Unemployment and Underemployment of 24 to 30 Million, Falling Real Wages, 44 Million on Food Stamps and Global Inflation
Carlos M. Pelaez
© Carlos M. Pelaez, 2010, 2011
Executive Summary
I Unemployment and Underemployment
II Falling Real Wages
III 44 Million on Food Stamps
IV Inflation Policy
V Global Inflation
VI Risk Aversion
VII Valuation of Risk Financial Assets
VIII Economic Indicators
IX Interest Rates
X Conclusion
References
Executive Summary
There are between 24 and 30 million people in the United States in job stress because of outright unemployment or underemployment. The number of unemployed could be as high as 18 million. Hiring in the US, which is the avenue for exiting unemployment and underemployment, has declined by 17 million per year. The number of people with jobs has declined by four million. Inflation-adjusted hourly earnings measured by nonfarm business generating 75 percent of US economic activity or GDP have declined by 2.6 percent annual equivalent in the first quarter of 2011. The combination of unemployment, underemployment and increases in the cost of living has resulted in 44.4 million people receiving benefits under the Supplemental Nutrition Assistance Program formerly known as food stamps.
The results of applying to the population the labor force participation rate, or share of the labor force in population, prevailing before the recession of 66.2 percent are that: (1) there are an estimated 4.976 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 18.397 million and not 13.421 million of whom many have been unemployed long term; (3) the rate of unemployment is 11.6 percent and not 8.7 percent, not seasonally adjusted, or 9.1 percent seasonally adjusted; and (4) the number of people in job stress is close to 30 million by adding the 4.976 million leaving the labor force because they believe they could not find another job. The employment population ratio, or people with jobs as percent of population, dropped from 62.9 percent on average in 2006 to 58.7 percent in May 2010, 58.4 percent in Apr 2011 and 58.5 percent in May 2011 and the number of employed dropped from 144 million to 140 million. 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 almost four million less people working in 2011 than in 2006 and the number employed is not increasing. 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. Job creation is subpar compared with past recoveries from similarly deep contractions. For example, if total nonfarm jobs had grown between May 2010 and May 2011 by 4.9 percent, as between May 1983 and May 1984, 6.409 million jobs would have been created in the past 12 months for a difference of 5.457 million more total nonfarm jobs relative to 0.952 million jobs actually created. If total private jobs had grown between May 2010 and May 2011 by 5.9 percent as between May 1983 and May 1984, 6.337 million private jobs would have been created for a difference of 4.539 million more total private jobs relative to 1.798 million jobs actually created.
The wage bill is the average weekly hours times the earnings per hour. The Bureau of Labor Statistics estimates earnings per hour seasonally adjusted, increasing from $22.57/hour in May 2010 to $22.98/hour in May 2011, or by 1.8 percent. There is disappointment about the pace of wage increases because of rising food and energy costs. Average private weekly earnings increased slightly by $18.62 from $771.89 in May 2010 to $790.51 in May 2011 or by 2.4 percent. The number of average weekly hours rose from 34.2 in May 2010 to 34.4 in May 2011, or by 0.6 percent. The wage bill before taxes rose by 2.4 percent (1.018 times 1.006). The wage bill rose 2.4 percent in the 12 months ending in Apr [($22.92x34.4)/($22.52x34.1) while CPI inflation was 3.2 percent for an inflation-adjusted decline of 0.8 percent {[(1.024/1.032)-1]100}. Energy and food increases are similar to a “silent tax” that is highly regressive, harming the most those with lowest incomes who spend a higher portion of their incomes on food and energy. Hourly compensation in the first quarter of 2011 rose 2.5 percent annual equivalent, which deflated by the estimated 5.3 percent consumer price increase annual equivalent results in a decline of real hourly compensation by 2.6 percent. The number of persons receiving benefits under the Supplemental Assistance Program (SNAP), formerly food stamps, jumped to 40.3 million in fiscal year 2010, or by 20.3 percent, and then jumped again to 44.6 million, or by 10.6 percent in Mar 2011. The increase in the number of people receiving SNAP or food stamps between fiscal years 2009 and 2011 is 33.1 percent and the cost increased from $50.3 billion in 2009 to $64.7 billion in 2010. More than 14 percent of the US population is receiving assistance through SNAP.
I Unemployment and Underemployment. The Bureau of Labor Statistics (BLS) released on Fri, Jun 3 the employment report showing an increase in the seasonally adjusted rate of unemployment, or unemployed as percent of the labor force, from 9.0 percent in Apr 2011 to 9.1 percent in May 2011 (http://www.bls.gov/news.release/pdf/empsit.pdf). The number of people in job stress in Table 1 is 24.6 million, compared with 24.8 million in Apr and 24.4 million in Mar, composed of 13.9 million unemployed (of whom 6.2 million, or 44.6 percent, unemployed for 27 weeks or more) compared with 13.7 million unemployed in Apr (of whom 5.8 million, or 42.5 percent, unemployed for 27 weeks or more), 8.5 million employed part-time for economic reasons (who suffered reductions in their work hours or could not find full-time employment) compared with 8.6 million in Apr and 2.2 million who were marginally attached to the labor force (who were not in the labor force but wanted and were available for work) compared with 2.5 million in Apr.
Table 1, People in Job Stress, Millions and % SA
| Mar | Apr | May | |
| Unemployed Millions | 13.542 | 13.747 | 13.914 |
| Unemployed >27 weeks Millions | 6.122 | 5.839 | 6.200 |
| Unemployed >27 weeks % | 45.2 | 42.5 | 44.6 |
| Part Time Economic Reasons Millions | 8.433 | 8.600 | 8.548 |
| Marginally Attached Labor Force Million | 2.434 | 2.466 | 2.206 |
| Job Stress Millions | 24.409 | 24.813 | 24.668 |
| Unemploy- ment Rate | 8.8 | 9.0 | 9.1 |
Job Stress = Unemployed + Part Time Economic Reasons + Marginally Attached Labor Force
Source: http://www.bls.gov/news.release/pdf/empsit.pdf
http://www.bls.gov/news.release/archives/empsit_05062011.pdf
http://www.bls.gov/news.release/archives/empsit_04012011.pdf
Additional information provides deeper insight. Table 2 consists of data and additional calculations using the BLS household survey, illustrating the possibility that the actual rate of unemployment could be 11.6 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 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 May 2010 and Apr and May 2011 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 2 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 population in May 2010 and Apr and May 2011 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 63.9 percent by Apr 2011 and was 64.1 percent in May 2011, 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 4.976 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 18.397 million and not 13.421 million of whom many have been unemployed long term; (3) the rate of unemployment is 11.6 percent and not 8.7 percent, not seasonally adjusted, or 9.1 percent seasonally adjusted; and (4) the number of people in job stress is close to 30 million by adding the 4.976 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 58.7 percent in May 2010, 58.4 percent in Apr 2011 and 58.5 percent in May 2011 and the number of employed dropped from 144 million to 140 million. 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 almost four million less people working in 2011 than in 2006 and the number employed is not increasing. 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 (http://cmpassocregulationblog.blogspot.com/2011/03/slow-growth-inflation-unemployment-and.html).
Table 2, Population, Labor Force and Unemployment, NSA
| 2006 | May 2010 | Apr 11 | May 11 | |
| POP | 229 | 237,499 | 239,146 | 239,313 |
| LF | 151 | 153,866 | 152,898 | 153,449 |
| PART% | 66.2 | 64.8 | 63.9 | 64.1 |
| EMP | 144 | 139,497 | 139,661 | 140,028 |
| EMP/POP% | 62.9 | 58.7 | 58.4 | 58.5 |
| UEM | 7 | 14,369 | 13,237 | 13,421 |
| UEM/LF Rate% | 4.6 | 9.3 | 8.7 | 8.7 |
| NLF | 77 | 83,633 | 86,248 | 85,864 |
| LF PART 66.2% | 157,224 | 158,315 | 158,425 | |
| ∆NLF UEM | 3,358 | 5,417 | 4,976 | |
| Total UEM | 17,727 | 18,654 | 18,397 | |
| Total UEM% | 11.3 | 11.8 | 11.6 |
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 54,000 in May and private payroll employment rose by 83,000. Table 3 provides the monthly change in jobs seasonally adjusted in the prior strong contraction of 1981-1982 and the recovery in 1983 into 1984 and in the contraction of 2008-2009 and in the recovery in 2009 to 2011. All revisions have been incorporated in Table 3. The data in the recovery periods are in relief to facilitate comparison. There is significant bias in the comparison. The average yearly civilian noninstitutional 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). Total nonfarm payroll jobs in 1983 were 90.280 million, jumping to 94.530 million in 1984 while total nonfarm jobs in 2010 were 129.818 million declining from 130.807 million in 2009 (http://www.bls.gov/webapps/legacy/cesbtab1.htm ). What is striking about the data in Table 3 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 and total number of jobs in payrolls rose by 39.5 million in 2010 relative to 1983 or by 43.8 percent. 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, 2.6 percent in IIIQ2010, 3.1 percent in IVQ2010 and 1.8 percent in IQ2011. Growth has been mediocre in the six quarters of expansion beginning in IIIQ2009 in comparison with earlier expansions http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html (http://cmpassocregulationblog.blogspot.com/2011/05/mediocre-growth-world-inflation.html http://cmpassocregulationblog.blogspot.com/2011/03/slow-growth-inflation-unemployment-and.html http://cmpassocregulationblog.blogspot.com/2011/02/mediocre-growth-raw-materials-shock-and.html) and also in terms of what is required to reduce the job stress of at least 24 million persons but likely close to 30 million. Some of the job growth and contraction in 2010 in Table 3 is caused by the hiring and subsequent layoff of temporary workers for the 2010 census.
Table 3, Monthly Change in Jobs, Number SA
| Month | 1981 | 1982 | 1983 | 2008 | 2009 | 2010 | Private |
| Jan | 95 | -327 | 225 | 13 | -820 | -39 | -42 |
| Feb | 67 | -6 | -78 | -83 | -726 | -35 | -21 |
| Mar | 104 | -129 | 173 | -72 | -796 | 192 | 144 |
| Apr | 74 | -281 | 276 | -185 | -660 | 277 | 229 |
| May | 10 | -45 | 277 | -233 | -386 | 458 | 48 |
| Jun | 196 | -243 | 378 | -178 | -502 | -192 | 65 |
| Jul | 112 | -343 | 418 | -231 | -300 | -49 | 93 |
| Aug | -36 | -158 | -308 | -267 | -231 | -59 | 110 |
| Sep | -87 | -181 | 1114 | -434 | -236 | -29 | 109 |
| Oct | -100 | -277 | 271 | -509 | -221 | 171 | 143 |
| Nov | -209 | 124 | 352 | -802 | -55 | 93 | 128 |
| Dec | -278 | -14 | 356 | -619 | -130 | 152 | 167 |
| 1984 | 2011 | Private | |||||
| Jan | 447 | 68 | 94 | ||||
| Feb | 479 | 235 | 261 | ||||
| Mar | 275 | 194 | 219 | ||||
| Apr | 363 | 232 | 251 | ||||
| May | 308 | 54 | 83 | ||||
| Jun | 379 | ||||||
| Jul | 312 | ||||||
| Aug | 241 | ||||||
| Sep | 311 | ||||||
| Oct | 286 | ||||||
| Nov | 349 | ||||||
| Dec | 127 |
Source: http://data.bls.gov/PDQ/servlet/SurveyOutputServlet
http://www.bls.gov/webapps/legacy/cesbtab1.htm
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 May 2010 to May 2011, not seasonally adjusted (NSA), are provided in Table 4. Total nonfarm employment increased by 952,000, consisting of growth of total private employment by 1,798,000 and decline by 846,000 of government employment. Monthly average growth of private payroll employment has been 149,833, which is mediocre relative to 24 to 30 million in job stress, while total nonfarm employment has grown on average by only 79,333 per month. Manufacturing employment increased by 173,000 while private service providing employment grew by 1,535,000. An important feature is that jobs in temporary help services increased by 185,000. This episode of jobless recovery is characterized by part-time jobs. An important characteristic is that the losses of government jobs have been highest in local government, 257,000 jobs lost, because of the higher number of employees in local government, 14.5 million relative to 5.1 million in state jobs and 2.8 million in federal jobs.
Table 4, Employees in Nonfarm Payrolls Not Seasonally Adjusted in Thousands
| May 2010 | May 2011 | Change | |
| A Total Nonfarm | 130,801 | 131,753 | 952 |
| B Total Private | 107,405 | 109,203 | 1,798 |
| B1 Goods Producing | 17,755 | 18,018 | 263 |
| B1a Manu-facturing | 11,496 | 11,669 | 173 |
| B2 Private service providing | 89,650 | 91,185 | 1,535 |
| B2a Temporary help services | 2,059 | 2,244 | 185 |
| C Government | 23,396 | 22,550 | -846 |
| C1 Federal | 3,410 | 2,847 | -563 |
| C2 State | 5,176 | 5,150 | -26 |
| C3 Local | 14,810 | 14,553 | -257 |
Note: A = B+C, B = B1 + B2, C=C1 + C2 + C3
Source:http://www.bls.gov/news.release/pdf/empsit.pdf
The NBER dates recessions in the US from peaks to troughs as: IQ80 to IIIQ80, IIIQ81 to IV82 and IVQ07 to IIQ09 (http://www.nber.org/cycles/cyclesmain.html). Table 5 provides total annual level nonfarm employment in the US for the 1980s and the 2000s, which is different from 12 months comparisons. Nonfarm jobs rose by 4.853 million in 1982 to 1984, or 5.4 percent, and continued rapid growth in the rest of the decade. In contrast, nonfarm jobs are down by 7.780 million in 2010 relative to 2007 and fell by 989,000 in 2010 relative to 2009 even after six quarters of GDP growth. Monetary and fiscal stimuli have failed in increasing growth to rates required for mitigating job stress. The initial growth impulse reflects a flatter growth curve in the current expansion.
Table 5, Total Nonfarm Employment in Thousands
| Year | Total Nonfarm | Year | Total Nonfarm |
| 1980 | 90,528 | 2000 | 131,785 |
| 1981 | 91,289 | 2001 | 131,826 |
| 1982 | 89,677 | 2002 | 130,341 |
| 1983 | 90,280 | 2003 | 129,999 |
| 1984 | 94,530 | 2004 | 131,435 |
| 1985 | 97,511 | 2005 | 133,703 |
| 1986 | 99,474 | 2006 | 136,086 |
| 1987 | 102,088 | 2007 | 137,598 |
| 1988 | 105,345 | 2008 | 136,790 |
| 1989 | 108,014 | 2009 | 130,807 |
| 1990 | 109,487 | 2010 | 129,818 |
Source: http://www.bls.gov/webapps/legacy/cesbtab1.htm
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).
The Bureau of Labor Statistics (BLS) makes yearly revisions of its establishment survey (Harris 2011BA):
“With the release of data for January 2011, the Bureau of Labor Statistics (BLS) introduced its annual revision of national estimates of employment, hours, and earnings from the Current Employment Statistics (CES) monthly survey of nonfarm establishments. Each year, the CES survey realigns its sample-based estimates to incorporate universe counts of employment—a process known as benchmarking. Comprehensive counts of employment, or benchmarks, are derived primarily from unemployment insurance (UI) tax reports that nearly all employers are required to file with State Workforce Agencies.”
The number of not seasonally adjusted total private jobs in the US in Dec 2010 is 108.464 million, declining to 106.079 million in Jan 2011, or by 2.385 million, because of the adjustment of a different benchmark and not actual job losses. The not seasonally adjusted number of total private jobs in Dec 1984 is 80.250 million, declining to 78.704 million in Jan 1985, or by 1.546 million for the similar adjustment. Table 6 attempts to measure job losses and gains in the recessions and expansions of 1981-1985 and 2007-2011. The final ten rows provide job creation from May 1983 to May 1984 and from May 2010 to May 2011, that is, at equivalent stages of the recovery from two comparable strong recessions. The row “Change ∆%” for May 1983 to May 1984 shows an increase of total nonfarm jobs by 4.9 percent and of 5.9 percent for total private jobs. The row “Change ∆%” for May 2010 to May 2011 shows an increase of total nonfarm jobs by 0.7 percent and of 1.7 percent for total private jobs. The last two rows of Table 6 provide a calculation of the number of jobs that would have been created from May 2010 to May 2011 if the rate of job creation had been the same as from May 1983 to May 1984. If total nonfarm jobs had grown between May 2010 and May 2011 by 4.9 percent, as between May 1983 and May 1984, 6.409 million jobs would have been created in the past 12 months for a difference of 5.457 million more total nonfarm jobs relative to 0.952 million jobs actually created. If total private jobs had grown between May 2010 and May 2011 by 5.9 percent as between May 1983 and May 1984, 6.337 million private jobs would have been created for a difference of 4.539 million more total private jobs relative to 1.798 million jobs actually created.
Table 6, Total Nonfarm and Total Private Jobs Destroyed and Subsequently Created in Two Recessions IIIQ1981-IVQ1982 and IVQ2007-IIQ2009, Thousands and Percent
| 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 |
*[(130,801x1.049)-130,801] = 6,409 thousand
**[(107,405)x1.059 – 107,405] = 6,337 thousand
Source: http://data.bls.gov/pdq/SurveyOutputServlet
II Falling Real Wages. The wage bill is the average weekly hours times the earnings per hour. Table 7 provides the estimates by the BLS of earnings per hour seasonally adjusted, increasing from $22.57/hour in May 2010 to $22.98/hour in May 2011, or by 1.8 percent. There is disappointment in financial markets about the pace of wage increases because of rising food and energy costs. Average private weekly earnings increased slightly by $18.62 from $771.89 in May 2010 to $790.51 in May 2011 or by 2.4 percent. The number of average weekly hours rose from 34.2 in May 2010 to 34.4 in Apr 2011, or by 0.6 percent. The wage bill before taxes rose by 2.4 percent (1.018 times 1.006). The wage bill rose 2.4 percent in the 12 months ending in Apr [($22.92x34.4)/($22.52x34.1) while CPI inflation was 3.2 percent for an inflation-adjusted decline of 0.8 percent {[(1.024/1.032)-1]100}. Energy and food increases are similar to a “silent tax” that is highly regressive, harming the most those with lowest incomes. There are concerns that the wage bill would deteriorate in purchasing power because of the raw materials shock in the form of increases in prices of commodities such as the 33.8 percent steady increase in the DJ-UBS Commodity Index from Jul 2, 2010 to Jun 3, 2011 (see Table 18). The charts of four commodity price indexes by Bloomberg show steady increase since Jul 2 that was interrupted briefly only in Nov with the sovereign issues in Europe triggered by Ireland, in Mar by the earthquake and tsunami in Japan and in the beginning of May by the decline in oil prices (http://noir.bloomberg.com/markets/commodities/cfutures.html).
Table 7, Earnings per Hour and Average Weekly Hours SA
| Earnings per Hour | May 10 | Mar 11 | Apr 11 | May 11 |
| Total Private | $22.57 | $22.89 | $22.92 | $22.98 |
| Goods Producing | $24.05 | $24.29 | $24.34 | $24.40 |
| Service Providing | $22.22 | $22.56 | $22.59 | $22.64 |
| Average Weekly Earnings | ||||
| Total Private | $771.89 | $785.13 | $788.45 | $790.51 |
| Goods Producing | $957.19 | $969.17 | $971.17 | $978.44 |
| Service Providing | $753.48 | $748.99 | $752.25 | $753.91 |
| Average Weekly Hours | ||||
| Total Private | 34.2 | 34.3 | 34.4 | 34.4 |
| Goods Producing | 39.8 | 39.9 | 39.9 | 40.1 |
| Service Providing | 33.1 | 33.2 | 33.3 | 33.3 |
Source: http://www.bls.gov/news.release/pdf/empsit.pdf
Average hourly earnings in the first four months of 2007, 2010 and 2011 are shown in Table 8 together with their 12-months change, CPI 12 month inflation and 12-month percentage changes in CPI inflation-adjusted average hourly earnings. All data in Table 8 are not seasonally adjusted. Nominal changes of hourly earnings in 2007 were high and compensated for CPI inflation as shown by positive changes in 12 months real or CPI inflation-adjusted average hourly earnings. In 2010 and 2011, real average hourly earnings have been falling with acceleration in Mar because of the high headline CPI inflation of 2.7 percent, accelerating in Apr to 3.2 percent. Headline CPI inflation not seasonally adjusted in the first four months of 2011 accumulated to 2.6 percent or 8.0 percent annual equivalent if repeated in another three four-month periods compared with cumulative 0.9 percent in the first four months of 2010 or annual equivalent of 2.9 percent. CPI inflation excluding food and energy accumulated to 1.0 percent in the first four months of 2011 or annual equivalent of 3.2 percent while it accumulated to 0.5 percent in the first four months of 2010 or annual equivalent of 1.6 percent.
Table 8, Average Hourly Earnings Nominal and Inflation Adjusted, Dollars and % NSA
| AHE ALL | 12 Month Nominal ∆% | ∆% 12 Month CPI | 12 Month Real ∆% | |
| 2007 | ||||
| Jan* | $20.70* | 4.2* | 2.1 | 1.8* |
| Feb* | $20.79* | 4.1* | 2.4 | 1.7* |
| Mar | $20.82 | 3.7 | 2.8 | 0.8 |
| Apr | $21.05 | 3.3 | 2.6 | 0.9 |
| May | $20.83 | 3.7 | 2.7 | 0.9 |
| 2010 | ||||
| Jan | $22.55 | 1.9 | 2.6 | -0.7 |
| Feb | $22.61 | 1.4 | 2.1 | -0.2 |
| Mar | $22.51 | 1.2 | 2.3 | -0.4 |
| Apr | $22.56 | 1.8 | 2.2 | -0.4 |
| May | $22.63 | 2.5 | 2.0 | 0.5 |
| 2011 | ||||
| Jan | $23.20 | 2.9 | 1.6 | 1.3 |
| Feb | $23.03 | 1.8 | 2.1 | -0.3 |
| Mar | $22.92 | 1.8 | 2.7 | -0.9 |
| Apr | $22.97 | 1.8 | 3.2 | -1.4 |
| May | $23.08 | 1.9 |
Note: AHE ALL: average hourly earnings of all employees; CPI: consumer price index; Real: adjusted by CPI inflation; NA: not available
*AHE of production and nonsupervisory employees because of unavailability of data for all employees
Source: http://data.bls.gov/cgi-bin/surveymost?bls
The Bureau of Labor Statistics (BLS) calculates labor productivity “by dividing an index of real output by an index of hours worked of all persons, including employees, proprietors and unpaid family workers” (http://www.bls.gov/news.release/pdf/prod2.pdf). Business output is measured as “a chain type, current-weighted index constructed after excluding from gross domestic product (GDP) the following outputs: general government, nonprofit institutions, and private households (Ibid). Business output had a share of 75 percent in the value of GDP in 2009 and nonfarm business output of 74 percent of 2009 GDP. Productivity measures “the changes from period to period in the amount of goods and services produced per hour” (Ibid). Various factors affect productivity such as technology, investment and others. Labor compensation “includes accrued wages and salaries, supplements, employer contributions to employee benefit plans and taxes” (Ibid). Unit labor costs are defined by BLS as “the ratio of hourly compensation to labor productivity; increases in hourly compensation tend to increase unit labor costs and increases in output per hour tend to reduce them” (Ibid). Real hourly compensation is obtained by diving hourly compensation by the consumer price index. Increases in hourly compensation raise unit labor costs while increases in labor productivity could soften increases in compensation, lowering unit labor costs. The report on productivity and costs of the BLS is important because of the measurement of activity accounting for three quarters of GDP and the motivation for investment by business in exploiting opportunities for increases in productivity and decisions on the use of labor.
Table 9 provides the revised data for nonfarm business sector productivity and costs for IQ2011 as seasonally adjusted annual equivalent rate, IQ2011 relative to a year earlier and the change in annual averages in 2010 and 2009. Reflecting increases in output of 3.2 percent and of 1.4 percent in hours worked, nonfarm business sector labor productivity rose at a seasonally-adjusted annual equivalent (SAAE) rate of 1.8 percent in IQ2011, as shown in column 2 “IQ2011 SAEE.” The year-to-year increase of labor productivity from IQ2010 to IQ2011 was 1.3 percent, reflecting increases in output of 3.2 percent and of hours worked of 1.9 percent, as shown in column 3 “IQ2011 year to year.” Unit labor costs rose by 0.7 percent in IQ2011 and by 0.7 percent in IQ2011 year to year. Hourly compensation in IQ2011 SAAE rose 2.5 percent, which deflated by the estimated 5.3 percent consumer price increase SAAE in the IQ2011 results in a decline of real hourly compensation by 2.6 percent. The increases in productivity of 3.9 percent in the 2010 annual average and 3.7 percent in the 2009 annual average were facilitated by reductions in hours worked of 0.2 percent in 2010 and 7.2 percent in 2009. The report on productivity and costs confirms a weak economy in IQ2011 and losses in real hourly compensation of labor.
Table 9, Nonfarm Business Sector Productivity and Costs %
| IQ2011 SAAE | IQ2011 Year to Year | 2010 Annual Average | 2009 Annual Average | |
| Produc-tivity | 1.8 | 1.3 | 3.9 | 3.7 |
| Output | 3.2 | 3.2 | 3.7 | -3.8 |
| Hours | 1.4 | 1.9 | -0.2 | -7.2 |
| Hourly Comp. | 2.5 | 2.0 | 2.2 | 2.0 |
| Real Hourly Comp. | -2.6 | -0.2 | 0.6 | 2.4 |
| Unit Labor Costs | 0.7 | 0.7 | -1.6 | -1.6 |
| Unit Nonlabor Payments | 2.3 | 4.4 | 4.6 | |
| Implicit Price Deflator | 1.4 | 0.8 | 0.8 |
Notes: SAAE: seasonally adjusted annual equivalent; Comp.: compensation
Source: http://www.bls.gov/news.release/pdf/prod2.pdf
III 44 Million on Food Stamps. The US Department of Agriculture provides support for households through its Supplemental Nutrition Assistance Program (SNAP), formerly known as food stamps. Households must meet eligibility criteria based on various tests that include resource and income tests (http://www.fns.usda.gov/snap/applicant_recipients/eligibility.htm). Table 10 provides SNAP program data. SNAP monthly benefits are at $134.21 for individuals and $284.34 for households (http://www.fns.usda.gov/pd/34SNAPmonthly.htm). In fiscal year (2009), 33.5 million persons and 15.2 million households received benefits. The number of persons receiving benefits jumped to 40.3 million in fiscal year 2010, or by 20.3 percent, and then jumped again to 44.6 million, or by 10.6 percent in Mar 2011. The increase in the number of people receiving SNAP or food stamps between fiscal years 2009 and 2011 is 33.1 percent and the cost increased from $50.3 billion in 2009 to $64.7 billion in 2010. Real Time Economics of the WSJ finds that about 14 percent of the US population received food stamps in Nov 2010 to buy groceries because of high unemployment and constrained increases in wages (http://blogs.wsj.com/economics/2011/02/05/number-of-the-week-businesses-unemployment-taxes-rise/). Real Time Economics informs that 14.4 percent of the population was receiving food stamps in Mar, which is 1.4 percentage points higher than a year earlier (http://blogs.wsj.com/economics/2011/05/31/share-of-population-on-food-stamps-grows-in-most-states/). Falling real wages and high unemployment are the drivers of the need for nutrition assistance. Increases in the population on food stamps occurred throughout all states in the US.
Table 10, Supplemental Nutrition Assistance Program, Data as of May 27, 2011,
| # Persons Millions | # House- holds Millions | Costs $ B | Average Benefits $/Month Person | Average Benefits $/Month House- hold | |
| 2011 | |||||
| J | 44.2 | 20.7 | 5.9* | 132.81 | 282.83 |
| F | 44.2 | 20.8 | 5.9* | 133.24 | 283.25 |
| M | 44.6 | 21.0 | 5.9* | 134.21 | 284.34 |
| 2010 | 40.3 | 18.7 | 64.7 | 133.79 | 289.61 |
| 2009 | 33.5 | 15.2 | 50.3 | 125.31 | 275.51 |
| 2008 | 28.2 | 12.7 | 34.6 | 102.19 | 226.60 |
*Monthly
$ B: billions of dollars
Source: http://www.fns.usda.gov/pd/34SNAPmonthly.htm
IV Inflation Policy. The objective of this section is to analyze the current focus of inflation policy by central banks on headline and core inflation. Dr. Lorenzo Bini Smaghi, Member of the Executive Board of the European Central Bank (http://www.ecb.int/ecb/orga/decisions/html/cvbinismaghi.en.html), finds a distinctive characteristic of growth of the US before the credit/dollar crisis and global recession (Smaghi 2011Mar4):
“The US economy was capable of growing at a fast pace prior to the crisis mainly through borrowing. Such borrowing was rational only if household and firms expected their income to increase in the future, at a faster pace, and if asset prices continued to increase, which ultimately did not happen. In fact, economic growth and asset price increases were the result of overly expansionary fiscal and monetary policies, predicated on measures of output gaps which turned out to be much smaller than estimated in real time, as well as regulatory failures justified by the desire to improve access to borrowing.”
There are multiple important determinants of the interest rate: “aggregate wealth, the distribution of wealth among investors, the expected rate of return on physical investment, taxes, government policy and inflation” (Ingersoll 1987, 405). Aggregate wealth is a major driver of interest rates (Ibid, 406). Unconventional monetary policy, with zero fed funds rates and flattening of long-term yields by quantitative easing, causes uncontrollable effects on risk taking that can have profound undesirable effects on financial stability. Excessively aggressive and exotic monetary policy is the main culprit and not the inadequacy of financial management and risk controls.
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 restatement: “The basic idea is simply that individuals live for many years and that therefore the appropriate constraint for consumption decisions 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→∞.
The lowering of 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, the so-called “shadow banking system” (http://www.ny.frb.org/research/staff_reports/sr458.pdf), and every financial institution and investor in the world. This is the expectation to which Dr. Smaghi refers in the above quote. The discipline of calculating risks and returns was seriously impaired. The objective of monetary policy was to encourage borrowing, consumption and investment but 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 close to zero interest rates, from adjustable rate mortgages (ARMS) to asset-backed commercial paper.
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 structured investment vehicles (SIV) created off-balance sheet to issue short-term commercial paper to purchase risky 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. The housing subsidy of $221 billion per year created the impression of ever increasing house prices. The suspension of auctions of 30-year Treasuries was designed to increase demand for mortgage-backed securities, lowering their yield, which was equivalent to lowering the costs of housing finance and refinancing. Fannie and Freddie purchased or guaranteed $1.6 trillion of nonprime mortgages and worked with leverage of 75:1 under Congress-provided charters and lax oversight. The combination of these policies resulted in high risks because of the put option on wealth by near zero interest rates, excessive leverage because of cheap rates, low liquidity because of the penalty in the form of low interest rates and unsound credit decisions because the put option on wealth by monetary policy created the illusion that nothing could ever go wrong, causing the credit/dollar crisis and global recession (Pelaez and Pelaez, Financial Regulation after the Global Recession, 157-66, Regulation of Banks, and Finance, 217-27, International Financial Architecture, 15-18, The Global Recession Risk, 221-5, Globalization and the State Vol. II, 197-213, Government Intervention in Globalization, 182-4).
Smaghi (2011Mar4) argues that monetary policy models assume that the rate of growth of the economy is determined by internal factors of individual countries while the rate of interest is determined by “long-term equilibrium conditions in the US.” An important characteristic of world economic growth is two-speed growth rates with emerging countries growing at faster rates than advanced economies during the past decade and as forecast in the foreseeable future. Rapid growth of emerging-market economies (EME) “is pushing up demand for commodities, in particular food and energy, and increasing these prices permanently, in terms of overall levels and rates of change” (Smaghi 2011Mar4). The consumption basket of the euro area gives weight of 30 percent to imported food and energy. If commodity prices increase at 4 percent per year, accompanying the rate of growth of the world economy, euro area consumer prices increase yearly by 1.2 percent merely because of the impact of imported food and energy. If the other 70 percent of the basket of consumption used in CPI calculations grow at 2 percent, the CPI will grow at 2.6 percent, 1.4 percent from the 70 percent growing at 2 percent per year and 1.2 percent of the 30 percent that are imported and grow at 4 percent per year. Inflation is higher than the 2 percent ceiling tolerated by most central banks in the world.
There are four propositions in the supply shock explanation of the Great Inflation (Blinder and Rudd 2010, 1; Blinder 1982, 262-3). (1) Aggregate demand and aggregate supply determine the economy’s underlying or “core” inflation; headline inflation tends to converge to core inflation. (2) There are multiple factors affecting aggregate demand but not exclusively monetary and fiscal policy; the growth rate of productivity in the long term is the main driving factor of supply but supply shocks restricting aggregate supply can prevail in the short run. (3) The core inflation rate excluding energy and food is a proxy for the rate of inflation of all inflation components other than food and energy. (4) Changes in food and energy prices can temporarily cause headline inflation to deviate from core inflation but there could be other factors such as relaxing wage-price controls in 1974. An influential approach to empirical practice captures the essence of core inflation’s definition (Quah and Vahey 1995, 1130):
“Core inflation is defined as that component of measured inflation that has no medium- to long-rum impact on real output. This definition captures the commonly held view that (moderate) movements in inflation can be benign for the real economy once financial and wage contracts have been written taking into account (rewriting those contracts—or adjusting implicit agreements—might be time consuming).”
There are three arguments by Yellen (2011CP): (1) explanation of commodity price increases; (2) critique of alternative interpretations; and (3) impact of commodity price increases on overall inflation. (1) Yellen (2011CP) argues that commodity price increases are explained by fundamental demand and supply factors. Commodity prices increase because of the pull of demand by emerging countries, especially China that accounted for 50 percent of demand for oil in the past decade. Advanced economies have not increased oil consumption as shown by the US with GDP growth of 20 percent between 1999 and 2010 but with oil consumption being lower in 2010 than in 1999. Climatic factors such as draughts in China and Russia and similar events have caused the jump in food prices globally. (2) Yellen (2011CP) dismisses arguments that dollar devaluation by 10 percent since Nov 4 after quantitative easing cannot explain the increase in oil prices by 70 percent and of non-energy commodities by 40 percent. Similar arguments are also found wanting in explanatory power. (3) Yellen (2011CP) finds that commodity prices could increase general inflation in the short term but the effects would be transitory because of abundant idle resources. Transitory increases in prices of energy and food would not cause inflation if inflationary expectations are anchored, which would be the case according to observations by the Fed.
The argument for excluding food and energy is based on their wide fluctuations, which would introduce “noise” in central bank targets. For example, if headline inflation were to rise precipitously because of rising commodity prices, increases in interest rates to control inflation could lower output and have impact on inflation with a long lag, as measured by Romer and Romer (2004), that could occur after commodity prices and headline inflation have already collapsed. Smaghi (2001Jun1), in an important essay in the Financial Times, on “Ignoring the core can keep inflation at bay,” argues that the condition for adequately forecasting headline inflation with core inflation is that increases in energy and food prices must be temporary and not different on average from increases in other prices. The superiority of core inflation as predictor of future headline inflation is its lower volatility that permits extrapolating future paths. Smaghi (2011Jun1) finds that data since 1999, excluding the recession of 2008-2009 and a few months in 2002, show headline inflation exceeding core inflation, in the case of both Europe and the US, accumulating to a difference of 6 percent in Europe and the US and 9 percent in the UK. Statistical tests reported by Smaghi (2011Jun1), for both the US and Europe, show that the causal link is not from core inflation to headline but actually from headline inflation to core inflation. Thus, core inflation is not an accurate predictor of headline inflation. In fact, headline inflation may be a better predictor of core inflation. The explanation offered by Smaghi (2011Jun1) is the unusual demand for commodities and raw materials by rapidly growing EMEs, which has invalidated the argument for mean reversion of commodity prices that is alleged to have occurred in the 1980s and 1990s, creating a strong trend of commodity price increases linked to the growth of the world economy of 4 percent per year. Adding a monetary policy of near zero interest rates that stimulates valuations of commodity futures contracts (http://cmpassocregulationblog.blogspot.com/2011/01/professor-mckinnons-bubble-economy.html) reinforces the misinformation in core inflation measurements. Smaghi (2011Jun1) closes his contribution in the Financial Times by recalling that “as the Romans used to say, errare humanum est, perserverare diabolicum.”
V Global Inflation. There is inflation everywhere in the world economy, with slow growth and persistently high unemployment in advanced economies. Table 11 updated with every post, provides the latest yearly data for GDP, consumer price index (CPI) inflation, producer price index (PPI) inflation and unemployment (UNE) for the advanced economies, China and the highly-indebted European countries with sovereign risk issues. The table now includes the Netherlands and Finland that with Germany make up the set of northern countries in the euro zone that hold key votes in the enhancement of the mechanism for solution of the sovereign risk issues (http://www.ft.com/cms/s/0/55eaf350-4a8b-11e0-82ab-00144feab49a.html#axzz1G67TzFqs). CPI inflation stabilized in China at 5.3 percent in the 12 months ending in Apr relative to 5.4 percent in the 12 months ending in Mar. Food prices in China soared by 11.7 percent in Mar after 11.0 percent in Feb, 10.3 percent in Jan and 9.6 percent in Dec (http://www.ft.com/cms/s/0/69aa5fcc-670d-11e0-8d88-00144feab49a.html#axzz1J7CmnPhC). Food prices rose 11.5 percent in China in the 12 months ending in Apr relative to 11 percent in the first quarter of 2011 relative to 2010 as analyzed by Jamil Anderlini in the Financial Times (China inflation edges lower to 5.3% http://www.ft.com/cms/s/0/09a22246-7b75-11e0-ae56-00144feabdc0.html#axzz1LqpStZfj
). New loans in local currency rose CNY (Chinese yuan) 740 billion (http://noir.bloomberg.com/apps/news?pid=20601087&sid=aolyrQHuzo4o&pos=4). The People’s Bank of China increased reserve requirements by 50 basis points to 21 percent for the largest lenders in the fifth increase this year and may use other measures of inflation control (http://noir.bloomberg.com/apps/news?pid=20601087&sid=aCS.hGGzvNMU&pos=2).
Table 11, GDP Growth, Inflation and Unemployment in Selected Countries, Percentage Annual Rates
| GDP | CPI | PPI | UNE | |
| US | 2.9 | 3.2 | 6.8 | 8.8 |
| Japan | -1.0*** | 0.3 | 2.5 | 4.7 |
| China | 9.7 | 5.3 | 6.8 | |
| UK | 1.8 | 4.5* | 5.3* output | 8.0 |
| Euro Zone | 2.5 | 2.7 | 6.7 | 9.9 |
| Germany | 5.2 (4.9 working day adjusted) | 2.7 | 6.1 | 6.1 |
| France | 2.2 | 2.2 | 6.7 | 9.4 |
| Nether-lands | 3.2 | 2.2 | 10.8 | 4.2 |
| Finland | 5.2 | 3.4 | 8.8 | 8.0 |
| Belgium | 3.0 | 3.3 | 10.2 | 7.7 |
| Portugal | -0.7 | 4.0 | 6.9 | 12.6 |
| Ireland | -1.0 | 1.5 | 5.4 | 14.7 |
| Italy | 1.0 | 2.9 | 6.1 | 8.1 |
| Greece | -4.8 | 3.7 | 8.1 | 15.1 |
| Spain | 0.8 | 3.5 | 7.8 | 20.7 |
Notes: GDP: rate of growth of GDP; CPI: change in consumer price inflation; PPI: producer price inflation; UNE: rate of unemployment; all rates relative to year earlier
*Office for National Statistics
PPI http://www.statistics.gov.uk/pdfdir/ppi0511.pdf
CPI http://www.statistics.gov.uk/pdfdir/cpi0511.pdf
** Excluding food, beverage, tobacco and petroleum
http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-04042011-AP/EN/4-04042011-AP-EN.PDF
***Change from IQ2011 relative to IQ2010 http://www.esri.cao.go.jp/jp/sna/sokuhou/kekka/toukei/qe111/jikei_1.pdf
Source: EUROSTAT; country statistical sources http://www.census.gov/aboutus/stat_int.html
The euro area harmonized consumer price index (HICP), used in monetary policy, was 2.8 percent in Apr, which is higher than 2.7 percent in Mar; the HICP rose 0.6 percent in Apr relative to Mar, which is equivalent to 7.4 percent if repeated over a year (http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-16052011-BP/EN/2-16052011-BP-EN.PDF). The HICP flash estimate for May is 2.7 percent (http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-31052011-AP/EN/2-31052011-AP-EN.PDF). The euro area unemployment rate is estimated at 9.9 percent for Apr (http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/3-31052011-BP/EN/3-31052011-BP-EN.PDF). Stagflation is still an unknown event but the risk is sufficiently high to be worthy of consideration. The analysis of stagflation also permits the identification of important policy issues in solving vulnerabilities that have high impact on global financial risks. There are six key interrelated vulnerabilities in the world economy that have been causing global financial turbulence: (1) sovereign risk issues in Europe resulting from countries in need of fiscal consolidation and enhancement of their sovereign risk ratings (see section IV in http://cmpassocregulationblog.blogspot.com/2011/04/budget-quagmire-fed-commodities_10.html); (2) the tradeoff of growth and inflation in China; (3) slow growth (see http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/05/mediocre-growth-world-inflation.html http://cmpassocregulationblog.blogspot.com/2011_03_01_archive.html http://cmpassocregulationblog.blogspot.com/2011/02/mediocre-growth-raw-materials-shock-and.html), weak hiring (http://cmpassocregulationblog.blogspot.com/2011/03/slow-growth-inflation-unemployment-and.html and section III Hiring Collapse in http://cmpassocregulationblog.blogspot.com/2011/04/fed-commodities-price-shocks-global.html ) and continuing job stress of 24 to 30 million people in the US and stagnant wages in a fractured job market (http://cmpassocregulationblog.blogspot.com/2011/05/job-stress-of-24-to-30-million-falling.html http://cmpassocregulationblog.blogspot.com/2011/04/twenty-four-to-thirty-million-in-job_03.html http://cmpassocregulationblog.blogspot.com/2011/03/unemployment-and-undermployment.html); (4) the timing, dose, impact and instruments of normalizing monetary and fiscal policies (see http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html http://cmpassocregulationblog.blogspot.com/2011/03/global-financial-risks-and-fed.html http://cmpassocregulationblog.blogspot.com/2011/02/policy-inflation-growth-unemployment.html) in advanced and emerging economies; (5) the earthquake and tsunami affecting Japan that is having repercussions throughout the world economy because of Japan’s share of about 9 percent in world output, role as entry point for business in Asia, key supplier of advanced components and other inputs as well as major role in finance and multiple economic activities (http://professional.wsj.com/article/SB10001424052748704461304576216950927404360.html?mod=WSJ_business_AsiaNewsBucket&mg=reno-wsj); and (6) the geopolitical events in the Middle East.
The Ministry of Economy, Trade and Industry of Japan (METI) provides a more optimistic assessment of the impact of the Mar 11 earthquake/tsunami on Japan (METI 2011May30). Japan’s industrial production seasonally adjusted rose 1 percent in Apr relative to Mar but is 14 percent below a year earlier (http://www.meti.go.jp/english/statistics/tyo/iip/index.html). The Survey of Production Forecast in Manufacturing finds an expected increase of manufacturing output of 8.0 percent in May to be followed by an increase of 7.7 percent in Jun. According to METI, “the survey is one of the useful economic indicators which reflect changing business conditions and provide a view of where the economy is heading in the near future” (Ibid).
The price index of the 2011 Manufacturing Institute for Supply Management (ISM) Report on Business fell from 85.5 percent in Apr to 76.5 percent in May, for the first time of a lower index since Dec 2010 but the 23rd consecutive month of the index registering above 50 percent (http://ism.ws/ISMReport/MfgROB.cfm). The percentage of respondents experiencing price increases fell from 72 percent in Apr to 58 percent in May. Bradley J. Holcomb, chair of the ISM manufacturing survey committee states: “manufacturers continue to experience significant cost pressures from commodities and other inputs” (http://ism.ws/ISMReport/MfgROB.cfm). The price index of the nonmanufacturing ISM Report on Business declined slightly from 70.1 in Apr to 69.6 in May. Anthony Nieves, chair of the ISM nonmanufacturing survey committee states: “there is sentiment that there is a degree of stability in the economy; however, a continued concern exists over fuel costs and various volatile commodities” (http://ism.ws/ISMReport/NonMfgROB.cfm).
DeLong (1997, 247-8) shows that the 1970s were the only peacetime period of inflation in the US without parallel in the prior century. The price level in the US drifted upward since 1896 with jumps resulting from the two world wars: “on this scale, the inflation of the 1970s was as large an increase in the price level relative to drift as either of this century’s major wars” (DeLong, 1997, 248). Monetary policy focused on accommodating higher inflation, with emphasis solely on the mandate of promoting employment, has been blamed as deliberate or because of model error or imperfect measurement for creating the Great Inflation (http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html). As DeLong (1997) shows, the Great Inflation began in the mid 1960s, well before the oil shocks of the 1970s (see also the comment to DeLong 1997 by Taylor 1997, 276-7). Table 12 provides the change in GDP, CPI and the rate of unemployment from 1960 to 1990. There are three waves of inflation (1) in the second half of the 1960s; (2) from 1973 to 1975; and (3) from 1978 to 1981. In one of his multiple important contributions to understanding the Great Inflation, Meltzer (2005) distinguishes between one-time price jumps, such as by oil shocks, and a “maintained” inflation rate. Meltzer (2005) uses a dummy variable to extract the one-time oil price changes, resulting in a maintained inflation rate that was never higher than 8 to 10 percent in the 1970s. There is revealing analysis of the Great Inflation and its reversal by Meltzer (2005, 2010a, 2010b).
Table 12, US Annual Rate of Growth of GDP and CPI and Unemployment Rate 1960-1982
| ∆% GDP | ∆% CPI | UNE | |
| 1960 | 2.5 | 1.4 | 6.6 |
| 1961 | 2.3 | 0.7 | 6.0 |
| 1962 | 6.1 | 1.3 | 5.5 |
| 1963 | 4.4 | 1.6 | 5.5 |
| 1964 | 5.8 | 1.0 | 5.0 |
| 1965 | 6.4 | 1.9 | 4.0 |
| 1966 | 6.5 | 3.5 | 3.8 |
| 1967 | 2.5 | 3.0 | 3.8 |
| 1968 | 4.8 | 4.7 | 3.4 |
| 1969 | 3.1 | 6.2 | 3.5 |
| 1970 | 0.2 | 5.6 | 6.1 |
| 1971 | 3.4 | 3.3 | 6.0 |
| 1972 | 5.3 | 3.4 | 5.2 |
| 1973 | 5.8 | 8.7 | 4.9 |
| 1974 | -0.6 | 12.3 | 7.2 |
| 1975 | -0.2 | 6.9 | 8.2 |
| 1976 | 5.4 | 4.9 | 7.8 |
| 1977 | 4.6 | 6.7 | 6.4 |
| 1978 | 5.6 | 9.0 | 6.0 |
| 1979 | 3.1 | 13.3 | 6.0 |
| 1980 | -0.3 | 12.5 | 7.2 |
| 1981 | 2.5 | 8.9 | 8.5 |
| 1982 | -1.9 | 3.8 | 10.8 |
| 1983 | 4.5 | 3.8 | 8.3 |
| 1984 | 7.2 | 3.9 | 7.3 |
| 1985 | 4.1 | 3.8 | 7.0 |
| 1986 | 3.5 | 1.1 | 6.6 |
| 1987 | 3.2 | 4.4 | 5.7 |
| 1988 | 4.1 | 4.4 | 5,3 |
| 1989 | 3.6 | 4.6 | 5.4 |
| 1990 | 1.9 | 6.1 | 6.3 |
Note: GDP: Gross Domestic Product; CPI: consumer price index; UNE: rate of unemployment; CPI and UNE are at year end instead of average to obtain a complete series
Source: ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt
http://www.bls.gov/web/empsit/cpseea01.htm
http://data.bls.gov/pdq/SurveyOutputServlet
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 13 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 14 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 Fed 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 13, 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
Table 14, updated with every blog comment, provides in the second column the yield at the close of market of the 10-year Treasury note on the date in the first column. The price in the third column is calculated with the coupon of 2.625 percent of the 10-year note current at the time of the second round of quantitative easing after Nov 3, 2010 and the final column “∆% 11/04/10” calculates the percentage change of the price on the date relative to that of 101.2573 at the close of market on Nov 4, 2010, one day after the decision on quantitative easing by the Fed on Nov 3, 2010. Prices with the new coupon of 3.63 percent in recent auctions (http://www.treasurydirect.gov/instit/annceresult/press/preanre/2011/2011.htm) are not comparable to prices in Table 14. The highest yield in the decade was 5.510 percent on May 1, 2001 that would result in a loss of principal of 22.9 percent relative to the price on Nov 4. The Fed has created a “duration trap” of bond prices. Duration is the percentage change in bond price resulting from a percentage change in yield or what economists call the yield elasticity of bond price. Duration is higher the lower the bond coupon and yield, all other things constant. This means that the price loss in a yield rise from low coupons and yields is much higher than with high coupons and yields. Intuitively, the higher coupon payments offset part of the price loss. Prices/yields of Treasury securities were affected by the combination of Fed purchases for its program of quantitative easing and also by the flight to dollar-denominated assets because of geopolitical risks in the Middle East, subsequently by the tragic earthquake and tsunami in Japan and now again by the sovereign risk doubts in Europe. The yield of 3.068 percent at the close of market on Jun 3, 2011, would be equivalent to price of 96.8672 in a hypothetical bond maturing in 10 years with coupon of 2.625 percent for price loss of 4.3 percent relative to the price on Nov 4, 2010, one day after the decision on the second program of quantitative easing. If inflation accelerates, yields of Treasury securities may rise sharply. Yields are not observed without special yield-lowering effects such as the flight into dollars caused by the events in the Middle East, continuing purchases of Treasury securities by the Fed, the tragic earthquake and tsunami affecting Japan and recurring fears on European sovereign credit issues. Important causes of the rise in yields shown in Table 14 are expectations of rising inflation and US government debt estimated to exceed 70 percent of GDP in 2012 (http://cmpassocregulationblog.blogspot.com/2011/02/policy-inflation-growth-unemployment.html), rising from 40.8 percent of GDP in 2008 and 53.5 percent in 2009 (Table 2 in http://cmpassocregulationblog.blogspot.com/2011/04/budget-quagmire-fed-commodities_10.html). On Jun 1, 2011, the line “Reserve Bank credit” in the Fed balance sheet stood at $2772 billion, or $2.8 trillion, with portfolio of long-term securities of $2543 billion, or $2.5 trillion, consisting of $1444 Treasury nominal notes and bonds, $62 billion of notes and bonds inflation-indexed, $119 billion Federal agency debt securities and $918 billion mortgage-backed securities; reserve balances deposited with Federal Reserve Banks reached $1591 billion or $1.6 trillion (http://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1). There is no simple exit of this trap created by the highest monetary policy accommodation in US history together with the highest deficits and debt in percent of GDP since World War II. The yield of the 10-year Treasury note fluctuated during the week from 3.13 percent on Mon May 23 to 3.067 percent on Fri May 27 and 2.99 percent on Fri Jun 3 while the yield of the 10-year German government bond fell from 3.07 percent on Tue May 24 to 2.99 percent on Fri May 27 (http://noir.bloomberg.com/markets/rates/germany.html). Risk aversion from various sources, discussed in section V, has been affecting financial markets for several weeks. The risk is that in a reversal of risk aversion that has been typical in this cyclical expansion of the economy yields of Treasury securities may back up sharply.
Table 14, 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 |
| 01/14/11 | 3.323 | 94.1064 | -7.1 |
| 01/21/11 | 3.414 | 93.4687 | -7.7 |
| 01/28/11 | 3.323 | 94.1064 | -7.1 |
| 02/04/11 | 3.640 | 91.750 | -9.4 |
| 02/11/11 | 3.643 | 91.5319 | -9.6 |
| 02/18/11 | 3.582 | 92.0157 | -9.1 |
| 02/25/11 | 3.414 | 93.3676 | -7.8 |
| 03/04/11 | 3.494 | 92.7235 | -8.4 |
| 03/11/11 | 3.401 | 93.4727 | -7.7 |
| 03/18/11 | 3.273 | 94.5115 | -6.7 |
| 03/25/11 | 3.435 | 93.1935 | -7.9 |
| 04/01/11 | 3.445 | 93.1129 | -8.0 |
| 04/08/11 | 3.576 | 92.0635 | -9.1 |
| 04/15/11 | 3.411 | 93.3874 | -7.8 |
| 04/22/11 | 3.402 | 93.4646 | -7.7 |
| 04/29/11 | 3.290 | 94.3759 | -6.8 |
| 05/06/11 | 3.147 | 95.5542 | -5.6 |
| 05/13/11 | 3.173 | 95.3387 | -5.8 |
| 05/20/11 | 3.146 | 95.5625 | -5.6 |
| 05/27/11 | 3.068 | 96.2089 | -4.9 |
| 06/03/11 | 2.990 | 96.8672 | -4.3 |
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 and the coupon of 2.625% on 11/04/10
Source:
http://online.wsj.com/mdc/public/page/mdc_bonds.html?mod=mdc_topnav_2_3020
VI Risk Aversion. The past three weeks have been characterized by unusual financial turbulence. Table 15 provides beginning values on May 30 (Memorial Day closed market in the US) and daily values throughout the week ending on Jun 3. All data are for New York time at 5 PM. The first three rows provide three key exchange rates versus the dollar and the cumulative percentage change relative to the value on May 27. Positive changes constitute appreciation of the relevant exchange rate and negative changes depreciation. The dollar devalued by 2.24 percent relative to the euro with devaluation occurring mostly on Thu Jun 2 when the weak ISM manufacturing report was released together with continuing high new claims for unemployment insurance and further devaluation on Fri Jun 3 with the release of a weak employment situation report. The Japanese yen appreciated by 0.63 percent during the week. The Swiss franc gained 2.11 percent during the week with gains every trading day, which could be a signal of risk aversion by funds fleeing temporarily to safe haven in a strong deposit and investment market.
The three yields in Table 15 capture risk aversion in the flight to the safety of US Treasury securities and German securities. The 2-year US Treasury note is highly attractive because of minimal duration or sensitivity to price change and its yield continued declining for a sustained period to 0.42 percent per year on Fri Jun 3. Much the same is true of the 10-year Treasury note and the 10-year bond of the government of Germany. All three stock market indexes in Table 15 accumulated declines during the week that intensified with the risks of low growth and unemployment in the US and the new rescue package for Greece plus delays in stress tests of European banks. The three commodities in the final three rows of Table 15 were relatively stable.
Table 15, Daily Valuation of Risk Financial Assets
| M 30 | T 31 | W 1 | Th 2 | F 3 | |
| USD/ | 1.4288 -0.15% | 1.4393 0.58% | 1.4331 0.15% | 1.4492 1.27% | 1.463 2.24% |
| JPY/ | 80.956 0.2% | 81.253 0.59% | 80.981 0.26% | 80.936 0.21% | 80.26 -0.63 |
| CHF/ | 0.8520 -0.23% | 0.8531 -0.11 | 0.843 -1.29% | 0.8422 -1.38% | 0.836 -2.11% |
| 10 Year Yield | Holiday | 3.05 | 2.95 | 3.03 | 2.99 |
| 2 Year Yield | Holiday | 0.46 | 0.44 | 0.46 | 0.42 |
| 10 Year | 2.98 | 3.02 | 2.99 | 2.99 | 3.06 |
| DJIA | Holiday | 1.03%% | -1.22%% | -1.55% | -2.33% |
| DJ Global | -0.04% | 1.29% | 0.03% | -0.86% | -1.33% |
| DAX | -0.04% | 1.82% | 0.75% | -1.25% | -0.76% |
| WTI $/b | 100.38 | 102.620 | 99.680 | 100.66 | 100.22 |
| Brent $/b | 114.68 | 116.520 | 114.350 | 115.710 | 115.480 |
| Gold $/ounce | 1539.80 | 1536.80 | 1539.50 | 1535.10 | 1542.40 |
Note: USD: US dollar; JPY: Japanese Yen; CHF: Swiss Franc; AUD: Australian dollar
Source: http://noir.bloomberg.com/intro_markets.html
http://professional.wsj.com/mdc/page/marketsdata.html?mod=WSJ_hps_marketdata
In the current expansion phase of the business cycle after the credit/dollar crisis and global recession of 2007-2009, risk aversion has occurred in the form of: (1) sovereign risk doubts in the euro area; (2) slower growth in China because of the tough tradeoff of inflation and growth; (3) geopolitical events in the Middle East and subsequently the earthquake/tsunami in Japan; (4) mediocre growth, job stress, wage stagnation and fiscal/monetary imbalance in the US; and (5) increasingly the rise of inflation everywhere in the world that injects uncertainty in financial and economic decisions, or allocation disruptive effect of Bailey (1956), and redistributions of income and wealth, or income/wealth redistributive effect of Bailey (1956). The strongest impact occurred in Apr to Jul 2010 because of the sovereign doubts in Europe, recurring less strongly in Nov 2010 and again in Mar 2011.
A major immediate cause of risk aversion is being ameliorated. The European Commission, European Central Bank and the International Monetary Fund concluded their fourth review mission to Greece (http://www.imf.org/external/np/sec/pr/2011/pr11212.htm). There is now “staff-level agreement” with Greek authorities on the “set of economic and financial policies needed to meet program objectives.” The objective of these policies is “to restore fiscal sustainability, safeguard financial sector stability, and boost competitiveness” that can create the environment “for sustained growth and employment.” In the view of the mission, Greece has made significant progress in fiscal consolidation during the first year of the adjustment program. The outlook on the economy is improving with increases in exports and reductions in unit costs. The government is committed to “an ambitious medium-term fiscal strategy that will enable it to maintain its 2011 and medium-term fiscal targets.” The strategy “includes a significant downsizing of public sector employment, restructuring or closure of public entities, and rationalization in entitlements, while protecting vulnerable groups.” Revenue will be enhanced by reducing tax exemptions, increasing property taxes and efforts to contain tax evasion. A new “professionally and independently managed privatization agency” will be created to raise €50 billion by the end of 2015. Tight liquidity current conditions are being faced by ensuring liquidity to banks. Greece is also implementing multiple structural reforms.
Jonathan Stearns and Maria Petrakis, writing in Bloomberg on “EU preparing new Greek rescue after aid payout approved” (http://noir.bloomberg.com/apps/news?pid=20601087&sid=aWmC2QvhYf7E&pos=3), analyze the mission and its consequences. After the favorable mission opinion, the IMF will release in Jul the €3.3 tranche of the €12 billion assistance to Greece. The original program contemplated that Greece would be able to sell €27 billion in euro bonds in 2012, which does not appear feasible in view of the yield on the two-year bond of 24 to 25 percent and on the ten-year bond exceeding 16 percent. The European Union will prepare a rescue packs with “voluntary” role for private investors. Stearns and Petrakis quote ING Grope NV on the estimate that about 55 percent of investors will roll over maturing debt through 2013. The voluntary nature of the rollovers meets the view of the European Central Bank of avoiding default, which would occur with forced changes of the original credit obligation. The leaders of the Europe Union will meet on Jun 23-24 for approval of the new rescue package. On Jun 1, Moody’s lowered the rating on Greece’s sovereign debt to Caa1 because of increasing risks that Greece will not stabilize its debt without debt restructuring and the increasing possibility that the European Union, European Central Bank and IMF will require that private creditors engage in debt restructuring (http://www.moodys.com/research/Moodys-downgrades-Greece-to-Caa1-from-B1-negative-outlook?lang=en&cy=global&docid=PR_220046).
Bailout packages of European sovereigns encounter significant hurdles, according to Blejer (2011May31). Loans by the official institutions increase debt ratios, creating new emergencies in the future. The proceeds of the loans are used to meet current obligations and budget gaps. The essence of the approach is to meet temporary liquidity problems but instead of finding a definitive structural solution, the bailout packages simply postpone worse crises. The risk to the other European economies is through the exposures of banks. Blejer (2011May31) finds that bailout resources would prevent crises from spreading by strengthening banks. Current debt obligations of sovereigns are excessive relative to their capacity to serve them. Thus, debt reduction may be inevitable in a definitive resolution.
Moody’s Investors Service is also placing on review for possible downgrade the ratings on deposit, senior debt and senior subordinated debt of three large US banks (http://www.moodys.com/research/Moodys-reviews-BofA-Citi-Wells-Fargo-supported-ratings-for-downgrade?lang=en&cy=global&docid=PR_219798). The reasons for the rating decisions are the impact of the Dodd-Frank act and government support. Moody’s Investors Service also warned that it could place US government debt for review of possible downgrade of its Aaa rating should there not be progress in increasing the statutory debt limit in the new few weeks (http://www.moodys.com/research/Moodys-Updates-on-Rating-Implications-of-US-Debt-Limit-Long?lang=en&cy=global&docid=PR_220066). The risk would consist of a temporary default.
VII Valuation of Risk Financial Assets. Table 16 shows the phenomenal impulse to valuations of risk financial assets originating in the initial shock of near zero interest rates in 2003-2004 with the fed funds rate at 1 percent, in fear of deflation that never materialized, and quantitative easing in the form of suspension of the auction of 30-year Treasury bonds to lower mortgage rates. World financial markets were dominated by monetary and housing policies in the US. Between 2002 and 2008, the DJ UBS Commodity Index rose 165.5 percent largely because of the unconventional monetary policy encouraging carry trade from low US interest rates to long leveraged positions in commodities, exchange rates and other risk financial assets. The charts of risk financial assets show sharp increase in valuations leading to the financial crisis and then profound drops that are captured in Table 16 by percentage changes of peaks and troughs. The first round of quantitative easing and near zero interest rates depreciated the dollar relative to the euro by 39.3 percent between 2003 and 2008, with revaluation of the dollar by 25.1 percent from 2008 to 2010 in the flight to dollar-denominated assets in fear of world financial risks and then devaluation of the dollar by 22.7 percent by Fri Jun 3, 2011. Dollar devaluation is a major vehicle of monetary policy in reducing the output gap that is implemented in the probably erroneous belief that devaluation will not accelerate inflation. The last row of Table 16 shows CPI inflation in the US rising from 1.9 percent in 2003 to 4.1 percent in 2007 even as the Fed increased the fed funds rate from 1 percent in Jun 2004 to 5.25 percent in Jun 2006.
Table 16, 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 | 6/26/03 | 7/14/08 | 6/07/10 | 06/03 |
| Rate | 1.1423 | 1.5914 | 1.192 | 1.463 |
| CNY/USD | 01/03 | 07/21 | 7/15 | 05/27/ 2011 |
| Rate | 8.2798 | 8.2765 | 6.8211 | 6.4792 |
| 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 |
| 2003 | 2005 | 2007 | 2010 | |
| CPI | 1.9 | 3.4 | 4.1 | 1.5 |
Sources: http://online.wsj.com/mdc/page/marketsdata.html
http://www.census.gov/const/www/newressalesindex_excel.html
http://federalreserve.gov/releases/h10/Hist/dat00_eu.htm
ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt
http://federalreserve.gov/releases/h10/Hist/dat00_ch.htm
Table 16A extracts four rows of Table 16 with the Dollar/Euro (USD/EUR) exchange rate and Chinese Yuan/Dollar (CNY/USD) exchange rate that reveal pursuit of exchange rate policies resulting from monetary policy in the US and capital control/exchange rate policy in China. The ultimate intentions are the same: promoting internal economic activity at the expense of the rest of the world. The easy money policy of the US was deliberately or not but effectively to devalue the dollar from USD 1.1423/EUR on Jun 26, 2003 to USD 1.5914/EUR on Jul 14, 2008, or by 39.3 percent. The flight into dollar assets after the global recession caused revaluation to USD 1.192/EUR on Jun 7, 2010, or by 25.1 percent. After the temporary interruption of the sovereign risk issues in Europe from Apr to Jul, 2010, shown in Table 18, the dollar has devalued again to USD 1.463/EUR or by 22.7 percent. Yellen (2011AS, 6) admits that Fed monetary policy results in dollar devaluation with the objective of increasing net exports, which was the policy that Joan Robinson (1947) labeled as “beggar-my-neighbor” remedies for unemployment. China fixed the CNY to the dollar for a long period at a highly undervalued level of around CNY 8.2765/USD until it revalued to CNY 6.8211/USD until Jun 7, 2010, or by 17.6 percent and after fixing it again to the dollar, revalued to CNY 6.4792/USD on Jun 3, 2011, or by an additional 5.0, for cumulative revaluation of 21.7 percent.
Table 16A, Dollar/Euro (USD/EUR) Exchange Rate and Chinese Yuan/Dollar (CNY/USD) Exchange Rate
| USD/EUR | 6/26/03 | 7/14/08 | 6/07/10 | 06/03 |
| Rate | 1.1423 | 1.5914 | 1.192 | 1.463 |
| CNY/USD | 01/03 | 07/21 | 7/15 | 05/27/ 2011 |
| Rate | 8.2798 | 8.2765 | 6.8211 | 6.4792 |
Source: Table 16.
Dollar devaluation did not eliminate the US current account deficit, which is projected by the International Monetary Fund (IMF) at 3.2 percent of GDP in 2011 and also in 2012, as shown in Table 17. Revaluation of the CNY has not reduced the current account surplus of China, which is projected by the IMF to increase from 5.7 percent of GDP in 2011 to 6.3 percent of GDP in 2012.
Table 17, Fiscal Deficit, Current Account Deficit and Government Debt as % of GDP and 2011 Dollar GDP
| GDP $B | FD %GDP 2011 | CAD %GDP 2011 | Debt %GDP 2011 | FD%GDP 2012 | CAD%GDP 2012 | Debt %GDP 2012 | |
| US | 15227 | -10.6 | -3.2 | 64.8 | -10.8 | -3.2 | 72.4 |
| Japan | 5821 | -9.9 | 2.3 | 127.8 | -8.4 | 2.3 | 135.1 |
| UK | 2471 | -8.6 | -2.4 | 75.1 | -6.9 | -1.9 | 78.6 |
| Euro | 12939 | -4.4 | 0.03 | 66.9 | -3.6 | 0.05 | 68.2 |
| Ger | 3519 | -2.3 | 5.1 | 54.7 | -1.5 | 4.6 | 54.7 |
| France | 2751 | -6.0 | -2.8 | 77.9 | -5.0 | -2.7 | 79.9 |
| Italy | 2181 | -4.3 | -3.4 | 100.6 | -3.5 | -2.9 | 100.4 |
| Can | 1737 | -4.6 | -2.8 | 35.1 | -2.8 | -2.6 | 36.3 |
| China | 6516 | -1.6 | 5.7 | 17.1 | -0.9 | 6.3 | 16.3 |
| Brazil | 2090 | -2.4 | -2.6 | 39.9 | -2.6 | -2.9 | 39.4 |
Note: GER = Germany; Can = Canada; FD = fiscal deficit; CAD = current account deficit
Source: http://www.imf.org/external/pubs/ft/weo/2011/01/weodata/index.aspx
There is a new carry trade that learned from the losses after the crisis of 2007 or learned from the crisis how to avoid losses. The sharp rise in valuations of risk financial assets shown in Table 16 after the first policy round of near zero fed funds and quantitative easing by the equivalent of withdrawing supply with the suspension of the 30-year Treasury auction was on a smooth trend with relatively subdued fluctuations. The credit crisis and global recession have been followed by significant fluctuations originating in sovereign risk issues in Europe, doubts of continuing high growth and accelerating inflation in China, events such as in the Middle East and Japan and legislative restructuring, regulation, insufficient growth, falling real wages, depressed hiring and high job stress of unemployment and underemployment in the US. The “trend is your friend” motto of traders has been replaced with a “hit and realize profit” approach of managing positions to realize profits without sitting on positions. There is a trend of valuation of risk financial assets with fluctuations provoked by events of risk aversion. Table 18, which is updated for every comment, shows the deep contraction of valuations of risk financial assets after the Apr 2010 sovereign risk issues in the fourth column “∆% to Trough” and the sharp recovery after around Jul 2010 in the last column “∆% Trough to 06/03/11” with all risk financial assets in the range from 11.3 percent for European stocks to 33.8 percent for the DJ UBS Commodities Index, excluding Japan that has currently weaker performance of 7.6 percent because of the earthquake/tsunami, while the dollar devalued by 22.7 percent and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 6/03/2011” shows the fall of most risk financial assets, with the exception of commodities that had fallen sharply in the week of May 6 and some recovery in the NYSE Financials and the Shanghai Composite. Aggressive tightening of monetary policy to maintain the credibility of inflation not rising above 2 percent—in contrast with timid “measured” policy during the adjustment in Jun 2004 to Jun 2006 after the earlier round of near zero interest rates—may cause another credit/dollar crisis and stress on the overall world economy. The choices may prove tough and will magnify effects on financial variables because of the corner in which policy has been driven by aggressive impulses that have resulted in the fed funds rate of 0 to ¼ percent and holdings of long-term securities close to 30 percent of Treasury securities in circulation.
Table 18, Stock Indexes, Commodities, Dollar and 10-Year Treasury
| Peak | Trough | ∆% to Trough | ∆% Peak to 6/ | ∆% Week 6/ | ∆% Trough to 6/ | |
| DJIA | 4/26/ | 7/2/10 | -13.6 | 8.4 | -2.3 | 25.4 |
| S&P 500 | 4/23/ | 7/20/ | -16.0 | 6.8 | -2.3 | 27.1 |
| NYSE Finance | 4/15/ | 7/2/10 | -20.3 | -8.1 | 2.0 | 15.4 |
| Dow Global | 4/15/ | 7/2/10 | -18.4 | 1.7 | -1.3 | 24.6 |
| Asia Pacific | 4/15/ | 7/2/10 | -12.5 | 4.9 | -0.2 | 19.9 |
| Japan Nikkei Aver. | 4/05/ | 8/31/ | -22.5 | -16.7 | -0.3 | 7.6 |
| China Shang. | 4/15/ | 7/02 | -24.7 | -13.8 | 0.7 | 14.5 |
| STOXX 50 | 4/15/10 | 7/2/10 | -15.3 | -5.8 | -2.4 | 11.3 |
| DAX | 4/26/ | 5/25/ | -10.5 | 12.3 | -0.8 | 25.4 |
| Dollar | 11/25 2009 | 6/7 | 21.2 | 3.3 | -2.2 | -22.7 |
| DJ UBS Comm. | 1/6/ | 7/2/10 | -14.5 | 14.4 | 0.3 | 33.8 |
| 10-Year Tre. | 4/5/ | 4/6/10 | 3.986 | 2.990 |
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.
Bernanke (2010WP) and Yellen (2011AS) reveal the emphasis of monetary policy on the impact of the rise of stock market valuations in stimulating consumption by wealth effects on household confidence. Table 19 shows a gain by Apr 29, 2011 in the DJIA of 14.3 percent and of the S&P 500 of 12.5 percent since Apr 26, 2010, around the time when sovereign risk issues in Europe began to be acknowledged in financial risk asset valuations. There were still fluctuations. Reversals of valuations are possible during aggressive changes in interest rate policy. In the week of May 6, return of risk aversion, resulted in moderation of the valuation of the DJIA to 12.8 percent and that of the S&P 500 to 10.6 percent. There was further loss of dynamism in the week of May 13 with the DJIA reducing its gain to 12.4 percent and the S&P 500 to 10.4 percent. Further declines lowered the gain to 11.7 percent in the DJIA and to 10.0 in the S&P 500 by Fri May 20. By Fri May 27 the gains were further reduced to 11.0 percent for the DJIA and 9.8 percent for the S&P 500. In the fifth consecutive week of declines, the DJIA fell 2.3 percent, reducing the cumulative gain to 8.4 percent, and the S&P 500 also lost 2.3 percent, resulting in cumulative gain of 7.3 percent. The DJIA has lost 5.1 percent since Apr 29 and the S&P 500 has lost 4.7 percent.
Table 19, Percentage Changes of DJIA and S&P 500 in Selected Dates
| 2010 | ∆% DJIA from earlier date | ∆% DJIA from | ∆% S&P 500 from earlier date | ∆% S&P 500 from |
| 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 |
| Jan 14 | 0.9 | 5.2 | 1.7 | 6.7 |
| Jan 21 | 0.7 | 5.9 | -0.8 | 5.9 |
| Jan 28 | -0.4 | 5.5 | -0.5 | 5.3 |
| Feb 4 | 2.3 | 7.9 | 2.7 | 8.1 |
| Feb 11 | 1.5 | 9.5 | 1.4 | 9.7 |
| Feb 18 | 0.9 | 10.6 | 1.0 | 10.8 |
| Feb 25 | -2.1 | 8.3 | -1.7 | 8.9 |
| Mar 4 | 0.3 | 8.6 | 0.1 | 9.0 |
| Mar 11 | -1.0 | 7.5 | -1.3 | 7.6 |
| Mar 18 | -1.5 | 5.8 | -1.9 | 5.5 |
| Mar 25 | 3.1 | 9.1 | 2.7 | 8.4 |
| Apr 1 | 1.3 | 10.5 | 1.4 | 9.9 |
| Apr 8 | 0.03 | 10.5 | -0.3 | 9.6 |
| Apr 15 | -0.3 | 10.1 | -0.6 | 8.9 |
| Apr 22 | 1.3 | 11.6 | 1.3 | 10.3 |
| Apr 29 | 2.4 | 14.3 | 1.9 | 12.5 |
| May 6 | -1.3 | 12.8 | -1.7 | 10.6 |
| May 13 | -0.3 | 12.4 | -0.2 | 10.4 |
| May 20 | -0.7 | 11.7 | -0.3 | 10.0 |
| May 27 | -0.6 | 11.0 | -0.2 | 9.8 |
| Jun 3 | -2.3 | 8.4 | -2.3 | 7.3 |
Source: http://online.wsj.com/mdc/public/page/mdc_us_stocks.html?mod=mdc_topnav_2_3004
Table 20, updated with every post, shows that exchange rate valuations affect a large variety of countries, in fact, almost the entire world, in magnitudes that cause major problems for domestic monetary policy and trade flows. Dollar devaluation is expected to continue because of zero fed funds rate, expectations of rising inflation and the large budget deficit of the federal government (http://professional.wsj.com/article/SB10001424052748703907004576279321350926848.html?mod=WSJ_hp_LEFTWhatsNewsCollection) but with interruptions caused by risk aversion events.
Table 20, Exchange Rates
| Peak | Trough | ∆% P/T | Jun 3 2011 | ∆% T Jun 3 2011 | ∆% P Jun 3 2011 | |
| EUR USD | 7/15 | 6/7 2010 | 6/03 2011 | |||
| Rate | 1.59 | 1.192 | 1.463 | |||
| ∆% | -33.4 | 18.5 | -8.7 | |||
| JPY USD | 8/18 | 9/15 | 6/03 2011 | |||
| Rate | 110.19 | 83.07 | 80.26 | |||
| ∆% | 24.6 | 3.4 | 27.2 | |||
| CHF USD | 11/21 2008 | 12/8 2009 | 6/03 2011 | |||
| Rate | 1.225 | 1.025 | 0.836 | |||
| ∆% | 16.3 | 18.4 | 31.8 | |||
| USD GBP | 7/15 | 1/2/ 2009 | 6/03 2011 | |||
| Rate | 2.006 | 1.388 | 1.642 | |||
| ∆% | -44.5 | 15.5 | -22.2 | |||
| USD AUD | 7/15 2008 | 10/27 2008 | 6/03 | |||
| Rate | 1.0215 | 1.6639 | 1.0716 | |||
| ∆% | -62.9 | 43.9 | 8.6 | |||
| ZAR USD | 10/22 2008 | 8/15 | 6/03 2011 | |||
| Rate | 11.578 | 7.238 | 6.712 | |||
| ∆% | 37.5 | 7.3 | 42.0 | |||
| SGD USD | 3/3 | 8/9 | 6/03 | |||
| Rate | 1.553 | 1.348 | 1.229 | |||
| ∆% | 13.2 | 8.8 | 20.9 | |||
| HKD USD | 8/15 2008 | 12/14 2009 | 6/03 | |||
| Rate | 7.813 | 7.752 | 7.778 | |||
| ∆% | 0.8 | -0.3 | 0.4 | |||
| BRL USD | 12/5 2008 | 4/30 2010 | 6/03 2011 | |||
| Rate | 2.43 | 1.737 | 1.577 | |||
| ∆% | 28.5 | 9.2 | 35.1 | |||
| CZK USD | 2/13 2009 | 8/6 2010 | 6/03 | |||
| Rate | 22.19 | 18.693 | 16.612 | |||
| ∆% | 15.7 | 11.1 | 25.1 | |||
| SEK USD | 3/4 2009 | 8/9 2010 | 6/03 2011 | |||
| Rate | 9.313 | 7.108 | 6.128 | |||
| ∆% | 23.7 | 13.8 | 34.2 | |||
| CNY USD | 7/20 2005 | 7/15 | 6/03 | |||
| Rate | 8.2765 | 6.8211 | 6.4792 | |||
| ∆% | 17.6 | 5.0 | 21.7 |
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; CNY: Chinese yuan; 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
http://federalreserve.gov/releases/h10/Hist/dat00_ch.htm
http://markets.ft.com/ft/markets/currencies.asp
VIII Economic Indicators. There appears to be deceleration in the rate of growth of manufacturing worldwide. Real Time Economics of the Wall Street Journal provides the manufacturing purchasing managers’ index (PMI) for 25 countries for May and Apr (http://blogs.wsj.com/economics/2011/06/01/world-wide-factory-activity-by-country-15/tab/interactive/). The PMIs fell for 22 of the 25 countries. Japan is the only country jumping from contraction at 45.7 in Apr to expansion at 51.3 in May for an improvement of 5.6 points. The other two countries expanding faster are Brazil by 0.1 percentage point from 50.7 in Apr to 50.8 in May and Switzerland by 0.8 percentage point from 58.4 in Apr to 59.2 in May. The euro zone is expanding slower by 3.4 points from 58.0 in Apr to 54.6 in May. China is also expanding slower by 0.9 percentage points from 52.9 in Apr to 53.0 in May. The UK is also expanding slower by 2.3 points from 54.4 in Apr to 52.1 in May. The ISM Manufacturing Report on Business shows strong deceleration in May (http://ism.ws/ISMReport/MfgROB.cfm). There were sharp declines in percentage points from Apr to May: -6.9 for the PMI, -10.7 for the critical new orders component; -9.8 for production, -4.5 for employment, -10.5 for backlog of orders, -7.0 for exports and so on. However, the ISM nonmanufacturing Report on Business improved by 1.8 points from 52.8 in Apr to 54.6 in May with new orders rising by 4.1 points, employment by 2.1 points and new export orders by 3.5 points (http://ism.ws/ISMReport/NonMfgROB.cfm). Although prices paid fell by 9 points for the manufacturing report and 0.5 points for the nonmanufacturing report, both reports mention concern with the volatility and uncertainty of commodity and raw materials prices.
Table 21 shows the total value of manufacturers’ shipments and new orders, seasonally adjusted, released by the US Census Bureau on Jun 2 after an earlier report on May 26 (http://www.census.gov/manufacturing/m3/). The percentages changes for Jan/Feb and Mar/Apr are quite weak while those for Feb/Mar are much stronger. The last row shows, for example, the wide swing in new orders for nondefense aircraft that fell 30.0 percent in Mar/Apr after rising 39.9 percent in Jan/Feb.
Table 21, Value of Manufacturers’ Shipments and New Orders, SA, %
| Mar/Apr ∆% | Feb/Mar ∆% | Jan/Feb ∆% | |
| Total | |||
| S | -0.2 | 3.1 | 0.2 |
| NO | -1.2 | 3.8 | -0.3 |
| Excluding Transport | |||
| S | 0.2 | 2.9 | 0.1 |
| NO | -0.2 | 2.9 | 0.0 |
| Excluding Defense | |||
| S | -0.1 | 3.2 | 0.2 |
| NO | -1.2 | 3.6 | 0.5 |
| Durable Goods | |||
| S | -1.3 | 3.1 | 0.0 |
| NO | -3.6 | 4.6 | -1.1 |
| Transport Equipment | |||
| S | -3.3 | 5.1 | 0.6 |
| NO | -9.3 | 10.6 | -2.4 |
| Motor Vehicles | |||
| S | -5.3 | 8.0 | -2.1 |
| NO | -5.5 | 7.3 | -1.3 |
| Nondefense Aircraft | |||
| S | -1.8 | 2.5 | 2.7 |
| NO | -30.0 | 2.3 | 39.9 |
Note: S: shipments; NO: new orders; Transport: transportation
Source: http://www.census.gov/manufacturing/m3/prel/pdf/s-i-o.pdf
Table 22 provides the percentage change of the value of manufacturers’ shipments and new orders, not seasonally adjusted, in Jan through Apr 2011 relative to Jan through Apr 2010. Automobiles rose by only 4.8 percent, raising the issue of whether part of the deceleration of manufacturing originates in supply interruptions caused by the earthquake/tsunami of Japan on Mar 11. The double-digit percentage increases of nominal values suggest that part of growth is inflation.
Table 22, Value of Manufacturers’ Shipments and New Orders, NSA, %
| Jan-Apr 2011/Jan-Apr 2010 ∆% | |
| Total | |
| S | 11.0 |
| NO | 11.8 |
| Excluding Transport | |
| S | 12.0 |
| NO | 12.2 |
| Excluding Defense | |
| S | 12.1 |
| NO | 12.6 |
| Durable Goods | |
| S | 7.7 |
| NO | 9.3 |
| Transport Equipment | |
| S | 3.8 |
| NO | 8.4 |
| Automobiles | |
| S | 4.8 |
| Nondefense Aircraft | |
| S | 6.0 |
| NO | 19.8 |
Note: S: shipments; NO: new orders; Transport: transportation
Source: http://www.census.gov/manufacturing/m3/prel/pdf/s-i-o.pdf
The value of construction put in place in the US in seasonally adjusted annual equivalent rate grew by 0.4 percent in Apr relative to Mar and residential construction by 3.1 percent, as shown in Table 23. Unfavorable weather in the beginning of the year may be a factor in seasonal recovery.
Table 23, Value of Construction Put in Place in the United States
| Apr SAAR $ B | ∆% | |
| Total | 843.1 | 0.4 |
| Residential | 273.7 | 3.1 |
| Nonresidential | 569.5 | -0.8 |
| Total Private | 538.4 | 1.7 |
| Total Public | 304.8 | -1.9 |
SAAR: seasonally adjusted annual rate; B: billions
Source: http://www.census.gov/const/C30/release.pdf
The value of construction put in place in the US, not seasonally adjusted, from Jan to Apr fell 8.4 in 2011 relative to 2010, as shown in Table 24. The contraction of construction has been quite profound: a fall in the first four months of the year in 2011 by 37.1 percent relative to 2006 and by 30.5 percent relative to 2005.
Table 24, Value of Construction Put in Place in the United States, Not Seasonally Adjusted, $ Billions and ∆%
| Jan-Apr 2011 $ B | 222.7 |
| Jan-Apr 2010 $ B | 243.0 |
| ∆% to 2011 | -8.4 |
| Jan-Apr 2006 | 353.8 |
| ∆% to 2011 | -37.1 |
| Jan-Apr 2005 | 320.6 |
| ∆% to 2011 | -30.5 |
Source: http://www.census.gov/const/C30/release.pdf
http://www.census.gov/const/C30/pr200604.pdf
http://www.census.gov/const/C30/pr200704.pdf
Another dimension of real estate in the US is provided by the Standard & Poor’s Case-Shiller Home Price Indices. Table 25 shows that both the 10-city and the 20-city composite indices increased by very high percentages from Mar 2000 to Mar 2005: 94.9 percent for the 10-city composite and 77.8 for the 20-city composite. But both indices significantly dropped from Mar 2005 to Mar 2011: 23.9 percent for the 10-city composite and 23.8 percent for the 20-city composite. There may be a second recession round in housing perhaps shown by the fall of the 10-city composite by 3.6 percent from Apr 2009 to Mar 2011 and of the 20-city composite by 4.4 percent. In the 12 months ending in Mar 2011, the 10-city composite fell 2.9 percent and the 20-city composite lost 3.7 percent.
Table 25, Percentage Changes of Standard & Poor’s Case-Shiller Home Price Indices, Not Seasonally Adjusted, ∆%
| 10-City Composite | 20-City Composite | |
| ∆% Mar 2000 to Mar 2003 | 41.7 | 34.6 |
| ∆% Mar 2000 to Mar 2005 | 94.9 | 77.8 |
| ∆% Mar 2000 to Mar 2011 | 48.3 | 35.5 |
| ∆% Mar 2005 to Mar 2011 | -23.9 | -23.8 |
| ∆% Aug 2006 to Mar 2011 | -32.8 | -32.9 |
| ∆% Apr 2009 to Mar 2011 | -3.6 | -4.4 |
| ∆% Mar 2010 to Mar 2011 | -2.9 | -3.7 |
Mitra Kalita and Nick Timiraos analyze housing in an article for the Wall Street Journal on “Housing imperils recovery” (http://professional.wsj.com/article/SB10001424052702303657404576357170425058088.html?mod=WSJ_hp_LEFTWhatsNewsCollection). Kalita and Timiraos quote CoreLogic Inc which estimates that another fall of house prices by 5 percent could increase the share of homeowners with underwater mortgages, or potential sale prices below mortgage debt, to 28 percent from 23 percent at the end of 2010 and to one-third if prices fall by another 10 percent. Lenders will experience reductions in the value of assets in their balance sheets because of the incentive to default on an underwater mortgage.
Let V(T) represent the value of the firm’s equity at time T and B stand for the promised debt of the firm to bondholders and assume that corporate management, elected by equity owners, is acting on the interests of equity owners. Robert C. Merton (1974, 453) states:
“On the maturity date T, the firm must either pay the promised payment of B to the debtholders or else the current equity will be valueless. Clearly, if at time T, V(T) > B, the firm should pay the bondholders because the value of equity will be V(T) – B > 0 whereas if they do not, the value of equity would be zero. If V(T) ≤ B, then the firm will not make the payment and default the firm to the bondholders because otherwise the equity holders would have to pay in additional money and the (formal) value of equity prior to such payments would be (V(T)- B) < 0.”
Pelaez and Pelaez (The Global Recession Risk (2007), 208-9) apply this analysis to the US housing market in 2005-2006 concluding:
“The house market [in 2006] is probably operating with low historical levels of individual equity. There is an application of structural models [Duffie and Singleton 2003] to the individual decisions on whether or not to continue paying a mortgage. The costs of sale would include realtor and legal fees. There could be a point where the expected net sale value of the real estate may be just lower than the value of the mortgage. At that point, there would be an incentive to default. The default vulnerability of securitization is unknown.”
A deterrent to mortgage default exists in the form of the drastic impact on FICO scores that lasts over several years. Lenders also have the option to litigate payment from borrowers who default for opportunistic reasons. The liability of the shareholder in a corporation is limited to the value of the share in equity.
The Energy Information Administration Weekly Petroleum Status Report is summarized in Table 26. Crude oil stocks rose to 373.8 million barrels in the week of May 27 from 370.9 million in the week of May 20 and are higher by more than 10.6 million barrels than in the week of May 28, 2010. Future WTI prices fell after the release of this estimate but recovered at the closing on Jun 2. The world crude oil price increased slightly to $108.48/barrel on May 27 from $108.32/barrel on May 20, but is 46.6 percent higher than $74.0/barrel on May 31, 2010. The price of regular motor gasoline of $3.794/gallon on May 30, 2011 was 39.1 percent higher than $2.728/gallon on May 31, 2010.
Table 26, Energy Information Administration Weekly Petroleum Status Report
| Week Ending 05/27/11 | Week Ending 05/20/11 | Week Ending 05/28/10 | |
| Crude Oil Stocks Million B | 373.8 | 370.9 | 363.2 |
| Crude Oil Imports Thousand Barrels/Day | 9,037 | 8,877 | 9,691 |
| Motor Gasoline Million B | 212.3 | 209.7 | 219.0 |
| Distillate Fuel Oil Million B | 140.1 | 141.1 | 153.0 |
| World Crude Oil Price $/B | 108.48 | 108.32 | 74.0 |
| 05/30/11 | 05/23/11 | 05/31/10 | |
| Regular Motor Gasoline $/G | 3.794 | 3.849 | 2.728 |
B: barrels; G: gallon
Initial claims for unemployment insurance, seasonally adjusted, fell only 6000 in the week of May 28 to 422,000 from 428,000 in the week of May 21, as shown in Table 27. Equity markets were affected on Thu Jun 2 by the release of these data. Not seasonally adjusted initial claims rose 1701 to reach 377,421 in the week of May 28 from 375,729 in the week of May 21. The fall in the 4-week moving average by 14,000 show also mild improvement. The job-creating capacity of the US economy is fractured.
Table 27, Initial Claims for Unemployment Insurance
| SA | NSA | 4-week MA SA | |
| May 28 | 422,000 | 377,421 | 425,500 |
| May 21 | 428,000 | 375,720 | 439,500 |
| Change | -6,000 | 1,701 | -14,000 |
| May 14 | 414,000 | 361,573 | 440,250 |
| Prior Year | 464,000 | 418,873 | 465,750 |
Note: SA: seasonally adjusted; NSA: not seasonally adjusted; MA: moving average
Source: http://www.dol.gov/opa/media/press/eta/ui/current.htm
IX Interest Rates. It is quite difficult to measure inflationary expectations because they tend to break abruptly from past inflation. There could still be an influence of past and current inflation in the calculation of future inflation by economic agents. Table 28 provides inflation of the CPI. In Jan-Apr 2011, CPI inflation for all items seasonally adjusted was 5.5 percent in annual equivalent, that is, compounding inflation in the first four months and assuming it would be repeated during three consecutive four-month periods. In the 12 months ending in Apr, CPI inflation of all items not seasonally adjusted was 3.2 percent. The second column provides the same measurements for the CPI of all items excluding food and energy: 3.7 percent annual equivalent in Jan-Apr and 1.3 percent in 12 months. Bloomberg provides the yield curve of US Treasury securities (http://noir.bloomberg.com/markets/rates/index.html). The lowest yield is 0.03 percent for three months or virtually zero, 0.1 percent for six months, 0.17 percent for 12 months, 0.42 percent for two years, 0.72 percent for three years, 1.6 percent for five years, 2.28 percent for seven years and 2.99 percent for ten years. The Irving Fisher definition of the real interest rates is approximately the difference between the nominal interest rates, which are those estimated by Bloomberg, and the rate of inflation expected in the term of the security, which could behave as in Table 28. Real interest rates in the US have been negative during substantial periods in the past decade while monetary policy pursues a policy of attaining its “dual mandate” of (http://www.federalreserve.gov/aboutthefed/mission.htm):
“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”
Negative real rates of interest distort calculations of risk and returns from capital budgeting by firms, through lending by financial intermediaries to decisions on savings, housing and purchases of households. Inflation on near zero interest rates misallocates resources away from their most productive uses and creates uncertainty of the future path of adjustment to higher interest rates that inhibit sound decisions.
Table 28, Percentage Changes of Consumer Price Index
| CPI All Items | CPI All Items Less Food and Energy | |
| Jan-Apr Annual Equivalent SA | 5.5 | 2.1 |
| 12 Month Ending in Apr NSA | 3.2 | 1.3 |
Source: http://www.bls.gov/news.release/pdf/cpi.pdf
X Conclusions. There are between 24 and 30 million people in the United States in job stress because of outright unemployment or underemployment. The number of unemployed could be as high as 18 million. Hiring in the US, which is the avenue for exiting unemployment and underemployment, has declined by 17 million per year. The number of people with jobs has declined by four million. Inflation adjusted hourly earnings measured by nonfarm business generating 75 percent of US economic activity or GDP have declined by 2.6 percent annual equivalent in the first quarter of 2011. The combination of unemployment and increases in the cost of living has resulted in 44.4 million people receiving benefits under the Supplemental Nutrition Assistance Program formerly known as food stamps. (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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