.0 |
| 2003 | 12.7 | 12.7 | 12.2 | 12.0 | 13.0 | 14.8 | 13.3 | 11.9 | 10.5 | 12.4 |
| 2004 | 12.8 | 12.3 | 12.1 | 11.1 | 12.2 | 13.4 | 12.3 | 11.1 | 10.5 | 11.8 |
| 2005 | 12.4 | 13.0 | 11.7 | 11.2 | 11.9 | 12.6 | 11.0 | 10.8 | 9.4 | 11.3 |
| 2006 | 11.1 | 11.3 | 10.3 | 9.7 | 10.2 | 11.9 | 11.2 | 10.4 | 9.1 | 10.5 |
| 2007 | 10.9 | 10.3 | 9.7 | 9.7 | 10.2 | 12.0 | 10.8 | 10.5 | 10.7 | 10.5 |
| 2008 | 12.3 | 11.8 | 11.1 | 10.3 | 13.3 | 14.4 | 14.0 | 13.0 | 13.7 | 12.8 |
| 2009 | 15.8 | 16.4 | 16.1 | 15.8 | 18.0 | 19.9 | 18.5 | 18.0 | 17.5 | 17.6 |
| 2010 | 19.8 | 19.2 | 18.4 | 18.5 | 18.4 | 20.0 | 19.1 | 17.8 | 16.7 | 18.4 |
| 2011 | 18.9 | 18.2 | 17.2 | 16.5 | 17.5 | 18.9 | 18.1 | 17.5 | 15.5 | 17.3 |
| 2012 | 16.8 | 17.0 | 16.0 | 15.4 | 16.3 | 18.1 | 17.1 | 16.8 | 15.2 | 16.2 |
| 2013 | 17.6 | 16.7 | 15.9 |
Source: US Bureau of Labor Statistics http://www.bls.gov/
Chart I-23 provides the BLS estimate of the not-seasonally-adjusted rate of youth unemployment for ages 16 to 24 years from 2002 to 2013. The rate of youth unemployment increased sharply during the global recession of 2008 and 2009 but has failed to drop to earlier lower levels during the fourteen consecutive quarters of expansion of the economy since IIIQ2009 because of much lower growth at 2.1 percent annual equivalent on (Table I -5 http://cmpassocregulationblog.blogspot.com/2013/04/mediocre-and-decelerating-united-states.html). Boskin (2010Sep) measures that the US economy grew at 6.2 percent in the first four quarters and 4.5 percent in the first 12 quarters after the trough in the second quarter of 1975; and at 7.7 percent in the first four quarters and 5.8 percent in the first 12 quarters after the trough in the first quarter of 1983 (Professor Michael J. Boskin, Summer of Discontent, Wall Street Journal, Sep 2, 2010 http://professional.wsj.com/article/SB10001424052748703882304575465462926649950.html).
Chart I-23, US, Unemployment Rate 16-24 Years, Percent, NSA, 2001-2013
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
Chart I-24 provides longer perspective with the rate of youth unemployment in ages 16 to 24 years from 1948 to 2013. The rate of youth unemployment rose to 20 percent during the contractions of the early 1980s and also during the contraction of the global recession in 2008 and 2009. The data illustrate again the claim in this blog that the contractions of the early 1980s are the valid framework for comparison with the global recession of 2008 and 2009 instead of misleading comparisons with the 1930s. During the initial phase of recovery, the rate of youth unemployment 16 to 24 years NSA fell from 18.9 percent in Jun 1983 to 14.5 percent in Jun 1984 while the rate of youth unemployment 16 to 24 years was nearly the same during the expansion after IIIQ2009: 17.5 percent in Dec 2009, 16.7 percent in Dec 2010, 15.5 percent in Dec 2011, 15.2 percent in Dec 2012, 17.6 percent in Jan 2013, 16.7 percent in Feb 2013 and 15.9 percent in Mar 2013. In Jul 2007, the rate of youth unemployment was 10.8 percent, increasing to 17.1 percent in Jul 2012. The difference originates in the vigorous seasonally-adjusted annual equivalent average rate of GDP growth of 5.7 percent during the recovery from IQ1983 to IVQ1985 compared with 2.1 percent on average during the first fourteen quarters of expansion from IIIQ2009 to IVQ2012 (see table I-5 in http://cmpassocregulationblog.blogspot.com/2013/04/mediocre-and-decelerating-united-states.html). The fractured US labor market denies an early start for young people.
Chart I-24, US, Unemployment Rate 16-24 Years, Percent NSA, 1948-2013
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
It is more difficult to move to other jobs after a certain age because of fewer available opportunities for matured individuals than for new entrants into the labor force. Middle-aged unemployed are less likely to find another job. Table I-13 provides the unemployment level ages 45 years and over. The number unemployed ages 45 years and over rose from 1.985 million in Jul 2006 to 4.821 million in July 2010 or by 142.9 percent. The number of unemployed ages 45 years and over declined to 4.405 million in Jul 2012 that is still higher by 121.9 percent than in Jul 2006. The number unemployed age 45 and over jumped from 1.794 million in Dec 2006 to 4.762 million in Dec 2010 or 165.4 percent and at 3.927 million in Dec 2012 is higher by 2.133 million or 118.9 percent higher than 1.794 million in Dec 2006. The level of unemployment of those aged 45 year or more of 3.929 million in Mar 2013 is higher by 2.052 million than 1.877 million in Mar 2006 or higher by 109.3 percent.
Table I-13, US, Unemployment Level 45 Years and Over, Thousands NSA
| Year | Jan | Feb | Mar | Apr | Dec | Annual |
| 2000 | 1498 | 1392 | 1291 | 1062 | 1217 | 1249 |
| 2001 | 1572 | 1587 | 1533 | 1421 | 1901 | 1576 |
| 2002 | 2235 | 2280 | 2138 | 2101 | 2210 | 2114 |
| 2003 | 2495 | 2415 | 2485 | 2287 | 2130 | 2253 |
| 2004 | 2453 | 2397 | 2354 | 2160 | 2086 | 2149 |
| 2005 | 2286 | 2286 | 2126 | 1939 | 1963 | 2009 |
| 2006 | 2126 | 2056 | 1881 | 1843 | 1794 | 1848 |
| 2007 | 2155 | 2138 | 2031 | 1871 | 2120 | 1966 |
| 2008 | 2336 | 2336 | 2326 | 2104 | 3485 | 2540 |
| 2009 | 4138 | 4380 | 4518 | 4172 | 4960 | 4500 |
| 2010 | 5314 | 5307 | 5194 | 4770 | 4762 | 4879 |
| 2011 | 5027 | 4837 | 4748 | 4373 | 4182 | 4537 |
| 2012 | 4458 | 4472 | 4390 | 4037 | 3927 | 4133 |
| 2013 | 4394 | 4107 | 3929 |
Source: US Bureau of Labor Statistics http://www.bls.gov/
Chart I-25 provides the level unemployed ages 45 years and over. There was sharp increase during the global recession and inadequate decline. There was an increase during the 2001 recession and then stability. The US is facing a major challenge of reemploying middle-aged workers.
Chart I-25, US, Unemployment Level Ages 45 Years and Over, Thousands, NSA, 1976-2013
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
ESIV Global Financial and Economic Risk. The International Monetary Fund (IMF) provides an international safety net for prevention and resolution of international financial crises. The IMF’s Financial Sector Assessment Program (FSAP) provides analysis of the economic and financial sectors of countries (see Pelaez and Pelaez, International Financial Architecture (2005), 101-62, Globalization and the State, Vol. II (2008), 114-23). Relating economic and financial sectors is a challenging task both for theory and measurement. The IMF (2012WEOOct) provides surveillance of the world economy with its Global Economic Outlook (WEO) (http://www.imf.org/external/pubs/ft/weo/2012/02/index.htm), of the world financial system with its Global Financial Stability Report (GFSR) (IMF 2012GFSROct) (http://www.imf.org/external/pubs/ft/gfsr/2012/02/index.htm) and of fiscal affairs with the Fiscal Monitor (IMF 2012FMOct) (http://www.imf.org/external/pubs/ft/fm/2012/02/fmindex.htm). There appears to be a moment of transition in global economic and financial variables that may prove of difficult analysis and measurement. It is useful to consider a summary of global economic and financial risks, which are analyzed in detail in the comments of this blog in Section VI Valuation of Risk Financial Assets, Table VI-4.
Economic risks include the following:
- China’s Economic Growth. China is lowering its growth target to 7.5 percent per year. China’s GDP growth decelerated significantly from annual equivalent 9.9 percent in IIIQ2011 to 7.0 percent in IVQ2011 and 6.1 percent in IQ2012, rebounding to 8.2 percent in IIQ2012, 9.1 percent in IIIQ2012 and 8.2 percent in IVQ2012. (See Subsection VC at http://cmpassocregulationblog.blogspot.com/2013/01/recovery-without-hiring-world-inflation.html and earlier at http://cmpassocregulationblog.blogspot.com/2012/10/world-inflation-waves-stagnating-united_21.html).
- United States Economic Growth, Labor Markets and Budget/Debt Quagmire. The US is growing slowly with 30.8 million in job stress, fewer 10 million full-time jobs, high youth unemployment, historically low hiring and declining real wages.
- Economic Growth and Labor Markets in Advanced Economies. Advanced economies are growing slowly. There is still high unemployment in advanced economies.
- World Inflation Waves. Inflation continues in repetitive waves globally (http://cmpassocregulationblog.blogspot.com/2013/03/recovery-without-hiring-ten-million.html and earlier http://cmpassocregulationblog.blogspot.com/2013/02/world-inflation-waves-united-states.html).
A list of financial uncertainties includes:
- Euro Area Survival Risk. The resilience of the euro to fiscal and financial doubts on larger member countries is still an unknown risk.
- Foreign Exchange Wars. Exchange rate struggles continue as zero interest rates in advanced economies induce devaluation of their currencies.
- Valuation of Risk Financial Assets. Valuations of risk financial assets have reached extremely high levels in markets with lower volumes.
- Duration Trap of the Zero Bound. The yield of the US 10-year Treasury rose from 2.031 percent on Mar 9, 2012, to 2.294 percent on Mar 16, 2012. Considering a 10-year Treasury with coupon of 2.625 percent and maturity in exactly 10 years, the price would fall from 105.3512 corresponding to yield of 2.031 percent to 102.9428 corresponding to yield of 2.294 percent, for loss in a week of 2.3 percent but far more in a position with leverage of 10:1. Min Zeng, writing on “Treasurys fall, ending brutal quarter,” published on Mar 30, 2012, in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052702303816504577313400029412564.html?mod=WSJ_hps_sections_markets), informs that Treasury bonds maturing in more than 20 years lost 5.52 percent in the first quarter of 2012.
- Credibility and Commitment of Central Bank Policy. There is a credibility issue of the commitment of monetary policy (Sargent and Silber 2012Mar20).
- Carry Trades. Commodity prices driven by zero interest rates have resumed their increasing path with fluctuations caused by intermittent risk aversion
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). Matt Jarzemsky, writing on Dow industrials set record,” on Mar 5, 2013, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324156204578275560657416332.html), analyzes that the DJIA broke the closing high of 14164.53 set on Oct 9, 2007, and subsequently also broke the intraday high of 14198.10 reached on Oct 11, 2007. The DJIA closed at 14865.06
on Fri Apr 12, 2013, which is higher by 4.9 percent than the value of 14,164.53 reached on Oct 9, 2007 and higher by 4.7 percent than the value of 14,198.10 reached on Oct 11, 2007. Values of risk financial are approaching or exceeding historical highs.
Jon Hilsenrath, writing on “Jobs upturn isn’t enough to satisfy Fed,” on Mar 8, 2013, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324582804578348293647760204.html), finds that much stronger labor market conditions are required for the Fed to end quantitative easing. Unconventional monetary policy with zero interest rates and quantitative easing is quite difficult to unwind because of the adverse effects of raising interest rates on valuations of risk financial assets and home prices, including the very own valuation of the securities held outright in the Fed balance sheet. Gradual unwinding of 1 percent fed funds rates from Jun 2003 to Jun 2004 by seventeen consecutive increases of 25 percentage points from Jun 2004 to Jun 2006 to reach 5.25 percent caused default of subprime mortgages and adjustable-rate mortgages linked to the overnight fed funds rate. The zero interest rate has penalized liquidity and increased risks by inducing carry trades from zero interest rates to speculative positions in risk financial assets. There is no exit from zero interest rates without provoking another financial crash.
The carry trade from zero interest rates to leveraged positions in risk financial assets had proved strongest for commodity exposures but US equities have regained leadership. The DJIA has increased 53.5 percent since the trough of the sovereign debt crisis in Europe on Jul 2, 2010 to Apr 12, 2013, S&P 500 has gained 55.4 percent and DAX 36.6 percent. Before the current round of risk aversion, almost all assets in the column “∆% Trough to 4/12/13” had double digit gains relative to the trough around Jul 2, 2010 followed by negative performance but now some valuations of equity indexes show varying behavior: China’s Shanghai Composite is 7.4 percent below the trough; Japan’s Nikkei Average is 52.8 percent above the trough; DJ Asia Pacific TSM is 23.0 percent above the trough; Dow Global is 25.9 percent above the trough; STOXX 50 of 50 blue-chip European equities (http://www.stoxx.com/indices/index_information.html?symbol=sx5E) is 16.7 percent above the trough; and NYSE Financial Index is 31.4 percent above the trough. DJ UBS Commodities is 7.9 percent above the trough. DAX index of German equities (http://www.bloomberg.com/quote/DAX:IND) is 36.6 percent above the trough. Japan’s Nikkei Average is 52.8 percent above the trough on Aug 31, 2010 and 18.4 percent above the peak on Apr 5, 2010. The Nikkei Average closed at 13485.14
on Fri Apr 12, 2013 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata), which is 31.5 percent higher than 10,254.43 on Mar 11, 2011, on the date of the Tōhoku or Great East Japan Earthquake/tsunami. Global risk aversion erased the earlier gains of the Nikkei. The dollar depreciated by 10.0 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 4/12/13” in Table VI-4 shows that there were decreases of valuations of risk financial assets in the week of Apr 12, 2013 such as 0.8 percent for China’s Shanghai Composite. DJ Asia Pacific increased 3.2 percent. NYSE Financial increased 2.6 percent in the week. DJ UBS Commodities decreased 0.2 percent. Dow Global increased 3.2 percent in the week of Apr 12, 2013. The DJIA increased 2.1 percent and S&P 500 increased 2.3 percent. DAX of Germany increased 1.1 percent. STOXX 50 gained 1.4 percent. The USD depreciated 0.9 percent. There are still high uncertainties on European sovereign risks and banking soundness, US and world growth slowdown and China’s growth tradeoffs. Sovereign problems in the “periphery” of Europe and fears of slower growth in Asia and the US cause risk aversion with trading caution instead of more aggressive risk exposures. There is a fundamental change in Table VI-4 from the relatively upward trend with oscillations since the sovereign risk event of Apr-Jul 2010. Performance is best assessed in the column “∆% Peak to 4/12/13” that provides the percentage change from the peak in Apr 2010 before the sovereign risk event to Apr 12, 2013. Most risk financial assets had gained not only relative to the trough as shown in column “∆% Trough to 4/12/13” but also relative to the peak in column “∆% Peak to 4/12/13.” There are now several equity indexes above the peak in Table VI-4: DJIA 32.7 percent, S&P 500 30.5 percent, DAX 22.3 percent, Dow Global 2.8 percent, DJ Asia Pacific 7.7 percent, NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) 4.6 percent and Nikkei Average 18.4 percent. There are two equity indexes below the peak: Shanghai Composite by 30.3 percent and STOXX 50 by 1.2 percent. DJ UBS Commodities Index is now 7.7 percent below the peak. The US dollar strengthened 13.3 percent relative to the peak. The factors of risk aversion have adversely affected the performance of risk financial assets. The performance relative to the peak in Apr 2010 is more important than the performance relative to the trough around early Jul 2010 because improvement could signal that conditions have returned to normal levels before European sovereign doubts in Apr 2010. 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. It may be quite painful to exit QE→∞ or use of the balance sheet of the central together with zero interest rates forever. 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 Rτ is expected revenue in the time horizon from τ =1 to T; Cτ 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. Equally, decline in expected revenue from the stock or project, Rτ, causes decline in valuation. An intriguing issue is the difference in performance of valuations of risk financial assets and economic growth and employment. Paul A. Samuelson (http://www.nobelprize.org/nobel_prizes/economics/laureates/1970/samuelson-bio.html).
Table VI-4, Stock Indexes, Commodities, Dollar and 10-Year Treasury
| Peak | Trough | ∆% to Trough | ∆% Peak to 4/12/ /13 | ∆% Week 4/12/13 | ∆% Trough to 4/12/ 13 | |
| DJIA | 4/26/ | 7/2/10 | -13.6 | 32.7 | 2.1 | 53.5 |
| S&P 500 | 4/23/ | 7/20/ | -16.0 | 30.5 | 2.3 | 55.4 |
| NYSE Finance | 4/15/ | 7/2/10 | -20.3 | 4.6 | 2.6 | 31.4 |
| Dow Global | 4/15/ | 7/2/10 | -18.4 | 2.8 | 3.2 | 25.9 |
| Asia Pacific | 4/15/ | 7/2/10 | -12.5 | 7.7 | 3.2 | 23.0 |
| Japan Nikkei Aver. | 4/05/ | 8/31/ | -22.5 | 18.4 | 5.1 | 52.8 |
| China Shang. | 4/15/ | 7/02 | -24.7 | -30.3 | -0.8 | -7.4 |
| STOXX 50 | 4/15/10 | 7/2/10 | -15.3 | -1.2 | 1.4 | 16.7 |
| DAX | 4/26/ | 5/25/ | -10.5 | 22.3 | 1.1 | 36.6 |
| Dollar | 11/25 2009 | 6/7 | 21.2 | 13.3 | -0.9 | -10.0 |
| DJ UBS Comm. | 1/6/ | 7/2/10 | -14.5 | -7.7 | -0.2 | 7.9 |
| 10-Year T Note | 4/5/ | 4/6/10 | 3.986 | 1.719 |
T: trough; Dollar: positive sign appreciation relative to euro (less dollars paid per euro), negative sign depreciation relative to euro (more dollars paid per euro)
Source: http://professional.wsj.com/mdc/page/marketsdata.html?mod=WSJ_hps_marketdata
I Recovery without Hiring. Professor Edward P. Lazear (2012Jan19) at Stanford University finds that recovery of hiring in the US to peaks attained in 2007 requires an increase of hiring by 30 percent while hiring levels have increased by only 4 percent since Jan 2009. The high level of unemployment with low level of hiring reduces the statistical probability that the unemployed will find a job. According to Lazear (2012Jan19), the probability of finding a new job currently is about one third of the probability of finding a job in 2007. Improvements in labor markets have not increased the probability of finding a new job. Lazear (2012Jan19) quotes an essay coauthored with James R. Spletzer in the American Economic Review (Lazear and Spletzer 2012Mar, 2012May) on the concept of churn. A dynamic labor market occurs when a similar amount of workers is hired as those who are separated. This replacement of separated workers is called churn, which explains about two-thirds of total hiring. Typically, wage increases received in a new job are higher by 8 percent. Lazear (2012Jan19) argues that churn has declined 35 percent from the level before the recession in IVQ2007. Because of the collapse of churn there are no opportunities in escaping falling real wages by moving to another job. As this blog argues, there are meager chances of escaping unemployment because of the collapse of hiring and those employed cannot escape falling real wages by moving to another job (http://cmpassocregulationblog.blogspot.com/2013/03/thirty-one-million-unemployed-or.html). Lazear and Spletzer (2012Mar, 1) argue that reductions of churn reduce the operational effectiveness of labor markets. Churn is part of the allocation of resources or in this case labor to occupations of higher marginal returns. The decline in churn can harm static and dynamic economic efficiency. Losses from decline of churn during recessions can affect an economy over the long-term by preventing optimal growth trajectories because resources are not used in the occupations where they provide highest marginal returns. Lazear and Spletzer (2012Mar 7-8) conclude that: “under a number of assumptions, we estimate that the loss in output during the recession [of 2007 to 2009] and its aftermath resulting from reduced churn equaled $208 billion. On an annual basis, this amounts to about .4% of GDP for a period of 3½ years.”
There are two additional facts discussed below: (1) there are about ten million fewer full-time jobs currently than before the recession of 2008 and 2009; and (2) the extremely high and rigid rate of youth unemployment is denying an early start to young people ages 16 to 24 years while unemployment of ages 45 years or over has swelled. There are four subsections. IA1 Hiring Collapse provides the data and analysis on the weakness of hiring in the United States economy. IA2 Labor Underutilization provides the measures of labor underutilization of the Bureau of Labor Statistics (BLS). Statistics on the decline of full-time employment are in IA3 Ten Million Fewer Full-time Jobs. IA4 Youth and Middle-Age Unemployment provides the data on high unemployment of ages 16 to 24 years and of ages 45 years or over.
IA1 Hiring Collapse. An important characteristic of the current fractured labor market of the US is the closing of the avenue for exiting unemployment and underemployment normally available through dynamic hiring. Another avenue that is closed is the opportunity for advancement in moving to new jobs that pay better salaries and benefits again because of the collapse of hiring in the United States. Those who are unemployed or underemployed cannot find a new job even accepting lower wages and no benefits. The employed cannot escape declining inflation-adjusted earnings because there is no hiring. The objective of this section is to analyze hiring and labor underutilization in the United States.
Blanchard and Katz (1997, 53 consider an appropriate measure of job stress:
“The right measure of the state of the labor market is the exit rate from unemployment, defined as the number of hires divided by the number unemployed, rather than the unemployment rate itself. What matters to the unemployed is not how many of them there are, but how many of them there are in relation to the number of hires by firms.”
The natural rate of unemployment and the similar NAIRU are quite difficult to estimate in practice (Ibid; see Ball and Mankiw 2002).
The Bureau of Labor Statistics (BLS) created the Job Openings and Labor Turnover Survey (JOLTS) with the purpose that (http://www.bls.gov/jlt/jltover.htm#purpose):
“These data serve as demand-side indicators of labor shortages at the national level. Prior to JOLTS, there was no economic indicator of the unmet demand for labor with which to assess the presence or extent of labor shortages in the United States. The availability of unfilled jobs—the jobs opening rate—is an important measure of tightness of job markets, parallel to existing measures of unemployment.”
The BLS collects data from about 16,000 US business establishments in nonagricultural industries through the 50 states and DC. The data are released monthly and constitute an important complement to other data provided by the BLS (see also Lazear and Spletzer 2012Mar, 6-7).
Hiring in the nonfarm sector (HNF) has declined from 63.8 million in 2006 to 52.0 million in 2012 or by 11.8 million while hiring in the private sector (HP) has declined from 59.5 million in 2006 to 48.5 million in 2012 or by 11.0 million, as shown in Table I-1. The ratio of nonfarm hiring to employment (RNF) has fallen from 47.2 in 2005 to 38.9 in 2012 and in the private sector (RHP) from 52.1 in 2006 to 43.4 in 2012. The collapse of hiring in the US has not been followed by dynamic labor markets because of the low rate of economic growth of 2.1 percent in the first fourteen quarters of expansion from IIIQ2009 to IVQ2012 (see table I-5 in http://cmpassocregulationblog.blogspot.com/2013/04/mediocre-and-decelerating-united-states.html). Boskin (2010Sep) measures that the US economy grew at 6.2 percent in the first four quarters and 4.5 percent in the first 12 quarters after the trough in the second quarter of 1975; and at 7.7 percent in the first four quarters and 5.8 percent in the first 12 quarters after the trough in the first quarter of 1983 (Professor Michael J. Boskin, Summer of Discontent, Wall Street Journal, Sep 2, 2010 http://professional.wsj.com/article/SB10001424052748703882304575465462926649950.html).
Table I-1, US, Annual Total Nonfarm Hiring (HNF) and Total Private Hiring (HP) in the US and Percentage of Total Employment
| HNF | Rate RNF | HP | Rate HP | |
| 2001 | 62,948 | 47.8 | 58,825 | 53.1 |
| 2002 | 58,583 | 44.9 | 54,759 | 50.3 |
| 2003 | 56,451 | 43.4 | 53,056 | 48.9 |
| 2004 | 60,367 | 45.9 | 56,617 | 51.6 |
| 2005 | 63,150 | 47.2 | 59,372 | 53.1 |
| 2006 | 63,773 | 46.9 | 59,494 | 52.1 |
| 2007 | 62,421 | 45.4 | 58,035 | 50.3 |
| 2008 | 55,128 | 40.3 | 51,591 | 45.1 |
| 2009 | 46,357 | 35.4 | 43,031 | 39.8 |
| 2010 | 48,607 | 37.4 | 44,788 | 41.7 |
| 2011 | 49,675 | 37.8 | 46,552 | 42.5 |
| 2012 | 51,991 | 38.9 | 48,493 | 43.4 |
Source: Bureau of Labor Statistics http://www.bls.gov/jlt/
Chart I-1 shows the annual level of total nonfarm hiring (HNF) that collapsed during the global recession after 2007 in contrast with milder decline in the shallow recession of 2001. Nonfarm hiring has not been recovered, remaining at a depressed level.
Chart I-1, US, Level Total Nonfarm Hiring (HNF), Annual, 2001-2012
Source: US Bureau of Labor Statistics
Chart I-2 shows the ratio or rate of nonfarm hiring to employment (RNF) that also fell much more in the recession of 2007 to 2009 than in the shallow recession of 2001. Recovery is weak.
Chart I-2, US, Rate Total Nonfarm Hiring (HNF), Annual, 2001-2012
Source: US Bureau of Labor Statistics
Yearly percentage changes of total nonfarm hiring (HNF) are provided in Table I-2. There were much milder declines in 2002 of 6.9 percent and 3.6 percent in 2003 followed by strong rebounds of 6.9 percent in 2004 and 4.6 percent in 2005. In contrast, the contractions of nonfarm hiring in the recession after 2007 were much sharper in percentage points: 2.1 in 2007, 11.7 in 2008 and 15.9 percent in 2009. On a yearly basis, nonfarm hiring grew 4.9 percent in 2010 relative to 2009, 2.2 percent in 2011 and 4.7 percent in 2012.
Table I-2, US, Annual Total Nonfarm Hiring (HNF), Annual Percentage Change, 2002-2012
| Year | Annual |
| 2002 | -6.9 |
| 2003 | -3.6 |
| 2004 | 6.9 |
| 2005 | 4.6 |
| 2006 | 1.0 |
| 2007 | -2.1 |
| 2008 | -11.7 |
| 2009 | -15.9 |
| 2010 | 4.9 |
| 2011 | 2.2 |
| 2012 | 4.7 |
Source: Bureau of Labor Statistics http://www.bls.gov/jlt/
Chart I-3 plots yearly percentage changes of nonfarm hiring. Percentage declines after 2007 were quite sharp.
Chart I-3, US, Annual Total Nonfarm Hiring (HNF), Annual Percentage Change, 2001-2012
Source: Bureau of Labor Statistics
Total private hiring (HP) yearly data are provided in Chart I-4. There has been sharp contraction of total private hiring in the US and only milder recovery from 2010 to 2012.
Chart I-4, US, Total Private Hiring Level, Annual, 2001-2012
Source: Bureau of Labor Statistics
Chart I-5 plots the rate of total private hiring relative to employment (RHP). The rate collapsed during the global recession after 2007 with insufficient recovery.
![clip_image005[1]](file:///C:\Users\cmpelaez\AppData\Local\Temp\WindowsLiveWriter393614076\supfiles3BCAFD\image19.png "clip_image005[1]")
Chart I-5, US, Rate Total Private Hiring, Annual, 2001-2012
Source: Bureau of Labor Statistics
Total nonfarm hiring (HNF), total private hiring (HP) and their respective rates are provided for the month of Feb in the years from 2001 to 2013 in Table I-3. Hiring numbers are in thousands. There is virtually no recovery in HNF from 3283 thousand (or 3.3 million) in Feb 2009 to 3124 thousand in Feb 2010, 3328 thousand in Feb 2011, 3683 thousand in Feb 2012 and 3632 thousand in Jan 2013 for cumulative gain of 10.6 percent. HP rose from 3102 thousand in Feb 2009 to 3166 thousand in Feb 2011, 3466 thousand in Feb 2012 and 3415 in Feb 2013 for cumulative gain of 10.1 percent. HNF has fallen from 4421 in Feb 2006 to 3632 in Feb 2012 or by 17.8 percent. HP has fallen from 4176 in Feb 2005 to 3415 in Feb 2013 or by 18.2 percent. The labor market continues to be fractured, failing to provide an opportunity to exit from unemployment/underemployment or to find an opportunity for advancement away from declining inflation-adjusted earnings.
Table I-3, US, Total Nonfarm Hiring (HNF) and Total Private Hiring (HP) in the US in Thousands and in Percentage of Total Employment Not Seasonally Adjusted
| HNF | Rate RNF | HP | Rate HP | |
| 2001 Feb | 4399 | 3.4 | 4136 | 3.8 |
| 2002 Feb | 4007 | 3.1 | 3774 | 3.5 |
| 2003 Feb | 3821 | 3.0 | 3617 | 3.4 |
| 2004 Feb | 3840 | 3.0 | 3618 | 3.4 |
| 2005 Feb | 4305 | 3.3 | 4079 | 3.7 |
| 2006 Feb | 4421 | 3.3 | 4176 | 3.7 |
| 2007 Feb | 4265 | 3.1 | 4001 | 3.5 |
| 2008 Feb | 4007 | 2.9 | 3786 | 3.3 |
| 2009 Feb | 3283 | 2.5 | 3102 | 2.9 |
| 2010 Feb | 3124 | 2.4 | 2924 | 2.8 |
| 2011 Feb | 3328 | 2.6 | 3166 | 3.0 |
| 2012 Feb | 3683 | 2.8 | 3466 | 3.2 |
| 2013 Feb | 3632 | 2.7 | 3415 | 3.1 |
Source: Bureau of Labor Statistics http://www.bls.gov/jlt/
Chart I-6 provides total nonfarm hiring on a monthly basis from 2001 to 2013. Nonfarm hiring rebounded in early 2010 but then fell and stabilized at a lower level than the early peak not-seasonally adjusted (NSA) of 4774 in May 2010 until it surpassed it with 4883 in Jun 2011 but declined to 3013 in Dec 2012. Nonfarm hiring fell again in Dec 2011 to 2990 from 3827 in Nov and to revised 3683 in Feb 2012, increasing to 4210 in Mar 2012, 3013 in Dec 2012 and 4128 in Jan 2013 and declining to 3632 in Feb 2013. Chart I-6 provides seasonally adjusted (SA) monthly data. The number of seasonally-adjusted hires in Aug 2011 was 4187 thousand, increasing to revised 4489 thousand in Feb 2012, or 7.2 percent, moving to 4195 in Dec 2012 for cumulative increase of 0.5 percent from 4174 in Dec 2011 and 4418 in Mar 2013 for increase of 5.3 percent relative to 4195 in Dec 2012. The number of hires not seasonally adjusted was 4883 in Jun 2011, falling to 2990 in Dec 2011 but increasing to 4013 in Jan 2012 and declining to 3013 in Dec 2012. The number of nonfarm hiring not seasonally adjusted fell by 38.8 percent from 4883 in Jun 2011 to 2990 in Dec 2011 and fell 41.3 percent from 5130 in Jun 2012 to 3013 in Dec 2012 in a yearly-repeated seasonal pattern.
Chart I-6, US, Total Nonfarm Hiring (HNF), 2001-2013 Month SA
Source: Bureau of Labor Statistics
Similar behavior occurs in the rate of nonfarm hiring in Chart I-7. Recovery in early 2010 was followed by decline and stabilization at a lower level but with stability in monthly SA estimates of 3.2 in Aug 2011 to 3.2 in Jan 2012, increasing to 3.4 in May 2012 and falling to 3.3 in Jun and 3.1Jul 2012, increasing to 3.3 in Aug 2012 but falling to 3.1 in Dec 2012 and 3.3 in Feb 2013. The rate not seasonally adjusted fell from 3.7 in Jun 2011 to 2.2 in Dec 2012, climbing to 3.8 in Jun 2012 but falling to 2.2 in Dec 2012 and 2.7 in Feb 2013. Rates of nonfarm hiring NSA were in the range of 2.8 (Dec) to 4.5 (Jun) in 2006.
Chart I-7, US, Rate Total Nonfarm Hiring, Month SA 2001-2013
Source: Bureau of Labor Statistics
There is only milder improvement in total private hiring shown in Chart I-8. Hiring private (HP) rose in 2010 with stability and renewed increase in 2011 followed by almost stationary series in 2012. The number of private hiring seasonally adjusted fell from 4026 thousand in Sep 2011 to 3876 in Dec 2011 or by 3.7 percent, increasing to 3915 in Jan 2012 or decline by 2.8 percent relative to the level in Sep 2011 but decreasing to 3934 in Sep 2012 or lower by 2.3 percent relative to Sep 2011 and decreasing to 3915 in Dec 2012 for change of 0.0 percent relative to 3915 in Jan 2012. The number of private hiring not seasonally adjusted fell from 4504 in Jun 2011 to 2809 in Dec 2011 or by 37.6 percent, reaching 3749 in Jan 2012 or decline of 16.8 percent relative to Jun 2011 and moving to 2842 in Dec 2012 or 39.8 percent lower relative to 4724 in Jun 2012. Companies do not hire in the latter part of the year that explains the high seasonality in year-end employment data. For example, NSA private hiring fell from 5661 in Jun 2006 to 3635 in Dec 2006 or by 35.8 percent. Private hiring NSA data are useful in showing the huge declines from the period before the global recession. In Jul 2006 private hiring NSA was 5555, declining to 4245 in Jul 2011 or by 23.6 percent and to 4277 in Jul 2012 or lower by 23.0 percent relative to Jul 2006. Private hiring NSA fell from 5215 in Sep 2005 to 4005 in Sep 2012 or 23.2 percent and fell from 3635 in Dec 2006 to 2842 in Dec 2012 or 21.8 percent. The conclusion is that private hiring in the US is around 20 percent below the hiring before the global recession. The main problem in recovery of the US labor market has been the low rate of growth of 2.1 percent in the fourteen quarters of expansion of the economy from IIIQ2009 to IVQ2012 (see table I-5 in http://cmpassocregulationblog.blogspot.com/2013/04/mediocre-and-decelerating-united-states.html). Boskin (2010Sep) measures that the US economy grew at 6.2 percent in the first four quarters and 4.5 percent in the first 12 quarters after the trough in the second quarter of 1975; and at 7.7 percent in the first four quarters and 5.8 percent in the first 12 quarters after the trough in the first quarter of 1983 (Professor Michael J. Boskin, Summer of Discontent, Wall Street Journal, Sep 2, 2010 http://professional.wsj.com/article/SB10001424052748703882304575465462926649950.html).The US missed the opportunity to recover employment as in past cyclical expansions from contractions.
Chart I-8, US, Total Private Hiring Month SA 2001-2013
Source: Bureau of Labor Statistics
Chart I-9 shows similar behavior in the rate of private hiring. The rate in 2011 in monthly SA data did not rise significantly above the peak in 2010. The rate seasonally adjusted fell from 3.6 in Sep 2011 to 3.5 in Dec 2011 and reached 3.5 in Dec 2012 and 3.6 in Feb 2013. The rate not seasonally adjusted (NSA) fell from 3.7 in Sep 2011 to 2.5 in Dec 2011, increasing to 3.8 in Oct 2012 but falling to 2.5 in Dec 2012 and 3.1 in Feb 2013. The NSA rate of private hiring fell from 4.8 in Jul 2006 to 3.4 in Aug 2009 but recovery was insufficient to only 3.8 in Aug 2012, 2.5 in Dec 2012 and 3.1 in Feb 2013.
![clip_image009[1]](file:///C:\Users\cmpelaez\AppData\Local\Temp\WindowsLiveWriter393614076\supfiles3BCAFD\image34.png "clip_image009[1]")
Chart I-9, US, Rate Total Private Hiring Month SA 2001-2013
Source: Bureau of Labor Statistics
The JOLTS report of the Bureau of Labor Statistics also provides total nonfarm job openings (TNF JOB), TNF JOB rate and TNF LD (layoffs and discharges) shown in Table I-4 for the month of Feb from 2001 to 2013. The final column provides annual TNF LD for the years from 2001 to 2012. Nonfarm job openings (TNF JOB) fell from a peak of 4267 in Feb 2007 to 3730 in Feb 2013 or by 12.6 percent while the rate dropped from 3.0 to 2.7. Nonfarm layoffs and discharges (TNF LD) rose from 1420 in Feb 2006 to 2022 in Feb 2009 or by 42.4 percent. The annual data show layoffs and discharges rising from 21.2 million in 2006 to 26.8 million in 2009 or by 26.4 percent. Business pruned payroll jobs to survive the global recession but there has not been hiring because of the weak recovery in the form of growth of 2.1 percent on average in the fourteen quarters of expansion from IIIQ2009 to IVQ2012 (see Table I-5 at http://cmpassocregulationblog.blogspot.com/2013/04/mediocre-and-decelerating-united-states.html). Boskin (2010Sep) measures that the US economy grew at 6.2 percent in the first four quarters and 4.5 percent in the first 12 quarters after the trough in the second quarter of 1975; and at 7.7 percent in the first four quarters and 5.8 percent in the first 12 quarters after the trough in the first quarter of 1983 (Professor Michael J. Boskin, Summer of Discontent, Wall Street Journal, Sep 2, 2010 http://professional.wsj.com/article/SB10001424052748703882304575465462926649950.html).
Table I-4, US, Job Openings and Total Separations, Thousands NSA
| TNF JOB | TNF JOB | TNF LD | TNF LD | |
| Feb 2001 | 4389 | 3.2 | 1442 | 24499 |
| Feb 2002 | 3164 | 2.4 | 1624 | 22922 |
| Feb 2003 | 3174 | 2.4 | 1611 | 23294 |
| Feb 2004 | 3209 | 2.4 | 1559 | 22802 |
| Feb 2005 | 3550 | 2.6 | 1573 | 22185 |
| Feb 2006 | 4088 | 3.0 | 1420 | 21157 |
| Feb 2007 | 4267 | 3.0 | 1449 | 22142 |
| Feb 2008 | 3856 | 2.7 | 1505 | 24181 |
| Feb 2009 | 2657 | 2.0 | 2022 | 26784 |
| Feb 2010 | 2437 | 1.9 | 1424 | 21773 |
| Feb 2011 | 2853 | 2.2 | 1275 | 20401 |
| Feb 2012 | 3319 | 2.5 | 1388 | 20546 |
| Feb 2013 | 3730 | 2.7 | 1261 |
Notes: TNF JOB: Total Nonfarm Job Openings; LD: Layoffs and Discharges
Source: Bureau of Labor Statistics http://www.bls.gov/jlt/
Chart I-10 shows monthly job openings rising from the trough in 2009 to a high in the beginning of 2010. Job openings then stabilized into 2011 but have surpassed the peak of 3142 seasonally adjusted in Apr 2010 with 3612 seasonally adjusted in Dec 2012, which is higher by 15.0 percent relative to Apr 2010 but lower by 4.7 percent than 3789 in Nov 2012 and lower than 3848 in Mar 2012 by 6.1 percent. Nonfarm job openings increased from 3612 in Dec 2012 to 3925 in Feb 2012 or by 8.7 percent. The high of job openings not seasonally adjusted in 2010 was 3396 in Apr 2010 that was surpassed by 3554 in Jul 2011, increasing to 3896 in Oct 2012 but declining to 3103 in Dec 2012 and increasing to 3730 in Feb 2013. The level of job openings not seasonally adjusted fell to 3103 in Dec 2012 or by 19.0 percent relative to 3831 in Apr 2012. There is here again the strong seasonality of year-end labor data. The level of job openings of 3879 in Jan 2013 NSA is lower by 19.1 percent relative to 4794 in Dec 2007. The main problem in recovery of the US labor market has been the low rate of growth of 2.1 percent in the fourteen quarters of expansion of the economy since IIIQ2009 (see table I-5 at http://cmpassocregulationblog.blogspot.com/2013/04/mediocre-and-decelerating-united-states.html). Boskin (2010Sep) measures that the US economy grew at 6.2 percent in the first four quarters and 4.5 percent in the first 12 quarters after the trough in the second quarter of 1975; and at 7.7 percent in the first four quarters and 5.8 percent in the first 12 quarters after the trough in the first quarter of 1983 (Professor Michael J. Boskin, Summer of Discontent, Wall Street Journal, Sep 2, 2010 http://professional.wsj.com/article/SB10001424052748703882304575465462926649950.html).
The US missed the opportunity to recover employment as in past cyclical expansions from contractions.
Chart I-10, US Job Openings, Thousands NSA, 2001-2013
Source: US Bureau of Labor Statistics
The rate of job openings in Chart I-11 shows similar behavior. The rate seasonally adjusted rose from 2.1 percent in Jan 2011 to 2.5 percent in Dec 2011, 2.6 in Dec 2012 and 2.8 in Feb 2013. The rate not seasonally adjusted rose from the high of 2.6 in Apr 2010 to 2.7 in Feb 2013. The rate of job openings NSA fell from 3.4 in Jul 2007 to 1.6 in Nov-Dec 2009, recovering insufficiently to 2.7 in Feb 2013.
Chart I-11, US, Rate of Job Openings, NSA, 2001-2013
Source: US Bureau of Labor Statistics
Total separations are shown in Chart I-12. Separations are much lower in 2012-2-13 than before the global recession but hiring has not recovered.
Chart I-12, US, Total Nonfarm Separations, Month SA, 2001-2013
Source: US Bureau of Labor Statistics
Annual total separations are shown in Chart I-13. Separations are much lower in 2011-2012 than before the global recession but without recovery in hiring.
Chart I-13, US, Total Separations, Annual, 2001-2012
Source: US Bureau of Labor Statistics
Table I-5 provides total nonfarm total separations from 2001 to 2012. Separations fell from 61.6 million in 2006 to 47.6 million in 2010 or by 14.0 million and 47.6 million in 2011 or by 14.0 million. Total separations increased from 47.6 million in 2011 to 49.7 million in 2012 or by 2.1 million.
Table I-5, US, Total Nonfarm Total Separations, Thousands, 2001-2012
| Year | Annual |
| 2001 | 64765 |
| 2002 | 59190 |
| 2003 | 56487 |
| 2004 | 58340 |
| 2005 | 60733 |
| 2006 | 61565 |
| 2007 | 61162 |
| 2008 | 58627 |
| 2009 | 51532 |
| 2010 | 47646 |
| 2011 | 47626 |
| 2012 | 49676 |
Source: US Bureau of Labor Statistics
Monthly data of layoffs and discharges reach a peak in early 2009, as shown in Chart I-14. Layoffs and discharges dropped sharply with the recovery of the economy in 2010 and 2011 once employers reduced their job count to what was required for cost reductions and loss of business. Weak rates of growth of 2.1 percent of GDP on average from IIIQ2009 to IVQ2012 (http://cmpassocregulationblog.blogspot.com/2013/04/mediocre-and-decelerating-united-states.html) frustrated employment recovery. Boskin (2010Sep) measures that the US economy grew at 6.2 percent in the first four quarters and 4.5 percent in the first 12 quarters after the trough in the second quarter of 1975; and at 7.7 percent in the first four quarters and 5.8 percent in the first 12 quarters after the trough in the first quarter of 1983 (Professor Michael J. Boskin, Summer of Discontent, Wall Street Journal, Sep 2, 2010 http://professional.wsj.com/article/SB10001424052748703882304575465462926649950.html).
Chart I-14, US, Total Nonfarm Layoffs and Discharges, Monthly SA, 2011-2013
Source: US Bureau of Labor Statistics
Layoffs and discharges in Chart I-15 rose sharply to a peak in 2009. There was pronounced drop into 2010 and 2011 with mild increase into 2012.
Chart I-15, US, Total Nonfarm Layoffs and Discharges, Annual, 2001-2012
Source: US Bureau of Labor Statistics
Table I-6 provides annual nonfarm layoffs and discharges from 2001 to 2012. Layoffs and discharges peaked at 26.8 million in 2009 and then fell to 20.4 million in 2011, by 6.4 million, or 23.9 percent. Total nonfarm layoffs and discharges increased mildly to 20.5 million in 2012.
Table I-6, US, Total Nonfarm Layoffs and Discharges, 2001-2012
| Year | Annual |
| 2001 | 24499 |
| 2002 | 22922 |
| 2003 | 23294 |
| 2004 | 22802 |
| 2005 | 22185 |
| 2006 | 21157 |
| 2007 | 22142 |
| 2008 | 24181 |
| 2009 | 26784 |
| 2010 | 21773 |
| 2011 | 20401 |
| 2012 | 20546 |
Source: US Bureau of Labor Statistics
IA2 Labor Underutilization. The Bureau of Labor Statistics also provides alternative measures of labor underutilization shown in Table I-7. The most comprehensive measure is U6 that consists of total unemployed plus total employed part time for economic reasons plus all marginally attached workers as percent of the labor force. U6 not seasonally annualized has risen from 8.2 percent in 2006 to 13.9 percent in Mar 2013.
Table I-7, US, Alternative Measures of Labor Underutilization NSA %
| U1 | U2 | U3 | U4 | U5 | U6 | |
| 2013 | ||||||
| Mar | 4.3 | 4.3 | 7.6 | 8.1 | 9.0 | 13.9 |
| Feb | 4.3 | 4.6 | 8.1 | 8.6 | 9.6 | 14.9 |
| Jan | 4.3 | 4.9 | 8.5 | 9.0 | 9.9 | 15.4 |
| 2012 | ||||||
| Dec | 4.2 | 4.3 | 7.6 | 8.3 | 9.2 | 14.4 |
| Nov | 4.2 | 3.9 | 7.4 | 7.9 | 8.8 | 13.9 |
| Oct | 4.3 | 3.9 | 7.5 | 8.0 | 9.0 | 13.9 |
| Sep | 4.2 | 4.0 | 7.6 | 8.0 | 9.0 | 14.2 |
| Aug | 4.3 | 4.4 | 8.2 | 8.7 | 9.7 | 14.6 |
| Jul | 4.3 | 4.6 | 8.6 | 9.1 | 10.0 | 15.2 |
| Jun | 4.5 | 4.4 | 8.4 | 8.9 | 9.9 | 15.1 |
| May | 4.7 | 4.3 | 7.9 | 8.4 | 9.3 | 14.3 |
| Apr | 4.8 | 4.3 | 7.7 | 8.3 | 9.1 | 14.1 |
| Mar | 4.9 | 4.8 | 8.4 | 8.9 | 9.7 | 14.8 |
| Feb | 4.9 | 5.1 | 8.7 | 9.3 | 10.2 | 15.6 |
| Jan | 4.9 | 5.4 | 8.8 | 9.4 | 10.5 | 16.2 |
| 2011 | ||||||
| Dec | 4.8 | 5.0 | 8.3 | 8.8 | 9.8 | 15.2 |
| Nov | 4.9 | 4.7 | 8.2 | 8.9 | 9.7 | 15.0 |
| Oct | 5.0 | 4.8 | 8.5 | 9.1 | 10.0 | 15.3 |
| Sep | 5.2 | 5.0 | 8.8 | 9.4 | 10.2 | 15.7 |
| Aug | 5.2 | 5.1 | 9.1 | 9.6 | 10.6 | 16.1 |
| Jul | 5.2 | 5.2 | 9.3 | 10.0 | 10.9 | 16.3 |
| Jun | 5.1 | 5.1 | 9.3 | 9.9 | 10.9 | 16.4 |
| May | 5.5 | 5.1 | 8.7 | 9.2 | 10.0 | 15.4 |
| Apr | 5.5 | 5.2 | 8.7 | 9.2 | 10.1 | 15.5 |
| Mar | 5.7 | 5.8 | 9.2 | 9.7 | 10.6 | 16.2 |
| Feb | 5.6 | 6.0 | 9.5 | 10.1 | 11.1 | 16.7 |
| Jan | 5.6 | 6.2 | 9.8 | 10.4 | 11.4 | 17.3 |
| Dec 2010 | 5.4 | 5.9 | 9.1 | 9.9 | 10.7 | 16.6 |
| Annual | ||||||
| 2012 | 4.5 | 4.4 | 8.1 | 8.6 | 9.5 | 14.7 |
| 2011 | 5.3 | 5.3 | 8.9 | 9.5 | 10.4 | 15.9 |
| 2010 | 5.7 | 6.0 | 9.6 | 10.3 | 11.1 | 16.7 |
| 2009 | 4.7 | 5.9 | 9.3 | 9.7 | 10.5 | 16.2 |
| 2008 | 2.1 | 3.1 | 5.8 | 6.1 | 6.8 | 10.5 |
| 2007 | 1.5 | 2.3 | 4.6 | 4.9 | 5.5 | 8.3 |
| 2006 | 1.5 | 2.2 | 4.6 | 4.9 | 5.5 | 8.2 |
| 2005 | 1.8 | 2.5 | 5.1 | 5.4 | 6.1 | 8.9 |
| 2004 | 2.1 | 2.8 | 5.5 | 5.8 | 6.5 | 9.6 |
| 2003 | 2.3 | 3.3 | 6.0 | 6.3 | 7.0 | 10.1 |
| 2002 | 2.0 | 3.2 | 5.8 | 6.0 | 6.7 | 9.6 |
| 2001 | 1.2 | 2.4 | 4.7 | 4.9 | 5.6 | 8.1 |
| 2000 | 0.9 | 1.8 | 4.0 | 4.2 | 4.8 | 7.0 |
Note: LF: labor force; U1, persons unemployed 15 weeks % LF; U2, job losers and persons who completed temporary jobs %LF; U3, total unemployed % LF; U4, total unemployed plus discouraged workers, plus all other marginally attached workers; % LF plus discouraged workers; U5, total unemployed, plus discouraged workers, plus all other marginally attached workers % LF plus all marginally attached workers; U6, total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons % LF plus all marginally attached workers
Source: US Bureau of Labor Statistics http://www.bls.gov/
Monthly seasonally adjusted measures of labor underutilization are provided in Table I-8. U6 climbed from 16.1 percent in Aug 2011 to 16.3 percent in Sep 2011 and then fell to 14.5 percent in Apr 2012 and 13.8 percent in Mar 2013. Unemployment is an incomplete measure of the stress in US job markets. A different calculation in this blog is provided by using the participation rate in the labor force before the global recession. This calculation shows 29.6 million in job stress of unemployment/underemployment in Mar 2013, not seasonally adjusted, corresponding to 18.2 percent of the labor force (Table I-4 http://cmpassocregulationblog.blogspot.com/2013/04/thirty-million-unemployed-or.html).
Table I-8, US, Alternative Measures of Labor Underutilization SA %
| U1 | U2 | U3 | U4 | U5 | U6 | |
| Mar 2013 | 4.1 | 4.1 | 7.6 | 8.1 | 8.9 | 13.8 |
| Feb | 4.2 | 4.2 | 7.7 | 8.3 | 9.2 | 14.3 |
| Jan | 4.2 | 4.3 | 7.9 | 8.4 | 9.3 | 14.4 |
| Dec 2012 | 4.3 | 4.1 | 7.8 | 8.5 | 9.4 | 14.4 |
| Nov | 4.3 | 4.1 | 7.8 | 8.3 | 9.2 | 14.4 |
| Oct | 4.4 | 4.2 | 7.9 | 8.4 | 9.3 | 14.5 |
| Sep | 4.3 | 4.2 | 7.8 | 8.3 | 9.3 | 14.7 |
| Aug | 4.4 | 4.5 | 8.1 | 8.6 | 9.6 | 14.7 |
| Jul | 4.5 | 4.6 | 8.2 | 8.7 | 9.7 | 14.9 |
| Jun | 4.6 | 4.6 | 8.2 | 8.7 | 9.6 | 14.8 |
| May | 4.6 | 4.5 | 8.2 | 8.7 | 9.6 | 14.8 |
| Apr | 4.5 | 4.5 | 8.1 | 8.7 | 9.5 | 14.5 |
| Mar | 4.6 | 4.5 | 8.2 | 8.7 | 9.6 | 14.5 |
| Feb | 4.8 | 4.6 | 8.3 | 8.9 | 9.8 | 15.0 |
| Jan | 4.8 | 4.7 | 8.3 | 8.9 | 9.9 | 15.1 |
| Dec 2011 | 4.9 | 4.9 | 8.5 | 9.0 | 10.0 | 15.2 |
| Nov | 5.0 | 4.9 | 8.6 | 9.3 | 10.2 | 15.5 |
| Oct | 5.1 | 5.1 | 8.9 | 9.5 | 10.4 | 16.0 |
| Sep | 5.4 | 5.2 | 9.0 | 9.6 | 10.5 | 16.3 |
| Aug | 5.3 | 5.2 | 9.0 | 9.6 | 10.5 | 16.1 |
| Jul | 5.3 | 5.3 | 9.0 | 9.7 | 10.6 | 16.0 |
| Jun | 5.3 | 5.3 | 9.1 | 9.7 | 10.7 | 16.1 |
| May | 5.3 | 5.4 | 9.0 | 9.5 | 10.3 | 15.8 |
| Apr | 5.2 | 5.4 | 9.0 | 9.6 | 10.5 | 16.0 |
| Mar | 5.3 | 5.4 | 8.9 | 9.5 | 10.4 | 15.8 |
| Feb | 5.4 | 5.5 | 9.0 | 9.6 | 10.6 | 16.0 |
| Jan | 5.5 | 5.5 | 9.1 | 9.7 | 10.8 | 16.2 |
Note: LF: labor force; U1, persons unemployed 15 weeks % LF; U2, job losers and persons who completed temporary jobs %LF; U3, total unemployed % LF; U4, total unemployed plus discouraged workers, plus all other marginally attached workers; % LF plus discouraged workers; U5, total unemployed, plus discouraged workers, plus all other marginally attached workers % LF plus all marginally attached workers; U6, total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons % LF plus all marginally attached workers
Source: US Bureau of Labor Statistics http://www.bls.gov/
Chart I-16 provides U1 on a monthly basis from 2001 to 2013. There was a steep climb from 2007 into 2009 and then this measure of unemployment and underemployment stabilized at that high level but declined into 2012. The low of U6 SA was 7.9 percent in Dec 2006 and the peak was 17.1 percent in Oct-Dec 2009. The low NSA was 7.6 percent in Oct 2006 and the peak was 18.0 percent in Jan 2010.
Chart I-16, US, U6, total unemployed, plus all marginally attached workers, plus total employed Part-Time for Economic Reasons, Month, SA, 2001-2013
Source: US Bureau of Labor Statistics
Chart I-17 provides the number employed part-time for economic reasons or who cannot find full-time employment. There are sharp declines at the end of 2009, 2010 and 2011 but an increase in 2012 followed by stability.
Chart I-17, US, Working Part-time for Economic Reasons
Thousands, Month SA 2001-2013
Sources: US Bureau of Labor Statistics
There is strong seasonality in US labor markets around the end of the year. The number employed part-time for economic reasons because they could not find full-time employment fell from 9.101 million in Sep 2011 to 8.043 million in Aug 2012, seasonally adjusted, or decline of 1.058 million in nine months, as shown in Table I-9, but then rebounded to 8.607 million in Sep 2012 for increase of 564,000 in one month from Aug to Sep 2012, declining to 8.286 million in Oct 2012 or by 321,000 again in one month, further declining to 8.138 million in Nov 2012 for another major one-month decline of 148,000 and 7.918 million in Dec 2012 or fewer 220,000 in just one month. The number employed part-time for economic reasons increased to 7.973 million in Jan 2013 or 55,000 more than in Dec 2012 and to 7,988 million in Feb 2013, declining to 7.638 million in Mar 2013 There is an increase of 243,000 in part-time for economic reasons from Aug 2012 to Oct 2012 and of 95,000 from Aug 2012 to Nov 2012. The number employed full-time increased from 112.871 million in Oct 2011 to 115.145 million in Mar 2012 or 2.274 million but then fell to 114.300 million in May 2012 or 0.845 million fewer full-time employed than in Mar 2012. The number employed full-time increased from 114.492 million in Aug 2012 to 115.469 million in Oct 2012 or increase of 0.977 million full-time jobs in two months and further to 115.918 million in Jan 2013 or increase of 1.426 million more full-time jobs in four months from Aug 2012 to Jan 2013. The number of full time jobs decreased slightly to 115.841 in Feb 2013, increasing to 115.903 million in Mar 2013. Benchmark and seasonality-factors adjustments at the turn of every year could affect comparability of labor market indicators (http://cmpassocregulationblog.blogspot.com/2013/02/thirty-one-million-unemployed-or.html http://cmpassocregulationblog.blogspot.com/2013/03/thirty-one-million-unemployed-or.html). The number of employed part-time for economic reasons actually increased without seasonal adjustment from 8.271 million in Nov 2011 to 8.428 million in Dec 2011 or by 157,000 and then to 8.918 million in Jan 2012 or by an additional 490,000 for cumulative increase from Nov 2011 to Jan 2012 of 647,000. The level of employed part-time for economic reasons then fell from 8.918 million in Jan 2012 to 7.867 million in Mar 2012 or by 1.0151 million and to 7.694 million in Apr 2012 or 1.224 million fewer relative to Jan 2012. In Aug 2012, the number employed part-time for economic reasons reached 7.842 million NSA or 148,000 more than in Apr 2012. The number employed part-time for economic reasons increased from 7.842 million in Aug 2012 to 8.110 million in Sep 2012 or by 3.4 percent. The number part-time for economic reasons fell from 8.110 million in Sep 2012 to 7.870 million in Oct 2012 or by 240.000 in one month. The number employed part-time for economic reasons NSA increased to 8.628 million in Jan 2013 or 758,000 more than in Oct 2012. The number employed part-time for economic reasons fell to 8.298 million in Feb 2013, which is lower by 330,000 relative to 8.628 million in Jan 2013 but higher by 428,000 relative to 7.870 million in Oct 2012. The number employed part time for economic reasons fell to 7.734 million in Mar 2013 or 564,000 less than in Feb 2013. The number employed full time without seasonal adjustment fell from 113.138 million in Nov 2011 to 113.050 million in Dec 2011 or by 88,000 and fell further to 111.879 in Jan 2012 for cumulative decrease of 1.259 million. The number employed full-time not seasonally adjusted fell from 113.138 million in Nov 2011 to 112.587 million in Feb 2012 or by 551.000 but increased to 116.214 million in Aug 2012 or 3.076 million more full-time jobs than in Nov 2011. The number employed full-time not seasonally adjusted decreased from 116.214 million in Aug 2012 to 115.678 million in Sep 2012 for loss of 536,000 full-time jobs and rose to 116.045 million in Oct 2012 or by 367,000 full-time jobs in one month relative to Sep 2012. The number employed full-time NSA fell from 116.045 million in Oct 2012 to 115.515 million in Nov 2012 or decline of 530.000 in one month. The number employed full-time fell from 115.515 in Nov 2012 to 115.079 million in Dec 2012 or decline by 436,000 in one month. The number employed full time fell from 115.079 million in Dec 2012 to 113.868 million in Jan 2013 or decline of 1.211 million in one month. The number of full time jobs increased to 114.191 in Feb 2012 or by 323,000 in one month and increased to 114.796 million in Mar 2013 for cumulative increase from Jan by 928,000 full-time jobs but decrease of 283,000 from Dec 2012. Comparisons over long periods require use of NSA data. The number with full-time jobs fell from a high of 123.219 million in Jul 2007 to 108.777 million in Jan 2010 or by 14.442 million. The number with full-time jobs in Mar 2013 is 114.796 million, which is lower by 8.423 million relative to the peak of 123.219 million in Jul 2007. The magnitude of the stress in US labor markets is magnified by the increase in the civilian noninstitutional population of the United States from 231.958 million in Jul 2007 to 244.995 million in Mar 2013 or by 13.037 million (http://www.bls.gov/data/) while in the same period the number of full-time jobs fell 8.243 million. There appear to be around 10 million fewer full-time jobs in the US than before the global recession while population increased around 13 million. Growth at 2.1 percent on average in the fourteen quarters of expansion from IIIQ2009 to IVQ2012 is the main culprit of the fractured US labor market (see table I-5 in http://cmpassocregulationblog.blogspot.com/2013/04/mediocre-and-decelerating-united-states.html). Boskin (2010Sep) measures that the US economy grew at 6.2 percent in the first four quarters and 4.5 percent in the first 12 quarters after the trough in the second quarter of 1975; and at 7.7 percent in the first four quarters and 5.8 percent in the first 12 quarters after the trough in the first quarter of 1983 (Professor Michael J. Boskin, Summer of Discontent, Wall Street Journal, Sep 2, 2010 http://professional.wsj.com/article/SB10001424052748703882304575465462926649950.html).
Table I-9, US, Employed Part-time for Economic Reasons, Thousands, and Full-time, Millions
| Part-time Thousands | Full-time Millions | |
| Seasonally Adjusted | ||
| Mar 2013 | 7,638 | 115.903 |
| Feb 2013 | 7,988 | 115.841 |
| Jan 2013 | 7,973 | 115.918 |
| Dec 2012 | 7,918 | 115.868 |
| Nov 2012 | 8,138 | 115.665 |
| Oct 2012 | 8,286 | 115.469 |
| Sep 2012 | 8,607 | 115.259 |
| Aug 2012 | 8,043 | 114.492 |
| Jul 2012 | 8,245 | 114.478 |
| Jun 2012 | 8,210 | 114.606 |
| May 2012 | 8,116 | 114.300 |
| Apr 2012 | 7,896 | 114.441 |
| Mar 2012 | 7,664 | 115.145 |
| Feb 2012 | 8,127 | 114.263 |
| Jan 2012 | 8,220 | 113.833 |
| Dec 2011 | 8,168 | 113.820 |
| Nov 2011 | 8,436 | 113.217 |
| Oct 2011 | 8,726 | 112.871 |
| Sep 2011 | 9,101 | 112.541 |
| Aug 2011 | 8,816 | 112.555 |
| Jul 2011 | 8,416 | 112.141 |
| Not Seasonally Adjusted | ||
| Mar 2013 | 7,734 | 114.796 |
| Feb 2013 | 8,298 | 114.191 |
| Jan 2013 | 8,628 | 113.868 |
| Dec 2012 | 8,116 | 115.079 |
| Nov 2012 | 7,994 | 115.515 |
| Oct 2012 | 7,870 | 116.045 |
| Sep 2012 | 8,110 | 115.678 |
| Aug 2012 | 7,842 | 116.214 |
| Jul 2012 | 8,316 | 116.131 |
| Jun 2012 | 8,394 | 116.024 |
| May 2012 | 7,837 | 114.634 |
| Apr 2012 | 7,694 | 113.999 |
| Mar 2012 | 7,867 | 113.916 |
| Feb 2012 | 8,455 | 112.587 |
| Jan 2012 | 8,918 | 111.879 |
| Dec 2011 | 8,428 | 113.050 |
| Nov 2011 | 8,271 | 113.138 |
| Oct 2011 | 8,258 | 113.456 |
| Sep 2011 | 8,541 | 112.980 |
| Aug 2011 | 8,604 | 114.286 |
| Jul 2011 | 8,514 | 113.759 |
| Jun 2011 | 8,738 | 113.255 |
| May 2011 | 8,270 | 112.618 |
| Apr 2011 | 8,425 | 111.844 |
| Mar 2011 | 8,737 | 111.186 |
| Feb 2011 | 8,749 | 110.731 |
| Jan 2011 | 9,187 | 110.373 |
| Dec 2010 | 9,205 | 111.207 |
| Nov 2010 | 8,670 | 111.348 |
| Oct 2010 | 8,408 | 112.342 |
| Sep 2010 | 8,628 | 112.385 |
| Aug 2010 | 8,628 | 113.508 |
| Jul 2010 | 8,737 | 113.974 |
| Jun 2010 | 8,867 | 113.856 |
| May 2010 | 8,513 | 112.809 |
| Apr 2010 | 8,921 | 111.391 |
| Mar 2010 | 9,343 | 109.877 |
| Feb 2010 | 9,282 | 109.100 |
| Jan 2010 | 9,290 | 108.777 (low) |
| Dec 2009 | 9,354 (high) | 109.875 |
| Nov 2009 | 8,894 | 111.274 |
| Oct 2009 | 8,474 | 111.599 |
| Sep 2009 | 8,255 | 111.991 |
| Aug 2009 | 8,835 | 113.863 |
| Jul 2009 | 9,103 | 114.184 |
| Jun 2009 | 9,301 | 114.014 |
| May 2009 | 8,785 | 113.083 |
| Apr 2009 | 8,648 | 112.746 |
| Mar 2009 | 9,305 | 112.215 |
| Feb 2009 | 9,170 | 112.947 |
| Jan 2009 | 8,829 | 113.815 |
| Dec 2008 | 8,250 | 116.422 |
| Nov 2008 | 7,135 | 118.432 |
| Oct 2008 | 6,267 | 120.020 |
| Sep 2008 | 5,701 | 120.213 |
| Aug 2008 | 5,736 | 121.556 |
| Jul 2008 | 6,054 | 122.378 |
| Jun 2008 | 5,697 | 121.845 |
| May 2008 | 5,096 | 120.809 |
| Apr 2008 | 5,071 | 120.027 |
| Mar 2008 | 5,038 | 119.875 |
| Feb 2008 | 5,114 | 119.452 |
| Jan 2008 | 5,340 | 119.332 |
| Dec 2007 | 4,750 | 121.042 |
| Nov 2007 | 4,374 | 121.846 |
| Oct 2007 | 4,028 | 122.006 |
| Sep 2007 | 4,137 | 121.728 |
| Aug 2007 | 4,494 | 122.870 |
| Jul 2007 | 4,516 | 123.219 (high) |
| Jun 2007 | 4,469 | 122.150 |
| May 2007 | 4,315 | 120.846 |
| Apr 2007 | 4,205 | 119.609 |
| Mar 2007 | 4,384 | 119.640 |
| Feb 2007 | 4,417 | 119.041 |
| Jan 2007 | 4,726 | 119.094 |
| Dec 2006 | 4,281 | 120.371 |
| Nov 2006 | 4,054 | 120.507 |
| Oct 2006 | 4,010 | 121.199 |
| Sep 2006 | 3,735 (low) | 120.780 |
| Aug 2006 | 4,104 | 121.979 |
| Jul 2006 | 4,450 | 121.951 |
| Jun 2006 | 4,456 | 121.070 |
| May 2006 | 3,968 | 118.925 |
| Apr 2006 | 3,787 | 118.559 |
| Mar 2006 | 4,097 | 117.693 |
| Feb 2006 | 4,403 | 116.823 |
| Jan 2006 | 4,597 | 116.395 |
Source: US Bureau of Labor Statistics http://www.bls.gov/
People lose their marketable job skills after prolonged unemployment and find increasing difficulty in finding another job. Chart I-18 shows the sharp rise in unemployed over 27 weeks and stabilization at an extremely high level.
Chart I-18, US, Number Unemployed for 27 Weeks or Over, Thousands SA Month 2001-2013
Sources: US Bureau of Labor Statistics
Another segment of U6 consists of people marginally attached to the labor force who continue to seek employment but less frequently on the frustration there may not be a job for them. Chart I-19 shows the sharp rise in people marginally attached to the labor force after 2007 and subsequent stabilization.
Chart I-19, US, Marginally Attached to the Labor Force, NSA Month 2001-2013
Sources: US Bureau of Labor Statistics
IA3 Ten Million Fewer Full-time Jobs. Chart I-20 reveals the fracture in the US labor market. The number of workers with full-time jobs not-seasonally-adjusted rose with fluctuations from 2002 to a peak in 2007, collapsing during the global recession. The terrible state of the job market is shown in the segment from 2009 to 2013 with fluctuations around the typical behavior of a stationary series: there is no improvement in the United States in creating full-time jobs.
Chart I-20, US, Full-time Employed, Thousands, NSA, 2001-2013
Sources: US Bureau of Labor Statistics
Chart I-20A provides the noninstitutional civilian population of the United States from 2001 to 2013. There is clear trend of increase of the population while the number of full-time jobs collapsed after 2008 without sufficient recovery as shown in the preceding Chart I-20.
Chart I-20A, US, Noninstitutional Civilian Population, 2001-2013
Sources: US Bureau of Labor Statistics
Chart I-20B provides number of full-time jobs in the US from 1968 to 2013. There were multiple recessions followed by expansions without contraction of full-time jobs without recovery as during the period after 2008.
![clip_image014[1]](file:///C:\Users\cmpelaez\AppData\Local\Temp\WindowsLiveWriter393614076\supfiles2D6F4E7\image%5b11%5d.png "clip_image014[1]")
Chart I-20B, US, Full-time Employed, Thousands, NSA, 1968-2013
Sources: US Bureau of Labor Statistics
Chart I-20C provides the noninstitutional civilian population of the United States from 1968 to 2013. Population expanded at a relatively constant rate of increase with the assurance of creation of full-time jobs that has been broken since 2008.
Chart I-20C, US, Noninstitutional Civilian Population, 1968-2013
Sources: US Bureau of Labor Statistics
IA4 Youth Unemployment and Middle-Aged Unemployment. The United States is experiencing high youth unemployment as in European economies. Table I-10 provides the employment level for ages 16 to 24 years of age estimated by the Bureau of Labor Statistics. On an annual basis, youth employment fell from 20.041 million in 2006 to 17.362 million in 2011 or 2.679 million fewer youth jobs and to 17.834 million in 2012 or 2.207 million fewer jobs. During the seasonal peak months of youth employment in the summer from Jun to Aug, youth employment has fallen by more than two million jobs relative to 21.914 million in Jul 2006 with 19.461 million in Jul 2012 for 2.453 million fewer youth jobs. There are two hardships behind these data. First, young people cannot find employment after finishing high-school and college, reducing prospects for achievement in older age. Second, students with more modest means cannot find employment to keep them in college.
Table I-10, US, Employment Level 16-24 Years, Thousands, NSA
| Year | Jan | Feb | Mar | Apr | Dec | Annual |
| 2001 | 19678 | 19745 | 19800 | 19778 | 19547 | 20088 |
| 2002 | 18653 | 19074 | 19091 | 19108 | 19394 | 19683 |
| 2003 | 18811 | 18880 | 18709 | 18873 | 19136 | 19351 |
| 2004 | 18852 | 18841 | 18752 | 19184 | 19619 | 19630 |
| 2005 | 18858 | 18670 | 18989 | 19071 | 19733 | 19770 |
| 2006 | 19003 | 19182 | 19291 | 19406 | 20129 | 20041 |
| 2007 | 19407 | 19415 | 19538 | 19368 | 19361 | 19875 |
| 2008 | 18724 | 18546 | 18745 | 19161 | 18378 | 19202 |
| 2009 | 17467 | 17606 | 17564 | 17739 | 16615 | 17601 |
| 2010 | 16166 | 16412 | 16587 | 16764 | 16727 | 17077 |
| 2011 | 16512 | 16638 | 16898 | 16970 | 17234 | 17362 |
| 2012 | 16944 | 17150 | 17301 | 17387 | 17604 | 17834 |
| 2013 | 17183 | 17257 | 17271 |
Source: US Bureau of Labor Statistics http://www.bls.gov/
Chart I-21 provides US employment level ages 16 to 24 years from 2002 to 2013. Employment level is sharply lower in Jun 2012 relative to the peak in 2007.
Chart I-21, US, Employment Level 16-24 Years, Thousands SA, 2001-2013
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
Table I-11 provides US unemployment level ages 16 to 24 years. The number unemployed ages 16 to 24 years increased from 2342 thousand in 2007 to 3634 thousand in 2011 or by 1.292 million and 3451 thousand in 2012 or by 1.109 million. This situation may persist for many years.
Table I-11, US, Unemployment Level 16-24 Years, Thousands NSA
| Year | Jan | Feb | Mar | Apr | Dec | Annual |
| 2001 | 2250 | 2258 | 2253 | 2095 | 2412 | 2371 |
| 2002 | 2754 | 2731 | 2822 | 2515 | 2374 | 2683 |
| 2003 | 2748 | 2740 | 2601 | 2572 | 2248 | 2746 |
| 2004 | 2767 | 2631 | 2588 | 2387 | 2294 | 2638 |
| 2005 | 2661 | 2787 | 2520 | 2398 | 2055 | 2521 |
| 2006 | 2366 | 2433 | 2216 | 2092 | 2007 | 2353 |
| 2007 | 2363 | 2230 | 2096 | 2074 | 2323 | 2342 |
| 2008 | 2633 | 2480 | 2347 | 2196 | 2928 | 2830 |
| 2009 | 3278 | 3457 | 3371 | 3321 | 3532 | 3760 |
| 2010 | 3983 | 3888 | 3748 | 3803 | 3352 | 3857 |
| 2011 | 3851 | 3696 | 3520 | 3365 | 3161 | 3634 |
| 2012 | 3416 | 3507 | 3294 | 3175 | 3153 | 3451 |
| 2013 | 3674 | 3449 | 3261 |
Source: US Bureau of Labor Statistics http://www.bls.gov/
Chart I-22 provides the unemployment level ages 16 to 24 from 2002 to 2012. The level rose sharply from 2007 to 2010 with tepid improvement into 2012 and deterioration into 2013.
Chart I-22, US, Unemployment Level 16-24 Years, Thousands SA, 2001-2013
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
Table I-12 provides the rate of unemployment of young peoples in ages 16 to 24 years. The annual rate jumped from 10.5 percent in 2007 to 18.4 percent in 2010, 17.3 percent in 2011 and 16.2 percent in 2012. During the seasonal peak in Jul the rate of youth unemployed was 18.1 percent in Jul 2011 and 17.1 percent in Jul 2012 compared with 10.8 percent in Jul 2007.
Table I-12, US, Unemployment Rate 16-24 Years, Thousands, NSA
| Year | Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Dec | Annual |
| 2001 | 10.3 | 10.3 | 10.2 | 9.6 | 10.0 | 11.6 | 10.5 | 10.7 | 11.0 | 10.6 |
| 2002 | 12.9 | 12.5 | 12.9 | 11.6 | 11.6 | 13.2 | 12.4 | 11.5 | 10.9 | 12.0 |
| 2003 | 12.7 | 12.7 | 12.2 | 12.0 | 13.0 | 14.8 | 13.3 | 11.9 | 10.5 | 12.4 |
| 2004 | 12.8 | 12.3 | 12.1 | 11.1 | 12.2 | 13.4 | 12.3 | 11.1 | 10.5 | 11.8 |
| 2005 | 12.4 | 13.0 | 11.7 | 11.2 | 11.9 | 12.6 | 11.0 | 10.8 | 9.4 | 11.3 |
| 2006 | 11.1 | 11.3 | 10.3 | 9.7 | 10.2 | 11.9 | 11.2 | 10.4 | 9.1 | 10.5 |
| 2007 | 10.9 | 10.3 | 9.7 | 9.7 | 10.2 | 12.0 | 10.8 | 10.5 | 10.7 | 10.5 |
| 2008 | 12.3 | 11.8 | 11.1 | 10.3 | 13.3 | 14.4 | 14.0 | 13.0 | 13.7 | 12.8 |
| 2009 | 15.8 | 16.4 | 16.1 | 15.8 | 18.0 | 19.9 | 18.5 | 18.0 | 17.5 | 17.6 |
| 2010 | 19.8 | 19.2 | 18.4 | 18.5 | 18.4 | 20.0 | 19.1 | 17.8 | 16.7 | 18.4 |
| 2011 | 18.9 | 18.2 | 17.2 | 16.5 | 17.5 | 18.9 | 18.1 | 17.5 | 15.5 | 17.3 |
| 2012 | 16.8 | 17.0 | 16.0 | 15.4 | 16.3 | 18.1 | 17.1 | 16.8 | 15.2 | 16.2 |
| 2013 | 17.6 | 16.7 | 15.9 |
Source: US Bureau of Labor Statistics http://www.bls.gov/
Chart I-23 provides the BLS estimate of the not-seasonally-adjusted rate of youth unemployment for ages 16 to 24 years from 2002 to 2013. The rate of youth unemployment increased sharply during the global recession of 2008 and 2009 but has failed to drop to earlier lower levels during the fourteen consecutive quarters of expansion of the economy since IIIQ2009 because of much lower growth at 2.1 percent annual equivalent on (Table I -5 http://cmpassocregulationblog.blogspot.com/2013/04/mediocre-and-decelerating-united-states.html). Boskin (2010Sep) measures that the US economy grew at 6.2 percent in the first four quarters and 4.5 percent in the first 12 quarters after the trough in the second quarter of 1975; and at 7.7 percent in the first four quarters and 5.8 percent in the first 12 quarters after the trough in the first quarter of 1983 (Professor Michael J. Boskin, Summer of Discontent, Wall Street Journal, Sep 2, 2010 http://professional.wsj.com/article/SB10001424052748703882304575465462926649950.html).
![clip_image018[1]](file:///C:\Users\cmpelaez\AppData\Local\Temp\WindowsLiveWriter393614076\supfiles3BCAFD\image1211.png "clip_image018[1]")
Chart I-23, US, Unemployment Rate 16-24 Years, Percent, NSA, 2001-2013
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
Chart I-24 provides longer perspective with the rate of youth unemployment in ages 16 to 24 years from 1948 to 2013. The rate of youth unemployment rose to 20 percent during the contractions of the early 1980s and also during the contraction of the global recession in 2008 and 2009. The data illustrate again the claim in this blog that the contractions of the early 1980s are the valid framework for comparison with the global recession of 2008 and 2009 instead of misleading comparisons with the 1930s. During the initial phase of recovery, the rate of youth unemployment 16 to 24 years NSA fell from 18.9 percent in Jun 1983 to 14.5 percent in Jun 1984 while the rate of youth unemployment 16 to 24 years was nearly the same during the expansion after IIIQ2009: 17.5 percent in Dec 2009, 16.7 percent in Dec 2010, 15.5 percent in Dec 2011, 15.2 percent in Dec 2012, 17.6 percent in Jan 2013, 16.7 percent in Feb 2013 and 15.9 percent in Mar 2013. In Jul 2007, the rate of youth unemployment was 10.8 percent, increasing to 17.1 percent in Jul 2012. The difference originates in the vigorous seasonally-adjusted annual equivalent average rate of GDP growth of 5.7 percent during the recovery from IQ1983 to IVQ1985 compared with 2.1 percent on average during the first fourteen quarters of expansion from IIIQ2009 to IVQ2012 (see table I-5 in http://cmpassocregulationblog.blogspot.com/2013/04/mediocre-and-decelerating-united-states.html). The fractured US labor market denies an early start for young people.
Chart I-24, US, Unemployment Rate 16-24 Years, Percent NSA, 1948-2013
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
It is more difficult to move to other jobs after a certain age because of fewer available opportunities for matured individuals than for new entrants into the labor force. Middle-aged unemployed are less likely to find another job. Table I-13 provides the unemployment level ages 45 years and over. The number unemployed ages 45 years and over rose from 1.985 million in Jul 2006 to 4.821 million in July 2010 or by 142.9 percent. The number of unemployed ages 45 years and over declined to 4.405 million in Jul 2012 that is still higher by 121.9 percent than in Jul 2006. The number unemployed age 45 and over jumped from 1.794 million in Dec 2006 to 4.762 million in Dec 2010 or 165.4 percent and at 3.927 million in Dec 2012 is higher by 2.133 million or 118.9 percent higher than 1.794 million in Dec 2006. The level of unemployment of those aged 45 year or more of 3.929 million in Mar 2013 is higher by 2.052 million than 1.877 million in Mar 2006 or higher by 109.3 percent.
Table I-13, US, Unemployment Level 45 Years and Over, Thousands NSA
| Year | Jan | Feb | Mar | Apr | Dec | Annual |
| 2000 | 1498 | 1392 | 1291 | 1062 | 1217 | 1249 |
| 2001 | 1572 | 1587 | 1533 | 1421 | 1901 | 1576 |
| 2002 | 2235 | 2280 | 2138 | 2101 | 2210 | 2114 |
| 2003 | 2495 | 2415 | 2485 | 2287 | 2130 | 2253 |
| 2004 | 2453 | 2397 | 2354 | 2160 | 2086 | 2149 |
| 2005 | 2286 | 2286 | 2126 | 1939 | 1963 | 2009 |
| 2006 | 2126 | 2056 | 1881 | 1843 | 1794 | 1848 |
| 2007 | 2155 | 2138 | 2031 | 1871 | 2120 | 1966 |
| 2008 | 2336 | 2336 | 2326 | 2104 | 3485 | 2540 |
| 2009 | 4138 | 4380 | 4518 | 4172 | 4960 | 4500 |
| 2010 | 5314 | 5307 | 5194 | 4770 | 4762 | 4879 |
| 2011 | 5027 | 4837 | 4748 | 4373 | 4182 | 4537 |
| 2012 | 4458 | 4472 | 4390 | 4037 | 3927 | 4133 |
| 2013 | 4394 | 4107 | 3929 |
Source: US Bureau of Labor Statistics http://www.bls.gov/
Chart I-25 provides the level unemployed ages 45 years and over. There was sharp increase during the global recession and inadequate decline. There was an increase during the 2001 recession and then stability. The US is facing a major challenge of reemploying middle-aged workers.
![clip_image020[1]](file:///C:\Users\cmpelaez\AppData\Local\Temp\WindowsLiveWriter393614076\supfiles3BCAFD\image161.png "clip_image020[1]")
Chart I-25, US, Unemployment Level Ages 45 Years and Over, Thousands, NSA, 1976-2013
Source: US Bureau of Labor Statistics http://www.bls.gov/data/
II United States International Trade. Table IIA-1 provides the trade balance of the US and monthly growth of exports and imports seasonally adjusted with the latest release and revisions (http://www.census.gov/foreign-trade/). Because of heavy dependence on imported oil, fluctuations in the US trade account originate largely in fluctuations of commodity futures prices caused by carry trades from zero interest rates into commodity futures exposures in a process similar to world inflation waves (http://cmpassocregulationblog.blogspot.com/2013/03/recovery-without-hiring-ten-million.html). Data for 2012 have been revised. The US trade balance improved from deficit of $51,726 million in Mar 2012 to deficit of $49,726 million in Apr 2012 and lower deficits of $47,009 million in May, $40,921 million in Jun and $41,944 million in Jul 2012 but with increase to 42,552 million in Aug 2012. The trade deficits of Mar and Apr 2012 both end in 726 in actual data. The increase of exports in Sep 2012 of 3.1 percent was higher than increase of imports of 1.5 percent, resulting in decrease of the trade deficit in Sep to $40,345 million. Exports decreased 3.4 percent in Oct 2012 and imports decreased 2.1 percent for increase in the trade deficit to $42,046 million in Oct 2012. The increase of exports by 1.2 percent in Nov 2012 was much lower than the increase in imports of 3.8 percent, resulting in sharply increasing deficit of $48,228 million. Export growth of 2.2 with decline of imports by 2.6 resulted in lower trade deficit of $38,144 million in Dec 2012. The trade deficit increased to $44,460 million in Jan 2013 with decrease of exports of 1.2 percent while imports increased 1.8 percent. Growth of exports of 0.8 percent in Feb 2013 with zero growth of imports reduced the trade deficit to $42,960 million. The deterioration of the trade deficit from $44,586 million in Feb 2012 to $51,726 million in Mar 2012 resulted from growth of exports of 2.5 percent while imports jumped 5.2 percent. The US trade balance had improved from deficit of $52,288 million in Jan 2012 to lower deficit of $44,586 million in Feb 2012 mostly because of decline of imports by 2.7 percent while exports increased 0.9 percent. The US trade balance deteriorated sharply from Nov 2011 to Jan 2012 with growth of imports by cumulative 2.9 percent and cumulative change of exports of 0.0 percent, resulting in deficits of $48,835 million in Nov 2011, $51,748 million in Dec 2011 and $52,288 million in Jan 2012, which are the highest since $50,234 million in Jun 2011. In the months of Jun to Oct 2011, exports increased 1.8 percent while imports increased 0.5 percent, resulting in improvement of the trade deficit from $50,234 million in Jun 2011 to $45,703 million in Oct 2011. The trade balance deteriorated from cumulative deficit of $494,737 million in Jan-Dec 2010 to deficit of $559,880 million in Jan-Dec 2011 and virtually no change to $539,514 million in Jan-Dec 2012.
Table IIA-1, US, Trade Balance of Goods and Services Seasonally Adjusted Millions of Dollars and ∆%
| Trade Balance | Exports | Month ∆% | Imports | Month ∆% | |
| Feb 2013 | -42,960 | 185,963 | 0.8 | 228,923 | 0.0 |
| Jan | -44,460 | 184,401 | -1.2 | 228,862 | 1.8 |
| Dec 2012 | -38,144 | 186,630 | 2.2 | 224,774 | -2.6 |
| Nov | -48,228 | 182,526 | 1.2 | 230,753 | 3.8 |
| Oct | -42,046 | 180,279 | -3.4 | 222,325 | -2.1 |
| Sep | -40,345 | 186,653 | 3.1 | 226,998 | 1.5 |
| Aug | -42,552 | 181,117 | -0.9 | 223,668 | -0.4 |
| Jul | -41,944 | 182,689 | -1.5 | 224,634 | -0.8 |
| Jun | -40,921 | 185,550 | 1.3 | 226,471 | -1.6 |
| May | -47,009 | 183,109 | 0.4 | 230,118 | -0.9 |
| Apr | -49,726 | 182,468 | -1.2 | 232,194 | -1.8 |
| Mar | -51,726 | 184,685 | 2.5 | 236,412 | 5.2 |
| Feb | -44,586 | 180,166 | 0.9 | 224,751 | -2.7 |
| Jan | -52,288 | 178,619 | 0.5 | 230,907 | 0.6 |
| Dec 2011 | -51,748 | 177,751 | 0.6 | 229,499 | 1.8 |
| Nov | -48,835 | 176,710 | -1.1 | 225,545 | 0.5 |
| Oct | -45,703 | 178,742 | -1.0 | 224,445 | -0.3 |
| Sep | -44,467 | 180,629 | 1.3 | 225,096 | 0.9 |
| Aug | -44,775 | 178,382 | 0.0 | 223,157 | -0.3 |
| Jul | -45,580 | 178,339 | 3.3 | 223,919 | 0.4 |
| Jun | -50,234 | 172,664 | -1.7 | 222,988 | -0.2 |
| May | -47,669 | 175,673 | 0.0 | 223,343 | 1.9 |
| Apr | -43,556 | 175,662 | 0.9 | 219,218 | 0.1 |
| Mar | -44,902 | 174,169 | 4.6 | 219,071 | 3.7 |
| Feb | -44,801 | 166,545 | -0.9 | 211,346 | -2.0 |
| Jan | -47,523 | 168,098 | 1.6 | 215,621 | 4.6 |
| Dec 2010 | -40,677 | 165,499 | 2.0 | 206,176 | 2.5 |
| Jan-Dec 2012 | -539,514 | 2,194,491 | 2,734,005 | ||
| Jan-Dec | -559,880 | 2,103,367 | 2,663,247 | ||
| Jan-Dec | -494,737 | 1,842,485 | 2,337,222 |
Note: Trade Balance of Goods and Services = Exports of Goods and Services less Imports of Goods and Services. Trade balance may not add exactly because of errors of rounding and seasonality. Source: US Census Bureau http://www.census.gov/foreign-trade/
Table IIA-2 provides the US international trade balance, exports and imports on an annual basis from 1992 to 2012. The trade balance deteriorated sharply over the long term. The US has a large deficit in goods or exports less imports of goods but it has a surplus in services that helps to reduce the trade account deficit or exports less imports of goods and services. The current account deficit of the US decreased from $117.9 billion in IVQ2011, or 3.1 percent of GDP to $111.9 billion in IVQ2012, or 2.8 percent of GDP (http://cmpassocregulationblog.blogspot.com/2013/03/recovery-without-hiring-ten-million.html). The ratio of the current account deficit to GDP has stabilized around 3 percent of GDP compared with much higher percentages before the recession (see Pelaez and Pelaez, The Global Recession Risk (2007), Globalization and the State, Vol. II (2008b), 183-94, Government Intervention in Globalization (2008c), 167-71). The last row of Table IIA-2 shows marginal improvement of the trade deficit from $559,880 million in 2011 to lower $539,514 million in 2012 with exports growing 4.4 percent and imports 2.7 percent. Growth and commodity shocks under alternating inflation waves (http://cmpassocregulationblog.blogspot.com/2013/03/recovery-without-hiring-ten-million.html) have deteriorated the trade deficit from the low of $379,154 million in 2009.
Table IIA-2, US, International Trade Balance, Exports and Imports SA, Millions of Dollars and ∆%
| Year | Balance | Exports | Imports |
| 1960 | 3,508 | 25,940 | 22,432 |
| 1961 | 4,195 | 26,403 | 22,208 |
| 1962 | 3,370 | 27,722 | 24,352 |
| 1963 | 4,210 | 29,620 | 25,410 |
| 1964 | 6,022 | 33,341 | 27,319 |
| 1965 | 4,664 | 35,285 | 30,621 |
| 1966 | 2,939 | 38,926 | 35,987 |
| 1967 | 2,604 | 41,333 | 38,729 |
| 1968 | 250 | 45,543 | 45,293 |
| 1969 | 91 | 49,220 | 49,129 |
| 1970 | 2,254 | 56,640 | 54,386 |
| 1971 | -1,302 | 59,677 | 60,979 |
| 1972 | -5,443 | 67,222 | 72,665 |
| 1973 | 1,900 | 91,242 | 89,342 |
| 1974 | -4,293 | 120,897 | 125,190 |
| 1975 | 12,404 | 132,585 | 120,181 |
| 1976 | -6,082 | 142,716 | 148,798 |
| 1977 | -27,246 | 152,301 | 179,547 |
| 1978 | -29,763 | 178,428 | 208,191 |
| 1979 | -24,565 | 224,131 | 248,696 |
| 1980 | -19,407 | 271,834 | 291,241 |
| 1981 | -16,172 | 294,398 | 310,570 |
| 1982 | -24,156 | 275,236 | 299,391 |
| 1983 | -57,767 | 266,106 | 323,874 |
| 1984 | -109,072 | 291,094 | 400,166 |
| 1985 | -121,880 | 289,070 | 410,950 |
| 1986 | -138,538 | 310,033 | 448,572 |
| 1987 | -151,684 | 348,869 | 500,552 |
| 1988 | -114,566 | 431,149 | 545,715 |
| 1989 | -93,141 | 487,003 | 580,144 |
| 1990 | -80,864 | 535,233 | 616,097 |
| 1991 | -31,135 | 578,344 | 609,479 |
| 1992 | -39,212 | 616,882 | 656,094 |
| 1993 | -70,311 | 642,863 | 713,174 |
| 1994 | -98,493 | 703,254 | 801,747 |
| 1995 | -96,384 | 794,387 | 890,771 |
| 1996 | -104,065 | 851,602 | 955,667 |
| 1997 | -108,273 | 934,453 | 1,042,726 |
| 1998 | -166,140 | 933,174 | 1,099,314 |
| 1999 | -263,160 | 967,008 | 1,230,168 |
| 2000 | -376,749 | 1,072,783 | 1,449,532 |
| 2001 | -361,771 | 1,007,726 | 1,369,496 |
| 2002 | -417,432 | 980,879 | 1,398,311 |
| 2003 | -490,984 | 1,023,519 | 1,514,503 |
| 2004 | -605,357 | 1,163,146 | 1,768,502 |
| 2005 | -708,624 | 1,287,441 | 1,996,065 |
| 2006 | -753,288 | 1,459,823 | 2,213,111 |
| 2007 | -696,728 | 1,654,561 | 2,351,289 |
| 2008 | -698,338 | 1,842,682 | 2,541,020 |
| 2009 | -379,154 | 1,578,945 | 1,958,099 |
| 2010 | -494,737 | 1,842,485 | 2,337,222 |
| 2011 | -559,880 | 2,103,367 | 2,663,247 |
| 2012 | -539,514 | 2,194,491 | 2,734,005 |
Source: US Census Bureau http://www.census.gov/foreign-trade/
Chart IIA-1 of the US Census Bureau of the Department of Commerce shows that the trade deficit (gap between exports and imports) fell during the economic contraction after 2007 but has grown again during the expansion. There was slight improvement at the margin from Jul to Oct 2011 but new increase in the gap from Nov 2011 to Jan 2012 and again in Mar 2012 as exports grow less rapidly than imports. There is improvement in Apr 2012 with imports declining at a faster rate of 1.8 percent than decline of exports by 1.2 percent and growth of exports of 0.4 percent in May 2012 with imports declining 0.9 percent. Further improvement occurred in Jun 2012 with imports increasing 1.3 percent and exports declining 1.6 percent. There was deterioration in Jul with exports declining 1.5 percent and imports only 0.8 percent but deterioration in Aug with exports decreasing 0.9 percent while imports declined only 0.4 percent. In Sep 2012, exports increased 3.1 percent while imports increased only 1.5 percent. Further deterioration occurred in Oct with exports declining 3.4 percent but imports falling 2.1 percent. The trade deficit widened sharply to $48,228 million in Nov 2012 with growth of imports by 3.8 percent while exports increased 1.2 percent. In Dec 2012, the trade deficit narrowed to $38,144 million with growth of exports of 2.2 percent while imports fell 2.6 percent. There was further deterioration in Jan 2013 with exports falling 1.2 percent while exports grew 1.8 percent. The trade balance improved in Feb with growth of exports of 0.8 percent while imports were unchanged. Weaker world and internal demand and fluctuating commodity price increases explain the declining or less dynamic changes in exports and imports in Chart IIA-1.
Chart IIA-1, US, International Trade Balance, Exports and Imports of Goods and Services USD Billions
Source: US Census Bureau
http://www.census.gov/briefrm/esbr/www/esbr042.html
Chart IIA-2 of the US Census Bureau provides the US trade account in goods and services SA from Jan 1992 to Feb 2013. There is a long-term trend of deterioration of the US trade deficit shown vividly by Chart IIA-2. The trend of deterioration was reversed by the global recession from IVQ2007 to IIQ2009. Deterioration resumed together with incomplete recovery and was influenced significantly by the carry trade from zero interest rates to commodity futures exposures (these arguments are elaborated in Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 157-66, Regulation of Banks and Finance (2009b), 217-27, International Financial Architecture (2005), 15-18, The Global Recession Risk (2007), 221-5, Globalization and the State Vol. II (2008b), 197-213, Government Intervention in Globalization (2008c), 182-4 http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/01/professor-mckinnons-bubble-economy.html http://cmpassocregulationblog.blogspot.com/2011/01/world-inflation-quantitative-easing.html http://cmpassocregulationblog.blogspot.com/2011/01/treasury-yields-valuation-of-risk.html http://cmpassocregulationblog.blogspot.com/2010/11/quantitative-easing-theory-evidence-and.html http://cmpassocregulationblog.blogspot.com/2010/12/is-fed-printing-money-what-are.html). Earlier research focused on the long-term external imbalance of the US in the form of trade and current account deficits (Pelaez and Pelaez, The Global Recession Risk (2007), Globalization and the State Vol. II (2008b) 183-94, Government Intervention in Globalization (2008c), 167-71). US external imbalances have not been fully resolved and tend to widen together with improving world economic activity and commodity price shocks.
Chart IIA-2, US, Balance of Trade SA, Monthly, Millions of Dollars, Jan 1992-Feb 2013
Source: US Census Bureau
http://www.census.gov/foreign-trade/
Chart IIA-3 of the US Census Bureau provides US exports SA from Jan 1992 to Feb 2013. There was sharp acceleration from 2003 to 2007 during worldwide economic boom and increasing inflation. Exports fell sharply during the financial crisis and global recession from IVQ2007 to IIQ2009. Growth picked up again together with world trade and inflation but stalled in the final segment with less rapid global growth and inflation.
Chart IIA-3, US, Exports SA, Monthly, Millions of Dollars Jan 1992-Feb 2013
Source: US Census Bureau
http://www.census.gov/foreign-trade/
Chart IIA-4 of the US Census Bureau provides US imports SA from Jan 1992 to Feb 2013. Growth was stronger between 2003 and 2007 with worldwide economic boom and inflation. There was sharp drop during the financial crisis and global recession. There is stalling import levels in the final segment resulting from weaker world economic growth and diminishing inflation because of risk aversion.
Chart IIA-4, US, Imports SA, Monthly, Millions of Dollars Jan 1992-Feb 2013
Source: US Census Bureau
http://www.census.gov/foreign-trade/
The balance of international trade in goods of the US seasonally adjusted is shown in Table IIA-3. The US has a dynamic surplus in services that reduces the large deficit in goods for a still very sizeable deficit in international trade of goods and services. The balance in international trade of goods was virtually unchanged from $60.1 billion in Feb 2012 to $60.2 billion in Feb 2013. The improvement of the goods balance in Feb 2013 relative to Feb 2012 occurred mostly in the petroleum balance, exports less imports of petroleum, in the magnitude of decreasing the deficit by $4693 million, while there was deterioration in the nonpetroleum balance, exports less imports of nonpetroleum goods, in the magnitude of increasing the deficit by $4632 million. US terms of trade, export prices relative to import prices, and the US trade account fluctuate in accordance with the carry trade from zero interest rates to commodity futures exposures, especially oil futures. Exports increased 3.1 percent with nonpetroleum exports increasing 2.5 percent. Total imports increased 2.2 percent with petroleum imports declining 10.1 percent and nonpetroleum imports increasing 5.0 percent.
Table IIA-3, US, International Trade in Goods Balance, Exports and Imports $ Millions and ∆% SA
| Feb 2013 | Feb 2012 | ∆% | |
| Total Balance | -60,222 | -60,101 | |
| Petroleum | -21,209 | -25,902 | |
| Non Petroleum | -38,301 | -33,669 | |
| Total Exports | 132,187 | 128,217 | 3.1 |
| Petroleum | 10,893 | 9,800 | 11.2 |
| Non Petroleum | 119,762 | 116,888 | 2.5 |
| Total Imports | 192,409 | 188,318 | 2.2 |
| Petroleum | 32,102 | 35,702 | -10.1 |
| Non Petroleum | 158,064 | 150,557 | 5.0 |
Details may not add because of rounding and seasonal adjustment
Source: US Census Bureau http://www.census.gov/foreign-trade/
US exports and imports of goods not seasonally adjusted in Jan-Feb 2013 and Jan-Feb 2012 are shown in Table IIA-4. The rate of growth of exports was 2.2 percent and minus 0.1 percent for imports. The US has partial hedge of commodity price increases in exports of agricultural commodities that increased 10.7 percent and of mineral fuels that increased 3.5 percent both because higher prices of raw materials and commodities increase and fall recurrently as a result of shocks of risk aversion. The US exports an insignificant amount of crude oil. US exports and imports consist mostly of manufactured products, with less rapidly increasing prices. US manufactured exports rose 2.5 percent while imports rose 2.6 percent. Significant part of the US trade imbalance originates in imports of mineral fuels decreasing 12.0 percent and petroleum decreasing 12.0 percent with wide oscillations in oil prices. The limited hedge in exports of agricultural commodities and mineral fuels compared with substantial imports of mineral fuels and crude oil results in waves of deterioration of the terms of trade of the US, or export prices relative to import prices, originating in commodity price increases caused by carry trades from zero interest rates. These waves are similar to those in worldwide inflation (http://cmpassocregulationblog.blogspot.com/2013/03/recovery-without-hiring-ten-million.html).
Table IIA-4, US, Exports and Imports of Goods, Not Seasonally Adjusted Millions of Dollars and %
| Jan-Feb 2013 $ Millions | Jan-Feb 2012 $ Millions | ∆% | |
| Exports | 246,995 | 241,637 | 2.2 |
| Manufactured | 183,780 | 179,378 | 2.5 |
| Agricultural | 25,514 | 23,051 | 10.7 |
| Mineral Fuels | 21,460 | 20,730 | 3.5 |
| Petroleum | 17,796 | 16,673 | 6.7 |
| Imports | 354,870 | 355,147 | -0.1 |
| Manufactured | 284,120 | 276,835 | 2.6 |
| Agricultural | 17,249 | 17,386 | -0.8 |
| Mineral Fuels | 62,074 | 70,540 | -12.0 |
| Petroleum | 58,983 | 67,478 | -12.6 |
Source: US Census Bureau http://www.census.gov/foreign-trade/
The current account of the US balance of payments is provided in Table IIA-5 for IVQ2011 and IVQ2012. The US has a large deficit in goods or exports less imports of goods but it has a surplus in services that helps to reduce the trade account deficit or exports less imports of goods and services. The current account deficit of the US decreased from $117.9 billion in IVQ2011, or 3.1 percent of GDP, to $111.2 billion in IIIQ2012, or 2.8 percent of GDP. The ratio of the current account deficit to GDP has stabilized around 3 percent of GDP compared with much higher percentages before the recession but is combined now with much higher imbalance in the Treasury budget (see Pelaez and Pelaez, The Global Recession Risk (2007), Globalization and the State, Vol. II (2008b), 183-94, Government Intervention in Globalization (2008c), 167-71).
Table IIA-5, US Balance of Payments, Millions of Dollars NSA
| IVQ2011 | IVQ2012 | Difference | |
| Goods Balance | -186,332 | -176,774 | 9,558 |
| X Goods | 387,237 | 399,304 | 3.1 ∆% |
| M Goods | -573,569 | -576,078 | 0.4 ∆% |
| Services Balance | 44,252 | 52,148 | 3,647 |
| X Services | 151,164 | 158,749 | 5.0 ∆% |
| M Services | -106,912 | -106,601 | -0.3 ∆% |
| Balance Goods and Services | -142,080 | -124,626 | 17,454 |
| Balance Income | 56,263 | 48,293 | -7,970 |
| Unilateral Transfers | -32,135 | -34,827 | -2,692 |
| Current Account Balance | -117,952 | -111,159 | 6,793 |
| % GDP | IVQ2011 | IVQ2012 | IIIQ2012 |
| 3.1 | 2.8 | 2.8 |
X: exports; M: imports
Balance on Current Account = Balance on Goods and Services + Balance on Income + Unilateral Transfers
Source: Bureau of Economic Analysis http://www.bea.gov/international/index.htm#bop http://www.bea.gov/iTable/index_nipa.cfm
In their classic work on “unpleasant monetarist arithmetic,” Sargent and Wallace (1981, 2) consider a regime of domination of monetary policy by fiscal policy (emphasis added):
“Imagine that fiscal policy dominates monetary policy. The fiscal authority independently sets its budgets, announcing all current and future deficits and surpluses and thus determining the amount of revenue that must be raised through bond sales and seignorage. Under this second coordination scheme, the monetary authority faces the constraints imposed by the demand for government bonds, for it must try to finance with seignorage any discrepancy between the revenue demanded by the fiscal authority and the amount of bonds that can be sold to the public. Suppose that the demand for government bonds implies an interest rate on bonds greater than the economy’s rate of growth. Then if the fiscal authority runs deficits, the monetary authority is unable to control either the growth rate of the monetary base or inflation forever. If the principal and interest due on these additional bonds are raised by selling still more bonds, so as to continue to hold down the growth of base money, then, because the interest rate on bonds is greater than the economy’s growth rate, the real stock of bonds will growth faster than the size of the economy. This cannot go on forever, since the demand for bonds places an upper limit on the stock of bonds relative to the size of the economy. Once that limit is reached, the principal and interest due on the bonds already sold to fight inflation must be financed, at least in part, by seignorage, requiring the creation of additional base money.”
The alternative fiscal scenario of the CBO (2012NovCDR) resembles an economic world in which eventually the placement of debt reaches a limit of what is proportionately desired of US debt in investment portfolios. This unpleasant environment is occurring in various European countries.
The current real value of government debt plus monetary liabilities depends on the expected discounted values of future primary surpluses or difference between tax revenue and government expenditure excluding interest payments (Cochrane 2011Jan, 27, equation (16)). There is a point when adverse expectations about the capacity of the government to generate primary surpluses to honor its obligations can result in increases in interest rates on government debt.
This analysis suggests that there may be a point of saturation of demand for United States financial liabilities without an increase in interest rates on Treasury securities. A risk premium may develop on US debt. Such premium is not apparent currently because of distressed conditions in the world economy and international financial system. Risk premiums are observed in the spread of bonds of highly indebted countries in Europe relative to bonds of the government of Germany.
The issue of global imbalances centered on the possibility of a disorderly correction (Pelaez and Pelaez, The Global Recession Risk (2007), Globalization and the State Vol. II (2008b) 183-94, Government Intervention in Globalization (2008c), 167-71). Such a correction has not occurred historically but there is no argument proving that it could not occur. The need for a correction would originate in unsustainable large and growing United States current account deficits (CAD) and net international investment position (NIIP) or excess of financial liabilities of the US held by foreigners net of financial liabilities of foreigners held by US residents. The IMF estimated that the US could maintain a CAD of two to three percent of GDP without major problems (Rajan 2004). The threat of disorderly correction is summarized by Pelaez and Pelaez, The Global Recession Risk (2007), 15):
“It is possible that foreigners may be unwilling to increase their positions in US financial assets at prevailing interest rates. An exit out of the dollar could cause major devaluation of the dollar. The depreciation of the dollar would cause inflation in the US, leading to increases in American interest rates. There would be an increase in mortgage rates followed by deterioration of real estate values. The IMF has simulated that such an adjustment would cause a decline in the rate of growth of US GDP to 0.5 percent over several years. The decline of demand in the US by four percentage points over several years would result in a world recession because the weakness in Europe and Japan could not compensate for the collapse of American demand. The probability of occurrence of an abrupt adjustment is unknown. However, the adverse effects are quite high, at least hypothetically, to warrant concern.”
The United States could be moving toward a situation typical of heavily indebted countries, requiring fiscal adjustment and increases in productivity to become more competitive internationally. The CAD and NIIP of the United States are not observed in full deterioration because the economy is well below potential. There are two complications in the current environment relative to the concern with disorderly correction in the first half of the past decade. Table IIA-6 provides data on the US fiscal and balance of payments imbalances. In 2007, the federal deficit of the US was $161 billion corresponding to 1.2 percent of GDP while the Congressional Budget Office (CBO 2012NovCDR) estimates the federal deficit in 2012 at $1089 billion or 7.0 percent of GDP (http://cmpassocregulationblog.blogspot.com/2013/02/united-states-unsustainable-fiscal.html). The combined record federal deficits of the US from 2009 to 2012 are $5092 billion or 33 percent of the estimate of GDP of $15,549 billion for fiscal year 2012 by the CBO (http://www.cbo.gov/publication/43905 CBO (2013BEOFeb5)). The deficits from 2009 to 2012 exceed one trillion dollars per year, adding to $5092 trillion in four years, using the fiscal year deficit of $1089.4 billion for fiscal year 2012 (http://www.fms.treas.gov/mts/mts0912.txt), which is the worst fiscal performance since World War II. Federal debt in 2007 was $5035 billion, less than the combined deficits from 2009 to 2012 of $5092 billion. Federal debt in 2011 was 67.8 percent of GDP and is estimated to reach 72.5 percent of GDP in 2012 (CBO2012AugBEO, CBO2012NovCDR, CBO2013BEOFeb5). This situation may worsen in the future (CBO 2012LTBO):
“The budget outlook is much bleaker under the extended alternative fiscal scenario, which maintains what some analysts might consider “current policies,” as opposed to current laws. Federal debt would grow rapidly from its already high level, exceeding 90 percent of GDP in 2022. After that, the growing imbalance between revenues and spending, combined with spiraling interest payments, would swiftly push debt to higher and higher levels. Debt as a share of GDP would exceed its historical peak of 109 percent by 2026, and it would approach 200 percent in 2037.
The changes under this scenario would result in much lower revenues than would occur under the extended baseline scenario because almost all expiring tax provisions are assumed to be extended through 2022 (with the exception of the current reduction in the payroll tax rate for Social Security). After 2022, revenues under this scenario are assumed to remain at their 2022 level of 18.5 percent of GDP, just above the average of the past 40 years.
Outlays would be much higher than under the other scenario. This scenario incorporates assumptions that through 2022, lawmakers will act to prevent Medicare’s payment rates for physicians from declining; that after 2022, lawmakers will not allow various restraints on the growth of Medicare costs and health insurance subsidies to exert their full effect; and that the automatic reductions in spending required by the Budget Control Act of 2011 will not occur (although the original caps on discretionary appropriations in that law are assumed to remain in place). Finally, under this scenario, federal spending as a percentage of GDP for activities other than Social Security, the major health care programs, and interest payments is assumed to return to its average level during the past two decades, rather than fall significantly below that level, as it does under the extended baseline scenario.”
Table IIA-6, US, Current Account, NIIP, Fiscal Balance, Nominal GDP, Federal Debt and Direct Investment, Dollar Billions and %
| 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | |
| Goods & | -696 | -698 | -379 | -495 | -560 | -539 |
| Income | 101 | 147 | 119 | 184 | 227 | 198 |
| UT | -115 | -126 | -122 | -131 | -133 | -134 |
| Current Account | -710 | -677 | -382 | -442 | -466 | -475 |
| NGDP | 14028 | 14291 | 13974 | 14499 | 15076 | 15681 |
| Current Account % GDP | -5.1 | -4.7 | -2.7 | -3.1 | -3.1 | -3.0 |
| NIIP | -1796 | -3260 | -2321 | -2474 | -4030 | NA |
| US Owned Assets Abroad | 18399 | 19464 | 18512 | 20298 | 21132 | NA |
| Foreign Owned Assets in US | 20195 | 22724 | 20833 | 22772 | 25162 | NA |
| NIIP % GDP | -12.8 | -22.8 | -16.6 | -17.1 | -26.7 | NA |
| Exports | 2488 | 2657 | 2181 | 2519 | 2848 | 2937 |
| NIIP % | -72 | -123 | -106 | -98 | -142 | NA |
| DIA MV | 5274 | 3102 | 4287 | 4767 | 4499 | NA |
| DIUS MV | 3551 | 2486 | 2995 | 3397 | 3509 | NA |
| Fiscal Balance | -161 | -459 | -1413 | -1294 | -1296 | -1089 |
| Fiscal Balance % GDP | -1.2 | -3.2 | -10.1 | -9.0 | -8.7 | -7.0 |
| Federal Debt | 5035 | 5803 | 7545 | 9019 | 10128 | 11280 |
| Federal Debt % GDP | 36.3 | 40.5 | 54.1 | 62.9 | 67.8 | 72.5 |
| Federal Outlays | 2729 | 2983 | 3518 | 3456 | 3598 | 3538 |
| ∆% | 2.8 | 9.3 | 17.9 | -1.8 | 4.1 | -1.7 |
| % GDP | 19.7 | 20.8 | 25.2 | 24.1 | 24.1 | 22.8 |
| Federal Revenue | 2568 | 2524 | 2105 | 2162 | 2302 | 2449 |
| ∆% | 6.7 | -1.7 | -16.6 | 2.7 | 6.5 | 6.4 |
| % GDP | 18.5 | 17.6 | 15.1 | 15.1 | 15.4 | 15.8 |
Sources:
Notes: UT: unilateral transfers; NGDP: nominal GDP or in current dollars; NIIP: Net International Investment Position; DIA MV: US Direct Investment Abroad at Market Value; DIUS MV: Direct Investment in the US at Market Value. There are minor discrepancies in the decimal point of percentages of GDP between the balance of payments data and federal debt, outlays, revenue and deficits in which the original number of the CBO source is maintained. These discrepancies do not alter conclusions.
Sources: http://www.bea.gov/international/index.htm#bop Balance of Payments and NIIP, Bureau of Economic Analysis (BEA)
Gross Domestic Product, Bureau of Economic Analysis (BEA) http://www.bea.gov/iTable/index_nipa.cfm
Chart IIA-5 of the Bureau of Economic Analysis shows the US balance on current account from 1960 to 2012. The sharp devaluation of the dollar resulting from unconventional monetary policy of zero interest rates and elimination of auctions of 30-year Treasury bonds did not adjust the US balance of payments. Adjustment only occurred after the contraction of economic activity during the global recession.
Chart IIA-5, US, Balance on Current Account, 1960-2012, Millions of Dollars
Source: Bureau of Economic Analysis
http://www.bea.gov/iTable/index_ita.cfm
Chart IIA-6 provides the quarterly balance of payments of the United States in millions of dollars from 1995 to IVQ2012. The global recession appeared to be adjusting the current account deficit that rises to lower dollar values. Recovery of the economy worsened again the current account deficit. Growth at trend worsens the external imbalance of the US that combines now with unsustainable Treasury deficits/debt.
Chart IIA-6, US, Balance on Current Account, Quarterly 1995-2012, Millions of Dollars, SA
Source: Bureau of Economic Analysis
http://www.bea.gov/iTable/index_ita.cfm
IIA2 United States Import and Export Prices. Chart IIA2-1 provides prices of total US imports 2001-2013. Prices fell during the contraction of 2001. Import price inflation accelerated after unconventional monetary policy of near zero interest rates in 2003-2004 and quantitative easing by withdrawing supply with the suspension of 30-year Treasury bond auctions. Slow pace of adjusting fed funds rates from 1 percent by increments of 25 basis points in 17 consecutive meetings of the Federal Open Market Committee (FOMC) between Jun 2004 and Jun 2006 continued to give impetus to carry trades. The reduction of fed funds rates toward zero in 2008 fueled a spectacular global hunt for yields that caused commodity price inflation in the middle of a global recession. After risk aversion in 2009 because of the announcement of TARP (Troubled Asset Relief Program) creating anxiety on “toxic assets” in bank balance sheets (see Cochrane and Zingales 2009), prices collapsed because of unwinding carry trades. Renewed price increases returned with zero interest rates and quantitative easing. Monetary policy impulses in massive doses have driven inflation and valuation of risk financial assets in wide fluctuations over a decade.
Chart IIA2-1, US, Prices of Total US Imports 2001=100, 2001-2013
Source: Bureau of Labor Statistics http://www.bls.gov/mxp/data.htm
Chart IIA2-2 provides 12-month percentage changes of prices of total US imports from 2001 to 2013. The only plausible explanation for the wide oscillations is by the carry trade originating in unconventional monetary policy. Import prices jumped in 2008 during deep and protracted global recession driven by carry trades from zero interest rates to long, leveraged positions in commodity futures. Carry trades were unwound during the financial panic in the final quarter of 2008 that resulted in flight to government obligations. Import prices jumped again in 2009 with subdued risk aversion because US banks did not have unsustainable toxic assets. Import prices then fluctuated as carry trades were resumed during periods of risk appetite and unwound during risk aversion resulting from the European debt crisis.
Chart IIA2-2, US, Prices of Total US Imports, 12-Month Percentage Changes, 2001-2013
Source: Bureau of Labor Statistics http://www.bls.gov/mxp/data.htm
Chart IIA2-3 provides prices of US imports from 1982 to 2013. There is no similar episode to that of the increase of commodity prices in 2008 during a protracted and deep global recession with subsequent collapse during a flight into government obligations. Trade prices have been driven by carry trades created by unconventional monetary policy in the past decade.
Chart IIA2-3, US, Prices of Total US Imports, 2001=100, 1982-2013
Source: Bureau of Labor Statistics http://www.bls.gov/mxp/data.htm
Chart IIA2-4 provides 12-month percentage changes of US total imports from 1982 to 2013. There have not been wide consecutive oscillations as the ones during the global recession of IVQ2007 to IIQ2009.
Chart IIA2-4, US, Prices of Total US Imports, 12-Month Percentage Changes, 1982-2013
Source: Bureau of Labor Statistics http://www.bls.gov/mxp/data.htm
Chart IIA2-5 provides the index of US export prices from 2001 to 2013. Import and export prices have been driven by impulses of unconventional monetary policy in massive doses. The most recent segment in Chart IIA2-5 shows declining trend resulting from a combination of the world economic slowdown and the decline of commodity prices as carry trade exposures are unwound because of risk aversion to the sovereign debt crisis in Europe and slowdown in the world economy.
Chart IIA2-5, US, Prices of Total US Exports, 2001=100, 2001-2013
Source: Bureau of Labor Statistics http://www.bls.gov/mxp/data.htm
Chart IIA2-6 provides prices of US total exports from 1982 to 2013. The rise before the global recession from 2003 to 2008, driven by carry trades, is also unique in the series and is followed by another steep increase after risk aversion moderated in IQ2009.
Chart IIA2-6, US, Prices of Total US Exports, 2001=100, 1982-2013
Source: Bureau of Labor Statistics http://www.bls.gov/mxp/data.htm
Chart IIA2-7 provides 12-month percentage changes of total US exports from 1982 to 2013. The uniqueness of the oscillations around the global recession of IVQ2007 to IIQ2009 is clearly revealed.
Chart IIA2-7, US, Prices of Total US Exports, 12-Month Percentage Changes, 1982-2013
Source:
Bureau of Labor Statistics http://www.bls.gov/mxp/data.htm
Twelve-month percentage changes of US prices of exports and imports are provided in Table IIA2-1. Import prices have been driven since 2003 by unconventional monetary policy of near zero interest rates influencing commodity prices according to moods of risk aversion. In a global recession without risk aversion until the panic of Sep 2008 with flight to government obligations, import prices increased 21.4 percent in the 12 months ending in Jul 2008, 18.1 percent in the 12 months ending in Aug 2008, 13.1 percent in the 12 months ending in Sep 2008, 4.9 percent in the twelve months ending in Oct 2008 and fell 5.9 percent in the 12 months ending in Nov 2008 when risk aversion developed in 2008 until mid 2009 (http://www.bls.gov/mxp/data.htm). Import prices rose again sharply in Nov 2010 by 4.1 percent and in Nov 2011 by 0.1 percent in the presence of zero interest rates with relaxed mood of risk aversion until carry trades were unwound in May 2011 and following months as shown by decrease of import prices by 1.4 percent in the 12 months ending in Nov 2012 and 1.8 percent in Dec 2012 and decrease of 0.3 percent in prices of exports in the 12 months ending in Dec 2012. Import prices increased 15.2 percent in the 12 months ending in Mar 2008, fell 14.9 percent in the 12 months ending in Mar 2009 and increased 11.2 percent in the 12 months ending in Mar 2010. Fluctuations are much sharper in imports because of the high content of oil that as all commodities futures contracts increases sharply with zero interest rates and risk appetite, contracting under risk aversion. There is similar behavior of prices of imports ex fuels, exports and exports ex agricultural goods but less pronounced than for commodity-rich prices dominated by carry trades from zero interest rates. A critical event resulting from unconventional monetary policy driving higher commodity prices by carry trades is the deterioration of the terms of trade, or export prices relative to import prices, that has adversely affected US real income growth relative to what it would have been in the absence of unconventional monetary policy. Europe, Japan and other advanced economies have experienced similar deterioration of their terms of trade. Because of unwinding carry trades of commodity futures as a result of risk aversion, import prices decreased 2.7 percent in the 12 months ending in Mar 2013, export prices increased 0.3 percent and prices of nonagricultural exports fell 0.7 percent. Imports excluding fuel fell 0.5 percent in the 12 months ending in Mar 2013. At the margin, price changes over the year in world exports and imports are decreasing or increasing moderately because of unwinding carry trades in a temporary mood of risk aversion if exposures in commodity futures.
Table IIA2-1, US, Twelve-Month Percentage Rates of Change of Prices of Exports and Imports
| Imports | Imports Ex Fuels | Exports | Exports Non-Ag | |
| Mar 2013 | -2.7 | -0.5 | 0.3 | -0.7 |
| Mar 2012 | 3.5 | 2.0 | 1.1 | 1.9 |
| Mar 2011 | 10.3 | 4.4 | 9.5 | 7.1 |
| Mar 2010 | 11.2 | 2.7 | 4.9 | 4.6 |
| Mar 2009 | -14.9 | -2.8 | -6.7 | -5.0 |
| Mar 2008 | 15.2 | 5.1 | 7.9 | 5.5 |
| Mar 2007 | 2.8 | 2.6 | 5.4 | 4.3 |
| Mar 2006 | 4.5 | 0.7 | 2.3 | 2.5 |
| Mar 2005 | 7.6 | 2.5 | 3.3 | 4.5 |
| Mar 2004 | 1.1 | 2.1 | 3.3 | 1.8 |
| Mar 2003 | 6.8 | 0.6 | 2.2 | 1.6 |
| Mar 2002 | -5.6 | NA | -2.4 | -2.4 |
| Mar 2001 | -1.6 | NA | 0.0 | -0.1 |
Source: Bureau of Labor Statistics http://www.bls.gov/mxp/data.htm
Table IIA2-2 provides 12-month percentage changes of the import price index all commodities from 2001 to 2013. Interest rates moving toward zero during unconventional monetary policy in 2008 induced carry trades into highly leveraged commodity derivatives positions that caused increases in 12-month percentage changes of import prices of around 20 percent. The flight into dollars and Treasury securities by fears of toxic assets in banks in the proposal of TARP (Cochrane and Zingales 2009) caused reversion of carry trades and collapse of commodity futures. Twelve-month percentage changes of import prices at the end of 2012 and into 2013 occurred during another bout of risk aversion.
Table IIA2-2, US, Twelve-Month Percentage Changes of Import Price Index All Commodities, 2001-2013
| Year | Jan | Feb | Mar | Apr | May | Jun | Jul | Nov | Dec |
| 2001 | 2.8 | 0.2 | -1.6 | -0.7 | -0.8 | -2.6 | -4.1 | -8.8 | -9.1 |
| 2002 | -8.9 | -8.3 | -5.6 | -3.6 | -3.7 | -3.6 | -1.7 | 2.5 | 4.2 |
| 2003 | 5.8 | 7.5 | 6.8 | 1.8 | 1.0 | 2.2 | 2.3 | 2.3 | 2.4 |
| 2004 | 2.2 | 0.9 | 1.1 | 4.6 | 6.9 | 5.7 | 5.6 | 9.0 | 6.7 |
| 2005 | 5.7 | 6.1 | 7.6 | 8.4 | 5.9 | 7.4 | 8.2 | 6.4 | 8.0 |
| 2006 | 8.7 | 6.9 | 4.5 | 5.8 | 8.6 | 7.4 | 7.0 | 1.3 | 2.5 |
| 2007 | 0.0 | 1.2 | 2.8 | 2.1 | 1.2 | 2.3 | 2.8 | 12.0 | 10.6 |
| 2008 | 13.6 | 13.5 | 15.2 | 16.9 | 19.1 | 21.3 | 21.4 | -5.9 | -10.1 |
| 2009 | -12.5 | -12.7 | -14.9 | -16.4 | -17.3 | -17.5 | -19.1 | 3.4 | 8.6 |
| 2010 | 11.4 | 11.3 | 11.2 | 11.2 | 8.5 | 4.3 | 4.9 | 4.1 | 5.3 |
| 2011 | 5.6 | 7.6 | 10.3 | 11.9 | 12.9 | 13.6 | 13.7 | 10.1 | 8.5 |
| 2012 | 6.9 | 5.1 | 3.5 | 0.8 | -0.8 | -2.5 | -3.3 | -1.4 | -2.0 |
| 2013 | -1.5 | -0.8 | -2.7 |
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
There is finer detail in one-month percentage changes of imports of the US in Table IIA2-3. Carry trades into commodity futures induced by interest rates moving to zero in unconventional monetary policy caused sharp monthly increases in import prices for cumulative increase of 13.8 percent from Mar to Jul 2008 at average rate of 2.6 percent per month or annual equivalent in five months of 36.4 percent (3.1 percent in Mar 2008, 2.8 percent in Apr 2008, 2.8 percent in May 2008, 3.0 percent in Jun 2008 and 1.4 percent in Jul 2008, data from http://www.bls.gov/mxp/data.htm). There is no other explanation for increases in import prices during sharp global recession and contracting world trade. Import prices then fell 23.4 percent from Aug 2008 to Jan 2009 or at the annual equivalent rate of minus 41.4 percent in the flight to US government securities in fear of the need to buy toxic assets from banks in the TARP program (Cochrane and Zingales 2009). Risk aversion during the first sovereign debt crisis of the euro area in May-Jun 2010 caused decline of US import prices at the annual equivalent rate of 11.4 percent. US import prices have been driven by combinations of carry trades induced by unconventional monetary policy and bouts of risk aversion (http://cmpassocregulationblog.blogspot.com/2013/03/recovery-without-hiring-ten-million.html). US import prices increased 0.6 percent in Jan 2013 and 0.6 percent in Feb 2013 for annual equivalent rate of 6.8 percent, similar to those in national price indexes worldwide, originating in carry trades from zero interest rates to commodity futures. Import prices fell 0.5 percent in Mar 2013.
Table IIA2-3, US, One-Month Percentage Changes of Import Price Index All Commodities, 2001-2013
| Year | Jan | Feb | Mar | Apr | May | Jun | Dec |
| 2001 | 0.0 | -0.6 | -1.6 | -0.5 | 0.2 | -0.4 | -1.0 |
| 2002 | 0.2 | 0.0 | 1.3 | 1.6 | 0.1 | -0.3 | 0.6 |
| 2003 | 1.8 | 1.7 | 0.6 | -3.1 | -0.7 | 0.9 | 0.7 |
| 2004 | 1.5 | 0.4 | 0.8 | 0.2 | 1.5 | -0.2 | -1.4 |
| 2005 | 0.6 | 0.9 | 2.2 | 0.9 | -0.8 | 1.2 | 0.0 |
| 2006 | 1.2 | -0.8 | -0.1 | 2.1 | 1.8 | 0.1 | 1.1 |
| 2007 | -1.2 | 0.4 | 1.6 | 1.4 | 0.9 | 1.2 | -0.2 |
| 2008 | 1.5 | 0.2 | 3.1 | 2.8 | 2.8 | 3.0 | -4.6 |
| 2009 | -1.3 | 0.0 | 0.5 | 1.1 | 1.7 | 2.7 | 0.2 |
| 2010 | 1.2 | -0.1 | 0.4 | 1.1 | -0.8 | -1.2 | 1.4 |
| 2011 | 1.5 | 1.7 | 3.0 | 2.6 | 0.1 | -0.6 | 0.0 |
| 2012 | 0.0 | 0.0 | 1.4 | -0.1 | -1.5 | -2.3 | -0.6 |
| 2013 | 0.5 | 0.6 | -0.5 |
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
Chart IIA2-8 shows the US monthly import price index of all commodities excluding fuels from 2001 to 2013. All curves of nominal values follow the same behavior under the influence of unconventional monetary policy. Zero interest rates without risk aversion result in jumps of nominal values while under strong risk aversion even with zero interest rates there are declines of nominal values.
Chart IIA2-8, US, Import Price Index All Commodities Excluding Fuels, 2001=100, 2001-2013
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
Chart IIA2-9 provides 12-month percentage changes of the US import price index excluding fuels between 2001 and 2013. There is the same behavior of carry trades driving up without risk aversion and down with risk aversion prices of raw materials, commodities and food in international trade during the global recession of IVQ2007 to IIQ2009 and in previous and subsequent periods.
Chart IIA2-9, US, Import Price Index All Commodities Excluding Fuels, 12-Month Percentage Changes, 2002-2013
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
Chart IIA2-10 provides the monthly US import price index ex petroleum from 2001 to 2013. Prices including or excluding commodities follow the same fluctuations and trends originating in impulses of unconventional monetary policy of zero interest rates.
Chart IIA2-10, US, Import Price Index ex Petroleum, 2001=100, 2000-2013
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
Chart IIA2-11 provides the US import price index ex petroleum from 1982 to 2013. There is the same unique hump in 2008 caused by carry trades from zero interest rates to prices of commodities and raw materials.
Chart IIA2-11, US, Import Price Index ex Petroleum, 2001=100, 1985-2013
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
Chart IIA2-12 provides 12-month percentage changes of the import price index ex petroleum from 1986 to 2013. The oscillations caused by the carry trade in increasing prices of commodities and raw materials without risk aversion and subsequently decreasing them during risk aversion are unique.
Chart IIA2-12, US, Import Price Index ex Petroleum, 12-Month Percentage Changes, 1986-2013
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
Chart IIA2-13 of the US Energy Information Administration shows the price of WTI crude oil since the 1980s. Chart IA2-13 captures commodity price shocks during the past decade. The costly mirage of deflation was caused by the decline in oil prices during the recession of 2001. The upward trend after 2003 was promoted by the carry trade from near zero interest rates. The jump above $140/barrel during the global recession in 2008 at $145.29/barrel on Jul 3, 2008, can only be explained by the carry trade promoted by monetary policy of zero fed funds rate. After moderation of risk aversion, the carry trade returned with resulting sharp upward trend of crude prices. Risk aversion resulted in another drop in recent weeks followed by some recovery and renewed deterioration.
Chart IIA2-13, US, Crude Oil Futures Contract
Source: US Energy Information Administration
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=RCLC1&f=D
The price index of US imports of petroleum and petroleum products in shown in Chart IIA2-14. There is similar behavior of the curves all driven by the same impulses of monetary policy.
Chart IIA2-14, US, Import Price Index of Petroleum and Petroleum Products, 2001=100, 2001-2013
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
Chart IIA2-15 provides the price index of petroleum and petroleum products from 1982 to 2013. The rise in prices during the global recession in 2008 and the decline after the flight to government obligations is unique in the history of the series. Increases in prices of trade in petroleum and petroleum products were induced by carry trades and declines by unwinding carry trades in flight to government obligations
Chart IIA2-15, US, Import Price Index of Petroleum and Petroleum Products, 2001=100, 1982-2013
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
Chart IIA2-16 provides 12-month percentage changes of the price index of US imports of petroleum and petroleum products from 1982 to 2013. There were wider oscillations in this index from 1999 to 2001 (see Barsky and Killian 2004 for an explanation).
Chart IIA2-16, US, Import Price Index of Petroleum and Petroleum Products, 12-Month Percentage Changes, 1982-2013
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
The price index of US exports of agricultural commodities is in Chart IIA2-17 from 2001 to 2013. There are similar fluctuations and trends as in all other price index originating in unconventional monetary policy repeated over a decade. The most recent segment in 2011 has declining trend in a new flight from risk resulting from the sovereign debt crisis in Europe followed by declines in Jun 2012 and Nov 2012 with stability in Dec 2012 to Jan-Mar 2013.
Chart IIA2-17, US, Exports Price Index of Agricultural Commodities, 2001=100, 2001-2013
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
Chart IIA2-18 provides the price index of US exports of agricultural commodities from 1982 to 2013. The increase in 2008 in the middle of deep, protracted contraction was induced by unconventional monetary policy. The decline from 2008 into 2009 was caused by unwinding carry trades in a flight to government obligations. The increase into 2011 and current pause were also induced by unconventional monetary policy in waves of increases during relaxed risk aversion and declines during unwinding of positions because of aversion to financial risk.
Chart IIA2-18, US, Exports Price Index of Agricultural Commodities, 2001=100, 1982-2013
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
Chart IIA2-19 provides 12-month percentage changes of the index of US exports of agricultural commodities from 1986 to 2013. The wide swings in 2008, 2009 and 2011 are only explained by unconventional monetary policy inducing carry trades from zero interest rates to commodity futures and reversals during risk aversion.
Chart IIA2-19, US, Exports Price Index of Agricultural Commodities, 12-Month Percentage Changes, 1986-2013
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
Chart IIA2-20 shows the export price index of nonagricultural commodities from 2001 to 2013. Unconventional monetary policy of zero interest rates drove price behavior during the past decade. Policy has been based on the myth of stimulating the economy by climbing the negative slope of an imaginary short-term Phillips curve.
Chart IIA2-20, US, Exports Price Index of Nonagricultural Commodities, 2001=100, 2001-2013
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
Chart IIA2-21 provides a longer perspective of the price index of US nonagricultural commodities from 1982 to 2013. Increases and decreases around the global contraction after 2007 were caused by carry trade induced by unconventional monetary policy.
Chart IIA2-21, US, Exports Price Index of Nonagricultural Commodities, 2001=100, 1982-2013
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
Finally, Chart IIA2-22 provides 12-month percentage changes of the price index of US exports of nonagricultural commodities from 1986 to 2013. The wide swings before, during and after the global recession beginning in 2007 were caused by carry trades induced by unconventional monetary policy.
Chart IIA2-22, US, Exports Price Index of Nonagricultural Commodities, 12-Month Percentage Changes, 1986-2013
Source: US Bureau of Labor Statistics
http://www.bls.gov/mxp/data.htm
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 8.4 percent adjusted for inflation while growing 617.2 percent adjusted for inflation from IVQ1945 to IVQ2012 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 Fri Apr 5 and daily values throughout the week ending on Apr 12, 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 Apr 5 and the percentage change in that prior week below the label of the financial risk asset. For example, the first column “Fri Apr 5, 2013”, first row “USD/EUR 1.2995 -1.4%,” provides the information that the US dollar (USD) depreciated 1.4 percent to USD 1.2995/EUR in the week ending on Fri Apr 5 relative to the exchange rate on Fri Mar 29. 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 1.2995/EUR in the first row, first column in the block for currencies in Table III-1 for Fri Apr 5, depreciating to USD 1.3008/EUR on Mon Apr 8, 2013, or by 0.1 percent. The dollar depreciated because more dollars, $1.3008, were required on Mon Apr 8 to buy one euro than $1.2995 on Apr 5. 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 1.2995/EUR on Apr 5; the second row provides the cumulative percentage appreciation or depreciation of the exchange rate from the rate on the last business day of the prior week, in this case Fri Apr 5, to the last business day of the current week, in this case Fri Apr 12, such as depreciation to USD 1.3111/EUR by Apr 12; and the third row provides the percentage change from the prior business day to the current business day. For example, the USD depreciated (denoted by negative sign) by 0.9 percent from the rate of USD 1.2995/EUR on Fri Apr 5 to the rate of USD 1.3111/EUR on Fri Apr 12 {[(1.311/1.2995) – 1]100 = 0.9%} and depreciated (denoted by negative sign) by 0.1 percent from the rate of USD 1.3100 on Thu Apr 11 to USD 1.3111/EUR on Fri Apr 12 {[(1.3111/1.3100) -1]100 = 0.1%}. 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 assets to the safety of dollar-denominated assets during risk aversion and return to higher yielding risk assets during risk appetite.
Table III-I, Weekly Financial Risk Assets Apr 8 to Apr 12, 2013
| Fri Apr 5, 2013 | M 8 | Tue 9 | W 10 | Thu 11 | Fri 12 |
| USD/EUR 1.2995 -1.4% | 1.3008 -0.1% -0.1% | 1.3082 -0.7% -0.6% | 1.3071 -0.6% 0.1% | 1.3100 -0.8% -0.2% | 1.3111 -0.9% -0.1% |
| JPY/ USD 97.55 -3.5% | 99.37 -1.9% -1.9% | 99.03 -1.5% 0.3% | 99.78 -2.3% 0.8% | 99.68 -2.2% 0.1% | 98.41 -0.9% 1.3% |
| CHF/ USD 0.9344 1.6% | 0.9351 -0.1% -0.1% | 0.9326 0.2% 0.3% | 0.9326 0.2% 0.0% | 0.9309 0.4% 0.2% | 0.9274 0.7% 0.4% |
| CHF/ EUR 1.2143 0.2% | 1.2164 -0.2% -0.2% | 1.2201 -0.5% -0.3% | 1.2190 -0.4% 0.1% | 1.2198 -0.5% -0.1% | 1.2161 -0.1% 0.3% |
| USD/ AUD 1.0392 0.9623 | 1.0413 0.9603 0.2% 0.2% | 1.0489 0.9534 0.9% 0.7% | 1.0543 0.9485 1.4% 0.5% | 1.0543 0.9485 1.4% 0.0% | 1.0507 0.9517 1.1% -0.3% |
| 10 Year T Note 1.706 | 1.743 | 1.75 | 1.803 | 1.788 | 1.719 |
| 2 Year T Note 0.228 | 0.228 | 0.232 | 0.230 | 0.232 | 0.228 |
| German Bond 2Y 0.01 10Y 1.21 | 2Y 0.02 10Y 1.24 | 2Y 0.03 10Y 1.26 | 2Y 0.05 10Y 1.30 | 2Y 0.03 10Y 1.30 | 2Y 0.02 10Y 1.26 |
| DJIA 14565.25 -0.1% | 14613.48 0.3% 0.3% | 14673.46 0.7% 0.4% | 14802.24 1.6% 0.9% | 14865.14 2.1% 0.4% | 14865.06 2.1% 0.0% |
| DJ Global 2079.02 -1.6% | 2091.05 0.6% 0.6% | 2105.29 1.3% 0.7% | 2140.59 3.0% 1.7% | 2155.89 3.7% 0.7% | 2144.60 3.2% -0.5% |
| DJ Asia Pacific 1364.17 -1.5% | 1368.71 0.3% 0.3% | 1375.03 0.8% 0.5% | 1387.18 1.7% 0.9% | 1406.39 3.1% 1.4% | 1407.68 3.2% 0.1% |
| Nikkei 12833.64 3.5% | 13192.59 2.8% 2.8% | 13192.35 2.8% 0.0% | 13288.13 3.5% 0.7% | 13549.16 5.6% 2.0% | 13485.14 5.1% -0.5% |
| Shanghai 2225.29 -0.5% | 2211.59 -0.6% -0.6% | 2225.77 0.0% 0.6% | 2226.13 0.0% 0.0% | 2219.55 -0.3% -0.3% | 2206.78 -0.8% -0.6% |
| DAX 7658.75 -1.8% | 7662.64 0.1% 0.1% | 7637.51 -0.3% -0.3% | 7810.63 2.0% 2.3% | 7871.63 2.8% 0.8% | 7744.77 1.1% -1.6% |
| DJ UBS Comm. 134.08 -2.5% | 134.49 0.3% 0.3% | 135.30 0.9% 0.6% | 135.03 0.7% -0.2% | 135.02 0.7% 0.0% | 133.85 -0.2% -0.9% |
| WTI $ B 93.03 -4.3% | 93.54 0.5% 0.5% | 93.95 1.0% 0.4% | 94.56 1.6% 0.6% | 93.51 0.5% -1.1% | 90.85 -2.3% -2.8% |
| Brent $/B 104.31 -5.2% | 104.81 0.5% 0.5% | 106.29 1.9% 1.4% | 105.62 1.3% -0.6% | 104.22 -0.1% -1.3% | 102.98 -1.3% -1.2% |
| Gold $/OZ 1580.6 -0.9% | 1572.2 -0.5% -0.5% | 1584.9 0.3% 0.8% | 1557.8 -1.4% -1.7% | 1560.4 -1.3% 0.2% | 1484.7 -6.1% -4.9% |
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. Financial markets in Japan and worldwide were shocked by new bold measures of “quantitative and qualitative monetary easing” by the Bank of Japan (http://www.boj.or.jp/en/announcements/release_2013/k130404a.pdf). The objective of policy is to “achieve the price stability target of 2 percent in terms of the year-on-year rate of change in the consumer price index (CPI) at the earliest possible time, with a time horizon of about two years” (http://www.boj.or.jp/en/announcements/release_2013/k130404a.pdf). The main elements of the new policy are as follows:
- Monetary Base Control. Most central banks in the world pursue interest rates instead of monetary aggregates, injecting bank reserves to lower interest rates to desired levels. The Bank of Japan (BOJ) has shifted back to monetary aggregates, conducting money market operations with the objective of increasing base money, or monetary liabilities of the government, at the annual rate of 60 to 70 trillion yen. The BOJ estimates base money outstanding at “138 trillion yen at end-2012) and plans to increase it to “200 trillion yen at end-2012 and 270 trillion yen at end 2014” (http://www.boj.or.jp/en/announcements/release_2013/k130404a.pdf).
- Maturity Extension of Purchases of Japanese Government Bonds. Purchases of bonds will be extended even up to bonds with maturity of 40 years with the guideline of extending the average maturity of BOJ bond purchases from three to seven years. The BOJ estimates the current average maturity of Japanese government bonds (JGB) at around seven years. The BOJ plans to purchase about 7.5 trillion yen per month (http://www.boj.or.jp/en/announcements/release_2013/rel130404d.pdf). Takashi Nakamichi, Tatsuo Ito and Phred Dvorak, wiring on “Bank of Japan mounts bid for revival,” on Apr 4, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887323646604578401633067110420.html ), find that the limit of maturities of three years on purchases of JGBs was designed to avoid views that the BOJ would finance uncontrolled government deficits.
- Seigniorage. The BOJ is pursuing coordination with the government that will take measures to establish “sustainable fiscal structure with a view to ensuring the credibility of fiscal management” (http://www.boj.or.jp/en/announcements/release_2013/k130404a.pdf).
- Diversification of Asset Purchases. The BOJ will engage in transactions of exchange traded funds (ETF) and real estate investment trusts (REITS) and not solely on purchases of JGBs. Purchases of ETFs will be at an annual rate of increase of one trillion yen and purchases of REITS at 30 billion yen.
The European sovereign debt crisis continues to shake financial markets and the world economy. Debt resolution within the international financial architecture requires that a country be capable of borrowing on its own from the private sector. Mechanisms of debt resolution have included participation of the private sector (PSI), or “bail in,” that has been voluntary, almost coercive, agreed and outright coercive (Pelaez and Pelaez, International Financial Architecture: G7, IMF, BIS, Creditors and Debtors (2005), Chapter 4, 187-202). Private sector involvement requires losses by the private sector in bailouts of highly indebted countries. The essence of successful private sector involvement is to recover private-sector credit of the highly indebted country. Mary Watkins, writing on “Bank bailouts reshuffle risk hierarchy,” published on Mar 19, 2013, in the Financial Times (http://www.ft.com/intl/cms/s/0/7666546a-9095-11e2-a456-00144feabdc0.html#axzz2OSpbvCn8) analyzes the impact of the bailout or resolution of Cyprus banks on the hierarchy of risks of bank liabilities. Cyprus banks depend mostly on deposits with less reliance on debt, raising concerns in creditors of fixed-income debt and equity holders in banks in the euro area. Uncertainty remains as to the dimensions and structure of losses in private sector involvement or “bail in” in other rescue programs in the euro area. Alkman Granitsas, writing on “Central bank details losses at Bank of Cyprus,” on Mar 30, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887324000704578392502889560768.html), analyzes the impact of the agreement with the €10 billion agreement with IMF and the European Union on the banks of Cyprus. The recapitalization plan provides for immediate conversion of 37.5 percent of all deposits in excess of €100,000 to shares of special class of the bank. An additional 22.5 percent will be frozen without interest until the plan is completed. 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). Matt Jarzemsky, writing on Dow industrials set record,” on Mar 5, 2013, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324156204578275560657416332.html), analyzes that the DJIA broke the closing high of 14164.53 set on Oct 9, 2007, and subsequently also broke the intraday high of 14198.10 reached on Oct 11, 2007. The DJIA closed at 14865.06
on Fri Apr 12, 2013, which is higher by 4.9 percent than the value of 14,164.53 reached on Oct 9, 2007 and higher by 4.7 percent than the value of 14,198.10 reached on Oct 11, 2007. Values of risk financial are approaching or exceeding historical highs. Jon Hilsenrath, writing on “Jobs upturn isn’t enough to satisfy Fed,” on Mar 8, 2013, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324582804578348293647760204.html), finds that much stronger labor market conditions are required for the Fed to end quantitative easing. Unconventional monetary policy with zero interest rates and quantitative easing is quite difficult to unwind because of the adverse effects of raising interest rates on valuations of risk financial assets and home prices, including the very own valuation of the securities held outright in the Fed balance sheet. Gradual unwinding of 1 percent fed funds rates from Jun 2003 to Jun 2004 by seventeen consecutive increases of 25 percentage points from Jun 2004 to Jun 2006 to reach 5.25 percent caused default of subprime mortgages and adjustable-rate mortgages linked to the overnight fed funds rate. The zero interest rate has penalized liquidity and increased risks by inducing carry trades from zero interest rates to speculative positions in risk financial assets. There is no exit from zero interest rates without provoking another financial crash.
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 4.719 percent on Apr 15, 2013 and that of the ten-year sovereign bond of Italy at 4.300 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 Apr 12, 2013, the yield of the two-year Treasury stabilized 0.228 percent and that of the ten-year Treasury increased to 1.719 percent while the two-year bond of Germany stabilized at 0.02 percent and the ten-year increased to 1.26 percent; and the dollar depreciated to USD 1.3111/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 2.0 percent in the 12 months ending in Feb 2013 (http://cmpassocregulationblog.blogspot.com/2013/03/recovery-without-hiring-ten-million.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 | |
| 4/12/13 | 0.228 | 1.719 | 0.02 | 1.26 | 1.3111 |
| 4/5/13 | 0.228 | 1.706 | 0.01 | 1.21 | 1.2995 |
| 3/29/13 | 0.244 | 1.847 | -0.02 | 1.29 | 1.2818 |
| 3/22/13 | 0.242 | 1.931 | 0.03 | 1.38 | 1.2988 |
| 3/15/13 | 0.246 | 1.992 | 0.05 | 1.46 | 1.3076 |
| 3/8/13 | 0.256 | 2.056 | 0.09 | 1.53 | 1.3003 |
| 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.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 overnight fed funds rate and 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, 3.82 percent for the fed funds rate 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 Apr 4, 2013, with the one-month yield at 0.06 percent, the two-year at 0.24 percent, the ten-year at 1.82 percent, the fed funds rate at 0.15 percent and the corporate Baa bond at 4.66 percent.
Chart III-1A, US, Ten-Year, Two-Year and One-Month Treasury Constant Maturity Yields, Overnight Fed Funds Rate and Yield of Moody’s Baa Corporate Bond, Jul 31, 2001-Apr 11, 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 Rτ is expected revenue in the time horizon from τ =1 to T; Cτ 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
There was strong performance in equity indexes with many indexes increasing in Table III-1 in the week ending on Apr 12, 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 riving indexes higher. DJIA changed 0.0 percent on Apr 12, increasing 2.1 percent in the week. Germany’s Dax decreased 1.6 percent on Fri Apr 12 and increased 1.1 percent in the week. Dow Global decreased 0.5 percent on Apr 12 and increased 3.2 percent in the week. Japan’s Nikkei Average decreased 0.5 percent on Fri Apr 12 and increased 5.1 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 and monetary stimulus by a new board of the Bank of Japan. Dow Asia Pacific TSM increased 0.1 percent on Apr 12 and increased 3.2 percent in the week while Shanghai Composite that decreased 0.2 percent on Mar 8 and decreased 1.7 percent in the week of Mar 8, falling below 2000 to close at 1980.13 on Fri Nov 30 but closing at 2206.78 on Thu Apr 12 for loss of 0.6 percent and loss of 0.8 percent in the week of Apr 12. 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 mostly weaker in the week of Apr 12, 2013. The DJ UBS Commodities Index decreased 0.9 percent on Fri Apr 5 and decreased 0.2 percent in the week, as shown in Table III-1. WTI decreased 2.3 percent in the week of Apr 12 while Brent decreased 1.3 percent in the week. Gold decreased 4.9 percent on Fri Apr 12 and decreased 6.1 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 €896,763 million on Apr 5, 2013 with some repayment of loans already occurring. The sum of line 5 and line 7 (“Securities of Euro Area Residents Denominated in Euro”) has increased to €1,515,716 million in the statement of Apr 5, 2013, with marginal reduction. There is high credit risk in these transactions with capital of only €88,917 million as analyzed by Cochrane (2012Aug31).
Table III-2, Consolidated Financial Statement of the Eurosystem, Million EUR
| Dec 31, 2010 | Dec 28, 2011 | Apr 5, 2013 | |
| 1 Gold and other Receivables | 367,402 | 419,822 | 435,316 |
| 2 Claims on Non Euro Area Residents Denominated in Foreign Currency | 223,995 | 236,826 | 254,649 |
| 3 Claims on Euro Area Residents Denominated in Foreign Currency | 26,941 | 95,355 | 34,312 |
| 4 Claims on Non-Euro Area Residents Denominated in Euro | 22,592 | 25,982 | 21,799 |
| 5 Lending to Euro Area Credit Institutions Related to Monetary Policy Operations Denominated in Euro | 546,747 | 879,130 | 896,763 |
| 6 Other Claims on Euro Area Credit Institutions Denominated in Euro | 45,654 | 94,989 | 90,059 |
| 7 Securities of Euro Area Residents Denominated in Euro | 457,427 | 610,629 | 618,953 |
| 8 General Government Debt Denominated in Euro | 34,954 | 33,928 | 29,894 |
| 9 Other Assets | 278,719 | 336,574 | 265,354 |
| TOTAL ASSETS | 2,004, 432 | 2,733,235 | 2,647,097 |
| Memo Items | |||
| Sum of 5 and 7 | 1,004,174 | 1,489,759 | 1,515,716 |
| Capital and Reserves | 78,143 | 85,748 | 88,917 |
Source: European Central Bank
http://www.ecb.int/press/pr/wfs/2011/html/fs110105.en.html
http://www.ecb.int/press/pr/wfs/2011/html/fs111228.en.html
http://www.ecb.int/press/pr/wfs/2013/html/fs130409.en.html
IIIE Appendix Euro Zone survival risk. Professors Ricardo Caballero and Francesco Giavazzi (2012Jan15) find that the resolution of the European sovereign crisis with survival of the euro area would require success in the restructuring of Italy. That success would be assured with growth of the Italian economy. A critical problem is that the common euro currency prevents Italy from devaluing the exchange rate to parity or the exchange rate that would permit export growth to promote internal economic activity, which could generate fiscal revenues for primary fiscal surplus that ensure creditworthiness. Fiscal consolidation and restructuring are important but of long-term gestation. Immediate growth of the Italian economy would consolidate the resolution of the sovereign debt crisis. Professors Ricardo Caballero and Francesco Giavazzi (2012Jan15) find that the resolution of the European sovereign crisis with survival of the euro area would require success in the restructuring of Italy. That success would be assured with growth of the Italian economy. A critical problem is that the common euro currency prevents Italy from devaluing the exchange rate to parity or the exchange rate that would permit export growth to promote internal economic activity, which could generate fiscal revenues for primary fiscal surplus that ensure creditworthiness. Fiscal consolidation and restructuring are important but of long-term gestation. Immediate growth of the Italian economy would consolidate the resolution of the sovereign debt crisis. Caballero and Giavazzi (2012Jan15) argue that 55 percent of the exports of Italy are to countries outside the euro area such that devaluation of 15 percent would be effective in increasing export revenue. Newly available data in Table III-3 providing Italy’s trade with regions and countries supports the argument of Caballero and Giavazzi (2012Jan15). Italy’s exports to the European Monetary Union (EMU), or euro area, are only 40.5 percent of the total. Exports to the non-European Union area with share of 46.3 percent in Italy’s total exports are growing at 17.6 percent in Jan 2013 relative to Jan 2012 while those to EMU are growing at 1.7 percent.
Table III-3, Italy, Exports and Imports by Regions and Countries, % Share and 12-Month ∆%
| Jan 2013 | Exports | ∆% Jan- 2013/ Jan 2012 | Imports | Imports |
| EU | 53.7 | 2.6 | 52.9 | 2.4 |
| EMU 17 | 40.5 | 1.7 | 42.7 | 3.3 |
| France | 11.1 | 4.0 | 8.3 | 0.0 |
| Germany | 12.5 | 0.3 | 14.6 | -4.4 |
| Spain | 4.7 | -8.6 | 4.4 | 2.3 |
| UK | 4.9 | 8.1 | 2.5 | 5.9 |
| Non EU | 46.3 | 17.6 | 47.1 | -5.6 |
| Europe non EU | 13.9 | 10.7 | 11.3 | 19.9 |
| USA | 6.8 | 19.7 | 3.3 | -16.9 |
| China | 2.3 | 24.6 | 6.5 | -2.8 |
| OPEC | 5.7 | 26.1 | 10.8 | -19.6 |
| Total | 100.0 | 8.7 | 100.0 | -1.8 |
Notes: EU: European Union; EMU: European Monetary Union (euro zone)
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/85204
Table III-4 provides Italy’s trade balance by regions and countries. Italy had trade surplus of €663 million with the 17 countries of the euro zone (EMU 17) in Jan 2013 and cumulative surplus of €663 million in Jan 2013. Depreciation to parity could permit greater competitiveness in improving the trade deficit of €193 million in Jan 2013 with Europe non-European Union and the trade surplus of €762 million with the US and trade with non-European Union of €2281 million in Jan 2013. There is significant rigidity in the trade deficits in Jan of €1619 million with China and €1143 million with members of the Organization of Petroleum Exporting Countries (OPEC). Higher exports could drive economic growth in the economy of Italy that would permit less onerous adjustment of the country’s fiscal imbalances, raising the country’s credit rating.
Table III-4, Italy, Trade Balance by Regions and Countries, Millions of Euro
| Regions and Countries | Trade Balance Jan 2013 Millions of Euro | Trade Balance Cumulative Jan 2013 Millions of Euro |
| EU | 663 | 663 |
| EMU 17 | -296 | -296 |
| France | 1,002 | 1,002 |
| Germany | -246 | -246 |
| Spain | 156 | 156 |
| UK | 702 | 702 |
| Non EU | -2,281 | -2,281 |
| Europe non EU | -193 | -193 |
| USA | 762 | 762 |
| China | -1,619 | -1,619 |
| OPEC | -1,435 | -1,1435 |
| Total | -1,619 | -1,619 |
Notes: EU: European Union; EMU: European Monetary Union (euro zone)
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/85204
Growth rates of Italy’s trade and major products are provided in Table III-5 for the period Jan 2013 relative to Jan 2012. Growth rates in 12 months of imports are negative for energy with minus 14.9 percent, minus 14.4 percent for durable goods, minus 5.0 percent for exports and minus 1.8 percent for total imports. The higher rate of growth of exports of 8.7 percent in Jan 2013/Jan 2012 relative to imports of minus 1.8 percent may reflect weak demand in Italy with GDP declining during six consecutive quarters from IIIQ2011 through IVQ2012 together with softening commodity prices.
Table III-5, Italy, Exports and Imports % Share of Products in Total and ∆%
| Exports | Exports | Imports | Imports | |
| Consumer | 29.3 | 15.2 | 25.6 | 5.2 |
| Durable | 5.8 | 14.5 | 2.9 | -14.4 |
| Non | 23.5 | 15.3 | 22.7 | 7.7 |
| Capital Goods | 31.6 | 11.7 | 19.5 | -5.0 |
| Inter- | 33.6 | 6.9 | 32.6 | 5.5 |
| Energy | 5.5 | -23.8 | 22.3 | -14.9 |
| Total ex Energy | 94.5 | 11.0 | 77.7 | 2.7 |
| Total | 100.0 | 8.7 | 100.0 | -1.8 |
Note: % Share for Jan-Nov 2012.
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/85204
Table III-6 provides Italy’s trade balance by product categories in Jan 2013 and cumulative Jan 2013. Italy’s trade balance excluding energy generated surplus of €3844 million in Jan 2013 and €3844 million cumulative in Jan 2013 but the energy trade balance created deficit of €5463 million in Jan 2013 and cumulative €63844 million in Jan 2013. The overall deficit in Jan 2013 was €1618 million with cumulative deficit of €1618 million in Jan 2013. Italy has significant competitiveness in various economic activities in contrast with some other countries with debt difficulties.
Table III-6, Italy, Trade Balance by Product Categories, € Millions
| Jan 2013 | Cumulative Jan 2013 | |
| Consumer Goods | 996 | 996 |
| Durable | 802 | 802 |
| Nondurable | 194 | 194 |
| Capital Goods | 3,065 | 3,065 |
| Intermediate Goods | -217 | -217 |
| Energy | -5,463 | -5,463 |
| Total ex Energy | 3,844 | 3,844 |
| Total | -1,619 | -1,619 |
Source: Istituto Nazionale di Statistica http://www.istat.it/it/archivio/85204
Brazil faced in the debt crisis of 1982 a more complex policy mix. Between 1977 and 1983, Brazil’s terms of trade, export prices relative to import prices, deteriorated 47 percent and 36 percent excluding oil (Pelaez 1987, 176-79; Pelaez 1986, 37-66; see Pelaez and Pelaez, The Global Recession Risk (2007), 178-87). Brazil had accumulated unsustainable foreign debt by borrowing to finance balance of payments deficits during the 1970s. Foreign lending virtually stopped. The German mark devalued strongly relative to the dollar such that Brazil’s products lost competitiveness in Germany and in multiple markets in competition with Germany. The resolution of the crisis was devaluation of the Brazilian currency by 30 percent relative to the dollar and subsequent maintenance of parity by monthly devaluation equal to inflation and indexing that resulted in financial stability by parity in external and internal interest rates avoiding capital flight. With a combination of declining imports, domestic import substitution and export growth, Brazil followed rapid growth in the US and grew out of the crisis with surprising GDP growth of 4.5 percent in 1984.
The euro zone faces a critical survival risk because several of its members may default on their sovereign obligations if not bailed out by the other members. The valuation equation of bonds is essential to understanding the stability of the euro area. An explanation is provided in this paragraph and readers interested in technical details are referred to the Subsection IIIF Appendix on Sovereign Bond Valuation. Contrary to the Wriston doctrine, investing in sovereign obligations is a credit decision. The value of a bond today is equal to the discounted value of future obligations of interest and principal until maturity. On Dec 30 the yield of the 2-year bond of the government of Greece was quoted around 100 percent. In contrast, the 2-year US Treasury note traded at 0.239 percent and the 10-year at 2.871 percent while the comparable 2-year government bond of Germany traded at 0.14 percent and the 10-year government bond of Germany traded at 1.83 percent. There is no need for sovereign ratings: the perceptions of investors are of relatively higher probability of default by Greece, defying Wriston (1982), and nil probability of default of the US Treasury and the German government. The essence of the sovereign credit decision is whether the sovereign will be able to finance new debt and refinance existing debt without interrupting service of interest and principal. Prices of sovereign bonds incorporate multiple anticipations such as inflation and liquidity premiums of long-term relative to short-term debt but also risk premiums on whether the sovereign’s debt can be managed as it increases without bound. The austerity measures of Italy are designed to increase the primary surplus, or government revenues less expenditures excluding interest, to ensure investors that Italy will have the fiscal strength to manage its debt of 120 percent of GDP, which is the third largest in the world after the US and Japan. Appendix IIIE links the expectations on the primary surplus to the real current value of government monetary and fiscal obligations. As Blanchard (2011SepWEO) analyzes, fiscal consolidation to increase the primary surplus is facilitated by growth of the economy. Italy and the other indebted sovereigns in Europe face the dual challenge of increasing primary surpluses while maintaining growth of the economy (for the experience of Brazil in the debt crisis of 1982 see Pelaez 1986, 1987).
Much of the analysis and concern over the euro zone centers on the lack of credibility of the debt of a few countries while there is credibility of the debt of the euro zone as a whole. In practice, there is convergence in valuations and concerns toward the fact that there may not be credibility of the euro zone as a whole. The fluctuations of financial risk assets of members of the euro zone move together with risk aversion toward the countries with lack of debt credibility. This movement raises the need to consider analytically sovereign debt valuation of the euro zone as a whole in the essential analysis of whether the single-currency will survive without major changes.
Welfare economics considers the desirability of alternative states, which in this case would be evaluating the “value” of Germany (1) within and (2) outside the euro zone. Is the sum of the wealth of euro zone countries outside of the euro zone higher than the wealth of these countries maintaining the euro zone? On the choice of indicator of welfare, Hicks (1975, 324) argues:
“Partly as a result of the Keynesian revolution, but more (perhaps) because of statistical labours that were initially quite independent of it, the Social Product has now come right back into its old place. Modern economics—especially modern applied economics—is centered upon the Social Product, the Wealth of Nations, as it was in the days of Smith and Ricardo, but as it was not in the time that came between. So if modern theory is to be effective, if it is to deal with the questions which we in our time want to have answered, the size and growth of the Social Product are among the chief things with which it must concern itself. It is of course the objective Social Product on which attention must be fixed. We have indexes of production; we do not have—it is clear we cannot have—an Index of Welfare.”
If the burden of the debt of the euro zone falls on Germany and France or only on Germany, is the wealth of Germany and France or only Germany higher after breakup of the euro zone or if maintaining the euro zone? In practice, political realities will determine the decision through elections.
The prospects of survival of the euro zone are dire. Table III-7 is constructed with IMF World Economic Outlook database (http://www.imf.org/external/datamapper/index.php?db=WEO) for GDP in USD billions, primary net lending/borrowing as percent of GDP and general government debt as percent of GDP for selected regions and countries in 2010.
Table III-7, World and Selected Regional and Country GDP and Fiscal Situation
| GDP 2012 | Primary Net Lending Borrowing | General Government Net Debt | |
| World | 71,277 | ||
| Euro Zone | 12,065 | -0.5 | 73.4 |
| Portugal | 211 | -0.7 | 110.9 |
| Ireland | 205 | -4.4 | 103.0 |
| Greece | 255 | -1.7 | 170.7 |
| Spain | 1,340 | -4.5 | 78.6 |
| Major Advanced Economies G7 | 33,769 | -5.1 | 89.0 |
| United States | 15,653 | -6.5 | 83.8 |
| UK | 2,434 | -5.6 | 83.7 |
| Germany | 3,367 | 1.4 | 58.4 |
| France | 2,580 | -2.2 | 83.7 |
| Japan | 5,984 | -9.1 | 135.4 |
| Canada | 1,770 | -3.2 | 35.8 |
| Italy | 1,980 | 2.6 | 103.1 |
| China | 8,250 | -1.3* | 22.2** |
*Net Lending/borrowing**Gross Debt
Source: IMF World Economic Outlook databank http://www.imf.org/external/datamapper/index.php?db=WEO
The data in Table III-7 are used for some very simple calculations in Table III-8. The column “Net Debt USD Billions” in Table III-8 is generated by applying the percentage in Table III-7 column “General Government Net Debt % GDP 2010” to the column “GDP USD Billions.” The total debt of France and Germany in 2012 is $4155.8 billion, as shown in row “B+C” in column “Net Debt USD Billions” The sum of the debt of Italy, Spain, Portugal, Greece and Ireland is $3975.1 billion, adding rows D+E+F+G+H in column “Net Debt USD billions.” There is some simple “unpleasant bond arithmetic” in the two final columns of Table III-8. Suppose the entire debt burdens of the five countries with probability of default were to be guaranteed by France and Germany, which de facto would be required by continuing the euro zone. The sum of the total debt of these five countries and the debt of France and Germany is shown in column “Debt as % of Germany plus France GDP” to reach $8130.8 billion, which would be equivalent to 136.7 percent of their combined GDP in 2012. Under this arrangement the entire debt of the euro zone including debt of France and Germany would not have nil probability of default. The final column provides “Debt as % of Germany GDP” that would exceed 241.5 percent if including debt of France and 177.4 percent of German GDP if excluding French debt. The unpleasant bond arithmetic illustrates that there is a limit as to how far Germany and France can go in bailing out the countries with unsustainable sovereign debt without incurring severe pains of their own such as downgrades of their sovereign credit ratings. A central bank is not typically engaged in direct credit because of remembrance of inflation and abuse in the past. There is also a limit to operations of the European Central Bank in doubtful credit obligations. Wriston (1982) would prove to be wrong again that countries do not bankrupt but would have a consolation prize that similar to LBOs the sum of the individual values of euro zone members outside the current agreement exceeds the value of the whole euro zone. Internal rescues of French and German banks may be less costly than bailing out other euro zone countries so that they do not default on French and German banks.
Table III-8, Guarantees of Debt of Sovereigns in Euro Area as Percent of GDP of Germany and France, USD Billions and %
| Net Debt USD Billions | Debt as % of Germany Plus France GDP | Debt as % of Germany GDP | |
| A Euro Area | 8,855.7 | ||
| B Germany | 1,996.3 | $8130.9 as % of $3367 =241.5% $5971.4 as % of $3367 =177.4% | |
| C France | 2,159.5 | ||
| B+C | 4,155.8 | GDP $5,947.0 Total Debt $8130.9 Debt/GDP: 136.7% | |
| D Italy | 2,041.4 | ||
| E Spain | 1,053.2 | ||
| F Portugal | 234.0 | ||
| G Greece | 435.3 | ||
| H Ireland | 211.2 | ||
| Subtotal D+E+F+G+H | 3,975.1 |
Source: calculation with IMF data http://www.imf.org/external/datamapper/index.php?db=WEO
There is extremely important information in Table III-9 for the current sovereign risk crisis in the euro zone. Table III-9 provides the structure of regional and country relations of Germany’s exports and imports with newly available data for Feb 2013. German exports to other European Union (EU) members are 58.1 percent of total exports in Feb 2013 and 58.4 percent in cumulative Jan-Feb 2013. Exports to the euro area are 38.1 percent in Feb and 38.4 percent cumulative in Jan-Feb. Exports to third countries are 41.9 percent of the total in Jan-Feb and 41.6 percent cumulative in Jan-Feb. There is similar distribution for imports. Exports to non-euro countries are decreasing 1.9 percent in Feb 2013 and increasing 1.2 percent cumulative in Jan-Feb 2013 while exports to the euro area are decreasing 4.1 percent in Feb 2013 and decreasing 2.0 percent cumulative in Jan-Feb 2013. Exports to third countries, accounting for 41.9 percent of the total in Jan 2013, are decreasing 1.9 percent in Jan 2013 and increasing 1.2 percent cumulative in Jan-Feb 2013, accounting for 41.6 percent of the cumulative total in Jan-Feb 2013. Price competitiveness through devaluation could improve export performance and growth. Economic performance in Germany is closely related to its high competitiveness in world markets. Weakness in the euro zone and the European Union in general could affect the German economy. This may be the major reason for choosing the “fiscal abuse” of the European Central Bank considered by Buiter (2011Oct31) over the breakdown of the euro zone. There is a tough analytical, empirical and forecasting doubt of growth and trade in the euro zone and the world with or without maintenance of the European Monetary Union (EMU) or euro zone. Germany could benefit from depreciation of the euro because of high share in its exports to countries not in the euro zone but breakdown of the euro zone raises doubts on the region’s economic growth that could affect German exports to other member states.
Table III-9, Germany, Structure of Exports and Imports by Region, € Billions and ∆%
| Feb 2013 | Feb 12-Month | Cumulative Jan-Feb 2012 € Billions | Cumulative Jan-Feb 2013/ | |
| Total | 88.7 | -2.8 | 177.2 | 0.0 |
| A. EU | 51.5 % 58.1 | -3.4 | 103.5 % 58.4 | -0.8 |
| Euro Area | 33.8 % 38.1 | -4.1 | 68.1 % 38.4 | -2.0 |
| Non-euro Area | 17.7 % 19.9 | -1.9 | 35.4 % 20.0 | 1.6 |
| B. Third Countries | 37.2 % 41.9 | -1.9 | 73.7 % 41.6 | 1.2 |
| Total Imports | 71.9 | -5.9 | 146.8 | -1.6 |
| C. EU Members | 46.4 % 62.6 | -4.5 | 93.3 % 63.6 | -0.1 |
| Euro Area | 32.1 % 43.1 | -5.7 | 64.4 % 43.9 | -1.6 |
| Non-euro Area | 14.3 % 19.5 | -1.5 | 28.9 % 19.7 | 3.3 |
| D. Third Countries | 25.5 % 37.4 | -8.3 | 53.5 % 36.4 | -4.0 |
Notes: Total Exports = A+B; Total Imports = C+D
IIIF Appendix on Sovereign Bond Valuation. There are two approaches to government finance and their implications: (1) simple unpleasant monetarist arithmetic; and (2) simple unpleasant fiscal arithmetic. Both approaches illustrate how sovereign debt can be perceived riskier under profligacy.
First, Unpleasant Monetarist Arithmetic. Fiscal policy is described by Sargent and Wallace (1981, 3, equation 1) as a time sequence of D(t), t = 1, 2,…t, …, where D is real government expenditures, excluding interest on government debt, less real tax receipts. D(t) is the real deficit excluding real interest payments measured in real time t goods. Monetary policy is described by a time sequence of H(t), t=1,2,…t, …, with H(t) being the stock of base money at time t. In order to simplify analysis, all government debt is considered as being only for one time period, in the form of a one-period bond B(t), issued at time t-1 and maturing at time t. Denote by R(t-1) the real rate of interest on the one-period bond B(t) between t-1 and t. The measurement of B(t-1) is in terms of t-1 goods and [1+R(t-1)] “is measured in time t goods per unit of time t-1 goods” (Sargent and Wallace 1981, 3). Thus, B(t-1)[1+R(t-1)] brings B(t-1) to maturing time t. B(t) represents borrowing by the government from the private sector from t to t+1 in terms of time t goods. The price level at t is denoted by p(t). The budget constraint of Sargent and Wallace (1981, 3, equation 1) is:
D(t) = {[H(t) – H(t-1)]/p(t)} + {B(t) – B(t-1)[1 + R(t-1)]} (1)
Equation (1) states that the government finances its real deficits into two portions. The first portion, {[H(t) – H(t-1)]/p(t)}, is seigniorage, or “printing money.” The second part,
{B(t) – B(t-1)[1 + R(t-1)]}, is borrowing from the public by issue of interest-bearing securities. Denote population at time t by N(t) and growing by assumption at the constant rate of n, such that:
N(t+1) = (1+n)N(t), n>-1 (2)
The per capita form of the budget constraint is obtained by dividing (1) by N(t) and rearranging:
B(t)/N(t) = {[1+R(t-1)]/(1+n)}x[B(t-1)/N(t-1)]+[D(t)/N(t)] – {[H(t)-H(t-1)]/[N(t)p(t)]} (3)
On the basis of the assumptions of equal constant rate of growth of population and real income, n, constant real rate of return on government securities exceeding growth of economic activity and quantity theory equation of demand for base money, Sargent and Wallace (1981) find that “tighter current monetary policy implies higher future inflation” under fiscal policy dominance of monetary policy. That is, the monetary authority does not permanently influence inflation, lowering inflation now with tighter policy but experiencing higher inflation in the future.
Second, Unpleasant Fiscal Arithmetic. The tool of analysis of Cochrane (2011Jan, 27, equation (16)) is the government debt valuation equation:
(Mt + Bt)/Pt = Et∫(1/Rt, t+τ)st+τdτ (4)
Equation (4) expresses the monetary, Mt, and debt, Bt, liabilities of the government, divided by the price level, Pt, in terms of the expected value discounted by the ex-post rate on government debt, Rt, t+τ, of the future primary surpluses st+τ, which are equal to Tt+τ – Gt+τ or difference between taxes, T, and government expenditures, G. Cochrane (2010A) provides the link to a web appendix demonstrating that it is possible to discount by the ex post Rt, t+τ. The second equation of Cochrane (2011Jan, 5) is:
MtV(it, ·) = PtYt (5)
Conventional analysis of monetary policy contends that fiscal authorities simply adjust primary surpluses, s, to sanction the price level determined by the monetary authority through equation (5), which deprives the debt valuation equation (4) of any role in price level determination. The simple explanation is (Cochrane 2011Jan, 5):
“We are here to think about what happens when [4] exerts more force on the price level. This change may happen by force, when debt, deficits and distorting taxes become large so the Treasury is unable or refuses to follow. Then [4] determines the price level; monetary policy must follow the fiscal lead and ‘passively’ adjust M to satisfy [5]. This change may also happen by choice; monetary policies may be deliberately passive, in which case there is nothing for the Treasury to follow and [4] determines the price level.”
An intuitive interpretation by Cochrane (2011Jan 4) is that when the current real value of government debt exceeds expected future surpluses, economic agents unload government debt to purchase private assets and goods, resulting in inflation. If the risk premium on government debt declines, government debt becomes more valuable, causing a deflationary effect. If the risk premium on government debt increases, government debt becomes less valuable, causing an inflationary effect.
There are multiple conclusions by Cochrane (2011Jan) on the debt/dollar crisis and Global recession, among which the following three:
(1) The flight to quality that magnified the recession was not from goods into money but from private-sector securities into government debt because of the risk premium on private-sector securities; monetary policy consisted of providing liquidity in private-sector markets suffering stress
(2) Increases in liquidity by open-market operations with short-term securities have no impact; quantitative easing can affect the timing but not the rate of inflation; and purchase of private debt can reverse part of the flight to quality
(3) The debt valuation equation has a similar role as the expectation shifting the Phillips curve such that a fiscal inflation can generate stagflation effects similar to those occurring from a loss of anchoring expectations.
© Carlos M. Pelaez, 2010, 2011, 2012, 2013
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