Mediocre and Decelerating United States Economic Growth, Stagnating Real Disposable Income, Destruction of Household Wealth for Inflation Adjusted Loss, United States Commercial Banks Assets and Liabilities, Housing Collapse, World Economic Slowdown and Global Recession Risk: Part I

 

Mediocre and Decelerating United States Economic Growth, Stagnating Real Disposable Income, Destruction of Household Wealth for Inflation Adjusted Loss, United States Commercial Banks Assets and Liabilities, Housing Collapse, World Economic Slowdown and Global Recession Risk

Carlos M. Pelaez

© Carlos M. Pelaez, 2009, 2010, 2011, 2012, 2013

Executive Summary

I Mediocre and Decelerating United States Economic Growth

IA Mediocre and Decelerating United States Economic Growth

IA1 Contracting Real Private Fixed Investment

IA2 Swelling Undistributed Corporate Profits

IB Stagnating Real Disposable Income and Consumption Expenditures

IB1 Stagnating Real Disposable Income and Consumption Expenditures

IB2 Financial Repression

IIA Destruction of Household Wealth for Inflation Adjusted Loss

IIB United States Housing Collapse

IIC United States Commercial Banks Assets and Liabilities

IIC1 Transmission of Monetary Policy

IIC2 Functions of Banks

IIC3 United States Commercial Banks Assets and Liabilities

IIC4 Theory and Reality of Economic History and Monetary Policy Based on Fear of Deflation

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

Contents of Executive Summary

ESI Increasing Interest Rate Risk, Tapering Quantitative Easing, Duration Dumping, Steepening Yield Curve and Global Financial and Economic Risk

ESII Mediocre and Decelerating United States Economic Growth

ESIII Weakness of Growth in Expansion

ESIV Contracting Real Private Fixed Investment

ESV Swelling Undistributed Corporate Profits

ESVI Stagnating Real Disposable Income and Consumption Expenditures

ESVII Financial Repression

ESVIII Destruction of Household Wealth for Inflation Adjusted Loss

ESIX United States Housing Collapse

ESX United States Commercial Banks Assets and Liabilities

ESI Increasing Interest Rate Risk, Tapering Quantitative Easing, Duration Dumping, Steepening Yield Curve and 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 for both 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:

1. 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 10.4 percent in IIQ2011 to 7.4 percent in IVQ2011 and 6.2 percent in IQ2012, rebounding to 8.7 percent in IIQ2012, 8.2 percent in IIIQ2012 and 7.8 percent in IVQ2012. Annual equivalent growth in IQ2013 fell to 6.6 percent and to 7.0 percent in IIQ2013 (See Subsection VC and earlier at http://cmpassocregulationblog.blogspot.com/2013/07/tapering-quantitative-easing-policy-and_7005.html and earlier 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).
2. United States Economic Growth, Labor Markets and Budget/Debt Quagmire. The US is growing slowly with 28.3 million in job stress, fewer 10 million full-time jobs, high youth unemployment, historically low hiring and declining/stagnating real wages.
3. Economic Growth and Labor Markets in Advanced Economies. Advanced economies are growing slowly. There is still high unemployment in advanced economies.
4. World Inflation Waves. Inflation continues in repetitive waves globally (http://cmpassocregulationblog.blogspot.com/2013/09/duration-dumping-and-peaking-valuations.html).

A list of financial uncertainties includes:

1. Euro Area Survival Risk. The resilience of the euro to fiscal and financial doubts on larger member countries is still an unknown risk.
2. Foreign Exchange Wars. Exchange rate struggles continue as zero interest rates in advanced economies induce devaluation of their currencies.
3. Valuation of Risk Financial Assets. Valuations of risk financial assets have reached extremely high levels in markets with lower volumes.
4. Duration Trap of the Zero Bound. The yield of the US 10-year Treasury rose from 2.031 percent on Mar 9, 2012, to 2.294 percent on Mar 16, 2012. Considering a 10-year Treasury with coupon of 2.625 percent and maturity in exactly 10 years, the price would fall from 105.3512 corresponding to yield of 2.031 percent to 102.9428 corresponding to yield of 2.294 percent, for loss in a week of 2.3 percent but far more in a position with leverage of 10:1. Min Zeng, writing on “Treasurys fall, ending brutal quarter,” published on Mar 30, 2012, in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052702303816504577313400029412564.html?mod=WSJ_hps_sections_markets), informs that Treasury bonds maturing in more than 20 years lost 5.52 percent in the first quarter of 2012.
5. Credibility and Commitment of Central Bank Policy. There is a credibility issue of the commitment of monetary policy (Sargent and Silber 2012Mar20).
6. Carry Trades. Commodity prices driven by zero interest rates have resumed their increasing path with fluctuations caused by intermittent risk aversion

Professionals use a variety of techniques in measuring interest rate risk (Fabozzi, Buestow and Johnson, 2006, Chapter Nine, 183-226):

• Full valuation approach in which securities and portfolios are shocked by 50, 100, 200 and 300 basis points to measure their impact on asset values
• Stress tests requiring more complex analysis and translation of possible events with high impact even if with low probability of occurrence into effects on actual positions and capital
• Value at Risk (VaR) analysis of maximum losses that are likely in a time horizon
• Duration and convexity that are short-hand convenient measurement of changes in prices resulting from changes in yield captured by duration and convexity
• Yield volatility

Analysis of these methods is in Pelaez and Pelaez (International Financial Architecture (2005), 101-162) and Pelaez and Pelaez, Globalization and the States, Vol. (I) (2008a), 78-100). Frederick R. Macaulay (1938) introduced the concept of duration in contrast with maturity for analyzing bonds. Duration is the sensitivity of bond prices to changes in yields. In economic jargon, duration is the yield elasticity of bond price to changes in yield, or the percentage change in price after a percentage change in yield, typically expressed as the change in price resulting from change of 100 basis points in yield. The mathematical formula is the negative of the yield elasticity of the bond price or –[dB/d(1+y)]((1+y)/B), where d is the derivative operator of calculus, B the bond price, y the yield and the elasticity does not have dimension (Hallerbach 2001). The duration trap of unconventional monetary policy is that duration is higher the lower the coupon and higher the lower the yield, other things being constant. Coupons and yields are historically low because of unconventional monetary policy. Duration dumping during a rate increase may trigger the same crossfire selling of high duration positions that magnified the credit crisis. Traders reduced positions because capital losses in one segment, such as mortgage-backed securities, triggered haircuts and margin increases that reduced capital available for positioning in all segments, causing fire sales in multiple segments (Brunnermeier and Pedersen 2009; see Pelaez and Pelaez, Regulation of Banks and Finance (2008b), 217-24). Financial markets are currently experiencing fear of duration resulting from the debate within and outside the Fed on tapering quantitative easing. Table VIII-2 provides the yield curve of Treasury securities on Sep 27, 2013, Sep 5, 2013, May 1, 2013, Sep 27, 2012 and Sep 27, 2006. There is ongoing steepening of the yield curve for longer maturities, which are also the ones with highest duration. The 10-year yield increased from 1.45 percent on Jul 26, 2012 to 2.98 percent on Sep 5, 2013, as measured by the United States Treasury. Assume that a bond with maturity in 10 years were issued on Sep 5, 2013 at par or price of 100 with coupon of 1.45 percent. The price of that bond would be 86.8530 with instantaneous increase of the yield to 2.98 percent for loss of 13.1 percent and far more with leverage. Losses absorb capital available for positioning, triggering crossfire sales in multiple asset classes (Brunnermeier and Pedersen 2009). Chris Dieterich, writing on “Bond investors turn to cash,” on Jul 25, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887323971204578625900935618178.html), uses data of the Investment Company Institute (http://www.ici.org/) in showing withdrawals of $43 billion in taxable mutual funds in Jun, which is the largest in history, with flows into cash investments such as $8.5 billion in the week of Jul 17 into money-market funds.

Table VIII-2, United States, Treasury Yields

	9/27/13	9/05/13	5/01/13	9/27/12	9/27/06
1 M	0.03	0.03	0.03	0.05	4.60
3 M	0.02	0.02	0.06	0.09	4.88
6 M	0.03	0.06	0.08	0.14	5.01
1 Y	0.10	0.16	0.11	0.16	4.89
2 Y	0.34	0.52	0.20	0.25	4.66
3 Y	0.64	0.97	0.30	0.34	4.59
5 Y	1.40	1.85	0.65	0.64	4.56
7 Y	2.02	2.45	1.07	1.05	4.56
10 Y	2.64	2.98	1.66	1.66	4.60
20 Y	3.40	3.64	2.44	2.43	4.81
30 Y	3.68	3.88	2.83	2.83	4.73

Source: United States Treasury http://www.treasury.gov/resource-center/data-chart-center/Pages/index.aspx

Interest rate risk is increasing in the US. Chart VI-13 of the Board of Governors provides the conventional mortgage rate for a fixed-rate 30-year mortgage. The rate stood at 5.87 percent on Jan 8, 2004, increasing to 6.79 percent on Jul 6, 2006. The rate bottomed at 3.35 percent on May 2, 2013. Fear of duration risk in longer maturities such as mortgage-backed securities caused continuing increases in the conventional mortgage rate that rose to 4.51 percent on Jul 11, 2013 and 4.32 percent on Sep 26, 2013, which is the last data point in Chart VI-13.

Chart VI-13, US, Conventional Mortgage Rate, Jan 8, 2004 to Sep 19, 2013

Source: Board of Governors of the Federal Reserve System

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

The major reason and channel of transmission of unconventional monetary policy is through expectations of inflation. Fisher (1930) provided theoretical and historical relation of interest rates and inflation. Let i_n be the nominal interest rate, i_r the real or inflation-adjusted interest rate and π^e the expectation of inflation in the time term of the interest rate, which are all expressed as proportions. The following expression provides the relation of real and nominal interest rates and the expectation of inflation:

(1 + i_r) = (1 + i_n)/(1 + π^e) (1)

That is, the real interest rate equals the nominal interest rate discounted by the expectation of inflation in time term of the interest rate. Fisher (1933) analyzed the devastating effect of deflation on debts. Nominal debt contracts remained at original principal interest but net worth and income of debtors contracted during deflation. Real interest rates increase during declining inflation. For example, if the interest rate is 3 percent and prices decline 0.2 percent, equation (1) calculates the real interest rate as:

(1 +0.03)/(1 – 0.02) = 1.03/(0.998) = 1.032

That is, the real rate of interest is (1.032 – 1) 100 or 3.2 percent. If inflation were 2 percent, the real rate of interest would be 0.98 percent, or about 1.0 percent {[(1.03/1.02) -1]100 = 0.98%}.

The yield of the one-year Treasury security was quoted in the Wall Street Journal at 0.114 percent on Fri May 17, 2013 (http://online.wsj.com/mdc/page/marketsdata.html?mod=WSJ_topnav_marketdata_main). The expected rate of inflation π^e in the next twelve months is not observed. Assume that it would be equal to the rate of inflation in the past twelve months estimated by the Bureau of Economic Analysis (BLS) at 1.1 percent (http://www.bls.gov/cpi/). The real rate of interest would be obtained as follows:

(1 + 0.00114)/(1 + 0.011) = (1 + r_r) = 0.9902

That is, i_r is equal to 1 – 0.9902 or minus 0.98 percent. Investing in a one-year Treasury security results in a loss of 0.98 percent relative to inflation. The objective of unconventional monetary policy of zero interest rates is to induce consumption and investment because of the loss to inflation of riskless financial assets. Policy would be truly irresponsible if it intended to increase inflationary expectations or π^e. The result could be the same rate of unemployment with higher inflation (Kydland and Prescott 1977).

Current focus is on tapering quantitative easing by the Federal Open Market Committee (FOMC). There is sharp distinction between the two measures of unconventional monetary policy: (1) fixing of the overnight rate of fed funds at 0 to ¼ percent; and (2) outright purchase of Treasury and agency securities and mortgage-backed securities for the balance sheet of the Federal Reserve. Market are overreacting to the so-called “paring” of outright purchases of $85 billion of securities per month for the balance sheet of the Fed. What is truly important is the fixing of the overnight fed funds at 0 to ¼ percent for which there is no end in sight as evident in the FOMC statement for Sep 18, 2013 (http://www.federalreserve.gov/newsevents/press/monetary/20130918a.htm):

“To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored” (emphasis added).

There is a critical phrase in the statement of Sep 19, 2013 (http://www.federalreserve.gov/newsevents/press/monetary/20130918a.htm): “but mortgage rates have risen further.” Did the increase of mortgage rates influence the decision of the FOMC not to taper? Is FOMC “communication” and “guidance” successful?

In delivering the biannual report on monetary policy (Board of Governors 2013Jul17), Chairman Bernanke (2013Jul17) advised Congress that:

“Instead, we are providing additional policy accommodation through two distinct yet complementary policy tools. The first tool is expanding the Federal Reserve's portfolio of longer-term Treasury securities and agency mortgage-backed securities (MBS); we are currently purchasing $40 billion per month in agency MBS and $45 billion per month in Treasuries. We are using asset purchases and the resulting expansion of the Federal Reserve's balance sheet primarily to increase the near-term momentum of the economy, with the specific goal of achieving a substantial improvement in the outlook for the labor market in a context of price stability. We have made some progress toward this goal, and, with inflation subdued, we intend to continue our purchases until a substantial improvement in the labor market outlook has been realized. We are relying on near-zero short-term interest rates, together with our forward guidance that rates will continue to be exceptionally low--our second tool--to help maintain a high degree of monetary accommodation for an extended period after asset purchases end, even as the economic recovery strengthens and unemployment declines toward more-normal levels. In appropriate combination, these two tools can provide the high level of policy accommodation needed to promote a stronger economic recovery with price stability.

The Committee's decisions regarding the asset purchase program (and the overall stance of monetary policy) depend on our assessment of the economic outlook and of the cumulative progress toward our objectives. Of course, economic forecasts must be revised when new information arrives and are thus necessarily provisional.”

Friedman (1953) argues there are three lags in effects of monetary policy: (1) between the need for action and recognition of the need; (2) the recognition of the need and taking of actions; and (3) taking of action and actual effects. Friedman (1953) finds that the combination of these lags with insufficient knowledge of the current and future behavior of the economy causes discretionary economic policy to increase instability of the economy or standard deviations of real income σ_y and prices σ_p. Policy attempts to circumvent the lags by policy impulses based on forecasts. We are all naïve about forecasting. Data are available with lags and revised to maintain high standards of estimation. Policy simulation models estimate economic relations with structures prevailing before simulations of policy impulses such that parameters change as discovered by Lucas (1977). Economic agents adjust their behavior in ways that cause opposite results from those intended by optimal control policy as discovered by Kydland and Prescott (1977). Advance guidance attempts to circumvent expectations by economic agents that could reverse policy impulses but is of dubious effectiveness. There is strong case for using rules instead of discretionary authorities in monetary policy (http://cmpassocregulationblog.blogspot.com/search?q=rules+versus+authorities).

The key policy is maintaining fed funds rate between 0 and ¼ percent. An increase in fed funds rates could cause flight out of risk financial markets worldwide. There is no exit from this policy without major financial market repercussions. Indefinite financial repression induces carry trades with high leverage, risks and illiquidity.

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 14,164.53 set on Oct 9, 2007, and subsequently also broke the intraday high of 14,198.10 reached on Oct 11, 2007. The DJIA closed at 15,258.24

on Fri Sep 27, 2013, which is higher by 7.7 percent than the value of 14,164.53 reached on Oct 9, 2007 and higher by 7.5 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 57.5 percent since the trough of the sovereign debt crisis in Europe on Jul 2, 2010 to Sep 27, 2013; S&P 500 has gained 65.4 percent; and DAX 52.7 percent. Before the current round of risk aversion, almost all assets in the column “∆% Trough to 9/27/13” 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 9.4 percent below the trough; Japan’s Nikkei Average is 67.3 percent above the trough; DJ Asia Pacific TSM is 25.9 percent above the trough; Dow Global is 37.0 percent above the trough; STOXX 50 of 50 blue-chip European equities (http://www.stoxx.com/indices/index_information.html?symbol=sx5E) is 21.6 percent above the trough; and NYSE Financial Index is 41.4 percent above the trough. DJ UBS Commodities is 3.2 percent above the trough. DAX index of German equities (http://www.bloomberg.com/quote/DAX:IND) is 52.7 percent above the trough. Japan’s Nikkei Average is 67.3 percent above the trough on Aug 31, 2010 and 29.6 percent above the peak on Apr 5, 2010. The Nikkei Average closed at 14,760.07 on Fri Sep 27, 2013 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata), which is 43.9 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 13.4 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 9/27/13” in Table VI-4 shows decrease of 1.5 percent in the week for China’s Shanghai Composite. DJ Asia Pacific increased 0.2 percent. NYSE Financial decreased 1.2 percent in the week. DJ UBS Commodities decreased 0.2 percent. Dow Global decreased 0.7 percent in the week of Sep 27, 2013. The DJIA decreased 1.2 percent and S&P 500 decreased 1.1 percent. DAX of Germany decreased 0.2 percent. STOXX 50 decreased 0.3 percent. The USD changed 0.0 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 9/27/13” that provides the percentage change from the peak in Apr 2010 before the sovereign risk event to Sep 27, 2013. Most risk financial assets had gained not only relative to the trough as shown in column “∆% Trough to 9/27/13” but also relative to the peak in column “∆% Peak to 9/27/13.” There are now several equity indexes above the peak in Table VI-4: DJIA 36.2 percent, S&P 500 39.0 percent, DAX 36.8 percent, Dow Global 11.8 percent, DJ Asia Pacific 10.2 percent, NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) 12.6 percent, Nikkei Average 29.6 percent and STOXX 50 2.9 percent. There is only one equity index below the peak: Shanghai Composite by 31.8 percent. DJ UBS Commodities Index is now 11.7 percent below the peak. The US dollar strengthened 10.6 percent relative to the peak. The factors of risk aversion have adversely affected the performance of risk financial assets. The performance relative to the peak in Apr 2010 is more important than the performance relative to the trough around early Jul 2010 because improvement could signal that conditions have returned to normal levels before European sovereign doubts in Apr 2010. Alexandra Scaggs, writing on “Tepid profits, roaring stocks,” on May 16, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887323398204578487460105747412.html), analyzes stabilization of earnings growth: 70 percent of 458 reporting companies in the S&P 500 stock index reported earnings above forecasts but sales fell 0.2 percent relative to forecasts of increase of 0.5 percent. Paul Vigna, writing on “Earnings are a margin story but for how long,” on May 17, 2013, published in the Wall Street Journal (http://blogs.wsj.com/moneybeat/2013/05/17/earnings-are-a-margin-story-but-for-how-long/), analyzes that corporate profits increase with stagnating sales while companies manage costs tightly. More than 90 percent of S&P components reported moderate increase of earnings of 3.7 percent in IQ2013 relative to IQ2012 with decline of sales of 0.2 percent. Earnings and sales have been in declining trend. In IVQ2009, growth of earnings reached 104 percent and sales jumped 13 percent. Net margins reached 8.92 percent in IQ2013, which is almost the same at 8.95 percent in IIIQ2006. Operating margins are 9.58 percent. There is concern by market participants that reversion of margins to the mean could exert pressure on earnings unless there is more accelerated growth of sales. Vigna (op. cit.) finds sales growth limited by weak economic growth. 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. Future company cash flows derive from investment projects. In IQ1980, gross private domestic investment in the US was $951.6 billion of 2009 dollars, growing to $1,143.0 billion in IVQ1986 or 20.1 percent. Real gross private domestic investment in the US decreased 3.1 percent from $2,605.2 billion of 2009 dollars in IVQ2007 to $2,524.9 billion in IIQ2013. Real private fixed investment fell 4.9 percent from $2,586.3 billion of 2009 dollars in IVQ2007 to $2,458.4 billion in IIQ2013. Growth of real private investment in is mediocre for all but four quarters from IIQ2011 to IQ2012 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/09/increasing-interest-rate-risk.html). The investment decision of United States corporations has been fractured in the current economic cycle in preference of cash. Corporate profits with IVA and CCA fell $26.6 billion in IQ2013 after increasing $34.9 billion in IVQ2012 and $13.9 billion in IIIQ2012. Corporate profits with IVA and CCA rebounded with $66.8 billion in IIQ2013. Profits after tax with IVA and CCA fell $1.7 billion in IQ2013 after increasing $40.8 billion in IVQ2012 and $4.5 billion in IIIQ2012. In IIQ2013, profits after tax with IVA and CCA increased $56.9 billion. Anticipation of higher taxes in the “fiscal cliff” episode caused increase of $120.9 billion in net dividends in IVQ2012 followed with adjustment in the form of decrease of net dividends by $103.8 billion in IQ2013, rebounding with $273.5 billion in IIQ2013. There is similar decrease of $80.1 billion in undistributed profits with IVA and CCA in IVQ2012 followed by increase of $102.1 billion in IQ2013 and decline of $216.6 billion in IIQ2013. Undistributed profits of US corporations swelled 263.4 percent from $107.7 billion IQ2007 to $391.4 billion in IIQ2013 and changed signs from minus $55.9 billion in billion in IVQ2007 (Section IA2). In IQ2013, corporate profits with inventory valuation and capital consumption adjustment fell $26.6 billion relative to IVQ2012, from $2047.2 billion to $2020.6 billion at the quarterly rate of minus 1.3 percent. In IIQ2013, corporate profits with IVA and CCA increased $66.8 billion from $2020.6 billion in IQ2013 to $2087.4 billion at the quarterly rate of 3.3 percent (http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_3rd.pdf). Uncertainty originating in fiscal, regulatory and monetary policy causes wide swings in expectations and decisions by the private sector with adverse effects on investment, real economic activity and employment. The investment decision of US business is fractured.

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

declines. Equally, decline in expected revenue from the stock or project, R_τ, 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) popularized the view of the elusive relation between stock markets and economic activity in an often-quoted phrase “the stock market has predicted nine of the last five recessions.” In the presence of zero interest rates forever, valuations of risk financial assets are likely to differ from the performance of the overall economy. The interrelations of financial and economic variables prove difficult to analyze and measure.

Table VI-4, Stock Indexes, Commodities, Dollar and 10-Year Treasury  

	Peak	Trough	∆% to Trough	∆% Peak to 9/27/ /13	∆% Week 9/27/13	∆% Trough to 9/27/ 13
DJIA	4/26/ 10	7/2/10	-13.6	36.2	-1.2	57.5
S&P 500	4/23/ 10	7/20/ 10	-16.0	39.0	-1.1	65.4
NYSE Finance	4/15/ 10	7/2/10	-20.3	12.6	-1.2	41.4
Dow Global	4/15/ 10	7/2/10	-18.4	11.8	-0.7	37.0
Asia Pacific	4/15/ 10	7/2/10	-12.5	10.2	0.2	25.9
Japan Nikkei Aver.	4/05/ 10	8/31/ 10	-22.5	29.6	0.1	67.3
China Shang.	4/15/ 10	7/02 /10	-24.7	-31.8	-1.5	-9.4
STOXX 50	4/15/10	7/2/10	-15.3	2.9	-0.3	21.6
DAX	4/26/ 10	5/25/ 10	-10.5	36.8	-0.2	52.7
Dollar Euro	11/25 2009	6/7 2010	21.2	10.6	0.0	-13.4
DJ UBS Comm.	1/6/ 10	7/2/10	-14.5	-11.7	-0.2	3.2
10-Year T Note	4/5/ 10	4/6/10	3.986	2.784	2.626

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

ESII Mediocre and Decelerating United States Economic Growth. The US is experiencing the first expansion from a recession after World War II with disastrous socioeconomic conditions:

• Mediocre economic growth below potential and long-term trend, resulting in idle productive resources (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/09/increasing-interest-rate-risk.html)
• Private fixed investment declining 4.9 percent in the entire cycle from IVQ2007 to IIQ2013 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/09/increasing-interest-rate-risk.html)
• Twenty eight million or 17.4 percent of the effective labor force unemployed or underemployed in involuntary part-time jobs with stagnating or declining real wages (http://cmpassocregulationblog.blogspot.com/2013/09/twenty-eight-million-unemployed-or.html)
• Stagnating real disposable income per person or income per person after inflation and taxes (Section IB and earlier http://cmpassocregulationblog.blogspot.com/2013/09/increasing-interest-rate-risk.html)
• Twenty eight million unemployed or underemployed (http://cmpassocregulationblog.blogspot.com/2013/09/twenty-eight-million-unemployed-or.html)
• Depressed hiring that does not afford an opportunity for reducing unemployment/underemployment and moving to better-paid jobs (http://cmpassocregulationblog.blogspot.com/2013/09/recovery-without-hiring-ten-million.html)
• Unsustainable government deficit/debt and balance of payments deficit (http://cmpassocregulationblog.blogspot.com/2013/09/duration-dumping-and-peaking-valuations.html)
• Worldwide waves of inflation (http://cmpassocregulationblog.blogspot.com/2013/09/duration-dumping-and-peaking-valuations.html)
• Deteriorating terms of trade and net revenue margins in squeeze of economic activity by carry trades induced by zero interest rates (http://cmpassocregulationblog.blogspot.com/2013/09/duration-dumping-and-peaking-valuations.html)
• Financial repression of interest rates and credit affecting the most people without means and access to sophisticated financial investments with likely adverse effects on income distribution and wealth disparity (Section IB and earlier http://cmpassocregulationblog.blogspot.com/2013/09/increasing-interest-rate-risk.html)
• 47 million in poverty and 48 million without health insurance with family income adjusted for inflation regressing to 1995 levels (http://cmpassocregulationblog.blogspot.com/2013/09/duration-dumping-and-peaking-valuations.html
• Net worth of households and nonprofits organizations declining by 0.9 percent after adjusting for inflation in the entire cycle from IVQ2007 to IIQ2013 in contrast with growth at 3.0 percent in real terms from 1945 to 2012 (Section IIA and earlier (http://cmpassocregulationblog.blogspot.com/2013/06/recovery-without-hiring-seven-million.html)

Valuations of risk financial assets approach historical highs. Long-term economic performance in the United States consisted of trend growth of GDP at 3 percent per year and of per capita GDP at 2 percent per year as measured for 1870 to 2010 by Robert E Lucas (2011May). The economy returned to trend growth after adverse events such as wars and recessions. The key characteristic of adversities such as recessions was much higher rates of growth in expansion periods that permitted the economy to recover output, income and employment losses that occurred during the contractions. Over the business cycle, the economy compensated the losses of contractions with higher growth in expansions to maintain trend growth of GDP of 3 percent and of GDP per capita of 2 percent. US economic growth has been at only 2.2 percent on average in the cyclical expansion in the 16 quarters from IIIQ2009 to IIQ2013. 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). There are new calculations using the revision of US GDP and personal income data since 1929 by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm http://bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_adv.pdf http://bea.gov/newsreleases/national/pi/2013/pdf/pi0613.pdf) and the second estimate of GDP for IIQ2013 (http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_3rd.pdf). The average of 7.7 percent in the first four quarters of major cyclical expansions is in contrast with the rate of growth in the first four quarters of the expansion from IIIQ2009 to IIQ2010 of only 2.7 percent obtained by diving GDP of $14,738.0 billion in IIQ2010 by GDP of $14,356.9 billion in IIQ2009 {[$14,738.0/$14,356.9 -1]100 = 2.7%], or accumulating the quarter on quarter growth rates (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/09/increasing-interest-rate-risk.html). The expansion from IQ1983 to IVQ1985 was at the average annual growth rate of 5.7 percent and at 7.8 percent from IQ1983 to IVQ1983 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/09/increasing-interest-rate-risk.html). As a result, there are 28.3 million unemployed or underemployed in the United States for an effective unemployment rate of 17.4 percent (http://cmpassocregulationblog.blogspot.com/2013/09/twenty-eight-million-unemployed-or.html).

The economy of the US can be summarized in growth of economic activity or GDP as decelerating from mediocre growth of 2.5 percent on an annual basis in 2010 to 1.8 percent in 2011 to 2.8 percent in 2012. The following calculations show that actual growth is around 1.4 to 1.8 percent per year. This rate is well below 3 percent per year in trend from 1870 to 2010, which the economy of the US always attained for entire cycles in expansions after events such as wars and recessions (Lucas 2011May).

Revisions and enhancements of United States GDP and personal income accounts by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm http://bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_adv.pdf http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_2nd.pdf http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_3rd.pdf http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0713.pdf http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0813.pdf http://bea.gov/newsreleases/national/pi/2013/pdf/pi0613.pdf) provide important information on long-term growth and cyclical behavior. Table Summary provides relevant data.

1. Long-term. US GDP grew at the average yearly rate of 3.3 percent from 1929 to 2012 and at 3.2 percent from 1947 to 2012. There were periodic contractions or recessions in this period but the economy grew at faster rates in the subsequent expansions, maintaining long-term economic growth at trend.
2. Cycles. The combined contraction of GDP in the two almost consecutive recessions in the early 1980s is 4.7 percent. The contraction of US GDP from IVQ2007 to IIQ2009 during the global recession was 4.3 percent. The critical difference in the expansion is growth at average 7.8 percent in annual equivalent in the first four quarters of recovery from IQ1983 to IVQ1983. The average rate of growth of GDP in four cyclical expansions in the postwar period is 7.7 percent. In contrast, the rate of growth in the first four quarters from IIIQ2009 to IIQ2010 was only 2.7 percent. Average annual equivalent growth in the expansion from IQ1983 to IQ1986 was 5.7 percent. In contrast, average annual equivalent growth in the expansion from IIIQ2009 to IIQ2013 was only 2.7 percent. The US appears to have lost its dynamism of income growth and employment creation.

Table Summary, Long-term and Cyclical Growth of GDP, Real Disposable Income and Real Disposable Income per Capita

	GDP
Long-Term
1929-2012	3.3
1947-2012	3.2
Cyclical Contractions ∆%
IQ1980 to IIIQ1980, IIIQ1981 to IVQ1982	-4.7
IVQ2007 to IIQ2009	-4.3
Cyclical Expansions Average Annual Equivalent ∆%
IQ1983 to IQ1986	5.7
First Four Quarters IQ1983 to IVQ1983	7.8
IIIQ2009 to IIQ2013	2.2
First Four Quarters IIIQ2009 to IIQ2010	2.7
	Real Disposable Income	Real Disposable Income per Capita
Long-Term
1929-2012	3.2	2.0
1947-1999	3.7	2.3
Whole Cycles
1980-1989	3.5	2.6
2006-2012	1.4	0.6

Source: Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_3rd.pdf http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0813.pdf

The revisions and enhancements of United States GDP and personal income accounts by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm http://bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_adv.pdf http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_2nd.pdf http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_3rd.pdf http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0713.pdf http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0813.pdf http://bea.gov/newsreleases/national/pi/2013/pdf/pi0613.pdf) also provide critical information in assessing the current rhythm of US economic growth. The economy appears to be moving at a pace from 1.8 to 1.9 percent per year. Table Summary GDP provides the data.

1. Average Annual Growth in the Past Six Quarters. GDP growth in the four quarters of 2012 and the first two quarters of 2013 accumulated to 2.9 percent. This growth is equivalent to 1.9 percent per year, obtained by dividing GDP in IIQ2013 of $15,679.7 by GDP in IVQ2011 of $15,242.1 and compounding by 4/6: {[($15,679.7/$15,242.1)^4/6 -1]100 = 1.9.

2. Average Annual Growth in the First Two Quarters of 2013. GDP growth in the first two quarters of 2013 accumulated to 0.9 percent that is equivalent to 1.8 percent in a year. This is obtained by dividing GDP in IIQ2013 of $15,679.7 by GDP in IVQ2012 of $15,539.6 and compounding by 4/2: {[($15,679.7/$15,539.6)^4/2 -1]100 =1.8%}. The US economy grew 1.6 percent in IIQ2013 relative to the same quarter a year earlier in IIQ2012. Another important revelation of the revisions and enhancements is that GDP was flat in IVQ2012, which is just at the borderline of contraction.

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

	Real GDP, Billions Chained 2005 Dollars	∆% Relative to IVQ2007	∆% Relative to Prior Quarter	∆% over Year Earlier
IVQ2007	14,996.1	NA	NA	1.9
IVQ2011	15,242.1	1.6	1.2	2.0
IQ2012	15,381.6	2.6	0.9	3.3
IIQ2012	15,427.7	2.9	0.3	2.8
IIIQ2012	15,534.0	3.6	0.7	3.1
IVQ2012	15,539.6	3.6	0.0	2.0
IQ2013	15,583.9	3.9	0.3	1.3
IIQ2013	15,679.7	4.6	0.6	1.6
Cumulative ∆% IQ2012 to IIQ2013	2.9		2.8
Annual Equivalent ∆%	1.9		1.9

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_3rd.pdf

ESIII Weakness of Growth in Expansion. Characteristics of the four cyclical contractions are provided in Table I-4 with the first column showing the number of quarters of contraction; the second column the cumulative percentage contraction; and the final column the average quarterly rate of contraction. There were two contractions from IQ1980 to IIIQ1980 and from IIIQ1981 to IVQ1982 separated by three quarters of expansion. The drop of output combining the declines in these two contractions is 4.7 percent, which is almost equal to the decline of 4.3 percent in the contraction from IVQ2007 to IIQ2009. In contrast, during the Great Depression in the four years of 1930 to 1933, GDP in constant dollars fell 26.3 percent cumulatively and fell 45.3 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7 and revisions in http://bea.gov/iTable/index_nipa.cfm). The comparison of the global recession after 2007 with the Great Depression is entirely misleading.

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

	Number of Quarters	Cumulative Percentage Contraction	Average Percentage Rate
IIQ1953 to IIQ1954	3	-2.4	-0.8
IIIQ1957 to IIQ1958	3	-3.0	-1.0
IVQ1973 to IQ1975	5	-3.1	-0.6
IQ1980 to IIIQ1980	2	-2.2	-1.1
IIIQ1981 to IVQ1982	4	-2.5	-0.64
IVQ2007 to IIQ2009	6	-4.3	-0.72

Sources: Source: Bureau of Economic Analysis http://bea.gov/iTable/index_nipa.cfm Reference Cycles National Bureau of Economic Research http://www.nber.org/cycles/cyclesmain.html

Cycles National Bureau of Economic Research http://www.nber.org/cycles/cyclesmain.html

Table I-5 shows the extraordinary contrast between the mediocre average annual equivalent growth rate of 2.2 percent of the US economy in the sixteen quarters of the current cyclical expansion from IIIQ2009 to IIQ2013 and the average of 5.7 percent in the first thirteen quarters of expansion from IQ1983 to IQ1986, 5.3 percent in the first fifteen quarters of expansion from IQ1983 to IIIQ1986 and 5.2 percent in the first sixteen quarters of expansion from IQ1983 to IVQ1986. The line “average first four quarters in four expansions” provides the average growth rate of 7.7 percent with 7.8 percent from IIIQ1954 to IIQ1955, 9.2 percent from IIIQ1958 to IIQ1959, 6.1 percent from IIIQ1975 to IIQ1976 and 7.8 percent from IQ1983 to IVQ1983. The United States missed this opportunity of high growth in the initial phase of 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). Table I-5 provides an average of 7.7 percent in the first four quarters of major cyclical expansions while the rate of growth in the first four quarters of the expansion from IIIQ2009 to IIQ2010 is only 2.7 percent obtained by diving GDP of $14,738.0 billion in IIQ2010 by GDP of $14,356.9 billion in IIQ2009 {[$14,738.0/$14,356.9 -1]100 = 2.7%], or accumulating the quarter on quarter growth rates. As a result, there are 28.3 million unemployed or underemployed in the United States for an effective unemployment rate of 17.4 percent (http://cmpassocregulationblog.blogspot.com/2013/09/twenty-eight-million-unemployed-or.html). BEA data show the US economy in standstill with annual growth of 2.4 percent in 2010 decelerating to 1.8 percent annual growth in 2011 and 2.8 percent in 2012 (http://www.bea.gov/iTable/index_nipa.cfm) The expansion from IQ1983 to IVQ1985 was at the average annual growth rate of 5.7 percent and at 7.8 percent from IQ1983 to IVQ1983. GDP growth in the first two quarters of 2013 accumulated to 0.9 percent that is equivalent to 1.8 percent in a year. This is obtained by dividing GDP in IIQ2013 of $15,679.7 by GDP in IVQ2012 of $15,539.6 and compounding by 4/2: {[($15,679.7/$15,539.6)^4/2 -1]100 =1.8%}. The US economy grew 1.6 percent in IIQ2013 relative to the same quarter a year earlier in IIQ2012. Another important revelation of the revisions and enhancements is that GDP was flat in IVQ2012, just at the borderline of contraction.

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

	Number of Quarters	Cumulative Growth ∆%	Average Annual Equivalent Growth Rate
IIIQ 1954 to IQ1957	11	12.8	4.5
First Four Quarters IIIQ1954 to IIQ1955	4	7.8
IIQ1958 to IIQ1959	5	10.0	7.9
First Four Quarters IIIQ1958 to IIQ1959	4	9.2
IIQ1975 to IVQ1976	8	8.3	4.1
First Four Quarters IIIQ1975 to IIQ1976	4	6.1
IQ1983 to IQ1986 IQ1983 to IIIQ1986 IQ1983 to IVQ1986	13 15 16	19.9 21.6 22.3	5.7 5.4 5.2
First Four Quarters IQ1983 to IVQ1983	4	7.8
Average First Four Quarters in Four Expansions*		7.7
IIIQ2009 to IIQ2013	16	9.2	2.2
First Four Quarters IIIQ2009 to IIQ2010		2.7

*First Four Quarters: 7.8% IIIQ1954-IIQ1955; 9.2% IIIQ1958-IIQ1959; 6.1% IIIQ1975-IIQ1976; 7.8% IQ1983-IVQ1983

Source: Bureau of Economic Analysis http://bea.gov/iTable/index_nipa.cfm Reference Cycles National Bureau of Economic Research http://www.nber.org/cycles/cyclesmain.html

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

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

Source: US Bureau of Economic Analysis

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

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

Chart I-9, US, Real GDP, 2007-2013

Source: US Bureau of Economic Analysis

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

As shown in Tables I-4 and I-5 above the loss of real GDP in the US during the contraction was 4.3 percent but the gain in the cyclical expansion has been only 9.2 percent (first to the last row in Table I-5), using all latest revisions. As a result, the level of real GDP in IIQ2013 with the second estimate and revisions is only higher by 4.6 percent than the level of real GDP in IVQ2007. Growth at trend of 3.0 percent in the entire cycle as in past cyclical expansions would result in GDP higher by 18.5 percent in IIQ2013 relative to IVQ2007. Trend GDP would be $17,770.4 billion, which is higher than actual GDP in IIQ2013 of $15,679.7 billion, for underperformance of $2,090.7 billion. Table I-6 provides in the second column real GDP in billions of chained 2005 dollars. The third column provides the percentage change of the quarter relative to IVQ2007; the fourth column provides the percentage change relative to the prior quarter; and the final fifth column provides the percentage change relative to the same quarter a year earlier. The contraction actually concentrated in two quarters: decline of 2.2 percent in IVQ2008 relative to the prior quarter and decline of 1.4 percent in IQ2009 relative to IVQ2008. The combined fall of GDP in IVQ2008 and IQ2009 was 3.6 percent {[(1-0.022) x (1-0.014) -1]100 = -3.6%}, or {[(IQ2009 $14,372.1)/(IIIQ2008 $14,895.1) – 1]100 = -3.5%} except for rounding. Those two quarters coincided with the worst effects of the financial crisis. GDP fell 0.1 percent in IIQ2009 but grew 0.3 percent in IIIQ2009, which is the beginning of recovery in the cyclical dates of the NBER. Most of the recovery occurred in five successive quarters from IVQ2009 to IVQ2010 of growth of 1.0 percent in IVQ2009, 0.4 percent in IQ2010, 0.9 percent in IIQ2010 and equal growth at 0.7 percent in IIIQ2010 and 0.7 percent in IVQ2010 for cumulative growth in those five quarters of 3.8 percent, obtained by accumulating the quarterly rates {[(1.01 x 1.004 x 1.009 x 1.007 x 1.007) – 1]100 = 3.8%} or {[(IVQ2010 $14,942.4)/(IIIQ2009 $14,402.5) – 1]100 = 3.7%} with minor rounding difference. The economy then stalled during the first half of 2011 with decline of 0.3 percent in IQ2011 and growth of 0.8 percent in IIQ2011 for combined annual equivalent rate of 1.0 percent {(0.997 x 1.008)²}. The economy grew 0.3 percent in IIIQ2011 for annual equivalent growth of 1.1 percent in the first three quarters {[(0.997 x 1.008 x 1.003)^4/3 -1]100 = 1.1%}. Growth picked up in IVQ2011 with 1.2 percent relative to IIIQ2011. Growth in a quarter relative to a year earlier in Table I-6 slows from over 2.7 percent during three consecutive quarters from IIQ2010 to IVQ2010 to 2.0 percent in IQ2011, 1.9 percent in IIQ2011, 1.5 percent in IIIQ2011 and 2.0 percent in IVQ2011. As shown below, growth of 1.2 percent in IVQ2011 was partly driven by inventory accumulation. In IQ2012, GDP grew 0.9 percent relative to IVQ2011 and 3.3 percent relative to IQ2011, decelerating to 0.3 percent in IIQ2012 and 2.8 percent relative to IIQ2011 and 0.7 percent in IIIQ2012 and 3.1 percent relative to IIIQ2011 largely because of inventory accumulation and national defense expenditures. Growth was 0.0 percent in IVQ2012 with 2.0 percent relative to a year earlier but mostly because of deduction of 2.00 percentage points of inventory divestment and 1.22 percentage points of reduction of one-time national defense expenditures. Growth was 0.3 percent in IQ2013 and 1.3 percent relative to IQ2012 in large part because of burning savings to consume caused by financial repression of zero interest rates. There is similar growth of 0.6 percent in IIQ2013 and 1.6 percent relative to a year earlier. Rates of a quarter relative to the prior quarter capture better deceleration of the economy than rates on a quarter relative to the same quarter a year earlier. The critical question for which there is not yet definitive solution is whether what lies ahead is continuing growth recession with the economy crawling and unemployment/underemployment at extremely high levels or another contraction or conventional recession. Forecasts of various sources continued to maintain high growth in 2011 without taking into consideration the continuous slowing of the economy in late 2010 and the first half of 2011. The sovereign debt crisis in the euro area is one of the common sources of doubts on the rate and direction of economic growth in the US but there is weak internal demand in the US with almost no investment and spikes of consumption driven by burning saving because of financial repression forever in the form of zero interest rates.

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

	Real GDP, Billions Chained 2009 Dollars	∆% Relative to IVQ2007	∆% Relative to Prior Quarter	∆% over Year Earlier
IVQ2007	14,996.1	NA	NA	1.9
IQ2008	14,895.4	-0.7	-0.7	1.1
IIQ2008	14,969.2	-0.2	0.5	0.9
IIIQ2008	14,895.1	-0.7	-0.5	-0.3
IVQ2008	14,574.6	-2.8	-2.2	-2.8
IQ2009	14,372.1	-4.2	-1.4	-3.5
IIQ2009	14,356.9	-4.3	-0.1	-4.1
IIIQ2009	14,402.5	-4.0	0.3	-3.3
IV2009	14,540.2	-3.0	1.0	-0.2
IQ2010	14,597.7	-2.7	0.4	1.6
IIQ2010	14,738.0	-1.7	0.9	2.7
IIIQ2010	14,839.3	-1.0	0.7	3.0
IVQ2010	14,942.4	-0.4	0.7	2.8
IQ2011	14,894.0	-0.7	-0.3	2.0
IIQ2011	15,011.3	0.1	0.8	1.9
IIIQ2011	15,062.1	0.4	0.3	1.5
IV2011	15,242.1	1.6	1.2	2.0
IQ2012	15,381.6	2.6	0.9	3.3
IIQ2012	15,427.7	2.9	0.3	2.8
IIIQ2012	15,534.0	3.6	0.7	3.1
IVQ2012	15,539.6	3.6	0.0	2.0
IQ2013	15,583.9	3.9	0.3	1.3
IIQ2013	15,679.7	4.6	0.6	1.6

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

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

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

Source: US Bureau of Economic Analysis

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

The experience of recovery after 2009 is not as complete as during the 1980s. Chart I-11 shows the much lower rates of growth in the early phase of the current expansion and sharp decline from an early peak. The US missed the initial high growth rates in cyclical expansions that eliminate unemployment and underemployment.

Chart I-11, Percentage Change of Real Gross Domestic Product from Quarter a Year Earlier 2007-2013

Source: US Bureau of Economic Analysis

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

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

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

Source: US Bureau of Economic Analysis

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

Chart I-13 provides growth rates in a quarter relative to the prior quarter from 2007 to 2013. Growth in the current expansion after IIIQ2009 has not been as strong as in other postwar cyclical expansions.

Chart I-13, Percentage Change of Real Gross Domestic Product from Prior Quarter 2007-2013

Source: US Bureau of Economic Analysis

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

ESIV Contracting Real Private Fixed Investment. The United States economy has grown at the average yearly rate of 3 percent per year and 2 percent per year in per capita terms from 1870 to 2010, as measured by Lucas (2011May). An important characteristic of the economic cycle in the US has been rapid growth in the initial phase of expansion after recessions.

Inferior performance of the US economy and labor markets is the critical current issue of analysis and policy design. Long-term economic performance in the United States consisted of trend growth of GDP at 3 percent per year and of per capita GDP at 2 percent per year as measured for 1870 to 2010 by Robert E Lucas (2011May). The economy returned to trend growth after adverse events such as wars and recessions. The key characteristic of adversities such as recessions was much higher rates of growth in expansion periods that permitted the economy to recover output, income and employment losses that occurred during the contractions. Over the business cycle, the economy compensated the losses of contractions with higher growth in expansions to maintain trend growth of GDP of 3 percent and of GDP per capita of 2 percent. US economic growth has been at only 2.2 percent on average in the cyclical expansion in the 16 quarters from IIIQ2009 to IIQ2013. 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). There are new calculations using the revision of US GDP and personal income data since 1929 by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm http://bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_adv.pdf http://bea.gov/newsreleases/national/pi/2013/pdf/pi0613.pdf) and the second estimate of GDP for IIQ2013 (http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_3rd.pdf). The average of 7.7 percent in the first four quarters of major cyclical expansions is in contrast with the rate of growth in the first four quarters of the expansion from IIIQ2009 to IIQ2010 of only 2.7 percent obtained by diving GDP of $14,738.0 billion in IIQ2010 by GDP of $14,356.9 billion in IIQ2009 {[$14,738.0/$14,356.9 -1]100 = 2.7%], or accumulating the quarter on quarter growth rates (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/09/increasing-interest-rate-risk.html). The expansion from IQ1983 to IVQ1985 was at the average annual growth rate of 5.7 percent and at 7.8 percent from IQ1983 to IVQ1983 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/09/increasing-interest-rate-risk.html). As a result, there are 28.3 million unemployed or underemployed in the United States for an effective unemployment rate of 17.4 percent (http://cmpassocregulationblog.blogspot.com/2013/09/twenty-eight-million-unemployed-or.html).

Table IA1-1 provides quarterly seasonally adjusted annual rates (SAAR) of growth of private fixed investment for the recessions of the 1980s and the current economic cycle. In the cyclical expansion beginning in IQ1983 (http://www.nber.org/cycles.html), real private fixed investment in the United States grew at the average annual rate of 14.7 percent in the first eight quarters from IQ1983 to IVQ1984. Growth rates fell to an average of 2.2 percent in the following eight quarters from IQ1985 to IVQ1986. There were only two quarters of contraction of private fixed investment from IQ1983 to IVQ1986. There is quite different behavior of private fixed investment in the sixteen quarters of cyclical expansion from IIIQ2009 to IIQ2013. The average annual growth rate in the first eight quarters of expansion from IIIQ2009 to IIQ2011 was 3.3 percent, which is significantly lower than 14.7 percent in the first eight quarters of expansion from IQ1983 to IVQ1984. There is only strong growth of private fixed investment in the four quarters of expansion from IIQ2011 to IQ2012 at the average annual rate of 10.5 percent. Growth has fallen from the SAAR of 14.8 percent in IIIQ2011 to 2.7 percent in IIIQ2012, recovering to 11.6 percent in IVQ2012 and falling to minus 1.5 percent in IQ2013. The SAAR of fixed investment rose to 6.5 percent in IIQ2013. Sudeep Reddy and Scott Thurm, writing on “Investment falls off a cliff,” on Nov 18, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324595904578123593211825394.html?mod=WSJPRO_hpp_LEFTTopStories) analyze the decline of private investment in the US and inform that a review by the Wall Street Journal of filing and conference calls finds that 40 of the largest publicly traded corporations in the US have announced intentions to reduce capital expenditures in 2012. The SAAR of real private fixed investment jumped to 11.6 percent in IVQ2012 but declined to minus 1.5 percent in IQ2013, recovering to 6.5 percent in IIQ2013.

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

Q	1981	1982	1983	1984	2008	2009	2010
I	3.8	-12.2	9.4	13.1	-7.1	-27.4	0.8
II	3.2	-12.1	16.0	16.6	-5.5	-14.2	13.6
III	0.1	-9.3	24.4	8.2	-12.1	-0.5	-0.4
IV	-1.5	0.2	24.3	7.3	-23.9	-2.8	8.5
				1985			2011
I				3.7			-0.5
II				5.2			8.6
III				-1.6			14.8
IV				7.8			10.0
				1986			2012
I				1.1			8.6
II				0.1			4.7
III				-1.8			2.7
IV				3.1			11.6
				1987			2013
I				-6.7			-1.5
II				6.3			6.5
III				7.1
IV				-0.2

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

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

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

Source: US Bureau of Economic Analysis

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

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

Chart IA1-2, US, Real Private Fixed Investment, Seasonally-Adjusted Annual Rates Percent Change from Prior Quarter, 2007-2013

Source: US Bureau of Economic Analysis

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

Table IA1-2 provides real private fixed investment at seasonally adjusted annual rates from IVQ2007 to IIQ2013 or for the complete economic cycle. The first column provides the quarter, the second column percentage change relative to IVQ2007, the third column the quarter percentage change in the quarter relative to the prior quarter and the final column percentage change in a quarter relative to the same quarter a year earlier. In IQ1980, gross private domestic investment in the US was $951.6 billion of 2009 dollars, growing to $1,143.0 billion in IVQ1986 or 20.1 percent. Real gross private domestic investment in the US decreased 3.1 percent from $2,605.2 billion of 2009 dollars in IVQ2007 to $2,524.9 billion in IIQ2013. As shown in Table IAI-2, real private fixed investment fell 4.9 percent from $2,586.3 billion of 2009 dollars in IVQ2007 to $2,458.4 billion in IIQ2013. Growth of real private investment in Table IA1-2 is mediocre for all but four quarters from IIQ2011 to IQ2012.

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

	Real PFI, Billions Chained 2005 Dollars	∆% Relative to IVQ2007	∆% Relative to Prior Quarter	∆% over Year Earlier
IVQ2007	2586.3	NA	-1.2	-1.4
IQ2008	2539.1	-1.8	-1.8	-3.0
IIQ2008	2503.4	-3.2	-1.4	-4.6
IIIQ2008	2424.1	-6.3	-3.2	-7.1
IV2008	2263.8	-12.5	-6.6	-12.5
IQ2009	2089.3	-19.2	-7.7	-17.7
IIQ2009	2011.0	-22.2	-3.7	-19.7
IIIQ2009	2008.4	-22.3	-0.1	-17.1
IVQ2009	1994.1	-22.9	-0.7	-11.9
IQ2010	1997.9	-22.8	0.2	-4.4
IIQ2010	2062.8	-20.2	3.2	2.6
IIIQ2010	2060.8	-20.3	-0.1	2.6
IVQ2010	2103.1	-18.7	2.1	5.5
IQ2011	2100.7	-18.8	-0.1	5.1
IIQ2011	2144.4	-17.1	2.1	4.0
IIIQ2011	2219.8	-14.2	3.5	7.7
IVQ2011	2273.4	-12.1	2.4	8.1
IQ2012	2320.8	-10.3	2.1	10.5
IIQ2012	2347.9	-9.2	1.2	9.5
IIIQ2012	2363.5	-8.6	0.7	6.5
IVQ2012	2429.1	-6.1	2.8	6.8
IQ2013	2420.0	-6.4	-0.4	4.3
IIQ2013	2458.4	-4.9	1.6	4.7

PFI: Private Fixed Investment

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

Chart IA1-3 provides real private fixed investment in billions of chained 2009 dollars from IV2007 to IIQ2013. Real private fixed investment has not recovered, stabilizing at a level in IIQ2013 that is 4.9 percent below the level in IVQ2007.

Chart IA1-3, US, Real Private Fixed Investment, Billions of Chained 2005 Dollars, IQ2007 to IIQ2013

Source: US Bureau of Economic Analysis

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

Chart IA1-4 provides real gross private domestic investment in chained dollars of 2009 from 1980 to 1986. Real gross private domestic investment climbed 20.1 percent to $1143.0 billion of 2009 dollars in IVQ1986 above the level of $951.6 billion in IQ1980.

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

Source: US Bureau of Economic Analysis

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

Chart IA1-5 provides real gross private domestic investment in the United States in billions of dollars of 2009 from 2006 to 2013. Gross private domestic investment reached a level of $2524.9 in IIQ2013 of that was 3.1 percent lower than the level of $2605.2 billion in IVQ2007 (http://www.bea.gov/iTable/index_nipa.cfm).

Chart IA1-5, US, Real Gross Private Domestic Investment, Billions of Chained 2005 Dollars at Seasonally Adjusted Annual Rate, 2007-2013

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

ESV Swelling Undistributed Corporate Profits. Table IA1-5 provides value added of corporate business, dividends and corporate profits in billions of current dollars at seasonally adjusted annual rates (SAAR) in IVQ2007 and IIQ2013 together with percentage changes. The last three rows of Table IA1-5 provide gross value added of nonfinancial corporate business, consumption of fixed capital and net value added in billions of chained 2009 dollars at SAARs. Deductions from gross value added of corporate profits down the rows of Table IA1-5 end with undistributed corporate profits. Profits after taxes with inventory valuation adjustment (IVA) and capital consumption adjustment (CCA) increased by 100.0 percent in nominal terms from IVQ2007 to IIQ2013 while net dividends increased 26.9 percent and undistributed corporate profits swelled 263.4 percent from $107.7 billion in IQ2007 to $391.4 billion in IIQ2013 and changed signs from minus $55.9 billion in current dollars in IVQ2007. The investment decision of United States corporations has been fractured in the current economic cycle in preference of cash. Gross value added of nonfinancial corporate business adjusted for inflation increased 4.7 percent from IVQ2007 to IIQ2013, which is much lower than nominal increase of 15.3 percent in the same period for gross value added of total corporate business.

Table IA1-5, US, Value Added of Corporate Business, Corporate Profits and Dividends, IVQ2007-IQ2013

	IVQ2007	IIQ2013	∆%
Current Billions of Dollars Seasonally Adjusted Annual Rates (SAAR)
Gross Value Added of Corporate Business	8,165.9	9,414.0	15.3
Consumption of Fixed Capital	1,216.5	1,415.7	16.4
Net Value Added	6,949.4	7,998.3	15.1
Compensation of Employees	4,945.8	5,350.3	8.2
Taxes on Production and Imports Less Subsidies	688.5	752.1	9.2
Net Operating Surplus	1,315.1	1,895.9	44.2
Net Interest and Misc	204.2	113.4	-44.5
Business Current Transfer Payment Net	68.9	98.2	42.5
Corporate Profits with IVA and CCA Adjustments	1,042.0	1,684.3	61.6
Taxes on Corporate Income	408.8	418.2	2.3
Profits after Tax with IVA and CCA Adjustment	633.2	1,266.1	100.0
Net Dividends	689.1	874.7	26.9
Undistributed Profits with IVA and CCA Adjustment	-55.9	391.4	NA
Billions of Chained USD 2009 SAAR
Gross Value Added of Nonfinancial Corporate Business	7,519.3	7,873.6	4.7
Consumption of Fixed Capital	1,066.0	1,164.7	9.3
Net Value Added	6,453.4	6,708.9	4.0

IVA: Inventory Valuation Adjustment; CCA: Capital Consumption Adjustment

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

Table IA1-6 provides comparable United States value added of corporate business, corporate profits and dividends from IQ1980 to IIIQ1986. There is significant difference both in nominal and inflation-adjusted data. Between IQ1980 and IIIQ1986, profits after tax with IVA and CCA increased 68.6 percent with dividends growing 110.0 percent and undistributed profits increasing 40.0 percent. There was much higher inflation in the 1980s than in the current cycle. For example, the consumer price index for all items not seasonally adjusted increased 37.9 percent between Mar 1980 and Dec 1986 but only 11.2 percent between Dec 2007 and Jun 2013 (http://www.bls.gov/cpi/data.htm). The comparison is still valid in terms of inflation-adjusted data: gross value added of nonfinancial corporate business adjusted for inflation increased 23.7 percent between IQ1980 and IIIQ1986 but only 4.6 percent between IVQ2007 and IIQ2013 while net value added adjusted for inflation increased 22.4 percent between IQ1980 and IIIQ1986 but only 4.0 percent between IVQ2007 and IIQ2013.

Table IA1-6, US, Value Added of Corporate Business, Corporate Profits and Dividends, IQ1980-IVQ1985

	IQ1980	IIIQ1986	∆%
Current Billions of Dollars Seasonally Adjusted Annual Rates (SAAR)
Gross Value Added of Corporate Business	1,654.1	2,713.5	64.0
Consumption of Fixed Capital	200.5	352.7	75.9
Net Value Added	1,453.6	2,360.9	62.4
Compensation of Employees	1,072.9	1,732.1	61.4
Taxes on Production and Imports Less Subsidies	121.5	220.9	81.8
Net Operating Surplus	259.2	408.0	57.4
Net Interest and Misc.	50.4	105.4	109.1
Business Current Transfer Payment Net	11.5	26.4	129.6
Corporate Profits with IVA and CCA Adjustments	197.2	276.2	40.1
Taxes on Corporate Income	97.0	107.3	10.6
Profits after Tax with IVA and CCA Adjustment	100.2	168.9	68.6
Net Dividends	40.9	85.9	110.0
Undistributed Profits with IVA and CCA Adjustment	59.3	83.0	40.0
Billions of Chained USD 2009 SAAR
Gross Value Added of Nonfinancial Corporate Business	2,952.3	3,651.9	23.7
Consumption of Fixed Capital	315.6	423.6	34.2
Net Value Added	2,636.7	3,228.3	22.4

IVA: Inventory Valuation Adjustment; CCA: Capital Consumption Adjustment

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

Chart IA1-12 of the US Bureau of Economic Analysis provides quarterly corporate profits after tax and undistributed profits with IVA and CCA from 1979 to 2013. There is tightness between the series of quarterly corporate profits and undistributed profits in the 1980s with significant gap developing from 1988 and to the present with the closest approximation peaking in IVQ2005 and surrounding quarters. These gaps widened during all recessions including in 1991 and 2001 and recovered in expansions with exceptionally weak performance in the current expansion.

Chart IA1-14, US, Corporate Profits after Tax and Undistributed Profits with Inventory Valuation Adjustment and Capital Consumption Adjustment, Quarterly, 1979-2013

Source: US Bureau of Economic Analysis

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

ESVI Stagnating Real Disposable Income and Consumption Expenditures. The Bureau of Economic Analysis (BEA) provides a wealth of revisions and enhancements of US personal income and outlays since 1929 (http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0613.pdf http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0713.pdf http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0813.pdf http://www.bea.gov/iTable/index_nipa.cfm). Table IB-4 provides growth rates of real disposable income and real disposable income per capita in the long-term and selected periods. Real disposable income consists of after-tax income adjusted for inflation. Real disposable income per capita is income per person after taxes and inflation. There is remarkable long-term trend of real disposable income of 3.2 percent per year on average from 1929 to 2012 and 2.0 percent in real disposable income per capita. Real disposable income increased at the average yearly rate of 3.7 percent from 1947 to 1999 and real disposable income per capita at 2.3 percent. These rates of increase broadly accompany rates of growth of GDP. Institutional arrangements in the United States provided the environment for growth of output and income after taxes, inflation and population growth. There is significant break of growth by much lower 2.4 percent for real disposable income on average from 1999 to 2012 and 1.5 percent in real disposable per capita income. Real disposable income grew at 3.5 percent from 1980 to 1989 and real disposable per capita income at 2.6 percent. In contrast, real disposable income grew at only 1.4 percent on average from 2006 to 2012 and real disposable income at 0.6 percent. The United States has interrupted its long-term and cyclical dynamism of output, income and employment growth. Recovery of this dynamism could prove to be a major challenge.

Table IB-4, Average Annual Growth Rates of Real Disposable Income (RDPI) and Real Disposable Income per Capita (RDPIPC), Percent per Year 

RDPI Average ∆%
1929-2012	3.2
1947-1999	3.7
1999-2012	2.4
1999-2006	3.2
1980-1989	3.5
2006-2012	1.4
RDPIPC Average ∆%
1929-2012	2.0
1947-1999	2.3
1999-2012	1.5
1999-2006	2.2
1980-1989	2.6
2006-2012	0.6

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

Chart IB-3 provides personal income in the US between 1980 and 1989. These data are not adjusted for inflation that was still high in the 1980s in the exit from the Great Inflation of the 1960s and 1970s. Personal income grew steadily during the 1980s after recovery from two recessions from Jan IQ1980 to Jul IIIQ1980 and from Jul IIIQ1981 to Nov IVQ1982.

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

Source: US Bureau of Economic Analysis

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

A different evolution of personal income is shown in Chart IB-4. Personal income also fell during the recession from Dec IVQ2007 to Jun IIQ2009 (http://www.nber.org/cycles.html). Growth of personal income during the expansion has been tepid even with the new revisions. In IVQ2012, nominal disposable personal income grew at the SAAR of 11.9 percent and real disposable personal income at 9.0 percent (http://www.bea.gov/iTable/index_nipa.cfm http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0713.pdf http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0813.pdf http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0613.pdf), which the BEA explains as: “Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf pages 1-2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0113.pdf). The Bureau of Economic Analysis explains as (http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0213.pdf 2-3): “The January estimate of employee contributions for government social insurance reflected the expiration of the “payroll tax holiday,” that increased the social security contribution rate for employees and self-employed workers by 2.0 percentage points, or $114.1 billion at an annual rate. For additional information, see FAQ on “How did the expiration of the payroll tax holiday affect personal income for January 2013?” at www.bea.gov. The January estimate of employee contributions for government social insurance also reflected an increase in the monthly premiums paid by participants in the supplementary medical insurance program, in the hospital insurance provisions of the Patient Protection and Affordable Care Act, and in the social security taxable wage base.”

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

In IQ2013, personal income fell at the SAAR of minus 4.1 percent; real personal income excluding current transfer receipts at minus 7.2 percent; and real disposable personal income at minus 7.9 percent (Table 6 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0813.pdf). The BEA explains as follows (page 3 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0313.pdf):

“The February and January changes in disposable personal income (DPI) mainly reflected the effect of special factors in January, such as the expiration of the “payroll tax holiday” and the acceleration of bonuses and personal dividends to November and to December in anticipation of changes in individual tax rates.”

In IIQ2013, personal income grew at 4.1 percent, real personal income excluding current transfer receipts at 4.9 percent and real disposable income at 3.5 percent (http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0813.pdf).

Chart IB-4, US, Personal Income, Current Billions of Dollars, Quarterly Seasonally Adjusted at Annual Rates, 2007-2013

Source: US Bureau of Economic Analysis

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

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

Chart IB-5, US, Real Disposable Income, Billions of Chained 2009 Dollars, Quarterly Seasonally Adjusted at Annual Rates 1980-1989

Source: US Bureau of Economic Analysis

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

In IQ2013, personal income fell at the SAAR of minus 4.1 percent; real personal income excluding current transfer receipts at minus 7.2 percent; and real disposable personal income at minus 7.9 percent (Table 6 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0813.pdf)The BEA explains as follows (page 3 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0313.pdf):

“The February and January changes in disposable personal income (DPI) mainly reflected the effect of special factors in January, such as the expiration of the “payroll tax holiday” and the acceleration of bonuses and personal dividends to November and to December in anticipation of changes in individual tax rates.”

This is the explanation for the decline in IQ2013 in Chart IB-6. In IIQ2013, personal income increased at 4.1 percent, real disposable income excluding current transfer receipts at 4.9 percent and real disposable income at 3.5 percent (http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0813.pdf).

Chart IB-6, US, Real Disposable Income, Billions of Chained 2009 Dollars, Quarterly Seasonally Adjusted at Annual Rates, 2007-2013

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

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

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

Source: US Bureau of Economic Analysis

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

Chart IB-8 provides percentage quarterly changes in real disposable income from the preceding period at seasonally adjusted annual rates from 2007 to 2013. There has been a period of positive rates followed by decline of rates and then negative and low rates in 2011. Recovery in 2012 has not reproduced the dynamism of the brief early phase of expansion. In IVQ2012, nominal disposable personal income grew at the SAAR of 10.7 percent and real disposable personal income at 9.0 percent (http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0813.pdf), which the BEA explains as: “Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf). In IQ2013, personal income fell at the SAAR of minus 4.1 percent; real personal income excluding current transfer receipts at minus 7.2 percent; and real disposable personal income at minus 7.9 percent (Table 6 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0713.pdf). The BEA explains as follows (page 3 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0313.pdf):

“The February and January changes in disposable personal income (DPI) mainly reflected the effect of special factors in January, such as the expiration of the “payroll tax holiday” and the acceleration of bonuses and personal dividends to November and to December in anticipation of changes in individual tax rates.”

In IIQ2013, personal income grew at 4.1 percent, real personal income excluding current transfer receipts at 4.9 percent and real disposable personal income at 3.5 percent (http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0813.pdf).

Chart, IB-8, US, Real Disposable Income, Percentage Change from Preceding Period at Seasonally-Adjusted Annual Rates, 2007-2013

Source: US Bureau of Economic Analysis

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

In the latest available report, the Bureau of Economic Analysis (BEA) estimates US personal income in Aug 2013 at the seasonally adjusted annual rate of $14,188.2 billion, as shown in Table IB-3 above (see Table 1 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0813.pdf). The major portion of personal income is compensation of employees of $8,855.9 billion, or 62.4 percent of the total. Wages and salaries are $7,132.8 billion, of which $5,945.4 billion by private industries and supplements to wages and salaries of $1,723.1 billion (employer contributions to pension and insurance funds are $1,192.7 billion and contributions to social insurance are $530.4 billion). In Aug 1985, US personal income was $3,748.9 billion at SAAR (http://www.bea.gov/iTable/index_nipa.cfm). Compensation of employees was $2,559.0 billion, or 68.3 percent of the total. Wages and salaries were $2,113.6 billion of which $1714.4 billion by private industries. Supplements to wages and salaries were $445.4 billion with employer contributions to pension and insurance funds of $286.5 billion and $157.9 billion to government social insurance. Chart IB-9 provides US wages and salaries by private industries in the 1980s. Growth was robust after the interruption of the recessions.

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

Source: US Bureau of Economic Analysis

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

Chart II-10 shows US wages and salaries of private industries from 2007 to 2012. There is a drop during the contraction followed by initial recovery in 2010 and then the current much weaker relative performance in 2011, 2012 and 2013.

Chart IB-10, US, Wage and Salary Disbursement, Private Industries, Quarterly, Seasonally Adjusted at Annual Rates, Billions of Dollars 2007-2013

Source: US Bureau of Economic Analysis

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

Chart IB-11 provides finer detail with monthly wages and salaries of private industries from 2007 to 2013. Total wages and salaries decreased 0.9 percent from Dec 2012 to Aug 2013, as shown in Table IB-3.

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

Source: US Bureau of Economic Analysis

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

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

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

Source: US Bureau of Economic Analysis

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

Chart IB-13 provides monthly real disposable personal per capita from 2007 to 2013. There was initial recovery from the drop during the global recession followed by stagnation. Real per capita disposable income increased 1.2 percent from $36,580 in chained dollars of 2009 in Oct 2012 to $37,030 in Nov 2012 and 3.1 percent to $38,170 in Dec 2012 for cumulative increase of 4.3 percent from Oct 2012 to Dec 2012. Real per capita disposable income fell 5.2 percent from $38,170 in Dec 2012 to $36,190 in Jan 2013, increasing marginally 0.8 percent to $36,497 in Feb 2013 for cumulative change of minus 0.2 percent from Oct 2012 (data at http://www.bea.gov/iTable/index_nipa.cfm). This increase is shown in a jump in the final segment in Chart II-13 with Nov-Dec 2012, decline in Jan 2013 and recovery in Feb 2013. Real per capita disposable income increased 0.4 percent from $36,497 in Feb 2013 in chained dollars of 2009 to $36,626 in Mar 2013 for cumulative increase of 0.1 percent relative to Oct 2012. Real per capita disposable income increased to $36,734 in May 2013 for gain of 0.2 percent relative to $36,676 in Apr 2013 and 0.4 percent from Oct 2012. Real disposable per capita income eased to $36,668 in Jun 2013 for decrease of 0.2 percent relative to May 2013 and increase of 0.2 percent relative to Oct 2012. Real disposable income per capita increased 0.1 percent from $36,668 in Jun 2013 to $36,707 in Jul 2013 and 0.3 percent relative to $36,580 in Oct 2013. Real per capita disposable income increased to $36,797 in Aug 2013 or 0.2 percent higher than in Jul 2013 and 0.6 percent above Oct 2012. BEA explains as: “Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf pages 1-2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0113.pdf). The Bureau of Economic Analysis explains as (http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0213.pdf 2-3): “The January estimate of employee contributions for government social insurance reflected the expiration of the “payroll tax holiday,” that increased the social security contribution rate for employees and self-employed workers by 2.0 percentage points, or $114.1 billion at an annual rate. For additional information, see FAQ on “How did the expiration of the payroll tax holiday affect personal income for January 2013?” at www.bea.gov. The January estimate of employee contributions for government social insurance also reflected an increase in the monthly premiums paid by participants in the supplementary medical insurance program, in the hospital insurance provisions of the Patient Protection and Affordable Care Act, and in the social security taxable wage base.”

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

The BEA explains as follows (page 3 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0313.pdf):

“The February and January changes in disposable personal income (DPI) mainly reflected the effect of special factors in January, such as the expiration of the “payroll tax holiday” and the acceleration of bonuses and personal dividends to November and to December in anticipation of changes in individual tax rates.”

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

Source: US Bureau of Economic Analysis

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

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

Most regulatory actions trigger compensatory measures by the private sector that result in outcomes that are different from those intended by regulation (Kydland and Prescott 1977). Banks offered services to their customers and loans at rates lower than market rates to compensate for the prohibition to pay interest on demand deposits (Friedman 1970, 24). The prohibition of interest on demand deposits was eventually lifted in recent times. In the second half of the 1960s, already in the beginning of the Great Inflation (DeLong 1997), market rates rose above the ceilings of Regulation Q because of higher inflation. Nobody desires savings allocated to time or savings deposits that pay less than expected inflation. This is a fact currently with zero interest rates and consumer price inflation of 2.0 percent in the 12 months ending in Feb 2013 (http://www.bls.gov/cpi/) but rising during waves of carry trades from zero interest rates to commodity futures exposures (http://cmpassocregulationblog.blogspot.com/2013/03/recovery-without-hiring-ten-million.html). Funding problems motivated compensatory measures by banks. Money-center banks developed the large certificate of deposit (CD) to accommodate increasing volumes of loan demand by customers. As Friedman (1970, 25) finds:

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

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

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

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

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

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

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

Chart IB-14 of the Bureau of Economic Analysis (BEA) provides quarterly savings as percent of disposable income or the US savings rate from 1980 to 2013. There was a long-term downward sloping trend from 12 percent in the early 1980s to 2.0 percent in Jul 2005. The savings rate then rose during the contraction and in the expansion. In 2011 and into 2012 the savings rate declined as consumption is financed with savings in part because of the disincentive or frustration of receiving a few pennies for every $10,000 of deposits in a bank. The savings rate increased in the final segment of Chart IB-14 in 2012 followed by another decline because of the pain of the opportunity cost of zero remuneration for hard-earned savings. Swelling realization of income in Oct-Dec 2012 in anticipation of tax increases in Jan 2012 caused the jump of the savings rate to 8.7 percent in Dec 2012. The BEA explains as: Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf). The savings rate then collapsed to 3.6 percent in Jan 2013 in part because of the decline of 5.1 percent in real disposable personal income and to 4.2 percent with increase of real disposable income by 0.9 percent in Feb 2013. The savings rate increased to 4.3 percent in Mar 2013 with increase of real disposable income by 0.4 percent and at 4.5 percent in Apr 2013 with increase of real disposable income by 0.2 percent. The savings rate rose to 4.7 percent in May 2013 with increase of real disposable income by 0.2 percent. The savings rate fell to 4.4 percent in Jun 2013 with decline of real disposable personal income by 0.1 percent. The savings rate increased to 4.5 percent in Jul 2013 with increase of real disposable income by 0.3 percent. In Aug 2013, real disposable income increased 0.3 percent and the savings rate increased to 4.6 percent. The decline of personal income was caused by increasing contributions to government social insurance (page 1 http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0113.pdf http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0213.pdf). The objective of monetary policy is to reduce borrowing rates to induce consumption but it has collateral disincentive of reducing savings and misallocating resources away from their best uses. The zero interest rate of monetary policy is a tax on saving. This tax is highly regressive, meaning that it affects the most people with lower income or wealth and retirees. The long-term decline of savings rates in the US has created a dependence on foreign savings to finance the deficits in the federal budget and the balance of payments.

Chart IB-14, US, Personal Savings as a Percentage of Disposable Personal Income, Quarterly, 1980-2013

Source: US Bureau of Economic Analysis

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

Chart IB-15 of the US Bureau of Economic Analysis provides personal savings as percent of personal disposable income, or savings ratio, from Jan 2007 to Aug 2013. The uncertainties caused by the global recession resulted in sharp increase in the savings ratio that peaked at 8.0 percent in May 2008 (http://www.bea.gov/iTable/index_nipa.cfm). The second peak occurred at 8.1 percent in May 2009. There was another rising trend until 5.9 percent in Jun 2010 and then steady downward trend until 4.8 percent in Nov 2011. This was followed by an upward trend with 5.6 percent in Jun 2012 but decline to 4.9 percent in Aug 2012 followed by jump to 8.7 percent in Dec 2012. Swelling realization of income in Oct-Dec 2012 in anticipation of tax increases in Jan 2013 caused the jump of the savings rate to 8.7 percent in Dec 2012. The BEA explains as: Personal income in November and December was boosted by accelerated and special dividend payments to persons and by accelerated bonus payments and other irregular pay in private wages and salaries in anticipation of changes in individual income tax rates. Personal income in December was also boosted by lump-sum social security benefit payments” (page 2 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1212.pdf). There was a reverse effect in Jan 2013 with decline of the savings rate to 3.6 percent. Real disposable personal income fell 5.1 percent and real disposable per capita income fell from $38,170 in Dec 2012 to $36,190 in Jan 2013 or by 5.2 percent, which is explained by the Bureau of Economic Analysis as follows (page 3 http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0213.pdf):

“Contributions for government social insurance -- a subtraction in calculating personal income --increased $6.4 billion in February, compared with an increase of $126.8 billion in January. The

January estimate reflected increases in both employer and employee contributions forgovernment social insurance. The January estimate of employee contributions for government social insurance reflected the expiration of the “payroll tax holiday,” that increased the social security contribution rate for employees and self-employed workers by 2.0 percentage points, or $114.1 billion at an annual rate. For additional information, see FAQ on “How did the expiration of the payroll tax holiday affect personal income for January 2013?” at www.bea.gov. The January estimate of employee contributions for government social insurance also reflected an increase in the monthly premiums paid by participants in the supplementary medical insurance program, in the hospital insurance provisions of the Patient Protection and Affordable Care Act, and in the social security taxable wage base; together, these changes added $12.9 billion to January. Employer contributions were boosted $5.9 billion in January, which reflected increases in the social security taxable wage base (from $110,100 to $113,700), in the tax rates paid by employers to state unemployment insurance, and in employer contributions for the federal unemployment tax and for pension guaranty. The total contribution of special factors to the January change in contributions for government social insurance was $132.9billion.”

The savings rate then collapsed to 3.6 percent in Jan 2013 in part because of the decline of 5.1 percent in real disposable personal income and to 4.2 percent with increase of real disposable income by 0.9 percent in Feb 2013. The savings rate increased to 4.3 percent in Mar 2013 with increase of real disposable income by 0.4 percent and at 4.5 percent in Apr 2013 with increase of real disposable income by 0.2 percent. The savings rate rose to 4.7 percent in May 2013 with increase of real disposable income by 0.2 percent. The savings rate fell to 4.4 percent in Jun 2013 with decline of real disposable personal income by 0.1 percent. The savings rate increased to 4.5 percent in Jul 2013 with increase of real disposable income by 0.2 percent. The savings rate increased to 4.6 percent in Aug 2013 with increase of real disposable income by 0.3 percent. The decline of personal income was caused by increasing contributions to government social insurance (page 1 http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0113.pdf http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0213.pdf). Permanent manipulation of the entire spectrum of interest rates with monetary policy measures distorts the compass of resource allocation with inferior outcomes of future growth, employment and prosperity and dubious redistribution of income and wealth worsening the most the personal welfare of people without vast capital and financial relations to manage their savings.

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

Source: US Bureau of Economic Analysis

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

ESVIII Destruction of Household Wealth for Inflation Adjusted Loss. The Flow of Funds Accounts of the United States provided by the Board of Governors of the Federal Reserve System (http://www.federalreserve.gov/releases/z1/Current/ http://www.federalreserve.gov/apps/fof/) is rich in valuable information. Table IIA-1, updated in this blog for every new quarterly release, shows the balance sheet of US households combined with nonprofit organizations in 2007, 2011, 2012 and IIQ2013. The data show the strong shock to US wealth during the contraction. Assets fell from $82.3 trillion in 2007 to $78.3 trillion in 2011 even after nine consecutive quarters of growth beginning in IIIQ2009 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/09/increasing-interest-rate-risk.html http://wwwdev.nber.org/cycles/cyclesmain.html), for decline of $4.0 trillion or 4.9 percent. Assets stood at $84.2 trillion in 2012 for gain of $1.9 trillion relative to $82.3 trillion in 2007 or increase by 2.4 percent. Assets increased to $88.4 trillion in IIQ2013 by $6.1 trillion relative to 2007 or 7.4 percent. Liabilities declined from $14.4 trillion in 2007 to $13.6 trillion in 2011 or by $802.8 billion equivalent to decline by 5.6 percent. Liabilities declined $773.1 billion or 5.4 percent from 2007 to 2012 and increased 0.2 percent from 2011 to 2012. Liabilities fell from $14.4 trillion in 2007 to $13.5 trillion in IIQ2013, by $822.7 billion or decline of 5.7 percent. Net worth shrank from $67.9 trillion in 2007 to $64.7 trillion in 2011, that is, $3.2 trillion equivalent to decline of 4.7 percent. Net worth increased from $67,918.6 billion in 2007 to $74,820.9 billion in IIQ2013 by $6,902.3 billion or 10.2 percent. The US consumer price index for all items increased from 210.036 in Dec 2007 to 233.504 in Jun 2013 (http://www.bls.gov/cpi/data.htm) or 11.2 percent. Net worth adjusted by CPI inflation fell 0.9 percent from 2007 to IIQ2013. There was brutal decline from 2007 to IIQ2013 of $2.325 trillion in real estate assets or by 9.9 percent. The National Association of Realtors estimated that the gains in net worth in homes by Americans were about $4 trillion between 2000 and 2005 (quoted in Pelaez and Pelaez, The Global Recession Risk (2007), 224-5).

Table IIA-1, US, Balance Sheet of Households and Nonprofit Organizations, Billions of Dollars Outstanding End of Period, NSA

	2007	2011	2012	IIQ2013
Assets	82,289.6	78,265.0	84,238.9	88,369.4
Nonfinancial	28,271.6	23,251.3	24,934.3	26,516.1
Real Estate	23,448.6	18,096.7	19,638.0	21,123.5
Durable Goods	4,476.0	4,726.4	4,848.0	4,937.3
Financial	54,018.1	55,013.7	59,304.6	61,853.3
Deposits	6,158.2	8,572.4	8,997.8	9,025.5
Credit   Market	5,039.8	5,467.4	5,575.2	5,505.7
Mutual Fund Shares	4,687.9	4,452.3	5,315.9	5,864.7
Equities Corporate	10,113.4	9,045.8	10,322.0	11,461.7
Equity Noncorporate	9,101.4	7,528.4	8,186.3	8,373.8
Pension	13,269.2	17,115.2	18,075.1	18,736.6
Liabilities	14,371.1	13,568.3	13,598.0	13,548.4
Home Mortgages	9,978.7	9,677.8	9,436.3	9,344.8
Consumer Credit	2,616.6	2,757.2	2,924.3	2,966.2
Net Worth	67,918.6	64,696.7	70,640.8	74,820.9

Net Worth = Assets – Liabilities

Source: Board of Governors of the Federal Reserve System. 2013. Flow of funds, balance sheets and integrated macroeconomic accounts: second quarter 2013. Washington, DC, Federal Reserve System, Sep 25.

http://www.federalreserve.gov/releases/Z1/Current/

Table IIA-4 summarizes the brutal drops in assets and net worth of US households and nonprofit organizations from 2007 to 2008 and 2009. Total assets fell $10.8 trillion or 13.2 percent from 2007 to 2008 and $9.4 trillion or 11.4 percent to 2009. Net worth fell $10.7 trillion from 2007 to 2008 or 15.8 percent and $9.6 trillion to 2009 or 14.2 percent. Subsidies to housing prolonged over decades together with interest rates at 1.0 percent from Jun 2003 to Jun 2004 inflated valuations of real estate and risk financial assets such as equities. The increase of fed funds rates by 25 basis points until 5.25 percent in Jun 2006 reversed carry trades through exotic vehicles such as subprime adjustable rate mortgages (ARM) and world financial markets. Short-term zero interest rates encourage financing of everything with short-dated funds, explaining the SIVs created off-balance sheet to issue short-term commercial paper to purchase default-prone mortgages that were financed in overnight or short-dated sale and repurchase agreements (Pelaez and Pelaez, Financial Regulation after the Global Recession, 50-1, Regulation of Banks and Finance, 59-60, Globalization and the State Vol. I, 89-92, Globalization and the State Vol. II, 198-9, Government Intervention in Globalization, 62-3, International Financial Architecture, 144-9).

Table IIA-4, Difference of Balance Sheet of Households and Nonprofit Organizations, Billions of Dollars from 2007 to 2008 and 2009

	2007	2008	Change to 2008	2009	Change to 2009
A	82,289.6	71,448.5	-10,841.1	72,931.6	-9,358.0
Non FIN	28,271.6	24,831.9	-3,439.7	23,657.3	-4,614.3
RE	23,448.6	19,879.5	-3,569.1	18,679.7	-4,768.9
FIN	54,918.1	46,616.5	-8,301.6	49,274.3	-5,643.8
LIAB	14,371.1	14,234.4	-136.7	14,011.7	-359.4
NW	67,918.6	57,214.1	-10,704.5	58,290.0	-9,628.6

Source: Board of Governors of the Federal Reserve System. 2013. Flow of funds, balance sheets and integrated macroeconomic accounts: second quarter 2013. Washington, DC, Federal Reserve System, Sep 25.

http://www.federalreserve.gov/releases/Z1/Current/

The apparent improvement in Table IIA-4A is mostly because of increases in valuations of risk financial assets by the carry trade from zero interest rates to leveraged exposures in risk financial assets such as stocks, high-yield bonds, emerging markets, commodities and so on. Zero interest rates also act to increase net worth by reducing debt or liabilities. The net worth of households has become an instrument of unconventional monetary policy by zero interest rates in the theory that increases in net worth increase consumption that accounts for 68.6 percent of GDP in IIQ2013 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/09/increasing-interest-rate-risk.html), generating demand to increase aggregate economic activity and employment. There are neglected and counterproductive risks in unconventional monetary policy. Between 2007 and IIQ2013, real estate fell in value by $2325.1 billion and financial assets increased $7835.2 billion for net gain of real estate and financial assets of $5510.1billion, explaining most of the increase in net worth of $6902.3 billion obtained by adding the decrease in liabilities of $822.7 billion to the increase of assets of $6079.8 billion. Net worth increased from $67,918.6 billion in 2007 to $74,820.9 billion in IIQ2013 by $6902.3 billion or 10.2 percent. The US consumer price index for all items increased from 210.036 in Dec 2007 to 233.504 in Jun 2013 (http://www.bls.gov/cpi/data.htm) or 11.2 percent. Net worth adjusted by CPI inflation fell 0.9 percent from 2007 to IIQ2013. There are multiple complaints that unconventional monetary policy concentrates income on wealthier individuals because of their holdings of financial assets while the middle class has gained less because of fewer holdings of financial assets and higher share of real estate in family wealth. There is nothing new in these arguments. Interest rate ceilings on deposits and loans have been commonly used. The Banking Act of 1933 imposed prohibition of payment of interest on demand deposits and ceilings on interest rates on time deposits. These measures were justified by arguments that the banking panic of the 1930s was caused by competitive rates on bank deposits that led banks to engage in high-risk loans (Friedman, 1970, 18; see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 74-5). The objective of policy was to prevent unsound loans in banks. Savings and loan institutions complained of unfair competition from commercial banks that led to continuing controls with the objective of directing savings toward residential construction. Friedman (1970, 15) argues that controls were passive during periods when rates implied on demand deposit were zero or lower and when Regulation Q ceilings on time deposits were above market rates on time deposits. The Great Inflation or stagflation of the 1960s and 1970s changed the relevance of Regulation Q. Friedman (1970, 26-7) predicted the future:

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

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

“These are the people who have the fewest alternative ways to invest their limited assets and are least sophisticated about the alternatives.” US economic growth has been at only 2.2 percent on average in the cyclical expansion in the 16 quarters from IIIQ2009 to IIQ2013. 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). There are new calculations using the revision of US GDP and personal income data since 1929 by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm http://bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_adv.pdf http://bea.gov/newsreleases/national/pi/2013/pdf/pi0613.pdf) and the second estimate of GDP for IIQ2013 (http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_3rd.pdf). The average of 7.7 percent in the first four quarters of major cyclical expansions is in contrast with the rate of growth in the first four quarters of the expansion from IIIQ2009 to IIQ2010 of only 2.7 percent obtained by diving GDP of $14,738.0 billion in IIQ2010 by GDP of $14,356.9 billion in IIQ2009 {[$14,738.0/$14,356.9 -1]100 = 2.7%], or accumulating the quarter on quarter growth rates (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/09/increasing-interest-rate-risk.html). The expansion from IQ1983 to IVQ1985 was at the average annual growth rate of 5.7 percent and at 7.8 percent from IQ1983 to IVQ1983 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/09/increasing-interest-rate-risk.html). As a result, there are 28.3 million unemployed or underemployed in the United States for an effective unemployment rate of 17.4 percent (http://cmpassocregulationblog.blogspot.com/2013/09/twenty-eight-million-unemployed-or.html). The US missed the opportunity to recover employment as in past cyclical expansions from contractions.

Table IIA-4A, US, Difference of Balance Sheet of Households and Nonprofit Organizations Billions of Dollars from 2007 to 2011 and 2012

	Value 2007	Change to 2011	Change to 2012	Change to IIQ2013
Assets	82,289.6	-4,0246	1,949.3	6,079.8
Nonfinancial	28,271.6	-5,020.3	-3,337.3	-1,755.5
Real Estate	23,448.6	-5,351.9	-3,810.6	-2,325.1
Financial	54,018.1	995.6	5,286.5	7,835.2
Liabilities	14,371.1	-802.8	-773.1	-822.7
Net Worth	67,918.6	-3,221.9	2,722.2	6,902.3

Net Worth = Assets – Liabilities

Source: Board of Governors of the Federal Reserve System. 2013. Flow of funds, balance sheets and integrated macroeconomic accounts: second quarter 2013. Washington, DC, Federal Reserve System, Sep 25.

http://www.federalreserve.gov/releases/Z1/Current/

The comparison of net worth of households and nonprofit organizations in the entire economic cycle from IQ1980 (and from IVQ1979) to IVQ1985 and from IVQ2007 to IQ2012 is provided in Table IB-4. The data reveal the following facts for the cycles in the 1980s:

• IVQ1979 to IVQ1985. Net worth increased 68.2 percent from IVQ1979 to IVQ1985, the all items CPI index increased 42.5 percent from 76.7 in Dec 1979 to 109.3 in Dec 1985 and real net worth increased 18.0 percent.
• IQ1980 to IVQ1985. Net worth increased 64.6 percent, the all items CPI index increased 36.5 percent from 80.1 in Mar 1980 to 109.3 in Dec 1985 and real net worth increased 20.6 percent.
• IVQ1979 to IIIQ1986. Net worth increased 79.4 percent, the all items CPI index increased 43.7 percent from 76.7 in Dec 1979 to 110.2 in Sep 1986 and real net worth increased 24.9 percent.
• IQ1980 to IIIQ1986. Net worth increased 75.5 percent, the all items CPI index increased 37.6 percent from 80.1 in Mar 1980 to 110.2 in Sep 1986 and real net worth increased 27.6 percent.

There is disastrous performance in the current economic cycle:

• IVQ2007 to IIQ2013. Net worth increased 10.2 percent, the all items CPI increased 11.2 percent from 210.036 in Dec 2007 to 233.504 in Jun 2013 and real or inflation adjusted net worth fell 0.9 percent.

The explanation is partly in the sharp decline of wealth of households and nonprofit organizations and partly in the mediocre growth rates of the cyclical expansion beginning in IIIQ2009. US economic growth has been at only 2.2 percent on average in the cyclical expansion in the 16 quarters from IIIQ2009 to IIQ2013. 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). There are new calculations using the revision of US GDP and personal income data since 1929 by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm http://bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_adv.pdf http://bea.gov/newsreleases/national/pi/2013/pdf/pi0613.pdf) and the second estimate of GDP for IIQ2013 (http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_3rd.pdf). The average of 7.7 percent in the first four quarters of major cyclical expansions is in contrast with the rate of growth in the first four quarters of the expansion from IIIQ2009 to IIQ2010 of only 2.7 percent obtained by diving GDP of $14,738.0 billion in IIQ2010 by GDP of $14,356.9 billion in IIQ2009 {[$14,738.0/$14,356.9 -1]100 = 2.7%], or accumulating the quarter on quarter growth rates (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/09/increasing-interest-rate-risk.html). The expansion from IQ1983 to IVQ1985 was at the average annual growth rate of 5.7 percent and at 7.8 percent from IQ1983 to IVQ1983 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/09/increasing-interest-rate-risk.html). As a result, there are 28.3 million unemployed or underemployed in the United States for an effective unemployment rate of 17.4 percent (http://cmpassocregulationblog.blogspot.com/2013/09/twenty-eight-million-unemployed-or.html).

Table IIA-5, Net Worth of Households and Nonprofit Organizations in Billions of Dollars, IVQ1979 to IVQ1985 and IVQ2007 to IVQ2012

Period IQ1980 to IVQ1985
Net Worth of Households and Nonprofit Organizations USD Millions
IVQ1979 IQ1980	9,021.4 9,220.7
IVQ1985 III1986	15,174.7 16,182.9
∆ USD Billions IVQ1985 IIIQ1986 IQ1980-IVQ1985 IQ1980-IIIQ1986	+6,153.3  ∆%68.2 R∆%18.0 +7,161.5  ∆%79.4 R∆%24.9 +5,954.0 ∆%64.6 R∆%20.6 +6,962.2 ∆%75.5 R∆%27.6
Period IVQ2007 to IQ2013
Net Worth of Households and Nonprofit Organizations USD Millions
IVQ2007	67,918.6
IIQ2013	74,820.9
∆ USD Billions	6,902.3 ∆%10.2 R∆%-0.9

Net Worth = Assets – Liabilities. : R∆% real percentage change or adjusted for CPI percentage change.

Source: Board of Governors of the Federal Reserve System. 2013. Flow of funds, balance sheets and integrated macroeconomic accounts: second quarter 2013. Washington, DC, Federal Reserve System, Sep 25.

http://www.federalreserve.gov/releases/Z1/Current/

Chart IIA-1 of the Board of Governors of the Federal Reserve System provides US wealth of households and nonprofit organizations from IVQ2007 to IQ2013. There is remarkable stop and go behavior in this series with two sharp declines and two standstills in the 16 quarters of expansion of the economy beginning in IIIQ2009. The increase in net worth of households and nonprofit organizations is the result of increases in valuations of risk financial assets and compressed liabilities resulting from zero interest rates. Wealth of households and nonprofits organization fell 0.9 percent from IVQ2007 to IIQ2013 when adjusting for consumer price inflation.

Chart IIA-1, Net Worth of Households and Nonprofit Organizations in Millions of Dollars, IVQ2007 to IIQ2013

Source: Board of Governors of the Federal Reserve System. 2013. Flow of funds, balance sheets and integrated macroeconomic accounts: second quarter 2013. Washington, DC, Federal Reserve System, Sep 25.

http://www.federalreserve.gov/releases/Z1/Current/

Chart IIA-2 of the Board of Governors of the Federal Reserve System provides US wealth of households and nonprofit organizations from IVQ1979 to IVQ1985. There are changes in the rates of growth of wealth suggested by the changing slopes but there is smooth upward trend. There was significant financial turmoil during the 1980s. Benston and Kaufman (1997, 139) find that there was failure of 1150 US commercial and savings banks between 1983 and 1990, or about 8 percent of the industry in 1980, which is nearly twice more than between the establishment of the Federal Deposit Insurance Corporation in 1934 through 1983. More than 900 savings and loans associations, representing 25 percent of the industry, were closed, merged or placed in conservatorships (see Pelaez and Pelaez, Regulation of Banks and Finance (2008b), 74-7). The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) created the Resolution Trust Corporation (RTC) and the Savings Association Insurance Fund (SAIF) that received $150 billion of taxpayer funds to resolve insolvent savings and loans. The GDP of the US in 1989 was $5657.7 billion (http://www.bea.gov/iTable/index_nipa.cfm), such that the partial cost to taxpayers of that bailout was around 2.65 percent of GDP in a year. US GDP in 2012 is estimated at $16,244.6 billion, such that the bailout would be equivalent to cost to taxpayers of about $430.5 billion in current GDP terms. A major difference with the Troubled Asset Relief Program (TARP) for private-sector banks is that most of the costs were recovered with interest gains whereas in the case of savings and loans there was no recovery. Money center banks were under extraordinary pressure from the default of sovereign debt by various emerging nations that represented a large share of their net worth (see Pelaez 1986). Net worth of households and nonprofits organizations increased 68.2 percent from IVQ1979 to IVQ1985 and 18.0 percent after adjusting for consumer price inflation. Net worth of households and nonprofit organizations increased 64.6 percent from IQ1980 to IVQ1985 and 20.6 percent when adjusting for consumer price inflation.

Chart IIA-2, Net Worth of Households and Nonprofit Organizations in Millions of Dollars, IVQ1979 to IVQ1985

Source: Board of Governors of the Federal Reserve System. 2013. Flow of funds, balance sheets and integrated macroeconomic accounts: second quarter 2013. Washington, DC, Federal Reserve System, Sep 25.

http://www.federalreserve.gov/releases/Z1/Current/

Chart IIA-2A provides net worth of households and nonprofits organizations in millions of dollars from IVQ1979 to IIIQ1986. Net worth of households and nonprofit organizations increased 79.4 percent from IVQ1979 to IIIQ1986 and 24.9 percent when adjusting for consumer price inflation. Net worth of households and nonprofit organizations increased 75.5 percent from IQ1980 to IIIQ1986 and 27.6 percent when adjusting for consumer price inflation.

Chart IIA-2A, Net Worth of Households and Nonprofit Organizations in Millions of Dollars, IVQ1979 to IIIQ1986

Source: Board of Governors of the Federal Reserve System. 2013. Flow of funds, balance sheets and integrated macroeconomic accounts: second quarter 2013. Washington, DC, Federal Reserve System, Sep 25.

http://www.federalreserve.gov/releases/Z1/Current/

Chart IIA-3 of the Board of Governors of the Federal Reserve System provides US wealth of households and nonprofit organizations from IVQ1945 at $764.7 billion to IIQ2013 at $74,820.9 billion or increase of 9684.3 percent. The consumer price index not seasonally adjusted was 18.2 in Dec 1945 jumping to 233.504 in Jun 2013 or increase of 1,182.9 percent. There was a gigantic increase of US net worth of households and nonprofit organizations over 67 years and two quarters with inflation-adjusted increase from $42.016 in dollars of 1945 to $320.4266 in IIQ2013 or 662.6 percent. In a simple formula: {[($74,820.9/$764.7)/(233.504/18.2)-1]100 = 662.6%}. Wealth of households and nonprofit organizations increased from $764.7 billion at year-end 2012 to $70,640.8 billion at the end of 2012 or 9137.7 percent. The consumer price index increased from 18.2 in Dec 1945 to 229.601 in Dec 2012 or 1161.5 percent. Net wealth of households and nonprofit organizations in dollars of 1945 increased from $42.016 in 1945 to $307.668 in 2012 or 632.3 percent at the average yearly rate of 3.0 percent. US real GDP grew at the average rate of 2.9 percent from 1945 to 2012 (http://www.bea.gov/iTable/index_nipa.cfm). The combination of collapse of values of real estate and financial assets during the global recession of IVQ2007 to IIQ2009 caused sharp contraction of US households and nonprofits net worth. Recovery has been in stop-and-go fashion during the worst cyclical expansion in the 67 years when US GDP grew at 2.2 percent on average in sixteen quarters between IIIQ2009 and IIQ2013 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/09/increasing-interest-rate-risk.html). US GDP was $228.2 billion in 1945 and net worth of households and nonprofit organizations $764.7 for ratio of wealth to GDP of 3.35. The ratio of net worth of households and nonprofits of $67,918.6 billion in 2007 to GDP of $14,480.3 billion was 4.69. The ratio of net worth of households and nonprofits of $74,820.9 billion in 2012 to GDP of 16,244.6 billion was 4.61.

Chart IIA-3, Net Worth of Households and Nonprofit Organizations in Millions of Dollars, IVQ1945 to IIQ2013

Source: Board of Governors of the Federal Reserve System. 2013. Flow of funds, balance sheets and integrated macroeconomic accounts: second quarter 2013. Washington, DC, Federal Reserve System, Sep 25.

http://www.federalreserve.gov/releases/Z1/Current/

ESIX United States Housing Collapse. Data and other information continue to provide depressed conditions in the US housing market in a longer perspective, with recent improvement at the margin. Table IIB-1 shows sales of new houses in the US at seasonally adjusted annual equivalent rate (SAAR). House sales fell in fifteen of thirty-two months from Jan 2011 to Aug 2013 but mostly concentrated in Jan-Feb 2011 and May-Aug 2011. In Jan-Apr 2012, house sales increased at the annual equivalent rate of 10.3 percent and at 23.5 percent in May-Sep 2012. There was significant strength in Sep-Dec 2011 with annual equivalent rate of 48.4 percent. Sales of new houses fell 0.5 percent in Dec 2012 and 4.9 percent in Oct 2012 with increase of 9.0 percent in Nov 2012. Sales of new houses rebounded 15.7 percent in Jan 2013 with annual equivalent rate of 69.9 percent from Oct 2012 to Jan 2013 because of the increase of 15.7 percent in Jan 2013. New house sales fell at annual equivalent 17.7 percent in Feb-Mar 2013. New house sales weakened with decline of 11.3 percent in annual equivalent from Apr to Aug 2013, mostly because of the decline of 14.0 percent in Jul 2013. Robbie Whelan and Conor Dougherty, writing on “Builders fuel home sale rise,” on Feb 26, 2013, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324338604578327982067761860.html), analyze how builders have provided financial assistance to home buyers, including those short of cash and with weaker credit background, explaining the rise in new home sales and the highest gap between prices of new and existing houses. The 30-year conventional mortgage rate increased from 3.40 on Apr 25, 2013 to 4.58 percent on Aug 22, 2013 (http://www.federalreserve.gov/releases/h15/data.htm), which could also be a factor in recent weakness. The conventional mortgage rate measured in a survey by Freddie Mac (http://www.freddiemac.com/pmms/release.html) is the “contract interest rate on commitments for fixed-rate first mortgages” (http://www.federalreserve.gov/releases/h15/data.htm).

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

	SA Annual Rate Thousands	∆%
Aug 2013	421	7.9
Jul	390	-14.0
Jun	454	5.8
May	429	-3.8
Apr	446	0.7
AE ∆% Apr-Jul		-11.3
Mar	443	-0.4
Feb	445	-2.8
AE ∆% Feb-Mar		-17.7
Jan	458	15.7
Dec 2012	396	-0.5
Nov	398	9.0
Oct	365	-4.9
AE ∆% Oct-Jan		69.9
Sep	384	2.7
Aug	374	1.4
Jul	369	2.5
Jun	360	-2.4
May	369	4.8
AE ∆% May-Sep		23.5
Apr	352	0.9
Mar	349	-4.6
Feb	366	8.3
Jan	338	-0.9
AE ∆% Jan-Apr		10.3
Dec 2011	341	4.0
Nov	328	3.8
Oct	316	3.9
Sep	304	1.7
AE ∆% Sep-Dec		48.4
Aug	299	-1.7
Jul	296	-2.3
Jun	301	-1.3
May	305	-1.6
AE ∆% May-Aug		-18.9
Apr	310	3.3
Mar	300	11.1
Feb	270	-12.1
Jan	307	-5.8
AE ∆% Jan-Apr		-14.2
Dec 2010	326	13.6

AE: Annual Equivalent

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

There is additional information of the report of new house sales in Table IIB-2. The stock of unsold houses stabilized in Apr-Aug 2011 at average 6.6 monthly equivalent sales at current sales rates and then dropped to 4.6 in Jul-Aug 2012, increasing to 4.8 in Oct 2012, 4.5 in Nov 2012 and 4.5 percent in Dec 2012. Inventories dropped to 3.9 in Jan 2013 and 4.1 in Feb 2013. Inventories stabilized at 4.2-4.5 in Mar-Jun 2013 and increased to 5.2 in Jul 2013. Inventories fell marginally to 5.0 in Aug 2013. Robbie Whelan and Conor Dougherty, writing on “Builders fuel home sale rise,” on Feb 26, 2013, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324338604578327982067761860.html), find that inventories of houses have declined as investors acquire distressed houses of higher quality. Median and average house prices oscillate. In Aug 2013, median prices of new houses sold not seasonally adjusted (NSA) decreased 0.7 percent. Average prices increased 6.0 percent in Jul 2013 and 0.1 percent in Aug 2013. Between Dec 2010 and Aug 2013 median prices increased 6.6 percent and average prices increased 10.6 percent. Between Dec 2010 and Dec 2012, median prices increased 5.6 percent and average prices increased 9.3 percent. Price increases concentrated in 2012 with increase of median prices of 18.2 percent from Dec 2011 to Dec 2012 and of average prices of 13.8 percent. Robbie Williams, writing on “New homes hit record as builders cap supply,” on May 24, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887323475304578500973445311276.html?mod=WSJ_economy_LeftTopHighlights), finds that homebuilders are continuing to restrict the number of new homes for sale. Restriction of available new homes for sale increases prices paid by buyers.

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

	Unsold* Stocks in Equiv. Months of Sales SA %	Median New House Sales Price USD NSA	Month ∆%	Average New House Sales Price USD NSA	Month ∆%
Aug 2013	5.0	254,600	-0.7	318,900	0.1
Jul	5.2	256,300	-0.1	318,500	6.0
Jun	4.3	256,600	-2.7	300,500	-4.3
May	4.5	263,700	-5.6	314,000	-6.8
Apr	4.3	279,300	8.5	337,000	12.3
Mar	4.2	257,500	-2.9	300,200	-3.9
Feb	4.1	265,100	5.4	312,500	1.8
Jan	3.9	251,500	-2.6	306,900	2.6
Dec 2012	4.5	258,300	5.4	299,200	2.9
Nov	4.5	245,000	-0.9	290,700	1.9
Oct	4.8	247,200	-2.9	285,400	-4.1
Sep	4.5	254,600	0.6	297,700	-2.6
Aug	4.6	253,200	6.7	305,500	8.2
Jul	4.6	237,400	2.1	282,300	3.9
Jun	4.8	232,600	-2.8	271,800	-3.2
May	4.7	239,200	1.2	280,900	-2.4
Apr	4.9	236,400	-1.4	287,900	1.5
Mar	5.0	239,800	0.0	283,600	3.5
Feb	4.8	239,900	8.2	274,000	3.1
Jan	5.3	221,700	1.4	265,700	1.1
Dec 2011	5.3	218,600	2.0	262,900	5.2
Nov	5.7	214,300	-4.7	250,000	-3.2
Oct	6.0	224,800	3.6	258,300	1.1
Sep	6.3	217,000	-1.2	255,400	-1.5
Aug	6.5	219,600	-4.5	259,300	-4.1
Jul	6.7	229,900	-4.3	270,300	-1.0
Jun	6.6	240,200	8.2	273,100	3.9
May	6.6	222,000	-1.2	262,700	-2.3
Apr	6.7	224,700	1.9	268,900	3.1
Mar	7.2	220,500	0.2	260,800	-0.8
Feb	8.1	220,100	-8.3	262,800	-4.7
Jan	7.3	240,100	-0.5	275,700	-5.5
Dec 2010	7.0	241,200	9.8	291,700	3.5

*Percent of new houses for sale relative to houses sold

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

The depressed level of residential construction and new house sales in the US is evident in Table IIB-3 providing new house sales not seasonally adjusted in Jan-Aug of various years. Sales of new houses in Jan-Aug 2013 are substantially lower than in any year between 1963 and 2013 with the exception of the years from 2009 to 2012. There are only four increases of 20.4 percent relative to Jan-Aug 2012, 45.2 percent relative to Jan-Aug 2011, 31.5 percent relative to Jan-Aug 2010 and 16.9 percent relative to Jan-Aug 2009. Sales of new houses in Jan-Aug 2013 are lower by 16.4 percent relative to Jan-Aug 2008, 47.0 percent relative to 2007, 59.6 percent relative to 2006 and 66.3 percent relative to 2005. The housing boom peaked in 2005 and 2006 when increases in fed funds rates to 5.25 percent in Jun 2006 from 1.0 percent in Jun 2004 affected subprime mortgages that were programmed for refinancing in two or three years on the expectation that price increases forever would raise home equity. Higher home equity would permit refinancing under feasible mortgages incorporating full payment of principal and interest (Gorton 2009EFM; see other references in http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html). Sales of new houses in Jan-Aug 2013 relative to the same period in 2004 fell 63.7 percent and 59.8 percent relative to the same period in 2003. Similar percentage declines are also observed for 2013 relative to years from 2000 to 2004. Sales of new houses in Jan-Aug 2013 fell 34.7 per cent relative to the same period in 1995. The population of the US was 179.3 million in 1960 and 281.4 million in 2000 (Hobbs and Stoops 2002, 16). Detailed historical census reports are available from the US Census Bureau at (http://www.census.gov/population/www/censusdata/hiscendata.html). The US population reached 308.7 million in 2010 (http://2010.census.gov/2010census/data/). The US population increased by 129.4 million from 1960 to 2010 or 72.2 percent. The final row of Table IIB-3 reveals catastrophic data: sales of new houses in Jan-Aug 2013 of 305 thousand units are lower by 23.2 percent relative to 397 thousand units of houses sold in Jan-Aug 1963, the first year when data become available. The civilian noninstitutional population increased from 122.667 million in Aug 1963 to 245.959 million in Aug 2013, or 100.5 percent (http://www.bls.gov/data/). The Bureau of Labor Statistics (BLS) defines the civilian noninstitutional population (http://www.bls.gov/lau/rdscnp16.htm#cnp): “The civilian noninstitutional population consists of persons 16 years of age and older residing in the 50 States and the District of Columbia who are not inmates of institutions (for example, penal and mental facilities and homes for the aged) and who are not on active duty in the Armed Forces.”

The civilian noninstitutional population is the universe of the labor force.

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

	Not Seasonally Adjusted Thousands
Jan-Aug 2013	305
Jan-Aug 2012	253
∆% Jan-Aug 2013/Jan-Aug 2012	20.4*
Jan-Aug 2011	210
∆% Jan-Aug 2013/Jan-Aug 2011	45.2
Jan-Aug 2010	232
∆% Jan-Aug 2013/  Jan-Aug 2010	31.5
Jan-Aug 2009	261
∆% Jan-Aug 2013/  Jan-Aug 2009	16.9
Jan-Aug 2008	365
∆% Jan-Aug 2013/  Jan-Aug 2008	-16.4
Jan-Aug 2007	576
∆% Jan-Aug 2013/ Jan-Aug 2007	-47.0
Jan-Aug 2006	755
∆% Jan-Aug 2013/Jan-Aug 2006	-59.6
Jan-Aug 2005	906
∆% Jan-Aug 2013/Jan-Aug 2005	-66.3
Jan-Aug 2004	841
∆% Jan-Aug 2013/Jan-Aug 2004	-63.7
Jan-Aug 2003	758
∆% Jan-Aug 2013/ Jan-Aug  2003	-59.8
Jan-Aug 2002	671
∆% Jan-Aug 2013/ Jan-Aug 2002	-54.5
Jan-Aug 2001	643
∆% Jan-Aug 2013/ Jan-Aug 2001	-52.6
Jan-Aug 2000	608
∆% Jan-Aug 2013/ Jan-Aug 2000	-49.8
Jan-Aug 1995	467
∆% Jan-Aug 2013/ Jan-Aug 1995	-34.7
Jan-Aug 1963	397
∆% Jan-Aug 2013/ Jan-Aug 1963	-23.2

*Computed using unrounded data

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

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

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

Source: US Census Bureau

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

Chart IIA-5 of the Board of Governors of the Federal Reserve System provides the rate for the 30-year conventional mortgage, the yield of the 30-year Treasury bond and the rate of the overnight federal funds rate, monthly, from 1971 to 2013. All rates decline throughout the period from the Great Inflation of the 1970s through the following Great Moderation and until currently. In Apr 1971, the fed funds rate was 4.15 percent and the conventional mortgage rate 7.31 percent. In November 2012, the fed funds rate was 0.16 percent, the yield of the 30-year Treasury 2.80 percent and the conventional mortgage rate 3.35. The final segment shows an increase in the yield of the 30-year Treasury to 3.61 percent in July 2013 with the fed funds rate at 0.09 percent and the conventional mortgage at 4.37 percent. The final data point shows increase of the conventional mortgage rate to 4.46 percent in Aug 2012 with the yield of the 30-year Treasury bond at 3.76 percent. The recent increase in interest rates if sustained could affect the US real estate market.

Chart IIB-5, US, Thirty-year Conventional Mortgage, Thirty-year Treasury Bond and Overnight Federal Funds Rate, Monthly, 1971-2013

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/H15/default.htm

ESX United States Commercial Banks Assets and Liabilities. Selected assets and liabilities of US commercial banks, not seasonally adjusted, in billions of dollars, from Report H.8 of the Board of Governors of the Federal Reserve System are in Table IIC-1. Data are not seasonally adjusted to permit comparison between Aug 2012 and Aug 2013. Total assets of US commercial banks grew 6.4 percent from $12,838.3 billion in Aug 2012 to $13,664.5 billion in Aug 2013. US GDP in IIQ2013 is estimated at $16,667.9 billion (http://www.bea.gov/iTable/index_nipa.cfm). Thus, total assets of US commercial banks are equivalent to around 82 percent of US GDP. Bank credit grew 2.0 percent from $9767.2 billion in Aug 2012 to $9962.1 billion in Aug 2013. Securities in bank credit increased 1.1 percent from $2646.9 billion in Aug 2012 to $2673.6 billion in Aug 2013. A large part of securities in banking credit consists of US Treasury and agency securities, falling 3.0 percent from $1837.9 billion in Aug 2012 to $1782.7 billion in Aug 2013. Credit to the government that issues or backs Treasury and agency securities of $1782.7 billion in Aug 2013 is about 17.9 percent of total bank credit of US commercial banks of $9962.1 billion. Mortgage-backed securities, providing financing of home loans, fell 1.1 percent, from $1332.8 billion in Aug 2012 to $1318.6 billion in Aug 2013. Loans and leases are relatively more dynamic, growing 2.4 percent from $7120.3 billion in Aug 2012 to $7288.5 billion in Aug 2013. The only dynamic class is commercial and industrial loans, growing 7.4 percent from Aug 2012 to Aug 2013 and providing $1563.0 billion or 21.4 percent of total loans and leases of $7288.5 billion in Aug 2013. Real estate loans decreased only 0.2 percent, providing $3517.1 billion in Aug 2013 or 48.3 percent of total loans and leases. Consumer loans increased 3.4 percent, providing $1145.4 billion in Aug 2013 or 15.7 percent of total loans. Cash assets are measured to “include vault cash, cash items in process of collection, balances due from depository institutions and balances due from Federal Reserve Banks” (http://www.federalreserve.gov/releases/h8/current/default.htm). Cash assets in US commercial banks increased 42.5 percent from $1663.2 billion in Aug 2012 to $2370.3 billion in Aug 2013 but a single year of the series masks exploding cash in banks because of unconventional monetary policy, which is discussed below. Bank deposits increased 7.3 percent from $8824.7 billion to $9472.8 billion. The difference between bank deposits and total loans and leases in banks increased from $1704.4 billion in Aug 2012 to $2184.3 billion in Aug 2013 or by $479.9 billion, which is also similar to the increase in securities in bank credit by $26.7 billion from $2646.9 billion in Aug 2012 to $2673.6 billion in Aug 2013 and to the decrease in Treasury and agency securities by $55.2 billion from $1837.9 billion in Aug 2012 to $1782.7 billion in Aug 2013. Loans and leases increased $168.6 billion from $7120.3 billion in Aug 2012 to $7288.9 billion in Aug 2013. Banks expanded both lending and investment in lower risk securities partly because of the weak economy and credit disappointments during the global recession that has resulted in an environment of fewer sound lending opportunities. Investing in securities with high duration, or price elasticity of yields, is riskier because of the increase in yields that can cause loss of principal as investors shift away from bond funds into money market funds invested in short-term assets. Lower interest rates resulting from monetary policy may not necessarily encourage higher borrowing in the current loss of dynamism of the US economy with real disposable income per capita in IIQ2013 higher by only 3.4 percent than in IVQ2007 (Table IB-2 IX Conclusion and extended analysis in IB Collapse of United States Dynamism of Income Growth and Employment Creation) in contrast with 12.1 percent higher if the economy had performed in long-term growth of per capita income in the United States at 2 percent per year from 1870 to 2010 (Lucas 2011May). In contrast, growth of real disposable income grew cumulatively 16.4 percent in the cycle from IQ1980 to IIIQ1986 that was higher than trend growth of 14.9 percent.

Table IIC-1, US, Assets and Liabilities of Commercial Banks, NSA, Billions of Dollars

	Aug 2012	Aug 2013	∆%
Total Assets	12,838.3	13,664.5	6.4
Bank Credit	9767.2	9962.1	2.0
Securities in Bank Credit	2646.9	2673.6	1.0
Treasury & Agency Securities	1837.9	1782.7	-3.0
Mortgage-Backed Securities	1332.8	1318.6	-1.1
Loans & Leases	7120.3	7288.5	2.4
Real Estate Loans	3524.3	3517.1	-0.2
Consumer Loans	1107.8	1145.4	3.4
Commercial & Industrial Loans	1455.7	1563.0	7.4
Other Loans & Leases	1032.6	1063.1	2.9
Cash Assets*	1663.2	2370.3	42.5
Total Liabilities	11,355.7	12,168.6	7.2
Deposits	8824.7	9472.8	7.3

Note: balancing item of residual assets less liabilities not included

*”Includes vault cash, cash items in process of collection, balances due from depository institutions and balances due from Federal Reserve Banks.”

Source: Board of Governors of the Federal Reserve System http://www.federalreserve.gov/releases/h8/current/default.htm

Seasonally adjusted annual equivalent rates (SAAR) of change of selected assets and liabilities of US commercial banks from the report H.8 of the Board of Governors of the Federal Reserve System are in Table IIC-2 annually from 2008 to 2012 and for Jul 2013 and Aug 2013. The global recession had strong impact on bank assets as shown by declines of total assets of 6.0 percent in 2009 and 2.7 percent in 2010. Loans and leases fell 10.2 percent in 2009 and 5.8 percent in 2010. Commercial and industrial loans fell 18.6 percent in 2009 and 9.0 percent in 2010. Unconventional monetary policy caused an increase of cash assets of banks of 160.3 percent in 2008, 49.2 percent in 2009 and 48.4 percent in 2011 followed by decline by 2.0 percent in 2012. Cash assets of banks increased at the SAAR of 22.4 percent in Aug 2012 but contraction by 49.6 percent in Sep 2012 and 6.3 percent in Oct 2012. Cash assets of banks increased at 56.0 percent in Nov 2012, minus 7.8 percent in Dec 2012, 38.8 percent in Jan 2013, 66.2 percent in Feb 2013, 66.0 percent in Mar 2013 and 14.5 percent in Apr 2013. Cash assets of banks increased at the SAAR of 63.2 percent in May 2013, 46.6 percent in Jun 2013, 46.0 percent in Jul 2013 and 85.8 percent in Aug 2013. Acquisitions of securities for the portfolio of the central bank injected reserves in depository institutions that banks held as cash and reserves at the central bank because of the lack of sound lending opportunities and the adverse expectations in the private sector on doing business. The truly dynamic investment of banks has been in securities in bank credit: growing at the SAAR of 15.4 percent in Jul 2012, 2.6 percent in Aug 2012, 5.3 percent in Sep 2012, 4.7 percent in Oct 2012, 1.7 percent in Nov 2012 and 20.5 percent in Dec 2012. There were declines of securities in bank credit at 1.1 percent in Jan 2013, 3.2 percent in Feb 2013 and 2.7 percent in Mar 2013 but growth of 1.5 percent in Apr 2013. Securities in bank credit fell at the SAAR of 2.6 percent in May 2013 and 8.2 percent in Jun 2013. Securities in bank credit fell at the SAAR of 14.6 percent in Jul 2013 and at 11.0 in Aug 2013. Fear of loss of principal in securities with high duration or price elasticity of yield is shifting investments away from bonds into cash and other assets with less price risk. Positions marked to market in balance sheets experience sharp declines. Throughout the crisis banks allocated increasing part of their assets to the safety of Treasury and agency securities, or credit to the US government and government-backed credit: with growth of 13.4 percent in 2009 and 15.2 percent in 2010 and at the rate of 16.3 percent in Jul 2012, declining to the rate of 3.4 percent in Aug 2012, 2.1 percent in Sep 2012 and 0.7 percent in Oct 2012. Treasury and agency securities in bank credit fell at the rate of 0.8 percent in Nov 2012, increasing at 17.2 percent in Dec 2012. Treasury and agency securities in bank credit fell at 5.9 percent in Jan 2013, 3.1 percent in Feb 2013, 7.0 percent in Mar 2013 and 5.4 percent in Apr 2013 and 8.3 percent in May 2013. Treasury and agency securities in US commercial banks fell at the SAAR of 7.0 percent in Jun 2013, 23.9 percent in Jul 2013 and 20.8 percent in Aug 2013. Increases in yield result in capital losses that may explain less interest in holding securities with higher duration. Deposits grew at the rate of 10.5 percent in Jul 2012, with the rate declining as for most assets of commercial banks to the rate of 6.2 percent in Aug 2012 but increasing to 7.2 percent in Sep 2012, 8.4 percent in Oct 2012, 5.7 percent in Nov 2012, 18.7 percent in Dec 2012, 2.7 percent in Jan 2013. Deposits grew at the rate of 4.4 percent in Feb 2013, 7.7 percent in Mar 2013, 3.5 percent in Apr 2013 and 2.4 percent in May 2013. Deposits increased at the SAAR of 6.3 percent in Jun 2013, 8.9 percent in Jul 2013 and 1.8 percent in Aug 2013. The credit intermediation function of banks is broken because of adverse expectations on future business and cannot be fixed by monetary and fiscal policy. Incentives to business and consumers are more likely to be effective in this environment in recovering willingness to assume risk on the part of the private sector, which is the driver of growth and job creation.

Table IIC-2, US, Selected Assets and Liabilities of Commercial Banks, Seasonally Adjusted Annual Rate, ∆%

	2008	2009	2010	2011	2012	Jul  2013	Aug   2013
Total Assets	7.9	-6.0	-2.7	5.4	2.5	4.2	8.2
Bank Credit	2.1	-6.6	-2.7	1.8	3.9	-3.1	-4.8
Securities in Bank Credit	-1.9	6.7	6.9	1.8	7.4	-14.6	-11.0
Treasury & Agency Securities	2.6	13.4	15.2	3.0	8.5	-23.9	-20.8
Other Securities	-7.7	-3.1	-7.1	-0.7	5.0	4.9	9.2
Loans & Leases	3.3	-10.2	-5.8	1.9	2.7	1.2	-2.6
Real Estate Loans	-0.2	-5.7	-5.5	-3.8	-1.1	-4.5	-5.5
Consumer Loans	5.1	-3.3	-7.0	-0.7	1.2	3.9	3.7
Commercial & Industrial Loans	12.9	-18.6	-9.0	9.6	11.0	10.7	-0.1
Other Loans & Leases	1.7	-23.1	0.4	19.2	6.8	3.8	-3.0
Cash Assets	160.3	49.2	-7.7	48.4	-2.0	46.0	85.8
Total Liabilities	10.6	-7.1	-3.4	5.5	2.2	7.0	6.9
Deposits	5.4	5.2	2.4	6.7	7.1	8.9	1.8

Source: Board of Governors of the Federal Reserve System http://www.federalreserve.gov/releases/h8/current/default.htm

The average rate of growth of real GDP in expansions after recessions with financial crises was 8 percent but only 6.9 percent on average for recessions without financial crises (Bordo 2012Sep27). Real GDP declined 12 percent in the Panic of 1907 and increased 13 percent in the recovery, consistent with the plucking model of Friedman (Bordo 2012Sep27). Bordo (2012Sep27) finds two probable explanations for the weak recovery during the current economic cycle: (1) collapse of United States housing; and (2) uncertainty originating in fiscal policy, regulation and structural changes. There are serious doubts if monetary policy is adequate to recover the economy under these conditions.

Lucas (2011May) estimates US economic growth in the long-term at 3 percent per year and about 2 percent per year in per capita terms. There are displacements from this trend caused by events such as wars and recessions but the economy then returns to trend. Historical US GDP data exhibit remarkable growth: Lucas (2011May) estimates an increase of US real income per person by a factor of 12 in the period from 1870 to 2010. The explanation by Lucas (2011May) of this remarkable growth experience is that government provided stability and education while elements of “free-market capitalism” were an important driver of long-term growth and prosperity. Lucas sharpens this analysis by comparison with the long-term growth experience of G7 countries (US, UK, France, Germany, Canada, Italy and Japan) and Spain from 1870 to 2010. Countries benefitted from “common civilization” and “technology” to “catch up” with the early growth leaders of the US and UK, eventually growing at a faster rate. Significant part of this catch up occurred after World War II. Lucas (2011May) finds that the catch up stalled in the 1970s. The analysis of Lucas (2011May) is that the 20-40 percent gap that developed originated in differences in relative taxation and regulation that discouraged savings and work incentives in comparison with the US. A larger welfare and regulatory state, according to Lucas (2011May), could be the cause of the 20-40 percent gap. Cobet and Wilson (2002) provide estimates of output per hour and unit labor costs in national currency and US dollars for the US, Japan and Germany from 1950 to 2000 (see Pelaez and Pelaez, The Global Recession Risk (2007), 137-44). The average yearly rate of productivity change from 1950 to 2000 was 2.9 percent in the US, 6.3 percent for Japan and 4.7 percent for Germany while unit labor costs in USD increased at 2.6 percent in the US, 4.7 percent in Japan and 4.3 percent in Germany. From 1995 to 2000, output per hour increased at the average yearly rate of 4.6 percent in the US, 3.9 percent in Japan and 2.6 percent in Germany while unit labor costs in USD fell at minus 0.7 percent in the US, 4.3 percent in Japan and 7.5 percent in Germany. There was increase in productivity growth in Japan and France within the G7 in the second half of the 1990s but significantly lower than the acceleration of 1.3 percentage points per year in the US. The key indicator of growth of real income per capita or what is earned per person after inflation, measures long-term economic growth and prosperity. A refined concept would include real disposable income per capita, which is what a person earns after inflation and taxes.

Table IIC-3 provides the data required for broader comparison of long-term and cyclical performance of the United States economy. Revisions and enhancements of United States GDP and personal income accounts by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm http://bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_adv.pdf http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_2nd.pdf http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp2q13_3rd.pdf http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0713.pdf http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi0813.pdf http://bea.gov/newsreleases/national/pi/2013/pdf/pi0613.pdf) provide important information on long-term growth and cyclical behavior. First, Long-term performance. Using annual data, US GDP grew at the average rate of 3.3 percent per year from 1929 to 2012 and at 3.2 percent per year from 1947 to 2012. Real disposable income grew at the average yearly rate of 3.2 percent from 1929 to 2013 and at 3.7 percent from 1947 to 1999. Real disposable income per capita grew at the average yearly rate of 2.0 percent from 1929 to 2012 and at 2.3 percent from 1947 to 1999. US economic growth was much faster during expansions, compensating for the contraction in maintaining trend growth for whole cycles. Using annual data, US real disposable income grew at the average yearly rate of 3.5 percent from 1980 to 1980 and real disposable income per capita at 2.6 percent. The US economy has lost its dynamism in the current cycle: real disposable income grew at the yearly average rate of 1.4 percent from 2006 to 2012 and real disposable income per capita at 0.6 percent. Second, first four quarters of expansion. Growth in the first four quarters of expansion is critical in recovering loss of output and employment occurring during the contraction. In the first four quarters of expansion from IQ1983 to IVQ1983: GDP increased 7.8 percent, real disposable personal income 5.3 percent and real disposable income per capita 4.4 percent. In the first four quarters of expansion from IIIQ2009 to IIQ2010: GDP increased 2.7 percent, real disposable personal income 1.4 percent and real disposable income per capita 0.8 percent. Third, first 16 quarters of expansion. In the expansion from IQ1983 to IIIQ1986: GDP grew 22.3 percent at the annual equivalent rate of 5.2 percent; real disposable income grew 17.3 percent at the annual equivalent rate of 4.1 percent; and real disposable income per capita grew 13.7 percent at the annual equivalent rate of 3.3 percent. In the expansion from IIIQ2009 to IIQ2013: GDP grew 9.0 percent at the annual equivalent rate of 2.2 percent; real disposable income grew 6.4 percent at the annual equivalent rate of 1.6 percent; and real disposable personal income per capita grew 3.5 percent at the annual equivalent rate of 0.9 percent. Fourth, entire quarterly cycle. In the entire cycle combining contraction and expansion from IQ1980 to IIIQ1986: GDP grew 21.1 percent at the annual equivalent rate of 2.8 percent; real disposable personal income 24.7 percent at the annual equivalent rate of 3.2 percent; and real disposable personal income per capita 17.4 percent at the annual equivalent rate of 2.3 percent. In the entire cycle combining contraction and expansion from IVQ2007 to IIQ2013: GDP grew 4.4 percent at the annual equivalent rate of 0.7 percent; real disposable personal income 6.9 percent at the annual equivalent rate of 1.2 percent; and real disposable personal income per capita 2.4 percent at the annual equivalent rate of 0.4 percent. The United States grew during its history at high rates of per capita income that made its economy the largest in the world. That dynamism is disappearing. Bordo (2012 Sep27) and Bordo and Haubrich (2012DR) provide strong evidence that recoveries have been faster after deeper recessions and recessions with financial crises, casting serious doubts on the conventional explanation of weak growth during the current expansion allegedly because of the depth of the contraction of 4.3 percent from IVQ2007 to IIQ2009 and the financial crisis.

Table IIC-3, US, GDP, Real Disposable Personal Income, Real Disposable Income per Capita and Population in 1983-85 and 2007-2013, %

Long-term GDP	Average ∆% per Year
1929-2012	3.3
1947-2012	3.2
Long-term Average ∆% per Year	Real Disposable Income	Real Disposable Income per Capita
1929-2012	3.2	2.0
1947-1999	3.7	2.3
Whole Cycles Average ∆% per Year
1980-1989	3.5	2.6
2006-2012	1.4	0.6
Comparison of Cycles	# Quarters	∆%	∆% Annual Equivalent
IQ1983 to IVQ1986 IQ1983 to IIIQ1986	4 16
GDP IQ1983 to IVQ1983 IQ1983 to IIIQ1986	4 16	7.8 22.3	7.8 5.2
RDPI IQ1983 to IVQ1983 IQ1983 to IIIQ1986	4 16	5.3 17.3	5.3 4.1
RDPI Per Capita IQ1983 to IVQ1983 IQ1983 to IIIQ1986	4 16	4.4 13.7	4.4 3.3
Whole Cycle IQ1980 to IIIQ1986
GDP	28	21.1	2.8
RDPI	28	24.7	3.2
RDPI per Capita	28	17.4	2.3
Population	28	6.3	0.9
GDP First Four Quarters IIIQ2009 to IIQ2010 IIIQ2009 to IIQ2013	4 16	2.7 9.0	2.7 2.2
RDPI IIIQ2009 to IIQ2010 IIIQ2009 to IIQ2013	4 16	1.4 6.4	1.4 1.6
RDPI per Capita IIIQ2009 to IIQ2010 IIIQ2009 to IIQ2013	4 16	0.8 3.5	0.8 0.9
Population IIIQ2009 to IIQ2010 IIIQ2009 to IIQ2013	4 16	0.6 2.8	0.6 0.7
IVQ2007 to IIQ2013	23
GDP	23	4.4	0.7
RDPI	23	6.9	1.2
RDPI per Capita	23	2.4	0.4
Population	23	4.4	0.8

RDPI: Real Disposable Personal Income

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

Chart IIC-16 is quite revealing in analyzing the state of bank credit in the US economy. The upper curves are (1) deposits and (2) loans and leases in bank credit. Historically since 1973, the level and rate of change of deposits and loans and leases in bank credit were almost identical. The lower two curves are Treasury and agency securities in bank credit and cash assets with treasury and agency securities moving closely with cash assets until the 1990s when Treasury and agency securities exceeded cash assets. The shaded area of the recession from IV2007 to IIQ2009 shows a break in the level and rate of movement of the series. Deposits continued to expand rapidly through the recession and the following expansion period. Loans and leases fell and barely recovered the level before the recession while deposits moved nearly vertically well above the level before the recession. While Treasury and agency securities in bank credit continued to expand at a higher rate, reaching a level well above that before the recession, cash assets jumped as the counterpart of excess reserves in banks that financed quantitative easing or massive outright purchases of securities for the balance sheet of the Fed. Unconventional monetary policy of zero interest rates and outright purchases of securities caused sharp increases of deposits, cash assets and Treasury and agency securities in bank credit but not in loans and leases. There is much discussion about the almost impossible task of evaluating monetary policy in terms of costs and benefits. Before the financial crisis, Chairman Greenspan (2004) analyzes monetary policy and its limitations (see Pelaez and Pelaez, The Global Recession Risk (2007), 13-4, 212-13) that do not differ from those of private financial institutions:

“The Federal Reserve's experiences over the past two decades make it clear that uncertainty is not just a pervasive feature of the monetary policy landscape; it is the defining characteristic of that landscape. The term "uncertainty" is meant here to encompass both "Knightian uncertainty," in which the probability distribution of outcomes is unknown, and "risk," in which uncertainty of outcomes is delimited by a known probability distribution. In practice, one is never quite sure what type of uncertainty one is dealing with in real time, and it may be best to think of a continuum ranging from well-defined risks to the truly unknown.

As a consequence, the conduct of monetary policy in the United States has come to involve, at its core, crucial elements of risk management. This conceptual framework emphasizes understanding as much as possible the many sources of risk and uncertainty that policymakers face, quantifying those risks when possible, and assessing the costs associated with each of the risks. In essence, the risk management approach to monetary policymaking is an application of Bayesian decision making.

This framework also entails devising, in light of those risks, a strategy for policy directed at maximizing the probabilities of achieving over time our goals of price stability and the maximum sustainable economic growth that we associate with it. In designing strategies to meet our policy objectives, we have drawn on the work of analysts, both inside and outside the Fed, who over the past half century have devoted much effort to improving our understanding of the economy and its monetary transmission mechanism. A critical result has been the identification of a relatively small set of key relationships that, taken together, provide a useful approximation of our economy's dynamics. Such an approximation underlies the statistical models that we at the Federal Reserve employ to assess the likely influence of our policy decisions.

However, despite extensive efforts to capture and quantify what we perceive as the key macroeconomic relationships, our knowledge about many of the important linkages is far from complete and, in all likelihood, will always remain so. Every model, no matter how detailed or how well designed, conceptually and empirically, is a vastly simplified representation of the world that we experience with all its intricacies on a day-to-day basis.

Given our inevitably incomplete knowledge about key structural aspects of an ever-changing economy and the sometimes asymmetric costs or benefits of particular outcomes, a central bank needs to consider not only the most likely future path for the economy but also the distribution of possible outcomes about that path. The decision makers then need to reach a judgment about the probabilities, costs, and benefits of the various possible outcomes under alternative choices for policy.”

“Whale” trades at official institutions causing wide swings of financial and economic variables do not receive the same media attention as those in large private banking institutions such as the teapot storm over JP Morgan Chase.

Chart IIC-16, US, Deposits, Treasury and Government Securities in Bank Credit, Loans and Leases in Bank Credit and Cash Assets, US Commercial Banks, Not Seasonally Adjusted, Monthly, 1973-2013, Billions of Dollars

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/h8/current/default.htm

© Carlos M. Pelaez, 2009, 2010, 2011, 2012, 2013