CMP Associates Regulation Blog: Financial Turbulence, the Wriston Doctrine on Sovereign Bankruptcy and Euro Zone Survival, Hiring Collapse and World Economic Slowdown

Financial Turbulence, the Wriston Doctrine on Sovereign Bankruptcy and Euro Zone Survival, Hiring Collapse and World Economic Slowdown

Carlos M. Pelaez

Executive Summary

I International Financial Turbulence

II Euro Zone Survival Risk

IIA Appendix on Sovereign Bond Valuation

III Hiring Collapse

IV Global Inflation

V World Economic Slowdown

VA United States

VB Japan

VC China

VD Euro Zone

VE Germany

VF France

VG Italy

VH United Kingdom

VI Valuation of Risk Financial Assets

VII Economic Indicators

VIII Interest Rates

IX Conclusion

References

Executive Summary

The Wriston “doctrine” on sovereign lending was predicated on the argument that countries do not bankrupt (Wriston 1982). Another Wriston idea was that the old Citibank should be more valuable if it followed the model of the old Merrill Lynch and then broken into parts. There was a rise in leveraged buy outs (LBO) in the 1980s that has been extensively analyzed in academic literature (see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 159-66). Is the sum of the wealth of euro zone countries higher than the wealth of maintaining the euro zone? The debt crisis of the 1980s actually proved that a country can bankrupt and that many countries can bankrupt simultaneously. In fact, research in economic history has focused on the critically important issue of sovereign credibility (North and Weingast 1982, Summerhill 2007SC, 2007IR).

The euro zone faces a critical survival risk because several of its members may default on their sovereign obligations if not bailed out by the other members. The valuation equation of bonds is essential to understanding the stability of the euro area. An explanation is provided in this paragraph and readers interested in technical details are referred to Subsection IIA Appendix on Sovereign Bond Valuation. Contrary to the Wriston doctrine, investing in sovereign obligations is a credit decision. The value of a bond today is equal to the discounted value of future obligations of interest and principal until maturity. On Apr 9, the yield of the 2-year bond of the government of Greece was quoted at over 44 percent and the 10-year bond yield traded at over 21 percent. In contrast, the 2-year US Treasury note traded at 0.169 percent and the 10-year at 1.918 percent while the comparable 2-year government bond of Germany traded at 0.39 percent and the 10-year government bond of Germany traded at 1.77 (see Table 1 in the text). There is no need for sovereign ratings: the perceptions of investors are of relatively higher probability of default by Greece, defying Wriston (1982), and nil probability of default of the US Treasury and the German government. The essence of the sovereign credit decision is whether the sovereign will be able to finance new debt and refinance existing debt without interrupting service of interest and principal. Prices of sovereign bonds incorporate multiple anticipations such as inflation and liquidity premiums of long-term relative to short-term debt but also risk premiums on whether the sovereign’s debt can be managed as it increases without bound.

Much of the analysis and concern over the euro zone centers on the lack of credibility of the debt of a few countries while it is assumed that there is credibility of the debt of the euro zone as a whole. In practice, there is convergence in valuations and concerns toward the fact that there may not be credibility of the euro zone as a whole. The fluctuations of financial risk assets of members of the euro zone move together with risk aversion toward the countries with lack of debt credibility. This movement raises the need to consider analytically sovereign debt valuation of the euro zone as a whole in the essential analysis of whether the single-currency will survive without major changes.

The prospects of survival of the euro zone are dire. Table 3 in the text provides IMF World Economic Outlook data for GDP in USD billions, primary net lending/borrowing as percent of GDP and general government debt as percent of GDP for selected regions and countries in 2010.

The data in Table 3 are used to construct some very simple calculations in Table 4 anticipated here from the text. The column “Net Debt USD Billions” in Table 4 is generated by applying the percentage in Table 3 column “General Government Net Debt % GDP 2010” to the column “GDP USD Billions.” The total debt of France and Germany in 2010 is $3710.3 billion, as shown in the column “Net Debt USD Billions.” The sum of the debt of Italy, Spain, Portugal, Greece and Ireland is $3491.8 billion. There is some simple “unpleasant bond arithmetic” in the two final columns of Table 4. Suppose the entire debt burdens of the five countries with debt lacking credibility were to be guaranteed by France and Germany, which de facto would be required by continuing the euro zone. The sum of the total debt of these five countries and the debt of France and Germany is shown in column “Debt as % of Germany plus France GDP” to reach $7202.1 billion, which would be equivalent to 122.1 percent of their combined GDP in 2010. Under this arrangement the entire debt of the euro zone including those of France and Germany would lack sovereign credibility. The final column provides “Debt as % of Germany GDP” that would exceed 217 percent if including debt of France and 159 percent of GDP if excluding French debt. The unpleasant bond arithmetic illustrates that there is a limit as to how far Germany and France can go in bailing out the countries with unsustainable sovereign debt without incurring severe pains of their own. A central bank is not typically engaged in direct credit because of remembrance of inflation and abuse in the past. There is a limit also to operations of the European Central Bank in doubtful credit obligations. Wriston (1982) would prove to be wrong again that countries do not bankrupt but would have a consolation prize that similar to LBOs the sum of the individual values exceeds the value of the whole.

Table 4, Guarantees of Debt of Sovereigns in Euro Area as Percent of GDP of Germany and France, USD Billions and %

	Net Debt USD Billions	Debt as % of Germany Plus France GDP	Debt as % of Germany GDP
A Euro Area	7,839.9
B Germany	1,783.8		$7202.5 as % of $3315.6 =217% $5276.0 as % of $3315.6 =159%
C France	1,926.5
B+C	3,710.3	GDP $5898.1 Total Debt $7,202.1 Debt/GDP: 122.1%
D Italy	2,046.9
E Spain	688.0
F Portugal	181.4
G Greece	433.7
H Ireland	141.8
Subtotal D+E+F+G+H	3,491.8

Source: Table 3.

I International Financial Turbulence. The past three months have been characterized by financial turbulence, attaining unusual magnitude in the past month. Table 1, updated with every comment in this blog, provides beginning values on Sep 2 and daily values throughout the week ending on Fr Sep 9 of several financial assets. Section VI Valuation of Risk Financial Assets provides a set of more complete values. All data are for New York time at 5 PM. The first column provides the value on Fri Sep 2 and the percentage change in that prior week below the label of the financial risk asset. The first five asset rows provide five key exchange rates versus the dollar and the percentage cumulative appreciation (positive change or no sign) or depreciation (negative change or negative sign). Positive changes constitute appreciation of the relevant exchange rate and negative changes depreciation. Financial turbulence has been dominated by reactions to the new program for Greece (see section IB in http://cmpassocregulationblog.blogspot.com/2011/07/debt-and-financial-risk-aversion-and.html), doubts on the larger countries in the euro zone with sovereign risks such as Spain and Italy, the growth standstill recession and long-term unsustainable government debt in the US, worldwide deceleration of economic growth and continuing inflation. The dollar/euro rate is quoted as number of US dollars USD per one euro EUR, USD 1.4206/EUR in the first row, column 1 in the block for currencies in Table 1 for Fri Sep 2, appreciating to USD 1.3992/EUR on Tue Sep 6, or by 1.5 percent. Mon Sep 5 was the Labor Day holiday in the US. Table 1 defines a country’s exchange rate as number of units of domestic currency per unit of foreign currency. USD/EUR would be the definition of the exchange rate of the US and the inverse [1/(USD/EUR)] is the definition in this convention of the rate of exchange of the euro zone, EUR/USD. A convention is required to maintain consistency in characterizing movements of the exchange rate in Table 1 as appreciation and depreciation. The first row for each of the currencies shows the exchange rate at 5 PM New York time, such as USD 1.4206/EUR on Sep 2; the second row provides the cumulative percentage appreciation or depreciation of the exchange rate from the rate on the last business day of the prior week, in this case Fri Sep 2, to the last business day of the current week, in this case Fri Sep 9, such as appreciation of 3.8 percent for the dollar to USD 1.366/EUR by Sep 9; and the third row provides the percentage change from the prior business day to the current business day. For example, the USD appreciated (positive sign) by 3.8 percent from the rate of USD 1.4206/EUR on Fri Sep 2 to the rate of USD 1.366 on Fri Sep 9 {[1.366/1.4206 – 1]100 = -3.8%} and appreciated by 1.9 percent from the rate of USD 1.3927 on Thu Sep 8 to USD 1.366 on Fri Sep 9 {[1.366/1.3927 -1]100 = -1.9%}. The dollar appreciated during the week because more dollars $1.4206 were required to buy one euro on Fri Sep 2 than $1.366 required to buy one euro on Fri Sep 9.

Table 1, Weekly Valuations of Financial Risk Assets Aug 6 to Aug 9, 2011

9/02/11

Tu 6

W 7

Th 8

Fr 9

USD/
EUR

1.4206

2.0

1.3992

1.5%

1.4099

0.7%

0.8%

1.3927

1.9%

1.2%

1.366

3.8%

1.9%

JPY/
USD

76.79

-0.2%

77.7162

-1.2%

77.2868

-0.6%

0.6%

77.4890

-0.9%

-0.3%

77.581

-1.0%

-0.1%

CHF/
USD

0.783

-3.4%

0.8617

-10.1%

0.8582

-9.6%

0.4%

0.8725

-11.4%

-1.7%

0.8837

-12.9%

-1.3%

CHF/EUR

1.1197

4.3%

1.2057

-7.7%

1.2099

-8.1%

-0.3%

1.2151

-8.5%

-0.4%

1.2075

-7.8%

0.6%

USD/
AUD

1.064

0.9398

0.7%

1.0503

0.9521

-1.3%

1.0656

0.9384

0.1%

1.4%

1.0634

0.9404

-0.1%

-0.2%

1.0469

0.9552

-1.6%

10 Year
T Note

1.992

1.98

2.04

2.01

1.918

2 Year T Note
0.20

0.20

0.19

0.169

German Government Bond

2Y 0.52

10Y 2.01

2Y 0.44 10Y 1.85

2Y 0.49

10Y 1.91

2Y 0.44

10Y 1.87

2Y 0.39

10Y 1.77

DJIA

11240.26

-0.4%

-0.9%

1.6%

2.5%

-0.5%

-1.0%

-2.2%

-2.7%

DJ Global

1858.61

1.1%

-3.1%

-0.4%

2.7%

-0.9%

-0.5%

-3.9%

-3.1%

DJ Asia Pacific

1279.83

-2.1%

-3.9%

-1.9%

2.0%

-1.6%

0.3%

-2.6%

-0.9%

Nikkei
8950.74

1.7%

-4.0%

-2.2%

-2.1%

2.0%

-1.8%

0.3%

-2.4%

-0.6%

Shanghai

2528.28

-3.2%

-2.3%

-0.5%

1.8%

-1.2%

-0.7%

-1.2%

-0.0%

DAX
5538.33

0.0%

-6.2%

-2.4%

4.1%

-2.3%

0.1%

-6.3%

-4.0%

DJ UBS Comm.

162.51

0.9%

-0.8%

-0.1%

0.7%

0.1%

0.3%

-1.2%

-1.3%

WTI $ B
86.450

1.2%

86.390

-0.1%

89.440

3.5%

89.370

3.4%

-0.1

87.270

0.9%

-2.3%

Brent $/B

112.30

1.1%

113.050

0.7%

115.880

3.2%

2.5%

114.830

2.3%

-0.9%

112.650

0.3%

-1.9%

Gold $/oz

1876.90

2.7%

1881.60

0.3%

1820.1

-3.0%

-3.2%

1859.60

-0.9%

2.2%

1861.60

-0.8%

0.1%

Note: USD: US dollar; JPY: Japanese Yen; CHF: Swiss

Franc; AUD: Australian dollar; Comm.: commodities; Oz: ounce

http://www.bloomberg.com/markets/

http://professional.wsj.com/mdc/page/marketsdata.html?mod=WSJ_hps_marketdata

There are three factors dominating valuations of risk financial assets that are systematically discussed in this blog.

1. Euro zone survival risk. The fundamental issue of sovereign risks in the euro zone is whether the group of countries with euro as common currency and unified monetary policy through the European Central Bank will (i) continue to exist; (ii) downsize to a limited number of countries with the same currency; or (iii) revert to the prior system of individual national currencies. This issue is discussed in the following Section II Euro Zone Survival Risk

2. United Growth, Employment and Fiscal Soundness. The President of the United States addressed Congress on Sep 8, proposing the American Jobs Act (http://www.whitehouse.gov/the-press-office/2011/09/08/fact-sheet-american-jobs-act). The financing proposal will be released on Sep 19 when it will be possible to assess the intention of stimulating growth and jobs in the short run with commitment to fiscal soundness in the long run. Section III Hiring Collapse provides the latest available information on the fractured jobs market of the US

3. World Economic Slowdown. Careful, detailed analysis of the slowdown of the world economy is provided in Section V World Economic Slowdown. Data and analysis are provided for regions and countries that jointly account for about three quarters of world output

The exchange rate translates the price of foreign-originated goods and services into domestic currency that determines the competitiveness of foreign-originated goods and services with domestic-originated goods and services. The exchange rate also translates domestic-originated goods and services into other currencies that determine the competitiveness of domestic-originated goods and services in international markets. Consider the example from Pelaez and Pelaez (Government Intervention in Globalization (2008c), 71).

· The exchange rate on Apr 2, 2007, was USD 1.3374/EUR. An export of a US good of USD 10,000 to Europe translated into EUR 7477 obtained by dividing USD 10,000 by USD 1.3374/EUR

· The exchange rate on Apr 2, 2008 was USD 1.5618/EUR. After one year that USD 10,000 export of the US good to Europe would equal EUR 6403 obtained by dividing USD 10,000 by USD1.5618/EUR

· The consequence of the depreciation of the dollar by 14.4 percent [(1.3374/1.5618)-1)100] is that US goods exported to the euro zone would be cheaper by 14.4 percent. US monetary policy during almost a decade has been devaluing the dollar relative to most currencies of the world to increase the competitiveness of US goods in the US market and the competitiveness of US goods into foreign markets. Section VI Valuation of Risk Financial Assets analyzes this policy. Zero interest rates and quantitative easing are designed to promote economic growth mainly by devaluing the dollar to increase US exports net of imports that adds to economic growth and employment creation. Pelaez and Pelaez (Government Intervention in Globalization (2008a), 70-4) also analyze the effects on investment of relative changes of exchange rates, which is also the background theme in Pelaez and Pelaez (The Global Recession Risk (2007)). The analytical issues are more complex than this simple arithmetic with technical debate on the analytical and empirical effectiveness of changes in exchange rates in altering foreign trade and investment

There are three examples among almost all countries of the world in terms of the combination of risk aversion and monetary policy alternatively devaluing and revaluing the dollar. The examples in Table 2 are the Japanese yen, JPY, Swiss franc, CHF, and Brazilian real, BRL.

Table 2, Exchange Rates

	Peak	Trough	∆% P/T	Sep 9, 2011	∆T Sep 02 2011	∆P Sep 02 2011
JPY USD	8/18 2008	9/15 2010		9/09 2011
Rate	110.19	83.07		77.59
∆%			24.6		6.6	29.6
CHF USD	11/21 2008	12/8 2009		9/09 2011
Rate	1.225	1.025		0.883
∆%			16.3		13.9	27.9
BRL USD	12/5 2008	4/30 2010		9/09 2011
Rate	2.43	1.737		1.678
∆%			28.5		3.4	30.9

Symbols: USD: US dollar; EUR: euro; JPY: Japanese yen; CHF: Swiss franc; BRL: Brazil real

Source: http://online.wsj.com/mdc/public/page/mdc_currencies.html?mod=mdc_topnav_2_3000

First, as Table 1 shows, the most dramatic effect of the week ending on Fri Apr 9 was the devaluation of the Swiss franc relative to the dollar from CHF 0.783/USD on Fri Apr 2 to 0.8837 on Fri Apr 9, or by 12.9 percent. The Swiss franc devalued relative to the EUR from CHF 1.1197/EUR on Fri Apr 2 to CHF 1.2075/EUR on Fri Apr 9, or by 7.8 percent. The devaluation is explained by Swiss National Bank (SNB) pegging the Swiss franc exchange rate relative to the euro on Sep 6 (http://www.snb.ch/en/mmr/reference/pre_20110906/source/pre_20110906.en.pdf):

“Swiss National Bank sets minimum exchange rate at CHF 1.20 per euro

The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development.

The Swiss National Bank (SNB) is therefore aiming for a substantial and sustained weakening of the Swiss franc. With immediate effect, it will no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities.

Even at a rate of CHF 1.20 per euro, the Swiss franc is still high and should continue to weaken over time. If the economic outlook and deflationary risks so require, the SNB will take further measures”

In practice, what the SNB will do is “to buy foreign currency in unlimited quantities” to ensure that the rate remains at least at or higher than CHF 1.20/EUR. The rationale for the policy is in “an acute threat to the Swiss economy” in terms of the strong Swiss franc preventing competitiveness of Swiss-originated goods in home and foreign markets. As Table 2 shows, the Swiss franc is still well behind by 27.9 percent of the rate of CHF 1.225/USD on Nov 21, 2008.

Second, the Japanese yen has been used also as safe-haven from risk aversion. Various types of interventions conducted jointly with the full support of the G7 and with various national measures by the ministry of finance of Japan have failed to devalue the yen. The cumulative appreciation from JPY 110.19/USD on Aug 18, 2008 is 29.6 percent. Japan is an export economy with exports sensitive to the yen exchange rate.

Third, Brazil has experienced cumulative appreciation of its currency the Brazilian real, BRL, by 30.9 percent from BRL 2.43/USD on Dec 5, 2008 to BRL 1.678/USD on Sep 9. The Monetary Policy Committee (COPOM) of the Central Bank of Brazil lowered the policy interest rate SELIC on Aug 31 (http://www.bcb.gov.br/textonoticia.asp?codigo=3204&IDPAI=NEWS):

“Copom reduces the Selic rate to 12.00 percent

31/08/2011 8:46:00 PM

Brasília – The Copom decided to reduce the Selic rate to 12.00 percent, without bias, with five votes for the monetary policy action and two votes in favor of maintaining the Selic rate at 12.50 percent. Reassessing the international scenario, the Copom considers that there was substantial deterioration, materialized, for instance, in generalized and significant reduction in growth projections for the main economic blocks. The Committee understands that there was an increase in the chances that restrictions to which today several mature economies are exposed prolong for a period greater than previously anticipated. It also notices that, in these economies, the scope for the use of monetary policy seems limited, and a scenario of fiscal restriction prevails. Therefore, the Committee evaluates that the international scenario shows disinflationary bias in the relevant forecast period.

For the Copom, the transmission of external developments for the Brazilian economy may materialize through several channels, among others, the reduction in the current of trade, moderation of the investments flow, more restrictive credit conditions and deterioration in the consumers and businessmen sentiment. The Committee understands that the complexity that surrounds the international scenario will contribute to intensify and accelerate the ongoing process of domestic activity moderation, which already materializes, for example, in the retreat of projections for the Brazilian economy growth. Therefore, in the relevant forecast period, the balance of risks for inflation becomes more favorable. By the way, the revision of the scenario for the fiscal policy also points in the same direction.

Under this context, the Copom understands that, by promptly mitigating the effects stemming from a more restrictive global environment, a moderate adjustment in the basic rate level is consistent with the scenario of convergence of inflation to the target in 2012.

The Committee will carefully monitor the evolution of macroeconomic environment and the developments in the international scenario, so that it then defines the next steps in its monetary policy strategy.”

On Jul 29, 2011, a little more than a month ago, the real traded at BRL 1.551/USD, for cumulative appreciation of 36.2 percent relative to BRL 2.43/USD on Dec 5, 2008 (as documented in this blog http://cmpassocregulationblog.blogspot.com/2011/07/growth-recession-debt-financial-risk.html). Various measures to depreciate the real have not been successful. The appreciation of the currency can cause substantial harm to domestic economic activity and exports of industrial goods.

Risk aversion rose to dramatic highs during the week as shown in Table 1 by the collapse of the yield of the 10-year Treasury note to 1.918 percent while the yield of the 2-year note fell to 0.169 percent. A similar flight out of risk is shown by the decline of the yield of the 2-year German government bond to 0.39 percent and of the yield of the 10-year government bond to 1.77 percent.

Investors abandoned equities as shown in Table 1 by sharp declines in key stock market indexes. The DJIA lost 2.2 percent in the week but the impact of the world economic slowdown and euro zone survival risk was felt acutely on Fri Nov 9 with a drop of 2.7 percent. The DJ Global index lost 3.9 percent in the week. The highest impact occurred in Germany’s DAX, which fell 6.3 percent on concerns with the spread of the sovereign crisis through exposures of banks and investors.

Commodities also oscillated during the week. The DJ UBS Commodities index fell 1.2 percent, mostly by a drop of 1.3 percent on Fri Sep 9 during market fears of Europe and the world economic slowdown: WTI fell 2.3 percent on Fri Sep 9 and Brent lost 1.9 percent. Even gold ended with decline of 0.8 percent in the week.

II Euro Zone Survival Risk. The Wriston “doctrine” on sovereign lending was predicated on the argument that countries do not bankrupt (Wriston 1982). Another Wriston idea was that the old Citibank should be more valuable if it followed the model of the old Merrill Lynch and broken into parts. There was a rise in leveraged buy outs (LBO) in the 1980s that has been extensively analyzed in academic literature (see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 159-66). Is the sum of the wealth of euro zone countries higher than the wealth of maintaining the euro zone? The debt crisis of the 1980s actually proved that a country can bankrupt and that many countries can bankrupt simultaneously. In fact, research in economic history has focused on the critically important issue of sovereign credibility (North and Weingast 1982, Summerhill 2007SC, 2007IR).

The euro zone faces a critical survival risk because several of its members may default on their sovereign obligations if not bailed out by the other members. The valuation equation of bonds is essential to understanding the stability of the euro area. An explanation is provided in this paragraph and readers interested in technical details are referred to the following Subsection IIA Appendix on Sovereign Bond Valuation. Contrary to the Wriston doctrine, investing in sovereign obligations is a credit decision. The value of a bond today is equal to the discounted value of future obligations of interest and principal until maturity. On Apr 9, the yield of the 2-year bond of the government of Greece was quoted at over 44 percent and the 10-year bond yield traded at over 21 percent. In contrast, the 2-year US Treasury note traded at 0.169 percent and the 10-year at 1.918 percent while the comparable 2-year government bond of Germany traded at 0.39 percent and the 10-year government bond of Germany traded at 1.77 (see Table 1). There is no need for sovereign ratings: the perceptions of investors are of relatively higher probability of default by Greece, defying Wriston (1982), and nil probability of default of the US Treasury and the German government. The essence of the sovereign credit decision is whether the sovereign will be able to finance new debt and refinance existing debt without interrupting service of interest and principal. Prices of sovereign bonds incorporate multiple anticipations such as inflation and liquidity premiums of long-term relative to short-term debt but also risk premiums on whether the sovereign’s debt can be managed as it increases without bound.

Much of the analysis and concern over the euro zone centers on the lack of credibility of the debt of a few countries while there is credibility of the debt of the euro zone as a whole. In practice, there is convergence in valuations and concerns toward the fact that there may not be credibility of the euro zone as a whole. The fluctuations of financial risk assets of members of the euro zone move together with risk aversion toward the countries with lack of debt credibility. This movement raises the need to consider analytically sovereign debt valuation of the euro zone as a whole in the essential analysis of whether the single-currency will survive without major changes.

The prospects of survival of the euro zone are dire. Table 3 provides IMF World Economic Outlook data for GDP in USD billions, primary net lending/borrowing as percent of GDP and general government debt as percent of GDP for selected regions and countries in 2010.

Table 3, World and Selected Regional and Country GDP and Fiscal Situation

	GDP 2010 USD Billions	Primary Net Lending Borrowing % GDP 2010	General Government Net Debt % GDP 2010
World	57,920.3
Euro Zone	12,192.8	-3.6	64.3
Portugal	229.3	-4.6	79.1
Ireland	204.3	-29.7	69.4
Greece	305.4	-3.2	142.0
Spain	1,409.9	-7.8	48.8
Major Advanced Economies G7	31,891.5	-6.9	74.4
United States	14,657.8	-10.6	64.8
UK	2,247.5	-8.6	69.4
Germany	3,315.6	-3.3	53.8
France	2,582.5	-7.7	74.6
Japan	5,458.9	-9.5	117.5
Canada	1,574.1	-5.5	32.2
Italy	2,055.1	-4.6	99.6
China	5,878.3	-2.6	17.7
Cyprus	23.2	-5.4	61.6

Source: http://www.imf.org/external/pubs/ft/weo/2011/01/weodata/index.aspx

The data in Table 3 are used to construct some very simple calculations in Table 4. The column “Net Debt USD Billions” in Table 4 is generated by applying the percentage in Table 3 column “General Government Net Debt % GDP 2010” to the column “GDP USD Billions.” The total debt of France and Germany in 2010 is $3710.3 billion, as shown in the column “Net Debt USD Billions.” The sum of the debt of Italy, Spain, Portugal, Greece and Ireland is $3491.8 billion. There is some simple “unpleasant bond arithmetic” in the two final columns of Table 4. Suppose the entire debt burdens of the five countries with debt lacking credibility were to be guaranteed by France and Germany, which de facto would be required by continuing the euro zone. The sum of the total debt of these five countries and the debt of France and Germany is shown in column “Debt as % of Germany plus France GDP” to reach $7202.1 billion, which would be equivalent to 122.1 percent of their combined GDP in 2010. Under this arrangement the entire debt of the euro zone including those of France and Germany would lack sovereign credibility. The final column provides “Debt as % of Germany GDP” that would exceed 217 percent if including debt of France and 159 percent of GDP if excluding French debt. The unpleasant bond arithmetic illustrates that there is a limit as to how far Germany and France can go in bailing out the countries with unsustainable sovereign debt without incurring severe pains of their own. A central bank is not typically engaged in direct credit because of remembrance of inflation and abuse in the past. There is a limit also to operations of the European Central Bank in doubtful credit obligations. Wriston (1982) would prove to be wrong again that countries do not bankrupt but would have a consolation prize that similar to LBOs the sum of the individual values exceeds the value of the whole.

Table 4, Guarantees of Debt of Sovereigns in Euro Area as Percent of GDP of Germany and France, USD Billions and %

	Net Debt USD Billions	Debt as % of Germany Plus France GDP	Debt as % of Germany GDP
A Euro Area	7,839.9
B Germany	1,783.8		$7202.5 as % of $3315.6 =217% $5276.0 as % of $3315.6 =159%
C France	1,926.5
B+C	3,710.3	GDP $5898.1 Total Debt $7,202.1 Debt/GDP: 122.1%
D Italy	2,046.9
E Spain	688.0
F Portugal	181.4
G Greece	433.7
H Ireland	141.8
Subtotal D+E+F+G+H	3,491.8

Source: Table 3.

IIA Appendix on Sovereign Bond Valuation. There are two approaches to government finance and their implications: (1) simple unepleasant monetarist arithmetic; and (2) simple unpleasant fiscal arithmetic. Both approaches illustrate how sovereign debt can be perceived riskier under profligacy.

First, Unpleasant Monetarist Arithmetic. Fiscal policy is described by Sargent and Wallace (1981, 3, equation 1) as a time sequence of D(t), t = 1, 2,…t, …, where D is real government expenditures, excluding interest on government debt, less real tax receipts. D(t) is the real deficit excluding real interest payments measured in real time t goods. Monetary policy is described by a time sequence of H(t), t=1,2,…t, …, with H(t) being the stock of base money at time t. In order to simplify analysis, all government debt is considered as being only for one time period, in the form of a one-period bond B(t), issued at time t-1 and maturing at time t. Denote by R(t-1) the real rate of interest on the one-period bond B(t) between t-1 and t. The measurement of B(t-1) is in terms of t-1 goods and [1+R(t-1)] “is measured in time t goods per unit of time t-1 goods” (Sargent and Wallace 1981, 3). Thus, B(t-1)[1+R(t-1)] brings B(t-1) to maturing time t. B(t) represents borrowing by the government from the private sector from t to t+1 in terms of time t goods. The price level at t is denoted by p(t). The budget constraint of Sargent and Wallace (1981, 3, equation 1) is:

D(t) = {[H(t) – H(t-1)]/p(t)} + {B(t) – B(t-1)[1 + R(t-1)]} (1)

Equation (1) states that the government finances its real deficits into two portions. The first portion, {[H(t) – H(t-1)]/p(t)}, is seigniorage, or “printing money.” The second part,

{B(t) – B(t-1)[1 + R(t-1)]}, is borrowing from the public by issue of interest-bearing securities. Denote population at time t by N(t) and growing by assumption at the constant rate of n, such that:

N(t+1) = (1+n)N(t), n>-1 (2)

The per capita form of the budget constraint is obtained by dividing (1) by N(t) and rearranging:

B(t)/N(t) = {[1+R(t-1)]/(1+n)}x[B(t-1)/N(t-1)]+[D(t)/N(t)] – {[H(t)-H(t-1)]/[N(t)p(t)]} (3)

On the basis of the assumptions of equal constant rate of growth of population and real income, n, constant real rate of return on government securities exceeding growth of economic activity and quantity theory equation of demand for base money, Sargent and Wallace (1981) find that “tighter current monetary policy implies higher future inflation” under fiscal policy dominance of monetary policy. That is, the monetary authority does not permanently influence inflation, lowering inflation now with tighter policy but experiencing higher inflation in the future.

Second, Unpleasant Fiscal Arithmetic. The tool of analysis of Cochrane (2011Jan, 27, equation (16)) is the government debt valuation equation:

(M_t + B_t)/P_t = E_t∫(1/R_t_{, t+τ})s_t_+τdτ (4)

Equation (4) expresses the monetary, M_t, and debt, B_t, liabilities of the government, divided by the price level, P_t, in terms of the expected value discounted by the ex-post rate on government debt, R_t_{, t+τ}, of the future primary surpluses s_t_+τ, which are equal to T_t_+τ – G_t_+τ or difference between taxes, T, and government expenditures, G. Cochrane (2010A) provides the link to a web appendix demonstrating that it is possible to discount by the ex post R_t_{, t+τ}. The second equation of Cochrane (2011Jan, 5) is:

M_tV(i_t, ·) = P_tY_t (5)

Conventional analysis of monetary policy contends that fiscal authorities simply adjust primary surpluses, s, to sanction the price level determined by the monetary authority through equation (5), which deprives the debt valuation equation (4) of any role in price level determination. The simple explanation is (Cochrane 2011Jan, 5):

“We are here to think about what happens when [4] exerts more force on the price level. This change may happen by force, when debt, deficits and distorting taxes become large so the Treasury is unable or refuses to follow. Then [4] determines the price level; monetary policy must follow the fiscal lead and ‘passively’ adjust M to satisfy [5]. This change may also happen by choice; monetary policies may be deliberately passive, in which case there is nothing for the Treasury to follow and [4] determines the price level.”

An intuitive interpretation by Cochrane (2011Jan 4) is that when the current real value of government debt exceeds expected future surpluses, economic agents unload government debt to purchase private assets and goods, resulting in inflation. If the risk premium on government debt declines, government debt becomes more valuable, causing a deflationary effect. If the risk premium on government debt increases, government debt becomes less valuable, causing an inflationary effect.

There are multiple conclusions by Cochrane (2011Jan) on the debt/dollar crisis and Global recession, among which the following three:

(1) The flight to quality that magnified the recession was not from goods into money but from private-sector securities into government debt because of the risk premium on private-sector securities; monetary policy consisted of providing liquidity in private-sector markets suffering stress

(2) Increases in liquidity by open-market operations with short-term securities have no impact; quantitative easing can affect the timing but not the rate of inflation; and purchase of private debt can reverse part of the flight to quality

(3) The debt valuation equation has a similar role as the expectation shifting the Phillips curve such that a fiscal inflation can generate stagflation effects similar to those occurring from a loss of anchoring expectations.

III Hiring Collapse. The President addressed Congress on Sep 8 (http://blogs.wsj.com/washwire/2011/09/08/text-of-obamas-remarks-on-his-jobs-plan/). The objective of the President was to propose the American Jobs Act (http://www.whitehouse.gov/the-press-office/2011/09/08/fact-sheet-and-overview). Further details on financing new legislation will be provided by Sep 19.

An appropriate measure of job stress is considered by Blanchard and Katz (1997, 53):

“The right measure of the state of the labor market is the exit rate from unemployment, defined as the number of hires divided by the number unemployed, rather than the unemployment rate itself. What matters to the unemployed is not how many of them there are, but how many of them there are in relation to the number of hires by firms.”

The natural rate of unemployment and the similar NAIRU are quite difficult to estimate in practice (Ibid; see Ball and Mankiw 2002).

The Bureau of Labor Statistics (BLS) created the Job Openings and Labor Turnover Survey (JOLTS) with the purpose that (http://www.bls.gov/jlt/jltover.htm#purpose):

“These data serve as demand-side indicators of labor shortages at the national level. Prior to JOLTS, there was no economic indicator of the unmet demand for labor with which to assess the presence or extent of labor shortages in the United States. The availability of unfilled jobs—the jobs opening rate—is an important measure of tightness of job markets, parallel to existing measures of unemployment.”

The BLS collects data from about 16,000 US business establishments in nonagricultural industries through the 50 states and DC. The data are released monthly and constitute an important complement to other data provided by the BLS.

Hiring in the nonfarm sector (HNF) has declined from 64.9 million in 2006 to 47.2 million in 2010 or by 17.7 million while hiring in the private sector (HP) has declined from 60.4 million in 2006 to 43.3 million in 2010 or by 17.1 million, as shown in Table 5. The ratio of nonfarm hiring to unemployment (RNF) has fallen from 47.7 in 2006 to 36.4 in 2010 and in the private sector (RHP) from 52.9 in 2006 to 40.3 in 2010 (http://cmpassocregulationblog.blogspot.com/2011/03/slow-growth-inflation-unemployment-and.html).

Table 5, Annual Total Nonfarm Hiring (HNF) and Total Private Hiring (HP) in the US and Percentage of Total Employment

	HNF	Rate RNF	HP	Rate HP
2001	63,766	48.4	59,374	53.6
2002	59,797	45.9	55,665	51.1
2003	57,787	44.5	54,082	49.9
2004	61,624	46.9	57,534	52.4
2005	64,498	48.2	60,444	54.0
2006	64,870	47.7	60,419	52.9
2007	63,326	46.0	58,760	50.9
2008	53,986	39.5	50,286	44.0
2009	45,372	34.7	41,966	38.8
2010	47,234	36.4	43,299	40.3

Source: http://www.bls.gov/jlt/data.htm

Table 6 provides total HNF and HP in the month of Jul from 2001 to 2011. An important characteristic of the labor market in the US is that HNF has declined from 6.123 million in Jul 2006 to 4.291 million in Jul 2011, or by 1.832 million, and HP has fallen from 5.695 million in Jun 2006 to 3.985 million in Jun 2011, or by 1.710 million. HNF of 4.291 million in Jul 2011 is almost unchanged relative to 4.263 million in Jul 2010. HP in Jun 2011 of 3.985 million is lower by 1.393 million than 5.378 million in Jul 2001 during the full strength of the prior recession in 2001 with major losses in employment while in Jul 2011 the economy is in the eight consecutive quarter of recovery. HP in Jul 2011 of 3.985 is almost unchanged from 3.933 in Jul 2010. The US labor market is fractured, creating fewer opportunities to exit job stress of unemployment and underemployment of 25 to 30 million people and declining inflation-adjusted wages in the midst of fast increases in prices of everything (http://cmpassocregulationblog.blogspot.com/2011/09/global-growth-standstill-recession.html http://cmpassocregulationblog.blogspot.com/2011/08/global-growth-recession-25-to-30.html http://cmpassocregulationblog.blogspot.com/2011/07/twenty-five-to-thirty-million.html http://cmpassocregulationblog.blogspot.com/2011/06/unemployment-and-underemployment-of-24.html 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).

Table 6, Total Nonfarm Hiring (HNF) and Total Private Hiring (HP) in the US in Thousands and in Percentage of Total Employment Not Seasonally Adjusted

	HNF	Rate RNF	HP	Rate HP
2001 Jul	5793	4.4	5378	4.8
2002 Jul	5744	4.4	5365	4.9
2003 Jul	5154	4.0	4783	4.4
2004 Jul	5491	4.2	5091	4.6
2005 Jul	5890	4.4	5486	4.9
2006 Jul	6123	4.5	5695	4.9
2007 Jul	5757	4.2	5350	4.6
2008 Jul	4608	3.4	4278	3.7
2009 Jul	4006	3.1	3682	3.4
2010 Jul	4263	3.3	3933	3.6
2011 Jul	4291	3.3	3985	3.6

Source: http://www.bls.gov/jlt/data.htm

Chart 1 of the US Bureau of Labor Statistics (BLS) of the Department of Labor shows the difference in private sector hiring (HF) after the contraction of 2001 and after the contraction of 2007-2009. Hiring declined, stabilized and then rose after 2003. The contraction of hiring was much stronger during the deeper contraction of 2007 to 2009, then stabilized and has not yet risen.

Chart 1, Private Sector Hiring 2001-2011

Source: http://www.bls.gov/jlt/data.htm

The Bureau of Labor Statistics (BLS) also calculates alternative measures of labor underutilization for the US and all states. Table 7 shows six measure of underutilization described in the note. There is dramatic rise in the broad measure of labor underutilization, U6, or total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons as percent of the labor force plus all marginally attached workers. This blog provides the numerator of U6 after the release of every employment situation report by the BLS. The number for Jun is 25.368 million in job stress (see Table 2 in http://cmpassocregulationblog.blogspot.com/2011/09/global-growth-standstill-recession.html http://cmpassocregulationblog.blogspot.com/2011/08/global-growth-recession-25-to-30.html Table 1 in http://cmpassocregulationblog.blogspot.com/2011/07/twenty-five-to-thirty-million.html http://cmpassocregulationblog.blogspot.com/2011/06/unemployment-and-underemployment-of-24.html) but using a different rate of participation of the population in the labor force the number could be 29.877 million (see Table 3 and discussion in http://cmpassocregulationblog.blogspot.com/2011/09/global-growth-standstill-recession.html http://cmpassocregulationblog.blogspot.com/2011/08/global-growth-recession-25-to-30.html Table 2 and discussion in http://cmpassocregulationblog.blogspot.com/2011/07/twenty-five-to-thirty-million.html http://cmpassocregulationblog.blogspot.com/2011/07/twenty-five-to-thirty-million.html http://cmpassocregulationblog.blogspot.com/2011/06/unemployment-and-underemployment-of-24.html).

Table 7, Alternative Measures of Labor Underutilization %

	U1	U2	U3	U4	U5	U6
Aug 2011 NSA	5.2	5.1	9.1	9.6	10.6	16.7
Aug 2010 NSA	5.3	5.7	9.5	10.2	10.9	16.4
Jul 2011 NSA	5.2	5.2	9.3	10.0	10.9	16.3
Jul 2010 NSA	5.5	5.8	9.7	10.4	11.2	16.8
2010	5.7	6.0	9.6	10.3	11.1	16.7
2009	4.7	5.9	9.3	9.7	10.5	16.2
2008	2.1	3.1	5.8	6.1	6.8	10.5
2007	1.5	2.3	4.6	4.9	5.5	8.3
2006	1.5	2.2	4.6	4.9	5.5	5.6

Note: LF: labor force; U1, persons unemployed 15 weeks % LF; U2, job losers and persons who completed temporary jobs %LF; U3, total unemployed % LF; U4, total unemployed plus discouraged workers, plus all other marginally attached workers; % LF plus discouraged workers; U5, total unemployed, plus discouraged workers, plus all other marginally attached workers % LF plus all marginally attached workers; U6, total unemployed, plus all marginally attached workers, plus total employed part time for economic reasons % LF plus all marginally attached workers

Source: http://www.bls.gov/news.release/pdf/empsit.pdf

Seasonally-adjusted measures of labor underutilization for Jul 2010 and Mar to Jul 2011 are provided in Table 8. The more comprehensive measure is U6 consisting of total unemployed plus all marginally attached workers plus total employed part-time for economic reasons as percent of the labor force plus all marginally attached workers. U6 has increased SA from 15.9 percent in Apr 2011 to 16.2 percent in Aug 2011. Unemployed and underemployed for long periods lose hope and skills of ever again being productive and enjoy working for improving their living conditions. There is a social trauma in large segments of the population in dismal living conditions and resulting stress on the social and health care safety net.

Table 8, US, Alternative Measures of Labor Underutilization SA %

	Aug 2010	Aug 2011	Jul 2011	Jun 2011	May 2011	Apr 2011
U1	5.7	5.4	5.3	5.3	5.3	5.1
U2	5.9	5.3	5.4	5.4	5.4	5.3
U3	9.5	9.1	9.1	9.2	9.1	9.0
U4	10.2	9.7	9.8	9.8	9.5	9.5
U5	11.0	10.6	10.7	10.7	10.3	10.4
U6	16.5	16.2	16.1	16.2	15.8	15.9

Source: http://www.bls.gov/news.release/pdf/empsit.pdf

IV Global Inflation. There is inflation everywhere in the world economy, with slow growth and persistently high unemployment in advanced economies. Table 9 updated with every post, provides the latest annual 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). Newly available data on inflation is considered below in this section. The data in Table 9 for the euro zone and its members is updated from information provided by Eurostat but individual country information is provided in this section as soon as available, following Table 9. Data for other countries in Table 9 is also updated with reports from their statistical agencies. Economic data for major regions and countries is considered in Section V World Economic Slowdown following individual country and regional data tables.

Table 9, GDP Growth, Inflation and Unemployment in Selected Countries, Percentage Annual Rates

	GDP	CPI	PPI	UNE
US	2.9	3.6	7.0	9.1
Japan	-1.1	0.2	2.5	4.6
China	9.6	6.2	7.3
UK	1.8	4.5* RPI 5.2	6.1* output 16.2* input 13.0**	7.7
Euro Zone	1.6	2.5	6.1	10.0
Germany	2.8	2.6	5.7	6.1
France	1.6	2.1	6.1	9.9
Nether-lands	1.5	2.9	8.2	4.3
Finland	2.7	3.7	7.3	7.9
Belgium	2.5	4.0	8.4	7.5
Portugal	-0.9	3.0	5.7	12.3
Ireland	-1.0	1.0	5.0	14.5
Italy	0.8	2.1	4.9	8.0
Greece	-4.8	2.1	8.7	15.1
Spain	0.7	3.0	7.4	21.2

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.ons.gov.uk/ons/dcp171778_230822.pdf

CPI http://www.statistics.gov.uk/pdfdir/cpi0611.pdf

** Excluding food, beverage, tobacco and petroleum

Source: EUROSTAT; country statistical sources http://www.census.gov/aboutus/stat_int.html

Table 10 provides the forecasts of the Federal Reserve Board Members and Federal Reserve Bank Presidents for the FOMC meeting in Jun. Inflation by the price index of personal consumption expenditures (PCE) was forecast for 2011 in the Apr meeting of the FOMC between 2.1 to 2.8 percent. Table 15 shows that the interval has narrowed to PCE (personal consumption expenditures) headline inflation of between 2.3 and 2.5 percent. The FOMC focuses on core PCE inflation, which excludes food and energy. The Apr forecast of core PCE inflation was an interval between 1.3 and 1.6 percent. Table 15 shows the revision of this forecast in Jun to a higher interval between 1.5 and 1.8 percent.

Table 10, Forecasts of PCE Inflation and Core PCE Inflation by the FOMC, %

	PCE Inflation	Core PCE Inflation
2011	2.3 to 2.5	1.5 to 1.8
2012	1.5 to 2.0	1.4 to 2.0
2013	1.5 to 2.0	1.4 to 2.0
Longer Run	1.7 to 2.0

Source: http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20110622.pdf

The discussion of the FOMC on the statement of the Aug 9 meeting, revealed in the FOMC minutes released on Aug 30 (http://www.federalreserve.gov/newsevents/press/monetary/fomcminutes20110809.pdf 8), provides some information on the view of the members of the committee:

“The Committee agreed to keep the target range for the federal funds rate at 0 to ¼ percent and to state that economic conditions are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. That anticipated path for the federal funds rate was viewed both as appropriate in light of most members’ outlook for the economy and as generally consistent with some prescriptions for monetary policy based on historical and model-based analysis. In choosing to phrase the outlook for policy in terms of a time horizon, members also considered conditioning the outlook for the level of the federal funds rate on explicit numerical values for the unemployment rate or the inflation rate. Some members argued that doing so would establish greater clarity regarding the Committee’s intentions and its likely reaction to future economic developments, while others raised questions about how an appropriate numerical value might be chosen. No such references were included in the statement for this meeting. One member expressed concern that the use of a specific date in the forward guidance would be seen by the public as an unconditional commitment, and it could undermine Committee credibility if a change in timing subsequently became appropriate.

Most members, however, agreed that stating a conditional expectation for the level of the federal funds rate through mid-2013 provided useful guidance to the public, with some noting that such an indication did not remove the Committee’s flexibility to adjust the policy rate earlier or later if economic conditions do not evolve as the Committee currently expects.”

There is continuing high inflation in the producer price indexes for China in Table 11. The rate of increase of producer prices in China in the 12 months ending in Aug is 7.3 percent and 7.1 percent in the first eight months of 2011 relative to the first eight months of 2010. The only favorable information is the moderation of the monthly rate of increase at 0.1 percent in Aug or annual equivalent of 1.2 percent. The monthly rates of price increase are much lower than the rates in 12 months. There is significant upward pressure on production costs as shown by the increase of the purchaser price index of 10.6 percent in the 12 months ending in Aug. At the margin inflation of 0.2 percent in Aug is much lower in annual equivalent of 2.4 percent.

Table 11, China, Price Indexes for Industry ∆%

	Month Aug ∆%	12 Months Aug ∆%	Jan-Aug 2011/ Jan-Aug 2010 ∆%
I Producer Price Indexes	0.1	7.3	7.1
Means of Production	0.1	8.0	7.9
Mining	0.8	18.8	16.6
Raw Materials	0.2	11.6	10.7
Processing	-0.1	5.4	5.8
Consumer Goods	0.3	4.8	4.5
Food	0.4	8.3	8.0
Clothing	0.3	4.6	4.3
Daily Use Articles	0.3	4.7	4.4
Durable Consumer Goods	0.0	-0.3	-0.6
II Purchaser Price Indexes	0.2	10.6	10.4
Nonferrous Metals	0.0	16.8	15.2
Fuel and Power	0.1	12.7	11.0
Ferrous Metals	0.4	9.9	11.6
Raw Chemical Materials	0.3	13.4	12.2

Source: http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20110909_402753249.htm

http://www.stats.gov.cn/english/newsandcomingevents/index.htm

There is evident deceleration of producer price inflation in Table 12. The 12 months rates have increased from 5.9 percent in Dec 2010 to 7.1 percent in Jun, 7.5 percent in Jul and 7.3 percent in Aug. At the same time, the monthly rate of producer price inflation has fallen from 0.7 percent in Dec 2010, 0.9 percent in Jan 2011 and 0.8 percent, in Feb 2011, or 10.0 percent in annual equivalent in those three months, to 0.0 percent in both Jun and Jul and only 0.1 percent in Aug, or 0.4 percent in annual equivalent in those three months.

Table 12, China, Month and 12 Months Rate of Change of Producer Price Index, ∆%

	12 Month ∆%	Month ∆%
Aug 2011	7.3	0.1
Jul	7.5	0.0
Jun	7.1	0.0
May	6.8	0.3
Apr	6.8	0.5
Mar	7.3	0.6
Feb	7.2	0.8
Jan	6.6	0.9
Dec 2010	5.9	0.7

Source: http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20110909_402753249.htm

http://www.stats.gov.cn/english/newsandcomingevents/index.htm

Chart 2 of the National Bureau of Statistics of China illustrates the moderation of monthly producer price inflation in China. Twelve months rates of price increase continued but may be eventually pulled down if low monthly inflation rates continue. To be sure, past 12 months inflation is mostly water over the dam. There is risk in another commodity price surge because China imports raw materials and commodities.

Chart 2, China, Producer Prices for the Industrial Sector Month and 12 months ∆%

Source: http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20110909_402753249.htm

http://www.stats.gov.cn/english/newsandcomingevents/index.htm

Consumer price inflation in China in Table 13 is 6.2 percent in the 12 months ending in Aug and 5.6 percent in Jan-Aug 2011 relative to Jan-Aug 2010. The highest pressure is in food prices, increasing 13.4 percent in the 12 months ending in Aug, 12.3 percent in the first eight months relative to a year earlier and 0.3 percent in the month of Aug. Food price increases are also politically and socially sensitive.

Table 13, China, Consumer Price Index

	Aug Month ∆%	Aug 12 Month ∆%	Jan/Aug 2011/ Jan/Aug 2010
Consumer Prices	0.3	6.2	5.6
Urban	0.3	5.9	5.4
Rural	0.3	6.7	6.1
Food	0.6	13.4	12.3
Non-food	0.2	3.0	2.8
Consumer Goods	0.3	7.3	6.3
Services	0.2	3.4	3.9
Commodity Categories:
Food	0.6	13.4	12.3
Tobacco, Liquor	0.2	2.9	2.4
Clothing	-0.1	2.9	1.4
Household	0.2	2.8	2.2
Healthcare and Personal	0.6	4.1	3.3
Transport Comm.	0.0	1.0	0.4
Recreation, Education	0.1	0.4	0.6
Housing	0.2	5.5	6.1

Source: http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20110909_402753248.htm

http://www.stats.gov.cn/english/newsandcomingevents/index.htm

Monthly and 12 months rates of consumer price inflation in China have oscillated in different fashion than producer price inflation, as shown in Table 14. There are three periods. (1) The quarter from Dec 2010 to Feb 2011 experienced annual equivalent inflation of 11.3 percent with domestic interruptions in food supply. (2) Annual equivalent inflation collapsed to 0.0 percent in the following quarter Mar to May. (3) In the quarter Jun to Aug annual equivalent inflation resurfaced at 4.5 percent.

Table 14, China, Month and 12 Months Rates of Change of Consumer Price Index ∆%

	12 Month ∆%	Month ∆%
Aug 2011	6.2	0.3
Jul	6.5	0.5
Jun	6.4	0.3
AE ∆% Jun to Aug	4.5
May	5.5	0.1
Apr	5.3	0.1
Mar	5.4	-0.2
AE ∆% Mar to May	0.0
Feb	4.9	1.2
Jan	4.9	1.0
Dec 2010	4.6	0.5
AE ∆% Dec 2010 to Feb 2011	11.3

AE: Annual Equivalent

Source: http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20110909_402753248.htm

http://www.stats.gov.cn/english/newsandcomingevents/index.htm

Chart 3 of the National Bureau of Statistics of China shows monthly and 12 months rates of consumer price inflation in China. Monthly inflation rates rose sharply in the latter part of 2010 and early 2011, fell in Mar to May and then rose again.

Chart 3, China, Consumer Prices ∆% Month and 12 Months Aug 2010 to Aug 2011

Source: http://www.stats.gov.cn/enGliSH/newsandcomingevents/t20110909_402753248.htm

http://www.stats.gov.cn/english/newsandcomingevents/index.htm

Table 15 provides wholesale price inflation rates in Germany. There was strong price pressure in the four months from Dec 2010 to Mar with annual equivalent rate of 18.5 percent. Monthly inflation rates collapsed with two declines by 0.6 percent in both Jun and Jul, 0.0 percent in May, 0.2 percent in Apr and 0.1 percent in Aug. The 12-month rate of wholesale price inflation fell from 10.9 percent in Mar to 6.5 percent in Aug. Declining commodity prices because of risk aversion in financial markets and global economic slowdown helped to moderate inflation. Wholesale price inflation rose from 3.0 percent in 2005 to 5.4 percent in 2008 in part because of the rise in commodity prices caused by the upward trend in valuation of commodities and most risk financial assets.

Table 15, German, Wholesale Prices ∆%

	12 Months ∆%	Month ∆%
Aug 2011	6.5	0.1
Jul	8.2	-0.6
Jun	8.5	-0.6
May	8.9	0.0
Apr	9.2	0.2
Mar	10.9	1.3
Feb	10.8	1.4
Jan	9.4	1.2
Dec 2010	9.5	1.8
Nov	7.8	0.7
Oct	7.7	-0.3
Sep	7.6	1.0
Aug	6.4	1.6
Annual Average ∆%
2010	5.9
2009	-7.0
2008	5.4
2007	3.5
2006	3.5
2005	3.0

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/DE/Presse/pm/2011/09/PD11__330__61281,templateId=renderPrint.psml

Consumer price inflation in Germany has moderated as shown in Table 16. With the exception of 0.4 percent in Jul, monthly inflation has been quite low with 0.0 percent in both May and Aug and 0.2 percent in Apr. The 12 month rate of inflation in Aug was 2.4 percent while the annual average equivalent rate in the first eight months of 2011 was lower at 1.9 percent.

Table 16, Germany, Consumer Price Index ∆%

	12 Months ∆%	Month ∆%
Aug 2011	2.4	0.0
Jul	2.4	0.4
Jun	2.3	0.1
May	2.3	0.0
Apr	2.4	0.2
Mar	2.1	0.5
Feb	2.1	0.5
Jan	2.0	-0.4
AE ∆%		1.9
Dec 2010	1.7	1.0
Nov	1.5	0.1
Oct	1.3	0.1
Sep	1.3	-0.1
Aug	1.0	0.0
Annual Average ∆%
2010	1.1
2009	0.4
2008	2.6

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2011/09/PE11__329__611,templateId=renderPrint.psml

Table 17 provides components of the 12 months and monthly Aug rates of inflation in Germany. The 12 month rate of inflation has been driven by increases in energy components in the last block of data in Table 17. Motor fuels inflation rose 11.1 percent in the 12 months ending in Aug but fell 1.9 percent in the month of Aug. Heating oil rose 22.1 percent in the 12 months ending in Aug but fell 2.9 percent in the month of Aug. Food rose 2.5 percent in 12 months and fell 0.5 percent in Aug.

Table 17, Germany, Consumer Price Index ∆%

Aug 2011	12 Months ∆%	Month ∆%
Total	2.4	0.0
Excluding heating oil and motor fuels	1.8	0.1
Excluding household energy	1.9	0.0
Excluding Energy	1.4	0.0
Total Goods	3.4	-0.1
Nondurable Consumer Goods	4.8	-0.4
Medium-Term Life Consumer Goods	1.4	0.8
Durable Consumer Goods	0.0	0.3
Energy Components
Motor Fuels	11.1	-1.9
Household Energy	9.3	-0.1
Heating Oil	22.1	-2.9
Food	2.5	-0.5

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2011/09/PE11__329__611,templateId=renderPrint.psml

Price pressures have been stronger in the United Kingdom than in most advanced economies. The 12 months rate of inflation of manufactured products rose from 4.2 percent in Dec 2010 to 6.1 percent in Aug 2011, as shown in Table 18. Excluding food, beverage and petroleum, the 12 months rate of inflation rose from 2.7 percent in Dec 2010 to 3.6 percent in Aug 2011.

Table 18, UK Output Prices 12 Months ∆% NSA

	All Manufac -tured Products	Excluding Food, Beverage and Petroleum	All Excluding Duty
Aug 2011	6.1	3.6	6.2
Jul	6.1	3.4	6.2
Jun	5.8	3.2	5.9
May	5.4	3.4	5.5
Apr	5.6	3.6	5.8
Mar	5.6	3.1	5.5
Feb	5.3	3.1	5.2
Jan	5.0	3.3	5.0
Dec 2010	4.2	2.7	4.0

Source: http://www.ons.gov.uk/ons/dcp171778_230822.pdf

http://www.statistics.gov.uk/pdfdir/ppi0811.pdf

http://www.statistics.gov.uk/pdfdir/ppi0711.pdf

http://www.statistics.gov.uk/pdfdir/ppi0611.pdf

Input price inflation is at a relatively high level in the UK, as shown in Table 19. The overall index without exclusions rose 16.2 percent in Aug 2011, which is much higher than the already high 13.1 percent in Dec 2010. Excluding food, tobacco, beverages and petroleum, 12 months inflation still rose from 9.0 percent in Dec 2010 to 13.0 percent in Aug 2011.

Table 19, UK Input Prices 12 Months ∆% NSA

	Materials and Fuels Purchased	Excluding Food, Tobacco, Beverages and Petroleum
Aug 2011	16.2	13.0
Jul	18.3	13.3
Jun	16.8	12.6
May	16.2	11.4
Apr	17.9	12.2
Mar	14.8	10.3
Feb	14.9	10.7
Jan	14.2	10.5
Dec 2010	13.1	9.0

Source: http://www.ons.gov.uk/ons/dcp171778_230822.pdf

http://www.statistics.gov.uk/pdfdir/ppi0811.pdf

http://www.statistics.gov.uk/pdfdir/ppi0711.pdf

http://www.statistics.gov.uk/pdfdir/ppi0611.pdf

Inflation has been moderating in the four months from May to Aug 2011, as shown in Table 20. The annual equivalent inflation of output prices for the first eight months is 7.6 percent but it fell to 3.2 percent in the fourth months of May to Aug. Annual equivalent input price inflation in the first eight months of 2011 was 17.4 percent but was minus 11.4 percent in the four months from May to Aug.

Table 20, UK Output and Input Prices ∆% NSA

	Output Prices	Input Prices
Annual Equivalent Jan-Aug 2011	7.6	17.4
Annual Equivalent May-Aug 2011	3.2	-11.4
Aug	0.1	-1.9
Jul	0.3	-0.5
Jun	0.2	0.1
May	0.2	-1.6
Apr	1.1	2.8
Mar	1.1	3.8
Feb	0.5	1.4
Jan	1.1	2.3

Source: http://www.ons.gov.uk/ons/dcp171778_230822.pdf

http://www.statistics.gov.uk/pdfdir/ppi0811.pdf

http://www.statistics.gov.uk/pdfdir/ppi0711.pdf

The UK Office for National Statistics provides contributions in percentage points of components to the rates of inflation of consumer prices for 12 months ending in Aug and for the month of Aug, as shown in Table 21. The largest contribution to 12 months consumer price inflation was petroleum with 1.84 percentage points but contributed minus 0.09 percentage points in Aug. Food products contributed 1.36 percentage points to the 12 months rate of consumer price inflation but nothing in the month of Aug. Inflation in Aug was nearly flat, increasing by only 0.1 percent.

Table 21, UK, Contributions to Month and 12 Month Change in Prices of All Manufactured Products, Percentage Points

	12 Months % Points	Month % Points
Total %	6.1	0.1
Food Products	1.36	0.00
Tobacco & Alcohol	0.66	0.00
Clothing, Textile & Leather	0.58	0.00
Paper and Printing	0.20	-0.00
Petroleum	1.84	-0.09
Chemical & Pharmaceutical	0.63	0.14
Metal, Machinery & Equipment	0.13	0.00
Computer, Electrical & Optical	-0.08	0.01
Transport Equipment	0.18	-0.02
Other Manufactured Products	0.61	0.06

Source: http://www.ons.gov.uk/ons/dcp171778_230822.pdf

The same calculations are provided by the Office for National Statistics for the 12 months and monthly inflation rates of input prices shown in Table 22. Input price inflation fell 1.9 percent in Aug and rose 16.2 percent in 12 months. The largest contribution to the 12 months rate of input inflation was 8.14 percentage points by crude oil, which also made the highest negative contribution of 1.68 percentage points in the month of Aug. The remainder of 8.06 percentage points of contribution to the 12 months rate is mostly divided among 1.73 percentage points for imported metals, 1.44 percentage points for other imported materials, 1.31 percentage points for imported chemicals and 1.29 percentage points for imported parts and equipment, for joint contribution of 5.77 percentage points of imports.

Table 22, Contributions to Month and 12 Month Change in Prices of Inputs, Percentage Points

	12 Months % Points	Month % Points
Total	16.2	-1.9
Fuel	0.75	-0.08
Crude Oil	8.14	-1.68
Domestic Food Materials	0.62	-0.11
Imported Food Materials	0.76	0.00
Other Domestic Produced Materials	0.15	0.00
Imported Metals	1.73	-0.07
Imported Chemicals	1.31	0.07
Imported Parts and Equipment	1.29	-0.09
Other Imported Materials	1.44	0.06

Source: http://www.ons.gov.uk/ons/dcp171778_230822.pdf

V World Economic Slowdown. The JP Morgan Global Manufacturing & Services PMI^™ produced by JP Morgan and Markit jointly with ISM and IFPSM finds slowing global growth with contraction of manufacturing (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8544). The JP Morgan all-industry PMI seasonally adjusted diffusion index is closely associated with the seasonally-adjusted annual equivalent rate of global GDP. The headline index of 52.0 with available information for IIIQ2011 is lower than 52.3 in IIQ2011 and much lower than 57.3 in IQ2011. The slowdown is widespread with the index for the euro zone at the slowest pace in two years, the UK at the slowest since May 2009, India at a 27-month low, China flat from Jul and Brazil with the first decline in more than two years (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8544). The Director of Global Economics Coordination at JP Morgan, David Hensley, finds that world output has fallen to the slowest pace in the recovery from the global recession. Slowing world output was mainly caused by manufacturing but the services sector was only marginally better.

This section considers seven countries and the euro zone in separate subsections, each of which is preceded by a regional or country data table. The subsections update economic indicators released during the week ending on Aug 9. The earliest released indicators are the diffusion indexes of purchasing managers provided by Markit in association with multiple institutions. The subsections follow on the purchasing managers’ indexes with high-frequency data and analysis.

VA United States. The nonmanufacturing PMI of the Institute for Supply Management rose 0.6 percentage points from 52.7 in Jul to 53.3 in Aug, indicating faster growth, while the manufacturing purchasing managers’ index fell 0.3 percentage points from 50.9 in Jul to 50.6 in Aug, indicating slower growth (http://www.ism.ws/ISMReport/NonMfgROB.cfm). Business activity fell 0.5 percentage points for the nonmanufacturing index from 56.1 in Jul to 55.6, indicating slower growth, but fell 3.7 percentage points in manufacturing, from 52.3 in Jul to 48.6 in Aug, now indicating contraction. New orders rose 1.1 percentage points for the nonmanufacturing survey from 51.7 in Jul to 52.8 in Aug, indicating faster growth, and increased 0.4 points from 49.2 in Jul to 49.6 in Aug, which remains in contraction territory.

The US economy continues to grow moderately but at a rate insufficient to reduce the job stress of about 29 million people who are unemployed or underemployed. The JOLTS report shows private sector hiring of 3.985 million in Jul 2011, which is lower by 1.393 million than 5.378 million during a shallow contraction in 2001 that created the term “jobless recovery.” Sales of merchant wholesalers in Jan-Jul 2011 relative to Jan-Jul 2010 were growing at 14.5 percent and of durable goods at 11.4 percent suggest continuing economic growth. Consumer credit expanded at the annual rate of 5.9 percent in Jul, also suggesting stronger confidence. Exports in Jan-Jul 2011 relative to Jan-Jul 2010 grew at 18.1 percent with importing growing at 17.5 percent, also suggesting growth impulse. The quarterly services report show continuing growth of services revenue, also indicative of growth.

Table USA, US Economic Indicators

Consumer Price Index	Jun 12 months NSA ∆%: 3.6; ex food and energy ∆%: 1.6 Jun month ∆%: –0.2; ex food and energy ∆%: 0.3 Blog 08/21/11
Producer Price Index	Jun 12 months NSA ∆%: 7.0; ex food and energy ∆% 2.4 Jun month SA ∆% –0.4; ex food and energy∆%: 0.3 Blog 08/21/11
PCE Inflation	Jul 12 months NSA ∆%: headline 2.8; ex food and energy ∆% 1.6 Blog 09/04/11
Employment Situation	Household Survey: Jul Unemployment Rate SA 9.1% Blog calculation People in Job Stress Aug: 29.9 million NSA Establishment Survey: Aug Nonfarm Jobs 0 (zero jobs created); Private +17,000 job created Jul 12 months Average Hourly Earnings Inflation Adjusted ∆%: minus 1.3% Blog 09/04/11
Nonfarm Hiring	Nonfarm Hiring fell from 64.9 million in 2006 to 47.2 million in 2010 or by 17.7 million Private-Sector Hiring Jul 2011 3.985 million lower by 1.393 million than 5.378 million during contraction in Jul 2001 Blog 09/11/11
GDP Growth	BEA Revised National Income Accounts back to 2003 IQ2011 SAAR ∆%: 0.4 IIQ2011 SAAR ∆%: 1.0 First semester 2011 AE ∆% 0.7 Blog 08/28/11
Personal Income and Consumption	Jul month ∆% SA Real Disposable Personal Income (RDPI) -0.1 Jul month SA ∆% Real Personal Consumption Expenditures (RPCE): 0.5 12 months NSA ∆%: RDPI: 1.2; RPCE ∆%: 1.6 Blog 09/04/11
Quarterly Services Report	IIQ11/IQII SA ∆%: Information 2.0 Professional 1.6 Administrative 2.1 Hospitals 1.8 Blog 09/11/11
Employment Cost Index	IIQ2011 SA ∆%: 0.7 Jun 12 months ∆%: 3.4 Blog 08/07/11
Industrial Production	Jul month SA ∆%: 0.9 Jun 12 months NSA ∆%: 3.7 Capacity Utilization: 77.5 Blog 08/21/11
Productivity and Costs	Nonfarm Business Productivity IIQ2011∆% SAAE -0.7; IIQ2011/IIQ2010 ∆% minus 0.7; Unit Labor Costs IIQ2011 ∆% 3.3; IIQ2011/IIQ2010 ∆%: 1.9 Blog 09/04/11
New York Fed Manufacturing Index	General Business Conditions Aug: –7.72 New Orders: –7.82 Blog 08/21/11
Philadelphia Fed Business Outlook Index	General Index from 3.2 Jul to -30.7 Aug New Orders from Jul 0.1 to -30.7 Aug Blog 08/21/11
Manufacturing Shipments and Orders	Jul/Jun New Orders SA ∆%: 2.4; ex transport ∆%: 0.9 12 months Jun NSA ∆%: 12.6; ex transport ∆% 12.9 Blog 09/04/11
Durable Goods	Jul New Orders SA ∆%: 4.0; ex transport ∆%: 0.7 Jul 12 months NSA New Orders ∆%: 9.4; ex transport ∆% : 9.2 Blog 08/28/11
Sales of Merchant Wholesalers	Jan-Jul 2011/2010 ∆%: Total 14.5; Durable Goods: 11.4; Nondurable Goods 17.2 Blog 09/11/11
Sales and Inventories of Manufacturers, Retailers and Merchant Wholesalers	Jun 11/Jun 10 NSA ∆%: Total Business 12.1; Manufacturers 12.3 Retailers 9.1; Merchant Wholesalers 14.6 Blog 08/14/11
Sales for Retail and Food Services	Jul 12 months ∆%: Retail and Food Services: 8.5; Retail ∆% 8.9 Blog 08/14/11
Value of Construction Put in Place	Jun SAAR month SA ∆%: -1.3 Jun 12 months NSA: –0.5 Blog 09/04/11
Case-Shiller Home Prices	Jun 2011/Jun 2010 ∆% NSA: 10 Cities –3.8; 20 Cities: –4.5 ∆% Jun SA: 10 Cities 0.04; 20 Cities: –0.1 Blog 09/04/11
FHFA House Price Index Purchases Only	Jul SA ∆% 0.9; 12 month ∆%: minus 4.3 Blog 08/28/11
New House Sales	Jul month SAAR ∆%: -0.7 Jan/Jul 2011/2010 NSA ∆%: minus 10.6 Blog 08/28/11
Housing Starts and Permits	Jul Starts month SA ∆%: -1.5; Permits ∆%: -3.2 Jan/Jul 2011/2010 NSA ∆% Starts -3.6; Permits ∆% –5.1 Blog 08/21/11
Trade Balance	Balance Jul SA -$44,808 million versus Jun -$51,570 million Exports Jul SA ∆%: 3.6 Imports Jul SA ∆%: -0.2 Exports Jan-Jul 2011/2010 NSA ∆%: 18.1 Imports Jan-Jul 2011/2010 NSA ∆%: 17.5 Blog 09/11/11
Export and Import Prices	Jun 12 months NSA ∆%: Imports 13.6; Exports 9.9 Blog 08/21/11
Consumer Credit	Jul ∆% annual rate: 5.9% Blog 08/07/11
Net Foreign Purchases of Long-term Treasury Securities	May Net Foreign Purchases of Long-term Treasury Securities: $3.7 billion Jun versus May $24.2 billion Major Holders of Treasury Securities: China $1165 billion; Japan $911 billion Blog 08/21/11
Treasury Budget	Fiscal Year to Jul 2011/2010 ∆%: Receipts 8.0; Outlays 2.4; Deficit -5.9; Individual Income Taxes 23.8 Deficit Fiscal Year to Jul 2011: $1,099,901 million Blog 08/14/11

Links to blog comments in Table USA:

08/28/11 http://cmpassocregulationblog.blogspot.com/2011/08/united-states-gdp-growth-standstill.html

08/21/11 http://cmpassocregulationblog.blogspot.com/2011/08/world-financial-turbulence-global.html

08/14/11 (08/9): http://cmpassocregulationblog.blogspot.com/2011/08/turbulence-in-world-financial-markets.html

08/07/11: http://cmpassocregulationblog.blogspot.com/2011/08/global-growth-recession-25-to-30.html

There was noticeable improvement in the US trade balance from deficit of $51.570 million in Jun to deficit of $44,808 million in Jul, as shown in Table 23. The reduction in the deficit originated in a jump of exports by 3.6 percent from Jun to Jul while imports declined by 0.2 percent, which was lower than the decline by 1.1 percent from May into Jun. The trade balance deteriorated from deficit of $291,728 million in Jan-Jul 2010 to deficit of $329,774 billion in Jan-Jul 2011.

Table 23, US, Trade Balance of Goods and Services Seasonally Adjusted Millions of Dollars

	Trade Balance	Exports	Imports
Jul	-44,808	178,035	222,844
∆%		3.6	-0.2
Jun	-51,570	171,802	223,372
∆%		-2.2	-1.1
May	-50,182	175,673	225,855
∆%		-0.3	2.9
Apr	-43,242	176,267	219,509
∆%		1.3	-0.4
Mar	-46,397	173,981	220,378
∆%		4.9	4.2
Feb	-45,718	165,727	211,444
∆%		-1.3	-1.9
Jan	-47,858	167,849	215,707
∆%		2.3	5.5
Dec 2010	-40,454	164,006	204,459
Jan-Jul 2011	-329,774	1,209,335	1,539,109
Jan-Jul 2010	-291,729	1,042,311	1,334,040

Note: Trade Balance of Goods and Services = Exports of Goods and Services less Imports of Goods and Services. Trade balance may not add exactly because of errors of rounding.

Source: http://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf

Chart 4 of the US Bureau of the Census of the Department of Commerce shows that the trade deficit fell during the contraction but has grown again during the expansion. There has been a slight improvement in the margin in Jun and Jul.

Chart 4, US Balance, Exports and Imports of Goods and Services $ Billions

Source: http://www.census.gov/briefrm/esbr/www/esbr042.html

The international balance of trade in goods of the US seasonally-adjusted is shown in Table 24. The US has a dynamic surplus in services that reduces the large deficit in goods for a still very sizeable deficit in international trade of goods and services. The international trade in goods balance deteriorated sharply from Jan-Jul 2010 to Jan-Jul 2011. Deterioration occurred both in the petroleum balance, exports less imports of petroleum, as well as in the non-petroleum balance, exports less imports of non-petroleum goods. Exports rose 18.2 percent with non-petroleum exports growing by 15.5 percent. Total imports rose by 17.6 percent with petroleum exports increasing by 30.5 percent and non-petroleum imports by 14.5 percent.

Table 24, US, International Trade in Goods Balance, Exports and Imports $ Millions and ∆% SA

	Jan-Jul 2011	Jan-Jul 2010	∆%
Total Balance	-433,290	-372,465
Petroleum	-193,955	-156,896
Non Petroleum	-233,739	-209,817
Total Exports	861,542	728,817	18.2
Petroleum	61,500	38,803	58.5
Non Petroleum	789,370	683,729	15.5
Total Imports	1,294,832	1,101,282	17.6
Petroleum	255,454	195,700	30.5
Non Petroleum	1,023,108	893,546	14.5

Details may not add because of rounding and seasonal adjustment

Source: http://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf

US exports and imports of goods not seasonally adjusted in Jan-Jul 2010 and Jan-Jul 2011 are shown in Table 25. The rate of growth of exports was 18.1 percent, which is slightly higher than 17.5 percent for imports. The US has partial hedge of commodity price increases in exports of agricultural commodities that rose 30.8 percent and of mineral fuels that increased 59.4 percent both because of higher prices of raw materials and commodities. The US exports an insignificant amount of crude oil. US exports and imports consist mostly of manufactured products, with less rapidly increasing prices. US manufactured exports rose only 11.5 percent while imports rose 14.2 percent. Significant part of the US trade imbalance originates in mineral fuels growing by 27.9 percent and crude oil increasing by 27.5 percent. The limited hedge in exports of agricultural commodities and mineral fuels compared with substantial imports of mineral fuels and crude oil results in deterioration of the terms of trade of the US, export prices relative to import prices, originating in commodity price increases caused by carry trades from zero interest rates.

Table 25, US, Exports and Imports of Goods, Not Seasonally Adjusted Millions of Dollars and %

	Jan- Jul 2011 $ Millions	Jan-Jul 2010 $ Millions	∆%
Exports	852,943	722,321	18.1
Manu- factured	553,398	496,208	11.5
Agricultural Commodities	80,104	61,224	30.8
Mineral Fuels	69,826	43,805	59.4
Crude Oil	775	991	-21.8
Imports	1,270,575	1,081,657	17.5
Manu- factured	905,810	792,836	14.2
Agricultural Commodities	57,749	47,679	21.1
Mineral Fuels	266,667	208,543	27.9
Crude Oil	193,739	151,977	27.5

Source: http://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf

Table 26 provides sales of merchant wholesalers except manufacturers’ sales branches and office, not seasonally-adjusted, in Jan-Jul 2011 and Jan-Jul 2010. Data are not adjusted for price changes, thus reflecting both increases in prices and quantities. There is a high component of inflation in these data with commodity-rich items increasing at high rates: 48.5 percent for farm products, 36.5 percent for petroleum and 22.9 percent for petroleum plus groceries. An important aspect is the growth of durable goods by 11.4 percent, which has less inflation than commodity-rich items. These data suggest continuing growth of the US economy. The automotive sector is rebounding with growth of 8.8 percent.

Table 26, US, Sales of Merchant Wholesalers Except Manufacturers’ Sales Branches and Offices, Billions of Dollars and ∆% NSA

	Jan-Jul 2011 $ B	Jan-Jul 2010 $ B	∆%
US Total	2,706	2,363	14.5
Durable	1,191	1,069	11.4
Automotive	185	170	8.8
Prof. Equip.	211	202	4.5
Computer Equipment	112	105	7.8
Electrical	224	202	10.9
Machinery	198	165	20.0
Not Durable	1,516	1,294	17.2
Drugs	233	216	7.9
Apparel	73	72	1.4
Groceries	330	302	9.3
Farm Products	153	103	48.5
Petroleum	419	307	36.5
Petroleum plus Groceries	749	609	22.9

Sources:

http://www2.census.gov/wholesale/pdf/mwts/currentwhl.pdf

Inventory/sales ratios of merchant wholesalers except manufacturers’ sales branches and offices in Table 27 appear normal during an expansion period. The US total ratio is 1.17 with 1.51 in durables and 0.89 in nondurables. There are no increases at the margin that would suggest sluggish sales with inventory accumulation.

Table 27, Inventory/Sales Ratios of Merchant Wholesalers Except Manufacturers’ Sales Branches and Offices, % SA

	Jul 2011	Jun 2011	Jul 2010
US Total	1.17	1.16	1.16
Durable	1.51	1.51	1.50
Automotive	1.47	1.54	1.41
Prof. Equip.	1.05	1.02	0.97
Comp. Equip.	0.76	0.76	0.72
Electrical	1.22	1.18	1.16
Machinery	2.21	2.22	2.39
Not Durable	0.89	0.88	0.87
Drugs	0.90	0.92	0.97
Apparel	2.12	2.05	1.63
Groceries	0.67	0.67	0.65
Farm Products	1.07	1.04	1.06
Petroleum	0.44	0.43	0.44

Sources: http://www2.census.gov/wholesale/pdf/mwts/currentwhl.pdf

Chart 5 of the US Bureau of the Census of the Department of Commerce shows the inventory/sales ratio of merchant wholesalers except manufacturers’ sales branches and offices in the past ten years. The ratio jumped almost vertically close to 1.45 during the contraction and has returned to levels around the period preceding the contraction.

Chart 5, Inventory/Sales Ratio of Merchant Wholesalers Except Manufacturers’ Sales Branches and Offices

Source: http://www2.census.gov/wholesale/img/mwtsbrf.jpg

Table 28 provides the quarterly services report of the US Bureau of the Department of Commerce. Data are adjusted for seasonality but not for price changes. Revenue growth accelerated in the second quarter with quarterly growth by 2.0 for information services, 1.6 percent for professional, scientific and technical services, 2.1 percent for administrative services and support and 1.8 percent for hospitals. Growth rates in IIQ2011 relative to IIQ2010 are relatively high. There is again the difficulty in separating price and quantity changes.

Table 28, US, Selected Services, Estimates of Quarterly Revenue for Employer Firms, SA Millions of USD and ∆%

	INFO	PROF	ADMIN	HOSP
IIQ2011	287,558	339,459	152,793	212,285
∆% IIQ2011/ IQ2011	2.0	1.6	2.1	1.8
IQ2011	282,016	334.156	149,608	208,466
∆% IQ2011/ IVQ2010	0.2	2.1	0.8	< 0.05%
IVQ2010	281,400	327,438	148,437	208,398
∆% IVQ2010/ IIIQ2010	0.9	1.2	0.8	2.0
IIIQ2010	278,953	323,530	147,243	204,322
∆% IIQ2010/ IIQ2010	1.0	1.4	1.0	1.6
IIQ2010	276,202	318,909	145,775	201,187
IQ2010	273,577	217,463	140,211	195,768
∆% Relative Earlier Year Quarter
IIQ2011/ IIQ2010 ∆%	4.1	6.4	4.8	5.5
IQ2011/ IQ 2010 ∆%	3.1	5.3	6.7	6.5

Note: INFO: Information; PROF: Professional, Scientific and Technical Services; ADMIN: Administrative and Support and Waste Management and Remediation Services; HOSP: Hospitals

Source: http://www2.census.gov/services/qss/qss-current.pdf

Chart 6 of the US Bureau of the Census of the Department of Commerce provides the quarterly service report SA from IVQ2003 to IIQ2011. The recession from IVQ2007 to IIQ2009 contracted revenue of services but there appears to be continuing growth especially for professional, scientific and technical services.

Chart 6, US, Quarterly Revenue for Selected Services, SA $ Billions

Source: http://www2.census.gov/services/qss/qss.gif

The consumer credit report of the Federal Reserve is in Table 29. The annual percentage rate of total credit rose markedly from 3.5 percent in IIQ2011 to 5.9 percent in Jul with growth already in June at the annual rate of 5.6 percent. Non-revolving credit contracted 5.2 percent in Jul after anemic growth of 1.6 percent in IIQ2011. Expansion was in the form of a high 11.2 percent annual rate in non-revolving credit, which contributes most consumer credit in the US.

Table 29, US, Consumer Credit Seasonally Adjusted Annual Percentage Rate and Billions of Dollars

	IIQ2011	May	Jun	Jul
∆%
Total	3.5	3.0	5.6	5.9
Revolving	1.6	4.6	3.9	-5.2
Non Revolving	4.4	2.2	6.4	11.2
$ Billions
Total	2442.5	2431.2	2442.5	2454.5
Revolving	795.9	793.3	795.9	792.5
Non Revolving	1646.6	1637.8	1646.6	1662.0

Source: http://www.federalreserve.gov/releases/g19/current/g19.htm

VB Japan. The Markit Japan Services PMI^™ report with composite PMI data shows the sharpest rate of decline of activity in the sector service which combined with the slowest pace of growth of manufacturing in three months results in combined manufacturing/services output index of 46.7 in Aug that is the lowest in three months (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8455). A worrisome aspect of the report is growth driven by domestic demand as new export business declined in a tough environment of world economic activity.

Table JPY provides the country data table for Japan. Real GDP growth fell 0.5 percent in IIQ2011 relative to IQ2011 and fell 1.1 percent relative to IQ2010. GDP fell 0.9 percent in IQ2011 relative to IVQ2010 and fell 1.0 percent relative to IQ2010. Private sector machine orders fell 15.9 percent in Jul and private sector orders excluding volatile orders fell 8.2 percent in Jul. The most worrisome order is that export orders have fallen in very month from Apr to Jul.

Table JPY, Japan, Economic Indicators

Historical GDP and CPI	1981-2010 Real GDP Growth and CPI Inflation 1981-2010 Blog 07/31/11
Corporate Goods Prices	Jul ∆% 0.2 12 months ∆% 2.9 Blog 08/14/11
Consumer Price Index	Jul SA ∆% 0.0 Jul 12 months NSA ∆% 0.2 Blog 08/28/11
Real GDP Growth	IIQ2011 ∆%: –0.5 on IQ2011; ∆% from quarter a year earlier: –1.1% Blog 09/11/11
Employment Report	Jul Unemployed 2.92 million Change in unemployed since last year: minus 360 thousand Unemployment rate: 4.7% Blog 09/04/11
All Industry Index	Jun month SA ∆% 2.3 12 months NSA ∆% 0.2 Blog 08/21/11
Industrial Production	Jul SA month ∆%: 0.6 12 months NSA ∆% –2.8 Blog 09/04/11
Machine Orders	Total Jul ∆% –11.3 Private Jul ∆%: -15.9 Jul ∆% Excluding Volatile Orders -8.2 Blog 09/11/2011
Tertiary Index	Jun month SA ∆% 1.19 Jun 12 months NSA ∆% 0.8 Blog 08/14/2011
Wholesale and Retail Sales	Jul 12 months: Total ∆%: 2.5 Wholesale ∆%: 3.2 Retail ∆%: 0.7 Blog 09/04/11
Family Income and Expenditure Survey	Jul 12 months ∆% total nominal consumption minus 1.8, real minus 2.1 Blog 09/04/11
Trade Balance	Exports Jul 12 months ∆%: -3.3 Imports Jul 12 months ∆% 9.9 Blog 08/21/11

Links to blog comments in Table JPY:

08/28/11 http://cmpassocregulationblog.blogspot.com/2011/08/united-states-gdp-growth-standstill.html

08/14/11 (08/9): http://cmpassocregulationblog.blogspot.com/2011/08/turbulence-in-world-financial-markets.html

08/07/11: http://cmpassocregulationblog.blogspot.com/2011/08/global-growth-recession-25-to-30.html

07/31/11: http://cmpassocregulationblog.blogspot.com/2011/07/growth-recession-debt-financial-risk.html

Japan’s GDP fell by 0.5 percent in IIQ2011 from the prior quarter after falling 0.9 percent in IQ2011, as shown in Table 30. Japan’s recovery had been weak before the earthquake/tsunami on Mar 11, 2011, as shown by decline of GDP of 0.2 percent in IIQ2010 and again decline of 0.6 percent in IVQ2010. The deepest contractions in the recession were 2.9 percent in IVQ2008 and 4.9 percent in IQ2009.

Table 30, Japan, Real GDP ∆% Changes from the Previous Quarter Seasonally Adjusted ∆%

	IQ	IIQ	IIIQ	IVQ
2011	-0.9	-0.5
2010	2.3	-0.2	1.0	-0.6
2009	-4.9	2.0	-0.4	1.6
2008	0.7	-1.2	-1.3	-2.9
2007	1.2	0.3	-0.3	0.6
2006	0.0	1.1	0.3	0.6
2005	0.7	1.1	0.7	0.3
2004	1.1	-0.3	0.6	-0.4
2003	-0.4	0.6	0.7	1.4
2002	0.3	0.8	0.8	0.1
2001	0.4	-0.6	-1.2	-0.4
2000	1.9	0.2	0.1	1.0

Source: http://www.esri.cao.go.jp/en/sna/sokuhou/qe/gdemenu_ea.html

Japan’s quarterly growth of GDP not seasonally-adjusted relative to the same quarter a year earlier is shown in Table 31. The contraction extended over seven quarters from IIQ2008 through IVQ2009. It was strongest in IQ2009 with output declining 10.3 percent relative to a year earlier. Yearly quarterly rates of growth of Japan were relatively high for a mature economy through the decade with the exception of the contractions in 2001 and after 2007.

Table 31, Japan, Real GDP ∆% Changes from Same Quarter Year Earlier, NSA ∆%

	IQ	IIQ	IIIQ	IVQ
2011	-1.0	-1.1
2010	5.7	3.1	5.0	2.2
2009	-10.3	-7.0	-6.3	-1.5
2008	1.3	-0.3	-1.1	-4.5
2007	3.5	2.3	1.7	1.9
2006	2.5	2.0	1.6	2.0
2005	1.1	2.0	2.0	2.6
2004	4.2	3.2	2.9	0.8
2003	1.3	1.3	1.1	1.9
2002	-1.9	-0.2	1.5	1.7
2001	2.0	1.0	-0.3	-1.8
2000	3.3	2.5	3.0	2.6

Source: http://www.esri.cao.go.jp/en/sna/sokuhou/qe/gdemenu_ea.html

Japan’s machinery orders interrupted sound growth from Apr through Jun with sharp drop in Jul. Private sector orders fell 15.9 percent in Jul and fell 8.2 percent excluding volatile orders. A worrisome aspect is the decline of overseas orders in all months Apr through Jul and by high percentages.

Table 32, Japan, Machinery Orders, Month ∆%

	Jul	Jun	May	Apr
Total	-11.3	5.6	-2.3	3.1
Private Sector	-15.9	19.4	4.9	2.8
Excluding Volatile Orders	-8.2	7.7	3.0	-3.3
Mfg	-5.2	9.3	-1.4	-2.7
Non Mfg	-1.4	15.7	-5.4	2.9
Gvt	-1.7	-3.2	10.7	-1.2
From Overseas	-9.8	-5.9	-6.6	-2.1
Through Agencies	-1.5	-6.6	-22.4	23.3

Note: Mfg: manufacturing; Gvt: government

Source: http://www.esri.cao.go.jp/en/stat/juchu/1107juchu-e.html

Chart 7 of the Economic and Social Research Institute of the Cabinet Office of Japan provides an enhanced perspective on machine orders of the private sector and excluding volatile orders since 2006. Orders fell very sharply to about 40 percent of their level at the low of the recession and to about 54 percent for orders excluding volatile orders. Recovery has been on an upward trend with fluctuations as typical of industrial orders worldwide but the levels before the contraction have not been recovered.

Chart 7, Japan, Total Machine Orders and Total Machine Orders Excluding Volatile Orders, JPY Billions

Source: http://www.esri.cao.go.jp/en/stat/juchu/1107juchu-e.html

VC China. The HSBC China Services PMI^™ with composite PMI data compiled by Markit shows that the composite output index registered 50.4 in Aug, flat relative to the low of 28 months registered in Jul (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8453). The Business Activity segment registered 50.6, suggesting muted growth of services. New orders for the private sector in China have stagnated.

Table CNY provides the country data table for China. An important development is the lower rate of monthly inflation of price indexes for industry of 0.1 percent in Aug. If there are no further shocks of commodity prices, China could experience favorable continuing moderation of input prices. Consumer price inflation continues to be resilient at 0.3 percent in Aug and 6.2 in 12 months but appears also declining at the margin. Value added of industry continues to growth with the cumulative Jan-Aug rate at 14.2 percent relative to a year earlier. Investment in fixed assets, a driver of rapid growth in China, grew 25.0 percent in Jan-Aug relative to a year earlier. Retail sales have also been driving growth with the rate of 1.4 percent in Aug, 17.0 percent in 12 months ending in Aug and 16.9 percent in the cumulative of Jan-Aug relative to a year earlier. The trade balance of China is closely watched for imports as indicator of domestic growth and exports as indicators of world demand. Exports grew at 24.5 percent in Aug relative to a year earlier and imports surged at 30.2 percent relative to a year earlier. The trade balance shrunk somewhat to a still high $17.9 billion.

Table CNY, China, Economic Indicators

Price Indexes for Industry	Aug 12 months ∆%: 7.3 Jan-Aug ∆%: 7.1 Aug month ∆%: 0.1 Blog 09/11/11
Consumer Price Index	Aug month ∆%: 0.3 Aug 12 month ∆%: 6.2 Jan-Aug ∆%: 5.6 Blog 09/11/11
Value Added of Industry	Aug 12 month ∆%: 13.5 Jan-Aug 2011/Jan-Aug 2010 ∆%: 14.2 Blog 09/11/11
GDP Growth Rate	Year IIQ2011 ∆%: 9.6 Quarter IIQ2011 ∆%: 2.2 Blog 08/14/11
Investment in Fixed Assets	Total Jan-Aug ∆%: 25.0 Jan-Aug ∆% real estate development: 33.2 Blog 09/11/11
Retail Sales	Aug month ∆%: 1.4 Aug 12 month ∆%: 17.0 Jan-Aug ∆%: 16.9 Blog 09/11/11
Trade Balance	Aug balance $17.9 billion Exports ∆% 24.5 Imports ∆% 30.2 Jan-Aug balance $76.2 billion Exports ∆% 23.6 Import ∆% 27.5 Blog 09/11/11

Links to blog comments in Table CNY:

08/14/11 (08/9): http://cmpassocregulationblog.blogspot.com/2011/08/turbulence-in-world-financial-markets.html

Value added of industry in China rose 13.5 percent in Aug relative to a year earlier, as shown in Table 33. In Jan-Aug growth of value added of industry rose 14.2 percent relative to a year earlier. Growth of value added in industry has been around 14 percent relative to a year earlier throughout the first eight months of 2011.

Table 33, China, Growth Rate of Value Added of Industry ∆%

	Industry	Light Industry	Heavy Industry	State Owned	Private
12 M Aug	13.5	13.4	13.5	9.4	15.5
Jan-Aug	14.2	13.1	14.6	10.4	16.1
12 M Jul	14.0	12.8	14.5	9.5
Jan-Jul	14.3
12 M Jun	15.1	13.9	15.6	10.7	20.8
Jan-Jun	14.3	13.1	14.7	10.7	19.7
12 M May	13.3	12.9	13.5	8.9	18.7
Jan-May	14.0	12.9	14.4	10.7	19.3
12 M Apr	13.4	11.9	14.0	10.4	18.0
Jan-Apr	14.2	12.9	14.7	11.2	19.5
12 M Mar	14.8	12.8	15.6	12.9	19.2
Jan-Mar	14.4	13.1	14.9	11.4	19.8
12 M Feb	14.9	13.1	15.6	10.5	21.7
Jan-Feb	14.1	13.3	14.4	10.6	20.3

Source: http://www.stats.gov.cn/english/newsandcomingevents/t20110909_402753263.htm

http://www.stats.gov.cn/english/newsandcomingevents/t20110810_402746176.htm

http://www.stats.gov.cn/english/statisticaldata/index.htm

Output of various sectors of industrial production in China is shown in Table 34. As in all industrial activity, there has been fluctuation. The data do show strong growth across all segments in Table 34.

Table 34, China, Industrial Production Operation ∆%

	Elec- tricity	Pig Iron	Cement	Crude Oil	Non- ferrous Metals	Motor Vehicles
12 M Aug	10.0	12.9	12.8	4.5	15.6	9.5
Jan-Aug	13.0	13.1	18.4	6.6		4.7
12 M Jul	13.2	14.9	16.8	5.9	9.8	-1.3
Jan-Jul	13.3	13.0	19.2	6.9	9.9	4.0
12 M Jun	16.2	14.8	19.9	-0.7	9.8	3.6
12 M May	12.1	10.6	19.2	6.0	14.2	-1.9
12 M Apr	11.7	8.3	22.4	6.8	6.1	-1.6
12 M Mar	14.8	13.7	29.8	8.0	11.6	9.9
12 M Feb	11.7	14.5	9.1	10.9	14.4	10.3
12 M Jan	5.1	3.5	16.4	12.2	1.4	23.9
12 M Dec 2010	5.6	4.6	17.3	10.3	-1.9	27.6

M: month

Source: http://www.stats.gov.cn/english/newsandcomingevents/t20110810_402746176.htm

http://www.stats.gov.cn/english/newsandcomingevents/t20110909_402753263.htm

Chinese growth is commonly viewed as resulting from strong domestic saving and investment. Growth rates of investment in fixed assets in China in Table 35 show vigorous growth. Total fixed asset investment in Jan-Aug 2011 relative to Jan-Aug 2010 stood at 25.0 percent. State fixed asset investment growing at 12.1 percent was much lower than the total. Real estate development investment in fixed assets rose at a high 33.2 percent. The rates of growth of fixed asset investment in China have been quite steady throughout 2011.

Table 35, China, Investment in Fixed Assets ∆% Relative to a Year Earlier

	Total	State	Real Estate Development
Jan-Aug	25.0	12.1	33.2
Jan-Jul	25.4	13.6	33.6
Jan-Jun	25.6	14.6	32.9
Jan-May	25.8	14.9	34.6
Jan-Apr	25.4	16.6	34.3
Jan-Mar	25.0	17.0	34.1
Jan-Feb	24.9	15.6	35.2

Source:

http://www.stats.gov.cn/english/statisticaldata/index.htm

http://www.stats.gov.cn/english/newsandcomingevents/t20110909_402753254.htm

Another important feature of Chinese growth has been rapid growth of retail sales. There is significant stability at high rates of growth of retail sales in 2011 in Table 36. Retail sales grew 1.4 percent in Aug, 17.0 percent relative to Aug 2010 and 16.9 percent in the cumulative Jan-Aug 2011 relative to Jan-Aug 2010.

Table 36, China, Total Retail Sales of Consumer Goods ∆%

	Month ∆%	12 Months ∆%	Cumulative ∆%/ Cumulative Year Earlier
Aug	1.4	17.0	16.9
Jul	1.3	17.2	16.8
Jun	1.4	17.7	16.8
May	1.3	16.9	16.6
Apr	1.4	17.1	16.5
Mar	1.3	16.3	17.4
Feb	1.3	11.6	15.8
Jan		19.9	19.9
AE ∆% Feb-Aug	17.4

Note: there are slight revisions of month relative to earlier month data but not of the month on the same month year earlier or cumulative relative to cumulative year earlier in the databank

Source: http://www.stats.gov.cn/english/newsandcomingevents/t20110810_402746163.htm

http://www.stats.gov.cn/english/statisticaldata/index.htm

Chinese foreign trade is watched closely because of indications of growth in the domestic economy in import growth and of world demand in export growth. Exports in Aug 2011 grew by 24.5 percent relative to a year earlier and imports increased by 30.2 percent, shrinking the trade surplus from $31.5 billion in Jul to $17.8 in Aug, as shown in Table 37. Trade growth has resumed relative to an apparent slowdown in Feb-Mar.

Table 37, China, Exports, Imports and Trade Balance USD Billion and ∆%

	Exports USD Billion	∆% Relative Year Earlier	Imports USD Billion	∆% Relative Year Earlier	Balance USD Billion
Aug	173.31	24.5	155.56	30.2	17.75
Jul	175.13	20.4	143.64	22.9	31.49
Jun	161.98	17.9	139.71	19.3	22.27
May	157.16	19.4	144.11	28.4	13.05
Apr	155.69	29.9	144.26	21.8	11.43
Mar	152.2	35.8	152.06	27.3	0.14
Feb	96.74	2.4	104.04	19.4	-7.3
Jan	150.73	37.7	144.27	51.0	6.46
Dec 2010	154.15	17.9	141.07	25.6	13.08

Source: http://english.customs.gov.cn/publish/portal191/

http://english.mofcom.gov.cn/static/column/statistic/BriefStatistics.html/1

Cumulative exports, imports and the trade balance of China are shown in Table 38. The data continue to be quite strong. Exports in Jan-Aug were $1.2 trillion, growing at 23.6 percent from a year earlier. Imports in Jan-Aug were $1.1 trillion, growing by 27.5 percent. The cumulative trade surplus rose to $92.7 billion.

Table 38, China, Year to Date Exports, Imports and Trade Balance USD Billion and ∆%

	Exports USD Billion	∆% Relative Year Earlier	Imports USD Billion	∆% Relative Year Earlier	Balance USD Billion
Aug	1,222	23.6	1,130	27.5	92.7
Jul	1,049.4	23.4	973.2	26.9	76.2
Jun	874.3	24.0	829.4	27.6	44.9
May	712.4	25.5	689.4	29.4	23.0
Apr	555.3	27.4	545.0	29.6	10.3
Mar	399.6	26.5	400.7	32.6	-1.1
Feb	247.47	21.3	248.36	36.0	-0.9
Jan	150.7	37.7	144.3	51.0	6.4
Dec 2010	1577.9	31.3	1394.8	38.7	183.1

Source: http://english.mofcom.gov.cn/static/column/statistic/BriefStatistics.html/1

VD Euro Zone. The Markit Eurozone Composite output PMI^® registered 50.7 in Aug, lower than 51.1 in Jul, which is the second weakest rate since Aug 2009 when recovery began (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8486). Chris Williamson, Chief Economist at Markit, finds that growth is the slowest in two years with recovery almost dropping to standstill. New business fell for the first in two years when recovery began. Weakness is across all member states.

Table EU provides the data table for the euro zone. Demand in the euro zone is as weak as in most advanced economies. The euro zone economy slowed after the good momentum in IQ2011. GDP growth was 0.2 percent on a quarter to quarter basis in IIQ2011 and grew by 1.6 relative to the same quarter a year earlier. Retail sales grew at the moderate rate of 0.2 percent in Jul and fell 0.2 percent relative to a year earlier.

Table EUR, Euro Area Economic Indicators

GDP	IIQ2011 ∆% 0.2; IIQ2011/IIQ2010 ∆% 1.6 Blog 09/11/11
Unemployment	Jul 2011: 10.0% unemployment rate Jul 2011: 15.757 million unemployed Blog 09/04/11
HICP	Month ∆%: -0.6 12 months Jun ∆%: 2.5 Blog 08/21/11
Producer Prices	Euro Zone industrial producer prices Jul 12 months ∆%: 6.1 Blog 09/04/11
Industrial Production	Jun month ∆%: -0.7 Jun 12 months ∆%: 2.9 Blog 08/14/11
Industrial New Orders	May month ∆%: 3.6 May 12 months ∆%: 15.5 Blog 07/24/11
Construction Output	May month ∆%: –1.1 May 12 months ∆%: –1.9 Blog 07/24/11
Retail Sales	Jul month ∆%: 0.2 Jul 12 months ∆%: –0.2 Blog 09/11/11
Confidence and Economic Sentiment Indicator	Sentiment 98.3 Aug 2011 down from 107 in Dec 2010 Confidence minus 16.5 Aug 2011 down from 11 in Dec 2010 Blog 09/04/11
Trade	Jan-Jun 2011/2010 Exports ∆%: 16.8 Imports ∆%: 17.8 Blog 08/21/11
HICP, Rate of Unemployment and GDP	Historical from 1999 to 2011 Blog 09/04/11

Links to blog comments in Table EUR:

08/21/11 http://cmpassocregulationblog.blogspot.com/2011/08/world-financial-turbulence-global.html

08/14/11 (08/9): http://cmpassocregulationblog.blogspot.com/2011/08/turbulence-in-world-financial-markets.html

08/07/11: http://cmpassocregulationblog.blogspot.com/2011/08/global-growth-recession-25-to-30.html

07/31/11: http://cmpassocregulationblog.blogspot.com/2011/07/growth-recession-debt-financial-risk.html

07/24/11: http://cmpassocregulationblog.blogspot.com/2011/07/debt-and-financial-risk-aversion-and.html

Aggregate demand is weak across advanced economies. Euro zone retail sales in Table 39 accumulated to zero growth. Growth in some months is erased by sharp declines in others such as a fall by 1.2 percent in May and another fall of 0.8 percent in Mar. In Jul 2011, retail sales grew 0.2 percent and fell 0.2 percent in 12 months.

Table 39, Euro Zone, Volume of Retail Sales, ∆%

	Month ∆%	12 Months ∆%
Jul 2011	0.2	-0.2
Jun	0.7	-0.7
May	-1.2	-2.0
Apr	0.7	1.0
Mar	-0.8	-1.3
Feb	0.2	1.1
Jan	0.2	0.6
Jan-Jul ∆%	-0.016
AE ∆%	-0.027

AE: Annual equivalent

Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-05092011-AP/EN/4-05092011-AP-EN.PDF

More detail on euro zone sales by product categories is shown in Table 40. Food, drinks and tobacco fell 0.4 percent in Aug while nonfood product excluding automotive fuel rose 0.5 percent. Food, drinks and tobacco fell 2.0 percent in the 12 months ending in Aug but rose 1.7 percent for nonfood products excluding automotive fuel.

Table 40, Euro Zone, Volume of Retail Sales by Products, ∆%

Jul 2011	Month ∆%	12 Months ∆%
Total	0.2	-0.2
Food, Drinks, Tobacco	-0.4	-2.0
Nonfood Products ex Automotive Fuel	0.5	1.7

Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-05092011-AP/EN/4-05092011-AP-EN.PDF

Retail sales of euro zone members and the United Kingdom are provided in Table 41. Germany’s retail sales were flat in Aug and rose 1.6 percent relative to a year earlier. France’s retail sales rose 0.6 percent in Aug and 0.8 percent in 12 months. There is weakness across the euro zone.

Table 41, Euro Zone, Volume of Retail Sales by Member Countries, ∆%

Jul 2011	Month ∆%	12 Months ∆%
Euro Zone	0.2	-0.2
Germany	0.0	1.6
France	0.6	0.8
Netherlands	NA	NA
Finland	-1.9	2.7
Belgium	1.2	2.7
Portugal	2.5	-5.3
Ireland	0.3	-2.6
Italy	NA	NA
Greece	NA	NA
Spain	0.0	-3.9
UK	0.3	0.3

Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/4-05092011-AP/EN/4-05092011-AP-EN.PDF

Euro zone GDP growth relative to the prior quarter and year earlier quarter is shown in Table 42. IIQ2011 growth of 0.2 is much lower than 0.8 percent in IQ2011. Growth has also decelerated to 1.6 relative to a year earlier for IIQ2011. The initial growth momentum of the first quarter of 2011 has not been sustained at least through IIQ2011.

Table 42, Euro Zone, GDP Growth on Prior Quarter and Year Earlier Quarter, ∆%

	Quarter on Prior Quarter ∆%	Quarter on Same Quarter Year Earlier ∆%
IIQ2011	0.2	1.6
IQ2011	0.8	2.4
IV2010	0.3	2.0
IIQ2010	0.4	2.0

Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-06092011-AP/EN/2-06092011-AP-EN.PDF

The growth rates on a quarter relative to the prior quarter of GDP and expenditure components of the euro zone in Table 43 also provide evidence of declining momentum from IQ2011 into IIQ2011. Household consumption fell 0.2 percent in the second quarter of 2011 compared with growth of 0.2 percent in the first quarter of 2011. There was sharp rise of gross fixed capital formation (GFCF) by 1.8 percent in IIQ2011, an excellent result relative to declines by 0.2 percent in IVQ2010 and 0.1 percent in IIIQ2010. Exports also fell from growth of 2.0 percent in IQ2011 to 1.0 percent in IIQ2011 and imports from 1.5 percent to 0.5 percent.

Table 43, Euro Zone, GDP and Expenditure Components, ∆% on Prior Quarter

	IIQ2011	IQ2011	IVQ2010	IIIQ2010
GDP	0.2	0.8	0.3	0.4
Household Cons.	-0.2	0.2	0.3	0.2
Govt, Cons.	-0.2	0.4	0.0	0.1
GFCF	0.2	1.8	-0.2	-0.1
Exports	1.0	2.0	1.4	1.8
Imports	0.5	1.5	1.2	1.4

Notes: Cons.: Consumption; Govt.: Government, GFCG: Gross fixed capital formation

Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-06092011-AP/EN/2-06092011-AP-EN.PDF

Growth rates of GDP on a quarter relative to the same quarter a year earlier in Table 44 also confirm the declining growth momentum in the euro zone. Growth of household consumption slowed to 0.5 percent in IIQ2011 compared with yearly rates around 1 percent for the earlier three quarters. Trade also grew at much lower yearly rates for both exports and imports in IIQ2011.

Table 44, Euro Zone, GDP and Expenditure Components, ∆% on Same Quarter Year Earlier

	IIQ2011	IQ2011	IVQ2010	IIIQ2010
GDP	1.6	2.4	2.0	2.0
Household Cons.	0.5	0.9	1.1	1.0
Govt. Cons.	0.3	0.8	-0.1	0.3
GFCF	1.7	3.7	1.2	0.6
Exports	6.3	9.6	11.1	11.7
Imports	4.7	8.2	10.5	10.5

Notes: Cons.: Consumption; Govt.: Government, GFCG: Gross Fixed Capital Formation

Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-06092011-AP/EN/2-06092011-AP-EN.PDF

There is no driver of GDP growth in the euro zone in terms of contributions of expenditure components to change in GDP from the prior quarter shown in Table 45. Growth was positive because of export contribution of 0.4 percent and change in inventories of 0.1 percent.

Table 45, Euro Zone, Contribution of Expenditures Components to Change in GDP from Prior Quarter, %

	IIQ2011	IQ2011	IVQ2010	IIIQ2010
GDP	0.2	0.8	0.3	0.4
Household Cons.	-0.1	0.1	0.2	0.1
Govt. Cons.	0.0	0.1	0.0	0.0
GFCF	0.0	0.3	0.0	0.0
Change in Inv.	0.1	0.0	0.1	0.1
Exports	0.4	0.8	0.6	0.7
Imports	-0.2	-0.6	-0.5	-0.5

Notes: Cons.: Consumption; Govt.: Government, GFCG: Gross Fixed Capital Formation; Inv. : Inventories

Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-06092011-AP/EN/2-06092011-AP-EN.PDF

The contributions of expenditure components to GDP change in the euro zone relative to the same quarter a year earlier are provided in Table 46. Momentum in IIQ2011 was provided by 2.6 percent contributed by exports but the contribution has been shrinking steadily since IIIQ2010. Paralysis of world demand for exports could have strong effects on the economy of the euro zone.

Table 46, Euro Zone, Contribution of Expenditures Components to Change in GDP from Same Quarter Year Earlier, %

	IIQ2011	IQ2011	IVQ2010	IIIQ2010
GDP	1.6	2.4	2.0	2.0
Household Cons.	0.3	0.5	0.6	0.6
Govt. Cons.	0.1	0.2	0.0	0.1
GFCF	0.3	0.7	0.2	0.1
Change in Inv.	0.2	0.3	0.7	0.6
Exports	2.6	3.8	4.1	4.3
Imports	-1.9	-3.2	-3.7	-3.7

Notes: Cons.: Consumption; Govt.: Government, GFCG: Gross Fixed Capital Formation; Inv. : Inventories

Source: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-06092011-AP/EN/2-06092011-AP-EN.PDF

Euro zone contributions of gross value added by industry from the prior quarter are shown in Table 47. Growth originated in 0.1 percent contributed by industry and 0.1 percent by financial services and business activities.

Table 47, Euro Zone, Contributions of Gross Value Added by Industry to Change in GDP from Prior Quarter, %

	IIQ2011	IQ2011	IVQ2010	IIIQ2010
GDP	0.2	0.8	0.3	0.4
AG	0.0	0.0	0.0	0.0
IND	0.1	0.3	0.2	0.1
CONST	0.0	0.1	-0.1	-0.1
TRADE TRANS	0.0	0.1	0.0	0.1
FS, BA	0.1	0.1	0.1	0.1
OTHER SERV	0.0	0.1	0.0	0.0
TAXES LESS SUBSIDIES	0.0	0.1	0.0	0.0

Note: AG: Agriculture, Hunting & Fishing; IND: Industry, including Electricity; CONST: Construction; TRADE TRANSP: Trade, Transport & Communication Services; FS, BA: Financial Services and Business Activities; OTHER SERV: Other Services

Sources: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-06092011-AP/EN/2-06092011-AP-EN.PDF

Euro zone contributions of gross value added by industry to change in GDP from same quarter a year earlier are shown in Table 48. Industry and financial services and business activities are the drivers of GDP growth.

Table 48, Euro Zone, Contributions of Gross Value Added by Industry to Change in GDP from Same Quarter Year Earlier, %

	IIQ2011	IQ2011	IVQ2010	IIIQ2010
GDP	1.6	2.4	2.0	2.0
AG	0.0	0.0	0.0	0.0
IND	0.7	1.0	1.0	0.9
CONST	0.0	0.1	-0.2	-0.2
TRADE TRANS	0.3	0.4	0.4	0.6
FS, BA	0.4	0.4	0.4	0.3
OTHER SERV	0.1	0.1	0.1	0.2
TAXES LESS SUBSIDIES	0.1	0.4	0.2	0.2

Sources: http://epp.eurostat.ec.europa.eu/cache/ITY_PUBLIC/2-06092011-AP/EN/2-06092011-AP-EN.PDF

VE Germany. The Markit Germany Services PMI^® with Composite PMI^® data for manufacturing and services exhibits high association with German GDP since 1997. The composite output index registered 51.3 in Aug, lower than 52.5 in Jul, indicating the slowest expansion of Germany’s private sector out in the 25 months of recovery (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8460). The information shows weakness in both manufacturing and services. The favorable events are reduced pressure in inflation of inputs.

Table DE provides the data table for Germany. The analysis of the economy of Germany is important not only because it is a large economy and the strongest economy in the euro zone but also because it is a key world export economy providing valuable information on world trade. GDP grew 0.1 percent in IIQ2011 and 2.7 percent relative to a year earlier. There is deceleration of inflation with consumer prices flat in Aug and increasing 2.4 percent in 12 months. Producer prices rose only 0.1 percent in Aug and 6.5 percent in 12 months. Industrial production showed strength with growth of 4.0 percent in Jul and 6.3 percent in 12 months. Machine orders fell 2.8 percent in Jul and grew 5.5 percent in 12 months but trend analysis shows growth. The trade balance shows deceleration of exports and imports in Jun and Jul.

Table DE, Germany, Economic Indicators

GDP	IIQ2011 0.1 ∆%; II/Q2011/IIQ2010 ∆% 2.7 Blog 09/11/11
Consumer Price Index	Aug month SA ∆%: 0.0 Aug 12 months ∆%: 2.4 Blog 09/04/11
Wholesale Price Index	Aug month ∆%: 0.1 12 months NSA ∆%: 6.5 Blog 09/11/11
Industrial Production	Jul month SA ∆%: 4.0 12 months NSA: 6.3 Blog 09/11/11
Machine Orders	Jul month ∆%: -2.8 Jul 12 months ∆%: 5.5 Blog 09/11/11
Retail Sales	Jul Month ∆% 0.0 12 Months ∆% minus 1.6 Blog 09/04/11
Employment Report	Employment Accounts: Jul Employed 12 months NSA ∆%: 1.4 Labor Force Survey: Jul Unemployment Rate: 6.1% Blog 09/04/11
Trade Balance	Exports Jul 12 month NSA ∆%: 4.4 (versus ∆% 3.1 Jun and 19.9 May) Imports Jul 12 months NSA ∆%: 9.9 (versus ∆% 6.0 Jun and 15.7 May) Exports Jul month SA ∆%: minus 1.8 percent, versus Jun minus 1.2; Imports Jul month SA minus 0.3∆% versus Jun 0.3 Blog 09/11/11

Links to blog comments in Table DE:

08/21/11 http://cmpassocregulationblog.blogspot.com/2011/08/world-financial-turbulence-global.html

08/14/11 (08/9): http://cmpassocregulationblog.blogspot.com/2011/08/turbulence-in-world-financial-markets.html

08/07/11: http://cmpassocregulationblog.blogspot.com/2011/08/global-growth-recession-25-to-30.html

07/31/11: http://cmpassocregulationblog.blogspot.com/2011/07/growth-recession-debt-financial-risk.html

07/24/11: http://cmpassocregulationblog.blogspot.com/2011/07/debt-and-financial-risk-aversion-and.html

The analysis of the economy of Germany is important not only because it is a large economy and the strongest economy in the euro zone but also because it is a key world export economy providing valuable information on world trade. Table 49 provides growth rates of industrial production in Germany in Jul from 2002 to 2011 for both the month and 12 months. The report for Jul 2011 is excellent with growth of 4.0 percent in the month and 6.3 percent in 12 months. Industry fell 16.6 percent in the 12 months ending in Jul 2009.

Table 49, Germany, Production Industries, Month and 12 Months ∆%

	12 Months ∆% Non-adjusted	Month ∆% Seasonally and Calendar Adjusted
Jul 2011	6.3	4.0
Jul 2010	7.7	0.7
Jul 2009	-16.5	-0.5
Jul 2008	3.4	-1.1
Jul 2007	8.6	0.7
Jul 2006	5.4	1.8
Jul 2005	-0.2	1.4
Jul 2004	-0.5	0.9
Jul 2003	1.4	1.9
Jul 2002	3.2	-1.5

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Navigation/Statistics/TimeSeries/Indicators/ShortTermIndicators__nk.psml;jsessionid=90689D690E8A470A877AF40862BF46C1.internet

Chart 8 of the Statistisches Bundesamt Deutschland or Federal Statistical Office of Germany shows industrial production in Germany from 2007 to 2011. The Federal Statistical Office of Germany provides analysis of cycles and trends because of significant variation in industrial data. The trend in Chart 8 shows visually lower slope toward the end of 2010 and the first seven months of 2011. It is still too early to detect sustained trends.

Chart 8, Germany, Production Industries

Soource: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Navigation/Statistics/TimeSeries/Indicators/ShortTermIndicators__nk.psml;jsessionid=90689D690E8A470A877AF40862BF46C1.internet

Table 50 would lead to the conclusion that German industrial production improved significantly from May to Jul on the basis of monthly changes with seasonal adjustment. Production of investment goods jumped 7.5 percent in Jul in contrast with decline of 2.8 percent in Jun and increase of 2.6 percent in May. Production of durable goods rose 15.4 percent in Jul in contrast with fall by 6.3 percent in Jul with growth of 0.3 percent in May. Intermediate goods rose 2.3 percent in Jul after growth by 0.6 in Jun and 0.8 percent in May. Manufacturing grew 4.6 percent in Jul after falling 1.2 percent in Jun and growing 1.5 percent in May.

Table 50, Germany, Production Industries, Industry and Components, Month ∆%

	Jul/Jun ∆%	Jun/May ∆%	May/Apr ∆%
Production Industries	4.0	-1.0	0.9
Industry	4.5	-1.1	1.4
Mfg	4.6	-1.2	1.5
Intermediate Goods	2.3	0.6	0.8
Investment Goods	7.5	-2.8	2.6
Durable Goods	15.4	-6.3	0.3
Nondurable Goods	0.1	-0.2	0.0
Energy	-1.0	3.4	-4.8

Seasonally Calendar Adjusted

Industrial data are difficult to analyze because of significant variations that could be smoothed somewhat by considering 12 months rates of growth. Table 51 provides 12 months rates of growth of industrial production and major components in Germany in 2011 and 2010. There is significant volatility in the 12 months rates of growth. Chart 8 captures multiple fluctuations around an upward trend.

Table 51, Germany, Industry and Components, 12 Months ∆% Unadjusted

	IND	MFG	INTG	INVG	DG	NDG	EN
2011
Jul	8.1	8.4	6.2	13.4	7.6	0.3	-9.6
Jun	0.5	0.7	1.3	1.6	-11.0	-2.0	-6.3
May	21.0	21.1	17.4	27.7	21.1	13.3	-11.8
Apr	7.1	7.3	5.6	10.6	4.3	2.4	-7.6
Mar	10.7	10.9	10.2	14.8	8.5	1.9	-0.3
Feb	17.0	17.2	16.3	22.4	11.0	6.1	-2.9
Jan	17.1	17.2	17.0	23.2	11.2	4.4	-3.0
2010
Dec	17.5	17.6	14.5	26.3	9.1	2.9	4.8
Nov	13.8	13.8	13.1	19.0	7.9	3.6	2.9
Oct	9.9	10.1	10.1	13.9	6.5	0.9	0.2
Sep	9.5	9.3	12.1	10.0	7.9	1.7	-2.4
Aug	17.2	17.2	19.0	20.3	19.5	6.9	-2.1
Jul	9.1	8.8	12.7	8.7	7.2	0.9	-0.2
Jun	16.2	16.1	20.5	16.0	20.5	5.3	-2.5
May	13.3	13.3	20.2	11.6	10.7	1.7	12.8
Apr	14.9	14.8	21.8	15.3	8.5	0.0	9.9
Mar	14.2	14.5	20.4	11.7	11.8	6.4	7.2
Feb	7.1	7.5	10.8	7.0	7.4	-1.2	5.4
Jan	0.6	0.9	6.7	-3.4	-0.4	-3.9	3.3

Note: IND: Industry; MFG: Manufacturing; INTG: Intermediate Goods; INVG: Investment Goods; DG: Durable Goods; NDG: Nondurable Goods; EN: Energy

Orders received in manufacturing in Germany are shown in Table 52 for total orders, foreign orders and domestic orders for rates of change in months and 12 months. Monthly rates are adjusted for seasonality and calendar effects while 12 months rates are unadjusted. Sharp fluctuations make analysis quite difficult. Total orders fell 2.8 percent in Jul mostly because of decline by 7.4 percent in foreign orders while domestic orders rose 3.6 percent.

Table 52, Germany, Volume of Orders Received in Manufacturing, Total, Domestic and Foreign, ∆%

	Total 12 M	Total M	Foreign 12 M	Foreign M	Home 12 M	Home M
2011
Jul	5.5	-2.8	5.2	-7.4	5.8	3.6
Jun	2.9	1.8	6.2	13.1	-1.2	-10.1
May	22.5	1.5	15.7	-6.0	30.5	10.7
Apr	7.3	2.9	10.5	3.5	3.4	2.2
Mar	8.8	-2.7	11.6	-2.9	5.5	-2.6
Feb	21.1	1.9	24.8	1.7	16.9	2.1
Jan	20.1	2.5	23.6	1.2	16.0	4.3
AE ∆%
2010
Dec	22.2	-3.0	27.3	-3.1	15.8	-2.9
Nov	21.5	4.8	26.8	7.4	15.6	1.7
Oct	14.1	1.9	17.7	1.7	10.4	2.0
Sep	13.9	-3.5	16.0	-6.1	11.6	-0.2
Aug	23.5	3.7	31.9	7.0	14.4	-0.5
Jul	14.2	-2.2	21.7	-3.7	6.3	-0.2
Jun	28.5	4.1	32.0	6.7	24.3	0.9
May	24.4	0.4	28.9	0.9	19.9	-0.1
Apr	29.3	2.5	33.0	2.5	25.2	2.5
Mar	29.4	5.6	32.3	6.1	26.4	5.0
Feb	23.4	-0.7	27.6	-0.7	18.6	-0.8
Jan	16.7	4.9	23.6	4.6	9.7	5.2

Notes: AE: Annual Equivalent; M: Month; M: Calendar and seasonally-adjusted; 12 M: Non-adjusted

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/TimeSeries/EconomicIndicators/KeyIndicators/OrdersRecieved/liste__aeverg,templateId=renderPrint.psml

Table 53 provides orders received by investment goods industries in Germany. There appears to be deceleration of foreign orders with decline of 12.8 percent in Jul but likely because it follows sharp increase by 20.6 percent in Jun.

Table 53, Germany, Volume of Orders Received of Investment Goods Industries, Total, Foreign and Domestic, ∆%

	Total 12 M	Total M	Foreign 12 M	Total M	Home 12 M	Home M
2011
Jul	8.1	-7.0	7.1	-12.8	9.6	3.6
Jun	7.1	5.1	10.6	20.6	1.2	-14.8
May	26.8	2.0	17.9	-8.3	40.4	19.0
Apr	11.8	4.8	15.6	6.6	6.3	2.2
Mar	10.7	-5.3	13.7	-4.9	6.5	-6.1
Feb	28.9	3.6	32.8	3.4	23.1	3.8
Jan	24.3	1.5	28.6	0.9	17.9	2.6
2010
Dec	27.3	-4.7	31.0	-6.2	21.3	-2.1
Nov	30.1	8.0	35.9	11.7	21.5	2.2
Oct	20.6	2.1	23.9	1.0	16.0	4.0
Sep	18.1	-5.2	20.4	-8.1	14.6	-0.2
Aug	29.3	7.5	42.8	11.4	12.0	1.4
Jul	14.1	-5.1	28.4	-7.4	-2.3	-1.3
Jun	33.5	6.7	41.3	10.8	22.2	0.7
May	25.9	1.8	35.6	1.4	13.6	2.5
Apr	30.1	2.1	40.1	3.0	17.4	0.6
Mar	26.2	7.4	33.8	8.4	16.1	5.7
Feb	20.3	-1.9	30.3	-1.5	8.1	-2.5
Jan	16.9	4.9	29.5	3.7	2.5	6.6

Notes: AE: Annual Equivalent; M: Month; M: Calendar and seasonally-adjusted; 12 M: Non-adjusted

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/TimeSeries/EconomicIndicators/KeyIndicators/OrdersRecieved/liste__aeverg,templateId=renderPrint.psml

Table 54 provides 12 months unadjusted rates and monthly seasonally and calendar adjusted for total orders received in manufacturing in Jul from 2002 to 2011. The impact of the recession was felt strongly in decline by 19.8 percent in Jul 2009.

Table 54, Germany, Volume of Total Orders Received in Manufacturing, ∆%

	12 Months ∆% Non-adjusted	Month ∆% Seasonally and Calendar Adjusted
Jul 2011	5.5	-2.8
Jul 2010	14.2	-2.2
Jul 2009	-19.8	3.4
Jul 2008	-1.4	-1.2
Jul 2007	10.8	-5.0
Jul 2006	7.8	2.9
Jul 2005	3.8	2.6
Jul 2004	4.9	1.1
Jul 2003	-0.7	-1.1
Jul 2002	4.2	-1.4

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/TimeSeries/EconomicIndicators/OrdersRecieved/Content100/kae211x12.psml

Chart 9 of the Statistisches Bundesamt Deutschland or Federal Statistical Office of Germany is highly useful in showing fluctuations around trend. Machine orders received in manufacturing have been growing around strong trend since the beginning of recovery.

Chart 9, Germany, Volume of Total Orders in Manufacturing and Trend, Non-Adjusted

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/Content/Statistics/TimeSeries/EconomicIndicators/OrdersRecieved/Content100/kae211graf0.psml

Table 55 provides exports and imports of Germany in billion euro and rates of change in 12 months, monthly in 2011 and 2010 and in Dec from 2000 to 2009. There is evident deceleration of the rates of growth of exports and imports from double digits in the months before May to single digits in Jun and Jul.

Table 55, Germany, Exports and Imports NSA Euro Billions and 12 Months ∆%

	Exports EURO Billions	12 Months ∆%	Imports EURO Billions	12 Months ∆%
Jul	85.9	4.4	75.4	9.9
Jun	88.3	3.1	75.6	6.0
May	92.2	20.1	77.4	15.7
Apr	84.3	13.4	73.4	20.1
Mar	98.2	15.7	79.4	17.0
Feb	84.1	21.1	72.1	27.3
Jan	78.6	24.4	68.5	24.3
Dec 2010	81.7	21.0	69.6	26.4
Nov	87.2	20.6	74.1	31.6
Oct	85.9	18.5	71.6	19.3
Sep	86.1	21.4	69.2	16.5
Aug	74.5	24.0	65.3	27.8
Jul	82.2	16.5	68.6	24.8
Jun	85.6	28.0	71.3	34.1
May	76.8	26.6	66.9	32.9
Apr	74.3	15.4	61.2	12.5
Mar	84.9	21.0	67.9	15.5
Feb	69.4	8.8	56.7	3.0
Jan	63.3	-0.5	55.1	-1.8
Dec 2009	67.5	1.2
Dec 2008	66.7	-8.6
Dec 2007	72.9	-0.6
Dec 2006	73.4	10.2
Dec 2005	66.6	11.5
Dec 2004	59.7	9.2
Dec 2003	54.7	7.6
Dec 2002	50.8	5.5
Dec 2001	48.2	-3.7
Dec 2000	50.0

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2011/09/PE11__326__51,templateId=renderPrint.psml

Monthly seasonally and calendar adjusted rates of growth of exports and imports are provided in Table 56. There are significant fluctuations and changes of signs. The weakness in Jul and Jun in 12 months corresponds to the weakness in monthly rates.

Table 56, Germany, Exports and Imports Month ∆% Calendar and Seasonally Adjusted

	Exports	Imports
Jul 2011	-1.8	-0.3
Jun	-1.2	0.3
May	4.4	3.8
Apr	-5.6	-2.5
Mar	7.2	3.1
Feb	2.7	3.9
Jan	-0.9	2.4
Dec 2010	0.5	-2.6

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2011/09/PE11__326__51,templateId=renderPrint.psml

Table 57 provides exports and imports of Germany in billion euro in Jul 2011 and in Jan-Jul 2011 with rates of growth relative to a year earlier for the total and by world regions. Trade relations are stronger with countries outside the euro area.

Table 57, Germany, Structure of Exports and Imports by Region, € Billions and ∆%

	Jul 2011 € Billions	12 Months ∆%	Jan-Jul 2011 € Billions	Jan-Jul 2011/ Jan-Jul 2010 ∆%
Total Exports	85.9	4.4	611.5	14.0
A. EU Members	49.7	3.9	367.1	13.4
Euro Area	33.3	1.9	248.0	12.0
Non-euro Area	16.5	8.2	119.0	16.5
B. Third Countries	36.1	5.1	244.4	14.8
Total Imports	75.4	9.9	521.9	16.6
C. EU Members	46.9	8.6	331.8	17.3
Euro Area	32.7	5.5	234.1	16.2
Non-euro Area	14.2	16.2	97.7	19.9
D. Third Countries	28.6	12.2	190.1	15.4

Notes: Total Exports = A+B; Total Imports = C+D

Source: http://www.destatis.de/jetspeed/portal/cms/Sites/destatis/Internet/EN/press/pr/2011/09/PE11__326__51,templateId=renderPrint.psml

VF France. The Markit France Services PMI^® with Composite PMI^® finds dynamism in services that compensated for the first decline of manufacturing output in 26 month. The result is a composite output index of 53.7 that is slightly higher than 53.2 in Jul (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8533). Table FR provides the data table for France.

Table FR, France, Economic Indicators

CPI	Jul month ∆% –0.4 12 months ∆%: 1.9 08/14/11
PPI	Jun month ∆%: –0.1 Jun 12 months ∆%: 6.1
GDP Growth	IIQ2011/IQ2011 ∆%: 0.0 IIQ2011/IIQ2010 ∆%: 1.6 Blog 08/14/11
Industrial Production	Jul/Jun SA ∆%: Industrial Production 1.5; Manufacturing 1.4 Jun 12 months NSA ∆%: Industrial Production 2.8; Manufacturing 4.2 Blog 09/11/11
Consumer Spending	Jun Manufactured Goods ∆%: 1.1 Jun Manufactured Goods ∆%: 2.2 Blog 08/07/11
Employment	IIQ2011 Unemployed 2.580 million Unemployment Rate: 9.1% Employment Rate: 63.9% Blog 09/04/11
Trade Balance	Jul Exports ∆%: month 0.3, 12 months 2.4 Jul Imports ∆%: month 2.9, 12 months 8.6 Blog 09/11/11

Links to blog comments in Table FR:

08/14/11 (08/9): http://cmpassocregulationblog.blogspot.com/2011/08/turbulence-in-world-financial-markets.html

08/07/11: http://cmpassocregulationblog.blogspot.com/2011/08/global-growth-recession-25-to-30.html

Industrial production in France is provided in Table 58. Industry fell from May into Jun with declines in both manufacturing by 1.8 percent and construction by 0.8 percent. Growth was stronger in Jul relative to Jun with industry growing 1.5 percent and manufacturing 1.4 percent. Year over year, industry grew 2.8 percent and manufacturing 4.2 percent.

Table 58, France, Industrial Production ∆%

	Jul/Jun	Jun/May	QOQ	YOY
Industry	1.5	-1.5	0.9	2.8
Manufac- turing	1.4	-1.8	0.4	4.2
Mining	2.2	0.7	3.5	-5.9
Construc- ion	-0.1	-0.8	-1.4	-0.4

Note: QOQ: quarter on quarter; YOY:most recent quarter on the same quarter a year earlier

Source: http://www.insee.fr/en/themes/info-rapide.asp?id=10&date=20110909

Table 59 provides growth rates of exports and imports of France both monthly and in 12 months. The 12 months rates of both exports and imports exhibit the same slowing as observed for Germany from high two-digit rates to single-digit rates in Jul and Jun.

Table 59, France, Exports and Imports, Month and 12 Months ∆%

	Exports Month ∆%	Exports 12 Months ∆%	Imports Month ∆%	Imports 12 Months ∆%
Jul 2011	0.3	2.4	2.9	8.6
Jun	0.0	3.4	-2.8	8.1
May	0.6	14.9	-0.3	15.9
Apr	-2.1	7.5	0.7	14.2
Mar	1.2	11.9	0.1	15.5
Feb	1.0	14.0	0.8	21.6
Jan	2.1	13.7	4.4	20.1
Dec 2010	-4.4	13.4	-1.0	14.4
Dec 2009	0.8	-9.7	-0.2	-2.4
Dec 2008	1.4	-7.2	-4.9	-11.3
Dec 2007	5.3	5.8	2.5	8.2
Dec 2006	1.0	7.5	4.0	7.1
Dec 2005	-3.7	10.7	-1.4	14.6
Dec 2004	-6.3	-3.7	-2.6	5.9
Dec 2003	4.8	3.1	2.8	2.8

Source: http://lekiosque.finances.gouv.fr/APPCHIFFRE/nationales/presse/Presse_frame.asp

Exports, imports and the trade balance of France are shown in Table 60. France has been running a trade deficit of similar magnitude throughout 2011.

Table 60, France, Exports, Imports and Trade Balance, € Millions

	Exports	Imports	Trade Balance
Jul 2011	34,756	41,126	-6,460
Jun	34,657	40,062	-5,405
May	34,641	41,227	-6,586
Apr	34,439	41,532	-6,913
Mar	35,173	41,082	-5,909
Feb	34,766	41,062	-6,296
Jan	34,409	40,754	-6,345
Dec 2010	33,704	39,029	-5,235

Source: http://lekiosque.finances.gouv.fr/APPCHIFFRE/nationales/presse/Presse_frame.asp

VG Italy. The Markit/ADACI Italy Services PMI^® finds contraction of business activity in services in Italy at moderate pace (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8528). The index fell to 48.4 in Aug from 48.6 in Jul, indicating moderate contraction as in manufacturing.

Table IT provides the country data table for Italy. Growth has moderated as in most advanced economies. GDP grew at 0.3 percent in IIQ2011 and 0.8 percent relative to a year earlier.

Table IT, Italy, Economic Indicators

Consumer Price Index	Aug month ∆%: 0.3 Aug 12 months ∆%: 2.8 Blog 09/04/11
Producer Price Index	Jul month ∆%: 0.3 Aug 12 months ∆%: 4.9 Blog 09/04/11
GDP Growth	IIQ2011/IIQ2010 SA ∆%: 0.8 IIQ2011/IQ2011 NSA ∆%: 0.3 Blog 09/11/11
Labor Report	Jul 2011 Participation rate 62% Employment ratio 56.9% Unemployment rate 8.0% Blog 09/04/11
Industrial Production	Jun month ∆%: –0.6 12 months ∆%: 0.2 Blog 08/07/11
Retail Sales	Jun month ∆%: -0.2 Jun 12 months ∆%: -1.2 Blog 09/04/11
Business Confidence	Mfg Aug 99.9, Apr 102.6 Construction Jul 75.8, Apr 73.1 Blog 09/04/11
Consumer Confidence	Consumer Confidence Aug 100.3, Apr 103.7 Economy Aug 70.0, Apr 72.8 Blog 09/04/11
Trade Balance	Balance Jun SA -€ 1,944 million versus May -€ 3,114 Exports Jun month SA ∆%: -0.8 Imports Jun month SA ∆%: 4.1 Exports 12 months NSA ∆%: 8.1 Imports 12 months NSA ∆%: 3.2 Blog 08/14/11

Links to blog comments in Table IT:

08/14/11 (08/9): http://cmpassocregulationblog.blogspot.com/2011/08/turbulence-in-world-financial-markets.html

08/07/11: http://cmpassocregulationblog.blogspot.com/2011/08/global-growth-recession-25-to-30.html

Table 61 provides quarter on quarter and quarter on earlier year same quarter rates of growth of GDP for Italy. GDP has been growing during six consecutive quarters but at very low rates. The yearly rate has fallen from 1.5 percent in IVQ2010 to 0.8 percent in IIQ2011.

Table 61, Italy, GDP ∆%

	Quarter ∆% Relative to Preceding Quarter	Quarter ∆% Relative to Same Quarter Year Earlier
IIQ2011	0.3	0.8
IQ2011	0.1	1.0
IVQ2010	0.1	1.5
IIIQ2010	0.3	1.4
IIQ2010	0.5	1.4
IQ2010	0.6	0.7
IVQ2009	0.0	-3.0
IIIQ2009	0.4	-4.9
IIQ2009	-0.3	-6.3
IQ2009	-3.0	-6.7
IVQ2008	-2.0	-3.4
IIIQ2008	-1.1	-1.8
IIQ2008	-0.7	-0.4
IQ2008	0.4	0.3

Source: http://www.istat.it/salastampa/comunicati/in_calendario/stimapil/20110805_00/testointegrale20110805.pdf

Chart 10 of the Italian National Institute of Statistics (ISTAT) provides growth of GDP of Italy at market prices. The year on year rate of growth pulled strongly out of the contraction. There is what appears to be the beginning of a trend of deceleration in 2011 much the same as in most advanced economies.

Chart 10, Italy, GDP at Market Prices, ∆%

Source: http://www.istat.it/it/

Percentage change of GDP and expenditures components for Italy is shown in Table 62. There is muted demand in consumption and gross fixed capital formation (GFCF) but insufficient to drive acceleration of growth.

Table 62, Italy, Percentage Change in GDP and Expenditure Components, SA and Calendar Adjusted, Chain-linked Volumes, ∆%

	IIQ2011/IQ2011 ∆%	IIQ2011/IIQ2010 ∆%
GDP	0.3	0.8
Imports	-2.3	4.5
Consumption	0.2	0.7
Household	0.2	1.1
Government	0.0	-0.2
GFCF	0.2	0.6
Equipment	2.5	3.4
Transport	-0.3	0.6
Construction	-1.6	-1.5
Inventory ∆	-	-
Exports	0.9	5.4

Note: GFCF: Gross Fixed Capital Formation

Source: http://www.istat.it/it/archivio/37815

Value added by sectors and GDP for Italy is shown in Table 63. Industry as in most advanced economies is driving recovery.

Table 63, Italy, Value Added by Sectors, SA and Calendar Adjusted, ∆%

	IIQ20011/ IQ2011 ∆%	IIQ2011/IIQ2010 ∆%
Agriculture	-2.4	0.5
Industry	0.9	1.2
Services
GDP	0.1	0.8

Source: http://www.istat.it/it/archivio/37815

VH United Kingdom. The Markit/CIPS UK Services PMI^® finds activity in the UK service sector at its slowest rate in 2011. The Business Activity Index fell 4.3 points in Aug to 51.1, which is the second steepest decline in the history of the index excluding the market crash following Lehman Brothers (http://www.markiteconomics.com/MarkitFiles/Pages/ViewPressRelease.aspx?ID=8536). The UK private sector is experiencing weakness in manufacturing, services and construction.

Table UK provides the country data table for the United Kingdom. Manufacturing is growing at the yearly rate of 1.9 percent but total industrial production is held down by weakness in mining.

Table UK, UK Economic Indicators


CPI	Jul month ∆%: 0.0 Jun 12 months ∆%: 4.4 Blog 08/21/11
Output/Input Prices	Output Prices: Aug 12 months NSA ∆%: 6.1; excluding food, petroleum ∆%: 3.6 Input Prices: Aug 12 months NSA ∆%: 16.2 Excluding ∆%: 13.0 Blog 09/011/11
GDP Growth	IIQ2011 prior quarter ∆% 02; year earlier same quarter ∆%: 0.7 Blog 08/28/11
Industrial Production	Jul 2011/Jul 2010 NSA ∆%: Industrial Production -0.7; Manufacturing 1.9 Jul/Jun 2011 ∆%: Industrial Production -0.2 Manufacturing 0.1 Blog 09/11/11
Retail Sales	Jul month SA ∆%: 0.2 Jul 12 months ∆%: 0.0 Blog 08/21/11
Labor Market	Apr-Jun Unemployment Rate: 7.9% Blog 08/21/11
Trade Balance	Balance Jun -₤4,496 billion Exports Jun ∆%: -2.8 IIQ2011/IIQ2010 ∆%: 8.6 Imports Jun ∆%: -1.5 IIQ2011/IQ2010 ∆%: 7.3 Blog 08/14/11

Links to blog comments in Table UK:

08/28/11 http://cmpassocregulationblog.blogspot.com/2011/08/united-states-gdp-growth-standstill.html

08/21/11 http://cmpassocregulationblog.blogspot.com/2011/08/world-financial-turbulence-global.html

08/14/11 (08/9): http://cmpassocregulationblog.blogspot.com/2011/08/turbulence-in-world-financial-markets.html

08/07/11: http://cmpassocregulationblog.blogspot.com/2011/08/global-growth-recession-25-to-30.html

07/31/11: http://cmpassocregulationblog.blogspot.com/2011/07/growth-recession-debt-financial-risk.html

07/24/11: http://cmpassocregulationblog.blogspot.com/2011/07/debt-and-financial-risk-aversion-and.html

Twelve months rates of growth of industry and components for the UK are shown in Table 64. There is evident deceleration in the total and all components from 2010 into 2011. There is strength basically in manufacturing and capital goods.

Table 64, UK, Output of the Production Industries, 12 Months ∆%

	PROD IND	MNG	MFG	ENGY	CON DUR	CON NDUR	CAP
2011
Jul	-0.7	-14.3	1.9	-1.7	1.7	0.6	5.7
Jun	-0.3	-13.1	2.1	-1.4	2.2	0.8	6.4
May	-0.9	-18.5	2.8	-3.0	4.4	2.3	3.9
Apr	-1.2	-11.9	1.2	-3.7	-1.7	2.4	3.6
Mar	0.1	-12.1	2.2	0.9	-2.3	1.4	6.2
Feb	1.9	-10.3	4.6	-0.1	0.4	1.6	9.6
Jan	4.0	-3.9	6.2	-0.3	2.9	2.3	11.1
2010
Dec	3.5	-5.3	4.2	10.1	-1.8	2.9	9.5
Nov	3.2	-8.8	5.1	6.7	-3.2	2.1	10.3
Oct	3.2	-9.0	5.3	5.1	-5.6	3.5	9.3
Sep	3.7	0.2	4.5	3.0	-3.1	2.7	8.5
Aug	4.1	-1.6	5.6	0.9	3.6	4.2	9.7
Jul	1.7	-9.5	4.4	-0.7	4.4	1.6	8.4
Jun	1.2	-10.2	3.5	2.1	0.6	1.4	8.0
May	2.7	-2.1	3.6	3.4	-3.4	-1.2	10.7
Apr	1.4	-5.5	2.6	2.8	2.8	-3.9	8.4
Mar	2.8	-1.1	3.7	2.0	3.0	-0.9	8.9
Feb	-0.2	-7.4	1.1	1.1	0.2	-2.2	5.9
Jan	-1.7	-7.1	-1.0	1.3	-0.3	-2.0	1.7
2010/ 2009	2.1	-5.7	3.6	3.1	-0.3	0.6	8.2
2009/ 2008	-10.1	-9.4	-10.7	-6.1	-13.8	-3.7	-13.3
2008/ 2007	-3.1	-6.3	-2.9	NA	-5.9	-1.6	-3.7
2007/ 2006	0.1	-1.9	0.5	0.2	0.6	-0.6	1.6
2006/ 2005	NA	-7.9	1.6	-0.5	1.9	1.0	2.9

Notes: PROD IND: Production Industries; MNG: Mining; MFG: Manufacturing; ENGY: Electricity, Gas and Water Supply; CON DUR: Consumer Durables; CONS NDUR: Consumer Nondurables; CAP: Capital Goods

Source: http://www.ons.gov.uk/ons/publications/re-reference-tables.html?edition=tcm%3A77-224807

Analysis of the contributions of production industries by components provided by the UK Office for National Statistics is shown in Table 65. Manufacturing has weight of 74.4 percent of the total, contributing 1.5 percentage points to the 12 months rate of growth. Mining subtracted 1.9 percentage points and energy subtracted 0.2 percentage points.

Table 65, UK, Weights of Components, Volume 12 Months and Month ∆% and Percentage Point Contributions of Production Industries by Components

	Weight %	Volume 12 Months ∆% Ending in Jul 2011	% Point Contri -bution	Volume Month ∆% Jul 2011/ Jun 2011	% Point Contri -bution
PROD IND	100.0	-0.7	-0.7	-0.2	-0.2
MNG	15.6	-14.3	-1.9	-1.4	-0.2
MFG	74.4	1.9	1.5	0.1	0.1
ENGY	10.0	-1.7	-0.2	-1.1	-0.1

Notes: PROD IND: Index of Production; MNG: Mining and Quarrying (of which 14.4 percent of the total weight in oil and gas extraction); MFG: Manufacturing; ENGY: Energy including electricity, gas and water

Source: http://www.ons.gov.uk/ons/publications/re-reference-tables.html?edition=tcm%3A77-224807

Yearly, monthly and quarterly rates of change of UK industrial production and manufacturing are shown in Table 66. There is some strength in manufacturing but total industrial production is weak because of mining.

Table 66, UK, Production and Manufacturing ∆%

	Index of Production	Index of Manufacturing
Jul 2011/ Jul 2010	-0.7	1.9
May to Jul 2011/ May to Jul 2010	-0.6	2.3
Jul 2011/ Jun 2011	-0.2	0.1
May to Jul 2011/ Feb to Mar 2011	-0.4	0.5

Source: http://www.ons.gov.uk/ons/publications/re-reference-tables.html?edition=tcm%3A77-224807

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

Table 67 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 67 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 14.6 percent by Fri Sep 9, 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 and cause misallocation of resources toward less productive economic activities. The last row of Table 67 shows CPI inflation in the US rising from 1.9 percent in 2003 to 4.1 percent in 2007 even as monetary policy increased the fed funds rate from 1 percent in Jun 2004 to 5.25 percent in Jun 2006.

Table 67, 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	09/09 /2011
Rate	1.1423	1.5914	1.192	1.366
CNY/USD	01/03 2000	07/21 2005	7/15 2008	09/09 2011
Rate	8.2798	8.2765	6.8211	6.3882
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 68 extracts four rows of Table 67 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 70 below, the dollar has devalued again to USD 1.366/EUR or by 14.6 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 6.3882/USD on Fri Sep 9, 2011, or by an additional 6.3 percent, for cumulative revaluation of 22.8 percent.

Table 68, 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	09/09 /2011
Rate	1.1423	1.5914	1.192	1.366
CNY/USD	01/03 2000	07/21 2005	7/15 2008	09/09 2011
Rate	8.2798	8.2765	6.8211	6.3882

Source: Table 67.

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 69. 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 69, 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 67 above 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 now with realization of growth standstill recession. 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 driven by the carry trade from zero interest rates with fluctuations provoked by events of risk aversion. Table 70, which is updated for every comment of this blog, shows the deep contraction of valuations of risk financial assets after the Apr 2010 sovereign risk issues in the fourth column “∆% to Trough.” There was sharp recovery after around Jul 2010 in the last column “∆% Trough to 09/09/11,” which has been recently stalling or reversing amidst profound risk aversion. Recovering risk financial assets are in the range from 4.8 percent for the Dow Global and Shanghai Composite and 29.5 percent for the DJ UBS Commodity Index. The carry trade from zero interest rates to leveraged positions in risk financial assets has proved strongest for commodity exposures. Before the current round of risk aversion, all assets in the column “∆% Trough to 09/09/11” had double digit gains relative to the trough around Jul 2, 2010. There are now several valuations lower than those at the trough around Jul 2: European stocks index STOXX 50 is now 8.2 percent below the trough on Jul 2, 2010; the NYSE Financial Index is 7.9 percent below the trough on Jul 2, 2010; Germany DAX index is 8.5 percent below; and Japan’s Nikkei is 0.9 below the trough on Aug 31, 2010 and 23.3 percent below the peak on Apr 5, 2010. The Nikkei Average closed at 8737.66 on Fri Sep 9, which is 14.8 percent below 10,254.43 on Mar 11 on the date of the earthquake. Global risk aversion erased the earlier gains of the Nikkei. The dollar depreciated by 14.6 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 09/09/2011” shows losses for all risk financial assets in Table 70. There are still high uncertainties on European sovereign risks, US and world growth recession and China’s growth and inflation tradeoff. Sovereign problems in the “periphery” of Europe and fears of slower growth in Asia and the US cause risk aversion with trading caution instead of more aggressive risk exposures. There is a fundamental change in Table 70 from the relatively upward trend with oscillations since the sovereign risk event of Apr-Jul 2010. Performance is best assessed in the column “∆% Peak to 8/26/11” that provides the percentage from the peak in Apr 2010 before the sovereign risk event to Jul 29. Most financial risk assets had gained not only relative to the trough as shown in column “∆% Trough to 9/09/11” but also relative to the peak in column “∆% Peak to 9/09/11.” Only one index is now above the peak, DJ UBS Commodity Index by 10.7 percent and DJIA. There are several indexes well below the peak: NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) by 26.7 percent, Nikkei Average by 23.3 percent, Shanghai Composite by 21.1 percent, STOXX 50 by 22.2 percent and Dow Global by 14.5 percent. S&P 500 is lower relative to the peak by 5.2 percent, DJIA is down by 2.2 percent and DJ Asia Pacific is lower by 4.7 percent. The factors of risk aversion have adversely affected the performance of financial risk assets. The performance relative to the peak in Apr is more important than the performance relative to the trough around early Jul because improvement could signal that conditions have returned to normal levels before European sovereign doubts in Apr 2010. The situation of risk financial assets has worsened.

Table 70, Stock Indexes, Commodities, Dollar and 10-Year Treasury

	Peak	Trough	∆% to Trough	∆% Peak to 9/ 09/11	∆% Week 9/ 09/11	∆% Trough to 9/ 09/11
DJIA	4/26/ 10	7/2/10	-13.6	-1.9	-2.2	13.5
S&P 500	4/23/ 10	7/20/ 10	-16.0	-5.2	-1.7	12.9
NYSE Finance	4/15/ 10	7/2/10	-20.3	-26.7	-3.8	-7.9
Dow Global	4/15/ 10	7/2/10	-18.4	-14.5	-3.9	4.8
Asia Pacific	4/15/ 10	7/2/10	-12.5	-4.7	-2.6	8.9
Japan Nikkei Aver.	4/05/ 10	8/31/ 10	-22.5	-23.3	-2.4	-0.9
China Shang.	4/15/ 10	7/02 /10	-24.7	-21.1	-1.2	4.8
STOXX 50	4/15/10	7/2/10	-15.3	-22.2	-4.3	-8.2
DAX	4/26/ 10	5/25/ 10	-10.5	-18.0	-6.3	-8.5
Dollar Euro	11/25 2009	6/7 2010	21.2	9.7	3.8	-14.6
DJ UBS Comm.	1/6/ 10	7/2/10	-14.5	10.7	-1.2	29.5
10-Year Tre.	4/5/ 10	4/6/10	3.986	1.918

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 71 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. The last row of Table 71 for Sep 9 shows that the S&P 500 is now 4.8 percent below the Apr 26, 2010 level and the DJIA is 1.9 percent below the level on Apr 26, 2010. Multiple rounds of risk aversion eroded the earlier gains, showing that risk aversion can destroy market value even with zero interest rates. Much the same zero interest rates and quantitative easing have not had any effects in recovering economic activity while distorting financial markets and resource allocation.

Table 71, Percentage Changes of DJIA and S&P 500 in Selected Dates

2010	∆% DJIA from prior date	∆% DJIA from Apr 26	∆% S&P 500 from prior date	∆% S&P 500 from Apr 26
Apr 26
May 6	-6.1	-6.1	-6.9	-6.9
May 26	-5.2	-10.9	-5.4	-11.9
Jun 8	-1.2	-11.3	2.1	-12.4
Jul 2	-2.6	-13.6	-3.8	-15.7
Aug 9	10.5	-4.3	10.3	-7.0
Aug 31	-6.4	-10.6	-6.9	-13.4
Nov 5	14.2	2.1	16.8	1.0
Nov 30	-3.8	-3.8	-3.7	-2.6
Dec 17	4.4	2.5	5.3	2.6
Dec 23	0.7	3.3	1.0	3.7
Dec 31	0.03	3.3	0.07	3.8
Jan 7	0.8	4.2	1.1	4.9
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
Jun 10	-1.6	6.7	-2.2	4.9
Jun 17	0.4	7.1	0.04	4.9
Jun 24	-0.6	6.5	-0.2	4.6
Jul 1	5.4	12.3	5.6	10.5
Jul 8	0.6	12.9	0.3	10.9
Jul 15	-1.4	11.4	-2.1	8.6
Jul 22	1.6	13.2	2.2	10.9
Jul 29	-4.2	8.4	-3.9	6.6
Aug 05	-5.8	2.1	-7.2	-1.0
Aug 12	-1.5	0.6	-1.7	-2.7
Aug 19	-4.0	-3.5	-4.7	-7.3
Aug 26	4.3	0.7	4.7	-2.9
Sep 02	-0.4	0.3	-0.2	-3.1
Sep 09	-2.2	-1.9	-1.7	-4.8

Source: http://online.wsj.com/mdc/public/page/mdc_us_stocks.html?mod=mdc_topnav_2_3004

Table 72, 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, the large budget deficit of the federal government (http://professional.wsj.com/article/SB10001424052748703907004576279321350926848.html?mod=WSJ_hp_LEFTWhatsNewsCollection) and zero interest rates indefinitely but with interruptions caused by risk aversion events.

Table 72, Exchange Rates

	Peak	Trough	∆% P/T	Sep 09, 2011	∆T Sep 09 2011	∆P Sep 09 2011
EUR USD	7/15 2008	6/7 2010		9/09 2011
Rate	1.59	1.192		1.366
∆%			-33.4		12.7	-16.4
JPY USD	8/18 2008	9/15 2010		9/09 2011
Rate	110.19	83.07		77.59
∆%			24.6		6.6	29.6
CHF USD	11/21 2008	12/8 2009		9/09 2011
Rate	1.225	1.025		0.883
∆%			16.3		13.9	27.9
USD GBP	7/15 2008	1/2/ 2009		9/09 2011
Rate	2.006	1.388		1.588
∆%			-44.5		12.6	-26.3
USD AUD	7/15 2008	10/27 2008		9/09 2011
Rate	1.0215	1.6639		1.047
∆%			-62.9		42.6	6.5
ZAR USD	10/22 2008	8/15 2010		9/02 2011
Rate	11.578	7.238		7.278
∆%			37.5		-0.6	37.1
SGD USD	3/3 2009	8/9 2010		9/09 2011
Rate	1.553	1.348		1.227
∆%			13.2		8.9	20.9
HKD USD	8/15 2008	12/14 2009		9/09 2011
Rate	7.813	7.752		7.796
∆%			0.8		-0.6	0.2
BRL USD	12/5 2008	4/30 2010		9/09 2011
Rate	2.43	1.737		1.678
∆%			28.5		3.4	30.9
CZK USD	2/13 2009	8/6 2010		9/09 2011
Rate	22.19	18.693		17.941
∆%			15.7		4.0	19.1
SEK USD	3/4 2009	8/9 2010		9/09 2011
Rate	9.313	7.108		6.533
∆%			23.7		8.1	29.8
CNY USD	7/20 2005	7/15 2008		9/09 2011
Rate	8.2765	6.8211		6.3882
∆%			17.6		6.3	22.8

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

Table 73, 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 new coupons such as 3.63 percent in recent auctions (http://www.treasurydirect.gov/instit/annceresult/press/preanre/2011/2011.htm) are not comparable to prices in Table 62. 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 and the growth recession in the US and the world. The yield of 1.918 percent at the close of market on Fr Sep 9, 2011, just shy two basis points from an all-time record of 1.89 percent, would be equivalent to price of 106.4055 in a hypothetical bond maturing in 10 years with coupon of 2.625 percent for price gain of 5.1 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. The realization of a growth standstill recession is also influencing yields. Important causes of the rise in yields shown in Table 73 are expectations of rising inflation and US government debt estimated to exceed 70 percent of GDP in 2012 (http://cmpassocregulationblog.blogspot.com/2011/08/united-states-gdp-growth-standstill.html http://cmpassocregulationblog.blogspot.com/2011/02/policy-inflation-growth-unemployment.html http://cmpassocregulationblog.blogspot.com/2011/04/budget-quagmire-fed-commodities_10.html), rising from 40.8 percent of GDP in 2008, 53.5 percent in 2009 (Table 2 in http://cmpassocregulationblog.blogspot.com/2011/04/budget-quagmire-fed-commodities_10.html) and 69 percent in 2011. On Sep 7, 2011, the line “Reserve Bank credit” in the Fed balance sheet stood at $2841 billion, or $2.8 trillion, with portfolio of long-term securities of $2622 billion, or $2.6 trillion, consisting of $1560 billion Treasury nominal notes and bonds, $67 billion of notes and bonds inflation-indexed, $110 billion Federal agency debt securities and $885 billion mortgage-backed securities; reserve balances deposited with Federal Reserve Banks reached $1608 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. Risk aversion from various sources, discussed in section I, 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 73, 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
06/10/11	2.973	97.0106	-4.2
06/17/11	2.937	97.3134	-3.9
06/24/11	2.872	97.8662	-3.3
07/01/11	3.186	95.2281	-5.9
07/08/11	3.022	96.5957	-4.6
07/15/11	2.905	97.5851	-3.6
07/22/11	2.964	97.0847	-4.1
07/29/11	2.795	98.5258	-2.7
08/05/11	2.566	100.5175	-0.7
08/12/11	2.249	103.3504	2.1
08/19/11	2.066	105.270	3.7
08/26/11	2.202	103.7781	2.5
09/02/11	1.992	105.7137	4.4
09/09/11	1.918	106.4055	5.1

Note: price is calculated for an artificial 10-year note paying semi-annual coupon and maturing in ten years using the actual yields traded on the dates 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

VII Economic Indicators. Crude oil input in refineries fell to 15,494 thousand barrels per day on average in the four weeks ending on Sep 2 from 15,538 thousand barrels per day in the four weeks ending on Aug 26, as shown in Table 74. The rate of capacity utilization in refineries continues at a high level close to 89.4 percent. Imports of crude oil fell from 9,165 thousand barrels per day on average to 9,031 thousand barrels per day. Decreasing utilization with decreasing imports resulted in decrease of commercial crude oil stocks by 4.0 million barrels from 357.1 million barrels on Aug 26 to 353.1 million on Sep 2. Gasoline stocks rose 0.2 million barrels and stocks of fuel oil increased 0.7 million barrels. The most worrisome fact is that supply of gasoline fell from 9,371 thousand barrels per day on Sep 3, 2010, to 9,097 thousand barrels per day on Sep 2, 2011, or by 2.9 percent, while fuel oil supply rose 1.2 percent. Part of the fall in consumption of gasoline is due to higher prices and part to the growth recession. Table 74 also shows increase in the world oil price by 44.2 percent from Sep 3, 2010 to Sep 2, 2011. Gasoline prices rose by 36.9 percent from Sep 6, 2010 to Sep 5, 2011.

Table 74, US, Energy Information Administration Weekly Petroleum Status Report

Four Weeks Ending Thousand Barrels/Day	09/02/11	08/26/11	09/03/10
Crude Oil Refineries Input	15,494	15,538	14,966
Refinery Capacity Utilization %	89.4	89.6	88.2
Motor Gasoline Production	9,353	9,446	9,466
Distillate Fuel Oil Production	4,621	4,615	4,310
Crude Oil Imports	9,031	9,165	9,470
Motor Gasoline Supplied	9,097 ∆% 2011/2010= –2.9%	9,169	9,371
Distillate Fuel Oil Supplied	3,836 ∆% 2011/2010 = 1.2%	3,859	3,790
	09/02/11	08/26/11	09/03/10
Crude Oil Stocks Million B	353.1 ∆= –4.0 MB	357.1	359.9
Motor Gasoline Million B	208.8 ∆= 0.2 MB	208.6	225.2
Distillate Fuel Oil Million B	156.8 ∆= 0.7 MB	156.1	174.8
World Crude Oil Price $/B	NA ∆% 2011/2010 44.2	105.89	73.45
	09/05/11	08/29/11	09/06/10
Regular Motor Gasoline $/G	3.674 ∆% 2011/2010 36.9	3.627	2.682

B: barrels; G: gallon

Source: http://www.eia.gov/pub/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/current/pdf/highlights.pdf

Chart 11 of the US Energy Information Administration (EIA) provides the weekly ending stocks of crude oil in the US excluding strategic reserves. There has been an upward trend since 2005.

Chart 11, US, Weekly Ending Stocks of Crude Oil Excluding Strategic Reserve

Source: http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=WCESTUS1&f=W

Initial claims for unemployment insurance seasonally adjusted rose 2,000 to reach 414,000 in the week of Sep 3 from 412,000 in the week of Aug 27, as shown in Table 75. Claims not seasonally adjusted, or the actual estimate, rose 9,355 to reach 346,065 in the week of Sep 3 from 336,710 in the week of Aug 27.

Table 75, US, Initial Claims for Unemployment Insurance

	SA	NSA	4-week MA SA
Sep 3	414,000	346,065	414,750
Aug 27	412,000	336,710	411,000
Change	+2,000	+9,355	+3,750
Aug 20	421,000	344,870	408,500
Prior Year	455,000	381,363	470,000

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 76 provides inflation of the CPI. In Jan-Jul 2011, CPI inflation for all items seasonally adjusted was 4.1 percent in annual equivalent, that is, compounding inflation in the first seven months and assuming it would be repeated during the remainder of 2011. In the 12 months ending in Jul, CPI inflation of all items not seasonally adjusted was 3.6 percent. The second row provides the same measurements for the CPI of all items excluding food and energy: 2.6 percent annual equivalent in Jan-Jun and 1.8 percent in 12 months. Bloomberg provides the yield curve of US Treasury securities (http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/). The lowest yield is 0.01 percent for three months or zero, 0.05 percent for six months, 0.09 percent for 12 months, 0.18 percent for two years, 0.30 percent for three years, 0.81 percent for five years, 1.33 percent for seven years, 1.91 percent for ten years and 3.25 percent for 30 years. The Irving Fisher definition of real interest rates is approximately the difference between 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 76. 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 76, Consumer Price Index Percentage Changes 12 months NSA and Annual Equivalent ∆%

	∆% 12 Months Jul 2011/Jul 2010 NSA	∆% Annual Equivalent Jan-Jul 2011 SA
CPI All Items	3.6	4.1
CPI ex Food and Energy	1.8	2.6

Source: http://www.bls.gov/news.release/pdf/cpi.pdf

X Conclusion. Growth recession does not necessarily lead to another contraction but the probability of downturn is higher when growth approximates zero. The US economy is in perilous standstill that could lead to continuing slow growth or even contraction. Unemployment and underemployment affect around 30 million people. Wages are falling in real terms. Incomes are stagnating. There is more evidence of deceleration in Europe than in the US and Asia. Financial turbulence may continue because of the shocks of risk aversion resulting from the lack of a definitive resolution of European sovereign risks. In fact, there may be a different currency regime. Monetary policy should move toward conventional impulses that may better promote financial stability and recovery. Unconventional monetary policy is merely contributing to excessive valuations of risk financial assets

(Go to http://cmpassocregulationblog.blogspot.com/ http://sites.google.com/site/economicregulation/carlos-m-pelaez)

http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10 ).

References

Ball, Laurence and N. Gregory Mankiw. 2002. The NAIRU in theory and practice. Journal of Economic Perspectives 16 (4, Autumn): 115-36.

Batini, Nicoletta and Edward Nelson. 2002. The lag from monetary policy actions to inflation: Friedman revisited. London, Bank of England, External MPC Unit Discussion Paper No. 6, Jan.

Bernanke, Ben S. 2010WP. What the Fed did and why: supporting the recovery and sustaining price stability. Washington Post, Nov 4. http://www.washingtonpost.com/wp-dyn/content/article/2010/11/03/AR2010110307372_pf.html

Blanchard, Olivier and Lawrence F. Katz. 1997. What we know and do not know about the natural rate of unemployment. Journal of Economic Perspectives 11 (1, Winter): 51-72.

Cochrane, John H. 2010A. The government debt valuation equation. An appendix to ‘Understanding Policy.’ http://faculty.chicagobooth.edu/john.cochrane/research/Papers/

Cochrane, John H. 2011Jan. Understanding policy in the great recession: some unpleasant fiscal arithmetic. European Economic Review 55 (1, Jan): 2-30.

Culbertson, J. M. 1960. Friedman on the lag in effect of monetary policy. Journal of Political Economy 68 (6, Dec): 617-21.

Culbertson, J. M. 1961. The lag in effect of monetary policy: reply. Journal of Political Economy 69 (5, Oct): 467-77.

De Long, J. Bradford. 1997. America’s peacetime inflation: the 1970s. In Christina D. Romer and David H. Romer, eds. Reducing inflation: motivation and strategy. Chicago: University of Chicago Press, 1997.

Friedman, Milton. 1961. The lag in effect of monetary policy. Journal of Political Economy 69 (5, Oct): 447-66.

Meltzer, Allan H. 2005. Origins of the Great Inflation. Federal Reserve Bank of St. Louis Review 87 (2, Part 2, Mar/Apr): 145-72.

Meltzer, Allan H. 2010a. A history of the Federal Reserve, Volume 2, Book 1, 1951-1969. Chicago: University of Chicago Press.

Meltzer, Allan H. 2010b. A history of the Federal Reserve, Volume 2, Book 2, 1970-1986. Chicago: University of Chicago Press.

North, Douglass C. and Barry R. Weingast. 1989. Constitutions and commitments: the evolution of institutional governing public choice in seventeenth-century England. Journal of Economic History 49 (4): 803-32.

Pelaez, Carlos M. and Carlos A. Pelaez. 2005. International Financial Architecture. Basingstoke: Palgrave Macmillan. http://us.macmillan.com/QuickSearchResults.aspx?search=pelaez%2C+carlos&ctl00%24ctl00%24cphContent%24ucAdvSearch%24imgGo.x=26&ctl00%24ctl00%24cphContent%24ucAdvSearch%24imgGo.y=14 http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10

Pelaez, Carlos M. and Carlos A. Pelaez. 2007. The Global Recession Risk. Basingstoke: Palgrave Macmillan. http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10

Pelaez, Carlos M. and Carlos A. Pelaez. 2008a. Globalization and the State: Vol. I. Basingstoke: Palgrave Macmillan. http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10

Pelaez, Carlos M. and Carlos A. Pelaez. 2008b. Globalization and the State: Vol. II. Basingstoke: Palgrave Macmillan.

Pelaez, Carlos M. and Carlos A. Pelaez. 2008c. Government Intervention in Globalization. Basingstoke: Palgrave Macmillan. http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10

Pelaez, Carlos M. and Carlos A. Pelaez. 2009a. Financial Regulation after the Global Recession. Basingstoke: Palgrave Macmillan. http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10

Pelaez, Carlos M. and Carlos A. Pelaez. 2009b. Regulation of Banks and Finance. Basingstoke: Palgrave Macmillan.http://www.amazon.com/Carlos-Manuel-Pel%C3%A1ez/e/B001HCUT10

Pelaez, Carlos Manuel. 1986. O Cruzado e o Austral. São Paulo: Editora Atlas.

Reinhart, Carmen M. and Kenneth Rogoff. 2010GTD. Growth in a time of debt. American Economic Review 100 (2): 1-9.

Robinson, Joan. 1947. Beggar-my-neighbour remedies for unemployment. In Joan Robinson, Essays in the Theory of Employment, Oxford, Basil Blackwell, 1947.

Romer, Christina D. and David H. Romer. 2004. A new measure of monetary shocks: derivation and implications. American Economic Review 94 (4, Sep): 1055-84.

Sargent, Thomas J. and Neil Wallace. 1981. Some unpleasant monetarist arithmetic. Federal Reserve Bank of Minneapolis Quarterly Review 5 (3, Fall): 1-17.

Summerhill, Jr., William R. 2007SC. Sovereign credibility with financial underdevelopment. Palo Alto, CA, Hoover Seminar on Collective Choice, Mar 6.

Summerhill, Jr., William R. 2007IR. Inglorious revolution: political institutions, sovereign debt and financial underdevelopment in Imperial Brazil. Los Angeles, CA, UCLA, Book Manuscript.

Taylor, John B. 1997. Comment. In Christina Romer and David Romer, eds. Reducing inflation: motivation and strategy. Chicago: University of Chicago Press.

Wriston, Walter B. 1982. Banking against disaster. New York Times, Sep 14.

Yellen, Janet L. 2011AS. The Federal’s Reserve’s asset purchase program. Denver, Colorado, Allied Social Science Association Annual Meeting, Jan 8 http://federalreserve.gov/newsevents/speech/yellen20110108a.pdf

Appendix I. The Great Inflation

Inflation and unemployment in the period 1966 to 1985 is analyzed by Cochrane (2011Jan, 23) by means of a Phillips circuit joining points of inflation and unemployment. Chart I1 for Brazil in Pelaez (1986, 94-5) was reprinted in The Economist in the issue of Jan 17-23, 1987 as updated by the author. Cochrane (2011Jan, 23) argues that the Phillips circuit shows the weakness in Phillips curve correlation. The explanation is by a shift in aggregate supply, rise in inflation expectations or loss of anchoring. The case of Brazil in Chart I1 cannot be explained without taking into account the increase in the fed funds rate that reached 22.36 percent on Jul 22, 1981 (http://www.federalreserve.gov/releases/h15/data.htm) in the Volcker Fed that precipitated the stress on a foreign debt bloated by financing balance of payments deficits with bank loans in the 1970s; the loans were used in projects, many of state-owned enterprises with low present value in long gestation. The combination of the insolvency of the country because of debt higher than its ability of repayment and the huge government deficit with declining revenue as the economy contracted caused adverse expectations on inflation and the economy. This interpretation is consistent with the case of the 24 emerging market economies analyzed by Reinhart and Rogoff (2010GTD, 4), concluding that “higher debt levels are associated with significantly higher levels of inflation in emerging markets. Median inflation more than doubles (from less than seven percent to 16 percent) as debt rises from the low (0 to 30 percent) range to above 90 percent. Fiscal dominance is a plausible interpretation of this pattern.”

The reading of the Phillips circuits of the 1970s by Cochrane (2011Jan, 25) is doubtful about the output gap and inflation expectations:

“So, inflation is caused by ‘tightness’ and deflation by ‘slack’ in the economy. This is not just a cause and forecasting variable, it is the cause, because given ‘slack’ we apparently do not have to worry about inflation from other sources, notwithstanding the weak correlation of [Phillips circuits]. These statements [by the Fed] do mention ‘stable inflation expectations. How does the Fed know expectations are ‘stable’ and would not come unglued once people look at deficit numbers? As I read Fed statements, almost all confidence in ‘stable’ or ‘anchored’ expectations comes from the fact that we have experienced a long period of low inflation (adaptive expectations). All these analyses ignore the stagflation experience in the 1970s, in which inflation was high even with ‘slack’ markets and little ‘demand, and ‘expectations’ moved quickly. They ignore the experience of hyperinflations and currency collapses, which happen in economies well below potential.”

Chart I1, Brazil, Phillips Circuit 1963-1987

©Carlos Manuel Pelaez, O cruzado e o austral. São Paulo: Editora Atlas, 1986, pages 94-5. Reprinted in: Brazil. Tomorrow’s Italy, The Economist, 17-23 January 1987, page 25.

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). TableI1 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 I1, 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.bea.gov/national/nipaweb/TableView.asp?SelectedTable=2&ViewSeries=NO&Java=no&Request3Place=N&3Place=N&FromView=YES&Freq=Year&FirstYear=2009&LastYear=2010&3Place=N&Update=Update&JavaBox=no

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 I2 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 I2 shows a drop of the price of the 30-year bond by 18.1 percent and of the 10-year bond by 14.1 percent. CPI inflation remained almost the same and there is no valid counterfactual that inflation would have been higher without monetary policy tightening because of the long lag in effect of monetary policy on inflation (see Culbertson 1960, 1961, Friedman 1961, Batini and Nelson 2002, Romer and Romer 2004). The pursuit of nonexistent deflation during the past ten years has resulted in the largest monetary policy accommodation in history that created the 2007 financial market crash and global recession and is currently preventing smoother recovery while creating another financial crash in the future. The issue is not whether there should be a central bank and monetary policy but rather whether policy accommodation in doses from zero interest rates to trillions of dollars in the fed balance sheet endangers economic stability.

Table I2, 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

CMP Associates Regulation Blog

Followers

Blog Archive

About Me

Monday, September 12, 2011

Financial Turbulence, the Wriston Doctrine on Sovereign Bankruptcy and Euro Zone Survival, Hiring Collapse and World Economic Slowdown

No comments:

Post a Comment