Is the US Unemployment Rate 12 Percent? Are there 30 Million People in Job Stress?
Carlos M. Pelaez
© Carlos M. Pelaez, 2010, 2011
The objective of this post is to relate job stress and the calculation of the rate of unemployment to monetary policy and risks in the global economy. The content is as follows:
Introduction
I Job Stress and the Rate of Unemployment
II Monetary Policy
IIA Theory and Mandate
IIB Treasury Yields
IIC Portfolio Valuation
III World Devaluation War
IV European Sovereign Risk
V Economic Indicators
VI Interest Rates
VII Conclusion
I Job Stress and the Rate of Unemployment. The Bureau of Labor Statistics (BLS) released on Fri Jan 7 the employment report showing a decrease in the seasonally adjusted rate of unemployment, or unemployed as percent of the labor force, from 9.8 percent in Nov 2010 to 9.4 percent in Dec 2010 (http://www.bls.gov/news.release/pdf/empsit.pdf). The number of people in job stress is 26 million composed of 14.5 million unemployed (of whom 6.4 million unemployed for 27 weeks or more), 8.9 million employed part-time for economic reasons (who suffered reductions in their work hours or could not find full-time employment) and 2.6 million who were marginally attached to the labor force (who were not in the labor force but wanted and were available for work) (Ibid, 2). Table 1 consists of data and additional calculations with the BLS household survey, illustrating the possibility that the actual rate of unemployment could be 12 percent and the number of people in job stress could be closer to 30 million. 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), the employment population ratio (EMP/POP %), unemployment (UEM), the unemployment rate of unemployment as percent of labor force (UEM/LF Rate %) and the number of people not in the labor force (NLF). The numbers in column 2006 are averages in millions while the monthly numbers for Oct, Nov and Dec 2010 are in thousands, not seasonally adjusted. The average yearly participation rate of the population in the labor force was in the range of 62.0 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). The objective of Table 1 is to assess how many people 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 population in Oct, Nov and Dec 2010 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 64.1 percent by Dec 2010, 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 last row is the effective total unemployed “Total UEM” as percent of the effective labor force in row “LF PART 66.2%.” The results are that: (1) there are an estimated 4.988 million unemployed who are not counted because they left the labor force on their belief they could not find another job; (2) the total number of unemployed is effectively 18.985 million and not 13.997 million of whom many have been unemployed long term; (3) the rate of unemployment is 12.0 percent and not 9.1 percent, not seasonally annualized, or 9.4 percent seasonally annualized; and (4) the number of people in job stress is close to 30 million because of the 4.988 million leaving the labor force because they believe they could not find another job. The employment population ratio “EMP/POP %” dropped from 62.9 percent on average in 2006 to 58.3 percent in Dec 2010 and the number of employed dropped from 144 million to 139 million. There are almost five million less people working in 2010 than in 2006 and the number employed is not increasing.
Table 1, Population, Labor Force and Unemployment, NSA
| 2006 | Oct 2010 | Nov 10 | Dec 10 | |
| POP | 229 | 238,530 | 238,715 | 238,889 |
| LF | 151 | 153,652 | 153,698 | 153,156 |
| PART% | 66.2 | 64.4 | 64.4 | 64.1 |
| EMP | 144 | 139,749 | 139,415 | 139,159 |
| EMP/POP% | 62.9 | 58.6 | 58.4 | 58.3 |
| UEM | 7 | 13,903 | 14,282 | 13,997 |
| UEM/LF Rate% | 4.6 | 9.0 | 9.3 | 9.1 |
| NLF | 77 | 84,878 | 85,017 | 83,752 |
| LF PART 66.2% | 157,907 | 158,029 | 158,144 | |
| ∆NLF UEM | 4,225 | 4,331 | 4,988 | |
| Total UEM | 18,128 | 18,613 | 18,985 | |
| Total UEM% | 11.5 | 11.8 | 12.0 |
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%.
Note: the first column for 2006 is in average millions; the remaining columns are in thousands; NSA: not seasonally adjusted
The last four rows are calculated by applying the labor force participation of 66.2% in 2006 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%
Sources:
ftp://ftp.bls.gov/pub/special.requests/lf/aa2006/pdf/cpsaat1.pdf
http://www.bls.gov/news.release/archives/empsit_12032010.pdf
http://www.bls.gov/news.release/pdf/empsit.pdf
Total nonfarm payroll employment seasonally adjusted (SA) rose by 103,000 in Nov and private payroll employment rose by 113,000. Revisions of Nov and Oct have increased payroll employment by about 70.000. Table 2 provides the monthly change in jobs in the prior strong contraction of 1981-1982 and the recovery in 1983 and in the contraction of 2008-2009 and in the recovery in 2009-2010. The data in the recovery periods are in relief to facilitate comparison. There is significant bias in the comparison. The average yearly civilian noninsitutional population was 174.2 million in 1983 and the civilian labor force 111.6 million, growing by 2009 to an average yearly civilian noninstitutional population of 235.8 million and civilian labor force of 154.1 million, that is, increasing by 35.4 percent and 38.1 percent, respectively (http://www.bls.gov/cps/cpsaat1.pdf). What is striking about the data in Table 2 is that the numbers of monthly increases in jobs in 1983 are several times higher than in 2010 even with population higher by 35.4 percent and labor force higher by 38.1 percent in 2009 relative to 1983 nearly three decades ago. Professor Michael Boskin of Stanford, former Chairman of the CEA, provides analysis of growth in cyclical expansions in an article for the Wall Street Journal (http://professional.wsj.com/article/SB10001424052748703882304575465462926649950.html ). The critical historical perspective is that average quarterly rates of growth in the expansions after a severe recession were incomparably higher than during the current expansion: 6.2 percent in the first four quarters and 4.5 percent in the first 12 quarters after the trough in the second quarter of 1975, 7.7 percent in the first four quarters and 5.8 percent in the first 12 quarters after the trough in the first quarter in 1983 and only 3 percent in the first four quarters and 2.9 percent forecast in the first 12 quarters after the trough in the third quarter of 2009. GDP grew at the SA quarter-on-quarter yearly-equivalent rate of 1.7 percent in IQ2010 and 2.6 percent in IIIQ2010. Growth has been mediocre in the five quarters of expansion beginning in IIIQ2009 in comparison with earlier expansions (http://cmpassocregulationblog.blogspot.com/2010/12/economic-growth-stimulus-policy-rising.html) and also in terms of what is required to reduce the job stress of at least 26 million persons but likely close to 30 million. Some of the job growth and contraction in 2010 is caused by the hiring of temporary workers for the 2010 census.
Table 2, Monthly Change in Jobs, Number SA
| Month | 1981 | 1982 | 1983 | 2008 | 2009 | 2010 | Private |
| Jan | 95 | -327 | 225 | -10 | -779 | 14 | 16 |
| Feb | 67 | -6 | -78 | -50 | -1266 | 39 | 62 |
| Mar | 104 | -129 | 173 | -33 | -213 | 208 | 158 |
| Apr | 74 | -281 | 276 | -149 | -528 | 313 | 241 |
| May | 10 | -45 | 277 | -231 | -387 | 432 | 51 |
| Jun | 196 | -243 | 378 | -193 | -515 | -175 | 61 |
| Jul | 112 | -343 | 418 | -210 | -346 | -66 | 117 |
| Aug | -36 | -158 | -308 | -334 | -212 | -1 | 143 |
| Sep | -87 | -181 | 1144 | 271 | -225 | -24 | 112 |
| Oct | -100 | -277 | 271 | -554 | -224 | 210 | 193 |
| Nov | -209 | 124 | 352 | -728 | 64 | 71 | 79 |
| Dec | -278 | -14 | 356 | -673 | -109 | 103 | 113 |
Source: http://data.bls.gov/PDQ/servlet/SurveyOutputServlet
http://www.bls.gov/schedule/archives/empsit_nr.htm#2010
http://www.bls.gov/news.release/pdf/empsit.pdf
Important aspects of growth of payroll jobs from Dec 2009 to Dec 2010, not seasonally adjusted (NSA), are provided in Table 3. Total nonfarm employment increased by 1,066,000, consisting of growth of total private employment by 1,296,000 and decline by 230,000 of government employment. Monthly average growth of payroll employment has been only a mediocre 88.8 thousand. Manufacturing employment increased by 138,000 while private service providing grew by 1,178,000. An important feature is that jobs in temporary help services increased by 323,000. This episode of jobless recovery is characterized by part-time jobs.
Table 3, Employees in Nonfarm Payrolls Not Seasonally Adjusted in Thousands
| Dec 2009 | Dec 2010 | Change | |
| A Total Nonfarm | 130,448 | 131,514 | 1,066 |
| B Total Private | 107,623 | 108.919 | 1,296 |
| B1 Goods Producing | 17,871 | 17,989 | 118 |
| B1a Manufacturing | 11,580 | 11,718 | 138 |
| B2 Private service providing | 89,752 | 90,930 | 1,178 |
| B2a Temporary help services | 1,982 | 2,305 | 323 |
| C Government | 22,825 | 22,595 | -230 |
Note: A = B+C, B = B1 + B2
Source:http://www.bls.gov/news.release/pdf/empsit.pdf
The highest average yearly percentage of unemployed to the labor force since 1940 was 14.6 percent in 1940 followed by 9.9 percent in 1941, 8.5 percent in 1975, 9.7 percent in 1982 and 9.6 percent in 1983 (ftp://ftp.bls.gov/pub/special.requests/lf/aa2006/pdf/cpsaat1.pdf). The rate of unemployment remained at high levels in the 1930s, rising from 3.2 percent in 1929 to 22.9 percent in 1932 in one estimate and 23.6 percent in another with real wages increasing by 16.4 percent (Margo 1993, 43; see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 214-5). There are alternative estimates of 17.2 percent or 9.5 percent for 1940 with real wages increasing by 44 percent. Employment declined sharply during the 1930s. The number of hours worked remained 29 percent in 1939 below the level of 1929 (Cole and Ohanian 1999). Private hours worked fell in 1939 to 25 percent of the level in 1929. The policy of encouraging collusion through the National Industrial Recovery Act (NIRA), to maintain high prices, together with the National Labor Relations Act (NLRA), to maintain high wages, prevented the US economy from recovering employment levels until Roosevelt abandoned these policies toward the end of the 1930s (for review of the literature analyzing the Great Depression see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 198-217). Recovery from economic contractions under various economic systems is unlikely to be promoted by hurried reforms, legislative restructurings and regulation that disturb business models.
II Monetary Policy. This section considers monetary policy in three subsections: (IIA) theory and mandate; (IIB) Treasury yields; and (IIIC) portfolio valuation
IIA. Theory and Mandate. The policy mission of the Fed consists of “conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices and moderate long-term interest rates” (http://www.federalreserve.gov/aboutthefed/mission.htm). Most participants at the Federal Open Market Committee (FOMC) expect the rate of unemployment to be around 8 percent in two years (http://federalreserve.gov/newsevents/testimony/bernanke20110107a.htm), conflicting with the maximum employment mandate. Most FOMC participants project inflation to be at low levels in the future (Ibid), conflicting with the mandate of stable prices. The expectations of weaker than required economic growth and threat of deflation have been held at the FOMC for some time. The speech of Chairman Bernanke at the Jackson Hole meeting on Aug 27 analyzed the economic outlook and reiterated that the FOMC “will certainly use its tools as needed to maintain price stability—avoiding excessive inflation or further disinflation—and to promote the continuation of the economic recovery” (http://www.federalreserve.gov/newsevents/speech/bernanke20100827a.htm). Several other members of the FOMC delivered views in favor of another round of quantitative easing with others offering reservations. The various views of FOMC members tended to create the expectation that quantitative easing would occur, as it did, in the meeting ending on Nov 3, one day after the elections for the legislature. Chairman Bernanke (2010WP) explained the objectives of purchasing an additional $600 billion of long-term Treasury securities and reinvesting maturing principal and interest in the Fed portfolio. Long-term interest rates fell and stock prices rose when investors anticipated the new round of quantitative easing. Growth would be promoted by easier lending such as for refinancing of home mortgages and more investment by lower corporate bond yields. Consumers would experience higher confidence as their wealth in stocks rose, increasing outlays. Income and profits would rise and, in a “virtuous circle,” support higher economic growth. Bernanke (2000) analyzes the role of stock markets in central bank policy (see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 99-100). Fed policy in 1929 increased interest rates to avert a gold outflow and failed to prevent the deepening of the banking crisis without which the Great Depression may not have occurred. In the crisis of Oct 19, 1987, Fed policy supported stock and futures markets by persuading banks to extend credit to brokerages. Collapse of stock markets would slow consumer spending.
IIB Treasury Yields. Table 4, which is updated with every post, provides the yield of the 10-year Treasury on selected dates and the price calculated with that yield, coupon of 2.625 percent of the 10-year note maturing on Nov 15, 2020, and maturity in exactly ten years. The final column, “∆% 11/04/10” shows the percentage change of the price in the third column relative to the price of the 10-year note at the close of market on Nov 4, 2010, a day after the announcement of the Fed decision to buy an additional $600 billion of long-term Treasury securities. Price risk is quite evident in the peak yield of 5.510 percent on May 1, 2001 that would result in a principal loss of 22.9 percent relative to the price on Nov 4, 2010. Another example of risk is the yield of 5.297 percent on Jun 12, 2007, for a price loss of 17.1 percent relative to the yield of 3.112 on Jun 10, 2003 (and loss of 21.45 percent relative to the yield of 2.481 percent on Nov 4, 2010) as consumer price inflation rose from 1.9 percent in 2003, when the Fed had another bout of deflation fear, to 4.1 percent in 2007 (ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt). Table 4 also shows that the yield of the 10-year Treasury rose from 2.481 percent on Nov 4, a day after the FOMC decision (http://federalreserve.gov/newsevents/press/monetary/20101103a.htm), to 3.322 percent on Fri Jan 7, 2011, reaching 3.517 percent on Dec 15. Participants at the FOMC on Dec 15 (http://federalreserve.gov/newsevents/press/monetary/20101214a.htm) discussed the fact that “interest rates at intermediate and longer maturities rose substantially over the intervening period, while credit spreads were roughly unchanged and equity prices rose moderately” (http://federalreserve.gov/monetarypolicy/files/fomcminutes20101214.pdf 7). The “significant backup in yields” was explained in various different ways (see also http://professional.wsj.com/article/SB10001424052748704723104576061952980530640.html?mod=WSJPRO_hpp_MIDDLETopStories): (1) lower expectations by investors of the actual size of the new purchases; (2) improvement in the economic outlook; (3) the tax package that could enhance economic growth while increasing the deficit; (4) year-end positions; (5) hedging flows in mortgage markets; and (6) consistency of investors’ expectations with Fed policy that lowered rates below what they would have been without the new purchases. Evidently, markets, economists and policymakers do not have precise knowledge and forecasts with resulting errors in positions, analysis and policy without agreement ex ante on what would happen in the future or ex post on the causes of what happened with disputes on theory, data and measurements. There is a rush in the first week of the year to issue bond in what appears an attempt to lock in current yields because of growing expectation of rising yields. US corporate bond sales were at a record $48.5 billion in the first week of 2011, motivated by higher yields than Treasury securities, affording more cushion in a rate backup (http://noir.bloomberg.com/apps/news?pid=20601087&sid=aFk.CVdMwFuM&pos=7 http://www.ft.com/cms/s/0/531ab4d8-19c8-11e0-b921-00144feab49a.html#axzz1AJCJ1Em9).
Table 4, Yield, Price and Percentage Change to November 4, 2010 of Ten-Year Treasury Note
| Date | Yield | Price | ∆% 11/04/10 |
| 05/01/01 | 5.510 | 78.0582 | -22.9 |
| 06/10/03 | 3.112 | 95.8452 | -5.3 |
| 06/12/07 | 5.297 | 79.4747 | -21.5 |
| 12/19/08 | 2.213 | 104.4981 | 3.2 |
| 12/31/08 | 2.240 | 103.4295 | 2.1 |
| 03/19/09 | 2.605 | 100.1748 | -1.1 |
| 06/09/09 | 3.862 | 89.8257 | -11.3 |
| 10/07/09 | 3.182 | 95.2643 | -5.9 |
| 11/27/09 | 3.197 | 95.1403 | -6.0 |
| 12/31/09 | 3.835 | 90.0347 | -11.1 |
| 02/09/10 | 3.646 | 91.5239 | -9.6 |
| 03/04/10 | 3.605 | 91.8384 | -9.3 |
| 04/05/10 | 3.986 | 88.8726 | -12.2 |
| 08/31/10 | 2.473 | 101.3338 | 0.08 |
| 10/07/10 | 2.385 | 102.1224 | 0.8 |
| 10/28/10 | 2.658 | 99.7119 | -1.5 |
| 11/04/10 | 2.481 | 101.2573 | - |
| 11/15/10 | 2.964 | 97.0867 | -4.1 |
| 11/26/10 | 2.869 | 97.8932 | -3.3 |
| 12/03/10 | 3.007 | 96.7241 | -4.5 |
| 12/10/10 | 3.324 | 94.0982 | -7.1 |
| 12/15/10 | 3.517 | 92.5427 | -8.6 |
| 12/17/10 | 3.338 | 93.9842 | -7.2 |
| 12/23/10 | 3.397 | 93.5051 | -7.7 |
| 12/31/10 | 3.228 | 94.3923 | -6.7 |
| 01/07/11 | 3.322 | 94.1146 | -7.1 |
Note: price is calculated for an artificial 10-year note paying semi-annual coupon and maturing in ten years using the actual yields traded on the dates
Source:
http://online.wsj.com/mdc/public/page/mdc_bonds.html?mod=mdc_topnav_2_3020
IIC. Portfolio Valuation. The vehicle of transmission of quantitative easing is through changes in relative shares of portfolio holdings by investors. Hicks (1935) suggested the analysis of capital accounts or balance sheets by means of value theory and expected return and risk or standard deviation. Bernanke and Reinhart (2004, 88) argue that “the possibility monetary policy works through portfolio substitution effects, even in normal times, has a long intellectual history, having been espoused by both Keynesians (James Tobin 1969) and monetarists (Karl Brunner and Allan Meltzer 1973).” Andres et al. (2004) explain the Tobin (1969) contribution by optimizing agents in a general-equilibrium model. Both Tobin (1969) and Brunner and Meltzer (1973) consider capital assets to be gross instead of perfect substitutes with positive partial derivatives of own rates of return and negative partial derivatives of cross rates in the vector of asset returns (interest plus principal gain or loss) as argument in portfolio balancing equations (see Pelaez and Suzigan, 1978, 113-23). Tobin (1969, 26) explains portfolio substitution after monetary policy:
“When the supply of any asset is increased, the structure of rates of return, on this and other assets, must change in a way that induces the public to hold the new supply. When the asset’s own rate can rise, a large part of the necessary adjustment can occur in this way. But if the rate is fixed, the whole adjustment must take place through reductions in other rates or increases in prices of other assets. This is the secret of the special role of money; it is a secret that would be shared by any other asset with a fixed interest rate.”
Andrés et al. (2004, 682) find that in their multiple-channels model “base money expansion now matters for the deviations of long rates from the expected path of short rates. Monetary policy operates by both the expectations channel (the path of current and expected future short rates) and this additional channel. As in Tobin’s framework, interest rates spreads (specifically, the deviations from the pure expectations theory of the term structure) are an endogenous function of the relative quantities of assets supplied.”
The policy risk of quantitative easing is whether there is an “orderly” exit, which could be defined as unwinding the Fed balance sheet without interest rate increases that flatten the expansion path of the economy below what would occur without prior quantitative easing. This is, much the same as all counterfactuals, almost impossible to determine with limitations of theory, data and measurement techniques (for counterfactuals see Pelaez and Pelaez, Globalization and the State, Vol. I (2009a), 17, 124-5). Reserve Bank credit in the Fed balance sheet on Jan 5, 2011, stood at $2418 billion, or $2.4 trillion, with a portfolio of long-term securities of $2144 billion, or $2.1 trillion, composed of $956 billion of long-term Treasury securities, $49.7 billion of inflation-indexed Treasury securities, $147 billion of Federal agency debt securities and $992 billion of mortgage-backed securities; reserve balances with Federal Reserve banks stood at $1001 billion (http://federalreserve.gov/releases/h41/current/h41.htm#h41tab1). In testimony at the Senate Committee on the Budget, Chairman Bernanke stated that “the Federal Reserve has all the tools its needs to ensure that it will be able to smoothly and effectively exit from this program at the appropriate time” (http://federalreserve.gov/newsevents/testimony/bernanke20110107a.htm). Monetary policy could be tightened, if required by economic conditions, by raising interest rates on reserves deposited at the Federal Reserve Banks “even if reserves remain high” (Ibid). Easy monetary policy could be reversed by draining or immobilizing reserves through methods developed at the Fed. Policy could also be tightened by redeeming or selling securities in open market operations (Ibid). The fact is that the unwinding of the Fed portfolio of long-term securities could exert significant upward pressure on interest rates with potential adverse effects on economic growth and employment. The Fed could be caught in a duration trap: as yields back up, duration is dumped from portfolios and asset/liability management positions, accelerating yield backups and spreading through multiple classes of securities.
Fed purchases of long-term securities with near zero short-term interest rates trigger multiple portfolio adjustment through vast classes of securities, capital and other real assets. The Fed does not have control of what type of asset valuations it may ultimately influence. Near zero interest rates encourage the carry trade of borrowing at extremely low short-term rates and taking long positions in financial risk assets such as commodities, currencies, stocks and so on. Families, investors and most everybody worldwide were encouraged to benefit from the low interest rates originating in Fed policy of 1 percent fed funds rate in 2003-2004 and housing subsidies by borrowing significantly or high leverage, ignoring potential future adverse events or taking high risks, investing fully or having little or no cash assets or low liquidity and induced easy lending or taking unsound credit decisions. The carry trade of borrowing at extremely low short-term rates and taking long positions in risk financial assets is shown in Table 5 in the form of high valuations in most risk financial assets and then eventual collapse in the form of the credit/dollar crisis and global recession after 2007. The financial crisis and global recession were caused by interest rate and housing 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).
Table 5, Volatility of Assets
| DJIA | 10/08/02-10/01/07 | 10/01/07-3/4/09 | 3/4/09- 4/6/10 | |
∆% | 87.8 | -51.2 | 60.3 | |
| NYSE Financial | 1/15/04- 6/13/07 | 6/13/07- 3/4/09 | 3/4/09- 4/16/07 | |
∆% | 42.3 | -75.9 | 121.1 | |
| Shanghai Composite | 6/10/05- 10/15/07 | 10/15/07- 10/30/08 | 10/30/08- 7/30/09 | |
∆% | 444.2 | -70.8 | 85.3 | |
| STOXX EUROPE 50 | 3/10/03- 7/25/07 | 7/25/07- 3/9/09 | 3/9/09- 4/21/10 | |
∆% | 93.5 | -57.9 | 64.3 | |
| UBS Com. | 1/23/02- 7/1/08 | 7/1/08- 2/23/09 | 2/23/09- 1/6/10 | |
∆% | 165.5 | -56.4 | 41.4 | |
| 10-Year Treasury | 6/10/03 | 6/12/07 | 12/31/08 | 4/5/10 |
| % | 3.112 | 5.297 | 2.247 | 3.986 |
| USD/EUR | 7/14/08 | 6/03/10 | 8/13/10 | |
| Rate | 1.59 | 1.216 | 1.323 | |
| New House | 1963 | 1977 | 2005 | 2009 |
| Sales 1000s | 560 | 819 | 1283 | 375 |
| New House | 2000 | 2007 | 2009 | 2010 |
| Median Price $1000 | 169 | 247 | 217 | 203 |
Sources: http://online.wsj.com/mdc/page/marketsdata.html
http://www.census.gov/const/www/newressalesindex_excel.html
The ultimate objective of the Fed is stimulating investment and hiring. The minutes of the FOMC continue to carry the view of participants that “many contacts remained cautious about hiring and investment, with some reportedly concerned about the potential effects of government policies” (http://federalreserve.gov/newsevents/press/monetary/fomcminutes20101214.pdf). Fed easy lending may run more toward risk financial assets instead of toward corporate bonds, mortgage-backed securities and asset-backed securities because of disturbance of business models by legislative restructurings and regulation. Sovereign risk issues in Europe, doubts about inflation, monetary policy and growth in China and policy, regulation and expectations of tax/interest rate increases in the US cause fluctuations in valuations of risk financial assets. When these diverse risks subside, the combination of zero interest rates and quantitative easing encourages the carry trade of borrowing at short-term rates and taking long positions in risk financial assets to quickly reverse them when global financial risk returns. Table 6, updated with every post, shows in the last column the sharp increase in valuations of almost all risk financial assets with the exception of the devaluation of the dollar, now interrupted by another bout of European risk issues.
Table 6, Stock Indexes, Commodities, Dollar and 10-Year Treasury
| Peak | Trough | ∆% to Trough | ∆% Peak to 1/7/11 | ∆% Week 1/7/11 | ∆% Trough to 1/7/11 | |
| DJIA | 4/26/10 | 7/2/10 | -13.6 | 4.2 | 0.8 | 20.5 |
| S&P 500 | 4/23/10 | 7/20/10 | -16.0 | 4.5 | 1.1 | 24.3 |
| NYSE Finance | 4/15/10 | 7/2/10 | -20.3 | -6.4 | 0.7 | 17.5 |
| Dow Global | 4/15/10 | 7/2/10 | -18.4 | 0.3 | 0.3 | 22.8 |
| Asia Pacific | 4/15/10 | 7/2/10 | -12.5 | 7.9 | -0.02 | 23.2 |
| Japan Nikkei Average | 4/05/10 | 8/31/10 | -22.5 | -7.5 | 3.1 | 19.5 |
| China Shanghai | 4/15/10 | 7/02/10 | -24.7 | -10.3 | 1.1 | 19.1 |
| STOXX 50 | 4/15/10 | 7/2/10 | -15.3 | -2.5 | 2.2 | 15.1 |
| DAX | 4/26/10 | 5/25/10 | -10.5 | 9.7 | 0.5 | 22.5 |
| Dollar Euro | 11/25 2009 | 6/7 2010 | 21.2 | 14.7 | 3.4 | -8.3 |
| DJ UBS Comm. | 1/6/10 | 7/2/10 | -14.5 | 8.8 | -2.8 | 27.2 |
| 10-Year Tre. | 4/5/10 | 4/6/10 | 3.986 | 3.322 |
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://online.wsj.com/mdc/page/marketsdata.html
Table 7 shows the percentage change of financial assets at year end 2010 relative to year-end 2009, 2008, 2007 and 2006. Values of financial assets have not recovered from levels before the financial crisis and global recession as learning by losing and the incidence of risks in Europe, China and the US induced an opportunistic and high-frequency management of carry trade positions in “profit and run” fashion. Financial crisis risk is not solved by curtailing the reactions of financial participants through draconian regulation at an inopportune time when financial intermediation is required for growth. What is needed is changing monetary policy to less aggressive doses and more conventional instead of exotic instruments that permit normal channeling of financial flows to investment and hiring instead of carry trades to high risk financial positions.
Table 7, Percentage Change of Year-end 2010 Values of Financial Assets Relative to Year-end Values 2006-2009
| 2009 | 2008 | 2007 | 2006 | |
| DJIA | 11.0 | 31.9 | -12.7 | -7.4 |
| S&P 500 | 12.8 | 39.2 | -14.3 | -11.7 |
| NYSE Fin | 5.0 | 28.8 | -40.3 | -48.3 |
| Dow Glo bal | 4.6 | 36.8 | -25.5 | -2.5 |
| Dow Asia-P | 15.9 | 58.2 | -11.7 | 0.8 |
| Nikkei Av | -3.0 | 16.9 | -33.2 | -40.4 |
| Shanghai | -11.9 | 53.2 | -46.6 | 9.4 |
| STOXX 50 | -0.1 | 28.3 | 28.8 | -30.4 |
| DAX | 16/1 | 43.7 | -14.3 | 4.6 |
| USD/EUR | 6.7 | 3.9 | 8.4 | -0.9 |
| DJ UBS Com | 16.7 | 38.5 | -12.2 | -2.3 |
Sources: http://online.wsj.com/mdc/page/marketsdata.html
http://federalreserve.gov/releases/h10/Hist/dat00_eu.htm
US stock markets have been also plagued by fluctuations instead of a steady increase. Table 8, updated with every post, shows the fluctuations of the DJIA and S&P 500 stock indexes. Since the onset of the European sovereign risk issues around Apr 26, the DJIA has gained 4.2 percent and the S&P 500 4.9 percent. Further financial turbulence is not to be discarded.
Table 8, Percentage Changes of DJIA and S&P 500 in Selected Dates
| 2010 | ∆% DJIA from earlier date | ∆% DJIA from Apr 26 | ∆% S&P 500 from earlier date | ∆% S&P 500 from Apr 26 |
| Apr 26 | ||||
| May 6 | -6.1 | -6.1 | -6.9 | -6.9 |
| May 26 | -5.2 | -10.9 | -5.4 | -11.9 |
| Jun 8 | -1.2 | -11.3 | 2.1 | -12.4 |
| Jul 2 | -2.6 | -13.6 | -3.8 | -15.7 |
| Aug 9 | 10.5 | -4.3 | 10.3 | -7.0 |
| Aug 31 | -6.4 | -10.6 | -6.9 | -13.4 |
| Nov 5 | 14.2 | 2.1 | 16.8 | 1.0 |
| Nov 30 | -3.8 | -3.8 | -3.7 | -2.6 |
| Dec 17 | 4.4 | 2.5 | 5.3 | 2.6 |
| Dec 23 | 0.7 | 3.3 | 1.0 | 3.7 |
| Dec 31 | 0.03 | 3.3 | 0.07 | 3.8 |
| Jan 7 | 0.8 | 4.2 | 1.1 | 4.9 |
Source: http://online.wsj.com/mdc/public/page/mdc_us_stocks.html?mod=mdc_topnav_2_3004
III World Devaluation War. During a press briefing, Caroline Atkinson, Director of the External Relations Department of the International Monetary Fund (IMF), stated (http://www.imf.org/external/np/tr/2011/tr010611.htm):
“Capital controls are a little bit in the eye of the beholder, but capital controls are certainly a part of the toolkit. Some capital controls are more focused on macro-prudential measures; other are more focused on, for example, shifting the length of the maturity of inflows as they are taxing short-term and encouraging longer term flows. So these are all part of a range of measures that countries may consider.”
Various countries are complaining that zero interest rates and quantitative easing are channeling significant flows of funds in search of higher yields in their national markets that must be offset by policy measures. Brazil is imposing reserve requirements on the FX positions of domestic banks (http://www.ft.com/cms/s/0/f53b66e4-1983-11e0-a853-00144feab49a.html#axzz1AJCJ1Em9). Chile is also intervening to arrest the appreciation of its currency (http://professional.wsj.com/article/SB10001424052748704723104576062232377334242.html). The central banks of Brazil, Russia, India and China, or fast-growing emerging countries sometimes referred as BRIC, accounting now for a fifth of world economic activity, have increased interest rates recently together with other measures to control inflation (http://professional.wsj.com/article/SB10001424052748704739504576068171365313408.html?mod=WSJPRO_hps_MIDDLESixthNews). Inflation has increased to 5.9 percent in Brazil, 5.1 percent in China, 8.7 percent in Russia, 4.4 percent in Mexico, 7 percent in Indonesia and food price inflation is running at 18 percent in India (Ibid). There is increasing concern in many countries that near zero short-term interest rates in the US and massive purchases of long-term securities by the Fed divert world capital flows in hunt of higher yields in commodities and emerging market stocks, appreciating currencies that erode export competitiveness and set pressure on monetary, exchange and capital inflow policies. Table 9, which is updated with every post, shows the devaluation of the dollar against currencies of all types of countries. The Fed easy lending policy encourages worldwide carry trades with long positions in commodities, emerging market stocks and currencies that could cause again a financial markets event.
Table 9, Exchange Rates
| Peak | Trough | ∆% P/T | Jan 7 2011 | ∆% T Jan 7 | ∆% P Jan 7 | |
| EUR USD | 7/15 2008 | 6/7 2010 | 1/7 2011 | |||
| Rate | 1.59 | 1.192 | 1.291 | |||
| ∆% | -33.4 | 7.7 | -23.2 | |||
| JPY USD | 8/18 2008 | 9/15 2010 | 1/7 2011 | |||
| Rate | 110.19 | 83.07 | 83.15 | |||
| ∆% | 24.6 | -0.1 | 24.5 | |||
| CHF USD | 11/21 2008 | 12/8 2009 | 1/7 2011 | |||
| Rate | 1.225 | 1.025 | 0.964 | |||
| ∆% | 16.3 | 5.9 | 21.3 | |||
| USD GBP | 7/15 2008 | 1/2/ 2009 | 1/7 2011 | |||
| Rate | 2.006 | 1.388 | 1.554 | |||
| ∆% | -44.5 | 10.7 | -29.1 | |||
| USD AUD | 7/15 2008 | 10/27 2008 | 1/7 2011 | |||
| Rate | 0.979 | 0.601 | 0.996 | |||
| ∆% | -62.9 | 39.5 | -0.2 | |||
| ZAR USD | 10/22 2008 | 8/15 2010 | 1/7 2011 | |||
| Rate | 11.578 | 7.238 | 6.798 | |||
| ∆% | 37.5 | 6.1 | 41.3 | |||
| SGD USD | 3/3 2009 | 8/9 2010 | 1/7 2011 | |||
| Rate | 1.553 | 1.348 | 1.293 | |||
| ∆% | 13.2 | 4.1 | 16.7 | |||
| HKD USD | 8/15 2008 | 12/14 2009 | 1/7 2011 | |||
| Rate | 7.813 | 7.752 | 7.772 | |||
| ∆% | 0.8 | -0.3 | 0.5 | |||
| BRL USD | 12/5 2008 | 4/30 2010 | 1/7 2011 | |||
| Rate | 2.43 | 1.737 | 1.684 | |||
| ∆% | 28.5 | 3.1 | 30.7 | |||
| CZK USD | 2/13 2009 | 8/6 2010 | 1/7 2011 | |||
| Rate | 22.19 | 18.693 | 18.847 | |||
| ∆% | 15.7 | 0.8 | 15.1 | |||
| SEK USD | 3/4 2009 | 8/9 2010 | 1/7 2011 | |||
| Rate | 9.313 | 7.108 | 6.934 | |||
| ∆% | 23.7 | 2.4 | 25.5 |
Symbols: USD: US dollar; EUR: euro; JPY: Japanese yen; CHF: Swiss franc; GBP: UK pound; AUD: Australian dollar; ZAR: South African rand; SGD: Singapore dollar; HKD: Hong Kong dollar; BRL: Brazil real; CZK: Czech koruna; SEK: Swedish krona; P: peak; T: trough
Note: percentages calculated with currencies expressed in units of domestic currency per dollar; negative sign means devaluation and no sign appreciation
Source: http://online.wsj.com/mdc/public/page/mdc_currencies.html?mod=mdc_topnav_2_3000
IV European Sovereign Risk. The issues of sovereign risk that plagued world financial markets in Apr are rising again as the euro’s decline below $1.30 is attributed to potential effects by haircuts on private-sector debt holdings (http://noir.bloomberg.com/apps/news?pid=20601087&sid=aTEbFWwONrtE&pos=1). China is providing some relief to funding needs in Europe with its large stock of international reserves (http://noir.bloomberg.com/apps/news?pid=20601087&sid=aM8RZJCnvJT4&pos=2). Market participants believe that the European Central Bank is renewing purchases of sovereign bonds (http://noir.bloomberg.com/apps/news?pid=20601087&sid=aovMqoDrknJY&pos=5). The euro is again at the center of financial market turbulence (http://professional.wsj.com/article/SB10001424052748704739504576067284064388912.html?mod=WSJPRO_hps_LEFTWhatsNews http://www.ft.com/cms/s/0/e1bf1138-1a41-11e0-b003-00144feab49a.html#axzz1AXQJvhqL). Table 10 provides GDP and debt/GDP and current account/GDP ratios for selected countries. The combined GDP of Portugal, $224 billion, Ireland, $204 billion, and Greece, $305 billion, is $773 billion, or 6 percent of the GDP of the euro area. European assistance may still be prohibitively high depending on financial needs. Adding the GDPs of Spain, $1275 billion, and Italy, $2037, results in combined GDP of $4045 billion, or 33.7 percent of the euro zone’s GDP. The table now includes the BRIC countries of China, Brazil, Russia and India, with combined GDP of $10,675 billion, or 88.9 percent of the GDP of the euro zone and 72.9 percent of the US. The pleas for international cooperation by the IMF are easier to understand with the changing shares of countries and regions in world output and trade.
Table 10, GDP, Debt/GDP and Current Account/GDP for Selected Countries
| GDP $ Billions | Debt/GDP 2010 % | Debt/GDP 2015 % | Current Account % GDP 2010 | Current Account % GDP 2015 | |
| Euro Area | 12,067 | 53.4 | 67.4 | 73.8 | 0.2 |
| Germany | 3,652 | 58.7 | 61.8 | 6.1 | 3.9 |
| France | 2,865 | 74.5 | 78.7 | -1.8 | -1.8 |
| Portugal | 224 | 79.9 | 93.6 | -9.9 | -8.4 |
| Ireland | 204 | 55.2 | 71.4 | -2.7 | -1.2 |
| Italy | 2,037 | 98.9 | 99.5 | -2.9 | -2.4 |
| Greece | 305 | 109.5 | 112.6 | -10.8 | -4.0 |
| Spain | 1,275 | 54.1 | 72.6 | -5.2 | -4.3 |
| Belgium | 461 | 91.4 | 100.1 | 0.5 | 4.1 |
| USA | 14,624 | 65.8 | 84.7 | -3.2 | -3.4 |
| UK | 2,259 | 68.8 | 76.0 | -2.2 | -1.1 |
| Japan | 6,517 | 120.7 | 153.4 | 3.1 | 1.9 |
| China | 5,745 | 19.1 | 13.9 | 4.7 | 7.8 |
| Brazil | 2,023 | 36.7 | 30.8 | -2.6 | -3.3 |
| Russia | 1,477 | 11.1 | 14.6 | 4.7 | 1.3 |
| India | 1,430 | 71.8 | 67.2 | -3.1 | -2.2 |
Source: http://www.imf.org/external/pubs/ft/weo/2010/02/weodata/index.aspx
V Economic Indicators. Economic indicators for the US are more encouraging but with lag in recovery of real estate and employment. The world economy is growing at a moderate rate with higher growth and inflation in emerging countries than in advanced countries. The chair of the Institute for Supply Management (ISM) finds “significant recovery for much of the US manufacturing sector in 2010” and “December’s strong readings in new orders and production, combined with positive comments from the panel, should create momentum as we go in the first quarter of 2011” (see the report in the WSJ archive of economic reports http://online.wsj.com/mdc/public/page/2_3024-bbnapm.html). New orders jumped 4.3 points from 56.6 in Nov to 60.9 in Dec; production jumped 5.7 points from 55.0 in Nov to 60.7 in Dec; but employment fell 1.8 points from 57.5 in Nov to 55.7 in Dec. The nonmanufacturing index of the ISM jumped 2.1 points from 55.0 in Nov to 57.1 in Dec; new orders soared by 5.3 points from 57.7 in Nov to 63.0 in Dec; prices rose 6.8 points from 63.2 in Nov to 70.0 in Dec; but employment fell 2.2 points from 52.7 in Nov to 50.5 in Dec (see the archived report at http://online.wsj.com/mdc/public/page/2_3024-bbnonman.html). New orders for manufactured goods, seasonally adjusted, rose 0.7 percent in Nov relative to Oct but new orders excluding transportation rose 2.4 percent. New orders for manufactured durable goods fell by 0.3 percent in Nov after declining 3.1 percent in Oct while new orders for manufactured nondurable goods rose 1.7 percent in Nov. In the first eleven months of 2010, total orders for manufacturing industries rose 12.3 percent and 11.9 percent excluding transportation; orders for durable goods industries rose 14.4 percent and orders for nondurable goods industries rose 10.6 percent (http://www.census.gov/manufacturing/m3/prel/pdf/s-i-o.pdf). Construction spending, seasonally adjusted, grew by 0.4 percent in Nov relative to Oct but was 6.0 percent below Nov 2009. Residential construction rose 0.7 percent in Nov relative to Oct; nonresidential construction fell 0.1 percent in Nov relative to Oct. Public construction rose 0.7 percent in Nov relative to Oct. Total construction in the first eleven months, not seasonally adjusted, was $753.9 billion or 10.6 percent below 2009; residential construction was $234.5 billion or 0.4 percent below 2009; and nonresidential construction was $519.4 billion or 14.5 percent below 2009 (http://www.census.gov/const/C30/release.pdf). Construction data for the first eleven months of 2005, not seasonally adjusted, permit important comparisons: $1031.2 billion for total construction such that the 2010 estimate is 26.9 percent lower; $583.1 billion for residential construction such that the 2010 estimate is 59.8 percent lower; and $558.2 billion for nonresidential construction such that the 2010 estimate is 6.9 percent lower (http://www.census.gov/const/C30/pr200511.pdf). The share of residential construction in total construction has declined from 56.5 percent in the first eleven months of 2005 to 31.1 percent in 2010 and the share of nonresidential construction has increased from 54.1 percent in 2005 to 68.9 percent in 2010. Construction data illustrate the allocation of resources to residential construction resulting from easy lending by holding interest rates at 1 percent together with the policy of affordable housing by subsidies, Fannie and Freddie. Table 11 provides EUROSTAT (http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home) estimates of GDP growth in the third quarter of 2010 relative to the second quarter of 2010 (IIIQ10/IIQ10) and in the third quarter of 2010 relative to the third quarter of 2009 (IIIQ10/IIIQ09). There are also estimates of GDP growth for the US and Japan. The data illustrate the various speeds of adjustment from the global recession. The euro area 16 members, EA16, adding Estonia to become EA17, grew by 0.3 percent in IIIQ10 and 1.9 percent relative to a year earlier while the European Union 27 members, EU27, grew 0.5 percent in IIIQ10 and 2.2 percent relative to a year earlier. Germany grew at 0.7 percent in IIIQ10 and 3.9 percent relative to a year earlier and France 0.3 and 1.7, respectively. Growth is much lower in the countries facing sovereign risk issues and negative in Greece. Growth differs but is proceeding in the UK, US and Japan. The EA16 unemployment rate was 10.1 percent in Nov 2010, unchanged from Oct but higher than 9.9 percent in Nov 2009. The EU27 unemployment rate was 9.6 percent in Nov 2010, unchanged from Oct but higher than 9.4 percent in Nov 2009 (http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/3-07012011-AP/EN/3-07012011-AP-EN.PDF). The volume of retail trade fell 0.8 percent in EA16 in Nov but higher by 0.1 percent relative to Nov 2009; the volume of retail trade fell 0.4 percent in EU27 but was higher by 0.8 percent than in Nov 2009 (http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-06012011-AP/EN/4-06012011-AP-EN.PDF). Industrial new orders rose by 1.4 percent in Oct/Sep 2010 in EA16 and by 14.8 percent relative to Oct 2009; industrial new orders rose by 0.6 percent in Oct/Sep 2010 in EU27 and by 14.4 percent relative to Oct 2009 (http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-05012010-BP/EN/4-05012010-BP-EN.PDF). The flash estimate of euro area inflation for Dec 2010 is 2.2 percent (http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-04012011-AP/EN/2-04012011-AP-EN.PDF), which is above the 2 percent guideline of the European Central Bank.
Table 11, GDP Growth %
| IIIQ10/IIQ10 | IIIQ10/III09 | |
| EA16 | 0.3 | 1.9 |
| EU27 | 0.5 | 2.2 |
| EA17 | 0.3 | 1.9 |
| Germany | 0.7 | 3.9 |
| France | 0.3 | 1.7 |
| Italy | 0.3 | 1.1 |
| Portugal | 0.3 | 1.4 |
| Ireland | 0.5 | -0.7 |
| Greece | -1.3 | -4.6 |
| Spain | 0.0 | 0.2 |
| UK | 0.7 | 2.7 |
| US | 0.6 | 3.2 |
| Japan | 1.1 | 5.5 |
EA: euro area; EU: European Union
Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-07012011-BP/EN/2-07012011-BP-EN.PDF
VI Interest Rates. The 10-year Treasury yield rose to 3.33 percent on Fri Jan 7 from 3.29 percent a week ago but declined from 3.22 percent a month ago; the 5-year Treasury fell to 1.96 percent from 2.01 percent a week ago but rose from 1.90 percent a month ago. The 10-year German government bond traded at 2.86 percent for a negative spread relative to the comparable Treasury of 46 basis points (http://markets.ft.com/markets/bonds.asp). The US Treasury note paying 2.63 percent coupon, maturing in 11/20 traded on Jan 7 at a yield of 3.33 percent or price of 94.13 (http://markets.ft.com/ft/markets/reports/FTReport.asp?dockey=GOV-070111).
VII Conclusion. The rate of unemployment appears to be higher than 9.4 percent seasonally adjusted because of the large number of persons dropping from the labor force on the basis of nil prospects of finding another job. The number of persons in job stress is at least 26 million but likely closer to 30 million. There is no certainty that quantitative easing and zero interest rates will result in higher investment, consumption and hiring. If there is uncertainty in the private sector on the viability of business models, quantitative easing may simply result in carry trades, borrowing at near zero US short-term interest rates and taking long positions in risk financial assets that are creating a confrontational international policy environment. Economic indicators are more encouraging but with recessive conditions in real estate and labor markets. A policy change inducing flows of financial intermediation to investment and hiring may prove more productive than zero interest rates and quantitative easing that merely encourage carry trades toward risk financial assets. (Go to http://cmpassocregulationblog.blogspot.com/ http://sites.google.com/site/economicregulation/carlos-m-pelaez)
http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10 )
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© Carlos M. Pelaez, 2010, 2011
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