CMP Associates Regulation Blog: Financial Instability, Rules, Discretionary Authorities and Slow Productivity Growth, Thirty Million Unemployed or Underemployed, Stagnating Real Wages, United States International Trade, World Economic Slowdown and Global Recession Risk: Part I

Financial Instability, Rules, Discretionary Authorities and Slow Productivity Growth, Thirty Million Unemployed or Underemployed, Stagnating Real Wages, United States International Trade, World Economic Slowdown and Global Recession Risk

Carlos M. Pelaez

Executive Summary

I Thirty Million Unemployed or Underemployed

IA1 Summary of the Employment Situation

IA2 Number of People in Job Stress

IA3 Long-term and Cyclical Comparison of Employment

IA4 Job Creation

IB Stagnating Real Wages

II United States International Trade

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 Thirty Million Unemployed or Underemployed

ESIII Job Creation

ESIV Stagnating Real Wages

ESV Rules, Discretionary Authorities and Slow Productivity Growth

ESVI United States International Trade

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 from 12.1 percent in IQ2010 and 11.2 percent in IIQ2010 to 7.7 percent in IQ2013, 7.5 percent in IIQ2013 and 7.8 percent in IIIQ2013. GDP grew 7.7 percent in IVQ2013 relative to a year earlier and 1.8 percent relative to IIIQ2013, which is equivalent to 7.4 percent per year (http://cmpassocregulationblog.blogspot.com/2014/01/capital-flows-exchange-rates-and.html and earlier 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). There is also concern about indebtedness.
United States Economic Growth, Labor Markets and Budget/Debt Quagmire. The US is growing slowly with 29.3 million in job stress, fewer 10 million full-time jobs, high youth unemployment, historically low hiring and declining/stagnating real wages. Actual GDP is about two trillion dollars lower than trend GDP.
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/2014/01/world-inflation-waves-interest-rate.htmland earlier http://cmpassocregulationblog.blogspot.com/2013/12/tapering-quantitative-easing-mediocre.html). There is growing concern on capital outflows and currency depreciation of emerging markets.

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 with alternating episodes of revaluation.
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 by the penalty in the form of low interest rates and unsound credit decisions. 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 (http://www.federalreserve.gov/boarddocs/press/monetary/2004/20040630/default.htm) to 5.25 percent in Jun 2006 (http://www.federalreserve.gov/newsevents/press/monetary/20060629a.htm) 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 $2547 billion, or $2.5 trillion, of 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 (Friedman 1957). 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 (1)

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 Feb 6, 2014

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
1/2/2014	0.08	3.00	5.34
1/9/2014	0.07	2.97	5.28
1/16/2014	0.07	2.86	5.18
1/23/2014	0.07	2.79	5.11
1/31/2014	0.07	2.72	5.08
2/7/2014	0.07	2.73	5.13

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 and riskier asset classes resulting from the debate within and outside the Fed on tapering quantitative easing. Table VIII-2 provides the yield curve of Treasury securities on Feb 7, 2014, Dec 31, 2013, May 1, 2013, Feb 7, 2013 and Feb 7, 2006. There is oscillating 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 3.04 percent on Dec 31, 2013 and 2.71 percent on Feb 7, 2014, as measured by the United States Treasury. Assume that a bond with maturity in 10 years were issued on Dec 31, 2013, at par or price of 100 with coupon of 1.45 percent. The price of that bond would be 86.3778 with instantaneous increase of the yield to 3.04 percent for loss of 13.6 percent and far more with leverage. Assume that the yield of a bond with exactly ten years to maturity and coupon of 2.71 percent as occurred on Feb 7, 2013 would jump instantaneously from yield of 2.71 percent on Feb 7, 2014 to 4.57 percent as occurred on Feb 7, 2006 when the economy was closer to full employment. The price of the hypothetical bond issued with coupon of 2.71 percent would drop from 100 to 85.2032 after an instantaneous increase of the yield to 4.57 percent. The price loss would be 14.8 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

	2/7/14	12/31/13	5/01/13	2/7/13	2/7/06
1 M	0.10	0.01	0.03	0.03	4.33
3 M	0.08	0.07	0.06	0.07	4.49
6 M	0.09	0.10	0.08	0.11	4.67
1 Y	0.12	0.13	0.11	0.15	4.65
2 Y	0.30	0.38	0.20	0.25	4.61
3 Y	0.66	0.78	0.30	0.39	4.57
5 Y	1.47	1.75	0.65	0.83	4.52
7 Y	2.13	2.45	1.07	1.34	4.54
10 Y	2.71	3.04	1.66	1.99	4.57
20 Y	3.39	3.72	2.44	2.78	4.73
30 Y	3.67	3.96	2.83	3.17	NA

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 with amplifying fluctuations. 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 4.23 percent on Feb 6, 2014, which is the last data point in Chart VI-13. Shayndi Raice and Nick Timiraos, writing on “Banks cut as mortgage boom ends,” on Jan 9, 2014, published in the Wall Street Journal (http://online.wsj.com/news/articles/SB10001424052702303754404579310940019239208), analyze the drop in mortgage applications to a 13-year low, as measured by the Mortgage Bankers Association.

Chart VI-13, US, Conventional Mortgage Rate, Jan 8, 2004 to Feb 6, 2014

Source: Board of Governors of the Federal Reserve System

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

There is a false impression of the existence of a monetary policy “science,” measurements and forecasting with which to steer the economy into “prosperity without inflation.” Market participants are remembering the Great Bond Crash of 1994 shown in Table VI-7G when monetary policy pursued nonexistent inflation, causing trillions of dollars of losses in fixed income worldwide while increasing the fed funds rate from 3 percent in Jan 1994 to 6 percent in Dec. The exercise in Table VI-7G shows a drop of the price of the 30-year bond by 18.1 percent and of the 10-year bond by 14.1 percent. CPI inflation remained almost the same and there is no valid counterfactual that inflation would have been higher without monetary policy tightening because of the long lag in effect of monetary policy on inflation (see Culbertson 1960, 1961, Friedman 1961, Batini and Nelson 2002, Romer and Romer 2004). The pursuit of nonexistent deflation during the past ten years has resulted in the largest monetary policy accommodation in history that created the 2007 financial market crash and global recession and is currently preventing smoother recovery while creating another financial crash in the future. The issue is not whether there should be a central bank and monetary policy but rather whether policy accommodation in doses from zero interest rates to trillions of dollars in the fed balance sheet endangers economic stability.

Table VI-7G, Fed Funds Rates, Thirty and Ten Year Treasury Yields and Prices, 30-Year Mortgage Rates and 12-month CPI Inflation 1994

1994	FF	30Y	30P	10Y	10P	MOR	CPI
Jan	3.00	6.29	100	5.75	100	7.06	2.52
Feb	3.25	6.49	97.37	5.97	98.36	7.15	2.51
Mar	3.50	6.91	92.19	6.48	94.69	7.68	2.51
Apr	3.75	7.27	88.10	6.97	91.32	8.32	2.36
May	4.25	7.41	86.59	7.18	88.93	8.60	2.29
Jun	4.25	7.40	86.69	7.10	90.45	8.40	2.49
Jul	4.25	7.58	84.81	7.30	89.14	8.61	2.77
Aug	4.75	7.49	85.74	7.24	89.53	8.51	2.69
Sep	4.75	7.71	83.49	7.46	88.10	8.64	2.96
Oct	4.75	7.94	81.23	7.74	86.33	8.93	2.61
Nov	5.50	8.08	79.90	7.96	84.96	9.17	2.67
Dec	6.00	7.87	81.91	7.81	85.89	9.20	2.67

Notes: FF: fed funds rate; 30Y: yield of 30-year Treasury; 30P: price of 30-year Treasury assuming coupon equal to 6.29 percent and maturity in exactly 30 years; 10Y: yield of 10-year Treasury; 10P: price of 10-year Treasury assuming coupon equal to 5.75 percent and maturity in exactly 10 years; MOR: 30-year mortgage; CPI: percent change of CPI in 12 months

Sources: yields and mortgage rates http://www.federalreserve.gov/releases/h15/data.htm CPI ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.t

Chart VI-14 provides the overnight fed funds rate, the yield of the 10-year Treasury constant maturity bond, the yield of the 30-year constant maturity bond and the conventional mortgage rate from Jan 1991 to Dec 1996. In Jan 1991, the fed funds rate was 6.91 percent, the 10-year Treasury yield 8.09 percent, the 30-year Treasury yield 8.27 percent and the conventional mortgage rate 9.64 percent. Before monetary policy tightening in Oct 1993, the rates and yields were 2.99 percent for the fed funds, 5.33 percent for the 10-year Treasury, 5.94 for the 30-year Treasury and 6.83 percent for the conventional mortgage rate. After tightening in Nov 1994, the rates and yields were 5.29 percent for the fed funds rate, 7.96 percent for the 10-year Treasury, 8.08 percent for the 30-year Treasury and 9.17 percent for the conventional mortgage rate.

Chart VI-14, US, Overnight Fed Funds Rate, 10-Year Treasury Constant Maturity, 30-Year Treasury Constant Maturity and Conventional Mortgage Rate, Monthly, Jan 1991 to Dec 1996

Source: Board of Governors of the Federal Reserve System

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

Chart VI-15 of the Bureau of Labor Statistics provides the all items consumer price index from Jan 1991 to Dec 1996. There does not appear acceleration of consumer prices requiring aggressive tightening.

Chart VI-15, US, Consumer Price Index All Items, Jan 1991 to Dec 1996

Source: Bureau of Labor Statistics

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

Chart IV-16 of the Bureau of Labor Statistics provides 12-month percentage changes of the all items consumer price index from Jan 1991 to Dec 1996. Inflation collapsed during the recession from Jul 1990 (III) and Mar 1991 (I) and the end of the Kuwait War on Feb 25, 1991 that stabilized world oil markets. CPI inflation remained almost the same and there is no valid counterfactual that inflation would have been higher without monetary policy tightening because of the long lag in effect of monetary policy on inflation (see Culbertson 1960, 1961, Friedman 1961, Batini and Nelson 2002, Romer and Romer 2004). Policy tightening had adverse collateral effects in the form of emerging market crises in Mexico and Argentina and fixed income markets worldwide.

Chart VI-16, US, Consumer Price Index All Items, Twelve-Month Percentage Change, Jan 1991 to Dec 1996

Source: Bureau of Labor Statistics

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

Carry trades induced by zero interest rates increase capital flows into emerging markets that appreciate exchange rates. Portfolio reallocations away from emerging markets depreciate their exchange rates in reversals of capital flows. Chart VI-4A provides the exchange rate of the Mexican peso (MXN) per US dollar from Nov 8, 1993 to Jan 31, 2014. The first data point in Chart VI-4A is MXN 3.1520 on Nov 8, 1993. The rate devalued to 11.9760 on Nov 14, 1995 during emerging market crises in the 1990s and the increase of interest rates in the US in 1994 that stressed world financial markets (Pelaez and Pelaez, International Financial Architecture 2005, The Global Recession Risk 2007, 147-77). The MXN depreciated sharply to MXN 15.4060/USD on Mar 2, 2009, during the global recession. The rate moved to MXN 11.5050/USD on May 2, 2011, during the sovereign debt crisis in the euro area. The rate depreciated to 11.9760 on May 9, 2013. The final data point in the current flight from emerging markets is MXN 13.3585/USD on Jan 31, 2014.

Chart VI-4A, Mexican Peso (MXN) per US Dollar (USD), Nov 8, 1993 to Jan 31, 2014

Note: US Recessions in Shaded Areas

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/H10/default.htm

There are collateral effects worldwide from unconventional monetary policy. In remarkable anticipation in 2005, Professor Raghuram G. Rajan (2005) warned of low liquidity and high risks of central bank policy rates approaching the zero bound (Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 218-9). Professor Rajan excelled in a distinguished career as an academic economist in finance and was chief economist of the International Monetary Fund (IMF). Shefali Anand and Jon Hilsenrath, writing on Oct 13, 2013, on “India’s central banker lobbies Fed,” published in the Wall Street Journal (http://online.wsj.com/news/articles/SB10001424052702304330904579133530766149484?KEYWORDS=Rajan), interviewed Raghuram G Rajan, who is the current Governor of the Reserve Bank of India, which is India’s central bank (http://www.rbi.org.in/scripts/AboutusDisplay.aspx). In this interview, Rajan argues that central banks should avoid unintended consequences on emerging market economies of inflows and outflows of capital triggered by monetary policy. Professor Rajan, in an interview with Kartik Goyal of Bloomberg (http://www.bloomberg.com/news/2014-01-30/rajan-warns-of-global-policy-breakdown-as-emerging-markets-slide.html), warns of breakdown of global policy coordination. Professor Willem Buiter (2014Feb4), a distinguished economist currently Global Chief Economist at Citigroup (http://www.willembuiter.com/resume.pdf), writing on “The Fed’s bad manners risk offending foreigners,” on Feb 4, 2014, published in the Financial Times (http://www.ft.com/intl/cms/s/0/fbb09572-8d8d-11e3-9dbb-00144feab7de.html#axzz2suwrwkFs), concurs with Raghuram G Rajan. Buiter (2014Feb4) argues that international policy cooperation in monetary policy is both in the interest of the world and the United States. Portfolio reallocations induced by combination of zero interest rates and risk events stimulate carry trades that generate wide swings in world capital flows. Chart VI-4B provides the rate of the Indian rupee (INR) per US dollar (USD) from Jan 2, 1973 to Jan 24, 2014. The first data point is INR 8.0200 on Jan 2, 1973. The rate depreciated sharply to INR 51.9600 on Mar 3, 2009, during the global recession. The rate appreciated to INR 44.0300/USD on Jul 28, 2011 in the midst of the sovereign debt event in the euro area. The rate overshot to INR 68.8000 on Aug 28, 2013. The final data point if INR 62.6300/USD on Jan 31, 2014.

Chart VI-4B, Indian Rupee (INR) per US Dollar (USD), Jan 2, 1973 to Jan 31, 2014

Note: US Recessions in Shaded Areas

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/H10/default.htm

ChVI-5 provides the exchange rate of JPY (Japan yen) per USD (US dollars). The first data point on the extreme left is JPY 357.7300/USD for Jan 4, 1971. The JPY has appreciated over the long term relative to the USD with fluctuations along an evident long-term appreciation. Before the global recession, the JPY stood at JPY 124.0900/USD on Jun 22, 2007. The use of the JPY as safe haven is evident by sharp appreciation during the global recession to JPY 110.48/USD on Aug 15, 2008, and to JPY 87.8000/USD on Jan 21, 2009. The final data point in Chart VI-5 is JPY 102.2800/USD on Jan 31, 2013 for appreciation of 17.6 percent relative to JPY 124.0900/USD on Jun 22, 2007 before the global recession and expansion characterized by recurring bouts of risk aversion. Takashi Nakamichi and Eleanor Warnock, writing on “Japan lashes out over dollar, euro,” on Dec 29, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887323530404578207440474874604.html?mod=WSJ_markets_liveupdate&mg=reno64-wsj), analyze the “war of words” launched by Japan’s new Prime Minister Shinzo Abe and his finance minister Taro Aso, arguing of deliberate devaluations of the USD and EUR relative to the JPY, which are hurting Japan’s economic activity. The data in Table VI-6 is obtained from closing dates in New York published by the Wall Street Journal (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata).

Chart VI-5, Japanese Yen JPY per US Dollars USD, Monthly, Jan 4, 1971-Jan 31, 2014

Note: US Recessions in Shaded Areas

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/H10/default.htm

The financial crisis and global recession were caused by interest rate and housing subsidies and affordability policies that encouraged high leverage and risks, low liquidity and unsound credit (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 157-66, Regulation of Banks and Finance (2009b), 217-27, International Financial Architecture (2005), 15-18, The Global Recession Risk (2007), 221-5, Globalization and the State Vol. II (2008b), 197-213, Government Intervention in Globalization (2008c), 182-4). Several past comments of this blog elaborate on these arguments, among which: http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html http://cmpassocregulationblog.blogspot.com/2011/01/professor-mckinnons-bubble-economy.html http://cmpassocregulationblog.blogspot.com/2011/01/world-inflation-quantitative-easing.html http://cmpassocregulationblog.blogspot.com/2011/01/treasury-yields-valuation-of-risk.html http://cmpassocregulationblog.blogspot.com/2010/11/quantitative-easing-theory-evidence-and.html http://cmpassocregulationblog.blogspot.com/2010/12/is-fed-printing-money-what-are.html

Zero interest rates in the United States forever tend to depreciate the dollar against every other currency if there is no risk aversion preventing portfolio rebalancing toward risk financial assets, which include the capital markets and exchange rates of emerging-market economies. The objective of unconventional monetary policy as argued by Yellen 2011AS) is to devalue the dollar to increase net exports that increase US economic growth. Increasing net exports and internal economic activity in the US is equivalent to decreasing net exports and internal economic activity in other countries.

Continental territory, rich endowment of natural resources, investment in human capital, teaching and research universities, motivated labor force and entrepreneurial initiative provide Brazil with comparative advantages in multiple economic opportunities. Exchange rate parity is critical in achieving Brazil’s potential but is difficult in a world of zero interest rates. Chart IV-6 of the Board of Governors of the Federal Reserve System provides the rate of Brazilian real (BRL) per US dollar (USD) from BRL 1.2074/USD on Jan 4, 1999 to BRL 2.4116/USD on Jan 31, 2013. The rate reached BRL 3.9450/USD on Oct 10, 2002 appreciating 60.5 percent to BRL 1.5580/USD on Aug 1, 2008. The rate depreciated 68.1 percent to BRL 2.6187/USD on Dec 5, 2008 during worldwide flight from risk. The rate appreciated again by 41.3 percent to BRL 1.5375/USD on Jul 26, 2011. The final data point in Chart VI-6 is BRL 2.4116/USD on Jan 31, 2014 for depreciation of 56.9 percent. The data in Table VI-6 is obtained from closing dates in New York published by the Wall Street Journal (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata).

Chart VI-6, Brazilian Real (BRL) per US Dollar (USD) Jan 4, 1999 to Jan 31, 2014

Note: US Recessions in Shaded Areas

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/H10/default.htm

Chart VI-7 of the Board of Governors of the Federal Reserve System provides the history of the BRL beginning with the first data point of BRL 0.8440/USD on Jan 2, 1995. The rate jumped to BRL 2.0700/USD on Jan 29, 1999 after changes in exchange rate policy and then to BRL 2.2000/USD on Mar 3, 1999. The rate depreciated 26.7 percent to BRL 2.7880/USD on Sep 21, 2001 relative to Mar 3, 1999.

Chart VI-7, Brazilian Real (BRL) per US Dollar (USD), Jan 2, 1995 to Jan 31, 2014

Note: US Recessions in Shaded Areas

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/H10/default.htm

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/20140129a.htm):

“Taking into account the extent of federal fiscal retrenchment since the inception of its current asset progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in February, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $30 billion per month rather than $35 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $35 billion per month rather than $40 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 Jan 29, 2014 (http://www.federalreserve.gov/newsevents/press/monetary/20140129a.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. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal (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).”

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

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). A competing event is the high level of valuations of risk financial assets (http://cmpassocregulationblog.blogspot.com/2013/01/peaking-valuation-of-risk-financial.html). Matt Jarzemsky, writing on “Dow industrials set record,” on Mar 5, 2013, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324156204578275560657416332.html), analyzes that the DJIA broke the closing high of 14,164.53 set on Oct 9, 2007, and subsequently also broke the intraday high of 14,198.10 reached on Oct 11, 2007. The DJIA closed at 15,794.08 on Fri Feb 7, 2014, which is higher by 11.5 percent than the value of 14,164.53 reached on Oct 9, 2007 and higher by 11.2 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 63.1 percent since the trough of the sovereign debt crisis in Europe on Jul 2, 2010 to Feb 7, 2014; S&P 500 has gained 75.7 percent and DAX 64.0 percent. Before the current round of risk aversion, almost all assets in the column “∆% Trough to 2/7/14” 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 14.2 percent below the trough. Japan’s Nikkei Average is 63.9 percent above the trough. DJ Asia Pacific TSM is 20.1 percent above the trough. Dow Global is 41.3 percent above the trough. STOXX 50 of 50 blue-chip European equities (http://www.stoxx.com/indices/index_information.html?symbol=sx5E) is 24.5 percent above the trough. NYSE Financial Index is 44.6 percent above the trough. DJ UBS Commodities is 3.6 percent above the trough. DAX index of German equities (http://www.bloomberg.com/quote/DAX:IND) is 64.0 percent above the trough. Japan’s Nikkei Average is 63.9 percent above the trough on Aug 31, 2010 and 26.9 percent above the peak on Apr 5, 2010. The Nikkei Average closed at 14,462.41 on Fri Feb 7, 2014 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata), which is 41.0 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 14.4 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 2/7/14” in Table VI-4 shows decrease of 0.3 percent in the week for China’s Shanghai Composite. DJ Asia Pacific decreased 1.1 percent. NYSE Financial increased 1.1 percent in the week. DJ UBS Commodities increased 1.9 percent. Dow Global increased 0.7 percent in the week of Feb 7, 2014. The DJIA increased 0.6 percent and S&P 500 increased 0.8 percent. DAX of Germany changed 0.0 percent. STOXX 50 increased 0.2 percent. The USD depreciated 1.1 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 2/7/14” that provides the percentage change from the peak in Apr 2010 before the sovereign risk event to Feb 7, 2014. Most risk financial assets had gained not only relative to the trough as shown in column “∆% Trough to 2/7/14” but also relative to the peak in column “∆% Peak to 2/7/14.” There are now several equity indexes above the peak in Table VI-4: DJIA 41.0 percent, S&P 500 47.6 percent, DAX 46.9 percent, Dow Global 15.3 percent, DJ Asia Pacific 5.2 percent, NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) 15.2 percent, Nikkei Average 26.9 percent and STOXX 50 5.5 percent. There is only one equity index below the peak: Shanghai Composite by 35.4 percent. DJ UBS Commodities Index is now 11.4 percent below the peak. The US dollar strengthened 9.9 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/2013/12/tapering-quantitative-easing-mediocre.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:

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

declines. Equally, decline in expected revenue from the stock or project, R_τ, causes decline in valuation. An intriguing issue is the difference in performance of valuations of risk financial assets and economic growth and employment. Paul A. Samuelson (http://www.nobelprize.org/nobel_prizes/economics/laureates/1970/samuelson-bio.html) popularized the view of the elusive relation between stock markets and economic activity in an often-quoted phrase “the stock market has predicted nine of the last five recessions.” In the presence of zero interest rates forever, valuations of risk financial assets are likely to differ from the performance of the overall economy. The interrelations of financial and economic variables prove difficult to analyze and measure.

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

	Peak	Trough	∆% to Trough	∆% Peak to 2/7/ /14	∆% Week 2/7/14	∆% Trough to 2/7/ 14
DJIA	4/26/ 10	7/2/10	-13.6	41.0	0.6	63.1
S&P 500	4/23/ 10	7/20/ 10	-16.0	47.6	0.8	75.7
NYSE Finance	4/15/ 10	7/2/10	-20.3	15.2	1.1	44.6
Dow Global	4/15/ 10	7/2/10	-18.4	15.3	0.7	41.3
Asia Pacific	4/15/ 10	7/2/10	-12.5	5.2	-1.1	20.1
Japan Nikkei Aver.	4/05/ 10	8/31/ 10	-22.5	26.9	-3.0	63.9
China Shang.	4/15/ 10	7/02 /10	-24.7	-35.4	-0.3	-14.2
STOXX 50	4/15/10	7/2/10	-15.3	5.5	0.2	24.5
DAX	4/26/ 10	5/25/ 10	-10.5	46.9	0.0	64.0
Dollar Euro	11/25 2009	6/7 2010	21.2	9.9	-1.1	-14.4
DJ UBS Comm.	1/6/ 10	7/2/10	-14.5	-11.4	1.9	3.6
10-Year T Note	4/5/ 10	4/6/10	3.986	2.784	2.681

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 Thirty Million Unemployed or Underemployed. Table I-4 consists of data and additional calculations using the BLS household survey, illustrating the possibility that the actual rate of unemployment could be 12.2 percent and the number of people in job stress could be around 30.3 million, which is 18.5 percent of the effective labor force. The first column provides for 2006 the yearly average population (POP), labor force (LF), participation rate or labor force as percent of population (PART %), employment (EMP), employment population ratio (EMP/POP %), unemployment (UEM), the unemployment rate as percent of labor force (UEM/LF Rate %) and the number of people not in the labor force (NLF). All data are unadjusted or not-seasonally-adjusted (NSA). The numbers in column 2006 are averages in millions while the monthly numbers for Jan 2013, Dec 2013 and Jan 2014 are in thousands, not seasonally adjusted. The average yearly participation rate of the population in the labor force was in the range of 66.0 percent minimum to 67.1 percent maximum between 2000 and 2006 with the average of 66.4 percent (ftp://ftp.bls.gov/pub/special.requests/lf/aa2006/pdf/cpsaat1.pdf). Table I-4b provides the yearly labor force participation rate from 1979 to 2014. The objective of Table I-4 is to assess how many people could have left the labor force because they do not think they can find another job. Row “LF PART 66.2 %” applies the participation rate of 2006, almost equal to the rates for 2000 to 2006, to the noninstitutional civilian population in Jan 2013, Dec 2013 and Jan 2014 to obtain what would be the labor force of the US if the participation rate had not changed. In fact, the participation rate fell to 63.3 percent by Jan 2013 and was 62.6 percent in Dec 2013 and 62.5 percent in Jan 2014, suggesting that many people simply gave up on finding another job. Row “∆ NLF UEM” calculates the number of people not counted in the labor force because they could have given up on finding another job by subtracting from the labor force with participation rate of 66.2 percent (row “LF PART 66.2%”) the labor force estimated in the household survey (row “LF”). Total unemployed (row “Total UEM”) is obtained by adding unemployed in row “∆NLF UEM” to the unemployed of the household survey in row “UEM.” The row “Total UEM%” is the effective total unemployed “Total UEM” as percent of the effective labor force in row “LF PART 66.2%.” The results are that:

there are an estimated 9.077 million unemployed in Jan 2014 who are not counted because they left the labor force on their belief they could not find another job (∆NLF UEM), that is, they dropped out of their job searches
the total number of unemployed is effectively 19.932 million (Total UEM) and not 10.855 million (UEM) of whom many have been unemployed long term
the rate of unemployment is 12.2 percent (Total UEM%) and not 7.0 percent, not seasonally adjusted, or 6.6 percent seasonally adjusted
the number of people in job stress is close to 29.3 million by adding the 9.077 million leaving the labor force because they believe they could not find another job.

The row “In Job Stress” in Table I-4 provides the number of people in job stress not seasonally adjusted at 30.395 million in Jan 2014, adding the total number of unemployed (“Total UEM”), plus those involuntarily in part-time jobs because they cannot find anything else (“Part Time Economic Reasons”) and the marginally attached to the labor force (“Marginally attached to LF”). The final row of Table I-4 shows that the number of people in job stress is equivalent to 18.5 percent of the labor force in Jan 2014. The employment population ratio “EMP/POP %” dropped from 62.9 percent on average in 2006 to 57.9 percent in Jan 2013, 58.5 percent in Dec 2013 and 58.1 percent in Jan 2014. The number employed in Jan 2014 was 143.526 million (NSA) or 3.789 million fewer people with jobs relative to the peak of 147.315 million in Jul 2007 while the civilian noninstitutional population increased from 231.958 million in Jul 2007 to 246.915 million in Jan 2014 or by 14.957 million. The number employed fell 2.6 percent from Jul 2007 to Jan 2014 while population increased 6.4 percent. There is actually not sufficient job creation in merely absorbing new entrants in the labor force because of those dropping from job searches, worsening the stock of unemployed or underemployed in involuntary part-time jobs.

What really matters for labor input in production and wellbeing is the number of people with jobs or the employment/population ratio, which has declined and does not show signs of increasing. There are several million fewer people working in 2014 than in 2006 and the number employed is not increasing while population increased 14.957 million. 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/2014/01/capital-flows-exchange-rates-and.htm and earlier at 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. The number of hiring relative to the number unemployed measures the chances of becoming employed. The number of hiring in the US economy has declined by 17 million and does not show signs of increasing in an unusual recovery without hiring (http://cmpassocregulationblog.blogspot.com/2014/01/capital-flows-exchange-rates-and.htm and earlier http://cmpassocregulationblog.blogspot.com/2013/12/theory-and-reality-of-secular.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). US GDP grew 6.5 percent from $14,996.1 billion in IVQ2007 in constant dollars to $15,965.6 billion in IVQ2013 or 6.5 percent. The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions. US GDP grew 6.5 percent from $14,996.1 billion in IVQ2007 in constant dollars to $15,965.6 billion in IVQ2013 or 6.5 percent. The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions. Growth under trend in the entire cycle from IVQ2007 to IV2013 would have accumulated to 20.3 percent. GDP in IVQ2013 would be $18,040.3 billion if the US had grown at trend, which is higher by $2,074.7 billion than actual $15,965.6 billion. The cause of resource underutilization such as unemployment and underemployment is cyclical slow growth and not the illusion of secular stagnation. There are about two trillion dollars of GDP less than under trend, explaining the 30.3 million unemployed or underemployed equivalent to actual unemployment of 18.5 percent of the effective labor force (Section I and earlier http://cmpassocregulationblog.blogspot.com/2014/01/twenty-nine-million-unemployed-or.html). The US missed the opportunity to grow at higher rates during the expansion and it is difficult to catch up because rates in the final periods of expansions tend to decline.

Table I-4, US, Population, Labor Force and Unemployment, NSA

	2006	Jan 2013	Dec 2013	Jan 2014
POP	229	244.663	246,745	246,915
LF	151	154,794	154,408	154,381
PART%	66.2	63.3	62.6	62.5
EMP	144	141,614	144,423	143,526
EMP/POP%	62.9	57.9	58.5	58.1
UEM	7	13,181	9,984	10,855
UEM/LF Rate%	4.6	8.5	6.5	7.0
NLF	77	89,868	92,338	92,534
LF PART 66.2%		161,967	163,345	163,458
∆NLF UEM		7,173	8,937	9,077
Total UEM		20,354	18,921	19,932
Total UEM%		12.6	11.6	12.2
Part Time Economic Reasons		8,628	7,990	7,771
Marginally Attached to LF		2,443	2,427	2,592
In Job Stress		31,425	29,338	30,295
People in Job Stress as % Labor Force		19.4	18.0	18.5

Pop: population; LF: labor force; PART: participation; EMP: employed; UEM: unemployed; NLF: not in labor force; ∆NLF UEM: additional unemployed; Total UEM is UEM + ∆NLF UEM; Total UEM% is Total UEM as percent of LF PART 66.2%; In Job Stress = Total UEM + Part Time Economic Reasons + Marginally Attached to LF

Note: the first column for 2006 is in average millions; the remaining columns are in thousands; NSA: not seasonally adjusted

The labor force participation rate of 66.2% in 2006 is applied to current population to obtain LF PART 66.2%; ∆NLF UEM is obtained by subtracting the labor force with participation of 66.2 percent from the household survey labor force LF; Total UEM is household data unemployment plus ∆NLF UEM; and total UEM% is total UEM divided by LF PART 66.2%

Source: US Bureau of Labor Statistics

http://www.bls.gov/cps/

In the analysis of Hansen (1939, 3) of secular stagnation, economic progress consists of growth of real income per person driven by growth of productivity. The “constituent elements” of economic progress are “(a) inventions, (b) the discovery and development of new territory and new resources, and (c) the growth of population” (Hansen 1939, 3). Secular stagnation originates in decline of population growth and discouragement of inventions. According to Hansen (1939, 2), US population grew by 16 million in the 1920s but grew by one half or about 8 million in the 1930s with forecasts at the time of Hansen’s writing in 1938 of growth of around 5.3 million in the 1940s. Hansen (1939, 2) characterized demography in the US as “a drastic decline in the rate of population growth. Hansen’s plea was to adapt economic policy to stagnation of population in ensuring full employment. In the analysis of Hansen (1939, 8), population caused half of the growth of US GDP per year. Growth of output per person in the US and Europe was caused by “changes in techniques and to the exploitation of new natural resources.” In this analysis, population caused 60 percent of the growth of capital formation in the US. Declining population growth would reduce growth of capital formation. Residential construction provided an important share of growth of capital formation. Hansen (1939, 12) argues that market power of imperfect competition discourages innovation with prolonged use of obsolete capital equipment. Trade unions would oppose labor-savings innovations. The combination of stagnating and aging population with reduced innovation caused secular stagnation. Hansen (1939, 12) concludes that there is role for public investments to compensate for lack of dynamism of private investment but with tough tax/debt issues.

The current application of Hansen’s (1938, 1939, 1941) proposition argues that secular stagnation occurs because full employment equilibrium can be attained only with negative real interest rates between minus 2 and minus 3 percent. Professor Lawrence H. Summers (2013Nov8) finds that “a set of older ideas that went under the phrase secular stagnation are not profoundly important in understanding Japan’s experience in the 1990s and may not be without relevance to America’s experience today” (emphasis added). Summers (2013Nov8) argues there could be an explanation in “that the short-term real interest rate that was consistent with full employment had fallen to -2% or -3% sometime in the middle of the last decade. Then, even with artificial stimulus to demand coming from all this financial imprudence, you wouldn’t see any excess demand. And even with a relative resumption of normal credit conditions, you’d have a lot of difficulty getting back to full employment.” The US economy could be in a situation where negative real rates of interest with fed funds rates close to zero as determined by the Federal Open Market Committee (FOMC) do not move the economy to full employment or full utilization of productive resources. Summers (2013Oct8) finds need of new thinking on “how we manage an economy in which the zero nominal interest rates is a chronic and systemic inhibitor of economy activity holding our economies back to their potential.”

Former US Treasury Secretary Robert Rubin (2014Jan8) finds three major risks in prolonged unconventional monetary policy of zero interest rates and quantitative easing: (1) incentive of delaying action by political leaders; (2) “financial moral hazard” in inducing excessive exposures pursuing higher yields of risker credit classes; and (3) major risks in exiting unconventional policy. Rubin (2014Jan8) proposes reduction of deficits by structural reforms that could promote recovery by improving confidence of business attained with sound fiscal discipline.

Professor John B. Taylor (2014Jan01, 2014Jan3) provides clear thought on the lack of relevance of Hansen’s contention of secular stagnation to current economic conditions. The application of secular stagnation argues that the economy of the US has attained full-employment equilibrium since around 2000 only with negative real rates of interest of minus 2 to minus 3 percent. At low levels of inflation, the so-called full-employment equilibrium of negative interest rates of minus 2 to minus 3 percent cannot be attained and the economy stagnates. Taylor (2014Jan01) analyzes multiple contradictions with current reality in this application of the theory of secular stagnation:

Secular stagnation would predict idle capacity, in particular in residential investment when fed fund rates were fixed at 1 percent from Jun 2003 to Jun 2004. Taylor (2014Jan01) finds unemployment at 4.4 percent with house prices jumping 7 percent from 2002 to 2003 and 14 percent from 2004 to 2005 before dropping from 2006 to 2007. GDP prices doubled from 1.7 percent to 3.4 percent when interest rates were low from 2003 to 2005.
Taylor (2014Jan01, 2014Jan3) finds another contradiction in the application of secular stagnation based on low interest rates because of savings glut and lack of investment opportunities. Taylor (2009) shows that there was no savings glut. The savings rate of the US in the past decade is significantly lower than in the 1980s.
Taylor (2014Jan01, 2014Jan3) finds another contradiction in the low ratio of investment to GDP currently and reduced investment and hiring by US business firms.
Taylor (2014Jan01, 2014Jan3) argues that the financial crisis and global recession were caused by weak implementation of existing regulation and departure from rules-based policies.
Taylor (2014Jan01, 2014Jan3) argues that the recovery from the global recession was constrained by a change in the regime of regulation and fiscal/monetary policies.

In revealing research, Edward P. Lazear and James R. Spletzer (2012JHJul22) use the wealth of data in the valuable database and resources of the Bureau of Labor Statistics (http://www.bls.gov/data/) in providing clear thought on the nature of the current labor market of the United States. The critical issue of analysis and policy currently is whether unemployment is structural or cyclical. Structural unemployment could occur because of (1) industrial and demographic shifts and (2) mismatches of skills and job vacancies in industries and locations. Consider the aggregate unemployment rate, Y, expressed in terms of share s_i of a demographic group in an industry i and unemployment rate y_i of that demographic group (Lazear and Spletzer 2012JHJul22, 5-6):

Y = ∑_is_iy_i (1)

This equation can be decomposed for analysis as (Lazear and Spletzer 2012JHJul22, 6):

∆Y = ∑_i∆s_iy*_i+ ∑_i∆y_is*_i (2)

The first term in (2) captures changes in the demographic and industrial composition of the economy ∆s_i multiplied by the average rate of unemployment y*_i, or structural factors. The second term in (2) captures changes in the unemployment rate specific to a group, or ∆y_i, multiplied by the average share of the group s*_i,or cyclical factors. There are also mismatches in skills and locations relative to available job vacancies. A simple observation by Lazear and Spletzer (2012JHJul22) casts intuitive doubt on structural factors: the rate of unemployment jumped from 4.4 percent in the spring of 2007 to 10 percent in October 2009. By nature, structural factors should be permanent or occur over relative long periods. The revealing result of the exhaustive research of Lazear and Spletzer (2012JHJul22) is:

“The analysis in this paper and in others that we review do not provide any compelling evidence that there have been changes in the structure of the labor market that are capable of explaining the pattern of persistently high unemployment rates. The evidence points to primarily cyclic factors.”

Table I-4b and Chart I-12-b provide the US labor force participation rate or percentage of the labor force in population. It is not likely that simple demographic trends caused the sharp decline during the global recession and failure to recover earlier levels. The civilian labor force participation rate dropped from the peak of 66.9 percent in Jul 2006 to 62.6 percent in Dec 2013. The civilian labor force participation rate was 63.7 percent on an annual basis in 1979 and 63.4 percent in Dec 1980 and Dec 1981, reaching even 62.9 percent in both Apr and May 1979. The civilian labor force participation rate jumped with the recovery to 64.8 percent on an annual basis in 1985 and 65.9 percent in Jul 1985. Structural factors cannot explain these sudden changes vividly shown visually in the final segment of Chart I-12b. Seniors would like to delay their retiring especially because of the adversities of financial repression on their savings. Labor force statistics are capturing the disillusion of potential workers with their chances in finding a job in what Lazear and Spletzer (2012JHJul22) characterize as accentuated cyclical factors. 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/2014/01/capital-flows-exchange-rates-and.htm and earlier http://cmpassocregulationblog.blogspot.com/2013/12/theory-and-reality-of-secular.html). “Secular stagnation” would be a process over many years and not from one year to another. This is merely another case of theory without reality with dubious policy proposals.

Table I-4b, US, Labor Force Participation Rate, Percent of Labor Force in Population, NSA, 1979-2014

Year	Jan	Feb	Jul	Aug	Sep	Oct	Nov	Dec	Annual
1979	62.9	63.0	64.9	64.5	63.8	64.0	63.8	63.8	63.7
1980	63.3	63.2	65.1	64.5	63.6	63.9	63.7	63.4	63.8
1981	63.2	63.2	65.0	64.6	63.5	64.0	63.8	63.4	63.9
1982	63.0	63.2	65.3	64.9	64.0	64.1	64.1	63.8	64.0
1983	63.3	63.2	65.4	65.1	64.3	64.1	64.1	63.8	64.0
1984	63.3	63.4	65.9	65.2	64.4	64.6	64.4	64.3	64.4
1985	64.0	64.0	65.9	65.4	64.9	65.1	64.9	64.6	64.8
1986	64.2	64.4	66.6	66.1	65.3	65.5	65.4	65.0	65.3
1987	64.7	64.8	66.8	66.5	65.5	65.9	65.7	65.5	65.6
1988	65.1	65.2	67.1	66.8	65.9	66.1	66.2	65.9	65.9
1989	65.8	65.6	67.7	67.2	66.3	66.6	66.7	66.3	66.5
1990	66.0	66.0	67.7	67.1	66.4	66.5	66.3	66.1	66.5
1991	65.5	65.7	67.3	66.6	66.1	66.1	66.0	65.8	66.2
1992	65.7	65.8	67.9	67.2	66.3	66.2	66.2	66.1	66.4
1993	65.6	65.8	67.5	67.0	66.1	66.4	66.3	66.2	66.3
1994	66.0	66.2	67.5	67.2	66.5	66.8	66.7	66.5	66.6
1995	66.1	66.2	67.7	67.1	66.5	66.7	66.5	66.2	66.6
1996	65.8	66.1	67.9	67.2	66.8	67.1	67.0	66.7	66.8
1997	66.4	66.5	68.1	67.6	67.0	67.1	67.1	67.0	67.1
1998	66.6	66.7	67.9	67.3	67.0	67.1	67.1	67.0	67.1
1999	66.7	66.8	67.9	67.3	66.8	67.0	67.0	67.0	67.1
2000	66.8	67.0	67.6	67.2	66.7	66.9	66.9	67.0	67.1
2001	66.8	66.8	67.4	66.8	66.6	66.7	66.6	66.6	66.8
2002	66.2	66.6	67.2	66.8	66.6	66.6	66.3	66.2	66.6
2003	66.1	66.2	66.8	66.3	65.9	66.1	66.1	65.8	66.2
2004	65.7	65.7	66.8	66.2	65.7	66.0	66.1	65.8	66.0
2005	65.4	65.6	66.8	66.5	66.1	66.2	66.1	65.9	66.0
2006	65.5	65.7	66.9	66.5	66.1	66.4	66.4	66.3	66.2
2007	65.9	65.8	66.8	66.1	66.0	66.0	66.1	65.9	66.0
2008	65.7	65.5	66.8	66.4	65.9	66.1	65.8	65.7	66.0
2009	65.4	65.5	66.2	65.6	65.0	64.9	64.9	64.4	65.4
2010	64.6	64.6	65.3	65.0	64.6	64.4	64.4	64.1	64.7
2011	63.9	63.9	64.6	64.3	64.2	64.1	63.9	63.8	64.1
2012	63.4	63.6	64.3	63.7	63.6	63.8	63.5	63.4	63.7
2013	63.3	63.2	64.0	63.4	63.2	62.9	62.9	62.6	63.2
2014	62.5

Source: US Bureau of Labor Statistics

http://www.bls.gov/cps/

Chart I-12b, US, Labor Force Participation Rate, Percent of Labor Force in Population, NSA, 1979-2014

Source: Bureau of Labor Statistics

Month	1981	1982	1983	2008	2009	2010	Private
Jan	94	-326	224	15	-798	18	20
Feb	68	-5	-75	-86	-701	-50	-38
Mar	105	-130	172	-80	-826	156	113
Apr	73	-280	276	-214	-684	251	192
May	10	-45	277	-182	-354	516	94
Jun	197	-243	379	-172	-467	-122	110
Jul	112	-342	418	-210	-327	-61	120
Aug	-36	-158	-308	-259	-216	-42	117
Sep	-87	-181	1115	-452	-227	-57	107
Oct	-99	-277	271	-474	-198	241	199
Nov	-209	-123	353	-765	-6	137	149
Dec	-278	-14	356	-697	-283	71	94
			1984			2011	Private
Jan			446			70	72
Feb			481			168	223
Mar			275			212	231
Apr			363			322	320
May			308			102	166
Jun			379			217	186
Jul			313			106	219
Aug			242			122	125
Sep			310			183	268
Oct			286			183	177
Nov			349			164	191
Dec			128			196	222
			1985			2012	Private
Jan			266			360	364
Feb			124			226	228
Mar			346			243	246
Apr			196			96	102
May			274			110	131
Jun			146			88	75
Jul			190			160	172
Aug			193			150	136
Sep			203			161	159
Oct			188			225	255
Nov			209			203	211
Dec			167			214	215
			1986			2013	Private
Jan			125			197	219
Feb			107			280	263
Mar			94			141	164
Apr			187			203	188
May			127			199	222
Jun			-94			201	201
Jul			318			149	170
Aug			114			202	180
Sep			347			164	153
Oct			186			237	247
Nov			186			274	272
Dec			205			75	89
			1987			2014	Private
Jan			172			113	142

	Jan 2013	Jan 2014	Change
A Total Nonfarm	133,074	135,396	2,322
B Total Private	111,342	113,712	2,370
B1 Goods Producing	18,071	18,373	302
B1a Manufacturing	11,880	11,965	85
B2 Private service providing	93,271	95,339	2,068
B2a Wholesale Trade	5,663	5,762	99
B2b Retail Trade	14,852	15,169	317
B2c Transportation & Warehousing	4,440	4,536	96
B2d Financial Activities	7,783	7,850	67
B2e Professional and Business Services	17,845	18,545	700
B2e1 Temporary help services	2,409	2,663	254
B2f Health Care & Social Assistance	17,559	17,836	277
B2g Leisure & Hospitality	13,324	13,782	458
C Government	21,732	21,684	-48
C1 Federal	2,786	2,707	-79
C2 State	4,928	4,957	29
C3 Local	14,018	14,020	2

	Dec 2013 SA	Jan 2014 SA	∆	Dec 2013 NSA	Jan 2014 NSA	∆
A Total Nonfarm	137,386	137,499	113	138,266	135,396	-2870
B Total Private	115,544	115,686	142	116,058	113,712	-2346
B1 Goods Producing	18,811	18,887	76	18,700	18,373	-327
B1a Constr.	5,874	5,922	48	5,773	5,533	-240
B Mfg	12,054	12,075	21	12,048	11,965	-83
B2 Private Service Providing	96,733	96,799	66	97,358	95,339	-2019
B2a Wholesale Trade	5,796	5,810	14	5,805	5,762	-43
B2b Retail Trade	15,272	15,259	-13	15,829	15,169	-660
B2c Couriers & Mess.	573	563	-10	681	582	-99
B2d Health-care & Social Assistance	17,875	17,877	2	17,947	17,836	-111
B2De Profess. & Business Services	18,830	18,866	36	18,903	18,545	-358
B2De1 Temp Help Services	2,772	2,780	8	2,855	2,663	-192
B2f Leisure & Hospit.	14,437	14,461	24	14,095	13,782	-313

	SAAR IIQ2013	% Total	SAAR IIIQ2013	% Total
National Income WCCA	14,495.5	100.0	14,643.3	100.0
Domestic Industries	14,248.7	98.3	14,380.3	98.2
Private Industries	12,568.6	86.7	12,705.2	86.8
Agriculture	220.3	1.5	225.2	1.5
Mining	254.3	1.8	256.4	1.8
Utilities	216.5	1.5	221.2	1.5
Construction	629.0	4.3	639.1	4.4
Manufacturing	1558.9	10.8	1577.7	10.8
Durable Goods	888.1	6.1	910.1	6.2
Nondurable Goods	670.1	4.6	667.6	4.6
Wholesale Trade	874.4	6.0	884.0	6.0
Retail Trade	995.8	6.9	1000.2	6.8
Transportation & WH	436.3	3.0	443.6	3.0
Information	507.2	3.5	497.5	3.4
Finance, Insurance, RE	2448.1	16.9	2521.0	17.2
Professional, BS	2004.7	13.8	2004.0	13.7
Education, Health Care	1438.9	9.9	1439.2	9.8
Arts, Entertainment	577.1	4.0	585.2	4.0
Other Services	409.7	2.8	410.8	2.8
Government	1680.1	11.6	1675.1	11.4
Rest of the World	246.8	1.7	262.9	1.8

Year	Total Nonfarm	Year	Total Nonfarm
1980	90,533	2000	132,019
1981	91,297	2001	132,074
1982	89,689	2002	130,628
1983	90,295	2003	130,318
1984	94,548	2004	131,749
1985	97,532	2005	134,005
1986	99,500	2006	136,398
1987	102,116	2007	137,936
1988	105,378	2008	137,170
1989	108,051	2009	131,233
1990	109,527	2010	130,275
1991	108,427	2011	131,842
1992	108,802	2012	134,104
1993	110,935	2013	136,368

Year	Jun	Jul	Aug	Sep	Oct	Nov	Dec
2006	9.88	9.97	9.87	10.03	10.16	10.14	10.21
2007	9.99	10.07	10.02	10.15	10.07	10.05	10.16
2008	9.83	9.76	9.82	9.93	10.05	10.36	10.46
2009	10.19	10.23	10.28	10.29	10.31	10.38	10.37
2010	10.25	10.28	10.33	10.35	10.38	10.37	10.39
2011	10.11	10.16	10.09	10.16	10.29	10.24	10.29
2012	10.14	10.25	10.10	10.23	10.17	10.25	10.39
∆%12M	0.3	0.9	0.1	0.7	-1.2	0.1	1.0
2013	10.25	10.19	10.17	10.32	10.29	10.34	10.43
∆%12M	1.1	-0.6	0.7	0.9	1.2	0.9	0.4

Year	Aug	Sep	Oct	Nov	Dec
2006	341.42	346.02	354.71	348.95	353.20
2007	347.64	355.39	347.58	346.68	354.76
2008	339.86	341.51	345.63	358.50	356.85
2009	352.48	346.72	348.35	355.07	351.48
2010	358.43	352.96	356.00	354.81	355.29
2011	347.12	349.62	358.27	351.14	353.95
2012	348.48	357.13	348.76	351.46	362.53
∆%12M	0.4	2.1	-2.7	0.1	2.4
2013	350.94	360.10	354.10	355.85	361.82
∆%12M	0.7	0.8	1.5	1.2	-0.2

	IVQ 2013 SAAE	IVQ 2013 YoY	IIIQ 2013 SSAE	IIIQ 2013 YOY	IIQ 2013 SAAE	IIQ 2013 YoY
Productivity	3.2	1.7	3.6	0.5	1.8	0.2
Output	4.9	3.3	5.4	2.3	3.3	1.9
Hours	1.7	1.6	1.7	1.8	1.4	1.7
Hourly Comp.	1.5	0.4	1.6	2.4	3.8	2.2
Real Hourly Comp.	0.6	-0.9	-1.0	0.8	3.9	0.7
Unit Labor Costs	-1.6	-1.3	-2.0	1.9	2.0	2.0
Unit Nonlabor Payments	4.6	4.7	8.4	0.3	-0.7	0.1
Implicit Price Deflator	1.1	1.3	2.4	1.2	0.8	1.2

	2013 ∆%	2012 ∆%	2011 ∆%	2010 ∆%	2009 ∆%	2008 ∆%	2007 ∆%
Productivity	0.6	1.5	0.5	3.3	3.2	0.8	1.6
Real Hourly Compensation	0.2	0.5	-0.7	0.4	1.5	-1.1	1.4
Unit Labor Costs	1.0	1.2	2.0	-1.2	-2.0	2.0	2.6

Year	Qtr1	Qtr2	Qtr3	Qtr4	Annual
1999	4.5	0.8	3.5	6.8	3.5
2000	-1.4	8.7	0.1	3.9	3.3
2001	-1.2	6.8	2.3	4.9	2.7
2002	9.5	0.3	3.1	-0.7	4.3
2003	4.0	5.7	9.1	3.7	3.7
2004	0.0	4.1	1.1	1.2	3.1
2005	4.6	-0.3	2.9	0.1	2.1
2006	2.6	-0.3	-1.8	3.2	0.9
2007	0.4	2.7	4.7	1.8	1.6
2008	-3.9	4.0	0.9	-2.6	0.8
2009	3.2	8.2	5.9	4.7	3.2
2010	1.9	1.5	2.4	2.1	3.3
2011	-3.2	1.9	0.0	2.9	0.5
2012	1.5	1.2	2.5	-1.7	1.5
2013	-1.7	1.8	3.6	3.2	0.6

	Trade Balance	Exports	Month ∆%	Imports	Month ∆%
Dec 2013	-38,701	191,287	-1.8	229,988	0.3
Nov	-34,558	194,796	0.8	229,354	-1.3
Oct	-39,073	193,333	2.0	232,406	0.1
Sep	-42,714	189,509	-0.1	232,223	1.6
Aug	-38,690	189,776	0.0	228,466	0.0
Jul	-38,570	189,827	-0.7	228,397	1.3
Jun	-34,383	191,072	2.2	225,454	-2.2
May	-43,631	186,924	-0.2	230,555	1.7
Apr	-39,344	187,322	1.4	226,667	2.4
Mar	-36,532	184,774	-1.1	221,307	-3.8
Feb	-43,227	186,895	0.0	230,122	0.5
Jan	-42,109	186,804	-1.0	228,913	0.8
Jan-Dec 2013	-471,532	2,272,320		2,743,851
Dec 2012	-38,307	188,686	1.9	226,994	-2.0
Nov	-46,422	185,220	1.4	231,641	2.8
Oct	-42,650	182,655	-2.2	225,304	-1.4
Sep	-41,570	186,829	2.6	228,400	1.0
Aug	-44,007	182,071	-0.7	226,078	-0.3
Jul	-43,451	183,375	-1.0	226,826	-0.4
Jun	-42,430	185,218	0.5	227,648	-1.2
May	-46,247	184,217	0.0	230,464	-0.2
Apr	-46,625	184,267	-1.2	230,892	-1.5
Mar	-47,790	186,505	2.4	234,295	3.7
Feb	-43,763	182,064	1.4	225,827	-2.2
Jan	-51,393	179,477	0.2	230,871	0.2
Jan-Dec 2012	-534,656	2,210,585		2,745,240
Jan-Dec 2011	-556,838	2,112,825		2,669,663
Jan-Dec 2010	-499,379	1,844,468		2,343,847

	Balance	Exports	Imports
1960	3,508	25,940	22,432
1961	4,195	26,403	22,208
1962	3,370	27,722	24,352
1963	4,210	29,620	25,410
1964	6,022	33,341	27,319
1965	4,664	35,285	30,621
1966	2,939	38,926	35,987
1967	2,604	41,333	38,729
1968	250	45,543	45,293
1969	91	49,220	49,129
1970	2,254	56,640	54,386
1971	-1,302	59,677	60,979
1972	-5,443	67,222	72,665
1973	1,900	91,242	89,342
1974	-4,293	120,897	125,190
1975	12,404	132,585	120,181
1976	-6,082	142,716	148,798
1977	-27,246	152,301	179,547
1978	-29,763	178,428	208,191
1979	-24,565	224,131	248,696
1980	-19,407	271,834	291,241
1981	-16,172	294,398	310,570
1982	-24,156	275,236	299,391
1983	-57,767	266,106	323,874
1984	-109,072	291,094	400,166
1985	-121,880	289,070	410,950
1986	-138,538	310,033	448,572
1987	-151,684	348,869	500,552
1988	-114,566	431,149	545,715
1989	-93,141	487,003	580,144
1990	-80,864	535,233	616,097
1991	-31,135	578,344	609,479
1992	-39,212	616,882	656,094
1993	-70,311	642,863	713,174
1994	-98,493	703,254	801,747
1995	-96,384	794,387	890,771
1996	-104,065	851,602	955,667
1997	-108,273	934,453	1,042,726
1998	-166,140	933,174	1,099,314

	Dec 2013	Dec 2012	∆%
Total Balance	-58,818	-57,182
Petroleum	-15,595	-19,059
Non Petroleum	-42,049	-37,130
Total Exports	132,761	132,685	0.1
Petroleum	13,469	11,572	16.4
Non Petroleum	118,169	119,950	-1.5
Total Imports	191,579	189,866	0.9
Petroleum	29,063	30,631	-5.1
Non Petroleum	160,219	157,079	2.0

	Jan-Dec 2013 $ Millions	Jan-Dec 2012 $ Millions	∆%
Exports	1,578,893	1,545,709	2.1
Manufactured	1,182,567	1,163,567	1.6
Agricultural Commodities	144,085	141,252	2.0
Mineral Fuels	147,087	136,023	8.1
Petroleum	122,839	112,016	9.7
Imports	2,267,557	2,275,320	-0.3
Manufactured	1,829,243	1,805,260	1.3
Agricultural Commodities	104,370	103,230	1.1
Mineral Fuels	379,630	423,591	-10.4
Petroleum	362,792	408,134	-11.1

	Average Annual Percentage Rate 2007-2013	Average Annual Percentage Rate 1947-2013
Productivity	1.6	2.2
Output	1.2	3.4
Hours	0.0	1.2
Employment	0.0	1.4
Average Weekly Hours	0.0	NA
Hourly Compensation	2.4	5.1
Consumer Price Inflation	2.1	3.6
Real Hourly Compensation	0.3	1.6
Non-labor Payments	3.5	3.4
Output per Job	1.5	2.0

	Jan 2014	Dec 2013
New Nonfarm Payroll Jobs	113,000	75,000
New Private Payroll Jobs	142,000	89,000
Average Hourly Earnings	Jan 14 $24.21 SA ∆% Jan 14/Jan 13 NSA: 2.0 ∆% Jan 14/Dec 13 SA: 0.2	Dec 13 $24.16 SA ∆% Dec 13/ Dec 12 NSA: 1.9 ∆% Dec 13/Nov 13 SA: 0.0
Average Hourly Earnings in Constant Dollars		∆% Dec 2013/Dec 2012: 0.4
Average Weekly Hours	34.4 SA 34.0 NSA	34.4 SA 34.7 NSA
Unemployment Rate Household Survey % of Labor Force SA	6.6	6.7
Number in Job Stress Unemployed and Underemployed Blog Calculation	30.3 million NSA	29.3 million NSA
In Job Stress as % Labor Force	18.5 NSA	18.0 NSA

2013-2014	Jan 2014	Dec 2013	Nov 2013
Labor Force Millions	155.460	154.937	155.284
Unemployed Millions	10.236	10.351	10.841
Unemployment Rate (unemployed as % labor force)	6.6	6.7	7.0
Unemployed ≥27 weeks Millions	3.646	3.878	4.044
Unemployed ≥27 weeks %	35.6	37.5	37.3
Part Time for Economic Reasons Millions	7.257	7.771	7.723
Marginally Attached to Labor Force Millions	2.592	2.427	2.096
Job Stress Millions	20.085	20.549	20.660
In Job Stress as % Labor Force	12.9	13.3	13.3

Year	GDP ∆%	Year	GDP ∆%	Year	GDP ∆%
1930	-8.5	1980	-0.2	2000	4.1
1931	-6.4	1981	2.6	2001	1.0
1932	-12.9	1982	-1.9	2002	1.8
1933	-1.3	1983	4.6	2003	2.8
1934	10.8	1984	7.3	2004	3.8
1935	8.9	1985	4.2	2005	3.4
1936	12.9	1986	3.5	2006	2.7
1937	5.1	1987	3.5	2007	1.8
1938	-3.3	1988	4.2	2008	-0.3
1930	8.0	1989	3.7	2009	-2.8
1940	8.8	1990	1.9	2010	2.5
1941	17.7	1991	-0.1	2011	1.8
1942	18.9	1992	3.6	2012	2.8
1943	17.0	1993	2.7	2013	1.9

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

	Number of Quarters	Cumulative Growth ∆%	Average Annual Equivalent Growth Rate
IIIQ 1954 to IQ1957	11	12.8	4.5
First Four Quarters IIIQ1954 to IIQ1955	4	7.8
IIQ1958 to IIQ1959	5	10.0	7.9
First Four Quarters IIIQ1958 to IIQ1959	4	9.2
IIQ1975 to IVQ1976	8	8.3	4.1
First Four Quarters IIIQ1975 to IIQ1976	4	6.1
IQ1983-IQ1986 IQ1983-IIIQ1986 IQ1983-IVQ1986 IQ1983-IQ1987 IQ1983-IIQ1987	13 15 16 17 18	19.9 21.6 22.3 23.1 24.5	5.7 5.4 5.2 5.0 5.0
First Four Quarters IQ1983 to IVQ1983	4	7.8
Average First Four Quarters in Four Expansions*		7.7
IIIQ2009 to IVQ2013	18	11.2	2.4
First Four Quarters IIIQ2009 to IIQ2010		2.7

	Total Nonfarm Jobs	Total Private Jobs
06/1981 #	92,288	75,969
11/1982 #	89,482	73,260
Change #	-2,806	-2,709
Change ∆%	-3.0	-3.6
12/1982 #	89,383	73,185
05/1984 #	94,471	78,049
Change #	5,088	4,864
Change ∆%	5.7	6.6
11/2007 #	139,090	116,291
05/2009 #	131,626	108,601
Change %	-7,464	-7,690
Change ∆%	-5.4	-6.6
12/2009 #	130,178	107,338
05/2011 #	131,753	108,494
Change #	1,575	1,156
Change ∆%	1.2	1.1
05/1983 #	90,005	73,667
05/1984 #	94,471	78,049
Change #	4,466	4,382
Change ∆%	4.9	5.9
05/2010 #	130,801	107,405
05/2011 #	131,753	109,203
Change #	952	1,798
Change ∆%	0.7	1.7
Change # by ∆% as in 05/1984 to 05/1985	6,409*	6,337**
Difference in Jobs that Would Have Been Created	5,457 = 6,409-952	4,539 = 6,337-1,798

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Tuesday, February 11, 2014

Financial Instability, Rules, Discretionary Authorities and Slow Productivity Growth, Thirty Million Unemployed or Underemployed, Stagnating Real Wages, United States International Trade, World Economic Slowdown and Global Recession Risk: Part I

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