CMP Associates Regulation Blog: Collapse of United States Dynamism of Income Growth and Employment Creation, Interest Rate Risk, Stagnating Real Disposable Income and Consumption Expenditures, Destruction of Household Nonfinancial Wealth with Stagnating Total Real Wealth, United States Commercial Banks Assets and Liabilities, United States Housing Collapse, World Economic Slowdown and Global Recession Risk: Part I

Collapse of United States Dynamism of Income Growth and Employment Creation, Interest Rate Risk, Stagnating Real Disposable Income and Consumption Expenditures, Destruction of Household Nonfinancial Wealth with Stagnating Total Real Wealth, United States Commercial Banks Assets and Liabilities, United States Housing Collapse, World Economic Slowdown and Global Recession Risk

Carlos M. Pelaez

Executive Summary

I Stagnating Real Disposable Income and Consumption Expenditures

IA1 Stagnating Real Disposable Income and Consumption Expenditures

IA2 Financial Repression

IB Collapse of United States Dynamism of Income Growth and Employment Creation

IIA Destruction of Household Nonfinancial Wealth with Stagnating Total Real Wealth

IIB United States Commercial Banks Assets and Liabilities

IIA1 Transmission of Monetary Policy

IIB1 Functions of Banks

IIC United States Commercial Banks Assets and Liabilities

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

IIE United States Housing Collapse

III World Financial Turbulence

IIIA Financial Risks

IIIE Appendix Euro Zone Survival Risk

IIIF Appendix on Sovereign Bond Valuation

IV Global Inflation

V World Economic Slowdown

VA United States

VB Japan

VC China

VD Euro Area

VE Germany

VF France

VG Italy

VH United Kingdom

VI Valuation of Risk Financial Assets

VII Economic Indicators

VIII Interest Rates

IX Conclusion

References

Appendixes

Appendix I The Great Inflation

IIIB Appendix on Safe Haven Currencies

IIIC Appendix on Fiscal Compact

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

IIIG Appendix on Deficit Financing of Growth and the Debt Crisis

IIIGA Monetary Policy with Deficit Financing of Economic Growth

IIIGB Adjustment during the Debt Crisis of the 1980s

Executive Summary

Contents of Executive Summary

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

ESII Destruction of Household Nonfinancial Wealth with Stagnating Total Real Wealth

ESIII Collapse of United States Dynamism of Income Growth and Employment Creation

ESIV Stagnating Real Disposable Income

ESV Financial Repression

ESVI United States Housing Collapse

ESVII 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 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 (2013WEOOct) provides surveillance of the world economy with its Global Economic Outlook (WEO) (http://www.imf.org/external/pubs/ft/weo/2013/02/), of the world financial system with its Global Financial Stability Report (GFSR) (IMF 2013GFSROct) (http://www.imf.org/External/Pubs/FT/GFSR/2013/02/index.htm) and of fiscal affairs with the Fiscal Monitor (IMF 2013FMOct) (http://www.imf.org/external/pubs/ft/fm/2013/02/fmindex.htm). There appears to be a moment of transition in global economic and financial variables that may prove of difficult analysis and measurement. It is useful to consider a summary of global economic and financial risks, which are analyzed in detail in the comments of this blog in Section VI Valuation of Risk Financial Assets, Table VI-4.

Economic risks include the following:

China’s Economic Growth. China is lowering its growth target to 7.5 percent per year. China’s GDP growth decelerated significantly from annual equivalent 10.8 percent in IIQ2011 to 7.4 percent in IVQ2011 and 5.7 percent in IQ2012, rebounding to 9.1 percent in IIQ2012, 8.2 percent in IIIQ2012 and 7.8 percent in IVQ2012. Annual equivalent growth in IQ2013 fell to 6.1 percent and to 7.8 percent in IIQ2013, rebounding to 9.1 percent in IIIQ2013 (http://cmpassocregulationblog.blogspot.com/2013/10/twenty-eight-million-unemployed-or.html 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).
United States Economic Growth, Labor Markets and Budget/Debt Quagmire. The US is growing slowly with 28.1 million in job stress, fewer 10 million full-time jobs, high youth unemployment, historically low hiring and declining/stagnating real wages.
Economic Growth and Labor Markets in Advanced Economies. Advanced economies are growing slowly. There is still high unemployment in advanced economies.
World Inflation Waves. Inflation continues in repetitive waves globally (http://cmpassocregulationblog.blogspot.com/2013/12/tapering-quantitative-easing-mediocre.html).

A list of financial uncertainties includes:

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

Chart VIII-1 of the Board of Governors of the Federal Reserve System provides the rate on the overnight fed funds rate and the yields of the 10-year constant maturity Treasury and the Baa seasoned corporate bond. Table VIII-3 provides the data for selected points in Chart VIII-1. There are two important economic and financial events, illustrating the ease of inducing carry trade with extremely low interest rates and the resulting financial crash and recession of abandoning extremely low interest rates.

The Federal Open Market Committee (FOMC) lowered the target of the fed funds rate from 7.03 percent on Jul 3, 2000, to 1.00 percent on Jun 22, 2004, in pursuit of non-existing deflation (Pelaez and Pelaez, International Financial Architecture (2005), 18-28, The Global Recession Risk (2007), 83-85). Central bank commitment to maintain the fed funds rate at 1.00 percent induced adjustable-rate mortgages (ARMS) linked to the fed funds rate. Lowering the interest rate near the zero bound in 2003-2004 caused the illusion of permanent increases in wealth or net worth in the balance sheets of borrowers and also of lending institutions, securitized banking and every financial institution and investor in the world. The discipline of calculating risks and returns was seriously impaired. The objective of monetary policy was to encourage borrowing, consumption and investment. The exaggerated stimulus resulted in a financial crisis of major proportions as the securitization that had worked for a long period was shocked with policy-induced excessive risk, imprudent credit, high leverage and low liquidity by the incentive to finance everything overnight at interest rates close to zero, from adjustable rate mortgages (ARMS) to asset-backed commercial paper of structured investment vehicles (SIV). The consequences of inflating liquidity and net worth of borrowers were a global hunt for yields to protect own investments and money under management from the zero interest rates and unattractive long-term yields of Treasuries and other securities. Monetary policy distorted the calculations of risks and returns by households, business and government by providing central bank cheap money. Short-term zero interest rates encourage financing of everything with short-dated funds, explaining the SIVs created off-balance sheet to issue short-term commercial paper with the objective of purchasing default-prone mortgages that were financed in overnight or short-dated sale and repurchase agreements (Pelaez and Pelaez, Financial Regulation after the Global Recession, 50-1, Regulation of Banks and Finance, 59-60, Globalization and the State Vol. I, 89-92, Globalization and the State Vol. II, 198-9, Government Intervention in Globalization, 62-3, International Financial Architecture, 144-9). ARMS were created to lower monthly mortgage payments by benefitting from lower short-dated reference rates. Financial institutions economized in liquidity that was penalized with near zero interest rates. There was no perception of risk because the monetary authority guaranteed a minimum or floor price of all assets by maintaining low interest rates forever or equivalent to writing an illusory put option on wealth. Subprime mortgages were part of the put on wealth by an illusory put on house prices. The housing subsidy of $221 billion per year created the impression of ever-increasing house prices. The suspension of auctions of 30-year Treasuries was designed to increase demand for mortgage-backed securities, lowering their yield, which was equivalent to lowering the costs of housing finance and refinancing. Fannie and Freddie purchased or guaranteed $1.6 trillion of nonprime mortgages and worked with leverage of 75:1 under Congress-provided charters and lax oversight. The combination of these policies resulted in high risks because of the put option on wealth by near zero interest rates, excessive leverage because of cheap rates, low liquidity because of the penalty in the form of low interest rates and unsound credit decisions because the put option on wealth by monetary policy created the illusion that nothing could ever go wrong, causing the credit/dollar crisis and global recession (Pelaez and Pelaez, Financial Regulation after the Global Recession, 157-66, Regulation of Banks, and Finance, 217-27, International Financial Architecture, 15-18, The Global Recession Risk, 221-5, Globalization and the State Vol. II, 197-213, Government Intervention in Globalization, 182-4). The FOMC implemented increments of 25 basis points of the fed funds target from Jun 2004 to Jun 2006, raising the fed funds rate to 5.25 percent on Jul 3, 2006, as shown in Chart VIII-1. The gradual exit from the first round of unconventional monetary policy from 1.00 percent in Jun 2004 to 5.25 percent in Jun 2006 caused the financial crisis and global recession.
On Dec 16, 2008, the policy determining committee of the Fed decided (http://www.federalreserve.gov/newsevents/press/monetary/20081216b.htm): “The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent.” Policymakers emphasize frequently that there are tools to exit unconventional monetary policy at the right time. At the confirmation hearing on nomination for Chair of the Board of Governors of the Federal Reserve System, Vice Chair Yellen (2013Nov14 http://www.federalreserve.gov/newsevents/testimony/yellen20131114a.htm), states that: “The Federal Reserve is using its monetary policy tools to promote a more robust recovery. A strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases. I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy.” Perception of withdrawal of $2451 billion, or $2.5 trillion bank reserves (http://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1), would cause Himalayan increase in interest rates that would provoke another recession. There is no painless gradual or sudden exit from zero interest rates because reversal of exposures created on the commitment of zero interest rates forever.

In his classic restatement of the Keynesian demand function in terms of “liquidity preference as behavior toward risk,” James Tobin (http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1981/tobin-bio.html) identifies the risks of low interest rates in terms of portfolio allocation (Tobin 1958, 86):

“The assumption that investors expect on balance no change in the rate of interest has been adopted for the theoretical reasons explained in section 2.6 rather than for reasons of realism. Clearly investors do form expectations of changes in interest rates and differ from each other in their expectations. For the purposes of dynamic theory and of analysis of specific market situations, the theories of sections 2 and 3 are complementary rather than competitive. The formal apparatus of section 3 will serve just as well for a non-zero expected capital gain or loss as for a zero expected value of g. Stickiness of interest rate expectations would mean that the expected value of g is a function of the rate of interest r, going down when r goes down and rising when r goes up. In addition to the rotation of the opportunity locus due to a change in r itself, there would be a further rotation in the same direction due to the accompanying change in the expected capital gain or loss. At low interest rates expectation of capital loss may push the opportunity locus into the negative quadrant, so that the optimal position is clearly no consols, all cash. At the other extreme, expectation of capital gain at high interest rates would increase sharply the slope of the opportunity locus and the frequency of no cash, all consols positions, like that of Figure 3.3. The stickier the investor's expectations, the more sensitive his demand for cash will be to changes in the rate of interest (emphasis added).”

Tobin (1969) provides more elegant, complete analysis of portfolio allocation in a general equilibrium model. The major point is equally clear in a portfolio consisting of only cash balances and a perpetuity or consol. Let g be the capital gain, r the rate of interest on the consol and r^e the expected rate of interest. The rates are expressed as proportions. The price of the consol is the inverse of the interest rate, (1+r^e). Thus, g = [(r/r^e) – 1]. The critical analysis of Tobin is that at extremely low interest rates there is only expectation of interest rate increases, that is, dr^e>0, such that there is expectation of capital losses on the consol, dg<0. Investors move into positions combining only cash and no consols. Valuations of risk financial assets would collapse in reversal of long positions in carry trades with short exposures in a flight to cash. There is no exit from a central bank created liquidity trap without risks of financial crash and another global recession. The net worth of the economy depends on interest rates. In theory, “income is generally defined as the amount a consumer unit could consume (or believe that it could) while maintaining its wealth intact” (Friedman 1957, 10). Income, Y, is a flow that is obtained by applying a rate of return, r, to a stock of wealth, W, or Y = rW (Ibid). According to a subsequent statement: “The basic idea is simply that individuals live for many years and that therefore the appropriate constraint for consumption is the long-run expected yield from wealth r*W. This yield was named permanent income: Y* = r*W” (Darby 1974, 229), where * denotes permanent. The simplified relation of income and wealth can be restated as:

W = Y/r (10)

Equation (1) shows that as r goes to zero, r→0, W grows without bound, W→∞. Unconventional monetary policy lowers interest rates to increase the present value of cash flows derived from projects of firms, creating the impression of long-term increase in net worth. An attempt to reverse unconventional monetary policy necessarily causes increases in interest rates, creating the opposite perception of declining net worth. As r→∞, W = Y/r →0. There is no exit from unconventional monetary policy without increasing interest rates with resulting pain of financial crisis and adverse effects on production, investment and employment.

Chart VIII-1, Fed Funds Rate and Yields of Ten-year Treasury Constant Maturity and Baa Seasoned Corporate Bond, Jan 2, 2001 to Dec 26, 2013

Source: Board of Governors of the Federal Reserve System

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

Table VIII-3, Selected Data Points in Chart VIII-1, % per Year

	Fed Funds Overnight Rate	10-Year Treasury Constant Maturity	Seasoned Baa Corporate Bond
1/2/2001	6.67	4.92	7.91
10/1/2002	1.85	3.72	7.46
7/3/2003	0.96	3.67	6.39
6/22/2004	1.00	4.72	6.77
6/28/2006	5.06	5.25	6.94
9/17/2008	2.80	3.41	7.25
10/26/2008	0.09	2.16	8.00
10/31/2008	0.22	4.01	9.54
4/6/2009	0.14	2.95	8.63
4/5/2010	0.20	4.01	6.44
2/4/2011	0.17	3.68	6.25
7/25/2012	0.15	1.43	4.73
5/1/13	0.14	1.66	4.48
9/5/13	0.08	2.98	5.53
11/21/2013	0.09	2.79	5.44
11/27/13	0.09	2.74	5.34 (11/26/13)
12/6/13	0.09	2.88	5.47
12/12/13	0.09	2.89	5.42
12/19/13	0.09	2.94	5.36
12/26/13	0.08	3.00	5.37

Source: Board of Governors of the Federal Reserve System

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

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 State, 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 Dec 27, 2013, Sep 5, 2013, May 1, 2013, Dec 27, 2012 and Dec 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 and 3.02 percent on Dec 27, 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 86.5359 with instantaneous increase of the yield to 3.02 percent for loss of 13.5 percent and far more with leverage. Assume that the yield of a bond with exactly ten years to maturity and coupon of 3.02 percent as occurred on Dec 20, 2013 would jump instantaneously from yield of 3.02 percent on Dec 27, 2013 to 4.66 percent as occurred on Dec 27, 2006 when the economy was closer to full employment. The price of the hypothetical bond issued with coupon of 3.02 percent would drop from 100 to 87.0092 after an instantaneous increase of the yield to 4.60 percent. The price loss would be 13.0 percent. Losses absorb capital available for positioning, triggering crossfire sales in multiple asset classes (Brunnermeier and Pedersen 2009). What is the path of adjustment of zero interest rates on fed funds and artificially low bond yields? There is no painless exit from unconventional monetary policy. 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

	12/27/13	9/05/13	5/01/13	12/27/12	12/27/06
1 M	0.01	0.03	0.03	0.01	4.75
3 M	0.07	0.02	0.06	0.08	4.97
6 M	0.09	0.06	0.08	0.12	5.10
1 Y	0.12	0.16	0.11	0.15	4.99
2 Y	0.40	0.52	0.20	0.26	4.77
3 Y	0.79	0.97	0.30	0.37	4.69
5 Y	1.74	1.85	0.65	0.72	4.64
7 Y	2.44	2.45	1.07	1.15	4.64
10 Y	3.02	2.98	1.66	1.74	4.66
20 Y	3.70	3.64	2.44	2.48	4.87
30 Y	3.94	3.88	2.83	2.89	4.78

Source: United States Treasury

http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield

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, 4.58 percent on Aug 22, 2013 and 4.48 percent on Dec 26, 2013, which is the last data point in Chart VI-13.

Chart VI-13, US, Conventional Mortgage Rate, Jan 8, 2004 to Dec 26, 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 (http://www.federalreserve.gov/newsevents/press/monetary/20131218a.htm):

“In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of its asset purchases. Beginning in January, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.”

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 Dec 18, 2013 (http://www.federalreserve.gov/newsevents/press/monetary/20131218a.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. The Committee also reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent 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? Will the FOMC increase purchases of mortgage-backed securities if mortgage rates increase?

At the confirmation hearing on nomination for Chair of the Board of Governors of the Federal Reserve System, Vice Chair Yellen (2013Nov14 http://www.federalreserve.gov/newsevents/testimony/yellen20131114a.htm), states needs and intentions of policy:

“We have made good progress, but we have farther to go to regain the ground lost in the crisis and the recession. Unemployment is down from a peak of 10 percent, but at 7.3 percent in October, it is still too high, reflecting a labor market and economy performing far short of their potential. At the same time, inflation has been running below the Federal Reserve's goal of 2 percent and is expected to continue to do so for some time.

For these reasons, the Federal Reserve is using its monetary policy tools to promote a more robust recovery. A strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases. I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy.”

“The assumption that investors expect on balance no change in the rate of interest has been adopted for the theoretical reasons explained in section 2.6 rather than for reasons of realism. Clearly investors do form expectations of changes in interest rates and differfrom each other in their expectations. For the purposes of dynamic theory and of analysis of specific market situations, the theories of sections 2 and 3 are complementary rather than competitive. The formal apparatus of section 3 will serve just as well for a non-zero expected capital gain or loss as for a zero expected value of g. Stickiness of interest rate expectations would mean that the expected value of g is a function of the rate of interest r, going down when r goes down and rising when r goes up. In addition to the rotation of the opportunity locus due to a change in r itself, there would be a further rotation in the same direction due to the accompanying change in the expected capital gain or loss. At low interest rates expectation of capital loss may push the opportunity locus into the negative quadrant, so that the optimal position is clearly no consols, all cash. At the other extreme, expectation of capital gain at high interest rates would increase sharply the slope of the opportunity locus and the frequency of no cash, all consols positions, like that of Figure 3.3. The stickier the investor's expectations, the more sensitive his demand for cash will be to changes in the rate of interest (emphasis added).”

W = Y/r (10

The argument that anemic population growth causes “secular stagnation” in the US (Hansen 1938, 1939, 1941) is as misplaced currently as in the late 1930s (for early dissent see Simons 1942). There is currently population growth in the ages of 16 to 24 years but not enough job creation and discouragement of job searches for all ages (http://cmpassocregulationblog.blogspot.com/2013/12/theory-and-reality-of-secular.html). This is merely another case of theory without reality with dubious policy proposals.

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 16,478.41 on Fri Dec 27, 2013, which is higher by 16.3 percent than the value of 14,164.53 reached on Oct 9, 2007 and higher by 16.1 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 70.1 percent since the trough of the sovereign debt crisis in Europe on Jul 2, 2010 to Dec 27, 2013; S&P 500 has gained 80.1 percent and DAX 69.1 percent. Before the current round of risk aversion, almost all assets in the column “∆% Trough to 12/27/13” 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 11.8 percent below the trough. Japan’s Nikkei Average is 83.4 percent above the trough. DJ Asia Pacific TSM is 25.5 percent above the trough. Dow Global is 45.6 percent above the trough. STOXX 50 of 50 blue-chip European equities (http://www.stoxx.com/indices/index_information.html?symbol=sx5E) is 27.1 percent above the trough. NYSE Financial Index is 48.7 percent above the trough. DJ UBS Commodities is 2.9 percent above the trough. DAX index of German equities (http://www.bloomberg.com/quote/DAX:IND) is 69.1 percent above the trough. Japan’s Nikkei Average is 83.4 percent above the trough on Aug 31, 2010 and 42.0 percent above the peak on Apr 5, 2010. The Nikkei Average closed at 16,178.94 on Fri Dec 27, 2013 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata), which is 57.7 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 15.3 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 12/27/13” in Table VI-4 shows increase of 0.8 percent in the week for China’s Shanghai Composite. DJ Asia Pacific increased 1.3 percent. NYSE Financial increased 1.3 percent in the week. DJ UBS Commodities changed 0.0 percent. Dow Global increased 1.8 percent in the week of Dec 27, 2013. The DJIA increased 1.6 percent and S&P 500 increased 1.3 percent. DAX of Germany increased 2.0 percent. STOXX 50 increased 2.1 percent. The USD depreciated 0.5 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 12/27/13” that provides the percentage change from the peak in Apr 2010 before the sovereign risk event to Dec 27, 2013. Most risk financial assets had gained not only relative to the trough as shown in column “∆% Trough to 12/27/13” but also relative to the peak in column “∆% Peak to 12/27/13.” There are now several equity indexes above the peak in Table VI-4: DJIA 47.1 percent, S&P 500 51.3 percent, DAX 51.4 percent, Dow Global 18.8 percent, DJ Asia Pacific 9.9 percent, NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) 18.4 percent, Nikkei Average 42.0 percent and STOXX 50 7.7 percent. There is only one equity index below the peak: Shanghai Composite by 33.6 percent. DJ UBS Commodities Index is now 12.0 percent below the peak. The US dollar strengthened 9.1 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 increased 0.8 percent from $2,605.2 billion of 2009 dollars in IVQ2007 to $2,627.2 billion in IIIQ2013. As shown in Table IAI-2, real private fixed investment fell 3.6 percent from $2,586.3 billion of 2009 dollars in IVQ2007 to $2,494.0 billion in IIIQ2013. Growth of real private investment is mediocre for all but four quarters from IIQ2011 to IQ2012 (Section I and earlier http://cmpassocregulationblog.blogspot.com/2013/11/global-financial-risk-mediocre-united.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 and $39.2 billion in IIIQ2013. 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 and $39.5 billion in IIIQ2013. 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. Net dividends fell at $179.0 billion in IIIQ2013. 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 with IVA and CCA rose at $218.6 billion in IIIQ2013. Undistributed profits of US corporations swelled 382.4 percent from $107.7 billion IQ2007 to $519.5 billion in IIIQ2013 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. Corporate profits with IVA and CCA increased $39.2 billion from $2087.4 billion in IIQ2013 to $2126.6 billion in IIIQ2013 at the annual rate of 1.9 percent (http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp3q13_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. 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. 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:

clip_image003

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

clip_image003

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 12/27/ /13	∆% Week 12/27/13	∆% Trough to 12/27/ 13
DJIA	4/26/ 10	7/2/10	-13.6	47.1	1.6	70.1
S&P 500	4/23/ 10	7/20/ 10	-16.0	51.3	1.3	80.1
NYSE Finance	4/15/ 10	7/2/10	-20.3	18.4	1.3	48.7
Dow Global	4/15/ 10	7/2/10	-18.4	18.8	1.8	45.6
Asia Pacific	4/15/ 10	7/2/10	-12.5	9.9	1.3	25.5
Japan Nikkei Aver.	4/05/ 10	8/31/ 10	-22.5	42.0	1.9	83.4
China Shang.	4/15/ 10	7/02 /10	-24.7	-33.6	0.8	-11.8
STOXX 50	4/15/10	7/2/10	-15.3	7.7	2.1	27.1
DAX	4/26/ 10	5/25/ 10	-10.5	51.4	2.0	69.1
Dollar Euro	11/25 2009	6/7 2010	21.2	9.1	-0.5	-15.3
DJ UBS Comm.	1/6/ 10	7/2/10	-14.5	-12.0	0.0	2.9
10-Year T Note	4/5/ 10	4/6/10	3.986	2.784	3.004

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 Destruction of Household Nonfinancial Wealth with Stagnating Total Real Wealth. The valuable report on Financial Accounts of the United States formerly 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 important information and analysis. 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 IIIQ2013. The data show the strong shock to US wealth during the contraction. Assets fell from $82.4 trillion in 2007 to $78.4 trillion in 2011 even after nine consecutive quarters of growth beginning in IIIQ2009 (http://cmpassocregulationblog.blogspot.com/2013/12/tapering-quantitative-easing-mediocre.html http://wwwdev.nber.org/cycles/cyclesmain.html), for decline of $4.0 trillion or 4.9 percent. Assets stood at $84.5 trillion in 2012 for gain of $2.1 trillion relative to $82.4 trillion in 2007 or increase by 2.6 percent. Assets increased to $90.9 trillion in IIIQ2013 by $8.5 trillion relative to 2007 or 10.4 percent. Liabilities declined from $14.4 trillion in 2007 to $13.6 trillion in 2011 or by $825.8 billion equivalent to decline by 5.7 percent. Liabilities declined $795.0 billion or 5.5 percent from 2007 to 2012 and increased 0.2 percent from 2011 to 2012. Liabilities fell from $14.4 trillion in 2007 to $13.7 trillion in IIIQ2013, by $714.8 billion or decline of 5.0 percent. Net worth shrank from $68.0 trillion in 2007 to $64.9 trillion in 2011, that is, $3.1 trillion equivalent to decline of 4.6 percent. Net worth increased from $67,990.3 billion in 2007 to $77,259.3 billion in IIIQ2013 by $9,269.0 billion or 13.6 percent. The US consumer price index for all items increased from 210.036 in Dec 2007 to 234.149 in Sep 2013 (http://www.bls.gov/cpi/data.htm) or 11.5 percent. Net worth adjusted by CPI inflation increased 1.9 percent from 2007 to IIIQ2013. Nonfinancial assets fell $1,228.7 billion from $28,272.8 billion in 2007 to $27,044.1 billion in IIIQ2013 or 4.3 percent. There was brutal decline from 2007 to IIIQ2013 of $1.839 trillion in real estate assets or by 7.8 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	IIIQ2013
Assets	82,384.1	78,448.9	84,526.0	90,938.3
Nonfinancial	28,272.8	23,278.9	25,004.5	27,044.1
Real Estate	23,449.8	18,124.3	19,709.0	21,610.9
Durable Goods	4,476.0	4,726.4	4,848.0	4,973.7
Financial	54,111.3	55,170.0	59,521.5	63,894.2
Deposits	7,564.0	8,738.9	9,184.5	9,274.7
Credit Market	5,036.7	5,489.0	5,627.9	5,500.1
Mutual Fund Shares	4,682.9	4,449.2	5,293.7	6,193.9
Equities Corporate	10,118.3	9,049.9	10,327.0	12,104.6
Equity Noncorporate	9,097.3	7,495.6	8,181.0	8,820.2
Pension	14,956.6	17,115.2	18,075.1	19,098.4
Liabilities	14,393.8	13,568.0	13,598.8	13,679.0
Home Mortgages	10,610.3	9,677.8	9,436.9	9,373.3
Consumer Credit	2,616.6	2,757.0	2,924.3	3,039.5
Net Worth	67,990.3	64,881.0	70,927.3	77,259.3

Net Worth = Assets – Liabilities

Source: Board of Governors of the Federal Reserve System. 2013. Flow of funds, balance sheets and integrated macroeconomic accounts: third quarter 2013. Washington, DC, Federal Reserve System, Dec 9.

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 13.1 percent from 2007 to 2008 and $9.3 trillion or 11.3 percent to 2009. Net worth fell $10.7 trillion from 2007 to 2008 or 15.7 percent and $8.9 trillion to 2009 or 13.2 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	82,384.1	71,595.2	-10,788.9	73,090.6	-9,293.5
Non FIN	28,272.8	24,851.1	-3,439.7	23,676.7	-4,596.1
RE	23,449.8	19,898.7	-3,569.1	18,699.1	-4,750.7
FIN	54,111.3	46,744.0	-8,301.6	49,413.8	-4.697.5
LIAB	14,393.8	14,276.1	-136.7	14,050.7	-343.1
NW	67,990.3	57,319.1	-10,704.5	59,039.9	-8,950.4

A: Assets; Non FIN: Nonfinancial Assets; RE: Real Estate; FIN: Financial Assets; LIAB: Liabilities; NW: Net Worth

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 68.2 percent of GDP in IIIQ2013 (http://cmpassocregulationblog.blogspot.com/2013/12/tapering-quantitative-easing-mediocre.html), generating demand to increase aggregate economic activity and employment. There are neglected and counterproductive risks in unconventional monetary policy. Between 2007 and IIIQ2013, real estate fell in value by $1838.9 billion and financial assets increased $9782.9 billion for net gain of real estate and financial assets of $7944.0 billion, explaining most of the increase in net worth of $9269.0 billion obtained by adding the decrease in liabilities of $714.8 billion to the increase of assets of $8554.2 billion. Net worth increased from $67,990.3 billion in 2007 to $77,259.3 billion in IIIQ2013 by $9269.0 billion or 13.6 percent. The US consumer price index for all items increased from 210.036 in Dec 2007 to 234.149 in Sep 2013 (http://www.bls.gov/cpi/data.htm) or 11.5 percent. Net worth adjusted by CPI inflation increased 1.9 percent from 2007 to IIIQ2013. 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 2.3 percent on average in the cyclical expansion in the 17 quarters from IIIQ2009 to IIIQ2013. 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) and the third estimate of GDP for IIIQ2013 (http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp3q13_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 (http://cmpassocregulationblog.blogspot.com/2013/12/tapering-quantitative-easing-mediocre.html and earlier http://cmpassocregulationblog.blogspot.com/2013/12/risks-of-zero-interest-rates-mediocre.html).The expansion from IQ1983 to IVQ1985 was at the average annual growth rate of 5.9 percent, 5.4 percent from IQ1983 to IIIQ1986, 5.4 percent from IQ1983 to IVQ1986 and at 7.8 percent from IQ1983 to IVQ1983 (http://cmpassocregulationblog.blogspot.com/2013/12/tapering-quantitative-easing-mediocre.html and earlier http://cmpassocregulationblog.blogspot.com/2013/12/risks-of-zero-interest-rates-mediocre.html). As a result, there are 28.1 million unemployed or underemployed in the United States for an effective unemployment rate of 17.2 percent (http://cmpassocregulationblog.blogspot.com/2013/12/risks-of-zero-interest-rates-mediocre.html http://cmpassocregulationblog.blogspot.com/2013/11/global-financial-risk-mediocre-united.html). The US missed the opportunity for recovery of output and employment always afforded in the first four quarters of expansion from recessions. Zero interest rates and quantitative easing were not required or present in successful cyclical expansions and in secular economic growth at 3.0 percent per year and 2.0 percent per capita as measured by Lucas (2011May).

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 IIIQ2013
Assets	82,384.1	-3,935.2	2,141.9	8,554.2
Nonfinancial	28,272.8	-4,993.9	-3,268.3	-1,228.7
Real Estate	23,449.8	-5,325.5	-3,740.8	-1,838.9
Financial	54,018.1	1,058.7	5,410.2	9,782.9
Liabilities	14,371.1	-825.8	-795.0	-714.8
Net Worth	67,990.3	-3,109.3	2,937.0	9,269.0

Net Worth = Assets – Liabilities

Source: Net Worth = Assets – Liabilities

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 IQ1987 and from IVQ2007 to IIIQ2012 is provided in Table IIA-5. The data reveal the following facts for the cycles in the 1980s:

IVQ1979 to IQ1987. Net worth increased 94.1 percent from IVQ1979 to IQ1987, the all items CPI index increased 46.2 percent from 76.7 in Dec 1979 to 112.1 in Mar 1987 and real net worth increased 32.8 percent.
IQ1980 to IVQ1985. Net worth increased 65.7 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 21.4 percent.
IVQ1979 to IVQ1985. Net worth increased 69.4 percent, 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 18.8 percent.
IQ1980 to IQ1987. Net worth increased 89.9 percent, the all items CPI index increased 39.9 percent from 80.1 in Mar 1980 to 112.1 in Mar 1987 and real net worth increased 35.7 percent.

There is disastrous performance in the current economic cycle:

IVQ2007 to IIIQ2013. Net worth increased 13.6 percent, the all items CPI increased 11.5 percent from 210.036 in Dec 2007 to 234.149 in Sep 2013 and real or inflation adjusted net worth increased 1.9 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 2.3 percent on average in the cyclical expansion in the 17 quarters from IIIQ2009 to IIIQ2013. US economic growth has been at only 2.3 percent on average in the cyclical expansion in the 17 quarters from IIIQ2009 to IIIQ2013. 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) and the third estimate of GDP for IIIQ2013 (http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp3q13_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 [CP1] (http://cmpassocregulationblog.blogspot.com/2013/12/tapering-quantitative-easing-mediocre.html and earlier http://cmpassocregulationblog.blogspot.com/2013/12/risks-of-zero-interest-rates-mediocre.html). The expansion from IQ1983 to IVQ1985 was at the average annual growth rate of 5.9 percent, 5.4 percent from IQ1983 to IIIQ1986, 5.4 percent from IQ1983 to IVQ1986 and at 7.8 percent from IQ1983 to IVQ1983 (http://cmpassocregulationblog.blogspot.com/2013/12/tapering-quantitative-easing-mediocre.html and earlier http://cmpassocregulationblog.blogspot.com/2013/12/risks-of-zero-interest-rates-mediocre.html). As a result, there are 28.1 million unemployed or underemployed in the United States for an effective unemployment rate of 17.2 percent (http://cmpassocregulationblog.blogspot.com/2013/12/risks-of-zero-interest-rates-mediocre.html http://cmpassocregulationblog.blogspot.com/2013/11/global-financial-risk-mediocre-united.html). The US missed the opportunity for recovery of output and employment always afforded in the first four quarters of expansion from recessions. Zero interest rates and quantitative easing were not required or present in successful cyclical expansions and in secular economic growth at 3.0 percent per year and 2.0 percent per capita as measured by Lucas (2011May).

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	9,021.2 9,220.3
IVQ1985 IIIQ1986 IVQ1986 IQ1987	15,278.5 16,292.9 16,845,1 17,509.1
∆ USD Billions IVQ1985 IQ1987 IQ1980-IVQ1985 IQ1980-IIIQ1986 IQ1980-IVQ1986 IQ1980-IQ1987	+6,257.3 ∆%69.4 R∆%18.8 +8,487.9 ∆%94.1 R∆%32.8 +6,058.2 ∆%65.7 R∆%21.4 +7,072.6 ∆%76.7 R∆%28.4 +7,624.8 ∆%82.7 R∆%32.4 +8,288.8 ∆%89.9 R∆%35.7
Period IVQ2007 to IQ2013
Net Worth of Households and Nonprofit Organizations USD Millions
IVQ2007	67,990.3
IIIQ2013	77,259.3
∆ USD Billions	9,269.0 ∆%13.6 R∆%1.9

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

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 IIIQ2013. There is remarkable stop and go behavior in this series with two sharp declines and two standstills in the 17 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 increased 1.9 percent from IVQ2007 to IIIQ2013 when adjusting for consumer price inflation.

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

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 nonprofit organizations increased 94.1 percent from IVQ1979 to IQ1987 and 32.8 percent when adjusting for consumer price inflation. Net worth of households and nonprofit organizations increased 89.9 percent from IQ1980 to IQ1987 and 35.7 percent when adjusting for consumer price inflation.

Chart IIA-2, Net Worth of Households and Nonprofit Organizations in Millions of Dollars, IVQ1979 to IQ1987

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 IIIQ2013 at $77,259.3 billion or increase of 10,003.2 percent. The consumer price index not seasonally adjusted was 18.2 in Dec 1945 jumping to 234.149 in Sep 2013 or increase of 1,186.5 percent. There was a gigantic increase of US net worth of households and nonprofit organizations over 67 years and three quarters with inflation-adjusted increase from $42.016 in dollars of 1945 to $329.958 in IIIQ2013 or 685.3 percent. In a simple formula: {[($77,259.3/$764.7)/(234.149/18.2)-1]100 = 685.3%}. Wealth of households and nonprofit organizations increased from $764.7 billion at year-end 1945 to $70,927.3 billion at the end of 2012 or 9175.2 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 $308.915 in 2012 or 635.2 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 net worth of US households and nonprofit organizations. Recovery has been in stop-and-go fashion during the worst cyclical expansion in the 67 years when US GDP grew at 2.3 percent on average in sixteen quarters between IIIQ2009 and IIIQ2013 (http://cmpassocregulationblog.blogspot.com/2013/12/tapering-quantitative-easing-mediocre.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 $67,990.3 billion in 2007 to GDP of $14,480.3 billion was 4.69. The ratio of net worth of households and nonprofits of $70,027.3 billion in 2012 to GDP of 16,244.6 billion was 4.31.

Chart IIA-3, Net Worth of Households and Nonprofit Organizations in Millions of Dollars, IVQ1945 to IIIQ2013

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

Table IIA-6 provides percentage changes of nonfinancial domestic sector debt. Households increased debt by 10.0 percent in 2006 but have been reducing their debt continuously with the exception of growth at 1.4 percent in IIQ2012 but renewed decrease at 1.6 percent in IIIQ2012 and increase at 2.1 percent in IVQ2012. Household debt declined at 0.7 percent in IQ2013 and increased at 0.8 percent in IIQ2013. Household debt increased at 3.0 percent in IIIQ2013 with personal consumption expenditures contributing 1.36 percentage points to growth of GDP in IIIQ2013 (http://cmpassocregulationblog.blogspot.com/2013/12/tapering-quantitative-easing-mediocre.html). Financial repression by zero fed funds rates or negative interest rates is intended to increase debt and reduce savings. Business had not been as exuberant in acquiring debt and has been increasing debt benefitting from historically low costs while increasing cash holdings to around $2 trillion by swelling undistributed profits because of the uncertainty of capital budgeting. The key to growth and hiring consists in creating the incentives for business to invest and hire. States and local government were forced into increasing debt by the decline in revenues but began to contract in IQ2011, decreasing again from IQ2011 to IVQ2011, increasing at 2.9 percent in IIQ2012 and decreasing at 0.2 percent in IIIQ2012 and 3.8 percent in IVQ2012. State and local government increased debt at 2.4 percent in IQ2013 and at 1.1 percent in IIQ2013. State and local government decreased debt at 3.9 percent in IIIQ2013. Opposite behavior is found for the federal government that has been rapidly accumulating debt but without success in the self-assigned goal of promoting economic growth. Financial repression constitutes seigniorage of government debt (http://cmpassocregulationblog.blogspot.com/2011/05/global-inflation-seigniorage-financial.html http://cmpassocregulationblog.blogspot.com/2011/05/global-inflation-seigniorage-monetary.html).

Table IIA-6, US, Percentage Change of Nonfinancial Domestic Sector Debt

	Total	Households	Business	State & Local Govern-ment	Federal
IIIQ2013	3.5	3.0	7.5	-3.9	1.5
IIQ2013	3.4	0.8	7.2	1.1	2.5
IQ2013	4.4	-0.7	4.9	2.4	10.1
IVQ2012	6.2	2.1	9.1	-3.8	10.4
IIIQ2012	3.0	-1.6	5.1	-0.2	7.1
IIQ2012	5.3	1.4	4.9	2.9	11.0
IQ2012	4.7	-1.1	4.5	0.4	13.5
IVQ 2011	4.6	-0.1	5.0	-1.6	12.1
IIIQ 2011	4.7	-1.1	4.3	-0.3	14.4
2012	4.9	0.2	6.0	-0.2	10.9
2011	3.7	-1.4	4.8	-1.7	11.4
2010	4.0	-2.8	1.5	2.3	20.2
2009	3.1	-1.7	-2.2	4.0	22.7
2008	6.0	0.1	6.3	0.6	24.2
2007	8.6	6.8	13.6	5.5	4.9
2006	8.7	10.0	10.9	3.9	3.9
2005	9.3	11.2	9.0	5.8	7.0
2004	9.3	11.1	6.8	11.4	9.0
2003	8.0	11.8	2.2	8.3	10.9

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

ESIII Collapse of United States Dynamism of Income Growth and Employment Creation. 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 IB-1 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) 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 2012 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 1989 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. Table IB-1 illustrates the contradiction of long-term growth with the proposition of secular stagnation (Hansen 1938, 1938, 1941 with early critique by Simons (1942). Secular stagnation would occur over long periods. Table IB-1 also provides the corresponding rates of population growth that is only marginally lower at 0.8 to 0.9 percent recently from 1.1 percent over the long-term. GDP growth fell abruptly from 2.6 percent on average from 2000 to 2006 to 0.9 percent from 2006 to 2012 and real disposable income growth fell from 2.9 percent from 2000 to 2006 to 1.4 percent from 2006 to 2012. The decline of real per capita disposable income is even sharper from average 2.0 percent from 2000 to 2006 to 0.6 percent from 2006 to 2012 while population growth was 0.8 percent on average. Lazear and Spletzer (2012JHJul122) provides theory and measurements showing that cyclic factors explain currently depressed labor markets. This is also the case of the overall economy. 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 decreased 0.5 percent. Third, first 17 quarters of expansion. In the expansion from IQ1983 to IQ1987: GDP grew 23.1 percent at the annual equivalent rate of 5.0 percent; real disposable income grew 19.5 percent at the annual equivalent rate of 4.3 percent; and real disposable income per capita grew 15.1 percent at the annual equivalent rate of 3.4 percent. In the expansion from IIIQ2009 to IIIQ2013: GDP grew 10.3 percent at the annual equivalent rate of 2.3 percent; real disposable income grew 6.3 percent at the annual equivalent rate of 1.4 percent; and real disposable personal income per capita grew 2.9 percent at the annual equivalent rate of 0.7 percent. Fourth, entire quarterly cycle. In the entire cycle combining contraction and expansion from IQ1980 to IQ1987: GDP grew 22.9 percent at the annual equivalent rate of 2.8 percent; real disposable personal income 2.4 percent at the annual equivalent rate of 3.2 percent; and real disposable personal income per capita 18.1 percent at the annual equivalent rate of 2.2 percent. In the entire cycle combining contraction and expansion from IVQ2007 to IIIQ2013: GDP grew 5.6 percent at the annual equivalent rate of 0.9 percent; real disposable personal income 7.9 percent at the annual equivalent rate of 1.3 percent; and real disposable personal income per capita 3.1 percent at the annual equivalent rate of 0.5 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. The proposition of secular stagnation should explain a long-term process of decay and not the actual abrupt collapse of the economy and labor markets currently.

Table IB-1, US, GDP, Real Disposable Personal Income, Real Disposable Income per Capita and Population in 1983-85 and 2007-2013, %

Long-term Average ∆% per Year	GDP	Population
1929-2012	3.3	1.1
1947-2012	3.2	1.2
1947-1999	3.6	1.3
2000-2012	1.7	0.9
2000-2006	2.6	0.9
Long-term Average ∆% per Year	Real Disposable Income	Real Disposable Income per Capita	Population
1929-2012	3.2	2.0	1.1
1947-1999	3.7	2.3	1.3
2000-2012	2.2	1.3	0.9
2000-2006	2.9	2.0	0.9
Whole Cycles Average ∆% per Year
1980-1989	3.5	2.6	0.9
2006-2012	1.4	0.6	0.8
Comparison of Cycles	# Quarters	∆%	∆% Annual Equivalent
GDP
I83 to IV83 IQ83 to IQ87	4 17
I83 to IV83 I83 to IQ87	4 17	7.8 23.1	7.8 5.0
RDPI
I83 to IV83 I83 to I87	4 17	5.3 19.5	5.3 4.3
RDPI Per Capita
I83 to IV83 I83 to I87	4 17	4.4 15.1	4.4 3.4
Whole Cycle IQ1980 to IQ1987
GDP	30	22.9	2.8
RDPI	30	26.4	3.2
RDPI per Capita	30	18.1	2.2
Population	30	7.0	0.9
GDP
III09 to II10 III09 to III13	4 17	2.7 10.3	2.7 2.3
RDPI
III09 to II10 III09 to III13	4 17	0.3 6.3	0.3 1.4
RDPI per Capita
III09 to II10 II09 to IIIQ13	4 17	-0.5 2.9	-0.5 0.7
Population
II09 to II010 II09 to III13	4 17	0.9 3.2	0.8 0.8
IVQ2007 to IIIQ2013	23
GDP	24	5.6	0.9
RDPI	24	7.9	1.3
RDPI per Capita	24	3.1	0.5
Population	24	4.6	0.8

RDPI: Real Disposable Personal Income

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

There are seven basic facts illustrating the current economic disaster of the United States:

GDP maintained trend growth in the entire business cycle from IQ1980 to IQ1987 and I, including contractions and expansions. GDP is well below trend in the entire business cycle from IVQ2007, including contractions and expansions
Per capita real disposable income exceeded trend growth in the 1980s but is substantially below trend in IIIQ2013
Level of employed persons increased in the 1980s but declined into IIIQ2013
Level of full-time employed persons increased in the 1980s but declined into IIIQ2013
Level unemployed, unemployment rate and employed part-time for economic reasons fell in the recovery from the recessions in the 1980s but not substantially in the recovery since IIIQ2009
Wealth of households and nonprofit organizations soared in the 1980s but stagnated in real terms into IIIQ2013
Gross private domestic investment increased sharply from IQ1980 to IQ1987 but gross private domestic investment stagnated and private fixed investment fell from IVQ2007 into IIIQ2013

There is a critical issue of the United States economy will be able in the future to attain again the level of activity and prosperity of projected trend growth. Growth at trend during the entire business cycles built the largest economy in the world but there may be an adverse, permanent weakness in United States economic performance and prosperity. Table IB-2 provides data for analysis of these seven basic facts. The seven blocks of Table IB-2 are separated initially after individual discussion of each one followed by the full Table IB-2.

1. Trend Growth.

i. As shown in Table IB-2, actual GDP grew cumulatively 22.5 percent from IQ1980 to IQ1987, which is relatively close to what trend growth would have been at 24.8 percent. Real GDP grew 22.9 percent from IVQ1979 to IQ1987. Rapid growth at the average annual rate of 5.0 percent annual per quarter during the expansion from IQ1983 to IQ1987 erased the loss of GDP of 4.6 percent during the contraction and maintained trend growth at 2.8 percent for GDP and 3.2 percent for real disposable personal income over the entire cycle.

ii. In contrast, cumulative growth from IVQ2007 to IIIQ2013 was 3.1 percent while trend growth would have been 19.4 percent. GDP in IIIQ2013 at seasonally adjusted annual rate is $15,839.3 billion as estimated by the Bureau of Economic Analysis (BEA) (http://www.bea.gov/iTable/index_nipa.cfm) and would have been $17,905.3 billion, or $2066.0 billion higher, had the economy grown at trend over the entire business cycle as it happened during the 1980s and throughout most of US history. There is $2.1 trillion of foregone GDP that the economy would have created as it occurred during past cyclical expansions, which explains why employment net of population growth has not rebounded to even higher than before. There would not be recovery of full employment even with growth of 3 percent per year beginning immediately because the opportunity was lost to grow faster during the expansion from IIIQ2009 to IIIQ2013 after the recession from IVQ2007 to IIQ2009. The United States has acquired a heavy social burden of unemployment and underemployment of 28.1 million people or 17.3 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2013/12/risks-of-zero-interest-rates-mediocre.html) that will not be significantly diminished even with return to growth of GDP of 3 percent per year because of growth of the labor force by new entrants. The US labor force grew from 142.583 million in 2000 to 153.124 million in 2007 or by 7.4 percent at the average yearly rate of 1.0 percent per year. The civilian noninstitutional population or those able to work, increased from 212.577 million in 2000 to 231.867 million in 2007 or 9.1 percent at the average yearly rate of 1.2 percent per year (data from http://www.bls.gov/data/). Data for the past five years cloud accuracy because of the number of people discouraged from seeking employment. The noninstitutional population of the United States increased from 231.867 million in 2007 to 243.284 million in 2012 or by 4.9 percent. In the same period, the labor force increased from 153.124 million in 2007 to 154.975 million in 2012 or by 1.2 percent and only by 0.9 percent to 153.617 million in 2011 while population increased 3.3 percent from 231.867 million in 2007 to 239.618 million in 2011 (data from http://www.bls.gov/data/). People ceased to seek jobs because they do not believe that there is a job available for them (http://cmpassocregulationblog.blogspot.com/2013/12/risks-of-zero-interest-rates-mediocre.html). Structural change in demography occurs over relatively long periods and not suddenly as shown by Edward P. Lazear and James R. Spletzer (2012JHJul22). There is an abrupt cyclical event and no evidence for secular stagnation and similar propositions.

Period IQ1980 to IQ1987
GDP SAAR USD Billions
IQ1980	6,517.9
IQ1987	7,986.4
∆% IQ1980 to IQ1987 (22.9 percent from IVQ1979 $6496.8 billion)	22.5
∆% Trend Growth IQ1980 to IQ1987	24.8

Period IVQ2007 to IIIQ2013
GDP SAAR USD Billions
IVQ2007	14,996.1
IIIQ2013	15,839.3
∆% IVQ2007 to IIIQ2013 Actual	5.6
∆% IVQ2007 to IIIQ2013 Trend	19.4

2. Stagnating Per Capita Real Disposable Income

i. In the entire business cycle from IQ1980 to IQ1987, as shown in Table IB-2, trend growth of per capita real disposable income, or what is left per person after inflation and taxes, grew cumulatively 18.0 percent, which is close to what would have been trend growth of 16.0 percent.

ii. In contrast, in the entire business cycle from IVQ2007 to IIIQ2013, per capita real disposable income increased 3.1 percent while trend growth would have been 12.6 percent. Income available after inflation and taxes is about the same or lower as before the contraction after 17 consecutive quarters of GDP growth at mediocre rates relative to those prevailing during historical cyclical expansions. In IIQ2013, personal income grew at the SAAR of 4.7 percent after falling at 4.1 percent in IQ2013. In IIQ2013, real personal income excluding current transfer receipts grew at 5.6 percent after falling at 7.2 percent in IQ2013. In IIQ2013, real disposable personal income grew at 4.1 percent after falling at minus 7.9 percent in IQ2013 percent (Table 6 at http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1113.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.”

Nominal personal income grew at 4.0 percent in IIIQ2013 and real personal income excluding current transfer receipts at 2.0 percent while real disposable income grew at 3.0 percent (http://www.bea.gov/newsreleases/national/pi/2013/pdf/pi1113.pdf).

Period IQ1980 to IQ1987

Real Disposable Personal Income per Capita IQ1980 Chained 2009 USD	20,242
Real Disposable Personal Income per Capita IQ1987 Chained 2009 USD	23,891
∆% IQ1980 to IQ1987 (18.1 percent from IVQ1982 $20,230)	18.0
∆% Trend Growth	16.0

Period IVQ2007 to IIIQ2013

Real Disposable Personal Income per Capita IVQ2007 Chained 2009 USD	35,823
Real Disposable Personal Income per Capita IIIQ2013 Chained 2009 USD	36,943
∆% IVQ2007 to IIIQ2013	3.1
∆% Trend Growth	12.6

3. Number of Employed Persons

i. As shown in Table IB-2, the number of employed persons increased over the entire business cycle from 98.527 million not seasonally adjusted (NSA) in IQ1980 to 110.229 million NSA in IQ1987 or by 11.9 percent.

ii. In contrast, during the entire business cycle the number employed fell from 146.334 million in IVQ2007 to 144,651 million in IIIQ2013 or by 1.2 percent. There are 28.1 million persons unemployed or underemployed, which is 17.2 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2013/12/risks-of-zero-interest-rates-mediocre.html).

Period IQ1980 to IQ1987

Employed Millions IQ1980 NSA End of Quarter	98.527
Employed Millions IQ1987 NSA End of Quarter	110.229
∆% Employed IQ1980 to IQ1987	11.9

Period IVQ2007 to IIIQ2013

Employed Millions IVQ2007 NSA End of Quarter	146.334
Employed Millions IIIQ2013 NSA End of Quarter	144.651
∆% Employed IVQ2007 to IIIQ2013	-1.2

4. Number of Full-Time Employed Persons

i. As shown in Table IB-2, during the entire business cycle in the 1980s, including contractions and expansion, the number of employed full-time rose from 81.280 million NSA in IQ1980 to 90.270 million NSA in IQ1987 or 11.1 percent.

ii. In contrast, during the entire current business cycle, including contraction and expansion, the number of persons employed full-time fell from 121.042 million in IVQ2007 to 117.308 million in IIIQ2013 or by minus 3.1 percent.

4. Number of Full-time Employed Persons

Period IQ1980 to IQ1987

Employed Full-time Millions IQ1980 NSA End of Quarter	81.280
Employed Full-time Millions IQ1987 NSA End of Quarter	90,270
∆% Full-time Employed IQ1980 to IQ1987	11.1

Period IVQ2007 to IIIQ2013

Employed Full-time Millions IVQ2007 NSA End of Quarter	121.042
Employed Full-time Millions IIIQ2013 NSA End of Quarter	117.308
∆% Full-time Employed IVQ2007 to IIIQ2013	-3.1

5. Unemployed, Unemployment Rate and Employed Part-time for Economic Reasons.

i. As shown in Table IB-2 and in the following block, in the cycle from IQ1980 to IQ1987: (a) The rate of unemployment was virtually the same at 6.9 percent in IQ1987 relative to 6.6 percent in IQ1980. (b) The number unemployed increased from 6.983 million in IQ1980 to 8.124 million in IQ1987 or 16.3 percent. (c) The number employed part-time for economic reasons increased 44.4 percent from 3.624 million in IQ1980 to 5.232 million in IQ1987.

ii. In contrast, in the economic cycle from IVQ2007 to IIIQ2013: (a) The rate of unemployment increased from 4.8 percent in IVQ2007 to 7.0 percent in IIIQ2013. (b) The number unemployed increased 47.7 percent from 7.371 million in IVQ2007 to 10.885 million in IIIQ2013. (c) The number employed part-time for economic reasons because they could not find any other job increased 58.4 percent from 4.750 million in IVQ2007 to 7.522 million in IIIQ2013. (d) U6 Total Unemployed plus all marginally attached workers plus total employed part time for economic reasons as percent of all civilian labor force plus all marginally attached workers NSA increased from 8.7 percent in IVQ2007 to 13.1 percent in IIIQ2013.

Period IQ1980 to IQ1987

Unemployment Rate IQ1980 NSA End of Quarter	6.6
Unemployment Rate IQ1987 NSA End of Quarter	6.9
Unemployed IQ1980 Millions End of Quarter	6.983
Unemployed IQ1987 Millions End of Quarter	8.124
∆%	16.3
Employed Part-time Economic Reasons Millions IQ1980 End of Quarter	3.624
Employed Part-time Economic Reasons Millions IQ1987 End of Quarter	5.232
∆%	44.4

Period IVQ2007 to IIIQ2013

Unemployment Rate IVQ2007 NSA End of Quarter	4.8
Unemployment Rate IIIQ2013 NSA End of Quarter	7.0
Unemployed IVQ2007 Millions End of Quarter	7.371
Unemployed IIIQ2013 Millions End of Quarter	10.885
∆%	47.7
Employed Part-time Economic Reasons IVQ2007 Millions End of Quarter	4.750
Employed Part-time Economic Reasons Millions IIIQ2013 End of Quarter	7.522
∆%	58.4
U6 Total Unemployed plus all marginally attached workers plus total employed part time for economic reasons as percent of all civilian labor force plus all marginally attached workers NSA
IVQ2007	8.7
IIIQ2013	13.1

6. Wealth of Households and Nonprofit Organizations.

The comparison of net worth of households and nonprofit organizations in the entire economic cycle from IQ1980 (and from IVQ1979) to IQ1987 and from IVQ2007 to IIIQ2012 is provided in Table IB-2 and in the following block. i. The data reveal the following facts for the cycles in the 1980s:

IVQ1979 to IQ1987. Net worth increased 94.1 percent from IVQ1979 to IQ1987, the all items CPI index increased 46.2 percent from 76.7 in Dec 1979 to 112.1 in Mar 1987 and real net worth increased 32.8 percent.
IQ1980 to IVQ1985. Net worth increased 65.7 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 21.4 percent.
IVQ1979 to IVQ1985. Net worth increased 69.4 percent, 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 18.8 percent.
IQ1980 to IQ1987. Net worth increased 89.9 percent, the all items CPI index increased 39.9 percent from 80.1 in Mar 1980 to 112.1 in Mar 1987 and real net worth increased 35.7 percent.

ii. There is disastrous performance in the current economic cycle:

IVQ2007 to IIIQ2013. Net worth increased 13.6 percent, the all items CPI increased 11.5 percent from 210.036 in Dec 2007 to 234.149 in Sep 2013 and real or inflation adjusted net worth increased 1.9 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 2.3 percent on average in the cyclical expansion in the 17 quarters from IIIQ2009 to IIIQ2013. 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) and the third estimate of GDP for IIIQ2013 (http://www.bea.gov/newsreleases/national/gdp/2013/pdf/gdp3q13_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 (http://cmpassocregulationblog.blogspot.com/2013/12/tapering-quantitative-easing-mediocre.html and earlier http://cmpassocregulationblog.blogspot.com/2013/12/risks-of-zero-interest-rates-mediocre.html).The expansion from IQ1983 to IVQ1985 was at the average annual growth rate of 5.9 percent, 5.4 percent from IQ1983 to IIIQ1986, 5.4 percent from IQ1983 to IVQ1986 and at 7.8 percent from IQ1983 to IVQ1983 (http://cmpassocregulationblog.blogspot.com/2013/12/tapering-quantitative-easing-mediocre.html and earlier http://cmpassocregulationblog.blogspot.com/2013/12/risks-of-zero-interest-rates-mediocre.html). As a result, there are 28.1 million unemployed or underemployed in the United States for an effective unemployment rate of 17.2 percent (http://cmpassocregulationblog.blogspot.com/2013/12/risks-of-zero-interest-rates-mediocre.html http://cmpassocregulationblog.blogspot.com/2013/11/global-financial-risk-mediocre-united.html). The US missed the opportunity for recovery of output and employment always afforded in the first four quarters of expansion from recessions. Zero interest rates and quantitative easing were not required or present in successful cyclical expansions and in secular economic growth at 3.0 percent per year and 2.0 percent per capita as measured by Lucas (2011May).

Period IQ1980 to IVQ1985
Net Worth of Households and Nonprofit Organizations USD Millions
IVQ1979 IQ1980	9,021.2 9,220.3
IVQ1985 IIIQ1986 IVQ1986 IQ1987	15,278.5 16,292.9 16,845,1 17,509.1
∆ USD Billions IVQ1985 IQ1987 IQ1980-IVQ1985 IQ1980-IIIQ1986 IQ1980-IVQ1986 IQ1980-IQ1987	+6,257.3 ∆%69.4 R∆%18.8 +8,487.9 ∆%94.1 R∆%32.8 +6,058.2 ∆%65.7 R∆%21.4 +7,072.6 ∆%76.7 R∆%28.4 +7,624.8 ∆%82.7 R∆%32.4 +8,288.8 ∆%89.9 R∆%35.7
Period IVQ2007 to IQ2013
Net Worth of Households and Nonprofit Organizations USD Millions
IVQ2007	67,990.3
IIIQ2013	77,259.3
∆ USD Billions	9,269.0 ∆%13.6 R∆%1.9

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

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

7. Gross Private Domestic Investment.

i. The comparison of gross private domestic investment in the entire economic cycles from IQ1980 to IQ1987 and from IVQ2007 to IIIQ2013 is in the following block and in Table IB-2. Gross private domestic investment increased from $951.6 billion in IQ1980 to $1,173.8 billion in IQ1987 or by 23.4 percent.

ii In the current cycle, gross private domestic investment increased from $2,605.2 billion in IVQ2007 to $2,627.2 billion in IIIQ2013, or 0.8 percent. Private fixed investment fell from $2,586.3 billion in IVQ2007 to $2,494.0 billion in IIIQ2013, or decline by 3.6 percent.

Period IQ1980 to IQ1987
Gross Private Domestic Investment USD 2009 Billions
IQ1980	951.6
IQ1987	1,173.8
∆%	23.4
Period IVQ2007 to IIIQ2013
Gross Private Domestic Investment USD Billions
IVQ2007	2,605.2
IIQ2013	2,627.2
∆%	0.8
Private Fixed Investment USD 2009 Billions
IVQ2007	2,586.3
IIIQ2013	2,494.0
∆%	-3.6

Table IB-2, US, GDP and Real Disposable Personal Income per Capita Actual and Trend Growth and Employment, 1980-1985 and 2007-2012, SAAR USD Billions, Millions of Persons and ∆%


Period IQ1980 to IQ1987
GDP SAAR USD Billions
IQ1980	6,517.9
IQ1987	7,986.4
∆% IQ1980 to IQ1987 (22.9 percent from IVQ1982 $6496.8 billion)	21.1
∆% Trend Growth IQ1980 to IQ1987	24.8
Real Disposable Personal Income per Capita IQ1980 Chained 2009 USD	20,242
Real Disposable Personal Income per Capita IQ1987 Chained 2009 USD	23,891
∆% IQ1980 to IQ1987 (18.1 percent from IVQ1982 $20,230 billion)	18.0
∆% Trend Growth	16.0
Employed Millions IQ1980 NSA End of Quarter	98.527
Employed Millions IQ1987 NSA End of Quarter	110.229
∆% Employed IQ1980 to IQ1987	11.9
Employed Full-time Millions IQ1980 NSA End of Quarter	81.280
Employed Full-time Millions IQ1987 NSA End of Quarter	90.270
∆% Full-time Employed IQ1980 to IQ1987	11.1
Unemployment Rate IQ1980 NSA End of Quarter	6.6
Unemployment Rate IQ1987 NSA End of Quarter	6.9
Unemployed IQ1980 Millions NSA End of Quarter	6.983
Unemployed IQ1987 Millions NSA End of Quarter	8.124
∆%	16.3
Employed Part-time Economic Reasons IQ1980 Millions NSA End of Quarter	3.624
Employed Part-time Economic Reasons Millions IQ1987 NSA End of Quarter	5.232
∆%	44.4
Net Worth of Households and Nonprofit Organizations USD Billions
IVQ1979	9,021.4
IQ1987	17,509.1
∆ USD Billions	+8,487.9
∆% CPI Adjusted	32.8
Gross Private Domestic Investment USD 2009 Billions
IQ1980	951.6
IQ1987	1173.8
∆%	23.4
Period IVQ2007 to IIQ2013
GDP SAAR USD Billions
IVQ2007	14,996.1
IIIQ2013	15,839.3
∆% IVQ2007 to IIIQ2013	5.6
∆% IVQ2007 to IIIQ2013 Trend Growth	19.4
Real Disposable Personal Income per Capita IVQ2007 Chained 2009 USD	35,823
Real Disposable Personal Income per Capita IIIQ2013 Chained 2009 USD	36,943
∆% IVQ2007 to IIIQ2013	3.1
∆% Trend Growth	12.6
Employed Millions IVQ2007 NSA End of Quarter	146.334
Employed Millions IIIQ2013 NSA End of Quarter	144.651
∆% Employed IVQ2007 to IIIQ2013	-1.2
Employed Full-time Millions IVQ2007 NSA End of Quarter	121.042
Employed Full-time Millions IIIQ2013 NSA End of Quarter	117.308
∆% Full-time Employed IVQ2007 to IIIQ2013	-3.1
Unemployment Rate IVQ2007 NSA End of Quarter	4.8
Unemployment Rate IIIQ2013 NSA End of Quarter	7.0
Unemployed IVQ2007 Millions NSA End of Quarter	7.371
Unemployed IIIQ2013 Millions NSA End of Quarter	10.885
∆%	47.7
Employed Part-time Economic Reasons IVQ2007 Millions NSA End of Quarter	4.750
Employed Part-time Economic Reasons Millions IIIQ2013 NSA End of Quarter	7.522
∆%	58.4
U6 Total Unemployed plus all marginally attached workers plus total employed part time for economic reasons as percent of all civilian labor force plus all marginally attached workers NSA
IVQ2007	8.7
IIIQ2013	13.1
Net Worth of Households and Nonprofit Organizations USD Billions
IVQ2007	67,990.3
IIIQ2013	77.259.3
∆ USD Billions	9,269 ∆%13.6 R∆%1.9
Gross Private Domestic Investment USD Billions
IVQ2007	2,605.2
IIIQ2013	2,627.2
∆%	0.8
Private Fixed Investment USD 2005 Billions
IVQ2007	2,586.3
IIIQ2013	2,494.0
∆%	-3.6

Note: GDP trend growth used is 3.0 percent per year and GDP per capita is 2.0 percent per year as estimated by Lucas (2011May) on data from 1870 to 2010.

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm US Bureau of Labor Statistics http://www.bls.gov/data/. Board of Governors of the Federal Reserve System. 2013Jun6. Flow of funds, balance sheets and integrated macroeconomic accounts. Washington, DC, Federal Reserve System, Jun 6.

The Congressional Budget Office (CBO 2013BEOFeb5) estimates potential GDP, potential labor force and potential labor productivity provided in Table IB-3. The CBO estimates average rate of growth of potential GDP from 1950 to 2012 at 3.3 percent per year. The projected path is significantly lower at 2.2 percent per year from 2012 to 2023. The legacy of the economic cycle expansion from IIIQ2009 to IIIQ2013 at 2.3 percent on average is in contrast with 5.0 percent on average in the expansion from IQ1983 to IQ1987 (http://cmpassocregulationblog.blogspot.com/2013/12/tapering-quantitative-easing-mediocre.html). Subpar economic growth may perpetuate unemployment and underemployment estimated at 28.1 million or 17.2 percent of the effective labor force in Nov 2013 (http://cmpassocregulationblog.blogspot.com/2013/12/risks-of-zero-interest-rates-mediocre.html) with much lower hiring than in the period before the current cycle (http://cmpassocregulationblog.blogspot.com/2013/12/theory-and-reality-of-secular.html).

Table IB-3, US, Congressional Budget Office History and Projections of Potential GDP of US Overall Economy, ∆%

	Potential GDP	Potential Labor Force	Potential Labor Productivity*
Average Annual ∆%
1950-1973	3.9	1.6	2.3
1974-1981	3.3	2.5	0.8
1982-1990	3.1	1.6	1.5
1991-2001	3.1	1.3	1.8
2002-2012	2.2	0.8	1.4
Total 1950-2012	3.3	1.5	1.7
Projected Average Annual ∆%
2013-2018	2.2	0.6	1.6
2019-2023	2.3	0.5	1.8
2012-2023	2.2	0.5	1.7

*Ratio of potential GDP to potential labor force

Source: CBO (2013BEOFeb5).

Chart IB-1 of the Congressional Budget Office (CBO 2013BEOFeb5) provides actual and potential GDP of the United States from 2000 to 2011 and projected to 2024. Lucas (2011May) estimates trend of United States real GDP of 3.0 percent from 1870 to 2010 and 2.2 percent for per capita GDP. The United States successfully returned to trend growth of GDP by higher rates of growth during cyclical expansion as analyzed by Bordo (2012Sep27, 2012Oct21) and Bordo and Haubrich (2012DR). Growth in expansions following deeper contractions and financial crises was much higher in agreement with the plucking model of Friedman (1964, 1988). The unusual weakness of growth at 2.3 percent on average from IIIQ2009 to IIIQ2013 during the current economic expansion in contrast with 5.0 percent on average in the cyclical expansion from IQ1983 to IQ1987 (http://cmpassocregulationblog.blogspot.com/2013/12/tapering-quantitative-easing-mediocre.html) cannot be explained by the contraction of 4.3 percent of GDP from IVQ2007 to IIQ2009 and the financial crisis. Weakness of growth in the expansion is perpetuating unemployment and underemployment of 28.1 million or 17.2 percent of the labor force as estimated for Nov 2013 (http://cmpassocregulationblog.blogspot.com/2013/12/risks-of-zero-interest-rates-mediocre.html). There is no exit from unemployment/underemployment and stagnating real wages because of the collapse of hiring (http://cmpassocregulationblog.blogspot.com/2013/12/theory-and-reality-of-secular.html). The US economy and labor markets collapsed without recovery. Abrupt collapse of economic conditions can be explained only with cyclic factors (Lazear and Spletzer 2012Jul22) and not by secular stagnation (Hansen 1938, 1939, 1941 with early dissent by Simons 1942).

Chart IB-1, US, Congressional Budget Office, Actual and Projections of Potential GDP, 2000-2024, Trillions of Dollars

Source: Congressional Budget Office, CBO (2013BEOFeb5).

ESIV Stagnating Real Disposable Income. 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/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

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

	Not Seasonally Adjusted Thousands
Jan-Nov 2013	402
Jan-Nov 2012	340
∆% Jan-Nov 2013/Jan-Nov 2012	18.1*
Jan-Nov 2011	282
∆% Jan-Nov 2013/Jan-Nov 2011	42.6
Jan-Nov 2010	300
∆% Jan-Nov 2013/ Jan-Nov 2010	34.0
Jan-Nov 2009	350
∆% Jan-Nov 2013/ Jan-Nov 2009	14.9
Jan-Nov 2008	459
∆% Jan-Nov 2013/ Jan-Nov 2008	-12.4
Jan-Nov 2007	732
∆% Jan-Nov 2013/ Jan-Nov 2007	-45.1
Jan-Nov 2006	980
∆% Jan-Nov 2013/Jan-Nov 2006	-59.0
Jan-Nov 2005	1,196
∆% Jan-Nov 2013/Jan-Nov 2005	-66.4
Jan-Nov 2004	1,120
∆% Jan-Nov 2013/Jan-Nov 2004	-64.1
Jan-Nov 2003	1011
∆% Jan-Nov 2013/ Jan-Nov 2003	-60.2
Jan-Nov 2002	903
∆% Jan-Nov 2013/ Jan-Nov 2002	-55.5
Jan-Nov 2001	842
∆% Jan-Nov 2013/ Jan-Nov 2001	-52.3
Jan-Nov 2000	812
∆% Jan-Nov 2013/ Jan-Nov 2000	-50.5
Jan-Nov 1995	622
∆% Jan-Nov 2013/ Jan-Nov 1995	-35.4
Jan-Nov 1963	529
∆% Jan-Nov 2013/ Jan-Nov 1963	-24.0

	Oct 2012	Oct 2013	∆%
Total Assets	13,025.7	13,978.5	7.3
Bank Credit	9923.4	10,078.5	1.6
Securities in Bank Credit	2712.7	2707.3	-0.2
Treasury & Agency Securities	1859.3	1797.7	-3.3
Mortgage-Backed Securities	1338.7	1325.1	-1.0
Loans & Leases	7210.7	7371.2	2.2
Real Estate Loans	3560.1	3526.2	-1.0
Consumer Loans	1114.4	1144.1	2.7
Commercial & Industrial Loans	1473.0	1587.6	7.8
Other Loans & Leases	1063.2	1113.3	4.7
Cash Assets*	1675.6	2609.7	55.7
Total Liabilities	11,506.9	12,456.6	8.3
Deposits	9134.7	9733.3	6.6

	NPI	NDPI	RDPI	NPCE	RPCE
2013
Nov	0.2	0.1	0.1	0.5	0.5
AE ∆% Nov	2.4	1.2	1.2	6.2	6.2
Oct	-0.1	-0.2	-0.2	0.4	0.4
AE ∆% Oct	-1.2	-2.4	-2.4	4.9	4.9
Sep	0.4	0.5	0.4	0.3	0.2
Aug	0.5	0.6	0.5	0.3	0.2
Jul	0.1	0.3	0.2	0.2	0.1
Jun	0.4	0.3	-0.1	0.6	0.2
May	0.4	0.4	0.3	0.2	0.1
Apr	0.1	0.0	0.3	-0.2	0.0
AE ∆% Apr-Sep	3.9	4.3	3.2	2.8	1.6
Mar	0.3	0.3	0.4	0.2	0.3
Feb	1.3	1.3	0.9	0.7	0.3
AE ∆% Feb-Mar	10.0	10.0	8.1	5.5	3.7
Jan	-4.4	-5.1 (0.1)^a	-5.1	0.2	0.1
AE ∆% Jan	-41.7	-46.6 (3.7)^a	-46.6	2.4	1.2
2012
∆% Jan-Dec 2012***	7.9	7.5	5.9	3.8	2.2
Dec	3.1	3.1 (0.3)*	3.1 (0.5)*	0.1	0.1
Nov	1.2	1.2 (0.6)*	1.3 (0.9)*	0.2	0.3
AE ∆% Nov-Dec	29.0	29.0 (5.5)*	29.8 (8.7)*	1.8	2.4
Oct	0.4	0.4	0.2	0.1	-0.1
Sep	0.6	0.5	0.2	0.7	0.4
Aug	0.1	0.0	-0.3	0.2	-0.1
AE ∆% Aug-Oct	4.5	3.7	0.4	4.1	0.8
Jul	-0.1	-0.1	-0.1	0.4	0.4
Jun	0.3	0.3	0.1	0.1	0.0
May	0.0	0.0	0.0	-0.1	0.0
Apr	0.2	0.2	0.2	0.3	0.3
AE ∆% Apr-Jul	1.2	1.2	0.6	2.1	2.1
Mar	0.4	0.3	0.1	0.2	0.0
Feb	0.7	0.6	0.3	0.8	0.5
Jan	0.9	0.8	0.5	0.6	0.4
AE ∆% Jan-Mar	8.3	7.0	3.7	6.6	3.7
2011
∆% Jan-Dec 2011*	4.6	3.6	1.2	4.3	1.8
Dec	0.7	0.6	0.6	0.0	0.0
Nov	-0.1	-0.1	-0.2	0.2	0.0
Oct	0.0	0.1	0.0	0.4	0.4
Sep	-0.1	-0.1	-0.3	0.5	0.3
AE ∆% Sep-Dec	1.5	1.5	0.3	3.3	2.1
Aug	0.1	0.1	-0.1	0.2	0.0
Jul	0.6	0.6	0.4	0.5	0.3
Jun	0.4	0.4	0.3	0.3	0.2
May	0.3	0.3	0.0	0.3	0.0
AE ∆% May-Aug	4.3	4.3	1.8	4.0	1.5
Apr	0.2	0.2	-0.1	0.4	0.0
Mar	0.2	0.2	-0.2	0.7	0.4
Feb	0.6	0.5	0.3	0.4	0.2
Jan	1.6	0.8	0.6	0.3	0.1
AE ∆% Jan-Apr	8.1	5.2	1.8	5.5	2.1
2010
∆% Jan-Dec 2010**	4.8	4.2	2.8	4.4	2.9
Dec	0.9	0.9	0.7	0.3	0.1
Nov	0.5	0.4	0.3	0.6	0.4
Oct	0.5	0.5	0.2	0.8	0.5
IVQ2010∆%	1.9	1.8	1.2	1.7	1.0
IVQ2010 AE ∆%	7.9	7.4	4.9	7.0	4.1

	RDPI	RPCE	RPCEG	RPCEGD	RPCES
2013
Nov	0.6	2.6	4.7	7.8	1.5
Oct	1.8	2.4	4.7	7.7	1.2
Sep	2.2	1.9	3.5	5.9	1.1
Aug	2.0	2.1	3.9	8.9	1.2
Jul	1.3	1.8	3.9	8.0	0.7
Jun	0.9	2.0	4.1	8.3	1.0
May	1.1	1.8	3.6	7.7	0.9
Apr	0.8	1.7	3.0	7.1	1.1
Mar	0.8	2.0	3.1	6.3	1.4
Feb	0.5	1.7	3.2	6.6	0.9
Jan	-0.1	2.0	3.7	7.7	1.1
2012
Dec	5.9	2.2	4.2	9.0	1.2
Nov	3.2	2.1	3.6	8.4	1.4
Oct	1.7	1.8	2.8	6.1	1.3
Sep	1.6	2.3	4.1	8.8	1.4
Aug	1.1	2.1	4.0	9.1	1.2
Jul	1.2	2.2	3.4	7.9	1.6
Jun	1.7	2.2	3.2	8.9	1.7
May	1.9	2.4	3.5	7.7	1.8
Apr	1.8	2.4	3.0	6.7	2.1
Mar	1.5	2.1	2.9	6.5	1.7
Feb	1.2	2.5	3.0	7.5	2.2
Jan	1.1	2.1	2.3	6.4	1.9
Dec 2011	1.2	1.8	1.9	5.8	1.7
Dec 2010	2.8	2.9	4.7	8.4	2.1

	Personal Income	Wages & Salaries	Personal Taxes	DPI	Savings Rate %
Nov 2013	14,310.3	7,231.8	1,685.2	12,625.1	4.2
Oct 2013	14,280.2	7,204.7	1,671.2	12,608.9	4.5
Change Nov 2013/ Oct 2013	30.1 ∆% 0.2	27.1 ∆% 0.4	14.0 ∆% 0.8	16.2 ∆% 0.1
Jan 2013	13,791.7	7,001.5	1,612.9	12,178.7	3.6
Dec 2012	14,420.2	7,200.8	1,591.0	12,829.2	8.7
Change Nov 2013/ Dec 2012	-109.9 ∆% -0.8	31.0 ∆% 0.4	94.2 ∆% 5.9	-204.0 ∆% -1.6
Change Dec 2012/ Dec 2011	1060.8 ∆% 7.9	510.7 ∆% 7.6	163.3 ∆% 11.4	897.6 ∆% 7.5
Dec 2011	13,359.4	6,690.1	1,427.7	11,931.6	5.4
Dec 2010	12,767.8	6,506.0	1,254.2	11,513.7	5.8
Change Dec 2011/ Dec 2010	591.6 ∆% 4.6	184.1 ∆% 2.8	173.5 ∆% 13.8	417.9 ∆% 3.6

CMP Associates Regulation Blog

Followers

Blog Archive

About Me

Monday, December 30, 2013

No comments:

Post a Comment